Item 8. Financial Statements and Supplementary Data

Our Consolidated Financial Statements and the related report of our independent registered public accounting firm thereon are included in this Annual Report on Form 10-K on the pages indicated below:

	Page
Consolidated Statements of Operations for each of the years in the three-year period ended January 2, 2016	36
Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended January 2, 2016	37
Consolidated Balance Sheets as of January 2, 2016 and January 3, 2015	38
Consolidated Statements of Shareholders’ Equity for each of the years in the three-year period ended January 2, 2016	39
Consolidated Statements of Cash Flows for each of the years in the three-year period ended January 2, 2016	40
Notes to the Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies	42
Note 2. Business Acquisitions, Goodwill and Intangible Assets	46
Note 3. Accounts Receivable and Finance Receivables	48
Note 4. Inventories	50
Note 5. Property, Plant and Equipment, Net	51
Note 6. Accrued Liabilities	51
Note 7. Debt and Credit Facilities	52
Note 8. Derivative Instruments and Fair Value Measurements	53
Note 9. Shareholders’ Equity	54
Note 10. Share-Based Compensation	56
Note 11. Retirement Plans	58
Note 12. Income Taxes	62
Note 13. Commitments and Contingencies	65
Note 14. Supplemental Cash Flow Information	65
Note 15. Segment and Geographic Data	66
Report of Independent Registered Public Accounting Firm	68
Supplementary Information:
Quarterly Data for 2015 and 2014 (Unaudited)	69
Schedule II – Valuation and Qualifying Accounts	70

All other schedules are omitted either because they are not applicable or not required or because the required information is included in the financial statements or notes thereto.

Consolidated Statements of Operations

For each of the years in the three-year period ended January 2, 2016

(In millions, except per share data)			2015				2014			2013
Revenues
Manufacturing revenues			$	13,340			$	13,775		$	11,972
Finance revenues			83				103			132
Total revenues			13,423				13,878			12,104
Costs and expenses
Cost of sales			10,979				11,421			10,131
Selling and administrative expense			1,304				1,361			1,126
Interest expense			169				191			173
Acquisition and restructuring costs			—				52			—
Total costs and expenses			12,452				13,025			11,430
Income from continuing operations before income taxes			971				853			674
Income tax expense			273				248			176
Income from continuing operations			698				605			498
Loss from discontinued operations, net of income taxes			(1		)		(5		)	—
Net income			$	697			$	600		$	498
Basic earnings per share
Continuing operations			$	2.52			$	2.17		$	1.78
Discontinued operations			—				(0.02		)	—
Basic earnings per share			$	2.52			$	2.15		$	1.78
Diluted earnings per share
Continuing operations			$	2.50			$	2.15		$	1.75
Discontinued operations			—				(0.02		)	—
Diluted earnings per share			$	2.50			$	2.13		$	1.75

See Notes to the Consolidated Financial Statements.

Consolidated Statements of Comprehensive Income

For each of the years in the three-year period ended January 2, 2016

(In millions)			2015				2014			2013
Net income			$	697			$	600		$	498
Other comprehensive income (loss), net of tax:
Pension and postretirement benefits adjustments, net of reclassifications			184				(401		)	747
Foreign currency translation adjustments			(65		)		(75		)	12
Deferred losses on hedge contracts, net of reclassifications			(11		)		(3		)	(16		)
Other comprehensive income (loss)			108				(479		)	743
Comprehensive income			$	805			$	121		$	1,241

See Notes to the Consolidated Financial Statements.

Consolidated Balance Sheets

(In millions, except share data)			January 2, 2016				January 3, 2015
Assets
Manufacturing group
Cash and equivalents			$	946			$	731
Accounts receivable, net			1,047				1,035
Inventories			4,144				3,928
Other current assets			341				320
Total current assets			6,478				6,014
Property, plant and equipment, net			2,492				2,497
Goodwill			2,023				2,027
Other assets			2,399				2,538
Total Manufacturing group assets			13,392				13,076
Finance group
Cash and equivalents			59				91
Finance receivables, net			1,087				1,238
Other assets			170				200
Total Finance group assets			1,316				1,529
Total assets			$	14,708			$	14,605
Liabilities and shareholders’ equity
Liabilities
Manufacturing group
Short-term debt and current portion of long-term debt			$	262			$	8
Accounts payable			1,063				1,014
Accrued liabilities			2,467				2,616
Total current liabilities			3,792				3,638
Other liabilities			2,376				2,587
Long-term debt			2,435				2,803
Total Manufacturing group liabilities			8,603				9,028
Finance group
Other liabilities			228				242
Debt			913				1,063
Total Finance group liabilities			1,141				1,305
Total liabilities			9,744				10,333
Shareholders’ equity
Common stock (288.3 million and 285.5 million shares issued, respectively, and 274.2 million and 276.6 million shares outstanding, respectively)			36				36
Capital surplus			1,587				1,459
Treasury stock			(559		)		(340		)
Retained earnings			5,298				4,623
Accumulated other comprehensive loss			(1,398		)		(1,506		)
Total shareholders’ equity			4,964				4,272
Total liabilities and shareholders’ equity			$	14,708			$	14,605

See Notes to the Consolidated Financial Statements.

Consolidated Statements of Shareholders’ Equity

(In millions, except per share data)		Common Stock			Capital Surplus			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance at December 29, 2012		$	35		$	1,177		$	(275	)	$	3,824		$	(1,770	)	$	2,991
Net income											498						498
Other comprehensive income														743			743
Dividends declared ($0.08 per share)											(22		)				(22		)
Share-based compensation activity					99												99
Purchases/conversions of convertible notes		2			39			(41		)							—
Settlement of capped call					75												75
Retirement of treasury stock		(2		)	(59		)	316			(255		)				—
Balance at December 28, 2013		35			1,331			—			4,045			(1,027		)	4,384
Net income											600						600
Other comprehensive loss														(479		)	(479		)
Dividends declared ($0.08 per share)											(22		)				(22		)
Share-based compensation activity		1			134												135
Purchases of common stock								(340		)							(340		)
Other					(6		)										(6		)
Balance at January 3, 2015		36			1,459			(340		)	4,623			(1,506		)	4,272
Net income											697						697
Other comprehensive income														108			108
Dividends declared ($0.08 per share)											(22		)				(22		)
Share-based compensation activity					126												126
Purchases of common stock								(219		)							(219		)
Other					2												2
Balance at January 2, 2016		$	36		$	1,587		$	(559	)	$	5,298		$	(1,398	)	$	4,964

See Notes to the Consolidated Financial Statements.

Consolidated Statements of Cash Flows

For each of the years in the three-year period ended January 2, 2016

		Consolidated
(In millions)			2015				2014			2013
Cash flows from operating activities
Net income			$	697			$	600		$	498
Less: Loss from discontinued operations			(1		)		(5		)	—
Income from continuing operations			698				605			498
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Non-cash items:
Depreciation and amortization			461				459			389
Deferred income taxes			4				(19		)	86
Other, net			106				100			61
Changes in assets and liabilities:
Accounts receivable, net			(14		)		56			(118		)
Inventories			(239		)		(209		)	(118		)
Other assets			(36		)		(33		)	(42		)
Accounts payable			43				(228		)	65
Accrued and other liabilities			(155		)		311			(182		)
Pension, net			69				46			17
Income taxes, net			71				(22		)	(84		)
Captive finance receivables, net			90				150			237
Other operating activities, net			(4		)		(5		)	4
Net cash provided by operating activities of continuing operations			1,094				1,211			813
Net cash used in operating activities of discontinued operations			(4		)		(3		)	(3		)
Net cash provided by operating activities			1,090				1,208			810
Cash flows from investing activities
Capital expenditures			(420		)		(429		)	(444		)
Net cash used in acquisitions			(81		)		(1,628		)	(196		)
Finance receivables repaid			67				91			190
Proceeds from sales of receivables and other finance assets			38				43			178
Other investing activities, net			8				4			8
Net cash used in investing activities			(388		)		(1,919		)	(264		)
Cash flows from financing activities
Principal payments on long-term debt and nonrecourse debt			(356		)		(904		)	(1,056		)
Proceeds from long-term debt			61				1,567			448
Purchases of Textron common stock			(219		)		(340		)	—
Settlement of convertible notes			—				—			(215		)
Proceeds from settlement of capped call			—				—			75
Proceeds from exercise of stock options			32				50			31
Dividends paid			(22		)		(28		)	(22		)
Other financing activities, net			—				(10		)	(3		)
Net cash provided by (used in) financing activities			(504		)		335			(742		)
Effect of exchange rate changes on cash and equivalents			(15		)		(13		)	(6		)
Net increase (decrease) in cash and equivalents			183				(389		)	(202		)
Cash and equivalents at beginning of year			822				1,211			1,413
Cash and equivalents at end of year			$	1,005			$	822		$	1,211

See Notes to the Consolidated Financial Statements.

Consolidated Statements of Cash Flows continued

For each of the years in the three-year period ended January 2, 2016

	Manufacturing Group											Finance Group
(In millions)		2015				2014			2013				2015				2014			2013
Cash flows from operating activities
Net income		$	683			$	585		$	470			$	14			$	15		$	28
Less: Loss from discontinued operations		(1		)		(5		)	—				—				—			—
Income from continuing operations		684				590			470				14				15			28
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Non-cash items:
Depreciation and amortization		449				446			371				12				13			18
Deferred income taxes		14				(7		)	51				(10		)		(12		)	35
Other, net		97				86			86				9				14			(25		)
Changes in assets and liabilities:
Accounts receivable, net		(14		)		56			(118		)		—				—			—
Inventories		(241		)		(168		)	(135		)		—				—			—
Other assets		(40		)		(18		)	(41		)		4				(15		)	—
Accounts payable		43				(228		)	65				—				—			—
Accrued and other liabilities		(144		)		316			(171		)		(8		)		(5		)	(21		)
Pension, net		69				46			21				—				—			(4		)
Income taxes, net		62				(17		)	(119		)		9				(5		)	35
Dividends received from Finance group		63				—			175				—				—			—
Other operating activities, net		(4		)		(5		)	3				—				—			—
Net cash provided by operating activities of continuing operations		1,038				1,097			658				30				5			66
Net cash used in operating activities of discontinued operations		(4		)		(3		)	(3		)		—				—			—
Net cash provided by operating activities		1,034				1,094			655				30				5			66
Cash flows from investing activities
Capital expenditures		(420		)		(429		)	(444		)		—				—			—
Net cash used in acquisitions		(81		)		(1,628		)	(196		)		—				—			—
Finance receivables repaid		—				—			—				351				456			675
Finance receivables originated		—				—			—				(194		)		(215		)	(271		)
Proceeds from sales of receivables and other finance assets		—				—			—				38				43			178
Other investing activities, net		5				(8		)	16				2				(29		)	42
Net cash provided by (used in) investing activities		(496		)		(2,065		)	(624		)		197				255			624
Cash flows from financing activities
Principal payments on long-term and nonrecourse debt		(100		)		(559		)	(313		)		(256		)		(345		)	(743		)
Proceeds from long-term debt		—				1,439			150				61				128			298
Purchases of Textron common stock		(219		)		(340		)	—				—				—			—
Settlement of convertible notes		—				—			(215		)		—				—			—
Proceeds from settlement of capped call		—				—			75				—				—			—
Proceeds from exercise of stock options		32				50			31				—				—			—
Dividends paid		(22		)		(28		)	(22		)		(63		)		—			(175		)
Intergroup financing		—				—			57				—				—			(57		)
Other financing activities, net		1				(10		)	(3		)		(1		)		—			—
Net cash provided by (used in) financing activities		(308		)		552			(240		)		(259		)		(217		)	(677		)
Effect of exchange rate changes on cash and equivalents		(15		)		(13		)	(6		)		—				—			—
Net increase (decrease) in cash and equivalents		215				(432		)	(215		)		(32		)		43			13
Cash and equivalents at beginning of year		731				1,163			1,378				91				48			35
Cash and equivalents at end of year		$	946			$	731		$	1,163			$	59			$	91		$	48

See Notes to the Consolidated Financial Statements.

Notes to the Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation and Financial Statement Presentation

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

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

Collaborative Arrangements

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

Use of Estimates

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

During 2015, 2014 and 2013, 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 2015, 2014 and 2013 by $78 million, $95 million and $29 million, respectively, ($49 million, $60 million and $18 million after tax, or $0.18, $0.21 and $0.06 per diluted share, respectively). For 2015, 2014 and 2013, the gross favorable program profit adjustments totaled $111 million, $132 million and $51 million, respectively. For 2015, 2014 and 2013, the gross unfavorable program profit adjustments totaled $33 million, $37 million and $22 million, respectively. The increase in net program profit adjustments in 2014, compared with 2013, is largely driven by the Bell segment related to the impact of cost reduction activities in 2014 as well as unfavorable performance in 2013 related to manufacturing inefficiencies. In addition, gross favorable program profit adjustments in 2014 included $16 million related to the settlement of the System

Development and Demonstration phase of the Armed Reconnaissance Helicopter (ARH) program, which was terminated in October 2008.

Revenue Recognition

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

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

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

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

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

Cash and Equivalents

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

Inventories

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

as an offset against the related inventory balances. Customer deposits are recorded against inventory when the right of offset exists. All other customer deposits are recorded in accrued liabilities.

Property, Plant and Equipment

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

Goodwill and Intangible Assets

For our business acquisitions, we estimate the fair value of intangible assets primarily using discounted cash flow analysis of anticipated cash flows reflecting incremental revenues and/or cost savings resulting from the acquired intangible asset using market participant assumptions. Goodwill represents the excess of cost over the fair values assigned to intangible and other net assets of acquired businesses. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to an annual impairment test. We evaluate the recoverability of these assets in the fourth quarter of each year or more frequently if events or changes in circumstances, such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate a potential impairment.

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

Acquired intangible assets with finite lives are subject to amortization. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Amortization of these intangible assets is recognized over their estimated useful lives using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized. Approximately 76% of our gross intangible assets are amortized based on the cash flow streams used to value the assets, with the remaining assets amortized using the straight-line method.

Finance Receivables

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

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

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

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

Pension and Postretirement Benefit Obligations

We maintain various pension and postretirement plans for our employees globally. These plans include significant pension and postretirement benefit obligations, which are calculated based on actuarial valuations. Key assumptions used in determining these obligations and related expenses include expected long-term rates of return on plan assets, discount rates and healthcare cost projections. We evaluate and update these assumptions annually in consultation with third-party actuaries and investment advisors. We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increases. We recognize the overfunded or underfunded status of our pension and postretirement plans in the Consolidated Balance Sheets and recognize changes in the funded status of our defined benefit plans in comprehensive income in the year in which they occur. Actuarial gains and losses that are not immediately recognized as net periodic pension cost are recognized as a component of other comprehensive income (loss) (OCI) and are amortized into net periodic pension cost in future periods.

Derivatives and Hedging Activities

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

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

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

Product Liabilities

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

Environmental Liabilities and Asset Retirement Obligations

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

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

Warranty and Product Maintenance Liabilities

We provide limited warranty and product maintenance programs for certain products for periods ranging from one to five years. A significant portion of these liabilities arises from our commercial aircraft businesses. For our product maintenance contracts,

revenue is recognized on a straight-line basis over the contract period, unless sufficient historical evidence indicates that the cost of providing these services is incurred on a basis other than straight-line. In those circumstances, revenue is recognized over the contract period in proportion to the costs expected to be incurred in performing the service.

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

Research and Development Costs

Our customer-funded research and development costs are charged directly to the related contracts, which primarily consist of U.S. Government contracts. In accordance with government regulations, we recover a portion of company-funded research and development costs through overhead rate charges on our U.S. Government contracts. Research and development costs that are not reimbursable under a contract with the U.S. Government or another customer are charged to expense as incurred. Company-funded research and development costs were $778 million, $694 million, and $651 million in 2015, 2014 and 2013, respectively, and are included in cost of sales.

Income Taxes

Deferred income tax balances reflect the effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and their tax bases, as well as from net operating losses and tax credit carryforwards, and are stated at enacted tax rates in effect for the year taxes are expected to be paid or recovered. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including the future reversal of existing taxable temporary differences, taxable income in carryback years, available tax planning strategies and estimated future taxable income. We recognize net tax-related interest and penalties for continuing operations in income tax expense.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, that outlines a 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.

Note 2. Business Acquisitions, Goodwill and Intangible Assets

2015 Acquisitions

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

2014 Beechcraft Acquisition

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

The consideration paid for this business was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date as presented below.

(In millions)
Accounts receivable		$	129
Inventories		775
Other current assets		175
Property, plant and equipment		261
Intangible assets		581
Goodwill		228
Other assets		172
Accounts payable		(143		)
Accrued liabilities		(294		)
Other liabilities		(406		)
Total net assets acquired		$	1,478

Goodwill of $228 million was primarily related to expected synergies from combining operations and the value of the existing workforce. Intangible assets of $581 million included unpatented technology related to original equipment manufactured parts and designs and customer relationships valued at $373 million and trade names valued at $208 million. The unpatented technology and customer relationships assets have a life of 15 years, resulting in amortization expense in the range of approximately $17 million to $31 million annually. Substantially all of the trade names have an indefinite life and therefore are not subject to amortization. We acquired tax-deductible goodwill of approximately $260 million in this transaction.

We executed a restructuring program in our Textron Aviation segment to align the Cessna and Beechcraft businesses, reduce operating redundancies and maximize efficiencies. During 2014, we recorded charges of $41 million related to these restructuring activities along with $11 million of transaction costs, which were included in the Acquisition and restructuring costs line on the Consolidated Statements of Operations.

Other 2014 Acquisitions

During 2014, we also made aggregate cash payments of $149 million for seven acquisitions within our Industrial and Systems Segments, including Tug Technologies Corporation, a manufacturer of ground support equipment in the aviation industry.

Actual and Pro-Forma Impact from 2014 Acquisitions

The operating results for the 2014 acquisitions are included in the Consolidated Statement of Operations since their respective closing dates. From the closing dates through January 3, 2015, revenues related to these acquisitions totaled $1.6 billion. The cost structures of the Beechcraft and Cessna businesses have been significantly integrated since the acquisition of Beechcraft; therefore, it is not possible to separately report earnings for this acquisition. The earnings related to the other 2014 acquisitions were not significant for this period.

The unaudited supplemental pro-forma data included in the table below presents consolidated information as if our 2014 acquisitions had been completed at the beginning of the year prior to acquisition. This pro-forma data should not be considered indicative of the results that would have occurred if the acquisitions and related financing had been consummated at the beginning of the year prior to acquisition, nor are they necessarily indicative of future results as they do not reflect the potential realization of cost savings and synergies associated with the acquisitions.

(In millions, except per share amounts)		2014					2013
Revenues		$	14,240				$	13,956
Income from continuing operations, net of income taxes		689					482
Diluted earnings per share from continuing operations		$	2.45				$	1.69

Certain pro-forma adjustments were made to reflect the purchase price allocated to the acquired net assets of each business, including depreciation and intangible amortization expense resulting from the valuation of tangible and intangible assets, amortization of inventory fair value step-up adjustments and the related tax effects. The pro-forma results for 2013 were also adjusted to include transaction and restructuring costs of $52 million, related to the Beechcraft acquisition; these costs were excluded from the 2014 pro-forma results. In addition, the pro-forma results exclude the financial impact related to Beechcraft’s emergence from bankruptcy in 2013.

Goodwill

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

(In millions)		Textron Aviation			Bell			Textron Systems			Industrial			Total
Balance at December 28, 2013		$	326		$	31		$	1,026		$	352		$	1,735
Acquisitions		228			—			35			50			313
Foreign currency translation		—			—			(4		)	(17		)	(21		)
Balance at January 3, 2015		554			31			1,057			385			2,027
Acquisitions		6			—			—			10			16
Foreign currency translation		—			—			(6		)	(14		)	(20		)
Balance at January 2, 2016		$	560		$	31		$	1,051		$	381		$	2,023

Intangible Assets

Our intangible assets are summarized below:

					January 2, 2016										January 3, 2015
(Dollars in millions)		Weighted-Average Amortization Period (in years)			Gross Carrying Amount			Accumulated Amortization			Net				Gross Carrying Amount			Accumulated Amortization			Net
Patents and technology		15			$	513		$	(120)		$	393			$	513		$	(92)		$	421
Customer relationships and contractual agreements		15			375			(220)			155				364			(192)			172
Trade names and trademarks		16			263			(32)			231				263			(28)			235
Other		9			23			(19)			4				23			(18)			5
Total					$	1,174		$	(391)		$	783			$	1,163		$	(330)		$	833

Trade names and trademarks in the table above include $204 million of indefinite-lived intangible assets for both January 2, 2016 and January 3, 2015.

Amortization expense totaled $61 million, $62 million and $37 million in 2015, 2014 and 2013, respectively. Amortization expense is estimated to be approximately $64 million, $64 million, $60 million, $59 million and $55 million in 2016, 2017, 2018, 2019 and 2020, respectively.

Note 3. Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:

(In millions)														January 2, 2016			January 3, 2015
Commercial														$	841		$	765
U.S. Government contracts															239			300
															1,080			1,065
Allowance for doubtful accounts														(33		)	(30		)
Total														$	1,047		$	1,035

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 $135 million at January 2, 2016 and $151 million at January 3, 2015.

Finance Receivables

Finance receivables are presented in the following table.

(In millions)														January 2, 2016			January 3, 2015
Finance receivables*														$	1,135		$	1,289
Allowance for losses															(48	)		(51	)
Total finance receivables, net														$	1,087		$	1,238

* Includes finance receivables held for sale of $30 million and $35 million at January 2, 2016 and January 3, 2015, respectively.

Finance receivables primarily includes loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters. These loans typically have initial terms ranging from five to ten years, amortization terms ranging from eight to fifteen years and an average balance of $1 million at January 2, 2016. Loans generally require the customer to pay a significant down payment, along with periodic scheduled principal payments that reduce the outstanding balance through the term of the loan.

Our finance receivables are diversified across geographic region and borrower industry. At January 2, 2016, 38% of our finance receivables were distributed throughout the U.S. compared with 37% at the end of 2014. At January 2, 2016 and January 3, 2015, finance receivables of $493 million and $565 million, respectively, have been pledged as collateral for TFC’s debt of $352 million and $434 million, respectively. In addition, at January 2, 2016 and January 3, 2015, finance receivables included $51 million and $113 million, respectively, of receivables that have been legally sold to a special purpose entity (SPE), which is a consolidated subsidiary of TFC. The assets of the SPE are pledged as collateral for its debt, which is reflected as securitized on-balance sheet debt in Note 7. Third-party investors have no legal recourse to TFC beyond the credit enhancement provided by the assets of the SPE.

Finance Receivable Portfolio Quality

Credit Quality Indicators and Nonaccrual Finance Receivables

We internally assess the quality of our finance receivables based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors. Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan. These three categories are performing, watchlist and nonaccrual.

We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful. Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain. All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing.

Delinquency

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

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

(In millions)														January 2, 2016			January 3, 2015
Performing														$	891		$	1,062
Watchlist															130			111
Nonaccrual														84			81
Nonaccrual as a percentage of finance receivables															7.60	%		6.46	%
Less than 31 days past due														$	950		$	1,080
31-60 days past due															86			117
61-90 days past due														42			28
Over 90 days past due															27			29
60+ days contractual delinquency as a percentage of finance receivables															6.24	%		4.55	%

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 2015 or 2014.

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

(In millions)														January 2, 2016			January 3, 2015
Recorded investment:
Impaired loans with related allowance for losses														$	62		$	68
Impaired loans with no related allowance for losses															42			42
Total														$	104		$	110
Unpaid principal balance														$	113		$	115
Allowance for losses on impaired loans														17			20
Average recorded investment															102			115

Allowance for Losses

A rollforward of the allowance for losses on finance receivables and a summary of its composition, based on how the underlying finance receivables are evaluated for impairment, is provided below. The finance receivables reported in this table specifically exclude $118 million and $121 million of leveraged leases at January 2, 2016 and January 3, 2015, respectively, in accordance with U.S. generally accepted accounting principles.

(In millions)														January 2, 2016			January 3, 2015
Balance at the beginning of year														$	51		$	55
Provision for losses															(2	)		6
Charge-offs															(14	)		(17	)
Recoveries															13			7
Balance at the end of year														$	48		$	51
Allowance based on collective evaluation															31			31
Allowance based on individual evaluation															17			20
Finance receivables evaluated collectively														883			1,023
Finance receivables evaluated individually															104			110

Note 4. Inventories

Inventories are composed of the following:

(In millions)														January 2, 2016			January 3, 2015
Finished goods														$	1,735		$	1,582
Work in process															2,921			2,683
Raw materials and components															605			546
															5,261			4,811
Progress/milestone payments														(1,117		)	(883		)
Total														$	4,144		$	3,928

Inventories valued by the LIFO method totaled $1.6 billion and $1.4 billion at January 2, 2016 and January 3, 2015, respectively, and the carrying values of these inventories would have been higher by approximately $463 million and $468 million, respectively, had our LIFO inventories been valued at current costs. Inventories related to long-term contracts, net of progress/milestone payments, were $611 million and $447 million at January 2, 2016 and January 3, 2015, respectively.

Note 5. Property, Plant and Equipment, Net

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

(Dollars in millions)											Useful Lives (in years)			January 2, 2016			January 3, 2015
Land and buildings											3 - 40			$	1,859		$	1,818
Machinery and equipment											1 - 20				4,548			4,364
															6,407			6,182
Accumulated depreciation and amortization														(3,915		)	(3,685		)
Total														$	2,492		$	2,497

At January 2, 2016 and January 3, 2015, assets under capital leases totaled $275 million and $279 million, respectively, and had accumulated amortization of $87 million and $68 million, respectively. The Manufacturing group’s depreciation expense, which included amortization expense on capital leases, totaled $383 million, $379 million and $335 million in 2015, 2014 and 2013, respectively.

Note 6. Accrued Liabilities

The accrued liabilities of our Manufacturing group are summarized below:

(In millions)														January 2, 2016			January 3, 2015
Customer deposits														$	1,323		$	1,412
Salaries, wages and employer taxes															315			332
Current portion of warranty and product maintenance contracts															137			169
Other														692			703
Total														$	2,467		$	2,616

Changes in our warranty liability are as follows:

(In millions)											2015			2014			2013
Beginning of period											$	148		$	121		$	133
Provision												78			75			53
Settlements												(72	)		(71	)		(60	)
Acquisitions												3			43			—
Adjustments*											(14		)	(20		)	(5		)
End of period											$	143		$	148		$	121

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

Note 7. Debt and Credit Facilities

Our debt is summarized in the table below:

(In millions)											January 2, 2016			January 3, 2015
Manufacturing group
4.625% due 2016											$	250		$	250
5.60% due 2017												350			350
Variable-rate note due 2018 (1.58% and 1.48%, respectively)												150			150
7.25% due 2019												250			250
Variable-rate note due 2019 (1.59% and 1.67%, respectively)												200			300
6.625% due 2020												222			234
5.95% due 2021												250			250
3.65% due 2021												250			250
4.30% due 2024												350			350
3.875% due 2025												350			350
Other (weighted-average rate of 1.29% and 1.32%, respectively)												75			77
Total Manufacturing group debt											$	2,697		$	2,811
Less: Short-term and current portion of long-term debt												(262	)		(8	)
Total Long-term debt											$	2,435		$	2,803
Finance group
Fixed-rate notes due 2016-2017 (weighted-average rate of 4.59%) (a)											$	21		$	32
Variable-rate notes due 2016 and 2018 (weighted-average rate of 1.53% and 1.73%, respectively)												200			200
Fixed-rate notes due 2017-2025 (weighted-average rate of 2.79% and 2.76%, respectively) (a) (b)												300			381
Variable-rate notes due 2016-2025 (weighted-average rate of 1.54% and 1.18%, respectively) (a) (b)												52			52
Securitized debt (weighted-average rate of 1.71%) (b)												41			98
6% Fixed-to-Floating Rate Junior Subordinated Notes												299			299
Fair value adjustments and unamortized discount												—			1
Total Finance group debt											$	913		$	1,063

(a) Notes amortize on a quarterly or semi-annual basis.

(b) Notes are secured by finance receivables as described in Note 3_._

The following table shows required payments during the next five years on debt outstanding at January 2, 2016:

(In millions)		2016			2017			2018			2019			2020
Manufacturing group		$	262		$	358		$	155		$	455		$	232
Finance group		155			91			204			50			48
Total		$	417		$	449		$	359		$	505		$	280

Textron has a senior unsecured revolving credit facility that expires in October 2018 for an aggregate principal amount of $1.0 billion, of which up to $100 million is available for the issuance of letters of credit. At January 2, 2016, there were no amounts borrowed against the facility, and there were $33 million of letters of credit issued against it.

6% Fixed-to-Floating Rate Junior Subordinated Notes

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

Support Agreement

Under a Support Agreement, as amended in December 2015, Textron Inc. is required to ensure that TFC maintains fixed charge coverage of no less than 125% and consolidated shareholder’s equity of no less than $125 million. There were no cash contributions required to be paid to TFC in 2015, 2014 and 2013 to maintain compliance with the support agreement.

Note 8. Derivative Instruments and Fair Value Measurements

We measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We prioritize the assumptions that market participants would use in pricing the asset or liability into a three-tier fair value hierarchy. This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exist, requiring companies to develop their own assumptions. Observable inputs that do not meet the criteria of Level 1, which include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, are categorized as Level 2. Level 3 inputs are those that reflect our estimates about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are utilized only to the extent that observable inputs are not available or cost effective to obtain.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

We manufacture and sell our products in a number of countries throughout the world, and, therefore, we are exposed to movements in foreign currency exchange rates. We utilize foreign currency exchange contracts to manage this volatility. 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 January 2, 2016 and January 3, 2015, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $706 million and $696 million, respectively. At January 2, 2016, the fair value amounts of our foreign currency exchange contracts were a $7 million asset and a $28 million liability. At January 3, 2015, the fair value amounts of our foreign currency exchange contracts were a $16 million asset and a $26 million liability.

We primarily utilize forward exchange contracts which have maturities of no more than three years. 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. At January 2, 2016, we had a net deferred loss of $24 million in Accumulated other comprehensive loss related to these cash flow hedges. 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.

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

Assets Recorded at Fair Value on a Nonrecurring Basis

During the years ended January 2, 2016 and January 3, 2015, the Finance group’s impaired nonaccrual finance receivables of $45 million and $49 million, respectively, were measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3). Impaired nonaccrual finance receivables represent assets recorded at fair value on a nonrecurring basis since the measurement of required reserves on our impaired finance receivables is significantly dependent on the fair value of the underlying collateral. For impaired nonaccrual finance receivables secured by aviation assets, the fair values of collateral are determined primarily based on the use of industry pricing guides. Fair value measurements recorded on impaired finance receivables resulted in charges to provision for loan losses totaling $13 million and $18 million for 2015 and 2014, respectively.

Assets and Liabilities Not Recorded at Fair Value

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

			January 2, 2016							January 3, 2015
(In millions)			Carrying Value			Estimated Fair Value				Carrying Value			Estimated Fair Value
Manufacturing group
Long-term debt, excluding leases			$	(2,628	)	$	(2,744	)		$	(2,742	)	$	(2,944	)
Finance group
Finance receivables, excluding leases			863			820				1,004			1,021
Debt			(913		)	(840		)		(1,063		)	(1,051		)

Fair value for the Manufacturing group debt is determined using market observable data for similar transactions (Level 2). At January 2, 2016 and January 3, 2015, approximately 74% and 75%, respectively, 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). The remaining Finance group debt was determined based on observable market transactions (Level 1). 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.

Note 9. Shareholders’ Equity

Capital Stock

We have authorization for 15 million shares of preferred stock with a par value of $0.01 and 500 million shares of common stock with a par value of $0.125. Outstanding common stock activity for the three years ended January 2, 2016 is presented below:

(In thousands)		2015			2014		2013
Beginning balance		276,582			282,059		271,263
Exercise of stock options		1,335			1,910		1,333
Issued to Textron Savings Plan		1,392			1,490		1,921
Stock repurchases		(5,197	)		(8,921	)	—
Exercise of warrants		—			—		7,435
Issued upon vesting of restricted stock units		116			44		107
Ending balance		274,228			276,582		282,059

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 and, prior to the maturity of our convertible notes on May 1, 2013, the shares that could have been issued upon the conversion of the notes and upon the exercise of the related warrants. In addition, diluted EPS for 2014 includes the impact of the initial delivery of shares under an Accelerated Share Repurchase agreement (ASR). In February 2014, we entered into the ASR with a counterparty and repurchased 4.3 million shares of our outstanding common stock. We settled the ASR in December 2014 for a final purchase price of $167 million.

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

(In thousands)		2015			2014		2013
Basic weighted-average shares outstanding		276,682			279,409		279,299
Dilutive effect of:
Stock options		2,045			2,049		328
ASR		—			332		—
Convertible notes and warrants		—			—		4,801
Diluted weighted-average shares outstanding		278,727			281,790		284,428

In 2015, 2014 and 2013, options to purchase 2 million, 2 million and 5 million shares, respectively, of common stock are excluded from the calculation of diluted weighted-average shares outstanding as their effect would have been anti-dilutive.

Accumulated Other Comprehensive Loss

The components of Accumulated Other Comprehensive Loss are presented below:

(In millions)		Pension and Postretirement Benefits Adjustments			Foreign Currency Translation Adjustments			Deferred Losses on Hedge Contracts			Accumulated Other Comprehensive Loss
Balance at December 28, 2013		$	(1,110	)	$	93		$	(10	)	$	(1,027	)
Other comprehensive loss before reclassifications		(471		)	(75		)	(12		)	(558		)
Reclassified from Accumulated other comprehensive loss		70			—			9			79
Other comprehensive loss		(401		)	(75		)	(3		)	(479		)
Balance at January 3, 2015		(1,511		)	18			(13		)	(1,506		)
Other comprehensive income (loss) before reclassifications		92			(65		)	(26		)	1
Reclassified from Accumulated other comprehensive loss		92			—			15			107
Other comprehensive income (loss)		184			(65		)	(11		)	108
Balance at January 2, 2016		$	(1,327	)	$	(47	)	$	(24	)	$	(1,398	)

Other Comprehensive Income (Loss)

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

		2015									2014									2013
(In millions)		Pre-Tax Amount			Tax (Expense) Benefit			After-Tax Amount			Pre-Tax Amount			Tax (Expense) Benefit			After-Tax Amount			Pre-Tax Amount			Tax (Expense) Benefit			After-Tax Amount
Pension and postretirement benefits adjustments:
Unrealized gains (losses)		$	136		$	(44	)	$	92		$	(734	)	$	252		$	(482	)	$	1,019		$	(410	)	$	609
Amortization of net actuarial loss*		150			(53		)	97			114			(40		)	74			189			(67		)	122
Amortization of prior service credit*		(7		)	2			(5		)	(8		)	4			(4		)	(2		)	1			(1		)
Recognition of prior service cost		—			—			—			18			(7		)	11			29			(12		)	17
Pension and postretirement benefits adjustments, net		279			(95		)	184			(610		)	209			(401		)	1,235			(488		)	747
Deferred losses on hedge contracts:
Current deferrals		(33		)	7			(26		)	(16		)	4			(12		)	(20		)	5			(15		)
Reclassification adjustments		19			(4		)	15			12			(3		)	9			(1		)	—			(1		)
Deferred losses on hedge contracts, net		(14		)	3			(11		)	(4		)	1			(3		)	(21		)	5			(16		)
Foreign currency translation adjustments		(55		)	(10		)	(65		)	(71		)	(4		)	(75		)	13			(1		)	12
Total		$	210		$	(102	)	$	108		$	(685	)	$	206		$	(479	)	$	1,227		$	(484	)	$	743

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

Note 10. Share-Based Compensation

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

Through our Deferred Income Plan for Textron Executives, we provide certain executives the opportunity to voluntarily defer up to 80% of their base salary, along with incentive and other compensation. Elective deferrals may be put into either a stock unit account or an interest-bearing account. Participants cannot move amounts between the two accounts while actively employed by us and cannot receive distributions until termination of employment. The intrinsic value of amounts paid under this deferred income plan was not significant in 2015, 2014 and 2013.

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

(In millions)		2015		2014		2013
Compensation expense	$	63	$	85	$	86
Income tax benefit		(23)		(32)		(32)
Total net compensation expense included in net income	$	40	$	53	$	54

Compensation expense included approximately $21 million, $21 million and $26 million in 2015, 2014 and 2013, respectively, for a portion of the fair value of options issued and the portion of previously granted options for which the requisite service has been rendered.

Compensation cost for awards subject only to service conditions that vest ratably are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. As of January 2, 2016, we had not recognized $48 million of total compensation costs associated with unvested awards subject only to service conditions. We expect to recognize compensation expense for these awards over a weighted-average period of approximately two years.

Stock Options

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

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

		2015		2014		2013
Fair value of options at grant date	$	14.03	$	12.72	$	9.69
Dividend yield		0.2%		0.2%		0.3%
Expected volatility		34.9%		34.5%		37.0%
Risk-free interest rate		1.5%		1.5%		0.9%
Expected term (in years)		4.8		5.0		5.5

The stock option activity during 2015 is provided below:

(Options in thousands)		Number of Options		Weighted- Average Exercise Price
Outstanding at beginning of year		8,637			$	29.99
Granted		1,825			44.30
Exercised		(1,344	)		(26.93		)
Forfeited or expired		(310	)		(44.58		)
Outstanding at end of year		8,808			$	32.91
Exercisable at end of year		5,275			$	28.16

At January 2, 2016, our outstanding options had an aggregate intrinsic value of $86 million and a weighted-average remaining contractual life of six years. Our exercisable options had an aggregate intrinsic value of $75 million and a weighted-average remaining contractual life of five years at January 2, 2016. The total intrinsic value of options exercised during 2015, 2014 and 2013 was $23 million, $25 million and $10 million, respectively.

Restricted Stock Units

We issue restricted stock units settled in both cash and stock (vesting one-third each in the third, fourth and fifth year following the year of the grant), which include the right to receive dividend equivalents. The fair value of these units is based on the trading price of our common stock and is recognized ratably over the vesting period. For units payable in stock, we use the trading price on the grant date, while units payable in cash are remeasured using the price at each reporting period date. Prior to 2012, we issued restricted stock units that vested in equal installments over five years. The 2015 activity for restricted stock units 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 year, nonvested		906			$	30.59		1,666			$	29.84
Granted		174			44.10			374			44.25
Vested		(183	)		(27.20		)	(459	)		(24.60		)
Forfeited		(17	)		(30.74		)	(89	)		(33.65		)
Outstanding at end of year, nonvested		880			$	33.97		1,492			$	34.84

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

(In millions)		2015		2014		2013
Fair value of awards vested	$	25	$	25	$	26
Cash paid		20		23		23

Performance Share Units

The fair value of share-based compensation awards accounted for as liabilities includes performance share units, which are paid in cash in the first quarter of the year following vesting. Payouts under performance share units vary based on certain performance criteria generally set for each year of a three-year performance period. The performance share units vest at the end of three years. The fair value of these awards is based on the trading price of our common stock and is remeasured at each reporting period date.

The 2015 activity for our performance share units is as follows:

(Units in thousands)								Number of Units		Weighted- Average Grant Date Fair Value
Outstanding at beginning of year, nonvested								677			$	33.38
Granted								257			44.31
Vested								(377	)		(28.47		)
Forfeited								(8	)		(35.29		)
Outstanding at end of year, nonvested								549			$	41.84

The fair value of the performance share units that vested and/or amounts paid under these awards is as follows:

(In millions)		2015		2014		2013
Fair value of awards vested	$	16	$	20	$	13
Cash paid		17		12		11

Note 11. Retirement Plans

Our defined benefit and defined contribution plans cover substantially all of our employees. A significant number of our U.S.-based employees participate in the Textron Retirement Plan, which is designed to be a “floor-offset” arrangement with both a defined benefit component and a defined contribution component. The defined benefit component of the arrangement includes the Textron Master Retirement Plan (TMRP) and the Bell Helicopter Textron Master Retirement Plan (BHTMRP), and the defined contribution component is the Retirement Account Plan (RAP). The defined benefit component provides a minimum guaranteed benefit (or “floor” benefit). Under the RAP, participants are eligible to receive contributions from Textron of 2% of their eligible compensation but may not make contributions to the plan. Upon retirement, participants receive the greater of the floor benefit or the value of the RAP. Both the TMRP and the BHTMRP are subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Effective on January 1, 2010, the Textron Retirement Plan was closed to new participants, and employees hired after that date receive an additional 4% annual cash contribution to their Textron Savings Plan account based on their eligible compensation.

We also have other funded and unfunded defined benefit pension plans that cover certain of our U.S. and Non-U.S. employees. In addition, several defined contribution plans are sponsored by our various businesses, of which the largest plan is the Textron Savings Plan, which is a qualified 401(k) plan subject to ERISA. Our defined contribution plans cost approximately $103 million, $99 million and $93 million in 2015, 2014 and 2013, respectively; these amounts include $12 million, $16 million and $19 million, respectively, in contributions to the RAP. We also provide postretirement benefits other than pensions for certain retired employees in the U.S., which include healthcare, dental care, Medicare Part B reimbursement and life insurance benefits.

Periodic Benefit Cost

The components of net periodic benefit cost and other amounts recognized in OCI are as follows:

			Pension Benefits										Postretirement Benefits Other than Pensions
(In millions)			2015				2014			2013				2015				2014			2013
Net periodic benefit cost
Service cost			$	113			$	109		$	133			$	4			$	4		$	6
Interest cost			327				334			290				15				19			19
Expected return on plan assets			(483		)		(462		)	(418		)		—				—			—
Amortization of prior service cost (credit)			16				15			15				(25		)		(23		)	(17		)
Amortization of net actuarial loss			148				112			183				2				2			6
Curtailment and other charges			6				—			—				—				—			—
Net periodic benefit cost (credit)			$	127			$	108		$	203			$	(4	)		$	2		$	14
Other changes in plan assets and benefit obligations recognized in OCI
Current year actuarial loss (gain)			$	(107	)		$	729		$	(964	)		$	(29	)		$	5		$	(55	)
Current year prior service cost (credit)			—				12			16				—				(30		)	(45		)
Amortization of net actuarial loss			(148		)		(112		)	(183		)		(2		)		(2		)	(6		)
Amortization of prior service credit (cost)			(18		)		(15		)	(15		)		25				23			17
Total recognized in OCI, before taxes			$	(273	)		$	614		$	(1,146	)		$	(6	)		$	(4	)	$	(89	)
Total recognized in net periodic benefit cost and OCI			$	(146	)		$	722		$	(943	)		$	(10	)		$	(2	)	$	(75	)

The estimated amount that will be amortized from Accumulated other comprehensive loss into net periodic pension costs in 2016 is as follows:

(In millions)		Pension Benefits			Postretirement Benefits Other than Pensions
Net actuarial loss		$	105		$	—
Prior service cost (credit)		15			(22		)
Total		$	120		$	(22	)

Obligations and Funded Status

All of our plans are measured as of our fiscal year-end. The changes in the projected benefit obligation and in the fair value of plan assets, along with our funded status, are as follows:

		Pension Benefits								Postretirement Benefits Other than Pensions
(In millions)			2015				2014				2015				2014
Change in benefit obligation
Benefit obligation at beginning of year			$	8,006			$	6,544			$	413			$	445
Service cost			113				109				4				4
Interest cost			327				334				15				19
Acquisitions			—				570				—				13
Amendments			—				12				—				(30		)
Plan participants’ contributions			—				—				5				5
Actuarial losses (gains)			(470		)		886				(29		)		4
Benefits paid			(423		)		(400		)		(44		)		(47		)
Curtailments and special termination benefits			(4		)		—				—				—
Foreign exchange rate changes and other			(73		)		(49		)		—				—
Benefit obligation at end of year			$	7,476			$	8,006			$	364			$	413
Change in fair value of plan assets
Fair value of plan assets at beginning of year			$	6,979			$	6,345
Actual return on plan assets			113				623
Acquisitions			—				390
Employer contributions			55				60
Benefits paid			(423		)		(400		)
Foreign exchange rate changes and other			(56		)		(39		)
Fair value of plan assets at end of year			$	6,668			$	6,979
Funded status at end of year			$	(808	)		$	(1,027	)		$	(364	)		$	(413	)
Amounts recognized in our balance sheets are as follows:
		Pension Benefits								Postretirement Benefits Other than Pensions
(In millions)			2015				2014				2015				2014
Non-current assets			$	73			$	60			$	—			$	—
Current liabilities			(26		)		(26		)		(40		)		(45		)
Non-current liabilities			(855		)		(1,061		)		(324		)		(368		)
Recognized in Accumulated other comprehensive loss, pre-tax:
Net loss			1,915				2,193				9				40
Prior service cost (credit)			92				110				(50		)		(75		)

The accumulated benefit obligation for all defined benefit pension plans was $7.1 billion and $7.6 billion at January 2, 2016 and January 3, 2015, respectively, which included $371 million and $392 million, respectively, in accumulated benefit obligations for unfunded plans where funding is not permitted or in foreign environments where funding is not feasible.

Pension plans with accumulated benefit obligations exceeding the fair value of plan assets are as follows:

(In millions)									2015				2014
Projected benefit obligation									$	2,881			$	3,096
Accumulated benefit obligation									2,708				2,900
Fair value of plan assets									2,091				2,215

Assumptions

The weighted-average assumptions we use for our pension and postretirement plans are as follows:

		Pension Benefits									Postretirement Benefits Other than Pensions
			2015			2014		2013			2015			2014		2013
Net periodic benefit cost
Discount rate			4.25%			4.92%		4.23%			4.00%			4.50%		3.75%
Expected long-term rate of return on assets			7.57%			7.60%		7.56%
Rate of compensation increase			3.49%			3.50%		3.47%
Benefit obligations at year-end
Discount rate			4.66%			4.18%		4.94%			4.50%			4.00%		4.50%
Rate of compensation increases			3.49%			3.49%		3.51%

Our assumed healthcare cost trend rate for both the medical and prescription drug cost was 7.5% in 2015 and 6.6% in 2014. We expect this rate to gradually decline to 5.0% by 2024 where we assume it will remain. These assumed healthcare cost trend rates have a significant effect on the amounts reported for the postretirement benefits other than pensions. A one-percentage-point change in these assumed healthcare cost trend rates would have the following effects:

(In millions)														One- Percentage- Point Increase			One- Percentage- Point Decrease
Effect on total of service and interest cost components														$	1		$	(1	)
Effect on postretirement benefit obligations other than pensions														17			(15		)

Pension Assets

The expected long-term rate of return on plan assets is determined based on a variety of considerations, including the established asset allocation targets and expectations for those asset classes, historical returns of the plans’ assets and other market considerations. We invest our pension assets with the objective of achieving a total rate of return, over the long term, sufficient to fund future pension obligations and to minimize future pension contributions. We are willing to tolerate a commensurate level of risk to achieve this objective based on the funded status of the plans and the long-term nature of our pension liability. Risk is controlled by maintaining a portfolio of assets that is diversified across a variety of asset classes, investment styles and investment managers. Where possible, investment managers are prohibited from owning our stock in the portfolios that they manage on our behalf.

For U.S. plan assets, which represent the majority of our plan assets, asset allocation target ranges are established consistent with our investment objectives, and the assets are rebalanced periodically. For Non-U.S. plan assets, allocations are based on expected cash flow needs and assessments of the local practices and markets. Our target allocation ranges are as follows:

U.S. Plan Assets
Domestic equity securities		23% to 38%
International equity securities		11% to 22%
Debt securities		27% to 38%
Real estate		7% to 13%
Private investment partnerships		5% to 11%
Hedge funds		0% to 5%
Non-U.S. Plan Assets
Equity securities		51% to 74%
Debt securities		26% to 46%
Real estate		4% to 15%

The fair value of our pension plan assets by major category and valuation method is as follows:

		January 2, 2016										January 3, 2015
(In millions)			Level 1			Level 2			Level 3				Level 1			Level 2			Level 3
Cash and equivalents			$	27		$	184		$	—			$	27		$	194		$	—
Equity securities:
Domestic			1,252			595			—				1,417			595			—
International			812			360			—				1,185			253			—
Mutual funds			251			—			—				—			—			—
Debt securities:
National, state and local governments			410			357			—				526			419			—
Corporate debt			—			878			—				—			950			—
Asset-backed securities			—			92			—				—			110			—
Real estate			—			—			758				—			—			744
Private investment partnerships			—			—			441				—			—			380
Hedge funds			—			—			251				—			—			179
Total			$	2,752		$	2,466		$	1,450			$	3,155		$	2,521		$	1,303

Cash equivalents and equity and debt securities include comingled funds, which represent investments in funds offered to institutional investors that are similar to mutual funds in that they provide diversification by holding various equity and debt securities. Since these comingled funds are not quoted on any active market, they are priced based on the relative value of the underlying equity and debt investments and their individual prices at any given time; accordingly, they are classified as Level 2. Debt securities are valued based on same day actual trading prices, if available. If such prices are not available, we use a matrix pricing model with historical prices, trends and other factors.

Private investment partnerships represent investments in funds, which, in turn, invest in stocks and debt securities of companies that, in most cases, are not publicly traded. These partnerships are valued using income and market methods that include cash flow projections and market multiples for various comparable companies. Real estate includes owned properties and investments in partnerships. Owned properties are valued using certified appraisals at least every three years, which then are updated at least annually by the real estate investment manager based on current market trends and other available information. These appraisals generally use the standard methods for valuing real estate, including forecasting income and identifying current transactions for comparable real estate to arrive at a fair value. Real estate partnerships are valued similar to private investment partnerships, with the general partner using standard real estate valuation methods to value the real estate properties and securities held within their fund portfolios. We believe these assumptions are consistent with assumptions that market participants would use in valuing these investments.

Hedge funds represent an investment in a diversified fund of hedge funds of which we are the sole investor. The fund invests in portfolio funds that are not publicly traded and are managed by various portfolio managers. Investments in portfolio funds are typically valued on the basis of the most recent price or valuation provided by the relevant fund’s administrator. The administrator for the fund aggregates these valuations with the other assets and liabilities to calculate the net asset value of the fund.

The fair value measurements of plan assets in the real estate category, which use significant unobservable inputs (Level 3), changed due to the following:

(In millions)		Real Estate			Private Investment Partnerships			Hedge Funds
Balance at December 28, 2013		$	553		$	305		$	175
Unrealized gains (losses), net		6			(7		)	4
Realized gains, net		28			41			—
Purchases, sales and settlements, net		157			41			—
Balance at January 3, 2015		744			380			179
Unrealized gains (losses), net		73			(18		)	2
Realized gains (losses), net		(21		)	19			—
Purchases, sales and settlements, net		(38		)	60			70
Balance at January 2, 2016		$	758		$	441		$	251

Estimated Future Cash Flow Impact

Defined benefits under salaried plans are based on salary and years of service. Hourly plans generally provide benefits based on stated amounts for each year of service. Our funding policy is consistent with applicable laws and regulations. In 2016, we expect to contribute approximately $60 million to fund our pension plans and the RAP. Benefit payments provided below reflect expected future employee service, as appropriate, and are expected to be paid, net of estimated participant contributions. These payments are based on the same assumptions used to measure our benefit obligation at the end of fiscal 2015. While pension benefit payments primarily will be paid out of qualified pension trusts, we will pay postretirement benefits other than pensions out of our general corporate assets. Benefit payments that we expect to pay on an undiscounted basis are as follows:

(In millions)		2016			2017			2018			2019			2020			2021-2025
Pension benefits		$	401		$	405		$	411		$	419		$	427		$	2,278
Post-retirement benefits other than pensions		41			40			38			36			34			142

Note 12. Income Taxes

We conduct business globally and, as a result, file numerous consolidated and separate income tax returns within and outside the U.S. For all of our U.S. subsidiaries, we file a consolidated federal income tax return. Income from continuing operations before income taxes is as follows:

(In millions)			2015				2014			2013
U.S.			$	745			$	553		$	454
Non-U.S.			226				300			220
Income from continuing operations before income taxes			$	971			$	853		$	674

Income tax expense for continuing operations is summarized as follows:

(In millions)			2015				2014			2013
Current:
Federal			$	212			$	195		$		23
State			16				18			10
Non-U.S.			41				54			56
			269				267			89
Deferred:
Federal			17				(12		)	91
State			(14		)		(4		)	13
Non-U.S.			1				(3		)	(17			)
			4				(19		)	87
Income tax expense			$	273			$	248		$		176

The following table reconciles the federal statutory income tax rate to our effective income tax rate for continuing operations:

			2015				2014				2013
U.S. Federal statutory income tax rate			35.0%				35.0%				35.0%
Increase (decrease) in taxes resulting from:
State income taxes (a)			0.2				1.0				2.4
Non-U.S. tax rate differential and foreign tax credits (b)			(3.6)				(5.8)				(7.2)
Domestic manufacturing deduction			(2.7)				(1.1)				(1.1)
Research credit			(1.5)				(1.5)				(3.8)
Other, net			0.7				1.5				0.8
Effective income tax rate			28.1%				29.1%				26.1%

(a) Includes a favorable impact of (0.7)% in 2015 and (0.2)% in 2014 related to valuation allowance releases.

(b) Includes a favorable impact of (1.4)% in 2015, (0.6)% in 2014 and (2.0)% in 2013 related to a net change in valuation allowances.

The amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and non-U.S. tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, we record the largest amount of tax benefit with a greater than 50% likelihood of being

realized upon settlement with a taxing authority that has full knowledge of all relevant information. Interest and penalties are accrued, where applicable. If we do not believe that it is not more likely than not that a tax benefit will be sustained, no tax benefit is recognized.

Our future results may include favorable or unfavorable adjustments to our estimated tax liabilities due to settlement of income tax examinations, new regulatory or judicial pronouncements, expiration of statutes of limitations or other relevant events. As a result, our effective tax rate may fluctuate significantly on a quarterly and annual basis.

Our unrecognized tax benefits represent tax positions for which reserves have been established. Unrecognized state tax benefits and interest related to unrecognized tax benefits are reflected net of applicable tax benefits. A reconciliation of our unrecognized tax benefits, excluding accrued interest, is as follows:

(In millions)	January 2, 2016		January 3, 2015		December 28, 2013
Balance at beginning of year	$	385	$	284	$	290
Additions for tax positions related to current year	12		10		15
Additions for tax positions of prior years	6		—		1
Additions for acquisitions	1		100		—
Reductions for tax positions of prior years	(1)		(6)		(17)
Reductions for expiration of statute of limitations and settlements	(2)		(3)		(5)
Balance at end of year	$	401	$	385	$	284

At January 2, 2016 and January 3, 2015, approximately $321 million and $305 million, respectively, of these unrecognized tax benefits, if recognized, would favorably affect our effective tax rate in a future period. At January 2, 2016 and January 3, 2015, the remaining $80 million in unrecognized tax benefits were related to discontinued operations.

It is reasonably possible that within the next 12 months our unrecognized tax benefits, exclusive of interest, may decrease in the range of approximately $0 to $215 million, as a result of the conclusion of audits and any related appeals or review processes, the expiration of statutes of limitations and additional worldwide uncertain tax positions. This potential decrease primarily relates to uncertainties with respect to prior dispositions and research tax credits. However, based on the process of finalizing audits and any required review process by relevant authorities, it is difficult to estimate the timing and amount of potential changes to our unrecognized tax benefits. Although the outcome of these matters cannot be determined, we believe adequate provision has been made for any potential unfavorable financial statement impact.

In the normal course of business, we are subject to examination by taxing authorities throughout the world, including major jurisdictions such as Canada, China, Germany, Mexico, United Kingdom and the U.S. With few exceptions, we no longer are subject to U.S. federal, state and local income tax examinations for years before 1997. We are no longer subject to non-U.S. income tax examinations in our major jurisdictions for years before 2010.

During 2015, 2014 and 2013, we recognized net tax-related interest expense totaling approximately $7 million, $6 million and $6 million, respectively, in the Consolidated Statements of Operations. At January 2, 2016 and January 3, 2015, we had a total of $139 million and $132 million, respectively, of net accrued interest expense included in our Consolidated Balance Sheets.

The tax effects of temporary differences that give rise to significant portions of our net deferred tax assets and liabilities are as follows:

(In millions)		January 2, 2016			January 3, 2015
Deferred tax assets
Obligation for pension and postretirement benefits		$	436		$	541
Accrued expenses*		288			287
Deferred compensation		184			190
Loss carryforwards		142			137
Inventory		71			79
Allowance for credit losses		29			36
Deferred income		9			22
Other, net		97			91
Total deferred tax assets		1,256			1,383
Valuation allowance for deferred tax assets		(115		)	(167		)
		$	1,141		$	1,216
Deferred tax liabilities
Property, plant and equipment, principally depreciation		$	(171	)	$	(167	)
Leasing transactions		(146		)	(165		)
Amortization of goodwill and other intangibles		(156		)	(118		)
Prepaid pension and postretirement benefits		(21		)	(14		)
Total deferred tax liabilities		(494		)	(464		)
Net deferred tax asset		$	647		$	752

• Accrued expenses includes warranty reserves, self-insured liabilities and interest.

We believe that our earnings during the periods when the temporary differences become deductible will be sufficient to realize the related future income tax benefits. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not more than likely, a valuation allowance is provided.

The following table presents the breakdown of net deferred tax assets:

(In millions)		January 2, 2016			January 3, 2015
Manufacturing group:
Other assets		$	778		$	889
Other liabilities		(24		)	(19		)
Finance group - Other liabilities		(107		)	(118		)
Net deferred tax asset		$	647		$	752

In 2015, the FASB issued ASU No. 2015-17, Income Taxes, that requires deferred tax assets and liabilities to be classified as noncurrent in the statement of financial position. We elected to adopt this standard in the fourth quarter of 2015 and have reclassified $259 million of deferred tax assets at January 3, 2015 from Other current assets to Other assets to conform with the current year presentation.

Our net operating loss and credit carryforwards at January 2, 2016 are as follows:

(In millions)
Non-U.S. net operating loss with no expiration		$	78
Non-U.S. net operating loss expiring through 2035		52
U.S. federal net operating losses expiring through 2035, related to 2014 acquisitions		328
U.S. foreign tax credits expiring through 2022, related to 2014 acquisitions		8
State net operating loss and tax credits, net of tax benefits, expiring through 2035		115

We intend to reinvest the undistributed earnings of our non-U.S. subsidiaries indefinitely and have therefore not provided for deferred taxes related to U.S. income and foreign withholding taxes. The undistributed earnings of our non-U.S. subsidiaries that have not been subject to U.S. tax approximated $1.2 billion at January 2, 2016. Because of the effect of U.S. foreign tax credits, it is not practicable to estimate the amount of tax that might be payable on these earnings in the event they no longer are indefinitely reinvested.

Note 13. 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.

In the ordinary course of business, we enter into standby letter of credit agreements and surety bonds with financial institutions to meet various performance and other obligations. These outstanding letter of credit arrangements and surety bonds aggregated to approximately $612 million and $790 million at January 2, 2016 and January 3, 2015, respectively.

Environmental Remediation

As with other industrial enterprises engaged in similar businesses, we are involved in a number of remedial actions under various federal and state laws and regulations relating to the environment that impose liability on companies to clean up, or contribute to the cost of cleaning up, sites on which hazardous wastes or materials were disposed or released. Our accrued environmental liabilities relate to installation of remediation systems, disposal costs, U.S. Environmental Protection Agency oversight costs, legal fees, and operating and maintenance costs for both currently and formerly owned or operated facilities. Circumstances that can affect the reliability and precision of the accruals include the identification of additional sites, environmental regulations, level of cleanup required, technologies available, number and financial condition of other contributors to remediation and the time period over which remediation may occur. We believe that any changes to the accruals that may result from these factors and uncertainties will not have a material effect on our financial position or results of operations.

Based upon information currently available, we estimate that our potential environmental liabilities are within the range of $40 million to $160 million. At January 2, 2016, environmental reserves of approximately $75 million have been established to address these specific estimated liabilities. We estimate that we will likely pay our accrued environmental remediation liabilities over the next ten years and have classified $17 million as current liabilities. Expenditures to evaluate and remediate contaminated sites approximated $15 million, $13 million and $12 million in 2015, 2014 and 2013, respectively.

Leases

Rental expense approximated $113 million, $121 million and $95 million in 2015, 2014 and 2013, respectively. Future minimum rental commitments for noncancelable operating leases in effect at January 2, 2016 approximated $74 million for 2016, $57 million for 2017, $44 million for 2018, $36 million for 2019, $38 million for 2020 and $131 million thereafter. The total future minimum rental receipts under noncancelable subleases at January 2, 2016 approximated $22 million.

Note 14. Supplemental Cash Flow Information

We have made the following cash payments:

(In millions)											2015			2014			2013
Interest paid:
Manufacturing group											$	123		$	134		$	124
Finance group												34			41			46
Net taxes paid /(received):
Manufacturing group											187			266			223
Finance group												11			23			(49	)

Note 15. Segment and Geographic Data

We operate in, and report financial information for, the following five business segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. The accounting policies of the segments are the same as those described in Note 1.

Textron Aviation products include Citation jets, King Air turboprops, Caravan utility turboprops, piston engine aircraft, T-6 and AT-6 military aircraft, and aftermarket sales and services sold to a diverse base of corporate and individual buyers.

Bell products include military and commercial helicopters, tiltrotor aircraft and related spare parts and services. Bell supplies military helicopters and, in association with The Boeing Company, military tiltrotor aircraft, and aftermarket services to the U.S. and non-U.S. governments. Bell also supplies commercial helicopters and aftermarket services to corporate, offshore petroleum exploration and development, utility, charter, police, fire, rescue, emergency medical helicopter operators and foreign governments.

Textron Systems products include unmanned aircraft systems, marine and land systems, weapons and sensors, simulation, training and other defense and aviation mission support products and services primarily for U.S. and non-U.S. governments.

Industrial products and markets include the following:

· Kautex products include blow-molded plastic fuel systems, windshield and headlamp washer systems, selective catalytic reduction systems and engine camshafts that are marketed primarily to automobile OEMs, as well as plastic bottles and containers for various uses;

· Specialized Vehicles and Equipment products include golf cars, off-road utility and light transportation vehicles, aviation ground support equipment, professional turf-maintenance equipment and turf-care vehicles that are marketed primarily to golf courses, resort communities, municipalities, sporting venues, consumers, and commercial and industrial users; and

· Tools and Test Equipment products include powered equipment, electrical test and measurement instruments, mechanical and hydraulic tools, cable connectors, fiber optic assemblies, underground and aerial transmission and distribution products, and power utility products, principally used in the construction, maintenance, telecommunications, data communications, electrical, utility and plumbing industries.

The Finance segment provides financing primarily to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters.

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 acquisition and restructuring costs related to the Beechcraft acquisition. 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:

		Revenues									Segment Profit (Loss)
(In millions)		2015			2014			2013			2015			2014			2013
Textron Aviation		$	4,822		$	4,568		$	2,784		$	400		$	234		$	(48	)
Bell			3,454			4,245			4,511			400			529			573
Textron Systems			1,520			1,624			1,665			129			150			147
Industrial			3,544			3,338			3,012			302			280			242
Finance			83			103			132			24			21			49
Total		$	13,423		$	13,878		$	12,104		$	1,255		$	1,214		$	963
Corporate expenses and other, net												(154	)		(161	)		(166	)
Interest expense, net for Manufacturing group												(130	)		(148	)		(123	)
Acquisition and restructuring costs												—			(52	)		—
Income from continuing operations before income taxes											$	971		$	853		$	674

Revenues by major product type are summarized below:

(In millions)											2015			2014			2013
Fixed-wing aircraft											$	4,822		$	4,568		$	2,784
Rotor aircraft												3,454			4,245			4,511
Unmanned aircraft systems, armored vehicles, precision weapons and other												1,520			1,624			1,665
Fuel systems and functional components												2,078			1,975			1,853
Specialized vehicles and equipment												1,021			868			713
Tools and test equipment												445			495			446
Finance												83			103			132
Total revenues											$	13,423		$	13,878		$	12,104

Our revenues included sales to the U.S. Government of approximately $3.2 billion, $3.8 billion and $3.7 billion in 2015, 2014 and 2013, respectively, primarily in the Bell and Textron Systems segments.

Other information by segment is provided below:

		Assets						Capital Expenditures									Depreciation and Amortization
(In millions)		January 2, 2016			January 3, 2015			2015			2014			2013			2015			2014			2013
Textron Aviation		$	4,039		$	4,085		$	124		$	96		$	72		$	134		$	137		$	87
Bell		2,829			2,858			97			152			197			143			132			116
Textron Systems		2,398			2,283			86			65			66			80			84			89
Industrial		2,236			2,171			105			97			89			76			76			72
Finance		1,316			1,529			—			—			—			12			13			18
Corporate		1,890			1,679			8			19			20			16			17			7
Total		$	14,708		$	14,605		$	420		$	429		$	444		$	461		$	459		$	389

Geographic Data

Presented below is selected financial information of our continuing operations by geographic area:

					Revenues*									Property, Plant and Equipment, net**
(In millions)					2015			2014			2013			January 2, 2016			January 3, 2015
United States					$	8,299		$	8,677		$	7,512		$	2,039		$	2,015
Europe						1,730			1,761			1,535			251			272
Asia and Australia						1,324			1,155			1,111			72			74
Latin and South America						1,101			1,261			878			51			44
Canada						531			383			375			79			92
Middle East and Africa						438			641			693			—			—
Total					$	13,423		$	13,878		$	12,104		$	2,492		$	2,497

* Revenues are attributed to countries based on the location of the customer.

** Property, plant and equipment, net are based on the location of the asset.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Textron Inc.

We have audited the accompanying Consolidated Balance Sheets of Textron Inc. as of January 2, 2016 and January 3, 2015, and the related Consolidated Statements of Operations, Comprehensive Income, Shareholders’ Equity and Cash Flows for each of the three years in the period ended January 2, 2016. Our audits also included the financial statement schedule contained on page 70. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Textron Inc. at January 2, 2016 and January 3, 2015 and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 2, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Textron Inc.’s internal control over financial reporting as of January 2, 2016, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 24, 2016 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Boston, Massachusetts

February 24, 2016

Quarterly Data

(Unaudited)			2015												2014
(Dollars in millions, except per share amounts)			Q1			Q2			Q3			Q4			Q1			Q2			Q3			Q4
Revenues
Textron Aviation			$	1,051		$	1,124		$	1,159		$	1,488		$	785		$	1,183		$	1,080		$	1,520
Bell			813			850			756			1,035			873			1,119			1,182			1,071
Textron Systems			315			322			420			463			363			282			358			621
Industrial			872			927			828			917			797			894			785			862
Finance			22			24			17			20			29			27			25			22
Total revenues			$	3,073		$	3,247		$	3,180		$	3,923		$	2,847		$	3,505		$	3,430		$	4,096
Segment profit
Textron Aviation (a)			$	67		$	88		$	107		$	138		$	14		$	28		$	62		$	130
Bell			76			101			99			124			96			141			146			146
Textron Systems			28			21			39			41			39			34			27			50
Industrial			82			86			61			73			66			94			53			67
Finance			6			10			6			2			4			7			5			5
Total segment profit			259			306			312			378			219			304			293			398
Corporate expenses and other, net			(42		)	(33		)	(27		)	(52		)	(43		)	(38		)	(22		)	(58		)
Interest expense, net for Manufacturing group			(33		)	(32		)	(33		)	(32		)	(35		)	(36		)	(37		)	(40		)
Acquisition and restructuring costs (b)			—			—			—			—			(16		)	(20		)	(3		)	(13		)
Income tax expense			(56		)	(72		)	(76		)	(69		)	(38		)	(65		)	(71		)	(74		)
Income from continuing operations			128			169			176			225			87			145			160			213
Income (loss) from discontinued operations, net of income taxes			—			(2		)	—			1			(2		)	(1		)	(1		)	(1		)
Net income			$	128		$	167		$	176		$	226		$	85		$	144		$	159		$	212
Basic earnings per share
Continuing operations			$	0.46		$	0.61		$	0.64		$	0.81		$	0.31		$	0.52		$	0.57		$	0.77
Discontinued operations			—			(0.01		)	—			0.01			(0.01		)	—			—			(0.01		)
Basic earnings per share			$	0.46		$	0.60		$	0.64		$	0.82		$	0.30		$	0.52		$	0.57		$	0.76
Basic average shares outstanding (In thousands)			277,902			277,715			276,334			274,776			281,094			280,280			278,860			277,347
Diluted earnings per share
Continuing operations			$	0.46		$	0.60		$	0.63		$	0.81		$	0.31		$	0.51		$	0.57		$	0.76
Discontinued operations			—			—			—			0.01			(0.01		)	—			—			—
Diluted earnings per share			$	0.46		$	0.60		$	0.63		$	0.82		$	0.30		$	0.51		$	0.57		$	0.76
Diluted average shares outstanding (In thousands)			280,077			279,935			278,039			276,653			283,327			282,764			281,030			279,771
Segment profit margins
Textron Aviation			6.4		%	7.8		%	9.2		%	9.3		%	1.8		%	2.4		%	5.7		%	8.6		%
Bell			9.3			11.9			13.1			12.0			11.0			12.6			12.4			13.6
Textron Systems			8.9			6.5			9.3			8.9			10.7			12.1			7.5			8.1
Industrial			9.4			9.3			7.4			8.0			8.3			10.5			6.8			7.8
Finance			27.3			41.7			35.3			10.0			13.8			25.9			20.0			22.7
Segment profit margin			8.4		%	9.4		%	9.8		%	9.6		%	7.7		%	8.7		%	8.5		%	9.7		%
Common stock information
Price range: High			$	45.61		$	46.93		$	44.98		$	43.93		$	40.18		$	40.93		$	39.03		$	44.23
Low			$	40.95		$	42.97		$	32.20		$	38.18		$	34.28		$	36.96		$	35.54		$	32.28
Dividends declared per share			$	0.02		$	0.02		$	0.02		$	0.02		$	0.02		$	0.02		$	0.02		$	0.02
(a)	Includes amortization of $5 million, $6 million and $1 million for the first, second, and third quarters of 2015, respectively, and $12 million, $33 million, $10 million and $8 million for the first, second, third and fourth quarters of 2014, respectively, related to fair value step-up adjustments of Beechcraft acquired inventories sold during the periods.
(b)	Acquisition and restructuring costs include restructuring costs of $5 million, $20 million, $3 million and $13 million for the first, second, third and fourth quarters of 2014, respectively, related to the acquisition of Beech Holdings, LLC, the parent of Beechcraft Corporation, which was completed on March 14, 2014. Transaction costs of $11 million related to the Beechcraft acquisition are also included in the first quarter of 2014.

Schedule II — Valuation and Qualifying Accounts

(In millions)											2015			2014			2013
Allowance for doubtful accounts
Balance at beginning of year											$	30		$	22		$	19
Charged to costs and expenses												5			11			7
Deductions from reserves*												(2	)		(3	)		(4	)
Balance at end of year											$	33		$	30		$	22
Inventory FIFO reserves
Balance at beginning of year											$	169		$	150		$	136
Charged to costs and expenses												56			51			54
Deductions from reserves*												(19	)		(32	)		(40	)
Balance at end of year											$	206		$	169		$	150

*Deductions primarily include amounts written off on uncollectable accounts (less recoveries), inventory disposals and currency translation adjustments.