filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
Our Consolidated Financial Statements and the related report of our independent registered public accounting firm thereon are included in this Annual Report on Form 10-K on the pages indicated below:
All other schedules are omitted either because they are not applicable or not required or because the required information is included in the financial statements or notes thereto.
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 2022
| (In millions, except per share data) | 2022 | 2021 | 2020 | ||||||||
| Revenues | |||||||||||
| Manufacturing product revenues | $ | 10,945 | $ | 10,541 | $ | 9,720 | |||||
| Manufacturing service revenues | 1,872 | 1,792 | 1,876 | ||||||||
| Finance revenues | 52 | 49 | 55 | ||||||||
| Total revenues | 12,869 | 12,382 | 11,651 | ||||||||
| Costs, expenses and other | |||||||||||
| Cost of products sold | 9,380 | 8,955 | 8,715 | ||||||||
| Cost of services sold | 1,420 | 1,342 | 1,379 | ||||||||
| Selling and administrative expense | 1,186 | 1,221 | 1,045 | ||||||||
| Interest expense, net | 107 | 142 | 166 | ||||||||
| Special charges | — | 25 | 147 | ||||||||
| Non-service components of pension and postretirement income, net | (240) | (159) | (83) | ||||||||
| Gain on business disposition | — | (17) | — | ||||||||
| Total costs, expenses and other | 11,853 | 11,509 | 11,369 | ||||||||
| Income from continuing operations before income taxes | 1,016 | 873 | 282 | ||||||||
| Income tax expense (benefit) | 154 | 126 | (27) | ||||||||
| Income from continuing operations | $ | 862 | $ | 747 | $ | 309 | |||||
| Loss from discontinued operations | (1) | (1) | — | ||||||||
| Net income | $ | 861 | $ | 746 | $ | 309 | |||||
| Basic Earnings per share | |||||||||||
| Continuing operations | $ | 4.05 | $ | 3.33 | $ | 1.35 | |||||
| Diluted Earnings per share | |||||||||||
| Continuing operations | $ | 4.01 | $ | 3.30 | $ | 1.35 | |||||
See Notes to the Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
For each of the years in the three-year period ended December 31, 2022
| (In millions) | 2022 | 2021 | 2020 | ||||||||
| Net income | $ | 861 | $ | 746 | $ | 309 | |||||
| Other comprehensive income, net of tax | |||||||||||
| Pension and postretirement benefits adjustments, net of reclassifications | 283 | 981 | 31 | ||||||||
| Foreign currency translation adjustments, net of reclassifications | (103) | (37) | 78 | ||||||||
| Deferred gains (losses) on hedge contracts, net of reclassifications | (3) | 2 | (1) | ||||||||
| Total other comprehensive income, net of tax | 177 | 946 | 108 | ||||||||
| Comprehensive income | $ | 1,038 | $ | 1,692 | $ | 417 |
See Notes to the Consolidated Financial Statements.
Consolidated Balance Sheets
| (In millions, except share data) | December 31, 2022 | January 1, 2022 | ||||||
| Assets | ||||||||
| Manufacturing group | ||||||||
| Cash and equivalents | $ | 1,963 | $ | 1,922 | ||||
| Accounts receivable, net | 855 | 838 | ||||||
| Inventories | 3,550 | 3,468 | ||||||
| Other current assets | 1,033 | 1,018 | ||||||
| Total current assets | 7,401 | 7,246 | ||||||
| Property, plant and equipment, net | 2,523 | 2,538 | ||||||
| Goodwill | 2,283 | 2,149 | ||||||
| Other assets | 3,422 | 3,027 | ||||||
| Total Manufacturing group assets | 15,629 | 14,960 | ||||||
| Finance group | ||||||||
| Cash and equivalents | 72 | 195 | ||||||
| Finance receivables, net | 563 | 605 | ||||||
| Other assets | 29 | 67 | ||||||
| Total Finance group assets | 664 | 867 | ||||||
| Total assets | $ | 16,293 | $ | 15,827 | ||||
| Liabilities and shareholders’ equity | ||||||||
| Liabilities | ||||||||
| Manufacturing group | ||||||||
| Current portion of long-term debt | $ | 7 | $ | 6 | ||||
| Accounts payable | 1,018 | 786 | ||||||
| Other current liabilities | 2,645 | 2,344 | ||||||
| Total current liabilities | 3,670 | 3,136 | ||||||
| Other liabilities | 1,879 | 2,005 | ||||||
| Long-term debt | 3,175 | 3,179 | ||||||
| Total Manufacturing group liabilities | 8,724 | 8,320 | ||||||
| Finance group | ||||||||
| Other liabilities | 81 | 110 | ||||||
| Debt | 375 | 582 | ||||||
| Total Finance group liabilities | 456 | 692 | ||||||
| Total liabilities | 9,180 | 9,012 | ||||||
| Shareholders’ equity | ||||||||
| Common stock (207.4 million and 219.2 million shares issued, respectively, and 206.2 million and 216.9 million shares outstanding, respectively) | 26 | 28 | ||||||
| Capital surplus | 1,880 | 1,863 | ||||||
| Treasury stock | (84) | (157) | ||||||
| Retained earnings | 5,903 | 5,870 | ||||||
| Accumulated other comprehensive loss | (612) | (789) | ||||||
| Total shareholders’ equity | 7,113 | 6,815 | ||||||
| Total liabilities and shareholders’ equity | $ | 16,293 | $ | 15,827 |
See Notes to the Consolidated Financial Statements.
Consolidated Statements of Shareholders’ Equity
| (In millions, except per share data) | Common Stock | Capital Surplus | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders’ Equity | ||||||||||||||
| Balance at January 4, 2020 | $ | 29 | $ | 1,674 | $ | (20) | $ | 5,682 | $ | (1,847) | $ | 5,518 | ||||||||
| Net income | — | — | — | 309 | — | 309 | ||||||||||||||
| Other comprehensive income | — | — | — | — | 108 | 108 | ||||||||||||||
| Dividends declared ($0.08 per share) | — | — | — | (18) | — | (18) | ||||||||||||||
| Share-based compensation activity | — | 111 | — | — | — | 111 | ||||||||||||||
| Purchases of common stock | — | — | (183) | — | — | (183) | ||||||||||||||
| Balance at January 2, 2021 | 29 | 1,785 | (203) | 5,973 | (1,739) | 5,845 | ||||||||||||||
| Net income | — | — | — | 746 | — | 746 | ||||||||||||||
| Other comprehensive income | — | — | — | — | 946 | 946 | ||||||||||||||
| Dividends declared ($0.08 per share) | — | — | — | (18) | — | (18) | ||||||||||||||
| Share-based compensation activity | 1 | 212 | — | — | — | 213 | ||||||||||||||
| Purchases of common stock | — | — | (921) | — | — | (921) | ||||||||||||||
| Retirement of treasury stock | (2) | (134) | 967 | (831) | — | — | ||||||||||||||
| Other | — | — | — | — | 4 | 4 | ||||||||||||||
| Balance at January 1, 2022 | 28 | 1,863 | (157) | 5,870 | (789) | 6,815 | ||||||||||||||
| Net income | — | — | — | 861 | — | 861 | ||||||||||||||
| Other comprehensive income | — | — | — | — | 177 | 177 | ||||||||||||||
| Dividends declared ($0.08 per share) | — | — | — | (17) | — | (17) | ||||||||||||||
| Share-based compensation activity | — | 144 | — | — | — | 144 | ||||||||||||||
| Purchases of common stock | — | — | (867) | — | — | (867) | ||||||||||||||
| Retirement of treasury stock | (2) | (127) | 940 | (811) | — | — | ||||||||||||||
| Balance at December 31, 2022 | $ | 26 | $ | 1,880 | $ | (84) | $ | 5,903 | $ | (612) | $ | 7,113 |
See Notes to the Consolidated Financial Statements.
Consolidated Statements of Cash Flows
For each of the years in the three-year period ended December 31, 2022
| Consolidated | |||||||||||
| (In millions) | 2022 | 2021 | 2020 | ||||||||
| Cash flows from operating activities | |||||||||||
| Income from continuing operations | $ | 862 | $ | 747 | $ | 309 | |||||
| Adjustments to reconcile income from continuing operations to net cash provided by operating activities of continuing operations: | |||||||||||
| Non-cash items: | |||||||||||
| Depreciation and amortization | 397 | 390 | 391 | ||||||||
| Deferred income taxes | (220) | 23 | (7) | ||||||||
| Asset impairments and TRU inventory charge | 2 | 13 | 116 | ||||||||
| Gain on business disposition | — | (17) | — | ||||||||
| Other, net | 94 | 88 | 79 | ||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable, net | (26) | (58) | 149 | ||||||||
| Inventories | (55) | 45 | 434 | ||||||||
| Other assets | 35 | (112) | 66 | ||||||||
| Accounts payable | 235 | 13 | (613) | ||||||||
| Other liabilities | 270 | 405 | (5) | ||||||||
| Income taxes, net | 18 | 11 | (62) | ||||||||
| Pension, net | (165) | (82) | (15) | ||||||||
| Captive finance receivables, net | 35 | 131 | (89) | ||||||||
| Other operating activities, net | 8 | 2 | 16 | ||||||||
| Net cash provided by operating activities of continuing operations | 1,490 | 1,599 | 769 | ||||||||
| Net cash used in operating activities of discontinued operations | (2) | (1) | (1) | ||||||||
| Net cash provided by operating activities | 1,488 | 1,598 | 768 | ||||||||
| Cash flows from investing activities | |||||||||||
| Capital expenditures | (354) | (375) | (317) | ||||||||
| Net cash used in acquisitions | (202) | — | (15) | ||||||||
| Net proceeds (payments) from corporate-owned life insurance policies | 23 | (2) | 22 | ||||||||
| Proceeds from sale of property, plant and equipment and an insurance recovery | 22 | 3 | 33 | ||||||||
| Net proceeds from business disposition | — | 38 | — | ||||||||
| Finance receivables repaid | 20 | 19 | 22 | ||||||||
| Other investing activities, net | 44 | 36 | 7 | ||||||||
| Net cash used in investing activities | (447) | (281) | (248) | ||||||||
| Cash flows from financing activities | |||||||||||
| Decrease in short-term debt | (14) | (1) | — | ||||||||
| Net proceeds from long-term debt | — | — | 1,137 | ||||||||
| Principal payments on long-term debt and nonrecourse debt | (234) | (621) | (593) | ||||||||
| Proceeds from borrowings against corporate-owned life insurance policies | — | — | 377 | ||||||||
| Payments on borrowings against corporate-owned life insurance policies | — | — | (377) | ||||||||
| Purchases of Textron common stock | (867) | (921) | (183) | ||||||||
| Proceeds from exercise of stock options | 44 | 116 | 22 | ||||||||
| Dividends paid | (17) | (18) | (18) | ||||||||
| Other financing activities, net | (3) | (1) | (5) | ||||||||
| Net cash provided by (used in) financing activities | (1,091) | (1,446) | 360 | ||||||||
| Effect of exchange rate changes on cash and equivalents | (32) | (8) | 17 | ||||||||
| Net increase (decrease) in cash and equivalents | (82) | (137) | 897 | ||||||||
| Cash and equivalents at beginning of year | 2,117 | 2,254 | 1,357 | ||||||||
| Cash and equivalents at end of year | $ | 2,035 | $ | 2,117 | $ | 2,254 |
See Notes to the Consolidated Financial Statements.
Consolidated Statements of Cash Flows continued
For each of the years in the three-year period ended December 31, 2022
| Manufacturing Group | Finance Group | |||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | ||||||||||||||
| Cash flows from operating activities | ||||||||||||||||||||
| Income from continuing operations | $ | 835 | $ | 740 | $ | 301 | $ | 27 | $ | 7 | $ | 8 | ||||||||
| Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities of continuing operations: | ||||||||||||||||||||
| Non-cash items: | ||||||||||||||||||||
| Depreciation and amortization | 396 | 380 | 386 | 1 | 10 | 5 | ||||||||||||||
| Deferred income taxes | (200) | 27 | (2) | (20) | (4) | (5) | ||||||||||||||
| Asset impairments and TRU inventory charge | 2 | 13 | 116 | — | — | — | ||||||||||||||
| Gain on business disposition | — | (17) | — | — | — | — | ||||||||||||||
| Other, net | 103 | 97 | 69 | (9) | (9) | 10 | ||||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||||||
| Accounts receivable, net | (26) | (58) | 149 | — | — | — | ||||||||||||||
| Inventories | (55) | 45 | 434 | — | — | — | ||||||||||||||
| Other assets | 34 | (111) | 68 | 1 | (1) | (2) | ||||||||||||||
| Accounts payable | 235 | 13 | (613) | — | — | — | ||||||||||||||
| Other liabilities | 277 | 404 | (15) | (7) | 1 | (2) | ||||||||||||||
| Income taxes, net | 18 | 16 | (61) | — | (5) | (1) | ||||||||||||||
| Pension, net | (165) | (82) | (15) | — | — | — | ||||||||||||||
| Other operating activities, net | 7 | 2 | 16 | — | — | — | ||||||||||||||
| Net cash provided by (used in) operating activities of continuing operations | 1,461 | 1,469 | 833 | (7) | (1) | 13 | ||||||||||||||
| Net cash used in operating activities of discontinued operations | (2) | (1) | (1) | — | — | — | ||||||||||||||
| Net cash provided by (used in) operating activities | 1,459 | 1,468 | 832 | (7) | (1) | 13 | ||||||||||||||
| Cash flows from investing activities | ||||||||||||||||||||
| Capital expenditures | (354) | (375) | (317) | — | — | — | ||||||||||||||
| Net cash used in acquisitions | (202) | — | (15) | — | — | — | ||||||||||||||
| Net proceeds (payments) from corporate-owned life insurance policies | 23 | (2) | 22 | — | — | — | ||||||||||||||
| Proceeds from sale of property, plant and equipment and an insurance recovery | 22 | 3 | 33 | — | — | — | ||||||||||||||
| Net proceeds from business disposition | — | 38 | — | — | — | — | ||||||||||||||
| Finance receivables repaid | — | — | — | 147 | 250 | 128 | ||||||||||||||
| Finance receivables originated | — | — | — | (92) | (100) | (195) | ||||||||||||||
| Other investing activities, net | — | 1 | — | 45 | 35 | 19 | ||||||||||||||
| Net cash provided by (used in) investing activities | (511) | (335) | (277) | 100 | 185 | (48) | ||||||||||||||
| Cash flows from financing activities | ||||||||||||||||||||
| Decrease in short-term debt | (14) | (1) | — | — | — | — | ||||||||||||||
| Net proceeds from long-term debt | — | — | 1,137 | — | — | — | ||||||||||||||
| Principal payments on long-term debt and nonrecourse debt | (18) | (524) | (548) | (216) | (97) | (45) | ||||||||||||||
| Proceeds from borrowings against corporate-owned life insurance policies | — | — | 377 | — | — | — | ||||||||||||||
| Payments on borrowings against corporate-owned life insurance policies | — | — | (377) | — | — | — | ||||||||||||||
| Purchases of Textron common stock | (867) | (921) | (183) | — | — | — | ||||||||||||||
| Proceeds from exercise of stock options | 44 | 116 | 22 | — | — | — | ||||||||||||||
| Dividends paid | (17) | (18) | (18) | — | — | — | ||||||||||||||
| Other financing activities, net | (3) | (1) | (17) | — | — | 12 | ||||||||||||||
| Net cash provided by (used in) financing activities | (875) | (1,349) | 393 | (216) | (97) | (33) | ||||||||||||||
| Effect of exchange rate changes on cash and equivalents | (32) | (8) | 17 | — | — | — | ||||||||||||||
| Net increase (decrease) in cash and equivalents | 41 | (224) | 965 | (123) | 87 | (68) | ||||||||||||||
| Cash and equivalents at beginning of year | 1,922 | 2,146 | 1,181 | 195 | 108 | 176 | ||||||||||||||
| Cash and equivalents at end of year | $ | 1,963 | $ | 1,922 | $ | 2,146 | $ | 72 | $ | 195 | $ | 108 |
See Notes to the Consolidated Financial Statements.
Notes to the Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation and Financial Statement Presentation
Our Consolidated Financial Statements include the accounts of Textron Inc. and its majority-owned subsidiaries. Our financings are conducted through two separate borrowing groups. The Manufacturing group consists of Textron Inc. consolidated with its majority-owned subsidiaries that operate in the Textron Aviation, Bell, Textron Systems and Industrial segments, and the Textron eAviation segment, which was formed in the second quarter of 2022 upon the acquisition of Pipistrel, a manufacturer of electrically powered aircraft as discussed in Note 2. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation (TFC) 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.
Our 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 in consolidation.
Collaborative Arrangements
Our Bell segment has a strategic alliance agreement with The Boeing Company (Boeing) to provide engineering, development and test services related to the V-22 aircraft, as well as to produce the V-22 aircraft, under a number of separate contracts with the U.S. Government (V-22 Contracts). The alliance created by this agreement is not a legal entity and has no employees, no assets and no true operations. This agreement creates contractual rights and does not represent an entity in which we have an equity interest. We account for this alliance as a collaborative arrangement with Bell and Boeing reporting costs incurred and revenues generated from transactions with the U.S. Government in each company’s respective income statement. Neither Bell nor Boeing is considered to be the principal participant for the transactions recorded under this agreement. Profits on cost-plus contracts are allocated between Bell and Boeing on a 50%-50% basis. Negotiated profits on fixed-price contracts are also allocated 50%-50%; however, Bell and Boeing are each responsible for their own cost overruns and are entitled to retain any cost underruns. Based on the contractual arrangement established under the alliance, Bell accounts for its rights and obligations under the specific requirements of the V-22 Contracts allocated to Bell under the work breakdown structure. We account for all of our rights and obligations, including warranty, product and any contingent liabilities, under the specific requirements of the V-22 Contracts allocated to us under the agreement. Revenues and cost of sales reflect our performance under the V-22 Contracts with revenues recognized using the cost-to-cost method. We include all assets used in performance of the V-22 Contracts that we own and all liabilities arising from our obligations under the V-22 Contracts in our Consolidated Balance Sheets.
Use of Estimates
We prepare our financial statements in conformity with generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the Consolidated Statements of Operations in the period that they are determined.
Revenue Recognition
Revenue is recognized when control of the product or service promised under the contract is transferred to the customer either at a point in time (e.g., upon delivery) or over time (e.g., as we perform under the contract). We account for a contract when it has approval and commitment from both parties, the rights and payment terms of the parties are identified, the contract has commercial substance and collectability of consideration is probable. Contracts are reviewed to determine whether there is one or multiple performance obligations. A performance obligation is a promise to transfer a distinct product or service to a customer and represents the unit of accounting for revenue recognition. For contracts with multiple performance obligations, the expected consideration, or the transaction price, is allocated to each performance obligation identified in the contract based on the relative
standalone selling price of each performance obligation. Revenue is then recognized for the transaction price allocated to the performance obligation when control of the promised product or service underlying the performance obligation is transferred. Contract consideration is not adjusted for the effects of a significant financing component when, at contract inception, the period between when control transfers and when the customer will pay for that good or service is one year or less.
Revenue is classified as product or service revenue based on the predominant attributes of each performance obligation.
Commercial Contracts
The majority of our contracts with commercial customers have a single performance obligation as there is only one product or service promised or the promise to transfer the product or service is not distinct or separately identifiable from other promises in the contract. Revenue is primarily recognized at a point in time, which is generally when the customer obtains control of the asset upon delivery and customer acceptance. Contract modifications that provide for additional distinct products or services at the standalone selling price are treated as separate contracts.
For commercial aircraft, we contract with our customers to sell fully outfitted fixed-wing aircraft, which may include configuration options. The aircraft typically represents a single performance obligation and revenue is recognized upon customer acceptance and delivery. For commercial helicopters, our customers generally contract with us for fully functional basic configuration aircraft and control is transferred upon customer acceptance and delivery. At times, customers may separately contract with us for the installation of accessories and customization to the basic aircraft. If these contracts are entered into at or near the same time of the basic aircraft contract, we assess whether the contracts meet the criteria to be combined. For contracts that are combined, the basic aircraft and the accessories and customization are typically considered to be distinct, and therefore, are separate performance obligations. For these contracts, revenue is recognized on the basic aircraft upon customer acceptance and transfer of title and risk of loss, and on the accessories and customization, upon delivery and customer acceptance. We utilize observable prices to determine the standalone selling prices when allocating the transaction price to these performance obligations.
The transaction price for our commercial contracts reflects our estimate of returns, rebates and discounts, which are based on historical, current and forecasted information. Amounts billed to customers for shipping and handling are included in the transaction price and generally are not treated as separate performance obligations as these costs fulfill a promise to transfer the product to the customer. Taxes collected from customers and remitted to government authorities are recorded on a net basis.
We primarily provide standard warranty programs for products in our commercial businesses for periods that typically range from one year to five years. These assurance-type programs typically cannot be purchased separately and do not meet the criteria to be considered a performance obligation.
U.S. Government Contracts
Our contracts with the U.S. Government generally include the design, development, manufacture or modification of aerospace and defense products, as well as related services. These contracts, which also include those under the U.S. Government-sponsored foreign military sales program, accounted for approximately 22% of total revenues in 2022. The customer typically contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability, which often results in the delivery of multiple units. Accordingly, the entire contract is accounted for as one performance obligation. In certain circumstances, a contract may include both production and support services, such as logistics and parts plans, which are considered to be distinct in the context of the contract and represent separate performance obligations. When a contract is separated into more than one performance obligation, we generally utilize the expected cost plus a margin approach to determine the standalone selling prices when allocating the transaction price.
Our contracts are frequently modified for changes in contract specifications and requirements. Most of our contract modifications with the U.S. Government are for products and services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as part of that existing contract. The effect of these contract modifications on our estimates is recognized using the cumulative catch-up method of accounting.
Contracts with the U.S. Government generally contain clauses that provide lien rights to work-in-process along with clauses that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work-in-process. Due to the continuous transfer of control to the U.S. Government, we recognize revenue over the time that we perform under the contract. Selecting the method to measure progress towards completion requires judgment and is based on the nature of the products or service to be provided. We generally use the cost-to-cost method to measure progress for our 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.
The transaction price for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding variable consideration as applicable. Certain of our long-term contracts contain incentive fees or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance, historical performance, and all other information that is reasonably available to us.
Total contract cost is estimated utilizing current contract specifications and expected engineering requirements. Contract costs typically are incurred over a period of several years, and the estimation of these costs requires substantial judgment. 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 projections of costs quarterly or more frequently when circumstances significantly change.
Approximately 73% of our 2022 revenues with the U.S. Government were under fixed-price and fixed-price incentive contracts. Under the typical payment terms of these contracts, the customer pays us either performance-based or progress payments. Performance-based payments represent interim payments of up to 90% of the contract price based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments of up to 80% of costs incurred as the work progresses. Because the customer retains a small portion of the contract price until completion of the contract, these contracts generally result in revenue recognized in excess of billings, which we present as contract assets in the Consolidated Balance Sheets. Amounts billed and due from our customers are classified in Accounts receivable, net. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer. For cost-type contracts, we are generally paid for our actual costs incurred within a short period of time.
Finance Revenues
Finance revenues primarily include interest on finance receivables, finance lease earnings and portfolio gains/losses. Portfolio gains/losses include impairment charges related to repossessed assets and properties and gains/losses on the sale or early termination of finance assets. We recognize interest using the interest method, which provides a constant rate of return over the terms of the receivables. Accrual of interest income is suspended if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically suspend the accrual of interest income for accounts that are contractually delinquent by more than three months unless collection is not doubtful. Cash payments on nonaccrual accounts, including finance charges, generally are applied to reduce the net investment balance. Once we conclude that the collection of all principal and interest is no longer doubtful, we resume the accrual of interest and recognize previously suspended interest income at the time either a) the loan becomes contractually current through payment according to the original terms of the loan, or b) if the loan has been modified, following a period of performance under the terms of the modification.
Contract Estimates
For contracts where revenue is recognized over time, we recognize changes in estimated contract revenues, costs and profits using the cumulative catch-up method of accounting. This method recognizes the cumulative effect of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current period. Anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable.
In 2022, our cumulative catch-up adjustments decreased segment profit by $16 million and net income by $12 million, ($0.06 per diluted share). In 2021 and 2020, our cumulative catch-up adjustments increased segment profit by $81 million and $72 million, respectively, and net income by $62 million and $55 million, respectively ($0.27 and $0.24 per diluted share, respectively). Revenue was reduced by $25 million in 2022 and increased by $93 million and $77 million in 2021 and 2020, respectively, related to changes in profit booking rates for performance obligations satisfied in prior periods.
Contract Assets and Liabilities
Contract assets arise from contracts when revenue is recognized over time and the amount of revenue recognized exceeds the amount billed to the customer. These amounts are included in contract assets until the right to payment is no longer conditional on events other than the passage of time and are included in Other current assets in the Consolidated Balance Sheets. Contract liabilities, which are primarily included in Other current liabilities, include deposits, largely from our commercial aviation customers, and billings in excess of revenue recognized.
The incremental costs of obtaining a contract with a customer that is expected to be recovered is expensed as incurred when the period to be benefitted is one year or less.
Accounts Receivable, Net
Accounts receivable, net includes amounts billed to customers where the right to payment is unconditional. We maintain an allowance for credit losses for our commercial accounts receivable to provide for the estimated amount that will not be collected, even when the risk of loss is remote. The allowance is measured on a collective pool basis when similar risk characteristics exist and is established as a percentage of accounts receivable. We have identified pools with similar risk characteristics, based on customer and industry type and geographic location. The percentage is based on all available and relevant information including age of outstanding receivables and collateral value, if any, historical payment experience and loss history, current economic conditions, and, when reasonable and supportable factors exist, management’s expectation of future economic conditions. For amounts due from the U.S. Government, we have not established an allowance for credit losses as we have zero loss expectation based on a long history of no credit losses and the explicit guarantee of a sovereign entity.
Cash and Equivalents
Cash and equivalents consist of cash and short-term, highly liquid investments with original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or estimated realizable value. The majority of our inventories are valued using the last-in, first-out (LIFO) method, while the remaining inventories are generally valued using the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated primarily using the straight-line method. We capitalize expenditures for improvements that increase asset values and extend useful lives. Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying value of the asset exceeds the sum of the undiscounted expected future cash flows, the asset is written down to fair value.
Goodwill and Intangible Assets
Goodwill represents the excess of the consideration paid for the acquisition of a business over the fair values assigned to intangible and other net assets of the acquired business. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to an annual impairment test. We evaluate the recoverability of these assets in the fourth quarter of each year 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 a potential impairment.
For our goodwill impairment test, we calculate the fair value of each reporting unit using discounted cash flows. A 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. The discounted cash flows incorporate assumptions for 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 characteristics to the reporting unit being assessed. The fair value of our indefinite-lived intangible assets is primarily determined using the relief of royalty method based on forecasted revenues and royalty rates. If the estimated fair value of the reporting unit or indefinite-lived intangible asset exceeds the carrying value, there is no impairment. Otherwise, an impairment loss is recognized for the amount by which the carrying value exceeds the estimated fair value.
Acquired intangible assets with finite lives are subject to amortization. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Amortization of these intangible assets is recognized over their estimated useful lives using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized. Approximately 81% of our gross intangible assets are amortized based on the cash flow streams used to value the assets, with the remaining assets amortized using the straight-line method.
Finance Receivables
Finance receivables primarily include loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters. Finance receivables are generally recorded at the amount of outstanding principal less allowance for credit losses.
We establish an allowance for credit losses to cover probable but specifically unknown losses existing in the portfolio. This allowance is established as a percentage of finance receivables categorized by pools with similar risk characteristics, such as collateral or customer type and geographic location. The percentage is based on a combination of factors, including historical loss experience, current delinquency and default trends, collateral values, current economic conditions, and, when reasonable and supportable factors exist, management’s expectation of future economic conditions.
For those finance receivables that do not have similar risk characteristics, including larger balance accounts specifically identified as impaired, a reserve is established based on comparing the expected future cash flows, discounted at the finance receivable's effective interest rate, or the fair value of the underlying collateral if the finance receivable is collateral dependent, to its carrying amount. The expected future cash flows consider collateral value; financial performance and liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs associated with the repossession and eventual disposal of collateral. When there is a range of potential outcomes, we perform multiple discounted cash flow analyses and weight the potential outcomes based on their relative likelihood of occurrence. The evaluation of our portfolio is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the estimated fair value of the underlying collateral, which may differ from actual results. While our analysis is specific to each individual account, critical factors included in this analysis include industry valuation guides, age and physical condition of the collateral, payment history, and existence and financial strength of guarantors.
Finance receivables are charged off at the earlier of the date the collateral is repossessed or when management no longer deems the receivable collectible. Repossessed assets are recorded at their fair value, less estimated cost to sell.
Pension and Postretirement Benefit Obligations
We maintain various pension and postretirement plans for our employees globally. Our pension plans include significant 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 evaluate and update these assumptions annually in consultation with third-party actuaries and investment advisors. We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increases.
For our year-end measurement, our defined benefit plan assets and obligations are measured as of the month-end date closest to our fiscal year-end. We recognize the overfunded or underfunded status of our pension and postretirement plans in the Consolidated Balance Sheets and recognize changes in the funded status of our defined benefit plans in comprehensive income (loss) in the year in which they occur. To the extent actuarial gains and losses exceed 10% of the higher of the market-related value of assets or the benefit obligation in a year, the excess is recognized as a component of accumulated other comprehensive income (loss) and is amortized into net periodic pension cost over the remaining service period of the active participants. For plans in which all or almost all of the plan’s participants are inactive, the amortization period is the remaining life expectancy of the inactive participants. This determination is made on a plan-by-plan basis.
Derivatives and Hedging Activities
We are exposed to market risk primarily from changes in currency exchange rates and interest rates. We do not hold or issue derivative financial instruments for trading or speculative purposes. To manage the volatility relating to our exposures, we net these exposures on a consolidated basis to take advantage of natural offsets. For the residual portion, we enter into various derivative transactions pursuant to our policies in areas such as counterparty exposure and hedging practices. Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties and through periodic settlements of positions.
All derivative instruments are reported at fair value in the Consolidated Balance Sheets. Designation to support hedge accounting is performed on a specific exposure basis. For financial instruments qualifying as cash flow hedges, we record changes in the fair value of derivatives (to the extent they are effective as hedges) in other comprehensive income (loss), net of deferred taxes. Changes in fair value of derivatives not qualifying as hedges are recorded in earnings.
Foreign currency denominated assets and liabilities are translated into U.S. dollars. Adjustments from currency rate changes are recorded in the cumulative translation adjustment account in shareholders’ equity until the related foreign entity is sold or substantially liquidated.
Leases
We identify leases by evaluating our contracts to determine if the contract conveys the right to use an identified asset for a stated period of time in exchange for consideration. Specifically, we consider whether we can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the asset. For our contracts that contain both lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) and non-lease components (e.g., common-area maintenance costs or other goods/services), we allocate the consideration in the contract to each component based on its standalone price. Leases with terms greater than 12 months are classified as either operating or finance leases at the commencement date. For these leases, we capitalize the lesser of a) the present value of the minimum lease payments over the lease term, or b) the fair value of the asset, as a right-of-use asset with an offsetting lease liability. The discount rate used to calculate the present value of the minimum lease payments is typically our incremental borrowing rate, as the rate implicit in the lease is generally not known or determinable. The lease term includes any noncancelable period for which we have the right to use the asset and may include options to extend or terminate the lease when it is reasonably certain that we will exercise the
option. Operating leases are recognized as a single lease cost on a straight-line basis over the lease term, while finance lease cost is recognized separately as amortization and interest expense.
Product Liabilities
We accrue for product liability claims and related defense costs when a loss is probable and reasonably estimable. Our estimates are generally based on the specifics of each claim or incident and our best estimate of the probable loss using historical experience.
Environmental Liabilities and Asset Retirement Obligations
Liabilities for environmental matters are recorded on a site-by-site basis when it is probable that an obligation has been incurred and the cost can be reasonably estimated. We estimate our accrued environmental liabilities using currently available facts, existing technology, and presently enacted laws and regulations, all of which are subject to a number of factors and uncertainties. Our environmental liabilities are not discounted and do not take into consideration possible future insurance proceeds or significant amounts from claims against other third parties.
We have incurred asset retirement obligations primarily related to costs to remove and dispose of underground storage tanks and asbestos materials used in insulation, adhesive fillers and floor tiles. Currently, there is no legal requirement to remove these items and there is no plan to remodel the related facilities or otherwise cause the impacted items to require disposal. Since these asset retirement obligations are not probable, there is no related liability recorded in the Consolidated Balance Sheets.
Warranty Liabilities
For our assurance-type warranty programs, we estimate the costs that may be incurred and record a liability in the amount of such costs at the time product revenues are recognized. Factors that affect this liability include the number of products sold, historical costs per claim, length of warranty period, contractual recoveries from vendors and historical and anticipated rates of warranty claims, including production and warranty patterns for new models. We assess the adequacy of our recorded warranty liability periodically and adjust the amounts as necessary. Additionally, we may establish a warranty liability related to the issuance of aircraft service bulletins for aircraft no longer covered under the limited warranty programs.
Research and Development Costs
Our customer-funded research and development costs are charged directly to the related contracts, which primarily consist of U.S. Government contracts. In accordance with government regulations, we recover a portion of company-funded research and development costs through overhead rate charges on our U.S. Government contracts. Research and development costs that are not reimbursable under a contract with the U.S. Government or another customer are charged to expense as incurred. Company-funded research and development costs were $601 million, $619 million and $549 million in 2022, 2021 and 2020, respectively, and are included in cost of sales.
Income Taxes
The provision for income tax expense is calculated on reported income before income taxes based on current tax law and includes, in the current period, the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Tax laws may require items to be included in the determination of taxable income at different times from when the items are reflected in the financial statements. Deferred tax balances reflect the effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and their tax bases, as well as from net operating losses and tax credit carryforwards, and are stated at enacted tax rates in effect for the year taxes are expected to be paid or recovered.
Deferred tax assets represent tax benefits for tax deductions or credits available in future years and require certain estimates and assumptions to determine whether it is more likely than not that all or a portion of the benefit will not be realized. The recoverability of these future tax deductions and credits is determined by assessing the adequacy of future expected taxable income from all sources, including the future reversal of existing taxable temporary differences, taxable income in carryback years, estimated future taxable income and available tax planning strategies. Should a change in facts or circumstances lead to a change in judgment about the ultimate recoverability of a deferred tax asset, we record or adjust the related valuation allowance in the period that the change in facts and circumstances occurs, along with a corresponding increase or decrease in income tax expense.
We record tax benefits for uncertain tax positions based upon management’s evaluation of the information available at the reporting date. To be recognized in the financial statements, the tax position must meet the more-likely-than-not threshold that the position will be sustained upon examination by the tax authority based on technical merits assuming the tax authority has full knowledge of all relevant information. For positions meeting this recognition threshold, the benefit is measured as the largest amount of benefit that meets the more-likely-than-not threshold to be sustained. We periodically evaluate these tax positions based on the latest available information. For tax positions that do not meet the threshold requirement, we recognize net tax-related interest and penalties for continuing operations in income tax expense.
Note 2. Business Acquisition and Disposition
2022 Business Acquisition
On April 15, 2022, we acquired Pipistrel, a manufacturer of electrically powered aircraft, for a cash purchase price of $239 million, which included the assumption of $35 million of debt and other contractual obligations under the agreement and a final fixed payment of $21 million due in 2024. Beginning in the second quarter of 2022, this business is included in a new reporting segment, Textron eAviation, which combines the operating results of Pipistrel along with other research and development initiatives related to sustainable aviation solutions.
We allocated the purchase price for this business to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date and recorded $141 million in goodwill, related to expected synergies and the value of the assembled workforce, and $76 million in intangible assets, primarily developed technologies. The intangible assets were primarily valued using the relief-from-royalty method. This method utilizes significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy and requires us to make estimates and assumptions about sales, growth rates, royalty rates and discount rates based on marketplace data.
2021 Business Disposition
On January 25, 2021, we completed the sale of TRU Simulation + Training Canada Inc. (TRU Canada) within our Textron Systems segment for net cash proceeds of $38 million and recorded an after-tax gain of $17 million.
Note 3. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill by segment are as follows:
| (In millions) | Textron Aviation | Bell | Textron Systems | Industrial | Textron eAviation | Total | ||||||||||||||
| Balance at January 2, 2021 | $ | 631 | $ | 35 | $ | 1,009 | $ | 482 | $ | — | $ | 2,157 | ||||||||
| Foreign currency translation | — | — | 1 | (9) | — | (8) | ||||||||||||||
| Balance at January 1, 2022 | 631 | 35 | 1,010 | 473 | — | 2,149 | ||||||||||||||
| Acquisitions | 3 | 2 | — | — | 141 | 146 | ||||||||||||||
| Foreign currency translation | (1) | — | — | (8) | (3) | (12) | ||||||||||||||
| Balance at December 31, 2022 | $ | 633 | $ | 37 | $ | 1,010 | $ | 465 | $ | 138 | $ | 2,283 |
Intangible Assets
Our intangible assets are summarized below:
| December 31, 2022 | January 1, 2022 | ||||||||||||||||||||||
| (Dollars in millions) | Weighted-Average Amortization Period (in years) | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||
| Patents and technology | 15 | $ | 527 | $ | (319) | $ | 208 | $ | 481 | $ | (289) | $ | 192 | ||||||||||
| Trade names and trademarks | 18 | 199 | (8) | 191 | 181 | (8) | 173 | ||||||||||||||||
| Customer relationships and contractual agreements | 15 | 392 | (330) | 62 | 382 | (309) | 73 | ||||||||||||||||
| Other | — | — | — | — | 3 | (3) | — | ||||||||||||||||
| Total | $ | 1,118 | $ | (657) | $ | 461 | $ | 1,047 | $ | (609) | $ | 438 |
Trade names and trademarks in the table above include $169 million of indefinite-lived intangible assets at both December 31, 2022 and January 1, 2022. In 2022, 2021 and 2020, amortization expense totaled $52 million, $51 million and $54 million, respectively. Amortization expense is estimated to be approximately $39 million, $37 million, $34 million, $31 million and $29 million in 2023, 2024, 2025, 2026 and 2027, respectively.
Note 4. Accounts Receivable and Finance Receivables
Accounts Receivable
Accounts receivable is composed of the following:
| (In millions) | December 31, 2022 | January 1, 2022 | ||||||
| Commercial | $ | 755 | $ | 704 | ||||
| U.S. Government contracts | 124 | 158 | ||||||
| 879 | 862 | |||||||
| Allowance for credit losses | (24) | (24) | ||||||
| Total | $ | 855 | $ | 838 |
Finance Receivables
Finance receivables are presented in the following table:
| (In millions) | December 31, 2022 | January 1, 2022 | ||||||
| Finance receivables | $ | 587 | $ | 630 | ||||
| Allowance for credit losses | (24) | (25) | ||||||
| Total finance receivables, net | $ | 563 | $ | 605 |
Finance receivables primarily includes loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters. These loans have initial terms ranging from five years to twelve years, amortization terms ranging from eight years to fifteen years and an average balance of $1.8 million at December 31, 2022. Loans generally require the customer to pay a significant down payment, along with periodic scheduled principal payments that reduce the outstanding balance through the term of the loan.
Our finance receivables are diversified across geographic region and borrower industry. At December 31, 2022, 58% of our finance receivables were distributed internationally and 42% throughout the U.S., compared with 56% and 44%, respectively, at January 1, 2022. At December 31, 2022 and January 1, 2022, finance receivables of $73 million and $93 million, respectively, have been pledged as collateral for TFC’s debt of $28 million and $43 million, respectively.
Finance Receivable Portfolio Quality
We internally assess the quality of our finance receivables based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors. Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan. These three categories are performing, watchlist and nonaccrual.
We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful. Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain. All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing.
We measure delinquency based on the contractual payment terms of our finance receivables. In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.
Finance receivables categorized based on the credit quality indicators and by delinquency aging category are summarized as follows:
| (Dollars in millions) | December 31, 2022 | January 1, 2022 | ||||||
| Performing | $ | 515 | $ | 536 | ||||
| Watchlist | 26 | — | ||||||
| Nonaccrual | 46 | 94 | ||||||
| Nonaccrual as a percentage of finance receivables | 7.84% | 14.92% | ||||||
| Current and less than 31 days past due | $ | 579 | $ | 624 | ||||
| 31-60 days past due | 7 | 5 | ||||||
| 61-90 days past due | — | — | ||||||
| Over 90 days past due | 1 | 1 | ||||||
| 60+ days contractual delinquency as a percentage of finance receivables | 0.17% | 0.16% |
At December 31, 2022, 43% of our performing finance receivables were originated since the beginning of 2020 and 24% were originated from 2017 to 2019. For finance receivables categorized as watchlist, 94% were originated since the beginning of 2020 and for nonaccrual, 82% were originated from 2017 to 2019.
On a quarterly basis, we evaluate individual larger balance accounts for impairment. A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators described above. Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified. If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification.
A summary of impaired finance receivables, excluding leveraged leases, and the average recorded investment is provided below:
| (In millions) | December 31, 2022 | January 1, 2022 | ||||||
| Recorded investment: | ||||||||
| Impaired finance receivables with specific allowance for credit losses | $ | 15 | $ | 33 | ||||
| Impaired finance receivables with no specific allowance for credit losses | 31 | 61 | ||||||
| Total | $ | 46 | $ | 94 | ||||
| Unpaid principal balance | $ | 60 | $ | 109 | ||||
| Allowance for credit losses on impaired finance receivables | 3 | 4 | ||||||
| Average recorded investment of impaired finance receivables | 67 | 117 |
A summary of the allowance for credit losses on finance receivables based on how the underlying finance receivables are evaluated for impairment is provided below. The finance receivables reported in this table exclude $91 million and $95 million of leveraged leases at December 31, 2022 and January 1, 2022, respectively, in accordance with U.S. generally accepted accounting principles.
| (In millions) | December 31, 2022 | January 1, 2022 | ||||||
| Allowance for credit losses based on collective evaluation | $ | 21 | $ | 21 | ||||
| Allowance for credit losses based on individual evaluation | 3 | 4 | ||||||
| Finance receivables evaluated collectively | 450 | 441 | ||||||
| Finance receivables evaluated individually | 46 | 94 |
Note 5. Inventories
Inventories are composed of the following:
| (In millions) | December 31, 2022 | January 1, 2022 | ||||||
| Finished goods | $ | 991 | $ | 1,071 | ||||
| Work in process | 1,540 | 1,548 | ||||||
| Raw materials and components | 1,019 | 849 | ||||||
| Total | $ | 3,550 | $ | 3,468 |
At both December 31, 2022 and January 1, 2022, 71% of inventories were valued using the LIFO method. Inventories valued at LIFO cost would have been higher by approximately $594 million and $523 million, at December 31, 2022 and January 1, 2022, respectively, if they had been valued using the FIFO method.
Note 6. Property, Plant and Equipment, Net
Our Manufacturing group’s property, plant and equipment, net is composed of the following:
| (Dollars in millions) | Useful Lives (in years) | December 31, 2022 | January 1, 2022 | ||||||||||||||
| Land, buildings and improvements | 2 | - | 40 | $ | 2,140 | $ | 2,097 | ||||||||||
| Machinery and equipment | 1 | - | 20 | 5,467 | 5,329 | ||||||||||||
| 7,607 | 7,426 | ||||||||||||||||
| Accumulated depreciation and amortization | (5,084) | (4,888) | |||||||||||||||
| Total | $ | 2,523 | $ | 2,538 |
The Manufacturing group’s depreciation expense totaled $340 million, $325 million and $325 million in 2022, 2021 and 2020, respectively.
Note 7. Other Current Liabilities
The other current liabilities of our Manufacturing group are summarized below:
| (In millions) | December 31, 2022 | January 1, 2022 | ||||||
| Contract liabilities | $ | 1,416 | $ | 1,105 | ||||
| Salaries, wages and employer taxes | 414 | 477 | ||||||
| Current portion of warranty and product maintenance liabilities | 171 | 142 | ||||||
| Other | 644 | 620 | ||||||
| Total | $ | 2,645 | $ | 2,344 |
Changes in our warranty liability are as follows:
| (In millions) | 2022 | 2021 | 2020 | ||||||||
| Balance at beginning of year | $ | 127 | $ | 119 | $ | 141 | |||||
| Provision | 73 | 70 | 54 | ||||||||
| Settlements | (60) | (66) | (64) | ||||||||
| Adjustments* | 9 | 4 | (12) | ||||||||
| Balance at end of year | $ | 149 | $ | 127 | $ | 119 |
** Adjustments include changes to prior year estimates, new issues on prior year sales, business acquisitions and dispositions, and currency translation adjustments.*
Note 8. Leases
We primarily lease certain manufacturing plants, offices, warehouses, training and service centers at various locations worldwide through operating leases. Our operating leases have remaining lease terms up to 26 years, which include options to extend the lease term for periods up to 25 years when it is reasonably certain the option will be exercised. Operating lease cost totaled $69 million, $66 million and $61 million in 2022, 2021 and 2020, respectively. Variable and short-term lease costs were not significant. In 2022, 2021 and 2020, cash paid for operating lease liabilities totaled $68 million, $66 million and $60 million, respectively, and is classified in cash flows from operating activities. Noncash transactions totaled $58 million, $86 million and $119 million in 2022, 2021 and 2020, reflecting the recognition of operating lease assets and liabilities for new or extended leases.
Balance sheet and other information related to our operating leases is as follows:
| (Dollars in millions) | December 31, 2022 | January 1, 2022 | ||||||
| Other assets | $ | 372 | $ | 374 | ||||
| Other current liabilities | 54 | 56 | ||||||
| Other liabilities | 326 | 325 | ||||||
| Weighted-average remaining lease term (in years) | 10.4 | 10.5 | ||||||
| Weighted-average discount rate | 4.14% | 3.19% | ||||||
At December 31, 2022, maturities of our operating lease liabilities on an undiscounted basis totaled $68 million for 2023, $61 million for 2024, $54 million for 2025, $40 million for 2026, $35 million for 2027 and $230 million thereafter.
Note 9. Debt and Credit Facilities
Our debt is summarized in the table below:
| (In millions) | December 31, 2022 | January 1, 2022 | ||||||
| Manufacturing group | ||||||||
| 4.30% due 2024 | $ | 350 | $ | 350 | ||||
| 3.875% due 2025 | 350 | 350 | ||||||
| 4.00% due 2026 | 350 | 350 | ||||||
| 3.65% due 2027 | 350 | 350 | ||||||
| 3.375% due 2028 | 300 | 300 | ||||||
| 3.90% due 2029 | 300 | 300 | ||||||
| 3.00% due 2030 | 650 | 650 | ||||||
| 2.45% due 2031 | 500 | 500 | ||||||
| Other (weighted-average rate of 2.20% and 2.04%, respectively) | 32 | 35 | ||||||
| Total Manufacturing group debt | $ | 3,182 | $ | 3,185 | ||||
| Less: Current portion of long-term debt | (7) | (6) | ||||||
| Total Long-term debt | $ | 3,175 | $ | 3,179 | ||||
| Finance group | ||||||||
| Variable-rate note due 2025 (5.86%) and 2022 (1.65%) | $ | 25 | $ | 100 | ||||
| Fixed-rate note due 2027 (4.40%) and 2022 (2.88%) | 50 | 150 | ||||||
| Variable-rate notes due 2022-2027 (weighted-average rate of 5.81% and 1.57%, respectively)* | 5 | 7 | ||||||
| Fixed-rate notes due 2022-2028 (weighted-average rate of 3.39% and 3.29%, respectively)* | 23 | 36 | ||||||
| Floating Rate Junior Subordinated Notes due 2067 (6.34% and 1.89%, respectively) | 272 | 289 | ||||||
| Total Finance group debt | $ | 375 | $ | 582 |
** Notes amortize on a monthly basis and are secured by finance receivables as described in Note 4.*
The following table shows required payments during the next five years on debt outstanding at December 31, 2022:
| (In millions) | 2023 | 2024 | 2025 | 2026 | 2027 | ||||||||||||
| Manufacturing group | $ | 7 | $ | 357 | $ | 356 | $ | 355 | $ | 355 | |||||||
| Finance group | 13 | 10 | 28 | 1 | 51 | ||||||||||||
| Total | $ | 20 | $ | 367 | $ | 384 | $ | 356 | $ | 406 |
On October 21, 2022, Textron entered into a senior unsecured revolving credit facility for an aggregate principal amount of $1.0 billion, of which $100 million is available for the issuance of letters of credit. We may elect to increase the aggregate amount of commitments under the facility to up to $1.3 billion by designating an additional lender or by an existing lender agreeing to increase its commitment. The facility expires in October 2027 and provides for two one-year extensions at our option with the consent of lenders representing a majority of the commitments under the facility. This new facility replaces the existing five-year facility, which was scheduled to expire in October 2024. At December 31, 2022 and January 1, 2022, there were no amounts borrowed against either facility. At December 31, 2022, there were $9 million of outstanding letters of credit issued under the new facility, and at January 1, 2022, there were $9 million of outstanding letters of credit issued under the prior facility.
Floating Rate Junior Subordinated Notes
The Finance group’s $272 million of Floating Rate Junior Subordinated Notes are unsecured and rank junior to all of its existing and future senior debt. The notes mature on February 15, 2067; however, we have the right to redeem the notes at par at any time and we are obligated to redeem the notes beginning on February 15, 2042. In 2022 and 2021, TFC repurchased $17 million and $5 million, respectively, of these notes. Interest is variable at the three-month London Interbank Offered Rate + 1.735%.
Support Agreement
Under a Support Agreement between Textron and TFC, Textron is required to maintain a controlling interest in TFC. The agreement, as amended in December 2015, also requires Textron to ensure that TFC maintains fixed charge coverage of no less than 125% and consolidated shareholders' equity of no less than $125 million. There were no cash contributions required to be paid to TFC in 2022, 2021 and 2020 to maintain compliance with the support agreement.
Note 10. Derivative Instruments and Fair Value Measurements
We measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We prioritize the assumptions that market participants would use in pricing the asset or liability into a three-tier fair value hierarchy. This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exist, requiring companies to develop their own assumptions. Observable inputs that do not meet the criteria of Level 1, which include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, are categorized as Level 2. Level 3 inputs are those that reflect our estimates about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are utilized only to the extent that observable inputs are not available or cost effective to obtain.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
We manufacture and sell our products in a number of countries throughout the world, and, therefore, we are exposed to movements in foreign currency exchange rates. We primarily utilize foreign currency exchange contracts with maturities of no more than three years to manage this volatility. These contracts qualify as cash flow hedges and are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses. Net gains and losses recognized in earnings and Accumulated other comprehensive loss on cash flow hedges, including gains and losses related to hedge ineffectiveness, were not significant in the periods presented.
Our foreign currency exchange contracts are measured at fair value using the market method valuation technique. The inputs to this technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data providers. These are observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions, so they are classified as Level 2. At December 31, 2022 and January 1, 2022, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $354 million and $272 million, respectively. At December 31, 2022, the fair value amount of our foreign currency exchange contracts was an $11 million liability. At January 1, 2022, the fair value amounts of our foreign currency exchange contracts were a $4 million asset and a $3 million liability.
Our Finance group enters into interest rate swap agreements to mitigate exposure to fluctuations in interest rates. By using these contracts, we are able to convert floating-rate cash flows to fixed-rate cash flows. These agreements are designated as cash flow hedges. At December 31, 2022, we had a swap agreement for a notional amount of $272 million with a maturity of August 2023 and a swap agreement for a notional amount of $25 million, maturing in June 2025, with a combined fair value of an $8 million asset. At January 1, 2022, we had a swap agreement for a notional amount of $289 million with a maturity of August 2023 and an insignificant fair value. The fair value of these swap agreements is determined using values published by third-party leading financial news and data providers. These values are observable data that represent the value that financial institutions use for contracts entered into at that date, but are not based on actual transactions, so they are classified as Level 2.
Assets and Liabilities Not Recorded at Fair Value
The carrying value and estimated fair value of our financial instruments that are not reflected in the financial statements at fair value are as follows:
| December 31, 2022 | January 1, 2022 | |||||||||||||
| (In millions) | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | ||||||||||
| Manufacturing group | ||||||||||||||
| Debt, excluding leases | $ | (3,175) | $ | (2,872) | $ | (3,181) | $ | (3,346) | ||||||
| Finance group | ||||||||||||||
| Finance receivables, excluding leases | 390 | 369 | 413 | 444 | ||||||||||
| Debt | (375) | (294) | (582) | (546) |
Fair value for the Manufacturing group debt is determined using market observable data for similar transactions (Level 2). The fair value for the Finance group debt was determined primarily based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations (Level 2). Fair value estimates for finance receivables were determined based on internally developed discounted cash flow models primarily utilizing significant unobservable inputs (Level 3), which include estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and expectations of borrowers’ ability to make payments on a timely basis.
Note 11. Shareholders’ Equity
Capital Stock
We have authorization for 15 million shares of preferred stock with a par value of $0.01 and 500 million shares of common stock with a par value of $0.125. Outstanding common stock activity is presented below:
| (In thousands) | 2022 | 2021 | 2020 | ||||||||
| Balance at beginning of year | 216,935 | 226,444 | 227,956 | ||||||||
| Share repurchases | (13,075) | (13,533) | (4,145) | ||||||||
| Share-based compensation activity | 2,301 | 4,024 | 2,633 | ||||||||
| Balance at end of year | 206,161 | 216,935 | 226,444 |
Earnings Per Share
We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period. Basic EPS is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends. Diluted EPS considers the dilutive effect of all potential future common stock, including stock options.
The weighted-average shares outstanding for basic and diluted EPS are as follows:
| (In thousands) | 2022 | 2021 | 2020 | ||||||||
| Basic weighted-average shares outstanding | 212,809 | 224,106 | 228,536 | ||||||||
| Dilutive effect of stock options | 2,164 | 2,414 | 443 | ||||||||
| Diluted weighted-average shares outstanding | 214,973 | 226,520 | 228,979 |
In 2022, 2021 and 2020, stock options to purchase 1.0 million, 1.1 million and 7.6 million shares, respectively, of common stock were excluded from the calculation of diluted weighted-average shares outstanding as their effect would have been anti-dilutive.
Accumulated Other Comprehensive Loss
The components of Accumulated other comprehensive loss are presented below:
| (In millions) | Pension and Postretirement Benefits Adjustments | Foreign Currency Translation Adjustments | Deferred Gains (Losses) on Hedge Contracts | Accumulated Other Comprehensive Loss | ||||||||||
| Balance at January 2, 2021 | $ | (1,780) | $ | 42 | $ | (1) | $ | (1,739) | ||||||
| Other comprehensive income before reclassifications | 861 | (51) | 3 | 813 | ||||||||||
| Reclassified from Accumulated other comprehensive loss | 120 | 14 | (1) | 133 | ||||||||||
| Other | — | 4 | — | 4 | ||||||||||
| Balance at January 1, 2022 | $ | (799) | $ | 9 | $ | 1 | $ | (789) | ||||||
| Other comprehensive income before reclassifications | 214 | (103) | (3) | 108 | ||||||||||
| Reclassified from Accumulated other comprehensive loss | 69 | — | — | 69 | ||||||||||
| Balance at December 31, 2022 | $ | (516) | $ | (94) | $ | (2) | $ | (612) |
Other comprehensive income
The before and after-tax components of other comprehensive income are presented below:
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||
| (In millions) | Pre-Tax Amount | Tax (Expense) Benefit | After- Tax Amount | Pre-Tax Amount | Tax (Expense) Benefit | After- Tax Amount | Pre-Tax Amount | Tax (Expense) Benefit | After- Tax Amount | ||||||||||||||||||||
| Pension and postretirement benefits adjustments: | |||||||||||||||||||||||||||||
| Unrealized gains (losses) | $ | 285 | $ | (67) | $ | 218 | $ | 1,148 | $ | (271) | $ | 877 | $ | (144) | $ | 35 | $ | (109) | |||||||||||
| Amortization of net actuarial loss* | 83 | (20) | 63 | 150 | (34) | 116 | 184 | (43) | 141 | ||||||||||||||||||||
| Amortization of prior service cost* | 8 | (2) | 6 | 7 | (3) | 4 | 6 | (1) | 5 | ||||||||||||||||||||
| Recognition of prior service cost | (4) | — | (4) | (20) | 4 | (16) | (8) | 2 | (6) | ||||||||||||||||||||
| Pension and postretirement benefits adjustments, net | 372 | (89) | 283 | 1,285 | (304) | 981 | 38 | (7) | 31 | ||||||||||||||||||||
| Foreign currency translation adjustments: | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (103) | — | (103) | (51) | — | (51) | 81 | (3) | 78 | ||||||||||||||||||||
| Business disposition | — | — | — | 14 | — | 14 | — | — | — | ||||||||||||||||||||
| Foreign currency translation adjustments, net | (103) | — | (103) | (37) | — | (37) | 81 | (3) | 78 | ||||||||||||||||||||
| Deferred gains (losses) on hedge contracts: | |||||||||||||||||||||||||||||
| Current deferrals | (7) | 4 | (3) | 3 | — | 3 | 4 | (1) | 3 | ||||||||||||||||||||
| Reclassification adjustments | — | — | — | (1) | — | (1) | (6) | 2 | (4) | ||||||||||||||||||||
| Deferred gains (losses) on hedge contracts, net | (7) | 4 | (3) | 2 | — | 2 | (2) | 1 | (1) | ||||||||||||||||||||
| Total | $ | 262 | $ | (85) | $ | 177 | $ | 1,250 | $ | (304) | $ | 946 | $ | 117 | $ | (9) | $ | 108 |
** These components of other comprehensive income are included in the computation of net periodic pension cost. See Note 15 for additional information.*
Note 12. Segment and Geographic Data
We operate in, and report financial information for, the following six operating segments: Textron Aviation, Bell, Textron Systems, Industrial, Textron eAviation and Finance. The accounting policies of the segments are the same as those described in Note 1.
Textron Aviation products include Citation jets, King Air and Caravan turboprop aircraft, military trainer and defense aircraft, piston engine aircraft, and aftermarket part sales and services sold to a diverse base of corporate and individual buyers, and U.S. and non-U.S. governments.
Bell products include military and commercial helicopters, tiltrotor aircraft and related spare parts and services. Bell supplies military helicopters and, in association with The Boeing Company, military tiltrotor aircraft, and aftermarket services to the U.S. and non-U.S. governments. Bell also supplies commercial helicopters and aftermarket services to corporate, private, law enforcement, utility, public safety and emergency medical helicopter operators, and U.S. and foreign governments.
Textron Systems products and services include unmanned aircraft systems, electronic systems and solutions, advanced marine craft, piston aircraft engines, live military air-to-air and air-to-ship training, weapons and related components, and armored and specialty vehicles for U.S. and international military, government and commercial customers.
Industrial products and markets include the following:
-
Fuel Systems and Functional Components products consist of blow-molded plastic fuel systems, including conventional plastic fuel tanks and pressurized fuel tanks for hybrid applications, clear-vision systems, plastic tanks for selective catalytic reduction systems and battery housing systems for use in electric vehicles that are marketed primarily to automobile OEMs; and
-
Specialized Vehicles products include golf cars, off-road utility vehicles, recreational side-by-side and all-terrain vehicles, snowmobiles, light transportation vehicles, aviation ground support equipment, professional turf-maintenance equipment and turf-care vehicles that are marketed primarily to golf courses and resorts, government agencies and municipalities, consumers, outdoor enthusiasts, and commercial and industrial users.
The Textron eAviation segment manufactures a family of light aircraft and gliders with both electric and combustion engines, and also performs other research and development initiatives related to sustainable aviation solutions.
The Finance segment provides financing primarily to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters.
Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments includes non-service components of net periodic benefit cost/(income) and excludes interest expense, net; certain corporate expenses; gains/losses on major business dispositions; special charges; and an inventory charge related to the 2020 COVID-19 restructuring plan, as discussed in Note 16. The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense.
Our revenues by segment, along with a reconciliation of segment profit to income from continuing operations before income taxes, are as follows:
| Revenues | Segment Profit (Loss) | |||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | ||||||||||||||
| Textron Aviation | $ | 5,073 | $ | 4,566 | $ | 3,974 | $ | 584 | $ | 378 | $ | 16 | ||||||||
| Bell | 3,091 | 3,364 | 3,309 | 317 | 408 | 462 | ||||||||||||||
| Textron Systems | 1,172 | 1,273 | 1,313 | 152 | 189 | 152 | ||||||||||||||
| Industrial | 3,465 | 3,130 | 3,000 | 165 | 140 | 111 | ||||||||||||||
| Textron eAviation | 16 | — | — | (26) | — | — | ||||||||||||||
| Finance | 52 | 49 | 55 | 31 | 19 | 10 | ||||||||||||||
| Total | $ | 12,869 | $ | 12,382 | $ | 11,651 | $ | 1,223 | $ | 1,134 | $ | 751 | ||||||||
| Corporate expenses and other, net | (113) | (129) | (122) | |||||||||||||||||
| Interest expense, net for Manufacturing group | (94) | (124) | (145) | |||||||||||||||||
| Special charges* | — | (25) | (147) | |||||||||||||||||
| Inventory charge* | — | — | (55) | |||||||||||||||||
| Gain on business disposition | — | 17 | — | |||||||||||||||||
| Income from continuing operations before income taxes | $ | 1,016 | $ | 873 | $ | 282 |
** See Note 16 for additional information.*
Other information by segment is provided below:
| Assets | Capital Expenditures | Depreciation and Amortization | ||||||||||||||||||||||||
| (In millions) | December 31, 2022 | January 1, 2022 | 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | ||||||||||||||||||
| Textron Aviation | $ | 4,496 | $ | 4,390 | $ | 138 | $ | 115 | $ | 94 | $ | 152 | $ | 139 | $ | 138 | ||||||||||
| Bell | 2,857 | 3,382 | 80 | 92 | 117 | 90 | 87 | 91 | ||||||||||||||||||
| Textron Systems | 1,989 | 1,980 | 57 | 80 | 42 | 49 | 45 | 43 | ||||||||||||||||||
| Industrial | 2,555 | 2,529 | 78 | 82 | 62 | 93 | 99 | 102 | ||||||||||||||||||
| Textron eAviation | 278 | — | 1 | — | — | 2 | — | — | ||||||||||||||||||
| Finance | 664 | 867 | — | — | — | 1 | 10 | 5 | ||||||||||||||||||
| Corporate | 3,454 | 2,679 | — | 6 | 2 | 10 | 10 | 12 | ||||||||||||||||||
| Total | $ | 16,293 | $ | 15,827 | $ | 354 | $ | 375 | $ | 317 | $ | 397 | $ | 390 | $ | 391 |
Geographic Data
Presented below is selected financial information by geographic area:
| Revenues* | Property, Plant and Equipment, net** | ||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | December 31, 2022 | January 1, 2022 | ||||||||||||
| United States | $ | 8,702 | $ | 8,572 | $ | 7,943 | $ | 2,137 | $ | 2,121 | |||||||
| Europe | 1,468 | 1,369 | 1,336 | 188 | 201 | ||||||||||||
| Other international | 2,699 | 2,441 | 2,372 | 198 | 216 | ||||||||||||
| Total | $ | 12,869 | $ | 12,382 | $ | 11,651 | $ | 2,523 | $ | 2,538 |
** Revenues are attributed to countries based on the location of the customer.*
*** Property, plant and equipment, net is based on the location of the asset.*
Note 13. Revenues
Disaggregation of Revenues
Our revenues disaggregated by major product type are presented below:
| (In millions) | 2022 | 2021 | 2020 | ||||||||
| Aircraft | $ | 3,387 | $ | 3,116 | $ | 2,714 | |||||
| Aftermarket parts and services | 1,686 | 1,450 | 1,260 | ||||||||
| Textron Aviation | 5,073 | 4,566 | 3,974 | ||||||||
| Military aircraft and support programs | 1,740 | 2,073 | 2,213 | ||||||||
| Commercial helicopters, parts and services | 1,351 | 1,291 | 1,096 | ||||||||
| Bell | 3,091 | 3,364 | 3,309 | ||||||||
| Textron Systems | 1,172 | 1,273 | 1,313 | ||||||||
| Fuel systems and functional components | 1,771 | 1,735 | 1,751 | ||||||||
| Specialized vehicles | 1,694 | 1,395 | 1,249 | ||||||||
| Industrial | 3,465 | 3,130 | 3,000 | ||||||||
| Textron eAviation | 16 | — | — | ||||||||
| Finance | 52 | 49 | 55 | ||||||||
| Total revenues | $ | 12,869 | $ | 12,382 | $ | 11,651 |
Our revenues for our segments by customer type and geographic location are presented below:
| (In millions) | Textron Aviation | Bell | Textron Systems | Industrial | Textron eAviation | Finance | Total | ||||||||||||||||
| 2022 | |||||||||||||||||||||||
| Customer type: | |||||||||||||||||||||||
| Commercial | $ | 4,959 | $ | 1,284 | $ | 274 | $ | 3,450 | $ | 16 | $ | 52 | $ | 10,035 | |||||||||
| U.S. Government | 114 | 1,807 | 898 | 15 | — | — | 2,834 | ||||||||||||||||
| Total revenues | $ | 5,073 | $ | 3,091 | $ | 1,172 | $ | 3,465 | $ | 16 | $ | 52 | $ | 12,869 | |||||||||
| Geographic location: | |||||||||||||||||||||||
| United States | $ | 3,520 | $ | 2,242 | $ | 1,054 | $ | 1,862 | $ | 7 | $ | 17 | $ | 8,702 | |||||||||
| Europe | 579 | 139 | 42 | 699 | 6 | 3 | 1,468 | ||||||||||||||||
| Other international | 974 | 710 | 76 | 904 | 3 | 32 | 2,699 | ||||||||||||||||
| Total revenues | $ | 5,073 | $ | 3,091 | $ | 1,172 | $ | 3,465 | $ | 16 | $ | 52 | $ | 12,869 | |||||||||
| 2021 | |||||||||||||||||||||||
| Customer type: | |||||||||||||||||||||||
| Commercial | $ | 4,435 | $ | 1,328 | $ | 257 | $ | 3,113 | $ | — | $ | 49 | $ | 9,182 | |||||||||
| U.S. Government | 131 | 2,036 | 1,016 | 17 | — | — | 3,200 | ||||||||||||||||
| Total revenues | $ | 4,566 | $ | 3,364 | $ | 1,273 | $ | 3,130 | $ | — | $ | 49 | $ | 12,382 | |||||||||
| Geographic location: | |||||||||||||||||||||||
| United States | $ | 3,424 | $ | 2,425 | $ | 1,126 | $ | 1,570 | $ | — | $ | 27 | $ | 8,572 | |||||||||
| Europe | 396 | 171 | 44 | 757 | — | 1 | 1,369 | ||||||||||||||||
| Other international | 746 | 768 | 103 | 803 | — | 21 | 2,441 | ||||||||||||||||
| Total revenues | $ | 4,566 | $ | 3,364 | $ | 1,273 | $ | 3,130 | $ | — | $ | 49 | $ | 12,382 | |||||||||
| 2020 | |||||||||||||||||||||||
| Customer type: | |||||||||||||||||||||||
| Commercial | $ | 3,826 | $ | 1,079 | $ | 249 | $ | 2,993 | $ | — | $ | 55 | $ | 8,202 | |||||||||
| U.S. Government | 148 | 2,230 | 1,064 | 7 | — | — | 3,449 | ||||||||||||||||
| Total revenues | $ | 3,974 | $ | 3,309 | $ | 1,313 | $ | 3,000 | $ | — | $ | 55 | $ | 11,651 | |||||||||
| Geographic location: | |||||||||||||||||||||||
| United States | $ | 2,825 | $ | 2,564 | $ | 1,129 | $ | 1,398 | $ | — | $ | 27 | $ | 7,943 | |||||||||
| Europe | 356 | 148 | 44 | 786 | — | 2 | 1,336 | ||||||||||||||||
| Other international | 793 | 597 | 140 | 816 | — | 26 | 2,372 | ||||||||||||||||
| Total revenues | $ | 3,974 | $ | 3,309 | $ | 1,313 | $ | 3,000 | $ | — | $ | 55 | $ | 11,651 |
Remaining Performance Obligations
Our remaining performance obligations, which is the equivalent of our backlog, represent the expected transaction price allocated to our contracts that we expect to recognize as revenue in future periods when we perform under the contracts. These remaining obligations exclude unexercised contract options and potential orders under ordering-type contracts such as Indefinite Delivery, Indefinite Quantity contracts. At December 31, 2022, we had $13.3 billion in remaining performance obligations of which we expect to recognize revenues of approximately 86% through 2024, an additional 11% through 2026, and the balance thereafter.
Contract Assets and Liabilities
Assets and liabilities related to our contracts with customers are reported on a contract-by-contract basis at the end of each reporting period. At December 31, 2022 and January 1, 2022, contract assets totaled $680 million and $717 million, respectively, and contract liabilities totaled $1.5 billion and $1.2 billion, respectively, reflecting timing differences between revenues recognized, billings and payments from customers. During 2022, 2021 and 2020, we recognized revenues of $873 million, $600 million and $506 million, respectively, that were included in the contract liability balance at the beginning of each year.
Note 14. Share-Based Compensation
Under our 2015 Long-Term Incentive Plan (Plan), which replaced our 2007 Long-Term Incentive Plan in April 2015, we have authorization to provide awards to selected employees and non-employee directors in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance share units and other awards. A maximum of 17 million shares is authorized for issuance for all purposes under the Plan plus any shares that become available upon cancellation, forfeiture or expiration of awards granted under the 2007 Long-Term Incentive Plan. No more than 17 million shares may be awarded pursuant to incentive stock options, and no more than 4.25 million shares may be issued pursuant to awards of restricted stock, restricted stock units, performance stock, performance share units or other awards that are payable in shares. For 2022, 2021 and 2020, the awards granted under this Plan primarily included stock options, restricted stock units and performance share units.
Share-based compensation costs are reflected primarily in selling and administrative expense. Compensation expense included in net income for our share-based compensation plans is as follows:
| (In millions) | 2022 | 2021 | 2020 | ||||||||
| Compensation expense | $ | 66 | $ | 138 | $ | 57 | |||||
| Income tax benefit | (16) | (33) | (14) | ||||||||
| Total compensation expense included in net income | $ | 50 | $ | 105 | $ | 43 |
Compensation cost for awards subject only to service conditions that vest ratably is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award utilizing an estimated forfeiture rate. Our awards include continued vesting provisions for retirement eligible employees. Upon reaching retirement eligibility, the service requirement for these individuals is considered to have been satisfied and compensation expense for future awards is recognized on the date of the grant.
As of December 31, 2022, we had not recognized $27 million of total compensation costs associated with unvested awards subject only to service conditions. We expect to recognize compensation expense for these awards over a weighted-average period of approximately two years. We typically grant stock appreciation rights to selected non-U.S. employees. At December 31, 2022, outstanding stock appreciation rights totaled 574,315 with a weighted-average exercise price of $51.82 and a weighted-average remaining contractual life of 6.2 years; these units had an intrinsic value of $11 million, compared to $18 million at January 1, 2022.
Stock Options
Stock option compensation expense was $22 million, $21 million and $20 million in 2022, 2021 and 2020, respectively. Options to purchase our shares have a maximum term of ten years and generally vest ratably over a three-year period. Stock option compensation cost is calculated under the fair value approach using the Black-Scholes option-pricing model to determine the fair value of options granted on the date of grant. The expected volatility used in this model is based on historical volatilities and implied volatilities from traded options on our common stock. The expected term is based on historical option exercise data, which is adjusted to reflect any anticipated changes in expected behavior.
We grant options annually on the first day of March. The assumptions used in our option-pricing model for these grants and the weighted-average fair value for these options are as follows:
| 2022 | 2021 | 2020 | |||||||||
| Fair value of options at grant date | $ | 19.95 | $ | 15.05 | $ | 10.66 | |||||
| Dividend yield | 0.1% | 0.2% | 0.2% | ||||||||
| Expected volatility | 29.2% | 33.6% | 29.3% | ||||||||
| Risk-free interest rate | 1.9% | 0.7% | 1.1% | ||||||||
| Expected term (in years) | 4.8 | 4.7 | 4.7 |
The stock option activity during 2022 is provided below:
| (Options in thousands) | Number of Options | Weighted- Average Exercise Price | ||||||
| Outstanding at beginning of year | 8,289 | $ | 46.18 | |||||
| Granted | 1,232 | 69.55 | ||||||
| Exercised | (1,102) | (41.00) | ||||||
| Forfeited or expired | (109) | (52.66) | ||||||
| Outstanding at end of year | 8,310 | $ | 50.25 | |||||
| Exercisable at end of year | 5,596 | $ | 47.03 |
At December 31, 2022, our outstanding options had an aggregate intrinsic value of $171 million and a weighted-average remaining contractual life of 5.8 years. Our exercisable options had an aggregate intrinsic value of $133 million and a weighted-average remaining contractual life of 4.6 years at December 31, 2022. The total intrinsic value of options exercised during 2022, 2021 and 2020 was $32 million, $63 million and $10 million, respectively.
Restricted Stock Units
We issue restricted stock units that include the right to receive dividend equivalents and are settled in either cash or stock. Beginning in 2020, new grants of restricted stock units vest in full on the third anniversary of the grant date. Restricted stock units granted prior to 2020 vest one-third each in the third, fourth and fifth year following the year of the grant. Compensation cost is determined using the fair value of these units based on the trading price of our common stock. For units payable in stock, we use the trading price on the grant date, while units payable in cash are remeasured using the price at each reporting period date.
The 2022 activity for restricted stock units is provided below:
| Units Payable in Stock | Units Payable in Cash | ||||||||||||||||
| (Shares/Units in thousands) | Number of Shares | Weighted- Average Grant Date Fair Value | Number of Units | Weighted- Average Grant Date Fair Value | |||||||||||||
| Outstanding at beginning of year, nonvested | 569 | $ | 50.01 | 1,158 | $ | 49.92 | |||||||||||
| Granted | 104 | 70.25 | 226 | 71.05 | |||||||||||||
| Vested | (148) | (53.68) | (248) | (53.98) | |||||||||||||
| Forfeited | — | — | (50) | (52.48) | |||||||||||||
| Outstanding at end of year, nonvested | 525 | $ | 52.99 | 1,086 | $ | 53.26 |
The fair value of the restricted stock unit awards that vested and/or amounts paid under these awards is as follows:
| (In millions) | 2022 | 2021 | 2020 | ||||||||
| Fair value of awards vested | $ | 25 | $ | 20 | $ | 17 | |||||
| Cash paid | 17 | 13 | 11 |
Performance Share Units
The fair value of share-based compensation awards accounted for as liabilities includes performance share units, which are paid in cash in the first quarter of the year following vesting. Performance share units are subject to performance goals set at the beginning of the three-year performance period and vest at the end of the performance period. These units are remeasured to fair value at the end of each reporting period based on the trading price of our common stock and the number of units, as adjusted based on assumptions with respect to performance on the relevant metrics.
The 2022 activity for our performance share units is as follows:
| (Units in thousands) | Number of Units | Weighted- Average Grant Date Fair Value | ||||||
| Outstanding at beginning of year, nonvested | 526 | $ | 45.87 | |||||
| Granted | 174 | 71.07 | ||||||
| Vested | (273) | (40.60) | ||||||
| Outstanding at end of year, nonvested | 427 | $ | 59.51 |
The fair value of the performance share units that vested and/or amounts paid under these awards is as follows:
| (In millions) | 2022 | 2021 | 2020 | ||||||||
| Fair value of awards vested | $ | 19 | $ | 18 | $ | 8 | |||||
| Cash paid | 15 | 6 | 7 |
Note 15. Retirement Plans
We provide defined-contribution benefits to eligible employees, as well as some remaining defined-benefit pension and other post-retirement benefits covering certain of our U.S. and Non-U.S. employees. Substantially all of our employees are covered by defined contribution plans. The largest of these plans, the Textron Savings Plan, is a qualified 401(k) plan subject to the Employee Retirement Income Security Act of 1974 (ERISA). Our defined contribution plans cost $140 million, $131 million and $128 million in 2022, 2021 and 2020, respectively. We also provide postretirement benefits other than pensions for certain retired employees in the U.S. that include healthcare, dental care, Medicare Part B reimbursement and life insurance.
A portion of our U.S. employees participate in the legacy defined benefit pension plans which were closed to new participants beginning on January 1, 2010. These legacy plans include the Textron Master Retirement Plan (TMRP), the Bell Helicopter Textron Master Retirement Plan, and the CWC Castings Division of Textron Inc. Hourly-Rated Employees' Pension Plan, which are each subject to the provisions of ERISA and provide a minimum guaranteed benefit to participants. The primary factors affecting the benefits earned by participants in our pension plans are employees’ years of service and compensation levels. Employees hired subsequent to the closure of these plans receive an additional annual cash contribution to their Textron Savings Plan account based on their eligible compensation of up to 4%.
Periodic Benefit Cost (Income)
The components of net periodic benefit cost (income) and other amounts recognized in other comprehensive income (loss) (OCI) are as follows:
| Pension Benefits | Postretirement Benefits Other than Pensions | |||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | ||||||||||||||
| Net periodic benefit cost (income) | ||||||||||||||||||||
| Service cost | $ | 108 | $ | 116 | $ | 106 | $ | 2 | $ | 3 | $ | 2 | ||||||||
| Interest cost | 272 | 252 | 293 | 6 | 5 | 8 | ||||||||||||||
| Expected return on plan assets | (609) | (573) | (574) | — | — | — | ||||||||||||||
| Amortization of prior service cost (credit) | 13 | 12 | 11 | (5) | (5) | (5) | ||||||||||||||
| Amortization of net actuarial loss (gain) | 87 | 152 | 185 | (4) | (2) | (1) | ||||||||||||||
| Net periodic benefit cost (income)* | $ | (129) | $ | (41) | $ | 21 | $ | (1) | $ | 1 | $ | 4 | ||||||||
| Other changes in plan assets and benefit obligations recognized in OCI | ||||||||||||||||||||
| Current year actuarial loss (gain) | $ | (246) | $ | (1,135) | $ | 146 | $ | (39) | $ | (13) | $ | (2) | ||||||||
| Current year prior service cost | 4 | 20 | 8 | — | — | — | ||||||||||||||
| Amortization of net actuarial gain (loss) | (87) | (152) | (185) | 4 | 2 | 1 | ||||||||||||||
| Amortization of prior service credit (cost) | (13) | (12) | (11) | 5 | 5 | 5 | ||||||||||||||
| Total recognized in OCI, before taxes | $ | (342) | $ | (1,279) | $ | (42) | $ | (30) | $ | (6) | $ | 4 | ||||||||
| Total recognized in net periodic benefit cost (income) and OCI | $ | (471) | $ | (1,320) | $ | (21) | $ | (31) | $ | (5) | $ | 8 |
** Excludes the cost associated with the defined contribution component that is included in certain of our U.S.-based defined benefit pension plans, of $11 million in 2022, 2021 and 2020, respectively.*
Obligations and Funded Status
All of our plans are measured as of our fiscal year-end. The changes in the projected benefit obligation and in the fair value of plan assets, along with our funded status, are as follows:
| Pension Benefits | Postretirement Benefits Other than Pensions | |||||||||||||
| (In millions) | December 31, 2022 | January 1, 2022 | December 31, 2022 | January 1, 2022 | ||||||||||
| Change in projected benefit obligation | ||||||||||||||
| Projected benefit obligation at beginning of year | $ | 9,339 | $ | 9,833 | $ | 202 | $ | 230 | ||||||
| Service cost | 108 | 116 | 2 | 3 | ||||||||||
| Interest cost | 272 | 252 | 6 | 5 | ||||||||||
| Plan participants’ contributions | — | — | 4 | 4 | ||||||||||
| Actuarial gains | (2,373) | (436) | (40) | (13) | ||||||||||
| Benefits paid | (448) | (446) | (24) | (27) | ||||||||||
| Plan amendment | 1 | 18 | — | — | ||||||||||
| Foreign exchange rate changes and other | (51) | 2 | — | — | ||||||||||
| Projected benefit obligation at end of year | $ | 6,848 | $ | 9,339 | $ | 150 | $ | 202 | ||||||
| Change in fair value of plan assets | ||||||||||||||
| Fair value of plan assets at beginning of year | $ | 9,947 | $ | 9,080 | ||||||||||
| Actual return on plan assets | (1,520) | 1,273 | ||||||||||||
| Employer contributions | 37 | 42 | ||||||||||||
| Benefits paid | (448) | (446) | ||||||||||||
| Foreign exchange rate changes and other | (73) | (2) | ||||||||||||
| Fair value of plan assets at end of year | $ | 7,943 | $ | 9,947 | ||||||||||
| Funded status at end of year | $ | 1,095 | $ | 608 | $ | (150) | $ | (202) |
Actuarial gains for both 2022 and 2021 were largely the result of changes in the discount rate utilized.
Amounts recognized in our balance sheets are as follows:
| Pension Benefits | Postretirement Benefits Other than Pensions | |||||||||||||
| (In millions) | December 31, 2022 | January 1, 2022 | December 31, 2022 | January 1, 2022 | ||||||||||
| Non-current assets | $ | 1,440 | $ | 1,129 | $ | — | $ | — | ||||||
| Current liabilities | (28) | (29) | (19) | (21) | ||||||||||
| Non-current liabilities | (317) | (492) | (131) | (181) | ||||||||||
| Recognized in Accumulated other comprehensive loss, pre-tax: | ||||||||||||||
| Net loss (gain) | 623 | 953 | (70) | (34) | ||||||||||
| Prior service cost (credit) | 46 | 58 | (6) | (10) |
The accumulated benefit obligation for all defined benefit pension plans was $6.6 billion and $8.8 billion at December 31, 2022 and January 1, 2022, respectively, which included $326 million and $418 million, respectively, in accumulated benefit obligations for unfunded plans where funding is not permitted or in foreign environments where funding is not feasible.
Pension plans with accumulated benefit obligation exceeding the fair value of plan assets are as follows:
| (In millions) | December 31, 2022 | January 1, 2022 | ||||||
| Accumulated benefit obligation | $ | 326 | $ | 741 | ||||
| Fair value of plan assets | — | 298 |
Pension plans with projected benefit obligation exceeding the fair value of plan assets are as follows:
| (In millions) | December 31, 2022 | January 1, 2022 | ||||||
| Projected benefit obligation | $ | 597 | $ | 819 | ||||
| Fair value of plan assets | 252 | 298 |
Assumptions
The weighted-average assumptions we use for our pension and postretirement plans are as follows:
| Pension Benefits | Postretirement Benefits Other than Pensions | |||||||||||||||||||
| 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | |||||||||||||||
| Net periodic benefit cost | ||||||||||||||||||||
| Discount rate | 2.99% | 2.62% | 3.36% | 2.80% | 2.35% | 3.20% | ||||||||||||||
| Expected long-term rate of return on assets | 7.10% | 7.10% | 7.55% | |||||||||||||||||
| Rate of compensation increase | 3.95% | 3.49% | 3.50% | |||||||||||||||||
| Benefit obligations at year-end | ||||||||||||||||||||
| Discount rate | 5.51% | 2.99% | 2.62% | 5.70% | 2.80% | 2.35% | ||||||||||||||
| Rate of compensation increase | 3.97% | 3.95% | 3.50% | |||||||||||||||||
| Interest crediting rate for cash balance plans | 5.25% | 5.25% | 5.25% |
As discussed in Note 1, actuarial gains and losses are amortized into net periodic pension cost based on either the remaining service period of the active participants or the remaining life expectancy of the inactive participants. As of January 2, 2021, almost all of the participants for our largest domestic plan, the TMRP, were considered inactive largely due to actions taken in prior years to close the plan to new entrants. Accordingly, the amortization period for this plan changed to the average remaining life expectancy of the participant; this change reduced 2021 pension cost by approximately $85 million.
Our assumed healthcare cost trend rate for both the medical and prescription drug cost was 6.5% and 7.0% in 2022 and 2021, respectively. We expect this rate to gradually decline to 4.75% by 2029 where we assume it will remain.
Pension Assets
The expected long-term rate of return on plan assets is determined based on a variety of considerations, including the established asset allocation targets and expectations for those asset classes, historical returns of the plans’ assets and other market considerations. We invest our pension assets with the objective of achieving a total rate of return over the long term that will be sufficient to fund future pension obligations and to minimize future pension contributions. We are willing to tolerate a commensurate level of risk to achieve this objective based on the funded status of the plans and the long-term nature of our pension liability. Risk is controlled by maintaining a portfolio of assets that is diversified across a variety of asset classes, investment styles and investment managers. Where possible, investment managers are prohibited from owning our securities in the portfolios that they manage on our behalf.
For U.S. plan assets, which represent the majority of our plan assets, asset allocation target ranges are established consistent with our investment objectives, and the assets are rebalanced periodically. For Non-U.S. plan assets, allocations are based on expected cash flow needs and assessments of the local practices and markets. Our target allocation ranges are as follows:
| U.S. Plan Assets | |||||||||||
| Domestic equity securities | 17 | % | to | 33% | |||||||
| International equity securities | 6 | % | to | 17% | |||||||
| Global equities | 5 | % | to | 17% | |||||||
| Debt securities | 27 | % | to | 38% | |||||||
| Real estate | 7 | % | to | 13% | |||||||
| Private investment partnerships | 7 | % | to | 13% | |||||||
| Non-U.S. Plan Assets | |||||||||||
| Equity securities | 55 | % | to | 75% | |||||||
| Debt securities | 25 | % | to | 45% | |||||||
| Real estate | 0 | % | to | 13% |
The fair value of our pension plan assets by major category and valuation method is as follows:
| December 31, 2022 | January 1, 2022 | |||||||||||||||||||||||||
| (In millions) | Level 1 | Level 2 | Level 3 | Not Subject to Leveling | Level 1 | Level 2 | Level 3 | Not Subject to Leveling | ||||||||||||||||||
| Cash and equivalents | $ | 378 | $ | 3 | $ | — | $ | — | $ | 200 | $ | 6 | $ | — | $ | — | ||||||||||
| Equity securities: | ||||||||||||||||||||||||||
| Domestic | 2,304 | — | — | 225 | 2,774 | — | — | 271 | ||||||||||||||||||
| International | 1,171 | — | — | 230 | 1,772 | — | — | 305 | ||||||||||||||||||
| Mutual funds | 150 | — | — | — | 123 | — | — | — | ||||||||||||||||||
| Debt securities: | ||||||||||||||||||||||||||
| National, state and local governments | 332 | 239 | — | 27 | 677 | 274 | — | 98 | ||||||||||||||||||
| Corporate debt | 58 | 663 | — | 129 | 150 | 1,055 | — | 170 | ||||||||||||||||||
| Private investment partnerships | — | — | — | 1,070 | — | — | — | 1,098 | ||||||||||||||||||
| Real estate | — | — | 569 | 395 | — | — | 599 | 375 | ||||||||||||||||||
| Total | $ | 4,393 | $ | 905 | $ | 569 | $ | 2,076 | $ | 5,696 | $ | 1,335 | $ | 599 | $ | 2,317 |
Cash and equivalents, equity securities and debt securities include commingled funds, which represent investments in funds offered to institutional investors that are similar to mutual funds in that they provide diversification by holding various equity and debt securities. The fair value of the commingled funds is determined and published by the fund's investment managers and is the basis for current transactions, therefore, they are categorized as Level 1 in the table above; certain of these funds were previously categorized as not subject to leveling and the prior year amounts have been reclassified to conform to the current presentation. Debt securities are valued based on same day actual trading prices, if available. If such prices are not available, we use a matrix pricing model with historical prices, trends and other factors.
Private investment partnerships represents interests in funds which invest in equity, debt and other financial assets. These funds are generally not publicly traded so the interests therein are valued using income and market methods that include cash flow projections and market multiples for various comparable investments. Real estate includes owned properties and limited partnership interests in real estate partnerships. Owned properties are valued using certified appraisals at least every three years that are updated at least annually by the real estate investment manager based on current market trends and other available information. These appraisals generally use the standard methods for valuing real estate, including forecasting income and identifying current transactions for comparable real estate to arrive at a fair value. Limited partnership interests in real estate partnerships are valued similarly to private investment partnerships, with the general partner using standard real estate valuation methods to value the real estate properties and securities held within their portfolios. Neither private investment nor real estate partnerships are subject to leveling within the fair value hierarchy.
The table below presents a reconciliation of the fair value measurements for owned real estate properties, which use significant unobservable inputs (Level 3):
| (In millions) | 2022 | 2021 | ||||||
| Balance at beginning of year | $ | 599 | $ | 458 | ||||
| Unrealized gains (losses), net | (10) | 90 | ||||||
| Realized gains, net | 11 | 9 | ||||||
| Purchases, sales and settlements, net | (31) | 42 | ||||||
| Balance at end of year | $ | 569 | $ | 599 |
Estimated Future Cash Flow Impact
Defined benefits under salaried plans are based on salary and years of service. Hourly plans generally provide benefits based on stated amounts for each year of service. Our funding policy is consistent with applicable laws and regulations. In 2023, we expect to contribute approximately $50 million to our pension plans. Benefit payments provided below reflect expected future employee service, as appropriate, and are expected to be paid, net of estimated participant contributions. These payments are based on the same assumptions used to measure our benefit obligation at the end of 2022. While pension benefit payments primarily will be paid out of qualified pension trusts, we will pay postretirement benefits other than pensions out of our general corporate assets. Benefit payments that we expect to pay on an undiscounted basis are as follows:
| (In millions) | 2023 | 2024 | 2025 | 2026 | 2027 | 2028-2032 | ||||||||||||||
| Pension benefits | $ | 442 | $ | 450 | $ | 458 | $ | 466 | $ | 474 | $ | 2,451 | ||||||||
| Postretirement benefits other than pensions | 19 | 19 | 18 | 17 | 16 | 63 |
Note 16. Special Charges
There were no special charges recorded in 2022. Special charges recorded in 2021 and 2020 by segment and type of cost are as follows:
| (In millions) | Severance Costs | Contract Terminations and Other | Asset Impairments | Total Restructuring Charges | Other Charges | Total | ||||||||||||||
| 2021 | ||||||||||||||||||||
| Industrial | $ | 4 | $ | 9 | $ | 12 | $ | 25 | $ | — | $ | 25 | ||||||||
| Total special charges | $ | 4 | $ | 9 | $ | 12 | $ | 25 | $ | — | $ | 25 | ||||||||
| 2020 | ||||||||||||||||||||
| Textron Aviation | $ | 31 | $ | — | $ | 2 | $ | 33 | $ | 32 | $ | 65 | ||||||||
| Industrial | 27 | 1 | 6 | 34 | 7 | 41 | ||||||||||||||
| Textron Systems | 11 | 12 | 14 | 37 | — | 37 | ||||||||||||||
| Corporate | 4 | — | — | 4 | — | 4 | ||||||||||||||
| Total special charges | $ | 73 | $ | 13 | $ | 22 | $ | 108 | $ | 39 | $ | 147 |
2020 COVID-19 Restructuring Plan
In 2020, we initiated a restructuring plan to reduce operating expenses through headcount reductions, facility consolidations and other actions in response to the economic challenges and uncertainty resulting from the COVID-19 pandemic. Upon completion of this plan, we had incurred total charges of $133 million, which included severance costs of $77 million, asset impairment charges of $34 million and contract terminations and other costs of $22 million. Of these amounts, $59 million was incurred at Industrial, $37 million at Textron Systems, $33 million at Textron Aviation, and $4 million at Corporate.
In connection with this plan, we ceased manufacturing at TRU Canada's facility in Montreal, resulting in a production suspension of our commercial air transport simulators. As a result of this action and market conditions, we incurred an inventory valuation charge of $55 million in 2020 to write-down TRU Canada’s inventory to its net realizable value and recorded the charge in cost of sales.
2020 Other Charges
In 2020, due to the impact of the COVID-19 pandemic, we experienced decreased demand for our products and services as our customers delayed or ceased orders due to the environment of economic uncertainty. In light of these conditions, Textron Aviation had temporarily shut down most aircraft production. Based on these events, we performed an interim impairment test of the indefinite-lived Beechcraft and King Air trade name intangible assets and recorded an impairment charge of $32 million.
Restructuring Reserve
Our restructuring reserve activity is summarized below:
| (In millions) | Severance Costs | Contract Terminations and Other | Total | ||||||||
| Balance at January 2, 2021 | $ | 43 | $ | 9 | $ | 52 | |||||
| Provision for 2020 COVID-19 restructuring plan | 9 | 10 | 19 | ||||||||
| Cash paid | (27) | (9) | (36) | ||||||||
| Reversals | (5) | (1) | (6) | ||||||||
| Foreign currency translation | (1) | — | (1) | ||||||||
| Balance at January 1, 2022 | $ | 19 | $ | 9 | $ | 28 | |||||
| Cash paid | (13) | (2) | (15) | ||||||||
| Foreign currency translation | (1) | — | (1) | ||||||||
| Balance at December 31, 2022 | $ | 5 | $ | 7 | $ | 12 |
The majority of the remaining cash outlays of $12 million is expected to be paid in the first quarter of 2023.
Note 17. Income Taxes
We conduct business globally and, as a result, file numerous consolidated and separate income tax returns within and outside the U.S. For all of our U.S. subsidiaries, we file a consolidated federal income tax return. Income from continuing operations before income taxes is as follows:
| (In millions) | 2022 | 2021 | 2020 | ||||||||
| U.S. | $ | 810 | $ | 699 | $ | 202 | |||||
| Non-U.S. | 206 | 174 | 80 | ||||||||
| Income from continuing operations before income taxes | $ | 1,016 | $ | 873 | $ | 282 |
Income tax expense (benefit) is summarized as follows:
| (In millions) | 2022 | 2021 | 2020 | ||||||||
| Current expense (benefit): | |||||||||||
| Federal | $ | 272 | $ | 41 | $ | (1) | |||||
| State | 33 | 15 | (76) | ||||||||
| Non-U.S. | 69 | 47 | 57 | ||||||||
| 374 | 103 | (20) | |||||||||
| Deferred expense (benefit): | |||||||||||
| Federal | (182) | 35 | 3 | ||||||||
| State | (29) | (10) | 5 | ||||||||
| Non-U.S. | (9) | (2) | (15) | ||||||||
| (220) | 23 | (7) | |||||||||
| Income tax expense (benefit) | $ | 154 | $ | 126 | $ | (27) |
The following table reconciles the federal statutory income tax rate to our effective income tax rate:
| 2022 | 2021 | 2020 | |||||||||
| U.S. Federal statutory income tax rate | 21.0% | 21.0% | 21.0% | ||||||||
| Increase (decrease) resulting from: | |||||||||||
| Research and development tax credits (a) | (5.0) | (7.0) | (18.2) | ||||||||
| Foreign-derived intangible income deduction (b) | (2.5) | — | — | ||||||||
| State income taxes (net of federal impact) | 0.3 | 0.5 | (1.2) | ||||||||
| Non-U.S. tax rate differential and foreign tax credits (c) | 1.8 | 1.3 | 10.8 | ||||||||
| State income tax audit settlement (net of federal impact) | — | — | (18.6) | ||||||||
| Outside basis difference in assets held for sale | — | — | (2.7) | ||||||||
| Other, net | (0.4) | (1.4) | (0.7) | ||||||||
| Effective income tax rate | 15.2% | 14.4% | (9.6)% |
*(a)*In 2020, the benefit of research and development tax credits as a percentage of pre-tax income was higher than other periods primarily due to lower pre-tax income.
*(b)*In 2022, the foreign-derived intangible income deduction is primarily due to the impact of capitalizing research and development expenditures for tax-purposes effective on January 1, 2022 as part of the Tax Cuts and Jobs Act of 2017.
*(c)*In 2020, the effective tax rate was unfavorably impacted by a $55 million inventory charge and special charges in a non-U.S. jurisdiction where tax benefits cannot be realized, along with a $10 million tax expense related to a decision to dividend back cash from select non-U.S. jurisdictions to the U.S., partially offset by a $14 million valuation allowance release.
Unrecognized Tax Benefits
Our unrecognized tax benefits represent tax positions for which reserves have been established, with unrecognized state tax benefits reflected net of applicable federal tax benefits. At the end of 2022, 2021 and 2020, if our unrecognized tax benefits were recognized in future periods, they would favorably impact our effective tax rate. A reconciliation of these unrecognized tax benefits is as follows:
| (In millions) | 2022 | 2021 | 2020 | ||||||||
| Balance at beginning of year | $ | 207 | $ | 183 | $ | 221 | |||||
| Additions for tax positions related to current year | 24 | 21 | 11 | ||||||||
| Additions for tax positions of prior years | — | 10 | 21 | ||||||||
| Reductions for settlements and expiration of statute of limitations (a) | — | (3) | (69) | ||||||||
| Reductions for tax positions of prior years | — | (4) | (1) | ||||||||
| Balance at end of year | $ | 231 | $ | 207 | $ | 183 |
*(a)*In 2020, certain tax positions related to state tax attributes were reduced by $68 million based on an audit settlement with respect to certain state income tax returns.
In the normal course of business, we are subject to examination by tax authorities throughout the world. We are generally no longer subject to U.S. federal tax examinations for years before 2014, state and local income tax examinations for years before 2017, and non-U.S. income tax examinations for years before 2011. In 2019, we filed U.S. federal amended returns for 2012 and 2013 for additional research and development tax credits that are subject to examination.
Deferred Taxes
The significant components of our net deferred tax assets/(liabilities) are provided below:
| (In millions) | December 31, 2022 | January 1, 2022 | ||||||
| Capitalized research and development expenditures (a) | $ | 319 | $ | — | ||||
| U.S. operating loss and tax credit carryforwards (b) | 257 | 313 | ||||||
| Accrued liabilities (c) | 209 | 191 | ||||||
| Obligation for pension and postretirement benefits | 117 | 175 | ||||||
| Deferred compensation | 108 | 108 | ||||||
| Operating lease liabilities | 102 | 103 | ||||||
| Non-U.S. operating loss and tax credit carryforwards (d) | 53 | 48 | ||||||
| Prepaid pension benefits (e) | (348) | (269) | ||||||
| Property, plant and equipment, principally depreciation | (222) | (204) | ||||||
| Amortization of goodwill and other intangibles | (194) | (183) | ||||||
| Valuation allowance on deferred tax assets | (99) | (109) | ||||||
| Operating lease right-of-use assets | (99) | (101) | ||||||
| Other leasing transactions, principally leveraged leases | (53) | (73) | ||||||
| Other, net | (22) | 20 | ||||||
| Deferred taxes, net | $ | 128 | $ | 19 |
*(a)*Effective for tax years beginning after December 31, 2021, research and development expenditures must be capitalized and amortized for tax-purposes as part of the Tax Cuts and Jobs Act of 2017.
*(b)*At December 31, 2022, U.S. operating loss and tax credit carryforward benefits of $218 million expire through 2042 if not utilized and $39 million may be carried forward indefinitely.
*(c)*Accrued liabilities include warranty reserves, self-insured liabilities and interest.
*(d)*At December 31, 2022, non-U.S. operating loss and tax credit carryforward benefits of $50 million may be carried forward indefinitely.
*(e)*Prepaid pension benefits increased due to the annual valuation adjustment.
We believe earnings during the period when the temporary differences become deductible will be sufficient to realize the related future income tax benefits. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not more than likely, a valuation allowance is provided.
The following table presents the breakdown of our deferred taxes:
| (In millions) | December 31, 2022 | January 1, 2022 | ||||||
| Manufacturing group: | ||||||||
| Deferred tax assets, net of valuation allowance | $ | 223 | $ | 129 | ||||
| Deferred tax liabilities | (52) | (49) | ||||||
| Finance group – Deferred tax liabilities | (43) | (61) | ||||||
| Net deferred tax asset | $ | 128 | $ | 19 |
Non-U.S. and U.S. state income taxes have not been provided for on basis differences in certain investments, primarily as a result of unremitted earnings in foreign subsidiaries that are indefinitely reinvested, totaling $1.6 billion at December 31, 2022 and $1.8 billion at January 1, 2022. Should these earnings be distributed in the future in the form of dividends or otherwise, we would be subject to withholding and local taxes to various non-U.S. jurisdictions and U.S. states. Determination of the deferred tax liability associated with indefinitely reinvested earnings is not practicable due to multiple factors, including the complexity of non-U.S. tax laws and tax treaty interpretations, exchange rate fluctuations, and the uncertainty of available credits or exemptions.
Note 18. Commitments and Contingencies
We are subject to actual and threatened legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts; alleged lack of compliance with applicable laws and regulations; disputes with suppliers, production partners or other third parties; product liability; patent and trademark infringement; employment disputes; and environmental, health and safety matters. Some of these legal proceedings and claims seek damages, fines or penalties in substantial amounts or remediation of environmental contamination. As a government contractor, we are subject to audits, reviews and investigations to determine whether our operations are being conducted in accordance with applicable regulatory requirements. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our suspension or debarment from U.S. Government contracting for a period of time. On the basis of information presently available, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations.
In the ordinary course of business, we enter into standby letter of credit agreements and surety bonds with financial institutions to meet various performance and other obligations. These outstanding letter of credit arrangements and surety bonds aggregated to approximately $285 million and $213 million at December 31, 2022 and January 1, 2022, respectively.
Environmental Remediation
As with other industrial enterprises engaged in similar businesses, we are involved in a number of remedial actions under various federal and state laws and regulations relating to the environment that impose liability on companies to clean up, or contribute to the cost of cleaning up, sites on which hazardous wastes or materials were disposed or released. Our accrued environmental liabilities relate to installation of remediation systems, disposal costs, U.S. Environmental Protection Agency oversight costs, legal fees, and operating and maintenance costs for both currently and formerly owned or operated facilities. Circumstances that can affect the reliability and precision of the accruals include the identification of additional sites, environmental regulations, level of cleanup required, technologies available, number and financial condition of other contributors to remediation and the time period over which remediation may occur. We believe that any changes to the accruals that may result from these factors and uncertainties will not have a material effect on our financial position or results of operations.
Based upon information currently available, we estimate that our potential environmental liabilities are within the range of $40 million to $145 million. At December 31, 2022, environmental reserves of $74 million have been established to address these specific estimated liabilities. We estimate that we will likely pay our accrued environmental remediation liabilities over the next ten years and have classified $13 million as current liabilities. In 2022, 2021 and 2020, to evaluate and remediate contaminated sites, we incurred expense, net of recoveries received, of $9 million, $6 million and $7 million, respectively.
Note 19. Supplemental Cash Flow Information
Our cash payments and receipts are as follows:
| (In millions) | 2022 | 2021 | 2020 | ||||||||
| Interest paid: | |||||||||||
| Manufacturing group | $ | 110 | $ | 128 | $ | 139 | |||||
| Finance group | 13 | 17 | 20 | ||||||||
| Net taxes paid: | |||||||||||
| Manufacturing group | 332 | 72 | 34 | ||||||||
| Finance group | 24 | 21 | 8 |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Textron Inc.
Opinion on the Financial Statements
We have audited the accompanying Consolidated Balance Sheets of Textron Inc. (the Company) as of December 31, 2022 and January 1, 2022, the related Consolidated Statements of Operations, Comprehensive Income, Shareholders’ Equity and Cash Flows for each of the three years in the period ended December 31, 2022, and the related notes and the financial statement schedule contained on page 70 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and January 1, 2022 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 16, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Revenue Recognition - Estimates at Completion for Select Long Term Contracts | ||||||||
| Description of the Matter | As described in Note 1 to the consolidated financial statements, revenues under long-term contracts with the U.S. Government are generally recognized over time using the cost-to-cost method of accounting. Under this method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion, and revenue is recorded proportionally as costs are incurred. Contract costs, which are estimated utilizing current contract specifications and expected engineering requirements, typically are incurred over a period of several years, and the estimation of these costs at completion requires substantial judgment. The Company’s cost estimation process is based on professional knowledge and experience of engineers and program managers along with finance professionals. The Company updates its projections of costs quarterly or more frequently when circumstances significantly change. 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 of the contract recorded in the current period and required disclosure is provided in the consolidated financial statements. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. |
| Auditing the Company’s estimated costs at completion for select long-term contracts was challenging and complex due to the judgment involved in evaluating management’s assumptions and key estimates over the duration of these long-term contracts. The estimated costs at completion for the select long-term contracts consider risks surrounding the Company’s ability to achieve the technical requirements and specifications of the contract, schedule, and other cost elements of the contract, and depend on whether the Company is able to successfully retire risks surrounding such aspects of the contract. | ||||||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls related to the Company’s revenue recognition process, including controls over management’s review of the estimated costs at completion for the select long-term contracts and related key assumptions and management’s review that the data underlying the estimated costs at completion was complete and accurate. | |||||||
| To test the accuracy of the Company’s estimated costs at completion for the select long-term contracts, our audit procedures included, among others, evaluating the key assumptions used by management to determine such estimate. This included evaluating the historical accuracy of management’s estimates by comparing planned costs to actual costs incurred to date. We also tested the completeness and accuracy of the underlying data back to source documents and contracts. | ||||||||
| Defined Benefit Pension Obligations | ||||||||
| Description of the Matter | As described in Note 15 to the consolidated financial statements, at December 31, 2022, the aggregate qualified defined benefit pension obligation was $6.8 billion and the fair value of pension plan assets was $7.9 billion, resulting in a net pension asset of $1.1 billion. As explained in Note 1 to the consolidated financial statements, the Company updates the estimates used to measure the defined benefit pension obligation and plan assets annually in the fourth quarter or upon a remeasurement event to reflect the actual return on plan assets and updated actuarial assumptions. | |||||||
| Auditing the defined benefit pension obligations was complex due to the highly judgmental nature of the actuarial assumptions (e.g., discount rate, mortality rate, expected return on plan assets) used in the measurement process. These assumptions have a significant effect on the projected benefit obligation. | ||||||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls that address the risks of material misstatement relating to the measurement and valuation of the defined benefit pension obligation. For example, we tested controls over management’s review of the defined benefit pension obligation actuarial calculations, the significant actuarial assumptions, and the data inputs provided to the actuaries. | |||||||
| To test the defined benefit pension obligation, our audit procedures included, among others, evaluating the methodology used, the significant actuarial assumptions discussed above, and the underlying data used by management and its actuaries. We compared the actuarial assumptions used by management to historical trends and evaluated the change in the defined benefit pension obligation from the prior year due to the change in service cost, interest cost, benefit payments, actuarial gains and losses, contributions, new mortality assumptions and plan amendments, as applicable. In addition, we involved an actuarial specialist to assist in evaluating management’s methodology for determining the discount rate that reflects the maturity and duration of the benefit payments and is used to measure the defined benefit pension obligation. As part of this assessment, we compared the projected cash flows to prior year and compared the current year benefits paid to the prior year projected cash flows. To evaluate the mortality rate, we assessed whether the information is consistent with publicly available information and entity-specific data. We also tested the completeness and accuracy of the underlying data, including the participant data provided to the Company’s actuaries. Lastly, to evaluate the expected return on plan assets, we assessed whether management’s assumption is consistent with a range of returns for a portfolio of comparative investments. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1957.
Boston, Massachusetts
February 16, 2023
Schedule II — Valuation and Qualifying Accounts
| (In millions) | 2022 | 2021 | 2020 | ||||||||
| Allowance for credit losses on accounts receivable | |||||||||||
| Balance at beginning of year | $ | 24 | $ | 36 | $ | 29 | |||||
| Provision (reversal) for credit losses | 2 | (1) | 25 | ||||||||
| Deductions from reserves* | (2) | (11) | (18) | ||||||||
| Balance at end of year | $ | 24 | $ | 24 | $ | 36 | |||||
| Allowance for credit losses on finance receivables | |||||||||||
| Balance at beginning of year | $ | 25 | $ | 35 | $ | 25 | |||||
| Provision (reversal) for credit losses | (4) | (9) | 7 | ||||||||
| Charge-offs | — | (3) | — | ||||||||
| Recoveries | 3 | 2 | 3 | ||||||||
| Balance at end of year | $ | 24 | $ | 25 | $ | 35 | |||||
| Inventory FIFO reserves | |||||||||||
| Balance at beginning of year | $ | 370 | $ | 357 | $ | 309 | |||||
| Charged to costs and expenses | 21 | 40 | 105 | ||||||||
| Deductions from reserves* | (41) | (27) | (57) | ||||||||
| Balance at end of year | $ | 350 | $ | 370 | $ | 357 |
*** Deductions primarily include amounts written off on uncollectible accounts (less recoveries), inventory disposals, changes to prior year estimates, business dispositions and currency translation adjustments.
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