Consolidated Statements of Operations - USD ($) $ in Millions |
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Jun. 29, 2019 |
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Revenues | ||||
Total revenues | $ 2,472 | $ 3,227 | $ 5,249 | $ 6,336 |
Costs, expenses and other | ||||
Cost of sales | 2,251 | 2,641 | 4,638 | 5,218 |
Selling and administrative expense | 239 | 292 | 502 | 599 |
Interest expense | 42 | 43 | 82 | 85 |
Special charges | 78 | 117 | ||
Non-service components of pension and post-retirement income, net | (20) | (28) | (41) | (57) |
Total costs, expenses and other | 2,590 | 2,948 | 5,298 | 5,845 |
Income (loss) before income taxes | (118) | 279 | (49) | 491 |
Income tax expense (benefit) | (26) | 62 | (7) | 95 |
Net income (loss) | $ (92) | $ 217 | $ (42) | $ 396 |
Earnings per share | ||||
Basic (in dollars per share) | $ (0.40) | $ 0.94 | $ (0.18) | $ 1.70 |
Diluted (in dollars per share) | $ (0.40) | $ 0.93 | $ (0.18) | $ 1.69 |
Manufacturing | ||||
Revenues | ||||
Total revenues | $ 2,457 | $ 3,211 | $ 5,220 | $ 6,303 |
Finance | ||||
Revenues | ||||
Finance revenues | $ 15 | $ 16 | $ 29 | $ 33 |
Consolidated Statements of Comprehensive Income (Loss) - USD ($) $ in Millions |
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Jul. 04, 2020 |
Jun. 29, 2019 |
Jul. 04, 2020 |
Jun. 29, 2019 |
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Consolidated Statements of Comprehensive Income (Loss) | ||||
Net income (loss) | $ (92) | $ 217 | $ (42) | $ 396 |
Other comprehensive income, net of tax: | ||||
Pension and postretirement benefits adjustments, net of reclassifications | 36 | 20 | 73 | 41 |
Foreign currency translation adjustments | 30 | 1 | (10) | 4 |
Deferred gains (losses) on hedge contracts, net of reclassifications | 2 | (7) | 2 | |
Other comprehensive income | 68 | 21 | 56 | 47 |
Comprehensive income (loss) | $ (24) | $ 238 | $ 14 | $ 443 |
Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Millions |
Jul. 04, 2020 |
Jan. 04, 2020 |
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Consolidated Balance Sheets | ||
Accumulated depreciation and amortization | $ 4,538 | $ 4,405 |
Basis of Presentation |
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Basis of Presentation | |
Basis of Presentation | Note 1. Basis of Presentation Our Consolidated Financial Statements include the accounts of Textron Inc. (Textron) and its majority-owned subsidiaries. We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information. Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 4, 2020. In the opinion of management, the interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair presentation of our consolidated financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Our financings are conducted through two separate borrowing groups. The Manufacturing group consists of Textron consolidated with its majority-owned subsidiaries that operate in the Textron Aviation, Bell, Textron Systems and Industrial segments. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation and its consolidated subsidiaries. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements. All significant intercompany transactions are eliminated from the Consolidated Financial Statements, including retail financing activities for inventory sold by our Manufacturing group and financed by our Finance group. Use of Estimates We prepare our financial statements in conformity with generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the Consolidated Statements of Operations in the period that they are determined. Contract Estimates For contracts where revenue is recognized over time, we recognize changes in estimated contract revenues, costs and profits using the cumulative catch-up method of accounting. This method recognizes the cumulative effect of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current period. Anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable. In the second quarter of 2020 and 2019, our cumulative catch-up adjustments increased revenues and segment profit by $17 million and $27 million, respectively. These adjustments decreased the net loss in the second quarter of 2020 by $13 million ($0.06 per share) and increased net income in the second quarter of 2019 by $21 million ($0.09 per diluted share). In the second quarter of 2020 and 2019, gross favorable adjustments totaled $46 million and $46 million, respectively, and the gross unfavorable adjustments totaled $29 million and $19 million, respectively. In the first half of 2020 and 2019, our cumulative catch-up adjustments increased revenue and segment profit by $19 million and $58 million, respectively. These adjustments decreased the net loss in the first half of 2020 by $14 million ($0.06 per share) and increased net income in the first half of 2019 by $44 million ($0.19 per diluted share). In the first half of 2020 and 2019, gross favorable adjustments totaled $73 million and $99 million, respectively, and the gross unfavorable adjustments totaled $54 million and $41 million, respectively.
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Summary of Significant Accounting Policies Update |
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Summary of Significant Accounting Policies Update | |
Summary of Significant Accounting Policies Update | Note 2. Summary of Significant Accounting Policies Update At the beginning of 2020, we adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (ASC 326). This standard changed the prior incurred loss model to a forward-looking current expected credit loss model for most financial assets, such as trade and finance receivables, contract assets and other instruments. This standard required a cumulative-effect adjustment to retained earnings upon adoption with no restatement of prior periods. There was no significant impact on our consolidated financial statements upon adoption of the standard. Our significant accounting policies are included in Note 1 of our Annual Report on Form 10-K for the year ended January 4, 2020. Significant changes to our policies resulting from the adoption of ASC 326 are provided below. Accounts Receivable, Net Accounts receivable, net includes amounts billed to customers where the right to payment is unconditional. We maintain an allowance for credit losses for our commercial accounts receivable to provide for the estimated amount that will not be collected, even when the risk of loss is remote. The allowance is measured on a collective pool basis when similar risk characteristics exists and is established as a percentage of accounts receivable. We have identified pools with similar risk characteristics, based on customer and industry type and geographic location. The percentage is based on all available and relevant information including age of outstanding receivables and collateral value, if any, historical payment experience and loss history, current economic conditions, and, when reasonable and supportable factors exist, management’s expectation of future economic conditions. For amounts due from the U.S. Government, we have not established an allowance for credit losses as we have zero loss expectation based on a long history of no credit losses and the explicit guarantee of a sovereign entity. Finance Receivables, Net We establish an allowance for credit losses to cover probable but specifically unknown losses existing in the portfolio. This allowance is established as a percentage of finance receivables categorized by pools with similar risk characteristics, such as collateral or customer type and geographic location. The percentage is based on a combination of factors, including historical loss experience, current delinquency and default trends, collateral values, current economic conditions, and, when reasonable and supportable factors exist, management’s expectation of future economic conditions. For those finance receivables that do not have similar risk characteristics, including larger balance accounts specifically identified as impaired, a reserve is established based on comparing the expected future cash flows, discounted at the finance receivable's effective interest rate, or the fair value of the underlying collateral if the finance receivable is collateral dependent, to its carrying amount. The expected future cash flows consider collateral value; financial performance and liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs associated with the repossession and eventual disposal of collateral. When there is a range of potential outcomes, we perform multiple discounted cash flow analyses and weight the potential outcomes based on their relative likelihood of occurrence. The evaluation of our portfolio is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the estimated fair value of the underlying collateral, which may differ from actual results. While our analysis is specific to each individual account, critical factors included in this analysis include industry valuation guides, age and physical condition of the collateral, payment history, existence and financial strength of guarantors. |
Accounts Receivable and Finance Receivables |
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Accounts Receivable and Finance Receivables | Note 3. Accounts Receivable and Finance Receivables Accounts Receivable Accounts receivable is composed of the following:
Finance Receivables Finance receivables are presented in the following table:
Finance Receivable Portfolio Quality We internally assess the quality of our finance receivables based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors. Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan. These three categories are performing, watchlist and nonaccrual. We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful. Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain. All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing. We measure delinquency based on the contractual payment terms of our finance receivables. In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category. In March 2020, due to the economic impact of the COVID-19 pandemic and at the request of certain of our customers, we began working with them to provide temporary payment relief through loan modifications. The types of temporary payment relief we offered to these customers included delays in the timing of required principal payments, deferrals of interest payments and/or interest-only payments. For loan modifications that cover payment-relief periods in excess of six months, even if the loan was previously current, the loan is deemed a troubled debt restructuring and considered impaired. These impaired loans are classified as either nonaccrual or watchlist based on a review of the credit quality indicators as discussed above. During the first half of 2020, we modified finance receivable contracts for 75 customers with an outstanding balance totaling $251 million at July 4, 2020. We are continuing to work with other customers on modifications to accounts with an outstanding balance totaling approximately $60 million. Of the modifications occurring during the first half of 2020, contracts for 22 customers or $103 million of finance receivables were categorized as troubled debt restructurings. Due to the nature of these restructurings, the financial effects were not significant. We had one customer default related to finance receivables previously modified as a troubled debt restructuring that had an insignificant outstanding balance. We believe our allowance for credit losses adequately covers our exposure on these loans as our estimated collateral values largely exceed the outstanding loan amounts. Finance receivables categorized based on the credit quality indicators and by the delinquency aging category are summarized as follows:
At July 4, 2020, 33% of our performing finance receivables were originated since the beginning of 2019 and 32% were originated from 2016 to 2018. For finance receivables categorized as watchlist, 17% were originated since the beginning of 2019 and 42% from 2016 to 2018. For accounts modified in the first half of 2020, the origination date prior to the modification was maintained based on the types of temporary payment relief provided. On a quarterly basis, we evaluate individual larger balance accounts for impairment. A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators described above. Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified. If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification. A summary of finance receivables and the allowance for credit losses, based on the results of our impairment evaluation, is provided below. The finance receivables included in this table specifically exclude leveraged leases in accordance with U.S. generally accepted accounting principles.
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Inventories |
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Inventories | Note 4. Inventories Inventories are composed of the following:
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Other Assets |
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Other Assets | |
Other Assets | Note 5. Other Assets Other assets includes the cash surrender value of corporate-owned life insurance policies, net of any borrowings against these policies. During the first quarter of 2020, we borrowed $377 million against the policies as we strengthened our cash position in light of disruptions in the capital markets caused by the COVID-19 pandemic. At July 4, 2020, there was $362 million of outstanding borrowings against the policies. Proceeds from these borrowings and subsequent payments have been classified as financing activities in the consolidated statement of cash flows. Interest expense incurred on borrowings against corporate-owned life insurance policies is recorded as an offset with policy income.
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Warranty Liability |
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Warranty Liability | Note 6. Warranty Liability Changes in our warranty liability are as follows:
* Adjustments include changes to prior year estimates, new issues on prior year sales and currency translation adjustments. |
Leases |
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Leases | Note 7. Leases We primarily lease certain manufacturing plants, offices, warehouses, training and service centers at various locations worldwide that are classified as either operating or finance leases. Our finance leases at July 4, 2020 were not significant. Our operating leases have remaining lease terms up to 29 years, which include options to extend the lease term for periods up to 25 years when it is reasonably certain the option will be exercised. Operating lease cost totaled $15 million and $16 million in the second quarter of 2020 and 2019, respectively, and $30 million and $32 million in the first half of 2020 and 2019, respectively. Cash paid for operating leases totaled $30 million and $32 million in the first half of 2020 and 2019, respectively, which is classified in cash flows from operating activities. Variable and short-term lease costs were not significant. Balance sheet and other information related to our operating leases is as follows:
At July 4, 2020, maturities of our operating lease liabilities on an undiscounted basis totaled $32 million for 2020, $49 million for 2021, $41 million for 2022, $32 million for 2023, $25 million for 2024 and $150 million thereafter. |
Debt |
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Debt | |
Debt | Note 8. Debt On April 1, 2020, we entered into a 364-Day Term Loan Credit Agreement in an aggregate principal amount of $500 million and borrowed the full principal amount available under the agreement. At our current credit ratings, the borrowings accrue interest at a rate equal to the London interbank offered rate, subject to a floor of 0.75%, plus 2.0%, which is an annual interest rate of 2.75% at July 4, 2020. We can pre-pay any amount of the principal balance during the term of the loan; however, we cannot borrow additional principal amounts. The Term Loan Credit Agreement restricts us from incurring additional indebtedness, subject to various exceptions, one of which allows us to borrow under our $1.0 billion revolving credit facility. While this loan is outstanding, we have agreed not to repurchase any of our common stock. The principal amount outstanding, plus accrued and unpaid interest and fees, is due on March 31, 2021. Under our shelf registration statement, on March 17, 2020, we issued $650 million of fixed-rate notes due June 1, 2030 with an annual interest rate of 3.00%. The net proceeds of the issuance totaled $642 million, after deducting underwriting discounts, commissions and offering expenses.
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Derivative Instruments and Fair Value Measurements |
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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 July 4, 2020 and January 4, 2020, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $364 million and $342 million, respectively. At July 4, 2020, the fair value amounts of our foreign currency exchange contracts were a $6 million asset and a $8 million liability. At January 4, 2020, the fair value amounts of our foreign currency exchange contracts were a $2 million asset and a $2 million liability. We hedge our net investment position in certain major currencies and generate foreign currency interest payments that offset other transactional exposures in these currencies. To accomplish this, we borrow directly in the foreign currency and designate a portion of the debt as a hedge of the net investment. We record changes in the fair value of these contracts in other comprehensive income (loss) 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:
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. |
Shareholders' Equity |
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Shareholders' Equity | Note 10. Shareholders’ Equity A reconciliation of Shareholders’ equity is presented below:
Dividends per share of common stock were $0.02 for both the second quarter of 2020 and 2019 and $0.04 for both the first half of 2020 and 2019. Earnings Per Share We calculate basic and diluted earnings per share (EPS) based on net income (loss), which approximates income (loss) 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:
As a result of incurring a net loss for the second quarter and first half of 2020, potential common shares of 0.1 million and 0.3 million, respectively, were excluded from diluted loss per share because the effect would have been anti-dilutive. In addition, stock options to purchase 8.9 million and 8.2 million shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding for the second quarter and first half of 2020, respectively, as their effect would have been anti-dilutive. Stock options to purchase 3.1 million shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding for both the second quarter and first half of 2019, 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:
The before and after-tax components of Other comprehensive income are presented below:
*These components of other comprehensive income are included in the computation of net periodic pension cost (credit). See Note 16 of our 2019 Annual Report on Form 10-K for additional information. |
Segment Information |
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Segment Information | Note 11. Segment Information We operate in, and report financial information for, the following five segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses, gains/losses on major business dispositions, special charges and an inventory charge related to the 2020 COVID-19 restructuring plan, as discussed in Note 14. 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 (loss) before income taxes, are included in the table below:
* In connection with the restructuring plan initiated in the second quarter of 2020, we ceased manufacturing at the Montreal facility of the TRU Simulation + Training business, resulting in the production suspension of our commercial air transport simulators. As a result of this action and current market conditions, we recorded a $55 million charge to write-down the related inventory to its net realizable value. |
Revenues |
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Revenues | Note 12. Revenues Disaggregation of Revenues Our revenues disaggregated by major product type are presented below:
Our revenues for our segments by customer type and geographic location are presented below:
Remaining Performance Obligations Our remaining performance obligations, which is the equivalent of our backlog, represent the expected transaction price allocated to our contracts that we expect to recognize as revenues in future periods when we perform under the contracts. These remaining obligations exclude unexercised contract options and potential orders under ordering-type contracts such as Indefinite Delivery, Indefinite Quantity contracts. At July 4, 2020, we had $9.1 billion in remaining performance obligations of which we expect to recognize revenues of approximately 68% through , an additional 24% through , 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 July 4, 2020 and January 4, 2020, contract assets totaled $542 million and $567 million, respectively, and contract liabilities totaled $927 million and $830 million, respectively, reflecting timing differences between revenue recognized, billings and payments from customers. During the second quarter and first half of 2020, we recognized revenues of $121 million and $352 million, respectively, that were included in the contract liability balance at January 4, 2020. We recognized revenues of $146 million and $457 million in the second quarter and first half of 2019, respectively, that were included in the contract liability balance at December 29, 2018. |
Retirement Plans |
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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:
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Special Charges |
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Special Charges | Note 14. Special Charges Special Charges Special charges recorded in the second quarter and first half of 2020 by segment and type of cost are presented in the table below. There were no special charges recorded in the first half of 2019.
2020 COVID-19 Restructuring Plan In the second quarter of 2020, we initiated a restructuring plan to reduce operating expenses through headcount reductions, facility consolidations and other actions in response to the economic challenges and uncertainty resulting from the COVID-19 pandemic. The total pre-tax cost of this plan is expected to be in the range of $110 million to $130 million, of which $78 million was recorded in the second quarter of 2020. We anticipate that this plan will be substantially completed by the end of 2020. The plan primarily impacts the TRU Simulation + Training (TRU) business within the Textron Systems segment, the Textron Aviation segment and the TSV business within the Industrial segment, and will result in the elimination of up to approximately 1,950 positions, representing 6% of our workforce. At TRU, there has been a substantial decline in demand and order cancellations for flight simulators in light of the expected long-term impact of the pandemic on the commercial air transportation business. Accordingly, we will cease manufacturing at TRU’s facility in Montreal, Canada, resulting in a production suspension of its commercial air transport simulators, along with workforce reductions, contract terminations, facility closures and asset impairments. As a result of current market conditions and the cessation of manufacturing at this facility, we incurred an inventory valuation charge of $55 million, which was recorded in Cost of Sales, to write-down TRU’s inventory to its net realizable value. First Quarter 2020 Asset Impairment Charges In the first quarter of 2020, we recognized special charges of $39 million of intangible asset impairment charges at the Textron Aviation and Industrial segments. Due to the impact of the COVID-19 pandemic, we experienced decreased demand for our products and services as our customers delayed or ceased orders due to the environment of economic uncertainty. In light of these conditions, Textron Aviation had temporarily shut down most aircraft production, including the King Air turboprop and Beechcraft piston product lines, and had instituted employee furloughs. Based on these events, we performed an interim impairment test of the indefinite-lived Beechcraft and King Air trade name intangible assets at April 4, 2020. Fair value of these assets was determined utilizing the relief of royalty method assuming an increase in the discount rate based on current market data to 9.7% and revised expectations of future revenues for the products and services associated with the tradenames. This analysis resulted in an impairment charge of $32 million. At July 4, 2020, these intangible assets totaled $169 million. In the Industrial segment, we fully impaired the Arctic Cat trade name intangible asset within the Specialized Vehicles product line and recorded a $7 million impairment charge. Restructuring Reserve Restructuring reserve activity related to our 2020 and prior restructuring plans is summarized below:
The majority of the remaining cash outlays of $92 million is expected to be paid in the second half of 2020. Severance costs generally are paid on a lump-sum basis and include outplacement costs, which are paid in accordance with normal payment terms. |
Income Taxes |
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Income Taxes | |
Income Taxes | Note 15. Income Taxes Our effective tax rate for the second quarter and first half of 2020 was (22.0)% and (14.3)%, respectively, compared to the statutory rate of (21)%. In the second quarter and first half of 2020, we incurred special charges and an inventory charge in a non-U.S. jurisdiction where tax benefits cannot be realized, which were partially offset by a $14 million benefit recognized upon the release of a valuation allowance in a non-U.S. jurisdiction. In the first half of 2020, these items had a more significant impact on the effective tax rate due to the lower loss before income taxes for the period. Our effective tax rate for the second quarter and first half of 2019 was 22.2% and 19.3%, respectively. In the first half 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.
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Commitments and Contingencies |
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Commitments and Contingencies | |
Commitments and Contingencies | Note 16. 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. |
Summary of Significant Accounting Policies Update (Policies) |
6 Months Ended |
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Jul. 04, 2020 | |
Summary of Significant Accounting Policies Update | |
Accounts Receivable, Net | Accounts Receivable, Net Accounts receivable, net includes amounts billed to customers where the right to payment is unconditional. We maintain an allowance for credit losses for our commercial accounts receivable to provide for the estimated amount that will not be collected, even when the risk of loss is remote. The allowance is measured on a collective pool basis when similar risk characteristics exists and is established as a percentage of accounts receivable. We have identified pools with similar risk characteristics, based on customer and industry type and geographic location. The percentage is based on all available and relevant information including age of outstanding receivables and collateral value, if any, historical payment experience and loss history, current economic conditions, and, when reasonable and supportable factors exist, management’s expectation of future economic conditions. For amounts due from the U.S. Government, we have not established an allowance for credit losses as we have zero loss expectation based on a long history of no credit losses and the explicit guarantee of a sovereign entity. Finance Receivables, Net We establish an allowance for credit losses to cover probable but specifically unknown losses existing in the portfolio. This allowance is established as a percentage of finance receivables categorized by pools with similar risk characteristics, such as collateral or customer type and geographic location. The percentage is based on a combination of factors, including historical loss experience, current delinquency and default trends, collateral values, current economic conditions, and, when reasonable and supportable factors exist, management’s expectation of future economic conditions. For those finance receivables that do not have similar risk characteristics, including larger balance accounts specifically identified as impaired, a reserve is established based on comparing the expected future cash flows, discounted at the finance receivable's effective interest rate, or the fair value of the underlying collateral if the finance receivable is collateral dependent, to its carrying amount. The expected future cash flows consider collateral value; financial performance and liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs associated with the repossession and eventual disposal of collateral. When there is a range of potential outcomes, we perform multiple discounted cash flow analyses and weight the potential outcomes based on their relative likelihood of occurrence. The evaluation of our portfolio is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the estimated fair value of the underlying collateral, which may differ from actual results. While our analysis is specific to each individual account, critical factors included in this analysis include industry valuation guides, age and physical condition of the collateral, payment history, existence and financial strength of guarantors. |
Accounts Receivable and Finance Receivables (Tables) |
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Accounts receivable |
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Finance receivables |
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Finance receivables by credit quality indicator and by delinquency aging category |
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Summary of finance receivables and allowance for loan losses based on impairment evaluation, excluding leveraged leases |
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Inventories (Tables) |
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Inventories |
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Warranty Liability (Tables) |
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Changes in warranty liability |
* Adjustments include changes to prior year estimates, new issues on prior year sales and currency translation adjustments. |
Leases (Tables) |
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Leases | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of balance sheet and other information |
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Derivative Instruments and Fair Value Measurements (Tables) |
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Carrying value and estimated fair value of financial instruments |
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Shareholders' Equity (Tables) |
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Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Shareholder's equity |
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Schedule of weighted-average shares outstanding for basic and diluted EPS |
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Schedule of components of Accumulated Other Comprehensive Loss |
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Schedule of before and after-tax components of other comprehensive income (loss) |
*These components of other comprehensive income are included in the computation of net periodic pension cost (credit). See Note 16 of our 2019 Annual Report on Form 10-K for additional information. |
Segment Information (Tables) |
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Revenues by segment and reconciliation of segment profit to income (loss) before income taxes |
* In connection with the restructuring plan initiated in the second quarter of 2020, we ceased manufacturing at the Montreal facility of the TRU Simulation + Training business, resulting in the production suspension of our commercial air transport simulators. As a result of this action and current market conditions, we recorded a $55 million charge to write-down the related inventory to its net realizable value. |
Revenues (Tables) |
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Schedule of revenue by major product type, customer type and geographic location | Our revenues disaggregated by major product type are presented below:
Our revenues for our segments by customer type and geographic location are presented below:
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Retirement Plans (Tables) |
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Schedule of components of net periodic benefit cost (credit) |
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Special Charges (Tables) |
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Special Charges | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of special charges |
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Schedule of restructuring reserve activity |
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Basis of Presentation (Details) $ / shares in Units, $ in Millions |
3 Months Ended | 6 Months Ended | ||
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Jul. 04, 2020
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Jun. 29, 2019
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Number of borrowing groups | item | 2 | |||
Cumulative catch-up method | ||||
Cumulative catch-up adjustments | $ 17 | $ 27 | $ 19 | $ 58 |
Change in accounting estimate financial effect, increase in net income or decrease in net loss | $ 13 | $ 21 | $ 14 | $ 44 |
Change in accounting estimate financial effect increase in earnings per share diluted or decrease in earnings per share diluted | $ / shares | $ 0.06 | $ 0.09 | $ 0.06 | $ 0.19 |
Gross favorable adjustments | $ 46 | $ 46 | $ 73 | $ 99 |
Gross unfavorable adjustments | $ 29 | $ 19 | $ 54 | $ 41 |
Accounts Receivable and Finance Receivables - Accounts receivable (Details) - Manufacturing group - USD ($) $ in Millions |
Jul. 04, 2020 |
Jan. 04, 2020 |
---|---|---|
Accounts Receivable | ||
Accounts Receivable, Gross | $ 806 | $ 950 |
Allowance for credit losses | (42) | (29) |
Total accounts receivable, net | 764 | 921 |
Commercial | ||
Accounts Receivable | ||
Accounts Receivable, Gross | 650 | 835 |
U.S. Government contracts | ||
Accounts Receivable | ||
Accounts Receivable, Gross | $ 156 | $ 115 |
Accounts Receivable and Finance Receivables - Finance receivables (Details) $ in Millions |
6 Months Ended | |
---|---|---|
Jul. 04, 2020
USD ($)
customer
|
Jan. 04, 2020
USD ($)
|
|
Finance Receivables | ||
Finance receivables | $ 719 | $ 707 |
Allowance for credit losses | (28) | (25) |
Total finance receivables, net | $ 691 | $ 682 |
Number of customers finance receivable contracts modified | customer | 75 | |
Modified finance receivable outstanding balance | $ 251 | |
Outstanding balance in the process of modification | $ 60 | |
Number of customers categorized as troubled debt restructurings | customer | 22 | |
Finance receivables categorized as troubled debt restructurings | $ 103 | |
Customer default related to finance receivables previously modified as a troubled debt restructuring that had an insignificant outstanding balance | customer | 1 |
Accounts Receivable and Finance Receivables - Finance receivables and allowance for losses based on the results of impairment evaluation (Details) - USD ($) $ in Millions |
6 Months Ended | 12 Months Ended |
---|---|---|
Jul. 04, 2020 |
Jan. 04, 2020 |
|
Finance receivables | ||
Finance receivables evaluated collectively | $ 458 | $ 564 |
Finance receivables evaluated individually | 156 | 39 |
Allowance for credit losses based on collective evaluation | 24 | 22 |
Allowance for credit losses based on individual evaluation | 4 | 3 |
Impaired finance receivables with no related allowance for credit losses | 135 | 22 |
Impaired finance receivables with related allowance for credit losses | 21 | 17 |
Unpaid principal balance of impaired finance receivables | 167 | 50 |
Allowance for credit losses on impaired loans | 4 | 3 |
Average recorded investment of impaired finance receivables | $ 103 | $ 40 |
Inventories (Details) - USD ($) $ in Millions |
Jul. 04, 2020 |
Jan. 04, 2020 |
---|---|---|
Inventories | ||
Finished goods | $ 1,593 | $ 1,557 |
Work in process | 1,659 | 1,616 |
Raw materials and components | 1,010 | 896 |
Total inventories | $ 4,262 | $ 4,069 |
Other Assets (Details) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended |
---|---|---|
Apr. 04, 2020 |
Jul. 04, 2020 |
|
Other Assets | ||
Proceeds from borrowings against corporate-owned life insurance policies | $ 377 | $ 377 |
Borrowings against corporate-owned life insurance policies | $ 362 |
Warranty Liability (Details) - USD ($) $ in Millions |
6 Months Ended | |
---|---|---|
Jul. 04, 2020 |
Jun. 29, 2019 |
|
Changes in warranty liability | ||
Balance at beginning of period | $ 141 | $ 149 |
Provision | 22 | 30 |
Settlements | (29) | (38) |
Adjustments | (12) | (5) |
Balance at end of period | $ 122 | $ 136 |
Leases (Details) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jul. 04, 2020 |
Jun. 29, 2019 |
Jul. 04, 2020 |
Jun. 29, 2019 |
|
Leases | ||||
Operating lease - Option to extend | true | |||
Operating lease cost | $ 15 | $ 16 | $ 30 | $ 32 |
Cash paid for operating lease liabilities | $ 30 | $ 32 | ||
Maximum | ||||
Leases | ||||
Operating lease and finance lease - Remaining lease term | 29 years | |||
Operating lease - Option to extend the lease, term | 25 years | 25 years |
Leases - Balance sheet and other information (Details) - USD ($) $ in Millions |
Jul. 04, 2020 |
Jan. 04, 2020 |
---|---|---|
Operating leases: | ||
Other assets | $ 255 | $ 277 |
Other current liabilities | 47 | 48 |
Other liabilities | $ 214 | $ 233 |
Weighted-average remaining lease term (in years) | ||
Operating leases | 10 years | 10 years 2 months 12 days |
Weighted-average discount rate | ||
Operating leases | 4.43% | 4.42% |
Leases - Maturity of lease liabilities (Details) $ in Millions |
Jul. 04, 2020
USD ($)
|
---|---|
Operating Leases | |
2020 | $ 32 |
2021 | 49 |
2022 | 41 |
2023 | 32 |
2024 | 25 |
Thereafter | $ 150 |
Debt (Details) - USD ($) $ in Millions |
Apr. 01, 2020 |
Mar. 17, 2020 |
Jul. 04, 2020 |
---|---|---|---|
Revolving credit facility | |||
Debt | |||
Maximum borrowing capacity | $ 1,000 | ||
364-Day Term Loan Credit Agreement | |||
Debt | |||
Debt instrument term | 364 days | ||
Issuance of debt | $ 500 | ||
Interest rate (as a percent) | 2.75% | ||
364-Day Term Loan Credit Agreement | London interbank offered rate | |||
Debt | |||
Floor rate (as a percent) | 0.75% | ||
Interest rate spread (as a percent) | 2.00% | ||
Fixed rate notes due 2030 | |||
Debt | |||
Issuance of debt | $ 650 | ||
Interest rate (as a percent) | 3.00% | ||
Net proceeds from issuance | $ 642 |
Derivative Instruments and Fair Value Measurements - Assets and liabilities recorded at fair value on a recurring basis (Details) - Manufacturing group - USD ($) $ in Millions |
6 Months Ended | |
---|---|---|
Jul. 04, 2020 |
Jan. 04, 2020 |
|
Fair value of derivative instruments | ||
Forward exchange contracts maximum maturity period | 3 years | |
Foreign currency exchange contracts | ||
Fair value of derivative instruments | ||
Notional amounts | $ 364 | $ 342 |
Level 2 | Foreign currency exchange contracts | ||
Fair value of derivative instruments | ||
Derivative Asset, Fair Value | 6 | 2 |
Derivative Liability, Fair Value | $ 8 | $ 2 |
Derivative Instruments and Fair Value Measurements - Assets and liabilities not recorded at fair value (Details) - USD ($) $ in Millions |
Jul. 04, 2020 |
Jan. 04, 2020 |
---|---|---|
Manufacturing group | Carrying Value | ||
Financial instruments not reflected at fair value | ||
Debt, excluding leases | $ (4,044) | $ (3,097) |
Manufacturing group | Estimated Fair Value | ||
Financial instruments not reflected at fair value | ||
Debt, excluding leases | (4,203) | (3,249) |
Finance group | ||
Financial instruments not reflected at fair value | ||
Debt | (670) | (686) |
Finance group | Carrying Value | ||
Financial instruments not reflected at fair value | ||
Finance receivables, excluding leases | 499 | 493 |
Debt | (670) | (686) |
Finance group | Estimated Fair Value | ||
Financial instruments not reflected at fair value | ||
Finance receivables, excluding leases | 503 | 527 |
Debt | $ (566) | $ (634) |
Shareholders' Equity - Earnings Per Share (Details) - shares shares in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jul. 04, 2020 |
Jun. 29, 2019 |
Jul. 04, 2020 |
Jun. 29, 2019 |
|
Weighted-average shares outstanding for basic and diluted EPS | ||||
Basic weighted-average shares outstanding | 228,247 | 232,013 | 228,279 | 233,426 |
Dilutive effect of stock options | 1,532 | 1,567 | ||
Diluted weighted-average shares outstanding | 228,247 | 233,545 | 228,279 | 234,993 |
Potential Common Shares | ||||
Weighted-average shares outstanding for basic and diluted EPS | ||||
Anti-dilutive effect of weighted average shares | 100 | 300 | ||
Stock options | ||||
Weighted-average shares outstanding for basic and diluted EPS | ||||
Anti-dilutive effect of weighted average shares | 8,900 | 3,100 | 8,200 | 3,100 |
Segment Information - Operating and reportable segments (Details) |
6 Months Ended |
---|---|
Jul. 04, 2020
segment
| |
Operating and reportable business segments | |
Number of business operating segments | 5 |
Number of reportable business segments | 5 |
Revenues - Contract Assets and Liabilities (Details) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
Jul. 04, 2020 |
Jun. 29, 2019 |
Jul. 04, 2020 |
Jun. 29, 2019 |
Jan. 04, 2020 |
|
Contract Assets and Liabilities | |||||
Contract assets | $ 542 | $ 542 | $ 567 | ||
Contract liabilities | 927 | 927 | $ 830 | ||
Revenue recognized included in contract liabilities | $ 121 | $ 146 | $ 352 | $ 457 |
Retirement Plans (Details) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jul. 04, 2020 |
Jun. 29, 2019 |
Jul. 04, 2020 |
Jun. 29, 2019 |
|
Pension Benefits | ||||
Net periodic benefit cost (credit) | ||||
Service cost | $ 26 | $ 22 | $ 52 | $ 45 |
Interest cost | 74 | 81 | 147 | 163 |
Expected return on plan assets | (143) | (139) | (287) | (278) |
Amortization of net actuarial loss | 46 | 25 | 92 | 50 |
Amortization of prior service cost | 3 | 4 | 6 | 7 |
Net periodic benefit cost (credit) | 6 | (7) | 10 | (13) |
Postretirement Benefits Other Than Pensions | ||||
Net periodic benefit cost (credit) | ||||
Service cost | 1 | 2 | 1 | |
Interest cost | 2 | 3 | 4 | 5 |
Amortization of net actuarial loss | (1) | (1) | ||
Amortization of prior service cost | (2) | (1) | (3) | (3) |
Net periodic benefit cost (credit) | $ 1 | $ 1 | $ 3 | $ 2 |
Special Charges - Special charges by segment (Details) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended |
---|---|---|
Jul. 04, 2020 |
Jul. 04, 2020 |
|
Special Charges | ||
Asset impairments | $ 15 | $ 54 |
Contract Terminations and Other | 12 | 12 |
Severance Costs | 51 | 51 |
Total | 78 | 117 |
Corporate | ||
Special Charges | ||
Severance Costs | 2 | 2 |
Total | 2 | 2 |
Textron Systems | ||
Special Charges | ||
Asset impairments | 14 | 14 |
Contract Terminations and Other | 12 | 12 |
Severance Costs | 14 | 14 |
Total | 40 | 40 |
Textron Aviation | ||
Special Charges | ||
Asset impairments | 1 | 33 |
Severance Costs | 27 | 27 |
Total | 28 | 60 |
Industrial | ||
Special Charges | ||
Asset impairments | 7 | |
Severance Costs | 8 | 8 |
Total | $ 8 | $ 15 |
Special Charges - 2020 Covid 19 Restructuring Plan (Details) $ in Millions |
3 Months Ended | 6 Months Ended |
---|---|---|
Jul. 04, 2020
USD ($)
position
|
Jul. 04, 2020
USD ($)
|
|
2020 Restructuring Plan | ||
TRU inventory valuation charge | $ 55 | $ 55 |
2020 COVID-19 Restructuring Plan | ||
2020 Restructuring Plan | ||
Restructuring and Related Cost, Cost Incurred to Date | $ 78 | 78 |
Number of positions eliminated | position | 1,950 | |
Percentage of workforce reduction | 6.00% | |
TRU inventory valuation charge | $ 55 | |
Minimum | 2020 COVID-19 Restructuring Plan | ||
2020 Restructuring Plan | ||
Restructuring and Related Cost, Expected Cost | 110 | 110 |
Maximum | 2020 COVID-19 Restructuring Plan | ||
2020 Restructuring Plan | ||
Restructuring and Related Cost, Expected Cost | $ 130 | $ 130 |
Special Charges Asset Impairment Charges (Details) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | |
---|---|---|---|
Jul. 04, 2020 |
Apr. 04, 2020 |
Jul. 04, 2020 |
|
Special Charges | |||
Asset impairments | $ 15 | $ 54 | |
Beechcraft and King Air trade name intangible assets | |||
Special Charges | |||
Discount rate to determine fair value (as a percent) | 9.70% | ||
Impairment charge | $ 32 | ||
Intangible assets | $ 169 | $ 169 | |
Arctic Cat trade name intangible asset | |||
Special Charges | |||
Impairment charge | 7 | ||
Textron Aviation and Industrial segments | |||
Special Charges | |||
Asset impairments | $ 39 |
Special Charges - Restructuring reserve (Details) $ in Millions |
6 Months Ended |
---|---|
Jul. 04, 2020
USD ($)
| |
Restructuring Reserve [Roll Forward] | |
Balance at January 4, 2020 | $ 65 |
Provision for 2020 COVID-19 plan | 63 |
Cash paid | (36) |
Balance at July 4, 2020 | 92 |
Remaining cash outlays expected to be paid | 92 |
Severance Costs | |
Restructuring Reserve [Roll Forward] | |
Balance at January 4, 2020 | 46 |
Provision for 2020 COVID-19 plan | 51 |
Cash paid | (31) |
Balance at July 4, 2020 | 66 |
Contract Terminations and Other | |
Restructuring Reserve [Roll Forward] | |
Balance at January 4, 2020 | 19 |
Provision for 2020 COVID-19 plan | 12 |
Cash paid | (5) |
Balance at July 4, 2020 | $ 26 |
Income Taxes (Details) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jul. 04, 2020 |
Jun. 29, 2019 |
Jul. 04, 2020 |
Jun. 29, 2019 |
|
Income Taxes | ||||
Effective income tax rate (as a percent) | (22.00%) | 22.20% | (14.30%) | 19.30% |
U.S. federal statutory income tax rate (as a percent) | 21.00% | 21.00% | ||
Tax benefit recognized upon the release of a valuation allowance | $ 14 | |||
Discrete tax benefit | $ 12 |