Form 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Inc.
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Delaware | 05-0315468 | |||||||
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) | ||||||
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40 Westminster Street, | | 02903 | ||||||
(Address of principal executive offices) | | (Zip code) | ||||||
(401)
| Title of each class | Trading Symbol (s) | Name of each exchange on which registered | ||||||
Common stock, $0.125 par value | TXT | New York Stock Exchange (NYSE) | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ þNo ☐¨
| Large accelerated filer |
| Accelerated filer | ☐ | Non-accelerated filer | ☐ | ||||||||||||
Smaller reporting company | ☐ | | | Emerging growth company | ☐ | ||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☑þ
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Three Months Ended April 4, March 30, (In millions, except per share amounts) 2020 2019 Revenues Manufacturing revenues $ 2,763 $ 3,092 Finance revenues 14 17 Total revenues 2,777 3,109 Costs, expenses and other Cost of sales 2,387 2,577 Selling and administrative expense 263 307 Interest expense 40 42 Special charges 39 — Non-service components of pension and post-retirement income, net (21) (29) Total costs, expenses and other 2,708 2,897 Income before income taxes 69 212 Income tax expense 19 33 Net income $ 50 $ 179 Earnings per share Basic $ 0.22 $ 0.76 Diluted $ 0.22 $ 0.76 See Notes to the Consolidated Financial Statements. Three Months Ended April 4, March 30, (In millions) 2020 2019 Net income $ 50 $ 179 Other comprehensive income, net of tax: Pension and postretirement benefits adjustments, net of reclassifications 37 21 Foreign currency translation adjustments (40) 3 Deferred gains (losses) on hedge contracts, net of reclassifications (9) 2 Other comprehensive income (loss) (12) 26 Comprehensive income $ 38 $ 205 April 4, January 4, (Dollars in millions) 2020 2020 Assets Manufacturing group Cash and equivalents $ 2,263 $ 1,181 Accounts receivable, net 870 921 Inventories 4,385 4,069 Other current assets 984 894 Total current assets 8,502 7,065 Property, plant and equipment, less accumulated depreciation 2,483 2,527 Goodwill 2,150 2,150 Other assets 1,854 2,312 Total Manufacturing group assets 14,989 14,054 Finance group Cash and equivalents 183 176 Finance receivables, net 681 682 Other assets 93 106 Total Finance group assets 957 964 Total assets $ 15,946 $ 15,018 Liabilities and shareholders’ equity Liabilities Manufacturing group Short-term debt and current portion of long-term debt $ 1,396 $ 561 Accounts payable 1,322 1,378 Other current liabilities 1,797 1,907 Total current liabilities 4,515 3,846 Other liabilities 2,143 2,288 Long-term debt 2,956 2,563 Total Manufacturing group liabilities 9,614 8,697 Finance group Other liabilities 116 117 Debt 682 686 Total Finance group liabilities 798 803 Total liabilities 10,412 9,500 Shareholders’ equity Common stock 29 29 Capital surplus 1,711 1,674 Treasury stock (74) (20) Retained earnings 5,727 5,682 Accumulated other comprehensive loss (1,859) (1,847) Total shareholders’ equity 5,534 5,518 Total liabilities and shareholders’ equity $ 15,946 $ 15,018 Common shares outstanding (in thousands) 227,379 227,956 Consolidated (In millions) 2020 2019 Cash flows from operating activities Net income $ 50 $ 179 Adjustments to reconcile net income to net cash used in operating activities: Non-cash items: Depreciation and amortization 90 102 Deferred income taxes (10) 15 Asset impairments 39 — Other, net 33 33 Changes in assets and liabilities: Accounts receivable, net 47 (33) Inventories (368) (215) Other assets (41) (31) Accounts payable (49) 47 Other liabilities (203) (288) Income taxes, net 20 (7) Pension, net (5) (14) Captive finance receivables, net — (1) Other operating activities, net 3 (3) Net cash used in operating activities of continuing operations (394) (216) Net cash used in operating activities of discontinued operations (1) — Net cash used in operating activities (395) (216) Cash flows from investing activities Capital expenditures (50) (59) Finance receivables repaid 13 12 Other investing activities, net (6) 5 Net cash used in investing activities (43) (42) Cash flows from financing activities Increase in short-term debt 603 100 Proceeds from long-term debt 643 — Proceeds from borrowings against corporate-owned life insurance policies 377 — Principal payments on long-term debt and nonrecourse debt (24) (19) Purchases of Textron common stock (54) (202) Dividends paid (5) (5) Other financing activities, net 3 10 Net cash provided by (used in) financing activities 1,543 (116) Effect of exchange rate changes on cash and equivalents (16) 9 Net increase (decrease) in cash and equivalents 1,089 (365) Cash and equivalents at beginning of period 1,357 1,107 Cash and equivalents at end of period $ 2,446 $ 742 TEXTRON INC. Manufacturing Group Finance Group (In millions) 2020 2019 2020 2019 Cash flows from operating activities Net income $ 48 $ 175 $ 2 $ 4 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Non-cash items: Depreciation and amortization 89 100 1 2 Deferred income taxes (11) 15 1 — Asset impairments 39 — — — Other, net 33 33 — — Changes in assets and liabilities: Accounts receivable, net 47 (33) — — Inventories (368) (241) — — Other assets (41) (30) — (1) Accounts payable (49) 47 — — Other liabilities (198) (286) (5) (2) Income taxes, net 20 (9) — 2 Pension, net (5) (14) — — Dividends received from Finance group — 50 — — Other operating activities, net 3 (3) — — Net cash provided by (used in) operating activities of continuing operations (393) (196) (1) 5 Net cash used in operating activities of discontinued operations (1) — — — Net cash provided by (used in) operating activities (394) (196) (1) 5 Cash flows from investing activities Capital expenditures (50) (59) — — Finance receivables repaid — — 46 40 Finance receivables originated — — (33) (29) Other investing activities, net (6) 3 — 28 Net cash provided by (used in) investing activities (56) (56) 13 39 Cash flows from financing activities Increase in short-term debt 603 100 — — Proceeds from long-term debt 643 — — — Proceeds from borrowings against corporate-owned life insurance policies 377 — — — Principal payments on long-term debt and nonrecourse debt (7) — (17) (18) Purchases of Textron common stock (54) (202) — — Dividends paid (5) (5) — (50) Other financing activities, net (9) 9 12 — Net cash provided by (used in) financing activities 1,548 (98) (5) (68) Effect of exchange rate changes on cash and equivalents (16) 9 — — Net increase (decrease) in cash and equivalents 1,082 (341) 7 (24) Cash and equivalents at beginning of period 1,181 987 176 120 Cash and equivalents at end of period $ 2,263 $ 646 $ 183 $ 96 Three Months Ended Nine Months Ended (In millions, except per share amounts) October 3,
2020September 28,
2019October 3,
2020September 28,
2019Revenues Manufacturing revenues $ 2,722 $ 3,245 $ 7,942 $ 9,548 Finance revenues 13 14 42 47 Total revenues 2,735 3,259 7,984 9,595 Costs, expenses and other Cost of sales 2,332 2,747 6,970 7,965 Selling and administrative expense 258 255 760 854 Interest expense 43 44 125 129 Special charges 7 0 124 0 Non-service components of pension and post-retirement income, net (21) (28) (62) (85) Total costs, expenses and other 2,619 3,018 7,917 8,863 Income before income taxes 116 241 67 732 Income tax expense (benefit) 1 21 (6) 116 Net income $ 115 $ 220 $ 73 $ 616 Earnings per share Basic $ 0.50 $ 0.96 $ 0.32 $ 2.65 Diluted $ 0.50 $ 0.95 $ 0.32 $ 2.64 Three Months Ended Nine Months Ended (In millions) October 3,
2020September 28,
2019October 3,
2020September 28,
2019Net income $ 115 $ 220 $ 73 $ 616 Other comprehensive income (loss), net of tax Pension and postretirement benefits adjustments, net of reclassifications 37 20 110 61 Foreign currency translation adjustments 35 (34) 25 (30) Deferred gains (losses) on hedge contracts, net of reclassifications 2 0 (5) 2 Other comprehensive income (loss) 74 (14) 130 33 Comprehensive income $ 189 $ 206 $ 203 $ 649
and amortization of $4,453 and $4,405, respectively(Dollars in millions) October 3,
2020January 4,
2020Assets Manufacturing group Cash and equivalents $ 2,518 $ 1,181 Accounts receivable, net 872 921 Inventories 4,252 4,069 Other current assets 825 894 Total current assets 8,467 7,065 2,438 2,527 Goodwill 2,159 2,150 Other assets 1,863 2,312 Total Manufacturing group assets 14,927 14,054 Finance group Cash and equivalents 152 176 Finance receivables, net 693 682 Other assets 89 106 Total Finance group assets 934 964 Total assets $ 15,861 $ 15,018 Liabilities and shareholders’ equity Liabilities Manufacturing group Short-term debt and current portion of long-term debt $ 859 $ 561 Accounts payable 1,121 1,378 Other current liabilities 2,011 1,907 Total current liabilities 3,991 3,846 Other liabilities 2,159 2,288 Long-term debt 3,199 2,563 Total Manufacturing group liabilities 9,349 8,697 Finance group Other liabilities 105 117 Debt 666 686 Total Finance group liabilities 771 803 Total liabilities 10,120 9,500 Shareholders’ equity Common stock 29 29 Capital surplus 1,762 1,674 Treasury stock (74) (20) Retained earnings 5,741 5,682 Accumulated other comprehensive loss (1,717) (1,847) Total shareholders’ equity 5,741 5,518 Total liabilities and shareholders’ equity $ 15,861 $ 15,018 Common shares outstanding (in thousands) 228,790 227,956 ThreeNine Months Ended April 4,October 3, 2020 and March 30,September 28, 2019, respectively Consolidated (In millions) 2020 2019 Cash flows from operating activities Net income $ 73 $ 616 Adjustments to reconcile net income to net cash provided by operating activities: Non-cash items: Depreciation and amortization 283 302 Deferred income taxes (31) 85 Asset impairments and TRU inventory charge 111 0 Other, net 81 61 Changes in assets and liabilities: Accounts receivable, net 59 (7) Inventories (258) (652) Other assets 114 27 Accounts payable (267) 134 Other liabilities 60 (251) Income taxes, net (4) (70) Pension, net (11) (44) Captive finance receivables, net (25) 22 Other operating activities, net 15 2 Net cash provided by operating activities of continuing operations 200 225 Net cash used in operating activities of discontinued operations (1) (2) Net cash provided by operating activities 199 223 Cash flows from investing activities Capital expenditures (151) (216) Proceeds from an insurance recovery and sale of property, plant and equipment 25 6 Net proceeds from corporate-owned life insurance policies 21 4 Net cash used in acquisitions (11) 0 Finance receivables repaid 21 20 Other investing activities, net 3 3 Net cash used in investing activities (92) (183) Cash flows from financing activities Increase (decrease) in short-term debt (2) 118 Net proceeds from long-term debt 1,137 297 Proceeds from borrowings against corporate-owned life insurance policies 377 0 Payment on borrowings against corporate-owned life insurance policies (15) 0 Principal payments on long-term debt and nonrecourse debt (235) (42) Purchases of Textron common stock (54) (470) Dividends paid (14) (9) Other financing activities, net 14 18 Net cash provided by (used in) financing activities 1,208 (88) Effect of exchange rate changes on cash and equivalents (2) (6) Net increase (decrease) in cash and equivalents 1,313 (54) Cash and equivalents at beginning of period 1,357 1,107 Cash and equivalents at end of period $ 2,670 $ 1,053 ThreeNine Months Ended April 4,October 3, 2020 and March 30,September 28, 2019, respectively Manufacturing Group Finance Group (In millions) 2020 2019 2020 2019 Cash flows from operating activities Net income $ 67 $ 603 $ 6 $ 13 Adjustments to reconcile net income to net cash provided by
operating activities:Non-cash items: Depreciation and amortization 279 297 4 5 Deferred income taxes (30) 86 (1) (1) Asset impairments and TRU inventory charge 111 0 0 0 Other, net 74 60 7 1 Changes in assets and liabilities: Accounts receivable, net 59 (7) 0 0 Inventories (258) (679) 0 0 Other assets 114 28 0 (1) Accounts payable (267) 134 0 0 Other liabilities 66 (250) (6) (1) Income taxes, net 1 (75) (5) 5 Pension, net (11) (44) 0 0 Dividends received from Finance group 0 50 0 0 Other operating activities, net 15 2 0 0 Net cash provided by operating activities of continuing operations 220 205 5 21 Net cash used in operating activities of discontinued operations (1) (2) 0 0 Net cash provided by operating activities 219 203 5 21 Cash flows from investing activities Capital expenditures (151) (216) 0 0 Proceeds from an insurance recovery and sale of property, plant and equipment 25 6 0 0 Net proceeds from corporate-owned life insurance policies 21 4 0 0 Net cash used in acquisitions (11) 0 0 0 Finance receivables repaid 0 0 90 149 Finance receivables originated 0 0 (94) (107) Other investing activities, net 0 0 3 30 Net cash provided by (used in) investing activities (116) (206) (1) 72 Cash flows from financing activities Increase (decrease) in short-term debt (2) 118 0 0 Net proceeds from long-term debt 1,137 297 0 0 Proceeds from borrowings against corporate-owned life insurance policies 377 0 0 0 Payment on borrowings against corporate-owned life insurance policies (15) 0 0 0 Principal payments on long-term debt and nonrecourse debt (195) (1) (40) (41) Purchases of Textron common stock (54) (470) 0 0 Dividends paid (14) (9) 0 (50) Other financing activities, net 2 18 12 0 Net cash provided by (used in) financing activities 1,236 (47) (28) (91) Effect of exchange rate changes on cash and equivalents (2) (6) 0 0 Net increase (decrease) in cash and equivalents 1,337 (56) (24) 2 Cash and equivalents at beginning of period 1,181 987 176 120 Cash and equivalents at end of period $ 2,518 $ 931 $ 152 $ 122
firstthird quarter of 2020 and 2019, our cumulative catch-up adjustments increased revenues and segment profit by $2$22 million and $31$21 million, respectively, and increased net income by $1$17 million and $23$16 million, respectively ($0.01 and $0.100.07 per diluted share respectively)for both periods). In the firstthird quarter of 2020 and 2019, gross favorable adjustments totaled $27$31 million and $53$41 million, respectively, and the gross unfavorable adjustments totaled $25$9 million and $22$20 million, respectively.
At the beginning of 2020, we adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (ASC 326). This standard changed the prior incurred loss model to a forward-looking current expected credit loss model for most financial assets, such as trade and finance receivables, contract assets and other instruments. This standard required a cumulative-effect adjustment to retained earnings upon adoption with no restatement of prior periods. There was no significant impact on our consolidated financial statements upon adoption of the standard. customer and industry type and geographic location. The percentage is based on all available and relevant information including age of outstanding receivables and collateral value, if any, historical payment experience and loss history, current economic conditions, and, when reasonable and supportable factors exist, management’s expectation of future economic conditions. For amounts due from the U.S. Government, we have not established an allowance for credit losses as we have zero loss expectation based on a long history of no credit losses and the explicit guarantee of a sovereign entity. April 4, January 4, (In millions) 2020 2020 Commercial $ 720 $ 835 U.S. Government contracts 189 115 909 950 Allowance for credit losses (39) (29) Total accounts receivable, net $ 870 $ 921 April 4, January 4, (In millions) 2020 2020 Finance receivables $ 706 $ 707 Allowance for credit losses (25) (25) Total finance receivables, net $ 681 $ 682 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. April 4, January 4, (Dollars in millions) 2020 2020 Performing $ 554 $ 664 Watchlist 115 4 Nonaccrual 37 39 Nonaccrual as a percentage of finance receivables 5.24 % 5.52 % Current and less than 31 days past due $ 622 $ 637 31-60 days past due 29 53 61-90 days past due 35 7 Over 90 days past due 20 10 60+ days contractual delinquency as a percentage of finance receivables 7.79 % 2.40 % For accounts modified in the first nine months of 2020, the origination date prior to the modification was maintained based on the types of temporary payment relief provided. April 4, January 4, (In millions) 2020 2020 Finance receivables evaluated collectively $ 489 $ 564 Finance receivables evaluated individually 113 39 Allowance for credit losses based on collective evaluation 22 22 Allowance for credit losses based on individual evaluation 3 3 Impaired finance receivables with no related allowance for credit losses $ 96 $ 22 Impaired finance receivables with related allowance for credit losses 17 17 Unpaid principal balance of impaired finance receivables 124 50 Allowance for credit losses on impaired loans 3 3 Average recorded investment of impaired finance receivables 76 40 April 4, January 4, (In millions) 2020 2020 Finished goods $ 1,611 $ 1,557 Work in process 1,762 1,616 Raw materials and components 1,012 896 Total inventories $ 4,385 $ 4,069 Interest expense incurred on borrowings against corporate-owned life insurance policies is recorded as an offset with policy income. Warranty Liability Three Months Ended April 4, March 30, (In millions) 2020 2019 Beginning of period $ 141 $ 149 Provision 13 14 Settlements (19) (22) Adjustments* (2) 4 End of period $ 133 $ 145 April 4, January 4, (Dollars in millions) 2020 2020 Other assets $ 272 $ 277 Other current liabilities 49 48 Other liabilities 225 233 Weighted-average remaining lease term (in years) 10.0 10.2 Weighted-average discount rate 4.42 % 4.42 % At agreement was terminated. April 4, 2020 January 4, 2020 Carrying Estimated Carrying Estimated (In millions) Value Fair Value Value Fair Value Manufacturing group Debt, excluding leases $ (4,335) $ (4,272) $ (3,097) $ (3,249) Finance group Finance receivables, excluding leases 494 460 493 527 Debt (682) (545) (686) (634) Accumulated Other Total Common Capital Treasury Retained Comprehensive Shareholders’ (In millions) Stock Surplus Stock Earnings Loss Equity Balance at January 4, 2020 $ 29 $ 1,674 $ (20) $ 5,682 $ (1,847) $ 5,518 Net income — — — 50 — 50 Other comprehensive loss — — — — (12) (12) Share-based compensation activity — 37 — — — 37 Dividends declared — — — (5) — (5) Purchases of common stock — — (54) — — (54) Balance at April 4, 2020 $ 29 $ 1,711 $ (74) $ 5,727 $ (1,859) $ 5,534 Balance at December 29, 2018 $ 30 $ 1,646 $ (129) $ 5,407 $ (1,762) $ 5,192 Net income — — — 179 — 179 Other comprehensive income — — — — 26 26 Share-based compensation activity — 43 — — — 43 Dividends declared — — — (5) — (5) Purchases of common stock — — (202) — — (202) Balance at March 30, 2019 $ 30 $ 1,689 $ (331) $ 5,581 $ (1,736) $ 5,233 Three Months Ended April 4, March 30, (In thousands) 2020 2019 Basic weighted-average shares outstanding 228,311 234,839 Dilutive effect of stock options 616 1,598 Diluted weighted-average shares outstanding 228,927 236,437 Pension and Foreign Deferred Accumulated Postretirement Currency Gains (Losses) Other Benefits Translation on Hedge Comprehensive (In millions) Adjustments Adjustments Contracts Loss Balance at January 4, 2020 $ (1,811) $ (36) $ — $ (1,847) Other comprehensive loss before reclassifications — (40) (8) (48) Reclassified from Accumulated other comprehensive loss 37 — (1) 36 Balance at April 4, 2020 $ (1,774) $ (76) $ (9) $ (1,859) Balance at December 29, 2018 $ (1,727) $ (32) $ (3) $ (1,762) Other comprehensive income before reclassifications — 3 3 6 Reclassified from Accumulated other comprehensive loss 21 — (1) 20 Balance at March 30, 2019 $ (1,706) $ (29) $ (1) $ (1,736) April 4, 2020 March 30, 2019 Tax Tax Pre-Tax (Expense) After-Tax Pre-Tax (Expense) After-Tax (In millions) Amount Benefit Amount Amount Benefit Amount Three Months Ended Pension and postretirement benefits adjustments: Amortization of net actuarial loss* $ 46 $ (10) $ 36 $ 25 $ (5) $ 20 Amortization of prior service cost* 2 (1) 1 1 — 1 Pension and postretirement benefits adjustments, net 48 (11) 37 26 (5) 21 Deferred gains (losses) on hedge contracts: Current deferrals (9) 1 (8) 4 (1) 3 Reclassification adjustments (1) — (1) (1) — (1) Deferred gains (losses) on hedge contracts, net (10) 1 (9) 3 (1) 2 Foreign currency translation adjustments (37) (3) (40) 1 2 3 Total $ 1 $ (13) $ (12) $ 30 $ (4) $ 26 Three Months Ended April 4, March 30, (In millions) 2020 2019 Revenues Textron Aviation $ 872 $ 1,134 Bell 823 739 Textron Systems 328 307 Industrial 740 912 Finance 14 17 Total revenues $ 2,777 $ 3,109 Segment Profit Textron Aviation $ 3 $ 106 Bell 115 104 Textron Systems 26 28 Industrial 9 50 Finance 3 6 Segment profit 156 294 Corporate expenses and other, net (14) (47) Interest expense, net for Manufacturing group (34) (35) Special charges (39) — Income before income taxes $ 69 $ 212 Three Months Ended April 4, March 30, (In millions) 2020 2019 Aircraft $ 515 $ 766 Aftermarket parts and services 357 368 Textron Aviation 872 1,134 Military aircraft and support programs 620 508 Commercial helicopters, parts and services 203 231 Bell 823 739 Unmanned systems 148 134 Marine and land systems 48 48 Simulation, training and other 132 125 Textron Systems 328 307 Fuel systems and functional components 465 594 Specialized vehicles 275 318 Industrial 740 912 Finance 14 17 Total revenues $ 2,777 $ 3,109 (In millions) Textron Bell Textron Industrial Finance Total Three months ended April 4, 2020 Customer type: Commercial $ 848 $ 198 $ 71 $ 739 $ 14 $ 1,870 U.S. Government 24 625 257 1 — 907 Total revenues $ 872 $ 823 $ 328 $ 740 $ 14 $ 2,777 Geographic location: United States $ 597 $ 690 $ 286 $ 329 $ 6 $ 1,908 Europe 84 24 12 228 1 349 Asia and Australia 123 50 20 53 1 247 Other international 68 59 10 130 6 273 Total revenues $ 872 $ 823 $ 328 $ 740 $ 14 $ 2,777 Three months ended March 30, 2019 Customer type: Commercial $ 1,092 $ 230 $ 74 $ 905 $ 17 $ 2,318 U.S. Government 42 509 233 7 — 791 Total revenues $ 1,134 $ 739 $ 307 $ 912 $ 17 $ 3,109 Geographic location: United States $ 789 $ 578 $ 257 $ 389 $ 8 $ 2,021 Europe 183 20 23 311 1 538 Asia and Australia 23 82 16 77 1 199 Other international 139 59 11 135 7 351 Total revenues $ 1,134 $ 739 $ 307 $ 912 $ 17 $ 3,109 Three Months Ended April 4, March 30, (In millions) 2020 2019 Compensation (income) expense $ (13) $ 44 Income tax expense (benefit) 3 (11) Total net compensation (income) expense included in net income $ (10) $ 33 March 1, March 1, 2020 2019 Fair value of options at grant date $ 10.66 $ 14.62 Dividend yield 0.2 % 0.2 % Expected volatility 29.3 % 26.6 % Risk-free interest rate 1.1 % 2.5 % Expected term (in years) 4.7 4.7 Weighted- Number of Average Exercise (Options in thousands) Options Price Outstanding at January 4, 2020 8,744 $ 44.00 Granted 1,728 40.60 Exercised (169) (31.48) Forfeited or expired (66) (51.93) Outstanding at April 4, 2020 10,237 $ 43.58 Exercisable at April 4, 2020 7,018 $ 41.83 Units Payable in Stock Units Payable in Cash Weighted- Weighted- Number of Average Grant Number of Average Grant (Shares/Units in thousands) Shares Date Fair Value Units Date Fair Value Outstanding at January 4, 2020, nonvested 543 $ 49.44 1,104 $ 49.61 Granted 134 40.60 358 40.60 Vested (136) (42.31) (272) (42.33) Forfeited — — (11) (50.25) Outstanding at April 4, 2020, nonvested 541 $ 49.05 1,179 $ 48.54 Three Months Ended April 4, March 30, (In millions) 2020 2019 Fair value of awards vested $ 17 $ 22 Cash paid 11 16 Weighted- Number of Average Grant (Units in thousands) Units Date Fair Value Outstanding at January 4, 2020, nonvested 411 $ 56.03 Granted 276 40.60 Outstanding at April 4, 2020, nonvested 687 $ 49.84 Postretirement Benefits Pension Benefits Other Than Pensions April 4, March 30, April 4, March 30, (In millions) 2020 2019 2020 2019 Three Months Ended Service cost $ 26 $ 23 $ 1 $ 1 Interest cost 73 82 2 2 Expected return on plan assets (144) (139) — — Amortization of net actuarial loss 46 25 — — Amortization of prior service cost (credit) 3 3 (1) (2) Net periodic benefit cost (credit) $ 4 $ (6) $ 2 $ 1 In the Industrial segment, 2020. Consolidated Results of Operations Three Months Ended April 4, March 30, (Dollars in millions) 2020 2019 % Change Revenues $ 2,777 $ 3,109 (11) % Cost of sales 2,387 2,577 (7) % Selling and administrative expense 263 307 (14) % Gross margin as a percentage of Manufacturing revenues 13.6 % 16.7 % 28. Lower Textron Aviation revenues of $406 million, largely due to lower Citation jet and commercial turboprop volume of $317 million, reflecting a decline in demand related to the pandemic, and lower aftermarket volume of $95 million, reflecting lower aircraft utilization resulting from the pandemic. TRU inventory charge. due to cost reduction activities across our segments, principally at the Textron Aviation and Industrial segments. In the Industrial segment, impairment charge. Our backlog is summarized below: April 4, January 4, (In millions) 2020 2020 Bell $ 6,416 $ 6,902 Textron Aviation 1,423 1,714 Textron Systems 1,371 1,211 Total backlog $ 9,210 $ 9,827 lines. Textron Aviation Three Months Ended April 4, March 30, (Dollars in millions) 2020 2019 % Change Revenues: Aircraft $ 515 $ 766 (33) % Aftermarket parts and services 357 368 (3) % Total revenues 872 1,134 (23) % Operating expenses 869 1,028 (15) % Segment profit 3 106 (97) % Profit margin 0.3 % 9.3 % periods: Textron Aviation’s revenues decreased 2020, compared with 45 Citation jets and 39 commercial turboprops in the third quarter of 2019. The decrease in operating expenses for the third quarter of 2020 also included a favorable impact from cost reduction activities, which was offset by inventory valuation charges and idle facility costs of $11 million, largely resulting from the pandemic. (Loss) periods: Segment profit at Textron Aviation decreased Three Months Ended April 4, March 30, (Dollars in millions) 2020 2019 % Change Revenues: Military aircraft and support programs $ 620 $ 508 22 % Commercial helicopters, parts and services 203 231 (12) % Total revenues 823 739 11 % Operating expenses 708 635 11 % Segment profit 115 104 11 % Profit margin 14.0 % 14.1 % periods: Bell’s revenues increased periods: Bell’s segment profit increased Textron Systems Three Months Ended April 4, March 30, (Dollars in millions) 2020 2019 % Change Revenues $ 328 $ 307 7 % Operating expenses 302 279 8 % Segment profit 26 28 (7) % Profit margin 7.9 % 9.1 % periods: Revenues at Textron Systems line, partially offset by lower volume of $28 million in the Marine and Land Systems product line. Within the Simulation, Training and Other product line, lower volume of $48 million in the TRU Simulation + Training business, largely due to a decline in demand and order cancellations related to the pandemic, was largely offset by higher volumes at the other businesses included in this product line. periods: Textron Systems’ segment profit Three Months Ended April 4, March 30, (Dollars in millions) 2020 2019 % Change Revenues: Fuel Systems and Functional Components $ 465 $ 594 (22) % Specialized Vehicles 275 318 (14) % Total revenues 740 912 (19) % Operating expenses 731 862 (15) % Segment profit 9 50 (82) % Profit margin 1.2 % 5.5 % Industrial segment revenues decreased second quarter. performance of $24 million, principally reflecting cost reduction activities, partially offset by lower volume and mix described above. Segment profit for the Industrial segment decreased closures. Three Months Ended April 4, March 30, (In millions) 2020 2019 Revenues $ 14 $ 17 Segment profit 3 6 April 4, January 4, (Dollars in millions) 2020 2020 Finance receivables $ 706 $ 707 Allowance for credit losses 25 25 Ratio of allowance for credit losses to finance receivables 3.54 % 3.54 % Nonaccrual finance receivables 37 39 Ratio of nonaccrual finance receivables to finance receivables 5.24 % 5.52 % 60+ days contractual delinquency $ 55 $ 17 60+ days contractual delinquency as a percentage of finance receivables 7.79 % 2.40 % April 4, January 4, (Dollars in millions) 2020 2020 Manufacturing group Cash and equivalents $ 2,263 $ 1,181 Debt 4,352 3,124 Shareholders’ equity 5,534 5,518 Capital (debt plus shareholders’ equity) 9,886 8,642 Net debt (net of cash and equivalents) to capital 27 % 26 % Debt to capital 44 % 36 % Finance group Cash and equivalents $ 183 $ 176 Debt 682 686 Manufacturing Group Cash Flows Three Months Ended April 4, March 30, (In millions) 2020 2019 Operating activities $ (393) $ (196) Investing activities (56) (56) Financing activities 1,548 (98) In the first long-term debt and $118 million from the issuance of short-term debt. Three Months Ended April 4, March 30, (In millions) 2020 2019 Operating activities $ (1) $ 5 Investing activities 13 39 Financing activities (5) (68) Three Months Ended April 4, March 30, (In millions) 2020 2019 Operating activities $ (394) $ (216) Investing activities (43) (42) Financing activities 1,543 (116) In the first Cash flows provided by financing activities in the first long-term debt and $118 million from the issuance of short-term debt. Three Months Ended April 4, March 30, (In millions) 2020 2019 Reclassification adjustments from investing activities: Finance receivable originations for Manufacturing group inventory sales $ (33) $ (29) Cash received from customers 33 28 Other — 26 Total reclassification adjustments from investing activities — 25 Reclassification adjustments from financing activities: Dividends received by Manufacturing group from Finance group — (50) Total reclassification adjustments to cash flows from operating activities $ — $ (25) For the Textron Aviation and Kautex reporting units, considering the impact of the pandemic on the industries in which they operate and our expectation that it will likely take the economy a period of time to recover, we performed an interim impairment test Based on the assumptions used in the first quarter test, there have been no indications of impairment through the end of the third quarter of 2020. Three Months Ended April 4, March 30, (In millions) 2020 2019 Gross favorable $ 27 $ 53 Gross unfavorable (25) (22) Net adjustments $ 2 $ 31 Forward-Looking Information dismiss and closed the case. On August 18, 2020, plaintiffs filed a notice of appeal contesting the dismissal, which Textron has opposed. That appeal remains pending. As a result, our costs may increase as a result of the COVID-19 outbreak. These cost increases may not be fully recoverable, negatively impacting our profitability, and may continue even after the business environment has improved. Maximum Total Average Price Total Number of Number of Shares Number of Paid per Share Shares Purchased as that may yet be Shares (excluding part of Publicly Purchased under Period (shares in thousands) Purchased * commissions) Announced Plan * the Plan January 5, 2020 – February 8, 2020 200 $ 46.27 200 6,981 February 9, 2020 – March 7, 2020 660 44.84 660 24,575 March 8, 2020 – April 4, 2020 450 33.71 450 24,125 Total 1,310 $ 41.24 1,310 For Against Abstain Broker Non-Vote Scott C. Donnelly 172,220,276 18,532,856 1,085,308 15,047,516 Kathleen M. Bader 173,822,752 16,238,609 1,777,079 15,047,516 R. Kerry Clark 172,510,636 17,116,092 2,211,712 15,047,516 James T. Conway 175,975,123 13,852,379 2,010,938 15,047,516 Paul E. Gagné 149,490,023 40,169,166 2,179,251 15,047,516 Ralph D. Heath 153,076,421 36,692,233 2,069,786 15,047,516 Deborah Lee James 175,745,351 14,033,042 2,060,047 15,047,516 Lionel L. Nowell III 185,943,643 3,635,670 2,259,127 15,047,516 James L. Ziemer 149,404,785 40,264,376 2,169,279 15,047,516 Maria T. Zuber 153,387,104 36,429,603 2,021,733 15,047,516 For Against Abstain Broker Non-Vote 126,708,595 55,355,856 9,773,989 15,047,516 For Against Abstain 199,056,151 6,019,306 1,810,499 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 32.2 101 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). 8(In millions) October 3,
2020January 4,
2020Commercial $ 761 $ 835 U.S. Government contracts 152 115 913 950 Allowance for credit losses (41) (29) Total accounts receivable, net $ 872 $ 921 Table of Contents(In millions) October 3,
2020January 4,
2020Finance receivables $ 725 $ 707 Allowance for credit losses (32) (25) Total finance receivables, net $ 693 $ 682 3three categories based on the key credit quality indicators for the individual loan. These 3three categories are performing, watchlist and nonaccrual.9 Loan modifications inquarternine months of 2020, we modified finance receivable contracts for 90 customers with an outstanding balance totaling $283 million at October 3, 2020. Of the modifications occurring during the first nine months of 2020, contracts for 25 customers, or $109 million of finance receivables, were categorized as troubled debt restructurings. Due to the nature of these restructurings, the financial effects were not significant, however, we are working on modifications for approximately 30% of our totalsignificant. We had 2 customer defaults related to finance receivables.receivables previously modified as a troubled debt restructuring that had an insignificant outstanding balance. We believe our allowance for credit losses adequately covers our exposure on these loans as our estimated collateral values largely exceed the outstanding loan amounts.(Dollars in millions) October 3,
2020January 4,
2020Performing $ 560 $ 664 Watchlist 107 4 Nonaccrual 58 39 Nonaccrual as a percentage of finance receivables 8.00% 5.52% Current and less than 31 days past due $ 683 $ 637 31-60 days past due 9 53 61-90 days past due 2 7 Over 90 days past due 31 10 60+ days contractual delinquency as a percentage of finance receivables 4.55% 2.40% April 4,October 3, 2020, 31%38% of our performing finance receivables were originated since the beginning of 2019 and 35%29% were originated from 2016 to 2018. For finance receivables categorized as watchlist, 36%15% were originated since the beginning of 2019 and 23%44% from 2016 to 2018.(In millions) October 3,
2020January 4,
2020Finance receivables evaluated collectively $ 461 $ 564 Finance receivables evaluated individually 157 39 Allowance for credit losses based on collective evaluation 26 22 Allowance for credit losses based on individual evaluation 6 3 Impaired finance receivables with no related allowance for credit losses $ 120 $ 22 Impaired finance receivables with related allowance for credit losses 37 17 Unpaid principal balance of impaired finance receivables 166 50 Allowance for credit losses on impaired loans 6 3 Average recorded investment of impaired finance receivables 116 40 10(In millions) October 3,
2020January 4,
2020Finished goods $ 1,468 $ 1,557 Work in process 1,869 1,616 Raw materials and components 915 896 Total inventories $ 4,252 $ 4,069 thesethe policies as we strengthened our cash position in light of disruptions in the capital markets caused by the COVID-19 pandemic. These proceedsAt October 3, 2020, there was $362 million of outstanding borrowings against the policies. Proceeds from these borrowings and subsequent payments have been classified as financing activities in the consolidated statement of cash flows.Other Current Liabilities Nine Months Ended (In millions) October 3,
2020September 28,
2019Beginning of period $ 141 $ 149 Provision 35 45 Settlements (46) (56) Adjustments* (13) (3) End of period $ 117 $ 135 Restructuring ReserveApril 4,October 3, 2020 were not significant. Our operating leases have remaining lease terms up to 2928 years, which include options to extend the lease term for periods up to 25 years when it is reasonably certain the option will be exercised. In the first quarter of 2020 and 2019, both our operatingOperating lease cost and cash paid for these leases totaled $15 million and $16 million in the third quarter of 2020 and 2019, respectively, and $45 million and $48 million in the first nine months of 2020 and 2019, respectively. Cash paid for operating leases totaled $45 million and $48 million in the first nine months of 2020 and 2019, respectively, which is classified in cash flows from operating activities. Variable and short-term lease costs were not significant. Balance sheet and other information related to our operating leases is as follows:11(Dollars in millions) October 3,
2020January 4,
2020Other assets $ 268 $ 277 Other current liabilities 45 48 Other liabilities 228 233 Weighted-average remaining lease term (in years) 10.0 10.2 Weighted-average discount rate 4.28% 4.42% April 4,October 3, 2020, maturities of our operating lease liabilities on an undiscounted basis totaled $46$18 million for 2020, $48$52 million for 2021, $41$44 million for 2022, $32$35 million for 2023, $25$28 million for 2024 and $153$165 million thereafter.At our current credit ratings,On August 10, 2020, we repaid the borrowings accrue interest at a rate equal to the London interbank offered rate plus 2.00%, which is an annual interest rate of 3.00% at April 4, 2020. We can pre-pay any amount of the principal balance during the term of the loan; however, we cannot borrow additional principal amounts. The Term Loan Credit Agreement restricts us from incurring additional indebtedness, subject to various exceptions, one of which allows us to borrow under our $1.0 billion revolving credit facility. While this loan is outstanding we have agreed not to repurchase any of our common stock. The principal amount outstanding, plus accrued and unpaid interest and fees, will be due on March 31, 2021.Under our shelf registration statement, on March 17, 2020, we issued $650 million of fixed-rate notes due June 1, 2030 with an annual interest rate of 3.00%. The net proceeds of the issuance totaled $643 million, after deducting underwriting discounts, commissions and offering expenses.April 4,October 3, 2020 and January 4, 2020, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $410$301 million and $342 million, respectively. At April 4,October 3, 2020, the fair value amounts of our foreign currency exchange contracts were a $14$3 million asset and a $18$4 million liability. At January 4, 2020, the fair value amounts of our foreign currency exchange contracts were a $2 million asset and a $2 million liability.12 October 3, 2020 January 4, 2020 Carrying Estimated Carrying Estimated (In millions) Value Fair Value Value Fair Value Manufacturing group Debt, excluding leases $ (4,042) $ (4,294) $ (3,097) $ (3,249) Finance group Finance receivables, excluding leases 501 522 493 527 Debt (666) (581) (686) (634) Shareholder’sShareholders’ equity is presented below:Accumulated Other Total Common Capital Treasury Retained Comprehensive Shareholders' (In millions) Stock Surplus Stock Earnings Loss Equity Three months ended October 3, 2020 Beginning of period $ 29 $ 1,732 $ (74) $ 5,631 $ (1,791) $ 5,527 Net income — — — 115 — 115 Other comprehensive income — — — — 74 74 Share-based compensation activity — 30 — — — 30 Dividends declared — — — (5) — (5) End of period $ 29 $ 1,762 $ (74) $ 5,741 $ (1,717) $ 5,741 Three months ended September 28, 2019 Beginning of period $ 30 $ 1,717 $ (490) $ 5,794 $ (1,715) $ 5,336 Net income — — — 220 — 220 Other comprehensive loss — — — — (14) (14) Share-based compensation activity — 24 — — — 24 Dividends declared — — — (5) — (5) Purchases of common stock — — (109) — — (109) End of period $ 30 $ 1,741 $ (599) $ 6,009 $ (1,729) $ 5,452 Nine months ended October 3, 2020 Beginning of period $ 29 $ 1,674 $ (20) $ 5,682 $ (1,847) $ 5,518 Net income — — — 73 — 73 Other comprehensive income — — — — 130 130 Share-based compensation activity — 88 — — — 88 Dividends declared — — — (14) — (14) Purchases of common stock — — (54) — — (54) End of period $ 29 $ 1,762 $ (74) $ 5,741 $ (1,717) $ 5,741 Nine months ended September 28, 2019 Beginning of period $ 30 $ 1,646 $ (129) $ 5,407 $ (1,762) $ 5,192 Net income — — — 616 — 616 Other comprehensive income — — — — 33 33 Share-based compensation activity — 95 — — — 95 Dividends declared — — — (14) — (14) Purchases of common stock — — (470) — — (470) End of period $ 30 $ 1,741 $ (599) $ 6,009 $ (1,729) $ 5,452 firstthird quarter of 2020 and 2019 and $0.06 for both the first nine months of 2020 and 2019.13 Three Months Ended Nine Months Ended (In thousands) October 3,
2020September 28,
2019October 3,
2020September 28,
2019Basic weighted-average shares outstanding 228,918 229,755 228,492 232,202 Dilutive effect of stock options 361 1,342 345 1,487 Diluted weighted-average shares outstanding 229,279 231,097 228,837 233,689 Table of Contents3.17.9 million shares of common stock arewere excluded from the calculation of diluted weighted-average shares outstanding for the third quarter and first quarternine months of 2020, respectively, as their effect would have been anti-dilutive. Stock options to purchase 4.3 million and 3.1 million shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding for the third quarter and first nine months of 2019, respectively, as their effect would have been anti-dilutive.Pension and Foreign Deferred Accumulated Postretirement Currency Gains (Losses) Other Benefits Translation on Hedge Comprehensive (In millions) Adjustments Adjustments Contracts Loss Balance at January 4, 2020 $ (1,811) $ (36) $ 0 $ (1,847) Other comprehensive income before reclassifications 0 25 (2) 23 Reclassified from Accumulated other comprehensive loss 110 0 (3) 107 Balance at October 3, 2020 $ (1,701) $ (11) $ (5) $ (1,717) Balance at December 29, 2018 $ (1,727) $ (32) $ (3) $ (1,762) Other comprehensive loss before reclassifications 0 (30) 4 (26) Reclassified from Accumulated other comprehensive loss 61 0 (2) 59 Balance at September 28, 2019 $ (1,666) $ (62) $ (1) $ (1,729) October 3, 2020 September 28, 2019 Tax Tax Pre-Tax (Expense) After-Tax Pre-Tax (Expense) After-Tax (In millions) Amount Benefit Amount Amount Benefit Amount Three Months Ended Pension and postretirement benefits adjustments: Amortization of net actuarial loss* $ 46 $ (11) $ 35 $ 25 $ (6) $ 19 Amortization of prior service cost* 2 0 2 1 0 1 Pension and postretirement benefits adjustments, net 48 (11) 37 26 (6) 20 Deferred gains (losses) on hedge contracts: Current deferrals 3 0 3 0 0 0 Reclassification adjustments (2) 1 (1) 0 0 0 Deferred gains (losses) on hedge contracts, net 1 1 2 0 0 0 Foreign currency translation adjustments 35 0 35 (33) (1) (34) Total $ 84 $ (10) $ 74 $ (7) $ (7) $ (14) Nine Months Ended Pension and postretirement benefits adjustments: Amortization of net actuarial loss* $ 138 $ (32) $ 106 $ 74 $ (17) $ 57 Amortization of prior service cost* 5 (1) 4 5 (1) 4 Pension and postretirement benefits adjustments, net 143 (33) 110 79 (18) 61 Deferred gains (losses) on hedge contracts: Current deferrals (2) 0 (2) 6 (2) 4 Reclassification adjustments (5) 2 (3) (2) 0 (2) Deferred gains (losses) on hedge contracts, net (7) 2 (5) 4 (2) 2 Foreign currency translation adjustments 28 (3) 25 (29) (1) (30) Total $ 164 $ (34) $ 130 $ 54 $ (21) $ 33 14special charges.an inventory charge related to the restructuring plan initiated in the second quarter of 2020, as discussed in Note 14. The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense.segmentSegment profit to incomeIncome before income taxes, are included in the table below: Three Months Ended Nine Months Ended (In millions) October 3,
2020September 28,
2019October 3,
2020September 28,
2019Revenues Textron Aviation $ 795 $ 1,201 $ 2,414 $ 3,458 Bell 793 783 2,438 2,293 Textron Systems 302 311 956 926 Industrial 832 950 2,134 2,871 Finance 13 14 42 47 Total revenues $ 2,735 $ 3,259 $ 7,984 $ 9,595 Segment Profit Textron Aviation $ (29) $ 104 $ (92) $ 315 Bell 119 110 352 317 Textron Systems 40 31 103 108 Industrial 58 47 56 173 Finance 1 5 8 17 Segment profit 189 297 427 930 Corporate expenses and other, net (28) (17) (72) (88) Interest expense, net for Manufacturing group (38) (39) (109) (110) Special charges (7) 0 (124) 0 Inventory charge* 0 0 (55) 0 Income before income taxes $ 116 $ 241 $ 67 $ 732 �� �� Three Months Ended Nine Months Ended (In millions) October 3,
2020September 28,
2019October 3,
2020September 28,
2019Aircraft $ 486 $ 797 $ 1,479 $ 2,296 Aftermarket parts and services 309 404 935 1,162 Textron Aviation 795 1,201 2,414 3,458 Military aircraft and support programs 515 473 1,737 1,463 Commercial helicopters, parts and services 278 310 701 830 Bell 793 783 2,438 2,293 Unmanned systems 156 147 473 416 Marine and land systems 36 47 127 155 Simulation, training and other 110 117 356 355 Textron Systems 302 311 956 926 Fuel systems and functional components 497 521 1,233 1,707 Specialized vehicles 335 429 901 1,164 Industrial 832 950 2,134 2,871 Finance 13 14 42 47 Total revenues $ 2,735 $ 3,259 $ 7,984 $ 9,595 15Textron Textron (In millions) Aviation Bell Systems Industrial Finance Total Three months ended October 3, 2020 Customer type: Commercial $ 758 $ 273 $ 54 $ 830 $ 13 $ 1,928 U.S. Government 37 520 248 2 0 807 Total revenues $ 795 $ 793 $ 302 $ 832 $ 13 $ 2,735 Geographic location: United States $ 562 $ 608 $ 263 $ 401 $ 7 $ 1,841 Europe 65 43 10 203 0 321 Asia and Australia 68 67 15 92 0 242 Other international 100 75 14 136 6 331 Total revenues $ 795 $ 793 $ 302 $ 832 $ 13 $ 2,735 Three months ended September 28, 2019 Customer type: Commercial $ 1,153 $ 306 $ 73 $ 947 $ 14 $ 2,493 U.S. Government 48 477 238 3 0 766 Total revenues $ 1,201 $ 783 $ 311 $ 950 $ 14 $ 3,259 Geographic location: United States $ 836 $ 583 $ 247 $ 454 $ 8 $ 2,128 Europe 154 41 11 236 1 443 Asia and Australia 80 68 37 93 0 278 Other international 131 91 16 167 5 410 Total revenues $ 1,201 $ 783 $ 311 $ 950 $ 14 $ 3,259 Nine months ended October 3, 2020 Customer type: Commercial $ 2,322 $ 687 $ 182 $ 2,128 $ 42 $ 5,361 U.S. Government 92 1,751 774 6 0 2,623 Total revenues $ 2,414 $ 2,438 $ 956 $ 2,134 $ 42 $ 7,984 Geographic location: United States 1,677 1,979 825 1,017 21 5,519 Europe 219 88 33 558 1 899 Asia and Australia 241 183 50 221 1 696 Other international 277 188 48 338 19 870 Total revenues $ 2,414 $ 2,438 $ 956 $ 2,134 $ 42 $ 7,984 Nine months ended September 28, 2019 Customer type: Commercial $ 3,322 $ 815 $ 230 $ 2,856 $ 47 $ 7,270 U.S. Government 136 1,478 696 15 0 2,325 Total revenues $ 3,458 $ 2,293 $ 926 $ 2,871 $ 47 $ 9,595 Geographic location: United States $ 2,361 $ 1,732 $ 753 $ 1,309 $ 23 $ 6,178 Europe 501 108 51 838 2 1,500 Asia and Australia 168 229 66 254 3 720 Other international 428 224 56 470 19 1,197 Total revenues $ 3,458 $ 2,293 $ 926 $ 2,871 $ 47 $ 9,595
Aviation
SystemsApril 4,October 3, 2020, we had $9.2$9.4 billion in remaining performance obligations of which we expect to recognize revenues of approximately 72%65% through 2021, an additional 21%27% through 2023, and the balance thereafter. April 4,October 3, 2020 and January 4, 2020, contract assets totaled $565$546 million and $567 million, respectively, and contract liabilities totaled $930$965 million and $830 million, respectively, reflecting timing differences between revenue recognized, billings and payments from customers. During the third quarter and first quarternine months of 2020, and 2019, we recognized revenues of $231$44 million and $311$396 million, respectively, that were included in the contract liability balance at the beginningJanuary 4, 2020. We recognized revenues of each year.Note 13. Share-Based CompensationUnder our share-based compensation plans, we have authorization to provide awards to selected employees$54 million 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. Compensation expense, or income in periods of share price depreciation, for these plans is included in net income as follows: �� Compensation (income) expense included stock option expense of $10$511 million in the third quarter and first quarter 2020 and $11 millionnine months of 2019, respectively, that were included in the first quarter of 2019.16Stock OptionsOptions to purchase our shares have a maximum term of ten years and generally vest ratably over a three-year period. Stock option compensation cost is calculated under the fair value approach using the Black-Scholes option-pricing model to determine the fair value of options granted on the date of grant. The expected volatility used in this model is based on implied volatilities from traded options on our common stock, historical volatilities and other factors. The expected term is based on historical option exercise data, which is adjusted to reflect any anticipated changes in expected behavior.We grant options annually on the first day of March and the assumptions used in our option-pricing model and the weighted-average fair value for these options are as follows:The stock option activity during the first quarter of 2020 is provided below: �� At April 4, 2020, the aggregate intrinsic value of our outstanding and exercisable options was de minimis and these options had a weighted-average remaining contractual life of 6.2 and 4.9 years, respectively. The total intrinsic value of options exercised in the first quarter of 2020 and 2019 was $3 million and $16 million, respectively.Restricted Stock UnitsWe issue restricted stock units that include the right to receive dividend equivalents and are settled in both cash and stock. Beginning in 2020, new grants of restricted stock units will vest in full on the third anniversary of the grant date. Restricted stock units granted prior to 2020 vest one-third each in the third, fourth and fifth year following the year of the grant. The activity for restricted stock units payable in both stock and cash during the first quarter of 2020 is provided below:17The fair value of the restricted stock unit awards that vested and/or amounts paid under these awards is as follows:Performance Share UnitsThe activity for our performance share units during the first quarter of 2020 is provided below:Cash paid under these awards totaled $7 million and $10 million in the first quarter of 2020 and 2019, respectively.14.13. Retirement Plans Three Months Ended Nine Months Ended (In millions) October 3,
2020September 28,
2019October 3,
2020September 28,
2019Pension Benefits Service cost $ 27 $ 23 $ 79 $ 68 Interest cost 73 82 220 245 Expected return on plan assets (144) (139) (431) (417) Amortization of net actuarial loss 47 26 139 76 Amortization of prior service cost 3 3 9 10 Net periodic benefit cost (credit) $ 6 $ (5) $ 16 $ (18) Postretirement Benefits Other Than Pensions Service cost $ 0 $ 1 $ 2 $ 2 Interest cost 2 3 6 8 Amortization of net actuarial loss (1) (1) (1) (2) Amortization of prior service credit (1) (2) (4) (5) Net periodic benefit cost $ 0 $ 1 $ 3 $ 3 15.14. Special ChargesTotal 2020 Contract COVID-19 Severance Terminations Asset Restructuring Other Asset (In millions) Costs and Other Impairments Plan Impairments Total Three months ended October 3, 2020 Industrial $ 3 $ 0 $ 2 $ 5 $ 0 $ 5 Corporate 2 0 0 2 0 2 Total special charges $ 5 $ 0 $ 2 $ 7 $ 0 $ 7 Nine months ended October 3, 2020 Textron Aviation $ 27 0 $ 1 $ 28 $ 32 $ 60 Textron Systems 14 12 14 40 0 40 Industrial 11 0 2 13 7 20 Corporate 4 0 0 4 0 4 Total special charges $ 56 $ 12 $ 17 $ 85 $ 39 $ 124 recordedrecognized special charges of $39 million inof intangible asset impairment charges inat the Textron Aviation and Industrial segments. The aviation industry in which Textron Aviation operates has been significantly impacted byDue to the impact of the COVID-19 pandemic. We havepandemic, we experienced decreased demand for our products and services as our customers have delayed or ceased orders due to the current environment of economic uncertainty. In light of these conditions, Textron Aviation hashad temporarily shut down most aircraft production, including the King Air turboprop and Beechcraft piston product lines, and hashad instituted employee furloughs. Based on these events, we performed an interim impairment test of the indefinite-lived Beechcraft and King Air trade name intangible assets at April 4, 2020. Fair value of these assets was determined utilizing the relief of royalty method assuming an increase in the discount rate based on current market data to 9.7% and revised expectations of future revenues for the products and services associated with the tradenames. This analysis resulted in an impairment charge of $32 million. At April 4,October 3, 2020, these intangible assets totaled $169 million.the Specialized Vehicles product line has experienced reduced demand for its products as the consumer and commercial markets in which it operates have been significantly impacted by the pandemic. Many of the dealers and retail stores that sell its products are currently closed throughout the U.S. and globally, and there is uncertainty as to when they will reopen. Based on these events, we performed an interim intangible impairment test offully impaired the indefinite-lived Arctic Cat trade name intangible asset usingwithin the relief of royalty methodSpecialized Vehicles product line and recorded an impairment charge ofa $7 million impairment charge.fully impair this asset.Contract Severance Terminations (In millions) Costs and Other Total Balance at January 4, 2020 $ 46 $ 19 $ 65 Provision for 2020 COVID-19 restructuring plan 56 12 68 Cash paid (62) (8) (70) Balance at October 3, 2020 $ 40 $ 23 $ 63 18quarternine months of 2020 was 0.9% and (9.0)%, respectively, compared to the statutory rate of 21%, largely due to the favorable impact of research credits. In the first nine months of 2020, we incurred special charges and an inventory charge in a non-U.S. jurisdiction where tax benefits cannot be realized, which were partially offset by a $14 million benefit recognized upon the release of a valuation allowance in a non-U.S. jurisdiction. These items had a more significant impact on the effective tax rate due to the lower income before income taxes for the period.27.5%8.7% and 15.6%15.8%, respectively. In the third quarter and first quarter of 2020, the effective tax rate was higher than the U.S. federal statutory tax rate of 21%, primarily due to a $10 million tax provision established related to a decision to dividend cash back from select non-U.S. jurisdictions to the U.S. in 2020. In the first quarternine months of 2019, the effective tax rate was lower than the U.S. federal statutory tax rate of 21%, primarily due to a $12$41 million benefitand $53 million, respectively, in benefits recognized for additional research credits related to prior years.17.16. Commitments and Contingencies19Recent DevelopmentsTheOur operations have experiencedThe effects of the pandemic and continue to experience various degrees of disruption due to the unprecedented conditions surrounding the pandemic. Whileresulting global disruptions on our U.S. business and operations are largely excluded from various statediscussed in Item 2 of Part I, “Management’s Discussion and local government shut-down orders implemented as a resultAnalysis of COVID-19,Financial Condition and Results of Operations” in our Quarterly Report on Form 10-Q for the period ended July 4, 2020. While certain of our commercial manufacturing facilities havewere temporarily closed and/or furloughed employeesduring the first quarter through the latter part of the second quarter due to reduced demand for our products. In addition, certain of our non-U.S. facilities have been, and a few currently are, subject to government issued shut-down orders and operating restrictions. Our businesses are and may continue to be affected by various other COVID-19 related challenges, including remote working arrangements, adherence to social distancing guidelines, travel restrictions, quarantines and other workforce and supply chain disruptions. Additionally, government shut-down orders and operating restrictions are subject to change at any time and our business could be further impacted by these actionsproducts, substantially all manufacturing activities had resumed in the future.Our top priority has beensecond quarter. In the safety of our employees, and we have taken steps to implement safe work practices to protect the health of our employees, including reconfiguring workspaces to enable adherence to social distancing guidelines and increasing cleaning and disinfecting of our facilities. We have formed enterprise-wide response teams to implement actions and provide guidance for our businesses on reducing the spread of COVID-19 in the workplace. We have also enhanced our IT infrastructure to support employees who are working remotely.At Bell and Textron Systems, as U.S. defense contractors, a significant portion of their operations remain open and these businesses continue to fulfill their contracts with the U.S. Government. However, the COVID-19 pandemic has adversely impacted revenues and segment profit during thethird quarter, for our commercial businesses which have experienced decreasedgenerally seen an increase in customer demand most notably for general aviation products and services, recreational and other specialized vehicles and our automotive products. In particular, as a resultcompared with the first half of the outbreak of COVID-19, Textron Aviation has experienced decreased demand for its products and services and has temporarily shut down most aircraft production and instituted employee furloughs. The Industrial segment has also been significantly impacted due to reduced demand, temporary manufacturing facility closures throughout the world and employee furloughs. At our Finance segment, we are working with customers impacted by the pandemic to provide temporary payment relief, primarily in the form of interest-free periods, as discussed in Note 3 to the consolidated financial statements.We ended the quarter with $2.4 billion in cash and cash equivalents and we have a $1.0 billion credit facility which remains undrawn. We strengthened our cash position during the quarter by issuing $650 million in senior debt and by borrowing $500 million under a new 364-day term loan credit agreement. In addition, we have taken measures to reduce costs and conserve cash, including closing manufacturing facilities and implementing employee furloughs at many of our commercial businesses, reducing capital expenditures, delaying certain research and development projects, and other cost reduction and cash preservation actions. We have also taken other measures to ensure adequate liquidity such as suspending share repurchases and deferring U.S. payroll tax payments as permitted under the Coronavirus Aid, Relief, and Economic Security Act (Cares Act). As of April 4, 2020, we have reviewed our assets that are subject to impairment in light of the pandemic, resulting in charges that are included in the Special Charges section below. While we do not currently anticipate any material impairments on our other assets as a result of the pandemic, as discussed in the Critical Accounting Estimates – Goodwill section on pages 29 to 30, future changes in revenue expectations, earnings and cash flows related to intangible assets, goodwill and other long-lived assets below current projections could cause these assets to be impaired. There are many uncertainties regarding the COVID-19 pandemic, and we arecontinue to closely monitoringmonitor the impact of the pandemic on all aspects of our business, including how it will impactis impacting our customers, employees, suppliers, vendors, business partners and distribution channels. See Item 1A. Risk Factors on page 34 for additional risks and uncertainties related to the pandemic’s impact on our business. The ultimate extent of the effects of the COVID-19 pandemic on the company is uncertain and will depend on future developments, and such effects could exist for an extended period of time, even after the pandemic ends.20 Three Months Ended Nine Months Ended (Dollars in millions) October 3,
2020September 28,
2019% Change October 3,
2020September 28,
2019% Change Revenues $ 2,735 $ 3,259 (16)% $ 7,984 $ 9,595 (17)% Cost of sales 2,332 2,747 (15)% 6,970 7,965 (12)% Selling and administrative expense 258 255 1% 760 854 (11)% Gross margin as a percentage of Manufacturing revenues 14.3% 15.3% 12.2% 16.6% 2224 to 26.$332$524 million, 11%16%, in the firstthird quarter of 2020, compared with the firstthird quarter of 2019. The net revenue decrease included the following factors:●Lower Textron Aviation revenues of $262 million, largely due to lower volume and mix of $260 million, primarily from lower Citation jet volume and commercial turboprop volume, reflecting a decline in demand related to the pandemic, disruption in our composite manufacturing production due to a plant accident that occurred in December 2019, and delays in the acceptance of aircraft related to COVID-19 travel restrictions.●Lower Industrial revenues of $172 million, primarily due to lower volume and mix of $164 million, largely in the Fuel Systems and Functional Components product line related to manufacturing facility closures that began in China in January and extended to almost all locations by the end of the quarter as a result of the COVID-19 pandemic.●Higher Bell revenues of $80 million, primarily due to higher military revenue of $112 million, partially offset by lower commercial revenues, principally due to delayed deliveries as a result of COVID-19 travel restrictions.●Higher Textron Systems revenues of $21 million, primarily reflecting higher volume.•$190$415 million, 7%15%, and $995 million, 12%, in the third quarter and first quarternine months of 2020, respectively, compared with the first quartercorresponding periods of 2019, largely resulting fromdue to lower net volume and mix described above. For the first nine months of 2020, the decrease in cost of sales was partially offset by idle facility costs of $100 million, primarily at the Textron Aviation segment, reflecting unfavorable absorption of manufacturing costs attributable to abnormally low production levels resulting from the pandemic and temporary manufacturing facility closures, and a $55 million inventory charge related to the TRU business discussed below in the Special Charges section. Gross margin as a percentage of Manufacturing revenues decreased 310430 basis points in the first nine months of 2020, primarily due to lower margin at both the Textron Aviation segment reflecting unfavorable impacts from the pandemic, including the idle facility costs and Industrial segments, largely reflectinginventory valuation charges, and the impact of lower volume and mix and unfavorable performance related to idle facility costs. We expensed approximately $25 million of idle facility costs in the first quarter of 2020 due to temporary manufacturing facility closures and employee furloughs resulting from the COVID-19 pandemic.$44$94 million, 14%11%, in the first quarternine months of 2020, compared with the first quarternine months of 2019, primarily reflecting lower share-based compensation expense.Total 2020 Contract COVID-19 Severance Terminations Asset Restructuring Other Asset (In millions) Costs and Other Impairments Plan Impairments Total Three months ended October 3, 2020 Industrial $ 3 $ — $ 2 $ 5 $ — $ 5 Corporate 2 — — 2 — 2 Total special charges $ 5 $ — $ 2 $ 7 $ — $ 7 Nine months ended October 3, 2020 Textron Aviation $ 27 — $ 1 $ 28 $ 32 $ 60 Textron Systems 14 12 14 40 — 40 Industrial 11 — 2 13 7 20 Corporate 4 — — 4 — 4 Total special charges $ 56 $ 12 $ 17 $ 85 $ 39 $ 124 recordedrecognized special charges of $39 million inof intangible asset impairment charges inat the Textron Aviation and Industrial segments. In light ofDue to the impact of the COVID-19 pandemic, onwe experienced decreased demand for our products and services as our customers delayed or ceased orders due to the environment of economic uncertainty. In light of these conditions, Textron Aviation had temporarily shut down most aircraft production, including the King Air turboprop aircraft,and Beechcraft piston product lines, and had instituted employee furloughs. Based on these events, we performed an interim impairment test of Textron Aviation’sthe indefinite-lived Beechcraft and King Air trade name intangible assets at April 4, 2020. We utilized a higherFair value of these assets was determined utilizing the relief of royalty method assuming an increase in the discount rate based on current market data to 9.7% and revised our expectationexpectations of future revenues for the Beechcraftproducts and King Air models, resultingservices associated with the tradenames. This analysis resulted in an impairment charge of $32 million. At April 4,October 3, 2020, these intangiblesintangible assets totaled $169 million.the Specialized Vehicles business product line has experienced reduced demand in the consumer and commercial markets in which it operates, reflecting the impact of the pandemic. As a result, we performed an interim intangible impairment test offully impaired the indefinite-lived Arctic Cat trade name intangible asset within the Specialized Vehicles product line and recorded an impairment charge ofa $7 million to fully impair the asset.quarternine months of 2020 was 0.9% and (9.0)%, respectively, compared to the statutory rate of 21%, largely due to the favorable impact of research credits. In the first nine months of 2020, we incurred special charges and an inventory charge in a non-U.S. jurisdiction where tax benefits cannot be realized, which were partially offset by a $14 million benefit recognized upon the release of a valuation allowance in a non-U.S. jurisdiction. These items had a more significant impact on the effective tax rate due to the lower income before income taxes for the period.27.5%8.7% and 15.6%15.8%, respectively. In the third quarter and first quarter of 2020, the effective tax rate was higher than the U.S. federal statutory tax rate of 21%, primarily due to a $10 million tax provision established related to a decision to dividend cash back from select non-U.S. jurisdictions to the U.S. in 2020. In the first quarternine months of 2019, the effective tax rate was lower than the U.S. federal statutory tax rate of 21%, primarily due to a $12$41 million benefitand $53 million, respectively, in benefits recognized for additional research credits related to prior years.21Backlog(In millions) October 3,
2020January 4,
2020Bell $ 5,704 $ 6,902 Textron Systems 1,874 1,211 Textron Aviation 1,807 1,714 Total backlog $ 9,385 $ 9,827 Bell's$486 million, 7%$1.2 billion, 17%, primarily as a result of revenues recognized on our U.S. Government contracts in excess of new contracts received. Backlog at Textron Aviation decreased $291Systems’ increased $663 million, 17%, primarily due to a fractional jet customer that reduced orders based on its revised demand outlook as a result of the pandemic. Textron Systems' backlog increased $160 million, 13%55%, primarily due to new contracts received in excess of revenues recognized in the Marine and Land Systems and Unmanned Systems product line and the Weapons and Sensors System business in the Simulation, Training and Other product line.special charges.an inventory charge related to the 2020 COVID-19 restructuring plan, as discussed in the Special Charges section on page 22. The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense. Operating expenses for the Manufacturing segments include cost of sales, selling and administrative expense and other non-service components of net periodic benefit cost/(credit), and exclude certain corporate expenses and special charges.22 Three Months Ended Nine Months Ended (Dollars in millions) October 3,
2020September 28,
2019% Change October 3,
2020September 28,
2019% Change Revenues: Aircraft $ 486 $ 797 (39)% $ 1,479 $ 2,296 (36)% Aftermarket parts and services 309 404 (24)% 935 1,162 (20)% Total revenues 795 1,201 (34)% 2,414 3,458 (30)% Operating expenses 824 1,097 (25)% 2,506 3,143 (20)% Segment profit (loss) (29) 104 (128)% (92) 315 (129)% Profit (loss) margin (3.6)% 8.7% (3.8)% 9.1% fromfor the prior year quarter:(In millions) Q3 2020
versus
Q3 2019YTD 2020
versus
YTD 2019Volume and mix $ (410) $ (1,043) Pricing 4 (1) Total change $ (406) $ (1,044) 2020versus(In millions)2019Volume and mix $(260)Pricing(2)Total change $(262)$262$406 million, 23%34%, in the firstthird quarter of 2020, compared with the firstthird quarter of 2019, primarilylargely due to lower volume and mix of $260 million, largely the result of lower Citation jet volume of $154$234 million and lower commercial turboprop volume of $99 million. We delivered 23 Citation jets and 16 commercial turboprops in the first quarter of 2020, compared with 44 Citation jets and 44 commercial turboprops in the first quarter of 2019. The decrease in Citation jet and turboprop volume reflected$83 million, reflecting a decline in demand related to the pandemic, disruption in our composite manufacturing production due to a plant accident that occurred in December 2019, and delayslower aftermarket volume of $95 million, reflecting lower aircraft utilization resulting from the pandemic. We delivered 25 Citation jets and 21 commercial turboprops in the acceptancethird quarter of aircraft related to COVID-19 travel restrictions.operating expensesrevenues decreased $159 million, 15%$1.0 billion, 30%, in the first quarternine months of 2020, compared with the first nine months of 2019, largely due to lower Citation jet volume of $566 million and lower commercial turboprop volume of $230 million, reflecting a decline in demand related to the pandemic, and lower aftermarket volume of $227 million, reflecting lower aircraft utilization resulting from the pandemic. We delivered 71 Citation jets and 52 commercial turboprops in the first nine months of 2020, compared with 135 Citation jets and 117 commercial turboprops in the first nine months of 2019.as described above.from(loss) for the prior year quarter:(In millions) Q3 2020
versus
Q3 2019YTD 2020
versus
YTD 2019Volume and mix $ (116) $ (321) Performance (4) (54) Inflation and pricing (13) (32) Total change $ (133) $ (407) 2020versus(In millions)2019Volume and mix $(72)Performance(23)Inflation, net of pricing(8)Total change $(103)$103$133 million and $407 million in the third quarter and first quarternine months of 2020, respectively, compared with the first quartercorresponding periods of 2019, primarily due to the impact from lower volume and mix described above. In the first nine months of $722020, the decrease in segment profit also included unfavorable performance of $54 million, described above and an unfavorable impact of $23 million from performance, which includes $12primarily reflecting $76 million of idle facility costs, recognized in the first quarter of 2020 due to temporary manufacturing facility closuresdescribed above, and employee furloughsinventory valuation charges, largely resulting from the COVID-19 pandemic. These facility closures and employee furloughs will continue into the second quarter of 2020, which will result in additional idle facility costs.23 Three Months Ended Nine Months Ended (Dollars in millions) October 3,
2020September 28,
2019% Change October 3,
2020September 28,
2019% Change Revenues: Military aircraft and support programs $ 515 $ 473 9% $ 1,737 $ 1,463 19% Commercial helicopters, parts and services 278 310 (10)% 701 830 (16)% Total revenues 793 783 1% 2,438 2,293 6% Operating expenses 674 673 — 2,086 1,976 6% Segment profit 119 110 8% 352 317 11% Profit margin 15.0% 14.0% 14.4% 13.8% Bellfromfor the prior year quarter:(In millions) Q3 2020
versus
Q3 2019YTD 2020
versus
YTD 2019Volume and mix $ 6 $ 133 Other 4 12 Total change $ 10 $ 145 2020versus(In millions)2019Volume and mix $80Other4Total change $84$84$10 million, 11%, in the firstthird quarter of 2020, compared with the firstthird quarter of 2019, as higher military revenues of $112$42 million waswere partially offset by lower commercial revenues. The decrease in commercial revenues principally due to delayed deliveriesprimarily reflected the mix of aircraft sold in the period as a result of COVID-19 travel restrictions. Wewe delivered 1541 commercial helicopters in the firstthird quarter of 2020, compared with 3042 commercial helicopters in the firstthird quarter of 2019.operating expensesrevenues increased $73$145 million, 11%6%, in the first quarternine months of 2020, compared with the first quarternine months of 2019, as higher military revenues of $274 million were partially offset by lower commercial revenues. We delivered 83 commercial helicopters in the first nine months of 2020, compared with 125 commercial helicopters in the first nine months of 2019. fromfor the prior year quarter:(In millions) Q3 2020
versus
Q3 2019YTD 2020
versus
YTD 2019Volume and mix $ (1) $ 40 Performance and other 10 (5) Total change $ 9 $ 35 2020versus(In millions)2019Volume and mix $19Performance and other(8)Total change $11$11$9 million, 8%, in the third quarter of 2020, compared with the third quarter 2019, primarily due to the favorable impact from performance and other of $10 million.quarternine months of 2020, compared with the first quarter ofnine months 2019, primarily due to the impact of higher volume and mix described above, partially offset by an unfavorable impact of $8 million from performance and other. Performance and other of $5 million, which included $25$39 million in lower net favorable program adjustments, partially offset by lower research and development costs.24 Three Months Ended Nine Months Ended (Dollars in millions) October 3,
2020September 28,
2019% Change October 3,
2020September 28,
2019% Change Revenues $ 302 $ 311 (3)% $ 956 $ 926 3% Operating expenses 262 280 (6)% 853 818 4% Segment profit 40 31 29% 103 108 (5)% Profit margin 13.2% 10.0% 10.8% 11.7% fromfor the prior year quarter:(In millions) Q3 2020
versus
Q3 2019YTD 2020
versus
YTD 2019Volume $ (10) $ 27 Other 1 3 Total change $ (9) $ 30 2020versus(In millions)2019Volume $20Other1Total change $21increased $21decreased $9 million, 7%3%, in the firstthird quarter of 2020, compared with the firstthird quarter of 2019, largelyprimarily due to lower volume of $20 million at the TRU Simulation + Training business.mostthe Unmanned Systems product lines.increased $23decreased $18 million, 8%6%, in the firstthird quarter of 2020, compared with the firstthird quarter of 2019, primarily due to a favorable impact from performance and lower net volume described above. Operating expenses increased $35 million, 4%, in the first nine months of 2020 compared with the first nine months of 2019, primarily due to the impact of anfromfor the prior year quarter:(In millions) Q3 2020
versus
Q3 2019YTD 2020
versus
YTD 2019Performance and other $ 12 $ (19) Volume and mix (3) 14 Total change $ 9 $ (5) 2020 versus(In millions)2019Performance and other $(13)Volume and mix11Total change $(2)decreased $2increased $9 million, 7%29%, in the firstthird quarter of 2020, compared with the firstthird quarter of 2019, as unfavorabledue to a favorable impact from performance and other of $13$12 million, was largelypartially offset by lower volume and mix described above. Performance and other included a $12 million unfavorable impact in the Simulation + Training business. Three Months Ended Nine Months Ended (Dollars in millions) October 3,
2020September 28,
2019% Change October 3,
2020September 28,
2019% Change Revenues: Fuel systems and functional components $ 497 $ 521 (5)% $ 1,233 $ 1,707 (28)% Specialized vehicles 335 429 (22)% 901 1,164 (23)% Total revenues 832 950 (12)% 2,134 2,871 (26)% Operating expenses 774 903 (14)% 2,078 2,698 (23)% Segment profit 58 47 23% 56 173 (68)% Profit margin 7.0% 4.9% 2.6% 6.0% fromfor the prior year quarter:2020versus(In millions)2019Volume and mix $(164)Foreign exchange(9)Other1Total change $(172)25(In millions) Q3 2020
versus
Q3 2019YTD 2020
versus
YTD 2019Volume and mix $ (126) $ (735) Foreign exchange 8 (6) Other — 4 Total change $ (118) $ (737) $172$118 million, 19%12%, in the firstthird quarter of 2020, compared with the third quarter of 2019, primarily due to lower volume and mix in the Specialized Vehicles product line, principally reflecting the timing of snowmobile deliveries, and reduced demand in the ground support equipment business, which has been impacted by the reduction in global air travel as a result of the pandemic.quarternine months of 2020, Industrial segment revenues decreased $737 million, 26%, compared with the first nine months of 2019, largely due to lower volume and mix, of $164 million, largelyprimarily in the Fuel Systems and Functional Components product line related to manufacturing facility closures that began in China in Januarythe first half of 2020 as a result of the pandemic. As our OEM customers reopened and expanded to European and North American locationsresumed production, all of our manufacturing facilities had reopened by the end of the quarter as a result of the COVID-19 pandemic. Most of our manufacturing facilities located in China reopened in March and the current expectation is that our other locations will begin opening once our OEM customers open and resume production. Lower volume and mix in the Specialized Vehicles product line was primarily related to reduced demand and temporary manufacturing facility closures as the consumer and commercial markets in which it operates have been impacted by the pandemic. $131$129 million, 15%14%, and $620 million, 23%, in the third quarter and first quarternine months of 2020, respectively, compared with the first quartercorresponding periods of 2019, primarily due to lower volume and mix described above.(In millions) Q3 2020
versus
Q3 2019YTD 2020
versus
YTD 2019Volume and mix $ (19) $ (182) Performance 24 53 Pricing and inflation 4 10 Foreign exchange 2 2 Total change $ 11 $ (117) the prior year quarter:2020versus(In millions)2019Volume and mix $(45)Pricing and inflation3Performance and other1Total change $(41)$41$117 million, 82%, in the first quarternine months of 2020, compared with the first quarternine months of 2019, largely resulting from lower volume and mix described above. Performance and other includes approximately $13 millionincluded the impact of cost reduction activities, partially offset by idle facility costs of $24 million recognized in the first quarternine months of 2020, duereflecting unfavorable absorption of manufacturing costs attributable to abnormally low production levels resulting from the pandemic and temporary manufacturing facility closures and employee furloughs resulting from the COVID-19 pandemic, partially offset by lower share-based compensation expense. Three Months Ended Nine Months Ended (In millions) October 3,
2020September 28,
2019October 3,
2020September 28,
2019Revenues $ 13 $ 14 $ 42 $ 47 Segment profit 1 5 8 17 Financeprofit were largely unchanged$5 million in the third quarter and first quarternine months of 2020, respectively, compared with the first quartercorresponding periods of 2019.2019, and segment profit decreased $4 million and $9 million, respectively. The following table reflects information about the Finance segment’s credit performance related to finance receivables.(Dollars in millions) October 3,
2020January 4,
2020Finance receivables $ 725 $ 707 Allowance for credit losses 32 25 Ratio of allowance for credit losses to finance receivables 4.41% 3.54% Nonaccrual finance receivables 58 39 Ratio of nonaccrual finance receivables to finance receivables 8.00% 5.52% 60+ days contractual delinquency $ 33 $ 17 60+ days contractual delinquency as a percentage of finance receivables 4.55% 2.40% During the first quarter of 2020, 60+ days delinquency increased by $38 million, largely due to one customer. is working to providehas provided temporary payment relief to customers through loan modifications at the request of certain customers and continues to work with customers to provide temporary payment relief as discussed above, however, ifneeded. If the current economic conditions continue to persist or worsen, we may experience increased customer delinquencies. Wedelinquencies, however, we believe our allowance for credit losses adequately covers our exposure on these loans as our estimated collateral values largely exceed the outstanding loan amounts. KeyLoan modifications and key portfolio quality indicators for the portfolio are discussed in Note 3 to the consolidated financial statements.26(Dollars in millions) October 3,
2020January 4,
2020Manufacturing group Cash and equivalents $ 2,518 $ 1,181 Debt 4,058 3,124 Shareholders’ equity 5,741 5,518 Capital (debt plus shareholders’ equity) 9,799 8,642 Net debt (net of cash and equivalents) to capital 21% 26% Debt to capital 41% 36% Finance group Cash and equivalents $ 152 $ 176 Debt 666 686 As discussed in the Recent Developments section on page 20, thebelow and have suspended share repurchases. In addition, we have taken other measures to reduce costs and conserve cash, including closing manufacturing facilities and implementing employee furloughs at many ofbelow. Given our commercial businesses, reducing capital expenditures, delaying certain research and development projects, and other cost reduction and cash preservation actions. Whilestrengthened liquidity position, we expect to reactivate our share repurchase plan on an opportunistic basis in the impacts of COVID-19 to continue to have an adverse effect on our business, we cannot reasonably estimate the length or severity of this pandemic, or the extent to which the disruption may impact our consolidated financial position, results of operations and cash flows in 2020 and beyond.fourth quarter. We believe that we will have sufficient cash to meet our needs based on our existing cash balances, the cash we expect to generate from our manufacturing operations and the availability of our existing credit facility.April 4,October 3, 2020 and January 4, 2020, there were no amounts borrowed against the facility.At our current credit ratings,On August 10, 2020, we repaid the borrowings accrue interest at a rate equal to the London interbank offered rate plus 2.0%, which is an annual interest rate of 3.00% at April 4, 2020. We can pre-pay any amount of the principal balance during the term of the loan; however, we cannot borrow additional principal amounts. The Term Loan Credit Agreement restricts us from incurring additional indebtedness, subject to various exceptions, one of which allows us to borrow under our $1.0 billion revolving credit facility. While this loan is outstanding we have agreed not to repurchase any of our common stock. The principal amount outstanding, plus accrued and unpaid interest and fees, is due on March 31, 2021.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, on March 17, 2020, we issued $650 million of fixed-rate notes due June 2030 with an annual interest rate of 3.00%.To further enhance our liquidity, inagreement was terminated.27 Nine Months Ended (In millions) October 3,
2020September 28,
2019Operating activities $ 220 $ 205 Investing activities (116) (206) Financing activities 1,236 (47) Thequarternine months of our fiscal year typically results in2020, net cash outflow from operating activities. Consistent with prior years, we expect positive cash flowsinflow from operating activities increased $15 million to $220 million, reflecting a $421 million reduction in cash used for inventories, primarily at the full year. In the first quarter of 2020, the net cash outflow from operating activities was $393 million, compared with $196Textron Aviation segment, $146 million in higher customer advances/deposits, largely at the first quarter of 2019, primarily reflectingBell segment, and other favorable improvements in working capital accounts, largely offset by lower earnings and ana $401 million period over period increase in cash outflows of $127 million relatedused to changes in inventories between the periods,settle accounts payable, principally at the Textron Aviation segment.$50$151 million and $59$216 million in the first quarternine months of 2020 and 2019, respectively.quarternine months of 2020, cash flows provided by financing activities primarily included net proceeds of $643 million$1.1 billion from the issuance of long-term debt and $498 million from borrowings under the 364-Day Term Loan facility discussed above. In addition, we receivedproceeds of $377 million in proceeds from borrowings against corporate-owned life insurance policies and $105 million of proceeds from the issuance of commercial paper.policies. These cash inflows were partially offset by the repayment of $195 million of outstanding debt and $54 million of cash paid to repurchase an aggregate of 1.3 million shares of our common stock under both a prior 2018 share repurchase plan and a recent repurchase plan as described below. In the first quarternine months of 2019, cash flows used in financing activities primarily included $202$470 million of cash paid to repurchase an aggregate of 3.99.3 million shares of our outstanding common stock, partially offset by $100net proceeds of $297 million of proceeds from the issuance of commercial paper. We have suspended share repurchases while our 364-Day Term Loan remains outstanding. Nine Months Ended (In millions) October 3,
2020September 28,
2019Operating activities $ 5 $ 21 Investing activities (1) 72 Financing activities (28) (91) $46$90 million and $40$149 million in the first quarternine months of 2020 and 2019, respectively, partially offset by finance receivable originations of $33$94 million and $29$107 million, respectively. In the first nine months of 2020 and 2019, financing activities included payments on long-term and nonrecourse debt of $40 million and $41 million, respectively. Financing activities in the first quarternine months of 2019 also included a dividend payment of $50 million to the Manufacturing group.28 Nine Months Ended (In millions) October 3,
2020September 28,
2019Operating activities $ 200 $ 225 Investing activities (92) (183) Financing activities 1,208 (88) quarternine months of 2020, the net cash outflowinflow from Consolidated operating activities wasdecreased $25 million to $200 million, reflecting lower earnings and a $401 million period over period increase in cash used to settle accounts payable, principally at the Textron Aviation segment, largely offset by a $394 million compared withreduction in cash used for inventories, primarily at the Textron Aviation segment, $146 million of higher customer advances/deposits, largely at the Bell segment, and other favorable improvements in working capital accounts.quarter of 2019, primarily reflecting lower earnings and an increase in cash outflows of $127 million related to changes in inventories between the periods, principally at the Textron Aviation segment.Investing cash flows primarily included capital expenditures of $50 million and $59 million in the first quarternine months of 2020 and 2019, respectively, partially offset by collections on finance receivables totaling $13 million and $12 million, respectively.quarternine months of 2020 primarily included net proceeds of $643 million$1.1 billion from the issuance of long-term debt and $498 million from borrowings under the 364-Day Term Loan facility discussed above. In addition, we receivedproceeds of $377 million in proceeds from borrowings against corporate-owned life insurance policies and $105 million of proceeds from the issuance of commercial paper.policies. These cash inflows were partially offset by the repayment of $235 million of outstanding debt and $54 million of cash paid to repurchase shares of our outstanding common stock. In the first quarternine months of 2019, cash flows used in financing activities primarily included $202$470 million of cash paid to repurchase an aggregate of 3.9 million shares of our outstanding common stock, partially offset by $100$297 million of net proceeds from the issuance of commercial paper. Nine Months Ended (In millions) October 3,
2020September 28,
2019Reclassification adjustments from investing activities: Finance receivable originations for Manufacturing group inventory sales $ (94) $ (107) Cash received from customers 69 129 Other — 27 Total reclassification adjustments from investing activities (25) 49 Reclassification adjustments from financing activities: Dividends received by Manufacturing group from Finance group — (50) Total reclassification adjustments to cash flows from operating activities $ (25) $ (1) See Note 15 to the consolidated financial statements for a discussion of our review of indefinite-lived intangible assets, which resulted in the impairment of trade names related to discrete product lines due to the impact of the pandemic.29in the first quarter of 2020. Based on this test, weand determined that the fair valuevalues of these reporting units continuescontinue to exceed the carrying amountamounts and no impairment iswas required.ManyDuring the first quarter of 2020, many of the dealers and retail stores that sell its products are currentlywere closed throughout the U.S. and globally, and there iswas uncertainty as to when they will reopen. In addition, the severity of the economiciswas required. To assess the sensitivity of this estimate to a change in the discount rate, we increased the rate by an additional 50 basis points and the fair value estimate exceeded the carrying amount by 8%. Depending on the timing and continued impact of the pandemic on this unit, it is reasonably possible that it may require another interim impairment test during 2020 that may result in an impairment charge. At the end of the first quarter ofOctober 3, 2020, Textron Specialized Vehicles had $363 million in goodwill.30 Three Months Ended Nine Months Ended (In millions) October 3,
2020September 28,
2019October 3,
2020September 28,
2019Gross favorable $ 31 $ 41 $ 104 $ 140 Gross unfavorable (9) (20) (63) (61) Net adjustments $ 22 $ 21 $ 41 $ 79 •●Interruptions in the U.S. Government’s ability to fund its activities and/or pay its obligations;●Changing priorities or reductions in the U.S. Government defense budget, including those related to military operations in foreign countries;●Our ability to perform as anticipated and to control costs under contracts with the U.S. Government;●The U.S. Government’s ability to unilaterally modify or terminate its contracts with us for the U.S. Government’s convenience or for our failure to perform, to change applicable procurement and accounting policies, or, under certain circumstances, to withhold payment or suspend or debar us as a contractor eligible to receive future contract awards;●Changes in foreign military funding priorities or budget constraints and determinations, or changes in government regulations or policies on the export and import of military and commercial products;●Volatility in the global economy or changes in worldwide political conditions that adversely impact demand for our products;●Volatility in interest rates or foreign exchange rates;●Risks related to our international business, including establishing and maintaining facilities in locations around the world and relying on joint venture partners, subcontractors, suppliers, representatives, consultants and other business partners in connection with international business, including in emerging market countries;●Our Finance segment’s ability to maintain portfolio credit quality or to realize full value of receivables;●Performance issues with key suppliers or subcontractors;●Legislative or regulatory actions, both domestic and foreign, impacting our operations or demand for our products;●Our ability to control costs and successfully implement various cost-reduction activities;●The efficacy of research and development investments to develop new products or unanticipated expenses in connection with the launching of significant new products or programs;●The timing of our new product launches or certifications of our new aircraft products;●Our ability to keep pace with our competitors in the introduction of new products and upgrades with features and technologies desired by our customers;●Pension plan assumptions and future contributions;●Demand softness or volatility in the markets in which we do business;●Cybersecurity threats, including the potential misappropriation of assets or sensitive information, corruption of data or operational disruption;●Difficulty or unanticipated expenses in connection with integrating acquired businesses;●The risk that acquisitions do not perform as planned, including, for example, the risk that acquired businesses will not achieve revenues and profit projections;●The impact of changes in tax legislation; and●Risks and uncertainties related to the impact of the COVID-19 pandemic on our business and operations.Interruptions in the U.S. Government’s ability to fund its activities and/or pay its obligations;April 4,October 3, 2020. For discussion of our exposure to market risk, refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk contained in Textron’s 2019 Annual Report on Form 10-K.31April 4,October 3, 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 April 4,October 3, 2020.April 4,October 3, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.On February 7, 2012, a lawsuit was filed in the United States Bankruptcy Court, Northern District of Ohio, Eastern Division (Akron) by Brian A. Bash, Chapter 7 Trustee for Fair Finance Company against Textron Financial Corporation (TFC), Fortress Credit Corp. and Fair Facility I, LLC. TFC provided a revolving line of credit of up to $17.5 million to Fair Finance Company from 2002 through 2007. The complaint alleges numerous counts against TFC, as Fair Finance Company's working capital lender, including receipt of fraudulent transfers and assisting in fraud perpetrated on Fair Finance investors. The Trustee seeks avoidance and recovery of alleged fraudulent transfers in the amount of $316 million as well as damages of $223 million on the other claims. On November 9, 2012, the Court dismissed all claims against TFC. The trustee appealed, and on August 23, 2016, the 6th Circuit Court of Appeals reversed the dismissal in part and remanded certain claims back to the trial court. On September 27, 2018, after reconsidering the remanded claims which were based upon civil conspiracy and intentional fraudulent transfer, the trial court granted partial summary judgment in favor of TFC, dismissing the Trustee's civil conspiracy claim, as well as a portion of the Trustee's claim for intentional fraudulent transfer, leaving only a portion of the intentional fraudulent transfer claim to be adjudicated. Trial in this matter commenced on February 24, 2020. On March 10, 2020, the jury returned a verdict in favor of TFC and against the Trustee. On the same day, the Court entered judgment in TFC's favor. On March 23, 2020, the Trustee filed a notice of appeal. We intend to continue to vigorously defend this lawsuit.Complaint. OnComplaint, and on March 6, 2020, Textron filed a motion to dismiss the Second Amended Complaint. We intendOn July 20, 2020, the Court granted Textron’s motion to continue to vigorously defend this lawsuit.chain, disruptions or restrictions onchains. Challenges resulting from the pandemic have impacted, and may continue to impact, the ability of many of our employees to work effectively, including because of illness, quarantines, government actions, facility closures, changes in manufacturing processes to accommodate social distancing guidelines, remote working arrangements, or other government-imposed operating restrictions. We have experienced and may continue to experience increased costs as a result of these business and production disruptions. Likewise, we have incurred and may continue to incur additional expenses related to implementing processes and procedures to comply with required operating restrictions as well as temporary closures of certainand to enhance the safety of our facilities including manufacturing and service facilities, orto protect the facilitieshealth of our customers, suppliers or business partners. employees.our recreational and other specialized vehicles and our automotive products. We have experienced a decline in orders for our aviation products and services, and the delay and cancellation of existing orders by32a fractional jet customer because of economic weakness resulting from the pandemic, and we have also experienced lower deliveries of commercial helicopters and fixed-wing aircraft because of travel restrictions imposed in response to the pandemic. Economic and other impacts from the COVID-19 pandemic may also result in future weak demand for our aviation and commercial helicopter products and services, the delay or cancellation of existing orders by our fixed wing and commercial helicopter customers and lower flight hours, and consequently, lower demand for parts and maintenance. In recent weeks the continued spread of COVID-19 has resulted in disruption and volatility in the global capital markets, adversely impacting access to capital. Any of these events are likely to negatively impact our operations. As a result, we may be unable to perform fully on our contracts and our costs may increase as a result of the COVID-19 outbreak. We also expect to experience increased costs as a result of the business and production disruptions described above. These cost increases may not be fully recoverable, negatively impacting our profitability, and may continue even after the business environment has improved. It is possible that the continued spread of COVID-19 and actions taken by various governmental authorities and other third parties in response to the outbreak could also further cause disruption in our supply chain or in the operations of our business partners, impacting their ability to perform their obligations; cause delay, or limit the ability of, the U.S. Government and other customers to perform, including in making timely payments to us; and cause other unpredictable events. In addition, new regulations by U.S. or foreign governments and government agencies addressed to the aviation or travel industry could impose additional regulatory, aircraft security, travel restrictions or other requirements or restrictions related to the pandemic that could adversely impact demand for aircraft and rotorcraft or significantly reduce hours flown.bankruptcybankruptcies of our suppliers, customers or other business partners, adverse impact to investment performance of our pension plans and continued volatility in the global capital markets adversely impacting our access to capital. The extent to which COVID-19the pandemic could impact our business, results of operations, financial condition and liquidity is highly uncertain and also will depend on future developments, manymost of which are outside our control. Such developments may include the geographic spread and duration of the virus, the severity of the disease, the development of treatments or vaccines, and the effects of actions that have been or may be taken by various governmental authorities and other third parties in response to the outbreak.is working with certain of its customers to modifyhas modified a significant number of the loans in its portfolio and is continuing to work with other customers on modifications in order to provide temporary payment relief which will delay our ultimate recovery on these assets. In addition, a substantial number of the new originations in our finance receivable portfolio are cross-border transactions for aircraft sold outside of the U.S. Cross-border transactions present additional challenges and risks in realizing upon collateral in the event of borrower default, which can result in difficulty or delay in collecting on the related finance receivables. Should current economic conditions persist or worsen, our Finance segment may have difficulty successfully collecting on its finance receivable portfolio, and as a result our cash flow, results of operations and financial condition could be adversely affected.Item 2. Unregistered Sales of Equity Securities and Use of ProceedsThe following provides information about our first quarter 2020 repurchases of equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:* On February 25, 2020, our Board of Directors authorized the repurchase of up to 25 million shares of our common stock. This new plan has no expiration date and replaced the existing plan adopted in 2018. Under the 2018 plan, 435,000 shares were repurchased during the period January 5, 2020 through February 24, 2020, with the remainder purchased pursuant to the 2020 plan.33Item 5. Other InformationBecause this Quarterly Report on Form 10-Q is being filed within four business days from the date of the reportable event, we have elected to make the following disclosure in this Quarterly Report on Form 10-Q instead of in a Current Report on Form 8-K under Item 5.07.Item 5.07(a) The 2020 Annual Meeting of Shareholders of Textron was held on April 29, 2020.(b) The results of the voting on the matters submitted to our shareholders are as follows:1.The following persons were elected to serve as directors until the next annual shareholders’ meeting and received the following votes:2. The advisory (non-binding) resolution to approve the compensation of our named executive officers, as disclosed in our proxy statement, was approved by the following vote:3. The appointment of Ernst & Young LLP by the Audit Committee as Textron's independent registered public accounting firm for 2020 was ratified by the following vote:3410.110.131.110.2Form of Performance Share Unit Grant Agreement under 2015 Long-Term Incentive Plan31.1April 4,October 3, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Income (Loss), (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.TEXTRON INC.TEXTRON INC.Date:May 1, 2020 Date: October 29, 2020 /s/ Mark S. Bamford Mark S. Bamford
Vice President and Corporate Controller
(principal accounting officer)