TEXTRON INC, 10-K filed on 2/14/2014
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 28, 2013
Feb. 1, 2014
Jun. 28, 2013
Document and Entity Information
 
 
 
Entity Registrant Name
TEXTRON INC 
 
 
Entity Central Index Key
0000217346 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 28, 2013 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-28 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 7.3 
Entity Common Stock, Shares Outstanding
 
282,500,851 
 
Document Fiscal Year Focus
2013 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 28, 2013
Dec. 29, 2012
Dec. 31, 2011
Revenues
 
 
 
Manufacturing revenues
$ 11,972 
$ 12,022 
$ 11,172 
Finance revenues
132 
215 
103 
Total revenues
12,104 
12,237 
11,275 
Costs, expenses and other
 
 
 
Cost of sales
10,131 
10,019 
9,308 
Selling and administrative expense
1,126 
1,165 
1,195 
Interest expense
173 
212 
246 
Valuation allowance on transfer of Golf Mortgage portfolio to held for sale
 
 
186 
Other losses, net
 
 
Total costs, expenses and other
11,430 
11,396 
10,938 
Income from continuing operations before income taxes
674 
841 
337 
Income tax expense
176 
260 
95 
Income from continuing operations
498 
581 
242 
Income from discontinued operations, net of income taxes
 
 
Net income
$ 498 
$ 589 
$ 242 
Basic earnings per share
 
 
 
Continuing operations (in dollars per share)
$ 1.78 
$ 2.07 
$ 0.87 
Discontinued operations (in dollars per share)
 
$ 0.03 
 
Basic earnings per share (in dollars per share)
$ 1.78 
$ 2.10 
$ 0.87 
Diluted earnings per share
 
 
 
Continuing operations (in dollars per share)
$ 1.75 
$ 1.97 
$ 0.79 
Discontinued operations (in dollars per share)
 
$ 0.03 
 
Diluted earnings per share (in dollars per share)
$ 1.75 
$ 2.00 
$ 0.79 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 28, 2013
Dec. 29, 2012
Dec. 31, 2011
Consolidated Statements of Comprehensive Income (Loss)
 
 
 
Net income
$ 498 
$ 589 
$ 242 
Other comprehensive income (loss), net of tax:
 
 
 
Pension and postretirement benefits adjustments, net of reclassifications
747 
(146)
(286)
Deferred gains/losses on hedge contracts, net of reclassifications
(16)
(1)
(20)
Foreign currency translation adjustments
12 
(3)
Other comprehensive income (loss)
743 
(145)
(309)
Comprehensive income (loss)
$ 1,241 
$ 444 
$ (67)
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 28, 2013
Dec. 29, 2012
Assets
 
 
Cash and equivalents
$ 1,211 
$ 1,413 
Inventories
2,963 
2,712 
Total assets
12,944 
13,033 
Liabilities
 
 
Accrued liabilities
1,888 
1,956 
Total liabilities
8,560 
10,042 
Shareholders' equity
 
 
Common stock (282.1 million and 282.6 million shares issued, respectively, and 282.1 million and 271.3 million shares outstanding, respectively)
35 
35 
Capital surplus
1,331 
1,177 
Retained earnings
4,045 
3,824 
Accumulated other comprehensive loss
(1,027)
(1,770)
Total shareholders' equity including cost of treasury shares
4,384 
3,266 
Less cost of treasury shares
 
275 
Total shareholders' equity
4,384 
2,991 
Total liabilities and shareholders' equity
12,944 
13,033 
Manufacturing group
 
 
Assets
 
 
Cash and equivalents
1,163 
1,378 
Accounts receivable, net
979 
829 
Inventories
2,963 
2,712 
Other current assets
467 
470 
Total current assets
5,572 
5,389 
Property, plant and equipment, net
2,215 
2,149 
Goodwill
1,735 
1,649 
Other assets
1,697 
1,524 
Total assets
11,219 
10,711 
Liabilities
 
 
Current portion of long-term debt
535 
Accounts payable
1,107 
1,021 
Accrued liabilities
1,888 
1,956 
Total current liabilities
3,003 
3,512 
Other liabilities
2,118 
2,798 
Long-term debt
1,923 
1,766 
Debt
1,931 
2,301 
Total liabilities
7,044 
8,076 
Finance group
 
 
Assets
 
 
Cash and equivalents
48 
35 
Finance receivables, net
1,493 
1,990 
Other assets
184 
297 
Total assets
1,725 
2,322 
Liabilities
 
 
Other liabilities
260 
280 
Debt
1,256 
1,686 
Total liabilities
$ 1,516 
$ 1,966 
Consolidated Balance Sheets (Parenthetical)
Dec. 28, 2013
Dec. 29, 2012
Consolidated Balance Sheets
 
 
Common stock, shares issued
282,100,000 
282,600,000 
Common stock, shares outstanding
282,059,000 
271,263,000 
Consolidated Statements of Shareholders' Equity (USD $)
In Millions, unless otherwise specified
Total
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Loss
Balance at Jan. 01, 2011
$ 2,972 
$ 35 
$ 1,301 
$ 3,037 
$ (85)
$ (1,316)
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income
242 
 
 
242 
 
 
Other comprehensive income (loss)
(309)
 
 
 
 
(309)
Dividends declared ($0.08 per share)
(22)
 
 
(22)
 
 
Purchases/conversions of convertible notes
(182)
 
(179)
 
(3)
 
Amendment of call option/warrant transactions and purchase of capped call
(30)
 
(30)
 
 
 
Share-based compensation activity
74 
 
(11)
 
85 
 
Balance at Dec. 31, 2011
2,745 
35 
1,081 
3,257 
(3)
(1,625)
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income
589 
 
 
589 
 
 
Other comprehensive income (loss)
(145)
 
 
 
 
(145)
Dividends declared ($0.08 per share)
(22)
 
 
(22)
 
 
Share-based compensation activity
96 
 
96 
 
 
 
Purchases of common stock
(272)
 
 
 
(272)
 
Balance at Dec. 29, 2012
2,991 
35 
1,177 
3,824 
(275)
(1,770)
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income
498 
 
 
498 
 
 
Other comprehensive income (loss)
743 
 
 
 
 
743 
Dividends declared ($0.08 per share)
(22)
 
 
(22)
 
 
Purchases/conversions of convertible notes
 
39 
 
(41)
 
Share-based compensation activity
99 
 
99 
 
 
 
Settlement of capped call
75 
 
75 
 
 
 
Retirement of treasury stock
 
(2)
(59)
(255)
316 
 
Balance at Dec. 28, 2013
$ 4,384 
$ 35 
$ 1,331 
$ 4,045 
 
$ (1,027)
Consolidated Statements of Shareholders' Equity (Parenthetical)
3 Months Ended 12 Months Ended
Dec. 28, 2013
Sep. 28, 2013
Jun. 29, 2013
Mar. 30, 2013
Dec. 29, 2012
Sep. 29, 2012
Jun. 30, 2012
Mar. 31, 2012
Dec. 28, 2013
Dec. 29, 2012
Dec. 31, 2011
Consolidated Statements of Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Dividends declared, per share (in dollars per share)
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.08 
$ 0.08 
$ 0.08 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 28, 2013
Dec. 29, 2012
Dec. 31, 2011
Cash flows from operating activities
 
 
 
Net income (loss)
$ 498 
$ 589 
$ 242 
Less: Income from discontinued operations
 
 
Income (loss) from continuing operations
498 
581 
242 
Non-cash items:
 
 
 
Depreciation and amortization
389 
383 
403 
Deferred income taxes
86 
171 
81 
Portfolio losses on finance receivables
29 
68 
102 
Valuation allowance on finance receivables held for sale
(31)
(76)
202 
Goodwill and other asset impairment charges
 
 
59 
Other, net
63 
94 
178 
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(118)
32 
36 
Inventories
(118)
(316)
(127)
Other assets
(42)
98 
Accounts payable
65 
179 
211 
Accrued and other liabilities
(182)
(96)
(175)
Income taxes, net
(84)
52 
48 
Pension, net
17 
(240)
(474)
Captive finance receivables, net
237 
96 
236 
Other operating activities, net
 
(52)
Net cash provided by operating activities of continuing operations
813 
935 
1,068 
Net cash used in operating activities of discontinued operations
(3)
(8)
(5)
Net cash provided by operating activities
810 
927 
1,063 
Cash flows from investing activities
 
 
 
Capital expenditures
(444)
(480)
(423)
Net cash used in acquisitions
(196)
(11)
(14)
Finance receivables repaid
190 
599 
824 
Proceeds from sales of receivables and other finance assets
178 
249 
530 
Finance receivables originated or purchased
(10)
(22)
(187)
Proceeds from collection on notes receivable from a prior disposition
 
 
58 
Other investing activities, net
18 
43 
55 
Net cash provided by (used in) investing activities
(264)
378 
843 
Cash flows from financing activities
 
 
 
Principal payments on long-term and nonrecourse debt
(1,056)
(615)
(785)
Proceeds from long-term debt
448 
106 
926 
Settlement of convertible notes
(215)
(2)
(580)
Proceeds from settlement of capped call
75 
 
 
Amendment of call option/warrant transactions and purchase of capped call
 
 
(30)
Payments on long-term lines of credit
 
 
(1,440)
Purchases of Textron common stock
 
(272)
 
Proceeds from exercise of stock options
31 
19 
Dividends paid
(22)
(17)
(22)
Other financing activities
(3)
 
(23)
Net cash provided by (used in) financing activities
(742)
(781)
(1,951)
Effect of exchange rate changes on cash and equivalents
(6)
(1)
Net increase (decrease) in cash and equivalents
(202)
528 
(46)
Cash and equivalents at beginning of year
1,413 
885 
931 
Cash and equivalents at end of year
1,211 
1,413 
885 
Manufacturing Group
 
 
 
Cash flows from operating activities
 
 
 
Net income (loss)
470 
542 
464 
Less: Income from discontinued operations
 
 
Income (loss) from continuing operations
470 
534 
464 
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
 
 
 
Dividends received from Finance group
175 
345 
179 
Capital contributions paid to Finance group
(1)
(240)
(182)
Non-cash items:
 
 
 
Depreciation and amortization
371 
358 
371 
Deferred income taxes
51 
102 
197 
Goodwill and other asset impairment charges
 
 
57 
Other, net
86 
97 
166 
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(118)
32 
36 
Inventories
(135)
(300)
(132)
Other assets
(41)
21 
92 
Accounts payable
65 
179 
211 
Accrued and other liabilities
(171)
(77)
(149)
Income taxes, net
(119)
148 
(22)
Pension, net
21 
(241)
(475)
Other operating activities, net
 
(52)
Net cash provided by operating activities of continuing operations
658 
958 
761 
Net cash used in operating activities of discontinued operations
(3)
(8)
(5)
Net cash provided by operating activities
655 
950 
756 
Cash flows from investing activities
 
 
 
Capital expenditures
(444)
(480)
(423)
Net cash used in acquisitions
(196)
(11)
(14)
Proceeds from collection on notes receivable from a prior disposition
 
 
58 
Other investing activities, net
16 
15 
(44)
Net cash provided by (used in) investing activities
(624)
(476)
(423)
Cash flows from financing activities
 
 
 
Principal payments on long-term and nonrecourse debt
(313)
(189)
(29)
Proceeds from long-term debt
150 
 
496 
Settlement of convertible notes
(215)
(2)
(580)
Proceeds from settlement of capped call
75 
 
 
Amendment of call option/warrant transactions and purchase of capped call
 
 
(30)
Purchases of Textron common stock
 
(272)
 
Proceeds from exercise of stock options
31 
19 
Dividends paid
(22)
(17)
(22)
Intergroup financing
57 
490 
(175)
Other financing activities
(3)
 
(23)
Net cash provided by (used in) financing activities
(240)
29 
(360)
Effect of exchange rate changes on cash and equivalents
(6)
 
Net increase (decrease) in cash and equivalents
(215)
507 
(27)
Cash and equivalents at beginning of year
1,378 
871 
898 
Cash and equivalents at end of year
1,163 
1,378 
871 
Finance Group
 
 
 
Cash flows from operating activities
 
 
 
Net income (loss)
28 
47 
(222)
Income (loss) from continuing operations
28 
47 
(222)
Non-cash items:
 
 
 
Depreciation and amortization
18 
25 
32 
Deferred income taxes
35 
69 
(116)
Portfolio losses on finance receivables
29 
68 
102 
Valuation allowance on finance receivables held for sale
(31)
(76)
202 
Other, net
(23)
(3)
12 
Changes in assets and liabilities:
 
 
 
Other assets
 
(11)
10 
Accrued and other liabilities
(21)
(19)
(26)
Income taxes, net
35 
(96)
70 
Pension, net
(4)
Net cash provided by operating activities of continuing operations
66 
65 
Net cash provided by operating activities
66 
65 
Cash flows from investing activities
 
 
 
Finance receivables repaid
675 
1,004 
1,289 
Proceeds from sales of receivables and other finance assets
178 
249 
585 
Finance receivables originated or purchased
(271)
(331)
(471)
Other investing activities, net
42 
12 
50 
Net cash provided by (used in) investing activities
624 
934 
1,453 
Cash flows from financing activities
 
 
 
Principal payments on long-term and nonrecourse debt
(743)
(426)
(756)
Proceeds from long-term debt
298 
106 
430 
Payments on long-term lines of credit
 
 
(1,440)
Dividends paid
(175)
(345)
(179)
Intergroup financing
(57)
(493)
167 
Capital contributions paid to Finance group
240 
182 
Capital contributions paid to Cessna Export Finance Corp.
 
 
60 
Other financing activities
(1)
 
 
Net cash provided by (used in) financing activities
(677)
(918)
(1,536)
Effect of exchange rate changes on cash and equivalents
 
 
(1)
Net increase (decrease) in cash and equivalents
13 
21 
(19)
Cash and equivalents at beginning of year
35 
14 
33 
Cash and equivalents at end of year
$ 48 
$ 35 
$ 14 
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

Note 1. Summary of Significant Accounting Policies

 

Principles of Consolidation and Financial Statement Presentation

Our Consolidated Financial Statements include the accounts of Textron Inc. and its majority-owned subsidiaries.  Our financings are conducted through two separate borrowing groups.  The Manufacturing group consists of Textron Inc. consolidated with its majority-owned subsidiaries that operate in the Cessna, Bell, Textron Systems and Industrial segments.  The Finance group, which also is the Finance segment, consists of Textron Financial Corporation (TFC) 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.

 

Our Finance group provides captive financing for retail purchases and leases for new and used aircraft and equipment manufactured by our Manufacturing group.  In the Consolidated Statements of Cash Flows, cash received from customers or from the sale of receivables is reflected as operating activities when received from third parties.  However, in the cash flow information provided for the separate borrowing groups, cash flows related to captive financing activities are reflected based on the operations of each group.  For example, when product is sold by our Manufacturing group to a customer and is financed by the Finance group, the origination of the finance receivable is recorded within investing activities as a cash outflow in the Finance group’s statement of cash flows.  Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the Finance group on the customer’s behalf is recorded within operating cash flows as a cash inflow.  Although cash is transferred between the two borrowing groups, there is no cash transaction reported in the consolidated cash flows at the time of the original financing.  These captive financing activities, along with all significant intercompany transactions, are reclassified or eliminated in consolidation.

 

Collaborative Arrangements

Our Bell segment has a strategic alliance agreement with The Boeing Company (Boeing) to provide engineering, development and test services related to the V-22 aircraft, as well as to produce the V-22 aircraft, under a number of separate contracts with the U.S. Government (V-22 Contracts).  The alliance created by this agreement is not a legal entity and has no employees, no assets and no true operations.  This agreement creates contractual rights and does not represent an entity in which we have an equity interest.  We account for this alliance as a collaborative arrangement with Bell and Boeing reporting costs incurred and revenues generated from transactions with the U.S. Government in each company’s respective income statement.  Neither Bell nor Boeing is considered to be the principal participant for the transactions recorded under this agreement.  Profits on cost-plus contracts are allocated between Bell and Boeing on a 50%-50% basis.  Negotiated profits on fixed-price contracts are also allocated 50%-50%; however, Bell and Boeing are each responsible for their own cost overruns and are entitled to retain any cost underruns.  Based on the contractual arrangement established under the alliance, Bell accounts for its rights and obligations under the specific requirements of the V-22 Contracts allocated to Bell under the work breakdown structure.  We account for all of our rights and obligations, including warranty, product and any contingent liabilities, under the specific requirements of the V-22 Contracts allocated to us under the agreement.  Revenues and cost of sales reflect our performance under the V-22 Contracts with revenues recognized using the units-of-delivery method.  We include all assets used in performance of the V-22 Contracts that we own, including inventory and unpaid receivables and all liabilities arising from our obligations under the V-22 Contracts in our Consolidated Balance Sheets.

 

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 2013, 2012 and 2011, 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 2013, 2012 and 2011 by $29 million, $15 million and $54 million, respectively, ($18 million, $9 million and $34 million after tax, or $0.06, $0.03 and $0.11 per diluted share, respectively).  For 2013, 2012 and 2011, the gross favorable program profit adjustments totaled $51 million, $88 million and $83 million, respectively. For 2013, 2012 and 2011, the gross unfavorable program profit adjustments totaled $22 million, $73 million and $29 million, respectively.

 

Revenue Recognition

We generally recognize revenue for the sale of products, which are not under long-term contracts, upon delivery.  For commercial aircraft, delivery is upon completion of manufacturing, customer acceptance, and the transfer of the risk and rewards of ownership.  Taxes collected from customers and remitted to government authorities are recorded on a net basis.

 

When a sale arrangement involves multiple deliverables, such as sales of products that include customization and other services, we evaluate the arrangement to determine whether there are separate items that are required to be delivered under the arrangement that qualify as separate units of accounting.  These arrangements typically involve the customization services we offer to customers who purchase Bell helicopters, and the services generally are provided within the first six months after the customer accepts the aircraft and assumes risk of loss.  We consider the aircraft and the customization services to be separate units of accounting and allocate contract price between the two on a relative selling price basis using the best evidence of selling price for each of the arrangement deliverables, typically by reference to the price charged when the same or similar items are sold separately by us, taking into consideration any performance, cancellation, termination or refund-type provisions.  We recognize revenue when the recognition criteria for each unit of accounting are met.

 

Long-Term Contracts — Revenues under long-term contracts are accounted for under the percentage-of-completion method of accounting.  Under this method, we estimate profit as the difference between the total estimated revenues and cost of a contract.  We then recognize that estimated profit over the contract term based on either the units-of-delivery method or the cost-to-cost method (which typically is used for development effort as costs are incurred), as appropriate under the circumstances.  Revenues under fixed-price contracts generally are recorded using the units-of-delivery method.  Revenues under cost-reimbursement contracts are recorded using the cost-to-cost method.

 

Long-term contract profits are based on estimates of total contract cost and revenues utilizing current contract specifications, expected engineering requirements, the achievement of contract milestones and product deliveries.  Certain contracts are awarded with fixed-price incentive fees that also are considered when estimating revenues and profit rates.  Contract costs typically are incurred over a period of several years, and the estimation of these costs requires substantial judgment.  Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals.  We update our projections of costs at least semiannually or when circumstances significantly change.  When adjustments are required, any changes from prior estimates are recognized using the cumulative catch-up method with the impact of the change from inception-to-date recorded in the current period.  Anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable.

 

Finance Revenues — Finance revenues include interest on finance receivables, direct loan origination costs and fees received, and capital and leveraged lease earnings, as well as portfolio gains/losses.  Portfolio gains/losses include impairment charges related to repossessed assets and properties and gains/losses on the sale or early termination of finance assets.  Revenues on direct loan origination costs and fees received are deferred and amortized to finance revenues over the contractual lives of the respective receivables and credit lines using the interest method.  When receivables are sold or prepaid, unamortized amounts are recognized in finance revenues.

 

We recognize interest using the interest method, which provides a constant rate of return over the terms of the receivables.  Accrual of interest income is suspended if credit quality indicators suggest full collection of principal and interest is doubtful.  In addition, we automatically suspend the accrual of interest income for accounts that are contractually delinquent by more than three months unless collection is not doubtful.  Cash payments on nonaccrual accounts, including finance charges, generally are applied 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.

 

Cash and Equivalents

Cash and equivalents consist of cash and short-term, highly liquid investments with original maturities of three months or less.

 

Inventories

Inventories are stated at the lower of cost or estimated net realizable value.  We value our inventories generally using the first-in, first-out (FIFO) method or the last-in, first-out (LIFO) method for certain qualifying inventories where LIFO provides a better matching of costs and revenues. We determine costs for our commercial helicopters on an average cost basis by model considering the expended and estimated costs for the current production release.  Inventoried costs related to long-term contracts are stated at actual production costs, including allocable operating overhead, advances to suppliers, and, in the case of contracts with the U.S. Government, allocable research and development and general and administrative expenses.  Since our inventoried costs include amounts related to contracts with long production cycles, a portion of these costs is not expected to be realized within one year.  Pursuant to contract provisions, agencies of the U.S. Government have title to, or security interest in, inventories related to such contracts as a result of advances, performance-based payments and progress payments.  Such advances and payments are reflected as an offset against the related inventory balances.  Customer deposits are recorded against inventory when the right of offset exists.  All other customer deposits are recorded in accrued liabilities.

 

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and are depreciated primarily using the straight-line method.  We capitalize expenditures for improvements that increase asset values and extend useful lives.

 

Goodwill

We evaluate the recoverability of goodwill annually in the fourth quarter or more frequently if events or changes in circumstances, such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of a reporting unit might be impaired.  The reporting unit represents the operating segment unless discrete financial information is prepared and reviewed by segment management for businesses one level below that operating segment, in which case such component is the reporting unit.  In certain instances, we have aggregated components of an operating segment into a single reporting unit based on similar economic characteristics.

 

We calculate the fair value of each reporting unit, primarily using discounted cash flows.  The discounted cash flows incorporate assumptions for short- and long-term revenue growth rates, operating margins and discount rates, which represent our best estimates of current and forecasted market conditions, cost structure, anticipated net cost reductions, and the implied rate of return that we believe a market participant would require for an investment in a business having similar risks and business characteristics to the reporting unit being assessed.  If the reporting unit’s estimated fair value exceeds its carrying value, the reporting unit is not impaired, and no further analysis is performed.  Otherwise, the amount of the impairment must be determined by comparing the carrying amount of the reporting unit’s goodwill to the implied fair value of that goodwill.  The implied fair value of goodwill is determined by assigning a fair value to all of the reporting unit’s assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination.  If the carrying amount of the goodwill exceeds the implied fair value, an impairment loss would be recognized in an amount equal to that excess.

 

Intangible and Other Long-Lived Assets

At acquisition, we estimate and record the fair value of purchased intangible assets primarily using a discounted cash flow analysis of anticipated cash flows reflecting incremental revenues and/or cost savings resulting from the acquired intangible asset using market participant assumptions.  Amortization of intangible assets with finite lives is recognized over their estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized.  Approximately 64% of our gross intangible assets are amortized based on the cash flow streams used to value the assets, with the remaining assets amortized using the straight-line method.  Long-lived assets, including intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  If the carrying value of the asset held for use exceeds the sum of the undiscounted expected future cash flows, the carrying value of the asset generally is written down to fair value.  Long-lived assets held for sale are stated at the lower of cost or fair value less cost to sell.  Fair value is determined using pertinent market information, including estimated future discounted cash flows.

 

Finance Receivables

Finance receivables primarily include finance receivables classified as held for investment, and also include finance receivables classified as held for sale.  Finance receivables are classified as held for investment when we have the intent and the ability to hold the receivable for the foreseeable future or until maturity or payoff.  Finance receivables held for investment are generally recorded at the amount of outstanding principal less 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, including large accounts in homogeneous portfolios, 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.  Repossessed assets are recorded at their fair value, less estimated cost to sell.

 

Finance receivables are classified as held for sale based on the determination that we no longer intend to hold the receivables for the foreseeable future, until maturity or payoff, or we no longer have the ability to hold to maturity.  Our decision to classify certain finance receivables as held for sale is based on a number of factors, including, but not limited to, contractual duration, type of collateral, credit strength of the borrowers, interest rates and perceived marketability of the receivables. These receivables are carried at the lower of cost or fair value.  At the time of transfer to the held for sale classification, we establish a valuation allowance for any shortfall between the carrying value and fair value.  In addition, any allowance for loan losses previously allocated to these finance receivables is transferred to the valuation allowance account and adjusted quarterly.  Fair value changes can occur based on market interest rates, market liquidity, and changes in the credit quality of the borrower and value of underlying loan collateral.

 

Pension and Postretirement Benefit Obligations

We maintain various pension and postretirement plans for our employees globally.  These plans include significant pension and postretirement benefit obligations, which are calculated based on actuarial valuations.  Key assumptions used in determining these obligations and related expenses include expected long-term rates of return on plan assets, discount rates and healthcare cost projections.  We evaluate and update these assumptions annually in consultation with third-party actuaries and investment advisors.  We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increases.  We recognize the overfunded or underfunded status of our pension and postretirement plans in the Consolidated Balance Sheets and recognize changes in the funded status of our defined benefit plans in comprehensive income in the year in which they occur. Actuarial gains and losses that are not immediately recognized as net periodic pension cost are recognized as a component of other comprehensive income (loss) (OCI) and are amortized into net periodic pension cost in future periods.

 

Derivative Financial Instruments

We are exposed to market risk primarily from changes in currency exchange rates and interest rates.  We do not hold or issue derivative financial instruments for trading or speculative purposes.  To manage the volatility relating to our exposures, we net these exposures on a consolidated basis to take advantage of natural offsets.  For the residual portion, we enter into various derivative transactions pursuant to our policies in areas such as counterparty exposure and hedging practices.  All derivative instruments are reported at fair value in the Consolidated Balance Sheets.  Designation to support hedge accounting is performed on a specific exposure basis.  For financial instruments qualifying as fair value hedges, we record changes in fair value in earnings, offset, in part or in whole, by corresponding changes in the fair value of the underlying exposures being hedged.  For cash flow hedges, we record changes in the fair value of derivatives (to the extent they are effective as hedges) in OCI, net of deferred taxes.  Changes in fair value of derivatives not qualifying as hedges are recorded in earnings.

 

Foreign currency denominated assets and liabilities are translated into U.S. dollars.  Adjustments from currency rate changes are recorded in the cumulative translation adjustment account in shareholders’ equity until the related foreign entity is sold or substantially liquidated.  We use foreign currency financing transactions to effectively hedge long-term investments in foreign operations with the same corresponding currency.  Foreign currency gains and losses on the hedge of the long-term investments are recorded in the cumulative translation adjustment account.

 

Product Liabilities

We accrue for product liability claims and related defense costs when a loss is probable and reasonably estimable.  Our estimates are generally based on the specifics of each claim or incident and our best estimate of the probable loss using historical experience.

 

Environmental Liabilities and Asset Retirement Obligations

Liabilities for environmental matters are recorded on a site-by-site basis when it is probable that an obligation has been incurred and the cost can be reasonably estimated.  We estimate our accrued environmental liabilities using currently available facts, existing technology, and presently enacted laws and regulations, all of which are subject to a number of factors and uncertainties.  Our environmental liabilities are not discounted and do not take into consideration possible future insurance proceeds or significant amounts from claims against other third parties.

 

We have incurred asset retirement obligations primarily related to costs to remove and dispose of underground storage tanks and asbestos materials used in insulation, adhesive fillers and floor tiles.  There is no legal requirement to remove these items, and there currently is no plan to remodel the related facilities or otherwise cause the impacted items to require disposal.  Since these asset retirement obligations are not estimable, there is no related liability recorded in the Consolidated Balance Sheets.

 

Warranty and Product Maintenance Contracts

We provide limited warranty and product maintenance programs, including parts and labor, for certain products for periods ranging from one to five years.  We estimate the costs that may be incurred under warranty programs and record a liability in the amount of such costs at the time product revenues are recognized.  Factors that affect this liability include the number of products sold, historical costs per claim, contractual recoveries from vendors and historical and anticipated rates of warranty claims, including production and warranty patterns for new models.  We assess the adequacy of our recorded warranty and product maintenance liabilities periodically and adjust the amounts as necessary.  Additionally, we may establish warranty liabilities related to the issuance of aircraft service bulletins for aircraft no longer covered under the limited warranty programs.

 

Research and Development Costs

Our customer-funded research and development costs are charged directly to the related contracts, which primarily consist of U.S. Government contracts.  In accordance with government regulations, we recover a portion of company-funded research and development costs through overhead rate charges on our U.S. Government contracts.  Research and development costs that are not reimbursable under a contract with the U.S. Government or another customer are charged to expense as incurred.  Company-funded research and development costs were $651 million, $584 million, and $525 million in 2013, 2012 and 2011, respectively, and are included in cost of sales.

 

Income Taxes

Deferred income tax balances reflect the effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and their tax bases, as well as from net operating losses and tax credit carryforwards, and are stated at enacted tax rates in effect for the year taxes are expected to be paid or recovered.  Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years.  We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including the future reversal of existing taxable temporary differences, taxable income in carryback years, available tax planning strategies and estimated future taxable income.  We recognize net tax-related interest and penalties for continuing operations in income tax expense.

 

Business Acquisitions, Goodwill and Intangible Assets
Business Acquisitions, Goodwill and Intangible Assets

Note 2. Business Acquisitions, Goodwill and Intangible Assets

 

Pending Business Acquisition

On December 26, 2013, we entered into an agreement and plan of merger pursuant to which we will acquire all outstanding equity interests in Beech Holdings, LLC (“Beech”), the parent of Beechcraft Corporation, for approximately $1.4 billion in cash.  Beech designs, builds and supports aircraft, including the King Air turboprops, piston-engine Baron and Bonanza, and the T-6 trainer and AT-6 light attack military aircraft.  Beech also has a global network of both factory-owned and authorized service centers. We plan to finance the purchase of the equity in Beech and the repayment of Beech’s outstanding debt, which is required at closing, through a combination of available cash at Beech and Textron and up to $1.1 billion in new debt.  The transaction is expected to close during the first half of 2014, subject to customary closing conditions, including regulatory approvals.

 

2013 Business Acquisitions

In 2013, we acquired the following businesses for an aggregate cash payment of $196 million:

 

Textron Systems

·      Mechtronix, Inc. and OPINICUS Corporation, both acquired on December 6, 2013, design, develop, install and provide maintenance of advanced full flight simulators for both rotary- and fixed-wing aircraft.

 

Industrial

·                  Sherman & Reilly, Inc., a manufacturer of underground and aerial transmission and distribution products was acquired by our Greenlee business on May 1, 2013.

·      HD Electric Company, a designer and manufacturer of power utility products that test, measure and control electric power was also acquired by our Greenlee business on December 18, 2013.

Cessna

·                  Two service centers located in Zurich, Switzerland and Düsseldorf, Germany were acquired on December 31, 2012.

 

The consideration paid for each of these businesses was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date.  We assigned $75 million to identifiable intangible assets, which primarily include platform technology and trade names.  For the three acquisitions that were closed in December 2013, we made preliminary estimates of the fair value of certain assets and we expect to complete the valuation of the assets in the first quarter of 2014.  The acquired intangible assets will be amortized over their estimate lives, which range from 7 to 11 years, primarily using accelerated amortization methods based on the cash flow streams used to value those assets. The excess of the purchase price over the estimated fair value of the net assets acquired totaled $82 million, which was recorded as goodwill, and reflects the expected revenue, assembled workforce and going concern nature of the businesses.  Approximately $52 million of the goodwill is deductible for tax purposes.

 

The operating results for these acquisitions have been included in the Consolidated Statement of Operations since their respective closing dates.  Pro forma information has not been included for these business acquisitions as the results would not be materially different from our consolidated results.

 

The changes in the carrying amount of goodwill by segment are as follows:

 

(In millions)

 

Cessna

 

Bell

 

Textron
Systems

 

Industrial

 

Total

 

Balance at January 1, 2011

 

$

322

 

$

31

 

$

974

 

$

305

 

$

1,632

 

Acquisitions

 

 

 

 

5

 

5

 

Foreign currency translation

 

 

 

 

(2

)

(2

)

Balance at December 31, 2011

 

322

 

31

 

974

 

308

 

1,635

 

Acquisitions

 

4

 

 

 

6

 

10

 

Foreign currency translation

 

 

 

 

4

 

4

 

Balance at December 29, 2012

 

326

 

31

 

974

 

318

 

1,649

 

Acquisitions

 

 

 

52

 

30

 

82

 

Foreign currency translation

 

 

 

 

4

 

4

 

Balance at December 28, 2013

 

$

326

 

$

31

 

$

1,026

 

$

352

 

$

1,735

 

 

Our intangible assets are summarized below:

 

 

 

 

 

 

December 28, 2013

 

 

December 29, 2012

 

(Dollars in millions)

 

Weighted-Average
Amortization
Period (in years)

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Customer agreements and contractual relationships

 

15

 

 

$

331

 

$

(165)

 

$

166

 

 

$

330

 

$

(139)

 

$

191

 

Patents and technology

 

10

 

 

142

 

(63)

 

79

 

 

84

 

(55)

 

29

 

Trademarks

 

15

 

 

49

 

(24)

 

25

 

 

36

 

(22)

 

14

 

Other

 

9

 

 

23

 

(17)

 

6

 

 

20

 

(16)

 

4

 

Total

 

 

 

 

$

545

 

$

(269)

 

$

276

 

 

$

470

 

$

(232)

 

$

238

 

 

Amortization expense totaled $37 million, $40 million and $51 million in 2013, 2012 and 2011, respectively.  Amortization expense is estimated to be approximately $43 million, $42 million, $36 million, $32 million and $25 million in 2014, 2015, 2016, 2017 and 2018, respectively.

 

Accounts Receivable and Finance Receivables
Accounts Receivable and Finance Receivables

 

 

Note 3. Accounts Receivable and Finance Receivables

 

Accounts Receivable

Accounts receivable is composed of the following:

 

(In millions)

 

 

December 28,
2013

 

 

December 29,
2012

 

Commercial

 

 

$

654

 

 

$

534

 

U.S. Government contracts

 

 

347

 

 

314

 

 

 

 

1,001

 

 

848

 

Allowance for doubtful accounts

 

 

(22

)

 

(19

)

Total

 

 

$

979

 

 

$

829

 

 

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 $163 million at December 28, 2013 and $149 million at December 29, 2012.

 

Finance Receivables

Finance receivables by classification are presented in the following table.

 

(In millions)

 

 

December 28,
2013

 

 

December 29,
2012

 

Finance receivables held for investment

 

 

$

1,483

 

 

$

1,934

 

Allowance for losses

 

 

(55

)

 

(84

)

Total finance receivables held for investment, net

 

 

1,428

 

 

1,850

 

Finance receivables held for sale

 

 

65

 

 

140

 

Total finance receivables, net

 

 

$

1,493

 

 

$

1,990

 

 

Finance receivables held for investment primarily includes loans and finance leases provided to purchasers of new and used Cessna aircraft and Bell helicopters and also includes loans and finance leases secured by used aircraft produced by other manufacturers.  These agreements typically have initial terms ranging from five to ten years and amortization terms ranging from eight to fifteen years.  The average balance of loans and finance leases was $1 million at December 28, 2013.  Loans generally require the customer to pay a significant down payment, along with periodic scheduled principal payments that reduce the outstanding balance through the term of the loan.  Finance leases with no significant residual value at the end of the contractual term are classified as loans, as their legal and economic substance is more equivalent to a secured borrowing than a finance lease with a significant residual value.  Finance receivables held for investment also includes leveraged leases secured by the ownership of the leased equipment and real property.

 

Finance receivables held for sale includes the non-captive loan portfolio at December 28, 2013.  These finance receivables are carried at the lower of cost or fair value and are not included in the credit performance tables below.  During 2013, we determined that we no longer had the intent to hold the remaining non-captive loan portfolio for the foreseeable future and, accordingly, transferred $34 million of the remaining non-captive loans, net of a $1 million allowance for losses, from the held for investment classification to the held for sale classification.  We received total proceeds of $64 million and $109 million in 2013 and 2012, respectively, from the sale of finance receivables held for sale and $76 million and $207 million, respectively, from payoffs and collections.

 

Our finance receivables are diversified across geographic region and borrower industry.  At December 28, 2013, 41% of our finance receivables were distributed throughout the U.S. compared with 45% at the end of 2012.  At December 28, 2013 and December 29, 2012, finance receivables included $200 million and $341 million, respectively, of receivables that have been legally sold to a special purpose entity (SPE), which is a consolidated subsidiary of TFC. The assets of the SPE are pledged as collateral for its debt, which is reflected as securitized on-balance sheet debt in Note 7. Third-party investors have no legal recourse to TFC beyond the credit enhancement provided by the assets of the SPE.

 

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.

 

A summary of finance receivables categorized based on the credit quality indicators discussed above is as follows:

 

(In millions)

 

 

December 28,
2013

 

 

December 29,
2012

 

Performing

 

 

$

1,285

 

 

$

1,661

 

Watchlist

 

 

93

 

 

130

 

Nonaccrual

 

 

105

 

 

143

 

Total

 

 

$

1,483

 

 

$

1,934

 

Nonaccrual as a percentage of total finance receivables

 

 

7.08

%

 

7.39

%

 

We measure delinquency based on the contractual payment terms of our loans and leases.  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 by delinquency aging category are summarized in the table below:

 

(In millions)

 

 

December 28,
2013

 

 

December 29,
2012

 

Less than 31 days past due

 

 

$

1,295

 

 

$

1,757

 

31-60 days past due

 

 

108

 

 

87

 

61-90 days past due

 

 

37

 

 

56

 

Over 90 days past due

 

 

43

 

 

34

 

Total

 

 

$

1,483

 

 

$

1,934

 

 

Accrual status loans that were greater than 90 days past due totaled $5 million at December 28, 2013.  There were no accrual status loans that were greater than 90 days past due at December 29, 2012.  At December 28, 2013 and December 29, 2012, 60+ days contractual delinquency as a percentage of finance receivables was 5.39% and 4.65%, respectively.

 

Loan Modifications

Troubled debt restructurings occur when we have either modified the contract terms of finance receivables for borrowers experiencing financial difficulties or accepted a transfer of assets in full or partial satisfaction of the loan balance.  The types of modifications we typically make include extensions of the original maturity date of the contract, extensions of revolving borrowing periods, delays in the timing of required principal payments, deferrals of interest payments, advances to protect the value of our collateral and principal reductions contingent on full repayment prior to the maturity date.  The changes effected by modifications made during 2013 and 2012 to finance receivables held for investment were not material.

 

Impaired Loans

On a quarterly basis, we evaluate individual finance receivables for impairment in non-homogeneous portfolios and larger 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.  There was no significant interest income recognized on impaired loans in 2013 or 2012.

 

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

 

(In millions)

 

 

December 28,
2013

 

 

December 29,
2012

 

Recorded investment:

 

 

 

 

 

 

 

Impaired loans with no related allowance for credit losses

 

 

$

78

 

 

$

72

 

Impaired loans with related allowance for credit losses

 

 

59

 

 

99

 

Total

 

 

$

137

 

 

$

171

 

Unpaid principal balance

 

 

$

141

 

 

$

187

 

Allowance for losses on impaired loans

 

 

14

 

 

27

 

Average recorded investment

 

 

155

 

 

270

 

 

Allowance for Losses

A rollforward of the allowance for losses on finance receivables and a summary of its composition, based on how the underlying finance receivables are evaluated for impairment, is provided below.  The finance receivables reported in this table specifically exclude $120 million and $122 million of leveraged leases at December 28, 2013 and December 29, 2012, respectively, in accordance with authoritative accounting standards.

 

(In millions)

 

 

December 28,
2013

 

 

December 29,
2012

 

Balance at beginning of period

 

 

$

84

 

 

$

156

 

Provision for losses

 

 

(23

)

 

(3

)

Charge-offs

 

 

(17

)

 

(84

)

Recoveries

 

 

12

 

 

15

 

Transfers

 

 

(1

)

 

 

Balance at end of period

 

 

$

55

 

 

$

84

 

Allowance based on collective evaluation

 

 

$

41

 

 

$

57

 

Allowance based on individual evaluation

 

 

14

 

 

27

 

Finance receivables evaluated collectively

 

 

$

1,226

 

 

$

1,641

 

Finance receivables evaluated individually

 

 

137

 

 

171

 

 

Our Finance group provides financing for retail purchases and leases for new and used aircraft and equipment manufactured by our Manufacturing group.  The finance receivables for these inventory sales that are included in the Finance group’s balance sheets are summarized below:

 

(In millions)

 

 

December 28,
2013

 

 

December 29,
2012

 

Loans

 

 

$

1,121

 

 

$

1,389

 

Finance leases

 

 

80

 

 

107

 

Total

 

 

$

1,201

 

 

$

1,496

 

 

In 2013, 2012 and 2011, our Finance group paid our Manufacturing group $248 million, $309 million and $284 million, respectively, related to the sale of Textron-manufactured products to third parties that were financed by the Finance group.  Operating agreements specify that our Finance group has recourse to our Manufacturing group for certain uncollected amounts related to these transactions. At December 28, 2013 and December 29, 2012, finance receivables and operating leases subject to recourse to the Manufacturing group totaled $75 million and $83 million, respectively.  Our Manufacturing group has established reserves for losses on its balance sheet within accrued and other liabilities for the amounts it guarantees.

Inventories
Inventories

Note 4. Inventories

 

Inventories are composed of the following:

 

(In millions)

 

 

December 28,
2013

 

 

December 29,
2012

 

Finished goods

 

 

$

1,276

 

 

$

1,329

 

Work in process

 

 

2,477

 

 

2,247

 

Raw materials and components

 

 

407

 

 

437

 

 

 

 

4,160

 

 

4,013

 

Progress/milestone payments

 

 

(1,197

)

 

(1,301

)

Total

 

 

$

2,963

 

 

$

2,712

 

 

Inventories valued by the LIFO method totaled $1.3 billion and $1.1 billion at the end of 2013 and 2012, respectively, and the carrying values of these inventories would have been higher by approximately $461 million and $435 million, respectively, had our LIFO inventories been valued at current costs.  Inventories related to long-term contracts, net of progress/milestone payments, were $359 million and $382 million at the end of 2013 and 2012, respectively.

 

Property, Plant and Equipment, Net
Property, Plant and Equipment, Net

Note 5. Property, Plant and Equipment, Net

 

Our Manufacturing group’s property, plant and equipment, net are composed of the following:

 

(Dollars in millions)

 

Useful Lives
(in years)

 

 

December 28,
2013

 

 

December 29,
2012

 

Land and buildings

 

3 - 40

 

 

$

1,636

 

 

$

1,604

 

Machinery and equipment

 

1 - 20

 

 

4,042

 

 

3,822

 

 

 

 

 

 

5,678

 

 

5,426

 

Accumulated depreciation and amortization

 

 

 

 

(3,463

)

 

(3,277

)

Total

 

 

 

 

$

2,215

 

 

$

2,149

 

 

At the end of 2013 and 2012, assets under capital leases totaled $247 million and $251 million and had accumulated amortization of $56 million and $51 million, respectively.  The Manufacturing group’s depreciation expense, which included amortization expense on capital leases, totaled $335 million, $315 million and $317 million in 2013, 2012 and 2011, respectively.

 

Accrued Liabilities
Accrued Liabilities

Note 6. Accrued Liabilities

 

The accrued liabilities of our Manufacturing group are summarized below:

 

(In millions)

 

 

December 28,
2013

 

 

December 29,
2012

 

Customer deposits

 

 

$

888

 

 

$

725

 

Salaries, wages and employer taxes

 

 

246

 

 

282

 

Current portion of warranty and product maintenance contracts

 

 

142

 

 

180

 

Retirement plans

 

 

74

 

 

80

 

Other

 

 

538

 

 

689

 

Total

 

 

$

1,888

 

 

$

1,956

 

 

Changes in our warranty and product maintenance contract liability are as follows:

 

(In millions)

 

 

2013

 

 

2012

 

 

2011

 

Accrual at beginning of year

 

 

$

222

 

 

$

224

 

 

$

242

 

Provision

 

 

299

 

 

255

 

 

223

 

Settlements

 

 

(293

)

 

(250

)

 

(223

)

Adjustments to prior accrual estimates*

 

 

(5

)

 

(7

)

 

(18

)

Accrual at end of year

 

 

$

223

 

 

$

222

 

 

$

224

 

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

 

Debt and Credit Facilities
Debt and Credit Facilities

Note 7. Debt and Credit Facilities

 

Our debt is summarized in the table below:

 

(In millions)

 

 

December 28,
2013

 

 

December 29,
2012

 

Manufacturing group

 

 

 

 

 

 

 

Long-term senior debt:

 

 

 

 

 

 

 

3.875% due 2013

 

 

$

 

 

$

318

 

4.50% convertible senior notes due 2013

 

 

 

 

210

 

6.20% due 2015

 

 

350

 

 

350

 

4.625% due 2016

 

 

250

 

 

250

 

Variable-rate note due 2016 (average rate of 1.54%)

 

 

150

 

 

 

5.60% due 2017

 

 

350

 

 

350

 

7.25% due 2019

 

 

250

 

 

250

 

6.625% due 2020

 

 

246

 

 

242

 

5.95% due 2021

 

 

250

 

 

250

 

Other (weighted-average rate of 1.57% and 1.52%, respectively)

 

 

85

 

 

81

 

 

 

 

1,931

 

 

2,301

 

Less: Current portion of long-term debt

 

 

(8

)

 

(535

)

Total Long-term debt

 

 

1,923

 

 

1,766

 

Total Manufacturing group debt

 

 

$

1,931

 

 

$

2,301

 

Finance group

 

 

 

 

 

 

 

Fixed-rate notes due 2013 (weighted-average rate of 5.28%)

 

 

$

 

 

$

400

 

Variable-rate note due 2013 (weighted-average rate of 1.21%)

 

 

 

 

48

 

Fixed-rate note due 2014 (5.13%)

 

 

100

 

 

100

 

Fixed-rate notes due 2013-2017* (weighted-average rate of 4.59% and 4.88%, respectively)

 

 

42

 

 

102

 

Variable-rate notes due 2016 (weighted-average rate of 1.78%)

 

 

200

 

 

 

Fixed-rate notes due 2017-2023* (weighted-average rate of 2.67% and 2.70%, respectively)

 

 

378

 

 

382

 

Variable-rate notes due 2015-2020* (weighted-average rate of 1.19% and 1.09%, respectively)

 

 

63

 

 

64

 

Securitized debt (weighted-average rate of 1.50% and 1.55%, respectively)

 

 

172

 

 

282

 

6% Fixed-to-Floating Rate Junior Subordinated Notes

 

 

299

 

 

300

 

Fair value adjustments and unamortized discount

 

 

2

 

 

8

 

Total Finance group debt

 

 

$

1,256

 

 

$

1,686

 

* Notes amortize on a quarterly or semi-annual basis.

 

The following table shows required payments during the next five years on debt outstanding at December 28, 2013:

 

(In millions)

 

2014

 

2015

 

2016

 

2017

 

2018

 

Manufacturing group

 

$

8

 

$

357

 

$

408

 

$

358

 

$

7

 

Finance group

 

223

 

148

 

302

 

92

 

67

 

Total

 

$

230

 

$

505

 

$

710

 

$

450

 

$

74

 

 

During the fourth quarter of  2013, Textron entered into a senior unsecured revolving credit facility for an aggregate principal amount of $1.0 billion, of which up to $100 million is available for the issuance of letters of credit. This facility expires in October 2018.  At December 28, 2013, there were no amounts borrowed against the facility, and there were $35 million of letters of credit issued against it.

 

On January 30, 2014, we issued $250 million in 3.65% notes due 2021 and $350 million in 4.30% notes due 2024 under our shelf registration statement.  We plan to use the net proceeds of the issuance of these notes to finance a portion of the acquisition of all outstanding equity interests in Beech Holdings, LLC, the parent of Beechcraft Corporation, which we have agreed to purchase for approximately $1.4 billion in cash.  The transaction is expected to close during the first half of 2014, subject to customary closing conditions, including regulatory approvals.  If the transaction is not completed, or the related merger agreement is terminated, on or before December 31, 2014, we will be required to redeem all outstanding 2021 notes at a redemption price equal to 101% of the principal amount thereof, plus accrued and unpaid interest.

 

On January 24, 2014, in order to finance the Beechcraft acquisition, we also entered into a five-year term loan with a syndicate of banks in the principal amount of $500 million which we intend to draw down upon the closing of the transaction.

 

4.50% Convertible Senior Notes and Related Transactions

On May 5, 2009, we issued $600 million of convertible senior notes with a maturity date of May 1, 2013 and interest payable semiannually. The convertible notes were accounted for in accordance with generally accepted accounting principles, which required us to separately account for the liability (debt) and the equity (conversion option) components of the convertible notes in a manner that reflected our non-convertible debt borrowing rate at time of issuance. Accordingly, we recorded a debt discount and corresponding increase to additional paid-in capital of $134 million at the issuance date. We amortized the debt discount utilizing the effective interest method over the life of the notes, which increased the effective interest rate of the convertible notes from its coupon rate of 4.50% to 11.72%. We incurred cash and non-cash interest expenses of $9 million in 2013,  $25 million in 2012 and $58 million in 2011 for these notes.

 

On May 1, 2013, our remaining convertible senior notes matured, and we paid the holders of the notes $215 million in settlement of the face value of the notes.  In addition, we issued 8.9 million shares of our common stock to converting holders in settlement of the excess of the conversion value over the face value of the notes; however, after giving effect to the exercise of the related call options and warrants discussed below, the incremental share settlement in excess of the face value of the notes resulted in a 7.4 million net share issuance.

 

Concurrently with the pricing of the convertible notes in May 2009, we entered into transactions with two counterparties, pursuant to which we purchased from the counterparties call options to acquire our common stock and sold to the counterparties warrants to purchase our common stock.  The call options settled on May 1, 2013, while the warrants settled daily over a 45-day period beginning on February 27, 2013.  We acquired 8.9 million shares of our common stock upon the settlement of the call options and issued an aggregate of 7.4 million shares of our common stock in connection with the settlement of the warrants during the first half of 2013.  The settlement of the call options and warrants resulted in a $41 million net increase in treasury stock during 2013.

 

On October 25, 2011, we entered into capped call transactions with the counterparties that covered an aggregate of 28.7 million shares of our common stock as of the end of 2012.  The capped calls had a strike price of $13.125 per share and a cap price of $15.75 per share, which entitled us to receive the per share value of our stock price in excess of $13.125 up to a maximum stock price of $15.75 at the expiration date.  Upon expiration of the capped calls, the market price of our common stock exceeded the maximum stock price, and we received $75 million in cash from the counterparties in the second quarter of 2013.

 

6% Fixed-to-Floating Rate Junior Subordinated Notes

The Finance group’s $299 million of 6% Fixed-to-Floating Rate Junior Subordinated Notes are unsecured and rank junior to all of its existing and future senior debt.  The notes mature on February 15, 2067; however, we have the right to redeem the notes at par on or after February 15, 2017 and are obligated to redeem the notes beginning on February 15, 2042.  The Finance group has agreed in a replacement capital covenant that it will not redeem the notes on or before February 15, 2047 unless it receives a capital contribution from the Manufacturing group and/or net proceeds from the sale of certain replacement capital securities at specified amounts. During 2013, the Manufacturing group made a capital contribution to TFC for the repurchase of $1 million of these notes.  Interest on the notes is fixed at 6% until February 15, 2017 and floats at the three-month London Interbank Offered Rate + 1.735% thereafter.

 

Support Agreement

Under a Support Agreement, Textron Inc. is required to ensure that TFC maintains fixed charge coverage of no less than 125% and consolidated shareholder’s equity of no less than $200 million.  Cash payments of $240 million and $182 million were made to TFC in 2012 and 2011, respectively, to maintain compliance with the fixed charge coverage ratio.

 

Derivative Instruments and Fair Value Measurements
Derivative Instruments and Fair Value Measurements

Note 8. 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 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 December 28, 2013 and December 29, 2012, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $636 million and $664 million, respectively.  At December 28, 2013, the fair value amounts of our foreign currency exchange contracts were a $2 million asset and a $15 million liability.  At December 29, 2012, the fair value amounts of our foreign currency exchange contracts were a $9 million asset and a $5 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 December 28, 2013, we had a net deferred loss of $10 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 these cash flow hedges, including gains and losses related to hedge ineffectiveness, amounted to a $16 million net loss in 2013 and were not significant in 2012.  We expect to reclassify a $10 million net loss from Accumulated other comprehensive loss to earnings in the next twelve months.

 

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, produced a $2 million after-tax gain in 2013, resulting in an accumulated net gain balance of $6 million at December 28, 2013.  There was no ineffectiveness recorded related to these hedges during 2013.

 

Our Finance group has entered into interest rate exchange contracts to mitigate exposure to changes in the fair value of its fixed-rate receivables and debt due to fluctuations in interest rates.  These interest rate exchange contracts are not exchange traded and are measured at fair value utilizing widely accepted, third-party developed valuation models.  The actual terms of each individual contract are entered into a valuation model, along with interest rate data, which is based on readily observable market data published by third-party leading financial news and data providers.  At December 28, 2013 and December 29, 2012, we had interest rate exchange contracts with notional amounts upon which the contracts were based of $229 million and $671 million, respectively.  The fair value amounts of our interest rate exchange contracts recorded at December 28, 2013, were a $2 million asset and a $5 million liability.  At December 29, 2012, the fair value amounts of our interest rate exchange contracts were an $8 million asset and an $8 million liability.

 

Our exposure to loss from nonperformance by the counterparties to our derivative agreements at the end of 2013 was minimal.  We do not anticipate nonperformance by counterparties in the periodic settlements of amounts due.  We historically have minimized this potential for risk by entering into contracts exclusively with major, financially sound counterparties having no less than a long-term bond rating of A.  The credit risk generally is limited to the amount by which the counterparties’ contractual obligations exceed our obligations to the counterparty.  We continuously monitor our exposures to ensure that we limit our risks.

 

Assets Recorded at Fair Value on a Nonrecurring Basis

During 2013 and 2012, certain assets in the Finance Group were measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3).  The table below sets forth the balance of those assets at the end of the year in which a fair value adjustment was taken.

 

(In millions)

 

December 28,
2013

 

 

December 29,
2012

 

Finance receivables held for sale

 

 

$

65

 

 

 

$

140

 

Impaired finance receivables

 

 

45

 

 

 

72

 

Other assets

 

 

35

 

 

 

76

 

 

The following table represents the fair value adjustments recorded for each asset class measured at fair value on a non-recurring basis during 2013 and 2012.

 

 

 

Gain (Loss)

 

(In millions)

 

2013

 

 

2012

 

Finance receivables held for sale

 

 

$

31

 

 

 

$

76

 

Impaired finance receivables

 

 

(7

)

 

 

(11

)

Other assets

 

 

(14

)

 

 

(51

)

 

Finance receivables held for sale are recorded at fair value on a nonrecurring basis during periods in which the fair value is lower than the cost value. There are no active, quoted market prices for these finance receivables.  At December 28, 2013, our finance receivables held for sale included the non-captive loan portfolio.  Fair values of each loan in this portfolio were determined based on a combination of discounted cash flow models and recent third-party offers to estimate the price we expect to receive in the principal market for each loan, in an orderly transaction. The gains on finance receivables held for sale during 2013 and 2012 were primarily the result of the payoff of loans in amounts, and sale of loans at prices, in excess of the values established in previous periods.

 

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 and primarily related to initial fair value adjustments.

 

Other assets in the table above primarily include aviation assets and repossessed golf and hotel properties. The fair value of our aviation assets was largely determined based on the use of industry pricing guides.  The fair value of our golf and hotel properties was determined based on the use of discounted cash flow models, bids from prospective buyers or inputs from market participants.  If the carrying amount of these assets is higher than their estimated fair value, we record a corresponding charge to income for the difference.

 

Assets and Liabilities Not Recorded at Fair Value

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

 

 

 

 

December 28, 2013

 

 

December 29, 2012

 

(In millions)

 

 

Carrying
Value

 

Estimated
Fair Value

 

 

Carrying
Value

 

Estimated
Fair Value

 

Manufacturing group

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, excluding leases

 

 

$

(1,854

)

$

(2,027

)

 

$

(2,225

)

$

(2,636

)

Finance group

 

 

 

 

 

 

 

 

 

 

 

Finance receivables held for investment, excluding leases

 

 

1,231

 

1,290

 

 

1,625

 

1,653

 

Debt

 

 

(1,256

)

(1,244

)

 

(1,686

)

(1,678

)

 

Fair value for the Manufacturing group debt is determined using market observable data for similar transactions or Level 2 inputs.  At December 28, 2013 and December 29, 2012, approximately 30% and 46%, respectively, of the fair value of term debt for the Finance group was determined based on observable market transactions (Level 1).  The remaining Finance group debt 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 held for investment 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.

 

Shareholders' Equity
Shareholders' Equity

Note 9. Shareholders’ Equity

 

Capital Stock

We have authorization for 15 million shares of preferred stock with a par value of $0.01 and 500 million shares of common stock with a par value of $0.125.  Outstanding common stock activity for the three years ended December 28, 2013 is presented below:

 

(In thousands)

 

2013

 

 

2012

 

2011

 

Beginning balance

 

271,263

 

 

278,873

 

275,739

 

Exercise of stock options

 

1,333

 

 

1,159

 

177

 

Issued to Textron Savings Plan

 

1,921

 

 

2,159

 

2,686

 

Exercise of warrants

 

7,435

 

 

 

 

Stock repurchases

 

 

 

(11,103

)

 

Other

 

107

 

 

175

 

271

 

Ending balance

 

282,059

 

 

271,263

 

278,873

 

 

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, restricted stock units and, prior to the maturity of our convertible notes on May 1, 2013, the shares that could have been issued upon the conversion of the notes and upon the exercise of the related warrants.

 

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

 

 

 

 

 

 

 

 

 

(In thousands)

 

2013

 

 

2012

 

2011

 

Basic weighted-average shares outstanding

 

279,299

 

 

280,182

 

277,684

 

Dilutive effect of:

 

 

 

 

 

 

 

 

Convertible notes and warrants

 

4,801

 

 

14,053

 

28,869

 

Stock options and restricted stock units

 

328

 

 

428

 

702

 

Diluted weighted-average shares outstanding

 

284,428

 

 

294,663

 

307,255

 

 

The dilutive effect of the convertible notes and warrants decreased significantly in 2013 from prior years due to the maturity of our convertible notes as described in Note 7.  We intended to settle the face value of the notes in cash and the excess of the conversion value over the face value in cash and/or shares of our common stock; accordingly, only the shares of our common stock potentially issuable with respect to the excess of the notes’ conversion value over the face amount were considered in calculating diluted EPS. The call options purchased in connection with the issuance of the convertible notes and the capped call transaction were excluded from the calculation of diluted EPS as their impact was always anti-dilutive.

 

In 2013, 2012 and 2011, stock options to purchase 5 million, 7 million and 5 million shares, respectively, of common stock outstanding are excluded from our calculation of diluted weighted-average shares outstanding as their effect would have been anti-dilutive.

 

Accumulated Other Comprehensive Loss

The components of Accumulated Other Comprehensive Loss are presented below:

 

(In millions)

 

Foreign
Currency
Translation
Adjustments

 

Pension and
Postretirement
Benefits
Adjustments

 

Deferred
Gains/Losses
on Hedge
Contracts

 

Accumulated
Other
Comprehensive
Loss

 

Balance at December 31, 2011

 

$

79

 

$

(1,711

)

$

7

 

$

(1,625

)

Other comprehensive loss before reclassifications

 

2

 

(230

)

11

 

(217

)

Amounts reclassified from Accumulated Other Comprehensive Loss

 

 

84

 

(12

)

72

 

Other comprehensive loss

 

2

 

(146

)

(1

)

(145

)

Balance at December 29, 2012

 

81

 

(1,857

)

6

 

(1,770

)

Other comprehensive income before reclassifications

 

12

 

626

 

(15

)

623

 

Amounts reclassified from Accumulated Other Comprehensive Loss

 

 

121

 

(1

)

120

 

Other comprehensive income

 

12

 

747

 

(16

)

743

 

Balance at December 28, 2013

 

$

93

 

$

(1,110

)

$

(10

)

$

(1,027

)

 

Other Comprehensive Income (Loss)

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

 

(In millions)

 

Pre-Tax
Amount

 

Tax
(Expense)
Benefit

 

After-Tax
Amount

 

2013

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

Unrealized gains

 

$

1,019

 

$

(410

)

$

609

 

Amortization of net actuarial loss*

 

189

 

(67

)

122

 

Amortization of prior service cost*

 

(2

)

1

 

(1

)

Recognition of prior service cost

 

29

 

(12

)

17

 

Pension and postretirement benefits adjustments, net

 

1,235

 

(488

)

747

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

(20

)

5

 

(15

)

Reclassification adjustments

 

(1

)

 

(1

)

Deferred gains/losses on hedge contracts, net

 

(21

)

5

 

(16

)

Foreign currency translation adjustments

 

13

 

(1

)

12

 

Total

 

$

1,227

 

$

(484

)

$

743

 

2012

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

Unrealized losses

 

$

(417

)

$

186

 

$

(231

)

Amortization of net actuarial loss*

 

124

 

(43

)

81

 

Amortization of prior service cost*

 

5

 

(2

)

3