TEXTRON INC, 10-Q filed on 10/24/2013
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 28, 2013
Oct. 11, 2013
Document and Entity Information
 
 
Entity Registrant Name
TEXTRON INC 
 
Entity Central Index Key
0000217346 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 28, 2013 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-28 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
281,150,492 
Document Fiscal Year Focus
2013 
 
Document Fiscal Period Focus
Q3 
 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 28, 2013
Sep. 29, 2012
Sep. 28, 2013
Sep. 29, 2012
Revenues
 
 
 
 
Manufacturing revenues
$ 2,871 
$ 2,936 
$ 8,492 
$ 8,695 
Finance revenues
33 
64 
106 
180 
Total revenues
2,904 
3,000 
8,598 
8,875 
Costs and expenses
 
 
 
 
Cost of sales
2,473 
2,475 
7,193 
7,222 
Selling and administrative expense
245 
264 
820 
852 
Interest expense
41 
52 
134 
160 
Total costs and expenses
2,759 
2,791 
8,147 
8,234 
Income from continuing operations before income taxes
145 
209 
451 
641 
Income tax expense
47 
67 
124 
206 
Income from continuing operations
98 
142 
327 
435 
Income from discontinued operations, net of income taxes
Net income
$ 99 
$ 151 
$ 331 
$ 441 
Basic earnings per share
 
 
 
 
Continuing operations (in dollars per share)
$ 0.35 
$ 0.51 
$ 1.18 
$ 1.55 
Discontinued operations (in dollars per share)
 
$ 0.03 
$ 0.01 
$ 0.02 
Basic earnings per share (in dollars per share)
$ 0.35 
$ 0.54 
$ 1.19 
$ 1.57 
Diluted earnings per share
 
 
 
 
Continuing operations (in dollars per share)
$ 0.35 
$ 0.48 
$ 1.15 
$ 1.47 
Discontinued operations (in dollars per share)
 
$ 0.03 
$ 0.01 
$ 0.02 
Diluted earnings per share (in dollars per share)
$ 0.35 
$ 0.51 
$ 1.16 
$ 1.49 
Dividends per share
 
 
 
 
Common stock (in dollars per share)
$ 0.02 
$ 0.02 
$ 0.06 
$ 0.06 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 28, 2013
Sep. 29, 2012
Sep. 28, 2013
Sep. 29, 2012
Consolidated Statements of Comprehensive Income
 
 
 
 
Net income
$ 99 
$ 151 
$ 331 
$ 441 
Other comprehensive income, net of tax:
 
 
 
 
Pension and postretirement benefits adjustments, net of reclassifications
64 
21 
127 
63 
Deferred gains/losses on hedge contracts, net of reclassifications
(11)
Foreign currency translation adjustments
12 
(5)
Other comprehensive income
78 
37 
119 
63 
Comprehensive income
$ 177 
$ 188 
$ 450 
$ 504 
Consolidated Balance Sheets (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
Sep. 28, 2013
Dec. 29, 2012
Assets
 
 
Cash and equivalents
$ 637 
$ 1,413 
Inventories
3,220 
2,712 
Total assets
12,457 
13,033 
Liabilities
 
 
Total liabilities
8,877 
10,042 
Shareholders' equity
 
 
Common stock
37 
35 
Capital surplus
1,372 
1,177 
Retained earnings
4,138 
3,824 
Accumulated other comprehensive loss
(1,651)
(1,770)
Total shareholders' equity including cost of treasury shares
3,896 
3,266 
Less cost of treasury shares
316 
275 
Total shareholders' equity
3,580 
2,991 
Total liabilities and shareholders' equity
12,457 
13,033 
Common shares outstanding
281,071 
271,263 
Manufacturing group
 
 
Assets
 
 
Cash and equivalents
444 
1,378 
Accounts receivable, net
1,024 
829 
Inventories
3,220 
2,712 
Other current assets
501 
470 
Total current assets
5,189 
5,389 
Property, plant and equipment, less accumulated depreciation and amortization of $3,405 and $3,277
2,163 
2,149 
Goodwill
1,675 
1,649 
Other assets
1,499 
1,524 
Total assets
10,526 
10,711 
Liabilities
 
 
Current portion of long-term debt and short-term debt
104 
535 
Accounts payable
1,004 
1,021 
Accrued liabilities
1,775 
1,956 
Total current liabilities
2,883 
3,512 
Other liabilities
2,504 
2,798 
Long-term debt
1,916 
1,766 
Total liabilities
7,303 
8,076 
Finance group
 
 
Assets
 
 
Cash and equivalents
193 
35 
Finance receivables held for investment, net
1,436 
1,850 
Finance receivables held for sale
91 
140 
Other assets
211 
297 
Total assets
1,931 
2,322 
Liabilities
 
 
Other liabilities
296 
280 
Debt
1,278 
1,686 
Total liabilities
$ 1,574 
$ 1,966 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, unless otherwise specified
Sep. 28, 2013
Dec. 29, 2012
Consolidated Balance Sheets
 
 
Accumulated depreciation and amortization
$ 3,405 
$ 3,277 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 28, 2013
Sep. 29, 2012
Cash flows from operating activities
 
 
Net income
$ 331 
$ 441 
Less: Income from discontinued operations
Income from continuing operations
327 
435 
Non-cash items:
 
 
Depreciation and amortization
285 
277 
Deferred income taxes
74 
111 
Other, net
38 
61 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(178)
(56)
Inventories
(443)
(409)
Other assets
(51)
31 
Accounts payable
(25)
108 
Accrued and other liabilities
(276)
(312)
Income taxes, net
(96)
71 
Pension, net
(17)
(57)
Captive finance receivables, net
257 
148 
Other operating activities, net
(6)
Net cash provided by (used in) operating activities of continuing operations
(103)
402 
Net cash used in operating activities of discontinued operations
(5)
(5)
Net cash provided by (used in) operating activities
(108)
397 
Cash flows from investing activities
 
 
Finance receivables repaid
157 
478 
Proceeds from sales of receivables and other finance assets
152 
184 
Capital expenditures
(300)
(314)
Net cash used in acquisitions
(53)
(8)
Other investing activities, net
13 
(1)
Net cash provided by (used in) investing activities
(31)
339 
Cash flows from financing activities
 
 
Principal payments on long-term and nonrecourse debt
(997)
(474)
Settlement of convertible debt
(215)
(2)
Proceeds from long-term debt
412 
88 
Increase in short-term debt
96 
 
Proceeds from settlement of capped call
75 
 
Dividends paid
(16)
(17)
Other financing activities, net
16 
17 
Net cash used in financing activities
(629)
(388)
Effect of exchange rate changes on cash and equivalents
(8)
Net increase (decrease) in cash and equivalents
(776)
353 
Cash and equivalents at beginning of period
1,413 
885 
Cash and equivalents at end of period
637 
1,238 
Manufacturing Group
 
 
Cash flows from operating activities
 
 
Net income
300 
400 
Less: Income from discontinued operations
Income from continuing operations
296 
394 
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
 
 
Dividends received from Finance Group
30 
345 
Capital contribution paid to Finance Group
(1)
(240)
Non-cash items:
 
 
Depreciation and amortization
271 
257 
Deferred income taxes
29 
93 
Other, net
69 
73 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(178)
(56)
Inventories
(459)
(419)
Other assets
(40)
36 
Accounts payable
(25)
108 
Accrued and other liabilities
(262)
(284)
Income taxes, net
(101)
153 
Pension, net
(12)
(57)
Other operating activities, net
(6)
Net cash provided by (used in) operating activities of continuing operations
(381)
397 
Net cash used in operating activities of discontinued operations
(5)
(5)
Net cash provided by (used in) operating activities
(386)
392 
Cash flows from investing activities
 
 
Capital expenditures
(300)
(314)
Net cash used in acquisitions
(53)
(8)
Other investing activities, net
19 
Net cash provided by (used in) investing activities
(334)
(313)
Cash flows from financing activities
 
 
Principal payments on long-term and nonrecourse debt
(312)
(139)
Settlement of convertible debt
(215)
(2)
Proceeds from long-term debt
150 
 
Increase in short-term debt
96 
 
Proceeds from settlement of capped call
75 
 
Intergroup financing
 
418 
Dividends paid
(16)
(17)
Other financing activities, net
16 
17 
Net cash used in financing activities
(206)
277 
Effect of exchange rate changes on cash and equivalents
(8)
Net increase (decrease) in cash and equivalents
(934)
361 
Cash and equivalents at beginning of period
1,378 
871 
Cash and equivalents at end of period
444 
1,232 
Finance Group
 
 
Cash flows from operating activities
 
 
Net income
31 
41 
Income from continuing operations
31 
41 
Non-cash items:
 
 
Depreciation and amortization
14 
20 
Deferred income taxes
45 
18 
Other, net
(31)
(12)
Changes in assets and liabilities:
 
 
Other assets
(11)
(5)
Accrued and other liabilities
(24)
(28)
Income taxes, net
(82)
Pension, net
(5)
 
Net cash provided by (used in) operating activities of continuing operations
24 
(48)
Net cash provided by (used in) operating activities
24 
(48)
Cash flows from investing activities
 
 
Finance receivables repaid
558 
798 
Proceeds from sales of receivables and other finance assets
152 
184 
Finance receivables originated or purchased
(164)
(194)
Other investing activities, net
40 
22 
Net cash provided by (used in) investing activities
586 
810 
Cash flows from financing activities
 
 
Principal payments on long-term and nonrecourse debt
(685)
(335)
Proceeds from long-term debt
262 
88 
Intergroup financing
 
(418)
Capital contributions paid to Finance group
240 
Dividends paid
(30)
(345)
Net cash used in financing activities
(452)
(770)
Net increase (decrease) in cash and equivalents
158 
(8)
Cash and equivalents at beginning of period
35 
14 
Cash and equivalents at end of period
$ 193 
$ 6 
Basis of Presentation
Basis of Presentation

Note 1.  Basis of Presentation

 

Our consolidated financial statements include the accounts of Textron Inc. (Textron) and its majority-owned subsidiaries.  We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information.  Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements.  The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 29, 2012.  In the opinion of management, the interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair presentation of our consolidated financial position, results of operations and cash flows for the interim periods presented.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

 

Our financings are conducted through two separate borrowing groups.  The Manufacturing group consists of Textron Inc. consolidated with its majority-owned subsidiaries that operate in the Cessna, Bell, Textron Systems and Industrial segments.  The Finance group, which also is the Finance segment, consists of Textron Financial Corporation (TFC), its consolidated subsidiaries and three other finance subsidiaries owned by Textron.  We designed this framework to enhance our borrowing power by separating the Finance group.  Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services.  Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance.  To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the consolidated financial statements.  All significant intercompany transactions are eliminated from the consolidated financial statements, including retail and wholesale financing activities for inventory sold by our Manufacturing group and financed by our Finance group.

 

Use of Estimates

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

 

During 2013 and 2012, we changed our estimates of revenues and costs on certain long-term contracts that are accounted for under the percentage-of-completion method of accounting.  The changes in estimates included in income from continuing operations before income taxes in the third quarter of 2013 and 2012 were $4 million and $(6) million, respectively, ($2 million and $(4) million after tax, or $0.01 and $(0.02) per diluted share, respectively).  For the third quarter of 2013 and 2012, the gross favorable program profit adjustments totaled $12 million and $12 million, respectively, and the gross unfavorable program profit adjustments totaled $8 million and $18 million, respectively.

 

The changes in estimates increased income from continuing operations before income taxes in the first nine months of 2013 and 2012 by $13 million and $10 million, ($8 million and $6 million after tax, or $0.03 and $0.02 per diluted share, respectively).  For the first nine months of 2013 and 2012, the gross favorable program profit adjustments totaled $30 million and $52 million, respectively, and the gross unfavorable program profit adjustments totaled $17 million and $42 million, respectively.

 

Retirement Plans
Retirement Plans

Note 2.  Retirement Plans

 

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

 

 

 

Pension Benefits

 

Postretirement Benefits
Other Than Pensions

 

(In millions)

 

September 28,
2013

 

September 29,
2012

 

September 28,
2013

 

September 29,
2012

 

Three Months Ended

 

 

 

 

 

 

 

 

 

Service cost

 

$

33

 

$

30

 

$

1

 

$

2

 

Interest cost

 

72

 

77

 

5

 

6

 

Expected return on plan assets

 

(104)

 

(102

)

 

 

Amortization of prior service cost (credit)

 

4

 

4

 

(6)

 

(3

)

Amortization of net actuarial loss

 

46

 

29

 

2

 

2

 

Net periodic benefit cost

 

$

51

 

$

38

 

$

2

 

$

7

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

Service cost

 

$

100

 

$

89

 

$

5

 

$

5

 

Interest cost

 

218

 

229

 

15

 

19

 

Expected return on plan assets

 

(314)

 

(305

)

 

 

Amortization of prior service cost (credit)

 

11

 

12

 

(11)

 

(9

)

Amortization of net actuarial loss

 

138

 

88

 

5

 

5

 

Net periodic benefit cost

 

$

153

 

$

113

 

$

14

 

$

20

 

 

Retirement Plan Amendment

During the third quarter of 2013, we amended one of our postretirement benefit plans which triggered a re-measurement of the plan’s projected benefit obligation. The discount rate for this plan was increased to 4.50% from 3.75%, while other assumptions remained consistent with year-end assumptions. As a result of the amendment and the revised discount rate, we recorded a reduction in unrealized losses and prior service cost of $55 million through other comprehensive income in the third quarter of 2013.

 

Earnings Per Share
Earnings Per Share

Note 3.  Earnings Per Share

 

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

 

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

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In thousands)

 

September 28,
2013

 

September 29,
2012

 

September 28,
2013

 

September 29,
2012

 

Basic weighted-average shares outstanding

 

281,525

 

281,813

 

278,296

 

280,983

 

Dilutive effect of:
Convertible notes and warrants

 

 

14,763

 

6,226

 

14,219

 

Stock options and restricted stock units

 

185

 

344

 

221

 

495

 

Diluted weighted-average shares outstanding

 

281,710

 

296,920

 

284,743

 

295,697

 

 

Stock options to purchase 6 million and 5 million shares of common stock outstanding are excluded from our calculation of diluted weighted-average shares outstanding for the three and nine months ended September 28, 2013, respectively, as their effect would have been anti-dilutive.  Stock options to purchase 5 million and 7 million shares of common stock outstanding are excluded from our calculation of diluted weighted-average shares outstanding for the three and nine months ended September 29, 2012, respectively. The effect of these securities would have been anti-dilutive.

 

Accounts Receivable and Finance Receivables
Accounts Receivable and Finance Receivables

Note 4.  Accounts Receivable and Finance Receivables

 

Accounts Receivable

Accounts receivable is composed of the following:

 

(In millions)

 

September 28,
2013

 

December 29,
2012

 

Commercial

 

$        708

 

$       534

 

U.S. Government contracts

 

340

 

314

 

 

 

1,048

 

848

 

Allowance for doubtful accounts

 

(24)

 

(19

)

Total

 

$     1,024

 

$       829

 

 

We have unbillable receivables, primarily on U.S. Government contracts, that arise when the revenues we have appropriately recognized based on performance cannot be billed yet under terms of the contract.  Unbillable receivables within accounts receivable totaled $136 million at September 28, 2013 and $149 million at December 29, 2012.

 

Finance Receivables

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

 

(In millions)

 

September 28,
2013

 

December 29,
2012

 

Captive

 

$     1,379

 

$     1,704

 

Non-captive

 

210

 

370

 

Total finance receivables

 

1,589

 

2,074

 

Less: Allowance for losses

 

62

 

84

 

Less: Finance receivables held for sale

 

91

 

140

 

Total finance receivables held for investment, net

 

$     1,436

 

$     1,850

 

 

In the third quarter of 2013, we determined that we no longer had the intent to hold the remaining non-captive loan portfolio for the foreseeable future and, accordingly, transferred $34 million of the remaining non-captive loans, net of a $1 million allowance for losses, from the held for investment classification to the held for sale classification.

 

Credit Quality Indicators and Nonaccrual Finance Receivables

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

 

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

 

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

 

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

 

 

 

September 28, 2013

 

December 29, 2012

 

(In millions)

 

Performing

 

Watchlist

 

Nonaccrual

 

Total

 

Performing

 

Watchlist

 

Nonaccrual

 

Total

 

Captive

 

$    1,173

 

$    101

 

$    105

 

$    1,379

 

$    1,476

 

$    130

 

$        98

 

$    1,704

 

Non-captive

 

119

 

 

 

119

 

185

 

 

45

 

230

 

Total

 

$    1,292

 

$    101

 

$    105

 

$    1,498

 

$    1,661

 

$    130

 

$      143

 

$    1,934

 

% of Total

 

86.3%

 

6.7%

 

7.0%

 

 

 

85.9%

 

6.7%

 

7.4%

 

 

 

 

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

 

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

 

 

 

September 28, 2013

 

December 29, 2012

 

(In millions)

 

Less Than
31 Days
Past Due

 

31-60
Days
Past Due

 

61-90
Days
Past Due

 

Over
90 Days
Past Due

 

Total

 

Less Than
31 Days
Past Due

 

31-60
Days
Past Due

 

61-90
Days
Past Due

 

Over
90 Days
Past Due

 

Total

 

Captive

 

$  1,206

 

$      85

 

$      62

 

$      26

 

$  1,379

 

$   1,531

 

$      87

 

$      55

 

$      31

 

$  1,704

 

Non-captive

 

119

 

 

 

 

119

 

226

 

 

1

 

3

 

230

 

Total

 

$  1,325

 

$     85

 

$      62

 

$      26

 

$  1,498

 

$   1,757

 

$      87

 

$      56

 

$      34

 

$  1,934

 

 

We had no accrual status loans greater than 90 days past due at September 28, 2013 or December 29, 2012.  At September 28, 2013 and December 29, 2012, 60+ days contractual delinquency as a percentage of finance receivables held for investment was 5.87% and 4.65%, respectively.

 

Loan Modifications

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

 

Impaired Loans

We evaluate individual finance receivables held for investment in non-homogeneous portfolios and larger accounts in homogeneous loan portfolios for impairment on a quarterly basis.  Finance receivables classified as held for sale are reflected at the lower of cost or fair value and are excluded from these evaluations.  A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators discussed above.  Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified.  If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification.  Interest income recognized on impaired loans was not significant in the first nine months of 2013 or 2012.

 

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

 

 

 

Recorded Investment

 

 

 

 

 

 

 

(In millions)

 

Impaired
Loans with
No Related
Allowance for
Credit Losses

 

Impaired
Loans with
Related
Allowance for
Credit Losses

 

Total
Impaired
Loans

 

Unpaid
Principal
Balance

 

Allowance
For Losses On
Impaired
Loans

 

Average
Recorded
Investment

 

September 28, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Captive

 

$

64

 

$

76

 

$

140

 

$

143

 

$

21

 

$

135

 

Non-captive

 

 

 

 

 

 

24

 

Total

 

$

64

 

$

76

 

$

140

 

$

143

 

$

21

 

$

159

 

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

 

 

A summary of the allowance for losses on finance receivables that are evaluated on an individual and on a collective basis is provided below.  The finance receivables reported in this table specifically exclude $119 million and $122 million of leveraged leases at September 28, 2013 and December 29, 2012, respectively, in accordance with authoritative accounting standards.

 

 

 

September 28, 2013

 

December 29, 2012

 

 

 

Finance
Receivables Evaluated

 

Allowance
Based on
Individual

 

Allowance
Based on
Collective

 

Finance
Receivables Evaluated

 

Allowance
Based on
Individual

 

Allowance
Based on
Collective

 

(In millions)

 

  Individually

 

Collectively

 

Evaluation

 

Evaluation

 

Individually

 

Collectively

 

Evaluation

 

Evaluation

 

Captive

 

$     140

 

$   1,239

 

$      21

 

$      41

 

$      127

 

$   1,577

 

$      15

 

$      55

 

Non-captive

 

 

 

 

 

44

 

64

 

12

 

2

 

Total

 

$     140

 

$   1,239

 

$      21

 

$      41

 

$      171

 

$   1,641

 

$      27

 

$      57

 

 

Allowance for Losses

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

 

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

 

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

 

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

 

(In millions)

 

Captive

 

Non-captive

 

Total

 

For the nine months ended September 28, 2013

 

 

 

 

 

 

 

Beginning balance

 

$

70

 

$

14

 

$

84

 

Provision for losses

 

(6

)

(17

)

(23

)

Charge-offs

 

(7

)

(2

)

(9

)

Recoveries

 

5

 

6

 

11

 

Transfers

 

 

(1

)

(1

)

Ending balance

 

$

62

 

$

 

$

62

 

For the nine months ended September 29, 2012

 

 

 

 

 

 

 

Beginning balance

 

$

101

 

$

55

 

$

156

 

Provision for losses

 

1

 

(5

)

(4

)

Charge-offs

 

(40

)

(38

)

(78

)

Recoveries

 

8

 

4

 

12

 

Ending balance

 

$

70

 

$

16

 

$

86

 

Inventories
Inventories

Note 5.  Inventories

 

(In millions)

 

September 28,
2013

 

December 29,
2012

 

Finished goods

 

$

 1,374

 

$

 1,329

 

Work in process

 

2,679

 

2,247

 

Raw materials

 

433

 

437

 

 

 

4,486

 

4,013

 

Progress/milestone payments

 

(1,266)

 

(1,301

)

Total

 

$

 3,220

 

$

 2,712

Debt
Debt

Note 6.  Debt

 

On October 4, 2013, Textron entered into a senior unsecured revolving credit facility for an aggregate principal amount of $1.0 billion, of which up to $100 million is available for the issuance of letters of credit. This facility expires in October 2018 and replaced the existing 4-year facility that was scheduled to expire in March 2015. At September 28, 2013, there were no amounts borrowed against the prior facility.

 

4.50% Convertible Senior Notes and Related Transactions

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

 

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

 

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

 

Accrued Liabilities
Accrued Liabilities

Note 7.  Accrued Liabilities

 

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

 

 

 

Nine Months Ended

 

(In millions)

 

  September 28,
2013

 

September 29,
2012

 

Accrual at the beginning of period

 

$

222

 

$

224

 

Provision

 

203

 

190

 

Settlements

 

(210)

 

(187

)

Adjustments to prior accrual estimates

 

(3)

 

(2

)

Accrual at the end of period

 

$

212

 

$

225

 

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

Note 8.  Accumulated Other Comprehensive Loss and Other Comprehensive Income

 

The components of Accumulated Other Comprehensive Loss are presented below:

 

(In millions)

 

Foreign
Currency
Translation
Adjustments

 

Pension and
Postretirement
Benefits
Adjustments

 

Deferred
Gains/Losses
on Hedge
Contracts

 

Accumulated
Other
Comprehensive
Loss

 

For the nine months ended September 28, 2013

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

81

 

$

(1,857

)

$

6

 

$

(1,770

)

Other comprehensive income before reclassifications

 

3

 

 

(9

)

(6

)

Amounts reclassified from Accumulated Other Comprehensive Loss

 

 

127

 

(2

)

125

 

Other comprehensive income

 

3

 

127

 

(11

)

119

 

Ending balance

 

$

84

 

$

(1,730

)

$

(5

)

$

(1,651

)

For the nine months ended September 29, 2012

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

79

 

$

(1,711

)

$

7

 

$

(1,625

)

Other comprehensive income before reclassifications

 

(5

)

 

15

 

10

 

Amounts reclassified from Accumulated Other Comprehensive Loss

 

 

63

 

(10

)

53

 

Other comprehensive income

 

(5

)

63

 

5

 

63

 

Ending balance

 

$

74

 

$

(1,648

)

$

12

 

$

(1,562

)

 

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

 

(In millions)

 

Pre-Tax
Amount

 

Tax
(Expense)
Benefit

 

After-Tax
Amount

 

For the three months ended September 28, 2013

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

48

 

$

(18

)

$

30

 

Amortization of prior service cost*

 

(2

)

1

 

(1

)

Amendment to postretirement benefit plan

 

55

 

(20

)

35

 

Pension and postretirement benefits adjustments, net

 

101

 

(37

)

64

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

3

 

(1

)

2

 

Deferred gains/losses on hedge contracts, net

 

3

 

(1

)

2

 

Foreign currency translation adjustments

 

8

 

4

 

12

 

Total

 

$

112

 

$

(34

)

$

78

 

For the three months ended September 29, 2012

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

31

 

$

(10

)

$

21

 

Amortization of prior service cost*

 

1

 

(1

)

 

Pension and postretirement benefits adjustments, net

 

32

 

(11

)

21

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

12

 

(3

)

9

 

Reclassification adjustments

 

 

(1

)

(1

)

Deferred gains/losses on hedge contracts, net

 

12

 

(4

)

8

 

Foreign currency translation adjustments

 

1

 

7

 

8

 

Total

 

$

45

 

$

(8

)

$

37

 

 

 

 

 

 

 

 

 

For the nine months ended September 28, 2013

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

143

 

$

(51

)

$

92

 

Amendment to postretirement benefit plan

 

55

 

(20

)

35

 

Pension and postretirement benefits adjustments, net

 

198

 

(71

)

127

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

(11

)

2

 

(9

)

Reclassification adjustments

 

(3

)

1

 

(2

)

Deferred gains/losses on hedge contracts, net

 

(14

)

3

 

(11

)

Foreign currency translation adjustments

 

6

 

(3

)

3

 

Total

 

$

190

 

$

(71

)

$

119

 

For the nine months ended September 29, 2012

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

93

 

$

(32

)

$

61

 

Amortization of prior service cost*

 

3

 

(1

)

2

 

Pension and postretirement benefits adjustments, net

 

96

 

(33

)

63

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

19

 

(4

)

15

 

Reclassification adjustments

 

(12

)

2

 

(10

)

Deferred gains/losses on hedge contracts, net

 

7

 

(2

)

5

 

Foreign currency translation adjustments

 

(9

)

4

 

(5

)

Total

 

$

94

 

$

(31

)

$

63

 

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

 

In the third quarter of 2013, we amended one of our postretirement benefit plans which triggered a re-measurement of the plan’s projected benefit obligation resulting in a $55 million reduction in unrealized losses and prior service costs, as discussed in Note 2.

 

Commitments and Contingencies
Commitments and Contingencies

Note 9.  Commitments and Contingencies

 

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

 

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

 

Note 10.  Derivative Instruments and Fair Value Measurements

 

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

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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

 

 

 

 

 

 

 

Asset (Liability)

 

(In millions)

 

Borrowing Group

 

Balance Sheet Location

 

  September 28,
2013

 

December 29,
2012

 

Assets

 

 

 

 

 

 

 

 

 

Interest rate exchange contracts*

 

Finance

 

Other assets

 

$

 3

 

$

 8

 

Foreign currency exchange contracts

 

Manufacturing

 

Other current assets

 

 

9

 

Total

 

 

 

 

 

$

 3

 

$

 17

 

Liabilities

 

 

 

 

 

 

 

 

 

Interest rate exchange contracts*

 

Finance

 

Other liabilities

 

$

 (6)

 

$

 (8

)

Foreign currency exchange contracts

 

Manufacturing

 

Accrued liabilities

 

(7)

 

(5

)

Total

 

 

 

 

 

$

 (13)

 

$

 (13

)

*Interest rate exchange contracts represent fair value hedges.

 

The Finance group’s interest rate exchange contracts are not exchange traded and are measured at fair value utilizing widely accepted, third-party developed valuation models.  The actual terms of each individual contract are entered into a valuation model, along with interest rate and foreign exchange rate data, which is based on readily observable market data published by third-party leading financial news and data providers.  Credit risk is factored into the fair value of these assets and liabilities based on the differential between both our credit default swap spread for liabilities and the counterparty’s credit default swap spread for assets as compared with a standard AA-rated counterparty; however, this had no significant impact on the valuation at September 28, 2013.  At September 28, 2013 and December 29, 2012, we had interest rate exchange contracts with notional amounts upon which the contracts were based of $268 million and $671 million, respectively.

 

Foreign currency exchange contracts are measured at fair value using the market method valuation technique.  The inputs to this technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data providers.  These are observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions so they are classified as Level 2.  At September 28, 2013 and December 29, 2012, we had foreign currency exchange contracts with notional amounts upon which the contracts were based on $641 million and $664 million, respectively.

 

Fair Value Hedges

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

 

Cash Flow Hedges

We manufacture and sell our products in a number of countries throughout the world, and, therefore, we are exposed to movements in foreign currency exchange rates.  The primary purpose of our foreign currency hedging activities is to manage the volatility associated with foreign currency purchases of materials, foreign currency sales of products, and other assets and liabilities in the normal course of business.  We primarily utilize forward exchange contracts and purchased options with maturities of no more than three years that qualify as cash flow hedges and are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses.  At September 28, 2013, we had a net deferred loss of $5 million in Accumulated other comprehensive loss related to these cash flow hedges.  Net gains and losses recognized in earnings and Accumulated other comprehensive loss on these cash flow hedges, including gains and losses related to hedge ineffectiveness, were not material in three and nine months ended September 28, 2013 and September 29, 2012.  We do not expect the amount of gains and losses in Accumulated other comprehensive loss that will be reclassified to earnings in the next twelve months to be material.

 

We hedge our net investment position in major currencies and generate foreign currency interest payments that offset other transactional exposures in these currencies.  To accomplish this, we borrow directly in foreign currency and designate a portion of foreign currency debt as a hedge of net investments. We also may utilize currency forwards as hedges of our related foreign net investments. We record changes in the fair value of these contracts in other comprehensive income to the extent they are effective as cash flow hedges.  If a contract does not qualify for hedge accounting or is designated as a fair value hedge, changes in the fair value of the contract are recorded in earnings.  Currency effects on the effective portion of these hedges, which are reflected in the foreign currency translation adjustment account within other comprehensive income, produced a $5 million after-tax gain for the first nine months of 2013, resulting in an accumulated net gain balance of $9 million at September 28, 2013.  The ineffective portion of these hedges was insignificant.

 

Assets Recorded at Fair Value on a Nonrecurring Basis

During the periods ended September 28, 2013 and December 29, 2012, certain assets in the Finance group were measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3).  The table below sets forth the balance of those assets at the end of the period in which a fair value adjustment was taken.

 

(In millions)

 

 September 28,
2013

 

December 29,
2012

 

Finance receivables held for sale

 

$

 91

 

$

 140

 

Impaired finance receivables

 

55

 

72

 

Other assets

 

26

 

76

 

 

The following table represents the fair value adjustments recorded for each asset class measured at fair value on a non-recurring basis during the three and nine months ended September 28, 2013 and September 29, 2012.

 

 

 

Gain (Loss)

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

 September 28,
2013

 

September 29,
2012

 

 September 28,
2013

 

September 29,
2012

 

Finance receivables held for sale

 

$

13

 

$

22

 

$

30

 

$

66

 

Impaired finance receivables

 

(3)

 

(2

)

(8)

 

(9

)

Other assets

 

(5)

 

(13

)

(10)

 

(45

)

 

Finance receivables held for sale

Finance receivables held for sale are recorded at fair value on a nonrecurring basis during periods in which the fair value is lower than the cost value. There are no active, quoted market prices for these finance receivables.  At September 28, 2013, our finance receivables held for sale included the non-captive loan portfolio.  Fair values of each loan in this portfolio were determined based on a combination of discounted cash flow models and recent third-party offers to estimate the price we expect to receive in the principal market for each loan, in an orderly transaction. The cash flow models include the use of qualitative assumptions regarding the borrower’s ability to pay and the period of time that will likely be required to restructure and/or exit the account through acquisition of the underlying collateral, as well as quantitative assumptions, including discount rates and revenue and earnings multiples, which are used to estimate the value of the underlying collateral.  The gains on finance receivables held for sale during the three and nine months ended September 28, 2013 and September 29, 2012 were primarily the result of the payoff of loans in amounts, and sale of loans at prices, in excess of the values established in previous periods.

 

Impaired finance receivables

Impaired nonaccrual finance receivables represent assets recorded at fair value on a nonrecurring basis since the measurement of required reserves on our impaired finance receivables is significantly dependent on the fair value of the underlying collateral.  For impaired nonaccrual finance receivables secured by aviation assets, the fair values of collateral are determined primarily based on the use of industry pricing guides. Fair value measurements recorded on impaired finance receivables resulted in charges to provision for loan losses and primarily related to initial fair value adjustments.

 

Other assets

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

 

Assets and Liabilities Not Recorded at Fair Value

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

 

 

 

September 28, 2013

 

December 29, 2012

 

(In millions)

 

Carrying
Value

 

Estimated
Fair Value

 

Carrying
Value

 

Estimated
Fair Value

 

Manufacturing group

 

 

 

 

 

 

 

 

 

Long-term debt, excluding leases

 

$  (1,847

)

$  (2,034)

 

$  (2,225

)

$  (2,636

)

Finance group

 

 

 

 

 

 

 

 

 

Finance receivables held for investment, excluding leases

 

1,235

 

1,194

 

1,625

 

1,653

 

Debt

 

(1,278

)

(1,267)

 

(1,686

)

(1,678

)

 

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

 

Income Tax Expense
Income Tax Expense

Note 11.  Income Tax Expense

 

Income tax expense equated to an effective income tax rate of 32.4% and 27.5% for the three and nine months ended September 28, 2013, respectively, compared with the U.S. federal statutory income tax rate of 35%.  In the first nine months of 2013, the difference between the effective income tax rate and the statutory income tax rate was primarily due to benefits from income attributable to international operations in countries with lower tax rates and a favorable impact of four percentage points, resulting from the retroactive reinstatement and extension of the Federal Research and Development Tax Credit as part of the American Taxpayer Relief Act of 2012 enacted on January 2, 2013. The difference between the effective income tax rate and the federal statutory income tax rate for the three months ended September 28, 2013 was not significant.

 

For the three and nine months ended September 29, 2012, the difference between the effective income tax rate and the federal statutory income tax rate was not significant.

 

Segment Information
Segment Information

Note 12.  Segment Information

 

We operate in, and report financial information for, the following five business segments: Cessna, Bell, Textron Systems, Industrial and Finance.  Segment profit is an important measure used for evaluating performance and for decision-making purposes.  Segment profit for the manufacturing segments excludes interest expense and certain corporate expenses.  The measurement for the Finance segment includes interest income and expense along with intercompany interest expense.  Provisions for losses on finance receivables involving the sale or lease of our products are recorded by the selling manufacturing division when our Finance group has recourse to the Manufacturing group.

 

Our revenues by segment and a reconciliation of segment profit to income from continuing operations before income taxes are as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

  September 28,
2013

 

September 29,
2012

 

  September 28,
2013

 

September 29,
2012

 

REVENUES

 

 

 

 

 

 

 

 

 

Manufacturing Group

 

 

 

 

 

 

 

 

 

Cessna

 

$

593

 

$

778

 

$

1,861

 

$

2,210

 

Bell

 

1,162

 

1,075

 

3,136

 

3,125

 

Textron Systems

 

405

 

400

 

1,256

 

1,166

 

Industrial

 

711

 

683

 

2,239

 

2,194

 

 

 

2,871

 

2,936

 

8,492

 

8,695

 

Finance Group

 

33

 

64

 

106

 

180

 

Total revenues

 

$

2,904

 

$

3,000

 

$

8,598

 

$

8,875

 

SEGMENT OPERATING PROFIT

 

 

 

 

 

 

 

 

 

Manufacturing Group

 

 

 

 

 

 

 

 

 

Cessna

 

$

(23)

 

$

30

 

$

(81)

 

$

59

 

Bell

 

131

 

165

 

395

 

462

 

Textron Systems

 

35

 

21

 

107

 

96

 

Industrial

 

52

 

38

 

188

 

172

 

 

 

195

 

254

 

609

 

789

 

Finance Group

 

13

 

28

 

47

 

62

 

Segment profit

 

208

 

282

 

656

 

851

 

Corporate expenses and other, net

 

(34)

 

(38

)

(109)

 

(105

)

Interest expense, net for Manufacturing group

 

(29)

 

(35

)

(96)

 

(105

)

Income from continuing operations before income taxes

 

$

145

 

$

209

 

$

451

 

$

641

 

Basis of Presentation (Policies)
Use of Estimates

Use of Estimates

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

 

During 2013 and 2012, we changed our estimates of revenues and costs on certain long-term contracts that are accounted for under the percentage-of-completion method of accounting.  The changes in estimates included in income from continuing operations before income taxes in the third quarter of 2013 and 2012 were $4 million and $(6) million, respectively, ($2 million and $(4) million after tax, or $0.01 and $(0.02) per diluted share, respectively).  For the third quarter of 2013 and 2012, the gross favorable program profit adjustments totaled $12 million and $12 million, respectively, and the gross unfavorable program profit adjustments totaled $8 million and $18 million, respectively.

 

The changes in estimates increased income from continuing operations before income taxes in the first nine months of 2013 and 2012 by $13 million and $10 million, ($8 million and $6 million after tax, or $0.03 and $0.02 per diluted share, respectively).  For the first nine months of 2013 and 2012, the gross favorable program profit adjustments totaled $30 million and $52 million, respectively, and the gross unfavorable program profit adjustments totaled $17 million and $42 million, respectively.

 

Retirement Plans (Tables)
Components of net periodic benefit cost

 

 

 

Pension Benefits

 

Postretirement Benefits
Other Than Pensions

 

(In millions)

 

September 28,
2013

 

September 29,
2012

 

September 28,
2013

 

September 29,
2012

 

Three Months Ended

 

 

 

 

 

 

 

 

 

Service cost

 

$

33

 

$

30

 

$

1

 

$

2

 

Interest cost

 

72

 

77

 

5

 

6

 

Expected return on plan assets

 

(104)

 

(102

)

 

 

Amortization of prior service cost (credit)

 

4

 

4

 

(6)

 

(3

)

Amortization of net actuarial loss

 

46

 

29

 

2

 

2

 

Net periodic benefit cost

 

$

51

 

$

38

 

$

2

 

$

7

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

Service cost

 

$

100

 

$

89

 

$

5

 

$

5

 

Interest cost

 

218

 

229

 

15

 

19

 

Expected return on plan assets

 

(314)

 

(305

)

 

 

Amortization of prior service cost (credit)

 

11

 

12

 

(11)

 

(9

)

Amortization of net actuarial loss

 

138

 

88

 

5

 

5

 

Net periodic benefit cost

 

$

153

 

$

113

 

$

14

 

$

20

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In thousands)

 

September 28,
2013

 

September 29,
2012

 

September 28,
2013

 

September 29,
2012

 

Basic weighted-average shares outstanding

 

281,525

 

281,813

 

278,296

 

280,983

 

Dilutive effect of:
Convertible notes and warrants

 

 

14,763

 

6,226

 

14,219

 

Stock options and restricted stock units

 

185

 

344

 

221

 

495

 

Diluted weighted-average shares outstanding

 

281,710

 

296,920

 

284,743

 

295,697

 

Accounts Receivable and Finance Receivables (Tables)

 

(In millions)

 

September 28,
2013

 

December 29,
2012

 

Commercial

 

$        708

 

$       534

 

U.S. Government contracts

 

340

 

314

 

 

 

1,048

 

848

 

Allowance for doubtful accounts

 

(24)

 

(19

)

Total

 

$     1,024

 

$       829

 

 

(In millions)

 

September 28,
2013

 

December 29,
2012

 

Captive

 

$     1,379

 

$     1,704

 

Non-captive

 

210

 

370

 

Total finance receivables

 

1,589

 

2,074

 

Less: Allowance for losses

 

62

 

84

 

Less: Finance receivables held for sale

 

91

 

140

 

Total finance receivables held for investment, net

 

$     1,436

 

$     1,850

 

 

 

 

September 28, 2013

 

December 29, 2012

 

(In millions)

 

Performing

 

Watchlist

 

Nonaccrual

 

Total

 

Performing

 

Watchlist

 

Nonaccrual

 

Total

 

Captive

 

$    1,173

 

$    101

 

$    105

 

$    1,379

 

$    1,476

 

$    130

 

$        98

 

$    1,704

 

Non-captive

 

119

 

 

 

119

 

185

 

 

45

 

230

 

Total

 

$    1,292

 

$    101

 

$    105

 

$    1,498

 

$    1,661

 

$    130

 

$      143

 

$    1,934

 

% of Total

 

86.3%

 

6.7%

 

7.0%

 

 

 

85.9%

 

6.7%

 

7.4%

 

 

 

 

 

 

September 28, 2013

 

December 29, 2012

 

(In millions)

 

Less Than
31 Days
Past Due

 

31-60
Days
Past Due

 

61-90
Days
Past Due

 

Over
90 Days
Past Due

 

Total

 

Less Than
31 Days
Past Due

 

31-60
Days
Past Due

 

61-90
Days
Past Due

 

Over
90 Days
Past Due

 

Total

 

Captive

 

$  1,206

 

$      85

 

$      62

 

$      26

 

$  1,379

 

$   1,531

 

$      87

 

$      55

 

$      31

 

$  1,704

 

Non-captive

 

119

 

 

 

 

119

 

226

 

 

1

 

3

 

230

 

Total

 

$  1,325

 

$     85

 

$      62

 

$      26

 

$  1,498

 

$   1,757

 

$      87

 

$      56

 

$      34

 

$  1,934

 

 

 

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

 

September 28, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Captive

 

$

64

 

$

76

 

$

140

 

$

143

 

$

21

 

$

135

 

Non-captive

 

 

 

 

 

 

24

 

Total

 

$

64

 

$

76

 

$

140

 

$

143

 

$

21

 

$

159

 

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

 

 

 

 

September 28, 2013

 

December 29, 2012

 

 

 

Finance
Receivables Evaluated

 

Allowance
Based on
Individual

 

Allowance
Based on
Collective

 

Finance
Receivables Evaluated

 

Allowance
Based on
Individual

 

Allowance
Based on
Collective

 

(In millions)

 

  Individually

 

Collectively

 

Evaluation

 

Evaluation

 

Individually

 

Collectively

 

Evaluation

 

Evaluation

 

Captive

 

$     140

 

$   1,239

 

$      21

 

$      41

 

$      127

 

$   1,577

 

$      15

 

$      55

 

Non-captive

 

 

 

 

 

44

 

64

 

12

 

2

 

Total

 

$     140

 

$   1,239

 

$      21

 

$      41

 

$      171

 

$   1,641

 

$      27

 

$      57

 

 

(In millions)

 

Captive

 

Non-captive

 

Total

 

For the nine months ended September 28, 2013

 

 

 

 

 

 

 

Beginning balance

 

$

70

 

$

14

 

$

84

 

Provision for losses

 

(6

)

(17

)

(23

)

Charge-offs

 

(7

)

(2

)

(9

)

Recoveries

 

5

 

6

 

11

 

Transfers

 

 

(1

)

(1

)

Ending balance

 

$

62

 

$

 

$

62

 

For the nine months ended September 29, 2012

 

 

 

 

 

 

 

Beginning balance

 

$

101

 

$

55

 

$

156

 

Provision for losses

 

1

 

(5

)

(4

)

Charge-offs

 

(40

)

(38

)

(78

)

Recoveries

 

8

 

4

 

12

 

Ending balance

 

$

70

 

$

16

 

$

86

 

Inventories (Tables)
Inventories

 

(In millions)

 

September 28,
2013

 

December 29,
2012

 

Finished goods

 

$

 1,374

 

$

 1,329

 

Work in process

 

2,679

 

2,247

 

Raw materials

 

433

 

437

 

 

 

4,486

 

4,013

 

Progress/milestone payments

 

(1,266)

 

(1,301

)

Total

 

$

 3,220

 

$

 2,712

Accrued Liabilities (Tables)
Changes in warranty and product maintenance liability

 

 

 

Nine Months Ended

 

(In millions)

 

  September 28,
2013

 

September 29,
2012

 

Accrual at the beginning of period

 

$

222

 

$

224

 

Provision

 

203

 

190

 

Settlements

 

(210)

 

(187

)

Adjustments to prior accrual estimates

 

(3)

 

(2

)

Accrual at the end of period

 

$

212

 

$

225

 

Accumulated Other Comprehensive Loss and Other Comprehensive Income (Tables)

 

(In millions)

 

Foreign
Currency
Translation
Adjustments

 

Pension and
Postretirement
Benefits
Adjustments

 

Deferred
Gains/Losses
on Hedge
Contracts

 

Accumulated
Other
Comprehensive
Loss

 

For the nine months ended September 28, 2013

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

81

 

$

(1,857

)

$

6

 

$

(1,770

)

Other comprehensive income before reclassifications

 

3

 

 

(9

)

(6

)

Amounts reclassified from Accumulated Other Comprehensive Loss

 

 

127

 

(2

)

125

 

Other comprehensive income

 

3

 

127

 

(11

)

119

 

Ending balance

 

$

84

 

$

(1,730

)

$

(5

)

$

(1,651

)

For the nine months ended September 29, 2012

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

79

 

$

(1,711

)

$

7

 

$

(1,625

)

Other comprehensive income before reclassifications

 

(5

)

 

15

 

10

 

Amounts reclassified from Accumulated Other Comprehensive Loss

 

 

63

 

(10

)

53

 

Other comprehensive income

 

(5

)

63

 

5

 

63

 

Ending balance

 

$

74

 

$

(1,648

)

$

12

 

$

(1,562

)

 

(In millions)

 

Pre-Tax
Amount

 

Tax
(Expense)
Benefit

 

After-Tax
Amount

 

For the three months ended September 28, 2013

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

48

 

$

(18

)

$

30

 

Amortization of prior service cost*

 

(2

)

1

 

(1

)

Amendment to postretirement benefit plan

 

55

 

(20

)

35

 

Pension and postretirement benefits adjustments, net

 

101

 

(37

)

64

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

3

 

(1

)

2

 

Deferred gains/losses on hedge contracts, net

 

3

 

(1

)

2

 

Foreign currency translation adjustments

 

8

 

4

 

12

 

Total

 

$

112

 

$

(34

)

$

78

 

For the three months ended September 29, 2012

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

31

 

$

(10

)

$

21

 

Amortization of prior service cost*

 

1

 

(1

)

 

Pension and postretirement benefits adjustments, net

 

32

 

(11

)

21

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

12

 

(3

)

9

 

Reclassification adjustments

 

 

(1

)

(1

)

Deferred gains/losses on hedge contracts, net

 

12

 

(4

)

8

 

Foreign currency translation adjustments

 

1

 

7

 

8

 

Total

 

$

45

 

$

(8

)

$

37

 

 

 

 

 

 

 

 

 

For the nine months ended September 28, 2013

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

143

 

$

(51

)

$

92

 

Amendment to postretirement benefit plan

 

55

 

(20

)

35

 

Pension and postretirement benefits adjustments, net

 

198

 

(71

)

127

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

(11

)

2

 

(9

)

Reclassification adjustments

 

(3

)

1

 

(2

)

Deferred gains/losses on hedge contracts, net

 

(14

)

3

 

(11

)

Foreign currency translation adjustments

 

6

 

(3

)

3

 

Total

 

$

190

 

$

(71

)

$

119

 

For the nine months ended September 29, 2012

 

 

 

 

 

 

 

Pension and postretirement benefits adjustments:

 

 

 

 

 

 

 

Amortization of net actuarial loss*

 

$

93

 

$

(32

)

$

61

 

Amortization of prior service cost*

 

3

 

(1

)

2

 

Pension and postretirement benefits adjustments, net

 

96

 

(33

)

63

 

Deferred gains/losses on hedge contracts:

 

 

 

 

 

 

 

Current deferrals

 

19

 

(4

)

15

 

Reclassification adjustments

 

(12

)

2

 

(10

)

Deferred gains/losses on hedge contracts, net

 

7

 

(2

)

5

 

Foreign currency translation adjustments

 

(9

)

4

 

(5

)

Total

 

$

94

 

$

(31

)

$

63

 

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

Derivative Instruments and Fair Value Measurements (Tables)

 

 

 

 

 

 

 

Asset (Liability)

 

(In millions)

 

Borrowing Group

 

Balance Sheet Location

 

  September 28,
2013

 

December 29,
2012

 

Assets

 

 

 

 

 

 

 

 

 

Interest rate exchange contracts*

 

Finance

 

Other assets

 

$

 3

 

$

 8

 

Foreign currency exchange contracts

 

Manufacturing

 

Other current assets

 

 

9

 

Total

 

 

 

 

 

$

 3

 

$

 17

 

Liabilities

 

 

 

 

 

 

 

 

 

Interest rate exchange contracts*

 

Finance

 

Other liabilities

 

$

 (6)

 

$

 (8

)

Foreign currency exchange contracts

 

Manufacturing

 

Accrued liabilities

 

(7)

 

(5

)

Total

 

 

 

 

 

$

 (13)

 

$

 (13

)

*Interest rate exchange contracts represent fair value hedges.

 

(In millions)

 

 September 28,
2013

 

December 29,
2012

 

Finance receivables held for sale

 

$

 91

 

$

 140

 

Impaired finance receivables

 

55

 

72

 

Other assets

 

26

 

76

 

 

 

 

Gain (Loss)

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

 September 28,
2013

 

September 29,
2012

 

 September 28,
2013

 

September 29,
2012

 

Finance receivables held for sale

 

$

13

 

$

22

 

$

30

 

$

66

 

Impaired finance receivables

 

(3)

 

(2

)

(8)

 

(9

)

Other assets

 

(5)

 

(13

)

(10)

 

(45

)

 

 

 

September 28, 2013

 

December 29, 2012

 

(In millions)

 

Carrying
Value

 

Estimated
Fair Value

 

Carrying
Value

 

Estimated
Fair Value

 

Manufacturing group

 

 

 

 

 

 

 

 

 

Long-term debt, excluding leases

 

$  (1,847

)

$  (2,034)

 

$  (2,225

)

$  (2,636

)

Finance group

 

 

 

 

 

 

 

 

 

Finance receivables held for investment, excluding leases

 

1,235

 

1,194

 

1,625

 

1,653

 

Debt

 

(1,278

)

(1,267)

 

(1,686

)

(1,678

)

Segment Information (Tables)
Reconciliation of segment profit to income from continuing operations before income taxes

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

  September 28,
2013

 

September 29,
2012

 

  September 28,
2013

 

September 29,
2012

 

REVENUES

 

 

 

 

 

 

 

 

 

Manufacturing Group

 

 

 

 

 

 

 

 

 

Cessna

 

$

593

 

$

778

 

$

1,861

 

$

2,210

 

Bell

 

1,162

 

1,075

 

3,136

 

3,125

 

Textron Systems

 

405

 

400

 

1,256

 

1,166

 

Industrial

 

711

 

683

 

2,239

 

2,194

 

 

 

2,871

 

2,936

 

8,492

 

8,695

 

Finance Group

 

33

 

64

 

106

 

180

 

Total revenues

 

$

2,904

 

$

3,000

 

$

8,598

 

$

8,875

 

SEGMENT OPERATING PROFIT

 

 

 

 

 

 

 

 

 

Manufacturing Group

 

 

 

 

 

 

 

 

 

Cessna

 

$

(23)

 

$

30

 

$

(81)

 

$

59

 

Bell

 

131

 

165

 

395

 

462

 

Textron Systems

 

35

 

21

 

107

 

96

 

Industrial

 

52

 

38

 

188

 

172

 

 

 

195

 

254

 

609

 

789

 

Finance Group

 

13

 

28

 

47

 

62

 

Segment profit

 

208

 

282

 

656

 

851

 

Corporate expenses and other, net

 

(34)

 

(38

)

(109)

 

(105

)

Interest expense, net for Manufacturing group

 

(29)

 

(35

)

(96)

 

(105

)

Income from continuing operations before income taxes

 

$

145

 

$

209

 

$

451

 

$

641

 

Basis of Presentation (Details) (Contracts accounted for under percentage of completion method, USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 28, 2013
Sep. 29, 2012
Sep. 28, 2013
Sep. 29, 2012
Contracts accounted for under percentage of completion method
 
 
 
 
Change in accounting estimate
 
 
 
 
Income from continuing operations before income taxes
$ 4 
$ (6)
$ 13 
$ 10 
Change in Accounting Estimate Financial Effect Increase in Income from Continuing Operations after taxes
(4)
Income from continuing operations per diluted share
$ 0.01 
$ (0.02)
$ 0.03 
$ 0.02 
Basis of Presentation
 
 
 
 
Gross favorable program profit adjustments
12 
12 
30 
52 
Gross unfavorable program profit adjustments
$ 8 
$ 18 
$ 17 
$ 42 
Retirement Plans (Details) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 28, 2013
Sep. 29, 2012
Sep. 28, 2013
Sep. 29, 2012
Dec. 29, 2012
Plan amendment adjustment
 
 
 
 
 
Amendment to postretirement benefit plan, pre-tax
$ 55 
 
$ 55 
 
 
Pension Benefits
 
 
 
 
 
Net periodic benefit cost
 
 
 
 
 
Service cost
33 
30 
100 
89 
 
Interest cost
72 
77 
218 
229 
 
Expected return on plan assets
(104)
(102)
(314)
(305)
 
Amortization of prior service cost (credit)
11 
12 
 
Amortization of net actuarial loss
46 
29 
138 
88 
 
Net periodic benefit cost
51 
38 
153 
113 
 
Postretirement Benefits Other than Pensions
 
 
 
 
 
Net periodic benefit cost
 
 
 
 
 
Service cost
 
Interest cost
15 
19 
 
Amortization of prior service cost (credit)
(6)
(3)
(11)
(9)
 
Amortization of net actuarial loss
 
Net periodic benefit cost
14 
20 
 
Discount rate as a percent
4.50% 
 
4.50% 
 
3.75% 
Plan amendment adjustment
 
 
 
 
 
Amendment to postretirement benefit plan, pre-tax
$ 55 
 
$ 55 
 
 
Earnings Per Share (Details)
3 Months Ended 9 Months Ended
Sep. 28, 2013
Sep. 29, 2012
Sep. 28, 2013
Sep. 29, 2012
Weighted-average shares outstanding for basic and diluted
 
 
 
 
Basic weighted-average shares outstanding
281,525,000 
281,813,000 
278,296,000 
280,983,000 
Dilutive effect of:
 
 
 
 
Convertible notes and warrants
 
14,763,000 
6,226,000 
14,219,000 
Stock options and restricted stock units
185,000 
344,000 
221,000 
495,000 
Diluted weighted-average shares outstanding
281,710,000 
296,920,000 
284,743,000 
295,697,000 
Anti-dilutive effect of weighted average shares
6,000,000 
5,000,000 
5,000,000 
7,000,000 
Accounts Receivable and Finance Receivables (Details) (USD $)
In Millions, unless otherwise specified
Sep. 28, 2013
Dec. 29, 2012
Accounts Receivable
 
 
Unbillable receivables on U.S. Government contracts within accounts receivable
$ 136 
$ 149 
Manufacturing group
 
 
Accounts Receivable
 
 
Accounts Receivable, Gross
1,048 
848 
Allowance for doubtful accounts
(24)
(19)
Total
1,024 
829 
Commercial
 
 
Accounts Receivable
 
 
Accounts Receivable, Gross
708 
534 
U. S. Government Contracts
 
 
Accounts Receivable
 
 
Accounts Receivable, Gross
$ 340 
$ 314 
Accounts Receivable and Finance Receivables (Details 2) (USD $)
In Millions, unless otherwise specified
9 Months Ended 3 Months Ended
Sep. 28, 2013
Dec. 29, 2012
Sep. 29, 2012
Dec. 31, 2011
Sep. 28, 2013
Finance group
Dec. 29, 2012
Finance group
Sep. 28, 2013
Captive
Dec. 29, 2012
Captive
Sep. 28, 2013
Non-captive
Dec. 29, 2012
Non-captive
Finance Receivables
 
 
 
 
 
 
 
 
 
 
Total finance receivables
 
 
 
 
$ 1,589 
$ 2,074 
$ 1,379 
$ 1,704 
$ 210 
$ 370 
Less: Allowance for losses
62 
84 
86 
156 
62 
84 
62 
 
 
 
Less: Finance receivables held for sale
 
 
 
 
91 
140 
 
 
 
 
Total finance receivables held for investment, net
 
 
 
 
1,436 
1,850 
 
 
 
 
Finance Receivables to the held for sale classification
 
 
 
 
 
 
 
 
34 
 
Allowance for loan losses on finance receivables transferred to held for sale
$ 1 
 
 
 
 
 
 
 
$ 1 
 
Accounts Receivable and Finance Receivables (Details 3) (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 28, 2013
item
Dec. 29, 2012
Accounts Receivable and Finance Receivables
 
 
Number of loan categories based on key credit quality indicators for individual loan
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
$ 1,498 
$ 1,934 
Performing
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
1,292 
1,661 
Finance receivables held for investment based on the internally assigned credit quality, percent
86.30% 
85.90% 
Watchlist
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
101 
130 
Finance receivables held for investment based on the internally assigned credit quality, percent
6.70% 
6.70% 
Nonaccrual
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
105 
143 
Finance receivables held for investment based on the internally assigned credit quality, percent
7.00% 
7.40% 
Nonaccrual |
Minimum
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Number of months of contractual delinquency to classify accounts as nonaccrual unless such collection is not doubtful
3 months 
 
Captive
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
1,379 
1,704 
Captive |
Performing
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
1,173 
1,476 
Captive |
Watchlist
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
101 
130 
Captive |
Nonaccrual
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
105 
98 
Non-captive
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
119 
230 
Non-captive |
Performing
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
119 
185 
Non-captive |
Nonaccrual
 
 
Finance receivables held for investment based on the internally assigned credit quality
 
 
Total finance receivables held for investment
 
$ 45 
Accounts Receivable and Finance Receivables (Details 4) (USD $)
In Millions, unless otherwise specified
Sep. 28, 2013
Dec. 29, 2012
Finance receivables held for investment by delinquency aging
 
 
Contractual delinquency of 60 plus days as percentage of finance receivables held for investment
5.87% 
4.65% 
Financing receivable held for investment, recorded investment, less than 31 days past due
$ 1,325 
$ 1,757 
Financing receivable held for investment, recorded investment, 31 to 60 days past due
85 
87 
Financing receivable held for investment, recorded investment, 61 days to 90 days past due
62 
56 
Financing receivable held for investment, recorded investment, over 90 days past due
26 
34 
Total finance receivables held for investment
1,498 
1,934 
Captive
 
 
Finance receivables held for investment by delinquency aging
 
 
Financing receivable held for investment, recorded investment, less than 31 days past due
1,206 
1,531 
Financing receivable held for investment, recorded investment, 31 to 60 days past due
85 
87 
Financing receivable held for investment, recorded investment, 61 days to 90 days past due
62 
55 
Financing receivable held for investment, recorded investment, over 90 days past due
26 
31 
Total finance receivables held for investment
1,379 
1,704 
Non-captive
 
 
Finance receivables held for investment by delinquency aging
 
 
Financing receivable held for investment, recorded investment, less than 31 days past due
119 
226 
Financing receivable held for investment, recorded investment, 61 days to 90 days past due
 
Financing receivable held for investment, recorded investment, over 90 days past due
 
Total finance receivables held for investment
119 
230 
Financing receivable accrual status loans, recorded investment, greater than 90 days past due
$ 0 
$ 0 
Accounts Receivable and Finance Receivables (Details 5) (USD $)
In Millions, unless otherwise specified
9 Months Ended 12 Months Ended
Sep. 28, 2013
Dec. 29, 2012
Summary of impaired finance receivables, excluding leveraged leases
 
 
Recorded investment, Impaired Loans with No Related Allowance for Credit Losses
$ 64 
$ 72 
Recorded investment, Impaired Loans with Related Allowance for Credit Losses
76 
99 
Recorded investment, Total Impaired Loans
140 
171 
Unpaid Principal Balance
143 
187 
Allowance For Losses On Impaired Loans
21 
27 
Average Recorded Investment
159 
270 
Captive
 
 
Summary of impaired finance receivables, excluding leveraged leases
 
 
Recorded investment, Impaired Loans with No Related Allowance for Credit Losses
64 
61 
Recorded investment, Impaired Loans with Related Allowance for Credit Losses
76 
66 
Recorded investment, Total Impaired Loans
140 
127 
Unpaid Principal Balance
143 
128 
Allowance For Losses On Impaired Loans
21 
15 
Average Recorded Investment
135 
121 
Non-captive
 
 
Summary of impaired finance receivables, excluding leveraged leases
 
 
Recorded investment, Impaired Loans with No Related Allowance for Credit Losses
 
11 
Recorded investment, Impaired Loans with Related Allowance for Credit Losses
 
33 
Recorded investment, Total Impaired Loans
 
44 
Unpaid Principal Balance
 
59 
Allowance For Losses On Impaired Loans
 
12 
Average Recorded Investment
$ 24 
$ 149 
Accounts Receivable and Finance Receivables (Details 6) (USD $)
In Millions, unless otherwise specified
Sep. 28, 2013
Dec. 29, 2012
Finance receivables
 
 
Leveraged leases
$ 119 
$ 122 
Individually evaluated for impairment
140 
171 
Collectively evaluated for impairment
1,239 
1,641 
Total Allowance Based on Individual Evaluation
21 
27 
Total Allowance Based on Collective Evaluation
41 
57 
Captive
 
 
Finance receivables
 
 
Individually evaluated for impairment
140 
127 
Collectively evaluated for impairment
1,239 
1,577 
Total Allowance Based on Individual Evaluation
21 
15 
Total Allowance Based on Collective Evaluation
41 
55 
Non-captive
 
 
Finance receivables
 
 
Individually evaluated for impairment
 
44 
Collectively evaluated for impairment
 
64 
Total Allowance Based on Individual Evaluation
 
12 
Total Allowance Based on Collective Evaluation
 
$ 2 
Accounts Receivable and Finance Receivables (Details 7) (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 28, 2013
Sep. 29, 2012
Allowance for losses
 
 
Beginning Balance
$ 84 
$ 156 
Provision for losses
(23)
(4)
Charge-offs
(9)
(78)
Recoveries
11 
12 
Transfers
(1)
 
Ending Balance
62 
86 
Captive
 
 
Allowance for losses
 
 
Beginning Balance
70 
101 
Provision for losses
(6)
Charge-offs
(7)
(40)
Recoveries
Ending Balance
62 
70 
Non-captive
 
 
Allowance for losses
 
 
Beginning Balance
14 
55 
Provision for losses
(17)
(5)
Charge-offs
(2)
(38)
Recoveries
Transfers
(1)
 
Ending Balance
 
$ 16 
Inventories (Details) (USD $)
In Millions, unless otherwise specified
Sep. 28, 2013
Dec. 29, 2012
Inventories
 
 
Finished goods
$ 1,374 
$ 1,329 
Work in process
2,679 
2,247 
Raw materials
433 
437 
Inventories, Gross
4,486 
4,013 
Progress/milestone payments
(1,266)
(1,301)
Total
$ 3,220 
$ 2,712 
Debt (Details) (USD $)
Share data in Millions, except Per Share data, unless otherwise specified
9 Months Ended 1 Months Ended 9 Months Ended 6 Months Ended 9 Months Ended 0 Months Ended 9 Months Ended
Sep. 28, 2013
Sep. 29, 2012
May 1, 2013
Dec. 29, 2012
May 31, 2009
Call option and warrant
item
Sep. 28, 2013
Call option and warrant
Jun. 29, 2013
Warrant
Sep. 28, 2013
Warrant
May 1, 2013
Call options
May 1, 2013
Convertible senior notes
Sep. 28, 2013
Senior Unsecured Revolving Credit Facility
Oct. 4, 2013
Senior Unsecured Revolving Credit Facility
Subsequent event
Debt
 
 
 
 
 
 
 
 
 
 
 
 
Senior unsecured revolving credit facility
 
 
 
 
 
 
 
 
 
 
 
$ 1,000,000,000 
Portion available for issuance of letters of credit against facility
 
 
 
 
 
 
 
 
 
 
 
100,000,000 
Term of debt instrument
 
 
 
 
 
 
 
 
 
 
4 years 
 
Amount borrowed against facility
 
 
 
 
 
 
 
 
 
 
 
Amount paid to holders of notes in settlement of face value
215,000,000 
2,000,000 
 
 
 
 
 
 
 
215,000,000 
 
 
Common stock issued to converting holders in settlement of the excess of the conversion value over the face value
 
 
 
 
 
 
 
 
 
8.9 
 
 
Incremental net share settlement in excess of the face amount of the notes issued upon conversion of convertible notes, after giving effect to the exercise of the call options and warrants
 
 
 
 
 
 
 
 
 
7.4 
 
 
Number of counterparties
 
 
 
 
 
 
 
 
 
 
 
Period for computing VWAP of common stock to determine settlement values
 
 
 
 
 
 
 
45 days 
 
 
 
 
Common stock shares acquired upon settlement of call options
 
 
 
 
 
 
 
 
8.9 
 
 
 
Common stock shares issued in connection with settlement of the warrants
 
 
 
 
 
 
7.4 
 
 
 
 
 
Net increase in treasury stock due to settlement of call options and warrants
 
 
 
 
 
39,000,000 
 
 
 
 
 
 
Common shares covered under capped call
 
 
 
28.7 
 
 
 
 
 
 
 
 
Strike price of capped calls (in dollars per share)
 
 
$ 13.125 
 
 
 
 
 
 
 
 
 
Cap price of capped calls (in dollars per share)
 
 
$ 15.75 
 
 
 
 
 
 
 
 
 
Minimum Stock Price (in dollars per share)
 
 
$ 13.125 
 
 
 
 
 
 
 
 
 
Maximum stock price (in dollars per share)
 
 
$ 15.75 
 
 
 
 
 
 
 
 
 
Amount received from counterparties upon expiration of the capped calls
 
 
$ 75,000,000 
 
 
 
 
 
 
 
 
 
Accrued Liabilities (Details) (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 28, 2013
Sep. 29, 2012
Changes in warranty and product maintenance contract liability
 
 
Accrual at the beginning of period
$ 222 
$ 224 
Provision
203 
190 
Settlements
(210)
(187)
Adjustments to prior accrual estimates
(3)
(2)
Accrual at the end of period
$ 212 
$ 225 
Minimum
 
 
Accrued Liabilities
 
 
Term of limited warranty and maintenance programs
1 year 
 
Maximum
 
 
Accrued Liabilities
 
 
Term of limited warranty and maintenance programs
5 years 
 
Accumulated Other Comprehensive Loss and Other Comprehensive Income (Details) (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 28, 2013
Sep. 29, 2012
Components of Accumulated Other Comprehensive Loss
 
 
Balance at the beginning of the period
$ (1,770)
$ (1,625)
Other comprehensive income before reclassifications
(6)
10 
Amounts reclassified from Accumulated Other Comprehensive Loss
125 
53 
Other comprehensive income
119 
63 
Balance at the end of the period
(1,651)
(1,562)
Foreign Currency Translation Adjustments
 
 
Components of Accumulated Other Comprehensive Loss
 
 
Balance at the beginning of the period
81 
79 
Other comprehensive income before reclassifications
(5)
Other comprehensive income
(5)
Balance at the end of the period
84 
74 
Pension and Post Retirement Benefit Adjustments
 
 
Components of Accumulated Other Comprehensive Loss
 
 
Balance at the beginning of the period
(1,857)
(1,711)
Amounts reclassified from Accumulated Other Comprehensive Loss
127 
63 
Other comprehensive income
127 
63 
Balance at the end of the period
(1,730)
(1,648)
Deferred Gains/Losses on Hedge Contracts
 
 
Components of Accumulated Other Comprehensive Loss
 
 
Balance at the beginning of the period
Other comprehensive income before reclassifications
(9)
15 
Amounts reclassified from Accumulated Other Comprehensive Loss
(2)
(10)
Other comprehensive income
(11)
Balance at the end of the period
$ (5)
$ 12 
Accumulated Other Comprehensive Loss and Other Comprehensive Income (Details 2) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 28, 2013
Sep. 29, 2012
Sep. 28, 2013
Sep. 29, 2012
Pension and postretirement benefits adjustments, Pre-Tax:
 
 
 
 
Amortization of net actuarial loss included in net periodic pension cost, pre-tax
$ 48 
$ 31 
$ 143 
$ 93 
Amortization of prior service cost included in net periodic pension cost, pre-tax
(2)
 
Amendment to postretirement benefit plan, pre-tax
55 
 
55 
 
Pension and postretirement benefits adjustments, net, Pre-Tax
101 
32 
198 
96 
Deferred gains/losses on hedge contracts, pre-tax:
 
 
 
 
Current deferrals, pre-tax
12 
(11)
19 
Reclassification adjustments included in net income, pre-tax
 
 
(3)
(12)
Deferred gains/losses on hedge contracts, net, pre-tax
12 
(14)
Foreign currency translation adjustments, pre-tax
(9)
Other comprehensive income (loss), pre-tax
112 
45 
190 
94 
Pension and postretirement benefits adjustments, tax (Expense) Benefit:
 
 
 
 
Amortization of net actuarial loss included in net periodic pension cost, tax
(18)
(10)
(51)
(32)
Amortization of prior service cost included in net periodic pension cost, tax
(1)
 
(1)
Amendment to postretirement benefit plan, tax
(20)
 
(20)
 
Pension and postretirement benefits adjustments, net, tax
(37)
(11)
(71)
(33)
Deferred gains/losses on hedge contracts, tax:
 
 
 
 
Current deferrals, tax
(1)
(3)
(4)
Reclassification adjustments included in net income, tax
 
(1)
Deferred gains/losses on hedge contracts, net, tax
(1)
(4)
(2)
Foreign currency translation adjustments, Tax
(3)
Other comprehensive income (loss), Tax
(34)
(8)
(71)
(31)
Pension and postretirement benefits adjustments, After Tax:
 
 
 
 
Amortization of net actuarial loss included in net periodic pension cost, after tax
30 
21 
92 
61 
Amortization of prior service cost included in net periodic pension cost, after tax
(1)
 
 
Amendment to postretirement benefit plan, after tax
35 
 
35 
 
Pension and postretirement benefits adjustments net, After-Tax
64 
21 
127 
63 
Deferred gains/losses on hedge contracts, after tax:
 
 
 
 
Current deferrals, after tax
(9)
15 
Reclassification adjustments included in net income, after tax
 
(1)
(2)
(10)
Deferred gains/losses on hedge contracts, net, after tax
(11)
Foreign currency translation adjustments, after Tax
12 
(5)
Other comprehensive income
$ 78 
$ 37 
$ 119 
$ 63 
Derivative Instruments and Fair Value Measurements (Details) (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 28, 2013
Manufacturing group
Sep. 28, 2013
Net Investment Hedge
Sep. 28, 2013
Interest rate exchange contracts
Finance group
Dec. 29, 2012
Interest rate exchange contracts
Finance group
Sep. 28, 2013
Foreign currency exchange contracts
Sep. 28, 2013
Foreign currency exchange contracts
Manufacturing group
Dec. 29, 2012
Foreign currency exchange contracts
Manufacturing group
Sep. 28, 2013
Recurring
Level 2
Designated as hedging instruments
Dec. 29, 2012
Recurring
Level 2
Designated as hedging instruments
Sep. 28, 2013
Recurring
Level 2
Designated as hedging instruments
Interest rate exchange contracts
Fair Value Hedges
Other assets
Finance group
Dec. 29, 2012
Recurring
Level 2
Designated as hedging instruments
Interest rate exchange contracts
Fair Value Hedges
Other assets
Finance group
Sep. 28, 2013
Recurring
Level 2
Designated as hedging instruments
Interest rate exchange contracts
Fair Value Hedges
Other liabilities
Finance group
Dec. 29, 2012
Recurring
Level 2
Designated as hedging instruments
Interest rate exchange contracts
Fair Value Hedges
Other liabilities
Finance group
Dec. 29, 2012
Recurring
Level 2
Designated as hedging instruments
Foreign currency exchange contracts
Cash Flow Hedges
Other current assets
Manufacturing group
Sep. 28, 2013
Recurring
Level 2
Designated as hedging instruments
Foreign currency exchange contracts
Cash Flow Hedges
Accrued liabilities
Manufacturing group
Dec. 29, 2012
Recurring
Level 2
Designated as hedging instruments
Foreign currency exchange contracts
Cash Flow Hedges
Accrued liabilities
Manufacturing group
Fair value of derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Asset, Fair Value
 
 
 
 
 
 
 
$ 3 
$ 17 
$ 3 
$ 8 
 
 
 
 
 
Foreign currency exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liability, Fair Value
 
 
 
 
 
 
 
(13)
(13)
 
 
(6)
(8)
 
 
 
Foreign currency exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(7)
(5)
Notional amounts
 
 
268 
671 
 
641 
664 
 
 
 
 
 
 
 
 
 
Forward exchange contracts and purchased options maximum maturity period
3 years 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net deferred gain / loss in Accumulated OCI
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency effects (after-tax gain) on the effective portion of cash flow hedges, which are reflected in the cumulative translation adjustment account within OCI
 
$ 9 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Instruments and Fair Value Measurements (Details 2) (Fair Value, Measurements, Nonrecurring, Finance group, Unobservable Inputs (Level 3), USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 28, 2013
Sep. 29, 2012
Sep. 28, 2013
Sep. 29, 2012
Dec. 29, 2012
Fair Value, Measurements, Nonrecurring |
Finance group |
Unobservable Inputs (Level 3)
 
 
 
 
 
Assets measured at fair value on a nonrecurring basis
 
 
 
 
 
Finance receivables held for sale, Balance
$ 91 
 
$ 91 
 
$ 140 
Impaired finance receivables, Balance
55 
 
55 
 
72 
Other assets, balance
26 
 
26 
 
76 
Finance receivables held for sale, Gain (Loss)
13 
22 
30 
66 
 
Impaired finance receivables, Gain (Loss)
(3)
(2)
(8)
(9)
 
Other assets, Gain (Loss)
$ (5)
$ (13)
$ (10)
$ (45)
 
Derivative Instruments and Fair Value Measurements (Details 3) (USD $)
In Millions, unless otherwise specified
Sep. 28, 2013
Dec. 29, 2012
Manufacturing group |
Carrying Value
 
 
Carrying value of financial instruments not recorded at fair value
 
 
Long-term debt, excluding leases
$ (1,847)
$ (2,225)
Manufacturing group |
Estimated Fair Value
 
 
Carrying value of financial instruments not recorded at fair value
 
 
Long-term debt, excluding leases
(2,034)
(2,636)
Finance group
 
 
Fair Value, Balance Sheet Grouping, Financial Statement Captions
 
 
Portion of fair value of term debt determined based on observable market transactions (as a percent)
29.00% 
46.00% 
Carrying value of financial instruments not recorded at fair value
 
 
Debt
(1,278)
(1,686)
Finance group |
Carrying Value
 
 
Carrying value of financial instruments not recorded at fair value
 
 
Finance receivables held for investment, excluding leases
1,235 
1,625 
Debt
(1,278)
(1,686)
Finance group |
Estimated Fair Value
 
 
Carrying value of financial instruments not recorded at fair value
 
 
Finance receivables held for investment, excluding leases
1,194 
1,653 
Debt
$ (1,267)
$ (1,678)
Income Tax Expense (Details)
3 Months Ended 9 Months Ended
Sep. 28, 2013
Sep. 28, 2013
Income Tax Expense
 
 
Effective income tax rate (as a percent)
32.40% 
27.50% 
U.S. federal statutory income tax rate (as a percent)
35.00% 
35.00% 
Effective income tax rate having favorable impact resulting from the retroactive reinstatement and extension of the Federal Research and Development Tax Credit (as a percent)
 
4.00% 
Segment Information (Details) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 28, 2013
Sep. 29, 2012
Sep. 28, 2013
item
Sep. 29, 2012
Operating and reportable business segments
 
 
 
 
Number of business operating segments
 
 
 
Number of reportable business segments
 
 
 
REVENUES
 
 
 
 
Manufacturing revenues
$ 2,871 
$ 2,936 
$ 8,492 
$ 8,695 
Finance revenues
33 
64 
106 
180 
Total revenues
2,904 
3,000 
8,598 
8,875 
SEGMENT OPERATING PROFIT
 
 
 
 
Segment profit
208 
282 
656 
851 
Corporate expenses and other, net
(34)
(38)
(109)
(105)
Interest Expense, net for Manufacturing group
(29)
(35)
(96)
(105)
Income from continuing operations before income taxes
145 
209 
451 
641 
Manufacturing group
 
 
 
 
REVENUES
 
 
 
 
Manufacturing revenues
2,871 
2,936 
8,492 
8,695 
SEGMENT OPERATING PROFIT
 
 
 
 
Segment profit
195 
254 
609 
789 
Cessna |
Manufacturing group
 
 
 
 
REVENUES
 
 
 
 
Manufacturing revenues
593 
778 
1,861 
2,210 
SEGMENT OPERATING PROFIT
 
 
 
 
Segment profit
(23)
30 
(81)
59 
Bell |
Manufacturing group
 
 
 
 
REVENUES
 
 
 
 
Manufacturing revenues
1,162 
1,075 
3,136 
3,125 
SEGMENT OPERATING PROFIT
 
 
 
 
Segment profit
131 
165 
395 
462 
Textron Systems |
Manufacturing group
 
 
 
 
REVENUES
 
 
 
 
Manufacturing revenues
405 
400 
1,256 
1,166 
SEGMENT OPERATING PROFIT
 
 
 
 
Segment profit
35 
21 
107 
96 
Industrial |
Manufacturing group
 
 
 
 
REVENUES
 
 
 
 
Manufacturing revenues
711 
683 
2,239 
2,194 
SEGMENT OPERATING PROFIT
 
 
 
 
Segment profit
52 
38 
188 
172 
Finance group
 
 
 
 
REVENUES
 
 
 
 
Finance revenues
33 
64 
106 
180 
SEGMENT OPERATING PROFIT
 
 
 
 
Segment profit
$ 13 
$ 28 
$ 47 
$ 62