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

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

Consolidated Results of Operations


	Three Months Ended
(Dollars in millions)		April 1, 2023		April 2, 2022		% Change
Revenues		$	3,024	$	3,001	1%
Cost of sales		2,531		2,492		2%
Gross margin as a % of Manufacturing revenues		16.0%		16.5%
Selling and administrative expense		305		305		—%

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 24.

Revenues

Revenues increased $23 million, 1%, in the first quarter of 2023, compared with the first quarter of 2022. The revenue increase primarily included the following factors:

Higher Textron Aviation revenues of $109 million, reflecting higher pricing of $58 million and higher volume and mix of $51 million, which includes higher defense and aftermarket volume.
Higher Industrial revenues of $94 million, largely due to higher volume and mix of $88 million at both product lines.
Higher Textron Systems revenues of $33 million, largely reflecting higher volume.
Lower Bell revenues of $213 million, reflecting lower military spares and support and V-22 and H-1 production volume.

Cost of Sales

Cost of sales increased $39 million, 2%, in the first quarter of 2023, compared with the first quarter of 2022, largely due to $77 million of inflation and LIFO inventory provision, partially offset by the impact of lower net volume and mix.

Income Taxes

Our effective tax rate for the first quarter of 2023 and 2022 was 15.9% and 16.8%, respectively. In the first quarter of 2023, 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 first quarter 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.

Backlog

Our backlog is summarized below:


(In millions)	April 1, 2023		December 31, 2022
Textron Aviation	$	6,523	$	6,387
Bell	4,586		4,781
Textron Systems	2,030		2,098
Total backlog	$	13,139	$	13,266

Segment Analysis

We operate in, and report financial information for, the following six business segments: Textron Aviation, Bell, Textron Systems, Industrial, Textron eAviation and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Beginning in 2023, we changed how we measure our manufacturing segment operating results to exclude the non-service components of pension and postretirement income, net; LIFO inventory provision; and intangible asset amortization. This measure also continues to exclude interest expense, net for Manufacturing group; certain corporate expenses; gains/losses on major business dispositions; and special charges. The prior period has been recast to conform to this presentation. The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense. Operating expenses for the Manufacturing segments include cost of sales and selling and administrative expense, while excluding certain corporate expenses, LIFO inventory provision, intangible asset amortization and special charges.

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

Approximately 22% of our 2022 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


	Three Months Ended
(Dollars in millions)		April 1, 2023		April 2, 2022		% Change
Revenues:
Aircraft		$	718	$	646	11%
Aftermarket parts and services		431		394		9%
Total revenues		1,149		1,040		10%
Operating expenses		1,024		930		10%
Segment profit		$	125	$	110	14%
Profit margin		10.9%		10.6%

Textron Aviation Revenues and Operating Expenses

The following factors contributed to the change in Textron Aviation’s revenues from the prior year quarter:


(In millions)	Q1 2023 versus Q1 2022
Pricing	$	58
Volume and mix	51
Total change	$	109

Textron Aviation’s revenues increased $109 million, 10%, in the first quarter of 2023, compared with the first quarter of 2022, reflecting higher pricing of $58 million and higher volume and mix of $51 million, which includes higher defense and aftermarket volume. We delivered 35 Citation jets and 34 commercial turboprops in the first quarter of 2023, compared with 39 Citation jets and 31 commercial turboprops in the first quarter of 2022.

Textron Aviation’s operating expenses increased $94 million, 10%, in the first quarter of 2023, compared with the first quarter of 2022, largely due to inflation of $41 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 from the prior year quarter:


(In millions)	Q1 2023 versus Q1 2022
Pricing, net of inflation	$	17
Volume and mix	15
Performance	(17)
Total change	$	15

Segment profit at Textron Aviation increased $15 million, 14%, in the first quarter of 2023, compared with the first quarter of 2022, due to favorable pricing, net of inflation of $17 million, and the impact from higher volume and mix described above, partially offset by an unfavorable impact from performance of $17 million.

Bell


	Three Months Ended
(Dollars in millions)		April 1, 2023		April 2, 2022		% Change
Revenues:
Military aircraft and support programs		$	385	$	597	(36)%
Commercial helicopters, parts and services		236		237		—%
Total revenues		621		834		(26)%
Operating expenses		561		743		(24)%
Segment profit		$	60	$	91	(34)%
Profit margin		9.7%		10.9%

A significant portion of Bell’s military aircraft and support program revenues is from the U.S. Government for the V-22 tiltrotor aircraft and the H-1 helicopter platforms, which are transitioning from production to the support stage over the next few years. Under the current contracts, production is expected to end in 2023 for the H-1 helicopter and 2025 for the V-22 tiltrotor. In December 2022, Bell was awarded the development contract for the U.S. Army's Future Long Range Assault Aircraft program. The award was protested by a competitor, but, on April 6, 2023, the Government Accountability Office denied the protest. The U.S. Army has cancelled the stop-work order, and work on the contract is proceeding.

Bell Revenues and Operating Expenses

The following factors contributed to the change in Bell’s revenues from the prior year quarter:


(In millions)	Q1 2023 versus Q1 2022
Volume and mix	$	(225)
Pricing	12

Total change	$	(213)

Bell’s revenues decreased $213 million, 26%, in the first quarter of 2023, compared with the first quarter of 2022, reflecting lower military spares and support and V-22 and H-1 production volume. We delivered 22 commercial helicopters in the first quarter of 2023, compared with 25 commercial helicopters in the first quarter of 2022.

Bell’s operating expenses decreased $182 million, 24% in the first quarter of 2023, compared with the first quarter of 2022, primarily due to lower volume and mix described above.

Bell Segment Profit

The following factors contributed to the change in Bell’s segment profit from the prior year quarter:


(In millions)	Q1 2023 versus Q1 2022
Volume and mix	$	(61)
Performance	29
Pricing, net of inflation	1
Total change	$	(31)

Bell’s segment profit decreased $31 million, 34%, in the first quarter of 2023, compared with the first quarter of 2022, largely due to lower volume and mix described above, partially offset by a favorable impact from performance of $29 million, which includes $18 million of lower research and development costs.

Textron Systems


	Three Months Ended
(Dollars in millions)		April 1, 2023		April 2, 2022		% Change
Revenues		$	306	$	273	12%
Operating expenses		272		245		11%
Segment profit		$	34	$	28	21%
Profit margin		11.1%		10.3%

Textron Systems Revenues and Operating Expenses

The following factors contributed to the change in Textron Systems’ revenues from the prior year quarter:


(In millions)	Q1 2023 versus Q1 2022

Volume	$	28
Pricing	5
Total change	$	33

Textron Systems' revenues increased $33 million, 12%, in the first quarter of 2023, compared with the first quarter of 2022, largely reflecting higher volume.

Textron Systems’ operating expenses increased $27 million, 11%, in the first quarter of 2023, compared with the first quarter of 2022, largely related to higher volume described above.

Textron Systems Segment Profit

The following factors contributed to the change in Textron Systems’ segment profit from the prior year quarter:


(In millions)	Q1 2023 versus Q1 2022
Performance	$	6
Pricing, net of inflation	2
Volume and mix	(2)
Total change	$	6

Textron Systems’ segment profit increased $6 million, 21%, in the first quarter of 2023, compared with the first quarter of 2022, largely due to a favorable impact from performance of $6 million.

Industrial


	Three Months Ended
(Dollars in millions)		April 1, 2023		April 2, 2022		% Change
Revenues:
Fuel systems and functional components		$	488	$	464	5%
Specialized vehicles		444		374		19%
Total revenues		932		838		11%
Operating expenses		891		799		12%
Segment profit		$	41	$	39	5%
Profit margin		4.4%		4.7%

Industrial Revenues and Operating Expenses

The following factors contributed to the change in Industrial’s revenues from the prior year quarter:


(In millions)	Q1 2023 versus Q1 2022
Volume and mix	$	88
Pricing	24
Foreign exchange	(18)
Total change	$	94

Industrial segment revenues increased $94 million, 11%, in the first quarter of 2023, compared with the first quarter of 2022, largely due to higher volume and mix of $88 million at both product lines.

Industrial's operating expenses increased $92 million, 12%, in the first quarter of 2023, compared with the first quarter of 2022, principally reflecting the impact of higher volume and mix described above .

Industrial Segment Profit

The following factors contributed to the change in Industrial’s segment profit from the prior year quarter:


(In millions)	Q1 2023 versus Q1 2022
Volume and mix	$	8
Pricing, net of inflation	8
Performance	(12)
Foreign exchange	(2)
Total change	$	2

Segment profit for the Industrial segment increased $2 million, 5%, in the first quarter of 2023, compared with the first quarter of 2022, largely due to higher volume and mix of $8 million as described above and an $8 million favorable impact from pricing, net of inflation, principally in the Specialized Vehicles product line, partially offset by an unfavorable impact of $12 million from performance.

Textron eAviation

In the first quarter of 2023, Textron eAviation segment revenues totaled $4 million and segment loss totaled $9 million, which was primarily related to research and development costs.

Finance


	Three Months Ended
(In millions)		April 1, 2023		April 2, 2022
Revenues		$	12	$	16
Segment profit		8		9

Finance segment revenues decreased $4 million in the first quarter of 2023, compared with the first quarter of 2022, and segment profit decreased $1 million. The following table reflects information about the Finance segment’s credit performance related to finance receivables.


(Dollars in millions)	April 1, 2023		December 31, 2022
Finance receivables	$	577	$	587
Allowance for credit losses	22		24
Ratio of allowance for credit losses to finance receivables	3.81%		4.09%
Nonaccrual finance receivables	39		46
Ratio of nonaccrual finance receivables to finance receivables	6.76%		7.84%
60+ days contractual delinquency	2		1
60+ days contractual delinquency as a percentage of finance receivables	0.35%		0.17%

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 2 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, Industrial and Textron eAviation segments. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation and its consolidated subsidiaries. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible 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)	April 1, 2023		December 31, 2022
Manufacturing group
Cash and equivalents	$	1,719	$	1,963
Debt	3,183		3,182
Shareholders’ equity	7,008		7,113
Capital (debt plus shareholders’ equity)	10,191		10,295
Net debt (net of cash and equivalents) to capital	17%		15%
Debt to capital	31%		31%
Finance group
Cash and equivalents	$	80	$	72
Debt	367		375

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

Textron has a senior unsecured revolving credit facility for an aggregate principal amount of $1.0 billion, of which $100 million is available for the issuance of letters of credit. We may elect to increase the aggregate amount of commitments under the facility to up to $1.3 billion by designating an additional lender or by an existing lender agreeing to increase its commitment. The facility expires in October 2027 and provides for two one-year extensions at our option with the consent of lenders representing a majority of the commitments under the facility. At April 1, 2023 and December 31, 2022, there were no amounts borrowed against the facility and there were $9 million of outstanding letters of credit issued under the facility.

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

Manufacturing Group Cash Flows

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


	Three Months Ended
(In millions)	April 1, 2023		April 2, 2022
Operating activities	$	153	$	225
Investing activities	(42)		(28)
Financing activities	(361)		(139)

In the first quarter of 2023, cash flows from operating activities decreased $72 million to $153 million, compared with $225 million in the first quarter of 2022, largely due to changes in working capital.

Cash flows used in investing activities in the first quarter of 2023 included $62 million of capital expenditures, partially offset by $20 million of net proceeds from corporate-owned life insurance policies. Investing activities in the first quarter of 2022 included $48 million of capital expenditures, partially offset by $18 million of proceeds from the sale of property, plant and equipment.

Cash flows used in financing activities in the first quarter of 2023 included $377 million of cash paid to repurchase an aggregate of 5.2 million shares of our common stock. In the first quarter of 2022, cash flows used in financing activities included $157 million of cash paid to repurchase an aggregate of 2.2 million shares of our common stock.

Finance Group Cash Flows

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


	Three Months Ended
(In millions)	April 1, 2023		April 2, 2022
Operating activities	$	4	$	(2)
Investing activities	19		74
Financing activities	(15)		(119)

The Finance group’s cash flows from investing activities included collections on finance receivables totaling $35 million and $40 million in the first quarter of 2023 and 2022, respectively, partially offset by finance receivable originations of $17 million and $9 million, respectively. Cash flows provided by investing activities in the first quarter of 2022 also included $43 million of other investing activities, largely related to proceeds from the sale of operating lease assets. In the first quarter of 2023 and 2022, financing activities included payments on long-term and nonrecourse debt of $15 million and $119 million, respectively.

Consolidated Cash Flows

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


	Three Months Ended
(In millions)	April 1, 2023		April 2, 2022
Operating activities	$	163	$	241
Investing activities	(29)		28
Financing activities	(376)		(258)

In the first quarter of 2023, cash flows from operating activities decreased $78 million to $163 million, compared with $241 million in the first quarter of 2022, largely due to changes in working capital.

Cash flows used in investing activities in the first quarter of 2023 included $62 million of capital expenditures, partially offset by $20 million of net proceeds from corporate-owned life insurance policies. Investing activities in the first quarter of 2022 included $43 million of other investing activities, largely related to proceeds from the sale of operating lease assets, and $18 million of proceeds from the sale of property, plant and equipment, partially offset by $48 million of capital expenditures.

Cash flows used in financing activities in the first quarter of 2023 included $377 million of cash paid to repurchase shares of our outstanding common stock. In the first quarter of 2022, cash flows used in financing activities included $157 million of cash paid to repurchase shares of our outstanding common stock and $121 million of payments on long-term debt.

Captive Financing and Other Intercompany Transactions

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

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


	Three Months Ended
(In millions)	April 1, 2023		April 2, 2022
Reclassification adjustments from investing activities to operating activities:
Cash received from customers	$	23	$	27
Finance receivable originations for Manufacturing group inventory sales	(17)		(9)




Total reclassification adjustments from investing activities to operating activities	$	6	$	18

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 December 31, 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:


	Three Months Ended
(In millions)		April 1, 2023		April 2, 2022
Gross favorable		$	25	$	16
Gross unfavorable		(17)		(33)
Net adjustments		$	8	$	(17)

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 2022 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.

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