TEXTRON INC, 10-Q filed on 4/30/2010
Quarterly Report
Document and Entity Information (USD $)
In Millions, except Share data
Apr. 17, 2010
3 Months Ended
Apr. 3, 2010
Jul. 4, 2009
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
 
TEXTRON INC 
 
Entity Central Index Key
 
0000217346 
 
Document Type
 
10-Q 
 
Document Period End Date
 
04/03/2010 
 
Amendment Flag
 
FALSE 
 
Document Fiscal Year Focus
 
2010 
 
Document Fiscal Period Focus
 
Q1 
 
Current Fiscal Year End Date
 
01/01 
 
Entity Well-known Seasoned Issuer
 
Yes 
 
Entity Voluntary Filers
 
No 
 
Entity Current Reporting Status
 
Yes 
 
Entity Filer Category
 
Large Accelerated Filer 
 
Entity Public Float
 
 
$ 2,512 
Entity Common Stock, Shares Outstanding
273,316,122 
 
 
Consolidated Statements of Operations (Unaudited) (USD $)
In Millions, except Per Share data
3 Months Ended
Apr. 3, 2010
Apr. 4, 2009
Revenues
 
 
Manufacturing revenues
$ 2,134 
$ 2,404 
Finance revenues
76 
122 
Total revenues
2,210 
2,526 
Costs, expenses and other
 
 
Cost of sales
1,776 
1,999 
Selling and administrative expense
287 
346 
Provision for losses on finance receivables
55 
76 
Interest expense
71 
83 
Interest income
(2)
(1)
Gain on sale of assets
 
(50)
Special charges
12 
32 
Total costs, expenses and other
2,199 
2,485 
Income from continuing operations before income taxes
11 
41 
Income tax expense (benefit)
15 
(2)
Income (loss) from continuing operations
(4)
43 
Income (loss) from discontinued operations, net of income taxes
(4)
43 
Net income (loss)
(8)
86 
Basic earnings per share
 
 
Continuing operations
(0.01)
0.18 
Discontinued operations
(0.02)
0.17 
Basic earnings per share
(0.03)
0.35 
Diluted earnings per share
 
 
Continuing operations
(0.01)
0.18 
Discontinued operations
(0.02)
0.17 
Diluted earnings per share
(0.03)
0.35 
Dividends per share
 
 
Common stock
0.02 
0.02 
Manufacturing Group
 
 
Income (loss) from continuing operations
35 
96 
Income (loss) from discontinued operations, net of income taxes
(4)
43 
Net income (loss)
31 
139 
Finance Group
 
 
Costs, expenses and other
 
 
Provision for losses on finance receivables
55 
76 
Income (loss) from continuing operations
(39)
(53)
Net income (loss)
$ (39)
$ (53)
Consolidated Balance Sheets (Unaudited) (USD $)
In Millions, except Share data in Thousands
Apr. 3, 2010
Jan. 2, 2010
Assets
 
 
Cash and equivalents
$ 1,509 
$ 1,892 
Total assets
18,110 
18,940 
Liabilities and shareholders' equity
 
 
Liabilities
 
 
Total liabilities
15,269 
16,114 
Shareholders' equity
 
 
Common stock
35 
35 
Capital surplus
1,355 
1,369 
Retained earnings
2,960 
2,973 
Accumulated other comprehensive loss
(1,313)
(1,321)
Total shareholders' equity including cost of treasury shares
3,037 
3,056 
Less cost of treasury shares
196 
230 
Total shareholders' equity
2,841 
2,826 
Total liabilities and shareholders' equity
18,110 
18,940 
Common shares outstanding (in thousands)
273,230 
272,272 
Manufacturing Group
 
 
Assets
 
 
Cash and equivalents
1,430 
1,748 
Accounts receivable, net
959 
894 
Inventories
2,475 
2,273 
Other current assets
1,155 
985 
Total current assets
6,019 
5,900 
Property, plant and equipment, less accumulated depreciation and amortization of $2,693 and $2,666
1,940 
1,968 
Goodwill
1,612 
1,622 
Other assets
1,893 
1,938 
Total assets
11,464 
11,428 
Liabilities
 
 
Current portion of long-term debt
124 
134 
Accounts payable
747 
569 
Accrued liabilities
1,848 
2,039 
Total current liabilities
2,719 
2,742 
Other liabilities
3,257 
3,253 
Long-term debt
3,422 
3,450 
Total liabilities
9,398 
9,445 
Finance Group
 
 
Assets
 
 
Cash and equivalents
79 
144 
Finance receivables held for investment, net
5,200 
5,865 
Finance receivables held for sale
721 
819 
Other assets
646 
684 
Total assets
6,646 
7,512 
Liabilities
 
 
Other liabilities
955 
866 
Deferred income taxes
105 
136 
Debt
4,811 
5,667 
Total liabilities
$ 5,871 
$ 6,669 
Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
In Millions
Apr. 3, 2010
Jan. 2, 2010
Manufacturing Group
 
 
Assets
 
 
Accumulated depreciation and amortization
$ 2,693 
$ 2,666 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Millions
3 Months Ended
Apr. 3, 2010
Apr. 4, 2009
Cash flows from operating activities:
 
 
Net income (loss)
$ (8)
$ 86 
Income (loss) from discontinued operations
(4)
43 
Income (loss) from continuing operations
(4)
43 
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities:
 
 
Non-cash items:
 
 
Depreciation and amortization
90 
96 
Provision for losses on finance receivables held for investment
55 
76 
Portfolio losses on finance receivables
28 
10 
Other, net
31 
26 
Deferred income taxes
(13)
(113)
Changes in assets and liabilities:
 
 
Accounts receivable, net
(76)
41 
Inventories
(211)
(248)
Other assets
45 
(17)
Accounts payable
184 
(97)
Accrued and other liabilities
(297)
(11)
Captive finance receivables, net
78 
39 
Other operating activities, net
(6)
Net cash provided by (used in) operating activities of continuing operations
(89)
(161)
Net cash provided by (used in) operating activities of discontinued operations
(8)
Net cash provided by (used in) operating activities
(88)
(169)
Cash flows from investing activities:
 
 
Finance receivables originated or purchased
(145)
(1,205)
Finance receivables repaid
501 
1,354 
Proceeds on receivables sales, including securitizations
277 
59 
Capital expenditures
(38)
(69)
Proceeds from sale of repossessed assets and properties
32 
68 
Other investing activities, net
12 
13 
Net cash provided by (used in) investing activities of continuing operations
639 
220 
Net cash provided by investing activities of discontinued operations
 
302 
Net cash provided by (used in) investing activities
639 
522 
Cash flows from financing activities:
 
 
Decrease in short-term debt
 
(1,612)
Proceeds from long-term lines of credit
 
2,970 
Proceeds from issuance of long-term debt
20 
16 
Principal payments on long-term debt
(936)
(578)
Dividends paid
(5)
(5)
Net cash provided by (used in) financing activities of continuing operations
(921)
791 
Effect of exchange rate changes on cash and equivalents
(13)
 
Net increase (decrease) in cash and equivalents
(383)
1,144 
Cash and equivalents at beginning of period
1,892 
547 
Cash and equivalents at end of period
1,509 
1,691 
Manufacturing Group
 
 
Cash flows from operating activities:
 
 
Net income (loss)
31 
139 
Income (loss) from discontinued operations
(4)
43 
Income (loss) from continuing operations
35 
96 
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities:
 
 
Dividends received from Finance group
125 
84 
Capital contributions paid to Finance group
(75)
 
Non-cash items:
 
 
Depreciation and amortization
82 
88 
Other, net
27 
26 
Deferred income taxes
16 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(76)
41 
Inventories
(207)
(245)
Other assets
46 
(29)
Accounts payable
184 
(97)
Accrued and other liabilities
(224)
(100)
Other operating activities, net
(6)
Net cash provided by (used in) operating activities of continuing operations
(66)
(134)
Net cash provided by (used in) operating activities of discontinued operations
(8)
Net cash provided by (used in) operating activities
(65)
(142)
Cash flows from investing activities:
 
 
Capital expenditures
(38)
(69)
Other investing activities, net
(37)
(20)
Net cash provided by (used in) investing activities of continuing operations
(75)
(89)
Net cash provided by investing activities of discontinued operations
 
302 
Net cash provided by (used in) investing activities
(75)
213 
Cash flows from financing activities:
 
 
Decrease in short-term debt
 
(869)
Proceeds from long-term lines of credit
 
1,230 
Principal payments on long-term debt
(11)
(35)
Intergroup financing
(150)
133 
Dividends paid
(5)
(5)
Net cash provided by (used in) financing activities of continuing operations
(166)
454 
Effect of exchange rate changes on cash and equivalents
(12)
(2)
Net increase (decrease) in cash and equivalents
(318)
523 
Cash and equivalents at beginning of period
1,748 
531 
Cash and equivalents at end of period
1,430 
1,054 
Finance Group
 
 
Cash flows from operating activities:
 
 
Net income (loss)
(39)
(53)
Income (loss) from continuing operations
(39)
(53)
Non-cash items:
 
 
Depreciation and amortization
Provision for losses on finance receivables held for investment
55 
76 
Portfolio losses on finance receivables
28 
10 
Other, net
 
Deferred income taxes
(29)
(121)
Changes in assets and liabilities:
 
 
Other assets
(4)
Accrued and other liabilities
(73)
89 
Net cash provided by (used in) operating activities of continuing operations
(50)
18 
Net cash provided by (used in) operating activities
(50)
18 
Cash flows from investing activities:
 
 
Finance receivables originated or purchased
(226)
(1,325)
Finance receivables repaid
660 
1,513 
Proceeds on receivables sales, including securitizations
277 
59 
Proceeds from sale of repossessed assets and properties
32 
68 
Other investing activities, net
28 
12 
Net cash provided by (used in) investing activities of continuing operations
771 
327 
Net cash provided by (used in) investing activities
771 
327 
Cash flows from financing activities:
 
 
Decrease in short-term debt
 
(743)
Proceeds from long-term lines of credit
 
1,740 
Proceeds from issuance of long-term debt
20 
16 
Principal payments on long-term debt
(925)
(543)
Intergroup financing
150 
(112)
Capital contributions paid to Finance group under Support Agreement
75 
 
Capital contributions paid to Cessna Export Finance Corporation
20 
 
Dividends paid
(125)
(84)
Net cash provided by (used in) financing activities of continuing operations
(785)
274 
Effect of exchange rate changes on cash and equivalents
(1)
Net increase (decrease) in cash and equivalents
(65)
621 
Cash and equivalents at beginning of period
144 
16 
Cash and equivalents at end of period
$ 79 
$ 637 
Basis of Presentation
Basis of Presentation
Note 1: Basis of Presentation
Our consolidated financial statements include the accounts of Textron Inc. and its majority-owned subsidiaries. We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information. Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 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.
Special Charges
Special Charges
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.
Share-Based Compensation
Share-Based Compensation
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        
 
Retirement Plans
Retirement Plans
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  
 
Discontinued Operations
Discontinued Operations
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.
Comprehensive Income
Comprehensive Income
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  
 
Income Tax Expense (Benefit)
Income Tax Expense (Benefit)
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.
Earnings per Share
Earnings per Share
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.
Accounts Receivable and Finance Receivables
Accounts Receivable and Finance Receivables
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.
Inventories
Inventories
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  
 
Debt
Debt
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.
Guarantees and Indemnifications
Guarantees and Indemnifications
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  
 
Commitments and Contingencies
Commitments and Contingencies
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.
Fair Values of Assets and Liabilities
Fair Values of Assets and Liabilities
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.
Derivatives
Derivatives
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 )
 
 
*   Represents a fair value hedge.
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.
Segment Information
Segment Information
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  
 
 
(a)   During the first quarter of 2009, we sold the assets of CESCOM, Cessna’s aircraft maintenance tracking service line, resulting in a pre-tax gain of $50 million.