TEXTRON INC, 10-Q filed on 4/24/2019
Quarterly Report
v3.19.1
Document and Entity Information - shares
3 Months Ended
Mar. 30, 2019
Apr. 12, 2019
Document and Entity Information    
Entity Registrant Name TEXTRON INC  
Entity Central Index Key 0000217346  
Document Type 10-Q  
Document Period End Date Mar. 30, 2019  
Amendment Flag false  
Current Fiscal Year End Date --01-04  
Entity Current Reporting Status Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Common Stock, Shares Outstanding   232,762,261
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
v3.19.1
Consolidated Statements of Operations - USD ($)
$ in Millions
3 Months Ended
Mar. 30, 2019
Mar. 31, 2018
Revenues    
Total revenues $ 3,109 $ 3,296
Costs, expenses and other    
Cost of sales 2,577 2,729
Selling and administrative expense 307 327
Interest expense 42 41
Non-service components of pension and post-retirement income, net (29) (19)
Total costs, expenses and other 2,897 3,078
Income before income taxes 212 218
Income tax expense 33 29
Net income $ 179 $ 189
Earnings per share    
Basic (in dollars per share) $ 0.76 $ 0.73
Diluted (in dollars per share) $ 0.76 $ 0.72
Manufacturing    
Revenues    
Total revenues $ 3,092 $ 3,280
Finance.    
Revenues    
Finance Revenue $ 17 $ 16
v3.19.1
Consolidated Statements of Comprehensive Income - USD ($)
$ in Millions
3 Months Ended
Mar. 30, 2019
Mar. 31, 2018
Consolidated Statements of Comprehensive Income    
Net income $ 179 $ 189
Other comprehensive income (loss), net of tax:    
Pension and postretirement benefits adjustments, net of reclassifications 21 31
Foreign currency translation adjustments 3 42
Deferred gains on hedge contracts, net of reclassifications 2 1
Other comprehensive income 26 74
Comprehensive income $ 205 $ 263
v3.19.1
Consolidated Balance Sheets - USD ($)
shares in Thousands, $ in Millions
Mar. 30, 2019
Dec. 29, 2018
Assets    
Inventories $ 4,047 $ 3,818
Finance receivables, net 756 760
Total assets 14,480 14,264
Liabilities    
Total liabilities 9,247 9,072
Shareholders' equity    
Common stock 30 30
Capital surplus 1,689 1,646
Treasury stock (331) (129)
Retained earnings 5,581 5,407
Accumulated other comprehensive loss (1,736) (1,762)
Total shareholders' equity 5,233 5,192
Total liabilities and shareholders' equity $ 14,480 $ 14,264
Common shares outstanding 232,699 235,621
Manufacturing group    
Assets    
Cash and equivalents $ 646 $ 987
Accounts receivable, net 1,059 1,024
Inventories 4,047 3,818
Other current assets 835 785
Total current assets 6,587 6,614
Property, plant and equipment, less accumulated depreciation and amortization of $4,256 and $4,203, respectively 2,523 2,615
Goodwill 2,141 2,218
Other assets 2,267 1,800
Total assets 13,518 13,247
Liabilities    
Short-term debt and current portion of long-term debt 363 258
Accounts payable 1,147 1,099
Other current liabilities 1,922 2,149
Total current liabilities 3,432 3,506
Other liabilities 2,186 1,932
Long-term debt 2,812 2,808
Total liabilities 8,430 8,246
Finance group    
Assets    
Cash and equivalents 96 120
Finance receivables, net 756 760
Other assets 110 137
Total assets 962 1,017
Liabilities    
Other liabilities 106 108
Debt 711 718
Total liabilities $ 817 $ 826
v3.19.1
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Millions
Mar. 30, 2019
Dec. 29, 2018
Consolidated Balance Sheets    
Accumulated depreciation and amortization $ 4,256 $ 4,203
v3.19.1
Consolidated Statements of Cash Flows - USD ($)
$ in Millions
3 Months Ended
Mar. 30, 2019
Mar. 31, 2018
Cash flows from operating activities    
Net income $ 179 $ 189
Non-cash items:    
Depreciation and amortization 102 105
Deferred income taxes 15 2
Other, net 33 32
Changes in assets and liabilities:    
Accounts receivable, net (33) 63
Inventories (215) (128)
Other assets (31) (119)
Accounts payable 47 15
Other liabilities (288) (263)
Income taxes, net (7) 9
Pension, net (14) (2)
Captive finance receivables, net (1) 15
Other operating activities, net (3) (3)
Net cash provided by (used in) operating activities (216) (85)
Cash flows from investing activities    
Capital expenditures (59) (77)
Net proceeds from corporate-owned life insurance policies 2 58
Finance receivables repaid 12 16
Other investing activities, net 3 9
Net cash provided by (used in) investing activities (42) 6
Cash flows from financing activities    
Increase in short-term debt 100 2
Principal payments on long-term debt and nonrecourse debt (19) (19)
Purchases of Textron common stock (202) (344)
Dividends paid (5) (5)
Other financing activities, net 10 8
Net cash used in financing activities (116) (358)
Effect of exchange rate changes on cash and equivalents 9 11
Net decrease in cash and equivalents (365) (426)
Cash and equivalents at beginning of period 1,107 1,262
Cash and equivalents at end of period 742 836
Manufacturing group    
Cash flows from operating activities    
Net income 175 179
Non-cash items:    
Depreciation and amortization 100 103
Deferred income taxes 15 2
Other, net 33 32
Changes in assets and liabilities:    
Accounts receivable, net (33) 63
Inventories (241) (128)
Other assets (30) (118)
Accounts payable 47 15
Other liabilities (286) (259)
Income taxes, net (9) 13
Pension, net (14) (2)
Dividends received from Finance group 50 50
Other operating activities, net (3) (3)
Net cash provided by (used in) operating activities (196) (53)
Cash flows from investing activities    
Capital expenditures (59) (77)
Net proceeds from corporate-owned life insurance policies 2 58
Other investing activities, net 1 9
Net cash provided by (used in) investing activities (56) (10)
Cash flows from financing activities    
Increase in short-term debt 100 2
Purchases of Textron common stock (202) (344)
Dividends paid (5) (5)
Other financing activities, net 9 8
Net cash used in financing activities (98) (339)
Effect of exchange rate changes on cash and equivalents 9 11
Net decrease in cash and equivalents (341) (391)
Cash and equivalents at beginning of period 987 1,079
Cash and equivalents at end of period 646 688
Finance group    
Cash flows from operating activities    
Net income 4 10
Non-cash items:    
Depreciation and amortization 2 2
Changes in assets and liabilities:    
Other assets (1) (1)
Other liabilities (2) (4)
Income taxes, net 2 (4)
Net cash provided by (used in) operating activities 5 3
Cash flows from investing activities    
Finance receivables repaid 40 65
Finance receivables originated (29) (34)
Other investing activities, net 28  
Net cash provided by (used in) investing activities 39 31
Cash flows from financing activities    
Principal payments on long-term debt and nonrecourse debt (18) (19)
Dividends paid (50) (50)
Net cash used in financing activities (68) (69)
Net decrease in cash and equivalents (24) (35)
Cash and equivalents at beginning of period 120 183
Cash and equivalents at end of period $ 96 $ 148
v3.19.1
Basis of Presentation
3 Months Ended
Mar. 30, 2019
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 December 29, 2018.  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 2019 and 2018, our cumulative catch-up adjustments increased revenue and segment profit by $31 million and $40 million, respectively, and net income by $23 million and $30 million, respectively ($0.10 and $0.12 per diluted share, respectively).  In the first quarter of 2019 and 2018, gross favorable adjustments totaled $53 million and $56 million, respectively, and the gross unfavorable adjustments totaled $22 million and $16 million, respectively.

v3.19.1
Summary of Significant Accounting Policies Update
3 Months Ended
Mar. 30, 2019
Summary of Significant Accounting Policies Update  
Summary of Significant Accounting Policies Update

 

Note 2.  Summary of Significant Accounting Policies Update

 

At the beginning of 2019, we adopted Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842), which requires lessees to recognize all leases with a term greater than 12 months on the balance sheet as right-of-use assets and lease liabilities. Upon adoption, the most significant impact was the recognition of $307 million in right-of-use assets and lease liabilities for operating leases, while our accounting for finance leases remained unchanged.  We applied the provisions of this standard to our existing leases at the adoption date using a retrospective transition method and have not adjusted comparative periods. The cumulative transition adjustment to retained earnings was not significant and the adoption had no impact on our earnings or cash flows.  We elected the practical expedients permitted under the transition guidance, which allowed us to carryforward the historical lease classification and to apply hindsight when evaluating options within a contract, resulting in the extension of the lease term for certain of our existing leases.

 

Our significant accounting policies are included in Note 1 of our Annual Report on Form 10-K for the year ended December 29, 2018.  Significant changes to our policies resulting from the adoption of ASC 842 are provided below.

 

Leases

We identify leases by evaluating our contracts to determine if the contract conveys the right to use an identified asset for a stated period of time in exchange for consideration. Specifically, we consider whether we can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the asset.  For our contracts that contain both lease components  (e.g., fixed payments including rent, real estate taxes and insurance costs) and non-lease components (e.g., common-area maintenance costs, other goods/services), we allocate the consideration in the contract to each component based on its standalone price.  Leases with terms greater than 12 months are classified as either operating or finance leases at the commencement date.  For these leases, we capitalize the lesser of a) the present value of the minimum lease payments over the lease term, or b) the fair value of the asset, as a right-of-use asset with an offsetting lease liability. The discount rate used to calculate the present value of the minimum lease payments is typically our incremental borrowing rate, as the rate implicit in the lease is generally not known or determinable. The lease term includes any noncancelable period for which we have the right to use the asset and may include options to extend or terminate the lease when it is reasonably certain that we will exercise the option.  Operating leases are recognized as a single lease cost on a straight-line basis over the lease term, while finance lease cost is recognized separately as amortization and interest expense.

 

Accounting Pronouncements Not Yet Adopted

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.

v3.19.1
Accounts Receivable and Finance Receivables
3 Months Ended
Mar. 30, 2019
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:

                                                                                                                                                                                                                                                                                                                            

(In millions)

 

 

 

 

 

March 30,
2019

 

December 29,
2018

Commercial

 

 

 

 

$

946

$

885

U.S. Government contracts

 

 

 

 

 

142

 

166

 

 

 

 

 

 

1,088

 

1,051

Allowance for doubtful accounts

 

 

 

 

 

(29)

 

(27)

Total

 

 

 

 

$

1,059

$

1,024

 

Finance Receivables

Finance receivables are presented in the following table:

                                                                                                                                                                                                                                                                                                                            

(In millions)

 

 

 

 

 

March 30,
2019

 

December 29,
2018

Finance receivables

 

 

 

 

$

782

$

789

Allowance for losses

 

 

 

 

 

(26)

 

(29)

Total finance receivables, net

 

 

 

 

$

756

$

760

 

Finance Receivable Portfolio Quality

We internally assess the quality of our finance receivables based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors.  Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan.  These three categories are performing, watchlist and nonaccrual.

 

We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful.  In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful.  Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain.  All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing.

 

We measure delinquency based on the contractual payment terms of our finance receivables.  In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due.  If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.

 

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

                                                                                                                                                                                                                                                                                                                            

(Dollars in millions)

 

March 30,
2019

 

December 29,
2018

Performing

$

708

$

704

Watchlist

 

43

 

45

Nonaccrual

 

31

 

40

Nonaccrual as a percentage of finance receivables

 

3.96%

 

5.07%

Less than 31 days past due

$

691

$

719

31-60 days past due

 

70

 

56

61-90 days past due

 

17

 

5

Over 90 days past due

 

4

 

9

60+ days contractual delinquency as a percentage of finance receivables

 

2.69%

 

1.77%

 

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 losses, based on the results of our impairment evaluation, is provided below. The finance receivables included in this table specifically exclude leveraged leases in accordance with U.S. generally accepted accounting principles.

                                                                                                                                                                                                                                                                                                                            

(In millions)

 

March 30,
2019

 

December 29,
2018

Finance receivables evaluated collectively

$

650

$

630

Finance receivables evaluated individually

 

31

 

58

Allowance for losses based on collective evaluation

 

24

 

24

Allowance for losses based on individual evaluation

 

2

 

5

Impaired finance receivables with no related allowance for losses

$

21

$

43

Impaired finance receivables with related allowance for losses

 

10

 

15

Unpaid principal balance on impaired finance receivables

 

40

 

67

Average recorded investment of impaired finance receivables

 

44

 

61

 

v3.19.1
Inventories
3 Months Ended
Mar. 30, 2019
Inventories  
Inventories

 

Note 4.  Inventories

 

Inventories are composed of the following:

                                                                                                                                                                                                                                                                                                                            

(In millions)

 

March 30,
2019

 

December 29,
2018

Finished goods

$

1,739

$

1,662

Work in process

 

1,518

 

1,356

Raw materials and components

 

790

 

800

Total

$

4,047

$

3,818

 

v3.19.1
Other Assets
3 Months Ended
Mar. 30, 2019
Other Assets  
Other Assets

 

Note 5. Other Assets

 

On April 1, 2019, Textron Systems’ TRU Simulation + Training Inc. contributed assets associated with its training business into FlightSafety Textron Aviation Training LLC, a company formed by FlightSafety International Inc. and TRU to provide training solutions for Textron Aviation’s business and general aviation aircraft. Our 30% investment in this newly formed company will be accounted for under the equity method of accounting.  The assets of the training business met the criteria to be classified as held for sale at March 30, 2019 and were reclassified to Other assets in the Consolidated Balance Sheets at their net carrying value of $145 million, primarily property, plant and equipment of $64 million and allocated goodwill of $77 million.

v3.19.1
Warranty Liability
3 Months Ended
Mar. 30, 2019
Warranty Liability  
Warranty Liability

 

Note 6.  Warranty Liability

 

Changes in our warranty liability are as follows:

                                                                                                                                                                                                                                                                                                                            

 

 

 

 

 

 

Three Months Ended

(In millions)

 

 

 

 

 

March 30,
2019

 

March 31,
2018

Beginning of period

 

 

 

 

$

149

$

164

Provision

 

 

 

 

 

14

 

16

Settlements

 

 

 

 

 

(22)

 

(22)

Adjustments*

 

 

 

 

 

4

 

10

End of period

 

 

 

 

$

145

$

168

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

 

v3.19.1
Leases
3 Months Ended
Mar. 30, 2019
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 leases have remaining lease terms up to 30 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 2019, our operating lease cost totaled $16 million. Our finance lease cost and our variable and short-term lease costs were not significant. In the first quarter of 2019, cash paid for operating lease liabilities totaled $16 million, which is classified in cash flows from operating activities.  Balance sheet and other information related to our leases is as follows:

                                                                                                                                                                                                                                                                                                                            

(Dollars in millions)

 

 

 

 

 

 

 

March 30,
2019

Operating leases:

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

$

301

Other current liabilities

 

 

 

 

 

 

 

54

Other liabilities

 

 

 

 

 

 

 

250

Finance leases:

 

 

 

 

 

 

 

 

Property, plant and equipment, less accumulated amortization of $50 million

 

 

 

 

 

 

$

117

Short-term and current portion of long-term debt

 

 

 

 

 

 

 

7

Long-term debt

 

 

 

 

 

 

 

78

Weighted-average remaining lease term (in years)

 

 

 

 

 

 

 

 

Finance leases

 

 

 

 

 

 

 

14.2

Operating leases

 

 

 

 

 

 

 

10.4

Weighted-average discount rate

 

 

 

 

 

 

 

 

Finance leases

 

 

 

 

 

 

 

2.72%

Operating leases

 

 

 

 

 

 

 

4.47%

 

Maturities of our lease liabilities at March 30, 2019 are as follows:

                                                                                                                                                                                                                                                                                                                            

(In millions)

 

 

 

 

 

Operating
Leases

 

Finance
Leases

2019

 

 

 

 

$

48

$

7

2020

 

 

 

 

 

55

 

9

2021

 

 

 

 

 

42

 

9

2022

 

 

 

 

 

35

 

9

2023

 

 

 

 

 

30

 

9

Thereafter

 

 

 

 

 

177

 

69

Total lease payments

 

 

 

 

 

387

 

112

Less: interest

 

 

 

 

 

(83)

 

(27)

Total lease liabilities

 

 

 

 

$

304

$

85

 

v3.19.1
Derivative Instruments and Fair Value Measurements
3 Months Ended
Mar. 30, 2019
Derivative Instruments and Fair Value Measurements  
Derivative Instruments and Fair Value Measurements

 

Note 8.  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 March 30, 2019 and December 29, 2018, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $489 million and $379 million, respectively.  At March 30, 2019, the fair value amounts of our foreign currency exchange contracts were a $4 million asset and a $7 million liability. At December 29, 2018, the fair value amounts of our foreign currency exchange contracts were a $2 million asset and a $10 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:

                                                                                                                                                                                                                                                                                                                            

 

 

March 30, 2019

 

December 29, 2018

(In millions)

 

Carrying
Value

 

Estimated
Fair Value

 

Carrying
Value

 

Estimated
Fair Value

Manufacturing group

 

 

 

 

 

 

 

 

Debt, excluding leases

$

(3,105)

$

(3,135)

$

(2,996)

$

(2,971)

Finance group

 

 

 

 

 

 

 

 

Finance receivables, excluding leases

 

579

 

610

 

582

 

584

Debt

 

(711)

 

(645)

 

(718)

 

(640)

 

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.

v3.19.1
Shareholders' Equity
3 Months Ended
Mar. 30, 2019
Shareholders' Equity  
Shareholders' Equity

 

Note 9.  Shareholders’ Equity

 

A reconciliation of Shareholder’s equity is presented below:

                                                                                                                                                                                                                                                                                                                            

(In millions)

 

Common
Stock

 

Capital
Surplus

 

Treasury
Stock

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Total
Shareholders’
Equity

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

Balance at December 30, 2017

$

33

$

1,669

$

(48)

$

5,368

$

(1,375)

$

5,647

Adoption of ASC 606

 

 

 

 

90

 

 

90

Net income

 

 

 

 

189

 

 

189

Other comprehensive income

 

 

 

 

 

74

 

74

Share-based compensation activity

 

 

41

 

 

 

 

41

Dividends declared

 

 

 

 

(5)

 

 

(5)

Purchases of common stock

 

 

 

(344)

 

 

 

(344)

Balance at March 31, 2018

$

33

$

1,710

$

(392)

$

5,642

$

(1,301)

$

5,692

 

Dividends per share of common stock were $0.02 for both the three months ended March 30, 2019 and March 31, 2018.

 

Earnings Per Share

 

We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period.  Basic EPS is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends. Diluted EPS considers the dilutive effect of all potential future common stock, including stock options.

 

The weighted-average shares outstanding for basic and diluted EPS are as follows:

                                                                                                                                                                                                                                                                                                                            

 

 

 

 

 

 

Three Months Ended

(In thousands)

 

 

 

 

 

March 30,
2019

 

March 31,
2018

Basic weighted-average shares outstanding

 

 

 

 

 

234,839

 

260,497

Dilutive effect of stock options

 

 

 

 

 

1,598

 

3,175

Diluted weighted-average shares outstanding

 

 

 

 

 

236,437

 

263,672

 

Stock options to purchase 3.1 million and 1.3 million shares of common stock are excluded from the calculation of diluted weighted-average shares outstanding for the first quarter of 2019 and 2018, respectively, as their effect would have been anti-dilutive.

 

Accumulated Other Comprehensive Loss and Other Comprehensive Income

 

The components of Accumulated other comprehensive loss are presented below:

                                                                                                                                                                                                                                                                                                                            

(In millions)

 

Pension and
Postretirement
Benefits
Adjustments

 

Foreign
Currency
Translation
Adjustments

 

Deferred
Gains (Losses)
on Hedge
Contracts

 

Accumulated
Other
Comprehensive
Loss

Balance at 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)

Balance at December 30, 2017

$

(1,396)

$

11

$

10

$

(1,375)

Other comprehensive income before reclassifications

 

 

42

 

1

 

43

Reclassified from Accumulated other comprehensive loss

 

31

 

 

 

31

Balance at March 31, 2018

$

(1,365)

$

53

$

11

$

(1,301)

 

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

                                                                                                                                                                                                                                                                                                                            

 

 

March 30, 2019

 

March 31, 2018

(In millions)

 

Pre-Tax
Amount

 

Tax
(Expense)
Benefit

 

After-Tax
Amount

 

Pre-Tax
Amount

 

Tax
(Expense)
Benefit

 

After-Tax
Amount

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss*

$

25

$

(5)

$

20

$

38

$

(9)

$

29

Amortization of prior service cost*

 

1

 

 

1

 

2

 

 

2

Pension and postretirement benefits adjustments, net

 

26

 

(5)

 

21

 

40

 

(9)

 

31

Deferred gains on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

4

 

(1)

 

3

 

2

 

(1)

 

1

Reclassification adjustments

 

(1)

 

 

(1)

 

 

 

Deferred gains on hedge contracts, net

 

3

 

(1)

 

2

 

2

 

(1)

 

1

Foreign currency translation adjustments

 

1

 

2

 

3

 

40

 

2

 

42

Total

$

30

$

(4)

$

26

$

82

$

(8)

$

74

*These components of other comprehensive income are included in the computation of net periodic pension cost.  See Note 14 of our 2018 Annual Report on Form 10-K for additional information.

v3.19.1
Segment Information
3 Months Ended
Mar. 30, 2019
Segment Information  
Segment Information

 

Note 10.  Segment Information

 

We operate in, and report financial information for, the following five business segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. On July 2, 2018, we sold our Tools and Test Equipment businesses that were previously included in the Industrial segment as discussed in Note 2 of our 2018 Annual Report on Form 10-K. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses, gains/losses on major business dispositions and special charges. The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense.

 

Our revenues by segment, along with a reconciliation of segment profit to income before income taxes, are included in the table below:

                                                                                                                                                                                                                                                                                                                            

 

 

Three Months Ended

(In millions)

 

March 30,
2019

 

March 31,
2018

Revenues

 

 

 

 

Textron Aviation

$

1,134

$

1,010

Bell

 

739

 

752

Textron Systems

 

307

 

387

Industrial

 

912

 

1,131

Finance

 

17

 

16

Total revenues

$

3,109

$

3,296

Segment Profit

 

 

 

 

Textron Aviation

$

106

$

72

Bell

 

104

 

87

Textron Systems

 

28

 

50

Industrial

 

50

 

64

Finance

 

6

 

6

Segment profit

 

294

 

279

Corporate expenses and other, net

 

(47)

 

(27)

Interest expense, net for Manufacturing group

 

(35)

 

(34)

Income before income taxes

$

212

$

218

 

v3.19.1
Revenues
3 Months Ended
Mar. 30, 2019
Revenues  
Revenues

 

Note 11. Revenues

 

Disaggregation of Revenues

Our revenues disaggregated by major product type are presented below:

                                                                                                                                                                                                                                                                                                                            

 

 

Three Months Ended

(In millions)

 

March 30,
2019

 

March 31,
2018

Aircraft

$

766

$

634

Aftermarket parts and services

 

368

 

376

Textron Aviation

 

1,134

 

1,010

Military aircraft and support programs

 

508

 

487

Commercial helicopters, parts and services

 

231

 

265

Bell

 

739

 

752

Unmanned systems

 

134

 

170

Marine and land systems

 

48

 

92

Simulation, training and other

 

125

 

125

Textron Systems

 

307

 

387

Fuel systems and functional components

 

594

 

655

Specialized vehicles

 

318

 

348

Tools and test equipment

 

 

128

Industrial

 

912

 

1,131

Finance

 

17

 

16

Total revenues

$

3,109

$

3,296

 

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 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

Three months ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Customer type:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

$

973

$

252

$

127

$

1,124

$

16

$

2,492

U.S. Government

 

37

 

500

 

260

 

7

 

 

804

Total revenues

$

1,010

$

752

$

387

$

1,131

$

16

$

3,296

Geographic location:

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

665

$

509

$

287

$

496

$

7

$

1,964

Europe

 

146

 

27

 

12

 

383

 

1

 

569

Asia and Australia

 

81

 

127

 

28

 

92

 

2

 

330

Other international

 

118

 

89

 

60

 

160

 

6

 

433

Total revenues

$

1,010

$

752

$

387

$

1,131

$

16

$

3,296

 

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 revenue 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 March 30, 2019, we had $9.7 billion in remaining performance obligations of which we expect to recognize revenues of approximately 70% through 2020, an additional 23% through 2022, 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 March 30, 2019, contract assets and contract liabilities totaled $477 million and $927 million, respectively.  At December 29, 2018, contract assets and contract liabilities totaled $461 million and $974 million, respectively.  During the first quarter of 2019, we recognized $311 million in revenues that were included in the contract liability balance at December 29, 2018. We recognized $322 million in revenues in the first quarter of 2018 that were included in the contract liability balance at the adoption date.

v3.19.1
Share-Based Compensation
3 Months Ended
Mar. 30, 2019
Share-Based Compensation  
Share-Based Compensation

 

Note 12.  Share-Based Compensation

 

Under our share-based compensation plans, we have authorization to provide awards to selected employees in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance share units and other awards.  Share-based compensation expense for awards subject only to service conditions vest ratably and is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. For employees eligible for early retirement under the plans, the service requirement of the award is satisfied at the date of grant and the expense is recognized in the period the award is granted.  Compensation expense included in net income for these plans is as follows:

                                                                                                                                                                                                                                                                                                                            

 

 

 

 

 

 

Three Months Ended

(In millions)

 

 

 

 

 

March 30,
2019

 

March 31,
2018

Compensation expense

 

 

 

 

$

44

$

33

Income tax benefit

 

 

 

 

 

(11)

 

(7)

Total net compensation expense included in net income

 

 

 

 

$

33

$

26

 

Stock Options

 

Options to purchase our shares have a maximum term of ten years and 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.

 

The weighted-average fair value of options granted and the assumptions used in our option-pricing model for such grants are as follows:

                                                                                                                                                                                                                                                                                                                            

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 30,
2019

 

March 31,
2018

Fair value of options at grant date

 

 

 

 

$

14.62

$

15.83

Dividend yield

 

 

 

 

 

0.2%

 

0.1%

Expected volatility

 

 

 

 

 

26.6%

 

26.6%

Risk-free interest rate

 

 

 

 

 

2.5%

 

2.6%

Expected term (in years)

 

 

 

 

 

4.7

 

4.7

 

The stock option activity during the first quarter of 2019 is provided below:

                                                                                                                                                                                                                                                                                                                            

(Options in thousands)

 

 

 

 

 

Number of
Options

 

Weighted-
Average
Exercise Price

Outstanding at beginning of period

 

 

 

 

 

8,284

$

40.58

Granted

 

 

 

 

 

1,583

 

54.43

Exercised

 

 

 

 

 

(558)

 

(25.06)

Forfeited or expired

 

 

 

 

 

(75)

 

(47.43)

Outstanding at end of period

 

 

 

 

 

9,234

$

43.84

Exercisable at end of period

 

 

 

 

 

6,182

$

38.45

 

At March 30, 2019, our outstanding options had an aggregate intrinsic value of $80 million and a weighted-average remaining contractual life of six years.  Our exercisable options had an aggregate intrinsic value of $79 million and a weighted-average remaining contractual life of five years at March 30, 2019.  The total intrinsic value of options exercised was $16 million and $8 million during the first quarter of 2019 and 2018, respectively.

 

Restricted Stock Units

 

The activity for restricted stock units payable in both stock and cash during the first quarter of 2019 is provided below:

                                                                                                                                                                                                                                                                                                                            

 

 

Units Payable in Stock

 

Units Payable in Cash

(Shares/Units in thousands)

 

Number of
Shares

 

Weighted-
Average Grant
 Date Fair Value

 

Number of
Units

 

Weighted-
Average Grant
 Date Fair Value

Outstanding at beginning of period, nonvested

 

598

$

45.22

 

1,143

$

45.48

Granted

 

168

 

54.43

 

327

 

54.43

Vested

 

(164)

 

(39.34)

 

(294)

 

(39.27)

Forfeited

 

 

 

(30)

 

(46.76)

Outstanding at end of period, nonvested

 

602

$

49.40

 

1,146

$

49.59

 

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

                                                                                                                                                                                                                                                                                                                            

 

 

 

 

 

 

Three Months Ended

(In millions)

 

 

 

 

 

March 30,
2019

 

March 31,
2018

Fair value of awards vested

 

 

 

 

$

22

$

24

Cash paid

 

 

 

 

 

16

 

18

 

Performance Share Units

The activity for our performance share units during the first quarter of 2019 is provided below:

                                                                                                                                                                                                                                                                                                                            

 

 

 

 

 

 

 

 

 

(Units in thousands)

 

 

 

 

 

Number of
Units

 

Weighted-
Average Grant
Date Fair Value

Outstanding at beginning of period, nonvested

 

 

 

 

 

404

$

53.63

Granted

 

 

 

 

 

262

 

54.43

Outstanding at end of period, nonvested

 

 

 

 

 

666

$

53.95

 

Cash paid under these awards totaled $10 million and $11 million during the first quarter of 2019 and 2018, respectively.

v3.19.1
Retirement Plans
3 Months Ended
Mar. 30, 2019
Retirement Plans  
Retirement Plans

 

Note 13.  Retirement Plans

 

We provide defined benefit pension plans and other postretirement benefits to eligible employees.  The components of net periodic benefit cost (credit) for these plans are as follows:

                                                                                                                                                                                                                                                                                                                            

 

 

Pension Benefits

 

Postretirement Benefits
Other Than Pensions

(In millions)

 

March 30,
2019

 

March 31,
2018

 

March 30,
2019

 

March 31,
2018

Three Months Ended

 

 

 

 

 

 

 

 

Service cost

$

23

$

26

$

1

$

1

Interest cost

 

82

 

77

 

2

 

2

Expected return on plan assets

 

(139)

 

(138)

 

 

Amortization of prior service cost (credit)

 

3

 

4

 

(2)

 

(2)

Amortization of net actuarial loss

 

25

 

38

 

 

Net periodic benefit cost (credit)

$

(6)

$

 7

$

1

$

1

 

v3.19.1
Income Taxes
3 Months Ended
Mar. 30, 2019
Income Taxes  
Income Taxes

 

Note 14.  Income Taxes

 

Our effective tax rate for the first quarter of 2019 and 2018 was 15.6% and 13.3%, respectively. In the first quarter of 2019, the effective tax rate was lower than the U.S. federal statutory tax rate of 21%, primarily due to a $12 million benefit recognized for additional research credits related to prior years.   In the first quarter of 2018, the effective tax rate was lower than the U.S. federal statutory tax rate of 21%, primarily due to benefits recognized from audit settlements.

 

Our reserve for unrecognized tax benefits totaled $175 million and $141 million at March 30, 2019 and December 29, 2018, respectively. The increase in this reserve largely reflects a claim filed in the first quarter of 2019 for tax credits related to prior years.

v3.19.1
Commitments and Contingencies
3 Months Ended
Mar. 30, 2019
Commitments and Contingencies  
Commitments and Contingencies

 

Note 15.  Commitments and Contingencies

 

We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts; alleged lack of compliance with applicable laws and regulations; production partners; product liability; patent and trademark infringement; employment disputes; and environmental, safety and health matters.  Some of these legal proceedings and claims seek damages, fines or penalties in substantial amounts or remediation of environmental contamination. As a government contractor, we are subject to audits, reviews and investigations to determine whether our operations are being conducted in accordance with applicable regulatory requirements. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our suspension or debarment from U.S. Government contracting for a period of time. On the basis of information presently available, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations.

v3.19.1
Summary of Significant Accounting Policies Update (Policies)
3 Months Ended
Mar. 30, 2019
Summary of Significant Accounting Policies Update  
Leases

 

Leases

We identify leases by evaluating our contracts to determine if the contract conveys the right to use an identified asset for a stated period of time in exchange for consideration. Specifically, we consider whether we can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the asset.  For our contracts that contain both lease components  (e.g., fixed payments including rent, real estate taxes and insurance costs) and non-lease components (e.g., common-area maintenance costs, other goods/services), we allocate the consideration in the contract to each component based on its standalone price.  Leases with terms greater than 12 months are classified as either operating or finance leases at the commencement date.  For these leases, we capitalize the lesser of a) the present value of the minimum lease payments over the lease term, or b) the fair value of the asset, as a right-of-use asset with an offsetting lease liability. The discount rate used to calculate the present value of the minimum lease payments is typically our incremental borrowing rate, as the rate implicit in the lease is generally not known or determinable. The lease term includes any noncancelable period for which we have the right to use the asset and may include options to extend or terminate the lease when it is reasonably certain that we will exercise the option.  Operating leases are recognized as a single lease cost on a straight-line basis over the lease term, while finance lease cost is recognized separately as amortization and interest expense.

Accounting Pronouncements Not Yet Adopted

 

Accounting Pronouncements Not Yet Adopted

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.

v3.19.1
Accounts Receivable and Finance Receivables (Tables)
3 Months Ended
Mar. 30, 2019
Accounts Receivable and Finance Receivables  
Accounts receivable