TEXTRON INC - FORM 10-Q - April 28, 2011

Attached files

file	filename
EX-10.1 - EXHIBIT 10.1 - TEXTRON INC	sdhangeragreement.htm
EX-3.2 - EXHIBIT 3.2 - TEXTRON INC	exhibitthreetwo.htm
EX-3.1 - EXHIBIT 3.1 - TEXTRON INC	exhibitthreeone.htm
EX-12.1 - EXHIBIT 12.1 - TEXTRON INC	exhibittwelveone.htm
EX-12.2 - EXHIBIT 12.2 - TEXTRON INC	exhibittwelvetwo.htm
EX-10.2 - EXHIBIT 10.2 - TEXTRON INC	fchangeragreement.htm
EX-32.2 - EXHIBIT 32.2 - TEXTRON INC	exhibithirtytwotwo.htm
EX-31.2 - EXHIBIT 31.2 - TEXTRON INC	exhibithirtyonetwo.htm
EX-31.1 - EXHIBIT 31.1 - TEXTRON INC	exhibithirtyoneone.htm
EX-32.1 - EXHIBIT 32.1 - TEXTRON INC	exhibithirtytwoone.htm
EXCEL - IDEA: XBRL DOCUMENT - TEXTRON INC	Financial_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

[ ]	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
	Consolidated Statements of Operations (Unaudited)		3
	Consolidated Balance Sheets (Unaudited)		4
	Consolidated Statements of Cash Flows (Unaudited)		5
	Notes to the Consolidated Financial Statements (Unaudited)
	Note 1:	Basis of Presentation	7
	Note 2:	Special Charges	7
	Note 3:	Retirement Plans	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.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		29
Item 4.	Controls and Procedures		29

PART II.	OTHER INFORMATION

Item 5.	Other Information		29
Item 6.	Exhibits		31
	Signatures		31

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.

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.

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.

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.

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

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

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	$	—

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.

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.

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

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

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

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.

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