TEXTRON INC, 10-K filed on 2/24/2016
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Jan. 2, 2016
Feb. 6, 2016
Jul. 4, 2015
Document and Entity Information
 
 
 
Entity Registrant Name
TEXTRON INC 
 
 
Entity Central Index Key
0000217346 
 
 
Document Type
10-K 
 
 
Document Period End Date
Jan. 02, 2016 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--01-02 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 12.3 
Entity Common Stock, Shares Outstanding
 
271,171,585 
 
Document Fiscal Year Focus
2015 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Jan. 2, 2016
Jan. 3, 2015
Dec. 28, 2013
Revenues
 
 
 
Manufacturing revenues
$ 13,340 
$ 13,775 
$ 11,972 
Finance revenues
83 
103 
132 
Total revenues
13,423 
13,878 
12,104 
Costs and expenses
 
 
 
Cost of sales
10,979 
11,421 
10,131 
Selling and administrative expense
1,304 
1,361 
1,126 
Interest expense
169 
191 
173 
Acquisition and restructuring costs
 
52 
 
Total costs and expenses
12,452 
13,025 
11,430 
Income from continuing operations before income taxes
971 
853 
674 
Income tax expense
273 
248 
176 
Income from continuing operations
698 
605 
498 
Income (loss) from discontinued operations, net of income taxes
(1)
(5)
 
Net income
$ 697 
$ 600 
$ 498 
Basic earnings per share
 
 
 
Continuing operations (in dollars per share)
$ 2.52 
$ 2.17 
$ 1.78 
Discontinued operations (in dollars per share)
 
$ (0.02)
 
Basic earnings per share (in dollars per share)
$ 2.52 
$ 2.15 
$ 1.78 
Diluted earnings per share
 
 
 
Continuing operations (in dollars per share)
$ 2.50 
$ 2.15 
$ 1.75 
Discontinued operations (in dollars per share)
 
$ (0.02)
 
Diluted earnings per share (in dollars per share)
$ 2.50 
$ 2.13 
$ 1.75 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
12 Months Ended
Jan. 2, 2016
Jan. 3, 2015
Dec. 28, 2013
Consolidated Statements of Comprehensive Income
 
 
 
Net income
$ 697 
$ 600 
$ 498 
Other comprehensive income (loss), net of tax:
 
 
 
Pension and postretirement benefits adjustments, net of reclassifications
184 
(401)
747 
Foreign currency translation adjustments
(65)
(75)
12 
Deferred losses on hedge contracts, net of reclassifications
(11)
(3)
(16)
Other comprehensive income (loss)
108 
(479)
743 
Comprehensive income
$ 805 
$ 121 
$ 1,241 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Jan. 2, 2016
Jan. 3, 2015
Assets
 
 
Cash and equivalents
$ 1,005 
$ 822 
Inventories
4,144 
3,928 
Property, plant and equipment, net
2,492 
2,497 
Finance receivables, net
1,087 
1,238 
Total assets
14,708 
14,605 
Liabilities
 
 
Total liabilities
9,744 
10,333 
Shareholders' equity
 
 
Common stock (288.3 million and 285.5 million shares issued, respectively, and 274.2 million and 276.6 million shares outstanding, respectively)
36 
36 
Capital surplus
1,587 
1,459 
Treasury stock
(559)
(340)
Retained earnings
5,298 
4,623 
Accumulated other comprehensive loss
(1,398)
(1,506)
Total shareholders' equity
4,964 
4,272 
Total liabilities and shareholders' equity
14,708 
14,605 
Manufacturing group
 
 
Assets
 
 
Cash and equivalents
946 
731 
Accounts receivable, net
1,047 
1,035 
Inventories
4,144 
3,928 
Other current assets
341 
320 
Total current assets
6,478 
6,014 
Property, plant and equipment, net
2,492 
2,497 
Goodwill
2,023 
2,027 
Other assets
2,399 
2,538 
Total assets
13,392 
13,076 
Liabilities
 
 
Short-term debt and current portion of long-term debt
262 
Accounts payable
1,063 
1,014 
Accrued liabilities
2,467 
2,616 
Total current liabilities
3,792 
3,638 
Other liabilities
2,376 
2,587 
Long-term debt
2,435 
2,803 
Debt
2,697 
2,811 
Total liabilities
8,603 
9,028 
Finance group
 
 
Assets
 
 
Cash and equivalents
59 
91 
Finance receivables, net
1,087 
1,238 
Other assets
170 
200 
Total assets
1,316 
1,529 
Liabilities
 
 
Other liabilities
228 
242 
Debt
913 
1,063 
Total liabilities
$ 1,141 
$ 1,305 
Consolidated Balance Sheets (Parenthetical)
Jan. 2, 2016
Jan. 3, 2015
Consolidated Balance Sheets
 
 
Common stock, shares issued
288,300,000 
285,500,000 
Common stock, shares outstanding
274,228,000 
276,582,000 
Consolidated Statements of Shareholders' Equity (USD $)
In Millions, unless otherwise specified
Common Stock
Capital Surplus
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Loss
Total
Beginning Balance at Dec. 29, 2012
$ 35 
$ 1,177 
$ (275)
$ 3,824 
$ (1,770)
$ 2,991 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income
 
 
 
498 
 
498 
Other comprehensive income (loss)
 
 
 
 
743 
743 
Dividends declared ($0.08 per share)
 
 
 
(22)
 
(22)
Share-based compensation activity
 
99 
 
 
 
99 
Purchases/conversions of convertible notes
39 
(41)
 
 
 
Settlement of capped call
 
75 
 
 
 
75 
Retirement of treasury stock
(2)
(59)
316 
(255)
 
 
Ending Balance at Dec. 28, 2013
35 
1,331 
 
4,045 
(1,027)
4,384 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income
 
 
 
600 
 
600 
Other comprehensive income (loss)
 
 
 
 
(479)
(479)
Dividends declared ($0.08 per share)
 
 
 
(22)
 
(22)
Share-based compensation activity
134 
 
 
 
135 
Purchases of common stock
 
 
(340)
 
 
(340)
Other
 
(6)
 
 
 
(6)
Ending Balance at Jan. 03, 2015
36 
1,459 
(340)
4,623 
(1,506)
4,272 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income
 
 
 
697 
 
697 
Other comprehensive income (loss)
 
 
 
 
108 
108 
Dividends declared ($0.08 per share)
 
 
 
(22)
 
(22)
Share-based compensation activity
 
126 
 
 
 
126 
Purchases of common stock
 
 
(219)
 
 
(219)
Other
 
 
 
 
Ending Balance at Jan. 02, 2016
$ 36 
$ 1,587 
$ (559)
$ 5,298 
$ (1,398)
$ 4,964 
Consolidated Statements of Shareholders' Equity (Parenthetical)
3 Months Ended 12 Months Ended
Jan. 2, 2016
Oct. 3, 2015
Jul. 4, 2015
Apr. 4, 2015
Jan. 3, 2015
Sep. 27, 2014
Jun. 28, 2014
Mar. 29, 2014
Jan. 2, 2016
Jan. 3, 2015
Dec. 28, 2013
Consolidated Statements of Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Dividends declared, per share (in dollars per share)
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.08 
$ 0.08 
$ 0.08 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Jan. 2, 2016
Jan. 3, 2015
Dec. 28, 2013
Cash flows from operating activities
 
 
 
Net income
$ 697 
$ 600 
$ 498 
Less: Loss from discontinued operations
(1)
(5)
 
Income from continuing operations
698 
605 
498 
Non-cash items:
 
 
 
Depreciation and amortization
461 
459 
389 
Deferred income taxes
(19)
86 
Other, net
106 
100 
61 
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(14)
56 
(118)
Inventories
(239)
(209)
(118)
Other assets
(36)
(33)
(42)
Accounts payable
43 
(228)
65 
Accrued and other liabilities
(155)
311 
(182)
Pension, net
69 
46 
17 
Income taxes, net
71 
(22)
(84)
Captive finance receivables, net
90 
150 
237 
Other operating activities, net
(4)
(5)
Net cash provided by operating activities of continuing operations
1,094 
1,211 
813 
Net cash used in operating activities of discontinued operations
(4)
(3)
(3)
Net cash provided by operating activities
1,090 
1,208 
810 
Cash flows from investing activities
 
 
 
Capital expenditures
(420)
(429)
(444)
Net cash used in acquisitions
(81)
(1,628)
(196)
Finance receivables repaid
67 
91 
190 
Proceeds from sales of receivables and other finance assets
38 
43 
178 
Other investing activities, net
Net cash provided by (used in) investing activities
(388)
(1,919)
(264)
Cash flows from financing activities
 
 
 
Principal payments on long-term debt and nonrecourse debt
(356)
(904)
(1,056)
Proceeds from long-term debt
61 
1,567 
448 
Purchases of Textron common stock
(219)
(340)
 
Settlement of convertible notes
 
 
(215)
Proceeds from settlement of capped call
 
 
75 
Proceeds from exercise of stock options
32 
50 
31 
Dividends paid
(22)
(28)
(22)
Other financing activities, net
 
(10)
(3)
Net cash provided by (used in) financing activities
(504)
335 
(742)
Effect of exchange rate changes on cash and equivalents
(15)
(13)
(6)
Net increase (decrease) in cash and equivalents
183 
(389)
(202)
Cash and equivalents at beginning of year
822 
1,211 
1,413 
Cash and equivalents at end of year
1,005 
822 
1,211 
Manufacturing group
 
 
 
Cash flows from operating activities
 
 
 
Net income
683 
585 
470 
Less: Loss from discontinued operations
(1)
(5)
 
Income from continuing operations
684 
590 
470 
Non-cash items:
 
 
 
Depreciation and amortization
449 
446 
371 
Deferred income taxes
14 
(7)
51 
Other, net
97 
86 
86 
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(14)
56 
(118)
Inventories
(241)
(168)
(135)
Other assets
(40)
(18)
(41)
Accounts payable
43 
(228)
65 
Accrued and other liabilities
(144)
316 
(171)
Pension, net
69 
46 
21 
Income taxes, net
62 
(17)
(119)
Dividends received from Finance Group
63 
 
175 
Other operating activities, net
(4)
(5)
Net cash provided by operating activities of continuing operations
1,038 
1,097 
658 
Net cash used in operating activities of discontinued operations
(4)
(3)
(3)
Net cash provided by operating activities
1,034 
1,094 
655 
Cash flows from investing activities
 
 
 
Capital expenditures
(420)
(429)
(444)
Net cash used in acquisitions
(81)
(1,628)
(196)
Other investing activities, net
(8)
16 
Net cash provided by (used in) investing activities
(496)
(2,065)
(624)
Cash flows from financing activities
 
 
 
Principal payments on long-term debt and nonrecourse debt
(100)
(559)
(313)
Proceeds from long-term debt
 
1,439 
150 
Purchases of Textron common stock
(219)
(340)
 
Settlement of convertible notes
 
 
(215)
Proceeds from settlement of capped call
 
 
75 
Proceeds from exercise of stock options
32 
50 
31 
Dividends paid
(22)
(28)
(22)
Intergroup financing
 
 
57 
Other financing activities, net
(10)
(3)
Net cash provided by (used in) financing activities
(308)
552 
(240)
Effect of exchange rate changes on cash and equivalents
(15)
(13)
(6)
Net increase (decrease) in cash and equivalents
215 
(432)
(215)
Cash and equivalents at beginning of year
731 
1,163 
1,378 
Cash and equivalents at end of year
946 
731 
1,163 
Finance group
 
 
 
Cash flows from operating activities
 
 
 
Net income
14 
15 
28 
Income from continuing operations
14 
15 
28 
Non-cash items:
 
 
 
Depreciation and amortization
12 
13 
18 
Deferred income taxes
(10)
(12)
35 
Other, net
14 
(25)
Changes in assets and liabilities:
 
 
 
Other assets
(15)
 
Accrued and other liabilities
(8)
(5)
(21)
Pension, net
 
 
(4)
Income taxes, net
(5)
35 
Net cash provided by operating activities of continuing operations
30 
66 
Net cash provided by operating activities
30 
66 
Cash flows from investing activities
 
 
 
Finance receivables repaid
351 
456 
675 
Finance receivables originated
(194)
(215)
(271)
Proceeds from sales of receivables and other finance assets
38 
43 
178 
Other investing activities, net
(29)
42 
Net cash provided by (used in) investing activities
197 
255 
624 
Cash flows from financing activities
 
 
 
Principal payments on long-term debt and nonrecourse debt
(256)
(345)
(743)
Proceeds from long-term debt
61 
128 
298 
Dividends paid
(63)
 
(175)
Intergroup financing
 
 
(57)
Other financing activities, net
(1)
 
 
Net cash provided by (used in) financing activities
(259)
(217)
(677)
Net increase (decrease) in cash and equivalents
(32)
43 
13 
Cash and equivalents at beginning of year
91 
48 
35 
Cash and equivalents at end of year
$ 59 
$ 91 
$ 48 
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

 

Note 1. Summary of Significant Accounting Policies

 

Principles of Consolidation and Financial Statement Presentation

 

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

 

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

 

Collaborative Arrangements

 

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

 

Use of Estimates

 

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

 

During 2015, 2014 and 2013, we changed our estimates of revenues and costs on certain long-term contracts that are accounted for under the percentage-of-completion method of accounting. These changes in estimates increased income from continuing operations before income taxes in 2015, 2014 and 2013 by $78 million, $95 million and $29 million, respectively, ($49 million, $60 million and $18 million after tax, or $0.18, $0.21 and $0.06 per diluted share, respectively).  For 2015, 2014 and 2013, the gross favorable program profit adjustments totaled $111 million, $132 million and $51 million, respectively.  For 2015, 2014 and 2013, the gross unfavorable program profit adjustments totaled $33 million, $37 million and $22 million, respectively.  The increase in net program profit adjustments in 2014, compared with 2013, is largely driven by the Bell segment related to the impact of cost reduction activities in 2014 as well as unfavorable performance in 2013 related to manufacturing inefficiencies.  In addition, gross favorable program profit adjustments in 2014 included $16 million related to the settlement of the System Development and Demonstration phase of the Armed Reconnaissance Helicopter (ARH) program, which was terminated in October 2008.

 

Revenue Recognition

 

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

 

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

 

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

 

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

 

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

 

Cash and Equivalents

 

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

 

Inventories

 

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

 

Property, Plant and Equipment

 

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

 

Goodwill and Intangible Assets

 

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

 

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

 

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

 

Finance Receivables

 

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

 

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

 

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

 

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

 

Pension and Postretirement Benefit Obligations

 

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

 

Derivatives and Hedging Activities

 

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

 

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

 

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

 

Product Liabilities

 

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

 

Environmental Liabilities and Asset Retirement Obligations

 

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

 

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

 

Warranty and Product Maintenance Liabilities

 

We provide limited warranty and product maintenance programs for certain products for periods ranging from one to five years.  A significant portion of these liabilities arises from our commercial aircraft businesses.  For our product maintenance contracts, revenue is recognized on a straight-line basis over the contract period, unless sufficient historical evidence indicates that the cost of providing these services is incurred on a basis other than straight-line.  In those circumstances, revenue is recognized over the contract period in proportion to the costs expected to be incurred in performing the service.

 

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

 

Research and Development Costs

 

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

 

Income Taxes

 

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

 

New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, that outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In July 2015, the FASB approved a one-year deferral of the effective date of the standard to the beginning of 2018 for public companies, with an option that would permit companies to adopt the standard as early as the original effective date of 2017.  The new standard may be adopted either retrospectively or on a modified retrospective basis whereby it would be applied to new contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch-up adjustment recorded to beginning retained earnings at the effective date for those contracts.  We are currently evaluating the impacts of adoption on our consolidated financial position, results of operations and related disclosures, along with the implementation approach to be used.

Business Acquisitions, Goodwill and Intangible Assets
Business Acquisitions, Goodwill and Intangible Assets

 

Note 2. Business Acquisitions, Goodwill and Intangible Assets

 

2015 Acquisitions

 

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

 

2014 Beechcraft Acquisition

 

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

 

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

 

(In millions)

 

 

 

Accounts receivable

 

$

129

 

Inventories

 

775

 

Other current assets

 

175

 

Property, plant and equipment

 

261

 

Intangible assets

 

581

 

Goodwill

 

228

 

Other assets

 

172

 

Accounts payable

 

(143

)

Accrued liabilities

 

(294

)

Other liabilities

 

(406

)

 

 

 

 

Total net assets acquired

 

$

1,478

 

 

 

 

 

 

 

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

 

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

 

Other 2014 Acquisitions

 

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

 

Actual and Pro-Forma Impact from 2014 Acquisitions

 

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

 

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

 

 

 

 

 

 

(In millions, except per share amounts)

 

2014 

 

 

2013 

 

Revenues

 

$

14,240 

 

 

$

13,956 

 

Income from continuing operations, net of income taxes

 

689 

 

 

482 

 

Diluted earnings per share from continuing operations

 

$

2.45 

 

 

$

1.69 

 

 

 

 

 

 

 

 

 

 

 

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

 

Goodwill

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

 

(In millions)

 

Textron
Aviation

 

Bell

 

Textron
Systems

 

Industrial

 

Total

 

Balance at December 28, 2013

 

$

326

 

$

31

 

$

1,026

 

$

352

 

$

1,735

 

Acquisitions

 

228

 

 

35

 

50

 

313

 

Foreign currency translation

 

 

 

(4

)

(17

)

(21

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 3, 2015

 

554

 

31

 

1,057

 

385

 

2,027

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

6

 

 

 

10

 

16

 

Foreign currency translation

 

 

 

(6

)

(14

)

(20

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 2, 2016

 

$

560

 

$

31

 

$

1,051

 

$

381

 

$

2,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible Assets

Our intangible assets are summarized below:

 

 

 

 

 

 

January 2, 2016

 

 

January 3, 2015

 

(Dollars in millions)

 

Weighted-Average 
Amortization 
Period (in years)

 

 

Gross 
Carrying 
Amount

 

Accumulated
Amortization

 

Net

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Patents and technology

 

15

 

 

$

513 

 

$

(120)

 

$

393 

 

 

$

513 

 

$

(92)

 

$

421 

 

Customer relationships and contractual agreements

 

15

 

 

375 

 

(220)

 

155 

 

 

364 

 

(192)

 

172 

 

Trade names and trademarks

 

16

 

 

263 

 

(32)

 

231 

 

 

263 

 

(28)

 

235 

 

Other

 

9

 

 

23 

 

(19)

 

 

 

23 

 

(18)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

1,174 

 

$

(391)

 

$

783 

 

 

$

1,163 

 

$

(330)

 

$

833 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

Accounts Receivable and Finance Receivables
Accounts Receivable and Finance Receivables

 

Note 3. Accounts Receivable and Finance Receivables

 

Accounts Receivable

Accounts receivable is composed of the following:

 

(In millions)

 

 

 

 

 

 

 

 

 

January 2,
2016

 

January 3,
2015

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

$

841

 

$

765

 

U.S. Government contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

239

 

 

300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,080

 

 

1,065

 

Allowance for doubtful accounts

 

 

 

 

 

 

 

 

 

(33

)

(30

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,047

 

$

1,035

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We have unbillable receivables, primarily on U.S. Government contracts, that arise when the revenues we have appropriately recognized based on performance cannot be billed yet under terms of the contract. Unbillable receivables within accounts receivable totaled $135 million at January 2, 2016 and $151 million at January 3, 2015.

 

Finance Receivables

Finance receivables are presented in the following table.

 

(In millions)

 

 

 

 

 

 

 

 

 

January 2,
2016

 

January 3,
2015

 

Finance receivables*

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,135

 

$

1,289

 

Allowance for losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(48

)

 

(51

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total finance receivables, net

 

 

 

 

 

 

 

 

 

 

 

$

1,087

 

$

1,238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

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

 

Finance Receivable Portfolio Quality

Credit Quality Indicators and Nonaccrual Finance Receivables

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

 

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

 

Delinquency

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

 

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

 

(In millions)

 

 

 

 

 

 

 

 

 

January 2,
2016

 

January 3,
2015

 

Performing

 

 

 

 

 

 

 

 

 

 

 

 

 

$

891 

 

$

1,062 

 

Watchlist

 

 

 

 

 

 

 

 

 

 

 

 

 

 

130 

 

 

111 

 

Nonaccrual

 

 

 

 

 

 

 

 

 

84 

 

81 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual as a percentage of finance receivables

 

 

 

 

 

 

 

 

 

 

 

 

7.60 

%

 

6.46 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 31 days past due

 

 

 

 

 

 

 

 

 

 

 

 

 

$

950 

 

$

1,080 

 

31-60 days past due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

86 

 

 

117 

 

61-90 days past due

 

 

 

 

 

 

 

 

 

42 

 

28 

 

Over 90 days past due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27 

 

 

29 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

60+ days contractual delinquency as a percentage of finance receivables

 

 

 

 

 

 

 

 

6.24 

%

 

4.55 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans

On a quarterly basis, we evaluate individual finance receivables for impairment in non-homogeneous portfolios and larger balance accounts in homogeneous loan portfolios.  A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators described above.  Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified.  If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification.  Interest income recognized on impaired loans was not significant in 2015 or 2014.

 

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

 

(In millions)

 

 

 

 

 

 

 

 

 

January 2,
2016

 

January 3,
2015

 

Recorded investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with related allowance for losses

 

 

 

 

$

62 

 

$

68 

 

Impaired loans with no related allowance for losses

 

 

 

 

 

42 

 

 

42 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

104 

 

$

110 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance

 

 

 

 

 

 

 

 

 

 

 

 

 

$

113 

 

$

115 

 

Allowance for losses on impaired loans

 

 

 

 

 

 

 

 

 

17 

 

20 

 

Average recorded investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102 

 

 

115 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Losses

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

 

(In millions)

 

 

 

 

 

 

 

 

 

January 2,
2016

 

January 3,
2015

 

Balance at the beginning of year

 

 

 

 

 

 

 

 

 

 

 

 

 

$

51

 

$

55

 

Provision for losses

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

6

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

(14

)

 

(17

)

Recoveries

 

 

 

 

 

 

 

 

 

 

 

13

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the end of year

 

 

 

 

 

 

 

 

 

 

 

 

 

$

48

 

$

51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance based on collective evaluation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31

 

 

31

 

Allowance based on individual evaluation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivables evaluated collectively

 

 

 

 

 

 

 

 

 

883

 

1,023

 

Finance receivables evaluated individually

 

 

 

 

 

 

 

 

 

 

 

 

 

 

104

 

 

110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories
Inventories

 

Note 4. Inventories

 

Inventories are composed of the following:

 

(In millions)

 

 

 

 

 

 

 

 

 

January 2,
2016

 

January 3,
2015

 

Finished goods

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,735

 

$

1,582

 

Work in process

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,921

 

 

2,683

 

Raw materials and components

 

 

 

 

 

 

 

 

 

 

 

 

 

 

605

 

 

546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,261

 

 

4,811

 

Progress/milestone payments

 

 

 

 

 

 

 

 

 

(1,117

)

(883

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,144

 

$

3,928

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Property, Plant and Equipment, Net
Property, Plant and Equipment, Net

 

Note 5. Property, Plant and Equipment, Net

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions)

 

 

 

 

 

 

 

Useful Lives
(in years)

 

January 2,
2016

 

January 3,
2015

 

Land and buildings

 

 

 

 

 

 

 

 

 

 

3 - 40

 

$

1,859

 

$

1,818

 

Machinery and equipment

 

 

 

 

 

 

 

 

 

 

1 - 20

 

 

4,548

 

 

4,364

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,407

 

 

6,182

 

Accumulated depreciation and amortization

 

 

 

 

 

 

 

 

 

(3,915

)

(3,685

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

$

2,492

 

$

2,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Accrued Liabilities
Accrued Liabilities

 

Note 6. Accrued Liabilities

 

The accrued liabilities of our Manufacturing group are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

January 2,
2016

 

January 3,
2015

 

Customer deposits

 

 

 

 

 

 

 

 

 

 

 

 

$

1,323 

 

$

1,412 

 

Salaries, wages and employer taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

315 

 

 

332 

 

Current portion of warranty and product maintenance contracts

 

 

137 

 

 

169 

 

Other

 

 

 

 

 

 

 

 

 

692 

 

703 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

$

2,467 

 

$

2,616 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in our warranty liability are as follows:

 

(In millions)

 

 

 

 

 

 

 

2015

 

2014

 

2013

 

Beginning of period

 

 

 

 

 

 

 

 

 

 

$

148

 

$

121

 

$

133

 

Provision

 

 

 

 

 

 

 

 

 

 

 

78

 

 

75

 

 

53

 

Settlements

 

 

 

 

 

 

 

 

 

 

 

(72

)

 

(71

)

 

(60

)

Acquisitions

 

 

 

 

 

 

 

 

 

 

 

3

 

 

43

 

 

 

Adjustments*

 

 

 

 

 

 

 

(14

)

(20

)

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

End of period

 

 

 

 

 

 

 

 

 

 

$

143

 

$

148

 

$

121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Debt and Credit Facilities
Debt and Credit Facilities

 

Note 7. Debt and Credit Facilities

 

Our debt is summarized in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

January 2,
2016

 

January 3,
2015

 

Manufacturing group

 

 

 

 

 

 

 

4.625% due 2016

 

$

250

 

$

250

 

5.60% due 2017

 

 

350

 

 

350

 

Variable-rate note due 2018 (1.58% and 1.48%, respectively)

 

 

150

 

 

150

 

7.25% due 2019

 

 

250

 

 

250

 

Variable-rate note due 2019 (1.59% and 1.67%, respectively)

 

 

200

 

 

300

 

6.625% due 2020

 

 

222

 

 

234

 

5.95% due 2021

 

 

250

 

 

250

 

3.65% due 2021

 

 

250

 

 

250

 

4.30% due 2024

 

 

350

 

 

350

 

3.875% due 2025

 

 

350

 

 

350

 

Other (weighted-average rate of 1.29% and 1.32%, respectively)

 

 

75

 

 

77

 

 

 

 

 

 

 

 

 

Total Manufacturing group debt

 

$

2,697

 

$

2,811

 

Less: Short-term and current portion of long-term debt

 

 

(262

)

 

(8

)

 

 

 

 

 

 

 

 

Total Long-term debt

 

$

2,435

 

$

2,803

 

 

 

 

 

 

 

 

 

Finance group

 

 

 

 

 

 

 

Fixed-rate notes due 2016-2017 (weighted-average rate of 4.59%) (a)

 

$

21

 

$

32

 

Variable-rate notes due 2016 and 2018 (weighted-average rate of 1.53% and 1.73%, respectively)

 

 

200

 

 

200

 

Fixed-rate notes due 2017-2025 (weighted-average rate of 2.79% and 2.76%, respectively) (a) (b)

 

 

300

 

 

381

 

Variable-rate notes due 2016-2025 (weighted-average rate of 1.54% and 1.18%, respectively) (a) (b)

 

 

52

 

 

52

 

Securitized debt (weighted-average rate of 1.71%) (b)

 

 

41

 

 

98

 

6% Fixed-to-Floating Rate Junior Subordinated Notes

 

 

299

 

 

299

 

Fair value adjustments and unamortized discount

 

 

 

 

1

 

 

 

 

 

 

 

 

 

Total Finance group debt

 

$

913