Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

 

 

 

 

Form 10-Q

 

 

 

 

 

(Mark One)

 

[ X ]

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

 

 

 

For the quarterly period ended October 3, 2015

 

 

 

OR

 

 

[    ]

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

 

 

 

 

For the transition period from            to            .

 

Commission File Number 1-5480

 

 

Textron Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

05-0315468

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

40 Westminster Street, Providence, RI

 

02903

(Address of principal executive offices)

 

(Zip code)

 

(401) 421-2800

(Registrant’s telephone number, including area code)

 

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   ü  No       

 

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

 

Large accelerated filer [  ü  ]

Accelerated filer [      ]

Non-accelerated filer [      ]

Smaller reporting company [      ]

 

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

 

As of October 16, 2015, there were 273,670,398 shares of common stock outstanding.

 



Table of Contents

 

TEXTRON INC.

Index to Form 10-Q

For the Quarterly Period Ended October 3, 2015

 

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

Consolidated Statements of Operations (Unaudited)

3

 

Consolidated Statements of Comprehensive Income (Unaudited)

4

 

Consolidated Balance Sheets (Unaudited)

5

 

Consolidated Statements of Cash Flows (Unaudited)

6

 

Notes to the Consolidated Financial Statements (Unaudited)

 

 

Note 1.

Basis of Presentation

8

 

Note 2.

Retirement Plans

9

 

Note 3.

Earnings Per Share

9

 

Note 4.

Accounts Receivable and Finance Receivables

10

 

Note 5.

Inventories

12

 

Note 6.

Accrued Liabilities

12

 

Note 7.

Derivative Instruments and Fair Value Measurements

12

 

Note 8.

Accumulated Other Comprehensive Loss and Other Comprehensive Income

14

 

Note 9.

Commitments and Contingencies

16

 

Note 10.

Segment Information

16

 

 

 

Item 2.

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

17

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

28

Item 4.

Controls and Procedures

28

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 6.

Exhibits

29

 

Signatures

29

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

TEXTRON INC.

Consolidated Statements of Operations (Unaudited)

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(In millions, except per share amounts)

 

 

October 3,
2015

 

 

September 27,
2014

 

 

October 3,
2015

 

 

September 27,
2014

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing revenues

 

 

$

3,163

 

 

$

3,405

 

 

$

9,437

 

 

$

9,701

 

Finance revenues

 

 

17

 

 

25

 

 

63

 

 

81

 

Total revenues

 

 

3,180

 

 

3,430

 

 

9,500

 

 

9,782

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

2,584

 

 

2,845

 

 

7,728

 

 

8,077

 

Selling and administrative expense

 

 

303

 

 

304

 

 

969

 

 

959

 

Interest expense

 

 

41

 

 

47

 

 

126

 

 

141

 

Acquisition and restructuring costs

 

 

 

 

3

 

 

 

 

39

 

Total costs and expenses

 

 

2,928

 

 

3,199

 

 

8,823

 

 

9,216

 

Income from continuing operations before income taxes

 

 

252

 

 

231

 

 

677

 

 

566

 

Income tax expense

 

 

76

 

 

71

 

 

204

 

 

174

 

Income from continuing operations

 

 

176

 

 

160

 

 

473

 

 

392

 

Loss from discontinued operations, net of income taxes

 

 

 

 

(1

)

 

(2

)

 

(4

)

Net income

 

 

$

176

 

 

$

159

 

 

$

471

 

 

$

388

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

$

0.64

 

 

$

0.57

 

 

$

1.71

 

 

$

1.40

 

Discontinued operations

 

 

 

 

 

 

(0.01

)

 

(0.02

)

Basic earnings per share

 

 

$

0.64

 

 

$

0.57

 

 

$

1.70

 

 

$

1.38

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

$

0.63

 

 

$

0.57

 

 

$

1.69

 

 

$

1.39

 

Discontinued operations

 

 

 

 

 

 

(0.01

)

 

(0.02

)

Diluted earnings per share

 

 

$

0.63

 

 

$

0.57

 

 

$

1.68

 

 

$

1.37

 

Dividends per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

$

0.02

 

 

$

0.02

 

 

$

0.06

 

 

$

0.06

 

 

See Notes to the Consolidated Financial Statements.

 

3



Table of Contents

 

TEXTRON INC.

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(In millions)

 

 

October 3,
2015

 

 

September 27,
2014

 

 

October 3,
2015

 

 

September 27,
2014

 

Net income

 

 

$

176

 

 

$

159

 

 

$

471

 

 

$

388

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments, net of reclassifications

 

 

22

 

 

17

 

 

133

 

 

62

 

Foreign currency translation adjustments

 

 

1

 

 

(43

)

 

(45

)

 

(47

)

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

 

 

(1

)

 

(5

)

 

(9

)

 

2

 

Other comprehensive income (loss)

 

 

22

 

 

(31

)

 

79

 

 

17

 

Comprehensive income

 

 

$

198

 

 

$

128

 

 

$

550

 

 

$

405

 

 

See Notes to the Consolidated Financial Statements.

 

4



Table of Contents

 

TEXTRON INC.

Consolidated Balance Sheets (Unaudited)

 

(Dollars in millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

January 3,
2015

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

 

 

 

 

 

 

 

 

 

$

497

 

 

$

731

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

1,159

 

 

 

1,035

 

Inventories

 

 

 

 

 

 

 

 

 

 

 

4,574

 

 

 

3,928

 

Other current assets

 

 

 

 

 

 

 

 

 

 

 

507

 

 

 

579

 

Total current assets

 

 

 

 

 

 

 

 

 

 

 

6,737

 

 

 

6,273

 

Property, plant and equipment, less accumulated
depreciation and amortization of $3,854 and $3,685

 

 

 

 

 

 

 

 

 

 

 

2,488

 

 

 

2,497

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

2,026

 

 

 

2,027

 

Other assets

 

 

 

 

 

 

 

 

 

 

 

2,234

 

 

 

2,279

 

Total Manufacturing group assets

 

 

 

 

 

 

 

 

 

 

 

13,485

 

 

 

13,076

 

Finance group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

 

 

 

 

 

 

 

 

 

 

117

 

 

 

91

 

Finance receivables, net

 

 

 

 

 

 

 

 

 

 

 

1,138

 

 

 

1,238

 

Other assets

 

 

 

 

 

 

 

 

 

 

 

158

 

 

 

200

 

Total Finance group assets

 

 

 

 

 

 

 

 

 

 

 

1,413

 

 

 

1,529

 

Total assets

 

 

 

 

 

 

 

 

 

 

$

14,898

 

 

$

14,605

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

$

414

 

 

$

8

 

Accounts payable

 

 

 

 

 

 

 

 

 

 

 

1,173

 

 

 

1,014

 

Accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

2,602

 

 

 

2,616

 

Total current liabilities

 

 

 

 

 

 

 

 

 

 

 

4,189

 

 

 

3,638

 

Other liabilities

 

 

 

 

 

 

 

 

 

 

 

2,426

 

 

 

2,587

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

2,391

 

 

 

2,803

 

Total Manufacturing group liabilities

 

 

 

 

 

 

 

 

 

 

 

9,006

 

 

 

9,028

 

Finance group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

 

 

 

 

 

 

229

 

 

 

242

 

Debt

 

 

 

 

 

 

 

 

 

 

 

967

 

 

 

1,063

 

Total Finance group liabilities

 

 

 

 

 

 

 

 

 

 

 

1,196

 

 

 

1,305

 

Total liabilities

 

 

 

 

 

 

 

 

 

 

 

10,202

 

 

 

10,333

 

Shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

36

 

 

 

36

 

Capital surplus

 

 

 

 

 

 

 

 

 

 

 

1,561

 

 

 

1,459

 

Treasury stock

 

 

 

 

 

 

 

 

 

 

 

(551

)

 

 

(340

)

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

5,077

 

 

 

4,623

 

Accumulated other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(1,427

)

 

 

(1,506

)

Total shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

4,696

 

 

 

4,272

 

Total liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

 

$

14,898

 

 

$

14,605

 

Common shares outstanding (in thousands)

 

 

 

 

 

 

 

 

 

 

 

273,862

 

 

 

276,582

 

 

See Notes to the Consolidated Financial Statements.

 

5



Table of Contents

 

TEXTRON INC.

Consolidated Statements of Cash Flows (Unaudited)

For the Nine Months Ended October 3, 2015 and September 27, 2014, respectively

 

 

 

 

 

 

 

 

 

 

Consolidated

 

(In millions)

 

 

 

 

 

 

 

 

2015

 

 

2014

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

$

471

 

 

$

388

 

Less: Loss from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(4

)

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

473

 

 

 

392

 

Adjustments to reconcile income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

332

 

 

 

325

 

Deferred income taxes

 

 

 

 

 

 

 

 

 

 

 

(11

)

 

 

(41

)

Other, net

 

 

 

 

 

 

 

 

 

 

 

78

 

 

 

80

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

(122

)

 

 

(55

)

Inventories

 

 

 

 

 

 

 

 

 

 

 

(654

)

 

 

(370

)

Other assets

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

24

 

Accounts payable

 

 

 

 

 

 

 

 

 

 

 

156

 

 

 

(120

)

Accrued and other liabilities

 

 

 

 

 

 

 

 

 

 

 

(18

)

 

 

137

 

Income taxes, net

 

 

 

 

 

 

 

 

 

 

 

64

 

 

 

61

 

Pension, net

 

 

 

 

 

 

 

 

 

 

 

61

 

 

 

31

 

Captive finance receivables, net

 

 

 

 

 

 

 

 

 

 

 

58

 

 

 

107

 

Other operating activities, net

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

(2

)

Net cash provided by operating activities of continuing operations

 

 

 

 

 

 

 

 

 

419

 

 

 

569

 

Net cash used in operating activities of discontinued operations

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

(3

)

Net cash provided by operating activities

 

 

 

 

 

 

 

 

 

 

 

415

 

 

 

566

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 

 

 

 

 

 

 

 

 

(286

)

 

 

(255

)

Net cash used in acquisitions

 

 

 

 

 

 

 

 

 

 

 

(81

)

 

 

(1,580

)

Finance receivables repaid

 

 

 

 

 

 

 

 

 

 

 

66

 

 

 

77

 

Other investing activities, net

 

 

 

 

 

 

 

 

 

 

 

31

 

 

 

33

 

Net cash used in investing activities

 

 

 

 

 

 

 

 

 

 

 

(270

)

 

 

(1,725

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments on long-term and nonrecourse debt

 

 

 

 

 

 

 

 

 

 

 

(196

)

 

 

(462

)

Proceeds from long-term debt

 

 

 

 

 

 

 

 

 

 

 

55

 

 

 

1,187

 

Increase in short-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25

 

Purchases of Textron common stock

 

 

 

 

 

 

 

 

 

 

 

(211

)

 

 

(302

)

Dividends paid

 

 

 

 

 

 

 

 

 

 

 

(17

)

 

 

(17

)

Other financing activities, net

 

 

 

 

 

 

 

 

 

 

 

25

 

 

 

33

 

Net cash provided by (used in) financing activities

 

 

 

 

 

 

 

 

 

 

 

(344

)

 

 

464

 

Effect of exchange rate changes on cash and equivalents

 

 

 

 

 

 

 

 

 

 

 

(9

)

 

 

(5

)

Net decrease in cash and equivalents

 

 

 

 

 

 

 

 

 

 

 

(208

)

 

 

(700

)

Cash and equivalents at beginning of period

 

 

 

 

 

 

 

 

 

 

 

822

 

 

 

1,211

 

Cash and equivalents at end of period

 

 

 

 

 

 

 

 

 

 

$

614

 

 

$

511

 

 

See Notes to the Consolidated Financial Statements.

 

6



Table of Contents

 

TEXTRON INC.

Consolidated Statements of Cash Flows (Unaudited) (Continued)

For the Nine Months Ended October 3, 2015 and September 27, 2014, respectively

 

 

 

 

Manufacturing Group

 

 

Finance Group

 

(In millions)

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

458

 

 

$

378

 

 

$

13

 

 

$

10

 

Less: Loss from discontinued operations

 

 

 

(2

)

 

 

(4

)

 

 

 

 

 

 

Income from continuing operations

 

 

 

460

 

 

 

382

 

 

 

13

 

 

 

10

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

324

 

 

 

315

 

 

 

8

 

 

 

10

 

Deferred income taxes

 

 

 

(3

)

 

 

(25

)

 

 

(8

)

 

 

(16

)

Other, net

 

 

 

74

 

 

 

69

 

 

 

4

 

 

 

11

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

 

(122

)

 

 

(55

)

 

 

 

 

 

 

Inventories

 

 

 

(661

)

 

 

(344

)

 

 

 

 

 

 

Other assets

 

 

 

(6

)

 

 

38

 

 

 

12

 

 

 

(14

)

Accounts payable

 

 

 

156

 

 

 

(120

)

 

 

 

 

 

 

Accrued and other liabilities

 

 

 

(10

)

 

 

145

 

 

 

(8

)

 

 

(8

)

Income taxes, net

 

 

 

58

 

 

 

57

 

 

 

6

 

 

 

4

 

Pension, net

 

 

 

61

 

 

 

31

 

 

 

 

 

 

 

Dividends received from Finance Group

 

 

 

20

 

 

 

 

 

 

 

 

 

 

Other operating activities, net

 

 

 

(4

)

 

 

(2

)

 

 

 

 

 

 

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

 

 

 

347

 

 

 

491

 

 

 

27

 

 

 

(3

)

Net cash used in operating activities of discontinued operations

 

 

 

(4

)

 

 

(3

)

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

 

 

343

 

 

 

488

 

 

 

27

 

 

 

(3

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 

(286

)

 

 

(255

)

 

 

 

 

 

 

Net cash used in acquisitions

 

 

 

(81

)

 

 

(1,580

)

 

 

 

 

 

 

Finance receivables repaid

 

 

 

 

 

 

 

 

 

269

 

 

 

307

 

Finance receivables originated

 

 

 

 

 

 

 

 

 

(145

)

 

 

(123

)

Other investing activities, net

 

 

 

2

 

 

 

(12

)

 

 

36

 

 

 

19

 

Net cash provided by (used in) investing activities

 

 

 

(365

)

 

 

(1,847

)

 

 

160

 

 

 

203

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments on long-term and nonrecourse debt

 

 

 

 

 

 

(201

)

 

 

(196

)

 

 

(261

)

Proceeds from long-term debt

 

 

 

 

 

 

1,093

 

 

 

55

 

 

 

94

 

Increase in short-term debt

 

 

 

 

 

 

25

 

 

 

 

 

 

 

Purchases of Textron common stock

 

 

 

(211

)

 

 

(302

)

 

 

 

 

 

 

Dividends paid

 

 

 

(17

)

 

 

(17

)

 

 

(20

)

 

 

 

Other financing activities, net

 

 

 

25

 

 

 

33

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

 

(203

)

 

 

631

 

 

 

(161

)

 

 

(167

)

Effect of exchange rate changes on cash and equivalents

 

 

 

(9

)

 

 

(5

)

 

 

 

 

 

 

Net increase (decrease) in cash and equivalents

 

 

 

(234

)

 

 

(733

)

 

 

26

 

 

 

33

 

Cash and equivalents at beginning of period

 

 

 

731

 

 

 

1,163

 

 

 

91

 

 

 

48

 

Cash and equivalents at end of period

 

 

$

497

 

 

$

430

 

 

$

117

 

 

$

81

 

 

See Notes to the Consolidated Financial Statements.

 

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TEXTRON INC.

Notes to the Consolidated Financial Statements (Unaudited)

 

 

Note 1.  Basis of Presentation

 

Our Consolidated Financial Statements include the accounts of Textron Inc. (Textron) and its majority-owned subsidiaries.  We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information.  Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements.  The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 3, 2015.  In the opinion of management, the interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair presentation of our consolidated financial position, results of operations and cash flows for the interim periods presented.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

 

Our financings are conducted through two separate borrowing groups.  The Manufacturing group consists of Textron consolidated with its majority-owned subsidiaries that operate in the Textron Aviation, Bell, Textron Systems and Industrial segments. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation and its consolidated subsidiaries. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance.  To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements.  All significant intercompany transactions are eliminated from the Consolidated Financial Statements, including retail and wholesale financing activities for inventory sold by our Manufacturing group and financed by our Finance group.

 

Use of Estimates

We prepare our financial statements in conformity with generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements.  Actual results could differ from those estimates.  Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the Consolidated Statements of Operations in the period that they are determined.

 

During 2015 and 2014, we changed our estimates of revenues and costs on certain long-term contracts that are accounted for under the percentage-of-completion method of accounting.  These changes in estimates increased income from continuing operations before income taxes in the third quarter of 2015 and 2014 by $14 million and $10 million, respectively, ($9 million and $6 million after tax, or $0.03 and $0.02 per diluted share, respectively).  For the third quarter of 2015 and 2014, the gross favorable program profit adjustments totaled $20 million and $25 million, respectively, and the gross unfavorable program profit adjustments totaled $6 million and $15 million, respectively.

 

The changes in estimates increased income from continuing operations before income taxes in the first nine months of 2015 and 2014 by $68 million and $69 million, respectively, ($43 million after tax, or $0.15 per diluted share for both periods).  For the first nine months of 2015 and 2014, the gross favorable program profit adjustments totaled $93 million and $90 million, respectively, and the gross unfavorable program profit adjustments totaled $25 million and $21 million, respectively.  Gross favorable program profit adjustments for the first nine months of 2014 included $16 million related to the settlement of the System Development and Demonstration phase of the Armed Reconnaissance Helicopter (ARH) program, which was terminated in October 2008.

 

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, that outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In July 2015, the FASB approved a one-year deferral of the effective date of the standard to the beginning of 2018 for public companies, with an option that would permit companies to adopt the standard as early as the original effective date of 2017.  The new standard may be adopted either retrospectively or on a modified retrospective basis whereby it would be applied to new contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch-up adjustment recorded to beginning retained earnings at the effective date for those contracts.  We are currently evaluating the impacts of adoption on our consolidated financial position, results of operations and related disclosures, along with the implementation approach to be used.

 

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Note 2. Retirement Plans

 

We provide defined benefit pension plans and other postretirement benefits to eligible employees.  The components of net periodic benefit cost for these plans are as follows:

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(In millions)

 

 

October 3,
2015

 

 

September 27,
2014

 

 

October 3,
2015

 

 

September 27,
2014

 

Pension Benefits

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

 

$

27

 

 

$

27

 

 

$

86

 

 

$

81

 

Interest cost

 

 

 

82

 

 

 

86

 

 

 

245

 

 

 

250

 

Expected return on plan assets

 

 

 

(121

)

 

 

(117

)

 

 

(363

)

 

 

(345

)

Amortization of prior service cost

 

 

 

4

 

 

 

3

 

 

 

12

 

 

 

11

 

Amortization of net actuarial loss

 

 

 

35

 

 

 

28

 

 

 

113

 

 

 

84

 

Curtailment and other charges

 

 

 

 

 

 

 

 

 

6

 

 

 

 

Net periodic benefit cost

 

 

$

27

 

 

$

27

 

 

$

99

 

 

$

81

 

Postretirement Benefits Other Than Pensions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

 

$

1

 

 

$

1

 

 

$

3

 

 

$

3

 

Interest cost

 

 

 

4

 

 

 

5

 

 

 

12

 

 

 

15

 

Amortization of prior service credit

 

 

 

(6

)

 

 

(5

)

 

 

(18

)

 

 

(16

)

Amortization of net actuarial loss

 

 

 

1

 

 

 

 

 

 

1

 

 

 

1

 

Net periodic benefit cost (credit)

 

 

$

 

 

$

1

 

 

$

(2

)

 

$

3

 

 

In April 2015, our Bell segment announced cost reduction actions that resulted in a headcount reduction of approximately 12% of the Bell workforce. We determined that a curtailment had occurred in Bell’s pension plan as a result of this reduction, which triggered a remeasurement of the projected benefit obligation. We remeasured Bell’s pension plan incorporating a 50 basis-point increase in the discount rate to 4.75%, while other assumptions remained consistent with year-end.  The remeasurement reduced our unrealized losses by approximately $98 million which was recorded in other comprehensive income in the second quarter of 2015.

 

Note 3.  Earnings Per Share

 

We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period. Basic EPS is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends. Diluted EPS considers the dilutive effect of all potential future common stock, including stock options. In addition, diluted EPS for the three and nine months ended September 27, 2014 includes the impact of the initial delivery of shares under an Accelerated Share Repurchase agreement (ASR), which was settled in December 2014 as disclosed in Note 9 of our 2014 Annual Report on Form 10-K.

 

The weighted-average shares outstanding for basic and diluted EPS are as follows:

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(In thousands)

 

 

October 3,
2015

 

 

September 27,
2014

 

 

October 3,
2015

 

 

September 27,
2014

 

Basic weighted-average shares outstanding

 

 

 

276,334

 

 

 

278,860

 

 

 

277,317

 

 

 

280,096

 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

1,705

 

 

 

1,892

 

 

 

2,083

 

 

 

2,027

 

ASR

 

 

 

 

 

 

278

 

 

 

 

 

 

301

 

Diluted weighted-average shares outstanding

 

 

 

278,039

 

 

 

281,030

 

 

 

279,400

 

 

 

282,424

 

 

Stock options to purchase 4 million and 2 million of common shares outstanding are excluded from the calculation of diluted weighted average shares outstanding for the three and nine months ended October 3, 2015, respectively, as their effect would have been anti-dilutive.  For both the three and nine months ended September 27, 2014, stock options to purchase 2 million of common shares outstanding are excluded from the calculation of diluted weighted average shares, as their effect would have been anti-dilutive.

 

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Note 4.  Accounts Receivable and Finance Receivables

 

Accounts Receivable

Accounts receivable is composed of the following:

 

(In millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

January 3,
2015

 

Commercial

 

 

 

 

 

 

 

 

 

 

$

920

 

 

$

765

 

U.S. Government contracts

 

 

 

 

 

 

 

 

 

 

 

273

 

 

 

300

 

 

 

 

 

 

 

 

 

 

 

 

 

1,193

 

 

 

1,065

 

Allowance for doubtful accounts

 

 

 

 

 

 

 

 

 

 

 

(34

)

 

 

(30

)

Total

 

 

 

 

 

 

 

 

 

 

$

1,159

 

 

$

1,035

 

 

We have unbillable receivables, primarily on U.S. Government contracts, that arise when the revenues we have appropriately recognized based on performance cannot be billed yet under terms of the contract.  Unbillable receivables within accounts receivable totaled $133 million at October 3, 2015 and $151 million at January 3, 2015.

 

Finance Receivables

Finance receivables are presented in the following table:

 

(In millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

January 3,
2015

 

Finance receivables*

 

 

 

 

 

 

 

 

 

 

$

1,187

 

 

$

1,289

 

Allowance for losses

 

 

 

 

 

 

 

 

 

 

 

(49

)

 

 

(51

)

Total finance receivables, net

 

 

 

 

 

 

 

 

 

 

$

1,138

 

 

$

1,238

 

* Includes finance receivables held for sale of $32 million and $35 million at October 3, 2015 and January 3, 2015, respectively.

 

Credit Quality Indicators and Nonaccrual Finance Receivables

We internally assess the quality of our finance receivables based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors. Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan. These three categories are performing, watchlist and nonaccrual.

 

We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful.  Recognition of interest income is suspended for these accounts and all cash collections are used to reduce the net investment balance.  We resume the accrual of interest when the loan becomes contractually current through payment according to the original terms of the loan or, if a loan has been modified, following a period of performance under the terms of the modification, provided we conclude that collection of all principal and interest is no longer doubtful.  Previously suspended interest income is recognized at that time.  Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain.  All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing.

 

Finance receivables categorized based on the credit quality indicators discussed above are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

January 3,
2015

 

Performing

 

 

 

 

 

 

 

 

 

 

$

985

 

 

$

1,062

 

Watchlist

 

 

 

 

 

 

 

 

 

 

 

76

 

 

 

111

 

Nonaccrual

 

 

 

 

 

 

 

 

 

 

 

94

 

 

 

81

 

Total

 

 

 

 

 

 

 

 

 

 

$

1,155

 

 

$

1,254

 

Nonaccrual as a percentage of finance receivables

 

 

 

 

 

 

 

 

 

 

 

8.14

%

 

 

6.46

%

 

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.

 

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Table of Contents

 

Finance receivables by delinquency aging category are summarized in the table below:

 

(In millions)

 

 

 

 

 

October 3,
2015

 

 

January 3,
2015

 

Less than 31 days past due

 

 

 

 

 

 

$

995

 

 

$

1,080

 

31-60 days past due

 

 

 

 

 

 

 

94

 

 

 

117

 

61-90 days past due

 

 

 

 

 

 

 

28

 

 

 

28

 

Over 90 days past due

 

 

 

 

 

 

 

38

 

 

 

29

 

Total

 

 

 

 

 

 

$

1,155

 

 

$

1,254

 

60 + days contractual delinquency as a percentage of finance receivables

 

 

 

 

 

 

 

5.71

%

 

 

4.55

%

 

Impaired Loans

On a quarterly basis, we evaluate individual finance receivables for impairment in non-homogeneous portfolios and larger balance accounts in homogeneous loan portfolios.  A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators discussed above.  Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified.  If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification.  Interest income recognized on impaired loans was not significant in the first nine months of 2015 or 2014.

 

A summary of impaired finance receivables, excluding leveraged leases, and the average recorded investment is provided below:

 

(In millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

January 3,
2015

 

Recorded investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with related allowance for losses

 

 

 

 

 

 

 

 

 

 

$

60

 

 

$

68

 

Impaired loans with no related allowance for losses

 

 

 

 

 

 

 

 

 

 

 

40

 

 

 

42

 

Total

 

 

 

 

 

 

 

 

 

 

$

100

 

 

$

110

 

Unpaid principal balance

 

 

 

 

 

 

 

 

 

 

$

105

 

 

$

115

 

Allowance for losses on impaired loans

 

 

 

 

 

 

 

 

 

 

 

16

 

 

 

20

 

Average recorded investment

 

 

 

 

 

 

 

 

 

 

 

102

 

 

 

115

 

 

A summary of the allowance for losses on finance receivables that are evaluated on an individual basis and on a collective basis is provided below.  The finance receivables included in the table below specifically exclude leveraged leases in accordance with generally accepted accounting principles.

 

(In millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

January 3,
2015

 

Allowance based on collective evaluation

 

 

 

 

 

 

 

 

 

 

$

33

 

 

$

31

 

Allowance based on individual evaluation

 

 

 

 

 

 

 

 

 

 

 

16

 

 

 

20

 

Finance receivables evaluated collectively

 

 

 

 

 

 

 

 

 

 

$

937

 

 

$

1,023

 

Finance receivables evaluated individually

 

 

 

 

 

 

 

 

 

 

 

100

 

 

 

110

 

 

Allowance for Losses

We maintain an allowance for losses on finance receivables at a level considered adequate to cover inherent losses in the portfolio based on management’s evaluation.  For larger balance accounts specifically identified as impaired, a reserve is established based on comparing the expected future cash flows, discounted at the finance receivable’s effective interest rate, or the fair value of the underlying collateral if the finance receivable is collateral dependent, to its carrying amount.  The expected future cash flows consider collateral value; financial performance and liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs associated with the repossession and eventual disposal of collateral.  When there is a range of potential outcomes, we perform multiple discounted cash flow analyses and weight the potential outcomes based on their relative likelihood of occurrence.  The evaluation of our portfolio is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the estimated fair value of the underlying collateral, which may differ from actual results.  While our analysis is specific to each individual account, critical factors included in this analysis include industry valuation guides, age and physical condition of the collateral, payment history and existence and financial strength of guarantors.

 

We also establish an allowance for losses to cover probable but specifically unknown losses existing in the portfolio. This allowance is established as a percentage of non-recourse finance receivables, which have not been identified as requiring specific

 

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Table of Contents

 

reserves.  The percentage is based on a combination of factors, including historical loss experience, current delinquency and default trends, collateral values and both general economic and specific industry trends.  Finance receivables are charged off at the earlier of the date the collateral is repossessed or when no payment has been received for six months, unless management deems the receivable collectible.

 

A rollforward of the allowance for losses on finance receivables is provided below:

 

 

 

 

 

 

 

 

 

Nine Months Ended

(In millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

September 27,
2014

 

Balance at the beginning of period

 

 

 

 

 

 

 

 

 

 

$

51

 

 

$

55

 

Provision for losses

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

7

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

(11

)

Recoveries

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

5

 

Balance at the end of period

 

 

 

 

 

 

 

 

 

 

$

49

 

 

$

56

 

 

Note 5.  Inventories

 

Inventories are composed of the following:

 

(In millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

January 3,
2015

 

Finished goods

 

 

 

 

 

 

 

 

 

 

$

1,871

 

 

$

1,582

 

Work in process

 

 

 

 

 

 

 

 

 

 

 

3,235

 

 

 

2,683

 

Raw materials and components

 

 

 

 

 

 

 

 

 

 

 

609

 

 

 

546

 

 

 

 

 

 

 

 

 

 

 

 

 

5,715

 

 

 

4,811

 

Progress/milestone payments

 

 

 

 

 

 

 

 

 

 

 

(1,141

)

 

 

(883

)

Total

 

 

 

 

 

 

 

 

 

 

$

4,574

 

 

$

3,928

 

 

Note 6.  Accrued Liabilities

 

We provide limited warranty and product maintenance programs, including parts and labor, for certain products for periods ranging from one to five years.  Changes in our warranty and product maintenance contract liability are as follows:

 

 

 

 

 

 

 

 

 

Nine Months Ended

(In millions)

 

 

 

 

 

 

 

 

October 3,
2015

 

 

September 27,
2014

 

Balance at the beginning of period

 

 

 

 

 

 

 

 

 

 

$

281

 

 

$

223

 

Provision

 

 

 

 

 

 

 

 

 

 

 

224

 

 

 

240

 

Settlements

 

 

 

 

 

 

 

 

 

 

 

(237

)

 

 

(240

)

Acquisitions

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

65

 

Adjustments*

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

(8

)

Balance at the end of period

 

 

 

 

 

 

 

 

 

 

$

265

 

 

$

280

 

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

 

Note 7.  Derivative Instruments and Fair Value Measurements

 

We measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  We prioritize the assumptions that market participants would use in pricing the asset or liability into a three-tier fair value hierarchy.  This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exist, requiring companies to develop their own assumptions.  Observable inputs that do not meet the criteria of Level 1, which include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, are categorized as Level 2. Level 3 inputs are those that reflect our estimates about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.  Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data.  These unobservable inputs are utilized only to the extent that observable inputs are not available or cost effective to obtain.

 

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Table of Contents

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

We manufacture and sell our products in a number of countries throughout the world, and, therefore, we are exposed to movements in foreign currency exchange rates.  We utilize foreign currency exchange contracts to manage this volatility. Our foreign currency exchange contracts are measured at fair value using the market method valuation technique.  The inputs to this technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data providers.  These are observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions so they are classified as Level 2. At October 3, 2015 and January 3, 2015, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $394 million and $696 million, respectively.  At October 3, 2015, the fair value amounts of our foreign currency exchange contracts were a $12 million asset and a $31 million liability. At January 3, 2015, the fair value amounts of our foreign currency exchange contracts were a $16 million asset and a $26 million liability.

 

We primarily utilize forward exchange contracts which have maturities of no more than three years.  These contracts qualify as cash flow hedges and are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses.  At October 3, 2015, we had a net deferred loss of $22 million in Accumulated other comprehensive loss related to these cash flow hedges.  Net gains and losses recognized in earnings and Accumulated other comprehensive loss on cash flow hedges, including gains and losses related to hedge ineffectiveness, were not significant in the periods presented.

 

We hedge our net investment position in major currencies and generate foreign currency interest payments that offset other transactional exposures in these currencies.  To accomplish this, we borrow directly in foreign currency and designate a portion of foreign currency debt as a hedge of a net investment.  We record changes in the fair value of these contracts in other comprehensive income to the extent they are effective as cash flow hedges.  Currency effects on the effective portion of these hedges, which are reflected in the foreign currency translation adjustments within Accumulated other comprehensive loss, were not significant in the periods presented.

 

Assets Recorded at Fair Value on a Nonrecurring Basis

During the periods ended October 3, 2015 and January 3, 2015, the Finance group’s impaired nonaccrual finance receivables of $44 million and $49 million, respectively, were measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3).  Impaired nonaccrual finance receivables represent assets recorded at fair value on a nonrecurring basis since the measurement of required reserves on our impaired finance receivables is significantly dependent on the fair value of the underlying collateral.  For impaired nonaccrual finance receivables secured by aviation assets, the fair values of collateral are determined primarily based on the use of industry pricing guides.  Fair value measurements recorded on impaired finance receivables resulted in charges to provision for loan losses totaling $2 million and $8 million for the three and nine months ended October 3, 2015 and $5 million and $16 million for the three and nine months ended September 27, 2014, respectively.

 

Assets and Liabilities Not Recorded at Fair Value

The carrying value and estimated fair value of our financial instruments that are not reflected in the financial statements at fair value are as follows:

 

 

 

 

October 3, 2015

 

 

January 3, 2015

 

(In millions)

 

 

Carrying
Value

 

 

Estimated
Fair Value

 

 

Carrying
Value

 

 

Estimated
Fair Value

 

Manufacturing group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, excluding leases

 

 

$

(2,734

)

 

$

(2,896

)

 

$

(2,742

)

 

$

(2,944

)

Finance group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivables, excluding leases

 

 

 

910

 

 

 

884

 

 

 

1,004

 

 

 

1,021

 

Debt

 

 

 

(967

)

 

 

(924

)

 

 

(1,063

)

 

 

(1,051

)

 

Fair value for the Manufacturing group debt is determined using market observable data for similar transactions (Level 2).  At October 3, 2015 and January 3, 2015, approximately 74% and 75%, respectively, of the fair value of term debt for the Finance group was determined based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations (Level 2).  The remaining Finance group debt was determined based on observable market transactions (Level 1). Fair value estimates for finance receivables were determined based on internally developed discounted cash flow models primarily utilizing significant unobservable inputs (Level 3), which include estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and expectations of borrowers’ ability to make payments on a timely basis.

 

13



Table of Contents

 

Note 8.  Accumulated Other Comprehensive Loss and Other Comprehensive Income

 

The components of Accumulated Other Comprehensive Loss are presented below:

 

 

(In millions)

 

 

Pension and
Postretirement
Benefits
Adjustments

 

 

Foreign
Currency
Translation
Adjustments

 

 

Deferred
Gains (Losses)
on Hedge
Contracts

 

Accumulated
Other
Comprehensive
Loss

 

For the nine months ended October 3, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

 

$

(1,511

)

 

$

18

 

 

$

(13

)

 

$

(1,506

)

Other comprehensive income (loss) before reclassifications

 

 

 

62

 

 

 

(45

)

 

 

(22

)

 

 

(5

)

Reclassified from Accumulated other comprehensive loss

 

 

 

71

 

 

 

 

 

 

13

 

 

 

84

 

Other comprehensive income (loss)

 

 

 

133

 

 

 

(45

)

 

 

(9

)

 

 

79

 

Balance at the end of the period

 

 

$

(1,378

)

 

$

(27

)

 

$

(22

)

 

$

(1,427

)

For the nine months ended September 27, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

 

$

(1,110

)

 

$

93

 

 

$

(10

)

 

$

(1,027

)

Other comprehensive income (loss) before reclassifications

 

 

 

9

 

 

 

(47

)

 

 

(4

)

 

 

(42

)

Reclassified from Accumulated other comprehensive loss

 

 

 

53

 

 

 

 

 

 

6

 

 

 

59

 

Other comprehensive income (loss)

 

 

 

62

 

 

 

(47

)

 

 

2

 

 

 

17

 

Balance at the end of the period

 

 

$

(1,048

)

 

$

46

 

 

$

(8

)

 

$

(1,010

)

 

14



Table of Contents

 

The before and after-tax components of Other Comprehensive Income are presented below:

 

(In millions)

 

 

 

 

 

Pre-Tax
Amount

 

 

Tax
(Expense)
Benefit

 

 

After-Tax
Amount

 

For the three months ended October 3, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

 

 

 

 

 

$

36

 

 

$

(12

)

 

$

24

 

Amortization of prior service credit*

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

(2

)

Pension and postretirement benefits adjustments, net

 

 

 

 

 

 

 

34

 

 

 

(12

)

 

 

22

 

Deferred gains (losses) on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

 

 

 

 

 

 

(10

)

 

 

2

 

 

 

(8

)

Reclassification adjustments

 

 

 

 

 

 

 

9

 

 

 

(2

)

 

 

7

 

Deferred losses on hedge contracts, net

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

4

 

 

 

(3

)

 

 

1

 

Total

 

 

 

 

 

 

$

37

 

 

$

(15

)

 

$

22

 

For the three months ended September 27, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

 

 

 

 

 

$

28

 

 

$

(10

)

 

$

18

 

Amortization of prior service credit*

 

 

 

 

 

 

 

(2

)

 

 

1

 

 

 

(1

)

Pension and postretirement benefits adjustments, net

 

 

 

 

 

 

 

26

 

 

 

(9

)

 

 

17

 

Deferred gains (losses) on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

 

 

 

 

 

 

(9

)

 

 

3

 

 

 

(6

)

Reclassification adjustments

 

 

 

 

 

 

 

2

 

 

 

(1

)

 

 

1

 

Deferred losses on hedge contracts, net

 

 

 

 

 

 

 

(7

)

 

 

2

 

 

 

(5

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

(39

)

 

 

(4

)

 

 

(43

)

Total

 

 

 

 

 

 

$

(20

)

 

$

(11

)

 

$

(31

)

For the nine months ended October 3, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

 

 

 

 

 

$

114

 

 

$

(40

)

 

$

74

 

Unrealized gains

 

 

 

 

 

 

 

98

 

 

 

(36

)

 

 

62

 

Amortization of prior service credit*

 

 

 

 

 

 

 

(4

)

 

 

1

 

 

 

(3

)

Pension and postretirement benefits adjustments, net

 

 

 

 

 

 

 

208

 

 

 

(75

)

 

 

133

 

Deferred gains (losses) on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

 

 

 

 

 

 

(28

)

 

 

6

 

 

 

(22

)

Reclassification adjustments

 

 

 

 

 

 

 

18

 

 

 

(5

)

 

 

13

 

Deferred losses on hedge contracts, net

 

 

 

 

 

 

 

(10

)

 

 

1

 

 

 

(9

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

(39

)

 

 

(6

)

 

 

(45

)

Total

 

 

 

 

 

 

$

159

 

 

$

(80

)

 

$

79

 

For the nine months ended September 27, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

 

 

 

 

 

$

85

 

 

$

(30

)

 

$

55

 

Amortization of prior service credit*

 

 

 

 

 

 

 

(5

)

 

 

3

 

 

 

(2

)

Recognition of prior service cost

 

 

 

 

 

 

 

15

 

 

 

(6

)

 

 

9

 

Pension and postretirement benefits adjustments, net

 

 

 

 

 

 

 

95

 

 

 

(33

)

 

 

62

 

Deferred gains (losses) on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

 

 

 

 

 

 

(7

)

 

 

3

 

 

 

(4

)

Reclassification adjustments

 

 

 

 

 

 

 

9

 

 

 

(3

)

 

 

6

 

Deferred gains on hedge contracts, net

 

 

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

(46

)

 

 

(1

)

 

 

(47

)

Total

 

 

 

 

 

 

$

51

 

 

$

(34

)

 

$

17

 

 

* These components of other comprehensive income are included in the computation of net periodic pension cost.  See Note 11 of our 2014 Annual Report on Form 10-K for additional information.

 

15



Table of Contents

 

Note 9.  Commitments and Contingencies

 

We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts; alleged lack of compliance with applicable laws and regulations; production partners; product liability; patent and trademark infringement; employment disputes; and environmental, safety and health matters.  Some of these legal proceedings and claims seek damages, fines or penalties in substantial amounts or remediation of environmental contamination.  As a government contractor, we are subject to audits, reviews and investigations to determine whether our operations are being conducted in accordance with applicable regulatory requirements. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our suspension or debarment from U.S. Government contracting for a period of time.  On the basis of information presently available, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations.

 

Note 10.  Segment Information

 

We operate in, and report financial information for, the following five business segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses and acquisition and restructuring costs related to the Beechcraft acquisition.  The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense.

 

Our revenues by segment, along with a reconciliation of segment profit to income from continuing operations before income taxes, are as follows:

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(In millions)

 

 

October 3,
2015

 

 

September 27,
2014

 

 

October 3,
2015

 

 

September 27,
2014

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Textron Aviation

 

 

$

  1,159

 

 

$

1,080

 

 

$

  3,334

 

 

$

3,048

 

Bell

 

 

 

756

 

 

 

1,182

 

 

 

2,419

 

 

 

3,174

 

Textron Systems

 

 

 

420

 

 

 

358

 

 

 

1,057

 

 

 

1,003

 

Industrial

 

 

 

828

 

 

 

785

 

 

 

2,627

 

 

 

2,476

 

Finance

 

 

 

17

 

 

 

25

 

 

 

63

 

 

 

81

 

Total revenues

 

 

 3,180

 

 

$

3,430

 

 

$

9,500

 

 

$

9,782

 

Segment Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Textron Aviation

 

 

$

  107

 

 

$

  62

 

 

$

262

 

 

$

104

 

Bell

 

 

 

99

 

 

 

146

 

 

 

276

 

 

 

383

 

Textron Systems

 

 

 

39

 

 

 

27

 

 

 

88

 

 

 

100

 

Industrial

 

 

 

61

 

 

 

53

 

 

 

229

 

 

 

213

 

Finance

 

 

 

6

 

 

 

5

 

 

 

22

 

 

 

16

 

Segment profit

 

 

 

312

 

 

 

293

 

 

 

877

 

 

 

816

 

Corporate expenses and other, net

 

 

 

(27

)

 

 

(22

)

 

 

(102

)

 

 

(103

)

Interest expense, net for Manufacturing group

 

 

 

(33

)

 

 

(37

)

 

 

(98

)

 

 

(108

)

Acquisition and restructuring costs

 

 

 

 

 

 

(3

)

 

 

 

 

 

(39

)

Income from continuing operations before income taxes

 

 

$

  252

 

 

$

231

 

 

$

677

 

 

$

566

 

 

16



Table of Contents

 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Consolidated Results of Operations

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended*

 

(Dollars in millions)

 

 

October 3,
2015

 

 

September 27,
2014

 

Percentage
Change

 

 

October 3,
2015

 

 

September 27,
2014

 

Percentage
Change

 

Revenues

 

 

$

3,180

 

 

$

3,430

 

(7)%

 

 

$

9,500

 

 

$

9,782

 

(3)%

 

Operating expenses

 

 

 

2,887

 

 

 

3,149

 

(8)%

 

 

 

8,697

 

 

 

9,036

 

(4)%

 

Cost of sales

 

 

 

2,584

 

 

 

2,845

 

(9)%

 

 

 

7,728

 

 

 

8,077

 

(4)%

 

Gross margin percentage of Manufacturing revenues

 

 

 

18.3

%

 

 

16.4

%

 

 

 

 

18.1

%

 

 

16.7

%

 

 

Selling and administrative expense

 

 

$

303

 

 

$

304

 

 

 

$

969

 

 

$

959

 

1%

 

* On March 14, 2014, we completed the acquisition of Beechcraft and as a result, the nine-month period ended September 27, 2014 does not reflect a full nine months of Beechcraft operating results.

 

An analysis of our consolidated operating results is set forth below. A more detailed analysis of our segments’ operating results is provided in the Segment Analysis section on pages 19 to 24.

 

Revenues

Revenues decreased $250 million, 7%, in the third quarter of 2015, compared with the third quarter of 2014, as decreases in the Bell segment were partially offset by higher revenues in the Textron Aviation, Textron Systems and Industrial segments.  The net revenue decrease included the following factors:

 

·

Lower Bell revenues of $426 million, largely due to a decrease of $365 million in V-22 program revenues, primarily reflecting lower aircraft deliveries, and a decrease of $69 million in commercial revenues, largely related to lower aftermarket volume of $35 million and a change in mix of commercial aircraft that offset higher deliveries during the period.

·

Higher Textron Aviation revenues of $79 million, primarily due to higher Citation jet volume of $81 million and higher military volume of $44 million.

·

Higher Textron Systems revenues of $62 million, primarily due to higher volume of $41 million in the Weapons and Sensors product line and higher volume of $31 million in the Unmanned Systems product line.

·

Higher Industrial segment revenues of $43 million, primarily due to higher volume of $100 million, largely in the Fuel Systems and Functional Components product line, partially offset by an unfavorable foreign exchange impact of $59 million.

 

Revenues decreased $282 million, 3%, in the first nine months of 2015, compared with the first nine months of 2014, as decreases in the Bell segment were partially offset by higher revenues in the Textron Aviation, Industrial and Textron Systems segments.  The net revenue decrease included the following factors:

 

·

Lower Bell revenues of $755 million, largely due to a decrease of $597 million in V-22 program revenues, primarily reflecting lower aircraft deliveries, a decrease of $108 million in commercial revenues, largely related to a change in mix of aircraft sold during the period, and a decrease of $50 million in other military revenues, primarily due to $41 million related to the settlement of the System Development and Demonstration (SDD) phase of the Armed Reconnaissance Helicopter (ARH) program in the second quarter of 2014.

·

Higher Textron Aviation revenues of $286 million, primarily due to the impact of the Beechcraft acquisition of $219 million and higher volume and mix of $68 million, primarily due to higher military volume.

·

Higher Industrial segment revenues of $151 million, primarily due to higher volume of $291 million, largely in the Fuel Systems and Functional Components product line, and an impact of $61 million from acquisitions, partially offset by an unfavorable foreign exchange impact of $190 million.

·

Higher Textron Systems revenues of $54 million, primarily due to higher volume of $93 million in the Unmanned Systems product line, largely reflecting higher unmanned aircraft systems deliveries, partially offset by lower volume in other product lines.

 

17



Table of Contents

 

Cost of Sales and Selling and Administrative Expense

Manufacturing cost of sales and selling and administrative expense together comprise our operating expenses. Cost of sales decreased $261 million, 9%, in the third quarter of 2015, compared with the third quarter of 2014, largely due to lower volume at the Bell segment, partially offset by higher volume in the Industrial, Systems and Textron Aviation segments, and a favorable foreign exchange impact of $52 million mostly related to the strengthening of the U.S. dollar against the Euro. The 190 basis point improvement in gross margin in the third quarter was largely driven by the Textron Aviation segment, primarily reflecting higher volume and mix, lower amortization of fair value step-up adjustments related to acquired Beechcraft inventories and the benefit of the integrated cost structure of Beechcraft and Cessna, as well as performance improvements at the Bell segment, largely related to ongoing cost reduction activities.

 

Cost of sales decreased $349 million, 4%, in the first nine months of 2015, compared with the first nine months of 2014, largely due to lower volume at the Bell segment, partially offset by an increase from acquired businesses, primarily Beechcraft, higher volume in the Industrial segment and a favorable foreign exchange impact of $166 million mostly related to the strengthening of the U.S. dollar against the Euro. The 140 basis point improvement in gross margin was largely driven by Textron Aviation, primarily reflecting the net impact of the Beechcraft acquisition, which includes the benefit of the integrated cost structure of Beechcraft and Cessna, and lower amortization of fair value step-up adjustments related to acquired Beechcraft inventories.

 

Selling and administrative expense was relatively unchanged in the third quarter of 2015, compared with the third quarter of 2014.  In the first nine months of 2015, selling and administrative expense increased $10 million, compared with the first nine months of 2014, largely reflecting higher operating expenses related to acquired businesses, primarily Beechcraft, partially offset by lower provision for loan losses of $11 million and a favorable foreign exchange impact of $8 million, mostly from the strengthening of the U.S. dollar against the Euro.

 

Acquisition and Restructuring Costs

In connection with the integration of Beechcraft, we initiated a restructuring program in our Textron Aviation segment in the first quarter of 2014 to align the Cessna and Beechcraft businesses, reduce operating redundancies and maximize efficiencies.  During the third quarter and first nine months of 2014, we recorded charges of $3 million and $28 million, respectively, related to these restructuring activities that were included in the Acquisition and restructuring costs line on the Consolidated Statements of Operations, along with $11 million of transaction costs incurred during the first quarter of 2014.

 

Interest Expense

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(Dollars in millions)

 

 

October 3,
2015

 

 

September 27,
2014

 

 

October 3,
2015

 

 

September 27,
2014

 

Interest expense

 

 

$

41

 

 

$

47

 

 

$

126

 

 

$

141

 

% change compared with prior period

 

 

 

(13)

%

 

 

 

 

 

 

(11)

%

 

 

 

 

 

Interest expense on the Consolidated Statement of Operations includes interest for both the Finance and Manufacturing borrowing groups with interest related to intercompany borrowings eliminated.  Interest expense for the Finance segment is included within segment profit and includes intercompany interest.  Consolidated interest expense decreased $6 million, 13%, and $15 million, 11%, in the third quarter and first nine months of 2015, respectively, compared with the corresponding periods of 2014, primarily due to favorable borrowing costs and lower average debt outstanding.

 

Backlog

 

(In millions)

 

 

 

 

 

 

 

 

 

 

October 3,
2015

 

 

January 3,
2015

 

Bell

 

 

 

 

 

 

 

 

 

 

$

5,148

 

 

$

5,524

 

Textron Systems

 

 

 

 

 

 

 

 

 

 

 

2,598

 

 

 

2,790

 

Textron Aviation

 

 

 

 

 

 

 

 

 

 

 

1,382

 

 

 

1,365

 

Total backlog

 

 

 

 

 

 

 

 

 

 

$

9,128

 

 

$

9,679

 

 

Bell’s backlog decreased $376 million during 2015, as total deliveries, largely under the V-22 program, exceeded new orders. Backlog at Textron Systems decreased $192 million during 2015, primarily due to deliveries in excess of new orders.

 

18



Table of Contents

 

Segment Analysis

 

We operate in, and report financial information for, the following five business segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance.  Segment profit is an important measure used for evaluating performance and for decision-making purposes.  Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses and acquisition and restructuring costs related to the Beechcraft acquisition. The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense.

 

In our discussion of comparative results for the Manufacturing group, changes in revenue and segment profit typically are expressed for our commercial business in terms of volume, pricing, foreign exchange and acquisitions.  Additionally, changes in segment profit may be expressed in terms of mix, inflation and cost performance. Volume changes in revenue represent increases/decreases in the number of units delivered or services provided.  Pricing represents changes in unit pricing.  Foreign exchange is the change resulting from translating foreign-denominated amounts into U.S. dollars at exchange rates that are different from the prior period.  Revenues generated by acquired businesses are reflected in Acquisitions for a twelve-month period. For segment profit, mix represents a change due to the composition of products and/or services sold at different profit margins.  Inflation represents higher material, wages, benefits, pension or other costs.  Performance reflects an increase or decrease in research and development, depreciation, selling and administrative costs, warranty, product liability, quality/scrap, labor efficiency, overhead, product line profitability, start-up, ramp up and cost-reduction initiatives or other manufacturing inputs.

 

Approximately 28% of our 2014 revenues were derived from contracts with the U.S. Government.  For our segments that have significant contracts with the U.S. Government, we typically express changes in segment profit related to the government business in terms of volume, changes in program performance or changes in contract mix. Changes in volume that are described in net sales typically drive corresponding changes in our segment profit based on the profit rate for a particular contract. Changes in program performance typically relate to profit recognition associated with revisions to total estimated costs at completion that reflect improved or deteriorated operating performance or award fee rates. Changes in contract mix refers to changes in operating margin due to a change in the relative volume of contracts with higher or lower fee rates such that the overall average margin rate for the segment changes.

 

Textron Aviation

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(Dollars in millions)

 

 

October 3,
2015

 

 

September 27,
2014

 

 

October 3,
2015

 

 

September 27,
2014

 

Revenues

 

 

$

1,159

 

 

$

1,080

 

 

$

3,334

 

 

$

3,048

 

Operating expenses

 

 

 

1,052

 

 

 

1,018

 

 

 

3,072

 

 

 

2,944

 

Segment profit

 

 

 

107

 

 

 

62

 

 

 

262

 

 

 

104

 

Profit margin

 

 

 

9.2

%

 

 

5.7

%

 

 

7.9

%

 

 

3.4

%

 

Textron Aviation Revenues and Operating Expenses

The following factors contributed to the change in Textron Aviation’s revenues for the periods:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

Q3 2015
versus
Q3 2014

 

 

YTD 2015
versus
YTD 2014

 

Acquisitions

 

 

 

 

 

 

 

 

 

 

$

 

 

$

219

 

Volume and mix

 

 

 

 

 

 

 

 

 

 

 

91

 

 

 

68

 

Other

 

 

 

 

 

 

 

 

 

 

 

(12

)

 

 

(1

)

Total change

 

 

 

 

 

 

 

 

 

 

$

79

 

 

$

286

 

 

In the third quarter of 2015, Textron Aviation’s revenues increased $79 million, 7%, compared with the third quarter of 2014, primarily due to higher volume and mix, resulting from higher Citation jet volume of $81 million and higher military volume of $44 million. We delivered 37 Citation jets and 29 King Air turboprops in the third quarter of 2015, compared with 33 Citation jets and 30 King Air turboprops in the third quarter of 2014.  The portion of the segment’s revenues derived from aftermarket sales and services represented 30% of its total revenues in the third quarter of 2015, compared with 35% in the third quarter of 2014, largely reflecting higher proportional aircraft revenues.

 

In the first nine months of 2015, Textron Aviation’s revenues increased $286 million, 9%, compared with the first nine months of 2014, primarily due to the impact of the Beechcraft acquisition of $219 million and higher volume and mix of $68 million, mostly the result of higher military volume.  We delivered 106 Citation jets and 84 King Air turboprops in the first nine months of 2015, compared with 104 Citation jets and 72 King Air turboprops in the first nine months of 2014.  The portion of the segment’s

 

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revenues derived from aftermarket sales and services represented 32% of its total revenues in the first nine months of 2015, compared with 33% in the first nine months of 2014.

 

Textron Aviation’s operating expenses increased by $34 million in the third quarter of 2015, compared with the third quarter of 2014, primarily due to higher volume as described above, partially offset by lower amortization of $9 million related to fair value step-up adjustments of acquired Beechcraft inventories sold during the period.

 

Textron Aviation’s operating expenses increased $128 million in the first nine months of 2015, compared with the first nine months of 2014, primarily due to the incremental operating costs related to the Beechcraft acquisition in the first quarter and higher volume as described above, partially offset by lower amortization of $43 million related to fair value step-up adjustments of acquired Beechcraft inventories sold during the period.

 

Textron Aviation Segment Profit

The following factors contributed to the change in Textron Aviation’s segment profit for the periods:

 

(In millions)

 

 

Q3 2015

versus

Q3 2014

 

 

YTD 2015
versus

YTD 2014

 

Performance and other

 

 

$

13

 

 

$

99

 

Volume and mix

 

 

32

 

 

59

 

Total change

 

 

$

45

 

 

$

158

 

 

Segment profit at Textron Aviation increased $45 million in the third quarter of 2015, compared with the third quarter of 2014, primarily due to higher volume as described above.  The increase in performance and other includes lower amortization of $9 million related to fair value step-up adjustments as described above.

 

Segment profit at Textron Aviation increased $158 million in the first nine months of 2015, compared with the first nine months of 2014, primarily due to an increase in performance and other, reflecting the net profit impact of the Beechcraft acquisition, which includes the benefit of the integrated cost structure of Beechcraft and Cessna. Performance and other in the first nine months of 2015 also includes lower amortization of $43 million related to fair value step-up adjustments as described above.  The favorable impact from volume and mix was largely due to higher volume as described above as well as the mix of products sold.

 

Bell

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(Dollars in millions)

 

 

October 3,

2015

 

 

September 27,

2014

 

 

October 3,

2015

 

 

September 27,

2014

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

V-22 program

 

 

$

235

 

 

$

600

 

 

$

828

 

 

$

1,425

 

Other military

 

 

172

 

 

164

 

 

597

 

 

647

 

Commercial

 

 

349

 

 

418

 

 

994

 

 

1,102

 

Total revenues

 

 

756

 

 

1,182

 

 

2,419

 

 

3,174

 

Operating expenses

 

 

657

 

 

1,036

 

 

2,143

 

 

2,791

 

Segment profit

 

 

99

 

 

146

 

 

276

 

 

383

 

Profit margin

 

 

13.1

%

 

12.4

%

 

11.4

%

 

12.1

%

 

Bell’s major U.S. Government programs at this time are the V-22 tiltrotor aircraft and the H-1 helicopter platforms, which are both in the production stage and represent a significant portion of Bell’s revenues from the U.S. Government.

 

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Table of Contents

 

Bell Revenues and Operating Expenses

The following factors contributed to the change in Bell’s revenues for the periods:

 

(In millions)

 

 

Q3 2015

versus

Q3 2014

 

 

YTD 2015

versus

YTD 2014

 

Volume and mix

 

 

$

(430

)

 

$

(766

)

Other

 

 

4

 

 

11

 

Total change

 

 

$

(426

)

 

$

(755

)

 

Bell’s revenues decreased $426 million, 36%, in the third quarter of 2015, compared with the third quarter of 2014, primarily due to the following factors:

 

·

 

$365 million decrease in V-22 program revenues, primarily reflecting lower aircraft deliveries, as we delivered 4 V-22 aircraft in the third quarter of 2015 compared with 12 V-22 aircraft in the third quarter of 2014.

·

 

$69 million decrease in commercial revenues, largely related to lower aftermarket volume of $35 million and a change in mix of commercial aircraft that offset higher deliveries during the period. Bell delivered 45 commercial aircraft in the third quarter of 2015, compared with 41 commercial aircraft in the third quarter of 2014.

 

Bell’s revenues decreased $755 million, 24%, in the first nine months of 2015, compared with the first nine months of 2014, primarily due to the following factors:

 

·

 

$597 million decrease in V-22 program revenues, primarily reflecting lower aircraft deliveries, as we delivered 16 V-22 aircraft in the first nine months of 2015, compared with 30 V-22 aircraft in the first nine months of 2014.

·

 

$108 million decrease in commercial revenues, largely related to a change in mix of commercial aircraft sold during the period. Bell delivered 119 commercial aircraft in the first nine months of 2015, compared with 121 commercial aircraft in the first nine months of 2014.

·

 

$50 million decrease in other military revenues primarily reflecting $41 million recorded in the second quarter of 2014 related to the settlement of the SDD phase of the ARH program. Bell delivered 15 H-1 aircraft in the first nine months of 2015, compared with 17 H-1 aircraft in the first nine months of 2014.

 

Bell’s operating expenses decreased $379  million and $648 million in the third quarter and first nine months of 2015, respectively, compared with the corresponding periods of 2014, primarily due to lower net sales volume as described above.

 

As a result of cost reduction actions announced in April 2015, Bell incurred approximately $40 million in severance and benefit costs during the second quarter of 2015.  The initial impact of the restructuring on Bell’s segment profit in the second quarter of 2015 was not significant due to cost savings from headcount reductions and the impact of including a portion of these costs in our indirect cost rates. These actions reduced Bell’s headcount by approximately 1,100 employees representing approximately 12% of the Bell workforce.

 

Bell Segment Profit

The following factors contributed to the change in Bell’s segment profit for the periods:

 

(In millions)

 

 

Q3 2015

versus

Q3 2014

 

 

YTD 2015

versus

YTD 2014

 

Volume and mix

 

 

$

(88

)

 

$

(177

)

Performance and other

 

 

41

 

 

70

 

Total change

 

 

$

(47

)

 

$

(107

)

 

Bell’s segment profit decreased $47 million in the third quarter of 2015, compared with the third quarter of 2014, primarily due to an $88 million unfavorable impact of volume and mix largely resulting from lower V-22 aircraft deliveries and lower commercial aftermarket volume, partially offset by favorable performance and other of $41 million, largely related to ongoing cost reduction activities.

 

Bell’s segment profit decreased $107 million in the first nine months of 2015, compared with the first nine months of 2014. The $177 million unfavorable impact of volume and mix was largely the result of lower V-22 aircraft deliveries, an unfavorable mix of commercial aircraft sold during the period, and a $16 million favorable program profit adjustment in the second quarter of 2014 related to the ARH program as described above. Volume and mix was partially offset by favorable performance and other of $70 million, largely related to ongoing cost reduction activities.

 

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Table of Contents

 

Textron Systems

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(Dollars in millions)

 

 

October 3,
2015

 

 

September 27,
2014

 

 

October 3,
2015

 

 

September 27,
2014

 

Revenues

 

 

$

420

 

 

$

358

 

 

$

1,057

 

 

$

1,003

 

Operating expenses

 

 

 

381

 

 

 

331

 

 

 

969

 

 

 

903

 

Segment profit

 

 

 

39

 

 

 

27

 

 

 

88

 

 

 

100

 

Profit margin

 

 

 

9.3

%

 

 

7.5

%

 

 

8.3

%

 

 

10.0

%

 

Textron Systems Revenues and Operating Expenses

The following factors contributed to the change in Textron Systems’ revenues for the periods:

 

(In millions)

 

 

 

 

 

 

 

 

Q3 2015

versus

Q3 2014

 

 

YTD 2015
versus
YTD 2014

 

Volume

 

 

 

 

 

 

 

 

 

 

$

61

 

 

$

50

 

Other

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

4

 

Total change

 

 

 

 

 

 

 

 

 

 

$

62

 

 

$

54

 

 

Revenues at Textron Systems increased $62 million, 17%, in the third quarter of 2015, compared with the third quarter of 2014, primarily due to higher volume of $41 million in the Weapons and Sensors product line, and higher volume of $31 million in the Unmanned Systems product line.

 

Revenues at Textron Systems increased $54 million, 5%,  in the first nine months of 2015, compared with the first nine months of 2014, primarily due to higher volume of $93 million in the Unmanned Systems product line, largely reflecting higher unmanned aircraft systems deliveries, partially offset by lower volume in other product lines.

 

Textron Systems’ operating expenses increased $50 million in the third quarter of 2015, compared with the third quarter of 2014, primarily due to higher volume as described above.

 

Textron Systems’ operating expenses increased $66 million in the first nine months of 2015, compared with the first nine months of 2014, primarily due to higher volume as described above and an unfavorable mix of products delivered.

 

Textron Systems Segment Profit

The following factors contributed to the change in Textron Systems’ segment profit for the periods:

 

(In millions)

 

 

 

 

 

 

 

 

Q3 2015

versus

Q3 2014

 

 

YTD 2015
versus
YTD 2014

 

Volume and mix

 

 

 

 

 

 

 

 

 

 

$

10

 

 

$

(12

)

Performance

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

4

 

Other

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(4

)

Total change

 

 

 

 

 

 

 

 

 

 

$

12

 

 

$

(12

)

 

Textron Systems’ segment profit increased $12 million in the third quarter of 2015, compared with the third quarter of 2014, primarily due to the higher volume described above.

 

Textron Systems’ segment profit decreased $12 million in the first nine months of 2015, compared with the first nine months of 2014, primarily resulting from a decrease in volume and mix, reflecting an unfavorable product mix in 2015.

 

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Table of Contents

 

Industrial

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(Dollars in millions)

 

 

October 3,
2015

 

 

September 27,
2014

 

 

October 3,
2015

 

 

September 27,
2014

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel Systems and Functional Components

 

 

$

485

 

 

$

459

 

 

$

1,524

 

 

$

1,462

 

Other Industrial

 

 

 

343

 

 

 

326

 

 

 

1,103

 

 

 

1,014

 

Total revenues

 

 

 

828

 

 

 

785

 

 

 

2,627

 

 

 

2,476

 

Operating expenses

 

 

 

767

 

 

 

732

 

 

 

2,398

 

 

 

2,263

 

Segment profit

 

 

 

61

 

 

 

53

 

 

 

229

 

 

 

213

 

Profit margin

 

 

 

7.4

%

 

 

6.8

%

 

 

8.7

%

 

 

8.6

%

 

Industrial Revenues and Operating Expenses

The following factors contributed to the change in Industrial’s revenues for the periods:

 

(In millions)

 

 

 

 

 

 

 

 

Q3 2015

versus

Q3 2014

 

 

YTD 2015

versus
YTD 2014

 

Volume

 

 

 

 

 

 

 

 

 

 

$

100

 

 

$

291

 

Foreign exchange

 

 

 

 

 

 

 

 

 

 

 

(59

)

 

 

(190

)

Acquisitions

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

61

 

Other

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

(11

)

Total change

 

 

 

 

 

 

 

 

 

 

$

43

 

 

$

151

 

 

Industrial segment revenues increased $43 million, 6%, in the third quarter of 2015, compared with the third quarter of 2014, primarily due to higher volume, partially offset by an unfavorable foreign exchange impact of $59 million mostly related to the strengthening of the U.S. dollar primarily against the Euro.  Higher volume reflected an $82 million increase in the Fuel Systems and Functional Components product line, primarily due to automotive industry demand in Europe.

 

Industrial segment revenues increased $151 million, 6%, in the first nine months of 2015, compared with the first nine months of 2014, primarily due to higher volume and the impact from acquisitions of $61 million, primarily within our Specialized Vehicles and Equipment product line, partially offset by an unfavorable foreign exchange impact of $190 million mostly related to the strengthening of the U.S. dollar primarily against the Euro.  Higher volume reflected a $228 million increase in the Fuel Systems and Functional Components product line, primarily due to automotive industry demand in Europe and North America.

 

Operating expenses for the Industrial segment increased $35 million and $135 million in the third quarter and first nine months of 2015, respectively, compared with the corresponding periods of 2014, largely due to the impact from higher volume as described above and additional operating expenses from acquisitions of $10 million and $63 million, respectively, partially offset by a favorable impact of $55 million and $179 million, respectively, from foreign exchange fluctuations.

 

Industrial Segment Profit

The following factors contributed to the change in Industrial’s segment profit for the periods:

 

(In millions)

 

 

 

 

 

 

 

 

Q3 2015

versus

Q3 2014

 

 

YTD 2015

versus
YTD 2014

 

Volume

 

 

 

 

 

 

 

 

 

 

$

9

 

 

$

36

 

Performance

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

(11

)

Foreign exchange

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

(11

)

Other

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

2

 

Total change

 

 

 

 

 

 

 

 

 

 

$

8

 

 

$

16

 

 

Segment profit for the Industrial segment increased $8 million in the third quarter of 2015, compared with the third quarter of 2014, primarily due to higher volume as described above.

 

Segment profit for the Industrial segment increased $16 million in the first nine months of 2015, compared with the first nine months of 2014, largely due to the impact from higher volume as described above, partially offset by unfavorable performance of $11 million and an unfavorable impact of $11 million from foreign exchange fluctuations.

 

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Table of Contents

 

Finance

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(In millions)

 

 

October 3,
2015

 

 

September 27,
2014

 

 

October 3,
2015

 

 

September 27,
2014

 

Revenues

 

 

$

17

 

 

$

25

 

 

$

63

 

 

$

81

 

Segment profit

 

 

 

6

 

 

 

5

 

 

 

22

 

 

 

16

 

 

Finance segment revenues decreased $8 million and $18 million in the third quarter and first nine months of 2015, respectively, compared with the corresponding periods of 2014, primarily attributable to average finance receivables being lower by $182 million and $202 million, respectively.  Finance segment profit increased $1 million and $6 million in the third quarter and first nine months of 2015, respectively, compared with the corresponding periods of 2014, primarily due to lower provision for loan losses.

 

Finance Portfolio Quality

The following table reflects information about the Finance segment’s credit performance related to finance receivables.

 

 

(Dollars in millions)

 

 

 

 

 

 

 

 

October 3,

2015

 

 

January 3,

2015

 

Finance receivables*

 

 

 

 

 

 

 

 

 

 

$

1,155

 

 

$

1,254

 

Nonaccrual finance receivables

 

 

 

 

 

 

 

 

 

 

 

94

 

 

 

81

 

Ratio of nonaccrual finance receivables to finance receivables

 

 

 

 

 

 

 

 

 

 

 

8.14

%

 

 

6.46

%

60+ days contractual delinquency

 

 

 

 

 

 

 

 

 

 

$

66

 

 

$

57

 

60+ days contractual delinquency as a percentage of finance receivables

 

 

 

 

 

 

 

5.71

%

 

 

4.55

%

 

 

* Excludes finance receivables held for sale.

 

Liquidity and Capital Resources

 

Our financings are conducted through two separate borrowing groups.  The Manufacturing group consists of Textron consolidated with its majority-owned subsidiaries that operate in the Textron Aviation, Bell, Textron Systems and Industrial segments.  The Finance group, which also is the Finance segment, consists of Textron Financial Corporation and its consolidated subsidiaries.  We designed this framework to enhance our borrowing power by separating the Finance group.  Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services.  Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance.  To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements.

 

Key information that is utilized in assessing our liquidity is summarized below:

 

(Dollars in millions)

 

 

 

 

 

 

 

 

October 3,

2015

 

 

January 3,

2015

 

Manufacturing group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

 

 

 

 

 

 

 

 

 

$

497

 

 

$

731

 

Debt

 

 

 

 

 

 

 

 

 

 

 

2,805

 

 

 

2,811

 

Shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

4,696

 

 

 

4,272

 

Capital (debt plus shareholders’ equity)

 

 

 

 

 

 

 

 

 

 

 

7,501

 

 

 

7,083

 

Net debt (net of cash and equivalents) to capital

 

 

 

 

 

 

 

 

 

 

 

33

%

 

 

33

%

Debt to capital

 

 

 

 

 

 

 

 

 

 

 

37

%

 

 

40

%

Finance group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

 

 

 

 

 

 

 

 

 

$

117

 

 

$

91

 

Debt

 

 

 

 

 

 

 

 

 

 

 

967

 

 

 

1,063

 

 

We believe that our calculations of debt to capital and net debt to capital are useful measures as they provide a summary indication of the level of debt financing (i.e., leverage) that is in place to support our capital structure, as well as to provide an indication of the capacity to add further leverage.  We believe that we will have sufficient cash to meet our future needs, based on our existing cash balances, the cash we expect to generate from our manufacturing operations and other available funding alternatives, as appropriate.

 

Textron has a senior unsecured revolving credit facility that expires in October 2018 for an aggregate principal amount of $1.0 billion, of which up to $100 million is available for the issuance of letters of credit.  At October 3, 2015, there were no amounts

 

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Table of Contents

 

borrowed against the facility. We also maintain an effective shelf registration statement filed with the Securities and Exchange Commission that allows us to issue an unlimited amount of public debt and other securities.

 

Manufacturing Group Cash Flows

Cash flows from continuing operations for the Manufacturing group as presented in our Consolidated Statements of Cash Flows are summarized below:

 

 

 

 

 

 

 

Nine Months Ended

 

(In millions)

 

 

 

 

 

 

 

 

October 3,

2015

 

 

September 27,

2014

 

Operating activities

 

 

 

 

 

 

 

 

 

 

$

347

 

 

$

491

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

(365

)

 

 

(1,847

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

(203

)

 

 

631

 

 

Cash flows from operating activities decreased $144 million during the first nine months of 2015, compared with the first nine months of 2014, largely due to an unfavorable change in working capital, partially offset by higher net income of $78 million.  A significant factor contributing to the working capital change was an increase in cash used for inventory at Textron Aviation and Textron Systems to support sales growth.

 

Cash flows used in investing activities included capital expenditures of $286 million and $255 million in the first nine months of 2015 and 2014, respectively.  Investing cash flows also included a $1.5 billion aggregate cash payment to acquire Beechcraft in the first quarter of 2014.

 

Under a 2013 share repurchase authorization, we repurchased an aggregate of 5.0 million shares of our outstanding common stock for $211 million in the first nine months of 2015 and an aggregate of 4.1 million shares of our outstanding common stock for $152 million in the first nine months of 2014. In addition, in the first nine months of 2014, we repurchased 4.3 million shares of our outstanding common stock from a counterparty for $150 million under an accelerated share repurchase agreement. Financing activities in the first nine months of 2014 also included proceeds of $1.1 billion from long-term debt, which was used to finance a portion of the Beechcraft acquisition, partially offset by the repayment of $201 million of outstanding debt.

 

Finance Group Cash Flows

Cash flows from continuing operations for the Finance group as presented in our Consolidated Statements of Cash Flows are summarized below:

 

 

 

 

 

 

 

Nine Months Ended

 

(In millions)

 

 

 

 

 

 

 

 

October 3,

2015

 

 

September 27,

2014

 

Operating activities

 

 

 

 

 

 

 

 

 

 

$

27

 

 

$

(3

)

Investing activities

 

 

 

 

 

 

 

 

 

 

 

160

 

 

 

203

 

Financing activities

 

 

 

 

 

 

 

 

 

 

 

(161

)

 

 

(167

)

 

Cash flows from investing activities included collections on finance receivables totaling $269 million and $307 million in the first nine months of 2015 and 2014, respectively, partially offset by finance receivable originations of $145 million and $123 million, respectively.

 

In the first nine months of 2015, cash flows used in financing activities included repayment of long-term and nonrecourse debt of $196 million, compared with $261 million of payments in the first nine months of 2014.  These cash outflows were partially offset by proceeds from long-term debt of $55 million and $94 million in the first nine months of 2015 and 2014, respectively.

 

Consolidated Cash Flows

The consolidated cash flows from continuing operations, after elimination of activity between the borrowing groups, are summarized below:

 

 

 

 

 

 

 

Nine Months Ended

 

(In millions)

 

 

 

 

 

 

 

 

October 3,

2015

 

 

September 27,

2014

 

Operating activities

 

 

 

 

 

 

 

 

 

 

$

419

 

 

$

569

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

(270

)

 

 

(1,725

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

(344

)

 

 

464

 

 

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Cash flows from operating activities decreased $150 million during the first nine months of 2015, compared with the first nine months of 2014, largely due to an unfavorable change in working capital, partially offset by higher net income of $81 million.  A significant factor contributing to the working capital change was an increase in cash used for inventory at Textron Aviation and Textron Systems to support sales growth.

 

Cash flows used in investing activities included capital expenditures of $286 million and $255 million in the first nine months of 2015 and 2014, respectively.  Investing cash flows also included a $1.5 billion aggregate cash payment to acquire Beechcraft in the first quarter of 2014.  Collections on finance receivables totaled $66 million and $77 million in the first nine months of 2015 and 2014, respectively.

 

Total cash used in financing activities included $211 million and $302 million of share repurchases in the first nine months of 2015 and 2014, respectively, and payments on long-term and nonrecourse debt of $196 million and $462 million, respectively.  Cash flows from financing activities in the first nine months of 2014 also included proceeds of $1.2 billion from long-term debt, which was used primarily to finance a portion of the Beechcraft acquisition.

 

Captive Financing and Other Intercompany Transactions

The Finance group finances retail purchases and leases for new and pre-owned aircraft and helicopters manufactured by our Manufacturing group, otherwise known as captive financing.  In the Consolidated Statements of Cash Flows, cash received from customers is reflected as operating activities when received from third parties.  However, in the cash flow information provided for the separate borrowing groups, cash flows related to captive financing activities are reflected based on the operations of each group.  For example, when product is sold by our Manufacturing group to a customer and is financed by the Finance group, the origination of the finance receivable is recorded within investing activities as a cash outflow in the Finance group’s statement of cash flows.  Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the Finance group on the customer’s behalf is recorded within operating cash flows as a cash inflow.  Although cash is transferred between the two borrowing groups, there is no cash transaction reported in the consolidated cash flows at the time of the original financing.  These captive financing activities, along with all significant intercompany transactions, are reclassified or eliminated from the Consolidated Statements of Cash Flows.

 

Reclassification adjustments included in the Consolidated Statements of Cash Flows are summarized below:

 

 

 

Nine Months Ended

 

(In millions)

 

 

October 3,
2015

 

 

September 27,
2014

 

Reclassification adjustments from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Cash received from customers

 

 

 

 

$

203

 

 

$

230

 

Finance receivable originations for Manufacturing group inventory sales

 

 

 

 

 

(145

)

 

 

(123

)

Other

 

 

 

 

 

7

 

 

 

(26

)

Total reclassification adjustments from investing activities

 

 

 

 

$

65

 

 

$

81

 

Reclassification adjustments from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Dividends received by Manufacturing group from Finance group

 

 

 

 

 

(20

)

 

 

 

Total reclassification adjustments from financing activities

 

 

 

 

 

(20

)

 

 

 

Total reclassification adjustments to cash flow from operating activities

 

 

 

 

$

45

 

 

$

81

 

 

Critical Accounting Estimates

 

The accounting policies that we believe are most critical to the portrayal of our financial condition and results of operations are disclosed on pages 33 through 36 in our 2014 Annual Report on Form 10-K. The following section provides an update of the year-end disclosure for long-term contracts to include program profit adjustments made during the quarter.

 

Long-Term Contracts

We make a substantial portion of our sales to government customers pursuant to long-term contracts. These contracts require development and delivery of products over multiple years and may contain fixed-price purchase options for additional products. We account for these long-term contracts under the percentage-of-completion method of accounting. Under this method, we estimate profit as the difference between total estimated revenues and cost of a contract. The percentage-of-completion method of accounting involves the use of various estimating techniques to project costs at completion and, in some cases, includes estimates of recoveries asserted against the customer for changes in specifications. Due to the size, length of time and nature of many of our contracts, the estimation of total contract costs and revenues through completion is complicated and subject to many variables relative to the outcome of future events over a period of several years. We are required to make numerous assumptions and estimates relating to items such as expected engineering requirements, complexity of design and related development costs, product performance, performance of subcontractors, availability and cost of materials, labor productivity and cost, overhead and

 

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capital costs, manufacturing efficiencies and the achievement of contract milestones, including product deliveries, technical requirements, or schedule.

 

At the outset of each contract, we estimate the initial profit booking rate. The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements (for example, a newly-developed product versus a mature product), schedule (for example, the number and type of milestone events), and costs by contract requirements in the initial estimated costs at completion. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule, and costs aspects of the contract. Likewise, the profit booking rate may decrease if we are not successful in retiring the risks; and, as a result, our estimated costs at completion increase. All of the estimates are subject to change during the performance of the contract and, therefore, may affect the profit booking rate. When adjustments are required, any changes from prior estimates are recognized using the cumulative catch-up method with the impact of the change from inception-to-date recorded in the current period. The aggregate gross amount of all program profit adjustments that are included within segment profit are presented below.

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(In millions)

 

 

October 3,
2015

 

 

September 27,
2014

 

 

October 3,
2015

 

 

September 27,
2014

 

Gross favorable

 

 

$

 20

 

 

$

25

 

 

$

93

 

 

$

90

 

Gross unfavorable

 

 

 

(6

)

 

 

(15

)

 

 

(25

)

 

 

(21

)

Net adjustments

 

 

$

 14

 

 

$

10

 

 

$

68

 

 

$

69

 

 

Forward-Looking Information

Certain statements in this Quarterly Report on Form 10-Q and other oral and written statements made by us from time to time are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which may describe strategies, goals, outlook or other non-historical matters, or project revenues, income, returns or other financial measures, often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “guidance,” “project,” “target,” “potential,” “will,” “should,” “could,” “likely” or “may” and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update or revise any forward-looking statements.  In addition to those factors described in our 2014 Annual Report on Form 10-K under “RISK FACTORS,” among the factors that could cause actual results to differ materially from past and projected future results are the following:

 

·

Interruptions in the U.S. Government’s ability to fund its activities and/or pay its obligations;

·

Changing priorities or reductions in the U.S. Government defense budget, including those related to military operations in foreign countries;

·

Our ability to perform as anticipated and to control costs under contracts with the U.S. Government;

·

The U.S. Government’s ability to unilaterally modify or terminate its contracts with us for the U.S. Government’s convenience or for our failure to perform, to change applicable procurement and accounting policies, or, under certain circumstances, to withhold payment or suspend or debar us as a contractor eligible to receive future contract awards;

·

Changes in foreign military funding priorities or budget constraints and determinations, or changes in government regulations or policies on the export and import of military and commercial products;

·

Volatility in the global economy or changes in worldwide political conditions that adversely impact demand for our products;

·

Volatility in interest rates or foreign exchange rates;

·

Risks related to our international business, including establishing and maintaining facilities in locations around the world and relying on joint venture partners, subcontractors, suppliers, representatives, consultants and other business partners in connection with international business, including in emerging market countries;

·

Our Finance segment’s ability to maintain portfolio credit quality or to realize full value of receivables;

·

Performance issues with key suppliers or subcontractors;

·

Legislative or regulatory actions, both domestic and foreign, impacting our operations or demand for our products;

·

Our ability to control costs and successfully implement various cost-reduction activities;

·

The efficacy of research and development investments to develop new products or unanticipated expenses in connection with the launching of significant new products or programs;

·

The timing of our new product launches or certifications of our new aircraft products;

·

Our ability to keep pace with our competitors in the introduction of new products and upgrades with features and technologies desired by our customers;

·

Pension plan assumptions and future contributions;

·

Demand softness or volatility in the markets in which we do business;

 

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·

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; and

·

The risk that anticipated synergies and opportunities as a result of acquisitions will not be realized or the risk that acquisitions do not perform as planned, including, for example, the risk that acquired businesses will not achieve revenue and profit projections.

 

Item 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There has been no significant change in our exposure to market risk during the fiscal quarter ended October 3, 2015. For discussion of our exposure to market risk, refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk contained in Textron’s 2014 Annual Report on Form 10-K.

 

Item 4.      CONTROLS AND PROCEDURES

 

We performed an evaluation of the effectiveness of our disclosure controls and procedures as of October 3, 2015. 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 October 3, 2015.

 

There were no changes in our internal control over financial reporting during the fiscal quarter ended October 3, 2015 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II.  OTHER INFORMATION

 

 

Item 2.                            UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following provides information about our third quarter 2015 repurchases of equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:

 

Period (shares in thousands)

 

Total Number of
Shares
Purchased (1)

 

Average Price
Paid per Share
(excluding
commissions)

 

Total Number of
Shares Purchased as
part of Publicly
Announced Plan (1)

 

Maximum
Number of Shares
that may yet be
Purchased under
the Plan

 

July 5, 2015 – August 8, 2015

 

550

 

$

43.70

 

550

 

13,600

 

August 9, 2015 – September 5, 2015

 

1,470

 

40.67

 

1,470

 

12,130

 

September 6, 2015 – October 3, 2015

 

1,040

 

39.01

 

1,040

 

11,090

 

Total

 

3,060

 

$

40.65

 

3,060

 

 

 

(1)          These shares were purchased pursuant to a plan authorizing the repurchase of up to 25 million shares of Textron common stock that had been announced on January 23, 2013. This plan has no expiration date.

 

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Item 6.

 

EXHIBITS

 

 

 

10.1

 

Amendment No. 1 to Textron Inc. Short-Term Incentive Plan (As amended and restated effective January 3, 2010), dated July 22, 2015.

 

 

 

10.2

 

Amended and Restated Hangar License and Services Agreement, made and entered into as of October 1, 2015, between Textron Inc. and Mr. Donnelly’s limited liability company.

 

 

 

10.3

 

Amended and Restated Hangar License and Services Agreement, made and entered into on July 24, 2015, between Textron Inc. and Mr. Connor’s limited liability company.

 

 

 

12.1

 

Computation of ratio of income to fixed charges of Textron Inc. Manufacturing Group

 

 

 

12.2

 

Computation of ratio of income to fixed charges of Textron Inc. including all majority-owned subsidiaries

 

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101

 

The following materials from Textron Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended October 3, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

TEXTRON INC.

 

 

 

Date:

October 28, 2015

 

 

/s/ Mark S. Bamford

 

 

 

 

Mark S. Bamford
Vice President and Corporate Controller
(principal accounting officer)

 

 

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Table of Contents

 

LIST OF EXHIBITS

 

10.1

 

Amendment No. 1 to Textron Inc. Short-Term Incentive Plan (As amended and restated effective January 3, 2010), dated July 22, 2015.

 

 

 

10.2

 

Amended and Restated Hangar License and Services Agreement, made and entered into as of October 1, 2015, between Textron Inc. and Mr. Donnelly’s limited liability company.

 

 

 

10.3

 

Amended and Restated Hangar License and Services Agreement, made and entered into on July 24, 2015, between Textron Inc. and Mr. Connor’s limited liability company.

 

 

 

12.1

 

Computation of ratio of income to fixed charges of Textron Inc. Manufacturing Group

 

 

 

12.2

 

Computation of ratio of income to fixed charges of Textron Inc. including all majority-owned subsidiaries

 

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101

 

The following materials from Textron Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended October 3, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.

 

30