TEXTRON INC, 10-Q filed on 4/26/2017
Quarterly Report
Document and Entity Information
3 Months Ended
Apr. 1, 2017
Apr. 14, 2017
Document and Entity Information
 
 
Entity Registrant Name
TEXTRON INC 
 
Entity Central Index Key
0000217346 
 
Document Type
10-Q 
 
Document Period End Date
Apr. 01, 2017 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-30 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
267,689,291 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q1 
 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended
Apr. 1, 2017
Apr. 2, 2016
Revenues
 
 
Manufacturing revenues
$ 3,075 
$ 3,181 
Finance revenues
18 
20 
Total revenues
3,093 
3,201 
Costs, expenses and other
 
 
Cost of sales
2,584 
2,635 
Selling and administrative expense
309 
308 
Interest expense
42 
43 
Special charges
37 
 
Total costs, expenses and other
2,972 
2,986 
Income from continuing operations before income taxes
121 
215 
Income tax expense
21 
64 
Income from continuing operations
100 
151 
Income (loss) from discontinued operations, net of income taxes
(1)
Net income
$ 101 
$ 150 
Basic earnings per share
 
 
Continuing operations (in dollars per share)
$ 0.37 
$ 0.55 
Basic earnings per share (in dollars per share)
$ 0.37 
$ 0.55 
Diluted earnings per share
 
 
Continuing operations (in dollars per share)
$ 0.37 
$ 0.55 
Diluted earnings per share (in dollars per share)
$ 0.37 
$ 0.55 
Dividends per share
 
 
Common stock (in dollars per share)
$ 0.02 
$ 0.02 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended
Apr. 1, 2017
Apr. 2, 2016
Consolidated Statements of Comprehensive Income
 
 
Net income
$ 101 
$ 150 
Other comprehensive income, net of tax:
 
 
Pension and postretirement benefits adjustments, net of reclassifications
24 
21 
Foreign currency translation adjustments
22 
24 
Deferred gains on hedge contracts, net of reclassifications
21 
Other comprehensive income
50 
66 
Comprehensive income
$ 151 
$ 216 
Consolidated Balance Sheets (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
Apr. 1, 2017
Dec. 31, 2016
Assets
 
 
Cash and equivalents
$ 997 
$ 1,298 
Inventories
4,709 
4,464 
Finance receivables, net
900 
935 
Total assets
15,703 
15,358 
Liabilities
 
 
Total liabilities
10,121 
9,784 
Shareholders' equity
 
 
Common stock
34 
34 
Capital surplus
1,648 
1,599 
Treasury stock
(186)
 
Retained earnings
5,641 
5,546 
Accumulated other comprehensive loss
(1,555)
(1,605)
Total shareholders' equity
5,582 
5,574 
Total liabilities and shareholders' equity
15,703 
15,358 
Common shares outstanding
267,717 
270,287 
Manufacturing group
 
 
Assets
 
 
Cash and equivalents
858 
1,137 
Accounts receivable, net
1,198 
1,064 
Inventories
4,709 
4,464 
Other current assets
361 
388 
Total current assets
7,126 
7,053 
Property, plant and equipment, less accumulated depreciation and amortization of $4,056 and $4,123
2,637 
2,581 
Goodwill
2,332 
2,113 
Other assets
2,398 
2,331 
Total assets
14,493 
14,078 
Liabilities
 
 
Short-term debt and current portion of long-term debt
462 
363 
Accounts payable
1,230 
1,273 
Accrued liabilities
2,331 
2,257 
Total current liabilities
4,023 
3,893 
Other liabilities
2,283 
2,354 
Long-term debt
2,768 
2,414 
Total liabilities
9,074 
8,661 
Finance group
 
 
Assets
 
 
Cash and equivalents
139 
161 
Finance receivables, net
900 
935 
Other assets
171 
184 
Total assets
1,210 
1,280 
Liabilities
 
 
Other liabilities
162 
220 
Debt
885 
903 
Total liabilities
$ 1,047 
$ 1,123 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, unless otherwise specified
Apr. 1, 2017
Dec. 31, 2016
Consolidated Balance Sheets
 
 
Accumulated depreciation and amortization
$ 4,056 
$ 4,123 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
3 Months Ended
Apr. 1, 2017
Apr. 2, 2016
Cash flows from operating activities
 
 
Net income
$ 101 
$ 150 
Less: Income (loss) from discontinued operations
(1)
Income from continuing operations
100 
151 
Non-cash items:
 
 
Depreciation and amortization
106 
109 
Asset impairments
11 
 
Deferred income taxes
13 
19 
Other, net
28 
30 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(103)
(143)
Inventories
(122)
(313)
Other assets
(8)
61 
Accounts payable
(102)
147 
Accrued and other liabilities
(158)
(230)
Income taxes, net
38 
17 
Pension, net
Captive finance receivables, net
25 
(4)
Other operating activities, net
(5)
(1)
Net cash provided by (used in) operating activities of continuing operations
(169)
(150)
Net cash used in operating activities of discontinued operations
(25)
 
Net cash provided by (used in) operating activities
(194)
(150)
Cash flows from investing activities
 
 
Net cash used in acquisitions
(318)
(164)
Capital expenditures
(76)
(88)
Finance receivables repaid
15 
17 
Other investing activities, net
13 
10 
Net cash provided by (used in) investing activities
(366)
(225)
Cash flows from financing activities
 
 
Proceeds from long-term debt
362 
362 
Increase in short-term debt
100 
42 
Principal payments on long-term debt and nonrecourse debt
(38)
(46)
Purchases of Textron common stock
(186)
(215)
Dividends paid
(6)
(6)
Other financing activities, net
19 
Net cash provided by (used in) financing activities
251 
144 
Effect of exchange rate changes on cash and equivalents
Net decrease in cash and equivalents
(301)
(227)
Cash and equivalents at beginning of period
1,298 
1,005 
Cash and equivalents at end of period
997 
778 
Manufacturing group
 
 
Cash flows from operating activities
 
 
Net income
95 
147 
Less: Income (loss) from discontinued operations
(1)
Income from continuing operations
94 
148 
Non-cash items:
 
 
Depreciation and amortization
103 
106 
Asset impairments
11 
 
Deferred income taxes
13 
17 
Other, net
28 
29 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(103)
(143)
Inventories
(122)
(313)
Other assets
(7)
62 
Accounts payable
(102)
147 
Accrued and other liabilities
(151)
(223)
Income taxes, net
90 
16 
Pension, net
Other operating activities, net
(5)
(1)
Net cash provided by (used in) operating activities of continuing operations
(143)
(148)
Net cash used in operating activities of discontinued operations
(25)
 
Net cash provided by (used in) operating activities
(168)
(148)
Cash flows from investing activities
 
 
Net cash used in acquisitions
(318)
(164)
Capital expenditures
(76)
(88)
Other investing activities, net
 
Net cash provided by (used in) investing activities
(393)
(252)
Cash flows from financing activities
 
 
Proceeds from long-term debt
347 
345 
Increase in short-term debt
100 
42 
Purchases of Textron common stock
(186)
(215)
Dividends paid
(6)
(6)
Other financing activities, net
19 
Net cash provided by (used in) financing activities
274 
173 
Effect of exchange rate changes on cash and equivalents
Net decrease in cash and equivalents
(279)
(223)
Cash and equivalents at beginning of period
1,137 
946 
Cash and equivalents at end of period
858 
723 
Finance group
 
 
Cash flows from operating activities
 
 
Net income
Income from continuing operations
Non-cash items:
 
 
Depreciation and amortization
Deferred income taxes
 
Other, net
 
Changes in assets and liabilities:
 
 
Other assets
(1)
(1)
Accrued and other liabilities
(7)
(7)
Income taxes, net
(52)
Net cash provided by (used in) operating activities of continuing operations
(51)
Net cash provided by (used in) operating activities
(51)
Cash flows from investing activities
 
 
Finance receivables repaid
76 
68 
Finance receivables originated
(36)
(55)
Other investing activities, net
12 
10 
Net cash provided by (used in) investing activities
52 
23 
Cash flows from financing activities
 
 
Proceeds from long-term debt
15 
17 
Principal payments on long-term debt and nonrecourse debt
(38)
(46)
Net cash provided by (used in) financing activities
(23)
(29)
Net decrease in cash and equivalents
(22)
(4)
Cash and equivalents at beginning of period
161 
59 
Cash and equivalents at end of period
$ 139 
$ 55 
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 December 31, 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.

 

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 decreased income from continuing operations before income taxes in the first quarter of 2017 by $12 million ($8 million after tax or $0.03 per diluted share) and increased income from continuing operations before income taxes in the first quarter of 2016 by $29 million ($19 million after tax or $0.07 per diluted share).  For the first quarter of 2017 and 2016, the gross favorable program profit adjustments totaled $20 million and $34 million, respectively, and the gross unfavorable program profit adjustments totaled $32 million and $5 million, respectively.

 

The total gross unfavorable program adjustments for the first quarter of 2017 includes a $24 million loss related to the Tactical Armoured Patrol Vehicle (TAPV) program.  In the third quarter of 2016, we began initial deliveries under a contract to deliver 500 TAPVs to our Canadian customer.  With these deliveries, we expected our production activities to ramp significantly by the beginning of 2017.  During the first quarter of 2017, production volume has not ramped up as anticipated due to various production issues, resulting in inefficiencies as well as revised estimates for production costs on the remaining vehicles still to be delivered under this contract.  Based on our revised estimate, we recorded a loss on this contract.

 

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. The standard is effective as of the beginning of 2018 for public companies and may be adopted either retrospectively or on a modified retrospective basis.  We expect to apply the standard 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.

 

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

 

Business Acquisitions
Business Acquisitions

Note 2.  Business Acquisitions

 

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

 

We allocated the consideration paid for this business on a preliminary basis to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date.  We expect to finalize the purchase accounting as soon as reasonably possible during the one-year measurement period.  Based on the preliminary allocation, $213 million has been allocated to goodwill, related to expected synergies and the value of the assembled workforce, and $75 million to intangible assets, which includes $18 million of indefinite-lived assets related to tradenames. The definite-lived intangible assets are primarily related to customer/dealer relationships and technology, which will be amortized over 8 to 20 years. We determined the value of the intangible assets using the relief-from-royalty and multi-period excess earnings methods, which utilize significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy.  Under these valuation methods, we are required to make estimates and assumptions about sales, operating margins, growth rates, royalty rates and discount rates based on anticipated cash flows and marketplace data.  Approximately $5 million of the goodwill is deductible for tax purposes.

Retirement Plans
Retirement Plans

Note 3.  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:

 

 

Pension Benefits

Postretirement Benefits
Other Than Pensions

(In millions)

 

April 1,
2017

 

April 2,
2016

 

April 1,
2017

 

April 2,
2016

Three Months Ended

 

 

 

 

 

 

 

 

Service cost

$

25

$

24

$

1

$

1

Interest cost

 

80

 

85

 

3

 

4

Expected return on plan assets

 

(126)

 

(123)

 

 

Amortization of prior service cost (credit)

 

4

 

4

 

(2)

 

(6)

Amortization of net actuarial loss

 

34

 

26

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost (credit)

$

17

$

16

$

2

$

(1)

 

 

 

 

 

 

 

 

 

 

Share-Based Compensation
Share-Based Compensation

Note 4.  Share-Based Compensation

 

Our share-based compensation plans provide stock options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance share units and other awards.  Compensation expense included in net income for these plans is as follows:

 

 

 

 

 

 

Three Months Ended

(In millions)

 

 

 

 

 

April 1,
2017

 

April 2,
2016

Compensation expense

 

 

 

 

$

20

$

7

Income tax benefit

 

 

 

 

 

(7)

 

(3)

 

 

 

 

 

 

 

 

 

Total net compensation expense included in net income

 

 

 

 

$

13

$

4

 

 

 

 

 

 

 

 

 

 

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 and the assumptions used in our option-pricing model for such grants are as follows:

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

April 1,
2017

 

April 2,
2016

Fair value of options at grant date

 

 

 

 

$

13.80

$

10.33

Dividend yield

 

 

 

 

 

0.2%

 

0.2%

Expected volatility

 

 

 

 

 

29.2%

 

33.6%

Risk-free interest rate

 

 

 

 

 

1.9%

 

1.2%

Expected term (in years)

 

 

 

 

 

4.7

 

4.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The stock option activity during the first quarter of 2017 is provided below:

 

(Options in thousands)

 

 

 

 

 

Number of
Options

 

Weighted-
Average
Exercise
Price

Outstanding at beginning of period

 

 

 

 

 

9,264

$

33.61

Granted

 

 

 

 

 

1,536

 

49.58

Exercised

 

 

 

 

 

(850)

 

(29.08)

Forfeited or expired

 

 

 

 

 

(112)

 

(39.02)

 

 

 

 

 

 

 

 

 

Outstanding at end of period

 

 

 

 

 

9,838

$

36.43

 

 

 

 

 

 

 

 

 

Exercisable at end of period

 

 

 

 

 

6,518

$

32.88

 

 

 

 

 

 

 

 

 

 

At April 1, 2017, our outstanding options had an aggregate intrinsic value of $113 million and a weighted-average remaining contractual life of 6.7 years.  Our exercisable options had an aggregate intrinsic value of $96 million and a weighted-average remaining contractual life of 5.5 years at April 1, 2017.  The total intrinsic value of options exercised was $17 million and $1 million during the first quarter of 2017 and 2016, respectively.

 

Restricted Stock Units

The activity for restricted stock units payable in both stock and cash during the first quarter of 2017 is provided below:

 

 

Units Payable in Stock

 

Units Payable in Cash

(Shares/Units in thousands)

 

Number of
Shares

 

Weighted-
Average Grant
Date Fair Value

 

Number of
Units

 

Weighted-
Average Grant
Date Fair Value

Outstanding at beginning of period, nonvested

 

797

$

35.94

 

1,444

$

36.33

Granted

 

150

 

49.58

 

304

 

49.58

Vested

 

(214)

 

(31.28)

 

(346)

 

(31.83)

Forfeited

 

(30)

 

(35.53)

 

(40)

 

(37.18)

 

 

 

 

 

 

 

 

 

Outstanding at end of period, nonvested

 

703

$

40.26

 

1,362

$

40.40

 

 

 

 

 

 

 

 

 

 

The fair value of the restricted stock awards that vested and/or amounts paid under these awards is as follows:

 

 

 

 

 

 

Three Months Ended

(In millions)

 

 

 

 

 

April 1,
2017

 

April 2,
2016

Fair value of awards vested

 

 

 

 

$

24

$

17

Cash paid

 

 

 

 

 

17

 

12

 

 

 

 

 

 

 

 

 

 

Performance Share Units

The activity for our performance share units during the first quarter of 2017 is provided below:

 

(Units in thousands)

 

 

 

 

 

Number of
Units

 

Weighted-
Average
Grant Date
Fair Value

Outstanding at beginning of period, nonvested

 

 

 

 

 

535

$

39.13

Granted

 

 

 

 

 

231

 

49.58

Forfeited

 

 

 

 

 

(19)

 

(39.18)

 

 

 

 

 

 

 

 

 

Outstanding at end of period, nonvested

 

 

 

 

 

747

$

42.36

 

 

 

 

 

 

 

 

 

 

Cash paid under these awards totaled $14 million and $13 million during the first quarter of 2017 and 2016, respectively.

 

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

(In thousands)

 

 

 

 

 

April 1,
2017

 

April 2,
2016

Basic weighted-average shares outstanding

 

 

 

 

 

270,489

 

271,660

Dilutive effect of stock options

 

 

 

 

 

2,341

 

1,362

 

 

 

 

 

 

 

 

 

Diluted weighted-average shares outstanding

 

 

 

 

 

272,830

 

273,022

 

 

 

 

 

 

 

 

 

 

Stock options to purchase 2 million and 4 million shares of common stock are excluded from the calculation of diluted weighted-average shares outstanding for the first quarter of 2017 and 2016, 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)

 

 

 

 

 

April 1,
2017

 

December 31,
2016

Commercial

 

 

 

 

$

941

$

797

U.S. Government contracts

 

 

 

 

 

285

 

294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,226

 

1,091

Allowance for doubtful accounts

 

 

 

 

 

(28)

 

(27)

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

1,198

$

1,064

 

 

 

 

 

 

 

 

 

 

We have unbillable receivables, primarily on U.S. Government contracts, that arise when the revenues we have appropriately recognized based on performance cannot be billed yet under terms of the contract.  Unbillable receivables within accounts receivable totaled $180 million at April 1, 2017 and $178 million at December 31, 2016.

 

Finance Receivables

Finance receivables are presented in the following table:

 

(In millions)

 

 

 

 

 

April 1,
2017

 

December 31,
2016

Finance receivables*

 

 

 

 

$

940

$

976

Allowance for losses

 

 

 

 

 

(40)

 

(41)

 

 

 

 

 

 

 

 

 

Total finance receivables, net

 

 

 

 

$

900

$

935

 

 

 

 

 

 

 

 

 

* Includes finance receivables held for sale of $30 million at both April 1, 2017 and December 31, 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.  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.  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:

 

(Dollars in millions)

 

 

 

 

 

April 1,
2017

 

December 31,
2016

Performing

 

 

 

 

$

723

$

758

Watchlist

 

 

 

 

 

103

 

101

Nonaccrual

 

 

 

 

 

84

 

87

 

 

 

 

 

 

 

 

 

Nonaccrual as a percentage of finance receivables

 

 

 

 

 

9.23%

 

9.20%

 

 

 

 

 

 

 

 

 

Less than 31 days past due

 

 

 

 

$

828

$

857

31-60 days past due

 

 

 

 

 

25

 

49

61-90 days past due

 

 

 

 

 

21

 

18

Over 90 days past due

 

 

 

 

 

36

 

22

 

 

 

 

 

 

 

 

 

60+ days contractual delinquency as a percentage of finance receivables

 

 

 

 

 

6.26%

 

4.23%

 

 

 

 

 

 

 

 

 

 

Impaired Loans

On a quarterly basis, we evaluate individual finance receivables for impairment in non-homogeneous portfolios and larger balance accounts in homogeneous loan portfolios. A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators described above. Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified. If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification. Interest income recognized on impaired loans was not significant in the first quarter of 2017 or 2016.

 

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

 

(In millions)

 

 

 

 

 

April 1,
2017

 

December 31,
2016

Recorded investment:

 

 

 

 

 

 

 

 

Impaired loans with related allowance for losses

 

 

 

 

$

49

$

55

Impaired loans with no related allowance for losses

 

 

 

 

 

45

 

65

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

94

$

120

 

 

 

 

 

 

 

 

 

Unpaid principal balance

 

 

 

 

$

101

$

125

Allowance for losses on impaired loans

 

 

 

 

 

10

 

11

Average recorded investment

 

 

 

 

 

107

 

101

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

April 1,
2017

 

December 31,
2016

Allowance based on collective evaluation

 

 

 

 

$

30

$

30

Allowance based on individual evaluation

 

 

 

 

 

10

 

11

Finance receivables evaluated collectively

 

 

 

 

 

719

 

727

Finance receivables evaluated individually

 

 

 

 

 

94

 

120

 

 

 

 

 

 

 

 

 

 

Inventories
Inventories

Note 7.  Inventories

 

Inventories are composed of the following:

(In millions)

 

 

 

 

 

         April 1,
2017

 

December 31,
2016

Finished goods

 

 

 

 

$

2,006

$

1,947

Work in process

 

 

 

 

 

2,886

 

2,742

Raw materials and components

 

 

 

 

 

814

 

724

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,706

 

5,413

Progress/milestone payments

 

 

 

 

 

(997)

 

(949)

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

4,709

$

4,464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warranty Liability
Warranty Liability

Note 8.  Warranty Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in our warranty liability are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

(In millions)

 

 

 

 

 

April 1,
2017

 

April 2,
2016

 

 

 

 

 

 

 

 

 

Beginning of period

 

 

 

 

$

138

$

143

Provision

 

 

 

 

 

20

 

16

Settlements

 

 

 

 

 

(21)

 

(16)

Acquisitions

 

 

 

 

 

28

 

1

Adjustments*

 

 

 

 

 

(2)

 

(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

End of period

 

 

 

 

$

163

$

138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Debt
Debt

Note 9.  Debt

 

Under our shelf registration statement, on March 6, 2017, we issued $350 million of fixed-rate notes due March 15, 2027 that bear an annual interest rate of 3.65%.  The net proceeds of the issuance totaled $347 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 April 1, 2017 and December 31, 2016, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $666 million and $665 million, respectively.  At April 1, 2017, the fair value amounts of our foreign currency exchange contracts were a $6 million asset and a $12 million liability. At December 31, 2016, the fair value amounts of our foreign currency exchange contracts were a $7 million asset and a $17 million liability.

 

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

 

Assets Recorded at Fair Value on a Nonrecurring Basis

During the periods ended April 1, 2017 and December 31, 2016, the Finance group’s impaired nonaccrual finance receivables of $39 million and $44 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 first quarter of 2017 and 2016.

 

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:

 

 

April 1, 2017

December 31, 2016

(In millions)

 

Carrying
Value

 

Estimated
Fair Value

 

Carrying
Value

 

Estimated
Fair Value

Manufacturing group

 

 

 

 

 

 

 

 

Debt, excluding leases

$

(3,043)

$

(3,173)

$

(2,690)

$

(2,809)

Finance group

 

 

 

 

 

 

 

 

Finance receivables, excluding leases

 

695

 

727

 

729

 

758

Debt

 

(885)

 

(823)

 

(903)

 

(831)

 

 

 

 

 

 

 

 

 

 

Fair value for the Manufacturing group debt is determined using market observable data for similar transactions (Level 2).  The fair value for the Finance group debt was determined primarily based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations (Level 2).  Fair value estimates for finance receivables were determined based on internally developed discounted cash flow models primarily utilizing significant unobservable inputs (Level 3), which include estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and expectations of borrowers’ ability to make payments on a timely basis.

 

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

 

Foreign
Currency
Translation
Adjustments

 

Deferred
Gains (Losses)
on Hedge
Contracts

 

Accumulated
Other
Comprehensive
Loss

For the three months ended April 1, 2017

 

 

 

 

 

 

 

 

Beginning of period

$

(1,505)

$

(96)

$

(4)

$

(1,605)

Other comprehensive income before reclassifications

 

 

22

 

2

 

24

Reclassified from Accumulated other comprehensive loss

 

24

 

 

2

 

26

Other comprehensive income

 

24

 

22

 

4

 

50

End of period

$

(1,481)

$

(74)

$

$

(1,555)

For the three months ended April 2, 2016

 

 

 

 

 

 

 

 

Beginning of period

$

(1,327)

$

(47)

$

(24)

$

(1,398)

Other comprehensive income before reclassifications

 

 

24

 

16

 

40

Reclassified from Accumulated other comprehensive loss

 

21

 

 

5

 

26

Other comprehensive income

 

21

 

24

 

21

 

66

End of period

$

(1,306)

$

(23)

$

(3)

$

(1,332)

 

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

 

 

April 1, 2017

April 2, 2016

(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*

$

34

$

(12)

$

22

$

26

$

(9)

$

17

Amortization of prior service cost (credit)*

 

2

 

 

2

 

(2)

 

1

 

(1)

Unrealized gains

 

 

 

 

7

 

(2)

 

5

Pension and postretirement benefits adjustments, net

 

36

 

(12)

 

24

 

31

 

(10)

 

21

Deferred gains on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

3

 

(1)

 

2

 

22

 

(6)

 

16

Reclassification adjustments

 

2

 

 

2

 

7

 

(2)

 

5

Deferred gains on hedge contracts, net

 

5

 

(1)

 

4

 

29

 

(8)

 

21

Foreign currency translation adjustments

 

21

 

1

 

22

 

25

 

(1)

 

24

Total

$

62

$

(12)

$

50

$

85

$

(19)

$

66

*These components of other comprehensive income are included in the computation of net periodic pension cost.  See Note 11 of our 2016 Annual Report on Form 10-K for additional information.

 

Special Charges
Special Charges

Note 12.  Special Charges

 

In the third quarter of 2016, we initiated a plan to restructure and realign our businesses by implementing headcount reductions, facility consolidations and other actions in order to improve overall operating efficiency across Textron. In the first quarter of 2017, we recorded special charges of $15 million related to this plan.  Since the inception of this plan, we have incurred a total of $71 million of severance costs, $48 million of asset impairments and $19 million in contract terminations and other costs.  Of these amounts, $63 million was incurred at Textron Systems, $46 million at Textron Aviation, $23 million at Industrial, and $6 million at Bell and Corporate. We expect to incur additional pre-tax charges under this plan in the range of $17 million to $32 million, primarily related to contract termination, severance, facility consolidation and relocation costs, which will principally be in the Industrial, Textron Aviation and Textron Systems segments.  We anticipate that these restructuring activities will be substantially completed by the end of the second quarter of 2017.  Upon completion, the total headcount reduction under this plan is expected to be approximately 2,000 positions, representing approximately 5% of our workforce.

 

In connection with the acquisition of Arctic Cat, as discussed in Note 2, we initiated a restructuring plan in the first quarter of 2017 to integrate this business into our Textron Specialized Vehicles business within the Industrial segment to reduce operating redundancies and maximize efficiencies.  As a result of this plan, we recorded $19 million of severance costs in the first quarter of 2017, largely related to change-of-control provisions, and we expect to incur an additional $8 million of restructuring costs. In addition, we recorded $3 million of acquisition transaction costs in the first quarter of 2017 that are included in special charges.  We estimate that we will incur total special charges of approximately $30 million related to Arctic Cat.

 

Special charges recorded in the first quarter of 2017 for both of these plans are as follows:

 

(In millions)

 

Severance
Costs

 

Asset
Impairments

 

Contract
Terminations
and Other

 

Acquisition
Transaction
Costs

 

Total
Special
Charges

Industrial

$

19

$

$

3

$

3

$

25

Textron Aviation

 

1

 

10

 

 

 

11

Textron Systems

 

 

 

1

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

$

20

$

10

$

4

$

3

$

37

 

 

 

 

 

 

 

 

 

 

 

 

An analysis of our restructuring reserve activity for both plans in the first quarter of 2017 is summarized below:

 

(In millions)

 

 

 

 

 

Severance
Costs

 

Contract
Terminations
and Other

 

Total

Balance at December 31, 2016

 

 

 

 

$

50

$

13

$

63

Provision for Arctic Cat plan

 

 

 

 

 

19

 

 

19

Provision for 2016 plan

 

 

 

 

 

1

 

4

 

5

Cash paid

 

 

 

 

 

(33)

 

(3)

 

(36)

 

 

 

 

 

 

 

 

 

 

 

Balance at April 1, 2017

 

 

 

 

$

37

$

14

$

51

 

 

 

 

 

 

 

 

 

 

 

 

The total expected cash outlay for both restructuring plans is estimated in the range of $135 million to $150 million, of which $58 million has been paid through the first quarter of 2017 and the remainder is expected to be paid by the end of 2017.  Severance costs generally are paid on a lump-sum basis and include outplacement costs, which are paid in accordance with normal payment terms.

 

 

Income Taxes
Income Taxes

Note 13.  Income Taxes

 

Our effective tax rate for the first quarter of 2017 and 2016 was 17.4% and 29.8%, respectively.  The effective tax rate for the first quarter of 2017 reflects benefits recognized as a result of audit settlements and the recognition of excess tax benefits related to share-based compensation.

 

Commitments and Contingencies
Commitments and Contingencies

Note 14.  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.

 

Segment Information
Segment Information

Note 15.  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 along with intercompany 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

(In millions)

 

 

 

 

 

April 1,
2017

 

April 2,
2016

Revenues

 

 

 

 

 

 

 

 

 Textron Aviation

 

 

 

 

$

970

$

1,091

 

 

 

 

 

 

 

 

 

 Bell

 

 

 

 

 

697

 

814

 

 

 

 

 

 

 

 

 

 Textron Systems

 

 

 

 

 

416

 

324

 

 

 

 

 

 

 

 

 

 Industrial

 

 

 

 

 

992

 

952

 Finance

 

 

 

 

 

18

 

20

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

 

$

3,093

$

3,201

 

 

 

 

 

 

 

 

 

Segment Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Textron Aviation

 

 

 

 

$

36

$

73

 

 

 

 

 

 

 

 

 

 Bell

 

 

 

 

 

83

 

82

 

 

 

 

 

 

 

 

 

 Textron Systems

 

 

 

 

 

20

 

29

 

 

 

 

 

 

 

 

 

 Industrial

 

 

 

 

 

76

 

91

 Finance

 

 

 

 

 

4

 

5

 

 

 

 

 

 

 

 

 

Segment profit

 

 

 

 

 

219

 

280

 

 

 

 

 

 

 

 

 

Corporate expenses and other, net

 

 

 

 

 

(27)

 

(32)

 

 

 

 

 

 

 

 

 

Interest expense, net for Manufacturing group

 

 

 

 

 

(34)

 

(33)

Special charges

 

 

 

 

 

(37)

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

 

 

 

$

121

$

215

 

 

 

 

 

 

 

 

 

 

 

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.

 

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 decreased income from continuing operations before income taxes in the first quarter of 2017 by $12 million ($8 million after tax or $0.03 per diluted share) and increased income from continuing operations before income taxes in the first quarter of 2016 by $29 million ($19 million after tax or $0.07 per diluted share).  For the first quarter of 2017 and 2016, the gross favorable program profit adjustments totaled $20 million and $34 million, respectively, and the gross unfavorable program profit adjustments totaled $32 million and $5 million, respectively.

 

The total gross unfavorable program adjustments for the first quarter of 2017 includes a $24 million loss related to the Tactical Armoured Patrol Vehicle (TAPV) program.  In the third quarter of 2016, we began initial deliveries under a contract to deliver 500 TAPVs to our Canadian customer.  With these deliveries, we expected our production activities to ramp significantly by the beginning of 2017.  During the first quarter of 2017, production volume has not ramped up as anticipated due to various production issues, resulting in inefficiencies as well as revised estimates for production costs on the remaining vehicles still to be delivered under this contract.  Based on our revised estimate, we recorded a loss on this contract.

 

 

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. The standard is effective as of the beginning of 2018 for public companies and may be adopted either retrospectively or on a modified retrospective basis.  We expect to apply the standard 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.

 

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

 

 

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

 

                                                                                                                                                                                           

 

Pension Benefits

Postretirement Benefits
Other Than Pensions

(In millions)

 

April 1,
2017

 

April 2,
2016

 

April 1,
2017

 

April 2,
2016

Three Months Ended

 

 

 

 

 

 

 

 

Service cost

$

25

$

24

$

1

$

1

Interest cost

 

80

 

85

 

3

 

4

Expected return on plan assets

 

(126)

 

(123)

 

 

Amortization of prior service cost (credit)

 

4

 

4

 

(2)

 

(6)

Amortization of net actuarial loss

 

34

 

26

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost (credit)

$

17

$

16

$

2

$

(1)

 

 

 

 

 

 

 

 

 

 

 

Share-Based Compensation (Tables)

 

 

 

              Three Months Ended              

(In millions)

 

 

April 1,
2017

 

April 2,
2016

Compensation expense

 

$

20

$

7

Income tax benefit

 

 

(7)

 

(3)

 

 

 

 

 

 

Total net compensation expense included in net income

 

$

13

$

4

 

 

 

 

 

 

 

 

 

 

              Three Months Ended              

 

 

 

April 1,
2017

 

April 2,
2016

Fair value of options at grant date

 

$

13.80

$

10.33

Dividend yield

 

 

0.2%

 

0.2%

Expected volatility

 

 

29.2%

 

33.6%

Risk-free interest rate

 

 

1.9%

 

1.2%

Expected term (in years)

 

 

4.7

 

4.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Options in thousands)

 

 

 

 

 

Number of
Options

 

Weighted-
Average
Exercise
Price

Outstanding at beginning of period

 

 

 

 

 

9,264

$

33.61

Granted

 

 

 

 

 

1,536

 

49.58

Exercised

 

 

 

 

 

(850)

 

(29.08)

Forfeited or expired

 

 

 

 

 

(112)

 

(39.02)

 

 

 

 

 

 

 

 

 

Outstanding at end of period

 

 

 

 

 

9,838

$

36.43

 

 

 

 

 

 

 

 

 

Exercisable at end of period

 

 

 

 

 

6,518

$

32.88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Units Payable in Stock

 

Units Payable in Cash

(Shares/Units in thousands)

 

Number of
Shares

 

Weighted-
Average Grant
Date Fair Value

 

Number of
Units

 

Weighted-
Average Grant
Date Fair Value

Outstanding at beginning of period, nonvested

 

797

$

35.94

 

1,444

$

36.33

Granted

 

150

 

49.58

 

304

 

49.58

Vested

 

(214)

 

(31.28)

 

(346)

 

(31.83)

Forfeited

 

(30)

 

(35.53)

 

(40)

 

(37.18)

 

 

 

 

 

 

 

 

 

Outstanding at end of period, nonvested

 

703

$

40.26

 

1,362

$

40.40

 

 

 

 

 

 

 

 

 

 

 

                                                                                                                                                                                           

 

 

 

 

 

Three Months Ended

(In millions)

 

 

 

 

 

  April 1,
2017

 

       April 2,
2016

Fair value of awards vested

 

 

 

 

$

24

$

17

Cash paid

 

 

 

 

 

17

 

12

 

 

 

 

 

 

 

 

 

 

 

 

                                                                                                                                                                                          

(Units in thousands)

 

 

 

 

 

Number of
Units

 

Weighted-
Average
Grant Date
Fair Value

Outstanding at beginning of period, nonvested

 

 

 

 

 

535

$

39.13

Granted

 

 

 

 

 

231

 

49.58

Forfeited

 

 

 

 

 

(19)

 

(39.18)

 

 

 

 

 

 

 

 

 

Outstanding at end of period, nonvested

 

 

 

 

 

747

$

42.36

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Three Months Ended

(In thousands)

 

 

 

 

 

April 1,
2017

 

April 2,
2016

Basic weighted-average shares outstanding

 

 

 

 

 

270,489

 

271,660

Dilutive effect of stock options

 

 

 

 

 

2,341

 

1,362

 

 

 

 

 

 

 

 

 

Diluted weighted-average shares outstanding

 

 

 

 

 

272,830

 

273,022

 

 

 

 

 

 

 

 

 

 

Accounts Receivable and Finance Receivables (Tables)

 

 

(In millions)