TEXTRON INC, 10-Q filed on 5/1/2020
Quarterly Report
v3.20.1
Document and Entity Information - shares
3 Months Ended
Apr. 04, 2020
Apr. 17, 2020
Document and Entity Information    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Apr. 04, 2020  
Document Transition Report false  
Entity File Number 1-5480  
Entity Registrant Name Textron Inc  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 05-0315468  
Entity Address, Address Line One 40 Westminster Street  
Entity Address, City or Town Providence  
Entity Address, State or Province RI  
Entity Address, Postal Zip Code 02903  
City Area Code 401  
Local Phone Number 421-2800  
Title of 12(b) Security Common stock, $0.125 par value  
Trading Symbol TXT  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   227,472,487
Entity Central Index Key 0000217346  
Current Fiscal Year End Date --01-02  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Amendment Flag false  
v3.20.1
Consolidated Statements of Operations - USD ($)
$ in Millions
3 Months Ended
Apr. 04, 2020
Mar. 30, 2019
Revenues    
Total revenues $ 2,777 $ 3,109
Costs, expenses and other    
Cost of sales 2,387 2,577
Selling and administrative expense 263 307
Interest expense 40 42
Special charges 39  
Non-service components of pension and post-retirement income, net (21) (29)
Total costs, expenses and other 2,708 2,897
Income before income taxes 69 212
Income tax expense 19 33
Net income $ 50 $ 179
Earnings per share    
Basic (in dollars per share) $ 0.22 $ 0.76
Diluted (in dollars per share) $ 0.22 $ 0.76
Manufacturing    
Revenues    
Total revenues $ 2,763 $ 3,092
Finance    
Revenues    
Finance revenues $ 14 $ 17
v3.20.1
Consolidated Statements of Comprehensive Income - USD ($)
$ in Millions
3 Months Ended
Apr. 04, 2020
Mar. 30, 2019
Consolidated Statements of Comprehensive Income    
Net income $ 50 $ 179
Other comprehensive income, net of tax:    
Pension and postretirement benefits adjustments, net of reclassifications 37 21
Foreign currency translation adjustments (40) 3
Deferred gains (losses) on hedge contracts, net of reclassifications (9) 2
Other comprehensive income (losses) (12) 26
Comprehensive income $ 38 $ 205
v3.20.1
Consolidated Balance Sheets - USD ($)
shares in Thousands, $ in Millions
Apr. 04, 2020
Jan. 04, 2020
Assets    
Inventories $ 4,385 $ 4,069
Finance receivables, net 681 682
Total assets 15,946 15,018
Liabilities    
Total liabilities 10,412 9,500
Shareholders' equity    
Common stock 29 29
Capital surplus 1,711 1,674
Treasury stock (74) (20)
Retained earnings 5,727 5,682
Accumulated other comprehensive loss (1,859) (1,847)
Total shareholders' equity 5,534 5,518
Total liabilities and shareholders' equity $ 15,946 $ 15,018
Common shares outstanding 227,379 227,956
Manufacturing group    
Assets    
Cash and equivalents $ 2,263 $ 1,181
Accounts receivable, net 870 921
Inventories 4,385 4,069
Other current assets 984 894
Total current assets 8,502 7,065
Property, plant and equipment, less accumulated depreciation and amortization of $4,453 and $4,405, respectively 2,483 2,527
Goodwill 2,150 2,150
Other assets 1,854 2,312
Total assets 14,989 14,054
Liabilities    
Short-term debt and current portion of long-term debt 1,396 561
Accounts payable 1,322 1,378
Other current liabilities 1,797 1,907
Total current liabilities 4,515 3,846
Other liabilities 2,143 2,288
Long-term debt 2,956 2,563
Total liabilities 9,614 8,697
Finance group    
Assets    
Cash and equivalents 183 176
Finance receivables, net 681 682
Other assets 93 106
Total assets 957 964
Liabilities    
Other liabilities 116 117
Debt 682 686
Total liabilities $ 798 $ 803
v3.20.1
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Millions
Apr. 04, 2020
Jan. 04, 2020
Consolidated Balance Sheets    
Accumulated depreciation and amortization $ 4,453 $ 4,405
v3.20.1
Consolidated Statements of Cash Flows - USD ($)
$ in Millions
3 Months Ended
Apr. 04, 2020
Mar. 30, 2019
Cash flows from operating activities    
Net income $ 50 $ 179
Non-cash items:    
Depreciation and amortization 90 102
Deferred income taxes (10) 15
Asset impairments 39  
Other, net 33 33
Changes in assets and liabilities:    
Accounts receivable, net 47 (33)
Inventories (368) (215)
Other assets (41) (31)
Accounts payable (49) 47
Other liabilities (203) (288)
Income taxes, net 20 (7)
Pension, net (5) (14)
Captive finance receivables, net   (1)
Other operating activities, net 3 (3)
Net cash (used in) provided by operating activities of continuing operations (394) (216)
Net cash used in operating activities of discontinued operations (1)  
Net cash (used in) provided by operating activities (395) (216)
Cash flows from investing activities    
Capital expenditures (50) (59)
Finance receivables repaid 13 12
Other investing activities, net (6) 5
Net cash used in investing activities (43) (42)
Cash flows from financing activities    
Increase in short-term debt 603 100
Proceeds from long-term debt 643  
Proceeds from borrowings against corporate-owned life insurance policies 377  
Principal payments on long-term debt and nonrecourse debt (24) (19)
Purchases of Textron common stock (54) (202)
Dividends paid (5) (5)
Other financing activities, net 3 10
Net cash provided by (used in) financing activities 1,543 (116)
Effect of exchange rate changes on cash and equivalents (16) 9
Net increase (decrease) in cash and equivalents 1,089 (365)
Cash and equivalents at beginning of period 1,357 1,107
Cash and equivalents at end of period 2,446 742
Manufacturing group    
Cash flows from operating activities    
Net income 48 175
Non-cash items:    
Depreciation and amortization 89 100
Deferred income taxes (11) 15
Asset impairments 39  
Other, net 33 33
Changes in assets and liabilities:    
Accounts receivable, net 47 (33)
Inventories (368) (241)
Other assets (41) (30)
Accounts payable (49) 47
Other liabilities (198) (286)
Income taxes, net 20 (9)
Pension, net (5) (14)
Dividends received from Finance group   50
Other operating activities, net 3 (3)
Net cash (used in) provided by operating activities of continuing operations (393) (196)
Net cash used in operating activities of discontinued operations (1)  
Net cash (used in) provided by operating activities (394) (196)
Cash flows from investing activities    
Capital expenditures (50) (59)
Other investing activities, net (6) 3
Net cash used in investing activities (56) (56)
Cash flows from financing activities    
Increase in short-term debt 603 100
Proceeds from long-term debt 643  
Proceeds from borrowings against corporate-owned life insurance policies 377  
Principal payments on long-term debt and nonrecourse debt (7)  
Purchases of Textron common stock (54) (202)
Dividends paid (5) (5)
Other financing activities, net (9) 9
Net cash provided by (used in) financing activities 1,548 (98)
Effect of exchange rate changes on cash and equivalents (16) 9
Net increase (decrease) in cash and equivalents 1,082 (341)
Cash and equivalents at beginning of period 1,181 987
Cash and equivalents at end of period 2,263 646
Finance group    
Cash flows from operating activities    
Net income 2 4
Non-cash items:    
Depreciation and amortization 1 2
Deferred income taxes 1  
Changes in assets and liabilities:    
Other assets   (1)
Other liabilities (5) (2)
Income taxes, net   2
Net cash (used in) provided by operating activities of continuing operations (1) 5
Net cash (used in) provided by operating activities (1) 5
Cash flows from investing activities    
Finance receivables repaid 46 40
Finance receivables originated (33) (29)
Other investing activities, net   28
Net cash used in investing activities 13 39
Cash flows from financing activities    
Principal payments on long-term debt and nonrecourse debt (17) (18)
Dividends paid   (50)
Other financing activities, net 12  
Net cash provided by (used in) financing activities (5) (68)
Net increase (decrease) in cash and equivalents 7 (24)
Cash and equivalents at beginning of period 176 120
Cash and equivalents at end of period $ 183 $ 96
v3.20.1
Basis of Presentation
3 Months Ended
Apr. 04, 2020
Basis of Presentation  
Basis of Presentation

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 4, 2020.  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 2020 and 2019, our cumulative catch-up adjustments increased revenues and segment profit by $2 million and $31 million, respectively, and net income by $1 million and $23 million, respectively ($0.01 and $0.10 per diluted share, respectively). In the first quarter of 2020 and 2019, gross favorable adjustments totaled $27 million and $53 million, respectively, and the gross unfavorable adjustments totaled $25 million and $22 million, respectively.

v3.20.1
Summary of Significant Accounting Policies Update
3 Months Ended
Apr. 04, 2020
Summary of Significant Accounting Policies Update  
Summary of Significant Accounting Policies Update

Note 2.  Summary of Significant Accounting Policies Update

At the beginning of 2020, we adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (ASC 326). This standard changed the prior incurred loss model to a forward-looking current expected credit loss model for most financial assets, such as trade and finance receivables, contract assets and other instruments. This standard required a cumulative-effect adjustment to retained earnings upon adoption with no restatement of prior periods. There was no significant impact on our consolidated financial statements upon adoption of the standard.

Our significant accounting policies are included in Note 1 of our Annual Report on Form 10-K for the year ended January 4, 2020.  Significant changes to our policies resulting from the adoption of ASC 326 are provided below.

Accounts Receivable, Net

Accounts receivable, net includes amounts billed to customers where the right to payment is unconditional. We maintain an allowance for credit losses for our commercial accounts receivable to provide for the estimated amount that will not be collected, even when the risk of loss is remote. The allowance is measured on a collective pool basis when similar risk characteristics exists and is established as a percentage of accounts receivable.  We have identified pools with similar risk characteristics, based on

customer and industry type and geographic location. The percentage is based on all available and relevant information including age of outstanding receivables and collateral value, if any, historical payment experience and loss history, current economic conditions, and, when reasonable and supportable factors exist, management’s expectation of future economic conditions. For amounts due from the U.S. Government, we have not established an allowance for credit losses as we have zero loss expectation based on a long history of no credit losses and the explicit guarantee of a sovereign entity.

Finance Receivables, Net

We establish an allowance for credit losses to cover probable but specifically unknown losses existing in the portfolio. This allowance is established as a percentage of finance receivables categorized by pools with similar risk characteristics, such as collateral or customer type and geographic location. The percentage is based on a combination of factors, including historical loss experience, current delinquency and default trends, collateral values, current economic conditions, and, when reasonable and supportable factors exist, management’s expectation of future economic conditions.

For those finance receivables that do not have similar risk characteristics, including larger balance accounts specifically identified as impaired, a reserve is established based on comparing the expected future cash flows, discounted at the finance receivable's effective interest rate, or the fair value of the underlying collateral if the finance receivable is collateral dependent, to its carrying amount. The expected future cash flows consider collateral value; financial performance and liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs associated with the repossession and eventual disposal of collateral. When there is a range of potential outcomes, we perform multiple discounted cash flow analyses and weight the potential outcomes based on their relative likelihood of occurrence. The evaluation of our portfolio is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the estimated fair value of the underlying collateral, which may differ from actual results. While our analysis is specific to each individual account, critical factors included in this analysis include industry valuation guides, age and physical condition of the collateral, payment history, existence and financial strength of guarantors.

v3.20.1
Accounts Receivable and Finance Receivables
3 Months Ended
Apr. 04, 2020
Accounts Receivable and Finance Receivables  
Accounts Receivable and Finance Receivables

Note 3.  Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

April 4,

January 4,

(In millions)

2020

2020

Commercial

  $

720

  $

835

U.S. Government contracts

189

 

115

909

 

950

Allowance for credit losses

(39)

 

(29)

Total accounts receivable, net

  $

870

  $

921

Finance Receivables

Finance receivables are presented in the following table:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

April 4,

January 4,

(In millions)

2020

2020

Finance receivables

  $

706

  $

707

Allowance for credit losses

(25)

 

(25)

Total finance receivables, net

  $

681

  $

682

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.

In March 2020, due to the economic impact of the COVID-19 pandemic and at the request of certain of our customers, we began working with them to provide temporary payment relief through loan modifications. 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. Loan modifications in the first quarter of 2020 were not significant, however, we are working on modifications for approximately 30% of our total finance receivables. We believe our allowance for credit losses adequately covers our exposure on these loans as our estimated collateral values largely exceed the outstanding loan amounts.

Finance receivables categorized based on the credit quality indicators and by the delinquency aging category are summarized as follows:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

April 4,

January 4,

(Dollars in millions)

2020

2020

Performing

  $

554

  $

664

Watchlist

115

 

4

Nonaccrual

37

 

39

Nonaccrual as a percentage of finance receivables

5.24

%

5.52

%

Current and less than 31 days past due

  $

622

  $

637

31-60 days past due

29

53

61-90 days past due

35

7

Over 90 days past due

20

10

60+ days contractual delinquency as a percentage of finance receivables

7.79

%

2.40

%

At April 4, 2020, 31% of our performing finance receivables were originated since the beginning of 2019 and 35% were originated from 2016 to 2018. For finance receivables categorized as watchlist, 36% were originated since the beginning of 2019 and 23% from 2016 to 2018.

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.  

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

April 4,

January 4,

(In millions)

2020

2020

Finance receivables evaluated collectively

  $

489

  $

564

Finance receivables evaluated individually

 

113

 

39

Allowance for credit losses based on collective evaluation

22

22

Allowance for credit losses based on individual evaluation

 

3

 

3

Impaired finance receivables with no related allowance for credit losses

  $

96

  $

22

Impaired finance receivables with related allowance for credit losses

17

17

Unpaid principal balance of impaired finance receivables

124

50

Allowance for credit losses on impaired loans

3

3

Average recorded investment of impaired finance receivables

76

40

v3.20.1
Inventories
3 Months Ended
Apr. 04, 2020
Inventories  
Inventories

Note 4.  Inventories

Inventories are composed of the following:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

April 4,

January 4,

(In millions)

2020

2020

Finished goods

  $

1,611

  $

1,557

Work in process

1,762

 

1,616

Raw materials and components

1,012

 

896

Total inventories

  $

4,385

  $

4,069

v3.20.1
Other Assets
3 Months Ended
Apr. 04, 2020
Other Assets  
Other Assets

Note 5. Other Assets

Other assets includes the cash surrender value of corporate-owned life insurance policies, net of any borrowings against these policies. During the first quarter of 2020, we borrowed $377 million against these policies as we strengthened our cash position in light of disruptions in the capital markets caused by the COVID-19 pandemic. These proceeds have been classified as financing activities in the consolidated statement of cash flows.

v3.20.1
Other Current Liabilities
3 Months Ended
Apr. 04, 2020
Other Current Liabilities  
Warranty Liability

Note 6. Other Current Liabilities

Warranty Liability

Changes in our warranty liability are as follows:

Three Months Ended

April 4,

March 30,

(In millions)

2020

2019

Beginning of period

  $

141

  $

149

Provision

 

13

 

14

Settlements

 

(19)

 

(22)

Adjustments*

 

(2)

 

4

End of period

  $

133

  $

145

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

* Adjustments include changes to prior year estimates, new issues on prior year sales and currency translation adjustments.

Restructuring Reserve

Our restructuring reserve activity related to restructuring plans prior to 2020  is summarized below:

Contract

Severance

Terminations

(In millions)

Costs

and Other

Total

Balance at January 4, 2020

  $

46

  $

19

  $

65

Cash paid

 

(26)

 

(2)

 

(28)

Balance at April 4, 2020

  $

20

  $

17

  $

37

The majority of the remaining cash outlays of $37 million is expected to be paid over the remainder of 2020. Severance costs generally are paid on a lump-sum basis and include outplacement costs, which are paid in accordance with normal payment terms.

v3.20.1
Leases
3 Months Ended
Apr. 04, 2020
Leases  
Leases

Note 7. Leases

We primarily lease certain manufacturing plants, offices, warehouses, training and service centers at various locations worldwide that are classified as either operating or finance leases. Our finance leases at April 4, 2020 were not significant. Our operating leases have remaining lease terms up to 29 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. In the first quarter of 2020 and 2019, both our operating lease cost and cash paid for these leases totaled $15 million and $16 million, respectively. Variable and short-term lease costs were not significant. Balance sheet and other information related to our operating leases is as follows:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

April 4,

January 4,

(Dollars in millions)

2020

2020

Other assets

  $

272

  $

277

Other current liabilities

 

49

48

Other liabilities

 

225

233

Weighted-average remaining lease term (in years)

 

10.0

10.2

Weighted-average discount rate

 

4.42

%

4.42

%

At April 4, 2020, maturities of our operating lease liabilities on an undiscounted basis totaled $46 million for 2020, $48 million for 2021, $41 million for 2022, $32 million for 2023, $25 million for 2024 and $153 million thereafter.

v3.20.1
Debt
3 Months Ended
Apr. 04, 2020
Debt  
Debt and Credit Facilities

Note 8.  Debt

On April 1, 2020, we entered into a 364-Day Term Loan Credit Agreement in an aggregate principal amount of $500 million and borrowed the full principal amount available under the agreement. At our current credit ratings, the borrowings accrue interest at a rate equal to the London interbank offered rate plus 2.00%, which is an annual interest rate of 3.00% at April 4, 2020. We can pre-pay any amount of the principal balance during the term of the loan; however, we cannot borrow additional principal amounts. The Term Loan Credit Agreement restricts us from incurring additional indebtedness, subject to various exceptions, one of which allows us to borrow under our $1.0 billion revolving credit facility. While this loan is outstanding, we have agreed not to repurchase any of our common stock. The principal amount outstanding, plus accrued and unpaid interest and fees, will be due on March 31, 2021.

Under our shelf registration statement, on March 17, 2020, we issued $650 million of fixed-rate notes due June 1, 2030 with an annual interest rate of 3.00%. The net proceeds of the issuance totaled $643 million, after deducting underwriting discounts, commissions and offering expenses.

v3.20.1
Derivative Instruments and Fair Value Measurements
3 Months Ended
Apr. 04, 2020
Derivative Instruments and Fair Value Measurements  
Derivative Instruments and Fair Value Measurements

Note 9.  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 4, 2020 and January 4, 2020, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $410 million and $342 million, respectively.  At April 4, 2020, the fair value amounts of our foreign currency exchange contracts were a $14 million asset and a $18 million liability.  At January 4, 2020, the fair value amounts of our foreign currency exchange contracts were a $2 million asset and a $2 million liability.

We hedge our net investment position in certain major currencies and generate foreign currency interest payments that offset other transactional exposures in these currencies. To accomplish this, we borrow directly in the foreign currency and designate a portion of the debt as a hedge of the net investment. We record changes in the fair value of these contracts in other comprehensive income to the extent they are effective as cash flow hedges.  Currency effects on the effective portion of these hedges, which are reflected in the foreign currency translation adjustments within Accumulated other comprehensive loss, were not significant in the periods presented.

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 4, 2020

January 4, 2020

Carrying

Estimated

Carrying

Estimated

(In millions)

Value

Fair Value

Value

Fair Value

Manufacturing group

Debt, excluding leases

  $

(4,335)

  $

(4,272)

  $

(3,097)

  $

(3,249)

Finance group

Finance receivables, excluding leases

 

494

 

460

 

493

 

527

Debt

 

(682)

 

(545)

 

(686)

 

(634)

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.

v3.20.1
Shareholders' Equity
3 Months Ended
Apr. 04, 2020
Shareholders' Equity  
Shareholders' Equity

Note 10. Shareholders’ Equity

A reconciliation of Shareholder’s equity is presented below:

Accumulated

Other

Total

Common

Capital

Treasury

Retained

Comprehensive

Shareholders’

(In millions)

Stock

Surplus

Stock

Earnings

Loss

Equity

Balance at January 4, 2020

  $

29

  $

1,674

  $

(20)

  $

5,682

  $

(1,847)

  $

5,518

Net income

50

50

Other comprehensive loss

(12)

(12)

Share-based compensation activity

37

37

Dividends declared

(5)

(5)

Purchases of common stock

(54)

(54)

Balance at April 4, 2020

  $

29

  $

1,711

  $

(74)

  $

5,727

  $

(1,859)

  $

5,534

Balance at December 29, 2018

  $

30

  $

1,646

  $

(129)

  $

5,407

  $

(1,762)

  $

5,192

Net income

 

 

 

 

179

 

 

179

Other comprehensive income

 

 

 

 

 

26

 

26

Share-based compensation activity

 

 

43

 

 

 

 

43

Dividends declared

 

 

 

 

(5)

 

 

(5)

Purchases of common stock

 

 

 

(202)

 

 

 

(202)

Balance at March 30, 2019

  $

30

  $

1,689

  $

(331)

  $

5,581

  $

(1,736)

  $

5,233

Dividends per share of common stock were $0.02 for both the first quarter of 2020 and 2019.

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

April 4,

March 30,

(In thousands)

2020

2019

Basic weighted-average shares outstanding

228,311

234,839

Dilutive effect of stock options

616

1,598

Diluted weighted-average shares outstanding

228,927

236,437

Stock options to purchase 7.5 million and 3.1 million shares of common stock are excluded from the calculation of diluted weighted-average shares outstanding for the first quarter of 2020 and  2019, respectively, as their effect would have been anti-dilutive.

Accumulated Other Comprehensive Loss and Other Comprehensive Income (Loss)

The components of Accumulated other comprehensive loss are presented below:

Pension and

Foreign

Deferred

Accumulated

Postretirement

Currency

Gains (Losses)

Other

Benefits

Translation

on Hedge

Comprehensive

(In millions)

Adjustments

Adjustments

Contracts

Loss

Balance at January 4, 2020

  $

(1,811)

  $

(36)

  $

  $

(1,847)

Other comprehensive loss before reclassifications

(40)

(8)

(48)

Reclassified from Accumulated other comprehensive loss

37

(1)

36

Balance at April 4, 2020

  $

(1,774)

  $

(76)

  $

(9)

  $

(1,859)

Balance at December 29, 2018

  $

(1,727)

  $

(32)

  $

(3)

  $

(1,762)

Other comprehensive income before reclassifications

 

 

3

 

3

 

6

Reclassified from Accumulated other comprehensive loss

 

21

 

 

(1)

 

20

Balance at March 30, 2019

  $

(1,706)

  $

(29)

  $

(1)

  $

(1,736)

The before and after-tax components of Other comprehensive income (loss) are presented below:

April 4, 2020

March 30, 2019

Tax

Tax

Pre-Tax

(Expense)

After-Tax

Pre-Tax

(Expense)

After-Tax

(In millions)

Amount

Benefit

Amount

Amount

Benefit

Amount

Three Months Ended

Pension and postretirement benefits adjustments:

Amortization of net actuarial loss*

  $

46

  $

(10)

  $

36

  $

25

  $

(5)

  $

20

Amortization of prior service cost*

 

2

 

(1)

 

1

1

1

Pension and postretirement benefits adjustments, net

 

48

 

(11)

 

37

26

(5)

21

Deferred gains (losses) on hedge contracts:

Current deferrals

 

(9)

 

1

 

(8)

4

(1)

3

Reclassification adjustments

 

(1)

 

 

(1)

(1)

(1)

Deferred gains (losses) on hedge contracts, net

(10)

1

(9)

3

(1)

2

Foreign currency translation adjustments

(37)

(3)

(40)

1

2

3

Total

  $

1

  $

(13)

  $

(12)

  $

30

  $

(4)

  $

26

*These components of other comprehensive income (loss) are included in the computation of net periodic pension cost (credit). See Note 16 of our 2019 Annual Report on Form 10-K for additional information.

v3.20.1
Segment Information
3 Months Ended
Apr. 04, 2020
Segment Information  
Segment Information

Note 11. 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

April 4,

March 30,

(In millions)

2020

2019

Revenues

Textron Aviation

  $

872

  $

1,134

Bell

823

 

739

Textron Systems

328

 

307

Industrial

740

 

912

Finance

14

 

17

Total revenues

  $

2,777

  $

3,109

Segment Profit

Textron Aviation

  $

3

  $

106

Bell

115

 

104

Textron Systems

26

 

28

Industrial

9

 

50

Finance

3

 

6

Segment profit

156

 

294

Corporate expenses and other, net

(14)

 

(47)

Interest expense, net for Manufacturing group

 

(34)

 

(35)

Special charges

(39)

Income before income taxes

  $

69

  $

212

v3.20.1
Revenues
3 Months Ended
Apr. 04, 2020
Revenues  
Revenues

Note 12. Revenues

Disaggregation of Revenues

Our revenues disaggregated by major product type are presented below:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

Three Months Ended

April 4,

March 30,

(In millions)

2020

2019

Aircraft

  $

515

  $

766

Aftermarket parts and services

357

 

368

Textron Aviation

872

 

1,134

Military aircraft and support programs

620

 

508

Commercial helicopters, parts and services

203

 

231

Bell

823

 

739

Unmanned systems

148

 

134

Marine and land systems

48

 

48

Simulation, training and other

132

 

125

Textron Systems

328

 

307

Fuel systems and functional components

465

 

594

Specialized vehicles

275

 

318

Industrial

740

 

912

Finance

14

 

17

Total revenues

  $

2,777

  $

3,109

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 April 4, 2020

Customer type:

Commercial

  $

848

  $

198

  $

71

  $

739

  $

14

  $

1,870

U.S. Government

24

625

257

1

907

Total revenues

  $

872

  $

823

  $

328

  $

740

  $

14

  $

2,777

Geographic location:

United States

  $

597

  $

690

  $

286

  $

329

  $

6

  $

1,908

Europe

84

24

12

228

1

349

Asia and Australia

123

50

20

53

1

247

Other international

68

59

10

130

6

273

Total revenues

  $

872

  $

823

  $

328

  $

740

  $

14

  $

2,777

Three months ended March 30, 2019

Customer type:

Commercial

  $

1,092

  $

230

  $

74

  $

905

  $

17

  $

2,318

U.S. Government

 

42

 

509

 

233

 

7

 

 

791

Total revenues

  $

1,134

  $

739

  $

307

  $

912

  $

17

  $

3,109

Geographic location:

 

 

 

 

 

 

United States

  $

789

  $

578

  $

257

  $

389

  $

8

  $

2,021

Europe

183

20

23

311

1

538

Asia and Australia

23

82

16

77

1

199

Other international

 

139

 

59

 

11

 

135

 

7

 

351

Total revenues

  $

1,134

  $

739

  $

307

  $

912

  $

17

  $

3,109

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 4, 2020, we had $9.2 billion in remaining performance obligations of which we expect to recognize revenues of approximately 72% through 2021, an additional 21% through 2023, 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 4, 2020 and January 4, 2020, contract assets totaled $565 million and $567 million, respectively, and contract liabilities totaled $930 million and $830 million, respectively, reflecting timing differences between revenue recognized, billings and payments from customers. During the first quarter of 2020 and 2019, we recognized revenues of $231 million and $311 million, respectively, that were included in the contract liability balance at the beginning of each year.

v3.20.1
Share-Based Compensation
3 Months Ended
Apr. 04, 2020
Share-Based Compensation  
Share-Based Compensation

Note 13.  Share-Based Compensation

Under our share-based compensation plans, 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, or income in periods of share price depreciation, for these plans is  included in net income as follows:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Three Months Ended

April 4,

March 30,

(In millions)

2020

2019

Compensation (income) expense

  $

(13)

  $

44

Income tax expense (benefit)

 

3

 

(11)

Total net compensation (income) expense included in net income

  $

(10)

  $

33

Compensation (income) expense included stock option expense of $10 million in the first quarter 2020 and $11 million in the first quarter of 2019.

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 implied volatilities from traded options on our common stock, historical volatilities and other factors. 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 and the assumptions used in our option-pricing model and the weighted-average fair value  for these options are as follows:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

March 1,

March 1,

2020

2019

Fair value of options at grant date

  $

10.66

  $

14.62

Dividend yield

 

0.2

%  

 

0.2

%

Expected volatility

 

29.3

%  

 

26.6

%

Risk-free interest rate

 

1.1

%  

 

2.5

%

Expected term (in years)

 

4.7

 

4.7

The stock option activity during the first quarter of 2020 is provided below:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

    

Weighted-

Number of

Average Exercise

(Options in thousands)

Options

 Price

Outstanding at January 4, 2020

 

8,744

  $

44.00

Granted

 

1,728

 

40.60

Exercised

 

(169)

 

(31.48)

Forfeited or expired

 

(66)

 

(51.93)

Outstanding at April 4, 2020

 

10,237

  $

43.58

Exercisable at April 4, 2020

 

7,018

  $

41.83

At April 4, 2020, the aggregate intrinsic value of our outstanding and exercisable options was de minimis and these options had a weighted-average remaining contractual life of 6.2 and 4.9 years, respectively. The total intrinsic value of options exercised in the first quarter of 2020 and 2019 was $3 million and $16 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 activity for restricted stock units payable in both stock and cash during the first quarter of 2020 is provided below:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Units Payable in Stock

Units Payable in Cash

Weighted-

Weighted-

Number of

Average Grant

Number of

Average Grant

(Shares/Units in thousands)

Shares

Date Fair Value

Units

Date Fair Value

Outstanding at January 4, 2020, nonvested

 

543

  $

49.44

 

1,104

  $

49.61

Granted

 

134

 

40.60

 

358

 

40.60

Vested

 

(136)

 

(42.31)

 

(272)

 

(42.33)

Forfeited

 

 

 

(11)

 

(50.25)

Outstanding at April 4, 2020, nonvested

 

541

  $

49.05

 

1,179

  $

48.54

The fair value of the restricted stock unit awards that vested and/or amounts paid under these awards is as follows: