| | | 2019 versus | (In millions) | 2018 | Performance | $ | 49 | Inflation, net of pricing | | | | | | | | 2017 versus
2016(28)
| Volume and mix | | | | | | | $
| (307)
| Other
| | | | | | | | 72(17)
| Total change | | | | | | | $ | (235)4
|
Textron Aviation’s revenues decreased $235segment profit increased $4 million, 5%, in 2017,2019, compared with 2016, primarily2018, due to a favorable impact of $49 million from performance, reflecting manufacturing efficiencies, partially offset by an unfavorable impact of $28 million from inflation, net of pricing and lower volume and mix of $307$17 million largely the result of lower military and commercial turboprop volume. We delivered 180 Citation jets, 155 commercial turboprops and 13 Beechcraft T-6 trainers in 2017, compared with 178 Citation jets, 190 commercial turboprops and 38 Beechcraft T-6 trainers in 2016. Textron Aviation’s operating expenses decreased $149 million, 3%, in 2017, compared with 2016, largely due to lower net volume as described above.
Textron Aviation Segment Profitthe mix of products sold in the year.
Factors contributing to 2018 year-over-year segment profit change are provided below: (In millions) | | | | | | | | 2018 versus 2017 | Volume and mix | | | | | | | $ | 65 | Pricing, net of inflation | | | | | | | | 57 | Performance | | | | | | | | 20 | Total change | | | | | | | $ | 142 |
| | | | 2018 versus | (In millions) | 2017 | Volume and mix | $ | 65 | Pricing, net of inflation | | 57 | Performance | | 20 | Total change | $ | 142 |
Segment profit at Textron Aviation increased $142 million, 47%, in 2018, compared with 2017, primarily due to the impact from higher volume and mix of $65 million as described above and the favorable impact from pricing, net of inflation. Factors contributing to 2017 year-over-year segment profit change are provided below:
(In millions)
| | | | | | | | 2017 versus
2016
| Volume and mix
| | | | | | | $
| (99)
| Pricing, net of inflation
| | | | | | | | 56
| Performance and other
| | | | | | | | (43)
| Total change
| | | | | | | $
| (86)
|
Segment profit at Textron Aviation decreased $86 million, 22%, in 2017, compared with 2016, primarily as a result of lower net volume and mix as described above. The favorable impact of $56 million from pricing, net of inflation, was largely offset by an unfavorable impact of $43 million from performance and other, largely reflecting higher research, development and engineering costs, which included costs related to the Scorpion program in 2017.
Textron Aviation Backlog Backlog at Textron Aviation increased $611 million, 52%, in 2018 as a result of orders in excess of deliveries. Bell | | | | | | | % Change | | | | | | | | | | | | | | | | | | | | | | | | | | % Change | | (Dollars in millions) | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | Revenues: | | | | | | | | | | | | | | | | | | | | | | | | Military aircraft and support programs | $ | 2,030 | $ | 2,076 | $ | 2,087 | | (2)% | | (1)% | $ | 1,988 | | $ | 2,030 | | $ | 2,076 | | (2) | % | (2) | % | Commercial helicopters, parts and services | | 1,150 | | 1,241 | | 1,152 | | (7)% | | 8% | | 1,266 | | | 1,150 | | | 1,241 | | 10 | % | (7) | % | Total revenues | | 3,180 | | 3,317 | | 3,239 | | (4)% | | 2% | | 3,254 | | | 3,180 | | | 3,317 | | 2 | % | (4) | % | Operating expenses | | 2,755 | | 2,902 | | 2,853 | | (5)% | | 2% | | 2,819 | | | 2,755 | | | 2,902 | | 2 | % | (5) | % | Segment profit | | 425 | | 415 | | 386 | | 2% | | 8% | | 435 | | | 425 | | | 415 | | 2 | % | 2 | % | Profit margin | | 13.4% | | 12.5% | | 11.9% | | | | | | 13.4 | % | | 13.4 | % | | 12.5 | % | | | | | Backlog | $ | 5,837 | $ | 4,598 | $ | 5,360 | | 27% | | (14)% | $ | 6,902 | | $ | 5,837 | | $ | 4,598 | | 18 | % | 27 | % |
Bell’s major U.S. Government programs at this time are the V-22 tiltrotor aircraft and the H-1 helicopter platforms, which are both in the production and support stage and represent a significant portion of Bell’s revenues from the U.S. Government. Bell Revenues and Operating Expenses Factors contributing to the 2019 year-over-year revenue change are provided below: | | | | 2019 versus | (In millions) | 2018 | Volume and mix | $ | 61 | Other | | 13 | Total change | $ | 74 |
Bell’s revenues increased $74 million, 2%, in 2019, compared with 2018, reflecting higher commercial revenues of $116 million, partially offset by lower military volume. We delivered 201 commercial helicopters in 2019, compared with 192 commercial helicopters in 2018. Bell’s operating expenses increased $64 million, 2%, in 2019, compared with 2018, primarily due to higher volume and mix as described above. Factors contributing to the 2018 year-over-year revenue change are provided below: | | | 2018 versus | (In millions) | | | | | | | | 2018 versus 2017
| Volume and mix | | | | | | | $ | (155) | Other | | | | | | | | 18 | Total change | | | | | | | $ | (137) |
Bell’s revenues decreased $137 million, 4%, in 2018, compared with 2017, primarily due to lower commercial revenues of $91 million, largely reflecting the mix of aircraft sold in the year, and lower military revenues of $46 million. We delivered 192 commercial helicopters in 2018, compared with 132 commercial helicopters in 2017. Bell’s operating expenses decreased $147 million, 5%, in 2018, compared with 2017, primarily due to lower volume and mix as described above and improved performance on military programs described below. Bell Segment Profit Factors contributing to the 20172019 year-over-year revenuesegment profit change are provided below: (In millions) | | | | | | | | 2017 versus 2016 | Volume and mix | | | | | | | $ | 57 | Other | | | | | | | | 21 | Total change | | | | | | | $ | 78 |
| | | | 2019 versus | (In millions) | 2018 | Performance and other | $ | 6 | Volume and mix | | 4 | Total change | $ | 10 |
Bell’s revenuessegment profit increased $78$10 million, 2%, in 2017,2019, compared with 2016, primarily2018, due to an $89favorable performance and other of $6 million increase in commercial revenues, largely due to higher deliveries as Bell delivered 132 commercial aircraft in 2017, compared with 114 aircraft in 2016. Military deliveries were largely unchanged in 2017 compared with 2016, as we delivered 22 V-22 aircraft in both years and 38 H-1 aircraft in 2017, compared with 35 H-1 aircraft in 2016. Bell’s operating expenses increased $49 million, 2%, in 2017, compared with 2016, primarily due tothe impact of higher volume and mix as described above. Performance and other includes improved manufacturing performance, partially offset by lower net favorable program adjustments.
Factors contributing to 2018 year-over-year segment profit change are provided below: (In millions) | | | | | | | | 2018 versus 2017 | Performance and other | | | | | | | $ | 60 | Volume and mix | | | | | | | | (50) | Total change | | | | | | | $ | 10 |
| | | | 2018 versus | (In millions) | 2017 | Performance and other | $ | 60 | Volume and mix | | (50) | Total change | $ | 10 |
Bell’s segment profit increased $10 million, 2%, in 2018, compared with 2017, due to a favorable impact of $60 million from performance and other, partially offset by an unfavorable impact from volume and mix, largely due to the mix of commercial aircraft sold in the year. The impact from performance and other was largely the result of $77 million in improved performance on military programs, which included an increase in favorable profit adjustments reflecting retirements of risk related to cost estimates and improved labor and overhead rates, partially offset by higher research and development costs. Factors contributing to 2017 year-over-year segment profit change are provided below:
(In millions) | | | | | | | | 2017 versus 2016 | Performance and other | | | | | | | $ | 66 | Volume and mix | | | | | | | | (37) | Total change | | | | | | | $ | 29 |
Bell Backlog Bell’s segment profitbacklog increased $29 million, 8%$1.1 billion, 18%, in 2017, compared2019, primarily reflecting new contracts with 2016, reflecting a favorable impact from performancethe U.S. Government for spares and otherlogistic support for the V-22 tiltrotor aircraft and the H-1 helicopter programs, in excess of $66 million, largely the result of improved manufacturing performance and lower research and development costs, partially offset by an unfavorable impact from volume and mix of $37 million. Bell Backlogrevenues recognized.
Bell’s backlog increased $1.2 billion, 27%, in 2018. New contracts received in excess of revenues recognized totaled $2.0 billion, which primarily reflected an increase of $2.4 billion for Bell’s portion of a third multi-year V-22 contract for the production and delivery of 63 units along with related supplies and services through 2024. This was partially offset by a decrease of $760 million upon the adoption of ASC 606 at the beginning of 2018, largely resulting from the acceleration of revenues upon conversion to the cost-to-cost method of revenue recognition. Bell’s backlog decreased $762 million, 14%, in 2017, primarily due to deliveries on the V-22 and H-1 programs in excess of orders.
Textron Systems | | | | | | | | | | | | | | | | | | | | | | | | % Change | | (Dollars in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | Revenues | $ | 1,325 | | $ | 1,464 | | $ | 1,840 | | (9) | % | (20) | % | Operating expenses | | 1,184 | | | 1,308 | | | 1,701 | | (9) | % | (23) | % | Segment profit | | 141 | | | 156 | | | 139 | | (10) | % | 12 | % | Profit margin | | 10.6 | % | | 10.7 | % | | 7.6 | % | | | | | Backlog | $ | 1,211 | | $ | 1,469 | | $ | 1,406 | | (18) | % | 4 | % |
| | | | | | | % Change | (Dollars in millions) | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | Revenues | $ | 1,464 | $ | 1,840 | $ | 1,756 | | (20)% | | 5% | Operating expenses | | 1,308 | | 1,701 | | 1,570 | | (23)% | | 8% | Segment profit | | 156 | | 139 | | 186 | | 12% | | (25)% | Profit margin | | 10.7% | | 7.6% | | 10.6% | | | | | Backlog | $ | 1,469 | $ | 1,406 | $ | 1,841 | | 4% | | (24)% |
Textron Systems Revenues and Operating Expenses Factors contributing to the 2019 year-over-year revenue change are provided below: | | | | 2019 versus | (In millions) | 2018 | Volume | $ | (144) | Other | | 5 | Total change | $ | (139) |
Revenues at Textron Systems decreased $139 million, 9%, in 2019, compared with 2018, largely due to lower volume of $103 million in the Marine and Land Systems product line, primarily reflecting lower armored vehicle deliveries, and $41 million in the Unmanned Systems product line. Textron Systems’ operating expenses decreased $124 million, 9%, in 2019, compared with 2018, primarily due to lower volume described above, and a favorable impact from the $18 million gain discussed below. Factors contributing to the 2018 year-over-year revenue change are provided below: | | | 2018 versus | (In millions) | | | | | | | | 2018 versus 2017
| Volume | | | | | | | $ | (380) | Other | | | | | | | | 4 | Total change | | | | | | | $ | (376) |
Revenues at Textron Systems decreased $376 million, 20%, in 2018, compared with 2017, primarily due to lower volume of $159 million in the Marine and Land Systems product line reflecting lower Tactical Armoured Patrol Vehicle program (TAPV) deliveries, along with a decrease due to the discontinuance of our sensor-fuzed weapon product in 2017. Textron Systems’ operating expenses decreased $393 million, 23%, in 2018, compared with 2017, primarily due to lower volume described above. The decrease in operating expenses in 2018 also included the impact from unfavorable net program adjustments recorded in 2017 as described below. Textron Systems Segment Profit Factors contributing to the 20172019 year-over-year revenuesegment profit change are provided below: | | | | 2019 versus | (In millions) | 2018 | Performance and other | $ | (9) | Volume and mix | | (6) | Total change | $ | (15) |
(In millions) | | | | | | | | 2017 versus 2016 | Volume | | | | | | | $ | 67 | Acquisitions | | | | | | | | 10 | Other | | | | | | | | 7 | Total change | | | | | | | $ | 84 |
Revenues at Textron Systems increased $84Systems’ segment profit decreased $15 million, 5%10%, in 2017,2019, compared with 2016,2018, primarily due to higher volume of $176 million in the Marine and Land Systems product line, partially offset by lower volume in the other product lines, largely due to the final deliveries of our discontinued sensor-fuzed weapon product in the first half of 2017.
Textron Systems’ operating expenses increased $131 million, 8%, in 2017, compared with 2016, primarily due to higher volume as described above and the unfavorable impact from performance and other of $9 million and the impact from lower volume as described above. Performance and other includes the impact of lower net favorable program adjustments, described below.
Textron Systems Segment Profitpartially offset by an $18 million gain recognized in the second quarter of 2019 related to a new training business we formed with FlightSafety International Inc., discussed in Note 7 to the Consolidated Financial Statements.
Factors contributing to 2018 year-over-year segment profit change are provided below: (In millions) | | | | | | | | 2018 versus 2017 | Performance and other | | | | | | | $ | 62 | Volume and mix | | | | | | | | (45) | Total change | | | | | | | $ | 17 |
| | | | 2018 versus | (In millions) | 2017 | Performance and other | $ | 62 | Volume and mix | | (45) | Total change | $ | 17 |
Textron Systems’ segment profit increased $17 million, 12%, in 2018, compared with 2017, primarily due to favorable performance and other of $62 million, partially offset by lower volume described above. Performance and other improved largely due to unfavorable program adjustments recorded in 2017 as discussed below. Factors contributing to 2017 year-over-year segment profit change are provided below:
(In millions)
| | | | | | | | 2017 versus
2016
| Performance
| | | | | | | $
| (28)
| Volume and mix
| | | | | | | | (13)
| Other
| | | | | | | | (6)
| Total change
| | | | | | | $
| (47)
|
Textron Systems’ segment profit decreased $47 million, 25%, in 2017, compared with 2016, primarily due to unfavorable performance. Performance reflects an unfavorable impact from net program adjustments compared with 2016, largely due toof $44 million of adjustments recorded in 2017 related to the TAPV program. In 2017, this program experienced inefficiencies resulting from various production issues during the ramp up and subsequent production.
Textron Systems Backlog In 2017,2019, backlog decreased $435$258 million, 24%18%, primarily due to deliveries in excess of orders in the Marine and Land Systems product line as TAPV deliveries neared completion, and final deliveriesrevenues recognized exceeded new contracts. Industrial | | | | | | | | | | | | | | | | | | | | | | | | % Change | | (Dollars in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | Revenues: | | | | | | | | | | | | | | Fuel Systems and Functional Components | $ | 2,237 | | $ | 2,352 | | $ | 2,330 | | (5) | % | 1 | % | Specialized Vehicles | | 1,561 | | | 1,691 | | | 1,486 | | (8) | % | 14 | % | Tools and Test Equipment | | — | | | 248 | | | 470 | | — | | (47) | % | Total revenues | | 3,798 | | | 4,291 | | | 4,286 | | (11) | % | — | | Operating expenses | | 3,581 | | | 4,073 | | | 3,996 | | (12) | % | 2 | % | Segment profit | | 217 | | | 218 | | | 290 | | — | | (25) | % | Profit margin | | 5.7 | % | | 5.1 | % | | 6.8 | % | | | | |
Industrial
| | | | | | | % Change | (Dollars in millions) | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | Revenues: | | | | | | | | | | | Fuel Systems and Functional Components | $ | 2,352 | $ | 2,330 | $ | 2,273 | | 1% | | 3% | Other Industrial | | 1,939 | | 1,956 | | 1,521 | | (1)% | | 29% | Total revenues | | 4,291 | | 4,286 | | 3,794 | | — | | 13% | Operating expenses | | 4,073 | | 3,996 | | 3,465 | | 2% | | 15% | Segment profit | | 218 | | 290 | | 329 | | (25)% | | (12)% | Profit margin | | 5.1% | | 6.8% | | 8.7% | | | | |
Industrial Revenues and Operating Expenses Factors contributing to the 2019 year-over-year revenue change are provided below: | | | | 2019 versus | (In millions) | 2018 | Disposition | $ | (248) | Volume and mix | | (233) | Foreign exchange | | (66) | Pricing | | 54 | Total change | $ | (493) |
Industrial segment revenues decreased $493 million, 11%, in 2019, compared with 2018, largely due to the impact of $248 million from the disposition of the Tools and Test Equipment product line in 2018 and $233 million of lower volume and mix at the remaining product lines, primarily in the Specialized Vehicles product line. The reduction in volume in the Specialized Vehicles product line largely reflected our management of the distribution channel related to products under the Arctic Cat brand, including a reduction of inventories sold into the channel. Operating expenses for the Industrial segment decreased $492 million, 12%, in 2019 compared with 2018, primarily due to lower operating expenses of $226 million from the disposition of our Tools and Test Equipment product line, lower volume and mix described above and improved performance described below. Factors contributing to the 2018 year-over-year revenue change are provided below: (In millions) | | | | | | | | 2018 versus 2017 | Disposition | | | | | | | $ | (246) | Volume | | | | | | | | 149 | Foreign exchange | | | | | | | | 57 | Acquisition | | | | | | | | 49 | Other | | | | | | | | (4) | Total change | | | | | | | $ | 5 |
| | | | 2018 versus | (In millions) | 2017 | Disposition | $ | (246) | Volume | | 149 | Foreign exchange | | 57 | Acquisition | | 49 | Other | | (4) | Total change | $ | 5 |
Industrial segment revenues increased $5 million, in 2018, compared with 2017. Higher volume of $149 million, largely related to the Textron Specialized Vehicles product line, a favorable impact of $57 million from foreign exchange, primarily related to the strengthening of the Euro against the U.S. dollar, and the impact of $49 million from the acquisition of Arctic Cat on March 6, 2017, were largely offset by $246 million in lower revenues due to the disposition of the Tools and Test Equipment product line. Operating expenses for the Industrial segment increased $77 million, 2%, in 2018, compared with 2017, primarily due to higher volume described above, the impact from foreign exchange and additional operating expenses from the Arctic Cat acquisition. These increases were partially offset by lower operating expenses from the disposition of our Tools and Test Equipment product line. Industrial Segment Profit Factors contributing to the 20172019 year-over-year revenuesegment profit change are provided below: (In millions) | | | | | | | | 2017 versus 2016 | Acquisitions | | | | | | �� | $ | 393 | Volume | | | | | | | | 77 | Foreign exchange | | | | | | | | 27 | Other | | | | | | | | (5) | Total change | | | | | | | $ | 492 |
| | | | 2019 versus | (In millions) | 2018 | Performance | $ | 94 | Pricing, net of inflation | | 18 | Volume and mix | | (82) | Disposition | | (22) | Foreign exchange | | (9) | Total change | $ | (1) |
Industrial segment revenues increased $492 million, 13%, in 2017, compared with 2016, primarily due to the impact from acquired businesses of $393 million, largely related to the acquisition of Arctic Cat as described below. Revenues were also impacted by higher volume of $77 million, primarily related to the Fuel Systems and Functional Components product line and a favorable impact of $27 million from foreign exchange, primarily related to the Euro.
On March 6, 2017, we acquired Arctic Cat, a manufacturer of all-terrain vehicles, side-by-sides and snowmobiles, in addition to related parts, garments and accessories. The operating results of Arctic Cat have been included in our financial results only for the period subsequent to the completion of the acquisition. See Note 2 for additional information regarding this acquisition.
Operating expensesSegment profit for the Industrial segment increased $531 million, 15%,was largely unchanged in 2017,2019, compared with 2016,2018, as favorable performance of $94 million, principally in the Specialized Vehicles product line primarily duereflecting cost reduction activities, was largely offset by the impact from lower volume and mix described above. Performance also includes the impact of a $17 million favorable adjustment recognized in the fourth quarter of 2018 related to additional operating expenses from acquired businesses. The increase in operating expenses was also due to higher volume as described above.
Industrial Segment Profita patent infringement matter.
Factors contributing to 2018 year-over-year segment profit change are provided below: | | | 2018 versus | (In millions) | | | | | | | | 2018 versus 2017
| Disposition | | | | | | | $ | (22) | Pricing and inflation | | | | | | | | (21) | Performance and other | | | | | | | | (16) | Volume and mix | | | | | | | | (13) | Total change | | | | | | | $ | (72) |
Segment profit for the Industrial segment decreased $72 million, 25%, in 2018, compared with 2017, resulting from the impact of the disposition of our Tools and Test Equipment product line of $22 million, an unfavorable impact of pricing and inflation of $21 million and unfavorable performance and other of $16 million, which were both primarily related to the Textron Specialized Vehicles product line. The unfavorable volume and mix was primarily due to the mix of products sold in the year. Performance and other primarily included additional operating expenses in the first quarter of 2018 due to the timing of the Arctic Cat acquisition and the seasonality of the outdoor power sports business and unfavorable inventory adjustments in the Textron Specialized Vehicles product line, partially offset by a favorable impact of $17 million recognized in the fourth quarter of 2018 related to a patent infringement matter. Finance | | | | | | | (In millions) | 2019 | 2018 | 2017 | Revenues | $ | 66 | $ | 66 | $ | 69 | Segment profit | | 28 | | 23 | | 22 |
Factors contributing to 2017 year-over-yearFinance segment revenues were unchanged and segment profit change are provided below:
(In millions)
| | | | | | | | 2017 versus
2016
| Pricing and inflation
| | | | | | | $
| (23)
| Performance and other
| | | | | | | | (10)
| Volume and mix
| | | | | | | | (6)
| Total change
| | | | | | | $
| (39)
|
Industrial’s segment profit decreased $39increased $5 million 12%, in 2017,2019, compared with 2016, largely due to an unfavorable impact from pricing and inflation of $23 million, primarily in the Fuel Systems and Functional Components product line, and unfavorable performance and other of $10 million. Performance and other primarily included the operating results of Arctic Cat, partially offset by favorable performance in the Fuel Systems and Functional Components product line.
Finance
(In millions) | | | | 2018 | | 2017 | | 2016 | Revenues | | | $ | 66 | $ | 69 | $ | 78 | Segment profit | | | | 23 | | 22 | | 19 |
2018. Finance segment revenues decreased $3 million and segment profit increased $1 million in 2018, compared with 2017. Finance segment revenues decreased $9 million, in 2017, compared with 2016, primarily attributable to lower average finance receivables, and segment profit increased $3 million in 2017, compared with 2016, primarily due to lower provision for loan losses, partially offset by lower average finance receivables. The following table reflects information about the Finance segment’s credit performance related to finance receivables. | | | | | | | | January 4, | December 29, | (Dollars in millions) | 2020 | 2018 | Finance receivables | $ | 707 | $ | 789 | Nonaccrual finance receivables | | 39 | | 40 | Ratio of nonaccrual finance receivables to finance receivables | | 5.52 | % | | 5.07 | % | 60+ days contractual delinquency | $ | 17 | $ | 14 | 60+ days contractual delinquency as a percentage of finance receivables | | 2.40 | % | | 1.77 | % |
(Dollars in millions) | | | | | | December 29, 2018 | | December 30, 2017 | Finance receivables | | | | | $ | 789 | $ | 850 | Nonaccrual finance receivables | | | | | | 40 | | 61 | Ratio of nonaccrual finance receivables to finance receivables | | | | | | 5.07% | | 7.18% | 60+ days contractual delinquency | | | | | $ | 14 | $ | 34 | 60+ days contractual delinquency as a percentage of finance receivables | | | | | | 1.77% | | 4.00% |
Liquidity and Capital Resources Our financings are conducted through two separate borrowing groups. The Manufacturing group consists of Textron consolidated with its majority-owned subsidiaries that operate in the Textron Aviation, Bell, Textron Systems and Industrial segments. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation and its consolidated subsidiaries. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements. Key information that is utilized in assessing our liquidity is summarized below: | | | | | | | | January 4, | December 29, | (Dollars in millions) | 2020 | 2018 | Manufacturing group | | | | | | | Cash and equivalents | $ | 1,181 | $ | 987 | Debt | | 3,124 | | 3,066 | Shareholders’ equity | | 5,518 | | 5,192 | Capital (debt plus shareholders’ equity) | | 8,642 | | 8,258 | Net debt (net of cash and equivalents) to capital | | 26 | % | | 29 | % | Debt to capital | | 36 | % | | 37 | % | Finance group | | | | | | | Cash and equivalents | $ | 176 | $ | 120 | Debt | | 686 | | 718 |
(Dollars in millions) | | | | | | December 29, 2018 | | December 30, 2017 | Manufacturing group | | | | | | | | | Cash and equivalents | | | | | $ | 987 | $ | 1,079 | Debt | | | | | | 3,066 | | 3,088 | Shareholders’ equity | | | | | | 5,192 | | 5,647 | Capital (debt plus shareholders’ equity) | | | | | | 8,258 | | 8,735 | Net debt (net of cash and equivalents) to capital | | | | | | 29% | | 26% | Debt to capital | | | | | | 37% | | 35% | Finance group | | | | | | | | | Cash and equivalents | | | | | $ | 120 | $ | 183 | Debt | | | | | | 718 | | 824 |
We believe that our calculations of debt to capital and net debt to capital are useful measures as they provide a summary indication of the level of debt financing (i.e., leverage) that is in place to support our capital structure, as well as to provide an indication of the capacity to add further leverage. We believe that we will have sufficient cash to meet our future needs, based on our existing cash balances, the cash we expect to generate from our manufacturing operations and other available funding alternatives, as appropriate. On October 18, 2019, Textron hasentered into a senior unsecured revolving credit facility that expires in September 2021 for an aggregate principal amount of $1.0 billion, of which up to $100 million is available for the issuance of letters of credit. Textron may elect to increase the aggregate amount of commitments under the facility to up to $1.3 billion by designating an additional lender or by an existing lender agreeing to increase its commitment. The facility expires in October 2024, subject to up to two one-year extensions at Textron’s option with the consent of lenders representing a majority of the commitments under the facility. This new facility replaced the prior 5-year facility, which was scheduled to expire in September 2021. At January 4, 2020 and December 29, 2018, there were no amounts borrowed against the facility andeither facility. At January 4, 2020, there were $10 million of outstanding letters of credit issued against it. under the new facility and at December 29, 2018, there were $10 million of outstanding letters of credit issued under the prior facility. We also maintain an effective shelf registration statement filed with the Securities and Exchange Commission that allows us to issue an unlimited amount of public debt and other securities. Under this registration statement, in May 2019, we issued $300 million of fixed-rate notes due September 2029 with an annual interest rate of 3.90%. In June 2019, we amended the Finance Group’s $150 million fixed-rate loan due August 2019, extending the maturity date to June 2022 and modifying the annual interest rate from the prior rate of 2.26% to 2.88%. Manufacturing Group Cash Flows Cash flows from continuing operations for the Manufacturing group as presented in our Consolidated Statements of Cash Flows are summarized below: | | | | | | | (In millions) | 2019 | 2018 | 2017 | Operating activities | $ | 960 | $ | 1,127 | $ | 930 | Investing activities | | (329) | | 539 | | (728) | Financing activities | | (439) | | (1,738) | | (266) |
(In millions) | | | | 2018 | | 2017 | | 2016 | Operating activities | | | $ | 1,127 | $ | 930 | $ | 901 | Investing activities | | | | 539 | | (728) | | (534) | Financing activities | | | | (1,738) | | (266) | | (146) |
In 2019, cash flows from operating activities were $960 million, compared with $1,127 million in 2018, a decrease of $167 million. The change in cash flows included a $364 million decrease from changes in inventories between the periods and a $133 million decrease from other liabilities, primarily due to changes in salaries, wages and employer taxes payable, partially offset by a $343 million increase in cash flows from changes in accounts payable. Cash flows provided by operating activities wasin 2018 were $1,127 million, compared with $930 million in 2017, a 21% increase, primarily reflecting lower pension contributions of $306 million, higher earnings and a dividend of $50 million received from the Finance group in the first quarter of 2018, which were partially offset by a higher use of net working capital in 2018, largely reflecting a $145 million cash outflow from changes in net taxes paid/received. Cash flows provided by operating activities was $930 million in 2017, compared with $901 million in 2016, a 3% increase, as improvements in working capital, were largely offset by higher pension contributions of $308 million and lower earnings. Significant factors contributing to the favorable change in working capital included an increase in cash flows of $769 million related to changes in inventory between the periods, principally in the Textron Aviation and Textron Systems segments, $333 million related to changes in customer deposits and $179 million from changes in net taxes paid/received, partially offset by changes in accounts payable and accounts receivable. The increase in cash flows from customer deposits between the periods is primarily related to lower performance-based payments received on certain military contracts in the Bell segment in 2016.
Net tax payments/(receipts) were $120 million, $129 million and $(16) million in 2019, 2018 and $1632017, respectively. Pension contributions were $51 million, $52 million and $358 million in 2019, 2018 2017 and 2016, respectively. Pension contributions were $52 million, $358 million and $50 million in 2018, 2017, and 2016, respectively. In 2017, pension contributions included a $300 million discretionary contribution to fund a U.S. pension plan. In 2018,2019, investing cash flows included capital expenditures of $339 million. Investing cash flows in 2018 included net cash proceeds of $807 million from the disposition of the Tools and Test Equipment product line and net proceeds from corporate-owned life insurance policies of $110 million,, partially offset by capital expenditures of $369 million. In 2017, cash flows used by investing activities included capital expenditures of $423 million and a $316 million aggregate cash payment for the Arctic Cat acquisition. Investing cash flows for 2016 included capital expenditures of $446 million and cash used for acquisitions of $186 million, partially offset by net proceeds from corporate-owned life insurance policies of $87 million. Cash flows used in financing activities in 2019 primarily included $503 million of cash paid to repurchase an aggregate of 10.0 million shares of our outstanding common stock under a 2018 primarilyshare repurchase authorization, and $252 million of payments on long-term debt, partially offset by net proceeds of $301 million from the issuance of long-term debt. In 2018, financing cash flows included $1.8 billion of cash paid to repurchase an aggregate of 29.1 million shares of our outstanding common stock under both a newthe 2018 share repurchase authorization as disclosed below and a prior 2017 authorization. In 2017 and 2016, financingFinancing cash flows in 2017 included $582million and $241 million of cash paid respectively, to repurchase an aggregate of 11.9 million and 6.9 million shares, respectively, of our outstanding common stock under prior share repurchase authorizations. Total financing cash flows in 2017authorizations and 2016 also included the repayment of outstanding debt of $704 million, and $254 million, respectively, and partially offset by proceeds from long-term debt of $992 million and $345 million, respectively.million. On April 16, 2018,February 25, 2020, our Board of Directors authorized the repurchase of up to 4025 million shares of our common stock. This repurchase plan was utilized in 2018 for repurchases funded, in part, by the net proceeds of $0.8 billion from the disposition of the Tools and Test product line. In addition, thisnew plan allows us to opportunistically repurchase shares and to continue our practice of repurchasing shares to offset the impact of dilution from shares issued under compensation and benefit plans. The 2020 plan replaces the prior 2018 share repurchase authorization which was utilized in 2019 and 2018 for repurchases funded, in part, by the net proceeds of $0.8 billion from the disposition of the Tools and Test product line. Dividend payments to shareholders totaled $18 million, $20 million and $21 million in 2019, 2018 and $22 million in 2018, 2017, and 2016, respectively. Dividends received from the Finance group, which totaled $50 million in both 2019 and $29 million in 2018, and 2016, respectively, are included within cash flows from operating activities for the Manufacturing group as they represent a return on investment. Finance Group Cash Flows The cash flows from continuing operations for the Finance group as presented in our Consolidated Statements of Cash Flows are summarized below: | | | | | | | (In millions) | 2019 | 2018 | 2017 | Operating activities | $ | 34 | $ | 14 | $ | (24) | Investing activities | | 135 | | 99 | | 140 | Financing activities | | (113) | | (176) | | (94) |
(In millions) | | | | 2018 | | 2017 | | 2016 | Operating activities | | | $ | 14 | $ | (24) | $ | 11 | Investing activities | | | | 99 | | 140 | | 142 | Financing activities | | | | (176) | | (94) | | (51) |
The Finance group’s cash flows from operating activities included net tax payments of $1 million, $17 million and $48 million in 2019, 2018 and $11 million in 2018, 2017, and 2016, respectively. Cash flows from investing activities primarily included collections on finance receivables totaling $226$277 million, $226 million and $273 million in 2019, 2018 and $292 million in 2018, 2017, and 2016, respectively, partially offset by finance receivable originations of $184 million, $177 million and $174 million, and $173 million, respectively. Cash flows used in financing activities included payments on long-term and nonrecourse debt of $51 million, $126 million and $137 million in 2019, 2018 and $2032017, respectively. Dividend payments to the Manufacturing group totaled $50 million in 2018, 2017both 2019 and 2016, respectively.2018. In 2017, and 2016,financing cash flows from financing activities also included proceeds from long-term debt of $44 million and $180 million, respectively. In 2018 and 2016, dividend payments to the Manufacturing group totaled $50 million and $29 million, respectively.million. Consolidated Cash Flows The consolidated cash flows from continuing operations, after elimination of activity between the borrowing groups, are summarized below: | | | | | | | (In millions) | 2019 | 2018 | 2017 | Operating activities | $ | 1,016 | $ | 1,109 | $ | 963 | Investing activities | | (266) | | 620 | | (645) | Financing activities | | (502) | | (1,864) | | (360) |
(In millions) | | | | 2018 | | 2017 | | 2016 | Operating activities | | | $ | 1,109 | $ | 963 | $ | 927 | Investing activities | | | | 620 | | (645) | | (436) | Financing activities | | | | (1,864) | | (360) | | (168) |
Consolidated cash flows from operating activities were $1,016 million in 2019, compared with $1,109 million in 2018, a decrease of $93 million. The change in cash flows included a $333 million decrease from changes in inventories between the periods and a $125 million decrease from other liabilities, primarily due to changes in salaries, wages and employer taxes payable, partially offset by a $343 million increase in cash flows from changes in accounts payable. In 2018, consolidated cash flows provided by operating activities waswere $1,109 million, compared with $963 million in 2017, a 15% increase, primarily reflecting lower pension contributions of $306$306 million and higher earnings, partially offset by a higher use of net working capital in 2018, reflecting a $114 million increase in net tax payments and $45$45 million in lower cash flows related to captive financing activities. Consolidated cash flows provided by operating activities was $963 million in 2017, compared with $927 million in 2016, a 4% increase, as improvements in working capital, were largely offset by higher pension contributions of $308 million and lower earnings. Significant factors contributing to the favorable change in working capital included an increase in cash flows of $764 million related to changes in inventory between the periods, principally in the Textron Aviation and Textron Systems segments, $333 million related to changes in customer deposits and $142 million of lower net tax payments, partially offset by changes in accounts payable and accounts receivable. The increase in cash flows from customer deposits between the periods is primarily related to lower performance-based payments received on certain military contracts in the Bell segment in 2016.
Net tax payments were $121 million, $146 million and $32 million in 2019, 2018 and $1742017, respectively. Pension contributions were $51 million, $52 million and $358 million in 2019, 2018 2017 and 2016, respectively. Pension contributions were $52 million, $358 million and $50 million in 2018, 2017, and 2016, respectively. In 2017, pension contributions included a $300 million discretionary contribution to fund a U.S. pension plan. In 2019, investing cash flows included capital expenditures of $339 million. Investing cash flows in 2018 included net cash proceeds of $807 million from the disposition of the Tools and Test Equipment product line and net proceeds from corporate-owned life insurance policies of $110 million,, partially offset by capital expenditures of $369 million. In 2017, cash flows used by investing activities included capital expenditures of $423 million and a $316 million aggregate cash payment for the Arctic Cat acquisition. Investing cash flows for 2016 included capital expenditures of $446 million In 2019, 2018 and cash used for acquisitions of $186 million, partially offset by net proceeds from corporate-owned life insurance policies of $87 million. In 2018, 2017, and 2016, cash used in financing activities included share repurchases of $503 million, $1,783 million $582 million and $241$582 million, respectively, and the repayment of outstanding debt of $303 million, $131 million and $841 million, respectively. In 2019 and $457 million, respectively. Total2017, financing cash flows in 2017 and 2016 also included proceeds from the issuance of long-term debt of $301 million and $1,036 million, and $525 million, respectively.respectively.
Captive Financing and Other Intercompany Transactions The Finance group provides financing primarily to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters manufactured by our Manufacturing group, otherwise known as captive financing. In the Consolidated Statements of Cash Flows, cash received from customers is reflected as operating activities when received from third parties. However, in the cash flow information provided for the separate borrowing groups, cash flows related to captive financing activities are reflected based on the operations of each group. For example, when product is sold by our Manufacturing group to a customer and is financed by the Finance group, the origination of the finance receivable is recorded within investing activities as a cash outflow in the Finance group’s statement of cash flows. Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the Finance group on the customer’s behalf is recorded within operating cash flows as a cash inflow. Although cash is transferred between the two borrowing groups, there is no cash transaction reported in the consolidated cash flows at the time of the original financing. These captive financing activities, along with all significant intercompany transactions, are reclassified or eliminated from the Consolidated Statements of Cash Flows. Reclassification adjustments included in the Consolidated Statements of Cash Flows are summarized below: | | | | | | | | | | | | | | | | | | (In millions) | | | | 2018 | | 2017 | | 2016 | 2019 | 2018 | 2017 | Reclassification adjustments from investing activities: | | | | | | | | | | | | | | | Cash received from customers | | | $ | 199 | $ | 241 | $ | 248 | $ | 229 | $ | 199 | $ | 241 | Finance receivable originations for Manufacturing group inventory sales | | | | (177) | | (174) | | (173) | | (184) | | (177) | | (174) | Other | | | | (4) | | (10) | | (31) | | 27 | | (4) | | (10) | Total reclassification adjustments from investing activities | | | | 18 | | 57 | | 44 | | 72 | | 18 | | 57 | Reclassification adjustments from financing activities: | | | | | | | | | | | | | | | Dividends received by Manufacturing group from Finance group | | | | (50) | | — | | (29) | | (50) | | (50) | | — | Total reclassification adjustments to cash flow from operating activities | | | $ | (32) | $ | 57 | $ | 15 | $ | 22 | $ | (32) | $ | 57 |
Under a Support Agreement between Textron and TFC, Textron is required to maintain a controlling interest in TFC. The agreement, as amended in December 2015, also requires Textron to ensure that TFC maintains fixed charge coverage of no less than 125% and consolidated shareholder’s equity of no less than $125 million. There were no cash contributions required to be paid to TFC in 2019, 2018 2017 and 20162017 to maintain compliance with the support agreement. Contractual Obligations Manufacturing Group The following table summarizes the known contractual obligations, as defined by reporting regulations, of our Manufacturing group as of December 29, 2018:January 4, 2020: | | | | | | | | | | | | | | Payments Due by Period | | | | | | | | | | More Than 5 | (In millions) | Total | Year 1 | Years 2-3 | Years 4-5 | Years | Debt | $ | 3,139 | $ | 561 | $ | 514 | $ | 368 | $ | 1,696 | Purchase obligations not reflected in balance sheet | | 3,376 | | 2,570 | | 729 | | 76 | | 1 | Interest on borrowings | | 631 | | 127 | | 182 | | 154 | | 168 | Pension benefits for unfunded plans | | 405 | | 27 | | 53 | | 47 | | 278 | Postretirement benefits other than pensions | | 246 | | 26 | | 46 | | 40 | | 134 | Other long-term liabilities | | 293 | | 62 | | 93 | | 44 | | 94 | Operating leases | | 356 | | 57 | | 88 | | 57 | | 154 | Total Manufacturing group | $ | 8,446 | $ | 3,430 | $ | 1,705 | $ | 786 | $ | 2,525 |
| | | Payments Due by Period | (In millions) | | Total | | Year 1 | | Years 2-3 | | Years 4-5 | | More Than 5 Years | Debt | $ | 3,082 | $ | 258 | $ | 1,059 | $ | 14 | $ | 1,751 | Purchase obligations not reflected in balance sheet | | 2,571 | | 2,032 | | 509 | | 28 | | 2 | Interest on borrowings | | 643 | | 136 | | 205 | | 135 | | 167 | Pension benefits for unfunded plans | | 369 | | 27 | | 50 | | 46 | | 246 | Postretirement benefits other than pensions | | 250 | | 28 | | 49 | | 41 | | 132 | Other long-term liabilities | | 345 | | 76 | | 103 | | 54 | | 112 | Operating leases | | 301 | | 64 | | 77 | | 45 | | 115 | Total Manufacturing group | $ | 7,561 | $ | 2,621 | $ | 2,052 | $ | 363 | $ | 2,525 |
Pension and Postretirement Benefits We maintain defined benefit pension plans and postretirement benefit plans other than pensions as described in Note 14.16 to the Consolidated Financial Statements. Included in the above table are discounted estimated benefit payments we expect to make related to unfunded pension and other postretirement benefit plans. Actual benefit payments are dependent on a number of factors, including mortality assumptions, expected retirement age, rate of compensation increases and medical trend rates, which are subject to change in future years. Our policy for funding pension plans is to make contributions annually, consistent with applicable laws and regulations; however, future contributions to our pension plans are not included in the above table. In 2019,2020, we expect to make approximately $25 million of contributions to our funded pension plans and the Retirement Account Plan. Based on our current assumptions, which may changevary with changes in market conditions, our current contribution for each of the years from 20202021 through 2023 are2024 is estimated to be approximately $50 million under the plan provisions in place at this time. Other Long-Term Liabilities Other long-term liabilities consist of undiscounted amounts in the Consolidated Balance Sheets that primarily include obligations under deferred compensation arrangements and estimated environmental remediation costs. Payments under deferred compensation arrangements have been estimated based on management’s assumptions of expected retirement age, mortality, stock price and rates of return on participant deferrals. The timing of cash flows associated with environmental remediation costs is largely based on historical experience. Certain other long-term liabilities, such as deferred taxes, unrecognized tax benefits, and reserves for product liability, warranty, product maintenance and litigation, reserves, have been excluded from the table due to the uncertainty of the timing of payments combined with the absence of historical trends to be used as a predictor for such payments. Purchase Obligations Purchase obligations include undiscounted amounts committed under legally enforceable contracts or purchase orders for goods and services with defined terms as to price, quantity and delivery dates. Approximately 37%39% of the purchase obligations we disclose represent purchase orders issued for goods and services to be delivered under firm contracts with the U.S. Government for which we have full recourse under customary contract termination clauses. Finance Group The following table summarizes the known contractual obligations, as defined by reporting regulations, of our Finance group as of December 29, 2018:January 4, 2020: | | | | | | | | | | | | | | Payments Due by Period | | | | | | | | | | More Than 5 | (In millions) | Total | Year 1 | Years 2-3 | Years 4-5 | Years | Term debt | $ | 387 | $ | 167 | $ | 181 | $ | 32 | $ | 7 | Subordinated debt | | 299 | | — | | — | | — | | 299 | Interest on borrowings | | 269 | | 22 | | 33 | | 24 | | 190 | Total Finance group | $ | 955 | $ | 189 | $ | 214 | $ | 56 | $ | 496 |
| | | Payments Due by Period | (In millions) | | Total | | Year 1 | | Years 2-3 | | Years 4-5 | | More Than 5 Years | Term debt | $ | 419 | $ | 167 | $ | 190 | $ | 37 | $ | 25 | Subordinated debt | | 299 | | — | | — | | — | | 299 | Interest on borrowings | | 216 | | 25 | | 37 | | 30 | | 124 | Total Finance group | $ | 934 | $ | 192 | $ | 227 | $ | 67 | $ | 448 |
Critical Accounting Estimates To prepare our Consolidated Financial Statements to be in conformity with generally accepted accounting principles, we must make complex and subjective judgments in the selection and application of accounting policies. The accounting policies that we believe are most critical to the portrayal of our financial condition and results of operations are listed below. We believe these policies require our most difficult, subjective and complex judgments in estimating the effect of inherent uncertainties. This section should be read in conjunction with Note 1 to the Consolidated Financial Statements, which includes other significant accounting policies. Revenue Recognition A substantial portion of our revenues is related to long-term contracts with the U.S. Government, including those under U.S. Government-sponsored foreign military sales program, for thethe design, development, manufacture or modification of aerospace and defense products as well as related services. At the beginning of 2018, we adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASC 606) and its related amendments using the modified retrospective transition method, which permitted comparative information to not be restated This standard primarily impacted our contracts with the U.S. GovernmentASC 606 as we were required to convert certain contracts from the units-of-delivery methoddiscussed in Note 1 to the cost-to-cost method for revenue recognition. Under ASC 606, while the timing of revenue recognition has changed for many of these contracts and the number of units of accounting, known as performance obligations, have been reduced from the prior standards, the process for establishing and reviewing our revenue and cost estimates is consistent with the prior periods. Consolidated Financial Statements. With the adoption of ASC 606 in 2018,this standard , due to the continuous transfer of control to the U.S. Government, we recognize revenue over the time that we perform under the contract. Selecting the method to measure progress towards completion requires judgment and is based on the nature of the products or service to be provided. We generally use the cost-to-cost method to measure progress for our contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts. Under this measure, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and revenue is recorded proportionally as costs are incurred. Prior to the ASC 606 adoption, we accounted for our long-term contracts under the percentage of completion method of accounting. Under this method, we estimated profit as the difference between total estimated revenues and cost of a contract. We then recognized that estimated profit over the contract term based on either the units-of-delivery method or the cost-to-cost method (which typically was used for development effort as costs were incurred), as appropriate under the circumstances. Revenues under fixed price contracts generally were recorded using the units-of-delivery method, while revenues under cost-reimbursement contracts were recorded using the cost-to-cost method. Approximately 80%70% of our 20182019 revenues with the U.S. Government were under fixed-price and fixed-price incentive contracts. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit and could potentially incur a loss. The transaction price for our contracts represents our best estimate of the consideration we expect to receive and includes assumptions regarding variable consideration as applicable. Certain of our long-term contracts contain incentive fees or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance, historical performance and all other information that is reasonably available to us. Due to the number of years it may take to complete many of our contracts and the scope and nature of the work required to be performed on those contracts, the estimation of total transaction price and costs at completion is complicated and subject to many variables and, accordingly, is subject to change. In estimating total costs at completion, we are required to make numerous assumptions related to the complexity of design and related development work to be performed; engineering requirements; product performance; subcontractor performance; availability and cost of materials; labor productivity, availability and cost; overhead and capital costs; manufacturing efficiencies; the length of time to complete the contract (to estimate increases in wages and prices for materials); and costs of satisfying offset obligations, among other variables. Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals. We review and update our cost projections quarterly or more frequently when circumstances significantly change. When estimates of total costs to be incurred on a contract exceed estimates of total sales to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss is determined. At the outset of each contract, we estimate an initial profit booking rate considering the risks surrounding our ability to achieve the technical requirements (e.g., a newly-developed product versus a mature product), schedule (e.g., the number and type of milestone events), and costs by contract requirements in the initial estimated costs at completion. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule, and cost aspects of the contract. Conversely, the profit booking rate may decrease if we are not successful in retiring the risks; and, as a result, our estimated costs at completion increase. All estimates are subject to change during the performance of the contract and, therefore, may affect the profit booking rate. Increases or decreases in profit booking rates are recognized in the current period and reflect the inception-to-date effect of such changes. Changes in our profit booking rate due to changes in our estimate of the total expected costs, along with changescost or in the transaction price are recognized onfor a contract typically impact our profit booking rate. We utilize the cumulative catch-up method of accounting. This method recognizes the cumulative effect of changes on current and prior periods withaccounting to recognize the impact of these changes on our profit booking rate for a contract. Under this method, the change from inception-to-date recordedimpact of a profit adjustment on a contract is recognized in the current period.period the adjustment is identified. The impact of our gross cumulative catch-up adjustments on revenues and segment profit recognized in prior periods is presented below:
| | | | | | | (In millions) | 2019 | 2018 | 2017 | Gross favorable | $ | 173 | $ | 249 | $ | 92 | Gross unfavorable | | (82) | | (53) | | (87) | Net adjustments | $ | 91 | $ | 196 | $ | 5 |
(In millions) | | | | 2018 | | 2017 | | 2016 | Gross favorable | | | $ | 249 | $ | 92 | $ | 106 | Gross unfavorable | | | | (53) | | (87) | | (23) | Net adjustments | | | $ | 196 | $ | 5 | $ | 83 |
With the adoption of ASC 606 at the beginning ofin 2018, a significant portion of our contracts with the U.S. Government converted to the cost-to-cost method for revenue recognition from the units of delivery method. The cost-to-cost method generally results in larger cumulative catch-up adjustments since revenue is recognized earlier on these contracts requiring the estimation of costs over longer periods of time. Under the units of delivery method that we used for many of our contracts in 2017, and 2016, we had more time to develop and refine our estimates as we were not required to recognize revenue until our products were delivered much later in the contract term. Due to the significance of judgment in the estimation process described above, it is likely that materially different revenues and/or cost of sales amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Our earnings could be reduced by a material amount resulting in a charge to earnings if (a) total estimated contract costs are significantly higher than expected due to changes in customer specifications prior to contract amendment, (b) total estimated contract costs are significantly higher than previously estimated due to cost overruns or inflation, (c) there is a change in engineering efforts required during the development stage of the contract or (d) we are unable to meet contract milestones. Goodwill Goodwill
We evaluate the recoverability of goodwill annually in the fourth quarter or more frequently if events or changes in circumstances, such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of a reporting unit might be impaired. The reporting unit represents the operating segment unless discrete financial information is prepared and reviewed by segment management for businesses one level below that operating segment, in which case such component is the reporting unit. In certain instances, we have aggregated components of an operating segment into a single reporting unit based on similar economic characteristics. We calculate the fair value of each reporting unit, primarily using discounted cash flows. These cash flows incorporate assumptions for short- and long-term revenue growth rates, operating margins and discount rates that represent our best estimates of current and forecasted market conditions, cost structure, anticipated net cost reductions, and the implied rate of return that we believe a market participant would require for an investment in a business having similar risks and business characteristics to the reporting unit being assessed. The revenue growth rates and operating margins used in our discounted cash flow analysis are based on our strategic plans and long-range planning forecasts. The long-term growth rate we use to determine the terminal value of the business is based on our assessment of its minimum expected terminal growth rate, as well as its past historical growth and broader economic considerations such as gross domestic product, inflation and the maturity of the markets we serve. We utilize a weighted-average cost of capital in our impairment analysis that makes assumptions about the capital structure that we believe a market participant would make and include a risk premium based on an assessment of risks related to the projected cash flows of each reporting unit. We believe this approach yields a discount rate that is consistent with an implied rate of return that an independent investor or market participant would require for an investment in a company having similar risks and business characteristics to the reporting unit being assessed. If the reporting unit’s estimated fair value exceeds its carrying value, there is no impairment, and no further analysis is performed. Otherwise, an impairment loss is recognized in an amount equal to that excess carrying value over the estimated fair value amount. Based on our annual impairment review, the fair value of all of our reporting units exceeded their carrying values, and we do not believe that there is a reasonable possibility that any units might fail the initial step of the impairment test in the foreseeable future. Retirement Benefits We maintain various pension and postretirement plans for our employees globally. These plans include significant pension and postretirement benefit obligations, which are calculated based on actuarial valuations. Key assumptions used in determining these obligations and related expenses include expected long-term rates of return on plan assets, discount rates and healthcare cost projections. We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increases. We evaluate and update these assumptions annually. To determine the weighted-average expected long-term rate of return on plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class. A lower expected rate of return on plan assets will increase pension expense. For 2018,2019, the assumed expected long-term rate of return on plan assets used in calculating pension expense was 7.58%7.55%, compared with 7.57%7.58% in 2017.2018. For the last seven years, the assumed rate of return for our domestic plans, which represent approximately 93%90% of our total pension assets, was 7.75%. A decrease of 50 basis-point decreasebasis-points in this long-term rate of return in 20182019 would have increased pension cost for our domestic plans by approximately $33$36 million. The discount rate enables us to state expected future benefit payments as a present value on the measurement date, reflecting the current rate at which the pension liabilities could be effectively settled. This rate should be in line with rates for high-quality fixed income investments available for the period to maturity of the pension benefits, which fluctuate as long-term interest rates change. A lower discount rate increases the present value of the benefit obligations and increases pension expense. In 2018,2019, the weighted-average discount rate used in calculating pension expense was 3.67%4.24%, compared with 4.13%3.67% in 2017.2018. For our domestic plans, the assumed discount rate was 4.35% in 2019, compared with 3.75% in 2018, compared with 4.25% in 2017.2018. A decrease of 50 basis-point decreasebasis-points in this weighted-average discount rate in 20182019 would have increased pension cost for our domestic plans by approximately $31$34 million. The trend in healthcare costs is difficult to estimate and has an important effect on postretirement liabilities. The 20182019 medical and prescription drug cost trend rates represent the weighted-average annual projected rate of increase in the per capita cost of covered benefits. In 2018,2019, we assumed a trend rate of 7% for both medical and prescription drug cost and assumed this rate would gradually decline to 5% by 2024 and then remain at that level. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Exchange Risk Our financial results are affected by changes in foreign currency exchange rates in the various countries in which our products are manufactured and/or sold. For our manufacturing operations, we manage our foreign currency transaction exposures by entering into foreign currency exchange contracts. These contracts generally are used to fix the local currency cost of purchased goods or services or selling prices denominated in currencies other than the functional currency. The notional amount of outstanding foreign currency exchange contracts was $342 million and $379 million at January 4, 2020 and $426 million at December 29, 2018, and December 30, 2017, respectively. We also manage exposures to foreign currency assets and earnings primarily by funding certain foreign currency-denominated assets with liabilities in the same currency so that certain exposures are naturally offset. We primarily use borrowings denominated in British pound sterling for these purposes. The impact of foreign currency exchange rate changes on our Consolidated Statements of Operations are as follows: | | | | | | | (In millions) | 2019 | 2018 | 2017 | Increase (decrease) in revenues | $ | (66) | $ | 57 | $ | 27 | Increase (decrease) in segment profit | | (10) | | 1 | | (1) |
(In millions) | | | | 2018 | | 2017 | | 2016 | Increase (decrease) in revenues | | | $ | 57 | $ | 27 | $ | (36) | Increase (decrease) in segment profit | | | | 1 | | (1) | | (12) |
Interest Rate Risk Our financial results are affected by changes in interest rates. As part of managing this risk, we seek to achieve a prudent balance between floating- and fixed-rate exposures. We continually monitor our mix of these exposures and adjust the mix, as necessary. For our Finance group, we generally limit our risk to changes in interest rates with a strategy of matching floating-rate assets with floating-rate liabilities. Quantitative Risk Measures In the normal course of business, we enter into financial instruments for purposes other than trading. The financial instruments that are subject to market risk include finance receivables (excluding leases), debt (excluding capitalfinance lease obligations) and foreign currency exchange contracts. To quantify the market risk inherent in these financial instruments, we utilize a sensitivity analysis that includes a hypothetical change in fair value assuming a 10% decrease in interest rates and a 10% strengthening in foreign exchange rates against the U.S. dollar. The fair value of these financial instruments is estimated using discounted cash flow analysis and indicative market pricing as reported by leading financial news and data providers. At the end of each year, the table below provides the carrying and fair values of these financial instruments along with the sensitivity of fair value to the hypothetical changes discussed above. This sensitivity analysis is most likely not indicative of actual results in the future. | | | | | | | | | | | | | | January 4, 2020 | December 29, 2018 | | | | | | Sensitivity of | | | | | Sensitivity of | | | | | | Fair Value | | | | | Fair Value | | Carrying | Fair | to a 10% | Carrying | Fair | to a 10% | (In millions) | Value* | Value* | Change | Value* | Value* | Change | Manufacturing group | | | | | | | | | | | | | Foreign currency exchange risk | | | | | | | | | | | | | Debt | $ | (210) | $ | (212) | $ | (21) | $ | (197) | $ | (208) | $ | (21) | Foreign currency exchange contracts | | (1) | | (1) | | 20 | | (8) | | (8) | | 50 | | $ | (211) | $ | (213) | $ | (1) | $ | (205) | $ | (216) | $ | 29 | Interest rate risk | | | | | | | | | | | | | Debt | $ | (3,097) | $ | (3,249) | $ | (21) | $ | (2,996) | $ | (2,971) | $ | (30) | Finance group | | | | | | | | | | | | | Interest rate risk | | | | | | | | | | | | | Finance receivables | $ | 493 | $ | 527 | $ | 9 | $ | 582 | $ | 584 | $ | 14 | Debt | | (686) | | (634) | | 1 | | (718) | | (640) | | 1 |
| December 29, 2018 | December 30, 2017 | (In millions) | | Carrying Value* | | Fair Value* | | Sensitivity of Fair Value to a 10% Change | | Carrying Value* | | Fair Value* | | Sensitivity of Fair Value to a 10% Change | Manufacturing group | | | | | | | | | | | | | Foreign currency exchange risk | | | | | | | | | | | | | Debt | $ | (197) | $ | (208) | $ | (21) | $ | (212) | $ | (232) | $ | (23) | Foreign currency exchange contracts | | (8) | | (8) | | 50 | | 11 | | 11 | | 26 | | $ | (205) | $ | (216) | $ | 29 | $ | (201) | $ | (221) | $ | 3 | Interest rate risk | | | | | | | | | | | | | Debt | $ | (2,996) | $ | (2,971) | $ | (30) | $ | (3,007) | $ | (3,136) | $ | (33) | Finance group | | | | | | | | | | | | | Interest rate risk | | | | | | | | | | | | | Finance receivables | $ | 582 | $ | 584 | $ | 14 | $ | 643 | $ | 675 | $ | 14 | Debt | | (718) | | (640) | | 1 | | (824) | | (799) | | 2 |
* The value represents an asset or (liability). Item 8. Financial Statements and Supplementary Data Our Consolidated Financial Statements and the related report of our independent registered public accounting firm thereon are included in this Annual Report on Form 10-K on the pages indicated below: |
| Page | | | | Consolidated Statements of Operations for each of the years in the three-year period ended December 29, 2018January 4, 2020 | | 37 | | | | Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 29, 2018January 4, 2020 | | 38 | | | | Consolidated Balance Sheets as of January 4, 2020 and December 29, 2018 and December 30, 2017 | | 39 | | | | Consolidated Statements of Shareholders’ Equity for each of the years in the three-year period ended December 29, 2018January 4, 2020 | | 40 | | | | Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 29, 2018January 4, 2020 | | 41 | | | | Notes to the Consolidated Financial Statements | | | | | | Note 1.Summary of Significant Accounting Policies | | 43 | Note 2.Business Disposition and AcquisitionsAcquisition | | 50 | Note 3.Goodwill and Intangible Assets | | 50 | Note 4. Accounts Receivable and Finance Receivables | | 51 | Note 4.Accounts Receivable and Finance Receivables5. Inventories | 51
| 52 | Note 5.Inventories6. Property, Plant and Equipment, Net | | 53 | Note 6.Property, Plant and Equipment, Net7. Other Assets | | 53 | Note 8. Other Current Liabilities | | 53 | Note 9. Leases | | 54 | Note 7.Other Current Liabilities | 54
| Note 8.10. Debt and Credit Facilities
| | 55 | Note 9.11. Derivative Instruments and Fair Value Measurements | | 56 | Note 10.12. Shareholders’ Equity | | 57 | Note 11.13. Segment and Geographic Data | | 58 | Note 12.14. Revenues | | 60 | Note 13.15. Share-Based Compensation | | 62 | Note 14.16. Retirement Plans | | 64 | Note 15.17. Special Charges | | 68 | Note 16.18. Income Taxes | | 69 | Note 17.19. Commitments and Contingencies | | 72 | Note 18.20. Supplemental Cash Flow Information | | 72 | | | | Report of Independent Registered Public Accounting Firm | | 73 | | | | Supplementary Information: | | | | | | Quarterly Data for 2019 and 2018 and 2017 (Unaudited) | 74
| 76 | Schedule II – Valuation and Qualifying Accounts | 75
| 77 |
All other schedules are omitted either because they are not applicable or not required or because the required information is included in the financial statements or notes thereto. Consolidated Statements of Operations For each of the years in the three-year period ended December 29, 2018
(In millions, except per share data) | | | | 2018 | | 2017 | | 2016 | Revenues | | | | | | | | | Manufacturing revenues | | | $ | 13,906 | $ | 14,129 | $ | 13,710 | Finance revenues | | | | 66 | | 69 | | 78 | Total revenues | | | | 13,972 | | 14,198 | | 13,788 | Costs, expenses and other | | | | | | | | | Cost of sales | | | | 11,594 | | 11,827 | | 11,337 | Selling and administrative expense | | | | 1,275 | | 1,334 | | 1,317 | Interest expense | | | | 166 | | 174 | | 174 | Special charges | | | | 73 | | 130 | | 123 | Gain on business disposition | | | | (444) | | — | | — | Non-service components of pension and post-retirement income, net | | | | (76) | | (29) | | (39) | Total costs, expenses and other | | | | 12,588 | | 13,436 | | 12,912 | Income from continuing operations before income taxes | | | | 1,384 | | 762 | | 876 | Income tax expense | | | | 162 | | 456 | | 33 | Income from continuing operations | | | | 1,222 | | 306 | | 843 | Income from discontinued operations, net of income taxes* | | | | — | | 1 | | 119 | Net income | | | $ | 1,222 | $ | 307 | $ | 962 | Basic earnings per share | | | | | | | | | Continuing operations | | | $ | 4.88 | $ | 1.15 | $ | 3.11 | Discontinued operations | | | | — | | — | | 0.44 | Basic earnings per share | | | $ | 4.88 | $ | 1.15 | $ | 3.55 | Diluted earnings per share | | | | | | | | | Continuing operations | | | $ | 4.83 | $ | 1.14 | $ | 3.09 | Discontinued operations | | | | — | | — | | 0.44 | Diluted earnings per share | | | $ | 4.83 | $ | 1.14 | $ | 3.53 |
* For 2016, see Note 16 for additional information.
See Notes to the Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
For each of the years in the three-year period ended December 29, 2018
(In millions) | | | | 2018 | | 2017 | | 2016 | Net income | | | $ | 1,222 | $ | 307 | $ | 962 | Other comprehensive income (loss), net of taxes: | | | | | | | | | Pension and postretirement benefits adjustments, net of reclassifications | | | | (74) | | 109 | | (178) | Foreign currency translation adjustments, net of reclassifications | | | | (43) | | 107 | | (49) | Deferred gains (losses) on hedge contracts, net of reclassifications | | | | (13) | | 14 | | 20 | Other comprehensive income (loss) | | | | (130) | | 230 | | (207) | Comprehensive income | | | $ | 1,092 | $ | 537 | $ | 755 |
See Notes to the Consolidated Financial Statements.
Consolidated Balance Sheets
(In millions, except share data) | | | | | | December 29, 2018 | | December 30, 2017 | Assets | | | | | | | | | Manufacturing group | | | | | | | | | Cash and equivalents | | | | | $ | 987 | $ | 1,079 | Accounts receivable, net | | | | | | 1,024 | | 1,363 | Inventories | | | | | | 3,818 | | 4,150 | Other current assets | | | | | | 785 | | 435 | Total current assets | | | | | | 6,614 | | 7,027 | Property, plant and equipment, net | | | | | | 2,615 | | 2,721 | Goodwill | | | | | | 2,218 | | 2,364 | Other assets | | | | | | 1,800 | | 2,059 | Total Manufacturing group assets | | | | | | 13,247 | | 14,171 | Finance group | | | | | | | | | Cash and equivalents | | | | | | 120 | | 183 | Finance receivables, net | | | | | | 760 | | 819 | Other assets | | | | | | 137 | | 167 | Total Finance group assets | | | | | | 1,017 | | 1,169 | Total assets | | | | | $ | 14,264 | $ | 15,340 | Liabilities and shareholders’ equity | | | | | | | | | Liabilities | | | | | | | | | Manufacturing group | | | | | | | | | Short-term debt and current portion of long-term debt | | | | | $ | 258 | $ | 14 | Accounts payable | | | | | | 1,099 | | 1,205 | Other current liabilities | | | | | | 2,149 | | 2,441 | Total current liabilities | | | | | | 3,506 | | 3,660 | Other liabilities | | | | | | 1,932 | | 2,006 | Long-term debt | | | | | | 2,808 | | 3,074 | Total Manufacturing group liabilities | | | | | | 8,246 | | 8,740 | Finance group | | | | | | | | | Other liabilities | | | | | | 108 | | 129 | Debt | | | | | | 718 | | 824 | Total Finance group liabilities | | | | | | 826 | | 953 | Total liabilities | | | | | | 9,072 | | 9,693 | Shareholders’ equity | | | | | | | | | Common stock (238.2 million and 262.3 million shares issued, respectively, and 235.6 million and 261.5 million shares outstanding, respectively) | | | | | | 30 | | 33 | Capital surplus | | | | | | 1,646 | | 1,669 | Treasury stock | | | | | | (129) | | (48) | Retained earnings | | | | | | 5,407 | | 5,368 | Accumulated other comprehensive loss | | | | | | (1,762) | | (1,375) | Total shareholders’ equity | | | | | | 5,192 | | 5,647 | Total liabilities and shareholders’ equity | | | | | $ | 14,264 | $ | 15,340 |
See Notes to the Consolidated Financial Statements.
Consolidated Statements of Shareholders’ Equity
(In millions, except per share data) | | Common Stock | | Capital Surplus | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity | Balance at January 2, 2016 | $ | 36 | $ | 1,587 | $ | (559) | $ | 5,298 | $ | (1,398) | $ | 4,964 | Net income | | — | | — | | — | | 962 | | — | | 962 | Other comprehensive loss | | — | | — | | — | | — | | (207) | | (207) | Dividends declared ($0.08 per share) | | — | | — | | — | | (22) | | — | | (22) | Share-based compensation activity | | 1 | | 119 | | — | | — | | — | | 120 | Purchases of common stock | | — | | — | | (241) | | — | | — | | (241) | Retirement of treasury stock | | (3) | | (105) | | 800 | | (692) | | — | | — | Other | | — | | (2) | | — | | — | | — | | (2) | Balance at December 31, 2016 | | 34 | | 1,599 | | — | | 5,546 | | (1,605) | | 5,574 | Net income | | — | | — | | — | | 307 | | — | | 307 | Other comprehensive income | | — | | — | | — | | — | | 230 | | 230 | Dividends declared ($0.08 per share) | | — | | — | | — | | (21) | | — | | (21) | Share-based compensation activity | | — | | 139 | | — | | — | | — | | 139 | Purchases of common stock | | — | | — | | (582) | | — | | — | | (582) | Retirement of treasury stock | | (1) | | (69) | | 534 | | (464) | | — | | — | Balance at December 30, 2017 | | 33 | | 1,669 | | (48) | | 5,368 | | (1,375) | | 5,647 | Adoption of ASC 606 | | — | | — | | — | | 90 | | — | | 90 | Net income | | — | | — | | — | | 1,222 | | — | | 1,222 | Other comprehensive loss | | — | | — | | — | | — | | (130) | | (130) | Reclassification of stranded tax effects | | — | | — | | — | | 257 | | (257) | | — | Dividends declared ($0.08 per share) | | — | | — | | — | | (20) | | — | | (20) | Share-based compensation activity | | — | | 166 | | — | | — | | — | | 166 | Purchases of common stock | | — | | — | | (1,783) | | — | | — | | (1,783) | Retirement of treasury stock | | (3) | | (189) | | 1,702 | | (1,510) | | — | | — | Balance at December 29, 2018 | $ | 30 | $ | 1,646 | $ | (129) | $ | 5,407 | $ | (1,762) | $ | 5,192 |
See Notes to the Consolidated Financial Statements.
Consolidated Statements of Cash Flows
For each of the years in the three-year period ended December 29, 2018January 4, 2020 | | | | | | | (In millions, except per share data) | 2019 | 2018 | 2017 | Revenues | | | | | | | Manufacturing revenues | $ | 13,564 | $ | 13,906 | $ | 14,129 | Finance revenues | | 66 | | 66 | | 69 | Total revenues | | 13,630 | | 13,972 | | 14,198 | Costs, expenses and other | | | | | | | Cost of sales | | 11,406 | | 11,594 | | 11,827 | Selling and administrative expense | | 1,152 | | 1,275 | | 1,334 | Interest expense | | 171 | | 166 | | 174 | Special charges | | 72 | | 73 | | 130 | Non-service components of pension and postretirement income, net | | (113) | | (76) | | (29) | Gain on business disposition | | — | | (444) | | — | Total costs, expenses and other | | 12,688 | | 12,588 | | 13,436 | Income from continuing operations before income taxes | | 942 | | 1,384 | | 762 | Income tax expense | | 127 | | 162 | | 456 | Income from continuing operations | | 815 | | 1,222 | | 306 | Income from discontinued operations, net of income taxes | | — | | — | | 1 | Net income | $ | 815 | $ | 1,222 | $ | 307 | Earnings per share from continuing operations | | | | | | | Basic | $ | 3.52 | $ | 4.88 | $ | 1.15 | Diluted | $ | 3.50 | $ | 4.83 | $ | 1.14 |
| | | | Consolidated | (In millions) | | | | 2018 | | 2017 | | 2016 | Cash flows from operating activities | | | | | | | | | Net income | | | $ | 1,222 | $ | 307 | $ | 962 | Less: Income from discontinued operations | | | | — | | 1 | | 119 | Income from continuing operations | | | | 1,222 | | 306 | | 843 | Adjustments to reconcile income from continuing operations to net cash provided by operating activities: | | | | | | | | | Non-cash items: | | | | | | | | | Depreciation and amortization | | | | 437 | | 447 | | 449 | Gain on business disposition | | | | (444) | | — | | — | Deferred income taxes | | | | 49 | | 346 | | 48 | Asset impairments | | | | 48 | | 47 | | 40 | Other, net | | | | 102 | | 90 | | 92 | Changes in assets and liabilities: | | | | | | | | | Accounts receivable, net | | | | 50 | | (236) | | (33) | Inventories | | | | 41 | | 412 | | (352) | Other assets | | | | (88) | | (44) | | (15) | Accounts payable | | | | (63) | | (156) | | 215 | Other liabilities | | | | (223) | | (113) | | (281) | Income taxes, net | | | | (33) | | 78 | | (189) | Pension, net | | | | (14) | | (277) | | 25 | Captive finance receivables, net | | | | 22 | | 67 | | 75 | Other operating activities, net | | | | 3 | | (4) | | 10 | Net cash provided by operating activities of continuing operations | | | | 1,109 | | 963 | | 927 | Net cash used in operating activities of discontinued operations | | | | (2) | | (27) | | (2) | Net cash provided by operating activities | | | | 1,107 | | 936 | | 925 | Cash flows from investing activities | | | | | | | | | Net proceeds from business disposition | | | | 807 | | — | | — | Capital expenditures | | | | (369) | | (423) | | (446) | Net proceeds from corporate-owned life insurance policies | | | | 110 | | 17 | | 87 | Net cash used in acquisitions | | | | (23) | | (331) | | (186) | Finance receivables repaid | | | | 27 | | 32 | | 44 | Other investing activities, net | | | | 68 | | 60 | | 65 | Net cash provided by (used in) investing activities | | | | 620 | | (645) | | (436) | Cash flows from financing activities | | | | | | | | | Proceeds from long-term debt | | | | — | | 1,036 | | 525 | Principal payments on long-term debt and nonrecourse debt | | | | (131) | | (841) | | (457) | Purchases of Textron common stock | | | | (1,783) | | (582) | | (241) | Proceeds from exercise of stock options | | | | 74 | | 52 | | 36 | Dividends paid | | | | (20) | | (21) | | (22) | Other financing activities, net | | | | (4) | | (4) | | (9) | Net cash used in financing activities | | | | (1,864) | | (360) | | (168) | Effect of exchange rate changes on cash and equivalents | | | | (18) | | 33 | | (28) | Net increase (decrease) in cash and equivalents | | | | (155) | | (36) | | 293 | Cash and equivalents at beginning of year | | | | 1,262 | | 1,298 | | 1,005 | Cash and equivalents at end of year | | | $ | 1,107 | $ | 1,262 | $ | 1,298 |
See Notes to the Consolidated Financial Statements. Consolidated Statements of Cash Flows continued Comprehensive Income For each of the years in the three-year period ended December 29, 2018January 4, 2020 | | Manufacturing Group | | Finance Group | (In millions) | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | Cash flows from operating activities | | | | | | | | | | | | | Net income | $ | 1,198 | $ | 248 | $ | 951 | $ | 24 | $ | 59 | $ | 11 | Less: Income from discontinued operations | | — | | 1 | | 119 | | — | | — | | — | Income from continuing operations | | 1,198 | | 247 | | 832 | | 24 | | 59 | | 11 | Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: | | | | | | | | | | | | | Non-cash items: | | | | | | | | | | | | | Depreciation and amortization | | 429 | | 435 | | 437 | | 8 | | 12 | | 12 | Gain on business disposition | | (444) | | — | | — | | — | | — | | — | Deferred income taxes | | 54 | | 390 | | 36 | | (5) | | (44) | | 12 | Asset impairments | | 48 | | 47 | | 40 | | — | | — | | — | Other, net | | 97 | | 94 | | 90 | | 5 | | (4) | | 2 | Changes in assets and liabilities: | | | | | | | | | | | | | Accounts receivable, net | | 50 | | (236) | | (33) | | — | | — | | — | Inventories | | 45 | | 422 | | (347) | | — | | — | | — | Other assets | | (87) | | (43) | | 17 | | (1) | | (1) | | (6) | Accounts payable | | (63) | | (156) | | 215 | | — | | — | | — | Other liabilities | | (219) | | (108) | | (276) | | (4) | | (5) | | (5) | Income taxes, net | | (20) | | 119 | | (174) | | (13) | | (41) | | (15) | Pension, net | | (14) | | (277) | | 25 | | — | | — | | — | Dividends received from Finance group | | 50 | | — | | 29 | | — | | — | | — | Other operating activities, net | | 3 | | (4) | | 10 | | — | | — | | — | Net cash provided by (used in) operating activities of continuing operations | | 1,127 | | 930 | | 901 | | 14 | | (24) | | 11 | Net cash used in operating activities of discontinued operations | | (2) | | (27) | | (2) | | — | | — | | — | Net cash provided by (used in) operating activities | | 1,125 | | 903 | | 899 | | 14 | | (24) | | 11 | Cash flows from investing activities | | | | | | | | | | | | | Net proceeds from business disposition | | 807 | | — | | — | | — | | — | | — | Capital expenditures | | (369) | | (423) | | (446) | | — | | — | | — | Net proceeds from corporate-owned life insurance policies | | 110 | | 17 | | 87 | | — | | — | | — | Net cash used in acquisitions | | (23) | | (331) | | (186) | | — | | — | | — | Finance receivables repaid | | — | | — | | — | | 226 | | 273 | | 292 | Finance receivables originated | | — | | — | | — | | (177) | | (174) | | (173) | Other investing activities, net | | 14 | | 9 | | 11 | | 50 | | 41 | | 23 | Net cash provided by (used in) investing activities | | 539 | | (728) | | (534) | | 99 | | 140 | | 142 | Cash flows from financing activities | | | | | | | | | | | | | Proceeds from long-term debt | | — | | 992 | | 345 | | — | | 44 | | 180 | Principal payments on long-term debt and nonrecourse debt | | (5) | | (704) | | (254) | | (126) | | (137) | | (203) | Purchases of Textron common stock | | (1,783) | | (582) | | (241) | | — | | — | | — | Proceeds from exercise of stock options | | 74 | | 52 | | 36 | | — | | — | | — | Dividends paid | | (20) | | (21) | | (22) | | (50) | | — | | (29) | Other financing activities, net | | (4) | | (3) | | (10) | | — | | (1) | | 1 | Net cash used in financing activities | | (1,738) | | (266) | | (146) | | (176) | | (94) | | (51) | Effect of exchange rate changes on cash and equivalents | | (18) | | 33 | | (28) | | — | | — | | — | Net increase (decrease) in cash and equivalents | | (92) | | (58) | | 191 | | (63) | | 22 | | 102 | Cash and equivalents at beginning of year | | 1,079 | | 1,137 | | 946 | | 183 | | 161 | | 59 | Cash and equivalents at end of year | $ | 987 | $ | 1,079 | $ | 1,137 | $ | 120 | $ | 183 | $ | 161 |
| | | | | | | (In millions) | 2019 | 2018 | 2017 | Net income | $ | 815 | $ | 1,222 | $ | 307 | Other comprehensive income (loss), net of taxes: | | | | | | | Pension and postretirement benefits adjustments, net of reclassifications | | (84) | | (74) | | 109 | Foreign currency translation adjustments, net of reclassifications | | (4) | | (43) | | 107 | Deferred gains (losses) on hedge contracts, net of reclassifications | | 3 | | (13) | | 14 | Other comprehensive income (loss) | | (85) | | (130) | | 230 | Comprehensive income | $ | 730 | $ | 1,092 | $ | 537 |
See Notes to the Consolidated Financial Statements. Consolidated Balance Sheets | | | | | | January 4, | December 29, | (In millions, except share data) | 2020 | 2018 | Assets | | | | | Manufacturing group | | | | | Cash and equivalents | $ | 1,181 | $ | 987 | Accounts receivable, net | | 921 | | 1,024 | Inventories | | 4,069 | | 3,818 | Other current assets | | 894 | | 785 | Total current assets | | 7,065 | | 6,614 | Property, plant and equipment, net | | 2,527 | | 2,615 | Goodwill | | 2,150 | | 2,218 | Other assets | | 2,312 | | 1,800 | Total Manufacturing group assets | | 14,054 | | 13,247 | Finance group | | | | | Cash and equivalents | | 176 | | 120 | Finance receivables, net | | 682 | | 760 | Other assets | | 106 | | 137 | Total Finance group assets | | 964 | | 1,017 | Total assets | $ | 15,018 | $ | 14,264 | Liabilities and shareholders’ equity | | | | | Liabilities | | | | | Manufacturing group | | | | | Current portion of long-term debt | $ | 561 | $ | 258 | Accounts payable | | 1,378 | | 1,099 | Other current liabilities | | 1,907 | | 2,149 | Total current liabilities | | 3,846 | | 3,506 | Other liabilities | | 2,288 | | 1,932 | Long-term debt | | 2,563 | | 2,808 | Total Manufacturing group liabilities | | 8,697 | | 8,246 | Finance group | | | | | Other liabilities | | 117 | | 108 | Debt | | 686 | | 718 | Total Finance group liabilities | | 803 | | 826 | Total liabilities | | 9,500 | | 9,072 | Shareholders’ equity | | | | | Common stock (228.4 million and 238.2 million shares issued, respectively, and 228.0 million and 235.6 million shares outstanding, respectively) | | 29 | | 30 | Capital surplus | | 1,674 | | 1,646 | Treasury stock | | (20) | | (129) | Retained earnings | | 5,682 | | 5,407 | Accumulated other comprehensive loss | | (1,847) | | (1,762) | Total shareholders’ equity | | 5,518 | | 5,192 | Total liabilities and shareholders’ equity | $ | 15,018 | $ | 14,264 |
See Notes to the Consolidated Financial Statements. Consolidated Statements of Shareholders’ Equity | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | Other | Total | | Common | Capital | Treasury | Retained | Comprehensive | Shareholders’ | (In millions, except per share data) | Stock | Surplus | Stock | Earnings | Loss | Equity | Balance at December 31, 2016 | $ | 34 | $ | 1,599 | $ | — | $ | 5,546 | $ | (1,605) | $ | 5,574 | Net income | | — | | — | | — | | 307 | | — | | 307 | Other comprehensive income | | — | | — | | — | | — | | 230 | | 230 | Dividends declared ($0.08 per share) | | — | | — | | — | | (21) | | — | | (21) | Share-based compensation activity | | — | | 139 | | — | | — | | — | | 139 | Purchases of common stock | | — | | — | | (582) | | — | | — | | (582) | Retirement of treasury stock | | (1) | | (69) | | 534 | | (464) | | — | | — | Balance at December 30, 2017 | | 33 | | 1,669 | | (48) | | 5,368 | | (1,375) | | 5,647 | Adoption of ASC 606 | | — | | — | | — | | 90 | | — | | 90 | Net income | | — | | — | | — | | 1,222 | | — | | 1,222 | Other comprehensive loss | | — | | — | | — | | — | | (130) | | (130) | Reclassification of stranded tax effects | | — | | — | | — | | 257 | | (257) | | — | Dividends declared ($0.08 per share) | | — | | — | | — | | (20) | | — | | (20) | Share-based compensation activity | | — | | 166 | | — | | — | | — | | 166 | Purchases of common stock | | — | | — | | (1,783) | | — | | — | | (1,783) | Retirement of treasury stock | | (3) | | (189) | | 1,702 | | (1,510) | | — | | — | Balance at December 29, 2018 | | 30 | | 1,646 | | (129) | | 5,407 | | (1,762) | | 5,192 | Net income | | — | | — | | — | | 815 | | — | | 815 | Other comprehensive loss | | — | | — | | — | | — | | (85) | | (85) | Dividends declared ($0.08 per share) | | — | | — | | — | | (18) | | — | | (18) | Share-based compensation activity | | — | | 117 | | — | | — | | — | | 117 | Purchases of common stock | | — | | — | | (503) | | — | | — | | (503) | Retirement of treasury stock | | (1) | | (89) | | 612 | | (522) | | — | | — | Balance at January 4, 2020 | $ | 29 | $ | 1,674 | $ | (20) | $ | 5,682 | $ | (1,847) | $ | 5,518 |
See Notes to the Consolidated Financial Statements. Consolidated Statements of Cash Flows For each of the years in the three-year period ended January 4, 2020 | | | | | | | | Consolidated | (In millions) | 2019 | 2018 | 2017 | Cash flows from operating activities | | | | | | | Net income | $ | 815 | $ | 1,222 | $ | 307 | Less: Income from discontinued operations, net of income taxes | | — | | — | | 1 | Income from continuing operations | | 815 | | 1,222 | | 306 | Adjustments to reconcile income from continuing operations to net cash provided by operating activities: | | | | | | | Non-cash items: | | | | | | | Depreciation and amortization | | 416 | | 437 | | 447 | Gain on business disposition | | — | | (444) | | — | Deferred income taxes | | 89 | | 49 | | 346 | Asset impairments | | 15 | | 48 | | 47 | Other, net | | 79 | | 102 | | 90 | Changes in assets and liabilities: | | | | | | | Accounts receivable, net | | 99 | | 50 | | (236) | Inventories | | (292) | | 41 | | 412 | Other assets | | (37) | | (88) | | (44) | Accounts payable | | 280 | | (63) | | (156) | Other liabilities | | (348) | | (223) | | (113) | Income taxes, net | | (83) | | (33) | | 78 | Pension, net | | (62) | | (14) | | (277) | Captive finance receivables, net | | 45 | | 22 | | 67 | Other operating activities, net | | — | | 3 | | (4) | Net cash provided by operating activities of continuing operations | | 1,016 | | 1,109 | | 963 | Net cash used in operating activities of discontinued operations | | (2) | | (2) | | (27) | Net cash provided by operating activities | | 1,014 | | 1,107 | | 936 | Cash flows from investing activities | | | | | | | Capital expenditures | | (339) | | (369) | | (423) | Net proceeds from corporate-owned life insurance policies | | 2 | | 110 | | 17 | Net proceeds from business disposition | | — | | 807 | | — | Net cash used in acquisitions | | (2) | | (23) | | (331) | Finance receivables repaid | | 48 | | 27 | | 32 | Other investing activities, net | | 25 | | 68 | | 60 | Net cash provided by (used in) investing activities | | (266) | | 620 | | (645) | Cash flows from financing activities | | | | | | | Proceeds from long-term debt | | 301 | | — | | 1,036 | Principal payments on long-term debt and nonrecourse debt | | (303) | | (131) | | (841) | Purchases of Textron common stock | | (503) | | (1,783) | | (582) | Proceeds from exercise of stock options | | 24 | | 74 | | 52 | Dividends paid | | (18) | | (20) | | (21) | Other financing activities, net | | (3) | | (4) | | (4) | Net cash used in financing activities | | (502) | | (1,864) | | (360) | Effect of exchange rate changes on cash and equivalents | | 4 | | (18) | | 33 | Net increase (decrease) in cash and equivalents | | 250 | | (155) | | (36) | Cash and equivalents at beginning of year | | 1,107 | | 1,262 | | 1,298 | Cash and equivalents at end of year | $ | 1,357 | $ | 1,107 | $ | 1,262 |
See Notes to the Consolidated Financial Statements. Consolidated Statements of Cash Flows continued For each of the years in the three-year period ended January 4, 2020 | | | | | | | | | | | | | | Manufacturing Group | Finance Group | (In millions) | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | Cash flows from operating activities | | | | | | | | | | | | | Net income | $ | 793 | $ | 1,198 | $ | 248 | $ | 22 | $ | 24 | $ | 59 | Less: Income from discontinued operations, net of income taxes | | — | | — | | 1 | | — | | — | | — | Income from continuing operations | | 793 | | 1,198 | | 247 | | 22 | | 24 | | 59 | Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: | | | | | | | | | | | | | Non-cash items: | | | | | | | | | | | | | Depreciation and amortization | | 410 | | 429 | | 435 | | 6 | | 8 | | 12 | Gain on business disposition | | — | | (444) | | — | | — | | — | | — | Deferred income taxes | | 91 | | 54 | | 390 | | (2) | | (5) | | (44) | Asset impairments | | 15 | | 48 | | 47 | | — | | — | | — | Other, net | | 79 | | 97 | | 94 | | — | | 5 | | (4) | Changes in assets and liabilities: | | | | | | | | | | | | | Accounts receivable, net | | 99 | | 50 | | (236) | | — | | — | | — | Inventories | | (319) | | 45 | | 422 | | — | | — | | — | Other assets | | (34) | | (87) | | (43) | | (3) | | (1) | | (1) | Accounts payable | | 280 | | (63) | | (156) | | — | | — | | — | Other liabilities | | (352) | | (219) | | (108) | | 4 | | (4) | | (5) | Income taxes, net | | (90) | | (20) | | 119 | | 7 | | (13) | | (41) | Pension, net | | (62) | | (14) | | (277) | | — | | — | | — | Dividends received from Finance group | | 50 | | 50 | | — | | — | | — | | — | Other operating activities, net | | — | | 3 | | (4) | | — | | — | | — | Net cash provided by (used in) operating activities of continuing operations | | 960 | | 1,127 | | 930 | | 34 | | 14 | | (24) | Net cash used in operating activities of discontinued operations | | (2) | | (2) | | (27) | | — | | — | | — | Net cash provided by (used in) operating activities | | 958 | | 1,125 | | 903 | | 34 | | 14 | | (24) | Cash flows from investing activities | | | | | | | | | | | | | Capital expenditures | | (339) | | (369) | | (423) | | — | | — | | — | Net proceeds from corporate-owned life insurance policies | | 2 | | 110 | | 17 | | — | | — | �� | — | Net proceeds from business disposition | | — | | 807 | | — | | — | | — | | — | Net cash used in acquisitions | | (2) | | (23) | | (331) | | — | | — | | — | Finance receivables repaid | | — | | — | | — | | 277 | | 226 | | 273 | Finance receivables originated | | — | | — | | — | | (184) | | (177) | | (174) | Other investing activities, net | | 10 | | 14 | | 9 | | 42 | | 50 | | 41 | Net cash provided by (used in) investing activities | | (329) | | 539 | | (728) | | 135 | | 99 | | 140 | Cash flows from financing activities | | | | | | | | | | | | | Proceeds from long-term debt | | 301 | | — | | 992 | | — | | — | | 44 | Principal payments on long-term debt and nonrecourse debt | | (252) | | (5) | | (704) | | (51) | | (126) | | (137) | Purchases of Textron common stock | | (503) | | (1,783) | | (582) | | — | | — | | — | Proceeds from exercise of stock options | | 24 | | 74 | | 52 | | — | | — | | — | Dividends paid | | (18) | | (20) | | (21) | | (50) | | (50) | | — | Other financing activities, net | | 9 | | (4) | | (3) | | (12) | | — | | (1) | Net cash used in financing activities | | (439) | | (1,738) | | (266) | | (113) | | (176) | | (94) | Effect of exchange rate changes on cash and equivalents | | 4 | | (18) | | 33 | | — | | — | | — | Net increase (decrease) in cash and equivalents | | 194 | | (92) | | (58) | | 56 | | (63) | | 22 | Cash and equivalents at beginning of year | | 987 | | 1,079 | | 1,137 | | 120 | | 183 | | 161 | Cash and equivalents at end of year | $ | 1,181 | $ | 987 | $ | 1,079 | $ | 176 | $ | 120 | $ | 183 |
See Notes to the Consolidated Financial Statements. Notes to the Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies Principles of Consolidation and Financial Statement Presentation Our Consolidated Financial Statements include the accounts of Textron Inc. and its majority-owned subsidiaries. Our financings are conducted through two2 separate borrowing groups. The Manufacturing group consists of Textron Inc. consolidated with its majority-owned subsidiaries that operate in the Textron Aviation, Bell, Textron Systems and Industrial segments. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation (TFC) and its consolidated subsidiaries. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements. Our Finance group provides financing primarily to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters manufactured by our Manufacturing group, otherwise known as captive financing. In the Consolidated Statements of Cash Flows, cash received from customers is reflected as operating activities when received from third parties. However, in the cash flow information provided for the separate borrowing groups, cash flows related to captive financing activities are reflected based on the operations of each group. For example, when product is sold by our Manufacturing group to a customer and is financed by the Finance group, the origination of the finance receivable is recorded within investing activities as a cash outflow in the Finance group’s statement of cash flows. Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the Finance group on the customer’s behalf is recorded within operating cash flows as a cash inflow. Although cash is transferred between the two borrowing groups, there is no cash transaction reported in the consolidated cash flows at the time of the original financing. These captive financing activities, along with all significant intercompany transactions, are reclassified or eliminated in consolidation. At the beginning of 2018, 2019, we adopted Accounting Standards Update (ASU) No. 2016-02, Leases (ASC Topic 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 did not adjust 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. We adopted ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606) and its related amendments, collectively referred to as ASC 606.606 at the beginning of 2018. We adopted ASC 606 using the modified retrospective transition method applied to contracts that were not substantially complete at the end of 2017. We recorded a $90 million adjustment to increase retained earnings to reflect the cumulative impact of adopting this standard at the beginning of 2018, primarily related to certain long-term contracts our Bell segment has with the U.S. Government that converted to the cost-to-cost method for revenue recognition. The comparative information for 2017 included in our financial statements and notes haswas not been restated and is reported under the accounting standards in effect for those periodsat that time based on the policies described in this note for the applicable year.note. We also adopted ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payment at the beginning of 2018. This standard provides guidance on the classification of certain cash flows and requires companies to classify cash proceeds received from the settlement of corporate-owned life insurance as cash inflows from investing activities. The standard is required to be adopted on a retrospective basis. Prior to adoption of this standard, we classified these proceeds as operating activities in the Consolidated Statements of Cash Flows. Upon adoption, we reclassified $17 million and $87 million of net cash proceeds for 2017 and 2016, respectively, from operating activities to investing activities.
Collaborative Arrangements Our Bell segment has a strategic alliance agreement with The Boeing Company (Boeing) to provide engineering, development and test services related to the V-22 aircraft, as well as to produce the V-22 aircraft, under a number of separate contracts with the U.S. Government (V-22 Contracts). The alliance created by this agreement is not a legal entity and has no employees, no assets and no true operations. This agreement creates contractual rights and does not represent an entity in which we have an equity interest. We account for this alliance as a collaborative arrangement with Bell and Boeing reporting costs incurred and revenues generated from transactions with the U.S. Government in each company’s respective income statement. Neither Bell nor Boeing is considered to be the principal participant for the transactions recorded under this agreement. Profits on cost-plus contracts are allocated between Bell and Boeing on a 50%-50% basis. Negotiated profits on fixed-price contracts are also allocated 50%-50%; however, Bell and Boeing are each responsible for their own cost overruns and are entitled to retain any cost underruns. Based on the contractual arrangement established under the alliance, Bell accounts for its rights and obligations under the specific requirements of the V-22 Contracts allocated to Bell under the work breakdown structure. We account for all of our rights and obligations, including warranty, product and any contingent liabilities, under the specific requirements of the V-22 Contracts allocated to us under the agreement. Revenues and cost of sales reflect our performance under the V-22 Contracts with revenues recognized using the cost-to-cost method upon the adoption of ASC 606. We include all assets used in performance of the V-22 Contracts that we own and all liabilities arising from our obligations under the V-22 Contracts in our Consolidated Balance Sheets. Use of Estimates We prepare our financial statements in conformity with generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the Consolidated Statements of Operations in the period that they are determined. Revenue Recognition for 2019 and 2018 With the adoption of ASC 606 at the beginning of 2018, revenue is recognized when control of the goods or services promised under the contract is transferred to the customer either at a point in time (e.g., upon delivery) or over time (e.g., as we perform under the contract). We account for a contract when it has approval and commitment from both parties, the rights and payment terms of the parties are identified, the contract has commercial substance and collectability of consideration is probable. Contracts are reviewed to determine whether there is one or multiple performance obligations. A performance obligation is a promise to transfer a distinct good or service to a customer and represents the unit of accounting for revenue recognition. For contracts with multiple performance obligations, the expected consideration, or the transaction price, is allocated to each performance obligation identified in the contract based on the relative standalone selling price of each performance obligation. Revenue is then recognized for the transaction price allocated to the performance obligation when control of the promised goods or services underlying the performance obligation is transferred. Contract consideration is not adjusted for the effects of a significant financing component when, at contract inception, the period between when control transfers and when the customer will pay for that good or service is one year or less. Commercial Contracts The majority of our contracts with commercial customers have a single performance obligation as there is only one good or service promised or the promise to transfer the goods or services is not distinct or separately identifiable from other promises in the contract. Revenue is primarily recognized at a point in time, which is generally when the customer obtains control of the asset upon delivery and customer acceptance. Contract modifications that provide for additional distinct goods or services at the standalone selling price are treated as separate contracts. For commercial aircraft, we contract with our customers to sell fully outfitted fixed-wing aircraft, which may include configuration options. The aircraft typically represents a single performance obligation and revenue is recognized upon customer acceptance and delivery. For commercial helicopters, our customers generally contract with us for fully functional basic configuration aircraft and control is transferred upon customer acceptance and delivery. At times, customers may separately contract with us for the installation of accessories and customization to the basic aircraft. If these contracts are entered into at or near the same time of the basic aircraft contract, we assess whether the contracts meet the criteria to be combined. For contracts that are combined, the basic aircraft and the accessories and customization, are typically considered to be distinct, and therefore, are separate performance obligations. For these contracts, revenue is recognized on the basic aircraft upon customer acceptance and transfer of title and risk of loss, and on the accessories and customization, upon delivery and customer acceptance. We utilize observable prices to determine the standalone selling prices when allocating the transaction price to these performance obligations. The transaction price for our commercial contracts reflects our estimate of returns, rebates and discounts, which are based on historical, current and forecasted information. Amounts billed to customers for shipping and handling are included in the transaction price and generally are not treated as separate performance obligations as these costs fulfill a promise to transfer the product to the customer. Taxes collected from customers and remitted to government authorities are recorded on a net basis. We primarily provide standard warranty programs for products in our commercial businesses for periods that typically range from one to five years. These assurance-type programs typically cannot be purchased separately and do not meet the criteria to be considered a performance obligation. U.S. Government Contracts Our contracts with the U.S. Government generally include the design, development, manufacture or modification of aerospace and defense products as well as related services. These contracts, which also include those under the U.S. Government-sponsored foreign military sales program, accounted for approximately 24% of total revenues in 2018.2019. The customer typically contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability, which often results in the delivery of multiple units. Accordingly, the entire contract is accounted for as one performance obligation. In certain circumstances, a contract may include both production and support services, such as logistics and parts plans, which are considered to be distinct in the context of the contract and represent separate performance obligations. When a contract is separated into more than one performance obligation, we generally utilize the expected cost plus a margin approach to determine the standalone selling prices when allocating the transaction price. Our contracts are frequently modified for changes in contract specifications and requirements. Most of our contract modifications with the U.S. Government are for goods and services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as part of that existing contract. The effect of these contract modifications on our estimates is recognized using the cumulative catch-up method of accounting. Contracts with the U.S. Government generally contain clauses that provide lien rights to work-in-process along with clauses that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work-in-process. Due to the continuous transfer of control to the U.S. Government, we recognize revenue over the time that we perform under the contract. Selecting the method to measure progress towards completion requires judgment and is based on the nature of the products or service to be provided. We generally use the cost-to-cost method to measure progress for our contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts. Under this measure, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and revenue is recorded proportionally as costs are incurred. The transaction price for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding variable consideration as applicable. Certain of our long-term contracts contain incentive fees or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance, historical performance, and all other information that is reasonably available to us. Total contract cost is estimated utilizing current contract specifications and expected engineering requirements. Contract costscosts typically are incurred over a period of several years, and the estimation of these costs requires substantial judgment. Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals. We review and update our projections of costs quarterly or more frequently when circumstances significantly change. Approximately 80%70% of our 20182019 revenues with the U.S. Government were under fixed-price and fixed-price incentive contracts. Under the typical payment terms of these contracts, the customer pays us either performance-based or progress payments. Performance-based payments represent interim payments of up to 90% of the contract price based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments of up to 80% of costs incurred as the work progresses. Because the customer retains a small portion of the contract price until completion of the contract, these contracts generally result in revenue recognized in excess of billings, which we present as contract assets in the Consolidated Balance Sheets. Amounts billed and due from our customers are classified in Accounts receivable, net. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer. For cost-type contracts, we are generally paid for our actual costs incurred within a short period of time. Revenue Recognition for 2017 and 2016 Prior to the adoption of ASC 606, in 2018, we generally recognized revenue for the sale of products, which were not under long-term contracts, upon delivery. For commercialCommercial aircraft delivery iswere considered to be delivered upon completion of manufacturing, customer acceptance, and the transfer of the risk and rewards of ownership. When a sale arrangement involved multiple deliverables, such as sales of products that include customization and other services, we evaluated the arrangement to determine whether there were separate items that were required to be delivered under the arrangement that qualify as separate units of accounting. These arrangements typically involved the customization services we offer to customers who purchase Bell helicopters, andwith the services generally are provided within the first six months after the customer acceptsacceptance of the aircraft and assumes risk of loss.loss assumption. The aircraft and the customization services were considered to be separate units of accounting and we allocated contract price between the two on a relative selling price basis using the best evidence of selling price for each of the deliverables, typically by reference to the price charged when the same or similar items were sold separately by us. We also considered any performance, cancellation, termination or refund-type provisions. Revenue was then recognized when the recognition criteria for each unit of accounting was met. Taxes collected from customers and remitted to government authorities are recorded on a net basis. Revenues under long-term contracts were accounted for under the percentage-of-completion method of accounting. Under this method, we estimated profit as the difference between the total estimated revenues and cost of a contract. We then recognized that estimated profit over the contract term based on either the units-of-delivery method or the cost-to-cost method (which typically iswas used for development effort as costs arewere incurred), as appropriate under the circumstances. Revenues under fixed-price contracts generally were recorded using the units-of-delivery method. Revenues under cost-reimbursement contracts were recorded using the cost-to-cost method. Long-term contract profits were based on estimates Finance Revenues Finance revenues primarily include interest on finance receivables, capitalfinance lease earnings and portfolio gains/losses. Portfolio gains/losses include impairment charges related to repossessed assets and properties and gains/losses on the sale or early termination of finance assets. We recognize interest using the interest method, which provides a constant rate of return over the terms of the receivables. Accrual of interest income is suspended if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically suspend the accrual of interest income for accounts that are contractually delinquent by more than three months unless collection is not doubtful. Cash payments on nonaccrual accounts, including finance charges, generally are applied to reduce the net investment balance. Once we conclude that the collection of all principal and interest is no longer doubtful, we resume the accrual of interest and recognize previously suspended interest income at the time either a) the loan becomes contractually current through payment according to the original terms of the loan, or b) if the loan has been modified, following a period of performance under the terms of the modification. 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 2019, 2018 2017 and 2016,2017, our cumulative catch-up adjustments increased segment profit by $91 million, $196 million $5 million and $83$5 million, respectively, and net income by $69 million, $149 million $3 million and $52$3 million, respectively ($0.59,0.30, $0.59 and $0.01 and $0.19 per diluted share, respectively). In 2019 and 2018, we recognized revenue from performance obligations satisfied in prior periods of approximately$97 million and $190 million, which related to changes in profit booking rates that impacted revenue. For 2019, 2018 2017 and 2016,2017, gross favorable adjustments totaled $173 million, $249 million $92 million and $106$92 million, respectively. The 2018 favorable adjustments included $145 million, largely related to overhead rate improvements and risk retirements associated with contracts in the Bell segment. In 2019, 2018 2017 and 2016,2017, gross unfavorable adjustments totaled $82 million, $53 million and $87 million, and $23 million, respectively. The 2017 unfavorable adjustments included $44 million related to the Tactical Armoured Patrol Vehicle program related to inefficiencies resulting from various production issues during the ramp up and subsequent production. Contract Assets and Liabilities Under ASC 606, contractContract assets arise from contracts when revenue is recognized over time and the amount of revenue recognized exceeds the amount billed to the customer. These amounts are included in contract assets until the right to payment is no longer conditional on events other than the passage of time. At December 29, 2018, contract assetstime and are included in Other current assets in the Consolidated Balance Sheet. Contract liabilities, which are primarily included in Other current liabilities, include deposits, largely from our commercial aviation customers, and billings in excess of revenue recognized.
The incremental costs of obtaining a contract with a customer that is expected to be recovered is expensed as incurred when the period to be benefitted is one year or less. Accounts Receivable, Net Accounts receivable, net includes amounts billed to customers where the right to payment is unconditional. We maintain an allowance for doubtful accounts to provide for the estimated amount of accounts receivable that will not be collected, which is based on an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivable and collateral value, if any. Cash and Equivalents Cash and equivalents consist of cash and short-term, highly liquid investments with original maturities of three months or less. Inventories Inventories are stated at the lower of cost or estimated net realizable value. We value our inventories generally using the first-in, first-out (FIFO) method or the last-in, first-out (LIFO) method for certain qualifying inventories where LIFO provides a better matching of costs and revenues. We determine costs for our commercial helicopters on an average cost basis by model considering the expended and estimated costs for the current production release. Property, Plant and Equipment Property, plant and equipment are recorded at cost and are depreciated primarily using the straight-line method. We capitalize expenditures for improvements that increase asset values and extend useful lives. Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying value of the asset exceeds the sum of the undiscounted expected future cash flows, the asset is written down to fair value. Goodwill and Intangible Assets Goodwill represents the excess of the consideration paid for the acquisition of a business over the fair values assigned to intangible and other net assets of the acquired business. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to an annual impairment test. We evaluate the recoverability of these assets in the fourth quarter of each year or more frequently if events or changes in circumstances, such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate a potential impairment. For our impairment test, we calculate the fair value of each reporting unit and indefinite-lived intangible asset primarily using discounted cash flows. A reporting unit represents the operating segment unless discrete financial information is prepared and reviewed by segment management for businesses one level below that operating segment, in which case such component is the reporting unit. In certain instances, we have aggregated components of an operating segment into a single reporting unit based on similar economic characteristics. For the goodwill impairment test, theThe discounted cash flows incorporate assumptions for revenue growth, operating margins and discount rates that represent our best estimates of current and forecasted market conditions, cost structure, anticipated net cost reductions, and the implied rate of return that we believe a market participant would require for an investment in a business having similar risks and characteristics to the reporting unit being assessed. The fair value of our indefinite-lived intangible assets is primarily determined using the relief of royalty method based on forecasted revenues and royalty rates. If the estimated fair value of the reporting unit or indefinite-lived intangible asset exceeds the carrying value, there is no impairment. Otherwise, an impairment loss is recognized for the amount by which the carrying value exceeds the estimated fair value. Acquired intangible assets with finite lives are subject to amortization. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Amortization of these intangible assets is recognized over their estimated useful lives using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized. Approximately 84%85% of our gross intangible assets are amortized based on the cash flow streams used to value the assets, with the remaining assets amortized using the straight-line method. Finance Receivables Finance receivables primarily include loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters. Finance receivables are generally recorded at the amount of outstanding principal less allowance for losses. We maintain an allowance for losses on finance receivables at a level considered adequate to cover inherent losses in the portfolio based on management’s evaluation. For larger balance accounts specifically identified as impaired, a reserve is established based on comparing the expected future cash flows, discounted at the finance receivable’s effective interest rate, or the fair value of the underlying collateral if the finance receivable is collateral dependent, to its carrying amount. The expected future cash flows consider collateral value; financial performance and liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs associated with the repossession and eventual disposal of collateral. When there is a range of potential outcomes, we perform multiple discounted cash flow analyses and weight the potential outcomes based on their relative likelihood of occurrence. The evaluation of our portfolio is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the estimated fair value of the underlying collateral, which may differ from actual results. While our analysis is specific to each individual account, critical factors included in this analysis include industry valuation guides, age and physical condition of the collateral, payment history and existence and financial strength of guarantors. We also establish an allowance for losses to cover probable but specifically unknown losses existing in the portfolio. This allowance is established as a percentage of non-recourse finance receivables, which have not been identified as requiring specific reserves. The percentage is based on a combination of factors, including historical loss experience, current delinquency and default trends, collateral values and both general economic and specific industry trends. Finance receivables are charged off at the earlier of the date the collateral is repossessed or when no payment has been received for six months, unless management deems the receivable collectible. Repossessed assets are recorded at their fair value, less estimated cost to sell. Pension and Postretirement Benefit Obligations We maintain various pension and postretirement plans for our employees globally. These plans include significant pension and postretirement benefit obligations, which are calculated based on actuarial valuations. Key assumptions used in determining these obligations and related expenses include expected long-term rates of return on plan assets, discount rates and healthcare cost projections. We evaluate and update these assumptions annually in consultation with third-party actuaries and investment advisors. We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increases. For our year-end measurement, our defined benefit plan assets and obligations are measured as of the month-end date closest to our fiscal year-end. We recognize the overfunded or underfunded status of our pension and postretirement plans in the Consolidated Balance Sheets and recognize changes in the funded status of our defined benefit plans in comprehensive income in the year in which they occur. Actuarial gains and losses that are not immediately recognized as net periodic pension cost are recognized as a component of other comprehensive income (loss) (OCI) and are amortized into net periodic pension cost in future periods. Derivatives and Hedging Activities We are exposed to market risk primarily from changes in currency exchange rates and interest rates. We do not hold or issue derivative financial instruments for trading or speculative purposes. To manage the volatility relating to our exposures, we net these exposures on a consolidated basis to take advantage of natural offsets. For the residual portion, we enter into various derivative transactions pursuant to our policies in areas such as counterparty exposure and hedging practices. Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties and through periodic settlements of positions. All derivative instruments are reported at fair value in the Consolidated Balance Sheets. Designation to support hedge accounting is performed on a specific exposure basis. For financial instruments qualifying as cash flow hedges, we record changes in the fair value of derivatives (to the extent they are effective as hedges) in OCI, net of deferred taxes. Changes in fair value of derivatives not qualifying as hedges are recorded in earnings. Foreign currency denominated assets and liabilities are translated into U.S. dollars. Adjustments from currency rate changes are recorded in the cumulative translation adjustment account in shareholders’ equity until the related foreign entity is sold or substantially liquidated. We use foreign currency financing transactions to effectively hedge long-term investments in foreign operations with the same corresponding currency. Foreign currency gains and losses on the hedge of the long-term investments are recorded in the cumulative translation adjustment account. 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. Product Liabilities We accrue for product liability claims and related defense costs when a loss is probable and reasonably estimable. Our estimates are generally based on the specifics of each claim or incident and our best estimate of the probable loss using historical experience. Environmental Liabilities and Asset Retirement Obligations Liabilities for environmental matters are recorded on a site-by-site basis when it is probable that an obligation has been incurred and the cost can be reasonably estimated. We estimate our accrued environmental liabilities using currently available facts, existing technology, and presently enacted laws and regulations, all of which are subject to a number of factors and uncertainties. Our environmental liabilities are not discounted and do not take into consideration possible future insurance proceeds or significant amounts from claims against other third parties. We have incurred asset retirement obligations primarily related to costs to remove and dispose of underground storage tanks and asbestos materials used in insulation, adhesive fillers and floor tiles. There is no legal requirement to remove these items, and there currently is no plan to remodel the related facilities or otherwise cause the impacted items to require disposal. Since these asset retirement obligations are not estimable, there is no0 related liability recorded in the Consolidated Balance Sheets. Warranty Liabilities For our assurance-type warranty programs, we estimate the costs that may be incurred and record a liability in the amount of such costs at the time product revenues are recognized. Factors that affect this liability include the number of products sold, historical costs per claim, length of warranty period, contractual recoveries from vendors and historical and anticipated rates of warranty claims, including production and warranty patterns for new models. We assess the adequacy of our recorded warranty liability periodically and adjust the amounts as necessary. Additionally, we may establish a warranty liability related to the issuance of aircraft service bulletins for aircraft no longer covered under the limited warranty programs. Research and Development Costs Our customer-funded research and development costs are charged directly to the related contracts, which primarily consist of U.S. Government contracts. In accordance with government regulations, we recover a portion of company-funded research and development costs through overhead rate charges on our U.S. Government contracts. Research and development costs that are not reimbursable under a contract with the U.S. Government or another customer are charged to expense as incurred. Company-funded research and development costs were $647 million, $643 million and $634 million in 2019, 2018 and $677 million in 2018, 2017, and 2016, respectively, and are included in cost of sales. Income Taxes The provision for income tax expense is calculated on reported Income from continuing operations before income taxes based on current tax law and includes, in the current period, the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Tax laws may require items to be included in the determination of taxable income at different times from when the items are reflected in the financial statements. Deferred tax balances reflect the effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and their tax bases, as well as from net operating losses and tax credit carryforwards, and are stated at enacted tax rates in effect for the year taxes are expected to be paid or recovered. Deferred tax assets represent tax benefits for tax deductions or credits available in future years and require certain estimates and assumptions to determine whether it is more likely than not that all or a portion of the benefit will not be realized. The recoverability of these future tax deductions and credits is determined by assessing the adequacy of future expected taxable income from all sources, including the future reversal of existing taxable temporary differences, taxable income in carryback years, estimated future taxable income and available tax planning strategies. Should a change in facts or circumstances lead to a change in judgment about the ultimate recoverability of a deferred tax asset, we record or adjust the related valuation allowance in the period that the change in facts and circumstances occurs, along with a corresponding increase or decrease in income tax expense. We record tax benefits for uncertain tax positions based upon management’s evaluation of the information available at the reporting date. To be recognized in the financial statements, the tax position must meet the more-likely-than-not threshold that the position will be sustained upon examination by the tax authority based on technical merits assuming the tax authority has full knowledge of all relevant information. For positions meeting this recognition threshold, the benefit is measured as the largest amount of benefit that meets the more-likely-than-not threshold to be sustained. We periodically evaluate these tax positions based on the latest available information. For tax positions that do not meet the threshold requirement, we recognize net tax-related interest and penalties for continuing operations in income tax expense. New Accounting StandardsPronouncements Not Yet Adopted
Lease Accounting
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases, requiring lessees to recognize all leases with a term greater than 12 months on the balance sheet as right-of-use assets and lease liabilities. Under current accounting guidance, we are not required to recognize assets and liabilities arising from operating leases on the balance sheet. In 2018, the FASB issued additional guidance to provide an alternate transition method for adoption. Under this method, entities may record the balance sheet amounts and the cumulative effect of adopting the standard to retained earnings as of the effective date without adjustment to comparative periods. This new standard becomes effective for us at the beginning of 2019 and will be adopted using this alternate transition method. At the adoption date, approximately $300 million of right-of-use assets and lease liabilities will be recognized related to our operating leases. The cumulative transition adjustment to retained earnings resulting from the adoption is not significant. We plan to elect the practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward the historical lease classification and allows hindsight when evaluating options within a contract, resulting in the extension of the lease term for certain of our existing leases at the adoption date. We have updated the accounting policies affected by this standard, redesigned our related internal controls over financial reporting and are expanding the disclosures to be included in our first quarter 2019 Form 10-Q to meet the new requirements. The standard has no impact on our liquidity or our debt-covenant compliance under our current agreements, and is not expected to have any significant impact on our results of operations.
Credit Losses
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 impactcompleted our evaluation of the standard and determined that the impact on our consolidated financial statements.statements is not significant.
Note 2. Business Disposition and Acquisitions DispositionAcquisition
On July 2, 2018, we completed the sale of the businesses that manufacture and sell the products in our Tools and Test Equipment product line within our Industrial segment to Emerson Electric Co. for net cash proceeds of $807 million. We recorded an after-tax gain of $419 million related to this disposition.The carrying amounts by major classes of assets and liabilities for this disposition are as follows: (In millions) | | | | | | | | July 2, 2018 | Assets | | | | | | | | | Accounts receivable, net | | | | | | | $ | 71 | Inventories | | | | | | | | 100 | Property, plant and equipment, net | | | | | | | | 59 | Goodwill | | | | | | | | 153 | Other assets | | | | | | | | 24 | Total Assets | | | | | | | $ | 407 | Liabilities | | | | | | | | | Accounts payable | | | | | | | $ | 30 | Other current liabilities | | | | | | | | 25 | Other liabilities | | | | | | | | 11 | Total Liabilities | | | | | | | $ | 66 |
Acquisitions
On March 6, 2017,, we completed the acquisition of Arctic Cat Inc. (Arctic Cat), a publicly-held company (NASDAQ: ACAT), pursuant to a cash tender offer for $18.50 per share, followed by a short-form merger. The cash paid for this business, including repayment of debt and net of cash acquired, totaled $316 million. Arctic Cat was incorporated into our Textron Specialized Vehicles business in the Industrial segment and its operating results arehave been included in the Consolidated Statements of Operations since the closing date. We allocated the consideration paid for this business to the assets acquired and liabilities assumed based on their fair values, and recorded $230 million in goodwill, related to expected synergies and the value of the assembled workforce, and $75 million in intangible assets. In 2016, we paid $186 million in cash and assumed debt of $19 million to acquire six businesses, net of cash acquired and holdbacks. Our acquisition of Able Engineering and Component Services, Inc. and Able Aerospace, Inc. in the first quarter of 2016 represented the largest of these businesses and is included in the Textron Aviation segment.
Note 3. Goodwill and Intangible Assets Goodwill The changes in the carrying amount of goodwill by segment are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | Textron | | | Textron | | | | | (In millions) | | Textron Aviation | | Bell | | Textron Systems | | Industrial | | Total | Aviation | Bell | Systems | Industrial | Total | Balance at December 31, 2016 | $ | 613 | $ | 31 | $ | 1,087 | $ | 382 | $ | 2,113 | | Acquisitions | | — | | — | | — | | 234 | | 234 | | Foreign currency translation | | 1 | | — | | — | | 16 | | 17 | | Balance at December 30, 2017 | | 614 | | 31 | | 1,087 | | 632 | | 2,364 | $ | 614 | $ | 31 | $ | 1,087 | $ | 632 | $ | 2,364 | Disposition | | — | | — | | — | | (153) | | (153) | | — | | — | | — | | (153) | | (153) | Acquisition | | — | | — | | 13 | | — | | 13 | | — | | — | | 13 | | — | | 13 | Foreign currency translation | | — | | — | | — | | (6) | | (6) | | — | | — | | — | | (6) | | (6) | Balance at December 29, 2018 | $ | 614 | $ | 31 | $ | 1,100 | $ | 473 | $ | 2,218 | | 614 | | 31 | | 1,100 | | 473 | | 2,218 | Disposition* | | | — | | — | | (71) | | — | | (71) | Acquisition | | | — | | — | | 4 | | — | | 4 | Foreign currency translation | | | — | | — | | — | | (1) | | (1) | Balance at January 4, 2020 | | $ | 614 | $ | 31 | $ | 1,033 | $ | 472 | $ | 2,150 |
*See Note 7 for additional information. Intangible Assets Our intangible assets are summarized below: | | | | | | | | | | | | | | | | | | | December 29, 2018 | December 30, 2017 | | | | | | | | | | | | | | | | | | | | January 4, 2020 | December 29, 2018 | | | Weighted-Average | Gross | | | | | Gross | | | | | | | Amortization | Carrying | Accumulated | | | Carrying | Accumulated | | | (Dollars in millions) | | Weighted-Average Amortization Period (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net | Period (in years) | Amount | Amortization | Net | Amount | Amortization | Net | Patents and technology | | 14 | $ | 514 | $ | (211) | $ | 303 | $ | 545 | $ | (188) | $ | 357 | 14 | $ | 501 | $ | (242) | $ | 259 | $ | 514 | $ | (211) | $ | 303 | Trade names and trademarks | | 14 | | 224 | | (7) | | 217 | | 284 | | (40) | | 244 | 14 | | 223 | | (8) | | 215 | | 224 | | (7) | | 217 | Customer relationships and contractual agreements | | 15 | | 413 | | (275) | | 138 | | 418 | | (255) | | 163 | 15 | | 413 | | (298) | | 115 | | 413 | | (275) | | 138 | Other | | 4 | | 6 | | (6) | | — | | 18 | | (17) | | 1 | 4 | | 6 | | (6) | | — | | 6 | | (6) | | — | Total | | | $ | 1,157 | $ | (499) | $ | 658 | $ | 1,265 | $ | (500) | $ | 765 | | $ | 1,143 | $ | (554) | $ | 589 | $ | 1,157 | $ | (499) | $ | 658 |
In connection with the 2018 restructuring plan discussed in Note 15, we recognized intangible asset impairment charges of $38 million in the fourth quarter of 2018, which primarily included $20 million of patents and technology and $14 million of trade names and trademarks.
Trade names and trademarks in the table above include $208 million and $222 million of indefinite-lived intangible assets at both January 4, 2020 and December 29, 2018 and December 30, 2017, respectively.2018. Amortization expense totaled $59 million, $66 million and $69 million in 2019, 2018 and $66 million in 2018, 2017, and 2016, respectively. Amortization expense is estimated to be approximately $60$55 million, $56$53 million, $54 million, $54$37 million and $38$32 million in 2019, 2020, 2021, 2022, 2023 and 2023,2024, respectively. Note 4. Accounts Receivable and Finance Receivables
Accounts Receivable Accounts receivable is composed of the following: | | | | | | | | January 4, | December 29, | (In millions) | | | | | | December 29, 2018 | | December 30, 2017 | 2020 | 2018 | Commercial | | | | | $ | 885 | $ | 1,007 | $ | 835 | $ | 885 | U.S. Government contracts | | | | | | 166 | | 383 | | 115 | | 166 | | | | | | | 1,051 | | 1,390 | | | | | 950 | | 1,051 | Allowance for doubtful accounts | | | | | | (27) | | (27) | | (29) | | (27) | Total | | | | | $ | 1,024 | $ | 1,363 | $ | 921 | $ | 1,024 |
Upon adoption of ASC 606, unbilled receivables, primarily related to U.S. Government contracts, totaling $203 million were reclassified from accounts receivable to contract assets or contract liabilities based on the net position of the contract as discussed in Note 12. In addition, $71 million of accounts receivable, net were sold in the third quarter of 2018 as a result of a business disposition as disclosed in Note 2.
Finance Receivables Finance receivables are presented in the following table: | | | | | | | | January 4, | December 29, | (In millions) | | | | | | December 29, 2018 | | December 30, 2017 | 2020 | 2018 | Finance receivables | | | | | $ | 789 | $ | 850 | $ | 707 | $ | 789 | Allowance for losses | | | | | | (29) | | (31) | | (25) | | (29) | Total finance receivables, net | | | | | $ | 760 | $ | 819 | $ | 682 | $ | 760 |
Finance receivables primarily includes loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters. These loans typically have initial terms ranging from five to twelve years, amortization terms ranging from eight to fifteen years and an average balance of $1 million at December 29, 2018.January 4, 2020. Loans generally require the customer to pay a significant down payment, along with periodic scheduled principal payments that reduce the outstanding balance through the term of the loan. Our finance receivables are diversified across geographic region and borrower industry. At both January 4, 2020 and December 29, 2018, 59% of our finance receivables were distributed internationally and 41% throughout the U.S., compared with 56% At January 4, 2020 and 44%, respectively, at December 30, 2017. At December 29, 2018 and December 30, 2017, finance receivables of $201$148 million and $257$201 million, respectively, have been pledged as collateral for TFC’s debt of $119$87 million and $175$119 million, respectively. 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 three3 categories are performing, watchlist and nonaccrual. We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful. Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain. All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing. We measure delinquency based on the contractual payment terms of our finance receivables. In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category. Finance receivables categorized based on the credit quality indicators and by delinquency aging category are summarized as follows: | | | | | | | | | | January 4, | December 29, | (Dollars in millions) | | | | | | December 29, 2018 | | December 30, 2017 | 2020 | 2018 | Performing | | | | | $ | 704 | $ | 733 | $ | 664 | $ | 704 | Watchlist | | | | | | 45 | | 56 | | 4 | | 45 | Nonaccrual | | | | | | 40 | | 61 | | 39 | | 40 | Nonaccrual as a percentage of finance receivables | | | | | | 5.07% | | 7.18% | | 5.52 | % | | 5.07 | % | Less than 31 days past due | | | | | $ | 719 | $ | 791 | $ | 637 | $ | 719 | 31-60 days past due | | | | | | 56 | | 25 | | 53 | | 56 | 61-90 days past due | | | | | | 5 | | 14 | | 7 | | 5 | Over 90 days past due | | | | | | 9 | | 20 | | 10 | | 9 | 60+ days contractual delinquency as a percentage of finance receivables | | | | | | 1.77% | | 4.00% | | 2.40 | % | | 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 impaired finance receivables, excluding leveraged leases, and the average recorded investment is provided below: | | | | | | | | January 4, | December 29, | (In millions) | | | | | | December 29, 2018 | | December 30, 2017 | 2020 | 2018 | Recorded investment: | | | | | | | | | | | | | Impaired loans with related allowance for losses | | | | | $ | 15 | $ | 24 | $ | 17 | $ | 15 | Impaired loans with no related allowance for losses | | | | | | 43 | | 70 | | 22 | | 43 | Total | | | | | $ | 58 | $ | 94 | $ | 39 | $ | 58 | Unpaid principal balance | | | | | $ | 67 | $ | 106 | $ | 50 | $ | 67 | Allowance for losses on impaired loans | | | | | | 5 | | 6 | | 3 | | 5 | Average recorded investment | | | | | | 61 | | 92 | | 40 | | 61 |
A summary of the allowance for losses on finance receivables based on how the underlying finance receivables are evaluated for impairment, is provided below. The finance receivables reported in this table specifically exclude $101$104 million and $98$101 million of leveraged leases at January 4, 2020 and December 29, 2018, and December 30, 2017, respectively, in accordance with U.S. generally accepted accounting principles. | | | | | | | | January 4, | December 29, | (In millions) | | | | | | December 29, 2018 | | December 30, 2017 | 2020 | 2018 | Allowance based on collective evaluation | | | | | $ | 24 | $ | 25 | $ | 22 | $ | 24 | Allowance based on individual evaluation | | | | | | 5 | | 6 | | 3 | | 5 | Finance receivables evaluated collectively | | | | | | 630 | | 658 | | 564 | | 630 | Finance receivables evaluated individually | | | | | | 58 | | 94 | | 39 | | 58 |
Note 5. Inventories Inventories are composed of the following: | | | | | | | | January 4, | December 29, | (In millions) | | | | | | December 29, 2018 | | December 30, 2017 | 2020 | 2018 | Finished goods | | | | | $ | 1,662 | $ | 1,790 | $ | 1,557 | $ | 1,662 | Work in process | | | | | | 1,356 | | 2,238 | | 1,616 | | 1,356 | Raw materials and components | | | | | | 800 | | 804 | | 896 | | 800 | | | | | | | 3,818 | | 4,832 | | Progress payments | | | | | | — | | (682) | | Total | | | | | $ | 3,818 | $ | 4,150 | $ | 4,069 | $ | 3,818 |
Upon adoption of ASC 606, $199 million of inventories, net of progress payments, primarily related to our U.S. Government contracts, were reclassified from inventories to contract assets or contract liabilities based on the net position of the contract as discussed in Note 12. In addition, $100 million of inventories were sold in the third quarter of 2018 as a result of a business disposition as disclosed in Note 2.
Inventories valued by the LIFO method totaled $2.5 billion and $2.2 billion at bothJanuary 4, 2020 and December 29, 2018, and December 30, 2017, respectively, and the carrying values of these inventories would have been higher by approximately $457$475 million and $452$457 million, respectively, had our LIFO inventories been valued at current costs. Note 6. Property, Plant and Equipment, Net Our Manufacturing group’s property, plant and equipment, net is composed of the following: | | | | | | | | | Useful Lives | January 4, | December 29, | (Dollars in millions) | | | | Useful Lives (in years) | | December 29, 2018 | | December 30, 2017 | (in years) | 2020 | 2018 | Land, buildings and improvements | | | | 3 – 40 | $ | 1,927 | $ | 1,948 | 3-40 | $ | 1,991 | $ | 1,927 | Machinery and equipment | | | | 1 – 20 | | 4,891 | | 4,893 | 2-20 | | 4,941 | | 4,891 | | | | | | | 6,818 | | 6,841 | | | | | | 6,932 | | 6,818 | Accumulated depreciation and amortization | | | | | | (4,203) | | (4,120) | | | (4,405) | | (4,203) | Total | | | | | $ | 2,615 | $ | 2,721 | | $ | 2,527 | $ | 2,615 |
At December 29, 2018 and December 30, 2017, assets under capital leases totaled $168 million and $176 million, respectively, and had accumulated amortization of $47 million and $46 million, respectively. The Manufacturing group’s depreciation expense, which included amortization expense on capitalfinance leases, totaled $346 million, $358 million and $362 million in 2019, 2018 and $3682017, respectively.
Note 7. Other Assets On April 1, 2019, TRU Simulation + Training Inc., a business within our Textron Systems segment, 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 commercial business and general aviation aircraft. We have a 30% interest in this newly formed company and our investment is accounted for under the equity method of accounting. We contributed assets with a carrying value of $69 million to the company, which primarily included property, plant and equipment. In addition, $71 million of the Textron Systems segment’s goodwill was allocated to this transaction. Based on the fair value of our share of the business, we recorded a pre-tax net gain of $18 million in 2018, 2017 and 2016, respectively.2019 to cost of sales in our Consolidated Statements of Operations. Note 7. 8. Other Current Liabilities The other current liabilities of our Manufacturing group are summarized below: | | | | | | | | January 4, | December 29, | (In millions) | | | | | | December 29, 2018 | | December 30, 2017 | 2020 | 2018 | Contract liabilities | | | | | $ | 876 | $ | — | $ | 715 | $ | 876 | Customer deposits | | | | | | — | | 1,007 | | Salaries, wages and employer taxes | | | | | | 381 | | 329 | | 362 | | 381 | Current portion of warranty and product maintenance liabilities | | | | | | 177 | | 190 | | 147 | | 177 | Other | | | | | | 715 | | 915 | | 683 | | 715 | Total | | | | | $ | 2,149 | $ | 2,441 | $ | 1,907 | $ | 2,149 |
Upon adoption of ASC 606, we reclassified customer deposits and certain other current liabilities totaling $1,166 million to contract liabilities or contract assets based on the net position of the contract as discussed in Note 12.
Changes in our warranty liability are as follows: | | | | | | | | (In millions) | | | | 2018 | | 2017 | | 2016 | 2019 | 2018 | 2017 | Balance at beginning of year | | | $ | 164 | $ | 138 | $ | 143 | $ | 149 | $ | 164 | $ | 138 | Provision | | | | 72 | | 81 | | 79 | | 68 | | 72 | | 81 | Settlements | | | | (78) | | (69) | | (70) | | (70) | | (78) | | (69) | Acquisitions | | | | 1 | | 35 | | 2 | | — | | 1 | | 35 | Adjustments* | | | | (10) | | (21) | | (16) | | (6) | | (10) | | (21) | Balance at end of year | | | $ | 149 | $ | 164 | $ | 138 | $ | 141 | $ | 149 | $ | 164 |
* Adjustments include changes to prior year estimates, new issues on prior year sales, business dispositions and currency translation adjustments. Note 9. 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 2019, our operating lease cost totaled $64 million. Our finance lease cost and our variable and short-term lease costs were not significant. Cash paid for operating lease liabilities during 2019 totaled $62 million, which is classified in cash flows from operating activities. Balance sheet and other information related to our leases is as follows: | | | | | January 4, | (Dollars in millions) | 2020 | Operating leases: | | | | Other assets | $ | 277 | Other current liabilities | | 48 | Other liabilities | | 233 | Finance leases: | | | | Property, plant and equipment, less accumulated amortization of $8 million | $ | 39 | Current portion of long-term debt | | 2 | Long-term debt | | 40 | Weighted-average remaining lease term (in years) | | | | Finance leases | | 17.9 | Operating leases | | 10.2 | Weighted-average discount rate | | | | Finance leases | | 4.37 | % | Operating leases | | 4.42 | % |
At December 29, 2018, assets under finance leases totaled $168 million and had accumulated amortization of $47 million. Maturities of our lease liabilities at January 4, 2020 are as follows: | | | | | | Operating | Finance | (In millions) | Leases | Leases | 2020 | $ | 57 | $ | 4 | 2021 | | 48 | | 4 | 2022 | | 40 | | 4 | 2023 | | 32 | | 4 | 2024 | | 25 | | 5 | Thereafter | | 154 | | 46 | Total lease payments | | 356 | | 67 | Less: interest | | (75) | | (25) | Total lease liabilities | $ | 281 | $ | 42 |
Note 8. 10. Debt and Credit Facilities Our debt is summarized in the table below: | | | | | | | | January 4, | December 29, | (In millions) | | | | | | December 29, 2018 | | December 30, 2017 | 2020 | 2018 | Manufacturing group | | | | | | | | | | | | | 7.25% due 2019 | | | | | $ | 250 | $ | 250 | $ | — | $ | 250 | 6.625% due 2020 | | | | | | 190 | | 201 | | 199 | | 190 | Variable-rate notes due 2020 (3.17% and 1.96%, respectively) | | | | | | 350 | | 350 | | Variable-rate notes due 2020 (2.45% and 3.17%, respectively) | | | 350 | | 350 | 3.65% due 2021 | | | | | | 250 | | 250 | | 250 | | 250 | 5.95% due 2021 | | | | | | 250 | | 250 | | 250 | | 250 | 4.30% due 2024 | | | | | | 350 | | 350 | | 350 | | 350 | 3.875% due 2025 | | | | | | 350 | | 350 | | 350 | | 350 | 4.00% due 2026 | | | | | | 350 | | 350 | | 350 | | 350 | 3.65% due 2027 | | | | | | 350 | | 350 | | 350 | | 350 | 3.375% due 2028 | | | | | | 300 | | 300 | | 300 | | 300 | Other (weighted-average rate of 2.63% and 3.04%, respectively) | | | | | | 76 | | 87 | | 3.90% due 2029 | | | 300 | | — | Other (weighted-average rate of 3.01% and 2.63%, respectively) | | | 75 | | 76 | Total Manufacturing group debt | | | | | $ | 3,066 | $ | 3,088 | $ | 3,124 | $ | 3,066 | Less: Short-term debt and current portion of long-term debt | | | | | | (258) | | (14) | | Less: Current portion of long-term debt | | | (561) | | (258) | Total Long-term debt | | | | | $ | 2,808 | $ | 3,074 | $ | 2,563 | $ | 2,808 | Finance group | | | | | | | | | | | | | 2.26% note due 2019 | | | | | $ | 150 | $ | 150 | | Variable-rate note due 2020 (3.57% and 2.38%, respectively) | | | | | | 150 | | 200 | | Fixed-rate notes due 2018-2028 (weighted-average rate of 3.17% and 3.15%, respectively) (a) (b) | | | | | | 84 | | 131 | | Variable-rate notes due 2018-2027 (weighted-average rate of 3.99% and 2.99%, respectively) (a) (b) | | | | | | 35 | | 44 | | Fixed-to-Floating Rate Junior Subordinated Notes (4.35% and 3.15%, respectively) | | | | | | 299 | | 299 | | Variable-rate note due 2020 (2.87% and 3.57%, respectively) | | $ | 150 | $ | 150 | 2.88% note due 2022 | | | 150 | | 150 | Fixed-rate notes due 2019-2028 (weighted-average rate of 3.20% and 3.17%, respectively) (a) (b) | | | 65 | | 84 | Variable-rate notes due 2019-2027 (weighted-average rate of 3.31% and 3.99%, respectively) (a) (b) | | | 22 | | 35 | Fixed-to-Floating Rate Junior Subordinated Notes (3.64% and 4.35%, respectively) | | | 299 | | 299 | Total Finance group debt | | | | | $ | 718 | $ | 824 | $ | 686 | $ | 718 |
(a) | Notes amortize on a quarterly or semi-annual basis. |
(b) | Notes are secured by finance receivables as described in Note 4. |
(a)Notes amortize on a quarterly or semi-annual basis.
(b)Notes are secured by finance receivables as described in Note 4.
The following table shows required payments during the next five years on debt outstanding at December 29, 2018:January 4, 2020: | | | | | | | | | | | | (In millions) | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | 2020 | 2021 | 2022 | 2023 | 2024 | Manufacturing group | $ | 258 | $ | 552 | $ | 507 | $ | 7 | $ | 7 | $ | 561 | $ | 507 | $ | 7 | $ | 7 | $ | 361 | Finance group | | 167 | | 172 | | 18 | | 18 | | 19 | | 167 | | 14 | | 167 | | 17 | | 15 | Total | $ | 425 | $ | 724 | $ | 525 | $ | 25 | $ | 26 | $ | 728 | $ | 521 | $ | 174 | $ | 24 | $ | 376 |
On October 18, 2019, Textron hasentered into a senior unsecured revolving credit facility that expires in September 2021 for an aggregate principal amount of $1.0 billion, of which up to $100 million is available for the issuance of letters of credit. Textron may elect to increase the aggregate amount of commitments under the facility to up to $1.3 billion by designating an additional lender or by an existing lender agreeing to increase its commitment. The facility expires in October 2024, subject to up to 2 one-year extensions at Textron's option with the consent of lenders representing a majority of the commitments under the facility. This new facility replaced the prior 5-year facility, which was scheduled to expire in September 2021. At January 4, 2020 and December 29, 2018, there were 0 amounts borrowed against either facility. At January 4, 2020, there were $10 million of outstanding letters of credit issued under the new facility and at December 29, 2018, there were no amounts borrowed against the facility and there were $10 million of outstanding letters of credit issued against it.under the prior facility. Fixed-to-Floating Rate Junior Subordinated Notes The Finance group’s $299 million of Fixed-to-Floating Rate Junior Subordinated Notes are unsecured and rank junior to all of its existing and future senior debt. The notes mature on February 15, 2067; however, we have the right to redeem the notes at par at any time and we are obligated to redeem the notes beginning on February 15, 2042. Interest on the notes was fixed at 6% through February 15, 2017 and is now variable at the three-month London Interbank Offered Rate + 1.735%. Support Agreement Under a Support Agreement, as amended in December 2015, Textron Inc. is required to ensure that TFC maintains fixed charge coverage of no less than 125% and consolidated shareholder’s equity of no less than $125 million. There were no0 cash contributions required to be paid to TFC in 2019, 2018 2017 and 20162017 to maintain compliance with the support agreement. Note 9.11. 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 January 4, 2020 and December 29, 2018, and December 30, 2017, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $342 million and $379 million, respectively. At January 4, 2020, the fair value amounts of our foreign currency exchange contracts were a $2 million asset and $426a $2 million respectively.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. At December 30, 2017, the fair value amounts of our foreign currency exchange contracts were a $13 million asset and a $7 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: | | December 29, 2018 | | December 30, 2017 | | | | | | | | | | | | | | January 4, 2020 | December 29, 2018 | | | Carrying | Estimated | Carrying | Estimated | (In millions) | | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value | Value | Fair Value | Value | Fair Value | Manufacturing group | | | | | | | | | | | | | | | | | Debt, excluding leases | $ | (2,996) | $ | (2,971) | $ | (3,007) | $ | (3,136) | $ | (3,097) | $ | (3,249) | $ | (2,996) | $ | (2,971) | Finance group | | | | | | | | | | | | | | | | | Finance receivables, excluding leases | | 582 | | 584 | | 643 | | 675 | | 493 | | 527 | | 582 | | 584 | Debt | | (718) | | (640) | | (824) | | (799) | | (686) | | (634) | | (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. Note 10.12. Shareholders’ Equity Capital Stock We have authorization for 15 million shares of preferred stock with a par value of $0.01 and 500 million shares of common stock with a par value of $0.125. Outstanding common stock activity is presented below: | | | (In thousands) | | | | 2018 | | 2017 | | 2016 | 2019 | 2018 | 2017 | Balance at beginning of year | | | | 261,471 | | 270,287 | | 274,228 | 235,621 | 261,471 | 270,287 | Share repurchases | | | | (29,094) | | (11,917) | | (6,898) | (10,011) | (29,094) | (11,917) | Share-based compensation activity | | | | 3,244 | | 3,101 | | 2,957 | 2,346 | 3,244 | 3,101 | Balance at end of year | | | | 235,621 | | 261,471 | | 270,287 | 227,956 | 235,621 | 261,471 |
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: | | | (In thousands) | | | | 2018 | | 2017 | | 2016 | 2019 | 2018 | 2017 | Basic weighted-average shares outstanding | | | | 250,196 | | 266,380 | | 270,774 | 231,315 | 250,196 | 266,380 | Dilutive effect of stock options | | | | 3,041 | | 2,370 | | 1,591 | 1,394 | 3,041 | 2,370 | Diluted weighted-average shares outstanding | | | | 253,237 | | 268,750 | | 272,365 | 232,709 | 253,237 | 268,750 |
In 2019, 2018 2017 and 2016,2017, stock options to purchase 4.3 million, 1.3 million 1.6 million and 2.01.6 million shares, respectively, of common stock are excluded from the calculation of diluted weighted-average shares outstanding as their effect would have been anti-dilutive. Accumulated Other Comprehensive Loss The components of Accumulated other comprehensive loss are presented below: | | | | | | | | | | | | Pension and | Foreign | Deferred | Accumulated | | | Postretirement | Currency | Gains (Losses) | Other | | | Benefits | Translation | on Hedge | Comprehensive | (In millions) | | Pension and Postretirement Benefits Adjustments | | Foreign Currency Translation Adjustments | | Deferred Gains (Losses) on Hedge Contracts | | Accumulated Other Comprehensive Loss | Adjustments | Adjustments | Contracts | Loss | Balance at December 31, 2016 | $ | (1,505) | $ | (96) | $ | (4) | $ | (1,605) | | Other comprehensive income before reclassifications | | 16 | | 107 | | 8 | | 131 | | Reclassified from Accumulated other comprehensive loss | | 93 | | — | | 6 | | 99 | | Balance at December 30, 2017 | $ | (1,396) | $ | 11 | $ | 10 | $ | (1,375) | $ | (1,396) | $ | 11 | $ | 10 | $ | (1,375) | Other comprehensive income before reclassifications | | (198) | | (49) | | (8) | | (255) | | Other comprehensive loss before reclassifications | | | (198) | | (49) | | (8) | | (255) | Reclassified from Accumulated other comprehensive loss | | 124 | | 6 | | (5) | | 125 | | 124 | | 6 | | (5) | | 125 | Reclassification of stranded tax effects | | (257) | | — | | — | | (257) | | (257) | | — | | — | | (257) | Balance at December 29, 2018 | $ | (1,727) | $ | (32) | $ | (3) | $ | (1,762) | $ | (1,727) | $ | (32) | $ | (3) | $ | (1,762) | Other comprehensive loss before reclassifications | | | (166) | | (4) | | 5 | | (165) | Reclassified from Accumulated other comprehensive loss | | | 82 | | — | | (2) | | 80 | Balance at January 4, 2020 | | $ | (1,811) | $ | (36) | $ | — | $ | (1,847) |
In 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows entities to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from accumulated other comprehensive loss to retained earnings. The strandedstranded tax effects are comprised of the tax amounts included in accumulated other comprehensive loss at the previous U.S. federal corporate tax rate of 35%, for which the related deferred tax asset or liability was remeasured at the new U.S. federal corporate tax rate of 21% in the fourth quarter of 2017. We elected to early adoptThe adoption of this standard in the fourth quarter of 2018, which resulted in an increase to accumulated other comprehensive loss of $257 million, with an offsetting increase to retained earnings. Other Comprehensive Income (Loss) The before and after-tax components of other comprehensive income (loss) are presented belowbelow: | | 2018 | | 2017 | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | 2019 | 2018 | 2017 | | | | | Tax | After- | | | Tax | After- | | | Tax | After- | | | Pre-Tax | (Expense) | Tax | Pre-Tax | (Expense) | Tax | Pre-Tax | (Expense) | Tax | (In millions) | | Pre-Tax Amount | | Tax (Expense) Benefit | | After- Tax Amount | | Pre-Tax Amount | | Tax (Expense) Benefit | | After- Tax Amount | | Pre-Tax Amount | | Tax (Expense) Benefit | | After- Tax Amount | Amount | Benefit | Amount | Amount | Benefit | Amount | Amount | Benefit | Amount | Pension and postretirement benefits adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized gains (losses) | $ | (248) | $ | 58 | $ | (190) | $ | 18 | $ | (1) | $ | 17 | $ | (382) | $ | 135 | $ | (247) | $ | (218) | $ | 52 | $ | (166) | $ | (248) | $ | 58 | $ | (190) | $ | 18 | $ | (1) | $ | 17 | Amortization of net actuarial loss* | | 152 | | (35) | | 117 | | 136 | | (48) | | 88 | | 104 | | (39) | | 65 | | 99 | | (23) | | 76 | | 152 | | (35) | | 117 | | 136 | | (48) | | 88 | Amortization of prior service cost (credit)* | | 9 | | (2) | | 7 | | 7 | | (2) | | 5 | | (7) | | 4 | | (3) | | Recognition of prior service credit (cost) | | (20) | | 5 | | (15) | | (1) | | — | | (1) | | 12 | | (5) | | 7 | | Amortization of prior service cost* | | | 8 | | (2) | | 6 | | 9 | | (2) | | 7 | | 7 | | (2) | | 5 | Recognition of prior service cost | | | — | | — | | — | | (20) | | 5 | | (15) | | (1) | | — | | (1) | Business disposition | | 7 | | — | | 7 | | — | | — | | — | | — | | — | | — | | — | | — | | — | | 7 | | — | | 7 | | — | | — | | — | Pension and postretirement benefits adjustments, net | | (100) | | 26 | | (74) | | 160 | | (51) | | 109 | | (273) | | 95 | | (178) | | (111) | | 27 | | (84) | | (100) | | 26 | | (74) | | 160 | | (51) | | 109 | Foreign currency translation adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustments | | (46) | | (3) | | (49) | | 100 | | 7 | | 107 | | (36) | | (13) | | (49) | | (6) | | 2 | | (4) | | (46) | | (3) | | (49) | | 100 | | 7 | | 107 | Business disposition | | 6 | | — | | 6 | | — | | — | | — | | — | | — | | — | | — | | — | | — | | 6 | | — | | 6 | | — | | — | | — | Foreign currency translation adjustments, net | | (40) | | (3) | | (43) | | 100 | | 7 | | 107 | | (36) | | (13) | | (49) | | (6) | | 2 | | (4) | | (40) | | (3) | | (43) | | 100 | | 7 | | 107 | Deferred gains (losses) on hedge contracts: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current deferrals | | (8) | | — | | (8) | | 10 | | (2) | | 8 | | 11 | | (4) | | 7 | | 8 | | (3) | | 5 | | (8) | | — | | (8) | | 10 | | (2) | | 8 | Reclassification adjustments | | (7) | | 2 | | (5) | | 7 | | (1) | | 6 | | 17 | | (4) | | 13 | | (2) | | — | | (2) | | (7) | | 2 | | (5) | | 7 | | (1) | | 6 | Deferred gains (losses) on hedge contracts, net | | (15) | | 2 | | (13) | | 17 | | (3) | | 14 | | 28 | | (8) | | 20 | | 6 | | (3) | | 3 | | (15) | | 2 | | (13) | | 17 | | (3) | | 14 | Total | $ | (155) | $ | 25 | $ | (130) | $ | 277 | $ | (47) | $ | 230 | $ | (281) | $ | 74 | $ | (207) | $ | (111) | $ | 26 | $ | (85) | $ | (155) | $ | 25 | $ | (130) | $ | 277 | $ | (47) | $ | 230 | |
*These components of other comprehensive income (loss) are included in the computation of net periodic pension cost. See Note 1416 for additional information. Note 11.13. Segment and Geographic Data We operate in, and report financial information for, the following five5 business segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. The accounting policies of the segments are the same as those described in Note 1. Textron Aviation products include Citation jets, King Air and Caravan turboprop aircraft, piston engine aircraft, military turboproptrainer and defense aircraft, and aftermarket part sales and services sold to a diverse base of corporate and individual buyers. Bell products include military and commercial helicopters, tiltrotor aircraft and related spare parts and services. Bell supplies military helicopters and, in association with The Boeing Company, military tiltrotor aircraft, and aftermarket services to the U.S. and non-U.S. governments. Bell also supplies commercial helicopters and aftermarket services to corporate, offshore petroleum exploration and development, utility, charter, police, fire, rescue and emergency medical helicopter operators, and foreign governments. Textron Systems products include unmanned aircraft and surface systems, marine craft, armored vehicles and land systems, simulation,specialty vehicles, advanced flight training devices and other defense and aviation mission support products and services primarily for U.S. and non-U.S. governments. Industrial products and markets include the following: · Kautex products include blow-molded plastic fuel systems and advanced fuel systems including pressurized fuel tanks for hybrid applications, clear-vision systems, selective catalytic reduction systems, cast iron engine components and other fuel system components that are marketed primarily to automobile OEMs, as well as plastic bottles and containers for various uses; and
· Specialized Vehicles products include golf cars, off-road utility vehicles, recreational side-by-side and all-terrain vehicles, snowmobiles, light transportation vehicles, aviation ground support equipment, professional turf-maintenance equipment and turf-care vehicles that are marketed primarily to golf courses and resorts, government agencies and municipalities, consumers, and commercial and industrial users.
| ● | Kautex products consist of blow-molded plastic fuel systems, including conventional plastic fuel tanks and pressurized fuel tanks for hybrid applications, clear-vision systems and plastic tanks for selective catalytic reduction systems that are marketed primarily to automobile OEMs; and |
| ● | Specialized Vehicles products include golf cars, off-road utility vehicles, recreational side-by-side and all-terrain vehicles, snowmobiles, light transportation vehicles, aviation ground support equipment, professional turf-maintenance equipment and turf-care vehicles that are marketed primarily to golf courses and resorts, government agencies and municipalities, consumers, outdoor enthusiasts, and commercial and industrial users. |
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. The Finance segment provides financing primarily to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters. 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 from continuing operations before income taxes, are as follows: | Revenues | Segment Profit | | | | | | | | | | | | | | | | | | Revenues | Segment Profit | (In millions) | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | Textron Aviation | $ | 4,971 | $ | 4,686 | $ | 4,921 | $ | 445 | $ | 303 | $ | 389 | $ | 5,187 | $ | 4,971 | $ | 4,686 | $ | 449 | $ | 445 | $ | 303 | Bell | | 3,180 | | 3,317 | | 3,239 | | 425 | | 415 | | 386 | | 3,254 | | 3,180 | | 3,317 | | 435 | | 425 | | 415 | Textron Systems | | 1,464 | | 1,840 | | 1,756 | | 156 | | 139 | | 186 | | 1,325 | | 1,464 | | 1,840 | | 141 | | 156 | | 139 | Industrial | | 4,291 | | 4,286 | | 3,794 | | 218 | | 290 | | 329 | | 3,798 | | 4,291 | | 4,286 | | 217 | | 218 | | 290 | Finance | | 66 | | 69 | | 78 | | 23 | | 22 | | 19 | | 66 | | 66 | | 69 | | 28 | | 23 | | 22 | Total | $ | 13,972 | $ | 14,198 | $ | 13,788 | $ | 1,267 | $ | 1,169 | $ | 1,309 | $ | 13,630 | $ | 13,972 | $ | 14,198 | $ | 1,270 | $ | 1,267 | $ | 1,169 | Corporate expenses and other, net | | | | | | | | (119) | | (132) | | (172) | | | | | | | | (110) | | (119) | | (132) | Interest expense, net for Manufacturing group | | | | | | | | (135) | | (145) | | (138) | | | | | | | | (146) | | (135) | | (145) | Special charges | | | | | | | | (73) | | (130) | | (123) | | | | | | | | (72) | | (73) | | (130) | Gain on business disposition | | | | | | | | 444 | | — | | — | | | | | | | | — | | 444 | | — | Income from continuing operations before income taxes | | | | | | | $ | 1,384 | $ | 762 | $ | 876 | | | | | | | $ | 942 | $ | 1,384 | $ | 762 |
Other information by segment is provided below: | Assets | Capital Expenditures | Depreciation and Amortization | | | | | | | | | | | | | | | | | | | | | | Assets | Capital Expenditures | Depreciation and Amortization | | | January 4, | December 29, | | | | | | | | | | | | | (In millions) | | December 29, 2018 | | December 30, 2017 | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | 2020 | 2018 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | Textron Aviation | $ | 4,290 | $ | 4,403 | $ | 132 | $ | 128 | $ | 157 | $ | 145 | $ | 139 | $ | 140 | $ | 4,692 | $ | 4,290 | $ | 122 | $ | 132 | $ | 128 | $ | 137 | $ | 145 | $ | 139 | Bell | | 2,652 | | 2,660 | | 65 | | 73 | | 86 | | 108 | | 117 | | 132 | | 2,783 | | 2,652 | | 81 | | 65 | | 73 | | 107 | | 108 | | 117 | Textron Systems | | 2,254 | | 2,330 | | 39 | | 60 | | 71 | | 54 | | 65 | | 75 | | 2,352 | | 2,254 | | 38 | | 39 | | 60 | | 48 | | 54 | | 65 | Industrial | | 2,815 | | 3,360 | | 132 | | 158 | | 121 | | 112 | | 105 | | 81 | | 2,781 | | 2,815 | | 97 | | 132 | | 158 | | 108 | | 112 | | 105 | Finance | | 1,017 | | 1,169 | | — | | — | | — | | 8 | | 12 | | 12 | | 964 | | 1,017 | | — | | — | | — | | 6 | | 8 | | 12 | Corporate | | 1,236 | | 1,418 | | 1 | | 4 | | 11 | | 10 | | 9 | | 9 | | 1,446 | | 1,236 | | 1 | | 1 | | 4 | | 10 | | 10 | | 9 | Total | $ | 14,264 | $ | 15,340 | $ | 369 | $ | 423 | $ | 446 | $ | 437 | $ | 447 | $ | 449 | $ | 15,018 | $ | 14,264 | $ | 339 | $ | 369 | $ | 423 | $ | 416 | $ | 437 | $ | 447 |
Geographic Data Presented below is selected financial information of our continuing operations by geographic area: | | | Revenues* | Property, Plant and Equipment, net** | | | | | | | | | | | | | | | | | | | | | | Property, Plant | | | Revenues* | and Equipment, net** | | | | | | | | | January 4, | December 29, | (In millions) | | | | 2018 | | 2017 | | 2016 | | December 29, 2018 | | December 30, 2017 | 2019 | 2018 | 2017 | 2020 | 2018 | United States | | | $ | 8,667 | $ | 8,786 | $ | 8,574 | $ | 2,115 | $ | 2,172 | $ | 8,963 | $ | 8,667 | $ | 8,786 | $ | 2,054 | $ | 2,115 | Europe | | | | 2,187 | | 1,962 | | 1,954 | | 267 | | 328 | | 1,986 | | 2,187 | | 1,962 | | 244 | | 267 | Asia and Australia | | | | 1,253 | | 1,206 | | 998 | | 88 | | 84 | | 1,070 | | 1,253 | | 1,206 | | 97 | | 88 | Other international | | | | 1,865 | | 2,244 | | 2,262 | | 145 | | 137 | | 1,611 | | 1,865 | | 2,244 | | 132 | | 145 | Total | | | $ | 13,972 | $ | 14,198 | $ | 13,788 | $ | 2,615 | $ | 2,721 | $ | 13,630 | $ | 13,972 | $ | 14,198 | $ | 2,527 | $ | 2,615 |
* Revenues are attributed to countries based on the location of the customer. ** Property, plant and equipment, net is based on the location of the asset. Note 12.14. Revenues Disaggregation of Revenues Our revenues disaggregated by major product type are presented below: | | | | | | | | (In millions) | | | | 2018 | | 2017 | | 2016 | 2019 | 2018 | 2017 | Aircraft | | | $ | 3,435 | $ | 3,112 | $ | 3,412 | $ | 3,592 | $ | 3,435 | $ | 3,112 | Aftermarket parts and services | | | | 1,536 | | 1,574 | | 1,509 | | 1,595 | | 1,536 | | 1,574 | Textron Aviation | | | | 4,971 | | 4,686 | | 4,921 | | 5,187 | | 4,971 | | 4,686 | Military aircraft and support programs | | | | 2,030 | | 2,076 | | 2,087 | | 1,988 | | 2,030 | | 2,076 | Commercial helicopters, parts and services | | | | 1,150 | | 1,241 | | 1,152 | | 1,266 | | 1,150 | | 1,241 | Bell | | | | 3,180 | | 3,317 | | 3,239 | | 3,254 | | 3,180 | | 3,317 | Unmanned systems | | | | 612 | | 714 | | 763 | | 572 | | 612 | | 714 | Marine and land systems | | | | 311 | | 470 | | 294 | | 208 | | 311 | | 470 | Simulation, training and other | | | | 541 | | 656 | | 699 | | 545 | | 541 | | 656 | Textron Systems | | | | 1,464 | | 1,840 | | 1,756 | | 1,325 | | 1,464 | | 1,840 | Fuel systems and functional components | | | | 2,352 | | 2,330 | | 2,273 | | 2,237 | | 2,352 | | 2,330 | Specialized vehicles | | | | 1,691 | | 1,486 | | 1,080 | | 1,561 | | 1,691 | | 1,486 | Tools and test equipment | | | | 248 | | 470 | | 441 | | — | | 248 | | 470 | Industrial | | | | 4,291 | | 4,286 | | 3,794 | | 3,798 | | 4,291 | | 4,286 | Finance | | | | 66 | | 69 | | 78 | | 66 | | 66 | | 69 | Total revenues | | | $ | 13,972 | $ | 14,198 | $ | 13,788 | $ | 13,630 | $ | 13,972 | $ | 14,198 |
Our 2019 and 2018 revenues for our segments by customer type and geographic location are presented below: | | | | | | | | | | | | | (In millions) | Textron Aviation | Bell | Textron Systems | Industrial | Finance | Total | 2019 | | | | | | | | | | | | | Customer type: | | | | | | | | | | | | | Commercial | $ | 4,956 | $ | 1,238 | $ | 359 | $ | 3,775 | $ | 66 | $ | 10,394 | U.S. Government | | 231 | | 2,016 | | 966 | | 23 | | — | | 3,236 | Total revenues | $ | 5,187 | $ | 3,254 | $ | 1,325 | $ | 3,798 | $ | 66 | $ | 13,630 | Geographic location: | | | | | | | | | | | | | United States | $ | 3,708 | $ | 2,440 | $ | 1,083 | $ | 1,698 | $ | 34 | $ | 8,963 | Europe | | 678 | | 142 | | 73 | | 1,091 | | 2 | | 1,986 | Asia and Australia | | 244 | | 348 | | 103 | | 374 | | 1 | | 1,070 | Other international | | 557 | | 324 | | 66 | | 635 | | 29 | | 1,611 | Total revenues | $ | 5,187 | $ | 3,254 | $ | 1,325 | $ | 3,798 | $ | 66 | $ | 13,630 | 2018 | | | | | | | | | | | | | Customer type: | | | | | | | | | | | | | Commercial | $ | 4,734 | $ | 1,114 | $ | 431 | $ | 4,277 | $ | 66 | $ | 10,622 | U.S. Government | | 237 | | 2,066 | | 1,033 | | 14 | | — | | 3,350 | Total revenues | $ | 4,971 | $ | 3,180 | $ | 1,464 | $ | 4,291 | $ | 66 | $ | 13,972 | Geographic location: | | | | | | | | | | | | | United States | $ | 3,379 | $ | 2,186 | $ | 1,118 | $ | 1,957 | $ | 27 | $ | 8,667 | Europe | | 612 | | 162 | | 74 | | 1,333 | | 6 | | 2,187 | Asia and Australia | | 336 | | 427 | | 127 | | 357 | | 6 | | 1,253 | Other international | | 644 | | 405 | | 145 | | 644 | | 27 | | 1,865 | Total revenues | $ | 4,971 | $ | 3,180 | $ | 1,464 | $ | 4,291 | $ | 66 | $ | 13,972 |
(In millions) | | Textron Aviation | | Bell | | Textron Systems | | Industrial | | Finance | | Total | Customer type: | | | | | | | | | | | | | Commercial | $ | 4,734 | $ | 1,114 | $ | 431 | $ | 4,277 | $ | 66 | $ | 10,622 | U.S. Government | | 237 | | 2,066 | | 1,033 | | 14 | | — | | 3,350 | Total revenues | $ | 4,971 | $ | 3,180 | $ | 1,464 | $ | 4,291 | $ | 66 | $ | 13,972 | Geographic location: | | | | | | | | | | | | | United States | $ | 3,379 | $ | 2,186 | $ | 1,118 | $ | 1,957 | $ | 27 | $ | 8,667 | Europe | | 612 | | 162 | | 74 | | 1,333 | | 6 | | 2,187 | Asia and Australia | | 336 | | 427 | | 127 | | 357 | | 6 | | 1,253 | Other international | | 644 | | 405 | | 145 | | 644 | | 27 | | 1,865 | Total revenues | $ | 4,971 | $ | 3,180 | $ | 1,464 | $ | 4,291 | $ | 66 | $ | 13,972 |
In 2017, and 2016, our revenues included sales to the U.S. Government of approximately $3.1 billion, and $3.4 billion, respectively, primarily in the Bell and Textron Systems segments. 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 December 29, 2018,January 4, 2020, we had $9.1$9.8 billion in remaining performance obligations of which we expect to recognize revenues of approximately 75% through 2020,2021, an additional 14%20% through 2022,2023, and the balance thereafter. Contract Assets and Liabilities Assets and liabilities related to our contracts with customers are reported on a contract-by-contract basis at the end of each reporting period. At January 4, 2020 and December 29, 2018, contract assets totaled $567 million and $461 million, respectively, and contract liabilities totaled $461$830 million and $974 million, respectively. Upon adoption of ASC 606 on December 31, 2017, contract assetsThe changes in these balances in 2019 resulted from timing differences between revenue recognized, billings and contract liabilitiespayments from customers, largely related to our contracts with customers were $429 millionthe V-22 program in the Bell segment. During 2019 and $1.0 billion, respectively. During 2018, we recognized revenues of $590 million and $817 million, in revenuesrespectively, that were included in the contract liability balance at the adoption date.beginning of each year. Reconciliation of ASC 606 to Prior Accounting Standards The amount by which each financial statement line item is affected in 2018 as a result of applying the new accounting standard as discussed in Note 1 is presented below: | | | December 29, 2018 | (In millions) | | | | As Reported | | Effect of the adoption of ASC 606 | | Under Prior Accounting | Consolidated Balance Sheets | | | | | | | | | Accounts receivable, net | | | $ | 1,024 | $ | 219 | $ | 1,243 | Inventories | | | | 3,818 | | 228 | | 4,046 | Other current assets | | | | 785 | | (454) | | 331 | Property, plant and equipment, net | | | | 2,615 | | 6 | | 2,621 | Other assets | | | | 1,800 | | 36 | | 1,836 | Total Manufacturing group assets | | | | 13,247 | | 35 | | 13,282 | Total assets | | | | 14,264 | | 35 | | 14,299 | Other current liabilities | | | | 2,149 | | 145 | | 2,294 | Total Manufacturing group liabilities | | | | 8,246 | | 145 | | 8,391 | Total liabilities | | | | 9,072 | | 145 | | 9,217 | Retained earnings | | | | 5,407 | | (110) | | 5,297 | Total shareholders’ equity | | | | 5,192 | | (110) | | 5,082 |
| | | | | | | | 2018 | | | | Effect of the | Under | | As | adoption of | Prior | (In millions, except per share amounts) | Reported | ASC 606 | Accounting | Consolidated Statements of Operations | | | | | | | Manufacturing revenues | $ | 13,906 | $ | (201) | $ | 13,705 | Total revenues | | 13,972 | | (201) | | 13,771 | Cost of sales | | 11,594 | | (174) | | 11,420 | Income from continuing operations before income taxes | | 1,384 | | (27) | | 1,357 | Income tax expense | | 162 | | (7) | | 155 | Income from continuing operations | | 1,222 | | (20) | | 1,202 | Net income | | 1,222 | | (20) | | 1,202 | Basic earnings per share - continuing operations | $ | 4.88 | $ | (0.08) | $ | 4.80 | Diluted earnings per share - continuing operations | | 4.83 | | (0.08) | | 4.75 | Consolidated Statements of Comprehensive Income | | | | | | | Other comprehensive loss | $ | (130) | $ | (20) | $ | (150) | Comprehensive income | | 1,092 | | (20) | | 1,072 | Consolidated Statements of Cash flows | | | | | | | Net income | $ | 1,222 | $ | (20) | $ | 1,202 | Income from continuing operations | | 1,222 | | (20) | | 1,202 | Deferred income taxes | | 49 | | (7) | | 42 | Accounts receivable, net | | 50 | | (16) | | 34 | Inventories | | 41 | | (50) | | (9) | Other assets | | (88) | | 34 | | (54) | Other liabilities | | (223) | | 59 | | (164) | Net cash provided by operating activities of continuing operations | | 1,109 | | — | | 1,109 |
| | | 2018 | (In millions, except per share amounts) | | | | As Reported | | Effect of the adoption of ASC 606 | | Under Prior Accounting | Consolidated Statements of Operations | | | | | | | | | Manufacturing revenues | | | $ | 13,906 | $ | (201) | $ | 13,705 | Total revenues | | | | 13,972 | | (201) | | 13,771 | Cost of sales | | | | 11,594 | | (174) | | 11,420 | Income from continuing operations before income taxes | | | | 1,384 | | (27) | | 1,357 | Income tax expense | | | | 162 | | (7) | | 155 | Income from continuing operations | | | | 1,222 | | (20) | | 1,202 | Net income | | | | 1,222 | | (20) | | 1,202 | Basic earnings per share - continuing operations | | | $ | 4.88 | $ | (0.08) | $ | 4.80 | Diluted earnings per share - continuing operations | | | | 4.83 | | (0.08) | | 4.75 | Consolidated Statements of Comprehensive Income | | | | | | | | | Other comprehensive loss | | | $ | (130) | $ | (20) | $ | (150) | Comprehensive income | | | | 1,092 | | (20) | | 1,072 | Consolidated Statements of Cash flows | | | | | | | | | Net income | | | $ | 1,222 | $ | (20) | $ | 1,202 | Income from continuing operations | | | | 1,222 | | (20) | | 1,202 | Deferred income taxes | | | | 49 | | (7) | | 42 | Accounts receivable, net | | | | 50 | | (16) | | 34 | Inventories | | | | 41 | | (50) | | (9) | Other assets | | | | (88) | | 34 | | (54) | Other liabilities | | | | (223) | | 59 | | (164) | Net cash provided by operating activities of continuing operations | | | | 1,109 | | — | | 1,109 |
Note 13.15. Share-Based Compensation Under our 2015 Long-Term Incentive Plan (Plan), which replaced our 2007 Long-Term Incentive Plan in April 2015, we have authorization to provide awards to selected employees and non-employee directors in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance share units and other awards. A maximum of 17 million shares is authorized for issuance for all purposes under the Plan plus any shares that become available upon cancellation, forfeiture or expiration of awards granted under the 2007 Long-Term Incentive Plan. No more than 17 million shares may be awarded pursuant to incentive stock options, and no more than 4.25 million shares may be issued pursuant to awards of restricted stock, restricted stock units, performance stock or other awards that are payable in shares. For 2019, 2018 2017 and 2016,2017, the awards granted under this Plan primarily included stock options, restricted stock units and performance share units. Through our Deferred Income Plan for Textron Executives, we provide certain executives the opportunity to voluntarily defer up to 80% of their base salary, along with incentive compensation. Elective deferrals may be put into either a stock unit account or an interest-bearing account. Participants cannot move amounts between the two accounts while actively employed by us and cannot receive distributions until termination of employment. The intrinsic value of amounts paid under this deferred income plan was not significant in 2019, 2018 2017 and 2016. 2017. Share-based compensation costs are reflected primarily in selling and administrative expense. Compensation expense included in net income for our share-based compensation plans is as follows: | | | | | | | | (In millions) | | | | 2018 | | 2017 | | 2016 | 2019 | 2018 | 2017 | Compensation expense | | | $ | 35 | $ | 77 | $ | 71 | $ | 52 | $ | 35 | $ | 77 | Income tax benefit | | | | (8) | | (28) | | (26) | | (12) | | (8) | | (28) | Total net compensation expense included in net income | | | $ | 27 | $ | 49 | $ | 45 | | Total compensation expense included in net income | | $ | 40 | $ | 27 | $ | 49 |
Compensation cost for awards subject only to service conditions that vest ratably areis recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. Our awards include continued vesting provisions for retirement eligible employees. Upon reaching retirement eligibility, the service requirement for these individuals is considered to have been satisfied and compensation expense for future awards is recognized on the date of the grant. As of December 29, 2018,January 4, 2020, we had not recognized $30$27 million of total compensation costs associated with unvested awards subject only to service conditions. We expect to recognize compensation expense for these awards over a weighted-average period of approximately two years. Stock Options Stock option compensation expense was $22 million, $23 million and $20 million in 2019, 2018 and 2017, respectively. Options to purchase our shares have a maximum term of ten years and generally vest ratably over a three-year period. The stockStock option compensation cost is calculated under the fair value approach is recognized overusing the vesting period of the stock options. In 2018, 2017 and 2016, compensation expense included $23 million, $20 million and $20 million, respectively, from stock options. We estimateBlack-Scholes option-pricing model to determine the fair value of options granted on the date of grant using the Black-Scholes option-pricing model. Expected volatilities aregrant. 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 during the past three years and the assumptions used in our option-pricing model for such grants are as follows: | | | | 2018 | | 2017 | | 2016 | | | | | | | | | | | | | | | 2019 | 2018 | 2017 | Fair value of options at grant date | | | $ | 15.83 | $ | 13.80 | $ | 10.33 | $ | 14.62 | $ | 15.83 | $ | 13.80 | Dividend yield | | | | 0.1% | | 0.2% | | 0.2% | | 0.2 | % | | 0.1 | % | | 0.2 | % | Expected volatility | | | | 26.6% | | 29.2% | | 33.6% | | 26.6 | % | | 26.6 | % | | 29.2 | % | Risk-free interest rate | | | | 2.6% | | 1.9% | | 1.2% | | 2.5 | % | | 2.6 | % | | 1.9 | % | Expected term (in years) | | | | 4.7 | | 4.7 | | 4.8 | | 4.7 | | 4.7 | | 4.7 |
The stock option activity during 20182019 is provided below: (Options in thousands) | | | | | | Number of Options | | Weighted- Average Exercise Price | Outstanding at beginning of year | | | | | | 9,238 | $ | 37.02 | Granted | | | | | | 1,353 | | 58.22 | Exercised | | | | | | (2,098) | | (35.30) | Forfeited or expired | | | | | | (209) | | (50.49) | Outstanding at end of year | | | | | | 8,284 | $ | 40.58 | Exercisable at end of year | | | | | | 5,391 | $ | 34.95 |
| | | | | | Weighted- | | Number of | Average | (Options in thousands) | Options | Exercise Price | Outstanding at beginning of year | 8,284 | $ | 40.58 | Granted | 1,618 | | 54.27 | Exercised | (877) | | (27.84) | Forfeited or expired | (281) | | (52.76) | Outstanding at end of year | 8,744 | $ | 44.00 | Exercisable at end of year | 5,937 | $ | 38.95 |
At December 29, 2018,January 4, 2020, our outstanding options had an aggregate intrinsic value of $66$45 million and a weighted-average remaining contractual life of six5.7 years. Our exercisable options had an aggregate intrinsic value of $60$45 million and a weighted-average remaining contractual life of five4.5 years at December 29, 2018.January 4, 2020. The total intrinsic value of options exercised during 2019, 2018 and 2017 and 2016 was $22 million, $62 million $29 million and $15$29 million, respectively. Restricted Stock Units We issue restricted stock units settled in both cash and stock (vesting one-third1-third each in the third, fourth and fifth year following the year of the grant), which include the right to receive dividend equivalents. The fair value of these units is based on the trading price of our common stock and is recognized ratably over the vesting period.stock. For units payable in stock, we use the trading price on the grant date, while units payable in cash are remeasured using the price at each reporting period date. The 20182019 activity forfor restricted stock units is provided below: | | Units Payable in Stock | | Units Payable in Cash | | | | | | | | | | | | | Units Payable in Stock | | Units Payable in Cash | | | | Weighted- | | | Weighted- | | | Number of | Average Grant | | Number of | Average Grant | (Shares/Units in thousands) | | Number of Shares | | Weighted- Average Grant Date Fair Value | | Number of Units | | Weighted- Average Grant Date Fair Value | Shares | Date Fair Value | | Units | Date Fair Value | Outstanding at beginning of year, nonvested | | 668 | $ | 40.55 | | 1,263 | $ | 40.75 | 598 | $ | 45.22 | | 1,143 | $ | 45.48 | Granted | | 130 | | 58.17 | | 270 | | 58.24 | 173 | | 54.22 | | 332 | | 54.31 | Vested | | (177) | | (37.02) | | (311) | | (37.40) | (166) | | (39.34) | | (299) | | (39.27) | Forfeited | | (23) | | (45.83) | | (79) | | (45.40) | (62) | | (49.16) | | (72) | | (48.72) | Outstanding at end of year, nonvested | | 598 | $ | 45.22 | | 1,143 | $ | 45.48 | 543 | $ | 49.44 | | 1,104 | $ | 49.61 |
The fair value of the restricted stock unit awards that vested and/or amounts paid under these awards is as follows: | | | | | | | | (In millions) | | | | 2018 | | 2017 | | 2016 | 2019 | 2018 | 2017 | Fair value of awards vested | | | $ | 25 | $ | 27 | $ | 20 | $ | 23 | $ | 25 | $ | 27 | Cash paid | | | | 18 | | 19 | | 12 | | 16 | | 18 | | 19 |
Performance Share Units The fair value of share-based compensation awards accounted for as liabilities includes performance share units, which are paid in cash in the first quarter of the year following vesting. Payouts under performance share units vary based on certain performance criteria generally set for each year of a three-year performance period. The performance share units vest at the end of three years. The fair value of these awardsunits is based on the trading price of our common stock and is remeasured at each reporting period date. The 2018 activity2019 activity for our performance share units is as follows: | | | | | | | | Weighted- | | | Number of | Average Grant | (Units in thousands) | | | | | | Number of Units | | Weighted- Average Grant Date Fair Value | Units | Date Fair Value | Outstanding at beginning of year, nonvested | | | | | | 485 | $ | 41.34 | 404 | $ | 53.63 | Granted | | | | | | 201 | | 58.02 | 262 | | 54.43 | Vested | | | | | | (257) | | (34.50) | (196) | | (49.58) | Forfeited | | | | | | (25) | | (46.74) | (59) | | (53.94) | Outstanding at end of year, nonvested | | | | | | 404 | $ | 53.63 | 411 | $ | 56.03 |
The fair value of the performance share units that vested and/or amounts paid under these awards is as follows: | | | | | | | | (In millions) | | | | 2018 | | 2017 | | 2016 | 2019 | 2018 | 2017 | Fair value of awards vested | | | $ | 12 | $ | 15 | $ | 14 | $ | 9 | $ | 12 | $ | 15 | Cash paid | | | | 11 | | 15 | | 13 | | 10 | | 11 | | 15 |
Note 14.16. Retirement Plans Our defined benefit and contribution plans cover substantially all of our employees. A significant number of our U.S.-based employees participate in the Textron Retirement Plan, which is designed to be a “floor-offset” arrangement with both a defined benefit component and a defined contribution component. The defined benefit component of the arrangement includes the Textron Master Retirement Plan (TMRP) and the Bell Helicopter Textron Master Retirement Plan (BHTMRP), and the defined contribution component is the Retirement Account Plan (RAP). The defined benefit component provides a minimum guaranteed benefit (or “floor” benefit). Under the RAP, participants are eligible to receive contributions from Textron of 2% of their eligible compensation but may not make contributions to the plan. Upon retirement, participants receive the greater of the floor benefit or the value of the RAP. Both the TMRP and the BHTMRP are subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Effective on January 1, 2010, the Textron Retirement Plan was closed to new participants, and employees hired after that date receive an additional 4% annual cash contribution to their Textron Savings Plan account based on their eligible compensation. We also have other funded and unfunded defined benefit pension plans that cover certain of our U.S. and Non-U.S. employees. In addition, several defined contribution plans are sponsored by our various businesses, of which the largest plan is the Textron Savings Plan, which is a qualified 401(k) plan subject to ERISA. Our defined contribution plans cost $130 million, $125 million and $123 million in 2019, 2018 and $110 million in 2018, 2017, and 2016, respectively, which included $13 million $13 million and $10 million, respectively, in contributions to the RAP.RAP for each year. We also provide postretirement benefits other than pensions for certain retired employees in the U.S. that include healthcare, dental care, Medicare Part B reimbursement and life insurance. Periodic Benefit Cost (Credit) The components of net periodic benefit cost (credit) and other amounts recognized in OCI are as follows: | Pension Benefits | Postretirement Benefits Other than Pensions | | | | | | | | | | | | | | | | | | | | | | | | Postretirement Benefits | | | Pension Benefits | Other than Pensions | (In millions) | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | Net periodic benefit cost (credit) | | | | | | | | | | | | | | Net periodic benefit cost | | | | | | | | | | | | | | Service cost | $ | 104 | $ | 100 | $ | 98 | $ | 3 | $ | 3 | $ | 3 | $ | 91 | $ | 104 | $ | 100 | $ | 3 | $ | 3 | $ | 3 | Interest cost | | 306 | | 323 | | 338 | | 10 | | 12 | | 16 | | 326 | | 306 | | 323 | | 10 | | 10 | | 12 | Expected return on plan assets | | (553) | | (507) | | (490) | | — | | — | | — | | (556) | | (553) | | (507) | | — | | — | | — | Amortization of prior service cost (credit) | | 15 | | 15 | | 15 | | (6) | | (8) | | (22) | | 14 | | 15 | | 15 | | (6) | | (6) | | (8) | Amortization of net actuarial loss (gain) | | 153 | | 137 | | 104 | | (1) | | (1) | | — | | 101 | | 153 | | 137 | | (2) | | (1) | | (1) | Net periodic benefit cost (credit) | $ | 25 | $ | 68 | $ | 65 | $ | 6 | $ | 6 | $ | (3) | $ | (24) | $ | 25 | $ | 68 | $ | 5 | $ | 6 | $ | 6 | Other changes in plan assets and benefit obligations recognized in OCI | | | | | | | | | | | | | | | | | | | | | | | | | Current year actuarial loss (gain) | $ | 270 | $ | (11) | $ | 399 | $ | (22) | $ | (7) | $ | (17) | $ | 207 | $ | 270 | $ | (11) | $ | 11 | $ | (22) | $ | (7) | Current year prior service cost (credit) | | 20 | | 1 | | — | | — | | — | | (12) | | Current year prior service cost | | | — | | 20 | | 1 | | — | | — | | — | Amortization of net actuarial gain (loss) | | (153) | | (137) | | (104) | | 1 | | 1 | | — | | (101) | | (153) | | (137) | | 2 | | 1 | | 1 | Amortization of prior service credit (cost) | | (15) | | (15) | | (15) | | 6 | | 8 | | 22 | | (14) | | (15) | | (15) | | 6 | | 6 | | 8 | Business disposition | | (7) | | — | | — | | — | | — | | — | | — | | (7) | | — | | — | | — | | — | Total recognized in OCI, before taxes | $ | 115 | $ | (162) | $ | 280 | $ | (15) | $ | 2 | $ | (7) | $ | 92 | $ | 115 | $ | (162) | $ | 19 | $ | (15) | $ | 2 | Total recognized in net periodic benefit cost (credit) and OCI | $ | 140 | $ | (94) | $ | 345 | $ | (9) | $ | 8 | $ | (10) | $ | 68 | $ | 140 | $ | (94) | $ | 24 | $ | (9) | $ | 8 |
In the first quarter of 2018, we adopted ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This standard requires companies to present only the service cost component of net periodic benefit cost in operating income in the same line as other compensation costs arising from services rendered by the pertinent employees during the period. The other non-service components of net periodic benefit cost must be presented separately from service cost and excluded from operating income. In addition, only the service cost component is eligible for capitalization into inventory. The change in the amount capitalized into inventory was applied prospectively. Using a practical expedient, the other non-service components of net periodic benefit cost (credit) previously disclosed were reclassified to a separate line on a retrospective basis for prior periods. As a result, we reclassifiedof $(29) million and $(39) million of other non-service components for 2017 and 2016, respectively,was reclassified from Cost of sales and Selling and administrative expense to Non-service components of pension and post-retirementpostretirement income, net in the Consolidated Statements of Operations. Obligations and Funded Status All of our plans are measured as of our fiscal year-end. The changes in the projected benefit obligation and in the fair value of plan assets, along with our funded status, are as follows: | Pension Benefits | Postretirement Benefits Other than Pensions | | | | | | | | | | | | | | | | | | Postretirement Benefits | | | Pension Benefits | Other than Pensions | (In millions) | | 2018 | | 2017 | | 2018 | | 2017 | 2019 | 2018 | 2019 | 2018 | Change in projected benefit obligation | | | | | | | | | | | | | | | | | Projected benefit obligation at beginning of year | $ | 8,563 | $ | 7,991 | $ | 289 | $ | 317 | $ | 7,901 | $ | 8,563 | $ | 250 | $ | 289 | Service cost | | 104 | | 100 | | 3 | | 3 | | 91 | | 104 | | 3 | | 3 | Interest cost | | 306 | | 323 | | 10 | | 12 | | 326 | | 306 | | 10 | | 10 | Plan participants’ contributions | | — | | — | | 5 | | 5 | | — | | — | | 5 | | 5 | Actuarial (gains) losses | | (615) | | 494 | | (22) | | (7) | | Actuarial losses (gains) | | | 1,001 | | (615) | | 11 | | (22) | Benefits paid | | (422) | | (413) | | (35) | | (41) | | (421) | | (422) | | (33) | | (35) | Plan amendment | | 20 | | 1 | | — | | — | | — | | 20 | | — | | — | Business disposition | | (15) | | — | | — | | — | | — | | (15) | | — | | — | Foreign exchange rate changes and other | | (40) | | 67 | | — | | — | | 40 | | (40) | | — | | — | Projected benefit obligation at end of year | $ | 7,901 | $ | 8,563 | $ | 250 | $ | 289 | $ | 8,938 | $ | 7,901 | $ | 246 | $ | 250 | Change in fair value of plan assets | | | | | | | | | | | | | | | | | Fair value of plan assets at beginning of year | $ | 7,877 | $ | 6,874 | | | | | $ | 7,122 | $ | 7,877 | | | | | Actual return on plan assets | | (335) | | 1,011 | | | | | | 1,350 | | (335) | | | | | Employer contributions* | | 39 | | 345 | | | | | | Employer contributions | | | 38 | | 39 | | | | | Benefits paid | | (422) | | (413) | | | | | | (421) | | (422) | | | | | Foreign exchange rate changes and other | | (37) | | 60 | | | | | | 40 | | (37) | | | | | Fair value of plan assets at end of year | $ | 7,122 | $ | 7,877 | | | | | $ | 8,129 | $ | 7,122 | | | | | Funded status at end of year | $ | (779) | $ | (686) | $ | (250) | $ | (289) | $ | (809) | $ | (779) | $ | (246) | $ | (250) |
*In 2017, employer contributions included a $300 million discretionary contribution to fund a U.S. pension plan.
Actuarial losses (gains) losses reflected in the table above for both 2019 and 2018 and 2017 were largely the result of changes in the discount rate utilized and asset return rate experienced as compared with our assumptions. utilized. Amounts recognized in our balance sheets are as follows: | Pension Benefits | Postretirement Benefits Other than Pensions | | | | | | | | | | | | | | | | | | Postretirement Benefits | | | Pension Benefits | Other than Pensions | (In millions) | | 2018 | | 2017 | | 2018 | | 2017 | 2019 | 2018 | 2019 | 2018 | Non-current assets | $ | 112 | $ | 106 | $ | — | $ | — | $ | 152 | $ | 112 | $ | — | $ | — | Current liabilities | | (27) | | (27) | | (28) | | (31) | | (27) | | (27) | | (26) | | (28) | Non-current liabilities | | (864) | | (765) | | (222) | | (258) | | (934) | | (864) | | (220) | | (222) | Recognized in Accumulated other comprehensive loss, pre-tax: | | | | | | | | | | | | | | | | | Net loss (gain) | | 2,157 | | 2,055 | | (34) | | (13) | | 2,271 | | 2,157 | | (21) | | (34) | Prior service cost (credit) | | 69 | | 64 | | (27) | | (33) | | 55 | | 69 | | (20) | | (27) |
The accumulated benefit obligation for all defined benefit pension plans was $8.5 billion and $7.5 billion at January 4, 2020 and $8.1 billion at December 29, 2018, and December 30, 2017, respectively, which included $369$404 million and $404$369 million, respectively, in accumulated benefit obligations for unfunded plans where funding is not permitted or in foreign environments where funding is not feasible. Pension plans with accumulated benefit obligation exceeding the fair value of plan assets are as follows: | | | | | | (In millions) | | | | | | 2018 | | 2017 | 2019 | 2018 | Accumulated benefit obligation | | | | | $ | 7,137 | $ | 670 | $ | 8,050 | $ | 7,137 | Fair value of plan assets | | | | | | 6,589 | | 237 | | 7,500 | | 6,589 |
Pension plans with projected benefit obligation exceeding the fair value of plan assets are as follows: | | | | | | (In millions) | | | | | | 2018 | | 2017 | 2019 | 2018 | Projected benefit obligation | | | | | $ | 7,481 | $ | 8,078 | $ | 8,462 | $ | 7,481 | Fair value of plan assets | | | | | | 6,589 | | 7,285 | | 7,500 | | 6,589 |
Assumptions The weighted-average assumptions we use for our pension and postretirement plans are as follows: | Pension Benefits | Postretirement Benefits Other than Pensions | | | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | Postretirement Benefits | | | | Pension Benefits | | Other than Pensions | | | | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | Net periodic benefit cost | | | | | | | | | | | | | | | | | | | | | | | | | Discount rate | | 3.67% | | 4.13% | | 4.66% | | 3.50% | | 4.00% | | 4.50% | 4.24 | % | 3.67 | % | 4.13 | % | 4.25 | % | 3.50 | % | 4.00 | % | Expected long-term rate of return on assets | | 7.58% | | 7.57% | | 7.58% | | | | | | | 7.55 | % | 7.58 | % | 7.57 | % | | | | | | | Rate of compensation increase | | 3.50% | | 3.50% | | 3.49% | | | | | | | 3.50 | % | 3.50 | % | 3.50 | % | | | | | | | Benefit obligations at year-end | | | | | | | | | | | | | | | | | | | | | | | | | Discount rate | | 4.24% | | 3.66% | | 4.13% | | 4.25% | | 3.50% | | 4.00% | 3.36 | % | 4.24 | % | 3.66 | % | 3.20 | % | 4.25 | % | 3.50 | % | Rate of compensation increase | | 3.50% | | 3.50% | | 3.50% | | | | | | | 3.50 | % | 3.50 | % | 3.50 | % | | | | | | | Interest crediting rate for cash balance plans | | 5.25% | | 5.25% | | 5.25% | | | | | | | 5.25 | % | 5.25 | % | 5.25 | % | | | | | | |
Our assumed healthcare cost trend rate for both the medical and prescription drug cost was 7.00% in both 2019 and 7.25% in 2018 and 2017, respectively.2018. We expect this rate to gradually decline to 5% by 2024 where we assume it will remain. Pension Assets The expected long-term rate of return on plan assets is determined based on a variety of considerations, including the established asset allocation targets and expectations for those asset classes, historical returns of the plans’ assets and other market considerations. We invest our pension assets with the objective of achieving a total rate of return over the long term that will be sufficient to fund future pension obligations and to minimize future pension contributions. We are willing to tolerate a commensurate level of risk to achieve this objective based on the funded status of the plans and the long-term nature of our pension liability. Risk is controlled by maintaining a portfolio of assets that is diversified across a variety of asset classes, investment styles and investment managers. Where possible, investment managers are prohibited from owning our securities in the portfolios that they manage on our behalf. For U.S. plan assets, which represent the majority of our plan assets, asset allocation target ranges are established consistent with our investment objectives, and the assets are rebalanced periodically. For Non-U.S. plan assets, allocations are based on expected cash flow needs and assessments of the local practices and markets. Our target allocation ranges are as follows: U.S. Plan Assets
| | | Domestic equity securities
| | 17% to 33%
| International equity securities
| | 8% to 19%
| Global equities
| | 5% to 17%
| Debt securities
| | 27% to 38%
| Real estate
| | 7% to 13%
| Private investment partnerships
| | 5% to 11%
| Hedge funds
| | 0%
| Non-U.S. Plan Assets
| | | Equity securities
| | 51% to 74%
| Debt securities
| | 26% to 46%
| Real estate
| | 0% to 13%
|
| | | | | | U.S. Plan Assets | | | | | | Domestic equity securities | 17 | % | to | 33 | % | International equity securities | 8 | % | to | 19 | % | Global equities | 5 | % | to | 17 | % | Debt securities | 27 | % | to | 38 | % | Real estate | 7 | % | to | 13 | % | Private investment partnerships | 5 | % | to | 11 | % | Non-U.S. Plan Assets | | | | | | Equity securities | 51 | % | to | 75 | % | Debt securities | 25 | % | to | 45 | % | Real estate | 0 | % | to | 13 | % |
The fair value of our pension plan assets by major category and valuation method is as follows: | | December 29, 2018 | | December 30, 2017 | | | | | | | | | | | | | | | | | | | | | | January 4, 2020 | December 29, 2018 | (In millions) | | Level 1 | | Level 2 | | Level 3 | | Not Subject to Leveling | | Level 1 | | Level 2 | | Level 3 | | Not Subject to Leveling | Level 1 | Level 2 | Level 3 | Not Subject to Leveling | Level 1 | Level 2 | Level 3 | Not Subject to Leveling | Cash and equivalents | $ | 19 | $ | 19 | $ | — | $ | 113 | $ | 22 | $ | 10 | $ | — | $ | 149 | $ | 18 | $ | 12 | $ | — | $ | 174 | $ | 19 | $ | 19 | $ | — | $ | 113 | Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Domestic | | 1,256 | | — | | — | | 828 | | 1,404 | | — | | — | | 665 | | 1,257 | | — | | — | | 1,160 | | 1,256 | | — | | — | | 828 | International | | 835 | | — | | — | | 450 | | 919 | | — | | — | | 636 | | 929 | | — | | — | | 780 | | 835 | | — | | — | | 450 | Mutual funds | | 266 | | — | | — | | — | | 387 | | — | | — | | — | | 176 | | — | | — | | — | | 266 | | — | | — | | — | Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | National, state and local governments | | 366 | | 290 | | — | | 53 | | 645 | | 289 | | — | | 56 | | 414 | | 308 | | — | | 56 | | 366 | | 290 | | — | | 53 | Corporate debt | | — | | 908 | | — | | 220 | | — | | 912 | | — | | 148 | | 14 | | 1,062 | | — | | 240 | | — | | 908 | | — | | 220 | Asset-backed securities | | — | | — | | — | | 104 | | — | | — | | — | | 103 | | — | | — | | — | | 18 | | — | | — | | — | | 104 | Private investment partnerships | | — | | — | | — | | 650 | | — | | — | | — | | 591 | | — | | — | | — | | 745 | | — | | — | | — | | 650 | Real estate | | — | | — | | 460 | | 285 | | — | | — | | 460 | | 284 | | — | | — | | 473 | | 293 | | — | | — | | 460 | | 285 | Hedge funds | | — | | — | | — | | — | | — | | — | | — | | 197 | | Total | $ | 2,742 | $ | 1,217 | $ | 460 | $ | 2,703 | $ | 3,377 | $ | 1,211 | $ | 460 | $ | 2,829 | $ | 2,808 | $ | 1,382 | $ | 473 | $ | 3,466 | $ | 2,742 | $ | 1,217 | $ | 460 | $ | 2,703 |
Cash and equivalents, equity securities and debt securities include comingled funds, which represent investments in funds offered to institutional investors that are similar to mutual funds in that they provide diversification by holding various equity and debt securities. Since these comingled funds are not quoted on any active market, they are priced based on the relative value of the underlying equity and debt investments and their individual prices at any given time; these funds are not subject to leveling within the fair value hierarchy. Debt securities are valued based on same day actual trading prices, if available. If such prices are not available, we use a matrix pricing model with historical prices, trends and other factors. Private investment partnerships represents interests in funds which invest in equity, debt and other financial assets. These funds are generally not publicly traded so the interests therein are valued using income and market methods that include cash flow projections and market multiples for various comparable investments. Real estate includes owned properties and limited partnership interests in real estate partnerships. Owned properties are valued using certified appraisals at least every three years that are updated at least annually by the real estate investment manager based on current market trends and other available information. These appraisals generally use the standard methods for valuing real estate, including forecasting income and identifying current transactions for comparable real estate to arrive at a fair value. Limited partnership interests in real estate partnerships are valued similarly to private investment partnerships, with the general partner using standard real estate valuation methods to value the real estate properties and securities held within their portfolios. Neither private investment nor real estate partnerships are subject to leveling within the fair value hierarchy. The table below presents a reconciliation of the fair value measurements for owned real estate properties, which use significant unobservable inputs (Level 3): | | | | | | (In millions) | | | | | | 2018 | | 2017 | 2019 | 2018 | Balance at beginning of year | | | | | $ | 460 | $ | 494 | $ | 460 | $ | 460 | Unrealized gains (losses), net | | | | | | 13 | | (6) | | Unrealized gains, net | | | 7 | | 13 | Realized gains, net | | | | | | 12 | | 24 | | 5 | | 12 | Purchases, sales and settlements, net | | | | | | (25) | | (52) | | 1 | | (25) | Balance at end of year | | | | | $ | 460 | $ | 460 | $ | 473 | $ | 460 |
Estimated Future Cash Flow Impact Defined benefits under salaried plans are based on salary and years of service. Hourly plans generally provide benefits based on stated amounts for each year of service. Our funding policy is consistent with applicable laws and regulations. In 2019,2020, we expect to contribute approximately $50 million to our pension plans and the RAP. Benefit payments provided below reflect expected future employee service, as appropriate, and are expected to be paid, net of estimated participant contributions. These payments are based on the same assumptions used to measure our benefit obligation at the end of 2018.2019. While pension benefit payments primarily will be paid out of qualified pension trusts, we will pay postretirement benefits other than pensions out of our general corporate assets. Benefit payments that we expect to pay on an undiscounted basis are as follows: | | | | | | | | | | | | | | (In millions) | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024-2028 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025-2029 | Pension benefits | $ | 418 | $ | 424 | $ | 432 | $ | 441 | $ | 449 | $ | 2,379 | $ | 426 | $ | 433 | $ | 441 | $ | 450 | $ | 460 | $ | 2,426 | Post-retirement benefits other than pensions | | 29 | | 27 | | 26 | | 25 | | 24 | | 96 | | Postretirement benefits other than pensions | | | 26 | | 25 | | 24 | | 23 | | 22 | | 88 |
Note 15.17. Special Charges Special charges recorded by segment and type of cost are as follows: 2018 Restructuring Plan
| | | | | | | | | | | | | | | | | | Acquisition | | | | | | Contract | | Integration and | | | Severance | Terminations | Asset | Transaction | | (In millions) | Costs | and Other | Impairments | Costs | Total | 2019 | | | | | | | | | | | Industrial | $ | 21 | $ | 11 | $ | 6 | $ | — | $ | 38 | Textron Aviation | | 25 | | — | | 4 | | — | | 29 | Corporate | | — | | — | | — | | 5 | | 5 | Total special charges | $ | 46 | $ | 11 | $ | 10 | $ | 5 | $ | 72 | 2018 | | | | | | | | | | | Industrial | $ | 8 | $ | 18 | $ | 47 | $ | — | $ | 73 | 2017 | | | | | | | | | | | Industrial | $ | 26 | $ | 19 | $ | 1 | $ | 12 | $ | 58 | Textron Aviation | | 11 | | — | | 17 | | — | | 28 | Bell | | 3 | | 8 | | 12 | | — | | 23 | Textron Systems | | 6 | | (1) | | 16 | | — | | 21 | Total special charges | $ | 46 | $ | 26 | $ | 46 | $ | 12 | $ | 130 |
In December 2019, we recorded $72 million in special charges, primarily in connection with a restructuring plan that was designed to reduce costs and improve overall operating efficiency through headcount reductions, facility consolidations and other actions in the Industrial and Textron Aviation segments. In the Industrial segment, in connection with the strategic review of our Kautex business, cost reduction and other measures were initiated to maximize its operating margin, and we took further cost cutting actions in our Textron Specialized Vehicles business. In the Textron Aviation segment, we conducted a review of our ongoing workforce requirements, resulting in targeted headcount reductions and other actions to realign our cost structure. Headcount reductions totaled approximately 1,000 positions and included business support and administrative functions within both segments. The headcount reductions at Textron Aviation were primarily related to engineering positions, reflecting completion of the Longitude certification activities and reduced requirements for ongoing development programs. This plan was substantially completed at the end of 2019. In the fourth quarter of 2018, we recorded $73 million in special charges in connection with a plan to restructure the Textron Specialized Vehicles businesses within our Industrial segment. These businesses have undergone significant changes since the acquisition of Arctic Cat as we have expanded the product portfolio and integrated manufacturing operations and retail distribution. In the third quarter of 2018, the operating results for these businesses were significantly below our expectations as dealer sell-through lagged despite the introduction of new products into our dealer network. Based on our review and assessment of the acquired dealer network and go-to-market strategy for the Textron Off Road and Arctic Cat brands in the fourth quarter of 2018, along with a review of the other businesses within the product line, we initiated a restructuring plan. This plan included product rationalization, closure of several factory-direct turf-care branch locations and a manufacturing facility and headcount reductions. Under this plan, we recorded asset impairment charges of $47 million, primarily intangible assets related to product rationalization, contract termination and other costs of $18 million and severance costs of $8 million. Headcount reductions totaled approximately 400 positions, representing 10% of Textron Specialized Vehicles’ workforce. The actions taken under thisThis plan werewas substantially completed at the end of 2018. 2017 and 2016 Restructuring Plans
In 2017, and 2016, we recorded special charges oftotaled $130 million, largely reflecting $90 million and $123 million, respectively, related to aan enterprise-wide restructuring plan that was initiated in 2016 to restructure and realign our businesses by implementing headcount reductions, facility consolidations and other actions in order to improve overall operating efficiency across Textron. The 2016 plan was completed in 2017. Special charges related to this plan included $97 million of severance costs, $84 million of asset impairments and $32 million in contract terminations and other costs. Of these amounts, $83 million was incurred at Textron Systems, $63 million at Textron Aviation, $38 million at Industrial, $28 million at Bell and $1 million at Corporate. The total headcount reduction under thisfor a restructuring plan was approximately 2,100 positions, representing 5%initiated in the first quarter of our workforce. In2017 in connection with the acquisition of Arctic Cat as discussed in Note 2, we initiated a restructuring plan2. Both of these plans were completed in the first quarter of 2017 and recorded restructuring charges of $28 million in 2017, which included $19 million of severance costs, largely related to change-of-control provisions, and $9 million of contract termination and other costs. In addition, we recorded $12 million of acquisition-related2017.
Acquisition integration and transaction costs include $5 million in 2017.2019 related to the strategic review of the Kautex business and $12 million in 2017 related to the Arctic Cat acquisition. For 2017 and 2016, special charges recorded by segment and type of cost are as follows:
(In millions) | | Severance Costs | | Asset Impairments | | Contract Terminations and Other | | Acquisition Integration/ Transaction Costs | | Total Special Charges | 2017 | | | | | | | | | | | Industrial | $ | 26 | $ | 1 | $ | 19 | $ | 12 | $ | 58 | Textron Aviation | | 11 | | 17 | | — | | — | | 28 | Bell | | 3 | | 12 | | 8 | | — | | 23 | Textron Systems | | 6 | | 16 | | (1) | | — | | 21 | | $ | 46 | $ | 46 | $ | 26 | $ | 12 | $ | 130 | 2016 | | | | | | | | | | | Industrial | $ | 17 | $ | 2 | $ | 1 | $ | — | $ | 20 | Textron Aviation | | 33 | | 1 | | 1 | | — | | 35 | Bell | | 4 | | 1 | | — | | — | | 5 | Textron Systems | | 15 | | 34 | | 13 | | — | | 62 | Corporate | | 1 | | — | | — | | — | | 1 | | $ | 70 | $ | 38 | $ | 15 | $ | — | $ | 123 |
Restructuring Reserve Our restructuring reserve activity is summarized below: | | | | | | | | | | | | Contract | | | | | Severance | Terminations | | | (In millions) | | | | | | Severance Costs | | Contract Terminations and Other | | Total | Costs | and Other | Total | Balance at December 31, 2016 | | | | | $ | 50 | $ | 13 | $ | 63 | | Provision for 2016 plan | | | | | | 33 | | 25 | | 58 | | Provision for Arctic Cat plan | | | | | | 19 | | 9 | | 28 | | Cash paid | | | | | | (72) | | (15) | | (87) | | Reversals* | | | | | | (6) | | (8) | | (14) | | Non-cash utilization | | | | | | — | | (4) | | (4) | | Balance at December 30, 2017 | | | | | | 24 | | 20 | | 44 | $ | 24 | $ | 20 | $ | 44 | Provision for 2018 plan | | | | | | 8 | | 18 | | 26 | | 8 | | 18 | | 26 | Cash paid | | | | | | (21) | | (9) | | (30) | | (21) | | (9) | | (30) | (Reversals)/provision for prior plans | | | | | | (3) | | 3 | | — | | (3) | | 3 | | — | Balance at December 29, 2018 | | | | | $ | 8 | $ | 32 | $ | 40 | | 8 | | 32 | | 40 | Provision for 2019 plan | | | 46 | | 11 | | 57 | Cash paid | | | (8) | | (23) | | (31) | Foreign currency translation | | | — | | (1) | | (1) | Balance at January 4, 2020 | | $ | 46 | $ | 19 | $ | 65 |
*Primarily related to favorable contract negotiations in the Textron Systems segment.
The majority of the remaining cash outlays of $40$65 million areis expected to be paid in 2019.the first half 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 16.18. Income Taxes We conduct business globally and, as a result, file numerous consolidated and separate income tax returns within and outside the U.S. For all of our U.S. subsidiaries, we file a consolidated federal income tax return. Income from continuing operations before income taxes is as follows: (In millions) | | | | 2018 | | 2017 | | 2016 | U.S. | | | $ | 557 | $ | 428 | $ | 652 | Non-U.S. | | | | 827 | | 334 | | 224 | Income from continuing operations before income taxes | | | $ | 1,384 | $ | 762 | $ | 876 |
| | | | | | | (In millions) | 2019 | 2018 | 2017 | U.S. | $ | 668 | $ | 557 | $ | 428 | Non-U.S. | | 274 | | 827 | | 334 | Income from continuing operations before income taxes | $ | 942 | $ | 1,384 | $ | 762 |
Income tax expense for continuing operations is summarized as follows: | | | | | | | | (In millions) | | | | 2018 | | 2017 | | 2016 | 2019 | 2018 | 2017 | Current expense (benefit): | | | | | | | | | | | | | | | Federal | | | $ | 3 | $ | 29 | $ | (74) | $ | (48) | $ | 3 | $ | 29 | State | | | | 9 | | (9) | | 18 | | 16 | | 9 | | (9) | Non-U.S. | | | | 101 | | 79 | | 41 | | | | | | 113 | | 99 | | (15) | | Non-U.S. | | | 70 | | 101 | | 79 | | | | 38 | | 113 | | 99 | Deferred expense (benefit): | | | | | | | | | | | | | | | Federal | | | | 60 | | 358 | | 47 | | 112 | | 60 | | 358 | State | | | | (5) | | (14) | | (7) | | (20) | | (5) | | (14) | Non-U.S. | | | | (6) | | 13 | | 8 | | | | | | 49 | | 357 | | 48 | | Non-U.S. | | | (3) | | (6) | | 13 | | | | 89 | | 49 | | 357 | Income tax expense | | | $ | 162 | $ | 456 | $ | 33 | $ | 127 | $ | 162 | $ | 456 |
The following table reconciles the federal statutory income tax rate to our effective income tax rate for continuing operations: | | | | 2018 | | 2017 | | 2016 | | | | | | | | | | | | 2019 | 2018 | 2017 | U.S. Federal statutory income tax rate | | | | 21.0% | | 35.0% | | 35.0% | 21.0 | % | 21.0 | % | 35.0 | % | Increase (decrease) resulting from: | | | | | | | | | | | | | | | U.S. tax reform enactment impact | | | | (1.0) | | 34.9 | | — | | Federal tax settlement of 1998 to 2008 | | | | — | | — | | (23.5) | | Research and development tax credits | | (7.6) | (2.9) | (2.6) | U.S. amended returns tax rate differential | | (1.2) | — | State income taxes (net of federal impact) | | | | (0.1) | | (1.9) | | 0.8 | 0.3 | (0.1) | (1.9) | Non-U.S. tax rate differential and foreign tax credits | | | | 1.3 | | (2.9) | | (2.7) | 1.4 | 1.3 | (2.9) | U.S. tax reform enactment impact | | — | (1.0) | 34.9 | Domestic manufacturing deduction | | | | — | | (1.1) | | (1.6) | — | — | (1.1) | Research credit* | | | | (2.9) | | (2.6) | | (3.2) | | Gain on business disposition, primarily in non-U.S. jurisdictions | | | | (5.0) | | — | | — | — | (5.0) | — | Other, net | | | | (1.6) | | (1.6) | | (1.0) | (0.4) | (1.6) | Effective income tax rate | | | | 11.7% | | 59.8% | | 3.8% | 13.5 | % | 11.7 | % | 59.8 | % |
*Includes
In 2019, the effective tax rate was favorably impacted by $61 million in benefits recognized for additional tax credits related to prior years as a favorable impactresult of (1.8)% inthe completion of a research and development tax credit analysis. In 2018, forthe effective tax rate was favorably impacted by a $25 million upon the reassessment of reserves for uncertain tax positions. positions related to research and development tax credits. The Tax Cuts and Jobs Act (the “Tax Act”)Tax Act) was enacted on December 22, 2017. Among other things, the Tax Act reduced the U.S. federal corporate tax rate from 35% to 21% and required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. We reasonably estimated the effects of the Tax Act and recorded provisional amounts in the fourth quarter of 2017 totaling $266 million. Our provisional estimate included a $154 million charge to remeasure our U.S. federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. In addition, the provisional estimate included $112 million in expense for the one-time transition tax. This tax was based on approximately $1.6 billion of our post-1986 earnings and profits that were previously deferred from U.S. income taxes, and on the amount of those earnings held in cash and other specified net assets. In 2018, we finalized the 2017 impacts of the Tax Act, specifically the remeasurement of our U.S. Federal deferred tax assets and liabilities and the post-1986 earnings and profits transition tax, which resulted in a $14 million benefit. For 2016, the provision for income taxes included a benefit of $319 million to reflect the settlement with the U.S. Internal Revenue Service Office of Appeals for our 1998 to 2008 tax years, which resulted in a $206 million benefit attributable to continuing operations and $113 million attributable to discontinued operations.
Unrecognized Tax Benefits Our unrecognized tax benefits represent tax positions for which reserves have been established, with unrecognized state tax benefits reflected net of applicable tax benefits. At the end of 2019, 2018 and 2017, if our unrecognized tax benefits were recognized in future periods, they would favorably impact our effective tax rate. A reconciliation of ourthese unrecognized tax benefits is as follows: | | | | | | | | (In millions) | | | | December 29, 2018 | | December 30, 2017 | | December 31, 2016 | 2019 | 2018 | 2017 | Balance at beginning of year | | | $ | 182 | $ | 186 | $ | 401 | $ | 141 | $ | 182 | $ | 186 | Additions for tax positions related to current year | | | | 5 | | 12 | | 12 | | 9 | | 5 | | 12 | Additions for tax positions of prior years | | | | 13 | | 16 | | — | | 74 | | 13 | | 16 | Reductions for settlements and expiration of statute of limitations | | | | (22) | | (17) | | (219) | | (1) | | (22) | | (17) | Reductions for tax positions of prior years* | | | | (37) | | (15) | | (8) | | Reductions for tax positions of prior years | | | (2) | | (37) | | (15) | Balance at end of year | | | $ | 141 | $ | 182 | $ | 186 | $ | 221 | $ | 141 | $ | 182 |
*In 2019, additional tax positions primarily reflect the completion of a research and development tax credit analysis for tax credits related to prior years. In 2018, certain tax positions related to research and development tax credits were reduced by $25 million based on new information, including interactions with the tax authorities and recent audit settlements.
At the end of 2018, 2017 and 2016, if these unrecognized tax benefits were recognized in future periods, they would favorably impact our effective tax rate.
In the normal course of business, we are subject to examination by tax authorities throughout the world. We are generally no longer subject to U.S. federal tax examinations for years before 2014, state and local income tax examinations for years before 2009,2012, and non-U.S. income tax examinations for years before 2011. In 2019, we filed U.S. federal amended returns for 2012 and 2013 for additional research and development tax credits that are subject to examination. Deferred Taxes The significant components of our net deferred tax assets/(liabilities) are provided below: | | | | | | | | January 4, | December 29, | (In millions) | | | | | | December 29, 2018 | | December 30, 2017 | 2020 | 2018 | Obligation for pension and postretirement benefits | | | | | $ | 272 | $ | 247 | $ | 289 | $ | 272 | Accrued expenses (a) | | | | | | 236 | | 260 | | U.S. operating loss and tax credit carryforwards (b)(a) | | | 235 | | 212 | Accrued liabilities (b) | | | 214 | | 236 | Deferred compensation | | | | | | 96 | | 103 | | 95 | | 96 | U.S. operating loss and tax credit carryforwards (b)(a) | | | | | | 212 | | 208 | | Non-U.S. operating loss and tax credit carryforwards (c) | | | | | | 69 | | 72 | | Operating lease liabilities (c) | | | 70 | | — | Non-U.S. operating loss and tax credit carryforwards (d) | | | 52 | | 69 | Valuation allowance on deferred tax assets | | | | | | (157) | | (148) | | (145) | | (157) | Amortization of goodwill and other intangibles | | | (160) | | (143) | Property, plant and equipment, principally depreciation | | | | | | (142) | | (125) | | (153) | | (142) | Amortization of goodwill and other intangibles | | | | | | (143) | | (154) | | Leasing transactions | | | | | | (77) | | (81) | | Operating lease right-of-use assets (c) | | | (68) | | — | Other leasing transactions, principally leveraged leases | | | (80) | | (77) | Prepaid pension benefits | | | | | | (21) | | (21) | | (29) | | (21) | Other, net | | | | | | (23) | | (13) | | (51) | | (23) | Deferred taxes, net | | | | | $ | 322 | $ | 348 | $ | 269 | $ | 322 |
(a) | At January 4, 2020, U.S. operating loss and tax credit carryforward benefits of $206 million expire through 2039 if not utilized and $29 million may be carried forward indefinitely. |
(b) | Accrued liabilities include warranty reserves, self-insured liabilities and interest. |
(c) | With the adoption of ASC 842 in 2019, as discussed in Note 1, we established a deferred tax asset for the operating lease liabilities and a deferred tax liability for the right-of-use assets. |
(d) | At January 4, 2020, non-U.S. operating loss and tax credit carryforward benefits of $20 million expire through 2039 if not utilized and $32 million may be carried forward indefinitely. |
(a)Accrued expenses included warranty reserves, self-insured liabilities and interest.
(b)At December 29, 2018, U.S. operating loss and tax credit carryforward benefits of $186 million expire through 2038 if not utilized and $26 million may be carried forward indefinitely.
(c)At December 29, 2018, non-U.S. operating loss and tax credit carryforward benefits of $16 million expire through 2038 if not utilized and $53 million may be carried forward indefinitely.
We believe earnings during the period when the temporary differences become deductible will be sufficient to realize the related future income tax benefits. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not more than likely, a valuation allowance is provided. The following table presents the breakdown of our deferred taxes: | | | | | | | | January 4, | December 29, | (In millions) | | | | | | December 29, 2018 | | December 30, 2017 | 2020 | 2018 | Manufacturing group: | | | | | | | | | | | | | Deferred tax assets, net of valuation allowance | | | | | $ | 397 | $ | 430 | $ | 341 | $ | 397 | Deferred tax liabilities | | | | | | (5) | | (7) | | (4) | | (5) | Finance group – Deferred tax liabilities | | | | | | (70) | | (75) | | (68) | | (70) | Net deferred tax asset | | | | | $ | 322 | $ | 348 | $ | 269 | $ | 322 |
At December 29, 2018 and December 30, 2017, non-U.S.Non-U.S. and U.S. state income taxes have not been provided for on basis differences in certain investments, primarily as a result of $1.6 billion of unremitted earnings in foreign subsidiaries totaling $1.7 billion at January 4, 2020 and $1.6 billion at December 29, 2018, which are indefinitely
reinvested. Should these earnings be distributed in the future in the form of dividends or otherwise, we would be subject to withholding and income taxes payable to various non-U.S. jurisdictions and U.S. states. Determination of the deferred tax liability associated with indefinitely reinvested earnings is not practicable due to multiple factors, including the complexity of non-U.S. tax laws and tax treaty interpretations, exchange rate fluctuations, and the uncertainty of available credits or exemptions under U.S. federal and state tax laws. Note 17.19. 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. In the ordinary course of business, we enter into standby letter of credit agreements and surety bonds with financial institutions to meet various performance and other obligations. These outstanding letter of credit arrangements and surety bonds aggregated to approximately $247 million and $333 million at January 4, 2020 and $380 million at December 29, 2018, and December 30, 2017, respectively. Environmental Remediation As with other industrial enterprises engaged in similar businesses, we are involved in a number of remedial actions under various federal and state laws and regulations relating to the environment that impose liability on companies to clean up, or contribute to the cost of cleaning up, sites on which hazardous wastes or materials were disposed or released. Our accrued environmental liabilities relate to installation of remediation systems, disposal costs, U.S. Environmental Protection Agency oversight costs, legal fees, and operating and maintenance costs for both currently and formerly owned or operated facilities. Circumstances that can affect the reliability and precision of the accruals include the identification of additional sites, environmental regulations, level of cleanup required, technologies available, number and financial condition of other contributors to remediation and the time period over which remediation may occur. We believe that any changes to the accruals that may result from these factors and uncertainties will not have a material effect on our financial position or results of operations. Based upon information currently available, we estimate that our potential environmental liabilities are within the range of $45$40 million to $150 million. At December 29, 2018,January 4, 2020, environmental reserves of approximately $81$76 million have been established to address these specific estimated liabilities. We estimate that we will likely pay our accrued environmental remediation liabilities over the next ten years and have classified $14 million as current liabilities. Expenditures to evaluate and remediate contaminated sites were $13 million, $13 million and $18 million in 2019, 2018 and $15 million in 2018, 2017, and 2016, respectively. Leases
Rental expense was $114 million, $122 million and $126 million in 2018, 2017 and 2016, respectively. Future minimum rental commitments for noncancelable operating leases in effect at December 29, 2018 totaled $64 million for 2019, $45 million for 2020, $32 million for 2021, $26 million for 2022, $19 million for 2023 and $115 million thereafter. The total future minimum rental receipts under noncancelable subleases at December 29, 2018 totaled $18 million.
Note 18.20. Supplemental Cash Flow Information Our cash payments and receipts are as follows: | | | | | | | | (In millions) | | | | 2018 | | 2017 | | 2016 | 2019 | 2018 | 2017 | Interest paid: | | | | | | | | | | | | | | | Manufacturing group | | | $ | 132 | $ | 133 | $ | 132 | $ | 138 | $ | 132 | $ | 133 | Finance group | | | | 25 | | 29 | | 32 | | 23 | | 25 | | 29 | Net taxes paid/(received): | | | | | | | | | | | | | | | Manufacturing group | | | | 129 | | (16) | | 163 | | 120 | | 129 | | (16) | Finance group | | | | 17 | | 48 | | 11 | | 1 | | 17 | | 48 |
Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors and the Shareholders of Textron Inc. Opinion on the Financial Statements We have audited the accompanying Consolidated Balance Sheets of Textron Inc. (the Company) as of January 4, 2020 and December 29, 2018, and December 30, 2017, the related Consolidated Statements of Operations, Comprehensive Income, Shareholders’ Equity and Cash Flows for each of the three years in the period ended December 29, 2018,January 4, 2020, and the related notes and financial statement schedule contained on page 7577 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 4, 2020 and December 29, 2018 and December 30, 2017 and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2018,January 4, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 29, 2018,January 4, 2020, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 14, 201925, 2020 expressed an unqualified opinion thereon. Adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) As discussed in Note 1 to the consolidated financial statements, the Company changed its method for recognizing revenue as a result of the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and its related amendments effective December 31, 2017. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. | | | | | Long Term Contracts | Description of the Matter | | As described in Note 1 to the consolidated financial statements, revenues under long-term contracts with the U.S. Government are generally recognized over time using the cost-to-cost method of accounting. Under this method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion, and revenue is recorded proportionally as costs are incurred. Contract costs, which are estimated utilizing current contract specifications and expected engineering requirements, typically are incurred over a period of several years, and the estimation of these costs at completion requires substantial judgment. The Company’s cost estimation process is based on professional knowledge and experience of engineers and program managers along with finance professionals. The Company updates its projections of costs quarterly or more frequently when circumstances significantly change. When adjustments are required, any changes from prior estimates are recognized using the cumulative catch-up method with the impact of the change from inception-to-date of the contract recorded in the current period and required disclosure is provided in the consolidated financial statements. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. | | | Auditing the Company’s estimated costs at completion was challenging and complex due to the judgement involved in evaluating management’s assumptions and key estimates over the duration of long-term contracts. The estimated costs at completion consider risks surrounding the Company’s ability to achieve the technical requirements and specifications of the contract, schedule, and other cost elements of the contract, and depend on whether the Company is able to successfully retire risks surrounding such aspects of the contract. | How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls related to the Company’s revenue recognition process, including controls over management’s review of the estimated costs at completion and related key assumptions and management’s review that the data underlying the estimated costs at completion was complete and accurate. | | | To test the accuracy of the Company’s estimated costs at completion, our audit procedures included, among others, evaluating the key assumptions used by management to determine such estimate. This included evaluating the historical accuracy of management’s estimates by comparing planned costs to actual costs incurred to date. We also tested the completeness and accuracy of the underlying data back to source documents and contracts. | | | Defined Benefit Pension Obligations | Description of the Matter | | As described in Note 16 to the consolidated financial statements, at January 4, 2020, the aggregate qualified defined benefit pension obligation was $8.9 billion and exceeded the fair value of pension plan assets of $8.1 billion, resulting in an unfunded defined benefit pension obligation of $809 million. As explained in Note 1 to the consolidated financial statements, the Company updates the estimates used to measure the defined benefit pension obligation and plan assets annually in the fourth quarter or upon a remeasurement event to reflect the actual return on plan assets and updated actuarial assumptions. | | | Auditing the defined benefit pension obligations was complex due to the highly judgmental nature of the actuarial assumptions (e.g., discount rate, mortality rate, longevity, expected return on plan assets) used in the measurement process. These assumptions have a significant effect on the projected benefit obligation. |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls that address the risks of material misstatement relating to the measurement and valuation of the defined benefit pension obligation. For example, we tested controls over management’s review of the defined benefit pension obligation actuarial calculations, the significant actuarial assumptions, and the data inputs provided to the actuaries. | | | To test the defined benefit pension obligation, our audit procedures included, among others, evaluating the methodology used, the significant actuarial assumptions discussed above, and the underlying data used by management and its actuaries. We compared the actuarial assumptions used by management to historical trends and evaluated the change in the defined benefit pension obligation from the prior year due to the change in service cost, interest cost, benefit payments, actuarial gains and losses, contributions, new longevity assumptions and plan amendments, as applicable. In addition, we involved an actuarial specialist to assist in evaluating management’s methodology for determining the discount rate that reflects the maturity and duration of the benefit payments and is used to measure the defined benefit pension obligation. As part of this assessment, we compared the projected cash flows to prior year and compared the current year benefits paid to the prior year projected cash flows. To evaluate the mortality rate and the longevity, we assessed whether the information is consistent with publicly available information and entity-specific data. We also tested the completeness and accuracy of the underlying data, including the participant data provided to the Company’s actuaries. Lastly, to evaluate the expected return on plan assets, we assessed whether management’s assumption is consistent with a range of returns for a portfolio of comparative investments. |
/s/ Ernst & Young LLP We have served as the Company’s auditor since 1957. Boston, Massachusetts February 14, 201925, 2020 Quarterly Data | | | | | | | | | | | | | | | | | | | | | | | | | (Unaudited) | 2019 | 2018 | | (Dollars in millions, except per share amounts) | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | Revenues | | | | | | | | | | | | | | | | | | | | | | | | | Textron Aviation | $ | 1,134 | $ | 1,123 | $ | 1,201 | $ | 1,729 | $ | 1,010 | $ | 1,276 | $ | 1,133 | $ | 1,552 | Bell | | 739 | | 771 | | 783 | | 961 | | 752 | | 831 | | 770 | | 827 | Textron Systems | | 307 | | 308 | | 311 | | 399 | | 387 | | 380 | | 352 | | 345 | Industrial | | 912 | | 1,009 | | 950 | | 927 | | 1,131 | | 1,222 | | 930 | | 1,008 | Finance | | 17 | | 16 | | 14 | | 19 | | 16 | | 17 | | 15 | | 18 | Total revenues | $ | 3,109 | $ | 3,227 | $ | 3,259 | $ | 4,035 | $ | 3,296 | $ | 3,726 | $ | 3,200 | $ | 3,750 | Segment profit | | | | | | | | | | | | | | | | | | | | | | | | | Textron Aviation | $ | 106 | $ | 105 | $ | 104 | $ | 134 | $ | 72 | $ | 104 | $ | 99 | $ | 170 | Bell | | 104 | | 103 | | 110 | | 118 | | 87 | | 117 | | 113 | | 108 | Textron Systems | | 28 | | 49 | | 31 | | 33 | | 50 | | 40 | | 29 | | 37 | Industrial | | 50 | | 76 | | 47 | | 44 | | 64 | | 80 | | 1 | | 73 | Finance | | 6 | | 6 | | 5 | | 11 | | 6 | | 5 | | 3 | | 9 | Total segment profit | | 294 | | 339 | | 297 | | 340 | | 279 | | 346 | | 245 | | 397 | Corporate expenses and other, net | | (47) | | (24) | | (17) | | (22) | | (27) | | (51) | | (29) | | (12) | Interest expense, net for Manufacturing group | | (35) | | (36) | | (39) | | (36) | | (34) | | (35) | | (32) | | (34) | Special charges (a) | | — | | — | | — | | (72) | | — | | — | | — | | (73) | Gain on business disposition (b) | | — | | — | | — | | — | | — | | — | | 444 | | — | Income tax expense | | (33) | | (62) | | (21) | | (11) | | (29) | | (36) | | (65) | | (32) | Net income | $ | 179 | $ | 217 | $ | 220 | $ | 199 | $ | 189 | $ | 224 | $ | 563 | $ | 246 | Earnings per share from continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | Basic | $ | 0.76 | $ | 0.94 | $ | 0.96 | $ | 0.87 | $ | 0.73 | $ | 0.88 | $ | 2.29 | $ | 1.02 | Diluted | | 0.76 | | 0.93 | | 0.95 | | 0.87 | | 0.72 | | 0.87 | | 2.26 | | 1.02 | Basic average shares outstanding (in thousands) | | 234,839 | | 232,013 | | 229,755 | | 228,653 | | 260,497 | | 253,904 | | 246,136 | | 240,248 | Diluted average shares outstanding (in thousands) | | 236,437 | | 233,545 | | 231,097 | | 229,790 | | 263,672 | | 257,177 | | 249,378 | | 242,569 | Segment profit margins | | | | | | | | | | | | | | | | | | | | | | | | | Textron Aviation | | 9.3 | % | | 9.4 | % | | 8.7 | % | | 7.8 | % | | 7.1 | % | | 8.2 | % | | 8.7 | % | | 11.0 | % | Bell | | 14.1 | | 13.4 | | 14.0 | | 12.3 | | 11.6 | | 14.1 | | 14.7 | | 13.1 | Textron Systems | | 9.1 | | 15.9 | | 10.0 | | 8.3 | | 12.9 | | 10.5 | | 8.2 | | 10.7 | Industrial | | 5.5 | | 7.5 | | 4.9 | | 4.7 | | 5.7 | | 6.5 | | 0.1 | | 7.2 | Finance | | 35.3 | | 37.5 | | 35.7 | | 57.9 | | 37.5 | | 29.4 | | 20.0 | | 50.0 | Segment profit margin | | 9.5 | % | | 10.5 | % | | 9.1 | % | | 8.4 | % | | 8.5 | % | | 9.3 | % | | 7.7 | % | | 10.6 | % |
(a) | In the fourth quarter of 2019, special charges of $72 million were recorded under a restructuring plan, principally impacting the Industrial and Textron Aviation segments. Special charges of $73 million were recorded in the fourth quarter of 2018 under a restructuring plan for the Textron Specialized Vehicles businesses within our Industrial segment that was initiated in December 2018. |
(b) | On July 2, 2018, we completed the sale of the Tools & Test Equipment product line which resulted in an after-tax gain of $419 million. |
(Unaudited) | | 2018 | | 2017 | (Dollars in millions, except per share amounts) | | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Q4 | Revenues (a) | | | | | | | | | | | | | | | | | Textron Aviation | $ | 1,010 | $ | 1,276 | $ | 1,133 | $ | 1,552 | $ | 970 | $ | 1,171 | $ | 1,154 | $ | 1,391 | Bell | | 752 | | 831 | | 770 | | 827 | | 697 | | 825 | | 812 | | 983 | Textron Systems | | 387 | | 380 | | 352 | | 345 | | 416 | | 477 | | 458 | | 489 | Industrial | | 1,131 | | 1,222 | | 930 | | 1,008 | | 992 | | 1,113 | | 1,042 | | 1,139 | Finance | | 16 | | 17 | | 15 | | 18 | | 18 | | 18 | | 18 | | 15 | Total revenues | $ | 3,296 | $ | 3,726 | $ | 3,200 | $ | 3,750 | $ | 3,093 | $ | 3,604 | $ | 3,484 | $ | 4,017 | Segment profit | | | | | | | | | | | | | | | | | Textron Aviation | $ | 72 | $ | 104 | $ | 99 | $ | 170 | $ | 36 | $ | 54 | $ | 93 | $ | 120 | Bell | | 87 | | 117 | | 113 | | 108 | | 83 | | 112 | | 106 | | 114 | Textron Systems | | 50 | | 40 | | 29 | | 37 | | 20 | | 42 | | 40 | | 37 | Industrial | | 64 | | 80 | | 1 | | 73 | | 76 | | 82 | | 49 | | 83 | Finance | | 6 | | 5 | | 3 | | 9 | | 4 | | 5 | | 7 | | 6 | Total segment profit | | 279 | | 346 | | 245 | | 397 | | 219 | | 295 | | 295 | | 360 | Corporate expenses and other, net | | (27) | | (51) | | (29) | | (12) | | (27) | | (31) | | (30) | | (44) | Interest expense, net for Manufacturing group | | (34) | | (35) | | (32) | | (34) | | (34) | | (36) | | (37) | | (38) | Special charges (b) | | — | | — | | — | | (73) | | (37) | | (13) | | (25) | | (55) | Gain on business disposition (c) | | — | | — | | 444 | | — | | — | | — | | — | | — | Income tax expense (d) | | (29) | | (36) | | (65) | | (32) | | (21) | | (62) | | (44) | | (329) | Income (loss) from continuing operations | | 189 | | 224 | | 563 | | 246 | | 100 | | 153 | | 159 | | (106) | Income from discontinued operations, net of income taxes | | — | | — | | — | | — | | 1 | | — | | — | | — | Net income (loss) | $ | 189 | $ | 224 | $ | 563 | $ | 246 | $ | 101 | $ | 153 | $ | 159 | $ | (106) | Basic earnings per share | | | | | | | | | | | | | | | | | Continuing operations | $ | 0.73 | $ | 0.88 | $ | 2.29 | $ | 1.02 | $ | 0.37 | $ | 0.57 | $ | 0.60 | $ | (0.40) | Discontinued operations | | — | | — | | — | | — | | — | | — | | — | | — | Basic earnings per share | $ | 0.73 | $ | 0.88 | $ | 2.29 | $ | 1.02 | $ | 0.37 | $ | 0.57 | $ | 0.60 | $ | (0.40) | Basic average shares outstanding (in thousands) | | 260,497 | | 253,904 | | 246,136 | | 240,248 | | 270,489 | | 267,114 | | 264,624 | | 263,295 | Diluted earnings per share (e) | | | | | | | | | | | | | | | | | Continuing operations | $ | 0.72 | $ | 0.87 | $ | 2.26 | $ | 1.02 | $ | 0.37 | $ | 0.57 | $ | 0.60 | $ | (0.40) | Discontinued operations | | — | | — | | — | | — | | — | | — | | — | | — | Diluted earnings per share | $ | 0.72 | $ | 0.87 | $ | 2.26 | $ | 1.02 | $ | 0.37 | $ | 0.57 | $ | 0.60 | $ | (0.40) | Diluted average shares outstanding (in thousands) | | 263,672 | | 257,177 | | 249,378 | | 242,569 | | 272,830 | | 269,299 | | 266,989 | | 263,295 | Segment profit margins | | | | | | | | | | | | | | | | | Textron Aviation | | 7.1% | | 8.2% | | 8.7% | | 11.0% | | 3.7% | | 4.6% | | 8.1% | | 8.6% | Bell | | 11.6 | | 14.1 | | 14.7 | | 13.1 | | 11.9 | | 13.6 | | 13.1 | | 11.6 | Textron Systems | | 12.9 | | 10.5 | | 8.2 | | 10.7 | | 4.8 | | 8.8 | | 8.7 | | 7.6 | Industrial | | 5.7 | | 6.5 | | 0.1 | | 7.2 | | 7.7 | | 7.4 | | 4.7 | | 7.3 | Finance | | 37.5 | | 29.4 | | 20.0 | | 50.0 | | 22.2 | | 27.8 | | 38.9 | | 40.0 | Segment profit margin | | 8.5% | | 9.3% | | 7.7% | | 10.6% | | 7.1% | | 8.2% | | 8.5% | | 9.0% |
(a)At the beginning of 2018, we adopted ASC 606 using a modified retrospective basis and as a result, the comparative information has not been restated and is reported under the accounting standards in effect for these periods. See Note 1 to the Consolidated Financial Statements for additional information.
(b)Special charges of $73 million were recorded in the fourth quarter of 2018 under a restructuring plan for the Textron Specialized Vehicles businesses within our Industrial segment that was initiated in December 2018. Special charges related to our 2016 restructuring plan were $15 million, $12 million, $15 million and $48 million in the first, second, third and fourth quarters of 2017, respectively. In addition, we recorded special charges of $22 million, $1 million, $10 million and $7 million in the first, second, third and fourth quarters of 2017, respectively, related to the Arctic Cat acquisition, which included restructuring, integration and transaction costs.
(c)On July 2, 2018, Textron completed the sale of the Tools & Test Equipment product line which resulted in an after-tax gain of $419 million.
(d)Income tax expense for the fourth quarter of 2017 included a $266 million charge to reflect our provisional estimate of the net impact of the Tax Cuts and Jobs Act. We completed our analysis of this legislation in the fourth quarter of 2018 and recorded a $14 million income tax benefit.
(e)For the fourth quarter of 2017, the diluted average shares outstanding excluded potential common shares (stock options) due to their antidilutive effect resulting from the net loss.
Schedule II — Valuation and Qualifying Accounts | | | | | | | | (In millions) | | | | 2018 | | 2017 | | 2016 | 2019 | 2018 | 2017 | Allowance for doubtful accounts | | | | | | | | | | | | | | | Balance at beginning of year | | | $ | 27 | $ | 27 | $ | 33 | $ | 27 | $ | 27 | $ | 27 | Charged to costs and expenses | | | | 5 | | 3 | | 3 | | 7 | | 5 | | 3 | Deductions from reserves* | | | | (5) | | (3) | | (9) | | (5) | | (5) | | (3) | Balance at end of year | | | $ | 27 | $ | 27 | $ | 27 | $ | 29 | $ | 27 | $ | 27 | Allowance for losses on finance receivables | | | | | | | | | | | | | | | Balance at beginning of year | | | $ | 31 | $ | 41 | $ | 48 | $ | 29 | $ | 31 | $ | 41 | Reversal of the provision for losses | | | | (3) | | (11) | | (1) | | (6) | | (3) | | (11) | Charge-offs | | | | (4) | | (6) | | (16) | | (4) | | (4) | | (6) | Recoveries | | | | 5 | | 7 | | 10 | | 6 | | 5 | | 7 | Balance at end of year | | | $ | 29 | $ | 31 | $ | 41 | $ | 25 | $ | 29 | $ | 31 | Inventory FIFO reserves | | | | | | | | | | | | | | | Balance at beginning of year | | | $ | 262 | $ | 231 | $ | 206 | $ | 280 | $ | 262 | $ | 231 | Charged to costs and expenses | | | | 56 | | 63 | | 59 | | 58 | | 56 | | 63 | Deductions from reserves* | | | | (38) | | (32) | | (34) | | (29) | | (38) | | (32) | Balance at end of year | | | $ | 280 | $ | 262 | $ | 231 | $ | 309 | $ | 280 | $ | 262 |
*Deductions primarily include amounts written off on uncollectable accounts (less recoveries), inventory disposals, changes to prior year estimates, business dispositions and currency translation adjustments. Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Disclosure Controls and Procedures We performed an evaluation of the effectiveness of our disclosure controls and procedures as of December 29, 2018.January 4, 2020. The evaluation was performed with the participation of senior management of each business segment and key Corporate functions, under the supervision of our Chairman, President and Chief Executive Officer (CEO) and our Executive Vice President and Chief Financial Officer (CFO). Based on this evaluation, the CEO and CFO concluded that our disclosure controls and procedures were operating and effective as of December 29, 2018.January 4, 2020. Changes in Internal Controls Over Financial Reporting There were no changes in our internal control over financial reporting during the fourth quarter of the fiscal year covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management’s Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting for Textron Inc. as such term is defined in Exchange Act Rules 13a-15(f). Our internal control structure is designed to provide reasonable assurance, at appropriate cost, that assets are safeguarded and that transactions are properly executed and recorded. The internal control structure includes, among other things, established policies and procedures, an internal audit function, the selection and training of qualified personnel as well as management oversight. With the participation of our management, we performed an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on our evaluation under the 2013 Framework, we have concluded that Textron Inc. maintained, in all material respects, effective internal control over financial reporting as of December 29, 2018. January 4, 2020. The independent registered public accounting firm, Ernst & Young LLP, has audited the Consolidated Financial Statements of Textron Inc. and has issued an attestation report on Textron’s internal controls over financial reporting as of December 29, 2018,January 4, 2020, as stated in its report, which is included herein. Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors and the Shareholders of Textron Inc. Opinion on Internal Control over Financial Reporting We have audited Textron Inc.’s internal control over financial reporting as of December 29, 2018,January 4, 2020, based on criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), (the COSO criteria). In our opinion, Textron, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 29, 2018,January 4, 2020, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Consolidated Balance Sheets of the Company as of January 4, 2020 and December 29, 2018, and December 30, 2017, and the related Consolidated Statements of Operations, Comprehensive Income, Shareholder’s Equity and Cash Flows for each of the three years in the period ended December 29, 2018,January 4, 2020, and the related notes and financial statement schedule contained on page 75,77, of the Company and our report dated February 14, 201925, 2020 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Boston, Massachusetts February 14, 201925, 2020 PART III Item 10. Directors, Executive Officers and Corporate Governance The information appearing under “ELECTION OF DIRECTORS—DIRECTORS — Nominees for Director,” “CORPORATE GOVERNANCE—GOVERNANCE — Corporate Governance Guidelines and Policies,” “— Code of Ethics,” “–and “— Board Committees—Committees — Audit Committee,” and “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in the Proxy Statement for our Annual Meeting of Shareholders to be held on April 24, 201929, 2020 is incorporated by reference into this Annual Report on Form 10-K. Information regarding our executive officers is contained in Part I of this Annual Report on Form 10-K. Item 11. Executive Compensation The information appearing under “CORPORATE GOVERNANCE —Compensation— Compensation of Directors,” “COMPENSATION COMMITTEE REPORT,” “COMPENSATION DISCUSSION AND ANALYSIS” and “EXECUTIVE COMPENSATION” in the Proxy Statement for our Annual Meeting of Shareholders to be held on April 24, 201929, 2020 is incorporated by reference into this Annual Report on Form 10-K. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information appearing under “SECURITY OWNERSHIP” and “EXECUTIVE COMPENSATION – Equity Compensation Plan Information” in the Proxy Statement for our Annual Meeting of Shareholders to be held on April 24, 201929, 2020 is incorporated by reference into this Annual Report on Form 10-K. Item 13. Certain Relationships and Related Transactions and Director Independence The information appearing under “CORPORATE GOVERNANCE--DirectorGOVERNANCE — Director Independence” and “EXECUTIVE COMPENSATION — Transactions with Related Persons” in the Proxy Statement for our Annual Meeting of Shareholders to be held on April 24, 201929, 2020 is incorporated by reference into this Annual Report on Form 10-K. Item 14. Principal Accountant Fees and Services The information appearing under “RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM — Fees to Independent Auditors” in the Proxy Statement for our Annual Meeting of Shareholders to be held on April 24, 201929, 2020 is incorporated by reference into this Annual Report on Form 10-K. PART IV Item 15. Exhibits and Financial Statement Schedules Financial Statements and Schedules — See Index on Page 36. | | Exhibits | | | | | | 3.1A | | Restated Certificate of Incorporation of Textron as filed with the Secretary of State of Delaware on April 29, 2010. Incorporated by reference to Exhibit 3.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2010. (SEC File No. 1-5480) | | | | 3.1B | | Certificate of Amendment of Restated Certificate of Incorporation of Textron Inc., filed with the Secretary of State of Delaware on April 27, 2011. Incorporated by reference to Exhibit 3.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 2011. (SEC File No. 1-5480) | | | | 3.2 | | Amended and Restated By-Laws of Textron Inc., effective April 28, 2010 and further amended April 27, 2011, July 23, 2013, February 25, 2015 and December 6, 2016. Incorporated by reference to Exhibit 3.2 to Textron’s Current Report on Form 8-K filed on December 8, 2016. | | | | 4.1A | | Support Agreement dated as of May 25, 1994, between Textron Inc. and Textron Financial Corporation. Incorporated by reference to Exhibit 4.1 to Textron’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. (SEC File No. 1-5480) | | | | 4.1B | | Amendment to Support Agreement, dated as of December 23, 2015, by and between Textron Inc. and Textron Financial Corporation. Incorporated by reference to Exhibit 4.1B to Textron’s Annual Report on Form 10-K for the fiscal year ended January 2, 2016. | | | | 4.6 | | Description of registrant’s securities. | | | | NOTE: | | Instruments defining the rights of holders of certain issues of long-term debt of Textron have not been filed as exhibits because the authorized principal amount of any one of such issues does not exceed 10% of the total assets of Textron and its subsidiaries on a consolidated basis. Textron agrees to furnish a copy of each such instrument to the Commission upon request. | | | | NOTE: | | Exhibits 10.1 through 10.17 below are management contracts or compensatory plans, contracts or agreements. | | | | 10.1A | | Textron Inc. 2007 Long-Term Incentive Plan (Amended and Restated as of April 28, 2010). Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2012. (SEC File No. 1-5480) | | | | 10.1B | | Form of Non-Qualified Stock Option Agreement. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. (SEC File No. 1-5480) | | | | 10.1C | | Form of Incentive Stock Option Agreement. Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. (SEC File No. 1-5480) | | | | 10.1D | | Form of Restricted Stock Unit Grant Agreement. Incorporated by reference to Exhibit 10.4 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. (SEC File No. 1-5480) | | | | 10.1E | | Form of Restricted Stock Unit Grant Agreement with Dividend Equivalents. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2008. (SEC File No. 1-5480) | | | | 10.1F | | Form of Performance Share Unit Grant Agreement. Incorporated by reference to Exhibit 10.1H to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. (SEC File No. 1-5480) | | | |
10.1G | | Form of Non-Qualified Stock Option Agreement. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2014. (SEC File No. 1-5480) | | | | 10.1H | | Form of Stock-Settled Restricted Stock Unit Grant Agreement with Dividend Equivalents. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2014. (SEC File No. 1-5480) | | | | 10.1I | | Form of Performance Share Unit Grant Agreement. Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2014. (SEC File No. 1-5480) | | | | 10.2 | | Textron Inc. Short-Term Incentive Plan. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2017. | | | | 10.3A | | Textron Inc. 2015 Long-Term Incentive Plan. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 2015. | | | | 10.3B | | Form of Non-Qualified Stock Option Agreement under 2015 Long-Term Incentive Plan. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 2016. | | | | 10.3C | | Form of Stock-Settled Restricted Stock Unit (with Dividend Equivalents) Grant Agreement under 2015 Long-Term Incentive Plan. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 2016. | | | | 10.3D | | Form of Performance Share Unit Grant Agreement under 2015 Long-Term Incentive Plan. Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 2016. | | | | 10.4 | | Textron Spillover Savings Plan, effective October 5, 2015. Incorporated by reference to Exhibit 10.4 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 2, 2016. | | | | 10.5A | | Textron Spillover Pension Plan, As Amended and Restated Effective January 3, 2010, including Appendix A (as amended and restated effective January 3, 2010), Defined Benefit Provisions of the Supplemental Benefits Plan for Textron Key Executives (As in effect before January 1, 2007). Incorporated by reference to Exhibit 10.4 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2010. (SEC File No. 1-5480) | | | | 10.5B | | Amendments to the Textron Spillover Pension Plan, dated October 12, 2011. Incorporated by reference to Exhibit 10.5B to Textron’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. (SEC File No. 1-5480) | | | | 10.5C | | Second Amendment to the Textron Spillover Pension Plan, dated October 7, 2013. Incorporated by reference to Exhibit 10.5C to Textron’s Annual Report on Form 10-K for the fiscal year ended December 28, 2013. (SEC File No. 1-5480) | | | | 10.6 | | Deferred Income Plan for Textron Executives, Effective October 5, 2015. Incorporated by reference to Exhibit 10.6 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 2, 2016. | | | | 10.7A | | Deferred Income Plan for Non-Employee Directors, As Amended and Restated Effective January 1, 2009, including Appendix A, Prior Plan Provisions (As in effect before January 1, 2008). Incorporated by reference to Exhibit 10.9 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. (SEC File No. 1-5480) | | | | 10.7B | | Amendment No. 1 to Deferred Income Plan for Non-Employee Directors, as Amended and Restated Effective January 1, 2009, dated as of November 6, 2012. Incorporated by reference to Exhibit 10.8B to Textron’s Annual Report on Form 10-K for the fiscal year ended December 29, 2012. (SEC File No. 1-5480) | | | |
10.7C | | Amendment No. 2 to Deferred Income Plan for Non-Employee Directors, as Amended and Restated Effective January 1, 2009. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2017. | | | | 10.7D | | Amendment No. 3 to Deferred Income Plan for Non-Employee Directors, as Amended and Restated Effective January 1, 2009. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 2018. | | | | 10.7E | | Amendment No. 4 to Deferred Income Plan for Non-Employee Directors, as Amended and Restated Effective January 1, 2009. | | | | 10.8A | | Severance Plan for Textron Key Executives, As Amended and Restated Effective January 1, 2010. Incorporated by reference to Exhibit 10.10 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010. (SEC File No. 1-5480) | | | | 10.8B | | First Amendment to the Severance Plan for Textron Key Executives, dated October 26, 2010. Incorporated by reference to Exhibit 10.10B to Textron’s Annual Report on Form 10-K for the fiscal year ended January 1, 2011. (SEC File No. 1-5480) | | | | 10.8C | | Second Amendment to the Severance Plan for Textron Key Executives, dated March 24, 2014. Incorporated by reference to Exhibit 10.5 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2014. (SEC File No. 1-5480) | | | | 10.9 | | Form of Indemnity Agreement between Textron and its executive officers. Incorporated by reference to Exhibit 10.9 to Textron’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017. | | | | 10.10 | | Form of Indemnity Agreement between Textron and its non-employee directors (approved by the Nominating and Corporate Governance Committee of the Board of Directors on July 21, 2009 and entered into with all non-employee directors, effective as of August 1, 2009). Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 3, 2009. (SEC File No. 1-5480) | | | | 10.11A | | Letter Agreement between Textron and Scott C. Donnelly, dated June 26, 2008. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 2008. (SEC File No. 1-5480) | | | | 10.11B | | Amendment to Letter Agreement between Textron and Scott C. Donnelly, dated December 16, 2008, together with Addendum No.1 thereto, dated December 23, 2008. Incorporated by reference to Exhibit 10.15B to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. (SEC File No. 1-5480) | | | | 10.11C | | Amended and Restated Hangar License and Services Agreement, made and entered into as of October 1, 2015, between Textron Inc. and Mr. Donnelly’s limited liability company. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 3, 2015. | | | | 10.11D | | Aircraft Dry Lease Agreement, made and entered into as of December 18, 2018, between Mr. Donnelly’s limited liability company and Textron Inc. Incorporated by reference to Exhibit 10.11D to Textron's Annual Report on Form 10-K for the fiscal year ended December 29, 2018. | | | | 10.12A | | Letter Agreement between Textron and Frank Connor, dated July 27, 2009. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 3, 2009. (SEC File No. 1-5480) | | | | 10.12B | | Amended and Restated Hangar License and Services Agreement, made and entered into on July 24, 2015, between Textron Inc. and Mr. Connor’s limited liability company. Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 3, 2015. | | | | 10.13 | | Letter Agreement between Textron and Julie G. Duffy, dated July 27, 2017. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2017. | | | |
| | | 10.14B | | Amendment to letter agreement between Textron and E. Robert Lupone, dated July 27, 2012. Incorporated by reference to Exhibit 10.5 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 2012. (SEC File No. 1-5480) | | | | 10.15 | | Director Compensation. Incorporated by reference to Exhibit 10.15 to Textron’s Annual Report on Form 10-KTextron Inc. 2015 Long-Term Incentive Plan Equity Program for the fiscal year ended December 30, 2017.Non-Employee Directors.
| | | | 10.16 | | Director Compensation. | | | | 10.17 | | Form of Aircraft Time Sharing Agreement between Textron and its executive officers. Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 2008. (SEC File No. 1-5480) | | | | 10.1710.18
| | Credit Agreement, dated as of September 30, 2016,October 18, 2019, among Textron, the Lenders listed therein, JPMorgan Chase Bank, N.A., as Administrative Agent, Citibank,Bank of America, N.A. and Bank of America,Citibank, N.A., as Syndication Agents, and TheMUFG Bank, of Tokyo-Mitsubishi UFJ, Ltd., as Documentation Agent. Incorporated by reference to Exhibit 10.1 to Textron’s CurrentQuarterly Report on Form 8-K filed on October 3, 2016.10-Q for the fiscal quarter ended September 28, 2019. | | | | 21 | | Certain subsidiaries of Textron. Other subsidiaries, which considered in the aggregate do not constitute a significant subsidiary, are omitted from such list. | | | | 23 | | Consent of Independent Registered Public Accounting Firm. | | | | 24 | | Power of attorney. | | | | 31.1 | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | 31.2 | | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | 32.1 | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | 32.2 | | Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | 101 | | The following materials from Textron Inc.’s Annual Report on Form 10-K for the year ended December 29, 2018,January 4, 2020, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Income (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, (vi) the Notes to the Consolidated Financial Statements, and (vii) Schedule II – Valuation and Qualifying Accounts. | | | | 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
Item 16. Form 10-K Summary Not applicable. Signatures Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on this 14th25th day of February 2019. 2020. | | | | | TEXTRON INC. | | | Registrant | | | | | By: | /s/ Frank T. Connor | | | | Frank T. Connor | | | Executive Vice President and Chief Financial Officer | | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below on this 14th25th day of February 20192020 by the following persons on behalf of the registrant and in the capacities indicated: | | | Name | | Title | | | | |
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| /s/ Scott C. Donnelly | | | | Scott C. Donnelly | | Chairman, President and Chief Executive Officer | | | | (principal executive officer) | | * | | | | Kathleen M. Bader | | Director | | | | | | * | | | | R. Kerry Clark | | Director | | | | | | * | | | | James T. Conway | | Director | | | | | | * | | | | Lawrence K. Fish | | Director | | | | | | * | | | | Paul E. Gagné | | Director | | | | | | * | | | | Ralph D. Heath | | Director | | | | | | * | | | | Deborah Lee James | | Director | | | | | | * | | | | Lionel L. Nowell III | | Director | | | | | | * | | | | Lloyd G. Trotter | | Director | | | | | | * | | | | James L. Ziemer | | Director | | | | | | * | | | | Maria T. Zuber | | Director | | | | | | | | | | /s/ Frank T. Connor | | | | Frank T. Connor | | Executive Vice President and Chief Financial Officer | | | | (principal financial officer) | | | | | | /s/ Mark S. Bamford | | | | Mark S. Bamford | | Vice President and Corporate Controller | | | | (principal accounting officer) | | | | | *By: | /s/ /s/ Jayne M. Donegan
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| | | Jayne M. Donegan, Attorney-in-fact | |
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