TEXTRON INC, 10-K filed on 2/14/2019
Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
$ in Billions
12 Months Ended
Dec. 29, 2018
Feb. 02, 2019
Jun. 30, 2018
Document and Entity Information      
Entity Registrant Name TEXTRON INC    
Entity Central Index Key 0000217346    
Document Type 10-K    
Document Period End Date Dec. 29, 2018    
Amendment Flag false    
Current Fiscal Year End Date --12-29    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Filer Category Large Accelerated Filer    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Entity Public Float     $ 16.4
Entity Common Stock, Shares Outstanding   234,679,051  
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
v3.10.0.1
Consolidated Statements of Operations - USD ($)
$ in Millions
12 Months Ended
Dec. 29, 2018
Dec. 30, 2017
Dec. 31, 2016
Revenues      
Total revenues $ 13,972 $ 14,198 $ 13,788
Costs, expenses and other      
Cost of sales 11,594 11,827 11,337
Selling and administrative expense 1,275 1,334 1,317
Interest expense 166 174 174
Special charges 73 130 123
Gain on business disposition (444)    
Non-service components of pension and post-retirement income, net (76) (29) (39)
Total costs, expenses and other 12,588 13,436 12,912
Income from continuing operations before income taxes 1,384 762 876
Income tax expense 162 456 33
Income from continuing operations 1,222 306 843
Income from discontinued operations, net of income taxes   1 119
Net income $ 1,222 $ 307 $ 962
Basic earnings per share      
Continuing operations (in dollars per share) $ 4.88 $ 1.15 $ 3.11
Discontinued operations (in dollars per share)     0.44
Basic earnings per share (in dollars per share) 4.88 1.15 3.55
Diluted earnings per share      
Continuing operations (in dollars per share) 4.83 1.14 3.09
Discontinued operations (in dollars per share)     0.44
Diluted earnings per share (in dollars per share) $ 4.83 $ 1.14 $ 3.53
Manufacturing      
Revenues      
Total revenues $ 13,906 $ 14,129 $ 13,710
Finance.      
Revenues      
Finance Revenue $ 66 $ 69 $ 78
v3.10.0.1
Consolidated Statements of Comprehensive Income - USD ($)
$ in Millions
3 Months Ended 12 Months Ended
Dec. 29, 2018
Sep. 29, 2018
Jun. 30, 2018
Mar. 31, 2018
Dec. 30, 2017
Sep. 30, 2017
Jul. 01, 2017
Apr. 01, 2017
Dec. 29, 2018
Dec. 30, 2017
Dec. 31, 2016
Consolidated Statements of Comprehensive Income                      
Net income $ 246 $ 563 $ 224 $ 189 $ (106) $ 159 $ 153 $ 101 $ 1,222 $ 307 $ 962
Other comprehensive income (loss), net of taxes:                      
Pension and postretirement benefits adjustments, net of reclassifications                 (74) 109 (178)
Foreign currency translation adjustments, net of reclassifications                 (43) 107 (49)
Deferred gains (losses) on hedge contracts, net of reclassifications                 (13) 14 20
Other comprehensive income (loss)                 (130) 230 (207)
Comprehensive income                 $ 1,092 $ 537 $ 755
v3.10.0.1
Consolidated Balance Sheets - USD ($)
$ in Millions
Dec. 29, 2018
Dec. 30, 2017
Assets    
Inventories $ 3,818 $ 4,150
Property, plant and equipment, net 2,615 2,721
Finance receivables, net 760 819
Total assets 14,264 15,340
Liabilities    
Total liabilities 9,072 9,693
Shareholders' equity    
Common stock (238.2 million and 262.3 million shares issued, respectively, and 235.6 million and 261.5 million shares outstanding, respectively) 30 33
Capital surplus 1,646 1,669
Treasury stock (129) (48)
Retained earnings 5,407 5,368
Accumulated other comprehensive loss (1,762) (1,375)
Total shareholders' equity 5,192 5,647
Total liabilities and shareholders' equity 14,264 15,340
Manufacturing group    
Assets    
Cash and equivalents 987 1,079
Accounts receivable, net 1,024 1,363
Inventories 3,818 4,150
Other current assets 785 435
Total current assets 6,614 7,027
Property, plant and equipment, net 2,615 2,721
Goodwill 2,218 2,364
Other assets 1,800 2,059
Total assets 13,247 14,171
Liabilities    
Short-term debt and current portion of long-term debt 258 14
Accounts payable 1,099 1,205
Other current liabilities 2,149 2,441
Total current liabilities 3,506 3,660
Other liabilities 1,932 2,006
Long-term debt 2,808 3,074
Debt 3,066 3,088
Total liabilities 8,246 8,740
Finance group    
Assets    
Cash and equivalents 120 183
Finance receivables, net 760 819
Other assets 137 167
Total assets 1,017 1,169
Liabilities    
Other liabilities 108 129
Debt 718 824
Total liabilities $ 826 $ 953
v3.10.0.1
Consolidated Balance Sheets (Parenthetical) - shares
shares in Thousands
Dec. 29, 2018
Dec. 30, 2017
Consolidated Balance Sheets    
Common stock, shares issued 238,200 262,300
Common stock, shares outstanding 235,621 261,471
v3.10.0.1
Consolidated Statements of Shareholders' Equity - USD ($)
$ in Millions
Common Stock
Capital Surplus
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Loss
Total
Beginning Balance at Jan. 02, 2016 $ 36 $ 1,587 $ (559) $ 5,298 $ (1,398) $ 4,964
Increase (Decrease) in Stockholders' Equity            
Net income       962   962
Other comprehensive income (loss)         (207) (207)
Dividends declared ($0.08 per share)       (22)   (22)
Share-based compensation activity 1 119       120
Purchases of common stock     (241)     (241)
Retirement of treasury stock (3) (105) 800 (692)    
Other   (2)       (2)
Ending Balance at Dec. 31, 2016 34 1,599   5,546 (1,605) 5,574
Increase (Decrease) in Stockholders' Equity            
Net income       307   307
Other comprehensive income (loss)         230 230
Dividends declared ($0.08 per share)       (21)   (21)
Share-based compensation activity   139       139
Purchases of common stock     (582)     (582)
Retirement of treasury stock (1) (69) 534 (464)    
Ending Balance at Dec. 30, 2017 33 1,669 (48) 5,368 (1,375) 5,647
Increase (Decrease) in Stockholders' Equity            
Net income       1,222   1,222
Other comprehensive income (loss)         (130) (130)
Reclassification of stranded tax effects       257 (257)  
Dividends declared ($0.08 per share)       (20)   (20)
Share-based compensation activity   166       166
Purchases of common stock     (1,783)     (1,783)
Retirement of treasury stock (3) (189) 1,702 (1,510)    
Adoption of ASC 606 | ASC 606       90   90
Ending Balance (ASC 606) at Dec. 29, 2018           5,192
Ending Balance at Dec. 29, 2018 $ 30 $ 1,646 $ (129) $ 5,407 $ (1,762) $ 5,192
v3.10.0.1
Consolidated Statements of Shareholders' Equity (Parenthetical) - $ / shares
12 Months Ended
Dec. 29, 2018
Dec. 30, 2017
Dec. 31, 2016
Consolidated Statements of Shareholders' Equity      
Dividends declared, per share (in dollars per share) $ 0.08 $ 0.08 $ 0.08
v3.10.0.1
Consolidated Statements of Cash Flows - USD ($)
$ in Millions
12 Months Ended
Dec. 29, 2018
Dec. 30, 2017
Dec. 31, 2016
Cash flows from operating activities      
Net income $ 1,222 $ 307 $ 962
Less: Income from discontinued operations   1 119
Income from continuing operations 1,222 306 843
Non-cash items:      
Depreciation and amortization 437 447 449
Gain on business disposition (444)    
Deferred income taxes 49 346 48
Asset impairments 48 47 40
Other, net 102 90 92
Changes in assets and liabilities:      
Accounts receivable, net 50 (236) (33)
Inventories 41 412 (352)
Other assets (88) (44) (15)
Accounts payable (63) (156) 215
Other liabilities (223) (113) (281)
Income taxes, net (33) 78 (189)
Pension, net (14) (277) 25
Captive finance receivables, net 22 67 75
Other operating activities, net 3 (4) 10
Net cash provided by (used in) operating activities of continuing operations 1,109 963 927
Net cash used in operating activities of discontinued operations (2) (27) (2)
Net cash provided by (used in) operating activities 1,107 936 925
Cash flows from investing activities      
Net proceeds from business disposition 807    
Capital expenditures (369) (423) (446)
Net proceeds from corporate-owned life insurance policies 110 17 87
Net cash used in acquisitions (23) (331) (186)
Finance receivables repaid 27 32 44
Other investing activities, net 68 60 65
Net cash provided by (used in) investing activities 620 (645) (436)
Cash flows from financing activities      
Proceeds from long-term debt   1,036 525
Principal payments on long-term debt and nonrecourse debt (131) (841) (457)
Purchases of Textron common stock (1,783) (582) (241)
Proceeds from exercise of stock options 74 52 36
Dividends paid (20) (21) (22)
Other financing activities, net (4) (4) (9)
Net cash provided by (used in) financing activities (1,864) (360) (168)
Effect of exchange rate changes on cash and equivalents (18) 33 (28)
Net increase (decrease) in cash and equivalents (155) (36) 293
Cash and equivalents at beginning of year 1,262 1,298 1,005
Cash and equivalents at end of year 1,107 1,262 1,298
Manufacturing group      
Cash flows from operating activities      
Net income 1,198 248 951
Less: Income from discontinued operations   1 119
Income from continuing operations 1,198 247 832
Non-cash items:      
Depreciation and amortization 429 435 437
Gain on business disposition (444)    
Deferred income taxes 54 390 36
Asset impairments 48 47 40
Other, net 97 94 90
Changes in assets and liabilities:      
Accounts receivable, net 50 (236) (33)
Inventories 45 422 (347)
Other assets (87) (43) 17
Accounts payable (63) (156) 215
Other liabilities (219) (108) (276)
Income taxes, net (20) 119 (174)
Pension, net (14) (277) 25
Dividends received from Finance group 50   29
Other operating activities, net 3 (4) 10
Net cash provided by (used in) operating activities of continuing operations 1,127 930 901
Net cash used in operating activities of discontinued operations (2) (27) (2)
Net cash provided by (used in) operating activities 1,125 903 899
Cash flows from investing activities      
Net proceeds from business disposition 807    
Capital expenditures (369) (423) (446)
Net proceeds from corporate-owned life insurance policies 110 17 87
Net cash used in acquisitions (23) (331) (186)
Other investing activities, net 14 9 11
Net cash provided by (used in) investing activities 539 (728) (534)
Cash flows from financing activities      
Proceeds from long-term debt   992 345
Principal payments on long-term debt and nonrecourse debt (5) (704) (254)
Purchases of Textron common stock (1,783) (582) (241)
Proceeds from exercise of stock options 74 52 36
Dividends paid (20) (21) (22)
Other financing activities, net (4) (3) (10)
Net cash provided by (used in) financing activities (1,738) (266) (146)
Effect of exchange rate changes on cash and equivalents (18) 33 (28)
Net increase (decrease) in cash and equivalents (92) (58) 191
Cash and equivalents at beginning of year 1,079 1,137 946
Cash and equivalents at end of year 987 1,079 1,137
Finance group      
Cash flows from operating activities      
Net income 24 59 11
Income from continuing operations 24 59 11
Non-cash items:      
Depreciation and amortization 8 12 12
Deferred income taxes (5) (44) 12
Other, net 5 (4) 2
Changes in assets and liabilities:      
Other assets (1) (1) (6)
Other liabilities (4) (5) (5)
Income taxes, net (13) (41) (15)
Net cash provided by (used in) operating activities of continuing operations 14 (24) 11
Net cash provided by (used in) operating activities 14 (24) 11
Cash flows from investing activities      
Finance receivables repaid 226 273 292
Finance receivables originated (177) (174) (173)
Other investing activities, net 50 41 23
Net cash provided by (used in) investing activities 99 140 142
Cash flows from financing activities      
Proceeds from long-term debt   44 180
Principal payments on long-term debt and nonrecourse debt (126) (137) (203)
Dividends paid (50)   (29)
Other financing activities, net   (1) 1
Net cash provided by (used in) financing activities (176) (94) (51)
Net increase (decrease) in cash and equivalents (63) 22 102
Cash and equivalents at beginning of year 183 161 59
Cash and equivalents at end of year $ 120 $ 183 $ 161
v3.10.0.1
Summary of Significant Accounting Policies
12 Months Ended
Dec. 29, 2018
Summary of Significant Accounting Policies  
Summary of Significant Accounting Policies

 

Note 1. Summary of Significant Accounting Policies

 

Principles of Consolidation and Financial Statement Presentation

Our Consolidated Financial Statements include the accounts of Textron Inc. and its majority-owned subsidiaries.  Our financings are conducted through two separate borrowing groups. The Manufacturing group consists of Textron Inc. 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 (TFC) 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.

 

Our 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 in consolidation.

 

At the beginning of 2018, we adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606) and its related amendments, collectively referred to as ASC 606. We adopted ASC 606 using the modified retrospective transition method applied to contracts that were not substantially complete at the end of 2017.  We recorded a $90 million adjustment to increase retained earnings to reflect the cumulative impact of adopting this standard at the beginning of 2018, primarily related to certain long-term contracts our Bell segment has with the U.S. Government that converted to the cost-to-cost method for revenue recognition.  The comparative information included in our financial statements and notes has not been restated and is reported under the accounting standards in effect for those periods based on the policies described in this note for the applicable year.

 

We also adopted ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payment at the beginning of 2018.  This standard provides guidance on the classification of certain cash flows and requires companies to classify cash proceeds received from the settlement of corporate-owned life insurance as cash inflows from investing activities. The standard is required to be adopted on a retrospective basis. Prior to adoption of this standard, we classified these proceeds as operating activities in the Consolidated Statements of Cash Flows. Upon adoption, we reclassified $17 million and $87 million of net cash proceeds for 2017 and 2016, respectively, from operating activities to investing activities.

 

Collaborative Arrangements

Our Bell segment has a strategic alliance agreement with The Boeing Company (Boeing) to provide engineering, development and test services related to the V-22 aircraft, as well as to produce the V-22 aircraft, under a number of separate contracts with the U.S. Government (V-22 Contracts).  The alliance created by this agreement is not a legal entity and has no employees, no assets and no true operations.  This agreement creates contractual rights and does not represent an entity in which we have an equity interest.  We account for this alliance as a collaborative arrangement with Bell and Boeing reporting costs incurred and revenues generated from transactions with the U.S. Government in each company’s respective income statement. Neither Bell nor Boeing is considered to be the principal participant for the transactions recorded under this agreement.  Profits on cost-plus contracts are allocated between Bell and Boeing on a 50%-50% basis.  Negotiated profits on fixed-price contracts are also allocated 50%-50%; however, Bell and Boeing are each responsible for their own cost overruns and are entitled to retain any cost underruns.  Based on the contractual arrangement established under the alliance, Bell accounts for its rights and obligations under the specific requirements of the V-22 Contracts allocated to Bell under the work breakdown structure.  We account for all of our rights and obligations, including warranty, product and any contingent liabilities, under the specific requirements of the V-22 Contracts allocated to us under the agreement.  Revenues and cost of sales reflect our performance under the V-22 Contracts with revenues recognized using the cost-to-cost method upon the adoption of ASC 606.  We include all assets used in performance of the V-22 Contracts that we own and all liabilities arising from our obligations under the V-22 Contracts in our Consolidated Balance Sheets.

 

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.

 

Revenue Recognition for 2018

With the adoption of ASC 606 at the beginning of 2018, revenue is recognized when control of the goods or services promised under the contract is transferred to the customer either at a point in time (e.g., upon delivery) or over time (e.g., as we perform under the contract).  We account for a contract when it has approval and commitment from both parties, the rights and payment terms of the parties are identified, the contract has commercial substance and collectability of consideration is probable.  Contracts are reviewed to determine whether there is one or multiple performance obligations. A performance obligation is a promise to transfer a distinct good or service to a customer and represents the unit of accounting for revenue recognition. For contracts with multiple performance obligations, the expected consideration, or the transaction price, is allocated to each performance obligation identified in the contract based on the relative standalone selling price of each performance obligation.  Revenue is then recognized for the transaction price allocated to the performance obligation when control of the promised goods or services underlying the performance obligation is transferred. Contract consideration is not adjusted for the effects of a significant financing component when, at contract inception, the period between when control transfers and when the customer will pay for that good or service is one year or less.

 

Commercial Contracts

The majority of our contracts with commercial customers have a single performance obligation as there is only one good or service promised or the promise to transfer the goods or services is not distinct or separately identifiable from other promises in the contract.  Revenue is primarily recognized at a point in time, which is generally when the customer obtains control of the asset upon delivery and customer acceptance.  Contract modifications that provide for additional distinct goods or services at the standalone selling price are treated as separate contracts.

 

For commercial aircraft, we contract with our customers to sell fully outfitted fixed-wing aircraft, which may include configuration options.  The aircraft typically represents a single performance obligation and revenue is recognized upon customer acceptance and delivery. For commercial helicopters, our customers generally contract with us for fully functional basic configuration aircraft and control is transferred upon customer acceptance and delivery.  At times, customers may separately contract with us for the installation of accessories and customization to the basic aircraft. If these contracts are entered into at or near the same time of the basic aircraft contract, we assess whether the contracts meet the criteria to be combined.  For contracts that are combined, the basic aircraft and the accessories and customization are typically considered to be distinct, and therefore, are separate performance obligations.  For these contracts, revenue is recognized on the basic aircraft upon customer acceptance and transfer of title and risk of loss and on the accessories and customization upon delivery and customer acceptance.  We utilize observable prices to determine the standalone selling prices when allocating the transaction price to these performance obligations.

 

The transaction price for our commercial contracts reflects our estimate of returns, rebates and discounts, which are based on historical, current and forecasted information.  Amounts billed to customers for shipping and handling are included in the transaction price and generally are not treated as separate performance obligations as these costs fulfill a promise to transfer the product to the customer.  Taxes collected from customers and remitted to government authorities are recorded on a net basis.

 

We primarily provide standard warranty programs for products in our commercial businesses for periods that typically range from one to five years. These assurance-type programs typically cannot be purchased separately and do not meet the criteria to be considered a performance obligation.

 

U.S. Government Contracts

Our contracts with the U.S. Government generally include the design, development, manufacture or modification of aerospace and defense products as well as related services.  These contracts, which also include those under the U.S. Government-sponsored foreign military sales program, accounted for approximately 24% of total revenues in 2018.  The customer typically contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability, which often results in the delivery of multiple units.  Accordingly, the entire contract is accounted for as one performance obligation.  In certain circumstances, a contract may include both production and support services, such as logistics and parts plans, which are considered to be distinct in the context of the contract and represent separate performance obligations. When a contract is separated into more than one performance obligation, we generally utilize the expected cost plus a margin approach to determine the standalone selling prices when allocating the transaction price.

 

Our contracts are frequently modified for changes in contract specifications and requirements.  Most of our contract modifications with the U.S. Government are for goods and services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as part of that existing contract.  The effect of these contract modifications on our estimates is recognized using the cumulative catch-up method of accounting.

 

Contracts with the U.S. Government generally contain clauses that provide lien rights to work-in-process along with clauses that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work-in-process. Due to the continuous transfer of control to the U.S. Government, we recognize revenue over the time that we perform under the contract.  Selecting the method to measure progress towards completion requires judgment and is based on the nature of the products or service to be provided.  We generally use the cost-to-cost method to measure progress for our contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts.  Under this measure, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and revenue is recorded proportionally as costs are incurred.

 

The transaction price for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding variable consideration as applicable.  Certain of our long-term contracts contain incentive fees or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion.  We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.  Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance, historical performance, and all other information that is reasonably available to us.

 

Total contract cost is estimated utilizing current contract specifications and expected engineering requirements. Contract costs typically are incurred over a period of several years, and the estimation of these costs requires substantial judgment. Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals.  We review and update our projections of costs quarterly or more frequently when circumstances significantly change.

 

Approximately 80% of our 2018 revenues with the U.S. Government were under fixed-price and fixed-price incentive contracts.  Under the typical payment terms of these contracts, the customer pays us either performance-based or progress payments. Performance-based payments represent interim payments of up to 90% of the contract price based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments of up to 80% of costs incurred as the work progresses. Because the customer retains a small portion of the contract price until completion of the contract, these contracts generally result in revenue recognized in excess of billings, which we present as contract assets in the Consolidated Balance Sheets. Amounts billed and due from our customers are classified in Accounts receivable, net. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer. For cost-type contracts, we are generally paid for our actual costs incurred within a short period of time.

 

Revenue Recognition for 2017 and 2016

Prior to the adoption of ASC 606 in 2018, we generally recognized revenue for the sale of products, which were not under long-term contracts, upon delivery.  For commercial aircraft, delivery is upon completion of manufacturing, customer acceptance, and the transfer of the risk and rewards of ownership.  When a sale arrangement involved multiple deliverables, such as sales of products that include customization and other services, we evaluated the arrangement to determine whether there were separate items that were required to be delivered under the arrangement that qualify as separate units of accounting.  These arrangements typically involved the customization services we offer to customers who purchase Bell helicopters, and the services generally are provided within the first six months after the customer accepts the aircraft and assumes risk of loss.  The aircraft and the customization services were considered to be separate units of accounting and we allocated contract price between the two on a relative selling price basis using the best evidence of selling price for each of the deliverables, typically by reference to the price charged when the same or similar items were sold separately by us.  We also considered any performance, cancellation, termination or refund-type provisions.  Revenue was then recognized when the recognition criteria for each unit of accounting was met. Taxes collected from customers and remitted to government authorities are recorded on a net basis.

 

Revenues under long-term contracts were accounted for under the percentage-of-completion method of accounting.  Under this method, we estimated profit as the difference between the total estimated revenues and cost of a contract.  We then recognized that estimated profit over the contract term based on either the units-of-delivery method or the cost-to-cost method (which typically is used for development effort as costs are incurred), as appropriate under the circumstances.  Revenues under fixed-price contracts generally were recorded using the units-of-delivery method.  Revenues under cost-reimbursement contracts were recorded using the cost-to-cost method.  Long-term contract profits were based on estimates of total contract cost and revenues utilizing current contract specifications, expected engineering requirements, the achievement of contract milestones and product deliveries.  Certain contracts are awarded with fixed-price incentive fees that also were considered when estimating revenues and profit rates.  Contract costs typically are incurred over a period of several years, and the estimation of these costs requires substantial judgment.  Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals. We update our projections of costs at least semiannually or when circumstances significantly change.  When adjustments are required, any changes from prior estimates were recognized using the cumulative catch-up method with the impact of the change from inception-to-date recorded in the current period.  Anticipated losses on contracts were recognized in full in the period in which the losses became probable and estimable.

 

Finance Revenues

Finance revenues primarily include interest on finance receivables, capital lease earnings and portfolio gains/losses.  Portfolio gains/losses include impairment charges related to repossessed assets and properties and gains/losses on the sale or early termination of finance assets.  We recognize interest using the interest method, which provides a constant rate of return over the terms of the receivables.  Accrual of interest income is suspended if credit quality indicators suggest full collection of principal and interest is doubtful.  In addition, we automatically suspend the accrual of interest income for accounts that are contractually delinquent by more than three months unless collection is not doubtful. Cash payments on nonaccrual accounts, including finance charges, generally are applied to reduce the net investment balance. Once we conclude that the collection of all principal and interest is no longer doubtful, we resume the accrual of interest and recognize previously suspended interest income at the time either a) the loan becomes contractually current through payment according to the original terms of the loan, or b) if the loan has been modified, following a period of performance under the terms of the modification.

 

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 2018, 2017 and 2016, our cumulative catch-up adjustments increased segment profit by $196 million, $5 million and $83 million, respectively, and net income by $149 million, $3 million and $52 million, respectively ($0.59, $0.01 and $0.19 per diluted share, respectively).  In 2018, we recognized revenue from performance obligations satisfied in prior periods of approximately $190 million, which related to changes in profit booking rates that impacted revenue.

 

For 2018, 2017 and 2016, gross favorable adjustments totaled $249 million, $92 million and $106 million, respectively.  The 2018 favorable adjustments included $145 million, largely related to overhead rate improvements and risk retirements associated with contracts in the Bell segment.  In 2018, 2017 and 2016, gross unfavorable adjustments totaled $53 million, $87 million and $23 million, respectively.  The 2017 unfavorable adjustments included $44 million related to the Tactical Armoured Patrol Vehicle program related to inefficiencies resulting from various production issues during the ramp up and subsequent production.

 

Contract Assets and Liabilities

Under ASC 606, contract assets arise from contracts when revenue is recognized over time and the amount of revenue recognized exceeds the amount billed to the customer. These amounts are included in contract assets until the right to payment is no longer conditional on events other than the passage of time. At December 29, 2018, contract assets are included in Other current assets in the Consolidated Balance Sheet. Contract liabilities, which are primarily included in Other current liabilities, include deposits, largely from our commercial aviation customers, and billings in excess of revenue recognized.

 

The incremental costs of obtaining a contract with a customer that is expected to be recovered is expensed as incurred when the period to be benefitted is one year or less.

 

Accounts Receivable, Net

Accounts receivable, net includes amounts billed to customers where the right to payment is unconditional.  We maintain an allowance for doubtful accounts to provide for the estimated amount of accounts receivable that will not be collected, which is based on an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivable and collateral value, if any.

 

Cash and Equivalents

Cash and equivalents consist of cash and short-term, highly liquid investments with original maturities of three months or less.

 

Inventories

Inventories are stated at the lower of cost or estimated net realizable value.  We value our inventories generally using the first-in, first-out (FIFO) method or the last-in, first-out (LIFO) method for certain qualifying inventories where LIFO provides a better matching of costs and revenues. We determine costs for our commercial helicopters on an average cost basis by model considering the expended and estimated costs for the current production release.

 

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and are depreciated primarily using the straight-line method.  We capitalize expenditures for improvements that increase asset values and extend useful lives.  Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  If the carrying value of the asset exceeds the sum of the undiscounted expected future cash flows, the asset is written down to fair value.

 

Goodwill and Intangible Assets

Goodwill represents the excess of the consideration paid for the acquisition of a business over the fair values assigned to intangible and other net assets of the acquired business.  Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to an annual impairment test. We evaluate the recoverability of these assets in the fourth quarter of each year or more frequently if events or changes in circumstances, such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate a potential impairment.

 

For our impairment test, we calculate the fair value of each reporting unit and indefinite-lived intangible asset primarily using discounted cash flows.  A reporting unit represents the operating segment unless discrete financial information is prepared and reviewed by segment management for businesses one level below that operating segment, in which case such component is the reporting unit.  In certain instances, we have aggregated components of an operating segment into a single reporting unit based on similar economic characteristics.  For the goodwill impairment test, the discounted cash flows incorporate assumptions for revenue growth, operating margins and discount rates that represent our best estimates of current and forecasted market conditions, cost structure, anticipated net cost reductions, and the implied rate of return that we believe a market participant would require for an investment in a business having similar risks and characteristics to the reporting unit being assessed.  If the estimated fair value of the reporting unit or indefinite-lived intangible asset exceeds the carrying value, there is no impairment. Otherwise, an impairment loss is recognized for the amount by which the carrying value exceeds the estimated fair value.

 

Acquired intangible assets with finite lives are subject to amortization. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  Amortization of these intangible assets is recognized over their estimated useful lives using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized.  Approximately 84% of our gross intangible assets are amortized based on the cash flow streams used to value the assets, with the remaining assets amortized using the straight-line method.

 

Finance Receivables

Finance receivables primarily include loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters. Finance receivables are generally recorded at the amount of outstanding principal less allowance for losses.

 

We maintain an allowance for losses on finance receivables at a level considered adequate to cover inherent losses in the portfolio based on management’s evaluation.  For 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 and existence and financial strength of guarantors.

 

We also establish an allowance for losses to cover probable but specifically unknown losses existing in the portfolio.  This allowance is established as a percentage of non-recourse finance receivables, which have not been identified as requiring specific reserves. The percentage is based on a combination of factors, including historical loss experience, current delinquency and default trends, collateral values and both general economic and specific industry trends.

 

Finance receivables are charged off at the earlier of the date the collateral is repossessed or when no payment has been received for six months, unless management deems the receivable collectible.  Repossessed assets are recorded at their fair value, less estimated cost to sell.

 

Pension and Postretirement Benefit Obligations

We maintain various pension and postretirement plans for our employees globally.  These plans include significant pension and postretirement benefit obligations, which are calculated based on actuarial valuations.  Key assumptions used in determining these obligations and related expenses include expected long-term rates of return on plan assets, discount rates and healthcare cost projections.  We evaluate and update these assumptions annually in consultation with third-party actuaries and investment advisors.  We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increases.

 

For our year-end measurement, our defined benefit plan assets and obligations are measured as of the month-end date closest to our fiscal year-end.  We recognize the overfunded or underfunded status of our pension and postretirement plans in the Consolidated Balance Sheets and recognize changes in the funded status of our defined benefit plans in comprehensive income in the year in which they occur. Actuarial gains and losses that are not immediately recognized as net periodic pension cost are recognized as a component of other comprehensive income (loss) (OCI) and are amortized into net periodic pension cost in future periods.

 

Derivatives and Hedging Activities

We are exposed to market risk primarily from changes in currency exchange rates and interest rates.  We do not hold or issue derivative financial instruments for trading or speculative purposes.  To manage the volatility relating to our exposures, we net these exposures on a consolidated basis to take advantage of natural offsets.  For the residual portion, we enter into various derivative transactions pursuant to our policies in areas such as counterparty exposure and hedging practices.  Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties and through periodic settlements of positions.

 

All derivative instruments are reported at fair value in the Consolidated Balance Sheets.  Designation to support hedge accounting is performed on a specific exposure basis.  For financial instruments qualifying as cash flow hedges, we record changes in the fair value of derivatives (to the extent they are effective as hedges) in OCI, net of deferred taxes.  Changes in fair value of derivatives not qualifying as hedges are recorded in earnings.

 

Foreign currency denominated assets and liabilities are translated into U.S. dollars.  Adjustments from currency rate changes are recorded in the cumulative translation adjustment account in shareholders’ equity until the related foreign entity is sold or substantially liquidated. We use foreign currency financing transactions to effectively hedge long-term investments in foreign operations with the same corresponding currency.  Foreign currency gains and losses on the hedge of the long-term investments are recorded in the cumulative translation adjustment account.

 

Product Liabilities

We accrue for product liability claims and related defense costs when a loss is probable and reasonably estimable.  Our estimates are generally based on the specifics of each claim or incident and our best estimate of the probable loss using historical experience.

 

Environmental Liabilities and Asset Retirement Obligations

Liabilities for environmental matters are recorded on a site-by-site basis when it is probable that an obligation has been incurred and the cost can be reasonably estimated.  We estimate our accrued environmental liabilities using currently available facts, existing technology, and presently enacted laws and regulations, all of which are subject to a number of factors and uncertainties.  Our environmental liabilities are not discounted and do not take into consideration possible future insurance proceeds or significant amounts from claims against other third parties.

 

We have incurred asset retirement obligations primarily related to costs to remove and dispose of underground storage tanks and asbestos materials used in insulation, adhesive fillers and floor tiles.  There is no legal requirement to remove these items, and there currently is no plan to remodel the related facilities or otherwise cause the impacted items to require disposal.  Since these asset retirement obligations are not estimable, there is no related liability recorded in the Consolidated Balance Sheets.

 

Warranty Liabilities

For our assurance-type warranty programs, we estimate the costs that may be incurred and record a liability in the amount of such costs at the time product revenues are recognized.  Factors that affect this liability include the number of products sold, historical costs per claim, length of warranty period, contractual recoveries from vendors and historical and anticipated rates of warranty claims, including production and warranty patterns for new models.  We assess the adequacy of our recorded warranty liability periodically and adjust the amounts as necessary.  Additionally, we may establish a warranty liability related to the issuance of aircraft service bulletins for aircraft no longer covered under the limited warranty programs.

 

Research and Development Costs

Our customer-funded research and development costs are charged directly to the related contracts, which primarily consist of U.S. Government contracts. In accordance with government regulations, we recover a portion of company-funded research and development costs through overhead rate charges on our U.S. Government contracts.  Research and development costs that are not reimbursable under a contract with the U.S. Government or another customer are charged to expense as incurred.  Company-funded research and development costs were $643 million, $634 million and $677 million in 2018, 2017 and 2016, respectively, and are included in cost of sales.

 

Income Taxes

The provision for income tax expense is calculated on reported Income from continuing operations before income taxes based on current tax law and includes, in the current period, the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Tax laws may require items to be included in the determination of taxable income at different times from when the items are reflected in the financial statements. Deferred tax balances reflect the effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and their tax bases, as well as from net operating losses and tax credit carryforwards, and are stated at enacted tax rates in effect for the year taxes are expected to be paid or recovered.

 

Deferred tax assets represent tax benefits for tax deductions or credits available in future years and require certain estimates and assumptions to determine whether it is more likely than not that all or a portion of the benefit will not be realized.  The recoverability of these future tax deductions and credits is determined by assessing the adequacy of future expected taxable income from all sources, including the future reversal of existing taxable temporary differences, taxable income in carryback years, estimated future taxable income and available tax planning strategies. Should a change in facts or circumstances lead to a change in judgment about the ultimate recoverability of a deferred tax asset, we record or adjust the related valuation allowance in the period that the change in facts and circumstances occurs, along with a corresponding increase or decrease in income tax expense.

 

We record tax benefits for uncertain tax positions based upon management’s evaluation of the information available at the reporting date.  To be recognized in the financial statements, the tax position must meet the more-likely-than-not threshold that the position will be sustained upon examination by the tax authority based on technical merits assuming the tax authority has full knowledge of all relevant information.  For positions meeting this recognition threshold, the benefit is measured as the largest amount of benefit that meets the more-likely-than-not threshold to be sustained. We periodically evaluate these tax positions based on the latest available information.  For tax positions that do not meet the threshold requirement, we recognize net tax-related interest and penalties for continuing operations in income tax expense.

 

New Accounting Standards Not Yet Adopted

 

Lease Accounting

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases, requiring lessees to recognize all leases with a term greater than 12 months on the balance sheet as right-of-use assets and lease liabilities.  Under current accounting guidance, we are not required to recognize assets and liabilities arising from operating leases on the balance sheet. In 2018, the FASB issued additional guidance to provide an alternate transition method for adoption.  Under this method, entities may record the balance sheet amounts and the cumulative effect of adopting the standard to retained earnings as of the effective date without adjustment to comparative periods. This new standard becomes effective for us at the beginning of 2019 and will be adopted using this alternate transition method.

 

At the adoption date, approximately $300 million of right-of-use assets and lease liabilities will be recognized related to our operating leases.  The cumulative transition adjustment to retained earnings resulting from the adoption is not significant. We plan to elect the practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward the historical lease classification and allows hindsight when evaluating options within a contract, resulting in the extension of the lease term for certain of our existing leases at the adoption date. We have updated the accounting policies affected by this standard, redesigned our related internal controls over financial reporting and are expanding the disclosures to be included in our first quarter 2019 Form 10-Q to meet the new requirements.  The standard has no impact on our liquidity or our debt-covenant compliance under our current agreements, and is not expected to have any significant impact on our results of operations.

 

Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses. For most financial assets, such as trade and other receivables, loans and other instruments, this standard changes the current incurred loss model to a forward-looking expected credit loss model, which generally will result in the earlier recognition of allowances for losses.  The new standard is effective for our company at the beginning of 2020.  Entities are required to apply the provisions of the standard through a cumulative-effect adjustment to retained earnings as of the effective date.  We are currently evaluating the impact of the standard on our consolidated financial statements.

 

v3.10.0.1
Business Disposition and Acquisitions
12 Months Ended
Dec. 29, 2018
Business Disposition and Acquisitions  
Business Disposition and Acquisitions

 

Note 2.  Business Disposition and Acquisitions

 

Disposition

On July 2, 2018, we completed the sale of the businesses that manufacture and sell the products in our Tools and Test Equipment product line within our Industrial segment to Emerson Electric Co. for net cash proceeds of $807 million.  We recorded an after-tax gain of $419 million related to this disposition. The carrying amounts by major classes of assets and liabilities for this disposition are as follows:

 

(In millions)

 

 

 

 

 

 

 

July 2,
2018

Assets

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

 

 

 

 

$

71

Inventories

 

 

 

 

 

 

 

100

Property, plant and equipment, net

 

 

 

 

 

 

 

59

Goodwill

 

 

 

 

 

 

 

153

Other assets

 

 

 

 

 

 

 

24

 

 

 

 

 

 

 

 

 

Total Assets

 

 

 

 

 

 

$

407

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

 

 

 

 

 

$

30

Other current liabilities

 

 

 

 

 

 

 

25

Other liabilities

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

 

 

 

 

$

66

 

 

 

 

 

 

 

 

 

 

Acquisitions

On March 6, 2017, we completed the acquisition of Arctic Cat Inc. (Arctic Cat), a publicly-held company (NASDAQ: ACAT), pursuant to a cash tender offer for $18.50 per share, followed by a short-form merger.  The cash paid for this business, including repayment of debt and net of cash acquired, totaled $316 million.  Arctic Cat was incorporated into our Textron Specialized Vehicles business in the Industrial segment and its operating results are included in the Consolidated Statements of Operations since the closing date. We allocated the consideration paid for this business to the assets acquired and liabilities assumed based on their fair values, and recorded $230 million in goodwill, related to expected synergies and the value of the assembled workforce, and $75 million in intangible assets.

 

In 2016, we paid $186 million in cash and assumed debt of $19 million to acquire six businesses, net of cash acquired and holdbacks.  Our acquisition of Able Engineering and Component Services, Inc. and Able Aerospace, Inc. in the first quarter of 2016 represented the largest of these businesses and is included in the Textron Aviation segment.

 

v3.10.0.1
Goodwill and Intangible Assets
12 Months Ended
Dec. 29, 2018
Goodwill and Intangible Assets  
Goodwill and Intangible Assets

 

Note 3.  Goodwill and Intangible Assets

 

Goodwill

The changes in the carrying amount of goodwill by segment are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Textron
Aviation

 

Bell

 

Textron
Systems

 

Industrial

 

Total

Balance at December 31, 2016

$

613

$

31

$

1,087

$

382

$

2,113

Acquisitions

 

 

 

 

234

 

234

Foreign currency translation

 

1

 

 

 

16

 

17

 

 

 

 

 

 

 

 

 

 

 

Balance at December 30, 2017

 

614

 

31

 

1,087

 

632

 

2,364

Disposition

 

 

 

 

(153)

 

(153)

Acquisition

 

 

 

13

 

 

13

Foreign currency translation

 

 

 

 

(6)

 

(6)

 

 

 

 

 

 

 

 

 

 

 

Balance at December 29, 2018

$

614

$

31

$

1,100

$

473

$

2,218

 

 

 

 

 

 

 

 

 

 

 

 

Intangible Assets

Our intangible assets are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 29, 2018

December 30, 2017

(Dollars in millions)

 

Weighted-Average
Amortization
Period (in years)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents and technology

 

14

$

514

$

(211)

$

303

$

545

$

(188)

$

357

Trade names and trademarks

 

14

 

224

 

(7)

 

217

 

284

 

(40)

 

244

Customer relationships and contractual agreements

 

15

 

413

 

(275)

 

138

 

418

 

(255)

 

163

Other

 

  4

 

6

 

(6)

 

 

18

 

(17)

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

1,157

$

(499)

$

658

$

1,265

$

(500)

$

765

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In connection with the 2018 restructuring plan discussed in Note 15, we recognized intangible asset impairment charges of $38 million in the fourth quarter of 2018, which primarily included $20 million of patents and technology and $14 million of trade names and trademarks.

 

Trade names and trademarks in the table above include $208 million and $222 million of indefinite-lived intangible assets at December 29, 2018 and December 30, 2017, respectively.  Amortization expense totaled $66 million, $69 million and $66 million in 2018, 2017 and 2016, respectively. Amortization expense is estimated to be approximately $60 million, $56 million, $54 million, $54 million and $38 million in 2019, 2020, 2021, 2022 and 2023, respectively.

 

v3.10.0.1
Accounts Receivable and Finance Receivables
12 Months Ended
Dec. 29, 2018
Accounts Receivable and Finance Receivables  
Accounts Receivable and Finance Receivables

 

Note 4. Accounts Receivable and Finance Receivables

 

Accounts Receivable

Accounts receivable is composed of the following:

 

(In millions)

 

 

 

 

 

December 29,
2018

 

December 30,
2017

Commercial

 

 

 

 

$

885

$

1,007

U.S. Government contracts

 

 

 

 

 

166

 

383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,051

 

1,390

Allowance for doubtful accounts

 

 

 

 

 

(27)

 

(27)

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

1,024

$

1,363

 

 

 

 

 

 

 

 

 

 

Upon adoption of ASC 606, unbilled receivables, primarily related to U.S. Government contracts, totaling $203 million were reclassified from accounts receivable to contract assets or contract liabilities based on the net position of the contract as discussed in Note 12. In addition, $71 million of accounts receivable, net were sold in the third quarter of 2018 as a result of a business disposition as disclosed in Note 2.

 

Finance Receivables

Finance receivables are presented in the following table:

 

(In millions)

 

 

 

 

 

December 29,
2018

 

December 30,
2017

Finance receivables

 

 

 

 

$

789

$

850

Allowance for losses

 

 

 

 

 

(29)

 

(31)

 

 

 

 

 

 

 

 

 

Total finance receivables, net

 

 

 

 

$

760

$

819

 

 

 

 

 

 

 

 

 

 

Finance receivables primarily includes loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters.  These loans typically have initial terms ranging from five to twelve years, amortization terms ranging from eight to fifteen years and an average balance of $1 million at December 29, 2018.  Loans generally require the customer to pay a significant down payment, along with periodic scheduled principal payments that reduce the outstanding balance through the term of the loan.

 

Our finance receivables are diversified across geographic region and borrower industry.  At December 29, 2018, 59% of our finance receivables were distributed internationally and 41% throughout the U.S., compared with 56% and 44%, respectively, at December 30, 2017.  At December 29, 2018 and December 30, 2017, finance receivables of $201 million and $257 million, respectively, have been pledged as collateral for TFC’s debt of $119 million and $175 million, respectively.

 

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 delinquency aging category are summarized as follows:

 

(Dollars in millions)

 

 

 

 

 

December 29,
2018

 

December 30,
2017

Performing

 

 

 

 

$

704

$

733

Watchlist

 

 

 

 

 

45

 

56

Nonaccrual

 

 

 

 

 

40

 

61

 

 

 

 

 

 

 

 

 

Nonaccrual as a percentage of finance receivables

 

 

 

 

 

5.07%

 

7.18%

 

 

 

 

 

 

 

 

 

Less than 31 days past due

 

 

 

 

$

719

$

791

31-60 days past due

 

 

 

 

 

56

 

25

61-90 days past due

 

 

 

 

 

5

 

14

Over 90 days past due

 

 

 

 

 

9

 

20

 

 

 

 

 

 

 

 

 

60+ days contractual delinquency as a percentage of finance receivables

 

 

 

 

 

1.77%

 

4.00%

 

 

 

 

 

 

 

 

 

 

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 impaired finance receivables, excluding leveraged leases, and the average recorded investment is provided below:

 

(In millions)

 

 

 

 

 

December 29,
2018

 

December 30,
2017

Recorded investment:

 

 

 

 

 

 

 

 

Impaired loans with related allowance for losses

 

 

 

 

$

15

$

24

Impaired loans with no related allowance for losses

 

 

 

 

 

43

 

70

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

58

$

94

 

 

 

 

 

 

 

 

 

Unpaid principal balance

 

 

 

 

$

67

$

106

Allowance for losses on impaired loans

 

 

 

 

 

5

 

6

Average recorded investment

 

 

 

 

 

61

 

92

 

 

 

 

 

 

 

 

 

 

A summary of the allowance for losses on finance receivables based on how the underlying finance receivables are evaluated for impairment, is provided below.  The finance receivables reported in this table specifically exclude $101 million and $98 million of leveraged leases at December 29, 2018 and December 30, 2017, respectively, in accordance with U.S. generally accepted accounting principles.

 

(In millions)

 

 

 

 

 

December 29,
2018

 

December 30,
2017

Allowance based on collective evaluation

 

 

 

 

$

24

$

25

Allowance based on individual evaluation

 

 

 

 

 

5

 

6

Finance receivables evaluated collectively

 

 

 

 

 

630

 

658

Finance receivables evaluated individually

 

 

 

 

 

58

 

94

 

 

 

 

 

 

 

 

 

 

v3.10.0.1
Inventories
12 Months Ended
Dec. 29, 2018
Inventories  
Inventories

 

Note 5. Inventories

 

Inventories are composed of the following:

 

(In millions)

 

 

 

 

 

December 29,
2018

 

December 30,
2017

Finished goods

 

 

 

 

$

1,662

$

1,790

Work in process

 

 

 

 

 

1,356

 

2,238

Raw materials and components

 

 

 

 

 

800

 

804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,818

 

4,832

Progress payments

 

 

 

 

 

 

(682)

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

3,818

$

4,150

 

 

 

 

 

 

 

 

 

 

Upon adoption of ASC 606, $199 million of inventories, net of progress payments, primarily related to our U.S. Government contracts, were reclassified from inventories to contract assets or contract liabilities based on the net position of the contract as discussed in Note 12. In addition, $100 million of inventories were sold in the third quarter of 2018 as a result of a business disposition as disclosed in Note 2.

 

Inventories valued by the LIFO method totaled $2.2 billion at both December 29, 2018 and December 30, 2017, respectively, and the carrying values of these inventories would have been higher by approximately $457 million and $452 million, respectively, had our LIFO inventories been valued at current costs.

 

v3.10.0.1
Property, Plant and Equipment, Net
12 Months Ended
Dec. 29, 2018
Property, Plant and Equipment, Net  
Property, Plant and Equipment, Net

 

Note 6. Property, Plant and Equipment, Net

 

Our Manufacturing group’s property, plant and equipment, net is composed of the following:

 

(Dollars in millions)

 

 

 

Useful Lives
(in years)

 

December 29,
2018

 

December 30,
2017

Land, buildings and improvements

 

 

 

3 – 40

$

1,927

$

1,948

Machinery and equipment

 

 

 

1 – 20

 

4,891

 

4,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,818

 

6,841

Accumulated depreciation and amortization

 

 

 

 

 

(4,203)

 

(4,120)

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

2,615

$

2,721

 

 

 

 

 

 

 

 

 

 

At December 29, 2018 and December 30, 2017, assets under capital leases totaled $168 million and $176 million, respectively, and had accumulated amortization of $47 million and $46 million, respectively. The Manufacturing group’s depreciation expense, which included amortization expense on capital leases, totaled $358 million, $362 million and $368 million in 2018, 2017 and 2016, respectively.

 

v3.10.0.1
Other Current Liabilities
12 Months Ended
Dec. 29, 2018
Other Current Liabilities  
Other Current Liabilities

 

Note 7. Other Current Liabilities

 

The other current liabilities of our Manufacturing group are summarized below:

 

(In millions)

 

 

 

 

 

December 29,
2018

 

December 30,
2017

Contract liabilities

 

 

 

 

$

876

$

Customer deposits

 

 

 

 

 

 

1,007

Salaries, wages and employer taxes

 

 

 

 

 

381

 

329

Current portion of warranty and product maintenance liabilities

 

 

 

 

 

177

 

190

Other

 

 

 

 

 

715

 

915

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

2,149

$

2,441

 

 

 

 

 

 

 

 

 

 

Upon adoption of ASC 606, we reclassified customer deposits and certain other current liabilities totaling $1,166 million to contract liabilities or contract assets based on the net position of the contract as discussed in Note 12.

 

Changes in our warranty liability are as follows:

 

(In millions)

 

 

 

2018

 

2017

 

2016

Balance at beginning of year

 

 

$

164

$

138

$

143

Provision

 

 

 

72

 

81

 

79

Settlements

 

 

 

(78)

 

(69)

 

(70)

Acquisitions

 

 

 

1

 

35

 

2

Adjustments*

 

 

 

(10)

 

(21)

 

(16)

 

 

 

 

 

 

 

 

 

Balance at end of year

 

 

$

149

$

164

$

138

 

 

 

 

 

 

 

 

 

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

 

v3.10.0.1
Debt and Credit Facilities
12 Months Ended
Dec. 29, 2018
Debt and Credit Facilities  
Debt and Credit Facilities

 

Note 8. Debt and Credit Facilities

 

Our debt is summarized in the table below:

 

(In millions)

 

 

 

 

 

December 29,
2018

 

December 30,
2017

Manufacturing group

 

 

 

 

 

 

 

 

7.25% due 2019

 

 

 

 

$

250

$

250

6.625% due 2020

 

 

 

 

 

190

 

201

Variable-rate notes due 2020 (3.17% and 1.96%, respectively)

 

 

 

 

 

350

 

350

3.65% due 2021

 

 

 

 

 

250

 

250

5.95% due 2021

 

 

 

 

 

250

 

250

4.30% due 2024

 

 

 

 

 

350

 

350

3.875% due 2025

 

 

 

 

 

350

 

350

4.00% due 2026

 

 

 

 

 

350

 

350

3.65% due 2027

 

 

 

 

 

350

 

350

3.375% due 2028

 

 

 

 

 

300

 

300

Other (weighted-average rate of 2.63% and 3.04%, respectively)

 

 

 

 

 

76

 

87

 

 

 

 

 

 

 

 

 

Total Manufacturing group debt

 

 

 

 

$

3,066

$

3,088

Less: Short-term debt and current portion of long-term debt

 

 

 

 

 

(258)

 

(14)

 

 

 

 

 

 

 

 

 

Total Long-term debt

 

 

 

 

$

2,808

$

3,074

 

 

 

 

 

 

 

 

 

Finance group

 

 

 

 

 

 

 

 

2.26% note due 2019

 

 

 

 

$

150

$

150

Variable-rate note due 2020 (3.57% and 2.38%, respectively)

 

 

 

 

 

150

 

200

Fixed-rate notes due 2018-2028 (weighted-average rate of 3.17% and 3.15%, respectively) (a) (b)

 

 

 

 

 

84

 

131

Variable-rate notes due 2018-2027 (weighted-average rate of 3.99% and 2.99%, respectively) (a) (b)

 

 

 

 

 

35

 

44

Fixed-to-Floating Rate Junior Subordinated Notes (4.35% and 3.15%, respectively)

 

 

 

 

 

299

 

299

 

 

 

 

 

 

 

 

 

Total Finance group debt

 

 

 

 

$

718

$

824

 

 

 

 

 

 

 

 

 

(a)

Notes amortize on a quarterly or semi-annual basis.

(b)

Notes are secured by finance receivables as described in Note 4.

 

The following table shows required payments during the next five years on debt outstanding at December 29, 2018:

 

(In millions)

 

2019

 

2020

 

2021

 

2022

 

2023

Manufacturing group

$

258

$

552

$

507

$

7

$

7

Finance group

 

167

 

172

 

18

 

18

 

19

 

 

 

 

 

 

 

 

 

 

 

Total

$

425

$

724

$

525

$

25

$

26

 

 

 

 

 

 

 

 

 

 

 

 

Textron has a senior unsecured revolving credit facility that expires in September 2021 for an aggregate principal amount of $1.0 billion, of which up to $100 million is available for the issuance of letters of credit.  At December 29, 2018, there were no amounts borrowed against the facility and there were $10 million of letters of credit issued against it.

 

Fixed-to-Floating Rate Junior Subordinated Notes

The Finance group’s $299 million of Fixed-to-Floating Rate Junior Subordinated Notes are unsecured and rank junior to all of its existing and future senior debt.  The notes mature on February 15, 2067; however, we have the right to redeem the notes at par at any time and we are obligated to redeem the notes beginning on February 15, 2042.  Interest on the notes was fixed at 6% through February 15, 2017 and is now variable at the three-month London Interbank Offered Rate + 1.735%.

 

Support Agreement

Under a Support Agreement, as amended in December 2015, Textron Inc. is required to ensure that TFC maintains fixed charge coverage of no less than 125% and consolidated shareholder’s equity of no less than $125 million.  There were no cash contributions required to be paid to TFC in 2018, 2017 and 2016 to maintain compliance with the support agreement.

 

v3.10.0.1
Derivative Instruments and Fair Value Measurements
12 Months Ended
Dec. 29, 2018
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 December 29, 2018 and December 30, 2017, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $379 million and $426 million, respectively.  At December 29, 2018, the fair value amounts of our foreign currency exchange contracts were a $2 million asset and a $10 million liability. At December 30, 2017, the fair value amounts of our foreign currency exchange contracts were a $13 million asset and a $7 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:

 

 

 

December 29, 2018

 

December 30, 2017

(In millions)

 

Carrying
Value

 

Estimated
Fair Value

 

Carrying
Value

 

Estimated
Fair Value

Manufacturing group

 

 

 

 

 

 

 

 

Debt, excluding leases

$

(2,996)

$

(2,971)

$

(3,007)

$

(3,136)

Finance group

 

 

 

 

 

 

 

 

Finance receivables, excluding leases

 

582

 

584

 

643

 

675

Debt

 

(718)

 

(640)

 

(824)

 

(799)

 

 

 

 

 

 

 

 

 

 

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.

 

v3.10.0.1
Shareholders' Equity
12 Months Ended
Dec. 29, 2018
Shareholders' Equity  
Shareholders' Equity

 

Note 10. Shareholders’ Equity

 

Capital Stock

We have authorization for 15 million shares of preferred stock with a par value of $0.01 and 500 million shares of common stock with a par value of $0.125.  Outstanding common stock activity is presented below:

 

(In thousands)

 

 

 

2018

 

2017

 

2016

Balance at beginning of year

 

 

 

261,471

 

270,287

 

274,228

Share repurchases

 

 

 

(29,094)

 

(11,917)

 

(6,898)

Share-based compensation activity

 

 

 

3,244

 

3,101

 

2,957

 

 

 

 

 

 

 

 

 

Balance at end of year

 

 

 

235,621

 

261,471

 

270,287

 

 

 

 

 

 

 

 

 

 

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:

 

(In thousands)

 

 

 

2018

 

2017

 

2016

Basic weighted-average shares outstanding

 

 

 

250,196

 

266,380

 

270,774

Dilutive effect of stock options

 

 

 

3,041

 

2,370

 

1,591

 

 

 

 

 

 

 

 

 

Diluted weighted-average shares outstanding

 

 

 

253,237

 

268,750

 

272,365

 

 

 

 

 

 

 

 

 

 

In 2018, 2017 and 2016, stock options to purchase 1.3 million, 1.6 million and 2.0 million shares, respectively, of common stock are excluded from the calculation of diluted weighted-average shares outstanding as their effect would have been anti-dilutive.