TXT 10-Q
Textron Inc (TXT)
10-Q
2021-10-28
For: 2021-10-02
View Original
Added on
April 08, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended October 2, 2021
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ______ to ______.
Commission File Number 1-5480
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip code) | |||||||
(401 ) 421-2800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol (s) | Name of each exchange on which registered | ||||||
New York Stock Exchange ( | ||||||||
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):
| þ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | |||||||||||||
| Smaller reporting company | Emerging growth company | ||||||||||||||||
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 15, 2021, there were 220,425,217 shares of common stock outstanding.
TEXTRON INC.
Index to Form 10-Q
For the Quarterly Period Ended October 2, 2021
| Page | ||||||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TEXTRON INC.
Consolidated Statements of Operations (Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||
| (In millions, except per share amounts) | October 2, 2021 | October 3, 2020 | October 2, 2021 | October 3, 2020 | ||||||||||
| Revenues | ||||||||||||||
| Manufacturing revenues | $ | $ | $ | $ | ||||||||||
| Finance revenues | ||||||||||||||
| Total revenues | ||||||||||||||
| Costs, expenses and other | ||||||||||||||
| Cost of sales | ||||||||||||||
| Selling and administrative expense | ||||||||||||||
| Interest expense | ||||||||||||||
| Special charges | ||||||||||||||
| Non-service components of pension and post-retirement income, net | ( | ( | ( | ( | ||||||||||
| Gain on business disposition | ( | |||||||||||||
| Total costs, expenses and other | ||||||||||||||
| Income from continuing operations before income taxes | ||||||||||||||
| Income tax expense (benefit) | ( | |||||||||||||
| Income from continuing operations | $ | $ | $ | $ | ||||||||||
| Loss from discontinued operations | ( | |||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||
| Basic Earnings per share | ||||||||||||||
| Continuing operations | $ | $ | $ | $ | ||||||||||
| Diluted Earnings per share | ||||||||||||||
| Continuing operations | $ | $ | $ | $ | ||||||||||
See Notes to the Consolidated Financial Statements.
3
TEXTRON INC.
Consolidated Statements of Comprehensive Income (Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||
| (In millions) | October 2, 2021 | October 3, 2020 | October 2, 2021 | October 3, 2020 | ||||||||||
| Net income | $ | $ | $ | $ | ||||||||||
| Other comprehensive income, net of tax | ||||||||||||||
| Pension and postretirement benefits adjustments, net of reclassifications | ||||||||||||||
| Foreign currency translation adjustments, net of reclassifications | ( | ( | ||||||||||||
| Deferred gains (losses) on hedge contracts, net of reclassifications | ( | ( | ||||||||||||
| Other comprehensive income | ||||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||
See Notes to the Consolidated Financial Statements.
4
TEXTRON INC.
Consolidated Balance Sheets (Unaudited)
| (Dollars in millions) | October 2, 2021 | January 2, 2021 | ||||||
| Assets | ||||||||
| Manufacturing group | ||||||||
| Cash and equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
Property, plant and equipment, less accumulated depreciation and amortization of $ | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total Manufacturing group assets | ||||||||
| Finance group | ||||||||
| Cash and equivalents | ||||||||
| Finance receivables, net | ||||||||
| Other assets | ||||||||
| Total Finance group assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and shareholders’ equity | ||||||||
| Liabilities | ||||||||
| Manufacturing group | ||||||||
| Current portion of long-term debt | $ | $ | ||||||
| Accounts payable | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Other liabilities | ||||||||
| Long-term debt | ||||||||
| Total Manufacturing group liabilities | ||||||||
| Finance group | ||||||||
| Other liabilities | ||||||||
| Debt | ||||||||
| Total Finance group liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders’ equity | ||||||||
| Common stock | ||||||||
| Capital surplus | ||||||||
| Treasury stock | ( | ( | ||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
| Common shares outstanding (in thousands) | ||||||||
See Notes to the Consolidated Financial Statements.
5
TEXTRON INC.
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended October 2, 2021 and October 3, 2020, respectively
| Consolidated | ||||||||
| (In millions) | 2021 | 2020 | ||||||
| Cash flows from operating activities | ||||||||
| Income from continuing operations | $ | $ | ||||||
| Adjustments to reconcile income from continuing operations to net cash provided by operating activities: | ||||||||
| Non-cash items: | ||||||||
| Depreciation and amortization | ||||||||
| Gain on business disposition | ( | |||||||
| Deferred income taxes | ( | |||||||
| Asset impairments and TRU inventory charge | ||||||||
| Other, net | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable, net | ||||||||
| Inventories | ( | ( | ||||||
| Other assets | ( | |||||||
| Accounts payable | ( | |||||||
| Other liabilities | ||||||||
| Income taxes, net | ( | |||||||
| Pension, net | ( | ( | ||||||
| Captive finance receivables, net | ( | |||||||
| Other operating activities, net | ||||||||
| Net cash provided by operating activities of continuing operations | ||||||||
| Net cash used in operating activities of discontinued operations | ( | ( | ||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities | ||||||||
| Capital expenditures | ( | ( | ||||||
| Net proceeds from business disposition | ||||||||
| Proceeds from an insurance recovery and sale of property, plant and equipment | ||||||||
| Net proceeds from corporate-owned life insurance policies | ||||||||
| Net cash used in acquisitions | ( | |||||||
| Finance receivables repaid | ||||||||
| Other investing activities, net | ||||||||
| Net cash used in investing activities | ( | ( | ||||||
| Cash flows from financing activities | ||||||||
| Decrease in short-term debt | ( | |||||||
| Net proceeds from long-term debt | ||||||||
| Proceeds from borrowings against corporate-owned life insurance policies | ||||||||
| Payment on borrowings against corporate-owned life insurance policies | ( | |||||||
| Principal payments on long-term debt and nonrecourse debt | ( | ( | ||||||
| Purchases of Textron common stock | ( | ( | ||||||
| Dividends paid | ( | ( | ||||||
| Proceeds from options exercised | ||||||||
| Other financing activities, net | ( | ( | ||||||
| Net cash provided by (used in) financing activities | ( | |||||||
| Effect of exchange rate changes on cash and equivalents | ( | ( | ||||||
| Net increase (decrease) in cash and equivalents | ( | |||||||
| Cash and equivalents at beginning of period | ||||||||
| Cash and equivalents at end of period | $ | $ | ||||||
See Notes to the Consolidated Financial Statements.
6
TEXTRON INC.
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Nine Months Ended October 2, 2021 and October 3, 2020, respectively
| Manufacturing Group | Finance Group | |||||||||||||
| (In millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||
| Cash flows from operating activities | ||||||||||||||
| Income from continuing operations | $ | $ | $ | $ | ||||||||||
| Adjustments to reconcile income from continuing operations to net cash provided by operating activities: | ||||||||||||||
| Non-cash items: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Gain on business disposition | ( | |||||||||||||
| Deferred income taxes | ( | ( | ( | |||||||||||
| Asset impairments and TRU inventory charge | ||||||||||||||
| Other, net | ( | |||||||||||||
| Changes in assets and liabilities: | ||||||||||||||
| Accounts receivable, net | ||||||||||||||
| Inventories | ( | ( | ||||||||||||
| Other assets | ( | ( | ||||||||||||
| Accounts payable | ( | |||||||||||||
| Other liabilities | ( | |||||||||||||
| Income taxes, net | ( | |||||||||||||
| Pension, net | ( | ( | ||||||||||||
| Other operating activities, net | ||||||||||||||
| Net cash provided by operating activities of continuing operations | ||||||||||||||
| Net cash used in operating activities of discontinued operations | ( | ( | ||||||||||||
| Net cash provided by operating activities | ||||||||||||||
| Cash flows from investing activities | ||||||||||||||
| Capital expenditures | ( | ( | ||||||||||||
| Net proceeds from business disposition | ||||||||||||||
| Proceeds from an insurance recovery and sale of property, plant and equipment | ||||||||||||||
| Net proceeds from corporate-owned life insurance policies | ||||||||||||||
| Net cash used in acquisitions | ( | |||||||||||||
| Finance receivables repaid | ||||||||||||||
| Finance receivables originated | ( | ( | ||||||||||||
| Other investing activities, net | ||||||||||||||
| Net cash provided by (used in) investing activities | ( | ( | ( | |||||||||||
| Cash flows from financing activities | ||||||||||||||
| Decrease in short-term debt | ( | |||||||||||||
| Net proceeds from long-term debt | ||||||||||||||
| Proceeds from borrowings against corporate-owned life insurance policies | ||||||||||||||
| Payment on borrowings against corporate-owned life insurance policies | ( | |||||||||||||
| Principal payments on long-term debt and nonrecourse debt | ( | ( | ( | ( | ||||||||||
| Purchases of Textron common stock | ( | ( | ||||||||||||
| Dividends paid | ( | ( | ||||||||||||
| Proceeds from options exercised | ||||||||||||||
| Other financing activities, net | ( | ( | ||||||||||||
| Net cash provided by (used in) financing activities | ( | ( | ( | |||||||||||
| Effect of exchange rate changes on cash and equivalents | ( | ( | ||||||||||||
| Net increase (decrease) in cash and equivalents | ( | ( | ||||||||||||
| Cash and equivalents at beginning of period | ||||||||||||||
| Cash and equivalents at end of period | $ | $ | $ | $ | ||||||||||
See Notes to the Consolidated Financial Statements.
7
TEXTRON INC.
Notes to the Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
Our Consolidated Financial Statements include the accounts of Textron Inc. (Textron) and its majority-owned subsidiaries. We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information. Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 2, 2021. In the opinion of management, the interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair presentation of our consolidated financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
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. All significant intercompany transactions are eliminated from the Consolidated Financial Statements, including retail financing activities for inventory sold by our Manufacturing group and financed by our Finance group.
Use of Estimates
We prepare our financial statements in conformity with generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the Consolidated Statements of Operations in the period that they are determined.
Contract Estimates
For contracts where revenue is recognized over time, we recognize changes in estimated contract revenues, costs and profits using the cumulative catch-up method of accounting. This method recognizes the cumulative effect of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current period. Anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable.
In the third quarter of 2021 and 2020, our cumulative catch-up adjustments increased segment profit by $25 million and $22 million, respectively, and increased net income by $19 million and $17 million, respectively ($0.08 and $0.07 per diluted share, respectively). Gross favorable profit adjustments totaled $43 million and $31 million in the third quarter of 2021 and 2020, respectively, and the gross unfavorable profit adjustments totaled $18 million and $9 million, respectively. We recognized revenues of $27 million and $22 million in the third quarter of 2021 and 2020, respectively, from performance obligations satisfied in prior periods that related to changes in profit booking rates.
Note 2. Business Disposition
8
Note 3. Accounts Receivable and Finance Receivables
Accounts Receivable
Accounts receivable is composed of the following:
| (In millions) | October 2, 2021 | January 2, 2021 | ||||||
| Commercial | $ | $ | ||||||
| U.S. Government contracts | ||||||||
| Allowance for credit losses | ( | ( | ||||||
| Total accounts receivable, net | $ | $ | ||||||
Finance Receivables
Finance receivables are presented in the following table:
| (In millions) | October 2, 2021 | January 2, 2021 | ||||||
| Finance receivables | $ | $ | ||||||
| Allowance for credit losses | ( | ( | ||||||
| Total finance receivables, net | $ | $ | ||||||
Finance Receivable Portfolio Quality
We internally assess the quality of our finance receivables based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors. Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan. These three categories are performing, watchlist and nonaccrual.
We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful. Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain. All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing.
We measure delinquency based on the contractual payment terms of our finance receivables. In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.
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 types of temporary payment relief we offered to these customers included delays in the timing of required principal payments, deferrals of interest payments and/or interest-only payments. The majority of these modified loans have returned to paying principal and interest. For loan modifications that cover payment-relief periods in excess of six months , even if the loan was previously current, the loan is deemed a troubled debt restructuring and considered impaired. These impaired loans are classified as either nonaccrual or watchlist based on a review of the credit quality indicators as discussed above.
During the first nine months of 2021, we modified finance receivable contracts for 21 customers with an outstanding balance at October 2, 2021 totaling $76 million, which were all categorized as troubled debt restructurings. Of these modifications, $71 million were previously modified in 2020. Due to the nature of these restructurings, the financial effects were not significant. We had no customer defaults during the last twelve months related to finance receivables previously modified as a troubled debt restructuring. 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.
9
Finance receivables categorized based on the credit quality indicators and by the delinquency aging category are summarized as follows:
| (Dollars in millions) | October 2, 2021 | January 2, 2021 | ||||||
| Performing | $ | $ | ||||||
| Watchlist | ||||||||
| Nonaccrual | ||||||||
| Nonaccrual as a percentage of finance receivables | ||||||||
| Current and less than 31 days past due | $ | $ | ||||||
| 31-60 days past due | ||||||||
| 61-90 days past due | ||||||||
| Over 90 days past due | ||||||||
| 60+ days contractual delinquency as a percentage of finance receivables | ||||||||
At October 2, 2021, 30 % of our performing finance receivables were originated since the beginning of 2020 and 32 % were originated from 2017 to 2019. For finance receivables categorized as nonaccrual, 63 % were originated from 2017 to 2019.
On a quarterly basis, we evaluate individual larger balance accounts for impairment. A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators described above. Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified. If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification.
A summary of finance receivables and the allowance for credit losses, based on the results of our impairment evaluation, is provided below. The finance receivables included in this table specifically exclude leveraged leases in accordance with U.S. generally accepted accounting principles.
| (In millions) | October 2, 2021 | January 2, 2021 | ||||||
| Finance receivables evaluated collectively | $ | $ | ||||||
| Finance receivables evaluated individually | ||||||||
| Allowance for credit losses based on collective evaluation | ||||||||
| Allowance for credit losses based on individual evaluation | ||||||||
| Impaired finance receivables with specific allowance for credit losses | $ | $ | ||||||
| Impaired finance receivables with no specific allowance for credit losses | ||||||||
| Unpaid principal balance of impaired finance receivables | ||||||||
| Allowance for credit losses on impaired finance receivables | ||||||||
| Average recorded investment of impaired finance receivables | ||||||||
Note 4. Inventories
Inventories are composed of the following:
| (In millions) | October 2, 2021 | January 2, 2021 | ||||||
| Finished goods | $ | $ | ||||||
| Work in process | ||||||||
| Raw materials and components | ||||||||
| Total inventories | $ | $ | ||||||
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Note 5. Warranty Liability
Changes in our warranty liability are as follows:
| Nine Months Ended | ||||||||
| (In millions) | October 2, 2021 | October 3, 2020 | ||||||
| Beginning of period | $ | $ | ||||||
| Provision | ||||||||
| Settlements | ( | ( | ||||||
| Adjustments* | ( | |||||||
| End of period | $ | $ | ||||||
* Adjustments include changes to prior year estimates, new issues on prior year sales and currency translation adjustments.
Note 6. Leases
We primarily lease certain manufacturing plants, offices, warehouses, training and service centers at various locations worldwide. Our operating leases have remaining lease terms up to 28 years, which include options to extend the lease term for periods up to 25 years when it is reasonably certain the option will be exercised. Operating lease cost totaled $17 million and $15 million in the third quarter of 2021 and 2020, respectively, and $49 million and $45 million in the first nine months of 2021 and 2020, respectively. Cash paid for operating leases totaled $49 million and $45 million in the first nine months of 2021 and 2020, respectively, and is classified in cash flows from operating activities. Noncash transactions totaled $81 million and $33 million in the first nine months of 2021 and 2020, respectively, reflecting the recognition of operating lease assets and liabilities for new or extended leases. Variable and short-term lease costs were not significant.
Balance sheet and other information related to our operating leases is as follows:
| (Dollars in millions) | October 2, 2021 | January 2, 2021 | ||||||
| $ | $ | |||||||
| Weighted-average remaining lease term (in years) | ||||||||
| Weighted-average discount rate | ||||||||
At October 2, 2021, maturities of our operating lease liabilities on an undiscounted basis totaled $20 million for the remainder of 2021, $69 million for 2022, $59 million for 2023, $51 million for 2024, $45 million for 2025 and $247 million thereafter.
Note 7. Derivative Instruments and Fair Value Measurements
We measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We prioritize the assumptions that market participants would use in pricing the asset or liability into a three-tier fair value hierarchy. This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exist, requiring companies to develop their own assumptions. Observable inputs that do not meet the criteria of Level 1, which include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, are categorized as Level 2. Level 3 inputs are those that reflect our estimates about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are utilized only to the extent that observable inputs are not available or cost effective to obtain.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
We manufacture and sell our products in a number of countries throughout the world, and, therefore, we are exposed to movements in foreign currency exchange rates. We primarily utilize foreign currency exchange contracts with maturities of no more than three years to manage this volatility. These contracts qualify as cash flow hedges and are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses. Net gains and losses recognized in earnings and Accumulated other comprehensive loss on cash flow hedges, including gains and losses related to hedge ineffectiveness, were not significant in the periods presented.
11
Our foreign currency exchange contracts are measured at fair value using the market method valuation technique. The inputs to this technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data providers. These are observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions, so they are classified as Level 2. At October 2, 2021 and January 2, 2021, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $341 million and $318 million, respectively. At October 2, 2021, the fair value amounts of our foreign currency exchange contracts were a $5 million asset and a $2 million liability. At January 2, 2021, the fair value amounts of our foreign currency exchange contracts were a $5 million asset and a $2 million liability.
Our Finance group enters into interest rate swap agreements to mitigate certain exposures to fluctuations in interest rates. By using these contracts, we are able to convert floating-rate cash flows to fixed-rate cash flows. These agreements are designated as cash flow hedges. At October 2, 2021, we had a swap agreement for a notional amount of $289 million with a maturity of August 2023 and a fair value of a $3 million liability. At January 2, 2021, we had a swap agreement for a notional amount of $294 million with a maturity of February 2022 and a fair value of a $4 million liability. The fair value of these swap agreements is determined using values published by third-party leading financial news and data providers. These values are observable data that represent the value that financial institutions use for contracts entered into at that date, but are not based on actual transactions, so they are classified as Level 2.
Assets and Liabilities Not Recorded at Fair Value
The carrying value and estimated fair value of our financial instruments that are not reflected in the financial statements at fair value are as follows:
| October 2, 2021 | January 2, 2021 | |||||||||||||
| Carrying | Estimated | Carrying | Estimated | |||||||||||
| (In millions) | Value | Fair Value | Value | Fair Value | ||||||||||
| Manufacturing group | ||||||||||||||
| Debt, excluding leases | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| Finance group | ||||||||||||||
| Finance receivables, excluding leases | ||||||||||||||
| Debt | ( | ( | ( | ( | ||||||||||
Fair value for the Manufacturing group debt is determined using market observable data for similar transactions (Level 2). The fair value for the Finance group debt was determined primarily based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations (Level 2). Fair value estimates for finance receivables were determined based on internally developed discounted cash flow models primarily utilizing significant unobservable inputs (Level 3), which include estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and expectations of borrowers’ ability to make payments on a timely basis.
12
Note 8. Shareholders’ Equity
A reconciliation of Shareholders’ equity is presented below:
| (In millions) | Common Stock | Capital Surplus | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | ||||||||||||||
| Three months ended October 2, 2021 | ||||||||||||||||||||
| Beginning of period | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||
| Net income | — | — | — | — | ||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||
| Share-based compensation activity | — | — | — | — | ||||||||||||||||
| Dividends declared | — | — | — | ( | — | ( | ||||||||||||||
| Purchases of common stock | — | — | ( | — | — | ( | ||||||||||||||
| End of period | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||
| Three months ended October 3, 2020 | ||||||||||||||||||||
| Beginning of period | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||
| Net income | — | — | — | — | ||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||
| Share-based compensation activity | — | — | — | — | ||||||||||||||||
| Dividends declared | — | — | — | ( | — | ( | ||||||||||||||
| End of period | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||
| Nine months ended October 2, 2021 | ||||||||||||||||||||
| Beginning of period | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||
| Net income | — | — | — | — | ||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||
| Share-based compensation activity | — | — | — | — | ||||||||||||||||
| Dividends declared | — | — | — | ( | — | ( | ||||||||||||||
| Purchases of common stock | — | — | ( | — | — | ( | ||||||||||||||
| End of period | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||
| Nine months ended October 3, 2020 | ||||||||||||||||||||
| Beginning of period | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||
| Net income | — | — | — | — | ||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||
| Share-based compensation activity | — | — | — | — | ||||||||||||||||
| Dividends declared | — | — | — | ( | — | ( | ||||||||||||||
| Purchases of common stock | — | — | ( | — | — | ( | ||||||||||||||
| End of period | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||
Dividends per share of common stock were $0.02 0.06
13
Earnings Per Share
We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period. Basic EPS is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends. Diluted EPS considers the dilutive effect of all potential future common stock, including stock options.
The weighted-average shares outstanding for basic and diluted EPS are as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||
| (In thousands) | October 2, 2021 | October 3, 2020 | October 2, 2021 | October 3, 2020 | ||||||||||
| Basic weighted-average shares outstanding | ||||||||||||||
| Dilutive effect of stock options | ||||||||||||||
| Diluted weighted-average shares outstanding | ||||||||||||||
For the first nine months of 2021, stock options to purchase 1.4 million shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding as their effect would have been anti-dilutive. Stock options to purchase 7.5 million and 7.9 million shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding for the third quarter and first nine months of 2020, respectively, as their effect would have been anti-dilutive.
Accumulated Other Comprehensive Loss and Other Comprehensive Income
The components of Accumulated other comprehensive loss are presented below:
| (In millions) | Pension and Postretirement Benefits Adjustments | Foreign Currency Translation Adjustments | Deferred Gains (Losses) on Hedge Contracts | Accumulated Other Comprehensive Loss | ||||||||||
| Balance at January 2, 2021 | $ | ( | $ | $ | ( | $ | ( | |||||||
| Other comprehensive loss before reclassifications | ( | ( | ||||||||||||
| Reclassified from Accumulated other comprehensive loss | ( | |||||||||||||
| Balance at October 2, 2021 | $ | ( | $ | $ | $ | ( | ||||||||
| Balance at January 4, 2020 | $ | ( | $ | ( | $ | $ | ( | |||||||
| Other comprehensive income before reclassifications | ( | |||||||||||||
| Reclassified from Accumulated other comprehensive loss | ( | |||||||||||||
| Balance at October 3, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
14
| October 2, 2021 | October 3, 2020 | |||||||||||||||||||
| (In millions) | Pre-Tax Amount | Tax (Expense) Benefit | After-tax Amount | Pre-Tax Amount | Tax (Expense) Benefit | After-tax Amount | ||||||||||||||
| Three Months Ended | ||||||||||||||||||||
| Pension and postretirement benefits adjustments: | ||||||||||||||||||||
| Amortization of net actuarial loss* | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||
| Amortization of prior service cost* | ( | |||||||||||||||||||
| Pension and postretirement benefits adjustments, net | ( | ( | ||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ||||||||||||||||||
| Deferred gains (losses) on hedge contracts: | ||||||||||||||||||||
| Current deferrals | ( | ( | ||||||||||||||||||
| Reclassification adjustments | ( | ( | ( | ( | ||||||||||||||||
| Deferred gains (losses) on hedge contracts, net | ( | ( | ||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||
| Nine Months Ended | ||||||||||||||||||||
| Pension and postretirement benefits adjustments: | ||||||||||||||||||||
| Amortization of net actuarial loss* | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||
| Amortization of prior service cost* | ( | ( | ||||||||||||||||||
| Pension and postretirement benefits adjustments, net | ( | ( | ||||||||||||||||||
| Foreign currency translation adjustments: | ||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | |||||||||||||||||
| Business disposition | ||||||||||||||||||||
| Foreign currency translation adjustments, net | ( | ( | ( | |||||||||||||||||
| Deferred gains (losses) on hedge contracts: | ||||||||||||||||||||
| Current deferrals | ( | ( | ||||||||||||||||||
| Reclassification adjustments | ( | ( | ( | ( | ||||||||||||||||
| Deferred gains (losses) on hedge contracts, net | ( | ( | ||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||
15
Note 9. Segment Information
We operate in, and report financial information for, the following five
Our revenues by segment, along with a reconciliation of segment profit to income from continuing operations before income taxes, are included in the table below:
| Three Months Ended | Nine Months Ended | |||||||||||||
| (In millions) | October 2, 2021 | October 3, 2020 | October 2, 2021 | October 3, 2020 | ||||||||||
| Revenues | ||||||||||||||
| Textron Aviation | $ | $ | $ | $ | ||||||||||
| Bell | ||||||||||||||
| Textron Systems | ||||||||||||||
| Industrial | ||||||||||||||
| Finance | ||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||
| Segment Profit | ||||||||||||||
| Textron Aviation | $ | $ | ( | $ | $ | ( | ||||||||
| Bell | ||||||||||||||
| Textron Systems | ||||||||||||||
| Industrial | ||||||||||||||
| Finance | ||||||||||||||
| Segment profit | ||||||||||||||
| Corporate expenses and other, net | ( | ( | ( | ( | ||||||||||
| Interest expense, net for Manufacturing group | ( | ( | ( | ( | ||||||||||
| Special charges* | ( | ( | ( | ( | ||||||||||
| Gain on business disposition | ||||||||||||||
| Inventory charge* | ( | |||||||||||||
| Income from continuing operations before income taxes | $ | $ | $ | $ | ||||||||||
* See Note 12 for additional information.
16
Note 10. Revenues
Disaggregation of Revenues
Our revenues disaggregated by major product type are presented below:
| Three Months Ended | Nine Months Ended | |||||||||||||
| (In millions) | October 2, 2021 | October 3, 2020 | October 2, 2021 | October 3, 2020 | ||||||||||
| Aircraft | $ | $ | $ | $ | ||||||||||
| Aftermarket parts and services | ||||||||||||||
| Textron Aviation | ||||||||||||||
| Military aircraft and support programs | ||||||||||||||
| Commercial helicopters, parts and services | ||||||||||||||
| Bell | ||||||||||||||
| Air systems* | ||||||||||||||
| Land and sea systems* | ||||||||||||||
| Other* | ||||||||||||||
| Textron Systems | ||||||||||||||
| Fuel systems and functional components | ||||||||||||||
| Specialized vehicles | ||||||||||||||
| Industrial | ||||||||||||||
| Finance | ||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||
17
Our revenues for our segments by customer type and geographic location are presented below:
| (In millions) | Textron Aviation | Bell | Textron Systems | Industrial | Finance | Total | ||||||||||||||
| Three months ended October 2, 2021 | ||||||||||||||||||||
| Customer type: | ||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | ||||||||||||||
| U.S. Government | ||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Geographic location: | ||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Europe | ||||||||||||||||||||
| Asia and Australia | ||||||||||||||||||||
| Other international | ||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Three months ended October 3, 2020 | ||||||||||||||||||||
| Customer type: | ||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | ||||||||||||||
| U.S. Government | ||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Geographic location: | ||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Europe | ||||||||||||||||||||
| Asia and Australia | ||||||||||||||||||||
| Other international | ||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Nine months ended October 2, 2021 | ||||||||||||||||||||
| Customer type: | ||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | ||||||||||||||
| U.S. Government | ||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Geographic location: | ||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Europe | ||||||||||||||||||||
| Asia and Australia | ||||||||||||||||||||
| Other international | ||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Nine months ended October 3, 2020 | ||||||||||||||||||||
| Customer type: | ||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | ||||||||||||||
| U.S. Government | ||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Geographic location: | ||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Europe | ||||||||||||||||||||
| Asia and Australia | ||||||||||||||||||||
| Other international | ||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||
18
Remaining Performance Obligations
Our remaining performance obligations, which is the equivalent of our backlog, represent the expected transaction price allocated to our contracts that we expect to recognize as revenues in future periods when we perform under the contracts. These remaining obligations exclude unexercised contract options and potential orders under ordering-type contracts such as Indefinite Delivery, Indefinite Quantity contracts. At October 2, 2021, we had $9.8 billion in remaining performance obligations of which we expect to recognize revenues of approximately 70 % through 2022, an additional 25 % through 2024, and the balance thereafter.
Contract Assets and Liabilities
Note 11. Retirement Plans
We provide defined benefit pension plans and other postretirement benefits to eligible employees. The components of net periodic benefit cost (credit) for these plans are as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||
| (In millions) | October 2, 2021 | October 3, 2020 | October 2, 2021 | October 3, 2020 | ||||||||||
| Pension Benefits | ||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||
| Interest cost | ||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ||||||||||
| Amortization of net actuarial loss | ||||||||||||||
| Amortization of prior service cost | ||||||||||||||
| Net periodic benefit cost (credit)* | $ | ( | $ | $ | ( | $ | ||||||||
| Postretirement Benefits Other Than Pensions | ||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||
| Interest cost | ||||||||||||||
| Amortization of net actuarial gain | ( | ( | ( | ( | ||||||||||
| Amortization of prior service credit | ( | ( | ( | ( | ||||||||||
| Net periodic benefit cost (credit) | $ | ( | $ | $ | $ | |||||||||
19
Note 12. Special Charges
Special charges recorded in the third quarter and first nine months of 2021 and 2020 by segment and type of cost are presented in the table below.
| (In millions) | Severance Costs | Contract Termination and Other | Asset Impairments | Total 2020 COVID-19 Restructuring Plan | Other Asset Impairments | Total | ||||||||||||||
| Three months ended October 2, 2021 | ||||||||||||||||||||
| Industrial | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Total special charges | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Three months ended October 3, 2020 | ||||||||||||||||||||
| Industrial | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Corporate | ||||||||||||||||||||
| Total special charges | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Nine months ended October 2, 2021 | ||||||||||||||||||||
| Industrial | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Total special charges | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Nine months ended October 3, 2020 | ||||||||||||||||||||
| Textron Aviation | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Textron Systems | ||||||||||||||||||||
| Industrial | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Total special charges | $ | $ | $ | $ | $ | $ | ||||||||||||||
2020 COVID-19 Restructuring Plan
In the second quarter of 2020, we initiated a restructuring plan to reduce operating expenses through headcount reductions, facility consolidations and other actions in response to the economic challenges and uncertainty resulting from the COVID-19 pandemic. This plan was expanded in the third quarter of 2020 to include additional headcount reductions and facility consolidations. Since inception of the plan, we have incurred total charges of $128 million, which included severance costs of $76 million for the termination of approximately 2,800 employees, asset impairment charges of $33 million and contract terminations and other costs of $19 million. Of these amounts, $54 million was incurred at Industrial, $37 million at Textron Systems, $33 million at Textron Aviation, and $4 million at Corporate. We expect to incur additional contract termination costs and other charges in the range of $5 million to $10 million, primarily in the Industrial segment, and expect the plan to be substantially completed in the fourth quarter of 2021.
In the second quarter of 2020 and in connection with the restructuring plan, we ceased manufacturing at TRU Simulation + Training Canada Inc.’s facility in Montreal, Canada, resulting in a production suspension of our commercial air transport simulators. As a result of this action and market conditions, we incurred an inventory charge of $55 million, which was recorded in Cost of Sales, to write-down the related inventory to its net realizable value.
Other Asset Impairments
In the first quarter of 2020, we recognized $39 million of intangible asset impairment charges at the Textron Aviation and Industrial segments. Due to the impact of the COVID-19 pandemic, we experienced decreased demand for our products and services as our customers delayed or ceased orders due to the environment of economic uncertainty. In light of these conditions, Textron Aviation had temporarily shut down most aircraft production, including the King Air turboprop and Beechcraft piston product lines, and had instituted employee furloughs. Based on these events, we performed an interim impairment test of the indefinite-lived Beechcraft and King Air trade name intangible assets and recorded an impairment charge of $32 million.
20
Restructuring Reserve
Our restructuring reserve activity is summarized below:
| (In millions) | Severance Costs | Contract Terminations and Other | Total | ||||||||
| Balance at January 2, 2021 | $ | $ | $ | ||||||||
| Provision for 2020 COVID-19 restructuring plan | |||||||||||
| Cash paid | ( | ( | ( | ||||||||
| Reversals | ( | ( | ( | ||||||||
| Foreign currency translation | ( | ( | |||||||||
| Balance at October 2, 2021 | $ | $ | $ | ||||||||
The majority of the remaining cash outlays of $32 million is expected to be paid by the first quarter of 2022. Severance costs generally are paid on a lump-sum basis and include outplacement costs, which are paid in accordance with normal payment terms.
Note 13. 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.
Note 14. Commitments and Contingencies
21
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.
22
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.
23
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no significant change in our exposure to market risk during the fiscal quarter ended October 2, 2021. For discussion of our exposure to market risk, refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk contained in Textron’s 2020 Annual Report on Form 10-K.
Item 4. Controls and Procedures
We performed an evaluation of the effectiveness of our disclosure controls and procedures as of October 2, 2021. 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 2, 2021.
There were no changes in our internal control over financial reporting during the fiscal quarter ended October 2, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported in Textron’s Annual Report on Form 10-K for the fiscal year ended January 4, 2020, on August 22, 2019, a purported shareholder class action lawsuit was filed in the United States District Court in the Southern District of New York against Textron, its Chairman and Chief Executive Officer and its Chief Financial Officer. The suit, filed by Building Trades Pension Fund of Western Pennsylvania, alleges that the defendants violated the federal securities laws by making materially false and misleading statements and concealing material adverse facts related to the Arctic Cat acquisition and integration. The complaint seeks unspecified compensatory damages. On November 12, 2019, the Court appointed IWA Forest Industry Pension Fund (IWA) as the sole lead plaintiff in the case. On December 24, 2019, IWA filed an Amended Complaint in the now entitled In re Textron Inc. Securities Litigation. On February 14, 2020, IWA filed a Second Amended Complaint, and on March 6, 2020, Textron filed a motion to dismiss the Second Amended Complaint. On July 20, 2020, the Court granted Textron’s motion to dismiss and closed the case. On August 18, 2020, plaintiffs filed a notice of appeal contesting the dismissal, which Textron opposed. On September 17, 2021, the Second Circuit Court of Appeals narrowed the case, unanimously upholding dismissal of most of the Second Amended Complaint, but reversing dismissal of one aspect of the Second Amended Complaint and remanding that remaining portion back to the District Court for further proceedings. We intend to continue to vigorously defend this lawsuit.
As previously reported in Textron’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, on February 7, 2012, a lawsuit was filed in the United States Bankruptcy Court, Northern District of Ohio, Eastern Division (Akron) by Brian A. Bash, Chapter 7 Trustee for Fair Finance Company against Textron Financial Corporation (TFC), Fortress Credit Corp. and Fair Facility I, LLC. TFC provided a revolving line of credit of up to $17.5 million to Fair Finance Company from 2002 through 2007. The complaint alleges numerous counts against TFC, as Fair Finance Company’s working capital lender, including receipt of fraudulent transfers and assisting in fraud perpetrated on Fair Finance investors. The Trustee seeks avoidance and recovery of alleged fraudulent transfers in the amount of $316 million as well as damages of $223 million on the other claims. On November 9, 2012, the Court dismissed all claims against TFC. The trustee appealed, and on August 23, 2016, the 6th Circuit Court of Appeals reversed the dismissal in part and remanded certain claims back to the trial court. On September 27, 2018, after reconsidering the remanded claims which were based upon civil conspiracy and intentional fraudulent transfer, the trial court granted partial summary judgment in favor of TFC, dismissing the Trustee’s civil conspiracy claim, as well as a portion of the Trustee’s claim for intentional fraudulent transfer, leaving only a portion of the intentional fraudulent transfer claim to be adjudicated. A trial for this matter was held in February 2020, and on March 10, 2020, the jury returned a verdict in favor of TFC and against the Trustee. On the same day, the Court entered judgment in TFC's favor. On March 23, 2020, the Trustee filed a notice of appeal, which Textron opposed. On September 10, 2021, the Sixth Circuit Court of Appeals unanimously affirmed the judgment in favor of TFC and
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denied the Trustee’s appeal in its entirety. On September 24, 2021, the Trustee filed a motion for rehearing with the Sixth Circuit, which was denied by the Sixth Circuit on October 5, 2021.
Item 1A. Risk Factors
Risks related to the U.S. Government’s failure to raise the debt ceiling.
As has been widely reported, the U.S. Government is reportedly approaching its existing statutory limit on the amount of permissible federal debt, and this limit must be raised in order for the U.S. Government to continue to pay its obligations on a timely basis. If the debt ceiling is not raised, it is unclear how the U.S. Government would prioritize its payments towards its various programs and where our payments would fall in that priority list. In addition, all forms of U.S. Government financing, such as performance-based payments and milestone payments may be delayed until the debt crisis is resolved. As described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, a significant portion of our products and services are provided under U.S. Government contracts. U.S. Government contracts generally require the contractor to continue to perform on the contract even if the U.S. Government is unable to make timely payments; failure to continue contract performance places the contractor at risk of termination for default. Should conditions occur such that the U.S. Government does not pay us on a timely basis, we would need to finance our continued performance of the impacted contracts from our available cash resources, credit facilities and/or access to the capital markets, if available. An extended delay in the timely payment by the U.S. Government could result in a material adverse effect on our cash flows, results of operations and financial condition.
Our success is highly dependent on our ability to hire and retain a qualified workforce.
Our success is highly dependent upon our ability to hire and retain a workforce with the skills necessary for our businesses to develop and manufacture the products desired by our customers. We need highly skilled personnel in multiple areas including, among others, engineering, manufacturing, information technology, cybersecurity, flight operations, business development and strategy and management. Because many of our businesses experience cyclical demand, they face challenges in maintaining their workforce at levels appropriate to market demand which in the past has necessitated workforce reductions at some of our businesses as demand decreased. Conversely, our businesses sometimes need to increase the size of their workforce in order to keep pace with production needs due to increased customer demand. In addition, from time to time we face challenges that may impact employee retention, such as workforce reductions and facility consolidations and closures, and some of our most experienced employees are retirement-eligible which may adversely impact retention. To the extent that we lose experienced personnel through retirement or otherwise, it is critical for us to develop other employees, hire new qualified employees and successfully manage the transfer of critical knowledge. Competition for skilled employees is intense, and we may incur higher labor, recruiting and/or training costs in order to attract and retain employees with the requisite skills. We may not be successful in hiring or retaining such employees which could adversely impact our business and results of operations.
Moreover, consistent with President Biden’s Executive Order regarding mandatory COVID-19 vaccinations for employees of U.S. government contractors, we recently notified substantially all of our U.S. employees that they would be required to obtain the COVID-19 vaccination prior to December 8, 2021, unless they request and receive a medical or religious accommodation. There is a risk that some of our employees may choose to leave our employment rather than be vaccinated.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following provides information about our third quarter 2021 repurchases of equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:
| Period (shares in thousands) | Total Number of Shares Purchased * | Average Price Paid per Share (excluding commissions) | Total Number of Shares Purchased as part of Publicly Announced Plan * | Maximum Number of Shares that may yet be Purchased under the Plan | ||||||||||
| July 4, 2021 – August 7, 2021 | 1,045 | $ | 69.34 | 1,045 | 15,475 | |||||||||
| August 8, 2021 – September 4, 2021 | 1,400 | 72.60 | 1,400 | 14,075 | ||||||||||
| September 5, 2021 – October 2, 2021 | 1,780 | 70.09 | 1,780 | 12,295 | ||||||||||
| Total | 4,225 | $ | 70.74 | 4,225 | ||||||||||
* These shares were purchased pursuant to a plan authorizing the repurchase of up to 25 million shares of Textron common stock that was announced on February 25, 2020, which had no expiration date.
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Item 6. Exhibits
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101 | The following materials from Textron Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended October 2, 2021, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements. | ||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | ||||
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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.
| TEXTRON INC. | |||||||||||
| Date: | October 28, 2021 | /s/ Mark S. Bamford | |||||||||
| Mark S. Bamford Vice President and Corporate Controller (principal accounting officer) | |||||||||||
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