Item 1. Financial Statements
TEXTRON INC.
Consolidated Statements of Operations (Unaudited)
| | | | | | | | | | |
| | Three Months Ended |
| (In millions, except per share amounts) | | | April 2,
2022 | April 3,
2021 |
| Revenues | | | | |
| Manufacturing product revenues | | | $ | 2,448 | | $ | 2,403 | |
| Manufacturing service revenues | | | 537 | | 461 | |
| Finance revenues | | | 16 | | 15 | |
| Total revenues | | | 3,001 | | 2,879 | |
| Costs, expenses and other | | | | |
| Cost of products sold | | | 2,069 | | 2,061 | |
| Cost of services sold | | | 423 | | 339 | |
| Selling and administrative expense | | | 305 | | 298 | |
| Interest expense | | | 33 | | 40 | |
| Non-service components of pension and postretirement income, net | | | (61) | | (40) | |
| Special charges | | | — | | 6 | |
| Gain on business disposition | | | — | | (15) | |
| Total costs, expenses and other | | | 2,769 | | 2,689 | |
| Income before income taxes | | | 232 | | 190 | |
| Income tax expense | | | 39 | | 19 | |
| | | | |
| | | | |
| Net income | | | $ | 193 | | $ | 171 | |
| Earnings per share | | | | |
| Basic | | | $ | 0.89 | | $ | 0.75 | |
| | | | |
| | | | |
| | | | |
| Diluted | | | $ | 0.88 | | $ | 0.75 | |
| | | | |
| | | | |
See Notes to the Consolidated Financial Statements.
TEXTRON INC.
Consolidated Statements of Comprehensive Income (Unaudited)
| | | | | | | | | | |
| | Three Months Ended |
| (In millions) | | | April 2,
2022 | April 3,
2021 |
| Net income | | | $ | 193 | | $ | 171 | |
| Other comprehensive income, net of tax | | | | |
| Pension and postretirement benefits adjustments, net of reclassifications | | | 17 | | 30 | |
| Foreign currency translation adjustments, net of reclassifications | | | (14) | | (18) | |
| Deferred gains on hedge contracts, net of reclassifications | | | 7 | | 4 | |
| Other comprehensive income | | | 10 | | 16 | |
| Comprehensive income | | | $ | 203 | | $ | 187 | |
See Notes to the Consolidated Financial Statements.
TEXTRON INC.
Consolidated Balance Sheets (Unaudited)
| | | | | | | | |
| (Dollars in millions) | April 2,
2022 | January 1,
2022 |
| Assets | | |
| Manufacturing group | | |
| Cash and equivalents | $ | 1,978 | | $ | 1,922 | |
| Accounts receivable, net | 800 | | 838 | |
| Inventories | 3,663 | | 3,468 | |
| Other current assets | 1,055 | | 1,018 | |
| Total current assets | 7,496 | | 7,246 | |
Property, plant and equipment, less accumulated depreciation and amortization of $4,914 and $4,888, respectively | 2,488 | | 2,538 | |
| Goodwill | 2,147 | | 2,149 | |
| Other assets | 3,025 | | 3,027 | |
| Total Manufacturing group assets | 15,156 | | 14,960 | |
| Finance group | | |
| Cash and equivalents | 148 | | 195 | |
| Finance receivables, net | 578 | | 605 | |
| Other assets | 29 | | 67 | |
| Total Finance group assets | 755 | | 867 | |
| Total assets | $ | 15,911 | | $ | 15,827 | |
| Liabilities and shareholders’ equity | | |
| Liabilities | | |
| Manufacturing group | | |
| Current portion of long-term debt | $ | 7 | | $ | 6 | |
| Accounts payable | 823 | | 786 | |
| Other current liabilities | 2,507 | | 2,344 | |
| Total current liabilities | 3,337 | | 3,136 | |
| Other liabilities | 1,912 | | 2,005 | |
| Long-term debt | 3,178 | | 3,179 | |
| Total Manufacturing group liabilities | 8,427 | | 8,320 | |
| Finance group | | |
| Other liabilities | 97 | | 110 | |
| Debt | 470 | | 582 | |
| Total Finance group liabilities | 567 | | 692 | |
| Total liabilities | 8,994 | | 9,012 | |
| Shareholders’ equity | | |
| Common stock | 28 | | 28 | |
| Capital surplus | 1,924 | | 1,863 | |
| Treasury stock | (314) | | (157) | |
| Retained earnings | 6,058 | | 5,870 | |
| Accumulated other comprehensive loss | (779) | | (789) | |
| Total shareholders’ equity | 6,917 | | 6,815 | |
| Total liabilities and shareholders’ equity | $ | 15,911 | | $ | 15,827 | |
| Common shares outstanding (in thousands) | 215,751 | | 216,935 | |
See Notes to the Consolidated Financial Statements.
TEXTRON INC.
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended April 2, 2022 and April 3, 2021, respectively
| | | | | | | | |
| Consolidated |
| (In millions) | 2022 | 2021 |
| Cash flows from operating activities | | |
| Net income | $ | 193 | | $ | 171 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Non-cash items: | | |
| Depreciation and amortization | 93 | | 90 | |
| Deferred income taxes | (52) | | 11 | |
| | |
| Gain on business disposition | — | | (15) | |
| Other, net | 36 | | 38 | |
| Changes in assets and liabilities: | | |
| Accounts receivable, net | 37 | | (103) | |
| Inventories | (176) | | (178) | |
| Other assets | (4) | | (17) | |
| Accounts payable | 38 | | 259 | |
| Other liabilities | 26 | | (105) | |
| Income taxes, net | 71 | | (11) | |
| Pension, net | (41) | | (23) | |
| Captive finance receivables, net | 18 | | 69 | |
| Other operating activities, net | 2 | | (5) | |
| | |
| | |
| Net cash provided by operating activities | 241 | | 181 | |
| Cash flows from investing activities | | |
| Capital expenditures | (48) | | (53) | |
| Proceeds from sale of property, plant and equipment | 18 | | — | |
| | |
| | |
| Net proceeds from business disposition | — | | 39 | |
| Finance receivables repaid | 13 | | 13 | |
| Other investing activities, net | 45 | | 6 | |
| Net cash provided by investing activities | 28 | | 5 | |
| Cash flows from financing activities | | |
| | |
| | |
| | |
| | |
| Principal payments on long-term debt and nonrecourse debt | (121) | | (287) | |
| Purchases of Textron common stock | (157) | | (91) | |
| Dividends paid | (5) | | (5) | |
| Proceeds from options exercised | 28 | | 27 | |
| Other financing activities, net | (3) | | (3) | |
| Net cash used in financing activities | (258) | | (359) | |
| Effect of exchange rate changes on cash and equivalents | (2) | | (3) | |
| Net increase (decrease) in cash and equivalents | 9 | | (176) | |
| Cash and equivalents at beginning of period | 2,117 | | 2,254 | |
| Cash and equivalents at end of period | $ | 2,126 | | $ | 2,078 | |
See Notes to the Consolidated Financial Statements.
TEXTRON INC.
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Three Months Ended April 2, 2022 and April 3, 2021, respectively
| | | | | | | | | | | | | | |
| Manufacturing Group | Finance Group |
| (In millions) | 2022 | 2021 | 2022 | 2021 |
| Cash flows from operating activities | | | | |
| Net income (loss) | $ | 185 | | $ | 177 | | $ | 8 | | $ | (6) | |
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: | | | | |
| Non-cash items: | | | | |
| Depreciation and amortization | 93 | | 88 | | — | | 2 | |
| Deferred income taxes | (45) | | 11 | | (7) | | — | |
| | | | |
| Gain on business disposition | — | | (15) | | — | | — | |
| Other, net | 37 | | 39 | | (1) | | (1) | |
| Changes in assets and liabilities: | | | | |
| Accounts receivable, net | 37 | | (103) | | — | | — | |
| Inventories | (176) | | (178) | | — | | — | |
| Other assets | (4) | | (17) | | — | | — | |
| Accounts payable | 38 | | 259 | | — | | — | |
| Other liabilities | 37 | | (103) | | (11) | | (2) | |
| Income taxes, net | 62 | | (23) | | 9 | | 12 | |
| Pension, net | (41) | | (23) | | — | | — | |
| | | | |
| Other operating activities, net | 2 | | (5) | | — | | — | |
| | | | |
| | | | |
| Net cash provided by (used in) operating activities | 225 | | 107 | | (2) | | 5 | |
| Cash flows from investing activities | | | | |
| Capital expenditures | (48) | | (53) | | — | | — | |
| Proceeds from sale of property, plant and equipment | 18 | | — | | — | | — | |
| | | | |
| | | | |
| Net proceeds from business disposition | — | | 39 | | — | | — | |
| Finance receivables repaid | — | | — | | 40 | | 89 | |
| Finance receivables originated | — | | — | | (9) | | (7) | |
| Other investing activities, net | 2 | | — | | 43 | | 6 | |
| Net cash provided by (used in) investing activities | (28) | | (14) | | 74 | | 88 | |
| Cash flows from financing activities | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Principal payments on long-term debt and nonrecourse debt | (2) | | (267) | | (119) | | (20) | |
| Purchases of Textron common stock | (157) | | (91) | | — | | — | |
| Dividends paid | (5) | | (5) | | — | | — | |
| Proceeds from options exercised | 28 | | 27 | | — | | — | |
| Other financing activities, net | (3) | | (3) | | — | | — | |
| Net cash used in financing activities | (139) | | (339) | | (119) | | (20) | |
| Effect of exchange rate changes on cash and equivalents | (2) | | (3) | | — | | — | |
| Net increase (decrease) in cash and equivalents | 56 | | (249) | | (47) | | 73 | |
| Cash and equivalents at beginning of period | 1,922 | | 2,146 | | 195 | | 108 | |
| Cash and equivalents at end of period | $ | 1,978 | | $ | 1,897 | | $ | 148 | | $ | 181 | |
See Notes to the Consolidated Financial Statements.
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 1, 2022. 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 first quarter of 2022, our cumulative catch-up adjustments decreased segment profit by $17 million and net income by $13 million, $0.06 per diluted share. In the first quarter of 2021, our cumulative catch-up adjustments increased segment profit by $14 million and net income by $11 million, $0.05 per diluted share. Gross favorable profit adjustments totaled $16 million and $36 million in the first quarter of 2022 and 2021, respectively, and gross unfavorable profit adjustments totaled $33 million and $22 million, respectively. We reduced revenues by $12 million and recognized revenues of $18 million in the first quarter of 2022 and 2021, respectively, from performance obligations satisfied in prior periods that related to changes in profit booking rates.
Note 2. Business Acquisition
On April 15, 2022, we acquired Pipistrel, a manufacturer of electrically powered aircraft, for a cash purchase price of approximately $240 million. Beginning with the second quarter of 2022, this business will be included in a new reporting segment, Textron eAviation, which will be focused on the development of sustainable aircraft.
Note 3. Accounts Receivable and Finance Receivables
Accounts Receivable
Accounts receivable is composed of the following:
| | | | | | | | |
| (In millions) | April 2,
2022 | January 1,
2022 |
| Commercial | $ | 711 | | $ | 704 | |
| U.S. Government contracts | 115 | | 158 | |
| 826 | | 862 | |
| Allowance for credit losses | (26) | | (24) | |
| Total accounts receivable, net | $ | 800 | | $ | 838 | |
Finance Receivables
Finance receivables are presented in the following table:
| | | | | | | | |
| (In millions) | April 2,
2022 | January 1,
2022 |
| Finance receivables | $ | 603 | | $ | 630 | |
| Allowance for credit losses | (25) | | (25) | |
| Total finance receivables, net | $ | 578 | | $ | 605 | |
Finance Receivable Portfolio Quality
We internally assess the quality of our finance receivables based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors. Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan. These three categories are performing, watchlist and nonaccrual.
We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful. Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain. All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing.
We measure delinquency based on the contractual payment terms of our finance receivables. In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.
Finance receivables categorized based on the credit quality indicators and by the delinquency aging category are summarized as follows:
| | | | | | | | |
| (Dollars in millions) | April 2,
2022 | January 1,
2022 |
| Performing | $ | 526 | $ | 536 |
| | |
| Nonaccrual | 77 | 94 |
| Nonaccrual as a percentage of finance receivables | 12.77% | 14.92% |
| Current and less than 31 days past due | $ | 599 | $ | 624 |
| 31-60 days past due | 2 | 5 |
| 61-90 days past due | 2 | — |
| Over 90 days past due | — | 1 |
| 60+ days contractual delinquency as a percentage of finance receivables | 0.33% | 0.16% |
At April 2, 2022, 39% of our performing finance receivables were originated since the beginning of 2020 and 27% were originated from 2017 to 2019. For finance receivables categorized as nonaccrual, 71% 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) | April 2,
2022 | January 1,
2022 |
| Finance receivables evaluated collectively | $ | 436 | | $ | 441 | |
| Finance receivables evaluated individually | 77 | | 94 | |
| Allowance for credit losses based on collective evaluation | 21 | | 21 | |
| Allowance for credit losses based on individual evaluation | 4 | | 4 | |
| Impaired finance receivables with specific allowance for credit losses | $ | 27 | | $ | 33 | |
| Impaired finance receivables with no specific allowance for credit losses | 50 | | 61 | |
| Unpaid principal balance of impaired finance receivables | 92 | | 109 | |
| Allowance for credit losses on impaired finance receivables | 4 | | 4 | |
| Average recorded investment of impaired finance receivables | 85 | | 117 | |
Note 4. Inventories
Inventories are composed of the following:
| | | | | | | | |
| (In millions) | April 2,
2022 | January 1,
2022 |
| Finished goods | $ | 1,100 | | $ | 1,071 | |
| Work in process | 1,686 | | 1,548 | |
| Raw materials and components | 877 | | 849 | |
| Total inventories | $ | 3,663 | | $ | 3,468 | |
Note 5. Warranty Liability
Changes in our warranty liability are as follows:
| | | | | | | | |
| Three Months Ended |
| (In millions) | April 2,
2022 | April 3,
2021 |
| Beginning of period | $ | 127 | | $ | 119 | |
| Provision | 16 | | 14 | |
| Settlements | (19) | | (20) | |
| Adjustments* | 6 | | 3 | |
| End of period | $ | 130 | | $ | 116 | |
* 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 through operating leases. Our operating leases have remaining lease terms up to 27 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 $16 million in the first quarter of 2022 and 2021, respectively. Variable and short-term lease costs were not significant. Cash paid for operating leases totaled $17 million and $16 million in the first quarter of 2022 and 2021, respectively, and is classified in cash flows from operating activities. Noncash transactions totaled $7 million and $45 million in the first quarter of 2022 and 2021, respectively, reflecting the recognition of operating lease assets and liabilities for new or extended leases.
Balance sheet and other information related to our operating leases is as follows:
| | | | | | | | |
| (Dollars in millions) | April 2,
2022 | January 1,
2022 |
| Other assets | $ | 367 | $ | 374 |
| Other current liabilities | 56 | 56 |
| Other liabilities | 317 | 325 |
| Weighted-average remaining lease term (in years) | 10.3 | 10.5 |
| Weighted-average discount rate | 3.18% | 3.19% |
At April 2, 2022, maturities of our operating lease liabilities on an undiscounted basis totaled $52 million for the remainder of 2022, $62 million for 2023, $53 million for 2024, $46 million for 2025, $35 million for 2026 and $216 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.
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 April 2, 2022 and January 1, 2022, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $345 million and $272 million, respectively. At April 2, 2022, the fair value amounts of our foreign currency exchange contracts were a $7 million asset and a $2 million liability. At January 1, 2022, the fair value amounts of our foreign currency exchange contracts were a $4 million asset and a $3 million liability.
Our Finance group enters into interest rate swap agreements to mitigate 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 April 2, 2022, we had a swap agreement for a notional amount of $280 million with a maturity of August 2023 and a fair value of a $5 million asset. At January 1, 2022, we had a swap agreement for a notional amount of $289 million with a maturity of August 2023 and an insignificant fair value. The fair value of these swap agreements is determined using values published by third-party leading financial news and data providers. These values are observable data that represent the value that financial institutions use for contracts entered into at that date, but are not based on actual transactions, so they are classified as Level 2.
Assets and Liabilities Not Recorded at Fair Value
The carrying value and estimated fair value of our financial instruments that are not reflected in the financial statements at fair value are as follows:
| | | | | | | | | | | | | | |
| April 2, 2022 | January 1, 2022 |
| Carrying | Estimated | Carrying | Estimated |
| (In millions) | Value | Fair Value | Value | Fair Value |
| Manufacturing group | | | | |
| Debt, excluding leases | $ | (3,180) | | $ | (3,118) | | $ | (3,181) | | $ | (3,346) | |
| Finance group | | | | |
| Finance receivables, excluding leases | 394 | | 400 | | 413 | | 444 | |
| Debt | (470) | | (414) | | (582) | | (546) | |
Fair value for the Manufacturing group debt is determined using market observable data for similar transactions (Level 2). The fair value for the Finance group debt was determined primarily based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations (Level 2). Fair value estimates for finance receivables were determined based on internally developed discounted cash flow models primarily utilizing significant unobservable inputs (Level 3), which include estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and expectations of borrowers’ ability to make payments on a timely basis.
Note 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 |
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| Three months ended April 2, 2022 | | | | | | |
| Beginning of period | $ | 28 | | $ | 1,863 | | $ | (157) | | $ | 5,870 | | $ | (789) | | $ | 6,815 | |
| Net income | — | | — | | — | | 193 | | — | | 193 | |
| Other comprehensive income | — | | — | | — | | — | | 10 | | 10 | |
| Share-based compensation activity | — | | 61 | | — | | — | | — | | 61 | |
| Dividends declared | — | | — | | — | | (5) | | — | | (5) | |
| Purchases of common stock | — | | — | | (157) | | — | | — | | (157) | |
| | | | | | |
| End of period | $ | 28 | | $ | 1,924 | | $ | (314) | | $ | 6,058 | | $ | (779) | | $ | 6,917 | |
| Three months ended April 3, 2021 | | | | | | |
| Beginning of period | $ | 29 | | $ | 1,785 | | $ | (203) | | $ | 5,973 | | $ | (1,739) | | $ | 5,845 | |
| Net income | — | | — | | — | | 171 | | — | | 171 | |
| Other comprehensive income | — | | — | | — | | — | | 16 | | 16 | |
| Share-based compensation activity | — | | 60 | | — | | — | | — | | 60 | |
| Dividends declared | — | | — | | — | | (5) | | — | | (5) | |
| Purchases of common stock | — | | — | | (91) | | — | | — | | (91) | |
| End of period | $ | 29 | | $ | 1,845 | | $ | (294) | | $ | 6,139 | | $ | (1,723) | | $ | 5,996 | |
Dividends per share of common stock were $0.02 for both the first quarter of 2022 and 2021.
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 |
| (In thousands) | | | April 2,
2022 | April 3,
2021 |
| Basic weighted-average shares outstanding | | | 217,010 | | 227,009 | |
| Dilutive effect of stock options | | | 2,597 | | 1,275 | |
| Diluted weighted-average shares outstanding | | | 219,607 | | 228,284 | |
Stock options to purchase 1.0 million and 4.3 million shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding for the first quarter of 2022 and 2021, 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 1, 2022 | $ | (799) | | $ | 9 | | $ | 1 | | $ | (789) | |
| Other comprehensive loss before reclassifications | — | | (14) | | 7 | | (7) | |
| Reclassified from Accumulated other comprehensive loss | 17 | | — | | — | | 17 | |
| Balance at April 2, 2022 | $ | (782) | | $ | (5) | | $ | 8 | | $ | (779) | |
| Balance at January 2, 2021 | $ | (1,780) | | $ | 42 | | $ | (1) | | $ | (1,739) | |
| Other comprehensive loss before reclassifications | — | | (32) | | 4 | | (28) | |
| Reclassified from Accumulated other comprehensive loss | 30 | | 14 | | — | | 44 | |
| Balance at April 3, 2021 | $ | (1,750) | | $ | 24 | | $ | 3 | | $ | (1,723) | |
The before and after-tax components of Other comprehensive income are presented below:
| | | | | | | | | | | | | | | | | | | | |
| April 2, 2022 | April 3, 2021 |
| (In millions) | Pre-Tax
Amount | Tax
(Expense)
Benefit | After-tax
Amount | Pre-Tax
Amount | Tax
(Expense)
Benefit | After-tax
Amount |
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| Three Months Ended | | | | | | |
| Pension and postretirement benefits adjustments: | | | | | | |
| Amortization of net actuarial loss* | $ | 21 | | $ | (5) | | $ | 16 | | $ | 38 | | $ | (9) | | $ | 29 | |
| Amortization of prior service cost* | 2 | | (1) | | 1 | | 2 | | (1) | | 1 | |
| Pension and postretirement benefits adjustments, net | 23 | | (6) | | 17 | | 40 | | (10) | | 30 | |
| Foreign currency translation adjustments: | | | | | | |
| Foreign currency translation adjustments | (14) | | — | | (14) | | (32) | | — | | (32) | |
| Business disposition | — | | — | | — | | 14 | | — | | 14 | |
| Foreign currency translation adjustments, net | (14) | | — | | (14) | | (18) | | — | | (18) | |
| Deferred gains on hedge contracts: | | | | | | |
| Current deferrals | 10 | | (3) | | 7 | | 5 | | (1) | | 4 | |
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| Deferred gains on hedge contracts, net | 10 | | (3) | | 7 | | 5 | | (1) | | 4 | |
| Total | $ | 19 | | $ | (9) | | $ | 10 | | $ | 27 | | $ | (11) | | $ | 16 | |
*These components of other comprehensive income are included in the computation of net periodic pension cost (income). See Note 15 of our 2021 Annual Report on Form 10-K for additional information.
Note 9. Segment Information
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.
Our revenues by segment, along with a reconciliation of segment profit to income before income taxes, are included in the table below:
| | | | | | | | | | |
| | Three Months Ended |
| (In millions) | | | April 2,
2022 | April 3,
2021 |
| Revenues | | | | |
| Textron Aviation | | | $ | 1,040 | | $ | 865 | |
| Bell | | | 834 | | 846 | |
| Textron Systems | | | 273 | | 328 | |
| Industrial | | | 838 | | 825 | |
| Finance | | | 16 | | 15 | |
| Total revenues | | | $ | 3,001 | | $ | 2,879 | |
| Segment Profit | | | | |
| Textron Aviation | | | $ | 121 | | $ | 47 | |
| Bell | | | 98 | | 105 | |
| Textron Systems | | | 33 | | 51 | |
| Industrial | | | 43 | | 47 | |
| Finance | | | 9 | | 6 | |
| Segment profit | | | 304 | | 256 | |
| Corporate expenses and other, net | | | (44) | | (40) | |
| Interest expense, net for Manufacturing group | | | (28) | | (35) | |
| Special charges | | | — | | (6) | |
| Gain on business disposition | | | — | | 15 | |
| Income before income taxes | | | $ | 232 | | $ | 190 | |
Note 10. Revenues
Disaggregation of Revenues
Our revenues disaggregated by major product type are presented below:
| | | | | | | | | | |
| | Three Months Ended |
| (In millions) | | | April 2,
2022 | April 3,
2021 |
| Aircraft | | | $ | 646 | | $ | 535 | |
| Aftermarket parts and services | | | 394 | | 330 | |
| Textron Aviation | | | 1,040 | | 865 | |
| Military aircraft and support programs | | | 597 | | 577 | |
| Commercial helicopters, parts and services | | | 237 | | 269 | |
| Bell | | | 834 | | 846 | |
| Textron Systems | | | 273 | | 328 | |
| Fuel systems and functional components | | | 464 | | 497 | |
| Specialized vehicles | | | 374 | | 328 | |
| Industrial | | | 838 | | 825 | |
| Finance | | | 16 | | 15 | |
| Total revenues | | | $ | 3,001 | | $ | 2,879 | |
Our revenues for our segments by customer type and geographic location are presented below:
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | Textron
Aviation | Bell | Textron
Systems | Industrial | Finance | Total |
| | | | | | |
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| | | | | | |
| Three months ended April 2, 2022 | | | | | | |
| Customer type: | | | | | | |
| Commercial | $ | 1,021 | | $ | 234 | | $ | 19 | | $ | 835 | | $ | 16 | | $ | 2,125 | |
| U.S. Government | 19 | | 600 | | 254 | | 3 | | — | | 876 | |
| Total revenues | $ | 1,040 | | $ | 834 | | $ | 273 | | $ | 838 | | $ | 16 | | $ | 3,001 | |
| Geographic location: | | | | | | |
| United States | $ | 732 | | $ | 670 | | $ | 246 | | $ | 426 | | $ | 5 | | $ | 2,079 | |
| Europe | 119 | | 28 | | 8 | | 190 | | 1 | | 346 | |
| | | | | | |
| Other international | 189 | | 136 | | 19 | | 222 | | 10 | | 576 | |
| Total revenues | $ | 1,040 | | $ | 834 | | $ | 273 | | $ | 838 | | $ | 16 | | $ | 3,001 | |
| Three months ended April 3, 2021 | | | | | | |
| Customer type: | | | | | | |
| Commercial | $ | 846 | | $ | 266 | | $ | 58 | | $ | 820 | | $ | 15 | | $ | 2,005 | |
| U.S. Government | 19 | | 580 | | 270 | | 5 | | — | | 874 | |
| Total revenues | $ | 865 | | $ | 846 | | $ | 328 | | $ | 825 | | $ | 15 | | $ | 2,879 | |
| Geographic location: | | | | | | |
| United States | $ | 609 | | $ | 616 | | $ | 289 | | $ | 378 | | $ | 8 | | $ | 1,900 | |
| Europe | 84 | | 36 | | 10 | | 236 | | — | | 366 | |
| | | | | | |
| Other international | 172 | | 194 | | 29 | | 211 | | 7 | | 613 | |
| Total revenues | $ | 865 | | $ | 846 | | $ | 328 | | $ | 825 | | $ | 15 | | $ | 2,879 | |
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 April 2, 2022, we had $12.1 billion in remaining performance obligations of which we expect to recognize revenues of approximately 78% through 2023, an additional 19% through 2025, and the balance thereafter.
Contract Assets and Liabilities
Assets and liabilities related to our contracts with customers are reported on a contract-by-contract basis at the end of each reporting period. At April 2, 2022 and January 1, 2022, contract assets totaled $754 million and $717 million, respectively, and contract liabilities totaled $1.5 billion and $1.2 billion, respectively, reflecting timing differences between revenues recognized, billings and payments from customers. In the first quarter of 2022 and 2021, we recognized revenues of $206 million and $278 million, respectively, that were included in the contract liability balance at the beginning of each year.
Note 11. Share-Based Compensation
Under our share-based compensation plan, we have authorization to provide awards to selected employees and non-employee directors in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance share units and other awards. Compensation expense included in net income for our share-based compensation plan is as follows:
| | | | | | | | |
| Three Months Ended |
| (In millions) | April 2,
2022 | April 3,
2021 |
| Compensation expense | $ | 34 | | $ | 55 | |
| Income tax expense | (8) | | (13) | |
| Total compensation expense included in net income | $ | 26 | | $ | 42 | |
Compensation expense included stock option expense of $12 million in both the first quarter of 2022 and 2021.
Stock Options
Options to purchase our shares have a maximum term of ten years and generally vest ratably over a three-year period. Stock option compensation cost is calculated under the fair value approach using the Black-Scholes option-pricing model to determine the fair value of options granted on the date of grant. The expected volatility used in this model is based on historical volatilities and implied volatilities from traded options on our common stock. The expected term is based on historical option exercise data, which is adjusted to reflect any anticipated changes in expected behavior.
We grant options annually on the first day of March. The assumptions used in our option-pricing model for these grants and the weighted-average fair value for these options are as follows:
| | | | | | | | |
| March 1, 2022 | March 1, 2021 |
| Fair value of options at grant date | $ | 19.95 | $ | 15.05 |
| Dividend yield | 0.1% | 0.2% |
| Expected volatility | 29.2% | 33.6% |
| Risk-free interest rate | 1.9% | 0.7% |
| Expected term (in years) | 4.8 | 4.7 |
The stock option activity during the first quarter of 2022 is provided below:
| | | | | | | | |
| (Options in thousands) | Number of
Options | Weighted-
Average
Exercise Price |
| Outstanding at January 1, 2022 | 8,289 | | $ | 46.18 | |
| Granted | 1,049 | | 71.07 | |
| Exercised | (705) | | (38.35) | |
| Forfeited or expired | (28) | | (45.34) | |
| Outstanding at April 2, 2022 | 8,605 | | $ | 49.86 | |
| Exercisable at April 2, 2022 | 5,902 | | $ | 47.13 | |
At April 2, 2022, our outstanding options had an aggregate intrinsic value of $199 million and a weighted-average remaining contractual life of 6.5 years. Our exercisable options had an aggregate intrinsic value of $153 million and a weighted-average remaining contractual life of 5.3 years at April 2, 2022. The total intrinsic value of options exercised during the first quarter of 2022 and 2021 was $23 million and $15 million, respectively.
Restricted Stock Units
We issue restricted stock units that include the right to receive dividend equivalents and are settled in both cash and stock. Beginning in 2020, new grants of restricted stock units will vest in full on the third anniversary of the grant date. Restricted stock units granted prior to 2020 vest one-third each in the third, fourth and fifth year following the year of the grant. The fair value of these units is based on the trading price of our common stock. For units payable in stock, we use the trading price on the grant date, while units payable in cash are remeasured using the price at each reporting period date. The activity for restricted stock units payable in both stock and cash during the first quarter of 2022 is provided below:
| | | | | | | | | | | | | | | | | |
| Units Payable in Stock | | Units Payable in Cash |
| (Shares/Units in thousands) | Number of
Shares | Weighted-
Average Grant
Date Fair Value | | Number of
Units | Weighted-
Average Grant
Date Fair Value |
| Outstanding at January 1, 2022, nonvested | 569 | | $ | 50.01 | | | 1,158 | | $ | 49.92 | |
| Granted | 84 | | 71.07 | | | 223 | | 71.07 | |
| Vested | (126) | | (53.95) | | | (246) | | (54.02) | |
| Forfeited | — | | — | | | (10) | | (49.55) | |
| Outstanding at April 2, 2022, nonvested | 527 | | $ | 52.44 | | | 1,125 | | $ | 53.23 | |
The fair value of the restricted stock unit awards that vested and/or amounts paid under these awards is as follows:
| | | | | | | | |
| Three Months Ended |
| (In millions) | April 2,
2022 | April 3,
2021 |
| Fair value of awards vested | $ | 24 | | $ | 19 | |
| Cash paid | 17 | | 13 | |
Performance Share Units
The activity for our performance share units during the first quarter of 2022 is as follows:
| | | | | | | | |
| (Units in thousands) | Number of
Units | Weighted-
Average Grant
Date Fair Value |
| Outstanding at January 1, 2022, nonvested | 526 | | $ | 45.87 | |
| Granted | 174 | | 71.07 | |
| Outstanding at April 2, 2022, nonvested | 700 | | $ | 52.14 | |
Cash paid under these awards totaled $15 million and $6 million in the first quarter of 2022 and 2021, respectively.
Note 12. Retirement Plans
We provide defined benefit pension plans and other postretirement benefits to eligible employees. The components of net periodic benefit income for these plans are as follows:
| | | | | | | | | | |
| | Three Months Ended |
| (In millions) | | | April 2,
2022 | April 3,
2021 |
| Pension Benefits | | | | |
| Service cost | | | $ | 27 | | $ | 29 | |
| Interest cost | | | 68 | | 63 | |
| Expected return on plan assets | | | (153) | | (144) | |
| Amortization of net actuarial loss | | | 22 | | 39 | |
| Amortization of prior service cost | | | 3 | | 3 | |
| Net periodic benefit income* | | | $ | (33) | | $ | (10) | |
| Postretirement Benefits Other Than Pensions | | | | |
| Service cost | | | $ | 1 | | $ | 1 | |
| Interest cost | | | 1 | | 1 | |
| Amortization of net actuarial gain | | | (1) | | (1) | |
| Amortization of prior service credit | | | (1) | | (1) | |
| Net periodic benefit income | | | $ | — | | $ | — | |
* Excludes the cost associated with the defined contribution component, included in certain of our U.S.-based defined benefit pension plans, that totaled $4 million and $3 million for the first quarter of 2022 and 2021, respectively. Note 13. Special Charges
In the first quarter of 2021, we recognized special charges of $6 million related to a restructuring plan initiated in 2020 in response to the economic challenges and uncertainty resulting from the COVID-19 pandemic. There were no special charges recorded in the first quarter of 2022.
Our restructuring reserve activity is summarized below:
| | | | | | | | | | | |
| (In millions) | Severance
Costs | Contract
Terminations
and Other | Total |
| Balance at January 1, 2022 | $ | 19 | | $ | 9 | | $ | 28 | |
| | | |
| Cash paid | (6) | | — | | (6) | |
| | | |
| | | |
| Balance at April 2, 2022 | $ | 13 | | $ | 9 | | $ | 22 | |
The majority of the remaining cash outlays of $22 million is expected to be paid in 2022.
Note 14. Income Taxes
Our effective tax rate for the first quarter of 2022 and 2021 was 16.8% and 10.0%, respectively. In the first quarter of 2022, the effective tax rate was lower than the U.S. federal statutory rate of 21%, largely due to the favorable impact of research and development credits. In the first quarter of 2021, the effective tax rate was lower than the U.S. federal statutory rate of 21%, largely due to a $12 million benefit recognized for additional research and development credits related to prior years.
Note 15. Commitments and Contingencies
We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts; alleged lack of compliance with applicable laws and regulations; production partners; product liability; patent and trademark infringement; employment disputes; and environmental, safety and health matters. Some of these legal proceedings and claims seek damages, fines or penalties in substantial amounts or remediation of environmental contamination. As a government contractor, we are subject to audits, reviews and investigations to determine whether our operations are being conducted in accordance with applicable regulatory requirements. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our suspension or debarment from U.S. Government contracting for a period of time. On the basis of information presently available, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations.
Consolidated Results of Operations
| | | | | | | | | | | | | | |
| | | Three Months Ended | |
| (Dollars in millions) | | | | April 2,
2022 | April 3,
2021 | % Change |
| Revenues | | | | $ | 3,001 | | $ | 2,879 | | 4% |
| Cost of sales | | | | 2,492 | | 2,400 | | 4% |
| Gross margin as a % of Manufacturing revenues | | | | 16.5% | 16.2% | |
| Selling and administrative expense | | | | 305 | | 298 | | 2% |
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 19 to 23.
Revenues
Revenues increased $122 million, 4%, in the first quarter of 2022, compared with the first quarter of 2021. The revenue increase included the following factors:
•Higher Textron Aviation revenues of $175 million, reflecting higher volume and mix of $142 million and higher pricing of $33 million.
•Higher Industrial revenues of $13 million, largely due to a favorable impact of $46 million from pricing, principally in the Specialized Vehicles product line, partially offset by lower volume and mix in the Fuel Systems and Functional Components product line.
•Lower Textron Systems revenues of $55 million, primarily due to lower volume of $59 million, which included a $39 million decrease from our Afghanistan fee-for-service and aircraft support contracts.
•Lower Bell revenues of $12 million, due to lower commercial revenues of $32 million, largely reflecting the mix of aircraft sold during the periods, partially offset by higher military revenues of $20 million.
Cost of Sales
Cost of sales increased $92 million, 4%, in the first quarter of 2022, compared with the first quarter of 2021, largely due to inflation of $73 million, principally reflecting higher material cost in the Industrial and Textron Aviation segments. Gross margin as a percentage of Manufacturing revenues increased 30 basis points in the first quarter of 2022, primarily due to higher margin at the Textron Aviation segment, reflecting higher volume and mix and pricing, partially offset by lower margins at the other manufacturing segments.
Income Taxes
Our effective tax rate for the first quarter of 2022 and 2021 was 16.8% and 10.0%, respectively. In the first quarter of 2022, the effective tax rate was lower than the U.S. federal statutory rate of 21%, largely due to the favorable impact of research and development credits. In the first quarter of 2021, the effective tax rate was lower than the U.S. federal statutory rate of 21%, largely due to a $12 million benefit recognized for additional research and development credits related to prior years.
Backlog
Our backlog is summarized below:
| | | | | | | | |
| (In millions) | April 2,
2022 | January 1,
2022 |
| Textron Aviation | $ | 5,122 | | $ | 4,120 | |
| Bell | 4,817 | | 3,871 | |
| Textron Systems | 2,135 | | 2,144 | |
| Total backlog | $ | 12,074 | | $ | 10,135 | |
Textron Aviation's backlog increased $1.0 billion, 24%, in the first quarter of 2022, reflecting orders in excess of deliveries. Backlog at Bell increased $946 million, 24%, primarily reflecting a new $1.4 billion 5-year contract with the U.S. Government for spares and logistic support for the V-22 tiltrotor aircraft.
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/(income), and exclude certain corporate expenses and special charges.
In our discussion of comparative results for the Manufacturing group, changes in revenues and segment profit for our commercial businesses typically are expressed in terms of volume and mix, pricing, foreign exchange, acquisitions and dispositions, inflation and performance. For revenues, volume and mix represents changes in revenues from increases or decreases in the number of units delivered or services provided and the composition of products and/or services sold. For segment profit, volume and mix represents a change due to the number of units delivered or services provided and the composition of products and/or services sold at different profit margins. Pricing represents changes in unit pricing. Foreign exchange is the change resulting from translating foreign-denominated amounts into U.S. dollars at exchange rates that are different from the prior period. Revenues generated by acquired businesses are reflected in Acquisitions for a twelve-month period, while reductions in revenues and segment profit from the sale of businesses are reflected as Dispositions. Inflation represents higher material, wages, benefits, pension service cost or other costs. Performance reflects an increase or decrease in research and development, depreciation, selling and administrative costs, warranty, product liability, quality/scrap, labor efficiency, overhead, non-service pension cost/(income), product line profitability, start-up, ramp up and cost-reduction initiatives or other manufacturing inputs.
Approximately 26% of our 2021 revenues were derived from contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program. For our segments that contract with the U.S. Government, changes in revenues related to these contracts are expressed in terms of volume. Changes in segment profit for these contracts are typically expressed in terms of volume and mix and performance; these include cumulative catch-up adjustments associated with a) revisions to the transaction price that may reflect contract modifications or changes in assumptions related to award fees and other variable consideration or b) changes in the total estimated costs at completion due to improved or deteriorated operating performance.
Textron Aviation
| | | | | | | | | | | | | | |
| | | Three Months Ended | |
| (Dollars in millions) | | | | April 2,
2022 | April 3,
2021 | % Change |
| Revenues: | | | | | | |
| Aircraft | | | | $ | 646 | | $ | 535 | | 21% |
| Aftermarket parts and services | | | | 394 | | 330 | | 19% |
| Total revenues | | | | 1,040 | | 865 | | 20% |
| Operating expenses | | | | 919 | | 818 | | 12% |
| Segment profit | | | | 121 | | 47 | | 157% |
| Profit margin | | | | 11.6% | 5.4% | |
Textron Aviation Revenues and Operating Expenses
The following factors contributed to the change in Textron Aviation’s revenues from the prior year quarter:
| | | | | | |
| (In millions) | | Q1 2022
versus
Q1 2021 |
| Volume and mix | | $ | 142 | |
| Pricing | | 33 | |
| Total change | | $ | 175 | |
Textron Aviation’s revenues increased $175 million, 20%, in the first quarter of 2022, compared with the first quarter of 2021, primarily due to higher Citation jet volume of $93 million, aftermarket volume of $61 million and commercial turboprop volume of $59 million, partially offset by lower pre-owned volume. The higher aftermarket volume reflected increased aircraft utilization. We delivered 39 Citation jets and 31 commercial turboprops in the first quarter of 2022, compared with 28 Citation jets and 14 commercial turboprops in the first quarter of 2021.
Textron Aviation’s operating expenses increased $101 million, 12%, in the first quarter of 2022, compared with the first quarter of 2021, largely due to higher volume and mix described above and inflation of $17 million.
Textron Aviation Segment Profit
The following factors contributed to the change in Textron Aviation’s segment profit from the prior year quarter:
| | | | | | |
| (In millions) | | Q1 2022
versus
Q1 2021 |
| Volume and mix | | $ | 55 | |
| Pricing, net of inflation | | 16 | |
| Performance | | 3 | |
| Total change | | $ | 74 | |
Segment profit at Textron Aviation increased $74 million, in the first quarter of 2022, compared with the first quarter of 2021, largely due to the impact from higher volume and mix described above and favorable pricing, net of inflation of $16 million.
Bell
| | | | | | | | | | | | | | |
| | | Three Months Ended | |
| (Dollars in millions) | | | | April 2,
2022 | April 3,
2021 | % Change |
| Revenues: | | | | | | |
| Military aircraft and support programs | | | | $ | 597 | | $ | 577 | | 3% |
| Commercial helicopters, parts and services | | | | 237 | | 269 | | (12)% |
| Total revenues | | | | 834 | | 846 | | (1)% |
| Operating expenses | | | | 736 | | 741 | | (1)% |
| Segment profit | | | | 98 | | 105 | | (7)% |
| Profit margin | | | | 11.8% | 12.4% | |
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. Over the next several years, the H-1 helicopter program with the U.S. Government will be transitioning from the production stage to the support stage.
Bell Revenues and Operating Expenses
The following factors contributed to the change in Bell’s revenues from the prior year quarter:
| | | | | | |
| (In millions) | | Q1 2022
versus
Q1 2021 |
| Volume and mix | | $ | (23) | |
| Pricing | | 11 | |
| | |
| Total change | | $ | (12) | |
Bell’s revenues decreased $12 million, in the first quarter of 2022, compared with the first quarter of 2021, due to lower commercial revenues of $32 million, largely reflecting the mix of aircraft sold during the periods, partially offset by higher military revenues of $20 million. We delivered 25 commercial helicopters in the first quarter of 2022, compared with 17 commercial helicopters in the first quarter of 2021.
Bell Segment Profit
The following factors contributed to the change in Bell’s segment profit from the prior year quarter:
| | | | | | |
| (In millions) | | Q1 2022
versus
Q1 2021 |
| Volume and mix | | $ | (10) | |
| Inflation, net of pricing | | (3) | |
| Performance | | 6 | |
| Total change | | $ | (7) | |
Bell’s segment profit decreased $7 million, 7%, in the first quarter of 2022, compared with the first quarter of 2021, primarily reflecting lower volume and mix described above, partially offset by a favorable impact from performance of $6 million.
Performance included lower research and development costs of $21 million as well as an unfavorable change of $23 million in net program adjustments.
Textron Systems
| | | | | | | | | | | | | | |
| | | Three Months Ended | |
| (Dollars in millions) | | | | April 2,
2022 | April 3,
2021 | % Change |
| Revenues | | | | $ | 273 | | $ | 328 | | (17)% |
| Operating expenses | | | | 240 | | 277 | | (13)% |
| Segment profit | | | | 33 | | 51 | | (35)% |
| Profit margin | | | | 12.1% | 15.5% | |
Textron Systems Revenues and Operating Expenses
The following factors contributed to the change in Textron Systems’ revenues from the prior year quarter:
| | | | | | |
| (In millions) | | Q1 2022
versus
Q1 2021 |
| | |
| Volume | | $ | (59) | |
| Other | | 4 | |
| Total change | | $ | (55) | |
Textron Systems' revenues decreased $55 million, 17%, in the first quarter of 2022, compared with the first quarter of 2021. Lower volume of $59 million included a $39 million decrease from our Afghanistan fee-for-service and aircraft support contracts, primarily reflecting the impact from the U.S. Army’s withdrawal from Afghanistan.
Textron Systems' operating expenses decreased $37 million, 13%, in the first quarter of 2022, compared with the first quarter of 2021, primarily related to lower net volume described above.
Textron Systems Segment Profit
The following factors contributed to the change in Textron Systems’ segment profit from the prior year quarter:
| | | | | | |
| (In millions) | | Q1 2022
versus
Q1 2021 |
| Volume and mix | | $ | (11) | |
| Performance and other | | (7) | |
| | |
| Total change | | $ | (18) | |
Textron Systems’ segment profit decreased $18 million, 35%, in the first quarter of 2022, compared with the first quarter of 2021, due to lower volume and mix of $11 million described above and an unfavorable impact from performance and other of $7 million, primarily related to lower net favorable program adjustments on the Afghanistan fee-for-service contracts.
Industrial
| | | | | | | | | | | | | | |
| | | Three Months Ended | |
| (Dollars in millions) | | | | April 2,
2022 | April 3,
2021 | % Change |
| Revenues: | | | | | | |
| Fuel systems and functional components | | | | $ | 464 | | $ | 497 | | (7)% |
| Specialized vehicles | | | | 374 | | 328 | | 14% |
| Total revenues | | | | 838 | | 825 | | 2% |
| Operating expenses | | | | 795 | | 778 | | 2% |
| Segment profit | | | | 43 | | 47 | | (9)% |
| Profit margin | | | | 5.1% | 5.7% | |
Industrial Revenues and Operating Expenses
The following factors contributed to the change in Industrial’s revenues from the prior year quarter:
| | | | | | |
| (In millions) | | Q1 2022
versus
Q1 2021 |
| Pricing | | $ | 46 | |
| Volume and mix | | (24) | |
| Foreign exchange | | (9) | |
| Total change | | $ | 13 | |
Industrial segment revenues increased $13 million, 2%, in the first quarter of 2022, compared with the first quarter of 2021, primarily due to a favorable impact of $46 million from pricing, principally in the Specialized Vehicles product line, partially offset by lower volume and mix in the Fuel Systems and Functional Components product line due to the impact of global supply chain shortages on our original equipment manufacturer customers.
Operating expenses increased $17 million, 2%, in the first quarter of 2022, compared with the first quarter of 2021, primarily reflecting inflation of $45 million, largely in material costs, partially offset by the impact of lower volume and mix described above.
Industrial Segment Profit
The following factors contributed to the change in Industrial’s segment profit from the prior year quarter:
| | | | | | |
| (In millions) | | Q1 2022
versus
Q1 2021 |
| Volume and mix | | $ | (6) | |
| | |
| Performance and other | | 2 | |
| | |
| Total change | | $ | (4) | |
Segment profit for the Industrial segment decreased $4 million, 9%, in the first quarter of 2022, compared with the first quarter of 2021, primarily due to lower volume and mix described above.
Finance
| | | | | | | | | | |
| | Three Months Ended |
| (In millions) | | | April 2,
2022 | April 3,
2021 |
| Revenues | | | $ | 16 | | $ | 15 | |
| Segment profit | | | 9 | | 6 | |
Finance segment revenues increased $1 million in the first quarter of 2022, compared with the first quarter of 2021, and segment profit increased $3 million. The following table reflects information about the Finance segment’s credit performance related to finance receivables.
| | | | | | | | |
| (Dollars in millions) | April 2,
2022 | January 1,
2022 |
| Finance receivables | $ | 603 | | $ | 630 | |
| Allowance for credit losses | 25 | | 25 | |
| Ratio of allowance for credit losses to finance receivables | 4.15% | 3.97% |
| Nonaccrual finance receivables | 77 | | 94 | |
| Ratio of nonaccrual finance receivables to finance receivables | 12.77% | 14.92% |
| 60+ days contractual delinquency | 2 | | 1 | |
| 60+ days contractual delinquency as a percentage of finance receivables | 0.33% | 0.16% |
We believe our allowance for credit losses adequately covers our exposure on these loans as our estimated collateral values largely exceed the outstanding loan amounts. Key portfolio quality indicators are discussed in Note 3 to the Consolidated Financial Statements.
Liquidity and Capital Resources
Our financings are conducted through two separate borrowing groups. The Manufacturing group consists of Textron consolidated with its majority-owned subsidiaries that operate in the Textron Aviation, Bell, Textron Systems and Industrial segments. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation and its consolidated subsidiaries. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements.
Key information that is utilized in assessing our liquidity is summarized below:
| | | | | | | | |
| (Dollars in millions) | April 2,
2022 | January 1,
2022 |
| Manufacturing group | | |
| Cash and equivalents | $ | 1,978 | $ | 1,922 |
| Debt | 3,185 | 3,185 |
| Shareholders’ equity | 6,917 | 6,815 |
| Capital (debt plus shareholders’ equity) | 10,102 | 10,000 |
| Net debt (net of cash and equivalents) to capital | 15% | 16% |
| Debt to capital | 32% | 32% |
| Finance group | | |
| Cash and equivalents | $ | 148 | $ | 195 |
| Debt | 470 | 582 |
We believe that our calculations of debt to capital and net debt to capital are useful measures as they provide a summary indication of the level of debt financing (i.e., leverage) that is in place to support our capital structure, as well as to provide an indication of the capacity to add further leverage. We expect to have sufficient cash to meet our needs based on our existing cash balances, the cash we expect to generate from our manufacturing operations and the availability of our existing credit facility.
Credit Facilities and Other Sources of Capital
Textron has a senior unsecured revolving credit facility for an aggregate principal amount of $1.0 billion, of which 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 April 2, 2022 and January 1, 2022.
We also maintain an effective shelf registration statement filed with the Securities and Exchange Commission that allows us to issue an unlimited amount of public debt and other securities.
Manufacturing Group Cash Flows
Cash flows for the Manufacturing group as presented in our Consolidated Statements of Cash Flows are summarized below:
| | | | | | | | |
| Three Months Ended |
| (In millions) | April 2,
2022 | April 3,
2021 |
| Operating activities | $ | 225 | | $ | 107 | |
| Investing activities | (28) | | (14) | |
| Financing activities | (139) | | (339) | |
In the first quarter of 2022, cash flows from operating activities were $225 million, compared with $107 million in the first quarter of 2021. The $118 million year-over-year increase in cash flows was primarily due to working capital improvements, which included $244 million from contract liabilities, largely reflecting higher customer deposits at the Textron Aviation segment, and $140 million from accounts receivable, partially offset by a $221 million change in accounts payable.
Cash flows used in investing activities in the first quarter of 2022 included capital expenditures of $48 million, partially offset by $18 million of proceeds from the sale of property, plant and equipment. Investing activities in the first quarter of 2021 included capital expenditures of $53 million, partially offset by $39 million of net proceeds from the disposition of TRU Simulation + Training Canada Inc.
Cash flows used in financing activities in the first quarter of 2022 included $157 million of cash paid to repurchase an aggregate of 2.2 million shares of our common stock. In the first quarter of 2021, cash flows used in financing activities included $267 million of payments on long-term debt and $91 million of cash paid to repurchase an aggregate of 1.8 million shares of our common stock.
On January 25, 2022, we announced the authorization of the repurchase of up to 25 million shares of our common stock. This new plan allows us to continue our practice of repurchasing shares to offset the impact of dilution from stock-based compensation and benefit plans and for opportunistic capital management purposes. The 2022 plan has no expiration date and replaced the prior 2020 share repurchase authorization.
Finance Group Cash Flows
Cash flows for the Finance group as presented in our Consolidated Statements of Cash Flows are summarized below:
| | | | | | | | |
| Three Months Ended |
| (In millions) | April 2,
2022 | April 3,
2021 |
| Operating activities | $ | (2) | | $ | 5 | |
| Investing activities | 74 | | 88 | |
| Financing activities | (119) | | (20) | |
The Finance group’s cash flows from investing activities included collections on finance receivables totaling $40 million and $89 million in the first quarter of 2022 and 2021, respectively, and finance receivable originations of $9 million and $7 million, respectively. Cash flows provided by investing activities in the first quarter of 2022 also included $43 million of other investing activities, largely related to proceeds from the sale of operating lease assets. In the first quarter of 2022 and 2021, financing activities included payments on long-term and nonrecourse debt of $119 million and $20 million, respectively.
Consolidated Cash Flows
The consolidated cash flows after elimination of activity between the borrowing groups, are summarized below:
| | | | | | | | |
| Three Months Ended |
| (In millions) | April 2,
2022 | April 3,
2021 |
| Operating activities | $ | 241 | | $ | 181 | |
| Investing activities | 28 | | 5 | |
| Financing activities | (258) | | (359) | |
In the first quarter of 2022, cash flows from operating activities were $241 million, compared with $181 million in the first quarter of 2021. The $60 million year-over-year increase in cash flows was primarily due to working capital improvements, partially offset by a $51 million decrease in cash flows from captive financing activities. The working capital improvements primarily included $244 million from contract liabilities, largely reflecting higher customer deposits at the Textron Aviation segment, and $140 million from accounts receivable, partially offset by a $221 million change in accounts payable.
Cash flows provided by investing activities in the first quarter of 2022 included $45 million of other investing activities, largely related to proceeds from the sale of operating lease assets, and $18 million of proceeds from the sale of property, plant and equipment, partially offset by capital expenditures of $48 million. Investing activities in the first quarter of 2021 included capital expenditures of $53 million, partially offset by $39 million of net proceeds from the disposition of TRU Simulation + Training Canada Inc.
Cash flows used in financing activities in the first quarter of 2022 included $157 million of cash paid to repurchase shares of our outstanding common stock and $121 million of payments on long-term debt. In the first quarter of 2021, cash flows used in financing activities included $287 million of payments on long-term debt and $91 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:
| | | | | | | | |
| Three Months Ended |
| (In millions) | April 2,
2022 | April 3,
2021 |
| Reclassification adjustments from investing activities to operating activities: | | |
| Cash received from customers | $ | 27 | | $ | 76 | |
| Finance receivable originations for Manufacturing group inventory sales | (9) | | (7) | |
| | |
| | |
| | |
| | |
| Total reclassification adjustments from investing activities to operating activities | $ | 18 | | $ | 69 | |
Critical Accounting Estimates Update
Our Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements. The accounting estimates that we believe are most critical to the portrayal of our financial condition and results of operations are reported in Item 7 of our Annual Report on Form 10-K for the year ended January 1, 2022. The following section provides an update of the year-end disclosure.
Revenue Recognition
A substantial portion of our revenues is related to long-term contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program, for the design, development, manufacture or modification of aerospace and defense products as well as related services. We generally use the cost-to-cost method to measure progress for these contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts. Under this measure, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and revenue is recorded proportionally as costs are incurred.
Changes in our estimate of the total expected cost or in the transaction price for a contract typically impact our profit booking rate. We utilize the cumulative catch-up method of accounting to recognize the impact of these changes on our profit booking rate for a contract. Under this method, the inception-to-date impact of a profit adjustment on a contract is recognized in the period the adjustment is identified. The impact of our cumulative catch-up adjustments on segment profit recognized in prior periods is presented below:
| | | | | | | | | | |
| | Three Months Ended |
| (In millions) | | | April 2,
2022 | April 3,
2021 |
| Gross favorable | | | $ | 16 | | $ | 36 | |
| Gross unfavorable | | | (33) | | (22) | |
| Net adjustments | | | $ | (17) | | $ | 14 | |
Forward-Looking Information
Certain statements in this Quarterly Report on Form 10-Q and other oral and written statements made by us from time to time are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which may describe strategies, goals, outlook or other non-historical matters, or project revenues, income, returns or other financial measures, often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “guidance,” “project,” “target,” “potential,” “will,” “should,” “could,” “likely” or “may” and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update or revise any forward-looking statements. In addition to those factors described in our 2021 Annual Report on Form 10-K under “Risk Factors,” among the factors that could cause actual results to differ materially from past and projected future results are the following:
•Interruptions in the U.S. Government’s ability to fund its activities and/or pay its obligations;
•Changing priorities or reductions in the U.S. Government defense budget, including those related to military operations in foreign countries;
•Our ability to perform as anticipated and to control costs under contracts with the U.S. Government;
•The U.S. Government’s ability to unilaterally modify or terminate its contracts with us for the U.S. Government’s convenience or for our failure to perform, to change applicable procurement and accounting policies, or, under certain circumstances, to withhold payment or suspend or debar us as a contractor eligible to receive future contract awards;
•Changes in foreign military funding priorities or budget constraints and determinations, or changes in government regulations or policies on the export and import of military and commercial products;
•Volatility in the global economy or changes in worldwide political conditions that adversely impact demand for our products;
•Volatility in interest rates or foreign exchange rates and inflationary pressures;
•Risks related to our international business, including establishing and maintaining facilities in locations around the world and relying on joint venture partners, subcontractors, suppliers, representatives, consultants and other business partners in connection with international business, including in emerging market countries;
•Our Finance segment’s ability to maintain portfolio credit quality or to realize full value of receivables;
•Performance issues with key suppliers or subcontractors;
•Legislative or regulatory actions, both domestic and foreign, impacting our operations or demand for our products;
•Our ability to control costs and successfully implement various cost-reduction activities;
•The efficacy of research and development investments to develop new products or unanticipated expenses in connection with the launching of significant new products or programs;
•The timing of our new product launches or certifications of our new aircraft products;
•Our ability to keep pace with our competitors in the introduction of new products and upgrades with features and technologies desired by our customers;
•Pension plan assumptions and future contributions;
•Demand softness or volatility in the markets in which we do business;
•Cybersecurity threats, including the potential misappropriation of assets or sensitive information, corruption of data or operational disruption;
•Difficulty or unanticipated expenses in connection with integrating acquired businesses;
•The risk that acquisitions do not perform as planned, including, for example, the risk that acquired businesses will not achieve revenues and profit projections;
•The impact of changes in tax legislation;
•Risks and uncertainties related to the ongoing impact of the COVID-19 pandemic and the potential impact of Russia’s invasion of, and continued military attacks on, Ukraine, on our business and operations; and
•The ability of our businesses to hire and retain the highly skilled personnel necessary for our businesses to succeed.