TEXTRON INC, 10-K filed on 3/1/2011
Annual Report
Document and Entity Information
In Billions, except Share data
Year Ended
Jan. 01, 2011
Feb. 12, 2011
Jul. 02, 2010
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
TEXTRON INC 
 
 
Entity Central Index Key
0000217346 
 
 
Document Type
10-K 
 
 
Document Period End Date
2011-01-01 
 
 
Amendment Flag
FALSE 
 
 
Document Fiscal Year Focus
2010 
 
 
Document Fiscal Period Focus
FY 
 
 
Current Fiscal Year End Date
01/01 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
Entity Common Stock, Shares Outstanding
 
276,027,951 
 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data
Year Ended
Jan. 01, 2011
Year Ended
Jan. 02, 2010
Year Ended
Jan. 03, 2009
Revenues
 
 
 
Manufacturing revenues
$ 10,307 
$ 10,139 
$ 13,287 
Finance revenues
218 
361 
723 
Total revenues
10,525 
10,500 
14,010 
Costs, expenses and other
 
 
 
Cost of sales
8,605 
8,468 
10,583 
Selling and administrative expense
1,231 
1,338 
1,590 
Special charges
190 
317 
526 
Provision for losses on finance receivables
143 
267 
234 
Interest expense
270 
309 
448 
Gain on sale of assets
 
(50)
 
Total costs, expenses and other
10,439 
10,649 
13,381 
Income (loss) from continuing operations before income taxes
86 
(149)
629 
Income tax expense (benefit)
(6)
(76)
305 
Income (loss) from continuing operations
92 
(73)
324 
Income (loss) from discontinued operations, net of income taxes
(6)
42 
162 
Net income (loss)
86 
(31)
486 
Basic earnings per share
 
 
 
Continuing operations
0.33 
(0.28)
1.32 
Discontinued operations
(0.02)
0.16 
0.65 
Basic earnings per share
0.31 
(0.12)
1.97 
Diluted earnings per share
 
 
 
Continuing operations
0.3 
(0.28)
1.29 
Discontinued operations
(0.02)
0.16 
0.65 
Diluted earnings per share
$ 0.28 
$ (0.12)
$ 1.94 
Consolidated Balance Sheets (USD $)
In Millions
Jan. 01, 2011
Jan. 02, 2010
Assets
 
 
Cash and equivalents
$ 931 
$ 1,892 
Total assets
15,282 
18,940 
Liabilities
 
 
Total liabilities
12,310 
16,114 
Shareholders' equity
 
 
Common stock (277.7 million and 277.4 million shares issued, respectively, and 275.7 million and 272.3 million shares outstanding, respectively)
35 
35 
Capital surplus
1,301 
1,369 
Retained earnings
3,037 
2,973 
Accumulated other comprehensive loss
(1,316)
(1,321)
Total shareholders' equity including cost of treasury shares
3,057 
3,056 
Less cost of treasury shares
85 
230 
Total shareholders' equity
2,972 
2,826 
Total liabilities and shareholders' equity
15,282 
18,940 
Manufacturing group
 
 
Assets
 
 
Cash and equivalents
898 
1,748 
Accounts receivable, net
892 
894 
Inventories
2,277 
2,273 
Other current assets
980 
985 
Total current assets
5,047 
5,900 
Property, plant and equipment, net
1,932 
1,968 
Goodwill
1,632 
1,622 
Other assets
1,722 
1,938 
Total assets
10,333 
11,428 
Liabilities
 
 
Current portion of long-term debt
19 
134 
Accounts payable
622 
569 
Accrued liabilities
2,016 
2,039 
Total current liabilities
2,657 
2,742 
Other liabilities
2,993 
3,253 
Long-term debt
2,283 
3,450 
Total liabilities
7,933 
9,445 
Finance group
 
 
Assets
 
 
Cash and equivalents
33 
144 
Finance receivables held for investment, net
3,871 
5,865 
Finance receivables held for sale
413 
819 
Other assets
632 
684 
Total assets
4,949 
7,512 
Liabilities
 
 
Other liabilities
391 
564 
Due to Manufacturing group
326 
438 
Debt
3,660 
5,667 
Total liabilities
$ 4,377 
$ 6,669 
Consolidated Balance Sheets (Parenthetical)
Jan. 01, 2011
Jan. 02, 2010
Shareholders' equity
 
 
Common Stock Issued
277.7 
277.4 
Common stock outstanding
275.7 
272.3 
Consolidated Statements of Shareholders' Equity (USD $)
In Millions
Preferred Stock
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Loss
Total
Beginning Balance at Dec. 29, 2007
$ 2 
$ 32 
$ 1,193 
$ 2,766 
$ (86)
$ (400)
$ 3,507 
Net income (loss)
 
 
 
486 
 
 
486 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
 
 
 
 
(195)
(195)
Deferred gains (losses) on hedge contracts
 
 
 
 
 
(73)
(73)
Pension adjustments
 
 
 
 
 
(803)
(803)
Reclassification due to sale of Fluid & Power
 
 
 
 
 
35 
35 
Other reclassification adjustments
 
 
 
 
 
14 
14 
Total other comprehensive income (loss)
 
 
 
 
 
 
(536)
Dividends declared ($0.92, $0.08 and $0.08 per share for 2008, 2009 and 2010, respectively)
 
 
 
(227)
 
 
(227)
Share-based compensation
 
 
50 
 
 
 
50 
Exercise of stock options
 
 
39 
 
 
 
39 
Purchases of common stock
 
 
 
 
(533)
 
(533)
Issuance of common stock for employee stock plans
 
 
(66)
 
119 
 
53 
Income tax impact of employee stock transactions
 
 
13 
 
 
 
13 
Ending Balance at Jan. 03, 2009
32 
1,229 
3,025 
(500)
(1,422)
2,366 
Net income (loss)
 
 
 
(31)
 
 
(31)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
 
 
 
 
23 
23 
Deferred gains (losses) on hedge contracts
 
 
 
 
 
67 
67 
Pension adjustments
 
 
 
 
 
(25)
(25)
Other reclassification adjustments
 
 
 
 
 
21 
21 
Pension curtailment
 
 
 
 
 
15 
15 
Total other comprehensive income (loss)
 
 
 
 
 
 
70 
Dividends declared ($0.92, $0.08 and $0.08 per share for 2008, 2009 and 2010, respectively)
 
 
 
(21)
 
 
(21)
Share-based compensation
 
 
30 
 
 
 
30 
Purchases of convertible note call options
 
 
(140)
 
 
 
(140)
Equity component of convertible debt issuance
 
 
134 
 
 
 
134 
Issuance of common stock and warrants
 
330 
 
 
 
333 
Issuance of common stock for employee stock plans
 
 
(210)
 
270 
 
60 
Redemption of preferred stock
(2)
 
 
 
 
(1)
Income tax impact of employee stock transactions
 
 
(5)
 
 
 
(5)
Ending Balance at Jan. 02, 2010
35 
1,369 
2,973 
(230)
(1,321)
2,826 
Net income (loss)
 
 
 
86 
 
 
86 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
 
 
 
 
(2)
(2)
Deferred gains (losses) on hedge contracts
 
 
 
 
 
14 
14 
Pension adjustments
 
 
 
 
 
(112)
(112)
Recognition of currency translation loss (see Note 11)
 
 
 
 
 
74 
74 
Other reclassification adjustments
 
 
 
 
 
31 
31 
Total other comprehensive income (loss)
 
 
 
 
 
 
91 
Dividends declared ($0.92, $0.08 and $0.08 per share for 2008, 2009 and 2010, respectively)
 
 
 
(22)
 
 
(22)
Share-based compensation
 
 
22 
 
 
 
22 
Exercise of stock options
 
 
 
 
 
Issuance of common stock for employee stock plans
 
 
(94)
 
145 
 
51 
Income tax impact of employee stock transactions
 
 
(3)
 
 
 
(3)
Ending Balance at Jan. 01, 2011
$ 0 
$ 35 
$ 1,301 
$ 3,037 
$ (85)
$ (1,316)
$ 2,972 
Consolidated Statements of Shareholders' Equity (Parenthetical) (USD $)
Year Ended
Jan. 01, 2011
Year Ended
Jan. 02, 2010
Year Ended
Jan. 03, 2009
Dividends declared per share $0.92, $0.08 and $0.08 in the year 2008, 2009 and 2010, respectively
$ 0.08 
$ 0.08 
$ 0.92 
Retained Earnings
 
 
 
Dividends declared per share $0.92, $0.08 and $0.08 in the year 2008, 2009 and 2010, respectively
$ 0.08 
$ 0.08 
$ 0.92 
Consolidated Statements of Cash Flows (USD $)
In Millions
Year Ended
Jan. 01, 2011
Year Ended
Jan. 02, 2010
Year Ended
Jan. 03, 2009
Cash flows from operating activities
 
 
 
Net income (loss)
$ 86 
$ (31)
$ 486 
Less: Income (loss) from discontinued operations
(6)
42 
162 
Income (loss) from continuing operations
92 
(73)
324 
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
 
 
 
Dividends received from Finance group
Capital contributions paid to Finance group
Non-cash items:
 
 
 
Depreciation and amortization
393 
409 
400 
Provision for losses on finance receivables held for investment
143 
267 
234 
Portfolio losses on finance receivables
112 
162 
 
Valuation allowance on finance receivables held for sale
(15)
293 
Goodwill and other asset impairment charges
19 
144 
191 
Deferred income taxes
69 
(265)
(43)
Other, net
109 
82 
103 
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(1)
17 
15 
Inventories
(10)
803 
(662)
Other assets
36 
(250)
(68)
Accounts payable
54 
(535)
276 
Accrued and other liabilities
(455)
78 
(33)
Captive finance receivables, net
424 
177 
(291)
Other operating activities, net
 
31 
25 
Net cash provided by (used in) operating activities of continuing operations
993 
1,032 
764 
Net cash used in operating activities of discontinued operations
(9)
(17)
(14)
Net cash provided by (used in) operating activities
984 
1,015 
750 
Cash flows from investing activities
 
 
 
Finance receivables originated or purchased
(450)
(3,005)
(10,860)
Finance receivables repaid
1,635 
4,011 
10,630 
Proceeds on receivables sales, including securitizations
528 
594 
518 
Net cash used in acquisitions
(57)
 
(109)
Capital expenditures
(270)
(238)
(545)
Proceeds from sale of repossessed assets and properties
129 
236 
22 
Retained interests
 
117 
15 
Purchase of marketable securities
 
 
(100)
Other investing activities, net
34 
13 
21 
Net cash provided by (used in) investing activities of continuing operations
1,549 
1,728 
(408)
Net cash provided by investing activities of discontinued operations
 
211 
471 
Net cash provided by (used in) investing activities
1,549 
1,939 
63 
Cash flows from financing activities
 
 
 
Proceeds from long-term lines of credit
 
2,970 
 
Payments on long-term lines of credit
(1,467)
(63)
 
Proceeds from issuance of long-term debt
231 
918 
1,461 
Principal payments on long-term debt
(2,241)
(4,163)
(1,922)
Increase (decrease) in short-term debt
 
(1,637)
218 
Proceeds (payments) on borrowings against officers' life insurance policies
 
(412)
222 
Intergroup financing
Proceeds from issuance of convertible notes, net of fees paid
 
582 
 
Purchases of convertible note call options
 
(140)
 
Proceeds from issuance of common stock and warrants
 
333 
 
Proceeds from option exercises and excess tax benefit on options
 
50 
Purchases of Textron common stock
 
 
(533)
Capital contributions paid to Finance group under Support Agreement
Capital contributions paid to Cessna Export Finance Corp.
Dividends paid
(22)
(21)
(284)
Net cash provided by (used in) financing activities of continuing operations
(3,493)
(1,633)
(788)
Net cash used in financing activities of discontinued operations
 
 
(2)
Net cash provided by (used in) financing activities
(3,493)
(1,633)
(790)
Effect of exchange rate changes on cash and equivalents
(1)
24 
(7)
Net increase (decrease) in cash and equivalents
(961)
1,345 
16 
Cash and equivalents at beginning of year
1,892 
547 
531 
Cash and equivalents at end of year
931 
1,892 
547 
Manufacturing group
 
 
 
Cash flows from operating activities
 
 
 
Net income (loss)
314 
175 
947 
Less: Income (loss) from discontinued operations
(6)
42 
162 
Income (loss) from continuing operations
320 
133 
785 
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
 
 
 
Dividends received from Finance group
505 
349 
142 
Capital contributions paid to Finance group
(383)
(270)
(625)
Non-cash items:
 
 
 
Depreciation and amortization
362 
373 
360 
Provision for losses on finance receivables held for investment
Portfolio losses on finance receivables
Valuation allowance on finance receivables held for sale
Goodwill and other asset impairment charges
18 
144 
11 
Deferred income taxes
131 
(61)
51 
Other, net
110 
112 
103 
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(1)
17 
15 
Inventories
(11)
810 
(648)
Other assets
(255)
(98)
Accounts payable
54 
(535)
276 
Accrued and other liabilities
(384)
(85)
21 
Captive finance receivables, net
Other operating activities, net
 
14 
Net cash provided by (used in) operating activities of continuing operations
730 
738 
407 
Net cash used in operating activities of discontinued operations
(9)
(17)
(14)
Net cash provided by (used in) operating activities
721 
721 
393 
Cash flows from investing activities
 
 
 
Finance receivables originated or purchased
Finance receivables repaid
Proceeds on receivables sales, including securitizations
Net cash used in acquisitions
(57)
 
(109)
Capital expenditures
(270)
(238)
(537)
Proceeds from sale of repossessed assets and properties
Retained interests
Purchase of marketable securities
Other investing activities, net
(26)
(50)
Net cash provided by (used in) investing activities of continuing operations
(353)
(288)
(637)
Net cash provided by investing activities of discontinued operations
 
211 
471 
Net cash provided by (used in) investing activities
(353)
(77)
(166)
Cash flows from financing activities
 
 
 
Proceeds from long-term lines of credit
 
1,230 
 
Payments on long-term lines of credit
(1,167)
(63)
 
Proceeds from issuance of long-term debt
 
595 
 
Principal payments on long-term debt
(130)
(392)
(348)
Increase (decrease) in short-term debt
 
(869)
867 
Proceeds (payments) on borrowings against officers' life insurance policies
 
(412)
222 
Intergroup financing
98 
(280)
(133)
Proceeds from issuance of convertible notes, net of fees paid
 
582 
 
Purchases of convertible note call options
 
(140)
 
Proceeds from issuance of common stock and warrants
 
333 
 
Proceeds from option exercises and excess tax benefit on options
 
50 
Purchases of Textron common stock
 
 
(533)
Capital contributions paid to Finance group under Support Agreement
Capital contributions paid to Cessna Export Finance Corp.
Dividends paid
(22)
(21)
(284)
Net cash provided by (used in) financing activities of continuing operations
(1,215)
563 
(159)
Net cash used in financing activities of discontinued operations
 
 
(2)
Net cash provided by (used in) financing activities
(1,215)
563 
(161)
Effect of exchange rate changes on cash and equivalents
(3)
10 
(6)
Net increase (decrease) in cash and equivalents
(850)
1,217 
60 
Cash and equivalents at beginning of year
1,748 
531 
471 
Cash and equivalents at end of year
898 
1,748 
531 
Finance group
 
 
 
Cash flows from operating activities
 
 
 
Net income (loss)
(228)
(206)
(461)
Less: Income (loss) from discontinued operations
Income (loss) from continuing operations
(228)
(206)
(461)
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
 
 
 
Dividends received from Finance group
Capital contributions paid to Finance group
Non-cash items:
 
 
 
Depreciation and amortization
31 
36 
40 
Provision for losses on finance receivables held for investment
143 
267 
234 
Portfolio losses on finance receivables
112 
162 
 
Valuation allowance on finance receivables held for sale
(15)
293 
Goodwill and other asset impairment charges
 
180 
Deferred income taxes
(62)
(204)
(94)
Other, net
(1)
(30)
 
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
Inventories
Other assets
32 
(5)
18 
Accounts payable
Accrued and other liabilities
(71)
166 
(54)
Captive finance receivables, net
Other operating activities, net
 
25 
11 
Net cash provided by (used in) operating activities of continuing operations
(35)
196 
167 
Net cash used in operating activities of discontinued operations
Net cash provided by (used in) operating activities
(35)
196 
167 
Cash flows from investing activities
 
 
 
Finance receivables originated or purchased
(866)
(3,659)
(11,879)
Finance receivables repaid
2,348 
4,804 
11,245 
Proceeds on receivables sales, including securitizations
655 
644 
631 
Net cash used in acquisitions
Capital expenditures
 
 
(8)
Proceeds from sale of repossessed assets and properties
129 
236 
22 
Retained interests
 
117 
15 
Purchase of marketable securities
 
 
(100)
Other investing activities, net
39 
11 
10 
Net cash provided by (used in) investing activities of continuing operations
2,305 
2,153 
(64)
Net cash provided by investing activities of discontinued operations
Net cash provided by (used in) investing activities
2,305 
2,153 
(64)
Cash flows from financing activities
 
 
 
Proceeds from long-term lines of credit
 
1,740 
 
Payments on long-term lines of credit
(300)
 
 
Proceeds from issuance of long-term debt
231 
323 
1,461 
Principal payments on long-term debt
(2,111)
(3,771)
(1,574)
Increase (decrease) in short-term debt
 
(768)
(649)
Proceeds (payments) on borrowings against officers' life insurance policies
Intergroup financing
(111)
280 
133 
Proceeds from issuance of convertible notes, net of fees paid
Purchases of convertible note call options
Proceeds from issuance of common stock and warrants
Proceeds from option exercises and excess tax benefit on options
Purchases of Textron common stock
Capital contributions paid to Finance group under Support Agreement
383 
270 
625 
Capital contributions paid to Cessna Export Finance Corp.
30 
40 
 
Dividends paid
(505)
(349)
(142)
Net cash provided by (used in) financing activities of continuing operations
(2,383)
(2,235)
(146)
Net cash used in financing activities of discontinued operations
Net cash provided by (used in) financing activities
(2,383)
(2,235)
(146)
Effect of exchange rate changes on cash and equivalents
14 
(1)
Net increase (decrease) in cash and equivalents
(111)
128 
(44)
Cash and equivalents at beginning of year
144 
16 
60 
Cash and equivalents at end of year
$ 33 
$ 144 
$ 16 
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation and Financial Statement Presentation
Our Consolidated Financial Statements include the accounts of Textron Inc. and its majority-owned subsidiaries. Our financings are conducted through two separate borrowing groups. The Manufacturing group consists of Textron Inc. consolidated with its majority-owned subsidiaries that operate in the Cessna, Bell, Textron Systems and Industrial segments. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation (TFC), its consolidated subsidiaries and three other finance subsidiaries owned by Textron Inc. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements.
Our Finance group provides captive financing for retail purchases and leases for new and used aircraft and equipment manufactured by our Manufacturing group. In the Consolidated Statements of Cash Flows, cash received from customers or from securitizations is reflected as operating activities when received from third parties. However, in the cash flow information provided for the separate borrowing groups, cash flows related to captive financing activities are reflected based on the operations of each group. For example, when product is sold by our Manufacturing group to a customer and is financed by the Finance group, the origination of the finance receivable is recorded within investing activities as a cash outflow in the Finance group’s statement of cash flows. Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the Finance group on the customer’s behalf is recorded within operating cash flows as a cash inflow. Although cash is transferred between the two borrowing groups, there is no cash transaction reported in the consolidated cash flows at the time of the original financing. These captive financing activities, along with all significant intercompany transactions, are reclassified or eliminated in consolidation.
We have reclassified certain prior period amounts to conform to the current presentation related to assets and liabilities of discontinued operations that are now combined with continuing operations on the Consolidated Balance Sheet due to their insignificance to the balance sheet.
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.
Cash and Equivalents
Cash and equivalents consist of cash and short-term, highly liquid investments with original maturities of three months or less.
Revenue Recognition
We generally recognize revenue for the sale of products, which are not under long-term contracts, upon delivery. For commercial aircraft, delivery is upon completion of manufacturing, customer acceptance, and the transfer of the risk and rewards of ownership. Taxes collected from customers and remitted to government authorities are recorded on a net basis.
When a sale arrangement involves multiple deliverables, such as sales of products that include customization and other services, we evaluate the arrangement to determine whether there are separate items that are required to be delivered under the arrangement that qualify as separate units of accounting. These arrangements typically involve the customization services we offer to customers who purchase Bell helicopters, and the services generally are provided within the first six months after the customer accepts the aircraft and assumes risk of loss. We consider the aircraft and the customization services to be separate units of accounting and allocate contract price between the two on a relative selling price basis using the best evidence of selling price for each of the arrangement deliverables, typically by reference to the price charged when the same or similar items are sold separately by us, taking into consideration any performance, cancellation, termination or refund-type provisions. We recognize revenue when the recognition criteria for each unit of accounting are met.
Long-Term Contracts — Revenues under long-term contracts are accounted for under the percentage-of-completion method of accounting. Under this method, we estimate profit as the difference between the total estimated revenues and cost of a contract. We then recognize that estimated profit over the contract term based on either the units-of-delivery method or the cost-to-cost method (which typically is used for development effort as costs are incurred), as appropriate under the circumstances. Revenues under fixed-price contracts generally are recorded using the units-of-delivery method. Revenues under cost-reimbursement contracts are recorded using the cost-to-cost method.
Our long-term contract profits are based on estimates of total contract cost and revenues utilizing current contract specifications, expected engineering requirements and the achievement of contract milestones, including product deliveries. Certain contracts are awarded with fixed-price incentive fees that also are considered when estimating revenues and profit rates. Contract costs typically are incurred over a period of several years, and the estimation of these costs requires substantial judgment. We review and revise these estimates periodically throughout the contract term. Revisions to contract profits are recorded when the revisions to estimated revenues or costs are made. Anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable.
Collaborative Arrangements — Our Bell segment has a strategic alliance agreement with The Boeing Company (Boeing) to provide engineering, development and test services related to the V-22 aircraft, as well as to produce the V-22 aircraft, under a number of separate contracts with the U.S. Government (V-22 Contracts). The alliance created by this agreement is not a legal entity and has no employees, no assets and no true operations. This agreement creates contractual rights and does not represent an entity in which we have an equity interest. We account for this alliance as a collaborative arrangement with Bell and Boeing reporting costs incurred and revenue generated from transactions with the U.S. Government in each company’s respective income statement. Neither Bell nor Boeing is considered to be the principal participant for the transactions recorded under this agreement. Profits on cost-plus contracts are allocated between Bell and Boeing on a 50%-50% basis. Negotiated profits on fixed-price contracts are also allocated 50%-50%; however, Bell and Boeing are each responsible for their own cost overruns and are entitled to retain any cost underruns. Based on the contractual arrangement established under the alliance, Bell accounts for its rights and obligations under the specific requirements of the V-22 Contracts allocated to Bell under the work breakdown structure. We account for all of our rights and obligations, including warranty, product and any contingent liabilities, under the specific requirements of the V-22 Contracts allocated to us under the agreement. Revenues and cost of sales reflect our performance under the V-22 Contracts with revenues recognized using the units-of-delivery method. We include all assets used in performance of the V-22 Contracts that we own, including inventory and unpaid receivables and all liabilities arising from our obligations under the V-22 Contracts in our Consolidated Balance Sheets.
Finance Revenues — Finance revenues include interest on finance receivables, direct loan origination costs and fees received, and capital and leveraged lease earnings, as well as portfolio gains/losses. Portfolio gains/losses include gains/losses on the sale or early termination of finance assets and impairment charges related to repossessed assets and properties and operating assets received in satisfaction of troubled finance receivables. Revenues on direct loan origination costs and fees received are deferred and amortized to finance revenues over the contractual lives of the respective receivables and credit lines using the interest method. When receivables are sold or prepaid, unamortized amounts are recognized in finance revenues.
We recognize interest using the interest method, which provides a constant rate of return over the terms of the receivables. Accrual of interest income is suspended if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically suspend the accrual of interest income for accounts that are contractually delinquent by more than three months unless collection is not doubtful. Cash payments on nonaccrual accounts, including finance charges, generally are applied to reduce the net investment balance. We resume the accrual of interest when the loan becomes contractually current through payment according to the original terms of the loan or, if a loan has been modified, following a period of performance under the terms of the modification, provided we conclude that collection of all principal and interest is no longer doubtful. Previously suspended interest income is recognized at that time.
Leases — Certain qualifying noncancelable aircraft and other product lease contracts are accounted for as sales-type leases. Upon delivery, we record the present value of all payments (net of executory costs and any guaranteed residual values) under these leases as revenues, and the related costs of the product are charged to cost of sales. For lease financing transactions that do not qualify as sales-type leases, we record revenues as earned over the lease period.
Finance Receivables Held for Sale
Finance receivables are classified as held for sale based on the determination that we no longer intend to hold the receivables for the foreseeable future, until maturity or payoff, or we no longer have the ability to hold to maturity. Our decision to classify certain finance receivables as held for sale is based on a number of factors, including, but not limited to, contractual duration, type of collateral, credit strength of the borrowers, interest rates and perceived marketability of the receivables. On an ongoing basis, these factors, combined with our overall liquidation strategy, determine which finance receivables we have the intent to hold for the foreseeable future and which finance receivables we will hold for sale. Our current strategy is based on an evaluation of both our performance and liquidity position and changes in external factors affecting the value and/or marketability of our finance receivables. A change in this strategy could result in a change in the classification of our finance receivables. As a result of the significant influence of economic and liquidity conditions on our business plans and strategies, and the rapid changes in these and other factors we utilize to determine which assets are classified as held for sale, we currently believe the term “foreseeable future” represents a time period of six to nine months. We also believe that unanticipated changes in both internal and external factors affecting our financial performance, liquidity position, or the value and/or marketability of our finance receivables could result in a modification of this assessment.
Finance receivables held for sale are carried at the lower of cost or fair value. At the time of transfer to held for sale classification, we establish a valuation allowance for any shortfall between the carrying value, net of all deferred fees and costs, and fair value. In addition, any allowance for loan losses previously allocated to these finance receivables is reclassified to the valuation allowance account, which is netted with finance receivables held for sale on the balance sheet. This valuation allowance is adjusted quarterly through earnings for any changes in the fair value of the finance receivables below the carrying value. Fair value changes can occur based on market interest rates, market liquidity, and changes in the credit quality of the borrower and value of underlying loan collateral. If we determine that finance receivables classified as held for sale will not be sold and we have the intent and ability to hold the finance receivables for the foreseeable future, until maturity or payoff, the finance receivables are reclassified to held for investment at the lower of cost or fair value.
Finance Receivables Held for Investment and Allowance for Losses
Finance receivables are classified as held for investment when we have the intent and the ability to hold the receivable for the foreseeable future or until maturity or payoff. Finance receivables held for investment are generally recorded at the amount of outstanding principal less allowance for loan 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 and analysis by product line. For larger balance accounts specifically identified as impaired, including large accounts in homogeneous portfolios, a reserve is established based on comparing the carrying value with either a) the expected future cash flows, discounted at the finance receivable’s effective interest rate; or b) the fair value, if the finance receivable is collateral dependent. The expected future cash flows consider collateral value; financial performance and liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs associated with the repossession/foreclosure and eventual disposal of collateral. When there is a range of potential outcomes, we perform multiple discounted cash flow analyses and weight the outcomes based on their relative likelihood of occurrence.
The evaluation of our portfolios is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the underlying collateral, which may differ from actual results. While our analysis is specific to each individual account, the most critical factors included in this analysis vary by product line. For the aviation product line, these factors include industry valuation guides, physical condition of the aircraft, payment history, and existence and financial strength of guarantors. For the golf equipment line, the critical factors are the age and condition of the collateral, while the factors for the golf mortgage line include historical golf course, hotel or marina cash flow performance; estimates of golf rounds and price per round or occupancy and room rates; market discount and capitalization rates; and existence and financial strength of guarantors. For the timeshare product line, the critical factors are the historical performance of consumer notes receivable collateral, real estate valuations, operating expenses of the borrower, the impact of bankruptcy court rulings on the value of the collateral, legal and other professional expenses and borrower’s access to capital.
We also establish an allowance for losses by product line to cover probable but specifically unknown losses existing in the portfolio. For homogeneous portfolios, including the aviation and golf equipment product lines, 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. For non-homogeneous portfolios, including the golf mortgage and timeshare product lines, the allowance is established as a percentage of watchlist balances, as defined on page 53, which represents a combination of assumed default likelihood and loss severity based on historical experience, industry trends and collateral values. In establishing our allowance for losses to cover accounts not specifically identified, the most critical factors for the aviation product line include the collateral value of the portfolio, historical default experience and delinquency trends; for golf equipment, factors considered include historical loss experience and delinquency trends; and for golf mortgage, factors include an evaluation of individual loan credit quality indicators such as delinquency, loan balance to collateral value, debt service coverage, existence and financial strength of guarantors, historical progression from watchlist to nonaccrual status and historical loss severity. For the timeshare product line, we evaluate individual loan credit quality indicators such as borrowing base shortfalls for revolving notes receivable facilities, default rates of our notes receivable collateral, borrower’s access to capital, historical progression from watchlist to nonaccrual status and estimates of loss severity based on analysis of impaired loans in the product line.
Finance receivables held for investment are written down to the fair value (less estimated costs to sell) of the related collateral at the earlier of the date when the collateral is repossessed or when no payment has been received for six months unless management deems the receivable collectable. Finance receivables are charged off when the remaining balance is deemed to be uncollectable.
Inventories
Inventories are stated at the lower of cost or estimated net realizable value. We value our inventories generally using the first-in, first-out (FIFO) method or the last-in, first-out (LIFO) method for certain qualifying inventories where LIFO provides a better matching of costs and revenues. We determine costs for our commercial helicopters on an average cost basis by model considering the expended and estimated costs for the current production release. Inventoried costs related to long-term contracts are stated at actual production costs, including allocable operating overhead, advances to suppliers, and, in the case of contracts with the U.S. Government, allocable research and development and general and administrative expenses. Since our inventoried costs include amounts related to contracts with long production cycles, a portion of these costs is not expected to be realized within one year. Pursuant to contract provisions, agencies of the U.S. Government have title to, or security interest in, inventories related to such contracts as a result of advances, performance-based payments and progress payments. Such advances and payments are reflected as an offset against the related inventory balances. Customer deposits are recorded against inventory when the right of offset exists. All other customer deposits are recorded in accrued liabilities.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated primarily using the straight-line method. Land improvements and buildings are depreciated primarily over estimated lives ranging from four to 40 years, while machinery and equipment are depreciated primarily over one to 15 years. We capitalize expenditures for improvements that increase asset values and extend useful lives.
Asset Retirement Obligations
We have incurred asset retirement obligations primarily related to costs to remove and dispose of underground storage tanks and asbestos materials used in insulation, adhesive fillers and floor tiles. There is no legal requirement to remove these items, and there currently is no plan to remodel the related facilities or otherwise cause the impacted items to require disposal. Since these asset retirement obligations are not estimable, there is no related liability recorded in the Consolidated Balance Sheets.
Intangible and Other Long-Lived Assets
At acquisition, we estimate and record the fair value of purchased intangible assets primarily using a discounted cash flow analysis of anticipated cash flows reflecting incremental revenues and/or cost savings resulting from the acquired intangible asset using market participant assumptions. Amortization of intangible assets with finite lives is recognized over their estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized. Approximately 35% of our gross intangible assets are amortized using the straight-line method, with the remaining assets, primarily customer agreements, amortized based on the cash flow streams used to value the asset.
Long-lived assets, including intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying value of the asset held for use exceeds the sum of the undiscounted expected future cash flows, the carrying value of the asset generally is written down to fair value. Long-lived assets held for sale are stated at the lower of cost or fair value less cost to sell. Fair value is determined using pertinent market information, including estimated future discounted cash flows.
Goodwill
We evaluate the recoverability of goodwill annually in the fourth quarter or more frequently if events or changes in circumstances, such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of a reporting unit might be impaired. The reporting unit represents the operating segment unless discrete financial information is prepared and reviewed by segment management for businesses one level below that operating segment, in which case such component is the reporting unit. In certain instances, we have aggregated components of an operating segment into a single reporting unit based on similar economic characteristics. Goodwill is considered to be potentially impaired when the carrying value of a reporting unit exceeds its estimated fair value. Fair values are established primarily using discounted cash flows that incorporate assumptions for the unit’s short- and long-term revenue growth rates, operating margins and discount rates, which represent our best estimates of current and forecasted market conditions, current cost structure, anticipated net cost reductions, and the implied rate of return that we believe a market participant would require for an investment in a company having similar risks and business characteristics to the reporting unit being assessed. When available, comparative market multiples are used to corroborate discounted cash flow results.
Pension and Postretirement Benefit Obligations
We maintain various pension and postretirement plans for our employees globally. These plans include significant pension and postretirement benefit obligations, which are calculated based on actuarial valuations. Key assumptions used in determining these obligations and related expenses include expected long-term rates of return on plan assets, discount rates and healthcare cost projections. We evaluate and update these assumptions annually in consultation with third-party actuaries and investment advisors. We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increases. We recognize the overfunded or underfunded status of our pension and postretirement plans in the Consolidated Balance Sheets and recognize changes in the funded status of our defined benefit plans in comprehensive income in the year in which they occur. Actuarial gains and losses that are not immediately recognized as net periodic pension cost are recognized as a component of other comprehensive (loss) income (OCI) and are amortized into net periodic pension cost in future periods.
Derivative Financial Instruments
We are exposed to market risk primarily from changes in interest rates and currency exchange rates. We do not hold or issue derivative financial instruments for trading or speculative purposes. To manage the volatility relating to our exposures, we net these exposures on a consolidated basis to take advantage of natural offsets. For the residual portion, we enter into various derivative transactions pursuant to our policies in areas such as counterparty exposure and hedging practices. All derivative instruments are reported at fair value in the Consolidated Balance Sheets. Designation to support hedge accounting is performed on a specific exposure basis. For financial instruments qualifying as fair value hedges, we record changes in fair value in earnings, offset, in part or in whole, by corresponding changes in the fair value of the underlying exposures being hedged. For cash flow hedges, we record changes in the fair value of derivatives (to the extent they are effective as hedges) in OCI, net of deferred taxes. Changes in fair value of derivatives not qualifying as hedges are recorded in earnings.
Foreign currency denominated assets and liabilities are translated into U.S. dollars. Adjustments from currency rate changes are recorded in the cumulative translation adjustment account in shareholders’ equity until the related foreign entity is sold or substantially liquidated. We use foreign currency financing transactions to effectively hedge long-term investments in foreign operations with the same corresponding currency. Foreign currency gains and losses on the hedge of the long-term investments are recorded in the cumulative translation adjustment account with the offset recorded as an adjustment to debt.
Product and Environmental Liabilities
We accrue for product liability claims and related defense costs when a loss is probable and reasonably estimable. Our estimates are generally based on the specifics of each claim or incident and our best estimate of the probable loss using historical experience and considering the insurance coverage and deductibles in effect at the date of the incident.
Liabilities for environmental matters are recorded on a site-by-site basis when it is probable that an obligation has been incurred and the cost can be reasonably estimated. We estimate our accrued environmental liabilities using currently available facts, existing technology, and presently enacted laws and regulations, all of which are subject to a number of factors and uncertainties. Our environmental liabilities are not discounted and do not take into consideration possible future insurance proceeds or significant amounts from claims against other third parties.
Warranty and Product Maintenance Contracts
We provide limited warranty and product maintenance programs, including parts and labor, for certain products for periods ranging from one to five years. We estimate the costs that may be incurred under warranty programs and record a liability in the amount of such costs at the time product revenues are recognized. Factors that affect this liability include the number of products sold, historical and anticipated rates of warranty claims, and cost per claim. We assess the adequacy of our recorded warranty and product maintenance liabilities periodically and adjust the amounts as necessary. Additionally, we may establish warranty liabilities related to the issuance of aircraft service bulletins for aircraft no longer covered under the limited warranty programs.
Research and Development Costs
Our customer-funded research and development costs primarily are related to U.S. Government contracts. Research and development costs incurred under long-term contracts with the U.S. Government are reported as cost of sales over the period that revenues are recognized. Research and development costs that are not reimbursable under a contract with the U.S. Government or another customer are charged to expense as incurred. Our research and development costs are as follows:
                         
 
(In millions)   2010     2009     2008  
     
Company-funded
  $ 403     $ 401     $ 465  
Customer-funded
    299       443       501  
     
Total research and development
  $ 702     $ 844     $ 966  
 
Our company-funded research and development costs include $33 million, $28 million and $23 million in development costs that were reimbursed by our commercial development partners in 2010, 2009 and 2008, respectively. In 2010, customer-funded research and development costs were lower than in prior years primarily due to the ramp up of the H-1 program into full production requiring less research and development costs and the cancellation of the Armed Reconnaissance Helicopter and VH-71 programs.
Income Taxes
Deferred income tax balances reflect the effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and their tax bases, as well as from net operating losses and tax credit carryforwards, and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including the future reversal of existing taxable temporary differences, taxable income in carryback years, available tax planning strategies and estimated future taxable income. We recognize net tax-related interest and penalties for continuing operations in income tax expense.
Discontinued Operations
Discontinued Operations
Note 2. Discontinued Operations
On April 3, 2009, we sold HR Textron, an operating unit previously reported within the Textron Systems segment. We recorded an after-tax gain of $8 million and net cash proceeds of approximately $376 million in 2009 in connection with this sale. In the fourth quarter of 2008, we completed the sale of the Fluid & Power business unit, previously reported in the Industrial segment, and recorded an after-tax gain of $111 million. We received net cash proceeds of approximately $479 million and a six-year note with a face value of $28 million in connection with this sale in 2008. Upon final settlement in 2009, we also recorded a five-year note with a face value of $30 million. Both of the notes received from this sale are recorded in the Consolidated Balance Sheet net of a valuation allowance. The HR Textron and Fluid & Power businesses met the discontinued operations criteria and are included in discontinued operations for all periods presented in our Consolidated Financial Statements.
Earnings for the businesses classified within discontinued operations were as follows:
                         
 
(In millions)   2010     2009     2008  
     
Revenues
  $     $ 48     $ 796  
     
Income (loss) from discontinued operations before income taxes
    (6 )     (2 )     63  
Income tax expense (benefit)
          (38 )     12  
     
Operating income (loss) from discontinued operations, net of income taxes
    (6 )     36       51  
Net gain on disposals, net of income taxes
          6       111  
     
Income (loss) from discontinued operations, net of income taxes
  $ (6   $ 42     $ 162  
 
We generally use a centralized approach to the cash management and financing of our manufacturing operations and, accordingly, do not allocate debt or interest expense to our discontinued businesses. Any debt and related interest expense of a specific entity within a business is recorded by the respective entity. General corporate overhead previously allocated to the businesses for reporting purposes is excluded from amounts reported as discontinued operations.
Goodwill and Intangible Assets
Goodwill and Intangible Assets
Note 3. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill, by segment, are as follows:
                                                 
                    Textron                    
(In millions)   Cessna     Bell     Systems     Industrial     Finance     Total  
 
Balance at December 29, 2007
  $ 322     $ 18     $ 1,151     $ 392     $ 169     $ 2,052  
Acquisitions and purchase price adjustments
          (5 )     (44 )                 (49 )
Adjustment related to business sold
                (134 )                 (134 )
Transfers
          17       (17 )                  
Impairment
                            (169 )     (169 )
Foreign currency translation
                      (2 )           (2 )
 
Balance at January 3, 2009
    322       30       956       390             1,698  
Impairment
                      (80 )           (80 )
Foreign currency translation
                      2             2  
Other
                2                   2  
 
Balance at January 2, 2010
    322       30       958       312             1,622  
Acquisitions
          1       16       5             22  
Foreign currency translation
                      (12 )           (12 )
 
Balance at January 1, 2011
  $ 322     $ 31     $ 974     $ 305     $     $ 1,632  
 
In 2010, we acquired four companies in the Bell, Textron Systems and Industrial segments for aggregate proceeds of $57 million and recorded $22 million in goodwill and $14 million in intangible assets. In 2009, we recorded an $80 million impairment charge in the Industrial segment’s Golf & Turf Care reporting unit based on lower forecasted revenues and profits related to the effects of the economic recession. In 2008, we recorded a $169 million impairment charge to eliminate all of the Finance segment’s goodwill based on prevailing market conditions and the plan to downsize the segment.
Intangible Assets
Our intangible assets are summarized below:
                                                         
 
            January 1, 2011     January 2, 2010  
     
    Weighted-                                          
    Average     Gross                     Gross              
    Amortization     Carrying     Accumulated             Carrying     Accumulated        
(Dollars in millions)   Period (in years)     Amount     Amortization     Net     Amount     Amortization     Net  
     
Customer agreements and contractual relationships
    13      $ 412     $ (115 )   $ 297     $ 407     $ (77 )   $ 330  
Patents and technology
    10       101       (53 )     48       101       (43 )     58  
Trademarks
    18       35       (16 )     19       34       (14 )     20  
Other
    8       22       (15 )     7       19       (15 )     4  
     
 
           $ 570     $ (199 )   $ 371     $ 561     $ (149 )   $ 412  
 
Amortization expense totaled $52 million, $52 million and $53 million in 2010, 2009 and 2008, respectively. Amortization expense is estimated to be approximately $52 million, $50 million, $46 million, $41 million and $40 million in 2011, 2012, 2013, 2014 and 2015, respectively.
Accounts Receivable and Finance Receivables
Accounts Receivable and Finance Receivables
Note 4. Accounts Receivable and Finance Receivables
Accounts Receivable
Accounts receivable is composed of the following:
                 
 
    January 1,     January 2,  
(In millions)   2011     2010  
     
Commercial
  $ 496     $ 470  
U.S. Government contracts
    416       447  
     
 
    912       917  
Allowance for doubtful accounts
    (20     (23 )
     
 
  $ 892     $ 894  
 
We have unbillable receivables 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 $195 million at January 1, 2011 and $170 million at January 2, 2010.
Finance Receivables
Finance receivables by product line, which includes both finance receivables held for investment and finance receivables held for sale, are presented in the following table by product line:
                                 
 
(Dollars in millions)   January 1, 2011   January 2, 2010
     
Aviation
    $ 2,120       46     $ 2,535       36 %
Golf equipment
    212       5       417       6  
Golf mortgage
    876       19       1,085       16  
Timeshare
    894       19       1,302       18  
Structured capital
    317       7       349       5  
Other liquidating
    207       4       1,337       19  
     
Total finance receivables
    4,626       100 %     7,025       100
Less: Allowance for losses
    342               341          
Less: Finance receivables held for sale
    413               819          
     
Total finance receivables held for investment, net
    $ 3,871               $ 5,865          
 
The aviation product line primarily includes installment contracts and finance leases provided to purchasers of new and used Cessna aircraft and Bell helicopters and also includes installment contracts and finance leases secured by used aircraft produced by other manufacturers. These agreements typically have initial terms ranging from five to ten years and amortization terms ranging from eight to fifteen years. The average balance of installment contracts and finance leases in the aviation product line was $1 million at January 1, 2011. Installment contracts generally require the customer to pay a significant down payment, along with periodic scheduled principal payments that reduce the outstanding balance through the term of the loan. Finance leases with no significant residual value at the end of the contractual term are classified as installment contracts, as their legal and economic substance is more equivalent to a secured borrowing than a finance lease with a significant residual value. The golf equipment product line primarily includes finance leases provided to purchasers of new E-Z-GO and Jacobsen golf and turf-care equipment. These finance receivables are secured by the financed equipment and, in some instances, by the personal guarantee of the principals, and typically have initial terms of three to five years and had an average balance of less than $0.1 million.
Golf mortgage primarily includes golf course mortgages and also includes mortgages secured by hotels and marinas. Mortgages in this product line are secured by real property and are generally limited to 75% or less of the property’s appraised market value at loan origination. These mortgages typically have initial terms ranging from five to ten years with amortization periods from 20 to 30 years. As of January 1, 2011, loans in the golf mortgage product line have an average balance of $7 million and a weighted-average contractual maturity of three years.
The timeshare product line primarily includes revolving loans secured by pools of timeshare interval resort notes receivable and also includes construction/inventory mortgages secured by timeshare interval inventory, by real property and, in many instances, by the personal guarantee of the principals. Construction/inventory mortgages are typically cross-collateralized with revolving notes receivable loans to the same borrower. Loans in this portfolio typically have initial revolving terms of one to three years and final maturity terms of an additional one to five years. As of January 1, 2011, borrowers in the timeshare product line have an average balance of $16 million and a weighted-average contractual maturity of two years. Structured capital primarily includes leveraged leases secured by the ownership of the leased equipment and real property.
Our finance receivables are diversified across geographic region, borrower industry and type of collateral. At January 1, 2011, 67% of our finance receivables were distributed throughout the U.S. compared with 68% at the end of 2009. Finance receivables held for investment are composed of the following types of financing vehicles:
                 
 
    January 1,     January 2,  
(In millions)   2011     2010  
     
Installment contracts
  $ 2,130     $ 2,509  
Mortgage loans
    859       1,073  
Revolving loans
    501       1,137  
Leveraged leases
    279       313  
Finance leases
    262       403  
Distribution finance receivables
    182       771  
     
 
  $ 4,213     $ 6,206  
 
At January 1, 2011 and January 2, 2010, these finance receivables included approximately $635 million and $629 million, respectively, of receivables that have been legally sold to special purpose entities (SPE), which are consolidated subsidiaries of TFC. The assets of the SPEs are pledged as collateral for their debt, which is reflected as securitized on-balance sheet debt in Note 8. Third-party investors have no legal recourse to TFC beyond the credit enhancement provided by the assets of the SPEs.
In 2010, we sold $655 million of finance receivables resulting in net gains of $31 million.
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 collateral value, the liquidity position of individual borrowers and guarantors, debt service coverage in the golf mortgage product line and default rates of our notes receivable collateral in the timeshare product line. 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/portfolios 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 is doubtful. In addition, we automatically classify accounts as nonaccrual that are contractually delinquent by more than three months unless collection is not doubtful. 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 internally assigned credit quality indicators discussed above is as follows:
                                                                 
     
    January 1, 2011     January 2, 2010  
     
(In millions)   Performing     Watchlist     Nonaccrual     Total     Performing     Watchlist     Nonaccrual     Total  
     
Aviation
  $ 1,713     $ 238     $ 169     $   2,120     $ 1,974     $ 275     $ 286     $ 2,535  
Golf equipment
    138       51       23       212       243       74       16       333  
Golf mortgage
    163       303       219       685       386       249       254       889  
Timeshare
    222       77       382       681       450       474       378       1,302  
Structured capital
    290       27             317       313       31       5       349  
Other liquidating
    130       11       57       198       533       164       101       798  
     
Total
  $ 2,656     $ 707     $ 850     $   4,213     $ 3,899     $ 1,267     $ 1,040     $ 6,206  
     
% of Total
    63.0 %     16.8 %     20.2 %             62.8 %     20.4 %     16.8 %        
 
Nonaccrual finance receivables decreased $190 million from the year-end balance, with a $117 million reduction in the aviation product line, $55 million reduction in the distribution finance line included within the other liquidating line and a $35 million reduction in the golf mortgage product line. These net reductions were primarily due to the resolution of several significant accounts through the repossession of collateral, restructure of finance receivables and cash collections, partially offset by new finance receivables identified as nonaccrual in 2010.
We measure delinquency based on the contractual payment terms of our loans and leases. In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.
Finance receivables held for investment by delinquency aging category is summarized in the tables below:
                                         
    Less Than                     Greater Than        
    31 Days     31-60 Days     61-90 Days     90 Days        
(In millions)   Past Due     Past Due     Past Due     Past Due     Total  
 
    January 1, 2011  
 
Aviation
  $ 1,964     $ 67     $ 41     $ 48     $ 2,120  
Golf equipment
    171       13       9       19       212  
Golf mortgage
    543       12       7       123       685  
Timeshare
    533       14       6       128       681  
Structured capital
    317                         317  
Other liquidating
    166       2       1       29       198  
 
Total
  $ 3,694     $ 108     $ 64     $ 347     $ 4,213  
 
    January 2, 2010
 
Aviation
  $ 2,259     $ 102     $ 96     $ 78     $ 2,535  
Golf equipment
    300       11       11       11       333  
Golf mortgage
    615       60       106       108       889  
Timeshare
    1,213       6             83       1,302  
Structured capital
    344                   5       349  
Other liquidating
    703       24       4       67       798  
 
Total
  $ 5,434     $ 203     $ 217     $ 352     $ 6,206  
 
We had no recorded investment in accrual status loans that were 90 days past due in 2010 or in 2009. For the year ended January 1, 2011 and January 2, 2010, 60+ days contractual delinquency as a percentage of finance receivables held for investment was 9.77% and 9.17%, respectively.
Impaired Loans
We evaluate individual finance receivables held for investment in non-homogeneous portfolios and larger accounts in homogeneous loan portfolios for impairment on a quarterly basis. Finance receivables classified as held for sale are reflected at the lower of cost or fair value and are excluded from these evaluations. A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators discussed above. Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified. If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification. There was no significant interest income recognized on impaired loans in either 2010 or 2009.
A summary of impaired finance receivables, excluding leveraged leases, and related allowance for losses at the end of 2010 and 2009 is provided below:
                                                 
            Golf     Golf             Other        
(In millions)   Aviation     Equipment     Mortgage     Timeshare     Liquidating     Total  
 
    For the year ended January 1, 2011
 
Impaired loans with a related allowance for losses recorded
                                               
Recorded investment
  $ 147     $ 4     $ 175     $ 355     $ 16     $ 697  
Unpaid principal balance
    144       5       178       385       15       727  
Related allowance
    45       2       39       102       3       191  
Average recorded investment
    187       5       182       356       21       751  
 
Impaired loans with no related allowance for losses recorded
                                               
Recorded investment
    17             138       69       30       254  
Unpaid principal balance
    21             146       74       89       330  
Average recorded investment
    14       1       118       70       58       261  
 
Total impaired loans
                                               
Recorded investment
    164       4       313       424       46       951  
Unpaid principal balance
    165       5       324       459       104       1,057  
Related allowance
    45       2       39       102       3       191  
Average recorded investment
    201       6       300       426       79       1,012  
 
    For the year ended January 2, 2010
 
Impaired loans with a related allowance for losses recorded
                                               
Recorded investment
  $ 258     $ 3     $ 179     $ 354     $ 53     $ 847  
Unpaid principal balance
    258       3       179       366       53       859  
Related allowance
    46       1       32       59       15       153  
Average recorded investment
    98       1       96       234       69       498  
 
Impaired loans with no related allowance for losses recorded
                                               
Recorded investment
    39             84       142       89       354  
Unpaid principal balance
    39             86       137       90       352  
Average recorded investment
    37             94       82       28       241  
 
Total impaired loans
                                               
Recorded investment
    297       3       263       496       142       1,201  
Unpaid principal balance
    297       3       265       503       143       1,211  
Related allowance
    46       1       32       59       15       153  
Average recorded investment
    135       1       190       316       97       739  
 
Allowance for Losses
A rollforward of the allowance for losses on finance receivables held for investment and a summary of its composition, based on how the underlying finance receivables are evaluated for impairment, is presented below. The finance receivables reported in the following table specifically exclude $279 million and $313 million of leveraged leases at January 1, 2011 and January 2, 2010, respectively, in accordance with authoritative accounting standards:
                                                 
            Golf     Golf             Other        
(In millions)   Aviation     Equipment     Mortgage     Timeshare     Liquidating     Total  
 
    For the year ended January 1, 2011  
 
Allowance for losses
                                               
Beginning balance
  $ 114     $ 9     $ 65     $ 79     $ 74     $ 341  
Provision for losses
    37       14       66       38       (12 )     143  
Net charge-offs and transfers
    (44 )     (7 )     (52 )     (11 )     (28 )     (142 )
 
Ending balance
  $ 107     $ 16     $ 79     $ 106     $ 34     $ 342  
 
Ending balance based on individual evaluations
    45       2       39       102       3       191  
Ending balance based on collective evaluation
    62       14       40       4       31       151  
 
Finance receivables
                                               
 
Individually evaluated for impairment
  $ 164     $ 4     $ 313     $ 424     $ 41     $ 946  
Collectively evaluated for impairment
    1,956       208       372       257       195       2,988  
 
Balance at end of year
  $ 2,120     $ 212     $ 685     $ 681     $ 236     $ 3,934  
 
    For the year ended January 2, 2010
 
Allowance for losses
                                               
Beginning balance
  $ 29     $ 9     $ 52     $ 35     $ 66     $ 191  
Provision for losses
    111       9       45       47       55       267  
Net charge-offs and transfers
    (26 )     (9 )     (32 )     (3 )     (47 )     (117 )
 
Ending balance
  $ 114     $ 9     $ 65     $ 79     $ 74     $ 341  
 
Ending balance based on individual evaluations
    46       1       32       59       15       153  
Ending balance based on collective evaluation
    68       8       33       20       59       188  
 
Finance receivables
                                               
Individually evaluated for impairment
  $ 297     $ 3     $ 263     $ 496     $ 137     $ 1,196  
Collectively evaluated for impairment
    2,238       330       626       806       697       4,697  
 
Balance at end of year
  $ 2,535     $ 333     $ 889     $ 1,302     $ 834     $ 5,893  
 
Captive and Other Intercompany Financing
Our Finance group provides financing for retail purchases and leases for new and used aircraft and equipment manufactured by our Manufacturing group. The captive finance receivables for these inventory sales that are included in the Finance group’s balance sheets are summarized below:
                 
     
    January 1,     January 2,  
(In millions)   2011     2010  
     
Installment contracts
  $ 1,652     $ 1,462  
Finance leases
    220       388  
Distribution finance receivables
    18       72  
     
Total
  $ 1,890     $ 1,922  
 
Operating agreements specify that our Finance group has recourse to our Manufacturing group for certain uncollected amounts related to these transactions. Our Manufacturing group has established reserves for losses on its balance sheet within accrued and other liabilities for the receivables it guarantees. These reserves are established for amounts that potentially are uncollectable or if the collateral values are considered insufficient to cover the outstanding receivable. If an account is deemed uncollectable and the collateral is repossessed by our Finance group, our Manufacturing group is charged for the deficiency. If the collateral is not repossessed, the receivable is transferred from the Finance group’s balance sheet to the Manufacturing group’s balance sheet. The Manufacturing group then is responsible for any additional collection efforts. When this occurs, any related reserve previously established by the Manufacturing group is reclassified from accrued or other liabilities and netted against the receivable or asset transferred from the Finance group.
In 2010, 2009 and 2008, our Finance group paid our Manufacturing group $0.4 billion, $0.6 billion and $1.0 billion, respectively, related to the sale of Textron-manufactured products to third parties that were financed by the Finance group. Our Cessna and Industrial segments also received proceeds in those years of $10 million, $13 million and $18 million, respectively, from the sale of equipment from their manufacturing operations to our Finance group for use under operating lease agreements. At January 1, 2011 and January 2, 2010, the amounts guaranteed by the Manufacturing group totaled $69 million and $216 million, respectively, on which the Manufacturing group had reserves for losses of $17 million for both periods.
In 2009, Textron Inc. agreed to lend TFC, with interest at 7%, funds to pay down maturing debt. As of January 1, 2011 and January 2, 2010, the outstanding balance due to Textron Inc. for these borrowings was $315 million and $413 million, respectively. These amounts are included in other current assets for the Manufacturing group and other liabilities for the Finance group in the Consolidated Balance Sheets.
Finance Receivables Held for Sale
At the end of 2010 and 2009, approximately $413 million and $819 million of finance receivables were classified as held for sale. A significant portion of the reduction in these finance receivables related to sales, primarily in the distribution finance and asset-based lending portfolios. We received proceeds of $582 million and $569 million in 2010 and 2009, respectively, from the sale of these receivables and $86 million and $208 million, respectively, from collections. In the fourth quarter of 2010, we reclassified $219 million of timeshare finance receivables from held for investment to held for sale as a result of an unanticipated inquiry we have received to purchase these finance receivables; we determined a sale of these finance receivables would be consistent with our goal to maximize the economic value of our portfolio and accelerate cash collections. At the end of 2010, the remaining finance receivables held for sale primarily are composed of assets in the timeshare and golf mortgage product lines.
In 2009, we reclassified $878 million of finance receivables, net of a $188 million valuation allowance, from held for sale to held for investment following efforts to market the portfolios and progress made through orderly liquidation. We also reclassified $421 million of other finance receivable portfolios, net of a $43 million valuation allowance, from held for investment to held for sale as a result of unanticipated purchase inquiries. Due to the nature of these inquiries, we determined a sale of these portfolios would be consistent with our goal to maximize the economic value of our portfolio and accelerate cash collections. During the fourth quarter of 2009, we recorded $720 million in finance receivables previously sold to the distribution finance securitization trust in our balance sheet. In connection with these finance receivables, $359 million were classified as held for sale and were sold during the quarter.
Inventories
Inventories
Note 5. Inventories
Inventories are composed of the following:
                 
     
    January 1,     January 2,  
(In millions)   2011     2010  
     
Finished goods
  $ 784     $ 735  
Work in process
    2,125       1,861  
Raw materials and components
    506       613  
     
 
    3,415       3,209  
Progress/milestone payments
    (1,138     (936 )
     
 
  $ 2,277     $ 2,273  
 
Inventories valued by the LIFO method totaled $1.3 billion at the end of 2010 and 2009, and the carrying values of these inventories would have been approximately $441 million and $414 million, respectively, higher had our LIFO inventories been valued at current costs. Inventories related to long-term contracts, net of progress/milestone payments, were $322 million and $366 million at the end of 2010 and 2009, respectively.
Property, Plant and Equipment, Net
Property, Plant and Equipment, Net
Note 6. Property, Plant and Equipment, Net
Our Manufacturing group’s property, plant and equipment, net are composed of the following:
                 
     
    January 1,     January 2,  
(In millions)   2011     2010  
     
Land and buildings
  $ 1,453     $ 1,426  
Machinery and equipment
    3,348       3,208  
     
 
    4,801       4,634  
Accumulated depreciation and amortization
    (2,869     (2,666 )
     
 
  $ 1,932     $ 1,968  
 
Assets under capital leases totaled $248 million and $218 million and had accumulated amortization of $40 million and $36 million at the end of 2010 and 2009, respectively. The Manufacturing group’s depreciation expense, which includes amortization expense on capital leases, totaled $308 million, $317 million and $302 million in 2010, 2009 and 2008, respectively.
Accrued Liabilities
Accrued Liabilities
Note 7. Accrued Liabilities
The accrued liabilities of our Manufacturing group are summarized below:
                 
     
    January 1,     January 2,  
(In millions)   2011     2010  
     
Customer deposits
  $ 715     $ 791  
Salaries, wages and employer taxes
    275       244  
Warranty and product maintenance contracts
    242       263  
Deferred revenues
    161       72  
Retirement plans
    82       85  
Restructuring
    62       51  
Other
    479       533  
     
Total accrued liabilities
  $ 2,016     $ 2,039  
 
Changes in our warranty and product maintenance contract liability are as follows:
                         
     
(In millions)   2010     2009     2008  
     
Accrual at beginning of year
  $ 263     $ 278     $ 313  
Provision
    189       174       189  
Settlements
    (231 )     (217 )     (198 )
Adjustments to prior accrual estimates*
    21       28       (26 )
     
Accrual at end of year
  $ 242     $ 263     $ 278  
 
*  Adjustments include changes to prior year estimates, new issues on prior year sales and currency translation adjustments.
Debt and Credit Facilities
Debt and Credit Facilities
Note 8. Debt and Credit Facilities
Our debt and credit facilities are summarized below:
                 
     
    January 1,     January 2,  
(In millions)   2011     2010  
     
Manufacturing group
               
Current portion of long-term debt
  $ 19     $ 134  
     
Long-term senior debt:
               
Medium-term notes due 2010 to 2011 (weighted-average rate of 9.83%)
    13       13  
4.50% due 2010
          128  
Credit line borrowings due 2012 (weighted-average rate of 0.93% and 0.96%, respectively)
          1,167  
6.50% due 2012
    154       154  
3.875% due 2013
    315       345  
4.50% convertible senior notes due 2013
    504       471  
6.20% due 2015
    350       350  
5.60% due 2017
    350       350  
7.25% due 2019
    250       250  
6.625% due 2020
    231       240  
Other (weighted-average rate of 3.12% and 3.65%, respectively)
    135       116  
     
 
    2,302       3,584  
Less: Current portion of long-term debt
    (19     (134 )
     
Total long-term debt
    2,283       3,450  
     
Total Manufacturing group debt
  $ 2,302     $ 3,584  
     
Finance group
               
Medium-term fixed-rate and variable-rate notes*:
               
Due 2010 (weighted-average rate of 2.09%)
  $     $ 1,635  
Due 2011 (weighted-average rate of 3.07% and 2.94%, respectively)
    374       419  
Due 2012 (weighted-average rate of 4.43%)
    52       52  
Due 2013 (weighted-average rate of 4.46% and 4.49%, respectively)
    553       578  
Due 2014 (weighted-average rate of 5.07%)
    111       111  
Due 2015 (weighted-average rate of 3.59% and 4.59%, respectively)
    14       10  
Due 2016 and thereafter (weighted-average rate of 3.37% and 4.04%, respectively)
    252       222  
Credit line borrowings due 2012 (weighted-average rate of 0.91%)
    1,440       1,740  
Securitized debt (weighted-average rate of 2.01% and 1.45%, respectively)
    530       559  
6% Fixed-to-Floating Rate Junior Subordinated Notes
    300       300  
Fair value adjustments and unamortized discount
    34       41  
     
Total Finance group debt
  $ 3,660     $ 5,667  
 
*  Variable-rate notes totaled $0.3 billion and $1.4 billion at January 1, 2011 and January 2, 2010, respectively.
In 2010 and 2009, finance subsidiaries of Textron Inc. entered into three separate credit agreements with the Export-Import Bank of the United States and the Export Development Canada Bank that established credit facilities totaling $770 million to provide funding to finance purchases of aircraft by non-U.S. buyers from Cessna and Bell. The facilities are structured to be available for financing sales to international customers who take delivery of new aircraft by dates ranging from June 2011 and through June 2012. At the end of 2010 and 2009, we had $224 million and $179 million, respectively, in outstanding notes under these facilities that are due in 2016 and thereafter.
Our aggregate $3 billion in committed bank lines of credit are due in April 2012. During 2010, Textron Inc. paid off the outstanding balance on its line of credit, and TFC paid down its outstanding balance by $300 million. We had no commercial paper borrowings in 2010. In 2009, the Manufacturing group and the Finance group had a weighted-average interest rate on commercial paper borrowings of 4.60% and 4.37%, respectively.
The following table shows required payments during the next five years on debt outstanding at January 1, 2011:
                                         
(In millions)   2011     2012     2013     2014     2015  
 
Manufacturing group
  $ 19     $ 161     $ 921     $ 7     $ 357  
Finance group
    486       1,594       664       204       132  
 
 
  $ 505     $ 1,755     $ 1,585     $ 211     $ 489  
 
4.50% Convertible Senior Notes
On May 5, 2009, we issued $600 million of 4.50% Convertible Senior Notes (Convertible Notes) with a maturity date of May 1, 2013 and interest payable semiannually. The Convertible Notes are convertible at the holder’s option, under certain circumstances, into shares of our common stock at an initial conversion rate of 76.1905 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $13.125 per share. Upon conversion, we have the right to settle the conversion of each $1,000 principal amount of Convertible Notes with any of the three following alternatives: (1) cash, (2) shares of our common stock or (3) a combination of cash and shares of our common stock.
The Convertible Notes are convertible only under the following certain circumstances: (1) during any calendar quarter commencing after June 30, 2009 and only during such calendar quarter if the last reported sale price of our common stock for at least 20 trading days during the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is more than 130% of the applicable conversion price per share of common stock on the last trading day of such preceding calendar quarter, (2) during the five-business-day period after any 10 consecutive trading day measurement period in which the trading price per $1,000 principal amount of Convertible Notes for each day in the measurement period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate, (3) if specified distributions to holders of our common stock are made or specified corporate transactions occur or (4) at any time on or after February 19, 2013.
Our common stock price exceeded the conversion threshold price of $17.06 per share for at least 20 trading days during the 30 consecutive trading days ended December 31, 2010. Accordingly, the notes are convertible at the holder’s option through March 31, 2011. We may deliver cash, shares of common stock or a combination of cash and shares of common stock in satisfaction of our obligations upon conversion of the Convertible Notes. We intend to settle the face value of the Convertible Notes in cash. Based on a January 1, 2011 stock price of $23.64, the “if converted value” exceeds the face amount of the notes by $480.7 million; however, after giving effect to the exercise of the call options and warrants described below, the incremental cash or share settlement in excess of the face amount would result in either a cash payment of $360.7 million, a 15 million net share issuance, or a combination of cash and stock, at our option. We have continued to classify these Convertible Notes as long term based on our intent and ability to maintain the debt outstanding for at least one year through the use of various funding sources available to us.
The net proceeds from the issuance of the Convertible Notes totaled approximately $582 million after deducting discounts, commissions and expenses. The Convertible Notes are accounted for in accordance with generally accepted accounting principles, which require us to separately account for the liability (debt) and the equity (conversion option) components of the Convertible Notes in a manner that reflected our non-convertible debt borrowing rate at time of issuance. Accordingly, we recorded a debt discount and corresponding increase to additional paid-in capital of approximately $135 million as of the date of issuance. Transaction costs of $18 million were proportionately allocated between the liability and equity components. We are amortizing the debt discount utilizing the effective interest method over the life of the Convertible Notes, which increases the effective interest rate of the Convertible Notes from its coupon rate of 4.50% to 11.72%. As of January 1, 2011, the unamortized discount amount, including issuance costs totaled $96 million. We incurred cash and non-cash interest expense of $60 million in 2010 and $38 million in 2009 for these Convertible Notes.
Concurrently with the pricing of the Convertible Notes, we entered into transactions with two counterparties, including an underwriter and an affiliate of an underwriter of the Convertible Notes, pursuant to which we purchased from the counterparties call options to acquire our common stock and sold to the counterparties warrants to purchase our common stock. We entered into these transactions for the purposes of reducing the cash outflow and/or the potential dilutive effect to our shareholders upon the conversion of the Convertible Notes.
The purchased call options give us the right to acquire from the counterparties 45,714,300 shares of our common stock (the number of shares into which all of the Convertible Notes are convertible) at the initial strike price of $13.125 per share (the same as the initial conversion price of the Convertible Notes), subject to adjustments that mirror the terms of the Convertible Notes. We may settle these transactions in cash, shares or a combination of cash and shares, at our option. The call options will terminate at the earlier of the maturity date of the related Convertible Notes or the last day on which any of the related Convertible Notes remain outstanding. The cost of the call options was $140 million, which was recorded as a reduction to additional paid-in capital. The warrants give the counterparties the right to acquire, subject to anti-dilution adjustments, an aggregate of 45,714,300 shares of common stock at an exercise price of $15.75 per share. We may also settle the exercise of the warrants in cash, shares or a combination of cash and shares, at our option. The warrants expire ratably over a 45-trading-day period beginning August 1, 2013. The aggregate proceeds from the sale of the warrants were $95 million, which was recorded as an increase to additional paid-in capital.
When evaluated in aggregate, the call options and warrants have the effect of increasing the effective conversion price of the Convertible Notes from $13.125 to $15.75, a 50% premium over the May 2009 common stock price of $10.50. Accordingly, we will not incur the cash outflow or the dilution that would be experienced due to the increase of the share price from $13.125 per share to $15.75 per share because we are entitled to receive from the counterparties the difference between our sale to the counterparties of 45,714,300 shares at $15.75 per share and our purchase of shares from the counterparties at $13.125 per share.
Based on the structure of the call options and warrants, these contracts meet all of the applicable accounting criteria for equity classification under the applicable accounting standards and, as such, are classified in shareholders’ equity in the Consolidated Balance Sheet. In addition, since these contracts are classified in shareholders’ equity and indexed to our common stock, they are not accounted for as derivatives, and, accordingly, we do not recognize changes in their fair value.
6% Fixed-to-Floating Rate Junior Subordinated Notes
In 2007, the Finance group issued $300 million of 6% Fixed-to-Floating Rate Junior Subordinated Notes, which are unsecured and rank junior to all of its existing and future senior debt. The notes mature on February 15, 2067; however, we have the right to redeem the notes at par on or after February 15, 2017 and are obligated to redeem the notes beginning on February 15, 2042. The Finance group has agreed in a replacement capital covenant that it will not redeem the notes on or before February 15, 2047 unless it receives a capital contribution from the Manufacturing group and/or net proceeds from the sale of certain replacement capital securities at specified amounts. Interest on the notes is fixed at 6% until February 15, 2017 and floats at the three-month London Interbank Offered Rate + 1.735% thereafter.
Financial Covenants
Under a Support Agreement, Textron Inc. is required to ensure that TFC maintains fixed charge coverage of no less than 125% and consolidated shareholder’s equity of no less than $200 million. In addition, TFC has lending agreements that contain provisions restricting additional debt, which is not to exceed nine times consolidated net worth and qualifying subordinated obligations. Due to certain charges as discussed in Note 11, on December 29, 2008, Textron Inc. made a cash payment of $625 million to TFC, which was reflected as a capital contribution, to maintain compliance with the fixed charge coverage ratio required by the Support Agreement and to maintain the leverage ratio required by its credit facility. Cash payments of $383 million in 2010 and $270 million in 2009 were paid to TFC to maintain compliance with the fixed charge coverage ratio. In addition, we paid $63 million on January 11, 2011 related to 2010.
Derivatives and Fair Value Measurements
Derivatives and Fair Value Measurements
Note 9. Derivatives 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 notional and fair value amounts of these instruments that are designated as hedging instruments are provided below:
                                             
        Notional Amount   Asset (Liability)  
        January 1,     January 2,             January 1,     January 2,  
(In millions)   Borrowing Group   2011     2010             2011     2010  
         
Assets
                                           
Interest rate exchange contracts*
  Finance   $ 628     $ 1,333             $ 34     $ 43  
Cross-currency interest rate exchange contracts
  Finance           161                     18  
Investment in other marketable securities
  Finance     51                     51        
Foreign currency exchange contracts
  Manufacturing     534       696               39       54  
 
Total
      $ 1,213     $ 2,190             $ 124     $ 115  
 
Liabilities
                                           
Interest rate exchange contracts*
  Finance   $ 451     $ 32             $ (6 )   $ (3 )  
Foreign currency exchange contracts
  Manufacturing     101       80               (2 )     (5 )
 
Total
      $ 552     $ 112             $ (8 )   $ (8 )
 
* Interest rate exchange contracts represent fair value hedges.
The fair values of derivative instruments for the Manufacturing group are included in either other current assets or accrued liabilities in our balance sheet. For the Finance group, these instruments are included in either other assets or other liabilities.
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 the end of 2010.
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.
Investments in other marketable securities represent investments in notes issued by securitization trusts that purchase timeshare notes receivables from timeshare developers. In the fourth quarter of 2010, these notes were classified as available for sale in connection with the reclassification of timeshare finance receivables discussed in Note 4 on page 57. Accordingly, at January 1, 2011, these notes were carried at fair value, which is determined based on observable market inputs for similar securitization interests in markets that are currently inactive compared with the market environment in which they were originally issued. At January 2, 2010, these notes were classified as held to maturity and were carried at amortized cost.
Derivatives Not Designated as Hedges
The notional and fair value amounts of our derivative instruments that are not designated as hedging instruments and are categorized as Level 2 in the fair value hierarchy are provided below:
                                             
        Notional Amount   Asset (Liability)  
        January 1,     January 2,             January 1,     January 2,  
(In millions)   Borrowing Group   2011     2010             2011     2010  
                   
Foreign currency exchange contracts
  Finance   $ 141     $ 531             $ (1 )   $ (13 )  
Foreign currency exchange contracts
  Manufacturing           224                     3  
                   
Total
      $ 141     $ 755             $ (1 )   $ (10 )
 
The Manufacturing group enters into certain other foreign currency exchange contracts that do not meet hedge accounting criteria and primarily are intended to protect against exposure related to intercompany financing transactions. For these instruments, the Manufacturing group reported gains of $9 million in 2010 and $14 million in 2009 in selling and administrative expenses, which were offset by the revaluation of the intercompany financing transactions.
The Finance group also utilizes certain foreign currency exchange contracts that do not meet hedge accounting criteria and are intended to convert certain foreign currency denominated assets and liabilities into the functional currency of the respective legal entity. Gains and losses related to these derivative instruments are naturally offset by the translation of the related foreign currency denominated assets and liabilities. For these instruments, the Finance group reported losses of $11 million in 2010 and $106 million in 2009 in selling and administrative expenses, which were largely offset by gains resulting from the translation of foreign currency denominated assets and liabilities.
Fair Value Hedges
Our Finance group enters into interest rate exchange contracts to mitigate exposure to changes in the fair value of its fixed-rate receivables and debt due to fluctuations in interest rates. By using these contracts, we are able to convert our fixed-rate cash flows to floating-rate cash flows. The amount of ineffectiveness on our fair value hedges is insignificant. The effect of these contracts is recorded in the Consolidated Statements of Operations, and the gain (loss) for each respective period is provided in the following table:
                     
 
(In millions)   Gain (Loss) Location   2010     2009  
     
Interest rate exchange contracts
  Interest expense   $ 25     $ (13 )
Interest rate exchange contracts
  Finance charges     (11 )     10  
 
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 18 months that qualify as cash flow hedges. These are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses. At January 1, 2011, we had a net deferred gain of $27 million in OCI related to these cash flow hedges. As the underlying transactions occur, we expect to reclassify a $16 million gain into earnings in the next 12 months and $11 million of gains into earnings in the following 12-month period.
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 cumulative translation adjustment account within OCI, produced a $26 million after-tax gain in 2010, resulting in an accumulated net gain balance of $14 million at January 1, 2011. The ineffective portion of these hedges was insignificant.
For our Manufacturing group cash flow hedges, the amount of gain recognized in OCI and the amount reclassified from accumulated other comprehensive loss into income is provided in the following table:
                                                 
    Amount of Gain (Loss)        
    Recognized in OCI     Effective Portion of Derivative Reclassified from Accumulated  
    (Effective Portion)     Other Comprehensive Loss into Income  
(In millions)   2010     2009     Gain (Loss) Location     2010     2009  
         
Foreign currency exchange contracts
  $ 13     $ 65     Cost of sales           $ 15     $ 3  
 
In 2009, certain foreign exchange contracts no longer were deemed to be effective cash flow hedges resulting in a gain of $11 million. These contracts were unwound through the purchase of forward contracts directly offsetting the terms of the undesignated hedges.
Counterparty Credit Risk
Our exposure to loss from nonperformance by the counterparties to our derivative agreements at the end of 2010 is minimal. We do not anticipate nonperformance by counterparties in the periodic settlements of amounts due. We historically have minimized this potential for risk by entering into contracts exclusively with major, financially sound counterparties having no less than a long-term bond rating of A. The credit risk generally is limited to the amount by which the counterparties’ contractual obligations exceed our obligations to the counterparty. We continuously monitor our exposures to ensure that we limit our risks.
Assets Recorded at Fair Value on a Nonrecurring Basis
The table below presents those assets that are measured at fair value on a nonrecurring basis that had fair value measurement adjustments during 2010 and 2009. These assets were measured using significant unobservable inputs (Level 3) and include the following:
                                         
    Balance at             Gain (Loss)  
    January 1,     January 2,                      
(In millions)   2011     2010             2010     2009  
         
Finance group
                                       
Impaired finance receivables
  $ 504     $ 686             $ (148 )   $   (165 )
Finance receivables held for sale
    413       819               (22 )     (14 )  
Other assets
    149       156               (47 )     (61 )
Manufacturing group
                                       
Goodwill
          61                     (80 )
Property, plant and equipment
    7       13               (15 )     (47 )
 
Impaired Finance Receivables — Impaired nonaccrual finance receivables are included in the table above since the measurement of required reserves on our impaired finance receivables is significantly dependent on the fair value of the underlying collateral. Fair values of collateral are determined based on the use of appraisals, industry pricing guides, input from market participants, our recent experience selling similar assets or internally developed discounted cash flow models. Fair value measurements recorded on impaired finance receivables resulted in charges to provision for loan losses and primarily were related to initial fair value adjustments.
Finance Receivables Held for Sale — Finance receivables held for sale are recorded at the lower of cost or fair value. As a result of our plan to exit the non-captive Finance business certain finance receivables are classified as held for sale. At January 1, 2011, the finance receivables held for sale are primarily assets in the timeshare and golf mortgage product lines. Timeshare finance receivables classified as held for sale were identified at the individual loan level; whereas golf course mortgages were identified as a portion of a larger portfolio with common characteristics based on the intention to balance the sale of certain loans with the collection of others to maximize economic value. These finance receivables are recorded at fair value on a nonrecurring basis during periods in which the fair value is lower than the cost value. See the “Finance Receivables Held for Sale” section in Note 4 for information regarding changes in classification of certain finance receivables between held for sale and held for investment.
There are no active, quoted market prices for our finance receivables. The estimate of fair value was determined based on the use of discounted cash flow models to estimate the exit price we expect to receive in the principal market for each type of loan in an orderly transaction, which includes both the sale of pools of similar assets and the sale of individual loans. The models we used incorporate estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and credit line utilization rates. Where available, assumptions related to the expectations of current market participants are compared with observable market inputs, including bids from prospective purchasers of similar loans and certain bond market indices for loans perceived to be of similar credit quality. Although we utilize and prioritize these market observable inputs in our discounted cash flow models, these inputs are not typically derived from markets with directly comparable loan structures, industries and collateral types. Therefore, all valuations of finance receivables held for sale involve significant management judgment, which can result in differences between our fair value estimates and those of other market participants.
Other assets — Other assets include repossessed assets and properties, operating assets received in satisfaction of troubled finance receivables and other investments, which are accounted for under the equity method of accounting and have no active, quoted market prices. The fair value of these assets is determined based on the use of appraisals, industry pricing guides, input from market participants, our recent experience selling similar assets or internally developed discounted cash flow models. For our other investments, the discounted cash flow models incorporate assumptions specific to the nature of the investments’ business and underlying assets and include industry valuation benchmarks such as discount rates, capitalization rates and cash flow multiples. For repossessed assets and properties, which are considered assets held for sale, if the carrying amount of the asset is higher than the estimated fair value, we record a corresponding charge to income for the difference. For operating assets received in satisfaction of troubled finance receivables and other investments, if the sum of the undiscounted cash flows is estimated to be less than the carrying value, we record a charge to income for any shortfall between estimated fair value and the carrying amount.
Goodwill — In the fourth quarter of 2009, we performed our annual goodwill impairment test using the annual operating plan along with its long-range forecast that was submitted to management in connection with our annual strategic planning process. This information indicated a more delayed recovery from previous estimates for the Golf and Turf Care reporting unit, as the economic recovery was proceeding slower than originally anticipated, resulting in lower golf membership and revenue per round of golf played in North America and delayed new course construction. Using undiscounted cash flows, we determined that the fair value of the Golf and Turf Care reporting unit had dropped to a level below its carrying value. Accordingly, we performed the required Step 2 calculation to determine the fair value of the reporting unit’s assets and liabilities in order to perform a purchase price allocation. In performing this analysis, we used assumptions that we believe a market participant would utilize in valuing the assets and liabilities of the business. Valuation methods used included the income and market approach depending on the nature of the asset/liability. Our calculation supported a goodwill amount of $61 million and required the impairment charge to reduce the carrying amount by $80 million.
Property, Plant and Equipment — In connection with our restructuring program, we have exited certain facilities and product lines. We performed impairment tests for the property, plant and equipment affected by such decisions and recorded impairment charges as appropriate. Fair value for these assets was primarily determined using discounted cash flow methodology. In 2009, in connection with the cancellation of the Citation Columbus development program, we recorded a $43 million impairment charge to write off capitalized costs related to tooling and a partially constructed manufacturing facility, which we no longer consider to be recoverable. The fair value of the remaining assets was determined using Level 3 inputs and was less than $1 million.
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:
                                 
    January 1, 2011     January 2, 2010  
    Carrying     Estimated     Carrying     Estimated  
(In millions)   Value     Fair Value     Value     Fair Value  
 
                       
Manufacturing group
                               
Debt, excluding leases
  $ (2,172 )   $ (2,698 )   $ (3,474 )   $ (3,762 )
Finance group
                               
Finance receivables held for investment, excluding leases
    3,345       3,131       5,159       4,703  
Investment in other marketable securities
                68       56  
Debt
    (3,660 )     (3,528 )     (5,667 )     (5,439 )
 
                       
Fair value for the Manufacturing group debt is determined using market observable data for similar transactions. At January 1, 2011 and January 2, 2010, approximately 33% and 54%, respectively, of the fair value of term debt for the Finance group was determined based on observable market transactions. The remaining Finance group debt was determined based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations. We utilize the same valuation methodologies to determine the fair value estimates for finance receivables held for investment as used for finance receivables held for sale.
Shareholders' Equity
Shareholders' Equity
Note 10. Shareholders’ Equity
Capital Stock
We have authorization for 15 million shares of preferred stock with a par value of $0.01 and 500 million shares of common stock with a par value of $0.125. Outstanding common stock activity for the three years ended January 1, 2011 is presented below:
                         
 
                 
(In thousands)   2010     2009     2008  
 
                 
Beginning balance
    272,272       242,041       250,061  
Purchases
                (11,649 )
Exercise of stock options
    336       10       1,147  
Conversion of preferred stock to common stock
    31       556       60  
Issued to Textron Savings Plan
    2,682       5,460       2,060  
Common stock offering
          23,805        
Other issuances
    418       400       362  
 
                 
Ending balance
    275,739       272,272       242,041  
 
                 
Reserved Shares of Common Stock
At the end of 2010, common stock reserved for the conversion of convertible debt, the exercise of outstanding stock options and warrants, and the issuance of shares upon vesting of outstanding restricted stock units totaled 140 million shares. See the “4.50% Convertible Senior Notes” section in Note 8 for information on our convertible debt.
Income per Common 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 earnings per share is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends. Diluted earnings per share considers the dilutive effect of all potential future common stock, including convertible preferred shares, stock options, restricted stock units and the shares that could be issued upon the conversion of our 4.50% Convertible Senior Notes, as discussed below, and upon the exercise of the related warrants. The convertible note call options purchased in connection with the issuance of the 4.50% Convertible Senior Notes are excluded from the calculation of diluted EPS as their impact is always anti-dilutive. Upon conversion of our 4.50% Convertible Senior Notes, as described in Note 8, the principal amount would be settled in cash, and the excess of the conversion value, as defined, over the principal amount may be settled in cash and/or shares of our common stock. Therefore, only the shares of our common stock potentially issuable with respect to the excess of the notes’ conversion value over the principal amount, if any, are considered as dilutive potential common shares for purposes of calculating diluted EPS.
The weighted-average shares outstanding for basic and diluted earnings per share are as follows:
                         
 
                 
(In thousands)   2010     2009     2008  
 
                 
Basic weighted-average shares outstanding
    274,452       262,923       246,208  
Dilutive effect of:
                       
Convertible notes and warrants
    27,450              
Stock options, restrictive stock units and convertible preferred stock
    653             4,130  
 
                 
Diluted weighted-average shares outstanding
    302,555       262,923       250,338  
 
                 
In 2010 and 2008, stock options to purchase 7 million and 8 million shares, respectively, of common stock outstanding are excluded from our calculation of diluted weighted-average shares outstanding as the exercise prices were greater than the average market price of our common stock for those periods. These securities could potentially dilute earnings per share in the future. In 2009, the potential dilutive effect of 8 million weighted-average shares of stock options, restricted stock units and the shares that could be issued upon the conversion of our 4.50% Convertible Senior Notes and upon the exercise of the related warrants was excluded from the computation of diluted weighted-average shares outstanding as the shares would have an anti-dilutive effect on the loss from continuing operations.
Other Comprehensive Income (Loss)
The before and after-tax components of other comprehensive income (loss) are presented below:
                         
    Before-Tax     Tax (Expense)     Net-of-Tax  
(In millions)   Amount     Benefit     Amount  
 
2010
                       
 
Foreign currency translation adjustment
  $ 44     $ (46 )   $ (2 )
Deferred gains on hedge contracts
    17       (3 )     14  
Pension adjustments
    (186 )     74       (112 )
Recognition of foreign currency translation loss (see Note 11)
    91       (17 )     74  
Other reclassification adjustments
    49       (18 )     31  
 
Other comprehensive income
  $ 15     $ (10 )   $ 5  
 
2009
                       
 
Foreign currency translation adjustment
  $ 16     $ 7     $ 23  
Deferred gains on hedge contracts
    90       (23 )     67  
Pension adjustments
    6       (31 )     (25 )
Reclassification adjustments
    30       (9 )     21  
Pension curtailment
    25       (10 )     15  
 
Other comprehensive income
  $ 167     $ (66 )   $ 101  
 
2008
                       
 
Foreign currency translation adjustment
  $ (210 )   $ 15     $ (195 )
Deferred losses on hedge contracts
    (91 )     18       (73 )
Pension adjustments
    (1,298 )     495       (803 )
Reclassification due to sale of Fluid & Power
    31       4       35  
Other reclassification adjustments
    25       (11 )     14  
 
Other comprehensive loss
  $ (1,543 )   $ 521     $ (1,022 )
 
Accumulated Other Comprehensive Loss
The after-tax components of accumulated other comprehensive loss are presented below:
                                 
            Pension              
    Foreign     and     Deferred        
    Currency     Postretirement     Gains (Losses)        
    Translation     Benefits     on Hedge        
(In millions)   Adjustment     Adjustments     Contracts     Total  
 
Balance at December 29, 2007
  $ 182     $ (625 )   $ 43     $   (400 )
Other comprehensive loss
    (195 )     (803 )     (73 )     (1,071 )
Reclassification due to sale of Fluid & Power
    2       33             35  
Other reclassification adjustments
          31       (17 )     14  
 
Balance at January 3, 2009
    (11 )     (1,364 )     (47 )     (1,422 )
Other comprehensive income (loss)
    23       (25 )     67       65  
Pension curtailment
          15             15  
Reclassification adjustments
    (2 )     20       3       21  
 
Balance at January 2, 2010
    10       (1,354 )     23       (1,321 )
Other comprehensive income (loss)
    (2 )     (112 )     14       (100 )
Recognition of foreign currency translation loss (see Note 11)
    74                   74  
Other reclassification adjustments
          41       (10 )     31  
 
Balance at January 1, 2011
  $ 82     $ (1,425 )   $ 27     $ (1,316 )
 
Special Charges
Special Charges
Note 11. Special Charges
Special charges included restructuring charges of $99 million, $237 million and $64 million in 2010, 2009 and 2008, respectively. In 2010, special charges also included a $91 million non-cash pre-tax charge to reclassify a foreign exchange loss from equity to the income statement as a result of substantially liquidating a Canadian Finance entity. In 2009, special charges also included a goodwill impairment charge of $80 million in the Industrial segment. In 2008, special charges also included an initial mark-to-market adjustment of $293 million that was made when we classified certain finance receivables from held for investment to held for sale in connection with our decision to sell the non-captive portion of our Finance business, along with a goodwill impairment charge of $169 million in the Finance segment.
Special charges by segment are as follows:
                                                         
  Restructuring Program            
    Severance     Curtailment     Asset     Contract     Total     Other        
(In millions)   Costs     Charges, Net     Impairments     Terminations     Restructuring     Charges     Total  
 
2010
                                                       
 
Cessna
  $ 34     $     $ 6     $ 3     $ 43     $     $ 43  
Finance
    7             1       3       11       91       102  
Corporate
    1                         1             1  
Industrial
    5             9       1       15             15  
Bell
    10                         10             10  
Textron Systems
    19                         19             19  
 
 
  $ 76     $     $ 16     $ 7     $ 99     $ 91     $ 190  
 
2009
                                                       
 
Cessna
  $ 80     $ 26     $ 54     $ 7     $ 167     $     $ 167  
Finance
    11       1             1       13             13  
Corporate
    34                   1       35             35  
Industrial
    6       (4 )           3       5       80       85  
Bell
    9                         9             9  
Textron Systems
    5       2             1       8             8  
 
 
  $ 145     $ 25     $ 54     $ 13     $ 237     $ 80     $ 317  
 
2008
                                                       
 
Cessna
  $ 5     $     $     $     $ 5     $     $ 5  
Finance
    15             11       1       27       462       489  
Corporate
    6                         6             6  
Industrial
    16             9             25             25  
Textron Systems
    1                         1             1  
 
 
  $ 43     $     $ 20     $ 1     $ 64     $ 462     $ 526  
 
Restructuring Program
In the fourth quarter of 2008, we initiated a restructuring program to reduce overhead costs and improve productivity across the company and announced the exit of portions of our commercial finance business. This restructuring program primarily included corporate and segment direct and indirect workforce reductions and the closure and consolidation of certain operations. In the fourth quarter of 2010, we initiated the final series of restructuring actions under this program, which included workforce reductions in the Bell, Systems and Industrial segments and at Corporate, along with the decision to exit a plant in the Industrial segment. With the completion of this program at the end of 2010, we have terminated approximately 12,100 positions worldwide representing approximately 28% of our global workforce since the inception of the program and have exited 30 leased and owned facilities and plants.
We record restructuring costs in special charges as these costs are generally of a nonrecurring nature and are not included in segment profit, which is our measure used for evaluating performance and for decision-making purposes. Severance costs related to an approved restructuring program are classified as special charges unless the costs are for volume-related reductions of direct labor that are deemed to be of a temporary or cyclical nature. Most of our severance benefits are provided for under existing severance programs, and the associated costs are accrued when they are probable and estimable. Special one-time termination benefits are accounted for once an approved plan is communicated to employees that establishes the terms of the benefit arrangement and the number of employees to be terminated, along with their job classification and location and the expected completion date.
Since the inception of the restructuring program in the fourth quarter of 2008, we have incurred the following costs through the end of 2010:
                                         
    Severance     Curtailment     Asset     Contract     Total  
(In millions)   Costs     Charges, Net     Impairments     Terminations     Restructuring  
 
Cessna
  $ 119     $ 26     $ 60     $ 10     $ 215  
Finance
    33       1       12       5       51  
Corporate
    41                   1       42  
Industrial
    27       (4 )     18       4       45  
Bell
    19                         19  
Textron Systems
    25       2             1       28  
 
 
  $ 264     $ 25     $ 90     $ 21     $ 400  
 
An analysis of our restructuring reserve activity is summarized below:
                                         
    Severance     Curtailment     Asset     Contract        
(In millions)   Costs     Charges, Net     Impairment     Terminations     Total  
 
Provision in 2008
  $ 43     $     $ 20     $ 1     $ 64  
Non-cash settlement
                (20 )           (20 )
Cash paid
    (7 )                       (7 )
 
Balance at January 3, 2009
    36                 1       37  
Provision in 2009
    152       25       54       13       244  
Reversals
    (7 )                       (7 )
Non-cash settlement and loss recognition
          (25 )     (54 )           (79 )
Cash paid
    (133 )                 (11 )     (144 )
 
Balance at January 2, 2010
    48                   3       51  
Provision in 2010
    79             16       7       102  
Reversals
    (3 )                       (3 )
Non-cash settlement
                (16 )           (16 )
Cash paid
    (67 )                 (5 )     (72 )
 
Balance at January 1, 2011
  $ 57     $     $     $ 5     $ 62  
 
Severance costs generally are paid on a lump sum basis or on a monthly basis over the severance period granted to each employee and include outplacement costs, which are paid in accordance with normal payment terms. Most of these costs are expected to be paid over the next 12 months. Contract termination costs generally are paid upon exiting the facility or over the remaining lease term.
Other Charges
In the third quarter of 2010, we substantially liquidated the assets held by a Canadian entity within the Finance segment. Accordingly, we recorded a non-cash charge of $91 million ($74 million after-tax) within special charges to reclassify the entity’s cumulative currency translation adjustment amount within other comprehensive income to the Statement of Operations. The reclassification of this amount had no impact on shareholders’ equity.
In the fourth quarter of 2009, we recorded a goodwill impairment charge of $80 million for the Golf and Turf Care reporting unit, which is part of our Industrial segment. See Note 9 for more information on this charge.
In connection with our 2008 decision to exit the non-captive portion of the commercial finance business of our Finance segment, we recorded a pre-tax mark-to-market adjustment of $293 million against owned receivables that were classified as held for sale due to this exit plan based on our estimate of the fair value of these receivables at that time. In addition, based on market conditions and the plan to downsize the Finance segment, we recorded a $169 million impairment charge to eliminate all goodwill in the Finance segment.
Share-Based Compensation
Share-Based Compensation
Note 12. Share-Based Compensation
Our 2007 Long-Term Incentive Plan (Plan) supersedes the 1999 Long-Term Incentive Plan and authorizes awards to our key employees in the form of options to purchase our shares, restricted stock, restricted stock units, stock appreciation rights, performance stock awards and other awards. Options to purchase our shares have a maximum term of 10 years and generally vest ratably over a three-year period. Restricted stock unit awards generally were payable in shares of common stock (vesting one-third each in the third, fourth and fifth year following the year of the grant), until the first quarter of 2009, when we began issuing restricted stock units settled in cash only (vesting in equal installments over five years). Since 2008, all restricted stock units have been issued with the right to receive dividend equivalents. A maximum of 12 million shares is authorized for issuance for all purposes under the Plan plus any shares that become available upon cancellation, forfeiture or expiration of awards granted under the 1999 Long-Term Incentive Plan. No more than 12 million shares may be awarded pursuant to incentive stock options, and no more than 3 million shares may be awarded pursuant to restricted stock or other “full value” awards intended to be paid in shares. The Plan also authorizes performance share units paid in cash based upon the value of our common stock. Payouts under performance share units vary based on certain performance criteria generally measured over a three-year period. The performance share units vest at the end of three years.
Through our Deferred Income Plan for Textron Key Executives (DIP), we provide participants the opportunity to voluntarily defer up to 25% of their base salary and up to 100% of annual, long-term incentive and other compensation. Effective January 1, 2008, the maximum amount deferred for annual, long-term incentive and other compensation decreased to 80%. Elective deferrals may be put into either a stock unit account or an interest bearing account. We generally contribute a 10% premium on amounts deferred into the stock unit account. Executives who are eligible to participate in the DIP who have not achieved and/or maintained the required minimum stock ownership level are required to defer annual incentive compensation in excess of 100% of the executive’s annual target into a deferred stock unit account and are not entitled to the 10% premium contribution on the amount deferred. Participants cannot move amounts between the two accounts while actively employed by us and cannot receive distributions until termination of employment.
The compensation expense that has been recorded in net income for our share-based compensation plans is as follows:
                         
     
(In millions)   2010     2009     2008  
     
Compensation (income) expense
  $ 86     $ 81     $ (78 )
Hedge expense (income) on forward contracts
    (1 )     2       100  
Income tax expense (benefit)
    (32 )     (30 )     29  
     
Total net compensation cost included in net income
  $ 53     $ 53     $ 51  
 
Share-based compensation costs are reflected primarily in selling and administrative expenses. Compensation expense includes approximately $7 million, $9 million and $20 million in 2010, 2009 and 2008, respectively, representing the attribution of the fair value of options issued and the portion of previously granted options for which the requisite service has been rendered.
Stock Options
The stock option compensation cost calculated under the fair value approach is recognized over the vesting period of the stock options. The weighted-average fair value of options granted per share was $7, $2 and $14 for 2010, 2009 and 2008, respectively. We estimate the fair value of options granted on the date of grant using the Black-Scholes option-pricing model. Expected volatilities are based on implied volatilities from traded options on our common stock, historical volatilities and other factors. We use historical data to estimate option exercise behavior, adjusted to reflect anticipated increases in expected life.
During 2010, we executed a one-time stock option exchange program, which provided eligible employees, other than executive officers, an opportunity to exchange certain outstanding stock options with exercise prices substantially above the current market price of our common stock for a lesser number of stock options with an exercise price set at current market value and a fair value that was approximately 15% lower than the fair value of the “out of the money” options that they replaced. The program commenced on July 2, 2010 and expired on July 30, 2010. As a result of this program, 2.6 million outstanding eligible stock options were exchanged for 1.0 million new options at an exercise price of $20.76. The new options will vest on July 30, 2011 or, if later, on the original vesting date of the eligible stock option for which it was exchanged. The new options were treated as a modification under the accounting guidance for equity-based compensation. Accordingly, since we discounted the fair value of the new options by 15% of the fair value of the options exchanged, we did not incur any incremental expense associated with the modification.
The weighted-average assumptions used in our Black-Scholes option-pricing model for awards issued during the respective periods are as follows:
                         
     
    2010     2009     2008  
     
Dividend yield
    0.4     1.4 %     1.7 %
Expected volatility
    37.0 %     50.0 %     30.0 %
Risk-free interest rate
    2.6 %     2.0 %     2.8 %
Expected term (in years)
    5.5       5.0      5.1 
 
The following table summarizes information related to stock option activity for the respective periods:
                         
     
(In millions)   2010     2009     2008  
     
Intrinsic value of options exercised
  $ 1     $     $ 28  
Cash received from option exercises
    8             40  
Actual tax benefit realized for tax deductions from option exercises
                10  
 
Our income taxes payable for federal and state purposes has been reduced by the tax benefits we receive from employee stock options. The income tax benefits we receive for certain stock options are calculated as the difference between the fair market value of the stock issued at the time of exercise and the option price, tax effected. The tax impact of the tax deduction in excess of the related deferred taxes is presented in the Consolidated Statements of Cash Flows as financing activities.
At January 1, 2011, our outstanding options had an aggregate intrinsic value of $24 million and a weighted-average remaining contractual life of five years. Our exercisable options had an aggregate intrinsic value of $8 million and a weighted-average remaining contractual life of four years at January 1, 2011.
Stock option activity under the Plan is summarized as follows:
                                                 
     
    2010     2009     2008  
            Weighted-             Weighted-             Weighted-  
            Average             Average             Average  
    Number of     Exercise     Number of     Exercise     Number of     Exercise  
(Options in thousands)   Options     Price     Options     Price     Options     Price  
     
Outstanding at beginning of year
    8,545     $ 35.67       9,021     $ 38.51       9,024     $ 35.37  
Granted
    1,969       20.49       859       6.50       1,692       53.46  
Exercised
    (348 )     20.63       (10 )     19.45       (1,147 )     34.26  
Canceled, expired or forfeited
    (3,240     44.15       (1,325 )     36.16       (548 )     41.86  
     
Outstanding at end of year
    6,926     $ 28.15       8,545     $ 35.67       9,021     $ 38.51  
     
Exercisable at end of year
    4,111     $ 32.89       6,177     $ 35.82       5,774     $ 32.45  
 
Restricted Stock Units
For restricted stock units paid in stock that were issued prior to 2008 and for all restricted stock units payable in cash, the fair value is based on the trading price of our common stock on the grant date, less required adjustments to reflect the fair value of the awards as dividends are not paid or accrued on these units until the restricted stock units vest. For restricted stock units paid in stock that were issued subsequent to 2007, cash dividends are paid on a quarterly basis prior to vesting. The fair value of these units is based solely on the trading price of our common stock on the grant date. The weighted-average grant date fair value of restricted stock units paid in stock that were granted in 2008 was approximately $53 per share. No restricted stock units paid in stock were granted in 2010 or 2009.
The 2010 activity for restricted stock units payable in stock and for restricted stock units payable in cash is provided below:
                                 
    Units Payable in Stock   Units Payable in Cash
            Weighted-             Weighted-  
    Number of     Average Grant     Number of     Average Grant  
(Shares in thousands)   Shares     Date Fair Value     Shares     Date Fair Value  
 
Outstanding at beginning of year, nonvested
    1,290     $ 46.02       2,498     $ 8.65  
Granted
                1,904       20.23  
Vested
    (447 )     (42.92 )     (568 )     (7.38 )
Forfeited
    (81 )     (48.75 )     (362 )     (14.48 )
 
Outstanding at end of year, nonvested
    762     $ 47.55       3,472     $ 14.60  
 
Performance Share Units
The fair value of share-based compensation awards accounted for as liabilities includes performance share units. The fair value of these awards is based on the trading price of our common stock, less adjustments to reflect the fair value of certain awards for which dividends are not paid or accrued until vested, and is remeasured at each reporting period date. The 2010 activity for our performance share units is as follows:
                 
            Weighted-  
            Average Grant  
    Number of     Date Fair  
(Shares in thousands)   Shares     Value  
 
Outstanding at beginning of year, nonvested
    1,664     $ 13.82  
Granted
    513       20.21  
Vested
    (280 )     (54.17 )
 
Outstanding at end of year, nonvested
    1,897     $ 9.59  
 
Cash payments based on approximately 273,000 performance share units will be paid out during the first quarter of 2011 in settlement of the 280,000 units that vested in 2010.
Share-Based Compensation Awards
The value of the share-based compensation awards that vested and/or were paid during the respective periods is as follows:
                         
     
(In millions)   2010     2009     2008  
     
Subject only to service conditions:
                       
Value of shares, options or units vested
  $ 31     $ 42     $ 47  
Intrinsic value of cash awards paid
    13       1       10  
Subject to performance vesting conditions:
                       
Value of units vested
    11       21       10  
Intrinsic value of cash awards paid
    5       10       40  
Intrinsic value of amounts paid under DIP
    9       1       3  
 
Compensation cost for awards subject only to service conditions that vest ratably are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. As of January 1, 2011, we had not recognized $48 million of total compensation costs associated with unvested awards subject only to service conditions. We expect to recognize compensation expense for these awards over a weighted-average period of approximately 2.1 years.
Retirement Plans
Retirement Plans
Note 13. Retirement Plans
Our defined benefit and defined contribution plans cover substantially all of our employees. A significant number of our U.S.-based employees participate in the Textron Retirement Plan, which is designed to be a “floor-offset” arrangement with both a defined benefit component and a defined contribution component. The defined benefit component of the arrangement includes the Textron Master Retirement Plan (TMRP) and the Bell Helicopter Textron Master Retirement Plan (BHTMRP), and the defined contribution component is the Retirement Account Plan (RAP). The defined benefit component provides a minimum guaranteed benefit (or “floor” benefit). Under the RAP, participants are eligible to receive contributions from Textron of 2% of their eligible compensation but may not make contributions to the plan. Upon retirement, participants receive the greater of the floor benefit or the value of the RAP. Both the TMRP and the BHTMRP are subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Effective on January 1, 2010, the Textron Retirement Plan was closed to new participants. Employees hired after January 1, 2010 will receive an additional 4% annual cash contribution to their Textron Savings Plan account based on their eligible compensation.
We also have domestic and foreign funded and unfunded defined benefit pension plans that cover certain of our U.S. and foreign employees. In addition, several defined contribution plans are sponsored by our various businesses. The largest such plan is the Textron Savings Plan, which is a qualified 401(k) plan subject to ERISA in which a significant number of our U.S.-based employees participate. Our defined contribution plans cost approximately $95 million, $96 million and $110 million in 2010, 2009 and 2008, respectively; these amounts include $25 million, $28 million and $28 million, respectively, in contributions to the RAP. We also provide postretirement benefits other than pensions for certain retired employees in the U.S., which include healthcare, dental care, Medicare Part B reimbursement and life insurance benefits.
Periodic Benefit Cost
The components of our net periodic benefit cost and other amounts recognized in OCI are as follows:
                                                 
                            Postretirement Benefits  
    Pension Benefits     Other than Pensions  
(In millions)   2010     2009     2008     2010     2009     2008  
         
Net periodic benefit cost
                                               
Service cost
  $ 124     $ 116     $ 146     $ 8     $ 8     $ 8  
Interest cost
    328       323       322       34       38       40  
Expected return on plan assets
    (385 )     (404 )     (427 )                  
Amortization of prior service cost (credit)
    16       18       19       (4 )     (5 )     (5 )
Amortization of net loss
    41       10       25       11       8       15  
Curtailment and special termination charges
    2       34       18             (5 )      
Settlements and disbursements
                (4 )                  
         
Net periodic benefit cost
  $ 126     $ 97     $ 99     $ 49     $ 44     $ 58  
         
Other changes in plan assets and benefit obligations recognized in OCI, including foreign exchange
                                               
Amortization of net loss
  $ (41 )   $ (10 )   $ (25 )   $ (11 )   $ (8 )   $ (15 )
Net loss (gain) arising during the year
    171       (58 )     1,320             24       (32 )
Amortization of prior service credit (cost)
    (16 )     (48 )     (19 )     4       10       5  
Prior service cost (credit) arising during the year
    5       26       7       (16 )     2       (27 )
Other charges
    (1 )           (18 )                  
         
Total recognized in OCI
  $ 118     $ (90 )   $ 1,265     $ (23 )   $ 28     $ (69 )
         
Total recognized in net periodic benefit cost and OCI
  $ 244     $ 7     $ 1,364     $ 26     $ 72     $ (11 )
 
The estimated amount that will be amortized from accumulated other comprehensive income into net periodic pension costs in 2011 is as follows:
                 
            Postretirement  
            Benefits  
    Pension     Other than  
(In millions)   Benefits     Pensions  
 
Net loss
  $ 75     $ 11  
Prior service cost (credit)
    16       (8 )
 
 
  $ 91     $ 3  
 
Obligations and Funded Status
All of our plans are measured as of our fiscal year-end. The changes in the projected benefit obligation and in the fair value of plan assets, along with our funded status, are as follows:
                                 
                    Postretirement Benefits  
    Pension Benefits     Other than Pensions  
(In millions)   2010     2009     2010     2009  
         
Change in benefit obligation
                               
Benefit obligation at beginning of year
  $ 5,470     $ 5,327     $ 646     $ 636  
Service cost
    124       116       8       8  
Interest cost
    328       323       34       38  
Amendments
    5       26       (16 )     2  
Plan participants’ contributions
                5       5  
Actuarial losses (gains)
    292       (2 )           22  
Benefits paid
    (330 )     (315 )     (63 )     (67 )
Foreign exchange rate changes
    (10 )     51              
Settlements and disbursements
          (55 )            
Curtailments
    (2 )     (1 )           2  
 
Benefit obligation at end of year
  $ 5,877     $ 5,470     $ 614     $ 646  
 
Change in fair value of plan assets
                               
Fair value of plan assets at beginning of year
  $ 4,005     $ 3,823     $     $  
Actual return on plan assets
    505       496              
Employer contributions
    390       51              
Benefits paid
    (330 )     (315 )            
Dispositions
          (40 )            
Foreign exchange rate changes
    (9 )     45              
Settlements and disbursements
    (2 )     (55 )            
 
Fair value of plan assets at end of year
  $ 4,559     $ 4,005     $     $  
 
Funded status at end of year
  $ (1,318 )   $ (1,465 )   $ (614 )   $ (646 )
 
Amounts recognized in our balance sheets are as follows:
                                 
                    Postretirement Benefits  
    Pension Benefits     Other than Pensions  
(In millions)   2010     2009     2010     2009  
         
Non-current assets
  $ 58     $ 51     $     $  
Current liabilities
    (22 )     (22 )     (60 )     (63 )
Non-current liabilities
    (1,354 )     (1,494 )     (554 )     (583 )
Recognized in accumulated other comprehensive loss:
                               
Net loss
    1,977       1,851       120       131  
Prior service cost (credit)
    138       150       (35 )     (23 )
 
The accumulated benefit obligation for all defined benefit pension plans was $5.5 billion and $5.1 billion at January 1, 2011 and January 2, 2010, respectively, which includes $334 million and $317 million, respectively, in accumulated benefit obligations for unfunded plans where funding is not permitted or in foreign environments where funding is not feasible.
Pension plans with accumulated benefit obligations exceeding the fair value of plan assets are as follows:
                 
     
(In millions)   2010     2009  
     
Projected benefit obligation
  $ 5,706     $ 5,328  
Accumulated benefit obligation
    5,288       4,929  
Fair value of plan assets
    4,329       3,813  
 
Assumptions
The weighted-average assumptions we use for our pension and postretirement plans are as follows:
                                                 
                            Postretirement Benefits  
    Pension Benefits     Other than Pensions  
 
    2010     2009     2008     2010     2009     2008  
         
Net periodic benefit cost
                                               
Discount rate
    6.20     6.61 %     5.99 %     5.50     6.25 %     6.00
Expected long-term rate of return on assets
    8.26 %     8.58 %     8.66 %                  
Rate of compensation increase
    4.00 %     4.36 %     4.48 %                  
Benefit obligations at year-end
                                               
Discount rate
    5.71 %     6.19 %     6.28 %     5.50 %     5.50 %     6.25 %
Rate of compensation increases
    3.99 %     4.00 %     4.47 %                  
 
Assumed healthcare cost trend rates are as follows:
                 
 
    2010     2009  
     
Medical cost trend rate
    8     7
Prescription drug cost trend rate
    9 %     10 %
Rate to which medical and prescription drug cost trend rates will gradually decline
    5 %     5 %
Year that the rates reach the rate where we assume they will remain
    2020      2019   
 
These assumed healthcare cost trend rates have a significant effect on the amounts reported for the postretirement benefits other than pensions. A one-percentage-point change in these assumed healthcare cost trend rates would have the following effects:
                 
    One-     One-  
    Percentage-     Percentage-  
    Point     Point  
(In millions)   Increase     Decrease  
 
Effect on total of service and interest cost components
  $ 3     $ (3 )
Effect on postretirement benefit obligations other than pensions
    39       (34
 
Pension Assets
The expected long-term rate of return on plan assets is determined based on a variety of considerations, including the established asset allocation targets and expectations for those asset classes, historical returns of the plans’ assets and other market considerations. We invest our pension assets with the objective of achieving a total rate of return, over the long term, sufficient to fund future pension obligations and to minimize future pension contributions. We are willing to tolerate a commensurate level of risk to achieve this objective based on the funded status of the plans and the long-term nature of our pension liability. Risk is controlled by maintaining a portfolio of assets that is diversified across a variety of asset classes, investment styles and investment managers. All of the assets are managed by external investment managers, and the majority of the assets are actively managed. Where possible, investment managers are prohibited from owning our stock in the portfolios that they manage on our behalf.
For U.S. plan assets, which represent the majority of our plan assets, asset allocation target ranges are established consistent with our investment objectives, and the assets are rebalanced periodically. Our target allocation ranges are 27% to 41% for domestic equity securities; 11% to 22% for international equity securities; 11% to 42% for debt securities; 5% to 11% for private equity partnerships; 9% to 15% for real estate; and 0% to 7% for hedge funds. For foreign plan assets, allocations are based on expected cash flow needs and assessments of the local practices and markets. The target asset allocation ranges for our foreign plans are 25% to 65% for equity securities; 25% to 53% for debt securities; and 0% to 17% for real estate.
The fair value of total pension plan assets by major category and level in the fair value hierarchy as defined in Note 9 is as follows:
                         
 
(In millions)   Level 1     Level 2     Level 3  
 
January 1, 2011
                       
 
Cash and equivalents
  $ 3     $ 178     $  
Equity securities:
                       
Domestic
    1,052       469        
International
    688       251        
Debt securities:
                       
National, state and local governments
    39       570        
Corporate debt
    10       432        
Asset-backed securities
    2       103        
Private equity partnerships
                324  
Real estate
                337  
Hedge funds
                101  
 
Total
  $ 1,794     $ 2,003     $ 762  
 
January 2, 2010
                       
 
Cash and equivalents
  $ 9     $ 128     $  
Equity securities:
                       
Domestic
    900       409        
International
    610       220        
Debt securities:
                       
National, state and local governments
          504        
Corporate debt
          463        
Asset-backed securities
          148        
Private equity partnerships
                313  
Real estate
                301  
 
Total
  $ 1,519     $ 1,872     $ 614  
 
Cash equivalents and equity and debt securities include comingled funds, which represent investments in funds offered to institutional investors that are similar to mutual funds in that they provide diversification by holding various equity and debt securities. Since these comingled funds are not quoted on any active market and are valued based on the relative dispersion of the underlying equity and debt investments and their individual prices at any given time, they are classified as Level 2. Debt securities are valued based on same day actual trading prices, if available. If such prices are not available, we use a matrix pricing model with historical prices, trends and other factors.
Private equity partnerships represent investments in funds, which, in turn, invest in stocks and debt securities of companies that, in most cases, are not publicly traded. These partnerships are valued using income and market methods that include cash flow projections and market multiples for various comparable companies.
Real estate includes owned properties and investments in partnerships. Owned properties are valued using certified appraisals at least every three years, which then are updated at least annually by the real estate investment manager, who considers current market trends and other available information. These appraisals generally use the standard methods for valuing real estate, including forecasting income and identifying current transactions for comparable real estate to arrive at a fair value. Real estate partnerships are valued similar to private equity partnerships, with the general partner using standard real estate valuation methods to value the real estate properties and securities held within their fund portfolios. We believe these assumptions are consistent with assumptions that market participants would use in valuing these investments.
Hedge funds represent an investment in a diversified fund of hedge funds of which we are the sole investor. The fund invests in portfolio funds that are not publicly traded and are managed by various portfolio managers. Investments in portfolio funds are typically valued on the basis of the most recent price or valuation provided by the relevant fund’s administrator. The administrator for the fund aggregates these valuations with the other assets and liabilities to calculate the net asset value of the fund.
The table below presents a reconciliation of the beginning and ending balances for fair value measurements that use significant unobservable inputs (Level 3) by major category:
                         
            Private Equity        
(In millions)   Hedge Funds     Partnerships     Real Estate  
 
Balance at beginning of year
  $     $ 313     $ 301  
Actual return on plan assets:
                       
Related to assets still held at reporting date
    1       13       7  
Related to assets sold during the period
          28        
Purchases, sales and settlements, net
    100       (30 )     29  
 
Balance at end of year
  $ 101     $ 324     $ 337  
 
Estimated Future Cash Flow Impact
Defined benefits under salaried plans are based on salary and years of service. Hourly plans generally provide benefits based on stated amounts for each year of service. Our funding policy is consistent with applicable laws and regulations. In 2011, we expect to contribute approximately $220 million to fund our qualified pension plans, non-qualified plans and foreign plans. Additionally, we expect to contribute $30 million to the RAP. We do not expect to contribute to our other postretirement benefit plans. Benefit payments provided below reflect expected future employee service, as appropriate, and are expected to be paid, net of estimated participant contributions. Benefit payments do not include the Medicare Part D subsidy we expect to receive. Benefit payments are based on the same assumptions used to measure our benefit obligation at the end of fiscal 2010. While pension benefit payments primarily will be paid out of qualified pension trusts, we will pay postretirement benefits other than pensions out of our general corporate assets as follows:
                         
            Post-