tenq.htm
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[ x ]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended October 2, 2010
OR
[ ]
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from ____ to ____.
Commission File Number 1-5480
Textron Inc.
(Exact name of registrant as specified in its charter)
Delaware
|
|
05-0315468
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
40 Westminster Street, Providence, RI 02903
(Address of principal executive offices)
(401) 421-2800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ü No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer [ ü ]
|
Accelerated filer [ ]
|
Non-accelerated filer [ ]
|
Smaller reporting company [ ]
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No ü
As of October 16, 2010, there were 274,900,552 shares of common stock outstanding.
INDEX
|
|
Page
|
PART I.
|
FINANCIAL INFORMATION
|
|
|
|
|
Item 1.
|
Financial Statements
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
Notes to the Consolidated Financial Statements (Unaudited)
|
|
|
Note 1:
|
Basis of Presentation
|
7
|
|
Note 2:
|
Special Charges
|
7
|
|
Note 3:
|
Retirement Plans
|
9
|
|
Note 4:
|
Income Tax Expense (Benefit)
|
9
|
|
Note 5:
|
Comprehensive Income
|
10
|
|
Note 6:
|
Earnings per Share and Shareholders’ Equity
|
10
|
|
Note 7:
|
Accounts Receivable and Finance Receivables Held for Investment
|
12
|
|
Note 8:
|
Inventories
|
13
|
|
Note 9:
|
Debt
|
13
|
|
Note 10:
|
Guarantees and Indemnifications
|
14
|
|
Note 11:
|
Commitments and Contingencies
|
14
|
|
Note 12:
|
Derivatives and Fair Value Measurements
|
15
|
|
Note 13:
|
Segment Information
|
19
|
Item 2.
|
|
21
|
Item 3.
|
|
33
|
Item 4.
|
|
33
|
|
|
|
PART II.
|
OTHER INFORMATION
|
|
|
|
|
Item 1A.
|
Risk Factors
|
34
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
34
|
Item 6.
|
|
34
|
|
|
35
|
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TEXTRON INC.
(In millions, except per share amounts)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing revenues
|
|
$ |
2,420 |
|
|
$ |
2,478 |
|
|
$ |
7,207 |
|
|
$ |
7,408 |
|
Finance revenues
|
|
|
59 |
|
|
|
71 |
|
|
|
191 |
|
|
|
279 |
|
Total revenues
|
|
|
2,479 |
|
|
|
2,549 |
|
|
|
7,398 |
|
|
|
7,687 |
|
Costs, expenses and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
2,037 |
|
|
|
2,047 |
|
|
|
6,000 |
|
|
|
6,144 |
|
Selling and administrative expense
|
|
|
301 |
|
|
|
348 |
|
|
|
886 |
|
|
|
1,034 |
|
Provision for losses on finance receivables
|
|
|
29 |
|
|
|
43 |
|
|
|
128 |
|
|
|
206 |
|
Interest expense
|
|
|
67 |
|
|
|
74 |
|
|
|
207 |
|
|
|
234 |
|
Gain on sale of assets
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(50 |
) |
Special charges
|
|
|
114 |
|
|
|
42 |
|
|
|
136 |
|
|
|
203 |
|
Total costs, expenses and other
|
|
|
2,548 |
|
|
|
2,554 |
|
|
|
7,357 |
|
|
|
7,771 |
|
Income (loss) from continuing operations before income taxes
|
|
|
(69 |
) |
|
|
(5 |
) |
|
|
41 |
|
|
|
(84 |
) |
Income tax expense (benefit)
|
|
|
(21 |
) |
|
|
(11 |
) |
|
|
12 |
|
|
|
(71 |
) |
Income (loss) from continuing operations
|
|
|
(48 |
) |
|
|
6 |
|
|
|
29 |
|
|
|
(13 |
) |
Income (loss) from discontinued operations, net of income taxes
|
|
|
— |
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
45 |
|
Net income (loss)
|
|
$ |
(48 |
) |
|
$ |
4 |
|
|
$ |
26 |
|
|
$ |
32 |
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
(0.17 |
) |
|
$ |
0.02 |
|
|
$ |
0.11 |
|
|
$ |
(0.05 |
) |
Discontinued operations
|
|
|
— |
|
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
0.17 |
|
Basic earnings per share
|
|
$ |
(0.17 |
) |
|
$ |
0.01 |
|
|
$ |
0.10 |
|
|
$ |
0.12 |
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
(0.17 |
) |
|
$ |
0.02 |
|
|
$ |
0.10 |
|
|
$ |
(0.05 |
) |
Discontinued operations
|
|
|
— |
|
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
0.17 |
|
Diluted earnings per share
|
|
$ |
(0.17 |
) |
|
$ |
0.01 |
|
|
$ |
0.09 |
|
|
$ |
0.12 |
|
Dividends per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.06 |
|
|
$ |
0.06 |
|
See Notes to the consolidated financial statements.
Consolidated Balance Sheets (Unaudited)
(Dollars in millions, except share data)
|
|
October 2,
2010
|
|
|
January 2,
2010
|
|
Assets
|
|
|
|
|
|
|
Manufacturing group
|
|
|
|
|
|
|
Cash and equivalents
|
|
$ |
802 |
|
|
$ |
1,748 |
|
Accounts receivable, net
|
|
|
899 |
|
|
|
894 |
|
Inventories
|
|
|
2,647 |
|
|
|
2,273 |
|
Other current assets
|
|
|
798 |
|
|
|
985 |
|
Total current assets
|
|
|
5,146 |
|
|
|
5,900 |
|
Property, plant and equipment, less accumulated
depreciation and amortization of $2,798 and $2,666
|
|
|
1,907 |
|
|
|
1,968 |
|
Goodwill
|
|
|
1,627 |
|
|
|
1,622 |
|
Other assets
|
|
|
1,868 |
|
|
|
1,938 |
|
Total Manufacturing group assets
|
|
|
10,548 |
|
|
|
11,428 |
|
Finance group
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
|
189 |
|
|
|
144 |
|
Finance receivables held for investment, net
|
|
|
4,378 |
|
|
|
5,865 |
|
Finance receivables held for sale
|
|
|
252 |
|
|
|
819 |
|
Other assets
|
|
|
646 |
|
|
|
684 |
|
Total Finance group assets
|
|
|
5,465 |
|
|
|
7,512 |
|
Total assets
|
|
$ |
16,013 |
|
|
$ |
18,940 |
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Manufacturing group
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$ |
18 |
|
|
$ |
134 |
|
Accounts payable
|
|
|
752 |
|
|
|
569 |
|
Accrued liabilities
|
|
|
1,888 |
|
|
|
2,039 |
|
Total current liabilities
|
|
|
2,658 |
|
|
|
2,742 |
|
Other liabilities
|
|
|
3,220 |
|
|
|
3,253 |
|
Long-term debt
|
|
|
2,289 |
|
|
|
3,450 |
|
Total Manufacturing group liabilities
|
|
|
8,167 |
|
|
|
9,445 |
|
Finance group
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
523 |
|
|
|
564 |
|
Due to Manufacturing group
|
|
|
275 |
|
|
|
438 |
|
Debt
|
|
|
4,062 |
|
|
|
5,667 |
|
Total Finance group liabilities
|
|
|
4,860 |
|
|
|
6,669 |
|
Total liabilities
|
|
|
13,027 |
|
|
|
16,114 |
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
35 |
|
|
|
35 |
|
Capital surplus
|
|
|
1,313 |
|
|
|
1,369 |
|
Retained earnings
|
|
|
2,983 |
|
|
|
2,973 |
|
Accumulated other comprehensive loss
|
|
|
(1,226 |
) |
|
|
(1,321 |
) |
|
|
|
3,105 |
|
|
|
3,056 |
|
Less cost of treasury shares
|
|
|
119 |
|
|
|
230 |
|
Total shareholders’ equity
|
|
|
2,986 |
|
|
|
2,826 |
|
Total liabilities and shareholders’ equity
|
|
$ |
16,013 |
|
|
$ |
18,940 |
|
Common shares outstanding (in thousands)
|
|
|
274,799 |
|
|
|
272,272 |
|
|
See Notes to the consolidated financial statements.
|
For the Nine Months Ended October 2, 2010 and October 3, 2009, respectively
(In millions)
|
|
Consolidated
|
|
|
|
2010
|
|
|
2009
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$ |
26 |
|
|
$ |
32 |
|
Income (loss) from discontinued operations
|
|
|
(3 |
) |
|
|
45 |
|
Income (loss) from continuing operations
|
|
|
29 |
|
|
|
(13 |
) |
Adjustments to reconcile income (loss) from continuing operations to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Non-cash items:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
282 |
|
|
|
297 |
|
Provision for losses on finance receivables held for investment
|
|
|
128 |
|
|
|
206 |
|
Portfolio losses on finance receivables
|
|
|
76 |
|
|
|
114 |
|
Deferred income taxes
|
|
|
4 |
|
|
|
(138 |
) |
Other, net
|
|
|
88 |
|
|
|
89 |
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(7 |
) |
|
|
(14 |
) |
Inventories
|
|
|
(383 |
) |
|
|
368 |
|
Other assets
|
|
|
186 |
|
|
|
(57 |
) |
Accounts payable
|
|
|
185 |
|
|
|
(444 |
) |
Accrued and other liabilities
|
|
|
(224 |
) |
|
|
(69 |
) |
Captive finance receivables, net
|
|
|
403 |
|
|
|
187 |
|
Other operating activities, net
|
|
|
— |
|
|
|
29 |
|
Net cash provided by (used in) operating activities of continuing operations
|
|
|
767 |
|
|
|
555 |
|
Net cash used in operating activities of discontinued operations
|
|
|
(8 |
) |
|
|
(17 |
) |
Net cash provided by (used in) operating activities
|
|
|
759 |
|
|
|
538 |
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Finance receivables originated or purchased
|
|
|
(378 |
) |
|
|
(2,613 |
) |
Finance receivables repaid
|
|
|
1,265 |
|
|
|
3,250 |
|
Proceeds on receivables sales, including securitizations
|
|
|
501 |
|
|
|
202 |
|
Capital expenditures
|
|
|
(134 |
) |
|
|
(165 |
) |
Net cash used in acquisitions
|
|
|
(47 |
) |
|
|
— |
|
Proceeds from sale of repossessed assets and properties
|
|
|
92 |
|
|
|
176 |
|
Other investing activities, net
|
|
|
39 |
|
|
|
152 |
|
Net cash provided by (used in) investing activities of continuing operations
|
|
|
1,338 |
|
|
|
1,002 |
|
Net cash provided by investing activities of discontinued operations
|
|
|
— |
|
|
|
239 |
|
Net cash provided by (used in) investing activities
|
|
|
1,338 |
|
|
|
1,241 |
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments on long-term lines of credit
|
|
|
(1,167 |
) |
|
|
(58 |
) |
Principal payments on long-term debt
|
|
|
(1,863 |
) |
|
|
(2,035 |
) |
Proceeds from issuance of long-term debt
|
|
|
47 |
|
|
|
641 |
|
Decrease in short-term debt
|
|
|
— |
|
|
|
(1,637 |
) |
Proceeds from long-term lines of credit
|
|
|
— |
|
|
|
2,970 |
|
Payments on borrowings against officers life insurance policies
|
|
|
— |
|
|
|
(411 |
) |
Proceeds from issuance of convertible notes, net of fees paid
|
|
|
— |
|
|
|
582 |
|
Purchase of convertible note call options
|
|
|
— |
|
|
|
(140 |
) |
Proceeds from issuance of common stock and warrants
|
|
|
— |
|
|
|
333 |
|
Proceeds from option exercises
|
|
|
2 |
|
|
|
— |
|
Dividends paid
|
|
|
(16 |
) |
|
|
(16 |
) |
Net cash provided by (used in) financing activities of continuing operations
|
|
|
(2,997 |
) |
|
|
229 |
|
Effect of exchange rate changes on cash and equivalents
|
|
|
(1 |
) |
|
|
21 |
|
Net increase (decrease) in cash and equivalents
|
|
|
(901 |
) |
|
|
2,029 |
|
Cash and equivalents at beginning of period
|
|
|
1,892 |
|
|
|
547 |
|
Cash and equivalents at end of period
|
|
$ |
991 |
|
|
$ |
2,576 |
|
See Notes to the consolidated financial statements
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Nine Months Ended October 2, 2010 and October 3, 2009, respectively
(In millions)
|
|
Manufacturing Group
|
|
|
Finance Group
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
215 |
|
|
$ |
194 |
|
|
$ |
(189 |
) |
|
$ |
(162 |
) |
Income (loss) from discontinued operations
|
|
|
(3 |
) |
|
|
45 |
|
|
|
— |
|
|
|
— |
|
Income (loss) from continuing operations
|
|
|
218 |
|
|
|
149 |
|
|
|
(189 |
) |
|
|
(162 |
) |
Adjustments to reconcile income (loss) from continuing operations to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends received from the Finance group
|
|
|
355 |
|
|
|
284 |
|
|
|
— |
|
|
|
— |
|
Capital contribution paid to Finance group
|
|
|
(228 |
) |
|
|
(197 |
) |
|
|
— |
|
|
|
— |
|
Non-cash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
260 |
|
|
|
270 |
|
|
|
22 |
|
|
|
27 |
|
Provision for losses on finance receivables held for investment
|
|
|
— |
|
|
|
— |
|
|
|
128 |
|
|
|
206 |
|
Portfolio losses on finance receivables
|
|
|
— |
|
|
|
— |
|
|
|
76 |
|
|
|
114 |
|
Deferred income taxes
|
|
|
28 |
|
|
|
(22 |
) |
|
|
(24 |
) |
|
|
(116 |
) |
Other, net
|
|
|
84 |
|
|
|
137 |
|
|
|
4 |
|
|
|
(48 |
) |
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(7 |
) |
|
|
(14 |
) |
|
|
— |
|
|
|
— |
|
Inventories
|
|
|
(382 |
) |
|
|
372 |
|
|
|
— |
|
|
|
— |
|
Other assets
|
|
|
167 |
|
|
|
(73 |
) |
|
|
26 |
|
|
|
8 |
|
Accounts payable
|
|
|
185 |
|
|
|
(444 |
) |
|
|
— |
|
|
|
— |
|
Accrued and other liabilities
|
|
|
(249 |
) |
|
|
(149 |
) |
|
|
25 |
|
|
|
80 |
|
Other operating activities, net
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
|
|
25 |
|
Net cash provided by (used in) operating activities of continuing operations
|
|
|
431 |
|
|
|
317 |
|
|
|
68 |
|
|
|
134 |
|
Net cash used in operating activities of discontinued operations
|
|
|
(8 |
) |
|
|
(17 |
) |
|
|
— |
|
|
|
— |
|
Net cash provided by (used in) operating activities
|
|
|
423 |
|
|
|
300 |
|
|
|
68 |
|
|
|
134 |
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables originated or purchased
|
|
|
— |
|
|
|
— |
|
|
|
(662 |
) |
|
|
(3,074 |
) |
Finance receivables repaid
|
|
|
— |
|
|
|
— |
|
|
|
1,825 |
|
|
|
3,860 |
|
Proceeds on receivables sales, including securitizations
|
|
|
— |
|
|
|
— |
|
|
|
628 |
|
|
|
252 |
|
Capital expenditures
|
|
|
(134 |
) |
|
|
(165 |
) |
|
|
— |
|
|
|
— |
|
Net cash used in acquisitions
|
|
|
(47 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Proceeds from sale of repossessed assets and properties
|
|
|
— |
|
|
|
— |
|
|
|
92 |
|
|
|
176 |
|
Other investing activities, net
|
|
|
(26 |
) |
|
|
(46 |
) |
|
|
40 |
|
|
|
149 |
|
Net cash provided by (used in) investing activities of continuing operations
|
|
|
(207 |
) |
|
|
(211 |
) |
|
|
1,923 |
|
|
|
1,363 |
|
Net cash provided by (used in) investing activities of discontinued operations
|
|
|
— |
|
|
|
239 |
|
|
|
— |
|
|
|
— |
|
Net cash provided by (used in) investing activities
|
|
|
(207 |
) |
|
|
28 |
|
|
|
1,923 |
|
|
|
1,363 |
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term lines of credit
|
|
|
(1,167 |
) |
|
|
(58 |
) |
|
|
— |
|
|
|
— |
|
Intergroup financing
|
|
|
150 |
|
|
|
133 |
|
|
|
(163 |
) |
|
|
(112 |
) |
Principal payments on long-term debt
|
|
|
(130 |
) |
|
|
(212 |
) |
|
|
(1,733 |
) |
|
|
(1,823 |
) |
Proceeds from issuance of long-term debt
|
|
|
— |
|
|
|
595 |
|
|
|
47 |
|
|
|
46 |
|
Decrease in short-term debt
|
|
|
— |
|
|
|
(869 |
) |
|
|
— |
|
|
|
(768 |
) |
Proceeds from long-term lines of credit
|
|
|
— |
|
|
|
1,230 |
|
|
|
— |
|
|
|
1,740 |
|
Payments on borrowings against officers life insurance policies
|
|
|
— |
|
|
|
(411 |
) |
|
|
— |
|
|
|
— |
|
Proceeds from issuance of convertible notes, net of fees paid
|
|
|
— |
|
|
|
582 |
|
|
|
— |
|
|
|
— |
|
Purchase of convertible note call options
|
|
|
— |
|
|
|
(140 |
) |
|
|
— |
|
|
|
— |
|
Proceeds from issuance of common stock and warrants
|
|
|
— |
|
|
|
333 |
|
|
|
— |
|
|
|
— |
|
Proceeds from option exercises
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Capital contributions paid to Finance group
|
|
|
— |
|
|
|
— |
|
|
|
258 |
|
|
|
217 |
|
Dividends paid
|
|
|
(16 |
) |
|
|
(16 |
) |
|
|
(355 |
) |
|
|
(284 |
) |
Net cash provided by (used in) financing activities of continuing operations
|
|
|
(1,161 |
) |
|
|
1,167 |
|
|
|
(1,946 |
) |
|
|
(984 |
) |
Effect of exchange rate changes on cash and equivalents
|
|
|
(1 |
) |
|
|
11 |
|
|
|
— |
|
|
|
10 |
|
Net increase (decrease) in cash and equivalents
|
|
|
(946 |
) |
|
|
1,506 |
|
|
|
45 |
|
|
|
523 |
|
Cash and equivalents at beginning of period
|
|
|
1,748 |
|
|
|
531 |
|
|
|
144 |
|
|
|
16 |
|
Cash and equivalents at end of period
|
|
$ |
802 |
|
|
$ |
2,037 |
|
|
$ |
189 |
|
|
$ |
539 |
|
See Notes to the consolidated financial statements.
TEXTRON INC.
Notes to the Consolidated Financial Statements (Unaudited)
Our consolidated financial statements include the accounts of Textron Inc. and its majority-owned subsidiaries. We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information. Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 2, 2010. In the opinion of management, the interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair presentation of our consolidated financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. We have reclassified certain prior period amounts to conform to the current period presentation.
Our financings are conducted through two separate borrowing groups. The Manufacturing group consists of Textron Inc. consolidated with its majority-owned subsidiaries that operate in the Cessna, Bell, Textron Systems and Industrial segments. The Finance group, which is also the Finance segment, consists of Textron Financial Corporation, its subsidiaries and the securitization trusts consolidated into it, along with 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. All significant intercompany transactions are eliminated from the consolidated financial statements, including retail and wholesale financing activities for inventory sold by our Manufacturing group and financed by our Finance group.
Note 2: Special Charges
In the fourth quarter of 2008, we initiated a restructuring program to reduce overhead costs and improve productivity across the company and announced the exit of portions of our commercial finance business. Our restructuring program primarily includes corporate and segment direct and indirect workforce reductions and the consolidation of certain operations. By the end of 2010, we expect to have eliminated approximately 12,200 positions worldwide representing approximately 28% of our global workforce since the inception of the program. As of October 2, 2010, we have terminated approximately 11,100 employees and have exited 28 leased and owned facilities and plants under this program.
Since the inception of the restructuring program in the fourth quarter of 2008, we have incurred the following costs through October 2, 2010:
(In millions)
|
|
Severance
Costs
|
|
|
Curtailment Charges, Net
|
|
|
Asset
Impairments
|
|
|
Contract
Terminations
|
|
|
Total
|
|
Cessna
|
|
$ |
114 |
|
|
$ |
26 |
|
|
$ |
54 |
|
|
$ |
9 |
|
|
$ |
203 |
|
Industrial
|
|
|
22 |
|
|
|
(4 |
) |
|
|
9 |
|
|
|
4 |
|
|
|
31 |
|
Bell
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10 |
|
Textron Systems
|
|
|
11 |
|
|
|
2 |
|
|
|
— |
|
|
|
1 |
|
|
|
14 |
|
Finance
|
|
|
32 |
|
|
|
1 |
|
|
|
11 |
|
|
|
5 |
|
|
|
49 |
|
Corporate
|
|
|
38 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
39 |
|
|
|
$ |
227 |
|
|
$ |
25 |
|
|
$ |
74 |
|
|
$ |
20 |
|
|
$ |
346 |
|
Special charges by segment for the three months ended October 2, 2010 and October 2, 2009 are as follows:
|
|
Restructuring
|
|
|
|
|
|
|
|
(In millions)
|
|
Severance
Costs
|
|
|
Asset
Impairments
|
|
|
Contract
Terminations
|
|
|
Other
|
|
|
Total
|
|
Three Months Ended October 2, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cessna
|
|
$ |
15 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
15 |
|
Textron Systems
|
|
|
4 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
Industrial
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Finance
|
|
|
1 |
|
|
|
— |
|
|
|
2 |
|
|
|
91 |
|
|
|
94 |
|
|
|
$ |
20 |
|
|
$ |
— |
|
|
$ |
3 |
|
|
$ |
91 |
|
|
$ |
114 |
|
Three Months Ended October 3, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cessna
|
|
$ |
10 |
|
|
$ |
2 |
|
|
$ |
5 |
|
|
$ |
— |
|
|
$ |
17 |
|
Bell
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8 |
|
Textron Systems
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Industrial
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Finance
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Corporate
|
|
|
14 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
$ |
35 |
|
|
$ |
2 |
|
|
$ |
5 |
|
|
$ |
— |
|
|
$ |
42 |
|
Special charges by segment for the nine months ended October 2, 2010 and October 3, 2009 are as follows:
|
|
Restructuring
|
|
|
|
|
(In millions)
|
|
Severance
Costs
|
|
|
Curtailment Charges, Net
|
|
|
Asset
Impairments
|
|
|
Contract
Terminations
|
|
|
Other
|
|
|
Total
|
|
Nine Months Ended October 2, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cessna
|
|
$ |
29 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
31 |
|
Bell
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Textron Systems
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
Industrial
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Finance
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
91 |
|
|
|
100 |
|
Corporate
|
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
$ |
39 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
6 |
|
|
$ |
91 |
|
|
$ |
136 |
|
Nine Months Ended October 3, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cessna
|
|
$ |
74 |
|
|
$ |
26 |
|
|
$ |
54 |
|
|
$ |
6 |
|
|
$ |
— |
|
|
$ |
160 |
|
Bell
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8 |
|
Textron Systems
|
|
|
2 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
Industrial
|
|
|
6 |
|
|
|
(4 |
) |
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
3 |
|
Finance
|
|
|
7 |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
9 |
|
Corporate
|
|
|
19 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19 |
|
|
|
$ |
116 |
|
|
$ |
25 |
|
|
$ |
54 |
|
|
$ |
8 |
|
|
$ |
— |
|
|
$ |
203 |
|
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 income statement. The reclassification of this amount had no impact on shareholders’ equity.
An analysis of our restructuring reserve activity is summarized below:
(In millions)
|
|
Severance
Costs
|
|
|
Contract
Terminations
|
|
|
Total
|
|
Balance at January 2, 2010
|
|
$ |
48 |
|
|
$ |
3 |
|
|
$ |
51 |
|
Provisions
|
|
|
41 |
|
|
|
6 |
|
|
|
47 |
|
Reversals
|
|
|
(2 |
) |
|
|
— |
|
|
|
(2 |
) |
Cash paid
|
|
|
(42 |
) |
|
|
(1 |
) |
|
|
(43 |
) |
Balance at October 2, 2010
|
|
$ |
45 |
|
|
$ |
8 |
|
|
$ |
53 |
|
We estimate that we will incur approximately $10 million in restructuring costs in the fourth quarter of 2010, primarily related to severance costs at the Cessna and Finance segments, most of which will be paid in the fourth quarter. We anticipate that the program will be substantially completed in 2010; however, we expect to incur additional restructuring costs of up to $15 million in 2011 as we complete the restructuring actions we have already announced, including severance costs related to our exit from the non-captive portion of our commercial finance business and severance and other cash costs related to the consolidation and relocation of Cessna’s facilities.
Note 3: Retirement Plans
We provide defined benefit pension plans and other postretirement benefits to eligible employees. The components of net periodic benefit cost for these plans are as follows:
|
|
Pension Benefits
|
|
|
Postretirement Benefits
Other Than Pensions
|
|
(In millions)
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
31 |
|
|
$ |
27 |
|
|
$ |
2 |
|
|
$ |
2 |
|
Interest cost
|
|
|
79 |
|
|
|
78 |
|
|
|
9 |
|
|
|
9 |
|
Expected return on plan assets
|
|
|
(92 |
) |
|
|
(96 |
) |
|
|
— |
|
|
|
— |
|
Amortization of prior service cost (credit)
|
|
|
4 |
|
|
|
4 |
|
|
|
(2 |
) |
|
|
(1 |
) |
Amortization of net loss
|
|
|
9 |
|
|
|
1 |
|
|
|
3 |
|
|
|
2 |
|
Net periodic benefit cost
|
|
$ |
31 |
|
|
$ |
14 |
|
|
$ |
12 |
|
|
$ |
12 |
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
93 |
|
|
$ |
90 |
|
|
$ |
6 |
|
|
$ |
6 |
|
Interest cost
|
|
|
237 |
|
|
|
233 |
|
|
|
25 |
|
|
|
28 |
|
Expected return on plan assets
|
|
|
(276 |
) |
|
|
(291 |
) |
|
|
— |
|
|
|
— |
|
Amortization of prior service cost (credit)
|
|
|
12 |
|
|
|
13 |
|
|
|
(4 |
) |
|
|
(4 |
) |
Amortization of net loss
|
|
|
27 |
|
|
|
9 |
|
|
|
9 |
|
|
|
6 |
|
Net periodic benefit cost
|
|
$ |
93 |
|
|
$ |
54 |
|
|
$ |
36 |
|
|
$ |
36 |
|
Note 4: Income Tax Expense (Benefit)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(In millions)
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
Income tax expense (benefit)
|
|
$ |
(21 |
) |
|
$ |
(11 |
) |
|
$ |
12 |
|
|
$ |
(71 |
) |
Effective tax rate
|
|
|
(30.4 |
)% |
|
|
(220.0 |
)% |
|
|
29.3 |
% |
|
|
(84.5 |
)% |
The third quarter 2010 effective tax rate benefit differs from the U.S. Federal statutory rate primarily due to a detriment of 21% related to the nondeductible portion of a cumulative currency translation charge resulting from the substantial liquidation of a Canadian entity within the Finance segment, as discussed in Note 2. This detriment was partially offset by a 16% benefit related to a higher proportion of income attributable to international operations in countries with lower tax rates.
For the nine months ended October 2, 2010, the effective tax rate provision differs from the U.S. Federal statutory rate primarily due to a 36% detriment related to the nondeductible portion of a cumulative currency translation charge resulting from the substantial liquidation of a Canadian entity within the Finance segment and a 27% detriment related to a change in the tax treatment of the Medicare Part D program related to U.S. health-care legislation enacted in the first quarter, offset by a 69% benefit related to changes in the functional currency of two Canadian subsidiaries and benefits related to a higher proportion of income attributable to international operations in countries with lower tax rates.
In the third quarter of 2009, the rate included a 416% benefit attributed to our international operations as a result of favorable tax settlements of prior year tax disputes, partially offset by a 173% detriment for unbenefited losses attributable to CitationAir. For the nine months ended October 3, 2009, the effective tax rate benefit differs from the U.S. Federal statutory rate due primarily to a 34% favorable impact attributed to our international operations as a result of favorable tax settlements of prior year tax disputes and the benefit attributable to the adoption, for Canadian income tax purposes, of the U.S. dollar as the functional currency for one of our wholly-owned Canadian subsidiaries; 14% due to a reduction in unrecognized tax benefits resulting from a capital gain on the sale of CESCOM and 9% due to a reduction in a valuation allowance related to contingent payments on a prior year transaction.
Note 5: Comprehensive Income
Our comprehensive income, net of taxes, is provided below:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(In millions)
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
Net income (loss)
|
|
$ |
(48 |
) |
|
$ |
4 |
|
|
$ |
26 |
|
|
$ |
32 |
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of foreign currency translation loss upon substantial liquidation of Canadian entity, net of income tax
benefit of $17
|
|
|
74 |
|
|
|
— |
|
|
|
74 |
|
|
|
— |
|
Recognition of prior service cost and unrealized
losses on pension and postretirement benefits
|
|
|
11 |
|
|
|
4 |
|
|
|
31 |
|
|
|
16 |
|
Deferred gains (losses) on hedge contracts
|
|
|
3 |
|
|
|
24 |
|
|
|
10 |
|
|
|
54 |
|
Unrealized gain on pension, net of income taxes of $48
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
82 |
|
Pension curtailment, net of income taxes of $10
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
Foreign currency translation and other
|
|
|
21 |
|
|
|
(2 |
) |
|
|
(20 |
) |
|
|
23 |
|
Comprehensive income
|
|
$ |
61 |
|
|
$ |
30 |
|
|
$ |
121 |
|
|
$ |
222 |
|
Note 6: Earnings Per Share and Shareholders’ Equity
Earnings Per Share
We calculate basic and diluted earnings per share based on net income, which approximates income available to common shareholders for each period. Basic earnings per share is calculated using the two-class method. This method includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock, which 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 Notes and upon the exercise of the related warrants. The convertible note call options purchased in connection with the issuance of the 4.50% Convertible Notes are excluded from the calculation of diluted EPS as their impact is always anti-dilutive.
Upon conversion of our 4.50% Convertible Notes, as described in Note 9, 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 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:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
(In thousands)
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
|
Basic weighted-average shares outstanding
|
|
|
274,896 |
|
|
|
271,224 |
|
|
|
274,056 |
|
|
|
260,099 |
|
Dilutive effect of Convertible Notes, stock options and warrants,restricted stock units and convertible preferred stock
|
|
|
— |
|
|
|
7,205 |
|
|
|
26,354 |
|
|
|
— |
|
Diluted weighted-average shares outstanding
|
|
|
274,896 |
|
|
|
278,429 |
|
|
|
300,410 |
|
|
|
260,099 |
|
Stock options to purchase 7 million shares of common stock outstanding are excluded from our calculation of diluted weighted-average shares outstanding for both the three- and nine-month periods ended October 2, 2010 as the exercise prices were greater than the average market price of our common stock for the periods. These securities may dilute earnings per share in the future. For the three months ended October 2, 2010, the potential dilutive effect of 23 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 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.
For the three and nine months ended October 3, 2009, stock options to purchase 8 million and 9 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 the periods. For the nine months ended October 3, 2009, the potential dilutive effect of 3.5 million weighted-average shares of stock options, restricted stock units, convertible preferred stock and the shares that could be issued upon the conversion of our 4.50% Convertible 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.
Shareholders’ Equity - Stock Option Exchange Program
On April 28, 2010, Textron’s shareholders approved a proposal to allow for a one-time stock option exchange program. The program 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 which they replaced. We believe that this program was necessary to motivate and retain key employees and to reinforce the alignment of our employees’ interests with those of our shareholders. 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 the later of 12 months from the exchange date or the remaining term 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 incremental expense associated with the modification.
Stock option activity under the 2007 Long-Term Incentive Plan for the nine months ended October 2, 2010 is as follows:
|
|
Number of
Options
(In thousands)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual Life
(In years)
|
|
Outstanding at beginning of period
|
|
|
8,545 |
|
|
$ |
35.67 |
|
|
|
6 |
|
Granted
|
|
|
1,968 |
|
|
|
20.49 |
|
|
|
|
|
Exercised
|
|
|
(92 |
) |
|
|
19.90 |
|
|
|
|
|
Canceled, expired or forfeited
|
|
|
(2,972 |
) |
|
|
45.33 |
|
|
|
|
|
Outstanding at end of period
|
|
|
7,449 |
|
|
$ |
28.01 |
|
|
|
5 |
|
Exercisable at end of period
|
|
|
4,626 |
|
|
$ |
32.16 |
|
|
|
4 |
|
At October 2, 2010, our outstanding options had an aggregate intrinsic value of $13 million and our exercisable options had an aggregate intrinsic value of $5 million.
Note 7: Accounts Receivable and Finance Receivables Held for Investment
(In millions)
|
|
October 2,
2010
|
|
|
January 2,
2010
|
|
Accounts receivable - Commercial
|
|
$ |
538 |
|
|
$ |
470 |
|
Accounts receivable - U.S. Government contracts
|
|
|
381 |
|
|
|
447 |
|
Gross accounts receivable
|
|
|
919 |
|
|
|
917 |
|
Allowance for doubtful accounts
|
|
|
(20 |
) |
|
|
(23 |
) |
Accounts receivable, net
|
|
$ |
899 |
|
|
$ |
894 |
|
Finance receivables held for investment
|
|
$ |
4,733 |
|
|
$ |
6,206 |
|
Allowance for loan losses
|
|
|
(355 |
) |
|
|
(341 |
) |
Finance receivables held for investment, net
|
|
$ |
4,378 |
|
|
$ |
5,865 |
|
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 $171 million at October 2, 2010 and $170 million at January 2, 2010.
The activity in the Finance group’s allowances for loan losses is provided below:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(In millions)
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
Reserve at the beginning of period
|
|
$ |
352 |
|
|
$ |
284 |
|
|
$ |
341 |
|
|
$ |
191 |
|
Provision for losses
|
|
|
29 |
|
|
|
43 |
|
|
|
128 |
|
|
|
206 |
|
Net charge-offs
|
|
|
(26 |
) |
|
|
(23 |
) |
|
|
(114 |
) |
|
|
(93 |
) |
Transfers
|
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
(2 |
) |
Reserve at the end of period
|
|
$ |
355 |
|
|
$ |
302 |
|
|
$ |
355 |
|
|
$ |
302 |
|
We periodically evaluate individual non-homogeneous finance receivables held for investment for impairment. We also evaluate portfolios of homogeneous loans and loans in non-homogeneous portfolios that are not specifically identified as impaired for impairment on a portfolio basis, as opposed to on an individual loan basis, and establish the necessary allowance for loan losses 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. Impaired finance receivables are classified as either
nonaccrual or accrual loans. We have suspended the accrual of interest income on nonaccrual finance receivables, which include accounts that are contractually delinquent by more than three months, unless collection is not doubtful, and accounts for which interest has been suspended based on detailed individual review without regard to contractual delinquency. We do not use the cash basis method to recognize interest income on these receivables. Impaired accrual finance receivables represent loans with original terms that have been or are expected to be significantly modified to reflect deferred principal payments, generally at market interest rates, for which collection of principal and interest is not doubtful.
Our impaired finance receivables are as follows:
(In millions)
|
|
October 2,
2010
|
|
|
January 2,
2010
|
|
Impaired nonaccrual finance receivables
|
|
$ |
824 |
|
|
$ |
984 |
|
Impaired accrual finance receivables
|
|
|
168 |
|
|
|
217 |
|
Total impaired finance receivables
|
|
|
992 |
|
|
|
1,201 |
|
Less: Impaired finance receivables without identified reserve requirements (including all impaired accrual finance receivables)
|
|
|
265 |
|
|
|
362 |
|
Impaired nonaccrual finance receivables with identified reserve requirements
|
|
$ |
727 |
|
|
$ |
839 |
|
Allowance for losses on impaired nonaccrual finance receivables
|
|
$ |
193 |
|
|
$ |
153 |
|
The average recorded investment in impaired nonaccrual finance receivables was $898 million and $508 million for the nine months ended October 2, 2010 and October 3, 2009, respectively. The average recorded investment in impaired accrual finance receivables amounted to $130 million and $116 million for the nine months ended October 2, 2010 and October 3, 2009, respectively.
Our nonaccrual finance receivables include impaired finance receivables, as well as accounts in homogeneous loan portfolios that are not considered to be impaired but are contractually delinquent by more than three months. At October 2, 2010 and January 2, 2010, nonaccrual finance receivables totaled $876 million and $1.04 billion, respectively. The reduction in nonaccrual finance receivables primarily reflects the resolution of several significant accounts through repossession of collateral, restructure of finance receivables and cash collections, partially offset by new finance receivables identified as nonaccrual in 2010. New finance receivables identified as nonaccrual were primarily comprised of accounts secured by golf course property, aircraft and marinas. The net reductions by collateral type include $93 million for general aviation aircraft, $40 million of dealer inventory, $34 million for golf course property and $20 million for hotels, partially offset by a $38 million increase in accounts secured by marinas.
Note 8: Inventories
(In millions)
|
|
October 2,
2010
|
|
|
January 2,
2010
|
|
Finished goods
|
|
$ |
913 |
|
|
$ |
735 |
|
Work in process
|
|
|
2,299 |
|
|
|
1,861 |
|
Raw materials
|
|
|
517 |
|
|
|
613 |
|
|
|
|
3,729 |
|
|
|
3,209 |
|
Progress/milestone payments
|
|
|
(1,082 |
) |
|
|
(936 |
) |
|
|
$ |
2,647 |
|
|
$ |
2,273 |
|
Note 9: Debt
On May 5, 2009, we issued $600 million of 4.5% Convertible Notes with a maturity date of May 1, 2013 and concurrently purchased call options to acquire our common stock and sold warrants to purchase our common stock for the purpose of reducing the potential dilutive effect to our shareholders and/or our cash outflow upon the conversion of the Convertible Notes. For more information on these transactions, see Note 8 to the Consolidated Financial Statements in Textron’s 2009 Annual Report on Form 10-K. For at least 20 trading days during the 30 consecutive trading days ended September 30, 2010, our common stock price exceeded the conversion threshold
price set forth for these Convertible Notes of $17.06 per share. Accordingly, the notes are convertible at the holder’s option through December 31, 2010. We may deliver shares of common stock, cash or a combination of cash and shares of common stock in satisfaction of our obligations upon conversion of the Convertible Notes. We intend to settle the face value of the Convertible Notes in cash. Based on an October 2, 2010 stock price of $20.75, the "if converted value" exceeds the face amount of the notes by $348.6 million; however, after giving effect to the exercise of the call options and warrants, the incremental cash or share settlement in excess of the face amount would result in either an 11 million net share issuance or a cash payment of $228.6 million, 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.
Note 10: Guarantees and Indemnifications
As disclosed under the caption “Guarantees and Indemnifications” in Note 18 to the Consolidated Financial Statements in Textron’s 2009 Annual Report on Form 10-K, we have issued or are party to certain guarantees. As of October 2, 2010, there has been no material change to these guarantees.
We provide limited warranty and product maintenance programs, including parts and labor, for certain products for periods ranging from one to five years. We estimate the costs that may be incurred under warranty programs and record a liability in the amount of such costs at the time product revenue is recognized. Factors that affect this liability include the number of products sold, historical and anticipated rates of warranty claims, and cost per claim. We assess the adequacy of our recorded warranty and product maintenance liabilities periodically and adjust the amounts as necessary. Additionally, we may establish warranty liabilities related to the issuance of aircraft service bulletins for aircraft no longer covered under the limited warranty programs.
Changes in our warranty and product maintenance liabilities are as follows:
|
|
Nine Months Ended
|
|
(In millions)
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
Accrual at the beginning of period
|
|
$ |
263 |
|
|
$ |
278 |
|
Provision
|
|
|
129 |
|
|
|
129 |
|
Settlements
|
|
|
(162 |
) |
|
|
(168 |
) |
Adjustments to prior accrual estimates
|
|
|
12 |
|
|
|
18 |
|
Accrual at the end of period
|
|
$ |
242 |
|
|
$ |
257 |
|
Note 11: Commitments and Contingencies
We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts; compliance with applicable laws and regulations; production partners; product liability; employment; and environmental, safety and health matters. Some of these legal proceedings and claims seek damages, fines or penalties in substantial amounts or remediation of environmental contamination. As a government contractor, we are subject to audits, reviews and investigations to determine whether our operations are being conducted in accordance with applicable regulatory requirements. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our being suspended or debarred from U.S. Government contracting for a period of time. On the basis of information presently available, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations.
On April 6, 2010, a jury in the Philadelphia Common Pleas Court returned verdicts against Avco Corporation, which includes the Lycoming Engines operating division, for $24.7 million in compensatory damages and $64 million in punitive damages in an aviation products liability case involving a 1999 accident. Judgment has not been entered pending post-trial motions. While the ultimate outcome of the litigation cannot be assured, we strongly disagree with the verdicts and intend to appeal the verdicts if our post-trial motions are unsuccessful. We believe that it is probable that the verdicts will be reversed through the appellate process.
Note 12. Derivative Instruments and Fair Value Measurements
We measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We prioritize the assumptions that market participants would use in pricing the asset or liability (the “inputs”) into a three-tier fair value hierarchy. This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exists, requiring companies to develop their own assumptions. Observable inputs that do not meet the criteria of Level 1, and include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, are categorized as Level 2. Level 3 inputs are those that reflect our estimates about the assumptions market participants would use in pricing the asset or liability, based on the best information available in the circumstances. Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
Our assets and liabilities that are recorded at fair value on a recurring basis consist of 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)
|
|
(In millions)
|
Borrowing Group
|
|
October 2,
2010
|
|
|
January 2, 2010
|
|
|
October 2,
2010
|
|
|
January 2, 2010
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate exchange contracts*
|
Finance
|
|
$ |
649 |
|
|
$ |
1,333 |
|
|
$ |
43 |
|
|
$ |
43 |
|
Cross-currency interest rate exchange contracts
|
Finance
|
|
|
— |
|
|
|
161 |
|
|
|
— |
|
|
|
18 |
|
Foreign currency exchange contracts
|
Manufacturing
|
|
|
569 |
|
|
|
696 |
|
|
|
34 |
|
|
|
54 |
|
Total
|
|
|
$ |
1,218 |
|
|
$ |
2,190 |
|
|
$ |
77 |
|
|
$ |
115 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate exchange contracts*
|
Finance
|
|
$ |
344 |
|
|
$ |
32 |
|
|
$ |
(7 |
) |
|
$ |
(3 |
) |
Foreign currency exchange contracts
|
Manufacturing
|
|
|
70 |
|
|
|
80 |
|
|
|
(1 |
) |
|
|
(5 |
) |
Total
|
|
|
$ |
414 |
|
|
$ |
112 |
|
|
$ |
(8 |
) |
|
$ |
(8 |
) |
*Represents a fair value hedge.
The fair values of derivative instruments for the Manufacturing group are included in either other current assets or accrued liabilities in our balance sheet. For the Finance group, 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 to a standard AA-rated counterparty; however, this had no significant impact on the valuation as of October 2, 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. This is observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions so they are classified as Level 2.
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:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(In millions)
|
Gain (Loss) Location
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
Interest rate exchange contracts
|
Interest expense
|
|
$ |
8 |
|
|
$ |
2 |
|
|
$ |
27 |
|
|
$ |
(13 |
) |
Interest rate exchange contracts
|
Finance charges
|
|
|
— |
|
|
|
2 |
|
|
|
(11 |
) |
|
|
8 |
|
Cash Flow Hedges
We manufacture and sell our products in a number of countries throughout the world, and, therefore, we are exposed to movements in foreign currency exchange rates. The primary purpose of our foreign currency hedging activities is to manage the volatility associated with foreign currency purchases of materials, foreign currency sales of products, and other assets and liabilities created in the normal course of business. We primarily utilize forward exchange contracts and purchased options with maturities of no more than 18 months that qualify as cash flow hedges. These are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses. At October 2, 2010, we had an accumulated net deferred gain of $26 million in other comprehensive income (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 $10 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 OCI 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 $25 million after-tax loss for the nine months ended October 2, 2010, resulting in an accumulated net deferred gain of $8 million at October 2, 2010. There was no ineffectiveness related to these hedges in 2010.
For our cash flow hedges, the amount of gain (loss) recognized in OCI and the amount reclassified from accumulated other comprehensive loss into income for the Manufacturing group for the respective periods is provided in the following table:
|
|
Amount of Gain(Loss) Recognized in OCI
(Effective Portion)
|
|
Effective Portion of Derivative Reclassified from Accumulated Other Comprehensive Loss into Income
|
|
(In millions)
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
Gain(Loss) Location
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
$ |
4 |
|
|
$ |
23 |
|
Cost of sales
|
|
$ |
5 |
|
|
$ |
(15 |
) |
Forward contracts for Textron stock
|
|
|
— |
|
|
|
4 |
|
Selling and administrative expense
|
|
|
— |
|
|
|
(2 |
) |
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
$ |
9 |
|
|
$ |
54 |
|
Cost of sales
|
|
$ |
12 |
|
|
$ |
(8 |
) |
Forward contracts for Textron stock
|
|
|
— |
|
|
|
— |
|
Selling and administrative expense
|
|
|
(1 |
) |
|
|
(6 |
) |
Derivatives Not Designated as Hedges
The Manufacturing group enters into certain foreign currency exchange contracts that do not meet hedge accounting criteria and primarily are intended to protect against exposure related to intercompany financing transactions. For these instruments, the Manufacturing group reported in selling and administrative expense a gain of $14 million for the nine months ended October 2, 2010 and a loss of $28 million and $3 million for the three and nine months ended October 3, 2009, respectively. These gains and losses were offset by the revaluation of the intercompany financing transactions.
The Finance group also utilizes foreign currency exchange contracts that do not meet hedge accounting criteria and are intended to convert certain foreign currency denominated assets and liabilities into the functional currency of the respective legal entity. Gains and losses related to these derivative instruments are naturally offset by the translation of the related foreign currency denominated assets and liabilities. For these instruments, the Finance group reported in selling and administrative expense a loss of $3 million and $6 million for the three and nine months ended October 2, 2010, respectively, and a loss of $30 million and $82 million for the three and nine months ended October 3, 2009. These net losses were largely offset by gains resulting from the translation of foreign currency denominated assets and liabilities.
The notional and fair value amounts of the 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)
|
|
(In millions)
|
Borrowing Group
|
|
October 2,
2010
|
|
|
January 2,
2010
|
|
|
October 2,
2010
|
|
|
January 2,
2010
|
|
Foreign currency exchange contracts
|
Finance
|
|
$ |
228 |
|
|
$ |
531 |
|
|
$ |
1 |
|
|
$ |
(13 |
) |
Foreign currency exchange contracts
|
Manufacturing
|
|
|
72 |
|
|
|
224 |
|
|
|
1 |
|
|
|
3 |
|
Total
|
|
|
$ |
300 |
|
|
$ |
755 |
|
|
$ |
2 |
|
|
$ |
(10 |
) |
Counterparty Credit Risk
Our exposure to loss from nonperformance by the counterparties to our derivative agreements at October 2, 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 the nine months ended October 2, 2010 and October 3, 2009. These assets were measured using significant unobservable inputs (Level 3) and include the following:
|
|
|
|
|
Gain (Loss) |
|
|
|
Balance at
|
|
|
Nine Months Ended
|
|
(In millions)
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
Finance Group
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables held for sale
|
|
$ |
252 |
|
|
$ |
998 |
|
|
$ |
(17 |
) |
|
$ |
(16 |
) |
Impaired finance receivables
|
|
|
525 |
|
|
|
532 |
|
|
|
(130 |
) |
|
|
(143 |
) |
Other assets
|
|
|
126 |
|
|
|
58 |
|
|
|
(38 |
) |
|
|
(47 |
) |
Manufacturing Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(43 |
) |
Finance Receivables Held for Sale - Finance receivables held for sale are recorded at the lower of cost or fair value. Finance receivables held for sale are recorded at fair value on a nonrecurring basis during periods in which the fair value is lower than the cost value. At October 2, 2010, finance receivables held for sale totaled $252 million and primarily included a golf mortgage portfolio. Golf course mortgages classified as held for sale were
identified as a portion of a larger portfolio with common characteristics based on the intention to balance the sale of certain loans with the collection of others to maximize economic value. Total gains related to receivable sales were $30 million for the nine months ended October 2, 2010.
There are no active, quoted market prices for our finance receivables. The estimate of fair value was determined based on the use of discounted cash flow models to estimate the exit price we expect to receive in the principal market for each type of loan in an orderly transaction, which includes both the sale of pools of similar assets and the sale of individual loans. The models we used incorporate estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and credit line utilization rates. Where available, the assumptions related to the expectations of current market participants are compared with observable market inputs, including bids from prospective purchasers of similar loans and certain bond market indices for loans of similar perceived credit quality. Although we utilize and prioritize these market observable inputs in our discounted cash flow models, these inputs rarely are derived from markets with directly comparable loan structures, industries and collateral types. Therefore, all valuations of finance receivables held for sale involve significant management judgment, which can result in differences between our fair value estimates and those of other market participants.
Impaired Finance Receivables - Finance receivable impairment is measured by comparing the expected future cash flows discounted at the finance receivable’s effective interest rate, or the fair value of the collateral if the receivable is collateral dependent, to its carrying amount. If the carrying amount is higher, we establish a reserve based on this difference. This evaluation is inherently subjective as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the underlying collateral, which may differ from actual results. Impaired nonaccrual finance receivables represent assets recorded at fair value on a nonrecurring basis since the measurement of required reserves on these 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 are recorded within provision for losses on finance receivables.
Other assets – Other assets in the Finance group 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 earnings 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 earnings for any shortfall between estimated fair value and the carrying amount.
For the Manufacturing group, in the second quarter of 2009, we recorded a $43 million impairment charge to write off capitalized costs that were no longer considered recoverable upon the cancellation of a development program at Cessna.
Financial Instruments 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:
|
|
October 2, 2010
|
|
|
January 2, 2010
|
|
(In millions)
|
|
Carrying
Value
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Value
|
|
|
Estimated
Fair Value
|
|
Manufacturing Group
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt, excluding leases
|
|
$ |
(2,189 |
) |
|
$ |
(2,674 |
) |
|
$ |
(3,474 |
) |
|
$ |
(3,762 |
) |
Finance Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables held for investment, excluding leases
|
|
|
3,855 |
|
|
|
3,545 |
|
|
|
5,159 |
|
|
|
4,703 |
|
Retained interest in securitizations
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
|
6 |
|
Investment in other marketable securities
|
|
|
55 |
|
|
|
54 |
|
|
|
68 |
|
|
|
55 |
|
Debt
|
|
|
(4,062 |
) |
|
|
(3,918 |
) |
|
|
(5,667 |
) |
|
|
(5,439 |
) |
Fair value for the Manufacturing group debt is determined using market observable data for similar transactions. We utilize the same valuation methodologies to determine the fair value estimates for finance receivables held for investment as used for finance receivables held for sale.
Investments in other marketable securities represent notes receivable issued by securitization trusts that purchase timeshare notes receivable from timeshare developers. These notes are classified as held-to-maturity and are held at amortized cost. The estimate of fair value was based on observable market inputs for similar securitization interests in markets that are currently inactive.
At October 2, 2010 and January 2, 2010, approximately 41% and 54%, respectively, of the fair value of term debt for the Finance group was determined based on observable market transactions. The remaining Finance group debt was determined based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations.
Note 13: Segment Information
We operate in, and report financial information for, the following five business segments: Cessna, Bell, Textron Systems, Industrial and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses and special charges. The measurement for the Finance segment includes interest income and expense and excludes special charges. Provisions for losses on finance receivables involving the sale or lease of our products are recorded by the selling manufacturing division when our Finance group has recourse to the Manufacturing group.
Our revenues by segment and a reconciliation of segment profit to income (loss) from continuing operations before income taxes are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(In millions)
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing Group
|
|
|
|
|
|
|
|
|
|
|
|
|
Cessna
|
|
$ |
535 |
|
|
$ |
825 |
|
|
$ |
1,603 |
|
|
$ |
2,465 |
|
Bell
|
|
|
825 |
|
|
|
628 |
|
|
|
2,266 |
|
|
|
2,040 |
|
Textron Systems
|
|
|
460 |
|
|
|
502 |
|
|
|
1,452 |
|
|
|
1,397 |
|
Industrial
|
|
|
600 |
|
|
|
523 |
|
|
|
1,886 |
|
|
|
1,506 |
|
|
|
|
2,420 |
|