10-Q 1 a18-14040_110q.htm 10-Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

 

Form 10-Q

 

 

 

 

 

 

 

 

(Mark One)

[ X ]

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

 

 

For the quarterly period ended June 30, 2018

 

OR

 

 

[    ]

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

 

 

For the transition period from            to           .

 

Commission File Number 1-5480

 

 

Textron Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

05-0315468

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

40 Westminster Street, Providence, RI

 

02903

(Address of principal executive offices)

 

(Zip code)

 

(401) 421-2800

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   ü  No___

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   ü  No____

 

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

 

Large accelerated filer  [  ü ]

Accelerated filer  [ ___ ]

Non-accelerated filer  [ ___ ]

 

Smaller reporting company  [        ]

Emerging growth company  [        ]

 

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

 

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

 

As of July 13, 2018, there were 248,410,831 shares of common stock outstanding.

 



Table of Contents

 

TEXTRON INC.

Index to Form 10-Q

For the Quarterly Period Ended June 30, 2018

 

 

 

 

Page

 

 

PART I.                        FINANCIAL INFORMATION

 

 

 

Item 1.                                 Financial Statements

 

 

 

Consolidated Statements of Operations (Unaudited)

3

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited)

4

 

 

 

 

Consolidated Balance Sheets (Unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited)

6

 

 

 

 

Notes to the Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Note 1.    Basis of Presentation

8

 

Note 2.    Summary of Significant Accounting Policies Update

8

 

Note 3.    Business Disposition

11

 

Note 4.    Retirement Plans

12

 

Note 5.    Earnings Per Share

12

 

Note 6.    Accounts Receivable and Finance Receivables

13

 

Note 7.    Inventories

15

 

Note 8.    Warranty Liability

15

 

Note 9.    Derivative Instruments and Fair Value Measurements

15

 

Note 10.  Shareholders’ Equity

16

 

Note 11.  Special Charges

18

 

Note 12.  Income Taxes

18

 

Note 13.  Commitments and Contingencies

19

 

Note 14.  Segment Information

19

 

Note 15.  Revenues

20

 

 

 

 

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

22

 

 

 

 

Item 3.                                 Quantitative and Qualitative Disclosures about Market Risk

32

 

 

 

 

Item 4.                                 Controls and Procedures

32

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 2.                                 Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

 

 

Item 6.                                 Exhibits

33

 

 

 

 

                       Signatures

34

 

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

TEXTRON INC.

Consolidated Statements of Operations (Unaudited)

 

 

Three Months Ended

Six Months Ended

(In millions, except per share amounts)

 

June 30,
2018

 

July 1,
2017

 

June 30,
2018

 

July 1,
2017

Revenues

 

 

 

 

 

 

 

 

Manufacturing revenues

$

3,709

$

3,586

$

6,989

$

6,661

Finance revenues

 

17

 

18

 

33

 

36

Total revenues

 

3,726

 

3,604

 

7,022

 

6,697

Costs, expenses and other

 

 

 

 

 

 

 

 

Cost of sales

 

3,073

 

2,996

 

5,802

 

5,588

Selling and administrative expense

 

370

 

343

 

697

 

652

Interest expense

 

42

 

43

 

83

 

85

Special charges

 

 

13

 

 

50

Other components of net periodic benefit cost (credit)

 

(19)

 

(6)

 

(38)

 

(14)

Total costs, expenses and other

 

3,466

 

3,389

 

6,544

 

6,361

Income from continuing operations before income taxes

 

260

 

215

 

478

 

336

Income tax expense

 

36

 

62

 

65

 

83

Income from continuing operations

 

224

 

153

 

413

 

253

Income from discontinued operations, net of income taxes

 

 

 

 

1

Net income

$

224

$

153

$

413

$

254

Basic earnings per share

 

 

 

 

 

 

 

 

Continuing operations

$

0.88

$

0.57

$

1.61

$

0.94

Discontinued operations

 

 

 

 

Basic earnings per share

$

0.88

$

0.57

$

1.61

$

0.94

Diluted earnings per share

 

 

 

 

 

 

 

 

Continuing operations

$

0.87

$

0.57

$

1.59

$

0.94

Discontinued operations

 

 

 

 

Diluted earnings per share

$

0.87

$

0.57

$

1.59

$

0.94

Dividends per share

 

 

 

 

 

 

 

 

Common stock

$

0.02

$

0.02

$

0.04

$

0.04

 

See Notes to the Consolidated Financial Statements.

 

3



Table of Contents

 

TEXTRON INC.

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

Three Months Ended

Six Months Ended

(In millions)

 

June 30,
2018

 

July 1,
2017

 

June 30,
2018

 

July 1,
2017

Net income

$

224

$

153

$

413

$

254

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments, net of reclassifications

 

31

 

23

 

62

 

47

Foreign currency translation adjustments

 

(69)

 

42

 

(27)

 

64

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

 

(4)

 

4

 

(3)

 

8

Other comprehensive income (loss)

 

(42)

 

69

 

32

 

119

Comprehensive income

$

182

$

222

$

445

$

373

 

See Notes to the Consolidated Financial Statements.

 

4



Table of Contents

 

TEXTRON INC.

Consolidated Balance Sheets (Unaudited)

 

(Dollars in millions)

 

 

 

 

 

June 30,
2018

 

December 30,
2017

Assets

 

 

 

 

 

 

 

 

Manufacturing group

 

 

 

 

 

 

 

 

Cash and equivalents

 

 

 

 

$

554

$

1,079

Accounts receivable, net

 

 

 

 

 

1,121

 

1,363

Inventories

 

 

 

 

 

3,925

 

4,150

Assets of businesses held for sale

 

 

 

 

 

407

 

Other current assets

 

 

 

 

 

763

 

435

Total current assets

 

 

 

 

 

6,770

 

7,027

Property, plant and equipment, less accumulated depreciation
and amortization of $4,097 and $4,120, respectively

 

 

 

 

 

2,608

 

2,721

Goodwill

 

 

 

 

 

2,207

 

2,364

Other assets

 

 

 

 

 

1,869

 

2,059

Total Manufacturing group assets

 

 

 

 

 

13,454

 

14,171

Finance group

 

 

 

 

 

 

 

 

Cash and equivalents

 

 

 

 

 

177

 

183

Finance receivables, net

 

 

 

 

 

763

 

819

Other assets

 

 

 

 

 

164

 

167

Total Finance group assets

 

 

 

 

 

1,104

 

1,169

Total assets

 

 

 

 

$

14,558

$

15,340

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Manufacturing group

 

 

 

 

 

 

 

 

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

 

 

 

 

$

9

$

14

Accounts payable

 

 

 

 

 

1,147

 

1,205

Liabilities of businesses held for sale

 

 

 

 

 

66

 

Other current liabilities

 

 

 

 

 

2,175

 

2,441

Total current liabilities

 

 

 

 

 

3,397

 

3,660

Other liabilities

 

 

 

 

 

1,809

 

2,006

Long-term debt

 

 

 

 

 

3,070

 

3,074

Total Manufacturing group liabilities

 

 

 

 

 

8,276

 

8,740

Finance group

 

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

111

 

129

Debt

 

 

 

 

 

809

 

824

Total Finance group liabilities

 

 

 

 

 

920

 

953

Total liabilities

 

 

 

 

 

9,196

 

9,693

Shareholders’ equity

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

33

 

33

Capital surplus

 

 

 

 

 

1,774

 

1,669

Treasury stock

 

 

 

 

 

(963)

 

(48)

Retained earnings

 

 

 

 

 

5,861

 

5,368

Accumulated other comprehensive loss

 

 

 

 

 

(1,343)

 

(1,375)

Total shareholders’ equity

 

 

 

 

 

5,362

 

5,647

Total liabilities and shareholders’ equity

 

 

 

 

$

14,558

$

15,340

Common shares outstanding (in thousands)

 

 

 

 

 

248,910

 

261,471

 

See Notes to the Consolidated Financial Statements.

 

5



Table of Contents

 

TEXTRON INC.

Consolidated Statements of Cash Flows (Unaudited)

For the Six Months Ended June 30, 2018 and July 1, 2017, respectively

 

 

 

 

 

 

 

Consolidated

(In millions)

 

 

 

 

 

2018

 

2017

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

 

 

 

$

413

$

254

Less: Income from discontinued operations

 

 

 

 

 

 

1

Income from continuing operations

 

 

 

 

 

413

 

253

Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Non-cash items:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

216

 

218

Deferred income taxes

 

 

 

 

 

12

 

21

Asset impairments

 

 

 

 

 

 

21

Other, net

 

 

 

 

 

61

 

52

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

 

 

 

(42)

 

(125)

Inventories

 

 

 

 

 

(78)

 

(61)

Other assets

 

 

 

 

 

(38)

 

(33)

Accounts payable

 

 

 

 

 

(22)

 

(140)

Other liabilities

 

 

 

 

 

(165)

 

(68)

Income taxes, net

 

 

 

 

 

17

 

55

Pension, net

 

 

 

 

 

(5)

 

16

Captive finance receivables, net

 

 

 

 

 

26

 

60

Other operating activities, net

 

 

 

 

 

3

 

(2)

Net cash provided by operating activities of continuing operations

 

 

 

 

 

398

 

267

Net cash used in operating activities of discontinued operations

 

 

 

 

 

(1)

 

(23)

Net cash provided by operating activities

 

 

 

 

 

397

 

244

Cash flows from investing activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 

 

 

(159)

 

(161)

Net proceeds from corporate-owned life insurance policies

 

 

 

 

 

98

 

22

Net cash used in acquisitions

 

 

 

 

 

 

(329)

Finance receivables repaid

 

 

 

 

 

25

 

24

Other investing activities, net

 

 

 

 

 

30

 

34

Net cash used in investing activities

 

 

 

 

 

(6)

 

(410)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Principal payments on long-term debt and nonrecourse debt

 

 

 

 

 

(34)

 

(74)

Proceeds from long-term debt

 

 

 

 

 

 

375

Purchases of Textron common stock

 

 

 

 

 

(915)

 

(329)

Dividends paid

 

 

 

 

 

(10)

 

(11)

Other financing activities, net

 

 

 

 

 

43

 

21

Net cash used in financing activities

 

 

 

 

 

(916)

 

(18)

Effect of exchange rate changes on cash and equivalents

 

 

 

 

 

(6)

 

15

Net decrease in cash and equivalents

 

 

 

 

 

(531)

 

(169)

Cash and equivalents at beginning of period

 

 

 

 

 

1,262

 

1,298

Cash and equivalents at end of period

 

 

 

 

$

731

$

1,129

 

See Notes to the Consolidated Financial Statements.

 

6



Table of Contents

 

TEXTRON INC.

Consolidated Statements of Cash Flows (Unaudited) (Continued)

For the Six Months Ended June 30, 2018 and July 1, 2017, respectively

 

 

Manufacturing Group

Finance Group

(In millions)

 

2018

 

2017

 

2018

 

2017

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

$

398

$

245

$

15

$

9

Less: Income from discontinued operations

 

 

1

 

 

Income from continuing operations

 

398

 

244

 

15

 

9

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

 

 

 

 

 

 

 

 

Non-cash items:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

212

 

211

 

4

 

7

Deferred income taxes

 

14

 

22

 

(2)

 

(1)

Asset impairments

 

 

21

 

 

Other, net

 

60

 

51

 

1

 

1

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

(42)

 

(125)

 

 

Inventories

 

(80)

 

(60)

 

 

Other assets

 

(39)

 

(30)

 

1

 

(3)

Accounts payable

 

(22)

 

(140)

 

 

Other liabilities

 

(162)

 

(62)

 

(3)

 

(6)

Income taxes, net

 

28

 

102

 

(11)

 

(47)

Pension, net

 

(5)

 

16

 

 

Dividends received from Finance group

 

50

 

 

 

Other operating activities, net

 

3

 

(2)

 

 

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

 

415

 

248

 

5

 

(40)

Net cash used in operating activities of discontinued operations

 

(1)

 

(23)

 

 

Net cash provided by (used in) operating activities

 

414

 

225

 

5

 

(40)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Capital expenditures

 

(159)

 

(161)

 

 

Net proceeds from corporate-owned life insurance policies

 

98

 

22

 

 

Net cash used in acquisitions

 

 

(329)

 

 

Finance receivables repaid

 

 

 

112

 

158

Finance receivables originated

 

 

 

(61)

 

(74)

Other investing activities, net

 

10

 

1

 

22

 

32

Net cash provided by (used in) investing activities

 

(51)

 

(467)

 

73

 

116

Cash flows from financing activities

 

 

 

 

 

 

 

 

Increase in short-term debt

 

 

 

 

Principal payments on long-term debt and nonrecourse debt

 

 

 

(34)

 

(74)

Proceeds from long-term debt

 

 

347

 

 

28

Purchases of Textron common stock

 

(915)

 

(329)

 

 

Dividends paid

 

(10)

 

(11)

 

(50)

 

Other financing activities, net

 

43

 

21

 

 

Net cash provided by (used in) financing activities

 

(882)

 

28

 

(84)

 

(46)

Effect of exchange rate changes on cash and equivalents

 

(6)

 

15

 

 

Net increase (decrease) in cash and equivalents

 

(525)

 

(199)

 

(6)

 

30

Cash and equivalents at beginning of period

 

1,079

 

1,137

 

183

 

161

Cash and equivalents at end of period

$

554

$

938

$

177

$

191

 

See Notes to the Consolidated Financial Statements.

 

7



Table of Contents

 

TEXTRON INC.

Notes to the Consolidated Financial Statements (Unaudited)

 

Note 1.  Basis of Presentation

 

Our Consolidated Financial Statements include the accounts of Textron Inc. (Textron) and its majority-owned subsidiaries.  We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information.  Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements.  The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 30, 2017.  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.

 

At the beginning of 2018, we adopted Accounting Standards Update (ASU) No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. This standard provides guidance on the classification of certain cash flows and requires companies to classify cash proceeds received from the settlement of corporate-owned life insurance as cash inflows from investing activities. The standard is required to be adopted on a retrospective basis. Prior to adoption of this standard, we classified these proceeds as operating activities in the Consolidated Statements of Cash Flows. Upon adoption, we reclassified $22 million of net cash proceeds for the first half of 2017 from operating activities to investing activities.

 

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

 

Use of Estimates

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

 

Note 2.  Summary of Significant Accounting Policies Update

 

Our significant accounting policies are included in Note 1 of our Annual Report on Form 10-K for the year ended December 30, 2017.  On December 31, 2017, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606).  Significant changes to our policies resulting from the adoption are provided below. We adopted ASC 606 using the modified retrospective transition method applied to contracts that were not substantially complete at the end of 2017.  We recorded a $90 million adjustment to increase retained earnings to reflect the cumulative impact of adopting this standard at the beginning of 2018, primarily related to certain long-term contracts our Bell segment has with the U.S. Government that converted to the cost-to-cost method for revenue recognition.  The comparative information has not been restated and is reported under the accounting standards in effect for those periods.  A reconciliation of the financial statement line items impacted for the three and six months ended June 30, 2018 under ASC 606 to the prior accounting standards is provided in Note 15.

 

Revenue Recognition

Revenue is recognized when control of the goods or services promised under the contract is transferred to the customer either at a point in time (e.g., upon delivery) or over time (e.g., as we perform under the contract).  We account for a contract when it has approval and commitment from both parties, the rights and payment terms of the parties are identified, the contract has commercial substance and collectability of consideration is probable.  Contracts are reviewed to determine whether there is one or multiple performance obligations. A performance obligation is a promise to transfer a distinct good or service to a customer and represents the unit of accounting for revenue recognition. For contracts with multiple performance obligations, the expected consideration, or the transaction price, is allocated to each performance obligation identified in the contract based on the relative standalone selling

 

8



Table of Contents

 

price of each performance obligation.  Revenue is then recognized for the transaction price allocated to the performance obligation when control of the promised goods or services underlying the performance obligation is transferred. Contract consideration is not adjusted for the effects of a significant financing component when, at contract inception, the period between when control transfers and when the customer will pay for that good or service is one year or less.

 

Commercial Contracts

The majority of our contracts with commercial customers have a single performance obligation as there is only one good or service promised or the promise to transfer the goods or services is not distinct or separately identifiable from other promises in the contract.  Revenue is primarily recognized at a point in time, which is generally when the customer obtains control of the asset upon delivery and customer acceptance.  Contract modifications that provide for additional distinct goods or services at the standalone selling price are treated as separate contracts.

 

For commercial aircraft, we contract with our customers to sell fully outfitted fixed-wing aircraft, which may include configuration options.  The aircraft typically represents a single performance obligation and revenue is recognized upon customer acceptance and delivery. For commercial helicopters, our customers generally contract with us for fully functional basic configuration aircraft and control is transferred upon customer acceptance and delivery.  At times, customers may separately contract with us for the installation of accessories and customization to the basic aircraft. If these contracts are entered into at or near the same time of the basic aircraft contract, we assess whether the contracts meet the criteria to be combined.  For contracts that are combined, the basic aircraft and the accessories and customization are typically considered to be distinct, and therefore, are separate performance obligations.  For these contracts, revenue is recognized on the basic aircraft upon customer acceptance and transfer of title and risk of loss and on the accessories and customization upon delivery and customer acceptance.  We utilize observable prices to determine the standalone selling prices when allocating the transaction price to these performance obligations.

 

The transaction price for our commercial contracts reflects our estimate of returns, rebates and discounts, which are based on historical, current and forecasted information.  Amounts billed to customers for shipping and handling are included in the transaction price and generally are not treated as separate performance obligations as these costs fulfill a promise to transfer the product to the customer.  Taxes collected from customers and remitted to government authorities are recorded on a net basis.

 

We primarily provide standard warranty programs for products in our commercial businesses for periods that typically range from one to five years. These assurance-type programs typically cannot be purchased separately and do not meet the criteria to be considered a performance obligation.

 

U.S. Government Contracts

Our contracts with the U.S. Government generally include the design, development, manufacture or modification of aerospace and defense products as well as related services.  These contracts, which also include those under the U.S. Government-sponsored foreign military sales program, accounted for approximately 24% of total revenues in 2017.  The customer typically contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability, which often results in the delivery of multiple units.  Accordingly, the entire contract is accounted for as one performance obligation.  In certain circumstances, a contract may include both production and support services, such as logistics and parts plans, which are considered to be distinct in the context of the contract and represent separate performance obligations. When a contract is separated into more than one performance obligation, we generally utilize the expected cost plus a margin approach to determine the standalone selling prices when allocating the transaction price.

 

Our contracts are frequently modified for changes in contract specifications and requirements.  Most of our contract modifications with the U.S. Government are for goods and services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as part of that existing contract.  The effect of these contract modifications on our estimates is recognized using the cumulative catch-up method of accounting.

 

Contracts with the U.S. Government generally contain clauses that provide lien rights to work-in-process along with clauses that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work-in-process. Due to the continuous transfer of control to the U.S. Government, we recognize revenue over the time that we perform under the contract.  Selecting the method to measure progress towards completion requires judgment and is based on the nature of the products or service to be provided.  We generally use the cost-to-cost method to measure progress for our contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts.  Under this measure, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and revenue is recorded proportionally as costs are incurred.

 

The transaction price for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding variable consideration as applicable.  Certain of our long-term contracts contain incentive fees or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion.  We include estimated amounts

 

9



Table of Contents

 

in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.  Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all other information that is reasonably available to us.

 

Total contract cost is estimated utilizing current contract specifications and expected engineering requirements. Contract costs typically are incurred over a period of several years, and the estimation of these costs requires substantial judgment. Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals.  We review and update our projections of costs quarterly or more frequently when circumstances significantly change.

 

Approximately 80% of our 2017 revenues with the U.S. Government were under fixed-price and fixed-price incentive contracts.  Under the typical payment terms of these contracts, the customer pays us either performance-based or progress payments. Performance-based payments represent interim payments of up to 90% of the contract price based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments of up to 80% of costs incurred as the work progresses. Because the customer retains a small portion of the contract price until completion of the contract, these contracts generally result in revenue recognized in excess of billings, which we present as contract assets in the Consolidated Balance Sheets. Amounts billed and due from our customers are classified in Accounts receivable, net. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer. For cost-type contracts, we are generally paid for our actual costs incurred within a short period of time.

 

Contract Estimates

For contracts where revenue is recognized over time, we generally recognize changes in estimated contract revenues, costs and profits using the cumulative catch-up method of accounting.  This method recognizes the cumulative effect of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current period.  Anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable.

 

The impact of cumulative catch-up adjustments on both revenues and segment profit recognized in prior periods totaled $64 million and $9 million in the second quarter of 2018 and 2017, respectively. The resulting impact increased income from continuing operations before income taxes by $64 million and $9 million, respectively, ($49 million and $6 million after tax, or $0.19 and $0.02 per diluted share, respectively). For the second quarter of 2018 and 2017, the gross favorable adjustments totaled $70 million and $23 million, respectively, and the gross unfavorable adjustments totaled $6 million and $14 million, respectively.

 

In the first half of 2018 and 2017, the impact of cumulative catch-up adjustments on both revenues and segment profit recognized in prior periods totaled $104 million and $(3) million, respectively. The resulting impact increased income from continuing operations before income taxes by $104 million ($79 million after tax or $0.30 per diluted share) in the first half of 2018 and decreased income from continuing operations before income taxes by $3 million ($2 million after tax or $0.01 per diluted share) in the first half of 2017.  For the first half of 2018 and 2017, the gross favorable adjustments totaled $126 million and $43 million, respectively, and the gross unfavorable adjustments totaled $22 million and $46 million, respectively. No individual adjustment was material to our Consolidated Statements of Operations for the second quarter and first half of 2018 and 2017.

 

Contract Assets and Liabilities

Contract assets arise from contracts when revenue is recognized over time and the amount of revenue recognized exceeds the amount billed to the customer. These amounts are included in contract assets until the right to payment is no longer conditional on events other than the passage of time. Contract assets are included in Other current assets in the Consolidated Balance Sheet. Contract liabilities, which are primarily included in Other current liabilities, include deposits, largely from our commercial aviation customers, and billings in excess of revenue recognized.

 

The incremental costs of obtaining a contract with a customer that is expected to be recovered is expensed as incurred when the period to be benefitted is one year or less.

 

Accounts Receivable, Net

Accounts receivable, net includes amounts billed to customers where the right to payment is unconditional.  We maintain an allowance for doubtful accounts to provide for the estimated amount of accounts receivable that will not be collected, which is based on an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivable and collateral value, if any.

 

10



Table of Contents

 

Accounting Pronouncements Not Yet Adopted

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases, that requires lessees to recognize all leases with a term greater than 12 months on the balance sheet as right-to-use assets and lease liabilities.  Under current accounting guidance, we are not required to recognize assets and liabilities arising from operating leases on the balance sheet. The new standard is effective for our company at the beginning of 2019, using the modified retrospective method of adoption.  In 2018, the FASB proposed a change that would permit companies to elect a transitional method that allows for application of the standard at the effective date without adjustment to comparative periods.

 

We are continuing to review and evaluate our leased assets to assess the impact of adopting the new standard and are implementing changes to our processes, systems and internal controls in order to quantify and account for the standard.  Upon adoption, the assets and liabilities on our consolidated balance sheet will materially increase as we recognize the rights and corresponding obligations related to our operating leases.  The standard is not expected to materially impact our cash flows or results of operations.  We expect to complete our assessment of the impact of adopting this standard in the fourth quarter of 2018.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses. For most financial assets, such as trade and other receivables, loans and other instruments, this standard changes the current incurred loss model to a forward-looking expected credit loss model, which generally will result in the earlier recognition of allowances for losses.  The new standard is effective for our company at the beginning of 2020 with early adoption permitted beginning in 2019.  Entities are required to apply the provisions of the standard through a cumulative-effect adjustment to retained earnings as of the effective date.  We are currently evaluating the impact of the standard on our consolidated financial statements.

 

Note 3.  Business Disposition

 

On April 18, 2018, we entered into an agreement to sell the businesses that manufacture and sell the products in our Tools and Test Equipment product line within our Industrial segment to Emerson Electric Co. for a purchase price of $810 million.  We completed this disposition on July 2, 2018 and expect to record an after-tax gain of approximately $400 million, subject to certain post-closing adjustments, in the third quarter of 2018.

 

At June 30, 2018, the assets and liabilities of these businesses met the criteria to be classified as held for sale, but did not qualify for presentation as a discontinued operation.  Accordingly, the assets and liabilities of these businesses are recorded at the lower of the carrying value or fair value, less cost to sell, in the current period, and are each presented on a single line in the Consolidated Balance Sheet. The carrying amounts of the major classes of assets and liabilities classified as held for sale related to this disposition are as follows:

 

(In millions)

 

 

 

 

 

 

 

June 30,
2018

Assets

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

 

 

 

 

$

71

Inventories

 

 

 

 

 

 

 

100

Property, plant and equipment, net

 

 

 

 

 

 

 

59

Goodwill

 

 

 

 

 

 

 

153

Other assets

 

 

 

 

 

 

 

24

Assets of businesses held for sale

 

 

 

 

 

 

$

407

Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

 

 

 

 

 

$

30

Other current liabilities

 

 

 

 

 

 

 

25

Other liabilities

 

 

 

 

 

 

 

11

Liabilities of businesses held for sale

 

 

 

 

 

 

$

66

 

11



Table of Contents

 

Note 4.  Retirement Plans

 

In the first quarter of 2018, we adopted ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  This standard requires companies to present only the service cost component of net periodic benefit cost in operating income in the same line as other compensation costs arising from services rendered by the pertinent employees during the period.  The other components of net periodic benefit cost must be presented separately from service cost and excluded from operating income.  In addition, only the service cost component is eligible for capitalization into inventory.  The change in the amount capitalized into inventory was applied prospectively.  The reclassification of the other components of net periodic benefit cost (credit) to a separate line was applied retrospectively using a practical expedient that permits the usage of amounts previously disclosed in the pension and other postretirement benefit plan note for prior periods. As a result, we reclassified $(6) million and $(14) million of other components of net periodic benefit cost (credit) for the second quarter and first half of 2017, respectively, from Cost of sales to a separate line item in the Consolidated Statements of Operations.

 

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

Six Months Ended

(In millions)

 

June 30,
2018

 

July 1,
2017

 

June 30,
2018

 

July 1,
2017

Pension Benefits

 

 

 

 

 

 

 

 

Service cost

$

27

$

25

$

53

$

50

Interest cost

 

76

 

81

 

153

 

161

Expected return on plan assets

 

(139)

 

(127)

 

(277)

 

(253)

Amortization of net actuarial loss

 

39

 

34

 

77

 

68

Amortization of prior service cost

 

3

 

4

 

7

 

8

Net periodic benefit cost

$

6

$

17

$

13

$

34

Postretirement Benefits Other Than Pensions

 

 

 

 

 

 

 

 

Service cost

$

$

$

1

$

1

Interest cost

 

3

 

3

 

5

 

6

Amortization of prior service credit

 

(1)

 

(2)

 

(3)

 

(4)

Net periodic benefit cost

$

2

$

1

$

3

$

3

 

Note 5.  Earnings Per Share

 

We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period. Basic EPS is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends. Diluted EPS considers the dilutive effect of all potential future common stock, including stock options.

 

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

 

 

Three Months Ended

Six Months Ended

(In thousands)

 

June 30,
2018

 

July 1,
2017

 

June 30,
2018

 

July 1,
2017

Basic weighted-average shares outstanding

 

253,904

 

267,114

 

257,200

 

268,802

Dilutive effect of stock options

 

3,273

 

2,185

 

3,262

 

2,274

Diluted weighted-average shares outstanding

 

257,177

 

269,299

 

260,462

 

271,076

 

Stock options to purchase 1.3 million shares of common stock are excluded from the calculation of diluted weighted-average shares outstanding for both the three and six months ended June 30, 2018, as their effect would have been anti-dilutive. Stock options to purchase 1.7 million shares of common stock are excluded from the calculation of diluted weighted-average shares outstanding for both the three and six months ended July 1, 2017, as their effect would have been anti-dilutive.

 

12



Table of Contents

 

Note 6.  Accounts Receivable and Finance Receivables

 

Accounts Receivable

Accounts receivable is composed of the following:

 

(In millions)

 

 

 

 

 

June 30,
2018

 

December 30,
2017

Commercial

 

 

 

 

$

931

$

1,007

U.S. Government contracts, including foreign military sales

 

 

 

 

 

215

 

383

 

 

 

 

 

 

1,146

 

1,390

Allowance for doubtful accounts

 

 

 

 

 

(25)

 

(27)

Total

 

 

 

 

$

1,121

$

1,363

 

Upon adoption of ASC 606, unbilled receivables, primarily related to U.S. Government contracts, totaling $203 million were reclassified from accounts receivable to contract assets or liabilities, depending on the net position of the contract as discussed in Note 15.  In addition, $71 million of accounts receivable, net was reclassified to assets of businesses held for sale at June 30, 2018 as disclosed in Note 3.

 

Finance Receivables

Finance receivables are presented in the following table:

 

(In millions)

 

 

 

 

 

June 30,
2018

 

December 30,
2017

Finance receivables

 

 

 

 

$

792

$

850

Allowance for losses

 

 

 

 

 

(29)

 

(31)

Total finance receivables, net

 

 

 

 

$

763

$

819

 

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.  Accrual of interest income is suspended for these accounts and all cash collections are generally applied to reduce the net investment balance.  Once we conclude that the collection of all principal and interest is no longer doubtful, we resume the accrual of interest and recognize previously suspended interest income at the time either a) the loan becomes contractually current through payment according to the original terms of the loan, or b) if the loan has been modified, following a period of performance under the terms of the modification.  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.

 

Delinquency

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.

 

13



Table of Contents

 

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

 

(Dollars in millions)

 

 

 

 

 

June 30,
2018

 

December 30,
2017

Performing

 

 

 

 

$

688

$

733

Watchlist

 

 

 

 

 

50

 

56

Nonaccrual

 

 

 

 

 

54

 

61

Nonaccrual as a percentage of finance receivables

 

 

 

 

 

6.82%

 

7.18%

Less than 31 days past due

 

 

 

 

$

705

$

791

31-60 days past due

 

 

 

 

 

35

 

25

61-90 days past due

 

 

 

 

 

40

 

14

Over 90 days past due

 

 

 

 

 

12

 

20

60 + days contractual delinquency as a percentage of finance receivables

 

 

 

 

 

6.57%

 

4.00%

 

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 described above.  Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified.  If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification.  Interest income recognized on impaired loans was not significant in the first half of 2018 or 2017.

 

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

 

(In millions)

 

 

 

 

 

June 30,
2018

 

December 30,
2017

Recorded investment:

 

 

 

 

 

 

 

 

   Impaired loans with related allowance for losses

 

 

 

 

$

19

$

24

   Impaired loans with no related allowance for losses

 

 

 

 

 

35

 

70

Total

 

 

 

 

$

54

$

94

Unpaid principal balance

 

 

 

 

$

63

$

106

Allowance for losses on impaired loans

 

 

 

 

 

5

 

6

Average recorded investment

 

 

 

 

 

68

 

92

 

A summary of the allowance for losses on finance receivables, based on how the underlying finance receivables are evaluated for impairment, is provided below.  The finance receivables reported in this table specifically exclude leveraged leases in accordance with U.S. generally accepted accounting principles.

 

(In millions)

 

 

 

 

 

June 30,
2018

 

December 30,
2017

Allowance based on collective evaluation

 

 

 

 

$

24

$

25

Allowance based on individual evaluation

 

 

 

 

 

5

 

6

Finance receivables evaluated collectively

 

 

 

 

 

639

 

658

Finance receivables evaluated individually

 

 

 

 

 

54

 

94

 

14



Table of Contents

 

Note 7.  Inventories

 

Inventories are composed of the following:

 

(In millions)

 

 

 

 

 

June 30,
2018

 

December 30,
2017

Finished goods

 

 

 

 

$

1,725

$

1,790

Work in process

 

 

 

 

 

1,483

 

2,238

Raw materials and components

 

 

 

 

 

717

 

804

 

 

 

 

 

 

3,925

 

4,832

Progress/milestone payments

 

 

 

 

 

 

(682)

Total

 

 

 

 

$

3,925

$

4,150

 

Upon adoption of ASC 606, $199 million of inventories, net of progress/milestone payments, primarily related to our U.S. Government contracts, were reclassified from inventories to contract assets or liabilities depending on the net position of the contract as discussed in Note 15.  In addition, $100 million of inventories were reclassified to assets of businesses held for sale at June 30, 2018 as disclosed in Note 3.

 

Note 8.  Warranty Liability

 

Changes in our warranty liability are as follows:

 

 

 

 

 

 

Six Months Ended

(In millions)

 

 

 

 

 

June 30,
2018

 

July 1,
2017

Beginning of period

 

 

 

 

$

164

$

138

Provision

 

 

 

 

 

34

 

35

Settlements

 

 

 

 

 

(39)

 

(36)

Acquisitions

 

 

 

 

 

1

 

28

Adjustments*

 

 

 

 

 

6

 

(9)

End of period

 

 

 

 

$

166

$

156

 

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

 

Note 9.  Derivative Instruments and Fair Value Measurements

 

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

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

We manufacture and sell our products in a number of countries throughout the world, and, therefore, we are exposed to movements in foreign currency exchange rates.  We primarily utilize foreign currency exchange contracts with maturities of no more than three years to manage this volatility. These contracts qualify as cash flow hedges and are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses. Net gains and losses recognized in earnings and Accumulated other comprehensive loss on cash flow hedges, including gains and losses related to hedge ineffectiveness, were not significant in the periods presented.

 

Our foreign currency exchange contracts are measured at fair value using the market method valuation technique.  The inputs to this technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data providers.  These are observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions so they are classified as Level 2. At June 30, 2018 and December 30, 2017, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $497 million and $426

 

15



Table of Contents

 

million, respectively.  At June 30, 2018, the fair value amounts of our foreign currency exchange contracts were a $9 million asset and a $6 million liability. At December 30, 2017, the fair value amounts of our foreign currency exchange contracts were a $13 million asset and a $7 million liability.

 

We hedge our net investment position in 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 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:

 

 

June 30, 2018

December 30, 2017

(In millions)

 

Carrying
Value

 

Estimated
Fair Value

 

Carrying
Value

 

Estimated
Fair Value

Manufacturing group

 

 

 

 

 

 

 

 

Debt, excluding leases

$

(3,004)

$

(3,018)

$

(3,007)

$

(3,136)

Finance group

 

 

 

 

 

 

 

 

Finance receivables, excluding leases

 

591

 

615

 

643

 

675

Debt

 

(809)

 

(787)

 

(824)

 

(799)

 

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

 

Note 10.  Shareholders’ Equity

 

A reconciliation of Shareholder’s equity is presented below:

 

(In millions)

 

Common
Stock

 

Capital
Surplus

 

Treasury
Stock

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Total
Shareholders’
Equity

Balance at December 30, 2017

$

33

$

1,669

$

(48)

$

5,368

$

(1,375)

$

5,647

Adoption of ASC 606

 

 

 

 

90

 

 

90

Balance at December 31, 2017

 

33

 

1,669

 

(48)

 

5,458

 

(1,375)

 

5,737

Net income

 

 

 

 

413

 

 

413

Other comprehensive income

 

 

 

 

 

32

 

32

Share-based compensation activity

 

 

105

 

 

 

 

105

Dividends declared

 

 

 

 

(10)

 

 

(10)

Purchases of common stock

 

 

 

(915)

 

 

 

(915)

Balance at June 30, 2018

$

33

$

1,774

$

(963)

$

5,861

$

(1,343)

$

5,362

 

16



Table of Contents

 

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 six months ended June 30, 2018

 

 

 

 

 

 

 

 

Beginning of period

$

(1,396)

$

11

$

10

$

(1,375)

Other comprehensive income before reclassifications

 

 

(27)

 

(2)

 

(29)

Reclassified from Accumulated other comprehensive loss

 

62

 

 

(1)

 

61

Other comprehensive income

 

62

 

(27)

 

(3)

 

32

End of period

$

(1,334)

$

(16)

$

7

$

(1,343)

For the six months ended July 1, 2017

 

 

 

 

 

 

 

 

Beginning of period

$

(1,505)

$

(96)

$

(4)

$

(1,605)

Other comprehensive income before reclassifications

 

 

64

 

3

 

67

Reclassified from Accumulated other comprehensive loss

 

47

 

 

5

 

52

Other comprehensive income

 

47

 

64

 

8

 

119

End of period

$

(1,458)

$

(32)

$

4

$

(1,486)

 

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

 

 

June 30, 2018

July 1, 2017

(In millions)

 

Pre-Tax
Amount

 

Tax
(Expense)
Benefit

 

After-Tax
Amount

 

Pre-Tax
Amount

 

Tax
(Expense)
Benefit

 

After-Tax
Amount

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss*

$

39

$

(9)

$

30

$

34

$

(12)

$

22

Amortization of prior service cost*

 

2

 

(1)

 

1

 

2

 

(1)

 

1

Pension and postretirement benefits adjustments, net

 

41

 

(10)

 

31

 

36

 

(13)

 

23

Deferred gains (losses) on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

(4)

 

1

 

(3)

 

2

 

(1)

 

1

Reclassification adjustments

 

(1)

 

 

(1)

 

4

 

(1)

 

3

Deferred gains (losses) on hedge contracts, net

 

(5)

 

1

 

(4)

 

6

 

(2)

 

4

Foreign currency translation adjustments

 

(66)

 

(3)

 

(69)

 

39

 

3

 

42

Total

$

(30)

$

(12)

$

(42)

$

81

$

(12)

$

69

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss*

$

77

$

(18)

$

59

$

68

$

(24)

$

44

Amortization of prior service cost*

 

4

 

(1)

 

3

 

4

 

(1)

 

3

Pension and postretirement benefits adjustments, net

 

81

 

(19)

 

62

 

72

 

(25)

 

47

Deferred gains (losses) on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

(2)

 

 

(2)

 

5

 

(2)

 

3

Reclassification adjustments

 

(1)

 

 

(1)

 

6

 

(1)

 

5

Deferred gains (losses) on hedge contracts, net

 

(3)

 

 

(3)

 

11

 

(3)

 

8

Foreign currency translation adjustments

 

(26)

 

(1)

 

(27)

 

60

 

4

 

64

Total

$

52

$

(20)

$

32

$

143

$

(24)

$

119

 

*These components of Other comprehensive income (loss) are included in the computation of net periodic pension cost.  See Note 11 of our 2017 Annual Report on Form 10-K for additional information.

 

17



Table of Contents

 

Note 11.  Special Charges

 

In 2017, special charges were related to a 2016 restructuring plan and the Arctic Cat acquisition, which included both restructuring, integration and transaction costs. There were no special charges recorded in 2018.

 

Special charges recorded in 2017 are as follows:

 

(In millions)

 

Severance
Costs

 

Asset
Impairments

 

Contract
Terminations
and Other

 

Acquisition
Integration/
Transaction
Costs

 

Total
Special
Charges

For the three months ended July 1, 2017

 

 

 

 

 

 

 

 

 

 

Industrial

$

$

$

3

$

1

$

4

Textron Aviation

 

4

 

7

 

 

 

11

Textron Systems

 

1

 

4

 

(7)

 

 

(2)

 

$

5

$

11

$

(4)

$

1

$

13

For the six months ended July 1, 2017

 

 

 

 

 

 

 

 

 

 

Industrial

$

19

$

$

6

$

4

$

29

Textron Aviation

 

5

 

17

 

 

 

22

Textron Systems

 

1

 

4

 

(6)

 

 

(1)

 

$

25

$

21

$

$

4

$

50

 

Our restructuring reserve activity for the first half of 2018 is summarized below:

(In millions)

 

 

 

 

 

Severance
Costs

 

Contract
Terminations
and Other

 

Total

Balance at December 30, 2017

 

 

 

 

$

24

$

20

$

44

Cash paid

 

 

 

 

 

(17)

 

(6)

 

(23)

Provision for 2016 Plan

 

 

 

 

 

 

3

 

3

Reversals

 

 

 

 

 

(2)

 

 

(2)

Balance at June 30, 2018

 

 

 

 

$

5

$

17

$

22

 

Both plans are substantially completed with approximately half of the remaining cash outlays of $22 million expected to be paid in the remainder of 2018.  Severance costs generally are paid on a lump-sum basis and include outplacement costs, which are paid in accordance with normal payment terms.

 

Note 12.  Income Taxes

 

Our effective tax rate for the second quarter and first half of 2018 was 13.8% and 13.6%, respectively. In the second quarter and first half of 2018, the effective tax rate was lower than the U.S. federal statutory tax rate of 21%, primarily due to a $25 million benefit recognized upon the reassessment of our reserve for uncertain tax positions based on new information, including interactions with the tax authorities and recent audit settlements.  The effective tax rate for the first half of 2018 also reflects benefits recognized from audit settlements in the first quarter of 2018.

 

U.S. Tax Reform

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. Among other things, the Act reduces the U.S. federal corporate tax rate from 35% to 21% and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred.  We have reasonably estimated the effects of the Act and recorded provisional amounts in the fourth quarter of 2017 to remeasure our U.S. federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, and for the one-time transition tax. The U.S. Government and state tax authorities are expected to continue to issue guidance regarding the Act, which may result in adjustments to our provisional estimates. We are continuing to analyze certain aspects of the Act and may refine our estimates, which could potentially affect the measurement of our net deferred tax assets or give rise to new deferred tax amounts.

 

In the first half of 2018, we have not recorded any measurement period adjustments to the provisional estimates recorded at the end of 2017.  The final determination of the remeasurement of our net deferred tax assets and the transition tax will be completed as additional information becomes available, but no later than one year from the enactment date.  Any subsequent adjustments to the provisional amounts will be recorded to current or deferred tax expense in the quarter of 2018 when the analysis is complete.

 

18



Table of Contents

 

Note 13.  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 14.  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 special charges.  The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense.

 

Our revenues by segment, along with a reconciliation of segment profit to income from continuing operations before income taxes, are included in the table below:

 

 

Three Months Ended

Six Months Ended

(In millions)

 

June 30,
2018

 

July 1,
2017

 

June 30,
2018

 

July 1,
2017

Revenues

 

 

 

 

 

 

 

 

Textron Aviation

$

1,276

$

1,171

$

2,286

$

2,141

Bell

 

831

 

825

 

1,583

 

1,522

Textron Systems

 

380

 

477

 

767

 

893

Industrial

 

1,222

 

1,113

 

2,353

 

2,105

Finance

 

17

 

18

 

33

 

36

Total revenues

$

3,726

$

3,604

$

7,022

$

6,697

Segment Profit

 

 

 

 

 

 

 

 

Textron Aviation

$

104

$

54

$

176

$

90

Bell

 

117

 

112

 

204

 

195

Textron Systems

 

40

 

42

 

90

 

62

Industrial

 

80

 

82

 

144

 

158

Finance

 

5

 

5

 

11

 

9

Segment profit

 

346

 

295

 

625

 

514

Corporate expenses and other, net

 

(51)

 

(31)

 

(78)

 

(58)

Interest expense, net for Manufacturing group

 

(35)

 

(36)

 

(69)

 

(70)

Special charges

 

 

(13)

 

 

(50)

Income from continuing operations before income taxes

$

260

$

215

$

478

$

336

 

19



Table of Contents

 

Note 15. Revenues

 

Disaggregation of Revenues

Our revenues disaggregated by major product type for the three and six months ended June 30, 2018 are presented below:

 

(In millions)

 

 

 

 

 

Three
Months
Ended

 

Six
Months
Ended

Aircraft

 

 

 

 

$

877

$

1,511

Aftermarket parts and services

 

 

 

 

 

399

 

775

Textron Aviation

 

 

 

 

 

1,276

 

2,286

Military aircraft and support programs

 

 

 

 

 

533

 

1,020

Commercial helicopters, parts and services

 

 

 

 

 

298

 

563

Bell

 

 

 

 

 

831

 

1,583

Unmanned systems

 

 

 

 

 

161

 

331

Marine and land systems

 

 

 

 

 

69

 

161

Simulation, training and other

 

 

 

 

 

150

 

275

Textron Systems 

 

 

 

 

 

380

 

767

Fuel systems and functional components

 

 

 

 

 

627

 

1,282

Specialized vehicles

 

 

 

 

 

475

 

823

Tools and test equipment

 

 

 

 

 

120

 

248

Industrial

 

 

 

 

 

1,222

 

2,353

Finance

 

 

 

 

 

17

 

33

Total revenues

 

 

 

 

$

3,726

$

7,022

 

Our revenues by customer type and geographic location for the three and six months ended June 30, 2018 are presented below:

 

(In millions)

 

Textron
Aviation

 

Bell

 

Textron
Systems

 

Industrial

 

Finance

 

Total

Three months ended

 

 

 

 

 

 

 

 

 

 

 

 

Customer type:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

$

1,191

$

291

$

107

$

1,215

$

17

$

2,821

U.S. Government

 

85

 

540

 

273

 

7