UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 29, 2019July 4, 2020
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol (s) | Name of each exchange on which registered |
Common stock, $0.125 par value | TXT | New York Stock Exchange (NYSE) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ 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 ☑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 | ☑ | 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 ☑
As of July 12, 2019,17, 2020, there were 230,123,580228,035,460 shares of common stock outstandingoutstanding.
.
TEXTRON INC.
Index to Form 10-Q
For the Quarterly Period Ended June 29, 2019July 4, 2020
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TEXTRON INC.
Consolidated Statements of Operations (Unaudited)
| | | | | | | | |
| Three Months Ended | Six Months Ended | ||||||
| June 29, | June 30, | June 29, | June 30, | ||||
(In millions, except per share amounts) | 2019 | 2018 | 2019 | 2018 | ||||
Revenues | | | | | | | | |
Manufacturing revenues | $ | 3,211 | $ | 3,709 | $ | 6,303 | $ | 6,989 |
Finance revenues |
| 16 |
| 17 |
| 33 |
| 33 |
Total revenues |
| 3,227 |
| 3,726 |
| 6,336 |
| 7,022 |
Costs, expenses and other | | | | | | | | |
Cost of sales |
| 2,641 |
| 3,073 |
| 5,218 |
| 5,802 |
Selling and administrative expense |
| 292 |
| 370 |
| 599 |
| 697 |
Interest expense |
| 43 |
| 42 |
| 85 |
| 83 |
Non-service components of pension and post-retirement income, net | | (28) | | (19) | | (57) | | (38) |
Total costs, expenses and other |
| 2,948 |
| 3,466 |
| 5,845 |
| 6,544 |
Income before income taxes |
| 279 |
| 260 |
| 491 |
| 478 |
Income tax expense |
| 62 |
| 36 |
| 95 |
| 65 |
Net income | $ | 217 | $ | 224 | $ | 396 | $ | 413 |
Earnings per share | | | | | | | | |
Basic | $ | 0.94 | $ | 0.88 | $ | 1.70 | $ | 1.61 |
Diluted | $ | 0.93 | $ | 0.87 | $ | 1.69 | $ | 1.59 |
| | | | | | | | |
| Three Months Ended | Six Months Ended | ||||||
| July 4, | June 29, | July 4, | June 29, | ||||
(In millions, except per share amounts) | 2020 | 2019 | 2020 | 2019 | ||||
Revenues | | | | | | | | |
Manufacturing revenues | $ | 2,457 | $ | 3,211 | $ | 5,220 | $ | 6,303 |
Finance revenues |
| 15 |
| 16 |
| 29 |
| 33 |
Total revenues |
| 2,472 |
| 3,227 |
| 5,249 |
| 6,336 |
Costs, expenses and other | | | | | | | | |
Cost of sales |
| 2,251 |
| 2,641 |
| 4,638 |
| 5,218 |
Selling and administrative expense |
| 239 |
| 292 |
| 502 |
| 599 |
Interest expense |
| 42 |
| 43 |
| 82 |
| 85 |
Special charges | | 78 | | — | | 117 | | — |
Non-service components of pension and post-retirement income, net | | (20) | | (28) | | (41) | | (57) |
Total costs, expenses and other |
| 2,590 |
| 2,948 |
| 5,298 |
| 5,845 |
Income (loss) before income taxes |
| (118) |
| 279 |
| (49) |
| 491 |
Income tax expense (benefit) |
| (26) |
| 62 |
| (7) |
| 95 |
Net income (loss) | $ | (92) | $ | 217 | $ | (42) | $ | 396 |
Earnings per share | | | | | | | | |
Basic | $ | (0.40) | $ | 0.94 | $ | (0.18) | $ | 1.70 |
Diluted | $ | (0.40) | $ | 0.93 | $ | (0.18) | $ | 1.69 |
See Notes to the Consolidated Financial Statements.
3
TEXTRON INC.
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
| | | | | | | | | | | | | | | | |
| Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | ||||||||||||
| June 29, | June 30, | June 29, | June 30, | July 4, | June 29, | July 4, | June 29, | ||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | ||||||||
Net income | $ | 217 | $ | 224 | $ | 396 | $ | 413 | ||||||||
Other comprehensive income (loss), net of taxes: | | | | | | | | | ||||||||
Net income (loss) | $ | (92) | $ | 217 | $ | (42) | $ | 396 | ||||||||
Other comprehensive income, net of tax: | | | | | | | | | ||||||||
Pension and postretirement benefits adjustments, net of reclassifications |
| 20 |
| 31 | | 41 | | 62 |
| 36 |
| 20 | | 73 | | 41 |
Foreign currency translation adjustments |
| 1 |
| (69) | | 4 | | (27) |
| 30 |
| 1 | | (10) | | 4 |
Deferred gains (losses) on hedge contracts, net of reclassifications |
| — |
| (4) | | 2 | | (3) |
| 2 |
| — | | (7) | | 2 |
Other comprehensive income (loss) |
| 21 |
| (42) | | 47 | | 32 | ||||||||
Comprehensive income | $ | 238 | $ | 182 | $ | 443 | $ | 445 | ||||||||
Other comprehensive income |
| 68 |
| 21 | | 56 | | 47 | ||||||||
Comprehensive income (loss) | $ | (24) | $ | 238 | $ | 14 | $ | 443 |
See Notes to the Consolidated Financial Statements.
4
TEXTRON INC.
Consolidated Balance Sheets (Unaudited)
| | | | |
| July 4, | January 4, | ||
(Dollars in millions) | 2020 | 2020 | ||
Assets | | | | |
Manufacturing group | | | | |
Cash and equivalents | $ | 2,176 | $ | 1,181 |
Accounts receivable, net | | 764 |
| 921 |
Inventories | | 4,262 |
| 4,069 |
Other current assets | | 863 |
| 894 |
Total current assets | | 8,065 |
| 7,065 |
Property, plant and equipment, less accumulated depreciation | | 2,446 |
| 2,527 |
Goodwill | | 2,153 |
| 2,150 |
Other assets | | 1,857 |
| 2,312 |
Total Manufacturing group assets | | 14,521 |
| 14,054 |
Finance group | | | | |
Cash and equivalents | | 170 |
| 176 |
Finance receivables, net | | 691 |
| 682 |
Other assets | | 89 |
| 106 |
Total Finance group assets | | 950 |
| 964 |
Total assets | $ | 15,471 | $ | 15,018 |
Liabilities and shareholders’ equity | | | | |
Liabilities | | | | |
Manufacturing group | | | | |
Short-term debt and current portion of long-term debt | $ | 1,107 | $ | 561 |
Accounts payable | | 982 |
| 1,378 |
Other current liabilities | | 1,983 |
| 1,907 |
Total current liabilities | | 4,072 |
| 3,846 |
Other liabilities | | 2,128 |
| 2,288 |
Long-term debt | | 2,955 |
| 2,563 |
Total Manufacturing group liabilities | | 9,155 |
| 8,697 |
Finance group | | | | |
Other liabilities | | 119 |
| 117 |
Debt | | 670 |
| 686 |
Total Finance group liabilities | | 789 |
| 803 |
Total liabilities | | 9,944 |
| 9,500 |
Shareholders’ equity | | | | |
Common stock | | 29 |
| 29 |
Capital surplus | | 1,732 |
| 1,674 |
Treasury stock | | (74) |
| (20) |
Retained earnings | | 5,631 |
| 5,682 |
Accumulated other comprehensive loss | | (1,791) |
| (1,847) |
Total shareholders’ equity | | 5,527 |
| 5,518 |
Total liabilities and shareholders’ equity | $ | 15,471 | $ | 15,018 |
Common shares outstanding (in thousands) | | 227,953 |
| 227,956 |
See Notes to the Consolidated Financial Statements.
5
TEXTRON INC.
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended July 4, 2020 and June 29, 2019, respectively
| | | | |
| June 29, | December 29, | ||
(Dollars in millions) | 2019 | 2018 | ||
Assets | | | | |
Manufacturing group | | | | |
Cash and equivalents | $ | 775 | $ | 987 |
Accounts receivable, net | | 989 |
| 1,024 |
Inventories | | 4,311 |
| 3,818 |
Other current assets | | 839 |
| 785 |
Total current assets | | 6,914 |
| 6,614 |
Property, plant and equipment, less accumulated depreciation and amortization of $4,317 and $4,203, respectively | | 2,517 |
| 2,615 |
Goodwill | | 2,147 |
| 2,218 |
Other assets | | 2,255 |
| 1,800 |
Total Manufacturing group assets | | 13,833 |
| 13,247 |
Finance group | | | | |
Cash and equivalents | | 82 |
| 120 |
Finance receivables, net | | 776 |
| 760 |
Other assets | | 105 |
| 137 |
Total Finance group assets | | 963 |
| 1,017 |
Total assets | $ | 14,796 | $ | 14,264 |
Liabilities and shareholders’ equity | | | | |
Liabilities | | | | |
Manufacturing group | | | | |
Short-term debt and current portion of long-term debt | $ | 457 | $ | 258 |
Accounts payable | | 1,231 |
| 1,099 |
Other current liabilities | | 1,891 |
| 2,149 |
Total current liabilities | | 3,579 |
| 3,506 |
Other liabilities | | 2,157 |
| 1,932 |
Long-term debt | | 2,910 |
| 2,808 |
Total Manufacturing group liabilities | | 8,646 |
| 8,246 |
Finance group | | | | |
Other liabilities | | 111 |
| 108 |
Debt | | 703 |
| 718 |
Total Finance group liabilities | | 814 |
| 826 |
Total liabilities | | 9,460 |
| 9,072 |
Shareholders’ equity | | | | |
Common stock | | 30 |
| 30 |
Capital surplus | | 1,717 |
| 1,646 |
Treasury stock | | (490) |
| (129) |
Retained earnings | | 5,794 |
| 5,407 |
Accumulated other comprehensive loss | | (1,715) |
| (1,762) |
Total shareholders’ equity | | 5,336 |
| 5,192 |
Total liabilities and shareholders’ equity | $ | 14,796 | $ | 14,264 |
Common shares outstanding (in thousands) | | 230,058 |
| 235,621 |
See Notes to the Consolidated Financial Statements.
5
TEXTRON INC.
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 29, 2019 and June 30, 2018, respectively
| | | | | | | | |
| Consolidated | Consolidated | ||||||
(In millions) | 2019 | 2018 | 2020 | 2019 | ||||
Cash flows from operating activities | | | | | | | | |
Net income | $ | 396 | $ | 413 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | ||||
Net income (loss) | $ | (42) | $ | 396 | ||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | ||||
Non-cash items: | | | | | | | | |
Depreciation and amortization | | 202 |
| 216 | | 188 |
| 202 |
Deferred income taxes | | 32 |
| 12 | | (41) | | 32 |
Asset impairments and TRU inventory charge | | 110 | | — | ||||
Other, net | | 40 |
| 61 | | 58 |
| 40 |
Changes in assets and liabilities: | | | | | | | | |
Accounts receivable, net | | 36 |
| (42) | | 157 |
| 36 |
Inventories | | (505) |
| (78) | | (244) |
| (505) |
Other assets | | (19) |
| (38) | | 51 |
| (19) |
Accounts payable | | 132 |
| (22) | | (400) |
| 132 |
Other liabilities | | (338) |
| (165) | | 17 |
| (338) |
Income taxes, net | | 14 |
| 17 | | 3 |
| 14 |
Pension, net | | (29) | | (5) | | (8) | | (29) |
Captive finance receivables, net | | (19) |
| 26 | | (14) |
| (19) |
Other operating activities, net | | (2) |
| 3 | | 13 |
| (2) |
Net cash provided by (used in) operating activities of continuing operations | | (60) | | 398 | ||||
Net cash used in operating activities of continuing operations | | (152) | | (60) | ||||
Net cash used in operating activities of discontinued operations | | (1) |
| (1) | | — |
| (1) |
Net cash provided by (used in) operating activities | | (61) | | 397 | ||||
Net cash used in operating activities | | (152) | | (61) | ||||
Cash flows from investing activities | | | | | | | | |
Capital expenditures | | (135) |
| (159) | | (96) |
| (135) |
Net proceeds from corporate-owned life insurance policies | | 4 | | 98 | | 17 | | 4 |
Net cash used in acquisitions | | (11) | | — | ||||
Finance receivables repaid | | 20 |
| 25 | | 20 |
| 20 |
Other investing activities, net | | 7 |
| 30 | | 6 |
| 7 |
Net cash used in investing activities | | (104) |
| (6) | | (64) |
| (104) |
Cash flows from financing activities | | | | | | | | |
Increase in short-term debt | | 499 | | — | ||||
Proceeds from long-term debt | | 297 | | — | | 642 | | 297 |
Proceeds from borrowings against corporate-owned life insurance policies | | 377 | | — | ||||
Payment on borrowings against corporate-owned life insurance policies | | (15) | | — | ||||
Principal payments on long-term debt and nonrecourse debt | | (35) | | (34) | | (229) | | (35) |
Purchases of Textron common stock | | (361) |
| (915) | | (54) |
| (361) |
Dividends paid | | (9) |
| (10) | | (9) |
| (9) |
Other financing activities, net | | 19 |
| 43 | | 4 |
| 19 |
Net cash used in financing activities | | (89) |
| (916) | ||||
Net cash provided by (used in) financing activities | | 1,215 |
| (89) | ||||
Effect of exchange rate changes on cash and equivalents | | 4 |
| (6) | | (10) |
| 4 |
Net decrease in cash and equivalents | | (250) |
| (531) | ||||
Net increase (decrease) in cash and equivalents | | 989 |
| (250) | ||||
Cash and equivalents at beginning of period | | 1,107 |
| 1,262 | | 1,357 |
| 1,107 |
Cash and equivalents at end of period | $ | 857 | $ | 731 | $ | 2,346 | $ | 857 |
See Notes to the Consolidated Financial Statements.
6
TEXTRON INC.
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Six Months Ended July 4, 2020 and June 29, 2019, and June 30, 2018, respectively
| | | | | | | | |
| Manufacturing Group | Finance Group | ||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | ||||
Cash flows from operating activities | | | | | | | | |
Net income | $ | 387 | $ | 398 | $ | 9 | $ | 15 |
Adjustments to reconcile net to net cash provided by (used in) | | | | | | | | |
Non-cash items: | | | | | | | | |
Depreciation and amortization | | 199 |
| 212 | | 3 |
| 4 |
Deferred income taxes | | 33 |
| 14 | | (1) |
| (2) |
Other, net | | 39 |
| 60 | | 1 |
| 1 |
Changes in assets and liabilities: | | | | | | | | |
Accounts receivable, net | | 36 |
| (42) | | — |
| — |
Inventories | | (532) |
| (80) | | — |
| — |
Other assets | | (17) |
| (39) | | (2) |
| 1 |
Accounts payable | | 132 |
| (22) | | — |
| — |
Other liabilities | | (339) |
| (162) | | 1 |
| (3) |
Income taxes, net | | 10 |
| 28 | | 4 |
| (11) |
Pension, net | | (29) | | (5) | | — | | — |
Dividends received from Finance group | | 50 | | 50 | | — | | — |
Other operating activities, net | | (2) |
| 3 | | — |
| — |
Net cash provided by (used in) operating activities of continuing operations | | (33) |
| 415 | | 15 |
| 5 |
Net cash used in operating activities of discontinued operations | | (1) | | (1) | | — | | — |
Net cash provided by (used in) operating activities | | (34) | | 414 | | 15 | | 5 |
Cash flows from investing activities | | | | | | | | |
Capital expenditures | | (135) |
| (159) | | — |
| — |
Net proceeds from corporate-owned life insurance policies | | 4 | | 98 | | — | | — |
Finance receivables repaid | | — |
| — | | 91 |
| 112 |
Finance receivables originated | | — |
| — | | (90) |
| (61) |
Other investing activities, net | | 4 |
| 10 | | 30 |
| 22 |
Net cash provided by (used in) investing activities | | (127) |
| (51) | | 31 |
| 73 |
Cash flows from financing activities | | | | | | | | |
Proceeds from long-term debt | | 297 |
| — | | — |
| — |
Principal payments on long-term debt and nonrecourse debt | | (1) | | — | | (34) | | (34) |
Purchases of Textron common stock | | (361) |
| (915) | | — |
| — |
Dividends paid | | (9) |
| (10) | | (50) |
| (50) |
Other financing activities, net | | 19 |
| 43 | | — |
| — |
Net cash used in financing activities | | (55) |
| (882) | | (84) |
| (84) |
Effect of exchange rate changes on cash and equivalents | | 4 |
| (6) | | — |
| — |
Net decrease in cash and equivalents | | (212) |
| (525) | | (38) |
| (6) |
Cash and equivalents at beginning of period | | 987 |
| 1,079 | | 120 |
| 183 |
Cash and equivalents at end of period | $ | 775 | $ | 554 | $ | 82 | $ | 177 |
| | | | | | | | |
| Manufacturing Group | Finance Group | ||||||
(In millions) | 2020 | 2019 | 2020 | 2019 | ||||
Cash flows from operating activities | | | | | | | | |
Net income (loss) | $ | (47) | $ | 387 | $ | 5 | $ | 9 |
Adjustments to reconcile net income (loss) to net cash provided by (used in) | | | | | | | | |
Non-cash items: | | | | | | | | |
Depreciation and amortization | | 186 |
| 199 | | 2 |
| 3 |
Deferred income taxes | | (39) | | 33 | | (2) | | (1) |
Asset impairments and TRU inventory charge | | 110 | | — | | — | | — |
Other, net | | 54 |
| 39 | | 4 |
| 1 |
Changes in assets and liabilities: | | | | | | | | |
Accounts receivable, net | | 157 |
| 36 | | — |
| — |
Inventories | | (244) |
| (532) | | — |
| — |
Other assets | | 50 |
| (17) | | 1 |
| (2) |
Accounts payable | | (400) |
| 132 | | — |
| — |
Other liabilities | | 21 |
| (339) | | (4) |
| 1 |
Income taxes, net | | (1) |
| 10 | | 4 |
| 4 |
Pension, net | | (8) | | (29) | | — | | — |
Dividends received from Finance group | | — | | 50 | | — | | — |
Other operating activities, net | | 13 |
| (2) | | — |
| — |
Net cash provided by (used in) operating activities of continuing operations | | (148) |
| (33) | | 10 |
| 15 |
Net cash used in operating activities of discontinued operations | | — | | (1) | | — | | — |
Net cash provided by (used in) operating activities | | (148) | | (34) | | 10 | | 15 |
Cash flows from investing activities | | | | | | | | |
Capital expenditures | | (96) |
| (135) | | — |
| — |
Net proceeds from corporate-owned life insurance policies | | 17 | | 4 | | — | | — |
Net cash used in acquisitions | | (11) |
| — | | — |
| — |
Finance receivables repaid | | — |
| — | | 65 |
| 91 |
Finance receivables originated | | — |
| — | | (59) |
| (90) |
Other investing activities, net | | 5 |
| 4 | | 1 |
| 30 |
Net cash provided by (used in) investing activities | | (85) |
| (127) | | 7 |
| 31 |
Cash flows from financing activities | | | | | | | | |
Increase in short-term debt | | 499 |
| — | | — |
| — |
Proceeds from long-term debt | | 642 |
| 297 | | — |
| — |
Proceeds from borrowings against corporate-owned life insurance policies | | 377 | | — | | — | | — |
Payment on borrowings against corporate-owned life insurance policies | | (15) | | — | | — | | — |
Principal payments on long-term debt and nonrecourse debt | | (194) | | (1) | | (35) | | (34) |
Purchases of Textron common stock | | (54) |
| (361) | | — |
| — |
Dividends paid | | (9) |
| (9) | | — |
| (50) |
Other financing activities, net | | (8) |
| 19 | | 12 |
| — |
Net cash provided by (used in) financing activities | | 1,238 |
| (55) | | (23) |
| (84) |
Effect of exchange rate changes on cash and equivalents | | (10) |
| 4 | | — |
| — |
Net increase (decrease) in cash and equivalents | | 995 |
| (212) | | (6) |
| (38) |
Cash and equivalents at beginning of period | | 1,181 |
| 987 | | 176 |
| 120 |
Cash and equivalents at end of period | $ | 2,176 | $ | 775 | $ | 170 | $ | 82 |
See Notes to the Consolidated Financial Statements.
7
TEXTRON INC.
Notes to the Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
Our Consolidated Financial Statements include the accounts of Textron Inc. (Textron) and its majority-owned subsidiaries. We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information. Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 29, 2018.January 4, 2020. 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 two2 separate borrowing groups. The Manufacturing group consists of Textron consolidated with its majority-owned subsidiaries that operate in the Textron Aviation, Bell, Textron Systems and Industrial segments. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation and its consolidated subsidiaries. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements. All significant intercompany transactions are eliminated from the Consolidated Financial Statements, including retail financing activities for inventory sold by our Manufacturing group and financed by our Finance group.
Use of Estimates
We prepare our financial statements in conformity with generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the Consolidated Statements of Operations in the period that they are determined.
Contract Estimates
For contracts where revenue is recognized over time, we recognize changes in estimated contract revenues, costs and profits using the cumulative catch-up method of accounting. This method recognizes the cumulative effect of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current period. Anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable.
In the second quarter of 2020 and 2019, our cumulative catch-up adjustments increased revenues and 2018,segment profit by $17 million and $27 million, respectively. These adjustments decreased the net loss in the second quarter of 2020 by $13 million ($0.06 per share) and increased net income in the second quarter of 2019 by $21 million ($0.09 per diluted share). In the second quarter of 2020 and 2019, gross favorable adjustments totaled $46 million and $46 million, respectively, and the gross unfavorable adjustments totaled $29 million and $19 million, respectively.
In the first half of 2020 and 2019, our cumulative catch-up adjustments increased revenue and segment profit by $27$19 million and $64$58 million, respectively,respectively. These adjustments decreased the net loss in the first half of 2020 by $14 million ($0.06 per share) and increased net income in the first half of 2019 by $21$44 million and $49 million, respectively ($0.09 and $0.190.19 per diluted share, respectively)share). In the second quarterfirst half of 20192020 and 2018,2019, gross favorable adjustments totaled $46$73 million and $70$99 million, respectively, and the gross unfavorable adjustments totaled $19$54 million and $6$41 million, respectively.
In the first half of 2019 and 2018, our cumulative catch-up adjustments increased revenue and segment profit by $58 million and $104 million, respectively, and net income by $44 million and $79 million, respectively ($0.19 and $0.30 per diluted share, respectively). In the first half of 2019 and 2018, gross favorable adjustments totaled $99 million and $126 million, respectively, and the gross unfavorable adjustments totaled $41 million and $22 million, respectively.
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Note 2. Summary of Significant Accounting Policies Update
At the beginning of 2019,2020, we adopted Accounting Standards Update (ASU) No. 2016-02,2016-13, Leases Financial Instruments - Credit Losses(ASC 842), which requires lessees (ASC 326). This standard changed the prior incurred loss model to recognize all leases with a term greater than 12 months on the balance sheetforward-looking current expected credit loss model for most financial assets, such as right-of-usetrade and finance receivables, contract assets and lease liabilities. Upon adoption, the most significant impact was the recognition of $307 million in right-of-use assets and lease liabilities for operating leases, while our accounting for finance leases remained unchanged. We applied the provisions of thisother instruments. This standard to our existing leases at the adoption date usingrequired a retrospective transition method and have not adjusted comparative periods. The cumulative transitioncumulative-effect adjustment to retained earnings upon adoption with no restatement of prior periods. There was notno significant and the adoption had no impact on our earnings or cash flows. We elected the practical expedients permitted under the transition guidance, which allowed us to carryforward the historical lease classification and to apply hindsight when evaluating options within a contract, resulting in the extensionconsolidated financial statements upon adoption of the lease term for certain of our existing leases.standard.
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Our significant accounting policies are included in Note 1 of our Annual Report on Form 10-K for the year ended December 29, 2018.January 4, 2020. Significant changes to our policies resulting from the adoption of ASC 842326 are provided below.
LeasesAccounts Receivable, Net
We identify leases by evaluating our contractsAccounts receivable, net includes amounts billed to determine if the contract conveyscustomers where the right to usepayment is unconditional. We maintain an allowance for credit losses for our commercial accounts receivable to provide for the estimated amount that will not be collected, even when the risk of loss is remote. The allowance is measured on a collective pool basis when similar risk characteristics exists and is established as a percentage of accounts receivable. We have identified asset for a stated periodpools with similar risk characteristics, based on customer and industry type and geographic location. The percentage is based on all available and relevant information including age of time in exchange for consideration. Specifically, we consider whether we can control the underlying assetoutstanding receivables and have the right to obtain substantially allcollateral value, if any, historical payment experience and loss history, current economic conditions, and, when reasonable and supportable factors exist, management’s expectation of thefuture economic benefits or outputsconditions. For amounts due from the asset. For our contracts that contain both lease components (e.g., fixed payments including rent, real estate taxesU.S. Government, we have not established an allowance for credit losses as we have zero loss expectation based on a long history of no credit losses and insurance costs) and non-lease components (e.g., common-area maintenance costs, other goods/services), we allocate the considerationexplicit guarantee of a sovereign entity.
Finance Receivables, Net
We establish an allowance for credit losses to cover probable but specifically unknown losses existing in the contract to each componentportfolio. This allowance is established as a percentage of finance receivables categorized by pools with similar risk characteristics, such as collateral or customer type and geographic location. The percentage is based on its standalone price. Leases with terms greater than 12 months are classifieda combination of factors, including historical loss experience, current delinquency and default trends, collateral values, current economic conditions, and, when reasonable and supportable factors exist, management’s expectation of future economic conditions.
For those finance receivables that do not have similar risk characteristics, including larger balance accounts specifically identified as either operating or finance leasesimpaired, a reserve is established based on comparing the expected future cash flows, discounted at the commencement date. For these leases, we capitalize the lesser of a) the present value of the minimum lease payments over the lease term,finance receivable's effective interest rate, or b) the fair value of the asset,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 a right-of-use asset with an offsetting lease liability. The discount rate usedit requires estimates, including the amount and timing of future cash flows expected to calculatebe received on impaired finance receivables and the presentestimated fair value of the minimum lease paymentsunderlying collateral, which may differ from actual results. While our analysis is typically our incremental borrowing rate, as the rate implicitspecific to each individual account, critical factors included in the lease is generally not known or determinable. The lease term includes any noncancelable period for which we have the right to use the assetthis analysis include industry valuation guides, age and may include options to extend or terminate the lease when it is reasonably certain that we will exercise the option. Operating leases are recognized as a single lease cost on a straight-line basis over the lease term, while finance lease cost is recognized separately as amortization and interest expense.
Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses. For most financial assets, such as trade and other receivables, loans and other instruments, this standard changes the current incurred loss model to a forward-looking expected credit loss model, which generally will result in the earlier recognition of allowances for losses. The new standard is effective for our company at the beginning of 2020. Entities are required to apply the provisionsphysical condition of the standard through a cumulative-effect adjustment to retained earnings ascollateral, payment history, existence and financial strength of the effective date. We are currently evaluating the impact of the standard on our consolidated financial statements.guarantors.
Note 3. Accounts Receivable and Finance Receivables
Accounts Receivable
Accounts receivable is composed of the following:
| | | | |
| June 29, | December 29, | ||
(In millions) | 2019 | 2018 | ||
Commercial | $ | 874 | $ | 885 |
U.S. Government contracts | | 142 |
| 166 |
| | 1,016 |
| 1,051 |
Allowance for doubtful accounts | | (27) |
| (27) |
Total accounts receivable, net | $ | 989 | $ | 1,024 |
| | | | |
| July 4, | January 4, | ||
(In millions) | 2020 | 2020 | ||
Commercial | $ | 650 | $ | 835 |
U.S. Government contracts | | 156 |
| 115 |
| | 806 |
| 950 |
Allowance for credit losses | | (42) |
| (29) |
Total accounts receivable, net | $ | 764 | $ | 921 |
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Finance Receivables
Finance receivables are presented in the following table:
| | | | | | | | |
| June 29, | December 29, | July 4, | January 4, | ||||
(In millions) | 2019 | 2018 | 2020 | 2020 | ||||
Finance receivables | $ | 802 | $ | 789 | $ | 719 | $ | 707 |
Allowance for losses | | (26) |
| (29) | ||||
Allowance for credit losses | | (28) |
| (25) | ||||
Total finance receivables, net | $ | 776 | $ | 760 | $ | 691 | $ | 682 |
Finance Receivable Portfolio Quality
We internally assess the quality of our finance receivables based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors. Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan. These three categories are performing, watchlist and nonaccrual.
We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful. Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain. All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing.
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We measure delinquency based on the contractual payment terms of our finance receivables. In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.
In March 2020, due to the economic impact of the COVID-19 pandemic and at the request of certain of our customers, we began working with them to provide temporary payment relief through loan modifications. The types of temporary payment relief we offered to these customers included delays in the timing of required principal payments, deferrals of interest payments and/or interest-only payments. For loan modifications that cover payment-relief periods in excess of six months, even if the loan was previously current, the loan is deemed a troubled debt restructuring and considered impaired. These impaired loans are classified as either nonaccrual or watchlist based on a review of the credit quality indicators as discussed above.
During the first half of 2020, we modified finance receivable contracts for 75 customers with an outstanding balance totaling $251 million at July 4, 2020. We are continuing to work with other customers on modifications to accounts with an outstanding balance totaling approximately $60 million. Of the modifications occurring during the first half of 2020, contracts for 22 customers or $103 million of finance receivables were categorized as troubled debt restructurings. Due to the nature of these restructurings, the financial effects were not significant. We had 1 customer default related to finance receivables previously modified as a troubled debt restructuring that had an insignificant outstanding balance. We believe our allowance for credit losses adequately covers our exposure on these loans as our estimated collateral values largely exceed the outstanding loan amounts.
Finance receivables categorized based on the credit quality indicators and by the delinquency aging category are summarized as follows:
| | | | | | | | | | | | |
| June 29, | December 29, | July 4, | January 4, | ||||||||
(Dollars in millions) | 2019 | 2018 | 2020 | 2020 | ||||||||
Performing | $ | 732 | $ | 704 | $ | 555 | $ | 664 | ||||
Watchlist | | 39 |
| 45 | | 111 |
| 4 | ||||
Nonaccrual | | 31 |
| 40 | | 53 |
| 39 | ||||
Nonaccrual as a percentage of finance receivables | | 3.87 | % | | 5.07 | % | | 7.37 | % | | 5.52 | % |
Less than 31 days past due | $ | 726 | $ | 719 | ||||||||
Current and less than 31 days past due | $ | 618 | $ | 637 | ||||||||
31-60 days past due | | 64 | | 56 | | 41 | | 53 | ||||
61-90 days past due | | 3 | | 5 | | 17 | | 7 | ||||
Over 90 days past due | | 9 | | 9 | | 43 | | 10 | ||||
60+ days contractual delinquency as a percentage of finance receivables | | 1.50 | % | | 1.77 | % | | 8.34 | % | | 2.40 | % |
At July 4, 2020, 33% of our performing finance receivables were originated since the beginning of 2019 and 32% were originated from 2016 to 2018. For finance receivables categorized as watchlist, 17% were originated since the beginning of 2019 and 42% from 2016 to 2018. For accounts modified in the first half of 2020, the origination date prior to the modification was maintained based on the types of temporary payment relief provided.
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On a quarterly basis, we evaluate individual larger balance accounts for impairment. A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators described above. Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified. If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification.
A summary of finance receivables and the allowance for credit losses, based on the results of our impairment evaluation, is provided below. The finance receivables included in this table specifically exclude leveraged leases in accordance with U.S. generally accepted accounting principles.
| | | | | | | | |
| June 29, | December 29, | July 4, | January 4, | ||||
(In millions) | 2019 | 2018 | 2020 | 2020 | ||||
Finance receivables evaluated collectively | $ | 669 | $ | 630 | $ | 458 | $ | 564 |
Finance receivables evaluated individually |
| 31 |
| 58 |
| 156 |
| 39 |
Allowance for losses based on collective evaluation | | 24 | | 24 | ||||
Allowance for losses based on individual evaluation |
| 2 |
| 5 | ||||
Impaired finance receivables with no related allowance for losses | $ | 23 | $ | 43 | ||||
Impaired finance receivables with related allowance for losses | | 8 | | 15 | ||||
Allowance for credit losses based on collective evaluation | | 24 | | 22 | ||||
Allowance for credit losses based on individual evaluation |
| 4 |
| 3 | ||||
Impaired finance receivables with no related allowance for credit losses | $ | 135 | $ | 22 | ||||
Impaired finance receivables with related allowance for credit losses | | 21 | | 17 | ||||
Unpaid principal balance of impaired finance receivables | | 41 | | 67 | | 167 | | 50 |
Allowance for credit losses on impaired loans | | 4 | | 3 | ||||
Average recorded investment of impaired finance receivables | | 40 | | 61 | | 103 | | 40 |
Note 4. Inventories
Inventories are composed of the following:
| | | | | | | | |
| June 29, | December 29, | July 4, | January 4, | ||||
(In millions) | 2019 | 2018 | 2020 | 2020 | ||||
Finished goods | $ | 1,743 | $ | 1,662 | $ | 1,593 | $ | 1,557 |
Work in process | | 1,771 |
| 1,356 | | 1,659 |
| 1,616 |
Raw materials and components | | 797 |
| 800 | | 1,010 |
| 896 |
Total inventories | $ | 4,311 | $ | 3,818 | $ | 4,262 | $ | 4,069 |
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Note 5. Other Assets
On April 1, 2019, TRU Simulation + Training Inc., a business within our Textron Systems segment, contributedOther assets associated with its training business into FlightSafety Textron Aviation Training LLC, a company formed by FlightSafety International Inc. and TRU to provide training solutions for Textron Aviation’s commercial business and general aviation aircraft. We have a 30% interest in this newly formed company and our investment is accounted for underincludes the equity method of accounting. We contributed assets with a carryingcash surrender value of $69corporate-owned life insurance policies, net of any borrowings against these policies. During the first quarter of 2020, we borrowed $377 million toagainst the company, which primarily included property, plant and equipment. In addition, $71policies as we strengthened our cash position in light of disruptions in the capital markets caused by the COVID-19 pandemic. At July 4, 2020, there was $362 million of outstanding borrowings against the Textron Systems segment's goodwill was allocated to this transaction. Inpolicies. Proceeds from these borrowings and subsequent payments have been classified as financing activities in the second quarterconsolidated statement of 2019, basedcash flows. Interest expense incurred on the fair value of our share of the business, weborrowings against corporate-owned life insurance policies is recorded a pre-tax net gain of $18 million, subject to post-closing adjustments, to cost of sales in our Consolidated Statements of Operations.as an offset with policy income.
Note 6. Warranty LiabilitWarranty Liabilityy
Changes in our warranty liability are as follows:
| | | | |
| Six Months Ended | |||
| June 29, | June 30, | ||
(In millions) | 2019 | 2018 | ||
Beginning of period | $ | 149 | $ | 164 |
Provision |
| 30 |
| 34 |
Settlements |
| (38) |
| (39) |
Adjustments* |
| (5) |
| 7 |
End of period | $ | 136 | $ | 166 |
| | | | |
| Six Months Ended | |||
| July 4, | June 29, | ||
(In millions) | 2020 | 2019 | ||
Beginning of period | $ | 141 | $ | 149 |
Provision |
| 22 |
| 30 |
Settlements |
| (29) |
| (38) |
Adjustments* |
| (12) |
| (5) |
End of period | $ | 122 | $ | 136 |
* Adjustments include changes to prior year estimates, new issues on prior year sales business dispositions,acquisitions and currency translation adjustments.
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Note 7. Leases
We primarily lease certain manufacturing plants, offices, warehouses, training and service centers at various locations worldwide that are classified as either operating or finance leases. Our finance leases at July 4, 2020 were not significant. Our operating leases have remaining lease terms up to 3029 years, which include options to extend the lease term for periods up to 25 years when it is reasonably certain the option will be exercised. InOperating lease cost totaled $15 million and $16 million in the second quarter of 2020 and first half of 2019, our operating lease cost totaled $16respectively, and $30 million and $32 million respectively. Our finance lease cost and our variable and short-term lease costs were not significant. Inin the first half of 2020 and 2019, cashrespectively. Cash paid for operating lease liabilitiesleases totaled $30 million and $32 million in the first half of 2020 and 2019, respectively, which is classified in cash flows from operating activities. Variable and short-term lease costs were not significant. Balance sheet and other information related to our operating leases is as follows:
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Maturities of our lease liabilities at June 29, 2019 are as follows:
| | | | | | |
| July 4, | January 4, | ||||
(Dollars in millions) | 2020 | 2020 | ||||
Other assets | $ | 255 | $ | 277 | ||
Other current liabilities |
| 47 | | 48 | ||
Other liabilities |
| 214 | | 233 | ||
Weighted-average remaining lease term (in years) |
| 10.0 | | 10.2 | ||
Weighted-average discount rate |
| 4.43 | % | | 4.42 | % |
At July 4, 2020, maturities of our operating lease liabilities on an undiscounted basis totaled $32 million for 2020, $49 million for 2021, $41 million for 2022, $32 million for 2023, $25 million for 2024 and $150 million thereafter.
| | | | |
| Operating | Finance | ||
(In millions) | Leases | Leases | ||
2019 | $ | 34 | $ | 5 |
2020 |
| 57 |
| 9 |
2021 |
| 43 |
| 9 |
2022 |
| 37 |
| 9 |
2023 |
| 31 |
| 9 |
Thereafter |
| 179 |
| 69 |
Total lease payments |
| 381 |
| 110 |
Less: interest |
| (81) |
| (27) |
Total lease liabilities | $ | 300 | $ | 83 |
Note 8. Debt
On April 1, 2020, we entered into a 364-Day Term Loan Credit Agreement in an aggregate principal amount of $500 million and borrowed the full principal amount available under the agreement. At our current credit ratings, the borrowings accrue interest at a rate equal to the London interbank offered rate, subject to a floor of 0.75%, plus 2.0%, which is an annual interest rate of 2.75% at July 4, 2020. We can pre-pay any amount of the principal balance during the term of the loan; however, we cannot borrow additional principal amounts. The Term Loan Credit Agreement restricts us from incurring additional indebtedness, subject to various exceptions, one of which allows us to borrow under our $1.0 billion revolving credit facility. While this loan is outstanding, we have agreed not to repurchase any of our common stock. The principal amount outstanding, plus accrued and unpaid interest and fees, is due on March 31, 2021.
Under our shelf registration statement, on May 7, 2019,March 17, 2020, we issued $300$650 million of fixed-rate notes due September 17, 2029June 1, 2030 with an annual interest rate of 3.90%3.00%. The net proceeds of the issuance totaled $297$642 million, after deducting underwriting discounts, commissions and offering expenses.
On June 24, 2019, the Finance Group's $150 million fixed-rate loan due August 16, 2019 was amended. The maturity date of this loan was extended to June 23, 2022 and the annual interest rate was modified from 2.26% to 2.88%.
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.
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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 29, 2019July 4, 2020 and December 29, 2018,January 4, 2020, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $395$364 million and $379$342 million, respectively. At June 29, 2019,July 4, 2020, the fair value amounts of our foreign currency exchange contracts were a $6 million asset and a $8 million liability. At January 4, 2020, the fair value amounts of our foreign currency exchange contracts were a $2 million asset and a $3 million liability. At December 29, 2018, the fair value amounts of our foreign currency exchange contracts were a $2 million asset and a $10 million liability.
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We hedge our net investment position in certain major currencies and generate foreign currency interest payments that offset other transactional exposures in these currencies. To accomplish this, we borrow directly in the foreign currency and designate a portion of the debt as a hedge of the net investment. We record changes in the fair value of these contracts in other comprehensive income (loss) 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 29, 2019 | December 29, 2018 | July 4, 2020 | January 4, 2020 | ||||||||||||
| Carrying | Estimated | Carrying | Estimated | Carrying | Estimated | Carrying | Estimated | ||||||||
(In millions) | Value | Fair Value | Value | Fair Value | Value | Fair Value | Value | Fair Value | ||||||||
Manufacturing group | | | | | | | | | | | | | | | | |
Debt, excluding leases | $ | (3,301) | $ | (3,414) | $ | (2,996) | $ | (2,971) | $ | (4,044) | $ | (4,203) | $ | (3,097) | $ | (3,249) |
Finance group | | | | | | | | | | | | | | | | |
Finance receivables, excluding leases |
| 589 |
| 615 |
| 582 |
| 584 |
| 499 |
| 503 |
| 493 |
| 527 |
Debt |
| (703) |
| (640) |
| (718) |
| (640) |
| (670) |
| (566) |
| (686) |
| (634) |
Fair value for the Manufacturing group debt is determined using market observable data for similar transactions (Level 2). The fair value for the Finance group debt was determined primarily based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations (Level 2). Fair value estimates for finance receivables were determined based on internally developed discounted cash flow models primarily utilizing significant unobservable inputs (Level 3), which include estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and expectations of borrowers’ ability to make payments on a timely basis.
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Note 10. Shareholders’ Equity
A reconciliation of Shareholders’ equity is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Accumulated | | | | | | | | | | | Accumulated | | | ||
| | | | | | | | | Other | Total | | | | | | | | | Other | Total | ||||
| Common | Capital | Treasury | Retained | Comprehensive | Shareholders’ | Common | Capital | Treasury | Retained | Comprehensive | Shareholders’ | ||||||||||||
(In millions) | Stock | Surplus | Stock | Earnings | Loss | Equity | Stock | Surplus | Stock | Earnings | Loss | Equity | ||||||||||||
Three months ended July 4, 2020 | | | | | | | | | | | | | ||||||||||||
Beginning of period | $ | 29 | $ | 1,711 | $ | (74) | $ | 5,727 | $ | (1,859) | $ | 5,534 | ||||||||||||
Net loss | | — | | — | | — | | (92) | | — | | (92) | ||||||||||||
Other comprehensive income | | — | | — | | — | | — | | 68 | | 68 | ||||||||||||
Share-based compensation activity | | — | | 21 | | — | | — | | — | | 21 | ||||||||||||
Dividends declared | | — | | — | | — | | (4) | | — | | (4) | ||||||||||||
End of period | $ | 29 | $ | 1,732 | $ | (74) | $ | 5,631 | $ | (1,791) | $ | 5,527 | ||||||||||||
Three months ended June 29, 2019 | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning of period | $ | 30 | $ | 1,689 | $ | (331) | $ | 5,581 | $ | (1,736) | $ | 5,233 | $ | 30 | $ | 1,689 | $ | (331) | $ | 5,581 | $ | (1,736) | $ | 5,233 |
Net income | | — | | — | | — | | 217 | | — | | 217 |
| — |
| — |
| — |
| 217 |
| — |
| 217 |
Other comprehensive income | | — | | — | | — | | — | | 21 | | 21 |
| — |
| — |
| — |
| — |
| 21 |
| 21 |
Share-based compensation activity | | — | | 28 | | — | | — | | — | | 28 |
| — |
| 28 |
| — |
| — |
| — |
| 28 |
Dividends declared | | — | | — | | — | | (4) | | — | | (4) |
| — |
| — |
| — |
| (4) |
| — |
| (4) |
Purchases of common stock | | — | | — | | (159) | | — | | — | | (159) |
| — |
| — |
| (159) |
| — |
| — |
| (159) |
End of period | $ | 30 | $ | 1,717 | $ | (490) | $ | 5,794 | $ | (1,715) | $ | 5,336 | $ | 30 | $ | 1,717 | $ | (490) | $ | 5,794 | $ | (1,715) | $ | 5,336 |
Three months ended June 30, 2018 | | | | | | | | | | | | | ||||||||||||
Six months ended July 4, 2020 | | | | | | | | | | | | | ||||||||||||
Beginning of period | $ | 33 | $ | 1,710 | $ | (392) | $ | 5,642 | $ | (1,301) | $ | 5,692 | $ | 29 | $ | 1,674 | $ | (20) | $ | 5,682 | $ | (1,847) | $ | 5,518 |
Net income |
| — |
| — |
| — |
| 224 |
| — |
| 224 | ||||||||||||
Other comprehensive (loss) |
| — |
| — |
| — |
| — |
| (42) |
| (42) | ||||||||||||
Net loss | | — | | — | | — | | (42) | | — | | (42) | ||||||||||||
Other comprehensive income | | — | | — | | — | | — | | 56 | | 56 | ||||||||||||
Share-based compensation activity |
| — |
| 64 |
| — |
| — |
| — |
| 64 | | — | | 58 | | — | | — | | — | | 58 |
Dividends declared |
| — |
| — |
| — |
| (5) |
| — |
| (5) | | — | | — | | — | | (9) | | — | | (9) |
Purchases of common stock |
| — |
| — |
| (571) |
| — |
| — |
| (571) | | — | | — | | (54) | | — | | — | | (54) |
End of period | $ | 33 | $ | 1,774 | $ | (963) | $ | 5,861 | $ | (1,343) | $ | 5,362 | $ | 29 | $ | 1,732 | $ | (74) | $ | 5,631 | $ | (1,791) | $ | 5,527 |
Six months ended June 29, 2019 | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning of period | $ | 30 | $ | 1,646 | $ | (129) | $ | 5,407 | $ | (1,762) | $ | 5,192 | $ | 30 | $ | 1,646 | $ | (129) | $ | 5,407 | $ | (1,762) | $ | 5,192 |
Net income | | — | | — | | — | | 396 | | — | | 396 |
| — |
| — |
| — |
| 396 |
| — |
| 396 |
Other comprehensive income | | — | | — | | — | | — | | 47 | | 47 |
| — |
| — |
| — |
| — |
| 47 |
| 47 |
Share-based compensation activity | | — | | 71 | | — | | — | | — | | 71 |
| — |
| 71 |
| — |
| — |
| — |
| 71 |
Dividends declared | | — | | — | | — | | (9) | | — | | (9) |
| — |
| — |
| — |
| (9) |
| — |
| (9) |
Purchases of common stock | | — | | — | | (361) | | — | | — | | (361) |
| — |
| — |
| (361) |
| — |
| — |
| (361) |
End of period | $ | 30 | $ | 1,717 | $ | (490) | $ | 5,794 | $ | (1,715) | $ | 5,336 | $ | 30 | $ | 1,717 | $ | (490) | $ | 5,794 | $ | (1,715) | $ | 5,336 |
Six months ended June 30, 2018 | | | | | | | | | | | | | ||||||||||||
Beginning of period | $ | 33 | $ | 1,669 | $ | (48) | $ | 5,368 | $ | (1,375) | $ | 5,647 | ||||||||||||
Adoption of ASC 606 |
| — |
| — |
| — |
| 90 |
| — |
| 90 | ||||||||||||
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) | ||||||||||||
End of period | $ | 33 | $ | 1,774 | $ | (963) | $ | 5,861 | $ | (1,343) | $ | 5,362 |
Dividends per share of common stock were $0.02 for both the second quarter of 20192020 and 20182019 and $0.04 for both the first half of 20192020 and 2018.2019.
Earnings Per Share
We calculate basic and diluted earnings per share (EPS) based on net income (loss), which approximates income (loss) 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 | ||||||
| July 4, | June 29, | July 4, | June 29, | ||||
(In thousands) | 2020 | 2019 | 2020 | 2019 | ||||
Basic weighted-average shares outstanding | | 228,247 | | 232,013 | | 228,279 | | 233,426 |
Dilutive effect of stock options | | — | | 1,532 | | — | | 1,567 |
Diluted weighted-average shares outstanding | | 228,247 | | 233,545 | | 228,279 | | 234,993 |
14
TheAs a result of incurring a net loss for the second quarter and first half of 2020, potential common shares of 0.1 million and 0.3 million, respectively, were excluded from diluted loss per share because the effect would have been anti-dilutive. In addition, stock options to purchase 8.9 million and 8.2 million shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding for basicthe second quarter and diluted EPS arefirst half of 2020, respectively, as follows:
| | | | |
| Three Months Ended | Six Months Ended | ||
| June 29, | June 30, | June 29, | June 30, |
(In thousands) | 2019 | 2018 | 2019 | 2018 |
Basic weighted-average shares outstanding | 232,013 | 253,904 | 233,426 | 257,200 |
Dilutive effect of stock options | 1,532 | 3,273 | 1,567 | 3,262 |
Diluted weighted-average shares outstanding | 233,545 | 257,177 | 234,993 | 260,462 |
their effect would have been anti-dilutive. Stock options to purchase 3.1 million shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding for both the second quarter and first half of 2019, as their effect would have been anti-dilutive. Stock options to purchase 1.3 million shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding for both the second quarter and first half of 2018, as their effect would have been anti-dilutive.
Accumulated Other Comprehensive Loss and Other Comprehensive Income
The components of Accumulated other comprehensive loss are presented below:
| | | | | | | | | | | | | | | | |
| Pension and | Foreign | Deferred | Accumulated | Pension and | Foreign | Deferred | Accumulated | ||||||||
| Postretirement | Currency | Gains (Losses) | Other | Postretirement | Currency | Gains (Losses) | Other | ||||||||
| Benefits | Translation | on Hedge | Comprehensive | Benefits | Translation | on Hedge | Comprehensive | ||||||||
(In millions) | Adjustments | Adjustments | Contracts | Loss | Adjustments | Adjustments | Contracts | Loss | ||||||||
Balance at January 4, 2020 | $ | (1,811) | $ | (36) | $ | — | $ | (1,847) | ||||||||
Other comprehensive loss before reclassifications | | — | | (10) | | (5) | | (15) | ||||||||
Reclassified from Accumulated other comprehensive loss | | 73 | | — | | (2) | | 71 | ||||||||
Balance at July 4, 2020 | $ | (1,738) | $ | (46) | $ | (7) | $ | (1,791) | ||||||||
Balance at December 29, 2018 | $ | (1,727) | $ | (32) | $ | (3) | $ | (1,762) | $ | (1,727) | $ | (32) | $ | (3) | $ | (1,762) |
Other comprehensive income before reclassifications | | — | | 4 | | 4 | | 8 |
| — |
| 4 |
| 4 |
| 8 |
Reclassified from Accumulated other comprehensive loss | | 41 | | — | | (2) | | 39 |
| 41 |
| — |
| (2) |
| 39 |
Balance at June 29, 2019 | $ | (1,686) | $ | (28) | $ | (1) | $ | (1,715) | $ | (1,686) | $ | (28) | $ | (1) | $ | (1,715) |
Balance at December 30, 2017 | $ | (1,396) | $ | 11 | $ | 10 | $ | (1,375) | ||||||||
Other comprehensive income before reclassifications |
| — |
| (27) |
| (2) |
| (29) | ||||||||
Reclassified from Accumulated other comprehensive loss |
| 62 |
| — |
| (1) |
| 61 | ||||||||
Balance at June 30, 2018 | $ | (1,334) | $ | (16) | $ | 7 | $ | (1,343) |
The before and after-tax components of Other comprehensive income (loss) are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| June 29, 2019 | June 30, 2018 | July 4, 2020 | June 29, 2019 | ||||||||||||||||||||
| | | Tax | | | | Tax | | | | Tax | | | | Tax | | ||||||||
| Pre-Tax | (Expense) | After-Tax | Pre-Tax | (Expense) | After-Tax | Pre-Tax | (Expense) | After-Tax | Pre-Tax | (Expense) | After-Tax | ||||||||||||
(In millions) | Amount | Benefit | Amount | Amount | Benefit | Amount | Amount | Benefit | Amount | Amount | Benefit | Amount | ||||||||||||
Three Months Ended | | | | | | | | | | | | | | | | | | | | | | | | |
Pension and postretirement benefits adjustments: | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization of net actuarial loss* | $ | 24 | $ | (6) | $ | 18 | $ | 39 | $ | (9) | $ | 30 | $ | 46 | $ | (11) | $ | 35 | $ | 24 | $ | (6) | $ | 18 |
Amortization of prior service cost* |
| 3 |
| (1) |
| 2 | | 2 | | (1) | | 1 |
| 1 |
| — |
| 1 | | 3 | | (1) | | 2 |
Pension and postretirement benefits adjustments, net |
| 27 |
| (7) |
| 20 | | 41 | | (10) | | 31 |
| 47 |
| (11) |
| 36 | | 27 | | (7) | | 20 |
Deferred gains (losses) on hedge contracts: | | | | | | | | | | | | | | | | | | | | | | | | |
Current deferrals |
| 2 |
| (1) |
| 1 | | (4) | | 1 | | (3) |
| 4 |
| (1) |
| 3 | | 2 | | (1) | | 1 |
Reclassification adjustments |
| (1) |
| — |
| (1) | | (1) | | — | | (1) |
| (2) |
| 1 |
| (1) | | (1) | | — | | (1) |
Deferred gains (losses) on hedge contracts, net | | 1 | | (1) | | — | | (5) | | 1 | | (4) | | 2 | | — | | 2 | | 1 | | (1) | | — |
Foreign currency translation adjustments | | 3 | | (2) | | 1 | | (66) | | (3) | | (69) | | 30 | | — | | 30 | | 3 | | (2) | | 1 |
Total | $ | 31 | $ | (10) | $ | 21 | $ | (30) | $ | (12) | $ | (42) | $ | 79 | $ | (11) | $ | 68 | $ | 31 | $ | (10) | $ | 21 |
Six Months Ended | | | | | | | | | | | | | | | | | | | | | | | | |
Pension and postretirement benefits adjustments: | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization of net actuarial loss* | $ | 49 | $ | (11) | $ | 38 | $ | 77 | $ | (18) | $ | 59 | $ | 92 | $ | (21) | $ | 71 | $ | 49 | $ | (11) | $ | 38 |
Amortization of prior service cost* |
| 4 |
| (1) |
| 3 | | 4 | | (1) | | 3 |
| 3 |
| (1) |
| 2 | | 4 | | (1) | | 3 |
Pension and postretirement benefits adjustments, net |
| 53 |
| (12) |
| 41 | | 81 | | (19) | | 62 |
| 95 |
| (22) |
| 73 | | 53 | | (12) | | 41 |
Deferred gains (losses) on hedge contracts: | | | | | | | | | | | | | | | | | | | | | | | | |
Current deferrals |
| 6 |
| (2) |
| 4 | | (2) | | — | | (2) |
| (5) |
| — |
| (5) | | 6 | | (2) | | 4 |
Reclassification adjustments |
| (2) |
| — |
| (2) | | (1) | | — | | (1) |
| (3) |
| 1 |
| (2) | | (2) | | — | | (2) |
Deferred gains (losses) on hedge contracts, net |
| 4 |
| (2) |
| 2 | | (3) | | — | | (3) |
| (8) |
| 1 |
| (7) | | 4 | | (2) | | 2 |
Foreign currency translation adjustments |
| 4 |
| — |
| 4 | | (26) | | (1) | | (27) | | (7) | | (3) | | (10) | | 4 | | — | | 4 |
Total | $ | 61 | $ | (14) | $ | 47 | $ | 52 | $ | (20) | $ | 32 | $ | 80 | $ | (24) | $ | 56 | $ | 61 | $ | (14) | $ | 47 |
*These components of other comprehensive income are included in the computation of net periodic pension cost.cost (credit). See Note 1416 of our 20182019 Annual Report on Form 10-K for additional information.
15
Note 11. Segment Information
We operate in, and report financial information for, the following five 5 business segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. On July 2, 2018, we sold our Tools and Test Equipment businesses that were previously included in the Industrial segment as discussed in Note 2 of our 2018 Annual Report on Form 10-K. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses, gains/losses on major business dispositions, special charges and special charges.an inventory charge related to the 2020 COVID-19 restructuring plan, as discussed in Note 14. 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 (loss) before income taxes, are included in the table below:
| | | | | | | | | | | | | | | | |
| Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | ||||||||||||
| June 29, | June 30, | June 29, | June 30, | July 4, | June 29, | July 4, | June 29, | ||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | ||||||||
Revenues | | | | | | | | | | | | | | | | |
Textron Aviation | $ | 1,123 | $ | 1,276 | $ | 2,257 | $ | 2,286 | $ | 747 | $ | 1,123 | $ | 1,619 | $ | 2,257 |
Bell | | 771 |
| 831 | | 1,510 | | 1,583 | | 822 |
| 771 | | 1,645 | | 1,510 |
Textron Systems | | 308 |
| 380 | | 615 | | 767 | | 326 |
| 308 | | 654 | | 615 |
Industrial | | 1,009 |
| 1,222 | | 1,921 | | 2,353 | | 562 |
| 1,009 | | 1,302 | | 1,921 |
Finance | | 16 |
| 17 | | 33 | | 33 | | 15 |
| 16 | | 29 | | 33 |
Total revenues | $ | 3,227 | $ | 3,726 | $ | 6,336 | $ | 7,022 | $ | 2,472 | $ | 3,227 | $ | 5,249 | $ | 6,336 |
Segment Profit | | | | | | | | | | | | | | | | |
Textron Aviation | $ | 105 | $ | 104 | $ | 211 | $ | 176 | $ | (66) | $ | 105 | $ | (63) | $ | 211 |
Bell | | 103 |
| 117 | | 207 | | 204 | | 118 |
| 103 | | 233 | | 207 |
Textron Systems | | 49 |
| 40 | | 77 | | 90 | | 37 |
| 49 | | 63 | | 77 |
Industrial | | 76 |
| 80 | | 126 | | 144 | | (11) |
| 76 | | (2) | | 126 |
Finance | | 6 |
| 5 | | 12 | | 11 | | 4 |
| 6 | | 7 | | 12 |
Segment profit | | 339 |
| 346 | | 633 | | 625 | | 82 |
| 339 | | 238 | | 633 |
Corporate expenses and other, net | | (24) |
| (51) |
| (71) | | (78) | | (30) |
| (24) |
| (44) | | (71) |
Interest expense, net for Manufacturing group |
| (36) |
| (35) |
| (71) | | (69) |
| (37) |
| (36) |
| (71) | | (71) |
Income before income taxes | $ | 279 | $ | 260 | $ | 491 | $ | 478 | ||||||||
Special charges | | (78) | | — | | (117) | | — | ||||||||
Inventory charge* | | (55) | | — | | (55) | | — | ||||||||
Income (loss) before income taxes | $ | (118) | $ | 279 | $ | (49) | $ | 491 |
* In connection with the restructuring plan initiated in the second quarter of 2020, we ceased manufacturing at the Montreal facility of the TRU Simulation + Training business, resulting in the production suspension of our commercial air transport simulators. As a result of this action and current market conditions, we recorded a $55 million charge to write-down the related inventory to its net realizable value.
Note 12. Revenues
Disaggregation of Revenues
Our revenues disaggregated by major product type are presented below:
| | | | | | | | | | | | | | | | |
| Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | ||||||||||||
| June 29, | June 30, | June 29, | June 30, | July 4, | June 29, | July 4, | June 29, | ||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | ||||||||
Aircraft | $ | 733 | $ | 877 | $ | 1,499 | $ | 1,511 | $ | 478 | $ | 733 | $ | 993 | $ | 1,499 |
Aftermarket parts and services | | 390 |
| 399 | | 758 |
| 775 | | 269 |
| 390 | | 626 |
| 758 |
Textron Aviation | | 1,123 |
| 1,276 | | 2,257 |
| 2,286 | | 747 |
| 1,123 | | 1,619 |
| 2,257 |
Military aircraft and support programs | | 482 |
| 533 | | 990 |
| 1,020 | | 602 |
| 482 | | 1,222 |
| 990 |
Commercial helicopters, parts and services | | 289 |
| 298 | | 520 |
| 563 | | 220 |
| 289 | | 423 |
| 520 |
Bell | | 771 |
| 831 | | 1,510 |
| 1,583 | | 822 |
| 771 | | 1,645 |
| 1,510 |
Unmanned systems | | 135 |
| 161 | | 269 |
| 331 | | 169 |
| 135 | | 317 |
| 269 |
Marine and land systems | | 60 |
| 69 | | 108 |
| 161 | | 43 |
| 60 | | 91 |
| 108 |
Simulation, training and other | | 113 |
| 150 | | 238 |
| 275 | | 114 |
| 113 | | 246 |
| 238 |
Textron Systems | | 308 |
| 380 | | 615 |
| 767 | | 326 |
| 308 | | 654 |
| 615 |
Fuel systems and functional components | | 592 |
| 627 | | 1,186 |
| 1,282 | | 271 |
| 592 | | 736 |
| 1,186 |
Specialized vehicles | | 417 |
| 475 | | 735 |
| 823 | | 291 |
| 417 | | 566 |
| 735 |
Tools and test equipment | | — |
| 120 | | — |
| 248 | ||||||||
Industrial | | 1,009 |
| 1,222 | | 1,921 |
| 2,353 | | 562 |
| 1,009 | | 1,302 |
| 1,921 |
Finance | | 16 |
| 17 | | 33 |
| 33 | | 15 |
| 16 | | 29 |
| 33 |
Total revenues | $ | 3,227 | $ | 3,726 | $ | 6,336 | $ | 7,022 | $ | 2,472 | $ | 3,227 | $ | 5,249 | $ | 6,336 |
16
Our revenues for our segments by customer type and geographic location are presented below:
| | | | | | | | | | | | | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Textron | Bell | Textron | Industrial | Finance | Total | Textron | Bell | Textron | Industrial | Finance | Total | ||||||||||||
Three months ended July 4, 2020 | | | | | | | | | | | | | ||||||||||||
Customer type: | | | | | | | | | | | | | ||||||||||||
Commercial | $ | 716 | $ | 216 | $ | 57 | $ | 559 | $ | 15 | $ | 1,563 | ||||||||||||
U.S. Government | | 31 | | 606 | | 269 | | 3 | | — | | 909 | ||||||||||||
Total revenues | $ | 747 | $ | 822 | $ | 326 | $ | 562 | $ | 15 | $ | 2,472 | ||||||||||||
Geographic location: | | | | | | | | | | | | | ||||||||||||
United States | $ | 518 | $ | 681 | $ | 276 | $ | 287 | $ | 8 | $ | 1,770 | ||||||||||||
Europe | | 70 | | 21 | | 11 | | 127 | | — | | 229 | ||||||||||||
Asia and Australia | | 50 | | 66 | | 15 | | 76 | | — | | 207 | ||||||||||||
Other international | | 109 | | 54 | | 24 | | 72 | | 7 | | 266 | ||||||||||||
Total revenues | $ | 747 | $ | 822 | $ | 326 | $ | 562 | $ | 15 | $ | 2,472 | ||||||||||||
Three months ended June 29, 2019 | | | | | | | | | | | | | | | | | | | | | | | | |
Customer type: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | $ | 1,077 | $ | 279 | $ | 83 | $ | 1,004 | $ | 16 | $ | 2,459 | $ | 1,077 | $ | 279 | $ | 83 | $ | 1,004 | $ | 16 | $ | 2,459 |
U.S. Government | | 46 | | 492 | | 225 | | 5 | | — | | 768 |
| 46 |
| 492 |
| 225 |
| 5 |
| — |
| 768 |
Total revenues | $ | 1,123 | $ | 771 | $ | 308 | $ | 1,009 | $ | 16 | $ | 3,227 | $ | 1,123 | $ | 771 | $ | 308 | $ | 1,009 | $ | 16 | $ | 3,227 |
Geographic location: | | | | | | | | | | | | |
| |
| |
| |
| |
| |
| |
United States | $ | 736 | $ | 571 | $ | 249 | $ | 466 | $ | 7 | $ | 2,029 | $ | 736 | $ | 571 | $ | 249 | $ | 466 | $ | 7 | $ | 2,029 |
Europe | | 164 | | 47 | | 17 | | 291 | | — | | 519 | | 164 | | 47 | | 17 | | 291 | | — | | 519 |
Asia and Australia | | 65 | | 79 | | 13 | | 84 | | 2 | | 243 | | 65 | | 79 | | 13 | | 84 | | 2 | | 243 |
Other international | | 158 | | 74 | | 29 | | 168 | | 7 | | 436 |
| 158 |
| 74 |
| 29 |
| 168 |
| 7 |
| 436 |
Total revenues | $ | 1,123 | $ | 771 | $ | 308 | $ | 1,009 | $ | 16 | $ | 3,227 | $ | 1,123 | $ | 771 | $ | 308 | $ | 1,009 | $ | 16 | $ | 3,227 |
Three months ended June 30, 2018 | | | | | | | | | | | | | ||||||||||||
Six months ended July 4, 2020 | | | | | | | | | | | | | ||||||||||||
Customer type: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | $ | 1,191 | $ | 291 | $ | 107 | $ | 1,215 | $ | 17 | $ | 2,821 | $ | 1,564 | $ | 414 | $ | 128 | $ | 1,298 | $ | 29 | $ | 3,433 |
U.S. Government |
| 85 |
| 540 |
| 273 |
| 7 |
| — |
| 905 | | 55 | | 1,231 | | 526 | | 4 | | — | | 1,816 |
Total revenues | $ | 1,276 | $ | 831 | $ | 380 | $ | 1,222 | $ | 17 | $ | 3,726 | $ | 1,619 | $ | 1,645 | $ | 654 | $ | 1,302 | $ | 29 | $ | 5,249 |
Geographic location: |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
United States | $ | 914 | $ | 543 | $ | 297 | $ | 590 | $ | 7 | $ | 2,351 | $ | 1,115 | $ | 1,371 | $ | 562 | $ | 616 | $ | 14 | $ | 3,678 |
Europe | | 128 | | 50 | | 23 | | 372 | | 2 | | 575 | | 154 | | 45 | | 23 | | 355 | | 1 | | 578 |
Asia and Australia | | 64 | | 150 | | 28 | | 100 | | 2 | | 344 | | 173 | | 116 | | 35 | | 129 | | 1 | | 454 |
Other international |
| 170 |
| 88 |
| 32 |
| 160 |
| 6 |
| 456 | | 177 | | 113 | | 34 | | 202 | | 13 | | 539 |
Total revenues | $ | 1,276 | $ | 831 | $ | 380 | $ | 1,222 | $ | 17 | $ | 3,726 | $ | 1,619 | $ | 1,645 | $ | 654 | $ | 1,302 | $ | 29 | $ | 5,249 |
Six months ended June 29, 2019 | | | | | | | | | | | | | | | | | | | | | | | | |
Customer type: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | $ | 2,169 | $ | 509 | $ | 157 | $ | 1,909 | $ | 33 | $ | 4,777 | $ | 2,169 | $ | 509 | $ | 157 | $ | 1,909 | $ | 33 | $ | 4,777 |
U.S. Government | | 88 | | 1,001 | | 458 | | 12 | | — | | 1,559 |
| 88 |
| 1,001 |
| 458 |
| 12 |
| — |
| 1,559 |
Total revenues | $ | 2,257 | $ | 1,510 | $ | 615 | $ | 1,921 | $ | 33 | $ | 6,336 | $ | 2,257 | $ | 1,510 | $ | 615 | $ | 1,921 | $ | 33 | $ | 6,336 |
Geographic location: | | | | | | | | | | | | |
| |
| |
| |
| |
| |
| |
United States | $ | 1,525 | $ | 1,149 | $ | 506 | $ | 855 | $ | 15 | $ | 4,050 | $ | 1,525 | $ | 1,149 | $ | 506 | $ | 855 | $ | 15 | $ | 4,050 |
Europe | | 347 | | 67 | | 40 | | 602 | | 1 | | 1,057 | | 347 | | 67 | | 40 | | 602 | | 1 | | 1,057 |
Asia and Australia | | 88 | | 161 | | 29 | | 161 | | 3 | | 442 | | 88 | | 161 | | 29 | | 161 | | 3 | | 442 |
Other international | | 297 | | 133 | | 40 | | 303 | | 14 | | 787 |
| 297 |
| 133 |
| 40 |
| 303 |
| 14 |
| 787 |
Total revenues | $ | 2,257 | $ | 1,510 | $ | 615 | $ | 1,921 | $ | 33 | $ | 6,336 | $ | 2,257 | $ | 1,510 | $ | 615 | $ | 1,921 | $ | 33 | $ | 6,336 |
Six months ended June 30, 2018 | | | | | | | | | | | | | ||||||||||||
Customer type: | | | | | | | | | | | | | ||||||||||||
Commercial | $ | 2,164 | $ | 543 | $ | 234 | $ | 2,339 | $ | 33 | $ | 5,313 | ||||||||||||
U.S. Government |
| 122 |
| 1,040 |
| 533 |
| 14 |
| — |
| 1,709 | ||||||||||||
Total revenues | $ | 2,286 | $ | 1,583 | $ | 767 | $ | 2,353 | $ | 33 | $ | 7,022 | ||||||||||||
Geographic location: |
| |
| |
| |
| |
| |
| | ||||||||||||
United States | $ | 1,579 | $ | 1,052 | $ | 584 | $ | 1,086 | $ | 14 | $ | 4,315 | ||||||||||||
Europe | | 274 | | 77 | | 35 | | 755 | | 3 | | 1,144 | ||||||||||||
Asia and Australia | | 145 | | 277 | | 56 | | 192 | | 4 | | 674 | ||||||||||||
Other international |
| 288 |
| 177 |
| 92 |
| 320 |
| 12 |
| 889 | ||||||||||||
Total revenues | $ | 2,286 | $ | 1,583 | $ | 767 | $ | 2,353 | $ | 33 | $ | 7,022 |
Remaining Performance Obligations
Our remaining performance obligations, which is the equivalent of our backlog, represent the expected transaction price allocated to our contracts that we expect to recognize as revenues in future periods when we perform under the contracts. These remaining obligations exclude unexercised contract options and potential orders under ordering-type contracts such as Indefinite Delivery, Indefinite Quantity contracts. At June 29, 2019,July 4, 2020, we had $9.3$9.1 billion in remaining performance obligations of which we expect to recognize revenues of approximately 68% through 2020,2021, an additional 26%24% through 2022,2023, and the balance thereafter.
17
Contract Assets and Liabilities
Assets and liabilities related to our contracts with customers are reported on a contract-by-contract basis at the end of each reporting period. At June 29, 2019,July 4, 2020 and January 4, 2020, contract assets totaled $542 million and $567 million, respectively, and contract liabilities totaled $499$927 million and $897$830 million, respectively. At December 29, 2018, contract assets respectively, reflecting timing differences between revenue recognized, billings
17
and contract liabilities totaled $461 million and $974 million, respectively.payments from customers. During the second quarter and first half of 2019,2020, we recognized revenues of $121 million and $352 million, respectively, that were included in the contract liability balance at January 4, 2020. We recognized revenues of $146 million and $457 million in the second quarter and first half of 2019, respectively, that were included in the contract liability balance at December 29, 2018. We recognized revenues of $377 million and $699 million in the second quarter and first half of 2018 that were included in the contract liability balance at December 31, 2017.
Note 13. Retirement Plans
We provide defined benefit pension plans and other postretirement benefits to eligible employees. The components of net periodic benefit cost (credit) for these plans are as follows:
| | | | | | | | | | | | | | | | |
| Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | ||||||||||||
| June 29, | June 30, | June 29, | June 30, | July 4, | June 29, | July 4, | June 29, | ||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | ||||||||
Pension Benefits | | | | | | | | | | | | | | | | |
Service cost | $ | 22 | $ | 27 | $ | 45 | $ | 53 | $ | 26 | $ | 22 | $ | 52 | $ | 45 |
Interest cost | | 81 | | 76 | | 163 | | 153 | | 74 | | 81 | | 147 | | 163 |
Expected return on plan assets | | (139) |
| (139) | | (278) |
| (277) | | (143) |
| (139) | | (287) |
| (278) |
Amortization of net actuarial loss | | 25 | | 39 | | 50 | | 77 | | 46 | | 25 | | 92 | | 50 |
Amortization of prior service cost | | 4 |
| 3 | | 7 |
| 7 | | 3 |
| 4 | | 6 |
| 7 |
Net periodic benefit cost (credit) | $ | (7) | $ | 6 | $ | (13) | $ | 13 | $ | 6 | $ | (7) | $ | 10 | $ | (13) |
Postretirement Benefits Other Than Pensions | | | | | | | | | | | | | | | | |
Service cost | $ | — | $ | — | $ | 1 | $ | 1 | $ | 1 | $ | — | $ | 2 | $ | 1 |
Interest cost | | 3 | | 3 | | 5 | | 5 | | 2 | | 3 | | 4 | | 5 |
Amortization of net actuarial loss | | (1) | | — | | (1) | | — | | — | | (1) | | — | | (1) |
Amortization of prior service credit | | (1) | | (1) | | (3) | | (3) | | (2) | | (1) | | (3) | | (3) |
Net periodic benefit cost | $ | 1 | $ | 2 | $ | 2 | $ | 3 | $ | 1 | $ | 1 | $ | 3 | $ | 2 |
Note 14. Special Charges
Special Charges
Special charges recorded in the second quarter and first half of 2020 by segment and type of cost are presented in the table below. There were no special charges recorded in the first half of 2019.
��
| | | | | | | | | | | | |
|
| | |
| Contract |
| | |
| | | |
| | Severance | | Terminations | | Asset | | |
| |||
(In millions) | | Costs | | and Other | | Impairments | | Total | ||||
Three months ended July 4, 2020 |
| |
|
| |
|
| |
|
| |
|
Textron Systems | | $ | 14 |
| $ | 12 |
| $ | 14 |
| $ | 40 |
Textron Aviation | |
| 27 |
| | — |
| | 1 |
| | 28 |
Industrial | |
| 8 |
| | — |
| | — |
| | 8 |
Corporate | |
| 2 |
| | — |
| | — |
| | 2 |
Total special charges | �� | $ | 51 |
| $ | 12 |
| $ | 15 |
| $ | 78 |
Six months ended July 4, 2020 | |
| |
| | |
| | |
| | |
Textron Systems | | $ | 14 |
| $ | 12 |
| $ | 14 |
| $ | 40 |
Textron Aviation | |
| 27 |
| | — |
| | 33 |
| | 60 |
Industrial | |
| 8 |
| | — |
| | 7 |
| | 15 |
Corporate | |
| 2 |
| | — |
| | — |
| | 2 |
Total special charges | | $ | 51 |
| $ | 12 |
| $ | 54 |
| $ | 117 |
2020 COVID-19 Restructuring Plan
In the second quarter of 2020, we initiated a restructuring plan to reduce operating expenses through headcount reductions, facility consolidations and other actions in response to the economic challenges and uncertainty resulting from the COVID-19 pandemic. The total pre-tax cost of this plan is expected to be in the range of $110 million to $130 million, of which $78 million was recorded in the second quarter of 2020. We anticipate that this plan will be substantially completed by the end of 2020. The plan primarily impacts the TRU Simulation + Training (TRU) business within the Textron Systems segment, the Textron Aviation segment and the TSV business within the Industrial segment, and will result in the elimination of up to approximately 1,950 positions, representing 6% of our workforce. At TRU, there has been a substantial decline in demand and order cancellations for flight simulators in light of the expected long-term impact of the pandemic on the commercial air transportation business. Accordingly, we will cease manufacturing at TRU’s facility in Montreal, Canada, resulting in a production suspension of its commercial air transport simulators, along with workforce reductions, contract terminations, facility closures and asset impairments. As a result of current market
18
conditions and the cessation of manufacturing at this facility, we incurred an inventory valuation charge of $55 million, which was recorded in Cost of Sales, to write-down TRU’s inventory to its net realizable value.
First Quarter 2020 Asset Impairment Charges
In the first quarter of 2020, we recognized special charges of $39 million of intangible asset impairment charges at the Textron Aviation and Industrial segments. Due to the impact of the COVID-19 pandemic, we experienced decreased demand for our products and services as our customers delayed or ceased orders due to the environment of economic uncertainty. In light of these conditions, Textron Aviation had temporarily shut down most aircraft production, including the King Air turboprop and Beechcraft piston product lines, and had instituted employee furloughs. Based on these events, we performed an interim impairment test of the indefinite-lived Beechcraft and King Air trade name intangible assets at April 4, 2020. Fair value of these assets was determined utilizing the relief of royalty method assuming an increase in the discount rate based on current market data to 9.7% and revised expectations of future revenues for the products and services associated with the tradenames. This analysis resulted in an impairment charge of $32 million. At July 4, 2020, these intangible assets totaled $169 million. In the Industrial segment, we fully impaired the Arctic Cat trade name intangible asset within the Specialized Vehicles product line and recorded a $7 million impairment charge.
Restructuring Reserve
Restructuring reserve activity related to our 2020 and prior restructuring plans is summarized below:
| | | | | | |
| | | Contract | | | |
| Severance | Terminations | | | ||
(In millions) | Costs | and Other | Total | |||
Balance at January 4, 2020 | $ | 46 | $ | 19 | $ | 65 |
Provision for 2020 COVID-19 restructuring plan |
| 51 |
| 12 |
| 63 |
Cash paid |
| (31) |
| (5) |
| (36) |
Balance at July 4, 2020 | $ | 66 | $ | 26 | $ | 92 |
The majority of the remaining cash outlays of $92 million is expected to be paid in the second half of 2020. Severance costs generally are paid on a lump-sum basis and include outplacement costs, which are paid in accordance with normal payment terms.
Note 14.15. Income Taxes
Our effective tax rate for the second quarter and first half of 2020 was (22.0)% and (14.3)%, respectively, compared to the statutory rate of (21)%. In the second quarter and first half of 2020, we incurred special charges and an inventory charge in a non-U.S. jurisdiction where tax benefits cannot be realized, which were partially offset by a $14 million benefit recognized upon the release of a valuation allowance in a non-U.S. jurisdiction. In the first half of 2020, these items had a more significant impact on the effective tax rate due to the lower loss before income taxes for the period.
Our effective tax rate for the second quarter and first half of 2019 was 22.2% and 19.3%, respectively. In the first half of 2019, the effective tax rate was lower than the U.S. federal statutory tax rate of 21%, primarily due to a $12 million benefit recognized for additional research credits related to prior years.
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.
Our reserve for unrecognized tax benefits totaled $175 million and $141 million at June 29, 2019 and December 29, 2018, respectively. The increase in this reserve largely reflects a claim filed in the first quarter of 2019 for tax credits related to prior years.
Note 15.16. 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.
1819
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Recent Developments
The global pandemic caused by the novel coronavirus, known as “COVID-19”, has led to worldwide facility closures, workforce disruptions, supply chain destabilizations, reduced demand for many products and services, volatility in the capital markets and uncertainty in the economic outlook. Our operations have experienced and continue to experience various degrees of disruption due to the unprecedented conditions surrounding the pandemic. While certain of our commercial manufacturing facilities had temporarily closed during the first quarter through the latter part of the second quarter due to reduced demand for our products, substantially all manufacturing activities have resumed.
In the first quarter, we formed enterprise-wide pandemic response teams, which have guided our operations in the implementation of processes and procedures to comply with applicable government-imposed health and safety-related operating restrictions and to enhance the safety of our facilities to protect the health of our employees. Among other actions, we have increased cleaning and disinfecting of our facilities and reconfigured workspaces to enable adherence to social distancing guidelines while minimizing disruption to our manufacturing processes and other work activities. We have outfitted our facilities with signage regarding required face coverings, proper physical distancing, symptom checks, revised elevator and room capacities, etc. Our businesses are and may continue to be affected by these operating restrictions as well as various other COVID-19 related challenges, including travel restrictions, quarantines, remote working arrangements, employee furloughs and other workforce and supply chain disruptions. During the course of the pandemic, our response teams will continue to provide guidance for our businesses on preventing the spread of COVID-19 in the workplace.
In June 2020, we initiated a restructuring plan to reduce operating expenses through headcount reductions, facility consolidations and other actions in response to the economic challenges and uncertainty resulting from the COVID-19 pandemic. The plan primarily impacts the TRU Simulation + Training (TRU) business within the Textron Systems segment, the Textron Aviation segment and the Textron Specialized Vehicles (TSV) business within the Industrial segment. Additional information related to this plan is provided in the Special Charges section on page 22. The impact of the COVID-19 pandemic and the current operating status of our segments are provided below:
● | Textron Aviation temporarily shut down most aircraft production and instituted employee furloughs during the first quarter through the latter part of the second quarter as a result of decreased demand for its products and services related to the pandemic. To align our cost structure with reduced production levels, in the second quarter, we initiated direct and indirect workforce reductions under the restructuring plan. |
● | At Bell and Textron Systems, as U.S. defense contractors, operations have largely remained open and these businesses continue to fulfill their contracts with the U.S. Government. At Textron Systems, however, TRU has experienced a substantial decline in demand and order cancellations for its flight simulators in light of the expected long-term impact of the pandemic on the commercial air transportation business. Accordingly, as part of the restructuring plan, TRU will cease manufacturing at its facility in Montreal, Canada, resulting in the production suspension of its commercial air transport simulators. |
● | Industrial has been significantly impacted by lower demand in certain markets that it serves and has experienced temporary manufacturing facility closures throughout the world, as well as employee furloughs. In the latter half of the second quarter, substantially all of its facilities reopened and employees returned to work. The TSV business also initiated headcount reductions, in part, related to its ground support equipment business, which has been severely impacted by the reduction in global air travel as a result of the pandemic. |
● | The Finance segment continues to work with customers impacted by the pandemic to provide temporary payment relief as discussed in Note 3 to the consolidated financial statements. |
During the second quarter, we generated $242 million of net cash from operating activities. At the end of the second quarter, we have $2.3 billion in cash and equivalents and a $1.0 billion credit facility which remains undrawn. We strengthened our cash position in the first quarter by issuing $650 million in senior debt and by borrowing $500 million under a new 364-Day Term Loan Credit Agreement. We also suspended share repurchases beginning in the first quarter. During the second quarter, we continued certain measures taken in the first quarter to reduce costs and conserve cash, including employee furloughs at many of our commercial businesses and at corporate headquarters, reducing capital expenditures and delaying certain research and development projects. In addition, we initiated the restructuring plan as discussed above to further reduce costs and preserve cash. While we expect the impacts of COVID-19 to continue to have an adverse effect on our business, we cannot reasonably estimate the length or severity of this pandemic, or the extent to which the disruption may impact our consolidated financial position, results of operations and cash flows in 2020 and beyond.
20
We reviewed our assets that are subject to impairment in light of the pandemic, resulting in charges in the first quarter that are discussed in the Special Charges section on page 22. While we do not currently anticipate any material impairments on our other assets as a result of the pandemic, as discussed in the Critical Accounting Estimates – Goodwill section on page 31, future changes in revenue expectations, earnings and cash flows related to intangible assets, goodwill and other long-lived assets below current projections could cause these assets to be impaired. There are many uncertainties regarding the pandemic, and we are closely monitoring the impact of the pandemic on all aspects of our business, including how it will impact our customers, employees, suppliers, vendors, business partners and distribution channels. See Item 1A. Risk Factors on page 33 for additional risks and uncertainties related to the pandemic’s impact on our business. The ultimate extent of the effects of the pandemic on the company is uncertain and will depend on future developments, and such effects could exist for an extended period of time, even after the pandemic ends.
Consolidated Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| Three Months Ended | | Six Months Ended | | ||||||||||||||||||||||||||||
| June 29, | June 30, | % | June 29, | June 30, | % | July 4, | June 29, |
| % | July 4, | June 29, |
| % | ||||||||||||||||||||||
(Dollars in millions) | 2019 | 2018 | Change | 2019 | 2018 | Change | 2020 | 2019 | | Change | 2020 | 2019 | | Change | ||||||||||||||||||||||
Revenues | $ | 3,227 | $ | 3,726 | (13) | % | $ | 6,336 | $ | 7,022 | (10) | % | $ | 2,472 | $ | 3,227 | | | (23) | % | $ | 5,249 | $ | 6,336 | | | (17) | % | ||||||||
Cost of sales |
| 2,641 |
| 3,073 | (14) | % |
| 5,218 |
| 5,802 | (10) | % |
| 2,251 |
| 2,641 | | | (15) | % |
| 4,638 |
| 5,218 | | | (11) | % | ||||||||
Selling and administrative expense |
| 292 |
| 370 | (21) | % |
| 599 |
| 697 | (14) | % |
| 239 |
| 292 | | | (18) | % |
| 502 |
| 599 | | | (16) | % | ||||||||
Gross margin percentage of Manufacturing revenues |
| 17.8 | % |
| 17.1 | % |
| |
| 17.2 | % |
| 17.0 | % |
| | ||||||||||||||||||||
Gross margin as a percentage of Manufacturing revenues |
| 8.4 | % |
| 17.8 | % | | |
| |
| 11.1 | % |
| 17.2 | % | | |
| |
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 2023 to 24.28.
Revenues
Revenues decreased $499$755 million, 13%23%, in the second quarter of 2019,2020, compared with the second quarter of 2018.2019. The revenue decrease included the following factors:
● | Lower Industrial revenues of |
● | Lower Textron Aviation revenues of |
● |
● |
Revenues decreased $686 million, 10%, in the first half of 2019, compared with the first half of 2018. The revenue decrease included the following factors:
Revenues decreased $1.1 billion, 17%, in the first half of 2020, compared with the first half of 2019. The revenue decrease included the following factors:
● | Lower Textron Aviation revenues of |
● | Lower Industrial revenues of $619 million, largely due to lower volume and mix of |
● | Higher Bell revenues of $135 million, reflecting higher military revenues of $232 million, partially offset by |
● | Higher Textron Systems revenues of $39 million, primarily due to higher volume of $48 million in the Unmanned Systems product line, partially offset by lower volume of $17 million in the Marine and Land Systems product line. |
21
Cost of Sales and Selling and Administrative Expense
Cost of sales decreased $432$390 million, 14%15%, and $584$580 million, 10%11%, in the second quarter and first half of 2019,2020, respectively, compared with the corresponding periods in 2018,2019, largely resulting fromdue to lower net volume and mix described aboveabove. The decreases in cost of sales were partially offset by idle facility costs of $61 million and $86 million recognized in the dispositionsecond quarter and first half of 2020, respectively, reflecting unfavorable absorption of manufacturing costs attributable to abnormally low production levels resulting from the Toolspandemic and Test Equipment product line.temporary manufacturing facility closures. In addition, both periods include a $55 million inventory charge related to the TRU business discussed below in the Special Charges section. Gross margin as a percentage of Manufacturing revenues increased 70 basis points and 20decreased 940 basis points in the second quarter of 2020 and 610 basis points in the first half of 2019, respectively. The gross margin percentage increase in the second quarter of 2019 was2020, primarily due to improved marginsthe impact of lower volume and mix at the Textron SystemsAviation and Industrial segments, idle facility costs, largely at the Textron Aviation segments, largely due to favorable performance as discussed insegment, and the Segment Analysis below.impact of the TRU inventory charge.
Selling and administrative expense decreased $78$53 million, 21%18%, and $98$97 million, 14%16%, in the second quarter and first half of 2019,2020, respectively, compared with the corresponding periods of 2018, reflectingin 2019, primarily due to cost reduction activities at the impact from the disposition of the ToolsTextron Aviation and Test Equipment product line.Industrial segments. The decrease in the second quarterfirst half of 2020, compared with the first half of 2019, also included lower share-based compensation expense.
Special Charges
Special charges recorded in the second quarter and first half of 2020 by segment and type of cost are presented in the table below. There were no special charges recorded in the first half of 2019.
| | | | | | | | |
| | | Contract | | | | | |
| Severance | Terminations | Asset |
| | |||
(In millions) | Costs | and Other | Impairments | Total | ||||
Three months ended July 4, 2020 | |
| |
| |
| |
|
Textron Systems | $ | 14 | $ | 12 | $ | 14 | $ | 40 |
Textron Aviation |
| 27 |
| — |
| 1 |
| 28 |
Industrial |
| 8 |
| — |
| — |
| 8 |
Corporate |
| 2 |
| — |
| — |
| 2 |
Total special charges | $ | 51 | $ | 12 | $ | 15 | $ | 78 |
Six months ended July 4, 2020 |
|
|
|
|
|
|
|
|
Textron Systems | $ | 14 | $ | 12 | $ | 14 | $ | 40 |
Textron Aviation |
| 27 |
| — |
| 33 |
| 60 |
Industrial |
| 8 |
| — |
| 7 |
| 15 |
Corporate |
| 2 |
| — |
| — |
| 2 |
Total special charges | $ | 51 | $ | 12 | $ | 54 | $ | 117 |
2020 COVID-19 Restructuring Plan
In the second quarter of 2020, we initiated a restructuring plan to reduce operating expenses through headcount reductions, facility consolidations and other actions in response to the economic challenges and uncertainty resulting from the COVID-19 pandemic. The total pre-tax cost of this plan is expected to be in the range of $110 million to $130 million, of which $78 million was recorded in the second quarter of 2020. We anticipate that this plan will be substantially completed by the end of 2020. The plan primarily impacts the TRU business within the Textron Systems segment, the Textron Aviation segment and the TSV business within the Industrial segment, and will result in the elimination of up to approximately 1,950 positions, representing 6% of our workforce. At TRU, there has been a substantial decline in demand and order cancellations for flight simulators in light of the expected long-term impact of the pandemic on the commercial air transportation business. Accordingly, we will cease manufacturing at TRU’s facility in Montreal, Canada, resulting in a production suspension of its commercial air transport simulators, along with workforce reductions, contract terminations, facility closures and asset impairments. As a result of current market conditions and the cessation of manufacturing at this facility, we incurred an inventory valuation charge of $55 million, which was recorded in Cost of Sales, to write-down TRU’s inventory to its net realizable value.
First Quarter 2020 Asset Impairment Charges
In the first quarter of 2020, we recognized special charges of $39 million of intangible asset impairment charges at the Textron Aviation and Industrial segments. Due to the impact of the COVID-19 pandemic, we experienced decreased demand for our products and services as our customers delayed or ceased orders due to the environment of economic uncertainty. In light of these conditions, Textron Aviation had temporarily shut down most aircraft production, including the King Air turboprop and Beechcraft piston product lines, and had instituted employee furloughs. Based on these events, we performed an interim impairment test of the indefinite-lived Beechcraft and King Air trade name intangible assets at April 4, 2020. Fair value of these assets was determined utilizing the relief of royalty method assuming an increase in the discount rate based on current market data to 9.7% and revised expectations of future revenues for the products and services associated with the tradenames. This analysis resulted in an impairment
22
charge of $32 million. At July 4, 2020, these intangible assets totaled $169 million. In the Industrial segment, we fully impaired the Arctic Cat trade name intangible asset within the Specialized Vehicles product line and recorded a $7 million impairment charge.
Income Taxes
Our effective tax rate for the second quarter and first half of 2020 was (22.0)% and (14.3)%, respectively, compared to the statutory rate of (21)%. In the second quarter and first half of 2020, we incurred special charges and an inventory charge in a non-U.S. jurisdiction where tax benefits cannot be realized, which were partially offset by a $14 million benefit recognized upon the release of a valuation allowance in a non-U.S. jurisdiction. In the first half of 2020, these items had a more significant impact on the effective tax rate due to the lower loss before income taxes for the period.
Our effective tax rate for the second quarter and first half of 2019 was 22.2% and 19.3%, respectively. In the first half of 2019, the effective tax rate was lower than the U.S. federal statutory tax rate of 21%, primarily due to a $12 million benefit recognized for additional research credits related to prior years.
19
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.
Backlog
Our backlog is summarized below:
| | | | | | | | |
| June 29, | December 29, | July 4, | January 4, | ||||
(In millions) | 2019 | 2018 | 2020 | 2020 | ||||
Bell | $ | 6,007 | $ | 5,837 | $ | 5,788 | $ | 6,902 |
Textron Aviation |
| 1,885 |
| 1,791 |
| 1,413 |
| 1,714 |
Textron Systems |
| 1,365 |
| 1,469 |
| 1,876 |
| 1,211 |
Total backlog | $ | 9,257 | $ | 9,097 | $ | 9,077 | $ | 9,827 |
Bell’s backlog decreased $1.1 billion, 16%, primarily as a result of revenues recognized on our U.S. Government contracts in excess of new contracts received. Backlog at Textron Aviation decreased $301 million, 18%, primarily due to a fractional jet customer that reduced orders in the first quarter based on its revised demand outlook as a result of the pandemic. Textron Systems’ backlog increased $665 million, 55%, primarily due to new contracts received in excess of revenues recognized in the Marine and Land Systems and Unmanned Systems product lines.
Segment Analysis
We operate in, and report financial information for, the following five business segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses, gains/losses on major business dispositions, special charges and special charges.an inventory charge related to the 2020 COVID-19 restructuring plan, as discussed in the Special Charges section on page 22. The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense. Operating expenses for the Manufacturing segments include cost of sales, selling and administrative expense and other non-service components of net periodic benefit cost/(credit), and exclude certain corporate expenses and special charges.
In our discussion of comparative results for the Manufacturing group, changes in revenues and segment profit typically are expressed for our commercial businessbusinesses typically are expressed in terms of volume and mix, pricing, foreign exchange, acquisitions and dispositions, while changes in segment profit may be expressed in terms of volume and mix, inflation and cost performance. For revenues, volume and mix represents changes in revenues from increases or decreases in the number of units delivered or services provided and the composition of products and/or services sold. For segment profit, volume and mix represents a change due to the number of units delivered or services provided and the composition of products and/or services sold at different profit margins. Pricing represents changes in unit pricing. Foreign exchange is the change resulting from translating foreign-denominated amounts into U.S. dollars at exchange rates that are different from the prior period. Revenues generated by acquired businesses are reflected in Acquisitions for a twelve-month period, while reductions in revenues and segment profit from the sale of businesses are reflected as Dispositions. For segment profit, volume and mix represents a change due to the number of units delivered or services provided and the composition of products and/or services sold at different profit margins. Inflation represents higher material, wages, benefits, pension service cost or other costs. Performance reflects an increase or decrease in research and development, depreciation, selling and administrative costs, warranty, product liability, quality/scrap, labor efficiency, overhead, non-service pension cost/(credit), product line profitability, start-up, ramp up and cost-reduction initiatives or other manufacturing inputs.
Approximately 24% of our 20182019 revenues were derived from contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program. For our segments that contract with the U.S. Government, changes in revenues related to these contracts are expressed in terms of volume. Revenues for our U.S. Government contracts are primarily recognized as costs are incurred. Changes in segment profit for these contracts are typically expressed in terms of volume and mix and performance; these include cumulative catch-up adjustments associated with a) revisions to the transaction price that may reflect contract modifications or changes in assumptions related to award fees and other variable consideration or b) changes in the total estimated costs at completion due to improved or deteriorated operating performance.
Textron Aviation
| | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| ||||||||
| June 29, | June 30, | June 29, | June 30, | ||||||||
(Dollars in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||
Revenues: | |
|
| |
| | |
|
| |
| |
Aircraft | $ | 733 | $ | 877 | $ | 1,499 | $ | 1,511 | ||||
Aftermarket parts and services |
| 390 |
| 399 |
| 758 |
| 775 | ||||
Total revenues |
| 1,123 |
| 1,276 |
| 2,257 |
| 2,286 | ||||
Operating expenses |
| 1,018 |
| 1,172 |
| 2,046 |
| 2,110 | ||||
Segment profit |
| 105 |
| 104 |
| 211 |
| 176 | ||||
Profit margin |
| 9.4 | % |
| 8.2 | % |
| 9.3 | % |
| 7.7 | % |
2023
Textron Aviation
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended | | ||||||||||||||||
| July 4, | June 29, | | % | July 4, | June 29, | | | % | | ||||||||||
(Dollars in millions) | 2020 | 2019 | | Change | 2020 | 2019 | | Change | ||||||||||||
Revenues: | |
|
| |
| | | | | | |
|
| |
| | | | | |
Aircraft | $ | 478 | $ | 733 | | | (35) | % | $ | 993 | $ | 1,499 | | | (34) | % | ||||
Aftermarket parts and services |
| 269 |
| 390 | | | (31) | % |
| 626 |
| 758 | | | (17) | % | ||||
Total revenues |
| 747 |
| 1,123 | | | (33) | % |
| 1,619 |
| 2,257 | | | (28) | % | ||||
Operating expenses |
| 813 |
| 1,018 | | | (20) | % |
| 1,682 |
| 2,046 | | | (18) | % | ||||
Segment profit (loss) |
| (66) |
| 105 | | | (163) | % |
| (63) |
| 211 | | | (130) | % | ||||
Profit margin |
| (8.8) | % |
| 9.4 | % | | | | |
| (3.9) | % |
| 9.3 | % | | | | |
Textron Aviation Revenues and Operating Expenses
The following factors contributed to the change in Textron Aviation’s revenues for the periods:
| | | | | | | | |
| Q2 2019 | YTD 2019 | Q2 2020 | YTD 2020 | ||||
| versus | versus | versus | |||||
(In millions) | Q2 2018 | YTD 2018 | Q2 2019 | YTD 2019 | ||||
Volume and mix | $ | (166) | $ | (48) | $ | (373) | $ | (633) |
Pricing |
| 13 |
| 19 |
| (3) |
| (5) |
Total change | $ | (153) | $ | (29) | $ | (376) | $ | (638) |
Textron Aviation’s revenues decreased $153$376 million, 12%33%, in the second quarter of 2019,2020, compared with the second quarter of 2018, primarily2019, largely due to lower Citation jet volume of $178 million, reflecting a decline in demand related to the pandemic and mixdelays in the acceptance of $166aircraft related to COVID-19 travel restrictions, and lower aftermarket volume of $120 million, largelyreflecting lower aircraft utilization resulting from the result of lower commercial turboprop and defense volume.pandemic. We delivered 23 Citation jets and 15 commercial turboprops in the second quarter of 2020, compared with 46 Citation jets and 34 commercial turboprops in the second quarter of 2019, compared with 48 Citation jets and 47 commercial turboprops in the second quarter of 2018.2019.
Textron Aviation’s revenues decreased $29$638 million, 28%, in the first half of 2019,2020, compared with the first half of 2018, primarily2019, largely due to lower volume and mix of $48 million, partially offset by favorable pricing of $19 million. Volume and mix included lower defense and aftermarket volume of $80 million, partially offset by higher Citation jet volume of $65 million.$332 million and lower commercial turboprop volume of $147 million, reflecting a decline in demand related to the pandemic and delays in the acceptance of aircraft related to COVID-19 travel restrictions, and from lower aftermarket volume of $132 million, reflecting lower aircraft utilization resulting from the pandemic. We delivered 46 Citation jets and 31 commercial turboprops in the first half of 2020, compared with 90 Citation jets and 78 commercial turboprops in the first half of 2019, compared with 84 Citation jets and 76 commercial turboprops in the first half of 2018.2019.
Textron Aviation’s operating expenses decreased $154$205 million, 13%20%, and $64$364 million, 3%18% in the second quarter and first half of 2019,2020, respectively, compared with the corresponding periods of 2018,2019, largely due to the lower volume and mix described aboveabove. The decreases in operating expenses were partially offset by idle facility costs of $53 million and improved$65 million recognized in the second quarter and first half of 2020, respectively, reflecting unfavorable absorption of manufacturing performance.costs attributable to abnormally low production levels resulting from the pandemic and temporary manufacturing facility closures. We expect to continue to experience abnormally low production levels through the remainder of the year resulting in additional idle facility costs that will be expensed as incurred.
Textron Aviation Segment Profit
The following factors contributed to the change in Textron Aviation’s segment profit for the periods:
| | | | | | | | |
| Q2 2019 | YTD 2019 | Q2 2020 | YTD 2020 | ||||
| versus | versus | versus | |||||
(In millions) | Q2 2018 | YTD 2018 | Q2 2019 | YTD 2019 | ||||
Volume and mix | $ | (133) | $ | (205) | ||||
Performance | $ | 34 | $ | 49 |
| (27) |
| (50) |
Volume and mix |
| (36) |
| (15) | ||||
Pricing, net of inflation |
| 3 |
| 1 | ||||
Inflation and pricing |
| (11) |
| (19) | ||||
Total change | $ | 1 | $ | 35 | $ | (171) | $ | (274) |
Segment profit at Textron Aviation was largely unchangeddecreased $171 million and $274 million in the second quarter and first half of 2019,2020, respectively, compared with the second quartercorresponding periods of 2018, as a favorable2019, primarily due to the impact of $34 million, reflecting improved manufacturing performance, was offset by thefrom lower volume and mix described above.
Inabove and an unfavorable impact from performance of $27 million and $50 million, respectively. Performance for the second quarter and first half of 2019, Textron Aviation’s segment profit increased $352020, compared to the corresponding periods, included $53 million 20%, compared with the first halfand $65 million of 2018, primarily due toidle facility costs, respectively, described above, partially offset by a favorable impact from cost reduction activities including employee furloughs and other actions.
24
Bell
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| Three Months Ended |
| Six Months Ended |
| Three Months Ended | | Six Months Ended |
| | | | |||||||||||||||||||||
| June 29, | June 30, | June 29, | June 30, | July 4, | June 29, |
|
| | | July 4, | June 29, |
|
| | | ||||||||||||||||
(Dollars in millions) | 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | | % Change | 2020 | 2019 | | % Change | ||||||||||||||||||||
Revenues: |
| | |
| |
|
| | |
| |
|
| | |
| |
| | | | |
| | |
| |
| | | | |
Military aircraft and support programs | $ | 482 | $ | 533 | $ | 990 | $ | 1,020 | $ | 602 | $ | 482 | | | 25 | % | $ | 1,222 | $ | 990 | | | 23 | % | ||||||||
Commercial helicopters, parts and services |
| 289 |
| 298 |
| 520 |
| 563 |
| 220 |
| 289 | | | (24) | % |
| 423 |
| 520 | | | (19) | % | ||||||||
Total revenues |
| 771 |
| 831 |
| 1,510 |
| 1,583 |
| 822 |
| 771 | | | 7 | % |
| 1,645 |
| 1,510 | | | 9 | % | ||||||||
Operating expenses |
| 668 |
| 714 |
| 1,303 |
| 1,379 |
| 704 |
| 668 | | | 5 | % |
| 1,412 |
| 1,303 | | | 8 | % | ||||||||
Segment profit |
| 103 |
| 117 |
| 207 |
| 204 |
| 118 |
| 103 | | | 15 | % |
| 233 |
| 207 | | | 13 | % | ||||||||
Profit margin |
| 13.4 | % |
| 14.1 | % |
| 13.7 | % |
| 12.9 | % |
| 14.4 | % |
| 13.4 | % | | | | |
| 14.2 | % |
| 13.7 | % | | | | |
Bell’s major U.S. Government programs currentlyat this time are the V-22 tiltrotor aircraft and the H-1 helicopter platforms, which are both in the production and support stage and represent a significant portion of Bell’s revenues from the U.S. Government.
21
Bell Revenues and Operating Expenses
The following factors contributed to the change in Bell’s revenues for the periods:
| | | | | | | | |
| Q2 2019 | YTD 2019 | Q2 2020 | YTD 2020 | ||||
| versus | versus | versus | |||||
(In millions) | Q2 2018 | YTD 2018 | Q2 2019 | YTD 2019 | ||||
Volume and mix | $ | (65) | $ | (81) | $ | 47 | $ | 127 |
Other |
| 5 |
| 8 |
| 4 |
| 8 |
Total change | $ | (60) | $ | (73) | $ | 51 | $ | 135 |
Bell’s revenues decreased $60increased $51 million, 7%, in the second quarter of 2019,2020, compared with the second quarter of 2018, primarily due to2019, as higher military revenues of $120 million were partially offset by lower military volume.commercial revenues. We delivered 27 commercial helicopters in the second quarter of 2020, compared with 53 commercial helicopters in the second quarter of 2019, compared with 57 commercial helicopters2019.
Bell’s revenues increased $135 million, 9%, in the second quarter of 2018.
In the first half of 2019, Bell’s revenues decreased $73 million, 5%,2020, compared with the first half of 2018, reflecting2019, as higher military revenues of $232 million were partially offset by lower commercial revenuesrevenues. We delivered 42 commercial helicopters in the first half of $43 million, largely due to lower aircraft deliveries, and lower military volume. We delivered2020, compared with 83 commercial helicopters in the first half of 2019, compared with 103 commercial helicopters in the first half of 2018.2019.
Bell’s operating expenses decreased $46increased $36 million, 6%5%, and $76$109 million, 6%8% in the second quarter and first half of 2019,2020, respectively, compared with the corresponding periods of 2018,2019, primarily due to the lowerhigher net volume and mix described above and the improved commercial performance described below.above.
Bell Segment Profit
The following factors contributed to the change in Bell’s segment profit for the periods:
| | | | | | | | |
| Q2 2019 | YTD 2019 | Q2 2020 | YTD 2020 | ||||
| versus | versus | versus | |||||
(In millions) | Q2 2018 | YTD 2018 | Q2 2019 | YTD 2019 | ||||
Volume and mix | $ | 22 | $ | 41 | ||||
Performance and other | $ | 8 | $ | 35 |
| (7) |
| (15) |
Volume and mix |
| (22) |
| (32) | ||||
Total change | $ | (14) | $ | 3 | $ | 15 | $ | 26 |
Bell’s segment profit decreased $14increased $15 million, 12%15%, and $26 million, 13%, in the second quarter and first half of 2019,2020, compared with the second quartercorresponding periods of 2018,2019, primarily due to the impact of the lowerhigher volume and mix described above.above, partially offset by an unfavorable impact from performance and other of $7 million and $15 million, respectively. Performance and other of $8 million reflected favorable commercial performance, which was partially offset by lower net favorable program adjustments.
Inin the first half of 2019, Bell’s segment profit increased $3 million,2020, compared with the first half of 2018, as2019, included $31 million in lower net favorable performance and other of $35 million, primarily the result of commercial performance, wasprogram adjustments, largely offset by the impactlower research and development costs.
25
Textron Systems
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| Six Months Ended |
| Three Months Ended | | Six Months Ended | | ||||||||||||||||||||||||
| June 29, | June 30, | June 29, | June 30, | July 4, | June 29, |
| % | July 4, | June 29, |
| % | ||||||||||||||||||||
(Dollars in millions) | 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | | Change | 2020 | 2019 | | Change | ||||||||||||||||||||
Revenues | $ | 308 | $ | 380 | $ | 615 | $ | 767 | $ | 326 | $ | 308 | | | 6 | % | $ | 654 | $ | 615 | | | 6 | % | ||||||||
Operating expenses |
| 259 |
| 340 |
| 538 |
| 677 |
| 289 |
| 259 | | | 12 | % |
| 591 |
| 538 | | | 10 | % | ||||||||
Segment profit |
| 49 |
| 40 |
| 77 |
| 90 |
| 37 |
| 49 | | | (24) | % |
| 63 |
| 77 | | | (18) | % | ||||||||
Profit margin |
| 15.9 | % |
| 10.5 | % |
| 12.5 | % |
| 11.7 | % |
| 11.3 | % |
| 15.9 | % | | | | |
| 9.6 | % |
| 12.5 | % | | | | |
Textron Systems Revenues and Operating Expenses
The following factors contributed to the change in Textron Systems’ revenues for the periods:
| | | | | | | | |
| Q2 2019 | YTD 2019 | Q2 2020 | YTD 2020 | ||||
| versus | versus | versus | |||||
(In millions) | Q2 2018 | YTD 2018 | Q2 2019 | YTD 2019 | ||||
Volume | $ | (73) | $ | (154) | $ | 17 | $ | 37 |
Other |
| 1 |
| 2 |
| 1 |
| 2 |
Total change | $ | (72) | $ | (152) | $ | 18 | $ | 39 |
22
Revenues at Textron Systems decreased $72increased $18 million, 19%6%, in the second quarter of 2019, compared with the second quarter of 2018, largely due to lower volume of $38 million in the Simulation, Training and other product line, principally due to lower deliveries in the TRU Simulation + Training business, and lower volume of $26 million in the Unmanned Systems product line.
In the first half of 2019, revenues at Textron Systems decreased $152 million, 20%, compared with the first half of 2018, largely due to lower volume of $62 million in the Unmanned Systems product line, $53 million in the Marine and Land Systems product line, reflecting lower Tactical Armoured Patrol Vehicle program deliveries, and $39 million, in the Simulation, Training and other product line, principally in the TRU Simulation + Training business.
Textron Systems’ operating expenses decreased $81 million, 24%, and $139 million, 21%6%, in the second quarter and first half of 2019,2020, respectively, compared with the corresponding periods of 2018,2019, primarily due to higher volume of $34 million and $48 million, respectively, in the Unmanned Systems product line, partially offset by lower volume of $17 million and $17 million, respectively, in the Marine and Land Systems product line.
Textron Systems’ operating expenses increased $30 million, 12%, and $53 million, 10%, in the second quarter and first half of 2020, respectively, compared with the corresponding periods of 2019, primarily due to higher net volume described above and the impact of an $18 million gain discussed below.recognized in the second quarter of 2019 related to our contribution of assets to a training business formed with FlightSaftey International, Inc.
Textron Systems Segment Profit
The following factors contributed to the change in Textron Systems’ segment profit for the periods:
| | | | | | | | |
| Q2 2019 | YTD 2019 | Q2 2020 | YTD 2020 | ||||
| versus | versus | versus | |||||
(In millions) | Q2 2018 | YTD 2018 | Q2 2019 | YTD 2019 | ||||
Performance and other | $ | (18) | $ | (31) | ||||
Volume and mix | $ | (2) | $ | (13) |
| 6 |
| 17 |
Performance and other |
| 11 |
| — | ||||
Total change | $ | 9 | $ | (13) | $ | (12) | $ | (14) |
Textron Systems’ segment profit increased $9decreased $12 million, 23%24%, and $14 million, 18%, in the second quarter and first half of 2019,2020, respectively, compared with the second quartercorresponding periods of 2018,2019, primarily due to an $11 millionunfavorable impact from performance and other reflecting anof $18 million and $31 million, respectively, which included the impact from a gain of $18 million recognized in the second quarter of 2019, related to our contribution of assets to a new training business we formed with FlightSafety International Inc., which is discussed in Note 5 to the Consolidated Financial Statements.
Inpartially offset by higher volume and mix described above. Performance and other for the first half of 2019, Textron Systems’ segment profit decreased $13 million, 14%,2020, compared with the first half of 2018, reflecting2019, also included unfavorable performance in the impact from the lower volume described above. Performance and other included the $18 million gain discussed above and lower net favorable program adjustments.TRU business.
26
Industrial
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| Six Months Ended |
| Three Months Ended | | Six Months Ended | | ||||||||||||||||||||||||
| June 29, | June 30, | June 29, | June 30, | July 4, | June 29, |
| % | July 4, | June 29, |
| % | ||||||||||||||||||||
(Dollars in millions) | 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | | Change | 2020 | 2019 | | Change | ||||||||||||||||||||
Revenues: | |
|
| |
| | |
|
| |
| | |
|
| |
| | | | | | |
|
| |
| | | | | |
Fuel systems and functional components | $ | 592 | $ | 627 | $ | 1,186 | $ | 1,282 | $ | 271 | $ | 592 | | | (54) | % | $ | 736 | $ | 1,186 | | | (38) | % | ||||||||
Specialized vehicles |
| 417 |
| 475 |
| 735 |
| 823 |
| 291 |
| 417 | | | (30) | % |
| 566 |
| 735 | | | (23) | % | ||||||||
Tools and test equipment |
| — |
| 120 |
| — |
| 248 | ||||||||||||||||||||||||
Total revenues |
| 1,009 |
| 1,222 |
| 1,921 |
| 2,353 |
| 562 |
| 1,009 | | | (44) | % |
| 1,302 |
| 1,921 | | | (32) | % | ||||||||
Operating expenses |
| 933 |
| 1,142 |
| 1,795 |
| 2,209 |
| 573 |
| 933 | | | (39) | % |
| 1,304 |
| 1,795 | | | (27) | % | ||||||||
Segment profit |
| 76 |
| 80 |
| 126 |
| 144 | ||||||||||||||||||||||||
Segment profit (loss) |
| (11) |
| 76 | | | (114) | % |
| (2) |
| 126 | | | (102) | % | ||||||||||||||||
Profit margin |
| 7.5 | % |
| 6.6 | % |
| 6.6 | % |
| 6.1 | % |
| (2.0) | % |
| 7.5 | % | | | | |
| (0.2) | % |
| 6.6 | % | | | | |
Industrial Revenues and Operating Expenses
The following factors contributed to the change in Industrial’s revenues for the periods:
| | | | | | | | |
| Q2 2019 | YTD 2019 | Q2 2020 | YTD 2020 | ||||
| versus | versus | versus | |||||
(In millions) | Q2 2018 | YTD 2018 | Q2 2019 | YTD 2019 | ||||
Disposition | $ | (120) | $ | (248) | ||||
Volume and mix |
| (80) |
| (152) | $ | (445) | $ | (609) |
Foreign exchange |
| (18) |
| (43) |
| (5) |
| (14) |
Other |
| 5 |
| 11 |
| 3 |
| 4 |
Total change | $ | (213) | $ | (432) | $ | (447) | $ | (619) |
Industrial segment revenues decreased $213$447 million, 17%44%, and $619 million, 32% in the second quarter and first half of 2019,2020, compared with the second quartercorresponding periods of 2018,2019, largely due to the impact of $120 million from the disposition of the Tools and Test Equipment product line and lower volume and mix, primarily in the Fuel Systems and Functional Components product line related to manufacturing facility closures in the first half of $80 million, primarily2020 as a result of the pandemic. As our OEM customers reopened and resumed production, all of our manufacturing facilities had reopened by the end of the second quarter. Lower volume and mix in the Specialized Vehicles product line.
23
In the first half of 2019, Industrial segment revenues decreased $432 million, 18%, compared with the first half of 2018, largely due to the impact of $248 million from the disposition of the Tools and Test Equipment product line lower volume and mix of $152 million at the remaining product lines and an unfavorable impact of $43 million from foreign exchange rate fluctuations,was primarily related to reduced demand and temporary manufacturing facility closures as the Euro.consumer and commercial markets in which it operates have been impacted by the pandemic.
Operating expenses for the Industrial segment decreased $209$360 million, 18%39%, and $414$491 million, 19%27%, in the second quarter and first half of 2019,2020, respectively, compared with the corresponding periods of 2018,2019, primarily due to lower operating expenses from the disposition of our Tools and Test Equipment product line and the lower volume and mix described above.
Industrial Segment Profit
The following factors contributed to the change in Industrial’s segment profit for the periods:
| | | | | | | | |
| Q2 2019 | YTD 2019 | Q2 2020 | YTD 2020 | ||||
| versus | versus | versus | |||||
(In millions) | Q2 2018 | YTD 2018 | Q2 2019 | YTD 2019 | ||||
Performance and other | $ | 31 | $ | 46 | ||||
Volume and mix |
| (26) |
| (36) | $ | (118) | $ | (163) |
Disposition |
| (7) |
| (22) | ||||
Foreign exchange |
| (2) |
| (6) | ||||
Performance | | 28 | | 29 | ||||
Pricing and inflation |
| 3 |
| 6 | ||||
Total change | $ | (4) | $ | (18) | $ | (87) | $ | (128) |
Segment profit for the Industrial segment decreased $4$87 million 5%, and $18$128 million, 13%, in the second quarter and first half of 2019,2020, respectively, compared with the corresponding periods of 2018, primarily due to the impact2019, largely resulting from the lower volume and mix described aboveabove. Performance for the second quarter and first half of $26 million and $36 million, respectively, and2020, compared to the corresponding periods of 2019, included the impact of the disposition of the Tools and Test Equipment product line of $7 million and $22 million, respectively. These decreases werecost reduction activities, partially offset by favorable performance and otheridle facility costs of $31$8 million and $46$21 million respectively, primarily in the Specialized Vehicles product line.
Finance
| | | | | | | | |
| Three Months Ended | Six Months Ended | ||||||
| June 29, | June 30, | June 29, | June 30, | ||||
(In millions) | 2019 | 2018 | 2019 | 2018 | ||||
Revenues | $ | 16 | $ | 17 | $ | 33 | $ | 33 |
Segment profit |
| 6 |
| 5 |
| 12 |
| 11 |
Finance segment revenues and profit were largely unchangedrecognized in the second quarter and first half of 2019,2020, respectively, reflecting unfavorable absorption of manufacturing costs attributable to abnormally low production levels resulting from the pandemic and temporary manufacturing facility closures.
27
Finance
| | | | | | | | |
| Three Months Ended | Six Months Ended | ||||||
| July 4, | June 29, | July 4, | June 29, | ||||
(In millions) | 2020 | 2019 | 2020 | 2019 | ||||
Revenues | $ | 15 | $ | 16 | $ | 29 | $ | 33 |
Segment profit |
| 4 |
| 6 |
| 7 |
| 12 |
Finance segment revenues decreased $1 million and $4 million in the second quarter and first half of 2020, respectively, compared with the corresponding periods of 2018.2019, and segment profit decreased $2 million and $5 million, respectively. The following table reflects information about the Finance segment’s credit performance related to finance receivables.
| | | | | | | | | | | | |
| June 29, | December 29, | July 4, | January 4, | ||||||||
(Dollars in millions) | 2019 | 2018 | 2020 | 2020 | ||||||||
Finance receivables | $ | 802 | $ | 789 | $ | 719 | $ | 707 | ||||
Allowance for credit losses | | 28 | | 25 | ||||||||
Ratio of allowance for credit losses to finance receivables | | 3.89 | % | | 3.54 | % | ||||||
Nonaccrual finance receivables |
| 31 |
| 40 |
| 53 |
| 39 | ||||
Ratio of nonaccrual finance receivables to finance receivables |
| 3.87 | % |
| 5.07 | % |
| 7.37 | % |
| 5.52 | % |
60+ days contractual delinquency | $ | 12 | $ | 14 | $ | 60 | $ | 17 | ||||
60+ days contractual delinquency as a percentage of finance receivables |
| 1.50 | % |
| 1.77 | % |
| 8.34 | % |
| 2.40 | % |
24
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:
| | | | | | | | | | | | |
| June 29, | December 29, | July 4, | January 4, | ||||||||
(Dollars in millions) | 2019 | 2018 | 2020 | 2020 | ||||||||
Manufacturing group | |
|
| |
| | |
|
| |
| |
Cash and equivalents | $ | 775 | $ | 987 | $ | 2,176 | $ | 1,181 | ||||
Debt |
| 3,367 |
| 3,066 |
| 4,062 |
| 3,124 | ||||
Shareholders’ equity |
| 5,336 |
| 5,192 |
| 5,527 |
| 5,518 | ||||
Capital (debt plus shareholders’ equity) |
| 8,703 |
| 8,258 |
| 9,589 |
| 8,642 | ||||
Net debt (net of cash and equivalents) to capital |
| 33 | % |
| 29 | % |
| 25 | % |
| 26 | % |
Debt to capital |
| 39 | % |
| 37 | % |
| 42 | % |
| 36 | % |
Finance group |
|
| |
|
| |
| | |
|
| |
Cash and equivalents | $ | 82 | $ | 120 | $ | 170 | $ | 176 | ||||
Debt |
| 703 |
| 718 |
| 670 |
| 686 |
We believe thatAs discussed in the Recent Developments section on page 20, the COVID-19 pandemic has led to volatility in the capital markets and uncertainty in the economic outlook, in addition to various degrees of disruption in our calculationsoperations due to the unprecedented conditions surrounding the pandemic. In light of debtthese conditions, we have strengthened our cash position by increasing our borrowings as discussed below and have suspended share repurchases. During the second quarter, we continued certain measures taken in the first quarter to reduce costs and conserve cash, including employee furloughs at many of our commercial businesses, reducing capital expenditures and net debtdelaying certain research and development projects. In addition, we initiated a restructuring plan to capital are useful measures as they provide a summary indicationfurther reduce costs and preserve cash. While we expect the impacts of COVID-19 to continue to have an adverse effect on our
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business, we cannot reasonably estimate the levellength or severity of debt financing (i.e., leverage) that isthis pandemic, or the extent to which the disruption may impact our consolidated financial position, results of operations and cash flows in place to support our capital structure, as well as to provide an indication of the capacity to add further leverage.2020 and beyond. 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.the availability of our existing credit facility.
Credit Facilities and Other Sources of Capital
Textron has a senior unsecured revolving credit facility that expires in September 2021 for an aggregate principal amount of $1.0 billion, of which up to $100 million is available for the issuance of letters of credit. We may elect to increase the aggregate amount of commitments under the facility to up to $1.3 billion by designating an additional lender or by an existing lender agreeing to increase its commitment. The facility expires in October 2024, subject to up to two one-year extensions at our option with the consent of lenders representing a majority of the commitments under the facility. At June 29, 2019,July 4, 2020 and January 4, 2020, there were no amounts borrowed against the facility.
On April 1, 2020, we entered into a 364-Day Term Loan Credit Agreement in an aggregate principal amount of $500 million and borrowed the full principal amount available under the agreement. At our current credit ratings, the borrowings accrue interest at a rate equal to the London interbank offered rate, subject to a floor of 0.75%, plus 2.0%, which is an annual interest rate of 2.75% at July 4, 2020. We can pre-pay any amount of the principal balance during the term of the loan; however, we cannot borrow additional principal amounts. The Term Loan Credit Agreement restricts us from incurring additional indebtedness, subject to various exceptions, one of which allows us to borrow under our $1.0 billion revolving credit facility. While this loan is outstanding, we have agreed not to repurchase any of our common stock. The principal amount outstanding, plus accrued and unpaid interest and fees, is due on March 31, 2021.
We also maintain an effective shelf registration statement filed with the Securities and Exchange Commission that allows us to issue an unlimited amount of public debt and other securities. Under this registration statement, in May 2019,On March 17, 2020, we issued $300$650 million of SEC-registered fixed-rate notes due September 2029June 2030 with an annual interest rate of 3.90%3.00%.
In June 2019,
To further enhance our liquidity, in the first quarter of 2020, we amendedborrowed $377 million against the Finance Group’s $150cash surrender value of our corporate-owned life insurance policies, representing the maximum amount available to be borrowed against these policies. At July 4, 2020, there was $362 million fixed-rate loan due August 2019, extending the maturity date to June 2022 with a modified annual interest rate of 2.88%.outstanding borrowings against these insurance policies.
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:
| | | | | | | | |
| Six Months Ended | Six Months Ended | ||||||
| June 29, | June 30, | July 4, | June 29, | ||||
(In millions) | 2019 | 2018 | 2020 | 2019 | ||||
Operating activities | $ | (33) | $ | 415 | $ | (148) | $ | (33) |
Investing activities | | (127) | | (51) | | (85) | | (127) |
Financing activities | | (55) | | (882) | | 1,238 | | (55) |
In the first half of 2019,2020, the net cash used inoutflow from operating activities was $33$148 million, compared with net cash provided by operating activities of $415$33 million in the first half of 2018.2019. The changeincrease in net cash flowsoutflow of $115 million between the periods was largely the result of working capital requirements, which primarily reflected anlower earnings and a $532 million period over period increase of $452 million in net cash used for inventory,to settle accounts payable, principally at the Textron Aviation segment. These changes were partially offset by a $288 million reduction in cash used for inventories, primarily at the Textron Aviation segment, higher customer advances/deposits of $227 million, largely at the Bell segment, and Bell segmentsa $121 million increase in support of future commercial aircraft sales. We expect the working capital increase to reverse during the second half of the year resultingcash received from accounts receivable.
Cash flows used in positive cash flows from operatinginvesting activities for the full year as we deliver higher volumes of commercial aircraft.
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Investing cash flowsprimarily included capital expenditures of $135$96 million and $159$135 million in the first half of 2020 and 2019, respectively. In the first half of 2020, cash flows provided by financing activities included net proceeds of $642 million from the issuance of long-term debt and 2018, respectively,$498 million from borrowings under the 364-Day Term Loan Credit Agreement discussed above. In addition, we received $377 million in proceeds from borrowings against corporate-owned life insurance policies. These cash inflows were partially offset by net proceeds received from corporate-owned life insurance policiesthe repayment of $4$194 million of outstanding debt and $98$54 million respectively.
of cash paid to repurchase an aggregate of 1.3 million shares of our common stock under both a prior 2018 share repurchase plan and a recent repurchase plan as described below. In the first half of 2019, cash flows used in financing activities primarily included $361 million of cash paid to repurchase an aggregate of 7.0 million shares of our outstanding common stock, partially offset by $297 million of net proceeds from the issuance of long-term debt. Cash flows used in financing activities in
On February 25, 2020, our Board of Directors authorized the first halfrepurchase of 2018 primarily included $915 million of cash paidup to repurchase an aggregate of 14.625 million shares of our outstanding common stock. This new plan allows us to opportunistically repurchase shares and to continue our practice of repurchasing shares to offset the impact of dilution from shares issued under compensation and benefit plans. The 2020 plan replaces the prior 2018 share repurchase authorization. We have suspended share repurchases while our 364-Day Term Loan Credit Agreement remains outstanding.
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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:
| | | | | | | | |
| Six Months Ended | Six Months Ended | ||||||
| June 29, | June 30, | July 4, | June 29, | ||||
(In millions) | 2019 | 2018 | 2020 | 2019 | ||||
Operating activities | $ | 15 | $ | 5 | $ | 10 | $ | 15 |
Investing activities |
| 31 |
| 73 |
| 7 |
| 31 |
Financing activities |
| (84) |
| (84) |
| (23) |
| (84) |
The Finance group’s cash flows from investing activities primarily included collections on finance receivables totaling $91$65 million and $112$91 million in the first half of 20192020 and 2018,2019, respectively, partially offset by finance receivable originations of $59 million and $90 million, and $61 million, respectively. Financing activities in bothIn the first half of 2020 and 2019, and 2018 reflected dividend payments of $50 million to the Manufacturing group andfinancing activities included payments on long-term and nonrecourse debt of $35 million $34 million.million, respectively. Financing activities in the first half of 2019 also included a dividend payment of $50 million to the Manufacturing group.
Consolidated Cash Flows
The consolidated cash flows, from continuing operations, after elimination of activity between the borrowing groups, are summarized below:
| | | | | | | | |
| Six Months Ended | Six Months Ended | ||||||
| June 29, | June 30, | July 4, | June 29, | ||||
(In millions) | 2019 | 2018 | 2020 | 2019 | ||||
Operating activities | $ | (60) | $ | 398 | $ | (152) | $ | (60) |
Investing activities |
| (104) |
| (6) |
| (64) |
| (104) |
Financing activities |
| (89) |
| (916) |
| 1,215 |
| (89) |
In the first half of 2019, consolidated2020, the net cash flows used inoutflow from Consolidated operating activities was $60$152 million, compared with net cash provided by operating activities of $398$60 million in the first half of 2018.2019. The change in cash flows between the periods was largely the result of working capital requirements, which primarily included an increase in net cash outflow of $92 million between the periods primarily reflected lower earnings and a $532 million period over period increase in cash used for inventory of $427 million,to settle accounts payable, principally at the Textron Aviation segment. These changes were partially offset by a $261 million reduction in cash used for inventories, primarily at the Textron Aviation segment, higher customer advances/deposits of $227 million, largely at the Bell segment, and Bell segmentsa $121 million increase in support of future commercial aircraft sales.cash received from accounts receivable.
Investing cash
Cash flows used in investing activities primarily included capital expenditures of $135$96 million and $159$135 million in the first half of 20192020 and 2018,2019, respectively, partially offset by net proceeds received from corporate-owned life insurance policies of $4collections on finance receivables totaling $20 million and $98 million, respectively. for both periods.
Cash flows used inprovided by financing activities in the first half of 20192020 primarily included net proceeds of $642 million from the issuance of long-term debt and 2018 included share repurchases$498 million from borrowings under the 364-Day Term Loan Credit Agreement discussed above. In addition, we received $377 million in proceeds from borrowings against corporate-owned life insurance policies. These cash inflows were partially offset by the repayment of $361$229 million of outstanding debt and $915$54 million respectively. Financingof cash flows inpaid to repurchase shares of our outstanding common stock. In the first half of 2019, alsocash flows used in financing activities primarily included $361 million of cash paid to repurchase shares of our outstanding common stock, partially offset by $297 million of proceeds from the issuance of long-term debt.
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Captive Financing and Other Intercompany Transactions
The Finance group provides financing primarily to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters manufactured by our Manufacturing group, otherwise known as captive financing. In the Consolidated Statements of Cash Flows, cash received from customers is reflected as operating activities when received from third parties. However, in the cash flow information provided for the separate borrowing groups, cash flows related to captive financing activities are reflected based on the operations of each group. For example, when product is sold by our Manufacturing group to a customer and is financed by the Finance group, the origination of the finance receivable is recorded within investing activities as a cash outflow in the Finance group’s statement of cash flows. Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the Finance group on the customer’s behalf is recorded within operating cash flows as a cash inflow. Although cash is transferred between the two borrowing groups, there is no cash transaction reported in the consolidated cash flows at the time of the original financing. These captive financing activities, along with all significant intercompany transactions, are reclassified or eliminated from the Consolidated Statements of Cash Flows.
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Reclassification adjustments included in the Consolidated Statements of Cash Flows are summarized below:
| | | | | | | | |
| Six Months Ended | Six Months Ended | ||||||
| June 29, | June 30, | July 4, | June 29, | ||||
(In millions) | 2019 | 2018 | 2020 | 2019 | ||||
Reclassification adjustments from investing activities: | |
| |
| |
| |
|
Finance receivable originations for Manufacturing group inventory sales | $ | (59) | $ | (90) | ||||
Cash received from customers | $ | 71 | $ | 87 |
| 45 |
| 71 |
Finance receivable originations for Manufacturing group inventory sales |
| (90) |
| (61) | ||||
Other |
| 27 |
| 2 |
| — |
| 27 |
Total reclassification adjustments from investing activities |
| 8 |
| 28 |
| (14) |
| 8 |
Reclassification adjustments from financing activities: |
|
|
|
|
|
|
|
|
Dividends received by Manufacturing group from Finance group |
| (50) |
| (50) |
| — |
| (50) |
Total reclassification adjustments to operating activities | $ | (42) | $ | (22) | ||||
Total reclassification adjustments to cash flows from operating activities | $ | (14) | $ | (42) |
Critical Accounting Estimates Update
Our Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements. The accounting estimates that we believe are most critical to the portrayal of our financial condition and results of operations are reported in Item 7 of our Annual Report on Form 10-K for the year ended December 29, 2018.January 4, 2020. The following section provides an update of the year-end disclosure.
Goodwill
In March of 2020, we observed a significant decline in the market valuation of our common shares as the overall stock market declined related to the COVID-19 pandemic. The global pandemic has led to worldwide facility closures, workforce disruptions, supply chain destabilizations, reduced demand for many products and services, volatility in the capital markets and uncertainty in the economic outlook. Despite the significant excess fair value identified in our 2019 impairment assessment, we determined that these factors could indicate that an impairment loss may have occurred. While short-term disruptions may not indicate an impairment, the effects of a prolonged suspension of activities may cause goodwill, intangible and other asset impairments. Accordingly, in the first quarter of 2020, we reviewed our reporting units to determine whether the impacts caused by the pandemic triggered an interim impairment test and identified indicators at three of our reporting units, Textron Aviation, Kautex and Textron Specialized Vehicles. See Note 14 to the consolidated financial statements for a discussion of our review of indefinite-lived intangible assets, which resulted in the impairment of trade names during the first quarter of 2020 related to discrete product lines due to the impact of the pandemic.
For the Textron Aviation and Kautex reporting units, considering the impact of the pandemic on the industries in which they operate and our expectation that it will likely take the economy a period of time to recover, we performed an interim impairment test in the first quarter of 2020. Based on this test, we determined that the fair value of these reporting units continues to exceed the carrying amount and no impairment is required. No impairment indicators were identified during the second quarter of 2020.
For the Textron Specialized Vehicles reporting unit, the consumer and commercial markets in which it operates have been significantly impacted. During the first quarter of 2020, many of the dealers and retail stores that sell its products were closed throughout the U.S. and globally, and there was uncertainty as to when they will reopen. In addition, the severity of the economic impact caused by the pandemic has resulted in a substantial increase in unemployment levels with projections of a severe global recession impacting demand for products produced by this reporting unit. Textron Specialized Vehicles also serves the airline industry, which has been significantly impacted by the travel restrictions caused by the pandemic. We calculated the fair value of Textron Specialized Vehicles using discounted cash flows, assuming a reduction in revenues and profit for the remainder of 2020 and into the next few years and calculated the discount rate based on current market data which resulted in an increase of 60 basis points as compared to the prior year analysis. Based on this analysis, we determined that the fair value of Textron Specialized Vehicles exceeded its carrying amount by 15% and no impairment was required. To assess the sensitivity of this estimate to a change in the discount rate, we increased the rate by an additional 50 basis points and the fair value estimate exceeded the carrying amount by 8%. While there was no indicator of impairment in the second quarter based on our review of the above assumptions compared to actual results and the updated forecast, depending on the timing and continued impact of the pandemic on this unit, it is reasonably possible that it may require another interim impairment test during 2020 that may result in an impairment charge. At the end of the second quarter of 2020, Textron Specialized Vehicles had $363 million in goodwill.
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Revenue Recognition
A substantial portion of our revenues is related to long-term contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program, for the design, development, manufacture or modification of aerospace and defense products as well as related services. Due to the continuous transfer of control to the U.S. Government, we recognize revenue over the time that we perform under the contract. 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.
Changes in our estimate of the total expected cost or in the transaction price for a contract typically impact our profit booking rate. We utilize the cumulative catch-up method of accounting to recognize the impact of these changes on our profit booking rate for a contract. Under this method, the inception-to-date impact of a profit adjustment on a contract is recognized in the period the adjustment is identified. The impact of our cumulative catch-up adjustments on revenues and segment profit recognized in prior periods is presented below:
| | | | | | | | | | | | | | | | |
| Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | ||||||||||||
| June 29, | June 30, | June 29, | June 30, | July 4, | June 29, | July 4, | June 29, | ||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | ||||||||
Gross favorable | $ | 46 | $ | 70 | $ | 99 | $ | 126 | $ | 46 | $ | 46 | $ | 73 | $ | 99 |
Gross unfavorable |
| (19) |
| (6) |
| (41) |
| (22) |
| (29) |
| (19) |
| (54) |
| (41) |
Net adjustments | $ | 27 | $ | 64 | $ | 58 | $ | 104 | $ | 17 | $ | 27 | $ | 19 | $ | 58 |
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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 20182019 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; |
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● | Demand softness or volatility in the markets in which we do business; |
● | Cybersecurity threats, including the potential misappropriation of assets or sensitive information, corruption of data or operational disruption; |
● | Difficulty or unanticipated expenses in connection with integrating acquired businesses; |
● | The risk that acquisitions do not perform as planned, including, for example, the risk that acquired businesses will not achieve revenues and profit projections; |
● | The impact of changes in tax |
● | Risks and uncertainties related to the impact of the COVID-19 pandemic on our business and operations. |
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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 June 29, 2019.July 4, 2020. For discussion of our exposure to market risk, refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk contained in Textron’s 20182019 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 June 29, 2019.July 4, 2020. The evaluation was performed with the participation of senior management of each business segment and key Corporate functions, under the supervision of our Chairman, President and Chief Executive Officer (CEO) and our Executive Vice President and Chief Financial Officer (CFO). Based on this evaluation, the CEO and CFO concluded that our disclosure controls and procedures were operating and effective as of June 29, 2019.July 4, 2020.
There were no changes in our internal control over financial reporting during the fiscal quarter ended June 29, 2019July 4, 2020 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 Proceeds1. Legal Proceedings
The following provides information about our second quarter 2019 repurchases of equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:
| | | | | |
| | | | | Maximum |
| Total | Average Price | Total Number of | Number of Shares | |
| Number of | Paid per Share | Shares Purchased as | that may yet be | |
| Shares | (excluding | part of Publicly | Purchased under | |
Period (shares in thousands) | Purchased * | commissions) | Announced Plan * | the Plan | |
March 31, 2019 – May 4, 2019 | 782 | $ | 57.69 | 782 | 12,528 |
May 5, 2019 – June 1, 2019 | 1,783 |
| 48.85 | 1,783 | 10,745 |
June 2, 2019 – June 29, 2019 | 555 |
| 47.97 | 555 | 10,190 |
Total | 3,120 | $ | 50.91 | 3,120 | |
*On August 22, 2019, a purported shareholder class action lawsuit was filed in the United States District Court in the Southern District of New York against Textron, its Chairman and Chief Executive Officer and its Chief Financial Officer. The suit, filed by Building Trades Pension Fund of Western Pennsylvania, alleges that the defendants violated the federal securities laws by making materially false and misleading statements and concealing material adverse facts related to the Arctic Cat acquisition and integration. The complaint seeks unspecified compensatory damages. On November 12, 2019, the Court appointed IWA Forest Industry Pension Fund ("IWA") as the sole lead plaintiff in the case. On December 24, 2019, IWA filed an Amended Complaint in the now entitled In re Textron Inc. Securities Litigation. On February 14, 2020, IWA filed a Second Amended Complaint, and on March 6, 2020, Textron filed a motion to dismiss the Second Amended Complaint. On July 20, 2020, the Court granted Textron’s motion to dismiss and closed the case.
Item 1A. Risk Factors
In addition to the effects of the COVID-19 pandemic and resulting global disruptions on our business and operations discussed in Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in the risk factors below in this Form 10-Q, additional or unforeseen effects from the COVID-19 pandemic and the global economic disruptions may give rise to or amplify many of the risks discussed in “Part I. Item 1A. Risk Factors” in our 2019 Annual Report on Form 10-K. These shares were purchased pursuantrisk factors do not identify all risks that we face; our operations could also be affected by factors, events, or uncertainties that are not presently known to us or that we currently do not consider to present significant risks to our operations.
Our business is being adversely impacted, and is expected to continue to be adversely impacted, by the coronavirus (COVID-19) pandemic.
As described under Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, our businesses have experienced and continue to experience various degrees of disruption and reduced demand for our products due to the unprecedented conditions surrounding the COVID-19 pandemic. The effects of COVID-19 have included and could continue to include disruption of the operation or temporary closure of certain of our facilities or the facilities of our customers, suppliers or business partners as well as other disruptions in our supply chains. Challenges resulting from the pandemic have impacted, and may continue to impact, the ability of many of our employees to work effectively, including because of illness, quarantines, facility closures, changes in manufacturing processes to accommodate social distancing guidelines, remote working
33
arrangements, or other government-imposed operating restrictions. We have experienced and may continue to experience increased costs as a result of these business and production disruptions. Likewise, we have incurred and may continue to incur additional expenses related to implementing processes and procedures to comply with required operating restrictions and to enhance the safety of our facilities to protect the health of our employees.
Our commercial businesses have been and may continue to be adversely impacted due to a plan authorizinggeneral slowdown in demand for our general aviation products and services, recreational and other specialized vehicles and automotive products. We have experienced a decline in orders for our aviation products and services, and we have also experienced lower deliveries of commercial helicopters and fixed-wing aircraft because of travel restrictions imposed in response to the repurchasepandemic. Economic and other impacts from the pandemic may also result in future weak demand for our aviation and commercial helicopter products and services, the delay or cancellation of upexisting orders by our customers and lower flight hours, and consequently, lower demand for parts and maintenance. In addition, new regulations by U.S. or foreign governments and government agencies addressed to 40 million sharesthe aviation or travel industry could impose additional regulatory, aircraft security, travel restrictions or other requirements or restrictions related to the pandemic that could adversely impact demand for aircraft and rotorcraft or significantly reduce hours flown. As a result, our costs may increase as a result of Textron common stockthe COVID-19 outbreak. These cost increases may not be fully recoverable, negatively impacting our profitability, and may continue even after the business environment has improved.
It is possible that was announcedthe continued spread of COVID-19 and actions taken by various governmental authorities and other third parties in response to the outbreak could also further cause disruption in our supply chain or in the operations of our business partners, impacting their ability to perform their obligations, which could impact our ability to perform our contractual obligations; cause delay by, or limit the ability of, the U.S. Government and other customers to perform, including in making timely payments to us; and cause other unpredictable events. Limitations on April 16, 2018. This plangovernment operations could impact regulatory approvals such as export licenses that are needed for international sales and deliveries. In addition, there may be changes in our U.S. and foreign government customers’ priorities as they confront competing budget priorities and more limited resources. These changes may impact current and future programs, government payments and other practices, procurements and funding decisions.
The outbreak of COVID-19 has no expiration date.resulted in a widespread health crisis that is adversely affecting the economies and financial markets of many countries. The resulting economic downturn, the severity and length of which cannot be predicted, may cause continued reduced demand for our products, delays or cancellations of customer orders, the inability of customers to obtain financing to purchase our products, bankruptcies of our suppliers, customers or other business partners, adverse impact to investment performance of our pension plans and continued volatility in the global capital markets adversely impacting our access to capital. The extent to which the pandemic could impact our business, results of operations, financial condition and liquidity is highly uncertain and also will depend on future developments, most of which are outside our control. Such developments may include the geographic spread and duration of the virus, the severity of the disease, the development of treatments or vaccines, and the effects of actions that have been or may be taken by various governmental authorities and other third parties in response to the outbreak.
If our Finance segment has difficulty collecting on its finance receivables, our financial performance could be adversely affected.
The financial performance of our Finance segment depends on the quality of loans, leases and other assets in its portfolio. Portfolio quality can be adversely affected by several factors, including finance receivable underwriting procedures, collateral value, geographic or industry concentrations, and the effect of general economic conditions such as the recent deterioration of the economy due to the impact from the COVID-19 pandemic. The pandemic has resulted in disruptions in the ability of many of our customers to conduct business effectively because of illness, quarantines, government shut-down orders, facility closures, reduced customer demand or other restrictions. As a result, our Finance segment has modified a significant number of the loans in its portfolio and is continuing to work with other customers on modifications in order to provide temporary payment relief which will delay our ultimate recovery on these assets. In addition, a substantial number of the originations in our finance receivable portfolio are cross-border transactions for aircraft sold outside of the U.S. Cross-border transactions present additional challenges and risks in realizing upon collateral in the event of borrower default, which can result in difficulty or delay in collecting on the related finance receivables. Should current economic conditions persist or worsen, our Finance segment may have difficulty successfully collecting on its finance receivable portfolio, and as a result our cash flow, results of operations and financial condition could be adversely affected.
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Item 6. Exhibits
31.1 |
| Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 | | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 | | |
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32.2 | | |
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101 | | The following materials from Textron Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended |
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104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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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.
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| TEXTRON INC. | ||||
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Date: | July | | /s/ Mark S. Bamford | ||
| Mark S. Bamford | ||||
| Vice President and Corporate Controller | ||||
| (principal accounting officer) |
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