TEXTRON INC, 10-Q filed on 10/28/2011
Quarterly Report
Document and Entity Information (USD $)
In Billions, except Share data
9 Months Ended
Oct. 1, 2011
Oct. 14, 2011
Jul. 2, 2010
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
TEXTRON INC 
 
 
Entity Central Index Key
0000217346 
 
 
Document Type
10-Q 
 
 
Document Period End Date
Oct. 01, 2011 
 
 
Amendment Flag
FALSE 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
Q3 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 4.4 
Entity Common Stock, Shares Outstanding
 
278,168,019 
 
Consolidated Statements of Operations (Unaudited) (USD $)
In Millions, except Per Share data
3 Months Ended
Oct. 1, 2011
3 Months Ended
Oct. 2, 2010
9 Months Ended
Oct. 1, 2011
9 Months Ended
Oct. 2, 2010
Revenues
 
 
 
 
Manufacturing revenues
$ 2,782 
$ 2,420 
$ 7,930 
$ 7,207 
Finance revenues
32 
59 
91 
191 
Total revenues
2,814 
2,479 
8,021 
7,398 
Costs, expenses and other
 
 
 
 
Cost of sales
2,313 
2,037 
6,593 
6,000 
Selling and administrative expense
251 
301 
850 
886 
Provision for losses on finance receivables
29 
27 
128 
Interest expense
61 
67 
184 
207 
Special charges
 
114 
 
136 
Total costs, expenses and other
2,628 
2,548 
7,654 
7,357 
Income (loss) from continuing operations before income taxes
186 
(69)
367 
41 
Income tax expense (benefit)
50 
(21)
108 
12 
Income (loss) from continuing operations
136 
(48)
259 
29 
Income (loss) from discontinued operations, net of income taxes
 
(3)
Net income (loss)
$ 142 
$ (48)
$ 261 
$ 26 
Basic earnings per share
 
 
 
 
Continuing operations
$ 0.49 
$ (0.17)
$ 0.93 
$ 0.11 
Discontinued operations
$ 0.02 
 
$ 0.01 
$ (0.01)
Basic earnings per share
$ 0.51 
$ (0.17)
$ 0.94 
$ 0.10 
Diluted earnings per share
 
 
 
 
Continuing operations
$ 0.45 
$ (0.17)
$ 0.83 
$ 0.10 
Discontinued operations
$ 0.02 
 
 
$ (0.01)
Diluted earnings per share
$ 0.47 
$ (0.17)
$ 0.83 
$ 0.09 
Dividends per share
 
 
 
 
Common stock
$ 0.02 
$ 0.02 
$ 0.06 
$ 0.06 
Consolidated Balance Sheets (Unaudited) (USD $)
In Millions, except Share data in Thousands
Oct. 1, 2011
Jan. 1, 2011
Assets
 
 
Cash and equivalents
$ 1,542 
$ 931 
Inventories
2,607 
2,277 
Finance receivables held for sale
(245)
(413)
Total assets
15,281 
15,282 
Liabilities
 
 
Total liabilities
11,969 
12,310 
Shareholders' equity
 
 
Common stock
35 
35 
Capital surplus
1,275 
1,301 
Retained earnings
3,282 
3,037 
Accumulated other comprehensive loss
(1,280)
(1,316)
Total shareholders' equity including cost of treasury shares
3,312 
3,057 
Less cost of treasury shares
85 
Total shareholders' equity
3,312 
2,972 
Total liabilities and shareholders' equity
15,281 
15,282 
Common shares outstanding (in thousands)
278,037 
275,739 
Manufacturing Group [Member]
 
 
Assets
 
 
Cash and equivalents
1,517 
898 
Accounts receivable, net
927 
892 
Inventories
2,607 
2,277 
Other current assets
1,094 
980 
Total current assets
6,145 
5,047 
Property, plant and equipment, less accumulated depreciation and amortization of $3,080 and $2,869
1,957 
1,932 
Goodwill
1,642 
1,632 
Other assets
1,687 
1,722 
Total assets
11,431 
10,333 
Liabilities
 
 
Short term and current portion of long-term debt
589 
19 
Accounts payable
805 
622 
Accrued liabilities
1,957 
2,016 
Total current liabilities
3,351 
2,657 
Long-term debt
2,473 
2,283 
Other liabilities
2,808 
2,993 
Total liabilities
8,632 
7,933 
Finance Group [Member]
 
 
Assets
 
 
Cash and equivalents
25 
33 
Finance receivables held for investment, net
3,026 
3,871 
Finance receivables held for sale
245 
413 
Other assets
554 
632 
Total assets
3,850 
4,949 
Liabilities
 
 
Other liabilities
364 
391 
Due to Manufacturing group
602 
326 
Debt
2,371 
3,660 
Total liabilities
$ 3,337 
$ 4,377 
Consolidated Balance Sheets (Unaudited) (Parenthetical) (Manufacturing Group [Member], USD $)
In Millions
Oct. 1, 2011
Jan. 1, 2011
Manufacturing Group [Member]
 
 
Assets
 
 
Accumulated depreciation and amortization on property, plant and equipment
$ 3,080 
$ 2,869 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Millions
9 Months Ended
Oct. 1, 2011
9 Months Ended
Oct. 2, 2010
Cash flows from operating activities:
 
 
Net income (loss)
$ 261 
$ 26 
Less: Income (loss) from discontinued operations
(3)
Income from continuing operations
259 
29 
Non-cash items:
 
 
Depreciation and amortization
289 
282 
Provision for losses on finance receivables held for investment
27 
128 
Portfolio losses on finance receivables
60 
76 
Deferred income taxes
(1)
Other, net
123 
88 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(29)
(7)
Inventories
(328)
(383)
Other assets
114 
186 
Accounts payable
178 
185 
Accrued and other liabilities
(178)
(224)
Captive finance receivables, net
149 
403 
Net cash provided by operating activities of continuing operations
663 
767 
Net cash used in operating activities of discontinued operations
(3)
(8)
Net cash provided by operating activities
660 
759 
Cash flows from investing activities:
 
 
Finance receivables originated or purchased
(149)
(378)
Finance receivables repaid
665 
1,265 
Proceeds on receivable sales
276 
501 
Capital expenditures
(271)
(134)
Net cash used in acquisitions
(3)
(47)
Proceeds from sale of repossessed assets and properties
77 
92 
Other investing activities, net
53 
39 
Net cash provided by (used in) investing activities
648 
1,338 
Cash flows from financing activities:
 
 
Proceeds from issuance of long-term debt
791 
47 
Payments on long-term lines of credit
(1,040)
(1,167)
Increase in short-term debt
227 
 
Principal payments on long-term debt
(643)
(1,863)
Proceeds from option exercises
Dividends paid
(17)
(16)
Other financing activities, net
(22)
 
Net cash provided by (used in) financing activities
(700)
(2,997)
Effect of exchange rate changes on cash and equivalents
(1)
Net increase (decrease) in cash and equivalents
611 
(901)
Cash and equivalents at beginning of period
931 
1,892 
Cash and equivalents at end of period
1,542 
991 
Manufacturing Group [Member]
 
 
Cash flows from operating activities:
 
 
Net income (loss)
332 
215 
Less: Income (loss) from discontinued operations
(3)
Income from continuing operations
330 
218 
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
 
 
Dividends received from TFC
179 
355 
Capital contribution paid to TFC under Support Agreement
(152)
(228)
Non-cash items:
 
 
Depreciation and amortization
267 
260 
Deferred income taxes
27 
28 
Other, net
104 
84 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(29)
(7)
Inventories
(324)
(382)
Other assets
113 
167 
Accounts payable
178 
185 
Accrued and other liabilities
(174)
(249)
Net cash provided by operating activities of continuing operations
519 
431 
Net cash used in operating activities of discontinued operations
(3)
(8)
Net cash provided by operating activities
516 
423 
Cash flows from investing activities:
 
 
Capital expenditures
(271)
(134)
Net cash used in acquisitions
(3)
(47)
Other investing activities, net
(27)
(26)
Net cash provided by (used in) investing activities
(301)
(207)
Cash flows from financing activities:
 
 
Proceeds from issuance of long-term debt
496 
 
Payments on long-term lines of credit
 
(1,167)
Increase in short-term debt
227 
 
Intergroup financing
(275)
150 
Principal payments on long-term debt
(13)
(130)
Proceeds from option exercises
Dividends paid
(17)
(16)
Other financing activities, net
(22)
 
Net cash provided by (used in) financing activities
400 
(1,161)
Effect of exchange rate changes on cash and equivalents
(1)
Net increase (decrease) in cash and equivalents
619 
(946)
Cash and equivalents at beginning of period
898 
1,748 
Cash and equivalents at end of period
1,517 
802 
Finance Group [Member]
 
 
Cash flows from operating activities:
 
 
Net income (loss)
(71)
(189)
Income from continuing operations
(71)
(189)
Non-cash items:
 
 
Depreciation and amortization
22 
22 
Provision for losses on finance receivables held for investment
27 
128 
Portfolio losses on finance receivables
60 
76 
Deferred income taxes
(28)
(24)
Other, net
19 
Changes in assets and liabilities:
 
 
Other assets
(3)
26 
Accrued and other liabilities
(4)
25 
Net cash provided by operating activities of continuing operations
22 
68 
Net cash provided by operating activities
22 
68 
Cash flows from investing activities:
 
 
Finance receivables originated or purchased
(343)
(662)
Finance receivables repaid
1,008 
1,825 
Proceeds on receivable sales
276 
628 
Proceeds from sale of repossessed assets and properties
77 
92 
Other investing activities, net
40 
40 
Net cash provided by (used in) investing activities
1,058 
1,923 
Cash flows from financing activities:
 
 
Proceeds from issuance of long-term debt
295 
47 
Payments on long-term lines of credit
(1,040)
 
Intergroup financing
275 
(163)
Principal payments on long-term debt
(630)
(1,733)
Capital contributions paid to TFC under Support Agreement
152 
228 
Other capital contributions paid to Finance group
40 
30 
Dividends paid
(179)
(355)
Net cash provided by (used in) financing activities
(1,087)
(1,946)
Effect of exchange rate changes on cash and equivalents
(1)
 
Net increase (decrease) in cash and equivalents
(8)
45 
Cash and equivalents at beginning of period
33 
144 
Cash and equivalents at end of period
$ 25 
$ 189 
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 January 1, 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.
Special Charges
Special Charges
Note 2: Special Charges
In the third quarter of 2010, we substantially liquidated the assets held by a Canadian entity within the Finance segment. Accordingly, we recorded a non-cash charge of $91 million ($74 million after-tax) within special charges to reclassify the entity’s cumulative currency translation adjustment amount within other comprehensive income to the statement of operations. The reclassification of this amount had no impact on shareholders’ equity.
In 2010, special charges also included costs incurred under a restructuring program that was completed at the end of 2010. There were no special charges in the first nine months of 2011.
Special charges by segment and type for the three and nine months ended October 2, 2010 are as follows:
                                 
    Restructuring              
    Severance     Contract              
(In millions)   Costs     Terminations     Other     Total  
 
Three Months Ended October 2, 2010
                               
 
Cessna
  $ 15     $     $     $ 15  
Textron Systems
    4                   4  
Industrial
          1             1  
Finance
    1       2       91       94  
 
 
  $ 20     $ 3     $ 91     $ 114  
 
Nine Months Ended October 2, 2010
                               
 
Cessna
  $ 29     $ 2     $     $ 31  
Bell
    1                   1  
Textron Systems
    5                   5  
Industrial
          1             1  
Finance
    6       3       91       100  
Corporate
    (2 )                 (2 )
 
 
  $ 39     $ 6     $ 91     $ 136  
 
An analysis of our restructuring reserve activity is summarized below:
                         
    Severance     Contract        
(In millions)   Costs     Terminations     Total  
 
Balance at January 1, 2011
  $ 57     $ 5     $ 62  
Cash paid
    (40 )     (1 )     (41 )
 
Balance at October 1, 2011
  $ 17     $ 4     $ 21  
 
Retirement Plans
Retirement Plans
Note 3: 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:
                                 
                    Postretirement Benefits  
    Pension Benefits     Other Than Pensions  
    October 1,     October 2,     October 1,     October 2,  
(In millions)   2011     2010     2011     2010  
 
Three Months Ended
                               
Service cost
  $ 32     $ 31     $ 2     $ 2  
Interest cost
    82       79       8       9  
Expected return on plan assets
    (98 )     (92 )            
Amortization of prior service cost (credit)
    4       4       (2 )     (2 )
Amortization of net loss
    19       9       3       3  
 
Net periodic benefit cost
  $ 39     $ 31     $ 11     $ 12  
 
Nine Months Ended
                               
 
Service cost
  $ 96     $ 93     $ 6     $ 6  
Interest cost
    246       237       24       25  
Expected return on plan assets
    (294 )     (276 )            
Amortization of prior service cost (credit)
    12       12       (5 )     (4 )
Amortization of net loss
    57       27       9       9  
 
Net periodic benefit cost
  $ 117     $ 93     $ 34     $ 36  
 
Comprehensive Income
Comprehensive Income
Note 4: Comprehensive Income
Our comprehensive income, net of taxes, is provided below:
                                 
    Three Months Ended     Nine Months Ended  
    October 1,     October 2,     October 1,     October 2,  
(In millions)   2011     2010     2011     2010  
 
Net income (loss)
  $ 142     $ (48 )   $ 261     $ 26  
Other comprehensive income (loss):
                               
Recognition of prior service cost and unrealized losses on pension and postretirement benefits
    15       11       48       31  
Deferred gains (losses) on hedge contracts
    (17 )     3       (9 )     10  
Recognition of foreign currency translation loss upon substantial liquidation of Canadian entity, net of income tax benefit of $17
          74             74  
Foreign currency translation and other
    (18 )     21       (3 )     (20 )
 
Comprehensive income
  $ 122     $ 61     $ 297     $ 121  
 
Earnings Per Share
Earnings Per Share
Note 5: 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 earnings per share 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 earnings per share 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 convertible note call options purchased in connection with the issuance of the convertible notes are excluded from the calculation of diluted EPS as their impact is always anti-dilutive.
Upon conversion of our convertible notes, as described in our 2010 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. See Note 8 regarding our cash tender offer pursuant to which we purchased a portion of our convertible notes subsequent to quarter end.
The weighted-average shares outstanding for basic and diluted earnings per share are as follows:
                                 
    Three Months Ended     Nine Months Ended  
    October 1,     October 2,     October 1,     October 2,  
(In thousands)   2011     2010     2011     2010  
 
Basic weighted-average shares outstanding
    278,090       274,896       277,285       274,056  
Dilutive effect of convertible notes, warrants, stock options and restricted stock units
    22,776             35,469       26,354  
 
Diluted weighted-average shares outstanding
    300,866       274,896       312,754       300,410  
 
Stock options to purchase 8 million and 5 million shares of common stock outstanding are excluded from our calculation of diluted weighted-average shares outstanding for the three and nine months ended October 1, 2011, respectively, as the exercise prices were greater than the average market price of our common stock for the periods. Stock options to purchase 7 million shares of common stock outstanding are excluded from our calculation of diluted weighted-average shares outstanding for both the three and nine months ended October 2, 2010 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. For the three months ended October 2, 2010, the potential dilutive effect of 23 million weighted-average shares of 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 was excluded from the computation of diluted weighted-average shares outstanding as the shares would have an anti-dilutive effect on the loss from continuing operations.
Accounts Receivable and Finance Receivables
Accounts Receivable and Finance Receivables
Note 6: Accounts Receivable and Finance Receivables
Accounts Receivable
Accounts receivable is composed of the following:
                 
    October 1,     January 1,  
(In millions)   2011     2011  
 
Commercial
  $ 578     $ 496  
U.S. Government contracts
    368       416  
 
 
    946       912  
Allowance for doubtful accounts
    (19 )     (20 )
 
 
  $ 927     $ 892  
 
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 $172 million at October 1, 2011 and $195 million at January 1, 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:
                 
    October 1,     January 1,  
(Dollars in millions)   2011     2011  
 
Aviation
  $ 1,927     $ 2,120  
Golf equipment
    141       212  
Golf mortgage
    703       876  
Timeshare
    495       894  
Structured capital
    217       317  
Other liquidating
    64       207  
 
Total finance receivables
    3,547       4,626  
Less: Allowance for losses
    276       342  
Less: Finance receivables held for sale
    245       413  
 
Total finance receivables held for investment, net
  $ 3,026     $ 3,871  
 
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 collateral value, the liquidity position of individual borrowers and guarantors, debt service coverage in the golf mortgage product line 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 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.
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 internally assigned credit quality indicators discussed above is as follows:
                                                                 
    October 1, 2011     January 1, 2011  
(In millions)   Performing     Watchlist     Nonaccrual     Total     Performing     Watchlist     Nonaccrual     Total  
 
Aviation
  $ 1,591     $ 214     $ 122     $ 1,927     $ 1,713     $ 238     $ 169     $ 2,120  
Golf equipment
    91       38       12       141       138       51       23       212  
Golf mortgage
    225       133       228       586       163       303       219       685  
Timeshare
    129       24       214       367       222       77       382       681  
Structured capital
    212       5             217       290       27             317  
Other liquidating
    34             30       64       130       11       57       198  
 
Total
  $ 2,282     $ 414     $ 606     $ 3,302     $ 2,656     $ 707     $ 850     $ 4,213  
 
% of Total
    69.1 %     12.5 %     18.4 %             63.0 %     16.8 %     20.2 %        
 
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 is summarized in the tables below:
                                         
    Less Than                     Greater Than        
    31 Days     31-60 Days     61-90 Days     90 Days        
(In millions)   Past Due     Past Due     Past Due     Past Due     Total  
 
October 1, 2011
                                       
 
Aviation
  $ 1,764     $ 75     $ 35     $ 53     $ 1,927  
Golf equipment
    122       8       5       6       141  
Golf mortgage
    502       11       13       60       586  
Timeshare
    283                   84       367  
Structured capital
    217                         217  
Other liquidating
    45                   19       64  
 
Total
  $ 2,933     $ 94     $ 53     $ 222     $ 3,302  
 
January 1, 2011
                                       
 
Aviation
  $ 1,964     $ 67     $ 41     $ 48     $ 2,120  
Golf equipment
    171       13       9       19       212  
Golf mortgage
    543       12       7       123       685  
Timeshare
    533       14       6       128       681  
Structured capital
    317                         317  
Other liquidating
    166       2       1       29       198  
 
Total
  $ 3,694     $ 108     $ 64     $ 347     $ 4,213  
 
We had no accrual status loans that were greater than 90 days past due at October 1, 2011 or at January 1, 2011. At October 1, 2011, the 60+ days contractual delinquency as a percentage of finance receivables held for investment was 8.33%, compared with 9.77% at January 1, 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 nine months of 2011 or 2010.
The average recorded investment in impaired loans for the first nine months of 2011 and 2010 is provided below:
                                                 
            Golf     Golf                    
(In millions)   Aviation     Equipment     Mortgage     Timeshare     Other Liquidating     Total  
 
For the nine months ended October 1, 2011
                                               
 
Impaired loans with a related allowance for losses recorded
  $ 126     $ 4     $ 193     $ 283     $ 19     $ 625  
Impaired loans with no related allowance for losses recorded
    21             96       54       15       186  
 
Total
  $ 147     $ 4     $ 289     $ 337     $ 34     $ 811  
 
For the nine months ended October 2, 2010
                                               
 
Impaired loans with a related allowance for losses recorded
  $ 198     $ 5     $ 184     $ 356     $ 23     $ 766  
Impaired loans with no related allowance for losses recorded
    14       1       112       70       60       257  
 
Total
  $ 212     $ 6     $ 296     $ 426     $ 83     $ 1,023  
 
A summary of impaired finance receivables, excluding leveraged leases, and related allowance for losses is provided below:
                                                 
            Golf     Golf             Other        
(In millions)   Aviation     Equipment     Mortgage     Timeshare     Liquidating     Total  
 
October 1, 2011
                                               
 
Impaired loans with a related allowance for losses recorded:
                                               
Recorded investment
  $ 94     $ 2     $ 196     $ 206     $ 23     $ 521  
Unpaid principal balance
    95       2       205       245       30       577  
Related allowance
    39             51       76       12       178  
 
Impaired loans with no related allowance for losses recorded:
                                               
Recorded investment
    26             108       73       4       211  
Unpaid principal balance
    27             114       87       44       272  
 
Total impaired loans:
                                               
Recorded investment
    120       2       304       279       27       732  
Unpaid principal balance
    122       2       319       332       74       849  
Related allowance
    39             51       76       12       178  
 
January 1, 2011
                                               
 
Impaired loans with a related allowance for losses recorded:
                                               
Recorded investment
  $ 147     $ 4     $ 175     $ 355     $ 16     $ 697  
Unpaid principal balance
    144       5       178       385       15       727  
Related allowance
    45       2       39       102       3       191  
 
Impaired loans with no related allowance for losses recorded:
                                               
Recorded investment
    17             138       69       30       254  
Unpaid principal balance
    21             146       74       89       330  
 
Total impaired loans:
                                               
Recorded investment
    164       4       313       424       46       951  
Unpaid principal balance
    165       5       324       459       104       1,057  
Related allowance
    45       2       39       102       3       191  
 
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. Modifications often arise in the golf mortgage and timeshare product lines as a result of the lack of financing available to borrowers in these industries. Loans in our golf mortgage product line are typically structured with amortization periods between 20 and 30 years and contractual maturities of between 5 and 10 years, resulting in a significant balloon payment. We modify a significant portion of these loans at, or near the maturity date as a result of this structure.
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.
Finance receivables held for investment that were modified during the three- and nine-month periods of 2011 and are categorized as troubled debt restructurings, excluding related allowances for doubtful accounts and transfers of assets in satisfaction of the loan balance, are summarized below.
                                 
            Pre-     Post-        
            Modification     Modification     Recorded  
    Number of     Recorded     Recorded     Investment at  
(Dollars in millions)   Customers     Investment     Investment     October 1, 2011  
 
For the Three Months Ended October 1, 2011
                               
 
Golf mortgage
    7     $ 38     $ 35     $ 35  
Timeshare
    3       136       136       133  
 
For the Nine Months Ended October 1, 2011
                               
 
Golf mortgage
    21     $ 166     $ 165     $ 163  
Timeshare
    9       219       219       158  
 
Due to the nature of these restructurings, the financial effect of the modifications included in the above table was insignificant. Modified finance receivables are classified as impaired loans and are evaluated on an individual basis to determine whether reserves are required. Our reserve evaluation includes an estimate of the likelihood that the borrower will be able to perform under the contractual terms of the modification. Subsequent payment defaults or delinquency trends of finance receivables modified as troubled debt restructurings are also factored into the evaluation of impaired loans for reserving purposes as a default decreases the likelihood that the borrower will be able to perform under the terms of future modifications. During the first nine months of 2011, we had four customer defaults in our timeshare product line for finance receivables that had been modified as troubled debt restructurings within the previous twelve months. The recorded investment for these customers totaled $171 million, excluding related allowances for doubtful accounts, at October 1, 2011.
We may foreclose, repossess or receive collateral when a customer no longer has the ability to make payment. These transfers of assets in full or partial satisfaction of the loan balance are also considered troubled debt restructurings if the fair value of the assets transferred is less than our recorded investment. Similar to the troubled debt restructurings described above, these loans typically have been classified as impaired loans prior to the asset transfer; therefore, reserves have already been established related to the loan. As a result, for the three and nine months ended October 1, 2011, respectively, charge-offs of $19 million and $58 million upon the transfer of such assets were largely offset by previously established reserves.
Troubled debt restructurings resulting in transfers of assets in satisfaction of the loan balance that occurred during the three and nine months of 2011 are as follows.
                         
            Pre-        
            Modification     Post-  
    Number of     Recorded     Modification  
(Dollars in millions)   Customers     Investment     Asset Balance  
 
For the Three Months Ended October 1, 2011
                       
 
Aviation
    5     $ 17     $ 11  
Golf mortgage
    2       14       7  
Timeshare
    1       30       24  
 
For the Nine Months Ended October 1, 2011
                       
 
Aviation
    19     $ 46     $ 27  
Golf mortgage
    3       23       14  
Timeshare
    2       96       60  
 
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, 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 using the probability-weighted approach.
The evaluation of our portfolios is inherently subjective as it requires estimates. These estimates include the amount and timing of future cash flows expected to be received on impaired finance receivables and the underlying collateral, which may differ from actual results. While our analysis is specific to each individual account, the most critical factors included in this analysis vary by product line. For the aviation product line, these factors include industry valuation guides, physical condition of the aircraft, payment history, and existence and financial strength of guarantors. For the golf equipment line, the critical factors are the age and condition of the collateral, while the factors for the golf mortgage line include historical golf course, hotel or marina cash flow performance; estimates of golf rounds and price per round or occupancy and room rates; market discount and capitalization rates; and existence and financial strength of guarantors. For the timeshare product line, the critical factors are the 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 the aviation and golf equipment product lines, 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, including the golf mortgage and timeshare product lines, the allowance is established as a percentage of watchlist balances, as defined on page 10, which represents a combination of assumed default likelihood and loss severity based on historical experience, industry trends and collateral values. In establishing our allowance for losses to cover accounts not specifically identified, the most critical factors for the aviation product line include the collateral value of the portfolio, historical default experience and delinquency trends; for golf equipment, factors considered include historical loss experience and delinquency trends; and for golf mortgage, factors include an evaluation of individual loan credit quality indicators such as delinquency, loan balance to collateral value, debt service coverage, existence and financial strength of guarantors, historical progression from watchlist to nonaccrual status and historical loss severity. For the timeshare product line, we evaluate 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 at the earlier of the date when the collateral is repossessed or when no payment has been received for six months unless management deems the receivable collectable. Finance receivables are charged off when the remaining balance is deemed to be uncollectible.
A rollforward of the allowance for losses on finance receivables held for investment and a summary of its composition, based on how the underlying finance receivables are evaluated for impairment, is presented below. The finance receivables reported in the following table specifically exclude $217 million and $281 million of leveraged leases at October 1, 2011 and October 2, 2010, respectively, in accordance with authoritative accounting standards:
                                                 
                                    Structured        
                                    Capital and        
            Golf     Golf             Other        
(In millions)   Aviation     Equipment     Mortgage     Timeshare     Liquidating     Total  
 
For the nine months ended October 1, 2011
                                               
 
Allowance for losses
                                               
Beginning balance
  $ 107     $ 16     $ 79     $ 106     $ 34     $ 342  
Provision for losses
    18       (3 )     4       7       1       27  
Net charge-offs and transfers
    (27 )     (4 )     (11 )     (35 )     (16 )     (93 )
 
Ending balance
  $ 98     $ 9     $ 72     $ 78     $ 19     $ 276  
 
Ending balance based on individual evaluations
    39             51       76       12       178  
Ending balance based on collective evaluation
    59       9       21       2       7       98  
 
Finance receivables
                                               
Individually evaluated for impairment
  $ 120     $ 2     $ 304     $ 279     $ 27     $ 732  
Collectively evaluated for impairment
    1,807       139       282       88       37       2,353  
 
Balance at end of period
  $ 1,927     $ 141     $ 586     $ 367     $ 64     $ 3,085  
 
For the nine months ended October 2, 2010
                                               
 
Allowance for losses
                                               
Beginning balance
  $ 114     $ 9     $ 65     $ 79     $ 74     $ 341  
Provision for losses
    27       12       61       37       (9 )     128  
Net charge-offs
    (36 )     (5 )     (48 )     (5 )     (20 )     (114 )
 
Ending balance
  $ 105     $ 16     $ 78     $ 111     $ 45     $ 355  
 
Ending balance based on individual evaluations
    47       2       38       99       7       193  
Ending balance based on collective evaluation
    58       14       40       12       38       162  
 
Finance receivables
                                               
Individually evaluated for impairment
  $ 180     $ 6     $ 289     $ 442     $ 70     $ 987  
Collectively evaluated for impairment
    2,002       194       438       565       266       3,465  
 
Balance at end of period
  $ 2,182     $ 200     $ 727     $ 1,007     $ 336     $ 4,452  
 
Inventories
Inventories
Note 7: Inventories
                 
    October 1,     January 1,  
(In millions)   2011     2011  
 
Finished goods
  $ 1,079     $ 784  
Work in process
    2,303       2,125  
Raw materials
    406       506  
 
 
    3,788       3,415  
Progress/milestone payments
    (1,181 )     (1,138 )
 
 
  $ 2,607     $ 2,277  
 
Debt
Debt
Note 8: Debt
In September 2011, we issued $250 million in 4.625% Notes due 2016 and $250 million in 5.950% Notes due 2021 for total net proceeds of $496 million. We also commenced a cash tender offer in September that expired on October 12, 2011 for any and all of our approximately $600 million in outstanding 4.50% convertible senior notes due 2013.
In accordance with the terms of the tender offer, for each $1,000 principal amount of the convertible notes purchased, a holder received a cash payment of $1,524 plus accrued and unpaid interest up to the October 13, 2011 settlement date. In the aggregate, the holders of convertible notes validly tendered $225 million principal amount, or 37.5%, of the convertible notes. Excluding accrued interest, we paid $342 million in cash for the tendered convertible notes. In accordance with the applicable authoritative accounting guidance, we have determined the fair value of the liability component of the convertible notes purchased in the tender offer to be $234 million, with the balance of $108 million representing the equity component. The carrying value of the tendered convertible notes, including unamortized issuance costs, was $200 million, so a pretax loss of $34 million will be recognized in the fourth quarter of 2011, along with a $108 million reduction to shareholders’ equity. We have classified $200 million of the convertible notes as current at October 1, 2011, based on the settlement subsequent to quarter end. Immediately following the settlement in October, we had approximately $375 million principal amount of convertible notes outstanding, which are convertible at the holder’s option, under certain circumstances described in our 2010 Form 10-K.
Accrued Liabilities
Accrued Liabilities
Note 9: 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:
                 
    Nine Months Ended  
    October 1,     October 2,  
(In millions)   2011     2010  
 
Accrual at the beginning of period
  $ 242     $ 263  
Provision
    162       129  
Settlements
    (173 )     (162 )
Adjustments to prior accrual estimates
    (11 )     12  
 
Accrual at the end of period
  $ 220     $ 242  
 
Commitments and Contingencies
Commitments and Contingencies
Note 10: 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.
Derivative Instruments and Fair Value Measurements
Derivative Instruments and Fair Value Measurements
Note 11. 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)  
                    October 1,     January 1,  
(In millions)   Borrowing Group     Balance Sheet Location     2011     2011  
 
Assets
                               
Interest rate exchange contracts*
  Finance   Other assets   $ 27     $ 34  
Foreign currency exchange contracts
  Manufacturing   Other current assets     12       39  
 
Total
                  $ 39     $ 73  
 
Liabilities
                               
Interest rate exchange contracts*
  Finance   Other liabilities   $ (9 )   $ (6 )
Foreign currency exchange contracts
  Manufacturing   Accrued liabilities     (6 )     (2 )
 
Total
                  $ (15 )   $ (8 )
 
 
*   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 October 1, 2011. At October 1, 2011 and January 1, 2011, we had interest rate exchange contracts with notional amounts upon which the contracts were based of $882 million and $1.1 billion, 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 October 1, 2011 and January 1, 2011, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $710 million and $635 million, respectively.
The Finance group also has investments in other marketable securities totaling $22 million and $51 million at October 1, 2011 and January 1, 2011, respectively, that are classified as available for sale. These investments are classified as Level 2 as the fair value for these notes was determined based on observable market inputs for similar securitization interests in markets that are relatively inactive compared with the market environment in which they were originally issued and based on bids received from prospective purchasers.
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 nine months of 2011 and 2010.
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 October 1, 2011, 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- and nine-month periods ended October 1, 2011 and October 2, 2010. 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 $10 million after-tax loss for the first nine months of 2011, resulting in an accumulated net gain balance of $4 million at October 1, 2011. The ineffective portion of these hedges was insignificant.
Assets Recorded at Fair Value on a Nonrecurring Basis
The table below presents those assets that are measured at fair value on a nonrecurring basis that had fair value measurement adjustments during the first nine months of 2011 and 2010. These assets were measured using significant unobservable inputs (Level 3) and include the following:
                                 
                    Gain (Loss)  
    Balance at     Nine Months Ended  
    October 1,     October 2,     October 1,     October 2,  
(In millions)   2011     2010     2011     2010  
 
Finance Group
                               
Impaired finance receivables
  $ 348     $ 525     $ (73 )   $ (130 )
Finance receivables held for sale
    245       252       (22 )     (17 )
Other assets
    115       126       (26 )     (38 )
 
Impaired Finance Receivables — Impaired nonaccrual finance receivables are included in the table above since the measurement of required reserves on our impaired finance receivables is significantly dependent on the fair value of the underlying collateral. Fair values of collateral are determined based on the use of appraisals, industry pricing guides, input from market participants, our recent experience selling similar assets or internally developed discounted cash flow models. Fair value measurements recorded on impaired finance receivables resulted in charges to provision for loan losses.
Finance Receivables Held for Sale — Finance receivables held for sale are recorded at the lower of cost or fair value. As a result of our plan to exit the non-captive Finance business certain finance receivables are classified as held for sale. In addition, during the third quarter of 2011, we reclassified $98 million of timeshare finance receivables from held for investment to held for sale based on an agreement in place at the end of the quarter. We determined a sale of these finance receivables is consistent with our goal to maximize the economic value of our portfolio and accelerate cash collections. At October 1, 2011, the finance receivables held for sale are primarily assets in the timeshare and golf mortgage product lines. Timeshare finance receivables classified as held for sale were identified at the individual loan level; whereas golf course mortgages were identified as a portion of a larger portfolio with common characteristics based on the intention to balance the sale of certain loans with the collection of others to maximize economic value. These finance receivables 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 our finance receivables. The estimate of fair value was determined based on the use of discounted cash flow models to estimate the exit price we expect to receive in the principal market for each type of loan in an orderly transaction, which includes both the sale of pools of similar assets and the sale of individual loans. The models we used incorporate 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 credit line utilization rates. Where available, assumptions related to the expectations of current market participants are compared with observable market inputs, including bids from prospective purchasers of similar loans and certain bond market indices for loans perceived to be of similar credit quality. Although we utilize and prioritize these market observable inputs in our discounted cash flow models, these inputs are not typically derived from markets with directly comparable loan structures, industries and collateral types. Therefore, all valuations of finance receivables held for sale involve significant management judgment, which can result in differences between our fair value estimates and those of other market participants.
Other assets — Other assets include repossessed assets and properties, operating assets received in satisfaction of troubled finance receivables and other investments, which are accounted for under the equity method of accounting and have no active, quoted market prices. The fair value of these assets is determined based on the use of appraisals, industry pricing guides, input from market participants, our recent experience selling similar assets or internally developed discounted cash flow models. For our other investments, the discounted cash flow models incorporate assumptions specific to the nature of the investments’ business and underlying assets.
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:
                                 
    October 1, 2011     January 1, 2011  
    Carrying     Estimated     Carrying     Estimated  
(In millions)   Value     Fair Value     Value     Fair Value  
 
Manufacturing group
                               
Long-term debt, excluding leases
  $ (2,703 )   $ (3,079 )   $ (2,172 )   $ (2,698 )
Finance group
                               
Finance receivables held for investment, excluding leases
    2,648       2,216       3,345       3,131  
Debt
    (2,371 )     (2,250 )     (3,660 )     (3,528 )
 
Fair value for the Manufacturing group debt is determined using market observable data for similar transactions. At October 1, 2011 and January 1, 2011, approximately 45% and 33%, respectively, of the fair value of term debt for the Finance group was determined based on observable market transactions. 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. We utilize the same valuation methodologies to determine the fair value estimates for finance receivables held for investment as used for finance receivables held for sale.
Income Tax Expense (Benefit)
Income Tax Expense (Benefit)
Note 12: Income Tax Expense (Benefit)
For the three and nine months ended October 1, 2011, income tax expense equated to an effective income tax rate of 27% and 29%, compared to the Federal statutory income tax rate of 35%. In the third quarter of 2011, the rate was significantly lower than the statutory income tax rate due to a 3% benefit associated with the early termination of certain leveraged leases and a 6% benefit associated with a higher proportion of income attributable to international operations in countries with lower tax rates for both periods.
For the three and nine months ended October 2, 2010, income tax expense (benefit) equated to an effective income tax rate of (30%) and 29%, compared to the Federal statutory income tax rate of 35%. The third quarter 2010 effective tax rate benefit differs from the U.S. Federal statutory rate primarily due to a detriment of 21% related to the nondeductible portion of a cumulative currency translation charge resulting from the substantial liquidation of a Canadian entity within the Finance segment, as discussed in Note 2. This detriment was partially offset by a 16% benefit related to a higher proportion of income attributable to international operations in countries with lower tax rates. For the nine months ended October 2, 2010, the effective tax rate provision differs from the U.S. Federal statutory rate primarily due to a 36% detriment related to the nondeductible portion of a cumulative currency translation charge resulting from the substantial liquidation of a Canadian entity within the Finance segment and a 27% detriment related to a change in the tax treatment of the Medicare Part D program related to U.S. health-care legislation enacted in the first quarter of 2010, offset by a 69% benefit related to changes in the functional currency of two Canadian subsidiaries and benefits related to a higher proportion of income attributable to international operations in countries with lower tax rates.
Segment Information
Segment Information
Note 13: 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     Nine Months Ended  
    October 1,     October 2,     October 1,     October 2,  
(In millions)   2011     2010     2011     2010  
 
REVENUES
                               
Manufacturing Group
                               
Cessna
  $ 771     $ 535     $ 1,979     $ 1,603  
Bell
    894       825       2,515       2,266  
Textron Systems
    462       460       1,359       1,452  
Industrial
    655       600       2,077       1,886  
 
 
    2,782       2,420       7,930       7,207  
Finance Group
    32       59       91       191  
 
Total revenues
  $ 2,814     $ 2,479     $ 8,021     $ 7,398  
 
SEGMENT OPERATING PROFIT
                               
Manufacturing Group
                               
Cessna
  $ 33     $ (31 )   $     $ (52 )
Bell
    143       107       354       289  
Textron Systems
    47       50       149       175  
Industrial
    37       37       153       137  
 
 
    260       163       656       549  
Finance Group
    (24 )     (51 )     (101 )     (180 )
 
Segment profit
    236       112       555       369  
Corporate expenses and other, net
    (13 )     (35 )     (75 )     (89 )
Interest expense, net for Manufacturing group
    (37 )     (32 )     (113 )     (103 )
Special charges
          (114 )           (136 )
 
Income (loss) from continuing operations before income taxes
  $ 186     $ (69 )   $ 367     $ 41  
 
Subsequent Events
Subsequent Events
Note 14. Subsequent Events
On October 13, 2011, we repurchased 37.5% of our outstanding convertible notes pursuant to the cash tender offer disclosed in Note 8. Subsequently, on October 25, 2011, we entered into separate agreements with each of the counterparties to the call option and warrant transactions entered into when the notes were originally issued to adjust the number of shares of common stock covered by these instruments. Accordingly, we reduced the number of common shares covered under the call options from 45.7 million shares to 28.6 million shares. This equates to the number of shares of common stock into which the $225 million principal amount of the repurchased notes would have been currently convertible. In addition, the warrants were amended to reduce the number of shares covered by the warrants to 28.0 million and to change the expiration dates specified in the original agreement to correspond with the final settlement period for the call options. Pursuant to these amendments, we received $135 million for the call option transaction and paid $133 million for the warrant transaction, and the net amount will be recorded within shareholders’ equity.
On October 25, 2011, we also entered into capped call transactions with the counterparties for a cost of $32 million. The capped call transactions cover an aggregate of 17.1 million shares of our common stock. The capped call transactions have a strike price of $13.125 per share and a cap price of $15.75 per share. The capped call transactions will expire in May 2013. We may elect for the settlement of the capped call transactions, if any, to be paid to us in shares of our common stock or cash or in a combination of cash and shares of common stock. Based on the structure of the capped call, the transactions meet all of the applicable accounting criteria for equity classification and will be classified within shareholders’ equity.
Accounting Policies (Policies)
We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period. Basic earnings per share 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 earnings per share 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 convertible note call options purchased in connection with the issuance of the convertible notes are excluded from the calculation of diluted EPS as their impact is always anti-dilutive.
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 collateral value, the liquidity position of individual borrowers and guarantors, debt service coverage in the golf mortgage product line 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 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.
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.
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 nine months of 2011 or 2010.
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. Modifications often arise in the golf mortgage and timeshare product lines as a result of the lack of financing available to borrowers in these industries. Loans in our golf mortgage product line are typically structured with amortization periods between 20 and 30 years and contractual maturities of between 5 and 10 years, resulting in a significant balloon payment. We modify a significant portion of these loans at, or near the maturity date as a result of this structure.
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.
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, 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 using the probability-weighted approach.
The evaluation of our portfolios is inherently subjective as it requires estimates. These estimates include the amount and timing of future cash flows expected to be received on impaired finance receivables and the underlying collateral, which may differ from actual results. While our analysis is specific to each individual account, the most critical factors included in this analysis vary by product line. For the aviation product line, these factors include industry valuation guides, physical condition of the aircraft, payment history, and existence and financial strength of guarantors. For the golf equipment line, the critical factors are the age and condition of the collateral, while the factors for the golf mortgage line include historical golf course, hotel or marina cash flow performance; estimates of golf rounds and price per round or occupancy and room rates; market discount and capitalization rates; and existence and financial strength of guarantors. For the timeshare product line, the critical factors are the 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 the aviation and golf equipment product lines, 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, including the golf mortgage and timeshare product lines, the allowance is established as a percentage of watchlist balances, as defined on page 10, which represents a combination of assumed default likelihood and loss severity based on historical experience, industry trends and collateral values. In establishing our allowance for losses to cover accounts not specifically identified, the most critical factors for the aviation product line include the collateral value of the portfolio, historical default experience and delinquency trends; for golf equipment, factors considered include historical loss experience and delinquency trends; and for golf mortgage, factors include an evaluation of individual loan credit quality indicators such as delinquency, loan balance to collateral value, debt service coverage, existence and financial strength of guarantors, historical progression from watchlist to nonaccrual status and historical loss severity. For the timeshare product line, we evaluate 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 at the earlier of the date when the collateral is repossessed or when no payment has been received for six months unless management deems the receivable collectable. Finance receivables are charged off when the remaining balance is deemed to be uncollectible.
Special Charges (Tables)
                                 
    Restructuring              
    Severance     Contract              
(In millions)   Costs     Terminations     Other     Total  
 
Three Months Ended October 2, 2010
                               
 
Cessna
  $ 15     $     $     $ 15  
Textron Systems
    4                   4  
Industrial
          1             1  
Finance
    1       2       91       94  
 
 
  $ 20     $ 3     $ 91     $ 114  
 
Nine Months Ended October 2, 2010
                               
 
Cessna
  $ 29     $ 2     $     $ 31  
Bell
    1                   1  
Textron Systems
    5                   5  
Industrial
          1             1  
Finance
    6       3       91       100  
Corporate
    (2 )                 (2 )
 
 
  $ 39     $ 6     $ 91     $ 136  
 
                         
    Severance     Contract        
(In millions)   Costs     Terminations     Total  
 
Balance at January 1, 2011
  $ 57     $ 5     $ 62  
Cash paid
    (40 )     (1 )     (41 )
 
Balance at October 1, 2011
  $ 17     $ 4     $ 21  
 
Retirement Plans (Tables)
Schedule of Costs of Retirement Plans
                                 
                    Postretirement Benefits  
    Pension Benefits     Other Than Pensions  
    October 1,     October 2,     October 1,     October 2,  
(In millions)   2011     2010     2011     2010  
 
Three Months Ended
                               
Service cost
  $ 32     $ 31     $ 2     $ 2  
Interest cost
    82       79       8       9  
Expected return on plan assets
    (98 )     (92 )            
Amortization of prior service cost (credit)
    4       4       (2 )     (2 )
Amortization of net loss
    19       9       3       3  
 
Net periodic benefit cost
  $ 39     $ 31     $ 11     $ 12  
 
Nine Months Ended
                               
 
Service cost
  $ 96     $ 93     $ 6     $ 6  
Interest cost
    246       237       24       25  
Expected return on plan assets
    (294 )     (276 )            
Amortization of prior service cost (credit)
    12       12       (5 )     (4 )
Amortization of net loss
    57       27       9       9  
 
Net periodic benefit cost
  $ 117     $ 93     $ 34     $ 36  
 
Comprehensive Income (Tables)
Schedule of Comprehensive Income (Loss)
                                 
    Three Months Ended     Nine Months Ended  
    October 1,     October 2,     October 1,     October 2,  
(In millions)   2011     2010     2011     2010  
 
Net income (loss)
  $ 142     $ (48 )   $ 261     $ 26  
Other comprehensive income (loss):
                               
Recognition of prior service cost and unrealized losses on pension and postretirement benefits
    15       11       48       31  
Deferred gains (losses) on hedge contracts
    (17 )     3       (9 )     10  
Recognition of foreign currency translation loss upon substantial liquidation of Canadian entity, net of income tax benefit of $17
          74             74  
Foreign currency translation and other
    (18 )     21       (3 )     (20 )
 
Comprehensive income
  $ 122     $ 61     $ 297     $ 121  
 
Earnings per Share (Tables)
Weighted-average shares outstanding for basic & Diluted earnings per share
                                 
    Three Months Ended     Nine Months Ended  
    October 1,     October 2,     October 1,     October 2,  
(In thousands)   2011     2010     2011     2010  
 
Basic weighted-average shares outstanding
    278,090       274,896       277,285       274,056  
Dilutive effect of convertible notes, warrants, stock options and restricted stock units
    22,776             35,469       26,354  
 
Diluted weighted-average shares outstanding
    300,866       274,896       312,754       300,410  
 
Accounts Receivable and Finance Receivables (Tables)
                 
    October 1,     January 1,  
(In millions)   2011     2011  
 
Commercial
  $ 578     $ 496  
U.S. Government contracts
    368       416  
 
 
    946       912  
Allowance for doubtful accounts
    (19 )     (20 )
 
 
  $ 927     $ 892  
 
                 
    October 1,     January 1,  
(Dollars in millions)   2011     2011  
 
Aviation
  $ 1,927     $ 2,120  
Golf equipment
    141       212  
Golf mortgage
    703       876  
Timeshare
    495       894  
Structured capital
    217       317  
Other liquidating
    64       207  
 
Total finance receivables
    3,547       4,626  
Less: Allowance for losses
    276       342  
Less: Finance receivables held for sale
    245       413  
 
Total finance receivables held for investment, net
  $ 3,026     $ 3,871  
 
                                                                 
    October 1, 2011     January 1, 2011  
(In millions)   Performing     Watchlist     Nonaccrual     Total     Performing     Watchlist     Nonaccrual     Total  
 
Aviation
  $ 1,591     $ 214     $ 122     $ 1,927     $ 1,713     $ 238     $ 169     $ 2,120  
Golf equipment
    91       38       12       141       138       51       23       212  
Golf mortgage
    225       133       228       586       163       303       219       685  
Timeshare
    129       24       214       367       222       77       382       681  
Structured capital
    212       5             217       290       27             317  
Other liquidating
    34             30       64       130       11       57       198  
 
Total
  $ 2,282     $ 414     $ 606     $ 3,302     $ 2,656     $ 707     $ 850     $ 4,213  
 
% of Total
    69.1 %     12.5 %     18.4 %             63.0 %     16.8 %     20.2 %        
 
                                         
    Less Than                     Greater Than        
    31 Days     31-60 Days     61-90 Days     90 Days        
(In millions)   Past Due     Past Due     Past Due     Past Due     Total  
 
October 1, 2011
                                       
 
Aviation
  $ 1,764     $ 75     $ 35     $ 53     $ 1,927  
Golf equipment
    122       8       5       6       141  
Golf mortgage
    502       11       13       60       586  
Timeshare
    283                   84       367  
Structured capital
    217                         217  
Other liquidating
    45                   19       64  
 
Total
  $ 2,933     $ 94     $ 53     $ 222     $ 3,302  
 
January 1, 2011
                                       
 
Aviation
  $ 1,964     $ 67     $ 41     $ 48     $ 2,120  
Golf equipment
    171       13       9       19       212  
Golf mortgage
    543       12       7       123       685  
Timeshare
    533       14       6       128       681  
Structured capital
    317                         317  
Other liquidating
    166       2       1       29       198  
 
Total
  $ 3,694     $ 108     $ 64     $ 347     $ 4,213  
 
                                                 
            Golf     Golf                    
(In millions)   Aviation     Equipment     Mortgage     Timeshare     Other Liquidating     Total  
 
For the nine months ended October 1, 2011
                                               
 
Impaired loans with a related allowance for losses recorded
  $ 126     $ 4     $ 193     $ 283     $ 19     $ 625  
Impaired loans with no related allowance for losses recorded
    21             96       54       15       186  
 
Total
  $ 147     $ 4     $ 289     $ 337     $ 34     $ 811  
 
For the nine months ended October 2, 2010
                                               
 
Impaired loans with a related allowance for losses recorded
  $ 198     $ 5     $ 184     $ 356     $ 23     $ 766  
Impaired loans with no related allowance for losses recorded
    14       1       112       70       60       257  
 
Total
  $ 212     $ 6     $ 296     $ 426     $ 83     $ 1,023  
 
                                                 
            Golf     Golf             Other        
(In millions)   Aviation     Equipment     Mortgage     Timeshare     Liquidating     Total  
 
October 1, 2011
                                               
 
Impaired loans with a related allowance for losses recorded:
                                               
Recorded investment
  $ 94     $ 2     $ 196     $ 206     $ 23     $ 521  
Unpaid principal balance
    95       2       205       245       30       577  
Related allowance
    39             51       76       12       178  
 
Impaired loans with no related allowance for losses recorded:
                                               
Recorded investment
    26             108       73       4       211  
Unpaid principal balance
    27             114       87       44       272  
 
Total impaired loans:
                                               
Recorded investment
    120       2       304       279       27       732  
Unpaid principal balance
    122       2       319       332       74       849  
Related allowance
    39             51       76       12       178  
 
January 1, 2011
                                               
 
Impaired loans with a related allowance for losses recorded:
                                               
Recorded investment
  $ 147     $ 4     $ 175     $ 355     $ 16     $ 697  
Unpaid principal balance
    144       5       178       385       15       727  
Related allowance
    45       2       39       102       3       191  
 
Impaired loans with no related allowance for losses recorded:
                                               
Recorded investment
    17             138       69       30       254  
Unpaid principal balance
    21             146       74       89       330  
 
Total impaired loans:
                                               
Recorded investment
    164       4       313       424       46       951  
Unpaid principal balance
    165       5       324       459       104       1,057  
Related allowance
    45       2       39       102       3       191  
 
                                 
            Pre-     Post-        
            Modification     Modification     Recorded  
    Number of     Recorded     Recorded     Investment at  
(Dollars in millions)   Customers     Investment     Investment     October 1, 2011  
 
For the Three Months Ended October 1, 2011
                               
 
Golf mortgage
    7     $ 38     $ 35     $ 35  
Timeshare
    3       136       136       133  
 
For the Nine Months Ended October 1, 2011
                               
 
Golf mortgage
    21     $ 166     $ 165     $ 163  
Timeshare
    9       219       219       158  
 
                         
            Pre-        
            Modification     Post-  
    Number of     Recorded     Modification  
(Dollars in millions)   Customers     Investment     Asset Balance  
 
For the Three Months Ended October 1, 2011
                       
 
Aviation
    5     $ 17     $ 11  
Golf mortgage
    2       14       7  
Timeshare
    1       30       24  
 
For the Nine Months Ended October 1, 2011
                       
 
Aviation
    19     $ 46     $ 27  
Golf mortgage
    3       23       14  
Timeshare
    2       96       60  
 
                                                 
                                    Structured        
                                    Capital and        
            Golf     Golf             Other        
(In millions)   Aviation     Equipment     Mortgage     Timeshare     Liquidating     Total  
 
For the nine months ended October 1, 2011
                                               
 
Allowance for losses
                                               
Beginning balance
  $ 107     $ 16     $ 79     $ 106     $ 34     $ 342  
Provision for losses
    18       (3 )     4       7       1       27  
Net charge-offs and transfers
    (27 )     (4 )     (11 )     (35 )     (16 )     (93 )
 
Ending balance
  $ 98     $ 9     $ 72     $ 78     $ 19     $ 276  
 
Ending balance based on individual evaluations
    39             51       76       12       178  
Ending balance based on collective evaluation
    59       9       21       2       7       98  
 
Finance receivables
                                               
Individually evaluated for impairment
  $ 120     $ 2     $ 304     $ 279     $ 27     $ 732  
Collectively evaluated for impairment
    1,807       139       282       88       37       2,353  
 
Balance at end of period
  $ 1,927     $ 141     $ 586     $ 367     $ 64     $ 3,085  
 
For the nine months ended October 2, 2010
                                               
 
Allowance for losses
                                               
Beginning balance
  $ 114     $ 9     $ 65     $ 79     $ 74     $ 341  
Provision for losses
    27       12       61       37       (9 )     128  
Net charge-offs
    (36 )     (5 )     (48 )     (5 )     (20 )     (114 )
 
Ending balance
  $ 105     $ 16     $ 78     $ 111     $ 45     $ 355  
 
Ending balance based on individual evaluations
    47       2       38       99       7       193  
Ending balance based on collective evaluation
    58       14       40       12       38       162  
 
Finance receivables
                                               
Individually evaluated for impairment
  $ 180     $ 6     $ 289     $ 442     $ 70     $ 987  
Collectively evaluated for impairment
    2,002       194       438       565       266       3,465  
 
Balance at end of period
  $ 2,182     $ 200     $ 727     $ 1,007     $ 336     $ 4,452  
 
Inventories (Tables)
Inventories
                 
    October 1,     January 1,  
(In millions)   2011     2011  
 
Finished goods
  $ 1,079     $ 784  
Work in process
    2,303       2,125  
Raw materials
    406       506  
 
 
    3,788       3,415  
Progress/milestone payments
    (1,181 )     (1,138 )
 
 
  $ 2,607     $ 2,277  
 
Accrued Liabilities (Tables)
Accruals
                 
    Nine Months Ended  
    October 1,     October 2,  
(In millions)   2011     2010  
 
Accrual at the beginning of period
  $ 242     $ 263  
Provision
    162       129  
Settlements
    (173 )     (162 )
Adjustments to prior accrual estimates
    (11 )     12  
 
Accrual at the end of period
  $ 220     $ 242  
 
Derivative Instruments and Fair Value Measurements (Tables)
                                 
                    Asset (Liability)  
                    October 1,     January 1,  
(In millions)   Borrowing Group     Balance Sheet Location     2011     2011  
 
Assets
                               
Interest rate exchange contracts*
  Finance   Other assets   $ 27     $ 34  
Foreign currency exchange contracts
  Manufacturing   Other current assets     12       39  
 
Total
                  $ 39     $ 73  
 
Liabilities
                               
Interest rate exchange contracts*
  Finance   Other liabilities   $ (9 )   $ (6 )
Foreign currency exchange contracts
  Manufacturing   Accrued liabilities     (6 )     (2 )
 
Total
                  $ (15 )   $ (8 )
 
                                 
                    Gain (Loss)  
    Balance at     Nine Months Ended  
    October 1,     October 2,     October 1,     October 2,  
(In millions)   2011     2010     2011     2010  
 
Finance Group
                               
Impaired finance receivables
  $ 348     $ 525     $ (73 )   $ (130 )
Finance receivables held for sale
    245       252       (22 )     (17 )
Other assets
    115       126       (26 )     (38 )
 
                                 
    October 1, 2011     January 1, 2011  
    Carrying     Estimated     Carrying     Estimated  
(In millions)   Value     Fair Value     Value     Fair Value  
 
Manufacturing group
                               
Long-term debt, excluding leases
  $ (2,703 )   $ (3,079 )   $ (2,172 )   $ (2,698 )
Finance group
                               
Finance receivables held for investment, excluding leases
    2,648       2,216       3,345       3,131  
Debt
    (2,371 )     (2,250 )     (3,660 )     (3,528 )
 
Segment Information (Tables)
Segment information
                                 
    Three Months Ended     Nine Months Ended  
    October 1,     October 2,     October 1,     October 2,  
(In millions)   2011     2010     2011     2010  
 
REVENUES
                               
Manufacturing Group
                               
Cessna
  $ 771     $ 535     $ 1,979     $ 1,603  
Bell
    894       825       2,515       2,266  
Textron Systems
    462       460       1,359       1,452  
Industrial
    655       600       2,077       1,886  
 
 
    2,782       2,420       7,930       7,207  
Finance Group
    32       59       91       191  
 
Total revenues
  $ 2,814     $ 2,479     $ 8,021     $ 7,398  
 
SEGMENT OPERATING PROFIT
                               
Manufacturing Group
                               
Cessna
  $ 33     $ (31 )   $     $ (52 )
Bell
    143       107       354       289  
Textron Systems
    47       50       149       175  
Industrial
    37       37       153       137  
 
 
    260       163       656       549  
Finance Group
    (24 )     (51 )     (101 )     (180 )
 
Segment profit
    236       112       555       369  
Corporate expenses and other, net
    (13 )     (35 )     (75 )     (89 )
Interest expense, net for Manufacturing group
    (37 )     (32 )     (113 )     (103 )
Special charges
          (114 )           (136 )
 
Income (loss) from continuing operations before income taxes
  $ 186     $ (69 )   $ 367     $ 41  
 
Special Charges (Details) (USD $)
In Millions
3 Months Ended
Oct. 2, 2010
9 Months Ended
Oct. 2, 2010
Special Charges
 
 
Special charges
$ 114 
$ 136 
Severance Costs [Member]
 
 
Special Charges
 
 
Special charges
20 
39 
Severance Costs [Member] |
Cessna [Member]
 
 
Special Charges
 
 
Special charges
15 
29 
Severance Costs [Member] |
Bell [Member]
 
 
Special Charges
 
 
Special charges
 
Severance Costs [Member] |
Textron Systems [Member]
 
 
Special Charges
 
 
Special charges
Severance Costs [Member] |
Finance [ Member]
 
 
Special Charges
 
 
Special charges
Severance Costs [Member] |
Corporate [Member]
 
 
Special Charges
 
 
Special charges
 
(2)
Contract Terminations [Member]
 
 
Special Charges
 
 
Special charges
Contract Terminations [Member] |
Cessna [Member]
 
 
Special Charges
 
 
Special charges
 
Contract Terminations [Member] |
Industrial [Member]
 
 
Special Charges
 
 
Special charges
Contract Terminations [Member] |
Finance [ Member]
 
 
Special Charges
 
 
Special charges
Other [Member]
 
 
Special Charges
 
 
Special charges
91 
91 
Other [Member] |
Finance [ Member]
 
 
Special Charges
 
 
Special charges
91 
91 
Cessna [Member]
 
 
Special Charges
 
 
Special charges
15 
31 
Bell [Member]
 
 
Special Charges
 
 
Special charges
 
Textron Systems [Member]
 
 
Special Charges
 
 
Special charges
Industrial [Member]
 
 
Special Charges
 
 
Special charges
Finance [ Member]
 
 
Special Charges
 
 
Special charges
94 
100 
Corporate [Member]
 
 
Special Charges
 
 
Special charges
 
$ (2)
Special Charges (Details 1) (USD $)
In Millions
3 Months Ended
Oct. 2, 2010
9 Months Ended
Oct. 1, 2011
Restructuring reserve
 
 
Restructuring Reserve, Beginning Balance
 
$ 62 
Cash paid
 
(41)
Restructuring Reserve, Ending Balance
 
21 
Special Charges (Textual) [Abstract]
 
 
Non cash charges within special charges
91 
 
Non cash charge after tax
74 
 
Severance Costs [Member]
 
 
Restructuring reserve
 
 
Restructuring Reserve, Beginning Balance
 
57 
Cash paid
 
(40)
Restructuring Reserve, Ending Balance
 
17 
Contract Terminations [Member]
 
 
Restructuring reserve
 
 
Restructuring Reserve, Beginning Balance
 
Cash paid
 
(1)
Restructuring Reserve, Ending Balance
 
$ 4 
Retirement Plans (Details) (USD $)
In Millions
3 Months Ended
Oct. 1, 2011
3 Months Ended
Oct. 2, 2010
9 Months Ended
Oct. 1, 2011
9 Months Ended
Oct. 2, 2010
Pension Plans Defined Benefit [Member]
 
 
 
 
Defined Benefit Plan Net Periodic Benefit Cost
 
 
 
 
Service cost
$ 32 
$ 31 
$ 96 
$ 93 
Interest cost
82 
79 
246 
237 
Expected return on plan assets
(98)
(92)
(294)
(276)
Amortization of prior service cost (credit)
12 
12 
Amortization of net loss
19 
57 
27 
Net periodic benefit cost
39 
31 
117 
93 
Other Postretirement Benefit Plans Defined Benefit [Member]
 
 
 
 
Defined Benefit Plan Net Periodic Benefit Cost
 
 
 
 
Service cost
Interest cost
24 
25 
Amortization of prior service cost (credit)
(2)
(2)
(5)
(4)
Amortization of net loss
Net periodic benefit cost
$ 11 
$ 12 
$ 34 
$ 36 
Comprehensive Income (Details) (USD $)
In Millions
3 Months Ended
Oct. 1, 2011
3 Months Ended
Oct. 2, 2010
9 Months Ended
Oct. 1, 2011
9 Months Ended
Oct. 2, 2010
Comprehensive Income (Loss), Net of Tax, Attributable to Parent
 
 
 
 
Net income (loss)
$ 142 
$ (48)
$ 261 
$ 26 
Other comprehensive income (loss):
 
 
 
 
Recognition of prior service cost and unrealized losses on pension and postretirement benefits
15 
11 
48 
31 
Deferred gains (losses) on hedge contracts
(17)
(9)
10 
Recognition of foreign currency translation loss upon substantial liquidation of Canadian entity, net of income tax benefit of $17
 
74 
 
74 
Foreign currency translation and other
(18)
21 
(3)
(20)
Comprehensive income
122 
61 
297 
121 
Comprehensive Income (Textual) [Abstract]
 
 
 
 
After tax income tax benefit on recognition of foreign currency translation loss upon liquidation
$ 17 
$ 17 
$ 17 
$ 17 
Earnings per Share (Details)
In Thousands
3 Months Ended
Oct. 1, 2011
3 Months Ended
Oct. 2, 2010
9 Months Ended
Oct. 1, 2011
9 Months Ended
Oct. 2, 2010
Weighted-average shares outstanding for basic & Diluted earnings per share
 
 
 
 
Basic weighted-average shares outstanding
278,090 
274,896 
277,285 
274,056 
Dilutive effect of convertible notes, warrants, stock options and restricted stock units
22,776 
 
35,469 
26,354 
Diluted weighted-average shares outstanding
300,866 
274,896 
312,754 
300,410 
Earnings per Share (Details Textual)
In Millions
3 Months Ended
Oct. 1, 2011
3 Months Ended
Oct. 2, 2010
9 Months Ended
Oct. 1, 2011
9 Months Ended
Oct. 2, 2010
Earnings Per Share, Diluted, Other Disclosures [Abstract]
 
 
 
 
Options to purchase common stock excluded from calculation
8,000,000 
7,000,000 
5,000,000 
7,000,000 
Stock options, restricted units and shares that could be issued upon the conversion of convertible notes and upon issuance of related warrants
 
23 
 
 
Accounts Receivable and Finance Receivables (Details) (USD $)
In Millions
Oct. 1, 2011
Jan. 1, 2011
Accounts Receivable
 
 
Accounts receivable, Gross
$ 946 
$ 912 
Allowance for doubtful accounts
(19)
(20)
Commercial [Member]
 
 
Accounts Receivable
 
 
Accounts receivable, Gross
578 
496 
U. S. Government Contracts [Member]
 
 
Accounts Receivable
 
 
Accounts receivable, Gross
368 
416 
Manufacturing Group [Member]
 
 
Accounts Receivable
 
 
Accounts receivable, net
$ 927 
$ 892 
Accounts Receivable and Finance Receivables (Details 1) (USD $)
In Millions
Oct. 1, 2011
Jan. 1, 2011
Oct. 2, 2010
Jan. 2, 2010
Finance Receivables
 
 
 
 
Total finance receivables
$ 3,547 
$ 4,626 
 
 
Less: Allowance for losses
276 
342 
355 
341 
Less: Finance receivables held for sale
245 
413 
 
 
Aviation [Member]
 
 
 
 
Finance Receivables
 
 
 
 
Total finance receivables
1,927 
2,120 
 
 
Golf equipment [Member]
 
 
 
 
Finance Receivables
 
 
 
 
Total finance receivables
141 
212 
 
 
Golf mortgage [Member]
 
 
 
 
Finance Receivables
 
 
 
 
Total finance receivables
703 
876 
 
 
Timeshare [Member]
 
 
 
 
Finance Receivables
 
 
 
 
Total finance receivables
495 
894 
 
 
Structured capital [Member]
 
 
 
 
Finance Receivables
 
 
 
 
Total finance receivables
217 
317 
 
 
Other liquidating [Member]
 
 
 
 
Finance Receivables
 
 
 
 
Total finance receivables
64 
207 
 
 
Finance Group [Member]
 
 
 
 
Finance Receivables
 
 
 
 
Less: Finance receivables held for sale
(245)
(413)
 
 
Finance receivables held for investment, net
$ 3,026 
$ 3,871 
 
 
Accounts Receivable and Finance Receivables (Details 2) (USD $)
In Millions, unless otherwise specified
Oct. 1, 2011
Jan. 1, 2011
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
$ 3,302 
$ 4,213 
Aviation [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
1,927 
2,120 
Aviation [Member] |
Performing [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
1,591 
1,713 
Aviation [Member] |
Watchlist [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
214 
238 
Aviation [Member] |
Nonaccrual [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
122 
169 
Golf equipment [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
141 
212 
Golf equipment [Member] |
Performing [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
91 
138 
Golf equipment [Member] |
Watchlist [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
38 
51 
Golf equipment [Member] |
Nonaccrual [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
12 
23 
Golf mortgage [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
586 
685 
Golf mortgage [Member] |
Performing [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
225 
163 
Golf mortgage [Member] |
Watchlist [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
133 
303 
Golf mortgage [Member] |
Nonaccrual [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
228 
219 
Timeshare [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
367 
681 
Timeshare [Member] |
Performing [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
129 
222 
Timeshare [Member] |
Watchlist [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
24 
77 
Timeshare [Member] |
Nonaccrual [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
214 
382 
Structured capital [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
217 
317 
Structured capital [Member] |
Performing [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
212 
290 
Structured capital [Member] |
Watchlist [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
27 
Structured capital [Member] |
Nonaccrual [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
Other liquidating [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
64 
198 
Other liquidating [Member] |
Performing [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
34 
130 
Other liquidating [Member] |
Watchlist [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
11 
Other liquidating [Member] |
Nonaccrual [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
30 
57 
Performing [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
2,282 
2,656 
Finance receivables held for investment based on the internally assigned credit quality, percent
69.10% 
63.00% 
Watchlist [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
414 
707 
Finance receivables held for investment based on the internally assigned credit quality, percent
12.50% 
16.80% 
Nonaccrual [Member]
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
$ 606 
$ 850 
Finance receivables held for investment based on the internally assigned credit quality, percent
18.40% 
20.20% 
Accounts Receivable and Finance Receivables (Details 3) (USD $)
In Millions
Oct. 1, 2011
Jan. 1, 2011
Finance receivables held for investment by delinquency aging
 
 
Financing receivable held for investment, recorded investment, 0 To 30 days past due
$ 2,933 
$ 3,694 
Financing receivable held for investment, recorded investment, 31 to 60 days past due
94 
108