TEXTRON INC, 10-Q filed on 4/25/2013
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 30, 2013
Apr. 12, 2013
Document and Entity Information
 
 
Entity Registrant Name
TEXTRON INC 
 
Entity Central Index Key
0000217346 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 30, 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
 
277,854,728 
Document Fiscal Year Focus
2013 
 
Document Fiscal Period Focus
Q1 
 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 30, 2013
Mar. 31, 2012
Revenues
 
 
Manufacturing revenues
$ 2,813 
$ 2,795 
Finance revenues
42 
61 
Total revenues
2,855 
2,856 
Costs and expenses
 
 
Cost of sales
2,382 
2,312 
Selling and administrative expense
279 
312 
Interest expense
51 
55 
Total costs and expenses
2,712 
2,679 
Income from continuing operations before income taxes
143 
177 
Income tax expense
28 
57 
Income from continuing operations
115 
120 
Income (loss) from discontinued operations, net of income taxes
(2)
Net income
$ 119 
$ 118 
Basic earnings per share
 
 
Continuing operations (in dollars per share)
$ 0.42 
$ 0.43 
Discontinued operations (in dollars per share)
$ 0.02 
$ (0.01)
Basic earnings per share (in dollars per share)
$ 0.44 
$ 0.42 
Diluted earnings per share
 
 
Continuing operations (in dollars per share)
$ 0.40 
$ 0.41 
Discontinued operations (in dollars per share)
$ 0.01 
$ (0.01)
Diluted earnings per share (in dollars per share)
$ 0.41 
$ 0.40 
Dividends per share
 
 
Common stock (in dollars per share)
$ 0.02 
$ 0.02 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 30, 2013
Mar. 31, 2012
Consolidated Statements of Comprehensive Income
 
 
Net income
$ 119 
$ 118 
Other comprehensive income, net of tax:
 
 
Pension adjustments, net of reclassifications
32 
21 
Deferred gains/losses on hedge contracts, net of reclassifications
(7)
 
Foreign currency translation adjustment
(10)
Other comprehensive income
15 
24 
Comprehensive income
$ 134 
$ 142 
Consolidated Balance Sheets (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
Mar. 30, 2013
Dec. 29, 2012
Assets
 
 
Cash and equivalents
$ 791 
$ 1,413 
Inventories
2,972 
2,712 
Total assets
12,557 
13,033 
Liabilities
 
 
Total liabilities
9,409 
10,042 
Shareholders' equity
 
 
Common stock
35 
35 
Capital surplus
1,114 
1,177 
Retained earnings
3,937 
3,824 
Accumulated other comprehensive loss
(1,755)
(1,770)
Total shareholders' equity including cost of treasury shares
3,331 
3,266 
Less cost of treasury shares
183 
275 
Total shareholders' equity
3,148 
2,991 
Total liabilities and shareholders' equity
12,557 
13,033 
Common shares outstanding
276,081 
271,263 
Manufacturing group
 
 
Assets
 
 
Cash and equivalents
701 
1,378 
Accounts receivable, net
954 
829 
Inventories
2,972 
2,712 
Other current assets
445 
470 
Total current assets
5,072 
5,389 
Property, plant and equipment, less accumulated depreciation and amortization of $3,335 and $3,277
2,134 
2,149 
Goodwill
1,645 
1,649 
Other assets
1,520 
1,524 
Total assets
10,371 
10,711 
Liabilities
 
 
Current portion of long-term debt and short-term debt
426 
535 
Accounts payable
1,052 
1,021 
Accrued liabilities
1,724 
1,956 
Total current liabilities
3,202 
3,512 
Other liabilities
2,619 
2,798 
Long-term debt
1,749 
1,766 
Total liabilities
7,570 
8,076 
Finance group
 
 
Assets
 
 
Cash and equivalents
90 
35 
Finance receivables held for investment, net
1,722 
1,850 
Finance receivables held for sale
112 
140 
Other assets
262 
297 
Total assets
2,186 
2,322 
Liabilities
 
 
Other liabilities
281 
280 
Debt
1,558 
1,686 
Total liabilities
$ 1,839 
$ 1,966 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, unless otherwise specified
Mar. 30, 2013
Dec. 29, 2012
Consolidated Balance Sheets
 
 
Accumulated depreciation and amortization
$ 3,335 
$ 3,277 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 30, 2013
Mar. 31, 2012
Cash flows from operating activities
 
 
Net income
$ 119 
$ 118 
Less: Income (loss) from discontinued operations
(2)
Income from continuing operations
115 
120 
Non-cash items:
 
 
Depreciation and amortization
97 
91 
Deferred income taxes
11 
62 
Portfolio losses on finance receivables
20 
Other, net
Changes in assets and liabilities:
 
 
Accounts receivable, net
(121)
(76)
Inventories
(254)
(187)
Other assets
13 
58 
Accounts payable
31 
48 
Accrued and other liabilities
(275)
(333)
Pension, net
(94)
(104)
Captive finance receivables, net
75 
42 
Other operating activities, net
(2)
 
Net cash provided by (used in) operating activities of continuing operations
(395)
(253)
Net cash used in operating activities of discontinued operations
(4)
(1)
Net cash provided by (used in) operating activities
(399)
(254)
Cash flows from investing activities
 
 
Finance receivables repaid
72 
154 
Proceeds from sales of receivables and other finance assets
28 
62 
Finance receivables originated or purchased
 
(18)
Capital expenditures
(77)
(73)
Other investing activities, net
(7)
(2)
Net cash provided by (used in) investing activities
16 
123 
Cash flows from financing activities
 
 
Principal payments on long-term and nonrecourse debt
(482)
(144)
Increase in short-term debt
205 
 
Proceeds from issuance of long-term debt
41 
27 
Dividends paid
(5)
(5)
Other financing activities, net
11 
10 
Net cash provided by (used in) financing activities
(230)
(112)
Effect of exchange rate changes on cash and equivalents
(9)
Net increase (decrease) in cash and equivalents
(622)
(239)
Cash and equivalents at beginning of period
1,413 
885 
Cash and equivalents at end of period
791 
646 
Manufacturing Group
 
 
Cash flows from operating activities
 
 
Net income
107 
108 
Less: Income (loss) from discontinued operations
(2)
Income from continuing operations
103 
110 
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
 
 
Dividends received from Finance Group
20 
240 
Capital contribution paid to Finance Group
 
(240)
Non-cash items:
 
 
Depreciation and amortization
92 
84 
Deferred income taxes
58 
Other, net
20 
26 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(121)
(76)
Inventories
(255)
(188)
Other assets
13 
60 
Accounts payable
31 
48 
Accrued and other liabilities
(288)
(197)
Pension, net
(86)
(102)
Other operating activities, net
 
Net cash provided by (used in) operating activities of continuing operations
(468)
(177)
Net cash used in operating activities of discontinued operations
(4)
(1)
Net cash provided by (used in) operating activities
(472)
(178)
Cash flows from investing activities
 
 
Capital expenditures
(77)
(73)
Other investing activities, net
(18)
 
Net cash provided by (used in) investing activities
(95)
(73)
Cash flows from financing activities
 
 
Principal payments on long-term and nonrecourse debt
(312)
 
Increase in short-term debt
205 
 
Dividends paid
(5)
(5)
Other financing activities, net
11 
Net cash provided by (used in) financing activities
(101)
Effect of exchange rate changes on cash and equivalents
(9)
Net increase (decrease) in cash and equivalents
(677)
(243)
Cash and equivalents at beginning of period
1,378 
871 
Cash and equivalents at end of period
701 
628 
Finance Group
 
 
Cash flows from operating activities
 
 
Net income
12 
10 
Income from continuing operations
12 
10 
Non-cash items:
 
 
Depreciation and amortization
Deferred income taxes
10 
Portfolio losses on finance receivables
20 
Other, net
(19)
(20)
Changes in assets and liabilities:
 
 
Other assets
 
(2)
Accrued and other liabilities
(136)
Pension, net
(8)
(2)
Other operating activities, net
(4)
 
Net cash provided by (used in) operating activities of continuing operations
(119)
Net cash provided by (used in) operating activities
(119)
Cash flows from investing activities
 
 
Finance receivables repaid
173 
262 
Proceeds from sales of receivables and other finance assets
28 
62 
Finance receivables originated or purchased
(26)
(84)
Other investing activities, net
22 
(1)
Net cash provided by (used in) investing activities
197 
239 
Cash flows from financing activities
 
 
Principal payments on long-term and nonrecourse debt
(170)
(144)
Proceeds from issuance of long-term debt
41 
27 
Capital contributions paid to Finance group under Support Agreement
 
240 
Dividends paid
(20)
(240)
Other financing activities, net
 
Net cash provided by (used in) financing activities
(149)
(116)
Net increase (decrease) in cash and equivalents
55 
Cash and equivalents at beginning of period
35 
14 
Cash and equivalents at end of period
$ 90 
$ 18 
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 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.  These changes in estimates increased income from continuing operations before income taxes in the first quarter of 2013 and 2012 by $7 million and $4 million, respectively, ($5 million and $2 million after tax, or $0.02 and $0.01 per diluted share, respectively).  For the first quarter of 2013 and 2012, the gross favorable program profit adjustments totaled $9 million and $17 million, respectively, and the gross unfavorable program profit adjustments totaled $2 million and $13 million, respectively.

Retirement Plans
Retirement Plans

Note 2.  Retirement Plans

 

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

 

 

 

Pension Benefits

 

Postretirement Benefits
Other Than Pensions

 

(In millions)

 

March 30,
2013

 

March 31,
2012

 

March 30,
2013

 

March 31,
2012

 

Three Months Ended

 

 

 

 

 

 

 

 

 

Service cost

 

$

33

 

$

30

 

$

2

 

$

2

 

Interest cost

 

73

 

76

 

5

 

6

 

Expected return on plan assets

 

(105

)

(101

)

 

 

Amortization of prior service cost (credit)

 

4

 

4

 

(3

)

(3

)

Amortization of net actuarial loss

 

46

 

29

 

2

 

2

 

Net periodic benefit cost

 

$

51

 

$

38

 

$

6

 

$

7

 

 

Share-Based Compensation
Share-Based Compensation

Note 3.  Share-Based Compensation

 

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

 

 

 

Three Months Ended

 

(In millions)

 

March 30,
2013

 

March 31,
2012

 

Compensation expense

 

$

30

 

$

46

 

Income tax benefit

 

(11

)

(17

)

Total net compensation cost included in net income

 

$

19

 

$

29

 

 

Stock Options

 

The stock option compensation cost calculated under the fair value approach is recognized over the vesting period of the stock options.  We estimate the fair value of options granted on the date of grant using the Black-Scholes option-pricing model.  Expected volatilities are based on implied volatilities from traded options on our common stock, historical volatilities and other factors.  The expected term is based on historical option exercise data, which is adjusted to reflect any anticipated changes in expected behavior.

 

The weighted-average fair value of options granted during the respective periods and the assumptions used in our option-pricing model for such grants are as follows:

 

 

 

Three Months Ended

 

 

 

March 30,
2013

 

March 31,
2012

 

Fair value of options at grant date

 

$

9.69

 

$

10.19

 

Dividend yield

 

0.3

%

0.3

%

Expected volatility

 

37.0

%

40.0

%

Risk-free interest rate

 

0.9

%

0.8

%

Expected term (in years)

 

5.5

 

5.5

 

 

The stock option activity during the first quarter of 2013 is provided below:

 

(Options in thousands)

 

Number of
Options

 

Weighted-
Average
Exercise
Price

 

Outstanding at beginning of period

 

9,484

 

$

27.98

 

Granted

 

2,133

 

28.47

 

Exercised

 

(504

)

(21.90

)

Canceled, expired or forfeited

 

(842

)

(40.07

)

Outstanding at end of period

 

10,271

 

$

27.39

 

Exercisable at end of period

 

5,302

 

$

26.86

 

 

At March 30, 2013, our outstanding options had an aggregate intrinsic value of $38 million and a weighted-average remaining contractual life of 8 years.  Our exercisable options had an aggregate intrinsic value of $28 million and a weighted-average remaining contractual life of 6 years at March 30, 2013.  The total intrinsic value of options exercised during the first quarter of 2013 and 2012 was $4 million and $2 million, respectively.

 

Restricted Stock Units

 

The activity for restricted stock units payable in stock and for restricted stock units payable in cash during the first quarter of 2013 is provided below:

 

 

 

Units Payable in Stock

 

Units Payable in Cash

 

(Shares/Units in thousands)

 

Number of
Shares

 

Weighted-
Average Grant
Date Fair Value

 

Number of
Units

 

Weighted-
Average Grant
Date Fair Value

 

Outstanding at beginning of year, nonvested

 

710

 

$

29.94

 

2,540

 

$

20.79

 

Granted

 

257

 

28.47

 

583

 

28.43

 

Vested

 

(107

)

(42.53

)

(595

)

(15.99

)

Forfeited

 

(30

)

(27.94

)

(148

)

(23.91

)

Outstanding at end of period, nonvested

 

830

 

$

27.93

 

2,380

 

$

23.67

 

 

The fair value of the restricted stock awards that vested and/or amounts paid under these awards during the respective periods is as follows:

 

 

 

Three Months Ended

 

(In millions)

 

March 30,
2013

 

March 31,
2012

 

Fair value of awards vested

 

$

21

 

$

30

 

Cash paid

 

18

 

21

 

 

Performance Share Units

 

The fair value of share-based compensation awards accounted for as liabilities includes performance share units.  The fair value of these awards is based on the trading price of our common stock and is remeasured at each reporting period date.  The activity for our performance share units during the first quarter of 2013 is as follows:

 

(Units in thousands)

 

Number of
Units

 

Weighted-
Average Grant
Date Fair Value

 

Outstanding at beginning of year, nonvested

 

875

 

$

27.14

 

Granted

 

418

 

28.47

 

Forfeited

 

(41

)

(27.42

)

Outstanding at end of period, nonvested

 

1,252

 

$

27.57

 

 

Cash paid under these awards totaled $11 million and $51 million during the first quarter of 2013 and 2012, respectively.

 

Earnings Per Share
Earnings Per Share

Note 4.  Earnings Per Share

 

We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period.  Basic EPS is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends.  Diluted EPS considers the dilutive effect of all potential future common stock, including stock options, restricted stock units and the shares that could be issued upon the conversion of our convertible notes, as discussed below, and upon the exercise of the remaining related warrants.  The convertible note call options purchased in connection with the issuance of the convertible notes and the capped call transaction entered into in 2011 are excluded from the calculation of diluted EPS as their impact is always anti-dilutive.

 

Upon conversion of our convertible notes, as described in Note 8 of our 2012 Annual Report on Form 10-K, the principal amount would be settled in cash, and the excess of the conversion value, as defined, over the principal amount may be settled in cash and/or shares of our common stock.  Therefore, only the shares of our common stock potentially issuable with respect to the excess of the notes’ conversion value over the principal amount, if any, are considered as dilutive potential common shares for purposes of calculating diluted EPS.

 

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

 

 

 

Three Months Ended

 

(In thousands)

 

March 30,
2013

 

March 31,
2012

 

Basic weighted-average shares outstanding

 

273,200

 

280,022

 

Dilutive effect of:

 

 

 

 

 

Convertible notes and warrants

 

15,461

 

13,902

 

Stock options and restricted stock units

 

317

 

708

 

Diluted weighted-average shares outstanding

 

288,978

 

294,632

 

 

Stock options to purchase 5 million and 6 million shares of common stock outstanding at March 30, 2013 and March 31, 2012, respectively, were not included in the computation of diluted weighted average shares outstanding, as their effect would have been anti-dilutive.

 

Accounts Receivable and Finance Receivables
Accounts Receivable and Finance Receivables

Note 5.  Accounts Receivable and Finance Receivables

 

Accounts Receivable

 

Accounts receivable is composed of the following:

 

(In millions)

 

March 30,
2013

 

December 29,
2012

 

Commercial

 

$

645

 

$

534

 

U.S. Government contracts

 

329

 

314

 

 

 

974

 

848

 

Allowance for doubtful accounts

 

(20

)

(19

)

Total

 

$

954

 

$

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 $154 million at March 30, 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)

 

March 30,
2013

 

December 29,
2012

 

Captive

 

$

1,592

 

$

1,704

 

Non-captive

 

319

 

370

 

Total finance receivables

 

1,911

 

2,074

 

Less: Allowance for losses

 

77

 

84

 

Less: Finance receivables held for sale

 

112

 

140

 

Total finance receivables held for investment, net

 

$

1,722

 

$

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:

 

 

 

March 30, 2013

 

December 29, 2012

 

(In millions)

 

Performing

 

Watchlist

 

Nonaccrual

 

Total

 

Performing

 

Watchlist

 

Nonaccrual

 

Total

 

Captive

 

$

1,387

 

$

90

 

$

115

 

$

1,592

 

$

1,476

 

$

130

 

$

98

 

$

1,704

 

Non-captive*

 

175

 

 

32

 

207

 

185

 

 

45

 

230

 

Total

 

$

1,562

 

$

90

 

$

147

 

$

1,799

 

$

1,661

 

$

130

 

$

143

 

$

1,934

 

% of Total

 

86.8

%

5.0

%

8.2

%

 

 

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:

 

 

 

March 30, 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

 

$

1,400

 

$

115

 

$

42

 

$

35

 

$

1,592

 

$

1,531

 

$

87

 

$

55

 

$

31

 

$

1,704

 

Non-captive

 

204

 

 

 

3

 

207

 

226

 

 

1

 

3

 

230

 

Total

 

$

1,604

 

$

115

 

$

42

 

$

38

 

$

1,799

 

$

1,757

 

$

87

 

$

56

 

$

34

 

$

1,934

 

 

We had no accrual status loans that were greater than 90 days past due at March 30, 2013 or December 29, 2012.  At March 30, 2013 and December 29, 2012, 60+ days contractual delinquency as a percentage of finance receivables held for investment was 4.45% 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 quarter 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 quarter 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

 

March 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Captive

 

$

62

 

$

75

 

$

137

 

$

144

 

$

18

 

$

132

 

Non-captive*

 

10

 

23

 

33

 

42

 

8

 

39

 

Total

 

$

72

 

$

98

 

$

170

 

$

186

 

$

26

 

$

171

 

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 $122 million of leveraged leases at both March 30, 2013 and December 29, 2012, in accordance with authoritative accounting standards.

 

 

 

March 30, 2013

 

December 29, 2012

 

 

 

Finance
Receivables Evaluated

 

Allowance
Based on
Individual

 

Allowance
Based on
Collective

 

Finance
Receivables Evaluated

 

Allowance
Based on
Individual

 

Allowance
Based on
Collective

 

(In millions)

 

Individually

 

Collectively

 

Evaluation

 

Evaluation

 

Individually

 

Collectively

 

Evaluation

 

Evaluation

 

Captive

 

$

137

 

$

1,455

 

$

18

 

$

50

 

$

127

 

$

1,577

 

$

15

 

$

55

 

Non-captive

 

33

 

52

 

8

 

1

 

44

 

64

 

12

 

2

 

Total

 

$

170

 

$

1,507

 

$

26

 

$

51

 

$

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 three months ended March 30, 2013

 

 

 

 

 

 

 

Beginning balance

 

$

70

 

$

14

 

$

84

 

Provision for losses

 

(2

)

(5

)

(7

)

Charge-offs

 

(2

)

(1

)

(3

)

Recoveries

 

2

 

1

 

3

 

Ending balance

 

$

68

 

$

9

 

$

77

 

For the three months ended March 31, 2012

 

 

 

 

 

 

 

Beginning balance

 

$

101

 

$

55

 

$

156

 

Provision for losses

 

2

 

2

 

4

 

Charge-offs

 

(25

)

(2

)

(27

)

Recoveries

 

2

 

1

 

3

 

Ending balance

 

$

80

 

$

56

 

$

136

 

 

 

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

Inventories
Inventories

Note 6.  Inventories

 

(In millions)

 

March 30,
2013

 

December 29,
2012

 

Finished goods

 

$

1,406

 

$

1,329

 

Work in process

 

2,431

 

2,247

 

Raw materials

 

438

 

437

 

 

 

4,275

 

4,013

 

Progress/milestone payments

 

(1,303

)

(1,301

)

Total

 

$

2,972

 

$

2,712

 

 

Debt
Debt

Note 7.  Debt

 

At March 30, 2013, the principal amount of our convertible senior notes was $215 million.  Under the terms of the Indenture that governs the notes, the notes are currently convertible at the holder’s option through April 29, 2013, the second trading day preceding their May 1, 2013 maturity.  We will settle the face value of the convertible notes in cash and the excess of the conversion value over the face value of the notes will be settled in shares of common stock.  Based on a March 30, 2013 stock price of $29.81, the “if converted value” exceeds the face value of the remaining notes by $273 million or 9.2 million shares; however, after giving effect to the exercise of the related outstanding call options and warrants, the incremental share settlement in excess of the face value would result in a 7.7 million net share issuance, of which 3.8 million shares were issued during the first quarter of 2013 in conjunction with the settlement of the warrants as described below.

 

Call Option and Warrant Transactions

 

Concurrently with the pricing of the convertible notes in May 2009, we entered into transactions with two counterparties, including an underwriter and an affiliate of an underwriter of the convertible notes, 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.  We entered into these transactions for the purposes of reducing the cash outflow and/or the potential dilutive effect to our shareholders upon the conversion of the convertible notes.  At the end of 2012, the outstanding purchased call options gave us the right to acquire from the counterparties 16.4 million shares of our common stock (the number of shares into which all of the remaining notes are convertible) at an exercise price of $13.125 per share (the same as the initial conversion price of the notes), subject to adjustments that mirror the terms of the convertible notes.  At the end of 2012, the warrants gave the counterparties the right to acquire, subject to anti-dilution adjustments, an aggregate of 16.4 million shares of common stock at an exercise price of $15.75 per share.  We may settle these transactions in cash, shares or a combination of cash and shares, at our option.

 

The settlement values of the call options and warrants are based on the daily Volume Weighted Average Price (VWAP) of our common stock over the 45-day period commencing on February 22, 2013 and ending on April 26, 2013.  The call options settle on May 1, 2013.  The warrants settle daily over the 45-day period beginning February 27, 2013.  Pursuant to the terms of the warrants, in connection with the upcoming May 1, 2013 maturity date of the convertible notes, a number of warrants were deemed to be automatically exercised on each expiration date beginning on February 22, 2013 and continuing for a period of 45 trading days thereafter. We have elected to “net share settle” meaning that, for each warrant being exercised, we deliver to the counterparties a number of shares of our common stock equal to the amount by which the stock price of our common stock exceeds the exercise price, divided by the stock price.  Therefore, during the first quarter of 2013, a total of 8.0 million warrants were exercised and settled, and we issued to the counterparties an aggregate of 3.8 million shares of our common stock at a VWAP of $29.90, resulting in a $92 million reduction in treasury stock.  At March 30, 2013, we had 8.4 million warrants outstanding that will be net share settled in the second quarter of 2013.

Accrued Liabilities
Accrued Liabilities

Note 8.  Accrued Liabilities

 

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

 

 

 

Three Months Ended

 

(In millions)

 

March 30,
2013

 

March 31,
2012

 

Accrual at the beginning of period

 

$

222

 

$

224

 

Provision

 

67

 

63

 

Settlements

 

(70

)

(65

)

Adjustments to prior accrual estimates

 

 

(3

)

Accrual at the end of period

 

$

219

 

$

219

 

 

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

Note 9.  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 three months ended March 30, 2013

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

81

 

$

(1,857

)

$

6

 

$

(1,770

)

Other comprehensive income before reclassifications

 

(10

)

 

(5

)

(15

)

Amounts reclassified from Accumulated Other Comprehensive Loss

 

 

32

 

(2

)

30

 

Other comprehensive income

 

(10

)

32

 

(7

)

15

 

Ending balance

 

$

71

 

$

(1,825

)

$

(1

)

$

(1,755

)

For the three months ended March 31, 2012

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

79

 

$

(1,711

)

$

7

 

$

(1,625

)

Other comprehensive income before reclassifications

 

3

 

 

6

 

9

 

Amounts reclassified from Accumulated Other Comprehensive Loss

 

 

21

 

(6

)

15

 

Other comprehensive income

 

3

 

21

 

 

24

 

Ending balance

 

$

82

 

$

(1,690

)

$

7

 

$

(1,601

)

 

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 March 30, 2013

 

 

 

 

 

 

 

Pension adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

48

 

$

(17

)

$

31

 

Amortization of prior service cost*

 

1

 

 

1

 

Pension adjustments, net

 

49

 

(17

)

32

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

(6

)

1

 

(5

)

Reclassification adjustments

 

(2

)

 

(2

)

Deferred gains/losses on hedge contracts, net

 

(8

)

1

 

(7

)

Foreign currency translation adjustment

 

(2

)

(8

)

(10

)

Total

 

$

39

 

$

(24

)

$

15

 

For the three months ended March 31, 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

 

8

 

(2

)

6

 

Reclassification adjustments

 

(8

)

2

 

(6

)

Deferred gains/losses on hedge contracts, net

 

 

 

 

Foreign currency translation adjustment

 

(3

)

6

 

3

 

Total

 

$

29

 

$

(5

)

$

24

 

 

 

*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 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)

 

(In millions)

 

Borrowing Group

 

Balance Sheet Location

 

March 30,
 2013

 

December 29,
2012

 

Assets

 

 

 

 

 

 

 

 

 

Interest rate exchange contracts*

 

Finance

 

Other assets

 

$

5

 

$

8

 

Foreign currency exchange contracts

 

Manufacturing

 

Other current assets

 

 

9

 

Total

 

 

 

 

 

$

5

 

$

17

 

Liabilities

 

 

 

 

 

 

 

 

 

Interest rate exchange contracts*

 

Finance

 

Other liabilities

 

$

(7

)

$

(8

)

Foreign currency exchange contracts

 

Manufacturing

 

Accrued liabilities

 

(4

)

(5

)

Total

 

 

 

 

 

$

(11

)

$

(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 March 30, 2013.  At March 30, 2013 and December 29, 2012, we had interest rate exchange contracts with notional amounts upon which the contracts were based of $590 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 March 30, 2013 and December 29, 2012, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $642 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 both insignificant in the first quarter 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 March 30, 2013, we had a net deferred loss of $1 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 months ended March 30, 2013 and March 31, 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 $14 million after-tax gain for the first quarter of 2013, resulting in an accumulated net gain balance of $18 million at March 30, 2013.  The ineffective portion of these hedges was insignificant.

 

Assets Recorded at Fair Value on a Nonrecurring Basis

 

During the periods ended March 30, 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)

 

March 30,
2013

 

December 29,
2012

 

Finance receivables held for sale

 

$

112

 

$

140

 

Impaired finance receivables

 

73

 

72

 

Other assets

 

49

 

76

 

 

The following table provides the fair value adjustments recorded for the assets measured at fair value on a non-recurring basis during the three months ended March 30, 2013 and March 31, 2012.

 

 

 

Gain (Loss)

 

 

 

Three Months Ended

 

(In millions)

 

March 30,
2013

 

March 31,
2012

 

Finance receivables held for sale

 

$

12

 

$

24

 

Impaired finance receivables

 

(3

)

(6

)

Other assets

 

(4

)

(16

)

 

Finance receivables held for sale — Finance receivables held for sale are recorded at fair value on a nonrecurring basis during periods in which the fair value is lower than the cost value.  There are no active, quoted market prices for these finance receivables.  At March 30, 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 months ended March 30, 2013 and March 31, 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:

 

 

 

March 30, 2013

 

December 29, 2012

 

(In millions)

 

Carrying
Value

 

Estimated
Fair Value

 

Carrying
Value

 

Estimated
Fair Value

 

Manufacturing group

 

 

 

 

 

 

 

 

 

Long-term debt, excluding leases

 

$

(1,896

)

$

(2,400

)

$

(2,225

)

$

(2,636

)

Finance group

 

 

 

 

 

 

 

 

 

Finance receivables held for investment, excluding leases

 

1,502

 

1,537

 

1,625

 

1,653

 

Debt

 

(1,558

)

(1,565

)

(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 March 30, 2013 and December 29, 2012, approximately 47% 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 12.  Income Tax Expense

 

Income tax expense equated to an effective income tax rate of 19.8% and 32.4% in the first quarter of 2013 and 2012, respectively, compared with the U.S. federal statutory income tax rate of 35.0%.  In the first quarter of 2013, the difference between the statutory and the effective income tax rate was primarily related to 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.

 

For the three months ended March 31, 2012, the difference between the federal statutory income tax rate and the effective income tax rate was not significant.

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 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

 

(In millions)

 

March 30,
2013

 

March 31,
2012

 

REVENUES

 

 

 

 

 

Manufacturing group

 

 

 

 

 

Cessna

 

$

708

 

$

669

 

Bell

 

949

 

994

 

Textron Systems

 

429

 

377

 

Industrial

 

727

 

755

 

 

 

2,813

 

2,795

 

Finance group

 

42

 

61

 

Total revenues

 

$

2,855

 

$

2,856

 

SEGMENT OPERATING PROFIT

 

 

 

 

 

Manufacturing group

 

 

 

 

 

Cessna

 

$

(8

)

$

(6

)

Bell

 

129

 

145

 

Textron Systems

 

38

 

35

 

Industrial

 

57

 

73

 

 

 

216

 

247

 

Finance group

 

19

 

12

 

Segment profit

 

235

 

259

 

Corporate expenses and other, net

 

(55

)

(47

)

Interest expense, net for Manufacturing group

 

(37

)

(35

)

Income from continuing operations before income taxes

 

$

143

 

$

177

 

 

Basis of Presentation (Policies)
Use of Estimates

Use of Estimates

 

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

 

During 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.  These changes in estimates increased income from continuing operations before income taxes in the first quarter of 2013 and 2012 by $7 million and $4 million, respectively, ($5 million and $2 million after tax, or $0.02 and $0.01 per diluted share, respectively).  For the first quarter of 2013 and 2012, the gross favorable program profit adjustments totaled $9 million and $17 million, respectively, and the gross unfavorable program profit adjustments totaled $2 million and $13 million, respectively.

Retirement Plans (Tables)
Components of net periodic benefit cost

 

 

 

 

Pension Benefits

 

Postretirement Benefits
Other Than Pensions

 

(In millions)

 

March 30,
2013

 

March 31,
2012

 

March 30,
2013

 

March 31,
2012

 

Three Months Ended

 

 

 

 

 

 

 

 

 

Service cost

 

$

33

 

$

30

 

$

2

 

$

2

 

Interest cost

 

73

 

76

 

5

 

6

 

Expected return on plan assets

 

(105

)

(101

)

 

 

Amortization of prior service cost (credit)

 

4

 

4

 

(3

)

(3

)

Amortization of net actuarial loss

 

46

 

29

 

2

 

2

 

Net periodic benefit cost

 

$

51

 

$

38

 

$

6

 

$

7

 

Share-Based Compensation (Tables)

 

 

 

 

Three Months Ended

 

(In millions)

 

March 30,
2013

 

March 31,
2012

 

Compensation expense

 

$

30

 

$

46

 

Income tax benefit

 

(11

)

(17

)

Total net compensation cost included in net income

 

$

19

 

$

29

 

 

 

 

 

Three Months Ended

 

 

 

March 30,
2013

 

March 31,
2012

 

Fair value of options at grant date

 

$

9.69

 

$

10.19

 

Dividend yield

 

0.3

%

0.3

%

Expected volatility

 

37.0

%

40.0

%

Risk-free interest rate

 

0.9

%

0.8

%

Expected term (in years)

 

5.5

 

5.5

 

 

 

(Options in thousands)

 

Number of
Options

 

Weighted-
Average
Exercise
Price

 

Outstanding at beginning of period

 

9,484

 

$

27.98

 

Granted

 

2,133

 

28.47

 

Exercised

 

(504

)

(21.90

)

Canceled, expired or forfeited

 

(842

)

(40.07

)

Outstanding at end of period

 

10,271

 

$

27.39

 

Exercisable at end of period

 

5,302

 

$

26.86

 

 

 

 

 

Units Payable in Stock

 

Units Payable in Cash

 

(Shares/Units in thousands)

 

Number of
Shares

 

Weighted-
Average Grant
Date Fair Value

 

Number of
Units

 

Weighted-
Average Grant
Date Fair Value

 

Outstanding at beginning of year, nonvested

 

710

 

$

29.94

 

2,540

 

$

20.79

 

Granted

 

257

 

28.47

 

583

 

28.43

 

Vested

 

(107

)

(42.53

)

(595

)

(15.99

)

Forfeited

 

(30

)

(27.94

)

(148

)

(23.91

)

Outstanding at end of period, nonvested

 

830

 

$

27.93

 

2,380

 

$

23.67

 

 

 

 

 

Three Months Ended

 

(In millions)

 

March 30,
2013

 

March 31,
2012

 

Fair value of awards vested

 

$

21

 

$

30

 

Cash paid

 

18

 

21

 

 

 

(Units in thousands)

 

Number of
Units

 

Weighted-
Average Grant
Date Fair Value

 

Outstanding at beginning of year, nonvested

 

875

 

$

27.14

 

Granted

 

418

 

28.47

 

Forfeited

 

(41

)

(27.42

)

Outstanding at end of period, nonvested

 

1,252

 

$

27.57

 

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

 

 

 

 

Three Months Ended

 

(In thousands)

 

March 30,
2013

 

March 31,
2012