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EXCEL - IDEA: XBRL DOCUMENT - TEXTRON INCFinancial_Report.xls


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 April 2, 2011
 
OR
 
[    ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from       to       .

Commission File Number 1-5480


Textron Inc.
(Exact name of registrant as specified in its charter)

 Delaware
 
05-0315468
 (State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
40 Westminster Street, Providence, RI
 
02903
(Address of principal executive offices)    
  (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  [     ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes        No  ü

As of April 15, 2011, there were 276,619,984 shares of common stock outstanding.
 
 
 

 

TEXTRON INC.

INDEX


   
Page
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
 
3
 
4
 
5
 
Notes to the Consolidated Financial Statements (Unaudited)
 
 
Note 1:
Basis of Presentation
7
 
Note 2:
Special Charges
7
 
Note 3:
Retirement Plans
8
 
Note 4:
Share-Based Compensation
8
 
Note 5:
Comprehensive Income
9
 
Note 6:
Earnings Per Share and Shareholders’ Equity
10
 
Note 7:
Accounts Receivable and Finance Receivables
10
 
Note 8:
Inventories
15
 
Note 9:
Debt
15
 
Note 10:
Accrued Liabilities
15
 
Note 11:
Commitments and Contingencies
15
 
Note 12:
Derivative Instruments and Fair Value Measurements
16
 
Note 13:
Income Tax Expense
18
 
Note 14:
Segment Information
18
Item 2.
20
Item 3.
29
Item 4.
29
     
PART II.
OTHER INFORMATION
 
     
Item 5.
Other Information
29
Item 6.
31
 
31
 
 
2

 

PART I.  FINANCIAL INFORMATION


Item 1.
FINANCIAL STATEMENTS
 

TEXTRON INC.
Consolidated Statements of Operations (Unaudited)
 
   
Three Months Ended
 
(In millions, except per share amounts)
 
April 2,
2011
   
April 3,
2010
 
Revenues
           
Manufacturing revenues
  $ 2,453     $ 2,134  
Finance revenues
    26       76  
Total revenues
    2,479       2,210  
Costs, expenses and other
               
Cost of sales
    2,055       1,776  
Selling and administrative expense
    304       285  
Provision for losses on finance receivables
    12       55  
Interest expense
    62       71  
Special charges
          12  
Total costs, expenses and other
    2,433       2,199  
Income from continuing operations before income taxes
    46       11  
Income tax expense
    15       15  
Income (loss) from continuing operations
    31       (4 )
Loss from discontinued operations, net of income taxes
    (2 )     (4 )
Net income (loss)
  $ 29     $ (8 )
Basic earnings per share
               
Continuing operations
  $ 0.11     $ (0.01 )
Discontinued operations
    (0.01 )     (0.02 )
Basic earnings per share
  $ 0.10     $ (0.03 )
Diluted earnings per share
               
Continuing operations
  $ 0.10     $ (0.01 )
Discontinued operations
    (0.01 )     (0.02 )
Diluted earnings per share
  $ 0.09     $ (0.03 )
Dividends per share
               
Common stock
  $ 0.02     $ 0.02  

See Notes to the consolidated financial statements.
 
3

 
TEXTRON INC.
Consolidated Balance Sheets (Unaudited)
 
(Dollars in millions)
 
April 2,
2011
   
January 1,
2011
 
Assets
           
Manufacturing group
           
Cash and equivalents
  $ 986     $ 898  
Accounts receivable, net
    910       892  
Inventories
    2,453       2,277  
Other current assets
    1,050       980  
Total current assets
    5,399       5,047  
Property, plant and equipment, less accumulated
depreciation and amortization of $2,968 and $2,869
    1,950       1,932  
Goodwill
    1,643       1,632  
Other assets
    1,659       1,722  
Total Manufacturing group assets
    10,651       10,333  
Finance group
               
Cash and equivalents
    36       33  
Finance receivables held for investment, net
    3,566       3,871  
Finance receivables held for sale
    237       413  
Other assets
    569       632  
Total Finance group assets
    4,408       4,949  
Total assets
  $ 15,059     $ 15,282  
Liabilities and shareholders’ equity
               
Liabilities
               
Manufacturing group
               
Short-term debt and current portion of long-term debt
  $ 216     $ 19  
Accounts payable
    748       622  
Accrued liabilities
    1,829       2,016  
Total current liabilities
    2,793       2,657  
Other liabilities
    2,986       2,993  
Long-term debt
    2,333       2,283  
Total Manufacturing group liabilities
    8,112       7,933  
Finance group
               
Other liabilities
    352       391  
Due to Manufacturing group
    391       326  
Debt
    3,152       3,660  
Total Finance group liabilities
    3,895       4,377  
Total liabilities
    12,007       12,310  
Shareholders’ equity
               
Common stock
    35       35  
Capital surplus
    1,299       1,301  
Retained earnings
    3,061       3,037  
Accumulated other comprehensive loss
    (1,280 )     (1,316 )
      3,115       3,057  
Less cost of treasury shares
    63       85  
            Total shareholders’ equity
    3,052       2,972  
Total liabilities and shareholders’ equity
  $ 15,059     $ 15,282  
Common shares outstanding (in thousands)
    276,520       275,739  
 
See Notes to the consolidated financial statements.
 
4

 
TEXTRON INC.
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended April 2, 2011 and April 3, 2010, respectively
 
   
Consolidated
 
(In millions)
 
2011
   
2010
 
Cash flows from operating activities:
           
Net income (loss)
  $ 29     $ (8 )
Loss from discontinued operations
    (2 )     (4 )
Income (loss) from continuing operations
    31       (4 )
Adjustments to reconcile income (loss) from continuing operations to net cash
               
provided by (used in) operating activities:
               
    Non-cash items:
               
Depreciation and amortization
    95       90  
Provision for losses on finance receivables held for investment
    12       55  
Portfolio losses on finance receivables
    23       28  
Deferred income taxes
    79       (13 )
Other, net
    21       31  
Changes in assets and liabilities:
               
Accounts receivable, net
    (4 )     (76 )
Inventories
    (166 )     (211 )
Other assets
    2       7  
Accounts payable
    119       184  
Accrued and other liabilities
    (229 )     (259 )
Captive finance receivables, net
    72       78  
Other operating activities, net
          1  
Net cash provided by (used in) operating activities of continuing operations
    55       (89 )
Net cash provided by (used in) operating activities of discontinued operations
    (1 )     1  
Net cash provided by (used in) operating activities
    54       (88 )
Cash flows from investing activities:
               
Finance receivables originated or purchased
    (76 )     (145 )
Finance receivables repaid
    290       501  
Proceeds on receivables sales
    168       277  
Capital expenditures
    (78 )     (38 )
Proceeds from sale of repossessed assets and properties
    28       32  
Other investing activities, net
    23       12  
Net cash provided by investing activities of continuing operations
    355       639  
Cash flows from financing activities:
               
Increase in short-term debt
    203        
Payments on long-term lines of credit
    (250 )      
Principal payments on long-term debt
    (417 )     (936 )
Proceeds from issuance of long-term debt
    144       20  
Proceeds from option exercises
    3        
Dividends paid
    (5 )     (5 )
Other financing activities, net
    (5 )      
Net cash used in financing activities of continuing operations
    (327 )     (921 )
Effect of exchange rate changes on cash and equivalents
    9       (13 )
Net increase (decrease) in cash and equivalents
    91       (383 )
Cash and equivalents at beginning of period
    931       1,892  
Cash and equivalents at end of period
  $ 1,022     $ 1,509  

See Notes to the consolidated financial statements.
 
5

 
TEXTRON INC.
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Three Months Ended April 2, 2011 and April 3, 2010, respectively
 
   
Manufacturing Group
   
Finance Group
 
(In millions)
 
2011
   
2010
   
2011
   
2010
 
Cash flows from operating activities:
                       
Net income (loss)
  $ 60     $ 31     $ (31 )   $ (39 )
Loss from discontinued operations
    (2 )     (4 )            
Income (loss) from continuing operations
    62       35       (31 )     (39 )
Adjustments to reconcile income (loss) from continuing operations to net cash
                               
provided by (used in) operating activities:
                               
Dividends received from TFC
    130       125              
Capital contribution paid to TFC
    (63 )     (75 )            
Non-cash items:
                               
Depreciation and amortization
    87       82       8       8  
Provision for losses on finance receivables held for investment
                12       55  
Portfolio losses on finance receivables
                23       28  
Deferred income taxes
    66       16       13       (29 )
Other, net
    32       27       (11 )     4  
Changes in assets and liabilities:
                               
Accounts receivable, net
    (4 )     (76 )            
Inventories
    (169 )     (207 )            
Other assets
    (1 )     8             (4 )
Accounts payable
    119       184              
Accrued and other liabilities
    (186 )     (186 )     (43 )     (73 )
Other operating activities, net
          1              
Net cash provided by (used in) operating activities of continuing operations
    73       (66 )     (29 )     (50 )
Net cash provided by (used in) operating activities of discontinued operations
    (1 )     1              
Net cash provided by (used in) operating activities
    72       (65 )     (29 )     (50 )
Cash flows from investing activities:
                               
Finance receivables originated or purchased
                (125 )     (226 )
Finance receivables repaid
                411       660  
Proceeds on receivables sales
                168       277  
Capital expenditures
    (78 )     (38 )            
Proceeds from sale of repossessed assets and properties
                28       32  
Other investing activities, net
    (43 )     (37 )     31       28  
Net cash provided by (used in) investing activities of continuing operations
    (121 )     (75 )     513       771  
Cash flows from financing activities:
                               
Payments on long-term lines of credit
                (250 )      
Increase in short-term debt
    203                    
Intergroup financing
    (60 )     (150 )     60       150  
Principal payments on long-term debt
    (7 )     (11 )     (410 )     (925 )
Proceeds from issuance of long-term debt
                144       20  
Proceeds from option exercises
    3                    
Capital contributions paid to TFC under Support Agreement
                63       75  
Other capital contributions paid to Finance Group
                40       20  
Dividends paid
    (5 )     (5 )     (130 )     (125 )
Other financing activities, net
    (5 )           1        
Net cash provided by (used in) financing activities of continuing operations
    129       (166 )     (482 )     (785 )
Effect of exchange rate changes on cash and equivalents
    8       (12 )     1       (1 )
Net increase (decrease) in cash and equivalents
    88       (318 )     3       (65 )
Cash and equivalents at beginning of period
    898       1,748       33       144  
Cash and equivalents at end of period
  $ 986     $ 1,430     $ 36     $ 79  
See Notes to the consolidated financial statements.
6

 

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

Note 1:  Basis of Presentation

Our consolidated financial statements include the accounts of Textron Inc. and its majority-owned subsidiaries.  We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information.  Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements.  The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 1, 2011.  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.  Certain prior period amounts have been reclassified to conform with the current year presentation.

Our financings are conducted through two separate borrowing groups.  The Manufacturing group consists of Textron Inc. consolidated with its majority-owned subsidiaries that operate in the Cessna, Bell, Textron Systems and Industrial segments.  The Finance group, which also is the Finance segment, consists of Textron Financial Corporation (TFC), its consolidated subsidiaries and three other finance subsidiaries owned by Textron Inc. We designed this framework to enhance our borrowing power by separating the Finance group.  Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services.  Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance.  To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the consolidated financial statements.  All significant intercompany transactions are eliminated from the consolidated financial statements, including retail and wholesale financing activities for inventory sold by our Manufacturing group and financed by our Finance group.

Note 2:  Special Charges

In 2010, special charges included restructuring costs incurred under a restructuring program that was completed at the end of 2010.  There were no special charges in the first quarter of 2011.

Restructuring costs by segment and type for the three months ended April 3, 2010 are as follows:

(In millions)
 
Severance
Costs
   
Contract
Terminations
   
Total
 
Cessna
  $ 8     $ 2     $ 10  
Bell
    1             1  
Finance
    3             3  
Corporate
    (2 )           (2 )
    $ 10     $ 2     $ 12  

An analysis of our restructuring reserve activity is summarized below:

(In millions)
 
Severance
Costs
   
Contract
Terminations
   
Total
 
Balance at January 1, 2011
  $ 57     $ 5     $ 62  
Cash paid
    (23 )     (1 )     (24 )
Balance at April 2, 2011
  $ 34     $ 4     $ 38  


 
7

 
Note 3:  Retirement Plans

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

   
Pension Benefits
   
Postretirement Benefits
Other Than Pensions
 
(In millions)
 
April 2,
2011
   
April 3,
2010
   
April 2,
2011
   
April 3,
2010
 
Three Months Ended
                       
Service cost
  $ 32     $ 31     $ 2     $ 2  
Interest cost
    82       79       8       8  
Expected return on plan assets
    (98 )     (92 )            
Amortization of prior service cost (credit)
    4       4       (1 )     (1 )
Amortization of net loss
    19       9       3       3  
Net periodic benefit cost
  $ 39     $ 31     $ 12     $ 12  

Note 4:  Share-Based Compensation
 
Share-based compensation expense includes restricted stock and stock option awards, as well as performance share units, restricted stock units, and deferred income plan stock unit awards which are payable in cash.  The compensation expense we recorded in net income (loss) for our share-based compensation plans is as follows:
 
   
Three Months Ended
 
 
(In millions)
 
April 2,
2011
   
April 3,
2010
 
Compensation expense
  $ 36     $ 23  
Hedge income
          (2 )
Income tax benefit
    (13 )     (9 )
Total net compensation cost included in net income (loss)
  $ 23     $ 12  

Stock Options
The stock option compensation cost calculated under the fair value approach is recognized over the vesting period of the stock options.  The weighted-average fair value of options granted per share was $10 and $7 in the first quarter of 2011 and 2010, respectively. We estimate the fair value of options granted on the date of grant using the Black-Scholes option-pricing model.  Expected volatilities consider implied volatilities from traded options on our common stock, historical volatilities and other factors.  We use historical data to estimate option exercise behavior, adjusted to reflect anticipated changes in expected life.  The weighted-average assumptions used in our Black-Scholes option-pricing model for awards issued during the respective periods are as follows:

   
Three Months Ended
 
   
April 2,
2011
   
April 3,
2010
 
Dividend yield
    0.3 %     0.4 %
Expected volatility
    38.0 %     37.0 %
Risk-free interest rate
    2.4 %     2.6 %
Expected lives (In years)
    5.5       5.5  
 
Stock option activity for the first quarter of 2011 is as follows:
   
 
 
Shares
Under
Options
(In thousands)
   
 
Weighted-
Average
Exercise
Price
   
Weighted-
Average
Remaining
Contractual
Life
(In years)
 
Outstanding at beginning of period
    6,926     $ 28.15       5.0  
Granted
    2,656       26.25          
Exercised
    (76 )     18.59          
Canceled, expired or forfeited
    (107 )     28.69          
Outstanding at end of period
    9,399     $ 27.68       7.0  
Exercisable at end of period
    4,719     $ 31.48       4.7  
8

 
At April 2, 2011, our outstanding and exercisable options had an aggregate intrinsic value of $40 million and $20 million, respectively.

Restricted Stock Units
The 2011 activity for restricted stock units payable in stock and for restricted stock units payable in cash is provided below:

   
Units Payable in Stock
   
Units Payable in Cash
 
(Shares in thousands)
 
Number of Shares
   
Weighted-Average Grant Date
Fair Value
   
Number of Shares
   
Weighted-Average Grant Date
Fair Value
 
Outstanding at beginning of year, nonvested
    762     $ 47.55       3,472     $ 14.60  
Granted
    278       26.25       663       26.25  
Vested
    (290 )     (46.34 )     (769 )     (12.92 )
Forfeited
    (21 )     (48.75 )     (89 )     (15.49 )
Outstanding at end of period, nonvested
    729     $ 39.87       3,277     $ 17.32  

Performance Share Units
The fair value of share-based compensation awards accounted for as liabilities includes performance share units.  The fair value of these awards is based on the trading price of our common stock, less adjustments to reflect the fair value of certain awards for which dividends are not paid or accrued until vested, and is remeasured at each reporting period date.  The 2011 activity for our performance share units is as follows:
 
(Shares in thousands)
 
Number of Shares
   
Weighted-Average Grant Date
Fair Value
 
Outstanding at beginning of year, nonvested
    1,897     $ 9.59  
Granted
    411       26.25  
Outstanding at end of period, nonvested
    2,308     $ 12.56  

Share-Based Compensation Awards
The value of the share-based compensation awards that vested and/or were paid during the respective periods is as follows:

   
Three Months Ended
 
(In millions)
 
April 2,
2011
   
April 3,
2010
 
Subject only to service conditions:
           
Value of shares, options or units vested
  $ 34     $ 36  
Intrinsic value of cash awards paid
    20       8  
Subject to performance vesting conditions:
               
Value of units vested
           
Intrinsic value of cash awards paid
    1       5  
Intrinsic value of amounts paid under Deferred Income Plan
          8  

Note 5:  Comprehensive Income

Our comprehensive income, net of taxes, is provided below:

   
Three Months Ended
 
(In millions)
 
April 2,
2011
   
April 3,
2010
 
Net income (loss)
  $ 29     $ (8 )
Other comprehensive income (loss):
               
Recognition of prior service cost and unrealized
losses on pension and postretirement benefits
    18       10  
Deferred gains on hedge contracts
    6       7  
Foreign currency translation and other
    12       (9 )
Comprehensive income
  $ 65     $  
9

 
Note 6:  Earnings Per Share and Shareholders’ Equity

Earnings Per Share
We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period.  Basic earnings per share is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends.  Diluted earnings per share considers the dilutive effect of all potential future common stock, including stock options, restricted stock units and the shares that could be issued upon the conversion of our 4.50% Convertible Notes and upon the exercise of the related warrants.  The convertible note call options purchased in connection with the issuance of the 4.50% Convertible Notes are excluded from the calculation of diluted EPS as their impact is always anti-dilutive.

Upon conversion of our 4.50% Convertible Notes, as described in Note 9, the principal amount would be settled in cash and the excess of the conversion value, as defined, over the principal amount may be settled in cash and/or shares of our common stock.  Therefore, only the shares of our common stock potentially issuable with respect to the excess of the notes’ conversion value over the principal amount, if any, are considered as dilutive potential common shares for purposes of calculating diluted EPS.

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

   
Three Months Ended
 
 
(In thousands)
 
April 2,
2011
   
April 3,
2010
 
Basic weighted-average shares outstanding
    276,358       273,174  
Dilutive effect of Convertible Notes, warrants, stock options and restricted stock units
    42,761        
Diluted weighted-average shares outstanding
    319,119       273,174  

Stock options to purchase 4 million and 7 million shares of common stock outstanding are excluded from our calculation of diluted weighted-average shares outstanding for the three months ended April 2, 2011 and April 3, 2010, respectively, as the exercise prices were greater than the average market price of our common stock for the periods.  These securities could potentially dilute earnings per share in the future.

For the three months ended April 3, 2010, the potential dilutive effect of 28 million weighted-average shares of Convertible Notes, warrants, stock options and restricted stock units was excluded from the computation of diluted weighted-average shares outstanding as the shares would have an anti-dilutive effect on the loss from continuing operations.

Note 7:  Accounts Receivable and Finance Receivables

Accounts Receivable
Accounts receivable is composed of the following:

(In millions)
 
April 2,
2011
   
January 1,
2011
 
Commercial
  $ 607     $ 496  
U.S. Government contracts
    321       416  
      928       912  
Allowance for doubtful accounts
    (18 )     (20 )
    $ 910     $ 892  

We have unbillable receivables on U.S. Government contracts that arise when the revenues we have appropriately recognized based on performance cannot be billed yet under terms of the contract.  Unbillable receivables within accounts receivable totaled $155 million at April 2, 2011 and $195 million at January 1, 2011.


 
10

 

Finance Receivables
Finance receivables by product line, which includes both finance receivables held for investment and finance receivables held for sale, are presented in the following table:

(Dollars in millions)
 
April 2, 2011
   
January 1, 2011
 
Aviation
  $ 2,028       49 %   $ 2,120       46 %
Golf equipment
    192       4       212       5  
Golf mortgage
    818       20       876       19  
Timeshare
    622       15       894       19  
Structured capital
    317       8       317       7  
Other liquidating
    164       4       207       4  
Total finance receivables
    4,141       100 %     4,626       100 %
Less: Allowance for losses
    338               342          
Less: Finance receivables held for sale
    237               413          
Total finance receivables held for investment, net
  $ 3,566             $ 3,871          

Credit Quality Indicators and Nonaccrual Finance Receivables
We internally assess the quality of our finance receivables held for investment portfolio based on a number of key credit quality indicators and statistics such as delinquency, loan balance to collateral value, the liquidity position of individual borrowers and guarantors, debt service coverage in the golf mortgage product line and default rates of our notes receivable collateral in the timeshare product line.  Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans/portfolios into three categories based on the key credit quality indicators for the individual loan.  These three categories are performing, watchlist and nonaccrual.

We classify finance receivables held for investment as nonaccrual if credit quality indicators suggest full collection is doubtful.  In addition, we automatically classify accounts as nonaccrual that are contractually delinquent by more than three months unless collection is not doubtful.  Cash payments on nonaccrual accounts, including finance charges, generally are applied to reduce the net investment balance.  We resume the accrual of interest when the loan becomes contractually current through payment according to the original terms of the loan or, if a loan has been modified, following a period of performance under the terms of the modification, provided we conclude that collection of all principal and interest is no longer doubtful.  Previously suspended interest income is recognized at that time.

Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain.  All other finance receivables held for investment that do not meet the watchlist or nonaccrual categories are classified as performing.

A summary of finance receivables held for investment categorized based on the internally assigned credit quality indicators discussed above is as follows:

   
April 2, 2011
   
January 1, 2011
 
(In millions)
 
Performing
   
Watchlist
   
Nonaccrual
   
Total
   
Performing
   
Watchlist
   
Nonaccrual
   
Total
 
Aviation
  $ 1,641     $ 219     $ 168     $ 2,028     $ 1,713     $ 238     $ 169     $ 2,120  
Golf equipment
    122       46       24       192       138       51       23       212  
Golf mortgage
    205       200       235       640       163       303       219       685  
Timeshare
    166       40       357       563       222       77       382       681  
Structured capital
    290       27             317       290       27             317  
Other liquidating
    98       14       52       164       130       11       57       198  
Total
  $ 2,522     $ 546     $ 836     $ 3,904     $ 2,656     $ 707     $ 850     $ 4,213  
% of Total
    64.6 %     14.0 %     21.4 %             63.0 %     16.8 %     20.2 %        

We measure delinquency based on the contractual payment terms of our loans and leases.  In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due.  If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.
 
 
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Finance receivables held for investment by delinquency aging category is summarized in the tables below:

(In millions)
 
Less Than
31 Days
Past Due
   
31-60 Days
Past Due
   
61-90 Days
Past Due
   
Greater Than
90 Days
Past Due
   
Total
 
April 2, 2011
     
Aviation
  $ 1,857     $ 101     $ 28     $ 42     $ 2,028  
Golf equipment
    162       10       4       16       192  
Golf mortgage
    527       11       3       99       640  
Timeshare
    326       38       80       119       563  
Structured capital
    317                         317  
Other liquidating
    135       2       1       26       164  
Total
  $ 3,324     $ 162     $ 116     $ 302     $ 3,904  
January 1, 2011
     
Aviation
  $ 1,964     $ 67     $ 41     $ 48     $ 2,120  
Golf equipment
    171       13       9       19       212  
Golf mortgage
    543       12       7       123       685  
Timeshare
    533       14       6       128       681  
Structured capital
    317                         317  
Other liquidating
    166       2       1       29       198  
Total
  $ 3,694     $ 108     $ 64     $ 347     $ 4,213  

At April 2, 2011, accrual status loans that were 90 days past due totaled $8 million.  We had no accrual status loans that were 90 days past due at January 1, 2011.  At April 2, 2011, the 60+ days contractual delinquency as a percentage of finance receivables held for investment was 10.71%, compared with 9.77% at January 1, 2011.

Impaired Loans
We evaluate individual finance receivables held for investment in non-homogeneous portfolios and larger accounts in homogeneous loan portfolios for impairment on a quarterly basis.  Finance receivables classified as held for sale are reflected at the lower of cost or fair value and are excluded from these evaluations.

A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators discussed above.  Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified.  If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification.  No significant interest income was recognized on impaired loans in the first quarter of 2011 or 2010.

The average recorded investment in impaired loans for the first quarter of 2011 and 2010 are provided below:

(In millions)
 
Aviation
   
Golf
Equipment
   
Golf
Mortgage
   
Timeshare
   
Other Liquidating
   
Total
 
For the three months ended April 2, 2011
     
Impaired loans with a related allowance for losses recorded
  $ 145     $ 5     $ 190     $ 341     $ 18     $ 699  
Impaired loans with no related allowance for losses recorded
    19             90       33       22       164  
Total
  $ 164     $ 5     $ 280     $ 374     $ 40     $ 863  
For the three months ended April 3, 2010
     
Impaired loans with a related allowance for losses recorded
  $ 240     $ 3     $ 186     $ 352     $ 27     $ 808  
Impaired loans with no related allowance for losses recorded
    12       1       111       54       63       241  
Total
  $ 252     $ 4     $ 297     $ 406     $ 90     $ 1,049  


 
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A summary of impaired finance receivables and related allowance for losses is provided below:

(In millions)
 
Aviation
   
Golf
Equipment
   
Golf
Mortgage
   
Timeshare
   
Other Liquidating
   
Total
 
April 2, 2011
     
Impaired loans with a related allowance for losses recorded:
                                   
   Recorded investment
  $ 144     $ 6     $ 205     $ 327     $ 19     $ 701  
   Unpaid principal balance
    146       6       215       367       25       759  
   Related allowance
    50       1       45       102       4       202  
Impaired loans with no related allowance for losses recorded:
                                               
   Recorded investment
    20             94       41       19       174  
   Unpaid principal balance
    20             98       41       75       234  
Total impaired loans:
                                               
   Recorded investment
    164       6       299       368       38       875  
   Unpaid principal balance
    166       6       313       408       100       993  
   Related allowance
    50       1       45       102       4       202  
January 1, 2011
     
Impaired loans with a related allowance for losses recorded:
                                               
   Recorded investment
  $ 147     $ 4     $ 175     $ 355     $ 16     $ 697  
   Unpaid principal balance
    144       5       178       385       15       727  
   Related allowance
    45       2       39       102       3       191  
Impaired loans with no related allowance for losses recorded:
                                               
   Recorded investment
    17             138       69       30       254  
   Unpaid principal balance
    21             146       74       89       330  
Total impaired loans:
                                               
   Recorded investment
    164       4       313       424       46       951  
   Unpaid principal balance
    165       5       324       459       104       1,057  
   Related allowance
    45       2       39       102       3       191  

Allowance for Losses We maintain the allowance for losses on finance receivables held for investment at a level considered adequate to cover inherent losses in the portfolio based on management’s evaluation and analysis by product line.  For larger balance accounts specifically identified as impaired, including large accounts in homogeneous portfolios, a reserve is established based on comparing the carrying value with either a) the expected future cash flows, discounted at the finance receivable’s effective interest rate; or b) the fair value, if the finance receivable is collateral dependent.  The expected future cash flows consider collateral value; financial performance and liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs associated with the repossession/foreclosure and eventual disposal of collateral.  When there is a range of potential outcomes, we perform multiple discounted cash flow analyses and weight the outcomes based on their relative likelihood of occurrence.

The evaluation of our portfolios is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the underlying collateral, which may differ from actual results.  While our analysis is specific to each individual account, the most critical factors included in this analysis vary by product line.  For the aviation product line, these factors include industry valuation guides, physical condition of the aircraft, payment history, and existence and financial strength of guarantors.  For the golf equipment line, the critical factors are the age and condition of the collateral, while the factors for the golf mortgage line include historical golf course, hotel or marina cash flow performance; estimates of golf rounds and price per round or occupancy and room rates; market discount and capitalization rates; and existence and financial strength of guarantors.  For the timeshare product line, the critical factors are the historical performance of consumer notes receivable collateral, real estate valuations, operating expenses of the borrower, the impact of bankruptcy court rulings on the value of the collateral, legal and other professional expenses and borrower’s access to capital.
 
We also establish an allowance for losses by product line to cover probable but specifically unknown losses existing in the portfolio.  For homogeneous portfolios, including the aviation and golf equipment product lines, the allowance is established as a percentage of non-recourse finance receivables, which have not been identified as requiring specific reserves.  The percentage is based on a combination of factors, including historical loss experience, current delinquency and default trends, collateral values, and both general economic and specific industry trends.  For non-homogeneous portfolios, including the
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golf mortgage and timeshare product lines, the allowance is established as a percentage of watchlist balances, as defined on page 11, which represents a combination of assumed default likelihood and loss severity based on historical experience, industry trends and collateral values.  In establishing our allowance for losses to cover accounts not specifically identified, the most critical factors for the aviation product line include the collateral value of the portfolio, historical default experience and delinquency trends; for golf equipment, factors considered include historical loss experience and delinquency trends;  and for golf mortgage, factors include an evaluation of individual loan credit quality indicators such as delinquency, loan balance to collateral value, debt service coverage, existence and financial strength of guarantors, historical progression from watchlist to nonaccrual status and historical loss severity.  For the timeshare product line, we evaluate individual loan credit quality indicators such as borrowing base shortfalls for revolving notes receivable facilities, default rates of our notes receivable collateral, borrower’s access to capital, historical progression from watchlist to nonaccrual status and estimates of loss severity based on analysis of impaired loans in the product line.

Finance receivables held for investment are written down to the fair value (less estimated costs to sell) of the related collateral at the earlier of the date when the collateral is repossessed or when no payment has been received for six months unless management deems the receivable collectable.  Finance receivables are charged off when the remaining balance is deemed to be uncollectable.

A rollforward of the allowance for losses on finance receivables held for investment and a summary of its composition, based on how the underlying finance receivables are evaluated for impairment, is presented below.  The finance receivables reported in the following table specifically exclude $279 million and $283 million of leveraged leases at April 2, 2011 and April 3, 2010, respectively, in accordance with authoritative accounting standards.

(In millions)
 
Aviation
   
Golf Equipment
   
Golf
Mortgage
   
Timeshare
   
Structured Capital and Other Liquidating
   
Total
 
For the three months ended April 2, 2011
     
Allowance for losses
                                   
Beginning balance
  $ 107     $ 16     $ 79     $ 106     $ 34     $ 342  
Provision for losses
    11             (1 )           2       12  
Net charge-offs and transfers
    (8 )     (3 )     (3 )     (1 )     (1 )     (16 )
Ending balance
  $ 110     $ 13     $ 75     $ 105     $ 35     $ 338  
Ending balance based on individual evaluations
    50       1       45       102       4       202  
Ending balance based on collective evaluation
    60       12       30       3       31       136  
Finance receivables
                                               
Individually evaluated for impairment
  $ 164     $ 6     $ 299     $ 368     $ 38     $ 875  
Collectively evaluated for impairment
    1,864       186       341       195       164       2,750  
Balance at end of period
  $ 2,028     $ 192     $ 640     $ 563     $ 202     $ 3,625  
For the three months ended April 3, 2010
     
Allowance for losses
                                               
Beginning balance
  $ 114     $ 9     $ 65     $ 79     $ 74     $ 341  
Provision for losses
    13       4       14       15       9       55  
Net charge-offs and transfers
    (10 )     (2 )     (11 )           (8 )     (31 )
Ending balance
  $ 117     $ 11     $ 68     $ 94     $ 75     $ 365  
Ending balance based on individual evaluations
    52       1       43       77       1       174  
Ending balance based on collective evaluation
    65       10       25       17       74       191  
Finance receivables
                                               
Individually evaluated for impairment
  $ 232     $ 6     $ 343     $ 434     $ 104     $ 1,119  
Collectively evaluated for impairment
    2,171       169       502       768       553       4,163  
Balance at end of period
  $ 2,403     $ 175     $ 845     $ 1,202     $ 657     $ 5,282  



 
14

 
Note 8:  Inventories

(In millions)
 
April 2,
2011
   
January 1,
2011
 
Finished goods
  $ 922     $ 784  
Work in process
    2,261       2,125  
Raw materials
    456       506  
      3,639       3,415  
Progress/milestone payments
    (1,186 )     (1,138 )
    $ 2,453     $ 2,277  

Note 9: Debt

On May 5, 2009, we issued $600 million of 4.5% Convertible Notes with a maturity date of May 1, 2013 and concurrently purchased call options to acquire our common stock and sold warrants to purchase our common stock for the purpose of reducing the potential dilutive effect to our shareholders and/or our cash outflow upon the conversion of the Convertible Notes.  For more information on these transactions, see Note 8 to the Consolidated Financial Statements in Textron’s 2010 Annual Report on Form 10-K.  For at least 20 trading days during the 30 consecutive trading days ended March 31, 2011, our common stock price exceeded the $17.06 per share conversion threshold price set forth for these Convertible Notes.  Accordingly, the notes are convertible at the holder’s option through June 30, 2011.  We may deliver shares of common stock, cash or a combination of cash and shares of common stock in satisfaction of our obligations upon conversion of the Convertible Notes.  We intend to settle the face value of the Convertible Notes in cash.  Based on an April 2, 2011 stock price of $27.40, the "if converted value" exceeds the face amount of the notes by $652.6 million; however, after giving effect to the exercise of the call options and warrants, the incremental cash or share settlement in excess of the face amount would result in either a 19 million net share issuance or a cash payment of $532.6 million, or a combination of cash and stock, at our option.  We have continued to classify these Convertible Notes as long-term based on our intent and ability to maintain the debt outstanding for at least one year through the use of various funding sources available to us.

Note 10:  Accrued Liabilities

We provide limited warranty and product maintenance programs, including parts and labor, for certain products for periods ranging from one to five years.  Changes in our warranty and product maintenance liabilities are as follows:

   
Three Months Ended
 
 
(In millions)
 
April 2,
2011
   
April 3,
2010
 
Accrual at the beginning of period
  $ 242     $ 263  
Provision
    57       38  
Settlements
    (64 )     (58 )
Adjustments to prior accrual estimates
    (6 )     (3 )
Accrual at the end of period
  $ 229     $ 240  
 
Note 11:  Commitments and Contingencies

We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts; compliance with applicable laws and regulations; production partners; product liability; employment; and environmental, safety and health matters.  Some of these legal proceedings and claims seek damages, fines or penalties in substantial amounts or remediation of environmental contamination.  As a government contractor, we are subject to audits, reviews and investigations to determine whether our operations are being conducted in accordance with applicable regulatory requirements.  Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our being suspended or debarred from U.S. Government contracting for a period of time.  On the basis of information presently available, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations.


 
15

 
Note 12. Derivative Instruments and Fair Value Measurements

We measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  We prioritize the assumptions that market participants would use in pricing the asset or liability into a three-tier fair value hierarchy.  This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exist, requiring companies to develop their own assumptions.  Observable inputs that do not meet the criteria of Level 1 and include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active are categorized as Level 2.  Level 3 inputs are those that reflect our estimates about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.  Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data.  These unobservable inputs are utilized only to the extent that observable inputs are not available or cost-effective to obtain.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The assets and liabilities that are recorded at fair value on a recurring basis consist primarily of our derivative financial instruments, which are categorized as Level 2 in the fair value hierarchy.  The notional and fair value amounts of these instruments that are designated as hedging instruments are provided below:
     
Notional Amount
   
Asset (Liability)
 
(In millions)
Borrowing Group
 
April 2,
2011
   
January 1,
2011
   
April 2,
2011
   
January 1,
2011
 
Assets
                         
Interest rate exchange contracts*
Finance
  $ 473     $ 628     $ 28     $ 34  
Investment in other marketable securities
Finance
    26       51       26       51  
Foreign currency exchange contracts
Manufacturing
    655       534       43