TEXTRON INC - FORM 10-Q - October 28, 2015

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



	Form 10-Q

(Mark One)

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

	For the quarterly period ended October 3, 2015

	OR

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

	For the transition period from to .

Commission File Number 1-5480

Textron Inc.

(Exact name of registrant as specified in its charter)

Delaware		05-0315468
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

40 Westminster Street, Providence, RI		02903
(Address of principal executive offices)		(Zip code)

(401) 421-2800

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer [ ü ]

Accelerated filer [ ]

Non-accelerated filer [ ]

Smaller reporting company [ ]

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

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

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TEXTRON INC.

Index to Form 10-Q

For the Quarterly Period Ended October 3, 2015

			Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Statements of Operations (Unaudited)		3
	Consolidated Statements of Comprehensive Income (Unaudited)		4
	Consolidated Balance Sheets (Unaudited)		5
	Consolidated Statements of Cash Flows (Unaudited)		6
	Notes to the Consolidated Financial Statements (Unaudited)
	Note 1.	Basis of Presentation	8
	Note 2.	Retirement Plans	9
	Note 3.	Earnings Per Share	9
	Note 4.	Accounts Receivable and Finance Receivables	10
	Note 5.	Inventories	12
	Note 6.	Accrued Liabilities	12
	Note 7.	Derivative Instruments and Fair Value Measurements	12
	Note 8.	Accumulated Other Comprehensive Loss and Other Comprehensive Income	14
	Note 9.	Commitments and Contingencies	16
	Note 10.	Segment Information	16

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		28
Item 4.	Controls and Procedures		28

PART II.	OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28
Item 6.	Exhibits		29
	Signatures		29

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

TEXTRON INC.

Consolidated Statements of Operations (Unaudited)

	Three Months Ended					Nine Months Ended
(In millions, except per share amounts)	October 3, 2015		September 27, 2014			October 3, 2015			September 27, 2014
Revenues
Manufacturing revenues	$	3,163	$	3,405		$	9,437		$	9,701
Finance revenues	17		25			63			81
Total revenues	3,180		3,430			9,500			9,782
Costs and expenses
Cost of sales	2,584		2,845			7,728			8,077
Selling and administrative expense	303		304			969			959
Interest expense	41		47			126			141
Acquisition and restructuring costs	—		3			—			39
Total costs and expenses	2,928		3,199			8,823			9,216
Income from continuing operations before income taxes	252		231			677			566
Income tax expense	76		71			204			174
Income from continuing operations	176		160			473			392
Loss from discontinued operations, net of income taxes	—		(1		)	(2		)	(4		)
Net income	$	176	$	159		$	471		$	388
Basic earnings per share
Continuing operations	$	0.64	$	0.57		$	1.71		$	1.40
Discontinued operations	—		—			(0.01		)	(0.02		)
Basic earnings per share	$	0.64	$	0.57		$	1.70		$	1.38
Diluted earnings per share
Continuing operations	$	0.63	$	0.57		$	1.69		$	1.39
Discontinued operations	—		—			(0.01		)	(0.02		)
Diluted earnings per share	$	0.63	$	0.57		$	1.68		$	1.37
Dividends per share
Common stock	$	0.02	$	0.02		$	0.06		$	0.06

See Notes to the Consolidated Financial Statements.

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TEXTRON INC.

Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended						Nine Months Ended
(In millions)	October 3, 2015			September 27, 2014			October 3, 2015			September 27, 2014
Net income	$	176		$	159		$	471		$	388
Other comprehensive income (loss), net of tax:
Pension and postretirement benefits adjustments, net of reclassifications	22			17			133			62
Foreign currency translation adjustments	1			(43		)	(45		)	(47		)
Deferred gains (losses) on hedge contracts, net of reclassifications	(1		)	(5		)	(9		)	2
Other comprehensive income (loss)	22			(31		)	79			17
Comprehensive income	$	198		$	128		$	550		$	405

See Notes to the Consolidated Financial Statements.

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TEXTRON INC.

Consolidated Balance Sheets (Unaudited)

(Dollars in millions)	October 3, 2015			January 3, 2015
Assets
Manufacturing group
Cash and equivalents	$	497		$	731
Accounts receivable, net		1,159			1,035
Inventories		4,574			3,928
Other current assets		507			579
Total current assets		6,737			6,273
Property, plant and equipment, less accumulated depreciation and amortization of $3,854 and $3,685		2,488			2,497
Goodwill		2,026			2,027
Other assets		2,234			2,279
Total Manufacturing group assets		13,485			13,076
Finance group
Cash and equivalents		117			91
Finance receivables, net		1,138			1,238
Other assets		158			200
Total Finance group assets		1,413			1,529
Total assets	$	14,898		$	14,605
Liabilities and shareholders’ equity
Liabilities
Manufacturing group
Short-term debt and current portion of long-term debt	$	414		$	8
Accounts payable		1,173			1,014
Accrued liabilities		2,602			2,616
Total current liabilities		4,189			3,638
Other liabilities		2,426			2,587
Long-term debt		2,391			2,803
Total Manufacturing group liabilities		9,006			9,028
Finance group
Other liabilities		229			242
Debt		967			1,063
Total Finance group liabilities		1,196			1,305
Total liabilities		10,202			10,333
Shareholders’ equity
Common stock		36			36
Capital surplus		1,561			1,459
Treasury stock		(551	)		(340	)
Retained earnings		5,077			4,623
Accumulated other comprehensive loss		(1,427	)		(1,506	)
Total shareholders’ equity		4,696			4,272
Total liabilities and shareholders’ equity	$	14,898		$	14,605
Common shares outstanding (in thousands)		273,862			276,582

See Notes to the Consolidated Financial Statements.

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TEXTRON INC.

Consolidated Statements of Cash Flows (Unaudited)

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

	Consolidated
(In millions)	2015			2014
Cash flows from operating activities
Net income	$	471		$	388
Less: Loss from discontinued operations		(2	)		(4	)
Income from continuing operations		473			392
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Non-cash items:
Depreciation and amortization		332			325
Deferred income taxes		(11	)		(41	)
Other, net		78			80
Changes in assets and liabilities:
Accounts receivable, net		(122	)		(55	)
Inventories		(654	)		(370	)
Other assets		6			24
Accounts payable		156			(120	)
Accrued and other liabilities		(18	)		137
Income taxes, net		64			61
Pension, net		61			31
Captive finance receivables, net		58			107
Other operating activities, net		(4	)		(2	)
Net cash provided by operating activities of continuing operations		419			569
Net cash used in operating activities of discontinued operations		(4	)		(3	)
Net cash provided by operating activities		415			566
Cash flows from investing activities
Capital expenditures		(286	)		(255	)
Net cash used in acquisitions		(81	)		(1,580	)
Finance receivables repaid		66			77
Other investing activities, net		31			33
Net cash used in investing activities		(270	)		(1,725	)
Cash flows from financing activities
Principal payments on long-term and nonrecourse debt		(196	)		(462	)
Proceeds from long-term debt		55			1,187
Increase in short-term debt		—			25
Purchases of Textron common stock		(211	)		(302	)
Dividends paid		(17	)		(17	)
Other financing activities, net		25			33
Net cash provided by (used in) financing activities		(344	)		464
Effect of exchange rate changes on cash and equivalents		(9	)		(5	)
Net decrease in cash and equivalents		(208	)		(700	)
Cash and equivalents at beginning of period		822			1,211
Cash and equivalents at end of period	$	614		$	511

See Notes to the Consolidated Financial Statements.

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TEXTRON INC.

Consolidated Statements of Cash Flows (Unaudited) (Continued)

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

	Manufacturing Group						Finance Group
(In millions)	2015			2014			2015			2014
Cash flows from operating activities
Net income	$	458		$	378		$	13		$	10
Less: Loss from discontinued operations		(2	)		(4	)		—			—
Income from continuing operations		460			382			13			10
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
Non-cash items:
Depreciation and amortization		324			315			8			10
Deferred income taxes		(3	)		(25	)		(8	)		(16	)
Other, net		74			69			4			11
Changes in assets and liabilities:
Accounts receivable, net		(122	)		(55	)		—			—
Inventories		(661	)		(344	)		—			—
Other assets		(6	)		38			12			(14	)
Accounts payable		156			(120	)		—			—
Accrued and other liabilities		(10	)		145			(8	)		(8	)
Income taxes, net		58			57			6			4
Pension, net		61			31			—			—
Dividends received from Finance Group		20			—			—			—
Other operating activities, net		(4	)		(2	)		—			—
Net cash provided by (used in) operating activities of continuing operations		347			491			27			(3	)
Net cash used in operating activities of discontinued operations		(4	)		(3	)		—			—
Net cash provided by (used in) operating activities		343			488			27			(3	)
Cash flows from investing activities
Capital expenditures		(286	)		(255	)		—			—
Net cash used in acquisitions		(81	)		(1,580	)		—			—
Finance receivables repaid		—			—			269			307
Finance receivables originated		—			—			(145	)		(123	)
Other investing activities, net		2			(12	)		36			19
Net cash provided by (used in) investing activities		(365	)		(1,847	)		160			203
Cash flows from financing activities
Principal payments on long-term and nonrecourse debt		—			(201	)		(196	)		(261	)
Proceeds from long-term debt		—			1,093			55			94
Increase in short-term debt		—			25			—			—
Purchases of Textron common stock		(211	)		(302	)		—			—
Dividends paid		(17	)		(17	)		(20	)		—
Other financing activities, net		25			33			—			—
Net cash provided by (used in) financing activities		(203	)		631			(161	)		(167	)
Effect of exchange rate changes on cash and equivalents		(9	)		(5	)		—			—
Net increase (decrease) in cash and equivalents		(234	)		(733	)		26			33
Cash and equivalents at beginning of period		731			1,163			91			48
Cash and equivalents at end of period	$	497		$	430		$	117		$	81

See Notes to the Consolidated Financial Statements.

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TEXTRON INC.

Notes to the Consolidated Financial Statements (Unaudited)

Note 1. Basis of Presentation

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

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

Use of Estimates

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

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

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

Recently Issued Accounting Standards

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

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Note 2. Retirement Plans

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

	Three Months Ended						Nine Months Ended
(In millions)	October 3, 2015			September 27, 2014			October 3, 2015			September 27, 2014
Pension Benefits
Service cost	$	27		$	27		$	86		$	81
Interest cost		82			86			245			250
Expected return on plan assets		(121	)		(117	)		(363	)		(345	)
Amortization of prior service cost		4			3			12			11
Amortization of net actuarial loss		35			28			113			84
Curtailment and other charges		—			—			6			—
Net periodic benefit cost	$	27		$	27		$	99		$	81
Postretirement Benefits Other Than Pensions
Service cost	$	1		$	1		$	3		$	3
Interest cost		4			5			12			15
Amortization of prior service credit		(6	)		(5	)		(18	)		(16	)
Amortization of net actuarial loss		1			—			1			1
Net periodic benefit cost (credit)	$	—		$	1		$	(2	)	$	3

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

Note 3. Earnings Per Share

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

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

	Three Months Ended				Nine Months Ended
(In thousands)	October 3, 2015		September 27, 2014		October 3, 2015		September 27, 2014
Basic weighted-average shares outstanding		276,334		278,860		277,317		280,096
Dilutive effect of:
Stock options		1,705		1,892		2,083		2,027
ASR		—		278		—		301
Diluted weighted-average shares outstanding		278,039		281,030		279,400		282,424

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

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Note 4. Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:

(In millions)	October 3, 2015			January 3, 2015
Commercial	$	920		$	765
U.S. Government contracts		273			300
		1,193			1,065
Allowance for doubtful accounts		(34	)		(30	)
Total	$	1,159		$	1,035

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

Finance Receivables

Finance receivables are presented in the following table:

(In millions)	October 3, 2015			January 3, 2015
Finance receivables*	$	1,187		$	1,289
Allowance for losses		(49	)		(51	)
Total finance receivables, net	$	1,138		$	1,238

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

Credit Quality Indicators and Nonaccrual Finance Receivables

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

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

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


(In millions)	October 3, 2015			January 3, 2015
Performing	$	985		$	1,062
Watchlist		76			111
Nonaccrual		94			81
Total	$	1,155		$	1,254
Nonaccrual as a percentage of finance receivables		8.14	%		6.46	%

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

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

(In millions)	October 3, 2015			January 3, 2015
Less than 31 days past due	$	995		$	1,080
31-60 days past due		94			117
61-90 days past due		28			28
Over 90 days past due		38			29
Total	$	1,155		$	1,254
60 + days contractual delinquency as a percentage of finance receivables		5.71	%		4.55	%

Impaired Loans

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

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

(In millions)		October 3, 2015		January 3, 2015
Recorded investment:
Impaired loans with related allowance for losses		$	60	$	68
Impaired loans with no related allowance for losses			40		42
Total		$	100	$	110
Unpaid principal balance		$	105	$	115
Allowance for losses on impaired loans	</