TEXTRON INC, 10-Q filed on 10/27/2016
Quarterly Report
Document and Entity Information
9 Months Ended
Oct. 1, 2016
Oct. 14, 2016
Document and Entity Information
 
 
Entity Registrant Name
TEXTRON INC 
 
Entity Central Index Key
0000217346 
 
Document Type
10-Q 
 
Document Period End Date
Oct. 01, 2016 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
270,208,112 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q3 
 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Oct. 1, 2016
Oct. 3, 2015
Oct. 1, 2016
Oct. 3, 2015
Revenues
 
 
 
 
Manufacturing revenues
$ 3,231 
$ 3,163 
$ 9,903 
$ 9,437 
Finance revenues
20 
17 
60 
63 
Total revenues
3,251 
3,180 
9,963 
9,500 
Costs, expenses and other
 
 
 
 
Cost of sales
2,661 
2,584 
8,185 
7,728 
Selling and administrative expense
323 
303 
949 
969 
Interest expense
45 
41 
132 
126 
Special charges
115 
 
115 
 
Total costs, expenses and other
3,144 
2,928 
9,381 
8,823 
Income from continuing operations before income taxes
107 
252 
582 
677 
Income tax benefit (expense)
192 
(76)
46 
(204)
Income from continuing operations
299 
176 
628 
473 
Income (loss) from discontinued operations, net of income taxes
122 1
 
120 1
(2)1
Net income
$ 421 
$ 176 
$ 748 
$ 471 
Basic earnings per share
 
 
 
 
Continuing operations (in dollars per share)
$ 1.11 
$ 0.64 
$ 2.32 
$ 1.71 
Discontinued operations (in dollars per share)
$ 0.45 
 
$ 0.44 
$ (0.01)
Basic earnings per share (in dollars per share)
$ 1.56 
$ 0.64 
$ 2.76 
$ 1.70 
Diluted earnings per share
 
 
 
 
Continuing operations (in dollars per share)
$ 1.10 
$ 0.63 
$ 2.31 
$ 1.69 
Discontinued operations (in dollars per share)
$ 0.45 
 
$ 0.44 
$ (0.01)
Diluted earnings per share (in dollars per share)
$ 1.55 
$ 0.63 
$ 2.75 
$ 1.68 
Dividends per share
 
 
 
 
Common stock (in dollars per share)
$ 0.02 
$ 0.02 
$ 0.06 
$ 0.06 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Oct. 1, 2016
Oct. 3, 2015
Oct. 1, 2016
Oct. 3, 2015
Consolidated Statements of Comprehensive Income
 
 
 
 
Net income
$ 421 
$ 176 
$ 748 
$ 471 
Other comprehensive income, net of tax:
 
 
 
 
Pension and postretirement benefits adjustments, net of reclassifications
16 
22 
52 
133 
Deferred gains (losses) on hedge contracts, net of reclassifications
(2)
(1)
23 
(9)
Foreign currency translation adjustments
(45)
Other comprehensive income
18 
22 
83 
79 
Comprehensive income
$ 439 
$ 198 
$ 831 
$ 550 
Consolidated Balance Sheets (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
Oct. 1, 2016
Jan. 2, 2016
Assets
 
 
Cash and equivalents
$ 739 
$ 1,005 
Inventories
4,791 
4,144 
Finance receivables, net
969 
1,087 
Total assets
15,167 
14,708 
Liabilities
 
 
Total liabilities
9,516 
9,744 
Shareholders' equity
 
 
Common stock
36 
36 
Capital surplus
1,674 
1,587 
Treasury stock
(774)
(559)
Retained earnings
6,030 
5,298 
Accumulated other comprehensive loss
(1,315)
(1,398)
Total shareholders' equity
5,651 
4,964 
Total liabilities and shareholders' equity
15,167 
14,708 
Common shares outstanding
270,134 
274,228 
Manufacturing group
 
 
Assets
 
 
Cash and equivalents
589 
946 
Accounts receivable, net
1,139 
1,047 
Inventories
4,791 
4,144 
Other current assets
348 
341 
Total current assets
6,867 
6,478 
Property, plant and equipment, less accumulated depreciation and amortization of $4,107 and $3,915
2,568 
2,492 
Goodwill
2,121 
2,023 
Other assets
2,318 
2,399 
Total assets
13,874 
13,392 
Liabilities
 
 
Short-term debt and current portion of long-term debt
126 
262 
Accounts payable
1,216 
1,063 
Accrued liabilities
2,278 
2,467 
Total current liabilities
3,620 
3,792 
Other liabilities
1,987 
2,376 
Long-term debt
2,777 
2,435 
Total liabilities
8,384 
8,603 
Finance group
 
 
Assets
 
 
Cash and equivalents
150 
59 
Finance receivables, net
969 
1,087 
Other assets
174 
170 
Total assets
1,293 
1,316 
Liabilities
 
 
Other liabilities
213 
228 
Debt
919 
913 
Total liabilities
$ 1,132 
$ 1,141 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, unless otherwise specified
Oct. 1, 2016
Jan. 2, 2016
Consolidated Balance Sheets
 
 
Accumulated depreciation and amortization
$ 4,107 
$ 3,915 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Oct. 1, 2016
Oct. 3, 2015
Cash flows from operating activities
 
 
Net income
$ 748 
$ 471 
Less: Income (loss) from discontinued operations
120 1
(2)1
Income from continuing operations
628 
473 
Non-cash items:
 
 
Depreciation and amortization
331 
332 
Asset impairments
36 
 
Deferred income taxes
30 
(11)
Other, net
76 
78 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(92)
(122)
Inventories
(637)
(654)
Other assets
56 
Accounts payable
146 
156 
Accrued and other liabilities
(290)
(18)
Income taxes, net
(216)
64 
Pension, net
21 
61 
Captive finance receivables, net
54 
58 
Other operating activities, net
(4)
Net cash provided by operating activities of continuing operations
145 
419 
Net cash used in operating activities of discontinued operations
(2)
(4)
Net cash provided by operating activities
143 
415 
Cash flows from investing activities
 
 
Capital expenditures
(306)
(286)
Net cash used in acquisitions
(179)
(81)
Finance receivables repaid
40 
66 
Other investing activities, net
53 
31 
Net cash provided by (used in) investing activities
(392)
(270)
Cash flows from financing activities
 
 
Proceeds from long-term debt
520 
55 
Increase in short-term debt
110 
 
Principal payments on long-term debt and nonrecourse debt
(433)
(196)
Purchases of Textron common stock
(215)
(211)
Dividends paid
(16)
(17)
Other financing activities, net
20 
25 
Net cash used in financing activities
(14)
(344)
Effect of exchange rate changes on cash and equivalents
(3)
(9)
Net increase (decrease) in cash and equivalents
(266)
(208)
Cash and equivalents at beginning of period
1,005 
822 
Cash and equivalents at end of period
739 
614 
Manufacturing group
 
 
Cash flows from operating activities
 
 
Net income
733 
458 
Less: Income (loss) from discontinued operations
120 
(2)
Income from continuing operations
613 
460 
Non-cash items:
 
 
Depreciation and amortization
322 
324 
Asset impairments
36 
 
Deferred income taxes
35 
(3)
Other, net
74 
74 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(92)
(122)
Inventories
(639)
(661)
Other assets
85 
(6)
Accounts payable
146 
156 
Accrued and other liabilities
(283)
(10)
Income taxes, net
(212)
58 
Pension, net
21 
61 
Dividends received from Finance Group
29 
20 
Other operating activities, net
(4)
Net cash provided by operating activities of continuing operations
137 
347 
Net cash used in operating activities of discontinued operations
(2)
(4)
Net cash provided by operating activities
135 
343 
Cash flows from investing activities
 
 
Capital expenditures
(306)
(286)
Net cash used in acquisitions
(179)
(81)
Other investing activities, net
Net cash provided by (used in) investing activities
(480)
(365)
Cash flows from financing activities
 
 
Proceeds from long-term debt
345 
 
Increase in short-term debt
110 
 
Principal payments on long-term debt and nonrecourse debt
(253)
 
Purchases of Textron common stock
(215)
(211)
Dividends paid
(16)
(17)
Other financing activities, net
20 
25 
Net cash used in financing activities
(9)
(203)
Effect of exchange rate changes on cash and equivalents
(3)
(9)
Net increase (decrease) in cash and equivalents
(357)
(234)
Cash and equivalents at beginning of period
946 
731 
Cash and equivalents at end of period
589 
497 
Finance group
 
 
Cash flows from operating activities
 
 
Net income
15 
13 
Income from continuing operations
15 
13 
Non-cash items:
 
 
Depreciation and amortization
Deferred income taxes
(5)
(8)
Other, net
Changes in assets and liabilities:
 
 
Other assets
(3)
12 
Accrued and other liabilities
(7)
(8)
Income taxes, net
(4)
Net cash provided by operating activities of continuing operations
27 
Net cash provided by operating activities
27 
Cash flows from investing activities
 
 
Finance receivables repaid
220 
269 
Finance receivables originated
(126)
(145)
Other investing activities, net
24 
36 
Net cash provided by (used in) investing activities
118 
160 
Cash flows from financing activities
 
 
Proceeds from long-term debt
175 
55 
Principal payments on long-term debt and nonrecourse debt
(180)
(196)
Dividends paid
(29)
(20)
Net cash used in financing activities
(34)
(161)
Net increase (decrease) in cash and equivalents
91 
26 
Cash and equivalents at beginning of period
59 
91 
Cash and equivalents at end of period
$ 150 
$ 117 
Basis of Presentation
Basis of Presentation

 

Note 1.  Basis of Presentation

 

Our Consolidated Financial Statements include the accounts of Textron Inc. (Textron) and its majority-owned subsidiaries.  We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information.  Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements.  The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 2, 2016.  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.

 

During 2016 and 2015, we changed 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 in the third quarter of 2016 and 2015 by $18 million and $14 million, respectively, ($11 million and $9 million after tax, or $0.04 and $0.03 per diluted share, respectively).  For the third quarter of 2016 and 2015, the gross favorable program profit adjustments totaled $21 million and $20 million, respectively, and the gross unfavorable program profit adjustments totaled $3 million and $6 million, respectively.

 

The changes in estimates increased income from continuing operations before income taxes in the first nine months of 2016 and 2015 by $57 million and $68 million, respectively, ($36 million and $43 million after tax, or $0.13 and $0.15 per diluted share, respectively).  For the first nine months of 2016 and 2015, the gross favorable program profit adjustments totaled $74 million and $93 million, respectively, and the gross unfavorable program profit adjustments totaled $17 million and $25 million, respectively.

 

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 comprehensive 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 that would permit companies to adopt the standard as early as the original effective date of 2017.  The new standard may be adopted either retrospectively or on a modified retrospective basis whereby it would be applied to new contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch-up adjustment recorded to beginning retained earnings at the effective date for those contracts.  We are currently evaluating the impacts of adoption on our consolidated financial position, results of operations and related disclosures, along with the implementation approach to be used.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, that requires all leases with a term greater than 12 months be recognized on the balance sheet, while lease expenses would continue to be recognized in the statement of operations in a manner similar to current accounting guidance.  The new standard is effective for our company at the beginning of fiscal 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.  We are currently evaluating the impact of adoption on our consolidated financial statements.

 

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 fiscal 2020 with early adoption permitted beginning in fiscal 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 adoption on our consolidated financial statements.

 

 

Business Acquisitions
Business Acquisitions

Note 2.  Business Acquisitions

 

In the first nine months of 2016, we paid $179 million in cash and assumed debt of $19 million to acquire five 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 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 these acquisitions.  Based on the preliminary allocation of the aggregate purchase price for these acquisitions, $97 million has been allocated to goodwill, related to expected synergies and the value of the existing workforce, and $62 million to intangible assets.  Of the recorded goodwill, approximately $43 million is deductible for tax purposes.  The intangible assets are primarily related to customer relationships and technologies, which will be amortized over 10 to 18 years.  The operating results of these acquisitions have been included in the Consolidated Statements of Operations since their respective closing dates.

 

Special Charges
Special Charges

Note 3.  Special Charges

 

Special charges recorded in the third quarter of 2016 are as follows:

 

(In millions)

 

Severance
Costs

Asset
Impairments

Contract
Terminations
and Other

 

Total

Textron Systems

$

13

$

33

$

13

$

59

Textron Aviation

 

34

 

1

 

 

35

Industrial

 

11

 

2

 

 

13

Bell

 

8

 

 

 

8

 

 

 

 

 

 

 

 

 

 

$

66

$

36

$

13

$

115

 

 

 

 

 

 

 

 

 

 

Our Board of Directors approved a plan in the third quarter of 2016 to restructure and realign our businesses by implementing headcount reductions, facility consolidations and other actions in order to improve overall operating efficiency across Textron.  The plan provides for Textron Systems to discontinue production of its sensor-fuzed weapon product, which will generate headcount reductions, facility consolidations and asset impairments within its Weapons and Sensors operating unit. Historically, sensor-fuzed weapon sales have relied on foreign military and direct commercial international customers for which both executive branch and congressional approval is required. The current political environment has made it difficult to obtain these approvals. Within our Industrial segment, the plan provides for the combination of our Jacobsen business with the Textron Specialized Vehicles businesses, resulting in the consolidation of certain facilities and general and administrative functions and related headcount reductions.  As a result of ongoing evaluations, we subsequently decided to take additional restructuring actions, principally headcount reductions, in our Textron Aviation segment, as well as other businesses.  The total headcount reduction related to restructuring activities is expected to be approximately 1,700 positions, representing approximately 5% of our workforce.

 

We expect to incur additional pre-tax charges under this plan of approximately $25 million to $55 million, primarily related to contract termination, severance, facility consolidation and relocation costs. The remaining charges are expected to primarily be in the Industrial and Textron Systems segments.  We anticipate the plan to be substantially completed by March 2017.

 

An analysis of our restructuring reserve activity under this plan is summarized below:

 

(In millions)

 

 

Severance
Costs

Contract
Terminations
and Other

 

Total

Provision

 

 

$

66

$

13

$

79

Cash paid

 

 

 

(2)

 

 

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

End of period

 

 

$

64

$

13

$

77

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expected cash outlays for restructuring activities are estimated to be in the range of $100 million to $120 million, approximately half of which is expected to be expended in 2016 and the remainder in 2017.  Severance costs generally are paid on a lump-sum basis and include outplacement costs, which are paid in accordance with normal payment terms.

 

Retirement Plans
Retirement Plans

Note 4.  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 Ended

Nine Months Ended

(In millions)

 

October 1,
2016

 

October 3,
2015

 

October 1,
2016

 

October 3,
2015

Pension Benefits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

25

$

27

$

74

$

86

Interest cost

 

84

 

82

 

254

 

245

Expected return on plan assets

 

(123)

 

(121)

 

(368)

 

(363)

Amortization of prior service cost

 

4

 

4

 

11

 

12

Amortization of net actuarial loss

 

26

 

35

 

78

 

113

Curtailment and other charges

 

 

 

 

6

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

$

16

$

27

$

49

$

99

 

 

 

 

 

 

 

 

 

Postretirement Benefits Other Than Pensions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

1

$

1

$

2

$

3

Interest cost

 

4

 

4

 

12

 

12

Amortization of prior service credit

 

(6)

 

(6)

 

(17)

 

(18)

Amortization of net actuarial loss

 

 

1

 

 

1

 

 

 

 

 

 

 

 

 

Net periodic benefit credit

$

(1)

$

$

(3)

$

(2)

 

 

 

 

 

 

 

 

 

 

Earnings Per Share
Earnings Per Share

Note 5.  Earnings Per Share

 

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

 

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

 

 

Three Months Ended

Nine Months Ended

(In thousands)

 

October 1,
2016

 

October 3,
2015

 

October 1,
2016

 

October 3,
2015

Basic weighted-average shares outstanding

 

270,560

 

276,334

 

270,703

 

277,317

Dilutive effect of stock options

 

1,539

 

1,705

 

1,348

 

2,083

 

 

 

 

 

 

 

 

 

Diluted weighted-average shares outstanding

 

272,099

 

278,039

 

272,051

 

279,400

 

 

 

 

 

 

 

 

 

 

Stock options to purchase 4 million shares of common stock are excluded from the calculation of diluted weighted average shares outstanding for both the three and nine months ended October 1, 2016, as their effect would have been anti-dilutive. Stock options to purchase 4 million and 2 million shares of common stock are excluded from the calculation of diluted weighted average shares outstanding for the three and nine months ended October 3, 2015, respectively, as their effect would have been anti-dilutive.

 

Accounts Receivable and Finance Receivables
Accounts Receivable and Finance Receivables

Note 6.  Accounts Receivable and Finance Receivables

 

Accounts Receivable

Accounts receivable is composed of the following:

 

(In millions)

 

 

 

 

 

October 1,
2016

 

January 2,
2016

Commercial

 

 

 

 

$

915

$

841

U.S. Government contracts

 

 

 

 

 

255

 

239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,170

 

1,080

Allowance for doubtful accounts

 

 

 

 

 

(31)

 

(33)

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

1,139

$

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 $179 million at October 1, 2016 and $135 million at January 2, 2016.

 

Finance Receivables

Finance receivables are presented in the following table:

 

(In millions)

 

 

 

 

 

October 1,
2016

 

January 2,
2016

Finance receivables*

 

 

 

 

$

1,013

$

1,135

Allowance for losses

 

 

 

 

 

(44)

 

(48)

 

 

 

 

 

 

 

 

 

Total finance receivables, net

 

 

 

 

$

969

$

1,087

 

 

 

 

 

 

 

 

 

 

* Includes finance receivables held for sale of $30 million at both October 1, 2016 and January 2, 2016.

 

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, 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.  Accrual of interest income is suspended for these accounts and all cash collections are generally 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.  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 the delinquency aging category are summarized as follows:

 

(In millions)

 

 

 

 

 

October 1,
2016

 

January 2,
2016

Performing

 

 

 

 

$

807

$

891

Watchlist

 

 

 

 

 

86

 

130

Nonaccrual

 

 

 

 

 

90

 

84

 

 

 

 

 

 

 

 

 

Nonaccrual as a percentage of finance receivables

 

 

 

 

 

9.16% 

 

7.60% 

 

 

 

 

 

 

 

 

 

Less than 31 days past due

 

 

 

 

$

817

$

950

31-60 days past due

 

 

 

 

 

81

 

86

61-90 days past due

 

 

 

 

 

45

 

42

Over 90 days past due

 

 

 

 

 

40

 

27

 

 

 

 

 

 

 

 

 

60 + days contractual delinquency as a percentage of finance receivables

 

 

 

 

8.65% 

 

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 the first nine months of 2016 or 2015.

 

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

 

(In millions)

 

 

 

 

 

October 1,
2016

 

January 2,
2016

Recorded investment:

 

 

 

 

 

 

 

 

Impaired loans with related allowance for losses

 

 

 

 

$

54

$

62

Impaired loans with no related allowance for losses

 

 

 

 

 

45

 

42

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

99

$

104

 

 

 

 

 

 

 

 

 

Unpaid principal balance

 

 

 

 

$

104

$

113

Allowance for losses on impaired loans

 

 

 

 

 

13

 

17

Average recorded investment

 

 

 

 

 

96

 

102

 

 

 

 

 

 

 

 

 

 

A summary of the allowance for losses on finance receivables, based on how the underlying finance receivables are evaluated for impairment, is provided below.  The finance receivables reported in this table specifically exclude leveraged leases in accordance with U.S. generally accepted accounting principles.

 

(In millions)

 

 

 

 

 

October 1,
2016

 

January 2,
2016

Allowance based on collective evaluation

 

 

 

 

$

31

$

31

Allowance based on individual evaluation

 

 

 

 

 

13

 

17

 

 

 

 

 

 

 

 

 

Finance receivables evaluated collectively

 

 

 

 

$

786

$

883

Finance receivables evaluated individually

 

 

 

 

 

99

 

104

 

 

 

 

 

 

 

 

 

 

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.

 

A rollforward of the allowance for losses on finance receivables is provided below:

 

 

 

 

 

 

Nine Months Ended

(In millions)

 

 

 

 

 

October 1,
2016

 

October 3,
2015

Beginning of period

 

 

 

 

$

48

$

51

Provision for losses

 

 

 

 

 

(1)

 

(4)

Charge-offs

 

 

 

 

 

(11)

 

(8)

Recoveries

 

 

 

 

 

8

 

10

 

 

 

 

 

 

 

 

 

End of period

 

 

 

 

$

44

$

49

 

 

 

 

 

 

 

 

 

 

Inventories
Inventories

 

 

Note 7.  Inventories

 

Inventories are composed of the following:

 

(In millions)

 

 

 

 

 

October 1,
2016

 

January 2,
2016

Finished goods

 

 

 

 

$

2,076

$

1,735

Work in process

 

 

 

 

 

2,958

 

2,921

Raw materials and components

 

 

 

 

 

701

 

605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,735

 

5,261

Progress/milestone payments

 

 

 

 

 

(944)

 

(1,117)

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

4,791

$

4,144

 

 

 

 

 

 

 

 

 

 

Warranty Liability
Warranty Liability

Note 8.  Warranty Liability

 

Changes in our warranty liability are as follows:

 

 

 

 

 

 

Nine Months Ended

(In millions)

 

 

 

 

 

October 1,
2016

 

October 3,
2015

Beginning of period

 

 

 

 

$

143

$

148

Provision

 

 

 

 

 

58

 

47

Settlements

 

 

 

 

 

(59)

 

(52)

Adjustments*

 

 

 

 

 

(10)

 

(3)

 

 

 

 

 

 

 

 

 

End of period

 

 

 

 

$

132

$

140

 

 

 

 

 

 

 

 

 

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

Debt
Debt

Note 9.  Debt

 

On September 30, 2016, Textron entered into a senior unsecured revolving credit facility for an aggregate principal amount of $1.0 billion, of which up to $100 million is available for the issuance of letters of credit. This facility expires in September 2021 and replaced the existing 5-year facility, which had no outstanding borrowings, and was scheduled to expire in October 2018.  At October 1, 2016, there were no amounts borrowed against the new facility.

 

Under our shelf registration statement, on March 11, 2016, we issued $350 million of fixed-rate notes due March 15, 2026 that bear an annual interest rate of 4.0%.  The net proceeds of the issuance totaled $345 million, after deducting underwriting discounts, commissions and offering expenses.

Derivative Instruments and Fair Value Measurements
Derivative Instruments and Fair Value Measurements

Note 10.  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 1, 2016 and January 2, 2016, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $687 million and $706 million, respectively.  At October 1, 2016, the fair value amounts of our foreign currency exchange contracts were a $5 million asset and an $11 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 periods ended October 1, 2016 and January 2, 2016, the Finance group’s impaired nonaccrual finance receivables of $41 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 were not significant for both the three and nine months ended October 1, 2016 and October 3, 2015.

 

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 1, 2016

January 2, 2016

(In millions)

 

Carrying
Value

Estimated
Fair Value

 

Carrying
Value

Estimated
Fair Value

Manufacturing group

 

 

 

 

 

 

 

 

Long-term debt, excluding leases

$

(2,701)

$

(2,905)

$

(2,628)

$

(2,744)

Finance group

 

 

 

 

 

 

 

 

Finance receivables, excluding leases

 

757

 

778

 

863

 

820

Debt

 

(919)

 

(851)

 

(913)

 

(840)

 

 

 

 

 

 

 

 

 

 

Fair value for the Manufacturing group debt is determined using market observable data for similar transactions (Level 2).  At both October 1, 2016 and January 2, 2016, approximately 75% of the fair value of term debt for the Finance group was determined 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.

 

Accumulated Other Comprehensive Loss and Other Comprehensive Income
Accumulated Other Comprehensive Loss and Other Comprehensive Income

Note 11.  Accumulated Other Comprehensive Loss and Other Comprehensive Income

 

The components of Accumulated Other Comprehensive Loss are presented below:

 

(In millions)

Pension and
Postretirement
Benefits
Adjustments

Deferred
Gains (Losses)
on Hedge
Contracts

Foreign
Currency
Translation
Adjustments

Accumulated
Other
Comprehensive
Loss

For the nine months ended October 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of the period

$

(1,327)

$

(24)

$

(47)

$

(1,398)

Other comprehensive income before reclassifications

 

5

 

11

 

8

 

24

Reclassified from Accumulated other comprehensive loss

 

47

 

12

 

 

59

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

52

 

23

 

8

 

83

 

 

 

 

 

 

 

 

 

End of the period

$

(1,275)

$

(1)

$

(39)

$

(1,315)

 

 

 

 

 

 

 

 

 

For the nine months ended October 3, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of the period

$

(1,511)

$

(13)

$

18

$

(1,506)

Other comprehensive income (loss) before reclassifications

 

62

 

(22)

 

(45)

 

(5)

Reclassified from Accumulated other comprehensive loss

 

71

 

13

 

 

84

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

133

 

(9)

 

(45)

 

79

 

 

 

 

 

 

 

 

 

End of the period

$

(1,378)

$

(22)

$

(27)

$

(1,427)

 

 

 

 

 

 

 

 

 

 

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

 

 

October 1, 2016

October 3, 2015

(In millions)

Pre-Tax
Amount

Tax
(Expense)
Benefit

After-Tax
Amount

Pre-Tax
Amount

Tax
(Expense)
Benefit

After-Tax
Amount

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss*

$

26

$

(9)

$

17

$

36

$

(12)

$

24

Amortization of prior service credit

 

(2)

 

1

 

(1)

 

(2)

 

 

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments, net

 

24

 

(8)

 

16

 

34

 

(12)

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred losses on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

(3)

 

 

(3)

 

(10)

 

2

 

(8)

Reclassification adjustments

 

1

 

 

1

 

9

 

(2)

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred losses on hedge contracts, net

 

(2)

 

 

(2)

 

(1)

 

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

13

 

(9)

 

4

 

4

 

(3)

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

35

$

(17)

$

18

$

37

$

(15)

$

22

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss*

$

78

$

(28)

$

50

$

114

$

(40)

$

74

Amortization of prior service credit*

 

(6)

 

3

 

(3)

 

(4)

 

1

 

(3)

Unrealized gains

 

7

 

(2)

 

5

 

98

 

(36)

 

62

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments, net

 

79

 

(27)

 

52

 

208

 

(75)

 

133

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred gains (losses) on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

17

 

(6)

 

11

 

(28)

 

6

 

(22)

Reclassification adjustments

 

16

 

(4)

 

12

 

18

 

(5)

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred gains (losses) on hedge contracts, net

 

33

 

(10)

 

23

 

(10)

 

1

 

(9)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

24

 

(16)

 

8

 

(39)

 

(6)

 

(45)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

136

$

(53)

$

83

$

159

$

(80)

$

79

 

 

 

 

 

 

 

 

 

 

 

 

 

*These components of other comprehensive income are included in the computation of net periodic pension cost.  See Note 11 of our 2015 Annual Report on Form 10-K for additional information.

Commitments and Contingencies
Commitments and Contingencies

Note 12.  Commitments and Contingencies

 

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

 

Income Taxes
Income Taxes

Note 13.  Income Taxes

 

We recognized an income tax benefit of $192 million in the third quarter of 2016 and $46 million in the first nine months of 2016, largely related to a settlement with the U.S. Internal Revenue Service Office of Appeals for our 1998 to 2008 tax years, which resulted in a $206 million benefit recognized in continuing operations.  We also recognized a $113 million benefit in discontinued operations related to the settlement.  U.S. federal income tax audits have now been settled for all years prior to 2009. Our reserve for unrecognized tax benefits and accrued interest decreased to $183 million and $6 million, respectively, at October 1, 2016, primarily due to the settlement.

 

In addition to the benefit of $206 million noted above, the effective tax rate for the third quarter of 2016 was favorably impacted by $9 million in higher qualified research and development expenses and $7 million from a change in the mix of our earnings from U.S. to non-U.S., which includes jurisdictions with lower tax rates than the U.S. federal statutory rate. Our U.S. earnings declined primarily due to the impact of restructuring activities as discussed in Note 3.

 

Segment Information
Segment Information

Note 14.  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 and special charges.  The measurement for the Finance segment includes interest income and expense.

 

Our revenues by segment, along with a reconciliation of segment profit to income from continuing operations before income taxes, are as follows:

 

 

Three Months Ended

Nine Months Ended

(In millions)

 

October 1,
2016

 

October 3,
2015

 

October 1,
2016

 

October 3,
2015

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Textron Aviation

$

1,198

$

1,159

$

3,485

$

3,334

 

 

 

 

 

 

 

 

 

 Bell

 

734

 

756

 

2,352

 

2,419

 

 

 

 

 

 

 

 

 

 Textron Systems

 

413

 

420

 

1,224

 

1,057

 

 

 

 

 

 

 

 

 

 Industrial

 

886

 

828

 

2,842

 

2,627

 Finance

 

20

 

17

 

60

 

63

 

 

 

 

 

 

 

 

 

Total revenues

$

3,251

$

3,180

$

9,963

$

9,500

 

 

 

 

 

 

 

 

 

Segment Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Textron Aviation

$

100

$

107

$

254

$

262

 

 

 

 

 

 

 

 

 

 Bell

 

97

 

99

 

260

 

276

 

 

 

 

 

 

 

 

 

 Textron Systems

 

44

 

39

 

133

 

88

 

 

 

 

 

 

 

 

 

 Industrial

 

66

 

61

 

256

 

229

 Finance

 

3

 

6

 

15

 

22

 

 

 

 

 

 

 

 

 

Segment profit

 

310

 

312

 

918

 

877

 

 

 

 

 

 

 

 

 

Corporate expenses and other, net

 

(53)

 

(27)

 

(116)

 

(102)

 

 

 

 

 

 

 

 

 

Interest expense, net for Manufacturing group

 

(35)

 

(33)

 

(105)

 

(98)

Special charges

 

(115)

 

 

(115)

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

$

107

$

252

$

582

$

677

 

 

 

 

 

 

 

 

 

 

Basis of Presentation (Policies)

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.

 

During 2016 and 2015, we changed 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 in the third quarter of 2016 and 2015 by $18 million and $14 million, respectively, ($11 million and $9 million after tax, or $0.04 and $0.03 per diluted share, respectively).  For the third quarter of 2016 and 2015, the gross favorable program profit adjustments totaled $21 million and $20 million, respectively, and the gross unfavorable program profit adjustments totaled $3 million and $6 million, respectively.

 

The changes in estimates increased income from continuing operations before income taxes in the first nine months of 2016 and 2015 by $57 million and $68 million, respectively, ($36 million and $43 million after tax, or $0.13 and $0.15 per diluted share, respectively).  For the first nine months of 2016 and 2015, the gross favorable program profit adjustments totaled $74 million and $93 million, respectively, and the gross unfavorable program profit adjustments totaled $17 million and $25 million, respectively.

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 comprehensive 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 that would permit companies to adopt the standard as early as the original effective date of 2017.  The new standard may be adopted either retrospectively or on a modified retrospective basis whereby it would be applied to new contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch-up adjustment recorded to beginning retained earnings at the effective date for those contracts.  We are currently evaluating the impacts of adoption on our consolidated financial position, results of operations and related disclosures, along with the implementation approach to be used.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, that requires all leases with a term greater than 12 months be recognized on the balance sheet, while lease expenses would continue to be recognized in the statement of operations in a manner similar to current accounting guidance.  The new standard is effective for our company at the beginning of fiscal 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.  We are currently evaluating the impact of adoption on our consolidated financial statements.

 

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 fiscal 2020 with early adoption permitted beginning in fiscal 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 adoption on our consolidated financial statements.

 

Special Charges (Tables)

 

(In millions)

 

Severance
Costs

Asset
Impairments

Contract
Terminations
and Other

 

Total

Textron Systems

$

13

$

33

$

13

$

59

Textron Aviation

 

34

 

1

 

 

35

Industrial

 

11

 

2

 

 

13

Bell

 

8

 

 

 

8

 

 

 

 

 

 

 

 

 

 

$

66

$

36

$

13

$

115

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

Severance
Costs

Contract
Terminations
and Other

 

Total

Provision

 

 

$

66

$

13

$

79

Cash paid

 

 

 

(2)

 

 

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

End of period

 

 

$

64

$

13

$

77

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement Plans (Tables)
Components of net periodic benefit cost (credit)

 

 

Three Months Ended

Nine Months Ended

(In millions)

 

October 1,
2016

 

October 3,
2015

 

October 1,
2016

 

October 3,
2015

Pension Benefits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

25

$

27

$

74

$

86

Interest cost

 

84

 

82

 

254

 

245

Expected return on plan assets

 

(123)

 

(121)

 

(368)

 

(363)

Amortization of prior service cost

 

4

 

4

 

11

 

12

Amortization of net actuarial loss

 

26

 

35

 

78

 

113

Curtailment and other charges

 

 

 

 

6

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

$

16

$

27

$

49

$

99

 

 

 

 

 

 

 

 

 

Postretirement Benefits Other Than Pensions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

1

$

1

$

2

$

3

Interest cost

 

4

 

4

 

12

 

12

Amortization of prior service credit

 

(6)

 

(6)

 

(17)

 

(18)

Amortization of net actuarial loss

 

 

1

 

 

1

 

 

 

 

 

 

 

 

 

Net periodic benefit credit

$

(1)

$

$

(3)

$

(2)

 

 

 

 

 

 

 

 

 

 

Earnings Per Share (Tables)
Weighted-average shares outstanding for basic and diluted EPS

 

 

Three Months Ended

Nine Months Ended

(In thousands)

 

October 1,
2016

 

October 3,
2015

 

October 1,
2016

 

October 3,
2015

Basic weighted-average shares outstanding

 

270,560

 

276,334

 

270,703

 

277,317

Dilutive effect of stock options

 

1,539

 

1,705

 

1,348

 

2,083

 

 

 

 

 

 

 

 

 

Diluted weighted-average shares outstanding

 

272,099

 

278,039

 

272,051

 

279,400

 

 

 

 

 

 

 

 

 

 

Accounts Receivable and Finance Receivables (Tables)

 

(In millions)

 

 

 

 

 

October 1,
2016

 

January 2,
2016

Commercial

 

 

 

 

$

915

$

841

U.S. Government contracts

 

 

 

 

 

255

 

239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,170

 

1,080

Allowance for doubtful accounts

 

 

 

 

 

(31)

 

(33)