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
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.
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.
3
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.
4
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
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
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.
11
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.
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 |
13
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
|
134 | 9 | ||||||
Total
short-term debt
|
134 | 876 | ||||||
Long-term
senior debt:
|
||||||||
Medium-term
notes due 2010 to 2011
|
14 | 17 | ||||||
4.50%
due 2010
|
128 | 250 | ||||||
Credit
line borrowings due 2012
|
1,172 | — | ||||||
6.50%
due 2012
|
300 | 300 | ||||||
3.875%
due 2013
|
379 | 429 | ||||||
4.50%
convertible senior notes due 2013
|
463 | — | ||||||
6.20%
due 2015
|
350 | — | ||||||
5.60%
due 2017
|
350 | 350 | ||||||
7.25%
due 2019
|
250 | — | ||||||
6.625%
due 2020
|
240 | 219 | ||||||
Other
|
112 | 137 | ||||||
3,758 | 1,702 | |||||||
Current
portion of long-term debt
|
(134 | ) | (9 | ) | ||||
Total
long-term debt
|
3,624 | 1,693 | ||||||
Total
Manufacturing group debt
|
$ | 3,758 | $ | 2,569 | ||||
Finance group:
|
||||||||
Commercial
paper
|
$ | — | $ | 743 | ||||
Other
short-term debt
|
— | 25 | ||||||
Medium-term
fixed-rate and variable-rate notes:
|
||||||||
Due
2009
|
756 | 1,534 | ||||||
Due
2010
|
1,969 | 2,315 | ||||||
Due
2011
|
579 | 727 | ||||||
Due
2012
|
55 | 52 | ||||||
Due
2013 and thereafter
|
762 | 730 | ||||||
Credit
line borrowings due 2012
|
1,740 | — | ||||||
Securitized
on-balance sheet debt
|
443 | 853 | ||||||
6%
Fixed-to-Floating Rate Junior Subordinated Notes due 2017 and
thereafter
|
300 | 300 | ||||||
Fair
value adjustments and unamortized discount
|
64 | 109 | ||||||
Total
Finance group debt
|
$ | 6,668 | $ | 7,388 |
4.50%
Convertible Senior Notes
On May 5,
2009, we issued $600 million of 4.50% Convertible Senior Notes (the
“Convertible Notes”) with a maturity date of May 1, 2013 and interest payable
semi-annually on May 1 and November 1. The Convertible Notes are
convertible, under certain circumstances, at the holder’s option, into shares of
our common stock, at an initial conversion rate of 76.1905 shares of common
stock per $1,000 principal amount of Convertible Notes, which is equivalent to
an initial conversion price of approximately $13.125 per share. Upon conversion,
we have the right to settle the conversion of each $1,000 principal amount of
Convertible Notes with any of the three
16
following alternatives: (1) shares of our common stock,
(2) cash, or (3) a combination of cash and shares of our common stock.
The
Convertible Notes are convertible only under the following certain
circumstances: (1) during any calendar quarter commencing after June 30,
2009 and only during such calendar quarter, if the last reported sale price of
our common stock for at least 20 trading days during the 30 consecutive trading
days ending on the last trading day of the preceding calendar quarter is more
than 130% of the applicable conversion price per share of common stock on the
last trading day of such preceding calendar quarter, (2) during the five
business day period after any ten consecutive trading day measurement period in
which the trading price per $1,000 principal amount of Convertible Notes for
each day in the measurement period was less than 98% of the product of the last
reported sale price of our common stock and the applicable conversion rate,
(3) if specified distributions to holders of our common stock are made or
specified corporate transactions occur, or (4) at any time on or after
February 19, 2013. As of October 3, 2009, none of the conditions
permitting conversion of the Convertible Notes had been satisfied.
The net
proceeds from the issuance of the Convertible Notes totaled approximately $582
million after deducting discounts, commissions and expenses. The
Convertible Notes are accounted for in accordance with generally accepted
accounting principles, which require us to separately account for the liability
(debt) and the equity (conversion option) components of the Convertible Notes in
a manner that reflects our non-convertible debt borrowing
rate. Accordingly, we recorded a debt discount and corresponding
increase to additional paid in capital of approximately $135 million as of the
date of issuance. We are amortizing the debt discount utilizing the
effective interest method over the life of the Convertible Notes which increases
the effective interest rate of the Convertible Notes from its coupon rate of
4.50% to 11.72%. Transaction costs of $18 million were
proportionately allocated between the liability and equity
components.
Concurrently
with the pricing of the Convertible Notes, we entered into convertible note
hedge transactions with two counterparties, including an underwriter and an
affiliate of an underwriter, of the Convertible Notes, for purposes of reducing
the potential dilutive effect upon the conversion. The initial strike
price of the convertible note hedge transactions is $13.125 per share of our
common stock (the same as the initial conversion price of the Convertible Notes)
and is subject to certain customary adjustments. The convertible note hedge
transactions cover 45,714,300 shares of common stock, subject to anti-dilution
adjustments. We may settle the convertible note hedge transactions in shares,
cash or a combination of cash and shares, at our option. The cost of
the convertible note hedge transactions was $140 million, which was recorded as
a reduction to additional paid-in capital. Separately and
concurrently with entering into these hedge transactions, we entered into
warrant transactions whereby we sold warrants to each of the hedge
counterparties to acquire, subject to anti-dilution adjustments, an aggregate of
45,714,300 shares of common stock at an initial exercise price of $15.75 per
share. The aggregate proceeds from the warrant transactions were $95 million,
which was recorded as an increase to additional paid-in capital.
We
incurred cash and non-cash interest expense of $14 million and $24 million for
these Convertible Notes for the three and nine months ended October 3,
2009. As of October 3, 2009, the unamortized discount amount,
including issuance costs totaled $137 million, resulting in a net carrying value
of $463 million for the liability component.
Credit
facility
On July
14, 2009, a newly formed, wholly-owned finance subsidiary of Textron entered
into a credit agreement with the Export-Import Bank of the United States which
establishes a $500 million credit facility to provide funding to finance
purchases of aircraft by non-U.S. buyers from Cessna and Bell. The
facility is structured to be available for financing sales to international
customers who take delivery of new aircraft by December 2010. At
October 3, 2009, we had $30 million outstanding under this
facility.
As
disclosed under the caption “Guarantees and Indemnifications” in Note 18 to the
Consolidated Financial Statements in Textron’s 2008 Annual Report on Form 10-K,
we have issued or are party to certain guarantees,
including a performance guarantee related to the VH-71 helicopter program. In June 2009, we received notification that the VH-71 helicopter program was terminated for convenience by the U.S. Government, and the related performance guarantee was cancelled in October. As of October 3, 2009, there has been no other material change to our guarantees.
17
including a performance guarantee related to the VH-71 helicopter program. In June 2009, we received notification that the VH-71 helicopter program was terminated for convenience by the U.S. Government, and the related performance guarantee was cancelled in October. As of October 3, 2009, there has been no other material change to our guarantees.
Warranty and Product Maintenance
Programs
We
provide limited warranty and product maintenance programs, including parts and
labor, for certain products for periods ranging from one to five
years. We estimate the costs that may be incurred under warranty
programs and record a liability in the amount of such costs at the time product
revenue is recognized. Factors that affect this liability include the
number of products sold, historical and anticipated rates of warranty claims,
and cost per claim. We assess the adequacy of our recorded warranty
and product maintenance liabilities periodically and adjust the amounts as
necessary.
Changes
in our warranty and product maintenance liabilities are as follows:
Nine
Months Ended
|
||||||||
(In
millions)
|
October
3,
2009
|
September
27,
2008
|
||||||
Accrual
at the beginning of period
|
$ | 278 | $ | 313 | ||||
Provision
|
129 | 145 | ||||||
Settlements
|
(168 | ) | (149 | ) | ||||
Adjustments
to prior accrual estimates
|
18 | (12 | ) | |||||
Reclassification
adjustments
|
— | (5 | ) | |||||
Accrual
at the end of period
|
$ | 257 | $ | 292 |
We are
subject to legal proceedings and other claims arising out of the conduct of our
business, including proceedings and claims relating to commercial and financial
transactions; government contracts; compliance with applicable laws and
regulations; production partners; product liability; employment; and
environmental, safety and health matters. Some of these legal proceedings and
claims seek damages, fines or penalties in substantial amounts or remediation of
environmental contamination. As a government contractor, we are subject to
audits, reviews and investigations to determine whether our operations are being
conducted in accordance with applicable regulatory requirements. Under federal
government procurement regulations, certain claims brought by the U.S.
Government could result in our being suspended or debarred from U.S. Government
contracting for a period of time. On the basis of information presently
available, we do not believe that existing proceedings and claims will have a
material effect on our financial position or results of operations.
ARH
Program Termination
On
October 16, 2008, we received notification from the U.S. Department of Defense
that it would not certify the continuation of the Armed Reconnaissance
Helicopter (ARH) program to Congress under the Nunn-McCurdy Act, resulting in
the termination of the program for the convenience of the Government. The ARH
program included a development phase, covered by the System Development and
Demonstration (SDD) contract, and a production phase. We submitted our claim for
the termination costs for the SDD contract in October 2009, and believe that
these costs are fully recoverable from the U.S. Government.
Prior to
termination of the program, we obtained inventory and incurred vendor
obligations for long-lead time materials related to the anticipated Low Rate
Initial Production (LRIP) contracts to maintain the program schedule based on
our belief that the LRIP contracts would be awarded. We have since terminated
these vendor contracts and are negotiating to settle our termination
obligations, which we estimate may cost up to approximately $75 million. We
continue to evaluate the utility of the related inventory to other Bell
programs, customers, or vendors. This review and the related discussions with
vendors are ongoing. We estimate that our potential loss resulting from our
LRIP-related vendor obligations will be between approximately $50 million and
$75 million. At October 3, 2009, our reserves related to this program totaled
$50 million. In October 2009, we filed a claim with the U.S. Government to
request reimbursement of costs expended in support of the LRIP
program.
18
We
measure fair value at the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. We prioritize the assumptions that market
participants would use in pricing the asset or liability (the “inputs”) into a
three-tier fair value hierarchy. This fair value hierarchy gives the
highest priority (Level 1) to quoted prices in active markets for identical
assets or liabilities and the lowest priority (Level 3) to unobservable inputs
in which little or no market data exists, requiring companies to develop their
own assumptions. Observable inputs that do not meet the criteria of
Level 1, and include quoted prices for similar assets or liabilities in active
markets or quoted prices for identical assets and liabilities in markets that
are not active, are categorized as Level 2. Level 3 inputs are those
that reflect our estimates about the assumptions market participants would use
in pricing the asset or liability, based on the best information available in
the circumstances. Valuation techniques for assets and liabilities
measured using Level 3 inputs may include methodologies such as the market
approach, the income approach or the cost approach, and may use unobservable
inputs such as projections, estimates and management’s interpretation of current
market data. These unobservable inputs are only utilized to the
extent that observable inputs are not available or cost-effective to
obtain.
Assets
and Liabilities Recorded at Fair Value on a Recurring Basis
The table
below presents the assets and liabilities measured at fair value on a recurring
basis categorized by the level of inputs used in the valuation of each asset and
liability.
October
3, 2009
|
January
3, 2009
|
|||||||||||||||||||||||
(In
millions)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||||||||
Assets
|
||||||||||||||||||||||||
Manufacturing
group
|
||||||||||||||||||||||||
Foreign currency exchange
contracts
|
$ | — | $ | 43 | $ | — | $ | — | $ | 2 | $ | — | ||||||||||||
Forward contracts for
Textron
Inc.
stock
|
6 | — | — | — | — | — | ||||||||||||||||||
Finance
group
|
||||||||||||||||||||||||
Derivative financial
instruments
|
— | 78 | — | — | 133 | — | ||||||||||||||||||
Retained interests in
securitizations
|
— | — | 88 | — | — | 12 | ||||||||||||||||||
Total assets
|
$ | 6 | $ | 121 | $ | 88 | $ | — | $ | 135 | $ | 12 | ||||||||||||
Liabilities
|
||||||||||||||||||||||||
Manufacturing
group
|
||||||||||||||||||||||||
Forward contracts for
Textron
Inc.
stock
|
$ | — | $ | — | $ | — | $ | 98 | $ | — | $ | — | ||||||||||||
Foreign currency exchange
contracts
|
— | 24 | — | — | 84 | — | ||||||||||||||||||
Finance
group
|
||||||||||||||||||||||||
Derivative financial
instruments
|
— | 5 | — | — | 21 | — | ||||||||||||||||||
Total
liabilities
|
$ | — | $ | 29 | $ | — | $ | 98 | $ | 105 | $ | — |
Foreign
currency exchange contracts are measured at fair value using the market method
valuation technique. The inputs to this technique utilize current foreign
currency exchange forward market rates published by third-party leading
financial news and data providers. This is observable data that represent the
rates that the financial institution uses for contracts entered into at that
date; however, they are not based on actual transactions so they are classified
as Level 2. We record changes in the fair value of these contracts, to the
extent they are effective as cash flow hedges, in other comprehensive income. If
a contract does not qualify for hedge accounting or is designated as a fair
value hedge, changes in the fair value of the contract are recorded in
income.
The
Finance group’s derivative contracts are not exchange-traded. Derivative
financial instruments are measured at fair value utilizing widely accepted,
third-party developed valuation models. The actual terms of each individual
contract are entered into a valuation model, along with interest rate and
foreign exchange rate data, which is based on readily observable market data
published by third-party leading financial news and data providers. Credit risk
is factored into the fair value of derivative assets and liabilities based on
the differential
between both our credit default swap spread for liabilities and the counterparty’s credit default swap spread for assets as compared to a standard AA-rated counterparty; however, this had no significant impact on the valuation as of October 3, 2009 as most of our counterparties are AA-rated and the vast majority of our derivative instruments are in an asset position.
19
between both our credit default swap spread for liabilities and the counterparty’s credit default swap spread for assets as compared to a standard AA-rated counterparty; however, this had no significant impact on the valuation as of October 3, 2009 as most of our counterparties are AA-rated and the vast majority of our derivative instruments are in an asset position.
Retained
interests in securitizations represent our subordinated interest in finance
receivables sold to qualified special purpose trusts and include interest-only
securities, seller certificates, cash reserve accounts and servicing rights and
obligations. We estimate fair value upon the initial recognition of
the retained interest based on the present value of expected future cash flows
using our best estimates of key assumptions – credit losses, prepayment speeds,
forward interest rate yield curves and discount rates commensurate with the
risks involved. These inputs are classified as Level 3 since they
reflect our own judgment regarding the assumptions market participants would use
in pricing these assets based on the best information available in the
circumstances as there is no active market for these assets. We
review the fair values of the retained interests quarterly using a discounted
cash flow model and updated assumptions, and compare such amounts with the
amortized cost basis. At October 3, 2009, the key economic
assumptions used in measuring the retained interests related to the distribution
finance revolving securitization included an annual rate for expected credit
losses of 4.98%, a monthly payment rate of 12.5% and a residual cash flows
discount rate of 10.1%. Net charge-offs as a percentage of distribution finance
receivables was 4.89% for the nine months ended October 3, 2009, compared with
1.94% for the full year of 2008. The 60+ days contractual
delinquency percentage for distribution finance receivables was 6.36% and 2.08%
at October 3, 2009 and January 3, 2009, respectively.
Cash
settlement forward contracts on our common stock are used to manage the expense
related to stock-based compensation awards. The use of these forward contracts
modifies compensation expense exposure to changes in the stock price with the
intent of reducing potential variability. These contracts are measured at fair
value using the market method valuation technique. Since the input to this
technique is based on the quoted price of our common stock at the measurement
date, it is classified as Level 1. Gains or losses on these instruments are
recorded as an adjustment to compensation expense.
The table
below presents the change in fair value measurements for our retained interests
in securitizations that used significant unobservable inputs (Level
3):
Three
Months
Ended
|
Nine
Months
Ended
|
|||||||||||||||
(In
millions)
|
October
3,
2009
|
September
27,
2008
|
October
3,
2009
|
September
27,
2008
|
||||||||||||
Balance,
beginning of period
|
$ | 3 | $ | 53 | $ | 12 | $ | 43 | ||||||||
Transfers
from nonrecurring classification
|
110 | — | 110 | — | ||||||||||||
Net
gains for the period:
|
||||||||||||||||
Increase due to securitization
gains on sale of finance receivables
|
— | 17 | — | 59 | ||||||||||||
Change in value recognized in
Finance revenues
|
— | 1 | — | 2 | ||||||||||||
Change in value recognized in
other comprehensive income
|
12 | — | 11 | — | ||||||||||||
Impairments
recognized in earnings
|
— | (5 | ) | (8 | ) | (5 | ) | |||||||||
Collections,
net
|
(37 | ) | (18 | ) | (37 | ) | (51 | ) | ||||||||
Balance,
end of period
|
$ | 88 | $ | 48 | $ | 88 | $ | 48 |
20
Assets
Recorded at Fair Value on a Nonrecurring Basis
The table
below presents those assets that are measured at fair value on a nonrecurring
basis that had fair value measurement adjustments in
2009. These assets were measured using significant unobservable
inputs (Level 3) and include the following as of October 3, 2009:
(In
millions)
|
||||
Finance
group
|
||||
Finance
receivables held for sale
|
$ | 998 | ||
Impaired
loans
|
532 | |||
Other
assets
|
43 |
Finance Receivables Held for Sale
- Finance receivables held for sale are recorded at the lower of cost or
fair value. Finance receivables held for sale are recorded at fair
value on a nonrecurring basis during periods in which the fair value is lower
than the cost value. The decrease in the finance receivables held for
sale was $4 million and $16 million during the three and nine months ended
October 3, 2009, which was recorded as an increase to the valuation allowance
during the periods. See Note 7: Accounts Receivable, Finance
Receivables and Securitizations, regarding the change in classification of
certain finance receivables from held for sale to held for investment in
2009. Finance receivables held for sale primarily include asset-based
revolving lines of credit, dealer inventory financing and golf mortgages. The
majority of the finance receivables held for sale were identified at the
individual loan level. Golf and resort mortgages classified as held for sale
were identified as a portion of a larger portfolio with common characteristics
based on the intention to balance the sale of certain loans with the collection
of others to maximize economic value.
There are
no active, quoted market prices for our finance receivables. The estimate of
fair value was determined based on the use of discounted cash flow models to
estimate the exit price we expect to receive in the principal market for each
type of loan in an orderly transaction, which includes both the sale of pools of
similar assets, and the sale of individual loans. The models we used incorporate
estimates of the rate of return, financing cost, capital structure and/or
discount rate expectations of current market participants combined with
estimated loan cash flows based on credit losses, payment rates and credit line
utilization rates. Where available, the assumptions related to the expectations
of current market participants were compared to observable market inputs,
including bids from prospective purchasers and certain bond market indices for
loans of similar perceived credit quality. Although we utilize and prioritize
these market observable inputs in our discounted cash flow models, these inputs
are rarely derived from markets with directly comparable loan structures,
industries and collateral types. Therefore, all valuations of finance
receivables held for sale involve significant management judgment, which can
result in differences between our fair value estimates and those of other market
participants.
Impaired Loans - Loan
impairment is measured by comparing the expected future cash flows discounted at
the loan’s effective interest rate, or the fair value of the collateral if the
loan is collateral dependent, to its carrying amount. If the carrying amount is
higher, we establish a reserve based on this difference. This evaluation is
inherently subjective as it requires estimates, including the amount and timing
of future cash flows expected to be received on impaired loans and the
underlying collateral, which may differ from actual results. Impaired nonaccrual
loans are included in the table above since the measurement of required reserves
on our impaired loans is significantly dependent on the fair value of the
underlying collateral. Fair values of collateral are determined based
on the use of appraisals, industry pricing guides, input from market
participants, our recent experience selling similar assets or internally
developed discounted cash flow models. Fair value measurements
recorded during the three and nine months ended October 3, 2009 on impaired
loans resulted in a $26 million and $143 million charge, respectively, to
provision for loan losses and were primarily related to initial fair value
adjustments.
Other assets - Other assets
include repossessed assets and properties and operating assets received in
satisfaction of troubled finance receivables. The fair value of these
assets is determined based on the use of appraisals, industry pricing guides,
input from market participants, our recent experience selling similar assets or
internally developed discounted cash flow models. For repossessed
assets and properties, which are considered assets held for sale, if the
carrying amount of the asset is higher than the estimated fair value, we record
a corresponding charge to income for the difference. For operating
assets received in satisfaction of troubled finance receivables,
if the sum of the undiscounted cash flows is estimated to be less than the carrying value, we record a charge to income for any shortfall between estimated fair value and the carrying amount. During the three and nine months ended October 3, 2009, fair value adjustments on these assets totaled $6 million and $28 million, respectively, and were recorded in Finance revenues in the Consolidated Statement of Operations.
21
if the sum of the undiscounted cash flows is estimated to be less than the carrying value, we record a charge to income for any shortfall between estimated fair value and the carrying amount. During the three and nine months ended October 3, 2009, fair value adjustments on these assets totaled $6 million and $28 million, respectively, and were recorded in Finance revenues in the Consolidated Statement of Operations.
In
connection with the cancellation of the Citation Columbus development program,
we recorded a $43 million impairment charge in the second quarter of 2009 to
write off capitalized costs related to tooling and a partially-constructed
manufacturing facility, which we no longer consider to be
recoverable. The fair value of the remaining assets was determined
using Level 3 inputs and was less than $1 million. See Note 2:
Special Charges for more detail regarding these charges.
Assets
and Liabilities Not Recorded at Fair Value
The
carrying value and estimated fair values of our financial instruments that are
not reflected in the financial statements at fair value are as
follows:
October
3, 2009
|
January
3, 2009
|
|||||||||||||||
(In
millions)
|
Carrying
Value
|
Estimated
Fair
Value
|
Carrying
Value
|
Estimated
Fair
Value
|
||||||||||||
Manufacturing
group
|
||||||||||||||||
Debt, excluding
leases
|
$ | (3,653 | ) | $ | (3,846 | ) | $ | (2,438 | ) | $ | (2,074 | ) | ||||
Finance
group
|
||||||||||||||||
Finance receivables held for
investment, excluding leases
|
4,941 | 4,305 | 5,665 | 4,828 | ||||||||||||
Retained interest in
securitizations, excluding interest only securities
|
5 | 5 | 188 | 178 | ||||||||||||
Investments in other
marketable securities
|
74 | 61 | 95 | 78 | ||||||||||||
Debt
|
(6,638 | ) | (6,299 | ) | (7,388 | ) | (6,507 | ) |
Fair
value for the Manufacturing group debt is determined using market observable
data for similar transactions. We utilize the same valuation methodologies to
determine the fair value estimates for finance receivables held for investment
as used for finance receivables held for sale.
At
October 3, 2009, retained interests in securitizations totaling $88 million were
recorded at fair value as discussed in the preceding section and, accordingly,
are not reflected in the above table.
Investments
in other marketable securities represent notes receivable issued by
securitization trusts that purchase timeshare notes receivable from timeshare
developers. These notes are classified as held-to-maturity and are held at cost.
The estimate of fair value was based on observable market inputs for similar
securitization interests in markets that are currently inactive.
At
October 3, 2009 and January 3, 2009, approximately 61% and 82%, respectively, of
the fair value of term debt for the Finance group was determined based on
observable market transactions. The remaining Finance group debt was determined
based on discounted cash flow analyses using observable market inputs from debt
with similar duration, subordination and credit default
expectations.
Fair
Value Hedges
Our
Finance group enters into interest rate exchange contracts to mitigate exposure
to changes in the fair value of its fixed-rate receivables and debt due to
fluctuations in interest rates. By using these contracts, we are able to convert
our fixed-rate cash flows to floating-rate cash flows.
Cash
Flow Hedges
We
experience variability in the cash flows we receive from our Finance group’s
investments in interest-only securities due to fluctuations in interest rates.
To mitigate our exposure to this variability, our Finance group enters into
interest rate exchange, cap and floor agreements. The combination of these
instruments converts net
residual floating-rate cash flows expected to be received by our Finance group to fixed-rate cash flows. Changes in the fair value of these instruments are recorded net of the income taxes in other comprehensive income (OCI).
22
residual floating-rate cash flows expected to be received by our Finance group to fixed-rate cash flows. Changes in the fair value of these instruments are recorded net of the income taxes in other comprehensive income (OCI).
Our
exposure to loss from nonperformance by the counterparties to our derivative
agreements at October 3, 2009 is minimal. We do not anticipate nonperformance by
counterparties in the periodic settlements of amounts due. We have historically
minimized this potential for risk by entering into contracts exclusively with
major, financially sound counterparties having no less than a long-term bond
rating of A. The recent uncertainty in the financial markets has negatively
affected the bond ratings of all of our counterparties, and we continuously
monitor our exposures to ensure that we limit our risks. The credit risk
generally is limited to the amount by which the counterparties’ contractual
obligations exceed our obligations to the counterparty.
We
manufacture and sell our products in a number of countries throughout the world,
and, therefore, we are exposed to movements in foreign currency exchange rates.
The primary purpose of our foreign currency hedging activities is to manage the
volatility associated with foreign currency purchases of materials, foreign
currency sales of products, and other assets and liabilities created in the
normal course of business. We primarily utilize forward exchange contracts and
purchased options with maturities of no more than 18 months that qualify as cash
flow hedges. These are intended to offset the effect of exchange rate
fluctuations on forecasted sales, inventory purchases and overhead
expenses. At October 3, 2009, we had a net deferred gain of $14
million in OCI related to these cash flow hedges. As the underlying
transactions occur, we expect to reclassify a $5 million loss into earnings in
the next 12 months and $19 million of gains in the following 12-month
period.
Net
Investment Hedges
We hedge
our net investment position in major currencies and generate foreign currency
interest payments that offset other transactional exposures in these currencies.
To accomplish this, we borrow directly in foreign currency and designate a
portion of foreign currency debt as a hedge of net investments. We also may
utilize currency forwards as hedges of our related foreign net investments.
Currency effects on the effective portion of these hedges, which are reflected
in the cumulative translation adjustment account within OCI, produced a $5
million after-tax loss for the third quarter, resulting in an accumulated net
loss balance of $22 million at October 3, 2009. The ineffective
portion of these hedges was insignificant.
Stock-Based
Compensation Hedges
We manage
the expense related to certain stock-based compensation awards using cash
settlement forward contracts on our common stock. The use of these forward
contracts modifies compensation expense exposure to changes in the stock price
with the intent to reduce potential variability. Cash received or paid on the
contract settlement is included in cash flows from operating activities,
consistent with the classification of the cash flows on the underlying hedged
compensation expense.
23
Fair
Values of Derivative Instruments
Assets
|
Liabilities
|
|||||||||||||||
(In
millions)
|
October
3,
2009
|
January
3,
2009
|
October
3,
2009
|
January
3,
2009
|
||||||||||||
Derivatives
designated as hedging instruments
|
||||||||||||||||
Fair
value hedges
|
||||||||||||||||
Finance
group
|
||||||||||||||||
Interest
rate exchange contracts
|
$ | 51 | $ | 112 | $ | (4 | ) | $ | (7 | ) | ||||||
Cash
flow hedges
|
||||||||||||||||
Manufacturing
group
|
||||||||||||||||
Foreign
currency exchange contracts
|
31 | 2 | (8 | ) | (41 | ) | ||||||||||
Forward
contracts for Textron Inc. stock
|
6 | — | — | (98 | ) | |||||||||||
Finance
group
|
||||||||||||||||
Cross-currency
interest rate exchange contracts
|
24 | 21 | (1 | ) | (1 | ) | ||||||||||
Total
cash flow hedges
|
61 | 23 | (9 | ) | (140 | ) | ||||||||||
Total
derivatives designated as hedging instruments
|
$ | 112 | $ | 135 | $ | (13 | ) | $ | (147 | ) | ||||||
Derivatives
not designated as hedging instruments
|
||||||||||||||||
Manufacturing
group
|
||||||||||||||||
Foreign
currency exchange contracts
|
$ | 12 | $ | — | $ | (16 | ) | $ | (43 | ) | ||||||
Finance
group
|
||||||||||||||||
Foreign
currency exchange contracts
|
3 | — | — | — | ||||||||||||
Interest
rate exchange contracts
|
— | — | — | (13 | ) | |||||||||||
Total
derivatives not designated as hedging instruments
|
$ | 15 | $ | — | $ | (16 | ) | $ | (56 | ) |
The fair
values of derivative instruments for the Manufacturing group are included in
either other current assets or accrued liabilities on our Consolidated Balance
Sheets. For the Finance group, they are included in either other assets or other
liabilities.
The
effect of derivative instruments designated as fair value hedges is recorded in
the Consolidated Statements of Operations. The gain (loss) for each
respective period is provided in the following table:
Three
Months Ended
|
Nine
Months Ended
|
||||||||||||||||
(In
millions)
|
Gain
(Loss) Location
|
October
3,
2009
|
September
27,
2008
|
October
3,
2009
|
September
27,
2008
|
||||||||||||
Finance
group
|
|||||||||||||||||
Interest rate exchange
contracts
|
Interest
expense, net
|
$ | 2 | $ | 14 | $ | (13 | ) | $ | 27 | |||||||
Interest rate exchange
contracts
|
Finance
charges
|
2 | — | 8 | (1 | ) |
For our
cash flow hedges, the amount of gain (loss) recognized in other comprehensive
income and the amount reclassified from accumulated other comprehensive income
into income for the nine months ended October 3, 2009 and September 27, 2008 is
provided in the following table:
Amount
of Gain(Loss) Recognized in OCI
(Effective
Portion)
|
Effective
Portion of Derivative Reclassified from Accumulated Other Comprehensive
Loss into Income
|
||||||||||||||||
(In
millions)
|
2009
|
2008
|
Gain
(Loss) Location
|
2009
|
2008
|
||||||||||||
Manufacturing
group
|
|||||||||||||||||
Foreign
currency exchange contracts
|
$ | 54 | $ | (24 | ) |
Cost
of sales
|
$ | (8 | ) | $ | 2 | ||||||
Forward
contracts for
Textron Inc.
stock
|
— | (13 | ) |
Selling
and
administrative
|
(6 | ) | 7 |
The
amount of ineffectiveness on our fair value hedges is
insignificant. During the third quarter of 2009, certain foreign
currency exchange contracts were no longer deemed to be effective cash flow
hedges resulting in a gain of
$11 million in the quarter. These contracts were unwound through the purchase of forward contracts directly offsetting the terms of the undesignated hedges.
24
$11 million in the quarter. These contracts were unwound through the purchase of forward contracts directly offsetting the terms of the undesignated hedges.
We also
enter into certain other foreign currency derivative instruments that do not
meet hedge accounting criteria and primarily are intended to protect against
exposure related to intercompany financing transactions. For these instruments,
the Manufacturing group reported a loss in selling and administrative expenses
of $28 million and $3 million for the three and nine months ended October 3,
2009, respectively, and a gain of $1 million and loss of $9 million for the
three and nine months ended September 27, 2008. Our Finance group
reported a loss of $30 million and $82 million in selling and administrative
expenses for the three and nine months ended October 3, 2009, respectively, and
a loss of $3 million for the nine months ended September 27, 2008.
In June
2009, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 166, “Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140.” This
standard eliminates the concept of a qualifying special-purpose entity (QSPE)
and its exclusion from consolidation by the primary beneficiary in that variable
interest entity (VIE) or the transferor of financial assets to the
VIE. The new accounting guidance also requires that former QSPEs be
reevaluated for consolidation. This standard is effective beginning
in the first quarter of 2010 and early application is prohibited. The
adoption of this standard will result in the consolidation of any
remaining off-balance sheet securitization trusts, which include
securitized finance receivables and related debt. The adoption of
this standard will not have a material impact on our financial position, results
of operations or liquidity.
Also in
June 2009, the FASB Issued SFAS No. 167, “Amendments to FASB Interpretation No
46(R).” This standard changes the approach to determining the primary
beneficiary of a VIE and requires companies to more frequently assess whether
they must consolidate VIEs. This standard is effective beginning in the first
quarter of 2010 and early application is prohibited. The adoption of
this standard is not expected to have any significant impact on our financial
position or results of operations.
We
operate in, and report financial information for, the following five business
segments: Cessna, Bell, Textron Systems, Industrial and
Finance. Segment profit is an important measure used for evaluating
performance and for decision-making purposes. Segment profit for the
manufacturing segments excludes interest expense, certain corporate expenses and
special charges. The measurement for the Finance segment includes
interest income and expense and excludes special charges. Provisions
for losses on finance receivables involving the sale or lease of our products
are recorded by the selling manufacturing division when our Finance group has
recourse to the Manufacturing group.
25
Our
revenues by segment and a reconciliation of segment profit to income (loss) from
continuing operations before income taxes are as follows:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
(In
millions)
|
October
3,
2009
|
September
27,
2008
|
October
3,
2009
|
September
27,
2008
|
||||||||||||
REVENUES
|
||||||||||||||||
MANUFACTURING:
|
||||||||||||||||
Cessna
|
$ | 825 | $ | 1,418 | $ | 2,465 | $ | 4,165 | ||||||||
Bell
|
628 | 702 | 2,040 | 1,974 | ||||||||||||
Textron
Systems
|
502 | 441 | 1,397 | 1,427 | ||||||||||||
Industrial
|
523 | 726 | 1,506 | 2,320 | ||||||||||||
2,478 | 3,287 | 7,408 | 9,886 | |||||||||||||
FINANCE
|
71 | 184 | 279 | 575 | ||||||||||||
Total
revenues
|
$ | 2,549 | $ | 3,471 | $ | 7,687 | $ | 10,461 | ||||||||
SEGMENT
OPERATING PROFIT
|
||||||||||||||||
MANUFACTURING:
|
||||||||||||||||
Cessna (a)
|
$ | 32 | $ | 238 | $ | 170 | $ | 707 | ||||||||
Bell
|
79 | 63 | 220 | 184 | ||||||||||||
Textron
Systems
|
68 | 67 | 175 | 194 | ||||||||||||
Industrial
|
6 | 6 | 9 | 91 | ||||||||||||
185 | 374 | 574 | 1,176 | |||||||||||||
FINANCE
|
(64 | ) | 18 | (229 | ) | 73 | ||||||||||
Segment
profit
|
121 | 392 | 345 | 1,249 | ||||||||||||
Special
charges
|
(42 | ) | — | (203 | ) | — | ||||||||||
Corporate
expenses and other, net
|
(44 | ) | (39 | ) | (124 | ) | (123 | ) | ||||||||
Interest
expense, net for Manufacturing group
|
(40 | ) | (32 | ) | (102 | ) | (91 | ) | ||||||||
Income
(loss) from continuing operations before income taxes
|
$ | (5 | ) | $ | 321 | $ | (84 | ) | $ | 1,035 |
(a)
|
During
the first quarter of 2009, we sold the assets of CESCOM, Cessna’s aircraft
maintenance tracking service line, resulting in a pre-tax gain of $50
million.
|
26
Item
1A. RISK
FACTORS
Our business, financial condition and results of operations are subject to various risks, including the risk factors discussed in our Annual Report on Form 10-K for the year ended January 3, 2009 and those additional and updated risk factors discussed in our Quarterly Report on Form 10-Q for the fiscal quarters ended April 4, 2009 and July 4, 2009, all of which should be carefully considered by investors in our securities. The risks discussed in our SEC filings are those that we believe currently are the most significant, although additional risks not presently known to us or that we currently deem less significant also may impact our business, financial condition or results of operations, perhaps materially.
Consolidated
Results of Operations
Revenues
Revenues
decreased $922 million, 27% and $2.8 billion, 27% in the three and nine months
ended October 3, 2009, respectively, compared with the corresponding periods of
2008. Lower volumes at Cessna accounted for approximately 65% and 63%
of the total revenue decrease in both periods, respectively, and were primarily
due to reductions in business jet and other aircraft volume, reflecting the
impact of order cancellations and reduced demand. The economic recession
has also negatively impacted the automotive, construction and golf industries
resulting in lower volume at the Industrial segment, which accounted for
approximately 21% and 27% of the total revenue decrease for both periods,
respectively. In addition, lower revenues for the Finance segment
accounted for approximately 12% and 11% of the total revenue decrease for both
periods, respectively, primarily due to discounts taken on the sale or early
termination of finance assets and impairment charges associated with repossessed
aircraft, and lower average finance receivables.
Cost
of Sales
Cost of
sales as a percentage of Manufacturing revenues was 82.6% and 83.0% for the
three and nine months ended October 3, 2009, respectively, compared with 78.9%
for both of the corresponding periods of 2008. Cost of sales
increased in 2009 primarily due to the impact of lower production levels and
temporary plant shutdowns at Cessna and Industrial, resulting in increased
conversion costs and idle capacity, along with inventory writedowns at
Cessna.
Selling
and Administrative Expense
Selling
and administrative expense decreased $71 million, 17%, and $169 million, 14%,
for the three and nine months ended October 3, 2009, respectively, compared with
corresponding periods of 2008, primarily due to workforce reductions and
furlough programs resulting in lower compensation and related costs, lower sales
commissions at Cessna, and a decline in professional service and travel costs
due to cost reduction efforts. For the three and nine months ended
October 3, 2009, Cessna’s sales commissions represented approximately $8 million
and $61 million, respectively, of the decrease due to lower sales.
Interest
Expense, net
Interest
expense, net includes interest for both the Finance group and the Manufacturing
group. For the third quarter of 2009, interest expense, net decreased
$29 million, 28%, compared with the third quarter of 2008, primarily due to
lower debt in the Finance segment as it continues to liquidate its
portfolio. Interest expense, net for the Manufacturing group
increased $8 million, 25%, largely due to $14 million in interest on the
Convertible Notes issued in the second quarter of 2009, partially offset by
lower rates in 2009 due to our borrowings from our bank lines of
credit. Interest expense for the Finance group is included within
segment profit.
27
For the
nine months ended October 3, 2009, interest expense, net decreased $88 million,
28%, compared with the corresponding period of 2008, primarily due to reduced
debt in the Finance segment as it continues to liquidate its portfolio. Interest
expense, net for the Manufacturing group increased $11 million, 12%, primarily
due to $24 million in interest on the Convertible Notes issued in the second
quarter of 2009, partially offset by lower rates in 2009 due to our borrowings
from our bank lines of credit.
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
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.
28
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 |
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 then 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.
Income
Taxes
The tax
benefit for continuing operations of $11 million and $71 million for the three
and nine months ended October 3, 2009, equated to an effective tax rate of
220.0% and 84.5% (benefits on a loss), compared with an effective tax rate for
continuing operations of 36.1% and 34.3% (provision on income) during the
corresponding periods of 2008, respectively.
The third
quarter 2009 effective tax rate benefit of 220% differs from the U.S. Federal
statutory rate of 35% due primarily to a 416% benefit attributed to our
international operations as a result of favorable tax settlements of prior year
tax disputes, partially offset by a 173% detriment for un-benefited losses
attributable to CitationShares, now called CitationAir.
For the
nine months ended October 3, 2009, the effective tax rate benefit of 84.5%
differs from the U.S. Federal statutory rate due primarily to a 34% favorable
impact attributed to our international operations as a result of favorable tax
settlements of prior year tax disputes and the benefit attributable to the
adoption, for Canadian tax purposes, of the U.S. dollar as the functional
currency for one of our wholly-owned Canadian subsidiaries, 14% due to a
reduction in unrecognized tax benefits resulting from a capital gain on the sale
of CESCOM and 9% due to a reduction in a valuation allowance related to
contingent payments on a prior year transaction.
Backlog
Our
aircraft and defense business backlog totaled $14.4 billion at October 3, 2009
and was primarily comprised of the following:
(In
millions)
|
October
3,
2009
|
January
3,
2009
|
||||||
Bell
|
$ | 5,633 | $ | 6,192 | ||||
Textron
Systems
|
1,845 | 2,192 | ||||||
Cessna
|
6,887 | 14,530 |
Backlog
at Cessna represents firm orders from customers who have made deposits to
purchase aircraft in the future. We work with our customers to provide estimated
delivery dates, which may be adjusted based on the customers’ needs or our
production schedule, but do not establish definitive delivery dates until
approximately six
months before expected delivery. There is considerable uncertainty as to when backlog will convert to revenues as the conversion depends on production capacity, customer needs and credit availability; these factors may also be impacted by the economy and public perceptions of private corporate jet usage. Therefore, while backlog is an indicator of future revenues, we cannot reasonably estimate the year each order in backlog will ultimately result in revenues and cash flows.
29
months before expected delivery. There is considerable uncertainty as to when backlog will convert to revenues as the conversion depends on production capacity, customer needs and credit availability; these factors may also be impacted by the economy and public perceptions of private corporate jet usage. Therefore, while backlog is an indicator of future revenues, we cannot reasonably estimate the year each order in backlog will ultimately result in revenues and cash flows.
In the
second quarter of 2009, Cessna decided to formally cancel the development of the
Citation Columbus. The decrease in backlog at Cessna includes $2.1
billion attributable to orders for the Citation Columbus aircraft that were
cancelled in the second quarter of 2009, along with cancellations of other
business jet orders due to the economic recession. We have continued
to experience cancellations and expect ongoing volatility in our Cessna backlog
until economic conditions stabilize.
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.
Income
from discontinued operations, net of income taxes was $45 million for the nine
months ended October 3, 2009, primarily due to 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 in
the first half of 2009.
Segment
Analysis
Segment
profit is an important measure used to evaluate performance and for
decision-making purposes. Segment profit for the manufacturing
segments excludes interest expense, certain corporate expenses and special
charges. The measurement for the Finance segment includes interest
income and expense and excludes special charges.
Cessna
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
(In
millions)
|
October
3,
2009
|
September
27,
2008
|
October
3,
2009
|
September
27,
2008
|
||||||||||||
Revenues
|
$ | 825 | $ | 1,418 | $ | 2,465 | $ | 4,165 | ||||||||
Segment
profit
|
32 | 238 | 170 | 707 |
The
deterioration in the global economy in 2009 has significantly impacted the
business jet market as evidenced by a decline in new aircraft orders and an
increase in order cancellations. In response to these conditions, Cessna has
made several reductions to its aircraft production schedule to align output with
customer demand. Cessna has reduced its headcount by approximately
7,900 employees through the end of the third quarter of 2009. See the
Special Charges section regarding this restructuring program, including
cancellation of the Citation Columbus development program in the second quarter
of 2009.
Third
Quarter of 2009
Cessna’s
revenues decreased $593 million in the third quarter of 2009, compared with the
corresponding period of 2008, primarily due to lower volume in business jets and
other aircraft reflecting the impact of order cancellations and decreased
demand. We delivered 68 jets in the third quarter of 2009, compared
with 124 jets in the corresponding period of 2008, representing 91% of the
decrease in revenue. Cessna’s spare parts, product support and
maintenance activities also experienced lower volume and represented 6% of the
decrease in revenue largely due to a decline in aircraft utilization primarily
due to the economic recession. Cessna’s lower revenues were partially
offset by an increase in used aircraft volume of $31 million.
Cessna’s
segment profit decreased $206 million in the third quarter of 2009, compared
with the corresponding period of 2008, primarily due to a $243 million impact
from lower volume. The volume impact also includes
$21 million due to idle capacity related to lower production levels and temporary plant shutdowns. The impact of lower volume was partially offset by $50 million in lower engineering, selling and administrative expenses, largely due to the workforce reduction in 2009.
30
$21 million due to idle capacity related to lower production levels and temporary plant shutdowns. The impact of lower volume was partially offset by $50 million in lower engineering, selling and administrative expenses, largely due to the workforce reduction in 2009.
Year-to-date
2009
For the
nine months ended October 3, 2009, Cessna’s revenues decreased $1.7 billion
compared with the corresponding period of 2008, primarily due to lower volume in
business jets and other aircraft reflecting the impact of order cancellations
and decreased demand. We delivered 221 jets in the nine months ended
October 3, 2009, compared with 336 jets in the corresponding period of 2008,
representing 85% of the decrease in revenues. Cessna’s spare parts,
product support and maintenance activities also experienced lower volume and
represented 7% of the decrease in revenue largely due to a decline in aircraft
utilization primarily due to the economic recession. Lower
CitationAir volume represented 4% of the decrease in revenues primarily due to
lower demand.
For the
nine months ended October 3, 2009, Cessna’s segment profit decreased $537
million compared with the corresponding period of 2008, primarily due to a $639
million impact from lower sales volume, which includes both the impact of lower
sales commissions and $34 million due to idle capacity related to lower
production levels and temporary plant shutdowns. This decrease was partially
offset by $50 million of favorable cost performance and a $50 million gain in
the first quarter of 2009 on the sale of assets related to CESCOM, which
provided maintenance tracking services to Cessna’s customers.
Cessna’s
favorable cost performance includes $77 million in lower engineering, selling
and administrative expense, largely due to the workforce reductions in 2009, and
$66 million in forfeiture income from order cancellations, partially offset by a
$43 million increase in write-downs of pre-owned aircraft inventory, reflecting
lower fair market values due to an excess supply in the market, higher warranty
expense of $14 million, an increase in inventory reserves of $14 million and
unfavorable performance at CitationAir of $11 million.
Bell
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
(In
millions)
|
October
3,
2009
|
September
27,
2008
|
October
3,
2009
|
September
27,
2008
|
||||||||||||
Revenues
|
$ | 628 | $ | 702 | $ | 2,040 | $ | 1,974 | ||||||||
Segment
profit
|
79 | 63 | 220 | 184 |
Third
Quarter of 2009
Bell’s
revenues decreased $74 million in the third quarter of 2009, compared with the
corresponding period of 2008. The decrease in revenues primarily
reflects lower commercial helicopter volume of $80 million, reflecting the
timing of certain deliveries and lower customer demand, and the impact of the
2008 cancellation of the ARH program, which contributed $32 million of revenue
in 2008. These decreases were partially offset by increased pricing
of $23 million, primarily for certain commercial helicopters.
Bell’s
segment profit increased by $16 million in the third quarter of 2009, compared
with the corresponding period of 2008, primarily due to lower selling and
administrative expenses of $16 million, an $11 million gain on a Canadian
currency exchange contract, lower research and development costs of $10 million
and a $9 million impact of higher pricing in excess of
inflation. These increases were partially offset by lower volume of
$18 million and a change in product mix of $13 million, which principally
relates to commercial helicopters. We recognized a gain on a Canadian currency
exchange contract that was unwound during the quarter due to a significant
decline in the production activity that we had hedged.
Year-to-date
2009
For the
nine months ended October 3, 2009, Bell’s revenues increased $66 million
compared with the corresponding period of 2008. Approximately 94% of
the increase is due to higher pricing, primarily related to certain commercial
helicopters, while higher volume accounted for 6% of the
increase. Our volume increased $89 million for the V-22 program, $27
million in the Kiowa Warrior Safety Enhancement Program and $14 million in Huey
II Kits, while volume decreased $72 million for commercial helicopters and $61
million related to the ARH program.
31
For the
nine months ended October 3, 2009, Bell’s segment profit increased by $36
million compared with the corresponding period of 2008, primarily due to higher
pricing in excess of inflation of $29 million and improved cost performance of
$22 million, partially offset by a change in product mix primarily due to
commercial helicopters of $12 million. The improved cost performance
primarily reflects lower selling and administrative expenses of $16 million,
lower research and development costs of $10 million and an $11 million gain on
the Canadian currency exchange contract unwound in the third quarter, as
discussed above. These cost improvements were partially offset by
higher warranty costs of $10 million and an increase in costs related to the
termination of certain commercial models of $8 million.
Textron
Systems
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
(In
millions)
|
October
3,
2009
|
September
27,
2008
|
October
3,
2009
|
September
27,
2008
|
||||||||||||
Revenues
|
$ | 502 | $ | 441 | $ | 1,397 | $ | 1,427 | ||||||||
Segment
profit
|
68 | 67 | 175 | 194 |
Third
Quarter of 2009
Textron
Systems’ revenue and segment profit increased $61 million and $1 million,
respectively, in the third quarter of 2009, compared with the corresponding
period of 2008. The revenue increase was primarily due to higher
defense volumes largely related to Unmanned Aircraft Systems (UAS), which had an
$8 million favorable impact on segment profit. This increase was
partially offset by lower aircraft engine volume of $17 million, which had a $3
million unfavorable impact on segment profit and is largely due to a decline in
aircraft production as aircraft manufacturers cut production levels in response
to lower demand. Segment profit was also impacted by a $4 million intangible
impairment charge.
Year-to-date
2009
For the
nine months ended October 3, 2009, Textron Systems’ revenue decreased $30
million compared with the corresponding period of 2008, primarily due to lower
volume. Aircraft engine volume decreased $62 million, largely due to
the decline in aircraft production as aircraft manufacturers cut production
levels in response to lower demand, while Armed Security Vehicles (ASV)
aftermarket volume decreased $28 million. These decreases were
partially offset by higher Sensor Fused Weapon volume of $35 million and an
increase in UAS volume of $23 million.
For the
nine months ended October 3, 2009, Textron Systems’ segment profit decreased by
$19 million compared with the corresponding period of 2008, primarily due to an
$11 million impact from lower aircraft engine volume, idle facility costs
resulting from lower production, lower defense volumes of $4 million and a $4
million intangible impairment charge.
Industrial
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
(In
millions)
|
October
3,
2009
|
September
27,
2008
|
October
3,
2009
|
September
27,
2008
|
||||||||||||
Revenues
|
$ | 523 | $ | 726 | $ | 1,506 | $ | 2,320 | ||||||||
Segment
profit
|
6 | 6 | 9 | 91 |
Third
Quarter of 2009
Revenues
for the Industrial segment decreased $203 million in the third quarter of 2009,
compared with the corresponding period of 2008, and segment profit was
unchanged. Approximately 96% of the revenue decrease is attributed to
lower volumes, while the remainder was primarily due to unfavorable foreign
exchange impact of fluctuations of the Euro. Lower volume had a $61
million impact on segment profit, which was offset by improved cost performance
of $55 million and lower inflation of $6 million. Cost performance
has improved largely due to significant efforts made to reduce costs through
workforce reductions, employee furloughs, temporary plant shutdowns and lower
engineering and selling and administrative costs.
Year-to-date
2009
For the
nine months ended October 3, 2009, revenues for the Industrial segment decreased
$814 million, compared with the corresponding period of 2008. Lower
volume comprised approximately 93% of the decrease, reflecting lower
demand due to the economic recession. An unfavorable foreign exchange impact of $82 million was largely due to fluctuations of the Euro, and was partially offset by $22 million in higher pricing.
32
demand due to the economic recession. An unfavorable foreign exchange impact of $82 million was largely due to fluctuations of the Euro, and was partially offset by $22 million in higher pricing.
For the
nine months ended October 3, 2009, the Industrial segment’s profit decreased $82
million compared with the corresponding period of 2008, primarily due to lower
volume of $239 million, partially offset by improved cost performance of $137
million and higher pricing of $21 million. Cost performance has
improved largely due to significant efforts made to reduce costs through
workforce reductions, employee furloughs, temporary plant shutdowns and lower
engineering, selling and administrative costs.
Finance
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
(In
millions)
|
October
3,
2009
|
September
27,
2008
|
October
3,
2009
|
September
27,
2008
|
||||||||||||
Revenues
|
$ | 71 | $ | 184 | $ | 279 | $ | 575 | ||||||||
Segment
profit (loss)
|
(64 | ) | 18 | (229 | ) | 73 |
Third
Quarter of 2009
Revenues
for the Finance group decreased $113 million and segment profit decreased $82
million in the third quarter of 2009, compared with the corresponding quarter of
2008, primarily due to the following:
(In millions)
|
Revenue
|
Segment
Profit
|
||||||
Portfolio
losses
|
$ | (53 | ) | $ | (53 | ) | ||
Increase in provision for loan
losses
|
— | (9 | ) | |||||
Lower other
income
|
(26 | ) | (26 | ) | ||||
Revenue impact of lower average
finance receivables of $1.2 billion
|
(21 | ) | (10 | ) | ||||
Lower market interest
rates
|
(20 | ) | — | |||||
Lower securitization
gains
|
(16 | ) | (16 | ) | ||||
Suspended earnings on
nonaccrual finance receivables
|
(8 | ) | (8 | ) | ||||
Accretion of valuation
allowance
|
16 | 16 | ||||||
Gains on debt
extinguishment
|
9 | 9 |
Portfolio
losses include discounts taken on the sale or early termination of finance
assets, which include discounts associated with the liquidation of distribution
finance and golf mortgage receivables of $26 million in the third quarter of
2009, and impairment charges. In the third quarter of 2009, we
recognized impairment charges of $19 million related to real estate received at
the maturity of a leveraged lease and $5 million associated with repossessed
aircraft as a result of weaker aircraft values.
Other
income decreased primarily due to an $11 million reduction in servicing and
investment income and a $4 million increase to the valuation allowance for the
held for sale portfolio to reflect the estimated cost to exit certain
portfolios.
Accretion
of valuation allowance represents the recognition of interest earnings in excess
of a loan’s contractual rate as a result of the discount rate utilized to record
the loan at fair value in previous periods. These interest earnings
are recognized over the remaining life of the portfolio to the extent the
valuation allowance is not expected to be utilized to absorb losses associated
with sales, discounted payoffs or credit losses.
The
higher provision for loan losses for the third quarter of 2009 was primarily due
to a $22 million increase in the captive finance portfolio related to an
increase in both the rate and severity of defaults as a result of weaker general
economic conditions and declining aircraft values, and a $7 million increase in
the resort finance portfolio, reflecting an increase in defaults in our
borrowers’ timeshare note portfolios and the lack of liquidity available to
borrowers in this industry. These increases were partially offset by
lower provision for losses in the distribution finance portfolio of $16 million
and specific reserving actions taken on two accounts in 2008 of $5
million. Net charge-offs as a percentage of average finance
receivables held for investment were 1.43% and 1.05% for the third quarter of
2009 and 2008, respectively.
33
Year-to-date
2009
Finance
segment revenues decreased $296 million and segment profit decreased $302
million in the nine months ended October 3, 2009, compared with the
corresponding period of 2008, primarily due to the following:
(In millions)
|
Revenue
|
Segment
Profit
|
||||||
Portfolio
losses
|
$ | (115 | ) | $ | (115 | ) | ||
Lower market interest
rates
|
(82 | ) | — | |||||
Increase in provision for loan
losses
|
— | (105 | ) | |||||
Lower securitization
gains
|
(57 | ) | (57 | ) | ||||
Lower other
income
|
(54 | ) | (54 | ) | ||||
Revenue impact of lower average
finance receivables of $728 million
|
(38 | ) | (17 | ) | ||||
Suspended earnings on
nonaccrual finance receivables
|
(26 | ) | (26 | ) | ||||
Increase in impairments of
retained interests in securitizations
|
(21 | ) | (21 | ) | ||||
Gains on debt
extinguishment
|
48 | 48 | ||||||
Benefit from variable-rate
receivable interest rate floors
|
26 | 26 | ||||||
Accretion of valuation
allowance, as described above
|
16 | 16 |
Portfolio
losses include discounts taken on the sale or early termination of finance
assets, including discounts associated with the liquidation of distribution
finance and golf mortgage receivables of $58 million and impairment charges of
$21 million associated with repossessed aircraft as a result of weaker aircraft
values. In addition, in the third quarter of 2009, we recognized impairment
charges of $19 million related to real estate received at the maturity of a
leveraged lease.
Other
income decreased primarily due to a $19 million reduction in servicing and
investment income and a $16 million increase to the valuation allowance for the
held for sale portfolio to reflect the estimated cost to exit certain
portfolios.
The
higher provision for loan losses in the nine months ended October 3, 2009 was
primarily the result of a $79 million increase in the captive finance portfolio
reflecting an increase in both the rate and severity of defaults as a result of
weaker general economic conditions and declining aircraft values, a $57 million
increase in the resort finance portfolio, reflecting an increase in defaults in
our borrowers’ timeshare note portfolios and the lack of liquidity available to
borrowers in this industry and a $32 million specific reserve established in the
second quarter on one automobile manufacturer lease within the structured
finance portfolio. The impact of these increases was partially offset by lower
provision for losses in the distribution finance portfolio of $40 million and
specific reserving actions taken on two accounts in 2008 of $32 million. Net
charge-offs as a percentage of average finance receivables held for investment
were 1.92% and 0.81% for the nine months ended October 3, 2009 and September 27,
2008, respectively.
The
following table reflects information about the Finance segment’s credit
performance related to finance receivables held for
investment. Finance receivables held for sale are reflected at fair
value on the Consolidated Balance Sheets. As a result, finance
receivables held for sale are not included in the credit performance statistics
below.
(Dollars
in millions)
|
October
3,
2009
|
January 3,
2009
|
||||||
Nonaccrual
finance receivables
|
$ | 838 | $ | 277 | ||||
Allowance
for losses
|
$ | 302 | $ | 191 | ||||
Ratio
of nonaccrual finance receivables to finance receivables held for
investment
|
13.74 | % | 4.01 | % | ||||
Ratio
of allowance for losses on finance receivables to nonaccrual finance
receivables held for investment
|
36.0 | % | 68.9 | % | ||||
Ratio
of allowance for losses on finance receivables to finance receivables held
for investment
|
4.95 | % | 2.76 | % | ||||
60+
days contractual delinquency as a percentage of finance
receivables
|
7.26 | % | 2.59 | % | ||||
60+
days contractual delinquency
|
$ | 440 | $ | 178 | ||||
Operating
assets received in satisfaction of troubled finance
receivables
|
$ | 168 | $ | 84 | ||||
Repossessed
assets and properties
|
$ | 74 | $ | 70 |
34
The
increase in nonaccrual finance receivables is primarily attributable to $371
million in resort finance as a result of the lack of liquidity available to
borrowers in that industry and $120 million in captive finance, primarily due to
a significant increase in delinquent accounts and weaker aircraft
values. The ratio of allowance for losses to nonaccrual finance
receivables held for investment decreased primarily as a result of the resort
and captive aviation accounts mentioned above for which specific reserves were
either not established or established at a percentage of the outstanding balance
based on a detailed review of our workout strategy and estimates of collateral
value. We expect nonaccrual finance receivables to liquidate more slowly than
our performing finance receivables, and believe that the percentage of
nonaccrual finance receivables to finance receivables held for investment
generally will continue to increase as we execute our liquidation plan under the
current economic conditions. See Note 7: Accounts Receivable, Finance
Receivables and Securitizations in the Consolidated Financial Statements for
more information on nonaccrual and impaired loans.
The
increase in operating assets received in satisfaction of troubled loans and
leases primarily reflects an increase in the number of golf courses whose
ownership was transferred from the borrower to us during 2009 and investments in
real estate associated with leveraged leases which matured during
2009. We intend to operate and improve the performance of these
properties prior to their eventual disposition.
Recently
Issued Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 166, “Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140.” This
standard eliminates the concept of a qualifying special-purpose entity (QSPE)
and its exclusion from consolidation by the primary beneficiary in that variable
interest entity (VIE) or the transferor of financial assets to the
VIE. The new accounting guidance also requires that former QSPEs be
reevaluated for consolidation. This standard is effective beginning
in the first quarter of 2010 and early application is prohibited. The
adoption of this standard will result in the consolidation of any
remaining off-balance sheet securitization trusts, which include
securitized finance receivables and related debt. The adoption of
this standard will not have a material impact on our
financial position, results of operations or liquidity.
Also in
June 2009, the FASB Issued SFAS No. 167, “Amendments to FASB Interpretation No
46(R).” This standard changes the approach to determining the primary
beneficiary of a VIE and requires companies to more frequently assess whether
they must consolidate VIEs. This standard is effective beginning in the first
quarter of 2010 and early application is prohibited. The adoption of
this standard is not expected to have any significant impact on our financial
position or results of operations.
Liquidity
and Capital Resources
Borrowing
Group Presentation
Our
financings are conducted through two separate borrowing groups. The
Manufacturing group consists of Textron Inc. consolidated with its
majority-owned subsidiaries that operate in the Cessna, Bell, Textron Systems
and Industrial segments. The Finance group 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 ability 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.
35
Overview
We
believe that with the continued successful execution of the Finance group’s exit
plan, combined with other liquidity actions discussed below and the cash we
expect to generate from our manufacturing operations, we will have cash
sufficient to meet our future liquidity needs. At October 3, 2009,
the Manufacturing group and Finance group had a combined balance of cash and
cash equivalents of $2.6 billion.
In the
fourth quarter of 2008, our Board of Directors approved a plan to exit all of
the commercial finance business of the Finance segment, other than that portion
of the business supporting customer purchases of Textron-manufactured products,
through a combination of orderly liquidation and selected sales. We made the
decision to exit this business due to continued weakness in the economy and in
order to address our long-term liquidity position in light of continuing
disruption and instability in the capital markets at that time. We
originally expected to reduce managed finance receivables by at least $2.6
billion, net of originations, in 2009, of which approximately $2.0 billion would
be used to pay down off-balance sheet securitized debt. Most of the
remainder of cash generated has been and will be utilized to repay the term debt
issued by the Finance group that is maturing in 2009. During the nine
months ended October 3, 2009, we have already reduced managed finance
receivables by approximately $3.0 billion, primarily in the distribution finance
and asset based lending portfolios, and we now expect a total reduction of at
least $3.4 billion, net of originations, for the year.
During
2009, the capital markets have improved and we have been able to successfully
access these markets to strengthen our current and future liquidity
profile. In May 2009, we completed a concurrent public offering of
4.50% Convertible Senior Notes (the “Convertible Notes”) due 2013 and 23,805,000
shares of our common stock for total net proceeds of approximately $775 million.
In July 2009, a newly formed, wholly-owned finance subsidiary of Textron entered
into a credit agreement with the Export-Import Bank of the United States which
establishes a $500 million credit facility to provide funding to finance
purchases of aircraft by non-U.S. buyers from Cessna and Bell. The
facility is structured to be available for financing sales to international
customers who take delivery of new aircraft by December 2010.
To
lengthen the maturity profile of our indebtedness, 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. 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 subsequent to the end of the third quarter, 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.
In
addition to the tender offer, Textron Financial Corporation and Textron Inc.
extinguished through open market purchases $595 million and $62
million of their debt, respectively, during the nine months ended October 3,
2009. We intend to continually evaluate opportunities to
strategically repurchase our outstanding debt, and that of our Finance group, if
it is in our economic interest, depending on our cash needs and market
conditions.
Contractual
Obligations
We have
updated our Form 10-K disclosure of the Finance group’s contractual obligations,
as defined by reporting regulations, to provide an update on the status of our
liquidation plan. Due to the nature of finance companies, we believe
that it is meaningful to include contractual cash receipts that we expect to
receive in the future. The Finance group has historically borrowed funds at
various contractual maturities to match the maturities of its finance
receivables.
36
The
following table summarizes the Finance group’s liquidity position, including all
managed finance receivables and both on- and off-balance sheet funding sources
as of September 30, 2009, for the specified periods
Payments/Receipts
Due by Period
|
|||||||||||||||||||||||||||
(In
millions)
|
Less
than
1
year
|
1-2
Years
|
2-3
Years
|
3-4
Years
|
4-5
Years
|
More
than
5
years
|
Total
|
||||||||||||||||||||
Payments
due: (1)
|
|||||||||||||||||||||||||||
Multi-year
bank lines of credit
|
$ | — | $ | — | $ | 1,740 | $ | — | $ | — | $ | — | $ | 1,740 | |||||||||||||
Term
debt
|
2,390 | 889 | 56 | 581 | 134 | 71 | 4,121 | ||||||||||||||||||||
Securitized
on-balance sheet debt (2)
|
57 | 61 | 85 | 62 | 60 | 118 | 443 | ||||||||||||||||||||
Subordinated
debt
|
— | — | — | — | — | 300 | 300 | ||||||||||||||||||||
Securitized
off-balance sheet debt (2)
|
879 | 3 | — | — | — | 31 | 913 | ||||||||||||||||||||
Interest
on borrowings (3)
|
115 | 69 | 53 | 36 | 28 | 67 | 368 | ||||||||||||||||||||
Operating
lease rental payments
|
4 | 4 | 2 | 1 | 1 | — | 12 | ||||||||||||||||||||
Total
payments due
|
3,445 | 1,026 | 1,936 | 680 | 223 | 587 | 7,897 | ||||||||||||||||||||
Cash
and contractual receipts: (1)(4)
|
|||||||||||||||||||||||||||
Finance
receivable held for investment
|
1,229 | 1,222 | 1,011 | 736 | 414 | 1,497 | 6,109 | ||||||||||||||||||||
Finance
receivable held for sale
|
418 | 297 | 160 | 173 | 51 | 27 | 1,126 | ||||||||||||||||||||
Securitized
off-balance sheet finance receivables and cash receipts
(2)
|
982 | 3 | — | — | — | 31 | 1,016 | ||||||||||||||||||||
Interest
receipts on finance receivables (3)
|
406 | 299 | 212 | 151 | 109 | 186 | 1,363 | ||||||||||||||||||||
Operating
lease rental receipts
|
25 | 20 | 16 | 10 | 6 | 14 | 91 | ||||||||||||||||||||
Total
contractual receipts
|
3,060 | 1,841 | 1,399 | 1,070 | 580 | 1,755 | 9,705 | ||||||||||||||||||||
Cash
|
616 | — | — | — | — | — | 616 | ||||||||||||||||||||
Total
cash and contractual receipts
|
3,676 | 1,841 | 1,399 | 1,070 | 580 | 1,755 | 10,321 | ||||||||||||||||||||
Net
cash and contractual receipts (payments)
|
$ | 231 | $ | 815 | $ | (537 | ) | $ | 390 | $ | 357 | $ | 1,168 | $ | 2,424 | ||||||||||||
Cumulative
net cash and contractual receipts
|
$ | 231 | $ | 1,046 | $ | 509 | $ | 899 | $ | 1,256 | $ | 2,424 |
(1)
|
Excludes
cash which may be generated by the disposal of operating lease residual
assets and other assets in addition to cash which may be used to pay
future income taxes, accrued interest and other
liabilities.
|
(2)
|
Securitized
on-balance sheet and securitized off-balance sheet debt payments are based
on the contractual receipts of the underlying receivables, which are
remitted into the securitization structure when and as they are received.
These payments do not represent contractual obligations of the Finance
group, and we do not provide legal recourse to investors that purchase
interests in the securitizations beyond the credit enhancement inherent in
the retained subordinate interests.
|
(3)
|
Interest
payments and receipts reflect the current interest rate paid or received
on the related debt and finance receivables. They do not
include anticipated changes in either market interest rates or changes in
borrower performance, which could have an impact on the interest rate
according to the terms of the related debt or finance receivable contract.
The future receipt of interest we charge borrowers on finance receivables
and payments of interest charged on debt obligations are excluded from
this liquidity profile.
|
(4)
|
Finance
receivable receipts are based on contractual cash flows only and do not
reflect any reserves for uncollectible amounts. These receipts could
differ due to sales, prepayments, charge-offs and other factors, including
the inability of borrowers to repay the balance of the loan at the
contractual maturity date. Finance receivable receipts on the held for
sale portfolio represent the contractual balance of the finance
receivables and therefore exclude the potential negative impact from
selling the portfolio at the estimated fair
value.
|
This
liquidity profile, combined with the excess cash generated by our borrowing
under committed bank lines of credit, is an indicator of the Finance group’s
ability to repay outstanding funding obligations, assuming contractual
collection of finance receivables and absent access to new sources of liquidity
or origination of additional finance receivables. On October 3, 2009,
our Finance group also had $325 million in other liabilities, primarily accounts
payable and accrued expenses, that are payable within the next 12
months.
At
October 3, 2009, the Finance group had unused commitments of $515 million to
fund new and existing customers under revolving lines of credit, construction
loans and equipment loans and leases. The revolving lines of credit commitments
generally have an original duration of less than three years, and funding under
these facilities is dependent on the availability of eligible collateral and
compliance with customary financial covenants. As these agreements may not be
used to the extent committed or may expire unused, the total commitment amount
does not represent future cash requirements. We also have ongoing customer
relationships, including manufacturers and dealers in the Distribution Finance
division, which do not contractually obligate us to provide
funding, however, we may choose to fund certain of these relationships to facilitate an orderly liquidation and mitigate credit losses. Neither of these types of potential fundings is included as contractual obligations in the table above.
37
funding, however, we may choose to fund certain of these relationships to facilitate an orderly liquidation and mitigate credit losses. Neither of these types of potential fundings is included as contractual obligations in the table above.
Bank
Facilities and Other Sources of Capital
In
February 2009, due to the unavailability of term debt and difficulty in
accessing sufficient commercial paper on a daily basis, we drew the full amount
available under our committed bank lines of credit. The $3.0 billion borrowed
under the bank lines of credit is not due until April 2012. The
debt (net of cash)-to-capital ratio for our Manufacturing group was 37% at
October 3, 2009, compared with 46% at January 3, 2009, and the gross
debt-to-capital ratio at October 3, 2009 was 56%, compared with 52% at January
3, 2009.
We maintain an effective shelf
registration statement filed with the Securities and Exchange Commission that
allows us to issue an unlimited amount of public debt and other securities, and
the Finance group maintains an effective shelf registration statement that
allows it to issue an unlimited amount of public debt securities. On September
14, 2009, we issued $600 million in senior notes comprised of $350 million of
6.20% notes due 2015 and $250 million of 7.25% notes due 2019 under Textron
Inc.’s registration statement. On May 5, 2009, we also
issued $600 million of Convertible Notes under Textron Inc.’s registration
statement.
The
Convertible Notes are convertible, under certain circumstances, at the holder’s
option, into shares of our common stock, at an initial conversion rate of
76.1905 shares of common stock per $1,000 principal amount of Convertible Notes,
which is equivalent to an initial conversion price of approximately $13.125 per
share. Upon conversion, we have the right to settle the conversion of each
$1,000 principal amount of Convertible Notes with any of the three following
alternatives: (1) shares of our common stock, (2) cash, or (3) a
combination of cash and shares of our common stock. The Convertible Notes are
convertible only under certain circumstances, which are described in Note 9 to
the Consolidated Financial Statements.
The net
proceeds from the issuance of the Convertible Notes totaled approximately $582
million after deducting discounts, commissions and expenses. In
connection with the issuance of the Convertible Notes, we entered into
convertible note hedge transactions with two counterparties, including an
underwriter and an affiliate of an underwriter, of the Convertible Notes, for
purposes of reducing the potential dilutive effect upon the conversion. The
initial strike price of the convertible note hedge transactions is $13.125 per
share of our common stock (the same as the initial conversion price of the
Convertible Notes) and is subject to certain customary adjustments. The
convertible note hedge transactions cover 45,714,300 shares of our common stock,
subject to anti-dilution adjustments. We may settle the convertible note hedge
transactions in shares, cash or a combination of cash and shares, at our
option. The cost of the convertible note hedge transactions was $140
million, which was recorded as a reduction to additional paid-in
capital. Separately and concurrently with entering into these hedge
transactions, we entered into warrant transactions whereby we sold warrants to
each of the hedge counterparties to acquire, subject to anti-dilution
adjustments, an aggregate of 45,714,300 shares of common stock at an initial
exercise price of $15.75 per share. The aggregate proceeds from the warrant
transactions were $95 million, which was recorded as an increase to additional
paid-in capital.
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.
Credit
Ratings
The major
rating agencies regularly evaluate both borrowing groups, and their ratings of
our long-term debt are based on a number of factors, including our financial
strength, and factors outside our control, such as conditions affecting the
financial services industry generally. Both our long- and short-term
credit ratings were downgraded since the end of 2008. In connection
with these rating actions, the rating agencies have cited concerns about the
Finance group, including execution risks associated with our plan to exit
portions of our commercial finance business and the need for Textron Inc. to
make capital contributions to Textron Financial Corporation, as well as lower
than expected business and financial outlook for 2009, including Cessna’s lower
earnings and cash flow,
the increase in outstanding debt resulting from the borrowing under our bank lines of credit, weak economic conditions and continued liquidity and funding constraints. Our current credit ratings prevent us from accessing the commercial paper markets, and may adversely affect the cost and other terms upon which we are able to obtain other financing and access the capital markets.
38
the increase in outstanding debt resulting from the borrowing under our bank lines of credit, weak economic conditions and continued liquidity and funding constraints. Our current credit ratings prevent us from accessing the commercial paper markets, and may adversely affect the cost and other terms upon which we are able to obtain other financing and access the capital markets.
The
credit ratings and outlooks of the debt-rating agencies at October 30, 2009 are
as follows:
|
Fitch
Ratings
|
Moody’s
|
Standard
& Poor’s
|
|||||||||
Long-term ratings:
|
||||||||||||
Manufacturing
|
BB+
|
Baa3
|
BBB-
|
|||||||||
Finance
|
BB+
|
Baa3
|
BB+
|
|||||||||
Short-term
ratings:
|
||||||||||||
Manufacturing
|
B | P3 | A3 | |||||||||
Finance
|
B | P3 | B | |||||||||
Outlook:
|
||||||||||||
Manufacturing
|
Negative
|
Negative
|
Negative
|
|||||||||
Finance
|
Negative
|
Negative
|
Developing
|
Manufacturing
Group Cash Flows of Continuing Operations
Nine
Months Ended
|
||||||||
(In
millions)
|
October
3,
2009
|
September
27,
2008
|
||||||
Operating
activities
|
$ | 317 | $ | 655 | ||||
Investing
activities
|
(211 | ) | (415 | ) | ||||
Financing
activities
|
1,167 | (459 | ) |
Cash
flows from operating activities decreased for the Manufacturing group primarily
due to lower earnings, including lower net distributions received from the
Finance group. For the nine months ended October 3, 2009, changes in
our working capital resulted in a $308 million use of cash, primarily due to a
decrease in accounts payable and accrued liabilities, which included a $100
million cash settlement of our 2008 stock-based compensation hedge, partially
offset by $372 million in cash inflow from inventory reductions. For
the nine months ended September 27, 2008, changes in our working capital
resulted in a $463 million use of cash, largely due to the buildup of
inventories in the aircraft businesses, partially offset by an increase in
accounts payable.
For the
nine months ended October 3, 2009, the Finance group paid the Manufacturing
group $284 million in cash dividends. Also during this period, the Manufacturing
group contributed $197 million of capital to Textron Financial Corporation to
maintain compliance with the fixed charge coverage ratio required by the Support
Agreement. On October 9, 2009, Textron Inc. made an additional $73
million cash contribution to maintain compliance with the Support
Agreement.
We used
less cash for investing activities primarily since we had no acquisitions in
2009, while we used $109 million in cash in 2008 in connection with our
acquisition of AAI Corporation. We also used less cash for capital expenditures
which decreased to $165 million for the nine months ended October 3, 2009,
compared with $310 million in the corresponding period of 2008.
Financing
activities provided more cash in 2009, compared with 2008, primarily due to the
draw on our bank credit lines and the receipt of proceeds from the issuance of
the senior notes, Convertible Notes, common stock and warrants. In
the first quarter of 2009, the Manufacturing group drew $1.2 billion on our bank
lines of credit, which was used to repay outstanding commercial paper borrowings
and for operations. In the second quarter of 2009, we received proceeds of $582
million, net of fees, from the issuance of the Convertible Notes, partially
offset by the purchase of a hedge for $140 million. In addition, we
received $238 million in cash from the issuance of 23,805,000 shares of our
common stock and $95 million from the granting of common stock
warrants. In the third quarter, we issued senior notes for proceeds
of $595 million. Also in 2009, we paid off $411 million of advances against our
officer life insurance policies and $212 million in long-term debt.
39
We have
not repurchased any of our common stock in 2009, while we used $533 million for
share repurchases for the nine months ended September 27, 2008. In
addition, as a result of the reduction in our dividend, we paid $156 million
less in dividends to our shareholders in 2009 compared to 2008.
Finance Group Cash Flows of
Continuing Operations
Nine
Months Ended
|
||||||||
(In
millions)
|
October
3,
2009
|
September
27,
2008
|
||||||
Operating
activities
|
$ | 134 | $ | 154 | ||||
Investing
activities
|
1,363 | (225 | ) | |||||
Financing
activities
|
(984 | ) | 148 |
The
Finance group’s cash flows from investing activities increased for the nine
months ended October 3, 2009, compared with the corresponding period of 2008,
largely due to lower finance receivable originations of $6.4 billion resulting
from our fourth quarter 2008 decision to exit portions of our commercial finance
business. Due to the wind down of this business, we also received
lower finance receivable collections of $4.7 billion and $494 million in lower
proceeds from receivable sales, including securitizations, which were partially
offset by $176 million in proceeds from the sale of repossessed assets and
properties and a $106 million increase in cash received from retained interests
in securitizations.
The
Finance group used more cash for financing activities in 2009, compared with
2008, primarily due to the repayment of debt, commercial paper and intergroup
financing in 2009 totaling $2.7 billion, compared with $1.2 billion in
2008. In 2009, the Finance group repurchased $595 million in debt
prior to its maturity resulting in early extinguishment gains of $48
million. The Finance group’s financing outflows were partially offset
by $1.7 billion in proceeds from the first quarter 2009 draw down on its bank
lines of credit. In 2008, proceeds from the issuance of long-term debt totaled
$1.5 billion.
In
addition, the Finance group paid $142 million more in dividends to the
Manufacturing group in 2009 compared with 2008. The Finance group
received $197 million in capital contributions from the Manufacturing group for
the nine months ended October 3, 2009 to enable it to maintain compliance with
the fixed charge coverage ratio required by the Support Agreement.
Consolidated
Cash Flows of Continuing Operations
Nine
Months Ended
|
||||||||
(In
millions)
|
October
3,
2009
|
September
27,
2008
|
||||||
Operating
activities
|
$ | 555 | $ | 653 | ||||
Investing
activities
|
1,002 | (626 | ) | |||||
Financing
activities
|
229 | (169 | ) |
Cash
flows from operating activities decreased primarily due to lower
earnings. For the nine months ended October 3, 2009, changes in our
consolidated working capital resulted in a $29 million use of cash, primarily
due to a decrease in accounts payable and accrued liabilities, which included a
$100 million cash settlement of our 2008 stock-based compensation hedge,
partially offset by $368 million in cash inflow from inventory reductions and a
$187 million reduction in captive finance receivables, net. For the
nine months ended September 27, 2008, changes in our working capital resulted in
a $472 million use of cash, largely due to the buildup of inventories in the
aircraft businesses, partially offset by an increase in accounts
payable.
Cash
flows from investing activities increased in the nine months ended October 3,
2009, compared with the corresponding period of 2008, largely due to lower
finance receivable originations of $6.2 billion resulting from our fourth
quarter 2008 decision to exit portions of our commercial finance
business. Due to the wind down of this business, we also received
lower finance receivable collections of $4.8 billion and $431 million in lower
proceeds from receivable sales, including securitizations, which were partially
offset by $176 million in proceeds from the sale of repossessed assets and
properties and a $106 million increase in cash received from retained interests
in securitizations. We also used less cash since we had no
acquisitions in 2009, while we used $109 million in cash in 2008 in connection
with our acquisition of AAI Corporation.
40
Financing
activities provided more cash in the nine months ended October 3, 2009, compared
with the corresponding period of 2008, primarily due to the draw on our bank
lines of credit and $333 million from the issuance of common stock and warrants,
partially offset by repayments. In the first quarter of 2009, we drew
$3.0 billion on our bank lines of credit, which was used to repay outstanding
commercial paper borrowings and for operations. Proceeds from long-term debt
issuances, including the Convertible Notes and the senior notes, totaled $1.2
billion of the nine months ended October 3, 2009, compared with $1.5 billion in
the corresponding period of 2008. We used $3.7 billion to repay debt and
commercial paper in the nine months ended October 3, 2009, compared with $1.0
billion in the corresponding period of 2008. Also in 2009, we paid
off $411 million of advances against our officer life insurance
policies.
Captive
Financing
Through
our Finance group, we provide diversified commercial financing to third parties.
In addition, this group finances retail purchases and leases for new and used
aircraft and equipment manufactured by our Manufacturing group, otherwise known
as captive financing. In the Consolidated Statements of Cash Flows, cash
received from customers or from securitizations is reflected as operating
activities when received from third parties. However, in the cash flow
information provided for the separate borrowing groups, cash flows related to
captive financing activities are reflected based on the operations of each
group. For example, when product is sold by our Manufacturing group to a
customer and is financed by the Finance group, the origination of the finance
receivable is recorded within investing activities as a cash outflow in the
Finance group’s Statement of Cash Flows. Meanwhile, in the Manufacturing group’s
Statement of Cash Flows, the cash received from the Finance group on the
customer’s behalf is recorded within operating cash flows as a cash inflow.
Although cash is transferred between the two borrowing groups, there is no cash
transaction reported in the consolidated cash flows at the time of the original
financing. These captive financing activities, along with all significant
intercompany transactions, are reclassified or eliminated from the Consolidated
Statements of Cash Flows.
Significant
reclassification and elimination adjustments included in the Consolidated
Statement of Cash Flows are summarized below:
Nine
Months Ended
|
||||||||
(In
millions)
|
October
3,
2009
|
September
27,
2008
|
||||||
Reclassifications/eliminations
from investing to operating activities:
|
||||||||
Finance receivable originations
for Manufacturing group inventory sales
|
$ | (461 | ) | $ | (723 | ) | ||
Cash received from customers,
sale of receivables and securitizations
|
648 | 715 | ||||||
Eliminations
from operating and financing activities:
|
||||||||
Dividends paid by Finance group
to Manufacturing group, net of capital
contributions
to the Finance group
|
(87 | ) | (142 | ) |
In 2009,
originations have decreased largely due to lower aircraft sales. In
addition, in April 2009, we signed a 3-year agreement with a financial service
company to become a provider of financing for a portion of our sales of E-Z-GO
golf cars. We expect this agreement to reduce future finance
receivable originations in this business.
Cash
Flows of Discontinued Operations
Nine
Months Ended
|
||||||||
(In
millions)
|
October
3,
2009
|
September
27,
2008
|
||||||
Operating
activities
|
$ | (17 | ) | $ | (21 | ) | ||
Investing
activities
|
239 | (10 | ) | |||||
Financing
activities
|
— | (2 | ) |
Cash flow
from investing activities increased for discontinued operations primarily due to
$280 million in after-tax net proceeds upon the sale of HR Textron in the first
quarter of 2009, partially offset by $69 million in tax payments made in 2009
related to the sale of the Fluid & Power businesses.
41
Off-Balance
Sheet Arrangements
As of
October 3, 2009, we have one significant off-balance sheet financing
arrangement. The distribution finance revolving securitization trust
is a master trust that purchases inventory finance receivables from our Finance
segment and issues asset-backed notes to investors. These finance
receivables typically have short durations, which results in significant
collections of previously purchased finance receivables and significant
additional purchases of replacement finance receivables from our Finance segment
on a monthly basis. 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
a result, our Finance segment can no longer fund finance receivables by selling
them to the trust.
The trust
had $978 million of notes outstanding as of October 3, 2009 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.
Foreign
Exchange Risks
Our
financial results are affected by changes in foreign currency exchange rates and
economic conditions in the foreign markets in which our products are
manufactured and/or sold. The impact of foreign exchange rate changes
for the three and nine months ended October 3, 2009 from the corresponding
periods of 2008 is provided below.
(In
millions)
|
Three
Months Ended
October
3, 2009
|
Nine
Months Ended
October
3,
2009
|
||||||
Impact
of foreign exchange rates increased (decreased):
|
||||||||
Revenues
|
$ | (12.7 | ) | $ | (82.5 | ) | ||
Segment profit
|
0.5 | (0.9 | ) |
Critical
Accounting Estimates Update
Finance
Receivables Held for Sale
Finance
receivables are classified as held for sale based on a determination that there
is no longer the intent to hold the finance receivables for the foreseeable
future, until maturity or payoff, or there is no longer the ability to hold the
finance receivables until maturity. Our decision to classify certain
finance receivables as held for sale is based on a number of factors, including,
but not limited to contractual duration, type of collateral, credit strength of
the borrowers, the existence of continued contractual commitments and the
perceived marketability of the finance receivables. On an ongoing
basis, these factors, combined with our overall liquidation strategy, determine
which finance receivables we have the positive intent to hold for the
foreseeable future and which finance receivables we will hold for
sale. Our current strategy is based on an evaluation of both our
performance and liquidity position and changes in external factors affecting the
value and/or marketability of our finance receivables. A change in
this strategy could result in a change in the classification of our finance
receivables. As a result of the significant influence of economic and
liquidity conditions on our business plans, 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. We also believe that unanticipated changes in both internal
and external factors affecting our financial performance, liquidity position or
the value and/or marketability of our finance receivables could result in a
modification of this assessment.
Finance
receivables held for sale are carried at the lower of cost or fair
value. At the time of transfer to held for sale classification, we
establish a valuation allowance for any shortfall between the carrying value,
net of all deferred fees and costs and fair value. In addition, any
allowance for loan losses previously allocated to these finance receivables is
reclassified to the valuation allowance account, which is netted with finance
receivables held for sale on the balance sheet. This valuation
allowance is adjusted quarterly through earnings for any changes in the fair
value of the finance receivables
below the carrying value. Fair value changes can occur based on market interest rates, market liquidity and changes in the credit quality of the borrower and value of underlying loan collateral. If we subsequently determine assets classified as held for sale will not be sold and we have the intent to hold the finance receivables for the foreseeable future, until maturity or payoff, and the ability to hold to maturity, they are reclassified as Finance receivables held for investment with an initial carrying value equivalent to fair value.
42
below the carrying value. Fair value changes can occur based on market interest rates, market liquidity and changes in the credit quality of the borrower and value of underlying loan collateral. If we subsequently determine assets classified as held for sale will not be sold and we have the intent to hold the finance receivables for the foreseeable future, until maturity or payoff, and the ability to hold to maturity, they are reclassified as Finance receivables held for investment with an initial carrying value equivalent to fair value.
Goodwill
Our
goodwill at October 3, 2009 by reporting unit is provided below:
(In
millions)
|
||||
Textron
Systems
|
$ | 956 | ||
Cessna
|
322 | |||
Golf
& Turfcare
|
141 | |||
Kautex
|
134 | |||
Greenlee
|
119 | |||
Bell
|
31 | |||
$ | 1,703 |
On an
annual basis, and if required, on an interim basis, goodwill impairment is
determined using a two-step process. In Step 1, companies are required to
estimate fair value of their reporting units, which may be done using various
methodologies, including the income method using discounted cash
flows. This estimated fair value is then compared to the carrying
value of the reporting unit. If estimated fair value is less than the
carrying value, Step 2 of the goodwill impairment test must be performed to
determine the amount of the impairment. In Step 2, companies must
determine the implied fair value of the reporting unit’s goodwill by assigning
the fair value of the reporting unit to all of the assets and liabilities of
that unit, including any unrecognized intangible assets, as if the reporting
unit had been acquired in a business combination at fair value. If
the carrying amount of the reporting unit goodwill exceeds the implied fair
value of that goodwill, an impairment loss would be recognized in an amount
equal to that excess.
We
evaluate the recoverability of goodwill annually in the fourth quarter or more
frequently if events or changes in circumstances, such as declines in sales,
earnings or cash flows, or material adverse changes in the business climate,
indicate that the carrying value of an asset might be impaired. If
necessary, we determine the fair value estimates for our reporting units at
interim periods using discounted cash flows that incorporate assumptions
consistent with those that we believe market participants would use in valuing
these businesses. These assumptions include short and long-term
revenue growth rates, operating margins and discount rates, which represent our
best estimates of current and forecasted market conditions, current cost
structure, anticipated net cost reductions, and the implied rate of return that
we believe a market participant would require for an investment in a company
having similar risks and business characteristics to the reporting unit being
assessed.
The
revenue growth rates and operating margins used in our discounted cash flow
analysis are based on our businesses’ strategic plans and long-range planning
forecasts. The long-term growth rate we use to determine the terminal
value is based on our assessment of the minimum expected terminal growth rate
for the business, as well as its past historical growth and broader economic
considerations such as gross domestic product, inflation and the maturity of the
markets we serve. We utilize a weighted average cost of capital in
our impairment analysis that makes assumptions about the capital structure that
we believe a market participant would make and include a risk premium based on
an assessment of risks related to the projected cash flows of each reporting
unit. We believe this approach yields a discount rate that is
consistent with an implied rate of return that an independent investor or market
participant would require for an investment in a company having similar risks
and business characteristics to the reporting unit being assessed.
Due to
uncertainty in the length and depth of the economic recession, which has
adversely impacted the markets served by the Golf & Turfcare and Kautex
reporting units, and its affect on certain key valuation assumptions, at
October 3, 2009 we believe there is reasonable possibility that these reporting units might fail the Step 1 impairment test in the future.
43
October 3, 2009 we believe there is reasonable possibility that these reporting units might fail the Step 1 impairment test in the future.
For the
Golf & Turfcare reporting unit, we last performed a Step 1 impairment test
in the second quarter of 2009 due to a significant deterioration in revenue and
operating margins in the first half of 2009 resulting from the poor economic
environment and its negative impact on sales volume. Our
calculation of fair value at that time assumed that improvements in the economy
will significantly impact the business beginning in 2011 with revenue returning
to 2008 levels by 2012 and average operating margins will be consistent with
historical margins. We performed sensitivity analyses around these
assumptions in order to assess the reasonableness of the assumptions and the
resulting estimated fair values and determined that the estimated fair value
exceeded carrying value by a range of 10% to 40%.
For the
Kautex reporting unit, we last performed a Step 1 impairment test in the first
quarter of 2009 due to the continued deterioration in the automotive market at
that time and a significant decline in forecasted revenue and profits for
2009. Our calculation of fair value at that time assumed that
revenues will begin to recover in 2010 with an average growth rate of 7%
beginning in 2010 through 2013 and operating margins returning to historical
levels by 2013. We performed sensitivity analyses around these assumptions in
order to assess the reasonableness of the assumptions and the resulting
estimated fair values and determined that the estimated fair value exceeded
carrying value by a range of 5% to 20%.
The
estimated fair values of the Golf & Turfcare and Kautex reporting units are
sensitive to changes in the assumed average margin and other key
assumptions. Deterioration from the revenues and/or margins assumed
in our calculation for these reporting units could result in estimated fair
value below the carrying value, requiring us to perform Step 2 of the goodwill
impairment test to measure the amount of any impairment loss. We will
continue to monitor the impact of the economic recession on these businesses, as
well as their ability to successfully adjust their cost structure, to assess
whether these factors impact our projected revenue and profit
assumptions.
Forward-Looking
Information
Certain
statements in this Quarterly Report on Form 10-Q and other oral and written
statements made by us from time to time are forward-looking statements,
including those that discuss strategies, goals, outlook or other non-historical
matters, or project revenues, income, returns or other financial measures. These
forward-looking statements speak only as of the date on which they are made, and
we undertake no obligation to update or revise any forward-looking statements.
These forward-looking statements are subject to risks and uncertainties that may
cause actual results to differ materially from those contained in the
statements, such as the Risk Factors contained herein and in our 2008 Annual
Report on Form 10-K and in our Quarterly Reports on Form 10-Q for the quarters
ended April 4 and July 4, 2009 and including the following: (a) changes in
worldwide economic and political conditions that impact demand for our products,
interest rates and foreign exchange rates; (b) the interruption of production at
our facilities or our customers or suppliers; (c) performance issues with key
suppliers, subcontractors and business partners; (d) our ability to perform as
anticipated and to control costs under contracts with the U.S. Government; (e)
the U.S. Government’s ability to unilaterally modify or terminate its contracts
with us for the U.S. Government’s convenience or for our failure to perform, to
change applicable procurement and accounting policies, and, under certain
circumstances, to suspend or debar us as a contractor eligible to receive future
contract awards; (f) changing priorities or reductions in the U.S. Government
defense budget, including those related to Operation Iraqi Freedom, Operation
Enduring Freedom and the Overseas Contingency Operations; (g) changes in
national or international funding priorities, U.S. and foreign military budget
constraints and determinations, and government policies on the export and import
of military and commercial products; (h) legislative or regulatory actions
impacting our operations or demand for our products; (i) the ability to control
costs and successful implementation of various cost-reduction programs,
including the enterprise-wide restructuring program; (j) the timing of new
product launches and certifications of new aircraft products; (k) the occurrence
of slowdowns or downturns in customer markets in which our products are sold or
supplied or where Textron Financial Corporation (TFC) offers financing; (l)
changes in aircraft delivery schedules or cancellation or deferrals of orders;
(m) the impact of changes in tax legislation; (n) the extent to which we are
able to pass raw material price increases through to customers or offset such
price increases by reducing other costs; (o) our ability
to offset, through cost reductions, pricing pressure brought by original equipment manufacturer customers; (p) our ability to realize full value of receivables; (q) the availability and cost of insurance; (r) increases in pension expenses and other postretirement employee costs; (s) TFC’s ability to maintain portfolio credit quality and certain minimum levels of financial performance required under its committed bank lines of credit and under Textron’s support agreement with TFC; (t) TFC’s access to financing, including securitizations, at competitive rates; (u) our ability to successfully exit from TFC’s commercial finance business, other than the captive finance business, including effecting an orderly liquidation or sale of certain TFC portfolios and businesses; (v) uncertainty in estimating market value of TFC’s receivables held for sale and reserves for TFC’s receivables to be retained; (w) uncertainty in estimating contingent liabilities and establishing reserves to address such contingencies; (x) risks and uncertainties related to acquisitions and dispositions, including difficulties or unanticipated expenses in connection with the consummation of acquisitions or dispositions, the disruption of current plans and operations, or the failure to achieve anticipated synergies and opportunities; (y) the efficacy of research and development investments to develop new products; (z) the launching of significant new products or programs which could result in unanticipated expenses; (aa) bankruptcy or other financial problems at major suppliers or customers that could cause disruptions in our supply chain or difficulty in collecting amounts owed by such customers; (bb) difficult conditions in the financial markets which may adversely impact our customers’ ability to fund or finance purchases of our products; and (cc) continued volatility in the economy resulting in a prolonged downturn in the markets in which we do business.
44
to offset, through cost reductions, pricing pressure brought by original equipment manufacturer customers; (p) our ability to realize full value of receivables; (q) the availability and cost of insurance; (r) increases in pension expenses and other postretirement employee costs; (s) TFC’s ability to maintain portfolio credit quality and certain minimum levels of financial performance required under its committed bank lines of credit and under Textron’s support agreement with TFC; (t) TFC’s access to financing, including securitizations, at competitive rates; (u) our ability to successfully exit from TFC’s commercial finance business, other than the captive finance business, including effecting an orderly liquidation or sale of certain TFC portfolios and businesses; (v) uncertainty in estimating market value of TFC’s receivables held for sale and reserves for TFC’s receivables to be retained; (w) uncertainty in estimating contingent liabilities and establishing reserves to address such contingencies; (x) risks and uncertainties related to acquisitions and dispositions, including difficulties or unanticipated expenses in connection with the consummation of acquisitions or dispositions, the disruption of current plans and operations, or the failure to achieve anticipated synergies and opportunities; (y) the efficacy of research and development investments to develop new products; (z) the launching of significant new products or programs which could result in unanticipated expenses; (aa) bankruptcy or other financial problems at major suppliers or customers that could cause disruptions in our supply chain or difficulty in collecting amounts owed by such customers; (bb) difficult conditions in the financial markets which may adversely impact our customers’ ability to fund or finance purchases of our products; and (cc) continued volatility in the economy resulting in a prolonged downturn in the markets in which we do business.
There has
been no significant change in our exposure to market risk during the third
quarter of 2009. For discussion of our exposure to market risk, refer
to Item 7A. Quantitative and Qualitative Disclosures about Market Risk contained
in Textron’s 2008 Annual Report on Form 10-K.
Item
4.
|
We have
carried out an evaluation, under the supervision and with the participation of
our management, including our Chairman and Chief Executive Officer (the CEO) and
our Executive Vice President and Chief Financial Officer (the CFO), of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the Act)) as of the end of the fiscal quarter
covered by this report. Based upon that evaluation, our CEO and CFO
concluded that our disclosure controls and procedures are effective in providing
reasonable assurance that (a) the information required to be disclosed by us in
the reports that we file or submit under the Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms, and (b) such information is accumulated
and communicated to our management, including our CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure.
There
were no changes in our internal control over financial reporting during the
fiscal quarter ended October 3, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
45
PART
II. OTHER INFORMATION
On August
13, 2009, a purported shareholder class action lawsuit was filed in the United
States District Court in Rhode Island against Textron, its Chairman and Chief
Executive Officer and its former Chief Financial Officer. The suit,
filed by the City of Roseville Employees' Retirement System, alleges that the
defendants violated the federal securities laws by making material
misrepresentations or omissions related to Cessna and Textron Financial
Corporation. The complaint seeks unspecified compensatory
damages.
On August
21, 2009, a purported class action lawsuit was filed in the United States
District Court in Rhode Island by Dianne Leach, an alleged participant in the
Textron Savings Plan. Five additional substantially similar class action
lawsuits were subsequently filed by other individuals. The complaints
varyingly name Textron and certain present and former employees, officers and
directors as defendants. These lawsuits allege that the defendants violated the
United States Employee Retirement Income Security Act by imprudently permitting
participants in the Textron Savings Plan to invest in Textron common
stock. The complaints seek equitable relief and unspecified
compensatory damages.
Textron
believes that these lawsuits are all without merit and intends to defend them
vigorously.
Item
5.
|
Because
this Quarterly Report on Form 10-Q is being filed within four business days from
the date of the reportable event, we have elected to make the following
disclosure in this Quarterly Report on Form 10-Q instead of in a Current Report
on Form 8-K under Item 5.02 Departure of Directors or Certain Officers; Election
of Directors; Appointment of Certain Officers; Compensatory Arrangements of
Certain Officers:
On
October 27, 2009, after thirty years of service, Mary L. Howell, the Executive
Vice President Government Affairs, Strategy & Business Development,
International, Communications and Investor Relations of Textron, terminated
employment with Textron, to be effective as of December 31, 2009.
Item
6.
|
EXHIBITS
|
10.1
|
Revised Form of Indemnity Agreement between Textron and its
non-employee directors (approved by the Nominating and Corporate
Governance Committee of the Board of Directors on July 21, 2009 and
entered into with all non-employee directors, effective as of August 1,
2009)
|
10.2
|
Letter agreement between Textron and Frank Connor, dated July 27,
2009
|
10.3
|
Letter agreement between Textron and Lewis B. Campbell, dated
September 22, 2009, along with clarification letter, dated September 30,
2009
|
12.1
|
Computation of ratio of income to fixed charges of Textron Inc.
Manufacturing Group.
|
12.2
|
Computation of ratio of income to fixed charges of Textron Inc.
including all majority-owned
subsidiaries
|
31.1
|
Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
31.2
|
Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
46
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
101
|
The following materials from Textron Inc.’s Quarterly Report on Form
10-Q for the quarterly period ended October 3, 2009, formatted in XBRL
(eXtensible Business Reporting Language): (i) the Consolidated Statements
of Operations, (ii) the Consolidated Balance Sheets, (iii) the
Consolidated Statements of Cash Flows and (iv) Notes to the Consolidated
Financial Statements, tagged as blocks of
text.
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
TEXTRON
INC.
|
|||
Date:
|
October
30, 2009
|
/s/Richard
L. Yates
|
|
Richard
L. Yates
Senior
Vice President and Corporate Controller
(principal
accounting officer)
|
47
LIST
OF EXHIBITS
10.1
|
Revised Form of Indemnity Agreement between Textron and its
non-employee directors (approved by the Nominating and Corporate
Governance Committee of the Board of Directors on July 21, 2009 and
entered into with all non-employee directors, effective as of August 1,
2009)
|
10.2
|
Letter agreement between Textron and Frank Connor, dated July 27,
2009
|
10.3
|
Letter agreement between Textron and Lewis B. Campbell, dated
September 22, 2009, along with clarification letter, dated September 30,
2009
|
12.1
|
Computation of ratio of income to fixed charges of Textron Inc.
Manufacturing Group.
|
12.2
|
Computation of ratio of income to fixed charges of Textron Inc.
including all majority-owned
subsidiaries
|
31.1
|
Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
31.2
|
Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
101
|
The following materials from Textron Inc.’s Quarterly Report on Form
10-Q for the quarterly period ended October 3, 2009, formatted in XBRL
(eXtensible Business Reporting Language): (i) the Consolidated Statements
of Operations, (ii) the Consolidated Balance Sheets, (iii) the
Consolidated Statements of Cash Flows and (iv) Notes to the Consolidated
Financial Statements, tagged as blocks of
text.
|