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EX-10.1 - EX-10.1 - TEXTRON INCa15-11861_1ex10d1.htm
EX-31.1 - EX-31.1 - TEXTRON INCa15-11861_1ex31d1.htm

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

 

 

 

 

Form 10-Q

 

 

 

 

 

(Mark One)

 

[ X ]

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

 

 

 

For the quarterly period ended July 4, 2015

 

 

 

OR

 

 

[    ]

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

 

 

For the transition period from            to            .

 

Commission File Number 1-5480

 

 

Textron Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

05-0315468

(State or other jurisdiction of incorporation or organization)

 

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

 

40 Westminster Street, Providence, RI

 

02903

(Address of principal executive offices)

 

(Zip code)

 

(401) 421-2800

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer [  ü  ]

Accelerated filer [      ]

Non-accelerated filer [      ]

Smaller reporting company [      ]

 

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

 

As of July 17, 2015, there were 276,421,869 shares of common stock outstanding.

 



Table of Contents

 

TEXTRON INC.

Index to Form 10-Q

For the Quarterly Period Ended July 4, 2015

 

 

 

 

 Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

Consolidated Statements of Operations (Unaudited)

3  

 

Consolidated Statements of Comprehensive Income (Unaudited)

4  

 

Consolidated Balance Sheets (Unaudited)

5  

 

Consolidated Statements of Cash Flows (Unaudited)

6  

 

Notes to the Consolidated Financial Statements (Unaudited)

 

 

Note 1.

Basis of Presentation

8  

 

Note 2.

Retirement Plans

9  

 

Note 3.

Earnings Per Share

9  

 

Note 4.

Accounts Receivable and Finance Receivables

10  

 

Note 5.

Inventories

12  

 

Note 6.

Accrued Liabilities

12  

 

Note 7.

Derivative Instruments and Fair Value Measurements

12  

 

Note 8.

Accumulated Other Comprehensive Loss and Other Comprehensive Income

14  

 

Note 9.

Commitments and Contingencies

16  

 

Note 10.

Segment Information

16  

 

 

 

Item 2.

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

17  

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

27  

Item 4.

Controls and Procedures

27  

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28  

Item 6.

Exhibits

29  

 

Signatures

29  

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

TEXTRON INC.

Consolidated Statements of Operations (Unaudited)

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

(In millions, except per share amounts)

 

 

July 4,
2015

 

 

June 28,
2014

 

 

July 4,
2015

 

 

June 28,
2014

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing revenues

 

 

$

3,223

 

 

$

3,478

 

 

$

6,274

 

 

$

6,296

 

Finance revenues

 

 

24

 

 

27

 

 

46

 

 

56

 

Total revenues

 

 

3,247

 

 

3,505

 

 

6,320

 

 

6,352

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

2,635

 

 

2,875

 

 

5,144

 

 

5,232

 

Selling and administrative expense

 

 

329

 

 

353

 

 

666

 

 

655

 

Interest expense

 

 

42

 

 

47

 

 

85

 

 

94

 

Acquisition and restructuring costs

 

 

 

 

20

 

 

 

 

36

 

Total costs and expenses

 

 

3,006

 

 

3,295

 

 

5,895

 

 

6,017

 

Income from continuing operations before income taxes

 

 

241

 

 

210

 

 

425

 

 

335

 

Income tax expense

 

 

72

 

 

65

 

 

128

 

 

103

 

Income from continuing operations

 

 

169

 

 

145

 

 

297

 

 

232

 

Loss from discontinued operations, net of income taxes

 

 

(2

)

 

(1

)

 

(2

)

 

(3

)

Net income

 

 

$

167

 

 

$

144

 

 

$

295

 

 

$

229

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

$

0.61

 

 

$

0.52

 

 

$

1.07

 

 

$

0.83

 

Discontinued operations

 

 

(0.01

)

 

 

 

(0.01

)

 

(0.01

)

Basic earnings per share

 

 

$

0.60

 

 

$

0.52

 

 

$

1.06

 

 

$

0.82

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

$

0.60

 

 

$

0.51

 

 

$

1.06

 

 

$

0.82

 

Discontinued operations

 

 

 

 

 

 

(0.01

)

 

(0.01

)

Diluted earnings per share

 

 

$

0.60

 

 

$

0.51

 

 

$

1.05

 

 

$

0.81

 

Dividends per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

$

0.02

 

 

$

0.02

 

 

$

0.04

 

 

$

0.04

 

 

See Notes to the Consolidated Financial Statements.

 

3



Table of Contents

 

TEXTRON INC.

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

(In millions)

 

 

July 4,
2015

 

 

June 28,
2014

 

 

July 4,
2015

 

 

June 28,
2014

 

Net income

 

 

$

167

 

 

$

144

 

 

$

295

 

 

$

229

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments, net of reclassifications

 

 

87

 

 

27

 

 

111

 

 

45

 

Foreign currency translation adjustments

 

 

10

 

 

2

 

 

(46

)

 

(4

)

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

 

 

4

 

 

14

 

 

(8

)

 

7

 

Other comprehensive income

 

 

101

 

 

43

 

 

57

 

 

48

 

Comprehensive income

 

 

$

268

 

 

$

187

 

 

$

352

 

 

$

277

 

 

See Notes to the Consolidated Financial Statements.

 

4



Table of Contents

 

TEXTRON INC.

Consolidated Balance Sheets (Unaudited)

 

(Dollars in millions)

 

 

July 4,
2015

 

 

January 3,
2015

 

Assets

 

 

 

 

 

 

 

Manufacturing group

 

 

 

 

 

 

 

Cash and equivalents

 

 

$

661

 

 

$

731

 

Accounts receivable, net

 

 

1,163

 

 

1,035

 

Inventories

 

 

4,437

 

 

3,928

 

Other current assets

 

 

512

 

 

579

 

Total current assets

 

 

6,773

 

 

6,273

 

Property, plant and equipment, less accumulated
depreciation and amortization of $3,797 and $3,685

 

 

2,462

 

 

2,497

 

Goodwill

 

 

2,015

 

 

2,027

 

Other assets

 

 

2,251

 

 

2,279

 

Total Manufacturing group assets

 

 

13,501

 

 

13,076

 

Finance group

 

 

 

 

 

 

 

Cash and equivalents

 

 

131

 

 

91

 

Finance receivables, net

 

 

1,162

 

 

1,238

 

Other assets

 

 

154

 

 

200

 

Total Finance group assets

 

 

1,447

 

 

1,529

 

Total assets

 

 

$

14,948

 

 

$

14,605

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Manufacturing group

 

 

 

 

 

 

 

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

 

 

$

263

 

 

$

8

 

Accounts payable

 

 

1,129

 

 

1,014

 

Accrued liabilities

 

 

2,671

 

 

2,616

 

Total current liabilities

 

 

4,063

 

 

3,638

 

Other liabilities

 

 

2,420

 

 

2,587

 

Long-term debt

 

 

2,650

 

 

2,803

 

Total Manufacturing group liabilities

 

 

9,133

 

 

9,028

 

Finance group

 

 

 

 

 

 

 

Other liabilities

 

 

242

 

 

242

 

Debt

 

 

971

 

 

1,063

 

Total Finance group liabilities

 

 

1,213

 

 

1,305

 

Total liabilities

 

 

10,346

 

 

10,333

 

Shareholders’ equity

 

 

 

 

 

 

 

Common stock

 

 

36

 

 

36

 

Capital surplus

 

 

1,535

 

 

1,459

 

Treasury stock

 

 

(427

)

 

(340

)

Retained earnings

 

 

4,907

 

 

4,623

 

Accumulated other comprehensive loss

 

 

(1,449

)

 

(1,506

)

Total shareholders’ equity

 

 

4,602

 

 

4,272

 

Total liabilities and shareholders’ equity

 

 

$

14,948

 

 

$

14,605

 

Common shares outstanding (in thousands)

 

 

276,342

 

 

276,582

 

 

See Notes to the Consolidated Financial Statements.

 

5



Table of Contents

 

TEXTRON INC.

Consolidated Statements of Cash Flows (Unaudited)

For the Six Months Ended July 4, 2015 and June 28, 2014, respectively

 

 

 

 

Consolidated

 

(In millions)

 

 

2015

 

 

2014

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

 

$

 295

 

 

$

 229

 

Less: Loss from discontinued operations

 

 

(2

)

 

(3

)

Income from continuing operations

 

 

297

 

 

232

 

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

 

 

 

 

 

 

 

Non-cash items:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

220

 

 

214

 

Deferred income taxes

 

 

(15

)

 

(14

)

Other, net

 

 

53

 

 

56

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(144

)

 

(96

)

Inventories

 

 

(516

)

 

(279

)

Other assets

 

 

(24

)

 

16

 

Accounts payable

 

 

123

 

 

(98

)

Accrued and other liabilities

 

 

27

 

 

208

 

Income taxes, net

 

 

93

 

 

35

 

Pension, net

 

 

40

 

 

17

 

Captive finance receivables, net

 

 

53

 

 

67

 

Other operating activities, net

 

 

(2

)

 

(5

)

Net cash provided by operating activities of continuing operations

 

 

205

 

 

353

 

Net cash used in operating activities of discontinued operations

 

 

(3

)

 

(2

)

Net cash provided by operating activities

 

 

202

 

 

351

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(173

)

 

(172

)

Net cash used in acquisitions

 

 

(34

)

 

(1,550

)

Finance receivables repaid

 

 

46

 

 

58

 

Other investing activities, net

 

 

26

 

 

16

 

Net cash used in investing activities

 

 

(135

)

 

(1,648

)

Cash flows from financing activities

 

 

 

 

 

 

 

Principal payments on long-term and nonrecourse debt

 

 

(130

)

 

(121

)

Increase in short-term debt

 

 

105

 

 

 

Proceeds from long-term debt

 

 

9

 

 

1,151

 

Purchases of Textron common stock

 

 

(87

)

 

(150

)

Dividends paid

 

 

(11

)

 

(11

)

Other financing activities, net

 

 

21

 

 

30

 

Net cash provided by (used in) financing activities

 

 

(93

)

 

899

 

Effect of exchange rate changes on cash and equivalents

 

 

(4

)

 

2

 

Net decrease in cash and equivalents

 

 

(30

)

 

(396

)

Cash and equivalents at beginning of period

 

 

822

 

 

1,211

 

Cash and equivalents at end of period

 

 

$

 792

 

 

$

 815

 

 

See Notes to the Consolidated Financial Statements.

 

6



Table of Contents

 

TEXTRON INC.

Consolidated Statements of Cash Flows (Unaudited) (Continued)

For the Six Months Ended July 4, 2015 and June 28, 2014, respectively

 

 

 

 

Manufacturing Group

 

 

Finance Group

 

(In millions)

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

285

 

 

$

222

 

 

$

10

 

 

$

7

 

Less: Loss from discontinued operations

 

 

(2

)

 

(3

)

 

 

 

 

Income from continuing operations

 

 

287

 

 

225

 

 

10

 

 

7

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash items:

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

215

 

 

207

 

 

5

 

 

7

 

Deferred income taxes

 

 

(6

)

 

(5

)

 

(9

)

 

(9

)

Other, net

 

 

51

 

 

48

 

 

2

 

 

8

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(144

)

 

(96

)

 

 

 

 

Inventories

 

 

(525

)

 

(272

)

 

 

 

 

Other assets

 

 

(34

)

 

16

 

 

10

 

 

 

Accounts payable

 

 

123

 

 

(98

)

 

 

 

 

Accrued and other liabilities

 

 

33

 

 

211

 

 

(6

)

 

(3

)

Income taxes, net

 

 

78

 

 

31

 

 

15

 

 

4

 

Pension, net

 

 

40

 

 

17

 

 

 

 

 

Other operating activities, net

 

 

(2

)

 

(1

)

 

 

 

(4

)

Net cash provided by operating activities of continuing operations

 

 

116

 

 

283

 

 

27

 

 

10

 

Net cash used in operating activities of discontinued operations

 

 

(3

)

 

(2

)

 

 

 

 

Net cash provided by operating activities

 

 

113

 

 

281

 

 

27

 

 

10

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(173

)

 

(172

)

 

 

 

 

Net cash used in acquisitions

 

 

(34

)

 

(1,550

)

 

 

 

 

Finance receivables repaid

 

 

 

 

 

 

181

 

 

222

 

Finance receivables originated

 

 

 

 

 

 

(82

)

 

(97

)

Other investing activities, net

 

 

 

 

(5

)

 

35

 

 

14

 

Net cash provided by (used in) investing activities

 

 

(207

)

 

(1,727

)

 

134

 

 

139

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments on long-term and nonrecourse debt

 

 

 

 

(1

)

 

(130

)

 

(120

)

Increase in short-term debt

 

 

105

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 

 

 

1,093

 

 

9

 

 

58

 

Purchases of Textron common stock

 

 

(87

)

 

(150

)

 

 

 

 

Dividends paid

 

 

(11

)

 

(11

)

 

 

 

 

Other financing activities, net

 

 

21

 

 

30

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

28

 

 

961

 

 

(121

)

 

(62

)

Effect of exchange rate changes on cash and equivalents

 

 

(4

)

 

2

 

 

 

 

 

Net increase (decrease) in cash and equivalents

 

 

(70

)

 

(483

)

 

40

 

 

87

 

Cash and equivalents at beginning of period

 

 

731

 

 

1,163

 

 

91

 

 

48

 

Cash and equivalents at end of period

 

 

$

661

 

 

$

680

 

 

$

131

 

 

$

135

 

 

See Notes to the Consolidated Financial Statements.

 

7



Table of Contents

 

TEXTRON INC.

Notes to the Consolidated Financial Statements (Unaudited)

 

Note 1.  Basis of Presentation

 

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

 

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

 

Use of Estimates

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

 

During 2015 and 2014, we changed our estimates of revenues and costs on certain long-term contracts that are accounted for under the percentage-of-completion method of accounting.  These changes in estimates increased income from continuing operations before income taxes in the second quarter of 2015 and 2014 by $36 million and $38 million, respectively, ($23 million and $24 million after tax, or $0.08 and $0.09 per diluted share, respectively). For the second quarter of 2015 and 2014, the gross favorable program profit adjustments totaled $40 million and $41 million, respectively, and the gross unfavorable program profit adjustments totaled $4 million and $3 million, respectively.  Gross favorable program profit adjustments for the second quarter of 2014 included $16 million related to the settlement of the System Development and Demonstration phase of the Armed Reconnaissance Helicopter (ARH) program, which was terminated in October 2008.

 

The changes in estimates increased income from continuing operations before income taxes in the first half of 2015 and 2014 by $54 million and $59 million, ($34 million and $37 million after tax, or $0.12 and $0.13 per diluted share, respectively).  For the first half of 2015 and 2014, the gross favorable program profit adjustments totaled $73 million and $65 million, respectively, and the gross unfavorable program profit adjustments totaled $19 million and $6 million, respectively.  Gross favorable program profit adjustments for the first half of 2014 included $16 million related to the ARH program as described above.

 

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, that outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. On July 9, 2015, the FASB approved a one-year deferral of the effective date of the standard to the beginning of 2018 for public companies, with an option that would permit companies to adopt the standard as early as the original effective date of 2017.  The new standard may be adopted either retrospectively or on a modified retrospective basis whereby it would be applied to new contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch-up adjustment recorded to beginning retained earnings at the effective date for those contracts.  We are currently evaluating the impacts of adoption on our consolidated financial position, results of operations and related disclosures, along with the implementation approach to be used.

 

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Note 2. Retirement Plans

 

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

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

(In millions)

 

 

 

July 4,
2015

 

 

 

June 28,
2014

 

 

 

July 4,
2015

 

 

 

June 28,
2014

 

Pension Benefits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

 

$

29

 

 

$

27

 

 

$

59

 

 

$

54

 

Interest cost

 

 

 

82

 

 

 

85

 

 

 

163

 

 

 

164

 

Expected return on plan assets

 

 

 

(121

)

 

 

(117

)

 

 

(242

)

 

 

(228

)

Amortization of prior service cost

 

 

 

4

 

 

 

4

 

 

 

8

 

 

 

8

 

Amortization of net actuarial loss

 

 

 

39

 

 

 

28

 

 

 

78

 

 

 

56

 

Curtailment and other charges

 

 

 

6

 

 

 

 

 

 

6

 

 

 

 

Net periodic benefit cost

 

 

$

39

 

 

$

27

 

 

$

72

 

 

$

54

 

Postretirement Benefits Other Than Pensions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

 

$

1

 

 

$

1

 

 

$

2

 

 

$

2

 

Interest cost

 

 

 

4

 

 

 

5

 

 

 

8

 

 

 

10

 

Expected return on plan assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service credit

 

 

 

(6

)

 

 

(5

)

 

 

(12

)

 

 

(11

)

Amortization of net actuarial loss

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Net periodic benefit cost (credit)

 

 

$

(1

)

 

$

1

 

 

$

(2

)

 

$

2

 

 

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

 

Note 3.  Earnings Per Share

 

We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period. Basic EPS is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends. Diluted EPS considers the dilutive effect of all potential future common stock, including stock options. In addition, diluted EPS for the three and six months ended June 28, 2014 includes the impact of the initial delivery of shares under an Accelerated Share Repurchase agreement (ASR), which was settled in December 2014 as disclosed in Note 9 of our 2014 Annual Report on Form 10-K.

 

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

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

(In thousands)

 

 

 

July 4,
2015

 

 

 

June 28,
2014

 

 

 

July 4,
2015

 

 

 

June 28,
2014

 

Basic weighted-average shares outstanding

 

 

 

277,715

 

 

 

280,280

 

 

 

277,808

 

 

 

280,715

 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

2,220

 

 

 

2,042

 

 

 

2,216

 

 

 

2,072

 

ASR

 

 

 

 

 

 

442

 

 

 

 

 

 

312

 

Diluted weighted-average shares outstanding

 

 

 

279,935

 

 

 

282,764

 

 

 

280,024

 

 

 

283,099

 

 

Stock options to purchase 2 million and 1 million of common shares outstanding are excluded from the calculation of diluted weighted average shares outstanding for the three and six months ended July 4, 2015, respectively, as their effect would have been anti-dilutive.  For both the three and six months ended June 28, 2014, stock options to purchase 2 million of common shares outstanding are excluded from the calculation of diluted weighted average shares, as their effect would have been anti-dilutive.

 

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Note 4.  Accounts Receivable and Finance Receivables

 

Accounts Receivable

Accounts receivable is composed of the following:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

July 4,
2015

 

 

January 3,
2015

 

Commercial

 

 

 

 

 

 

 

 

 

 

$

894

 

 

$

765

 

U.S. Government contracts

 

 

 

 

 

 

 

 

 

 

 

300

 

 

 

300

 

 

 

 

 

 

 

 

 

 

 

 

 

1,194

 

 

 

1,065

 

Allowance for doubtful accounts

 

 

 

 

 

 

 

 

 

 

 

(31

)

 

 

(30

)

Total

 

 

 

 

 

 

 

 

 

 

$

1,163

 

 

$

1,035

 

 

We have unbillable receivables, primarily on U.S. Government contracts, that arise when the revenues we have appropriately recognized based on performance cannot be billed yet under terms of the contract.  Unbillable receivables within accounts receivable totaled $150 million at July 4, 2015 and $151 million at January 3, 2015.

 

Finance Receivables

Finance receivables are presented in the following table:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

July 4,
2015

 

 

January 3,
2015

 

Finance receivables*

 

 

 

 

 

 

 

 

 

 

$

1,216

 

 

$

1,289

 

Allowance for losses

 

 

 

 

 

 

 

 

 

 

 

(54

)

 

 

(51

)

Total finance receivables, net

 

 

 

 

 

 

 

 

 

 

$

1,162

 

 

$

1,238

 

 

* Includes finance receivables held for sale of $33 million and $35 million at July 4, 2015 and January 3, 2015, respectively.

 

Credit Quality Indicators and Nonaccrual Finance Receivables

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

 

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

 

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

 

(In millions)

 

 

 

 

 

 

 

 

 

 

July 4,
2015

 

 

 

January 3,
2015

 

Performing

 

 

 

 

 

 

 

 

 

 

$

1,014

 

 

$

1,062

 

Watchlist

 

 

 

 

 

 

 

 

 

 

72

 

 

 

111

 

Nonaccrual

 

 

 

 

 

 

 

 

 

 

97

 

 

 

81

 

Total

 

 

 

 

 

 

 

 

 

 

$

1,183

 

 

$

1,254

 

Nonaccrual as a percentage of finance receivables

 

 

 

 

 

 

 

 

 

 

 

8.20

%

 

 

6.46

%

 

We measure delinquency based on the contractual payment terms of our finance receivables.  In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.

 

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

 

(In millions)

 

 

July 4,
2015

 

 

January 3,
2015

 

Less than 31 days past due

 

 

$

1,016

 

 

$

1,080

 

31-60 days past due

 

 

104

 

 

117

 

61-90 days past due

 

 

17

 

 

28

 

Over 90 days past due

 

 

46

 

 

29

 

Total

 

 

$

1,183

 

 

$

1,254

 

60 + days contractual delinquency as a percentage of finance receivables

 

 

5.33

%

 

4.55

%

 

Impaired Loans

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

 

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

 

(In millions)

 

 

July 4,
2015

 

 

January 3,
2015

 

Recorded investment:

 

 

 

 

 

 

 

Impaired loans with related allowance for losses

 

 

$

61

 

 

$

68

 

Impaired loans with no related allowance for losses

 

 

41

 

 

42

 

Total

 

 

$

102

 

 

$

110

 

Unpaid principal balance

 

 

$

108

 

 

$

115

 

Allowance for losses on impaired loans

 

 

22

 

 

20

 

Average recorded investment

 

 

103

 

 

115

 

 

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

 

(In millions)

 

 

July 4,
2015

 

 

January 3,
2015

 

Allowance based on collective evaluation

 

 

$

32

 

 

$

31

 

Allowance based on individual evaluation

 

 

22

 

 

20

 

Finance receivables evaluated collectively

 

 

$

962

 

 

$

1,023

 

Finance receivables evaluated individually

 

 

102

 

 

110

 

 

Allowance for Losses

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

 

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

 

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Table of Contents

 

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

 

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

 

 

 

 

Six Months Ended

 

(In millions)

 

 

July 4,
2015

 

 

June 28,
2014

 

Balance at the beginning of period

 

 

$

51

 

 

$

55

 

Provision for losses

 

 

(1

)

 

6

 

Charge-offs

 

 

(2

)

 

(10

)

Recoveries

 

 

6

 

 

3

 

Balance at the end of period

 

 

$

54

 

 

$

54

 

 

Note 5.  Inventories

 

Inventories are composed of the following:

 

(In millions)

 

 

July 4,
2015

 

 

January 3,
2015

 

Finished goods

 

 

$

1,895

 

 

$

1,582

 

Work in process

 

 

3,114

 

 

2,683

 

Raw materials and components

 

 

575

 

 

546

 

 

 

 

5,584

 

 

4,811

 

Progress/milestone payments

 

 

(1,147

)

 

(883

)

Total

 

 

$

4,437

 

 

$

3,928

 

 

Note 6.  Accrued Liabilities

 

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

 

 

 

 

Six Months Ended

 

(In millions)

 

 

July 4,
2015

 

 

June 28,
2014

 

Balance at the beginning of period

 

 

$

281

 

 

$

223

 

Provision

 

 

150

 

 

151

 

Settlements

 

 

(160

)

 

(144

)

Acquisitions

 

 

4

 

 

58

 

Adjustments*

 

 

(6

)

 

(6

)

Balance at the end of period

 

 

$

269

 

 

$

282

 

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

 

Note 7.  Derivative Instruments and Fair Value Measurements

 

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

 

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Table of Contents

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

We manufacture and sell our products in a number of countries throughout the world, and, therefore, we are exposed to movements in foreign currency exchange rates.  We utilize foreign currency exchange contracts to manage this volatility. Our foreign currency exchange contracts are measured at fair value using the market method valuation technique.  The inputs to this technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data providers.  These are observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions so they are classified as Level 2. At July 4, 2015 and January 3, 2015, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $468 million and $696 million, respectively.  At July 4, 2015, the fair value amounts of our foreign currency exchange contracts were a $15 million asset and a $35 million liability. At January 3, 2015, the fair value amounts of our foreign currency exchange contracts were a $16 million asset and a $26 million liability.

 

We primarily utilize forward exchange contracts which have maturities of no more than three years.  These contracts qualify as cash flow hedges and are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses.  At July 4, 2015, we had a net deferred loss of $21 million in Accumulated other comprehensive loss related to these cash flow hedges.  Net gains and losses recognized in earnings and Accumulated other comprehensive loss on cash flow hedges, including gains and losses related to hedge ineffectiveness, were not significant in the periods presented.

 

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

 

Assets Recorded at Fair Value on a Nonrecurring Basis

During the periods ended July 4, 2015 and January 3, 2015, the Finance group’s impaired nonaccrual finance receivables of $39 million and $49 million, respectively, were measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3).  Impaired nonaccrual finance receivables represent assets recorded at fair value on a nonrecurring basis since the measurement of required reserves on our impaired finance receivables is significantly dependent on the fair value of the underlying collateral.  For impaired nonaccrual finance receivables secured by aviation assets, the fair values of collateral are determined primarily based on the use of industry pricing guides.  Fair value measurements recorded on impaired finance receivables resulted in charges to provision for loan losses totaling $3 million and $6 million for the three and six months ended July 4, 2015 and $6 million and $11 million for the three and six months ended June 28, 2014, respectively.

 

Assets and Liabilities Not Recorded at Fair Value

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

 

 

 

 

July 4, 2015

 

 

January 3, 2015

 

(In millions)

 

 

Carrying
Value

 

Estimated
Fair Value

 

 

Carrying
Value

 

Estimated
Fair Value

 

Manufacturing group

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, excluding leases

 

 

$

 (2,740

)

$

 (2,897

)

 

$

 (2,742

)

$

 (2,944

)

Finance group

 

 

 

 

 

 

 

 

 

 

 

Finance receivables, excluding leases

 

 

928

 

937

 

 

1,004

 

1,021

 

Debt

 

 

(971

)

(946

)

 

(1,063

)

(1,051

)

 

Fair value for the Manufacturing group debt is determined using market observable data for similar transactions (Level 2).  At July 4, 2015 and January 3, 2015, approximately 73% and 75%, respectively, of the fair value of term debt for the Finance group was determined based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations (Level 2).  The remaining Finance group debt was determined based on observable market transactions (Level 1). Fair value estimates for finance receivables were determined based on internally developed discounted cash flow models primarily utilizing significant unobservable inputs (Level 3), which include estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and expectations of borrowers’ ability to make payments on a timely basis.

 

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Table of Contents

 

Note 8.  Accumulated Other Comprehensive Loss and Other Comprehensive Income

 

The components of Accumulated Other Comprehensive Loss are presented below:

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Pension and
Postretirement
Benefits
Adjustments

 

Foreign
Currency
Translation
Adjustments

 

Deferred
Gains (Losses)
on Hedge
Contracts

 

Accumulated
Other
Comprehensive
Loss

 

For the six months ended July 4, 2015

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

(1,511

)

$

18

 

$

(13

)

$

(1,506

)

Other comprehensive income (loss) before reclassifications

 

62

 

(46

)

(14

)

2

 

Reclassified from Accumulated other comprehensive loss

 

49

 

 

6

 

55

 

Other comprehensive income (loss)

 

111

 

(46

)

(8

)

57

 

Balance at the end of the period

 

$

(1,400

)

$

(28

)

$

(21

)

$

(1,449

)

For the six months ended June 28, 2014

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

(1,110

)

$

93

 

$

(10

)

$

(1,027

)

Other comprehensive income (loss) before reclassifications

 

9

 

(4

)

2

 

7

 

Reclassified from Accumulated other comprehensive loss

 

36

 

 

5

 

41

 

Other comprehensive income (loss)

 

45

 

(4

)

7

 

48

 

Balance at the end of the period

 

$

(1,065

)

$

89

 

$

(3

)

$

(979

)

 

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Table of Contents

 

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

 

(In millions)

 

 

 

 

 

Pre-Tax
Amount

 

 

Tax
(Expense)
Benefit

 

 

After-Tax
Amount

 

For the three months ended July 4, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains

 

 

 

 

 

$

98

 

 

$

(36

)

 

$

62

 

Amortization of net actuarial loss*

 

 

 

 

 

39

 

 

(14

)

 

25

 

Pension and postretirement benefits adjustments, net

 

 

 

 

 

137

 

 

(50

)

 

87

 

Deferred gains on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

 

 

 

 

3

 

 

(1

)

 

2

 

Reclassification adjustments

 

 

 

 

 

3

 

 

(1

)

 

2

 

Deferred gains on hedge contracts, net

 

 

 

 

 

6

 

 

(2

)

 

4

 

Foreign currency translation adjustments

 

 

 

 

 

9

 

 

1

 

 

10

 

Total

 

 

 

 

 

$

152

 

 

$

(51

)

 

$

101

 

For the three months ended June 28, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

 

 

 

 

$

28

 

 

$

(10

)

 

$

18

 

Amortization of prior service credit*

 

 

 

 

 

(1

)

 

1

 

 

 

Recognition of prior service cost

 

 

 

 

 

15

 

 

(6

)

 

9

 

Pension and postretirement benefits adjustments, net

 

 

 

 

 

42

 

 

(15

)

 

27

 

Deferred gains on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

 

 

 

 

13

 

 

(2

)

 

11

 

Reclassification adjustments

 

 

 

 

 

5

 

 

(2

)

 

3

 

Deferred gains on hedge contracts, net

 

 

 

 

 

18

 

 

(4

)

 

14

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

2

 

 

2

 

Total

 

 

 

 

 

$

60

 

 

$

(17

)

 

$

43

 

For the six months ended July 4, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains

 

 

 

 

 

$

98

 

 

$

(36

)

 

$

62

 

Amortization of net actuarial loss*

 

 

 

 

 

78

 

 

(28

)

 

50

 

Amortization of prior service credit*

 

 

 

 

 

(2

)

 

1

 

 

(1

)

Pension and postretirement benefits adjustments, net

 

 

 

 

 

174

 

 

(63

)

 

111

 

Deferred gains (losses) on hedge contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Current deferrals

 

 

 

 

 

(18

)

 

4

 

 

(14

)

Reclassification adjustments

 

 

 

 

 

9