filings.toolsItem 8. Financial Statements and Supplementary Data
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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:
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 December 29, 2018
| (In millions, except per share data) | 2018 | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|---|
| Revenues | ||||||||
| Manufacturing revenues | $ | 13,906 | $ | 14,129 | $ | 13,710 | ||
| Finance revenues | 66 | 69 | 78 | |||||
| Total revenues | 13,972 | 14,198 | 13,788 | |||||
| Costs, expenses and other | ||||||||
| Cost of sales | 11,594 | 11,827 | 11,337 | |||||
| Selling and administrative expense | 1,275 | 1,334 | 1,317 | |||||
| Interest expense | 166 | 174 | 174 | |||||
| Special charges | 73 | 130 | 123 | |||||
| Gain on business disposition | (444) | — | — | |||||
| Non-service components of pension and post-retirement income, net | (76) | (29) | (39) | |||||
| Total costs, expenses and other | 12,588 | 13,436 | 12,912 | |||||
| Income from continuing operations before income taxes | 1,384 | 762 | 876 | |||||
| Income tax expense | 162 | 456 | 33 | |||||
| Income from continuing operations | 1,222 | 306 | 843 | |||||
| Income from discontinued operations, net of income taxes* | — | 1 | 119 | |||||
| Net income | $ | 1,222 | $ | 307 | $ | 962 | ||
| Basic earnings per share | ||||||||
| Continuing operations | $ | 4.88 | $ | 1.15 | $ | 3.11 | ||
| Discontinued operations | — | — | 0.44 | |||||
| Basic earnings per share | $ | 4.88 | $ | 1.15 | $ | 3.55 | ||
| Diluted earnings per share | ||||||||
| Continuing operations | $ | 4.83 | $ | 1.14 | $ | 3.09 | ||
| Discontinued operations | — | — | 0.44 | |||||
| Diluted earnings per share | $ | 4.83 | $ | 1.14 | $ | 3.53 |
* For 2016, see Note 16 for additional information.
See Notes to the Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
For each of the years in the three-year period ended December 29, 2018
| (In millions) | 2018 | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|---|
| Net income | $ | 1,222 | $ | 307 | $ | 962 | ||
| Other comprehensive income (loss), net of taxes: | ||||||||
| Pension and postretirement benefits adjustments, net of reclassifications | (74) | 109 | (178) | |||||
| Foreign currency translation adjustments, net of reclassifications | (43) | 107 | (49) | |||||
| Deferred gains (losses) on hedge contracts, net of reclassifications | (13) | 14 | 20 | |||||
| Other comprehensive income (loss) | (130) | 230 | (207) | |||||
| Comprehensive income | $ | 1,092 | $ | 537 | $ | 755 |
See Notes to the Consolidated Financial Statements.
Consolidated Balance Sheets
| (In millions, except share data) | December 29, 2018 | December 30, 2017 | ||||||
|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||
| Manufacturing group | ||||||||
| Cash and equivalents | $ | 987 | $ | 1,079 | ||||
| Accounts receivable, net | 1,024 | 1,363 | ||||||
| Inventories | 3,818 | 4,150 | ||||||
| Other current assets | 785 | 435 | ||||||
| Total current assets | 6,614 | 7,027 | ||||||
| Property, plant and equipment, net | 2,615 | 2,721 | ||||||
| Goodwill | 2,218 | 2,364 | ||||||
| Other assets | 1,800 | 2,059 | ||||||
| Total Manufacturing group assets | 13,247 | 14,171 | ||||||
| Finance group | ||||||||
| Cash and equivalents | 120 | 183 | ||||||
| Finance receivables, net | 760 | 819 | ||||||
| Other assets | 137 | 167 | ||||||
| Total Finance group assets | 1,017 | 1,169 | ||||||
| Total assets | $ | 14,264 | $ | 15,340 | ||||
| Liabilities and shareholders’ equity | ||||||||
| Liabilities | ||||||||
| Manufacturing group | ||||||||
| Short-term debt and current portion of long-term debt | $ | 258 | $ | 14 | ||||
| Accounts payable | 1,099 | 1,205 | ||||||
| Other current liabilities | 2,149 | 2,441 | ||||||
| Total current liabilities | 3,506 | 3,660 | ||||||
| Other liabilities | 1,932 | 2,006 | ||||||
| Long-term debt | 2,808 | 3,074 | ||||||
| Total Manufacturing group liabilities | 8,246 | 8,740 | ||||||
| Finance group | ||||||||
| Other liabilities | 108 | 129 | ||||||
| Debt | 718 | 824 | ||||||
| Total Finance group liabilities | 826 | 953 | ||||||
| Total liabilities | 9,072 | 9,693 | ||||||
| Shareholders’ equity | ||||||||
| Common stock (238.2 million and 262.3 million shares issued, respectively, and 235.6 million and 261.5 million shares outstanding, respectively) | 30 | 33 | ||||||
| Capital surplus | 1,646 | 1,669 | ||||||
| Treasury stock | (129) | (48) | ||||||
| Retained earnings | 5,407 | 5,368 | ||||||
| Accumulated other comprehensive loss | (1,762) | (1,375) | ||||||
| Total shareholders’ equity | 5,192 | 5,647 | ||||||
| Total liabilities and shareholders’ equity | $ | 14,264 | $ | 15,340 |
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 January 2, 2016 | $ | 36 | $ | 1,587 | $ | (559) | $ | 5,298 | $ | (1,398) | $ | 4,964 |
| Net income | — | — | — | 962 | — | 962 | ||||||
| Other comprehensive loss | — | — | — | — | (207) | (207) | ||||||
| Dividends declared ($0.08 per share) | — | — | — | (22) | — | (22) | ||||||
| Share-based compensation activity | 1 | 119 | — | — | — | 120 | ||||||
| Purchases of common stock | — | — | (241) | — | — | (241) | ||||||
| Retirement of treasury stock | (3) | (105) | 800 | (692) | — | — | ||||||
| Other | — | (2) | — | — | — | (2) | ||||||
| Balance at December 31, 2016 | 34 | 1,599 | — | 5,546 | (1,605) | 5,574 | ||||||
| Net income | — | — | — | 307 | — | 307 | ||||||
| Other comprehensive income | — | — | — | — | 230 | 230 | ||||||
| Dividends declared ($0.08 per share) | — | — | — | (21) | — | (21) | ||||||
| Share-based compensation activity | — | 139 | — | — | — | 139 | ||||||
| Purchases of common stock | — | — | (582) | — | — | (582) | ||||||
| Retirement of treasury stock | (1) | (69) | 534 | (464) | — | — | ||||||
| Balance at December 30, 2017 | 33 | 1,669 | (48) | 5,368 | (1,375) | 5,647 | ||||||
| Adoption of ASC 606 | — | — | — | 90 | — | 90 | ||||||
| Net income | — | — | — | 1,222 | — | 1,222 | ||||||
| Other comprehensive loss | — | — | — | — | (130) | (130) | ||||||
| Reclassification of stranded tax effects | — | — | — | 257 | (257) | — | ||||||
| Dividends declared ($0.08 per share) | — | — | — | (20) | — | (20) | ||||||
| Share-based compensation activity | — | 166 | — | — | — | 166 | ||||||
| Purchases of common stock | — | — | (1,783) | — | — | (1,783) | ||||||
| Retirement of treasury stock | (3) | (189) | 1,702 | (1,510) | — | — | ||||||
| Balance at December 29, 2018 | $ | 30 | $ | 1,646 | $ | (129) | $ | 5,407 | $ | (1,762) | $ | 5,192 |
See Notes to the Consolidated Financial Statements.
Consolidated Statements of Cash Flows
For each of the years in the three-year period ended December 29, 2018
| Consolidated | ||||||||
|---|---|---|---|---|---|---|---|---|
| (In millions) | 2018 | 2017 | 2016 | |||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 1,222 | $ | 307 | $ | 962 | ||
| Less: Income from discontinued operations | — | 1 | 119 | |||||
| Income from continuing operations | 1,222 | 306 | 843 | |||||
| Adjustments to reconcile income from continuing operations to net cash provided by operating activities: | ||||||||
| Non-cash items: | ||||||||
| Depreciation and amortization | 437 | 447 | 449 | |||||
| Gain on business disposition | (444) | — | — | |||||
| Deferred income taxes | 49 | 346 | 48 | |||||
| Asset impairments | 48 | 47 | 40 | |||||
| Other, net | 102 | 90 | 92 | |||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable, net | 50 | (236) | (33) | |||||
| Inventories | 41 | 412 | (352) | |||||
| Other assets | (88) | (44) | (15) | |||||
| Accounts payable | (63) | (156) | 215 | |||||
| Other liabilities | (223) | (113) | (281) | |||||
| Income taxes, net | (33) | 78 | (189) | |||||
| Pension, net | (14) | (277) | 25 | |||||
| Captive finance receivables, net | 22 | 67 | 75 | |||||
| Other operating activities, net | 3 | (4) | 10 | |||||
| Net cash provided by operating activities of continuing operations | 1,109 | 963 | 927 | |||||
| Net cash used in operating activities of discontinued operations | (2) | (27) | (2) | |||||
| Net cash provided by operating activities | 1,107 | 936 | 925 | |||||
| Cash flows from investing activities | ||||||||
| Net proceeds from business disposition | 807 | — | — | |||||
| Capital expenditures | (369) | (423) | (446) | |||||
| Net proceeds from corporate-owned life insurance policies | 110 | 17 | 87 | |||||
| Net cash used in acquisitions | (23) | (331) | (186) | |||||
| Finance receivables repaid | 27 | 32 | 44 | |||||
| Other investing activities, net | 68 | 60 | 65 | |||||
| Net cash provided by (used in) investing activities | 620 | (645) | (436) | |||||
| Cash flows from financing activities | ||||||||
| Proceeds from long-term debt | — | 1,036 | 525 | |||||
| Principal payments on long-term debt and nonrecourse debt | (131) | (841) | (457) | |||||
| Purchases of Textron common stock | (1,783) | (582) | (241) | |||||
| Proceeds from exercise of stock options | 74 | 52 | 36 | |||||
| Dividends paid | (20) | (21) | (22) | |||||
| Other financing activities, net | (4) | (4) | (9) | |||||
| Net cash used in financing activities | (1,864) | (360) | (168) | |||||
| Effect of exchange rate changes on cash and equivalents | (18) | 33 | (28) | |||||
| Net increase (decrease) in cash and equivalents | (155) | (36) | 293 | |||||
| Cash and equivalents at beginning of year | 1,262 | 1,298 | 1,005 | |||||
| Cash and equivalents at end of year | $ | 1,107 | $ | 1,262 | $ | 1,298 |
See Notes to the Consolidated Financial Statements.
Consolidated Statements of Cash Flows continued
For each of the years in the three-year period ended December 29, 2018
| Manufacturing Group | Finance Group | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||
| Cash flows from operating activities | ||||||||||||
| Net income | $ | 1,198 | $ | 248 | $ | 951 | $ | 24 | $ | 59 | $ | 11 |
| Less: Income from discontinued operations | — | 1 | 119 | — | — | — | ||||||
| Income from continuing operations | 1,198 | 247 | 832 | 24 | 59 | 11 | ||||||
| Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: | ||||||||||||
| Non-cash items: | ||||||||||||
| Depreciation and amortization | 429 | 435 | 437 | 8 | 12 | 12 | ||||||
| Gain on business disposition | (444) | — | — | — | — | — | ||||||
| Deferred income taxes | 54 | 390 | 36 | (5) | (44) | 12 | ||||||
| Asset impairments | 48 | 47 | 40 | — | — | — | ||||||
| Other, net | 97 | 94 | 90 | 5 | (4) | 2 | ||||||
| Changes in assets and liabilities: | ||||||||||||
| Accounts receivable, net | 50 | (236) | (33) | — | — | — | ||||||
| Inventories | 45 | 422 | (347) | — | — | — | ||||||
| Other assets | (87) | (43) | 17 | (1) | (1) | (6) | ||||||
| Accounts payable | (63) | (156) | 215 | — | — | — | ||||||
| Other liabilities | (219) | (108) | (276) | (4) | (5) | (5) | ||||||
| Income taxes, net | (20) | 119 | (174) | (13) | (41) | (15) | ||||||
| Pension, net | (14) | (277) | 25 | — | — | — | ||||||
| Dividends received from Finance group | 50 | — | 29 | — | — | — | ||||||
| Other operating activities, net | 3 | (4) | 10 | — | — | — | ||||||
| Net cash provided by (used in) operating activities of continuing operations | 1,127 | 930 | 901 | 14 | (24) | 11 | ||||||
| Net cash used in operating activities of discontinued operations | (2) | (27) | (2) | — | — | — | ||||||
| Net cash provided by (used in) operating activities | 1,125 | 903 | 899 | 14 | (24) | 11 | ||||||
| Cash flows from investing activities | ||||||||||||
| Net proceeds from business disposition | 807 | — | — | — | — | — | ||||||
| Capital expenditures | (369) | (423) | (446) | — | — | — | ||||||
| Net proceeds from corporate-owned life insurance policies | 110 | 17 | 87 | — | — | — | ||||||
| Net cash used in acquisitions | (23) | (331) | (186) | — | — | — | ||||||
| Finance receivables repaid | — | — | — | 226 | 273 | 292 | ||||||
| Finance receivables originated | — | — | — | (177) | (174) | (173) | ||||||
| Other investing activities, net | 14 | 9 | 11 | 50 | 41 | 23 | ||||||
| Net cash provided by (used in) investing activities | 539 | (728) | (534) | 99 | 140 | 142 | ||||||
| Cash flows from financing activities | ||||||||||||
| Proceeds from long-term debt | — | 992 | 345 | — | 44 | 180 | ||||||
| Principal payments on long-term debt and nonrecourse debt | (5) | (704) | (254) | (126) | (137) | (203) | ||||||
| Purchases of Textron common stock | (1,783) | (582) | (241) | — | — | — | ||||||
| Proceeds from exercise of stock options | 74 | 52 | 36 | — | — | — | ||||||
| Dividends paid | (20) | (21) | (22) | (50) | — | (29) | ||||||
| Other financing activities, net | (4) | (3) | (10) | — | (1) | 1 | ||||||
| Net cash used in financing activities | (1,738) | (266) | (146) | (176) | (94) | (51) | ||||||
| Effect of exchange rate changes on cash and equivalents | (18) | 33 | (28) | — | — | — | ||||||
| Net increase (decrease) in cash and equivalents | (92) | (58) | 191 | (63) | 22 | 102 | ||||||
| Cash and equivalents at beginning of year | 1,079 | 1,137 | 946 | 183 | 161 | 59 | ||||||
| Cash and equivalents at end of year | $ | 987 | $ | 1,079 | $ | 1,137 | $ | 120 | $ | 183 | $ | 161 |
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 financing primarily to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters manufactured by our Manufacturing group, otherwise known as captive financing. In the Consolidated Statements of Cash Flows, cash received from customers is reflected as operating activities when received from third parties. However, in the cash flow information provided for the separate borrowing groups, cash flows related to captive financing activities are reflected based on the operations of each group. For example, when product is sold by our Manufacturing group to a customer and is financed by the Finance group, the origination of the finance receivable is recorded within investing activities as a cash outflow in the Finance group’s statement of cash flows. Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the Finance group on the customer’s behalf is recorded within operating cash flows as a cash inflow. Although cash is transferred between the two borrowing groups, there is no cash transaction reported in the consolidated cash flows at the time of the original financing. These captive financing activities, along with all significant intercompany transactions, are reclassified or eliminated in consolidation.
At the beginning of 2018, we adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606) and its related amendments, collectively referred to as ASC 606. We adopted ASC 606 using the modified retrospective transition method applied to contracts that were not substantially complete at the end of 2017. We recorded a $90 million adjustment to increase retained earnings to reflect the cumulative impact of adopting this standard at the beginning of 2018, primarily related to certain long-term contracts our Bell segment has with the U.S. Government that converted to the cost-to-cost method for revenue recognition. The comparative information included in our financial statements and notes has not been restated and is reported under the accounting standards in effect for those periods based on the policies described in this note for the applicable year.
We also adopted ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payment at the beginning of 2018_._ This standard provides guidance on the classification of certain cash flows and requires companies to classify cash proceeds received from the settlement of corporate-owned life insurance as cash inflows from investing activities. The standard is required to be adopted on a retrospective basis. Prior to adoption of this standard, we classified these proceeds as operating activities in the Consolidated Statements of Cash Flows. Upon adoption, we reclassified $17 million and $87 million of net cash proceeds for 2017 and 2016, respectively, from operating activities to investing activities.
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 cost-to-cost method upon the
adoption of ASC 606. We include all assets used in performance of the V-22 Contracts that we own 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.
Revenue Recognition for 2018
With the adoption of ASC 606 at the beginning of 2018, revenue is recognized when control of the goods or services promised under the contract is transferred to the customer either at a point in time (e.g., upon delivery) or over time (e.g., as we perform under the contract). We account for a contract when it has approval and commitment from both parties, the rights and payment terms of the parties are identified, the contract has commercial substance and collectability of consideration is probable. Contracts are reviewed to determine whether there is one or multiple performance obligations. A performance obligation is a promise to transfer a distinct good or service to a customer and represents the unit of accounting for revenue recognition. For contracts with multiple performance obligations, the expected consideration, or the transaction price, is allocated to each performance obligation identified in the contract based on the relative standalone selling price of each performance obligation. Revenue is then recognized for the transaction price allocated to the performance obligation when control of the promised goods or services underlying the performance obligation is transferred. Contract consideration is not adjusted for the effects of a significant financing component when, at contract inception, the period between when control transfers and when the customer will pay for that good or service is one year or less.
Commercial Contracts
The majority of our contracts with commercial customers have a single performance obligation as there is only one good or service promised or the promise to transfer the goods or services is not distinct or separately identifiable from other promises in the contract. Revenue is primarily recognized at a point in time, which is generally when the customer obtains control of the asset upon delivery and customer acceptance. Contract modifications that provide for additional distinct goods or services at the standalone selling price are treated as separate contracts.
For commercial aircraft, we contract with our customers to sell fully outfitted fixed-wing aircraft, which may include configuration options. The aircraft typically represents a single performance obligation and revenue is recognized upon customer acceptance and delivery. For commercial helicopters, our customers generally contract with us for fully functional basic configuration aircraft and control is transferred upon customer acceptance and delivery. At times, customers may separately contract with us for the installation of accessories and customization to the basic aircraft. If these contracts are entered into at or near the same time of the basic aircraft contract, we assess whether the contracts meet the criteria to be combined. For contracts that are combined, the basic aircraft and the accessories and customization are typically considered to be distinct, and therefore, are separate performance obligations. For these contracts, revenue is recognized on the basic aircraft upon customer acceptance and transfer of title and risk of loss and on the accessories and customization upon delivery and customer acceptance. We utilize observable prices to determine the standalone selling prices when allocating the transaction price to these performance obligations.
The transaction price for our commercial contracts reflects our estimate of returns, rebates and discounts, which are based on historical, current and forecasted information. Amounts billed to customers for shipping and handling are included in the transaction price and generally are not treated as separate performance obligations as these costs fulfill a promise to transfer the product to the customer. Taxes collected from customers and remitted to government authorities are recorded on a net basis.
We primarily provide standard warranty programs for products in our commercial businesses for periods that typically range from one to five years. These assurance-type programs typically cannot be purchased separately and do not meet the criteria to be considered a performance obligation.
U.S. Government Contracts
Our contracts with the U.S. Government generally include the design, development, manufacture or modification of aerospace and defense products as well as related services. These contracts, which also include those under the U.S. Government-sponsored foreign military sales program, accounted for approximately 24% of total revenues in 2018. The customer typically contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability, which often results in the delivery of multiple units. Accordingly, the entire contract is accounted for as one performance obligation. In certain circumstances, a contract may include both production and support services, such as logistics and parts plans, which are considered to be distinct in the context of the contract and represent separate performance obligations. When a contract is separated into more than one performance obligation, we generally utilize the expected cost plus a margin approach to determine the standalone selling prices when allocating the transaction price.
Our contracts are frequently modified for changes in contract specifications and requirements. Most of our contract modifications with the U.S. Government are for goods and services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as part of that existing contract. The effect of these contract modifications on our estimates is recognized using the cumulative catch-up method of accounting.
Contracts with the U.S. Government generally contain clauses that provide lien rights to work-in-process along with clauses that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work-in-process. Due to the continuous transfer of control to the U.S. Government, we recognize revenue over the time that we perform under the contract. Selecting the method to measure progress towards completion requires judgment and is based on the nature of the products or service to be provided. We generally use the cost-to-cost method to measure progress for our contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts. Under this measure, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and revenue is recorded proportionally as costs are incurred.
The transaction price for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding variable consideration as applicable. Certain of our long-term contracts contain incentive fees or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance, historical performance, and all other information that is reasonably available to us.
Total contract cost is estimated utilizing current contract specifications and expected engineering requirements. 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 review and update our projections of costs quarterly or more frequently when circumstances significantly change.
Approximately 80% of our 2018 revenues with the U.S. Government were under fixed-price and fixed-price incentive contracts. Under the typical payment terms of these contracts, the customer pays us either performance-based or progress payments. Performance-based payments represent interim payments of up to 90% of the contract price based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments of up to 80% of costs incurred as the work progresses. Because the customer retains a small portion of the contract price until completion of the contract, these contracts generally result in revenue recognized in excess of billings, which we present as contract assets in the Consolidated Balance Sheets. Amounts billed and due from our customers are classified in Accounts receivable, net. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer. For cost-type contracts, we are generally paid for our actual costs incurred within a short period of time.
Revenue Recognition for 2017 and 2016
Prior to the adoption of ASC 606 in 2018, we generally recognized revenue for the sale of products, which were 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. When a sale arrangement involved multiple deliverables, such as sales of products that include customization and other services, we evaluated the arrangement to determine whether there were separate items that were required to be delivered under the arrangement that qualify as separate units of accounting. These arrangements typically involved 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. The aircraft and the customization services were considered to be separate units of accounting and we allocated contract price between the two on a relative selling price basis using the best evidence of selling price for each of the deliverables, typically by reference to the price charged when the same or similar items were sold separately by us. We also considered any performance, cancellation, termination or refund-type provisions. Revenue was then recognized when the recognition criteria for each unit of accounting was met. Taxes collected from customers and remitted to government authorities are recorded on a net basis.
Revenues under long-term contracts were accounted for under the percentage-of-completion method of accounting. Under this method, we estimated profit as the difference between the total estimated revenues and cost of a contract. We then recognized 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 were recorded using the units-of-delivery method. Revenues under cost-reimbursement contracts were recorded using the cost-to-cost method. Long-term contract profits were 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 were 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 were 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 were recognized in full in the period in which the losses became 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.
Contract Estimates
For contracts where revenue is recognized over time, we recognize changes in estimated contract revenues, costs and profits using the cumulative catch-up method of accounting. This method recognizes the cumulative effect of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current period. Anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable.
In 2018, 2017 and 2016, our cumulative catch-up adjustments increased segment profit by $196 million, $5 million and $83 million, respectively, and net income by $149 million, $3 million and $52 million, respectively ($0.59, $0.01 and $0.19 per diluted share, respectively). In 2018, we recognized revenue from performance obligations satisfied in prior periods of approximately $190 million, which related to changes in profit booking rates that impacted revenue.
For 2018, 2017 and 2016, gross favorable adjustments totaled $249 million, $92 million and $106 million, respectively. The 2018 favorable adjustments included $145 million, largely related to overhead rate improvements and risk retirements associated with contracts in the Bell segment. In 2018, 2017 and 2016, gross unfavorable adjustments totaled $53 million, $87 million and $23 million, respectively. The 2017 unfavorable adjustments included $44 million related to the Tactical Armoured Patrol Vehicle program related to inefficiencies resulting from various production issues during the ramp up and subsequent production.
Contract Assets and Liabilities
Under ASC 606, contract assets arise from contracts when revenue is recognized over time and the amount of revenue recognized exceeds the amount billed to the customer. These amounts are included in contract assets until the right to payment is no longer conditional on events other than the passage of time. At December 29, 2018, contract assets are included in Other current assets in the Consolidated Balance Sheet. Contract liabilities, which are primarily included in Other current liabilities, include deposits, largely from our commercial aviation customers, and billings in excess of revenue recognized.
The incremental costs of obtaining a contract with a customer that is expected to be recovered is expensed as incurred when the period to be benefitted is one year or less.
Accounts Receivable, Net
Accounts receivable, net includes amounts billed to customers where the right to payment is unconditional. We maintain an allowance for doubtful accounts to provide for the estimated amount of accounts receivable that will not be collected, which is based on an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivable and collateral value, if any.
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.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated primarily using the straight-line method. We capitalize expenditures for improvements that increase asset values and extend useful lives. Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying value of the asset exceeds the sum of the undiscounted expected future cash flows, the asset is written down to fair value.
Goodwill and Intangible Assets
Goodwill represents the excess of the consideration paid for the acquisition of a business over the fair values assigned to intangible and other net assets of the acquired business. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to an annual impairment test. We evaluate the recoverability of these assets in the fourth quarter of each year or more frequently if events or changes in circumstances, such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate a potential impairment.
For our impairment test, we calculate the fair value of each reporting unit and indefinite-lived intangible asset primarily using discounted cash flows. A reporting unit represents the operating segment unless discrete financial information is prepared and reviewed by segment management for businesses one level below that operating segment, in which case such component is the reporting unit. In certain instances, we have aggregated components of an operating segment into a single reporting unit based on similar economic characteristics. For the goodwill impairment test, the discounted cash flows incorporate assumptions for revenue growth, operating margins and discount rates that represent our best estimates of current and forecasted market conditions, cost structure, anticipated net cost reductions, and the implied rate of return that we believe a market participant would require for an investment in a business having similar risks and characteristics to the reporting unit being assessed. If the estimated fair value of the reporting unit or indefinite-lived intangible asset exceeds the carrying value, there is no impairment. Otherwise, an impairment loss is recognized for the amount by which the carrying value exceeds the estimated fair value.
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 84% of our gross intangible assets are amortized based on the cash flow streams used to value the assets, with the remaining assets amortized using the straight-line method.
Finance Receivables
Finance receivables primarily include loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters. Finance receivables are generally recorded at the amount of outstanding principal less allowance for losses.
We maintain an allowance for losses on finance receivables at a level considered adequate to cover inherent losses in the portfolio based on management’s evaluation. For larger balance accounts specifically identified as impaired, a reserve is established based on comparing the expected future cash flows, discounted at the finance receivable’s effective interest rate, or the fair value of the underlying collateral if the finance receivable is collateral dependent, to its carrying amount. The expected future cash flows consider collateral value; financial performance and liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs associated with the repossession and eventual disposal of collateral. When there is a range of potential outcomes, we perform multiple discounted cash flow analyses and weight the potential outcomes based on their relative likelihood of occurrence. The evaluation of our portfolio is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the estimated fair value of the underlying collateral, which may differ from actual results. While our analysis is specific to each individual account, critical factors included in this analysis include industry valuation guides, age and physical condition of the collateral, payment history and existence and financial strength of guarantors.
We also establish an allowance for losses to cover probable but specifically unknown losses existing in the portfolio. This allowance is established as a percentage of non-recourse finance receivables, which have not been identified as requiring specific reserves. The percentage is based on a combination of factors, including historical loss experience, current delinquency and default trends, collateral values and both general economic and specific industry trends.
Finance receivables are charged off at the earlier of the date the collateral is repossessed or when no payment has been received for six months, unless management deems the receivable collectible. Repossessed assets are recorded at their fair value, less estimated cost to sell.
Pension and Postretirement Benefit Obligations
We maintain various pension and postretirement plans for our employees globally. These plans include significant pension and postretirement benefit obligations, which are calculated based on actuarial valuations. Key assumptions used in determining these obligations and related expenses include expected long-term rates of return on plan assets, discount rates and healthcare cost projections. We evaluate and update these assumptions annually in consultation with third-party actuaries and investment advisors. We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increases.
For our year-end measurement, our defined benefit plan assets and obligations are measured as of the month-end date closest to our fiscal year-end. We recognize the overfunded or underfunded status of our pension and postretirement plans in the Consolidated Balance Sheets and recognize changes in the funded status of our defined benefit plans in comprehensive income in the year in which they occur. Actuarial gains and losses that are not immediately recognized as net periodic pension cost are recognized as a component of other comprehensive income (loss) (OCI) and are amortized into net periodic pension cost in future periods.
Derivatives and Hedging Activities
We are exposed to market risk primarily from changes in currency exchange rates and interest rates. We do not hold or issue derivative financial instruments for trading or speculative purposes. To manage the volatility relating to our exposures, we net these exposures on a consolidated basis to take advantage of natural offsets. For the residual portion, we enter into various derivative transactions pursuant to our policies in areas such as counterparty exposure and hedging practices. Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties and through periodic settlements of positions.
All derivative instruments are reported at fair value in the Consolidated Balance Sheets. Designation to support hedge accounting is performed on a specific exposure basis. For financial instruments qualifying as cash flow hedges, we record changes in the fair value of derivatives (to the extent they are effective as hedges) in OCI, net of deferred taxes. Changes in fair value of derivatives not qualifying as hedges are recorded in earnings.
Foreign currency denominated assets and liabilities are translated into U.S. dollars. Adjustments from currency rate changes are recorded in the cumulative translation adjustment account in shareholders’ equity until the related foreign entity is sold or substantially liquidated. We use foreign currency financing transactions to effectively hedge long-term investments in foreign operations with the same corresponding currency. Foreign currency gains and losses on the hedge of the long-term investments are recorded in the cumulative translation adjustment account.
Product Liabilities
We accrue for product liability claims and related defense costs when a loss is probable and reasonably estimable. Our estimates are generally based on the specifics of each claim or incident and our best estimate of the probable loss using historical experience.
Environmental Liabilities and Asset Retirement Obligations
Liabilities for environmental matters are recorded on a site-by-site basis when it is probable that an obligation has been incurred and the cost can be reasonably estimated. We estimate our accrued environmental liabilities using currently available facts, existing technology, and presently enacted laws and regulations, all of which are subject to a number of factors and uncertainties. Our environmental liabilities are not discounted and do not take into consideration possible future insurance proceeds or significant amounts from claims against other third parties.
We have incurred asset retirement obligations primarily related to costs to remove and dispose of underground storage tanks and asbestos materials used in insulation, adhesive fillers and floor tiles. There is no legal requirement to remove these items, and there currently is no plan to remodel the related facilities or otherwise cause the impacted items to require disposal. Since these asset retirement obligations are not estimable, there is no related liability recorded in the Consolidated Balance Sheets.
Warranty Liabilities
For our assurance-type 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, length of warranty period, 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 $643 million, $634 million and $677 million in 2018, 2017 and 2016, respectively, and are included in cost of sales.
Income Taxes
The provision for income tax expense is calculated on reported Income from continuing operations before income taxes based on current tax law and includes, in the current period, the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Tax laws may require items to be included in the determination of taxable income at different times from when the items are reflected in the financial statements. Deferred tax balances reflect the effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and their tax bases, as well as from net operating losses and tax credit carryforwards, and are stated at enacted tax rates in effect for the year taxes are expected to be paid or recovered.
Deferred tax assets represent tax benefits for tax deductions or credits available in future years and require certain estimates and assumptions to determine whether it is more likely than not that all or a portion of the benefit will not be realized. The recoverability of these future tax deductions and credits is determined by assessing the adequacy of future expected taxable income from all sources, including the future reversal of existing taxable temporary differences, taxable income in carryback years, estimated future taxable income and available tax planning strategies. Should a change in facts or circumstances lead to a change in judgment about the ultimate recoverability of a deferred tax asset, we record or adjust the related valuation allowance in the period that the change in facts and circumstances occurs, along with a corresponding increase or decrease in income tax expense.
We record tax benefits for uncertain tax positions based upon management’s evaluation of the information available at the reporting date. To be recognized in the financial statements, the tax position must meet the more-likely-than-not threshold that the position will be sustained upon examination by the tax authority based on technical merits assuming the tax authority has full knowledge of all relevant information. For positions meeting this recognition threshold, the benefit is measured as the largest amount of benefit that meets the more-likely-than-not threshold to be sustained. We periodically evaluate these tax positions based on the latest available information. For tax positions that do not meet the threshold requirement, we recognize net tax-related interest and penalties for continuing operations in income tax expense.
New Accounting Standards Not Yet Adopted
Lease Accounting
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases, requiring lessees to recognize all leases with a term greater than 12 months on the balance sheet as right-of-use assets and lease liabilities. Under current accounting guidance, we are not required to recognize assets and liabilities arising from operating leases on the balance sheet. In 2018, the FASB issued additional guidance to provide an alternate transition method for adoption. Under this method, entities may record the balance sheet amounts and the cumulative effect of adopting the standard to retained earnings as of the effective date without adjustment to comparative periods. This new standard becomes effective for us at the beginning of 2019 and will be adopted using this alternate transition method.
At the adoption date, approximately $300 million of right-of-use assets and lease liabilities will be recognized related to our operating leases. The cumulative transition adjustment to retained earnings resulting from the adoption is not significant. We plan to elect the practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward the historical lease classification and allows hindsight when evaluating options within a contract, resulting in the extension of the lease term for certain of our existing leases at the adoption date. We have updated the accounting policies affected by this standard, redesigned our related internal controls over financial reporting and are expanding the disclosures to be included in our first quarter 2019 Form 10-Q to meet the new requirements. The standard has no impact on our liquidity or our debt-covenant compliance under our current agreements, and is not expected to have any significant impact on our results of operations.
Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses. For most financial assets, such as trade and other receivables, loans and other instruments, this standard changes the current incurred loss model to a forward-looking expected credit loss model, which generally will result in the earlier recognition of allowances for losses. The new standard is effective for our company at the beginning of 2020. Entities are required to apply the provisions of the standard through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of the standard on our consolidated financial statements.
Note 2. Business Disposition and Acquisitions
Disposition
On July 2, 2018, we completed the sale of the businesses that manufacture and sell the products in our Tools and Test Equipment product line within our Industrial segment to Emerson Electric Co. for net cash proceeds of $807 million. We recorded an after-tax gain of $419 million related to this disposition. The carrying amounts by major classes of assets and liabilities for this disposition are as follows:
| (In millions) | July 2, 2018 | |||||||
|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||
| Accounts receivable, net | $ | 71 | ||||||
| Inventories | 100 | |||||||
| Property, plant and equipment, net | 59 | |||||||
| Goodwill | 153 | |||||||
| Other assets | 24 | |||||||
| Total Assets | $ | 407 | ||||||
| Liabilities | ||||||||
| Accounts payable | $ | 30 | ||||||
| Other current liabilities | 25 | |||||||
| Other liabilities | 11 | |||||||
| Total Liabilities | $ | 66 |
Acquisitions
On March 6, 2017, we completed the acquisition of Arctic Cat Inc. (Arctic Cat), a publicly-held company (NASDAQ: ACAT), pursuant to a cash tender offer for $18.50 per share, followed by a short-form merger. The cash paid for this business, including repayment of debt and net of cash acquired, totaled $316 million. Arctic Cat was incorporated into our Textron Specialized Vehicles business in the Industrial segment and its operating results are included in the Consolidated Statements of Operations since the closing date. We allocated the consideration paid for this business to the assets acquired and liabilities assumed based on their fair values, and recorded $230 million in goodwill, related to expected synergies and the value of the assembled workforce, and $75 million in intangible assets.
In 2016, we paid $186 million in cash and assumed debt of $19 million to acquire six businesses, net of cash acquired and holdbacks. Our acquisition of Able Engineering and Component Services, Inc. and Able Aerospace, Inc. in the first quarter of 2016 represented the largest of these businesses and is included in the Textron Aviation segment.
Note 3. Goodwill and Intangible Assets
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 31, 2016 | $ | 613 | $ | 31 | $ | 1,087 | $ | 382 | $ | 2,113 |
| Acquisitions | — | — | — | 234 | 234 | |||||
| Foreign currency translation | 1 | — | — | 16 | 17 | |||||
| Balance at December 30, 2017 | 614 | 31 | 1,087 | 632 | 2,364 | |||||
| Disposition | — | — | — | (153) | (153) | |||||
| Acquisition | — | — | 13 | — | 13 | |||||
| Foreign currency translation | — | — | — | (6) | (6) | |||||
| Balance at December 29, 2018 | $ | 614 | $ | 31 | $ | 1,100 | $ | 473 | $ | 2,218 |
Intangible Assets
Our intangible assets are summarized below:
| December 29, 2018 | December 30, 2017 | |||||||||||||
| (Dollars in millions) | Weighted-Average Amortization Period (in years) | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||
| Patents and technology | 14 | $ | 514 | $ | (211) | $ | 303 | $ | 545 | $ | (188) | $ | 357 | |
| Trade names and trademarks | 14 | 224 | (7) | 217 | 284 | (40) | 244 | |||||||
| Customer relationships and contractual agreements | 15 | 413 | (275) | 138 | 418 | (255) | 163 | |||||||
| Other | 4 | 6 | (6) | — | 18 | (17) | 1 | |||||||
| Total | $ | 1,157 | $ | (499) | $ | 658 | $ | 1,265 | $ | (500) | $ | 765 |
In connection with the 2018 restructuring plan discussed in Note 15, we recognized intangible asset impairment charges of $38 million in the fourth quarter of 2018, which primarily included $20 million of patents and technology and $14 million of trade names and trademarks.
Trade names and trademarks in the table above include $208 million and $222 million of indefinite-lived intangible assets at December 29, 2018 and December 30, 2017, respectively. Amortization expense totaled $66 million, $69 million and $66 million in 2018, 2017 and 2016, respectively. Amortization expense is estimated to be approximately $60 million, $56 million, $54 million, $54 million and $38 million in 2019, 2020, 2021, 2022 and 2023, respectively.
Note 4. Accounts Receivable and Finance Receivables
Accounts Receivable
Accounts receivable is composed of the following:
| (In millions) | December 29, 2018 | December 30, 2017 | ||||||
|---|---|---|---|---|---|---|---|---|
| Commercial | $ | 885 | $ | 1,007 | ||||
| U.S. Government contracts | 166 | 383 | ||||||
| 1,051 | 1,390 | |||||||
| Allowance for doubtful accounts | (27) | (27) | ||||||
| Total | $ | 1,024 | $ | 1,363 |
Upon adoption of ASC 606, unbilled receivables, primarily related to U.S. Government contracts, totaling $203 million were reclassified from accounts receivable to contract assets or contract liabilities based on the net position of the contract as discussed in Note 12. In addition, $71 million of accounts receivable, net were sold in the third quarter of 2018 as a result of a business disposition as disclosed in Note 2.
Finance Receivables
Finance receivables are presented in the following table:
| (In millions) | December 29, 2018 | December 30, 2017 | ||||||
|---|---|---|---|---|---|---|---|---|
| Finance receivables | $ | 789 | $ | 850 | ||||
| Allowance for losses | (29) | (31) | ||||||
| Total finance receivables, net | $ | 760 | $ | 819 |
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 twelve years, amortization terms ranging from eight to fifteen years and an average balance of $1 million at December 29, 2018. Loans generally require the customer to pay a significant down payment, along with periodic scheduled principal payments that reduce the outstanding balance through the term of the loan.
Our finance receivables are diversified across geographic region and borrower industry. At December 29, 2018, 59% of our finance receivables were distributed internationally and 41% throughout the U.S., compared with 56% and 44%, respectively, at December 30, 2017. At December 29, 2018 and December 30, 2017, finance receivables of $201 million and $257 million, respectively, have been pledged as collateral for TFC’s debt of $119 million and $175 million, respectively.
Finance Receivable Portfolio Quality
We internally assess the quality of our finance receivables based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors. Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan. These three categories are performing, watchlist and nonaccrual.
We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful. Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain. All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing.
We measure delinquency based on the contractual payment terms of our finance receivables. In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.
Finance receivables categorized based on the credit quality indicators and by delinquency aging category are summarized as follows:
| (Dollars in millions) | December 29, 2018 | December 30, 2017 | ||||||
|---|---|---|---|---|---|---|---|---|
| Performing | $ | 704 | $ | 733 | ||||
| Watchlist | 45 | 56 | ||||||
| Nonaccrual | 40 | 61 | ||||||
| Nonaccrual as a percentage of finance receivables | 5.07% | 7.18% | ||||||
| Less than 31 days past due | $ | 719 | $ | 791 | ||||
| 31-60 days past due | 56 | 25 | ||||||
| 61-90 days past due | 5 | 14 | ||||||
| Over 90 days past due | 9 | 20 | ||||||
| 60+ days contractual delinquency as a percentage of finance receivables | 1.77% | 4.00% |
On a quarterly basis, we evaluate individual larger balance accounts for impairment. A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators described above. Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified. If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification.
A summary of impaired finance receivables, excluding leveraged leases, and the average recorded investment is provided below:
| (In millions) | December 29, 2018 | December 30, 2017 | ||||||
|---|---|---|---|---|---|---|---|---|
| Recorded investment: | ||||||||
| Impaired loans with related allowance for losses | $ | 15 | $ | 24 | ||||
| Impaired loans with no related allowance for losses | 43 | 70 | ||||||
| Total | $ | 58 | $ | 94 | ||||
| Unpaid principal balance | $ | 67 | $ | 106 | ||||
| Allowance for losses on impaired loans | 5 | 6 | ||||||
| Average recorded investment | 61 | 92 |
A summary of the allowance for losses on finance receivables based on how the underlying finance receivables are evaluated for impairment, is provided below. The finance receivables reported in this table specifically exclude $101 million and $98 million of leveraged leases at December 29, 2018 and December 30, 2017, respectively, in accordance with U.S. generally accepted accounting principles.
| (In millions) | December 29, 2018 | December 30, 2017 | ||||||
|---|---|---|---|---|---|---|---|---|
| Allowance based on collective evaluation | $ | 24 | $ | 25 | ||||
| Allowance based on individual evaluation | 5 | 6 | ||||||
| Finance receivables evaluated collectively | 630 | 658 | ||||||
| Finance receivables evaluated individually | 58 | 94 |
Note 5. Inventories
Inventories are composed of the following:
| (In millions) | December 29, 2018 | December 30, 2017 | ||||||
|---|---|---|---|---|---|---|---|---|
| Finished goods | $ | 1,662 | $ | 1,790 | ||||
| Work in process | 1,356 | 2,238 | ||||||
| Raw materials and components | 800 | 804 | ||||||
| 3,818 | 4,832 | |||||||
| Progress payments | — | (682) | ||||||
| Total | $ | 3,818 | $ | 4,150 |
Upon adoption of ASC 606, $199 million of inventories, net of progress payments, primarily related to our U.S. Government contracts, were reclassified from inventories to contract assets or contract liabilities based on the net position of the contract as discussed in Note 12. In addition, $100 million of inventories were sold in the third quarter of 2018 as a result of a business disposition as disclosed in Note 2.
Inventories valued by the LIFO method totaled $2.2 billion at both December 29, 2018 and December 30, 2017, respectively, and the carrying values of these inventories would have been higher by approximately $457 million and $452 million, respectively, had our LIFO inventories been valued at current costs.
Note 6. Property, Plant and Equipment, Net
Our Manufacturing group’s property, plant and equipment, net is composed of the following:
| (Dollars in millions) | Useful Lives (in years) | December 29, 2018 | December 30, 2017 | |||||
|---|---|---|---|---|---|---|---|---|
| Land, buildings and improvements | 3 – 40 | $ | 1,927 | $ | 1,948 | |||
| Machinery and equipment | 1 – 20 | 4,891 | 4,893 | |||||
| 6,818 | 6,841 | |||||||
| Accumulated depreciation and amortization | (4,203) | (4,120) | ||||||
| Total | $ | 2,615 | $ | 2,721 |
At December 29, 2018 and December 30, 2017, assets under capital leases totaled $168 million and $176 million, respectively, and had accumulated amortization of $47 million and $46 million, respectively. The Manufacturing group’s depreciation expense, which included amortization expense on capital leases, totaled $358 million, $362 million and $368 million in 2018, 2017 and 2016, respectively.
Note 7. Other Current Liabilities
The other current liabilities of our Manufacturing group are summarized below:
| (In millions) | December 29, 2018 | December 30, 2017 | ||||||
|---|---|---|---|---|---|---|---|---|
| Contract liabilities | $ | 876 | $ | — | ||||
| Customer deposits | — | 1,007 | ||||||
| Salaries, wages and employer taxes | 381 | 329 | ||||||
| Current portion of warranty and product maintenance liabilities | 177 | 190 | ||||||
| Other | 715 | 915 | ||||||
| Total | $ | 2,149 | $ | 2,441 |
Upon adoption of ASC 606, we reclassified customer deposits and certain other current liabilities totaling $1,166 million to contract liabilities or contract assets based on the net position of the contract as discussed in Note 12.
Changes in our warranty liability are as follows:
| (In millions) | 2018 | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|---|
| Balance at beginning of year | $ | 164 | $ | 138 | $ | 143 | ||
| Provision | 72 | 81 | 79 | |||||
| Settlements | (78) | (69) | (70) | |||||
| Acquisitions | 1 | 35 | 2 | |||||
| Adjustments* | (10) | (21) | (16) | |||||
| Balance at end of year | $ | 149 | $ | 164 | $ | 138 |
* Adjustments include changes to prior year estimates, new issues on prior year sales, business dispositions and currency translation adjustments.
Note 8. Debt and Credit Facilities
Our debt is summarized in the table below:
| (In millions) | December 29, 2018 | December 30, 2017 | ||||||
|---|---|---|---|---|---|---|---|---|
| Manufacturing group | ||||||||
| 7.25% due 2019 | $ | 250 | $ | 250 | ||||
| 6.625% due 2020 | 190 | 201 | ||||||
| Variable-rate notes due 2020 (3.17% and 1.96%, respectively) | 350 | 350 | ||||||
| 3.65% due 2021 | 250 | 250 | ||||||
| 5.95% due 2021 | 250 | 250 | ||||||
| 4.30% due 2024 | 350 | 350 | ||||||
| 3.875% due 2025 | 350 | 350 | ||||||
| 4.00% due 2026 | 350 | 350 | ||||||
| 3.65% due 2027 | 350 | 350 | ||||||
| 3.375% due 2028 | 300 | 300 | ||||||
| Other (weighted-average rate of 2.63% and 3.04%, respectively) | 76 | 87 | ||||||
| Total Manufacturing group debt | $ | 3,066 | $ | 3,088 | ||||
| Less: Short-term debt and current portion of long-term debt | (258) | (14) | ||||||
| Total Long-term debt | $ | 2,808 | $ | 3,074 | ||||
| Finance group | ||||||||
| 2.26% note due 2019 | $ | 150 | $ | 150 | ||||
| Variable-rate note due 2020 (3.57% and 2.38%, respectively) | 150 | 200 | ||||||
| Fixed-rate notes due 2018-2028 (weighted-average rate of 3.17% and 3.15%, respectively) (a) (b) | 84 | 131 | ||||||
| Variable-rate notes due 2018-2027 (weighted-average rate of 3.99% and 2.99%, respectively) (a) (b) | 35 | 44 | ||||||
| Fixed-to-Floating Rate Junior Subordinated Notes (4.35% and 3.15%, respectively) | 299 | 299 | ||||||
| Total Finance group debt | $ | 718 | $ | 824 |
(a) Notes amortize on a quarterly or semi-annual basis.
(b) Notes are secured by finance receivables as described in Note 4_._
The following table shows required payments during the next five years on debt outstanding at December 29, 2018:
| (In millions) | 2019 | 2020 | 2021 | 2022 | 2023 | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| Manufacturing group | $ | 258 | $ | 552 | $ | 507 | $ | 7 | $ | 7 |
| Finance group | 167 | 172 | 18 | 18 | 19 | |||||
| Total | $ | 425 | $ | 724 | $ | 525 | $ | 25 | $ | 26 |
Textron has a senior unsecured revolving credit facility that expires in September 2021 for an aggregate principal amount of $1.0 billion, of which up to $100 million is available for the issuance of letters of credit. At December 29, 2018, there were no amounts borrowed against the facility and there were $10 million of letters of credit issued against it.
Fixed-to-Floating Rate Junior Subordinated Notes
The Finance group’s $299 million of 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 at any time and we are obligated to redeem the notes beginning on February 15, 2042. Interest on the notes was fixed at 6% through February 15, 2017 and is now variable at the three-month London Interbank Offered Rate + 1.735%.
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 2018, 2017 and 2016 to maintain compliance with the support agreement.
Note 9. Derivative Instruments and Fair Value Measurements
We measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We prioritize the assumptions that market participants would use in pricing the asset or liability into a three-tier fair value hierarchy. This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exist, requiring companies to develop their own assumptions. Observable inputs that do not meet the criteria of Level 1, which include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, are categorized as Level 2. Level 3 inputs are those that reflect our estimates about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are utilized only to the extent that observable inputs are not available or cost effective to obtain.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
We manufacture and sell our products in a number of countries throughout the world, and, therefore, we are exposed to movements in foreign currency exchange rates. We primarily utilize foreign currency exchange contracts with maturities of no more than three years to manage this volatility. These contracts qualify as cash flow hedges and are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses. Net gains and losses recognized in earnings and Accumulated other comprehensive loss on cash flow hedges, including gains and losses related to hedge ineffectiveness, were not significant in the periods presented.
Our foreign currency exchange contracts are measured at fair value using the market method valuation technique. The inputs to this technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data providers. These are observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions so they are classified as Level 2. At December 29, 2018 and December 30, 2017, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $379 million and $426 million, respectively. At December 29, 2018, the fair value amounts of our foreign currency exchange contracts were a $2 million asset and a $10 million liability. At December 30, 2017, the fair value amounts of our foreign currency exchange contracts were a $13 million asset and a $7 million liability.
We hedge our net investment position in certain major currencies and generate foreign currency interest payments that offset other transactional exposures in these currencies. To accomplish this, we borrow directly in the foreign currency and designate a portion of the debt as a hedge of the net investment. We record changes in the fair value of these contracts in other comprehensive income to the extent they are effective as cash flow hedges. Currency effects on the effective portion of these hedges, which are reflected in the foreign currency translation adjustments within Accumulated other comprehensive loss, were not significant in the periods presented.
Assets and Liabilities Not Recorded at Fair Value
The carrying value and estimated fair value of our financial instruments that are not reflected in the financial statements at fair value are as follows:
| December 29, 2018 | December 30, 2017 | |||||||
|---|---|---|---|---|---|---|---|---|
| (In millions) | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | ||||
| Manufacturing group | ||||||||
| Debt, excluding leases | $ | (2,996) | $ | (2,971) | $ | (3,007) | $ | (3,136) |
| Finance group | ||||||||
| Finance receivables, excluding leases | 582 | 584 | 643 | 675 | ||||
| Debt | (718) | (640) | (824) | (799) |
Fair value for the Manufacturing group debt is determined using market observable data for similar transactions (Level 2). The fair value for the Finance group debt was determined primarily based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations (Level 2). Fair value estimates for finance receivables were determined based on internally developed discounted cash flow models primarily utilizing significant unobservable inputs (Level 3), which include estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and expectations of borrowers’ ability to make payments on a timely basis.
Note 10. 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 is presented below:
| (In thousands) | 2018 | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|---|
| Balance at beginning of year | 261,471 | 270,287 | 274,228 | |||||
| Share repurchases | (29,094) | (11,917) | (6,898) | |||||
| Share-based compensation activity | 3,244 | 3,101 | 2,957 | |||||
| Balance at end of year | 235,621 | 261,471 | 270,287 |
Earnings Per Share
We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period. Basic EPS is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends. Diluted EPS considers the dilutive effect of all potential future common stock, including stock options.
The weighted-average shares outstanding for basic and diluted EPS are as follows:
| (In thousands) | 2018 | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|---|
| Basic weighted-average shares outstanding | 250,196 | 266,380 | 270,774 | |||||
| Dilutive effect of stock options | 3,041 | 2,370 | 1,591 | |||||
| Diluted weighted-average shares outstanding | 253,237 | 268,750 | 272,365 |
In 2018, 2017 and 2016, stock options to purchase 1.3 million, 1.6 million and 2.0 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 Gains (Losses) on Hedge Contracts | Accumulated Other Comprehensive Loss | ||||
|---|---|---|---|---|---|---|---|---|
| Balance at December 31, 2016 | $ | (1,505) | $ | (96) | $ | (4) | $ | (1,605) |
| Other comprehensive income before reclassifications | 16 | 107 | 8 | 131 | ||||
| Reclassified from Accumulated other comprehensive loss | 93 | — | 6 | 99 | ||||
| Balance at December 30, 2017 | $ | (1,396) | $ | 11 | $ | 10 | $ | (1,375) |
| Other comprehensive income before reclassifications | (198) | (49) | (8) | (255) | ||||
| Reclassified from Accumulated other comprehensive loss | 124 | 6 | (5) | 125 | ||||
| Reclassification of stranded tax effects | (257) | — | — | (257) | ||||
| Balance at December 29, 2018 | $ | (1,727) | $ | (32) | $ | (3) | $ | (1,762) |
In 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows entities to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from accumulated other comprehensive loss to retained earnings. The stranded tax effects are comprised of the tax amounts included in accumulated other comprehensive loss at the previous U.S. federal corporate tax rate of 35%, for which the related deferred tax asset or liability was remeasured at the new U.S. federal corporate tax rate of 21% in the fourth quarter of 2017. We elected to early adopt this standard in the fourth quarter of 2018, which resulted in an increase to accumulated other comprehensive loss of $257 million, with an offsetting increase to retained earnings.
Other Comprehensive Income (Loss)
The before and after-tax components of other comprehensive income (loss) are presented below
| 2018 | 2017 | 2016 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (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) | $ | (248) | $ | 58 | $ | (190) | $ | 18 | $ | (1) | $ | 17 | $ | (382) | $ | 135 | $ | (247) | |||
| Amortization of net actuarial loss* | 152 | (35) | 117 | 136 | (48) | 88 | 104 | (39) | 65 | ||||||||||||
| Amortization of prior service cost (credit)* | 9 | (2) | 7 | 7 | (2) | 5 | (7) | 4 | (3) | ||||||||||||
| Recognition of prior service credit (cost) | (20) | 5 | (15) | (1) | — | (1) | 12 | (5) | 7 | ||||||||||||
| Business disposition | 7 | — | 7 | — | — | — | — | — | — | ||||||||||||
| Pension and postretirement benefits adjustments, net | (100) | 26 | (74) | 160 | (51) | 109 | (273) | 95 | (178) | ||||||||||||
| Foreign currency translation adjustments: | |||||||||||||||||||||
| Foreign currency translation adjustments | (46) | (3) | (49) | 100 | 7 | 107 | (36) | (13) | (49) | ||||||||||||
| Business disposition | 6 | — | 6 | — | — | — | — | — | — | ||||||||||||
| Foreign currency translation adjustments, net | (40) | (3) | (43) | 100 | 7 | 107 | (36) | (13) | (49) | ||||||||||||
| Deferred gains (losses) on hedge contracts: | |||||||||||||||||||||
| Current deferrals | (8) | — | (8) | 10 | (2) | 8 | 11 | (4) | 7 | ||||||||||||
| Reclassification adjustments | (7) | 2 | (5) | 7 | (1) | 6 | 17 | (4) | 13 | ||||||||||||
| Deferred gains (losses) on hedge contracts, net | (15) | 2 | (13) | 17 | (3) | 14 | 28 | (8) | 20 | ||||||||||||
| Total | $ | (155) | $ | 25 | $ | (130) | $ | 277 | $ | (47) | $ | 230 | $ | (281) | $ | 74 | $ | (207) | |||
*These components of other comprehensive income (loss) are included in the computation of net periodic pension cost. See Note 14 for additional information.
Note 11. 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 and Caravan turboprop aircraft, piston engine aircraft, military turboprop aircraft, and aftermarket part 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 and emergency medical helicopter operators, and foreign governments.
Textron Systems products include unmanned aircraft systems, marine and land systems, 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 and advanced fuel systems including pressurized fuel tanks for hybrid applications, clear-vision systems, selective catalytic reduction systems, cast iron engine components and other fuel system components that are marketed primarily to automobile OEMs, as well as plastic bottles and containers for various uses; and
· Specialized Vehicles products include golf cars, off-road utility vehicles, recreational side-by-side and all-terrain vehicles, snowmobiles, light transportation vehicles, aviation ground support equipment, professional turf-maintenance equipment and turf-care vehicles that are marketed primarily to golf courses and resorts, government agencies and municipalities, consumers, and commercial and industrial users.
On July 2, 2018, we sold our Tools and Test Equipment businesses that were previously included in the Industrial segment as discussed in Note 2.
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, gains/losses on major business dispositions and special charges. The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense.
Our revenues by segment, along with a reconciliation of segment profit to income from continuing operations before income taxes, are as follows:
| Revenues | Segment Profit | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||
| Textron Aviation | $ | 4,971 | $ | 4,686 | $ | 4,921 | $ | 445 | $ | 303 | $ | 389 |
| Bell | 3,180 | 3,317 | 3,239 | 425 | 415 | 386 | ||||||
| Textron Systems | 1,464 | 1,840 | 1,756 | 156 | 139 | 186 | ||||||
| Industrial | 4,291 | 4,286 | 3,794 | 218 | 290 | 329 | ||||||
| Finance | 66 | 69 | 78 | 23 | 22 | 19 | ||||||
| Total | $ | 13,972 | $ | 14,198 | $ | 13,788 | $ | 1,267 | $ | 1,169 | $ | 1,309 |
| Corporate expenses and other, net | (119) | (132) | (172) | |||||||||
| Interest expense, net for Manufacturing group | (135) | (145) | (138) | |||||||||
| Special charges | (73) | (130) | (123) | |||||||||
| Gain on business disposition | 444 | — | — | |||||||||
| Income from continuing operations before income taxes | $ | 1,384 | $ | 762 | $ | 876 |
Other information by segment is provided below:
| Assets | Capital Expenditures | Depreciation and Amortization | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | December 29, 2018 | December 30, 2017 | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||
| Textron Aviation | $ | 4,290 | $ | 4,403 | $ | 132 | $ | 128 | $ | 157 | $ | 145 | $ | 139 | $ | 140 |
| Bell | 2,652 | 2,660 | 65 | 73 | 86 | 108 | 117 | 132 | ||||||||
| Textron Systems | 2,254 | 2,330 | 39 | 60 | 71 | 54 | 65 | 75 | ||||||||
| Industrial | 2,815 | 3,360 | 132 | 158 | 121 | 112 | 105 | 81 | ||||||||
| Finance | 1,017 | 1,169 | — | — | — | 8 | 12 | 12 | ||||||||
| Corporate | 1,236 | 1,418 | 1 | 4 | 11 | 10 | 9 | 9 | ||||||||
| Total | $ | 14,264 | $ | 15,340 | $ | 369 | $ | 423 | $ | 446 | $ | 437 | $ | 447 | $ | 449 |
Geographic Data
Presented below is selected financial information of our continuing operations by geographic area:
| Revenues* | Property, Plant and Equipment, net** | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2018 | 2017 | 2016 | December 29, 2018 | December 30, 2017 | |||||||
| United States | $ | 8,667 | $ | 8,786 | $ | 8,574 | $ | 2,115 | $ | 2,172 | ||
| Europe | 2,187 | 1,962 | 1,954 | 267 | 328 | |||||||
| Asia and Australia | 1,253 | 1,206 | 998 | 88 | 84 | |||||||
| Other international | 1,865 | 2,244 | 2,262 | 145 | 137 | |||||||
| Total | $ | 13,972 | $ | 14,198 | $ | 13,788 | $ | 2,615 | $ | 2,721 |
* Revenues are attributed to countries based on the location of the customer.
** Property, plant and equipment, net is based on the location of the asset.
Note 12. Revenues
Disaggregation of Revenues
Our revenues disaggregated by major product type are presented below:
| (In millions) | 2018 | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|---|
| Aircraft | $ | 3,435 | $ | 3,112 | $ | 3,412 | ||
| Aftermarket parts and services | 1,536 | 1,574 | 1,509 | |||||
| Textron Aviation | 4,971 | 4,686 | 4,921 | |||||
| Military aircraft and support programs | 2,030 | 2,076 | 2,087 | |||||
| Commercial helicopters, parts and services | 1,150 | 1,241 | 1,152 | |||||
| Bell | 3,180 | 3,317 | 3,239 | |||||
| Unmanned systems | 612 | 714 | 763 | |||||
| Marine and land systems | 311 | 470 | 294 | |||||
| Simulation, training and other | 541 | 656 | 699 | |||||
| Textron Systems | 1,464 | 1,840 | 1,756 | |||||
| Fuel systems and functional components | 2,352 | 2,330 | 2,273 | |||||
| Specialized vehicles | 1,691 | 1,486 | 1,080 | |||||
| Tools and test equipment | 248 | 470 | 441 | |||||
| Industrial | 4,291 | 4,286 | 3,794 | |||||
| Finance | 66 | 69 | 78 | |||||
| Total revenues | $ | 13,972 | $ | 14,198 | $ | 13,788 |
Our 2018 revenues for our segments by customer type and geographic location are presented below:
| (In millions) | Textron Aviation | Bell | Textron Systems | Industrial | Finance | Total | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Customer type: | ||||||||||||
| Commercial | $ | 4,734 | $ | 1,114 | $ | 431 | $ | 4,277 | $ | 66 | $ | 10,622 |
| U.S. Government | 237 | 2,066 | 1,033 | 14 | — | 3,350 | ||||||
| Total revenues | $ | 4,971 | $ | 3,180 | $ | 1,464 | $ | 4,291 | $ | 66 | $ | 13,972 |
| Geographic location: | ||||||||||||
| United States | $ | 3,379 | $ | 2,186 | $ | 1,118 | $ | 1,957 | $ | 27 | $ | 8,667 |
| Europe | 612 | 162 | 74 | 1,333 | 6 | 2,187 | ||||||
| Asia and Australia | 336 | 427 | 127 | 357 | 6 | 1,253 | ||||||
| Other international | 644 | 405 | 145 | 644 | 27 | 1,865 | ||||||
| Total revenues | $ | 4,971 | $ | 3,180 | $ | 1,464 | $ | 4,291 | $ | 66 | $ | 13,972 |
In 2017 and 2016, our revenues included sales to the U.S. Government of approximately $3.1 billion and $3.4 billion, respectively, primarily in the Bell and Textron Systems segments.
Remaining Performance Obligations
Our remaining performance obligations, which is the equivalent of our backlog, represent the expected transaction price allocated to our contracts that we expect to recognize as revenue in future periods when we perform under the contracts. These remaining obligations exclude unexercised contract options and potential orders under ordering-type contracts such as Indefinite Delivery, Indefinite Quantity contracts. At December 29, 2018, we had $9.1 billion in remaining performance obligations of which we expect to recognize revenues of approximately 75% through 2020, an additional 14% through 2022, and the balance thereafter.
Contract Assets and Liabilities
Assets and liabilities related to our contracts with customers are reported on a contract-by-contract basis at the end of each reporting period. At December 29, 2018, contract assets and contract liabilities totaled $461 million and $974 million, respectively. Upon adoption of ASC 606 on December 31, 2017, contract assets and contract liabilities related to our contracts with customers were $429 million and $1.0 billion, respectively. During 2018, we recognized $817 million in revenues that were included in the contract liability balance at the adoption date.
Reconciliation of ASC 606 to Prior Accounting Standards
The amount by which each financial statement line item is affected in 2018 as a result of applying the new accounting standard as discussed in Note 1 is presented below:
| December 29, 2018 | ||||||||
|---|---|---|---|---|---|---|---|---|
| (In millions) | As Reported | Effect of the adoption of ASC 606 | Under Prior Accounting | |||||
| Consolidated Balance Sheets | ||||||||
| Accounts receivable, net | $ | 1,024 | $ | 219 | $ | 1,243 | ||
| Inventories | 3,818 | 228 | 4,046 | |||||
| Other current assets | 785 | (454) | 331 | |||||
| Property, plant and equipment, net | 2,615 | 6 | 2,621 | |||||
| Other assets | 1,800 | 36 | 1,836 | |||||
| Total Manufacturing group assets | 13,247 | 35 | 13,282 | |||||
| Total assets | 14,264 | 35 | 14,299 | |||||
| Other current liabilities | 2,149 | 145 | 2,294 | |||||
| Total Manufacturing group liabilities | 8,246 | 145 | 8,391 | |||||
| Total liabilities | 9,072 | 145 | 9,217 | |||||
| Retained earnings | 5,407 | (110) | 5,297 | |||||
| Total shareholders’ equity | 5,192 | (110) | 5,082 |
| 2018 | ||||||||
|---|---|---|---|---|---|---|---|---|
| (In millions, except per share amounts) | As Reported | Effect of the adoption of ASC 606 | Under Prior Accounting | |||||
| Consolidated Statements of Operations | ||||||||
| Manufacturing revenues | $ | 13,906 | $ | (201) | $ | 13,705 | ||
| Total revenues | 13,972 | (201) | 13,771 | |||||
| Cost of sales | 11,594 | (174) | 11,420 | |||||
| Income from continuing operations before income taxes | 1,384 | (27) | 1,357 | |||||
| Income tax expense | 162 | (7) | 155 | |||||
| Income from continuing operations | 1,222 | (20) | 1,202 | |||||
| Net income | 1,222 | (20) | 1,202 | |||||
| Basic earnings per share - continuing operations | $ | 4.88 | $ | (0.08) | $ | 4.80 | ||
| Diluted earnings per share - continuing operations | 4.83 | (0.08) | 4.75 | |||||
| Consolidated Statements of Comprehensive Income | ||||||||
| Other comprehensive loss | $ | (130) | $ | (20) | $ | (150) | ||
| Comprehensive income | 1,092 | (20) | 1,072 | |||||
| Consolidated Statements of Cash flows | ||||||||
| Net income | $ | 1,222 | $ | (20) | $ | 1,202 | ||
| Income from continuing operations | 1,222 | (20) | 1,202 | |||||
| Deferred income taxes | 49 | (7) | 42 | |||||
| Accounts receivable, net | 50 | (16) | 34 | |||||
| Inventories | 41 | (50) | (9) | |||||
| Other assets | (88) | 34 | (54) | |||||
| Other liabilities | (223) | 59 | (164) | |||||
| Net cash provided by operating activities of continuing operations | 1,109 | — | 1,109 |
Note 13. Share-Based Compensation
Under our 2015 Long-Term Incentive Plan (Plan), which replaced our 2007 Long-Term Incentive Plan in April 2015, we have authorization to provide 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. For 2018, 2017 and 2016, the awards granted under this Plan primarily included stock options, restricted stock units and performance share units.
Through our Deferred Income Plan for Textron Executives, we provide certain executives the opportunity to voluntarily defer up to 80% of their base salary, along with incentive compensation. Elective deferrals may be put into either a stock unit account or an interest-bearing account. Participants cannot move amounts between the two accounts while actively employed by us and cannot receive distributions until termination of employment. The intrinsic value of amounts paid under this deferred income plan was not significant in 2018, 2017 and 2016.
Share-based compensation costs are reflected primarily in selling and administrative expense. Compensation expense included in net income for our share-based compensation plans is as follows:
| (In millions) | 2018 | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|---|
| Compensation expense | $ | 35 | $ | 77 | $ | 71 | ||
| Income tax benefit | (8) | (28) | (26) | |||||
| Total net compensation expense included in net income | $ | 27 | $ | 49 | $ | 45 |
Compensation cost for awards subject only to service conditions that vest ratably are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. As of December 29, 2018, we had not recognized $30 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. In 2018, 2017 and 2016, compensation expense included $23 million, $20 million and $20 million, respectively, from 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:
| 2018 | 2017 | 2016 | ||||||
|---|---|---|---|---|---|---|---|---|
| Fair value of options at grant date | $ | 15.83 | $ | 13.80 | $ | 10.33 | ||
| Dividend yield | 0.1% | 0.2% | 0.2% | |||||
| Expected volatility | 26.6% | 29.2% | 33.6% | |||||
| Risk-free interest rate | 2.6% | 1.9% | 1.2% | |||||
| Expected term (in years) | 4.7 | 4.7 | 4.8 |
The stock option activity during 2018 is provided below:
| (Options in thousands) | Number of Options | Weighted- Average Exercise Price | ||||||
|---|---|---|---|---|---|---|---|---|
| Outstanding at beginning of year | 9,238 | $ | 37.02 | |||||
| Granted | 1,353 | 58.22 | ||||||
| Exercised | (2,098) | (35.30) | ||||||
| Forfeited or expired | (209) | (50.49) | ||||||
| Outstanding at end of year | 8,284 | $ | 40.58 | |||||
| Exercisable at end of year | 5,391 | $ | 34.95 |
At December 29, 2018, our outstanding options had an aggregate intrinsic value of $66 million and a weighted-average remaining contractual life of six years. Our exercisable options had an aggregate intrinsic value of $60 million and a weighted-average remaining contractual life of five years at December 29, 2018. The total intrinsic value of options exercised during 2018, 2017 and 2016 was $62 million, $29 million and $15 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.
The 2018 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 | 668 | $ | 40.55 | 1,263 | $ | 40.75 | ||
| Granted | 130 | 58.17 | 270 | 58.24 | ||||
| Vested | (177) | (37.02) | (311) | (37.40) | ||||
| Forfeited | (23) | (45.83) | (79) | (45.40) | ||||
| Outstanding at end of year, nonvested | 598 | $ | 45.22 | 1,143 | $ | 45.48 |
The fair value of the restricted stock unit awards that vested and/or amounts paid under these awards is as follows:
| (In millions) | 2018 | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|---|
| Fair value of awards vested | $ | 25 | $ | 27 | $ | 20 | ||
| Cash paid | 18 | 19 | 12 |
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 2018 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 | 485 | $ | 41.34 | |||||
| Granted | 201 | 58.02 | ||||||
| Vested | (257) | (34.50) | ||||||
| Forfeited | (25) | (46.74) | ||||||
| Outstanding at end of year, nonvested | 404 | $ | 53.63 |
The fair value of the performance share units that vested and/or amounts paid under these awards is as follows:
| (In millions) | 2018 | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|---|
| Fair value of awards vested | $ | 12 | $ | 15 | $ | 14 | ||
| Cash paid | 11 | 15 | 13 |
Note 14. Retirement Plans
Our defined benefit and 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 $125 million, $123 million and $110 million in 2018, 2017 and 2016, respectively, which included $13 million, $13 million and $10 million, respectively, in contributions to the RAP. We also provide postretirement benefits other than pensions for certain retired employees in the U.S. that include healthcare, dental care, Medicare Part B reimbursement and life insurance.
Periodic Benefit Cost (Credit)
The components of net periodic benefit cost (credit) and other amounts recognized in OCI are as follows:
| Pension Benefits | Postretirement Benefits Other than Pensions | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||
| Net periodic benefit cost (credit) | ||||||||||||
| Service cost | $ | 104 | $ | 100 | $ | 98 | $ | 3 | $ | 3 | $ | 3 |
| Interest cost | 306 | 323 | 338 | 10 | 12 | 16 | ||||||
| Expected return on plan assets | (553) | (507) | (490) | — | — | — | ||||||
| Amortization of prior service cost (credit) | 15 | 15 | 15 | (6) | (8) | (22) | ||||||
| Amortization of net actuarial loss (gain) | 153 | 137 | 104 | (1) | (1) | — | ||||||
| Net periodic benefit cost (credit) | $ | 25 | $ | 68 | $ | 65 | $ | 6 | $ | 6 | $ | (3) |
| Other changes in plan assets and benefit obligations recognized in OCI | ||||||||||||
| Current year actuarial loss (gain) | $ | 270 | $ | (11) | $ | 399 | $ | (22) | $ | (7) | $ | (17) |
| Current year prior service cost (credit) | 20 | 1 | — | — | — | (12) | ||||||
| Amortization of net actuarial gain (loss) | (153) | (137) | (104) | 1 | 1 | — | ||||||
| Amortization of prior service credit (cost) | (15) | (15) | (15) | 6 | 8 | 22 | ||||||
| Business disposition | (7) | — | — | — | — | — | ||||||
| Total recognized in OCI, before taxes | $ | 115 | $ | (162) | $ | 280 | $ | (15) | $ | 2 | $ | (7) |
| Total recognized in net periodic benefit cost (credit) and OCI | $ | 140 | $ | (94) | $ | 345 | $ | (9) | $ | 8 | $ | (10) |
In the first quarter of 2018, we adopted ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This standard requires companies to present only the service cost component of net periodic benefit cost in operating income in the same line as other compensation costs arising from services rendered by the pertinent employees during the period. The other non-service components of net periodic benefit cost must be presented separately from service cost and excluded from operating income. In addition, only the service cost component is eligible for capitalization into inventory. The change in the amount capitalized into inventory was applied prospectively. Using a practical expedient, the other non-service components of net periodic benefit cost (credit) previously disclosed were reclassified to a separate line on a retrospective basis for prior periods. As a result, we reclassified $(29) million and $(39) million of other non-service components for 2017 and 2016, respectively, from Cost of sales and Selling and administrative expense to Non-service components of pension and post-retirement income, net in the Consolidated Statements of Operations.
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) | 2018 | 2017 | 2018 | 2017 | ||||
| Change in projected benefit obligation | ||||||||
| Projected benefit obligation at beginning of year | $ | 8,563 | $ | 7,991 | $ | 289 | $ | 317 |
| Service cost | 104 | 100 | 3 | 3 | ||||
| Interest cost | 306 | 323 | 10 | 12 | ||||
| Plan participants’ contributions | — | — | 5 | 5 | ||||
| Actuarial (gains) losses | (615) | 494 | (22) | (7) | ||||
| Benefits paid | (422) | (413) | (35) | (41) | ||||
| Plan amendment | 20 | 1 | — | — | ||||
| Business disposition | (15) | — | — | — | ||||
| Foreign exchange rate changes and other | (40) | 67 | — | — | ||||
| Projected benefit obligation at end of year | $ | 7,901 | $ | 8,563 | $ | 250 | $ | 289 |
| Change in fair value of plan assets | ||||||||
| Fair value of plan assets at beginning of year | $ | 7,877 | $ | 6,874 | ||||
| Actual return on plan assets | (335) | 1,011 | ||||||
| Employer contributions* | 39 | 345 | ||||||
| Benefits paid | (422) | (413) | ||||||
| Foreign exchange rate changes and other | (37) | 60 | ||||||
| Fair value of plan assets at end of year | $ | 7,122 | $ | 7,877 | ||||
| Funded status at end of year | $ | (779) | $ | (686) | $ | (250) | $ | (289) |
*In 2017, employer contributions included a $300 million discretionary contribution to fund a U.S. pension plan.
Actuarial (gains) losses reflected in the table above for both 2018 and 2017 were the result of changes in the discount rate utilized and asset return rate experienced as compared with our assumptions.
Amounts recognized in our balance sheets are as follows:
| Pension Benefits | Postretirement Benefits Other than Pensions | |||||||
|---|---|---|---|---|---|---|---|---|
| (In millions) | 2018 | 2017 | 2018 | 2017 | ||||
| Non-current assets | $ | 112 | $ | 106 | $ | — | $ | — |
| Current liabilities | (27) | (27) | (28) | (31) | ||||
| Non-current liabilities | (864) | (765) | (222) | (258) | ||||
| Recognized in Accumulated other comprehensive loss, pre-tax: | ||||||||
| Net loss (gain) | 2,157 | 2,055 | (34) | (13) | ||||
| Prior service cost (credit) | 69 | 64 | (27) | (33) |
The accumulated benefit obligation for all defined benefit pension plans was $7.5 billion and $8.1 billion at December 29, 2018 and December 30, 2017, respectively, which included $369 million and $404 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 obligation exceeding the fair value of plan assets are as follows:
| (In millions) | 2018 | 2017 | ||||||
|---|---|---|---|---|---|---|---|---|
| Accumulated benefit obligation | $ | 7,137 | $ | 670 | ||||
| Fair value of plan assets | 6,589 | 237 |
Pension plans with projected benefit obligation exceeding the fair value of plan assets are as follows:
| (In millions) | 2018 | 2017 | ||||||
|---|---|---|---|---|---|---|---|---|
| Projected benefit obligation | $ | 7,481 | $ | 8,078 | ||||
| Fair value of plan assets | 6,589 | 7,285 |
Assumptions
The weighted-average assumptions we use for our pension and postretirement plans are as follows:
| Pension Benefits | Postretirement Benefits Other than Pensions | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | |||||||
| Net periodic benefit cost | ||||||||||||
| Discount rate | 3.67% | 4.13% | 4.66% | 3.50% | 4.00% | 4.50% | ||||||
| Expected long-term rate of return on assets | 7.58% | 7.57% | 7.58% | |||||||||
| Rate of compensation increase | 3.50% | 3.50% | 3.49% | |||||||||
| Benefit obligations at year-end | ||||||||||||
| Discount rate | 4.24% | 3.66% | 4.13% | 4.25% | 3.50% | 4.00% | ||||||
| Rate of compensation increase | 3.50% | 3.50% | 3.50% | |||||||||
| Interest crediting rate for cash balance plans | 5.25% | 5.25% | 5.25% |
Our assumed healthcare cost trend rate for both the medical and prescription drug cost was 7.00% and 7.25% in 2018 and 2017, respectively. We expect this rate to gradually decline to 5% by 2024 where we assume it will remain.
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 that will be 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 securities 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 | 17% to 33% | |
| International equity securities | 8% to 19% | |
| Global equities | 5% to 17% | |
| Debt securities | 27% to 38% | |
| Real estate | 7% to 13% | |
| Private investment partnerships | 5% to 11% | |
| Hedge funds | 0% | |
| Non-U.S. Plan Assets | ||
| Equity securities | 51% to 74% | |
| Debt securities | 26% to 46% | |
| Real estate | 0% to 13% |
The fair value of our pension plan assets by major category and valuation method is as follows:
| December 29, 2018 | December 30, 2017 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | Level 1 | Level 2 | Level 3 | Not Subject to Leveling | Level 1 | Level 2 | Level 3 | Not Subject to Leveling | ||||||||
| Cash and equivalents | $ | 19 | $ | 19 | $ | — | $ | 113 | $ | 22 | $ | 10 | $ | — | $ | 149 |
| Equity securities: | ||||||||||||||||
| Domestic | 1,256 | — | — | 828 | 1,404 | — | — | 665 | ||||||||
| International | 835 | — | — | 450 | 919 | — | — | 636 | ||||||||
| Mutual funds | 266 | — | — | — | 387 | — | — | — | ||||||||
| Debt securities: | ||||||||||||||||
| National, state and local governments | 366 | 290 | — | 53 | 645 | 289 | — | 56 | ||||||||
| Corporate debt | — | 908 | — | 220 | — | 912 | — | 148 | ||||||||
| Asset-backed securities | — | — | — | 104 | — | — | — | 103 | ||||||||
| Private investment partnerships | — | — | — | 650 | — | — | — | 591 | ||||||||
| Real estate | — | — | 460 | 285 | — | — | 460 | 284 | ||||||||
| Hedge funds | — | — | — | — | — | — | — | 197 | ||||||||
| Total | $ | 2,742 | $ | 1,217 | $ | 460 | $ | 2,703 | $ | 3,377 | $ | 1,211 | $ | 460 | $ | 2,829 |
Cash and equivalents, equity securities 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; these funds are not subject to leveling within the fair value hierarchy. 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 represents interests in funds which invest in equity, debt and other financial assets. These funds are generally not publicly traded so the interests therein are valued using income and market methods that include cash flow projections and market multiples for various comparable investments. Real estate includes owned properties and limited partnership interests in real estate partnerships. Owned properties are valued using certified appraisals at least every three years that 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. Limited partnership interests in real estate partnerships are valued similarly 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 portfolios. Neither private investment nor real estate partnerships are subject to leveling within the fair value hierarchy.
The table below presents a reconciliation of the fair value measurements for owned real estate properties, which use significant unobservable inputs (Level 3):
| (In millions) | 2018 | 2017 | ||||||
|---|---|---|---|---|---|---|---|---|
| Balance at beginning of year | $ | 460 | $ | 494 | ||||
| Unrealized gains (losses), net | 13 | (6) | ||||||
| Realized gains, net | 12 | 24 | ||||||
| Purchases, sales and settlements, net | (25) | (52) | ||||||
| Balance at end of year | $ | 460 | $ | 460 |
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 2019, we expect to contribute approximately $50 million to 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 2018. 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) | 2019 | 2020 | 2021 | 2022 | 2023 | 2024-2028 | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Pension benefits | $ | 418 | $ | 424 | $ | 432 | $ | 441 | $ | 449 | $ | 2,379 |
| Post-retirement benefits other than pensions | 29 | 27 | 26 | 25 | 24 | 96 |
Note 15. Special Charges
2018 Restructuring Plan
In the fourth quarter of 2018, we recorded $73 million in special charges in connection with a plan to restructure the Textron Specialized Vehicles businesses within our Industrial segment. These businesses have undergone significant changes since the acquisition of Arctic Cat as we have expanded the product portfolio and integrated manufacturing operations and retail distribution. In the third quarter of 2018, the operating results for these businesses were significantly below our expectations as dealer sell-through lagged despite the introduction of new products into our dealer network. Based on our review and assessment of the acquired dealer network and go-to-market strategy for the Textron Off Road and Arctic Cat brands in the fourth quarter of 2018, along with a review of the other businesses within the product line, we initiated a restructuring plan. This plan included product rationalization, closure of several factory-direct turf-care branch locations and a manufacturing facility and headcount reductions. Under this plan, we recorded asset impairment charges of $47 million, primarily intangible assets related to product rationalization, contract termination and other costs of $18 million and severance costs of $8 million. Headcount reductions totaled approximately 400 positions, representing 10% of Textron Specialized Vehicles’ workforce. The actions taken under this plan were substantially completed at the end of 2018.
2017 and 2016 Restructuring Plans
In 2017 and 2016, we recorded special charges of $90 million and $123 million, respectively, related to a plan that was initiated in 2016 to restructure and realign our businesses by implementing headcount reductions, facility consolidations and other actions in order to improve overall operating efficiency across Textron. The 2016 plan was completed in 2017. Special charges related to this plan included $97 million of severance costs, $84 million of asset impairments and $32 million in contract terminations and other costs. Of these amounts, $83 million was incurred at Textron Systems, $63 million at Textron Aviation, $38 million at Industrial, $28 million at Bell and $1 million at Corporate. The total headcount reduction under this plan was approximately 2,100 positions, representing 5% of our workforce.
In connection with the acquisition of Arctic Cat, as discussed in Note 2, we initiated a restructuring plan in the first quarter of 2017 and recorded restructuring charges of $28 million in 2017, which included $19 million of severance costs, largely related to change-of-control provisions, and $9 million of contract termination and other costs. In addition, we recorded $12 million of acquisition-related integration and transaction costs in 2017.
For 2017 and 2016, special charges recorded by segment and type of cost are as follows:
| (In millions) | Severance Costs | Asset Impairments | Contract Terminations and Other | Acquisition Integration/ Transaction Costs | Total Special Charges | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | ||||||||||
| Industrial | $ | 26 | $ | 1 | $ | 19 | $ | 12 | $ | 58 |
| Textron Aviation | 11 | 17 | — | — | 28 | |||||
| Bell | 3 | 12 | 8 | — | 23 | |||||
| Textron Systems | 6 | 16 | (1) | — | 21 | |||||
| $ | 46 | $ | 46 | $ | 26 | $ | 12 | $ | 130 | |
| 2016 | ||||||||||
| Industrial | $ | 17 | $ | 2 | $ | 1 | $ | — | $ | 20 |
| Textron Aviation | 33 | 1 | 1 | — | 35 | |||||
| Bell | 4 | 1 | — | — | 5 | |||||
| Textron Systems | 15 | 34 | 13 | — | 62 | |||||
| Corporate | 1 | — | — | — | 1 | |||||
| $ | 70 | $ | 38 | $ | 15 | $ | — | $ | 123 |
Restructuring Reserve
Our restructuring reserve activity is summarized below:
| (In millions) | Severance Costs | Contract Terminations and Other | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Balance at December 31, 2016 | $ | 50 | $ | 13 | $ | 63 | ||||
| Provision for 2016 plan | 33 | 25 | 58 | |||||||
| Provision for Arctic Cat plan | 19 | 9 | 28 | |||||||
| Cash paid | (72) | (15) | (87) | |||||||
| Reversals* | (6) | (8) | (14) | |||||||
| Non-cash utilization | — | (4) | (4) | |||||||
| Balance at December 30, 2017 | 24 | 20 | 44 | |||||||
| Provision for 2018 plan | 8 | 18 | 26 | |||||||
| Cash paid | (21) | (9) | (30) | |||||||
| (Reversals)/provision for prior plans | (3) | 3 | — | |||||||
| Balance at December 29, 2018 | $ | 8 | $ | 32 | $ | 40 |
*Primarily related to favorable contract negotiations in the Textron Systems segment.
The majority of the remaining cash outlays of $40 million are expected to be paid in 2019. Severance costs generally are paid on a lump-sum basis and include outplacement costs, which are paid in accordance with normal payment terms.
Note 16. 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) | 2018 | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|---|
| U.S. | $ | 557 | $ | 428 | $ | 652 | ||
| Non-U.S. | 827 | 334 | 224 | |||||
| Income from continuing operations before income taxes | $ | 1,384 | $ | 762 | $ | 876 |
Income tax expense for continuing operations is summarized as follows:
| (In millions) | 2018 | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|---|
| Current expense (benefit): | ||||||||
| Federal | $ | 3 | $ | 29 | $ | (74) | ||
| State | 9 | (9) | 18 | |||||
| Non-U.S. | 101 | 79 | 41 | |||||
| 113 | 99 | (15) | ||||||
| Deferred expense (benefit): | ||||||||
| Federal | 60 | 358 | 47 | |||||
| State | (5) | (14) | (7) | |||||
| Non-U.S. | (6) | 13 | 8 | |||||
| 49 | 357 | 48 | ||||||
| Income tax expense | $ | 162 | $ | 456 | $ | 33 |
The following table reconciles the federal statutory income tax rate to our effective income tax rate for continuing operations:
| 2018 | 2017 | 2016 | ||||||
|---|---|---|---|---|---|---|---|---|
| U.S. Federal statutory income tax rate | 21.0% | 35.0% | 35.0% | |||||
| Increase (decrease) resulting from: | ||||||||
| U.S. tax reform enactment impact | (1.0) | 34.9 | — | |||||
| Federal tax settlement of 1998 to 2008 | — | — | (23.5) | |||||
| State income taxes (net of federal impact) | (0.1) | (1.9) | 0.8 | |||||
| Non-U.S. tax rate differential and foreign tax credits | 1.3 | (2.9) | (2.7) | |||||
| Domestic manufacturing deduction | — | (1.1) | (1.6) | |||||
| Research credit* | (2.9) | (2.6) | (3.2) | |||||
| Gain on business disposition, primarily in non-U.S. jurisdictions | (5.0) | — | — | |||||
| Other, net | (1.6) | (1.6) | (1.0) | |||||
| Effective income tax rate | 11.7% | 59.8% | 3.8% |
_*_Includes a favorable impact of (1.8)% in 2018 for the reassessment of reserves for uncertain tax positions.
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. Among other things, the Tax Act reduced the U.S. federal corporate tax rate from 35% to 21% and required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. We reasonably estimated the effects of the Tax Act and recorded provisional amounts in the fourth quarter of 2017 totaling $266 million. Our provisional estimate included a $154 million charge to remeasure our U.S. federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. In addition, the provisional estimate included $112 million in expense for the one-time transition tax. This tax was based on approximately $1.6 billion of our post-1986 earnings and profits that were previously deferred from U.S. income taxes, and on the amount of those earnings held in cash and other specified net assets. In 2018, we finalized the 2017 impacts of the Tax Act, specifically the remeasurement of our U.S. Federal deferred tax assets and liabilities and the post-1986 earnings and profits transition tax, which resulted in a $14 million benefit.
For 2016, the provision for income taxes included a benefit of $319 million to reflect the settlement with the U.S. Internal Revenue Service Office of Appeals for our 1998 to 2008 tax years, which resulted in a $206 million benefit attributable to continuing operations and $113 million attributable to discontinued operations.
Unrecognized Tax Benefits
Our unrecognized tax benefits represent tax positions for which reserves have been established, with unrecognized state tax benefits reflected net of applicable tax benefits. A reconciliation of our unrecognized tax benefits is as follows:
| (In millions) | December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||
|---|---|---|---|---|---|---|---|---|
| Balance at beginning of year | $ | 182 | $ | 186 | $ | 401 | ||
| Additions for tax positions related to current year | 5 | 12 | 12 | |||||
| Additions for tax positions of prior years | 13 | 16 | — | |||||
| Reductions for settlements and expiration of statute of limitations | (22) | (17) | (219) | |||||
| Reductions for tax positions of prior years* | (37) | (15) | (8) | |||||
| Balance at end of year | $ | 141 | $ | 182 | $ | 186 |
_*_In 2018, certain tax positions related to research credits were reduced by $25 million based on new information, including interactions with the tax authorities and recent audit settlements.
At the end of 2018, 2017 and 2016, if these unrecognized tax benefits were recognized in future periods, they would favorably impact our effective tax rate.
In the normal course of business, we are subject to examination by tax authorities throughout the world. We are no longer subject to U.S. federal tax examinations for years before 2014, state and local income tax examinations for years before 2009, and non-U.S. income tax examinations for years before 2011.
Deferred Taxes
The significant components of our net deferred tax assets/(liabilities) are provided below:
| (In millions) | December 29, 2018 | December 30, 2017 | ||||||
|---|---|---|---|---|---|---|---|---|
| Obligation for pension and postretirement benefits | $ | 272 | $ | 247 | ||||
| Accrued expenses (a) | 236 | 260 | ||||||
| Deferred compensation | 96 | 103 | ||||||
| U.S. operating loss and tax credit carryforwards (b) | 212 | 208 | ||||||
| Non-U.S. operating loss and tax credit carryforwards (c) | 69 | 72 | ||||||
| Valuation allowance on deferred tax assets | (157) | (148) | ||||||
| Property, plant and equipment, principally depreciation | (142) | (125) | ||||||
| Amortization of goodwill and other intangibles | (143) | (154) | ||||||
| Leasing transactions | (77) | (81) | ||||||
| Prepaid pension benefits | (21) | (21) | ||||||
| Other, net | (23) | (13) | ||||||
| Deferred taxes, net | $ | 322 | $ | 348 |
(a) Accrued expenses included warranty reserves, self-insured liabilities and interest.
(b) At December 29, 2018, U.S. operating loss and tax credit carryforward benefits of $186 million expire through 2038 if not utilized and $26 million may be carried forward indefinitely.
(c) At December 29, 2018, non-U.S. operating loss and tax credit carryforward benefits of $16 million expire through 2038 if not utilized and $53 million may be carried forward indefinitely.
We believe earnings during the period 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 our deferred taxes:
| (In millions) | December 29, 2018 | December 30, 2017 | ||||||
|---|---|---|---|---|---|---|---|---|
| Manufacturing group: | ||||||||
| Deferred tax assets, net of valuation allowance | $ | 397 | $ | 430 | ||||
| Deferred tax liabilities | (5) | (7) | ||||||
| Finance group – Deferred tax liabilities | (70) | (75) | ||||||
| Net deferred tax asset | $ | 322 | $ | 348 |
At December 29, 2018 and December 30, 2017, non-U.S. and U.S. state income taxes have not been provided for on basis differences in certain investments, primarily as a result of $1.6 billion of unremitted earnings in foreign subsidiaries which are indefinitely
reinvested. Should these earnings be distributed in the future in the form of dividends or otherwise, we would be subject to withholding and income taxes payable to various non-U.S. jurisdictions and U.S. states. Determination of the deferred tax liability associated with indefinitely reinvested earnings is not practicable due to multiple factors, including the complexity of non-U.S. tax laws and tax treaty interpretations, exchange rate fluctuations, and the uncertainty of available credits or exemptions under U.S. federal and state tax laws.
Note 17. 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 $333 million and $380 million at December 29, 2018 and December 30, 2017, 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 $45 million to $150 million. At December 29, 2018, environmental reserves of approximately $81 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 $14 million as current liabilities. Expenditures to evaluate and remediate contaminated sites were $13 million, $18 million and $15 million in 2018, 2017 and 2016, respectively.
Leases
Rental expense was $114 million, $122 million and $126 million in 2018, 2017 and 2016, respectively. Future minimum rental commitments for noncancelable operating leases in effect at December 29, 2018 totaled $64 million for 2019, $45 million for 2020, $32 million for 2021, $26 million for 2022, $19 million for 2023 and $115 million thereafter. The total future minimum rental receipts under noncancelable subleases at December 29, 2018 totaled $18 million.
Note 18. Supplemental Cash Flow Information
Our cash payments and receipts are as follows:
| (In millions) | 2018 | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|---|
| Interest paid: | ||||||||
| Manufacturing group | $ | 132 | $ | 133 | $ | 132 | ||
| Finance group | 25 | 29 | 32 | |||||
| Net taxes paid/(received): | ||||||||
| Manufacturing group | 129 | (16) | 163 | |||||
| Finance group | 17 | 48 | 11 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and the Shareholders of Textron Inc.
Opinion on the Financial Statements
We have audited the accompanying Consolidated Balance Sheets of Textron Inc. (the Company) as of December 29, 2018 and December 30, 2017, the related Consolidated Statements of Operations, Comprehensive Income, Shareholders’ Equity and Cash Flows for each of the three years in the period ended December 29, 2018, and the related notes and financial statement schedule contained on page 75 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 29, 2018 and December 30, 2017 and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 29, 2018, 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 14, 2019 expressed an unqualified opinion thereon.
Adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606)
As discussed in Note 1 to the consolidated financial statements, the Company changed its method for recognizing revenue as a result of the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and its related amendments effective December 31, 2017.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1957.
Boston, Massachusetts
February 14, 2019
Quarterly Data
| (Unaudited) | 2018 | 2017 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions, except per share amounts) | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | ||||||||
| Revenues (a) | ||||||||||||||||
| Textron Aviation | $ | 1,010 | $ | 1,276 | $ | 1,133 | $ | 1,552 | $ | 970 | $ | 1,171 | $ | 1,154 | $ | 1,391 |
| Bell | 752 | 831 | 770 | 827 | 697 | 825 | 812 | 983 | ||||||||
| Textron Systems | 387 | 380 | 352 | 345 | 416 | 477 | 458 | 489 | ||||||||
| Industrial | 1,131 | 1,222 | 930 | 1,008 | 992 | 1,113 | 1,042 | 1,139 | ||||||||
| Finance | 16 | 17 | 15 | 18 | 18 | 18 | 18 | 15 | ||||||||
| Total revenues | $ | 3,296 | $ | 3,726 | $ | 3,200 | $ | 3,750 | $ | 3,093 | $ | 3,604 | $ | 3,484 | $ | 4,017 |
| Segment profit | ||||||||||||||||
| Textron Aviation | $ | 72 | $ | 104 | $ | 99 | $ | 170 | $ | 36 | $ | 54 | $ | 93 | $ | 120 |
| Bell | 87 | 117 | 113 | 108 | 83 | 112 | 106 | 114 | ||||||||
| Textron Systems | 50 | 40 | 29 | 37 | 20 | 42 | 40 | 37 | ||||||||
| Industrial | 64 | 80 | 1 | 73 | 76 | 82 | 49 | 83 | ||||||||
| Finance | 6 | 5 | 3 | 9 | 4 | 5 | 7 | 6 | ||||||||
| Total segment profit | 279 | 346 | 245 | 397 | 219 | 295 | 295 | 360 | ||||||||
| Corporate expenses and other, net | (27) | (51) | (29) | (12) | (27) | (31) | (30) | (44) | ||||||||
| Interest expense, net for Manufacturing group | (34) | (35) | (32) | (34) | (34) | (36) | (37) | (38) | ||||||||
| Special charges (b) | — | — | — | (73) | (37) | (13) | (25) | (55) | ||||||||
| Gain on business disposition (c) | — | — | 444 | — | — | — | — | — | ||||||||
| Income tax expense (d) | (29) | (36) | (65) | (32) | (21) | (62) | (44) | (329) | ||||||||
| Income (loss) from continuing operations | 189 | 224 | 563 | 246 | 100 | 153 | 159 | (106) | ||||||||
| Income from discontinued operations, net of income taxes | — | — | — | — | 1 | — | — | — | ||||||||
| Net income (loss) | $ | 189 | $ | 224 | $ | 563 | $ | 246 | $ | 101 | $ | 153 | $ | 159 | $ | (106) |
| Basic earnings per share | ||||||||||||||||
| Continuing operations | $ | 0.73 | $ | 0.88 | $ | 2.29 | $ | 1.02 | $ | 0.37 | $ | 0.57 | $ | 0.60 | $ | (0.40) |
| Discontinued operations | — | — | — | — | — | — | — | — | ||||||||
| Basic earnings per share | $ | 0.73 | $ | 0.88 | $ | 2.29 | $ | 1.02 | $ | 0.37 | $ | 0.57 | $ | 0.60 | $ | (0.40) |
| Basic average shares outstanding (in thousands) | 260,497 | 253,904 | 246,136 | 240,248 | 270,489 | 267,114 | 264,624 | 263,295 | ||||||||
| Diluted earnings per share (e) | ||||||||||||||||
| Continuing operations | $ | 0.72 | $ | 0.87 | $ | 2.26 | $ | 1.02 | $ | 0.37 | $ | 0.57 | $ | 0.60 | $ | (0.40) |
| Discontinued operations | — | — | — | — | — | — | — | — | ||||||||
| Diluted earnings per share | $ | 0.72 | $ | 0.87 | $ | 2.26 | $ | 1.02 | $ | 0.37 | $ | 0.57 | $ | 0.60 | $ | (0.40) |
| Diluted average shares outstanding (in thousands) | 263,672 | 257,177 | 249,378 | 242,569 | 272,830 | 269,299 | 266,989 | 263,295 | ||||||||
| Segment profit margins | ||||||||||||||||
| Textron Aviation | 7.1% | 8.2% | 8.7% | 11.0% | 3.7% | 4.6% | 8.1% | 8.6% | ||||||||
| Bell | 11.6 | 14.1 | 14.7 | 13.1 | 11.9 | 13.6 | 13.1 | 11.6 | ||||||||
| Textron Systems | 12.9 | 10.5 | 8.2 | 10.7 | 4.8 | 8.8 | 8.7 | 7.6 | ||||||||
| Industrial | 5.7 | 6.5 | 0.1 | 7.2 | 7.7 | 7.4 | 4.7 | 7.3 | ||||||||
| Finance | 37.5 | 29.4 | 20.0 | 50.0 | 22.2 | 27.8 | 38.9 | 40.0 | ||||||||
| Segment profit margin | 8.5% | 9.3% | 7.7% | 10.6% | 7.1% | 8.2% | 8.5% | 9.0% |
(a) At the beginning of 2018, we adopted ASC 606 using a modified retrospective basis and as a result, the comparative information has not been restated and is reported under the accounting standards in effect for these periods. See Note 1 to the Consolidated Financial Statements for additional information.
(b) Special charges of $73 million were recorded in the fourth quarter of 2018 under a restructuring plan for the Textron Specialized Vehicles businesses within our Industrial segment that was initiated in December 2018. Special charges related to our 2016 restructuring plan were $15 million, $12 million, $15 million and $48 million in the first, second, third and fourth quarters of 2017, respectively. In addition, we recorded special charges of $22 million, $1 million, $10 million and $7 million in the first, second, third and fourth quarters of 2017, respectively, related to the Arctic Cat acquisition, which included restructuring, integration and transaction costs.
(c) On July 2, 2018, Textron completed the sale of the Tools & Test Equipment product line which resulted in an after-tax gain of $419 million.
(d) Income tax expense for the fourth quarter of 2017 included a $266 million charge to reflect our provisional estimate of the net impact of the Tax Cuts and Jobs Act. We completed our analysis of this legislation in the fourth quarter of 2018 and recorded a $14 million income tax benefit.
(e) For the fourth quarter of 2017, the diluted average shares outstanding excluded potential common shares (stock options) due to their antidilutive effect resulting from the net loss.
Schedule II — Valuation and Qualifying Accounts
| (In millions) | 2018 | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|---|
| Allowance for doubtful accounts | ||||||||
| Balance at beginning of year | $ | 27 | $ | 27 | $ | 33 | ||
| Charged to costs and expenses | 5 | 3 | 3 | |||||
| Deductions from reserves* | (5) | (3) | (9) | |||||
| Balance at end of year | $ | 27 | $ | 27 | $ | 27 | ||
| Allowance for losses on finance receivables | ||||||||
| Balance at beginning of year | $ | 31 | $ | 41 | $ | 48 | ||
| Reversal of the provision for losses | (3) | (11) | (1) | |||||
| Charge-offs | (4) | (6) | (16) | |||||
| Recoveries | 5 | 7 | 10 | |||||
| Balance at end of year | $ | 29 | $ | 31 | $ | 41 | ||
| Inventory FIFO reserves | ||||||||
| Balance at beginning of year | $ | 262 | $ | 231 | $ | 206 | ||
| Charged to costs and expenses | 56 | 63 | 59 | |||||
| Deductions from reserves* | (38) | (32) | (34) | |||||
| Balance at end of year | $ | 280 | $ | 262 | $ | 231 |
*Deductions primarily include amounts written off on uncollectable accounts (less recoveries), inventory disposals, changes to prior year estimates, business dispositions and currency translation adjustments.
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