Item 1. Financial Statements

70K characters. Original on sec.gov · Markdown

Item 1. Financial Statements

TEXTRON INC.

Consolidated Statements of Operations (Unaudited)


	Three Months Ended				Nine Months Ended
(In millions, except per share amounts)	October 2, 2021		October 3, 2020		October 2, 2021		October 3, 2020
Revenues
Manufacturing revenues	$	2,979	$	2,722	$	9,022	$	7,942
Finance revenues	11		13		38		42
Total revenues	2,990		2,735		9,060		7,984
Costs, expenses and other
Cost of sales	2,486		2,332		7,546		6,970
Selling and administrative expense	283		258		895		760
Interest expense	33		43		109		125
Special charges	10		7		20		124
Non-service components of pension and post-retirement income, net	(40)		(21)		(119)		(62)
Gain on business disposition	—		—		(17)		—
Total costs, expenses and other	2,772		2,619		8,434		7,917
Income from continuing operations before income taxes	218		116		626		67
Income tax expense (benefit)	33		1		86		(6)
Income from continuing operations	$	185	$	115	$	540	$	73
Loss from discontinued operations	—		—		(1)		—
Net income	$	185	$	115	$	539	$	73
Basic Earnings per share
Continuing operations	$	0.83	$	0.50	$	2.39	$	0.32


Diluted Earnings per share
Continuing operations	$	0.82	$	0.50	$	2.37	$	0.32

See Notes to the Consolidated Financial Statements.

Table of Contents

TEXTRON INC.

Consolidated Statements of Comprehensive Income (Unaudited)


	Three Months Ended				Nine Months Ended
(In millions)	October 2, 2021		October 3, 2020		October 2, 2021		October 3, 2020
Net income	$	185	$	115	$	539	$	73
Other comprehensive income, net of tax
Pension and postretirement benefits adjustments, net of reclassifications	30		37		90		110
Foreign currency translation adjustments, net of reclassifications	(19)		35		(22)		25
Deferred gains (losses) on hedge contracts, net of reclassifications	(5)		2		1		(5)
Other comprehensive income	6		74		69		130
Comprehensive income	$	191	$	189	$	608	$	203

See Notes to the Consolidated Financial Statements.

Table of Contents

TEXTRON INC.

Consolidated Balance Sheets (Unaudited)


(Dollars in millions)	October 2, 2021		January 2, 2021
Assets
Manufacturing group
Cash and equivalents	$	1,969	$	2,146
Accounts receivable, net	773		787
Inventories	3,670		3,513
Other current assets	890		950
Total current assets	7,302		7,396
Property, plant and equipment, less accumulated depreciation and amortization of $4,855 and $4,696, respectively	2,469		2,516
Goodwill	2,152		2,157
Other assets	2,468		2,436
Total Manufacturing group assets	14,391		14,505
Finance group
Cash and equivalents	213		108
Finance receivables, net	596		744
Other assets	69		86
Total Finance group assets	878		938
Total assets	$	15,269	$	15,443
Liabilities and shareholders’ equity
Liabilities
Manufacturing group
Current portion of long-term debt	$	7	$	509
Accounts payable	775		776
Other current liabilities	2,270		1,985
Total current liabilities	3,052		3,270
Other liabilities	2,292		2,357
Long-term debt	3,180		3,198
Total Manufacturing group liabilities	8,524		8,825
Finance group
Other liabilities	123		111
Debt	585		662
Total Finance group liabilities	708		773
Total liabilities	9,232		9,598
Shareholders’ equity
Common stock	29		29
Capital surplus	1,969		1,785
Treasury stock	(789)		(203)
Retained earnings	6,498		5,973
Accumulated other comprehensive loss	(1,670)		(1,739)
Total shareholders’ equity	6,037		5,845
Total liabilities and shareholders’ equity	$	15,269	$	15,443
Common shares outstanding (in thousands)	221,031		226,444

See Notes to the Consolidated Financial Statements.

Table of Contents

TEXTRON INC.

Consolidated Statements of Cash Flows (Unaudited)

For the Nine Months Ended October 2, 2021 and October 3, 2020, respectively


	Consolidated
(In millions)	2021		2020
Cash flows from operating activities
Income from continuing operations	$	540	$	73
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Non-cash items:
Depreciation and amortization	285		283
Gain on business disposition	(17)		—
Deferred income taxes	7		(31)
Asset impairments and TRU inventory charge	11		111
Other, net	74		81
Changes in assets and liabilities:
Accounts receivable, net	8		59
Inventories	(164)		(258)
Other assets	(11)		114
Accounts payable	1		(267)
Other liabilities	323		60
Income taxes, net	26		(4)
Pension, net	(62)		(11)
Captive finance receivables, net	152		(25)
Other operating activities, net	1		15
Net cash provided by operating activities of continuing operations	1,174		200
Net cash used in operating activities of discontinued operations	(1)		(1)
Net cash provided by operating activities	1,173		199
Cash flows from investing activities
Capital expenditures	(204)		(151)
Net proceeds from business disposition	38		—
Proceeds from an insurance recovery and sale of property, plant and equipment	3		25
Net proceeds from corporate-owned life insurance policies	—		21
Net cash used in acquisitions	—		(11)
Finance receivables repaid	19		21
Other investing activities, net	17		3
Net cash used in investing activities	(127)		(92)
Cash flows from financing activities
Decrease in short-term debt	—		(2)
Net proceeds from long-term debt	—		1,137
Proceeds from borrowings against corporate-owned life insurance policies	—		377
Payment on borrowings against corporate-owned life insurance policies	—		(15)
Principal payments on long-term debt and nonrecourse debt	(615)		(235)
Purchases of Textron common stock	(586)		(54)
Dividends paid	(14)		(14)
Proceeds from options exercised	105		16
Other financing activities, net	(2)		(2)
Net cash provided by (used in) financing activities	(1,112)		1,208
Effect of exchange rate changes on cash and equivalents	(6)		(2)
Net increase (decrease) in cash and equivalents	(72)		1,313
Cash and equivalents at beginning of period	2,254		1,357
Cash and equivalents at end of period	$	2,182	$	2,670

See Notes to the Consolidated Financial Statements.

Table of Contents

TEXTRON INC.

Consolidated Statements of Cash Flows (Unaudited) (Continued)

For the Nine Months Ended October 2, 2021 and October 3, 2020, respectively


	Manufacturing Group				Finance Group
(In millions)	2021		2020		2021		2020
Cash flows from operating activities
Income from continuing operations	$	537	$	67	$	3	$	6
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Non-cash items:
Depreciation and amortization	277		279		8		4
Gain on business disposition	(17)		—		—		—
Deferred income taxes	9		(30)		(2)		(1)
Asset impairments and TRU inventory charge	11		111		—		—
Other, net	82		74		(8)		7
Changes in assets and liabilities:
Accounts receivable, net	8		59		—		—
Inventories	(164)		(258)		—		—
Other assets	(10)		114		(1)		—
Accounts payable	1		(267)		—		—
Other liabilities	323		66		—		(6)
Income taxes, net	16		1		10		(5)
Pension, net	(62)		(11)		—		—

Other operating activities, net	1		15		—		—
Net cash provided by operating activities of continuing operations	1,012		220		10		5
Net cash used in operating activities of discontinued operations	(1)		(1)		—		—
Net cash provided by operating activities	1,011		219		10		5
Cash flows from investing activities
Capital expenditures	(204)		(151)		—		—
Net proceeds from business disposition	38		—		—		—
Proceeds from an insurance recovery and sale of property, plant and equipment	3		25		—		—
Net proceeds from corporate-owned life insurance policies	—		21		—		—
Net cash used in acquisitions	—		(11)		—		—
Finance receivables repaid	—		—		205		90
Finance receivables originated	—		—		(34)		(94)
Other investing activities, net	—		—		17		3
Net cash provided by (used in) investing activities	(163)		(116)		188		(1)
Cash flows from financing activities
Decrease in short-term debt	—		(2)		—		—
Net proceeds from long-term debt	—		1,137		—		—
Proceeds from borrowings against corporate-owned life insurance policies	—		377		—		—
Payment on borrowings against corporate-owned life insurance policies	—		(15)		—		—
Principal payments on long-term debt and nonrecourse debt	(522)		(195)		(93)		(40)
Purchases of Textron common stock	(586)		(54)		—		—
Dividends paid	(14)		(14)		—		—
Proceeds from options exercised	105		16		—		—
Other financing activities, net	(2)		(14)		—		12
Net cash provided by (used in) financing activities	(1,019)		1,236		(93)		(28)
Effect of exchange rate changes on cash and equivalents	(6)		(2)		—		—
Net increase (decrease) in cash and equivalents	(177)		1,337		105		(24)
Cash and equivalents at beginning of period	2,146		1,181		108		176
Cash and equivalents at end of period	$	1,969	$	2,518	$	213	$	152

See Notes to the Consolidated Financial Statements.

Table of Contents

TEXTRON INC.

Notes to the Consolidated Financial Statements (Unaudited)

Note 1. Basis of Presentation

Our Consolidated Financial Statements include the accounts of Textron Inc. (Textron) and its majority-owned subsidiaries. We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information. Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 2, 2021. In the opinion of management, the interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair presentation of our consolidated financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

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

Use of Estimates

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

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 the third quarter of 2021 and 2020, our cumulative catch-up adjustments increased segment profit by $25 million and $22 million, respectively, and increased net income by $19 million and $17 million, respectively ($0.08 and $0.07 per diluted share, respectively). Gross favorable profit adjustments totaled $43 million and $31 million in the third quarter of 2021 and 2020, respectively, and the gross unfavorable profit adjustments totaled $18 million and $9 million, respectively. We recognized revenues of $27 million and $22 million in the third quarter of 2021 and 2020, respectively, from performance obligations satisfied in prior periods that related to changes in profit booking rates.

In the first nine months of 2021 and 2020, our cumulative catch-up adjustments increased segment profit by $54 million and $41 million, respectively, and increased net income by $41 million and $31 million, respectively ($0.18 and $0.14 per diluted share, respectively). Gross favorable profit adjustments totaled $119 million and $104 million in the first nine months of 2021 and 2020, respectively, and the gross unfavorable profit adjustments totaled $65 million and $63 million, respectively. We recognized revenues of $65 million and $48 million in the first nine months of 2021 and 2020, respectively, from performance obligations satisfied in prior periods that related to changes in profit booking rates.

Note 2. Business Disposition

On January 25, 2021, we completed the sale of TRU Simulation + Training Canada Inc. within our Textron Systems segment for net cash proceeds of $38 million and recorded an after-tax gain of $17 million.

Table of Contents

Note 3. Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:


(In millions)	October 2, 2021		January 2, 2021
Commercial	$	671	$	668
U.S. Government contracts	131		155
	802		823
Allowance for credit losses	(29)		(36)
Total accounts receivable, net	$	773	$	787

Finance Receivables

Finance receivables are presented in the following table:


(In millions)	October 2, 2021		January 2, 2021
Finance receivables	$	621	$	779
Allowance for credit losses	(25)		(35)
Total finance receivables, net	$	596	$	744

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.

Since the first quarter of 2020, the Finance segment has worked with certain customers impacted by the pandemic to provide payment relief through loan modifications. The types of temporary payment relief we offered to these customers included delays in the timing of required principal payments, deferrals of interest payments and/or interest-only payments. The majority of these modified loans have returned to paying principal and interest. For loan modifications that cover payment-relief periods in excess of six months, even if the loan was previously current, the loan is deemed a troubled debt restructuring and considered impaired. These impaired loans are classified as either nonaccrual or watchlist based on a review of the credit quality indicators as discussed above.

During the first nine months of 2021, we modified finance receivable contracts for 21 customers with an outstanding balance at October 2, 2021 totaling $76 million, which were all categorized as troubled debt restructurings. Of these modifications, $71 million were previously modified in 2020. Due to the nature of these restructurings, the financial effects were not significant. We had no customer defaults during the last twelve months related to finance receivables previously modified as a troubled debt restructuring. We believe our allowance for credit losses adequately covers our exposure on these loans as our estimated collateral values largely exceed the outstanding loan amounts.

Table of Contents

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


(Dollars in millions)	October 2, 2021		January 2, 2021
Performing	$	511	$	612
Watchlist	—		74
Nonaccrual	110		93
Nonaccrual as a percentage of finance receivables	17.71%		11.94%
Current and less than 31 days past due	$	604	$	738
31-60 days past due	5		12
61-90 days past due	3		11
Over 90 days past due	9		18
60+ days contractual delinquency as a percentage of finance receivables	1.93%		3.72%

At October 2, 2021, 30% of our performing finance receivables were originated since the beginning of 2020 and 32% were originated from 2017 to 2019. For finance receivables categorized as nonaccrual, 63% were originated from 2017 to 2019.

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 finance receivables and the allowance for credit losses, based on the results of our impairment evaluation, is provided below. The finance receivables included in this table specifically exclude leveraged leases in accordance with U.S. generally accepted accounting principles.


(In millions)	October 2, 2021		January 2, 2021
Finance receivables evaluated collectively	$	416	$	521
Finance receivables evaluated individually	110		163
Allowance for credit losses based on collective evaluation	21		28
Allowance for credit losses based on individual evaluation	4		7
Impaired finance receivables with specific allowance for credit losses	$	34	$	46
Impaired finance receivables with no specific allowance for credit losses	76		117
Unpaid principal balance of impaired finance receivables	124		175
Allowance for credit losses on impaired finance receivables	4		7
Average recorded investment of impaired finance receivables	123		126

Note 4. Inventories

Inventories are composed of the following:


(In millions)	October 2, 2021		January 2, 2021
Finished goods	$	1,085	$	1,228
Work in process	1,741		1,455
Raw materials and components	844		830
Total inventories	$	3,670	$	3,513

Table of Contents

Note 5. Warranty Liability

Changes in our warranty liability are as follows:


	Nine Months Ended
(In millions)	October 2, 2021		October 3, 2020
Beginning of period	$	119	$	141
Provision	49		35
Settlements	(52)		(46)
Adjustments*	5		(13)
End of period	$	121	$	117

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

Note 6. Leases

We primarily lease certain manufacturing plants, offices, warehouses, training and service centers at various locations worldwide. Our operating leases have remaining lease terms up to 28 years, which include options to extend the lease term for periods up to 25 years when it is reasonably certain the option will be exercised. Operating lease cost totaled $17 million and $15 million in the third quarter of 2021 and 2020, respectively, and $49 million and $45 million in the first nine months of 2021 and 2020, respectively. Cash paid for operating leases totaled $49 million and $45 million in the first nine months of 2021 and 2020, respectively, and is classified in cash flows from operating activities. Noncash transactions totaled $81 million and $33 million in the first nine months of 2021 and 2020, respectively, reflecting the recognition of operating lease assets and liabilities for new or extended leases. Variable and short-term lease costs were not significant.

Balance sheet and other information related to our operating leases is as follows:


(Dollars in millions)	October 2, 2021		January 2, 2021
Other assets	$	388	$	349
Other current liabilities	58		47
Other liabilities	336		306
Weighted-average remaining lease term (in years)	10.5		11.6
Weighted-average discount rate	3.34%		4.17%

At October 2, 2021, maturities of our operating lease liabilities on an undiscounted basis totaled $20 million for the remainder of 2021, $69 million for 2022, $59 million for 2023, $51 million for 2024, $45 million for 2025 and $247 million thereafter.

Note 7. 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.

Table of Contents

Our foreign currency exchange contracts are measured at fair value using the market method valuation technique. The inputs to this technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data providers. These are observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions, so they are classified as Level 2. At October 2, 2021 and January 2, 2021, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $341 million and $318 million, respectively. At October 2, 2021, the fair value amounts of our foreign currency exchange contracts were a $5 million asset and a $2 million liability. At January 2, 2021, the fair value amounts of our foreign currency exchange contracts were a $5 million asset and a $2 million liability.

Our Finance group enters into interest rate swap agreements to mitigate certain exposures to fluctuations in interest rates. By using these contracts, we are able to convert floating-rate cash flows to fixed-rate cash flows. These agreements are designated as cash flow hedges. At October 2, 2021, we had a swap agreement for a notional amount of $289 million with a maturity of August 2023 and a fair value of a $3 million liability. At January 2, 2021, we had a swap agreement for a notional amount of $294 million with a maturity of February 2022 and a fair value of a $4 million liability. The fair value of these swap agreements is determined using values published by third-party leading financial news and data providers. These values are observable data that represent the value that financial institutions use for contracts entered into at that date, but are not based on actual transactions, so they are classified as Level 2.

Assets and Liabilities Not Recorded at Fair Value

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


	October 2, 2021				January 2, 2021
	Carrying		Estimated		Carrying		Estimated
(In millions)	Value		Fair Value		Value		Fair Value
Manufacturing group
Debt, excluding leases	$	(3,183)	$	(3,413)	$	(3,690)	$	(3,986)
Finance group
Finance receivables, excluding leases	404		438		549		599
Debt	(585)		(552)		(662)		(587)

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.

Table of Contents

Note 8. Shareholders’ Equity

A reconciliation of Shareholders’ equity is presented below:


(In millions)	Common Stock		Capital Surplus		Treasury Stock		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders' Equity
Three months ended October 2, 2021
Beginning of period	$	29	$	1,920	$	(490)	$	6,318	$	(1,676)	$	6,101
Net income	—		—		—		185		—		185
Other comprehensive income	—		—		—		—		6		6
Share-based compensation activity	—		49		—		—		—		49
Dividends declared	—		—		—		(5)		—		(5)
Purchases of common stock	—		—		(299)		—		—		(299)

End of period	$	29	$	1,969	$	(789)	$	6,498	$	(1,670)	$	6,037
Three months ended October 3, 2020
Beginning of period	$	29	$	1,732	$	(74)	$	5,631	$	(1,791)	$	5,527
Net income	—		—		—		115		—		115
Other comprehensive income	—		—		—		—		74		74
Share-based compensation activity	—		30		—		—		—		30
Dividends declared	—		—		—		(5)		—		(5)

End of period	$	29	$	1,762	$	(74)	$	5,741	$	(1,717)	$	5,741
Nine months ended October 2, 2021
Beginning of period	$	29	$	1,785	$	(203)	$	5,973	$	(1,739)	$	5,845
Net income	—		—		—		539		—		539
Other comprehensive income	—		—		—		—		69		69
Share-based compensation activity	—		184		—		—		—		184
Dividends declared	—		—		—		(14)		—		(14)
Purchases of common stock	—		—		(586)		—		—		(586)

End of period	$	29	$	1,969	$	(789)	$	6,498	$	(1,670)	$	6,037
Nine months ended October 3, 2020
Beginning of period	$	29	$	1,674	$	(20)	$	5,682	$	(1,847)	$	5,518
Net income	—		—		—		73		—		73
Other comprehensive income	—		—		—		—		130		130
Share-based compensation activity	—		88		—		—		—		88
Dividends declared	—		—		—		(14)		—		(14)
Purchases of common stock	—		—		(54)		—		—		(54)
End of period	$	29	$	1,762	$	(74)	$	5,741	$	(1,717)	$	5,741

Dividends per share of common stock were $0.02 for both the third quarter of 2021 and 2020 and $0.06 for both the first nine months of 2021 and 2020.

Table of Contents

Earnings Per Share

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

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


	Three Months Ended		Nine Months Ended
(In thousands)	October 2, 2021	October 3, 2020	October 2, 2021	October 3, 2020
Basic weighted-average shares outstanding	223,663	228,918	225,545	228,492
Dilutive effect of stock options	2,827	361	2,250	345
Diluted weighted-average shares outstanding	226,490	229,279	227,795	228,837

For the first nine months of 2021, stock options to purchase 1.4 million shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding as their effect would have been anti-dilutive. Stock options to purchase 7.5 million and 7.9 million shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding for the third quarter and first nine months of 2020, respectively, as their effect would have been anti-dilutive.

Accumulated Other Comprehensive Loss and Other Comprehensive Income

The components of Accumulated other comprehensive loss are presented below:


(In millions)	Pension and Postretirement Benefits Adjustments		Foreign Currency Translation Adjustments		Deferred Gains (Losses) on Hedge Contracts		Accumulated Other Comprehensive Loss
Balance at January 2, 2021	$	(1,780)	$	42	$	(1)	$	(1,739)
Other comprehensive loss before reclassifications	—		(36)		2		(34)
Reclassified from Accumulated other comprehensive loss	90		14		(1)		103
Balance at October 2, 2021	$	(1,690)	$	20	$	—	$	(1,670)
Balance at January 4, 2020	$	(1,811)	$	(36)	$	—	$	(1,847)
Other comprehensive income before reclassifications	—		25		(2)		23
Reclassified from Accumulated other comprehensive loss	110		—		(3)		107
Balance at October 3, 2020	$	(1,701)	$	(11)	$	(5)	$	(1,717)

Table of Contents

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


	October 2, 2021						October 3, 2020
(In millions)	Pre-Tax Amount		Tax (Expense) Benefit		After-tax Amount		Pre-Tax Amount		Tax (Expense) Benefit		After-tax Amount
Three Months Ended
Pension and postretirement benefits adjustments:
Amortization of net actuarial loss*	$	38	$	(9)	$	29	$	46	$	(11)	$	35
Amortization of prior service cost*	2		(1)		1		2		—		2
Pension and postretirement benefits adjustments, net	40		(10)		30		48		(11)		37
Foreign currency translation adjustments	(19)		—		(19)		35		—		35
Deferred gains (losses) on hedge contracts:
Current deferrals	(6)		2		(4)		3		—		3
Reclassification adjustments	(1)		—		(1)		(2)		1		(1)
Deferred gains (losses) on hedge contracts, net	(7)		2		(5)		1		1		2
Total	$	14	$	(8)	$	6	$	84	$	(10)	$	74
Nine Months Ended
Pension and postretirement benefits adjustments:
Amortization of net actuarial loss*	$	114	$	(27)	$	87	$	138	$	(32)	$	106
Amortization of prior service cost*	6		(3)		3		5		(1)		4
Pension and postretirement benefits adjustments, net	120		(30)		90		143		(33)		110
Foreign currency translation adjustments:
Foreign currency translation adjustments	(36)		—		(36)		28		(3)		25
Business disposition	14		—		14		—		—		—
Foreign currency translation adjustments, net	(22)		—		(22)		28		(3)		25
Deferred gains (losses) on hedge contracts:
Current deferrals	1		1		2		(2)		—		(2)
Reclassification adjustments	(1)		—		(1)		(5)		2		(3)
Deferred gains (losses) on hedge contracts, net	—		1		1		(7)		2		(5)
Total	$	98	$	(29)	$	69	$	164	$	(34)	$	130

*These components of other comprehensive income are included in the computation of net periodic pension cost (credit). See Note 16 of our 2020 Annual Report on Form 10-K for additional information.

Table of Contents

Note 9. Segment Information

We operate in, and report financial information for, the following five business segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses, 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 included in the table below:


	Three Months Ended				Nine Months Ended
(In millions)	October 2, 2021		October 3, 2020		October 2, 2021		October 3, 2020
Revenues
Textron Aviation	$	1,181	$	795	$	3,207	$	2,414
Bell	769		793		2,506		2,438
Textron Systems	299		302		960		956
Industrial	730		832		2,349		2,134
Finance	11		13		38		42
Total revenues	$	2,990	$	2,735	$	9,060	$	7,984
Segment Profit
Textron Aviation	$	98	$	(29)	$	241	$	(92)
Bell	105		119		320		352
Textron Systems	45		40		144		103
Industrial	23		58		102		56
Finance	8		1		17		8
Segment profit	279		189		824		427
Corporate expenses and other, net	(23)		(28)		(100)		(72)
Interest expense, net for Manufacturing group	(28)		(38)		(95)		(109)
Special charges*	(10)		(7)		(20)		(124)
Gain on business disposition	—		—		17		—
Inventory charge*	—		—		—		(55)
Income from continuing operations before income taxes	$	218	$	116	$	626	$	67

** See Note 12 for additional information.*

Table of Contents

Note 10. Revenues

Disaggregation of Revenues

Our revenues disaggregated by major product type are presented below:


	Three Months Ended				Nine Months Ended
(In millions)	October 2, 2021		October 3, 2020		October 2, 2021		October 3, 2020
Aircraft	$	814	$	486	$	2,146	$	1,479
Aftermarket parts and services	367		309		1,061		935
Textron Aviation	1,181		795		3,207		2,414
Military aircraft and support programs	488		515		1,637		1,737
Commercial helicopters, parts and services	281		278		869		701
Bell	769		793		2,506		2,438
Air systems*	99		138		339		423
Land and sea systems*	53		54		174		177
Other*	147		110		447		356
Textron Systems	299		302		960		956
Fuel systems and functional components	382		497		1,319		1,233
Specialized vehicles	348		335		1,030		901
Industrial	730		832		2,349		2,134
Finance	11		13		38		42
Total revenues	$	2,990	$	2,735	$	9,060	$	7,984

** Due to a reorganization of certain products within Textron Systems, prior year amounts have been reclassified to conform to the current year presentation for Air Systems, formerly referred to as “Unmanned Systems”, and Land and Sea Systems, formerly referred to as “Marine and Land Systems”. Other includes the following operating units and businesses: Electronic Systems, Weapons Systems, Lycoming, Airborne Tactical Advantage Company and, prior to its disposition, TRU Simulation + Training Canada Inc.*

Table of Contents

Our revenues for our segments by customer type and geographic location are presented below:


(In millions)	Textron Aviation		Bell		Textron Systems		Industrial		Finance		Total
Three months ended October 2, 2021
Customer type:
Commercial	$	1,149	$	278	$	62	$	730	$	11	$	2,230
U.S. Government	32		491		237		—		—		760
Total revenues	$	1,181	$	769	$	299	$	730	$	11	$	2,990
Geographic location:
United States	$	915	$	569	$	266	$	377	$	7	$	2,134
Europe	97		48		10		160		—		315
Asia and Australia	58		90		16		88		1		253
Other international	111		62		7		105		3		288
Total revenues	$	1,181	$	769	$	299	$	730	$	11	$	2,990
Three months ended October 3, 2020
Customer type:
Commercial	$	758	$	273	$	54	$	830	$	13	$	1,928
U.S. Government	37		520		248		2		—		807
Total revenues	$	795	$	793	$	302	$	832	$	13	$	2,735
Geographic location:
United States	$	562	$	608	$	263	$	401	$	7	$	1,841
Europe	65		43		10		203		—		321
Asia and Australia	68		67		15		92		—		242
Other international	100		75		14		136		6		331
Total revenues	$	795	$	793	$	302	$	832	$	13	$	2,735
Nine months ended October 2, 2021
Customer type:
Commercial	$	3,122	$	894	$	187	$	2,337	$	38	$	6,578
U.S. Government	85		1,612		773		12		—		2,482
Total revenues	$	3,207	$	2,506	$	960	$	2,349	$	38	$	9,060
Geographic location:
United States	$	2,409	$	1,862	$	852	$	1,161	$	21	$	6,305
Europe	303		131		29		588		1		1,052
Asia and Australia	209		276		52		267		4		808
Other international	286		237		27		333		12		895
Total revenues	$	3,207	$	2,506	$	960	$	2,349	$	38	$	9,060
Nine months ended October 3, 2020
Customer type:
Commercial	$	2,322	$	687	$	182	$	2,128	$	42	$	5,361
U.S. Government	92		1,751		774		6		—		2,623
Total revenues	$	2,414	$	2,438	$	956	$	2,134	$	42	$	7,984
Geographic location:
United States	$	1,677	$	1,979	$	825	$	1,017	$	21	$	5,519
Europe	219		88		33		558		1		899
Asia and Australia	241		183		50		221		1		696
Other international	277		188		48		338		19		870
Total revenues	$	2,414	$	2,438	$	956	$	2,134	$	42	$	7,984

Table of Contents

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 revenues 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 October 2, 2021, we had $9.8 billion in remaining performance obligations of which we expect to recognize revenues of approximately 70% through 2022, an additional 25% through 2024, 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 October 2, 2021 and January 2, 2021, contract assets totaled $624 million and $561 million, respectively, and contract liabilities totaled $1.1 billion and $842 million, respectively, reflecting timing differences between revenues recognized, billings and payments from customers. We recognized revenues of $51 million and $499 million in the third quarter and first nine months of 2021, respectively, and $44 million and $396 million in the third quarter and first nine months of 2020, respectively, that were included in the contract liability balance at the beginning of each year.

Note 11. Retirement Plans

We provide defined benefit pension plans and other postretirement benefits to eligible employees. The components of net periodic benefit cost (credit) for these plans are as follows:


	Three Months Ended				Nine Months Ended
(In millions)	October 2, 2021		October 3, 2020		October 2, 2021		October 3, 2020
Pension Benefits
Service cost	$	29	$	27	$	87	$	79
Interest cost	62		73		188		220
Expected return on plan assets	(143)		(144)		(431)		(431)
Amortization of net actuarial loss	39		47		116		139
Amortization of prior service cost	4		3		10		9
Net periodic benefit cost (credit)*	$	(9)	$	6	$	(30)	$	16
Postretirement Benefits Other Than Pensions
Service cost	$	1	$	—	$	2	$	2
Interest cost	1		2		4		6
Amortization of net actuarial gain	(1)		(1)		(2)		(1)
Amortization of prior service credit	(2)		(1)		(4)		(4)
Net periodic benefit cost (credit)	$	(1)	$	—	$	—	$	3

** Excludes the cost associated with the defined contribution component, included in certain of our U.S.-based defined benefit pension plans, that totaled $2 million and $8 million for the third quarter and first nine months of 2021, respectively, and $2 million and $8 million for the third quarter and first nine months of 2020, respectively.*

Table of Contents

Note 12. Special Charges

Special charges recorded in the third quarter and first nine months of 2021 and 2020 by segment and type of cost are presented in the table below.


(In millions)	Severance Costs		Contract Termination and Other		Asset Impairments		Total 2020 COVID-19 Restructuring Plan		Other Asset Impairments		Total
Three months ended October 2, 2021
Industrial	$	3	$	1	$	6	$	10	$	—	$	10
Total special charges	$	3	$	1	$	6	$	10	$	—	$	10
Three months ended October 3, 2020


Industrial	$	3	$	—	$	2	$	5	$	—	$	5
Corporate	2		—		—		2		—		2
Total special charges	$	5	$	—	$	2	$	7	$	—	$	7
Nine months ended October 2, 2021
Industrial	$	3	$	6	$	11	$	20	$	—	$	20
Total special charges	$	3	$	6	$	11	$	20	$	—	$	20
Nine months ended October 3, 2020
Textron Aviation	$	27	$	—	$	1	$	28	$	32	$	60
Textron Systems	14		12		14		40		—		40
Industrial	11		—		2		13		7		20
Corporate	4		—		—		4		—		4
Total special charges	$	56	$	12	$	17	$	85	$	39	$	124

2020 COVID-19 Restructuring Plan

In the second quarter of 2020, we initiated a restructuring plan to reduce operating expenses through headcount reductions, facility consolidations and other actions in response to the economic challenges and uncertainty resulting from the COVID-19 pandemic. This plan was expanded in the third quarter of 2020 to include additional headcount reductions and facility consolidations. Since inception of the plan, we have incurred total charges of $128 million, which included severance costs of $76 million for the termination of approximately 2,800 employees, asset impairment charges of $33 million and contract terminations and other costs of $19 million. Of these amounts, $54 million was incurred at Industrial, $37 million at Textron Systems, $33 million at Textron Aviation, and $4 million at Corporate. We expect to incur additional contract termination costs and other charges in the range of $5 million to $10 million, primarily in the Industrial segment, and expect the plan to be substantially completed in the fourth quarter of 2021.

In the second quarter of 2020 and in connection with the restructuring plan, we ceased manufacturing at TRU Simulation + Training Canada Inc.’s facility in Montreal, Canada, resulting in a production suspension of our commercial air transport simulators. As a result of this action and market conditions, we incurred an inventory charge of $55 million, which was recorded in Cost of Sales, to write-down the related inventory to its net realizable value.

Other Asset Impairments

In the first quarter of 2020, we recognized $39 million of intangible asset impairment charges at the Textron Aviation and Industrial segments. Due to the impact of the COVID-19 pandemic, we experienced decreased demand for our products and services as our customers delayed or ceased orders due to the environment of economic uncertainty. In light of these conditions, Textron Aviation had temporarily shut down most aircraft production, including the King Air turboprop and Beechcraft piston product lines, and had instituted employee furloughs. Based on these events, we performed an interim impairment test of the indefinite-lived Beechcraft and King Air trade name intangible assets and recorded an impairment charge of $32 million.

Table of Contents

Restructuring Reserve

Our restructuring reserve activity is summarized below:


(In millions)	Severance Costs		Contract Terminations and Other		Total
Balance at January 2, 2021	$	43	$	9	$	52
Provision for 2020 COVID-19 restructuring plan	8		7		15
Cash paid	(21)		(7)		(28)
Reversals	(5)		(1)		(6)
Foreign currency translation	(1)		—		(1)
Balance at October 2, 2021	$	24	$	8	$	32

The majority of the remaining cash outlays of $32 million is expected to be paid by the first quarter of 2022. Severance costs generally are paid on a lump-sum basis and include outplacement costs, which are paid in accordance with normal payment terms.

Note 13. Income Taxes

Our effective tax rate for the third quarter and first nine months of 2021 was 15.1% and 13.7%, respectively. In the third quarter and first nine months of 2021, the effective tax rate was lower than the U.S. federal statutory rate of 21%, largely due to the favorable impact of research and development credits. In the first nine months of 2021, the effective tax rate also included a $12 million benefit recognized for additional research and development credits related to prior years.

Our effective tax rate for the third quarter and first nine months of 2020 was 0.9% and (9.0)%, respectively, compared with the statutory rate of 21%, largely due to the favorable impact of research and development credits. In the first nine months of 2020, we incurred special charges and an inventory charge in a non-U.S. jurisdiction where tax benefits cannot be realized, which were partially offset by a $14 million benefit recognized upon the release of a valuation allowance in a non-U.S. jurisdiction. These items had a more significant impact on the effective tax rate due to the lower income from continuing operations before income taxes for the period.

Note 14. Commitments and Contingencies

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

Table of Contents

Previous: Cover and table of contents · Next: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations