TEXTRON INC, 10-Q filed on 7/24/2013
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 29, 2013
Jul. 12, 2013
Document and Entity Information
 
 
Entity Registrant Name
TEXTRON INC 
 
Entity Central Index Key
0000217346 
 
Document Type
10-Q 
 
Document Period End Date
Jun. 29, 2013 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-28 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
280,504,882 
Document Fiscal Year Focus
2013 
 
Document Fiscal Period Focus
Q2 
 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 29, 2013
Jun. 30, 2012
Jun. 29, 2013
Jun. 30, 2012
Revenues
 
 
 
 
Manufacturing revenues
$ 2,808 
$ 2,964 
$ 5,621 
$ 5,759 
Finance revenues
31 
55 
73 
116 
Total revenues
2,839 
3,019 
5,694 
5,875 
Costs and expenses
 
 
 
 
Cost of sales
2,338 
2,435 
4,720 
4,747 
Selling and administrative expense
296 
276 
575 
588 
Interest expense
42 
53 
93 
108 
Total costs and expenses
2,676 
2,764 
5,388 
5,443 
Income from continuing operations before income taxes
163 
255 
306 
432 
Income tax expense
49 
82 
77 
139 
Income from continuing operations
114 
173 
229 
293 
Income (loss) from discontinued operations, net of income taxes
(1)
(1)
(3)
Net income
$ 113 
$ 172 
$ 232 
$ 290 
Basic earnings per share
 
 
 
 
Continuing operations (in dollars per share)
$ 0.41 
$ 0.61 
$ 0.83 
$ 1.04 
Discontinued operations (in dollars per share)
$ (0.01)
 
$ 0.01 
$ (0.01)
Basic earnings per share (in dollars per share)
$ 0.40 
$ 0.61 
$ 0.84 
$ 1.03 
Diluted earnings per share
 
 
 
 
Continuing operations (in dollars per share)
$ 0.40 
$ 0.58 
$ 0.80 
$ 0.99 
Discontinued operations (in dollars per share)
 
 
$ 0.01 
$ (0.01)
Diluted earnings per share (in dollars per share)
$ 0.40 
$ 0.58 
$ 0.81 
$ 0.98 
Dividends per share
 
 
 
 
Common stock (in dollars per share)
$ 0.02 
$ 0.02 
$ 0.04 
$ 0.04 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 29, 2013
Jun. 30, 2012
Jun. 29, 2013
Jun. 30, 2012
Consolidated Statements of Comprehensive Income
 
 
 
 
Net income
$ 113 
$ 172 
$ 232 
$ 290 
Other comprehensive income, net of tax:
 
 
 
 
Pension adjustments, net of reclassifications
31 
21 
63 
42 
Deferred gains/losses on hedge contracts, net of reclassifications
(6)
(3)
(13)
(3)
Foreign currency translation adjustments
(16)
(9)
(13)
Other comprehensive income
26 
41 
26 
Comprehensive income
$ 139 
$ 174 
$ 273 
$ 316 
Consolidated Balance Sheets (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
Jun. 29, 2013
Dec. 29, 2012
Assets
 
 
Cash and equivalents
$ 571 
$ 1,413 
Inventories
3,203 
2,712 
Total assets
12,440 
13,033 
Liabilities
 
 
Total liabilities
9,060 
10,042 
Shareholders' equity
 
 
Common stock
37 
35 
Capital surplus
1,344 
1,177 
Retained earnings
4,044 
3,824 
Accumulated other comprehensive loss
(1,729)
(1,770)
Total shareholders' equity including cost of treasury shares
3,696 
3,266 
Less cost of treasury shares
316 
275 
Total shareholders' equity
3,380 
2,991 
Total liabilities and shareholders' equity
12,440 
13,033 
Common shares outstanding
280,390 
271,263 
Manufacturing group
 
 
Assets
 
 
Cash and equivalents
459 
1,378 
Accounts receivable, net
1,007 
829 
Inventories
3,203 
2,712 
Other current assets
489 
470 
Total current assets
5,158 
5,389 
Property, plant and equipment, less accumulated depreciation and amortization of $3,386 and $3,277
2,141 
2,149 
Goodwill
1,670 
1,649 
Other assets
1,514 
1,524 
Total assets
10,483 
10,711 
Liabilities
 
 
Current portion of long-term debt and short-term debt
374 
535 
Accounts payable
966 
1,021 
Accrued liabilities
1,649 
1,956 
Total current liabilities
2,989 
3,512 
Other liabilities
2,559 
2,798 
Long-term debt
1,904 
1,766 
Total liabilities
7,452 
8,076 
Finance group
 
 
Assets
 
 
Cash and equivalents
112 
35 
Finance receivables held for investment, net
1,510 
1,850 
Finance receivables held for sale
106 
140 
Other assets
229 
297 
Total assets
1,957 
2,322 
Liabilities
 
 
Other liabilities
277 
280 
Debt
1,331 
1,686 
Total liabilities
$ 1,608 
$ 1,966 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, unless otherwise specified
Jun. 29, 2013
Dec. 29, 2012
Consolidated Balance Sheets
 
 
Accumulated depreciation and amortization
$ 3,386 
$ 3,277 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
6 Months Ended
Jun. 29, 2013
Jun. 30, 2012
Cash flows from operating activities
 
 
Net income
$ 232 
$ 290 
Less: Income (loss) from discontinued operations
(3)
Income from continuing operations
229 
293 
Non-cash items:
 
 
Depreciation and amortization
192 
183 
Deferred income taxes
42 
85 
Other, net
24 
44 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(169)
(67)
Inventories
(445)
(387)
Other assets
(23)
16 
Accounts payable
(61)
57 
Accrued and other liabilities
(374)
(236)
Income taxes, net
(90)
Pension, net
(55)
(82)
Captive finance receivables, net
276 
117 
Other operating activities, net
(8)
(4)
Net cash provided by (used in) operating activities of continuing operations
(462)
28 
Net cash used in operating activities of discontinued operations
(7)
(3)
Net cash provided by (used in) operating activities
(469)
25 
Cash flows from investing activities
 
 
Finance receivables repaid
112 
336 
Proceeds from sales of receivables and other finance assets
53 
117 
Capital expenditures
(190)
(158)
Net cash used in acquisitions
(53)
 
Other investing activities, net
10 
11 
Net cash provided by (used in) investing activities
(68)
306 
Cash flows from financing activities
 
 
Principal payments on long-term and nonrecourse debt
(925)
(393)
Settlement of convertible debt
(215)
(2)
Proceeds from long-term debt
402 
88 
Increase in short-term debt
366 
 
Proceeds from settlement of capped call
75 
 
Dividends paid
(11)
(11)
Other financing activities, net
13 
14 
Net cash used in financing activities
(295)
(304)
Effect of exchange rate changes on cash and equivalents
(10)
(1)
Net increase (decrease) in cash and equivalents
(842)
26 
Cash and equivalents at beginning of period
1,413 
885 
Cash and equivalents at end of period
571 
911 
Manufacturing Group
 
 
Cash flows from operating activities
 
 
Net income
209 
264 
Less: Income (loss) from discontinued operations
(3)
Income from continuing operations
206 
267 
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
 
 
Dividends received from Finance Group
30 
315 
Capital contribution paid to Finance Group
(1)
(240)
Non-cash items:
 
 
Depreciation and amortization
182 
170 
Deferred income taxes
29 
57 
Other, net
44 
50 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(169)
(67)
Inventories
(460)
(388)
Other assets
(23)
18 
Accounts payable
(61)
57 
Accrued and other liabilities
(372)
(213)
Income taxes, net
(98)
140 
Pension, net
(49)
(81)
Other operating activities, net
 
(4)
Net cash provided by (used in) operating activities of continuing operations
(742)
81 
Net cash used in operating activities of discontinued operations
(7)
(3)
Net cash provided by (used in) operating activities
(749)
78 
Cash flows from investing activities
 
 
Capital expenditures
(190)
(158)
Net cash used in acquisitions
(53)
 
Other investing activities, net
17 
Net cash provided by (used in) investing activities
(226)
(156)
Cash flows from financing activities
 
 
Principal payments on long-term and nonrecourse debt
(312)
(139)
Settlement of convertible debt
(215)
(2)
Proceeds from long-term debt
150 
 
Increase in short-term debt
366 
 
Proceeds from settlement of capped call
75 
 
Intergroup financing
 
245 
Dividends paid
(11)
(11)
Other financing activities, net
13 
13 
Net cash used in financing activities
66 
106 
Effect of exchange rate changes on cash and equivalents
(10)
(1)
Net increase (decrease) in cash and equivalents
(919)
27 
Cash and equivalents at beginning of period
1,378 
871 
Cash and equivalents at end of period
459 
898 
Finance Group
 
 
Cash flows from operating activities
 
 
Net income
23 
26 
Income from continuing operations
23 
26 
Non-cash items:
 
 
Depreciation and amortization
10 
13 
Deferred income taxes
13 
28 
Other, net
(20)
(6)
Changes in assets and liabilities:
 
 
Other assets
 
(2)
Accrued and other liabilities
(12)
(23)
Income taxes, net
(131)
Pension, net
(6)
(1)
Other operating activities, net
(8)
 
Net cash provided by (used in) operating activities of continuing operations
(96)
Net cash provided by (used in) operating activities
(96)
Cash flows from investing activities
 
 
Finance receivables repaid
422 
548 
Proceeds from sales of receivables and other finance assets
77 
117 
Finance receivables originated or purchased
(78)
(114)
Other investing activities, net
38 
29 
Net cash provided by (used in) investing activities
459 
580 
Cash flows from financing activities
 
 
Principal payments on long-term and nonrecourse debt
(613)
(254)
Proceeds from long-term debt
252 
88 
Intergroup financing
 
(245)
Capital contributions paid to Finance group
240 
Dividends paid
(30)
(315)
Other financing activities, net
 
Net cash used in financing activities
(390)
(485)
Net increase (decrease) in cash and equivalents
77 
(1)
Cash and equivalents at beginning of period
35 
14 
Cash and equivalents at end of period
$ 112 
$ 13 
Basis of Presentation
Basis of Presentation

Note 1:  Basis of Presentation

 

Our consolidated financial statements include the accounts of Textron Inc. (Textron) and its majority-owned subsidiaries.  We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information.  Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements.  The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 29, 2012.  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 (TFC), its consolidated subsidiaries and three other finance subsidiaries owned by Textron.  We designed this framework to enhance our borrowing power by separating the Finance group.  Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services.  Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance.  To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the consolidated financial statements.  All significant intercompany transactions are eliminated from the consolidated financial statements, including retail and wholesale financing activities for inventory sold by our Manufacturing group and financed by our Finance group.

 

Use of Estimates

 

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

 

During 2013 and 2012, we changed our estimates of revenues and costs on certain long-term contracts that are accounted for under the percentage-of-completion method of accounting.  The changes in estimates increased income from continuing operations before income taxes in the second quarter of 2013 and 2012 by $2 million and $12 million, respectively, ($1 million and $8 million after tax, or $0.00 and $0.03 per diluted share, respectively).  For the second quarter of 2013 and 2012, the gross favorable program profit adjustments totaled $9 million and $23 million, respectively, and the gross unfavorable program profit adjustments totaled $7 million and $11 million, respectively.

 

The changes in estimates increased income from continuing operations before income taxes in the first half of 2013 and 2012 by $9 million and $16 million, ($6 million and $10 million after tax, or $0.02 and $0.04 per diluted share, respectively).  For the first half of 2013 and 2012, the gross favorable program profit adjustments totaled $18 million and $40 million, respectively, and the gross unfavorable program profit adjustments totaled $9 million and $24 million, respectively.

 

Retirement Plans
Retirement Plans

Note 2:  Retirement Plans

 

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

 

 

 

Pension Benefits

 

Postretirement Benefits
Other Than Pensions

 

(In millions)

 

June 29,
2013

 

June 30,
2012

 

June 29,
2013

 

June 30,
2012

 

Three Months Ended

 

 

 

 

 

 

 

 

 

Service cost

 

$

34

 

$

29

 

$

2

 

$

1

 

Interest cost

 

73

 

76

 

5

 

7

 

Expected return on plan assets

 

(105

)

(102

)

 

 

Amortization of prior service cost (credit)

 

3

 

4

 

(2

)

(3

)

Amortization of net actuarial loss

 

46

 

30

 

1

 

1

 

Net periodic benefit cost

 

$

51

 

$

37

 

$

6

 

$

6

 

Six Months Ended

 

 

 

 

 

 

 

 

 

Service cost

 

$

67

 

$

59

 

$

4

 

$

3

 

Interest cost

 

146

 

152

 

10

 

13

 

Expected return on plan assets

 

(210

)

(203

)

 

 

Amortization of prior service cost (credit)

 

7

 

8

 

(5

)

(6

)

Amortization of net actuarial loss

 

92

 

59

 

3

 

3

 

Net periodic benefit cost

 

$

102

 

$

75

 

$

12

 

$

13

Earnings Per Share
Earnings Per Share

Note 3:  Earnings Per Share

 

We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period.  Basic EPS is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends.  Diluted EPS considers the dilutive effect of all potential future common stock, including stock options, restricted stock units and the shares that could have been issued upon the conversion of our convertible notes prior to their maturity on May 1, 2013 and upon the exercise of the related warrants.

 

The dilutive effect of the convertible notes and warrants decreased significantly in 2013 from the 2012 dilutive effect due to the maturity of our convertible notes as described more fully in Note 6.  As disclosed in Note 8 of our 2012 Annual Report on Form 10-K, we intended to settle the face value of the notes in cash and the excess of the conversion value over the face value in cash and/or shares of our common stock; accordingly, only the shares of our common stock potentially issuable with respect to the excess of the notes’ conversion value over the face amount were considered in calculating diluted EPS.  The call options purchased in connection with the issuance of the convertible notes and the capped call transaction were excluded from the calculation of diluted EPS as their impact was always anti-dilutive.

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

(In thousands)

 

June 29,
2013

 

June 30,
2012

 

June 29,
2013

 

June 30,
2012

 

Basic weighted-average shares outstanding

 

280,163

 

281,114

 

276,682

 

280,568

 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

Convertible notes and warrants

 

3,544

 

14,021

 

9,360

 

13,960

 

Stock options and restricted stock units

 

117

 

412

 

227

 

552

 

Diluted weighted-average shares outstanding

 

283,824

 

295,547

 

286,269

 

295,080

 

 

Stock options to purchase 6 million shares of common stock outstanding are excluded from our calculation of diluted weighted-average shares outstanding for the three and six months ended June 29, 2013, as their effect would have been anti-dilutive.  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 six months ended June 30, 2012, as their effect would have been anti-dilutive.

Accounts Receivable and Finance Receivables
Accounts Receivable and Finance Receivables

Note 4:  Accounts Receivable and Finance Receivables

 

Accounts Receivable

 

Accounts receivable is composed of the following:

 

(In millions)

 

June 29,
2013

 

December 29,
2012

 

Commercial

 

$

658

 

$

534

 

U.S. Government contracts

 

370

 

314

 

 

 

1,028

 

848

 

Allowance for doubtful accounts

 

(21

)

(19

)

Total

 

$

1,007

 

$

829

 

 

We have unbillable receivables, primarily on U.S. Government contracts, that arise when the revenues we have appropriately recognized based on performance cannot be billed yet under terms of the contract.  Unbillable receivables within accounts receivable totaled $138 million at June 29, 2013 and $149 million at December 29, 2012.

 

Finance Receivables

 

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

 

(In millions)

 

June 29,
2013

 

December 29,
2012

 

Captive

 

$

1,408

 

$

1,704

 

Non-captive

 

275

 

370

 

Total finance receivables

 

1,683

 

2,074

 

Less: Allowance for losses

 

67

 

84

 

Less: Finance receivables held for sale

 

106

 

140

 

Total finance receivables held for investment, net

 

$

1,510

 

$

1,850

 

 

Credit Quality Indicators and Nonaccrual Finance Receivables

 

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

 

We classify finance receivables held for investment as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful.  In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful.  Recognition of interest income is suspended for these accounts and all cash collections are used to reduce the net investment balance.  We resume the accrual of interest when the loan becomes contractually current through payment according to the original terms of the loan or, if a loan has been modified, following a period of performance under the terms of the modification, provided we conclude that collection of all principal and interest is no longer doubtful.  Previously suspended interest income is recognized at that time.

 

Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain.  All other finance receivables held for investment that do not meet the watchlist or nonaccrual categories are classified as performing.

 

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

 

 

 

June 29, 2013

 

December 29, 2012

 

(In millions)

 

Performing

 

Watchlist

 

Nonaccrual

 

Total

 

Performing

 

Watchlist

 

Nonaccrual

 

Total

 

Captive

 

$

1,211

 

$

90

 

$

107

 

$

1,408

 

$

1,476

 

$

130

 

$

98

 

$

1,704

 

Non-captive*

 

152

 

 

17

 

169

 

185

 

 

45

 

230

 

Total

 

$

1,363

 

$

90

 

$

124

 

$

1,577

 

$

1,661

 

$

130

 

$

143

 

$

1,934

 

% of Total

 

86.4

%

5.7

%

7.9

%

 

 

85.9

%

6.7

%

7.4

%

 

 

 

*Non-captive nonaccrual finance receivables are primarily related to the Timeshare portfolio.

 

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

 

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

 

 

 

June 29, 2013

 

December 29, 2012

 

(In millions)

 

Less Than
31 Days
Past Due

 

31-60
Days
Past Due

 

61-90
Days
Past Due

 

Over
90 Days
Past Due

 

Total

 

Less Than
31 Days
Past Due

 

31-60
Days
Past Due

 

61-90
Days
Past Due

 

Over
90 Days
Past Due

 

Total

 

Captive

 

$

1,220

 

$

126

 

$

24

 

$

38

 

$

1,408

 

$

1,531

 

$

87

 

$

55

 

$

31

 

$

1,704

 

Non-captive

 

166

 

 

 

3

 

169

 

226

 

 

1

 

3

 

230

 

Total

 

$

1,386

 

$

126

 

$

24

 

$

41

 

$

1,577

 

$

1,757

 

$

87

 

$

56

 

$

34

 

$

1,934

 

 

Accrual status loans greater than 90 days past due at June 29, 2013 were not significant.  We had no accrual status loans greater than 90 days past due at December 29, 2012.  At June 29, 2013 and December 29, 2012, 60+ days contractual delinquency as a percentage of finance receivables held for investment was 4.12% and 4.65%, respectively.

 

Loan Modifications

 

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

 

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 half of 2013 or 2012.

 

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

 

 

 

Recorded Investment

 

 

 

 

 

 

 

(In millions)

 

Impaired
Loans with
No Related
Allowance for
Credit Losses

 

Impaired
Loans with
Related
Allowance for
Credit Losses

 

Total
Impaired
Loans

 

Unpaid
Principal
Balance

 

Allowance
For Losses On
Impaired
Loans

 

Average
Recorded
Investment

 

June 29, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Captive

 

$

67

 

$

71

 

$

138

 

$

144

 

$

18

 

$

134

 

Non-captive*

 

7

 

11

 

18

 

25

 

4

 

32

 

Total

 

$

74

 

$

82

 

$

156

 

$

169

 

$

22

 

$

166

 

December 29, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Captive

 

$

61

 

$

66

 

$

127

 

$

128

 

$

15

 

$

121

 

Non-captive*

 

11

 

33

 

44

 

59

 

12

 

149

 

Total

 

$

72

 

$

99

 

$

171

 

$

187

 

$

27

 

$

270

 

 

*Non-captive impaired loans are primarily related to the Timeshare portfolio.

 

A summary of the allowance for losses on finance receivables that are evaluated on an individual and on a collective basis is provided below.  The finance receivables reported in this table specifically exclude $119 million and $122 million of leveraged leases at June 29, 2013 and December 29, 2012, in accordance with authoritative accounting standards.

 

 

 

June 29, 2013

 

December 29, 2012

 

 

 

 

 

 

 

Allowance

 

Allowance

 

 

 

 

 

Allowance

 

Allowance

 

 

 

Finance

 

Based on

 

Based on

 

Finance

 

Based on

 

Based on

 

 

 

Receivables Evaluated

 

Individual

 

Collective

 

Receivables Evaluated

 

Individual

 

Collective

 

(In millions)

 

Individually

 

Collectively

 

Evaluation

 

Evaluation

 

Individually

 

Collectively

 

Evaluation

 

Evaluation

 

Captive

 

$

138

 

$

1,270

 

$

18

 

$

44

 

$

127

 

$

1,577

 

$

15

 

$

55

 

Non-captive

 

18

 

32

 

4

 

1

 

44

 

64

 

12

 

2

 

Total

 

$

156

 

$

1,302

 

$

22

 

$

45

 

$

171

 

$

1,641

 

$

27

 

$

57

 

 

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.  For larger balance accounts specifically identified as impaired, including large accounts in homogeneous portfolios, a reserve is established based on comparing the expected future cash flows, discounted at the finance receivable’s effective interest rate, or the fair value of the underlying collateral if the finance receivable is collateral dependent, to its carrying amount.  The expected future cash flows consider collateral value; financial performance and liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs associated with the repossession/foreclosure and eventual disposal of collateral.  When there is a range of potential outcomes, we perform multiple discounted cash flow analyses and weight the potential outcomes based on their relative likelihood of occurrence.  The evaluation of our portfolio is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the estimated fair value of the underlying collateral, which may differ from actual results.  While our analysis is specific to each individual account, critical factors included in this analysis for the Captive product line include industry valuation guides, age and physical condition of the collateral, payment history and existence and financial strength of guarantors.

 

We also establish an allowance for losses to cover probable but specifically unknown losses existing in the portfolio.  For the Captive product line, 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.

 

Finance receivables held for investment are charged off at the earlier of the date the collateral is repossessed or when no payment has been received for six months, unless management deems the receivable collectible.

 

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

 

(In millions)

 

Captive

 

Non-captive*

 

Total

 

For the six months ended June 29, 2013

 

 

 

 

 

 

 

Beginning balance

 

$

70

 

$

14

 

$

84

 

Provision for losses

 

(5

)

(11

)

(16

)

Charge-offs

 

(6

)

(2

)

(8

)

Recoveries

 

3

 

4

 

7

 

Ending balance

 

$

62

 

$

5

 

$

67

 

For the six months ended June 30, 2012

 

 

 

 

 

 

 

Beginning balance

 

$

101

 

$

55

 

$

156

 

Provision for losses

 

 

(3

)

(3

)

Charge-offs

 

(26

)

(14

)

(40

)

Recoveries

 

7

 

2

 

9

 

Ending balance

 

$

82

 

$

40

 

$

122

 

 

*Non-captive allowance for losses is primarily related to the Timeshare portfolio.

 

Inventories
Inventories

Note 5:  Inventories

 

(In millions)

 

June 29,
2013

 

December 29,
2012

 

Finished goods

 

$

1,398

 

$

1,329

 

Work in process

 

2,613

 

2,247

 

Raw materials

 

473

 

437

 

 

 

4,484

 

4,013

 

Progress/milestone payments

 

(1,281

)

(1,301

)

 

 

$

3,203

 

$

2,712

Debt
Debt

 

Note 6:  Debt

 

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

 

Concurrently with the pricing of the convertible notes in May 2009, we entered into transactions with two counterparties, pursuant to which we purchased from the counterparties call options to acquire our common stock and sold to the counterparties warrants to purchase our common stock.   The call options settled on May 1, 2013, while the warrants settled daily over a 45-day period beginning on February 27, 2013.  We acquired 8.9 million shares of our common stock upon the settlement of the call options and issued an aggregate of 7.4 million shares of our common stock in connection with the settlement of the warrants during the first half of 2013.  The settlement of the call options and warrants resulted in a $39 million net increase in treasury stock during the first half of 2013.

 

As disclosed in Note 8 of our 2012 Form 10-K, we previously entered into capped call transactions with the counterparties that covered an aggregate of 28.7 million shares of our common stock as of the end of 2012.  The capped calls had a strike price of $13.125 per share and a cap price of $15.75 per share, which entitled us to receive the per share value of our stock price in excess of $13.125 up to a maximum stock price of $15.75 at the expiration date.  Upon expiration of the capped calls, the market price of our common stock exceeded the maximum stock price, and we received $75 million in cash from the counterparties.

 

Accrued Liabilities
Accrued Liabilities

Note 7:  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:

 

 

 

Six Months Ended

 

(In millions)

 

June 29,
2013

 

June 30,
2012

 

Accrual at the beginning of period

 

$

222

 

$

224

 

Provision

 

132

 

124

 

Settlements

 

(137

)

(123

)

Adjustments to prior accrual estimates

 

 

(4

)

Accrual at the end of period

 

$

217

 

$

221

 

Accumulated Other Comprehensive Loss and Other Comprehensive Income
Accumulated Other Comprehensive Loss and Other Comprehensive Income

Note 8:  Accumulated Other Comprehensive Loss and Other Comprehensive Income

 

The components of Accumulated Other Comprehensive Loss are presented below:

 

(In millions)

 

Foreign
Currency
Translation
Adjustment

 

Pension
Adjustments

 

Deferred
Gains/Losses
on Hedge
Contracts

 

Accumulated
Other
Comprehensive
Loss

 

For the six months ended June 29, 2013

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

81

 

$

(1,857

)

$

6

 

$

(1,770

)

Other comprehensive income before reclassifications

 

(9

)

 

(11

)

(20

)

Amounts reclassified from Accumulated Other Comprehensive Loss

 

 

63

 

(2

)

61

 

Other comprehensive income

 

(9

)

63

 

(13

)

41

 

Ending balance

 

$

72

 

$

(1,794

)

$

(7

)

$

(1,729

)

For the six months ended June 30, 2012

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

79

 

$

(1,711

)

$

7

 

$

(1,625

)

Other comprehensive income before reclassifications

 

(13

)

 

6

 

(7

)

Amounts reclassified from Accumulated Other Comprehensive Loss

 

 

42

 

(9

)

33

 

Other comprehensive income

 

(13

)

42

 

(3

)

26

 

Ending balance

 

$

66

 

$

(1,669

)

$

4

 

$

(1,599

)

 

The before and after-tax components of Other Comprehensive Income are presented below:

 

(In millions)

 

Pre-Tax
Amount

 

Tax
(Expense)
Benefit

 

After-Tax
Amount

 

For the three months ended June 29, 2013

 

 

 

 

 

 

 

Pension adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

47

 

$

(16

)

$

31

 

Amortization of prior service cost*

 

1

 

(1

)

 

Pension adjustments, net

 

48

 

(17

)

31

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

(8

)

2

 

(6

)

Reclassification adjustments

 

(1

)

1

 

 

Deferred gains/losses on hedge contracts, net

 

(9

)

3

 

(6

)

Foreign currency translation adjustment

 

 

1

 

1

 

Total

 

$

39

 

$

(13

)

$

26

 

For the three months ended June 30, 2012

 

 

 

 

 

 

 

Pension adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

31

 

$

(11

)

$

20

 

Amortization of prior service cost*

 

1

 

 

1

 

Pension adjustments, net

 

32

 

(11

)

21

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

(1

)

1

 

 

Reclassification adjustments

 

(4

)

1

 

(3

)

Deferred gains/losses on hedge contracts, net

 

(5

)

2

 

(3

)

Foreign currency translation adjustment

 

(7

)

(9

)

(16

)

Total

 

$

20

 

$

(18

)

$

2

 

For the six months ended June 29, 2013

 

 

 

 

 

 

 

Pension adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

95

 

$

(33

)

$

62

 

Amortization of prior service cost*

 

2

 

(1

)

1

 

Pension adjustments, net

 

97

 

(34

)

63

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

(14

)

3

 

(11

)

Reclassification adjustments

 

(3

)

1

 

(2

)

Deferred gains/losses on hedge contracts, net

 

(17

)

4

 

(13

)

Foreign currency translation adjustment

 

(2

)

(7

)

(9

)

Total

 

$

78

 

$

(37

)

$

41

 

For the six months ended June 30, 2012

 

 

 

 

 

 

 

Pension adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

62

 

$

(22

)

$

40

 

Amortization of prior service cost*

 

2

 

 

2

 

Pension adjustments, net

 

64

 

(22

)

42

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

7

 

(1

)

6

 

Reclassification adjustments

 

(12

)

3

 

(9

)

Deferred gains/losses on hedge contracts, net

 

(5

)

2

 

(3

)

Foreign currency translation adjustment

 

(10

)

(3

)

(13

)

Total

 

$

49

 

$

(23

)

$

26

 

 

*These components of other comprehensive income are included in the computation of net periodic pension cost.  See Note 13 of our 2012 Annual Report on Form 10-K for additional information.

 

Commitments and Contingencies
Commitments and Contingencies

Note 9:  Commitments and Contingencies

 

We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts; compliance with applicable laws and regulations; production partners; product liability; employment; and environmental, safety and health matters.  Some of these legal proceedings and claims seek damages, fines or penalties in substantial amounts or remediation of environmental contamination.  As a government contractor, we are subject to audits, reviews and investigations to determine whether our operations are being conducted in accordance with applicable regulatory requirements.  Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our being suspended or debarred from U.S. Government contracting for a period of time.  On the basis of information presently available, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations.

 

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

Note 10:  Derivative Instruments and Fair Value Measurements

 

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

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

 

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

 

 

 

 

 

 

 

Asset (Liability)

 

(In millions)

 

Borrowing Group

 

Balance Sheet Location

 

June 29,
2013

 

December 29,
2012

 

Assets

 

 

 

 

 

 

 

 

 

Interest rate exchange contracts*

 

Finance

 

Other assets

 

$

3

 

$

8

 

Foreign currency exchange contracts

 

Manufacturing

 

Other current assets

 

1

 

9

 

Total

 

 

 

 

 

$

4

 

$

17

 

Liabilities

 

 

 

 

 

 

 

 

 

Interest rate exchange contracts*

 

Finance

 

Other liabilities

 

$

(6

)

$

(8

)

Foreign currency exchange contracts

 

Manufacturing

 

Accrued liabilities

 

(13

)

(5

)

Total

 

 

 

 

 

$

(19

)

$

(13

)

 

*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 June 29, 2013.  At June 29, 2013 and December 29, 2012, we had interest rate exchange contracts with notional amounts upon which the contracts were based of $299 million and $671 million, respectively.

 

Foreign currency exchange contracts are measured at fair value using the market method valuation technique.  The inputs to this technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data providers.  These are observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions so they are classified as Level 2.  At June 29, 2013 and December 29, 2012, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $599 million and $664 million, respectively.

 

Fair Value Hedges

 

Our Finance group enters into interest rate exchange contracts to mitigate exposure to changes in the fair value of its fixed-rate receivables and debt due to fluctuations in interest rates.  By using these contracts, we are able to convert our fixed-rate cash flows to floating-rate cash flows.  The amount of ineffectiveness on our fair value hedges and the gain (loss) recorded in the Consolidated Statements of Operations were insignificant in both the first half of 2013 and 2012.

 

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 June 29, 2013, we had a net deferred loss 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 three and six months ended June 29, 2013 and June 30, 2012.  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 other comprehensive income, produced a $12 million after-tax gain for the first half of 2013, resulting in an accumulated net gain balance of $16 million at June 29, 2013.  The ineffective portion of these hedges was insignificant.

 

Assets Recorded at Fair Value on a Nonrecurring Basis

 

During the periods ended June 29, 2013 and December 29, 2012, certain assets in the Finance group were measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3).  The table below sets forth the balance of those assets at the end of the period in which a fair value adjustment was taken.

 

(In millions)

 

June 29,
2013

 

December 29,
2012

 

Finance receivables held for sale

 

$

106

 

$

140

 

Impaired finance receivables

 

60

 

72

 

Other assets

 

50

 

76

 

 

The following table represents the fair value adjustments recorded for each asset class measured at fair value on a non-recurring basis during the three and six months ended June 29, 2013 and June 30, 2012.

 

 

 

Gain (Loss)

 

 

 

Three Months Ended

 

Six Months Ended

 

(In millions)

 

June 29,
2013

 

June 30,
2012

 

June 29,
2013

 

June 30,
2012

 

Finance receivables held for sale

 

$

5

 

$

20

 

$

17

 

$

44

 

Impaired finance receivables

 

(2

)

(1

)

(5

)

(7

)

Other assets

 

(1

)

(16

)

(5

)

(32

)

 

Finance receivables held for sale — Finance receivables held for sale are recorded at fair value on a nonrecurring basis during periods in which the fair value is lower than the cost value.  There are no active, quoted market prices for these finance receivables.  At June 29, 2013, our finance receivables held for sale included the Golf Mortgage portfolio.  Fair value of this portfolio was determined based on the use of discounted cash flow models to estimate the price we expect to receive in the principal market for each pool of similar loans, in an orderly transaction.  The cash flow models include the use of qualitative assumptions regarding the borrower’s ability to pay and the period of time that will likely be required to restructure and/or exit the account through acquisition of the underlying collateral, as well as quantitative assumptions, including discount rates and revenue and earnings multiples, which are used to estimate the value of the underlying collateral.  Changes in the borrower’s ability to pay or the period of time required to restructure and/or exit accounts may significantly increase or decrease the fair value of these finance receivables, and, to a lesser extent, fluctuations in discount rates and/or revenue and earnings multiples could also change the fair value of these finance receivables.  The gains on finance receivables held for sale during the three and six months ended June 29, 2013 and June 30, 2012 were primarily the result of the payoff of loans in amounts, and sale of loans at prices, in excess of the values established in previous periods.

 

Impaired finance receivables — Impaired nonaccrual finance receivables represent assets recorded at fair value on a nonrecurring basis since the measurement of required reserves on our impaired finance receivables is significantly dependent on the fair value of the underlying collateral.  For impaired nonaccrual finance receivables secured by aviation assets, the fair values of collateral are determined primarily based on the use of industry pricing guides.  Timeshare impaired nonaccrual finance receivables largely consist of pools of timeshare interval resort notes receivable.  Fair values of collateral are estimated using cash flow models incorporating estimates of credit losses in the consumer notes pools.  Fair value measurements recorded on impaired finance receivables resulted in charges to provision for loan losses and primarily related to initial fair value adjustments.

 

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

 

Assets and Liabilities Not Recorded at Fair Value

 

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

 

 

 

June 29, 2013

 

December 29, 2012

 

(In millions)

 

Carrying
Value

 

Estimated
Fair Value

 

Carrying
Value

 

Estimated
Fair Value

 

Manufacturing group

 

 

 

 

 

 

 

 

 

Long-term debt, excluding leases

 

$

(1,835

)

$

(2,016

)

$

(2,225

)

$

(2,636

)

Finance group

 

 

 

 

 

 

 

 

 

Finance receivables held for investment, excluding leases

 

1,300

 

1,293

 

1,625

 

1,653

 

Debt

 

(1,331

)

(1,330

)

(1,686

)

(1,678

)

 

Fair value for the Manufacturing group debt is determined using market observable data for similar transactions or Level 2 inputs.  At June 29, 2013 and December 29, 2012, approximately 28% and 46%, respectively, of the fair value of term debt for the Finance group was determined based on observable market transactions (Level 1).  The remaining Finance group debt was determined based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations (Level 2). Fair value estimates for finance receivables held for investment were determined based on internally developed discounted cash flow models primarily utilizing significant unobservable inputs (Level 3), which include estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and expectations of borrowers’ ability to make payments on a timely basis.

 

Income Tax Expense
Income Tax Expense

Note 11:  Income Tax Expense

 

Income tax expense equated to an effective income tax rate of 30.1% and 25.2% in the second quarter and first half of 2013, respectively, compared with the U.S. federal statutory income tax rate of 35%. In the second quarter of 2013, the difference between the effective income tax rate and the statutory income tax rate was primarily due to benefits from income attributable to international operations in countries with lower tax rates. In the first half of 2013, the difference between the effective income tax rate and the statutory income tax rate was primarily due to benefits from income attributable to international operations in countries with lower tax rates and a favorable impact of five percentage points, resulting from the retroactive reinstatement and extension of the Federal Research and Development Tax Credit as part of the American Taxpayer Relief Act of 2012 enacted on January 2, 2013, which primarily impacted the first quarter of 2013.

 

For the three and six months ended June 30, 2012, the difference between the federal statutory income tax rate and the effective income tax rate was not significant.

 

Segment Information
Segment Information

Note 12:  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 and certain corporate expenses.  The measurement for the Finance segment 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

 

Six Months Ended

 

(In millions)

 

June 29,
2013

 

June 30,
2012

 

June 29,
2013

 

June 30,
2012

 

REVENUES

 

 

 

 

 

 

 

 

 

Manufacturing Group

 

 

 

 

 

 

 

 

 

Cessna

 

$

560

 

$

763

 

$

1,268

 

$

1,432

 

Bell

 

1,025

 

1,056

 

1,974

 

2,050

 

Textron Systems

 

422

 

389

 

851

 

766

 

Industrial

 

801

 

756

 

1,528

 

1,511

 

 

 

2,808

 

2,964

 

5,621

 

5,759

 

Finance Group

 

31

 

55

 

73

 

116

 

Total revenues

 

$

2,839

 

$

3,019

 

$

5,694

 

$

5,875

 

SEGMENT OPERATING PROFIT

 

 

 

 

 

 

 

 

 

Manufacturing Group

 

 

 

 

 

 

 

 

 

Cessna

 

$

(50

)

$

35

 

$

(58

)

$

29

 

Bell

 

135

 

152

 

264

 

297

 

Textron Systems

 

34

 

40

 

72

 

75

 

Industrial

 

79

 

61

 

136

 

134

 

 

 

198

 

288

 

414

 

535

 

Finance Group

 

15

 

22

 

34

 

34

 

Segment profit

 

213

 

310

 

448

 

569

 

Corporate expenses and other, net

 

(20

)

(20

)

(75

)

(67

)

Interest expense, net for Manufacturing group

 

(30

)

(35

)

(67

)

(70

)

Income from continuing operations before income taxes

 

$

163

 

$

255

 

$

306

 

$

432

Basis of Presentation (Policies)
Use of Estimates

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

 

During 2013 and 2012, we changed our estimates of revenues and costs on certain long-term contracts that are accounted for under the percentage-of-completion method of accounting.  The changes in estimates increased income from continuing operations before income taxes in the second quarter of 2013 and 2012 by $2 million and $12 million, respectively, ($1 million and $8 million after tax, or $0.00 and $0.03 per diluted share, respectively).  For the second quarter of 2013 and 2012, the gross favorable program profit adjustments totaled $9 million and $23 million, respectively, and the gross unfavorable program profit adjustments totaled $7 million and $11 million, respectively.

 

The changes in estimates increased income from continuing operations before income taxes in the first half of 2013 and 2012 by $9 million and $16 million, ($6 million and $10 million after tax, or $0.02 and $0.04 per diluted share, respectively).  For the first half of 2013 and 2012, the gross favorable program profit adjustments totaled $18 million and $40 million, respectively, and the gross unfavorable program profit adjustments totaled $9 million and $24 million, respectively.

Retirement Plans (Tables)
Components of net periodic benefit cost

 

 

 

Pension Benefits

 

Postretirement Benefits
Other Than Pensions

 

(In millions)

 

June 29,
2013

 

June 30,
2012

 

June 29,
2013

 

June 30,
2012

 

Three Months Ended

 

 

 

 

 

 

 

 

 

Service cost

 

$

34

 

$

29

 

$

2

 

$

1

 

Interest cost

 

73

 

76

 

5

 

7

 

Expected return on plan assets

 

(105

)

(102

)

 

 

Amortization of prior service cost (credit)

 

3

 

4

 

(2

)

(3

)

Amortization of net actuarial loss

 

46

 

30

 

1

 

1

 

Net periodic benefit cost

 

$

51

 

$

37

 

$

6

 

$

6

 

Six Months Ended

 

 

 

 

 

 

 

 

 

Service cost

 

$

67

 

$

59

 

$

4

 

$

3

 

Interest cost

 

146

 

152

 

10

 

13

 

Expected return on plan assets

 

(210

)

(203

)

 

 

Amortization of prior service cost (credit)

 

7

 

8

 

(5

)

(6

)

Amortization of net actuarial loss

 

92

 

59

 

3

 

3

 

Net periodic benefit cost

 

$

102

 

$

75

 

$

12

 

$

13

Earnings Per Share (Tables)
Weighted-average shares outstanding for basic and diluted EPS

 

 

 

Three Months Ended

 

Six Months Ended

 

(In thousands)

 

June 29,
2013

 

June 30,
2012

 

June 29,
2013

 

June 30,
2012

 

Basic weighted-average shares outstanding

 

280,163

 

281,114

 

276,682

 

280,568

 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

Convertible notes and warrants

 

3,544

 

14,021

 

9,360

 

13,960

 

Stock options and restricted stock units

 

117

 

412

 

227

 

552

 

Diluted weighted-average shares outstanding

 

283,824

 

295,547

 

286,269

 

295,080

Accounts Receivable and Finance Receivables (Tables)

 

 

(In millions)

 

June 29,
2013

 

December 29,
2012

 

Commercial

 

$

658

 

$

534

 

U.S. Government contracts

 

370

 

314

 

 

 

1,028

 

848

 

Allowance for doubtful accounts

 

(21

)

(19

)

Total

 

$

1,007

 

$

829

 

(In millions)

 

June 29,
2013

 

December 29,
2012

 

Captive

 

$

1,408

 

$

1,704

 

Non-captive

 

275

 

370

 

Total finance receivables

 

1,683

 

2,074

 

Less: Allowance for losses

 

67

 

84

 

Less: Finance receivables held for sale

 

106

 

140

 

Total finance receivables held for investment, net

 

$

1,510

 

$

1,850

 

 

 

June 29, 2013

 

December 29, 2012

 

(In millions)

 

Performing

 

Watchlist

 

Nonaccrual

 

Total

 

Performing

 

Watchlist

 

Nonaccrual

 

Total

 

Captive

 

$

1,211

 

$

90

 

$

107

 

$

1,408

 

$

1,476

 

$

130

 

$

98

 

$

1,704

 

Non-captive*

 

152

 

 

17

 

169

 

185

 

 

45

 

230

 

Total

 

$

1,363