TEXTRON INC, 10-Q filed on 10/28/2015
Quarterly Report
Document and Entity Information
9 Months Ended
Oct. 3, 2015
Oct. 16, 2015
Document and Entity Information
 
 
Entity Registrant Name
TEXTRON INC 
 
Entity Central Index Key
0000217346 
 
Document Type
10-Q 
 
Document Period End Date
Oct. 03, 2015 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--01-02 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
273,670,398 
Document Fiscal Year Focus
2015 
 
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
Oct. 3, 2015
Sep. 27, 2014
Oct. 3, 2015
Sep. 27, 2014
Revenues
 
 
 
 
Manufacturing revenues
$ 3,163 
$ 3,405 
$ 9,437 
$ 9,701 
Finance revenues
17 
25 
63 
81 
Total revenues
3,180 
3,430 
9,500 
9,782 
Costs and expenses
 
 
 
 
Cost of sales
2,584 
2,845 
7,728 
8,077 
Selling and administrative expense
303 
304 
969 
959 
Interest expense
41 
47 
126 
141 
Acquisition and restructuring costs
 
 
39 
Total costs and expenses
2,928 
3,199 
8,823 
9,216 
Income from continuing operations before income taxes
252 
231 
677 
566 
Income tax expense
76 
71 
204 
174 
Income from continuing operations
176 
160 
473 
392 
Loss from discontinued operations, net of income taxes
 
(1)
(2)
(4)
Net income
$ 176 
$ 159 
$ 471 
$ 388 
Basic earnings per share
 
 
 
 
Continuing operations (in dollars per share)
$ 0.64 
$ 0.57 
$ 1.71 
$ 1.40 
Discontinued operations (in dollars per share)
 
 
$ (0.01)
$ (0.02)
Basic earnings per share (in dollars per share)
$ 0.64 
$ 0.57 
$ 1.70 
$ 1.38 
Diluted earnings per share
 
 
 
 
Continuing operations (in dollars per share)
$ 0.63 
$ 0.57 
$ 1.69 
$ 1.39 
Discontinued operations (in dollars per share)
 
 
$ (0.01)
$ (0.02)
Diluted earnings per share (in dollars per share)
$ 0.63 
$ 0.57 
$ 1.68 
$ 1.37 
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
Oct. 3, 2015
Sep. 27, 2014
Oct. 3, 2015
Sep. 27, 2014
Consolidated Statements of Comprehensive Income
 
 
 
 
Net income
$ 176 
$ 159 
$ 471 
$ 388 
Other comprehensive income (loss), net of tax:
 
 
 
 
Pension and postretirement benefits adjustments, net of reclassifications
22 
17 
133 
62 
Foreign currency translation adjustments
(43)
(45)
(47)
Deferred gains (losses) on hedge contracts, net of reclassifications
(1)
(5)
(9)
Other comprehensive income (loss)
22 
(31)
79 
17 
Comprehensive income
$ 198 
$ 128 
$ 550 
$ 405 
Consolidated Balance Sheets (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
Oct. 3, 2015
Jan. 3, 2015
Assets
 
 
Cash and equivalents
$ 614 
$ 822 
Inventories
4,574 
3,928 
Finance receivables, net
1,138 
1,238 
Total assets
14,898 
14,605 
Liabilities
 
 
Total liabilities
10,202 
10,333 
Shareholders' equity
 
 
Common stock
36 
36 
Capital surplus
1,561 
1,459 
Treasury stock
(551)
(340)
Retained earnings
5,077 
4,623 
Accumulated other comprehensive loss
(1,427)
(1,506)
Total shareholders' equity
4,696 
4,272 
Total liabilities and shareholders' equity
14,898 
14,605 
Common shares outstanding
273,862 
276,582 
Manufacturing group
 
 
Assets
 
 
Cash and equivalents
497 
731 
Accounts receivable, net
1,159 
1,035 
Inventories
4,574 
3,928 
Other current assets
507 
579 
Total current assets
6,737 
6,273 
Property, plant and equipment, less accumulated depreciation and amortization of $3,854 and $3,685
2,488 
2,497 
Goodwill
2,026 
2,027 
Other assets
2,234 
2,279 
Total assets
13,485 
13,076 
Liabilities
 
 
Short-term debt and current portion of long-term debt
414 
Accounts payable
1,173 
1,014 
Accrued liabilities
2,602 
2,616 
Total current liabilities
4,189 
3,638 
Other liabilities
2,426 
2,587 
Long-term debt
2,391 
2,803 
Total liabilities
9,006 
9,028 
Finance group
 
 
Assets
 
 
Cash and equivalents
117 
91 
Finance receivables, net
1,138 
1,238 
Other assets
158 
200 
Total assets
1,413 
1,529 
Liabilities
 
 
Other liabilities
229 
242 
Debt
967 
1,063 
Total liabilities
$ 1,196 
$ 1,305 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, unless otherwise specified
Oct. 3, 2015
Jan. 3, 2015
Consolidated Balance Sheets
 
 
Accumulated depreciation and amortization
$ 3,854 
$ 3,685 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Oct. 3, 2015
Sep. 27, 2014
Cash flows from operating activities
 
 
Net income
$ 471 
$ 388 
Less: Loss from discontinued operations
(2)
(4)
Income from continuing operations
473 
392 
Non-cash items:
 
 
Depreciation and amortization
332 
325 
Deferred income taxes
(11)
(41)
Other, net
78 
80 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(122)
(55)
Inventories
(654)
(370)
Other assets
24 
Accounts payable
156 
(120)
Accrued and other liabilities
(18)
137 
Income taxes, net
64 
61 
Pension, net
61 
31 
Captive finance receivables, net
58 
107 
Other operating activities, net
(4)
(2)
Net cash provided by (used in) operating activities of continuing operations
419 
569 
Net cash used in operating activities of discontinued operations
(4)
(3)
Net cash provided by (used in) operating activities
415 
566 
Cash flows from investing activities
 
 
Capital expenditures
(286)
(255)
Net cash used in acquisitions
(81)
(1,580)
Finance receivables repaid
66 
77 
Other investing activities, net
31 
33 
Net cash provided by (used in) investing activities
(270)
(1,725)
Cash flows from financing activities
 
 
Principal payments on long-term debt and nonrecourse debt
(196)
(462)
Proceeds from long-term debt
55 
1,187 
Increase in short-term debt
 
25 
Purchases of Textron common stock
(211)
(302)
Dividends paid
(17)
(17)
Other financing activities, net
25 
33 
Net cash provided by (used in) financing activities
(344)
464 
Effect of exchange rate changes on cash and equivalents
(9)
(5)
Net increase (decrease) in cash and equivalents
(208)
(700)
Cash and equivalents at beginning of period
822 
1,211 
Cash and equivalents at end of period
614 
511 
Manufacturing group
 
 
Cash flows from operating activities
 
 
Net income
458 
378 
Less: Loss from discontinued operations
(2)
(4)
Income from continuing operations
460 
382 
Non-cash items:
 
 
Depreciation and amortization
324 
315 
Deferred income taxes
(3)
(25)
Other, net
74 
69 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(122)
(55)
Inventories
(661)
(344)
Other assets
(6)
38 
Accounts payable
156 
(120)
Accrued and other liabilities
(10)
145 
Income taxes, net
58 
57 
Pension, net
61 
31 
Dividends received from Finance Group
20 
 
Other operating activities, net
(4)
(2)
Net cash provided by (used in) operating activities of continuing operations
347 
491 
Net cash used in operating activities of discontinued operations
(4)
(3)
Net cash provided by (used in) operating activities
343 
488 
Cash flows from investing activities
 
 
Capital expenditures
(286)
(255)
Net cash used in acquisitions
(81)
(1,580)
Other investing activities, net
(12)
Net cash provided by (used in) investing activities
(365)
(1,847)
Cash flows from financing activities
 
 
Principal payments on long-term debt and nonrecourse debt
 
(201)
Proceeds from long-term debt
 
1,093 
Increase in short-term debt
 
25 
Purchases of Textron common stock
(211)
(302)
Dividends paid
(17)
(17)
Other financing activities, net
25 
33 
Net cash provided by (used in) financing activities
(203)
631 
Effect of exchange rate changes on cash and equivalents
(9)
(5)
Net increase (decrease) in cash and equivalents
(234)
(733)
Cash and equivalents at beginning of period
731 
1,163 
Cash and equivalents at end of period
497 
430 
Finance group
 
 
Cash flows from operating activities
 
 
Net income
13 
10 
Income from continuing operations
13 
10 
Non-cash items:
 
 
Depreciation and amortization
10 
Deferred income taxes
(8)
(16)
Other, net
11 
Changes in assets and liabilities:
 
 
Other assets
12 
(14)
Accrued and other liabilities
(8)
(8)
Income taxes, net
Net cash provided by (used in) operating activities of continuing operations
27 
(3)
Net cash provided by (used in) operating activities
27 
(3)
Cash flows from investing activities
 
 
Finance receivables repaid
269 
307 
Finance receivables originated
(145)
(123)
Other investing activities, net
36 
19 
Net cash provided by (used in) investing activities
160 
203 
Cash flows from financing activities
 
 
Principal payments on long-term debt and nonrecourse debt
(196)
(261)
Proceeds from long-term debt
55 
94 
Dividends paid
(20)
 
Net cash provided by (used in) financing activities
(161)
(167)
Net increase (decrease) in cash and equivalents
26 
33 
Cash and equivalents at beginning of period
91 
48 
Cash and equivalents at end of period
$ 117 
$ 81 
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.  We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information.  Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements.  The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 3, 2015.  In the opinion of management, the interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair presentation of our consolidated financial position, results of operations and cash flows for the interim periods presented.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

 

Our financings are conducted through two separate borrowing groups.  The Manufacturing group consists of Textron consolidated with its majority-owned subsidiaries that operate in the Textron Aviation, Bell, Textron Systems and Industrial segments. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation and its consolidated subsidiaries. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance.  To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements.  All significant intercompany transactions are eliminated from the Consolidated Financial Statements, including retail 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 2015 and 2014, 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 2015 and 2014 by $14 million and $10 million, respectively, ($9 million and $6 million after tax, or $0.03 and $0.02 per diluted share, respectively).  For the third quarter of 2015 and 2014, the gross favorable program profit adjustments totaled $20 million and $25 million, respectively, and the gross unfavorable program profit adjustments totaled $6 million and $15 million, respectively.

 

The changes in estimates increased income from continuing operations before income taxes in the first nine months of 2015 and 2014 by $68 million and $69 million, respectively, ($43 million after tax, or $0.15 per diluted share for both periods).  For the first nine months of 2015 and 2014, the gross favorable program profit adjustments totaled $93 million and $90 million, respectively, and the gross unfavorable program profit adjustments totaled $25 million and $21 million, respectively.  Gross favorable program profit adjustments for the first nine months 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.

 

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 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.

Retirement Plans
Retirement Plans

 

Note 2. 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:

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(In millions)

 

 

October 3,
2015

 

 

September 27,
2014

 

 

October 3,
2015

 

 

September 27,
2014

 

Pension Benefits

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

 

$

27

 

 

$

27

 

 

$

86

 

 

$

81

 

Interest cost

 

 

 

82

 

 

 

86

 

 

 

245

 

 

 

250

 

Expected return on plan assets

 

 

 

(121

)

 

 

(117

)

 

 

(363

)

 

 

(345

)

Amortization of prior service cost

 

 

 

4

 

 

 

3

 

 

 

12

 

 

 

11

 

Amortization of net actuarial loss

 

 

 

35

 

 

 

28

 

 

 

113

 

 

 

84

 

Curtailment and other charges

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

 

$

27

 

 

$

27

 

 

$

99

 

 

$

81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement Benefits Other Than Pensions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

 

$

1

 

 

$

1

 

 

$

3

 

 

$

3

 

Interest cost

 

 

 

4

 

 

 

5

 

 

 

12

 

 

 

15

 

Amortization of prior service credit

 

 

 

(6

)

 

 

(5

)

 

 

(18

)

 

 

(16

)

Amortization of net actuarial loss

 

 

 

1

 

 

 

 

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost (credit)

 

 

$

 

 

$

1

 

 

$

(2

)

 

$

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In April 2015, our Bell segment announced cost reduction actions that resulted in a headcount reduction of approximately 12% of the Bell workforce. We determined that a curtailment had occurred in Bell’s pension plan as a result of this reduction, which triggered a remeasurement of the projected benefit obligation. We remeasured Bell’s pension plan incorporating a 50 basis-point increase in the discount rate to 4.75%, while other assumptions remained consistent with year-end.  The remeasurement reduced our unrealized losses by approximately $98 million which was recorded in other comprehensive income in the second quarter of 2015.

Earnings Per Share
Earnings Per Share

 

Note 3.  Earnings Per Share

 

We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period. Basic EPS is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends. Diluted EPS considers the dilutive effect of all potential future common stock, including stock options. In addition, diluted EPS for the three and nine months ended September 27, 2014 includes the impact of the initial delivery of shares under an Accelerated Share Repurchase agreement (ASR), which was settled in December 2014 as disclosed in Note 9 of our 2014 Annual Report on Form 10-K.

 

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

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(In thousands)

 

 

October 3,
2015

 

 

September 27,
2014

 

 

October 3,
2015

 

 

September 27,
2014

 

Basic weighted-average shares outstanding

 

 

 

276,334 

 

 

 

278,860 

 

 

 

277,317 

 

 

 

280,096 

 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

1,705 

 

 

 

1,892 

 

 

 

2,083 

 

 

 

2,027 

 

ASR

 

 

 

 

 

 

278 

 

 

 

 

 

 

301 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted-average shares outstanding

 

 

 

278,039 

 

 

 

281,030 

 

 

 

279,400 

 

 

 

282,424 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options to purchase 4 million and 2 million of common shares outstanding are excluded from the calculation of diluted weighted average shares outstanding for the three and nine months ended October 3, 2015, respectively, as their effect would have been anti-dilutive.  For both the three and nine months ended September 27, 2014, stock options to purchase 2 million of common shares outstanding are excluded from the calculation of diluted weighted average shares, as their effect would have been anti-dilutive.

Accounts Receivable and Finance Receivables
Accounts Receivable and Finance Receivables

 

Note 4.  Accounts Receivable and Finance Receivables

 

Accounts Receivable

Accounts receivable is composed of the following:

 

(In millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

January 3,
2015

 

Commercial

 

 

 

 

 

 

 

 

 

 

$

920

 

 

$

765

 

U.S. Government contracts

 

 

 

 

 

 

 

 

 

 

 

273

 

 

 

300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,193

 

 

 

1,065

 

Allowance for doubtful accounts

 

 

 

 

 

 

 

 

 

 

 

(34

)

 

 

(30

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

$

1,159

 

 

$

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 $133 million at October 3, 2015 and $151 million at January 3, 2015.

 

Finance Receivables

Finance receivables are presented in the following table:

 

(In millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

January 3,
2015

 

Finance receivables*

 

 

 

 

 

 

 

 

 

 

$

1,187

 

 

$

1,289

 

Allowance for losses

 

 

 

 

 

 

 

 

 

 

 

(49

)

 

 

(51

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total finance receivables, net

 

 

 

 

 

 

 

 

 

 

$

1,138

 

 

$

1,238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Includes finance receivables held for sale of $32 million and $35 million at October 3, 2015 and January 3, 2015, respectively.

 

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.

 

Finance receivables categorized based on the credit quality indicators discussed above are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

January 3,
2015

 

Performing

 

 

 

 

 

 

 

 

 

 

$

985 

 

 

$

1,062 

 

Watchlist

 

 

 

 

 

 

 

 

 

 

 

76 

 

 

 

111 

 

Nonaccrual

 

 

 

 

 

 

 

 

 

 

 

94 

 

 

 

81 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

$

1,155 

 

 

$

1,254 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual as a percentage of finance receivables

 

 

 

 

 

 

 

 

 

 

 

8.14 

%

 

 

6.46 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 by delinquency aging category are summarized in the table below:

 

(In millions)

 

 

 

 

 

October 3,
2015

 

 

January 3,
2015

 

Less than 31 days past due

 

 

 

 

 

 

$

995 

 

 

$

1,080 

 

31-60 days past due

 

 

 

 

 

 

 

94 

 

 

 

117 

 

61-90 days past due

 

 

 

 

 

 

 

28 

 

 

 

28 

 

Over 90 days past due

 

 

 

 

 

 

 

38 

 

 

 

29 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

$

1,155 

 

 

$

1,254 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

60 + days contractual delinquency as a percentage of finance receivables

 

 

 

 

 

 

 

5.71 

%

 

 

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 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 2015 or 2014.

 

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

 

(In millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

January 3,
2015

 

Recorded investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with related allowance for losses

 

 

 

 

 

 

 

 

 

 

$

60 

 

 

$

68 

 

Impaired loans with no related allowance for losses

 

 

 

 

 

 

 

 

 

 

 

40 

 

 

 

42 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

$

100 

 

 

$

110 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance

 

 

 

 

 

 

 

 

 

 

$

105 

 

 

$

115 

 

Allowance for losses on impaired loans

 

 

 

 

 

 

 

 

 

 

 

16 

 

 

 

20 

 

Average recorded investment

 

 

 

 

 

 

 

 

 

 

 

102 

 

 

 

115 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 specifically exclude leveraged leases in accordance with generally accepted accounting principles.

 

(In millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

January 3,
2015

 

Allowance based on collective evaluation

 

 

 

 

 

 

 

 

 

 

$

33 

 

 

$

31 

 

Allowance based on individual evaluation

 

 

 

 

 

 

 

 

 

 

 

16 

 

 

 

20 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivables evaluated collectively

 

 

 

 

 

 

 

 

 

 

$

937 

 

 

$

1,023 

 

Finance receivables evaluated individually

 

 

 

 

 

 

 

 

 

 

 

100 

 

 

 

110 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

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

 

 

 

 

 

 

 

 

 

Nine Months Ended

(In millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

September 27,
2014

 

Balance at the beginning of period

 

 

 

 

 

 

 

 

 

 

$

51

 

 

$

55

 

Provision for losses

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

7

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

(11

)

Recoveries

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the end of period

 

 

 

 

 

 

 

 

 

 

$

49

 

 

$

56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories
Inventories

 

Note 5.  Inventories

 

Inventories are composed of the following:

                                                                                                                                                                                         

(In millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

January 3,
2015

 

Finished goods

 

 

 

 

 

 

 

 

 

 

$

1,871

 

 

$

1,582

 

Work in process

 

 

 

 

 

 

 

 

 

 

 

3,235

 

 

 

2,683

 

Raw materials and components

 

 

 

 

 

 

 

 

 

 

 

609

 

 

 

546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,715

 

 

 

4,811

 

Progress/milestone payments

 

 

 

 

 

 

 

 

 

 

 

(1,141

)

 

 

(883

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

$

4,574

 

 

$

3,928

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued Liabilities
Accrued Liabilities

 

Note 6.  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 contract liability are as follows:

 

 

 

 

 

 

 

 

 

Nine Months Ended

(In millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

September 27,
2014

 

Balance at the beginning of period

 

 

 

 

 

 

 

 

 

 

$

281

 

 

$

223

 

Provision

 

 

 

 

 

 

 

 

 

 

 

224

 

 

 

240

 

Settlements

 

 

 

 

 

 

 

 

 

 

 

(237

)

 

 

(240

)

Acquisitions

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

65

 

Adjustments*

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the end of period

 

 

 

 

 

 

 

 

 

 

$

265

 

 

$

280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

 

Note 7.  Derivative Instruments and Fair Value Measurements

 

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

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

We manufacture and sell our products in a number of countries throughout the world, and, therefore, we are exposed to movements in foreign currency exchange rates.  We 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 October 3, 2015 and January 3, 2015, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $394 million and $696 million, respectively.  At October 3, 2015, the fair value amounts of our foreign currency exchange contracts were a $12 million asset and a $31 million liability. At January 3, 2015, the fair value amounts of our foreign currency exchange contracts were a $16 million asset and a $26 million liability.

 

We primarily utilize forward exchange contracts which have maturities of no more than three years.  These contracts qualify as cash flow hedges and are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses.  At October 3, 2015, we had a net deferred loss of $22 million in Accumulated other comprehensive loss related to these cash flow hedges.  Net gains and losses recognized in earnings and Accumulated other comprehensive loss on cash flow hedges, including gains and losses related to hedge ineffectiveness, were not significant in the periods presented.

 

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

 

Assets Recorded at Fair Value on a Nonrecurring Basis

During the periods ended October 3, 2015 and January 3, 2015, the Finance group’s impaired nonaccrual finance receivables of $44 million and $49 million, respectively, were measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3).  Impaired nonaccrual finance receivables represent assets recorded at fair value on a nonrecurring basis since the measurement of required reserves on our impaired finance receivables is significantly dependent on the fair value of the underlying collateral.  For impaired nonaccrual finance receivables secured by aviation assets, the fair values of collateral are determined primarily based on the use of industry pricing guides.  Fair value measurements recorded on impaired finance receivables resulted in charges to provision for loan losses totaling $2 million and $8 million for the three and nine months ended October 3, 2015 and $5 million and $16 million for the three and nine months ended September 27, 2014, respectively.

 

Assets and Liabilities Not Recorded at Fair Value

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

 

 

 

 

October 3, 2015

 

 

January 3, 2015

 

(In millions)

 

 

Carrying
Value

 

 

Estimated
Fair Value

 

 

Carrying
Value

 

 

Estimated
Fair Value

 

Manufacturing group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, excluding leases

 

 

$

(2,734

)

 

$

(2,896

)

 

$

(2,742

)

 

$

(2,944

)

Finance group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivables, excluding leases

 

 

 

910

 

 

 

884

 

 

 

1,004

 

 

 

1,021

 

Debt

 

 

 

(967

)

 

 

(924

)

 

 

(1,063

)

 

 

(1,051

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value for the Manufacturing group debt is determined using market observable data for similar transactions (Level 2).  At October 3, 2015 and January 3, 2015, approximately 74% and 75%, respectively, of the fair value of term debt for the Finance group was determined based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations (Level 2).  The remaining Finance group debt was determined based on observable market transactions (Level 1). Fair value estimates for finance receivables were determined based on internally developed discounted cash flow models primarily utilizing significant unobservable inputs (Level 3), which include estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and expectations of borrowers’ ability to make payments on a timely basis.

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

 

Note 8.  Accumulated Other Comprehensive Loss and Other Comprehensive Income

 

The components of Accumulated Other Comprehensive Loss are presented below:

 

(In millions)

 

 

Pension and
Postretirement
Benefits
Adjustments

 

 

Foreign
Currency
Translation
Adjustments

 

 

Deferred
Gains (Losses)
on Hedge
Contracts

 

Accumulated
Other
Comprehensive
Loss

 

For the nine months ended October 3, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

 

$

(1,511

)

 

$

18

 

 

$

(13

)

 

$

(1,506

)

Other comprehensive income (loss) before reclassifications

 

 

 

62

 

 

 

(45

)

 

 

(22

)

 

 

(5

)

Reclassified from Accumulated other comprehensive loss

 

 

 

71

 

 

 

 

 

 

13

 

 

 

84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

133

 

 

 

(45

)

 

 

(9

)

 

 

79

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the end of the period

 

 

$

(1,378

)

 

$

(27

)

 

$

(22

)

 

$

(1,427

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 27, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

 

$

(1,110

)

 

$

93

 

 

$

(10

)

 

$

(1,027

)

Other comprehensive income (loss) before reclassifications

 

 

 

9

 

 

 

(47

)

 

 

(4

)

 

 

(42

)

Reclassified from Accumulated other comprehensive loss

 

 

 

53

 

 

 

 

 

 

6

 

 

 

59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

62

 

 

 

(47

)

 

 

2

 

 

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the end of the period

 

 

$

(1,048

)

 

$

46

 

 

$

(8

)

 

$

(1,010

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 October 3, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

 

 

 

 

 

$

36

 

 

$

(12

)

 

$

24

 

Amortization of prior service credit*

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments, net

 

 

 

 

 

 

 

34

 

 

 

(12

)

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred gains (losses) on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

 

 

 

 

 

 

(10

)

 

 

2

 

 

 

(8

)

Reclassification adjustments

 

 

 

 

 

 

 

9

 

 

 

(2

)

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred losses on hedge contracts, net

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

4

 

 

 

(3

)

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

$

37

 

 

$

(15

)

 

$

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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