Item 1. Financial Statements
TEXTRON INC.
Consolidated Statements of Operations (Unaudited)
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Three Months Ended
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Nine Months Ended
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(In millions, except per share amounts)
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October 3,
2020
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September 28,
2019
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October 3,
2020
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September 28,
2019
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Revenues
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Manufacturing revenues
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$
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2,722
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$
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3,245
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$
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7,942
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$
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9,548
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Finance revenues
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13
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14
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42
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47
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Total revenues
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2,735
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3,259
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7,984
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9,595
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Costs, expenses and other
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Cost of sales
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2,332
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2,747
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6,970
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7,965
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Selling and administrative expense
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258
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255
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760
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854
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Interest expense
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43
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44
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125
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129
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Special charges
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7
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—
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124
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—
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Non-service components of pension and post-retirement income, net
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(21)
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(28)
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(62)
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(85)
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Total costs, expenses and other
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2,619
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3,018
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7,917
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8,863
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Income before income taxes
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116
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241
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67
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732
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Income tax expense (benefit)
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1
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21
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(6)
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116
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Net income
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$
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115
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$
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220
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$
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73
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$
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616
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Earnings per share
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Basic
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$
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0.50
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$
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0.96
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$
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0.32
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$
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2.65
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Diluted
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$
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0.50
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$
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0.95
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$
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0.32
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$
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2.64
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See Notes to the Consolidated Financial Statements.
TEXTRON INC.
Consolidated Statements of Comprehensive Income (Unaudited)
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Three Months Ended
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Nine Months Ended
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(In millions)
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October 3,
2020
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September 28,
2019
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October 3,
2020
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September 28,
2019
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Net income
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$
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115
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$
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220
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$
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73
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$
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616
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Other comprehensive income (loss), net of tax
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Pension and postretirement benefits adjustments, net of reclassifications
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37
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20
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110
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61
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Foreign currency translation adjustments
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35
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(34)
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25
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(30)
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Deferred gains (losses) on hedge contracts, net of reclassifications
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2
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—
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(5)
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2
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Other comprehensive income (loss)
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74
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(14)
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130
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33
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Comprehensive income
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$
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189
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$
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206
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$
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203
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$
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649
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See Notes to the Consolidated Financial Statements.
TEXTRON INC.
Consolidated Balance Sheets (Unaudited)
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(Dollars in millions)
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October 3,
2020
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January 4,
2020
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Assets
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Manufacturing group
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Cash and equivalents
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$
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2,518
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$
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1,181
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Accounts receivable, net
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872
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921
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Inventories
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4,252
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4,069
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Other current assets
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825
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894
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Total current assets
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8,467
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7,065
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Property, plant and equipment, less accumulated depreciation
and amortization of $4,613 and $4,405, respectively
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2,438
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2,527
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Goodwill
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2,159
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2,150
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Other assets
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1,863
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2,312
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Total Manufacturing group assets
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14,927
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14,054
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Finance group
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Cash and equivalents
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152
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176
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Finance receivables, net
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693
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682
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Other assets
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89
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106
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Total Finance group assets
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934
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964
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Total assets
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$
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15,861
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$
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15,018
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Liabilities and shareholders’ equity
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Liabilities
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Manufacturing group
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Short-term debt and current portion of long-term debt
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$
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859
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$
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561
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Accounts payable
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1,121
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1,378
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Other current liabilities
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2,011
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1,907
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Total current liabilities
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3,991
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3,846
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Other liabilities
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2,159
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2,288
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Long-term debt
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3,199
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2,563
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Total Manufacturing group liabilities
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9,349
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8,697
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Finance group
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Other liabilities
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105
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117
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Debt
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666
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686
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Total Finance group liabilities
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771
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803
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Total liabilities
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10,120
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9,500
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Shareholders’ equity
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Common stock
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29
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29
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Capital surplus
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1,762
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1,674
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Treasury stock
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(74)
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(20)
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Retained earnings
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5,741
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5,682
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Accumulated other comprehensive loss
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(1,717)
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(1,847)
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Total shareholders’ equity
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5,741
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5,518
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Total liabilities and shareholders’ equity
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$
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15,861
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$
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15,018
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Common shares outstanding (in thousands)
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228,790
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227,956
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See Notes to the Consolidated Financial Statements.
TEXTRON INC.
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended October 3, 2020 and September 28, 2019, respectively
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Consolidated
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(In millions)
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2020
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2019
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Cash flows from operating activities
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Net income
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$
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73
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$
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616
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Adjustments to reconcile net income to net cash provided by operating activities:
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Non-cash items:
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Depreciation and amortization
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283
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302
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Deferred income taxes
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(31)
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85
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Asset impairments and TRU inventory charge
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111
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—
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Other, net
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81
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61
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Changes in assets and liabilities:
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Accounts receivable, net
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59
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(7)
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Inventories
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(258)
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(652)
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Other assets
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114
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27
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Accounts payable
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(267)
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134
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Other liabilities
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60
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(251)
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Income taxes, net
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(4)
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(70)
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Pension, net
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(11)
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(44)
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Captive finance receivables, net
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(25)
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22
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Other operating activities, net
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15
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2
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Net cash provided by operating activities of continuing operations
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200
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225
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Net cash used in operating activities of discontinued operations
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(1)
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(2)
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Net cash provided by operating activities
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199
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223
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Cash flows from investing activities
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Capital expenditures
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(151)
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(216)
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Proceeds from an insurance recovery and sale of property, plant and equipment
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25
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6
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Net proceeds from corporate-owned life insurance policies
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21
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4
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Net cash used in acquisitions
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(11)
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—
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Finance receivables repaid
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21
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20
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Other investing activities, net
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3
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3
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Net cash used in investing activities
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(92)
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(183)
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Cash flows from financing activities
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Increase (decrease) in short-term debt
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(2)
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118
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Net proceeds from long-term debt
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1,137
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297
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Proceeds from borrowings against corporate-owned life insurance policies
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377
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—
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Payment on borrowings against corporate-owned life insurance policies
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(15)
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—
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Principal payments on long-term debt and nonrecourse debt
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(235)
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(42)
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Purchases of Textron common stock
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(54)
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(470)
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Dividends paid
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(14)
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(9)
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Other financing activities, net
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14
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18
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Net cash provided by (used in) financing activities
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1,208
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(88)
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Effect of exchange rate changes on cash and equivalents
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(2)
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(6)
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Net increase (decrease) in cash and equivalents
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1,313
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(54)
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Cash and equivalents at beginning of period
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1,357
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1,107
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Cash and equivalents at end of period
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$
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2,670
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$
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1,053
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See Notes to the Consolidated Financial Statements.
TEXTRON INC.
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Nine Months Ended October 3, 2020 and September 28, 2019, respectively
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Manufacturing Group
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Finance Group
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(In millions)
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2020
|
2019
|
2020
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2019
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Cash flows from operating activities
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Net income
|
$
|
67
|
|
$
|
603
|
|
$
|
6
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|
$
|
13
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
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|
|
|
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|
Non-cash items:
|
|
|
|
|
|
Depreciation and amortization
|
279
|
|
297
|
|
4
|
|
5
|
|
|
Deferred income taxes
|
(30)
|
|
86
|
|
(1)
|
|
(1)
|
|
|
Asset impairments and TRU inventory charge
|
111
|
|
—
|
|
—
|
|
—
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|
|
Other, net
|
74
|
|
60
|
|
7
|
|
1
|
|
|
Changes in assets and liabilities:
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|
|
|
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Accounts receivable, net
|
59
|
|
(7)
|
|
—
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|
—
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|
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Inventories
|
(258)
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|
(679)
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|
—
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|
—
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Other assets
|
114
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|
28
|
|
—
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|
(1)
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Accounts payable
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(267)
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|
134
|
|
—
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|
—
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Other liabilities
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66
|
|
(250)
|
|
(6)
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|
(1)
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Income taxes, net
|
1
|
|
(75)
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|
(5)
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|
5
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|
|
Pension, net
|
(11)
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|
(44)
|
|
—
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|
—
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|
|
Dividends received from Finance group
|
—
|
|
50
|
|
—
|
|
—
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|
|
Other operating activities, net
|
15
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|
2
|
|
—
|
|
—
|
|
|
Net cash provided by operating activities of continuing operations
|
220
|
|
205
|
|
5
|
|
21
|
|
|
Net cash used in operating activities of discontinued operations
|
(1)
|
|
(2)
|
|
—
|
|
—
|
|
|
Net cash provided by operating activities
|
219
|
|
203
|
|
5
|
|
21
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
Capital expenditures
|
(151)
|
|
(216)
|
|
—
|
|
—
|
|
|
Proceeds from an insurance recovery and sale of property, plant and equipment
|
25
|
|
6
|
|
—
|
|
—
|
|
|
Net proceeds from corporate-owned life insurance policies
|
21
|
|
4
|
|
—
|
|
—
|
|
|
Net cash used in acquisitions
|
(11)
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|
—
|
|
—
|
|
—
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|
|
Finance receivables repaid
|
—
|
|
—
|
|
90
|
|
149
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|
Finance receivables originated
|
—
|
|
—
|
|
(94)
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|
(107)
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|
|
Other investing activities, net
|
—
|
|
—
|
|
3
|
|
30
|
|
|
Net cash provided by (used in) investing activities
|
(116)
|
|
(206)
|
|
(1)
|
|
72
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
Increase (decrease) in short-term debt
|
(2)
|
|
118
|
|
—
|
|
—
|
|
|
Net proceeds from long-term debt
|
1,137
|
|
297
|
|
—
|
|
—
|
|
|
Proceeds from borrowings against corporate-owned life insurance policies
|
377
|
|
—
|
|
—
|
|
—
|
|
|
Payment on borrowings against corporate-owned life insurance policies
|
(15)
|
|
—
|
|
—
|
|
—
|
|
|
Principal payments on long-term debt and nonrecourse debt
|
(195)
|
|
(1)
|
|
(40)
|
|
(41)
|
|
|
Purchases of Textron common stock
|
(54)
|
|
(470)
|
|
—
|
|
—
|
|
|
Dividends paid
|
(14)
|
|
(9)
|
|
—
|
|
(50)
|
|
|
Other financing activities, net
|
2
|
|
18
|
|
12
|
|
—
|
|
|
Net cash provided by (used in) financing activities
|
1,236
|
|
(47)
|
|
(28)
|
|
(91)
|
|
|
Effect of exchange rate changes on cash and equivalents
|
(2)
|
|
(6)
|
|
—
|
|
—
|
|
|
Net increase (decrease) in cash and equivalents
|
1,337
|
|
(56)
|
|
(24)
|
|
2
|
|
|
Cash and equivalents at beginning of period
|
1,181
|
|
987
|
|
176
|
|
120
|
|
|
Cash and equivalents at end of period
|
$
|
2,518
|
|
$
|
931
|
|
$
|
152
|
|
$
|
122
|
|
See Notes to the Consolidated Financial Statements.
TEXTRON INC.
Notes to the Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
Our Consolidated Financial Statements include the accounts of Textron Inc. (Textron) and its majority-owned subsidiaries. We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information. Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 4, 2020. In the opinion of management, the interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair presentation of our consolidated financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
Our financings are conducted through two separate borrowing groups. The Manufacturing group consists of Textron consolidated with its majority-owned subsidiaries that operate in the Textron Aviation, Bell, Textron Systems and Industrial segments. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation and its consolidated subsidiaries. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements. All significant intercompany transactions are eliminated from the Consolidated Financial Statements, including retail financing activities for inventory sold by our Manufacturing group and financed by our Finance group.
Use of Estimates
We prepare our financial statements in conformity with generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the Consolidated Statements of Operations in the period that they are determined.
Contract Estimates
For contracts where revenue is recognized over time, we recognize changes in estimated contract revenues, costs and profits using the cumulative catch-up method of accounting. This method recognizes the cumulative effect of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current period. Anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable.
In the third quarter of 2020 and 2019, our cumulative catch-up adjustments increased revenues and segment profit by $22 million and $21 million, respectively, and increased net income by $17 million and $16 million, respectively ($0.07 per diluted share for both periods). In the third quarter of 2020 and 2019, gross favorable adjustments totaled $31 million and $41 million, respectively, and the gross unfavorable adjustments totaled $9 million and $20 million, respectively.
In the first nine months of 2020 and 2019, our cumulative catch-up adjustments increased revenue and segment profit by $41 million and $79 million, respectively, and increased net income by $31 million and $60 million, respectively ($0.14 and $0.26 per diluted share, respectively). In the first nine months of 2020 and 2019, gross favorable adjustments totaled $104 million and $140 million, respectively, and the gross unfavorable adjustments totaled $63 million and $61 million, respectively.
Note 2. Summary of Significant Accounting Policies Update
At the beginning of 2020, we adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (ASC 326). This standard changed the prior incurred loss model to a forward-looking current expected credit loss model for most financial assets, such as trade and finance receivables, contract assets and other instruments. This standard required a cumulative-effect adjustment to retained earnings upon adoption with no restatement of prior periods. There was no significant impact on our consolidated financial statements upon adoption of the standard.
Our significant accounting policies are included in Note 1 of our Annual Report on Form 10-K for the year ended January 4, 2020. Significant changes to our policies resulting from the adoption of ASC 326 are provided below.
Accounts Receivable, Net
Accounts receivable, net includes amounts billed to customers where the right to payment is unconditional. We maintain an allowance for credit losses for our commercial accounts receivable to provide for the estimated amount that will not be collected, even when the risk of loss is remote. The allowance is measured on a collective pool basis when similar risk characteristics exists and is established as a percentage of accounts receivable. We have identified pools with similar risk characteristics, based on customer and industry type and geographic location. The percentage is based on all available and relevant information including age of outstanding receivables and collateral value, if any, historical payment experience and loss history, current economic conditions, and, when reasonable and supportable factors exist, management’s expectation of future economic conditions. For amounts due from the U.S. Government, we have not established an allowance for credit losses as we have zero loss expectation based on a long history of no credit losses and the explicit guarantee of a sovereign entity.
Finance Receivables, Net
We establish an allowance for credit losses to cover probable but specifically unknown losses existing in the portfolio. This allowance is established as a percentage of finance receivables categorized by pools with similar risk characteristics, such as collateral or customer type and geographic location. The percentage is based on a combination of factors, including historical loss experience, current delinquency and default trends, collateral values, current economic conditions, and, when reasonable and supportable factors exist, management’s expectation of future economic conditions.
For those finance receivables that do not have similar risk characteristics, including 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.
Note 3. Accounts Receivable and Finance Receivables
Accounts Receivable
Accounts receivable is composed of the following:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
October 3,
2020
|
January 4,
2020
|
|
Commercial
|
$
|
761
|
|
$
|
835
|
|
|
U.S. Government contracts
|
152
|
|
115
|
|
|
|
913
|
|
950
|
|
|
Allowance for credit losses
|
(41)
|
|
(29)
|
|
|
Total accounts receivable, net
|
$
|
872
|
|
$
|
921
|
|
Finance Receivables
Finance receivables are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
October 3,
2020
|
January 4,
2020
|
|
Finance receivables
|
$
|
725
|
|
$
|
707
|
|
|
Allowance for credit losses
|
(32)
|
|
(25)
|
|
|
Total finance receivables, net
|
$
|
693
|
|
$
|
682
|
|
Finance Receivable Portfolio Quality
We internally assess the quality of our finance receivables based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors. Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan. These three categories are performing, watchlist and nonaccrual.
We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful. Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain. All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing.
We measure delinquency based on the contractual payment terms of our finance receivables. In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.
In March 2020, due to the economic impact of the COVID-19 pandemic and at the request of certain of our customers, we began working with them to provide temporary payment relief through loan modifications. The types of temporary payment relief we offered to these customers included delays in the timing of required principal payments, deferrals of interest payments and/or interest-only payments. For loan modifications that cover payment-relief periods in excess of six months, even if the loan was previously current, the loan is deemed a troubled debt restructuring and considered impaired. These impaired loans are classified as either nonaccrual or watchlist based on a review of the credit quality indicators as discussed above.
During the first nine months of 2020, we modified finance receivable contracts for 90 customers with an outstanding balance totaling $283 million at October 3, 2020. Of the modifications occurring during the first nine months of 2020, contracts for 25 customers, or $109 million of finance receivables, were categorized as troubled debt restructurings. Due to the nature of these restructurings, the financial effects were not significant. We had two customer defaults related to finance receivables previously modified as a troubled debt restructuring that had an insignificant outstanding balance. We believe our allowance for credit losses adequately covers our exposure on these loans as our estimated collateral values largely exceed the outstanding loan amounts.
Finance receivables categorized based on the credit quality indicators and by the delinquency aging category are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
October 3,
2020
|
January 4,
2020
|
|
Performing
|
$
|
560
|
$
|
664
|
|
Watchlist
|
107
|
4
|
|
Nonaccrual
|
58
|
39
|
|
Nonaccrual as a percentage of finance receivables
|
8.00%
|
5.52%
|
|
Current and less than 31 days past due
|
$
|
683
|
$
|
637
|
|
31-60 days past due
|
9
|
53
|
|
61-90 days past due
|
2
|
7
|
|
Over 90 days past due
|
31
|
10
|
|
60+ days contractual delinquency as a percentage of finance receivables
|
4.55%
|
2.40%
|
At October 3, 2020, 38% of our performing finance receivables were originated since the beginning of 2019 and 29% were originated from 2016 to 2018. For finance receivables categorized as watchlist, 15% were originated since the beginning of 2019 and 44% from 2016 to 2018. For accounts modified in the first nine months of 2020, the origination date prior to the modification was maintained based on the types of temporary payment relief provided.
On a quarterly basis, we evaluate individual larger balance accounts for impairment. A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators described above. Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified. If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification.
A summary of finance receivables and the allowance for credit losses, based on the results of our impairment evaluation, is provided below. The finance receivables included in this table specifically exclude leveraged leases in accordance with U.S. generally accepted accounting principles.
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
October 3,
2020
|
January 4,
2020
|
|
Finance receivables evaluated collectively
|
$
|
461
|
|
$
|
564
|
|
|
Finance receivables evaluated individually
|
157
|
|
39
|
|
|
Allowance for credit losses based on collective evaluation
|
26
|
|
22
|
|
|
Allowance for credit losses based on individual evaluation
|
6
|
|
3
|
|
|
Impaired finance receivables with no related allowance for credit losses
|
$
|
120
|
|
$
|
22
|
|
|
Impaired finance receivables with related allowance for credit losses
|
37
|
|
17
|
|
|
Unpaid principal balance of impaired finance receivables
|
166
|
|
50
|
|
|
Allowance for credit losses on impaired loans
|
6
|
|
3
|
|
|
Average recorded investment of impaired finance receivables
|
116
|
|
40
|
|
Note 4. Inventories
Inventories are composed of the following:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
October 3,
2020
|
January 4,
2020
|
|
Finished goods
|
$
|
1,468
|
|
$
|
1,557
|
|
|
Work in process
|
1,869
|
|
1,616
|
|
|
Raw materials and components
|
915
|
|
896
|
|
|
Total inventories
|
$
|
4,252
|
|
$
|
4,069
|
|
Note 5. Other Assets
Other assets includes the cash surrender value of corporate-owned life insurance policies, net of any borrowings against these policies. During the first quarter of 2020, we borrowed $377 million against the policies as we strengthened our cash position in light of disruptions in the capital markets caused by the COVID-19 pandemic. At October 3, 2020, there was $362 million of outstanding borrowings against the policies. Proceeds from these borrowings and subsequent payments have been classified as financing activities in the consolidated statement of cash flows. Interest expense incurred on borrowings against corporate-owned life insurance policies is recorded as an offset with policy income.
Note 6. Warranty Liability
Changes in our warranty liability are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
(In millions)
|
October 3,
2020
|
September 28,
2019
|
|
Beginning of period
|
$
|
141
|
|
$
|
149
|
|
|
Provision
|
35
|
|
45
|
|
|
Settlements
|
(46)
|
|
(56)
|
|
|
Adjustments*
|
(13)
|
|
(3)
|
|
|
End of period
|
$
|
117
|
|
$
|
135
|
|
* Adjustments include changes to prior year estimates, new issues on prior year sales and currency translation adjustments.
Note 7. Leases
We primarily lease certain manufacturing plants, offices, warehouses, training and service centers at various locations worldwide that are classified as either operating or finance leases. Our finance leases at October 3, 2020 were not significant. Our operating leases have remaining lease terms up to 28 years, which include options to extend the lease term for periods up to 25 years when it is reasonably certain the option will be exercised. Operating lease cost totaled $15 million and $16 million in the third quarter of 2020 and 2019, respectively, and $45 million and $48 million in the first nine months of 2020 and 2019, respectively. Cash paid for operating leases totaled $45 million and $48 million in the first nine months of 2020 and 2019, respectively, which is classified in cash flows from operating activities. Variable and short-term lease costs were not significant. Balance sheet and other information related to our operating leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
October 3,
2020
|
January 4,
2020
|
|
Other assets
|
$
|
268
|
$
|
277
|
|
Other current liabilities
|
45
|
48
|
|
Other liabilities
|
228
|
233
|
|
Weighted-average remaining lease term (in years)
|
10.0
|
10.2
|
|
Weighted-average discount rate
|
4.28%
|
4.42%
|
At October 3, 2020, maturities of our operating lease liabilities on an undiscounted basis totaled $18 million for 2020, $52 million for 2021, $44 million for 2022, $35 million for 2023, $28 million for 2024 and $165 million thereafter.
Note 8. Debt
Under our shelf registration statement, on August 5, 2020, we issued $500 million of SEC-registered fixed-rate notes due March 2031 with an annual interest rate of 2.45%. The net proceeds of the issuance totaled $496 million, after deducting underwriting discounts, commissions and offering expenses. In addition, on March 17, 2020, we issued $650 million of SEC-registered fixed-rate notes due June 2030, with an annual interest rate of 3.00% and net proceeds totaling $642 million.
On September 18, 2020, the Finance Group’s $150 million variable-rate loan due December 13, 2020 was amended. The maturity date of this loan was extended to September 18, 2021, with an option to extend for an additional year. The annual interest rate was modified from the London interbank offered rate (LIBOR) plus 1.125% to LIBOR plus 1.55%, which is an annual interest rate of 1.70% at October 3, 2020.
On April 1, 2020, we entered into a 364-Day Term Loan Credit Agreement in an aggregate principal amount of $500 million and borrowed the full principal amount available under the agreement. On August 10, 2020, we repaid the outstanding principal amount and the agreement was terminated.
Note 9. Derivative Instruments and Fair Value Measurements
We measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We prioritize the assumptions that market participants would use in pricing the asset or liability into a three-tier fair value hierarchy. This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exist, requiring companies to develop their own assumptions. Observable inputs that do not meet the criteria of Level 1, which include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, are categorized as Level 2. Level 3 inputs are those that reflect our estimates about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are utilized only to the extent that observable inputs are not available or cost effective to obtain.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
We manufacture and sell our products in a number of countries throughout the world, and, therefore, we are exposed to movements in foreign currency exchange rates. We primarily utilize foreign currency exchange contracts with maturities of no more than three years to manage this volatility. These contracts qualify as cash flow hedges and are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses. Net gains and losses recognized in earnings and Accumulated other comprehensive loss on cash flow hedges, including gains and losses related to hedge ineffectiveness, were not significant in the periods presented.
Our foreign currency exchange contracts are measured at fair value using the market method valuation technique. The inputs to this technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data providers. These are observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions, so they are classified as Level 2. At October 3, 2020 and January 4, 2020, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $301 million and $342 million, respectively. At October 3, 2020, the fair value amounts of our foreign currency exchange contracts were a $3 million asset and a $4 million liability. At January 4, 2020, the fair value amounts of our foreign currency exchange contracts were a $2 million asset and a $2 million liability.
We hedge our net investment position in certain major currencies and generate foreign currency interest payments that offset other transactional exposures in these currencies. To accomplish this, we borrow directly in the foreign currency and designate a portion of the debt as a hedge of the net investment. We record changes in the fair value of these contracts in other comprehensive income (loss) to the extent they are effective as cash flow hedges. Currency effects on the effective portion of these hedges, which are reflected in the foreign currency translation adjustments within Accumulated other comprehensive loss, were not significant in the periods presented.
Assets and Liabilities Not Recorded at Fair Value
The carrying value and estimated fair value of our financial instruments that are not reflected in the financial statements at fair value are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3, 2020
|
January 4, 2020
|
|
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|
(In millions)
|
Value
|
Fair Value
|
Value
|
Fair Value
|
|
Manufacturing group
|
|
|
|
|
|
Debt, excluding leases
|
$
|
(4,042)
|
|
$
|
(4,294)
|
|
$
|
(3,097)
|
|
$
|
(3,249)
|
|
|
Finance group
|
|
|
|
|
|
Finance receivables, excluding leases
|
501
|
|
522
|
|
493
|
|
527
|
|
|
Debt
|
(666)
|
|
(581)
|
|
(686)
|
|
(634)
|
|
Fair value for the Manufacturing group debt is determined using market observable data for similar transactions (Level 2). The fair value for the Finance group debt was determined primarily based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations (Level 2). Fair value estimates for finance receivables were determined based on internally developed discounted cash flow models primarily utilizing significant unobservable inputs (Level 3), which include estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and expectations of borrowers’ ability to make payments on a timely basis.
Note 10. Shareholders’ Equity
A reconciliation of Shareholders’ equity is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Other
|
Total
|
|
|
Common
|
Capital
|
Treasury
|
Retained
|
Comprehensive
|
Shareholders'
|
|
(In millions)
|
Stock
|
Surplus
|
Stock
|
Earnings
|
Loss
|
Equity
|
|
Three months ended October 3, 2020
|
|
|
|
|
|
|
|
Beginning of period
|
$
|
29
|
|
$
|
1,732
|
|
$
|
(74)
|
|
$
|
5,631
|
|
$
|
(1,791)
|
|
$
|
5,527
|
|
|
Net income
|
—
|
|
—
|
|
—
|
|
115
|
|
—
|
|
115
|
|
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
74
|
|
74
|
|
|
Share-based compensation activity
|
—
|
|
30
|
|
—
|
|
—
|
|
—
|
|
30
|
|
|
Dividends declared
|
—
|
|
—
|
|
—
|
|
(5)
|
|
—
|
|
(5)
|
|
|
End of period
|
$
|
29
|
|
$
|
1,762
|
|
$
|
(74)
|
|
$
|
5,741
|
|
$
|
(1,717)
|
|
$
|
5,741
|
|
|
Three months ended September 28, 2019
|
|
|
|
|
|
|
|
Beginning of period
|
$
|
30
|
|
$
|
1,717
|
|
$
|
(490)
|
|
$
|
5,794
|
|
$
|
(1,715)
|
|
$
|
5,336
|
|
|
Net income
|
—
|
|
—
|
|
—
|
|
220
|
|
—
|
|
220
|
|
|
Other comprehensive loss
|
—
|
|
—
|
|
—
|
|
—
|
|
(14)
|
|
(14)
|
|
|
Share-based compensation activity
|
—
|
|
24
|
|
—
|
|
—
|
|
—
|
|
24
|
|
|
Dividends declared
|
—
|
|
—
|
|
—
|
|
(5)
|
|
—
|
|
(5)
|
|
|
Purchases of common stock
|
—
|
|
—
|
|
(109)
|
|
—
|
|
—
|
|
(109)
|
|
|
End of period
|
$
|
30
|
|
$
|
1,741
|
|
$
|
(599)
|
|
$
|
6,009
|
|
$
|
(1,729)
|
|
$
|
5,452
|
|
|
Nine months ended October 3, 2020
|
|
|
|
|
|
|
|
Beginning of period
|
$
|
29
|
|
$
|
1,674
|
|
$
|
(20)
|
|
$
|
5,682
|
|
$
|
(1,847)
|
|
$
|
5,518
|
|
|
Net income
|
—
|
|
—
|
|
—
|
|
73
|
|
—
|
|
73
|
|
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
130
|
|
130
|
|
|
Share-based compensation activity
|
—
|
|
88
|
|
—
|
|
—
|
|
—
|
|
88
|
|
|
Dividends declared
|
—
|
|
—
|
|
—
|
|
(14)
|
|
—
|
|
(14)
|
|
|
Purchases of common stock
|
—
|
|
—
|
|
(54)
|
|
—
|
|
—
|
|
(54)
|
|
|
End of period
|
$
|
29
|
|
$
|
1,762
|
|
$
|
(74)
|
|
$
|
5,741
|
|
$
|
(1,717)
|
|
$
|
5,741
|
|
|
Nine months ended September 28, 2019
|
|
|
|
|
|
|
|
Beginning of period
|
$
|
30
|
|
$
|
1,646
|
|
$
|
(129)
|
|
$
|
5,407
|
|
$
|
(1,762)
|
|
$
|
5,192
|
|
|
Net income
|
—
|
|
—
|
|
—
|
|
616
|
|
—
|
|
616
|
|
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
33
|
|
33
|
|
|
Share-based compensation activity
|
—
|
|
95
|
|
—
|
|
—
|
|
—
|
|
95
|
|
|
Dividends declared
|
—
|
|
—
|
|
—
|
|
(14)
|
|
—
|
|
(14)
|
|
|
Purchases of common stock
|
—
|
|
—
|
|
(470)
|
|
—
|
|
—
|
|
(470)
|
|
|
End of period
|
$
|
30
|
|
$
|
1,741
|
|
$
|
(599)
|
|
$
|
6,009
|
|
$
|
(1,729)
|
|
$
|
5,452
|
|
Dividends per share of common stock were $0.02 for both the third quarter of 2020 and 2019 and $0.06 for both the first nine months of 2020 and 2019.
Earnings Per Share
We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period. Basic EPS is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends. Diluted EPS considers the dilutive effect of all potential future common stock, including stock options.
The weighted-average shares outstanding for basic and diluted EPS are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
(In thousands)
|
October 3,
2020
|
September 28,
2019
|
October 3,
2020
|
September 28,
2019
|
|
Basic weighted-average shares outstanding
|
228,918
|
|
229,755
|
|
228,492
|
|
232,202
|
|
|
Dilutive effect of stock options
|
361
|
|
1,342
|
|
345
|
|
1,487
|
|
|
Diluted weighted-average shares outstanding
|
229,279
|
|
231,097
|
|
228,837
|
|
233,689
|
|
Stock options to purchase 7.5 million and 7.9 million shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding for the third quarter and first nine months of 2020, respectively, as their effect would have been anti-dilutive. Stock options to purchase 4.3 million and 3.1 million shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding for the third quarter and first nine months of 2019, respectively, as their effect would have been anti-dilutive.
Accumulated Other Comprehensive Loss and Other Comprehensive Income (Loss)
The components of Accumulated other comprehensive loss are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and
|
Foreign
|
Deferred
|
Accumulated
|
|
|
Postretirement
|
Currency
|
Gains (Losses)
|
Other
|
|
|
Benefits
|
Translation
|
on Hedge
|
Comprehensive
|
|
(In millions)
|
Adjustments
|
Adjustments
|
Contracts
|
Loss
|
|
Balance at January 4, 2020
|
$
|
(1,811)
|
|
$
|
(36)
|
|
$
|
—
|
|
$
|
(1,847)
|
|
|
Other comprehensive income before reclassifications
|
—
|
|
25
|
|
(2)
|
|
23
|
|
|
Reclassified from Accumulated other comprehensive loss
|
110
|
|
—
|
|
(3)
|
|
107
|
|
|
Balance at October 3, 2020
|
$
|
(1,701)
|
|
$
|
(11)
|
|
$
|
(5)
|
|
$
|
(1,717)
|
|
|
Balance at December 29, 2018
|
$
|
(1,727)
|
|
$
|
(32)
|
|
$
|
(3)
|
|
$
|
(1,762)
|
|
|
Other comprehensive loss before reclassifications
|
—
|
|
(30)
|
|
4
|
|
(26)
|
|
|
Reclassified from Accumulated other comprehensive loss
|
61
|
|
—
|
|
(2)
|
|
59
|
|
|
Balance at September 28, 2019
|
$
|
(1,666)
|
|
$
|
(62)
|
|
$
|
(1)
|
|
$
|
(1,729)
|
|
The before and after-tax components of Other comprehensive income (loss) are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3, 2020
|
September 28, 2019
|
|
|
|
Tax
|
|
|
Tax
|
|
|
|
Pre-Tax
|
(Expense)
|
After-Tax
|
Pre-Tax
|
(Expense)
|
After-Tax
|
|
(In millions)
|
Amount
|
Benefit
|
Amount
|
Amount
|
Benefit
|
Amount
|
|
Three Months Ended
|
|
|
|
|
|
|
|
Pension and postretirement benefits adjustments:
|
|
|
|
|
|
|
|
Amortization of net actuarial loss*
|
$
|
46
|
|
$
|
(11)
|
|
$
|
35
|
|
$
|
25
|
|
$
|
(6)
|
|
$
|
19
|
|
|
Amortization of prior service cost*
|
2
|
|
—
|
|
2
|
|
1
|
|
—
|
|
1
|
|
|
Pension and postretirement benefits adjustments, net
|
48
|
|
(11)
|
|
37
|
|
26
|
|
(6)
|
|
20
|
|
|
Deferred gains (losses) on hedge contracts:
|
|
|
|
|
|
|
|
Current deferrals
|
3
|
|
—
|
|
3
|
|
—
|
|
—
|
|
—
|
|
|
Reclassification adjustments
|
(2)
|
|
1
|
|
(1)
|
|
—
|
|
—
|
|
—
|
|
|
Deferred gains (losses) on hedge contracts, net
|
1
|
|
1
|
|
2
|
|
—
|
|
—
|
|
—
|
|
|
Foreign currency translation adjustments
|
35
|
|
—
|
|
35
|
|
(33)
|
|
(1)
|
|
(34)
|
|
|
Total
|
$
|
84
|
|
$
|
(10)
|
|
$
|
74
|
|
$
|
(7)
|
|
$
|
(7)
|
|
$
|
(14)
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
Pension and postretirement benefits adjustments:
|
|
|
|
|
|
|
|
Amortization of net actuarial loss*
|
$
|
138
|
|
$
|
(32)
|
|
$
|
106
|
|
$
|
74
|
|
$
|
(17)
|
|
$
|
57
|
|
|
Amortization of prior service cost*
|
5
|
|
(1)
|
|
4
|
|
5
|
|
(1)
|
|
4
|
|
|
Pension and postretirement benefits adjustments, net
|
143
|
|
(33)
|
|
110
|
|
79
|
|
(18)
|
|
61
|
|
|
Deferred gains (losses) on hedge contracts:
|
|
|
|
|
|
|
|
Current deferrals
|
(2)
|
|
—
|
|
(2)
|
|
6
|
|
(2)
|
|
4
|
|
|
Reclassification adjustments
|
(5)
|
|
2
|
|
(3)
|
|
(2)
|
|
—
|
|
(2)
|
|
|
Deferred gains (losses) on hedge contracts, net
|
(7)
|
|
2
|
|
(5)
|
|
4
|
|
(2)
|
|
2
|
|
|
Foreign currency translation adjustments
|
28
|
|
(3)
|
|
25
|
|
(29)
|
|
(1)
|
|
(30)
|
|
|
Total
|
$
|
164
|
|
$
|
(34)
|
|
$
|
130
|
|
$
|
54
|
|
$
|
(21)
|
|
$
|
33
|
|
*These components of other comprehensive income (loss) are included in the computation of net periodic pension cost (credit). See Note 16 of our 2019 Annual Report on Form 10-K for additional information.
Note 11. Segment Information
We operate in, and report financial information for, the following five business segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses, gains/losses on major business dispositions, special charges and an inventory charge related to the restructuring plan initiated in the second quarter of 2020, as discussed in Note 14. The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense.
Our revenues by segment, along with a reconciliation of Segment profit to Income before income taxes, are included in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
(In millions)
|
October 3,
2020
|
September 28,
2019
|
October 3,
2020
|
September 28,
2019
|
|
Revenues
|
|
|
|
|
|
Textron Aviation
|
$
|
795
|
|
$
|
1,201
|
|
$
|
2,414
|
|
$
|
3,458
|
|
|
Bell
|
793
|
|
783
|
|
2,438
|
|
2,293
|
|
|
Textron Systems
|
302
|
|
311
|
|
956
|
|
926
|
|
|
Industrial
|
832
|
|
950
|
|
2,134
|
|
2,871
|
|
|
Finance
|
13
|
|
14
|
|
42
|
|
47
|
|
|
Total revenues
|
$
|
2,735
|
|
$
|
3,259
|
|
$
|
7,984
|
|
$
|
9,595
|
|
|
Segment Profit
|
|
|
|
|
|
Textron Aviation
|
$
|
(29)
|
|
$
|
104
|
|
$
|
(92)
|
|
$
|
315
|
|
|
Bell
|
119
|
|
110
|
|
352
|
|
317
|
|
|
Textron Systems
|
40
|
|
31
|
|
103
|
|
108
|
|
|
Industrial
|
58
|
|
47
|
|
56
|
|
173
|
|
|
Finance
|
1
|
|
5
|
|
8
|
|
17
|
|
|
Segment profit
|
189
|
|
297
|
|
427
|
|
930
|
|
|
Corporate expenses and other, net
|
(28)
|
|
(17)
|
|
(72)
|
|
(88)
|
|
|
Interest expense, net for Manufacturing group
|
(38)
|
|
(39)
|
|
(109)
|
|
(110)
|
|
|
Special charges
|
(7)
|
|
—
|
|
(124)
|
|
—
|
|
|
Inventory charge*
|
—
|
|
—
|
|
(55)
|
|
—
|
|
|
Income before income taxes
|
$
|
116
|
|
$
|
241
|
|
$
|
67
|
|
$
|
732
|
|
* In connection with the restructuring plan initiated in the second quarter of 2020, we ceased manufacturing at the Montreal facility of the TRU Simulation + Training business, resulting in the production suspension of our commercial air transport simulators. As a result of this action and current market conditions, we recorded a $55 million charge to write-down the related inventory to its net realizable value.
Note 12. Revenues
Disaggregation of Revenues
Our revenues disaggregated by major product type are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
(In millions)
|
October 3,
2020
|
September 28,
2019
|
October 3,
2020
|
September 28,
2019
|
|
Aircraft
|
$
|
486
|
|
$
|
797
|
|
$
|
1,479
|
|
$
|
2,296
|
|
|
Aftermarket parts and services
|
309
|
|
404
|
|
935
|
|
1,162
|
|
|
Textron Aviation
|
795
|
|
1,201
|
|
2,414
|
|
3,458
|
|
|
Military aircraft and support programs
|
515
|
|
473
|
|
1,737
|
|
1,463
|
|
|
Commercial helicopters, parts and services
|
278
|
|
310
|
|
701
|
|
830
|
|
|
Bell
|
793
|
|
783
|
|
2,438
|
|
2,293
|
|
|
Unmanned systems
|
156
|
|
147
|
|
473
|
|
416
|
|
|
Marine and land systems
|
36
|
|
47
|
|
127
|
|
155
|
|
|
Simulation, training and other
|
110
|
|
117
|
|
356
|
|
355
|
|
|
Textron Systems
|
302
|
|
311
|
|
956
|
|
926
|
|
|
Fuel systems and functional components
|
497
|
|
521
|
|
1,233
|
|
1,707
|
|
|
Specialized vehicles
|
335
|
|
429
|
|
901
|
|
1,164
|
|
|
Industrial
|
832
|
|
950
|
|
2,134
|
|
2,871
|
|
|
Finance
|
13
|
|
14
|
|
42
|
|
47
|
|
|
Total revenues
|
$
|
2,735
|
|
$
|
3,259
|
|
$
|
7,984
|
|
$
|
9,595
|
|
Our revenues for our segments by customer type and geographic location are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Textron
|
|
Textron
|
|
|
|
|
(In millions)
|
Aviation
|
Bell
|
Systems
|
Industrial
|
Finance
|
Total
|
|
Three months ended October 3, 2020
|
|
|
|
|
|
|
|
Customer type:
|
|
|
|
|
|
|
|
Commercial
|
$
|
758
|
|
$
|
273
|
|
$
|
54
|
|
$
|
830
|
|
$
|
13
|
|
$
|
1,928
|
|
|
U.S. Government
|
37
|
|
520
|
|
248
|
|
2
|
|
—
|
|
807
|
|
|
Total revenues
|
$
|
795
|
|
$
|
793
|
|
$
|
302
|
|
$
|
832
|
|
$
|
13
|
|
$
|
2,735
|
|
|
Geographic location:
|
|
|
|
|
|
|
|
United States
|
$
|
562
|
|
$
|
608
|
|
$
|
263
|
|
$
|
401
|
|
$
|
7
|
|
$
|
1,841
|
|
|
Europe
|
65
|
|
43
|
|
10
|
|
203
|
|
—
|
|
321
|
|
|
Asia and Australia
|
68
|
|
67
|
|
15
|
|
92
|
|
—
|
|
242
|
|
|
Other international
|
100
|
|
75
|
|
14
|
|
136
|
|
6
|
|
331
|
|
|
Total revenues
|
$
|
795
|
|
$
|
793
|
|
$
|
302
|
|
$
|
832
|
|
$
|
13
|
|
$
|
2,735
|
|
|
Three months ended September 28, 2019
|
|
|
|
|
|
|
|
Customer type:
|
|
|
|
|
|
|
|
Commercial
|
$
|
1,153
|
|
$
|
306
|
|
$
|
73
|
|
$
|
947
|
|
$
|
14
|
|
$
|
2,493
|
|
|
U.S. Government
|
48
|
|
477
|
|
238
|
|
3
|
|
—
|
|
766
|
|
|
Total revenues
|
$
|
1,201
|
|
$
|
783
|
|
$
|
311
|
|
$
|
950
|
|
$
|
14
|
|
$
|
3,259
|
|
|
Geographic location:
|
|
|
|
|
|
|
|
United States
|
$
|
836
|
|
$
|
583
|
|
$
|
247
|
|
$
|
454
|
|
$
|
8
|
|
$
|
2,128
|
|
|
Europe
|
154
|
|
41
|
|
11
|
|
236
|
|
1
|
|
443
|
|
|
Asia and Australia
|
80
|
|
68
|
|
37
|
|
93
|
|
—
|
|
278
|
|
|
Other international
|
131
|
|
91
|
|
16
|
|
167
|
|
5
|
|
410
|
|
|
Total revenues
|
$
|
1,201
|
|
$
|
783
|
|
$
|
311
|
|
$
|
950
|
|
$
|
14
|
|
$
|
3,259
|
|
|
Nine months ended October 3, 2020
|
|
|
|
|
|
|
|
Customer type:
|
|
|
|
|
|
|
|
Commercial
|
$
|
2,322
|
|
$
|
687
|
|
$
|
182
|
|
$
|
2,128
|
|
$
|
42
|
|
$
|
5,361
|
|
|
U.S. Government
|
92
|
|
1,751
|
|
774
|
|
6
|
|
—
|
|
2,623
|
|
|
Total revenues
|
$
|
2,414
|
|
$
|
2,438
|
|
$
|
956
|
|
$
|
2,134
|
|
$
|
42
|
|
$
|
7,984
|
|
|
Geographic location:
|
|
|
|
|
|
|
|
United States
|
1,677
|
|
1,979
|
|
825
|
|
1,017
|
|
21
|
|
5,519
|
|
|
Europe
|
219
|
|
88
|
|
33
|
|
558
|
|
1
|
|
899
|
|
|
Asia and Australia
|
241
|
|
183
|
|
50
|
|
221
|
|
1
|
|
696
|
|
|
Other international
|
277
|
|
188
|
|
48
|
|
338
|
|
19
|
|
870
|
|
|
Total revenues
|
$
|
2,414
|
|
$
|
2,438
|
|
$
|
956
|
|
$
|
2,134
|
|
$
|
42
|
|
$
|
7,984
|
|
|
Nine months ended September 28, 2019
|
|
|
|
|
|
|
|
Customer type:
|
|
|
|
|
|
|
|
Commercial
|
$
|
3,322
|
|
$
|
815
|
|
$
|
230
|
|
$
|
2,856
|
|
$
|
47
|
|
$
|
7,270
|
|
|
U.S. Government
|
136
|
|
1,478
|
|
696
|
|
15
|
|
—
|
|
2,325
|
|
|
Total revenues
|
$
|
3,458
|
|
$
|
2,293
|
|
$
|
926
|
|
$
|
2,871
|
|
$
|
47
|
|
$
|
9,595
|
|
|
Geographic location:
|
|
|
|
|
|
|
|
United States
|
$
|
2,361
|
|
$
|
1,732
|
|
$
|
753
|
|
$
|
1,309
|
|
$
|
23
|
|
$
|
6,178
|
|
|
Europe
|
501
|
|
108
|
|
51
|
|
838
|
|
2
|
|
1,500
|
|
|
Asia and Australia
|
168
|
|
229
|
|
66
|
|
254
|
|
3
|
|
720
|
|
|
Other international
|
428
|
|
224
|
|
56
|
|
470
|
|
19
|
|
1,197
|
|
|
Total revenues
|
$
|
3,458
|
|
$
|
2,293
|
|
$
|
926
|
|
$
|
2,871
|
|
$
|
47
|
|
$
|
9,595
|
|
Remaining Performance Obligations
Our remaining performance obligations, which is the equivalent of our backlog, represent the expected transaction price allocated to our contracts that we expect to recognize as revenues in future periods when we perform under the contracts. These remaining obligations exclude unexercised contract options and potential orders under ordering-type contracts such as Indefinite Delivery, Indefinite Quantity contracts. At October 3, 2020, we had $9.4 billion in remaining performance obligations of which we expect to recognize revenues of approximately 65% through 2021, an additional 27% through 2023, and the balance thereafter.
Contract Assets and Liabilities
Assets and liabilities related to our contracts with customers are reported on a contract-by-contract basis at the end of each reporting period. At October 3, 2020 and January 4, 2020, contract assets totaled $546 million and $567 million, respectively, and contract liabilities totaled $965 million and $830 million, respectively, reflecting timing differences between revenue recognized, billings and payments from customers. During the third quarter and first nine months of 2020, we recognized revenues of $44 million and $396 million, respectively, that were included in the contract liability balance at January 4, 2020. We recognized revenues of $54 million and $511 million in the third quarter and first nine months of 2019, respectively, that were included in the contract liability balance at December 29, 2018.
Note 13. Retirement Plans
We provide defined benefit pension plans and other postretirement benefits to eligible employees. The components of net periodic benefit cost (credit) for these plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
(In millions)
|
October 3,
2020
|
September 28,
2019
|
October 3,
2020
|
September 28,
2019
|
|
Pension Benefits
|
|
|
|
|
|
Service cost
|
$
|
27
|
|
$
|
23
|
|
$
|
79
|
|
$
|
68
|
|
|
Interest cost
|
73
|
|
82
|
|
220
|
|
245
|
|
|
Expected return on plan assets
|
(144)
|
|
(139)
|
|
(431)
|
|
(417)
|
|
|
Amortization of net actuarial loss
|
47
|
|
26
|
|
139
|
|
76
|
|
|
Amortization of prior service cost
|
3
|
|
3
|
|
9
|
|
10
|
|
|
Net periodic benefit cost (credit)
|
$
|
6
|
|
$
|
(5)
|
|
$
|
16
|
|
$
|
(18)
|
|
|
Postretirement Benefits Other Than Pensions
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
$
|
1
|
|
$
|
2
|
|
$
|
2
|
|
|
Interest cost
|
2
|
|
3
|
|
6
|
|
8
|
|
|
Amortization of net actuarial loss
|
(1)
|
|
(1)
|
|
(1)
|
|
(2)
|
|
|
Amortization of prior service credit
|
(1)
|
|
(2)
|
|
(4)
|
|
(5)
|
|
|
Net periodic benefit cost
|
$
|
—
|
|
$
|
1
|
|
$
|
3
|
|
$
|
3
|
|
Note 14. Special Charges
Special Charges
Special charges recorded in the third quarter and first nine months of 2020 by segment and type of cost are presented in the table below. There were no special charges recorded in the first nine months of 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2020
|
|
|
|
|
|
Contract
|
|
COVID-19
|
|
|
|
|
Severance
|
Terminations
|
Asset
|
Restructuring
|
Other Asset
|
|
|
(In millions)
|
Costs
|
and Other
|
Impairments
|
Plan
|
Impairments
|
Total
|
|
Three months ended October 3, 2020
|
|
|
|
|
|
|
|
Industrial
|
$
|
3
|
|
$
|
—
|
|
$
|
2
|
|
$
|
5
|
|
$
|
—
|
|
$
|
5
|
|
|
Corporate
|
2
|
|
—
|
|
—
|
|
2
|
|
—
|
|
2
|
|
|
Total special charges
|
$
|
5
|
|
$
|
—
|
|
$
|
2
|
|
$
|
7
|
|
$
|
—
|
|
$
|
7
|
|
|
Nine months ended October 3, 2020
|
|
|
|
|
|
|
|
Textron Aviation
|
$
|
27
|
|
—
|
|
$
|
1
|
|
$
|
28
|
|
$
|
32
|
|
$
|
60
|
|
|
Textron Systems
|
14
|
|
12
|
|
14
|
|
40
|
|
—
|
|
40
|
|
|
Industrial
|
11
|
|
—
|
|
2
|
|
13
|
|
7
|
|
20
|
|
|
Corporate
|
4
|
|
—
|
|
—
|
|
4
|
|
—
|
|
4
|
|
|
Total special charges
|
$
|
56
|
|
$
|
12
|
|
$
|
17
|
|
$
|
85
|
|
$
|
39
|
|
$
|
124
|
|
2020 COVID-19 Restructuring Plan
In the second quarter of 2020, we initiated a restructuring plan to reduce operating expenses through headcount reductions, facility consolidations and other actions in response to the economic challenges and uncertainty resulting from the COVID-19 pandemic. As a result of ongoing evaluations, this plan has been expanded to include additional headcount reductions and facility consolidations in the Industrial segment beyond what was included in the plan as originally announced. We now expect to incur up to an additional $15 million in costs, and the total pre-tax cost of this plan is expected to be in the range of $125 million to $145 million, of which $85 million has been recorded since the inception of the plan. Under the restructuring plan, we expect to incur total severance costs in the range of $70 million to $80 million, contract termination and other costs in the range of $30 million to
$35 million, and asset impairment charges of $25 million to $30 million. Based on revisions to our original estimate, along with additional actions, we estimate a total reduction of 2,800 positions, representing 8% of our workforce. We expect the plan to be substantially completed in the first half of 2021.
The plan primarily impacts the TRU business within the Textron Systems segment, the Textron Aviation segment, and the Industrial segment. At TRU, there has been a substantial decline in demand and order cancellations for flight simulators in light of the expected long-term impact of the pandemic on the commercial air transportation business. Accordingly, we ceased manufacturing at TRU’s facility in Montreal, Canada, resulting in a production suspension of its commercial air transport simulators, along with workforce reductions, contract terminations, facility closures and asset impairments. As a result of current market conditions and the cessation of manufacturing at this facility, we incurred an inventory valuation charge of $55 million, which was recorded in Cost of Sales, to write-down TRU’s inventory to its net realizable value.
Other Asset Impairments
In the first quarter of 2020, we recognized special charges of $39 million of intangible asset impairment charges at the Textron Aviation and Industrial segments. Due to the impact of the COVID-19 pandemic, we experienced decreased demand for our products and services as our customers delayed or ceased orders due to the environment of economic uncertainty. In light of these conditions, Textron Aviation had temporarily shut down most aircraft production, including the King Air turboprop and Beechcraft piston product lines, and had instituted employee furloughs. Based on these events, we performed an interim impairment test of the indefinite-lived Beechcraft and King Air trade name intangible assets at April 4, 2020. Fair value of these assets was determined utilizing the relief of royalty method assuming an increase in the discount rate based on current market data to 9.7% and revised expectations of future revenues for the products and services associated with the tradenames. This analysis resulted in an impairment charge of $32 million. At October 3, 2020, these intangible assets totaled $169 million. In the Industrial segment, we fully impaired the Arctic Cat trade name intangible asset within the Specialized Vehicles product line and recorded a $7 million impairment charge.
Restructuring Reserve
Restructuring reserve activity related to our 2020 and prior restructuring plans is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
Severance
|
Terminations
|
|
|
(In millions)
|
Costs
|
and Other
|
Total
|
|
Balance at January 4, 2020
|
$
|
46
|
|
$
|
19
|
|
$
|
65
|
|
|
Provision for 2020 COVID-19 restructuring plan
|
56
|
|
12
|
|
68
|
|
|
Cash paid
|
(62)
|
|
(8)
|
|
(70)
|
|
|
Balance at October 3, 2020
|
$
|
40
|
|
$
|
23
|
|
$
|
63
|
|
The majority of the remaining cash outlays of $63 million is expected to be paid in 2020. Severance costs generally are paid on a lump-sum basis and include outplacement costs, which are paid in accordance with normal payment terms.
Note 15. Income Taxes
Our effective tax rate for the third quarter and first nine months of 2020 was 0.9% and (9.0)%, respectively, compared to the statutory rate of 21%, largely due to the favorable impact of research credits. In the first nine months of 2020, we incurred special charges and an inventory charge in a non-U.S. jurisdiction where tax benefits cannot be realized, which were partially offset by a $14 million benefit recognized upon the release of a valuation allowance in a non-U.S. jurisdiction. These items had a more significant impact on the effective tax rate due to the lower income before income taxes for the period.
For the third quarter and first nine months of 2019 our effective tax rate was 8.7% and 15.8%, respectively. In the third quarter and first nine months of 2019, the effective tax rate was lower than the U.S. federal statutory tax rate of 21%, primarily due to $41 million and $53 million, respectively, in benefits recognized for additional research credits related to prior years.
On October 19, 2020, we entered into a closing agreement with a tax authority related to an audit settlement with respect to certain state income tax returns. As a result, we will recognize a reduction of unrecognized tax benefits that is expected to reduce our tax expense by approximately $40 million to $50 million in the fourth quarter of 2020.
Note 16. Commitments and Contingencies
We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts; alleged lack of compliance with applicable laws and regulations; production partners; product liability; patent and trademark infringement; employment disputes; and environmental, safety and health matters. Some of these legal proceedings and claims seek damages, fines or penalties in substantial amounts or remediation of environmental contamination. As a government contractor, we are subject to audits, reviews and investigations to determine whether our operations are being conducted in accordance with applicable regulatory requirements. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our suspension or debarment from U.S. Government contracting for a period of time. On the basis of information presently available, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations.
Consolidated Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
(Dollars in millions)
|
October 3,
2020
|
September 28,
2019
|
% Change
|
October 3,
2020
|
September 28,
2019
|
% Change
|
|
Revenues
|
$
|
2,735
|
|
$
|
3,259
|
|
(16)%
|
$
|
7,984
|
|
$
|
9,595
|
|
(17)%
|
|
Cost of sales
|
2,332
|
|
2,747
|
|
(15)%
|
6,970
|
|
7,965
|
|
(12)%
|
|
Selling and administrative expense
|
258
|
|
255
|
|
1%
|
760
|
|
854
|
|
(11)%
|
|
Gross margin as a percentage of Manufacturing revenues
|
14.3%
|
15.3%
|
|
12.2%
|
16.6%
|
|
An analysis of our consolidated operating results is set forth below. A more detailed analysis of our segments’ operating results is provided in the Segment Analysis section on pages 24 to 28.
Revenues
Revenues decreased $524 million, 16%, in the third quarter of 2020, compared with the third quarter of 2019. The revenue decrease included the following factors:
•Lower Textron Aviation revenues of $406 million, largely due to lower Citation jet and commercial turboprop volume of $317 million, reflecting a decline in demand related to the pandemic, and lower aftermarket volume of $95 million, reflecting lower aircraft utilization resulting from the pandemic.
•Higher Bell revenues of $10 million, reflecting higher military revenues of $42 million, partially offset by lower commercial revenues.
•Lower Textron Systems revenues of $9 million, primarily due to lower volume of $20 million at the TRU Simulation + Training business.
•Lower Industrial revenues of $118 million, largely due to lower volume and mix of $126 million, primarily in the Specialized Vehicles product line, principally reflecting the timing of snowmobile deliveries, and reduced demand in the ground support equipment business, which has been impacted by the reduction in global air travel as a result of the pandemic.
Revenues decreased $1.6 billion, 17%, in the first nine months of 2020, compared with the first nine months of 2019. The revenue decrease included the following factors:
•Lower Textron Aviation revenues of $1.0 billion, largely due to lower Citation jet and commercial turboprop volume of $796 million, reflecting a decline in demand related to the pandemic, and lower aftermarket volume of $227 million, reflecting lower aircraft utilization resulting from the pandemic.
•Higher Bell revenues of $145 million, reflecting higher military revenues of $274 million, partially offset by lower commercial revenues.
•Higher Textron Systems revenues of $30 million, primarily due to higher volume of $57 million in the Unmanned Systems product line, partially offset by lower volume of $28 million in the Marine and Land Systems product line.
•Lower Industrial revenues of $737 million, largely due to lower volume and mix of $735 million, primarily in the Fuel Systems and Functional Components product line related to manufacturing facility closures as a result of the pandemic.
Cost of Sales and Selling and Administrative Expense
Cost of sales decreased $415 million, 15%, and $995 million, 12%, in the third quarter and first nine months of 2020, respectively, compared with corresponding periods of 2019, largely due to lower net volume and mix described above. For the first nine months of 2020, the decrease in cost of sales was partially offset by idle facility costs of $100 million, primarily at the Textron Aviation segment, reflecting unfavorable absorption of manufacturing costs attributable to abnormally low production levels resulting from the pandemic and temporary manufacturing facility closures, and a $55 million inventory charge related to the TRU business discussed below in the Special Charges section. Gross margin as a percentage of Manufacturing revenues decreased 430 basis points in the first nine months of 2020, primarily due to lower margin at the Textron Aviation segment reflecting unfavorable impacts from the pandemic, including the idle facility costs and inventory valuation charges, and the impact of the TRU inventory charge.
Selling and administrative expense decreased $94 million, 11%, in the first nine months of 2020, compared with the first nine months of 2019, primarily due to cost reduction activities across our segments, principally at the Textron Aviation and Industrial segments.
Special Charges
Special charges recorded in the third quarter and first nine months of 2020 by segment and type of cost are presented in the table below. There were no special charges recorded in the first nine months of 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2020
|
|
|
|
|
|
Contract
|
|
COVID-19
|
|
|
|
|
Severance
|
Terminations
|
Asset
|
Restructuring
|
Other Asset
|
|
|
(In millions)
|
Costs
|
and Other
|
Impairments
|
Plan
|
Impairments
|
Total
|
|
Three months ended October 3, 2020
|
|
|
|
|
|
|
|
Industrial
|
$
|
3
|
|
$
|
—
|
|
$
|
2
|
|
$
|
5
|
|
$
|
—
|
|
$
|
5
|
|
|
Corporate
|
2
|
|
—
|
|
—
|
|
2
|
|
—
|
|
2
|
|
|
Total special charges
|
$
|
5
|
|
$
|
—
|
|
$
|
2
|
|
$
|
7
|
|
$
|
—
|
|
$
|
7
|
|
|
Nine months ended October 3, 2020
|
|
|
|
|
|
|
|
Textron Aviation
|
$
|
27
|
|
—
|
|
$
|
1
|
|
$
|
28
|
|
$
|
32
|
|
$
|
60
|
|
|
Textron Systems
|
14
|
|
12
|
|
14
|
|
40
|
|
—
|
|
40
|
|
|
Industrial
|
11
|
|
—
|
|
2
|
|
13
|
|
7
|
|
20
|
|
|
Corporate
|
4
|
|
—
|
|
—
|
|
4
|
|
—
|
|
4
|
|
|
Total special charges
|
$
|
56
|
|
$
|
12
|
|
$
|
17
|
|
$
|
85
|
|
$
|
39
|
|
$
|
124
|
|
2020 COVID-19 Restructuring Plan
In the second quarter of 2020, we initiated a restructuring plan to reduce operating expenses through headcount reductions, facility consolidations and other actions in response to the economic challenges and uncertainty resulting from the COVID-19 pandemic. As a result of ongoing evaluations, this plan has been expanded to include additional headcount reductions and facility consolidations in the Industrial segment beyond what was included in the plan as originally announced. We now expect to incur up to an additional $15 million in costs, and the total pre-tax cost of this plan is expected to be in the range of $125 million to $145 million, of which $85 million has been recorded since the inception of the plan. Under the restructuring plan, we expect to incur total severance costs in the range of $70 million to $80 million, contract termination and other costs in the range of $30 million to $35 million, and asset impairment charges of $25 million to $30 million. Based on revisions to our original estimate, along with additional actions, we estimate a total reduction of 2,800 positions, representing 8% of our workforce. We expect the plan to be substantially completed in the first half of 2021.
The plan primarily impacts the TRU business within the Textron Systems segment, the Textron Aviation segment, and the Industrial segment. At TRU, there has been a substantial decline in demand and order cancellations for flight simulators in light of the expected long-term impact of the pandemic on the commercial air transportation business. Accordingly, we ceased manufacturing at TRU’s facility in Montreal, Canada, resulting in a production suspension of its commercial air transport simulators, along with workforce reductions, contract terminations, facility closures and asset impairments. As a result of current market conditions and the cessation of manufacturing at this facility, we incurred an inventory valuation charge of $55 million, which was recorded in Cost of Sales, to write-down TRU’s inventory to its net realizable value.
Other Asset Impairments
In the first quarter of 2020, we recognized special charges of $39 million of intangible asset impairment charges at the Textron Aviation and Industrial segments. Due to the impact of the COVID-19 pandemic, we experienced decreased demand for our products and services as our customers delayed or ceased orders due to the environment of economic uncertainty. In light of these conditions, Textron Aviation had temporarily shut down most aircraft production, including the King Air turboprop and Beechcraft piston product lines, and had instituted employee furloughs. Based on these events, we performed an interim impairment test of the indefinite-lived Beechcraft and King Air trade name intangible assets at April 4, 2020. Fair value of these assets was determined utilizing the relief of royalty method assuming an increase in the discount rate based on current market data to 9.7% and revised expectations of future revenues for the products and services associated with the tradenames. This analysis resulted in an impairment charge of $32 million. At October 3, 2020, these intangible assets totaled $169 million. In the Industrial segment, we fully impaired the Arctic Cat trade name intangible asset within the Specialized Vehicles product line and recorded a $7 million impairment charge.
Income Taxes
Our effective tax rate for the third quarter and first nine months of 2020 was 0.9% and (9.0)%, respectively, compared to the statutory rate of 21%, largely due to the favorable impact of research credits. In the first nine months of 2020, we incurred special charges and an inventory charge in a non-U.S. jurisdiction where tax benefits cannot be realized, which were partially offset by a $14 million benefit recognized upon the release of a valuation allowance in a non-U.S. jurisdiction. These items had a more significant impact on the effective tax rate due to the lower income before income taxes for the period.
For the third quarter and first nine months of 2019 our effective tax rate was 8.7% and 15.8%, respectively. In the third quarter and first nine months of 2019, the effective tax rate was lower than the U.S. federal statutory tax rate of 21%, primarily due to $41 million and $53 million, respectively, in benefits recognized for additional research credits related to prior years.
On October 19, 2020, we entered into a closing agreement with a tax authority related to an audit settlement with respect to certain state income tax returns. As a result, we will recognize a reduction of unrecognized tax benefits that is expected to reduce our tax expense by approximately $40 million to $50 million in the fourth quarter of 2020.
Backlog
Our backlog is summarized below:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
October 3,
2020
|
January 4,
2020
|
|
Bell
|
$
|
5,704
|
|
$
|
6,902
|
|
|
Textron Systems
|
1,874
|
|
1,211
|
|
|
Textron Aviation
|
1,807
|
|
1,714
|
|
|
Total backlog
|
$
|
9,385
|
|
$
|
9,827
|
|
Bell’s backlog decreased $1.2 billion, 17%, primarily as a result of revenues recognized on our U.S. Government contracts in excess of new contracts received. Backlog at Textron Systems’ increased $663 million, 55%, primarily due to new contracts received in excess of revenues recognized in the Marine and Land Systems and Unmanned Systems product lines.
Segment Analysis
We operate in, and report financial information for, the following five business segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses, gains/losses on major business dispositions, special charges and an inventory charge related to the 2020 COVID-19 restructuring plan, as discussed in the Special Charges section on page 22. The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense. Operating expenses for the Manufacturing segments include cost of sales, selling and administrative expense and other non-service components of net periodic benefit cost/(credit), and exclude certain corporate expenses and special charges.
In our discussion of comparative results for the Manufacturing group, changes in revenues and segment profit for our commercial businesses typically are expressed in terms of volume and mix, pricing, foreign exchange, acquisitions and dispositions, inflation and performance. For revenues, volume and mix represents changes in revenues from increases or decreases in the number of units delivered or services provided and the composition of products and/or services sold. For segment profit, volume and mix represents a change due to the number of units delivered or services provided and the composition of products and/or services sold at different profit margins. Pricing represents changes in unit pricing. Foreign exchange is the change resulting from translating foreign-denominated amounts into U.S. dollars at exchange rates that are different from the prior period. Revenues generated by acquired businesses are reflected in Acquisitions for a twelve-month period, while reductions in revenues and segment profit from the sale of businesses are reflected as Dispositions. Inflation represents higher material, wages, benefits, pension service cost or other costs. Performance reflects an increase or decrease in research and development, depreciation, selling and administrative costs, warranty, product liability, quality/scrap, labor efficiency, overhead, non-service pension cost/(credit), product line profitability, start-up, ramp up and cost-reduction initiatives or other manufacturing inputs.
Approximately 24% of our 2019 revenues were derived from contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program. For our segments that contract with the U.S. Government, changes in revenues related to these contracts are expressed in terms of volume. Changes in segment profit for these contracts are typically expressed in terms of volume and mix and performance; these include cumulative catch-up adjustments associated with a) revisions to the transaction price that may reflect contract modifications or changes in assumptions related to award fees and other variable consideration or b) changes in the total estimated costs at completion due to improved or deteriorated operating performance.
Textron Aviation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
(Dollars in millions)
|
October 3,
2020
|
September 28,
2019
|
% Change
|
October 3,
2020
|
September 28,
2019
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
Aircraft
|
$
|
486
|
|
$
|
797
|
|
(39)%
|
$
|
1,479
|
|
$
|
2,296
|
|
(36)%
|
|
Aftermarket parts and services
|
309
|
|
404
|
|
(24)%
|
935
|
|
1,162
|
|
(20)%
|
|
Total revenues
|
795
|
|
1,201
|
|
(34)%
|
2,414
|
|
3,458
|
|
(30)%
|
|
Operating expenses
|
824
|
|
1,097
|
|
(25)%
|
2,506
|
|
3,143
|
|
(20)%
|
|
Segment profit (loss)
|
(29)
|
|
104
|
|
(128)%
|
(92)
|
|
315
|
|
(129)%
|
|
Profit (loss) margin
|
(3.6)%
|
8.7%
|
|
(3.8)%
|
9.1%
|
|
Textron Aviation Revenues and Operating Expenses
The following factors contributed to the change in Textron Aviation’s revenues for the periods:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Q3 2020
versus
Q3 2019
|
YTD 2020
versus
YTD 2019
|
|
Volume and mix
|
$
|
(410)
|
|
$
|
(1,043)
|
|
|
Pricing
|
4
|
|
(1)
|
|
|
Total change
|
$
|
(406)
|
|
$
|
(1,044)
|
|
Textron Aviation’s revenues decreased $406 million, 34%, in the third quarter of 2020, compared with the third quarter of 2019, largely due to lower Citation jet volume of $234 million and lower commercial turboprop volume of $83 million, reflecting a decline in demand related to the pandemic, and lower aftermarket volume of $95 million, reflecting lower aircraft utilization resulting from the pandemic. We delivered 25 Citation jets and 21 commercial turboprops in the third quarter of 2020, compared with 45 Citation jets and 39 commercial turboprops in the third quarter of 2019.
Textron Aviation’s revenues decreased $1.0 billion, 30%, in the first nine months of 2020, compared with the first nine months of 2019, largely due to lower Citation jet volume of $566 million and lower commercial turboprop volume of $230 million, reflecting a decline in demand related to the pandemic, and lower aftermarket volume of $227 million, reflecting lower aircraft utilization resulting from the pandemic. We delivered 71 Citation jets and 52 commercial turboprops in the first nine months of 2020, compared with 135 Citation jets and 117 commercial turboprops in the first nine months of 2019.
Textron Aviation’s operating expenses decreased $273 million, 25%, in the third quarter 2020, compared with the third quarter of 2019, largely due to lower volume and mix described above. The decrease in operating expenses for the third quarter of 2020 also included a favorable impact from cost reduction activities, which was offset by inventory valuation charges and idle facility costs of $11 million, largely resulting from the pandemic.
Textron Aviation’s operating expenses decreased $637 million, 20% in the first nine months of 2020, compared with the first nine months of 2019, largely due to lower volume and mix described above. The decrease in operating expenses for the first nine months of 2020 also included a favorable impact from cost reduction activities including employee furloughs and other actions, which was more than offset by $76 million of idle facility costs recognized in the period and inventory valuation charges, largely resulting from the pandemic. Idle facility costs reflect unfavorable absorption of manufacturing costs attributable to abnormally low production levels resulting from the pandemic and temporary manufacturing facility closures. We expect to continue to experience abnormally low production levels through the remainder of the year resulting in additional idle facility costs that will be expensed as incurred.
Textron Aviation Segment Profit (Loss)
The following factors contributed to the change in Textron Aviation’s segment profit (loss) for the periods:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Q3 2020
versus
Q3 2019
|
YTD 2020
versus
YTD 2019
|
|
Volume and mix
|
$
|
(116)
|
|
$
|
(321)
|
|
|
Performance
|
(4)
|
|
(54)
|
|
|
Inflation and pricing
|
(13)
|
|
(32)
|
|
|
Total change
|
$
|
(133)
|
|
$
|
(407)
|
|
Segment profit at Textron Aviation decreased $133 million and $407 million in the third quarter and first nine months of 2020, respectively, compared with the corresponding periods of 2019, primarily due to the impact from lower volume and mix described above. In the first nine months of 2020, the decrease in segment profit also included unfavorable performance of $54 million, primarily reflecting $76 million of idle facility costs, described above, and inventory valuation charges, largely resulting from the pandemic, partially offset by a favorable impact from cost reduction activities.
Bell
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
(Dollars in millions)
|
October 3,
2020
|
September 28,
2019
|
% Change
|
October 3,
2020
|
September 28,
2019
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
Military aircraft and support programs
|
$
|
515
|
|
$
|
473
|
|
9%
|
$
|
1,737
|
|
$
|
1,463
|
|
19%
|
|
Commercial helicopters, parts and services
|
278
|
|
310
|
|
(10)%
|
701
|
|
830
|
|
(16)%
|
|
Total revenues
|
793
|
|
783
|
|
1%
|
2,438
|
|
2,293
|
|
6%
|
|
Operating expenses
|
674
|
|
673
|
|
—
|
2,086
|
|
1,976
|
|
6%
|
|
Segment profit
|
119
|
|
110
|
|
8%
|
352
|
|
317
|
|
11%
|
|
Profit margin
|
15.0%
|
14.0%
|
|
14.4%
|
13.8%
|
|
Bell’s major U.S. Government programs at this time are the V-22 tiltrotor aircraft and the H-1 helicopter platforms, which are both in the production and support stage and represent a significant portion of Bell’s revenues from the U.S. Government.
Bell Revenues and Operating Expenses
The following factors contributed to the change in Bell’s revenues for the periods:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Q3 2020
versus
Q3 2019
|
YTD 2020
versus
YTD 2019
|
|
Volume and mix
|
$
|
6
|
|
$
|
133
|
|
|
Other
|
4
|
|
12
|
|
|
Total change
|
$
|
10
|
|
$
|
145
|
|
Bell’s revenues increased $10 million, in the third quarter of 2020, compared with the third quarter of 2019, as higher military revenues of $42 million were partially offset by lower commercial revenues. The decrease in commercial revenues primarily reflected the mix of aircraft sold in the period as we delivered 41 commercial helicopters in the third quarter of 2020, compared with 42 commercial helicopters in the third quarter of 2019.
Bell’s revenues increased $145 million, 6%, in the first nine months of 2020, compared with the first nine months of 2019, as higher military revenues of $274 million were partially offset by lower commercial revenues. We delivered 83 commercial helicopters in the first nine months of 2020, compared with 125 commercial helicopters in the first nine months of 2019.
Bell’s operating expenses increased $110 million, 6%, in the first nine months of 2020, compared with the first nine months of 2019, primarily due to higher net volume and mix described above.
Bell Segment Profit
The following factors contributed to the change in Bell’s segment profit for the periods:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Q3 2020
versus
Q3 2019
|
YTD 2020
versus
YTD 2019
|
|
Volume and mix
|
$
|
(1)
|
|
$
|
40
|
|
|
Performance and other
|
10
|
|
(5)
|
|
|
Total change
|
$
|
9
|
|
$
|
35
|
|
Bell’s segment profit increased $9 million, 8%, in the third quarter of 2020, compared with the third quarter 2019, primarily due to the favorable impact from performance and other of $10 million.
Bell’s segment profit increased $35 million, 11%, in the first nine months of 2020, compared with the first nine months 2019, primarily due to the impact of higher volume and mix described above, partially offset by an unfavorable impact from performance and other of $5 million, which included $39 million in lower net favorable program adjustments, partially offset by lower research and development costs.
Textron Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
(Dollars in millions)
|
October 3,
2020
|
September 28,
2019
|
% Change
|
October 3,
2020
|
September 28,
2019
|
% Change
|
|
Revenues
|
$
|
302
|
|
$
|
311
|
|
(3)%
|
$
|
956
|
|
$
|
926
|
|
3%
|
|
Operating expenses
|
262
|
|
280
|
|
(6)%
|
853
|
|
818
|
|
4%
|
|
Segment profit
|
40
|
|
31
|
|
29%
|
103
|
|
108
|
|
(5)%
|
|
Profit margin
|
13.2%
|
10.0%
|
|
10.8%
|
11.7%
|
|
Textron Systems Revenues and Operating Expenses
The following factors contributed to the change in Textron Systems’ revenues for the periods:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Q3 2020
versus
Q3 2019
|
YTD 2020
versus
YTD 2019
|
|
Volume
|
$
|
(10)
|
|
$
|
27
|
|
|
Other
|
1
|
|
3
|
|
|
Total change
|
$
|
(9)
|
|
$
|
30
|
|
Revenues at Textron Systems decreased $9 million, 3%, in the third quarter of 2020, compared with the third quarter of 2019, primarily due to lower volume of $20 million at the TRU Simulation + Training business.
In the first nine months of 2020, Textron Systems revenues increased $30 million, 3%, compared with the first nine months of 2019, primarily due to higher volume of $57 million in the Unmanned Systems product line, partially offset by lower volume of $28 million in the Marine and Land Systems product line. Within the Simulation, Training and Other product line, lower volume of $48 million in the TRU Simulation + Training business, largely due to a decline in demand and order cancellations related to the pandemic, was largely offset by higher volumes at the other businesses included in this product line.
Textron Systems’ operating expenses decreased $18 million, 6%, in the third quarter of 2020, compared with the third quarter of 2019, primarily due to a favorable impact from performance and lower net volume described above. Operating expenses increased $35 million, 4%, in the first nine months of 2020 compared with the first nine months of 2019, primarily due to the impact of an
$18 million gain recognized in the second quarter of 2019 related to our contribution of assets to a training business formed with FlightSafety International, Inc. and higher net volume described above.
Textron Systems Segment Profit
The following factors contributed to the change in Textron Systems’ segment profit for the periods:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Q3 2020
versus
Q3 2019
|
YTD 2020
versus
YTD 2019
|
|
Performance and other
|
$
|
12
|
|
$
|
(19)
|
|
|
Volume and mix
|
(3)
|
|
14
|
|
|
Total change
|
$
|
9
|
|
$
|
(5)
|
|
Textron Systems’ segment profit increased $9 million, 29%, in the third quarter of 2020, compared with the third quarter of 2019, due to a favorable impact from performance and other of $12 million, partially offset by lower volume and mix described above.
Textron Systems’ segment profit decreased $5 million, 5%, in the first nine months of 2020, compared with the first nine months 2019, due to an unfavorable impact from performance and other of $19 million, which included the impact from the $18 million gain recognized in the second quarter of 2019 described above, partially offset by higher volume and mix described above.
Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
(Dollars in millions)
|
October 3,
2020
|
September 28,
2019
|
% Change
|
October 3,
2020
|
September 28,
2019
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
Fuel systems and functional components
|
$
|
497
|
|
$
|
521
|
|
(5)%
|
$
|
1,233
|
|
$
|
1,707
|
|
(28)%
|
|
Specialized vehicles
|
335
|
|
429
|
|
(22)%
|
901
|
|
1,164
|
|
(23)%
|
|
Total revenues
|
832
|
|
950
|
|
(12)%
|
2,134
|
|
2,871
|
|
(26)%
|
|
Operating expenses
|
774
|
|
903
|
|
(14)%
|
2,078
|
|
2,698
|
|
(23)%
|
|
Segment profit
|
58
|
|
47
|
|
23%
|
56
|
|
173
|
|
(68)%
|
|
Profit margin
|
7.0%
|
4.9%
|
|
2.6%
|
6.0%
|
|
Industrial Revenues and Operating Expenses
The following factors contributed to the change in Industrial’s revenues for the periods:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Q3 2020
versus
Q3 2019
|
YTD 2020
versus
YTD 2019
|
|
Volume and mix
|
$
|
(126)
|
|
$
|
(735)
|
|
|
Foreign exchange
|
8
|
|
(6)
|
|
|
Other
|
—
|
|
4
|
|
|
Total change
|
$
|
(118)
|
|
$
|
(737)
|
|
Industrial segment revenues decreased $118 million, 12%, in the third quarter of 2020, compared with the third quarter of 2019, primarily due to lower volume and mix in the Specialized Vehicles product line, principally reflecting the timing of snowmobile deliveries, and reduced demand in the ground support equipment business, which has been impacted by the reduction in global air travel as a result of the pandemic.
In the first nine months of 2020, Industrial segment revenues decreased $737 million, 26%, compared with the first nine months of 2019, largely due to lower volume and mix, primarily in the Fuel Systems and Functional Components product line related to manufacturing facility closures in the first half of 2020 as a result of the pandemic. As our OEM customers reopened and resumed production, all of our manufacturing facilities had reopened by the end of the second quarter.
Operating expenses for the Industrial segment decreased $129 million, 14%, and $620 million, 23%, in the third quarter and first nine months of 2020, respectively, compared with the corresponding periods of 2019, primarily due to lower volume and mix described above.
Industrial Segment Profit
The following factors contributed to the change in Industrial’s segment profit for the periods:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Q3 2020
versus
Q3 2019
|
YTD 2020
versus
YTD 2019
|
|
Volume and mix
|
$
|
(19)
|
|
$
|
(182)
|
|
|
Performance
|
24
|
|
53
|
|
|
Pricing and inflation
|
4
|
|
10
|
|
|
Foreign exchange
|
2
|
|
2
|
|
|
Total change
|
$
|
11
|
|
$
|
(117)
|
|
Segment profit for the Industrial segment increased $11 million, 23%, in the third quarter of 2020, compared with the third quarter of 2019, primarily due to a favorable impact from performance of $24 million, principally reflecting cost reduction activities, partially offset by lower volume and mix described above.
Segment profit for the Industrial segment decreased $117 million, in the first nine months of 2020, compared with the first nine months of 2019, largely resulting from lower volume and mix described above. Performance included the impact of cost reduction activities, partially offset by idle facility costs of $24 million recognized in the first nine months of 2020, reflecting unfavorable absorption of manufacturing costs attributable to abnormally low production levels resulting from the pandemic and temporary manufacturing facility closures.
Finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
(In millions)
|
October 3,
2020
|
September 28,
2019
|
October 3,
2020
|
September 28,
2019
|
|
Revenues
|
$
|
13
|
|
$
|
14
|
|
$
|
42
|
|
$
|
47
|
|
|
Segment profit
|
1
|
|
5
|
|
8
|
|
17
|
|
Finance segment revenues decreased $1 million and $5 million in the third quarter and first nine months of 2020, respectively, compared with the corresponding periods of 2019, and segment profit decreased $4 million and $9 million, respectively. The following table reflects information about the Finance segment’s credit performance related to finance receivables.
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
October 3,
2020
|
January 4,
2020
|
|
Finance receivables
|
$
|
725
|
$
|
707
|
|
Allowance for credit losses
|
32
|
25
|
|
Ratio of allowance for credit losses to finance receivables
|
4.41%
|
3.54%
|
|
Nonaccrual finance receivables
|
58
|
39
|
|
Ratio of nonaccrual finance receivables to finance receivables
|
8.00%
|
5.52%
|
|
60+ days contractual delinquency
|
$
|
33
|
$
|
17
|
|
60+ days contractual delinquency as a percentage of finance receivables
|
4.55%
|
2.40%
|
The Finance segment has provided temporary payment relief through loan modifications at the request of certain customers and continues to work with customers to provide temporary payment relief as needed. If the current economic conditions continue to persist or worsen, we may experience increased customer delinquencies, however, we believe our allowance for credit losses adequately covers our exposure on these loans as our estimated collateral values largely exceed the outstanding loan amounts. Loan modifications and key portfolio quality indicators are discussed in Note 3 to the consolidated financial statements.
Liquidity and Capital Resources
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.
Key information that is utilized in assessing our liquidity is summarized below:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
October 3,
2020
|
January 4,
2020
|
|
Manufacturing group
|
|
|
|
Cash and equivalents
|
$
|
2,518
|
$
|
1,181
|
|
Debt
|
4,058
|
3,124
|
|
Shareholders’ equity
|
5,741
|
5,518
|
|
Capital (debt plus shareholders’ equity)
|
9,799
|
8,642
|
|
Net debt (net of cash and equivalents) to capital
|
21%
|
26%
|
|
Debt to capital
|
41%
|
36%
|
|
Finance group
|
|
|
|
Cash and equivalents
|
$
|
152
|
$
|
176
|
|
Debt
|
666
|
686
|
The COVID-19 pandemic has led to volatility in the capital markets and uncertainty in the economic outlook, in addition to various degrees of disruption in our operations due to the unprecedented conditions surrounding the pandemic. In light of these conditions, we have strengthened our cash position since the onset of the pandemic by improving our operational performance and by increasing our borrowings as discussed below. Given our strengthened liquidity position, we expect to reactivate our share repurchase plan on an opportunistic basis in the fourth quarter. We believe that we will have sufficient cash to meet our needs based on our existing cash balances, the cash we expect to generate from our manufacturing operations and the availability of our existing credit facility.
Credit Facilities and Other Sources of Capital
Textron has a senior unsecured revolving credit facility for an aggregate principal amount of $1.0 billion, of which up to $100 million is available for the issuance of letters of credit. We may elect to increase the aggregate amount of commitments under the facility to up to $1.3 billion by designating an additional lender or by an existing lender agreeing to increase its commitment. The facility expires in October 2024, subject to up to two one-year extensions at our option with the consent of lenders representing a majority of the commitments under the facility. At October 3, 2020 and January 4, 2020, there were no amounts borrowed against the facility.
We also maintain an effective shelf registration statement filed with the Securities and Exchange Commission that allows us to issue an unlimited amount of public debt and other securities. On August 5, 2020, we issued $500 million of SEC-registered fixed-rate notes due March 2031 with an annual interest rate of 2.45% and on March 17, 2020, we issued $650 million of SEC-registered fixed-rate notes due June 2030, with an annual interest rate of 3.00%.
On September 18, 2020, the Finance Group’s $150 million variable-rate loan due December 13, 2020 was amended. The maturity date of this loan was extended to September 18, 2021, with an option to extend for an additional year. The annual interest rate was modified from the London interbank offered rate (LIBOR) plus 1.125% to LIBOR plus 1.55%, which is an annual interest rate of 1.70% at October 3, 2020.
On April 1, 2020, we entered into a 364-Day Term Loan Credit Agreement in an aggregate principal amount of $500 million and borrowed the full principal amount available under the agreement. On August 10, 2020, we repaid the outstanding principal amount and the agreement was terminated.
In the first quarter of 2020, we borrowed $377 million against the cash surrender value of our corporate-owned life insurance policies, representing the maximum amount available to be borrowed against these policies. At October 3, 2020, there was $362 million of outstanding borrowings against these insurance policies.
Manufacturing Group Cash Flows
Cash flows from continuing operations for the Manufacturing group as presented in our Consolidated Statements of Cash Flows are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
(In millions)
|
October 3,
2020
|
September 28,
2019
|
|
Operating activities
|
$
|
220
|
|
$
|
205
|
|
|
Investing activities
|
(116)
|
|
(206)
|
|
|
Financing activities
|
1,236
|
|
(47)
|
|
In the first nine months of 2020, net cash inflow from operating activities increased $15 million to $220 million, reflecting a $421 million reduction in cash used for inventories, primarily at the Textron Aviation segment, $146 million in higher customer advances/deposits, largely at the Bell segment, and other favorable improvements in working capital accounts, largely offset by lower earnings and a $401 million period over period increase in cash used to settle accounts payable, principally at the Textron Aviation segment.
Cash flows used in investing activities primarily included capital expenditures of $151 million and $216 million in the first nine months of 2020 and 2019, respectively. In the first nine months of 2020, cash flows provided by financing activities included net proceeds of $1.1 billion from the issuance of long-term debt and proceeds of $377 million from borrowings against corporate-owned life insurance policies. These cash inflows were partially offset by the repayment of $195 million of outstanding debt and $54 million of cash paid to repurchase an aggregate of 1.3 million shares of our common stock under both a prior 2018 share repurchase plan and a recent repurchase plan as described below. In the first nine months of 2019, cash flows used in financing activities primarily included $470 million of cash paid to repurchase an aggregate of 9.3 million shares of our outstanding common stock, partially offset by net proceeds of $297 million from the issuance of long-term debt and $118 million from the issuance of short-term debt.
On February 25, 2020, our Board of Directors authorized the repurchase of up to 25 million shares of our common stock. This new plan allows us to opportunistically repurchase shares and to continue our practice of repurchasing shares to offset the impact of dilution from shares issued under compensation and benefit plans. The 2020 plan replaces the prior 2018 share repurchase authorization.
Finance Group Cash Flows
Cash flows for the Finance group as presented in our Consolidated Statements of Cash Flows are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
(In millions)
|
October 3,
2020
|
September 28,
2019
|
|
Operating activities
|
$
|
5
|
|
$
|
21
|
|
|
Investing activities
|
(1)
|
|
72
|
|
|
Financing activities
|
(28)
|
|
(91)
|
|
The Finance group’s cash flows from investing activities primarily included collections on finance receivables totaling $90 million and $149 million in the first nine months of 2020 and 2019, respectively, partially offset by finance receivable originations of $94 million and $107 million, respectively. In the first nine months of 2020 and 2019, financing activities included payments on long-term and nonrecourse debt of $40 million and $41 million, respectively. Financing activities in the first nine months of 2019 also included a dividend payment of $50 million to the Manufacturing group.
Consolidated Cash Flows
The consolidated cash flows, after elimination of activity between the borrowing groups, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
(In millions)
|
October 3,
2020
|
September 28,
2019
|
|
Operating activities
|
$
|
200
|
|
$
|
225
|
|
|
Investing activities
|
(92)
|
|
(183)
|
|
|
Financing activities
|
1,208
|
|
(88)
|
|
In the first nine months of 2020, net cash inflow from Consolidated operating activities decreased $25 million to $200 million, reflecting lower earnings and a $401 million period over period increase in cash used to settle accounts payable, principally at the Textron Aviation segment, largely offset by a $394 million reduction in cash used for inventories, primarily at the Textron Aviation segment, $146 million of higher customer advances/deposits, largely at the Bell segment, and other favorable improvements in working capital accounts.
Cash flows used in investing activities primarily included capital expenditures of $151 million and $216 million in the first nine months of 2020 and 2019, respectively. Cash flows provided by financing activities in the first nine months of 2020 primarily included net proceeds of $1.1 billion from the issuance of long-term debt and proceeds of $377 million from borrowings against corporate-owned life insurance policies. These cash inflows were partially offset by the repayment of $235 million of outstanding debt and $54 million of cash paid to repurchase shares of our outstanding common stock. In the first nine months of 2019, cash flows used in financing activities primarily included $470 million of cash paid to repurchase shares of our outstanding common stock, partially offset by $297 million of net proceeds from the issuance of long-term debt and $118 million from the issuance of short-term debt.
Captive Financing and Other Intercompany Transactions
The Finance group provides financing primarily to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters manufactured by our Manufacturing group, otherwise known as captive financing. In the Consolidated Statements of Cash Flows, cash received from customers is reflected as operating activities when received from third parties. However, in the cash flow information provided for the separate borrowing groups, cash flows related to captive financing activities are reflected based on the operations of each group. For example, when product is sold by our Manufacturing group to a customer and is financed by the Finance group, the origination of the finance receivable is recorded within investing activities as a cash outflow in the Finance group’s statement of cash flows. Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the Finance group on the customer’s behalf is recorded within operating cash flows as a cash inflow. Although cash is transferred between the two borrowing groups, there is no cash transaction reported in the consolidated cash flows at the time of the original financing. These captive financing activities, along with all significant intercompany transactions, are reclassified or eliminated from the Consolidated Statements of Cash Flows.
Reclassification adjustments included in the Consolidated Statements of Cash Flows are summarized below:
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|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
(In millions)
|
October 3,
2020
|
September 28,
2019
|
|
Reclassification adjustments from investing activities:
|
|
|
|
Finance receivable originations for Manufacturing group inventory sales
|
$
|
(94)
|
|
$
|
(107)
|
|
|
Cash received from customers
|
69
|
|
129
|
|
|
Other
|
—
|
|
27
|
|
|
Total reclassification adjustments from investing activities
|
(25)
|
|
49
|
|
|
Reclassification adjustments from financing activities:
|
|
|
|
Dividends received by Manufacturing group from Finance group
|
—
|
|
(50)
|
|
|
Total reclassification adjustments to cash flows from operating activities
|
$
|
(25)
|
|
$
|
(1)
|
|
Critical Accounting Estimates Update
Our Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements. The accounting estimates that we believe are most critical to the portrayal of our financial condition and results of operations are reported in Item 7 of our Annual Report on Form 10-K for the year ended January 4, 2020. The following section provides an update of the year-end disclosure.
Goodwill
In March of 2020, we observed a significant decline in the market valuation of our common shares as the overall stock market declined related to the COVID-19 pandemic. The global pandemic has led to worldwide facility closures, workforce disruptions, supply chain destabilizations, reduced demand for many products and services, volatility in the capital markets and uncertainty in the economic outlook. Despite the significant excess fair value identified in our 2019 impairment assessment, we determined that these factors could indicate that an impairment loss may have occurred. While short-term disruptions may not indicate an impairment, the effects of a prolonged suspension of activities may cause goodwill, intangible and other asset impairments. Accordingly, in the first quarter of 2020, we reviewed our reporting units to determine whether the impacts caused by the pandemic triggered an interim impairment test and identified indicators at three of our reporting units, Textron Aviation, Kautex and Textron Specialized Vehicles. For the Textron Aviation and Kautex reporting units, considering the impact of the pandemic on the industries in which they operate and our expectation that it will likely take the economy a period of time to recover, we performed an interim impairment test and determined that the fair values of these units continue to exceed the carrying amounts and no impairment was required.
For the Textron Specialized Vehicles reporting unit, the consumer and commercial markets in which it operates have been significantly impacted. During the first quarter of 2020, many of the dealers and retail stores that sell its products were closed throughout the U.S. and globally, and there was uncertainty as to when they will reopen. In addition, the severity of the economic
impact caused by the pandemic has resulted in a substantial increase in unemployment levels with projections of a severe global recession impacting demand for products produced by this reporting unit. Textron Specialized Vehicles also serves the airline industry, which has been significantly impacted by the travel restrictions caused by the pandemic. We calculated the fair value of Textron Specialized Vehicles using discounted cash flows, assuming a reduction in revenues and profit for the remainder of 2020 and into the next few years and calculated the discount rate based on current market data which resulted in an increase of 60 basis points as compared to the prior year analysis. Based on this analysis, we determined that the fair value of Textron Specialized Vehicles exceeded its carrying amount by 15% and no impairment was required. At October 3, 2020, Textron Specialized Vehicles had $363 million in goodwill. Based on the assumptions used in the first quarter test, there have been no indications of impairment through the end of the third quarter of 2020.
Revenue Recognition
A substantial portion of our revenues is related to long-term contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program, for the design, development, manufacture or modification of aerospace and defense products as well as related services. Due to the continuous transfer of control to the U.S. Government, we recognize revenue over the time that we perform under the contract. We generally use the cost-to-cost method to measure progress for our contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts. Under this measure, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and revenue is recorded proportionally as costs are incurred.
Changes in our estimate of the total expected cost or in the transaction price for a contract typically impact our profit booking rate. We utilize the cumulative catch-up method of accounting to recognize the impact of these changes on our profit booking rate for a contract. Under this method, the inception-to-date impact of a profit adjustment on a contract is recognized in the period the adjustment is identified. The impact of our cumulative catch-up adjustments on segment profit recognized in prior periods is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
(In millions)
|
October 3,
2020
|
September 28,
2019
|
October 3,
2020
|
September 28,
2019
|
|
Gross favorable
|
$
|
31
|
|
$
|
41
|
|
$
|
104
|
|
$
|
140
|
|
|
Gross unfavorable
|
(9)
|
|
(20)
|
|
(63)
|
|
(61)
|
|
|
Net adjustments
|
$
|
22
|
|
$
|
21
|
|
$
|
41
|
|
$
|
79
|
|
Forward-Looking Information
Certain statements in this Quarterly Report on Form 10-Q and other oral and written statements made by us from time to time are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which may describe strategies, goals, outlook or other non-historical matters, or project revenues, income, returns or other financial measures, often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “guidance,” “project,” “target,” “potential,” “will,” “should,” “could,” “likely” or “may” and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update or revise any forward-looking statements. In addition to those factors described in our 2019 Annual Report on Form 10-K under “Risk Factors,” among the factors that could cause actual results to differ materially from past and projected future results are the following:
•Interruptions in the U.S. Government’s ability to fund its activities and/or pay its obligations;
•Changing priorities or reductions in the U.S. Government defense budget, including those related to military operations in foreign countries;
•Our ability to perform as anticipated and to control costs under contracts with the U.S. Government;
•The U.S. Government’s ability to unilaterally modify or terminate its contracts with us for the U.S. Government’s convenience or for our failure to perform, to change applicable procurement and accounting policies, or, under certain circumstances, to withhold payment or suspend or debar us as a contractor eligible to receive future contract awards;
•Changes in foreign military funding priorities or budget constraints and determinations, or changes in government regulations or policies on the export and import of military and commercial products;
•Volatility in the global economy or changes in worldwide political conditions that adversely impact demand for our products;
•Volatility in interest rates or foreign exchange rates;
•Risks related to our international business, including establishing and maintaining facilities in locations around the world and relying on joint venture partners, subcontractors, suppliers, representatives, consultants and other business partners in connection with international business, including in emerging market countries;
•Our Finance segment’s ability to maintain portfolio credit quality or to realize full value of receivables;
•Performance issues with key suppliers or subcontractors;
•Legislative or regulatory actions, both domestic and foreign, impacting our operations or demand for our products;
•Our ability to control costs and successfully implement various cost-reduction activities;
•The efficacy of research and development investments to develop new products or unanticipated expenses in connection with the launching of significant new products or programs;
•The timing of our new product launches or certifications of our new aircraft products;
•Our ability to keep pace with our competitors in the introduction of new products and upgrades with features and technologies desired by our customers;
•Pension plan assumptions and future contributions;
•Demand softness or volatility in the markets in which we do business;
•Cybersecurity threats, including the potential misappropriation of assets or sensitive information, corruption of data or operational disruption;
•Difficulty or unanticipated expenses in connection with integrating acquired businesses;
•The risk that acquisitions do not perform as planned, including, for example, the risk that acquired businesses will not achieve revenues and profit projections;
•The impact of changes in tax legislation; and
•Risks and uncertainties related to the impact of the COVID-19 pandemic on our business and operations.
