TEXTRON INC, 10-K filed on 2/15/2018
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 30, 2017
Feb. 3, 2018
Jul. 1, 2017
Document and Entity Information
 
 
 
Entity Registrant Name
TEXTRON INC 
 
 
Entity Central Index Key
0000217346 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 30, 2017 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-30 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 12.5 
Entity Common Stock, Shares Outstanding
 
261,771,970 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 30, 2017
Dec. 31, 2016
Jan. 2, 2016
Revenues
 
 
 
Manufacturing revenues
$ 14,129 
$ 13,710 
$ 13,340 
Finance revenues
69 
78 
83 
Total revenues
14,198 
13,788 
13,423 
Costs, expenses and other
 
 
 
Cost of sales
11,795 
11,311 
10,979 
Selling and administrative expense
1,337 
1,304 
1,304 
Interest expense
174 
174 
169 
Special charges
130 
123 
 
Total costs, expenses and other
13,436 
12,912 
12,452 
Income from continuing operations before income taxes
762 
876 
971 
Income tax expense
456 
33 
273 
Income (loss) from continuing operations
306 
843 
698 
Income (loss) from discontinued operations, net of income taxes
1
119 1
(1)1
Net income (loss)
$ 307 
$ 962 
$ 697 
Basic earnings per share
 
 
 
Continuing operations (in dollars per share)
$ 1.15 
$ 3.11 
$ 2.52 
Discontinued operations (in dollars per share)
 
$ 0.44 
 
Basic earnings per share (in dollars per share)
$ 1.15 
$ 3.55 
$ 2.52 
Diluted earnings per share
 
 
 
Continuing operations (in dollars per share)
$ 1.14 
$ 3.09 
$ 2.50 
Discontinued operations (in dollars per share)
 
$ 0.44 
 
Diluted earnings per share (in dollars per share)
$ 1.14 
$ 3.53 
$ 2.50 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 30, 2017
Dec. 31, 2016
Jan. 2, 2016
Consolidated Statements of Comprehensive Income
 
 
 
Net income (loss)
$ 307 
$ 962 
$ 697 
Other comprehensive income (loss), net of tax:
 
 
 
Pension and postretirement benefits adjustments, net of reclassifications
109 
(178)
184 
Foreign currency translation adjustments
107 
(49)
(65)
Deferred gains (losses) on hedge contracts, net of reclassifications
14 
20 
(11)
Other comprehensive income (loss)
230 
(207)
108 
Comprehensive income
$ 537 
$ 755 
$ 805 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 30, 2017
Dec. 31, 2016
Assets
 
 
Cash and equivalents
$ 1,262 
$ 1,298 
Inventories
4,150 
4,464 
Property, plant and equipment, net
2,721 
2,581 
Finance receivables, net
819 
935 
Total assets
15,340 
15,358 
Liabilities
 
 
Total liabilities
9,693 
9,784 
Shareholders' equity
 
 
Common stock (262.3 million and 270.3 million shares issued, respectively, and 261.5 million and 270.3 million shares outstanding, respectively)
33 
34 
Capital surplus
1,669 
1,599 
Treasury stock
(48)
 
Retained earnings
5,368 
5,546 
Accumulated other comprehensive loss
(1,375)
(1,605)
Total shareholders' equity
5,647 
5,574 
Total liabilities and shareholders' equity
15,340 
15,358 
Manufacturing group
 
 
Assets
 
 
Cash and equivalents
1,079 
1,137 
Accounts receivable, net
1,363 
1,064 
Inventories
4,150 
4,464 
Other current assets
435 
388 
Total current assets
7,027 
7,053 
Property, plant and equipment, net
2,721 
2,581 
Goodwill
2,364 
2,113 
Other assets
2,059 
2,331 
Total assets
14,171 
14,078 
Liabilities
 
 
Short-term debt and current portion of long-term debt
14 
363 
Accounts payable
1,205 
1,273 
Accrued liabilities
2,441 
2,257 
Total current liabilities
3,660 
3,893 
Other liabilities
2,006 
2,354 
Long-term debt
3,074 
2,414 
Debt
3,088 
2,777 
Total liabilities
8,740 
8,661 
Finance group
 
 
Assets
 
 
Cash and equivalents
183 
161 
Finance receivables, net
819 
935 
Other assets
167 
184 
Total assets
1,169 
1,280 
Liabilities
 
 
Other liabilities
129 
220 
Debt
824 
903 
Total liabilities
$ 953 
$ 1,123 
Consolidated Balance Sheets (Parenthetical)
Dec. 30, 2017
Dec. 31, 2016
Consolidated Balance Sheets
 
 
Common stock, shares issued
262,300,000 
270,300,000 
Common stock, shares outstanding
261,471,000 
270,287,000 
Consolidated Statements of Shareholders' Equity (USD $)
In Millions, unless otherwise specified
Common Stock
Capital Surplus
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Loss
Total
Beginning Balance at Jan. 03, 2015
$ 36 
$ 1,459 
$ (340)
$ 4,623 
$ (1,506)
$ 4,272 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income (loss)
 
 
 
697 
 
697 
Other comprehensive income (loss)
 
 
 
 
108 
108 
Dividends declared ($0.08 per share)
 
 
 
(22)
 
(22)
Share-based compensation activity
 
126 
 
 
 
126 
Purchases of common stock
 
 
(219)
 
 
(219)
Other
 
 
 
 
Ending Balance at Jan. 02, 2016
36 
1,587 
(559)
5,298 
(1,398)
4,964 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income (loss)
 
 
 
962 
 
962 
Other comprehensive income (loss)
 
 
 
 
(207)
(207)
Dividends declared ($0.08 per share)
 
 
 
(22)
 
(22)
Share-based compensation activity
119 
 
 
 
120 
Purchases of common stock
 
 
(241)
 
 
(241)
Retirement of treasury stock
(3)
(105)
800 
(692)
 
 
Other
 
(2)
 
 
 
(2)
Ending Balance at Dec. 31, 2016
34 
1,599 
 
5,546 
(1,605)
5,574 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income (loss)
 
 
 
307 
 
307 
Other comprehensive income (loss)
 
 
 
 
230 
230 
Dividends declared ($0.08 per share)
 
 
 
(21)
 
(21)
Share-based compensation activity
 
139 
 
 
 
139 
Purchases of common stock
 
 
(582)
 
 
(582)
Retirement of treasury stock
(1)
(69)
534 
(464)
 
 
Ending Balance at Dec. 30, 2017
$ 33 
$ 1,669 
$ (48)
$ 5,368 
$ (1,375)
$ 5,647 
Consolidated Statements of Shareholders' Equity (Parenthetical)
3 Months Ended 12 Months Ended
Dec. 30, 2017
Sep. 30, 2017
Jul. 1, 2017
Apr. 1, 2017
Dec. 31, 2016
Oct. 1, 2016
Jul. 2, 2016
Apr. 2, 2016
Dec. 30, 2017
Dec. 31, 2016
Jan. 2, 2016
Consolidated Statements of Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Dividends declared, per share (in dollars per share)
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.08 
$ 0.08 
$ 0.08 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 30, 2017
Dec. 31, 2016
Jan. 2, 2016
Cash flows from operating activities
 
 
 
Net income
$ 307 
$ 962 
$ 697 
Less: Income (loss) from discontinued operations
1
119 1
(1)1
Income (loss) from continuing operations
306 
843 
698 
Non-cash items:
 
 
 
Depreciation and amortization
447 
449 
461 
Asset impairments
47 
40 
Deferred income taxes
346 
48 
Other, net
90 
92 
99 
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(236)
(33)
(14)
Inventories
412 
(352)
(239)
Other assets
(27)
72 
(36)
Accounts payable
(156)
215 
43 
Accrued and other liabilities
(113)
(281)
(155)
Income taxes, net
78 
(189)
71 
Pension, net
(277)
25 
69 
Captive finance receivables, net
67 
75 
90 
Other operating activities, net
(4)
10 
(4)
Net cash provided by (used in) operating activities of continuing operations
980 
1,014 
1,094 
Net cash used in operating activities of discontinued operations
(27)
(2)
(4)
Net cash provided by (used in) operating activities
953 
1,012 
1,090 
Cash flows from investing activities
 
 
 
Capital expenditures
(423)
(446)
(420)
Net cash used in acquisitions
(331)
(186)
(81)
Finance receivables repaid
32 
44 
67 
Other investing activities, net
60 
65 
46 
Net cash provided by (used in) investing activities
(662)
(523)
(388)
Cash flows from financing activities
 
 
 
Proceeds from long-term debt
1,036 
525 
61 
Principal payments on long-term debt and nonrecourse debt
(841)
(457)
(356)
Purchases of Textron common stock
(582)
(241)
(219)
Proceeds from exercise of stock options
52 
36 
32 
Dividends paid
(21)
(22)
(22)
Other financing activities, net
(4)
(9)
 
Net cash used in financing activities
(360)
(168)
(504)
Effect of exchange rate changes on cash and equivalents
33 
(28)
(15)
Net increase (decrease) in cash and equivalents
(36)
293 
183 
Cash and equivalents at beginning of year
1,298 
1,005 
822 
Cash and equivalents at end of year
1,262 
1,298 
1,005 
Manufacturing group
 
 
 
Cash flows from operating activities
 
 
 
Net income
248 
951 
683 
Less: Income (loss) from discontinued operations
119 
(1)
Income (loss) from continuing operations
247 
832 
684 
Non-cash items:
 
 
 
Depreciation and amortization
435 
437 
449 
Asset impairments
47 
40 
Deferred income taxes
390 
36 
14 
Other, net
94 
90 
90 
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(236)
(33)
(14)
Inventories
422 
(347)
(241)
Other assets
(26)
104 
(40)
Accounts payable
(156)
215 
43 
Accrued and other liabilities
(108)
(276)
(144)
Income taxes, net
119 
(174)
62 
Pension, net
(277)
25 
69 
Dividends received from Finance group
 
29 
63 
Other operating activities, net
(4)
10 
(4)
Net cash provided by (used in) operating activities of continuing operations
947 
988 
1,038 
Net cash used in operating activities of discontinued operations
(27)
(2)
(4)
Net cash provided by (used in) operating activities
920 
986 
1,034 
Cash flows from investing activities
 
 
 
Capital expenditures
(423)
(446)
(420)
Net cash used in acquisitions
(331)
(186)
(81)
Other investing activities, net
11 
Net cash provided by (used in) investing activities
(745)
(621)
(496)
Cash flows from financing activities
 
 
 
Proceeds from long-term debt
992 
345 
 
Principal payments on long-term debt and nonrecourse debt
(704)
(254)
(100)
Purchases of Textron common stock
(582)
(241)
(219)
Proceeds from exercise of stock options
52 
36 
32 
Dividends paid
(21)
(22)
(22)
Other financing activities, net
(3)
(10)
Net cash used in financing activities
(266)
(146)
(308)
Effect of exchange rate changes on cash and equivalents
33 
(28)
(15)
Net increase (decrease) in cash and equivalents
(58)
191 
215 
Cash and equivalents at beginning of year
1,137 
946 
731 
Cash and equivalents at end of year
1,079 
1,137 
946 
Finance group
 
 
 
Cash flows from operating activities
 
 
 
Net income
59 
11 
14 
Income (loss) from continuing operations
59 
11 
14 
Non-cash items:
 
 
 
Depreciation and amortization
12 
12 
12 
Deferred income taxes
(44)
12 
(10)
Other, net
(4)
Changes in assets and liabilities:
 
 
 
Other assets
(1)
(6)
Accrued and other liabilities
(5)
(5)
(8)
Income taxes, net
(41)
(15)
Net cash provided by (used in) operating activities of continuing operations
(24)
11 
30 
Net cash provided by (used in) operating activities
(24)
11 
30 
Cash flows from investing activities
 
 
 
Finance receivables repaid
273 
292 
351 
Finance receivables originated
(174)
(173)
(194)
Other investing activities, net
41 
23 
40 
Net cash provided by (used in) investing activities
140 
142 
197 
Cash flows from financing activities
 
 
 
Proceeds from long-term debt
44 
180 
61 
Principal payments on long-term debt and nonrecourse debt
(137)
(203)
(256)
Dividends paid
 
(29)
(63)
Other financing activities, net
(1)
(1)
Net cash used in financing activities
(94)
(51)
(259)
Net increase (decrease) in cash and equivalents
22 
102 
(32)
Cash and equivalents at beginning of year
161 
59 
91 
Cash and equivalents at end of year
$ 183 
$ 161 
$ 59 
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

 

Note 1. Summary of Significant Accounting Policies

 

Principles of Consolidation and Financial Statement Presentation

Our Consolidated Financial Statements include the accounts of Textron Inc. and its majority-owned subsidiaries.  Our financings are conducted through two separate borrowing groups. The Manufacturing group consists of Textron Inc. consolidated with its majority-owned subsidiaries that operate in the Textron Aviation, Bell, Textron Systems and Industrial segments. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation (TFC) and its consolidated subsidiaries. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services.  Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance.  To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements.

 

Our Finance group provides financing primarily to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters manufactured by our Manufacturing group, otherwise known as captive financing.  In the Consolidated Statements of Cash Flows, cash received from customers is reflected as operating activities when received from third parties.  However, in the cash flow information provided for the separate borrowing groups, cash flows related to captive financing activities are reflected based on the operations of each group.  For example, when product is sold by our Manufacturing group to a customer and is financed by the Finance group, the origination of the finance receivable is recorded within investing activities as a cash outflow in the Finance group’s statement of cash flows.  Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the Finance group on the customer’s behalf is recorded within operating cash flows as a cash inflow.  Although cash is transferred between the two borrowing groups, there is no cash transaction reported in the consolidated cash flows at the time of the original financing.  These captive financing activities, along with all significant intercompany transactions, are reclassified or eliminated in consolidation.

 

Collaborative Arrangements

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

 

Use of Estimates

We prepare our financial statements in conformity with generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements.  Actual results could differ from those estimates. Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the Consolidated Statements of Operations in the period that they are determined.

 

We periodically change our estimates of revenues and costs on certain long-term contracts that are accounted for under the percentage-of-completion method of accounting. These changes in estimates increased income from continuing operations before income taxes by $5 million, $83 million and $78 million in 2017, 2016 and 2015, respectively, ($3 million, $52 million and $49 million after tax, respectively, or $0.01, $0.19 and $0.18 per diluted share, respectively).  For 2017, 2016 and 2015, the gross favorable program profit adjustments totaled $92 million, $106 million and $111 million, respectively, and the gross unfavorable program profit adjustments totaled $87 million, $23 million and $33 million, respectively. Gross unfavorable program adjustments for 2017 included $44 million related to the Tactical Armoured Patrol Vehicle program. In 2017, this program experienced inefficiencies resulting from various production issues during the ramp up and subsequent production.

 

Revenue Recognition

We generally recognize revenue for the sale of products, which are not under long-term contracts, upon delivery.  For commercial aircraft, delivery is upon completion of manufacturing, customer acceptance, and the transfer of the risk and rewards of ownership.  Taxes collected from customers and remitted to government authorities are recorded on a net basis.

 

When a sale arrangement involves multiple deliverables, such as sales of products that include customization and other services, we evaluate the arrangement to determine whether there are separate items that are required to be delivered under the arrangement that qualify as separate units of accounting.  These arrangements typically involve the customization services we offer to customers who purchase Bell helicopters, and the services generally are provided within the first six months after the customer accepts the aircraft and assumes risk of loss.  We consider the aircraft and the customization services to be separate units of accounting and allocate contract price between the two on a relative selling price basis using the best evidence of selling price for each of the deliverables, typically by reference to the price charged when the same or similar items are sold separately by us.  We also consider any performance, cancellation, termination or refund-type provisions.  Revenue is recognized when the recognition criteria for each unit of accounting are met.

 

Long-Term Contracts

Revenues under long-term contracts are accounted for under the percentage-of-completion method of accounting.  Under this method, we estimate profit as the difference between the total estimated revenues and cost of a contract.  We then recognize that estimated profit over the contract term based on either the units-of-delivery method or the cost-to-cost method (which typically is used for development effort as costs are incurred), as appropriate under the circumstances.  Revenues under fixed-price contracts generally are recorded using the units-of-delivery method.  Revenues under cost-reimbursement contracts are recorded using the cost-to-cost method.

 

Long-term contract profits are based on estimates of total contract cost and revenues utilizing current contract specifications, expected engineering requirements, the achievement of contract milestones and product deliveries.  Certain contracts are awarded with fixed-price incentive fees that also are considered when estimating revenues and profit rates.  Contract costs typically are incurred over a period of several years, and the estimation of these costs requires substantial judgment.  Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals.  We update our projections of costs at least semiannually or when circumstances significantly change.  When adjustments are required, any changes from prior estimates are recognized using the cumulative catch-up method with the impact of the change from inception-to-date recorded in the current period.  Anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable.

 

Finance Revenues

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

 

Cash and Equivalents

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

 

Inventories

Inventories are stated at the lower of cost or estimated net realizable value.  We value our inventories generally using the first-in, first-out (FIFO) method or the last-in, first-out (LIFO) method for certain qualifying inventories where LIFO provides a better matching of costs and revenues. We determine costs for our commercial helicopters on an average cost basis by model considering the expended and estimated costs for the current production release.  Inventories include costs related to long-term contracts, which are stated at actual production costs, including allocable operating overhead, advances to suppliers, and, in the case of contracts with the U.S. Government, allocable research and development and general and administrative expenses.  Since our inventoried costs include amounts related to contracts with long production cycles, a portion of these costs is not expected to be realized within one year.  Pursuant to contract provisions, agencies of the U.S. Government have title to, or security interest in, inventories related to such contracts as a result of advances, performance-based payments and progress payments.  Accordingly, these advances and payments are reflected as an offset against the related inventory balances with any remaining amounts recorded as a liability in customer deposits.  Customer deposits are recorded against inventory only when the right of offset exists, while all other customer deposits are recorded in Accrued liabilities.

 

Property, Plant and Equipment

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

 

Goodwill and Intangible Assets

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

 

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

 

Acquired intangible assets with finite lives are subject to amortization. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  Amortization of these intangible assets is recognized over their estimated useful lives using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized.  Approximately 78% of our gross intangible assets are amortized based on the cash flow streams used to value the assets, with the remaining assets amortized using the straight-line method.

 

Finance Receivables

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

 

We maintain an allowance for losses on finance receivables at a level considered adequate to cover inherent losses in the portfolio based on management’s evaluation.  For larger balance accounts specifically identified as impaired, a reserve is established based on comparing the expected future cash flows, discounted at the finance receivable’s effective interest rate, or the fair value of the underlying collateral if the finance receivable is collateral dependent, to its carrying amount. The expected future cash flows consider collateral value; financial performance and liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs associated with the repossession and eventual disposal of collateral. When there is a range of potential outcomes, we perform multiple discounted cash flow analyses and weight the potential outcomes based on their relative likelihood of occurrence. The evaluation of our portfolio is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the estimated fair value of the underlying collateral, which may differ from actual results. While our analysis is specific to each individual account, critical factors included in this analysis include industry valuation guides, age and physical condition of the collateral, payment history and existence and financial strength of guarantors.

 

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

 

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

 

Pension and Postretirement Benefit Obligations

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

 

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

 

Derivatives and Hedging Activities

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

 

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

 

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

 

Product Liabilities

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

 

Environmental Liabilities and Asset Retirement Obligations

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

 

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

 

Warranty and Product Maintenance Liabilities

We provide limited warranty and product maintenance programs for certain products for periods ranging from one to five years.  A significant portion of these liabilities arises from our commercial aircraft businesses.  For our product maintenance contracts, revenue is recognized on a straight-line basis over the contract period, unless sufficient historical evidence indicates that the cost of providing these services is incurred on a basis other than straight-line.  In those circumstances, revenue is recognized over the contract period in proportion to the costs expected to be incurred in performing the service.

 

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

 

Research and Development Costs

Our customer-funded research and development costs are charged directly to the related contracts, which primarily consist of U.S. Government contracts. In accordance with government regulations, we recover a portion of company-funded research and development costs through overhead rate charges on our U.S. Government contracts.  Research and development costs that are not reimbursable under a contract with the U.S. Government or another customer are charged to expense as incurred.  Company-funded research and development costs were $634 million, $677 million and $778 million in 2017, 2016 and 2015, respectively, and are included in cost of sales.

 

Income Taxes

The provision for income tax expense is calculated on reported Income from continuing operations before income taxes based on current tax law and includes, in the current period, the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Tax laws may require items to be included in the determination of taxable income at different times from when the items are reflected in the financial statements. Deferred tax balances reflect the effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and their tax bases, as well as from net operating losses and tax credit carryforwards, and are stated at enacted tax rates in effect for the year taxes are expected to be paid or recovered.  Deferred tax assets represent tax benefits for tax deductions or credits available in future years and require certain estimates and assumptions to determine whether it is more likely than not that all or a portion of the benefit will not be realized.  The recoverability of these future tax deductions and credits is determined by assessing the adequacy of future expected taxable income from all sources, including the future reversal of existing taxable temporary differences, taxable income in carryback years, estimated future taxable income and available tax planning strategies. Should a change in facts or circumstances lead to a change in judgment about the ultimate recoverability of a deferred tax asset, we record or adjust the related valuation allowance in the period that the change in facts and circumstances occurs, along with a corresponding increase or decrease in income tax expense.

 

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

 

New Accounting Standards

 

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, that outlines a five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This new standard became effective for us at the beginning of 2018, and will be adopted using the modified retrospective transition method. Under this method, we will record the cumulative effect of adopting the new standard in the first quarter of 2018.

 

Based on review and analysis of our contracts, the standard primarily impacts our Bell and Textron Systems segments, which have long-term production contracts with the U.S. Government.  Prior to adoption of the new standard, revenue was generally recognized for these contracts as units were delivered, while under the new standard, revenue will be recognized over time, principally as costs are incurred.  This change will generally result in an acceleration of revenue for these contracts.  At the adoption date, the impact of recognizing these revenues under the new standard for historical periods ending prior to December 31, 2017 will result in a cumulative after-tax transition adjustment to increase retained earnings by approximately $90 million, largely related to the Bell segment.  In addition, the transition adjustment will establish contract assets of approximately $350 million, with corresponding decreases in inventory of approximately $200 million and in contract liabilities (deferred revenue and customer deposits) and accounts receivables, primarily reflecting the conversion of contracts to the cost-to-cost method.  This change is not expected to have a significant impact on our future operating results as the revenues that would have been recognized under the units-of-delivery method in future years, will essentially be replaced by the acceleration of revenue on other contracts into earlier periods using the cost-to-cost method. The new standard will have no impact on cash flows and does not affect the economics of our underlying customer contracts.  The standard does not have a significant impact on revenue recognition for our Textron Aviation and Industrial segments, which will continue to primarily recognize revenue at the point in time when the customer accepts delivery of the goods provided.

 

At the end of 2017, our backlog excluded amounts where funding from the U.S. Government had not been formally appropriated.  Under the new standard, backlog will generally include these unfunded amounts as backlog will be the equivalent of the transaction price allocated to our remaining performance obligations, which represents the revenue we expect to recognize under our contracts in future periods for which work has not yet been performed.  At adoption, the increase in our backlog for the unfunded amounts will be fully offset by the decrease due to the acceleration of revenues in the transition adjustment.  We expect backlog at the Bell segment to decrease by approximately 15% at the adoption date, which will partially be offset by an increase of approximately 7% at the Textron Systems segment.

 

We have updated the accounting policies affected by this standard, redesigned our related internal controls over financial reporting and are expanding the disclosures to be included in our first quarter Form 10-Q to meet the new requirements.

 

Other Standards

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  This standard requires companies to present only the service cost component of net periodic benefit costs in operating income in the same line as other employee compensation costs, while the other components of net periodic benefit costs must be excluded from operating income. In addition, only the service cost component will be eligible for capitalization into inventory.  This standard is effective for our company at the beginning of 2018.  The reclassification of the other components of net periodic benefit cost out of operating income must be applied retrospectively, while the change in the amount companies may capitalize into inventory can be applied prospectively.  This standard will not have a material impact on our consolidated financial statements and will not change our segment reporting.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, that requires lessees to recognize all leases with a term greater than 12 months on the balance sheet as right-to-use assets and lease liabilities, while lease expenses would continue to be recognized in the statement of operations in a manner similar to current accounting guidance.  Under the current accounting guidance, we are not required to recognize assets and liabilities arising from operating leases on the balance sheet.  The new standard is effective for our company at the beginning of 2019 and early adoption is permitted.  Entities must adopt the standard on a modified retrospective basis whereby it would be applied at the beginning of the earliest comparative year.  While we continue to evaluate the impact of the standard on our consolidated financial statements, we expect that it will materially increase the assets and liabilities on our consolidated balance sheet as we recognize the rights and corresponding obligations related to operating leases.

 

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 with early adoption permitted beginning in 2019.  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.

Business Acquisitions, Goodwill and Intangible Assets
Business Acquisitions, Goodwill and Intangible Assets

 

Note 2. Business Acquisitions, Goodwill and Intangible Assets

 

2017 Acquisitions

On March 6, 2017, we completed the acquisition of Arctic Cat Inc. (Arctic Cat), a publicly-held company (NASDAQ: ACAT), pursuant to a cash tender offer for $18.50 per share, followed by a short-form merger.  Arctic Cat manufactures and markets all-terrain vehicles, side-by-sides and snowmobiles, in addition to related parts, garments and accessories.  The cash paid for this business, including repayment of debt and net of cash acquired, totaled $316 million.  Arctic Cat provides a platform to expand our product portfolio and increase our distribution channel to support growth within our Textron Specialized Vehicles business in the Industrial segment.  The operating results of Arctic Cat are included in the Consolidated Statements of Operations since the closing date.

 

We allocated the consideration paid for this business on a preliminary basis to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date.  We expect to finalize the purchase accounting in the first quarter of 2018.  Based on the preliminary allocation, $230 million has been allocated to goodwill, related to expected synergies and the value of the assembled workforce, and $75 million to intangible assets, which included $18 million of indefinite-lived assets related to tradenames. The definite-lived intangible assets are primarily related to customer/dealer relationships and technology, which will be amortized over 8 to 20 years. We determined the value of the intangible assets using the relief-from-royalty and multi-period excess earnings methods, which utilize significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy.  Under these valuation methods, we are required to make estimates and assumptions about sales, operating margins, growth rates, royalty rates and discount rates based on anticipated cash flows and marketplace data.  Approximately $5 million of the goodwill is deductible for tax purposes.

 

2016 and 2015 Acquisitions

In 2016, we paid $186 million in cash and assumed debt of $19 million to acquire six businesses, net of cash acquired and holdbacks.  Our acquisition of Able Engineering and Component Services, Inc. and Able Aerospace, Inc. in the first quarter of 2016 represented the largest of these businesses and is included in the Textron Aviation segment.  During 2015, we made aggregate cash payments for acquisitions of $81 million, which included three businesses within our Industrial and Textron Aviation segments.

 

Goodwill

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

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Textron
Aviation

 

Bell

 

Textron
Systems

 

Industrial

 

Total

Balance at January 2, 2016

$

560

$

31

$

1,051

$

381

$

2,023

Acquisitions

 

54

 

 

36

 

7

 

97

Foreign currency translation

 

(1)

 

 

 

(6)

 

(7)

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

613

 

31

 

1,087

 

382

 

2,113

Acquisitions

 

 

 

 

234

 

234

Foreign currency translation

 

1

 

 

 

16

 

17

 

 

 

 

 

 

 

 

 

 

 

Balance at December 30, 2017

$

614

$

31

$

1,087

$

632

$

2,364

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible Assets

Our intangible assets are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 30, 2017

December 31, 2016

(Dollars in millions)

 

Weighted-
Average
Amortization
Period (in years)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

Patents and technology

 

14

$

545

$

(188)

$

357

$

537

$

(158)

$

379

Customer relationships and
contractual agreements

 

15

 

418

 

(255)

 

163

 

384

 

(226)

 

158

Trade names and trademarks

 

15

 

284

 

(40)

 

244

 

264

 

(36)

 

228

Other

 

9

 

18

 

(17)

 

1

 

18

 

(16)

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

1,265

$

(500)

$

765

$

1,203

$

(436)

$

767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names and trademarks in the table above include $222 million and $204 million of indefinite-lived intangible assets at December 30, 2017 and December 31, 2016, respectively.  Amortization expense totaled $69 million, $66 million and $61 million in 2017, 2016 and 2015, respectively. Amortization expense is estimated to be approximately $68 million, $66 million, $61 million, $58 million and $58 million in 2018, 2019, 2020, 2021 and 2022, respectively.

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)

 

 

 

 

 

December 30,
2017

 

December 31,
2016

Commercial

 

 

 

 

$

1,007

$

797

U.S. Government contracts

 

 

 

 

 

383

 

294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,390

 

1,091

Allowance for doubtful accounts

 

 

 

 

 

(27)

 

(27)

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

1,363

$

1,064

 

 

 

 

 

 

 

 

 

 

We have unbillable receivables, primarily on U.S. Government contracts, that arise when the revenues we have appropriately recognized based on performance cannot be billed yet under terms of the contract. Unbillable receivables within accounts receivable totaled $179 million at December 30, 2017 and $178 million at December 31, 2016.

 

Finance Receivables

Finance receivables are presented in the following table:

 

(In millions)

 

 

 

 

 

December 30,
2017

 

December 31,
2016

Finance receivables*

 

 

 

 

$

850

$

976

Allowance for losses

 

 

 

 

 

(31)

 

(41)

 

 

 

 

 

 

 

 

 

Total finance receivables, net

 

 

 

 

$

819

$

935

 

 

 

 

 

 

 

 

 

* Included finance receivables held for sale of $30 million at December 31, 2016.

 

Finance receivables primarily includes loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters.  These loans typically have initial terms ranging from five to ten years, amortization terms ranging from eight to fifteen years and an average balance of $1 million at December 30, 2017.  Loans generally require the customer to pay a significant down payment, along with periodic scheduled principal payments that reduce the outstanding balance through the term of the loan.

 

Our finance receivables are diversified across geographic region and borrower industry.  At December 30, 2017, 56% of our finance receivables were distributed internationally and 44% throughout the U.S., compared with 61% and 39%, respectively, at the end of 2016.  At December 30, 2017 and December 31, 2016, finance receivables of $257 million and $411 million, respectively, have been pledged as collateral for TFC’s debt of $175 million and $244 million, respectively.

 

Finance Receivable Portfolio Quality

Credit Quality Indicators and Nonaccrual Finance Receivables

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.

 

Delinquency

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

 

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

 

(Dollars in millions)

 

 

 

 

 

December 30,
2017

 

December 31,
2016

Performing

 

 

 

 

$

733

$

758

Watchlist

 

 

 

 

 

56

 

101

Nonaccrual

 

 

 

 

 

61

 

87

 

 

 

 

 

 

 

 

 

Nonaccrual as a percentage of finance receivables

 

 

 

 

 

7.18%

 

9.20%

 

 

 

 

 

 

 

 

 

Less than 31 days past due

 

 

 

 

$

791

$

857

31-60 days past due

 

 

 

 

 

25

 

49

61-90 days past due

 

 

 

 

 

14

 

18

Over 90 days past due

 

 

 

 

 

20

 

22

 

 

 

 

 

 

 

 

 

60+ days contractual delinquency as a percentage of finance receivables

 

 

 

 

 

4.00%

 

4.23%

 

 

 

 

 

 

 

 

 

 

Impaired Loans

On a quarterly basis, we evaluate individual finance receivables for impairment in non-homogeneous portfolios and larger balance accounts in homogeneous loan portfolios.  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.  Interest income recognized on impaired loans was not significant in 2017 or 2016.

 

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

 

(In millions)

 

 

 

 

 

December 30,
2017

 

December 31,
2016

Recorded investment:

 

 

 

 

 

 

 

 

Impaired loans with related allowance for losses

 

 

 

 

$

24

$

55

Impaired loans with no related allowance for losses

 

 

 

 

 

70

 

65

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

94

$

120

 

 

 

 

 

 

 

 

 

Unpaid principal balance

 

 

 

 

$

106

$

125

Allowance for losses on impaired loans

 

 

 

 

 

6

 

11

Average recorded investment

 

 

 

 

 

92

 

101

 

 

 

 

 

 

 

 

 

 

Allowance for Losses

A rollforward of the allowance for losses on finance receivables and a summary of its composition, based on how the underlying finance receivables are evaluated for impairment, is provided below.  The finance receivables reported in this table specifically exclude $98 million and $99 million of leveraged leases at December 30, 2017 and December 31, 2016, respectively, in accordance with U.S. generally accepted accounting principles.

 

(In millions)

 

 

 

 

 

December 30,
2017

 

December 31,
2016

Balance at beginning of year

 

 

 

 

$

41

$

48

Provision for losses

 

 

 

 

 

(11)

 

(1)

Charge-offs

 

 

 

 

 

(6)

 

(16)

Recoveries

 

 

 

 

 

7

 

10

 

 

 

 

 

 

 

 

 

Balance at end of year

 

 

 

 

$

31

$

41

 

 

 

 

 

 

 

 

 

Allowance based on collective evaluation

 

 

 

 

$

25

$

30

Allowance based on individual evaluation

 

 

 

 

 

6

 

11

Finance receivables evaluated collectively

 

 

 

 

 

658

 

727

Finance receivables evaluated individually

 

 

 

 

 

94

 

120

 

 

 

 

 

 

 

 

 

 

Inventories
Inventories

 

Note 4. Inventories

 

Inventories are composed of the following:

 

(In millions)

 

 

 

 

 

December 30,
2017

 

December 31,
2016

Finished goods

 

 

 

 

$

1,790

$

1,947

Work in process

 

 

 

 

 

2,238

 

2,742

Raw materials and components

 

 

 

 

 

804

 

724

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,832

 

5,413

Progress/milestone payments

 

 

 

 

 

(682)

 

(949)

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

4,150

$

4,464

 

 

 

 

 

 

 

 

 

 

Inventories valued by the LIFO method totaled $2.2 billion and $1.9 billion at December 30, 2017 and December 31, 2016, respectively, and the carrying values of these inventories would have been higher by approximately $452 million and $457 million, respectively, had our LIFO inventories been valued at current costs. Inventories related to long-term contracts, net of progress/milestone payments, were $387 million and $557 million at December 30, 2017 and December 31, 2016, respectively.

Property, Plant and Equipment, Net
Property, Plant and Equipment, Net

 

Note 5. Property, Plant and Equipment, Net

 

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

 

(Dollars in millions)

 

 

 

Useful Lives
(in years)

 

December 30,
2017

 

December 31,
2016

Land and buildings

 

 

 

3 – 40

$

1,948

$

1,884

Machinery and equipment

 

 

 

1 – 20

 

4,893

 

4,820

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,841

 

6,704

Accumulated depreciation and amortization

 

 

 

 

 

(4,120)

 

(4,123)

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

2,721

$

2,581

 

 

 

 

 

 

 

 

 

 

At December 30, 2017 and December 31, 2016, assets under capital leases totaled $290 million and $284 million, respectively, and had accumulated amortization of $94 million and $85 million, respectively. The Manufacturing group’s depreciation expense, which included amortization expense on capital leases, totaled $362 million, $368 million and $383 million in 2017, 2016 and 2015, respectively.

Accrued Liabilities
Accrued Liabilities

 

Note 6. Accrued Liabilities

 

The accrued liabilities of our Manufacturing group are summarized below:

 

(In millions)

 

 

 

 

 

December 30,
2017

 

December 31,
2016

Customer deposits

 

 

 

 

$

1,007

$

991

Salaries, wages and employer taxes

 

 

 

 

 

329

 

301

Current portion of warranty and product maintenance contracts

 

 

 

 

 

190

 

151

Other

 

 

 

 

 

915

 

814

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

2,441

$

2,257

 

 

 

 

 

 

 

 

 

 

Changes in our warranty liability are as follows:

(In millions)

 

 

 

2017

 

2016

 

2015

Balance at beginning of year

 

 

$

138

$

143

$

148

Provision

 

 

 

81

 

79

 

78

Settlements

 

 

 

(69)

 

(70)

 

(72)

Acquisitions

 

 

 

35

 

2

 

3

Adjustments*

 

 

 

(21)

 

(16)

 

(14)

 

 

 

 

 

 

 

 

 

Balance at end of year

 

 

$

164

$

138

$

143

 

 

 

 

 

 

 

 

 

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

Debt and Credit Facilities
Debt and Credit Facilities

 

Note 7. Debt and Credit Facilities

 

Our debt is summarized in the table below:

 

(In millions)

 

 

 

 

 

December 30,
2017

 

December 31,
2016

Manufacturing group

 

 

 

 

 

 

 

 

5.60% due 2017

 

 

 

 

$

$

350

Variable-rate note due 2018 (2.09%)

 

 

 

 

 

 

150

Variable-rate notes due 2019 (1.95%)

 

 

 

 

 

 

200

7.25% due 2019

 

 

 

 

 

250

 

250

6.625% due 2020

 

 

 

 

 

201

 

184

Variable-rate notes due 2020 (1.96%)

 

 

 

 

 

350

 

3.65% due 2021

 

 

 

 

 

250

 

250

5.95% due 2021

 

 

 

 

 

250

 

250

4.30% due 2024

 

 

 

 

 

350

 

350

3.875% due 2025

 

 

 

 

 

350

 

350

4.00% due 2026

 

 

 

 

 

350

 

350

3.65% due 2027

 

 

 

 

 

350

 

3.375% due 2028

 

 

 

 

 

300

 

Other (weighted-average rate of 3.04% and 2.86%, respectively)

 

 

 

 

 

87

 

93

 

 

 

 

 

 

 

 

 

Total Manufacturing group debt

 

 

 

 

$

3,088

$

2,777

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

 

 

 

 

 

(14)

 

(363)

 

 

 

 

 

 

 

 

 

Total Long-term debt

 

 

 

 

$

3,074

$

2,414

 

 

 

 

 

 

 

 

 

Finance group

 

 

 

 

 

 

 

 

Fixed-rate notes due 2017 (weighted-average rate of 4.59%) (a)

 

 

 

 

$

$

10

Variable-rate note due 2019 (2.38% and 1.89%, respectively)

 

 

 

 

 

200

 

200

2.26% note due 2019

 

 

 

 

 

150

 

150

Fixed-rate notes due 2017-2028 (weighted-average rate of 3.15% and 2.87%, respectively) (a) (b)

 

 

 

 

 

131

 

202

Variable-rate notes due 2017-2027 (weighted-average rate of 2.99% and 1.97%, respectively) (a) (b)

 

 

 

 

 

44

 

42

Fixed-to-Floating Rate Junior Subordinated Notes (3.15% and 6.00%, respectively)

 

 

 

 

 

299

 

299

 

 

 

 

 

 

 

 

 

Total Finance group debt

 

 

 

 

$

824

$

903

 

 

 

 

 

 

 

 

 

(a)

Notes amortize on a quarterly or semi-annual basis.

(b)

Notes are secured by finance receivables as described in Note 3.

 

The following table shows required payments during the next five years on debt outstanding at December 30, 2017:

 

(In millions)

 

2018

 

2019

 

2020

 

2021

 

2022

Manufacturing group

$

14

$

257

$

563

$

507

$

7

Finance group

 

22

 

373

 

28

 

25

 

25

 

 

 

 

 

 

 

 

 

 

 

Total

$

36

$

630

$

591

$

532

$

32

 

 

 

 

 

 

 

 

 

 

 

 

Textron has a senior unsecured revolving credit facility that expires in September 2021 for an aggregate principal amount of $1.0 billion, of which up to $100 million is available for the issuance of letters of credit.  At December 30, 2017, there were no amounts borrowed against the facility and there were $11 million of letters of credit issued against it.

 

Fixed-to-Floating Rate Junior Subordinated Notes

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

 

Support Agreement

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

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 December 30, 2017 and December 31, 2016, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $426 million and $665 million, respectively.  At December 30, 2017, the fair value amounts of our foreign currency exchange contracts were a $13 million asset and a $7 million liability. At December 31, 2016, the fair value amounts of our foreign currency exchange contracts were a $7 million asset and a $17 million liability.

 

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

 

Assets and Liabilities Not Recorded at Fair Value

The carrying value and estimated fair value of our financial instruments that are not reflected in the financial statements at fair value are as follows:

 

 

 

December 30, 2017

 

December 31, 2016

(In millions)

 

Carrying
Value

 

Estimated
Fair Value

 

Carrying
Value

 

Estimated
Fair Value

Manufacturing group

 

 

 

 

 

 

 

 

Debt, excluding leases

$

(3,007)

$

(3,136)

$

(2,690)

$

(2,809)

Finance group

 

 

 

 

 

 

 

 

Finance receivables, excluding leases

 

643

 

675

 

729

 

758

Debt

 

(824)

 

(799)

 

(903)

 

(831)

 

 

 

 

 

 

 

 

 

 

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
Shareholders' Equity

 

Note 9. Shareholders’ Equity

 

Capital Stock

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

 

(In thousands)

 

 

 

2017

 

2016

 

2015

Balance at beginning of year

 

 

 

270,287

 

274,228

 

276,582

Stock repurchases

 

 

 

(11,917)

 

(6,898)

 

(5,197)

Share-based compensation activity

 

 

 

3,101

 

2,957

 

2,843

 

 

 

 

 

 

 

 

 

Balance at end of year

 

 

 

261,471

 

270,287

 

274,228

 

 

 

 

 

 

 

 

 

 

Earnings Per Share

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

 

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

 

(In thousands)

 

 

 

2017

 

2016

 

2015

Basic weighted-average shares outstanding

 

 

 

266,380

 

270,774

 

276,682

Dilutive effect of stock options

 

 

 

2,370

 

1,591

 

2,045

 

 

 

 

 

 

 

 

 

Diluted weighted-average shares outstanding

 

 

 

268,750

 

272,365

 

278,727

 

 

 

 

 

 

 

 

 

 

In 2017, 2016 and 2015, stock options to purchase 1.6 million, 2.0 million and 2.1 million shares, respectively, of common stock are excluded from the calculation of diluted weighted-average shares outstanding as their effect would have been anti-dilutive.

 

Accumulated Other Comprehensive Loss

The components of Accumulated Other Comprehensive Loss are presented below:

 

(In millions)

 

Pension and
Postretirement
Benefits
Adjustments

 

Foreign
Currency
Translation
Adjustments

 

Deferred
Gains (Losses)
on Hedge
Contracts

 

Accumulated
Other
Comprehensive
Loss

Balance at January 2, 2016

$

(1,327)

$

(47)

$

(24)

$

(1,398)

Other comprehensive income (loss) before reclassifications

 

(240)

 

(49)

 

7

 

(282)

Reclassified from Accumulated other comprehensive loss

 

62

 

 

13

 

75

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

(178)

 

(49)

 

20

 

(207)

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

$

(1,505)

$

(96)

$

(4)

$

(1,605)

Other comprehensive income before reclassifications

 

16

 

107

 

8

 

131

Reclassified from Accumulated other comprehensive loss

 

93

 

 

6

 

99

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

109

 

107

 

14

 

230

 

 

 

 

 

 

 

 

 

Balance at December 30, 2017

$

(1,396)

$

11

$

10

$

(1,375)

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss)

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

 

 

 

2017

 

2016

 

2015

(In millions)

 

Pre-Tax
Amount

 

Tax
(Expense)
Benefit

 

After-Tax
Amount

 

Pre-Tax
Amount

 

Tax
(Expense)
Benefit

 

After-Tax
Amount

 

Pre-Tax
Amount

 

Tax
(Expense)
Benefit

 

After-Tax
Amount

Pension and postretirement benefits
adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses)

$

18

$

(1)

$

17

$

(382)

$

135

$

(247)

$

136

$

(44)

$

92

Amortization of net actuarial loss*

 

136

 

(48)

 

88

 

104

 

(39)

 

65

 

150

 

(53)

 

97

Amortization of prior service cost (credit)*

 

7

 

(2)

 

5

 

(7)

 

4

 

(3)

 

(7)

 

2

 

(5)

Recognition of prior service credit (cost)

 

(1)

 

 

(1)

 

12

 

(5)

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits
adjustments, net

 

160

 

(51)

 

109

 

(273)

 

95

 

(178)

 

279

 

(95)

 

184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred gains (losses) on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

10

 

(2)

 

8

 

11

 

(4)

 

7

 

(33)

 

7

 

(26)

Reclassification adjustments

 

7

 

(1)

 

6

 

17

 

(4)

 

13

 

19

 

(4)

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred gains (losses) on hedge
contracts, net

 

17

 

(3)

 

14

 

28

 

(8)

 

20

 

(14)

 

3

 

(11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

100

 

7

 

107

 

(36)

 

(13)

 

(49)

 

(55)

 

(10)

 

(65)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

277

$

(47)

$

230

$

(281)

$

74

$

(207)

$

210

$

(102)

$

108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*These components of other comprehensive income (loss) are included in the computation of net periodic pension cost. See Note 11 for additional information.

Share-Based Compensation
Share-Based Compensation

 

Note 10. Share-Based Compensation

 

Our 2015 Long-Term Incentive Plan (Plan), which replaced our 2007 Long-Term Incentive Plan in April 2015, authorizes 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.  A maximum of 17 million shares is authorized for issuance for all purposes under the Plan plus any shares that become available upon cancellation, forfeiture or expiration of awards granted under the 2007 Long-Term Incentive Plan.  No more than 17 million shares may be awarded pursuant to incentive stock options, and no more than 4.25 million shares may be issued pursuant to awards of restricted stock, restricted stock units, performance stock or other awards that are payable in shares.

 

Through our Deferred Income Plan for Textron Executives, we provide certain executives the opportunity to voluntarily defer up to 80% of their base salary, along with incentive compensation.  Elective deferrals may be put into either a stock unit account or an interest-bearing account. Participants cannot move amounts between the two accounts while actively employed by us and cannot receive distributions until termination of employment.  The intrinsic value of amounts paid under this deferred income plan was not significant in 2017, 2016 and 2015.

 

Share-based compensation costs are reflected primarily in selling and administrative expense.  Compensation expense included in net income for our share-based compensation plans is as follows:

 

(In millions)

 

 

 

2017

 

2016

 

2015

Compensation expense

 

 

$

77

$

71

$

63

Income tax benefit

 

 

 

(28)

 

(26)

 

(23)

 

 

 

 

 

 

 

 

 

Total net compensation expense included in net income