Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Consolidated Results of Operations

			Three Months Ended									Nine Months Ended
(Dollars in millions)			October 2, 2021			October 3, 2020			% Change			October 2, 2021			October 3, 2020			% Change
Revenues			$	2,990		$	2,735		9%			$	9,060		$	7,984		13%
Cost of sales			2,486			2,332			7%			7,546			6,970			8%
Selling and administrative expense			283			258			10%			895			760			18%
Gross margin as a % of Manufacturing revenues			16.5%			14.3%						16.4%			12.2%

In the first nine months of 2021, operations at our commercial businesses began to return to more normalized pre-pandemic levels; however, we continue to manage through the impacts of global supply chain shortages, primarily in the Industrial segment. The commercial businesses, which were adversely impacted by the pandemic, experienced increased customer demand resulting in higher revenues in 2021.

An analysis of our consolidated operating results is set forth below. A more detailed analysis of our segments’ operating results is provided in the Segment Analysis section on pages 23 to 28.

Revenues

Revenues increased $255 million, 9%, in the third quarter of 2021, compared with the third quarter of 2020. The revenue increase primarily included the following factors:

• Higher Textron Aviation revenues of $386 million, largely due to higher Citation jet volume of $290 million, higher aftermarket volume of $62 million and higher commercial turboprop volume of $48 million.

• Lower Industrial revenues of $102 million, reflecting lower volume and mix of $156 million, largely in the Fuel Systems and Functional Components product line due to the impact of global supply chain shortages on our original equipment manufacturer customers.

Revenues increased $1.1 billion, 13%, in the first nine months of 2021, compared with the first nine months of 2020. The revenue increase primarily included the following factors:

• Higher Textron Aviation revenues of $793 million, largely due to higher Citation jet volume of $468 million, higher aftermarket volume of $136 million and higher commercial turboprop volume of $111 million.

• Higher Industrial revenues of $215 million, due to a favorable impact of $92 million from pricing, primarily in the Specialized Vehicles product line, higher volume and mix of $71 million and $52 million from foreign exchange rate fluctuations.

• Higher Bell revenues of $68 million, reflecting higher commercial revenues of $168 million, partially offset by lower military revenues.

Cost of Sales and Selling and Administrative Expense

Cost of sales increased $154 million, 7%, and $576 million, 8%, in the third quarter and first nine months of 2021, respectively, compared with the corresponding periods of 2020, largely due to higher net volume and mix described above. In the first nine months of 2020, cost of sales included the impact of idle facility costs of $100 million, primarily at the Textron Aviation segment, along with a $55 million inventory charge related to the TRU business recognized in the second quarter of 2020. Gross margin as a percentage of Manufacturing revenues increased 220 basis points and 420 basis points in the third quarter and first nine months of 2021, respectively, primarily due to higher margin at the Textron Aviation segment.

Selling and administrative expense increased $25 million, 10%, and $135 million, 18%, in the third quarter and first nine months of 2021, respectively, compared with the corresponding periods of 2020, largely at the Industrial and Textron Aviation segments as more normalized operating activities resumed during 2021 compared to 2020, which included temporary cost reduction activities related to the pandemic. The increase in the first nine months of 2021 was also largely impacted by higher share-based compensation expense due to stock appreciation.

Special Charges

In the third quarter and first nine months of 2021, we recorded special charges of $10 million and $20 million, respectively, compared with $7 million and $124 million in the third quarter and first nine months of 2020, respectively. These charges included restructuring activities and impairment charges as described in Note 12 to the Consolidated Financial Statements.

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Income Taxes

Our effective tax rate for the third quarter and first nine months of 2021 was 15.1% and 13.7%, respectively. In the third quarter and first nine months of 2021, the effective tax rate was lower than the U.S. federal statutory rate of 21%, largely due to the favorable impact of research and development credits. In the first nine months of 2021, the effective tax rate also included a $12 million benefit recognized for additional research and development credits related to prior years.

Our effective tax rate for the third quarter and first nine months of 2020 was 0.9% and (9.0)%, respectively, compared with the statutory rate of 21%, largely due to the favorable impact of research and development credits. In the first nine months of 2020, we incurred special charges and an inventory charge in a non-U.S. jurisdiction where tax benefits cannot be realized, which were partially offset by a $14 million benefit recognized upon the release of a valuation allowance in a non-U.S. jurisdiction. These items had a more significant impact on the effective tax rate due to the lower income from continuing operations before income taxes for the period.

Backlog

Our backlog is summarized below:

(In millions)			October 2, 2021			January 2, 2021
Bell			$	4,132		$	5,342
Textron Aviation			3,465			1,603
Textron Systems			2,212			2,556
Total backlog			$	9,809		$	9,501

Backlog at Textron Aviation increased $1.9 billion, reflecting orders in excess of deliveries. Bell's backlog decreased $1.2 billion, primarily as a result of revenues recognized on our U.S. Government contracts in excess of new contracts received.

Segment Analysis

We operate in, and report financial information for, the following five business segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses, gains/losses on major business dispositions and special charges. The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense. Operating expenses for the Manufacturing segments include cost of sales, selling and administrative expense and other non-service components of net periodic benefit cost/(credit), and exclude certain corporate expenses and special charges.

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

Approximately 30% of our 2020 revenues were derived from contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program. For our segments that contract with the U.S. Government, changes in revenues related to these contracts are expressed in terms of volume. Changes in segment profit for these contracts are typically expressed in terms of volume and mix and performance; these include cumulative catch-up adjustments associated with a) revisions to the transaction price that may reflect contract modifications or changes in assumptions related to award fees and other variable consideration or b) changes in the total estimated costs at completion due to improved or deteriorated operating performance.

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Textron Aviation

			Three Months Ended									Nine Months Ended
(Dollars in millions)			October 2, 2021			October 3, 2020			% Change			October 2, 2021			October 3, 2020			% Change
Revenues:
Aircraft			$	814		$	486		67%			$	2,146		$	1,479		45%
Aftermarket parts and services			367			309			19%			1,061			935			13%
Total revenues			1,181			795			49%			3,207			2,414			33%
Operating expenses			1,083			824			31%			2,966			2,506			18%
Segment profit (loss)			98			(29)			438%			241			(92)			362%
Profit margin			8.3%			(3.6)%						7.5%			(3.8)%

Textron Aviation Revenues and Operating Expenses

The following factors contributed to the change in Textron Aviation’s revenues for the periods:

(In millions)			Q3 2021 versus Q3 2020			YTD 2021 versus YTD 2020
Volume and mix			$	365		$	749
Pricing			21			44
Total change			$	386		$	793

Textron Aviation’s revenues increased $386 million, 49%, in the third quarter of 2021, compared with the third quarter of 2020, largely due to higher Citation jet volume of $290 million, higher aftermarket volume of $62 million and higher commercial turboprop volume of $48 million. We delivered 49 Citation jets and 35 commercial turboprops in the third quarter of 2021, compared with 25 Citation jets and 21 commercial turboprops in the third quarter of 2020.

Textron Aviation’s revenues increased $793 million, 33%, in the first nine months of 2021, compared with the first nine months of 2020, largely due to higher Citation jet volume of $468 million, higher aftermarket volume of $136 million and higher commercial turboprop volume of $111 million. We delivered 121 Citation jets and 82 commercial turboprops in the first nine months of 2021, compared with 71 Citation jets and 52 commercial turboprops in the first nine months of 2020.

Textron Aviation’s operating expenses increased $259 million, 31%, and $460 million, 18%, in the third quarter and first nine months of 2021, respectively, compared with the corresponding periods of 2020, largely due to higher volume and mix described above. Operating expenses in the first nine months of 2020 were also negatively impacted by idle facility costs of $76 million and inventory valuation charges, partially offset by cost reduction activities, including employee furloughs instituted during the first half of 2020.

Textron Aviation Segment Profit (Loss)

The following factors contributed to the change in Textron Aviation’s segment profit (loss) for the periods:

(In millions)			Q3 2021 versus Q3 2020			YTD 2021 versus YTD 2020
Volume and mix			$	96		$	229
Performance			9			68
Pricing, net of inflation			22			36
Total change			$	127		$	333

Segment profit at Textron Aviation increased $127 million in the third quarter of 2021, compared with the third quarter of 2020, primarily due to higher volume and mix of $96 million described above, and favorable pricing, net of inflation of $22 million.

Segment profit at Textron Aviation increased $333 million in the first nine months of 2021, compared with the first nine months of 2020, primarily due to higher volume and mix of $229 million described above, a favorable impact from performance of $68 million and favorable pricing, net of inflation of $36 million. Performance included idle facility costs of $76 million recognized in the first nine months of 2020 and lower inventory valuation charges, partially offset by cost reduction activities described above.

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Bell

			Three Months Ended									Nine Months Ended
(Dollars in millions)			October 2, 2021			October 3, 2020			% Change			October 2, 2021			October 3, 2020			% Change
Revenues:
Military aircraft and support programs			$	488		$	515		(5)%			$	1,637		$	1,737		(6)%
Commercial helicopters, parts and services			281			278			1%			869			701			24%
Total revenues			769			793			(3)%			2,506			2,438			3%
Operating expenses			664			674			(1)%			2,186			2,086			5%
Segment profit			105			119			(12)%			320			352			(9)%
Profit margin			13.7%			15.0%						12.8%			14.4%

Bell’s major U.S. Government programs at this time are the V-22 tiltrotor aircraft and the H-1 helicopter platforms, which are both in the production and support stage and represent a significant portion of Bell’s revenues from the U.S. Government.

Bell Revenues and Operating Expenses

The following factors contributed to the change in Bell’s revenues for the periods:

(In millions)			Q3 2021 versus Q3 2020			YTD 2021 versus YTD 2020
Volume and mix			$	(31)		$	49
Pricing			7			19
Total change			$	(24)		$	68

Bell’s revenues decreased $24 million, 3%, in the third quarter of 2021, compared with the third quarter of 2020, largely reflecting lower military revenues of $27 million. We delivered 33 commercial helicopters in the third quarter of 2021, compared with 41 commercial helicopters in the third quarter of 2020.

Bell’s revenues increased $68 million, 3%, in the first nine months of 2021, compared with the first nine months of 2020, reflecting higher commercial revenues of $168 million, partially offset by lower military revenues. We delivered 97 commercial helicopters in the first nine months of 2021, compared with 83 commercial helicopters in the first nine months of 2020.

Bell’s operating expenses decreased $10 million, 1%, in the third quarter of 2021, compared with the third quarter of 2020, primarily due to lower net volume and mix described above.

Bell's operating expenses increased $100 million, 5%, in the first nine months of 2021, compared with the first nine months of 2020, primarily due to higher net volume and mix described above and higher research and development costs, largely related to the future vertical lift programs.

Bell Segment Profit

The following factors contributed to the change in Bell’s segment profit for the periods:

(In millions)			Q3 2021 versus Q3 2020			YTD 2021 versus YTD 2020
Performance			$	(3)		$	(25)
Volume and mix			(11)			(14)
Pricing, net of inflation			—			7
Total change			$	(14)		$	(32)

Bell’s segment profit decreased $14 million, 12%, in the third quarter of 2021, compared with the third quarter 2020, primarily due to the impact of lower volume and mix as described above.

Bell’s segment profit decreased $32 million, 9%, in the first nine months of 2021, compared with the first nine months 2020, largely reflecting an unfavorable impact of $25 million from performance, which included higher research and development costs discussed above. The increase in revenues attributed to volume and mix above had an unfavorable impact on segment profit due to the mix of military and commercial products sold.

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Textron Systems

			Three Months Ended									Nine Months Ended
(Dollars in millions)			October 2, 2021			October 3, 2020			% Change			October 2, 2021			October 3, 2020			% Change
Revenues			$	299		$	302		(1)%			$	960		$	956		—%
Operating expenses			254			262			(3)%			816			853			(4)%
Segment profit			45			40			13%			144			103			40%
Profit margin			15.1%			13.2%						15.0%			10.8%

Textron Systems Revenues and Operating Expenses

The following factors contributed to the change in Textron Systems’ revenues for the periods:

(In millions)			Q3 2021 versus Q3 2020			YTD 2021 versus YTD 2020
Volume			$	(2)		$	21
Other			(1)			(17)
Total change			$	(3)		$	4

Textron Systems' revenues decreased $3 million in the third quarter of 2021, compared with the third quarter of 2020. Lower volume of $39 million in the Air Systems product line, formerly referred to as the Unmanned Systems product line, primarily reflected the impact from the U.S. Army’s withdrawal from Afghanistan on the product line’s fee-for-service contracts and was largely offset by higher volume in the Other product line.

Textron Systems' revenues increased $4 million, in the first nine months of 2021, compared with the first nine months of 2020, primarily due to higher volume in the Other product line, partially offset by lower volume of $84 million in the Air Systems product line as discussed above. Other in the table above included the impact of a $20 million reduction in revenues as a result of the cessation of manufacturing at the TRU Simulation + Training Canada Inc. (TRU Canada) facility which occurred in the second quarter of 2020 related to the impact of the pandemic on that business. In January 2021, we sold TRU Canada as discussed in Note 2 to the Consolidated Financial Statements.

Textron Systems’ operating expenses decreased $8 million, 3%, in the third quarter of 2021, compared with the third quarter of 2020. Textron Systems' operating expenses decreased $37 million, 4%, in the first nine months of 2021, compared with the first nine months of 2020, primarily related to the cessation of manufacturing at TRU Canada, partially offset by higher net volume described above.

Textron Systems Segment Profit

The following factors contributed to the change in Textron Systems’ segment profit for the periods:

(In millions)			Q3 2021 versus Q3 2020			YTD 2021 versus YTD 2020
Performance and other			$	5		$	41
Volume and mix			—			—
Total change			$	5		$	41

Textron Systems’ segment profit increased $5 million, 13%, in the third quarter of 2021, compared with the third quarter of 2020, due to a favorable impact from performance and other.

Textron Systems’ segment profit increased $41 million, 40%, in the first nine months of 2021, compared with the first nine months of 2020, due to a favorable impact from performance and other, which included a $20 million impact from TRU Canada related to unfavorable performance and other in 2020.

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Industrial

			Three Months Ended									Nine Months Ended
(Dollars in millions)			October 2, 2021			October 3, 2020			% Change			October 2, 2021			October 3, 2020			% Change
Revenues:
Fuel systems and functional components			$	382		$	497		(23)%			$	1,319		$	1,233		7%
Specialized vehicles			348			335			4%			1,030			901			14%
Total revenues			730			832			(12)%			2,349			2,134			10%
Operating expenses			707			774			(9)%			2,247			2,078			8%
Segment profit			23			58			(60)%			102			56			82%
Profit margin			3.2%			7.0%						4.3%			2.6%

Industrial Revenues and Operating Expenses

The following factors contributed to the change in Industrial’s revenues for the periods:

(In millions)			Q3 2021 versus Q3 2020			YTD 2021 versus YTD 2020
Pricing			$	44		$	92
Volume and mix			(156)			71
Foreign exchange			10			52
Total change			$	(102)		$	215

Industrial segment revenues decreased $102 million, 12%, in the third quarter of 2021, compared with the third quarter of 2020, reflecting lower volume and mix of $156 million, largely in the Fuel Systems and Functional Components product line due to the impact of global supply chain shortages on our original equipment manufacturer customers. The lower volume was partially offset by a favorable impact of $44 million from pricing, principally in the Specialized Vehicles product line, and $10 million from foreign exchange rate fluctuations, primarily related to the Euro.

Industrial segment revenues increased $215 million, 10%, in the first nine months of 2021, compared with the first nine months of 2020, due to a favorable impact of $92 million from pricing, principally in the Specialized Vehicles product line, higher volume and mix of $71 million and $52 million from foreign exchange rate fluctuations, primarily related to the Euro.

Operating expenses for the Industrial segment decreased $67 million, 9%, in the third quarter of 2021, compared with the third quarter of 2020, primarily due to lower volume and mix as described above, partially offset by material and labor inflation of $29 million. For the first nine months of 2021, operating expenses increased $169 million, 8%, compared with the first nine months of 2020, primarily due to an unfavorable impact of $57 million from foreign exchange rate fluctuations, material and labor inflation of $56 million, and the impact of higher volume and mix described above.

Industrial Segment Profit

The following factors contributed to the change in Industrial’s segment profit for the periods:

(In millions)			Q3 2021 versus Q3 2020			YTD 2021 versus YTD 2020
Pricing, net of inflation			$	15		$	36
Volume and mix			(44)			20
Performance			(5)			(5)
Foreign exchange			(1)			(5)
Total change			$	(35)		$	46

Segment profit for the Industrial segment decreased $35 million in the third quarter of 2021, compared with the third quarter of 2020, primarily due to lower volume and mix described above, partially offset by a favorable impact from pricing, net of inflation of $15 million, largely in the Specialized Vehicles product line.

Segment profit for the Industrial segment increased $46 million in the first nine months of 2021, compared with the first nine months of 2020, primarily due to a favorable impact of $36 million from pricing, net of inflation, largely in the Specialized Vehicles product line, and higher volume and mix described above.

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Finance

			Three Months Ended						Nine Months Ended
(In millions)			October 2, 2021			October 3, 2020			October 2, 2021			October 3, 2020
Revenues			$	11		$	13		$	38		$	42
Segment profit			8			1			17			8

Finance segment revenues decreased $2 million and $4 million in the third quarter and first nine months of 2021, respectively, compared with the corresponding periods of 2020, and segment profit increased $7 million and $9 million, respectively. The increase in segment profit for both periods is primarily due to lower provision for loan losses. The following table reflects information about the Finance segment’s credit performance related to finance receivables.

(Dollars in millions)			October 2, 2021			January 2, 2021
Finance receivables			$	621		$	779
Allowance for credit losses			25			35
Ratio of allowance for credit losses to finance receivables			4.03%			4.49%
Nonaccrual finance receivables			110			93
Ratio of nonaccrual finance receivables to finance receivables			17.71%			11.94%
60+ days contractual delinquency			12			29
60+ days contractual delinquency as a percentage of finance receivables			1.93%			3.72%

Since the first quarter of 2020, the Finance segment has worked with certain customers impacted by the pandemic to provide payment relief through loan modifications. The majority of loans modified have returned to paying principal and interest. We believe our allowance for credit losses adequately covers our exposure on these loans as our estimated collateral values largely exceed the outstanding loan amounts. Loan modifications and key portfolio quality indicators are discussed in Note 3 to the Consolidated Financial Statements.

Liquidity and Capital Resources

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

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

(Dollars in millions)			October 2, 2021			January 2, 2021
Manufacturing group
Cash and equivalents			$	1,969		$	2,146
Debt			3,187			3,707
Shareholders’ equity			6,037			5,845
Capital (debt plus shareholders’ equity)			9,224			9,552
Net debt (net of cash and equivalents) to capital			17%			21%
Debt to capital			35%			39%
Finance group
Cash and equivalents			$	213		$	108
Debt			585			662

We believe that our calculations of debt to capital and net debt to capital are useful measures as they provide a summary indication of the level of debt financing (i.e., leverage) that is in place to support our capital structure, as well as to provide an indication of the capacity to add further leverage. We believe that we will have sufficient cash to meet our future needs, based on our existing cash balances, the cash we expect to generate from our manufacturing operations and other available funding alternatives, as appropriate.

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Credit Facilities and Other Sources of Capital

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

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

On August 11, 2021, we repaid $50 million of the Finance Group’s $150 million variable-rate loan due September 2021. On September 20, 2021, the loan was amended to extend the maturity date to September 2022 for the remaining $100 million principal amount. The annual interest rate was unchanged at LIBOR plus 1.55%, which is an annual interest rate of 1.63% at October 2, 2021.

Manufacturing Group Cash Flows

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

			Nine Months Ended
(In millions)			October 2, 2021			October 3, 2020
Operating activities			$	1,012		$	220
Investing activities			(163)			(116)
Financing activities			(1,019)			1,236

In the first nine months of 2021, net cash inflow from operating activities was $1.0 billion, compared with a net cash inflow of $220 million in the first nine months of 2020. The $792 million year-over-year increase in net cash inflow was primarily due to higher earnings and working capital improvements. The working capital improvements largely reflected the impact of a $267 million cash outflow from accounts payable in the first nine months of 2020.

In the first nine months of 2021 and 2020, cash flows used in investing activities included capital expenditures of $204 million and $151 million, respectively. Investing activities in the first nine months of 2021 also included $38 million of net proceeds from the disposition of TRU Canada.

Cash flows used by financing activities in the first nine months of 2021 included $586 million of cash paid to repurchase an aggregate of 9.0 million shares of our common stock and $522 million of payments on long-term debt. In the first nine months of 2020, cash flows provided by financing activities included $1.1 billion of net proceeds from the issuance of long-term debt and $377 million of proceeds from borrowings against corporate-owned life insurance policies, partially offset by $195 million of payments on long-term debt and $54 million of cash paid to repurchase an aggregate of 1.3 million shares of our outstanding common stock.

Finance Group Cash Flows

Cash flows for the Finance group as presented in our Consolidated Statements of Cash Flows are summarized below:

			Nine Months Ended
(In millions)			October 2, 2021			October 3, 2020
Operating activities			$	10		$	5
Investing activities			188			(1)
Financing activities			(93)			(28)

The Finance group’s cash flows from investing activities included collections on finance receivables totaling $205 million and $90 million in the first nine months of 2021 and 2020, respectively, and finance receivable originations of $34 million and $94 million, respectively. In the first nine months of 2021 and 2020, financing activities included payments on long-term and nonrecourse debt of $93 million and $40 million, respectively.

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Consolidated Cash Flows

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

			Nine Months Ended
(In millions)			October 2, 2021			October 3, 2020
Operating activities			$	1,174		$	200
Investing activities			(127)			(92)
Financing activities			(1,112)			1,208

In the first nine months of 2021, net cash inflow from operating activities was $1.2 billion, compared with a net cash inflow of $200 million in the first nine months of 2020. The $974 million year-over-year increase in net cash inflow was primarily due to higher earnings and working capital improvements. The working capital improvements largely reflected the impact of a $267 million cash outflow from accounts payable in the first nine months of 2020 and a year-over-year cash inflow of $177 million from captive finance receivables.

In the first nine months of 2021 and 2020, cash flows used in investing activities primarily included capital expenditures of $204 million and $151 million, respectively. Investing activities in the first nine months of 2021 also included $38 million of net proceeds from the disposition of TRU Canada.

Cash flows used by financing activities in the first nine months of 2021 included $615 million of payments on long-term debt and $586 million of cash paid to repurchase shares of our outstanding common stock. In the first nine months of 2020, cash flows provided by financing activities included $1.1 billion of net proceeds from the issuance of long-term debt and $377 million of proceeds from borrowings against corporate-owned life insurance policies, partially offset by $235 million of payments on long-term debt and $54 million of cash paid to repurchase shares of our outstanding common stock.

Captive Financing and Other Intercompany Transactions

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

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

			Nine Months Ended
(In millions)			October 2, 2021			October 3, 2020
Reclassification adjustments from investing activities to operating activities:
Cash received from customers			$	186		$	69
Finance receivable originations for Manufacturing group inventory sales			(34)			(94)
Total reclassification adjustments from investing activities to operating activities			$	152		$	(25)

Critical Accounting Estimates Update

Our Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements. The accounting estimates that we believe are most critical to the portrayal of our financial condition and results of operations are reported in Item 7 of our Annual Report on Form 10-K for the year ended January 2, 2021. The following section provides an update of the year-end disclosure.

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Revenue Recognition

A substantial portion of our revenues is related to long-term contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program, for the design, development, manufacture or modification of aerospace and defense products as well as related services. We generally use the cost-to-cost method to measure progress for 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.

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

			Three Months Ended						Nine Months Ended
(In millions)			October 2, 2021			October 3, 2020			October 2, 2021			October 3, 2020
Gross favorable			$	43		$	31		$	119		$	104
Gross unfavorable			(18)			(9)			(65)			(63)
Net adjustments			$	25		$	22		$	54		$	41

Forward-Looking Information

Certain statements in this Quarterly Report on Form 10-Q and other oral and written statements made by us from time to time are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which may describe strategies, goals, outlook or other non-historical matters, or project revenues, income, returns or other financial measures, often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “guidance,” “project,” “target,” “potential,” “will,” “should,” “could,” “likely” or “may” and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update or revise any forward-looking statements. In addition to those factors described in our 2020 Annual Report on Form 10-K under “Risk Factors,” among the factors that could cause actual results to differ materially from past and projected future results are the following:

• Interruptions in the U.S. Government’s ability to fund its activities and/or pay its obligations;

• Changing priorities or reductions in the U.S. Government defense budget, including those related to military operations in foreign countries;

• Our ability to perform as anticipated and to control costs under contracts with the U.S. Government;

• The U.S. Government’s ability to unilaterally modify or terminate its contracts with us for the U.S. Government’s convenience or for our failure to perform, to change applicable procurement and accounting policies, or, under certain circumstances, to withhold payment or suspend or debar us as a contractor eligible to receive future contract awards;

• Changes in foreign military funding priorities or budget constraints and determinations, or changes in government regulations or policies on the export and import of military and commercial products;

• Volatility in the global economy or changes in worldwide political conditions that adversely impact demand for our products;

• Volatility in interest rates or foreign exchange rates;

• Risks related to our international business, including establishing and maintaining facilities in locations around the world and relying on joint venture partners, subcontractors, suppliers, representatives, consultants and other business partners in connection with international business, including in emerging market countries;

• Our Finance segment’s ability to maintain portfolio credit quality or to realize full value of receivables;

• Performance issues with key suppliers or subcontractors;

• Legislative or regulatory actions, both domestic and foreign, impacting our operations or demand for our products;

• Our ability to control costs and successfully implement various cost-reduction activities;

• The efficacy of research and development investments to develop new products or unanticipated expenses in connection with the launching of significant new products or programs;

• The timing of our new product launches or certifications of our new aircraft products;

• Our ability to keep pace with our competitors in the introduction of new products and upgrades with features and technologies desired by our customers;

• Pension plan assumptions and future contributions;

• Demand softness or volatility in the markets in which we do business;

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• Cybersecurity threats, including the potential misappropriation of assets or sensitive information, corruption of data or operational disruption;

• Difficulty or unanticipated expenses in connection with integrating acquired businesses;

• The risk that acquisitions do not perform as planned, including, for example, the risk that acquired businesses will not achieve revenues and profit projections;

• The impact of changes in tax legislation;

• Risks and uncertainties related to the impact of the COVID-19 pandemic on our business and operations; and

• The ability of our businesses to hire and retain the highly skilled personnel necessary for our businesses to succeed.