Company Quick10K Filing
Quick10K
Textron
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$50.84 233 $11,830
10-Q 2019-03-30 Quarter: 2019-03-30
10-K 2018-12-29 Annual: 2018-12-29
10-Q 2018-09-29 Quarter: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-30 Annual: 2017-12-30
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-07-01 Quarter: 2017-07-01
10-Q 2017-04-01 Quarter: 2017-04-01
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-10-01 Quarter: 2016-10-01
10-Q 2016-07-02 Quarter: 2016-07-02
10-Q 2016-04-02 Quarter: 2016-04-02
10-K 2016-01-02 Annual: 2016-01-02
10-Q 2015-10-03 Quarter: 2015-10-03
10-Q 2015-07-04 Quarter: 2015-07-04
10-Q 2015-04-04 Quarter: 2015-04-04
10-K 2015-01-03 Annual: 2015-01-03
10-Q 2014-09-27 Quarter: 2014-09-27
10-Q 2014-06-28 Quarter: 2014-06-28
10-Q 2014-03-29 Quarter: 2014-03-29
10-K 2013-12-28 Annual: 2013-12-28
8-K 2019-05-07 Other Events, Exhibits
8-K 2019-04-17 Earnings, Exhibits
8-K 2019-01-24 Earnings, Exhibits
8-K 2019-01-24 Earnings, Exhibits
8-K 2018-12-04 Exit Costs, Impairments
8-K 2018-10-18 Earnings, Exhibits
8-K 2018-07-18 Earnings, Exhibits
8-K 2018-04-16 Earnings, Other Events, Exhibits
8-K 2018-01-31 Earnings, Exhibits
8-K 2017-12-30 Exit Costs, Impairments, Other Events
CPL Cpfl Energy 7,770
TELL Tellurian 2,400
SBLK Star Bulk Carriers 732
SPKE Spark Energy 336
CIK Pinnacle Foods 163
SNMP Sanchez Midstream Partners 43
CLSN Celsion 42
BPMX Biopharmx 14
CPTP Capital Properties 0
REAP Renewable Energy & Power 0
TXT 2019-03-30
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. Warranty Liability
Note 7. Leases
Note 8. Derivative Instruments and Fair Value Measurements
Note 9. Shareholders' Equity
Note 10. Segment Information
Note 11. Revenues
Note 12. Share-Based Compensation
Note 13. Retirement Plans
Note 14. Income Taxes
Note 15. 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 5. Other Information
Item 5.07
EX-31.1 a19-6598_1ex31d1.htm
EX-31.2 a19-6598_1ex31d2.htm
EX-32.1 a19-6598_1ex32d1.htm
EX-32.2 a19-6598_1ex32d2.htm

Textron Earnings 2019-03-30

TXT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a19-6598_110q.htm 10-Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


Form 10-Q


 

(Mark One)

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

 

For the quarterly period ended March 30, 2019

 

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)

 

 

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   ü  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   ü  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  [  ü ]                     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   ü

 

As of April 12, 2019, there were 232,762,261 shares of common stock outstanding.

 


Table of Contents

 

TEXTRON INC.

Index to Form 10-Q

For the Quarterly Period Ended March 30, 2019

 

 

 

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)

 

 

 

 

 

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

10

 

Note 5.                        Other Assets

10

 

Note 6.                        Warranty Liability

11

 

Note 7.                        Leases

11

 

Note 8.                        Derivative Instruments and Fair Value Measurements

12

 

Note 9.                        Shareholders’ Equity

13

 

Note 10.                 Segment Information

14

 

Note 11.                 Revenues

15

 

Note 12.                 Share-Based Compensation

16

 

Note 13.                 Retirement Plans

17

 

Note 14.                 Income Taxes

17

 

Note 15.                 Commitments and Contingencies

18

 

 

 

Item 2.

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

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

27

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

 

Item 5.

Other Information

29

 

 

 

Item 6.

Exhibits

30

 

 

 

 

Signatures

30

 

2


Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

TEXTRON INC.
Consolidated Statements of Operations (Unaudited)

 

 

 

 

 

 

 

Three Months Ended

(In millions, except per share amounts)

 

 

 

 

 

March 30,
2019

 

March 31,
2018

Revenues

 

 

 

 

 

 

 

 

Manufacturing revenues

 

 

 

 

$

3,092

$

3,280

Finance revenues

 

 

 

 

 

17

 

16

Total revenues

 

 

 

 

 

3,109

 

3,296

Costs, expenses and other

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

 

2,577

 

2,729

Selling and administrative expense

 

 

 

 

 

307

 

327

Interest expense

 

 

 

 

 

42

 

41

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

 

 

 

 

 

(29)

 

(19)

Total costs, expenses and other

 

 

 

 

 

2,897

 

3,078

Income before income taxes

 

 

 

 

 

212

 

218

Income tax expense

 

 

 

 

 

33

 

29

Net income

 

 

 

 

$

179

$

189

Earnings per share

 

 

 

 

 

 

 

 

Basic

 

 

 

 

$

0.76

$

0.73

Diluted

 

 

 

 

$

0.76

$

0.72

 

See Notes to the Consolidated Financial Statements.

 

3


Table of Contents

 

TEXTRON INC.

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

 

 

 

Three Months Ended

(In millions)

 

 

 

 

 

March 30,
2019

 

March 31,
2018

Net income

 

 

 

 

$

179

$

189

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments, net of reclassifications

 

 

 

 

 

21

 

31

Foreign currency translation adjustments

 

 

 

 

 

3

 

42

Deferred gains on hedge contracts, net of reclassifications

 

 

 

 

 

2

 

1

Other comprehensive income

 

 

 

 

 

26

 

74

Comprehensive income

 

 

 

 

$

205

$

263

 

See Notes to the Consolidated Financial Statements.

 

4


Table of Contents

 

TEXTRON INC.

Consolidated Balance Sheets (Unaudited)

 

(Dollars in millions)

 

 

 

 

 

March 30,
2019

 

December 29,
2018

Assets

 

 

 

 

 

 

 

 

Manufacturing group

 

 

 

 

 

 

 

 

Cash and equivalents

 

 

 

 

$

646

$

987

Accounts receivable, net

 

 

 

 

 

1,059

 

1,024

Inventories

 

 

 

 

 

4,047

 

3,818

Other current assets

 

 

 

 

 

835

 

785

Total current assets

 

 

 

 

 

6,587

 

6,614

Property, plant and equipment, less accumulated depreciation
and amortization of $4,256 and $4,203, respectively

 

 

 

 

 

2,523

 

2,615

Goodwill

 

 

 

 

 

2,141

 

2,218

Other assets

 

 

 

 

 

2,267

 

1,800

Total Manufacturing group assets

 

 

 

 

 

13,518

 

13,247

Finance group

 

 

 

 

 

 

 

 

Cash and equivalents

 

 

 

 

 

96

 

120

Finance receivables, net

 

 

 

 

 

756

 

760

Other assets

 

 

 

 

 

110

 

137

Total Finance group assets

 

 

 

 

 

962

 

1,017

Total assets

 

 

 

 

$

14,480

$

14,264

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Manufacturing group

 

 

 

 

 

 

 

 

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

 

 

 

 

$

363

$

258

Accounts payable

 

 

 

 

 

1,147

 

1,099

Other current liabilities

 

 

 

 

 

1,922

 

2,149

Total current liabilities

 

 

 

 

 

3,432

 

3,506

Other liabilities

 

 

 

 

 

2,186

 

1,932

Long-term debt

 

 

 

 

 

2,812

 

2,808

Total Manufacturing group liabilities

 

 

 

 

 

8,430

 

8,246

Finance group

 

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

106

 

108

Debt

 

 

 

 

 

711

 

718

Total Finance group liabilities

 

 

 

 

 

817

 

826

Total liabilities

 

 

 

 

 

9,247

 

9,072

Shareholders’ equity

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

30

 

30

Capital surplus

 

 

 

 

 

1,689

 

1,646

Treasury stock

 

 

 

 

 

(331)

 

(129)

Retained earnings

 

 

 

 

 

5,581

 

5,407

Accumulated other comprehensive loss

 

 

 

 

 

(1,736)

 

(1,762)

Total shareholders’ equity

 

 

 

 

 

5,233

 

5,192

Total liabilities and shareholders’ equity

 

 

 

 

$

14,480

$

14,264

Common shares outstanding (in thousands)

 

 

 

 

 

232,699

 

235,621

 

See Notes to the Consolidated Financial Statements.

 

5


Table of Contents

 

TEXTRON INC.

Consolidated Statements of Cash Flows (Unaudited)

For the Three Months Ended March 30, 2019 and March 31, 2018, respectively

 

 

 

 

 

 

 

Consolidated

(In millions)

 

 

 

 

 

2019

 

2018

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

 

 

 

$

179

$

189

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

used in operating activities:

 

 

 

 

 

 

 

 

Non-cash items:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

102

 

105

Deferred income taxes

 

 

 

 

 

15

 

2

Other, net

 

 

 

 

 

33

 

32

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

 

 

 

(33)

 

63

Inventories

 

 

 

 

 

(215)

 

(128)

Other assets

 

 

 

 

 

(31)

 

(119)

Accounts payable

 

 

 

 

 

47

 

15

Other liabilities

 

 

 

 

 

(288)

 

(263)

Income taxes, net

 

 

 

 

 

(7)

 

9

Pension, net

 

 

 

 

 

(14)

 

(2)

Captive finance receivables, net

 

 

 

 

 

(1)

 

15

Other operating activities, net

 

 

 

 

 

(3)

 

(3)

Net cash used in operating activities

 

 

 

 

 

(216)

 

(85)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 

 

 

(59)

 

(77)

Net proceeds from corporate-owned life insurance policies

 

 

 

 

 

2

 

58

Finance receivables repaid

 

 

 

 

 

12

 

16

Other investing activities, net

 

 

 

 

 

3

 

9

Net cash provided by (used in) investing activities

 

 

 

 

 

(42)

 

6

Cash flows from financing activities

 

 

 

 

 

 

 

 

Increase in short-term debt

 

 

 

 

 

100

 

2

Principal payments on long-term debt and nonrecourse debt

 

 

 

 

 

(19)

 

(19)

Purchases of Textron common stock

 

 

 

 

 

(202)

 

(344)

Dividends paid

 

 

 

 

 

(5)

 

(5)

Other financing activities, net

 

 

 

 

 

10

 

8

Net cash used in financing activities

 

 

 

 

 

(116)

 

(358)

Effect of exchange rate changes on cash and equivalents

 

 

 

 

 

9

 

11

Net decrease in cash and equivalents

 

 

 

 

 

(365)

 

(426)

Cash and equivalents at beginning of period

 

 

 

 

 

1,107

 

1,262

Cash and equivalents at end of period

 

 

 

 

$

742

$

836

 

See Notes to the Consolidated Financial Statements.

 

6


Table of Contents

 

TEXTRON INC.

Consolidated Statements of Cash Flows (Unaudited) (Continued)

For the Three Months Ended March 30, 2019 and March 31, 2018, respectively

 

 

 

Manufacturing Group

 

Finance Group

(In millions)

 

2019

 

2018

 

2019

 

2018

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

$

175

$

179

$

4

$

10

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

 

 

 

 

 

 

 

 

Non-cash items:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

100

 

103

 

2

 

2

Deferred income taxes

 

15

 

2

 

 

Other, net

 

33

 

32

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

(33)

 

63

 

 

Inventories

 

(241)

 

(128)

 

 

Other assets

 

(30)

 

(118)

 

(1)

 

(1)

Accounts payable

 

47

 

15

 

 

Other liabilities

 

(286)

 

(259)

 

(2)

 

(4)

Income taxes, net

 

(9)

 

13

 

2

 

(4)

Pension, net

 

(14)

 

(2)

 

 

Dividends received from Finance group

 

50

 

50

 

 

Other operating activities, net

 

(3)

 

(3)

 

 

Net cash provided by (used in) operating activities

 

(196)

 

(53)

 

5

 

3

Cash flows from investing activities

 

 

 

 

 

 

 

 

Capital expenditures

 

(59)

 

(77)

 

 

Net proceeds from corporate-owned life insurance policies

 

2

 

58

 

 

Finance receivables repaid

 

 

 

40

 

65

Finance receivables originated

 

 

 

(29)

 

(34)

Other investing activities, net

 

1

 

9

 

28

 

Net cash provided by (used in) investing activities

 

(56)

 

(10)

 

39

 

31

Cash flows from financing activities

 

 

 

 

 

 

 

 

Increase in short-term debt

 

100

 

2

 

 

Principal payments on long-term debt and nonrecourse debt

 

 

 

(18)

 

(19)

Purchases of Textron common stock

 

(202)

 

(344)

 

 

Dividends paid

 

(5)

 

(5)

 

(50)

 

(50)

Other financing activities, net

 

9

 

8

 

 

Net cash used in financing activities

 

(98)

 

(339)

 

(68)

 

(69)

Effect of exchange rate changes on cash and equivalents

 

9

 

11

 

 

Net decrease in cash and equivalents

 

(341)

 

(391)

 

(24)

 

(35)

Cash and equivalents at beginning of period

 

987

 

1,079

 

120

 

183

Cash and equivalents at end of period

$

646

$

688

$

96

$

148

 

See Notes to the Consolidated Financial Statements.

 

7


Table of Contents

 

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 December 29, 2018.  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 2019 and 2018, our cumulative catch-up adjustments increased revenue and segment profit by $31 million and $40 million, respectively, and net income by $23 million and $30 million, respectively ($0.10 and $0.12 per diluted share, respectively).  In the first quarter of 2019 and 2018, gross favorable adjustments totaled $53 million and $56 million, respectively, and the gross unfavorable adjustments totaled $22 million and $16 million, respectively.

 

Note 2.  Summary of Significant Accounting Policies Update

 

At the beginning of 2019, we adopted Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842), which requires lessees to recognize all leases with a term greater than 12 months on the balance sheet as right-of-use assets and lease liabilities. Upon adoption, the most significant impact was the recognition of $307 million in right-of-use assets and lease liabilities for operating leases, while our accounting for finance leases remained unchanged.  We applied the provisions of this standard to our existing leases at the adoption date using a retrospective transition method and have not adjusted comparative periods. The cumulative transition adjustment to retained earnings was not significant and the adoption had no impact on our earnings or cash flows.  We elected the practical expedients permitted under the transition guidance, which allowed us to carryforward the historical lease classification and to apply hindsight when evaluating options within a contract, resulting in the extension of the lease term for certain of our existing leases.

 

8


Table of Contents

 

Our significant accounting policies are included in Note 1 of our Annual Report on Form 10-K for the year ended December 29, 2018.  Significant changes to our policies resulting from the adoption of ASC 842 are provided below.

 

Leases

We identify leases by evaluating our contracts to determine if the contract conveys the right to use an identified asset for a stated period of time in exchange for consideration. Specifically, we consider whether we can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the asset.  For our contracts that contain both lease components  (e.g., fixed payments including rent, real estate taxes and insurance costs) and non-lease components (e.g., common-area maintenance costs, other goods/services), we allocate the consideration in the contract to each component based on its standalone price.  Leases with terms greater than 12 months are classified as either operating or finance leases at the commencement date.  For these leases, we capitalize the lesser of a) the present value of the minimum lease payments over the lease term, or b) the fair value of the asset, as a right-of-use asset with an offsetting lease liability. The discount rate used to calculate the present value of the minimum lease payments is typically our incremental borrowing rate, as the rate implicit in the lease is generally not known or determinable. The lease term includes any noncancelable period for which we have the right to use the asset and may include options to extend or terminate the lease when it is reasonably certain that we will exercise the option.  Operating leases are recognized as a single lease cost on a straight-line basis over the lease term, while finance lease cost is recognized separately as amortization and interest expense.

 

Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses. For most financial assets, such as trade and other receivables, loans and other instruments, this standard changes the current incurred loss model to a forward-looking expected credit loss model, which generally will result in the earlier recognition of allowances for losses.  The new standard is effective for our company at the beginning of 2020.  Entities are required to apply the provisions of the standard through a cumulative-effect adjustment to retained earnings as of the effective date.  We are currently evaluating the impact of the standard on our consolidated financial statements.

 

Note 3.  Accounts Receivable and Finance Receivables

 

Accounts Receivable

Accounts receivable is composed of the following:

 

(In millions)

 

 

 

 

 

March 30,
2019

 

December 29,
2018

Commercial

 

 

 

 

$

946

$

885

U.S. Government contracts

 

 

 

 

 

142

 

166

 

 

 

 

 

 

1,088

 

1,051

Allowance for doubtful accounts

 

 

 

 

 

(29)

 

(27)

Total

 

 

 

 

$

1,059

$

1,024

 

Finance Receivables

Finance receivables are presented in the following table:

 

(In millions)

 

 

 

 

 

March 30,
2019

 

December 29,
2018

Finance receivables

 

 

 

 

$

782

$

789

Allowance for losses

 

 

 

 

 

(26)

 

(29)

Total finance receivables, net

 

 

 

 

$

756

$

760

 

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.

 

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

 

(Dollars in millions)

 

March 30,
2019

 

December 29,
2018

Performing

$

708

$

704

Watchlist

 

43

 

45

Nonaccrual

 

31

 

40

Nonaccrual as a percentage of finance receivables

 

3.96%

 

5.07%

Less than 31 days past due

$

691

$

719

31-60 days past due

 

70

 

56

61-90 days past due

 

17

 

5

Over 90 days past due

 

4

 

9

60+ days contractual delinquency as a percentage of finance receivables

 

2.69%

 

1.77%

 

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 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)

 

March 30,
2019

 

December 29,
2018

Finance receivables evaluated collectively

$

650

$

630

Finance receivables evaluated individually

 

31

 

58

Allowance for losses based on collective evaluation

 

24

 

24

Allowance for losses based on individual evaluation

 

2

 

5

Impaired finance receivables with no related allowance for losses

$

21

$

43

Impaired finance receivables with related allowance for losses

 

10

 

15

Unpaid principal balance on impaired finance receivables

 

40

 

67

Average recorded investment of impaired finance receivables

 

44

 

61

 

Note 4.  Inventories

 

Inventories are composed of the following:

 

(In millions)

 

March 30,
2019

 

December 29,
2018

Finished goods

$

1,739

$

1,662

Work in process

 

1,518

 

1,356

Raw materials and components

 

790

 

800

Total

$

4,047

$

3,818

 

Note 5. Other Assets

 

On April 1, 2019, Textron Systems’ TRU Simulation + Training Inc. contributed assets associated with its training business into FlightSafety Textron Aviation Training LLC, a company formed by FlightSafety International Inc. and TRU to provide training solutions for Textron Aviation’s business and general aviation aircraft. Our 30% investment in this newly formed company will be accounted for under the equity method of accounting.  The assets of the training business met the criteria to be classified as held for sale at March 30, 2019 and were reclassified to Other assets in the Consolidated Balance Sheets at their net carrying value of $145 million, primarily property, plant and equipment of $64 million and allocated goodwill of $77 million.

 

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Note 6.  Warranty Liability

 

Changes in our warranty liability are as follows:

 

 

 

 

 

 

 

Three Months Ended

(In millions)

 

 

 

 

 

March 30,
2019

 

March 31,
2018

Beginning of period

 

 

 

 

$

149

$

164

Provision

 

 

 

 

 

14

 

16

Settlements

 

 

 

 

 

(22)

 

(22)

Adjustments*

 

 

 

 

 

4

 

10

End of period

 

 

 

 

$

145

$

168

 

* Adjustments include changes to prior year estimates, new issues on prior year sales, acquisitions 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 leases have remaining lease terms up to 30 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 2019, our operating lease cost totaled $16 million. Our finance lease cost and our variable and short-term lease costs were not significant. In the first quarter of 2019, cash paid for operating lease liabilities totaled $16 million, which is classified in cash flows from operating activities.  Balance sheet and other information related to our leases is as follows:

 

(Dollars in millions)

 

 

 

 

 

 

 

March 30,
2019

Operating leases:

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

$

301

Other current liabilities

 

 

 

 

 

 

 

54

Other liabilities

 

 

 

 

 

 

 

250

Finance leases:

 

 

 

 

 

 

 

 

Property, plant and equipment, less accumulated amortization of $50 million

 

 

 

 

 

 

$

117

Short-term and current portion of long-term debt

 

 

 

 

 

 

 

7

Long-term debt

 

 

 

 

 

 

 

78

Weighted-average remaining lease term (in years)

 

 

 

 

 

 

 

 

Finance leases

 

 

 

 

 

 

 

14.2

Operating leases

 

 

 

 

 

 

 

10.4

Weighted-average discount rate

 

 

 

 

 

 

 

 

Finance leases

 

 

 

 

 

 

 

2.72%

Operating leases

 

 

 

 

 

 

 

4.47%

 

Maturities of our lease liabilities at March 30, 2019 are as follows:

 

(In millions)

 

 

 

 

 

Operating
Leases

 

Finance
Leases

2019

 

 

 

 

$

48

$

7

2020

 

 

 

 

 

55

 

9

2021

 

 

 

 

 

42

 

9

2022

 

 

 

 

 

35

 

9

2023

 

 

 

 

 

30

 

9

Thereafter

 

 

 

 

 

177

 

69

Total lease payments

 

 

 

 

 

387

 

112

Less: interest

 

 

 

 

 

(83)

 

(27)

Total lease liabilities

 

 

 

 

$

304

$

85

 

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Note 8.  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 March 30, 2019 and December 29, 2018, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $489 million and $379 million, respectively.  At March 30, 2019, the fair value amounts of our foreign currency exchange contracts were a $4 million asset and a $7 million liability. At December 29, 2018, the fair value amounts of our foreign currency exchange contracts were a $2 million asset and a $10 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.

 

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:

 

 

 

March 30, 2019

 

December 29, 2018

(In millions)

 

Carrying
Value

 

Estimated
Fair Value

 

Carrying
Value

 

Estimated
Fair Value

Manufacturing group

 

 

 

 

 

 

 

 

Debt, excluding leases

$

(3,105)

$

(3,135)

$

(2,996)

$

(2,971)

Finance group

 

 

 

 

 

 

 

 

Finance receivables, excluding leases

 

579

 

610

 

582

 

584

Debt

 

(711)

 

(645)

 

(718)

 

(640)

 

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.

 

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Note 9.  Shareholders’ Equity

 

A reconciliation of Shareholder’s equity is presented below:

 

(In millions)

 

Common
Stock

 

Capital
Surplus

 

Treasury
Stock

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Total
Shareholders’
Equity

Balance at December 29, 2018

$

30

$

1,646

$

(129)

$

5,407

$

(1,762)

$

5,192

Net income

 

 

 

 

179

 

 

179

Other comprehensive income

 

 

 

 

 

26

 

26

Share-based compensation activity

 

 

43

 

 

 

 

43

Dividends declared

 

 

 

 

(5)

 

 

(5)

Purchases of common stock

 

 

 

(202)

 

 

 

(202)

Balance at March 30, 2019

$

30

$

1,689

$

(331)

$

5,581

$

(1,736)

$

5,233

Balance at December 30, 2017

$

33

$

1,669

$

(48)

$

5,368

$

(1,375)

$

5,647

Adoption of ASC 606

 

 

 

 

90

 

 

90

Net income

 

 

 

 

189

 

 

189

Other comprehensive income

 

 

 

 

 

74

 

74

Share-based compensation activity

 

 

41

 

 

 

 

41

Dividends declared

 

 

 

 

(5)

 

 

(5)

Purchases of common stock

 

 

 

(344)

 

 

 

(344)

Balance at March 31, 2018

$

33

$

1,710

$

(392)

$

5,642

$

(1,301)

$

5,692

 

Dividends per share of common stock were $0.02 for both the three months ended March 30, 2019 and March 31, 2018.

 

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

(In thousands)

 

 

 

 

 

March 30,
2019

 

March 31,
2018

Basic weighted-average shares outstanding

 

 

 

 

 

234,839

 

260,497

Dilutive effect of stock options

 

 

 

 

 

1,598

 

3,175

Diluted weighted-average shares outstanding

 

 

 

 

 

236,437

 

263,672

 

Stock options to purchase 3.1 million and 1.3 million shares of common stock are excluded from the calculation of diluted weighted-average shares outstanding for the first quarter of 2019 and 2018, respectively, as their effect would have been anti-dilutive.

 

Accumulated Other Comprehensive Loss and Other Comprehensive Income

 

The components of Accumulated other comprehensive loss are presented below:

 

(In millions)

 

Pension and
Postretirement
Benefits
Adjustments

 

Foreign
Currency
Translation
Adjustments

 

Deferred
Gains (Losses)
on Hedge
Contracts

 

Accumulated
Other
Comprehensive
Loss

Balance at December 29, 2018

$

(1,727)

$

(32)

$

(3)

$

(1,762)

Other comprehensive income before reclassifications

 

 

3

 

3

 

6

Reclassified from Accumulated other comprehensive loss

 

21

 

 

(1)

 

20

Balance at March 30, 2019

$

(1,706)

$

(29)

$

(1)

$

(1,736)

Balance at December 30, 2017

$

(1,396)

$

11

$

10

$

(1,375)

Other comprehensive income before reclassifications

 

 

42

 

1

 

43

Reclassified from Accumulated other comprehensive loss

 

31

 

 

 

31

Balance at March 31, 2018

$

(1,365)

$

53

$

11

$

(1,301)

 

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The before and after-tax components of Other comprehensive income are presented below:

 

 

 

March 30, 2019

 

March 31, 2018

(In millions)

 

Pre-Tax
Amount

 

Tax
(Expense)
Benefit

 

After-Tax
Amount

 

Pre-Tax
Amount

 

Tax
(Expense)
Benefit

 

After-Tax
Amount

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss*

$

25

$

(5)

$

20

$

38

$

(9)

$

29

Amortization of prior service cost*

 

1

 

 

1

 

2

 

 

2

Pension and postretirement benefits adjustments, net

 

26

 

(5)

 

21

 

40

 

(9)

 

31

Deferred gains on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

4

 

(1)

 

3

 

2

 

(1)

 

1

Reclassification adjustments

 

(1)

 

 

(1)

 

 

 

Deferred gains on hedge contracts, net

 

3

 

(1)

 

2

 

2

 

(1)

 

1

Foreign currency translation adjustments

 

1

 

2

 

3

 

40

 

2

 

42

Total

$

30

$

(4)

$

26

$

82

$

(8)

$

74

 

*These components of other comprehensive income are included in the computation of net periodic pension cost.  See Note 14 of our 2018 Annual Report on Form 10-K for additional information.

 

Note 10.  Segment Information

 

We operate in, and report financial information for, the following five business segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. On July 2, 2018, we sold our Tools and Test Equipment businesses that were previously included in the Industrial segment as discussed in Note 2 of our 2018 Annual Report on Form 10-K. 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 and special charges. 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

(In millions)

 

March 30,
2019

 

March 31,
2018

Revenues

 

 

 

 

Textron Aviation

$

1,134

$

1,010

Bell

 

739

 

752

Textron Systems

 

307

 

387

Industrial

 

912

 

1,131

Finance

 

17

 

16

Total revenues

$

3,109

$

3,296

Segment Profit

 

 

 

 

Textron Aviation

$

106

$

72

Bell

 

104

 

87

Textron Systems

 

28

 

50

Industrial

 

50

 

64

Finance

 

6

 

6

Segment profit

 

294

 

279

Corporate expenses and other, net

 

(47)

 

(27)

Interest expense, net for Manufacturing group

 

(35)

 

(34)

Income before income taxes

$

212

$

218

 

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Note 11. Revenues

 

Disaggregation of Revenues

Our revenues disaggregated by major product type are presented below:

 

 

 

Three Months Ended

(In millions)

 

March 30,
2019

 

March 31,
2018

Aircraft

$

766

$

634

Aftermarket parts and services

 

368

 

376

Textron Aviation

 

1,134

 

1,010

Military aircraft and support programs

 

508

 

487

Commercial helicopters, parts and services

 

231

 

265

Bell

 

739

 

752

Unmanned systems

 

134

 

170

Marine and land systems

 

48

 

92

Simulation, training and other

 

125

 

125

Textron Systems

 

307

 

387

Fuel systems and functional components

 

594

 

655

Specialized vehicles

 

318

 

348

Tools and test equipment

 

 

128

Industrial

 

912

 

1,131

Finance

 

17

 

16

Total revenues

$

3,109

$

3,296

 

Our revenues for our segments by customer type and geographic location are presented below:

 

(In millions)

 

Textron
Aviation

 

Bell

 

Textron
Systems

 

Industrial

 

Finance

 

Total

Three months ended March 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Customer type:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

$

1,092

$

230

$

74

$

905

$

17

$

2,318

U.S. Government

 

42

 

509

 

233

 

7

 

 

791

Total revenues

$

1,134

$

739

$

307

$

912

$

17

$

3,109

Geographic location:

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

789

$

578

$

257

$

389

$

8

$

2,021

Europe

 

183

 

20

 

23

 

311

 

1

 

538

Asia and Australia

 

23

 

82

 

16

 

77

 

1

 

199

Other international

 

139

 

59

 

11

 

135

 

7

 

351

Total revenues

$

1,134

$

739

$

307

$

912

$

17

$

3,109

Three months ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Customer type:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

$

973

$

252

$

127

$

1,124

$

16

$

2,492

U.S. Government

 

37

 

500

 

260

 

7

 

 

804

Total revenues

$

1,010

$

752

$

387

$

1,131

$

16

$

3,296

Geographic location:

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

665

$

509

$

287

$

496

$

7

$

1,964

Europe

 

146

 

27

 

12

 

383

 

1

 

569

Asia and Australia

 

81

 

127

 

28

 

92

 

2

 

330

Other international

 

118

 

89

 

60

 

160

 

6

 

433

Total revenues

$

1,010

$

752

$

387

$

1,131

$

16

$

3,296

 

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 revenue 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 March 30, 2019, we had $9.7 billion in remaining performance obligations of which we expect to recognize revenues of approximately 70% through 2020, an additional 23% through 2022, and the balance thereafter.

 

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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 March 30, 2019, contract assets and contract liabilities totaled $477 million and $927 million, respectively.  At December 29, 2018, contract assets and contract liabilities totaled $461 million and $974 million, respectively.  During the first quarter of 2019, we recognized $311 million in revenues that were included in the contract liability balance at December 29, 2018. We recognized $322 million in revenues in the first quarter of 2018 that were included in the contract liability balance at the adoption date.

 

Note 12.  Share-Based Compensation

 

Under our share-based compensation plans, we have authorization to provide awards to selected employees in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance share units and other awards.  Share-based compensation expense for awards subject only to service conditions vest ratably and is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. For employees eligible for early retirement under the plans, the service requirement of the award is satisfied at the date of grant and the expense is recognized in the period the award is granted.  Compensation expense included in net income for these plans is as follows:

 

 

 

 

 

 

 

Three Months Ended

(In millions)

 

 

 

 

 

March 30,
2019

 

March 31,
2018

Compensation expense

 

 

 

 

$

44

$

33

Income tax benefit

 

 

 

 

 

(11)

 

(7)

Total net compensation expense included in net income

 

 

 

 

$

33

$

26

 

Stock Options

 

Options to purchase our shares have a maximum term of ten years and vest ratably over a three-year period. Stock option compensation cost is calculated under the fair value approach using the Black-Scholes option-pricing model to determine the fair value of options granted on the date of grant.  The expected volatility used in this model is based on implied volatilities from traded options on our common stock, historical volatilities and other factors.  The expected term is based on historical option exercise data, which is adjusted to reflect any anticipated changes in expected behavior.

 

The weighted-average fair value of options granted and the assumptions used in our option-pricing model for such grants are as follows:

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 30,
2019

 

March 31,
2018

Fair value of options at grant date

 

 

 

 

$

14.62

$

15.83

Dividend yield

 

 

 

 

 

0.2%

 

0.1%

Expected volatility

 

 

 

 

 

26.6%

 

26.6%

Risk-free interest rate

 

 

 

 

 

2.5%

 

2.6%

Expected term (in years)

 

 

 

 

 

4.7

 

4.7

 

The stock option activity during the first quarter of 2019 is provided below:

 

(Options in thousands)

 

 

 

 

 

Number of
Options

 

Weighted-
Average
Exercise Price

Outstanding at beginning of period

 

 

 

 

 

8,284

$

40.58

Granted

 

 

 

 

 

1,583

 

54.43

Exercised

 

 

 

 

 

(558)

 

(25.06)

Forfeited or expired

 

 

 

 

 

(75)

 

(47.43)

Outstanding at end of period

 

 

 

 

 

9,234

$

43.84

Exercisable at end of period

 

 

 

 

 

6,182

$

38.45

 

At March 30, 2019, our outstanding options had an aggregate intrinsic value of $80 million and a weighted-average remaining contractual life of six years.  Our exercisable options had an aggregate intrinsic value of $79 million and a weighted-average remaining contractual life of five years at March 30, 2019.  The total intrinsic value of options exercised was $16 million and $8 million during the first quarter of 2019 and 2018, respectively.

 

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Restricted Stock Units

 

The activity for restricted stock units payable in both stock and cash during the first quarter of 2019 is provided below:

 

 

 

Units Payable in Stock

 

Units Payable in Cash

(Shares/Units in thousands)

 

Number of
Shares

 

Weighted-
Average Grant

Date Fair Value

 

Number of
Units

 

Weighted-
Average Grant
Date Fair Value

Outstanding at beginning of period, nonvested

 

598

$

45.22

 

1,143

$

45.48

Granted

 

168

 

54.43

 

327

 

54.43

Vested

 

(164)

 

(39.34)

 

(294)

 

(39.27)

Forfeited

 

 

 

(30)

 

(46.76)

Outstanding at end of period, nonvested

 

602

$

49.40

 

1,146

$

49.59

 

The fair value of the restricted stock unit awards that vested and/or amounts paid under these awards is as follows:

 

 

 

 

 

 

 

Three Months Ended

(In millions)

 

 

 

 

 

March 30,
2019

 

March 31,
2018

Fair value of awards vested

 

 

 

 

$

22

$

24

Cash paid

 

 

 

 

 

16

 

18

 

Performance Share Units

The activity for our performance share units during the first quarter of 2019 is provided below:

 

 

 

 

 

 

 

 

 

 

(Units in thousands)

 

 

 

 

 

Number of
Units

 

Weighted-
Average Grant
Date Fair Value

Outstanding at beginning of period, nonvested

 

 

 

 

 

404

$

53.63

Granted

 

 

 

 

 

262

 

54.43

Outstanding at end of period, nonvested

 

 

 

 

 

666

$

53.95

 

Cash paid under these awards totaled $10 million and $11 million during the first quarter of 2019 and 2018, respectively.

 

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:

 

 

 

Pension Benefits

 

Postretirement Benefits
Other Than Pensions

(In millions)

 

March 30,
2019

 

March 31,
2018

 

March 30,
2019

 

March 31,
2018

Three Months Ended

 

 

 

 

 

 

 

 

Service cost

$

23

$

26

$

1

$

1

Interest cost

 

82

 

77

 

2

 

2

Expected return on plan assets

 

(139)

 

(138)

 

 

Amortization of prior service cost (credit)

 

3

 

4

 

(2)

 

(2)

Amortization of net actuarial loss

 

25

 

38

 

 

Net periodic benefit cost (credit)

$

(6)

$

 7

$

1

$

1

 

Note 14.  Income Taxes

 

Our effective tax rate for the first quarter of 2019 and 2018 was 15.6% and 13.3%, respectively. In the first quarter of 2019, the effective tax rate was lower than the U.S. federal statutory tax rate of 21%, primarily due to a $12 million benefit recognized for additional research credits related to prior years.   In the first quarter of 2018, the effective tax rate was lower than the U.S. federal statutory tax rate of 21%, primarily due to benefits recognized from audit settlements.

 

Our reserve for unrecognized tax benefits totaled $175 million and $141 million at March 30, 2019 and December 29, 2018, respectively. The increase in this reserve largely reflects a claim filed in the first quarter of 2019 for tax credits related to prior years.

 

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Note 15.  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.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Consolidated Results of Operations

 

 

 

 

 

Three Months Ended

(Dollars in millions)

 

 

 

March 30,
2019

 

March 31,
2018

 

% Change

Revenues

 

 

$

3,109

$

3,296

 

(6)%

Cost of sales

 

 

 

2,577

 

2,729

 

(6)%

Selling and administrative expense

 

 

 

307

 

327

 

(6)%

Gross margin as a percentage of Manufacturing revenues

 

 

 

16.7%

 

16.8%

 

 

 

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 20 to 23.

 

Revenues

 

Revenues decreased $187 million, 6%, in the first quarter of 2019, compared with the first quarter of 2018, largely driven by the disposition of the Tools and Test Equipment product line within the Industrial segment which occurred on July 2, 2018. The net revenue decrease included the following factors:

 

·                  Lower Industrial revenues of $219 million, primarily due to $128 million in lower revenues due to the impact from the disposition of the Tools and Test Equipment product line and lower volume of $72 million.

·                  Lower Textron Systems revenues of $80 million, largely reflecting lower volume of $44 million in the Marine and Land Systems product line and $36 million in the Unmanned Systems product line.

·                  Lower Bell revenues of $13 million, as lower commercial revenues of $34 million, largely due to lower aircraft deliveries, were partially offset by higher military revenues of $21 million.

·                  Higher Textron Aviation revenues of $124 million, primarily due to higher volume and mix of $118 million.

 

Cost of Sales and Selling and Administrative Expense

 

Cost of sales decreased $152 million, 6%, in the first quarter of 2019, compared with the first quarter of 2018, largely resulting from the disposition of the Tools and Test Equipment product line and lower net volume as described above. Selling and administrative expense decreased $20 million, 6%, in the first quarter of 2019, compared with the first quarter of 2018, primarily reflecting the impact from the disposition of the Tools and Test Equipment product line.

 

Income Taxes

 

Our effective tax rate for the first quarter of 2019 and 2018 was 15.6% and 13.3%, respectively. In the first quarter of 2019, the effective tax rate was lower than the U.S. federal statutory tax rate of 21%, primarily due to a $12 million benefit recognized for additional research credits related to prior years.   In the first quarter of 2018, the effective tax rate was lower than the U.S. federal statutory tax rate of 21%, primarily due to benefits recognized from audit settlements.

 

Backlog

 

Our backlog is summarized below:

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

March 30,
2019

 

December 29,
2018

Bell

 

 

 

 

$

6,296

$

5,837

Textron Aviation

 

 

 

 

 

1,995

 

1,791

Textron Systems

 

 

 

 

 

1,407

 

1,469

Total backlog

 

 

 

 

$

9,698

$

9,097

 

Bell’s backlog increased $459 million, 8%, in the first quarter of 2019, primarily as a result of new military contracts received, largely related to the H-1 helicopter program.  Backlog at Textron Aviation increased $204 million, 11%, in the first quarter of 2019, as a result of orders in excess of deliveries.

 

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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 and special charges.  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 typically are expressed for our commercial business in terms of volume and mix, pricing, foreign exchange, acquisitions and dispositions, while changes in segment profit may be expressed in terms of volume and mix, inflation and cost 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.  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 from the sale of businesses are reflected as Dispositions.  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.  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 2018 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 revenue related to these contracts are expressed in terms of volume.  Revenues for our U.S. Government contracts are primarily recognized as costs are incurred. Changes in segment profit 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

(Dollars in millions)

 

 

 

 

 

March 30,
2019