TEXTRON INC, 10-K filed on 2/22/2017
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Feb. 4, 2017
Jul. 2, 2016
Document and Entity Information
 
 
 
Entity Registrant Name
TEXTRON INC 
 
 
Entity Central Index Key
0000217346 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 9.8 
Entity Common Stock, Shares Outstanding
 
270,086,401 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Jan. 2, 2016
Jan. 3, 2015
Revenues
 
 
 
Manufacturing revenues
$ 13,710 
$ 13,340 
$ 13,775 
Finance revenues
78 
83 
103 
Total revenues
13,788 
13,423 
13,878 
Costs, expenses and other
 
 
 
Cost of sales
11,311 
10,979 
11,421 
Selling and administrative expense
1,304 
1,304 
1,361 
Interest expense
174 
169 
191 
Special charges
123 
 
52 
Total costs, expenses and other
12,912 
12,452 
13,025 
Income from continuing operations before income taxes
876 
971 
853 
Income tax expense
33 
273 
248 
Income from continuing operations
843 
698 
605 
Income (loss) from discontinued operations, net of income taxes
119 1
(1)1
(5)1
Net income
$ 962 
$ 697 
$ 600 
Basic earnings per share
 
 
 
Continuing operations (in dollars per share)
$ 3.11 
$ 2.52 
$ 2.17 
Discontinued operations (in dollars per share)
$ 0.44 
 
$ (0.02)
Basic earnings per share (in dollars per share)
$ 3.55 
$ 2.52 
$ 2.15 
Diluted earnings per share
 
 
 
Continuing operations (in dollars per share)
$ 3.09 
$ 2.50 
$ 2.15 
Discontinued operations (in dollars per share)
$ 0.44 
 
$ (0.02)
Diluted earnings per share (in dollars per share)
$ 3.53 
$ 2.50 
$ 2.13 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Jan. 2, 2016
Jan. 3, 2015
Consolidated Statements of Comprehensive Income
 
 
 
Net income
$ 962 
$ 697 
$ 600 
Other comprehensive income (loss), net of tax:
 
 
 
Pension and postretirement benefits adjustments, net of reclassifications
(178)
184 
(401)
Foreign currency translation adjustments
(49)
(65)
(75)
Deferred gains (losses) on hedge contracts, net of reclassifications
20 
(11)
(3)
Other comprehensive income (loss)
(207)
108 
(479)
Comprehensive income
$ 755 
$ 805 
$ 121 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2016
Jan. 2, 2016
Assets
 
 
Cash and equivalents
$ 1,298 
$ 1,005 
Inventories
4,464 
4,144 
Property, plant and equipment, net
2,581 
2,492 
Finance receivables, net
935 
1,087 
Total assets
15,358 
14,708 
Liabilities
 
 
Total liabilities
9,784 
9,744 
Shareholders' equity
 
 
Common stock (270.3 million and 288.3 million shares issued, respectively, and 270.3 million and 274.2 million shares outstanding, respectively)
34 
36 
Capital surplus
1,599 
1,587 
Treasury stock
 
(559)
Retained earnings
5,546 
5,298 
Accumulated other comprehensive loss
(1,605)
(1,398)
Total shareholders' equity
5,574 
4,964 
Total liabilities and shareholders' equity
15,358 
14,708 
Manufacturing group
 
 
Assets
 
 
Cash and equivalents
1,137 
946 
Accounts receivable, net
1,064 
1,047 
Inventories
4,464 
4,144 
Other current assets
388 
341 
Total current assets
7,053 
6,478 
Property, plant and equipment, net
2,581 
2,492 
Goodwill
2,113 
2,023 
Other assets
2,331 
2,399 
Total assets
14,078 
13,392 
Liabilities
 
 
Short-term debt and current portion of long-term debt
363 
262 
Accounts payable
1,273 
1,063 
Accrued liabilities
2,257 
2,467 
Total current liabilities
3,893 
3,792 
Other liabilities
2,354 
2,376 
Long-term debt
2,414 
2,435 
Debt
2,777 
2,697 
Total liabilities
8,661 
8,603 
Finance group
 
 
Assets
 
 
Cash and equivalents
161 
59 
Finance receivables, net
935 
1,087 
Other assets
184 
170 
Total assets
1,280 
1,316 
Liabilities
 
 
Other liabilities
220 
228 
Debt
903 
913 
Total liabilities
$ 1,123 
$ 1,141 
Consolidated Balance Sheets (Parenthetical)
Dec. 31, 2016
Jan. 2, 2016
Consolidated Balance Sheets
 
 
Common stock, shares issued
270,300,000 
288,300,000 
Common stock, shares outstanding
270,287,000 
274,228,000 
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 Dec. 28, 2013
$ 35 
$ 1,331 
 
$ 4,045 
$ (1,027)
$ 4,384 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income
 
 
 
600 
 
600 
Other comprehensive income (loss)
 
 
 
 
(479)
(479)
Dividends declared ($0.08 per share)
 
 
 
(22)
 
(22)
Share-based compensation activity
134 
 
 
 
135 
Purchases of common stock
 
 
(340)
 
 
(340)
Other
 
(6)
 
 
 
(6)
Ending Balance at Jan. 03, 2015
36 
1,459 
(340)
4,623 
(1,506)
4,272 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income
 
 
 
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
 
 
 
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 
Consolidated Statements of Shareholders' Equity (Parenthetical)
3 Months Ended 12 Months Ended
Dec. 31, 2016
Oct. 1, 2016
Jul. 2, 2016
Apr. 2, 2016
Jan. 2, 2016
Oct. 3, 2015
Jul. 4, 2015
Apr. 4, 2015
Dec. 31, 2016
Jan. 2, 2016
Jan. 3, 2015
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. 31, 2016
Jan. 2, 2016
Jan. 3, 2015
Cash flows from operating activities
 
 
 
Net income
$ 962 
$ 697 
$ 600 
Less: Income (loss) from discontinued operations
119 1
(1)1
(5)1
Income from continuing operations
843 
698 
605 
Non-cash items:
 
 
 
Depreciation and amortization
449 
461 
459 
Asset impairments
40 
 
Deferred income taxes
48 
(19)
Other, net
92 
99 
100 
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(33)
(14)
56 
Inventories
(352)
(239)
(209)
Other assets
72 
(36)
(33)
Accounts payable
215 
43 
(228)
Accrued and other liabilities
(281)
(155)
311 
Income taxes, net
(189)
71 
(22)
Pension, net
25 
69 
46 
Captive finance receivables, net
75 
90 
150 
Other operating activities, net
10 
(4)
(5)
Net cash provided by operating activities of continuing operations
1,014 
1,094 
1,211 
Net cash used in operating activities of discontinued operations
(2)
(4)
(3)
Net cash provided by operating activities
1,012 
1,090 
1,208 
Cash flows from investing activities
 
 
 
Capital expenditures
(446)
(420)
(429)
Net cash used in acquisitions
(186)
(81)
(1,628)
Finance receivables repaid
44 
67 
91 
Other investing activities, net
65 
46 
47 
Net cash provided by (used in) investing activities
(523)
(388)
(1,919)
Cash flows from financing activities
 
 
 
Proceeds from long-term debt
525 
61 
1,567 
Principal payments on long-term debt and nonrecourse debt
(457)
(356)
(904)
Purchases of Textron common stock
(241)
(219)
(340)
Proceeds from exercise of stock options
36 
32 
50 
Dividends paid
(22)
(22)
(28)
Other financing activities, net
(9)
 
(10)
Net cash provided by (used in) financing activities
(168)
(504)
335 
Effect of exchange rate changes on cash and equivalents
(28)
(15)
(13)
Net increase (decrease) in cash and equivalents
293 
183 
(389)
Cash and equivalents at beginning of year
1,005 
822 
1,211 
Cash and equivalents at end of year
1,298 
1,005 
822 
Manufacturing group
 
 
 
Cash flows from operating activities
 
 
 
Net income
951 
683 
585 
Less: Income (loss) from discontinued operations
119 
(1)
(5)
Income from continuing operations
832 
684 
590 
Non-cash items:
 
 
 
Depreciation and amortization
437 
449 
446 
Asset impairments
40 
 
Deferred income taxes
36 
14 
(7)
Other, net
90 
90 
86 
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(33)
(14)
56 
Inventories
(347)
(241)
(168)
Other assets
104 
(40)
(18)
Accounts payable
215 
43 
(228)
Accrued and other liabilities
(276)
(144)
316 
Income taxes, net
(174)
62 
(17)
Pension, net
25 
69 
46 
Dividends received from Finance Group
29 
63 
 
Other operating activities, net
10 
(4)
(5)
Net cash provided by operating activities of continuing operations
988 
1,038 
1,097 
Net cash used in operating activities of discontinued operations
(2)
(4)
(3)
Net cash provided by operating activities
986 
1,034 
1,094 
Cash flows from investing activities
 
 
 
Capital expenditures
(446)
(420)
(429)
Net cash used in acquisitions
(186)
(81)
(1,628)
Other investing activities, net
11 
(8)
Net cash provided by (used in) investing activities
(621)
(496)
(2,065)
Cash flows from financing activities
 
 
 
Proceeds from long-term debt
345 
 
1,439 
Principal payments on long-term debt and nonrecourse debt
(254)
(100)
(559)
Purchases of Textron common stock
(241)
(219)
(340)
Proceeds from exercise of stock options
36 
32 
50 
Dividends paid
(22)
(22)
(28)
Other financing activities, net
(10)
(10)
Net cash provided by (used in) financing activities
(146)
(308)
552 
Effect of exchange rate changes on cash and equivalents
(28)
(15)
(13)
Net increase (decrease) in cash and equivalents
191 
215 
(432)
Cash and equivalents at beginning of year
946 
731 
1,163 
Cash and equivalents at end of year
1,137 
946 
731 
Finance group
 
 
 
Cash flows from operating activities
 
 
 
Net income
11 
14 
15 
Income from continuing operations
11 
14 
15 
Non-cash items:
 
 
 
Depreciation and amortization
12 
12 
13 
Deferred income taxes
12 
(10)
(12)
Other, net
14 
Changes in assets and liabilities:
 
 
 
Other assets
(6)
(15)
Accrued and other liabilities
(5)
(8)
(5)
Income taxes, net
(15)
(5)
Net cash provided by operating activities of continuing operations
11 
30 
Net cash provided by operating activities
11 
30 
Cash flows from investing activities
 
 
 
Finance receivables repaid
292 
351 
456 
Finance receivables originated
(173)
(194)
(215)
Other investing activities, net
23 
40 
14 
Net cash provided by (used in) investing activities
142 
197 
255 
Cash flows from financing activities
 
 
 
Proceeds from long-term debt
180 
61 
128 
Principal payments on long-term debt and nonrecourse debt
(203)
(256)
(345)
Dividends paid
(29)
(63)
 
Other financing activities, net
(1)
 
Net cash provided by (used in) financing activities
(51)
(259)
(217)
Net increase (decrease) in cash and equivalents
102 
(32)
43 
Cash and equivalents at beginning of year
59 
91 
48 
Cash and equivalents at end of year
$ 161 
$ 59 
$ 91 
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 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 $83 million, $78 million and $95 million in 2016, 2015 and 2014, respectively, ($52 million, $49 million and $60 million after tax, respectively, or $0.19, $0.18 and $0.21 per diluted share, respectively).  For 2016, 2015 and 2014, the gross favorable program profit adjustments totaled $106 million, $111 million and $132 million, respectively, and the gross unfavorable program profit adjustments totaled $23 million, $33 million and $37 million, respectively.

 

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 79% 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 $677 million, $778 million and $694 million in 2016, 2015 and 2014, 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 Pronouncements

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. In July 2015, the FASB approved a one-year deferral of the effective date of the standard to the beginning of 2018 for public companies, with an option to adopt the standard as early as the original effective date of 2017.  The standard may be adopted either retrospectively or on a modified retrospective basis.  We will adopt the standard in 2018 and expect to apply it on a modified retrospective basis, with a cumulative catch-up adjustment recognized at the beginning of 2018.  The standard will primarily impact our businesses under long-term production contracts with the U.S. Government as these contracts currently use the units-of-delivery accounting method; under the new standard, these contracts will transition to a model that recognizes revenue over time, principally as costs are incurred, resulting in earlier revenue recognition.  In 2016, approximately 25% of our revenues were from contracts with the U.S. Government.  Given the complexity of our contracts, we are continuing to assess the potential effect that the standard is expected to have on our consolidated financial statements.

 

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 our assets and liabilities on our consolidated balance sheet as we recognize the rights and corresponding obligations related to our 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

 

2016 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. (Able) in the first quarter of 2016 represented the largest of these businesses and is included in the Textron Aviation segment.  Able is an industry-leading repair and overhaul business that provides component repairs, component exchanges and replacement parts, among other support and service offerings for commercial rotorcraft and fixed-wing aircraft customers around the world.  We are in the process of allocating the purchase price and valuing the acquired assets and liabilities for certain of these acquisitions.  Based on the allocation of the aggregate purchase price for these acquisitions as of December 31, 2016, $101 million has been allocated to goodwill, related to expected synergies and the value of the existing workforce, and $59 million to intangible assets.  Of the recorded goodwill, approximately $45 million is deductible for tax purposes.  The intangible assets, which primarily include customer relationships and technologies, are amortized over a weighted-average period of 15 years.  The operating results of these acquisitions have been included in the Consolidated Statements of Operations since their respective closing dates.

 

2015 Acquisitions

During 2015, we made aggregate cash payments for acquisitions of $81 million, which included three businesses within our Industrial and Textron Aviation segments.

 

2014 Acquisitions

On March 14, 2014, we completed the acquisition of all of the outstanding equity interests in Beech Holdings, LLC, which included Beechcraft Corporation and other subsidiaries, (collectively “Beechcraft”), for an aggregate cash payment of $1.5 billion. The acquisition of Beechcraft and the formation of the Textron Aviation segment has provided increased scale and complementary product offerings, allowing us to strengthen our position across the aviation industry and enhance our ability to support our customers.  We financed $1.1 billion of the purchase price with the issuance of long-term debt and the remaining balance was paid from cash on hand. During 2014, we also made aggregate cash payments of $149 million for seven acquisitions within our Industrial and Systems Segments, including Tug Technologies Corporation, a manufacturer of ground support equipment in the aviation industry.

 

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 3, 2015

$

554

$

31

$

1,057

$

385

$

2,027

Acquisitions

 

6

 

 

 

10

 

16

Foreign currency translation

 

 

 

(6)

 

(14)

 

(20)

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Intangible Assets

Our intangible assets are summarized below:

 

 

 

 

 

December 31, 2016

 

January 2, 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

 

15

$

537

$

(158)

$

379

$

513

$

(120)

$

393

Customer relationships and contractual agreements

 

15

 

384

 

(226)

 

158

 

375

 

(220)

 

155

Trade names and trademarks

 

16

 

264

 

(36)

 

228

 

263

 

(32)

 

231

Other

 

9

 

18

 

(16)

 

2

 

23

 

(19)

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

1,203

$

(436)

$

767

$

1,174

$

(391)

$

783

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names and trademarks in the table above include $204 million of indefinite-lived intangible assets at both December 31, 2016 and January 2, 2016.  Amortization expense totaled $66 million, $61 million and $62 million in 2016, 2015 and 2014, respectively. Amortization expense is estimated to be approximately $66 million, $63 million, $62 million, $58 million and $55 million in 2017, 2018, 2019, 2020 and 2021, 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 31,
2016

 

January 2,
2016

Commercial

 

 

 

 

$

797

$

841

U.S. Government contracts

 

 

 

 

 

294

 

239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,091

 

1,080

Allowance for doubtful accounts

 

 

 

 

 

(27)

 

(33)

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

1,064

$

1,047

 

 

 

 

 

 

 

 

 

 

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 $178 million at December 31, 2016 and $135 million at January 2, 2016.

 

Finance Receivables

Finance receivables are presented in the following table:

 

(In millions)

 

 

 

 

 

December 31,
2016

 

January 2,
2016

Finance receivables*

 

 

 

 

$

976

$

1,135

Allowance for losses

 

 

 

 

 

(41)

 

(48)

 

 

 

 

 

 

 

 

 

Total finance receivables, net

 

 

 

 

$

935

$

1,087

 

 

 

 

 

 

 

 

 

 

* Includes finance receivables held for sale of $30 million at both December 31, 2016 and January 2, 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 31, 2016.  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 31, 2016, 61% of our finance receivables were distributed internationally and 39% throughout the U.S., compared with 62% and 38%, respectively, at the end of 2015.  At December 31, 2016 and January 2, 2016, finance receivables of $411 million and $493 million, respectively, have been pledged as collateral for TFC’s debt of $244 million and $352 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 31,
2016

 

January 2,
2016

Performing

 

 

 

 

$

758

$

891

Watchlist

 

 

 

 

 

101

 

130

Nonaccrual

 

 

 

 

 

87

 

84

 

 

 

 

 

 

 

 

 

Nonaccrual as a percentage of finance receivables

 

 

 

 

 

9.20% 

 

7.60% 

 

 

 

 

 

 

 

 

 

Less than 31 days past due

 

 

 

 

$

857

$

950

31-60 days past due

 

 

 

 

 

49

 

86

61-90 days past due

 

 

 

 

 

18

 

42

Over 90 days past due

 

 

 

 

 

22

 

27

 

 

 

 

 

 

 

 

 

60+ days contractual delinquency as a percentage of finance receivables

 

 

 

 

 

4.23% 

 

6.24% 

 

 

 

 

 

 

 

 

 

 

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 2016 or 2015.

 

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

 

(In millions)

 

 

 

 

 

December 31,
2016

 

January 2,
2016

Recorded investment:

 

 

 

 

 

 

 

 

Impaired loans with related allowance for losses

 

 

 

 

$

55

$

62

Impaired loans with no related allowance for losses

 

 

 

 

 

65

 

42

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

120

$

104

 

 

 

 

 

 

 

 

 

Unpaid principal balance

 

 

 

 

$

125

$

113

Allowance for losses on impaired loans

 

 

 

 

 

11

 

17

Average recorded investment

 

 

 

 

 

101

 

102

 

 

 

 

 

 

 

 

 

 

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 $99 million and $118 million of leveraged leases at December 31, 2016 and January 2, 2016, respectively, in accordance with U.S. generally accepted accounting principles.

 

(In millions)

 

 

 

 

 

December 31,
2016

 

January 2,
2016

Balance at beginning of year

 

 

 

 

$

48

$

51

Provision for losses

 

 

 

 

 

(1)

 

(2)

Charge-offs

 

 

 

 

 

(16)

 

(14)

Recoveries

 

 

 

 

 

10

 

13

 

 

 

 

 

 

 

 

 

Balance at end of year

 

 

 

 

$

41

$

48

 

 

 

 

 

 

 

 

 

Allowance based on collective evaluation

 

 

 

 

$

30

$

31

Allowance based on individual evaluation

 

 

 

 

 

11

 

17

Finance receivables evaluated collectively

 

 

 

 

 

727

 

883

Finance receivables evaluated individually

 

 

 

 

 

120

 

104

 

 

 

 

 

 

 

 

 

 

Inventories
Inventories

Note 4. Inventories

 

Inventories are composed of the following:

 

(In millions)

 

 

 

 

 

December 31,
2016

 

January 2,
2016

Finished goods

 

 

 

 

$

1,947

$

1,735

Work in process

 

 

 

 

 

2,742

 

2,921

Raw materials and components

 

 

 

 

 

724

 

605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,413

 

5,261

Progress/milestone payments

 

 

 

 

 

(949)

 

(1,117)

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

4,464

$

4,144

 

 

 

 

 

 

 

 

 

 

Inventories valued by the LIFO method totaled $1.9 billion and $1.6 billion at December 31, 2016 and January 2, 2016, respectively, and the carrying values of these inventories would have been higher by approximately $457 million and $463 million, respectively, had our LIFO inventories been valued at current costs. Inventories related to long-term contracts, net of progress/milestone payments, were $557 million and $611 million at December 31, 2016 and January 2, 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 31,
2016

 

January 2,
2016

Land and buildings

 

 

 

3 – 40

$

1,884

$

1,859

Machinery and equipment

 

 

 

1 – 20

 

4,820

 

4,548

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,704

 

6,407

Accumulated depreciation and amortization

 

 

 

 

 

(4,123)

 

(3,915)

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

2,581

$

2,492

 

 

 

 

 

 

 

 

 

 

At December 31, 2016 and January 2, 2016, assets under capital leases totaled $284 million and $275 million, respectively, and had accumulated amortization of $85 million and $87 million, respectively. The Manufacturing group’s depreciation expense, which included amortization expense on capital leases, totaled $368 million, $383 million and $379 million in 2016, 2015 and 2014, respectively.

 

Accrued Liabilities
Accrued Liabilities

Note 6. Accrued Liabilities

 

The accrued liabilities of our Manufacturing group are summarized below:

 

(In millions)

 

 

 

 

 

December 31,
2016

 

January 2,
2016

Customer deposits

 

 

 

 

$

991

$

1,323

Salaries, wages and employer taxes

 

 

 

 

 

301

 

315

Current portion of warranty and product maintenance contracts

 

 

 

 

 

151

 

137

Other

 

 

 

 

 

814

 

692

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

2,257

$

2,467

 

 

 

 

 

 

 

 

 

 

Changes in our warranty liability are as follows:

 

(In millions)

 

 

 

2016

 

2015

 

2014

Balance at beginning of year

 

 

$

143

$

148

$

121

Provision

 

 

 

79

 

78

 

75

Settlements

 

 

 

(70)

 

(72)

 

(71)

Acquisitions

 

 

 

2

 

3

 

43

Adjustments*

 

 

 

(16)

 

(14)

 

(20)

 

 

 

 

 

 

 

 

 

Balance at end of year

 

 

$

138

$

143

$

148

 

 

 

 

 

 

 

 

 

 

* 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 31,
2016

 

January 2,
2016

Manufacturing group

 

 

 

 

 

 

 

 

4.625% due 2016

 

 

 

 

$

$

250

5.60% due 2017

 

 

 

 

 

350

 

350

Variable-rate note due 2018 (2.09% and 1.58%, respectively)

 

 

 

 

 

150

 

150

7.25% due 2019

 

 

 

 

 

250

 

250

Variable-rate note due 2019 (1.95% and 1.59%, respectively)

 

 

 

 

 

200

 

200

6.625% due 2020

 

 

 

 

 

184

 

222

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

 

Other (weighted-average rate of 2.86% and 1.29%, respectively)

 

 

 

 

 

93

 

75

 

 

 

 

 

 

 

 

 

Total Manufacturing group debt

 

 

 

 

$

2,777

$

2,697

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

 

 

 

 

 

(363)

 

(262)

 

 

 

 

 

 

 

 

 

Total Long-term debt

 

 

 

 

$

2,414

$

2,435

 

 

 

 

 

 

 

 

 

Finance group

 

 

 

 

 

 

 

 

Fixed-rate notes due 2016-2017 (weighted-average rate of 4.59%) (a)

 

 

 

 

$

10

$

21

Variable-rate note due 2018 (weighted-average rate of 1.89% and 1.53%, respectively)

 

 

 

 

 

200

 

200

2.26% note due 2019

 

 

 

 

 

150

 

Fixed-rate notes due 2017-2025 (weighted-average rate of 2.87% and 2.79%, respectively) (a) (b)

 

 

 

 

 

202

 

300

Variable-rate notes due 2016-2025 (weighted-average rate of 1.97% and 1.54%, respectively) (a) (b)

 

 

 

 

 

42

 

52

Securitized debt (weighted-average rate of 1.71%)

 

 

 

 

 

 

41

6% Fixed-to-Floating Rate Junior Subordinated Notes

 

 

 

 

 

299

 

299

 

 

 

 

 

 

 

 

 

Total Finance group debt

 

 

 

 

$

903

$

913

 

 

 

 

 

 

 

 

 

 

(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 31, 2016:

 

(In millions)

 

2017

 

2018

 

2019

 

2020

 

2021

Manufacturing group

$

363

$

157

$

457

$

195

$

507

Finance group

 

64

 

239

 

188

 

36

 

23

 

 

 

 

 

 

 

 

 

 

 

Total

$

427

$

396

$

645

$

231

$

530

 

 

 

 

 

 

 

 

 

 

 

 

On September 30, 2016, Textron entered into 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 31, 2016, there were no amounts borrowed against the facility and there were $11 million of letters of credit issued against it.  This facility replaced the existing 5-year facility, which had no outstanding borrowings and was scheduled to expire in October 2018.

 

6% Fixed-to-Floating Rate Junior Subordinated Notes

The Finance group’s $299 million of 6% 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 on or after February 15, 2017 and are obligated to redeem the notes beginning on February 15, 2042.  Interest on the notes is fixed at 6% until February 15, 2017 and is variable at the three-month London Interbank Offered Rate + 1.735% thereafter.

 

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 2016, 2015 and 2014 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 31, 2016 and January 2, 2016, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $665 million and $706 million, respectively.  At December 31, 2016, the fair value amounts of our foreign currency exchange contracts were a $7 million asset and a $17 million liability. At January 2, 2016, the fair value amounts of our foreign currency exchange contracts were a $7 million asset and a $28 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 Recorded at Fair Value on a Nonrecurring Basis

During the years ended December 31, 2016 and January 2, 2016, the Finance group’s impaired nonaccrual finance receivables of $44 million and $45 million, respectively, were measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3). Impaired nonaccrual finance receivables represent assets recorded at fair value on a nonrecurring basis since the measurement of required reserves on our impaired finance receivables is significantly dependent on the fair value of the underlying collateral.  For impaired nonaccrual finance receivables secured by aviation assets, the fair values of collateral are determined primarily based on the use of industry pricing guides. Fair value measurements recorded on impaired finance receivables resulted in charges to provision for loan losses totaling $10 million, $13 million and $18 million for 2016, 2015 and 2014, respectively.

 

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 31, 2016

 

January 2, 2016

(In millions)

 

Carrying
Value

 

Estimated
Fair Value

 

Carrying
Value

 

Estimated
Fair Value

Manufacturing group

 

 

 

 

 

 

 

 

Debt, excluding leases

$

(2,690)

$

(2,809)

$

(2,628)

$

(2,744)

Finance group

 

 

 

 

 

 

 

 

Finance receivables, excluding leases

 

729

 

758

 

863

 

820

Debt

 

(903)

 

(831)

 

(913)

 

(840)

 

 

 

 

 

 

 

 

 

 

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 for the three years ended December 31, 2016 is presented below:

 

(In thousands)

 

 

 

2016

 

2015

 

2014

Balance at beginning of year

 

 

 

274,228

 

276,582

 

282,059

Stock repurchases

 

 

 

(6,898)

 

(5,197)

 

(8,921)

Share-based compensation activity

 

 

 

2,957

 

2,843

 

3,444

 

 

 

 

 

 

 

 

 

Balance at end of year

 

 

 

270,287

 

274,228

 

276,582

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

2016

 

2015

 

2014

Basic weighted-average shares outstanding

 

 

 

270,774

 

276,682

 

279,409

Dilutive effect of:

 

 

 

 

 

 

 

 

Stock options

 

 

 

1,591

 

2,045

 

2,049

Accelerated Share Repurchase agreement

 

 

 

 

 

332

 

 

 

 

 

 

 

 

 

Diluted weighted-average shares outstanding

 

 

 

272,365

 

278,727

 

281,790

 

 

 

 

 

 

 

 

 

 

Stock options to purchase 2 million shares of common stock are excluded from the calculation of diluted weighted-average shares outstanding for each year presented 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 3, 2015

$

(1,511)

$

18

$

(13)

$

(1,506)

Other comprehensive income (loss) before reclassifications

 

92

 

(65)

 

(26)

 

1

Reclassified from Accumulated other comprehensive loss

 

92

 

 

15

 

107

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

184

 

(65)

 

(11)

 

108

 

 

 

 

 

 

 

 

 

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 (Loss)

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

 

 

 

2016

 

2015

 

2014

(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)

$

(382)

$

135

$

(247)

$

136

$

(44)

$

92

$

(734)

$

252

$

(482)

Amortization of net actuarial loss*

 

104

 

(39)

 

65

 

150

 

(53)

 

97

 

114

 

(40)

 

74

Amortization of prior service credit*

 

(7)

 

4

 

(3)

 

(7)

 

2

 

(5)

 

(8)

 

4

 

(4)

Recognition of prior service credit

 

12

 

(5)

 

7

 

 

 

 

18

 

(7)

 

11

Pension and postretirement benefits adjustments, net

 

(273)

 

95

 

(178)

 

279

 

(95)

 

184

 

(610)

 

209

 

(401)

Deferred gains (losses) on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

11

 

(4)

 

7

 

(33)

 

7

 

(26)

 

(16)

 

4

 

(12)

Reclassification adjustments

 

17

 

(4)

 

13

 

19

 

(4)

 

15

 

12

 

(3)

 

9

Deferred gains (losses) on hedge contracts, net

 

28

 

(8)

 

20

 

(14)

 

3

 

(11)

 

(4)

 

1

 

(3)

Foreign currency translation adjustments

 

(36)

 

(13)

 

(49)

 

(55)

 

(10)

 

(65)

 

(71)

 

(4)

 

(75)

Total

$

(281)

$

74

$

(207)

$

210

$

(102)

$

108

$

(685)

$

206

$

(479)

 

*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 2016, 2015 and 2014.

 

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)

 

 

 

2016

 

2015

 

2014

Compensation expense

 

 

$

71

$

63

$

85

Income tax benefit

 

 

 

(26)

 

(23)

 

(32)

 

 

 

 

 

 

 

 

 

Total net compensation expense included in net income

 

 

$

45

$

40

$

53

 

 

 

 

 

 

 

 

 

 

Compensation expense included approximately $20 million in 2016 and $21 million in both 2015 and 2014, respectively, for a portion of the fair value of stock options issued and the portion of previously granted options for which the requisite service has been rendered.

 

Compensation cost for awards subject only to service conditions that vest ratably are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. As of December 31, 2016, we had not recognized $43 million of total compensation costs associated with unvested awards subject only to service conditions. We expect to recognize compensation expense for these awards over a weighted-average period of approximately two years.

 

Stock Options

Options to purchase our shares have a maximum term of ten years and generally vest ratably over a three-year period. The stock option compensation cost calculated under the fair value approach is recognized over the vesting period of the stock options.  We estimate the fair value of options granted on the date of grant using the Black-Scholes option-pricing model.  Expected volatilities are based on implied volatilities from traded options on our common stock, historical volatilities and other factors.  The expected term is based on historical option exercise data, which is adjusted to reflect any anticipated changes in expected behavior.

 

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

 

 

 

 

 

2016

 

2015

 

2014

Fair value of options at grant date

 

 

$

10.33

$

14.03

$

12.72

Dividend yield

 

 

 

0.2% 

 

0.2% 

 

0.2% 

Expected volatility

 

 

 

33.6% 

 

34.9% 

 

34.5% 

Risk-free interest rate

 

 

 

1.2% 

 

1.5% 

 

1.5% 

Expected term (in years)

 

 

 

4.8

 

4.8

 

5.0

 

 

 

 

 

 

 

 

 

 

The stock option activity during 2016 is provided below:

 

(Options in thousands)

 

 

 

 

 

Number of
Options

 

Weighted-
Average
Exercise
Price

Outstanding at beginning of year

 

 

 

 

 

8,808

$

32.91

Granted

 

 

 

 

 

1,795

 

34.51

Exercised

 

 

 

 

 

(1,143)

 

(28.57)

Forfeited or expired

 

 

 

 

 

(196)

 

(39.85)