TEXTRON INC - FORM 10-Q - October 30, 2009

Attached files

file	filename
EX-12.1 - EXHIBIT 12.1 - TEXTRON INC	exhibittwelveone.htm
EX-12.2 - EXHIBIT 12.2 - TEXTRON INC	exhibittwelvetwo.htm
EX-32.2 - EXHIBIT 32.2 - TEXTRON INC	exhibitthirtytwotwo.htm
EX-31.1 - EXHIBIT 31.1 - TEXTRON INC	exhibitthirtyoneone.htm
EX-32.1 - EXHIBIT 32.1 - TEXTRON INC	exhibitthirtytwoone.htm
EX-31.2 - EXHIBIT 31.2 - TEXTRON INC	exhibitthirtyonetwo.htm
EX-10.1 - INDEMNITY AGREEMENT - DIRECTOR - TEXTRON INC	indemnityagmtdirector.htm
EX-10.3 - LEWIS B. CAMPBELL RETIREMENT LETTER - TEXTRON INC	lbcretirementltr.htm
EX-10.3 - LEWIS B. CAMPBELL CLARIFICATION RETIREMENT LETTER - TEXTRON INC	lbcretirementltrrevised.htm
EX-10.2 - FRANK CONNOR AGREEMENT - TEXTRON INC	frankconnoragreement.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

TEXTRON INC.

INDEX

			Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Statements of Operations (Unaudited)		3
	Consolidated Balance Sheets (Unaudited)		4
	Consolidated Statements of Cash Flows (Unaudited)		5
	Notes to the Consolidated Financial Statements (Unaudited)
	Note 1:	Basis of Presentation	7
	Note 2:	Special Charges	7
	Note 3:	Retirement Plans	10
	Note 4:	Discontinued Operations	10
	Note 5:	Comprehensive Income	11
	Note 6:	Earnings per Share	11
	Note 7:	Accounts Receivable, Finance Receivables and Securitizations	12
	Note 8:	Inventories	15
	Note 9:	Debt	15
	Note 10:	Guarantees and Indemnifications	17
	Note 11:	Commitments and Contingencies	18
	Note 12:	Fair Values of Assets and Liabilities	19
	Note 13:	Derivatives	22
	Note 14:	Recently Issued Accounting Pronouncements	25
	Note 15:	Segment Information	25
Item 1A.	Risk Factors		27
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		45
Item 4.	Controls and Procedures		45

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		46
Item 5.	Other Information		46
Item 6.	Exhibits		46
	Signatures		47

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

TEXTRON INC.

Consolidated Statements of Operations (Unaudited)

(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.

TEXTRON INC.

Consolidated Balance Sheets (Unaudited)

(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.

TEXTRON INC.

Consolidated Statements of Cash Flows (Unaudited)

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

TEXTRON INC.

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.

TEXTRON INC.

Notes to the Consolidated Financial Statements (Unaudited)

Note 1: Basis of Presentation

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.

Note 2: Special Charges

In the fourth quarter of 2008, we initiated a restructuring program to reduce overhead costs and improve productivity across the company, 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.

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.

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.

Note 3: Retirement Plans

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

	Pension Benefits						Postretirement Benefits Other Than Pensions
(In millions)	October 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

Note 4: Discontinued Operations

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.

Note 5: Comprehensive Income

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

Note 6: Earnings per Share

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

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

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

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.

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.

Note 8: Inventories

(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

Note 9: Debt

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

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. exti