Textron 10-Q 2022-10-01

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended October 1, 2022

OR

For the transition period from ______ to ______.

Commission File Number 1-5480

Textron Inc.

(Exact name of registrant as specified in its charter)

(401) 421-2800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ

As of October 14, 2022, there were 208,771,472 shares of common stock outstanding.

TEXTRON INC.

Index to Form 10-Q

For the Quarterly Period Ended October 1, 2022

PART I. FINANCIAL INFORMATION

TEXTRON INC.

Consolidated Statements of Operations (Unaudited)

See Notes to the Consolidated Financial Statements.

TEXTRON INC.

Consolidated Statements of Comprehensive Income (Unaudited)

See Notes to the Consolidated Financial Statements.

TEXTRON INC.

Consolidated Balance Sheets (Unaudited)

See Notes to the Consolidated Financial Statements.

TEXTRON INC.

Consolidated Statements of Cash Flows (Unaudited)

For the Nine Months Ended October 1, 2022 and October 2, 2021, respectively

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Consolidated Results of Operations

During the first nine months of 2022, all of our manufacturing segments were impacted by labor shortages and ongoing global supply chain shortages and delays resulting from the continuation of the COVID-19 pandemic and the war in Ukraine. While our businesses are managing through these challenges, in some cases they have caused, and we expect will continue to cause, some manufacturing inefficiencies and delays in delivery of certain of our products to customers.

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 20 to 25.

Revenues

Revenues increased $88 million, 3%, in the third quarter of 2022, compared with the third quarter of 2021. The revenue increase primarily included the following factors:

• Higher Industrial revenues of $119 million due to higher volume and mix of $95 million, largely in the Fuel Systems and Functional Components product line, and a favorable impact from pricing of $58 million, principally in the Specialized Vehicles product line, partially offset by an unfavorable impact from foreign exchange rate fluctuations of $34 million.

• Lower Bell revenues of $15 million due to lower military revenues of $112 million, primarily in the H-1 program due to lower aircraft and spares production volume, reflecting lower demand, partially offset by higher commercial revenues of $97 million, primarily due to higher volume and mix.

• Lower Textron Aviation revenues of $14 million, reflecting lower volume and mix of $73 million, partially offset by higher pricing of $59 million.

• Lower Textron Systems revenues of $7 million, largely due to lower volume of $13 million, which included a $15 million decrease from our Afghanistan fee-for-service and aircraft support contracts.

Revenues increased $173 million, 2%, in the first nine months of 2022, compared with the first nine months of 2021. The revenue increase primarily included the following factors:

• Higher Textron Aviation revenues of $284 million, reflecting higher volume and mix of $148 million and higher pricing of $136 million.

• Higher Industrial revenues of $209 million due to a favorable impact from pricing of $168 million, principally in the Specialized Vehicles product line, and higher volume and mix of $108 million in both product lines, partially offset by an unfavorable impact from exchange rate fluctuations of $67 million.

• Lower Bell revenues of $231 million due to lower military revenues of $262 million, primarily in the H-1 program due to lower aircraft and spares production volume, reflecting lower demand, partially offset by higher commercial revenues of $31 million, primarily due to higher pricing.

• Lower Textron Systems revenues of $102 million, largely due to lower volume of $116 million, which included a $83 million decrease from our Afghanistan fee-for-service and aircraft support contracts.

Cost of Sales and Selling and Administrative Expense

Cost of sales increased $98 million, 4%, in the third quarter of 2022, compared with the third quarter of 2021, largely due to inflation of $93 million, principally reflecting higher material cost in the Industrial and Textron Aviation segments. Gross margin as a percentage of Manufacturing revenues decreased 80 basis points in the third quarter of 2022 as higher margin at the Textron Aviation segment, largely reflecting favorable pricing, was more than offset by lower margin at the other Manufacturing segments, primarily at the Bell and Textron Systems segments, reflecting lower volume and mix.

Cost of sales increased $171 million, 2%, in the first nine months of 2022, compared with the first nine months of 2021, largely due to inflation of $274 million, principally reflecting higher material cost in the Industrial and Textron Aviation segments, partially offset by lower net volume and mix. Gross margin as a percentage of Manufacturing revenues decreased 40 basis points in the first nine months of 2022 as higher margin at the Textron Aviation segment, reflecting higher volume and mix and pricing, was more than offset by lower margin at the other Manufacturing segments.

Selling and administrative expense decreased $25 million, 9%, and $54 million, 6%, in the third quarter and first nine months of 2022, respectively, compared with the corresponding periods in 2021, primarily reflecting lower share-based compensation expense.

Non-service components of pension and postretirement income, net

In the third quarter of 2022, non-service components of pension and postretirement income, net increased by $19 million, 48%, to $59 million. In the first nine months of 2022, non-service components of pension and postretirement income, net increased by $61 million, 51%, to $180 million. The increase in both periods is based on our annual valuation at the end of 2021 and is primarily driven by an increase in the discount rate utilized for our domestic qualified pension plans and the impact of actual pension asset returns that exceeded our expected return on plan assets.

Income Taxes

Our effective tax rate for the third quarter and first nine months of 2022 was 14.8% and 16.2%, respectively. In the third quarter and first nine months of 2022, 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 and tax deductions for foreign derived intangible income. In the third quarter of 2022, these benefits were partially offset by a $13 million provision for withholding taxes due to the planned repatriation of cash related to a non-U.S. jurisdiction.

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.

Backlog

Our backlog is summarized below:

Textron Aviation's backlog increased $2.2 billion, 54%, in the first nine months of 2022, reflecting orders in excess of deliveries. Backlog at Bell increased $1.0 billion, 26%, largely due to new orders in excess of deliveries and revenues recognized. Bell was awarded a $1.4 billion 5-year contract with the U.S. Government for spares and logistic support for the V-22 tiltrotor aircraft in the first quarter of 2022.

Segment Analysis

Through the first quarter of 2022, we operated in, and reported financial information for, the following five business segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. Beginning in the second quarter of 2022, we formed a new reporting segment within the Manufacturing group, Textron eAviation. This new segment includes the operating results of Pipistrel, a manufacturer of electrically powered aircraft that we acquired on April 15, 2022, as discussed in Note 2 to the Consolidated Financial Statements, along with other research and development initiatives related to sustainable aviation solutions.

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 non-service components of net periodic benefit cost/(income), and exclude certain corporate expenses and special charges.

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

warranty, product liability, quality/scrap, labor efficiency, overhead, non-service pension cost/(income), product line profitability, start-up, ramp up and cost-reduction initiatives or other manufacturing inputs.

Approximately 26% of our 2021 revenues were derived from contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program. For our segments that contract with the U.S. Government, changes in revenues related to these contracts are expressed in terms of volume. Changes in segment profit for these contracts are typically expressed in terms of volume and mix and performance; these include cumulative catch-up adjustments associated with a) revisions to the transaction price that may reflect contract modifications or changes in assumptions related to award fees and other variable consideration or b) changes in the total estimated costs at completion due to improved or deteriorated operating performance.

Textron Aviation

Textron Aviation Revenues and Operating Expenses

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

Textron Aviation’s revenues decreased $14 million in the third quarter of 2022, compared with the third quarter of 2021, reflecting lower volume and mix of $73 million, partially offset by higher pricing of $59 million. The decrease in volume and mix was largely due to lower Citation jet and pre-owned volume, partially offset by higher aftermarket volume, reflecting increased aircraft utilization. We delivered 39 Citation jets and 33 commercial turboprops in the third quarter of 2022, compared with 49 Citation jets and 35 commercial turboprops in the third quarter of 2021.

Textron Aviation’s revenues increased $284 million, 9%, in the first nine months of 2022, compared with the first nine months of 2021, reflecting higher volume and mix of $148 million and higher pricing of $136 million. The increase in volume and mix was largely due to higher aftermarket, Citation jet and commercial turboprop volume, partially offset by lower pre-owned volume. The higher aftermarket volume reflected increased aircraft utilization. We delivered 126 Citation jets and 99 commercial turboprops in the first nine months of 2022, compared with 121 Citation jets and 82 commercial turboprops in the first nine months of 2021.

Textron Aviation’s operating expenses decreased $55 million, 5%, in the third quarter of 2022, compared with the third quarter of 2021, largely due to lower volume and mix described above, partially offset by inflation of $28 million.

Textron Aviation’s operating expenses increased $110 million, 4%, in the first nine months of 2022, compared with the first nine months of 2021, largely due to inflation of $74 million and higher volume and mix described above.

Textron Aviation Segment Profit

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

Segment profit at Textron Aviation increased $41 million, 42%, in the third quarter of 2022, compared with the third quarter of 2021, largely due to favorable pricing, net of inflation of $31 million.

Segment profit at Textron Aviation increased $174 million, 72%, in the first nine months of 2022, compared with the first nine months of 2021, largely due to the impact from higher volume and mix described above, favorable pricing, net of inflation of $62 million and a favorable impact from performance of $30 million.

Bell

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. Both programs with the U.S. Government are transitioning from the production stage to the support stage over the next several years with H-1 production expected to end in 2023.

Bell Revenues and Operating Expenses

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

Bell’s revenues decreased $15 million in the third quarter of 2022, compared with the third quarter of 2021. Military revenues decreased $112 million, primarily in the H-1 program due to lower aircraft and spares production volume, reflecting lower demand. Commercial revenues increased $97 million, primarily due to higher volume and mix. We delivered 49 commercial helicopters in the third quarter of 2022, compared with 33 commercial helicopters in the third quarter of 2021.

Bell’s revenues decreased $231 million, 9%, in the first nine months of 2022, compared with the first nine months of 2021, largely due to lower military revenues of $262 million, primarily in the H-1 program due to lower aircraft and spares production volume, reflecting lower demand. Commercial revenues increased $31 million, primarily due to higher pricing. We delivered 108 commercial helicopters in the first nine months of 2022, compared with 97 commercial helicopters in the first nine months of 2021.

Bell’s operating expenses increased $5 million in the third quarter of 2022, and decreased $157 million, 7% in the first nine months of 2022, compared with the corresponding periods of 2021. The decrease in the first nine months of 2022 was primarily due to lower volume and mix described above.

Bell Segment Profit

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

Bell’s segment profit decreased $20 million, 19%, in the third quarter of 2022, compared with the third quarter of 2021, primarily reflecting lower volume and mix as described above, partially offset by favorable pricing, net of inflation of $5 million. Performance included lower pension costs, selling and administrative expense and research and development costs of $23 million, which was mostly offset by an unfavorable change in net program adjustments.

Bell’s segment profit decreased $74 million, 23%, in the first nine months of 2022, compared with the first nine months of 2021, primarily reflecting lower volume and mix described above, partially offset by a favorable impact from performance of $23 million. Performance included lower research and development costs, pension costs and selling and administrative expense of $80 million, partially offset by an unfavorable change in net program adjustments.

Textron Systems

Textron Systems Revenues and Operating Expenses

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

Textron Systems' revenues decreased $7 million, 2%, and $102 million, 11%, in the third quarter and first nine months of 2022, respectively, compared with the corresponding periods of 2021. Lower volume in the third quarter and first nine months of 2022 included a decrease of $15 million and $83 million, respectively, from our Afghanistan fee-for-service and aircraft support contracts, primarily reflecting the impact from the U.S. Army’s withdrawal from Afghanistan.

Textron Systems’ operating expenses increased $1 million, in the third quarter of 2022, and decreased $70 million, 9%, in the first nine months of 2022, compared with the corresponding periods of 2021. The decrease in the first nine months of 2022 was primarily related to lower net volume described above.

Textron Systems Segment Profit

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

Textron Systems’ segment profit decreased $8 million, 18%, in the third quarter of 2022, compared with the third quarter of 2021, primarily due to lower volume and mix of $9 million.

Textron Systems’ segment profit decreased $32 million, 22%, in the first nine months of 2022, compared with the first nine months of 2021, primarily due to lower volume and mix of $24 million described above and an unfavorable impact from performance of $13 million.

Industrial

Industrial Revenues and Operating Expenses

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

Industrial segment revenues increased $119 million, 16%, in the third quarter of 2022, compared with the third quarter of 2021, due to higher volume and mix of $95 million, largely in our Fuel Systems and Functional Components product line, and a $58 million favorable impact from pricing, principally in the Specialized Vehicles product line, partially offset by an unfavorable impact of $34 million from foreign exchange rate fluctuations.

Industrial segment revenues increased $209 million, 9%, in the first nine months of 2022, compared with the first nine months of 2021, primarily due to a $168 million favorable impact from pricing, principally in the Specialized Vehicles product line, and higher volume and mix of $108 million in both product lines, partially offset by an unfavorable impact of $67 million from foreign exchange rate fluctuations.

Industrial's operating expenses increased $103 million, 15%, in the third quarter of 2022, compared with the third quarter of 2021, primarily reflecting the impact of higher volume and mix described above, and inflation of $56 million, largely in material costs, partially offset by a favorable impact of $29 million from foreign exchange rate fluctuations.

Industrial's operating expenses increased $188 million, 8%, in the first nine months of 2022, compared with the first nine months of 2021, primarily reflecting inflation of $171 million, largely in material costs, and the impact of higher volume and mix described above, partially offset by a favorable impact of $59 million from foreign exchange rate fluctuations.

Industrial Segment Profit

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

Segment profit for the Industrial segment increased $16 million, 70%, in the third quarter of 2022, compared with the third quarter of 2021, primarily due to higher volume and mix of $24 million described above, partially offset by an unfavorable impact from performance of $5 million and foreign exchange rate fluctuations of $5 million.

Segment profit for the Industrial segment increased $21 million, 21%, in the first nine months of 2022, compared with the first nine months of 2021, primarily due to higher volume and mix of $29 million described above, partially offset by an unfavorable impact from foreign exchange rate fluctuations of $8 million.

Textron eAviation

In the third quarter and first nine months of 2022, Textron eAviation segment revenues totaled $5 million and $10 million, respectively, and segment loss totaled $8 million and $16 million, respectively. These segment results reflected the operating results of Pipistrel, along with research and development costs for initiatives related to the development of sustainable aviation solutions.

Finance

Finance segment revenues were unchanged in the third quarter of 2022 and increased $3 million in the first nine months of 2022, compared with the corresponding periods of 2021. Segment profit decreased $1 million and increased $9 million, in the third quarter and first nine months of 2022, respectively, compared with the corresponding periods of 2021. The following table reflects information about the Finance segment’s credit performance related to finance receivables.

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. 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 along with Textron eAviation, a new segment formed at the beginning of the second quarter of 2022. 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:

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 expect to have sufficient cash to meet our needs based on our existing cash balances, the cash we expect to generate from our manufacturing operations and the availability of our existing credit facility.

Credit Facilities and Other Sources of Capital

On October 21, 2022, Textron entered into 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 2027, 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. This new facility replaces the existing 5-year facility, which was scheduled to expire in October 2024. There were no amounts borrowed against either facility and there were $9 million of outstanding letters of credit issued under the prior facility at both October 1, 2022 and January 1, 2022.

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.

Manufacturing Group Cash Flows

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

In the first nine months of 2022, cash flows from operating activities decreased $67 million to $945 million, compared with $1,012 million in the first nine months of 2021, primarily due to an increase in income tax payments of $197 million, largely resulting from a change in tax legislation, partially offset by higher earnings. Effective at the beginning of 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years. Without the option to deduct these expenses in the year incurred, our tax payments are expected to increase by approximately $300 million for the full year of 2022, depending on the final amount of research and development expenses incurred during the year.

Cash flows used in investing activities in the first nine months of 2022 included $201 million of net cash paid for business acquisitions, largely related to the Pipistrel acquisition discussed in Note 2 to the Consolidated Financial Statements, and $192 million of capital expenditures. Investing activities in the first nine months of 2021 included $204 million of capital expenditures, partially offset by $38 million of net proceeds from the disposition of TRU Simulation + Training Canada Inc.

Cash flows used in financing activities in the first nine months of 2022 included $639 million of cash paid to repurchase an aggregate of 9.8 million shares of our common stock. In the first nine months of 2021, cash flows used in financing activities 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.

On January 25, 2022, we announced the authorization of the repurchase of up to 25 million shares of our common stock. This plan allows us to continue our practice of repurchasing shares to offset the impact of dilution from stock-based compensation and benefit plans and for opportunistic capital management purposes. The 2022 plan has no expiration date and replaced the prior 2020 share repurchase authorization.

Finance Group Cash Flows

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

In the first nine months of 2022, the net cash outflow from operating activities was $11 million, compared with a net cash inflow of $10 million in the first nine months of 2021. The year-over-year decrease in cash flows was primarily due to an increase in income tax payments of $12 million.

The Finance group’s cash flows from investing activities included collections on finance receivables totaling $108 million and $205 million in the first nine months of 2022 and 2021, respectively, and finance receivable originations of $58 million and $34 million, respectively. Cash flows provided by investing activities in the first nine months of 2022 also included $44 million of other investing activities, largely related to proceeds from the sale of operating lease assets. In the first nine months of 2022 and 2021, financing activities included payments on long-term and nonrecourse debt of $211 million and $93 million, respectively.

Consolidated Cash Flows

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

In the first nine months of 2022, cash flows from operating activities decreased $211 million to $963 million, compared with $1,174 million in the first nine months of 2021. The decrease in cash flows was primarily due to an increase in income tax payments of $209 million, largely resulting from a change in tax legislation discussed above, and a decrease in cash inflows from captive finance receivables of $123 million, partially offset by higher earnings.

Cash flows used in investing activities in the first nine months of 2022 included $201 million of net cash paid for business acquisitions, largely related to the Pipistrel acquisition, and $192 million of capital expenditures, partially offset by $44 million of other investing activities, which included proceeds from the sale of operating lease assets. Investing activities in the first nine months of 2021 included $204 million of capital expenditures, partially offset by $38 million of net proceeds from the disposition of TRU Simulation + Training Canada Inc.

Cash flows used in financing activities in the first nine months of 2022 included $639 million of cash paid to repurchase shares of our outstanding common stock and $227 million of payments on long-term debt. In the first nine months of 2021, cash flows used in financing activities included $615 million of payments on long-term debt and $586 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:

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 1, 2022. The following section provides an update of the year-end disclosure.

Revenue Recognition

A substantial portion of our revenues is related to long-term contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program, for the design, development, manufacture or modification of aerospace and defense products as well as related services. We generally use the cost-to-cost method to measure progress for these contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts. Under this measure, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and revenue is recorded proportionally as costs are incurred.

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:

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 2021 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 and inflationary pressures;

• 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;

• 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 ongoing impact of the COVID-19 pandemic and the war between Russia and Ukraine 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.

There has been no significant change in our exposure to market risk during the fiscal quarter ended October 1, 2022. For discussion of our exposure to market risk, refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk contained in Textron’s 2021 Annual Report on Form 10-K.

We performed an evaluation of the effectiveness of our disclosure controls and procedures as of October 1, 2022. The evaluation was performed with the participation of senior management of each business segment and key Corporate functions, under the supervision of our Chairman, President and Chief Executive Officer (CEO) and our Executive Vice President and Chief Financial Officer (CFO). Based on this evaluation, the CEO and CFO concluded that our disclosure controls and procedures were operating and effective as of October 1, 2022.

There were no changes in our internal control over financial reporting during the fiscal quarter ended October 1, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following provides information about our third quarter of 2022 repurchases of equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:

** On January 25, 2022, our Board of Directors authorized the repurchase of up to 25 million shares of our common stock. This new plan has no expiration date and replaced the existing plan adopted in 2020.*

Because this Quarterly Report on Form 10-Q is being filed within four business days from the date of the reportable event, we have elected to make the following disclosure in this Quarterly Report on Form 10-Q instead of in a Current Report on Form 8-K under Items 1.01, 1.02 and 2.03.

Entry into a Material Definitive Agreement

On October 21, 2022, Textron Inc. ("Textron") entered into a senior unsecured revolving credit facility (the "Facility Agreement") with the Lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, in an aggregate principal amount of $1.0 billion. Textron may elect to increase the aggregate amount of commitments under the Facility Agreement to up to $1.3 billion by designating an additional lender or by agreeing with an existing lender that such lender’s commitment shall be increased. The Facility Agreement expires in October 2027, subject to up to two one-year extensions at Textron’s option with the consent of lenders having more than 50% of the aggregate amount of commitments under the Facility Agreement. The Facility Agreement replaces the $1.0 billion 5-year facility that was scheduled to expire in October 2024. The terms and conditions of the Facility Agreement are substantially the same as those in the facility being replaced.

Textron will have two options with respect to interest on syndicated borrowings under the Facility Agreement. The first option is for interest to be payable at a rate per annum equal to the sum of a margin (“Base Rate Margin”), which can range from 0 basis points to 40 basis points depending on Textron’s senior unsecured long-term debt ratings as determined by Standard & Poor's Ratings Services ("S&P") and Moody's Investors Service, Inc. ("Moody's"), plus the highest of (a) the Prime Rate, (b) the federal funds rate plus 0.50% per annum or (c) the Adjusted Term SOFR Rate (as defined below) for a one-month interest period plus 1.00% per annum (the “Base Rate”), provided that the Base Rate shall not be less than 1.0%. Based on Textron's current S&P and Moody's ratings (BBB and Baa2, respectively) the Base Rate Margin would be 12.5 basis points.

Alternatively, Textron may opt to pay interest for the applicable Interest Period at a rate per annum equal to the sum of a margin (“Term Benchmark Margin”), which can range from 91 basis points to 140 basis points depending upon Textron’s ratings, plus the applicable Term SOFR Rate, plus 0.10% (“Adjusted Term SOFR Rate”); provided that the Adjusted Term SOFR Rate shall not be less than 0.0%. The Term SOFR Rate means the Term SOFR Reference Rate published as specified by the Credit Agreement. Based on Textron's current S&P and Moody's ratings (BBB and Baa2, respectively) the Term Benchmark Margin would be 1.25 basis points.

Textron also will pay a quarterly facility fee under the Facility Agreement, regardless of borrowing activity. This fee will range from 9 basis points to 22.5 basis points, depending on Textron's ratings by S&P and Moody's. At Textron's current rating, the fee is 12.5 basis points.

The Facility Agreement provides that up to $100 million is available for the issuance of letters of credit in lieu of borrowings. Letters of credit are subject to fronting fees and accrue charges at the Letter of Credit Fee Rate which is equivalent to the Term Benchmark Margin.

The Facility Agreement contains covenants that, among other things:

• provide that Textron may not consolidate with, merge with or into, or sell all or substantially all of its assets to any other entity unless such entity expressly assumes all of Textron’s obligations under the Facility Agreement;

• restrict the ability of Textron and its manufacturing subsidiaries to incur liens, other than certain permitted liens, including liens securing indebtedness not in excess of the Pooled Basket Amount (equal to 3% of the consolidated total assets of Textron and its manufacturing subsidiaries);

• restrict the ability of Textron’s manufacturing subsidiaries to incur certain indebtedness in excess of the Pooled Basket Amount;

• require Textron to maintain the Finance Company Leverage Ratio (as such term is defined in the Facility Agreement) at no more than 9 to 1;

• require the Consolidated Indebtedness (as such term is defined in the Facility Agreement) of Textron and its manufacturing subsidiaries not to exceed 65% of Consolidated Capitalization (also as defined in the Facility Agreement).

The Facility Agreement contains customary Events of Default (as defined in the Facility Agreement); in addition, a Change of Control (also as defined in the Facility Agreement) triggers an Event of Default under the Facility Agreement. Upon the occurrence of an Event of Default, all loans outstanding under the Facility Agreement (including accrued interest and fees payable with respect thereto) may be declared immediately due and payable and all commitments under the Facility Agreement may be terminated.

The foregoing description of the Facility Agreement does not purport to be complete and is qualified in its entirety by reference to the text of the Facility Agreement, which is attached hereto as Exhibit 10.1 and is incorporated herein by reference.

Termination of a Material Definitive Agreement

On October 21, 2022, coincident with the entry into the Facility Agreement reported above, the existing 5-Year Credit Agreement, dated as of October 18, 2019, among Textron, the Banks listed therein and JPMorgan Chase Bank, N.A., as Administrative Agent, was terminated prior to its stated October 2024 expiration date.

Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant

The information described above under “Entry into a Material Definitive Agreement" is incorporated herein by reference.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.