TEXTRON INC - Annual Report: 2011 (Form 10-K)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[ x ] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 1, 2011
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)
(Address of principal executive offices)
Registrants Telephone Number, Including Area Code: (401) 421-2800
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock par value $0.125 | New York Stock Exchange | |
Chicago Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes ü
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes No ü
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form
10-K. [ ]
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 [ ] | |
(Do not check if a 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
The aggregate market value of the registrants Common Stock held by non-affiliates at July 2, 2010
was approximately $4.4 billion based on the New York Stock Exchange closing price for such shares
on that date. The registrant has no non-voting common equity.
At February 12, 2011, 276,027,951 shares of Common Stock were outstanding.
Documents Incorporated by Reference
Part III of this Report incorporates information from certain portions of the registrants
Definitive Proxy Statement for its Annual Meeting of Shareholders to be held on April 27, 2011.
PART I
Item 1. Business
Textron Inc. is a multi-industry company that leverages its global network of aircraft,
defense, industrial and finance businesses to provide customers with innovative products and
services around the world. We have approximately 32,000 employees worldwide. Textron Inc. was
founded in 1923 and reincorporated in Delaware on July 31, 1967. Unless otherwise indicated,
references to Textron Inc., the Company, we, our and us in this Annual Report on Form
10-K refer to Textron Inc. and its consolidated subsidiaries.
We conduct our business through five operating segments: Cessna, Bell, Textron Systems and
Industrial, which represent our manufacturing businesses, and Finance, which represents our
finance business. A description of the business of each of our segments is set forth below.
Our business segments include operations that are unincorporated divisions of Textron Inc. and
others that are separately incorporated subsidiaries. Financial information by business segment
and geographic area appears in Note 17 to the Consolidated Financial Statements on pages 80 and
82 of this Annual Report on Form 10-K. The following description of our business should be read
in conjunction with Managements Discussion and Analysis of Financial Condition and Results of
Operations on pages 18 through 35 of this Annual Report on Form 10-K. Information included in
this Annual Report on Form 10-K refers to our continuing businesses unless otherwise indicated.
Cessna Segment
Cessna is the worlds leading general aviation company based on unit sales with two principal lines of business: Aircraft sales and aftermarket services. Aircraft sales include Citation business jets, Caravan single-engine utility turboprops, single-engine piston aircraft and lift solutions by CitationAir. Aftermarket services include parts, maintenance, inspection and repair services. Revenues in the Cessna segment accounted for approximately 24%, 32% and 40% of our total revenues in 2010, 2009 and 2008, respectively. Revenues for Cessnas principal lines of business were as follows:
Cessna is the worlds leading general aviation company based on unit sales with two principal lines of business: Aircraft sales and aftermarket services. Aircraft sales include Citation business jets, Caravan single-engine utility turboprops, single-engine piston aircraft and lift solutions by CitationAir. Aftermarket services include parts, maintenance, inspection and repair services. Revenues in the Cessna segment accounted for approximately 24%, 32% and 40% of our total revenues in 2010, 2009 and 2008, respectively. Revenues for Cessnas principal lines of business were as follows:
(In millions) | 2010 | 2009 | 2008 | |||||||||
Aircraft sales |
$ | 1,896 | $ | 2,733 | $ | 4,941 | ||||||
Aftermarket |
667 | 587 | 721 | |||||||||
$ | 2,563 | $ | 3,320 | $ | 5,662 | |||||||
The family of business jets currently produced by Cessna includes the Citation CJ1+, Citation CJ2+,
Citation CJ3, Citation CJ4, Citation Sovereign, Citation X, Citation XLS+ and Mustang. The Cessna
Caravan is the worlds best-selling utility turboprop. Caravans are offered in four models: the
Grand Caravan, the Super Cargomaster, the Caravan 675 and the Caravan Amphibian. Caravans are used
in the United States primarily for overnight express package shipments and for personal
transportation. International uses of Caravans include humanitarian flights, tourism and freight
transport. Cessna offers nine models in its single-engine piston product line, which include the
four-place Skyhawk, Skyhawk SP, Skylane, Turbo Skylane, Corvalis and Corvalis TT, the six-place
Stationair and Turbo Stationair and the two-place Skycatcher.
The Citation family of aircraft currently is supported by nine Citation Service Centers owned or
operated by Cessna, along with authorized independent service stations and centers located in
more than 27 countries throughout the world. Cessna-owned Service Centers provide customers with
24-hour service and maintenance. Cessna also provides around-the-clock parts support for
Citation aircraft. Cessna Caravan and single-engine piston customers receive product support
through independently owned service stations and around-the-clock parts support through Cessna.
Cessna markets its products worldwide through its own sales force, as well as through a network of
authorized independent sales representatives, depending upon the product line. Cessna has several
competitors domestically and internationally in various market segments. Cessnas aircraft compete
with other aircraft that vary in size, speed, range, capacity and handling characteristics on the
basis of price, product quality and reliability, product support and reputation.
Cessnas private jet business called CitationAir offers a spectrum of private aviation lift
solutions, including Jet Card, Jet Access, Jet Shares, Jet Management and Corporate Solutions. The
CitationAir fleet operates throughout the contiguous U.S. and in Canada, Mexico, the Caribbean, the
Bahamas and Bermuda.
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Bell Segment
Bell Helicopter is one of the leading suppliers of military and commercial helicopters, tiltrotor aircraft, and related spare parts and services in the world. Revenues for Bell accounted for approximately 31%, 27% and 20% of our total revenues in 2010, 2009 and 2008, respectively. Revenues by Bells principal lines of business were as follows:
Bell Helicopter is one of the leading suppliers of military and commercial helicopters, tiltrotor aircraft, and related spare parts and services in the world. Revenues for Bell accounted for approximately 31%, 27% and 20% of our total revenues in 2010, 2009 and 2008, respectively. Revenues by Bells principal lines of business were as follows:
(In millions) | 2010 | 2009 | 2008 | |||||||||
Military: |
||||||||||||
V-22 Program |
$ | 1,155 | $ | 925 | $ | 845 | ||||||
Other Military |
845 | 722 | 744 | |||||||||
Commercial |
1,241 | 1,195 | 1,238 | |||||||||
$ | 3,241 | $ | 2,842 | $ | 2,827 | |||||||
Bell supplies advanced military helicopters and support to the U.S. Government and to military
customers outside the U.S. Bells primary U.S. Government programs are the V-22 tiltrotor
aircraft and the H-1 helicopters. Bell is one of the leading suppliers of helicopters to the
U.S. Government and, in association with The Boeing Company (Boeing), the only supplier of
military tiltrotor aircraft. Tiltrotor aircraft are designed to provide the benefits of both
helicopters and fixed-wing aircraft. Through its strategic alliance with Boeing, Bell produces
and supports the V-22 tiltrotor aircraft for the U.S. Department of Defense (DoD). The U.S.
Marine Corps H-1 helicopter program includes a utility model and an advanced attack model, the
UH-1Y and the AH-1Z, respectively, which have 84% parts commonality between them.
Through its commercial business, Bell is a leading supplier of commercially certified helicopters
and support to corporate, offshore petroleum exploration and development, utility, charter,
police, fire, rescue, emergency medical helicopter operators and foreign governments. Bell
produces a variety of commercial aircraft types, including light single- and twin-engine
helicopters and medium twin-engine helicopters, along with other related products. The
helicopters currently produced by Bell for commercial applications include the 206L-4, 407,
412EP, 429 and Huey II.
For both its military programs and its commercial products, Bell provides post-sale support and
service for its installed base of approximately 13,000 helicopters through a network of
Bell-owned service sites, more than 120 independent service centers and six supply centers that
are located worldwide. Collectively, these service sites offer a complete range of logistics
support, including parts, support equipment, technical data, training devices, pilot and
maintenance training, component repair and overhaul, engine repair and overhaul, aircraft
modifications, aircraft customizing, accessory manufacturing, contractor maintenance, field
service and product support engineering.
Bell competes against a number of competitors based in the U.S. and other countries for its
helicopter business, and its parts and support business competes against numerous competitors
around the world. Competition is based primarily on price, product quality and reliability,
product support, performance and reputation.
Textron Systems Segment
Textron Systems product lines consist of unmanned aircraft systems, land and marine systems, weapons and sensors and a variety of defense and aviation mission support products. Textron Systems is a supplier to the defense, aerospace and general aviation markets, providing approximately 19%, 18% and 13% of Textrons revenues in 2010, 2009 and 2008, respectively. While this segment sells most of its products to U.S. Government customers, it also increasingly sells products to customers outside the U.S. through foreign military sales sponsored by the U.S. Government and directly through commercial sales channels. Textron Systems competes on the basis of technology, contract performance, price, product quality and reliability, product support and reputation.
Textron Systems product lines consist of unmanned aircraft systems, land and marine systems, weapons and sensors and a variety of defense and aviation mission support products. Textron Systems is a supplier to the defense, aerospace and general aviation markets, providing approximately 19%, 18% and 13% of Textrons revenues in 2010, 2009 and 2008, respectively. While this segment sells most of its products to U.S. Government customers, it also increasingly sells products to customers outside the U.S. through foreign military sales sponsored by the U.S. Government and directly through commercial sales channels. Textron Systems competes on the basis of technology, contract performance, price, product quality and reliability, product support and reputation.
Revenues by Textron Systems product lines were as follows:
(In millions) | 2010 | 2009 | 2008 | |||||||||
Unmanned Aircraft Systems |
$ | 785 | $ | 634 | $ | 579 | ||||||
Land and Marine Systems |
503 | 528 | 546 | |||||||||
Weapons and Sensors |
284 | 314 | 296 | |||||||||
Mission Support and Other |
407 | 423 | 459 | |||||||||
$ | 1,979 | $ | 1,899 | $ | 1,880 | |||||||
Unmanned Aircraft Systems
Unmanned Aircraft Systems (UAS) consists of the AAI-UAS and AAI-Logistics & Technical Services businesses, which are operating units of Textron Systems. AAI-UAS is the prime system integrator for the U.S. Armys premier tactical UAS, the Shadow, which includes the One System Ground Control Station the U.S. Armys standard for interoperability of manned and unmanned airborne assets. AAI-Logistics & Technical Services provides logistical support related to the operation of various unmanned aircraft systems including field operational and maintenance service support, as well as engineering and supply chain services to government and commercial customers worldwide.
Unmanned Aircraft Systems (UAS) consists of the AAI-UAS and AAI-Logistics & Technical Services businesses, which are operating units of Textron Systems. AAI-UAS is the prime system integrator for the U.S. Armys premier tactical UAS, the Shadow, which includes the One System Ground Control Station the U.S. Armys standard for interoperability of manned and unmanned airborne assets. AAI-Logistics & Technical Services provides logistical support related to the operation of various unmanned aircraft systems including field operational and maintenance service support, as well as engineering and supply chain services to government and commercial customers worldwide.
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Land and Marine Systems
The Land and Marine Systems business is operated as Textron Marine & Land Systems (TMLS). TMLS is
a world leader in the design, production and support of Armored Security Vehicles (ASV), turrets
and related subsystems and advance marine craft. TMLS currently produces ASVs and its variants for
the U.S. Army and international allies.
Weapons and Sensors
The Weapons and Sensors business is operated as Textron Defense Systems (TDS). This business
consists of state-of-the-art smart weapons; airborne and ground-based sensors and surveillance
systems; and protection systems for the defense, aerospace and homeland security communities.
TDS is the U.S. Air Forces prime contractor for the Sensor Fuzed Weapon and the U.S. Armys lead
provider for networked munitions systems.
Mission Support and Other
Mission Support and Other includes three lines of business: AAI-Test & Training, Overwatch and
Lycoming. AAI-Test & Training provides training and simulation systems and automated aircraft
test and maintenance equipment. Overwatch is a widely recognized market leader in multi-source
intelligence and geospatial analysis solutions. Lycoming specializes in the engineering,
manufacture, service and support of piston aircraft engines for the general aviation market.
Industrial Segment
Our Industrial segment designs and manufactures a variety of products under three principal product
lines. Industrial segment revenues were as follows:
(In millions) | 2010 | 2009 | 2008 | ||||||||||
Fuel systems and functional components |
$ | 1,640 | $ | 1,287 | $ | 1,763 | |||||||
Golf and turf care |
554 | 491 | 720 | ||||||||||
Powered tools, testing and measurement equipment |
330 | 300 | 435 | ||||||||||
$ | 2,524 | $ | 2,078 | $ | 2,918 | ||||||||
Fuel Systems and Functional Components
Our fuel systems and functional components product line is operated by our Kautex division, which
is headquartered in Bonn, Germany. Kautex is a leading developer and manufacturer of blow-molded
plastic fuel systems for cars, light trucks, all-terrain vehicles, windshield and headlamp washer
systems, and selective catalytic reduction systems used to reduce emissions from diesel engines.
Kautex produces engine camshafts in North America, and serves the automobile market worldwide, with
operating facilities near its major customers around the world. In addition, from facilities in
Germany and Poland, Kautex develops and produces plastic bottles and containers for food,
household, laboratory and industrial uses. Revenues of Kautex accounted for approximately 16%, 12%
and 13% of our total revenues in 2010, 2009 and 2008, respectively.
Our automotive products have a limited number of competitors worldwide, some of which are
affiliated with the original equipment manufacturers that comprise our targeted customer base.
Competition typically is based on a number of factors, including price, product quality and
reliability, prior experience and available manufacturing capacity.
Golf and Turf Care
Our golf and turf care product line includes the products manufactured by our E-Z-GO and Jacobsen
divisions. E-Z-GO designs, manufactures and sells golf cars and off-road utility vehicles powered
by electric and internal combustion engines and electric on-road low speed vehicles under the
E-Z-GO name, as well as multipurpose utility vehicles and off-road vehicles under the E-Z-GO,
Cushman and Bad Boy Buggies brand names. E-Z-GOs diversified customer base consists primarily of
golf courses, resort communities and municipalities, consumers, and commercial and industrial users
such as airports, college campuses and factories. Sales are made factory direct and through
distributors and dealers worldwide. E-Z-GO has two major competitors for golf cars and several
other competitors for off-road, on-road and multipurpose utility vehicles. Competition is based
primarily on product quality and reliability, product support, reputation and price.
Jacobsen designs and manufactures professional turf-maintenance equipment, as well as specialized
turf-care vehicles. Brand names include Ransomes, Jacobsen and Cushman. Jacobsens customers
include golf courses, resort communities, sporting venues and municipalities. Products are sold
through a network of distributors and dealers. Jacobsen has two major competitors for
professional turf-maintenance equipment and several other competitors for specialized turf-care
products. Competition is based primarily on product features, product quality and reliability,
price and product support.
Powered Tools, Testing and Measurement Equipment
We design and manufacture powered tools, testing and measurement equipment through our Greenlee
division. Greenlee designs and manufactures powered equipment, electrical test and measurement
instruments, hand and hydraulic powered tools, and electrical and fiber optic assemblies under
the Greenlee, Klauke, Paladin Tools, Progressive and Tempo brand names. These products
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principally are used in the electrical construction, maintenance, telecommunications, data
communications, wiring and plumbing industries. Greenlee distributes its products through a
global network of sales representatives and distributors and sells its products
directly to home improvement retailers and original equipment manufacturers. Through a joint
venture, Greenlee also sells hand and powered tools for the plumbing and mechanical industries in
North America. The Greenlee businesses face competition from numerous manufacturers based
primarily on price, product quality and reliability.
Finance Segment
Our Finance segment, or the Finance group, is a commercial finance business that consists of
Textron Financial Corporation (TFC) and its consolidated subsidiaries, along with three other
finance subsidiaries owned by Textron Inc. In the fourth quarter of 2008, we announced a plan to
exit the non-captive portion of the commercial finance business of our Finance segment while
retaining the captive portion of the business that supports customer purchases of products that we
manufacture. We made the decision to exit this business in order to address our long-term liquidity
position in light of the disruption and instability in the capital markets. The non-captive
business is based primarily in North America and includes the following product lines: distribution
finance, golf mortgage, structured capital and timeshare. The exit plan is being effected through
a combination of orderly liquidation and selected sales. During 2010, we reduced our owned and
managed receivable portfolio by approximately $2.4 billion and expect, depending on market
conditions, to substantially liquidate the remaining non-captive portfolio over the next three to
five years.
Our Finance segment continues to originate new customer relationships and finance receivables in
the captive finance business, which provides financing primarily for new Cessna aircraft and Bell
helicopters and, to a lesser extent, for new E-Z-GO and Jacobsen golf and turf-care equipment. We
also provide financing to purchasers of pre-owned Cessna aircraft and Bell helicopters on a limited
basis. New finance receivables are originated primarily outside the United States. Originations
in the U.S. primarily finance purchases of Textron-manufactured products for purchasers who have
had difficulty in accessing other sources of financing.
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.
The commercial finance business traditionally has been extremely competitive. Our Finance segment
is subject to competition from various types of financing institutions, including banks, leasing
companies, commercial finance companies and finance operations of equipment vendors. Competition
within the commercial finance industry primarily is focused on price, term, structure and service.
Our Finance segments largest business risks are continued access to financing through the capital
markets and the collectability of its finance receivable portfolio. See Finance Portfolio
Quality in Managements Discussion and Analysis of Financial Condition and Results of Operations
on page 27 for a discussion of the credit quality of this portfolio.
Backlog
Our backlog at the end of 2010 and 2009 is summarized below:
January 1, | January 2, | |||||||
(In millions) | 2011 | 2010 | ||||||
U.S. Government: |
||||||||
Bell |
$ | 6,858 | $ | 6,416 | ||||
Textron Systems |
1,438 | 1,408 | ||||||
Total U.S. Government backlog |
8,296 | 7,824 | ||||||
Commercial: |
||||||||
Cessna |
2,928 | 4,893 | ||||||
Bell |
341 | 487 | ||||||
Textron Systems |
160 | 256 | ||||||
Industrial |
40 | 47 | ||||||
Total commercial backlog |
3,469 | 5,683 | ||||||
Total backlog |
$ | 11,765 | $ | 13,507 | ||||
Orders from Cessna customers, which cover a wide spectrum of industries worldwide, are included in
backlog when the customer enters into a definitive purchase agreement and the initial customer
deposit is received. We work with our customers to provide estimated delivery dates, which may be
adjusted based on the customers needs or our production schedule, but do not establish definitive
delivery dates until approximately six months before expected delivery. There is considerable
uncertainty as to when or whether backlog will convert to revenues as the conversion depends on
production capacity, customer needs and credit availability; these factors also may be impacted by
the economy and public perceptions of private corporate jet usage. While backlog is an indicator
of future revenues, we cannot reasonably estimate the year each order in backlog ultimately will
result in revenues and cash flows.
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Orders remain in backlog until the aircraft is delivered or upon cancellation by the customer.
Upon cancellation, deposits are used to defray costs, including remarketing fees, cost to
reconfigure the aircraft and other costs incurred as a result of the cancellation.
Remaining deposits, if any, may be retained or refunded at our discretion.
Approximately 58% of our total backlog at January 1, 2011 represents orders that are not
expected to be filled in 2011.
The U.S. Government is obligated only up to the amount of funding formally appropriated for a
contract. The difference between the award value of the contract and the amount formally
appropriated (funded) represents unfunded backlog. At January 1, 2011, substantially all U.S. Government backlog included in the above
table was funded. Under a multi-year procurement contract with the U.S. Government for the
purchase of V-22 tiltrotor aircraft, Bell has $4.9 billion of funded backlog included in the above
table. Bell also has approximately $1.2 billion of unfunded orders under the V-22 program that
have not yet been appropriated and are not included in the above table.
U.S. Government Contracts
In 2010, approximately 34% of our consolidated revenues were generated by or resulted from
contracts with the U.S. Government. This business is subject to competition, changes in procurement
policies and regulations, the continuing availability of funding, which is dependent upon
congressional appropriations, national and international priorities for defense spending, world
events, and the size and timing of programs in which we may participate.
Our contracts with the U.S. Government generally may be terminated by the U.S. Government for
convenience or if we default in whole or in part by failing to perform under the terms of the
applicable contract. If the U.S. Government terminates a contract for convenience, we normally
will be entitled to payment for the cost of contract work performed before the effective date of
termination, including, if applicable, reasonable profit on such work, as well as reasonable
termination costs. If, however, the U.S. Government terminates a contract for default, generally:
(a) we will be paid the contract price for completed supplies delivered and accepted, an
agreed-upon amount for manufacturing materials delivered and accepted and for the protection and
preservation of property, and an amount for partially completed products accepted by the U.S.
Government; (b) the U.S. Government will not be liable for our costs with respect to unaccepted
items and will be entitled to repayment of advance payments and progress payments related to the
terminated portions of the contract; and (c) we may be liable for excess costs incurred by the U.S.
Government in procuring undelivered items from another source.
Research and Development
Information regarding our research and development expenditures is contained in Note 1 to the
Consolidated Financial Statements on page 50 of this Annual Report on Form 10-K.
Patents and Trademarks
We own, or are licensed under, numerous patents throughout the world relating to products, services
and methods of manufacturing. Patents developed while under contract with the U.S. Government may
be subject to use by the U.S. Government. We also own or license active trademark registrations and
pending trademark applications in the U.S. and in various foreign countries or regions, as well as
trade names and service marks. While our intellectual property rights in the aggregate are
important to the operation of our business, we do not believe that any existing patent, license,
trademark or other intellectual property right is of such importance that its loss or termination
would have a material adverse effect on our business taken as a whole. Some of these trademarks,
trade names and service marks are used in this Annual Report on Form 10-K and other reports,
including: AAI; AH-1Z; BA609; Bell/Agusta Aerospace Company, LLC; Bell Helicopter; Bravo; Cadillac
Gage; Caravan; Caravan Amphibian; Caravan 675; Cessna; Cessna 350; Cessna 400; Citation;
CitationAir; CitationAir Jetcard; Citation Encore+ Citation Sovereign; Citation X; Citation XLS+
CJ1+ CJ2+ CJ3; CJ4; CLAW; Corvalis; Eclipse; Excel; E-Z-GO; Fly Bell; Fly Smart; Grand Caravan;
Greenlee; H-1; Huey II; IE2; Kautex; Kiowa Warrior; Klauke; Lycoming; M1117 ASV; McCauley; Mustang;
Next Generation Fuel System; NGFS; Overwatch; Paladin; PDCue; Power Advantage; Progressive;
ProParts; Rothenberger LLC; RXV; Sensor Fuzed Weapon; Shadow; SkyBOOKS; Skycatcher; Skyhawk;
Skyhawk SP; Skylane; SkyPLUS; Sovereign; Stationair; ST 4X4; Super Cargomaster; SuperCobra; SYMTX;
TDCue; Tempo; Textron; Textron Defense Systems; Textron Financial Corporation; Textron Global
Technology Center; Textron Marine & Land Systems; Textron Systems; Turbo Skylane; Turbo Stationair;
UAV SYSTEMS SPECIALIST; UH-1Y; US Helicopter; V-22 Osprey; 2FIVE; and 429. These marks and their
related trademark designs and logotypes (and variations of the foregoing) are trademarks, trade
names or service marks of Textron Inc., its subsidiaries, affiliates or joint ventures.
Environmental Considerations
Our operations are subject to numerous laws and regulations designed to protect the environment.
Compliance with these laws and expenditures for environmental control facilities has not had a
material effect on our capital expenditures, earnings or competitive position. Additional
information regarding environmental matters is contained in Note 15 to the Consolidated Financial
Statements on page 79 of this Annual Report on Form 10-K.
We do not believe that existing or pending climate change legislation, regulation, or international
treaties or accords are reasonably likely to have a material effect in the foreseeable future on
our business or markets nor on our results of operations, capital
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expenditures or financial
position. We will continue to monitor emerging developments in this area.
Employees
At January 1, 2011, we had approximately 32,000 employees.
Available Information
We make available free of charge on our Internet Web site (www.textron.com) our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission.
Forward-Looking Information
Certain statements in this report and other oral and written statements made by us from time to
time are forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements, which may describe strategies, goals,
outlook or other non-historical matters, or project revenues, income, returns or other financial
measures, often include words such as believe, expect, anticipate, intend, plan,
estimate, guidance, project, target, potential, will, should, could, likely or
may and similar expressions intended to identify forward-looking statements. These statements
are only predictions and involve known and unknown risks, uncertainties, and other factors that may
cause our actual results to differ materially from those expressed or implied by such
forward-looking statements. Given these uncertainties, you should not place undue reliance on these
forward-looking statements. Forward-looking statements speak only as of the date on which they are
made, and we undertake no obligation to update or revise any forward-looking statements. In
addition to those factors described herein under RISK FACTORS, factors that could cause actual
results to differ materially from past and projected future results are the following:
| Changing priorities or reductions in the U.S. Government defense budget, including those related to ongoing military operations in foreign countries; | ||
| Changes in worldwide economic and political conditions that impact demand for our products, interest rates and foreign exchange rates; | ||
| Our ability to perform as anticipated and to control costs under contracts with the U.S. Government; | ||
| The U.S. Governments ability to unilaterally modify or terminate its contracts with us for the U.S. Governments convenience or for our failure to perform, to change applicable procurement and accounting policies, and, under certain circumstances, to suspend or debar us as a contractor eligible to receive future contract awards; | ||
| Changes in international funding priorities, foreign military budget constraints and determinations, and government policies on the export and import of military and commercial products; | ||
| Our Finance segments ability to maintain portfolio credit quality and to realize full value of receivables and of assets acquired upon foreclosure of receivables; | ||
| TFCs ability to maintain certain minimum levels of financial performance required under its committed bank line of credit and under Textrons support agreement with TFC; | ||
| Our Finance segments access to financing, including securitizations, at competitive rates; performance issues with key suppliers, subcontractors and business partners; | ||
| Legislative or regulatory actions impacting our operations or demand for our products; | ||
| The ability to control costs and successful implementation of various cost-reduction programs; | ||
| The efficacy of research and development investments to develop new products and unanticipated expenses in connection with the launching of significant new products or programs, the timing of new product launches and certifications of new aircraft products; | ||
| The extent to which we are able to pass raw material price increases through to customers or offset such price increases by reducing other costs; | ||
| Increases in pension expenses and employee and retiree medical benefits; |
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| Uncertainty in estimating reserves, including reserves established to address contingent liabilities, unrecognized tax benefits and potential losses on TFCs receivables; | ||
| Difficult conditions in the financial markets that may adversely impact our customers ability to fund or finance purchases of our products; and | ||
| Continued volatility in the economy resulting in a prolonged downturn in the markets in which we do business. |
Item 1A. RISK FACTORS
Our business, financial condition and results of operations are subject to various risks,
including those discussed below, which may affect the value of our securities. The risks discussed
below are those that we believe currently are the most significant, although additional risks not
presently known to us or that we currently deem less significant also may impact our business,
financial condition or results of operations, perhaps materially.
We have customer concentration with the U.S. Government.
During 2010, we derived approximately 34% of our revenues from sales to a variety of U.S.
Government entities. Our ability to compete successfully for and retain U.S. Government business is
highly dependent on technical excellence, management proficiency, strategic alliances,
cost-effective performance, and the ability to recruit and retain key personnel. Our revenues from
the U.S. Government largely result from contracts awarded to us under various U.S. Government
defense-related programs. The funding of these programs is subject to congressional appropriation
decisions. Although multiple-year contracts may be planned in connection with major procurements,
Congress generally appropriates funds on a fiscal year basis even though a program may continue for
several years. Consequently, programs often are only partially funded initially, and additional
funds are committed only as Congress makes further appropriations. The reduction or termination of
funding, or changes in the timing of funding, for a U.S. Government program in which we provide
products or services would result in a reduction or loss of anticipated future revenues
attributable to that program and could have a negative impact on our results of operations.
Significant changes in national and international priorities for defense spending could impact the
funding, or the timing of funding, of our programs, which could negatively impact our results of
operations and financial condition.
U.S. Government contracts may be terminated at any time and may contain other unfavorable
provisions.
The U.S. Government typically can terminate or modify any of its contracts with us either for its
convenience or if we default by failing to perform under the terms of the applicable contract. A
termination arising out of our default could expose us to liability and have an adverse effect on
our ability to compete for future contracts and orders. If any of our contracts are terminated by
the U.S. Government, our backlog would be reduced, in accordance with contract terms, by the
expected value of the remaining work under such contracts. In addition, on those contracts for
which we are teamed with others and are not the prime contractor, the U.S. Government could
terminate a prime contract under which we are a subcontractor, irrespective of the quality of our
products and services as a subcontractor. In any such event, our financial condition and results of
operations could be adversely affected.
As a U.S. Government contractor, we are subject to a number of procurement rules and regulations.
We must comply with and are affected by laws and regulations relating to the formation,
administration and performance of U.S. Government contracts. These laws and regulations, among
other things, require certification and disclosure of all cost and pricing data in connection with
contract negotiation, define allowable and unallowable costs and otherwise govern our right to
reimbursement under certain cost-based U.S. Government contracts, and restrict the use and
dissemination of classified information and the exportation of certain products and technical data.
Our U.S. Government contracts contain provisions that allow the U.S. Government to unilaterally
suspend us from receiving new contracts pending resolution of alleged violations of procurement
laws or regulations, reduce the value of existing contracts, issue modifications to a contract, and
control and potentially prohibit the export of our products, services and associated materials.
Several of our U.S. Government contracts contain provisions that mandate us to disclose whether or
not we have been the subject of a proceeding that resulted in a criminal conviction, based on
certain statutes, certain findings of civil liability, and certain administrative determinations of
fault or a settlement with an acknowledgment of fault in connection with the performance of a
government contract. Failure to properly and timely disclose may result in a termination for
default or cause, suspension and/or debarment, and potential fines. In addition, we are subject to
audits by the Defense Contract Audit Agency to assure our compliance with the laws and regulations
applicable to U.S. Government contractors. A violation of specific laws and regulations could
result in the imposition of fines and penalties or the termination of our contracts and, under
certain circumstances, suspension or debarment from future contracts for a period of time. Also,
changes in procurement policies, budget considerations, unexpected U.S. developments, such as
terrorist attacks, or similar political developments or events abroad that may change the U.S.
Governments national security defense posture may affect sales to government entities. These laws
and regulations affect how we do business with our customers and, in some instances, impose added
costs on our business.
The Department of Defense (DoD) has announced plans for significant changes to its business
practices that could have a material effect on its overall procurement process and adversely impact
our current programs and potential new awards.
Recently, the DoD has announced various initiatives designed to gain efficiencies, refocus
priorities and enhance business practices used by the DoD, including those used to procure goods
and services from defense contractors. The most recent initiatives are
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organized in five major
areas: affordability and cost growth; productivity and innovation; competition; services
acquisition; and processes and bureaucracy. These new initiatives are expected to impact
significantly the contracting environment in which we do business with our DoD customers, and they
could have a significant impact on current programs, as well as new business
opportunities. Changes to the DoD acquisition system and contracting models could affect whether
and, if so, how we pursue certain opportunities and the terms under which we are able to do so.
Cost overruns on U.S. Government contracts could subject us to losses or adversely affect our
future business.
Under fixed-price contracts, as a general rule, we receive a fixed price irrespective of the actual
costs we incur, and, consequently, any costs in excess of the fixed price are absorbed by us.
Changes in underlying assumptions, circumstances or estimates used in developing the pricing for
such contracts may adversely affect our results of operations. Under time and materials contracts,
we are paid for labor at negotiated hourly billing rates and for certain expenses. Under
cost-reimbursement contracts, which are subject to a contract-ceiling amount, we are reimbursed for
allowable costs and paid a fee, which may be fixed or performance based. However, if our costs
exceed the contract ceiling or are not allowable under the provisions of the contract or applicable
regulations, we may not be able to obtain reimbursement for all such costs. Under each type of
contract, if we are unable to control costs we incur in performing under the contract, our
financial condition and results of operations could be adversely affected. Cost overruns also may
adversely affect our ability to sustain existing programs and obtain future contract awards.
Weak demand for our aircraft products may continue to adversely affect our financial results.
As a result of the recent worldwide economic downturn, over the past several years we have
experienced weak demand for our new and used aircraft, a tightening of credit availability for
potential purchasers of our aircraft, and a substantial number of cancellations of orders and
customer requests for delayed delivery of ordered aircraft. Soft demand for new and used business
jets and helicopters could persist and could continue to adversely impact the pricing of new
aircraft and the valuation of used aircraft. In addition, both U.S. and foreign governments and
government agencies regulate the aviation industry; they may impose new regulations with additional
aircraft security or other requirements or restrictions, including, for example, restrictions
and/or fees related to carbon emissions levels that may adversely impact demand for business jets
and/or helicopters. A prolonged weakness in the markets for our commercial aircraft products could
adversely impact our results of operations and our future prospects.
We may not be able to continue to execute the liquidation of our Finance segments non-captive
commercial finance business at a favorable pace and level of recovery.
In the fourth quarter of 2008, we announced a plan to exit the non-captive portion of the
commercial finance business of our Finance segment while retaining the captive portion of the
business that supports customer purchases of products that we manufacture. The exit plan is being
effected through a combination of orderly liquidation and selected sales. We cannot be certain
that we will be able to continue to accomplish the orderly liquidation of our portfolio on a timely
or successful basis or in a manner that will generate cash sufficient to service our Finance
segments debt. We may encounter delays and difficulties in effecting the continued orderly
liquidation of our various receivable portfolios as a result of many factors, including the
inability of our customers to find alternative financing, which could expose us to increased credit
losses. We may have greater difficulty in selling the remaining receivables that have been
designated for sale or transfer, assets that have been acquired upon foreclosure of receivables
and/or other non-operating assets at the pricing that we anticipate or in the time frame that we
anticipate. We may be required to make additional mark-to-market or other adjustments against
assets that we intend to sell or to take additional reserves against assets that we intend to
retain. We may change our current strategy based on either our performance and liquidity position
or changes in external factors affecting the value and/or marketability of our assets, which could
result in changes in the classification of assets we intend to hold for investment and additional
mark-to-market adjustments. We may incur higher costs than anticipated as a result of this exit
plan or be subject to claims made by third parties, and the exit plan may result in increased
credit losses. We expect that our portfolio quality will continue to deteriorate as we proceed
through the liquidation and the asset mix changes and that our cash conversion ratio on liquidation
will decrease; this deterioration could be more severe and the cash conversion ratio lower than we
anticipate, resulting in greater losses. Significant delay or difficulty in executing the
continued liquidation and/or substantial losses could result in the failure of our portfolio to
generate the cash necessary to service our Finance segments indebtedness, resulting in continuing
or increased adverse effects on our financial condition and results of operations.
Difficult conditions in the financial markets have adversely affected the quality of our Finance
segments finance asset portfolios, and our losses may increase if we are unable to successfully
collect our finance receivables or realize sufficient value from collateral.
The financial performance of our Finance segment depends on the quality of loans, leases and other
assets in its finance asset portfolios. Portfolio quality may be adversely affected by several
factors, including finance receivable underwriting procedures, collateral quality, geographic or
industry concentrations, and the effect of the recent economic downturn on our customers
businesses, as well as the broader deterioration of the financial markets. As a result of the
tumultuous conditions in the financial markets over the past two years, many lenders and
institutional investors have reduced, and, in some cases, ceased, to provide funding to borrowers.
These conditions have led to an increased level of commercial and consumer delinquencies and
defaults, lack of consumer confidence, increased market volatility, widespread reduction of
business activity, and bankruptcy filings. Valuations of the types of collateral securing our
timeshare and other portfolios have been and may continue to be adversely affected by increased
consumer delinquencies, the reduction in business activity and bankruptcy proceedings involving our
borrowers. Valuations of the types of collateral securing our captive finance portfolio,
particularly valuations of used aircraft, have decreased significantly over the past two years and
may continue to decrease if weak economic conditions continue. Declining collateral values could
result in greater
9
delinquencies and foreclosures as customers elect to discontinue payments on loan
balances that exceed asset values. Bankruptcy proceedings involving our borrowers may prevent or
delay our ability to exercise our rights and remedies and realize the full value of our collateral.
Our losses may increase if our collateral cannot be realized or is liquidated at prices not
sufficient to recover the full
amount of our finance receivable portfolio. If these negative market conditions persist or worsen,
the Finance segment may experience further deterioration in its ability to successfully collect its
finance receivables or realize sufficient value from collateral, which may adversely affect our
cash flow, profitability and financial condition.
Payments required under our Support Agreement with TFC could restrict our use of capital.
During the past several years, we have made quarterly capital contributions to TFC, as required
under the terms of our Support Agreement with TFC, to maintain both the fixed charge coverage ratio
required by the Support Agreement and the leverage ratio required by TFCs credit facility. A
summary of the capital contributions paid to TFC and dividends received from TFC is provided on
page 29. We will likely be required to make additional capital contributions to TFC in the future
in order to maintain this ratio. While capital contributions to TFC may not increase the aggregate
amount of outstanding consolidated indebtedness of Textron and TFC, such contributions could
restrict our allocation of available capital for other purposes. In addition, recently, from time
to time, TFC has borrowed from us to meet its liquidity needs, and is expected to require further
borrowings from us for its liquidity needs in the future, depending upon market conditions. TFCs
need for borrowings from us could restrict our use of funds for other purposes.
Failure to maintain credit ratings acceptable to investors may increase the cost of our funding and
may adversely affect our access to the capital markets.
The major rating agencies regularly evaluate us, including TFC, for purposes of assigning credit
ratings. Our ability to access the credit markets, and the cost of these borrowings, is affected by
the strength of our credit ratings and current market conditions. Failure to maintain credit
ratings that are acceptable to investors may adversely affect the cost and other terms upon which
we are able to obtain financing, as well as our access to the capital markets.
We may need to obtain financing in order to meet our debt obligations in the future; such financing
may not be available to us on satisfactory terms, if at all.
We may periodically need to obtain financing in order to meet our debt obligations as they come
due. Although we currently have access to the capital markets, we may not be able to refinance our
credit facilities or maturing debt at the time that such financing is necessary at terms that are
acceptable to us, or at all. If we cannot obtain adequate sources of credit on favorable terms, or
at all, our business, operating results, and financial condition could be adversely affected.
Our ability to fund our captive financing activities at economically competitive levels depends on
our ability to borrow and the cost of borrowing in the credit markets.
Our Finance segments ability to continue to offer customer financing for the products that we
manufacture, and the long-term viability and profitability of the captive finance business, is
largely dependent on our ability to obtain funding at a reasonable cost. This ability and cost, in
turn, are dependent on our credit ratings and are subject to credit market volatility. If we are
unable to continue to offer customer financing or if we are unable to offer competitive customer
financing, it could negatively impact our Manufacturing groups ability to generate sales, which
could adversely affect our results of operations and financial condition.
Failure to perform by our subcontractors or suppliers could adversely affect our performance.
We rely on other companies to provide raw materials, major components and subsystems for our
products. Subcontractors also perform services that we provide to our customers in certain
circumstances. In addition, we outsource certain support functions, including certain global
information technology infrastructure services to third-party service providers. We depend on
these vendors, subcontractors and service providers to meet our contractual obligations to our
customers and conduct our operations.
Our ability to meet our obligations to our customers may be adversely affected if suppliers or
subcontractors do not provide the agreed-upon supplies or perform the agreed-upon services in
compliance with customer requirements and in a timely and cost-effective manner. Likewise, the
quality of our products may be adversely impacted if companies to whom we delegate manufacture of
major components or subsystems for our products, or from whom we acquire such items, do not provide
components or subsystems which meet required specifications and perform to our and our customers
expectations. Our suppliers may be less likely than us to be able to quickly recover from natural
disasters and other events beyond their control and may be subject to additional risks such as
financial problems that limit their ability to conduct their operations. The risk of these adverse
effects may be greater in circumstances where we rely on only one or two subcontractors or
suppliers for a particular raw material, product or service. In particular, in the aircraft
industry, most vendor parts are certified by the regulatory agencies as part of the overall Type
Certificate for the aircraft being produced by the manufacturer. If a vendor does not or cannot
supply its parts, then the manufacturers production line may be stopped until the manufacturer can
design, manufacture and certify a similar part itself or identify and certify another similar
vendors part, resulting in significant delays in the completion of aircraft.
Such events may adversely affect our financial results, damage our reputation and relationships
with our customers, result in regulatory actions and/or result in product liability claims.
Likewise, any disruption of our information technology systems or other outsourced processes or
functions could have a material adverse impact on our operations and our financial results.
10
Developing new products and technologies entails significant risks and uncertainties.
To continue to grow our revenues and segment profit, we must successfully develop new products and
technologies or modify our existing products and technologies for our current and future markets.
Our future performance depends, in part, on our ability to
identify emerging technological trends and customer requirements in our current and future markets
and to develop and maintain competitive products and services. Delays or cost overruns in the
development and acceptance of new products, or certification of new aircraft and other products,
could affect our financial results of operations. These delays could be caused by unanticipated
technological hurdles, production changes to meet customer demands, unanticipated difficulties in
obtaining required regulatory certifications of new aircraft products, coordination with joint
venture partners or failure on the part of our suppliers to deliver components as agreed. Changes
in environmental laws and regulations, for example, those enacted in response to climate change
concerns and other actions known as green initiatives, could lead to the necessity for new or
additional investment in product designs and could increase environmental compliance expenditures,
including costs to defend regulatory reviews. We also could be adversely affected if the general
efficacy of our research and development investments to develop products is less than expected or
if we do not adequately protect the intellectual property developed through our research and
development efforts. Likewise, new products and technologies could generate unanticipated safety
or other concerns resulting in expanded product liability risks, potential product recalls and
other regulatory issues that could have an adverse impact on us. Furthermore, because of the
lengthy research and development cycle involved in bringing certain of our products to market, we
cannot predict the economic conditions that will exist when any new product is complete. A
reduction in capital spending in the aerospace or defense industries could have a significant
effect on the demand for new products and technologies under development, which could have an
adverse effect on our financial condition and results of operations. In addition, there can be no
assurance that the market for our offerings will develop or continue to expand as we currently
anticipate. Furthermore, we cannot be sure that our competitors will not develop competing
technologies which gain market acceptance in advance of our products. Our failure in our new
product development efforts or the failure of our products or services to achieve market acceptance
more rapidly than our competitors could have an adverse effect on our financial condition and
results of operations.
Our business is subject to the risks of doing business in foreign countries.
Our international business, including U.S. exports, exposes us to certain unique and potentially
greater risks than our domestic business. Our exposure to such risks increases as our
international business continues to grow. Our international business is subject to U.S. and local
government regulations and procurement policies and practices, which may change from time to time,
including regulations relating to import-export control; environmental, health and safety;
investments; exchange controls; and repatriation of earnings or cash settlement challenges, as well
as to varying currency, geopolitical and economic risks. These international risks may be
especially significant with respect to aerospace and defense products for which we sometimes first
must obtain licenses and authorizations from various U.S. Government agencies before we are
permitted to sell our products outside the U.S. Any significant impairment of our ability to sell
products outside the U.S. could negatively impact our results of operations and financial
condition. Additionally, some international government customers require contractors to agree to
specific in-country purchases, manufacturing agreements or financial support arrangements, known as
offsets, as a condition for a contract award. The contracts generally extend over several years and
may include penalties if we fail to meet the offset requirements, which could adversely impact our
revenues, profitability and cash flows. Additionally, we are facing increasing competition in our
international markets from foreign and multinational firms that may have certain home country
advantages over us; as a result, our ability to compete successfully in those markets may be
adversely affected, which could negatively impact our revenues.
We maintain manufacturing facilities, services centers, supply centers and other facilities
worldwide, including in various emerging market countries, and we expect that our investment in
emerging market countries will continue to increase. Emerging market operations can present many
risks, including civil disturbances, economic and government instability, terrorism and related
safety concerns, health concerns, cultural differences in employment and business practices, the
imposition of exchange controls and risks associated with inadequate infrastructures to deal with
natural disasters. The impact of any one or more of these or other factors could adversely affect
our business, financial condition or operating results.
We also are exposed to risks associated with using foreign representatives and consultants for
international sales and operations and teaming with international subcontractors and suppliers in
connection with international programs. In many foreign countries, particularly in those with
developing economies, it is common to engage in business practices that are prohibited by laws and
regulations applicable to us, such as the Foreign Corrupt Practices Act. Although we implement
policies and procedures designed to facilitate compliance with these laws, any such violation by
any of our international representatives, consultants, subcontractors or suppliers, even if
prohibited by our policies, could have an adverse effect on our business and reputation.
We are subject to increasing compliance risks that could adversely affect our operating results.
As a global business, we are subject to laws and regulations in the U.S. and other countries in
which we operate. Our increased focus on international sales and global operations requires
importing and exporting goods and technology, some of which have military applications subjecting
them to more stringent import-export controls, across international borders on a regular basis.
Both U.S. and foreign laws and regulations applicable to us have been increasing in scope and
complexity. In addition, we could be affected by U.S. or foreign laws or regulations imposed in
response to climate change concerns. Changes in laws and regulations, or in related interpretation
and policies, and new laws and regulations could increase our costs of doing business, affect how
we conduct our operations and limit our ability to sell our products and services. In addition, a
violation of U.S. and/or foreign laws by one of our
11
employees or business partners could subject us
or our employees to civil or criminal penalties, including material monetary fines, or other
adverse actions, including denial of import or export privileges and debarment as a government
contractor. These improper actions could damage our reputation and have an adverse effect on our
business.
We are subject to legal proceedings and other claims.
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; lack of compliance with applicable laws and regulations; production partners; product
liability; patent and trademark infringement; employment disputes; and environmental, safety and
health matters. 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. However, litigation is inherently unpredictable, and we could incur judgments or enter
into settlements for current or future claims that could adversely affect our financial position or
our results of operations in any particular period.
Intellectual property infringement claims of others and the inability to protect our intellectual
property rights could harm our business and our customers.
Intellectual property infringement claims may be asserted by third parties against us or our
customers. Any related indemnification payments or legal costs we may be obliged to pay on behalf
of our businesses, our customers or other third parties could be costly. In addition, we own the
rights to many patents, trademarks, brand names, trade names and trade secrets that are important
to our business. The inability to enforce these intellectual property rights may have an adverse
effect on our results of operations. Additionally, our intellectual property could be at risk due
to various cyber threats.
Certain of our products are subject to laws regulating consumer products and could be subject to
repurchase or recall as a result of safety issues.
As a distributor of consumer products in the U.S., certain of our products also are subject to the
Consumer Product Safety Act, which empowers the U.S. Consumer Product Safety Commission (CPSC) to
exclude from the market products that are found to be unsafe or hazardous. Under certain
circumstances, the CPSC could require us to repair, replace or refund the purchase price of one or
more of our products, or potentially even discontinue entire product lines, or we may voluntarily
do so, but within strictures recommended by the CPSC. The CPSC also can impose fines or penalties
on a manufacturer for non-compliance with its requirements. Furthermore, failure to timely notify
the CPSC of a potential safety hazard can result in significant fines being assessed against us.
Any repurchases or recalls of our products or an imposition of fines or penalties could be costly
to us and could damage the reputation or the value of our brands. Additionally, laws regulating
certain consumer products exist in some states, as well as in other countries in which we sell our
products, and more restrictive laws and regulations may be adopted in the future.
If we fail to comply with the covenants contained in our various debt agreements, it may adversely
affect our liquidity, results of operations and financial condition.
Our credit facility contains affirmative and negative covenants, including (i) limitations on
creation of liens on assets of Textron Inc. or of its manufacturing subsidiaries; (ii) maintenance
of existence and properties; and (iii) maintenance of a maximum debt to capital ratio (as defined
and excluding our Finance segment) of 65%. The indentures governing our outstanding senior notes
also contain covenants, including limitations on creation of liens on certain principal
manufacturing facilities and shares of stock of subsidiaries that own such facilities and
restrictions on sale and leaseback transactions with respect to such facilities. In addition, both
the credit facility and the indentures provide that consolidations, mergers or sale of all or
substantially all of our assets may be effected only if we comply with certain provisions. Some of
these covenants may limit our ability to engage in certain financing structures, create liens, sell
assets, or effect a consolidation or merger.
Our credit facility also contains a cross-default provision that would trigger an event of default
thereunder if we fail to pay or otherwise have a continued default under other indebtedness of
Textron Inc. or any of our subsidiaries, other than any of our subsidiaries that primarily are
engaged in the business of a finance company, of more than $100 million. Similarly, the
supplemental indenture governing our convertible notes contains a cross-default provision that
would trigger an event of default thereunder if we fail to pay or otherwise have a continued
default under other indebtedness of Textron Inc. or any of our subsidiaries, other than TFC or its
subsidiaries, of more than $100 million. Therefore, Cessna Finance Export Corporation, a
subsidiary of Textron Inc. that is the borrower under the Export-Import Bank facility entered into
on July 14, 2009, and Textron Aviation Finance Corporation, a subsidiary of Textron Inc. that is
the borrower under the Economic Development Canada Bank (EDC) facility entered into on August 6,
2010, would be included within the cross-default provision of the supplemental indenture for the
convertible notes, although not within the similar provision in our credit facility. As a result,
a failure to pay or a continued default under the Export-Import Bank facility or the EDC facility,
if the outstanding balance thereunder exceeded $100 million, could give rise to an event of default
with respect to our convertible notes.
In addition, a bankruptcy or monetary judgment in excess of $100 million against us or any of our
subsidiaries that accounts for more than 5% of our consolidated revenues or our consolidated
assets, including our finance subsidiaries, also would result in an event of default under our
credit facility, and a bankruptcy against us or any of our non-finance significant subsidiaries
(within the meaning
12
of the Securities and Exchange Commissions rules) also would result in an
event of default under the indenture governing our convertible notes.
Our failure to comply with material provisions or covenants in the credit facility or the
indentures, or the failure of certain of our subsidiaries to comply with their debt agreements,
could have a material adverse effect on our liquidity, results of operations and financial
condition.
The increasing costs of certain employee and retiree benefits could adversely affect our results.
Our earnings and cash flow may be impacted by the amount of income or expense we expend or record
for employee benefit plans. This is particularly true for our defined benefit pension plans, where
required contributions to those plans and related expenses are driven by, among other things, our
assumptions of the expected long-term rate of return on plan assets, the discount rate used for
future payment obligations and the rates of future cost growth. Additionally, as part of our annual
evaluation of these plans, significant changes in our assumptions, due to changes in economic,
legislative and/or demographic experience or circumstances, or changes in our actual investment
returns could impact our unfunded status of the plans requiring us to substantially increase our
pension liability with a resulting decrease in shareholders equity. Changes in the funded status
of these plans are recognized in other comprehensive income (loss) in the year in which they occur.
Also, changes in pension legislation and regulations could increase the cost associated with our
defined benefit pension plans.
In addition, medical costs are rising at a rate faster than the general inflation rate. Continued
medical cost inflation in excess of the general inflation rate would increase the risk that we will
not be able to mitigate the rising costs of medical benefits. Moreover, Congress recently has
enacted a comprehensive healthcare law, and we are evaluating the potential impacts of this new law
on our costs. We expect that some of the requirements of this new law will increase our future
costs. Increases to the costs of pension and medical benefits could have an adverse effect on our
financial results of operations.
Our business could be adversely affected by strikes or work stoppages and other labor issues.
Approximately 5,900 of our U.S. employees, or 24% of our total U.S. employees, are unionized, and
approximately 2,500 of our non-U.S. employees, or 33% of our total non-U.S. employees, are
represented by organized councils. As a result, we may experience work stoppages, which could
negatively impact our ability to manufacture our products on a timely basis, resulting in strain on
our relationships with our customers and a loss of revenues. In addition, the presence of unions
may limit our flexibility in responding to competitive pressures in the marketplace, which could
have an adverse effect on our financial results of operations.
In addition, the workforces of many of our customers and suppliers are represented by labor unions.
Work stoppages or strikes at the plants of our key customers could result in delayed or canceled
orders for our products. Work stoppages and strikes at the plants of our key suppliers could
disrupt our manufacturing processes. Any of these results could adversely affect our financial
results of operations.
Currency, raw material price and interest rate fluctuations may adversely affect our results.
We are exposed to a variety of market risks, including the effects of changes in foreign currency
exchange rates, raw material prices and interest rates. We monitor and manage these exposures as an
integral part of our overall risk management program. In some cases, we purchase derivatives or
enter into contracts to insulate our financial results of operations from these fluctuations.
Nevertheless, changes in currency exchange rates, raw material prices and interest rates can have
substantial adverse effects on our financial results of operations.
We may be unable to effectively mitigate pricing pressures.
In some markets, particularly where we deliver component products and services to original
equipment manufacturers, we face ongoing customer demands for price reductions, which sometimes are
contractually obligated. However, if we are unable to effectively mitigate future pricing
pressures through technological advances or by lowering our cost base through improved operating
and supply chain efficiencies, our financial results of operations could be adversely affected.
The levels of our reserves are subject to many uncertainties and may not be adequate to cover
write-downs or losses.
We establish reserves to cover uncollectable finance receivables and accounts receivable, excess or
obsolete inventory, fair market value write-downs on used aircraft and golf cars, recall campaigns,
environmental remediation, warranty costs and litigation. These reserves are subject to adjustment
from time to time depending on actual experience and/or current market conditions and are subject
to many uncertainties, including bankruptcy or other financial problems at key customers, as well
as changing market conditions.
Due to the nature of our manufacturing business, we may be subject to liability claims arising from
accidents involving our products, including claims for serious personal injuries or death caused by
climatic factors or by pilot or driver error. In the case of litigation matters for which reserves
have not been established because the loss is not deemed probable, it is reasonably possible that
such matters could be decided against us and could require us to pay damages or make other
expenditures in amounts that are not presently estimable. In addition, we cannot be certain that
our reserves are adequate and that our insurance coverage will be sufficient to cover one or more
substantial claims. Furthermore, there can be no assurance that we will be able to obtain
insurance coverage at acceptable levels and costs in the future.
13
Unanticipated changes in our tax rates or exposure to additional income tax liabilities could
affect our profitability.
We are subject to income taxes in both the U.S. and various non-U.S. jurisdictions, and our
domestic and international tax liabilities are subject to the allocation of income among these
different jurisdictions. Our effective tax rate could be adversely affected by changes in the mix
of earnings in countries with differing statutory tax rates, changes in the valuation of deferred
tax assets and liabilities, changes to unrecognized tax benefits or changes in tax laws, which
could affect our profitability. In particular, the carrying
value of deferred tax assets is dependent on our ability to generate future taxable income. In
addition, the amount of income taxes we pay is subject to audits in various jurisdictions, and a
material assessment by a tax authority could affect our profitability.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
On January 1, 2011, we operated a total of 58 plants located throughout the U.S. and 45
plants outside the U.S. We own 53 plants and lease the remainder for a total manufacturing space
of approximately 19.5 million square feet.
We also own or lease offices, warehouses and other space at various locations. We consider the
productive capacity of the plants operated by each of our business segments to be adequate. In
general, our facilities are in good condition, are considered to be adequate for the uses to which
they are being put and are substantially in regular use.
Item 3. Legal Proceedings
As previously reported in Textrons Annual Report on Form 10-K for the fiscal year ended
January 2, 2010, on August 13, 2009, a purported shareholder class action lawsuit was filed in the
United States District Court in Rhode Island against Textron, its Chairman and former Chief
Executive Officer and its former Chief Financial Officer. The suit, filed by the City of Roseville
Employees Retirement System, alleges that the defendants violated the federal securities laws by
making material misrepresentations or omissions related to Cessna and TFC. The complaint seeks
unspecified compensatory damages. In December 2009, the Automotive Industries Pension Trust Fund
was appointed lead plaintiff in the case. On February 8, 2010, an amended class action complaint
was filed with the Court. The amended complaint names as additional defendants TFC and three of
its present and former officers. On April 6, 2010, the court entered a stipulation agreed to by
the parties in which plaintiffs voluntarily dismissed, without prejudice, certain causes of action
in the amended complaint. On April 9, 2010, all defendants moved to dismiss the remaining counts
of the amended complaint, and that motion is still pending.
As previously reported in Textrons Annual Report on Form 10-K for the fiscal year ended January 2,
2010, on August 21, 2009, a purported class action lawsuit was filed in the United States District
Court in Rhode Island by Dianne Leach, an alleged participant in the Textron Savings Plan. Six
additional substantially similar class action lawsuits were subsequently filed by other
individuals. The complaints varyingly name Textron and certain present and former employees,
officers and directors as defendants. These lawsuits allege that the defendants violated the United
States Employee Retirement Income Security Act by imprudently permitting participants in the
Textron Savings Plan to invest in Textron common stock. The complaints seek equitable relief and
unspecified compensatory damages. On February 2, 2010, an amended class action complaint was filed
consolidating the seven previous lawsuits into a single complaint. On March 19, 2010, all
defendants moved to dismiss the consolidated amended complaint, and that motion is still pending.
As previously reported in Textrons Annual Report on Form 10-K for the fiscal year ended January 2,
2010, on November 18, 2009, a purported derivative lawsuit was filed by John D. Walker in the
United States District Court of Rhode Island against certain present and former officers and
directors of Textron. The suit alleges violations of the federal securities laws consistent with
the Roseville action described above, as well as breach of fiduciary duties, waste of corporate
assets and unjust enrichment. On February 16, 2010, all defendants moved to dismiss the derivative
complaint, and that motion is still pending.
Textron believes that these lawsuits are without merit and intends to defend them vigorously.
We also are subject to other actual and threatened legal proceedings and other claims arising out
of the conduct of our business. These proceedings include claims relating to commercial and
financial transactions; government contracts; lack of compliance with applicable laws and
regulations; production partners; product liability; patent and trademark infringement; employment
disputes; and environmental, health and safety matters. Some of these legal proceedings seek
damages, fines or penalties in substantial amounts or remediation of environmental contamination.
Under federal government procurement regulations, certain claims brought by the U.S. Government
could result in our suspension or debarment 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.
14
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during the last quarter of the
period covered by this Annual Report on Form 10-K.
Executive Officers of the Registrant
The following table sets forth certain information concerning our executive officers as of
March 1, 2011.
Name | Age | Current Position with Textron Inc. | ||||
Scott C. Donnelly
|
49 | Chairman, President and Chief Executive Officer | ||||
John D. Butler
|
63 | Executive Vice President Administration and Chief Human Resources Officer | ||||
Frank T. Connor
|
51 | Executive Vice President and Chief Financial Officer | ||||
Terrence ODonnell
|
66 | Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer | ||||
Mr. Donnelly joined Textron in June 2008 as Executive Vice President and Chief Operating Officer
and was promoted to President and Chief Operating Officer in January 2009. He was appointed to the
Board of Directors in October 2009 and became Chief Executive Officer of Textron in December 2009,
at which time the Chief Operating Officer position was eliminated. In July 2010, Mr. Donnelly was
appointed Chairman of the Board of Directors effective September 1, 2010. Previously, Mr. Donnelly
was the President and CEO of General Electric Companys Aviation business unit, a position he had
held since July 2005. GEs Aviation business unit is a $16 billion maker of commercial and
military jet engines and components, as well as integrated digital, electric power and mechanical
systems for aircraft. Prior to July 2005, Mr. Donnelly served as Senior Vice President of GE Global
Research, one of the worlds largest and most diversified industrial research organizations with
facilities in the U.S., India, China and Germany and held various other management positions since
joining General Electric in 1989.
Mr. Butler joined Textron in July 1997 as Executive Vice President and Chief Human Resources
Officer and became Executive Vice President Administration and Chief Human Resources Officer in
January 1999.
Mr. Connor joined Textron in August 2009 as Executive Vice President and Chief Financial Officer.
Previously, Mr. Connor was head of Telecom Investment Banking at Goldman, Sachs & Co from 2003 to
2008. Prior to that position, he served as Chief Operating Officer of Telecom, Technology and
Media Investment Banking at Goldman, Sachs from 1998 to 2003. Mr. Connor joined the Corporate
Finance Department of Goldman, Sachs in 1986 and became a Vice President in 1990 and a Managing
Director in 1996.
Mr. ODonnell joined Textron as Executive Vice President and General Counsel in March 2000. In
December 2009, he was also named Corporate Secretary and his title was expanded to reflect his
role as Chief Compliance Officer. Mr. ODonnell is a partner in the Washington, D.C.-based law
firm of Williams & Connolly, which he first joined in 1977. From 1989 to 1992, he served as
General Counsel of the U.S. Department of Defense.
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
The principal market on which our common stock is traded is the New York Stock Exchange under
the symbol TXT. Our stock also is traded on the Chicago Stock Exchange. At January 1, 2011,
there were approximately 14,000 record holders of Textron common stock.
The high and low sales prices per share of our common stock as reported on the New York Stock
Exchange and the dividends paid per share are provided in the following table:
2010 | 2009 | |||||||||||||||||||||||
Dividends | Dividends | |||||||||||||||||||||||
High | Low | per Share | High | Low | per Share | |||||||||||||||||||
First quarter |
$ | 23.46 | $ | 17.96 | $ |
0.02 | $ | 16.52 | $ | 3.57 | $ |
0.02 | ||||||||||||
Second quarter |
25.30 | 15.88 | 0.02 | 14.37 | 7.13 | 0.02 | ||||||||||||||||||
Third quarter |
21.52 | 16.02 | 0.02 | 20.99 | 8.51 | 0.02 | ||||||||||||||||||
Fourth quarter |
24.18 | 19.92 | 0.02 | 21.00 | 17.55 | 0.02 | ||||||||||||||||||
15
Stock Performance Graph
The following graph compares the total return on a cumulative basis at the end of each year of
$100 invested in our common stock on December 31, 2005 with the Standard & Poors (S&P) 500 Stock
Index, the S&P 500 Aerospace & Defense (A&D) Index and the S&P Industrial Conglomerates (IC) Index.
We are included in both the S&P 500 and the S&P IC indices. The values calculated assume dividend
reinvestment.
![(PERFORMANCE GRAPH)](https://www.sec.gov/Archives/edgar/data/0000217346/000095012311020392/b83538b8353806.gif)
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
Textron Inc. |
$ | 100.00 | $ | 123.94 | $ | 191.40 | $ | 38.35 | $ | 52.43 | $ | 66.16 | ||||||||||||
S&P 500 |
100.00 | 115.80 | 122.16 | 76.96 | 97.33 | 111.99 | ||||||||||||||||||
S&P 500 A&D |
100.00 | 125.16 | 149.34 | 94.77 | 118.12 | 135.98 | ||||||||||||||||||
S&P 500 IC |
100.00 | 108.61 | 113.34 | 54.97 | 60.55 | 71.87 | ||||||||||||||||||
16
Item 6. Selected Financial Data
(Dollars in millions, except per share amounts) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Revenues |
||||||||||||||||||||
Cessna |
$ | 2,563 | $ | 3,320 | $ | 5,662 | $ | 5,000 | $ | 4,156 | ||||||||||
Bell |
3,241 | 2,842 | 2,827 | 2,581 | 2,347 | |||||||||||||||
Textron Systems |
1,979 | 1,899 | 1,880 | 1,114 | 790 | |||||||||||||||
Industrial |
2,524 | 2,078 | 2,918 | 2,825 | 2,611 | |||||||||||||||
Finance |
218 | 361 | 723 | 875 | 798 | |||||||||||||||
Total revenues |
$ | 10,525 | $ | 10,500 | $ | 14,010 | $ | 12,395 | $ | 10,702 | ||||||||||
Segment profit |
||||||||||||||||||||
Cessna |
$ | (29 | ) | $ | 198 | $ | 905 | $ | 865 | $ | 645 | |||||||||
Bell |
427 | 304 | 278 | 144 | 108 | |||||||||||||||
Textron Systems |
230 | 240 | 251 | 174 | 92 | |||||||||||||||
Industrial |
162 | 27 | 67 | 173 | 149 | |||||||||||||||
Finance |
(237 | ) | (294 | ) | (50 | ) | 222 | 210 | ||||||||||||
Total segment profit |
553 | 475 | 1,451 | 1,578 | 1,204 | |||||||||||||||
Special charges (a) |
(190 | ) | (317 | ) | (526 | ) | | | ||||||||||||
Corporate expenses and other, net |
(137 | ) | (164 | ) | (171 | ) | (257 | ) | (207 | ) | ||||||||||
Interest expense, net for Manufacturing group |
(140 | ) | (143 | ) | (125 | ) | (87 | ) | (90 | ) | ||||||||||
Income tax benefit (expense) |
6 | 76 | (305 | ) | (368 | ) | (247 | ) | ||||||||||||
Income (loss) from continuing operations |
$ | 92 | $ | (73 | ) | $ | 324 | $ | 866 | $ | 660 | |||||||||
Per share of common stock (b) |
||||||||||||||||||||
Income (loss) from continuing operations basic |
$ | 0.33 | $ | (0.28 | ) | $ | 1.32 | $ | 3.47 | $ | 2.59 | |||||||||
Income (loss) from continuing operations diluted (c) |
$ | 0.30 | $ | (0.28 | ) | $ | 1.29 | $ | 3.40 | $ | 2.53 | |||||||||
Dividends declared |
$ | 0.08 | $ | 0.08 | $ | 0.92 | $ | 0.85 | $ | 0.78 | ||||||||||
Book value at year-end |
$ | 10.78 | $ | 10.38 | $ | 9.75 | $ | 13.99 | $ | 10.51 | ||||||||||
Common stock price: High |
$ | 25.30 | $ | 21.00 | $ | 71.69 | $ | 74.40 | $ | 49.48 | ||||||||||
Low |
$ | 15.88 | $ | 3.57 | $ | 10.09 | $ | 43.60 | $ | 37.76 | ||||||||||
Year-end |
$ | 23.64 | $ | 18.81 | $ | 15.37 | $ | 71.62 | $ | 46.88 | ||||||||||
Common shares outstanding (In thousands) (b) |
||||||||||||||||||||
Basic average |
274,452 | 262,923 | 246,208 | 249,792 | 255,098 | |||||||||||||||
Diluted average (c) |
302,555 | 262,923 | 250,338 | 254,826 | 260,444 | |||||||||||||||
Year-end |
275,739 | 272,272 | 242,041 | 250,061 | 251,192 | |||||||||||||||
Financial position |
||||||||||||||||||||
Total assets |
$ | 15,282 | $ | 18,940 | $ | 20,031 | $ | 20,002 | $ | 17,594 | ||||||||||
Manufacturing group debt |
$ | 2,302 | $ | 3,584 | $ | 2,569 | $ | 2,146 | $ | 1,796 | ||||||||||
Finance group debt |
$ | 3,660 | $ | 5,667 | $ | 7,388 | $ | 7,311 | $ | 6,862 | ||||||||||
Shareholders equity |
$ | 2,972 | $ | 2,826 | $ | 2,366 | $ | 3,507 | $ | 2,649 | ||||||||||
Manufacturing group debt-to-capital (net of cash) |
32 | % | 39 | % | 46 | % | 32 | % | 29 | % | ||||||||||
Manufacturing group debt-to-capital |
44 | % | 56 | % | 52 | % | 38 | % | 40 | % | ||||||||||
Investment data |
||||||||||||||||||||
Capital expenditures |
$ | 270 | $ | 238 | $ | 545 | $ | 379 | $ | 415 | ||||||||||
Depreciation |
$ | 334 | $ | 344 | $ | 331 | $ | 284 | $ | 257 | ||||||||||
Research and development |
$ | 702 | $ | 844 | $ | 966 | $ | 804 | $ | 771 | ||||||||||
(a) | Special charges include restructuring charges of $99 million, $237 million and $64 million in 2010, 2009 and 2008, respectively, primarily related to severance and asset impairment charges. In addition, in the third quarter of 2010, special charges include 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 Finance segment entity. In 2009, special charges also include a goodwill impairment charge of $80 million in the Industrial segment. In 2008, special charges also include charges related to strategic actions taken in the Finance segment to exit portions of the commercial finance business, including an impairment charge of $169 million for unrecoverable goodwill and the initial pre-tax mark-to-market adjustment of $293 million related to the designation of a portion of our finance receivables as held for sale. | |
(b) | For 2008, basic and diluted shares outstanding have been recast to reflect the adoption of a new accounting standard in 2009 that required restricted stock units with nonforfeitable rights to dividends to be included in the calculation of earnings per share as participating securities using the two-class method. Prior to 2008, we did not grant this type of restricted stock unit. Amounts for 2006 have been restated to reflect a two-for-one stock split in 2007. | |
(c) | For 2009, the potential dilutive effect 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. |
17
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in millions, except per share amounts) | 2010 | 2009 | 2008 | |||||||||
Revenues |
$ | 10,525 | $ | 10,500 | $ | 14,010 | ||||||
Operating expenses: |
||||||||||||
Manufacturing cost of sales |
8,605 | 8,468 | 10,583 | |||||||||
Selling and administrative expenses |
1,231 | 1,338 | 1,590 | |||||||||
Special charges |
190 | 317 | 526 | |||||||||
Net cash provided by operating activities of
continuing operations for Manufacturing group |
730 | 738 | 407 | |||||||||
Diluted earnings per share from continuing operations |
0.30 | (0.28 | ) | 1.29 | ||||||||
2010 was a year marked by continued global and economic challenges and yet also was a year in which
we made significant progress with cost initiatives, strengthened our overall capital position and
had strong execution that allowed us to deliver improved financial results. Cash generated from
our manufacturing businesses enabled us to continue to invest in products and technologies that
will position us for future growth as the economy recovers.
We completed our restructuring program in 2010, which has driven out costs in all of our segments.
Since the inception of the program in late 2008, we have lowered our headcount by 28% and have
exited 30 facilities.
During 2010, we continued to make significant progress in our plan to exit the non-captive
commercial finance business in our Finance segment by liquidating a total of $2.4 billion in
finance receivables across the segment, $1.8 billion of which were receivables in our non-captive
portfolio, through discounted payoffs, portfolio sales and finance receivable amortization.
Our liquidity position strengthened during the year as our businesses generated positive operating
cash flow. As a result, we paid off the Manufacturing groups drawn $1.25 billion credit facility
in its entirety and paid down the Finance groups $1.75 billion drawn credit facility by $300
million. In addition, we strengthened the funding level of our pension plans with a $350 million
voluntary contribution in the fourth quarter of 2010.
Revenues
(Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
Revenues |
$ | 10,525 | $ | 10,500 | $ | 14,010 | ||||||
% change compared with prior period |
| % | (25)% | |||||||||
Revenues increased $25 million in 2010, compared with 2009. This increase was due to significant
revenue increases in the Industrial, Bell and Textron Systems segments that were largely offset by
lower revenue in the Cessna and Finance segments. The net revenue increase included the following
factors:
| Higher revenues of $446 million in the Industrial segment, largely due to higher volume reflecting improvements in the automotive industry; | ||
| Bells revenue increased $399 million, primarily due to higher V-22 and H-1 volume and improved pricing in its commercial business; and | ||
| Textron Systems revenue increased $80 million, primarily due to higher UAS volume; | ||
| Partially offset by lower revenues at Cessna of $757 million, primarily due to lower business jet volume; and | ||
| A $143 million reduction in Finance segment revenues, largely due to lower average finance receivables resulting from the continued liquidation. |
In 2009, revenues decreased $3.5 billion, 25%, to $10.5 billion, compared with 2008. This decrease
was primarily due to the following factors:
| Lower manufacturing volume of $3.3 billion, reflecting: |
| $2.4 billion decrease at Cessna, primarily related to fewer deliveries due to the economic recession; | ||
| $801 million decrease in the Industrial segment, principally due to recession-related lower demand; and a | ||
| $79 million decrease at Bell, largely related to lower commercial helicopter volume as a result of the economic recession. |
| Lower Finance segment revenues of $362 million, reflecting an increase in portfolio losses, lower market interest rates and lower securitization income; and | ||
| Unfavorable foreign exchange impact of $51 million in the Industrial segment; | ||
| Partially offset by higher pricing of $155 million, primarily at Bell and Cessna. |
18
Cost of Sales
(Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
Cost of Sales |
$ | 8,605 | $ | 8,468 | $ | 10,583 | ||||||
% change compared with prior period |
2 | % | (20 | )% | ||||||||
Gross margin as a percentage of Manufacturing revenues |
16.5 | % | 16.5 | % | 20.4 | % | ||||||
Cost of sales as a percentage of Manufacturing revenues remained flat at 83.5% in 2010 and 2009.
On a dollar basis, cost of sales increased $137 million, 2%, in 2010, compared with 2009,
principally due to the net sales volume changes in the Industrial, Bell and Cessna segments
described above, as well as higher pension costs and inflation. In 2010, favorable conversion
costs in the Bell and Industrial segments, resulting from improved leverage and manufacturing
efficiencies on higher volumes, were offset by increased conversion costs at Cessna. Conversion
costs increased at Cessna as cost reduction activities, including workforce reductions and facility
consolidations, did not fully offset the impact of lower production volumes.
Cost of sales as a percentage of Manufacturing revenues increased to 83.5% in 2009 from 79.6% in
2008. On a dollar basis, cost of sales decreased $2.1 billion, 20%, in 2009, compared with 2008,
principally due to the sales volume changes in the Cessna and Industrial segments described above.
In 2009, cost of sales was unfavorably impacted from lower production levels and temporary plant
shutdowns in the Cessna and Industrial segments resulting in increased conversion costs and idle
capacity.
Selling and Administrative Expense
(Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
Selling and administrative expenses |
$ | 1,231 | $ | 1,338 | $ | 1,590 | ||||||
% change compared with prior period |
(8 | )% | (16 | )% | ||||||||
Selling and administrative expense decreased $107 million, 8%, to $1.2 billion in 2010, compared
with 2009, primarily due to $41 million in lower expenses in the Finance segment reflecting lower
compensation and related costs due to headcount reductions associated with its exit from the
non-captive commercial finance business, $39 million of lower commissions primarily resulting from
lower Cessna sales volume, and $27 million lower corporate expenses.
In 2009, selling and administrative expense decreased $252 million, 16%, to $1.3 billion, compared
with 2008, primarily due to workforce reductions and furlough programs resulting in lower
compensation and related costs, lower sales commissions at Cessna, and a decline in professional
services and travel costs due to cost-reduction efforts.
Special Charges
(Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
Special charges |
$ | 190 | $ | 317 | $ | 526 | ||||||
% change compared with prior period |
(40 | )% | (40 | )% | ||||||||
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 throughout
the company. In the fourth quarter of 2010, we initiated the final series of restructuring actions
under this program, which included workforce reductions in the Bell, Textron 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.
Special charges included restructuring charges of $99 million, $237 million and $64 million in
2010, 2009 and 2008, respectively, primarily related to severance costs and asset impairment
charges. In 2010, special charges also included a $91 million non-cash pre-tax charge to
reclassify a foreign exchange loss from equity to the Statement of Operations as a result of
substantially liquidating a Canadian Finance entity. In 2009, special charges also include a
goodwill impairment charge of $80 million in the Industrial segment. In 2008, special charges
include 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.
19
Interest Expense
(Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
Interest expense |
$ | 270 | $ | 309 | $ | 448 | ||||||
% change compared with prior period |
(13 | )% | (31 | )% | ||||||||
Interest expense on the Consolidated Statement of Operations includes interest for both the Finance
and Manufacturing borrowing groups with interest related to intercompany borrowings eliminated.
Interest expense for the Finance segment is included within segment profit and includes
intercompany interest.
Our consolidated interest expense decreased $39 million, 13%, in 2010, compared with 2009,
primarily due to a $63 million decrease for the Finance group, largely due to the reduction in its
debt as it liquidates the non-captive commercial finance business. This decrease was partially
offset by higher interest expense for the Manufacturing group of $24 million, primarily due to the
full year impact in 2010 of Convertible Notes issued in May 2009. In 2009, consolidated interest
expense decreased $139 million, 31%, compared with 2008, primarily due to reduced debt in the
Finance group as it liquidated receivables.
Segment Analysis
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.
In our discussion of comparative results for the Manufacturing group, changes in revenue and
segment profit typically are expressed in terms of volume, pricing, foreign exchange and
acquisitions. Additionally, changes in segment profit may be expressed in terms of mix, inflation
and cost performance. Volume changes in revenue represents increases/decreases in the number of
units delivered or services provided. Pricing represents changes in unit pricing. Foreign
exchange is the change resulting from translating foreign-denominated amounts into U.S. dollars at
exchange rates that are different from the prior period. Acquisitions refer to the results
generated from businesses that were acquired within the previous 12 months. For segment profit,
mix represents a change due to the composition of products and/or services sold at different profit
margins. Inflation represents higher material, wages, benefits, pension or other costs. Cost
performance reflects an increase or decrease in research and development, depreciation, selling and
administrative costs, warranty, product liability, quality/scrap, labor efficiency, overhead,
product line profitability, start-up, ramp-up and cost-reduction initiatives or other manufacturing
inputs. For the U.S. Government business, performance generally refers to changes in estimated
contract rates. These changes typically relate to profit recognition associated with revisions to
total estimated costs to complete a contract that reflect improved (or deteriorated) operating
performance on the contract and are recognized by recording cumulative catch-up adjustments in the
current period.
Cessna
% Change | |||||||||||||||||||||||
(Dollars in millions) | 2010 | 2009 | 2008 | 2010 | 2009 | ||||||||||||||||||
Revenues |
$ | 2,563 | $ | 3,320 | $ | 5,662 | (23 | )% | (41 | )% | |||||||||||||
Operating expenses |
2,592 | 3,122 | 4,757 | (17 | )% | (34 | )% | ||||||||||||||||
Segment profit (loss) |
(29 | ) | 198 | 905 | (115 | )% | (78 | )% | |||||||||||||||
Profit margin |
(1 | )% | 6 | % | 16 | % | |||||||||||||||||
Backlog |
$ | 2,928 | $ | 4,893 | $ | 14,530 | (40 | )% | (66 | )% | |||||||||||||
Cessna Revenues and Operating Expenses
Factors contributing to the 2010 year-over-year revenue change are provided below:
2010 versus | ||||
(In millions) | 2009 | |||
Volume |
$ | (798 | ) | |
Other |
41 | |||
Total change |
$ | (757 | ) | |
Cessnas revenues decreased $757 million, 23%, in 2010, compared with 2009, primarily due to
lower volume of business jets, reflecting the continued downturn in the business jet market
attributable to the economic recession. We delivered 179 Citation business jets in 2010 versus
289 jets in 2009. Increased aircraft utilization and our investment in additional service
capacity during 2010 contributed to increased aftermarket volume as Cessnas aftermarket revenues
increased by $80 million, 14%, from 2009.
20
Operating expenses decreased by $530 million, 17%, in 2010, compared with 2009, largely due to
a decline in direct material and labor costs, principally as
a result of the reduced volume. During 2010, Cessnas cost reduction activities were not able to
fully offset the lower volume.
Factors contributing to the 2009 year-over-year revenue change are provided below:
2009 versus | ||||
(In millions) | 2008 | |||
Volume |
$ | (2,390 | ) | |
Other |
48 | |||
Total change |
$ | (2,342 | ) | |
Cessnas revenues decreased $2.3 billion, 41%, in 2009, compared with 2008, primarily due to
lower volume of business jets, reflecting the economic recession. We delivered 289 Citation
business jets in 2009 versus 467 jets in 2008. Cessnas 2009 revenues also were affected by
lower aftermarket volume of $152 million, largely due to a decline in aircraft utilization
resulting from the economic recession, and CitationAir had lower volume of $79 million, primarily
due to lower demand.
Operating expenses decreased $1.6 billion, 34%, in 2009, compared with 2008, primarily due to lower
sales volumes of new aircraft. Additionally, engineering, selling and administrative expense
declined by an aggregate $116 million largely due to the workforce reductions in 2009 and $82
million in forfeiture income from order cancellations, partially offset by higher warranty expense
of $35 million and a $16 million increase in write-downs of pre-owned aircraft inventory,
reflecting lower fair market values due to an excess supply in the market.
Cessna Segment Profit (Loss)
Factors contributing to 2010 year-over-year segment profit change are provided below:
2010 versus | ||||
(In millions) | 2009 | |||
Volume |
$ | (253 | ) | |
Performance |
95 | |||
Inflation, net of pricing |
(19 | ) | ||
Sale of CESCOM assets |
(50 | ) | ||
Total change |
$ | (227 | ) | |
Cessnas segment profit decreased $227 million, 115%, in 2010, compared with 2009, due to the $253
million impact from lower volume, a nonrecurring $50 million gain on the 2009 sale of CESCOM assets
and $19 million of inflation, net of higher pricing, partially offset by improved performance of
$95 million. The improved performance included lower engineering, selling and administrative
expenses of $57 million, lower inventory reserves and pre-owned aircraft write-downs of $48
million, and lower tooling costs of $19 million, partially offset by lower deposit forfeiture
income of $49 million due to fewer order cancellations in 2010.
Factors contributing to 2009 year-over-year segment profit change are provided below:
2009 versus | ||||
(In millions) | 2008 | |||
Volume |
$ | (883 | ) | |
Performance |
131 | |||
Sale of CESCOM assets |
50 | |||
Other |
(5 | ) | ||
Total change |
$ | (707 | ) | |
In 2009, Cessnas segment profit decreased $707 million, 78%, compared with 2008, primarily due to
an $883 million impact from lower volume, which included $48 million due to idle capacity related
to lower production levels and temporary plant shutdowns. These decreases were partially offset by
$131 million of favorable performance and a $50 million gain on the 2009 sale of assets related to
CESCOM, which provided maintenance tracking services to Cessnas customers. Cessnas favorable
performance included $116 million in lower engineering, selling and administrative expense largely
due to the workforce reductions in 2009 and $82 million in forfeiture income from order
cancellations, partially offset by higher warranty expense of $35 million, a $16 million increase
in write-downs of pre-owned aircraft inventory, reflecting lower fair market values due to an
excess supply in the market, and unfavorable CitationAir performance of $10 million.
21
Cessna Backlog
Backlog decreased $2.0 billion, 40%, in 2010, compared with 2009, mainly attributable to canceled
business jet orders due to continued weakness in the general aviation industry and aircraft
deliveries in excess of orders. In 2009, the 66% decrease in backlog reflects the cancellation of
numerous business jets orders, largely due to the economic recession, and included a $2.1 billion
impact from our decision to cancel the development of the Citation Columbus aircraft and a $1.3
billion impact due to cancellations by one customer.
Bell
% Change | ||||||||||||||||||||||
(Dollars in millions) | 2010 | 2009 | 2008 | 2010 | 2009 | |||||||||||||||||
Revenues: |
||||||||||||||||||||||
V-22 program |
$ | 1,155 | $ | 925 | $ | 845 | 25 | % | 9 | % | ||||||||||||
Other military |
845 | 722 | 744 | 17 | % | (3 | )% | |||||||||||||||
Commercial |
1,241 | 1,195 | 1,238 | 4 | % | (3 | )% | |||||||||||||||
Total revenues |
3,241 | 2,842 | 2,827 | 14 | % | 1 | % | |||||||||||||||
Operating expenses |
2,814 | 2,538 | 2,549 | 11 | % | | ||||||||||||||||
Segment profit |
427 | 304 | 278 | 40 | % | 9 | % | |||||||||||||||
Profit margin |
13 | % | 11 | % | 10 | % | ||||||||||||||||
Backlog |
$ | 7,199 | $ | 6,903 | $ | 6,192 | 4 | % | 11 | % | ||||||||||||
Bell manufactures helicopters, tiltrotor aircraft, and related spare parts and provides services
for military and/or commercial markets. Bells major U.S. Government programs at this time are the
V-22 tiltrotor aircraft and the H-1 helicopters, which are both in the production stage and
represent a significant portion of Bells revenues from the U.S. Government. During 2010, we have
continued to ramp up production and deliveries to meet customer schedule requirements for these
programs.
Bell Revenues and Operating Expenses
Factors contributing to the 2010 year-over-year revenue change are provided below:
2010 versus | ||||
(In millions) | 2009 | |||
Volume |
$ | 332 | ||
Other |
67 | |||
Total change |
$ | 399 | ||
Revenues increased $399 million, 14%, in 2010, compared with 2009, with volume representing 83% of
the increase. Bells V-22 program revenues increased by $230 million, 25%, in 2010, compared with
2009, primarily reflecting higher aircraft deliveries as we delivered 26 V-22 aircraft in 2010
versus 20 aircraft in 2009. Other military revenues increased $123 million, 17%, in 2010, compared
with 2009, largely due to an increase in volume of $113 million due to higher deliveries of our H-1
aircraft, partially offset by the impact from revenues recognized in 2009 on the canceled Armed
Reconnaissance Helicopter program of $28 million. H-1 aircraft deliveries increased from 9
aircraft in 2009 to 18 aircraft in 2010. Additionally, the Kiowa Warrior Program generated slightly higher volume in 2010. Commercial revenues increased 4% in 2010 from
2009, primarily due to improved pricing.
Bells operating expenses increased 11% in 2010 from 2009, primarily due to the higher net sales
volume, partially offset by improved cost
performance. Improved cost performance primarily related to the V-22 and H-1 programs and unfavorable adjustments recorded in
2009 for the 429 program as discussed below, partially offset by $14
million in higher research and development costs.
Factors contributing to the 2009 year-over-year revenue change are provided below:
2009 versus | ||||
(In millions) | 2008 | |||
Volume |
$ | (79 | ) | |
Other |
94 | |||
Total change |
$ | 15 | ||
Revenues increased $15 million, 1%, in 2009, compared with 2008, as other items such as higher
pricing of $94 million, primarily related to certain commercial helicopters, offset reduced volume.
Bells V-22 program revenues increased by $80 million, 9%, in 2009, compared with 2008, primarily
reflecting higher aircraft deliveries. We delivered 20 V-22 aircraft in 2009 versus 18 aircraft in
2008. In 2009, other military revenues decreased 3% from 2008, primarily due to a $76 million
reduction related to the canceled Armed Reconnaissance Helicopter program and lower H-1 aircraft
deliveries. H-1 aircraft deliveries decreased to 9 aircraft in 2009 from 12 aircraft in 2008.
These reductions were partially offset by higher volume of $28 million for the Kiowa Warrior Safety
22
Enhancement Program, $13 million related to the H-1 higher production support and $14 million in
higher aftermarket volume. In 2009, commercial revenues decreased 3% from 2008, primarily due to
lower helicopter and aftermarket volume of $130 million, partially offset by higher pricing of $84
million.
Bells operating expenses decreased by $11 million in 2009, compared with 2008, as improved cost
performance, which included lower selling and administrative and research and development expense
of $47 million, and lower net sales volume were partially offset by inflation.
Bell Segment Profit
Factors contributing to 2010 year-over-year segment profit change are provided below:
2010 versus | ||||
(In millions) | 2009 | |||
Performance |
$ | 106 | ||
Pricing, net of inflation |
23 | |||
Other |
(6 | ) | ||
Total change |
$ | 123 | ||
Bells segment profit increased $123 million, 40%, in 2010, compared with 2009, primarily due to
improved performance of $106 million and higher pricing, net of inflation of $23 million. Sales
volume did not have a significant net impact on segment profit due to the mix of commercial and
military aircraft sold. The improved performance was largely due to the following factors:
| $73 million attributable to the V-22 and H-1 programs, resulting from a $38 million favorable impact from efficiencies realized in connection with the ramp-up of production lines, $21 million in profit recognized in the second quarter of 2010 related to the reimbursement of prior year costs and $14 million of lower material costs; and | ||
| An $18 million net improvement from unfavorable adjustments recorded in 2009 for the 429 program that did not occur in 2010; | ||
| Partially offset by $14 million in higher research and development costs. |
Factors contributing to 2009 year-over-year segment profit change are provided below:
2009 versus | ||||
(In millions) | 2008 | |||
Volume and mix |
$ | (40 | ) | |
Performance |
19 | |||
Pricing, net of inflation |
47 | |||
Total change |
$ | 26 | ||
In 2009, Bells segment profit increased $26 million, 9%, compared with 2008, primarily due to
higher pricing in excess of inflation of $47 million and improved cost performance of $19 million,
partially offset by a change in product mix of $22 million, primarily due to commercial helicopters
and lower volume of $18 million. The improved cost performance primarily reflects lower selling
and administrative expense of $26 million, lower research and development expense of $21 million
and improvement in the V-22 program of $16 million, partially offset by unfavorable adjustments of
$24 million for the 429 model, primarily due to inventory write-downs resulting from changes in
pricing assumptions and higher than anticipated learning curve costs.
Bell Backlog
In 2010, Bells backlog increased $296 million, 4%, largely related to the V-22 and H-1 programs,
partially offset by a decline in commercial backlog reflecting deliveries in excess of new orders.
Backlog at Bell increased 11% in 2009 from 2008, primarily due to funding for the V-22 program,
partially offset by a decline in commercial aircraft orders, largely due to the economic recession.
Textron Systems
% Change | ||||||||||||||||||||||
(Dollars in millions) | 2010 | 2009 | 2008 | 2010 | 2009 | |||||||||||||||||
Revenues |
$ | 1,979 | $ | 1,899 | $ | 1,880 | 4 | % | 1 | % | ||||||||||||
Operating expenses |
1,749 | 1,659 | 1,629 | 5 | % | 2 | % | |||||||||||||||
Segment profit |
230 | 240 | 251 | (4 | )% | (4 | )% | |||||||||||||||
Profit margin |
12 | % | 13 | % | 13 | % | ||||||||||||||||
Backlog |
$ | 1,598 | $ | 1,664 | $ | 2,190 | (4 | )% | (24 | )% | ||||||||||||
23
Textron Systems Revenues and Operating Expenses
Factors contributing to the 2010 year-over-year revenue change are provided below:
2010 versus | ||||
(In millions) | 2009 | |||
Volume |
$ | 83 | ||
Other |
(3 | ) | ||
Total change |
$ | 80 | ||
Revenues at Textron Systems increased $80 million, 4%, in 2010, compared with 2009, largely due to
a $151 million increase in our UAS product line revenues, primarily due to higher volume, partially
offset by a $55 million decrease in our Land and Marine Systems and Weapons and Sensors product
lines.
Textron Systems operating expenses increased $90 million, 5%, in 2010, compared with 2009,
primarily due to higher net sales volume and inflation, primarily due to higher pension costs.
Factors contributing to the 2009 year-over-year revenue change are provided below:
2009 versus | ||||
(In millions) | 2008 | |||
Volume |
$ | 15 | ||
Other |
4 | |||
Total change |
$ | 19 | ||
In 2009, revenues at Textron Systems increased $19 million, 1%, compared with 2008, primarily due
to a $55 million increase in our UAS product line revenues, primarily due to higher volume,
partially offset by a $36 million decrease in our Mission Support and Other product line, largely
due to lower aircraft engine volume resulting from a decline in aircraft production as aircraft
manufacturers cut production levels in response to lower demand.
Textron Systems operating expenses increased $30 million, 2%, in 2009, compared with 2008,
principally due to higher net sales volume.
Textron Systems Segment Profit
Factors contributing to 2010 year-over-year segment profit change are provided below:
2010 versus | ||||
(In millions) | 2009 | |||
Volume |
$ | 9 | ||
Inflation |
(14 | ) | ||
Other |
(5 | ) | ||
Total change |
$ | (10 | ) | |
Segment profit at Textron Systems decreased $10 million in 2010, 4%, compared with 2009, as the $26
million impact of the higher UAS volume was offset by a $19 million impact from lower volumes in
the Land and Marine Systems and Weapons and Sensors product lines and $14 million in inflation,
primarily due to higher pension costs.
Factors contributing to 2009 year-over-year segment profit change are provided below:
2009 versus | ||||
(In millions) | 2008 | |||
Volume |
$ | (10 | ) | |
Other |
(1 | ) | ||
Total change |
$ | (11 | ) | |
In 2009, segment profit at Textron Systems decreased $11 million, 4%, compared with 2008, primarily
due to the $28 million impact of lower volume in the Mission Support and Other product line,
partially offset by the $22 million impact of higher volumes in the Weapons and Sensors and UAS
product lines.
Textron Systems Backlog
In 2009, backlog decreased $526 million, 24%, primarily due to deliveries on existing government
contracts for UAS and armored security vehicles.
24
Industrial
% Change | ||||||||||||||||||||||
(Dollars in millions) | 2010 | 2009 | 2008 | 2010 | 2009 | |||||||||||||||||
Revenues: |
||||||||||||||||||||||
Fuel systems and functional components |
$ | 1,640 | $ | 1,287 | $ | 1,763 | 27 | % | (27 | )% | ||||||||||||
Other industrial |
884 | 791 | 1,155 | 12 | % | (32 | )% | |||||||||||||||
Total revenues |
2,524 | 2,078 | 2,918 | 21 | % | (29 | )% | |||||||||||||||
Operating expenses |
2,362 | 2,051 | 2,851 | 15 | % | (28 | )% | |||||||||||||||
Segment profit |
162 | 27 | 67 | 500 | % | (60 | )% | |||||||||||||||
Profit margin |
6 | % | 1 | % | 2 | % | ||||||||||||||||
Industrial Revenues and Operating Expenses
Factors contributing to the 2010 year-over-year revenue change are provided below:
2010 versus | ||||
(In millions) | 2009 | |||
Volume |
$ | 473 | ||
Foreign exchange |
(34 | ) | ||
Other |
7 | |||
Total change |
$ | 446 | ||
Sales of fuel systems and functional components increased 27% in 2010 from 2009 primarily due to
higher volume reflecting improvements in the automotive industry, partially offset by a $19 million
impact due to unfavorable foreign exchange fluctuations, largely related to the euro. Other
industrial revenues increased 12% due to higher volume, partially offset by an unfavorable foreign
exchange impact of $15 million, largely due to fluctuations with the euro.
The Industrial segments operating expenses increased $311 million, 15%, in 2010, compared with
2009, primarily due to higher sales volumes and inflation, partially offset by improved cost
performance, largely due to the significant efforts made in 2009 to reduce costs through workforce
reductions and other initiatives.
Factors contributing to the 2009 year-over-year revenue change are provided below:
2009 versus | ||||
(In millions) | 2008 | |||
Volume |
$ | (801 | ) | |
Foreign exchange |
(51 | ) | ||
Other |
12 | |||
Total change |
$ | (840 | ) | |
In 2009, sales of fuel systems and functional components decreased 27% from 2008 primarily due to
lower volume, reflecting lower demand due to the economic recession, and a $46 million impact from
unfavorable foreign exchange, largely due to fluctuations with the euro. Other industrial revenues
decreased 32% in 2009 from 2008 primarily due to lower volume.
Operating expenses decreased $800 million, 28%, in 2009, compared with 2008, primarily due to lower
sales volumes and lower costs due to workforce reductions, employee furloughs and temporary plant
shutdowns.
Industrial Segment Profit
Factors contributing to 2010 year-over-year segment profit change are provided below:
2010 versus | ||||
(In millions) | 2009 | |||
Volume |
$ | 127 | ||
Performance |
76 | |||
Inflation, net of pricing |
(59 | ) | ||
Other |
(9 | ) | ||
Total change |
$ | 135 | ||
Industrial segment profit increased $135 million, 500%, in 2010, compared with 2009, primarily
due to the $127 million impact from higher volume and $76 million in improved performance,
partially offset by inflation in excess of higher pricing of
$59 million. The improved cost performance in 2010 was largely due to the significant efforts made in 2009 to
reduce costs through workforce
25
reductions and other initiatives, along with improved
manufacturing leverage due to higher volume.
Factors contributing to 2009 year-over-year segment profit change are provided below:
2009 versus | ||||
(In millions) | 2008 | |||
Volume |
$ | (265 | ) | |
Performance |
211 | |||
Inflation |
21 | |||
Other |
(7 | ) | ||
Total change |
$ | (40 | ) | |
In 2009, Industrial segment profit decreased $40 million, 60%, compared with 2008, primarily due
to the $265 million impact from lower volume, partially offset by improved cost performance of
$211 million and lower inflation of $21 million. Cost performance improved largely due to
significant efforts made to reduce costs through workforce reductions, employee furloughs and
temporary plant shutdowns.
Finance
% Change | ||||||||||||||||||||||
(Dollars in millions) | 2010 | 2009 | 2008 | 2010 | 2009 | |||||||||||||||||
Revenues |
$ | 218 | $ | 361 | $ | 723 | (40 | )% | (50 | )% | ||||||||||||
Segment loss |
(237 | ) | (294 | ) | (50 | ) | (19 | )% | 488 | % | ||||||||||||
Profit (loss) margin |
(109 | )% | (81 | )% | (7 | )% | ||||||||||||||||
Our plan to exit the non-captive commercial finance business in our Finance segment is being
effected through a combination of orderly liquidation and selected sales. The exit of the
non-captive business is expected to be substantially completed over the next three to five years,
depending on market conditions.
Finance Revenues
Finance segment revenues decreased $143 million, 40%, in 2010 compared with 2009, primarily due to
the following:
| $141 million in lower average finance receivables of $1.8 billion and lower servicing fees, investment and other income; | ||
| $54 million in lower gains on debt extinguishment; | ||
| $26 million impact of variable-rate receivable with interest rate floors; | ||
| Partially offset by an $81 million impact from lower portfolio losses; and | ||
| $28 million in lower securitization losses, net of gains. |
In 2009, Finance segment revenues decreased $362 million, 50%, compared with 2008, primarily due to
the following:
| A $157 million impact from higher portfolio losses; | ||
| $92 million impact from lower market interest rates; | ||
| $70 million in lower securitization gains, net of impairments; | ||
| $62 million in lower average finance receivables of $1 billion; | ||
| $37 million in higher suspended earnings on nonaccrual finance receivables; | ||
| Partially offset by $55 million in gains on debt extinguishment. |
Portfolio losses, net of gains decreased in 2010, compared with 2009, primarily as a result of $40
million in lower impairment charges in the structured capital portfolio, $23 million in gains on
the sale of two distribution finance receivable portfolios in 2010 and a $21 million decrease in
discounts taken on the sale or early termination of finance assets associated with the liquidation
of distribution finance receivables, partially offset by an $11 million increase in impairment
charges on owned aircraft that are subject to operating lease or have been repossessed.
Portfolio losses recognized in 2009 include discounts taken on the sale or early termination of
finance assets, including $60 million in discounts associated with the liquidation of distribution
finance and golf mortgage finance receivables, $53 million in impairment charges related to
automobile manufacturing equipment and investments in real estate associated with matured leveraged
leases in the structured capital portfolio, and $25 million in impairment charges associated with
repossessed aircraft.
Finance Segment Loss
The Finance segment loss decreased by $57 million, 19%, in 2010, compared with 2009, as the
provision for loan losses decreased by $124 million, primarily due to a decline in the accounts
identified as nonaccrual during the year, and we had $81 million
in lower portfolio losses, net of gains and $28 million in lower securitization losses, net of gains. These
improvements were partially offset by the
26
impact of lower gains on debt extinguishment of $54
million, a $16 million impact from lower interest rates on debt and $16 million in lower accretion
of the valuation allowance on finance receivables held for sale. In addition, as we effected the
exit of our non-captive finance business, our lower average finance receivables had a $52 million
unfavorable impact on segment profit, along with $39 million in lower servicing fees, investment
and other income and a $26 million impact related to variable-rate receivable interest rate floors.
These factors were partially offset by lower operating and administrative expenses of $41 million,
primarily due to lower compensation expense associated with the workforce reduction.
In 2009, the Finance segments loss increased $244 million, 488%, compared with 2008, primarily due
to a $157 million impact from higher portfolio losses, $70 million in lower securitization gains,
net of impairments, $37 million in higher suspended earnings on nonaccrual finance receivables and
a $33 million increase in provision for loan losses, partially offset by $55 million in gains on
debt extinguishment. In 2009 and 2008, we increased the provision for loan losses significantly in
response to the economic recession, declining collateral values and the lack of liquidity available
to our borrowers and their customers. We also increased our estimate of credit losses as a result
of our decision to exit portions of the finance business in the fourth quarter of 2008, which we
believe will negatively impact credit losses over the duration of our portfolio. In 2009, the
increase was primarily due to an increase in both the rate and severity of defaults resulting from
the economic recession and due to declining aircraft values. The increase was partially offset by
a $73 million decrease in the provision for the distribution finance portfolio largely due to the
liquidation of 68% of its managed finance receivables in 2009.
Finance Portfolio Quality
The following table reflects information about the Finance segments credit performance related to
finance receivables held for investment. Finance receivables held for sale are reflected at the
lower of cost or fair value on the Consolidated Balance Sheets and are not included in the credit
performance statistics below:
January 1, | January 2, | |||||||
(Dollars in millions) | 2011 | 2010 | ||||||
Finance receivables |
$ | 4,213 | $ | 6,206 | ||||
Nonaccrual finance receivables |
850 | 1,040 | ||||||
Allowance for losses |
342 | 341 | ||||||
Ratio of nonaccrual finance receivables to finance receivables |
20.17 | % | 16.75 | % | ||||
Ratio of allowance for losses on impaired nonaccrual finance receivables to impaired
nonaccrual finance receivables |
23.82 | % | 15.57 | % | ||||
Ratio of allowance for losses on finance receivables to nonaccrual finance receivables |
40.30 | % | 32.80 | % | ||||
Ratio of allowance for losses on finance receivables to finance receivables |
8.13 | % | 5.49 | % | ||||
60+ days contractual delinquency as a percentage of finance receivables |
9.77 | % | 9.17 | % | ||||
60+ days contractual delinquency |
$ | 411 | $ | 569 | ||||
Repossessed assets and properties |
157 | 119 | ||||||
Operating assets received in satisfaction of troubled finance receivables |
107 | 112 | ||||||
At the end of 2010, finance receivables included $1.9 billion in finance receivables held for
investment in the non-captive business, compared with $3.3 billion at the end of 2009. In
addition, finance receivables held for sale by the non-captive business totaled $0.4 billion at the
end of 2010, compared with $0.8 billion at the end of 2009. These decreases were due to the
continued exit of this business as discussed above.
Nonaccrual finance receivables include accounts that are contractually delinquent by more than
three months, unless collection of principal and interest is not doubtful as well as accounts whose
credit quality indicators other than delinquency suggest full collection of principal and interest
is doubtful. We believe that the percentage of nonaccrual finance receivables generally will
remain high as we execute our non-captive liquidation plan. The liquidation plan is also likely to
result in a slower rate of liquidation for nonaccrual finance receivables. Nonaccrual finance
receivables decreased $190 million from the 2009 year-end balance, with a $117 million reduction in
the aviation product line, a $55 million reduction in the distribution finance 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. See Note 4 to the Consolidated Financial Statements for more detailed
information on the nonaccrual finance receivables by product line, along with a summary of finance
receivables held for investment based on our internally assigned credit quality indicators.
The percentage of contractual delinquency increased primarily due to one significant revolving
notes receivable loan in the timeshare product line, which has been classified as nonaccrual since
2009 but was not contractually past due until the borrowers bankruptcy filing in 2010, partially
offset by a reduction in delinquencies in the aviation and golf mortgage product lines, primarily
resulting from the repossession and foreclosure of collateral. In the timeshare product line,
revolving notes receivable loans often remain contractually current despite significant uncertainty
regarding the eventual collection of full principal and interest because we are entitled to receive
all of the cash flows from the underlying consumer notes receivable, which serve as the collateral
for our loan. See page 54 in Note 4 to the Consolidated Financial Statements for a summary of
delinquencies by aging category.
27
Liquidity and Capital Resources
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 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 groups activities, investors,
rating agencies and analysts use different measures to evaluate each groups performance. To
support those evaluations, we present balance sheet and cash flow information for each borrowing
group within the Consolidated Financial Statements.
Key information that is utilized in assessing our liquidity is summarized below:
January 1, | January 2, | |||||||
(In millions) | 2011 | 2010 | ||||||
Manufacturing group |
||||||||
Cash and equivalents |
$ | 898 | $ | 1,748 | ||||
Debt |
2,302 | 3,584 | ||||||
Shareholders equity |
2,972 | 2,826 | ||||||
Capital (debt plus shareholders equity) |
5,274 | 6,410 | ||||||
Net debt (net of cash and equivalents) to capital |
32.1% | 39.4% | ||||||
Debt to capital |
43.6% | 55.9% | ||||||
Finance group |
||||||||
Cash and equivalents |
$ | 33 | $ | 144 | ||||
Debt |
3,660 | 5,667 | ||||||
We believe that our calculations of debt to capital and net debt to capital are useful measures as
they provide a summary indication of the level of debt financing (i.e., leverage) that is in place
to support our capital structure, as well as to provide an indication of the capacity to add
further leverage. We believe that with our existing cash balances, coupled with the continued
successful execution of the exit plan for the non-captive portion of the commercial finance
business, and cash we expect to generate from our manufacturing operations, we will have sufficient
cash to meet our future needs.
We maintain an effective shelf registration statement filed with the Securities and Exchange
Commission that allows us to issue an unlimited amount of public debt and other securities. We
also have credit line facilities available for the Manufacturing group of $1.25 billion and for the
Finance group of $1.75 billion, which both expire in April 2012. At January 1, 2011, there were no
amounts outstanding under the Manufacturing groups facility and $1.4 billion outstanding under the
Finance groups facility.
During 2010, we liquidated $2.4 billion of the Finance groups finance receivables, net of
originations. These finance receivable reductions occurred in both the non-captive and captive
finance portfolios but were primarily driven by the non-captive portfolio in connection with our
exit plan, including $956 million in the distribution finance product line and $408 million in the
timeshare product line. These reductions resulted from the combination of scheduled finance
receivable collections, sales, discounted payoffs, repossession of collateral, charge-offs and
impairment charges recorded as portfolio losses, net of gains in our Consolidated Statements of
Operations. In addition, the reduction in finance receivables included $620 million in the captive
finance portfolio, primarily as a result of reduced loan and lease originations and the sale of $84
million of finance receivables. We measure the success of the exit plan based on the percentage of
total finance receivable and other finance asset reductions converted to cash. In 2010, we had a
cash conversion ratio of 93%, compared with 95% in 2009, on our non-captive finance receivables.
We expect the cash conversion ratio to continue to decline over the duration of the exit plan due
to the change in mix from shorter term assets in the distribution finance product line to longer
term assets in the timeshare, golf mortgage and structured finance product lines and the existence
of a higher concentration of nonaccrual finance receivables. At the end of 2010, $2.3 billion of
finance receivables remained in the non-captive portfolio.
On May 5, 2009, we issued $600 million of 4.5% Convertible Senior Notes with a maturity date of May
1, 2013 as discussed in Note 8 to the Consolidated Financial Statements. For at least 20 trading
days during the 30 consecutive trading days ended December 31, 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 holders option through March 31, 2011. We may
deliver shares of common stock, cash or a combination of cash and shares of common stock in
satisfaction of our obligations upon conversion of the Convertible Notes. We intend to settle the
face value of the Convertible Notes in cash. We have continued to classify these Convertible Notes
as long term based on our intent and ability to maintain the debt outstanding for at least one year
through the use of various funding sources available to us.
28
Manufacturing Group Cash Flows
Cash flows from continuing operations for the Manufacturing group as presented in our Consolidated
Statement of Cash Flows are summarized below:
(In millions) | 2010 | 2009 | 2008 | |||||||||
Operating activities |
$ | 730 | $ | 738 | $ | 407 | ||||||
Investing activities |
(353 | ) | (288 | ) | (637 | ) | ||||||
Financing activities |
(1,215 | ) | 563 | (159 | ) | |||||||
In the aggregate, cash flow from operating activities in 2010 was comparable with 2009; however,
our earnings for the Manufacturing group, adjusted for non-cash items such as depreciation and
amortization, were stronger in 2010 and totaled $941 million, compared with similarly adjusted
earnings in 2009 of $701 million. The cash inflow from higher earnings was offset by a $350
million voluntary cash contribution we made to our pension plans in the fourth quarter of 2010,
which is included in the Accrued and other liabilities line on the Consolidated Statement of Cash
Flows. We also used less cash for restructuring activities in 2010, compared with 2009, with cash
payments of $58 million, $132 million and $3 million in 2010, 2009 and 2008, respectively.
In 2009, cash flow from operating activities increased $331 million, compared with 2008, largely
due to $562 million in lower capital contributions paid to the Finance group, net of dividends
received, and working capital improvements, partially offset by lower earnings. In 2008, cash flow
from operating activities included a $625 million capital contribution to the Finance group as
discussed below. Our use of working capital improved significantly in 2009, largely related to
significant inventory reductions.
Investing cash flows in 2010, 2009 and 2008 primarily included capital expenditures of $270
million, $238 million and $537 million, respectively. The decrease in 2009 is largely due to a
reduction in discretionary spending due to the economic recession. In addition, the increase in
investing activities in 2010 from 2009 was primarily due to three acquisitions in the Bell, Textron
Systems and Industrial segments for $57 million. In 2008, we paid $109 million for acquisitions,
primarily due to transaction settlements related to AAI, which was acquired at the end of 2007.
Financing cash flows in 2010 primarily consist of the $1.2 billion repayment of the Manufacturing
groups bank line of credit. In 2009, financing activities provided more cash than in 2008,
primarily due to the draw of our $1.2 billion bank line of credit, a portion of which was used to
repay outstanding commercial paper borrowings, net proceeds of $442 million from the issuance of
the Convertible Notes (net of call options), $333 million in cash from the issuance of our common
stock and common stock warrants, $595 million in net proceeds from the issuance of senior notes and
a decrease in dividends paid. These increases in cash provided in 2009 were partially offset by an
$869 million decrease in commercial paper borrowings in 2009, compared with an $867 million
increase in these borrowings in 2008. In addition, we made $412 million in payments to settle
advances against our company-owned officer life insurance policies in 2009, while in 2008 we
received $222 million in advances against these policies.
Dividend payments to shareholders totaled $22 million, $21 million and $284 million in 2010, 2009
and 2008, respectively. The decrease in 2009 from 2008 payments was due to a reduction in the
annual per share dividend to $0.08 in 2009 from $0.92 in 2008. We have not repurchased any of our
common stock (other than in connection with an executive compensation award) since we suspended all
share repurchase activity under our repurchase program in September 2008. Under Board-authorized
share repurchase programs, we spent $533 million in 2008 for share repurchases representing
approximately 12 million shares of common stock.
Capital Contributions Paid To and Dividends Received From the Finance Group
Under a Support Agreement between Textron Inc. and TFC, Textron Inc. is required to maintain a
controlling interest in TFC. The agreement also requires Textron Inc. to ensure that TFC maintains
fixed charge coverage of no less than 125% and consolidated shareholders equity of no less than
$200 million. Cash contributions paid to TFC to maintain compliance with the Support Agreement and
dividends paid by TFC to Textron Inc. are detailed below:
(In millions) | 2010 | 2009 | 2008 | |||||||||
Dividends paid by TFC to Textron Inc. |
$ | 505 | $ | 349 | $ | 142 | ||||||
Capital contributions paid to TFC under Support Agreement |
(383 | ) | (270 | ) | (625 | ) | ||||||
An additional cash contribution of $63 million was paid to TFC on January 11, 2011 as required by
the Support Agreement.
Due to the nature of these contributions, we classify these contributions within cash flows used by
operating activities for the Manufacturing group in the Consolidated Statement of Cash Flows.
Capital contributions to support Finance group growth in the ongoing captive finance business are
classified as cash flows from financing activities. The Finance groups net income (loss) is
excluded from the Manufacturing groups cash flows, while dividends from the Finance group are
included within cash flows from operating activities for the Manufacturing group as they represent
a return on investment.
29
Finance Group Cash Flows
The cash flows from continuing operations for the Finance group are summarized below:
The cash flows from continuing operations for the Finance group are summarized below:
(In millions) | 2010 | 2009 | 2008 | |||||||||
Operating activities |
$ | (35 | ) | $ | 196 | $ | 167 | |||||
Investing activities |
2,305 | 2,153 | (64 | ) | ||||||||
Financing activities |
(2,383 | ) | (2,235 | ) | (146 | ) | ||||||
Cash flow from operating activities for the Finance group decreased $231 million in 2010, compared
with 2009, largely due to $103 million in taxes paid, primarily attributable to a settlement
related to the challenge of tax deductions we took in prior years for certain leverage lease
transactions. In 2009, the Finance group received a tax refund of $75 million, compared with tax
payments of $52 million in 2008, which was partially offset by lower fee income in 2010 due to the
wind-down of the non-captive business.
Cash receipts from the collection of finance receivables continued to outpace finance receivable
originations, which resulted in net cash inflow from investing activities in 2010 and in 2009.
Finance receivables repaid and proceeds from sales and securitizations totaled $3.0 billion in
2010, $5.4 billion in 2009 and $11.9 billion in 2008. Cash outflows for originations declined to
$0.9 billion in 2010 from $3.7 billion in 2009 and $11.9 billion in 2008.
In 2010, the Finance group used cash for financing activities primarily for repayments of long-term
debt of $2.4 billion and for dividends paid to Textron Inc., partially offset by capital
contributions received in compliance with the fixed charge coverage ratio required by the Support
Agreement. In 2009, the Finance group used more cash for financing activities, compared with 2008,
primarily due to the repayment of debt and commercial paper in 2009, totaling $4.5 billion,
compared with $2.2 billion in 2008. The Finance groups financing outflows were partially offset
by $1.7 billion in proceeds from the first quarter 2009 drawdown on its bank line of credit. In
2008, proceeds from the issuance of long-term debt totaled $1.5 billion.
TFC borrowed funds from Textron Inc. in 2010 and in 2009, with interest, 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.
Consolidated Cash Flows
The consolidated cash flows from continuing operations, after elimination of activity between the
borrowing groups, are summarized below:
(In millions) | 2010 | 2009 | 2008 | |||||||||
Operating activities |
$ | 993 | $ | 1,032 | $ | 764 | ||||||
Investing activities |
1,549 | 1,728 | (408 | ) | ||||||||
Financing activities |
(3,493 | ) | (1,633 | ) | (788 | ) | ||||||
Our earnings, adjusted for non-cash items such as depreciation and amortization and provision for
losses, were stronger in 2010 and totaled $945 million, compared with similarly adjusted earnings
in 2009 of $711 million. These higher earnings were offset by a $350 million voluntary
contribution we made to our pension plans in the fourth quarter of 2010. We also used less cash
for restructuring activities in 2010, compared with 2009, with cash payments of $72 million, $144
million and $7 million in 2010, 2009, and 2008, respectively.
Cash receipts from the collection of finance receivables continued to outpace finance receivable
originations, which resulted in net cash inflow from investing activities in 2010 and 2009.
Finance receivables repaid and proceeds from sales and securitizations totaled $2.2 billion in
2010, $4.6 billion in 2009 and $11.1 billion in 2008. Cash outflows for originations declined to
$450 million in 2010 from $3.0 billion in 2009 and $10.9 billion in 2008.
Financing cash flows in 2010 primarily consisted of the $1.2 billion repayment of Textron Inc.s
bank line of credit and a $300 million payment made on the outstanding balance of the TFCs bank
line of credit. In addition, we made $2.2 billion in principal payments on our long-term debt in
2010.
In 2009, more cash was used for financing activities as we repaid $4.2 billion in maturing
long-term debt, including early debt extinguishments, compared with $1.9 billion in 2008. This use
was partially offset by the receipt of $3.0 billion from drawing on our lines of credit, which was
partially offset by a $1.6 billion decrease in commercial paper borrowings in 2009, compared with a
$218 million increase in net commercial paper borrowings in 2008. We also made $412 million in
payments to settle advances against our company-owned officer life insurance policies in 2009,
while in 2008, we received $222 million in advances against these policies. In addition, we used
more cash in 2008 for stock repurchases and dividend payments, compared with 2009, as discussed in
the Manufacturing Group Cash Flows section herein.
30
Captive Financing and Other Intercompany Transactions
The Finance group finances retail purchases and leases for new and used aircraft and equipment
manufactured by our Manufacturing group, otherwise known as captive financing. 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 groups
statement of cash flows. Meanwhile, in the Manufacturing groups statement of cash flows, the cash
received from the Finance group on the customers 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 from the Consolidated Statements of Cash Flows.
Reclassification and elimination adjustments included in the Consolidated Statement of Cash Flows
are summarized below:
(In millions) | 2010 | 2009 | 2008 | ||||||||||||
Reclassifications from investing activities: |
|||||||||||||||
Finance receivable originations for Manufacturing group inventory sales |
$ | (416 | ) | $ | (654 | ) | $ | (1,019 | ) | ||||||
Cash received from customers, sale of receivables and securitizations |
840 | 831 | 728 | ||||||||||||
Other capital contributions made to Finance group |
(30 | ) | (40 | ) | | ||||||||||
Other |
9 | | (2 | ) | |||||||||||
Total reclassifications from investing activities |
403 | 137 | (293 | ) | |||||||||||
Reclassifications from financing activities: |
|||||||||||||||
Capital contribution paid by Manufacturing group to Finance group under
Support Agreement |
383 | 270 | 625 | ||||||||||||
Dividends received by Manufacturing group from Finance group |
(505 | ) | (349 | ) | (142 | ) | |||||||||
Other capital contributions made to Finance group |
30 | 40 | | ||||||||||||
Other |
(13 | ) | | | |||||||||||
Total reclassifications from financing activities |
(105 | ) | (39 | ) | 483 | ||||||||||
Total reclassifications and adjustments to cash flow from operating activities |
$ | 298 | $ | 98 | $ | 190 | |||||||||
In 2010 and 2009, captive finance receivable originations have decreased largely due to lower
aircraft sales.
Consolidated Discontinued Operations Cash Flows
The cash flows from discontinued operations are summarized below:
The cash flows from discontinued operations are summarized below:
(In millions) | 2010 | 2009 | 2008 | |||||||||
Operating activities |
$ | (9 | ) | $ | (17 | ) | $ | (14 | ) | |||
Investing activities |
| 211 | 471 | |||||||||
Financing activities |
| | (2 | ) | ||||||||
In 2009, cash flows from investing activities primarily include approximately $280 million in
after-tax net proceeds upon the sale of HR Textron, partially offset by $69 million in tax payments
related to the sale of the Fluid & Power business. In the fourth quarter of 2008, we received net
cash proceeds from the sale of the Fluid & Power business of approximately $479 million. See Note
2 to the Consolidated Financial Statements for details concerning these dispositions.
Contractual Obligations
Manufacturing Group
The following table summarizes the known contractual obligations, as defined by reporting
regulations, of our Manufacturing group as of January 1, 2011, as well as an estimate of the
year in which these obligations are expected to be paid:
2016 and | ||||||||||||||||||||||||||||
(In millions) | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | |||||||||||||||||||||
Liabilities reflected in balance sheet: |
||||||||||||||||||||||||||||
Long-term debt |
$ | 19 | $ | 161 | $ | 921 | $ | 7 | $ | 357 | $ | 945 | $ | 2,410 | ||||||||||||||
Interest on borrowings |
130 | 124 | 105 | 79 | 68 | 242 | 748 | |||||||||||||||||||||
Pension benefits for unfunded plans |
20 | 22 | 22 | 21 | 20 | 228 | 333 | |||||||||||||||||||||
Postretirement benefits other than
pensions |
60 | 56 | 52 | 49 | 45 | 352 | 614 | |||||||||||||||||||||
Other long-term liabilities |
76 | 141 | 67 | 38 | 33 | 240 | 595 | |||||||||||||||||||||
Liabilities not reflected in balance sheet: |
||||||||||||||||||||||||||||
Operating leases |
55 | 46 | 38 | 31 | 27 | 152 | 349 | |||||||||||||||||||||
Purchase obligations |
1,360 | 332 | 139 | 40 | 7 | 2 | 1,880 | |||||||||||||||||||||
Total Manufacturing group |
$ | 1,720 | $ | 882 | $ | 1,344 | $ | 265 | $ | 557 | $ | 2,161 | $ | 6,929 | ||||||||||||||
31
We maintain defined benefit pension plans and postretirement benefit plans other than pensions
as discussed in Note 14 to the Consolidated Financial Statements. Included in the above table are
discounted estimated benefit payments we expect to make related to unfunded pension and other
postretirement benefit plans. Actual benefit payments are dependent on a number of factors,
including mortality assumptions, expected retirement age, rate of compensation increases and
medical trend rates, which are subject to change in future years. Our policy for funding pension
plans is to make contributions annually, consistent with applicable laws and regulations; however,
future contributions to our pension plans are not included in the above table. In 2011, we expect
to make contributions to our funded pension plans of approximately $200 million and approximately
$30 million in the Retirement Account Plan. Based on our current assumptions, which may change
with changes in market conditions, our current contribution estimates for each of the years from
2012 through 2015 are estimated to be in the range of approximately $100 million to $400 million
under the plan provisions in place at this time.
Other long-term liabilities included in the table consist primarily of undiscounted amounts in the
Consolidated Balance Sheet as of January 1, 2011, representing obligations under deferred
compensation arrangements and estimated environmental remediation costs. Payments under deferred
compensation arrangements have been estimated based on managements assumptions of expected
retirement age, mortality, stock price and rates of return on participant deferrals. The timing of
cash flows associated with environmental remediation costs is largely based on historical
experience. Other long-term liabilities, such as deferred taxes, unrecognized tax benefits and
product liability and litigation reserves, have been excluded from the table due to the uncertainty
of the timing of payments combined with the absence of historical trends to be used as a predictor
for such payments.
Operating leases represent undiscounted obligations under noncancelable leases. Purchase
obligations represent undiscounted obligations for which we are committed to purchase goods and
services as of January 1, 2011. The ultimate liability for these obligations may be reduced
based upon termination provisions included in certain purchase contracts, the costs incurred to
date by vendors under these contracts or by recourse under firm contracts with the U.S.
Government under normal termination clauses.
Finance Group
The following table summarizes the known contractual obligations, as defined by reporting
regulations, of our Finance group as of January 1, 2011, as well as an estimate of the year
in which these obligations are expected to be paid:
2016 and | ||||||||||||||||||||||||||||
(In millions) | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | |||||||||||||||||||||
Liabilities reflected in balance sheet: |
||||||||||||||||||||||||||||
Multi-year bank lines of credit |
$ | | $ | 1,440 | $ | | $ | | $ | | $ | | $ | 1,440 | ||||||||||||||
Term debt |
400 | 76 | 578 | 136 | 36 | 130 | 1,356 | |||||||||||||||||||||
Securitized debt * |
86 | 78 | 86 | 68 | 96 | 116 | 530 | |||||||||||||||||||||
Subordinated debt |
| | | | | 300 | 300 | |||||||||||||||||||||
Interest on borrowings ** |
80 | 57 | 40 | 31 | 30 | 46 | 284 | |||||||||||||||||||||
Liabilities not reflected in balance sheet: |
||||||||||||||||||||||||||||
Operating leases |
5 | 1 | 1 | 1 | | | 8 | |||||||||||||||||||||
Total Finance group |
$ | 571 | $ | 1,652 | $ | 705 | $ | 236 | $ | 162 | $ | 592 | $ | 3,918 | ||||||||||||||
* | Securitized debt payments do not represent contractual obligations of the Finance group, and we do not provide legal recourse to investors who purchase interests in the securitizations beyond the credit enhancement inherent in the retained subordinate interests. | ||
** | Interest payments reflect the current interest rate paid on the related debt. They do not include anticipated changes in market interest rates, which could have an impact on the interest rate according to the terms of the related debt. |
On January 1, 2011, the Finance group also had $257 million in other liabilities, primarily
accounts payable and accrued expenses, that are payable within the next 12 months.
Critical Accounting Estimates
To prepare our Consolidated Financial Statements to be in conformity with generally accepted
accounting principles, we must make complex and subjective judgments in the selection and
application of accounting policies. The accounting policies that we believe are most critical to
the portrayal of our financial condition and results of operations are listed below. We believe
these policies require our most difficult, subjective and complex judgments in estimating the
effect of inherent uncertainties. This section should be read in conjunction with Note 1 to the
Consolidated Financial Statements, which includes other significant accounting policies.
Allowance for Losses on Finance Receivables Held for Investment
Finance receivables held for investment are generally recorded at the amount of outstanding
principal less allowance for losses. We maintain the allowance for losses on finance receivables
at a level considered adequate to cover inherent losses in the portfolio based on managements
evaluation and analysis by product line. For larger balance accounts specifically identified as
impaired, including large accounts in homogenous portfolios, a reserve is established based on
comparing the carrying value to either a) the expected future cash flows, discounted at the finance
receivables 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;
32
existence and 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, certain critical factors are included in this analysis for each product
line, which are discussed in detail in Note 4 to the Consolidated Financial Statements. We also
establish an allowance for losses by product line to cover probable, but specifically unknown
losses existing in the portfolio. For homogenous 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-homogenous portfolios, including the golf mortgage and timeshare product lines, the allowance
is established as a percentage of watchlist balances, which represents a combination of assumed
default likelihood and loss severity based on historical experience, industry trends and collateral
values. We classify accounts as watchlist based on credit quality indicators discussed in Note 4
to the Consolidated Financial Statements.
In 2010 and 2009, net charge-offs totaled $138 million and $115 million, respectively, compared
with the provision for losses recorded during the periods of $143 million and $267 million,
respectively.
Finance Receivables
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. 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 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.
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 at that time. Conversely, if we determine that there are other finance receivables that
we subsequently determine we no longer intend or have the ability to hold to maturity, these
receivables would be designated as held for sale, and a valuation allowance would be established at
that time, if necessary. At January 1, 2011, if we had classified additional finance receivables
as held for sale, a valuation allowance would likely have been required at that time based on the
fair value estimates we completed for our footnote disclosure requirements. See page 65 in Note 9
to the Consolidated Financial Statements for a table where we have included the carrying value and
fair value for the financial assets and liabilities that currently are not recorded at fair value
in our Consolidated Balance Sheet.
Finance receivables held for sale are carried at the lower of cost or fair value. 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 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.
Long-Term Contracts
We make a substantial portion of our sales to government customers pursuant to long-term
contracts. These contracts require development and delivery of products over multiple years and
may contain fixed-price purchase options for additional products. We
account for these long-term contracts under the percentage-of-completion method of accounting.
Under the percentage-of-completion method, we estimate profit as the difference between total
estimated revenues and cost of a contract. The percentage-of-completion method of accounting
involves the use of various estimating techniques to project costs at completion and, in some
cases,
33
includes estimates of recoveries asserted against the customer for changes in
specifications. Due to the size, length of time and nature of many of our contracts, the
estimation of total contract costs and revenues through completion is complicated and subject to
many variables relative to the outcome of future events over a period of several years. We are
required to make numerous assumptions and estimates relating to items such as expected
engineering requirements, complexity of design and related development costs, performance of
subcontractors, availability and cost of materials, labor productivity and cost, overhead and
capital costs, manufacturing efficiencies and the achievement of contract milestones, including
product deliveries.
Our cost estimation process is based on the professional knowledge and experience of engineers and
program managers along with finance professionals. We update our projections of costs at least
semiannually or when circumstances significantly change. Adjustments to projected costs are
recognized in earnings when determinable. Anticipated losses on contracts are recognized in full
in the period in which the losses become probable and estimable. Due to the significance of
judgment in the estimation process described above, it is likely that materially different revenues
and/or cost of sales amounts could be recorded if we used different assumptions or if the
underlying circumstances were to change. Our earnings could be reduced by a material amount
resulting in a charge to earnings if (a) total estimated contract costs are significantly higher
than expected due to changes in customer specifications prior to contract amendment, (b) total
estimated contract costs are significantly higher than previously estimated due to cost overruns or
inflation, (c) there is a change in engineering efforts required during the development stage of
the contract or (d) we are unable to meet contract milestones.
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. Goodwill is reviewed for potential impairment using a two-step process. In Step 1,
companies are required to estimate fair value of their reporting units, which may be done using
various methodologies, including the income method using discounted cash flows. If its estimated
fair value exceeds its carrying value, the reporting unit is not impaired, and no further analysis
is performed. Otherwise, the amount of the impairment must be determined in Step 2 of the goodwill
impairment test. In Step 2, the implied fair value of goodwill is determined by assigning a fair
value to all of the reporting units assets and liabilities, including any unrecognized intangible
assets, as if the reporting unit had been acquired in a business combination at fair value. If the
carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss would be recognized in an amount equal to that excess.
Fair values are established primarily using discounted cash flows that incorporate assumptions for
the units 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. The revenue growth rates and operating
margins used in our discounted cash flow analysis are based on our businesses strategic plans and
long-range planning forecasts. The long-term growth rate we use to determine the terminal value of
the business is based on our assessment of its minimum expected terminal growth rate, as well as
its past historical growth and broader economic considerations such as gross domestic product,
inflation and the maturity of the markets we serve. We utilize a weighted-average cost of capital
in our impairment analysis that makes assumptions about the capital structure that we believe a
market participant would make and include a risk premium based on an assessment of risks related to
the projected cash flows of each reporting unit. We believe this approach yields a discount rate
that is consistent with an implied rate of return that an independent investor or market
participant would require for an investment in a company having similar risks and business
characteristics to the reporting unit being assessed.
Based on our annual review, the fair value of all of our reporting units exceeded their carrying
values, and we do not believe that there is a reasonable possibility that any units might fail the
Step 1 impairment test in the foreseeable future.
Retirement Benefits
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 also make assumptions regarding employee demographic factors such as retirement
patterns, mortality, turnover and rate of compensation increases. We evaluate and update these
assumptions annually.
To determine the weighted-average expected long-term rate of return on plan assets, we consider
the current and expected asset allocation, as well as historical and expected returns on each plan
asset class. A lower expected rate of return on plan assets will increase pension expense. For
2010, the assumed expected long-term rate of return on plan assets used in calculating pension
expense was 8.26%, compared with 8.58% in 2009. In 2010 and 2009, the assumed rate of return for
our domestic plans, which represent approximately 90% of our total pension assets, was 8.50% and
8.75%, respectively. A 50-basis-point decrease in this long-term rate of return in 2010 would
have resulted in approximately a $22 million increase in pension expense for our domestic plans.
The discount rate enables us to state expected future benefit payments as a present value on the
measurement date, reflecting the current rate at which the pension liabilities could be effectively
settled. This rate should be in line with rates for high-quality fixed
34
income investments
available for the period to maturity of the pension benefits, which fluctuate as long-term interest
rates change. A lower discount rate increases the present value of the benefit obligations and
increases pension expense. In 2010, the weighted-average discount rate used in calculating pension
expense was 6.20%, compared with 6.61% in 2009. For our domestic plans, the assumed discount rate
was 6.25% in 2010, compared with 6.57% for 2009. A 50-basis-point decrease in this discount rate
in 2010 would have resulted in approximate a $25 million increase in pension expense for our
domestic plans.
The trend in healthcare costs is difficult to estimate, and it has an important effect on
postretirement liabilities. The 2010 medical and prescription drug healthcare cost trend rates
represent the weighted-average annual projected rate of increase in the per capita cost of covered
benefits. The 2010 medical rate of 8% is assumed to decrease to 5% by 2020 and then remain at that
level. The 2010 prescription drug rate of 9% is assumed to decrease to 5% by 2020 and then remain
at that level. See Note 13 to the Consolidated Financial Statements for the impact of a
one-percentage-point change in the cost trend rate.
Warranty Liabilities
We provide limited warranty and product maintenance programs, including parts and labor, for
certain products for periods ranging from one to five years. A significant portion of these
liabilities arises from our commercial aircraft businesses. We also may incur costs related to
product recalls. 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 costs per claim, contractual
recoveries from vendors, and historical and anticipated rates of warranty claims, including
production and warranty patterns for new models. During our initial aircraft model launches, we
typically incur higher warranty-related costs until the production process matures, at which point
warranty costs moderate. We assess the adequacy of our recorded warranty and product maintenance
liabilities periodically and adjust the amounts as necessary. Adjustments are made to accruals as
claim data and actual experience warrant. Should future warranty experience differ materially from
our historical experience, we may be required to record additional warranty liabilities, which
could have a material adverse effect on our results of operations and cash flows in the period in
which these additional liabilities are required.
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.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax
authorities, which may result in proposed assessments. Our estimate of the potential outcome for
any uncertain tax issue is highly judgmental. We assess our income tax positions and record tax
benefits for all years subject to examination based upon our evaluation of the facts, circumstances
and information available at the reporting date. For those tax positions for which it is more
likely than not that a tax benefit will be sustained, we record the largest amount of tax benefit
with a greater than 50% likelihood of being realized upon settlement with a taxing authority that
has full knowledge of all relevant information. Interest and penalties are accrued, where
applicable. We recognize net tax-related interest and penalties for continuing operations in
income tax expense. If we do not believe that it is more likely than not that a tax benefit will
be sustained, no tax benefit is recognized. However, our future results may include favorable or
unfavorable adjustments to our estimated tax liabilities due to closure of income tax examinations,
new regulatory or judicial pronouncements, or other relevant events. As a result, our effective
tax rate may fluctuate significantly on a quarterly and annual basis.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risks
Our financial results are affected by changes in the U.S. and foreign interest rates. As part of
managing this risk, we seek to achieve a prudent balance between floating- and fixed-rate
exposures. We continually monitor our mix of these exposures and adjust the mix, as necessary.
Our Finance group limits its risk to changes in interest rates with its strategy of matching
floating-rate assets with floating-rate liabilities. This strategy includes the use of interest
rate exchange agreements. At January 1, 2011, floating-rate liabilities in excess of floating-rate
assets were $591 million, after considering interest rate exchange agreements and the treatment of
$640 million of floating-rate loans with index-rate floors as fixed-rate loans. These loans have
index rates that are, on average, 198 basis points above the applicable index rate (predominately
the Prime rate). The Finance group has benefited from interest rate floor agreements in the recent
low-rate environment; however, in a rising rate environment, this benefit will dissipate until the
Prime rate exceeds the floor
rates embedded in these agreements. The net effect of interest rate exchange agreements designated
as hedges of debt decreased interest expense for our Finance group by $28 million, $56 million and
$25 million in 2010, 2009 and 2008, respectively.
35
Foreign Exchange Risks
Our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which our products are manufactured and/or sold. The impact of foreign exchange rate changes for 2010 and 2009 from the prior year for each period is provided below:
Our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which our products are manufactured and/or sold. The impact of foreign exchange rate changes for 2010 and 2009 from the prior year for each period is provided below:
(In millions) | 2010 | 2009 | ||||||
Impact of foreign exchange rates increased (decreased): |
||||||||
Revenues |
$ | (34 | ) | $ | (51 | ) | ||
Segment profit |
(7 | ) | (2 | ) | ||||
For our manufacturing operations, we manage exposures to foreign currency assets and earnings
primarily by funding certain foreign currency-denominated assets with liabilities in the same
currency so that certain exposures are naturally offset. We primarily use borrowings denominated
in euro and British pound sterling for these purposes. In managing our foreign currency
transaction exposures, we also enter into foreign currency forward exchange and option contracts.
These contracts generally are used to fix the local currency cost of purchased goods or services
or selling prices denominated in currencies other than the functional currency. The notional
amount of outstanding foreign exchange contracts and foreign currency options was approximately
$0.6 billion and $1.0 billion at the end of 2010 and 2009, respectively.
Quantitative Risk Measures
In the normal course of business, we enter into financial instruments for purposes other than trading. To quantify the market risk inherent in our financial instruments, we utilize a sensitivity analysis. The financial instruments that are subject to market risk (interest rate risk, foreign exchange rate risk and equity price risk) include finance receivables (excluding lease receivables), debt (excluding lease obligations), interest rate exchange agreements and foreign currency exchange contracts.
In the normal course of business, we enter into financial instruments for purposes other than trading. To quantify the market risk inherent in our financial instruments, we utilize a sensitivity analysis. The financial instruments that are subject to market risk (interest rate risk, foreign exchange rate risk and equity price risk) include finance receivables (excluding lease receivables), debt (excluding lease obligations), interest rate exchange agreements and foreign currency exchange contracts.
Presented below is a sensitivity analysis of the fair value of financial instruments outstanding at
year-end. We estimate the fair value of the financial instruments using discounted cash flow
analysis and indicative market pricing as reported by leading financial news and data providers.
This sensitivity analysis is most likely not indicative of actual results in the future. The
following table illustrates the sensitivity to a hypothetical change in the fair value of the
financial instruments assuming a 10% decrease in interest rates and a 10% strengthening in exchange
rates against the U.S. dollar:
2010 | 2009 | |||||||||||||||||||||||
Sensitivity of | Sensitivity of | |||||||||||||||||||||||
Fair Value | Fair Value | |||||||||||||||||||||||
Carrying | Fair | to a 10% | Carrying | Fair | to a 10% | |||||||||||||||||||
(In millions) | Value | * | Value | * | Change | Value | * | Value | * | Change | ||||||||||||||
Manufacturing group |
||||||||||||||||||||||||
Foreign exchange rate risk |
||||||||||||||||||||||||
Debt |
$ | (549 | ) | $ | (549 | ) | $ | (55 | ) | $ | (589 | ) | $ | (545 | ) | $ | (55 | ) | ||||||
Foreign currency exchange contracts |
42 | 42 | 39 | 58 | 58 | 46 | ||||||||||||||||||
$ | (507 | ) | $ | (507 | ) | $ | (16 | ) | $ | (531 | ) | $ | (487 | ) | $ | (9 | ) | |||||||
Interest rate risk |
||||||||||||||||||||||||
Debt |
$ | (2,172 | ) | $ | (2,698 | ) | $ | (22 | ) | $ | (3,474 | ) | $ | (3,762 | ) | $ | (37 | ) | ||||||
Finance group |
||||||||||||||||||||||||
Interest rate risk |
||||||||||||||||||||||||
Finance receivables |
$ | 3,758 | $ | 3,544 | $ | 114 | $ | 5,952 | $ | 5,494 | $ | 135 | ||||||||||||
Debt, including intergroup |
(3,975 | ) | (3,843 | ) | (47 | ) | (6,115 | ) | (5,887 | ) | (54 | ) | ||||||||||||
Interest rate exchanges debt |
34 | 34 | 1 | 58 | 58 | 4 | ||||||||||||||||||
Interest rate exchanges receivables |
(8 | ) | (8 | ) | (2 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||||||
$ | (191 | ) | $ | (273 | ) | $ | 66 | $ | (106 | ) | $ | (336 | ) | $ | 84 | |||||||||
* | The value represents an asset or (liability). |
36
Item 8. Financial Statements and Supplementary Data
Our Consolidated Financial Statements and the related reports of our independent registered
public accounting firm thereon are included in this Annual Report on Form 10-K on the pages
indicated below.
Page | ||
Report of Management |
38 | |
Reports of Independent Registered Public Accounting Firm |
39 | |
Consolidated Statements of Operations for each of the years in the three-year period ended January 1, 2011 |
41 | |
Consolidated Balance Sheets as of January 1, 2011 and January 2, 2010 |
42 | |
Consolidated Statements of Shareholders Equity for each of the years in the three-year period ended January 1, 2011 |
43 | |
Consolidated Statements of Cash Flows for each of the years in the three-year period ended January 1, 2011 |
44 | |
Notes to the Consolidated Financial Statements |
46 | |
Supplementary Information: |
||
Quarterly Data for 2010 and 2009 (Unaudited) |
83 | |
Schedule II Valuation and Qualifying Accounts |
84 |
All other schedules are omitted either because they are not applicable or not required or because
the required information is included in the financial statements or notes thereto.
37
Report of Management
Management is responsible for the integrity and objectivity of the financial data presented in this
Annual Report on Form 10-K. The Consolidated Financial Statements have been prepared in conformity
with U.S. generally accepted accounting principles and include amounts based on managements best
estimates and judgments. Management also is responsible for establishing and maintaining adequate
internal control over financial reporting for Textron Inc. as such term is defined in Exchange Act
Rules 13a-15(f). With the participation of our management, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the framework in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal
Control Integrated
Framework, we have concluded that Textron Inc. maintained, in all material respects, effective
internal control over financial reporting as of January 1, 2011.
The independent registered public accounting firm, Ernst & Young LLP, has audited the
Consolidated Financial Statements of Textron Inc. and has issued an attestation report on
Textrons internal controls over financial reporting as of January 1, 2011, as stated in its
reports, which are included herein.
We conduct our business in accordance with the standards outlined in the Textron Business Conduct
Guidelines, which are communicated to all employees. Honesty, integrity and high ethical standards
are the core values of how we conduct business. Every Textron business prepares and carries out an
annual Compliance Plan to ensure these values and standards are maintained. Our internal control
structure is designed to provide reasonable assurance, at appropriate cost, that assets are
safeguarded and that transactions are properly executed and recorded. The internal control
structure includes, among other things, established policies and procedures, an internal audit
function, and the selection and training of qualified personnel. Textrons management is
responsible for implementing effective internal control systems and monitoring their effectiveness,
as well as developing and executing an annual internal control plan.
The Audit Committee of our Board of Directors, on behalf of the shareholders, oversees managements
financial reporting responsibilities. The Audit Committee consists of five directors who are not
officers or employees of Textron and meets regularly with the independent auditors, management and
our internal auditors to review matters relating to financial reporting, internal accounting
controls and auditing. Both the independent auditors and the internal auditors have free and full
access to senior management and the Audit Committee.
/s/ Scott C. Donnelly
|
/s/ Frank T. Connor | |
Scott C. Donnelly
|
Frank T. Connor | |
Chairman, President and Chief Executive Officer
|
Executive Vice President and Chief Financial Officer | |
March
1, 2011 |
38
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Textron Inc.
We have audited Textron Inc.s internal
control over financial reporting as of January 1, 2011,
based on criteria established in Internal Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Textron Inc.s
management is responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting included
in the accompanying Report of Management. Our responsibility is to express an opinion on the
companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Textron Inc. maintained, in all material respects, effective internal control over
financial reporting as of January 1, 2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Consolidated Balance Sheets of Textron Inc. as of January 1, 2011 and
January 2, 2010, and the related Consolidated Statements of Operations, Shareholders Equity and
Cash Flows for each of the three years in the period ended January 1, 2011 of Textron Inc. and
our report dated March 1, 2011 expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Boston, Massachusetts
March 1, 2011
Boston, Massachusetts
March 1, 2011
39
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Textron Inc.
We have audited the accompanying Consolidated Balance Sheets of Textron Inc. as of January 1, 2011
and January 2, 2010, and the related Consolidated Statements of Operations, Shareholders Equity
and Cash Flows for each of the three years in the period ended January 1, 2011. Our audits also
included the financial statement schedule contained on page 84. These financial statements and
schedule are the responsibility of the companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Textron Inc. at January 1, 2011 and January 2,
2010 and the consolidated results of its operations and its cash flows for each of the three years
in the period ended January 1, 2011, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight
Board (United States), Textron Inc.s internal control over financial reporting as of January 1,
2011, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and
our report dated March 1,
2011 expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Boston, Massachusetts
March 1, 2011
Boston, Massachusetts
March 1, 2011
40
Consolidated Statements of Operations
For each of the years in the three-year period ended January 1, 2011
(In millions, except per share data) | 2010 | 2009 | 2008 | |||||||||
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 |
$ | 0.30 | $ | (0.28 | ) | $ | 1.29 | |||||
Discontinued operations |
(0.02 | ) | 0.16 | 0.65 | ||||||||
Diluted earnings per share |
$ | 0.28 | $ | (0.12 | ) | $ | 1.94 | |||||
See Notes to the Consolidated Financial Statements.
41
Consolidated Balance Sheets
January 1, | January 2, | |||||||
(In millions, except share data) | 2011 | 2010 | ||||||
Assets |
||||||||
Manufacturing group |
||||||||
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 Manufacturing group assets |
10,333 | 11,428 | ||||||
Finance group |
||||||||
Cash and cash 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 Finance group assets |
4,949 | 7,512 | ||||||
Total assets |
$ | 15,282 | $ | 18,940 | ||||
Liabilities and shareholders equity |
||||||||
Liabilities |
||||||||
Manufacturing group |
||||||||
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 Manufacturing group liabilities |
7,933 | 9,445 | ||||||
Finance group |
||||||||
Other liabilities |
391 | 564 | ||||||
Due to Manufacturing group |
326 | 438 | ||||||
Debt |
3,660 | 5,667 | ||||||
Total Finance group liabilities |
4,377 | 6,669 | ||||||
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 | ) | ||||
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 | ||||
See Notes to the Consolidated Financial Statements.
42
Consolidated Statements of Shareholders Equity
Accumu- | ||||||||||||||||||||||||||||
lated | ||||||||||||||||||||||||||||
Other | Total | |||||||||||||||||||||||||||
Compre- | Share- | |||||||||||||||||||||||||||
Preferred | Common | Capital | Retained | Treasury | hensive | holders | ||||||||||||||||||||||
(In millions, except per share data) | Stock | Stock | Surplus | Earnings | Stock | Loss | Equity | |||||||||||||||||||||
Balance at December 29, 2007 |
$ | 2 | $ | 32 | $ | 1,193 | $ | 2,766 | $ | (86 | ) | $ | (400 | ) | $ | 3,507 | ||||||||||||
Net income |
486 | 486 | ||||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||
Foreign currency translation adjustment |
(195 | ) | (195 | ) | ||||||||||||||||||||||||
Deferred 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 per share) |
(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 | ||||||||||||||||||||||||||
Balance at January 3, 2009 |
2 | 32 | 1,229 | 3,025 | (500 | ) | (1,422 | ) | 2,366 | |||||||||||||||||||
Net loss |
(31 | ) | (31 | ) | ||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||
Foreign currency translation adjustment |
23 | 23 | ||||||||||||||||||||||||||
Deferred gains on hedge contracts |
67 | 67 | ||||||||||||||||||||||||||
Pension adjustments |
(25 | ) | (25 | ) | ||||||||||||||||||||||||
Reclassification adjustments |
21 | 21 | ||||||||||||||||||||||||||
Pension curtailment |
15 | 15 | ||||||||||||||||||||||||||
Total other comprehensive income (loss) |
70 | |||||||||||||||||||||||||||
Dividends declared ($0.08 per share) |
(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 |
3 | 330 | 333 | |||||||||||||||||||||||||
Issuance of common stock for employee stock plans |
(210 | ) | 270 | 60 | ||||||||||||||||||||||||
Redemption of preferred stock |
(2 | ) | 1 | (1 | ) | |||||||||||||||||||||||
Income tax impact of employee stock transactions |
(5 | ) | (5 | ) | ||||||||||||||||||||||||
Balance at January 2, 2010 |
| 35 | 1,369 | 2,973 | (230 | ) | (1,321 | ) | 2,826 | |||||||||||||||||||
Net income |
86 | 86 | ||||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||
Foreign currency translation adjustment |
(2 | ) | (2 | ) | ||||||||||||||||||||||||
Deferred gains 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 ($0.08 per share) |
(22 | ) | (22 | ) | ||||||||||||||||||||||||
Share-based compensation |
22 | 22 | ||||||||||||||||||||||||||
Exercise of stock options |
7 | 7 | ||||||||||||||||||||||||||
Issuance of common stock for employee stock plans |
(94 | ) | 145 | 51 | ||||||||||||||||||||||||
Income tax impact of employee stock transactions |
(3 | ) | (3 | ) | ||||||||||||||||||||||||
Balance at January 1, 2011 |
$ | | $ | 35 | $ | 1,301 | $ | 3,037 | $ | (85 | ) | $ | (1,316 | ) | $ | 2,972 | ||||||||||||
See Notes to the Consolidated Financial Statements.
43
Consolidated Statements of Cash Flows
For each of the years in the three-year period ended January 1, 2011
Consolidated | ||||||||||||
(In millions) | 2010 | 2009 | 2008 | |||||||||
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 |
8 | (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 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 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 | | |||||||||
Purchase 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 |
6 | | 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 | ||||||
See Notes to the Consolidated Financial Statements.
44
Consolidated Statements of Cash Flows
continued
For each of the years in the three-year period ended January 1, 2011
Manufacturing Group | Finance Group | |||||||||||||||||||||||
(In millions) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||||||
Net income (loss) |
$ | 314 | $ | 175 | $ | 947 | $ | (228 | ) | $ | (206 | ) | $ | (461 | ) | |||||||||
Less: Income (loss) from discontinued operations |
(6 | ) | 42 | 162 | | | | |||||||||||||||||
Income (loss) from continuing operations |
320 | 133 | 785 | (228 | ) | (206 | ) | (461 | ) | |||||||||||||||
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 | 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 |
| | | 8 | (15 | ) | 293 | |||||||||||||||||
Goodwill and other asset impairment charges |
18 | 144 | 11 | 1 | | 180 | ||||||||||||||||||
Deferred income taxes |
131 | (61 | ) | 51 | (62 | ) | (204 | ) | (94 | ) | ||||||||||||||
Other, net |
110 | 112 | 103 | (1 | ) | (30 | ) | | ||||||||||||||||
Changes in assets and liabilities |
||||||||||||||||||||||||
Accounts receivable, net |
(1 | ) | 17 | 15 | | | | |||||||||||||||||
Inventories |
(11 | ) | 810 | (648 | ) | | | | ||||||||||||||||
Other assets |
9 | (255 | ) | (98 | ) | 32 | (5 | ) | 18 | |||||||||||||||
Accounts payable |
54 | (535 | ) | 276 | | | | |||||||||||||||||
Accrued and other liabilities |
(384 | ) | (85 | ) | 21 | (71 | ) | 166 | (54 | ) | ||||||||||||||
Captive finance receivables, net |
| | | | | | ||||||||||||||||||
Other operating activities, net |
| 6 | 14 | | 25 | 11 | ||||||||||||||||||
Net cash provided by (used in) operating activities of continuing operations |
730 | 738 | 407 | (35 | ) | 196 | 167 | |||||||||||||||||
Net cash used in operating activities of discontinued operations |
(9 | ) | (17 | ) | (14 | ) | | | | |||||||||||||||
Net cash provided by (used in) operating activities |
721 | 721 | 393 | (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 |
(57 | ) | | (109 | ) | | | | ||||||||||||||||
Capital expenditures |
(270 | ) | (238 | ) | (537 | ) | | | (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 |
(26 | ) | (50 | ) | 9 | 39 | 11 | 10 | ||||||||||||||||
Net cash provided by (used in) investing activities of continuing operations |
(353 | ) | (288 | ) | (637 | ) | 2,305 | 2,153 | (64 | ) | ||||||||||||||
Net cash provided by investing activities of discontinued operations |
| 211 | 471 | | | | ||||||||||||||||||
Net cash provided by (used in) investing activities |
(353 | ) | (77 | ) | (166 | ) | 2,305 | 2,153 | (64 | ) | ||||||||||||||
Cash flows from financing activities |
||||||||||||||||||||||||
Proceeds from long-term lines of credit |
| 1,230 | | | 1,740 | | ||||||||||||||||||
Payments on long-term lines of credit |
(1,167 | ) | (63 | ) | | (300 | ) | | | |||||||||||||||
Proceeds from issuance of long-term debt |
| 595 | | 231 | 323 | 1,461 | ||||||||||||||||||
Principal payments on long-term debt |
(130 | ) | (392 | ) | (348 | ) | (2,111 | ) | (3,771 | ) | (1,574 | ) | ||||||||||||
Increase (decrease) in short-term debt |
| (869 | ) | 867 | | (768 | ) | (649 | ) | |||||||||||||||
Proceeds (payments) on borrowings against officers life insurance policies |
| (412 | ) | 222 | | | | |||||||||||||||||
Intergroup financing |
98 | (280 | ) | (133 | ) | (111 | ) | 280 | 133 | |||||||||||||||
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 and excess tax benefit on options |
6 | | 50 | | | | ||||||||||||||||||
Purchases of Textron common stock |
| | (533 | ) | | | | |||||||||||||||||
Capital contributions paid to Finance group under Support Agreement |
| | | 383 | 270 | 625 | ||||||||||||||||||
Capital contributions paid to Cessna Export Finance Corp. |
| | | 30 | 40 | | ||||||||||||||||||
Dividends paid |
(22 | ) | (21 | ) | (284 | ) | (505 | ) | (349 | ) | (142 | ) | ||||||||||||
Net cash provided by (used in) financing activities of continuing operations |
(1,215 | ) | 563 | (159 | ) | (2,383 | ) | (2,235 | ) | (146 | ) | |||||||||||||
Net cash used in financing activities of discontinued operations |
| | (2 | ) | | | | |||||||||||||||||
Net cash provided by (used in) financing activities |
(1,215 | ) | 563 | (161 | ) | (2,383 | ) | (2,235 | ) | (146 | ) | |||||||||||||
Effect of exchange rate changes on cash and equivalents |
(3 | ) | 10 | (6 | ) | 2 | 14 | (1 | ) | |||||||||||||||
Net increase (decrease) in cash and equivalents |
(850 | ) | 1,217 | 60 | (111 | ) | 128 | (44 | ) | |||||||||||||||
Cash and equivalents at beginning of year |
1,748 | 531 | 471 | 144 | 16 | 60 | ||||||||||||||||||
Cash and equivalents at end of year |
$ | 898 | $ | 1,748 | $ | 531 | $ | 33 | $ | 144 | $ | 16 | ||||||||||||
See Notes to the Consolidated Financial Statements.
45
Notes to the Consolidated Financial Statements
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
groups activities, investors, rating agencies and analysts use different measures to evaluate each
groups 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 groups
statement of cash flows. Meanwhile, in the Manufacturing groups statement of cash flows, the
cash received from the Finance group on the customers 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
46
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 companys 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
47
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 managements 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
receivables 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 borrowers
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, borrowers 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.
48
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 units 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
49
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
50
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.
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.
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
segments 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 segments goodwill based on prevailing market conditions and the plan
to downsize the segment.
51
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.
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
52
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 propertys 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.
53
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 accounts 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
54
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 | ||||||||||||||||||
55
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:
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 groups balance sheets are summarized below:
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 groups 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 groups balance sheet to the Manufacturing groups
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.
56
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.
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.
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.
57
Note 6. Property, Plant and Equipment, Net
Our Manufacturing groups 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
groups depreciation expense, which includes amortization expense on capital leases, totaled $308
million, $317 million and $302 million in 2010, 2009 and 2008, respectively.
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. |
58
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 | |||||||||||
59
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 holders 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 holders 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.
60
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 shareholders 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.
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 managements 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. |
61
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 groups 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 counterpartys 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
62
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
63
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 units 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.
64
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.
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.
65
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 | ) | ||||
66
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 | ) | ||||||
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 | |||||||||||||||
67
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.
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 entitys 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 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 entitys 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.
68
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.
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 executives
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.
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
69
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.
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.
70
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:
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.
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.
71
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 | |||||
72
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:
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 | ||||||||||
73
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.
74
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 funds administrator. The
administrator for the fund aggregates these valuations with the other assets and liabilities to
calculate the net asset value of the fund.
75
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- | ||||||||||||
retirement | Expected | |||||||||||
Benefits | Medicare | |||||||||||
Pension | Other than | Part D | ||||||||||
(In millions) | Benefits | Pensions | Subsidy | |||||||||
2011 |
$ | 344 | $ | 64 | $ | (3 | ) | |||||
2012 |
350 | 63 | (3 | ) | ||||||||
2013 |
354 | 63 | (3 | ) | ||||||||
2014 |
360 | 62 | (2 | ) | ||||||||
2015 |
365 | 60 | (2 | ) | ||||||||
2016 2020 |
1,960 | 264 | (10 | ) | ||||||||
Note 14. Income Taxes
We conduct business globally and, as a result, file numerous consolidated and separate income tax
returns within and outside the U.S. For all of our U.S. subsidiaries, we file a consolidated
federal income tax return. Income (loss) from continuing operations before income taxes is as
follows:
(In millions) | 2010 | 2009 | 2008 | |||||||||
U.S. |
$ | (63 | ) | $ | (229 | ) | $ | 598 | ||||
Non-U.S. |
149 | 80 | 31 | |||||||||
Total income (loss) from continuing operations before income taxes |
$ | 86 | $ | (149 | ) | $ | 629 | |||||
Income tax expense (benefit) for continuing operations is summarized as follows:
(In millions) | 2010 | 2009 | 2008 | |||||||||
Current: |
||||||||||||
Federal |
$ | (79 | ) | $ | 160 | $ | 317 | |||||
State |
3 | 17 | 16 | |||||||||
Non-U.S. |
19 | (8 | ) | 14 | ||||||||
(57 | ) | 169 | 347 | |||||||||
Deferred: |
||||||||||||
Federal |
59 | (238 | ) | (61 | ) | |||||||
State |
(5 | ) | (22 | ) | 5 | |||||||
Non-U.S. |
(3 | ) | 15 | 14 | ||||||||
51 | (245 | ) | (42 | ) | ||||||||
Income tax expense (benefit) |
$ | (6 | ) | $ | (76 | ) | $ | 305 | ||||
76
The current federal and state provisions for 2009 include $85 million of tax related to the
sale of certain leverage leases in the Finance segment for which we had previously recorded
significant deferred tax liabilities. A substantial portion of the tax was paid in 2010.
The following table reconciles the federal statutory income tax rate to our effective income tax
rate for continuing operations:
2010 | 2009 | 2008 | |||||||||||
Federal statutory income tax rate |
35.0 | % | (35.0 | )% | 35.0 | % | |||||||
Increase (decrease) in taxes resulting from: |
|||||||||||||
State income taxes |
(2.7 | ) | 0.4 | 2.3 | |||||||||
Non-U.S. tax rate differential and foreign tax credits |
(60.5 | ) | (13.5 | ) | (5.7 | ) | |||||||
Unrecognized tax benefits and related interest |
17.5 | (4.1 | ) | 3.4 | |||||||||
Nondeductible healthcare claims |
12.7 | | | ||||||||||
Change in status of subsidiaries |
12.0 | (3.6 | ) | 5.0 | |||||||||
Research credit |
(5.4 | ) | (4.7 | ) | (1.9 | ) | |||||||
Cash surrender value of life insurance |
(5.1 | ) | (1.9 | ) | (0.8 | ) | |||||||
Valuation allowance on contingent receipts |
(2.0 | ) | (7.3 | ) | (0.5 | ) | |||||||
Goodwill impairment |
| 18.5 | 8.4 | ||||||||||
Manufacturing deduction |
| (3.1 | ) | (2.8 | ) | ||||||||
Other, net |
(7.9 | ) | 3.3 | 6.2 | |||||||||
Effective income tax rate |
(6.4 | )% | (51.0 | )% | 48.6 | % | |||||||
The amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and non-U.S.
tax authorities, which may result in proposed assessments. Our estimate for the potential outcome
for any uncertain tax issue is highly judgmental. We assess our income tax positions and record
tax benefits for all years subject to examination based upon managements evaluation of the facts,
circumstances and information available at the reporting date. For those tax positions for which
it is more likely than not that a tax benefit will be sustained, we record the largest amount of
tax benefit with a greater than 50% likelihood of being realized upon settlement with a taxing
authority that has full knowledge of all relevant information. Interest and penalties are accrued,
where applicable. If we do not believe that it is not more likely than not that a tax benefit will
be sustained, no tax benefit is recognized.
Our future results may include favorable or unfavorable adjustments to our estimated tax
liabilities due to closure of income tax examinations, new regulatory or judicial pronouncements,
expiration of statutes of limitations or other relevant events. As a result, our effective tax
rate may fluctuate significantly on a quarterly and annual basis.
Our unrecognized tax benefits represent tax positions for which reserves have been established.
Unrecognized state tax benefits and interest related to unrecognized tax benefits are reflected net
of applicable tax benefits. A reconciliation of our unrecognized tax benefits, excluding accrued
interest, is as follows:
January 1, | January 2, | |||||||
(In millions) | 2011 | 2010 | ||||||
Balance at beginning of year |
$ | 294 | $ | 324 | ||||
Additions for tax positions related to current year |
7 | 9 | ||||||
Additions for tax positions of prior years |
8 | 11 | ||||||
Reductions for tax positions of prior years |
(17 | ) | (43 | ) | ||||
Reductions for expiration of statute of limitations |
(5 | ) | (1 | ) | ||||
Reductions for settlements with tax authorities |
(2 | ) | (6 | ) | ||||
Balance at end of year |
$ | 285 | $ | 294 | ||||
At January 1, 2011 and January 2, 2010, approximately $197 million and $208 million, respectively,
of these unrecognized tax benefits, if recognized, would favorably affect our effective tax rate in
a future period. The remaining $88 million and $86 million, respectively, in unrecognized tax
benefits are related to discontinued operations. Unrecognized tax benefits were reduced in 2010,
primarily due to an international related favorable tax audit settlement, and were reduced in 2009,
primarily due to the sale of CESCOM assets and the HR Textron and Fluid & Power business unit
sales. Based on the outcome of appeals proceedings and the expiration of statutes of limitations,
it is possible that certain audit cycles for U.S. and foreign jurisdictions could be completed
during the next 12 months, which could result in a change in our balance of unrecognized tax
benefits with the aggregate tax effect of the differences between tax return positions and the
benefits being recognized in our financial statements. Although the outcome of these matters
cannot be determined, we believe adequate provision has been made for any potential unfavorable
financial statement impact.
In the normal course of business, we are subject to examination by taxing authorities throughout
the world, including major jurisdictions such as Belgium, Canada, Germany, Japan, the United
Kingdom and the U.S. With few exceptions, we no longer are
77
subject to U.S. federal, state and local income tax examinations for years before 1997. We are
no longer subject to non-U.S. income tax examinations in our major jurisdictions for years before
2005.
During 2010, 2009 and 2008, we recognized net tax-related interest expense totaling approximately
$19 million, $12 million and $31 million, respectively, in the Consolidated Statements of
Operations. At January 1, 2011 and January 2, 2010, we had a total of $122 million and $114
million, respectively, of net accrued interest expense included in our Consolidated Balance Sheets.
The tax effects of temporary differences that give rise to significant portions of our net deferred
tax assets and liabilities are as follows:
January 1, | January 2, | |||||||
(In millions) | 2011 | 2010 | ||||||
Deferred tax assets |
||||||||
Obligation for pension and postretirement benefits |
$ | 692 | $ | 765 | ||||
Accrued expenses* |
255 | 267 | ||||||
Deferred compensation |
203 | 197 | ||||||
Allowance for credit losses |
141 | 146 | ||||||
Loss carryforwards |
66 | 60 | ||||||
Deferred income |
59 | 33 | ||||||
Valuation allowance on finance receivables held for sale |
29 | 71 | ||||||
Foreign currency translation adjustment |
| 41 | ||||||
Other, net |
177 | 192 | ||||||
Total deferred tax assets |
1,622 | 1,772 | ||||||
Valuation allowance for deferred tax assets |
(200 | ) | (227 | ) | ||||
$ | 1,422 | $ | 1,545 | |||||
Deferred tax liabilities |
||||||||
Leasing transactions |
$ | (387 | ) | $ | (468 | ) | ||
Amortization of goodwill and other intangibles |
(135 | ) | (146 | ) | ||||
Property, plant and equipment, principally depreciation |
(132 | ) | (115 | ) | ||||
Inventory |
(15 | ) | (5 | ) | ||||
Total deferred tax liabilities |
(669 | ) | (734 | ) | ||||
Net deferred tax asset |
$ | 753 | $ | 811 | ||||
* Accrued expenses includes warranty and product maintenance reserves, self-insured liabilities, interest and restructuring charges. |
We believe that our earnings during the periods when the temporary differences become deductible
will be sufficient to realize the related future income tax benefits. For those jurisdictions
where the expiration date of tax carryforwards or the projected operation results indicate that
realization is not likely, a valuation allowance is provided.
The following table presents the breakdown between current and long-term net deferred tax assets:
January 1, | January 2, | |||||||
(In millions) | 2011 | 2010 | ||||||
Current |
$ | 290 | $ | 315 | ||||
Non-current |
571 | 632 | ||||||
861 | 947 | |||||||
Finance groups net deferred tax liability |
(108 | ) | (136 | ) | ||||
Net deferred tax asset |
$ | 753 | $ | 811 | ||||
We have net operating loss and credit carryforwards at the end of each year as follows:
January 1, | January 2, | |||||||
(In millions) | 2011 | 2010 | ||||||
Non-U.S. net operating loss carryforwards with no expiration |
$ | 126 | $ | 157 | ||||
Non-U.S. net operating loss carryforwards expiring through 2030 |
30 | 18 | ||||||
State unitary net operating loss carryforwards, net of tax benefits, expiring through 2026 |
4 | | ||||||
U.S. foreign tax credits expiring in 2021 |
16 | | ||||||
State credit carryforwards beginning to expire in 2018 |
12 | 11 | ||||||
The undistributed earnings of our non-U.S. subsidiaries approximated $329 million at January 1,
2011. We consider the undistributed earnings to be indefinitely reinvested; therefore, a deferred
tax liability has not been provided on these earnings. Because of the effect
78
of U.S. foreign tax credits, it is not practicable to estimate the amount of tax that might be
payable on these earnings in the event they no longer are indefinitely reinvested.
Note 15. Contingencies and Commitments
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, health and safety 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, in an aviation products
liability case involving a 1999 accident. In January 2011, this matter was settled with the
plaintiffs at no additional expense to us beyond the estimated defense costs we previously accrued
in 2010.
In the ordinary course of business, we enter into standby letter of credit agreements and surety
bonds with financial institutions to meet various performance and other obligations. These
outstanding letter of credit arrangements and surety bonds aggregated to approximately $325 million
at the end of 2010.
Environmental Remediation
As with other industrial enterprises engaged in similar businesses, we are involved in a number of
remedial actions under various federal and state laws and regulations relating to the environment
that impose liability on companies to clean up, or contribute to the cost of cleaning up, sites on
which hazardous wastes or materials were disposed or released. Our accrued environmental
liabilities relate to disposal costs, U.S. Environmental Protection Agency oversight costs, legal
fees, and operating and maintenance costs for both currently and formerly owned or operated
facilities. Circumstances that can affect the reliability and precision of the accruals include
the identification of additional sites, environmental regulations, level of cleanup required,
technologies available, number and financial condition of other contributors to remediation, and
the time period over which remediation may occur. We believe that any changes to the accruals that
may result from these factors and uncertainties will not have a material effect on our financial
position or results of operations.
Based upon information currently available, we estimate that our potential environmental
liabilities are within the range of $40 million to $170 million. At January 1, 2011, environmental
reserves of approximately $78 million have been established to address these specific estimated
liabilities, including $20 million for sites related to our discontinued operations. We estimate
that we will likely pay our accrued environmental remediation liabilities over the next five to 10
years and have classified $15 million as current liabilities. Expenditures to evaluate and
remediate contaminated sites for continuing operations approximated $5 million, $7 million and $15
million in 2010, 2009 and 2008, respectively, and discontinued operations expenditures totaled $5
million, $4 million and $2 million in 2010, 2009 and 2008, respectively.
Repurchase Commitments
During 2009, we entered into contracts to sell used aircraft that entitle the customer to resell
the aircraft back to us at predetermined values ranging from 80% to 100% of the customers purchase
price for a limited period of time, generally not exceeding 24 months for used aircraft and 36
months for used fractional share interests. Revenue recognition on these sales has been deferred
and totaled $181 million at January 1, 2011 and $186 million at January 2, 2010.
Leases
Rental expense approximated $92 million in 2010, $100 million in 2009 and $106 million in 2008.
Future minimum rental commitments for noncancelable operating leases in effect at January 1, 2011
approximated $60 million for 2011, $47 million for 2012, $38 million for 2013, $31 million for
2014, $27 million for 2015 and a total of $152 million thereafter.
Loan Commitments
At January 2, 2010, the Finance group had $192 million of unused commitments primarily to fund new
and existing customers under revolving lines of credit. These commitments generally have an
original duration of less than three years, and funding under these facilities is dependent on the
availability of eligible collateral and compliance with customary financial covenants. Since many
of the agreements will not be used to the extent committed or will expire unused, the total
commitment amount does not necessarily represent future cash requirements.
79
Note 16. Supplemental Cash Flow Information
We have made the following cash payments:
(In millions) | 2010 | 2009 | 2008 | ||||||||||
Interest paid: |
|||||||||||||
Manufacturing group |
$ | 145 | $ | 116 | $ | 139 | |||||||
Finance group |
127 | 171 | 310 | ||||||||||
Taxes paid, net of refunds received: |
|||||||||||||
Manufacturing group |
59 | 49 | 346 | ||||||||||
Finance group |
101 | (75 | ) | 52 | |||||||||
Discontinued operations |
2 | 156 | 15 | ||||||||||
Cash paid for interest by the Finance group includes amounts paid to the Manufacturing group of $32
million, $3 million and $3 million in 2010, 2009 and 2008, respectively.
In 2010, taxes paid, net of refunds received for the Finance group includes $103 million in taxes
paid primarily attributable to a settlement related to the challenge of tax deductions we took in
prior years for certain leverage lease transactions.
Note 17. Segment and Geographic Data
We operate in, and report financial information for, the following five business segments: Cessna,
Bell, Textron Systems, Industrial and Finance. The accounting policies of the segments are the
same as those described in Note 1.
Cessna products include Citation business jets, Caravan single-engine turboprops, single-engine
piston aircraft, and aftermarket services sold to a diverse base of corporate and individual
buyers.
Bell products include military and commercial helicopters, tiltrotor aircraft and related spare
parts and services for U.S. and non-U.S. governments in the defense and aerospace industries and
general aviation markets.
Textron Systems products include armored security vehicles, advanced marine craft, precision
weapons, airborne and ground-based surveillance systems and services, the Unmanned Aircraft System,
training and simulation systems and countersniper devices, and intelligence and situational
awareness software for U.S. and non-U.S. governments in the defense and aerospace industries and
general aviation markets.
Industrial products and markets include the following:
| Kautex products include blow-molded plastic fuel systems, windshield and headlamp washer systems, engine camshafts and other parts that are marketed primarily to automobile original equipment manufacturers, as well as plastic bottles and containers for various uses; | |
| Greenlee products include powered equipment, electrical test and measurement instruments, hand and hydraulic powered tools, and electrical and fiber optic assemblies, principally used in the electrical construction and maintenance, plumbing, wiring, telecommunications and data communications industries; and | |
| E-Z-GO and Jacobsen products include golf cars; professional turf-maintenance equipment; and off-road, multipurpose utility and specialized turf-care vehicles that are marketed primarily to golf courses, resort communities, municipalities, sporting venues, and commercial and industrial users. |
The Finance segment provided secured commercial loans and leases primarily in North America to the
aviation, golf equipment, asset-based lending, distribution finance, golf mortgage, hotel,
structured capital and timeshare markets through the fourth quarter of 2008, when we announced a
plan to exit the non-captive portion of the commercial finance business of the segment while
retaining the captive portion of the business that supports customer purchases of products that we
manufacture.
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.
80
Our revenues by segment, along with a reconciliation of segment profit to income from
continuing operations before income taxes, are as follows:
Revenues | Segment Profit (Loss) | |||||||||||||||||||||||
(In millions) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
Cessna |
$ | 2,563 | $ | 3,320 | $ | 5,662 | $ | (29 | ) | $ | 198 | $ | 905 | |||||||||||
Bell |
3,241 | 2,842 | 2,827 | 427 | 304 | 278 | ||||||||||||||||||
Textron Systems |
1,979 | 1,899 | 1,880 | 230 | 240 | 251 | ||||||||||||||||||
Industrial |
2,524 | 2,078 | 2,918 | 162 | 27 | 67 | ||||||||||||||||||
Finance |
218 | 361 | 723 | (237 | ) | (294 | ) | (50 | ) | |||||||||||||||
$ | 10,525 | $ | 10,500 | $ | 14,010 | 553 | 475 | 1,451 | ||||||||||||||||
Special charges |
(190 | ) | (317 | ) | (526 | ) | ||||||||||||||||||
Corporate expenses and other, net |
(137 | ) | (164 | ) | (171 | ) | ||||||||||||||||||
Interest expense, net for Manufacturing group |
(140 | ) | (143 | ) | (125 | ) | ||||||||||||||||||
Income (loss) from continuing operations before income taxes |
$ | 86 | $ | (149 | ) | $ | 629 | |||||||||||||||||
Revenues by major product type are summarized below:
Revenues | ||||||||||||
(In millions) | 2010 | 2009 | 2008 | |||||||||
Fixed-wing aircraft |
$ | 2,563 | $ | 3,320 | $ | 5,662 | ||||||
Rotor aircraft |
3,241 | 2,842 | 2,827 | |||||||||
Unmanned aircraft systems, armored security vehicles, precision weapons and other |
1,979 | 1,899 | 1,880 | |||||||||
Fuel systems and functional components |
1,640 | 1,287 | 1,763 | |||||||||
Powered tools, testing and measurement equipment |
330 | 300 | 435 | |||||||||
Golf and turf-care products |
554 | 491 | 720 | |||||||||
Finance |
218 | 361 | 723 | |||||||||
$ | 10,525 | $ | 10,500 | $ | 14,010 | |||||||
Our revenues included sales to the U.S. Government of approximately $3.6 billion, $3.3 billion and
$3.2 billion in 2010, 2009 and 2008, respectively, primarily in the Bell and Textron Systems
segments.
Other information by segment is provided below:
Assets | ||||||||
(In millions) | January 1, 2011 |
January 2, 2010 |
||||||
Cessna |
$ | 2,294 | $ | 2,427 | ||||
Bell |
2,079 | 2,059 | ||||||
Textron Systems |
1,997 | 1,973 | ||||||
Industrial |
1,604 | 1,623 | ||||||
Finance |
4,949 | 7,512 | ||||||
Corporate |
2,359 | 3,346 | ||||||
$ | 15,282 | $ | 18,940 | |||||
Capital Expenditures | Depreciation and Amortization | |||||||||||||||||||||||
(In millions) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
Cessna |
$ | 47 | $ | 65 | $ | 285 | $ | 106 | $ | 115 | $ | 105 | ||||||||||||
Bell |
123 | 101 | 138 | 92 | 83 | 71 | ||||||||||||||||||
Textron Systems |
41 | 31 | 34 | 81 | 85 | 85 | ||||||||||||||||||
Industrial |
51 | 38 | 69 | 72 | 76 | 83 | ||||||||||||||||||
Finance |
| | 8 | 31 | 36 | 40 | ||||||||||||||||||
Corporate |
8 | 3 | 11 | 11 | 14 | 16 | ||||||||||||||||||
$ | 270 | $ | 238 | $ | 545 | $ | 393 | $ | 409 | $ | 400 | |||||||||||||
81
Geographic Data
Presented below is selected financial information of our continuing operations by geographic area:
Revenues* | Property, Plant and Equipment, net** |
|||||||||||||||||||
January 1, | January 2, | |||||||||||||||||||
(In millions) | 2010 | 2009 | 2008 | 2011 | 2010 | |||||||||||||||
United States |
$ | 6,688 | $ | 6,563 | $ | 8,609 | $ | 1,565 | $ | 1,594 | ||||||||||
Europe |
1,448 | 1,625 | 2,601 | 220 | 238 | |||||||||||||||
Canada |
347 | 344 | 431 | 89 | 82 | |||||||||||||||
Latin America and Mexico |
815 | 815 | 1,131 | 22 | 19 | |||||||||||||||
Asia and Australia |
776 | 553 | 753 | 52 | 56 | |||||||||||||||
Middle East and Africa |
451 | 600 | 485 | | | |||||||||||||||
$ | 10,525 | $ | 10,500 | $ | 14,010 | $ | 1,948 | $ | 1,989 | |||||||||||
* Revenues are attributed to countries based on the location of the customer.
** Property, plant and equipment, net are based on the location of the asset.
82
Quarterly Data
(Unaudited) | 2010 | 2009 | |||||||||||||||||||||||||||||||
(Dollars in millions, except per share amounts) | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | |||||||||||||||||||||||||
Revenues |
|||||||||||||||||||||||||||||||||
Cessna |
$ | 433 | $ | 635 | $ | 535 | $ | 960 | $ | 769 | $ | 871 | $ | 825 | $ | 855 | |||||||||||||||||
Bell |
618 | 823 | 825 | 975 | 742 | 670 | 628 | 802 | |||||||||||||||||||||||||
Textron Systems |
458 | 534 | 460 | 527 | 418 | 477 | 502 | 502 | |||||||||||||||||||||||||
Industrial |
625 | 661 | 600 | 638 | 475 | 508 | 523 | 572 | |||||||||||||||||||||||||
Finance |
76 | 56 | 59 | 27 | 122 | 86 | 71 | 82 | |||||||||||||||||||||||||
Total revenues |
$ | 2,210 | $ | 2,709 | $ | 2,479 | $ | 3,127 | $ | 2,526 | $ | 2,612 | $ | 2,549 | $ | 2,813 | |||||||||||||||||
Segment profit |
|||||||||||||||||||||||||||||||||
Cessna |
$ | (24 | ) | $ | 3 | $ | (31 | ) | $ | 23 | $ | 90 | $ | 48 | $ | 32 | $ | 28 | |||||||||||||||
Bell |
74 | 108 | 107 | 138 | 69 | 72 | 79 | 84 | |||||||||||||||||||||||||
Textron Systems |
55 | 70 | 50 | 55 | 52 | 55 | 68 | 65 | |||||||||||||||||||||||||
Industrial |
49 | 51 | 37 | 25 | (9 | ) | 12 | 6 | 18 | ||||||||||||||||||||||||
Finance |
(58 | ) | (71 | ) | (51 | ) | (57 | ) | (66 | ) | (99 | ) | (64 | ) | (65 | ) | |||||||||||||||||
Total segment profit |
96 | 161 | 112 | 184 | 136 | 88 | 121 | 130 | |||||||||||||||||||||||||
Special charges (a) |
(12 | ) | (10 | ) | (114 | ) | (54 | ) | (32 | ) | (129 | ) | (42 | ) | (114 | ) | |||||||||||||||||
Corporate expenses and other, net |
(37 | ) | (17 | ) | (35 | ) | (48 | ) | (35 | ) | (45 | ) | (44 | ) | (40 | ) | |||||||||||||||||
Interest expense, net for Manufacturing group |
(36 | ) | (35 | ) | (32 | ) | (37 | ) | (28 | ) | (34 | ) | (40 | ) | (41 | ) | |||||||||||||||||
Income tax benefit (expense) |
(15 | ) | (18 | ) | 21 | 18 | 2 | 58 | 11 | 5 | |||||||||||||||||||||||
Income (loss) from continuing operations |
(4 | ) | 81 | (48 | ) | 63 | 43 | (62 | ) | 6 | (60 | ) | |||||||||||||||||||||
Income (loss) from discontinued operations, net of
income taxes |
(4 | ) | 1 | | (3 | ) | 43 | 4 | (2 | ) | (3 | ) | |||||||||||||||||||||
Net income (loss) |
$ | (8 | ) | $ | 82 | $ | (48 | ) | $ | 60 | $ | 86 | $ | (58 | ) | $ | 4 | $ | (63 | ) | |||||||||||||
Basic earnings per share |
|||||||||||||||||||||||||||||||||
Continuing operations |
$ | (0.01 | ) | $ | 0.30 | $ | (0.17 | ) | $ | 0.23 | $ | 0.18 | $ | (0.23 | ) | $ | 0.02 | $ | (0.22 | ) | |||||||||||||
Discontinued operations |
(0.02 | ) | | | (0.01 | ) | 0.17 | 0.01 | (0.01 | ) | (0.01 | ) | |||||||||||||||||||||
Basic earnings per share |
$ | (0.03 | ) | $ | 0.30 | $ | (0.17 | ) | $ | 0.22 | $ | 0.35 | $ | (0.22 | ) | $ | 0.01 | $ | (0.23 | ) | |||||||||||||
Basic average shares outstanding (In thousands) |
273,174 | 274,098 | 274,896 | 275,640 | 243,988 | 264,091 | 271,224 | 272,168 | |||||||||||||||||||||||||
Diluted earnings per share (b) |
|||||||||||||||||||||||||||||||||
Continuing operations |
$ | (0.01 | ) | $ | 0.27 | $ | (0.17 | ) | $ | 0.20 | $ | 0.18 | $ | (0.23 | ) | $ | 0.02 | $ | (0.22 | ) | |||||||||||||
Discontinued operations |
(0.02 | ) | | | (0.01 | ) | 0.17 | 0.01 | (0.01 | ) | (0.01 | ) | |||||||||||||||||||||
Diluted earnings per share |
$ | (0.03 | ) | $ | 0.27 | $ | (0.17 | ) | $ | 0.19 | $ | 0.35 | $ | (0.22 | ) | $ | 0.01 | $ | (0.23 | ) | |||||||||||||
Diluted average shares outstanding (In thousands) |
273,174 | 302,397 | 274,896 | 308,491 | 244,956 | 264,091 | 278,429 | 272,168 | |||||||||||||||||||||||||
Segment profit margins |
|||||||||||||||||||||||||||||||||
Cessna |
(5.5 | )% | 0.5 | % | (5.8 | )% | 2.4 | % | 11.7 | % | 5.5 | % | 3.9 | % | 3.3 | % | |||||||||||||||||
Bell |
12.0 | 13.1 | 13.0 | 14.2 | 9.3 | 10.7 | 12.6 | 10.5 | |||||||||||||||||||||||||
Textron Systems |
12.0 | 13.1 | 10.9 | 10.4 | 12.4 | 11.5 | 13.5 | 12.9 | |||||||||||||||||||||||||
Industrial |
7.8 | 7.7 | 6.2 | 3.9 | (1.9 | ) | 2.4 | 1.1 | 3.1 | ||||||||||||||||||||||||
Finance |
(76.3 | ) | (126.8 | ) | (86.4 | ) | (211.1 | ) | (54.1 | ) | (115.1 | ) | (90.1 | ) | (79.3 | ) | |||||||||||||||||
Segment profit margin |
4.3 | % | 5.9 | % | 4.5 | % | 5.9 | % | 5.4 | % | 3.4 | % | 4.7 | % | 4.6 | % | |||||||||||||||||
Common stock information (b) |
|||||||||||||||||||||||||||||||||
Price range: High |
$ | 23.46 | $ | 25.30 | $ | 21.52 | $ | 24.18 | $ | 16.52 | $ | 14.37 | $ | 20.99 | $ | 21.00 | |||||||||||||||||
Low |
$ | 17.96 | $ | 15.88 | $ | 16.02 | $ | 19.92 | $ | 3.57 | $ | 7.13 | $ | 8.51 | $ | 17.55 | |||||||||||||||||
Dividends declared per share |
$ | 0.02 | $ | 0.02 | $ | 0.02 | $ | 0.02 | $ | 0.02 | $ | 0.02 | $ | 0.02 | $ | 0.02 | |||||||||||||||||
(a) | Special charges include restructuring charges of $99 million and $237 million in 2010 and 2009, respectively, primarily related to severance and asset impairment charges. In addition, in the third quarter of 2010, special charges include 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 Finance segment entity. Also, in the fourth quarter of 2009, special charges include a goodwill impairment charge of $80 million in the Industrial segment. | |
(b) | For the first and third quarters of 2010 and the second and fourth quarters of 2009, the potential dilutive effect 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. |
83
(c) | Schedule II Valuation and Qualifying Accounts |
(In millions) | 2010 | 2009 | 2008 | |||||||||
Allowance for doubtful accounts |
||||||||||||
Balance at beginning of year |
$ | 23 | $ | 24 | $ | 29 | ||||||
Charged to costs and expenses |
2 | 8 | 5 | |||||||||
Deductions from reserves* |
(5 | ) | (9 | ) | (10 | ) | ||||||
Balance at end of year |
$ | 20 | $ | 23 | $ | 24 | ||||||
Inventory FIFO reserves |
||||||||||||
Balance at beginning of year |
$ | 158 | $ | 114 | $ | 81 | ||||||
Charged to costs and expenses |
54 | 126 | 65 | |||||||||
Deductions from reserves* |
(79 | ) | (82 | ) | (32 | ) | ||||||
Balance at end of year |
$ | 133 | $ | 158 | $ | 114 | ||||||
* | Deductions primarily include amounts written off on uncollectable accounts (less recoveries), inventory disposals and currency translation adjustments. |
84
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures We have carried out an evaluation, under the supervision
and with the participation of our management, including our President and Chief Executive Officer
(CEO) and our Executive Vice President and Chief Financial Officer (CFO), of the effectiveness of
the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Act)) as of the end of
the fiscal year covered by this report. Based upon that evaluation, our CEO and CFO concluded that
our disclosure controls and procedures are effective in providing reasonable assurance that (a) the
information required to be disclosed by us in the reports that we file or submit under the Act is
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms, and (b) such information is accumulated and communicated
to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
Report
of Management See page 38.
Report of Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting See page 39.
Changes in Internal Controls There have been no changes in our internal control over financial
reporting during the fourth quarter of the fiscal year covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information appearing under ELECTION OF DIRECTORS Nominees for Director, Directors
Continuing in Office, The Board of Directors Corporate Governance, The Board of
Directors Code of Ethics, Board Committees Audit Committee, and SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE in the Proxy Statement for our Annual Meeting of Shareholders to be
held on April 27, 2011 is incorporated by reference into this Annual Report on Form 10-K.
Information regarding our executive officers is contained in Part I of this Annual Report on Form
10-K.
Item 11. Executive Compensation
The information appearing under ELECTION OF DIRECTORS The Board of Directors
Compensation of Directors, COMPENSATION DISCUSSION AND ANALYSIS and EXECUTIVE COMPENSATION in
the Proxy Statement for our Annual Meeting of Shareholders to be held on April 27, 2011 is
incorporated by reference into this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information appearing under ELECTION OF DIRECTORS The Board of DirectorsCompensation
of Directors, COMPENSATION DISCUSSION AND ANALYSIS and EXECUTIVE COMPENSATION in the Proxy
Statement for our Annual Meeting of Shareholders to be held on April 27, 2011 is incorporated by
reference into this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information appearing under ELECTION OF DIRECTORS The Board of DirectorsDirector
Independence and EXECUTIVE COMPENSATION Transactions with Related Persons in the Proxy
Statement for our Annual Meeting of Shareholders to be held on April 27, 2011 is incorporated by
reference into this Annual Report on Form 10-K.
Item 14. Principal Accountant Fees and Services
The information appearing under RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM Fees to Independent Auditors in the Proxy Statement for our Annual Meeting of
Shareholders to be held on April 27, 2011 is incorporated by reference into this Annual Report on
Form 10-K.
85
PART IV
Item 15. Exhibits and Financial Statement Schedules
Financial
Statements and Schedules See Index on Page 37.
Exhibits | ||
3.1
|
Restated Certificate of Incorporation of Textron as filed with the Secretary of State of Delaware on April 29, 2010. Incorporated by reference to Exhibit 3.1 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2010. | |
3.2
|
Amended and Restated By-Laws of Textron Inc. Incorporated by reference to Exhibit 3.2 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2010. | |
4.1A
|
Indenture dated as of December 9, 1999, between Textron Financial Corporation and SunTrust Bank (formerly known as Sun Trust Bank, Atlanta) (including form of debt securities). Incorporated by reference to Exhibit 4.1 to Amendment No. 2 to Textron Financial Corporations Registration Statement on Form S-3 (No. 333-88509). | |
4.1B
|
First Supplemental Indenture dated November 16, 2006, between Textron Financial Corporation and U.S. Bank National Association (successor trustee to Sun Trust Bank) to Indenture dated as of December 9, 1999. Incorporated by reference to Exhibit 4.3 of Textron Financial Corporations Form S-3 (File No. 333-138755). | |
4.1C
|
Form of Medium-Term Note of Textron Financial Corporation. Incorporated by reference to Exhibit 4.3 to Textron Financial Corporations Current Report on Form 8-K filed November 17, 2006. | |
4.2
|
Support Agreement dated as of May 25, 1994, between Textron Inc. and Textron Financial Corporation. Incorporated by reference to Exhibit 10.1 to Textron Financial Corporations Registration Statement on Form 10 (File No. 0-27559). | |
NOTE:
|
Instruments defining the rights of holders of certain issues of long-term debt of Textron have not been filed as exhibits because the authorized principal amount of any one of such issues does not exceed 10% of the total assets of Textron and its subsidiaries on a consolidated basis. Textron agrees to furnish a copy of each such instrument to the Commission upon request. | |
NOTE:
|
Exhibits 10.1 through 10.19 below are management contracts or compensatory plans, contracts or agreements. | |
10.1A
|
Textron Inc. 2007 Long-Term Incentive Plan (Amended and Restated as of April 28, 2010). Incorporated by reference to Exhibit 99(D)(1) to Textrons Schedule TO filed on July 1, 2010. | |
10.1B
|
Form of Non-Qualified Stock Option Agreement. Incorporated by reference to Exhibit 10.2 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. | |
10.1C
|
Form of Incentive Stock Option Agreement. Incorporated by reference to Exhibit 10.3 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. | |
10.1D
|
Form of Restricted Stock Unit Grant Agreement. Incorporated by reference to Exhibit 10.4 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. | |
10.1E
|
Form of Restricted Stock Unit Grant Agreement with Dividend Equivalents. Incorporated by reference to Exhibit 10.2 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2008. | |
10.1F
|
Form of Cash-Settled Restricted Stock Unit Grant Agreement with Dividend Equivalents. Incorporated by reference to Exhibit 10.1G to Textrons Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
10.1G
|
Form of Performance Share Unit Grant Agreement. Incorporated by reference to Exhibit 10.1H to Textrons Annual Report on Form 10-K for the fiscal year ended January 3, 2009. |
86
10.1H
|
Form of Performance Cash Unit Grant Agreement. Incorporated by reference to Exhibit 10.2 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 2009. | |
10.2
|
Textron Inc. Short-Term Incentive Plan (As amended and restated effective January 3, 2010). Incorporated by reference to Exhibit 10.1 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2010. | |
10.3A
|
Textron Inc. 1999 Long-Term Incentive Plan for Textron Employees (Amended and Restated Effective July 25, 2007). Incorporated by reference to Exhibit 10.3 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 2007. | |
10.3B
|
Form of Non-Qualified Stock Option Agreement. Incorporated by reference to Exhibit 10.1 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 2004. | |
10.3C
|
Form of Incentive Stock Option Agreement. Incorporated by reference to Exhibit 10.2 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 2004. | |
10.4
|
Textron Spillover Savings Plan, effective January 3, 2010, including Appendix A, Defined Contribution Provisions of the Supplemental Benefits Plan for Textron Key Executives (As in effect before January 1, 2008). Incorporated by reference to Exhibit 10.3 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2010. | |
10.5
|
Textron Spillover Pension Plan, As Amended and Restated Effective January 3, 2010, including Appendix A (as amended and restated effective January 3, 2010), Defined Benefit Provisions of the Supplemental Benefits Plan for Textron Key Executives (As in effect before January 1, 2007). Incorporated by reference to Exhibit 10.4 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2010. | |
10.6
|
Supplemental Retirement Plan for Textron Key Executives, As Amended and Restated Effective January 3, 2010, including Appendix A, Provisions of the Supplemental Retirement Plan for Textron Key Executives (As in effect before January 1, 2008). Incorporated by reference to Exhibit 10.5 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2010. | |
10.7
|
Deferred Income Plan for Textron Executives, Effective January 3, 2010, including Appendix A, Provisions of the Deferred Income Plan for Textron Key Executives (As in effect before January 1, 2008). Incorporated by reference to Exhibit 10.2 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2010. | |
10.8
|
Deferred Income Plan for Non-Employee Directors, As Amended and Restated Effective January 1, 2009, including Appendix A, Prior Plan Provisions (As in effect before January 1, 2008). Incorporated by reference to Exhibit 10.9 to Textrons Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
10.9
|
Survivor Benefit Plan for Textron Key Executives (As amended and restated effective January 3, 2010). Incorporated by reference to Exhibit 10.6 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2010. | |
10.10A
|
Severance Plan for Textron Key Executives, As Amended and Restated Effective January 1, 2010. Incorporated by reference to Exhibit 10.10 to Textrons Annual Report on Form 10-K for the fiscal year ended January 2, 2010. | |
10.10B
|
First Amendment to the Severance Plan for Textron Key Executives, dated October 26, 2010. | |
10.11
|
Form of Indemnity Agreement between Textron and its executive officers. Incorporated by reference to Exhibit A to Textrons Proxy Statement for its Annual Meeting of Shareholders on April 29, 1987. | |
10.12
|
Form of Indemnity Agreement between Textron and its non-employee directors (approved by the Nominating and Corporate Governance Committee of the Board of Directors on July 21, 2009 and entered into with all non-employee directors, effective as of August 1, 2009). Incorporated by reference to Exhibit 10.1 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended October 3, 2009. | |
10.13
|
Second Amended and Restated Employment Agreement between Textron and John D. Butler dated as of February 26, 2008. Incorporated by reference to Exhibit 10.3 to Textrons Current Report on Form 8-K filed February 28, 2008. | |
10.14
|
Letter Agreement between Textron and Scott C. Donnelly, dated June 26, 2008. Incorporated by reference to Exhibit 10.1 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 2008. |
87
10.15
|
Amendment to Letter Agreement between Textron and Scott C. Donnelly, dated December 16, 2008, together with Addendum No. 1 thereto, dated December 23, 2008. Incorporated by reference to Exhibit 10.15B to Textrons Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
10.16
|
Second Amended and Restated Employment Agreement between Textron and Terrence ODonnell dated as of February 26, 2008. Incorporated by reference to Exhibit 10.5 to Textrons Current Report on Form 8-K filed February 28, 2008. | |
10.17
|
Letter Agreement between Textron and Frank Connor, dated July 27, 2009. Incorporated by reference to Exhibit 10.2 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended October 3, 2009. | |
10.18
|
Director Compensation. Incorporated by reference to Exhibit 10.21 to Textrons Annual Report on Form 10-K for the fiscal year ended December 29, 2007. | |
10.19
|
Form of Aircraft Time Sharing Agreement between Textron and its executive officers. Incorporated by reference to Exhibit 10.3 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 2008. | |
10.20A
|
5-Year Credit Agreement, dated as of March 28, 2005, among Textron, the Banks listed therein, JPMorgan Chase Bank, N.A., as Administrative Agent, and Citibank, N.A., as Syndication Agent (the 5-Year Credit Agreement). Incorporated by reference to Exhibit 10.1 to Textrons Current Report on Form 8-K filed March 31, 2005. | |
10.20B
|
Amendment No. 1, dated as of April 21, 2006, to 5-Year Credit Agreement. Incorporated by reference to Exhibit 10.1 to Textrons Current Report on Form 8-K filed April 25, 2006. | |
10.20C
|
Amendment No. 2, dated as of April 20, 2007 to 5-Year Credit Agreement. Incorporated by reference to Exhibit 10.1 to Textrons Current Report on Form 8-K filed April 24, 2007. | |
10.21A
|
Five-Year Credit Agreement dated July 28, 2003 among Textron Financial Corporation, the Banks listed therein, and JPMorgan Chase Bank, as Administrative Agent. Incorporated by reference to Exhibit 10.2 to Textron Financial Corporations Current Report on Form 8-K as filed on August 26, 2003. | |
10.21B
|
Amendment No. 1, dated as of July 25, 2005, to the Five-Year Credit Agreement dated as of July 28, 2003 among Textron Financial Corporation, the Banks listed therein, and JPMorgan Chase Bank N.A., as Administrative Agent. Incorporated by reference to Exhibit 10.1 of Textron Financial Corporations Current Report on Form 8-K filed July 27, 2005. | |
10.21C
|
Amendment No. 2, dated as of April 28, 2006, to the Five-Year Credit Agreement dated as of July 28, 2003 among Textron Financial Corporation, the Banks listed therein, and JPMorgan Chase Bank N.A., as Administrative Agent. Incorporated by reference to Exhibit 10.1 of Textron Financial Corporations Current Report on Form 8-K filed May 1, 2006. | |
10.21D
|
Amendment No. 3, dated as of April 27, 2007, to the Five-Year Credit Agreement dated as of July 28, 2003 among Textron Financial Corporation, the Banks listed therein and JPMorgan Chase Bank as Administrative Agent. Incorporated by reference to Exhibit 10.1 of Textron Financial Corporations Current Report on Form 8-K dated April 27, 2007. | |
10.22A
|
Master Services Agreement between Textron Inc. and Computer Sciences Corporation dated October 27, 2004. Confidential treatment has been requested for portions of this agreement. Incorporated by reference to Exhibit 10.26 to Textrons Annual Report on Form 10-K for the fiscal year ended January 1, 2005. * | |
10.22B
|
Amendment No. 4 to Master Services Agreement between Textron Inc. and Computer Sciences Corporation, dated July 1, 2007. Incorporated by reference to Exhibit 10.1 to Textrons Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 2007. | |
10.22C
|
Amendment No. 5 to Master Services Agreement between Textron Inc. and Computer Sciences Corporation, dated as of March 13, 2008. * | |
10.22D
|
Amendment No. 6 to Master Services Agreement between Textron Inc. and Computer Sciences Corporation, dated as of June 17, 2009. |
88
10.22E
|
Amendment No. 7 to Master Services Agreement between Textron Inc. and Computer Sciences Corporation, dated as of September 30, 2010. * | |
10.23A
|
Convertible Bond Hedge Transaction Confirmation, dated April 29, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.1 to Textrons Current Report on Form 8-K filed May 5, 2009. | |
10.23B
|
Issuer Warrant Transaction Confirmation, dated April 29, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.2 to Textrons Current Report on Form 8-K filed May 5, 2009. | |
10.23C
|
Convertible Bond Hedge Transaction Confirmation, dated April 29, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.3 to Textrons Current Report on Form 8-K filed May 5, 2009. | |
10.23D
|
Issuer Warrant Transaction Confirmation, dated April 29, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.4 to Textrons Current Report on Form 8-K filed May 5, 2009. | |
10.23E
|
Convertible Bond Hedge Transaction Confirmation, dated April 30, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.5 to Textrons Current Report on Form 8-K filed May 5, 2009. | |
10.23F
|
Issuer Warrant Transaction Confirmation, dated April 30, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.6 to Textrons Current Report on Form 8-K filed May 5, 2009. | |
10.23G
|
Convertible Bond Hedge Transaction Confirmation, dated April 30, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.7 to Textrons Current Report on Form 8-K filed May 5, 2009. | |
10.23H
|
Issuer Warrant Transaction Confirmation, dated April 30, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.8 to Textrons Current Report on Form 8-K filed May 5, 2009. | |
10.23I
|
Issuer Warrant Transaction Reformation Agreement, dated May 4, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.9 to Textrons Current Report on Form 8-K filed May 5, 2009. | |
10.23J
|
Issuer Warrant Transaction Reformation Agreement, dated May 4, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.10 to Textrons Current Report on Form 8-K filed May 5, 2009. | |
10.23K
|
Additional Issuer Warrant Transaction Reformation Agreement, dated May 4, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.11 to Textrons Current Report on Form 8-K filed May 5, 2009. | |
10.23L
|
Additional Issuer Warrant Transaction Reformation Agreement, dated May 4, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.12 to Textrons Current Report on Form 8-K filed May 5, 2009. | |
12.1
|
Computation of ratio of income to fixed charges of Textron Inc.s Manufacturing group. | |
12.2
|
Computation of ratio of income to fixed charges of Textron Inc., including all majority-owned subsidiaries. | |
21
|
Certain subsidiaries of Textron. Other subsidiaries, which considered in the aggregate do not constitute a significant subsidiary, are omitted from such list. | |
23
|
Consent of Independent Registered Public Accounting Firm. | |
24
|
Power of attorney. | |
31.1
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
89
31.2
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101
|
The following materials from Textron Inc.s Annual Report on Form 10-K for the year ended January 1, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Shareholders Equity, (iv) the Consolidated Statements of Cash Flows, (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text and (vi) Schedule II Valuation and Qualifying Accounts, tagged in block text format. |
* | Confidential Treatment has been requested for portions of this document. |
Signatures
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized on this 1st day of March 2011.
TEXTRON INC. Registrant |
||||
By: | /s/ Frank T. Connor | |||
Frank T. Connor | ||||
Executive Vice President and Chief Financial Officer |
90
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form
10-K has been signed below on this 1st day of March 2011 by the following persons on behalf of
the registrant and in the capacities indicated:
Name | Title | |
/s/ Scott C. Donnelly
|
Chairman, President and Chief Executive Officer (principal executive officer) |
|
*
|
Director | |
*
|
Director | |
*
|
Director | |
*
|
Director | |
*
|
Director | |
*
|
Director | |
*
|
Director | |
*
|
Director | |
*
|
Director | |
*
|
Director | |
*
|
Director | |
/s/ Frank T. Connor
|
Executive Vice President and Chief Financial Officer (principal financial officer) |
|
/s/ Richard L. Yates
|
Senior Vice President and Corporate Controller (principal accounting officer) |
*By: | /s/ Jayne M. Donegan | |||
Jayne M. Donegan, Attorney-in-fact | ||||
91