TEXTRON INC, 10-K filed on 2/15/2013
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 29, 2012
Feb. 2, 2013
Jun. 29, 2012
Document and Entity Information
 
 
 
Entity Registrant Name
TEXTRON INC 
 
 
Entity Central Index Key
0000217346 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 29, 2012 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-29 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 7.0 
Entity Common Stock, Shares Outstanding
 
271,544,305 
 
Document Fiscal Year Focus
2012 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 29, 2012
Dec. 31, 2011
Jan. 1, 2011
Revenues
 
 
 
Manufacturing revenues
$ 12,022 
$ 11,172 
$ 10,307 
Finance revenues
215 
103 
218 
Total revenues
12,237 
11,275 
10,525 
Costs, expenses and other
 
 
 
Cost of sales
10,019 
9,308 
8,605 
Selling and administrative expense
1,168 
1,183 
1,231 
Interest expense
212 
246 
270 
Provision for losses on finance receivables
(3)
12 
143 
Valuation allowance on transfer of Golf Mortgage portfolio to held for sale
 
186 
 
Special charges
 
 
190 
Other losses, net
 
 
Total costs, expenses and other
11,396 
10,938 
10,439 
Income from continuing operations before income taxes
841 
337 
86 
Income tax expense (benefit)
260 
95 
(6)
Income from continuing operations
581 
242 
92 
Income (loss) from discontinued operations, net of income taxes
 
(6)
Net income
$ 589 
$ 242 
$ 86 
Basic earnings per share
 
 
 
Continuing operations (in dollars per share)
$ 2.07 
$ 0.87 
$ 0.33 
Discontinued operations (in dollars per share)
$ 0.03 
 
$ (0.02)
Basic earnings per share (in dollars per share)
$ 2.10 
$ 0.87 
$ 0.31 
Diluted earnings per share
 
 
 
Continuing operations (in dollars per share)
$ 1.97 
$ 0.79 
$ 0.30 
Discontinued operations (in dollars per share)
$ 0.03 
 
$ (0.02)
Diluted earnings per share (in dollars per share)
$ 2.00 
$ 0.79 
$ 0.28 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 29, 2012
Dec. 31, 2011
Jan. 1, 2011
Consolidated Statements of Comprehensive Income (Loss)
 
 
 
Net income
$ 589 
$ 242 
$ 86 
Other comprehensive income (loss), net of tax:
 
 
 
Pension adjustments, net of reclassifications
(146)
(286)
(71)
Deferred gains/losses on hedge contracts, net of reclassifications
(1)
(20)
Foreign currency translation adjustment
(3)
(2)
Recognition of currency translation loss (see Note 11)
 
 
74 
Comprehensive income (loss)
$ 444 
$ (67)
$ 91 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 29, 2012
Dec. 31, 2011
Assets
 
 
Cash and equivalents
$ 1,413 
$ 885 
Inventories
2,712 
2,402 
Property, plant and equipment, net
2,149 
1,996 
Total assets
13,033 
13,615 
Liabilities
 
 
Accrued liabilities
1,956 
1,952 
Total liabilities
10,042 
10,870 
Shareholders' equity
 
 
Common stock (282.6 million and 279.1 million shares issued, respectively, and 271.3 million and 278.9 million shares outstanding, respectively)
35 
35 
Capital surplus
1,177 
1,081 
Retained earnings
3,824 
3,257 
Accumulated other comprehensive loss
(1,770)
(1,625)
Total shareholders' equity including cost of treasury shares
3,266 
2,748 
Less cost of treasury shares
275 
Total shareholders' equity
2,991 
2,745 
Total liabilities and shareholders' equity
13,033 
13,615 
Manufacturing group
 
 
Assets
 
 
Cash and equivalents
1,378 
871 
Accounts receivable, net
829 
856 
Inventories
2,712 
2,402 
Other current assets
470 
1,134 
Total current assets
5,389 
5,263 
Property, plant and equipment, net
2,149 
1,996 
Goodwill
1,649 
1,635 
Other assets
1,524 
1,508 
Total assets
10,711 
10,402 
Liabilities
 
 
Current portion of long-term debt
535 
146 
Accounts payable
1,021 
833 
Accrued liabilities
1,956 
1,952 
Total current liabilities
3,512 
2,931 
Other liabilities
2,798 
2,826 
Long-term debt
1,766 
2,313 
Debt
2,301 
2,459 
Total liabilities
8,076 
8,070 
Finance group
 
 
Assets
 
 
Cash and equivalents
35 
14 
Finance receivables held for investment, net
1,850 
2,321 
Finance receivables held for sale
140 
418 
Other assets
297 
460 
Total assets
2,322 
3,213 
Liabilities
 
 
Other liabilities
279 
333 
Due to Manufacturing group
493 
Debt
1,686 
1,974 
Total liabilities
$ 1,966 
$ 2,800 
Consolidated Balance Sheets (Parenthetical)
Dec. 29, 2012
Dec. 31, 2011
Consolidated Balance Sheets
 
 
Common stock, shares issued
282,600,000 
279,100,000 
Common stock, shares outstanding
271,263,000 
278,873,000 
Consolidated Statements of Shareholders' Equity (USD $)
In Millions, unless otherwise specified
Total
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Loss
Balance at Jan. 02, 2010
$ 2,826 
$ 35 
$ 1,369 
$ 2,973 
$ (230)
$ (1,321)
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income
86 
 
 
86 
 
 
Other comprehensive income (loss)
 
 
 
 
Dividends declared ($0.08 per share)
(22)
 
 
(22)
 
 
Share-based compensation activity
77 
 
(68)
 
145 
 
Balance at Jan. 01, 2011
2,972 
35 
1,301 
3,037 
(85)
(1,316)
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income
242 
 
 
242 
 
 
Other comprehensive income (loss)
(309)
 
 
 
 
(309)
Dividends declared ($0.08 per share)
(22)
 
 
(22)
 
 
Purchases/conversions of convertible notes
(182)
 
(179)
 
(3)
 
Amendment of call option/warrant transactions and purchase of capped call
(30)
 
(30)
 
 
 
Share-based compensation activity
74 
 
(11)
 
85 
 
Balance at Dec. 31, 2011
2,745 
35 
1,081 
3,257 
(3)
(1,625)
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income
589 
 
 
589 
 
 
Other comprehensive income (loss)
(145)
 
 
 
 
(145)
Dividends declared ($0.08 per share)
(22)
 
 
(22)
 
 
Share-based compensation activity
96 
 
96 
 
 
 
Purchases of common stock
(272)
 
 
 
(272)
 
Balance at Dec. 29, 2012
$ 2,991 
$ 35 
$ 1,177 
$ 3,824 
$ (275)
$ (1,770)
Consolidated Statements of Shareholders' Equity (Parenthetical)
3 Months Ended 12 Months Ended
Dec. 29, 2012
Sep. 29, 2012
Jun. 30, 2012
Mar. 31, 2012
Dec. 31, 2011
Oct. 1, 2011
Jul. 2, 2011
Apr. 2, 2011
Dec. 29, 2012
Dec. 31, 2011
Jan. 1, 2011
Consolidated Statements of Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Dividends declared, per share (in dollars per share)
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.02 
$ 0.08 
$ 0.08 
$ 0.08 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 29, 2012
Dec. 31, 2011
Jan. 1, 2011
Cash flows from operating activities
 
 
 
Net income (loss)
$ 589 
$ 242 
$ 86 
Less: Income (loss) from discontinued operations
 
(6)
Income (loss) from continuing operations
581 
242 
92 
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
 
 
 
Dividends received from Finance group
 
 
Capital contributions paid to Finance group
 
 
Non-cash items:
 
 
 
Depreciation and amortization
383 
403 
393 
Provision for losses on finance receivables held for investment
(3)
12 
143 
Portfolio losses on finance receivables
68 
102 
112 
Valuation allowance on finance receivables held for sale
(76)
202 
Goodwill and other asset impairment charges
 
59 
19 
Deferred income taxes
171 
81 
69 
Other, net
97 
166 
109 
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
32 
36 
(1)
Inventories
(316)
(127)
(10)
Other assets
85 
76 
99 
Accounts payable
179 
211 
54 
Accrued and other liabilities
(122)
(105)
(249)
Pension, net
(240)
(474)
(269)
Captive finance receivables, net
96 
236 
424 
Other operating activities, net
 
(52)
 
Net cash provided by (used in) operating activities of continuing operations
935 
1,068 
993 
Net cash used in operating activities of discontinued operations
(8)
(5)
(9)
Net cash provided by (used in) operating activities
927 
1,063 
984 
Cash flows from investing activities
 
 
 
Finance receivables repaid
599 
824 
1,635 
Finance receivables originated or purchased
(22)
(187)
(450)
Proceeds on receivables sales
116 
421 
528 
Capital expenditures
(480)
(423)
(270)
Proceeds from collection on notes receivable from a prior disposition
 
58 
 
Net cash used in acquisitions
(11)
(14)
(57)
Proceeds from sale of repossessed assets and properties
133 
109 
129 
Other investing activities, net
43 
55 
34 
Net cash provided by (used in) investing activities
378 
843 
1,549 
Cash flows from financing activities
 
 
 
Principal payments on long-term and nonrecourse debt
(615)
(785)
(2,241)
Net proceeds from issuance of long-term debt
106 
926 
231 
Intergroup financing
 
 
Payments on long-term lines of credit
 
(1,440)
(1,467)
Settlement of convertible notes
(2)
(580)
 
Capital contributions paid to Finance group under Support Agreement
 
 
Capital contributions paid to Cessna Export Finance Corp.
 
 
Amendment of call option/warrant transactions and purchase of capped call
 
(30)
 
Purchases of Textron common stock
(272)
 
 
Dividends paid
(17)
(22)
(22)
Other financing activities
19 
(20)
Net cash provided by (used in) financing activities
(781)
(1,951)
(3,493)
Effect of exchange rate changes on cash and equivalents
(1)
(1)
Net increase (decrease) in cash and equivalents
528 
(46)
(961)
Cash and equivalents at beginning of year
885 
931 
1,892 
Cash and equivalents at end of year
1,413 
885 
931 
Manufacturing Group
 
 
 
Cash flows from operating activities
 
 
 
Net income (loss)
542 
464 
314 
Less: Income (loss) from discontinued operations
 
(6)
Income (loss) from continuing operations
534 
464 
320 
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
 
 
 
Dividends received from Finance group
345 
179 
505 
Capital contributions paid to Finance group
(240)
(182)
(383)
Non-cash items:
 
 
 
Depreciation and amortization
358 
371 
362 
Goodwill and other asset impairment charges
 
57 
18 
Deferred income taxes
102 
197 
131 
Other, net
97 
166 
110 
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
32 
36 
(1)
Inventories
(300)
(132)
(11)
Other assets
99 
70 
72 
Accounts payable
179 
211 
54 
Accrued and other liabilities
(7)
(149)
(170)
Pension, net
(241)
(475)
(277)
Other operating activities, net
 
(52)
 
Net cash provided by (used in) operating activities of continuing operations
958 
761 
730 
Net cash used in operating activities of discontinued operations
(8)
(5)
(9)
Net cash provided by (used in) operating activities
950 
756 
721 
Cash flows from investing activities
 
 
 
Capital expenditures
(480)
(423)
(270)
Proceeds from collection on notes receivable from a prior disposition
 
58 
 
Net cash used in acquisitions
(11)
(14)
(57)
Other investing activities, net
15 
(44)
(26)
Net cash provided by (used in) investing activities
(476)
(423)
(353)
Cash flows from financing activities
 
 
 
Principal payments on long-term and nonrecourse debt
(189)
(29)
(130)
Net proceeds from issuance of long-term debt
 
496 
 
Intergroup financing
490 
(175)
98 
Payments on long-term lines of credit
 
 
(1,167)
Settlement of convertible notes
(2)
(580)
 
Amendment of call option/warrant transactions and purchase of capped call
 
(30)
 
Purchases of Textron common stock
(272)
 
 
Dividends paid
(17)
(22)
(22)
Other financing activities
19 
(20)
Net cash provided by (used in) financing activities
29 
(360)
(1,215)
Effect of exchange rate changes on cash and equivalents
 
(3)
Net increase (decrease) in cash and equivalents
507 
(27)
(850)
Cash and equivalents at beginning of year
871 
898 
1,748 
Cash and equivalents at end of year
1,378 
871 
898 
Finance Group
 
 
 
Cash flows from operating activities
 
 
 
Net income (loss)
47 
(222)
(228)
Income (loss) from continuing operations
47 
(222)
(228)
Non-cash items:
 
 
 
Depreciation and amortization
25 
32 
31 
Provision for losses on finance receivables held for investment
(3)
12 
143 
Portfolio losses on finance receivables
68 
102 
112 
Valuation allowance on finance receivables held for sale
(76)
202 
Goodwill and other asset impairment charges
 
 
Deferred income taxes
69 
(116)
(62)
Other, net
 
 
(1)
Changes in assets and liabilities:
 
 
 
Other assets
(11)
10 
32 
Accrued and other liabilities
(115)
44 
(79)
Pension, net
Net cash provided by (used in) operating activities of continuing operations
65 
(35)
Net cash provided by (used in) operating activities
65 
(35)
Cash flows from investing activities
 
 
 
Finance receivables repaid
1,004 
1,289 
2,348 
Finance receivables originated or purchased
(331)
(471)
(866)
Proceeds on receivables sales
116 
476 
655 
Proceeds from sale of repossessed assets and properties
133 
109 
129 
Other investing activities, net
12 
50 
39 
Net cash provided by (used in) investing activities
934 
1,453 
2,305 
Cash flows from financing activities
 
 
 
Principal payments on long-term and nonrecourse debt
(426)
(756)
(2,111)
Net proceeds from issuance of long-term debt
106 
430 
231 
Intergroup financing
(493)
167 
(111)
Payments on long-term lines of credit
 
(1,440)
(300)
Capital contributions paid to Finance group under Support Agreement
240 
182 
383 
Capital contributions paid to Cessna Export Finance Corp.
 
60 
30 
Dividends paid
(345)
(179)
(505)
Net cash provided by (used in) financing activities
(918)
(1,536)
(2,383)
Effect of exchange rate changes on cash and equivalents
 
(1)
Net increase (decrease) in cash and equivalents
21 
(19)
(111)
Cash and equivalents at beginning of year
14 
33 
144 
Cash and equivalents at end of year
$ 35 
$ 14 
$ 33 
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

Note 1. Summary of Significant Accounting Policies

 

Principles of Consolidation and Financial Statement Presentation

Our Consolidated Financial Statements include the accounts of Textron Inc. and its majority-owned subsidiaries.  Our financings are conducted through two separate borrowing groups.  The Manufacturing group consists of Textron Inc. consolidated with its majority-owned subsidiaries that operate in the Cessna, Bell, Textron Systems and Industrial segments.  The Finance group, which also is the Finance segment, consists of Textron Financial Corporation (TFC), its consolidated subsidiaries and three other finance subsidiaries owned by Textron 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.

 

Our Finance group provides captive financing for retail purchases and leases for new and used aircraft and equipment manufactured by our Manufacturing group.  In the Consolidated Statements of Cash Flows, cash received from customers or from the sale of receivables is reflected as operating activities when received from third parties.  However, in the cash flow information provided for the separate borrowing groups, cash flows related to captive financing activities are reflected based on the operations of each group.  For example, when product is sold by our Manufacturing group to a customer and is financed by the Finance group, the origination of the finance receivable is recorded within investing activities as a cash outflow in the Finance group’s statement of cash flows.  Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the Finance group on the customer’s behalf is recorded within operating cash flows as a cash inflow.  Although cash is transferred between the two borrowing groups, there is no cash transaction reported in the consolidated cash flows at the time of the original financing.  These captive financing activities, along with all significant intercompany transactions, are reclassified or eliminated in consolidation.

 

Collaborative Arrangements

Our Bell segment has a strategic alliance agreement with The Boeing Company (Boeing) to provide engineering, development and test services related to the V-22 aircraft, as well as to produce the V-22 aircraft, under a number of separate contracts with the U.S. Government (V-22 Contracts).  The alliance created by this agreement is not a legal entity and has no employees, no assets and no true operations.  This agreement creates contractual rights and does not represent an entity in which we have an equity interest.  We account for this alliance as a collaborative arrangement with Bell and Boeing reporting costs incurred and revenues generated from transactions with the U.S. Government in each company’s respective income statement.  Neither Bell nor Boeing is considered to be the principal participant for the transactions recorded under this agreement.  Profits on cost-plus contracts are allocated between Bell and Boeing on a 50%-50% basis.  Negotiated profits on fixed-price contracts are also allocated 50%-50%; however, Bell and Boeing are each responsible for their own cost overruns and are entitled to retain any cost underruns.  Based on the contractual arrangement established under the alliance, Bell accounts for its rights and obligations under the specific requirements of the V-22 Contracts allocated to Bell under the work breakdown structure.  We account for all of our rights and obligations, including warranty, product and any contingent liabilities, under the specific requirements of the V-22 Contracts allocated to us under the agreement.  Revenues and cost of sales reflect our performance under the V-22 Contracts with revenues recognized using the units-of-delivery method.  We include all assets used in performance of the V-22 Contracts that we own, including inventory and unpaid receivables and all liabilities arising from our obligations under the V-22 Contracts in our Consolidated Balance Sheets.

 

Use of Estimates

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

 

During 2012, 2011 and 2010, we changed our estimates of revenues and costs on certain long-term contracts that are accounted for under the percentage-of-completion method of accounting.  These changes in estimates increased income from continuing operations before income taxes in 2012, 2011 and 2010 by $15 million, $54 million and $78 million, respectively, ($9 million, $34 million and $49 million after tax, or $0.03, $0.11 and $0.16 per diluted share, respectively).  For 2012, 2011 and 2010, the gross favorable program profit adjustments totaled $88 million, $83 million and $98 million, respectively.  For 2012, 2011 and 2010, the gross unfavorable program profit adjustments totaled $73 million, $29 million and $20 million, respectively.

 

Cash and Equivalents

Cash and equivalents consist of cash and short-term, highly liquid investments with original maturities of three months or less.

 

Revenue Recognition

We generally recognize revenue for the sale of products, which are not under long-term contracts, upon delivery.  For commercial aircraft, delivery is upon completion of manufacturing, customer acceptance, and the transfer of the risk and rewards of ownership.  Taxes collected from customers and remitted to government authorities are recorded on a net basis.

 

When a sale arrangement involves multiple deliverables, such as sales of products that include customization and other services, we evaluate the arrangement to determine whether there are separate items that are required to be delivered under the arrangement that qualify as separate units of accounting.  These arrangements typically involve the customization services we offer to customers who purchase Bell helicopters, and the services generally are provided within the first six months after the customer accepts the aircraft and assumes risk of loss.  We consider the aircraft and the customization services to be separate units of accounting and allocate contract price between the two on a relative selling price basis using the best evidence of selling price for each of the arrangement deliverables, typically by reference to the price charged when the same or similar items are sold separately by us, taking into consideration any performance, cancellation, termination or refund-type provisions.  We recognize revenue when the recognition criteria for each unit of accounting are met.

 

Long-Term Contracts — Revenues under long-term contracts are accounted for under the percentage-of-completion method of accounting.  Under this method, we estimate profit as the difference between the total estimated revenues and cost of a contract.  We then recognize that estimated profit over the contract term based on either the units-of-delivery method or the cost-to-cost method (which typically is used for development effort as costs are incurred), as appropriate under the circumstances.  Revenues under fixed-price contracts generally are recorded using the units-of-delivery method.  Revenues under cost-reimbursement contracts are recorded using the cost-to-cost method.

 

Long-term contract profits are based on estimates of total contract cost and revenues utilizing current contract specifications, expected engineering requirements, the achievement of contract milestones and product deliveries.  Certain contracts are awarded with fixed-price incentive fees that also are considered when estimating revenues and profit rates.  Contract costs typically are incurred over a period of several years, and the estimation of these costs requires substantial judgment.  Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals.  We update our projections of costs at least semiannually or when circumstances significantly change.  When adjustments are required, any changes from prior estimates are recognized using the cumulative catch-up method with the impact of the change from inception-to-date recorded in the current period.  Anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable.

 

Finance Revenues — Finance revenues include interest on finance receivables, direct loan origination costs and fees received, and capital and leveraged lease earnings, as well as portfolio gains/losses.  Portfolio gains/losses include impairment charges related to repossessed assets and properties and gains/losses on the sale or early termination of finance assets.  Revenues on direct loan origination costs and fees received are deferred and amortized to finance revenues over the contractual lives of the respective receivables and credit lines using the interest method.  When receivables are sold or prepaid, unamortized amounts are recognized in finance revenues.

 

We recognize interest using the interest method, which provides a constant rate of return over the terms of the receivables.  Accrual of interest income is suspended if credit quality indicators suggest full collection of principal and interest is doubtful.  In addition, we automatically suspend the accrual of interest income for accounts that are contractually delinquent by more than three months unless collection is not doubtful.  Cash payments on nonaccrual accounts, including finance charges, generally are applied to reduce the net investment balance.  We resume the accrual of interest when the loan becomes contractually current through payment according to the original terms of the loan or, if a loan has been modified, following a period of performance under the terms of the modification, provided we conclude that collection of all principal and interest is no longer doubtful.  Previously suspended interest income is recognized at that time.

 

Finance Receivables Held for Investment and Allowance for Losses

Finance receivables are classified as held for investment when we have the intent and the ability to hold the receivable for the foreseeable future or until maturity or payoff.  Finance receivables held for investment are generally recorded at the amount of outstanding principal less allowance for losses.

 

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

 

We also establish an allowance for losses to cover probable but specifically unknown losses existing in the portfolio.  For the Captive product line, the allowance is established as a percentage of non-recourse finance receivables, which have not been identified as requiring specific reserves.  The percentage is based on a combination of factors, including historical loss experience, current delinquency and default trends, collateral values and both general economic and specific industry trends.

 

Finance receivables held for investment are charged off at the earlier of the date the collateral is repossessed or when no payment has been received for six months, unless management deems the receivable collectible.  Repossessed assets are recorded at their fair value, less estimated cost to sell.

 

Finance Receivables Held for Sale

Finance receivables are classified as held for sale based on the determination that we no longer intend to hold the receivables for the foreseeable future, until maturity or payoff, or we no longer have the ability to hold to maturity.  Our decision to classify certain finance receivables as held for sale is based on a number of factors, including, but not limited to, contractual duration, type of collateral, credit strength of the borrowers, interest rates and perceived marketability of the receivables.

 

Finance receivables held for sale are carried at the lower of cost or fair value.  At the time of transfer to the held for sale classification, we establish a valuation allowance for any shortfall between the carrying value and fair value.  In addition, any allowance for loan losses previously allocated to these finance receivables is transferred to the valuation allowance account, which is netted with finance receivables held for sale on the balance sheet.  This valuation allowance is adjusted quarterly.  Fair value changes can occur based on market interest rates, market liquidity, and changes in the credit quality of the borrower and value of underlying loan collateral.

 

Inventories

Inventories are stated at the lower of cost or estimated net realizable value.  We value our inventories generally using the first-in, first-out (FIFO) method or the last-in, first-out (LIFO) method for certain qualifying inventories where LIFO provides a better matching of costs and revenues. We determine costs for our commercial helicopters on an average cost basis by model considering the expended and estimated costs for the current production release.  Inventoried costs related to long-term contracts are stated at actual production costs, including allocable operating overhead, advances to suppliers, and, in the case of contracts with the U.S. Government, allocable research and development and general and administrative expenses.  Since our inventoried costs include amounts related to contracts with long production cycles, a portion of these costs is not expected to be realized within one year.  Pursuant to contract provisions, agencies of the U.S. Government have title to, or security interest in, inventories related to such contracts as a result of advances, performance-based payments and progress payments.  Such advances and payments are reflected as an offset against the related inventory balances.  Customer deposits are recorded against inventory when the right of offset exists.  All other customer deposits are recorded in accrued liabilities.

 

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and are depreciated primarily using the straight-line method.  We capitalize expenditures for improvements that increase asset values and extend useful lives.

 

Intangible and Other Long-Lived Assets

At acquisition, we estimate and record the fair value of purchased intangible assets primarily using a discounted cash flow analysis of anticipated cash flows reflecting incremental revenues and/or cost savings resulting from the acquired intangible asset using market participant assumptions.  Amortization of intangible assets with finite lives is recognized over their estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized.  Approximately 37% of our gross intangible assets are amortized using the straight-line method, with the remaining assets, primarily customer agreements, amortized based on the cash flow streams used to value the asset.  Long-lived assets, including intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  If the carrying value of the asset held for use exceeds the sum of the undiscounted expected future cash flows, the carrying value of the asset generally is written down to fair value.  Long-lived assets held for sale are stated at the lower of cost or fair value less cost to sell.  Fair value is determined using pertinent market information, including estimated future discounted cash flows.

 

Goodwill

We evaluate the recoverability of goodwill annually in the fourth quarter or more frequently if events or changes in circumstances, such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of a reporting unit might be impaired.  The reporting unit represents the operating segment unless discrete financial information is prepared and reviewed by segment management for businesses one level below that operating segment, in which case such component is the reporting unit.  In certain instances, we have aggregated components of an operating segment into a single reporting unit based on similar economic characteristics.

 

We may perform a qualitative assessment based on economic, industry and company-specific factors as the initial step in our annual goodwill impairment test for selected reporting units.  If we determine that it is more likely than not that a reporting unit’s fair value exceeds its carrying value, we do not perform a quantitative assessment.  For all other reporting units, we calculate the fair value of each reporting unit, primarily using discounted cash flows.  The discounted cash flows incorporate assumptions for the unit’s short- and long-term revenue growth rates, operating margins and discount rates, which represent our best estimates of current and forecasted market conditions, cost structure, anticipated net cost reductions, and the implied rate of return that we believe a market participant would require for an investment in a business having similar risks and business characteristics to the reporting unit being assessed.  If the reporting unit’s estimated fair value exceeds its carrying value, the reporting unit is not impaired, and no further analysis is performed.  Otherwise, the amount of the impairment must be determined by comparing the carrying amount of the reporting unit goodwill to the implied fair value of that goodwill.  The implied fair value of goodwill is determined by assigning a fair value to all of the reporting unit’s assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination at fair value.  If the carrying amount of the reporting unit goodwill exceeds the implied fair value, an impairment loss would be recognized in an amount equal to that excess.

 

Pension and Postretirement Benefit Obligations

We maintain various pension and postretirement plans for our employees globally.  These plans include significant pension and postretirement benefit obligations, which are calculated based on actuarial valuations.  Key assumptions used in determining these obligations and related expenses include expected long-term rates of return on plan assets, discount rates and healthcare cost projections.  We evaluate and update these assumptions annually in consultation with third-party actuaries and investment advisors.  We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increases.  We recognize the overfunded or underfunded status of our pension and postretirement plans in the Consolidated Balance Sheets and recognize changes in the funded status of our defined benefit plans in comprehensive income in the year in which they occur. Actuarial gains and losses that are not immediately recognized as net periodic pension cost are recognized as a component of other comprehensive (loss) income (OCI) and are amortized into net periodic pension cost in future periods.

 

Derivative Financial Instruments

We are exposed to market risk primarily from changes in interest rates and currency exchange rates.  We do not hold or issue derivative financial instruments for trading or speculative purposes.  To manage the volatility relating to our exposures, we net these exposures on a consolidated basis to take advantage of natural offsets.  For the residual portion, we enter into various derivative transactions pursuant to our policies in areas such as counterparty exposure and hedging practices.  All derivative instruments are reported at fair value in the Consolidated Balance Sheets.  Designation to support hedge accounting is performed on a specific exposure basis.  For financial instruments qualifying as fair value hedges, we record changes in fair value in earnings, offset, in part or in whole, by corresponding changes in the fair value of the underlying exposures being hedged.  For cash flow hedges, we record changes in the fair value of derivatives (to the extent they are effective as hedges) in OCI, net of deferred taxes.  Changes in fair value of derivatives not qualifying as hedges are recorded in earnings.

 

Foreign currency denominated assets and liabilities are translated into U.S. dollars.  Adjustments from currency rate changes are recorded in the cumulative translation adjustment account in shareholders’ equity until the related foreign entity is sold or substantially liquidated.  We use foreign currency financing transactions to effectively hedge long-term investments in foreign operations with the same corresponding currency.  Foreign currency gains and losses on the hedge of the long-term investments are recorded in the cumulative translation adjustment account with the offset recorded as an adjustment to debt.

 

Product Liabilities

We accrue for product liability claims and related defense costs when a loss is probable and reasonably estimable.  Our estimates are generally based on the specifics of each claim or incident and our best estimate of the probable loss using historical experience.

 

Environmental Liabilities and Asset Retirement Obligations

Liabilities for environmental matters are recorded on a site-by-site basis when it is probable that an obligation has been incurred and the cost can be reasonably estimated.  We estimate our accrued environmental liabilities using currently available facts, existing technology, and presently enacted laws and regulations, all of which are subject to a number of factors and uncertainties.  Our environmental liabilities are not discounted and do not take into consideration possible future insurance proceeds or significant amounts from claims against other third parties.

 

We have incurred asset retirement obligations primarily related to costs to remove and dispose of underground storage tanks and asbestos materials used in insulation, adhesive fillers and floor tiles.  There is no legal requirement to remove these items, and there currently is no plan to remodel the related facilities or otherwise cause the impacted items to require disposal.  Since these asset retirement obligations are not estimable, there is no related liability recorded in the Consolidated Balance Sheets.

 

Warranty and Product Maintenance Contracts

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 revenues are 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.

 

Research and Development Costs

Our customer-funded research and development costs are charged directly to the related contracts, which primarily consist of U.S. Government contracts.  In accordance with government regulations, we recover a portion of company-funded research and development costs through overhead rate charges on our U.S. Government contracts.  Research and development costs that are not reimbursable under a contract with the U.S. Government or another customer are charged to expense as incurred.  Company-funded research and development costs were $584 million, $525 million, and $403 million in 2012, 2011 and 2010, respectively, and are included in cost of sales.

 

Income Taxes

Deferred income tax balances reflect the effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and their tax bases, as well as from net operating losses and tax credit carryforwards, and are stated at enacted tax rates in effect for the year taxes are expected to be paid or recovered.  Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years.  We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including the future reversal of existing taxable temporary differences, taxable income in carryback years, available tax planning strategies and estimated future taxable income.  We recognize net tax-related interest and penalties for continuing operations in income tax expense.

 

Discontinued Operations
Discontinued Operations

Note 2. Discontinued Operations

 

In pursuing our business strategies, we have periodically divested certain non-core businesses. For several previously-disposed businesses, we have retained certain assets and liabilities. All residual activity relating to our previously-disposed businesses that meet the appropriate criteria is included in discontinued operations.

 

In connection with the 2008 sale of the Fluid & Power business unit, we received a six-year note with a face value of $28 million and a five-year note with a face value of $30 million, which were both recorded in the Consolidated Balance Sheet net of a valuation allowance.  In the fourth quarter of 2011, we received full payment of both of these notes plus interest, resulting in a gain of $52 million that was recorded in Other losses, net.

Goodwill and Intangible Assets
Goodwill and Intangible Assets

Note 3. Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill by segment are as follows:

 

(In millions)

 

Cessna

 

Bell

 

Textron
Systems

 

Industrial

 

Total

 

Balance at January 2, 2010

 

$

322

 

$

30

 

$

958

 

$

312

 

$

1,622

 

Acquisitions

 

 

1

 

16

 

5

 

22

 

Foreign currency translation

 

 

 

 

(12

)

(12

)

Balance at January 1, 2011

 

322

 

31

 

974

 

305

 

1,632

 

Acquisitions

 

 

 

 

5

 

5

 

Foreign currency translation

 

 

 

 

(2

)

(2

)

Balance at December 31, 2011

 

322

 

31

 

974

 

308

 

1,635

 

Acquisitions

 

4

 

 

 

6

 

10

 

Foreign currency translation

 

 

 

 

4

 

4

 

Balance at December 29, 2012

 

$

326

 

$

31

 

$

974

 

$

318

 

$

1,649

 

 

Our intangible assets are summarized below:

 

 

 

 

 

 

December 29, 2012

 

 

December 31, 2011

 

(Dollars in millions)

 

Weighted-Average
Amortization
Period (in years)

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Customer agreements and contractual relationships

 

15

 

 

$

330

 

  $

(139)

 

$

191

 

 

$

330

 

  $

(112)

 

$

218

 

Patents and technology

 

10

 

 

84

 

(55)

 

29

 

 

95

 

(59)

 

36

 

Trademarks

 

18

 

 

36

 

(22)

 

14

 

 

36

 

(19)

 

17

 

Other

 

9

 

 

20

 

(16)

 

4

 

 

22

 

(16)

 

6

 

Total

 

 

 

 

$

470

 

  $

(232)

 

$

238

 

 

$

483

 

  $

(206)

 

$

277

 

 

In the fourth quarter of 2011, we recorded a $41 million impairment charge to write down $37 million in customer agreements and contractual relationships and $4 million in patents and technology.  See Note 9 for more information on this charge.

 

Amortization expense totaled $40 million, $51 million and $52 million in 2012, 2011 and 2010, respectively.  Amortization expense is estimated to be approximately $36 million, $35 million, $34 million, $28 million and $24 million in 2013, 2014, 2015, 2016 and 2017, respectively.

 

Accounts Receivable and Finance Receivables
Accounts Receivable and Finance Receivables

Note 4. Accounts Receivable and Finance Receivables

 

Accounts Receivable

Accounts receivable is composed of the following:

 

(In millions)

 

December 29,
2012

 

 

December 31,
2011

 

Commercial

 

   $

534

 

 

   $

528

 

U.S. Government contracts

 

314

 

 

346

 

 

 

848

 

 

874

 

Allowance for doubtful accounts

 

(19

)

 

(18

)

Total

 

   $

829

 

 

   $

856

 

 

We have unbillable receivables primarily on U.S. Government contracts that arise when the revenues we have appropriately recognized based on performance cannot be billed yet under terms of the contract.  Unbillable receivables within accounts receivable totaled $149 million at December 29, 2012 and $192 million at December 31, 2011.

 

Finance Receivables

Finance receivables by product line, which includes both finance receivables held for investment and finance receivables held for sale, are presented in the following table.

 

(In millions)

 

December 29,
2012

 

 

December 31,
2011

 

Captive

 

$

1,704

 

 

$

1,945

 

Non-captive:

 

 

 

 

 

 

Golf Mortgage

 

140

 

 

381

 

Structured Capital

 

122

 

 

208

 

Timeshare

 

100

 

 

318

 

Other liquidating

 

8

 

 

43

 

Total finance receivables

 

2,074

 

 

2,895

 

Less: Allowance for losses

 

84

 

 

156

 

Less: Finance receivables held for sale

 

140

 

 

418

 

Total finance receivables held for investment, net

 

$

1,850

 

 

$

2,321

 

 

Captive primarily includes loans and finance leases provided to purchasers of new and used Cessna aircraft and Bell helicopters and also includes loans and finance leases secured by used aircraft produced by other manufacturers.  These agreements typically have initial terms ranging from five to ten years and amortization terms ranging from eight to fifteen years.  The average balance of loans and finance leases in Captive was $1 million at December 29, 2012.  Loans generally require the customer to pay a significant down payment, along with periodic scheduled principal payments that reduce the outstanding balance through the term of the loan.  Finance leases with no significant residual value at the end of the contractual term are classified as loans, as their legal and economic substance is more equivalent to a secured borrowing than a finance lease with a significant residual value.  Captive also includes, to a limited extent, finance leases provided to purchasers of new E-Z-GO and Jacobsen golf and turf-care equipment.

 

Golf Mortgage primarily includes golf course mortgages and also includes mortgages secured by hotels and marinas, which are secured by real property and are generally limited to 75% or less of the property’s appraised market value at loan origination.  These mortgages typically have initial terms ranging from five to ten years with amortization periods from twenty to thirty years.  As of December 29, 2012, loans in Golf Mortgage had an average balance of $7 million and a weighted-average contractual maturity of two years.  All loans in this portfolio are classified as held for sale.  Structured Capital primarily includes leveraged leases secured by the ownership of the leased equipment and real property.  Timeshare includes pools of timeshare interval resort notes that typically have terms of ten to twenty years, as well as term loans secured by timeshare interval inventory.

 

Our finance receivables are diversified across geographic region and borrower industry.  At December 29, 2012, 45% of our finance receivables were distributed throughout the U.S. compared with 54% at the end of 2011.  Finance receivables held for investment are composed primarily of loans.  At December 29, 2012 and December 31, 2011, these finance receivables included $341 million and $559 million, respectively, of receivables, primarily in the Captive product line, that have been legally sold to special purpose entities (SPEs), which are consolidated subsidiaries of TFC.  The assets of the SPEs are pledged as collateral for their debt, which is reflected as securitized on-balance sheet debt in Note 8.  Third-party investors have no legal recourse to TFC beyond the credit enhancement provided by the assets of the SPEs.

 

We received total proceeds of $116 million and $476 million from the sale of finance receivables in 2012 and 2011, respectively. Total gains resulting from these sales were not material for 2012 and 2011.

 

Credit Quality Indicators and Nonaccrual Finance Receivables

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

 

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

 

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

 

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

 

 

 

December 29, 2012

 

 

December 31, 2011

 

(In millions)

 

Performing

 

Watchlist

 

Nonaccrual

 

Total

 

 

Performing

 

Watchlist

 

Nonaccrual

 

Total

 

Captive

 

$

1,476

 

$

130

 

$

98

 

$

1,704

 

 

$

1,558

 

$

251

 

$

136

 

$

1,945

 

Non-captive*

 

185

 

 

45

 

230

 

 

317

 

30

 

185

 

532

 

Total

 

$

1,661

 

$

130

 

$

143

 

$

1,934

 

 

$

1,875

 

$

281

 

$

321

 

$

2,477

 

% of Total

 

85.9%

 

6.7%

 

7.4%

 

 

 

 

75.7%

 

11.3%

 

13.0%

 

 

 

 

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

 

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

 

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

 

 

 

December 29, 2012

 

 

December 31, 2011

 

(In millions)

 

Less Than
31 Days
Past Due

 

31-60
Days
Past Due

 

61-90
Days
Past Due

 

Over
90 Days
Past Due

 

Total

 

 

Less Than
31 Days
Past Due

 

31-60
Days
Past Due

 

61-90
Days
Past Due

 

Over
90 Days
Past Due

 

Total

 

Captive

 

  $

 1,531

 

$

87

 

$

55

 

$

31

 

$

1,704

 

 

  $

1,758

 

$

69

 

$

43

 

$

75

 

$

 1,945

 

Non-captive

 

226

 

 

1

 

3

 

230

 

 

481

 

3

 

 

48

 

532

 

Total

 

  $

 1,757

 

$

87

 

$

56

 

$

34

 

$

1,934

 

 

  $

2,239

 

$

72

 

$

43

 

$

123

 

$

 2,477

 

 

We had no accrual status loans that were greater than 90 days past due at December 29, 2012 or December 31, 2011.  At December 29, 2012 and December 31, 2011, 60+ days contractual delinquency as a percentage of finance receivables held for investment was 4.65% and 6.70%, respectively.

 

Loan Modifications

Troubled debt restructurings occur when we have either modified the contract terms of finance receivables held for investment for borrowers experiencing financial difficulties or accepted a transfer of assets in full or partial satisfaction of the loan balance.  The types of modifications we typically make include extensions of the original maturity date of the contract, extensions of revolving borrowing periods, delays in the timing of required principal payments, deferrals of interest payments, advances to protect the value of our collateral and principal reductions contingent on full repayment prior to the maturity date.  The changes effected by modifications made during 2012 and 2011 to finance receivables held for investment were not material.

 

Impaired Loans

We evaluate individual finance receivables held for investment in non-homogeneous portfolios and larger accounts in homogeneous loan portfolios for impairment on a quarterly basis.  Finance receivables classified as held for sale are reflected at the lower of cost or fair value and are excluded from these evaluations.  A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators discussed above.  Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified.  If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification.  There was no significant interest income recognized on impaired loans in 2012 or 2011.

 

A summary of impaired finance receivables, excluding leveraged leases, at year end and the average recorded investment for the year is provided below:

 

 

 

 

Recorded Investment

 

 

 

 

 

 

 

 

(In millions)

 

Impaired
Loans with
No Related
Allowance for
Credit Losses

 

Impaired
Loans with
Related
Allowance for
Credit Losses

 

Total
Impaired
Loans

 

Unpaid
Principal
Balance

 

Allowance
For Losses On
Impaired Loans

 

Average
Recorded
Investment

 

December 29, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Captive

 

   $

61

 

   $

66

 

$

127

 

$

128

 

$

15

 

$

121

 

Non-captive

 

11

 

33

 

44

 

59

 

12

 

149

 

Total

 

   $

72

 

   $

99

 

$

171

 

$

187

 

$

27

 

$

270

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Captive

 

   $

47

 

   $

94

 

$

141

 

$

144

 

$

40

 

$

149

 

Non-captive

 

173

 

69

 

242

 

347

 

47

 

577

 

Total

 

   $

220

 

   $

163

 

$

383

 

$

491

 

$

87

 

$

726

 

 

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

 

A summary of the allowance for losses on finance receivables that are evaluated on an individual and on a collective basis is provided below.  The finance receivables reported in this table specifically exclude $122 million and $208 million of leveraged leases at December 29, 2012 and December 31, 2011, respectively, in accordance with authoritative accounting standards.

 

 

 

December 29, 2012

 

 

December 31, 2011

 

 

 

Finance
Receivables Evaluated

 

Allowance
Based on
Individual

 

Allowance
Based on
Collective

 

 

Finance
Receivables Evaluated

 

Allowance
Based on
Individual

 

Allowance
Based on
Collective

 

(In millions)

 

Individually

 

Collectively

 

Evaluation

 

Evaluation

 

 

Individually

 

Collectively

 

Evaluation

 

Evaluation

 

Captive

 

$

127

 

$

1,577

 

$

15

 

$

55

 

 

$

141

 

$

1,804

 

$

40

 

$

61

 

Non-captive

 

44

 

64

 

12

 

2

 

 

242

 

82

 

47

 

8

 

Total

 

$

171

 

$

1,641

 

$

27

 

$

57

 

 

$

383

 

$

  1,886

 

$

87

 

$

69

 

 

Allowance for Losses

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

 

(In millions)

 

Captive

 

Golf
Mortgage

 

Timeshare

 

Other
Liquidating

 

Total

 

Balance at January 1, 2011

 

$

123

 

$

79

 

$

106

 

$

34

 

$

342

 

Provision for losses

 

15

 

25

 

(26

)

(2

)

12

 

Charge-offs

 

(43

)

(27

)

(40

)

(14

)

(124

)

Recoveries

 

9

 

3

 

 

10

 

22

 

Transfers

 

(3

)

(80

)

 

(13

)

(96

)

Balance at December 31, 2011

 

$

101

 

$

 

$

40

 

$

15

 

$

156

 

Provision for losses

 

1

 

 

2

 

(6

)

(3

)

Charge-offs

 

(42

)

 

(32

)

(10

)

(84

)

Recoveries

 

10

 

 

1

 

4

 

15

 

Balance at December 29, 2012

 

$

70

 

$

 

$

11

 

$

3

 

$

84

 

 

Captive and Other Intercompany Financing

Our Finance group provides financing for retail purchases and leases for new and used aircraft and equipment manufactured by our Manufacturing group.  The captive finance receivables for these inventory sales that are included in the Finance group’s balance sheets are summarized below:

 

(In millions)

 

December 29,
2012

 

 

December 31,
2011

 

Loans

 

$

1,389

 

 

$

1,496

 

Finance leases

 

107

 

 

121

 

Total

 

$

1,496

 

 

$

1,617

 

 

In 2012, 2011 and 2010, our Finance group paid our Manufacturing group $309 million, $284 million and $416 million, respectively, related to the sale of Textron-manufactured products to third parties that were financed by the Finance group.  Our Cessna and Industrial segments also received proceeds in those years of $19 million, $2 million and $10 million, respectively, from the sale of equipment from their manufacturing operations to our Finance group for use under operating lease agreements.  Operating agreements specify that our Finance group has recourse to our Manufacturing group for certain uncollected amounts related to these transactions. At December 29, 2012 and December 31, 2011, finance receivables and operating leases subject to recourse to the Manufacturing group totaled $83 million and $88 million, respectively.  Our Manufacturing group has established reserves for losses on its balance sheet within accrued and other liabilities for the amounts it guarantees.

 

Textron lends TFC funds to pay down maturing debt.  The average interest rate on these borrowings was 4.3% and 5.0% during 2012 and 2011, respectively.  At December 29, 2012, there was no outstanding balance due to Textron under this arrangement, and at December 31, 2011, the outstanding balance due to Textron was $490 million.  These amounts are included in other current assets for the Manufacturing group and Due to Manufacturing group for the Finance group in the Consolidated Balance Sheets.

 

Finance Receivables Held for Sale

At the end of 2012 and 2011, $140 million and $418 million of finance receivables were classified as held for sale.  At December 29, 2012, finance receivables held for sale included the entire Golf Mortgage portfolio.  In 2011, we transferred $458 million of the remaining Golf Mortgage portfolio, net of an $80 million allowance for loan losses, from the held for investment classification to the held for sale classification.  These finance receivables were recorded at fair value at the time of the transfer, resulting in a $186 million charge recorded to Valuation allowance on transfer of Golf Mortgage portfolio to held for sale.  Also, in 2011, we transferred a total of $125 million of Timeshare finance receivables to the held for sale classification, based on an agreement to sell a portion of the portfolio that was sold in the fourth quarter of 2011 and interest in other portions of the portfolio.  We received proceeds of $109 million and $383 million in 2012 and 2011, respectively, from the sale of finance receivables held for sale and $207 million and $10 million, respectively, from payoffs and collections.

 

Inventories
Inventories

Note 5. Inventories

 

Inventories are composed of the following:

 

(In millions)

 

December 29,
2012

 

 

December 31,
2011

 

Finished goods

 

$

1,329

 

 

$

1,012

 

Work in process

 

2,247

 

 

2,202

 

Raw materials and components

 

437

 

 

399

 

 

 

4,013

 

 

3,613

 

Progress/milestone payments

 

(1,301

)

 

(1,211

)

Total

 

$

2,712

 

 

$

2,402

 

 

Inventories valued by the LIFO method totaled $1.1 billion and $1.0 billion at the end of 2012 and 2011, respectively, and the carrying values of these inventories would have been higher by approximately $435 million and $422 million, respectively, had our LIFO inventories been valued at current costs.  Inventories related to long-term contracts, net of progress/milestone payments, were $382 million and $414 million at the end of 2012 and 2011, respectively.

 

Property, Plant and Equipment, Net
Property, Plant and Equipment, Net

Note 6. Property, Plant and Equipment, Net

 

Our Manufacturing group’s property, plant and equipment, net are composed of the following:

 

(Dollars in millions)

 

Useful Lives
(in years)

 

 

December 29,
2012

 

 

December 31,
2011

 

Land and buildings

 

4 - 40

 

 

$

1,604

 

 

$

1,502

 

Machinery and equipment

 

1 - 15

 

 

3,822

 

 

3,591

 

 

 

 

 

 

5,426

 

 

5,093

 

Accumulated depreciation and amortization

 

 

 

 

(3,277

)

 

(3,097

)

Total

 

 

 

 

$

2,149

 

 

$

1,996

 

 

At the end of 2012 and 2011, assets under capital leases totaled $251 million and had accumulated amortization of $51 million and $47 million, respectively.  The Manufacturing group’s depreciation expense, which included amortization expense on capital leases, totaled $315 million, $317 million and $308 million in 2012, 2011 and 2010, respectively.

 

Accrued Liabilities
Accrued Liabilities

Note 7. Accrued Liabilities

 

The accrued liabilities of our Manufacturing group are summarized below:

 

(In millions)

 

 

 

 

December 29,
2012

 

 

December 31,
2011

 

Customer deposits

 

 

 

 

$

725

 

 

$

729

 

Salaries, wages and employer taxes

 

 

 

 

282

 

 

282

 

Current portion of warranty and product maintenance contracts

 

 

 

 

180

 

 

198

 

Deferred revenues

 

 

 

 

115

 

 

169

 

Retirement plans

 

 

 

 

80

 

 

80

 

Other

 

 

 

 

574

 

 

494

 

Total

 

 

 

 

$

1,956

 

 

$

1,952

 

 

Changes in our warranty and product maintenance contract liability are as follows:

 

(In millions)

 

2012

 

 

2011

 

2010

 

Accrual at beginning of year

 

$

224

 

 

$

242

 

$

263

 

Provision

 

255

 

 

223

 

189

 

Settlements

 

(250

)

 

(223

)

(231

)

Adjustments to prior accrual estimates*

 

(7

)

 

(18

)

21

 

Accrual at end of year

 

$

222

 

 

$

224

 

$

242

 

 

* Adjustments include changes to prior year estimates, new issues on prior year sales and currency translation adjustments.

 

Debt and Credit Facilities
Debt and Credit Facilities

Note 8. Debt and Credit Facilities

 

Our debt is summarized in the table below:

 

(In millions)

 

 

December 29,
2012

 

 

December 31,
2011

 

Manufacturing group

 

 

 

 

 

 

 

Long-term senior debt:

 

 

 

 

 

 

 

6.50% due 2012

 

 

$

 

 

$

139

 

3.875% due 2013

 

 

318

 

 

308

 

4.50% convertible senior notes due 2013

 

 

210

 

 

195

 

6.20% due 2015

 

 

350

 

 

350

 

4.625% due 2016

 

 

250

 

 

250

 

5.60% due 2017

 

 

350

 

 

350

 

7.25% due 2019

 

 

250

 

 

250

 

6.625% due 2020

 

 

242

 

 

231

 

5.95% due 2021

 

 

250

 

 

250

 

Other (weighted-average rate of 1.52% and 3.72%, respectively)

 

 

81

 

 

136

 

 

 

 

2,301

 

 

2,459

 

Less: Current portion of long-term debt

 

 

(535

)

 

(146

)

Total Long-term debt

 

 

1,766

 

 

2,313

 

Total Manufacturing group debt

 

 

$

2,301

 

 

$

2,459

 

Finance group

 

 

 

 

 

 

 

Fixed-rate notes due 2013 (weighted-average rate of 5.28%)

 

 

$

400

 

 

$

400

 

Variable-rate note due 2013 (weighted-average rate of 1.21% and 1.41%, respectively)

 

 

48

 

 

100

 

Fixed-rate note due 2014 (5.13%)

 

 

100

 

 

100

 

Fixed-rate notes due 2012-2017* (weighted-average rate of 4.88% and 4.48%, respectively)

 

 

102

 

 

147

 

Fixed-rate notes due 2015-2022* (weighted-average rate of 2.70% and 2.76%, respectively)

 

 

382

 

 

364