Company Quick10K Filing
Textron
Price50.38 EPS4
Shares234 P/E14
MCap11,773 P/FCF53
Net Debt-1,053 EBIT1,139
TEV10,720 TEV/EBIT9
TTM 2019-09-28, in MM, except price, ratios
10-Q 2020-04-04 Filed 2020-05-01
10-K 2020-01-04 Filed 2020-02-25
10-Q 2019-09-28 Filed 2019-10-23
10-Q 2019-06-29 Filed 2019-07-24
10-Q 2019-03-30 Filed 2019-04-24
10-K 2018-12-29 Filed 2019-02-14
10-Q 2018-09-29 Filed 2018-10-25
10-Q 2018-06-30 Filed 2018-07-26
10-Q 2018-03-31 Filed 2018-04-25
10-K 2017-12-30 Filed 2018-02-15
10-Q 2017-09-30 Filed 2017-10-27
10-Q 2017-07-01 Filed 2017-07-27
10-Q 2017-04-01 Filed 2017-04-26
10-K 2016-12-31 Filed 2017-02-22
10-Q 2016-10-01 Filed 2016-10-27
10-Q 2016-07-02 Filed 2016-07-28
10-Q 2016-04-02 Filed 2016-04-28
10-K 2016-01-02 Filed 2016-02-24
10-Q 2015-10-03 Filed 2015-10-28
10-Q 2015-07-04 Filed 2015-07-29
10-Q 2015-04-04 Filed 2015-04-29
10-K 2015-01-03 Filed 2015-02-25
10-Q 2014-09-27 Filed 2014-10-24
10-Q 2014-06-28 Filed 2014-07-23
10-Q 2014-03-29 Filed 2014-05-01
10-K 2013-12-28 Filed 2014-02-14
10-Q 2013-09-28 Filed 2013-10-24
10-Q 2013-06-29 Filed 2013-07-24
10-Q 2013-03-30 Filed 2013-04-25
10-K 2012-12-29 Filed 2013-02-15
10-Q 2012-09-29 Filed 2012-10-25
10-Q 2012-06-30 Filed 2012-07-26
10-Q 2012-03-31 Filed 2012-04-26
10-K 2011-12-31 Filed 2012-02-23
10-Q 2011-10-01 Filed 2011-10-28
10-Q 2011-07-02 Filed 2011-07-29
10-Q 2011-04-20 Filed 2011-04-28
10-K 2011-01-01 Filed 2011-03-01
10-Q 2010-10-22 Filed 2010-10-28
10-Q 2010-07-03 Filed 2010-07-29
10-Q 2010-04-03 Filed 2010-04-30
10-K 2010-01-02 Filed 2010-02-25
8-K 2020-06-18
8-K 2020-04-30
8-K 2020-04-01
8-K 2020-03-17
8-K 2020-01-29
8-K 2020-01-10
8-K 2019-12-20
8-K 2019-12-05
8-K 2019-10-17
8-K 2019-08-05
8-K 2019-07-17
8-K 2019-05-07
8-K 2019-04-17
8-K 2019-01-24
8-K 2018-12-04
8-K 2018-10-18
8-K 2018-07-18
8-K 2018-04-16
8-K 2018-01-31
8-K 2017-12-30

TXT 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Note 1. Basis of Presentation
Note 2. Summary of Significant Accounting Policies Update
Note 3. Accounts Receivable and Finance Receivables
Note 4. Inventories
Note 5. Other Assets
Note 6. Other Current Liabilities
Note 7. Leases
Note 8. Debt
Note 9. Derivative Instruments and Fair Value Measurements
Note 10. Shareholders' Equity
Note 11. Segment Information
Note 12. Revenues
Note 13. Share - Based Compensation
Note 14. Retirement Plans
Note 15. Special Charges
Note 16. Income Taxes
Note 17. Commitments and Contingencies
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 5. Other Information
Item 5.07
Item 6. Exhibits
EX-10.1 txt-20200404xex10d1.htm
EX-10.2 txt-20200404xex10d2.htm
EX-31.1 txt-20200404xex31d1.htm
EX-31.2 txt-20200404xex31d2.htm
EX-32.1 txt-20200404xex32d1.htm
EX-32.2 txt-20200404xex32d2.htm

Textron Earnings 2020-04-04

Balance SheetIncome StatementCash Flow
2016128402012201420172020
Assets, Equity
4.13.22.41.50.7-0.22012201420172020
Rev, G Profit, Net Income
1.70.90.1-0.6-1.4-2.22012201420172020
Ops, Inv, Fin

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 4, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______.

Commission File Number 1-5480

Textron Inc.

(Exact name of registrant as specified in its charter)

Delaware

    

05-0315468

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

40 Westminster Street, Providence, RI

02903

(Address of principal executive offices)

(Zip code)

(401) 421-2800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol (s)

Name of each exchange on which registered

Common stock, $0.125 par value

TXT

New York Stock Exchange (NYSE)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer  

Accelerated filer  

Non-accelerated filer

Smaller reporting company  

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 

As of  April 17, 2020, there were 227,472,487 shares of common stock outstanding.

Table of Contents

TEXTRON INC.

Index to Form 10-Q

For the Quarterly Period Ended April 4, 2020

Page

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Statements of Operations (Unaudited)

3

Consolidated Statements of Comprehensive Income (Unaudited)

4

Consolidated Balance Sheets (Unaudited)

5

Consolidated Statements of Cash Flows (Unaudited)

6

Notes to the Consolidated Financial Statements (Unaudited)

8

Note 1.      Basis of Presentation

8

Note 2.      Summary of Significant Accounting Policies Update

8

Note 3.      Accounts Receivable and Finance Receivables

9

Note 4.      Inventories

11

Note 5.      Other Assets

11

Note 6.      Other Current Liabilities

11

Note 7.      Leases

11

Note 8.      Debt

12

Note 9.     Derivative Instruments and Fair Value Measurements

12

Note 10.    Shareholders’ Equity

13

Note 11.    Segment Information

15

Note 12.    Revenues

15

Note 13.    Share-Based Compensation

16

Note 14.    Retirement Plans

18

Note 15.    Special charges

18

Note 16.    Income Taxes

19

Note 17.    Commitments and Contingencies

19

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

Item 4.

Controls and Procedures

32

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 5.

Other Information

34

Item 6.

Exhibits

35

Signatures

36

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TEXTRON INC.

Consolidated Statements of Operations (Unaudited)

Three Months Ended

April 4,

March 30,

(In millions, except per share amounts)

2020

2019

Revenues

Manufacturing revenues

  $

2,763

  $

3,092

Finance revenues

 

14

 

17

Total revenues

 

2,777

 

3,109

Costs, expenses and other

Cost of sales

 

2,387

 

2,577

Selling and administrative expense

 

263

 

307

Interest expense

 

40

 

42

Special charges

39

Non-service components of pension and post-retirement income, net

(21)

(29)

Total costs, expenses and other

 

2,708

 

2,897

Income before income taxes

 

69

 

212

Income tax expense

 

19

 

33

Net income

  $

50

  $

179

Earnings per share

Basic

  $

0.22

  $

0.76

Diluted

  $

0.22

  $

0.76

See Notes to the Consolidated Financial Statements.

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TEXTRON INC.

Consolidated Statements of Comprehensive Income (Unaudited)

Three Months Ended

April 4,

March 30,

(In millions)

2020

2019

Net income

  $

50

  $

179

Other comprehensive income, net of tax:

Pension and postretirement benefits adjustments, net of reclassifications

 

37

 

21

Foreign currency translation adjustments

 

(40)

 

3

Deferred gains (losses) on hedge contracts, net of reclassifications

 

(9)

 

2

Other comprehensive income (loss)

 

(12)

 

26

Comprehensive income

  $

38

  $

205

See Notes to the Consolidated Financial Statements.

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TEXTRON INC.

Consolidated Balance Sheets (Unaudited)

April 4,

January 4,

(Dollars in millions)

2020

2020

Assets

Manufacturing group

Cash and equivalents

  $

2,263

  $

1,181

Accounts receivable, net

870

 

921

Inventories

4,385

 

4,069

Other current assets

984

 

894

Total current assets

8,502

 

7,065

Property, plant and equipment, less accumulated depreciation
and amortization of $4,453 and $4,405, respectively

2,483

 

2,527

Goodwill

2,150

 

2,150

Other assets

1,854

 

2,312

Total Manufacturing group assets

14,989

 

14,054

Finance group

Cash and equivalents

183

 

176

Finance receivables, net

681

 

682

Other assets

93

 

106

Total Finance group assets

957

 

964

Total assets

  $

15,946

  $

15,018

Liabilities and shareholders’ equity

Liabilities

Manufacturing group

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

  $

1,396

  $

561

Accounts payable

1,322

 

1,378

Other current liabilities

1,797

 

1,907

Total current liabilities

4,515

 

3,846

Other liabilities

2,143

 

2,288

Long-term debt

2,956

 

2,563

Total Manufacturing group liabilities

9,614

 

8,697

Finance group

Other liabilities

116

 

117

Debt

682

 

686

Total Finance group liabilities

798

 

803

Total liabilities

10,412

 

9,500

Shareholders’ equity

Common stock

29

 

29

Capital surplus

1,711

 

1,674

Treasury stock

(74)

 

(20)

Retained earnings

5,727

 

5,682

Accumulated other comprehensive loss

(1,859)

 

(1,847)

Total shareholders’ equity

5,534

 

5,518

Total liabilities and shareholders’ equity

  $

15,946

  $

15,018

Common shares outstanding (in thousands)

227,379

 

227,956

See Notes to the Consolidated Financial Statements.

5

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TEXTRON INC.

Consolidated Statements of Cash Flows (Unaudited)

For the Three Months Ended April 4, 2020 and March 30, 2019, respectively

Consolidated

(In millions)

2020

2019

Cash flows from operating activities

Net income

  $

50

  $

179

Adjustments to reconcile net income to net cash used in operating activities:

Non-cash items:

Depreciation and amortization

90

 

102

Deferred income taxes

(10)

15

Asset impairments

39

Other, net

33

 

33

Changes in assets and liabilities:

Accounts receivable, net

47

 

(33)

Inventories

(368)

 

(215)

Other assets

(41)

 

(31)

Accounts payable

(49)

 

47

Other liabilities

(203)

 

(288)

Income taxes, net

20

 

(7)

Pension, net

(5)

(14)

Captive finance receivables, net

 

(1)

Other operating activities, net

3

 

(3)

Net cash used in operating activities of continuing operations

(394)

(216)

Net cash used in operating activities of discontinued operations

(1)

 

Net cash used in operating activities

(395)

(216)

Cash flows from investing activities

Capital expenditures

(50)

 

(59)

Finance receivables repaid

13

 

12

Other investing activities, net

(6)

 

5

Net cash used in investing activities

(43)

 

(42)

Cash flows from financing activities

Increase in short-term debt

603

100

Proceeds from long-term debt

643

Proceeds from borrowings against corporate-owned life insurance policies

377

Principal payments on long-term debt and nonrecourse debt

(24)

(19)

Purchases of Textron common stock

(54)

 

(202)

Dividends paid

(5)

 

(5)

Other financing activities, net

3

 

10

Net cash provided by (used in) financing activities

1,543

 

(116)

Effect of exchange rate changes on cash and equivalents

(16)

 

9

Net increase (decrease) in cash and equivalents

1,089

 

(365)

Cash and equivalents at beginning of period

1,357

 

1,107

Cash and equivalents at end of period

  $

2,446

  $

742

See Notes to the Consolidated Financial Statements.

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TEXTRON INC.

Consolidated Statements of Cash Flows (Unaudited) (Continued)

For the Three Months Ended April 4, 2020 and March 30, 2019, respectively

Manufacturing Group

Finance Group

(In millions)

2020

2019

2020

2019

Cash flows from operating activities

Net income

  $

48

  $

175

  $

2

  $

4

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Non-cash items:

Depreciation and amortization

89

 

100

1

 

2

Deferred income taxes

(11)

15

1

Asset impairments

39

Other, net

33

 

33

 

Changes in assets and liabilities:

Accounts receivable, net

47

 

(33)

 

Inventories

(368)

 

(241)

 

Other assets

(41)

 

(30)

 

(1)

Accounts payable

(49)

 

47

 

Other liabilities

(198)

 

(286)

(5)

 

(2)

Income taxes, net

20

 

(9)

 

2

Pension, net

(5)

(14)

Dividends received from Finance group

50

Other operating activities, net

3

 

(3)

 

Net cash provided by (used in) operating activities of continuing operations

(393)

 

(196)

(1)

 

5

Net cash used in operating activities of discontinued operations

(1)

Net cash provided by (used in) operating activities

(394)

(196)

(1)

5

Cash flows from investing activities

Capital expenditures

(50)

 

(59)

 

Finance receivables repaid

 

46

 

40

Finance receivables originated

 

(33)

 

(29)

Other investing activities, net

(6)

 

3

 

28

Net cash provided by (used in) investing activities

(56)

 

(56)

13

 

39

Cash flows from financing activities

Increase in short-term debt

603

 

100

 

Proceeds from long-term debt

643

 

 

Proceeds from borrowings against corporate-owned life insurance policies

377

Principal payments on long-term debt and nonrecourse debt

(7)

(17)

(18)

Purchases of Textron common stock

(54)

 

(202)

 

Dividends paid

(5)

 

(5)

 

(50)

Other financing activities, net

(9)

 

9

12

 

Net cash provided by (used in) financing activities

1,548

 

(98)

(5)

 

(68)

Effect of exchange rate changes on cash and equivalents

(16)

 

9

 

Net increase (decrease) in cash and equivalents

1,082

 

(341)

7

 

(24)

Cash and equivalents at beginning of period

1,181

 

987

176

 

120

Cash and equivalents at end of period

  $

2,263

  $

646

  $

183

  $

96

See Notes to the Consolidated Financial Statements.

7

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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 first quarter of 2020 and 2019, our cumulative catch-up adjustments increased revenues and segment profit by $2 million and $31 million, respectively, and net income by $1 million and $23 million, respectively ($0.01 and $0.10 per diluted share, respectively). In the first quarter of 2020 and 2019, gross favorable adjustments totaled $27 million and $53 million, respectively, and the gross unfavorable adjustments totaled $25 million and $22 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

8

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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, existence and financial strength of guarantors.

Note 3.  Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

April 4,

January 4,

(In millions)

2020

2020

Commercial

  $

720

  $

835

U.S. Government contracts

189

 

115

909

 

950

Allowance for credit losses

(39)

 

(29)

Total accounts receivable, net

  $

870

  $

921

Finance Receivables

Finance receivables are presented in the following table:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

April 4,

January 4,

(In millions)

2020

2020

Finance receivables

  $

706

  $

707

Allowance for credit losses

(25)

 

(25)

Total finance receivables, net

  $

681

  $

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.

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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. 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. Loan modifications in the first quarter of 2020 were not significant, however, we are working on modifications for approximately 30% of our total finance receivables. 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:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

April 4,

January 4,

(Dollars in millions)

2020

2020

Performing

  $

554

  $

664

Watchlist

115

 

4

Nonaccrual

37

 

39

Nonaccrual as a percentage of finance receivables

5.24

%

5.52

%

Current and less than 31 days past due

  $

622

  $

637

31-60 days past due

29

53

61-90 days past due

35

7

Over 90 days past due

20

10

60+ days contractual delinquency as a percentage of finance receivables

7.79

%

2.40

%

At April 4, 2020, 31% of our performing finance receivables were originated since the beginning of 2019 and 35% were originated from 2016 to 2018. For finance receivables categorized as watchlist, 36% were originated since the beginning of 2019 and 23% from 2016 to 2018.

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.  

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

April 4,

January 4,

(In millions)

2020

2020

Finance receivables evaluated collectively

  $

489

  $

564

Finance receivables evaluated individually

 

113

 

39

Allowance for credit losses based on collective evaluation

22

22

Allowance for credit losses based on individual evaluation

 

3

 

3

Impaired finance receivables with no related allowance for credit losses

  $

96

  $

22

Impaired finance receivables with related allowance for credit losses

17

17

Unpaid principal balance of impaired finance receivables

124

50

Allowance for credit losses on impaired loans

3

3

Average recorded investment of impaired finance receivables

76

40

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Note 4.  Inventories

Inventories are composed of the following:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

April 4,

January 4,

(In millions)

2020

2020

Finished goods

  $

1,611

  $

1,557

Work in process

1,762

 

1,616

Raw materials and components

1,012

 

896

Total inventories

  $

4,385

  $

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 these policies as we strengthened our cash position in light of disruptions in the capital markets caused by the COVID-19 pandemic. These proceeds have been classified as financing activities in the consolidated statement of cash flows.

Note 6. Other Current Liabilities

Warranty Liability

Changes in our warranty liability are as follows:

Three Months Ended

April 4,

March 30,

(In millions)

2020

2019

Beginning of period

  $

141

  $

149

Provision

 

13

 

14

Settlements

 

(19)

 

(22)

Adjustments*

 

(2)

 

4

End of period

  $

133

  $

145

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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

Restructuring Reserve

Our restructuring reserve activity related to restructuring plans prior to 2020  is summarized below:

Contract

Severance

Terminations

(In millions)

Costs

and Other

Total

Balance at January 4, 2020

  $

46

  $

19

  $

65

Cash paid

 

(26)

 

(2)

 

(28)

Balance at April 4, 2020

  $

20

  $

17

  $

37

The majority of the remaining cash outlays of $37 million is expected to be paid over the remainder of 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 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 April 4, 2020 were not significant. Our operating leases have remaining lease terms up to 29 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. In the first quarter of 2020 and 2019, both our operating lease cost and cash paid for these leases totaled $15 million and $16 million, respectively. Variable and short-term lease costs were not significant. Balance sheet and other information related to our operating leases is as follows:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

April 4,

January 4,

(Dollars in millions)

2020

2020

Other assets

  $

272

  $

277

Other current liabilities

 

49

48

Other liabilities

 

225

233

Weighted-average remaining lease term (in years)

 

10.0

10.2

Weighted-average discount rate

 

4.42

%

4.42

%

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At April 4, 2020, maturities of our operating lease liabilities on an undiscounted basis totaled $46 million for 2020, $48 million for 2021, $41 million for 2022, $32 million for 2023, $25 million for 2024 and $153 million thereafter.

Note 8.  Debt

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. At our current credit ratings, the borrowings accrue interest at a rate equal to the London interbank offered rate plus 2.00%, which is an annual interest rate of 3.00% at April 4, 2020. We can pre-pay any amount of the principal balance during the term of the loan; however, we cannot borrow additional principal amounts. The Term Loan Credit Agreement restricts us from incurring additional indebtedness, subject to various exceptions, one of which allows us to borrow under our $1.0 billion revolving credit facility. While this loan is outstanding, we have agreed not to repurchase any of our common stock. The principal amount outstanding, plus accrued and unpaid interest and fees, will be due on March 31, 2021.

Under our shelf registration statement, on March 17, 2020, we issued $650 million of fixed-rate notes due June 1, 2030 with an annual interest rate of 3.00%. The net proceeds of the issuance totaled $643 million, after deducting underwriting discounts, commissions and offering expenses.

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 April 4, 2020 and January 4, 2020, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $410 million and $342 million, respectively.  At April 4, 2020, the fair value amounts of our foreign currency exchange contracts were a $14 million asset and a $18 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 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.

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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:

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

April 4, 2020

January 4, 2020

Carrying

Estimated

Carrying

Estimated

(In millions)

Value

Fair Value

Value

Fair Value

Manufacturing group

Debt, excluding leases

  $

(4,335)

  $

(4,272)

  $

(3,097)

  $

(3,249)

Finance group

Finance receivables, excluding leases

 

494

 

460

 

493

 

527

Debt

 

(