TEXTRON INC, 10-Q filed on 10/24/2014
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 27, 2014
Oct. 10, 2014
Document and Entity Information
 
 
Entity Registrant Name
TEXTRON INC 
 
Entity Central Index Key
0000217346 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 27, 2014 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--01-03 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
276,048,870 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q3 
 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 27, 2014
Sep. 28, 2013
Sep. 27, 2014
Sep. 28, 2013
Revenues
 
 
 
 
Manufacturing revenues
$ 3,405 
$ 2,871 
$ 9,701 
$ 8,492 
Finance revenues
25 
33 
81 
106 
Total revenues
3,430 
2,904 
9,782 
8,598 
Costs and expenses
 
 
 
 
Cost of sales
2,845 
2,473 
8,077 
7,193 
Selling and administrative expense
304 
245 
959 
820 
Interest expense
47 
41 
141 
134 
Acquisition and restructuring costs
 
39 
 
Total costs and expenses
3,199 
2,759 
9,216 
8,147 
Income from continuing operations before income taxes
231 
145 
566 
451 
Income tax expense
71 
47 
174 
124 
Income from continuing operations
160 
98 
392 
327 
Income (loss) from discontinued operations, net of income taxes
(1)
(4)
Net income
$ 159 
$ 99 
$ 388 
$ 331 
Basic earnings per share
 
 
 
 
Continuing operations (in dollars per share)
$ 0.57 
$ 0.35 
$ 1.40 
$ 1.18 
Discontinued operations (in dollars per share)
 
 
$ (0.02)
$ 0.01 
Basic earnings per share (in dollars per share)
$ 0.57 
$ 0.35 
$ 1.38 
$ 1.19 
Diluted earnings per share
 
 
 
 
Continuing operations (in dollars per share)
$ 0.57 
$ 0.35 
$ 1.39 
$ 1.15 
Discontinued operations (in dollars per share)
 
 
$ (0.02)
$ 0.01 
Diluted earnings per share (in dollars per share)
$ 0.57 
$ 0.35 
$ 1.37 
$ 1.16 
Dividends per share
 
 
 
 
Common stock (in dollars per share)
$ 0.02 
$ 0.02 
$ 0.06 
$ 0.06 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 27, 2014
Sep. 28, 2013
Sep. 27, 2014
Sep. 28, 2013
Consolidated Statements of Comprehensive Income
 
 
 
 
Net income
$ 159 
$ 99 
$ 388 
$ 331 
Other comprehensive income, net of tax:
 
 
 
 
Pension and postretirement benefits adjustments, net of reclassifications
17 
64 
62 
127 
Deferred gains/losses on hedge contracts, net of reclassifications
(5)
(11)
Foreign currency translation adjustments
(43)
12 
(47)
Other comprehensive income (loss)
(31)
78 
17 
119 
Comprehensive income
$ 128 
$ 177 
$ 405 
$ 450 
Consolidated Balance Sheets (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
Sep. 27, 2014
Dec. 28, 2013
Assets
 
 
Cash and equivalents
$ 511 
$ 1,211 
Inventories
4,081 
2,963 
Total assets
14,739 
12,944 
Liabilities
 
 
Total liabilities
10,167 
8,560 
Shareholders' equity
 
 
Common stock
36 
35 
Capital surplus
1,432 
1,331 
Treasury stock
(302)
 
Retained earnings
4,416 
4,045 
Accumulated other comprehensive loss
(1,010)
(1,027)
Total shareholders' equity
4,572 
4,384 
Total liabilities and shareholders' equity
14,739 
12,944 
Common shares outstanding
276,195 
282,059 
Manufacturing group
 
 
Assets
 
 
Cash and equivalents
430 
1,163 
Accounts receivable, net
1,150 
979 
Inventories
4,081 
2,963 
Other current assets
539 
467 
Total current assets
6,200 
5,572 
Property, plant and equipment, less accumulated depreciation and amortization of $3,662 and $3,463
2,442 
2,215 
Goodwill
2,020 
1,735 
Other assets
2,509 
1,697 
Total assets
13,171 
11,219 
Liabilities
 
 
Short-term and current portion of long-term debt
383 
Accounts payable
1,135 
1,107 
Accrued liabilities
2,375 
1,888 
Total current liabilities
3,893 
3,003 
Other liabilities
2,451 
2,118 
Long-term debt
2,474 
1,923 
Total liabilities
8,818 
7,044 
Finance group
 
 
Assets
 
 
Cash and equivalents
81 
48 
Finance receivables, net
1,308 
1,493 
Other assets
179 
184 
Total assets
1,568 
1,725 
Liabilities
 
 
Other liabilities
238 
260 
Debt
1,111 
1,256 
Total liabilities
$ 1,349 
$ 1,516 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, unless otherwise specified
Sep. 27, 2014
Dec. 28, 2013
Consolidated Balance Sheets
 
 
Accumulated depreciation and amortization
$ 3,662 
$ 3,463 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 27, 2014
Sep. 28, 2013
Cash flows from operating activities
 
 
Net income
$ 388 
$ 331 
Less: Income (loss) from discontinued operations
(4)
Income from continuing operations
392 
327 
Non-cash items:
 
 
Depreciation and amortization
325 
285 
Deferred income taxes
(41)
74 
Other, net
80 
38 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(55)
(178)
Inventories
(370)
(443)
Other assets
24 
(51)
Accounts payable
(120)
(25)
Accrued and other liabilities
137 
(276)
Income taxes, net
61 
(96)
Pension, net
31 
(17)
Captive finance receivables, net
107 
257 
Other operating activities, net
(2)
Net cash provided by (used in) operating activities of continuing operations
569 
(103)
Net cash used in operating activities of discontinued operations
(3)
(5)
Net cash provided by (used in) operating activities
566 
(108)
Cash flows from investing activities
 
 
Net cash used in acquisitions
(1,580)
(53)
Capital expenditures
(255)
(300)
Finance receivables repaid
77 
157 
Proceeds from sales of receivables and other finance assets
37 
152 
Other investing activities, net
(4)
13 
Net cash used in investing activities
(1,725)
(31)
Cash flows from financing activities
 
 
Proceeds from long-term debt
1,187 
412 
Principal payments on long-term and nonrecourse debt
(462)
(997)
Increase in short-term debt
25 
96 
Purchases of Textron common stock
(302)
 
Settlement of convertible notes
 
(215)
Proceeds from settlement of capped call
 
75 
Dividends paid
(17)
(16)
Other financing activities, net
33 
16 
Net cash provided by (used in) financing activities
464 
(629)
Effect of exchange rate changes on cash and equivalents
(5)
(8)
Net decrease in cash and equivalents
(700)
(776)
Cash and equivalents at beginning of period
1,211 
1,413 
Cash and equivalents at end of period
511 
637 
Manufacturing Group
 
 
Cash flows from operating activities
 
 
Net income
378 
300 
Less: Income (loss) from discontinued operations
(4)
Income from continuing operations
382 
296 
Non-cash items:
 
 
Depreciation and amortization
315 
271 
Deferred income taxes
(25)
29 
Other, net
69 
69 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(55)
(178)
Inventories
(344)
(459)
Other assets
38 
(40)
Accounts payable
(120)
(25)
Accrued and other liabilities
145 
(262)
Income taxes, net
57 
(101)
Pension, net
31 
(12)
Dividends received from Finance Group
 
30 
Capital contributions paid to Finance Group
 
(1)
Other operating activities, net
(2)
Net cash provided by (used in) operating activities of continuing operations
491 
(381)
Net cash used in operating activities of discontinued operations
(3)
(5)
Net cash provided by (used in) operating activities
488 
(386)
Cash flows from investing activities
 
 
Net cash used in acquisitions
(1,580)
(53)
Capital expenditures
(255)
(300)
Other investing activities, net
(12)
19 
Net cash used in investing activities
(1,847)
(334)
Cash flows from financing activities
 
 
Proceeds from long-term debt
1,093 
150 
Principal payments on long-term and nonrecourse debt
(201)
(312)
Increase in short-term debt
25 
96 
Purchases of Textron common stock
(302)
 
Settlement of convertible notes
 
(215)
Proceeds from settlement of capped call
 
75 
Dividends paid
(17)
(16)
Other financing activities, net
33 
16 
Net cash provided by (used in) financing activities
631 
(206)
Effect of exchange rate changes on cash and equivalents
(5)
(8)
Net decrease in cash and equivalents
(733)
(934)
Cash and equivalents at beginning of period
1,163 
1,378 
Cash and equivalents at end of period
430 
444 
Finance Group
 
 
Cash flows from operating activities
 
 
Net income
10 
31 
Income from continuing operations
10 
31 
Non-cash items:
 
 
Depreciation and amortization
10 
14 
Deferred income taxes
(16)
45 
Other, net
11 
(31)
Changes in assets and liabilities:
 
 
Other assets
(14)
(11)
Accrued and other liabilities
(8)
(24)
Income taxes, net
Pension, net
 
(5)
Net cash provided by (used in) operating activities of continuing operations
(3)
24 
Net cash provided by (used in) operating activities
(3)
24 
Cash flows from investing activities
 
 
Finance receivables repaid
307 
558 
Finance receivables originated or purchased
(123)
(164)
Proceeds from sales of receivables and other finance assets
37 
152 
Other investing activities, net
(18)
40 
Net cash used in investing activities
203 
586 
Cash flows from financing activities
 
 
Proceeds from long-term debt
94 
262 
Principal payments on long-term and nonrecourse debt
(261)
(685)
Dividends paid
 
(30)
Capital contributions paid to Finance group
 
Net cash provided by (used in) financing activities
(167)
(452)
Net decrease in cash and equivalents
33 
158 
Cash and equivalents at beginning of period
48 
35 
Cash and equivalents at end of period
$ 81 
$ 193 
Basis of Presentation
Basis of Presentation

Note 1.  Basis of Presentation

 

Our Consolidated Financial Statements include the accounts of Textron Inc. (Textron) and its majority-owned subsidiaries.  On March 14, 2014, we completed the acquisition of all of the outstanding equity interests in Beech Holdings, LLC, which included Beechcraft Corporation and other subsidiaries, (collectively “Beechcraft”). The results of Beechcraft have been included in our consolidated financial statements only for the period subsequent to the completion of the acquisition. As a result, the consolidated financial results for the nine months ended September 27, 2014 do not reflect a full nine months of Beechcraft operations.

 

We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information.  Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements.  The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 28, 2013.  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 Bell, Textron Systems and Industrial segments, and the recently formed Textron Aviation segment, which includes the legacy Cessna segment and the acquired Beechcraft business. 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.  All significant intercompany transactions are eliminated from the Consolidated Financial Statements, including retail and wholesale financing activities for inventory sold by our Manufacturing group and financed by our Finance group.

 

Use of Estimates

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

 

During 2014 and 2013, we changed our estimates of revenues and costs on certain long-term contracts that are accounted for under the percentage-of-completion method of accounting.  These changes in estimates increased income from continuing operations before income taxes in the third quarter of 2014 and 2013 by $10 million and $4 million, respectively, ($6 million and $2 million after tax, or $0.02 and $0.01 per diluted share, respectively). For the third quarter of 2014 and 2013, the gross favorable program profit adjustments totaled $25 million and $12 million, respectively, and the gross unfavorable program profit adjustments totaled $15 million and $8 million, respectively.

 

The changes in estimates increased income from continuing operations before income taxes in the first nine months of 2014 and 2013 by $69 million and $13 million, respectively, ($43 million and $8 million after tax, or $0.15 and $0.03 per diluted share, respectively).  For the first nine months of 2014 and 2013, the gross favorable program profit adjustments totaled $90 million and $30 million, respectively, and the gross unfavorable program profit adjustments totaled $21 million and $17 million, respectively.  Gross favorable program profit adjustments in the second quarter of 2014 included $16 million related to the settlement of the System Development and Demonstration phase of the Armed Reconnaissance Helicopter (ARH) program which was terminated in October 2008.

 

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers,” that outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption. This ASU is effective for our company at the beginning of fiscal 2017; early adoption is not permitted. We are currently evaluating the new guidance to determine the impact it is expected to have on our consolidated financial statements, along with the transition method we expect to utilize.

 

Business Acquisitions
Business Acquisitions

Note 2.  Business Acquisitions

 

2014 Beechcraft Acquisition

On March 14, 2014, we acquired Beechcraft for an aggregate cash payment of $1.5 billion that included a repayment of a portion of Beechcraft’s working capital credit facility at closing. We financed a portion of the purchase price with the issuance of $600 million in senior notes on January 30, 2014 and by drawing $500 million under the five-year term loan agreement entered into on January 24, 2014.  The balance was paid from cash on hand.

 

Beechcraft is a leading manufacturer of business, special mission, light attack and trainer aircraft, including the King Air turboprops, piston-engine Baron and Bonanza, and the T-6 trainer and AT-6 light attack military aircraft. Beechcraft also has a global network of both factory-owned and authorized service centers.  The acquisition of Beechcraft and the formation of the Textron Aviation segment provide increased scale and complementary product offerings, allowing us to strengthen our position across the aviation industry and enhance our ability to support our customers.

 

The consideration paid for this business was allocated on a preliminary basis to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date, which have been subsequently adjusted as estimates are being finalized.  Due to the size and breadth of this acquisition, additional time is necessary to complete the purchase accounting related to the fair values of certain assets and liabilities.  We will finalize the purchase accounting as soon as reasonably possible during the one-year-measurement period allowed under generally accepted accounting principles.  Any potential adjustments to the preliminary fair values could be material.  Our allocation of the purchase price is presented below.

 

(In millions)

 

 

 

Accounts receivable

 

$

118

 

Inventories

 

770

 

Other current assets

 

175

 

Property, plant and equipment

 

258

 

Intangible assets

 

581

 

Goodwill

 

226

 

Other assets

 

171

 

Accounts payable

 

(143

)

Accrued liabilities

 

(282

)

Other liabilities

 

(396

)

Total net assets acquired

 

$

1,478

 

 

Goodwill of $226 million was primarily related to expected synergies from combining operations and the value of the existing workforce, and intangible assets of $581 million included unpatented technology related to original equipment manufactured parts and designs and customer relationships valued at $373 million and trade names valued at $208 million.  The unpatented technology and customer relationships assets have a life of 15 years, resulting in amortization expense in the range of approximately $17 million to $31 million annually.  Substantially all of the trade names intangible asset has an indefinite life and therefore is not subject to amortization.

 

We acquired tax-deductible goodwill of approximately $260 million in this transaction.  We also recorded unrecognized tax benefits of approximately $95 million at the acquisition date.

 

In connection with the integration of Beechcraft, we initiated a restructuring program in our Textron Aviation segment in the first quarter of 2014 to align the Cessna and Beechcraft businesses, reduce operating redundancies and maximize efficiencies. We expect to incur costs for this program related to employee terminations, facility consolidations, contract terminations and other transition-related costs, and estimate that this program will result in charges of approximately $35 million in 2014.  We expect to incur additional costs in 2015, but do not expect these costs to be material.   In the third quarter and first nine months of 2014, we recorded charges of $3 million and $28 million, respectively, related to restructuring activities that were included in the Acquisition and restructuring costs line on the Consolidated Statements of Operations.  In addition, we incurred transaction costs of $11 million during the first quarter of 2014 related to the acquisition that were also included in the Acquisition and restructuring costs line.

 

Other 2014 Acquisitions

During the first nine months of 2014, we made aggregate cash payments of $101 million for the following acquisitions:

 

Industrial

·         Tug Technologies Corporation, a manufacturer of ground support equipment in the aviation industry, acquired on May 2, 2014.

·         The assets of Dixie Chopper, a manufacturer of zero-turn radius mowers for the commercial and residential markets, acquired on February 6, 2014.

 

Textron Systems

·         ProFlight, LLC, a pilot training operation, acquired on July 2, 2014.

 

Actual and Pro-Forma Impact from 2014 Acquisitions

The operating results for the 2014 acquisitions are included in the Consolidated Statement of Operations since their respective closing dates.  From the closing dates through September 27, 2014, revenues related to these acquisitions totaled $435 million and $993 million for the three- and nine-month periods, respectively.  The cost structures of Beechcraft and Cessna have been significantly integrated since the acquisition of Beechcraft, therefore, it is not possible to separately report earnings for this acquisition.  The earnings related to the other 2014 acquisitions were not significant.

 

The unaudited supplemental pro-forma data included in the table below presents consolidated information as if our 2014 acquisitions had been completed on December 30, 2012.  This pro-forma information should not be considered indicative of the results that would have occurred if the acquisition and related financing had been consummated on December 30, 2012, nor are they necessarily indicative of future results as they do not reflect the potential realization of cost savings and synergies associated with the acquisition.

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions, except per share amounts)

 

September 27,
2014

 

September 28,
2013

 

September 27,
2014

 

September 28,
2013

 

Revenues

 

$

3,430

 

$

3,308

 

$

10,145

 

$

9,907

 

Income from continuing operations, net of income taxes

 

169

 

78

 

462

 

279

 

Diluted earnings per share from continuing operations

 

$

0.60

 

$

0.28

 

$

1.64

 

$

0.98

 

 

Certain pro-forma adjustments were made to reflect the allocation of the preliminary purchase price to the acquired net assets including depreciation and intangible amortization expense, resulting from the valuation of tangible and intangible assets, and amortization of inventory fair value step-up adjustments, along with the related tax effects.  The pro-forma results for 2013 were also adjusted to include transaction and restructuring costs of $3 million and $39 million for the three- and nine-month periods, respectively, related to the Beechcraft acquisition; these costs were excluded from the 2014 pro-forma results. In addition, the pro-forma results exclude the financial impact related to Beechcraft’s emergence from bankruptcy in 2013.

 

Retirement Plans
Retirement Plans

Note 3. Retirement Plans

 

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

 

 

 

Pension Benefits

 

Postretirement Benefits
Other Than Pensions

 

(In millions)

 

September 27,
2014

 

September 28,
2013

 

September 27,
2014

 

September 28,
2013

 

Three Months Ended

 

 

 

 

 

 

 

 

 

Service cost

 

$

27

 

$

33

 

$

1

 

$

1

 

Interest cost

 

86

 

72

 

5

 

5

 

Expected return on plan assets

 

(117)

 

(104

)

 

 

Amortization of prior service cost (credit)

 

3

 

4

 

(5)

 

(6

)

Amortization of net actuarial loss

 

28

 

46

 

 

2

 

Net periodic benefit cost

 

$

27

 

$

51

 

$

1

 

$

2

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

Service cost

 

$

81

 

$

100

 

$

3

 

$

5

 

Interest cost

 

250

 

218

 

15

 

15

 

Expected return on plan assets

 

(345)

 

(314

)

 

 

Amortization of prior service cost (credit)

 

11

 

11

 

(16)

 

(11

)

Amortization of net actuarial loss

 

84

 

138

 

1

 

5

 

Net periodic benefit cost

 

$

81

 

$

153

 

$

3

 

$

14

 

 

Earnings Per Share
Earnings Per Share

Note 4.  Earnings Per Share

 

In February 2014, we entered into an Accelerated Share Repurchase agreement (ASR) with a counterparty and repurchased 4.3 million shares of our outstanding common stock from the counterparty for $150 million. The initial delivery of shares resulted in an immediate reduction of the outstanding shares used to calculate the weighted average common shares for basic and diluted earnings per share. The ASR is scheduled to settle in December 2014. Upon final settlement of the ASR, we may receive additional shares or pay additional cash or shares, at our option, based on the daily volume weighted average market price (VWAP) of our common stock over the course of the calculation period, less a discount. We intend to settle any amount payable by us in shares. At September 27, 2014, based on the VWAP through that date, we would be required to issue to the counterparty approximately 278,000 shares to settle the ASR. For accounting purposes, the ASR is considered a treasury stock purchase for the 4.3 million shares delivered to us by the counterparty, and a forward contract indexed to our common stock for the shares to be delivered upon settlement, if any. The forward contract is not required to be separately accounted for as a derivative.

 

We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period. Basic EPS is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends. Diluted EPS considers the dilutive effect of all potential future common stock, including stock options and shares that would have been delivered if the ASR were settled at September 27, 2014. In addition, for the first nine months of 2013, prior to the maturity of our convertible notes on May 1, 2013 as disclosed in Note 7 of our 2013 Annual Report on Form 10-K, diluted EPS included the shares that could have been issued upon the conversion of the notes and upon the exercise of the related warrants.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In thousands)

 

September 27,
2014

 

September 28,
2013

 

September 27,
2014

 

September 28,
2013

 

Basic weighted-average shares outstanding

 

278,860

 

281,525

 

280,096

 

278,296

 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

Stock options

 

1,892

 

185

 

2,027

 

221

 

ASR

 

278

 

 

301

 

 

Convertible notes and warrants

 

 

 

 

6,226

 

Diluted weighted-average shares outstanding

 

281,030

 

281,710

 

282,424

 

284,743

 

 

Stock options to purchase 2 million shares of common stock outstanding are excluded from our calculation of diluted weighted-average shares outstanding for both the three and nine months ended September 27, 2014, as their effect would have been anti-dilutive.  Stock options to purchase 6 million and 5 million shares of common stock outstanding are excluded from our calculation of diluted weighted-average shares outstanding for the three and nine months ended September 28, 2013, respectively, as their effect would have been anti-dilutive.

 

Accounts Receivable and Finance Receivables
Accounts Receivable and Finance Receivables

Note 5.  Accounts Receivable and Finance Receivables

 

Accounts Receivable

Accounts receivable is composed of the following:

 

(In millions)

 

September 27,
2014

 

December 28,
2013

 

Commercial

 

$

849

 

$

654

 

U.S. Government contracts

 

329

 

347

 

 

 

1,178

 

1,001

 

Allowance for doubtful accounts

 

(28)

 

(22

)

Total

 

$

1,150

 

$

979

 

 

We have unbillable receivables, primarily on U.S. Government contracts, that arise when the revenues we have appropriately recognized based on performance cannot be billed yet under terms of the contract.  Unbillable receivables within accounts receivable totaled $124 million at September 27, 2014 and $163 million at December 28, 2013.

 

Finance Receivables

Finance receivables by classification are presented in the following table:

 

(In millions)

 

September 27,
2014

 

December 28,
2013

 

Finance receivables held for investment

 

$

1,329

 

$

1,483

 

Allowance for losses

 

(56)

 

(55

)

Total finance receivables held for investment, net

 

1,273

 

1,428

 

Finance receivables held for sale

 

35

 

65

 

Total finance receivables, net

 

$

1,308

 

$

1,493

 

 

Credit Quality Indicators and Nonaccrual Finance Receivables

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

 

We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful.  In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful.  Recognition of interest income is suspended for these accounts and all cash collections are used to reduce the net investment balance.  We resume the accrual of interest when the loan becomes contractually current through payment according to the original terms of the loan or, if a loan has been modified, following a period of performance under the terms of the modification, provided we conclude that collection of all principal and interest is no longer doubtful.  Previously suspended interest income is recognized at that time.  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.

 

A summary of finance receivables categorized based on the credit quality indicators discussed above is as follows:

 

(In millions)

 

September 27,
2014

 

December 28,
 2013

 

Performing

 

$

1,111

 

$

1,285

 

Watchlist

 

117

 

93

 

Nonaccrual

 

101

 

105

 

Total

 

$

1,329

 

$

1,483

 

Nonaccrual as a percentage of total finance receivables

 

7.60%

 

7.08%

 

 

We measure delinquency based on the contractual payment terms of our loans and leases.  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 by delinquency aging category are summarized in the table below:

 

(In millions)

 

September 27,
2014

 

December 28,
2013

 

Less than 31 days past due

 

$

1,165

 

$

1,295

 

31-60 days past due

 

94

 

108

 

61-90 days past due

 

41

 

37

 

Over 90 days past due

 

29

 

43

 

Total

 

$

1,329

 

$

1,483

 

 

Accrual status loans that were greater than 90 days past due totaled $4 million at September 27, 2014 and $5 million at December 28, 2013.  At September 27, 2014 and December 28, 2013, 60+ days contractual delinquency as a percentage of finance receivables was 5.27% and 5.39%, respectively.

 

Loan Modifications

Troubled debt restructurings occur when we have either modified the contract terms of finance receivables for borrowers experiencing financial difficulties or accepted a transfer of assets in full or partial satisfaction of the loan balance.  The types of modifications we typically make include extensions of the original maturity date of the contract, delays in the timing of required principal payments and deferrals of interest payments. The changes effected by modifications made during the first nine months of 2014 and 2013 to finance receivables were not material.

 

Impaired Loans

On a quarterly basis, we evaluate individual finance receivables for impairment in non-homogeneous portfolios and larger balance accounts in homogeneous loan portfolios. A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators discussed above. Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified. If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification. Interest income recognized on impaired loans was not significant in the first nine months of 2014 or 2013.

 

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

 

(In millions)

 

September 27,
2014

 

December 28,
2013

 

Recorded investment:

 

 

 

 

 

Impaired loans with related allowance for losses

 

$

78

 

$

59

 

Impaired loans with no related allowance for losses

 

53

 

78

 

Total

 

$

131

 

$

137

 

Unpaid principal balance

 

$

135

 

$

141

 

Allowance for losses on impaired loans

 

23

 

14

 

Average recorded investment

 

116

 

155

 

 

A summary of the allowance for losses on finance receivables that are evaluated on an individual basis and on a collective basis is provided below. The finance receivables included in the table below excludes leveraged leases in accordance with generally accepted accounting principles.

 

(In millions)

 

September 27,
2014

 

December 28,
2013

 

Allowance based on collective evaluation

 

$

33

 

$

41

 

Allowance based on individual evaluation

 

23

 

14

 

Finance receivables evaluated collectively

 

$

1,077

 

$

1,226

 

Finance receivables evaluated individually

 

131

 

137

 

 

Allowance for Losses

We maintain the 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 are 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. The allowance is established as a percentage of non-recourse finance receivables, which have not been identified as requiring specific reserves. The percentage is based on a combination of factors, including historical loss experience, current delinquency and default trends, collateral values and both general economic and specific industry trends. Finance receivables are charged off at the earlier of the date the collateral is repossessed or when no payment has been received for six months, unless management deems the receivable collectible.

 

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

 

 

 

Nine Months Ended

 

(In millions)

 

September 27,
2014

 

September 28,
2013

 

Balance at the beginning of period

 

$

55

 

$

84

 

Provision for losses

 

7

 

(23

)

Charge-offs

 

(11)

 

(9

)

Recoveries

 

5

 

11

 

Transfers

 

 

(1

)

Balance at the end of period

 

$

56

 

$

62

 

 

Inventories
Inventories

Note 6.  Inventories

 

Inventories are composed of the following:

 

(In millions)

 

September 27,
2014

 

December 28,
2013

 

Finished goods

 

$

1,646

 

$

1,276

 

Work in process

 

2,791

 

2,477

 

Raw materials and components

 

555

 

407

 

 

 

4,992

 

4,160

 

Progress/milestone payments

 

(911)

 

(1,197

)

Total

 

$

4,081

 

$

2,963

 

 

Accrued Liabilities
Accrued Liabilities

Note 7.  Accrued Liabilities

 

We provide limited warranty and product maintenance programs, including parts and labor, for certain products for periods ranging from one to five years. Changes in our warranty and product maintenance liabilities are as follows:

 

 

 

Nine Months Ended

 

(In millions)

 

September 27,
2014

 

September 28,
2013

 

Accrual at the beginning of period

 

$

223

 

$

222

 

Provision

 

240

 

203

 

Settlements

 

(240)

 

(210

)

Acquisitions

 

65

 

 

Adjustments*

 

(8)

 

(3

)

Accrual at the end of period

 

$

280

 

$

212

 

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

 

Debt
Debt

Note 8.  Debt

 

On January 24, 2014, we entered into a five-year term loan agreement with a syndicate of banks in the principal amount of $500 million. On January 30, 2014, we issued $250 million in 3.65% notes due 2021 and $350 million in 4.30% notes due 2024 under our shelf registration statement.  Upon the closing of the Beechcraft acquisition on March 14, 2014, we fully drew down on the five-year term loan and used the cash, along with the net proceeds of the issuance of the notes, to finance a portion of the acquisition.  During the third quarter of 2014, we repaid $200 million of the five-year term loan.

 

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

Note 9.  Accumulated Other Comprehensive Loss and Other Comprehensive Income

 

The components of Accumulated Other Comprehensive Loss are presented below:

 

(In millions)

 

Foreign
Currency
Translation
Adjustments

 

Pension and
Postretirement
Benefits
Adjustments

 

Deferred
Gains/Losses
on Hedge
Contracts

 

Accumulated
Other
Comprehensive
Loss

 

For the nine months ended September 27, 2014

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

93

 

$

(1,110)

 

$

(10)

 

$

(1,027

)

Other comprehensive income (loss) before reclassifications

 

(47)

 

9

 

(4)

 

(42

)

Amounts reclassified from Accumulated Other Comprehensive Loss

 

 

53

 

6

 

59

 

Other comprehensive income (loss)

 

(47)

 

62

 

2

 

17

 

Ending balance

 

$

46

 

$

(1,048)

 

$

(8)

 

$

(1,010

)

For the nine months ended September 28, 2013

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

81

 

$

(1,857)

 

$

6

 

$

(1,770

)

Other comprehensive income (loss) before reclassifications

 

3

 

 

(9)

 

(6

)

Amounts reclassified from Accumulated Other Comprehensive Loss

 

 

127

 

(2)

 

125

 

Other comprehensive income (loss)

 

3

 

127

 

(11)

 

119

 

Ending balance

 

$

84

 

$

(1,730)

 

$

(5)

 

$

(1,651

)

 

The before and after-tax components of Other Comprehensive Income are presented below:

 

(In millions)

 

Pre-Tax
Amount

 

Tax
(Expense)
Benefit

 

After-Tax
Amount

 

For the three months ended September 27, 2014

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

28

 

$

(10

)

$

18

 

Amortization of prior service credit*

 

(2

)

1

 

(1

)

Pension and postretirement benefits adjustments, net

 

26

 

(9

)

17

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

(9

)

3

 

(6

)

Reclassification adjustments

 

2

 

(1

)

1

 

Deferred gains/losses on hedge contracts, net

 

(7

)

2

 

(5

)

Foreign currency translation adjustments

 

(39

)

(4

)

(43

)

Total

 

$

(20

)

$

(11

)

$

(31

)

For the three months ended September 28, 2013

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

48

 

$

(18

)

$

30

 

Amortization of prior service credit*

 

(2

)

1

 

(1

)

Amendment to postretirement benefit plan

 

55

 

(20

)

35

 

Pension and postretirement benefits adjustments, net

 

101

 

(37

)

64

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

3

 

(1

)

2

 

Deferred gains/losses on hedge contracts, net

 

3

 

(1

)

2

 

Foreign currency translation adjustments

 

8

 

4

 

12

 

Total

 

$

112

 

$

(34

)

$

78

 

For the nine months ended September 27, 2014

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

85

 

$

(30

)

$

55

 

Amortization of prior service credit*

 

(5

)

3

 

(2

)

Amendment to postretirement benefit plan

 

15

 

(6

)

9

 

Pension and postretirement benefits adjustments, net

 

95

 

(33

)

62

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

(7

)

3

 

(4

)

Reclassification adjustments

 

9

 

(3

)

6

 

Deferred gains/losses on hedge contracts, net

 

2

 

 

2

 

Foreign currency translation adjustments

 

(46

)

(1

)

(47

)

Total

 

$

51

 

$

(34

)

$

17

 

For the nine months ended September 28, 2013

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

143

 

$

(51

)

$

92

 

Amendment to postretirement benefit plan

 

55

 

(20

)

35

 

Pension and postretirement benefits adjustments, net

 

198

 

(71

)

127

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

(11

)

2

 

(9

)

Reclassification adjustments

 

(3

)

1

 

(2

)

Deferred gains/losses on hedge contracts, net

 

(14

)

3

 

(11

)

Foreign currency translation adjustments

 

6

 

(3

)

3

 

Total

 

$

190

 

$

(71

)

$

119

 

*These components of other comprehensive income are included in the computation of net periodic pension cost.  See Note 11 of our 2013 Annual Report on Form 10-K for additional information.

 

Commitments and Contingencies
Commitments and Contingencies

Note 10.  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.

 

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

Note 11.  Derivative Instruments and Fair Value Measurements

 

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

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

We manufacture and sell our products in a number of countries throughout the world, and, therefore, we are exposed to movements in foreign currency exchange rates.  We utilize foreign currency exchange contracts to manage this volatility.  Our foreign currency exchange contracts are measured at fair value using the market method valuation technique.  The inputs to this technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data providers.  These are observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions so they are classified as Level 2.  At September 27, 2014 and December 28, 2013, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $753 million and $636 million, respectively.  At September 27, 2014, the fair value amounts of our foreign currency exchange contracts were a $7 million asset and a $15 million liability.  At December 28, 2013, the fair value amounts of our foreign currency exchange contracts were a $2 million asset and a $15 million liability.

 

We primarily utilize forward exchange contracts which have maturities of no more than three years.  These contracts qualify as cash flow hedges and are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses.  At September 27, 2014, we had a net deferred loss of $8 million in Accumulated other comprehensive loss related to these cash flow hedges.  Net gains and losses recognized in earnings and Accumulated other comprehensive loss on cash flow hedges, including gains and losses related to hedge ineffectiveness, were not significant in the periods presented.

 

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

 

Our Finance group has entered into interest rate exchange contracts to mitigate exposure to changes in the fair value of its fixed-rate receivables and debt due to fluctuations in interest rates.  These interest rate exchange contracts are not exchange traded and are measured at fair value utilizing widely accepted, third-party developed valuation models.  The actual terms of each individual contract are entered into a valuation model, along with interest rate data, which is based on readily observable market data published by third-party leading financial news and data providers.  At September 27, 2014 and December 28, 2013, we had interest rate exchange contracts with notional amounts upon which the contracts were based of $162 million and $229 million, respectively.  The fair value amounts of our interest rate exchange contracts were a $1 million asset and a $3 million liability at September 27, 2014.  At December 28, 2013, the fair value amounts of our interest rate exchange contracts were a $2 million asset and $5 million liability.

 

Our exposure to loss from nonperformance by the counterparties to our derivative agreements at September 27, 2014 was minimal.  We do not anticipate nonperformance by counterparties in the periodic settlements of amounts due. We historically have minimized this potential for risk by entering into contracts exclusively with major, financially sound counterparties having no less than a long-term bond rating of A.  The credit risk generally is limited to the amount by which the counterparties’ contractual obligations exceed our obligations to the counterparty.  We continuously monitor our exposures to ensure that we limit our risks.

 

Assets Recorded at Fair Value on a Nonrecurring Basis

During the periods ended September 27, 2014 and December 28, 2013, the Finance group’s impaired nonaccrual finance receivables of $55 million and $45 million, respectively, were measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3).  Impaired nonaccrual finance receivables represent assets recorded at fair value on a nonrecurring basis since the measurement of required reserves on our impaired finance receivables is significantly dependent on the fair value of the underlying collateral. For impaired nonaccrual finance receivables secured by aviation assets, the fair values of collateral are determined primarily based on the use of industry pricing guides. Fair value measurements recorded on impaired finance receivables resulted in charges to provision for loan losses totaling $5 million and $16 million for the three and nine months ended September 27, 2014, respectively, and $3 million and $8 million for the three and nine months ended September 27, 2013, respectively.

 

Assets and Liabilities Not Recorded at Fair Value

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

 

 

 

September 27, 2014

 

December 28, 2013

 

(In millions)

 

Carrying
Value

 

Estimated Fair
Value

 

Carrying
Value

 

Estimated Fair
Value

 

Manufacturing group

 

 

 

 

 

 

 

 

 

Long-term debt, excluding leases

 

$    (2,760

)

$     (2,959

)

$    (1,854

)

$     (2,027

)

Finance group

 

 

 

 

 

 

 

 

 

Finance receivables held for investment, excluding leases

 

1,072

 

1,102

 

1,231

 

1,290

 

Debt

 

(1,111

)

(1,112

)

(1,256

)

(1,244

)

 

Fair value for the Manufacturing group debt is determined using market observable data for similar transactions (Level 2).  At September 27, 2014 and December 28, 2013, approximately 76% and 70%, respectively, of the fair value of term debt for the Finance group was determined based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations (Level 2). The remaining Finance group debt was determined based on observable market transactions (Level 1). Fair value estimates for finance receivables held for investment 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.

 

Income Tax Expense
Income Tax Expense

Note 12.  Income Tax Expense

 

Income tax expense equated to an effective income tax rate of 30.7% for both the three and nine months ended September 27, 2014, compared with the U.S. federal statutory income tax rate of 35.0%.  The difference between the statutory and the effective income tax rate was primarily due to benefits from income attributable to international operations in countries with lower tax rates.

 

Income tax expense equated to an effective income tax rate of 32.4% and 27.5% for the three and nine months ended September 28, 2013, respectively, compared with the U.S. federal statutory income tax rate of 35.0%.  For the nine months ended September 28, 2013, the difference between the statutory and the effective income tax rate was primarily due to benefits from income attributable to international operations in countries with lower tax rates and a favorable impact of four percentage points, resulting from the retroactive reinstatement and extension of the Federal Research and Development Tax Credit as part of the American Taxpayer Relief Act of 2012 enacted on January 2, 2013.

 

Segment Information
Segment Information

Note 13.  Segment Information

 

We operate in, and report financial information for, the following five business segments: Bell, Textron Systems, Industrial, Finance and the recently formed Textron Aviation segment as discussed in Note 1.

 

Segment profit is an important measure used for evaluating performance and for decision-making purposes.  Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses and acquisition and restructuring costs related to the Beechcraft acquisition.  The measurement for the Finance segment includes interest income and expense along with intercompany interest expense.  Our revenues by segment and a reconciliation of segment profit to income from continuing operations before income taxes are as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

September 27,
2014

 

September 28,
2013

 

September 27,
2014

 

September 28,
2013

 

REVENUES

 

 

 

 

 

 

 

 

 

Manufacturing group

 

 

 

 

 

 

 

 

 

Textron Aviation

 

$

1,080

 

$

593

 

$

3,048

 

$

1,861

 

Bell

 

1,182

 

1,162

 

3,174

 

3,136

 

Textron Systems

 

358

 

405

 

1,003

 

1,256

 

Industrial

 

785

 

711

 

2,476

 

2,239

 

 

 

3,405

 

2,871

 

9,701

 

8,492

 

Finance segment

 

25

 

33

 

81

 

106

 

Total revenues

 

$

3,430

 

$

2,904

 

$

9,782

 

$

8,598

 

SEGMENT PROFIT

 

 

 

 

 

 

 

 

 

Manufacturing Group

 

 

 

 

 

 

 

 

 

Textron Aviation

 

$

62

 

$

(23

)

$

104

 

$

(81

)

Bell

 

146

 

131

 

383

 

395

 

Textron Systems

 

27

 

35

 

100

 

107

 

Industrial

 

53

 

52

 

213

 

188

 

 

 

288

 

195

 

800

 

609

 

Finance segment

 

5

 

13

 

16

 

47

 

Segment profit

 

293

 

208

 

816

 

656

 

Corporate expenses and other, net

 

(22)

 

(34

)

(103)

 

(109

)

Interest expense, net for Manufacturing group

 

(37)

 

(29

)

(108)

 

(96

)

Acquisition and restructuring costs

 

(3)

 

 

(39)

 

 

Income from continuing operations before income taxes

 

$

231

 

$

145

 

$

566

 

$

451

 

 

Basis of Presentation (Policies)

Use of Estimates

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

 

During 2014 and 2013, we changed our estimates of revenues and costs on certain long-term contracts that are accounted for under the percentage-of-completion method of accounting.  These changes in estimates increased income from continuing operations before income taxes in the third quarter of 2014 and 2013 by $10 million and $4 million, respectively, ($6 million and $2 million after tax, or $0.02 and $0.01 per diluted share, respectively). For the third quarter of 2014 and 2013, the gross favorable program profit adjustments totaled $25 million and $12 million, respectively, and the gross unfavorable program profit adjustments totaled $15 million and $8 million, respectively.

 

The changes in estimates increased income from continuing operations before income taxes in the first nine months of 2014 and 2013 by $69 million and $13 million, respectively, ($43 million and $8 million after tax, or $0.15 and $0.03 per diluted share, respectively).  For the first nine months of 2014 and 2013, the gross favorable program profit adjustments totaled $90 million and $30 million, respectively, and the gross unfavorable program profit adjustments totaled $21 million and $17 million, respectively.  Gross favorable program profit adjustments in the second quarter of 2014 included $16 million related to the settlement of the System Development and Demonstration phase of the Armed Reconnaissance Helicopter (ARH) program which was terminated in October 2008.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers,” that outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption. This ASU is effective for our company at the beginning of fiscal 2017; early adoption is not permitted. We are currently evaluating the new guidance to determine the impact it is expected to have on our consolidated financial statements, along with the transition method we expect to utilize.

Business Acquisitions (Tables)

 

 

(In millions)

 

 

 

Accounts receivable

 

$

118

 

Inventories

 

770

 

Other current assets

 

175

 

Property, plant and equipment

 

258

 

Intangible assets

 

581

 

Goodwill

 

226

 

Other assets

 

171

 

Accounts payable

 

(143

)

Accrued liabilities

 

(282

)

Other liabilities

 

(396

)

Total net assets acquired

 

$

1,478

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions, except per share amounts)

 

September 27,
2014

 

September 28,
2013

 

September 27,
2014

 

September 28,
2013

 

Revenues

 

$

3,430

 

$

3,308

 

$

10,145

 

$

9,907

 

Income from continuing operations, net of income taxes

 

169

 

78

 

462

 

279

 

Diluted earnings per share from continuing operations

 

$

0.60

 

$

0.28

 

$

1.64

 

$

0.98

 

 

Retirement Plans (Tables)
Components of net periodic benefit cost

 

 

 

 

Pension Benefits

 

Postretirement Benefits
Other Than Pensions

 

(In millions)

 

September 27,
2014

 

September 28,
2013

 

September 27,
2014

 

September 28,
2013

 

Three Months Ended

 

 

 

 

 

 

 

 

 

Service cost

 

$

27

 

$

33

 

$

1

 

$

1

 

Interest cost

 

86

 

72

 

5

 

5

 

Expected return on plan assets

 

(117)

 

(104

)

 

 

Amortization of prior service cost (credit)

 

3

 

4

 

(5)

 

(6

)

Amortization of net actuarial loss

 

28

 

46

 

 

2

 

Net periodic benefit cost

 

$

27

 

$

51

 

$

1

 

$

2

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

Service cost

 

$

81

 

$

100

 

$

3

 

$

5

 

Interest cost

 

250

 

218

 

15

 

15

 

Expected return on plan assets

 

(345)

 

(314

)

 

 

Amortization of prior service cost (credit)

 

11

 

11

 

(16)

 

(11

)

Amortization of net actuarial loss

 

84

 

138

 

1

 

5

 

Net periodic benefit cost

 

$

81

 

$

153

 

$

3

 

$

14

 

 

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

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In thousands)

 

September 27,
2014

 

September 28,
2013

 

September 27,
2014

 

September 28,
2013

 

Basic weighted-average shares outstanding

 

278,860

 

281,525

 

280,096

 

278,296

 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

Stock options

 

1,892

 

185

 

2,027

 

221

 

ASR

 

278

 

 

301

 

 

Convertible notes and warrants

 

 

 

 

6,226

 

Diluted weighted-average shares outstanding

 

281,030

 

281,710

 

282,424

 

284,743

 

 

Accounts Receivable and Finance Receivables (Tables)

 

 

(In millions)

 

September 27,
2014

 

December 28,
2013

 

Commercial

 

$

849

 

$

654

 

U.S. Government contracts

 

329

 

347

 

 

 

1,178

 

1,001

 

Allowance for doubtful accounts

 

(28)

 

(22

)

Total

 

$

1,150

 

$

979

 

 

 

 

(In millions)

 

September 27,
2014

 

December 28,
2013

 

Finance receivables held for investment

 

$

1,329

 

$

1,483

 

Allowance for losses

 

(56)

 

(55

)

Total finance receivables held for investment, net

 

1,273

 

1,428

 

Finance receivables held for sale

 

35

 

65

 

Total finance receivables, net

 

$

1,308

 

$

1,493

 

 

 

 

(In millions)

 

September 27,
2014

 

December 28,
 2013

 

Performing

 

$

1,111

 

$

1,285

 

Watchlist

 

117

 

93

 

Nonaccrual

 

101

 

105

 

Total

 

$

1,329

 

$

1,483

 

Nonaccrual as a percentage of total finance receivables

 

7.60%

 

7.08%

 

 

 

 

(In millions)

 

September 27,
2014

 

December 28,
2013

 

Less than 31 days past due

 

$

1,165

 

$

1,295

 

31-60 days past due

 

94

 

108

 

61-90 days past due

 

41

 

37

 

Over 90 days past due

 

29

 

43

 

Total

 

$

1,329

 

$

1,483

 

 

 

 

(In millions)

 

September 27,
2014

 

December 28,
2013

 

Recorded investment:

 

 

 

 

 

Impaired loans with related allowance for losses

 

$

78

 

$

59

 

Impaired loans with no related allowance for losses

 

53

 

78

 

Total

 

$

131

 

$

137

 

Unpaid principal balance

 

$

135

 

$

141

 

Allowance for losses on impaired loans

 

23

 

14

 

Average recorded investment

 

116

 

155

 

 

 

 

(In millions)