Note 1: Basis of Presentation

Our consolidated financial statements include the accounts of Textron Inc. and its majority-owned subsidiaries. We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information. Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 2, 2010. 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. We have reclassified certain prior period amounts to conform to the current period presentation.

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 is also the Finance segment, consists of Textron Financial Corporation, its subsidiaries and the securitization trusts consolidated into it, along with two other finance subsidiaries owned by Textron Inc. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the consolidated financial statements. All significant intercompany transactions are eliminated from the consolidated financial statements, including retail and wholesale financing activities for inventory sold by our Manufacturing group and financed by our Finance group.

Note 2: Special Charges

In the fourth quarter of 2008, we initiated a restructuring program to reduce overhead costs and improve productivity across the company and announced the exit of portions of our commercial finance business. Our restructuring program primarily includes corporate and segment direct and indirect workforce reductions and the consolidation of certain operations. By the end of 2010, we expect to have eliminated approximately 11,000 positions worldwide representing approximately 25% of our global workforce since the inception of the program. As of April 3, 2010, we have terminated approximately 10,500 employees and have exited 25 leased and owned facilities and plants under this program.

Restructuring costs by segment are as follows:

		Severance				Contract
(In millions)		Costs				Terminations				Total
Three Months Ended April 3, 2010
Cessna		$	8			$	2			$	10
Bell			1				—				1
Finance			3				—				3
Corporate			(2	)			—				(2	)
		$	10			$	2			$	12
Three Months Ended April 4, 2009
Cessna		$	26			$	—			$	26
Industrial			1				—				1
Finance			2				1				3
Corporate			2				—				2
		$	31			$	1			$	32

Since the inception of the restructuring program in the fourth quarter of 2008, we have incurred the following costs through April 3, 2010:

														Contract
		Severance				Curtailment				Asset				Terminations
(In millions)		Costs				Charges, Net				Impairments				and Other				Total
Cessna		$	93			$	26			$	54			$	9			$	182
Industrial			22				(4	)			9				3				30
Bell			10				—				—				—				10
Textron Systems			6				2				—				1				9
Finance			29				1				11				2				43
Corporate			38				—				—				1				39
		$	198			$	25			$	74			$	16			$	313

An analysis of our restructuring reserve activity is summarized below:

		Severance				Contract
(In millions)		Costs				Terminations				Total
Balance at January 2, 2010		$	48			$	3			$	51
Provisions			12				2				14
Reversals			(2	)			—				(2	)
Cash paid			(20	)			—				(20	)
Balance at April 3, 2010		$	38			$	5			$	43

The specific restructuring measures and associated estimated costs are based on our best judgment under prevailing circumstances. We believe that the restructuring reserve balance is adequate to cover the costs presently accruable relating to activities formally identified and committed to under approved plans as of April 3, 2010 and anticipate that all actions related to these liabilities will be completed within a 12-month period. We estimate that we will incur approximately $20 million in additional pre-tax restructuring costs during the remainder of 2010, most of which will result in future cash outlays. The additional costs are expected to primarily include relocation costs at Cessna as it consolidates certain operations and severance costs in the Cessna and Finance segments. We expect that the program will be substantially completed in 2010; however, we also expect to incur additional costs to exit the non-captive portion of our commercial finance business over the next two to three years, which are estimated to be within a range of $10 million to $15 million, primarily attributable to severance and retention benefits.

Note 3: Share-Based Compensation

Share-based compensation expense includes restricted stock and stock option awards, as well as performance share units, restricted stock units, and deferred income plan stock unit awards which are payable in cash. The compensation expense we recorded in net income for our share-based compensation plans is as follows:

		Three Months Ended
		April 3,				April 4,
(In millions)		2010				2009
Compensation expense (income)		$	23			$	—
Hedge expense (income)			(2	)			12
Income tax expense (benefit)			(9	)			—
Total net compensation cost included in net income		$	12			$	12

In January 2010, we discontinued hedging our stock-based compensation awards and we have not entered into any new forward contracts.

Stock Options

The stock option compensation cost calculated under the fair value approach is recognized over the vesting period of the stock options. The weighted-average fair value of options granted per share was $7 and $2 in the first quarter of 2010 and 2009, respectively. We estimate the fair value of options granted on the date of grant using the Black-Scholes option-pricing model. Expected volatilities are based on implied volatilities from traded options on our common stock, historical volatilities and other factors. We use historical data to estimate option exercise behavior, adjusted to reflect anticipated changes in expected life.

The weighted-average assumptions used in our Black-Scholes option-pricing model for awards issued during the respective periods are as follows:

		Three Months Ended
		April 3,				April 4,
		2010				2009
Dividend yield			0.4	%			1.4	%
Expected volatility			37.0	%			50.0	%
Risk-free interest rate			2.6	%			2.0	%
Expected lives (In years)			5.5				5.0

Stock option activity under the 2007 Long-Term Incentive Plan for the first quarter of 2010 is as follows:

										Weighted-
										Average
						Weighted-				Remaining
		Number of				Average				Contractual
		Options				Exercise				Life
		(In thousands)				Price				(In years)
Outstanding at beginning of period			8,545			$	35.67				6
Granted			967				20.21
Exercised			(59	)			19.48
Canceled, expired or forfeited			(155	)			37.57
Outstanding at end of period			9,298			$	34.13				6
Exercisable at end of period			7,147			$	36.65				5

At April 3, 2010, our outstanding options had an aggregate intrinsic value of $15 million and our exercisable options had an aggregate intrinsic value of $5 million.

Restricted Stock Units

There were no stock-settled restricted stock units granted in the first quarter of 2010 or 2009. Activity for restricted stock units paid in stock during the first quarter of 2010 is as follows:

						Weighted-
						Average
						Grant
		Number of				Date Fair
(Shares in thousands)		Shares				Value
Outstanding at beginning of period, nonvested			1,290			$	46.02
Vested			(316	)			40.41
Forfeited			(29	)			46.44
Outstanding at end of period, nonvested			945			$	47.88

Share-Based Compensation Awards

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

		Three Months Ended
		April 3,				April 4,
(In millions)		2010				2009
Subject only to service conditions:
Value of shares, options or units vested		$	36			$	34
Intrinsic value of cash awards paid			8				—
Subject to performance vesting conditions:
Intrinsic value of cash awards paid			5				9
Intrinsic value of amounts paid under Deferred Income Plan			8				—

Note 4: 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 for the first quarter of 2010 and 2009 are as follows:

										Postretirement Benefits
		Pension Benefits								Other Than Pensions
(In millions)		2010				2009				2010				2009
Service cost		$	31			$	33			$	2			$	2
Interest cost			79				76				8				9
Expected return on plan assets			(92	)			(97	)			—				—
Amortization of prior service cost (credit)			4				5				(1	)			(1	)
Amortization of net loss			9				6				3				2
Net periodic benefit cost		$	31			$	23			$	12			$	12

Note 5: Discontinued Operations

On April 3, 2009, we sold HR Textron, an operating unit previously reported within the Textron Systems segment, for $376 million in cash proceeds. The sale resulted in an after-tax gain of $8 million after final settlement and net after-tax proceeds of approximately $280 million. Also, in the first quarter of 2009, we had a $34 million tax benefit from the reduction in tax contingencies as a result of the HR Textron sale and a valuation allowance reversal on a previously established deferred tax asset.

Note 6: Comprehensive Income

Our comprehensive income, net of taxes, is provided below:

		Three Months Ended
		April 3,				April 4,
(In millions)		2010				2009
Net income (loss)		$	(8	)		$	86
Other comprehensive income (loss):
Recognition of prior service cost and unrealized losses on pension and postretirement benefits			10				7
Deferred gains (losses) on hedge contracts			7				(10	)
Foreign currency translation and other			(9	)			2
Comprehensive income		$	—			$	85

Note 7: Income Tax Expense (Benefit)

Income tax expense for continuing operations of $15 million for the first quarter of 2010 equated to an effective income tax rate of 136.4% (provision on income), compared with an effective income tax rate for continuing operations of 4.9% (benefit on income) for the first quarter of 2009. The increase in the effective tax rate was primarily attributable to the write-off of an $11 million deferred tax asset related to a change in the tax treatment of the Medicare Part D program due to recently enacted U.S. health-care law and a prior year tax benefit due to a reduction in unrecognized tax benefits as a result of the recognition of a capital gain in connection with the sale of CESCOM.

Note 8: Earnings Per Share

We calculate basic and diluted earnings per share based on net income, which approximates income available to common shareholders for each period. Basic earnings per share is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends. Diluted earnings per share considers the dilutive effect of all potential future common stock, including convertible preferred shares, Convertible Notes, stock options and warrants and restricted stock units in the weighted-average number of common shares outstanding.

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

		Three Months Ended
		April 3,				April 4,
(In thousands)		2010				2009
Basic weighted-average shares outstanding			273,174				243,988
Dilutive effect of convertible preferred shares, stock options and restricted stock units			—				968
Diluted weighted-average shares outstanding			273,174				244,956

The potential dilutive effect of 28 million weighted-average shares of convertible debt, restricted stocks units, stock options and warrants was excluded from the computation of diluted weighted-average shares outstanding for the three months ended April 3, 2010 as the shares would have an anti-dilutive effect on the loss from continuing operations. In addition, stock options to purchase 7 million shares of common stock outstanding are excluded from our calculation of diluted weighted-average shares outstanding for the three months ended April 3, 2010 as the exercise prices were greater than the average market price of our common stock for the period. These securities will likely dilute earnings per share in the future.

Note 9: Accounts Receivable and Finance Receivables

		April 3,				January 2,
(In millions)		2010				2010
Accounts receivable — Commercial		$	525			$	470
Accounts receivable — U.S. Government contracts			456				447
Gross accounts receivable			981				917
Allowance for doubtful accounts			(22	)			(23	)
Accounts receivable, net		$	959			$	894
Finance receivables held for investment		$	5,565			$	6,206
Allowance for loan losses			(365	)			(341	)
Finance receivables held for investment, net		$	5,200			$	5,865

During the first quarter of 2010, we reclassified $144 million of captive finance receivables from held for investment to held for sale as a result of inquiries we have received to purchase these finance receivables. We determined a sale of these finance receivables would be consistent with our goal to maximize the economic value of our portfolio and accelerate cash collections.

The activity in the Finance group’s allowances for loan losses is provided below:

		Three Months Ended
		April 3,				April 4,
(In millions)		2010				2009
Reserve at the beginning of period		$	341			$	191
Provision for losses			55				76
Net charge-offs			(31	)			(47	)
Reserve at the end of period		$	365			$	220

We periodically evaluate finance receivables held for investment, excluding homogeneous loan portfolios and finance leases, for impairment. Finance receivables classified as held for sale are reflected at the lower of cost or fair value and are excluded from this assessment. 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. Impaired finance receivables are classified as either nonaccrual or accrual loans. Nonaccrual finance receivables include accounts that are contractually delinquent by more than three months for which the accrual of interest income is suspended. Impaired accrual finance receivables represent loans with original terms that have been or are expected to be significantly modified to reflect deferred principal payments, generally at market interest rates, for which collection of principal and interest is not doubtful.

Our impaired finance receivables are as follows:

		April 3,				January 2,
(In millions)		2010				2010
Impaired nonaccrual finance receivables		$	966			$	984
Impaired accrual finance receivables			158				217
Total impaired finance receivables			1,124				1,201
Less: Impaired finance receivables without identified reserve requirements			347				362
Impaired nonaccrual finance receivables with identified reserve requirements		$	777			$	839
Allowance for losses on impaired nonaccrual finance receivables		$	174			$	153

The average recorded investment in impaired nonaccrual finance receivables was $975 million and $311 million in the first quarter of 2010 and 2009, respectively. The average recorded investment in impaired accrual finance receivables amounted to $187 million and $45 million in the first quarter of 2010 and 2009, respectively.

Nonaccrual finance receivables include impaired finance receivables, as well as accounts in homogeneous loan portfolios that are not considered to be impaired but are contractually delinquent by more than three months. At April 3, 2010 and January 2, 2010, nonaccrual finance receivables totaled $1.03 billion and $1.04 billion, respectively. Nonaccrual finance receivables resulted in the Finance segment’s revenues being reduced by $17 million and $8 million in the first quarter of 2010 and 2009, respectively.

Note 10: Inventories

		April 3,				January 2,
(In millions)		2010				2010
Finished goods		$	843			$	735
Work in process			2,121				1,861
Raw materials			567				613
			3,531				3,209
Progress/milestone payments			(1,056	)			(936	)
		$	2,475			$	2,273

Note 11: Debt

Subsequent to quarter-end, we decided to pay down a portion of the outstanding amount owed under Textron Inc.’s bank line of credit and repaid approximately $250 million. This debt was classified as long-term debt on our balance sheet at April 3, 2010.

4.5% Convertible Senior Notes

Our common stock price exceeded the conversion threshold price of $17.06 per share for at least 20 trading days during the 30 consecutive trading days ended March 31, 2010. Accordingly, the notes are convertible at the holder’s option through June 30, 2010. We may deliver shares of common stock, cash or a combination of cash and shares of common stock in satisfaction of our obligations upon conversion of the Convertible Notes. We intend to settle the face value of the Convertible Notes in cash. We have continued to classify these Convertible Notes as long-term based on our intent and ability to maintain the debt outstanding for at least one year through the use of various funding sources available to us.

Note 12: Guarantees and Indemnifications

As disclosed under the caption “Guarantees and Indemnifications” in Note 18 to the Consolidated Financial Statements in Textron’s 2009 Annual Report on Form 10-K, we have issued or are party to certain guarantees. As of April 3, 2010, there has been no material change to these guarantees.

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

Changes in our warranty and product maintenance liabilities are as follows:

		Three Months Ended
		April 3,				April 4,
(In millions)		2010				2009
Accrual at the beginning of period		$	263			$	278
Provision			38				40
Settlements			(58	)			(63	)
Adjustments to prior accrual estimates			(3	)			1
Accrual at the end of period		$	240			$	256

Note 13: Commitments and Contingencies

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

On April 6, 2010, a jury in the Philadelphia Common Pleas Court returned verdicts against Avco Corporation, which includes the Lycoming Engines operating division, for $24.7 million in compensatory damages and $64 million in punitive damages in an aviation products liability case involving a 1999 accident. Judgment has not been entered pending post-trial motions. While the ultimate outcome of the litigation cannot be assured, we strongly disagree with the verdicts and intend to appeal the verdicts if our post-trial motions are unsuccessful. We believe that it is probable that the verdicts will be reversed through the appellate process.

Note 14: Fair Values of Assets and Liabilities

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 (the “inputs”) 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 exists, 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 only utilized 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 table below presents the assets and liabilities measured at fair value on a recurring basis, which are categorized as Level 2 based on the level of inputs used in the valuation of each asset and liability.

						April 3,				January 2,
(In millions)		Borrowing Group				2010				2010
Assets
Foreign currency exchange contracts		Manufacturing				$	65			$	57
Derivative financial instruments		Finance					60				61
Total assets						$	125			$	118
Liabilities
Foreign currency exchange contracts		Manufacturing				$	5			$	5
Derivative financial instruments		Finance					3				16
Total liabilities						$	8			$	21

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. This is 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. 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.

The Finance group’s derivative contracts are not exchange-traded. Derivative financial instruments 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 derivative 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 to a standard AA-rated counterparty; however, this had no significant impact on the valuation as of April 3, 2010.

Assets Recorded at Fair Value on a Nonrecurring Basis

The table below presents those assets that are measured at fair value on a nonrecurring basis that had fair value measurement adjustments for the Finance group during the first quarter of 2010. These assets were measured using significant unobservable inputs (Level 3) and include the following:

		Balance at
		April 3,				Gain
(In millions)		2010				(Loss)
Finance receivables held for sale		$	598			$	(10	)
Impaired finance receivables			510				(46	)
Other assets			67				(18	)

Finance Receivables Held for Sale — Finance receivables held for sale are recorded at the lower of cost or fair value. 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. The majority of the finance receivables held for sale were identified at the individual loan level. Golf course, timeshare and hotel mortgages classified as held for sale were identified as a portion of a larger portfolio with common characteristics based on the intention to balance the sale of certain loans with the collection of others to maximize economic value. There was no significant change in the fair value of the finance receivables held for sale in the first quarter of 2009. During the first quarter of 2010, we sold $208 million of finance receivables classified as held for sale in the distribution finance product line and recorded a $13 million gain related to this sale. Total gains related to receivable sales were $15 million for the first quarter of 2010.

There are no active, quoted market prices for our finance receivables. The estimate of fair value was determined based on the use of discounted cash flow models to estimate the exit price we expect to receive in the principal market for each type of loan in an orderly transaction, which includes both the sale of pools of similar assets and the sale of individual loans. The models we used incorporate estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and credit line utilization rates. Where available, the assumptions related to the expectations of current market participants are compared with observable market inputs, including bids from prospective purchasers of similar loans and certain bond market indices for loans of similar perceived credit quality. Although we utilize and prioritize these market observable inputs in our discounted cash flow models, these inputs rarely are derived from markets with directly comparable loan structures, industries and collateral types. Therefore, all valuations of finance receivables held for sale involve significant management judgment, which can result in differences between our fair value estimates and those of other market participants.

Impaired Finance Receivables - Finance receivable impairment is measured by comparing the expected future cash flows discounted at the finance receivable’s effective interest rate, or the fair value of the collateral if the receivable is collateral dependent, with its carrying amount. If the carrying amount is higher, we establish a reserve based on this difference. This evaluation 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 underlying collateral that may differ from actual results. Impaired nonaccrual finance receivables are included in the table above since the measurement of required reserves on our impaired finance receivables is significantly dependent on the fair value of the underlying collateral. Fair values of collateral are determined based on the use of appraisals, industry pricing guides, input from market participants, our recent experience selling similar assets or internally developed discounted cash flow models. In the first quarter of 2009, fair value measurements recorded on impaired finance receivables resulted in a $32 million charge to provision for loan losses and primarily were related to initial fair value adjustments.

Other assets — Other assets include repossessed assets and properties, operating assets received in satisfaction of troubled finance receivables and other investments, which are accounted for under the equity method of accounting and have no active, quoted market prices. The fair value of these assets is determined based on the use of appraisals, industry pricing guides, input from market participants, our recent experience selling similar assets or internally developed discounted cash flow models. For our other investments, the discounted cash flow models incorporate assumptions specific to the nature of the investments’ business and underlying assets and include industry valuation benchmarks such as discount rates, capitalization rates and cash flow multiples. For repossessed assets and properties, which are considered assets held for sale, if the carrying amount of the asset is higher than the estimated fair value, we record a corresponding charge to income for the difference. For operating assets received in satisfaction of troubled finance receivables and other investments, if the sum of the undiscounted cash flows is estimated to be less than the carrying value, we record a charge to income for any shortfall between estimated fair value and the carrying amount.

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:

		April 3, 2010								January 2, 2010
(In millions)		Carrying Value				Estimated Fair Value				Carrying Value				Estimated Fair Value
Manufacturing group:
Debt, excluding leases		$	(3,430	)		$	(3,845	)		$	(3,474	)		$	(3,762	)
Finance group:
Finance receivables held for investment, excluding leases			4,685				4,313				5,159				4,703
Retained interest in securitizations			—				—				6				6
Investment in other marketable securities			63				57				68				55
Debt			(4,811	)			(4,640	)			(5,667	)			(5,439	)

Fair value for the Manufacturing group debt is determined using market observable data for similar transactions. We utilize the same valuation methodologies to determine the fair value estimates for finance receivables held for investment as used for finance receivables held for sale.

Investments in other marketable securities represent notes receivable issued by securitization trusts that purchase timeshare notes receivable from timeshare developers. These notes are classified as held-to-maturity and are held at amortized cost. The estimate of fair value was based on observable market inputs for similar securitization interests in markets that are currently inactive.

At April 3, 2010 and January 2, 2010, approximately 46% and 54%, respectively, of the fair value of term debt for the Finance group was determined based on observable market transactions. The remaining Finance group debt was determined based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations.

Note 15: Derivatives

The notional and fair value amounts of our derivative instruments that are designated as hedging instruments are provided below:

						Notional Amount								Asset (Liability)
						April 3,				January 2,				April 3,				January 2,
(In millions)		Borrowing Group				2010				2010				2010				2010
Assets
Interest rate exchange contracts*		Finance				$	1,305			$	1,333			$	40			$	43
Cross-currency interest rate exchange contracts		Finance					140				161				19				18
Foreign currency exchange contracts		Manufacturing					629				696				54				54
Total in other current or other assets						$	2,074			$	2,190			$	113			$	115
Liabilities
Interest rate exchange contracts*		Finance				$	32			$	32			$	(3	)		$	(3	)
Foreign currency exchange contracts		Manufacturing					49				80				(4	)			(5	)
Total in accrued or other liabilities						$	81			$	112			$	(7	)		$	(8	)

The fair values of derivative instruments for the Manufacturing group are included in either other current assets or accrued liabilities in our balance sheet. For the Finance group, derivative instruments are included in either other assets or other liabilities.

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. Currency effects on the effective portion of these hedges, which are reflected in the cumulative translation adjustment account within other comprehensive income (OCI), produced a $29 million after-tax gain in the first quarter of 2010, resulting in an accumulated net gain balance of $17 million at April 3, 2010. The ineffective portion of these hedges was insignificant.

Our exposure to loss from nonperformance by the counterparties to our derivative agreements at April 3, 2010 is minimal. We do not anticipate nonperformance by counterparties in the periodic settlements of amounts due. We historically have minimized this potential for risk by entering into contracts exclusively with major, financially sound counterparties having no less than a long-term bond rating of A. The credit risk generally is limited to the amount by which the counterparties’ contractual obligations exceed our obligations to the counterparty. We continuously monitor our exposures to ensure that we limit our risks.

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 is insignificant. The effect of these contracts is recorded in the Consolidated Statements of Operations, and the gain (loss) for the first quarter of 2010 and 2009 is provided in the following table:

(In millions)		Gain (Loss) Location				2010				2009
Interest rate exchange contracts		Interest expense				$	10			$	4
Interest rate exchange contracts		Finance charges					(4	)			(2	)

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 created in the normal course of business. We primarily utilize forward exchange contracts and purchased options with maturities of no more than 18 months that qualify as cash flow hedges. These are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses. At April 3, 2010, we had a net deferred gain of $32 million in OCI related to these cash flow hedges. As the underlying transactions occur, we expect to reclassify an $11 million gain into earnings in the next 12 months and $21 million of gains in the following 12-month period.

For our cash flow hedges, the amount of gain (loss) recognized in OCI and the amount reclassified from accumulated other comprehensive loss into income for the Manufacturing group for the first quarter of 2010 and 2009 is provided in the following table:

		Amount of Gain(Loss)
		Recognized in OCI								Effective Portion of Derivative Reclassified from
		(Effective Portion)								Accumulated Other Comprehensive Loss into Income
(In millions)		2010				2009				Gain(Loss) Location				2010				2009
Foreign currency exchange contracts		$	6			$	(7	)		Cost of sales				$	3			$	(5	)

Derivatives Not Designated as Hedges

The notional and fair value amounts of our derivative instruments that are not designated as hedging instruments are provided below:

						Notional Amount								Asset (Liability)
						April 3,				January 2,				April 3,				January 2,
(In millions)		Borrowing Group				2010				2010				2010				2010
Foreign currency exchange contracts		Finance				$	258			$	531			$	1			$	(13	)
Foreign currency exchange contracts		Manufacturing					124				224				10				3
Total						$	382			$	755			$	11			$	(10	)

The Manufacturing group enters into certain other foreign currency exchange contracts that do not meet hedge accounting criteria and primarily are intended to protect against exposure related to intercompany financing transactions. For these instruments, the Manufacturing group reported in selling and administrative expenses an $8 million gain and a $17 million loss in the first quarter of 2010 and 2009, respectively, which were offset by the revaluation of the intercompany financing transactions.

The Finance group also utilizes certain foreign currency exchange contracts that do not meet hedge accounting criteria and are intended to convert certain foreign currency denominated assets and liabilities into the functional currency of the respective legal entity. Gains and losses related to these derivative instruments are naturally offset by the translation of the related foreign currency denominated assets and liabilities. For these instruments, the Finance group reported in selling and administrative expenses a $7 million loss in the first quarter of 2010, which was offset by a $6 million gain resulting from the translation of foreign currency denominated assets and liabilities.

Note 16: Segment Information

We operate in, and report financial information for, the following five business segments: Cessna, Bell, Textron Systems, Industrial and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses and special charges. The measurement for the Finance segment includes interest income and expense and excludes special charges. 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 (loss) from continuing operations before income taxes are as follows:

		Three Months Ended
		April 3,				April 4,
(In millions)		2010				2009
REVENUES
Manufacturing Group
Cessna		$	433			$	769
Bell			618				742
Textron Systems			458				418
Industrial			625				475
			2,134				2,404
Finance Group			76				122
Total revenues		$	2,210			$	2,526
SEGMENT OPERATING PROFIT
Manufacturing Group
Cessna (a)		$	(24	)		$	90
Bell			74				69
Textron Systems			55				52
Industrial			49				(9	)
			154				202
Finance Group			(58	)			(66	)
Segment profit			96				136
Special charges			(12	)			(32	)
Corporate expenses and other, net			(37	)			(35	)
Interest expense, net for Manufacturing group			(36	)			(28	)
Income from continuing operations before income taxes		$	11			$	41