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EX-12.1 - EXHIBIT 12.1 - TEXTRON INCexhibittwelveone.htm
EX-12.2 - EXHIBIT 12.2 - TEXTRON INCexhibittwelvetwo.htm
EX-32.2 - EXHIBIT 32.2 - TEXTRON INCexhibitthirtytwotwo.htm
EX-31.1 - EXHIBIT 31.1 - TEXTRON INCexhibitthirtyoneone.htm
EX-32.1 - EXHIBIT 32.1 - TEXTRON INCexhibitthirtytwoone.htm
EX-31.2 - EXHIBIT 31.2 - TEXTRON INCexhibitthirtyonetwo.htm
EX-10.1 - INDEMNITY AGREEMENT - DIRECTOR - TEXTRON INCindemnityagmtdirector.htm
EX-10.3 - LEWIS B. CAMPBELL RETIREMENT LETTER - TEXTRON INClbcretirementltr.htm
EX-10.3 - LEWIS B. CAMPBELL CLARIFICATION RETIREMENT LETTER - TEXTRON INClbcretirementltrrevised.htm
EX-10.2 - FRANK CONNOR AGREEMENT - TEXTRON INCfrankconnoragreement.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
_______________

FORM 10-Q

(Mark One)

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended October 3, 2009
 
 
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
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
40 Westminster Street, Providence, RI
 
02903
(Address of principal executive offices)
 
(zip code)

(401) 421-2800
(Registrant’s Telephone Number, Including Area Code)


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ü   No      
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ü   No      
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  [  ü ]                                                         Accelerated filer  [   ]                                                 
 
Non-accelerated filer    [   ]                                                         Smaller reporting company   [   ]
(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 Exchange Act).   Yes        No   ü

 
Common stock outstanding at October 17, 2009 – 271,117,282 shares
 

 
 

 


INDEX


   
Page
 
PART I.
FINANCIAL INFORMATION
   
       
Item 1.
Financial Statements
   
 
3
 
 
4
 
 
5
 
 
Notes to the Consolidated Financial Statements (Unaudited)
   
 
Note 1:
7
 
 
Note 2:
7
 
 
Note 3:
10
 
 
Note 4:
10
 
 
Note 5:
11
 
 
Note 6:
11
 
 
Note 7:
12
 
 
Note 8:
15
 
 
Note 9:
15
 
 
Note 10:
17
 
 
Note 11:
18
 
 
Note 12:
19
 
 
Note 13:
22
 
 
Note 14:
25
 
 
Note 15:
25
 
Item 1A.
27
 
Item 2.
27
 
Item 3.
45
 
Item 4.
45
 
       
PART II.
OTHER INFORMATION
   
       
Item 1.
46
 
Item 5.
46
 
Item 6.
46
 
 
47
 



 

 


 

TEXTRON INC.
(In millions, except per share amounts)
   
Three Months Ended
   
Nine Months Ended
 
   
October 3,
2009
   
September 27,
2008
   
October 3,
2009
   
September 27,
2008
 
Revenues
                       
Manufacturing revenues
  $ 2,478     $ 3,287     $ 7,408     $ 9,886  
Finance revenues
    71       184       279       575  
Total revenues
    2,549       3,471       7,687       10,461  
Costs, expenses and other
                               
Cost of sales
    2,048       2,595       6,148       7,804  
Selling and administrative
    348       419       1,034       1,203  
Interest expense, net
    73       102       230       318  
Provision for losses on finance receivables
    43       34       206       101  
Gain on sale of assets
                (50 )      
Special charges
    42             203        
Total costs, expenses and other
    2,554       3,150       7,771       9,426  
Income (loss) from continuing operations before income taxes
    (5 )     321       (84 )     1,035  
Income tax expense (benefit)
    (11 )     116       (71 )     355  
Income (loss) from continuing operations
    6       205       (13 )     680  
Income (loss) from discontinued operations, net of income taxes
    (2 )     1       45       15  
Net income
  $ 4     $ 206     $ 32     $ 695  
Basic earnings per share
                               
Continuing operations
  $ 0.02     $ 0.85     $ (0.05 )   $ 2.75  
Discontinued operations
    (0.01 )           0.17       0.06  
Basic earnings per share
  $ 0.01     $ 0.85     $ 0.12     $ 2.81  
Diluted earnings per share
                               
Continuing operations
  $ 0.02     $ 0.83     $ (0.05 )   $ 2.70  
Discontinued operations
    (0.01 )           0.17       0.06  
Diluted earnings per share
  $ 0.01     $ 0.83     $ 0.12     $ 2.76  
Dividends per share
                               
$2.08 Preferred stock, Series A
  $ 0.52     $ 0.52     $ 1.56     $ 1.56  
$1.40 Preferred stock, Series B
  $ 0.35     $ 0.35     $ 1.05     $ 1.05  
Common stock
  $ 0.02     $ 0.23     $ 0.06     $ 0.69  

See Notes to the consolidated financial statements.

 
3

 


(Dollars in millions, except share data)
 
   
October 3,
2009
   
January 3,
2009
 
Assets
           
Manufacturing group
           
Cash and cash equivalents
  $ 2,037     $ 531  
Accounts receivable, net
    926       894  
Inventories
    2,716       3,093  
Other current assets
    493       584  
Assets of discontinued operations
    60       334  
Total current assets
    6,232       5,436  
Property, plant and equipment, less accumulated
depreciation and amortization of $2,627and $2,436
    1,988       2,088  
Goodwill
    1,703       1,698  
Other assets
    1,901       1,465  
Total Manufacturing group assets
    11,824       10,687  
Finance group
               
Cash and cash equivalents
    539       16  
Finance receivables held for investment, net
    5,796       6,724  
Finance receivables held for sale
    998       1,658  
Other assets
    801       946  
Total Finance group assets
    8,134       9,344  
Total assets
  $ 19,958     $ 20,031  
Liabilities and shareholders’ equity
               
Liabilities
               
Manufacturing group
               
Current portion of long-term debt and short-term debt
  $ 134     $ 876  
Accounts payable
    664       1,101  
Accrued liabilities
    2,205       2,609  
Liabilities of discontinued operations
    122       195  
Total current liabilities
    3,125       4,781  
Other liabilities
    2,991       2,926  
Long-term debt
    3,624       1,693  
Total Manufacturing group liabilities
    9,740       9,400  
Finance group
               
Other liabilities
    362       540  
Deferred income taxes
    226       337  
Debt
    6,668       7,388  
Total Finance group liabilities
    7,256       8,265  
Total liabilities
    16,996       17,665  
Shareholders’ equity
               
Preferred stock
    2       2  
Common stock
    35       32  
Capital surplus
    1,379       1,229  
Retained earnings
    3,042       3,025  
Accumulated other comprehensive loss
    (1,232 )     (1,422 )
      3,226       2,866  
Less cost of treasury shares
    264       500  
Total shareholders’ equity
    2,962       2,366  
Total liabilities and shareholders’ equity
  $ 19,958     $ 20,031  
Common shares outstanding (in thousands)
    271,016       242,041  
See Notes to the consolidated financial statements.

 
4

 
For the Nine Months Ended October 3, 2009 and September 27, 2008, respectively
(In millions)
 
   
Consolidated
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Net income
  $ 32     $ 695  
Income from discontinued operations
    45       15  
Income (loss) from continuing operations
    (13 )     680  
Adjustments to reconcile income (loss) from continuing operations to net cash
               
provided by (used in) operating activities:
               
Dividends received from the Finance group
           
Capital contributions paid to Finance group
           
Non-cash items:
               
Depreciation and amortization
    297       293  
Provision for losses on finance receivables held for investment
    206       101  
Portfolio losses on finance receivables
    114        
Asset impairment charges
    54        
Gains on extinguishment of debt
    (51 )      
Share-based compensation
    24       39  
Amortization of interest expense on convertible notes
    13        
Deferred income taxes
    (138 )     (16 )
Changes in assets and liabilities:
               
Accounts receivable, net
    (14 )     (83 )
Inventories
    368       (787 )
Other assets
    (57 )     78  
Accounts payable
    (444 )     220  
Accrued and other liabilities
    (69 )     108  
Captive finance receivables, net
    187       (8 )
Other operating activities, net
    78       28  
Net cash provided by (used in) operating activities of continuing operations
    555       653  
Net cash used in operating activities of discontinued operations
    (17 )     (21 )
Net cash provided by (used in) operating activities
    538       632  
Cash flows from investing activities:
               
Finance receivables originated or purchased
    (2,613 )     (8,766 )
Finance receivables repaid
    3,250       8,000  
Proceeds on receivables sales, including securitizations
    202       633  
Net cash used in acquisitions
          (109 )
Capital expenditures
    (165 )     (318 )
Proceeds from sale of property, plant and equipment
    3       4  
Proceeds from sale of repossessed assets and properties
    176        
Retained interests
    117       11  
Purchase of marketable securities
          (100 )
Other investing activities, net
    32       19  
Net cash provided by (used in) investing activities of continuing operations
    1,002       (626 )
Net cash provided by (used in) investing activities of discontinued operations
    239       (10 )
Net cash provided by (used in) investing activities
    1,241       (636 )
Cash flows from financing activities:
               
Increase (decrease) in short-term debt
    (1,637 )     270  
Proceeds from long-term lines of credit
    2,970        
Payments on long-term lines of credit
    (58 )      
Proceeds from issuance of long-term debt
    641       1,461  
Principal payments on long-term debt
    (2,035 )     (1,245 )
Payments on borrowings against officers life insurance policies
    (411 )      
Intergroup financing
           
Proceeds from issuance of convertible notes, net of fees paid
    582        
Purchase of convertible note hedge
    (140 )      
Proceeds from issuance of common stock and warrants
    333        
Proceeds from option exercises
          40  
Excess tax benefit on stock options
          10  
Purchases of Textron common stock
          (533 )
Capital contribution paid to Finance group
           
Dividends paid
    (16 )     (172 )
Net cash provided by (used in) financing activities of continuing operations
    229       (169 )
Net cash used in financing activities of discontinued operations
          (2 )
Net cash provided (used in) by financing activities
    229       (171 )
Effect of exchange rate changes on cash and cash equivalents
    21       1  
Net increase (decrease) in cash and cash equivalents
    2,029       (174 )
Cash and cash equivalents at beginning of period
    547       531  
Cash and cash equivalents at end of period
  $ 2,576     $ 357  
See Notes to the consolidated financial statements
 
5
 
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Nine Months Ended October 3, 2009 and September 27, 2008, respectively
 (In millions)
 
   
Manufacturing Group
   
Finance Group
 
   
2009
   
2008
   
2009
   
2008
 
Cash flows from operating activities:
                       
Net income (loss)
  $ 194     $ 646     $ (162 )   $ 49  
Income from discontinued operations
    45       15              
Income (loss) from continuing operations
    149       631       (162 )     49  
Adjustments to reconcile income (loss) from continuing operations to net cash
                               
provided by (used in) operating activities:
                               
Dividends received from the Finance group
    284       142              
Capital contributions paid to Finance group
    (197 )                  
Non-cash items:
                               
Depreciation and amortization
    270       262       27       31  
Provision for losses on finance receivables held for investment
                206       101  
Portfolio losses on finance receivables
                114        
Asset impairment charges
    54                    
Gains on extinguishment of debt
    (3 )           (48 )      
Share-based compensation
    24       39              
Amortization of interest expense on convertible notes
    13                    
Deferred income taxes
    (22 )     11       (116 )     (27 )
Changes in assets and liabilities:
                               
Accounts receivable, net
    (14 )     (83 )            
Inventories
    372       (773 )            
Other assets
    (73 )     59       8       11  
Accounts payable
    (444 )     220              
Accrued and other liabilities
    (149 )     114       80       (6 )
Captive finance receivables, net
                       
Other operating activities, net
    53       33       25       (5 )
Net cash provided by (used in) operating activities of continuing operations
    317       655       134       154  
Net cash used in operating activities of discontinued operations
    (17 )     (21 )            
Net cash provided by (used in) operating activities
    300       634       134       154  
Cash flows from investing activities:
                               
Finance receivables originated or purchased
                (3,074 )     (9,489 )
Finance receivables repaid
                3,860       8,602  
Proceeds on receivables sales, including securitizations
                252       746  
Net cash used in acquisitions
          (109 )            
Capital expenditures
    (165 )     (310 )           (8 )
Proceeds from sale of property, plant and equipment
    3       4              
Proceeds from sale of repossessed assets and properties
                176        
Retained interests
                117       11  
Purchase of marketable securities
                      (100 )
Other investing activities, net
    (49 )           32       13  
Net cash provided by (used in) investing activities of continuing operations
    (211 )     (415 )     1,363       (225 )
Net cash provided by (used in) investing activities of discontinued operations
    239       (10 )            
Net cash provided by (used in) investing activities
    28       (425 )     1,363       (225 )
Cash flows from financing activities:
                               
Increase (decrease) in short-term debt
    (869 )     240       (768 )     30  
Proceeds from long-term lines of credit
    1,230             1,740        
Payments on long-term lines of credit
    (58 )                  
Proceeds from issuance of long-term debt
    595             46       1,461  
Principal payments on long-term debt
    (212 )     (44 )     (1,823 )     (1,201 )
Payments on borrowings against officers life insurance policies
    (411 )                  
Intergroup financing
    133             (112 )      
Proceeds from issuance of convertible notes, net of fees paid
    582                    
Purchase of convertible note hedge
    (140 )                  
Proceeds from issuance of common stock and warrants
    333                    
Proceeds from option exercises
          40              
Excess tax benefit on stock options
          10              
Purchases of Textron common stock
          (533 )            
Capital contributions paid to Finance group
                217        
Dividends paid
    (16 )     (172 )     (284 )     (142 )
Net cash provided by (used in) financing activities of continuing operations
    1,167       (459 )     (984 )     148  
Net cash used in financing activities of discontinued operations
          (2 )            
Net cash provided by (used in) financing activities
    1,167       (461 )     (984 )     148  
Effect of exchange rate changes on cash and cash equivalents
    11       2       10       (1 )
Net increase (decrease) in cash and cash equivalents
    1,506       (250 )     523       76  
Cash and cash equivalents at beginning of period
    531       471       16       60  
Cash and cash equivalents at end of period
  $ 2,037     $ 221     $ 539     $ 136  
See Notes to the consolidated financial statements.
6
 

TEXTRON INC.
Notes to the Consolidated Financial Statements (Unaudited)


Our consolidated financial statements include the accounts of Textron Inc. and all of its majority-owned subsidiaries, along with any variable interest entities for which we are the primary beneficiary.  We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information. Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 3, 2009.  In the opinion of management, the interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair presentation of our consolidated financial position, results of operations and cash flows for the interim periods presented.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.  We have evaluated subsequent events up to the time of our filing with the Securities and Exchange Commission on October 30, 2009, which is the date that these financial statements were issued.

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 consists of Textron Financial Corporation, its subsidiaries and the securitization trusts consolidated into it, along with two finance subsidiaries owned by Textron Inc. We designed this framework to enhance our borrowing power by separating the Finance group.  Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the consolidated financial statements.  All significant intercompany transactions are eliminated from the consolidated financial statements, including retail and wholesale financing activities for inventory sold by our Manufacturing group that is financed by our Finance group.

As discussed in Note 4: Discontinued Operations, on April 3, 2009, we sold HR Textron and in November 2008, we completed the sale of our Fluid & Power business unit.  Both of these businesses have been classified as discontinued operations, and all prior period information has been recast to reflect this presentation.


In the fourth quarter of 2008, we initiated a restructuring program to reduce overhead costs and improve productivity across the company, which includes corporate and segment direct and indirect workforce reductions and streamlining of administrative overhead, and announced the exit of portions of our commercial finance business.  This program was expanded in the first half of 2009 to include additional workforce reductions, primarily at Cessna, and the cancellation of the Citation Columbus development project.  In the third quarter of 2009, the program was further expanded to include additional headcount reductions at Corporate and Bell.  We expect to eliminate approximately 10,700 positions worldwide representing approximately 25% of our global workforce at the inception of the program.  As of October 3, 2009, we have terminated approximately 10,100 employees and have exited 22 owned and leased facilities and plants under this program.

 
7

 


Restructuring costs by segment are as follows:

(In millions)
 
Severance
Costs
   
Curtailment
Charges, Net
   
Asset Impairments
   
Contract
Terminations and Other
   
Total
Restructuring
 
Three Months Ended October 3, 2009
                             
Cessna
  $ 10     $     $ 2     $ 5     $ 17  
Industrial
    1                         1  
Bell
    8                         8  
Textron Systems
    1                         1  
Finance
    1                         1  
Corporate
    14                         14  
    $ 35     $     $ 2     $ 5     $ 42  
Nine Months Ended October 3, 2009
                                       
Cessna
  $ 74     $ 26     $ 54     $ 6     $ 160  
Industrial
    6       (4 )           1       3  
Bell
    8                         8  
Textron Systems
    2       2                   4  
Finance
    7       1             1       9  
Corporate
    19                         19  
    $ 116     $ 25     $ 54     $ 8     $ 203  

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, the number of employees to be terminated, along with their job classification and location, and the expected completion date.

We recorded net curtailment charges of $25 million for our pension and other postretirement benefit plans in the second quarter of 2009, as our analysis of the impact of workforce reductions on these plans indicated that curtailments had occurred and the amounts could be reasonably estimated. These net curtailment charges are based primarily on the headcount reductions through the end of the second quarter.  The curtailment charge for the pension plan is primarily due to the recognition of prior service costs that were previously being amortized over a period of years.  We will continue to evaluate additional workforce reductions as they take place to assess additional potential curtailments that may occur.

Asset impairment charges include a $43 million charge recorded in the second quarter of 2009 to write off assets related to the Citation Columbus development project.  Due to the prevailing adverse market conditions and after analysis of the business jet market related to the product offering, Cessna formally cancelled the Citation Columbus development project in the second quarter of 2009.  Cessna began this project in early 2008 for the development of an all-new, wide-bodied, eight-passenger business jet designed for international travel that would extend Cessna’s product offering as its largest business jet to date.  This development project had capitalized costs related to tooling and a partially-constructed manufacturing facility of which $43 million is considered not to be recoverable.


 
8

 

Since the inception of the restructuring program, we have incurred the following costs through October 3, 2009:

(In millions)
 
Severance
Costs
   
Curtailment
Charges, Net
   
Asset Impairments
   
Contract
Terminations and Other
   
Total
Restructuring
 
Cessna
  $ 79     $ 26     $ 54     $ 6     $ 165  
Industrial
    22       (4 )     9       1       28  
Bell
    8                         8  
Textron Systems
    3       2                   5  
Finance
    22       1       11       2       36  
Corporate
    25                         25  
    $ 159     $ 25     $ 74     $ 9     $ 267  

An analysis of our restructuring reserve activity is summarized below:

(In millions)
 
Severance
Costs
   
Curtailment
Charges, Net
   
Asset Impairment
   
Contract
Terminations and Other
   
Total
 
Balance at January 3, 2009
  $ 36     $     $     $ 1     $ 37  
Provisions
    116       25       54       8       203  
Non-cash settlement
          (25 )     (54 )           (79 )
Cash paid
    (117 )                 (2 )     (119 )
Balance at October 3, 2009
  $ 35     $     $     $ 7     $ 42  

The specific restructuring measures and associated estimated costs are based on our best judgment under prevailing circumstances.  We believe that the restructuring reserve balance of $42 million is adequate to cover the costs presently accruable relating to activities formally identified and committed to under approved plans as of October 3, 2009 and anticipate that all actions related to these liabilities will be completed within a 12-month period.  We estimate that we will incur approximately $40 million in additional pre-tax restructuring costs in the fourth quarter 2009 most of which will result in future cash outlays, primarily attributable to severance payments related to additional workforce reductions throughout the company and a realignment of our management structure.  We expect that the program will be substantially completed in 2010. We also expect to incur additional costs to exit the non-captive portion of our Finance segment over the next two to three years.  These costs are expected to be primarily attributable to severance and retention benefits and are not reasonably estimable at this time.


 
9

 


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

   
Pension Benefits
   
Postretirement Benefits
Other Than Pensions
 
(In millions)
 
October 3,
2009
   
September 27, 2008
   
October 3,
2009
   
September 27, 2008
 
Three Months Ended
                       
Service cost
  $ 27     $ 35     $ 2     $ 2  
Interest cost
    78       75       9       11  
Expected return on plan assets
    (96 )     (101 )            
Amortization of prior service cost (credit)
    4       5       (1 )     (1 )
Amortization of net loss
    1       5       2       4  
Net periodic benefit cost
  $ 14     $ 19     $ 12     $ 16  
 
                               
 Nine Months Ended                                
Service cost
  $ 90     $ 106     $ 6     $ 7  
Interest cost
    233       227       28       32  
Expected return on plan assets
    (291 )     (304 )            
Amortization of prior service cost (credit)
    13       15       (4 )     (4 )
Amortization of net loss
    9       14       6       12  
Net periodic benefit cost
  $ 54     $ 58     $ 36     $ 47  


On April 3, 2009, we sold HR Textron, an operating unit previously reported within the Textron Systems segment, for $376 million in cash.  The sale resulted in an after-tax gain of $8 million after final settlement and net after-tax proceeds of approximately $280 million.

In November 2008, we completed the sale of the Fluid and Power business unit and received approximately $527 million in cash and a six-year note with a face value of $28 million.  In connection with the final settlement of the transaction in the third quarter of 2009, we also received a five-year note with a face value of $30 million which had no significant impact on the net gain from disposition.

Results of our discontinued businesses are as follows:

   
Three Months Ended
   
Nine Months Ended
 
 
(In millions)
 
October 3,
2009
   
September 27,
2008
   
October 3,
2009
   
September 27,
2008
 
Revenue
  $     $ 236     $ 48     $ 683  
Income (loss) from discontinued operations before income taxes
  $     $ 21     $ (1 )   $ 46  
Income tax expense (benefit)
    (1 )     20       (40 )     31  
      (1 )     1       39       15  
Gain (loss) on sale, net of income taxes
    (1 )           6        
Income (loss) from discontinued operations, net of
income taxes
  $ (2 )   $ 1     $ 45     $ 15  

In the first half of 2009, we had a $34 million tax benefit from the reduction in tax contingencies as a result of the HR Textron sale and a valuation allowance reversal on a previously established deferred tax asset.


 
10

 


Our comprehensive income for the periods is provided below:

   
Three Months Ended
   
Nine Months Ended
 
 
(In millions)
 
October 3,
2009
   
September 27,
2008
   
October 3,
2009
   
September 27,
2008
 
Net income
  $ 4     $ 206     $ 32     $ 695  
Other comprehensive income, net of income taxes:
                               
Unrealized gain on pension, net of income taxes of $48
                82        
Pension curtailment, net of income taxes of $10
                15        
Recognition of prior service cost and unrealized
losses on pension and postretirement benefits
    4       8       16       28  
Net deferred gain (loss) on hedge contracts
    24       (26 )     54       (43 )
Net deferred gain (loss) on retained interests
    8       (1 )     (1 )     (1 )
Foreign currency translation and other
    (10 )     (66 )     24       (71 )
Comprehensive income
  $ 30     $ 121     $ 222     $ 608  


In the first quarter of 2009, we adopted the new accounting standard for determining whether instruments granted in share-based payment transactions are participating securities. This new standard requires us to include any unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents as participating securities in our computation of basic earnings per share pursuant to the two-class method.  We have granted certain restricted stock units that are deemed participating securities, and as a result, prior period basic and diluted weighted-average shares outstanding have been recast to conform to the new calculation.  The adoption of this standard resulted in a $0.01 reduction in diluted earnings per share from continuing operations for the three and nine months ended September 27, 2008.

We calculate basic and diluted earnings per share based on income available to common shareholders, which approximates net income for each period.  We use the weighted-average number of common shares outstanding during the period and the restricted stock units discussed above for the computation of basic earnings per share using the two-class method. Diluted earnings per share includes the dilutive effect of convertible preferred shares, Convertible Notes (defined below), stock options and warrants and restricted stock units in the weighted-average number of common shares outstanding.

The weighted-average shares outstanding for basic and diluted earnings per share are as follows:

   
Three Months Ended
   
Nine Months Ended
 
 
(In thousands)
 
October 3,
2009
   
September 27,
2008
   
October 3,
2009
   
September 27,
2008
 
Basic weighted-average shares outstanding
    271,224       243,753       260,099       247,370  
Dilutive effect of :
                               
Convertible Notes and warrants
    5,906                    
Convertible preferred shares, stock options and
restricted stock units
    1,299       3,429             4,382  
Diluted weighted-average shares outstanding
    278,429       247,182       260,099       251,752  

The potential dilutive effect of 3.5 million weighted-average shares of restricted stocks units, stock options and warrants, convertible preferred stock and Convertible Notes was excluded from the computation of diluted weighted-average shares outstanding for the nine months ended October 3, 2009 as the shares would have an anti-dilutive effect on the loss from continuing operations.

We did not include stock options to purchase 8 million and 9 million shares of common stock outstanding in our calculation of diluted weighted-average shares outstanding for the three and nine months ended October 3, 2009


 
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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.

On May 5, 2009, we issued 4.50% Convertible Senior Notes (the “Convertible Notes”) due 2013, as discussed in Note 9: Debt.  In connection with the issuance of these notes, we entered into a warrant transaction with the note underwriters to sell common stock warrants. The initial strike price of these warrants is $15.75 per share of our common stock and the warrants cover an aggregate of 45,714,300 shares of our common stock.  When our closing stock price exceeds this strike price, a portion of these shares is dilutive.  It is our intention to settle the face value of the Convertible Notes in cash upon conversion/maturity.

Concurrently with the offering and sale of the Convertible Notes, we also offered and sold to the public under the Textron Inc. registration statement 23,805,000 shares of our common stock for net proceeds of approximately $238 million, after deducting discounts, commissions and expenses.

Note 7:  Accounts Receivable, Finance Receivables and Securitizations

Accounts Receivable
 
(In millions)
 
October 3,
2009
   
January 3,
2009
 
Accounts receivable - Commercial
  $ 500     $ 496  
Accounts receivable - U.S. Government contracts
    451       422  
      951       918  
Allowance for doubtful accounts
    (25 )     (24 )
    $ 926     $ 894  

Finance Receivables
We evaluate finance receivables on a managed as well as owned basis since we retain subordinated interests in finance receivables sold in securitizations resulting in credit risk.  In contrast, we do not have a retained financial interest or credit risk in the performance of the serviced portfolio and, therefore, performance of these portfolios is limited to billing and collection activities.  Our Finance group manages and services finance receivables for a variety of investors, participants and third-party portfolio owners.  A reconciliation of our managed and serviced finance receivables to finance receivables held for investment, net is provided below:

(In millions)
 
October 3,
2009
   
January 3,
2009
 
Total managed and serviced finance receivables
  $ 8,999     $ 12,173  
Less:  Nonrecourse participations sold to independent investors
    772       820  
Less:  Third-party portfolio servicing
    318       532  
Total managed finance receivables
    7,909       10,821  
Less:  Securitized receivables
    813       2,248  
Owned finance receivables
    7,096       8,573  
Less:  Finance receivables held for sale
    998       1,658  
Finance receivables held for investment
    6,098       6,915  
Allowance for loan losses
    (302 )     (191 )
Finance receivables held for investment, net
  $ 5,796     $ 6,724  

Finance receivables held for investment at October 3, 2009 and January 3, 2009 include approximately $549 million and $1.1 billion, respectively, of finance receivables that have been legally sold to special purpose entities and are consolidated subsidiaries of Textron Financial Corporation.  The assets of these special purpose entities are pledged as collateral for $443 million and $853 million of debt at October 3, 2009 and January 3, 2009, respectively, which is reflected as securitized on-balance sheet debt.

In connection with our fourth quarter 2008 plan to exit portions of the commercial finance business, we classified certain finance receivables as held for sale.  As a result of our marketing efforts for these finance receivables, we determined that the markets for certain classes of finance receivables were illiquid and inactive during the first


 
12

 

half of 2009.  We realized that, given market conditions, we were likely to be able to generate more cash flow from the loans’ obligors and/or the underlying collateral than from a buyer of the portfolio.  We reached this conclusion based on our evaluation of the obligors’ ability to repay the loans as compared to our evaluation of both the existence of potential buyers for these assets and market prices.  Accordingly, since we intended to hold a portion of these finance receivables for the foreseeable future, we reclassified $719 million, net of the valuation allowance, from the held for sale classification to held for investment in the first half of 2009.

As a result of the significant influence of economic and liquidity conditions on our business plans, strategies and liquidity position, 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.  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.

In the third quarter of 2009, we received unanticipated inquiries to purchase receivable portfolios classified as held for investment.  Based on the nature of these inquiries, we determined that a sale of these portfolios would be consistent with our goal to maximize the economic value of our portfolio and accelerate cash collections.  As a result, $313 million of the net finance receivables reclassified from held for sale to held for investment earlier in 2009 were reclassified as held for sale in the third quarter of 2009 and $108 million of additional finance receivables were also classified as held for sale.

Nonaccrual and Impaired Finance Receivables
We periodically evaluate finance receivables held for investment, excluding homogeneous loan portfolios and finance leases, for impairment.  Finance receivables classified as held for sale are reflected at fair value and are excluded from this assessment.  A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Impaired finance receivables are classified as either nonaccrual or accrual loans.  Nonaccrual finance receivables includes accounts that are contractually delinquent by more than three months for which the accrual of interest income is suspended.  Impaired accrual finance receivables represent loans with original terms that have been significantly modified to reflect deferred principal payments, generally at market interest rates, for which collection of principal and interest is not doubtful.

The impaired finance receivables are as follows:

(In millions)
 
October 3,
2009
   
January 3,
2009
 
Impaired nonaccrual finance receivables
  $ 781     $ 234  
Impaired accrual finance receivables
    276       19  
Total impaired finance receivables
  $ 1,057     $ 253  
Less: Impaired finance receivables without identified reserve requirements
    378       71  
Impaired nonaccrual finance receivables with identified reserve requirements
  $ 679     $ 182  


 
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Nonaccrual finance receivables include impaired nonaccrual finance receivables and nonaccrual accounts in homogeneous loan portfolios that are contractually delinquent by more than three months, but are not considered to be impaired. A summary of these finance receivables and the related allowance for losses by collateral type is as follows:

     
October 3, 2009
   
January 3, 2009
 
(In millions)
Collateral Type
 
Nonaccrual Finance Receivables
   
Impaired Nonaccrual Finance Receivables
   
Allowance for Losses on Impaired Nonaccrual Finance Receivables
   
Nonaccrual Finance Receivables
   
Impaired Nonaccrual Finance Receivables
   
Allowance for Losses on Impaired Nonaccrual Finance Receivables
 
Resort
Notes receivable(1)
  $ 303     $ 300     $ 42     $ 78     $ 74     $ 9  
Finance
Hotels
    62       62       7                    
 
Resort construction
and inventory
    67       67                          
 
Land
    17       17       4                    
Distribution Finance
Dealer inventory
    89       67       21       43       34       3  
Captive
Finance
General aviation
aircraft
    139       123       24       17       6       2  
 
Golf equipment
    16       3       1       18              
Golf Mortgage Finance
Golf course property
    96       95       21       107       107       25  
 
Marinas
    8       8                          
Structured Capital
Capital equipment
    32       32       27                    
Other
      9       7             14       13       4  
 
Total
  $ 838     $ 781     $ 147     $ 277     $ 234     $ 43  
(1)  
Finance receivables collateralized primarily by timeshare notes receivable may also be collateralized by certain real estate and other assets of our borrowers.

The increase in nonaccrual finance receivables is primarily attributable to the lack of liquidity available to borrowers in resort finance, weaker general economic conditions and weaker aircraft values in captive finance.  The increase in resort finance included one $212 million account, which is primarily collateralized by timeshare notes receivable and several resort properties.  For structured capital, the increase in nonaccrual finance receivables and the allowance for losses on impaired nonaccrual finance receivables is due to a $32 million lease that is secured by automobile manufacturing equipment.  Nonaccrual finance receivables resulted in a $36 million reduction in Finance revenues for the nine months ended October 3, 2009, compared with $10 million in the corresponding period of 2008, as no finance charges were recognized using the cash basis method.

Securitizations
Our Finance group has historically sold its distribution finance receivables to a qualified special purpose trust through securitization transactions. Distribution finance receivables represent loans secured by dealer inventories that typically are collected upon the sale of the underlying product. The distribution finance revolving securitization trust is a master trust that purchases inventory finance receivables from the Finance group and issues asset-backed notes to investors.  Through a revolving securitization, the proceeds from collection of the principal balance of these loans can be used by the trust to purchase additional distribution finance receivables from us each month. Proceeds from securitizations include amounts received related to the incremental increase in the issuance of additional asset-backed notes to investors, and exclude amounts received related to the ongoing replenishment of the outstanding sold balance of these short-duration finance receivables.  For the nine months ended October 3, 2009, we had no proceeds from securitizations, compared with $250 million in the corresponding period of 2008.


 
14

 


Generally, we retain an interest in the assets sold in the form of servicing responsibilities and subordinated interests, including interest-only securities, seller certificates and cash reserves. We had $103 million and $191 million of retained interests associated with $775 million and $2.2 billion of off-balance sheet finance receivables in the distribution finance securitization trust as of October 3, 2009 and January 3, 2009, respectively. The amortized cost basis of our retained interests is $86 million at October 3, 2009.  At October 3, 2009, the trust had $978 million of asset-backed notes outstanding of which $103 million represent our remaining retained interests.  In connection with the maturity of the notes, the trust accumulated $203 million of cash during the third quarter of 2009 from collections of finance receivables.  This cash, combined with cash accumulated during the first eight days of October, was utilized to repay $240 million of the notes held by third-party investors in October 2009.  Due to required amortization and accumulation periods associated with the scheduled maturity of the remaining asset-backed notes, the trust's revolving period ended in the third quarter of 2009.  As of October 8, 2009, due to a change in required cash distributions, the trust will be consolidated by us.

Cash received on retained interests totaled $117 million and $44 million for the nine months ended October 3, 2009 and September 27, 2008, respectively. Servicing fees received totaled $3 million and $18 million for the three and nine months ended October 3, 2009, respectively, compared with $8 million and $25 million for the corresponding periods of 2008.

Total net pre-tax losses, including impairments were $27 million for the nine months ended October 3, 2009.  During the second quarter of 2009, we recognized a $31 million other-than-temporary impairment of our retained interests, excluding interest-only securities.  Of this amount, $18 million was charged to income primarily due to credit losses, representing a decrease in cash flows expected to be collected on these interests for the distribution finance revolving securitization.  The remaining $13 million impairment charge was recognized in other comprehensive income as it is attributable to an increase in market discount rates.  For the three and nine months ended September 27, 2008, net pre-tax gains, including impairments totaled $10 million and $40 million, respectively.  See Note 12: Fair Values of Assets and Liabilities for disclosure of the fair value estimates for retained interests in securitizations and the impairments recorded on the interest-only securities and other retained interests in 2009.


(In millions)
 
October 3,
2009
   
January 3,
2009
 
Finished goods
  $ 908     $ 1,081  
Work in process
    2,062       1,866  
Raw materials
    637       765  
      3,607       3,712  
Progress/milestone payments
    (891 )     (619 )
    $ 2,716     $ 3,093  


On September 14, 2009, we issued $600 million of senior notes under our existing registration statement, comprised of $350 million of 6.20% notes due 2015 and $250 million of 7.25% notes due 2019.  Concurrently, Textron Inc. and Textron Financial Corporation announced separate cash tender offers for up to $650 million aggregate principal amount of five separate series of outstanding debt securities with maturity dates ranging from November 2009 to June 2012. The primary purpose of these transactions was to lengthen the maturity profile of our indebtedness.  In connection with these transactions, Textron Inc. extinguished $122 million of its $250 million 4.5% notes due 2010 as of October 3, 2009, and recognized a $3 million pre-tax loss on the early extinguishment of this debt, which is included in selling, general and administrative expense.

Subsequent to the end of the quarter, in connection with the tender offers, on October 13, 2009, Textron Inc. extinguished $146 million of its $300 million 6.5% notes due 2012 and Textron Financial Corporation extinguished $319 million of its medium-term notes with interest rates ranging from 4.6% to 6.0% and maturity


 
15

 

dates ranging from November 2009 to February 2011. The related pre-tax loss on these extinguishments totaled $9 million and will be recognized in the fourth quarter of 2009.
 
For the nine months ended October 3, 2009, Textron Financial Corporation has extinguished through open market purchases an additional $595 million of its debt and has recognized a pre-tax gain of $9 million and $48 million for the three and nine months ended October 3, 2009. In the third quarter of 2009, Textron Inc. extinguished through open market purchases an additional $62 million of its debt and recognized a pre-tax gain of $6 million.

Our debt and credit facilities are summarized below:

(In millions)
 
October 3,
2009
   
January 3,
2009
 
Manufacturing group:
           
Short-term debt:
           
Commercial paper
  $     $ 867  
Current portion of long-term debt