TEXTRON INC, 10-Q filed on 10/29/2020
Quarterly Report
v3.20.2
Cover - shares
9 Months Ended
Oct. 03, 2020
Oct. 16, 2020
Cover [Abstract]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Oct. 03, 2020  
Document Transition Report false  
Entity File Number 1-5480  
Entity Registrant Name Textron Inc.  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 05-0315468  
Entity Address, Address Line One 40 Westminster Street  
Entity Address, City or Town Providence  
Entity Address, State or Province RI  
Entity Address, Postal Zip Code 02903  
City Area Code 401  
Local Phone Number 421-2800  
Title of 12(b) Security Common stock, $0.125 par value  
Trading Symbol TXT  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   228,874,931
Entity Central Index Key 0000217346  
Current Fiscal Year End Date --01-02  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q3  
Amendment Flag false  
v3.20.2
Consolidated Statements of Operations (Unaudited) - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Oct. 03, 2020
Sep. 28, 2019
Oct. 03, 2020
Sep. 28, 2019
Revenues        
Total revenues $ 2,735 $ 3,259 $ 7,984 $ 9,595
Costs, expenses and other        
Cost of sales 2,332 2,747 6,970 7,965
Selling and administrative expense 258 255 760 854
Interest expense 43 44 125 129
Special charges 7 0 124 0
Non-service components of pension and post-retirement income, net (21) (28) (62) (85)
Total costs, expenses and other 2,619 3,018 7,917 8,863
Income before income taxes 116 241 67 732
Income tax expense (benefit) 1 21 (6) 116
Net income $ 115 $ 220 $ 73 $ 616
Earnings per share        
Basic (in dollars per share) $ 0.50 $ 0.96 $ 0.32 $ 2.65
Diluted (in dollars per share) $ 0.50 $ 0.95 $ 0.32 $ 2.64
Manufacturing revenues        
Revenues        
Total revenues $ 2,722 $ 3,245 $ 7,942 $ 9,548
Finance revenues        
Revenues        
Total revenues $ 13 $ 14 $ 42 $ 47
v3.20.2
Consolidated Statements of Comprehensive Income (Unaudited) - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Oct. 03, 2020
Sep. 28, 2019
Oct. 03, 2020
Sep. 28, 2019
Statement of Comprehensive Income [Abstract]        
Net income $ 115 $ 220 $ 73 $ 616
Other comprehensive income (loss), net of tax        
Pension and postretirement benefits adjustments, net of reclassifications 37 20 110 61
Foreign currency translation adjustments 35 (34) 25 (30)
Deferred gains (losses) on hedge contracts, net of reclassifications 2 0 (5) 2
Other comprehensive income (loss) 74 (14) 130 33
Comprehensive income $ 189 $ 206 $ 203 $ 649
v3.20.2
Consolidated Balance Sheets (Unaudited) - USD ($)
shares in Thousands, $ in Millions
Oct. 03, 2020
Jan. 04, 2020
Assets    
Inventories $ 4,252 $ 4,069
Finance receivables, net 693 682
Total assets 15,861 15,018
Liabilities    
Total liabilities 10,120 9,500
Shareholders’ equity    
Common stock 29 29
Capital surplus 1,762 1,674
Treasury stock (74) (20)
Retained earnings 5,741 5,682
Accumulated other comprehensive loss (1,717) (1,847)
Total shareholders’ equity 5,741 5,518
Total liabilities and shareholders’ equity $ 15,861 $ 15,018
Common shares outstanding (in shares) 228,790 227,956
Manufacturing group    
Assets    
Cash and equivalents $ 2,518 $ 1,181
Accounts receivable, net 872 921
Inventories 4,252 4,069
Other current assets 825 894
Total current assets 8,467 7,065
Property, plant and equipment, less accumulated depreciation and amortization of $4,613 and $4,405, respectively 2,438 2,527
Goodwill 2,159 2,150
Other assets 1,863 2,312
Total assets 14,927 14,054
Liabilities    
Short-term debt and current portion of long-term debt 859 561
Accounts payable 1,121 1,378
Other current liabilities 2,011 1,907
Total current liabilities 3,991 3,846
Other liabilities 2,159 2,288
Long-term debt 3,199 2,563
Total liabilities 9,349 8,697
Finance group    
Assets    
Cash and equivalents 152 176
Finance receivables, net 693 682
Other assets 89 106
Total assets 934 964
Liabilities    
Other liabilities 105 117
Debt 666 686
Total liabilities $ 771 $ 803
v3.20.2
Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($)
$ in Millions
Oct. 03, 2020
Jan. 04, 2020
Statement of Financial Position [Abstract]    
Accumulated depreciation and amortization $ 4,613.0 $ 4,405.0
v3.20.2
Consolidated Statements of Cash Flows (Unaudited) - USD ($)
$ in Millions
9 Months Ended
Oct. 03, 2020
Sep. 28, 2019
Cash flows from operating activities    
Net income $ 73 $ 616
Non-cash items:    
Depreciation and amortization 283 302
Deferred income taxes (31) 85
Asset impairments and TRU inventory charge 111 0
Other, net 81 61
Changes in assets and liabilities:    
Accounts receivable, net 59 (7)
Inventories (258) (652)
Other assets 114 27
Accounts payable (267) 134
Other liabilities 60 (251)
Income taxes, net (4) (70)
Pension, net (11) (44)
Captive finance receivables, net (25) 22
Other operating activities, net 15 2
Net cash provided by operating activities of continuing operations 200 225
Net cash used in operating activities of discontinued operations (1) (2)
Net cash provided by operating activities 199 223
Cash flows from investing activities    
Capital expenditures 151 216
Proceeds from an insurance recovery and sale of property, plant and equipment 25 6
Net proceeds from corporate-owned life insurance policies 21 4
Net cash used in acquisitions (11) 0
Finance receivables repaid 21 20
Other investing activities, net 3 3
Net cash provided by (used in) investing activities (92) (183)
Cash flows from financing activities    
Increase (decrease) in short-term debt (2) 118
Net proceeds from long-term debt 1,137 297
Proceeds from borrowings against corporate-owned life insurance policies 377 0
Payment on borrowings against corporate-owned life insurance policies (15) 0
Principal payments on long-term debt and nonrecourse debt (235) (42)
Purchases of Textron common stock (54) (470)
Dividends paid (14) (9)
Other financing activities, net 14 18
Net cash provided by (used in) financing activities 1,208 (88)
Effect of exchange rate changes on cash and equivalents (2) (6)
Net increase (decrease) in cash and equivalents 1,313 (54)
Cash and equivalents at beginning of period 1,357 1,107
Cash and equivalents at end of period 2,670 1,053
Manufacturing group    
Cash flows from operating activities    
Net income 67 603
Non-cash items:    
Depreciation and amortization 279 297
Deferred income taxes (30) 86
Asset impairments and TRU inventory charge 111 0
Other, net 74 60
Changes in assets and liabilities:    
Accounts receivable, net 59 (7)
Inventories (258) (679)
Other assets 114 28
Accounts payable (267) 134
Other liabilities 66 (250)
Income taxes, net 1 (75)
Pension, net (11) (44)
Dividends received from Finance group 0 50
Other operating activities, net 15 2
Net cash provided by operating activities of continuing operations 220 205
Net cash used in operating activities of discontinued operations (1) (2)
Net cash provided by operating activities 219 203
Cash flows from investing activities    
Capital expenditures 151 216
Proceeds from an insurance recovery and sale of property, plant and equipment 25 6
Net proceeds from corporate-owned life insurance policies 21 4
Net cash used in acquisitions (11) 0
Finance receivables repaid 0 0
Finance receivables originated 0 0
Other investing activities, net 0 0
Net cash provided by (used in) investing activities (116) (206)
Cash flows from financing activities    
Increase (decrease) in short-term debt (2) 118
Net proceeds from long-term debt 1,137 297
Proceeds from borrowings against corporate-owned life insurance policies 377 0
Payment on borrowings against corporate-owned life insurance policies (15) 0
Principal payments on long-term debt and nonrecourse debt (195) (1)
Purchases of Textron common stock (54) (470)
Dividends paid (14) (9)
Other financing activities, net 2 18
Net cash provided by (used in) financing activities 1,236 (47)
Effect of exchange rate changes on cash and equivalents (2) (6)
Net increase (decrease) in cash and equivalents 1,337 (56)
Cash and equivalents at beginning of period 1,181 987
Cash and equivalents at end of period 2,518 931
Finance group    
Cash flows from operating activities    
Net income 6 13
Non-cash items:    
Depreciation and amortization 4 5
Deferred income taxes (1) (1)
Asset impairments and TRU inventory charge 0 0
Other, net 7 1
Changes in assets and liabilities:    
Accounts receivable, net 0 0
Inventories 0 0
Other assets 0 (1)
Accounts payable 0 0
Other liabilities (6) (1)
Income taxes, net (5) 5
Pension, net 0 0
Dividends received from Finance group 0 0
Other operating activities, net 0 0
Net cash provided by operating activities of continuing operations 5 21
Net cash used in operating activities of discontinued operations 0 0
Net cash provided by operating activities 5 21
Cash flows from investing activities    
Capital expenditures 0 0
Proceeds from an insurance recovery and sale of property, plant and equipment 0 0
Net proceeds from corporate-owned life insurance policies 0 0
Net cash used in acquisitions 0 0
Finance receivables repaid 90 149
Finance receivables originated (94) (107)
Other investing activities, net 3 30
Net cash provided by (used in) investing activities (1) 72
Cash flows from financing activities    
Increase (decrease) in short-term debt 0 0
Net proceeds from long-term debt 0 0
Proceeds from borrowings against corporate-owned life insurance policies 0 0
Payment on borrowings against corporate-owned life insurance policies 0 0
Principal payments on long-term debt and nonrecourse debt (40) (41)
Purchases of Textron common stock 0 0
Dividends paid 0 (50)
Other financing activities, net 12 0
Net cash provided by (used in) financing activities (28) (91)
Effect of exchange rate changes on cash and equivalents 0 0
Net increase (decrease) in cash and equivalents (24) 2
Cash and equivalents at beginning of period 176 120
Cash and equivalents at end of period $ 152 $ 122
v3.20.2
Basis of Presentation
9 Months Ended
Oct. 03, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation 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 third quarter of 2020 and 2019, our cumulative catch-up adjustments increased revenues and segment profit by $22 million and $21 million, respectively, and increased net income by $17 million and $16 million, respectively ($0.07 per diluted share for both periods). In the third quarter of 2020 and 2019, gross favorable adjustments totaled $31 million and $41 million, respectively, and the gross unfavorable adjustments totaled $9 million and $20 million, respectively.
In the first nine months of 2020 and 2019, our cumulative catch-up adjustments increased revenue and segment profit by $41 million and $79 million, respectively, and increased net income by $31 million and $60 million, respectively ($0.14 and $0.26 per diluted share, respectively). In the first nine months of 2020 and 2019, gross favorable adjustments totaled $104 million and $140 million, respectively, and the gross unfavorable adjustments totaled $63 million and $61 million, respectively.
v3.20.2
Summary of Significant Accounting Policies Update
9 Months Ended
Oct. 03, 2020
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies Update 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, and existence and financial strength of guarantors.
v3.20.2
Accounts Receivable and Finance Receivables
9 Months Ended
Oct. 03, 2020
Receivables [Abstract]  
Accounts Receivable and Finance Receivables Accounts Receivable and Finance Receivables
Accounts Receivable
Accounts receivable is composed of the following:
(In millions)October 3,
2020
January 4,
2020
Commercial$761 $835 
U.S. Government contracts152 115 
913 950 
Allowance for credit losses(41)(29)
Total accounts receivable, net$872 $921 
Finance Receivables
Finance receivables are presented in the following table:
(In millions)October 3,
2020
January 4,
2020
Finance receivables$725 $707 
Allowance for credit losses(32)(25)
Total finance receivables, net$693 $682 

Finance Receivable Portfolio Quality
We internally assess the quality of our finance receivables based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors.  Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan.  These three categories are performing, watchlist and nonaccrual.
We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful. Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain. All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing.
We measure delinquency based on the contractual payment terms of our finance receivables.  In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.
In March 2020, due to the economic impact of the COVID-19 pandemic and at the request of certain of our customers, we began working with them to provide temporary payment relief through loan modifications. 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 nine months of 2020, we modified finance receivable contracts for 90 customers with an outstanding balance totaling $283 million at October 3, 2020. Of the modifications occurring during the first nine months of 2020, contracts for 25 customers, or $109 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 two customer defaults 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:
(Dollars in millions)October 3,
2020
January 4,
2020
Performing$560$664
Watchlist1074
Nonaccrual5839
Nonaccrual as a percentage of finance receivables8.00%5.52%
Current and less than 31 days past due$683$637
31-60 days past due953
61-90 days past due27
Over 90 days past due3110
60+ days contractual delinquency as a percentage of finance receivables4.55%2.40%

At October 3, 2020, 38% of our performing finance receivables were originated since the beginning of 2019 and 29% were originated from 2016 to 2018. For finance receivables categorized as watchlist, 15% were originated since the beginning of 2019 and 44% from 2016 to 2018. For accounts modified in the first nine months 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.
(In millions)October 3,
2020
January 4,
2020
Finance receivables evaluated collectively$461 $564 
Finance receivables evaluated individually157 39 
Allowance for credit losses based on collective evaluation26 22 
Allowance for credit losses based on individual evaluation
Impaired finance receivables with no related allowance for credit losses$120 $22 
Impaired finance receivables with related allowance for credit losses37 17 
Unpaid principal balance of impaired finance receivables166 50 
Allowance for credit losses on impaired loans
Average recorded investment of impaired finance receivables116 40 
v3.20.2
Inventories
9 Months Ended
Oct. 03, 2020
Inventory Disclosure [Abstract]  
Inventories Inventories
Inventories are composed of the following:
(In millions)October 3,
2020
January 4,
2020
Finished goods$1,468 $1,557 
Work in process1,869 1,616 
Raw materials and components915 896 
Total inventories$4,252 $4,069 
v3.20.2
Other Assets
9 Months Ended
Oct. 03, 2020
Other Assets, Noncurrent Disclosure [Abstract]  
Other Assets Other AssetsOther 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 October 3, 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.
v3.20.2
Warranty Liability
9 Months Ended
Oct. 03, 2020
Payables and Accruals [Abstract]  
Warranty Liability Warranty Liability
Changes in our warranty liability are as follows:
Nine Months Ended
(In millions)October 3,
2020
September 28,
2019
Beginning of period$141 $149 
Provision35 45 
Settlements(46)(56)
Adjustments*(13)(3)
End of period$117 $135 
* Adjustments include changes to prior year estimates, new issues on prior year sales and currency translation adjustments.
v3.20.2
Leases
9 Months Ended
Oct. 03, 2020
Leases [Abstract]  
Leases 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 October 3, 2020 were not significant. Our operating leases have remaining lease terms up to 28 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 third quarter of 2020 and 2019, respectively, and $45 million and $48 million in the first nine months of 2020 and 2019, respectively. Cash paid for operating leases totaled $45 million and $48 million in the first nine months 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:
(Dollars in millions)October 3,
2020
January 4,
2020
Other assets$268$277
Other current liabilities4548
Other liabilities228233
Weighted-average remaining lease term (in years)10.010.2
Weighted-average discount rate4.28%4.42%

At October 3, 2020, maturities of our operating lease liabilities on an undiscounted basis totaled $18 million for 2020, $52 million for 2021, $44 million for 2022, $35 million for 2023, $28 million for 2024 and $165 million thereafter.
v3.20.2
Debt
9 Months Ended
Oct. 03, 2020
Debt Disclosure [Abstract]  
Debt Debt
Under our shelf registration statement, on August 5, 2020, we issued $500 million of SEC-registered fixed-rate notes due March 2031 with an annual interest rate of 2.45%. The net proceeds of the issuance totaled $496 million, after deducting underwriting discounts, commissions and offering expenses. In addition, on March 17, 2020, we issued $650 million of SEC-registered fixed-rate notes due June 2030, with an annual interest rate of 3.00% and net proceeds totaling $642 million.
On September 18, 2020, the Finance Group’s $150 million variable-rate loan due December 13, 2020 was amended. The maturity date of this loan was extended to September 18, 2021, with an option to extend for an additional year. The annual interest rate was modified from the London interbank offered rate (LIBOR) plus 1.125% to LIBOR plus 1.55%, which is an annual interest rate of 1.70% at October 3, 2020.
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. On August 10, 2020, we repaid the outstanding principal amount and the agreement was terminated.
v3.20.2
Derivative Instruments and Fair Value Measurements
9 Months Ended
Oct. 03, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Fair Value Measurements 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 October 3, 2020 and January 4, 2020, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $301 million and $342 million, respectively. At October 3, 2020, the fair value amounts of our foreign currency exchange contracts were a $3 million asset and a $4 million liability. At January 4, 2020, the fair value amounts of our foreign currency exchange contracts were a $2 million asset and a $2 million liability.
We hedge our net investment position in certain major currencies and generate foreign currency interest payments that offset other transactional exposures in these currencies. To accomplish this, we borrow directly in the foreign currency and designate a portion of the debt as a hedge of the net investment. We record changes in the fair value of these contracts in other comprehensive income (loss) to the extent they are effective as cash flow hedges.  Currency effects on the effective portion of these hedges, which are reflected in the foreign currency translation adjustments within Accumulated other comprehensive loss, were not significant in the periods presented.
Assets and Liabilities Not Recorded at Fair Value
The carrying value and estimated fair value of our financial instruments that are not reflected in the financial statements at fair value are as follows:
October 3, 2020January 4, 2020
CarryingEstimatedCarryingEstimated
(In millions)ValueFair ValueValueFair Value
Manufacturing group
Debt, excluding leases$(4,042)$(4,294)$(3,097)$(3,249)
Finance group
Finance receivables, excluding leases501 522 493 527 
Debt(666)(581)(686)(634)

Fair value for the Manufacturing group debt is determined using market observable data for similar transactions (Level 2).  The fair value for the Finance group debt was determined primarily based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations (Level 2). Fair value estimates for finance receivables were determined based on internally developed discounted cash flow models primarily utilizing significant unobservable inputs (Level 3), which include estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and expectations of borrowers’ ability to make payments on a timely basis.
v3.20.2
Shareholders' Equity
9 Months Ended
Oct. 03, 2020
Equity [Abstract]  
Shareholders' Equity Shareholders’ Equity
A reconciliation of Shareholders’ equity is presented below:
Accumulated
OtherTotal
CommonCapitalTreasuryRetainedComprehensiveShareholders'
(In millions)StockSurplusStockEarningsLossEquity
Three months ended October 3, 2020
Beginning of period$29 $1,732 $(74)$5,631 $(1,791)$5,527 
Net income— — — 115 — 115 
Other comprehensive income— — — — 74 74 
Share-based compensation activity— 30 — — — 30 
Dividends declared— — — (5)— (5)
End of period$29 $1,762 $(74)$5,741 $(1,717)$5,741 
Three months ended September 28, 2019
Beginning of period$30 $1,717 $(490)$5,794 $(1,715)$5,336 
Net income— — — 220 — 220 
Other comprehensive loss— — — — (14)(14)
Share-based compensation activity— 24 — — — 24 
Dividends declared— — — (5)— (5)
Purchases of common stock— — (109)— — (109)
End of period$30 $1,741 $(599)$6,009 $(1,729)$5,452 
Nine months ended October 3, 2020
Beginning of period$29 $1,674 $(20)$5,682 $(1,847)$5,518 
Net income— — — 73 — 73 
Other comprehensive income— — — — 130 130 
Share-based compensation activity— 88 — — — 88 
Dividends declared— — — (14)— (14)
Purchases of common stock— — (54)— — (54)
End of period$29 $1,762 $(74)$5,741 $(1,717)$5,741 
Nine months ended September 28, 2019
Beginning of period$30 $1,646 $(129)$5,407 $(1,762)$5,192 
Net income— — — 616 — 616 
Other comprehensive income— — — — 33 33 
Share-based compensation activity— 95 — — — 95 
Dividends declared— — — (14)— (14)
Purchases of common stock— — (470)— — (470)
End of period$30 $1,741 $(599)$6,009 $(1,729)$5,452 

Dividends per share of common stock were $0.02 for both the third quarter of 2020 and 2019 and $0.06 for both the first nine months of 2020 and 2019.
Earnings Per Share
We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period.  Basic EPS is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends. Diluted EPS considers the dilutive effect of all potential future common stock, including stock options.  
The weighted-average shares outstanding for basic and diluted EPS are as follows:
Three Months EndedNine Months Ended
(In thousands)October 3,
2020
September 28,
2019
October 3,
2020
September 28,
2019
Basic weighted-average shares outstanding228,918 229,755 228,492 232,202 
Dilutive effect of stock options361 1,342 345 1,487 
Diluted weighted-average shares outstanding229,279 231,097 228,837 233,689 
Stock options to purchase 7.5 million and 7.9 million shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding for the third quarter and first nine months of 2020, respectively, as their effect would have been anti-dilutive. Stock options to purchase 4.3 million and 3.1 million shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding for the third quarter and first nine months of 2019, respectively, as their effect would have been anti-dilutive.
Accumulated Other Comprehensive Loss and Other Comprehensive Income (Loss)
The components of Accumulated other comprehensive loss are presented below:

Pension andForeignDeferredAccumulated
PostretirementCurrencyGains (Losses)Other
BenefitsTranslationon HedgeComprehensive
(In millions)AdjustmentsAdjustmentsContractsLoss
Balance at January 4, 2020$(1,811)$(36)$— $(1,847)
Other comprehensive income before reclassifications— 25 (2)23 
Reclassified from Accumulated other comprehensive loss110 — (3)107 
Balance at October 3, 2020$(1,701)$(11)$(5)$(1,717)
Balance at December 29, 2018$(1,727)$(32)$(3)$(1,762)
Other comprehensive loss before reclassifications— (30)(26)
Reclassified from Accumulated other comprehensive loss61 — (2)59 
Balance at September 28, 2019$(1,666)$(62)$(1)$(1,729)

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

October 3, 2020September 28, 2019
TaxTax
Pre-Tax(Expense)After-TaxPre-Tax(Expense)After-Tax
(In millions)AmountBenefitAmountAmountBenefitAmount
Three Months Ended
Pension and postretirement benefits adjustments:
Amortization of net actuarial loss*$46 $(11)$35 $25 $(6)$19 
Amortization of prior service cost*— — 
Pension and postretirement benefits adjustments, net48 (11)37 26 (6)20 
Deferred gains (losses) on hedge contracts:
Current deferrals— — — — 
Reclassification adjustments(2)(1)— — — 
Deferred gains (losses) on hedge contracts, net— — — 
Foreign currency translation adjustments35 — 35 (33)(1)(34)
Total$84 $(10)$74 $(7)$(7)$(14)
Nine Months Ended
Pension and postretirement benefits adjustments:
Amortization of net actuarial loss*$138 $(32)$106 $74 $(17)$57 
Amortization of prior service cost*(1)(1)
Pension and postretirement benefits adjustments, net143 (33)110 79 (18)61 
Deferred gains (losses) on hedge contracts:
Current deferrals(2)— (2)(2)
Reclassification adjustments(5)(3)(2)— (2)
Deferred gains (losses) on hedge contracts, net(7)(5)(2)
Foreign currency translation adjustments28 (3)25 (29)(1)(30)
Total$164 $(34)$130 $54 $(21)$33 
*These components of other comprehensive income (loss) are included in the computation of net periodic pension cost (credit). See Note 16 of our 2019 Annual Report on Form 10-K for additional information.
v3.20.2
Segment Information
9 Months Ended
Oct. 03, 2020
Segment Reporting [Abstract]  
Segment Information Segment Information
We operate in, and report financial information for, the following five business segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses, gains/losses on major business dispositions, special charges and an inventory charge related to the restructuring plan initiated in the second quarter of 2020, 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 before income taxes, are included in the table below:
Three Months EndedNine Months Ended
(In millions)October 3,
2020
September 28,
2019
October 3,
2020
September 28,
2019
Revenues
Textron Aviation$795 $1,201 $2,414 $3,458 
Bell793 783 2,438 2,293 
Textron Systems302 311 956 926 
Industrial832 950 2,134 2,871 
Finance13 14 42 47 
Total revenues$2,735 $3,259 $7,984 $9,595 
Segment Profit
Textron Aviation$(29)$104 $(92)$315 
Bell119 110 352 317 
Textron Systems40 31 103 108 
Industrial58 47 56 173 
Finance17 
Segment profit189 297 427 930 
Corporate expenses and other, net(28)(17)(72)(88)
Interest expense, net for Manufacturing group(38)(39)(109)(110)
Special charges(7)— (124)— 
Inventory charge*— — (55)— 
Income before income taxes$116 $241 $67 $732 
* 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.
v3.20.2
Revenues
9 Months Ended
Oct. 03, 2020
Revenue from Contract with Customer [Abstract]  
Revenues Revenues
Disaggregation of Revenues
Our revenues disaggregated by major product type are presented below:
Three Months EndedNine Months Ended
(In millions)October 3,
2020
September 28,
2019
October 3,
2020
September 28,
2019
Aircraft$486 $797 $1,479 $2,296 
Aftermarket parts and services309 404 935 1,162 
Textron Aviation795 1,201 2,414 3,458 
Military aircraft and support programs515 473 1,737 1,463 
Commercial helicopters, parts and services278 310 701 830 
Bell793 783 2,438 2,293 
Unmanned systems156 147 473 416 
Marine and land systems36 47 127 155 
Simulation, training and other110 117 356 355 
Textron Systems302 311 956 926 
Fuel systems and functional components497 521 1,233 1,707 
Specialized vehicles335 429 901 1,164 
Industrial832 950 2,134 2,871 
Finance13 14 42 47 
Total revenues$2,735 $3,259 $7,984 $9,595 
Our revenues for our segments by customer type and geographic location are presented below:
TextronTextron
(In millions)AviationBellSystemsIndustrialFinanceTotal
Three months ended October 3, 2020
Customer type:
Commercial$758 $273 $54 $830 $13 $1,928 
U.S. Government37 520 248 — 807 
Total revenues$795 $793 $302 $832 $13 $2,735 
Geographic location:
United States$562 $608 $263 $401 $$1,841 
Europe65 43 10 203 — 321 
Asia and Australia68 67 15 92 — 242 
Other international100 75 14 136 331 
Total revenues$795 $793 $302 $832 $13 $2,735 
Three months ended September 28, 2019
Customer type:
Commercial$1,153 $306 $73 $947 $14 $2,493 
U.S. Government48 477 238 — 766 
Total revenues$1,201 $783 $311 $950 $14 $3,259 
Geographic location:
United States$836 $583 $247 $454 $$2,128 
Europe154 41 11 236 443 
Asia and Australia80 68 37 93 — 278 
Other international131 91 16 167 410 
Total revenues$1,201 $783 $311 $950 $14 $3,259 
Nine months ended October 3, 2020
Customer type:
Commercial$2,322 $687 $182 $2,128 $42 $5,361 
U.S. Government92 1,751 774 — 2,623 
Total revenues$2,414 $2,438 $956 $2,134 $42 $7,984 
Geographic location:
United States1,677 1,979 825 1,017 21 5,519 
Europe219 88 33 558 899 
Asia and Australia241 183 50 221 696 
Other international277 188 48 338 19 870 
Total revenues$2,414 $2,438 $956 $2,134 $42 $7,984 
Nine months ended September 28, 2019
Customer type:
Commercial$3,322 $815 $230 $2,856 $47 $7,270 
U.S. Government136 1,478 696 15 — 2,325 
Total revenues$3,458 $2,293 $926 $2,871 $47 $9,595 
Geographic location:
United States$2,361 $1,732 $753 $1,309 $23 $6,178 
Europe501 108 51 838 1,500 
Asia and Australia168 229 66 254 720 
Other international428 224 56 470 19 1,197 
Total revenues$3,458 $2,293 $926 $2,871 $47 $9,595 

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 October 3, 2020, we had $9.4 billion in remaining performance obligations of which we expect to recognize revenues of approximately 65% through 2021, an additional 27% through 2023, and the balance thereafter.  
Contract Assets and Liabilities
Assets and liabilities related to our contracts with customers are reported on a contract-by-contract basis at the end of each reporting period. At October 3, 2020 and January 4, 2020, contract assets totaled $546 million and $567 million, respectively, and contract liabilities totaled $965 million and $830 million, respectively, reflecting timing differences between revenue recognized, billings and payments from customers. During the third quarter and first nine months of 2020, we recognized revenues of $44 million and $396 million, respectively, that were included in the contract liability balance at January 4, 2020. We recognized revenues of $54 million and $511 million in the third quarter and first nine months of 2019, respectively, that were included in the contract liability balance at December 29, 2018.
v3.20.2
Retirement Plans
9 Months Ended
Oct. 03, 2020
Retirement Benefits [Abstract]  
Retirement Plans 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:
Three Months EndedNine Months Ended
(In millions)October 3,
2020
September 28,
2019
October 3,
2020
September 28,
2019
Pension Benefits
Service cost$27 $23 $79 $68 
Interest cost73 82 220 245 
Expected return on plan assets(144)(139)(431)(417)
Amortization of net actuarial loss47 26 139 76 
Amortization of prior service cost10 
Net periodic benefit cost (credit)$$(5)$16 $(18)
Postretirement Benefits Other Than Pensions
Service cost$— $$$
Interest cost
Amortization of net actuarial loss(1)(1)(1)(2)
Amortization of prior service credit(1)(2)(4)(5)
Net periodic benefit cost$— $$$
v3.20.2
Special Charges
9 Months Ended
Oct. 03, 2020
Special Charges [Abstract]  
Special Charges Special Charges
Special Charges
Special charges recorded in the third quarter and first nine months of 2020 by segment and type of cost are presented in the table below. There were no special charges recorded in the first nine months of 2019.
Total 2020
ContractCOVID-19
SeveranceTerminationsAssetRestructuringOther Asset
(In millions)Costsand OtherImpairmentsPlanImpairmentsTotal
Three months ended October 3, 2020
Industrial$$— $$$— $
Corporate— — — 
Total special charges$$— $$$— $
Nine months ended October 3, 2020
Textron Aviation$27 — $$28 $32 $60 
Textron Systems14 12 14 40 — 40 
Industrial11 — 13 20 
Corporate— — — 
Total special charges$56 $12 $17 $85 $39 $124 

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. As a result of ongoing evaluations, this plan has been expanded to include additional headcount reductions and facility consolidations in the Industrial segment beyond what was included in the plan as originally announced. We now expect to incur up to an additional $15 million in costs, and the total pre-tax cost of this plan is expected to be in the range of $125 million to $145 million, of which $85 million has been recorded since the inception of the plan. Under the restructuring plan, we expect to incur total severance costs in the range of $70 million to $80 million, contract termination and other costs in the range of $30 million to
$35 million, and asset impairment charges of $25 million to $30 million. Based on revisions to our original estimate, along with additional actions, we estimate a total reduction of 2,800 positions, representing 8% of our workforce. We expect the plan to be substantially completed in the first half of 2021.
The plan primarily impacts the TRU business within the Textron Systems segment, the Textron Aviation segment, and the Industrial segment. 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 ceased 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.
Other Asset Impairments
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 October 3, 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:
Contract
SeveranceTerminations
(In millions)Costsand OtherTotal
Balance at January 4, 2020$46 $19 $65 
Provision for 2020 COVID-19 restructuring plan56 12 68 
Cash paid(62)(8)(70)
Balance at October 3, 2020$40 $23 $63 

The majority of the remaining cash outlays of $63 million is expected to be paid in 2020. Severance costs generally are paid on a lump-sum basis and include outplacement costs, which are paid in accordance with normal payment terms.
v3.20.2
Income Taxes
9 Months Ended
Oct. 03, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
Our effective tax rate for the third quarter and first nine months of 2020 was 0.9% and (9.0)%, respectively, compared to the statutory rate of 21%, largely due to the favorable impact of research credits. In the first nine months 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. These items had a more significant impact on the effective tax rate due to the lower income before income taxes for the period.
For the third quarter and first nine months of 2019 our effective tax rate was 8.7% and 15.8%, respectively. In the third quarter and first nine months of 2019, the effective tax rate was lower than the U.S. federal statutory tax rate of 21%, primarily due to $41 million and $53 million, respectively, in benefits recognized for additional research credits related to prior years.
On October 19, 2020, we entered into a closing agreement with a tax authority related to an audit settlement with respect to certain state income tax returns. As a result, we will recognize a reduction of unrecognized tax benefits that is expected to reduce our tax expense by approximately $40 million to $50 million in the fourth quarter of 2020.
v3.20.2
Commitments and Contingencies
9 Months Ended
Oct. 03, 2020
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and ContingenciesWe are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts; alleged lack of compliance with applicable laws and regulations; production partners; product liability; patent and trademark infringement; employment disputes; and environmental, safety and health matters. Some of these legal proceedings and claims seek damages, fines or penalties in substantial amounts or remediation of environmental contamination. As a government contractor, we are subject to audits, reviews and investigations to determine whether our operations are being conducted in accordance with applicable regulatory requirements. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our suspension or debarment from U.S. Government contracting for a period of time. On the basis of information presently available, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations.
v3.20.2
Summary of Significant Accounting Policies Update (Policies)
9 Months Ended
Oct. 03, 2020
Accounting Policies [Abstract]  
Use of Estimates
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.
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, and existence and financial strength of guarantors.
v3.20.2
Accounts Receivable and Finance Receivables (Tables)
9 Months Ended
Oct. 03, 2020
Receivables [Abstract]  
Accounts receivable
Accounts receivable is composed of the following:
(In millions)October 3,
2020
January 4,
2020
Commercial$761 $835 
U.S. Government contracts152 115 
913 950 
Allowance for credit losses(41)(29)
Total accounts receivable, net$872 $921 
Finance receivables
Finance receivables are presented in the following table:
(In millions)October 3,
2020
January 4,
2020
Finance receivables$725 $707 
Allowance for credit losses(32)(25)
Total finance receivables, net$693 $682 
Financing receivables categorized based on credit quality indicators
Finance receivables categorized based on the credit quality indicators and by the delinquency aging category are summarized as follows:
(Dollars in millions)October 3,
2020
January 4,
2020
Performing$560$664
Watchlist1074
Nonaccrual5839
Nonaccrual as a percentage of finance receivables8.00%5.52%
Current and less than 31 days past due$683$637
31-60 days past due953
61-90 days past due27
Over 90 days past due3110
60+ days contractual delinquency as a percentage of finance receivables4.55%2.40%
Financing receivable credit quality indicators
Finance receivables categorized based on the credit quality indicators and by the delinquency aging category are summarized as follows:
(Dollars in millions)October 3,
2020
January 4,
2020
Performing$560$664
Watchlist1074
Nonaccrual5839
Nonaccrual as a percentage of finance receivables8.00%5.52%
Current and less than 31 days past due$683$637
31-60 days past due953
61-90 days past due27
Over 90 days past due3110
60+ days contractual delinquency as a percentage of finance receivables4.55%2.40%
Finance receivables and allowance for credit losses based on impairment evaluation
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.
(In millions)October 3,
2020
January 4,
2020
Finance receivables evaluated collectively$461 $564 
Finance receivables evaluated individually157 39 
Allowance for credit losses based on collective evaluation26 22 
Allowance for credit losses based on individual evaluation
Impaired finance receivables with no related allowance for credit losses$120 $22 
Impaired finance receivables with related allowance for credit losses37 17 
Unpaid principal balance of impaired finance receivables166 50 
Allowance for credit losses on impaired loans
Average recorded investment of impaired finance receivables116 40 
v3.20.2
Inventories (Tables)
9 Months Ended
Oct. 03, 2020
Inventory Disclosure [Abstract]  
Inventories
Inventories are composed of the following:
(In millions)October 3,
2020
January 4,
2020
Finished goods$1,468 $1,557 
Work in process1,869 1,616 
Raw materials and components915 896 
Total inventories$4,252 $4,069 
v3.20.2
Warranty Liability (Tables)
9 Months Ended
Oct. 03, 2020
Payables and Accruals [Abstract]  
Changes in warranty liability
Changes in our warranty liability are as follows:
Nine Months Ended
(In millions)October 3,
2020
September 28,
2019
Beginning of period$141 $149 
Provision35 45 
Settlements(46)(56)
Adjustments*(13)(3)