TEXTRON INC, 10-Q filed on 4/26/2012
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2012
Apr. 14, 2012
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
TEXTRON INC 
 
Entity Central Index Key
0000217346 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 31, 2012 
 
Amendment Flag
false 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q1 
 
Current Fiscal Year End Date
--12-29 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
280,281,049 
Consolidated Statements of Operations (Unaudited) (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Apr. 2, 2011
Revenues
 
 
Manufacturing revenues
$ 2,795 
$ 2,453 
Finance revenues
61 
26 
Total revenues
2,856 
2,479 
Costs, expenses and other
 
 
Cost of sales
2,312 
2,055 
Selling and administrative expense
308 
304 
Provision for losses on finance receivables
12 
Interest expense
55 
62 
Total costs, expenses and other
2,679 
2,433 
Income from continuing operations before income taxes
177 
46 
Income tax expense
57 
15 
Income (loss) from continuing operations
120 
31 
Loss from discontinued operations, net of income taxes
(2)
(2)
Net income
$ 118 
$ 29 
Basic earnings per share
 
 
Continuing operations
$ 0.43 
$ 0.11 
Discontinued operations
$ (0.01)
$ (0.01)
Basic earnings per share
$ 0.42 
$ 0.10 
Diluted earnings per share
 
 
Continuing operations
$ 0.41 
$ 0.10 
Discontinued operations
$ (0.01)
$ (0.01)
Diluted earnings per share
$ 0.40 
$ 0.09 
Dividends per share
 
 
Common stock
$ 0.02 
$ 0.02 
Consolidated Statements of Comprehensive Income (Unaudited) (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Apr. 2, 2011
Consolidated Statements of Comprehensive Income [Abstract]
 
 
Net income
$ 118 
$ 29 
Other comprehensive income, net of tax:
 
 
Recognition of prior service cost and unrealized losses on pension and postretirement benefits
21 
18 
Deferred gains on hedge contracts
Foreign currency translation and other
(3)
12 
Other comprehensive income
24 
36 
Comprehensive income
$ 142 
$ 65 
Consolidated Balance Sheets (Unaudited) (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
Assets
 
 
Cash and equivalents
$ 646 
$ 885 
Inventories
2,593 
2,402 
Total assets
13,280 
13,615 
Liabilities
 
 
Total liabilities
10,365 
10,870 
Shareholders' equity
 
 
Common stock
35 
35 
Capital surplus
1,114 
1,081 
Retained earnings
3,370 
3,257 
Accumulated other comprehensive loss
(1,601)
(1,625)
Total shareholders' equity including cost of treasury shares
2,918 
2,748 
Less cost of treasury shares
Total shareholders' equity
2,915 
2,745 
Total liabilities and shareholders' equity
13,280 
13,615 
Common shares outstanding (in thousands)
280,165 
278,873 
Manufacturing Group [Member]
 
 
Assets
 
 
Cash and equivalents
628 
871 
Accounts receivable, net
937 
856 
Inventories
2,593 
2,402 
Other current assets
1,032 
1,134 
Total current assets
5,190 
5,263 
Property, plant and equipment, less accumulated depreciation and amortization of $3,180 and $3,097
2,003 
1,996 
Goodwill
1,639 
1,635 
Other assets
1,502 
1,508 
Total assets
10,334 
10,402 
Liabilities
 
 
Current portion of long-term debt
464 
146 
Accounts payable
884 
833 
Accrued liabilities
1,823 
1,952 
Total current liabilities
3,171 
2,931 
Other liabilities
2,657 
2,826 
Long-term debt
2,013 
2,313 
Total liabilities
7,841 
8,070 
Finance Group [Member]
 
 
Assets
 
 
Cash and equivalents
18 
14 
Finance receivables held for investment, net
2,174 
2,321 
Finance receivables held for sale
318 
418 
Other assets
436 
460 
Total assets
2,946 
3,213 
Liabilities
 
 
Other liabilities
193 
333 
Due to Manufacturing group
494 
493 
Debt
1,837 
1,974 
Total liabilities
$ 2,524 
$ 2,800 
Consolidated Balance Sheets (Unaudited) (Parenthetical) (Manufacturing Group [Member], USD $)
In Millions, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
Manufacturing Group [Member]
 
 
Accumulated depreciation and amortization on property, plant and equipment
$ 3,180 
$ 3,097 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Apr. 2, 2011
Cash flows from operating activities:
 
 
Net income (loss)
$ 118 
$ 29 
Less: Loss from discontinued operations
(2)
(2)
Income (loss) from continuing operations
120 
31 
Non-cash items:
 
 
Depreciation and amortization
91 
95 
Provision for losses on finance receivables held for investment
12 
Portfolio losses on finance receivables
20 
23 
Deferred income taxes
62 
79 
Other, net
21 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(76)
(4)
Inventories
(187)
(166)
Other assets
(11)
Accounts payable
48 
119 
Accrued and other liabilities
(368)
(229)
Captive finance receivables, net
42 
72 
Net cash provided by (used in) operating activities of continuing operations
(253)
55 
Net cash used in operating activities of discontinued operations
(1)
(1)
Net cash provided by (used in) operating activities
(254)
54 
Cash flows from investing activities:
 
 
Finance receivables originated or purchased
(18)
(76)
Finance receivables repaid
154 
290 
Proceeds on receivables sales
44 
168 
Capital expenditures
(73)
(78)
Proceeds from sale of repossessed assets and properties
18 
28 
Other investing activities, net
(2)
23 
Net cash provided by investing activities
123 
355 
Cash flows from financing activities:
 
 
Increase in short-term debt
 
203 
Payments on long-term lines of credit
 
(250)
Principal payments on long-term debt and nonrecourse debt
(144)
(417)
Proceeds from issuance of long-term debt
27 
144 
Dividends paid
(5)
(5)
Other financing activities, net
10 
(2)
Net cash used in financing activities
(112)
(327)
Effect of exchange rate changes on cash and equivalents
Net increase (decrease) in cash and equivalents
(239)
91 
Cash and equivalents at beginning of period
885 
931 
Cash and equivalents at end of period
646 
1,022 
Manufacturing Group [Member]
 
 
Cash flows from operating activities:
 
 
Net income (loss)
108 
60 
Less: Loss from discontinued operations
(2)
(2)
Income (loss) from continuing operations
110 
62 
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities:
 
 
Dividends received from Finance group
240 
130 
Capital contribution paid to Finance group
(240)
(63)
Non-cash items:
 
 
Depreciation and amortization
84 
87 
Deferred income taxes
58 
66 
Other, net
26 
32 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(76)
(4)
Inventories
(188)
(169)
Other assets
(9)
(1)
Accounts payable
48 
119 
Accrued and other liabilities
(230)
(186)
Net cash provided by (used in) operating activities of continuing operations
(177)
73 
Net cash used in operating activities of discontinued operations
(1)
(1)
Net cash provided by (used in) operating activities
(178)
72 
Cash flows from investing activities:
 
 
Capital expenditures
(73)
(78)
Other investing activities, net
 
(43)
Net cash provided by investing activities
(73)
(121)
Cash flows from financing activities:
 
 
Increase in short-term debt
 
203 
Principal payments on long-term debt and nonrecourse debt
 
(7)
Intergroup financing
 
(60)
Dividends paid
(5)
(5)
Other financing activities, net
(2)
Net cash used in financing activities
129 
Effect of exchange rate changes on cash and equivalents
Net increase (decrease) in cash and equivalents
(243)
88 
Cash and equivalents at beginning of period
871 
898 
Cash and equivalents at end of period
628 
986 
Finance Group [Member]
 
 
Cash flows from operating activities:
 
 
Net income (loss)
10 
(31)
Income (loss) from continuing operations
10 
(31)
Non-cash items:
 
 
Depreciation and amortization
Provision for losses on finance receivables held for investment
12 
Portfolio losses on finance receivables
20 
23 
Deferred income taxes
13 
Other, net
(24)
(11)
Changes in assets and liabilities:
 
 
Other assets
(2)
 
Accrued and other liabilities
(138)
(43)
Net cash provided by (used in) operating activities of continuing operations
(119)
(29)
Net cash provided by (used in) operating activities
(119)
(29)
Cash flows from investing activities:
 
 
Finance receivables originated or purchased
(84)
(125)
Finance receivables repaid
262 
411 
Proceeds on receivables sales
44 
168 
Proceeds from sale of repossessed assets and properties
18 
28 
Other investing activities, net
(1)
31 
Net cash provided by investing activities
239 
513 
Cash flows from financing activities:
 
 
Payments on long-term lines of credit
 
(250)
Principal payments on long-term debt and nonrecourse debt
(144)
(410)
Proceeds from issuance of long-term debt
27 
144 
Intergroup financing
 
60 
Capital contributions paid to Finance group under Support Agreement
240 
63 
Other capital contributions paid to Finance group
 
40 
Dividends paid
(240)
(130)
Other financing activities, net
Net cash used in financing activities
(116)
(482)
Effect of exchange rate changes on cash and equivalents
 
Net increase (decrease) in cash and equivalents
Cash and equivalents at beginning of period
14 
33 
Cash and equivalents at end of period
$ 18 
$ 36 
Basis of Presentation
Basis of Presentation

Note 1: Basis of Presentation

Our consolidated financial statements include the accounts of Textron Inc. and its majority-owned subsidiaries. We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information. Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011. 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 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, its consolidated subsidiaries and three other finance subsidiaries owned by Textron Inc. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the consolidated financial statements. All significant intercompany transactions are eliminated from the consolidated financial statements, including retail and wholesale financing activities for inventory sold by our Manufacturing group and financed by our Finance group.

Use of Estimates

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

During the first quarter 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. The changes in estimates increased income from continuing operations before income taxes in the first quarter of 2012 and 2011 by $4 million and $14 million, respectively, ($2 million and $8 million after tax, or $0.01 and $0.03 per diluted share, respectively). For the first quarter of 2012 and 2011, the gross favorable program profit adjustments totaled $17 million and $21 million, respectively, and the gross unfavorable program profit adjustments totaled $13 million and $7 million, respectively.

Retirement Plans
Retirement Plans

Note 2: Retirement Plans

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

 

                                 
    Pension Benefits     Postretirement Benefits
Other  Than Pensions
 

(In millions)

  March 31,
2012
    April 2,
2011
    March 31,
2012
    April 2,
2011
 

Three Months Ended

                               

Service cost

  $ 30     $ 32     $ 2     $ 2  

Interest cost

    76       82       6       8  

Expected return on plan assets

    (101     (98     —         —    

Amortization of prior service cost (credit)

    4       4       (3     (1

Amortization of net loss

    29       19       2       3  
   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

  $ 38     $ 39     $ 7     $ 12  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

Share - Based Compensation
Share Based Compensation

Note 3: Share-Based Compensation

Share-based compensation expense includes restricted stock, restricted stock units, stock options, stock appreciation rights, performance share units and deferred income plan stock unit awards. The compensation expense we recorded in net income for our share-based compensation plans is as follows:

 

                 
    Three Months
Ended
 

(In millions)

  March 31,
2012
    April 2,
2011
 

Compensation expense

  $ 46     $ 36  

Income tax benefit

    (17     (13
   

 

 

   

 

 

 

Total net compensation cost included in net income

  $ 29     $ 23  
   

 

 

   

 

 

 

Stock Options

The stock option compensation cost calculated under the fair value approach is recognized over the vesting period of the stock options. The weighted-average fair value of options granted per share was $10 in both the first quarter of 2012 and 2011. We estimate the fair value of options granted on the date of grant using the Black-Scholes option-pricing model. Expected volatilities are based on implied volatilities from traded options on our common stock, historical volatilities and other factors. We use historical data to estimate option exercise behavior, adjusted to reflect anticipated changes in expected life. The weighted-average assumptions used in our Black-Scholes option-pricing model for awards issued during the respective periods are as follows:

 

                 
    Three Months
Ended
 
    March 31,
2012
    April 2,
2011
 

Dividend yield

    0.3     0.3

Expected volatility

    40.0     38.0

Risk-free interest rate

    0.8     2.4

Expected lives (in years)

    5.5       5.5  

At March 31, 2012, our outstanding and exercisable options had an aggregate intrinsic value of $33 million and $26 million, respectively. Stock option activity for the first quarter of 2012 is as follows:

 

                         
    Number of
Options
(In thousands)
    Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual
Life
(In years)
 

Outstanding at beginning of period

    8,860     $ 27.68       6  

Granted

    3,008       27.76          

Exercised

    (594     (18.70        

Canceled, expired or forfeited

    (396     (27.96        
   

 

 

   

 

 

   

 

 

 

Outstanding at end of period

    10,878     $ 28.18       7  
   

 

 

   

 

 

   

 

 

 

Exercisable at end of period

    5,513     $ 29.36       5  
   

 

 

   

 

 

   

 

 

 

Restricted Stock Units

The 2012 activity for restricted stock units payable in stock and for restricted stock units payable in cash is provided below:

 

                                 
    Units Payable in Stock     Units Payable in Cash  

(Shares in thousands)

  Number of
Shares
    Weighted-
Average Grant
Date Fair Value
    Number of
Shares
    Weighted-
Average Grant
Date Fair Value
 

Outstanding at beginning of year, nonvested

    638     $ 35.53       2,927     $ 17.33  

Granted

    367       27.54       808       27.74  

Vested

    (218     (37.89     (801     (15.00

Forfeited

    (13     (33.19     (73     (19.24
   

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding at end of period, nonvested

    774     $ 31.12       2,861     $ 20.88  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

Performance Share Units

The fair value of share-based compensation awards accounted for as liabilities includes performance share units. The fair value of these awards is based on the trading price of our common stock, less adjustments to reflect that dividends are not paid on these awards, and is remeasured at each reporting period date. The 2012 activity for our performance share units is as follows:

 

                 

(Shares in thousands)

  Number of
Shares
    Weighted-
Average  Grant
Date Fair Value
 

Outstanding at beginning of year, nonvested

    859     $ 22.98  

Granted

    535       27.76  

Forfeited

    (53     (22.62
   

 

 

   

 

 

 

Outstanding at end of period, nonvested

    1,341     $ 24.90  
   

 

 

   

 

 

 

Share-Based Compensation Awards

The value of the share-based compensation awards that vested and/or were paid during the respective periods is as follows:

 

                 
    Three Months Ended  

(In millions)

  March 31,
2012
    April 2,
2011
 

Subject only to service conditions:

               

Value of awards vested

  $ 30     $ 34  

Intrinsic value of cash awards paid

    21       20  

Subject to performance conditions:

               

Intrinsic value of cash awards paid

    51       1  
Earnings Per Share
Earnings Per Share

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, restricted stock units and the shares that could be issued upon the conversion of our convertible notes and upon the exercise of the related warrants. The call options purchased in connection with the issuance of the convertible notes and the capped call transaction entered into in 2011 are excluded from the calculation of diluted EPS as their impact is always anti-dilutive.

Upon conversion of our convertible notes, as described in Note 8 of our 2011 Form 10-K, the principal amount would be settled in cash, and the excess of the conversion value, as defined, over the principal amount may be settled in cash and/or shares of our common stock. Therefore, only the shares of our common stock potentially issuable with respect to the excess of the notes’ conversion value over the principal amount, if any, are considered as dilutive potential common shares for purposes of calculating diluted EPS.

The weighted-average shares outstanding for basic and diluted earnings per share are as follows:

 

                 
    Three Months Ended  

(In thousands)

  March 31,
2012
    April 2,
2011
 

Basic weighted-average shares outstanding

    280,022       276,358  

Dilutive effect of:

               

Convertible notes and warrants

    13,902       41,504  

Stock options and restricted stock units

    708       1,257  
   

 

 

   

 

 

 

Diluted weighted-average shares outstanding

    294,632       319,119  
   

 

 

   

 

 

 

Stock options to purchase 6 million and 4 million shares of common stock outstanding are excluded from our calculation of diluted weighted-average shares outstanding for the three months ended March 31, 2012 and April 2, 2011, respectively, as the exercise prices were greater than the average market price of our common stock for the periods. These securities could potentially dilute earnings per share in the future.

 

Accounts Receivable and Finance Receivables
Accounts Receivable and Finance Receivables

Note 5: Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:

 

                 

(In millions)

  March 31,
2012
    December 31,
2011
 

Commercial

  $ 594     $ 528  

U.S. Government contracts

    360       346  
   

 

 

   

 

 

 
      954       874  

Allowance for doubtful accounts

    (17     (18
   

 

 

   

 

 

 
    $ 937     $ 856  
   

 

 

   

 

 

 

We have unbillable receivables 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 $197 million at March 31, 2012 and $192 million at December 31, 2011.

Finance Receivables

Finance receivables by product line, which includes both finance receivables held for investment and finance receivables held for sale, are presented in the following table:

 

                 

(In millions)

  March 31,
2012
    December 31,
2011
 

Aviation

  $ 1,788     $ 1,876  

Golf Equipment

    61       69  

Golf Mortgage

    314       381  

Timeshare

    260       318  

Structured Capital

    171       208  

Other liquidating

    34       43  
   

 

 

   

 

 

 

Total finance receivables

    2,628       2,895  

Less: Allowance for losses

    136       156  

Less: Finance receivables held for sale

    318       418  
   

 

 

   

 

 

 

Total finance receivables held for investment, net

  $ 2,174     $ 2,321  
   

 

 

   

 

 

 

Credit Quality Indicators and Nonaccrual Finance Receivables

We internally assess the quality of our finance receivables held for investment portfolio based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value, the liquidity position of individual borrowers and guarantors and default rates of our notes receivable collateral in the Timeshare product line. 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 held for investment as nonaccrual if credit quality indicators suggest full collection is doubtful. In addition, we automatically classify accounts as nonaccrual once they 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.

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 held for investment that do not meet the watchlist or nonaccrual categories are classified as performing.

 

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

 

                                                                 
    March 31, 2012     December 31, 2011  

(In millions)

  Performing     Watchlist     Nonaccrual     Total     Performing     Watchlist     Nonaccrual     Total  

Aviation

  $ 1,465     $ 221     $ 102     $ 1,788     $ 1,537     $ 214     $ 125     $ 1,876  

Golf Equipment

    20       33       8       61       21       37       11       69  

Timeshare

    87       4       165       256       89       25       167       281  

Structured Capital

    166       5       —         171       203       5       —         208  

Other liquidating

    19       —         15       34       25       —         18       43  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,757     $ 263     $ 290     $ 2,310     $ 1,875     $ 281     $ 321     $ 2,477  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total

    76.0     11.4     12.6             75.7     11.3     13.0        

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 held for investment by delinquency aging category are summarized in the table below:

 

                                                                                 
    March 31, 2012     December 31, 2011  

(In millions)

  Less
Than

31 Days
Past Due
    31-60
Days

Past  Due
    61-90
Days

Past  Due
    Over
90 Days
Past Due
    Total     Less
Than

31 Days
Past Due
    31-60
Days

Past  Due
    61-90
Days

Past  Due
    Over
90 Days
Past Due
    Total  

Aviation

  $ 1,606     $ 96     $ 19     $ 67     $ 1,788     $ 1,705     $ 66     $ 37     $ 68     $ 1,876  

Golf Equipment

    52       1       3       5       61       53       3       6       7       69  

Timeshare

    199       16       3       38       256       238       3       —         40       281  

Structured Capital

    171       —         —         —         171       208       —         —         —         208  

Other liquidating

    26       —         —         8       34       35       —         —         8       43  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,054     $ 113     $ 25     $ 118     $ 2,310     $ 2,239     $ 72     $ 43     $ 123     $ 2,477  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We had no accrual status loans that were greater than 90 days past due at March 31, 2012 or at December 31, 2011. At March 31, 2012, the 60+ days contractual delinquency as a percentage of finance receivables held for investment was 6.19%, compared with 6.70% at December 31, 2011.

Loan Modifications

Troubled debt restructurings occur when we have either modified the contract terms of finance receivables held for investment 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 the first quarter of 2012 to finance receivables held for investment were not material, primarily as a result of the reclassification of the Golf Mortgage finance receivables from the held for investment classification to the held for sale classification at December 31, 2011.

Impaired Loans

We evaluate individual finance receivables held for investment in non-homogeneous portfolios and larger accounts in homogeneous loan portfolios for impairment on a quarterly basis. Finance receivables classified as held for sale are reflected at the lower of cost or fair value and are excluded from these evaluations. 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 the first quarter of 2012 or 2011.

 

A summary of impaired finance receivables, excluding leveraged leases, is provided below:

 

                                                 
    Recorded Investment        

(In millions)

  Impaired
Loans with
No Related
Allowance for
Credit Losses
    Impaired
Loans with
Related
Allowance for
Credit Losses
    Total
Impaired
Loans
    Unpaid
Principal
Balance
    Allowance
For Losses  On
Impaired
Loans
    Average
Recorded
Investment
 

March 31, 2012

                                   

Aviation

  $ 39     $ 70     $ 109     $ 113     $ 21     $ 124  

Golf Equipment

    —         2       2       2       1       2  

Timeshare

    122       78       200       250       42       213  

Other liquidating

    1       12       13       24       9       15  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 162     $ 162     $ 324     $ 389     $ 73     $ 354  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2011

                                   

Aviation

  $ 47     $ 92     $ 139     $ 142     $ 39     $ 146  

Timeshare

    170       57       227       288       38       315  

Golf Mortgage

    —         —         —         —         —         232  

Other liquidating

    3       12       15       59       9       30  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 220     $ 161     $ 381     $ 489     $ 86     $ 723  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Losses

We maintain the allowance for losses on finance receivables held for investment at a level considered adequate to cover inherent losses in the portfolio based on management’s evaluation and analysis by product line. For larger balance accounts specifically identified as impaired, including large accounts in homogeneous portfolios, a reserve is established based on comparing the carrying value with either a) the expected future cash flows, discounted at the finance receivable’s effective interest rate; or b) the fair value of the underlying collateral, if the finance receivable is collateral dependent. 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/foreclosure 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 portfolios 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 vary by product line and include the following:

 

   

Aviation - industry valuation guides, physical condition of the aircraft, payment history, and existence and financial strength of guarantors.

 

   

Golf Equipment - age and condition of the collateral.

 

   

Timeshare - historical performance of consumer notes receivable collateral, real estate valuations, operating expenses of the borrower, the impact of bankruptcy court rulings on the value of the collateral, legal and other professional expenses and borrower’s access to capital.

We also establish an allowance for losses by product line to cover probable but specifically unknown losses existing in the portfolio. For homogeneous portfolios, including Aviation and Golf Equipment, the 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. For non-homogeneous portfolios, such as Timeshare, the allowance is established as a percentage of watchlist balances, as defined on page 11, which represents a combination of assumed default likelihood and loss severity based on historical experience, industry trends and collateral values. In estimating our allowance for losses to cover accounts not specifically identified, critical factors vary by product line and include the following:

 

   

Aviation - the collateral value of the portfolio, historical default experience and delinquency trends.

 

   

Golf Equipment - historical loss experience and delinquency trends.

 

   

Timeshare - individual loan credit quality indicators such as borrowing base shortfalls for revolving notes receivable facilities, default rates of our notes receivable collateral, borrower’s access to capital, historical progression from watchlist to nonaccrual status and estimates of loss severity based on analysis of impaired loans in the product line.

Finance receivables held for investment are written down to the fair value (less estimated costs to sell) of the related collateral when the collateral is repossessed and are charged off when the remaining balance is deemed to be uncollectible.

A rollforward of the allowances for losses on finance receivables held for investment is provided below:

 

                                                 

(In millions)

  Aviation     Golf
Equipment
    Golf
Mortgage
    Timeshare     Other
Liquidating
    Total  

For the three months ended March 31, 2012

                                   

Beginning balance

  $ 95     $ 6     $ —       $ 40     $ 15     $ 156  

Provision for losses

    2       —         —         3       (1     4  

Net charge-offs

    (23     —         —         (1     —         (24
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 74     $ 6     $ —       $ 42     $ 14     $ 136  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended April 2, 2011

                                   

Beginning balance

  $ 107     $ 16     $ 79     $ 106     $ 34     $ 342  

Provision for losses

    11       —         (1     —         2       12  

Net charge-offs and transfers

    (8     (3     (3     (1     (1     (16
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 110     $ 13     $ 75     $ 105     $ 35     $ 338  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

A summary of the allowance for losses on finance receivables that are evaluated on an individual and on a collective basis is provided below. The finance receivables reported in this table specifically exclude $171 million and $279 million of leveraged leases at March 31, 2012 and April 2, 2011, respectively, in accordance with authoritative accounting standards.

 

                                                                 
    March 31, 2012     April 2, 2011  
    Finance
Receivables Evaluated
    Allowance
Based on
Individual
Evaluation
    Allowance
Based on
Collective
Evaluation
    Finance
Receivables Evaluated
    Allowance
Based on
Individual
Evaluation
    Allowance
Based on
Collective
Evaluation
 

(In millions)

  Individually     Collectively         Individually     Collectively      

Aviation

  $ 109     $ 1,679     $ 21     $ 53     $ 164     $ 1,864     $ 50     $ 60  

Golf Equipment

    2       59       1       5       6       186       1       12  

Timeshare

    200       56       42       —         368       195       102       3  

Golf Mortgage

    —         —         —         —         299       341       45       30  

Other liquidating

    13       21       9       5       38       164       4       31  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 324     $ 1,815     $ 73     $ 63     $ 875     $ 2,750     $ 202     $ 136  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Inventories
Inventories

Note 6: Inventories

 

                 

(In millions)

  March 31,
2012
    December 31,
2011
 

Finished goods

  $ 1,210     $ 1,012  

Work in process

    2,233       2,202  

Raw materials

    418       399  
   

 

 

   

 

 

 
      3,861       3,613  

Progress/milestone payments

    (1,268     (1,211
   

 

 

   

 

 

 
    $ 2,593     $ 2,402  
   

 

 

   

 

 

 

 

Debt
Debt

Note 7: Debt

At March 31, 2012, the principal amount of our convertible senior notes was $215 million. Our common stock price exceeded the $17.06 per share conversion threshold price set forth for these convertible notes for at least 20 trading days during the 30 consecutive trading days ended March 31, 2012. Accordingly, these notes are convertible at the holder’s option through June 30, 2012. We may deliver shares of common stock, cash or a combination of cash and shares of common stock in satisfaction of our obligations upon conversion of the convertible notes. Based on a March 31, 2012 stock price of $27.83, the “if converted value” exceeds the face amount of the remaining notes by $241 million; however, after giving effect to the exercise of the related outstanding call options and warrants, the incremental cash or share settlement in excess of the face amount would result in either a 7 million net share issuance or a cash payment of $198 million, or a combination of cash and stock, at our option.

Accrued Liabilities
Accrued Liabilities

Note 8: Accrued Liabilities

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

 

                 
    Three Months
Ended
 

(In millions)

  March 31,
2012
    April 2,
2011
 

Accrual at the beginning of period

  $ 224     $ 242  

Provision

    63       57  

Settlements

    (65     (64

Adjustments to prior accrual estimates

    (3     (6
   

 

 

   

 

 

 

Accrual at the end of period

  $ 219     $ 229  
   

 

 

   

 

 

 
Commitments and Contingencies
Commitments and Contingencies

Note 9: 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; compliance with applicable laws and regulations; production partners; product liability; employment; 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 being suspended or debarred 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.

On February 7, 2012, a lawsuit was filed in the United States Bankruptcy Court, Northern District of Ohio, Eastern Division (Akron) by Brian A. Bash, Chapter 7 Trustee for Fair Finance Company against TFC, Fortress Credit Corp. and Fair Facility I, LLC. TFC provided a revolving line of credit of up to $17.5 million to Fair Finance Company from 2002 through 2007. The complaint alleges numerous counts against TFC, as Fair Finance Company’s working capital lender, including receipt of fraudulent transfers and assisting in fraud perpetrated on Fair Finance investors. The Trustee seeks avoidance and recovery of alleged fraudulent transfers in the amount of $316 million as well as damages of $223 million on the other claims. The Trustee also seeks trebled damages on all claims under Ohio law. We are in the process of reviewing the complaint and assessing these claims. We intend to vigorously defend this lawsuit. An estimate of a range of possible loss cannot be made at this time due to the early stage of the litigation.

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

Note 10. 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, and 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

The assets and liabilities that are recorded at fair value on a recurring basis consist primarily of our derivative financial instruments, which are categorized as Level 2 in the fair value hierarchy. The fair value amounts of these instruments that are designated as hedging instruments are provided below:

 

                         
            Asset (Liability)  

(In millions)

  Borrowing Group   Balance Sheet Location   March 31,
2012
    December 31,
2011
 

Assets

                       

Interest rate exchange contracts*

  Finance   Other assets   $ 19     $ 22  

Foreign currency exchange contracts

  Manufacturing   Other current assets     13       9  
           

 

 

   

 

 

 

Total

          $ 32     $ 31  
           

 

 

   

 

 

 

Liabilities

                       

Interest rate exchange contracts*

  Finance   Other liabilities   $ (7   $ (7

Foreign currency exchange contracts

  Manufacturing   Accrued liabilities     (4     (5
           

 

 

   

 

 

 

Total

          $ (11   $ (12
           

 

 

   

 

 

 

* Interest rate exchange contracts represent fair value hedges.

The Finance group’s 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 and foreign exchange rate data, which is based on readily observable market data published by third-party leading financial news and data providers. Credit risk is factored into the fair value of these assets and liabilities based on the differential between both our credit default swap spread for liabilities and the counterparty’s credit default swap spread for assets as compared with a standard AA-rated counterparty; however, this had no significant impact on the valuation at March 31, 2012. At March 31, 2012 and December 31, 2011, we had interest rate exchange contracts with notional amounts upon which the contracts were based of $805 million and $848 million, respectively.

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 March 31, 2012 and December 31, 2011, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $663 million and $645 million, respectively.

Fair Value Hedges

Our Finance group enters 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. By using these contracts, we are able to convert our fixed-rate cash flows to floating-rate cash flows. The amount of ineffectiveness on our fair value hedges and the gain (loss) recorded in the Consolidated Statements of Operations were both insignificant in the first quarter of 2012 and 2011.

Cash Flow Hedges

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. The primary purpose of our foreign currency hedging activities is to manage the volatility associated with foreign currency purchases of materials, foreign currency sales of products, and other assets and liabilities in the normal course of business. We primarily utilize forward exchange contracts and purchased options with maturities of no more than three years that 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 March 31, 2012, we had a net deferred gain of $7 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, were not material in the three-month periods ended March 31, 2012 and April 2, 2011. We do not expect the amount of gains and losses in Accumulated other comprehensive loss that will be reclassified to earnings in the next twelve months to be material.

 

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 net investments. We also may utilize currency forwards as hedges of our related foreign net investments. We record changes in the fair value of these contracts in other comprehensive income to the extent they are effective as cash flow hedges. If a contract does not qualify for hedge accounting or is designated as a fair value hedge, changes in the fair value of the contract are recorded in earnings. Currency effects on the effective portion of these hedges, which are reflected in the foreign currency translation adjustment account within OCI, produced a $12 million after-tax loss for the first quarter of 2012, resulting in an accumulated net gain balance of $6 million at March 31, 2012. The ineffective portion of these hedges was insignificant.

Assets Recorded at Fair Value on a Nonrecurring Basis

The assets that were measured at fair value on a nonrecurring basis that had fair value measurement adjustments during the first quarter of 2012 and 2011 are presented below. These assets are in the Finance group and were measured using significant unobservable inputs (Level 3).

 

                                 
          Gain (Loss)  
    Balance at     Three Months Ended  

(In millions)

  March 31,
2012
    April 2,
2011
    March 31,
2012
    April 2,
2011
 

Finance receivables held for sale

  $ 318     $ 237     $ 24     $ (11

Impaired finance receivables

    92       508       (6     (33

Repossessed assets and properties

    74       54       (16     (6

Finance Receivables Held for Sale — 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 March 31, 2012, our finance receivables held for sale primarily include the Golf Mortgage portfolio. Fair value of this portfolio was determined based on the use of discounted cash flow models to estimate the price we expect to receive in the principal market for each loan, or pool of similar loans, in an orderly transaction. The discount rates utilized in these models are derived from prevailing interest rate indices and are based on the nature of the assets, discussions with market participants and our experience in the actual disposition of similar assets. The cash flow models also include the use of qualitative assumptions regarding the borrower’s ability to pay and the period of time that will likely be required to restructure and/or exit the account through acquisition of the underlying collateral. We utilize revenue multiples to determine the expected value of the loan collateral. The range of multiples used is based on bids from prospective buyers, inputs from market participants and prices at which sales have been transacted for similar properties.

Based on our qualitative assumptions, we separate the loans into three categories for the cash flow models. In the first category, we include loans that we assume will be paid in accordance with the contractual terms of the loan. In the second category, we include loans where we perceive that the borrower has less of an ability to pay, and we assume that the loan will be restructured and resolved typically over a period of one to four years. For the third category, we assume that the borrower will default on the loan and that it will be resolved within an average of 24 months. The fair values of these finance receivables are sensitive to variability in both the quantitative and qualitative assumptions. Changes in the borrower’s ability to pay or the period of time required to restructure and/or exit accounts may significantly increase or decrease the fair value of these finance receivables, and, to a lesser extent, fluctuations in discount rates and/or revenue multiples could also change the fair value of these finance receivables.

 

Impaired Finance Receivables — 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 our Aviation impaired nonaccrual finance receivables, fair values of collateral are determined based on the use of industry pricing guides. Our Timeshare impaired nonaccrual finance receivables largely consist of notes receivable loans to developers of resort properties which are collateralized by pools of consumer notes receivable. Fair values of collateral are estimated using cash flow models incorporating estimates of credit losses in the consumer notes pools and the developer’s ability to mitigate losses through the repurchase or replacement of defaulted notes. Fair value measurements recorded on impaired finance receivables resulted in charges to provision for loan losses and primarily related to initial fair value adjustments.

Repossessed assets and properties — Repossessed assets and properties in the table above primarily include both golf properties and aviation assets at March 31, 2012. The fair value of our golf properties is determined based on the use of discounted cash flow models, bids from prospective buyers or inputs from market participants. The fair value of our aviation assets is largely determined based on the use of industry pricing guides. 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:

 

                                 
    March 31, 2012     December 31, 2011  

(In millions)

  Carrying
Value
    Estimated
Fair Value
    Carrying
Value
    Estimated
Fair Value
 

Manufacturing group

                               

Long-term debt, excluding leases

  $ (2,348   $ (2,757   $ (2,328   $ (2,561

Finance group

                               

Finance receivables held for investment, excluding leases

    1,890       1,819       1,997       1,848  

Debt

    (1,837     (1,778     (1,974     (1,854

Fair value for the Manufacturing group debt is determined using market observable data for similar transactions or Level 2 inputs. At March 31, 2012 and December 31, 2011, approximately 42% and 53%, 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.

 

Segment Information
Segment Information

Note 11: Segment Information

We operate in, and report financial information for, the following five business segments: Cessna, Bell, Textron Systems, Industrial and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses and special charges. The measurement for the Finance segment excludes special charges and includes interest income and expense along with intercompany interest expense. Provisions for losses on finance receivables involving the sale or lease of our products are recorded by the selling manufacturing division when our Finance group has recourse to the Manufacturing group.

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

 

                 
    Three Months
Ended
 

(In millions)

  March 31,
2012
    April 2,
2011
 

REVENUES

               

Manufacturing group

               

Cessna

  $ 669     $ 556  

Bell

    994       749  

Textron Systems

    377       445  

Industrial

    755       703  
   

 

 

   

 

 

 
      2,795       2,453  

Finance group

    61       26  
   

 

 

   

 

 

 

Total revenues

  $ 2,856     $ 2,479  
   

 

 

   

 

 

 

SEGMENT OPERATING PROFIT

               

Manufacturing group

               

Cessna

  $ (6   $ (38

Bell

    145       91  

Textron Systems

    35       53  

Industrial

    73       61  
   

 

 

   

 

 

 
      247       167  

Finance group

    12       (44
   

 

 

   

 

 

 

Segment profit

    259       123  

Corporate expenses and other, net

    (47     (39

Interest expense, net for Manufacturing group

    (35     (38
   

 

 

   

 

 

 

Income from continuing operations before income taxes

  $ 177     $ 46  
   

 

 

   

 

 

 
Basis of Presentation (Policies)
Use of Estimates

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 the first quarter 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. The changes in estimates increased income from continuing operations before income taxes in the first quarter of 2012 and 2011 by $4 million and $14 million, respectively, ($2 million and $8 million after tax, or $0.01 and $0.03 per diluted share, respectively). For the first quarter of 2012 and 2011, the gross favorable program profit adjustments totaled $17 million and $21 million, respectively, and the gross unfavorable program profit adjustments totaled $13 million and $7 million, respectively.

Retirement Plans (Tables)
Components of net periodic benefit cost
                                 
    Pension Benefits     Postretirement Benefits
Other  Than Pensions
 

(In millions)

  March 31,
2012
    April 2,
2011
    March 31,
2012
    April 2,
2011
 

Three Months Ended

                               

Service cost

  $ 30     $ 32     $ 2     $ 2  

Interest cost

    76       82       6       8  

Expected return on plan assets

    (101     (98     —         —    

Amortization of prior service cost (credit)

    4       4       (3     (1

Amortization of net loss

    29       19       2       3  
   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

  $ 38     $ 39     $ 7     $ 12  
   

 

 

   

 

 

   

 

 

   

 

 

 
Share - Based Compensation (Tables)
                 
    Three Months
Ended
 

(In millions)

  March 31,
2012
    April 2,
2011
 

Compensation expense

  $ 46     $ 36  

Income tax benefit

    (17     (13
   

 

 

   

 

 

 

Total net compensation cost included in net income

  $ 29     $ 23  
   

 

 

   

 

 

 
                 
    Three Months
Ended
 
    March 31,
2012
    April 2,
2011
 

Dividend yield

    0.3     0.3

Expected volatility

    40.0     38.0

Risk-free interest rate

    0.8     2.4

Expected lives (in years)

    5.5       5.5  
                         
    Number of
Options
(In thousands)
    Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual
Life
(In years)
 

Outstanding at beginning of period

    8,860     $ 27.68       6  

Granted

    3,008       27.76          

Exercised

    (594     (18.70        

Canceled, expired or forfeited

    (396     (27.96        
   

 

 

   

 

 

   

 

 

 

Outstanding at end of period

    10,878     $ 28.18       7  
   

 

 

   

 

 

   

 

 

 

Exercisable at end of period

    5,513     $ 29.36       5  
   

 

 

   

 

 

   

 

 

 
                                 
    Units Payable in Stock     Units Payable in Cash  

(Shares in thousands)

  Number of
Shares
    Weighted-
Average Grant
Date Fair Value
    Number of
Shares
    Weighted-
Average Grant
Date Fair Value
 

Outstanding at beginning of year, nonvested

    638     $ 35.53       2,927     $ 17.33  

Granted

    367       27.54       808       27.74  

Vested

    (218     (37.89     (801     (15.00

Forfeited

    (13     (33.19     (73     (19.24
   

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding at end of period, nonvested

    774     $ 31.12       2,861     $ 20.88  
   

 

 

   

 

 

   

 

 

   

 

 

 
                 

(Shares in thousands)

  Number of
Shares
    Weighted-
Average  Grant
Date Fair Value
 

Outstanding at beginning of year, nonvested

    859     $ 22.98  

Granted

    535       27.76  

Forfeited

    (53     (22.62
   

 

 

   

 

 

 

Outstanding at end of period, nonvested

    1,341     $ 24.90  
   

 

 

   

 

 

 
                 
    Three Months Ended  

(In millions)

  March 31,
2012
    April 2,
2011
 

Subject only to service conditions:

               

Value of awards vested

  $ 30     $ 34  

Intrinsic value of cash awards paid

    21       20  

Subject to performance conditions:

               

Intrinsic value of cash awards paid

    51       1  
Earnings Per Share (Tables)
Weighted-average shares outstanding for basic and diluted earnings
                 
    Three Months Ended  

(In thousands)

  March 31,
2012
    April 2,
2011
 

Basic weighted-average shares outstanding

    280,022       276,358  

Dilutive effect of:

               

Convertible notes and warrants

    13,902       41,504  

Stock options and restricted stock units

    708       1,257  
   

 

 

   

 

 

 

Diluted weighted-average shares outstanding

    294,632       319,119  
   

 

 

   

 

 

 
Accounts Receivable and Finance Receivables (Tables)
                 

(In millions)

  March 31,
2012
    December 31,
2011
 

Commercial

  $ 594     $ 528  

U.S. Government contracts

    360       346  
   

 

 

   

 

 

 
      954       874  

Allowance for doubtful accounts

    (17     (18
   

 

 

   

 

 

 
    $ 937     $ 856  
   

 

 

   

 

 

 
                 

(In millions)

  March 31,
2012
    December 31,
2011
 

Aviation

  $ 1,788     $ 1,876  

Golf Equipment

    61       69  

Golf Mortgage

    314       381  

Timeshare

    260       318  

Structured Capital

    171       208  

Other liquidating

    34       43  
   

 

 

   

 

 

 

Total finance receivables

    2,628       2,895  

Less: Allowance for losses

    136       156  

Less: Finance receivables held for sale

    318       418  
   

 

 

   

 

 

 

Total finance receivables held for investment, net

  $ 2,174     $ 2,321  
   

 

 

   

 

 

 
                                                                 
    March 31, 2012     December 31, 2011  

(In millions)

  Performing     Watchlist     Nonaccrual     Total     Performing     Watchlist     Nonaccrual     Total  

Aviation

  $ 1,465     $ 221     $ 102     $ 1,788     $ 1,537     $ 214     $ 125     $ 1,876  

Golf Equipment

    20       33       8       61       21       37       11       69  

Timeshare

    87       4       165       256       89       25       167       281  

Structured Capital

    166       5       —         171       203       5       —         208  

Other liquidating

    19       —         15       34       25       —         18       43  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,757     $ 263     $ 290     $ 2,310     $ 1,875     $ 281     $ 321     $ 2,477  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total

    76.0     11.4     12.6             75.7     11.3     13.0        
                                                                                 
    March 31, 2012     December 31, 2011  

(In millions)

  Less
Than

31 Days
Past Due
    31-60
Days

Past  Due
    61-90
Days

Past  Due
    Over
90 Days
Past Due
    Total     Less
Than

31 Days
Past Due
    31-60
Days

Past  Due
    61-90
Days

Past  Due
    Over
90 Days
Past Due
    Total  

Aviation

  $ 1,606     $ 96     $ 19     $ 67     $ 1,788     $ 1,705     $ 66     $ 37     $ 68     $ 1,876  

Golf Equipment

    52       1       3       5       61       53       3       6       7       69  

Timeshare

    199       16       3       38       256       238       3       —         40       281  

Structured Capital

    171       —         —         —         171       208       —         —         —         208  

Other liquidating

    26       —         —         8       34       35       —         —         8       43  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,054     $ 113     $ 25     $ 118     $ 2,310     $ 2,239     $ 72     $ 43     $ 123     $ 2,477  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                                 
    Recorded Investment        

(In millions)

  Impaired
Loans with
No Related
Allowance for
Credit Losses
    Impaired
Loans with
Related
Allowance for
Credit Losses
    Total
Impaired
Loans
    Unpaid
Principal
Balance
    Allowance
For Losses  On
Impaired
Loans
    Average
Recorded
Investment
 

March 31, 2012

                                   

Aviation

  $ 39     $ 70     $ 109     $ 113     $ 21     $ 124  

Golf Equipment

    —         2       2       2       1       2  

Timeshare

    122       78       200       250       42       213  

Other liquidating

    1       12       13       24       9       15  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 162     $ 162     $ 324     $ 389     $ 73     $ 354  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2011

                                   

Aviation

  $ 47     $ 92     $ 139     $ 142     $ 39     $ 146  

Timeshare

    170       57       227       288       38       315  

Golf Mortgage

    —         —         —         —         —         232  

Other liquidating

    3       12       15       59       9       30  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 220     $ 161     $ 381     $ 489     $ 86     $ 723  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                                 

(In millions)

  Aviation     Golf
Equipment
    Golf
Mortgage
    Timeshare     Other
Liquidating
    Total  

For the three months ended March 31, 2012

                                   

Beginning balance

  $ 95     $ 6     $ —       $ 40     $ 15     $ 156  

Provision for losses

    2       —         —         3       (1     4  

Net charge-offs

    (23     —         —         (1     —         (24
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 74     $ 6     $ —       $ 42     $ 14     $ 136  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended April 2, 2011

                                   

Beginning balance

  $ 107     $ 16     $ 79     $ 106     $ 34     $ 342  

Provision for losses

    11       —         (1     —         2       12  

Net charge-offs and transfers

    (8     (3     (3     (1     (1     (16
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 110     $ 13     $ 75     $ 105     $ 35     $ 338  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                                                 
    March 31, 2012     April 2, 2011  
    Finance
Receivables Evaluated
    Allowance
Based on
Individual
Evaluation
    Allowance
Based on
Collective
Evaluation
    Finance
Receivables Evaluated
    Allowance
Based on
Individual
Evaluation
    Allowance
Based on
Collective
Evaluation
 

(In millions)

  Individually     Collectively         Individually     Collectively      

Aviation

  $ 109     $ 1,679     $ 21     $ 53     $ 164     $ 1,864     $ 50     $ 60  

Golf Equipment

    2       59       1       5       6       186       1       12  

Timeshare

    200       56       42       —         368       195       102       3  

Golf Mortgage

    —         —         —         —         299       341       45       30  

Other liquidating

    13       21       9       5       38       164       4       31  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 324     $ 1,815     $ 73     $ 63     $ 875     $ 2,750     $ 202     $ 136  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Inventories (Tables)
Inventories
                 

(In millions)

  March 31,
2012
    December 31,
2011
 

Finished goods

  $ 1,210     $ 1,012  

Work in process

    2,233       2,202  

Raw materials

    418       399  
   

 

 

   

 

 

 
      3,861       3,613  

Progress/milestone payments

    (1,268     (1,211
   

 

 

   

 

 

 
    $ 2,593     $ 2,402  
   

 

 

   

 

 

 
Accrued Liabilities (Tables)
Changes in warranty and product maintenance contract liability
                 
    Three Months
Ended
 

(In millions)

  March 31,
2012
    April 2,
2011
 

Accrual at the beginning of period

  $ 224     $ 242  

Provision

    63       57  

Settlements

    (65     (64

Adjustments to prior accrual estimates

    (3     (6
   

 

 

   

 

 

 

Accrual at the end of period

  $ 219     $ 229  
   

 

 

   

 

 

 
Derivative Instruments and Fair Value Measurements (Tables)
                         
            Asset (Liability)  

(In millions)

  Borrowing Group   Balance Sheet Location   March 31,
2012
    December 31,
2011
 

Assets

                       

Interest rate exchange contracts*

  Finance   Other assets   $ 19     $ 22  

Foreign currency exchange contracts

  Manufacturing   Other current assets     13       9  
           

 

 

   

 

 

 

Total

          $ 32     $ 31  
           

 

 

   

 

 

 

Liabilities

                       

Interest rate exchange contracts*

  Finance   Other liabilities   $ (7   $ (7

Foreign currency exchange contracts

  Manufacturing   Accrued liabilities     (4     (5
           

 

 

   

 

 

 

Total

          $ (11   $ (12
           

 

 

   

 

 

 
                                 
          Gain (Loss)  
    Balance at     Three Months Ended  

(In millions)

  March 31,
2012
    April 2,
2011
    March 31,
2012
    April 2,
2011
 

Finance receivables held for sale

  $ 318     $ 237     $ 24     $ (11

Impaired finance receivables

    92       508       (6     (33

Repossessed assets and properties

    74       54       (16     (6
                                 
    March 31, 2012     December 31, 2011  

(In millions)

  Carrying
Value
    Estimated
Fair Value
    Carrying
Value
    Estimated
Fair Value
 

Manufacturing group

                               

Long-term debt, excluding leases

  $ (2,348   $ (2,757   $ (2,328   $ (2,561

Finance group

                               

Finance receivables held for investment, excluding leases

    1,890       1,819       1,997       1,848  

Debt

    (1,837     (1,778     (1,974     (1,854
Segment Information (Tables)
Reconciliation of segment profit to income from continuing operations before income taxes
                 
    Three Months
Ended
 

(In millions)

  March 31,
2012
    April 2,
2011
 

REVENUES

               

Manufacturing group

               

Cessna

  $ 669     $ 556  

Bell

    994       749  

Textron Systems

    377       445  

Industrial

    755       703  
   

 

 

   

 

 

 
      2,795       2,453  

Finance group

    61       26  
   

 

 

   

 

 

 

Total revenues

  $ 2,856     $ 2,479  
   

 

 

   

 

 

 

SEGMENT OPERATING PROFIT

               

Manufacturing group

               

Cessna

  $ (6   $ (38

Bell

    145       91  

Textron Systems

    35       53  

Industrial

    73       61  
   

 

 

   

 

 

 
      247       167  

Finance group

    12       (44
   

 

 

   

 

 

 

Segment profit

    259       123  

Corporate expenses and other, net

    (47     (39

Interest expense, net for Manufacturing group

    (35     (38
   

 

 

   

 

 

 

Income from continuing operations before income taxes

  $ 177     $ 46  
   

 

 

   

 

 

 
Basis of Presentation (Details Textual) (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Apr. 2, 2011
Basis of Presentation (Textual) [Abstract]
 
 
Gross favorable program profit adjustments
$ 17 
$ 21 
Gross unfavorable program profit adjustments
13 
Contracts Accounted for under Percentage of Completion Method [Member]
 
 
Change in Accounting Estimate [Line Items]
 
 
Income from continuing operations before income taxes
14 
Income from continuing operations after tax
$ 2 
$ 8 
Income from continuing operations per diluted share
$ 0.01 
$ 0.03 
Retirement Plans (Details) (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Apr. 2, 2011
Pension Benefits [Member]
 
 
Net periodic benefit cost
 
 
Service cost
$ 30 
$ 32 
Interest cost
76 
82 
Expected return on plan assets
(101)
(98)
Amortization of prior service cost (credit)
Amortization of net loss
29 
19 
Net periodic benefit cost
38 
39 
Postretirement Benefits Other than Pensions [Member]
 
 
Net periodic benefit cost
 
 
Service cost
Interest cost
Expected return on plan assets
   
   
Amortization of prior service cost (credit)
(3)
(1)
Amortization of net loss
Net periodic benefit cost
$ 7 
$ 12 
Share - Based Compensation (Details) (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Y
Apr. 2, 2011
Y
Compensation expense recorded in net income for share based compensation plans
 
 
Compensation expense
$ 46 
$ 36 
Income tax benefit
(17)
(13)
Total net compensation cost included in net income
$ 29 
$ 23 
Weighted average assumptions used in Black Scholes
 
 
Dividend yield
0.30% 
0.30% 
Expected Volatility
40.00% 
38.00% 
Risk free interest rate
0.80% 
2.40% 
Expected lives (in years)
5.5 
5.5 
Stock option activity under the plan
 
 
Outstanding at beginning of period, number of stock options
8,860 
 
Weighted Average Exercise Price, Beginning of Period
$ 27.68 
 
Grants in periods, number of options
3,008 
 
Granted in Period, Weighted Average Exercise Price
$ 27.76 
 
Exercise of stock options
(594)
 
Exercises in Period, Weighted Average Exercise Price
$ (18.70)
 
Canceled, expired or forfeited in period, number of options
(396)
 
Forfeitures and Expirations in Period, Weighted Average Exercise Price
$ (27.96)
 
Exercisable at end of period, number of options
5,513 
 
Exercisable at end of period, weighted average exercise price
$ 29.36 
 
Outstanding at end of period, number of stock options
10,878 
 
Outstanding at end of period, weighted average exercise price
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