Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

Commission File Number 1-5480

Textron Inc.

(Exact name of registrant as specified in its charter)

(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):

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 15, 2016, there were 269,463,621 shares of common stock outstanding.

Table of Contents

TEXTRON INC.

Index to Form 10-Q

For the Quarterly Period Ended July 2, 2016

2

Table of Contents

PART I.  FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

TEXTRON INC.
Consolidated Statements of Operations (Unaudited)

See Notes to the Consolidated Financial Statements.

3

Table of Contents

TEXTRON INC.

Consolidated Statements of Comprehensive Income (Unaudited)

See Notes to the Consolidated Financial Statements.

4

Table of Contents

TEXTRON INC.

Consolidated Balance Sheets (Unaudited)

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 2, 2016 and July 4, 2015, respectively

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 2, 2016 and July 4, 2015, respectively

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 2, 2016.  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 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 2016 and 2015, 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 2016 and 2015 by $10 million and $36 million, respectively, ($6 million and $23 million after tax, or $0.02 and $0.08 per diluted share, respectively). For the second quarter of 2016 and 2015, the gross favorable program profit adjustments totaled $19 million and $40 million, respectively, and the gross unfavorable program profit adjustments totaled $9 million and $4 million, respectively.

The changes in estimates increased income from continuing operations before income taxes in the first half of 2016 and 2015 by $39 million and $54 million, respectively, ($25 million and $34 million after tax, or $0.09 and $0.12 per diluted share, respectively).  For the first half of 2016 and 2015, the gross favorable program profit adjustments totaled $53 million and $73 million, respectively, and the gross unfavorable program profit adjustments totaled $14 million and $19 million, respectively.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 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.

In February 2016, the FASB issued ASU No. 2016-02, Leases, that requires all leases with a term greater than 12 months be recognized on the balance sheet, while lease expenses would continue to be recognized in the statement of operations in a manner similar to current accounting guidance.  The new standard is effective for our company at the beginning of fiscal 2019 and early adoption is permitted.  Entities must adopt the standard on a modified retrospective basis whereby it would be applied at the

8

Table of Contents

beginning of the earliest comparative year.  We are currently evaluating the impact of adoption on our consolidated financial statements.

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 fiscal 2020 with early adoption permitted beginning in fiscal 2019.  Entities are required to apply the provisions of the standard through a cumulative-effect adjustment to retained earnings as of the effective date.  We are currently evaluating the impact of adoption on our consolidated financial statements.

Note 2.  Business Acquisitions

In the first half of 2016, we paid $179 million in cash and assumed debt of $19 million to acquire five businesses, net of cash acquired and holdbacks.  Our acquisition of Able Engineering and Component Services, Inc. and Able Aerospace, Inc. (Able) in the first quarter represented the largest of these businesses and is included in the Textron Aviation segment.  Able is an industry-leading repair and overhaul business that provides component repairs, component exchanges and replacement parts, among other support and service offerings for commercial rotorcraft and fixed-wing aircraft customers around the world.  We are in the process of allocating the purchase price and valuing the acquired assets and liabilities for these acquisitions.  Based on the preliminary allocation of the aggregate purchase price for these acquisitions, $95 million has been allocated to goodwill, related to expected synergies and the value of the existing workforce, and $63 million to intangible assets.  Of the recorded goodwill, approximately $37 million is deductible for tax purposes.  The intangible assets are primarily related to customer relationships and technologies, which will be amortized over 10 to 18 years.  The operating results of these acquisitions have been included in the Consolidated Statements of Operations since their respective closing dates.

Note 3.  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:

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.

9

Table of Contents

Note 4.  Earnings Per Share

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

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

Stock options to purchase 5 million shares of common stock are excluded from the calculation of diluted weighted average shares outstanding for both the three and six months ended July 2, 2016, as their effect would have been anti-dilutive.  Stock options to purchase 2 million and 1 million shares of common stock 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.

Note 5.  Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:

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 $188 million at July 2, 2016 and $135 million at January 2, 2016.

Finance Receivables

Finance receivables are presented in the following table:

* Includes finance receivables held for sale of $30 million at both July 2, 2016 and January 2, 2016.

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, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful.  Accrual of interest income is suspended for these accounts and all cash collections are generally applied to reduce the net investment balance.  Once we conclude that the collection of all principal and interest is no longer doubtful, we resume the accrual of interest and recognize previously suspended interest income at the time either a) the loan becomes contractually current through payment according to the original terms of the loan, or b) if the loan has

10

Table of Contents

been modified, following a period of performance under the terms of the modification.  Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain.  All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing.

Delinquency

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

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

Impaired Loans

On a quarterly basis, we evaluate individual finance receivables for impairment in non-homogeneous portfolios and larger balance accounts in homogeneous loan portfolios.  A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators described above.  Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified.  If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification.  Interest income recognized on impaired loans was not significant in the first half of 2016 or 2015.

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

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

11

Table of Contents

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 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:

Note 6.  Inventories

Inventories are composed of the following:

Note 7.  Warranty Liability

Changes in our warranty liability are as follows:

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

12

Table of Contents

Note 8.  Debt

Under our shelf registration statement, on March 11, 2016, we issued $350 million of fixed-rate notes due March 15, 2026 that bear an annual interest rate of 4.0%.  The net proceeds of the issuance totaled $345 million, after deducting underwriting discounts, commissions and offering expenses.

Note 9.  Derivative Instruments and Fair Value Measurements

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

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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

Our foreign currency exchange contracts are measured at fair value using the market method valuation technique.  The inputs to this technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data providers.  These are observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions so they are classified as Level 2. At July 2, 2016 and January 2, 2016, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $734 million and $706 million, respectively.  At July 2, 2016, the fair value amounts of our foreign currency exchange contracts were a $7 million asset and an $11 million liability. At January 2, 2016, the fair value amounts of our foreign currency exchange contracts were a $7 million asset and a $28 million liability.

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

Assets Recorded at Fair Value on a Nonrecurring Basis

During the periods ended July 2, 2016 and January 2, 2016, the Finance group’s impaired nonaccrual finance receivables of $51 million and $45 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 were not significant for both the three and six months ended July 2, 2016 and July 4, 2015.

13

Table of Contents

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:

Fair value for the Manufacturing group debt is determined using market observable data for similar transactions (Level 2).  At both July 2, 2016 and January 2, 2016, approximately 75% 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).  Fair value estimates for finance receivables were determined based on internally developed discounted cash flow models primarily utilizing significant unobservable inputs (Level 3), which include estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and expectations of borrowers’ ability to make payments on a timely basis.

Note 10.  Accumulated Other Comprehensive Loss and Other Comprehensive Income (Loss)

The components of Accumulated Other Comprehensive Loss are presented below:

14

Table of Contents

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

*These components of other comprehensive income are included in the computation of net periodic pension cost.  See Note 11 of our 2015 Annual Report on Form 10-K for additional information.

Note 11.  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.

15

Table of Contents

Note 12.  Segment Information

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

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

Note 13.  Subsequent Events

On July 11, 2016, the Internal Revenue Service Office of Appeals approved a final settlement for our 1998 to 2008 tax years. As a result, in the third quarter of 2016 we expect to record an income tax benefit of approximately $175 million, exclusive of interest, of which $110 million is attributable to continuing operations and $65 million is attributable to discontinued operations.  In addition, we expect to record a favorable income tax benefit in the third quarter of 2016 upon the reversal of accrued interest of approximately $140 million, of which approximately $90 million is attributable to continuing operations.

16

Table of Contents

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

Consolidated Results of Operations

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 18 to 22.

Revenues

Revenues increased $264 million, 8%, in the second quarter of 2016, compared with the second quarter of 2015, largely driven by increases in the Textron Systems, Industrial and Textron Aviation segments, partially offset by lower revenues at the Bell segment.  The net revenue increase included the following factors:

·     Higher Textron Systems revenues of $165 million, primarily due to higher volume of $103 million in the Weapons and Sensors product line and higher volume of $37 million in the Unmanned Systems product line.

·     Higher Industrial revenues of $77 million, primarily due to higher volume of $49 million, largely in the Fuel Systems and Functional Components product line, and the impact from acquired businesses of $35 million.

·     Higher Textron Aviation revenues of $72 million, primarily due to higher volume and mix of $52 million, largely the result of higher Citation jet volume of $90 million, partially offset by lower turboprop volume.

·     Lower Bell revenues of $46 million, primarily due to a decrease in commercial revenues, largely reflecting lower commercial aircraft deliveries.

Revenues increased $392 million, 6%, in the first half of 2016, compared with the first half of 2015, largely driven by increases in the Textron Systems, Industrial and Textron Aviation segments, partially offset by lower revenues at the Bell segment.  The net revenue increase included the following factors:

·     Higher Textron Systems revenues of $174 million, primarily due to higher volume of $83 million in the Unmanned Systems product line and higher volume of $61 million in the Weapons and Sensors product line.

·     Higher Industrial revenues of $157 million, primarily due to higher volume of $111 million, largely in the Fuel Systems and Functional Components product line, and the impact from acquired businesses of $72 million.

·     Higher Textron Aviation revenues of $112 million, primarily due to higher volume and mix of $84 million, largely the result of higher Citation jet volume of $152 million, partially offset by lower turboprop volume.

·     Lower Bell revenues of $45 million, primarily due to an $88 million decrease in commercial revenues, largely reflecting lower commercial aircraft deliveries and $34 million of lower aftermarket volume, partially offset by a $45 million increase in other military revenues, primarily due to higher H-1 program revenues.

Cost of Sales and Selling and Administrative Expense

Manufacturing cost of sales and selling and administrative expense together comprise our operating expenses. Cost of sales increased $254 million, 10%, and $380 million, 7%, in the second quarter and first half of 2016, respectively, compared with the corresponding periods of 2015, largely due to higher volume at the Textron Systems, Textron Aviation, and Industrial segments, and an increase from acquired businesses.  In the second quarter and first half of 2016, the decrease in gross margin percentage was largely driven by an unfavorable impact from the mix of products sold during the period at Textron Aviation.

Selling and administrative expense decreased $11 million, 3%, and $40 million, 6%, in the second quarter and first half of 2016, respectively, compared with the corresponding periods of 2015.  The decrease in selling and administrative expense in the first half of 2016 was largely due to lower share-based compensation expense.

17

Table of Contents

Backlog

Bell’s backlog decreased $316 million during 2016, as total deliveries, largely under the V-22 program, exceeded new orders.

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 and certain corporate expenses.  The measurement for the Finance segment includes interest income and expense.

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

Approximately 24% of our 2015 revenues were derived from contracts with the U.S. Government.  For our segments that have significant contracts with the U.S. Government, we typically express changes in segment profit related to the government business in terms of volume, changes in program performance or changes in contract mix. Changes in volume that are described in net sales typically drive corresponding changes in our segment profit based on the profit rate for a particular contract. Changes in program performance typically relate to profit recognition associated with revisions to total estimated costs at completion that reflect improved or deteriorated operating performance or award fee rates. Changes in contract mix refers to changes in operating margin due to a change in the relative volume of contracts with higher or lower fee rates such that the overall average margin rate for the segment changes.

Textron Aviation

Textron Aviation Revenues and Operating Expenses

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

In the second quarter of 2016, Textron Aviation’s revenues increased $72 million, 6%, compared with the second quarter of 2015, primarily due to higher volume and mix of $52 million and the impact from the acquisition of a repair and overhaul business in the first quarter of 2016.  The increase in volume and mix is primarily due to higher Citation jet volume of $90 million, partially offset

18

Table of Contents

by lower turboprop volume. We delivered 45 Citation jets and 23 King Air turboprops in the second quarter of 2016, compared with 36 Citation jets and 30 King Air turboprops in the second quarter of 2015.  The portion of the segment’s revenues derived from aftermarket sales and services increased to 34% of its total revenues in the second quarter of 2016, from 31% in the second quarter of 2015, in part, due to the impact from the acquisition.

In the first half of 2016, Textron Aviation’s revenues increased $112 million, 5%, compared with the first half of 2015, primarily due to higher volume and mix of $84 million and the impact from the acquisition.  The increase in volume and mix is primarily due to higher Citation jet volume of $152 million, partially offset by lower turboprop volume.  We delivered 79 Citation jets and 49 King Air turboprops in the first half of 2016, compared with 69 Citation jets and 55 King Air turboprops in the first half of 2015.  The portion of the segment’s revenues derived from aftermarket sales and services represented 34% of its total revenues in the first half of 2016, compared with 33% in the first half of 2015.

Textron Aviation’s operating expenses increased by $79 million, 8%, and $113 million, 6%, in the second quarter and first half of 2016, respectively, compared with the corresponding periods of 2015, largely due to higher volume as described above and additional operating expenses resulting from the acquisition.

Textron Aviation Segment Profit

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

Segment profit at Textron Aviation decreased $7 million, 8%, in the second quarter of 2016, and was largely unchanged in the first half of 2016, compared with the corresponding periods of 2015. Volume and mix was essentially unchanged as the higher volume described above was largely offset by an unfavorable impact from the mix of products sold in 2016.

Bell

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

Bell Revenues and Operating Expenses

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

19

Table of Contents

Bell’s revenues decreased $46 million, 5%, in the second quarter of 2016, compared with the second quarter of 2015, primarily due to the following factors:

·     $72 million decrease in commercial revenues, primarily due to lower commercial aircraft deliveries.  Bell delivered 24 commercial aircraft in the second quarter of 2016, compared with 39 commercial aircraft in the second quarter of 2015.

·     $16 million increase in V-22 program revenues, primarily reflecting higher product support.  Bell delivered 6 V-22 aircraft in the second quarter of both 2016 and 2015.

·     $10 million increase in other military revenues, primarily reflecting higher H-1 program revenues.  Bell delivered 9 H-1 aircraft in the second quarter of 2016, compared with 6 H-1 aircraft in the second quarter of 2015.

Bell’s revenues decreased $45 million, 3%, in the first half of 2016, compared with the first half of 2015, primarily due to the following factors:

·     $88 million decrease in commercial revenues, primarily due to lower commercial aircraft deliveries and $34 million of lower aftermarket volume.  Bell delivered 54 commercial aircraft in the first half of 2016, compared with 74 commercial aircraft in the first half of 2015.

·     $45 million increase in other military revenues, primarily reflecting higher H-1 program revenues.  Bell delivered 19 H-1 aircraft in the first half of 2016, compared with 10 H-1 aircraft in the first half of 2015.

·     V-22 program revenues were largely unchanged. Bell delivered 12 V-22 aircraft in the first half of both 2016 and 2015.

Bell’s operating expenses decreased $26 million, 3%, and $31 million, 2%, in the second quarter and first half of 2016, respectively, compared with the corresponding periods of 2015, primarily due to lower net sales volume as described above.

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

Bell Segment Profit

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

Bell’s segment profit decreased $20 million, 20%, in the second quarter of 2016, compared with the second quarter of 2015.  The unfavorable impact from volume and mix was largely the result of lower commercial aircraft deliveries, while the unfavorable performance was primarily driven by lower favorable program adjustments.

Bell’s segment profit decreased $14 million, 8%, in the first half of 2016, compared with the first half of 2015, primarily due to lower volume as described above.

Textron Systems

20

Table of Contents

Textron Systems Revenues and Operating Expenses

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

Revenues at Textron Systems increased $165 million, 51%, in the second quarter of 2016 compared with the second quarter of 2015, primarily due to higher volume of $103 million in the Weapons and Sensors product line and higher volume of $37 million in the Unmanned Systems product line.

Revenues at Textron Systems increased $174 million, 27%, compared with the first half of 2015, primarily due to higher volume of $83 million in the Unmanned Systems product line and higher volume of $61 million in the Weapons and Sensors product line.

Textron Systems’ operating expenses increased $126 million, 42%, and $134 million, 23%, in the second quarter and first half of 2016, respectively, compared with the corresponding periods of 2015, primarily due to higher volume as described above.

Textron Systems Segment Profit

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