TEXTRON INC
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| x |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended January 2, 2010
| o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition
period from
to
.
Commission File Number 1-5480
Textron Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 05-0315468 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
40 Westminster Street,
Providence, RI
02903
(Address of principal executive offices)
(Address of principal executive offices)
Registrant’s Telephone Number, Including Area Code:
(401) 421-2800
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
|
Common Stock — par value $0.125
|
New York Stock Exchange | |
|
|
Chicago Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes
x
No
o
Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes
o
No
x
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
x
No
o
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
x
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this
Form
10-K
or any amendment to this Form 10-K.
o
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 the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act
(Check one):
|
Large accelerated filer
x
|
Accelerated filer o | |
|
Non-accelerated filer
o
|
Smaller reporting company o | |
| (Do not check if a smaller reporting company) | ||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
o
No
x
The aggregate market value of the registrant’s Common Stock held by non-affiliates at July 4,
2009 was approximately $2,512,000,000 based on the New York Stock Exchange closing price for such
shares on that date. The registrant has no non-voting common equity.
At February 13, 2010, 272,621,010 shares of Common Stock were outstanding.
Documents Incorporated by Reference
Part III of this Report incorporates information from certain portions of the registrant’s
Definitive Proxy Statement for its Annual Meeting of Shareholders to be held on April 28, 2010.
TABLE OF CONTENTS
Table of Contents
PART I
Item 1. Business
Textron Inc. is a multi-industry company that leverages its global network of aircraft,
defense, industrial and finance businesses to provide customers with innovative products and
services around the world. We have approximately 32,000 employees worldwide. Textron Inc. was
founded in 1923 and reincorporated in Delaware on July 31, 1967. Unless otherwise indicated,
references to “Textron Inc.,” the “Company,” “we,” “our” and “us” in this Annual Report on Form
10-K refer to Textron Inc. and its consolidated subsidiaries.
We conduct our business through five operating segments: Cessna, Bell, Textron Systems and
Industrial, which represent our manufacturing businesses, and Finance, which represents our finance
business. A description of the business of each of our segments is set forth below. Our business
segments include operations that are unincorporated divisions of Textron Inc. and others that are
separately incorporated subsidiaries. Financial information by business segment and geographic area
appears in Note 20 to the Consolidated Financial Statements on pages 86 and 87 of this Annual
Report on Form 10-K. The following description of our business should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 17
through 38 of this Annual Report on Form 10-K. Information included in this Annual Report on Form
10-K refers to our continuing businesses unless otherwise indicated.
Cessna Segment
Cessna is the world’s leading general aviation company based on unit sales with five major
lines of business: Citation business jets, Caravan single-engine utility turboprops, Cessna
single-engine piston aircraft, aftermarket services and lift solutions by CitationAir. Revenues in
the Cessna segment accounted for approximately 32%, 40% and 40% of our total revenues in 2009, 2008
and 2007, respectively.
The family of business jets currently produced by Cessna includes the Mustang, Citation CJ1+,
Citation CJ2+, Citation CJ3, Citation CJ4, Citation Encore+, Citation XLS+, Citation Sovereign and
Citation X. First customer deliveries of the Citation CJ4 are scheduled to commence in 2010.
The Cessna Caravan is the world’s best-selling utility turboprop. Caravans are offered in four
models: the Grand Caravan, the Super Cargomaster, the Caravan 675 and the Caravan Amphibian.
Caravans are used in the U.S. primarily for overnight express package shipments and for personal
transportation. International uses of Caravans include humanitarian flights, tourism and freight
transport.
Cessna offers nine models in its single engine piston product line, which include the four-place
Skyhawk, Skyhawk SP, Skylane, Turbo Skylane, 350 Corvalis and 400 Corvalis TT, the six-place
Stationair and Turbo Stationair and the two-place SkyCatcher.
The Citation family of aircraft currently is supported by nine Citation Service Centers owned or
operated by Cessna, along with authorized independent service stations and centers located in more
than 22 countries throughout the world. Cessna-owned Service Centers provide customers with 24-hour
service and maintenance. Cessna also provides around-the-clock parts support for Citation aircraft.
Cessna Caravan and single engine piston customers receive product support through independently
owned service stations and around-the-clock parts support through Cessna.
Cessna markets its products worldwide through its own sales force, as well as through a network of
authorized independent sales representatives, depending upon the product line. Cessna has several
competitors in various market segments and increasingly faces competition internationally. Cessna’s
aircraft compete with other aircraft that vary in size, speed, range, capacity and handling
characteristics on the basis of price, product quality and reliability, product support and
reputation.
Cessna’s private jet business called CitationAir (formerly, CitationShares) offers a spectrum of
private aviation solutions, including Jet Cards, Jet Shares, Jet Management and Corporate
Solutions. The CitationAir fleet operates throughout the contiguous U.S. and in Canada, Mexico,
Central America, the Caribbean and Bermuda.
Bell Segment
Bell
Helicopter
is one of the leading suppliers of helicopters, tiltrotor aircraft, and
related spare parts and services in the world. Bell manufactures for both military and commercial
applications. Revenues for Bell accounted for approximately 27%, 20% and 21% of our total revenues
in 2009, 2008 and 2007, respectively.
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Table of Contents
Bell supplies advanced military helicopters and support to the U.S. Government and to
military customers outside the U.S. Bell is one of the leading suppliers of helicopters to the U.S.
Government and, in association with The Boeing Company, the only supplier of military tiltrotor
aircraft. Bell’s major U.S. Government programs are the V-22 tiltrotor aircraft and the H-1
helicopters.
Bell is teamed with The Boeing Company to develop, produce and support the V-22 Osprey tiltrotor
aircraft for the U.S. Department of Defense. Tiltrotor aircraft are designed to provide the
benefits of both helicopters and fixed-wing aircraft. The U.S. Government has issued contracts for
286 production V-22 aircraft through production Lot 16, of which 116 have been delivered as of the
end of 2009. The U.S. Government’s program of record for the V-22 calls for a total of 458
production units.
The U.S. Marine Corps H-1 helicopter program includes a utility model and an advanced attack model,
the UH-1Y and the AH-1Z, respectively, both of which were designed to have 84% parts commonality
between them. Through production Lot 6, the U.S. Government has contracted for the production of 52
UH-1Y aircraft and 17 AH-1Z aircraft. We have delivered a combined total of 31 of these aircraft as
of the end of 2009. In August 2008, the UH-1Y was approved for full-rate production, and the AH-1Z
was extended for limited production, pending a Phase III Operational Evaluation in 2010. The U.S.
Government’s program of record for the H-1 program calls for a total of 349 production units, 123
of which are utility models and 226 of which are attack models.
Bell also is a leading supplier of commercially certified helicopters and support to corporate,
offshore petroleum exploration and development, utility, charter, police, fire, rescue and
emergency medical helicopter operators. Bell produces a variety of commercial aircraft types,
including light single- and twin-engine helicopters and medium twin-engine helicopters, along with
other related products. The commercial helicopters currently offered by Bell include the 206, 407,
412 and 429.
Bell’s Customer Support and Service division provides post-sale service and support for its
installed base of approximately 13,000 helicopters through a network of five Bell-owned service
centers, more than 125 independent service centers and six supply centers that are located
worldwide. Collectively, these service centers offer a complete range of logistics support,
including parts, support equipment, technical data, training devices, pilot and maintenance
training, component repair and overhaul, engine repair and overhaul, aircraft modifications,
aircraft customizing, accessory manufacturing, contractor maintenance, field service and product
support engineering.
Bell competes against a number of competitors based in the U.S. and other countries for its
helicopter business, and its parts and support business competes against numerous competitors
around the world. Competition is based primarily on price, product quality and reliability, product
support, contract performance and reputation.
Textron Systems Segment
Textron Systems is a primary supplier to the defense, aerospace and general aviation markets,
providing approximately 18%, 13% and 9% of Textron’s revenues in 2009, 2008 and 2007, respectively.
This segment’s principal focus is to address the U.S. Department of Defense’s current and emerging
needs for force protection; situational awareness, including Intelligence, Surveillance,
Reconnaissance (ISR); precision weapons; and related services and support. While this segment sells
most of its products to U.S. customers, it also increasingly sells products to customers outside
the U.S. through foreign military sales sponsored by the U.S. government and directly through
commercial sales channels. Textron Systems competes on the basis of technology, contract
performance, price, product quality and reliability, product support and reputation. The Textron
Systems segment is comprised of five operating units: AAI, Textron Marine & Land Systems (TMLS),
Textron Defense Systems, Lycoming and Overwatch.
AAI is the prime system integrator for the U.S. Army’s premier tactical Unmanned Aircraft System
(UAS), the Shadow
®
, which includes the One System
®
Ground Control Station —
the U.S. Army’s standard for interoperability of manned and unmanned airborne assets. AAI also
provides training and
simulation systems, automated aircraft test and maintenance equipment, armament systems,
countersniper detection systems, and logistical, engineering and supply chain services.
TMLS is a world leader in the design, production and support of advanced marine craft, armored
combat vehicles, turrets and related subsystems. The business currently produces the Armored
Security Vehicle and variants for the U.S. Army and international allies. In the marine market,
TMLS has designed and produced the U.S. Navy’s Landing Craft, Air Cushion and the U.S. Coast
Guard’s Motor Life Boat (MLB) and now is delivering MLBs to the Mexican Navy.
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Textron Defense Systems is the U.S. Air Force’s prime contractor for the Sensor Fuzed Weapon,
the U.S. Army’s lead provider for networked munitions systems, and a tier-one supplier of
unattended ground sensors for the U.S. Army Brigade Combat Team Modernization Program. Textron
Defense Systems manufactures state-of-the-art smart weapons; airborne and ground-based sensors and
surveillance systems; and protection systems for the defense, aerospace and homeland security
communities.
Lycoming Engines continues to power more than half of the world’s general aviation fleet — both
rotary-wing and fixed-wing — by specializing in the engineering, manufacture, service and support
of piston aircraft engines. Lycoming also is designing, testing and delivering new cutting-edge
engines, such as light sport aircraft and integrated electronic engines, to meet customers’ future
needs.
Overwatch is a widely recognized market leader in multi-source intelligence and geospatial analysis
solutions among U.S. Department of Defense, U.S. Army and Intelligence Community analysts.
Overwatch provides solutions for a full range of operational mission areas, including ISR,
precision targeting and strike, and tactical direct action.
Industrial Segment
The Industrial segment includes our Kautex, Greenlee, E-Z-GO and Jacobsen businesses.
Kautex,
headquartered in Bonn, Germany, is a leading developer and manufacturer of blow-molded fuel
systems for cars, light trucks, all-terrain vehicles and windshield and headlamp washer systems, as
well as selective catalytic reduction systems used to reduce emissions from diesel engines. Kautex
serves the automobile market worldwide, with operating facilities near its major customers around
the world. In addition to fuel systems and washer systems, in North America, Kautex produces engine
camshafts for the automobile market. From facilities in Germany and Poland, Kautex develops and
produces bottles and plastic containers for food, household, laboratory and industrial uses.
Revenues of Kautex accounted for approximately 12%, 13% and 14% of our total revenues in 2009, 2008
and 2007, respectively. Kautex’s automotive product lines have a limited number of competitors
worldwide, some of which are affiliated with the original equipment manufacturers that comprise
Kautex’s targeted customer base. Competition typically is based on a number of factors, including
price, product quality and reliability, prior experience and available manufacturing capacity.
Greenlee
designs and manufactures powered equipment, electrical test and measurement instruments,
hand and hydraulic powered tools, and electrical and fiber optic assemblies under the Greenlee,
Fairmont, Klauke, Paladin Tools, Progressive and Tempo brand names. The products principally are
used in the electrical construction and maintenance, telecommunications, data communications,
wiring and plumbing industries. Greenlee distributes its products through a global network of sales
representatives and distributors and sells its products directly to home improvement retailers and
original equipment manufacturers. Through a joint venture, Greenlee also sells hand and powered
tools for the plumbing and mechanical industries in North America. The Greenlee businesses face
competition from numerous manufacturers based primarily on price, product quality and reliability.
E-Z-GO
designs, manufactures and sells golf cars and off-road utility vehicles powered by electric
and internal combustion engines under the E-Z-GO name, as well as multipurpose utility vehicles
under the E-Z-GO and Cushman brand names. E-Z-GO’s diversified customer base consists primarily of
golf courses, resort communities and municipalities, consumers, and commercial and industrial users
such as airports, college campuses and factories. Sales are made factory direct and through
distributors and dealers worldwide. E-Z-GO has two major competitors for golf cars and several
other competitors for off-road and multipurpose utility vehicles. Competition is based primarily on
product quality and reliability, product support, reputation and price.
Jacobsen
designs and manufactures professional turf-maintenance equipment as well as specialized
turf-care vehicles. Brand names include Ransomes, Jacobsen and Cushman. Jacobsen’s customers
include golf courses, resort communities, sporting venues and municipalities. Products are sold
through a network of distributors and dealers. Jacobsen has two major competitors for professional
turf-maintenance equipment and several other competitors for specialized turf-care products.
Competition is based primarily on product features, product quality, price and product support.
Finance Segment
Our Finance segment, which is also the Finance group, consists of Textron Financial
Corporation (TFC), its subsidiaries and the securitization trusts consolidated into it, along with
two other finance subsidiaries owned by Textron Inc. Our Finance segment is a diversified
commercial finance business.
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In the fourth quarter of 2008, we announced a plan to exit the non-captive portion of the
commercial finance business of our Finance segment, while retaining the captive portion of the
business that supports customer purchases of products that we manufacture. We made the decision to
exit this business in order to address our long-term liquidity position in light of the disruption
and instability in the capital markets. The non-captive business includes the following product
lines: asset-based lending, distribution finance, golf mortgage, hotel, structured capital and
timeshare. The exit plan is being effected through a combination of orderly liquidation and
selected sales. During 2009, we reduced our owned and managed finance receivable portfolio by
approximately $3.8 billion and expect, depending on market conditions, to substantially complete
liquidation of the remaining non-captive portfolio over the next two to three years. This reduction
included approximately $450 million in finance receivables from our captive finance business.
Our Finance segment continues to originate new customer relationships and finance receivables in
the captive finance division, which provides financing for new Cessna aircraft and Bell helicopters
and new E-Z-GO and Jacobsen golf and turf-care equipment. Financing continues to be provided to
purchasers of used Cessna aircraft and Bell helicopters on a limited basis. Our Finance segment’s
services are offered primarily in North America; however, purchases of certain Textron products,
principally Bell helicopters and Cessna aircraft, are financed worldwide. Most financing for Cessna
aircraft sold to international buyers now is provided by using funding from the Export-Import Bank
of the United States through a credit facility provided to a wholly-owned finance subsidiary of
Textron and guaranteed by TFC.
In 2009, 2008 and 2007, our Finance group paid our Manufacturing group $0.6 billion, $1.0 billion
and $1.2 billion, respectively, related to the sale of Textron-manufactured products to third
parties that were financed by the Finance group. Our Cessna and Industrial segments also received
proceeds in those years of $13 million, $18 million and $27 million, respectively, from the sale of
equipment from their manufacturing operations to our Finance group for use under operating lease
agreements.
The commercial finance business has traditionally been extremely competitive. Our Finance segment
is subject to competition from various types of financing institutions, including banks, leasing
companies, commercial finance companies and finance operations of equipment vendors. Competition
within the commercial finance industry primarily is focused on price, term, structure and service.
Our Finance segment’s largest business risks are continued access to financing through the capital
markets and the collectability of its finance receivable portfolio. See “Finance Portfolio Quality”
in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages
26 and 27 for a discussion of the credit quality of this portfolio.
Backlog
Our backlog at the end of 2009 and 2008 is summarized below:
| January 2, | January 3, | |||||||
| (In millions) | 2010 | 2009 | ||||||
|
U.S. Government:
|
||||||||
|
Bell
|
$ | 6,416 | $ | 5,037 | ||||
|
Textron Systems
|
1,408 | 2,004 | ||||||
|
|
||||||||
|
Total U.S. Government backlog
|
7,824 | 7,041 | ||||||
|
|
||||||||
|
Commercial:
|
||||||||
|
Cessna
|
4,893 | 14,530 | ||||||
|
Bell
|
487 | 1,155 | ||||||
|
Textron Systems
|
256 | 186 | ||||||
|
Industrial
|
47 | 76 | ||||||
|
|
||||||||
|
Total commercial backlog
|
5,683 | 15,947 | ||||||
|
|
||||||||
|
Total backlog
|
$ | 13,507 | $ | 22,988 | ||||
|
|
||||||||
The decrease in backlog at Cessna reflects the cancellation of numerous business jet orders during
the year and includes a $2.1 billion impact from our decision to cancel the development of the
Citation Columbus aircraft and a $1.3 billion impact due to cancellations by one customer. The
economic recession has significantly impacted many of our customers, resulting in a significant
number of Cessna’s customers requesting deferral of their scheduled delivery date, transition to a
smaller or less expensive model, or, in many cases, cancellation of their order. We continue to
identify customers interested in accelerating their aircraft delivery date to replace deferrals or
cancellations and expect ongoing volatility in the timing of fulfillment of our Cessna backlog
until economic conditions begin to recover.
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Orders from Cessna customers, which cover a wide spectrum of industries worldwide, are
included in backlog when the customer enters into a definitive purchase agreement and the initial
customer deposit is received. We work with our customers to provide estimated delivery dates, which
may be adjusted based on the customers’ needs or our production schedule, but do not establish
definitive delivery dates until approximately six months before expected delivery. There is
considerable uncertainty as to when or whether backlog will convert to revenues as the conversion
depends on production capacity, customer needs and credit availability; these factors also may be
impacted by the economy and public perceptions of private corporate jet usage. While backlog is an
indicator of future revenues, we cannot reasonably estimate the year each order in backlog
ultimately will result in revenues and cash flows.
Orders remain in backlog until the aircraft is delivered or upon cancellation by the customer. Upon
cancellation, deposits are used to defray costs, including remarketing fees, cost to reconfigure
the aircraft and other costs incurred as a result of the cancellation. Remaining deposits, if any,
may be retained or refunded at our discretion.
Approximately 64% of our total backlog at January 2, 2010 represents orders that are not expected
to be filled in 2010, and approximately 10% is attributable to the Citation CJ4 aircraft, which we
expect will first be delivered in 2010.
The U.S. Government is obligated only up to the amount of funding formally appropriated for a
contract. The difference between the award value of the contract and the amount formally
appropriated (funded) represents unfunded backlog, which generally includes cost plus type
contracts. At January 2, 2010, approximately 1% of our backlog with the U.S. Government was
unfunded.
U.S. Government Contracts
In 2009, approximately 31% of our consolidated revenues were generated by or resulted from
contracts with the U.S. Government. This business is subject to competition, changes in procurement
policies and regulations, the continuing availability of funding, which is dependent upon
congressional appropriations, national and international priorities for defense spending, world
events, and the size and timing of programs in which we may participate.
Our contracts with the U.S. Government generally may be terminated by the U.S. Government for
convenience or if we default in whole or in part by failing to perform under the terms of the
applicable contract. If the U.S. Government terminates a contract for convenience, we normally will
be entitled to payment for the cost of contract work performed before the effective date of
termination, including, if applicable, reasonable profit on such work, as well as reasonable
termination costs. If, however, the U.S. Government terminates a contract for default, generally:
(a) we will be paid the contract price for completed supplies delivered and accepted, an
agreed-upon amount for manufacturing materials delivered and accepted and for the protection and
preservation of property, and for partially completed products accepted by the U.S. Government; (b)
the U.S. Government will not be liable for our costs with respect to unaccepted items and will be
entitled to repayment of advance payments and progress payments related to the terminated portions
of the contract; and (c) we may be liable for excess costs incurred by the U.S. Government in
procuring undelivered items from another source.
Research and Development
Information regarding our research and development expenditures is contained in Note 17 to
the Consolidated Financial Statements on page 84 of this Annual Report on Form 10-K.
Patents and Trademarks
We own, or are licensed under, numerous patents throughout the world relating to products,
services and methods of manufacturing. Patents developed while under contract with the U.S.
Government may be subject to use by the U.S. Government. We also own or license active trademark
registrations and pending trademark applications in the U.S. and in various foreign countries or
regions, as well as trade
names and service marks. While our intellectual property rights in the aggregate are important to
the operation of our business, we do not believe that any existing patent, license, trademark or
other intellectual property right is of such importance that its loss or termination would have a
material adverse effect on our business taken as a whole. Some of these trademarks, trade names and
service marks are used in this Annual Report on Form 10-K and other reports, including: AAI; AH-1Z;
BA609; Bell/Agusta Aerospace Company, LLC; Bell Helicopter; Bravo; Cadillac Gage; Caravan; Caravan
675; Caravan Amphibian; Cessna; Cessna 350; Cessna 400; Citation; CitationAir; CitationAir Jetcard;
Citation Encore+; Citation Sovereign; Citation X; Citation XLS+; CJ1; CJ1+; CJ2; CJ2+; CJ3; CJ4;
Eclipse; Excel; E-Z-GO; Fly Smart; Fly Bell; Grand Caravan; Greenlee; H-1; Huey II; Kautex; Kiowa
Warrior; Klauke; Lycoming; McCauley; Mustang; NGFS; Next Generation Fuel System; Overwatch Textron
Systems; Paladin; PDCue; Power Advantage; Progressive; ProParts; Quick Draw Loan; Rothenberger LLC;
RXV; Shadow; SkyBOOKS; SkyCatcher; Skyhawk; Skyhawk SP; Skylane; SkyPLUS; Sovereign; ST 4X4;
Stationair; Super Cargomaster; SuperCobra; SYMTX; TDCue; Tempo; Textron; Textron Business Services;
Textron Business Systems; Textron Defense Systems; Textron Financial Corporation; Textron Global
Technology Center; Textron Marine & Land Systems; Textron Six Sigma; Textron Systems; Turbo
Skylane; Turbo Stationair; UAV SYSTEMS SPECIALIST; UH-1Y;
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US Helicopter; V-22 Osprey; XLS; and 429. These marks and their related trademark designs and
logotypes (and variations of the foregoing) are trademarks, trade names or service marks of Textron
Inc., its subsidiaries, affiliates or joint ventures.
Environmental Considerations
Our operations are subject to numerous laws and regulations designed to protect the
environment. Compliance with these laws and expenditures for environmental control facilities has
not had a material effect on our capital expenditures, earnings or competitive position. Additional
information regarding environmental matters is contained in Note 16 to the Consolidated Financial
Statements on page 83 of this Annual Report on Form 10-K.
Employees
At January 2, 2010, we had approximately 32,000 employees.
Available Information
We make available free of charge on our Internet web site (www.textron.com) our Annual Report
on Form 10-K, Quarterly Reports on
Form 10-Q,
Current Reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically file such material with, or furnish
it to, the Securities and Exchange Commission.
Forward-Looking Information
Certain statements in this Annual Report on Form 10-K and other oral and written statements
made by us from time to time are forward-looking statements, including those that discuss
strategies, goals, outlook or other non-historical matters, or project revenues, income, returns or
other financial measures. These forward-looking statements speak only as of the date on which they
are made, and we undertake no obligation to update or revise any forward-looking statements. These
forward-looking statements are subject to risks and uncertainties that may cause actual results to
differ materially from those contained in the statements, such as the Risk Factors contained herein
and including the following: (a) changes in worldwide economic and political conditions that impact
demand for our products, interest rates and foreign exchange rates; (b) the interruption of
production at our facilities or our customers or suppliers; (c) performance issues with key
suppliers, subcontractors and business partners; (d) our ability to perform as anticipated and to
control costs under contracts with the U.S. Government; (e) the U.S. Government’s ability to
unilaterally modify or terminate its contracts with us for the U.S. Government’s convenience or for
our failure to perform, to change applicable procurement and accounting policies, and, under
certain circumstances, to suspend or debar us as a contractor eligible to receive future contract
awards; (f) changing priorities or reductions in the U.S. Government defense budget, including
those related to Operation Iraqi Freedom, Operation Enduring Freedom and the Overseas Contingency
Operations; (g) changes in national or international funding priorities, U.S. and foreign military
budget constraints and determinations, and government policies on the export and import of military
and commercial products; (h) legislative or regulatory actions impacting our operations or demand
for our products; (i) the ability to control costs and successful implementation of various
cost-reduction programs; (j) the timing of new product launches and certifications of new aircraft
products; (k) the occurrence of slowdowns or downturns in customer markets in which our products
are sold or supplied or in which our Finance segment holds receivables; (l) changes in aircraft
delivery schedules or cancellation or deferrals of orders; (m) the impact of changes in tax
legislation; (n) the extent to which we are able to pass raw material price increases through to
customers or offset such price increases by reducing other costs; (o) our ability to offset,
through cost reductions, pricing pressure brought by original equipment manufacturer customers; (p)
our ability to realize full value of receivables; (q) the availability and cost of insurance; (r)
increases in pension expenses and other postretirement employee costs; (s) our Finance segment’s
ability to maintain portfolio credit quality; (t) TFC’s ability to maintain certain minimum levels
of financial performance required under its committed bank lines of credit and under Textron’s
support agreement with TFC; (u) our Finance segment’s
access to financing, including securitizations, at competitive rates; (v) our ability to
successfully exit from TFC’s commercial finance business other than the captive finance business
including effecting an orderly liquidation or sale of certain TFC portfolios and businesses; (w)
uncertainty in estimating market value of TFC’s receivables held for sale and reserves for TFC’s
receivables to be retained; (x) uncertainty in estimating contingent liabilities and unrecognized
tax benefits and establishing reserves to address such items; (y) risks and uncertainties related
to acquisitions and dispositions, including difficulties or unanticipated expenses in connection
with the consummation of acquisitions or dispositions, the disruption of current plans and
operations, or the failure to achieve anticipated synergies and opportunities; (z) the efficacy of
research and development investments to develop new products; (aa) the launching of significant new
products or programs which could result in unanticipated expenses; (bb) bankruptcy or other
financial problems at major suppliers or customers that could cause disruptions in our supply chain
or difficulty in collecting amounts owed by such customers; (cc) difficult conditions in the
financial markets which may adversely impact our customers’ ability to fund or finance purchases of
our products; and (dd) continued volatility in the economy resulting in a prolonged downturn in the
markets in which we do business.
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Item 1A. Risk Factors
Our business, financial condition and results of operations are subject to various risks,
including those discussed below, which may affect the value of our securities. The risks discussed
below are those that we believe currently are the most significant, although additional risks not
presently known to us or that we currently deem less significant also may impact our business,
financial condition or results of operations, perhaps materially.
Decline in demand for our aircraft products, cancellation of orders and delays in aircraft
delivery schedules may continue to adversely affect our financial results.
The current weak economic environment has resulted in significantly reduced demand for our
aircraft and a tightening of credit availability for potential purchasers of our aircraft, as well
as a substantial number of cancellations of orders and customer requests for delayed delivery of
ordered aircraft. Weak economic conditions may continue to soften demand for new and used business
jets and helicopters and may continue to adversely impact the pricing of new aircraft and the
valuation of used aircraft. Difficult conditions in the financial markets may continue to adversely
impact our customers’ ability to fund or finance purchases of our aircraft. Weakness in the economy
may continue to result in fewer hours flown on existing aircraft and, consequently, lower demand
for spare parts and maintenance. We generally make sales of our commercial aircraft under purchase
orders that are subject to cancellation, modification or rescheduling. Aircraft customers,
including sellers of fractional share interests, may continue to respond to weak economic
conditions by canceling orders and/or delaying delivery of orders. In addition, both U.S. and
foreign governments and government agencies regulate the aviation industry; they may impose new
regulations with additional aircraft security or other requirements or restrictions, including, for
example, environmental-related restrictions and/or fees, that may adversely impact demand for
business jets and/or helicopters. Moreover, a prolonged downturn in our markets may impact our
decision to invest in the development of new products or improvements to existing products, which
could adversely impact our future competitiveness and profitability. Reduced demand for new and
used aircraft, spare parts and maintenance, continued cancellations of orders and/or delivery
delays could significantly reduce our revenues, profitability and cash flows.
We may not be able to continue to execute the liquidation of our Finance segment’s non-captive
commercial finance business at a favorable pace and level of recovery.
In the fourth quarter of 2008, we announced a plan to exit the non-captive portion of the
commercial finance business of our Finance segment, while retaining the captive portion of the
business that supports customer purchases of products that we manufacture. The exit plan is being
effected through a combination of orderly liquidation and selected sales. We cannot be certain that
we will be able to continue to accomplish the orderly liquidation of our portfolio on a timely or
successful basis or in a manner that will generate cash sufficient to service our Finance segment’s
debt. We may encounter delays and difficulties in effecting the continued orderly liquidation of
our various receivable portfolios as a result of many factors, including the inability of our
customers to find alternative financing, which could expose us to increased credit losses. We may
have greater difficulty in selling the remaining receivables that have been designated for sale or
transfer, assets that have been acquired upon foreclosure of receivables and/or other non-operating
assets at the pricing that we anticipate or in the time frame that we anticipate. We may be
required to make additional mark-to-market or other adjustments against assets that we intend to
sell or to take additional reserves against assets that we intend to retain. We may change our
current strategy based on either our performance and liquidity position or changes in external
factors affecting the value and/or marketability of our assets, which could result in changes in
the classification of assets we intend to hold for investment and additional mark-to-market
adjustments. We may incur higher costs than anticipated as a result of this exit plan or be subject
to claims made by third parties, and the exit plan may result in increased credit losses. We expect
that our portfolio quality will continue to deteriorate as we proceed through the liquidation and
the mix of assets changes and that our cash conversion ratio on liquidation will decrease; this
deterioration could be more severe and the cash conversion ratio lower than we anticipate,
resulting in substantial credit losses. Significant delay or difficulty in executing the continued
liquidation and/or substantial losses could result in the failure of our portfolio to generate the
cash necessary to service
our Finance segment’s indebtedness, resulting in continuing or increased adverse effects on our
financial condition and results of operations.
Difficult conditions in the financial markets have adversely affected the business and results
of operations of our Finance segment, and we do not expect these conditions to improve in the near
future.
The financial performance of our Finance segment depends on the quality of loans, leases and
other credit products in its finance asset portfolios. Portfolio quality may be adversely affected
by several factors, including finance receivable underwriting procedures, collateral quality, or
geographic or industry concentrations, as well as the ability of our customers to obtain
alternative financing as our Finance segment exits certain lines of business. Financial market
conditions over the previous 18 months have resulted in significant writedowns of asset values by
financial institutions, including government-sponsored entities and major commercial and investment
banks. These writedowns, initially of mortgage-backed securities but spreading to credit default
swaps and other derivative securities, have caused many financial institutions to seek additional
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capital, to merge with larger and stronger institutions and, in some cases, to fail. Many
lenders and institutional investors have reduced and, in some cases, ceased to provide funding to
borrowers, including other financial institutions. This market turmoil and tightening of credit
have led to an increased level of commercial and consumer delinquencies and defaults, lack of
consumer confidence, increased market volatility and widespread reduction of business activity.
Valuations of the types of collateral securing our captive finance portfolio, particularly
valuations of used aircraft, have decreased significantly and may continue to decrease if weak
economic conditions continue. Declining collateral values could result in greater delinquencies and
foreclosures as customers elect to discontinue payments on loan balances that exceed asset values.
Our losses may increase if our collateral cannot be realized or is liquidated at prices not
sufficient to recover the full amount of our finance receivable portfolio. In particular, declining
collateral values in the portion of our captive finance portfolio secured by non-Textron
manufactured aircraft may result in increased losses as we may have greater difficulty liquidating
these assets. Further deterioration of our Finance segment’s ability to successfully collect its
finance receivable portfolio and to resolve problem accounts may adversely affect our cash flow,
profitability and financial condition. If these negative market conditions persist or worsen, we
could experience continuing or increased adverse effects on our financial condition and results of
operations.
If our Finance segment’s estimates or assumptions used in determining the fair value of certain
of its assets and its allowance for losses on finance receivables prove to be incorrect, its cash
flow, profitability, financial condition and business prospects could be materially adversely
affected.
Our Finance segment uses estimates and various assumptions in determining the fair value of
certain of its assets, including finance receivables held-for-sale that do not have active, quoted
market prices. Our Finance segment also uses estimates and assumptions in determining its allowance
for losses on finance receivables and in determining the residual values of leased equipment and
the value of repossessed assets and properties. These estimates and assumptions are inherently
difficult to make, and our Finance segment’s actual experience may differ materially from these
estimates and assumptions. A material difference between our Finance segment’s estimates and
assumptions and its actual experience may adversely affect our Finance segment’s cash flow,
profitability and financial condition.
Payments required under our support agreement with Textron Financial Corporation could restrict
our use of capital.
Under the terms of our support agreement with Textron Financial Corporation, during 2009, we
made $270 million in cash payments to Textron Financial Corporation to maintain both the fixed
charge coverage ratio required by the support agreement and the leverage ratio required by Textron
Financial Corporation’s credit facility. These cash payments have been recorded as capital
contributions to Textron Financial Corporation. We will likely be required to make additional
capital contributions to Textron Financial Corporation in the future in order to maintain these
ratios. While capital contributions to Textron Financial Corporation may not increase the aggregate
amount of outstanding consolidated indebtedness of Textron and Textron Financial Corporation, such
contributions could restrict our allocation of available capital for other purposes. In addition,
recently, from time to time, Textron Financial Corporation has borrowed from us to meet its
liquidity needs, and it may require further borrowings from us for its liquidity needs in the
future, depending upon market conditions. Textron Financial Corporation’s need for borrowings from
us could restrict our use of funds for other purposes.
Failure to maintain investment grade credit ratings acceptable to investors may increase the
cost of our funding and may adversely affect our access to the capital markets.
The major rating agencies regularly evaluate us, including Textron Financial Corporation.
Late in 2008 and during 2009, our long- and short-term credit ratings were subject to several
downgrades resulting in the ratings disclosed on page 29 in the “Credit Ratings” section. Failure
to maintain investment grade credit ratings that are acceptable to investors may adversely affect
the cost and other terms upon which we are able to obtain financing, as well as our access to the
capital markets.
We may need to obtain financing in order to meet our debt obligations in the future; such
financing may not be available to us on satisfactory terms, if at all.
We may periodically need to obtain financing in order to meet our debt obligations as they
come due. This may include refinancing a portion of our credit facilities prior to April 2012 when
the approximate $3.0 billion in aggregate borrowings thereunder becomes due. Although we currently
believe we have access to the capital markets, due to the unstable economy and the volatile credit
market environment, or other factors, we may not be able to refinance our credit facilities or
maturing debt at the time that such financing is necessary at terms that are acceptable to us, or
at all. If we cannot obtain adequate sources of credit on favorable terms, or at all, our business,
operating results, and financial condition could be adversely affected.
Our ability to fund our captive financing activities at economically competitive levels depends
on our ability to borrow and the cost of borrowing in the credit markets.
Our Finance segment’s ability to continue to offer customer financing for the products that
we manufacture, and the long-term viability and
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profitability of the captive finance business, is largely dependent on our ability to obtain
funding at a reasonable cost. This ability and cost, in turn, are dependent on our credit ratings
and are subject to credit market volatility. If we are unable to continue to offer customer
financing or if we are unable to offer competitive customer financing, it could negatively impact
our Manufacturing group’s ability to generate sales, which could adversely affect our results of
operations and financial condition.
The soundness of our suppliers, customers and business partners could affect our business and
results of operations.
All of our segments are exposed to risks associated with the creditworthiness of our key
suppliers, customers and business partners, including automobile manufacturers and other industrial
customers, customers of our Bell and Cessna products, home improvement retailers and original
equipment manufacturers, many of which have been and may continue to be adversely affected by the
volatile conditions in the financial markets. These conditions could result in financial
instability or other adverse effects at any of our suppliers, customers or business partners. The
consequences of such adverse effects could include the interruption of production at the facilities
of our customers or suppliers, the reduction, delay or cancellation of customer orders, delays in
or the inability of customers to obtain financing to purchase our products and bankruptcy of
customers or other creditors. Any of these events may adversely affect our cash flow, profitability
and financial condition.
We have customer concentration with the U.S. Government.
During 2009, we derived approximately 31% of our revenues from sales to a variety of U.S.
Government entities. Our U.S. Government revenues have continued to grow both organically and
through acquisitions. Our ability to compete successfully for and retain U.S. Government business
is highly dependent on technical excellence, management proficiency, strategic alliances,
cost-effective performance, and the ability to recruit and retain key personnel. Our revenues from
the U.S. Government largely result from contracts awarded to us under various U.S. Government
defense-related programs. The funding of these programs is subject to congressional appropriation
decisions. Although multiple-year contracts may be planned in connection with major procurements,
Congress generally appropriates funds on a fiscal year basis even though a program may continue for
several years. Consequently, programs often are only partially funded initially, and additional
funds are committed only as Congress makes further appropriations. The reduction or termination of
funding, or changes in the timing of funding, for a U.S. Government program in which we provide
products or services would result in a reduction or loss of anticipated future revenues
attributable to that program and could have a negative impact on our results of operations. While
the overall level of U.S. defense spending has increased in recent years for numerous reasons,
including increases in funding of operations in Iraq and Afghanistan and the U.S. Department of
Defense’s military transformation initiatives, we can give no assurance that such spending will
continue to grow or not be reduced. Significant changes in national and international priorities
for defense spending could impact the funding, or the timing of funding, of our programs, which
could negatively impact our results of operations and financial condition.
U.S. Government contracts may be terminated at any time and may contain other unfavorable
provisions.
The U.S. Government typically can terminate or modify any of its contracts with us either for
its convenience or if we default by failing to perform under the terms of the applicable contract.
A termination arising out of our default could expose us to liability and have an adverse effect on
our ability to compete for future contracts and orders. If any of our contracts are terminated by
the U.S. Government, our backlog would be reduced, in accordance with contract terms, by the
expected value of the remaining work under such contracts. In addition, on those contracts for
which we are teamed with others and are not the prime contractor, the U.S. Government could
terminate a prime contract under which we are a subcontractor, irrespective of the quality of our
products and services as a subcontractor. In any such event, our financial condition and results of
operations could be adversely affected.
As a U.S. Government contractor, we are subject to a number of procurement rules and
regulations.
We must comply with and are affected by laws and regulations relating to the formation,
administration and performance of U.S. Government contracts. These laws and regulations, among
other things, require certification and disclosure of all cost and pricing data in connection with
contract negotiation, define allowable and unallowable costs and otherwise govern our right to
reimbursement under certain cost-based U.S. Government contracts, and restrict the use and
dissemination of classified information and the exportation of certain products and technical data.
Our U.S. Government contracts contain provisions that allow the U.S. Government to unilaterally
suspend us from receiving new contracts pending resolution of alleged violations of procurement
laws or regulations, reduce the value of existing contracts, issue modifications to a contract, and
control and potentially prohibit the export of our products, services and associated materials. In
addition, we are subject to audits by the Defense Contract Audit Agency to assure our compliance
with the laws and regulations applicable to U.S. Government contractors. A violation of specific
laws and regulations could result in the imposition of fines and penalties or the termination of
our contracts and, under certain circumstances, suspension or debarment from future contracts for a
period of time. Also, changes in procurement policies, budget considerations, unexpected U.S.
developments, such as terrorist attacks, or similar political developments or events abroad that
may change the U.S. federal government’s national security defense posture may affect sales to
government entities. These laws and regulations affect how we do business with our customers and,
in some instances, impose added costs on our business.
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Cost overruns on U.S. Government contracts could subject us to losses or adversely affect our
future business.
Contract and program accounting require judgment relative to assessing risks, estimating
contract revenues and costs, and making assumptions for schedule and technical issues. Due to the
size and nature of many of our contracts, the estimation of total revenues and cost at completion
is complicated and subject to many variables. Assumptions have to be made regarding the length of
time to complete the contract because costs include expected increases in wages and prices for
materials. Incentives or penalties related to performance on contracts are considered in estimating
sales and profit rates and are recorded when there is sufficient information for us to assess
anticipated performance. Estimates of award fees also are used in estimating sales and profit rates
based on actual and anticipated awards. Because of the significance of these estimates, it is
likely that different amounts could be recorded if we used different assumptions or if the
underlying circumstances were to change. Changes in underlying assumptions, circumstances or
estimates may adversely affect our future financial results of operations.
Under fixed-price contracts, we receive a fixed price irrespective of the actual costs we incur,
and, consequently, any costs in excess of the fixed price are absorbed by us. Under time and
materials contracts, we are paid for labor at negotiated hourly billing rates and for certain
expenses. Under cost-reimbursement contracts, which are subject to a contract-ceiling amount, we
are reimbursed for allowable costs and paid a fee, which may be fixed or performance based.
However, if our costs exceed the contract ceiling or are not allowable under the provisions of the
contract or applicable regulations, we may not be able to obtain reimbursement for all such costs.
Under each type of contract, if we are unable to control costs we incur in performing under the
contract, our financial condition and results of operations could be adversely affected. Cost
overruns also may adversely affect our ability to sustain existing programs and obtain future
contract awards.
Developing new products and technologies entails significant risks and uncertainties.
To continue to grow our revenues and segment profit, we must successfully develop new
products and technologies or modify our existing products and technologies for our current and
future markets. Our future performance depends, in part, on our ability to identify emerging
technological trends and customer requirements in our current and future markets and to develop and
maintain competitive products and services. Delays or cost overruns in the development and
acceptance of new products, or certification of new aircraft products and other products, could
affect our financial results of operations. These delays could be caused by unanticipated
technological hurdles, production changes to meet customer demands, unanticipated difficulties in
obtaining required regulatory certifications of new aircraft products, coordination with joint
venture partners or failure on the part of our suppliers to deliver components as agreed. We also
could be adversely affected if the general efficacy of our research and development investments to
develop products is less than expected or if we do not adequately protect the intellectual property
developed through our research and development efforts. Furthermore, because of the lengthy
research and development cycle involved in bringing certain of our products to market, we cannot
predict the economic conditions that will exist when any new product is complete. A reduction in
capital spending in the aerospace or defense industries could have a significant effect on the
demand for new products and technologies under development, which could have an adverse effect on
our financial condition and results of operations. In addition, there can be no assurance that the
market for our offerings will develop or continue to expand as we currently anticipate.
Furthermore, we cannot be sure that our competitors will not develop competing technologies which
gain market acceptance in advance of our products. Our failure in our new product development
efforts or the failure of our products or services to achieve market acceptance more rapidly than
our competitors could have an adverse effect on our financial condition and results of operations.
Our joint venture, teaming and other arrangements involve risks and uncertainties.
We have entered, and expect to continue to enter, into joint venture, teaming and other
arrangements, and these activities involve risks and uncertainties, including the risk of the joint
venture or related
business partner failing to satisfy its obligations, which may result in certain liabilities to us
for guarantees and other commitments; the challenges in achieving strategic objectives and expected
benefits of the business arrangement; the risk of conflicts arising between us and our partners and
the difficulty of managing and resolving such conflicts; and the difficulty of managing or
otherwise monitoring such business arrangements.
We may make acquisitions and dispositions that increase the risks of our business.
We may enter into acquisitions or dispositions in the future in an effort to enhance
shareholder value. Acquisitions or dispositions involve a certain amount of risks and uncertainties
that could result in our not achieving expected benefits. With respect to acquisitions, such risks
include difficulties in integrating newly acquired businesses and operations in an efficient and
cost-effective manner; challenges in achieving expected strategic objectives, cost savings and
other benefits; the risk that the acquired businesses’ markets do not evolve as anticipated and
that the technologies acquired do not prove to be those needed to be successful in those markets;
the risk that we pay a purchase price that exceeds what the future results of operations would have
merited; and the potential loss of key employees of the acquired businesses. With respect to
dispositions, the decision to dispose of a business or asset may result in a writedown of the
related assets if the fair market value of the assets, less costs of disposal, is less than the
book value. In addition, we may encounter difficulty in finding buyers or alternative exit
strategies at
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acceptable prices and terms and in a timely manner. We also may underestimate the costs of
retained liabilities or indemnification obligations. In addition, unanticipated delays or
difficulties in effecting acquisitions or dispositions may divert the attention of our management
and resources from our existing operations.
Failure to perform by our subcontractors or suppliers could adversely affect our performance.
We rely on other companies to provide raw materials, major components and subsystems for our
products. Subcontractors also perform services that we provide to our customers in certain
circumstances. In addition, we outsource certain support functions, including certain global
information technology infrastructure services to third-party service providers. We depend on these
vendors, subcontractors and service providers to meet our contractual obligations to our customers
and conduct our operations.
Our ability to meet our obligations to our customers may be adversely affected if suppliers do not
provide the agreed-upon supplies or perform the agreed-upon services in compliance with customer
requirements and in a timely and cost-effective manner. The risk of these adverse effects may be
greater in circumstances where we rely on only one or two subcontractors or suppliers for a
particular product or service. In particular, in the aircraft industry, most vendor parts are
certified by the regulatory agencies as part of the overall Type Certificate for the aircraft being
produced by the manufacturer. If a vendor does not or cannot supply its parts, then the
manufacturer’s production line may be stopped until the manufacturer can design, manufacture and
certify a similar part itself or identify and certify another similar vendor’s part, resulting in
significant delays in the completion of aircraft.
Such events may adversely affect our financial results of operations or damage our reputation and
relationships with our customers. Likewise, any disruption of our information technology systems or
other outsourced processes or functions could have a material adverse impact on our operations and
our financial results.
Our operations could be adversely affected by interruptions in production that are beyond our
control.
Our business and financial results may be affected by certain events that we cannot
anticipate or that are beyond our control, such as natural disasters and national emergencies that
could curtail production at our facilities and cause delayed deliveries and canceled orders. In
addition, we purchase components and raw materials and information technology and other services
from numerous suppliers, and, even if our facilities are not directly affected by such events, we
could be affected by interruptions at such suppliers. Such suppliers may be less likely than our
own facilities to be able to quickly recover from such events and may be subject to additional
risks such as financial problems that limit their ability to conduct their operations.
Our business could be adversely affected by strikes or work stoppages and other labor issues.
Approximately 5,900 of our U.S. employees, or 24% of our total U.S. employees, are unionized,
and approximately 2,500 of our non-U.S. employees, or 37% of our total non-U.S. employees, are
represented by organized councils. As a result, we may experience work stoppages, which could
negatively impact our ability to manufacture our products on a timely basis, resulting in strain on
our relationships with our customers and a loss of revenues. In addition, the presence of unions
may limit our flexibility in responding to competitive pressures in the marketplace, which could
have an adverse effect on our financial results of operations.
In addition to our workforce, the workforces of many of our customers and suppliers are represented
by labor unions. Work stoppages or strikes at the plants of our key customers could result in
delayed or canceled orders for our products. Work stoppages and strikes at the plants of our key
suppliers could disrupt our manufacturing processes. Any of these results could adversely affect
our financial results of operations.
Our international business is subject to the risks of doing business in foreign countries.
Our international business exposes us to certain unique and potentially greater risks than
our domestic business, and our exposure to such risks may increase if our international business
continues to grow. Our international business is subject to U.S. and local government regulations
and procurement policies and practices, which may change from time to time, including regulations
relating to import-export control, environmental, health and safety, investments, exchange controls
and repatriation of earnings or cash settlement challenges, as well as to varying currency,
geopolitical and economic risks. These international risks may be especially significant with
respect to sales of aerospace and defense products. We also are exposed to risks associated with
using foreign representatives and consultants for international sales and operations and teaming
with international subcontractors and suppliers in connection with international programs. Some
international government customers require contractors to agree to specific in-country purchases,
manufacturing agreements or financial support arrangements, known as offsets, as a condition for a
contract award. The contracts generally extend over several years and may include penalties if we
fail to meet the offset requirements, which could adversely impact our revenues, profitability and
cash flows. Additionally, we are facing increasing competition in our international markets from
foreign and multinational firms that may have certain advantages, including, for example, cost
advantages, over us; as a result, our ability to compete successfully in those markets may be
adversely affected, which could negatively impact our revenues.
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We are subject to legal proceedings and other claims.
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; lack of compliance with applicable laws and regulations; production partners;
product liability; patent and trademark infringement; employment disputes; and environmental,
safety and health matters. 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. However, litigation is inherently unpredictable, and we could incur
judgments or enter into settlements for current or future claims that could adversely affect our
financial position or our results of operations in any particular period.
If we fail to comply with the covenants contained in our various debt agreements, it may
adversely affect our liquidity, results of operations and financial condition.
Our credit facility contains affirmative and negative covenants, including (i) limitations on
creation of liens on assets of Textron Inc. or of its manufacturing subsidiaries; (ii) maintenance
of existence and properties; and (iii) maintaining a maximum debt to capital ratio (as defined and
excluding our Finance segment) of 65%. The indentures governing our outstanding senior notes also
contain covenants, including limitations on creation of liens on certain principal manufacturing
facilities and shares of stock of subsidiaries that own such facilities and restrictions on sale
and leaseback transactions with respect to such facilities. In addition, both the credit facility
and the indentures provide that consolidations, mergers or sale of all or substantially all of our
assets may only be effected if certain provisions are complied with. Some of these covenants may
limit our ability to engage in certain financing structures, create liens, sell assets or effect a
consolidation or merger.
Our credit facility also contains a cross-default provision that would trigger an event of default
thereunder if we fail to pay or otherwise have a continued default under other indebtedness of
Textron Inc. or any of our subsidiaries, other than any of our subsidiaries that primarily are
engaged in the business of a finance company, of over $100 million. Similarly, the supplemental
indenture governing our convertible notes contains a cross-default provision that would trigger an
event of default thereunder if we fail to pay or otherwise have a continued default under other
indebtedness of Textron Inc. or any of our subsidiaries, other than Textron Financial Corporation
or its subsidiaries, of over $100 million. Therefore, Cessna Finance Export Corporation, a
subsidiary of Textron Inc. that is the borrower under the Ex-Im Bank Facility entered into on July
14, 2009, would be included within the cross-default provision of the supplemental indenture for
the convertible notes, although not within the similar provision in our credit facility. As a
result, a failure to pay or a continued default under the Ex-Im Bank Facility, if the outstanding
balance thereunder exceeded $100 million, could give rise to an event of default with respect to
our convertible notes.
In addition, a bankruptcy or monetary judgment in excess of $100 million
against us or any of our subsidiaries that accounts for more than 5% of our consolidated revenues
or our consolidated assets, including our finance subsidiaries, also would result in an event of
default under our credit facility, and a bankruptcy against us or any of our non-finance
“significant subsidiaries” (within the meaning of the Securities Exchange Commission’s rules) also
would result in an event of default under the indenture governing our convertible notes.
Our failure to comply with material provisions or covenants in the credit facility or the
indentures, or the failure of certain of our subsidiaries to comply with their debt agreements,
could have a material adverse effect on our liquidity, results of operations and financial
condition.
Currency, raw material price and interest rate fluctuations may adversely affect our results.
We are exposed to a variety of market risks, including the effects of changes in foreign
currency exchange rates, raw material prices and interest rates. We monitor and manage these
exposures as an integral part of our overall risk management program. In some cases, we purchase
derivatives or enter into contracts to insulate our financial results of operations from these
fluctuations. Nevertheless,
changes in currency exchange rates, raw material prices and interest rates can have substantial
adverse effects on our financial results of operations.
We may be unable to effectively mitigate pricing pressures.
In some markets, particularly where we deliver component products and services to original
equipment manufacturers, we face ongoing customer demands for price reductions, which sometimes are
contractually obligated. In some cases, we are able to offset these reductions through
technological advances or by lowering our cost base through improved operating and supply chain
efficiencies. However, if we are unable to effectively mitigate future pricing pressures, our
financial results of operations could be adversely affected.
The levels of our reserves are subject to many uncertainties and may not be adequate to cover
writedowns or losses.
In addition to reserves at our Finance segment, we establish reserves in our manufacturing
segments to cover uncollectible accounts receivable, excess or obsolete inventory, fair market
value writedowns on used aircraft and golf cars, recall campaigns, environmental remediation,
warranty costs and litigation. These reserves are subject to adjustment from time to time depending
on actual experience and/or current market conditions and are subject to many uncertainties,
including bankruptcy or other financial problems at key customers, as well as changing market
conditions.
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Due to the nature of our business, we may be subject to liability claims arising from
accidents involving our products, including claims for serious personal injuries or death caused by
climatic factors or by pilot or driver error. In the case of litigation matters for which reserves
have not been established because the loss is not deemed probable, it is reasonably possible that
such matters could be decided against us and could require us to pay damages or make other
expenditures in amounts that are not presently estimable. In addition, we cannot be certain that
our reserves are adequate and that our insurance coverage will be sufficient to cover one or more
substantial claims. Furthermore, there can be no assurance that we will be able to obtain insurance
coverage at acceptable levels and costs in the future.
The increasing costs of certain employee and retiree benefits could adversely affect our
results.
Our earnings and cash flow may be impacted by the amount of income or expense we expend or
record for employee benefit plans. This is particularly true for our defined benefit pension plans,
where the contributions to those plans are driven by, among other things, our assumptions of the
rate of return on plan assets, the discount rate used for future payment obligations and the rates
of future cost growth. If the actual investment return and rates prove materially different from
our assumptions, this could adversely impact the amount of pension expense and require larger
contributions to the plans. Also, changing pension legislation and regulations could increase the
cost associated with our defined benefit pension plans. In addition, medical costs are rising at a
rate faster than the general inflation rate. Continued medical cost inflation in excess of the
general inflation rate increases the risk that we will not be able to mitigate the rising costs of
medical benefits. Increases to the costs of pension and medical benefits could have an adverse
effect on our financial results of operations.
Unanticipated changes in our tax rates or exposure to additional income tax liabilities could
affect our profitability.
We are subject to income taxes in both the U.S. and various non-U.S. jurisdictions, and our
domestic and international tax liabilities are subject to the allocation of income among these
different jurisdictions. Our effective tax rate could be adversely affected by changes in the mix
of earnings in countries with differing statutory tax rates, changes in the valuation of deferred
tax assets and liabilities, changes to unrecognized tax benefits or changes in tax laws, which
could affect our profitability. In particular, the carrying value of deferred tax assets is
dependent on our ability to generate future taxable income. In addition, the amount of income taxes
we pay is subject to audits in various jurisdictions, and a material assessment by a tax authority
could affect our profitability.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
On January 2, 2010, we operated a total of 66 plants located throughout the U.S. and 44
plants outside the U.S. We own 55 plants and lease the remainder for a total manufacturing space of
approximately 19.8 million square feet.
We also own or lease offices, warehouses and other space at various locations. We consider the
productive capacity of the plants operated by each of our business segments to be adequate. In
general, our facilities are in good condition, are considered to be adequate for the uses to which
they are being put and are substantially in regular use.
Item 3. Legal Proceedings
On August 13, 2009, a purported shareholder class action lawsuit was filed in the United
States District Court in Rhode Island against Textron, its Chairman and former Chief Executive
Officer and its former Chief Financial Officer. The suit, filed by the City of Roseville Employees’
Retirement System, alleges that the defendants violated the federal securities laws by making
material misrepresentations or omissions related to Cessna and Textron Financial Corporation. The
complaint seeks unspecified compensatory damages. In December 2009, the Automotive Industries
Pension Trust Fund was appointed lead plaintiff in the case. On February 8, 2010, an amended class
action complaint was filed with the Court. The amended complaint names as additional defendants
Textron Financial Corporation and three of its present and former officers.
On August 21, 2009, a purported class action lawsuit was filed in the United States District Court
in Rhode Island by Dianne Leach, an alleged participant in the Textron Savings Plan. Six additional
substantially similar class action lawsuits were subsequently filed by other individuals. The
complaints varyingly name Textron and certain present and former employees, officers and directors
as defendants. These lawsuits allege that the
13
Table of Contents
defendants violated the United States Employee Retirement Income Security Act by imprudently
permitting participants in the Textron Savings Plan to invest in Textron common stock. The
complaints seek equitable relief and unspecified compensatory damages. On February 2, 2010, an
amended class action complaint was filed consolidating the seven previous lawsuits into a single
complaint.
On November 18, 2009, a purported derivative lawsuit was filed by John D. Walker in the United
States District Court of Rhode Island against certain present and former officers and directors of
Textron. The suit alleges violations of the federal securities laws consistent with the Roseville
action described above, as well as breach of fiduciary duties, waste of corporate assets and unjust
enrichment.
Textron believes that these lawsuits are without merit and intends to defend them vigorously.
We are also subject to other actual and threatened legal proceedings and other claims arising out
of the conduct of our business. These proceedings include claims relating to commercial and
financial transactions, government contracts, lack of compliance with applicable laws and
regulations, production partners, product liability, patent and trademark infringement, employment
disputes, and environmental, safety and health matters. Some of these legal proceedings seek
damages, fines or penalties in substantial amounts or remediation of environmental contamination.
Under federal government procurement regulations, certain claims brought by the U.S. Government
could result in our suspension or debarment 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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during the last quarter of the
period covered by this Annual Report on Form 10-K.
Executive Officers of the Registrant
The following table sets forth certain information concerning our executive officers as of
February 26, 2010.
| Name | Age | Current Position with Textron Inc. | ||||
|
Scott C. Donnelly
|
48 | President, Chief Executive Officer and Director | ||||
|
John D. Butler
|
62 | Executive Vice President Administration and Chief Human Resources Officer | ||||
|
Frank T. Connor
|
50 | Executive Vice President and Chief Financial Officer | ||||
|
Terrence O’Donnell
|
65 | Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer | ||||
Mr. Donnelly joined Textron in June 2008 as Executive Vice President and Chief Operating
Officer and was promoted to President and Chief Operating Officer in January 2009. He was appointed
to the Board of Directors in October 2009 and became Chief Executive Officer of Textron in December
2009 at which time the Chief Operating Officer position was eliminated. Previously, Mr. Donnelly
was the President and CEO of General Electric Company’s Aviation business unit, a position he had
held since July 2005. GE’s Aviation business unit is a $16 billion maker of commercial and military
jet engines and components, as well as integrated digital, electric power and mechanical systems
for aircraft. Prior to July 2005, Mr. Donnelly served as Senior Vice President of GE Global
Research, one of the world’s largest and most diversified industrial research organizations with
facilities in the U.S., India, China and Germany and held various other management positions since
joining General Electric in 1989.
Mr. Butler joined Textron in July 1997 as Executive Vice President and Chief Human Resources
Officer and became Executive Vice President Administration and Chief Human Resources Officer in
January 1999.
Mr. Connor joined Textron in August 2009 as Executive Vice President and Chief Financial Officer.
Previously, Mr. Connor was head of Telecom Investment Banking at Goldman, Sachs & Co from 2003 to
2008. Prior to that position, he served as Chief Operating Officer of Telecom, Technology and Media
Investment Banking at Goldman, Sachs from 1998 to 2003. Mr. Connor joined the Corporate Finance
Department of Goldman, Sachs in 1986 and became a Vice President in 1990 and a Managing Director in
1996.
Mr. O’Donnell joined Textron as Executive Vice President and General Counsel in March 2000 and also
was named Corporate Secretary in December 2009 and his title was expanded to reflect his role as
Chief Compliance Officer. Mr. O’Donnell is a partner in the Washington, D.C.-based law firm of
Williams & Connolly, which he first joined in 1977. From 1989 to 1992, he served as General Counsel
of the U.S. Department of Defense.
14
Table of Contents
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
The principal market on which our common stock is traded is the New York Stock Exchange under
the symbol “TXT.” Our stock also is traded on the Chicago Stock Exchange. At January 2, 2010, there
were approximately 14,000 record holders of Textron common stock.
The high and low sales prices per share of our common stock as reported on the New York Stock
Exchange and the dividends paid per share, are provided in the following table:
| 2009 | 2008 | |||||||||||||||||||||||
| Dividends | Dividends | |||||||||||||||||||||||
| High | Low | per Share | High | Low | per Share | |||||||||||||||||||
|
First quarter
|
$ | 16.52 | $ | 3.57 | $ | 0.02 | $ | 71.69 | $ | 47.50 | $ | 0.23 | ||||||||||||
|
Second quarter
|
14.37 | 7.13 | 0.02 | 65.52 | 47.03 | 0.23 | ||||||||||||||||||
|
Third quarter
|
20.99 | 8.51 | 0.02 | 49.90 | 28.43 | 0.23 | ||||||||||||||||||
|
Fourth quarter
|
21.00 | 17.55 | 0.02 | 32.31 | 10.09 | 0.23 | ||||||||||||||||||
Issuer Repurchases of Equity Securities
On July 18, 2007, our Board of Directors approved a new plan authorizing the repurchase of up
to 24 million shares of our common stock. The plan has no expiration date. In September 2008, we
suspended all share repurchase activity under the plan. There were no shares purchased under the
plan in 2009. The maximum number of shares that may be purchased under the plan totaled 11,103,090
at January 2, 2010.
On December 11, 2009, we repurchased 60,000 shares of restricted common stock
that had vested upon the retirement of our former CEO, Lewis Campbell. Pursuant to the terms of the
related restricted stock award, the shares were purchased at $19.925, which was the average of the
high and low share price on the vesting date of November 30, 2009.
Stock Performance Graph
The following graph compares the total return on a cumulative basis at the end of each year
of $100 invested in our common stock on December 31, 2004 with the Standard & Poor’s (S&P) 500
Stock Index, the S&P 500 Aerospace & Defense (A&D) Index and the S&P Industrial Conglomerates (IC)
Index. We are included in both the S&P 500 and the S&P IC indices. The values calculated assume
dividend reinvestment.
15
Table of Contents
Item 6. Selected Financial Data
| (Dollars in millions, except per share amounts and where otherwise noted) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
Revenues
|
||||||||||||||||||||
|
Cessna
|
$ | 3,320 | $ | 5,662 | $ | 5,000 | $ | 4,156 | $ | 3,480 | ||||||||||
|
Bell
|
2,842 | 2,827 | 2,581 | 2,347 | 2,075 | |||||||||||||||
|
Textron Systems
|
1,899 | 1,880 | 1,114 | 790 | 529 | |||||||||||||||
|
Industrial
|
2,078 | 2,918 | 2,825 | 2,611 | 2,559 | |||||||||||||||
|
Finance
|
361 | 723 | 875 | 798 | 628 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total revenues
|
$ | 10,500 | $ | 14,010 | $ | 12,395 | $ | 10,702 | $ | 9,271 | ||||||||||
|
|
||||||||||||||||||||
|
Segment profit
|
||||||||||||||||||||
|
Cessna
|
$ | 198 | $ | 905 | $ | 865 | $ | 645 | $ | 457 | ||||||||||
|
Bell
|
304 | 278 | 144 | 108 | 269 | |||||||||||||||
|
Textron Systems
|
240 | 251 | 174 | 92 | 45 | |||||||||||||||
|
Industrial
|
27 | 67 | 173 | 149 | 125 | |||||||||||||||
|
Finance
|
(294 | ) | (50 | ) | 222 | 210 | 171 | |||||||||||||
|
|
||||||||||||||||||||
|
Total segment profit
|
475 | 1,451 | 1,578 | 1,204 | 1,067 | |||||||||||||||
|
Special charges
(a)
|
(317 | ) | (526 | ) | — | — | (118 | ) | ||||||||||||
|
Corporate expenses and other, net
|
(164 | ) | (171 | ) | (257 | ) | (207 | ) | (203 | ) | ||||||||||
|
Interest expense, net for Manufacturing group
|
(143 | ) | (125 | ) | (87 | ) | (90 | ) | (90 | ) | ||||||||||
|
Income taxes
|
76 | (305 | ) | (368 | ) | (247 | ) | (196 | ) | |||||||||||
|
|
||||||||||||||||||||
|
Income (loss) from continuing operations
|
$ | (73 | ) | $ | 324 | $ | 866 | $ | 660 | $ | 460 | |||||||||
|
|
||||||||||||||||||||
|
Per share
of common stock
(b)
|
||||||||||||||||||||
|
Income (loss) from continuing operations — basic
|
$ | (0.28 | ) | $ | 1.32 | $ | 3.47 | $ | 2.59 | $ | 1.72 | |||||||||
|
Income (loss) from continuing operations — diluted
(c)
|
$ | (0.28 | ) | $ | 1.29 | $ | 3.40 | $ | 2.53 | $ | 1.69 | |||||||||
|
Dividends declared
|
$ | 0.08 | $ | 0.92 | $ | 0.85 | $ | 0.78 | $ | 0.70 | ||||||||||
|
Book value at year-end
|
$ | 10.38 | $ | 9.75 | $ | 13.99 | $ | 10.51 | $ | 12.55 | ||||||||||
|
Common stock price: High
|
$ | 21.00 | $ | 71.69 | $ | 74.40 | $ | 49.48 | $ | 40.36 | ||||||||||
|
Low
|
$ | 3.57 | $ | 10.09 | $ | 43.60 | $ | 37.76 | $ | 32.60 | ||||||||||
|
Year-end
|
$ | 18.81 | $ | 15.37 | $ | 71.62 | $ | 46.88 | $ | 38.49 | ||||||||||
|
|
||||||||||||||||||||
|
Common shares outstanding
(In thousands)
(b)
|
||||||||||||||||||||
|
Basic average
|
262,923 | 246,208 | 249,792 | 255,098 | 267,062 | |||||||||||||||
|
Diluted average
(c)
|
262,923 | 250,338 | 254,826 | 260,444 | 272,892 | |||||||||||||||
|
Year-end
|
272,272 | 242,041 | 250,061 | 251,192 | 260,370 | |||||||||||||||
|
|
||||||||||||||||||||
|
Financial position
|
||||||||||||||||||||
|
Total assets
|
$ | 18,940 | $ | 20,031 | $ | 20,002 | $ | 17,594 | $ | 16,539 | ||||||||||
|
Manufacturing group debt
|
$ | 3,584 | $ | 2,569 | $ | 2,146 | $ | 1,796 | $ | 1,930 | ||||||||||
|
Finance group debt
|
$ | 5,667 | $ | 7,388 | $ | 7,311 | $ | 6,862 | $ | 5,420 | ||||||||||
|
Shareholders’ equity
|
$ | 2,826 | $ | 2,366 | $ | 3,507 | $ | 2,649 | $ | 3,276 | ||||||||||
|
Manufacturing group debt-to-capital (net of cash)
|
39 | % | 46 | % | 32 | % | 29 | % | 26 | % | ||||||||||
|
Manufacturing group debt-to-capital
|
56 | % | 52 | % | 38 | % | 40 | % | 37 | % | ||||||||||
|
|
||||||||||||||||||||
|
Investment data
|
||||||||||||||||||||
|
Capital expenditures
|
$ | 238 | $ | 545 | $ | 379 | $ | 415 | $ | 354 | ||||||||||
|
Depreciation
|
$ | 344 | $ | 331 | $ | 284 | $ | 257 | $ | 270 | ||||||||||
|
Research and development
|
$ | 844 | $ | 966 | $ | 804 | $ | 771 | $ | 672 | ||||||||||
|
|
||||||||||||||||||||
|
Other data
|
||||||||||||||||||||
|
Number of employees at year-end
|
32,000 | 43,000 | 42,000 | 38,000 | 35,000 | |||||||||||||||
|
Number of common shareholders at year-end
|
14,000 | 15,000 | 15,000 | 16,000 | 17,000 | |||||||||||||||
(a) For 2009, special charges include restructuring charges of $237 million and a goodwill
impairment charge in the Industrial segment of $80 million. For 2008, special charges include
restructuring charges of $64 million and charges related to strategic actions taken in the Finance
segment totaling $462 million. During the fourth quarter of 2008, we announced our plan to exit
portions of our commercial finance business. As a result, we recorded an impairment charge of $169
million for unrecoverable goodwill and designated a portion of our finance receivables as held for
sale, resulting in an initial pre-tax mark-to-market adjustment of $293 million. For 2005, special
charges include $112 million in charges related to the disposition of the Automotive Trim business
and $6 million in restructuring charges.
(b) For 2008, basic and diluted shares outstanding have been recast to reflect the adoption of a
new accounting standard in 2009 that requires restricted stock units with nonforfeitable rights to
dividends to be included in the calculation of earnings per share as participating securities using
the two-class method. Prior to 2008, we did not grant this type of restricted stock unit. Amounts
for 2006 and 2005 have been restated to reflect a two-for-one stock split in 2007.
(c) For 2009, the diluted average share base excluded potential common shares (convertible debt and
related warrants, stock options and restricted stock units) due to their antidilutive effect
resulting from the loss from continuing operations.
16
Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The global economic recession in 2009 significantly impacted many of our businesses as consumers
and businesses reduced spending and investment. The lower demand resulting from this environment
contributed to a decline in revenue of $3.5 billion to $10.5 billion and a decline in segment
profit of $976 million to $475 million. These declines were largely due to lower volume in the
Cessna and Industrial segments. The impact of lower volume was partially offset by improved cost
performance as we aligned our workforce and production levels with demand through our restructuring
program, employee furloughs and temporary plant shutdowns. Revenue and segment profit also were
adversely impacted by lower earnings and resulting operating losses in the Finance segment largely
due to an increase in portfolio losses, lower market interest rates and lower securitization
income.
Since our restructuring program was initiated at the end of 2008, we have improved our cost
structure by reducing our workforce by approximately 10,400 employees, representing approximately
24% of our workforce, and by closing 23 leased and owned facilities and plants. This program has
contributed to significant cost improvements in most of our businesses.
During the year, we continued to execute our plan to exit the non-captive portion of the commercial
finance business of our Finance segment, while retaining the captive portion of the business that
supports customer purchases of products that we manufacture. We reduced our managed finance
receivables by $3.8 billion in 2009 through discounted payoffs, portfolio sales and finance
receivable amortization and had a cash conversion ratio of 94%. This reduction included
approximately $450 million in finance receivables from our captive finance business. The Finance
segment’s on-and off-balance sheet debt was reduced by an aggregate of $3.8 billion largely due to
securitization payoffs and debt maturities. We expect the Finance segment to continue to contribute
operating losses in 2010 as it liquidates the non-captive portfolio.
Our defense businesses continue to perform well, reflecting strong program performance. At Textron
Systems, revenues have been favorably impacted by higher volume largely due to higher Shadow
Unmanned Aircraft System and Sensor Fused Weapon deliveries, partially offset by lower aircraft
engine volume as aircraft manufacturers cut production levels in response to lower market demand.
At Bell, higher military volumes from the V-22 and other programs have been partially offset by the
impact of the 2008 Armed Reconnaissance Helicopter (ARH) program cancellation and lower commercial
helicopter deliveries.
Backlog for our aircraft and defense businesses at the end of 2009 totaled $13.5 billion, a 41%
decline from the prior year, primarily due to a 66% decrease in backlog at Cessna. The decline in
backlog at Cessna reflects the cancellation of numerous business jet orders largely due to the
economic recession and includes a $2.1 billion impact from our decision to cancel the development
of the Citation Columbus aircraft and a $1.3 billion impact due to cancellations by one customer.
We expect ongoing volatility in our backlog at Cessna until economic conditions stabilize. Backlog
increased in the Bell segment largely related to the multi-year contract for the V-22.
During 2009, we took several actions to ensure adequate liquidity and capital resources in
light of the turmoil in the capital markets as summarized below:
| • | In February 2009, drew down on the balance of our $3.0 billion committed bank credit lines given the risks associated with the capital markets at the time. | ||
| • | Issued $600 million of Convertible Notes and $600 million of senior notes in May and September, respectively. | ||
| • | In May 2009, concurrent with the Convertible Note offering, offered and sold to the public 23,805,000 shares of our common stock for net proceeds of approximately $238 million. | ||
| • | Extinguished $1.3 billion of our outstanding debt securities with maturity dates ranging from 2009 to 2013 through open market repurchases and tender offers, resulting in a net gain of $53 million. |
We believe that, with the continued successful execution of the exit plan for the non-captive
business and the cash we expect to generate from our manufacturing operations, we will have
sufficient cash to meet our future needs.
Results of Operations
In our discussion of comparative results for the Manufacturing group, changes in revenue and
segment profit typically are expressed in terms of volume, pricing, foreign exchange and
acquisitions. Additionally, changes in segment profit may be expressed in terms of mix, inflation
and cost performance. Volume represents changes in the number of units delivered or services
provided. Pricing represents changes in unit pricing. Foreign exchange is the change resulting from
translating foreign-denominated amounts into U.S. dollars at exchange rates that are different from
the prior period. Acquisitions refer to the results generated from businesses that were acquired
within the previous 12 months. For segment profit,
17
Table of Contents
mix represents a change due to the composition of products and/or services sold at different profit
margins. Inflation represents higher material, wages, benefits or other costs. Cost performance
reflects an increase or decrease in research and development, depreciation, selling and
administrative costs, warranty, product liability, quality/scrap, labor efficiency, overhead,
product line profitability, start-up, ramp-up and cost reduction initiatives, or other
manufacturing inputs. For the U.S. Government business, performance generally refers to changes in
estimated contract rates. These changes typically relate to profit recognition associated with
revisions to total estimated costs to complete a contract that reflect improved (or deteriorated)
operating performance on the contract and are recognized by recording cumulative catch-up
adjustments in the current period.
Revenues
Revenues decreased $3.5 billion, or 25%, to $10.5 billion in 2009, compared with 2008. This
decrease is primarily due to the following factors:
| • | Lower manufacturing volume of $3.3 billion, reflecting: |
| – | $2.4 billion decrease at Cessna, primarily related to fewer deliveries due to the economic recession; | ||
| – | $801 million decrease in the Industrial segment, principally due to recession-related lower demand; and a | ||
| – | $79 million decrease at Bell largely related to lower commercial helicopter volume as a result of the economic recession. |
| • | Lower Finance segment revenues of $362 million, reflecting an increase in portfolio losses, lower market interest rates and lower securitization income; and | ||
| • | Unfavorable foreign exchange impact of $51 million in the Industrial segment; partially offset by | ||
| • | Higher pricing of $155 million, with $94 million at Bell and $48 million at Cessna. |
Revenues increased $1.6 billion, or 13%, to $14.0 billion in 2008, compared with 2007. This
increase is primarily due to the following factors in our manufacturing businesses, which were
partially offset by lower revenues of $152 million in the commercial finance business:
| • | Additional revenues from newly acquired businesses of $820 million, primarily the acquisition of AAI at Textron Systems; | ||
| • | Higher manufacturing volume of $498 million, reflecting: |
| – | $341 million in higher volume at Cessna, primarily related to an increase in business jet deliveries; | ||
| – | $134 million in higher volume at Bell, largely related to the V-22 and H-1 programs; and | ||
| – | $85 million in increased volume at Textron Systems from higher Armored Security Vehicle aftermarket, Lycoming and Intelligent Battlefield Systems products; partially offset by | ||
| – | $62 million decrease in the Industrial segment, principally due to lower demand at Kautex; |
| • | Higher pricing of $378 million, with $252 million at Cessna, $87 million at Bell and $34 million in the Industrial segment; and | ||
| • | Favorable foreign exchange impact of $95 million in the Industrial segment. |
Cost of Sales
Cost of
sales as a percentage of Manufacturing revenues was 83.5%, 79.6% and 79.0% in 2009, 2008 and
2007, respectively. The increase in 2009 is primarily due to the impact of lower production levels
and temporary plant shutdowns in the Cessna and Industrial segments resulting in increased
conversion costs and idle capacity. The increase in 2008 is largely due to higher product
development costs, primarily at Cessna related to the development of new Citation models and
inventory writedowns taken at Cessna at the end of 2008, largely related to pre-owned aircraft.
Selling and Administrative Expense
Selling and administrative expense decreased $262 million to $1,344 million in 2009, compared with
2008, primarily due to workforce reductions and furlough programs resulting in lower compensation
and related costs, lower sales commissions at Cessna, and a decline in professional service and
travel costs due to cost reduction efforts. In 2008, selling and administrative expense increased
$61 million to $1,606 million, compared with 2007, primarily due to an increase in commission
expense from higher business jet sales and higher operating expenses resulting from the acquisition
of AAI in 2007, partially offset by lower compensation expense largely caused by stock
depreciation.
Special Charges
Special charges include restructuring charges of $237 million and $64 million in 2009 and 2008,
respectively. In 2009, special charges also includes a goodwill impairment charge of $80 million in
the Industrial segment, which is discussed on page 67 of Note 10 to the Consolidated Financial
Statements. In 2008, we incurred other special charges of $462 million in the Finance segment in
connection with our decision to exit the non-captive portion of the commercial finance business.
These charges include the initial mark-to-market adjustment of $293 million that was made when we
classified certain finance receivables from held for investment to held for sale and a goodwill
impairment charge of $169 million. There were no special charges in 2007.
18
Table of Contents
Special charges by segment are as follows:
| Restructuring Program | ||||||||||||||||||||||||||||
| Contract | ||||||||||||||||||||||||||||
| Curtailment | Terminations | Total | ||||||||||||||||||||||||||
| Severance | Charges, | Asset | and | Total | Other | Special | ||||||||||||||||||||||
| (In millions) | Costs | Net | Impairments | Other | Restructuring | Charges | Charges | |||||||||||||||||||||
|
2009
|
||||||||||||||||||||||||||||
|
Cessna
|
$ | 80 | $ | 26 | $ | 54 | $ | 7 | $ | 167 | $ | — | $ | 167 | ||||||||||||||
|
Finance
|
11 | 1 | — | 1 | 13 | — | 13 | |||||||||||||||||||||
|
Corporate
|
34 | — | — | 1 | 35 | — | 35 | |||||||||||||||||||||
|
Industrial
|
6 | (4 | ) | — | 3 | 5 | 80 | 85 | ||||||||||||||||||||
|
Bell
|
9 | — | — | — | 9 | — | 9 | |||||||||||||||||||||
|
Textron Systems
|
5 | 2 | — | 1 | 8 | — | 8 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
$ | 145 | $ | 25 | $ | 54 | $ | 13 | $ | 237 | $ | 80 | $ | 317 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
2008
|
||||||||||||||||||||||||||||
|
Cessna
|
$ | 5 | $ | — | $ | — | $ | — | $ | 5 | $ | — | $ | 5 | ||||||||||||||
|
Finance
|
15 | — | 11 | 1 | 27 | 462 | 489 | |||||||||||||||||||||
|
Corporate
|
6 | — | — | — | 6 | — | 6 | |||||||||||||||||||||
|
Industrial
|
16 | — | 9 | — | 25 | — | 25 | |||||||||||||||||||||
|
Textron Systems
|
1 | — | — | — | 1 | — | 1 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
$ | 43 | $ | — | $ | 20 | $ | 1 | $ | 64 | $ | 462 | $ | 526 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
Restructuring Program
In the fourth quarter of 2008, we initiated a restructuring program to reduce overhead costs and
improve productivity across the company, which includes corporate and segment direct and indirect
workforce reductions and streamlining of administrative overhead, and announced the exit of
portions of our commercial finance business. This program was expanded in 2009 to include
additional workforce reductions, primarily at Cessna, Corporate and Bell, the cancellation of the
Citation Columbus development project, the streamlining and reorganization of senior management and
the consolidation of certain operations at Cessna. By the end of 2010, we expect to have eliminated
approximately 10,800 positions worldwide representing approximately 25% of our global workforce
since the inception of the program. As of January 2, 2010, we have terminated approximately 10,400
employees and have exited 23 leased and owned facilities and plants under this program.
We recorded net curtailment charges of $25 million for our pension and other postretirement benefit
plans in the second quarter of 2009, as our analysis of the impact of workforce reductions on these
plans indicated that curtailments had occurred and that the amounts could be reasonably estimated.
The curtailment charge for the pension plan is primarily due to the recognition of prior service
costs that previously were being amortized over a period of years.
Asset impairment charges included a $43 million charge recorded in the second quarter of 2009 to
write off assets related to the Citation Columbus development project. Due to the prevailing
adverse market conditions and after analysis of the business jet market related to the product
offering, Cessna formally canceled the Citation Columbus development project in the second quarter
of 2009. Cessna began this project in early 2008 for the development of an all-new, wide-bodied,
eight-passenger business jet designed for international travel that would extend Cessna’s product
offering as its largest business jet to date. This development project had capitalized costs
related to tooling and a partially constructed manufacturing facility, of which $43 million was
considered not to be recoverable.
19
Table of Contents
Since the inception of the restructuring program, we have incurred the following costs
through January 2, 2010:
| Curtailment | Contract | |||||||||||||||||||
| Severance | Charges, | Asset | Terminations | Total | ||||||||||||||||
| (In millions) | Costs | Net | Impairments | and Other | Restructuring | |||||||||||||||
|
Cessna
|
$ | 85 | $ | 26 | $ | 54 | $ | 7 | $ | 172 | ||||||||||
|
Finance
|
26 | 1 | 11 | 2 | 40 | |||||||||||||||
|
Corporate
|
40 | — | — | 1 | 41 | |||||||||||||||
|
Industrial
|
22 | (4 | ) | 9 | 3 | 30 | ||||||||||||||
|
Bell
|
9 | — | — | — | 9 | |||||||||||||||
|
Textron Systems
|
6 | 2 | — | 1 | 9 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 188 | $ | 25 | $ | 74 | $ | 14 | $ | 301 | ||||||||||
|
|
||||||||||||||||||||
We estimate that we will incur approximately $30 million in additional pre-tax restructuring costs
in 2010, most of which will result in future cash outlays. The additional costs are expected to
primarily include relocation costs at Cessna as it consolidates certain operations, severance in
the Cessna segment and $3 million in severance for the Finance segment. We expect that the program
will be substantially completed in 2010; however, we expect to incur additional costs to exit the
non-captive portion of our commercial finance business over the next two to three years, which are
estimated to be within a range of $7 million to $17 million, primarily attributable to severance
and retention benefits.
Interest Expense
Interest expense includes interest for both the Finance and Manufacturing borrowing groups.
Interest expense decreased $139 million to $309 million in 2009, compared with 2008, primarily due
to reduced debt in the Finance segment as it liquidates its non-captive business. Interest expense,
net for the Manufacturing group increased $18 million to $143 million in 2009, compared with 2008,
primarily due to $38 million in interest on the Convertible Notes issued in the second quarter of
2009, partially offset by lower rates in 2009 due to our borrowings from our bank lines of credit.
Interest expense for the Finance segment is included within segment profit.
In 2008, interest expense decreased $59 million to $448 million, compared with 2007, primarily due
to the Finance segment, reflecting lower interest rates, partially offset by higher average debt
outstanding. Lower interest rates were primarily attributable to the decrease in market rate
indices, partially offset by an increase in borrowing spreads. Interest expense, net for the
Manufacturing group increased $38 million to $125 million in 2008, compared with 2007, primarily
due to higher borrowing costs associated with our commercial paper borrowings in 2008.
Income Taxes
The following table reconciles the federal statutory income tax rate to our effective income tax
rate:
| 2009 | 2008 | 2007 | ||||||||||
|
Federal statutory income tax rate
|
(35.0 | )% | 35.0 | % | 35.0 | % | ||||||
|
Increase (decrease) in taxes resulting from:
|
||||||||||||
|
State income taxes
|
0.4 | 2.3 | 1.0 | |||||||||
|
Goodwill impairment
|
18.5 | 8.4 | — | |||||||||
|
Non-U.S. tax rate differential
|
(13.5 | ) | (5.7 | ) | (0.5 | ) | ||||||
|
Valuation allowance on contingent receipts
|
(7.3 | ) | (0.5 | ) | — | |||||||
|
Research credit
|
(4.7 | ) | (1.9 | ) | (0.8 | ) | ||||||
|
Unrecognized tax benefits and related interest
|
(4.1 | ) | 3.4 | 1.2 | ||||||||
|
Change in status of subsidiary
|
(3.6 | ) | 5.0 | — | ||||||||
|
Manufacturing deduction
|
(3.1 | ) | (2.8 | ) | (1.6 | ) | ||||||
|
Equity hedge loss (income)
|
0.5 | 6.2 | (1.5 | ) | ||||||||
|
Other, net
|
0.9 | (0.8 | ) | (3.0 | ) | |||||||
|
|
||||||||||||
|
Effective income tax rate
|
(51.0 | )% | 48.6 | % | 29.8 | % | ||||||
|
|
||||||||||||
20
Table of Contents
In 2009, the effective tax rate was favorably impacted by the adoption for Canadian tax purposes,
of the U.S. dollar as the functional currency for one of our Canadian subsidiaries, a reduction in
unrecognized tax benefits due to the recognition of a capital gain in connection with the sale of
the CESCOM assets and a reduction in a valuation allowance related to contingent payments on a
prior year transaction, partially offset by a writeoff of non-tax deductible goodwill in the
Industrial segment.
In 2008, the effective tax rate was significantly impacted by the plan announced in the fourth
quarter of 2008 to exit portions of the Finance segment’s business. This plan resulted in the
impairment of all of the Finance segment’s goodwill, of which only a small portion was deductible
for tax purposes. In addition, due to the change in the investment status of the Finance segment’s
Canadian subsidiary, we incurred $31 million in additional tax expense.
Income from Discontinued Operations, Net of Income Taxes
Discontinued Operations includes an $8 million gain on the sale of HR Textron in 2009 and a $111
million gain on the sale of the Fluid & Power business in 2008, along with income (loss) from
operations of these discontinued businesses prior to each disposition.
Segment Analysis
We operate in, and report financial information for, the following five business segments: Cessna,
Bell, Textron Systems, Industrial and Finance. Segment profit is an important measure used for
evaluating performance and for decision-making purposes. Segment profit for the manufacturing
segments excludes interest expense, certain corporate expenses and special charges. The measurement
for the Finance segment includes interest income and expense and excludes special charges.
Cessna
| (Dollars in millions) | 2009 | 2008 | 2007 | |||||||||
|
Revenues
|
$ | 3,320 | $ | 5,662 | $ | 5,000 | ||||||
|
Segment profit
|
$ | 198 | $ | 905 | $ | 865 | ||||||
|
Profit margin
|
6 | % | 16 | % | 17 | % | ||||||
|
Backlog
|
$ | 4,893 | $ | 14,530 | $ | 12,583 | ||||||
The deterioration in the global economy in 2009 significantly impacted the business jet market as
evidenced by order cancellations and a decline in new aircraft orders. In response to these
conditions, Cessna reduced its aircraft production schedule to align output with customer demand
and reduced its headcount by approximately 47% in 2009. See the “Special Charges” section regarding
this restructuring program, including cancellation of the Citation Columbus development program in
the second quarter of 2009.
Cessna Revenues
Cessna’s revenues decreased $2.3 billion in 2009, compared with 2008, primarily due to lower volume
in business jets and other aircraft, reflecting the impact of fewer deliveries due to the economic
recession. We delivered 289, 467 and 387 Citation business jets in
2009, 2008 and 2007, respectively.
Cessna’s spare parts, product support and maintenance activities also experienced $152 million in
lower volume largely due to a decline in aircraft utilization, primarily as a result of the
economic recession, and CitationAir had lower volume of $79 million, primarily due to lower demand.
We expect 2010 business jet volumes and margins will continue to be impacted by weakness in the
general aviation industry.
The $9.6 billion decrease in backlog reflects the cancellation of numerous business jets orders
largely due to the economic recession, and included a $2.1 billion impact from our decision to
cancel the development of the Citation Columbus aircraft and a $1.3 billion impact due to
cancellations by one customer. We expect ongoing volatility in our backlog until economic
conditions begin to recover.
In 2008, Cessna’s revenues increased $662 million, compared with 2007, due to higher volume of $341
million, higher pricing of $252 million and a benefit from a newly acquired business of $69
million.
Cessna Segment Profit
Cessna’s segment profit decreased $707 million in 2009, compared with 2008, primarily due to an
$883 million impact from lower sales volume and $48 million due to idle capacity related to lower
production levels and temporary plant shutdowns. These decreases were partially offset by $131
million of favorable cost performance and a $50 million gain in the first quarter of 2009 on the
sale of assets related to CESCOM, which provided maintenance tracking services to Cessna’s
customers.
21
Table of Contents
Cessna’s favorable cost performance included $116 million in lower engineering, selling and
administrative expense largely due to the workforce reductions in 2009 and $82 million in
forfeiture income from order cancellations, partially offset by higher warranty expense of $35
million, a $16 million increase in writedowns of pre-owned aircraft inventory, reflecting lower
fair market values due to an excess supply in the market, and unfavorable performance at
CitationAir of $10 million.
In 2008, Cessna’s segment profit increased $40 million, compared with 2007, primarily due to
the impact of higher volume of $110 million, pricing in excess of inflation of $82 million and
favorable warranty performance of $14 million, partially offset by increased engineering and
product development expense of $45 million, which included costs related to the development of
new Citation models, CJ4 and Columbus, inventory writedowns of $51 million, largely related to
used aircraft, and increased overhead costs of $19 million.
Bell
| (Dollars in millions) | 2009 | 2008 | 2007 | |||||||||
|
Revenues
|
$ | 2,842 | $ | 2,827 | $ | 2,581 | ||||||
|
Segment profit
|
$ | 304 | $ | 278 | $ | 144 | ||||||
|
Profit margin
|
11 | % | 10 | % | 6 | % | ||||||
|
Backlog
|
$ | 6,903 | $ | 6,192 | $ | 3,809 | ||||||
Bell Revenues
Bell’s revenues increased $15 million in 2009, compared with 2008, due to higher pricing of $94
million, primarily related to certain commercial helicopters, partially offset by lower volume of
$79 million. Our volume decreased $97 million for commercial helicopters and $30 million for spares
and support services largely due to a decline in demand, along with a $76 million decrease related
to the canceled ARH program. These decreases were partially offset by increased volume in other
programs with the U.S. Government, including an $80 million increase for the V-22 as we delivered
more aircraft under the multi-year program.
Backlog at Bell increased $711 million in 2009, primarily due to funding for the V-22 program,
partially offset by a decline in commercial aircraft orders largely due to the economic recession.
In 2008, Bell’s revenues increased $246 million, compared with 2007, primarily due to higher volume
of $134 million, higher pricing of $87 million and revenues from newly acquired businesses of $26
million. The increase in volume related primarily to higher V-22 volume of $125 million (largely
due to delivery of 18 aircraft in 2008, compared with 14 in 2007), higher H-1 volume of $47 million
(principally due to delivery of 12 aircraft in 2008, compared with 10 in 2007), and an increase in
spares and service sales volume of $28 million. These volume increases were partially offset by
lower commercial helicopter volume of $54 million and lower ARH program revenues of $19 million as
a result of the program’s termination in October 2008.
Bell Segment Profit
Bell’s segment profit increased $26 million in 2009, compared with 2008, primarily due to higher
pricing in excess of inflation of $47 million and improved cost performance of $19 million,
partially offset by a change in product mix of $22 million, primarily due to commercial helicopters
and lower volume of $18 million. The improved cost performance primarily reflects:
| • | Lower selling and administrative expenses of $26 million; | ||
| • | Lower research and development of $21 million; | ||
| • | Improvement in the V-22 program of $16 million, primarily due to prior year charges; and an | ||
| • | $11 million gain on a Canadian currency exchange contract that we had hedged, which was unwound during the third quarter due to a significant decline in the production activity; partially offset by | ||
| • | Unfavorable adjustments of $24 million for the 429 model, primarily related to pricing assumptions and higher than anticipated learning curve costs, resulting in inventory write downs; | ||
| • | Costs of $11 million related to the termination of certain commercial models; and | ||
| • | Lower spares and support performance of $8 million. |
22
Table of Contents
In 2008, Bell’s segment profit increased $134 million, compared with 2007, primarily due to
favorable cost performance of $78 million, higher pricing in excess of inflation of $32 million and
$21 million in increased royalty revenues, primarily related to the Model A139. Cost performance
included:
| • | Improved performance for the H-1 Low-Rate Initial Production (LRIP) program of $46 million, primarily resulting from a $30 million net charge recorded in the fourth quarter of 2007 to reflect higher costs estimates due to supplier delays and an estimated loss resulting from our price commitment under one contract. In 2008, production efficiencies improved resulting in $6 million in favorability; | ||
| • | Lower net charges of $32 million for the ARH program due to estimated contract losses related to supplier obligations for long-lead components; | ||
| • | Costs of $26 million incurred in 2007 related to our exit of certain commercial models; | ||
| • | The $14 million impact of improved commercial aircraft margins, primarily due to improved production efficiencies for the 412 and 407 models; and | ||
| • | Improvement in the V-22 program of $11 million, primarily due to manufacturing efficiencies; partially offset by | ||
| • | Increased selling and administrative expenses of $20 million due to higher project-related consulting expenses and | ||
| • | Higher research and development expense of $14 million. |
ARH Program Termination
On
October 16, 2008, we received notification from the U.S. Department of Defense that it would not
certify the continuation of the ARH program to Congress under the Nunn-McCurdy Act, resulting in
the termination of the program for the convenience of the government. The ARH program included a
development phase, covered by the System Development and Demonstration (SDD) contract, and a
production phase. We submitted our claim for the termination costs for the SDD contract in October
2009 and believe that these costs are fully recoverable from the U.S. Government.
Prior to termination of the program, we obtained inventory and incurred vendor obligations for
long-lead time materials related to the anticipated LRIP contracts to maintain the program schedule
based on our belief that the LRIP contracts would be awarded. We have since terminated our vendor
contracts and are negotiating to settle our termination obligations. In October 2009, we filed a
claim with the U.S. Government to request reimbursement of costs expended in support of the LRIP
program. On December 17, 2009, we received a decision from the Contracting Officer of the Department
of the Army that denied this claim in its entirety. We plan to appeal this decision in the first
quarter of 2010. At January 2, 2010, our reserves related to this program totaled $50 million, which
we believe are adequate to cover our exposure.
Textron Systems
| (Dollars in millions) | 2009 | 2008 | 2007 | |||||||||
|
Revenues
|
$ | 1,899 | $ | 1,880 | $ | 1,114 | ||||||
|
Segment profit
|
$ | 240 | $ | 251 | $ | 174 | ||||||
|
Profit margin
|
13 | % | 13 | % | 16 | % | ||||||
|
Backlog
|
$ | 1,664 | $ | 2,190 | $ | 2,144 | ||||||
Textron Systems Revenues
Revenues at Textron Systems increased $19 million in 2009, compared with 2008, primarily due
to higher defense volumes, including $83 million for Shadow Unmanned Aircraft Systems, $45 million
for Sensor Fused Weapons and $34 million for Armored Security Vehicles. These increases were
partially offset by lower aircraft engine volume of $73 million largely due to a decline in
aircraft production as aircraft manufacturers cut production levels in response to lower demand,
lower Armored Security Vehicle aftermarket volume of $45 million and a $33 million impact largely
due to the completion of programs related to laser and missile technology development.
Backlog at Textron Systems decreased $526 million in 2009, primarily due to deliveries on existing
government contracts for Shadow Unmanned Aircraft Systems and Armored Security Vehicles.
23
Table of Contents
In 2008, Textron Systems revenues increased $766 million, compared with 2007, primarily due to the
acquisition of AAI in 2007, which contributed $701 million to revenues in 2008, and higher volume
of $85 million, partially offset by the nonrecurrence of a $28 million cost reimbursement in 2007
related to losses incurred during Hurricane Katrina. The volume increase is primarily due to $69
million in higher volume in our Armored Security Vehicle aftermarket products, $48 million in
higher volume for Intelligent Battlefield System products and $22 million in higher volume at
Lycoming, partially offset by $32 million in lower Sensor Fused Weapon volume.
Textron Systems Segment Profit
Segment profit at Textron Systems decreased $11 million in 2009, compared with 2008, primarily due
to the impact of lower aircraft engine
volume of $38 million, partially offset by a $29 million impact from higher defense volumes.
In 2008, Textron Systems segment profit increased $77 million, compared with 2007, primarily due to
the acquisition of AAI, which contributed $62 million in 2008, and favorable cost performance of
$12 million. The favorable cost performance included $39 million related to the Armored Security
Vehicle program, partially offset by the 2007 reimbursement of $28 million for the impact of losses
incurred during Hurricane Katrina. The Armored Security Vehicle program cost performance is
primarily due to improved labor efficiencies and lower material costs.
Industrial
| (Dollars in millions) | 2009 | 2008 | 2007 | |||||||||
|
Revenues
|
$ | 2,078 | $ | 2,918 | $ | 2,825 | ||||||
|
Segment profit
|
$ | 27 | $ | 67 | $ | 173 | ||||||
|
Profit
|
1 | % | 2 | % | 6 | % | ||||||
Industrial Revenues
Revenues in the Industrial segment decreased $840 million in 2009, compared with 2008, primarily
due to $801 million in lower volume, reflecting lower demand due to the economic recession, and an
unfavorable foreign exchange impact of $51 million, largely due to fluctuations of the euro,
partially offset by $8 million in higher pricing.
In 2008, Industrial segment revenues increased $93 million, compared with 2007, primarily due to a
favorable foreign exchange impact of $95 million, higher pricing of $34 million and the favorable
impact of an acquisition of $24 million, partially offset by lower volume of $62 million. Volume
declined in the Kautex, Greenlee and Jacobsen businesses as demand softened, with the largest
decline at Kautex as the slowing economy had a significant impact on automotive sales in the second
half of 2008, resulting in numerous factory shutdowns at automotive original equipment
manufacturers around the world. At E-Z-GO, volume increased $41 million, largely due to increased
fleet car sales related to the successful introduction of the RXV model.
Industrial Segment Profit
Industrial segment profit decreased $40 million in 2009, compared with 2008, primarily due to the
$265 million impact from lower volume, partially offset by improved cost performance of $211
million and lower inflation of $21 million. Cost performance has improved largely due to
significant efforts made to reduce costs through workforce reductions, employee furloughs,
temporary plant shutdowns and lower selling and administrative costs.
In 2008, Industrial segment profit decreased $106 million, compared with 2007, mainly due to
inflation in excess of pricing of $61 million and the impact of lower volume and mix of $54
million, partially offset by improved cost performance of $13 million.
Finance
| (Dollars in millions) | 2009 | 2008 | 2007 | |||||||||
|
Revenues
|
$ | 361 | $ | 723 | $ | 875 | ||||||
|
Segment profit (loss)
|
$ | (294 | ) | $ | (50 | ) | $ | 222 | ||||
|
Profit (loss)
|
(81 | )% | (7 | )% | 25 | % | ||||||
24
Table of Contents
During 2009, we proceeded with our plan to exit the non-captive commercial finance business in our
Finance segment. We made the decision to exit this business in the fourth quarter of 2008 in order
to address our long-term liquidity position in light of disruption and instability in the capital
markets. The plan is being effected through a combination of orderly liquidation and selected sales
and is expected, depending on market conditions, to be substantially complete over the next two to
three years. The Finance segment also announced a restructuring program in the fourth quarter of
2008 primarily related to headcount reductions and asset impairments resulting from the exit plan.
See “Special Charges” section on pages 18 to 20 regarding charges taken as a result of the exit
plan, which are not reflected in segment profit.
Finance Revenues
Finance segment revenues decreased $362 million in 2009, compared with 2008, primarily due to the following:
| • | A $157 million impact from higher portfolio losses; | ||
| • | $92 million impact from lower market interest rates; | ||
| • | $70 million in lower securitization gains, net of impairments; | ||
| • | $62 million in lower average finance receivables of $1.0 billion; | ||
| • | $37 million in higher suspended earnings on nonaccrual finance receivables; partially offset by | ||
| • | $55 million in gains on debt extinguishment. |
Portfolio losses recognized in 2009 include discounts taken on the sale or early termination of
finance assets, including $60 million in discounts associated with the liquidation of distribution
finance and golf mortgage finance receivables, $53 million in impairment charges related to
automobile manufacturing equipment and investments in real estate associated with matured leveraged
leases and $25 million in higher impairment charges associated with repossessed aircraft.
In 2008, revenues in the Finance segment decreased $152 million, compared with 2007, primarily due
to the following:
| • | A $163 million impact from lower market interest rates; | ||
| • | $20 million in lower securitization gains, net of impairments; and | ||
| • | A lower gain on the sale of a leveraged lease investment of $16 million; partially offset by the | ||
| • | $24 million benefit from variable-rate receivable interest rate floors and | ||
| • | A $21 million impact from higher average finance receivables of $258 million. |
Finance Segment Profit (Loss)
The Finance segment loss increased $244 million in 2009, compared with 2008, primarily due to a
$157 million impact from higher portfolio losses, $70 million in lower securitization gains, net of
impairments, $37 million in higher suspended earnings on nonaccrual finance receivables and a $33
million increase in provision for loan losses, partially offset by $55 million in gains on debt
extinguishment.
In 2008, segment profit in the Finance segment decreased $272 million, compared with 2007,
primarily due to a $201 million increase in the provision for loan losses, a $51 million impact of
higher borrowing costs, relative to market rates, $20 million in lower securitization gains, net of
impairments, a $16 million lower gain on the sale of a leveraged lease investment, partially offset
by a $24 million benefit from variable-rate receivable interest rate floors.
We increased the allowance for loan losses significantly in 2009 and 2008 in response to the
economic recession, declining collateral values and the lack of liquidity available to our
borrowers and their customers. We also increased our estimate of credit losses as a result of our
decision to exit portions of the finance business in the fourth quarter of 2008, which we believe
will negatively impact credit losses over the duration of our portfolio. In 2009, the increase was
primarily due to an increase in both the rate and severity of defaults resulting from the economic
recession and due to declining aircraft values. The increase was partially offset by a $73 million
decrease in the provision for the distribution finance
25
Table of Contents
portfolio largely due to the liquidation of 68% of its managed finance receivables in 2009. In
2008, the increase in provision for loan losses was primarily a result of an $81 million increase
in defaults in the marine and recreational vehicles distribution finance portfolios, a $21 million
increase for the resort finance portfolio, a $19 million reserve established for one account in the
golf mortgage finance portfolio and a $16 million reserve for one account in the asset-based
lending portfolio.
Borrowing costs increased relative to the target Federal Funds rate as credit market volatility
significantly impacted the historical relationships between market indices. The increase was
primarily driven by an increase in the spread between the London Interbank Offered Rate (LIBOR) and
the target Federal Funds rate and from increased borrowing spreads on issuances of commercial paper
in comparison with 2007. These increases were partially offset by increased receivable pricing as a
result of variable-rate receivables with interest rate floors.
Finance Portfolio Quality
The following table reflects information about the Finance segment’s credit performance related to
finance receivables held for investment. Finance receivables held for
sale are reflected at fair
value on the Consolidated Balance Sheets. As a result, finance receivables held for sale are not
included in the credit performance statistics below.
| January 2, | January 3, | |||||||
| (Dollars in millions) | 2010 | 2009 | ||||||
|
Finance receivables
|
$ | 6,206 | $ | 6,915 | ||||
|
Nonaccrual finance receivables
|
$ | 1,040 | $ | 277 | ||||
|
Allowance for losses
|
$ | 341 | $ | 191 | ||||
|
Ratio of nonaccrual finance receivables to finance receivables held for
investment
|
16.75 | % | 4.01 | % | ||||
|
Ratio of allowance for losses on finance receivables to nonaccrual
finance receivables held for investment
|
32.80 | % | 68.90 | % | ||||
|
Ratio of allowance for losses on finance receivables to finance
receivables held for investment
|
5.49 | % | 2.76 | % | ||||
|
60+ days contractual delinquency as a percentage of finance receivables
|
9.23 | % | 2.59 | % | ||||
|
Repossessed assets and properties
|
$ | 119 | $ | 70 | ||||
|
Operating assets received in satisfaction of troubled finance receivables
|
$ | 112 | $ | 84 | ||||
Our nonaccrual finance receivables include impaired finance receivables, as well as accounts in
homogeneous loan portfolios that are not considered to be impaired but are contractually delinquent
by more than three months. We believe that the percentage of nonaccrual finance receivables
generally will remain high as we execute our liquidation plan under the current economic
conditions. The liquidation plan is also likely to result in a slower pace of liquidations for
nonaccrual finance receivables.
The ratio of allowance for losses to nonaccrual finance receivables held for investment decreased
primarily as a result of certain nonaccrual timeshare and aviation accounts for which specific
reserves were either not established due to sufficient collateral values and other considerations,
or were established at a percentage of the outstanding balance based on the expectation of partial
recovery. This reflects our best estimate of loss based on a detailed review of our workout
strategy and estimates of collateral value.
The increase in operating assets received in satisfaction of troubled finance receivables
primarily reflects an increase in the number of golf courses for which ownership was
transferred to us from the borrower in 2009. We intend to operate and improve the performance
of these properties prior to their eventual disposition.
26
Table of Contents
A summary of these finance receivables and the related allowance for losses by collateral
type is as follows:
| January 2, 2010 | January 3, 2009 | |||||||||||||||||||||||
| Allowance | Allowance | |||||||||||||||||||||||
| for Losses | for Losses | |||||||||||||||||||||||
| Impaired | on Impaired | Impaired | on Impaired | |||||||||||||||||||||
| Nonaccrual | Nonaccrual | Nonaccrual | Nonaccrual | Nonaccrual | Nonaccrual | |||||||||||||||||||
| Finance | Finance | Finance | Finance | Finance | Finance | |||||||||||||||||||
| Collateral Type (In millions) | Receivables | Receivables | Receivables | Receivables | Receivables | Receivables | ||||||||||||||||||
|
Timeshare notes receivable*
|
$ | 259 | $ | 254 | $ | 53 | $ | 78 | $ | 74 | $ | 9 | ||||||||||||
|
General aviation aircraft
|
286 | 272 | 46 | 17 | 6 | 2 | ||||||||||||||||||
|
Golf course property
|
166 | 165 | 27 | 107 | 107 | 25 | ||||||||||||||||||
|
Resort construction/inventory
|
104 | 104 | — | — | — | — | ||||||||||||||||||
|
Dealer inventory
|
88 | 68 | 14 | 43 | 34 | 3 | ||||||||||||||||||
|
Hotels
|
78 | 78 | 7 | — | — | — | ||||||||||||||||||
|
Other
|
59 | 43 | 6 | 32 | 13 | 4 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 1,040 | $ | 984 | $ | 153 | $ | 277 | $ | 234 | $ | 43 | ||||||||||||
|
|
||||||||||||||||||||||||
| * | Finance receivables collateralized primarily by timeshare notes receivable also maybe collateralized by certain real estate and other assets of our borrowers. |
The increase in nonaccrual finance receivables primarily is attributable to the lack of
liquidity available to borrowers in the timeshare portfolio, weaker general economic conditions and
depressed aircraft values. The increase in timeshare notes receivable includes one $203 million
account, of which $120 million is collateralized by notes receivable and $83 million is
collateralized by several resort properties, which are included in the resort
construction/inventory line above.
Liquidity and Capital Resources
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 is also the Finance
segment, consists of Textron Financial Corporation (TFC), its subsidiaries and the securitization
trusts consolidated into it, along with two 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.
Key information that is utilized in assessing our liquidity is summarized below:
| (Dollars in millions) | 2009 | 2008 | ||||||
|
Manufacturing group
|
||||||||
|
Cash and cash equivalents
|
$ | 1,748 | $ | 531 | ||||
|
Total debt
|
$ | 3,584 | $ | 2,569 | ||||
|
Total equity
|
$ | 2,826 | $ | 2,366 | ||||
|
Total capital (debt plus equity)
|
$ | 6,410 | $ | 4,935 | ||||
|
Net debt to capital (net of cash and cash equivalents)
|
39.4 | % | 46.3 | % | ||||
|
Gross debt to capital
|
55.9 | % | 52.1 | % | ||||
|
Free cash flow*
|
$ | 424 | $ | 362 | ||||
|
Finance group
|
||||||||
|
Cash and cash equivalents
|
$ | 144 | $ | 16 | ||||
|
Securitized off-balance sheet debt
|
$ | 31 | $ | 2,067 | ||||
|
Total debt on-balance sheet
|
$ | 5,667 | $ | 7,388 | ||||
| * | Free cash flow represents a non-GAAP measure. See page 29 for a reconciliation to GAAP. |
27
Table of Contents
We believe that with our existing cash balances, coupled with the continued successful execution
of the exit plan for the non-captive portion of the commercial finance business, and cash we
expect to generate from our manufacturing operations, we will have sufficient cash to meet our
future needs.
During 2009, we proceeded with our plan to exit the non-captive commercial finance business in our
Finance segment. We made the decision to exit this business in the fourth quarter of 2008 in order
to address our long-term liquidity position in light of disruption and instability in the capital
markets. The plan is being effected through a combination of orderly liquidation and selected sales
and is expected, depending on market conditions, to be substantially complete over the next two to
three years. We reduced our managed finance receivables by $3.8 billion in 2009 through discounted
payoffs, portfolio sales and finance receivable amortization, which included approximately $450
million in finance receivables from our captive finance business. Managed finance receivables
include owned finance receivables that are recorded on our balance sheets and finance receivables
sold in securitizations where we have retained credit risk to the extent of our subordinated
interest, which may or may not be recorded on our balance sheets. The reduction in managed finance
receivables was primarily driven by the accelerated pace of liquidations in the distribution
finance product line. Distribution finance receivables typically have short duration associated
with the sales pace of equipment dealer inventory and this natural liquidation pattern was
accelerated by asset sales, discounted payoff programs and the transfer of borrowers with revolving
credit lines to new lenders.
We
measure the progress of the exit plan, in part, based on the percentage of managed finance receivable and
other finance asset reductions converted to cash. In 2009, we had a cash conversion ratio of 94%.
We expect the cash conversion ratio to decline over the duration of our exit plan due to the change
in mix from shorter term assets in the distribution finance and asset-based lending product lines
to longer term assets in our timeshare, golf mortgage and structured finance product lines and the
existence of a higher concentration of nonaccrual finance receivables. At the end of 2009, the exit
plan applied to the remaining $4.1 billion of the Finance segment’s non-captive managed finance
receivables portfolio. In 2010, we expect a total reduction in managed finance receivables of
approximately $1.6 billion, net of originations, which includes non-captive finance receivables, as
well as captive finance receivables. In connection with the liquidation of our managed finance
receivables, we have reduced our Finance group’s on- and off-balance sheet debt portfolio by an
aggregate of $3.8 billion largely due to the payoff of the distribution finance and golf
securitizations and debt maturities.
In February 2009, due to the unavailability of term debt and difficulty in accessing sufficient
commercial paper on a daily basis, we drew the available balance from our aggregate $3.0 billion in
committed bank lines of credit. Amounts borrowed under the credit facilities are due in April 2012.
A portion of the proceeds was used to repay our outstanding commercial paper. These facilities
historically have been in support of commercial paper and letters of credit issuances only, and, at
the end of 2008, there were no borrowings outstanding related to the Manufacturing group’s $1.25
billion facility or the Finance group’s $1.75 billion facility.
During 2009, the capital markets improved, and we were able to successfully access these markets to
strengthen our current and future liquidity profile. We maintain an effective shelf registration
statement filed with the Securities and Exchange Commission that allows us to issue an unlimited
amount of public debt and other securities. On May 5, 2009, we issued $600 million of 4.50%
Convertible Senior Notes (Convertible Notes) under our registration statement. See Note 8 to the
Consolidated Financial Statement for more information on these Convertible Notes. Concurrently with
the offering and sale of the Convertible Notes, we also offered and sold to the public under our
registration statement 23,805,000 shares of our common stock for net proceeds of approximately $238
million. To further lengthen the maturity profile of our
indebtedness, on September 14, 2009, we
issued $600 million of senior notes under our registration statement, comprised of $350 million of
6.20% notes due 2015 and $250 million of 7.25% notes due 2019.
Both borrowing groups extinguished through open market repurchases an aggregate of $745 million in
outstanding debt securities prior to maturity during 2009, resulting in gains of $54 million. Also
in 2009, both borrowing groups completed separate cash tender offers for up to a $650 million
aggregate principal amount of five separate series of outstanding debt securities with maturity
dates ranging from November 2009 to June 2012. In completing these tender offers, we extinguished
an aggregate of $587 million of outstanding debt securities with maturity dates ranging from 2009
to 2012 and recognized a loss of $1 million in 2009.
We also have pursued new funding sources and transfers of existing funding obligations to new
financing providers. In July 2009, we entered into a credit agreement with the Export-Import Bank
of the United States that established a $500 million credit facility to provide funding to finance
purchases of Cessna and Bell aircraft by non-U.S. customers who take delivery of new aircraft by
December 2010. During the second quarter, we transferred the rights to financing programs with two
large manufacturers of lawn and garden products in the distribution finance business, which will
reduce future originations. Similarly, in early April, we entered into a three-year agreement with
a financial service company that now provides financing to third parties for a portion of our sales
of E-Z-GO golf cars.
28
Table of Contents
Credit Ratings
The major rating agencies regularly evaluate both borrowing groups, and their ratings of our debt
are based on a number of factors, including our financial strength and factors outside our control
such as conditions affecting the financial services industry generally. At the beginning of 2009,
our credit ratings were downgraded, and the rating agencies cited concerns about Textron Financial
Corporation, including execution risks associated with our plan to exit portions of our commercial
finance business and the need for Textron Inc. to make capital contributions to Textron Financial
Corporation, as well as lower expected earnings, the increase in outstanding debt resulting from
the borrowing under our bank lines of credit, weak economic conditions and liquidity and funding
constraints.
On February 2, 2010, Moody’s Investors Service affirmed its ratings of both borrowing groups and
changed its rating outlook to stable from negative, reflecting improved liquidity at Textron Inc.
and better than expected progress in the ongoing liquidation of TFC’s non-captive assets. The
credit ratings and outlooks of the debt-rating agencies at the date of this filing were as follows:
| Fitch Ratings | Moody’s | Standard & Poor’s | ||||||||||
|
Long-term ratings:
|
||||||||||||
|
Manufacturing
|
BB+ | Baa3 | BBB- | |||||||||
|
Finance
|
BB+ | Baa3 | BB+ | |||||||||
|
Short-term ratings:
|
||||||||||||
|
Manufacturing
|
B | P3 | A3 | |||||||||
|
Finance
|
B | P3 | B | |||||||||
|
Outlook:
|
||||||||||||
|
Manufacturing
|
Negative | Stable | Negative | |||||||||
|
Finance
|
Negative | Stable | Developing | |||||||||
Our current credit ratings may adversely affect the cost and other terms upon which we are able
to obtain other financing and access the capital markets.
Manufacturing Group Cash Flows
Free cash flow is a measure generally used by investors, analysts and management to gauge a
company’s ability to generate cash from operations in excess of that necessary to be reinvested to
sustain and grow the business. Our definition of Manufacturing free cash flow uses net cash from
operating activities of continuing operations and subtracts dividends received from the Finance
group and capital expenditures, then adds back capital contributions provided under a Support
Agreement with TFC, as discussed below, plus proceeds from the sale of plant, property and
equipment. We believe that our Manufacturing free cash flow calculation provides a relevant measure
of liquidity and a useful basis for assessing our ability to fund operations. This measure is not a
financial measure under generally accepted accounting principles (GAAP) and should be used in
conjunction with GAAP cash measures provided in our Consolidated Statement of Cash Flows. Our
Manufacturing free cash flow measure may not be comparable with similarly titled measures reported
by other companies as there is no definitive accounting standard on how the measure should be
calculated.
A reconciliation of net cash from operating activities of continuing operations as presented
in our Consolidated Statement of Cash Flows to Manufacturing free cash flow is provided below.
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Net cash from operating activities of continuing
operations — GAAP
|
$ | 738 | $ | 407 | $ | 1,144 | ||||||
|
Less: Dividends received from the Finance group
|
(349 | ) | (142 | ) | (135 | ) | ||||||
|
Plus: Capital contributions paid to Finance group
|
270 | 625 | — | |||||||||
|
Less: Capital expenditures
|
(238 | ) | (537 | ) | (369 | ) | ||||||
|
Plus: Proceeds on sale of property, plant and equipment
|
3 | 9 | 6 | |||||||||
|
|
||||||||||||
|
Manufacturing free cash flow — Non-GAAP
|
$ | 424 | $ | 362 | $ | 646 | ||||||
|
|
||||||||||||
Our Manufacturing group’s free cash flow improved by $62 million in 2009, compared with 2008, as
lower capital expenditures of $299 million and working capital improvements offset lower earnings
and an increase in cash paid for restructuring activities. Cash used for restructuring activities
totaled $132 million in 2009, compared with $3 million in 2008 and none in 2007. In 2008, free cash
flow decreased $284 million largely due to a higher investment in inventories related to increased
production levels and inventory build at Bell and Cessna and a $168 million increase in capital
expenditures in connection with the ramp up of production.
29
Table of Contents
Cash flows from continuing operations for the Manufacturing group as presented in our
Consolidated Statement of Cash Flows are summarized below:
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Operating activities
|
$ | 738 | $ | 407 | $ | 1,144 | ||||||
|
Investing activities
|
(288 | ) | (637 | ) | (1,469 | ) | ||||||
|
Financing activities
|
563 | (159 | ) | (75 | ) | |||||||
Cash flow from operating activities increased $331 million in 2009, compared with 2008, largely due
to $562 million in lower capital contributions paid to the Finance group, net of dividends
received, and working capital improvements, partially offset by lower earnings. We used $48 million
in working capital in 2009, compared with $434 million in 2008, largely related to significant
inventory reductions. In 2008, cash flow from operating activities decreased, primarily due to a
$625 million capital contribution made to the Finance group.
Investing
cash flows in 2009, 2008 and 2007 primarily include capital expenditures of $238 million,
$537 million and $369 million, respectively. The decrease in 2009 is largely due to a reduction in
discretionary spending due to the economic recession. In addition, in 2008 and 2007, we paid $109
million and $1.1 billion, respectively, for acquisitions, primarily related to AAI.
Financing activities provided more cash in 2009, compared with 2008, primarily due to the draw of
our $1.2 billion on bank lines of credit, a portion of which was used to repay outstanding
commercial paper borrowings, net proceeds of $442 million from the issuance of the Convertible
Notes (net of hedge), $333 million in cash from the issuance of our common stock and common stock
warrants, $595 million in net proceeds from the issuance of senior notes and a decrease in
dividends paid. These increases in cash provided were partially offset by an $869 million decrease
in commercial paper borrowings in 2009, compared with an $867 million increase in these borrowings
in 2008. In addition, we made $412 million in payments to settle advances against our company-owned
officer life insurance policies in 2009, while in 2008, we received $222 million in advances
against these policies.
We have not repurchased any of our common stock (other than in connection with an executive
compensation award) since we suspended all share repurchase activity under our repurchase program
in September 2008. Under Board-authorized share repurchase programs, we spent $533 million in 2008
and $304 million in 2007 for share repurchases representing approximately 12 million and 6 million
shares of common stock, respectively.
On
February 25, 2009, we announced that our Board of Directors had voted to reduce our quarterly
dividend to $0.02 per share for the first quarter of 2009 in an effort to increase our liquidity in
the long-term interest of our shareholders. Accordingly, the annual dividend decreased to $0.08 in
2009 from $0.92 in 2008. Dividend payments to shareholders totaled $21 million, $284 million and
$154 million in 2009, 2008 and 2007, respectively. In 2008, the timing of our quarterly dividend
payments resulted in four payments, compared with three payments in 2007.
Capital Contributions Paid To and Dividends Received From the Finance Group
Under a Support Agreement between Textron Inc. and TFC, Textron Inc. is required to maintain a
controlling interest in TFC. The agreement also requires Textron Inc. to ensure that TFC maintains
fixed charge coverage of no less than 125% and consolidated shareholder’s equity of no less than
$200 million. Due to a goodwill impairment charge of $169 million at TFC, along with other charges
resulting from the exit plan discussed above, on December 29, 2008, Textron Inc. was required to
make a cash payment to TFC, which was reflected as a capital contribution, to maintain compliance
with the fixed charge coverage ratio required by the support agreement and to maintain the leverage
ratio required by its credit facility. Cash contributions paid to TFC and dividends paid by TFC to
Textron Inc. are detailed below.
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Dividends paid by TFC to Textron Inc.
|
$ | 349 | $ | 142 | $ | 135 | ||||||
|
Capital contributions paid to TFC
under Support Agreement
|
(270 | ) | (625 | ) | — | |||||||
An additional cash contribution of $75 million was made to TFC on January 12, 2010 to maintain
compliance with the fixed charge coverage ratio required by the Support Agreement.
30
Table of Contents
Due to the nature of these contributions, we classify these contributions within cash flows
used by operating activities for the Manufacturing group in the Consolidated Statement of Cash
Flows. Capital contributions to support Finance group growth in the ongoing captive finance
business are classified as cash flows from financing activities. The Finance group’s net income
(loss) is excluded from the Manufacturing group’s cash flows, while dividends from the Finance
group are included within cash flows from operating activities for the Manufacturing group as they
represent a return on investment.
Finance Group Cash Flows
The cash flows from continuing operations for the Finance group are summarized below:
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Operating activities
|
$ | 196 | $ | 167 | $ | 262 | ||||||
|
Investing activities
|
2,153 | (64 | ) | (281 | ) | |||||||
|
Financing activities
|
(2,235 | ) | (146 | ) | 29 | |||||||
We generated cash from investing activities in the Finance group as new finance receivable
originations declined to $3.7 billion in 2009 from $11.9 billion in 2008 as we effected our exit
plan for the non-captive business. Finance receivables repaid and proceeds from sales and
securitizations decreased to $5.4 billion in 2009 from $11.9 billion in 2008. In 2008, cash used in
investing activities decreased from 2007, primarily due to a decrease in finance receivable
originations, net of collections and sale proceeds, largely related to our decision to exit the
non-captive business, resulting in lower originations.
The Finance group used more cash for financing activities in 2009, compared with 2008, primarily
due to the repayment of debt and commercial paper in 2009, totaling $4.5 billion, compared with
$2.2 billion in 2008. The Finance group’s financing outflows were partially offset by $1.7 billion
in proceeds from the first quarter 2009 drawdown on its bank lines of credit. In 2008, proceeds
from the issuance of long-term debt totaled $1.5 billion.
In 2009 and 2008, the Manufacturing group agreed to lend the Finance group, with interest, funds to
pay down maturing debt. As of January 2, 2010 and January 3, 2009, the outstanding balance due to
the Manufacturing group was $447 million and $133 million, respectively.
The Finance group received $270 million in capital contributions from the Manufacturing group in
2009, compared with $625 million in 2008, to enable it to maintain compliance with the fixed charge
coverage ratio required by the Support Agreement. In addition, the Finance group paid $207 million
more in dividends to the Manufacturing group in 2009, compared with 2008.
More cash was used for
financing activities in 2008, compared with 2007, primarily due to an increase in debt payments,
partially offset by the 2008 capital contribution received from the Manufacturing group and lower
proceeds from borrowings related to the reduction in managed receivable growth.
Consolidated Cash Flows
The consolidated cash flows from continuing operations, after elimination of activity between
the borrowing groups, are summarized below:
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Operating activities
|
$ | 1,032 | $ | 764 | $ | 985 | ||||||
|
Investing activities
|
1,728 | (408 | ) | (1,464 | ) | |||||||
|
Financing activities
|
(1,633 | ) | (788 | ) | 89 | |||||||
Consolidated cash provided by operating activities increased, primarily due to working capital
improvements, largely related to a reduction in inventory, partially offset by lower earnings and
an increase in cash used in connection with our restructuring program.
We received more cash from investing activities, primarily due to the Finance group’s exit
plan, which resulted in lower finance receivable originations. In 2007, $1.1 billion in cash
was used for acquisitions, primarily related to AAI.
More cash was used for financing activities as we repaid $4.2 billion in maturing long-term debt,
including early debt extinguishments, compared with $1.9 billion in 2008. This use was partially
offset by the receipt of $3.0 billion from drawing on our lines of credit, which was partially
offset by a $1.6 billion decrease in commercial paper borrowings in 2009, compared with a $218
million increase in net commercial paper borrowings in 2008. We also used more cash in 2008 for
stock repurchases and dividend payments, compared with 2009 as discussed in the “Manufacturing
Group Cash Flow” section. In 2008, we received less cash from financing activities, compared with
2007, primarily due to $663 million in lower proceeds from borrowings, net of principal payments.
31
Table of Contents
Captive Financing and Other Intercompany Transactions
The Finance group finances retail purchases and leases for new and used aircraft and
equipment manufactured by our Manufacturing group, otherwise known as captive financing. In the
Consolidated Statements of Cash Flows, cash received from customers or from securitizations is
reflected as operating activities when received from third parties. However, in the cash flow
information provided for the separate borrowing groups, cash flows related to captive financing
activities are reflected based on the operations of each group. For example, when product is sold
by our Manufacturing group to a customer and is financed by the Finance group, the origination of
the finance receivable is recorded within investing activities as a cash outflow in the Finance
group’s statement of cash flows. Meanwhile, in the Manufacturing group’s statement of cash flows,
the cash received from the Finance group on the customer’s behalf is recorded within operating cash
flows as a cash inflow. Although cash is transferred between the two borrowing groups, there is no
cash transaction reported in the consolidated cash flows at the time of the original financing.
These captive financing activities, along with all significant intercompany transactions, are
reclassified or eliminated from the Consolidated Statements of Cash Flows.
Reclassification and elimination adjustments included in the Consolidated Statement of Cash Flows
are summarized below:
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Reclassifications from investing activities:
|
||||||||||||
|
Finance receivable originations for Manufacturing group inventory sales
|
$ | (654 | ) | $ | (1,019 | ) | $ | (1,160 | ) | |||
|
Cash received from customers, sale of receivables and securitizations
|
831 | 728 | 881 | |||||||||
|
Capital contributions made to Cessna Export Finance Corp.
|
(40 | ) | — | — | ||||||||
|
Other
|
— | (2 | ) | (7 | ) | |||||||
|
|
||||||||||||
|
Total reclassifications from investing activities
|
137 | (293 | ) | (286 | ) | |||||||
|
|
||||||||||||
|
Reclassifications from financing activities:
|
||||||||||||
|
Capital contribution paid by Manufacturing group to Finance group
|
270 | 625 | — | |||||||||
|
Dividends received by Manufacturing group from Finance group
|
(349 | ) | (142 | ) | (135 | ) | ||||||
|
Capital contributions made to Cessna Export Finance Corp.
|
40 | — | — | |||||||||
|
|
||||||||||||
|
Total reclassifications from financing activities
|
(39 | ) | 483 | (135 | ) | |||||||
|
|
||||||||||||
|
Total reclassifications and adjustments to cash flow from operating
activities
|
$ | 98 | $ | 190 | $ | (421 | ) | |||||
|
|
||||||||||||
In 2009, captive finance receivable originations have decreased largely due to lower aircraft
sales. In addition, in April 2009, we signed a three-year agreement with a financial services
company that now provides financing to third parties for a portion of our sales of E-Z-GO golf
cars. We expect this agreement to reduce future finance receivable originations in this business.
Consolidated Discontinued Operations Cash Flows
The cash flows from discontinued operations are summarized below:
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Operating activities
|
$ | (17 | ) | $ | (14 | ) | $ | 64 | ||||
|
Investing activities
|
211 | 471 | 58 | |||||||||
|
Financing activities
|
— | (2 | ) | (2 | ) | |||||||
In 2009, cash flows from investing activities primarily include approximately $280 million in
after-tax net proceeds upon the sale of HR Textron, partially offset by $69 million in tax payments
related to the sale of the Fluid & Power business. In the fourth quarter of 2008, we received net
cash proceeds from the sale of the Fluid & Power business of approximately $479 million. In 2007,
cash flows from investing activities are primarily related to the realization of cash tax benefits
from the Fastening Systems business. See Note 2 to the Consolidated Financial Statements for
details concerning these dispositions.
32
Table of Contents
Contractual Obligations
Finance Group
Due to the nature of finance companies, we believe that it is meaningful to include contractual
cash receipts that we expect to receive in the future. The following table summarizes the Finance
group’s liquidity position, including all managed finance receivables and both on- and off-balance
sheet funding sources as of January 2, 2010, for the specified years:
| Payments/Receipts Due by Period | ||||||||||||||||||||||||||||
| 2015 | ||||||||||||||||||||||||||||
| and | ||||||||||||||||||||||||||||
| (In millions) | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | |||||||||||||||||||||
|
Payments due:
(1)
|
||||||||||||||||||||||||||||
|
Multi-year bank lines of credit
|
$ | — | $ | — | $ | 1,740 | $ | — | $ | — | $ | — | $ | 1,740 | ||||||||||||||
|
Term debt
|
1,653 | 437 | 70 | 596 | 129 | 142 | 3,027 | |||||||||||||||||||||
|
Securitized on-balance sheet debt
(2)
|
85 | 69 | 85 | 76 | 68 | 176 | 559 | |||||||||||||||||||||
|
Subordinated debt
|
— | — | — | — | — | 300 | 300 | |||||||||||||||||||||
|
Securitized off-balance sheet debt
(2)
|
— | — | — | — | — | 31 | 31 | |||||||||||||||||||||
|
Interest on borrowings
(3)
|
110 | 75 | 59 | 43 | 34 | 84 | 405 | |||||||||||||||||||||
|
Operating lease rental payments
|
5 | 4 | 1 | 1 | 1 | — | 12 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total payments due
|
1,853 | 585 | 1,955 | 716 | 232 | 733 | 6,074 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Cash and contractual receipts:
(1)(4)
|
||||||||||||||||||||||||||||
|
Finance receivable held for investment
|
1,630 | 1,266 | 866 | 690 | 381 | 1,454 | 6,287 | |||||||||||||||||||||
|
Finance receivable held for sale
|
260 | 249 | 197 | 121 | 76 | 20 | 923 | |||||||||||||||||||||
|
Securitized off-balance sheet finance
receivables and cash receipts
(2)
|
— | — | — | — | — | 31 | 31 | |||||||||||||||||||||
|
Interest receipts on finance receivables
(3)
|
373 | 272 | 199 | 144 | 103 | 165 | 1,256 | |||||||||||||||||||||
|
Operating lease rental receipts
|
26 | 22 | 18 | 11 | 9 | 14 | 100 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total contractual receipts
|
2,289 | 1,809 | 1,280 | 966 | 569 | 1,684 | 8,597 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Cash
|
144 | — | — | — | — | — | 144 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total cash and contractual receipts
|
2,433 | 1,809 | 1,280 | 966 | 569 | 1,684 | 8,741 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Net cash and contractual receipts
(payments)
|
$ | 580 | $ | 1,224 | $ | (675 | ) | $ | 250 | $ | 337 | $ | 951 | $ | 2,667 | |||||||||||||
|
|
||||||||||||||||||||||||||||
|
Cumulative net cash and contractual
receipts
|
$ | 580 | $ | 1,804 | $ | 1,129 | $ | 1,379 | $ | 1,716 | $ | 2,667 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||
| (1) | Excludes cash that may be generated by the disposal of operating lease residual assets and other assets in addition to cash that may be used to pay future income taxes, accrued interest and other liabilities. | |
| (2) | Securitized on-balance sheet and securitized off-balance sheet debt payments are based on the contractual receipts of the underlying receivables, which are remitted into the securitization structure when and as they are received. These payments do not represent contractual obligations of the Finance group, and we do not provide legal recourse to investors who purchase interests in the securitizations beyond the credit enhancement inherent in the retained subordinate interests. | |
| (3) | Interest payments and receipts reflect the current interest rate paid or received on the related debt and finance receivables. They do not include anticipated changes in either market interest rates or changes in borrower performance, which could have an impact on the interest rate according to the terms of the related debt or finance receivable contract. | |
| (4) | Finance receivable receipts are based on contractual cash flows only and do not reflect any reserves for uncollectible amounts. These receipts could differ due to sales, prepayments, charge-offs and other factors, including the inability of borrowers to repay the balance of the loan at the contractual maturity date. Finance receivable receipts on the held for sale portfolio represent the contractual balance of the finance receivable and, therefore, exclude the potential negative impact from selling the portfolio at the estimated fair value. |
This liquidity profile is an indicator of the Finance group’s ability to repay outstanding
funding obligations, assuming contractual collection of all finance receivables, absent access to
new sources of liquidity or origination of additional finance receivables. In addition, at January
2, 2010, our Finance group had $402 million in other liabilities, primarily including accounts
payable and accrued expenses, that are payable within the next 12 months.
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At January 2, 2010, the Finance group had $350 million of unused commitments to fund new and
existing customers under revolving lines of credit, construction loans and equipment loans and
leases. These commitments generally have an original duration of less than three years, and funding
under these facilities is dependent on the availability of eligible collateral and compliance with
customary financial covenants. Since many of the agreements will not be used to the extent
committed or will expire unused, the total commitment amount does not necessarily represent future
cash requirements. We also have ongoing customer relationships, including manufacturers and dealers
in the distribution finance product line, which do not contractually obligate us to provide
funding; however, we may choose to fund under certain of these relationships to facilitate an
orderly liquidation and mitigate credit losses. Neither of these potential fundings is included as
contractual obligations in the table above.
Manufacturing Group
The following table summarizes the known contractual obligations, as defined by reporting
regulations, of our Manufacturing group as of January 2, 2010, as well as an estimate of the timing
in which these obligations are expected to be satisfied:
| Payments Due by Year | ||||||||||||||||||||||||||||
| 2015 | ||||||||||||||||||||||||||||
| and | ||||||||||||||||||||||||||||
| (In millions) | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | |||||||||||||||||||||
|
Liabilities reflected in balance sheet:
|
||||||||||||||||||||||||||||
|
Multi-year credit facilities
|
$ | — | $ | — | $ | 1,167 | $ | — | $ | — | $ | — | $ | 1,167 | ||||||||||||||
|
Long-term debt
|
129 | 13 | 154 | 945 | — | 1,051 | 2,292 | |||||||||||||||||||||
|
Interest on borrowings
|
150 | 143 | 129 | 107 | 80 | 232 | 841 | |||||||||||||||||||||
|
Capital lease obligations
|
5 | 5 | 5 | 5 | 5 | 100 | 125 | |||||||||||||||||||||
|
Pension benefits for unfunded plans
|
22 | 23 | 23 | 24 | 25 | 200 | 317 | |||||||||||||||||||||
|
Postretirement benefits other than
pensions
|
67 | 67 | 66 | 65 | 64 | 357 | 686 | |||||||||||||||||||||
|
Other long-term liabilities
|
98 | 78 | 64 | 81 | 45 | 184 | 550 | |||||||||||||||||||||
|
Liabilities not reflected in balance sheet:
|
||||||||||||||||||||||||||||
|
Operating leases
|
60 | 47 | 42 | 32 | 26 | 167 | 374 | |||||||||||||||||||||
|
Purchase obligations
|
1,381 | 553 | 264 | 55 | 27 | 11 | 2,291 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total Manufacturing group
|
$ | 1,912 | $ | 929 | $ | 1,914 | $ | 1,314 | $ | 272 | $ | 2,302 | $ | 8,643 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
We maintain defined benefit pension plans and postretirement benefit plans other than
pensions as discussed in Note 14 to the Consolidated Financial Statements. Included in the above
table are discounted estimated benefit payments we expect to make related to unfunded pension and
other postretirement benefit plans. Actual benefit payments are dependent on a number of factors,
including mortality assumptions, expected retirement age, rate of compensation increases and
medical trend rates, which are subject to change in future years. Our policy for funding pension
plans is to make contributions annually, consistent with applicable laws and regulations; however,
future contributions to our pension plans are not included in the above table since the future cash
outflows are uncertain. We expect to make contributions to our funded pension plans of
approximately $20 million in 2010. Based on our current assumptions, which may change with changes
in market conditions, our current contribution estimates for each of the years from 2011 through
2014 are estimated to be in the range of approximately $200 million to $400 million under the plan
provisions in place at this time.
Other long-term liabilities included in the table consist primarily of undiscounted amounts in the
Consolidated Balance Sheet as of January 2, 2010, representing obligations under deferred
compensation arrangements and estimated environmental remediation costs. Payments under deferred
compensation arrangements have been estimated based on management’s assumptions of expected
retirement age, mortality, stock price and rates of return on participant deferrals. The timing of
cash flows associated with environmental remediation costs is largely based on historical
experience. Other long-term liabilities, such as deferred taxes, unrecognized tax benefits and
product liability reserves, have been excluded from the table due to the uncertainty of the timing
of payments combined with the absence of historical trends to be used as a predictor for such
payments.
Operating leases represent undiscounted obligations under noncancelable leases. Purchase
obligations represent undiscounted obligations for which we are committed to purchase goods and
services as of January 2, 2010. The ultimate liability for these obligations may be reduced based
upon
termination provisions included in certain purchase contracts, the costs incurred to date by
vendors under these contracts or by recourse under firm contracts with the U.S. Government under
normal termination clauses.
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Critical Accounting Estimates
To prepare our Consolidated Financial Statements to be in conformity with generally accepted
accounting principles, we must make complex and subjective judgments in the selection and
application of accounting policies. The accounting policies that we believe are most critical to
the portrayal of our financial condition and results of operations are listed below. We believe
these policies require our most difficult, subjective and complex judgments in estimating the
effect of inherent uncertainties. This section should be read in conjunction with Note 1 to the
Consolidated Financial Statements, which includes other significant accounting policies.
Allowance for Losses on Finance Receivables Held for Investment
We evaluate our allowance for losses on finance receivables held for investment based on a
combination of factors. For homogeneous loan pools, we examine current delinquencies, the
characteristics of the existing accounts, historical loss experience, the value of the underlying
collateral, general economic conditions and trends, and the potential impact of the lack of
liquidity available to our borrowers and their customers as a result of our current decision to
exit our non-captive finance business. We estimate losses will range from 0.75% to 10.0% of finance
receivables held for investment depending on the specific homogeneous loan pool. For larger balance
commercial loans, we also consider borrower-specific information, industry trends and estimated
discounted cash flows.
Provision for losses on finance receivables held for investment is charged to income in amounts
sufficient to maintain the allowance for losses on finance receivables held for investment at a
level considered adequate to cover losses inherent in the owned finance receivable held for
investment portfolio based on management’s evaluation and analysis of this portfolio. While
management believes that its consideration of the factors and assumptions referred to above does
result in an accurate evaluation of existing losses in the portfolio based on prior trends and
experience, changes in the assumptions or trends within reasonable historical volatility may have a
material impact on our allowance for losses on finance receivables held for investment. The
allowance for losses on finance receivables held for investment currently represents 5.49% of total
finance receivables held for investment. During the last five years, net charge-offs as a
percentage of finance receivables held for investment have ranged from 0.38% to 1.82%.
Finance Receivables Held for Sale
Finance receivables are classified as held for sale based on the determination that we no longer
intend to hold the receivables for the foreseeable future, until maturity or payoff, or there no
longer is the ability to hold to maturity. Our decision to classify certain finance receivables as
held for sale is based on a number of factors, including, but not limited to, contractual duration,
type of collateral, credit strength of the borrowers, the existence of continued contractual
commitments and the perceived marketability of the receivables. On an ongoing basis, these factors,
combined with our overall liquidation strategy, determine which finance receivables we have the
positive intent to hold for the foreseeable future and which receivables we will hold for sale.
Our current strategy is based on an evaluation of both our performance and liquidity position and
changes in external factors affecting the value and/or the marketability of our finance
receivables. A change in this strategy could result in a change in the classification of our
finance receivables. As a result of the significant influence of economic and liquidity conditions
on our business plans and strategies, and the rapid changes in these and other factors we utilize
to determine which assets are classified as held for sale, we currently believe the term
“foreseeable future” represents a time period of six to nine months. We also believe that
unanticipated changes in both internal and external factors affecting our financial performance,
liquidity position or the value and/or marketability of our finance receivables could result in a
modification of this assessment. If we determine that finance receivables classified as held for
sale will not be sold and we have the intent and ability to hold the finance receivables for the
foreseeable future, until maturity or payoff, the finance receivables are reclassified to held for
investment at the lower of cost or fair value at that time. Conversely, if we determine that there
are other finance receivables that we determine we no longer intend or have the ability to hold to
maturity, these receivables would be designated as held for sale, and a valuation allowance would
be established at that time, if necessary. At January 2, 2010, if we had classified additional
finance receivables as held for sale, a valuation allowance would likely have been required at that
time based on the fair value estimates we completed for our footnote disclosure requirements. See
page 68 in Note 10 to the Consolidated Financial Statements for a table where we have included the
carrying value and fair value for the assets and liabilities that currently are not recorded at
fair value on our balance sheet.
Finance receivables held for sale are carried at the lower of cost or fair value. At the time of
transfer to the held for sale classification, we establish a valuation allowance for any shortfall
between the carrying value, net of all deferred fees and costs, and fair value. Upon the initial
classification to held for sale, any shortfall is recorded as a charge within special charges. In
addition, any allowance for loan losses previously allocated to
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these finance receivables is reclassified to the valuation allowance account, which is netted with
finance receivables held for sale on the balance sheet. After the valuation allowance is initially
established, it is adjusted quarterly for any changes in the fair value of the receivables below
the carrying value, with subsequent adjustments included in earnings within segment profit. Fair
value changes can occur based on market interest rates, market liquidity and changes in the credit
quality of the borrower and value of underlying loan collateral.
There are no active, quoted market prices for our finance receivables. The estimate of fair value
was determined based on the use of discounted cash flow models to estimate the exit price we expect
to receive in the principal market for each type of loan in an orderly transaction, which includes
the sale of both pools of similar assets and the sale of individual loans. The models we used
incorporate estimates of the rate of return, financing cost, capital structure and/or discount rate
expectations of prospective purchasers combined with estimated loan cash flows based on credit
losses, payment rates and credit line utilization rates. Where available, the assumptions related
to the expectations of prospective purchasers were compared with observable market inputs,
including bids from prospective purchasers, and certain bond market indices for loans of similar
perceived credit quality. Although we utilize and prioritize these market observable inputs in our
discounted cash flow models, these inputs are rarely derived from markets with directly comparable
loan structures, industries and collateral types. Therefore, all valuations of finance receivables
held for sale involve significant management judgment, which can result in differences between our
fair value estimates and those of other market participants and the sale price that we may
ultimately recover.
Long-Term Contracts
We make a substantial portion of our sales to government customers pursuant to long-term contracts.
These contracts require development and delivery of products over multiple years and may contain
fixed-price purchase options for additional products. We account for these long-term contracts
under the percentage-of-completion method of accounting.
Under the percentage-of-completion method, we estimate profit as the difference between total
estimated revenues and cost of a contract. We then recognize that estimated profit over the
contract term based on either the costs incurred (under the cost-to-cost method, which typically is
used for development effort) or the units delivered (under the units-of-delivery method, which is
used for production effort), as appropriate under the circumstances. The percentage-of-completion
method of accounting involves the use of various estimating techniques to project costs at
completion and, in some cases, includes estimates of recoveries asserted against the customer for
changes in specifications. Due to the size, length of time and nature of many of our contracts, the
estimation of total contract costs and revenue through completion is complicated and subject to
many variables relative to the outcome of future events over a period of several years. We are
required to make numerous assumptions and estimates relating to items such as expected engineering
requirements, complexity of design and related development costs, performance of subcontractors,
availability and cost of materials, labor productivity and cost, overhead and capital costs,
manufacturing efficiencies and the achievement of contract milestones, including product
deliveries.
Our cost estimation process is based on the professional knowledge and experience of engineers and
program managers along with finance professionals. We update our projections of costs at least
semiannually or when circumstances significantly change. Adjustments to projected costs are
recognized in earnings when determinable. Anticipated losses on contracts are recognized in full in
the period in which the losses become probable and estimable. Due to the significance of judgment
in the estimation process described above, it is likely that materially different revenues and/or
cost of sales amounts could be recorded if we used different assumptions or if the underlying
circumstances were to change. Our earnings could be reduced by a material amount resulting in a
charge to earnings if (a) total estimated contract costs are significantly higher than expected due
to changes in customer specifications prior to contract amendment, (b) total estimated contract
costs are significantly higher than previously estimated due to cost overruns or inflation, (c)
there is a change in engineering efforts required during the development stage of the contract or
(d) we are unable to meet contract milestones.
Goodwill
We evaluate the recoverability of goodwill annually in the fourth quarter or more frequently if
events or changes in circumstances, such as declines in sales, earnings or cash flows, or material
adverse changes in the business climate, indicate that the carrying value of a reporting unit might
be impaired. Goodwill is reviewed for potential impairment using a two-step process. In Step 1,
companies are required to estimate fair value of their reporting units, which may be done using
various methodologies, including the income method using discounted cash flows. If its estimated
fair value exceeds its carrying value, the reporting unit is not impaired, and no further analysis
is performed. Otherwise, the amount of the impairment must be determined in Step 2 of the goodwill
impairment test. In Step 2, the implied fair value of goodwill is determined by assigning a fair
value to all of the reporting unit’s assets and liabilities, including any unrecognized intangible
assets, as if the reporting unit had been acquired in a business combination at fair value. If the
carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss would be recognized in an amount equal to that excess.
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Fair values are established primarily using discounted cash flows that incorporate assumptions for
the unit’s short and long-term revenue growth rates, operating margins and discount rates, which
represent our best estimates of current and forecasted market conditions, current cost structure,
anticipated net cost reductions, and the implied rate of return that we believe a market
participant would require for an investment in a company having similar risks and business
characteristics to the reporting unit being assessed. The revenue growth rates and operating
margins used in our discounted cash flow analysis are based on our businesses’ strategic plans and
long-range planning forecasts. The long-term growth rate we use to determine the terminal value of
the business is based on our assessment of its minimum expected terminal growth rate, as well as
its past historical growth and broader economic considerations such as gross domestic product,
inflation and the maturity of the markets we serve. We utilize a weighted-average cost of capital
in our impairment analysis that makes assumptions about the capital structure that we believe a
market participant would make and include a risk premium based on an assessment of risks related to
the projected cash flows of each reporting unit. We believe this approach yields a discount rate
that is consistent with an implied rate of return that an independent investor or market
participant would require for an investment in a company having similar risks and business
characteristics to the reporting unit being assessed.
As further discussed in Note 10 to the Consolidated Financial Statements, our annual test in the
fourth quarter of 2009 resulted in an impairment charge of $80 million in the Golf & Turf
reporting unit. The fair value of all the other reporting units exceeded their carrying values,
and we do not believe that there is a reasonable possibility that any of these units might fail
the Step 1 impairment test in the foreseeable future.
Retirement Benefits
We maintain various pension and postretirement plans for our employees globally. These plans
include significant pension and postretirement benefit obligations, which are calculated based on
actuarial valuations. Key assumptions used in determining these obligations and related expenses
include expected long-term rates of return on plan assets, discount rates and healthcare cost
projections. We also make assumptions regarding employee demographic factors such as retirement
patterns, mortality, turnover and the rate of compensation increases. We evaluate and update these
assumptions annually.
To determine the expected long-term rate of return on plan assets, we consider the current and
expected asset allocation, as well as historical and expected returns on each plan asset class. A
lower expected rate of return on plan assets will increase pension expense. For 2009, the assumed
expected long-term rate of return on plan assets used in calculating pension expense was 8.58%,
compared with 8.66% in 2008. In 2009 and 2008, the assumed rate of return for our domestic plans,
which represent approximately 88% of our total pension assets, was 8.75%. A 50-basis-point decrease
in this long-term rate of return in 2009 would have resulted in a $22 million increase in pension
expense for our domestic plans.
The discount rate enables us to state expected future benefit payments as a present value on the
measurement date, reflecting the current rate at which the pension liabilities could be effectively
settled. This rate should be in line with rates for high-quality fixed income investments available
for the period to maturity of the pension benefits, which fluctuate as long-term interest rates
change. A lower discount rate increases the present value of the benefit obligations and increases
pension expense. In 2009, the weighted-average discount rate used in calculating pension expense
was 6.61% , compared with 5.99% in 2008. For our domestic plans, the assumed discount rate was
6.57% in 2009, compared with 6.0% for 2008. A 50-basis-point decrease in this discount rate in 2009
would have resulted in a $32 million increase in pension expense for our domestic plans.
The trend in healthcare costs is difficult to estimate, and it has an important effect on
postretirement liabilities. The 2009 medical and prescription drug healthcare cost trend rates
represent the weighted-average annual projected rate of increase in the per capita cost of covered
benefits. The 2009 medical rate of 7% is assumed to decrease to 5% by 2019 and then remain at that
level. The 2009 prescription drug rate of 10% is assumed to decrease to 5% by 2019 and then remain
at that level. See Note 14 to the Consolidated Financial Statements for the impact of a
one-percentage-point change in the cost trend rate.
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Warranty Liabilities
We provide limited warranty and product maintenance programs, including parts and labor, for
certain products for periods ranging from one to five years. A significant portion of these
liabilities arises from our commercial aircraft businesses. We also may incur costs related to
product recalls.
We estimate the costs that may be incurred under warranty programs and record a liability in the
amount of such costs at the time product revenue is recognized. Factors that affect this liability
include the number of products sold, historical costs per claim, contractual recoveries from
vendors, and historical and anticipated rates of warranty claims, including production and warranty
patterns for new models. During our initial aircraft model launches, we typically incur higher
warranty-related costs until the production process matures, at which
point warranty costs moderate.
We assess the adequacy of our recorded warranty and product maintenance liabilities periodically
and adjust the amounts as necessary. Adjustments are made to accruals as claim data and actual
experience warrant. Should future warranty experience differ materially from our historical
experience, we may be required to record additional warranty liabilities, which could have a
material adverse effect on our results of operations and cash flows in the period in which these
additional liabilities are required.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between the
financial reporting and tax bases of assets and liabilities, applying tax rates expected to be
enacted for the year in which we expect the differences will reverse or settle. Based on the
evaluation of available evidence, we recognize future tax benefits, such as net operating loss
carryforwards, to the extent that we believe it is more likely than not that we will realize these
benefits. We periodically assess the likelihood that we will be able to recover our deferred tax
assets and reflect any changes in our estimates in a valuation allowance, with a corresponding
adjustment to earnings or other comprehensive income (loss), as appropriate. In assessing the need
for a valuation allowance, we look to the future reversal of existing taxable temporary
differences, taxable income in carryback years, the feasibility of tax planning strategies and
estimated future taxable income.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax
authorities, which may result in proposed assessments. Our estimate for the potential outcome for
any uncertain tax issue is highly judgmental. We assess our income tax positions and record tax
benefits for all years subject to examination based upon our evaluation of the facts, circumstances
and information available at the reporting date. For those tax positions for which it is more
likely than not that a tax benefit will be sustained, we record the largest amount of tax benefit
with a greater than 50% likelihood of being realized upon settlement with a taxing authority that
has full knowledge of all relevant information. Interest and penalties are accrued, where
applicable. We recognize net tax-related interest and penalties for continuing operations in income
tax expense. If we do not believe that it is more likely than not that a tax benefit will be
sustained, no tax benefit is recognized. However, our future results may include favorable or
unfavorable adjustments to our estimated tax liabilities due to closure of income tax examinations,
new regulatory or judicial pronouncements, or other relevant events. As a result, our effective tax
rate may fluctuate significantly on a quarterly and annual basis.
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Table of Contents
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risks
Our financial results are affected by changes in the U.S. and foreign interest rates. As part
of managing this risk, we seek to achieve a prudent balance between floating- and fixed-rate
exposures. We continually monitor our mix of floating- and fixed-rate exposures and adjust the mix,
as necessary, sometimes by entering into interest rate exchange agreements, based on our evaluation
of internal and external factors. The Manufacturing group did not enter into any interest rate
exchange agreements in 2009, and the difference between the rates received and the rates paid on
interest exchange agreements did not have a material impact on interest expense in 2008 or 2007.
Our Finance group limits its risk to changes in interest rates with its strategy of matching
floating-rate assets with floating-rate liabilities. This strategy includes the use of interest
rate exchange agreements. At January 2, 2010, floating-rate liabilities in excess of floating-rate
assets were $0.6 billion, after considering interest rate exchange agreements and the treatment of
$1.4 billion of floating-rate loans with index-rate floors as fixed-rate loans. These loans have
index rates that are, on average, 219 basis points above the applicable index rate (predominately
the Prime rate). The Finance group has benefited from interest rate floor agreements in the recent
low rate environment; however, in a rising rate environment, this benefit will dissipate until the
Prime rate exceeds the floor rates embedded in these agreements. The net effect of interest rate
exchange agreements designated as hedges of debt decreased interest expense for our Finance group
by $56 million in 2009 and by $25 million in 2008 and increased interest expense by $25 million in
2007.
Foreign Exchange Risks
Our financial results are affected by changes in foreign currency exchange rates and economic
conditions in the foreign markets in which our products are manufactured and/or sold. The impact of
foreign exchange rate changes for 2009 and 2008 from the prior year for each period is provided
below.
| (In millions) | 2009 | 2008 | ||||||
|
Impact of foreign exchange rates increased (decreased):
|
||||||||
|
Revenues
|
$ | (51 | ) | $ | 95 | |||
|
Segment profit
|
(2 | ) | (2 | ) | ||||
For our manufacturing operations, we manage exposures to foreign currency assets and earnings
primarily by funding certain foreign currency-denominated assets with liabilities in the same
currency so that certain exposures are naturally offset. We primarily use borrowings denominated in
euro and British pound sterling for these purposes. In managing our foreign currency transaction
exposures, we also enter into foreign currency forward exchange and option contracts. These
contracts generally are used to fix the local currency cost of purchased goods or services or
selling prices denominated in currencies other than the functional currency. The notional amount of
outstanding foreign exchange contracts and foreign currency options was approximately $1.0 billion
at the end of 2009.
Quantitative Risk Measures
In the normal course of business, we enter into financial instruments for purposes other than
trading. To quantify the market risk inherent in our financial instruments, we utilize a
sensitivity analysis. The financial instruments that are subject to market risk (interest rate
risk, foreign exchange rate risk and equity price risk) include finance receivables (excluding
lease receivables), debt (excluding lease obligations), interest rate exchange agreements, foreign
currency exchange contracts and marketable security price forward contracts for our common stock.
We historically have utilized forward contracts for our common stock to manage the expense related
to our stock-based compensation awards. On January 21, 2010, we settled our forward contract and
have elected not to enter into a new contract in 2010.
Presented below is a sensitivity analysis of the fair value of financial instruments outstanding at
year-end. We estimate the fair value of the financial instruments using discounted cash flow
analysis and indicative market pricing as reported by leading financial news and data providers.
This sensitivity analysis is most likely not indicative of actual results in the future. The
following table illustrates the sensitivity to a hypothetical change in the fair value of the
financial instruments assuming a 10% decrease in interest rates, a 10% strengthening in exchange
rates against the U.S. dollar and a 10% decrease in the quoted market price of our common stock.
39
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| 2009 | 2008 | |||||||||||||||||||||||
| Sensitivity of | Sensitivity of | |||||||||||||||||||||||
| Fair Value | Fair Value | |||||||||||||||||||||||
| Carrying | Fair | to a 10% | Carrying | Fair | to a 10% | |||||||||||||||||||
| (In millions) | Value* | Value* | Change | Value* | Value* | Change | ||||||||||||||||||
|
Manufacturing group:
|
||||||||||||||||||||||||
|
Foreign exchange rate risk
|
||||||||||||||||||||||||
|
Debt
|
$ | (589 | ) | $ | (545 | ) | $ | (55 | ) | $ | (653 | ) | $ | (497 | ) | $ | (50 | ) | ||||||
|
Foreign currency exchange contracts
|
58 | 58 | 46 | (20 | ) | (20 | ) | 72 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | (531 | ) | $ | (487 | ) | $ | (9 | ) | $ | (673 | ) | $ | (517 | ) | $ | 22 | |||||||
|
|
||||||||||||||||||||||||
|
Equity price risk
|
||||||||||||||||||||||||
|
Forward contracts for Textron Inc. stock
|
$ | 7 | $ | 7 | $ | (2 | ) | $ | (98 | ) | $ | (98 | ) | $ | (4 | ) | ||||||||
|
Interest rate risk
|
||||||||||||||||||||||||
|
Debt
|
$ | (3,474 | ) | $ | (3,762 | ) | $ | (37 | ) | $ | (2,438 | ) | $ | (2,074 | ) | $ | (10 | ) | ||||||
|
Finance group:
|
||||||||||||||||||||||||
|
Interest rate risk
|
||||||||||||||||||||||||
|
Finance receivables
|
$ | 5,952 | $ | 5,494 | $ | 135 | $ | 7,325 | $ | 6,487 | $ | 210 | ||||||||||||
|
Debt
|
(6,106 | ) | (5,874 | ) | (54 | ) | (7,549 | ) | (6,663 | ) | (105 | ) | ||||||||||||
|
Interest rate exchanges – debt
|
58 | 58 | 4 | 133 | 133 | 5 | ||||||||||||||||||
|
Interest rate exchanges – receivables
|
(1 | ) | (1 | ) | (1 | ) | (20 | ) | (20 | ) | (2 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | (97 | ) | $ | (323 | ) | $ | 84 | $ | (111 | ) | $ | (63 | ) | $ | 108 | ||||||||
|
|
||||||||||||||||||||||||
| * | The value represents an asset or (liability). |
Item 8. Financial Statements and Supplementary Data
Our Consolidated Financial Statements and the related reports of our independent registered
public accounting firm thereon are included in this Annual Report on Form 10-K on the pages
indicated below.
| Page | ||||
| 41 | ||||
|
|
||||
| 42 | ||||
|
|
||||
| 44 | ||||
|
|
||||
| 45 | ||||
|
|
||||
| 46 | ||||
|
|
||||
| 47 | ||||
|
|
||||
| 49 | ||||
|
|
||||
|
|
||||
| 88 | ||||
|
|
||||
| 89 | ||||
All other schedules are omitted either because they are not applicable or not required or because
the required information is included in the financial statements or notes thereto.
40
Table of Contents
Report of Management
Management is responsible for the integrity and objectivity of the financial data presented
in this Annual Report on Form 10-K. The Consolidated Financial Statements have been prepared in
conformity with U.S. generally accepted accounting principles and include amounts based on
management’s best estimates and judgments. Management also is responsible for establishing and
maintaining adequate internal control over financial reporting for Textron Inc. as such term is
defined in Exchange Act Rules 13a-15(f). With the participation of our management, we conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal
Control – Integrated Framework, we have concluded that Textron Inc. maintained, in all material
respects, effective internal control over financial reporting as of January 2, 2010.
The independent registered public accounting firm, Ernst & Young LLP, has audited the Consolidated
Financial Statements of Textron Inc. and has issued an attestation report on Textron’s internal
controls over financial reporting as of January 2, 2010, as stated in its reports, which are
included herein.
We conduct our business in accordance with the standards outlined in the Textron Business Conduct
Guidelines, which are communicated to all employees. Honesty, integrity and high ethical standards
are the core values of how we conduct business. Every Textron business prepares and carries out an
annual Compliance Plan to ensure these values and standards are maintained. Our internal control
structure is designed to provide reasonable assurance, at appropriate cost, that assets are
safeguarded and that transactions are properly executed and recorded. The internal control
structure includes, among other things, established policies and procedures, an internal audit
function, and the selection and training of qualified personnel. Textron’s management is
responsible for implementing effective internal control systems and monitoring their effectiveness,
as well as developing and executing an annual internal control plan.
The Audit Committee of our Board of Directors, on behalf of the shareholders, oversees management’s
financial reporting responsibilities. The Audit Committee consists of five directors who are not
officers or employees of Textron and meets regularly with the independent auditors, management and
our internal auditors to review matters relating to financial reporting, internal accounting
controls and auditing. Both the independent auditors and the internal auditors have free and full
access to senior management and the Audit Committee.
|
|
|
|
Scott C. Donnelly
|
Frank T. Connor | |
|
President and Chief
|
Executive Vice President and | |
|
Executive Officer
|
Chief Financial Officer | |
|
|
||
|
February 25, 2010
|
41
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Textron Inc.
We have audited Textron Inc.’s internal control over financial reporting as of January 2,
2010, based on criteria established in Internal
Control –
Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Textron
Inc.’s management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Report of Management. Our responsibility is to express an opinion on
the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Textron Inc. maintained, in all material respects, effective internal control over
financial reporting as of January 2, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Consolidated Balance Sheets as of January 2, 2010 and January 3, 2009,
and the related Consolidated Statements of Operations, Shareholders’ Equity and Cash Flows for each
of the three years in the period ended January 2, 2010 of Textron Inc. and our report dated
February 25, 2010 expressed an unqualified opinion thereon.
Boston, Massachusetts
February 25, 2010
February 25, 2010
42
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Textron Inc.
We have audited the accompanying Consolidated Balance Sheets of Textron Inc. as of January 2,
2010 and January 3, 2009, and the related Consolidated Statements of Operations, Shareholders’
Equity and Cash Flows for each of the three years in the period ended January 2, 2010. Our audits
also included the financial statement schedule contained on page 89. These financial statements and
schedule are the responsibility of the company’s management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Textron Inc. at January 2, 2010 and January 3,
2009 and the consolidated results of its operations and its cash flows for each of the three years
in the period ended January 2, 2010, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
In 2007, Textron Inc. adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109.”
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), Textron Inc.’s internal
control over financial reporting as of January 2, 2010, based on criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 25, 2010 expressed an unqualified opinion thereon.
Boston, Massachusetts
February 25, 2010
February 25, 2010
43
Table of Contents
Consolidated Statements of Operations
For each of the years in the three-year period ended January 2, 2010
For each of the years in the three-year period ended January 2, 2010
| (In millions, except per share data) | 2009 | 2008 | 2007 | |||||||||
|
Revenues
|
||||||||||||
|
Manufacturing revenues
|
$ | 10,139 | $ | 13,287 | $ | 11,520 | ||||||
|
Finance revenues
|
361 | 723 | 875 | |||||||||
|
|
||||||||||||
|
Total revenues
|
10,500 | 14,010 | 12,395 | |||||||||
|
|
||||||||||||
|
Costs, expenses and other
|
||||||||||||
|
Cost of sales
|
8,468 | 10,583 | 9,099 | |||||||||
|
Selling and administrative
|
1,344 | 1,606 | 1,545 | |||||||||
|
Special charges
|
317 | 526 | — | |||||||||
|
Provision for losses on finance receivables
|
267 | 234 | 33 | |||||||||
|
Interest expense
|
309 | 448 | 507 | |||||||||
|
Interest income
|
(6 | ) | (16 | ) | (23 | ) | ||||||
|
Gain on sale of assets
|
(50 | ) | — | — | ||||||||
|
|
||||||||||||
|
Total costs, expenses and other
|
10,649 | 13,381 | 11,161 | |||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations before income taxes
|
(149 | ) | 629 | 1,234 | ||||||||
|
Income tax expense (benefit)
|
(76 | ) | 305 | 368 | ||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations
|
(73 | ) | 324 | 866 | ||||||||
|
Income from discontinued operations, net of income taxes
|
42 | 162 | 51 | |||||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | (31 | ) | $ | 486 | $ | 917 | |||||
|
|
||||||||||||
|
Basic earnings per share
|
||||||||||||
|
Continuing operations
|
$ | (0.28 | ) | $ | 1.32 | $ | 3.47 | |||||
|
Discontinued operations
|
0.16 | 0.65 | 0.20 | |||||||||
|
|
||||||||||||
|
Basic earnings per share
|
$ | (0.12 | ) | $ | 1.97 | $ | 3.67 | |||||
|
|
||||||||||||
|
Diluted earnings per share
|
||||||||||||
|
Continuing operations
|
$ | (0.28 | ) | $ | 1.29 | $ | 3.40 | |||||
|
Discontinued operations
|
0.16 | 0.65 | 0.20 | |||||||||
|
|
||||||||||||
|
Diluted earnings per share
|
$ | (0.12 | ) | $ | 1.94 | $ | 3.60 | |||||
|
|
||||||||||||
See Notes to the Consolidated Financial Statements.
44
Table of Contents
Consolidated Balance Sheets
| January 2, | January 3, | |||||||
| (Dollars in millions, except share data) | 2010 | 2009 | ||||||
|
Assets
|
||||||||
|
Manufacturing group
|
||||||||
|
Cash and cash equivalents
|
$ | 1,748 | $ | 531 | ||||
|
Accounts receivable, net
|
894 | 894 | ||||||
|
Inventories
|
2,273 | 3,093 | ||||||
|
Other current assets
|
960 | 584 | ||||||
|
Assets of discontinued operations
|
58 | 334 | ||||||
|
|
||||||||
|
Total current assets
|
5,933 | 5,436 | ||||||
|
|
||||||||
|
Property, plant and equipment, net
|
1,968 | 2,088 | ||||||
|
Goodwill
|
1,622 | 1,698 | ||||||
|
Other assets
|
1,905 | 1,465 | ||||||
|
|
||||||||
|
Total Manufacturing group assets
|
11,428 | 10,687 | ||||||
|
|
||||||||
|
Finance group
|
||||||||
|
Cash and cash equivalents
|
144 | 16 | ||||||
|
Finance receivables held for investment, net
|
5,865 | 6,724 | ||||||
|
Finance receivables held for sale
|
819 | 1,658 | ||||||
|
Other assets
|
684 | 946 | ||||||
|
|
||||||||
|
Total Finance group assets
|
7,512 | 9,344 | ||||||
|
|
||||||||
|
Total assets
|
$ | 18,940 | $ | 20,031 | ||||
|
|
||||||||
|
Liabilities and shareholders’ equity
|
||||||||
|
Liabilities
|
||||||||
|
Manufacturing group
|
||||||||
|
Current portion of long-term debt and short-term debt
|
$ | 134 | $ | 876 | ||||
|
Accounts payable
|
569 | 1,101 | ||||||
|
Accrued liabilities
|
2,027 | 2,609 | ||||||
|
Liabilities of discontinued operations
|
138 | 195 | ||||||
|
|
||||||||
|
Total current liabilities
|
2,868 | 4,781 | ||||||
|
|
||||||||
|
Other liabilities
|
3,127 | 2,926 | ||||||
|
Long-term debt
|
3,450 | 1,693 | ||||||
|
|
||||||||
|
Total Manufacturing group liabilities
|
9,445 | 9,400 | ||||||
|
|
||||||||
|
Finance group
|
||||||||
|
Other liabilities
|
866 | 540 | ||||||
|
Deferred income taxes
|
136 | 337 | ||||||
|
Debt
|
5,667 | 7,388 | ||||||
|
|
||||||||
|
Total Finance group liabilities
|
6,669 | 8,265 | ||||||
|
|
||||||||
|
Total liabilities
|
16,114 | 17,665 | ||||||
|
|
||||||||
|
Shareholders’ equity
|
||||||||
|
$2.08 Cumulative Convertible Preferred Stock, Series A
|
— | 2 | ||||||
|
$1.40 Convertible Preferred Dividend Stock, Series B
|
— | — | ||||||
|
Common stock (277.4 million and 253.1 million shares issued, respectively, and 272.3 million
and 242.0 million shares outstanding, respectively)
|
35 | 32 | ||||||
|
Capital surplus
|
1,369 | 1,229 | ||||||
|
Retained earnings
|
2,973 | 3,025 | ||||||
|
Accumulated other comprehensive loss
|
(1,321 | ) | (1,422 | ) | ||||
|
|
||||||||
|
|
3,056 | 2,866 | ||||||
|
|
||||||||
|
Less cost of treasury shares
|
230 | 500 | ||||||
|
|
||||||||
|
Total shareholders’ equity
|
2,826 | 2,366 | ||||||
|
|
||||||||
|
Total liabilities and shareholders’ equity
|
$ | 18,940 | $ | 20,031 | ||||
|
|
||||||||
See Notes to the Consolidated Financial Statements.
45
Table of Contents
Consolidated Statements of Shareholders’ Equity
| Accumu- | ||||||||||||||||||||||||||||||||
| lated | ||||||||||||||||||||||||||||||||
| Other | Total | |||||||||||||||||||||||||||||||
| $2.08 | $1.40 | Compre- | Share- | |||||||||||||||||||||||||||||
| Preferred | Preferred | Common | Capital | Retained | Treasury | hensive | holders’ | |||||||||||||||||||||||||
| (In millions, except per share data) | Stock | Stock | Stock | Surplus | Earnings | Stock | Loss | Equity | ||||||||||||||||||||||||
|
Balance at December 30, 2006
|
$ | 4 | $ | 6 | $ | 26 | $ | 1,786 | $ | 6,211 | $ | (4,740 | ) | $ | (644 | ) | $ | 2,649 | ||||||||||||||
|
Net income
|
917 | 917 | ||||||||||||||||||||||||||||||
|
Other comprehensive income:
|
||||||||||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
57 | 57 | ||||||||||||||||||||||||||||||
|
Deferred gains on hedge contracts
|
53 | 53 | ||||||||||||||||||||||||||||||
|
Pension adjustments
|
96 | 96 | ||||||||||||||||||||||||||||||
|
Reclassification adjustments
|
38 | 38 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total other comprehensive income
|
1,161 | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Impact of adoption of new accounting standards
|
(11 | ) | (11 | ) | ||||||||||||||||||||||||||||
|
Retirement of treasury shares
|
(2 | ) | (6 | ) | (10 | ) | (770 | ) | (4,123 | ) | 4,911 | — | ||||||||||||||||||||
|
Stock split issued in the form of a stock dividend
|
16 | (16 | ) | — | ||||||||||||||||||||||||||||
|
Dividends declared ($0.85 per share)
|
(212 | ) | (212 | ) | ||||||||||||||||||||||||||||
|
Share-based compensation
|
41 | 41 | ||||||||||||||||||||||||||||||
|
Exercise of stock options
|
101 | 101 | ||||||||||||||||||||||||||||||
|
Purchases of common stock
|
(295 | ) | (295 | ) | ||||||||||||||||||||||||||||
|
Issuance of common stock under employee stock plans
|
8 | 38 | 46 | |||||||||||||||||||||||||||||
|
Income tax impact of employee stock transactions
|
27 | 27 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Balance at December 29, 2007
|
2 | — | 32 | 1,193 | 2,766 | (86 | ) | (400 | ) | 3,507 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net income
|
486 | 486 | ||||||||||||||||||||||||||||||
|
Other comprehensive loss:
|
||||||||||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
(195 | ) | (195 | ) | ||||||||||||||||||||||||||||
|
Deferred losses on hedge contracts
|
(73 | ) | (73 | ) | ||||||||||||||||||||||||||||
|
Pension adjustments
|
(803 | ) | (803 | ) | ||||||||||||||||||||||||||||
|
Reclassification adjustments
|
14 | 14 | ||||||||||||||||||||||||||||||
|
Reclassification due to sale of Fluid & Power
|
35 | 35 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total other comprehensive loss
|
(536 | ) | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Dividends declared ($0.92 per share)
|
(227 | ) | (227 | ) | ||||||||||||||||||||||||||||
|
Share-based compensation
|
50 | 50 | ||||||||||||||||||||||||||||||
|
Exercise of stock options
|
39 | 39 | ||||||||||||||||||||||||||||||
|
Purchases of common stock
|
(533 | ) | (533 | ) | ||||||||||||||||||||||||||||
|
Issuance of common stock under employee stock plans
|
(66 | ) | 119 | 53 | ||||||||||||||||||||||||||||
|
Income tax impact of employee stock transactions
|
13 | 13 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Balance at January 3, 2009
|
2 | — | 32 | 1,229 | 3,025 | (500 | ) | (1,422 | ) | 2,366 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net loss
|
(31 | ) | (31 | ) | ||||||||||||||||||||||||||||
|
Other comprehensive income:
|
||||||||||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
23 | 23 | ||||||||||||||||||||||||||||||
|
Deferred gains on hedge contracts
|
67 | 67 | ||||||||||||||||||||||||||||||
|
Pension adjustments
|
(25 | ) | (25 | ) | ||||||||||||||||||||||||||||
|
Reclassification adjustments
|
21 | 21 | ||||||||||||||||||||||||||||||
|
Pension curtailment
|
15 | 15 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total other comprehensive income
|
70 | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Dividends declared ($0.08 per share)
|
(21 | ) | (21 | ) | ||||||||||||||||||||||||||||
|
Share-based compensation
|
30 | 30 | ||||||||||||||||||||||||||||||
|
Purchase of convertible note hedge
|
(140 | ) | (140 | ) | ||||||||||||||||||||||||||||
|
Equity component of convertible debt issuance
|
134 | 134 | ||||||||||||||||||||||||||||||
|
Issuance of common stock and warrants
|
3 | 330 | 333 | |||||||||||||||||||||||||||||
|
Issuance of common stock under employee stock plans
|
(210 | ) | 270 | 60 | ||||||||||||||||||||||||||||
|
Redemption of preferred stock
|
(2 | ) | 1 | (1 | ) | |||||||||||||||||||||||||||
|
Income tax impact of employee stock transactions
|
(5 | ) | (5 | ) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Balance at January 2, 2010
|
$ | — | $ | — | $ | 35 | $ | 1,369 | $ | 2,973 | $ | (230 | ) | $ | (1,321 | ) | $ | 2,826 | ||||||||||||||
|
|
||||||||||||||||||||||||||||||||
See Notes to the Consolidated Financial Statements.
46
Table of Contents
Consolidated Statements of Cash Flows
For each of the years in the three-year period ended January 2, 2010
For each of the years in the three-year period ended January 2, 2010
| Consolidated | ||||||||||||
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net income (loss)
|
$ | (31 | ) | $ | 486 | $ | 917 | |||||
|
Income from discontinued operations
|
42 | 162 | 51 | |||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations
|
(73 | ) | 324 | 866 | ||||||||
|
Adjustments to reconcile income from continuing operations to net cash provided
by (used in) operating activities:
|
||||||||||||
|
Dividends received from Finance group
|
— | — | — | |||||||||
|
Capital contributions paid to Finance group
|
— | — | — | |||||||||
|
Non-cash items:
|
||||||||||||
|
Depreciation and amortization
|
409 | 400 | 322 | |||||||||
|
Provision for losses on finance receivables held for investment
|
267 | 234 | 33 | |||||||||
|
Portfolio losses on finance receivables
|
162 | — | — | |||||||||
|
Valuation allowance on finance receivables held for sale
|
(15 | ) | 293 | — | ||||||||
|
Goodwill and other asset impairment charges
|
144 | 191 | 1 | |||||||||
|
Other, net
|
82 | 103 | 87 | |||||||||
|
Deferred income taxes
|
(265 | ) | (43 | ) | (3 | ) | ||||||
|
Changes in assets and liabilities:
|
||||||||||||
|
Accounts receivable, net
|
17 | 15 | (38 | ) | ||||||||
|
Inventories
|
803 | (662 | ) | (453 | ) | |||||||
|
Other assets
|
(152 | ) | 9 | (14 | ) | |||||||
|
Accounts payable
|
(535 | ) | 276 | 35 | ||||||||
|
Accrued and other liabilities
|
(20 | ) | (110 | ) | 443 | |||||||
|
Captive finance receivables, net
|
177 | (291 | ) | (299 | ) | |||||||
|
Other operating activities, net
|
31 | 25 | 5 | |||||||||
|
|
||||||||||||
|
Net cash provided by operating activities of continuing operations
|
1,032 | 764 | 985 | |||||||||
|
Net cash provided by (used in) operating activities of discontinued operations
|
(17 | ) | (14 | ) | 64 | |||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
1,015 | 750 | 1,049 | |||||||||
|
|
||||||||||||
|
Cash flows from investing activities
|
||||||||||||
|
Finance receivables originated or purchased
|
(3,005 | ) | (10,860 | ) | (11,964 | ) | ||||||
|
Finance receivables repaid
|
4,011 | 10,630 | 11,059 | |||||||||
|
Proceeds on receivables sales, including securitizations
|
594 | 518 | 917 | |||||||||
|
Net cash used in acquisitions
|
— | (109 | ) | (1,092 | ) | |||||||
|
Net proceeds from sale of businesses
|
— | — | (14 | ) | ||||||||
|
Capital expenditures
|
(238 | ) | (545 | ) | (379 | ) | ||||||
|
Proceeds from sale of repossessed assets and properties
|
236 | 22 | 23 | |||||||||
|
Retained interests
|
117 | 15 | 8 | |||||||||
|
Purchase of marketable securities
|
— | (100 | ) | — | ||||||||
|
Other investing activities, net
|
13 | 21 | (22 | ) | ||||||||
|
|
||||||||||||
|
Net cash provided by (used in) investing activities of continuing operations
|
1,728 | (408 | ) | (1,464 | ) | |||||||
|
Net cash provided by investing activities of discontinued operations
|
211 | 471 | 58 | |||||||||
|
|
||||||||||||
|
Net cash provided by (used in) investing activities
|
1,939 | 63 | (1,406 | ) | ||||||||
|
|
||||||||||||
|
Cash flows from financing activities
|
||||||||||||
|
Increase (decrease) in short-term debt
|
(1,637 | ) | 218 | (412 | ) | |||||||
|
Proceeds from long-term lines of credit
|
2,970 | — | — | |||||||||
|
Payments on long-term lines of credit
|
(63 | ) | — | — | ||||||||
|
Proceeds from issuance of long-term debt
|
918 | 1,461 | 2,226 | |||||||||
|
Principal payments on long-term debt
|
(4,163 | ) | (1,922 | ) | (1,394 | ) | ||||||
|
Proceeds (payments) on borrowings against officers’ life insurance policies
|
(412 | ) | 222 | — | ||||||||
|
Intergroup financing
|
— | — | — | |||||||||
|
Proceeds from issuance of convertible notes, net of fees paid
|
582 | — | — | |||||||||
|
Purchase of convertible note hedge
|
(140 | ) | — | — | ||||||||
|
Proceeds from issuance of common stock and warrants
|
333 | — | — | |||||||||
|
Proceeds from option exercises
|
— | 40 | 103 | |||||||||
|
Excess tax benefit on stock options
|
— | 10 | 24 | |||||||||
|
Purchases of Textron common stock
|
— | (533 | ) | (304 | ) | |||||||
|
Capital contributions paid to Finance group under Support Agreement
|
— | — | — | |||||||||
|
Capital contributions paid to Cessna Export Finance Corp.
|
— | — | — | |||||||||
|
Dividends paid
|
(21 | ) | (284 | ) | (154 | ) | ||||||
|
|
||||||||||||
|
Net cash provided by (used in) financing activities of continuing operations
|
(1,633 | ) | (788 | ) | 89 | |||||||
|
Net cash used in financing activities of discontinued operations
|
— | (2 | ) | (2 | ) | |||||||
|
|
||||||||||||
|
Net cash provided by (used in) financing activities
|
(1,633 | ) | (790 | ) | 87 | |||||||
|
|
||||||||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
24 | (7 | ) | 21 | ||||||||
|
|
||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
1,345 | 16 | (249 | ) | ||||||||
|
Cash and cash equivalents at beginning of year
|
547 | 531 | 780 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents at end of year
|
$ | 1,892 | $ | 547 | $ | 531 | ||||||
|
|
||||||||||||
See Notes to the Consolidated Financial Statements.
47
Table of Contents
Consolidated Statements of Cash Flows continued
| Manufacturing Group | Finance Group | |||||||||||||||||||||||
| (In millions) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
|
Cash flows from operating activities
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 175 | $ | 947 | $ | 772 | $ | (206 | ) | $ | (461 | ) | $ | 145 | ||||||||||
|
Income from discontinued operations
|
42 | 162 | 51 | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) from continuing operations
|
133 | 785 | 721 | (206 | ) | (461 | ) | 145 | ||||||||||||||||
|
Adjustments to reconcile income from continuing operations to net cash provided
by (used in) operating activities:
|
||||||||||||||||||||||||
|
Dividends received from Finance group
|
349 | 142 | 135 | — | — | — | ||||||||||||||||||
|
Capital contributions paid to Finance group
|
(270 | ) | (625 | ) | — | — | — | — | ||||||||||||||||
|
Non-cash items:
|
||||||||||||||||||||||||
|
Depreciation and amortization
|
373 | 360 | 282 | 36 | 40 | 40 | ||||||||||||||||||
|
Provision for losses on finance receivables held for investment
|
— | — | — | 267 | 234 | 33 | ||||||||||||||||||
|
Portfolio losses on finance receivables
|
— | — | — | 162 | — | — | ||||||||||||||||||
|
Valuation allowance on finance receivables held for sale
|
— | — | — | (15 | ) | 293 | — | |||||||||||||||||
|
Goodwill and other asset impairment charges
|
144 | 11 | 1 | — | 180 | — | ||||||||||||||||||
|
Other, net
|
112 | 103 | 87 | (30 | ) | — | — | |||||||||||||||||
|
Deferred income taxes
|
(61 | ) | 51 | 4 | (204 | ) | (94 | ) | (7 | ) | ||||||||||||||
|
Changes in assets and liabilities:
|
||||||||||||||||||||||||
|
Accounts receivable, net
|
17 | 15 | (38 | ) | — | — | — | |||||||||||||||||
|
Inventories
|
810 | (648 | ) | (436 | ) | — | — | — | ||||||||||||||||
|
Other assets
|
(157 | ) | (21 | ) | (43 | ) | (5 | ) | 18 | 19 | ||||||||||||||
|
Accounts payable
|
(535 | ) | 276 | 35 | — | — | — | |||||||||||||||||
|
Accrued and other liabilities
|
(183 | ) | (56 | ) | 387 | 166 | (54 | ) | 36 | |||||||||||||||
|
Captive finance receivables, net
|
— | — | — | — | — | — | ||||||||||||||||||
|
Other operating activities, net
|
6 | 14 | 9 | 25 | 11 | (4 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by operating activities of continuing operations
|
738 | 407 | 1,144 | 196 | 167 | 262 | ||||||||||||||||||
|
Net cash provided by (used in) operating activities of discontinued operations
|
(17 | ) | (14 | ) | 64 | — | — | — | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by operating activities
|
721 | 393 | 1,208 | 196 | 167 | 262 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash flows from investing activities
|
||||||||||||||||||||||||
|
Finance receivables originated or purchased
|
— | — | — | (3,659 | ) | (11,879 | ) | (13,124 | ) | |||||||||||||||
|
Finance receivables repaid
|
— | — | — | 4,804 | 11,245 | 11,863 | ||||||||||||||||||
|
Proceeds on receivables sales, including securitizations
|
— | — | — | 644 | 631 | 994 | ||||||||||||||||||
|
Net cash used in acquisitions
|
— | (109 | ) | (1,092 | ) | — | — | — | ||||||||||||||||
|
Net proceeds from sale of businesses
|
— | — | (14 | ) | — | — | — | |||||||||||||||||
|
Capital expenditures
|
(238 | ) | (537 | ) | (369 | ) | — | (8 | ) | (10 | ) | |||||||||||||
|
Proceeds from sale of repossessed assets and properties
|
— | — | — | 236 | 22 | 23 | ||||||||||||||||||
|
Retained interests
|
— | — | — | 117 | 15 | 8 | ||||||||||||||||||
|
Purchase of marketable securities
|
— | — | — | — | (100 | ) | — | |||||||||||||||||
|
Other investing activities, net
|
(50 | ) | 9 | 6 | 11 | 10 | (35 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) investing activities of continuing operations
|
(288 | ) | (637 | ) | (1,469 | ) | 2,153 | (64 | ) | (281 | ) | |||||||||||||
|
Net cash provided by investing activities of discontinued operations
|
211 | 471 | 58 | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) investing activities
|
(77 | ) | (166 | ) | (1,411 | ) | 2,153 | (64 | ) | (281 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Cash flows from financing activities
|
||||||||||||||||||||||||
|
Increase (decrease) in short-term debt
|
(869 | ) | 867 | (42 | ) | (768 | ) | (649 | ) | (370 | ) | |||||||||||||
|
Proceeds from long-term lines of credit
|
1,230 | — | — | 1,740 | — | — | ||||||||||||||||||
|
Payments on long-term lines of credit
|
(63 | ) | — | — | — | — | — | |||||||||||||||||
|
Proceeds from issuance of long-term debt
|
595 | — | 348 | 323 | 1,461 | 1,878 | ||||||||||||||||||
|
Principal payments on long-term debt
|
(392 | ) | (348 | ) | (50 | ) | (3,771 | ) | (1,574 | ) | (1,344 | ) | ||||||||||||
|
Proceeds (payments) on borrowings against officers’ life insurance policies
|
(412 | ) | 222 | — | — | — | — | |||||||||||||||||
|
Intergroup financing
|
(280 | ) | (133 | ) | — | 280 | 133 | — | ||||||||||||||||
|
Proceeds from issuance of convertible notes, net of fees paid
|
582 | — | — | — | — | — | ||||||||||||||||||
|
Purchase of convertible note hedge
|
(140 | ) | — | — | — | — | — | |||||||||||||||||
|
Proceeds from issuance of common stock and warrants
|
333 | — | — | — | — | — | ||||||||||||||||||
|
Proceeds from option exercises
|
— | 40 | 103 | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Excess tax benefit on stock options
|
— | 10 | 24 | — | — | — | ||||||||||||||||||
|
Purchases of Textron common stock
|
— | (533 | ) | (304 | ) | — | — | — | ||||||||||||||||
|
Capital contributions paid to Finance group under Support Agreement
|
— | — | — | 270 | 625 | — | ||||||||||||||||||
|
Capital contributions paid to Cessna Export Finance Corp.
|
— | — | — | 40 | — | — | ||||||||||||||||||
|
Dividends paid
|
(21 | ) | (284 | ) | (154 | ) | (349 | ) | (142 | ) | (135 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) financing activities of continuing operations
|
563 | (159 | ) | (75 | ) | (2,235 | ) | (146 | ) | 29 | ||||||||||||||
|
Net cash used in financing activities of discontinued operations
|
— | (2 | ) | (2 | ) | — | — | — | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) financing activities
|
563 | (161 | ) | (77 | ) | (2,235 | ) | (146 | ) | 29 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
10 | (6 | ) | 18 | 14 | (1 | ) | 3 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
1,217 | 60 | (262 | ) | 128 | (44 | ) | 13 | ||||||||||||||||
|
Cash and cash equivalents at beginning of year
|
531 | 471 | 733 | 16 | 60 | 47 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash and cash equivalents at end of year
|
$ | 1,748 | $ | 531 | $ | 471 | $ | 144 | $ | 16 | $ | 60 | ||||||||||||
|
|
||||||||||||||||||||||||
48
Table of Contents
Notes to the Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation and Financial Statement Presentation
Our Consolidated Financial Statements include the accounts of Textron Inc. and its
majority-owned subsidiaries. As discussed in Note 2, on April 3, 2009, we sold HR Textron, and in
November 2008, we completed the sale of our Fluid & Power business unit. Both of these businesses
have been classified as discontinued operations, and all prior period information has been recast
to reflect this presentation.
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 subsidiaries and the securitization
trusts consolidated into it, along with two 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.
Our Finance group provides captive financing for retail purchases and leases for new and used
aircraft and equipment manufactured by our Manufacturing group. In the Consolidated Statements of
Cash Flows, cash received from customers or from securitizations is reflected as operating
activities when received from third parties. However, in the cash flow information provided for the
separate borrowing groups, cash flows related to captive financing activities are reflected based
on the operations of each group. For example, when product is sold by our Manufacturing group to a
customer and is financed by the Finance group, the origination of the finance receivable is
recorded within investing activities as a cash outflow in the Finance group’s statement of cash
flows. Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the
Finance group on the customer’s behalf is recorded within operating cash flows as a cash inflow.
Although cash is transferred between the two borrowing groups, there is no cash transaction
reported in the consolidated cash flows at the time of the original financing. These captive
financing activities, along with all significant intercompany transactions, are reclassified or
eliminated in consolidation.
We have evaluated subsequent events up to the time of our filing with
the Securities and Exchange Commission on February 25, 2010, which is the date that these financial
statements were issued.
Use of Estimates
We prepare our financial statements in conformity with generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements. Estimates are used in accounting for, among other items, finance receivables, long-term contracts, inventory valuation, residual values of leased assets, allowance for credit losses on receivables, the amount and timing of future cash flows expected to be received on impaired loans, product liability, workers’ compensation, actuarial assumptions for the pension and postretirement plans, future cash flows associated with goodwill and long-lived asset valuations, and environmental and warranty reserves. Our estimates are based on the facts and circumstances available at the time estimates are made, historical experience, risk of loss, general economic conditions and trends, and our assessments of the probable future outcomes of these matters. Actual results could differ from those estimates. Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the Consolidated Statements of Operations in the period that they are determined.
We prepare our financial statements in conformity with generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements. Estimates are used in accounting for, among other items, finance receivables, long-term contracts, inventory valuation, residual values of leased assets, allowance for credit losses on receivables, the amount and timing of future cash flows expected to be received on impaired loans, product liability, workers’ compensation, actuarial assumptions for the pension and postretirement plans, future cash flows associated with goodwill and long-lived asset valuations, and environmental and warranty reserves. Our estimates are based on the facts and circumstances available at the time estimates are made, historical experience, risk of loss, general economic conditions and trends, and our assessments of the probable future outcomes of these matters. Actual results could differ from those estimates. Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the Consolidated Statements of Operations in the period that they are determined.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly liquid investments with original maturities of three months or less.
Cash and cash equivalents consist of cash and short-term, highly liquid investments with original maturities of three months or less.
Revenue Recognition
We generally recognize revenue for the sale of products, which are not under long-term contracts, upon delivery. For commercial aircraft, delivery is upon completion of manufacturing, customer acceptance, and the transfer of the risk and rewards of ownership. Taxes collected from customers and remitted to government authorities are recorded on a net basis within cost of sales.
We generally recognize revenue for the sale of products, which are not under long-term contracts, upon delivery. For commercial aircraft, delivery is upon completion of manufacturing, customer acceptance, and the transfer of the risk and rewards of ownership. Taxes collected from customers and remitted to government authorities are recorded on a net basis within cost of sales.
When a sale arrangement involves multiple elements, such as sales of products that include
customization and other services, we evaluate the arrangement to determine whether there are
separate items that are required to be delivered under the arrangement that qualify as separate
units of accounting. The total fee from the arrangement is then allocated to each unit of
accounting based on its relative fair value, taking into consideration any performance,
cancellation, termination or refund-type provisions. Fair value generally is established for each
unit of accounting using the sales price charged when the same or similar items are sold
separately. We recognize revenue when the recognition criteria for each unit of accounting are met.
49
Table of Contents
Long-Term Contracts —
Revenues under long-term contracts are accounted for under the
percentage-of-completion method of accounting. Under this method, we estimate profit as the
difference between the total estimated revenues and cost of a contract. We then recognize that
estimated profit over the contract term based on either the costs incurred (under the cost-to-cost
method, which typically is used for development effort) or the units delivered (under the
units-of-delivery method, which is used for production effort), as appropriate under the
circumstances. Revenues under all cost-reimbursement contracts are recorded using the cost-to-cost
method. Revenues under fixed-price contracts generally are recorded using the units-of-delivery
method; however, when the contracts provide for periodic delivery after a lengthy period of time
over which significant costs are incurred or require a significant amount of development effort in
relation to total contract volume, revenues are recorded using the cost-to-cost method.
Our long-term contract profits are based on estimates of total contract cost and revenue utilizing
current contract specifications, expected engineering requirements and the achievement of contract
milestones, including product deliveries. Certain contracts are awarded with fixed-price incentive
fees that also are considered when estimating revenues and profit rates. Contract costs typically
are incurred over a period of several years, and the estimation of these costs requires substantial
judgment. We review and revise these estimates periodically throughout the contract term. Revisions
to contract profits are recorded when the revisions to estimated revenues or costs are made.
Anticipated losses on contracts are recognized in full in the period in which the losses become
probable and estimable.
Our Bell segment has a joint venture with The Boeing Company to provide engineering, development
and test services related to the V-22 aircraft, as well as to produce the V-22 aircraft, under a
number of separate contracts with the U.S. Government (the “V-22 Contracts”). This joint venture
agreement creates contractual, rather than ownership, rights related to the V 22. Accordingly, we
do not account for this joint venture under the equity method of accounting. We account for all of
our rights and obligations under the specific requirements of the V-22 Contracts allocated to us
under the joint venture agreement. Revenues and cost of sales reflect our performance under the
V-22 Contracts with revenues recognized using the units-of-delivery method. We include all assets
used in performance of the V-22 Contracts that we own, including inventory and unpaid receivables,
and all liabilities arising from our obligations under the V-22 Contracts in our Consolidated
Balance Sheets.
Finance Revenues —
Finance revenues include interest on finance receivables, direct loan
origination costs and fees received, and capital and leveraged lease earnings, as well as portfolio
gains/losses. We recognize interest using the interest method to provide a constant rate of return
over the terms of the receivables. We generally suspend the accrual of interest income for accounts
that are contractually delinquent by more than three months. In addition, detailed reviews of loans
may result in earlier suspension. We resume the accrual of interest when the loan becomes
contractually current and recognize the suspended interest income at that time. Cash payments on
nonaccrual accounts, including finance charges, generally are applied to reduce loan principal.
Revenues on direct loan origination costs and fees received are deferred and amortized to finance
revenues over the contractual lives of the respective receivables and credit lines using the
interest method. When receivables are sold or prepaid, unamortized amounts are recognized in
finance revenues. Portfolio gains/losses include gains/losses on the sale or early termination of
finance assets and impairment charges related to repossessed assets and properties and operating
assets received in satisfaction of troubled finance receivables.
Leases —
Certain qualifying noncancelable aircraft and other product lease contracts are accounted
for as sales-type leases. Upon delivery, we record the present value of all payments (net of
executory costs and any guaranteed residual values) under these leases as revenues, and the related
costs of the product are charged to cost of sales. For lease financing transactions that do not
qualify as sales-type leases, we record revenues as earned over the lease period.
Finance Receivables Held for Sale
Finance receivables are classified as held for sale based on a determination that there no longer is the intent to hold the finance receivables for the foreseeable future, until maturity or payoff, or there no longer is the ability to hold the finance receivables until maturity. Our decision to classify certain finance receivables as held for sale is based on a number of factors, including, but not limited to, contractual duration, type of collateral, credit strength of the borrowers, the existence of continued contractual commitments and the perceived marketability of the finance receivables. On an ongoing basis, these factors, combined with our overall liquidation strategy, determine which finance receivables we have the positive intent to hold for the foreseeable future and which finance receivables we will hold for sale. Our current strategy is based on an evaluation of both our performance and liquidity position and changes in external factors affecting the value and/or marketability of our finance receivables. A change in this strategy could result in a change in the classification of our finance receivables. As a result of the significant influence of economic and liquidity conditions on our business plans and strategies, and the rapid changes in these and other factors we utilize to determine which assets are classified as held for sale, we currently believe the term “foreseeable future” represents a time period of six to nine months. We also
Finance receivables are classified as held for sale based on a determination that there no longer is the intent to hold the finance receivables for the foreseeable future, until maturity or payoff, or there no longer is the ability to hold the finance receivables until maturity. Our decision to classify certain finance receivables as held for sale is based on a number of factors, including, but not limited to, contractual duration, type of collateral, credit strength of the borrowers, the existence of continued contractual commitments and the perceived marketability of the finance receivables. On an ongoing basis, these factors, combined with our overall liquidation strategy, determine which finance receivables we have the positive intent to hold for the foreseeable future and which finance receivables we will hold for sale. Our current strategy is based on an evaluation of both our performance and liquidity position and changes in external factors affecting the value and/or marketability of our finance receivables. A change in this strategy could result in a change in the classification of our finance receivables. As a result of the significant influence of economic and liquidity conditions on our business plans and strategies, and the rapid changes in these and other factors we utilize to determine which assets are classified as held for sale, we currently believe the term “foreseeable future” represents a time period of six to nine months. We also
50
Table of Contents
believe that unanticipated changes in both internal and external factors affecting our
financial performance, liquidity position or the value and/or marketability of our finance
receivables could result in a modification of this assessment.
Finance receivables held for sale are carried at the lower of cost or fair value. At the time of
transfer to held for sale classification, we establish a valuation allowance for any shortfall
between the carrying value, net of all deferred fees and costs, and fair value. In addition, any
allowance for loan losses previously allocated to these finance receivables is reclassified to the
valuation allowance account, which is netted with finance receivables held for sale on the balance
sheet. This valuation allowance is adjusted quarterly through earnings for any changes in the fair
value of the finance receivables below the carrying value. Fair value changes can occur based on
market interest rates, market liquidity and changes in the credit quality of the borrower and value
of underlying loan collateral. If we determine that finance receivables classified as held for sale
will not be sold and we have the intent and ability to hold the finance receivables for the
foreseeable future, until maturity or payoff, the finance receivables are reclassified to held for
investment at the lower of cost or fair value at that time.
Finance Receivables Held for Investment
Finance receivables are classified as held for investment when we have the intent and the ability to hold the receivable for the foreseeable future or until maturity or payoff. Finance receivables held for investment are generally recorded at the amount of outstanding principal less allowance for loan losses.
Finance receivables are classified as held for investment when we have the intent and the ability to hold the receivable for the foreseeable future or until maturity or payoff. Finance receivables held for investment are generally recorded at the amount of outstanding principal less allowance for loan losses.
Provisions for losses on finance receivables held for investment are charged to income in amounts
sufficient to maintain the allowance at a level considered adequate to cover losses in the
portfolio. We evaluate the allowance by examining current delinquencies, characteristics of the
existing accounts, historical loss experience, underlying collateral value, and general economic
conditions and trends. In addition, for larger balance commercial loans, we consider borrower
specific information, industry trends and estimated discounted cash flows. Finance receivables held
for investment generally 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. Finance receivables are charged off when they are deemed to be
uncollectible.
Inventories
Inventories are stated at the lower of cost or estimated net realizable value. We value our inventories generally using the first-in, first-out (FIFO) method or the last-in, first-out (LIFO) method for certain qualifying inventories where LIFO provides a better matching of costs and revenues. We determine costs for our commercial helicopters on an average cost basis by model considering the expended and estimated costs for the current production release.
Inventories are stated at the lower of cost or estimated net realizable value. We value our inventories generally using the first-in, first-out (FIFO) method or the last-in, first-out (LIFO) method for certain qualifying inventories where LIFO provides a better matching of costs and revenues. We determine costs for our commercial helicopters on an average cost basis by model considering the expended and estimated costs for the current production release.
Costs on long-term contracts represent costs incurred for production, allocable operating overhead,
advances to suppliers, and, in the case of contracts with the U.S. Government, allocable research
and development and general and administrative expenses. Since our inventoried costs include
amounts related to contracts with long production cycles, a portion of these costs is not expected
to be realized within one year. Pursuant to contract provisions, agencies of the U.S. Government
have title to, or security interest in, inventories related to such contracts as a result of
advances, performance-based payments and progress payments. Such advances and payments are
reflected as an offset against the related inventory balances.
Customer deposits are recorded against inventory when the right of offset exists. All other
customer deposits are recorded in accrued liabilities.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated primarily using the straight-line method. Land improvements and buildings are depreciated primarily over estimated lives ranging from four to 40 years, while machinery and equipment are depreciated primarily over one to 15 years. We capitalize expenditures for improvements that increase asset values and extend useful lives.
Property, plant and equipment are recorded at cost and are depreciated primarily using the straight-line method. Land improvements and buildings are depreciated primarily over estimated lives ranging from four to 40 years, while machinery and equipment are depreciated primarily over one to 15 years. We capitalize expenditures for improvements that increase asset values and extend useful lives.
Intangible and Other Long-Lived Assets
At acquisition, we estimate and record the fair value of purchased intangible assets primarily using a discounted cash flow analysis of anticipated cash flows reflecting incremental revenues and/or cost savings resulting from the acquired intangible asset using market participant assumptions. Amortization of intangible assets with finite lives is recognized over their estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized. Approximately 35% of our gross intangible assets are amortized using the straight-line method, with the remaining assets, primarily customer agreements, amortized based on the cash flow streams used to value the asset.
At acquisition, we estimate and record the fair value of purchased intangible assets primarily using a discounted cash flow analysis of anticipated cash flows reflecting incremental revenues and/or cost savings resulting from the acquired intangible asset using market participant assumptions. Amortization of intangible assets with finite lives is recognized over their estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized. Approximately 35% of our gross intangible assets are amortized using the straight-line method, with the remaining assets, primarily customer agreements, amortized based on the cash flow streams used to value the asset.
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Long-lived assets, including intangible assets subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. If the carrying value of the asset held for use exceeds the sum of
the undiscounted expected future cash flows, the carrying value of the asset is generally written
down to fair value. Long-lived assets held for sale are stated at the lower of cost or fair value
less cost to sell. Fair value is determined using pertinent market information, including estimated
future discounted cash flows.
Goodwill
We evaluate the recoverability of goodwill annually in the fourth quarter or more frequently if events or changes in circumstances, such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of a reporting unit might be impaired. The reporting unit represents the operating segment unless discrete financial information is prepared and reviewed by segment management for businesses one level below that operating segment (a “component”), in which case such component is the reporting unit. In certain instances, we have aggregated components of an operating segment into a single reporting unit based on similar economic characteristics. Goodwill is considered to be potentially impaired when the carrying value of a reporting unit exceeds its estimated fair value. Fair values are established primarily using discounted cash flows that incorporate assumptions for the unit’s short- and long-term revenue growth rates, operating margins and discount rates, which represent our best estimates of current and forecasted market conditions, current cost structure, anticipated net cost reductions, and the implied rate of return that we believe a market participant would require for an investment in a company having similar risks and business characteristics to the reporting unit being assessed. When available, comparative market multiples are used to corroborate discounted cash flow results.
We evaluate the recoverability of goodwill annually in the fourth quarter or more frequently if events or changes in circumstances, such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of a reporting unit might be impaired. The reporting unit represents the operating segment unless discrete financial information is prepared and reviewed by segment management for businesses one level below that operating segment (a “component”), in which case such component is the reporting unit. In certain instances, we have aggregated components of an operating segment into a single reporting unit based on similar economic characteristics. Goodwill is considered to be potentially impaired when the carrying value of a reporting unit exceeds its estimated fair value. Fair values are established primarily using discounted cash flows that incorporate assumptions for the unit’s short- and long-term revenue growth rates, operating margins and discount rates, which represent our best estimates of current and forecasted market conditions, current cost structure, anticipated net cost reductions, and the implied rate of return that we believe a market participant would require for an investment in a company having similar risks and business characteristics to the reporting unit being assessed. When available, comparative market multiples are used to corroborate discounted cash flow results.
Pension and Postretirement Benefit Obligations
We maintain various pension and postretirement plans for our employees globally. These plans include significant pension and postretirement benefit obligations, which are calculated based on actuarial valuations. Key assumptions used in determining these obligations and related expenses include expected long-term rates of return on plan assets, discount rates and healthcare cost projections. We evaluate and update these assumptions annually in consultation with third-party actuaries and investment advisors. We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and the rate of compensation increases.
We maintain various pension and postretirement plans for our employees globally. These plans include significant pension and postretirement benefit obligations, which are calculated based on actuarial valuations. Key assumptions used in determining these obligations and related expenses include expected long-term rates of return on plan assets, discount rates and healthcare cost projections. We evaluate and update these assumptions annually in consultation with third-party actuaries and investment advisors. We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and the rate of compensation increases.
We recognize the overfunded or underfunded status of our pension and postretirement plans in the
Consolidated Balance Sheets and recognize changes in the funded status of our defined benefit plans
in comprehensive income in the year in which they occur. Actuarial gains and losses that are not
immediately recognized as net periodic pension cost are recognized as a component of other
comprehensive (loss) income (OCI) and amortized into net periodic pension cost in future periods.
Derivative Financial Instruments
We are exposed to market risk primarily from changes in interest rates and currency exchange rates. We do not hold or issue derivative financial instruments for trading or speculative purposes. To manage the volatility relating to our exposures, we net these exposures on a consolidated basis to take advantage of natural offsets. For the residual portion, we enter into various derivative transactions pursuant to our policies in areas such as counterparty exposure and hedging practices. All derivative instruments are reported at fair value in the Consolidated Balance Sheets. Designation to support hedge accounting is performed on a specific exposure basis. For financial instruments qualifying as fair value hedges, we record changes in fair value in earnings, offset, in part or in whole, by corresponding changes in the fair value of the underlying exposures being hedged. For cash flow hedges, we record changes in the fair value of derivatives (to the extent they are effective as hedges) in OCI, net of deferred taxes. Changes in fair value of derivatives not qualifying as hedges are recorded in earnings.
We are exposed to market risk primarily from changes in interest rates and currency exchange rates. We do not hold or issue derivative financial instruments for trading or speculative purposes. To manage the volatility relating to our exposures, we net these exposures on a consolidated basis to take advantage of natural offsets. For the residual portion, we enter into various derivative transactions pursuant to our policies in areas such as counterparty exposure and hedging practices. All derivative instruments are reported at fair value in the Consolidated Balance Sheets. Designation to support hedge accounting is performed on a specific exposure basis. For financial instruments qualifying as fair value hedges, we record changes in fair value in earnings, offset, in part or in whole, by corresponding changes in the fair value of the underlying exposures being hedged. For cash flow hedges, we record changes in the fair value of derivatives (to the extent they are effective as hedges) in OCI, net of deferred taxes. Changes in fair value of derivatives not qualifying as hedges are recorded in earnings.
Foreign currency denominated assets and liabilities are translated into U.S. dollars. Adjustments
from currency rate changes are recorded in the cumulative translation adjustment account in
shareholders’ equity until the related foreign entity is sold or substantially liquidated. We use
foreign currency financing transactions, including currency swaps, to effectively hedge long-term
investments in foreign operations with the same corresponding currency. Foreign currency gains and
losses on the hedge of the long-term investments are recorded in the cumulative translation
adjustment account with the offset recorded as an adjustment to the non-U.S. dollar financing
liability.
Product and Environmental Liabilities
We accrue product liability claims and related defense costs on the occurrence method when a loss is probable and reasonably estimable. Our estimates are generally based on the specifics of each claim or incident and our best estimate of the probable loss using historical experience and considering the insurance coverage and deductibles in effect at the date of the incident.
We accrue product liability claims and related defense costs on the occurrence method when a loss is probable and reasonably estimable. Our estimates are generally based on the specifics of each claim or incident and our best estimate of the probable loss using historical experience and considering the insurance coverage and deductibles in effect at the date of the incident.
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Liabilities for environmental matters are recorded on a site-by-site basis when it is
probable that an obligation has been incurred and the cost can be reasonably estimated. We estimate
our accrued environmental liabilities using currently available facts, existing technology, and
presently enacted laws and regulations, all of which are subject to a number of factors and
uncertainties. Our environmental liabilities are undiscounted and do not take into consideration
possible future insurance proceeds or significant amounts from claims against other third parties.
Research and Development Costs
Research and development costs that are either not specifically covered by contracts or represent our share under cost-sharing arrangements are charged to expense as incurred. Research and development costs incurred under contracts with others are reported as cost of sales over the period that revenue is recognized.
Research and development costs that are either not specifically covered by contracts or represent our share under cost-sharing arrangements are charged to expense as incurred. Research and development costs incurred under contracts with others are reported as cost of sales over the period that revenue is recognized.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying tax rates expected to be enacted for the year in which we expect the differences will reverse or settle. Based on the evaluation of available evidence, we recognize future tax benefits, such as net operating loss carryforwards, to the extent that we believe it is more likely than not that we will realize these benefits. We periodically assess the likelihood that we will be able to recover our deferred tax assets and reflect any changes in our estimates in the valuation allowance, with a corresponding adjustment to earnings or OCI, as appropriate. In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary differences, taxable income in carryback years, the feasibility of tax planning strategies and estimated future taxable income. We recognize net tax-related interest and penalties for continuing operations in income tax expense.
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying tax rates expected to be enacted for the year in which we expect the differences will reverse or settle. Based on the evaluation of available evidence, we recognize future tax benefits, such as net operating loss carryforwards, to the extent that we believe it is more likely than not that we will realize these benefits. We periodically assess the likelihood that we will be able to recover our deferred tax assets and reflect any changes in our estimates in the valuation allowance, with a corresponding adjustment to earnings or OCI, as appropriate. In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary differences, taxable income in carryback years, the feasibility of tax planning strategies and estimated future taxable income. We recognize net tax-related interest and penalties for continuing operations in income tax expense.
Note 2. Discontinued Operations
On April 3, 2009, we sold HR Textron, an operating unit previously reported within the
Textron Systems segment, for $376 million in cash proceeds. The sale resulted in an after-tax gain
of $8 million after final settlement and net after-tax proceeds of approximately $280 million.
In
November 2008, we completed the sale of the Fluid & Power business unit and recorded an after-tax
gain of $111 million. We received approximately $527 million in cash proceeds from the sale, along
with a six-year note with a face value of $28 million. In connection with the final settlement of
the transaction in the third quarter of 2009, we also received a five-year note with a face value
of $30 million, which had no significant impact on the net gain from disposition. These notes are
recorded in the Consolidated Balance Sheet net of a valuation allowance.
The HR Textron and Fluid &
Power businesses met the discontinued operations criteria and have been included in discontinued
operations for all periods presented in our Consolidated Financial Statements. At January 2, 2010,
the assets and liabilities of our discontinued businesses primarily relate to income taxes. At
January 3, 2009, the assets of our discontinued businesses included $167 million of goodwill, $66
million in inventory, $30 million in accounts receivables, $27 million in property, plant and
equipment and $44 million in other assets. Liabilities of our discontinued operations at January 3,
2009 included accounts payable and accrued expenses and other liabilities, primarily related to
income taxes. Upon the sale of Fluid & Power, we retained sponsorship of a defined benefit pension
plan for former employees and retirees of the U.K.-based businesses. No additional benefits can be
earned under this plan.
Revenue, results of operations and gains on disposal for our discontinued businesses are as
follows:
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Revenue
|
$ | 48 | $ | 796 | $ | 830 | ||||||
|
|
||||||||||||
|
Income (loss) from discontinued operations before income taxes
|
(2 | ) | 63 | 69 | ||||||||
|
Income tax expense (benefit)
|
(38 | ) | 12 | 20 | ||||||||
|
|
||||||||||||
|
Operating income from discontinued operations, net of income taxes
|
36 | 51 | 49 | |||||||||
|
Net gain on disposals, net of income taxes
|
6 | 111 | 2 | |||||||||
|
|
||||||||||||
|
Income from discontinued operations, net of income taxes
|
$ | 42 | $ | 162 | $ | 51 | ||||||
|
|
||||||||||||
We generally use a centralized approach to the cash management and financing of our manufacturing
operations and, accordingly, do not allocate debt or interest expense to our discontinued
businesses. Any debt and related interest expense of a specific entity within a business is
recorded by the respective entity. General corporate overhead previously allocated to the
businesses for reporting purposes is excluded from amounts reported as discontinued operations.
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Note 3. Business Acquisitions, Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill, by segment, are as follows:
The changes in the carrying amount of goodwill, by segment, are as follows:
| Textron | ||||||||||||||||||||||||
| (In millions) | Cessna | Bell | Systems | Industrial | Finance | Total | ||||||||||||||||||
|
Balance at December 30, 2006
|
$ | 322 | $ | 17 | $ | 311 | $ | 368 | $ | 169 | $ | 1,187 | ||||||||||||
|
Acquisitions
|
— | 1 | 857 | 11 | — | 869 | ||||||||||||||||||
|
Foreign currency translation
|
— | — | — | 13 | — | 13 | ||||||||||||||||||
|
Other
|
— | — | (17 | ) | — | — | (17 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at December 29, 2007
|
322 | 18 | 1,151 | 392 | 169 | 2,052 | ||||||||||||||||||
|
Acquisitions and purchase price adjustments
|
— | (5 | ) | (44 | ) | — | — | (49 | ) | |||||||||||||||
|
Adjustment related to business sold
|
— | — | (134 | ) | — | — | (134 | ) | ||||||||||||||||
|
Transfers
|
— | 17 | (17 | ) | — | — | — | |||||||||||||||||
|
Impairment
|
— | — | — | — | (169 | ) | (169 | ) | ||||||||||||||||
|
Foreign currency translation
|
— | — | — | (2 | ) | — | (2 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at January 3, 2009
|
322 | 30 | 956 | 390 | — | 1,698 | ||||||||||||||||||
|
Impairment
|
— | — | — | (80 | ) | — | (80 | ) | ||||||||||||||||
|
Foreign currency translation
|
— | — | — | 2 | — | 2 | ||||||||||||||||||
|
Other
|
— | — | 2 | — | — | 2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at January 2, 2010
|
$ | 322 | $ | 30 | $ | 958 | $ | 312 | $ | — | $ | 1,622 | ||||||||||||
|
|
||||||||||||||||||||||||
We recorded an impairment charge of $80 million in 2009 based on lower forecasted revenues
and profits related to the effects of the economic recession on the Golf & Turfcare reporting unit.
In 2008, based on current market conditions and the plan to downsize the Finance segment, we
recorded an impairment charge of $169 million to eliminate all goodwill at the Finance segment. See
Notes 10 and 12 for more information on these charges.
Acquired Intangible Assets
Our acquired intangible assets are summarized below:
Our acquired intangible assets are summarized below:
| January 2, 2010 | January 3, 2009 | |||||||||||||||||||||||||||
| Weighted- | ||||||||||||||||||||||||||||
| Average | ||||||||||||||||||||||||||||
| Amortization | Gross | Gross | ||||||||||||||||||||||||||
| Period | Carrying | Accumulated | Carrying | Accumulated | ||||||||||||||||||||||||
| (Dollars in millions) | (In years) | Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||||
|
Customer
agreements and contractual relationships
|
13 | $ | 407 | $ | (77 | ) | $ | 330 | $ | 407 | $ | (43 | ) | $ | 364 | |||||||||||||
|
Patents and technology
|
10 | 101 | (43 | ) | 58 | 112 | (35 | ) | 77 | |||||||||||||||||||
|
Trademarks
|
19 | 34 | (14 | ) | 20 | 37 | (12 | ) | 25 | |||||||||||||||||||
|
Other
|
8 | 19 | (15 | ) | 4 | 18 | (13 | ) | 5 | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
$ | 561 | $ | (149 | ) | $ | 412 | $ | 574 | $ | (103 | ) | $ | 471 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
Amortization expense totaled $52 million in 2009, $53 million in 2008 and $23 million in
2007. Amortization expense is estimated to be approximately $50 million, $49 million, $48 million,
$46 million and $43 million in 2010, 2011, 2012, 2013 and 2014, respectively.
Acquisitions
On November 14, 2007, we acquired a majority ownership interest in United Industrial
Corporation (UIC), a publicly held company, pursuant to a cash tender offer of $81 per share. UIC
operates through its wholly owned subsidiary, AAI Corporation (AAI). AAI is a leading provider of
intelligent aerospace and defense systems, including unmanned aircraft and ground control stations,
aircraft and satellite test equipment, training systems and countersniper devices, and has been
integrated into our Textron Systems segment. In December 2007, we completed the acquisition and
obtained 100% ownership of UIC for a total cost of $1.0 billion. The results of operations for this
business are included in our Consolidated Statements of Operations since the acquisition date. Pro
forma information has not been included as the amounts are immaterial.
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The intangible assets we acquired with UIC represent primarily customer agreements and
contractual relationships with a weighted-average useful life of 13 years. We have allocated the
purchase price of this business to the estimated fair value of the net tangible and intangible
assets acquired, with any excess recorded as goodwill. Approximately $64 million of the goodwill is
deductible for tax purposes. In 2008, the goodwill and intangible amounts were adjusted to reflect
the final fair value adjustments, which resulted in a reduction of goodwill of $49 million, net of
deferred taxes, and an increase in intangible assets of $14 million.
Note 4. Accounts Receivable
Accounts receivable is comprised of the following:
| January 2, | January 3, | |||||||
| (In millions) | 2010 | 2009 | ||||||
|
Commercial
|
$ | 470 | $ | 496 | ||||
|
U.S. Government contracts
|
447 | 422 | ||||||
|
|
||||||||
|
|
917 | 918 | ||||||
|
Allowance for doubtful accounts
|
(23 | ) | (24 | ) | ||||
|
|
||||||||
|
|
$ | 894 | $ | 894 | ||||
|
|
||||||||
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 $170 million at January 2, 2010
and $157 million at January 3, 2009. Long-term contract receivables due from the U.S. Government
exclude significant amounts billed but unpaid due to contractual retainage provisions.
Note 5. Finance Receivables and Securitizations
Our Finance group manages and services finance receivables for a variety of investors,
participants and third-party portfolio owners. We do not have a retained financial interest or
credit risk in the performance of the serviced portfolio, and, therefore, performance of these
portfolios is limited to billing and collection activities. A reconciliation of our managed and
serviced finance receivables to finance receivables held for investment, net is provided below:
| January 2, | January 3, | |||||||
| (In millions) | 2010 | 2009 | ||||||
|
Total managed and serviced finance receivables
|
$ | 8,283 | $ | 12,173 | ||||
|
Less: Nonrecourse participations sold to independent investors
|
765 | 820 | ||||||
|
Less: Third-party portfolio servicing
|
463 | 532 | ||||||
|
|
||||||||
|
Total managed finance receivables
|
7,055 | 10,821 | ||||||
|
Less: Securitized receivables
|
30 | 2,248 | ||||||
|
|
||||||||
|
Owned finance receivables
|
7,025 | 8,573 | ||||||
|
Less: Finance receivables held for sale
|
819 | 1,658 | ||||||
|
|
||||||||
|
Finance receivables held for investment
|
6,206 | 6,915 | ||||||
|
Allowance for loan losses
|
(341 | ) | (191 | ) | ||||
|
|
||||||||
|
Finance receivables held for investment, net
|
$ | 5,865 | $ | 6,724 | ||||
|
|
||||||||
Finance receivables held for investment at January 2, 2010 and January 3, 2009 include
approximately $629 million and $1.1 billion of receivables that have been legally sold to special
purpose entities (SPE), which are consolidated subsidiaries of TFC. The assets of the SPEs are
pledged as collateral for their debt, which is reflected as securitized on-balance sheet debt in
Note 8. Third-party investors have no legal recourse to TFC beyond the credit enhancement provided
by the assets of the SPEs.
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Table of Contents
Our finance receivables are diversified across geographic region, borrower industry and type
of collateral. At January 2, 2010, 70% of our managed finance receivables were distributed
throughout the U.S., compared with 77% at the end of 2008. The most significant collateral
concentration was in general aviation, which accounted for 35% of managed receivables at the end of
2009 and 26% at the end of 2008. Industry concentrations in the resort and golf industries
accounted for 19% and 18%, respectively, of managed receivables at January 2, 2010, compared with
13% and 16%, respectively, at the end of 2008.
Finance receivables include installment contracts, revolving loans, golf course and resort
mortgages, distribution finance receivables, and finance and leveraged leases. Installment
contracts and finance leases have initial terms ranging from two to 20 years and are secured by the
financed equipment, and, in many instances, by the personal guarantee of the principals or recourse
arrangements with the originating vendor. Installment contracts generally require the customer to
pay a significant down payment, along with periodic scheduled principal payments that reduce the
outstanding balance through the term of the loan. Finance leases include residual values expected
to be realized at contractual maturity. Leases with no significant residual value at the end of the
contractual term are classified as installment contracts, as their legal and economic substance is
more equivalent to a secured borrowing than a finance lease with a significant residual value. In
the contractual maturities table in the “Finance Receivables Held for Investment” section below,
contractual maturities for finance leases classified as installment contracts represent the minimum
lease payments, net of the unearned income to be recognized over the life of the lease. Total
minimum lease payments and unearned income related to these contracts were $1.0 billion and $194
million, respectively, at January 2, 2010 and $1.2 billion and $299 million, respectively, at
January 3, 2009. Minimum lease payments due under these contracts for each of the next five years
are as follows: $199 million in 2010, $182 million in 2011, $147 million in 2012, $121 million in
2013 and $82 million in 2014. Minimum lease payments due under finance leases for each of the next
five years are as follows: $88 million in 2010, $66 million in 2011, $41 million in 2012, $17
million in 2013 and $9 million in 2014.
Revolving loans and distribution finance receivables generally mature within one to five years,
and, at times, convert to term loans that contractually amortize over an additional one to five
years. Revolving loans are secured by trade receivables, inventory, plant and equipment, pools of
timeshare interval resort notes receivables, finance receivable portfolios, pools of residential
and recreational land loans and the underlying property, and, in many instances, by the personal
guarantee of the principals. Distribution finance receivables generally are secured by the
inventory of the financed distributor and include floorplan financing for third-party dealers for
inventory sold by the E-Z-GO and Jacobsen businesses.
Golf
course, timeshare and hotel mortgages are secured by real property and generally are limited to 75% or
less of the property’s appraised market value at loan origination. Golf course mortgages have
initial terms ranging from five to 10 years with amortization periods from 15 to 25 years. Golf
course mortgages consist of loans with an average balance of $6 million and a weighted-average
remaining contractual maturity of three years. Timeshare and hotel mortgages generally represent construction
and inventory, or operating property loans with an average balance of $9 million and a weighted-average remaining
contractual maturity of three years.
Leveraged leases are secured by the ownership of the leased equipment and real property and have
initial terms up to approximately 30 years. Leveraged leases reflect contractual maturities net of
contractual nonrecourse debt payments and include residual values expected to be realized at
contractual maturity.
Finance Receivables Held for Investment
The contractual maturities of finance receivables held for investment at January 2, 2010 were
as follows:
| Finance Receivables | ||||||||||||||||||||||||||||||||
| Contractual Maturities | Held for Investment | |||||||||||||||||||||||||||||||
| (In millions) | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | 2009 | 2008 | ||||||||||||||||||||||||
|
Installment contracts
|
$ | 383 | $ | 333 | $ | 363 | $ | 358 | $ | 261 | $ | 811 | $ | 2,509 | $ | 2,787 | ||||||||||||||||
|
Revolving loans
|
288 | 430 | 242 | 131 | 49 | 43 | 1,183 | 1,208 | ||||||||||||||||||||||||
|
Golf course,
timeshare and hotel mortgages
|
209 | 298 | 176 | 178 | 63 | 162 | 1,086 | 1,206 | ||||||||||||||||||||||||
|
Distribution finance receivables
|
650 | 125 | 12 | 4 | 2 | — | 793 | 647 | ||||||||||||||||||||||||
|
Finance leases
|
102 | 77 | 79 | 28 | 5 | 112 | 403 | 608 | ||||||||||||||||||||||||
|
Leveraged leases
|
(2 | ) | 3 | (6 | ) | (9 | ) | 1 | 326 | 313 | 459 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
$ | 1,630 | $ | 1,266 | $ | 866 | $ | 690 | $ | 381 | $ | 1,454 | 6,287 | 6,915 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Allowance for credit losses and
valuation allowance
|
(422 | ) | (191 | ) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
$ | 5,865 | $ | 6,724 | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
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Finance receivables often are repaid or refinanced prior to maturity, and, in some instances,
payment may be delayed or extended beyond the scheduled maturity. Accordingly, the above
tabulations should not be regarded as a forecast of future cash collections. Finance receivable
receipts related to distribution finance receivables and revolving loans are based on historical
cash flow experience. Finance receivables held for investment include certain amounts previously
classified as held for sale that have an $81 million valuation allowance.
The net investments in finance leases, excluding leases classified as installment contracts, and
leveraged leases are provided below:
| January 2, | January 3, | |||||||
| (In millions) | 2010 | 2009 | ||||||
|
Finance leases:
|
||||||||
|
Total minimum lease payments receivable
|
$ | 395 | $ | 557 | ||||
|
Estimated residual values of leased equipment
|
183 | 259 | ||||||
|
|
||||||||
|
|
578 | 816 | ||||||
|
Less unearned income
|
(175 | ) | (208 | ) | ||||
|
|
||||||||
|
Net investment in finance leases
|
$ | 403 | $ | 608 | ||||
|
|
||||||||
|
Leveraged leases:
|
||||||||
|
Rental receivable, net of nonrecourse debt
|
$ | 378 | $ | 493 | ||||
|
Estimated residual values of leased assets
|
152 | 229 | ||||||
|
|
||||||||
|
|
530 | 722 | ||||||
|
Less unearned income
|
(217 | ) | (263 | ) | ||||
|
|
||||||||
|
Investment in leveraged leases
|
313 | 459 | ||||||
|
Deferred income taxes
|
(238 | ) | (350 | ) | ||||
|
|
||||||||
|
Net investment in leveraged leases
|
$ | 75 | $ | 109 | ||||
|
|
||||||||
Nonaccrual and Impaired Finance Receivables
We periodically evaluate finance receivables held for investment, excluding homogeneous loan
portfolios and finance leases, for impairment. Finance receivables classified as held for sale are
reflected at fair value and are excluded from this assessment. A finance receivable is considered
impaired when it is probable that we will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impaired finance receivables are classified as either
nonaccrual or accrual loans. Nonaccrual finance receivables include accounts that are contractually
delinquent by more than three months for which the accrual of interest income is suspended.
Impaired accrual finance receivables represent loans with original terms that have been
significantly modified to reflect deferred principal payments, generally at market interest rates,
for which collection of principal and interest is not doubtful.
The impaired finance receivables are as follows:
| January 2, | January 3, | |||||||
| (In millions) | 2010 | 2009 | ||||||
|
Impaired nonaccrual finance receivables
|
$ | 984 | $ | 234 | ||||
|
Impaired accrual finance receivables
|
217 | 19 | ||||||
|
|
||||||||
|
Total impaired finance receivables
|
$ | 1,201 | $ | 253 | ||||
|
Less: Impaired finance receivables without identified reserve requirements
|
362 | 71 | ||||||
|
|
||||||||
|
Impaired nonaccrual finance receivables with identified reserve requirements
|
$ | 839 | $ | 182 | ||||
|
|
||||||||
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Our nonaccrual finance receivables include impaired finance receivables, as well as accounts
in homogeneous loan portfolios that are not considered to be impaired but are contractually
delinquent by more than three months. A summary of these finance receivables and the related
allowance for losses by collateral type is as follows:
| January 2, 2010 | January 3, 2009 | |||||||||||||||||||||||
| Allowance | Allowance | |||||||||||||||||||||||
| for Losses | for Losses | |||||||||||||||||||||||
| Impaired | on Impaired | Impaired | on Impaired | |||||||||||||||||||||
| Nonaccrual | Nonaccrual | Nonaccrual | Nonaccrual | Nonaccrual | Nonaccrual | |||||||||||||||||||
| Finance | Finance | Finance | Finance | Finance | Finance | |||||||||||||||||||
| Collateral Type (In millions) | Receivables | Receivables | Receivables | Receivables | Receivables | Receivables | ||||||||||||||||||
|
Timeshare notes receivable*
|
$ | 259 | $ | 254 | $ | 53 | $ | 78 | $ | 74 | $ | 9 | ||||||||||||
|
General aviation aircraft
|
286 | 272 | 46 | 17 | 6 | 2 | ||||||||||||||||||
|
Golf course property
|
166 | 165 | 27 | 107 | 107 | 25 | ||||||||||||||||||
|
Resort construction/inventory
|
104 | 104 | — | — | — | — | ||||||||||||||||||
|
Dealer inventory
|
88 | 68 | 14 | 43 | 34 | 3 | ||||||||||||||||||
|
Hotels
|
78 | 78 | 7 | — | — | — | ||||||||||||||||||
|
Other
|
59 | 43 | 6 | 32 | 13 | 4 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 1,040 | $ | 984 | $ | 153 | $ | 277 | $ | 234 | $ | 43 | ||||||||||||
|
|
||||||||||||||||||||||||
| * | Finance receivables collateralized primarily by timeshare notes receivable also may be collateralized by certain real estate and other assets of our borrowers. |
The increase in nonaccrual finance receivables primarily is attributable to the lack of
liquidity available to borrowers in the timeshare portfolio, weaker general economic conditions and
depressed aircraft values. The increase in timeshare notes receivable includes one $203 million
account, of which $120 million is collateralized by notes receivable and $83 million is
collateralized by several resort properties, which are included in the resort
construction/inventory line above.
The average recorded investment in impaired nonaccrual finance receivables was $603 million in
2009, $143 million in 2008 and $53 million in 2007. The average recorded investment in impaired
accrual finance receivables amounted to $136 million in 2009, $34 million in 2008 and $31 million
in 2007. Nonaccrual finance receivables resulted in the Finance segment’s revenues being reduced by
$53 million, $16 million and $7 million for 2009, 2008 and 2007, respectively.
Captive and Other Intercompany Financing
Our Finance group provides financing for retail purchases and leases for new and used aircraft and
equipment manufactured by our Manufacturing group. The captive finance receivables for these
inventory sales that are included in the Finance group’s balance sheets are summarized below:
| January 2, | January 3, | |||||||
| (In millions) | 2010 | 2009 | ||||||
|
Installment contracts
|
$ | 1,462 | $ | 1,468 | ||||
|
Finance leases
|
388 | 544 | ||||||
|
Distribution finance
|
72 | 33 | ||||||
|
|
||||||||
|
Total
|
$ | 1,922 | $ | 2,045 | ||||
|
|
||||||||
Operating agreements specify that our Finance group has recourse to our Manufacturing group
for certain uncollected amounts related to these transactions. Our Manufacturing group has
established reserves for losses on its balance sheet within accrued and other liabilities for the
receivables it guarantees. These reserves are established for amounts that potentially are
uncollectible or if the collateral values are considered insufficient to cover the outstanding
receivable. If an account is deemed uncollectible and the collateral is repossessed by our Finance
group, our Manufacturing group is charged for the deficiency. If the collateral is not repossessed,
the receivable is transferred from the Finance group’s balance sheet to the Manufacturing group’s
balance sheet. The Manufacturing group then is responsible for any additional collection efforts.
When this occurs, any related reserve previously established by the Manufacturing group is
reclassified from accrued or other liabilities and netted against the receivable or asset
transferred from the Finance group.
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In 2009, 2008 and 2007, our Finance group paid our Manufacturing group $0.6 billion, $1.0
billion and $1.2 billion, respectively, related to the sale of Textron-manufactured products to
third parties that were financed by the Finance group. Our Cessna and Industrial segments also
received proceeds in those years of $13 million, $18 million and $27 million, respectively, from
the sale of equipment from their manufacturing operations to our Finance group for use under
operating lease agreements. At January 2, 2010 and January 3, 2009, the amounts guaranteed by the
Manufacturing group totaled $216 million and $206 million, respectively, on which the Manufacturing
group had reserves for losses of $17 million and $21 million, respectively.
During the fourth quarter of 2008, the Manufacturing group utilized its commercial paper borrowings
to lend cash to the Finance group, and in 2009, the Manufacturing group agreed to lend the Finance
group, with interest, funds to pay down maturing debt. The interest rate on these borrowings at
January 2, 2010 and January 3, 2009 was 7.00% and 4.03%, respectively. As of January 2, 2010 and
January 3, 2009, the outstanding balance due to the Manufacturing group was $447 million and $133
million, respectively. These amounts are included in other current assets for the Manufacturing
group and other liabilities for the Finance group in the Consolidated Balance Sheets.
Finance Receivables Held for Sale
As a result of the plan to reduce finance receivables, $1.7 billion of the owned finance
receivables were classified as held for sale in December 2008. During 2009, we reclassified $878
million of finance receivables, net of a $188 million valuation allowance, from held for sale to
held for investment following efforts to market the portfolios and progress made through orderly
liquidation. We also reclassified $421 million of other finance receivable portfolios, net of a $43
million valuation allowance, from held for investment to held for sale as a result of unanticipated
purchase inquiries. Due to the nature of these inquiries, we determined a sale of these portfolios
would be consistent with our goal to maximize the economic value of our portfolio and accelerate
cash collections. During the fourth quarter of 2009, we recorded certain finance receivables
previously sold to the Distribution Finance securitization in our balance sheet as discussed in the
“Securitizations” section below. In connection with these finance receivables, $359 million were
classified as held for sale and were sold during the quarter.
As of January 2, 2010, $819 million of owned finance receivables were classified as held for sale.
Finance receivable sales accounted for a significant portion of the reduction in finance
receivables held for sale, primarily related to the distribution finance and asset-based lending
portfolios. We received proceeds approximating our carrying value for each of these transactions.
The remaining finance receivables held for sale primarily are comprised of assets in the
distribution finance, golf mortgage and asset-based lending portfolios and include $84 million of
finance receivables in the golf equipment portfolio. Subsequent to year-end, in January 2010, we
completed another sale of distribution finance receivables that further reduced these finance
receivables by approximately $200 million and generated proceeds in excess of our carrying value.
Securitizations
During 2009, we had one significant off-balance sheet financing arrangement. The distribution
finance revolving securitization trust was a master trust that purchased inventory finance
receivables from the Finance group and issued asset-backed notes to investors. Approximately $1.4
billion of the outstanding notes issued by the distribution finance securitization trust were
repaid through finance receivable collections. During the fourth quarter of 2009, a reduction in
the pace of finance receivable collections triggered a corresponding change in required cash
distributions, which provided us the ability to repurchase the finance receivables resulting in the
consolidation of the securitization trust on our balance sheet. As a result, the finance
receivables held by the securitization trust were recorded at their fair value of $720 million,
$635 million of debt issued by the securitization trust was recorded on our balance sheet and $85
million of retained interests were removed from the balance sheet. TFC then made a capital
contribution to the trust sufficient to repay its $635 million of outstanding debt; following the
repayment, the remaining receivables were legally conveyed to TFC and the trust was dissolved.
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Note 6. Inventories
Inventories are comprised of the following:
| (In millions) |
January 2,
2010 |
January 3,
2009 |
||||||
|
Finished goods
|
$ | 735 | $ | 1,081 | ||||
|
Work in process
|
1,861 | 1,866 | ||||||
|
Raw materials and components
|
613 | 765 | ||||||
|
|
||||||||
|
|
3,209 | 3,712 | ||||||
|
Progress/milestone payments
|
(936 | ) | (619 | ) | ||||
|
|
||||||||
|
|
$ | 2,273 | $ | 3,093 | ||||
|
|
||||||||
Inventories valued by the LIFO method totaled $1.3 billion and $2.0 billion at January 2,
2010 and January 3, 2009, respectively. Had our LIFO inventories been valued at current costs,
their carrying values would have been approximately $414 million and $363 million higher at those
respective dates. Inventories related to long-term contracts, net of progress/milestone payments,
were $366 million at January 2, 2010 and $741 million at January 3, 2009.
Note 7. Property, Plant and Equipment, Net
Our Manufacturing group’s property, plant and equipment, net are comprised of the following:
| January 2, | January 3, | |||||||
| (In millions) | 2010 | 2009 | ||||||
|
Land and buildings
|
$ | 1,426 | $ | 1,289 | ||||
|
Machinery and equipment
|
3,208 | 3,235 | ||||||
|
|
||||||||
|
|
4,634 | 4,524 | ||||||
|
Accumulated depreciation and amortization
|
(2,666 | ) | (2,436 | ) | ||||
|
|
||||||||
|
|
$ | 1,968 | $ | 2,088 | ||||
|
|
||||||||
Assets under capital leases totaled $218 million and $194 million and had accumulated
amortization of $36 million and $30 million at the end of 2009 and 2008, respectively. Depreciation
expense for the Manufacturing group totaled $317 million in 2009, $302 million in 2008 and $256
million in 2007.
We have incurred asset retirement obligations primarily related to costs to remove and dispose of
underground storage tanks and asbestos materials used in insulation, adhesive fillers and floor
tiles. There is no legal requirement to remove these items, and there currently is no plan to
remodel the related facilities or otherwise cause the impacted items to require disposal. Since
these asset retirement obligations are not estimable, there is no related liability recorded in the
Consolidated Balance Sheets.
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Note 8. Debt and Credit Facilities
Our debt and credit facilities are summarized below:
| January 2, | January 3, | |||||||
| (In millions) | 2010 | 2009 | ||||||
|
Manufacturing group:
|
||||||||
|
Short-term debt:
|
||||||||
|
Commercial paper (weighted-average rate of 6.4%)
|
$ | — | $ | 867 | ||||
|
Current portion of long-term debt
|
134 | 9 | ||||||
|
|
||||||||
|
Total short-term debt
|
134 | 876 | ||||||
|
|
||||||||
|
Long-term senior debt:
|
||||||||
|
Medium-term notes due 2010 to 2011 (average rate of 9.85%)
|
13 | 17 | ||||||
|
4.50% due 2010
|
128 | 250 | ||||||
|
Credit line borrowings due 2012 (weighted-average rate of 0.96%)
|
1,167 | — | ||||||
|
6.50% due 2012
|
154 | 300 | ||||||
|
3.875% due 2013
|
345 | 429 | ||||||
|
4.50% convertible senior notes due 2013
|
471 | — | ||||||
|
6.20% due 2015
|
350 | — | ||||||
|
5.60% due 2017
|
350 | 350 | ||||||
|
7.25% due 2019
|
250 | — | ||||||
|
6.625% due 2020
|
240 | 219 | ||||||
|
Other (average rate of 3.65% and 3.93%, respectively)
|
116 | 137 | ||||||
|
|
||||||||
|
|
3,584 | 1,702 | ||||||
|
Current portion of long-term debt
|
(134 | ) | (9 | ) | ||||
|
|
||||||||
|
Total long-term debt
|
3,450 | 1,693 | ||||||
|
|
||||||||
|
Total Manufacturing group debt
|
$ | 3,584 | $ | 2,569 | ||||
|
|
||||||||
|
Finance group:
|
||||||||
|
Commercial paper (weighted-average rate of 5.64%)
|
$ | — | $ | 743 | ||||
|
Other short-term debt
|
— | 25 | ||||||
|
Medium-term fixed-rate and variable-rate notes*:
|
||||||||
|
Due 2009 (weighted-average rate of 4.07%)
|
— | 1,534 | ||||||
|
Due 2010 (weighted-average rate of 2.09% and 3.85%, respectively)
|
1,635 | 2,315 | ||||||
|
Due 2011 (weighted-average rate of 2.94% and 4.42%, respectively)
|
419 | 727 | ||||||
|
Due 2012 (weighted-average rate of 4.43%)
|
52 | 52 | ||||||
|
Due 2013 (weighted-average rate of 4.49% and 4.82%, respectively)
|
578 | 578 | ||||||
|
Due 2014 (weighted-average rate of 5.07%)
|
111 | 111 | ||||||
|
Due 2015 and thereafter (weighted-average rate of 4.07% and 4.98%, respectively)
|
232 | 41 | ||||||
|
Credit line borrowings due 2012 (weighted-average rate of 0.91%)
|
1,740 | — | ||||||
|
Securitized on-balance sheet debt (weighted-average rate of 1.45% and 3.09%, respectively)
|
559 | 853 | ||||||
|
6% Fixed-to-Floating Rate Junior Subordinated Notes
|
300 | 300 | ||||||
|
Fair value adjustments and unamortized discount
|
41 | 109 | ||||||
|
|
||||||||
|
Total Finance group debt
|
$ | 5,667 | $ | 7,388 | ||||
|
|
||||||||
| * | Variable-rate notes totaled $1.4 billion and $2.5 billion at January 2, 2010 and January 3, 2009, respectively. |
The Manufacturing group had a weighted-average interest rate on commercial paper borrowings
of 4.6% and 4.3% in 2009 and 2008, respectively. The Finance group had a weighted-average interest
rate on commercial paper borrowings of 4.37% and 3.63% in 2009 and 2008, respectively.
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Table of Contents
Both borrowing groups extinguished through open market repurchases an aggregate of $745
million in outstanding debt securities prior to maturity during 2009, resulting in gains of $54
million. Also in 2009, both borrowing groups completed separate cash tender offers for up to a $650
million aggregate principal amount of five separate series of outstanding debt securities with
maturity dates ranging from November 2009 to June 2012. In completing these tender offers, we
extinguished an aggregate of $587 million of outstanding debt securities with maturity dates
ranging from 2009 to 2012 and recognized a loss of $1 million in 2009.
The following table shows
required payments during the next five years on debt outstanding at January 2, 2010:
| (In millions) | 2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||||||
|
Manufacturing group
|
$ | 134 | $ | 18 | $ | 1,326 | $ | 950 | $ | 5 | ||||||||||
|
Finance group
|
1,738 | 506 | 1,895 | 672 | 197 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 1,872 | $ | 524 | $ | 3,221 | $ | 1,622 | $ | 202 | ||||||||||
|
|
||||||||||||||||||||
On July 14, 2009, a finance subsidiary of Textron Inc. entered into a credit agreement with the
Export-Import Bank of the United States that established a $500 million credit facility to provide
funding to finance purchases of aircraft by non-U.S. buyers from Cessna and Bell. The facility is
structured to be available for financing sales to international customers who take delivery of new
aircraft by December 2010. At January 2, 2010, we had $179 million in outstanding notes under this
facility that are due in 2015 and thereafter.
Our aggregate $3 billion in committed bank lines of credit historically have been in support of
commercial paper and letters of credit issuances only. In February 2009, due to the unavailability
of term debt and difficulty in accessing sufficient commercial paper on a daily basis, we drew the
available balance from these credit facilities. Amounts borrowed under the credit facilities are
due in April 2012. There were no borrowings outstanding related to these lines of credit at the end
of 2008.
4.50% Convertible Senior Notes
On May 5, 2009, we issued $600 million of 4.50% Convertible Senior Notes (Convertible Notes)
with a maturity date of May 1, 2013 and interest payable semiannually on May 1 and November 1. The
Convertible Notes are convertible at the holder’s option, under certain circumstances, into shares
of our common stock at an initial conversion rate of 76.1905 shares of common stock per $1,000
principal amount of Convertible Notes, which is equivalent to an initial conversion price of
approximately $13.125 per share. Upon conversion, we have the right to settle the conversion of
each $1,000 principal amount of Convertible Notes with any of the three following alternatives: (1)
shares of our common stock, (2) cash or (3) a combination of cash and shares of our common stock.
The Convertible Notes are convertible only under the following certain circumstances: (1) during
any calendar quarter commencing after June 30, 2009 and only during such calendar quarter if the
last reported sale price of our common stock for at least 20 trading days during the 30 consecutive
trading days ending on the last trading day of the preceding calendar quarter is more than 130% of
the applicable conversion price per share of common stock on the last trading day of such preceding
calendar quarter, (2) during the five-business-day period after any 10 consecutive trading day
measurement period in which the trading price per $1,000 principal amount of Convertible Notes for
each day in the measurement period was less than 98% of the product of the last reported sale price
of our common stock and the applicable conversion rate, (3) if specified distributions to holders
of our common stock are made or specified corporate transactions occur or (4) at any time on or
after February 19, 2013.
Our common stock price exceeded the conversion threshold price of $17.06 per share for at least 20
trading days during the 30 consecutive trading days ended December 31, 2009. Accordingly, the notes
are convertible at the holder’s option through March 31, 2010. 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. We have continued to classify these Convertible Notes as long-term based on our
intent and ability to maintain the debt outstanding for a least one year through the use of various
funding sources available to us.
The net proceeds from the issuance of the Convertible Notes totaled approximately $582 million
after deducting discounts, commissions and expenses. The Convertible Notes are accounted for in
accordance with generally accepted accounting principles, which require us to separately account
for the liability (debt) and the equity (conversion option) components of the Convertible Notes in
a manner that reflects our non-convertible debt borrowing rate. Accordingly, we recorded a debt
discount and corresponding increase to additional paid-in capital of approximately $135 million as
of the date of issuance. We are amortizing the debt discount utilizing the effective interest
method over the life of the Convertible Notes, which increases the effective interest rate of the
Convertible Notes from its coupon rate of 4.50% to 11.72%. Transaction costs of $18 million were
proportionately allocated between the liability and equity components.
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Table of Contents
Concurrently with the pricing of the Convertible Notes, we entered into convertible note
hedge transactions with two counterparties, including an underwriter and an affiliate of an
underwriter of the Convertible Notes, for purposes of reducing the potential dilutive effect upon
the conversion. The initial strike price of the convertible note hedge transactions is $13.125 per
share of our common stock (the same as the initial conversion price of the Convertible Notes) and
is subject to certain customary adjustments. The convertible note hedge transactions cover
45,714,300 shares of common stock, subject to antidilution adjustments. We may settle the
convertible note hedge transactions in shares, cash or a combination of cash and shares, at our
option. The cost of the convertible note hedge transactions was $140 million, which was recorded as
a reduction to additional paid-in capital. Separately and concurrently with entering into these
hedge transactions, we entered into warrant transactions whereby we sold warrants to each of the
hedge counterparties to acquire, subject to anti-dilution adjustments, an aggregate of 45,714,300
shares of common stock at an initial exercise price of $15.75 per share. The aggregate proceeds
from the warrant transactions were $95 million, which was recorded as an increase to additional
paid-in capital.
We incurred cash and non-cash interest expense of $38 million in 2009 for these Convertible Notes.
As of January 2, 2010, the unamortized discount amount, including issuance costs totaled $129
million, resulting in a net carrying value of $471 million for the liability component.
Securitized On-Balance Sheet Debt
In 2008, the Finance group amended the terms of its aviation finance securitization,
resulting in the consolidation of the special purpose entity. This special purpose entity holds
finance receivables previously sold as well as third-party notes under a revolving credit facility.
These third-party notes are reflected within securitized on-balance sheet debt.
6% Fixed-to-Floating Rate Junior Subordinated Notes
In 2007, the Finance group issued $300 million of 6% Fixed-to-Floating Rate Junior
Subordinated Notes, which are unsecured and rank junior to all of its existing and future senior
debt. The notes mature on February 15, 2067; however, we have the right to redeem the notes at par
on or after February 15, 2017 and are obligated to redeem the notes beginning on February 15, 2042.
The Finance group has agreed in a replacement capital covenant that it will not redeem the notes on
or before February 15, 2047 unless it receives a capital contribution from the Manufacturing group
and/or net proceeds from the sale of certain replacement capital securities at specified amounts.
Interest on the notes is fixed at 6% until February 15, 2017 and floats at the three-month London
Interbank Offered Rate + 1.735% thereafter.
Financial Covenants
Under a Support Agreement, Textron Inc. is required to ensure that TFC maintains fixed charge
coverage of no less than 125% and consolidated shareholder’s equity of no less than $200 million.
In addition, TFC has lending agreements that contain provisions restricting additional debt, which
is not to exceed nine times consolidated net worth and qualifying subordinated obligations. Due to
certain charges as discussed in Note 12, on December 29, 2008, Textron Inc. made a cash payment of
$625 million to TFC, which was reflected as a capital contribution, to maintain compliance with the
fixed charge coverage ratio required by the Support Agreement and to maintain the leverage ratio
required by its credit facility. Additional cash payments of $270 million in 2009 and $75 million
on January 12, 2010 were paid to TFC to maintain compliance with these covenants.
Note 9. Derivatives
Our exposure to loss from nonperformance by the counterparties to our derivative agreements
at the end of 2009 is minimal. We do not anticipate nonperformance by counterparties in the
periodic settlements of amounts due. We historically have minimized this potential for risk by
entering into contracts exclusively with major, financially sound counterparties having no less
than a long-term bond rating of A. The credit risk generally is limited to the amount by which the
counterparties’ contractual obligations exceed our obligations to the counterparty. We continuously
monitor our exposures to ensure that we limit our risks.
Fair Value Hedges
Our Finance group enters into interest rate exchange agreements to mitigate exposure to
changes in the fair value of its fixed-rate receivables and debt due to fluctuations in interest
rates. By using these agreements, we are able to convert our fixed-rate cash flows to floating-rate
cash flows.
Cash Flow Hedges
We manufacture and sell our products in a number of countries throughout the world, and,
therefore, we are exposed to movements in foreign currency exchange rates. The primary purpose of
our foreign currency hedging activities is to manage the volatility associated with foreign
currency purchases of materials, foreign currency sales of products, and other assets and
liabilities created in the normal course of business. We primarily utilize forward exchange
contracts and purchased options with maturities of no more than 18 months that qualify as cash flow
hedges.
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Table of Contents
These are intended to offset the effect of exchange rate fluctuations on forecasted sales,
inventory purchases and overhead expenses. At the end of 2009, we had a net deferred gain of $27
million in OCI related to these cash flow hedges. As the underlying transactions occur, we expect
to reclassify a $4 million gain into earnings in the next 12 months and $23 million of gains in the
following 12-month period.
Net Investment Hedges
We hedge our net investment position in major currencies and generate foreign currency
interest payments that offset other transactional exposures in these currencies. To accomplish
this, we borrow directly in foreign currency and designate a portion of foreign currency debt as a
hedge of net investments. We also may utilize currency forwards as hedges of our related foreign
net investments. Currency effects on the effective portion of these hedges, which are reflected in
the cumulative translation adjustment account within OCI, produced a $15 million after-tax loss in
2009, resulting in an accumulated net loss balance of $12 million at the end of 2009. The
ineffective portion of these hedges was insignificant.
Stock-Based Compensation Hedges
We historically have managed the expense related to certain stock-based compensation awards
using cash settlement forward contracts on our common stock. The use of these forward contracts
modifies compensation expense exposure to changes in the stock price with the intent to reduce
potential variability. Cash received or paid on the contract settlement is included in cash flows
from operating activities, consistent with the classification of the cash flows on the underlying
hedged compensation expense. In January 2010, we discontinued hedging our stock-based compensation
awards and did not enter into any new forward contracts.
Fair Values of Derivative Instruments
The fair values of derivative instruments for the Manufacturing group are included in either
other current assets or accrued liabilities in our balance sheet. For the Finance group, derivative
instruments are included in either other assets or other liabilities. The notional and fair value
amounts of our derivative instruments are provided below:
| Notional Amount | Asset (Liability) | |||||||||||||||
| (In millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Derivatives designated as hedging instruments
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Finance group:
|
||||||||||||||||
|
Interest rate exchange contracts
|
$ | 1,333 | $ | 2,055 | $ | 43 | $ | 112 | ||||||||
|
Cross-currency interest rate exchange contracts
|
161 | 140 | 18 | 21 | ||||||||||||
|
Manufacturing group:
|
||||||||||||||||
|
Foreign currency exchange contracts
|
696 | 30 | 54 | 2 | ||||||||||||
|
Forward contracts for Textron Inc. stock
|
22 | — | 7 | — | ||||||||||||
|
|
||||||||||||||||
|
Total included in other current or other assets
|
$ | 2,212 | $ | 2,225 | $ | 122 | $ | 135 | ||||||||
|
|
||||||||||||||||
|
Liabilities
|
||||||||||||||||
|
Finance group:
|
||||||||||||||||
|
Interest rate exchange contracts
|
$ | 32 | $ | 32 | $ | (3 | ) | $ | (7 | ) | ||||||
|
Cross-currency interest rate exchange contracts
|
4 | 5 | (1 | ) | (1 | ) | ||||||||||
|
Manufacturing group:
|
||||||||||||||||
|
Foreign currency exchange contracts
|
80 | 839 | (5 | ) | (41 | ) | ||||||||||
|
Forward contracts for Textron Inc. stock
|
— | 130 | — | (98 | ) | |||||||||||
|
Commodity contracts
|
— | 54 | — | (4 | ) | |||||||||||
|
|
||||||||||||||||
|
Total included in accrued or other liabilities
|
$ | 116 | $ | 1,060 | $ | (9 | ) | $ | (151 | ) | ||||||
|
|
||||||||||||||||
|
Derivatives not designated as hedging instruments
|
||||||||||||||||
|
Finance group:
|
||||||||||||||||
|
Foreign currency exchange contracts
|
$ | 531 | $ | 536 | $ | (13 | ) | $ | — | |||||||
|
Interest rate exchange contracts
|
— | 336 | — | (13 | ) | |||||||||||
|
Manufacturing group:
|
||||||||||||||||
|
Foreign currency exchange contracts
|
224 | 170 | 3 | (43 | ) | |||||||||||
|
|
||||||||||||||||
|
Total derivatives not designated as hedging instruments
|
$ | 755 | $ | 1,042 | $ | (10 | ) | $ | (56 | ) | ||||||
|
|
||||||||||||||||
64
Table of Contents
For our fair value hedges, the effect of the derivative instruments is recorded in the
Consolidated Statements of Operations, and the gain (loss) for each respective period is provided
in the following table:
| (In millions) | Gain (Loss) Location | 2009 | 2008 | |||||||
|
Finance group
|
||||||||||
|
Interest rate exchange contracts
|
Interest expense | $ | (13 | ) | $ | 120 | ||||
|
Interest rate exchange contracts
|
Finance charges | 10 | (7 | ) | ||||||
For our cash flow hedges, the amount of gain (loss) recognized in OCI and the amount
reclassified from accumulated other comprehensive loss into income during each period is provided
in the following table:
| Effective Portion of Derivative | ||||||||||||||||||||
| Amount of Gain(Loss) | Reclassified from Accumulated | |||||||||||||||||||
| Recognized in OCI | Other Comprehensive Loss | |||||||||||||||||||
| (Effective Portion) | into Income | |||||||||||||||||||
| (In millions) | 2009 | 2008 | Gain(Loss) Location | 2009 | 2008 | |||||||||||||||
|
Manufacturing group
|
||||||||||||||||||||
|
Foreign currency exchange contracts
|
$ | 65 | $ | (67 | ) | Cost of sales | $ | 3 | $ | 8 | ||||||||||
|
Forward contracts for Textron Inc. stock
|
6 | (21 | ) | Selling and administrative | 6 | 9 | ||||||||||||||
|
Finance group
|
||||||||||||||||||||
|
Interest rate exchange contracts
|
(4 | ) | (5 | ) | Interest expense | (4 | ) | (2 | ) | |||||||||||
The amount of ineffectiveness on our fair value hedges is insignificant. During the third
quarter of 2009, certain foreign currency exchange contracts no longer were deemed to be effective
cash flow hedges resulting in a gain of $11 million. These contracts were unwound through the
purchase of forward contracts directly offsetting the terms of the undesignated hedges.
We also enter into certain other foreign currency derivative instruments that do not meet hedge
accounting criteria and primarily are intended to protect against exposure related to intercompany
financing transactions. For these instruments, the Manufacturing group reported in selling and
administrative expenses a gain of $14 million in 2009 and a loss of $49 million in 2008. Our
Finance group reported a loss of $107 million and $6 million in selling and administrative expenses
in 2009 and 2008, respectively, which were largely offset by gains
resulting from the translation of foreign currency denominated assets
and liabilities.
Note 10. Fair Values of Assets and Liabilities
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.
The assumptions that market participants would use in pricing the asset or liability (the “inputs”)
are prioritized 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.
65
Table of Contents
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The table below presents the assets and liabilities measured at fair value on a recurring
basis categorized by the level of inputs used in the valuation of each asset and liability:
| January 2, 2010 | January 3, 2009 | |||||||||||||||||||||||
| (In millions) | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Manufacturing group
|
||||||||||||||||||||||||
|
Foreign currency exchange contracts
|
$ | — | $ | 57 | $ | — | $ | — | $ | 2 | $ | — | ||||||||||||
|
Forward contracts for Textron Inc. stock
|
7 | — | — | — | — | — | ||||||||||||||||||
|
Finance group
|
||||||||||||||||||||||||
|
Derivative financial instruments
|
— | 61 | — | — | 133 | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total assets
|
$ | 7 | $ | 118 | $ | — | $ | — | $ | 135 | $ | — | ||||||||||||
|
|
||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Manufacturing group
|
||||||||||||||||||||||||
|
Forward contracts for Textron Inc. stock
|
$ | — | $ | — | $ | — | $ | 98 | $ | — | $ | — | ||||||||||||
|
Foreign currency exchange contracts
|
— | 5 | — | — | 84 | — | ||||||||||||||||||
|
Finance group
|
||||||||||||||||||||||||
|
Derivative financial instruments
|
— | 17 | — | — | 21 | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities
|
$ | — | $ | 22 | $ | — | $ | 98 | $ | 105 | $ | — | ||||||||||||
|
|
||||||||||||||||||||||||
Valuation Techniques
Foreign currency exchange contracts are measured at fair value using the market method
valuation technique. The inputs to this technique utilize current foreign currency exchange forward
market rates published by third-party leading financial news and data providers. This is observable
data that represent the rates that the financial institution uses for contracts entered into at
that date; however, they are not based on actual transactions so they are classified as Level 2. We
record changes in the fair value of these contracts, to the extent they are effective as cash flow
hedges, in OCI. If a contract does not qualify for hedge accounting or is designated as a fair
value hedge, changes in the fair value of the contract are recorded in earnings.
Cash settlement forward contracts are measured at fair value using the market method valuation
technique. Since the input to this technique is based on the quoted price of our common stock at
the measurement date, it is classified as Level 1. Gains or losses on these instruments are
recorded as an adjustment to compensation expense.
The Finance group’s derivative contracts are not exchange traded. Derivative financial instruments
are measured at fair value utilizing widely accepted, third-party developed valuation models. The
actual terms of each individual contract are entered into a valuation model, along with interest
rate and foreign exchange rate data, which is based on readily observable market data published by
third-party leading financial news and data providers. Credit risk is factored into the fair value
of derivative assets and liabilities based on the differential between both our credit default swap
spread for liabilities and the counterparty’s credit default swap spread for assets as compared
with a standard AA-rated counterparty; however, this had no significant impact on the valuation at
the end of 2009 and 2008 as most of our counterparties are AA-rated, and the vast majority of our
derivative instruments are in an asset position.
66
Table of Contents
Assets Recorded at Fair Value on a Nonrecurring Basis
The table below presents the assets that are measured at fair value on a nonrecurring basis
that had measurement adjustments in 2009 and 2008. These assets were measured using significant
unobservable inputs (Level 3) and include the following at the end of each period in which they
were measured at fair value:
| January 2, | January 3, | |||||||
| (In millions) | 2010 | 2009 | ||||||
|
Manufacturing group
|
||||||||
|
Goodwill
|
$ | 61 | ||||||
|
Finance group
|
||||||||
|
Finance receivables held for sale
|
819 | $ | 1,658 | |||||
|
Impaired finance receivables
|
686 | 139 | ||||||
|
Other assets
|
126 | |||||||
|
|
||||||||
|
Total assets recorded at fair value during the year
|
$ | 1,692 | $ | 1,797 | ||||
|
|
||||||||
Goodwill —
In the fourth quarter of 2009, we performed our annual goodwill impairment test
using the annual operating plan for 2010 along with its long-range forecast that was submitted to
management in connection with our annual strategic planning process. This information indicated a
more delayed recovery from previous estimates for the Golf & Turfcare reporting unit, as the
economic recovery is proceeding slower than originally anticipated. Golf membership and revenue per
round of golf played have continued to decline in North America, and new course construction has
been significantly delayed in the rest of the world, resulting in a negative impact to the Golf &
Turfcare reporting unit’s outlook. Using discounted cash flows, we determined that the fair value
of the Golf & Turfcare reporting unit had dropped to a level below its carrying value. Accordingly,
we performed the required Step 2 calculation to determine the fair value of the reporting unit’s
assets and liabilities in order to perform a purchase price allocation. In performing this
analysis, we used assumptions that we believe a market participant would utilize in valuing the
assets and liabilities of the business. Valuation methods used included the income and market
approach depending on the nature of the asset/liability. Our calculation supported a goodwill
amount of $61 million and required the impairment charge to reduce the carrying amount by $80
million.
Finance Receivables Held for Sale —
Finance receivables held for sale are recorded at the lower of
cost or fair value. Finance receivables held for sale are recorded at fair value on a nonrecurring
basis during periods in which the fair value is lower than the cost value. At January 2, 2010,
finance receivables held for sale were recorded at fair value with a $104 million valuation
allowance. In the fourth quarter of 2008, upon initial reclassification of these receivables to
held for sale, we estimated the fair value to be $293 million less than the carrying value, net of
the $44 million allowance for loan losses attributable to these portfolios. This net adjustment was
recorded within special charges in 2008. See Note 5, regarding the change in classification of
certain finance receivables in 2009. The majority of the finance receivables held for sale were
identified at the individual loan level. Golf course, timeshare and
hotel mortgages classified as held for sale
were identified as a portion of a larger portfolio with common characteristics based on the
intention to balance the sale of certain loans with the collection of others to maximize economic
value. The decrease in the fair value of the finance receivables held for sale was $14 million in
2009.
There are no active, quoted market prices for our finance receivables. The estimate of fair value
was determined based on the use of discounted cash flow models to estimate the exit price we expect
to receive in the principal market for each type of loan in an orderly transaction, which includes
both the sale of pools of similar assets and the sale of individual loans. The models we used
incorporate estimates of the rate of return, financing cost, capital structure and/or discount rate
expectations of current market participants combined with estimated loan cash flows based on credit
losses, payment rates and credit line utilization rates. Where available, the assumptions related
to the expectations of current market participants are compared with observable market inputs,
including bids from prospective purchasers of similar loans and certain bond market indices for
loans of similar perceived credit quality. Although we utilize and prioritize these market
observable inputs in our discounted cash flow models, these inputs rarely are derived from markets
with directly comparable loan structures, industries and collateral types. Therefore, all
valuations of finance receivables held for sale involve significant management judgment, which can
result in differences between our fair value estimates and those of other market participants.
67
Table of Contents
Impaired Finance Receivables —
Finance receivable impairment is measured by comparing the
expected future cash flows discounted at the finance receivable’s effective interest rate, or the
fair value of the collateral if the receivable is collateral dependent, with its carrying amount.
If the carrying amount is higher, we establish a reserve based on this difference. This evaluation
is inherently subjective as it requires estimates, including the amount and timing of future cash
flows expected to be received on impaired finance receivables and the underlying collateral, that
may differ from actual results. Impaired nonaccrual finance receivables are included in the table
above since the measurement of required reserves on our impaired finance receivables is
significantly dependent on the fair value of the underlying collateral. Fair values of collateral
are determined based on the use of appraisals, industry pricing guides, input from market
participants, our recent experience selling similar assets or internally developed discounted cash
flow models. In 2009 and 2008, fair value measurements recorded on impaired finance receivables
resulted in a $165 million and $63 million, respectively, charge to provision for loan losses and
primarily were related to initial fair value adjustments.
Other assets —
Other assets include
repossessed assets and properties and operating assets received in satisfaction of troubled finance
receivables. The fair value of these assets is determined based on the use of appraisals, industry
pricing guides, input from market participants, our recent experience selling similar assets or
internally developed discounted cash flow models. For repossessed assets and properties, which are
considered assets held for sale, if the carrying amount of the asset is higher than the estimated
fair value, we record a corresponding charge to income for the difference. For operating assets
received in satisfaction of troubled finance receivables, if the sum of the undiscounted cash flows
is estimated to be less than the carrying value, we record a charge to income for any shortfall
between estimated fair value and the carrying amount. In 2009, fair value measurements recorded on
these assets resulted in a $41 million charge to Finance revenues in the Consolidated Statements of
Operations.
In connection with the cancellation of the Citation Columbus development program, we recorded a $43
million impairment charge in the second quarter of 2009 to write off capitalized costs related to
tooling and a partially constructed manufacturing facility, which we no longer consider to be
recoverable. The fair value of the remaining assets was determined using Level 3 inputs and was
less than $1 million. See Note 12 for more detail regarding these charges.
Assets and Liabilities Not Recorded at Fair Value
The carrying amounts and estimated fair values of our financial instruments that are not
reflected in the financial statements at fair value are as follows:
| January 2, 2010 | January 3, 2009 | |||||||||||||||
| Carrying | Estimated | Carrying | Estimated | |||||||||||||
| (In millions) | Value | Fair Value | Value | Fair Value | ||||||||||||
|
Manufacturing group
|
||||||||||||||||
|
Debt, excluding leases
|
$ | (3,474 | ) | $ | (3,762 | ) | $ | (2,438 | ) | $ | (2,074 | ) | ||||
|
Finance group
|
||||||||||||||||
|
Finance receivables held for investment, excluding leases
|
5,159 | 4,703 | 5,665 | 4,828 | ||||||||||||
|
Retained interest in securitizations, excluding interest-only strips
|
6 | 6 | 188 | 178 | ||||||||||||
|
Investment in other marketable securities
|
68 | 55 | 95 | 78 | ||||||||||||
|
Debt
|
(5,667 | ) | (5,439 | ) | (7,388 | ) | (6,507 | ) | ||||||||
Fair value for the Manufacturing group debt is determined using market observable data for
similar transactions. We utilize the same valuation methodologies to determine the fair value
estimates for finance receivables held for investment as described above for finance receivables
held for sale.
Investments in other marketable securities represent notes receivable issued by securitization
trusts that purchase timeshare notes receivable from timeshare developers. These notes are
classified as held-to-maturity and are held at cost. The estimate of fair value was based on
observable market inputs for similar securitization interests in markets that currently are
inactive.
In 2009 and 2008, approximately 54% and 82%, respectively, of the fair value of term debt for the
Finance group was determined based on observable market transactions. The remaining Finance group
debt was determined based on discounted cash flow analyses using observable market inputs from debt
with similar duration, subordination and credit default expectations.
68
Table of Contents
Note 11. Shareholders’ Equity
Capital Stock
We have authorization for 15 million shares of preferred stock with no par value and 500
million shares of $0.125 par value common stock. In December 2009, we elected to redeem all
outstanding shares of our $2.08 Cumulative Convertible Preferred Stock, Series A and our $1.40
Convertible Preferred Dividend Stock, Series B. As part of the redemption, approximately 45,600 and
21,300 shares of Series A and Series B preferred stock, respectively, were converted at the stated
conversion rate (8.8 for Series A and 7.2 for Series B) into approximately 554,000 shares of common
stock, and the remaining unconverted shares were paid in cash at the stated redemption rate. At the
end of 2008 and 2007, we had approximately 67,000 and 72,000 shares, respectively, of Series A
issued and outstanding and approximately 34,000 and 36,000 shares, respectively, of Series B issued
and outstanding.
Outstanding common stock activity for the three years ended January 2, 2010 is presented below:
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
Beginning balance
|
242,041 | 250,061 | 251,192 | |||||||||
|
Purchases
|
— | (11,649 | ) | (5,902 | ) | |||||||
|
Exercise of stock options
|
10 | 1,147 | 3,404 | |||||||||
|
Conversion of preferred stock to common stock
|
556 | 60 | 89 | |||||||||
|
Issued to Textron Savings Plan
|
5,460 | 2,060 | 994 | |||||||||
|
Common stock offering
|
23,805 | — | — | |||||||||
|
Other issuances
|
400 | 362 | 284 | |||||||||
|
|
||||||||||||
|
Ending balance
|
272,272 | 242,041 | 250,061 | |||||||||
|
|
||||||||||||
Reserved Shares of Common Stock
At the end of 2009, common stock reserved for the conversion of convertible debt, the
exercise of outstanding stock options and warrants, and the issuance of shares upon vesting of
outstanding restricted stock units totaled 143 million shares. See the “4.50% Convertible Senior
Notes” section in Note 8 for information on our convertible debt.
Income per Common Share
In the first quarter of 2009, we adopted the new accounting standard for determining whether
instruments granted in share-based payment transactions are participating securities. This new
standard requires us to include any unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities in
our basic earnings per share calculation. We have granted certain restricted stock units that are
deemed participating securities under this new standard, and, as a result, prior period basic and
diluted weighted-average shares outstanding have been recast to conform to the new calculation. The
adoption of this standard reduced our basic and diluted earnings per share by $0.01 in 2008, and
there was no impact in 2007.
We calculate basic and diluted earnings per share 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.
Diluted earnings per share considers the dilutive effect of all potential future common stock,
including convertible preferred shares, Convertible Notes, stock options and warrants and
restricted stock units in the weighted-average number of common shares outstanding. The
weighted-average shares outstanding for basic and diluted earnings per share are as follows:
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
Basic weighted-average shares outstanding
|
262,923 | 246,208 | 249,792 | |||||||||
|
Dilutive effect of convertible preferred shares, stock options and restricted stock units
|
— | 4,130 | 5,034 | |||||||||
|
|
||||||||||||
|
Diluted weighted-average shares outstanding
|
262,923 | 250,338 | 254,826 | |||||||||
|
|
||||||||||||
In 2009, the potential dilutive effect of 8 million weighted-average shares of restricted stock
units, stock options and warrants, convertible preferred stock and Convertible Notes was excluded
from the computation of diluted weighted-average shares outstanding as the shares would have an
antidilutive effect on the loss from continuing operations. In addition, stock options to purchase
7 million shares of common stock outstanding are excluded from our calculation of diluted
weighted-average shares outstanding in 2009 as the exercise prices were greater than the average
market price of our common stock for those periods. These securities could potentially dilute
earnings per share in the future.
69
Table of Contents
Other Comprehensive Income (Loss)
The before and after-tax components of OCI are presented below:
| Tax | ||||||||||||
| Before-Tax | (Expense) | Net-of-Tax | ||||||||||
| (In millions) | Amount | Benefit | Amount | |||||||||
|
2007
|
||||||||||||
|
Foreign currency translation adjustment
|
$ | 44 | $ | 13 | $ | 57 | ||||||
|
Deferred gains on hedge contracts
|
75 | (22 | ) | 53 | ||||||||
|
Pension adjustments
|
73 | 23 | 96 | |||||||||
|
Reclassification adjustments
|
55 | (17 | ) | 38 | ||||||||
|
|
||||||||||||
|
Other comprehensive income
|
$ | 247 | $ | (3 | ) | $ | 244 | |||||
|
|
||||||||||||
|
2008
|
||||||||||||
|
Foreign currency translation adjustment
|
$ | (210 | ) | $ | 15 | $ | (195 | ) | ||||
|
Deferred losses on hedge contracts
|
(91 | ) | 18 | (73 | ) | |||||||
|
Pension adjustments
|
(1,298 | ) | 495 | (803 | ) | |||||||
|
Reclassification due to sale of Fluid & Power
|
31 | 4 | 35 | |||||||||
|
Reclassification adjustments
|
25 | (11 | ) | 14 | ||||||||
|
|
||||||||||||
|
Other comprehensive loss
|
$ | (1,543 | ) | $ | 521 | $ | (1,022 | ) | ||||
|
|
||||||||||||
|
2009
|
||||||||||||
|
Foreign currency translation adjustment
|
$ | 16 | $ | 7 | $ | 23 | ||||||
|
Deferred gains on hedge contracts
|
90 | (23 | ) | 67 | ||||||||
|
Pension adjustments
|
6 | (31 | ) | (25 | ) | |||||||
|
Pension curtailment
|
25 | (10 | ) | 15 | ||||||||
|
Reclassification adjustments
|
30 | (9 | ) | 21 | ||||||||
|
|
||||||||||||
|
Other comprehensive income
|
$ | 167 | $ | (66 | ) | $ | 101 | |||||
|
|
||||||||||||
Accumulated Other Comprehensive Loss
The after-tax components of accumulated other comprehensive loss are presented below:
| Pension and | Deferred | |||||||||||||||
| Foreign | Post- | Gains | ||||||||||||||
| Currency | retirement | (Losses) | ||||||||||||||
| Translation | Benefits | on Hedge | ||||||||||||||
| (In millions) | Adjustment | Adjustments | Contracts | Total | ||||||||||||
|
Balance at December 30, 2006
|
$ | 125 | $ | (779 | ) | $ | 10 | $ | (644 | ) | ||||||
|
Other comprehensive income
|
57 | 96 | 53 | 206 | ||||||||||||
|
Reclassification adjustments
|
— | 58 | (20 | ) | 38 | |||||||||||
|
|
||||||||||||||||
|
Balance at December 29, 2007
|
182 | (625 | ) | 43 | (400 | ) | ||||||||||
|
Other comprehensive loss
|
(195 | ) | (803 | ) | (73 | ) | (1,071 | ) | ||||||||
|
Reclassification due to sale of Fluid & Power
|
2 | 33 | — | 35 | ||||||||||||
|
Reclassification adjustments
|
— | 31 | (17 | ) | 14 | |||||||||||
|
|
||||||||||||||||
|
Balance at January 3, 2009
|
(11 | ) | (1,364 | ) | (47 | ) | (1,422 | ) | ||||||||
|
Other comprehensive income (loss)
|
23 | (25 | ) | 67 | 65 | |||||||||||
|
Pension curtailment
|
— | 15 | — | 15 | ||||||||||||
|
Reclassification adjustments
|
(2 | ) | 20 | 3 | 21 | |||||||||||
|
|
||||||||||||||||
|
Balance at January 2, 2010
|
$ | 10 | $ | (1,354 | ) | $ | 23 | $ | (1,321 | ) | ||||||
|
|
||||||||||||||||
70
Table of Contents
Note 12. Special Charges
Special charges include restructuring charges of $237 million and $64 million in 2009 and
2008, respectively. In 2009, special charges also includes a goodwill impairment charge of $80
million in the Industrial segment. In the fourth quarter of 2008, in connection with our decision
to sell the non-captive portion of our Finance business, we incurred an initial mark-to-market
adjustment of $293 million that was made when we classified certain finance receivables from held
for investment to held for sale and a goodwill impairment charge in the Finance segment of $169
million, which are both included in special charges. There were no special charges in 2007.
Special charges by segment are as follows:
| Restructuring Program | ||||||||||||||||||||||||||||
| Curtailment | Contract | Total | ||||||||||||||||||||||||||
| Severance | Charges, | Asset | Terminations | Total | Other | Special | ||||||||||||||||||||||
| (In millions) | Costs | Net | Impairments | and Other | Restructuring | Charges | Charges | |||||||||||||||||||||
|
2009
|
||||||||||||||||||||||||||||
|
Cessna
|
$ | 80 | $ | 26 | $ | 54 | $ | 7 | $ | 167 | $ | — | $ | 167 | ||||||||||||||
|
Finance
|
11 | 1 | — | 1 | 13 | — | 13 | |||||||||||||||||||||
|
Corporate
|
34 | — | — | 1 | 35 | — | 35 | |||||||||||||||||||||
|
Industrial
|
6 | (4 | ) | — | 3 | 5 | 80 | 85 | ||||||||||||||||||||
|
Bell
|
9 | — | — | — | 9 | — | 9 | |||||||||||||||||||||
|
Textron Systems
|
5 | 2 | — | 1 | 8 | — | 8 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
$ | 145 | $ | 25 | $ | 54 | $ | 13 | $ | 237 | $ | 80 | $ | 317 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
2008
|
||||||||||||||||||||||||||||
|
Cessna
|
$ | 5 | $ | — | $ | — | $ | — | $ | 5 | $ | — | $ | 5 | ||||||||||||||
|
Finance
|
15 | — | 11 | 1 | 27 | 462 | 489 | |||||||||||||||||||||
|
Corporate
|
6 | — | — | — | 6 | — | 6 | |||||||||||||||||||||
|
Industrial
|
16 | — | 9 | — | 25 | — | 25 | |||||||||||||||||||||
|
Textron Systems
|
1 | — | — | — | 1 | — | 1 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
$ | 43 | $ | — | $ | 20 | $ | 1 | $ | 64 | $ | 462 | $ | 526 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
Restructuring Program
In the fourth quarter of 2008, we initiated a restructuring program to reduce overhead costs and
improve productivity across the company, which includes corporate and segment direct and indirect
workforce reductions and streamlining of administrative overhead, and announced the exit of
portions of our commercial finance business. This program was expanded in 2009 to include
additional workforce reductions, primarily at Cessna, Corporate and Bell, the cancellation of the
Citation Columbus development project, the streamlining and reorganization of senior management and
the consolidation of certain operations at Cessna. By the end of 2010, we expect to have eliminated
approximately 10, 800 positions worldwide representing approximately 25% of our global workforce
since the inception of the program. As of January 2, 2010, we have terminated approximately 10,400
employees and have exited 23 leased and owned facilities and plants under this program.
We record restructuring costs in special charges as these costs are generally of a nonrecurring
nature and are not included in segment profit, which is our measure used for evaluating performance
and for decision-making purposes. Severance costs related to an approved restructuring program are
classified as special charges unless the costs are for volume-related reductions of direct labor
that are deemed to be of a temporary or cyclical nature. Most of our severance benefits are
provided for under
existing severance programs, and the associated costs are accrued when they are probable and
estimable. Special one-time termination benefits are accounted for once an approved plan is
communicated to employees that establishes the terms of the benefit arrangement, the number of
employees to be terminated, along with their job classification and location, and the expected
completion date.
We recorded net curtailment charges of $25 million for our pension and other postretirement benefit
plans in the second quarter of 2009, as our analysis of the impact of workforce reductions on these
plans indicated that curtailments had occurred and the amounts could be reasonably estimated. The
curtailment charge for the pension plan is primarily due to the recognition of prior service costs
that were previously being amortized over a period of years.
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Table of Contents
Asset impairment charges include a $43 million charge recorded in the second quarter of 2009
to write off assets related to the Citation Columbus development project. Due to the prevailing
adverse market conditions and after analysis of the business jet market related to the product
offering, Cessna formally canceled the Citation Columbus development project in the second quarter
of 2009. Cessna began this project in early 2008 for the development of an all-new, wide-bodied,
eight-passenger business jet designed for international travel that would extend Cessna’s product
offering as its largest business jet to date. This development project had capitalized costs
related to tooling and a partially constructed manufacturing facility, of which $43 million was
considered not to be recoverable.
Since the inception of the restructuring program, we have incurred the following costs through
January 2, 2010:
| Curtailment | Contract | |||||||||||||||||||
| Severance | Charges, | Asset | Terminations | Total | ||||||||||||||||
| (In millions) | Costs | Net | Impairments | and Other | Restructuring | |||||||||||||||
|
Cessna
|
$ | 85 | $ | 26 | $ | 54 | $ | 7 | $ | 172 | ||||||||||
|
Finance
|
26 | 1 | 11 | 2 | 40 | |||||||||||||||
|
Corporate
|
40 | — | — | 1 | 41 | |||||||||||||||
|
Industrial
|
22 | (4 | ) | 9 | 3 | 30 | ||||||||||||||
|
Bell
|
9 | — | — | — | 9 | |||||||||||||||
|
Textron Systems
|
6 | 2 | — | 1 | 9 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 188 | $ | 25 | $ | 74 | $ | 14 | $ | 301 | ||||||||||
|
|
||||||||||||||||||||
An analysis of our restructuring reserve activity is summarized below:
| Curtailment | Contract | |||||||||||||||||||
| Severance | Charges, | Asset | Terminations | |||||||||||||||||
| (In millions) | Costs | Net | Impairments | and Other | Total | |||||||||||||||
|
Provision in 2008
|
$ | 43 | $ | — | $ | 20 | $ | 1 | $ | 64 | ||||||||||
|
Non-cash settlement
|
— | — | (20 | ) | — | (20 | ) | |||||||||||||
|
Cash paid
|
(7 | ) | — | — | — | (7 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Balance at January 3, 2009
|
$ | 36 | $ | — | $ | — | $ | 1 | $ | 37 | ||||||||||
|
Provision in 2009
|
152 | 25 | 54 | 13 | 244 | |||||||||||||||
|
Reversals
|
(7 | ) | — | — | — | (7 | ) | |||||||||||||
|
Non-cash settlement and loss recognition
|
— | (25 | ) | (54 | ) | — | (79 | ) | ||||||||||||
|
Cash paid
|
(133 | ) | — | — | (11 | ) | (144 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Balance at January 2, 2010
|
$ | 48 | $ | — | $ | — | $ | 3 | $ | 51 | ||||||||||
|
|
||||||||||||||||||||
Severance costs generally are paid on a lump sum basis or on a monthly basis over the severance
period granted to each employee and include outplacement costs, which are paid in accordance with
normal payment terms. Contract termination costs generally are paid upon exiting the facility or
over the remaining lease term.
The specific restructuring measures and associated estimated costs are based on our best judgment
under prevailing circumstances. We believe that the restructuring reserve balance of $51 million is
adequate to cover the costs presently accruable relating to activities formally identified and
committed to under approved plans as of January 2, 2010 and anticipate that all actions related to
these liabilities will be completed within a 12-month period. We estimate that we will incur
approximately $30 million in additional pre-tax restructuring costs in 2010, most of which will
result in future cash outlays. The additional costs are expected to primarily include relocation
costs at Cessna as it consolidates certain operations, severance in the Cessna segment and $3
million in severance for the Finance segment. We expect that the program
will be substantially completed in 2010; however, we expect to incur additional costs to exit the
non-captive portion of our commercial finance business over the next two to three years, which are
estimated to be within a range of $7 million to $17 million, primarily attributable to severance
and retention benefits.
Other Charges
In the fourth quarter of 2009, we recorded a goodwill impairment charge of $80 million for the Golf
& Turfcare reporting unit, which is part of our Industrial segment. See Note 10 for more
information on this charge.
In the fourth quarter of 2008, we made a decision to exit the non-captive portion of the commercial
finance business of our Finance segment, which is being effected through a combination of orderly
liquidation and selected sales and is expected, depending on market conditions, to be substantially
complete over the next two to three years. We recorded a pre-tax mark-to-market adjustment of $293
million against owned
72
Table of Contents
receivables that were classified as held for sale due to this exit plan based on our estimate
of the fair value of these receivables at that time. In addition, based on market conditions and
the plan to downsize the Finance segment, we recorded a $169 million impairment charge to eliminate
all goodwill in the Finance segment.
Note 13. Share-Based Compensation
Our 2007 Long-Term Incentive Plan (the “Plan”) succeeds the 1999 Long-Term Incentive Plan and
authorizes awards to our key employees in the form of options to purchase our shares, restricted
stock, restricted stock units, stock appreciation rights, performance stock awards and other
awards. Options to purchase our shares have a maximum term of 10 years and generally vest ratably
over a three-year period. Restricted stock unit awards generally vest one-third each in the third,
fourth and fifth year following the year of grant. These awards generally were paid in shares of
common stock until the first quarter of 2009, when we began issuing restricted stock units settled
in cash only; these awards vest in equal installments over five years. Since 2008, all restricted
stock units have been issued with the right to receive dividend equivalents. A maximum of 12
million shares is authorized for issuance for all purposes under the Plan plus any shares that
become available upon cancellation, forfeiture or expiration of awards granted under the 1999
Long-Term Incentive Plan. No more than 12 million shares may be awarded pursuant to incentive stock
options, and no more than 3 million shares may be awarded pursuant to restricted stock or other
“full value” awards intended to be paid in shares. The Plan also authorizes performance share units
paid in cash based upon the value of our common stock. Payouts under performance share units vary
based on certain performance criteria generally measured over a three-year period. The performance
share units vest at the end of three years.
Through our Deferred Income Plan for Textron Executives (the “DIP”), we provide participants the
opportunity to voluntarily defer up to 25% of their base salary and up to 100% of annual, long-term
incentive and other compensation. Effective January 1, 2008, the maximum amount deferred for
annual, long-term incentive and other compensation decreased to 80%. Elective deferrals may be put
into either a stock unit account or an interest bearing account. We generally contribute a 10%
premium on amounts deferred into the stock unit account. Executives who are eligible to participate
in the DIP who have not achieved and/or maintained the required minimum stock ownership level are
required to defer annual incentive compensation in excess of 100% of the executive’s annual target
into a deferred stock unit account and are not entitled to the 10% premium contribution on the
amount deferred. Participants cannot move amounts between the two accounts while actively employed
by us and cannot receive distributions until termination of employment.
Compensation costs for awards with only service conditions that vest ratably are recognized on a
straight-line basis over the requisite service period for each separately vesting portion of the
award.
The compensation expense that has been recorded in net income for our share-based compensation
plans is as follows:
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Compensation (income) expense
|
$ | 81 | $ | (78 | ) | $ | 150 | |||||
|
Hedge expense (income) on forward contracts
|
2 | 100 | (53 | ) | ||||||||
|
Income tax expense (benefit)
|
(30 | ) | 29 | (51 | ) | |||||||
|
|
||||||||||||
|
Total net compensation cost included in net income
|
$ | 53 | $ | 51 | $ | 46 | ||||||
|
|
||||||||||||
|
Less net compensation costs included in discontinued operations
|
— | — | 1 | |||||||||
|
|
||||||||||||
|
Net compensation costs included in continuing operations
|
$ | 53 | $ | 51 | $ | 45 | ||||||
|
|
||||||||||||
Share-based compensation costs are reflected primarily in selling and administrative expenses.
Compensation expense includes approximately $9 million, $20 million and $23 million in 2009, 2008
and 2007, respectively, representing the attribution of the fair value of options issued and the
portion of previously granted options for which the requisite service has been rendered.
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 $2, $14 and $14 for 2009, 2008 and 2007, respectively. We estimate the fair value of
options granted on the date of grant using the Black-Scholes option-pricing model. Expected
volatilities are based on 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 increases in expected life.
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Table of Contents
The weighted-average assumptions used in our Black-Scholes option-pricing model for awards
issued during the respective periods are as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Dividend yield
|
1 | % | 2 | % | 2 | % | ||||||
|
Expected volatility
|
50 | % | 30 | % | 30 | % | ||||||
|
Risk-free interest rate
|
2 | % | 3 | % | 5 | % | ||||||
|
Expected term (in years)
|
5.0 | 5.1 | 5.5 | |||||||||
The following table summarizes information related to stock option activity for the respective
periods:
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Intrinsic value of options exercised
|
$ | — | $ | 28 | $ | 85 | ||||||
|
Cash received from option exercises
|
— | 40 | 103 | |||||||||
|
Actual tax benefit realized for tax deductions from option exercises
|
— | 10 | 27 | |||||||||
Our income taxes payable for federal and state purposes have been reduced by the tax benefits we
receive from employee stock options. The income tax benefits we receive for certain stock options
are calculated as the difference between the fair market value of the stock issued at the time of
exercise and the option price, tax effected. The tax impact of the tax deduction in excess of the
related deferred taxes is presented in the Consolidated Statements of Cash Flows as financing
activities.
Stock option activity under the Plan is summarized as follows:
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Number of | Exercise | Number of | Exercise | Number of | Exercise | |||||||||||||||||||
| (Shares in thousands) | Options | Price | Options | Price | Options | Price | ||||||||||||||||||
|
Outstanding at beginning of year
|
9,021 | $ | 38.51 | 9,024 | $ | 35.37 | 10,840 | $ | 31.88 | |||||||||||||||
|
Granted
|
859 | 6.50 | 1,692 | 53.46 | 1,860 | 45.87 | ||||||||||||||||||
|
Exercised
|
(10 | ) | 19.45 | (1,147 | ) | 34.26 | (3,410 | ) | 29.93 | |||||||||||||||
|
Canceled, expired or forfeited
|
(1,325 | ) | 36.16 | (548 | ) | 41.86 | (266 | ) | 36.26 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Outstanding at end of year
|
8,545 | $ | 35.67 | 9,021 | $ | 38.51 | 9,024 | $ | 35.37 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Exercisable at end of year
|
6,177 | $ | 35.82 | 5,774 | $ | 32.45 | 5,395 | $ | 29.63 | |||||||||||||||
|
|
||||||||||||||||||||||||
At January 2, 2010, our outstanding options had an aggregate intrinsic value of $10 million
and a weighted-average remaining contractual life of six years. Our exercisable options had no
significant aggregate intrinsic value and a weighted-average remaining contractual life of five
years at January 2, 2010.
Restricted Stock Units
For restricted stock units paid in stock that were issued prior to 2008, the fair value is
based on the trading price of our common stock on the grant date, less required adjustments to
reflect the fair value of the awards as dividends are not paid or accrued on these units until the
restricted stock units vest. For restricted stock units issued in 2009 and 2008, cash dividends are
paid on a quarterly basis prior to vesting. The fair value of the units paid in stock is based
solely on the trading price of our common stock on the grant date. The weighted-average grant date
fair value of restricted stock units paid in stock that were granted in 2008 and 2007 was
approximately $53 and $45 per share, respectively. No restricted stock units paid in stock were
granted in 2009.
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Table of Contents
Activity for restricted stock units paid in stock is as follows:
| Weighted- | ||||||||
| Average | ||||||||
| Number of | Grant Date | |||||||
| (Shares in thousands) | Shares | Fair Value | ||||||
|
Outstanding at beginning of year, nonvested
|
2,441 | $ | 43.83 | |||||
|
Vested
|
(962 | ) | 39.87 | |||||
|
Forfeited
|
(329 | ) | 45.24 | |||||
|
|
||||||||
|
Outstanding at end of year, nonvested
|
1,150 | $ | 46.74 | |||||
|
|
||||||||
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:
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Subject only to service conditions:
|
||||||||||||
|
Value of shares, options or units vested
|
$ | 42 | $ | 47 | $ | 38 | ||||||
|
Intrinsic value of cash awards paid
|
1 | 10 | 10 | |||||||||
|
Subject to performance vesting conditions:
|
||||||||||||
|
Value of units vested
|
21 | 10 | 46 | |||||||||
|
Intrinsic value of cash awards paid
|
10 | 40 | 42 | |||||||||
|
Intrinsic value of amounts paid under DIP
|
1 | 3 | 4 | |||||||||
As of January 2, 2010, we had not recognized $50 million of total compensation cost associated with
unvested awards subject only to service conditions. We expect to recognize compensation expense for
these awards over a weighted-average period of approximately two years.
The fair value of share-based compensation awards accounted for as liabilities includes performance
share units, retention awards, restricted stock units payable in cash and DIP stock unit awards.
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.
Note 14. Retirement Plans
Our defined benefit and defined contribution plans cover substantially all of our employees.
A significant number of our U.S.-based employees participate in the Textron Retirement Plan, which
is designed to be a “floor-offset” arrangement with both a defined benefit component and a defined
contribution component. The defined benefit component of the arrangement includes the Textron
Master Retirement Plan (TMRP) and the Bell Helicopter Textron Master Retirement Plan (BHTMRP), and
the defined contribution component is the Retirement Account Plan (RAP). The defined benefit
component provides a minimum guaranteed benefit (or “floor” benefit). Under the RAP, participants
are eligible to receive contributions from Textron of 2% of their eligible compensation but may not
make contributions to the plan. Upon retirement, participants receive the greater of the floor
benefit or the value of the RAP. Both the TMRP and the BHTMRP are subject to the provisions of the
Employee Retirement Income Security Act of 1974 (ERISA).
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Table of Contents
We also have domestic and foreign funded and unfunded defined benefit pension plans that
cover certain of our U.S. and foreign employees. In addition, several defined contribution plans
are sponsored by our various businesses. The largest such plan is the Textron Savings Plan, which
is a qualified 401(k) plan subject to ERISA in which a significant number of our U.S.-based
employees participate. Our defined contribution plans cost approximately $96 million in 2009, $110
million in 2008 and $82 million in 2007.
We also provide postretirement benefits other than
pensions for certain retired employees in the U.S., which include healthcare, dental care, Medicare
Part B reimbursement and life insurance benefits.
Periodic Benefit Cost
The components of our net periodic benefit cost and other amounts recognized in OCI are as
follows:
| Postretirement Benefits | ||||||||||||||||||||||||
| Pension Benefits | Other than Pensions | |||||||||||||||||||||||
| (In millions) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
|
Net periodic benefit cost:
|
||||||||||||||||||||||||
|
Service cost
|
$ | 116 | $ | 141 | $ | 127 | $ | 8 | $ | 8 | $ | 8 | ||||||||||||
|
Interest cost
|
310 | 302 | 271 | 38 | 40 | 39 | ||||||||||||||||||
|
Expected return on plan assets
|
(386 | ) | (404 | ) | (369 | ) | — | — | — | |||||||||||||||
|
Amortization of prior service cost (credit)
|
18 | 19 | 18 | (5 | ) | (5 | ) | (4 | ) | |||||||||||||||
|
Amortization of net loss
|
10 | 19 | 40 | 8 | 15 | 20 | ||||||||||||||||||
|
Curtailment and special termination charges
|
34 | — | — | (5 | ) | — | — | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net periodic benefit cost
|
$ | 102 | $ | 77 | $ | 87 | $ | 44 | $ | 58 | $ | 63 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Other changes in plan assets and benefit obligations
recognized in OCI (including foreign exchange):
|
||||||||||||||||||||||||
|
Amortization of net loss
|
$ | (10 | ) | $ | (19 | ) | $ | (40 | ) | $ | (8 | ) | $ | (15 | ) | $ | (20 | ) | ||||||
|
Net loss (gain) arising during the year
|
(93 | ) | 1,329 | (30 | ) | 24 | (32 | ) | (52 | ) | ||||||||||||||
|
Amortization of prior service credit (cost)
|
(48 | ) | (19 | ) | (18 | ) | 10 | 5 | 4 | |||||||||||||||
|
Prior service cost (credit) arising during the year
|
26 | 7 | 44 | 2 | (27 | ) | (5 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total recognized in OCI
|
$ | (125 | ) | $ | 1,298 | $ | (44 | ) | $ | 28 | $ | (69 | ) | $ | (73 | ) | ||||||||
|
|
||||||||||||||||||||||||
|
Total recognized in net periodic benefit cost and OCI
|
$ | (23 | ) | $ | 1,375 | $ | 43 | $ | 72 | $ | (11 | ) | $ | (10 | ) | |||||||||
|
|
||||||||||||||||||||||||
We estimate that the net loss and prior service cost for the defined benefit pension plans that
will be amortized from OCI into net periodic benefit costs in 2010 will be $34 million and $23
million, respectively. The estimated net loss and prior service credit for postretirement benefits
other than pensions that will be amortized from OCI into net periodic benefit costs in 2010 will be
$11 million and $4 million, respectively. OCI also includes $1 million, $9 million and $13 million
of amortization of net loss and prior service cost and $35 million, $12 million and $31 million of
net loss and prior service costs arising during 2009, 2008 and 2007, respectively, related to
discontinued operations.
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Table of Contents
Obligations and Funded Status
All of our plans are measured as of our fiscal year-end. The changes in the projected benefit
obligation and in the fair value of plan assets, along with our funded status, are as follows:
| Postretirement Benefits | ||||||||||||||||
| Pension Benefits | Other than Pensions | |||||||||||||||
| (In millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Change in benefit obligation:
|
||||||||||||||||
|
Benefit obligation at beginning of year
|
$ | 5,088 | $ | 5,202 | $ | 636 | $ | 714 | ||||||||
|
Service cost
|
116 | 141 | 8 | 8 | ||||||||||||
|
Interest cost
|
310 | 302 | 38 | 40 | ||||||||||||
|
Amendments
|
26 | 8 | 2 | (27 | ) | |||||||||||
|
Plan participants’ contributions
|
— | — | 5 | 5 | ||||||||||||
|
Actuarial losses (gains)
|
(42 | ) | (205 | ) | 22 | (31 | ) | |||||||||
|
Benefits paid
|
(300 | ) | (295 | ) | (67 | ) | (73 | ) | ||||||||
|
Foreign exchange rate changes
|
29 | (52 | ) | — | — | |||||||||||
|
Curtailments
|
(1 | ) | (13 | ) | 2 | — | ||||||||||
|
|
||||||||||||||||
|
Benefit obligation at end of year
|
$ | 5,226 | $ | 5,088 | $ | 646 | $ | 636 | ||||||||
|
|
||||||||||||||||
|
Change in fair value of plan assets:
|
||||||||||||||||
|
Fair value of plan assets at beginning of year
|
$ | 3,574 | $ | 5,026 | $ | — | $ | — | ||||||||
|
Actual return on plan assets
|
473 | (1,139 | ) | — | — | |||||||||||
|
Employer contributions
|
51 | 41 | — | — | ||||||||||||
|
Benefits paid
|
(300 | ) | (295 | ) | — | — | ||||||||||
|
Dispositions
|
(40 | ) | — | — | — | |||||||||||
|
Foreign exchange rate changes
|
25 | (59 | ) | — | — | |||||||||||
|
|
||||||||||||||||
|
Fair value of plan assets at end of year
|
$ | 3,783 | $ | 3,574 | $ | — | $ | — | ||||||||
|
|
||||||||||||||||
|
Funded status at end of year
|
$ | (1,443 | ) | $ | (1,514 | ) | $ | (646 | ) | $ | (636 | ) | ||||
|
|
||||||||||||||||
Amounts recognized in our balance sheets for continuing operations are as follows:
| Postretirement Benefits | ||||||||||||||||
| Pension Benefits | Other than Pensions | |||||||||||||||
| (In millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Non-current assets
|
$ | 51 | $ | 47 | $ | — | $ | — | ||||||||
|
Current liabilities
|
(22 | ) | (18 | ) | (63 | ) | (63 | ) | ||||||||
|
Non-current liabilities
|
(1,472 | ) | (1,543 | ) | (583 | ) | (573 | ) | ||||||||
|
Recognized in accumulated other comprehensive loss:
|
||||||||||||||||
|
Net loss
|
1,851 | 1,844 | 131 | 115 | ||||||||||||
|
Prior service cost (credit)
|
150 | 172 | (23 | ) | (35 | ) | ||||||||||
Assumptions
The weighted-average assumptions we use for our pension and postretirement plans are as
follows:
| Postretirement Benefits | ||||||||||||||||||||||||
| Pension Benefits | Other than Pensions | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
|
Net periodic benefit cost:
|
||||||||||||||||||||||||
|
Discount rate
|
6.61 | % | 5.99 | % | 5.63 | % | 6.25 | % | 6.00 | % | 5.66 | % | ||||||||||||
|
Expected long-term rate of return on assets
|
8.58 | % | 8.66 | % | 8.63 | % | — | — | — | |||||||||||||||
|
Rate of compensation increase
|
4.36 | % | 4.48 | % | 4.45 | % | — | — | — | |||||||||||||||
|
Benefit obligations at year-end:
|
||||||||||||||||||||||||
|
Discount rate
|
6.19 | % | 6.28 | % | 5.99 | % | 5.50 | % | 6.25 | % | 6.00 | % | ||||||||||||
|
Rate of compensation increases
|
4.00 | % | 4.47 | % | 4.44 | % | — | — | — | |||||||||||||||
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We have estimated an initial medical cost trend rate of 7% in 2009, which we assume will
decrease to 5% by 2019 and then remain at that level. For the initial prescription drug cost trend
rate, we have estimated a rate of 10% in 2009, which we assume will decrease to 5% by 2019 and then
remain at that level. These assumed healthcare cost trend rates have a significant effect on the
amounts reported for the postretirement benefits other than pensions. A one-percentage-point change
in these assumed healthcare cost trend rates would have the following effects:
| One- | One- | |||||||
| Percentage- | Percentage- | |||||||
| Point | Point | |||||||
| (In millions) | Increase | Decrease | ||||||
|
Effect on total of service and interest cost components
|
$ | 4 | $ | (3 | ) | |||
|
Effect on postretirement benefit obligations other than pensions
|
37 | (33 | ) | |||||
Pension Benefits
The accumulated benefit obligation for all defined benefit pension plans was $4.8 billion at
January 2, 2010 and $4.7 billion at January 3, 2009, which includes $317 million and $297 million,
respectively, in accumulated benefit obligations for unfunded plans where funding is not permitted
or in foreign environments where funding is not feasible. Pension plans with accumulated benefit
obligations exceeding the fair value of plan assets were as follows:
| (In millions) | 2009 | 2008 | ||||||
|
Projected benefit obligation
|
$ | 5,084 | $ | 4,867 | ||||
|
Accumulated benefit obligation
|
4,685 | 4,463 | ||||||
|
Fair value of plan assets
|
3,590 | 3,323 | ||||||
Pension Assets
The expected long-term rate of return on plan assets is determined based on a variety of
considerations, including the established asset allocation targets and expectations for those asset
classes, historical returns of the plans’ assets and other market considerations. We invest our
pension assets with the objective of achieving a total rate of return, over the long term,
sufficient to fund future pension obligations and to minimize future pension contributions. We are
willing to tolerate a commensurate level of risk to achieve this objective based on the funded
status of the plans and the long-term nature of our pension liability. Risk is controlled by
maintaining a portfolio of assets that is diversified across a variety of asset classes, investment
styles and investment managers. All of the assets are managed by external investment managers, and
the majority of the assets are actively managed. Where possible, investment managers are prohibited
from owning our stock in the portfolios that they manage on our behalf.
For U.S. plan assets, which represent the majority of our plan assets, asset allocation target
ranges are established consistent with our investment objectives and the assets are rebalanced
periodically. Our target allocation ranges are 27% to 41% for domestic equity securities; 11% to
22% for international equity securities; 11% to 42% for debt securities; 5% to 11% for private
equity partnerships and 9% to 15% for real estate. For foreign plan assets, allocations are based
on expected cash flow needs and assessments of the local practices and markets. The target asset
allocation ranges for our foreign plans are 25% to 65% for equity securities; 25% to 53% for debt
securities and 0% to 17% for real estate.
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The fair value of total pension plan assets by major category and level in the fair value
hierarchy, as defined in Note 10, at January 2, 2010 is as follows:
| (In millions) | Level 1 | Level 2 | Level 3 | |||||||||
|
Cash and cash equivalents
|
$ | 9 | $ | 116 | $ | — | ||||||
|
Equity securities:
|
||||||||||||
|
Domestic
|
863 | 409 | — | |||||||||
|
International
|
519 | 220 | — | |||||||||
|
Debt securities:
|
||||||||||||
|
National, state, and local governments
|
— | 473 | — | |||||||||
|
Corporate debt
|
— | 428 | — | |||||||||
|
Asset-backed securities
|
— | 148 | — | |||||||||
|
Private equity partnerships
|
— | — | 313 | |||||||||
|
Real estate
|
— | — | 285 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 1,391 | $ | 1,794 | $ | 598 | ||||||
|
|
||||||||||||
Cash equivalents and equity and debt securities include co-mingled funds, which represent
investments in funds offered to institutional investors that are similar to mutual funds in that
they provide diversification by holding various debt and equity securities. Since these co-mingled
funds are not quoted on any active market and are valued based on the relative dispersion of the
underlying debt and equity investments and their individual prices at any given time, they are
classified as Level 2. Debt securities are valued based on same day actual trading prices, if
available. If such prices are not available, we use a matrix pricing model with historical prices,
trends and other factors.
Private equity partnerships represent investments in funds, which, in turn, invest in stocks and
debt securities of companies that, in most cases, are not publicly traded. These partnerships are
valued using income and market methods that include cash flow projections and market multiples for
various comparable companies.
Real estate includes owned properties and investments in partnerships. Owned properties are valued
using certified appraisals at least every three years, which then are updated at least annually by
the real estate investment manager, who considers current market trends and other available
information. These appraisals generally use the standard methods for valuing real estate, including
forecasting income and identifying current transactions for comparable real estate to arrive at a
fair value. Real estate partnerships are valued similar to private equity partnerships, with the
general partner using standard real estate valuation methods to value the real estate properties
and securities held within their fund portfolios. We believe these assumptions are consistent with
assumptions that market participants would use in valuing these investments.
The table below presents a reconciliation of the beginning and ending balances for fair value
measurements that use significant unobservable inputs (Level 3) by major category:
| Private Equity | Real | |||||||
| (In millions) | Partnerships | Estate | ||||||
|
Balance at beginning of year
|
$ | 290 | $ | 394 | ||||
|
Actual return on plan assets
|
||||||||
|
Related to assets still held at reporting date
|
16 | (117 | ) | |||||
|
Related to assets sold during the period
|
(1 | ) | (2 | ) | ||||
|
Purchases, sales and settlements, net
|
8 | 10 | ||||||
|
|
||||||||
|
Balance at end of year
|
$ | 313 | $ | 285 | ||||
|
|
||||||||
Estimated Future Cash Flow Impact
Defined benefits under salaried plans are based on salary and years of service. Hourly plans
generally provide benefits based on stated amounts for each year of service. Our funding policy is
consistent with applicable laws and regulations. In 2010, we expect to contribute approximately $20
million to fund our qualified pension plans and foreign plans. We do not expect to contribute to
our other postretirement benefit plans. Benefit
79
Table of Contents
payments provided below reflect expected future employee service, as appropriate, and are
expected to be paid, net of estimated participant contributions. Benefit payments do not include
the Medicare Part D subsidy we expect to receive. Benefit payments are based on the same
assumptions used to measure our benefit obligation at the end of fiscal 2009. While pension benefit
payments primarily will be paid out of qualified pension trusts, we will pay postretirement
benefits other than pensions out of our general corporate assets as follows:
| Post- | ||||||||||||
| retirement | Expected | |||||||||||
| Benefits | Medicare | |||||||||||
| Pension | Other than | Part D | ||||||||||
| (In millions) | Benefits | Pensions | Subsidy | |||||||||
|
2010
|
$ | 337 | $ | 69 | $ | (4 | ) | |||||
|
2011
|
342 | 69 | (4 | ) | ||||||||
|
2012
|
347 | 68 | (4 | ) | ||||||||
|
2013
|
354 | 67 | (4 | ) | ||||||||
|
2014
|
359 | 66 | (4 | ) | ||||||||
|
2015 - 2019
|
1,919 | 289 | (15 | ) | ||||||||
Note 15. Income Taxes
We conduct business globally and, as a result, file numerous consolidated and separate income
tax returns in the U.S. federal, various state and non-U.S. jurisdictions. For all of our U.S.
subsidiaries, we file a consolidated federal income tax return. Income (loss) from continuing
operations before income taxes is as follows:
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
U.S.
|
$ | (229 | ) | $ | 598 | $ | 1,090 | |||||
|
Non-U.S.
|
80 | 31 | 144 | |||||||||
|
|
||||||||||||
|
Total
|
$ | (149 | ) | $ | 629 | $ | 1,234 | |||||
|
|
||||||||||||
Income tax expense (benefit) for continuing operations is summarized as follows:
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 160 | $ | 317 | $ | 328 | ||||||
|
State
|
17 | 16 | 20 | |||||||||
|
Non-U.S.
|
(8 | ) | 14 | 51 | ||||||||
|
|
||||||||||||
|
|
169 | 347 | 399 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(238 | ) | (61 | ) | 7 | |||||||
|
State
|
(22 | ) | 5 | (24 | ) | |||||||
|
Non-U.S.
|
15 | 14 | (14 | ) | ||||||||
|
|
||||||||||||
|
|
(245 | ) | (42 | ) | (31 | ) | ||||||
|
|
||||||||||||
|
Income tax expense (benefit)
|
$ | (76 | ) | $ | 305 | $ | 368 | |||||
|
|
||||||||||||
The current federal and state provisions for 2009 include $85 million of tax related to the sale of
certain leverage leases in the Finance segment for which we had previously recorded significant
deferred tax liabilities. The tax is expected to be paid over a period of years in accordance with
a prior settlement with the Internal Revenue Service.
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The following table reconciles the federal statutory income tax rate to our effective income
tax rate:
| 2009 | 2008 | 2007 | ||||||||||
|
Federal statutory income tax rate
|
(35.0 | )% | 35.0 | % | 35.0 | % | ||||||
|
Increase (decrease) in taxes resulting from:
|
||||||||||||
|
State income taxes
|
0.4 | 2.3 | 1.0 | |||||||||
|
Goodwill impairment
|
18.5 | 8.4 | — | |||||||||
|
Non-U.S. tax rate differential
|
(13.5 | ) | (5.7 | ) | (0.5 | ) | ||||||
|
Valuation allowance on contingent receipts
|
(7.3 | ) | (0.5 | ) | — | |||||||
|
Research credit
|
(4.7 | ) | (1.9 | ) | (0.8 | ) | ||||||
|
Unrecognized tax benefits and related interest
|
(4.1 | ) | 3.4 | 1.2 | ||||||||
|
Change in status of subsidiary
|
(3.6 | ) | 5.0 | — | ||||||||
|
Manufacturing deduction
|
(3.1 | ) | (2.8 | ) | (1.6 | ) | ||||||
|
Equity hedge loss (income)
|
0.5 | 6.2 | (1.5 | ) | ||||||||
|
Other, net
|
0.9 | (0.8 | ) | (3.0 | ) | |||||||
|
|
||||||||||||
|
Effective income tax rate
|
(51.0 | )% | 48.6 | % | 29.8 | % | ||||||
|
|
||||||||||||
The amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and non-U.S.
tax authorities, which may result in proposed assessments. Our estimate for the potential outcome
for any uncertain tax issue is highly judgmental. We assess our income tax positions and record tax
benefits for all years subject to examination based upon management’s evaluation of the facts,
circumstances and information available at the reporting date. For those tax positions for which it
is more likely than not that a tax benefit will be sustained, we record the largest amount of tax
benefit with a greater than 50% likelihood of being realized upon settlement with a taxing
authority that has full knowledge of all relevant information. Interest and penalties are accrued,
where applicable. If we do not believe that it is not more likely than not that a tax benefit will
be sustained, no tax benefit is recognized.
Our future results may include favorable or unfavorable adjustments to our estimated tax
liabilities due to closure of income tax examinations, new regulatory or judicial pronouncements,
or other relevant events. As a result, our effective tax rate may fluctuate significantly on a
quarterly and annual basis.
Our unrecognized tax benefits represent tax positions for which reserves have been established.
Unrecognized state tax benefits and interest related to unrecognized tax benefits are reflected net
of applicable tax benefits. A reconciliation of our unrecognized tax benefits, excluding accrued
interest, is as follows:
| January 2, | January 3, | |||||||
| (In millions) | 2010 | 2009 | ||||||
|
Balance at beginning of year
|
$ | 324 | $ | 367 | ||||
|
Additions for tax positions related to current year
|
9 | 24 | ||||||
|
Additions for tax positions of prior years
|
11 | 4 | ||||||
|
Reductions for tax positions of prior years
|
(43 | ) | (71 | ) | ||||
|
Reductions for expiration of statute of limitations
|
(1 | ) | — | |||||
|
Reductions for settlements with tax authorities
|
(6 | ) | — | |||||
|
|
||||||||
|
Balance at end of year
|
$ | 294 | $ | 324 | ||||
|
|
||||||||
At January 2, 2010 and January 3, 2009, approximately $208 million and $210 million, respectively,
of these unrecognized tax benefits, if recognized, would favorably affect our effective tax rate in
any future period. The remaining $86 million and $114 million, respectively, in unrecognized tax
benefits are related to discontinued operations. Unrecognized tax benefits were reduced in 2009 and
2008 primarily due to the sale of CESCOM assets and the HR Textron and Fluid & Power sales. We do
not expect the amount of the unrecognized tax benefits disclosed above to change significantly over
the next 12 months.
In the normal course of business, we are subject to examination by taxing authorities throughout
the world, including major jurisdictions such as Belgium, Canada, Germany, Japan, the United
Kingdom and the U.S. With few exceptions, we no longer are subject to U.S. federal, state and local
income tax examinations for years before 1997 and no longer are subject to non-U.S. income tax
examinations in our major jurisdictions for years before 2004.
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Table of Contents
During 2009, 2008 and 2007, we recognized net tax-related interest totaling approximately $12
million, $31 million and $20 million, respectively, in the Consolidated Statements of Operations.
At January 2, 2010 and January 3, 2009, we had a total of $114 million and $102 million,
respectively, of net accrued interest included in our Consolidated Balance Sheets.
The tax effects of temporary differences that give rise to significant portions of our net deferred
tax assets and liabilities were as follows:
| January 2, | January 3, | |||||||
| (In millions) | 2010 | 2009 | ||||||
|
Deferred tax assets:
|
||||||||
|
Obligation for pension and postretirement benefits
|
$ | 767 | $ | 826 | ||||
|
Accrued expenses*
|
219 | 217 | ||||||
|
Deferred compensation
|
197 | 194 | ||||||
|
Allowance for credit losses
|
146 | 90 | ||||||
|
Valuation allowance on finance receivables held for sale
|
71 | 135 | ||||||
|
Loss carryforwards
|
60 | 63 | ||||||
|
Foreign currency translation adjustment
|
41 | 31 | ||||||
|
Other, net
|
225 | 156 | ||||||
|
|
||||||||
|
Total deferred tax assets
|
1,726 | 1,712 | ||||||
|
Valuation allowance for deferred tax assets
|
(210 | ) | (175 | ) | ||||
|
|
||||||||
|
|
$ | 1,516 | $ | 1,537 | ||||
|
|
||||||||
|
Deferred tax liabilities:
|
||||||||
|
Leasing transactions
|
$ | (468 | ) | $ | (601 | ) | ||
|
Amortization of goodwill and other intangibles
|
(147 | ) | (157 | ) | ||||
|
Property, plant and equipment, principally depreciation
|
(115 | ) | (99 | ) | ||||
|
Inventory
|
(7 | ) | (31 | ) | ||||
|
Change in status of non-U.S. subsidiary
|
— | (22 | ) | |||||
|
|
||||||||
|
Total deferred tax liabilities
|
(737 | ) | (910 | ) | ||||
|
|
||||||||
|
Net deferred tax asset
|
$ | 779 | $ | 627 | ||||
|
|
||||||||
| * | Accrued expenses includes warranty and product maintenance reserves, self-insured liabilities, interest and restructuring charges. |
The valuation allowance against our deferred tax assets is due to the uncertainty of
realizing the related benefits. Deferred tax liabilities decreased in 2009 primarily due to the
sale of certain leverage leases in the Finance segment.
The following table presents the breakdown between current and long-term net deferred tax assets:
| January 2, | January 3, | |||||||
| (In millions) | 2010 | 2009 | ||||||
|
Current
|
$ | 315 | $ | 266 | ||||
|
Non-current
|
600 | 698 | ||||||
|
|
||||||||
|
|
915 | 964 | ||||||
|
|
||||||||
|
Finance group’s net deferred tax liability
|
(136 | ) | (337 | ) | ||||
|
|
||||||||
|
Net deferred tax asset
|
$ | 779 | $ | 627 | ||||
|
|
||||||||
We have net operating loss and credit carryforwards at the end of each year as follows:
| January 2, | January 3, | |||||||
| (In millions) | 2010 | 2009 | ||||||
|
Non-U.S. net operating loss carryforwards with no expiration
|
$ | 157 | $ | 154 | ||||
|
Non-U.S. net operating loss carryforwards expiring through 2024
|
18 | 34 | ||||||
|
State credit carryforwards beginning to expire in 2018
|
11 | 14 | ||||||
82
Table of Contents
The undistributed earnings of our non-U.S. subsidiaries approximated $335 million at January
2, 2010. We consider the undistributed earnings, on which taxes previously have not been provided,
to be indefinitely reinvested; therefore, tax is not provided on these earnings. It is not
practicable to estimate the amount of tax that might be payable on these earnings in the event they
no longer are indefinitely reinvested.
Note 16. 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.
ARH Program Termination
On October 16, 2008, we received notification from the U.S. Department of Defense that it
would not certify the continuation of the Armed Reconnaissance Helicopter (ARH) program to Congress
under the Nunn-McCurdy Act, resulting in the termination of the program for the convenience of the
government. The ARH program included a development phase, covered by the System Development and
Demonstration (SDD) contract, and a production phase. We submitted our claim for the termination
costs for the SDD contract in October 2009 and believe that these costs are fully recoverable from
the U.S. Government.
Prior to termination of the program, we obtained inventory and incurred vendor obligations for
long-lead time materials related to the anticipated Low Rate Initial Production (LRIP) contracts to
maintain the program schedule based on our belief that the LRIP contracts would be awarded. We have
since terminated these vendor contracts and are negotiating to settle
our termination obligations.
In
October 2009, we filed a claim with the U.S. Government to request reimbursement of costs expended
in support of the LRIP program. On December 17, 2009, we received a decision from the Contracting
Officer of the Department of the Army that denied this claim in its entirety. We plan to appeal
this decision in the first quarter of 2010. At January 2, 2010, our reserves related to this
program totaled $50 million, which we believe are adequate to
cover our exposure.
Environmental Remediation
As with other industrial enterprises engaged in similar businesses, we are involved in a
number of remedial actions under various federal and state laws and regulations relating to the
environment that impose liability on companies to clean up, or contribute to the cost of cleaning
up, sites on which hazardous wastes or materials were disposed or released. Our accrued
environmental liabilities relate to disposal costs, U.S. Environmental Protection Agency oversight costs, legal fees, and operating and maintenance costs
for both currently and formerly owned or operated facilities. Circumstances that can affect the
reliability and precision of the accruals include the identification of additional sites,
environmental regulations, level of cleanup required, technologies available, number and financial
condition of other contributors to remediation, and the time period over which remediation may
occur. We believe that any changes to the accruals that may result from these factors and
uncertainties will not have a material effect on our financial position or results of operations.
Based upon information currently available, we estimate that our potential environmental
liabilities are within the range of $43 million to $173 million. At January 2, 2010, environmental
reserves of approximately $77 million have been established to address these specific estimated
potential liabilities, including $18 million for sites related to our discontinued operations. We
estimate that we will likely pay our accrued environmental remediation liabilities over the next
five to 10 years and have classified $15 million as current liabilities. Expenditures to evaluate
and remediate contaminated sites for continuing operations approximated $7 million, $15 million and
$7 million in 2009, 2008 and 2007, respectively, and discontinued operations expenditures totaled
$4 million and $2 million in 2009 and 2008, respectively.
83
Table of Contents
Leases
Rental expense approximated $100 million in 2009, $106 million in 2008 and $100 million in
2007. Future minimum rental commitments for noncancelable operating leases in effect at January 2,
2010 approximated $65 million for 2010, $51 million for 2011, $43 million for 2012, $33 million for
2013, $27 million for 2014 and a total of $167 million thereafter.
Loan Commitments
At January 2, 2010, the Finance group had $350 million of unused commitments to fund new and
existing customers under revolving lines of credit, construction loans and equipment loans and
leases. These commitments generally have an original duration of less than three years, and funding
under these facilities is dependent on the availability of eligible collateral and compliance with
customary financial covenants. Since many of the agreements will not be used to the extent
committed or will expire unused, the total commitment amount does not necessarily represent future
cash requirements. We also have ongoing customer relationships, including manufacturers and dealers
in the distribution finance product line, which do not contractually obligate us to provide
funding; however, we may choose to fund under certain of these relationships to facilitate an
orderly liquidation and mitigate credit losses.
Note 17. Research and Development
Company-funded and customer-funded research and development costs are as follows:
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Company-funded
|
$ | 401 | $ | 465 | $ | 358 | ||||||
|
Customer-funded
|
443 | 501 | 446 | |||||||||
|
|
||||||||||||
|
Total research and development
|
$ | 844 | $ | 966 | $ | 804 | ||||||
|
|
||||||||||||
Our customer-funded research and development costs primarily are related to U.S. Government
contracts, including development contracts for the V-22, H-1, Intelligent Battlefield Systems and
the Unmanned Aircraft System, and, prior to termination, the ARH and VH-71.
Note 18. Guarantees and Indemnifications
During 2009, we entered into contracts to sell used aircraft that entitle the customer to
resell the aircraft back to us at predetermined values ranging from 80% to 100% of the customer’s
purchase price for a limited period of time, generally not exceeding 24 months for used aircraft
and 36 months for used fractional share interests. Revenue recognition on these sales has been
deferred and totaled $186 million at January 2, 2010.
In connection with the disposition of certain
businesses, we indemnified the purchasers for remediation costs related to pre-existing
environmental conditions to the extent they exist at the sold locations and certain retained
litigation matters. In addition, we have other obligations arising from sales of businesses,
including representations and warranties and related indemnities for tax and employment matters. We
have estimated the fair value of uncapped indemnifications at approximately $21 million, which is
reflected as a liability in our Consolidated Balance Sheet. The maximum potential payment cannot be
determined for these uncapped indemnifications, while the maximum potential payment related to
capped obligations is $17 million. The fair value of the capped obligations is estimated to be
insignificant. At January 2, 2010, we did not believe there were any capped or uncapped matters
that could have a significant adverse effect on our financial position, results of operations or
liquidity. During 2009 and 2008, we incurred approximately $5 million and $2 million, respectively,
in environmental remediation costs related to these guarantees.
We enter into software license agreements with customers through our Overwatch Systems business.
These software license agreements generally include certain provisions for indemnifying customers
against liabilities if our software products infringe a third party’s intellectual property rights.
To date, we have not incurred any material costs as a result of such indemnifications and have not
accrued any liabilities related to such obligations. The risk that we will be required to perform
on any of these indemnifications is low.
In June 2009, we received notification that the VH-71 helicopter program was terminated for
convenience by the U.S. Government, and the related performance guarantee was canceled in October
2009.
84
Table of Contents
Warranty and Product Maintenance Contracts
We provide limited warranty and product maintenance programs, including parts and labor, for
certain products for periods ranging from one to five years. We estimate the costs that may be
incurred under warranty programs and record a liability in the amount of such costs at the time
product revenue is recognized. Factors that affect this liability include the number of products
sold, historical and anticipated rates of warranty claims, and cost per claim. We assess the
adequacy of our recorded warranty and product maintenance liabilities periodically and adjust the
amounts as necessary. Additionally, we may establish warranty liabilities related to the issuance
of aircraft service bulletins for aircraft no longer covered under the limited warranty programs.
Changes in our warranty and product maintenance liability are as follows:
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Accrual at beginning of year
|
$ | 278 | $ | 313 | $ | 308 | ||||||
|
Provision
|
174 | 189 | 188 | |||||||||
|
Settlements
|
(217 | ) | (194 | ) | (177 | ) | ||||||
|
Adjustments to prior accrual estimates*
|
28 | (26 | ) | (15 | ) | |||||||
|
Acquisitions and related adjustments
|
— | (4 | ) | 9 | ||||||||
|
|
||||||||||||
|
Accrual at end of year
|
$ | 263 | $ | 278 | $ | 313 | ||||||
|
|
||||||||||||
| * | Adjustments include changes to prior year estimates, new issues on prior year sales and currency translation adjustments. |
Note 19. Supplemental Cash Flow and Other Information
Supplemental Cash Flow Information
We have made the following cash payments:
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Interest paid:
|
||||||||||||
|
Manufacturing group
|
$ | 116 | $ | 139 | $ | 114 | ||||||
|
Finance group
|
171 | 310 | 388 | |||||||||
|
Taxes paid, net of refunds received:
|
||||||||||||
|
Manufacturing group
|
49 | 346 | 307 | |||||||||
|
Finance group
|
(75 | ) | 52 | 48 | ||||||||
|
Discontinued operations
|
156 | 15 | (75 | ) | ||||||||
Cash paid for interest by the Manufacturing group includes amounts paid to our Finance group of $1
million and $2 million in 2008 and 2007, respectively. Cash paid for interest by the Finance group
includes amounts paid to the Manufacturing group of $3 million in both 2009 and 2008.
Accrued Liabilities
The accrued liabilities of our Manufacturing group are summarized below:
| January 2, | January 3, | |||||||
| (In millions) | 2010 | 2009 | ||||||
|
Customer deposits
|
$ | 791 | $ | 992 | ||||
|
Warranty and product maintenance contracts
|
263 | 278 | ||||||
|
Salaries, wages and employer taxes
|
244 | 300 | ||||||
|
Postretirement benefits other than pension
|
85 | 82 | ||||||
|
Deferred revenue
|
72 | 140 | ||||||
|
Forward contract on Textron Inc. stock
|
— | 98 | ||||||
|
Foreign exchange rate forward contracts, net
|
5 | 84 | ||||||
|
Other
|
567 | 635 | ||||||
|
|
||||||||
|
Total accrued liabilities
|
$ | 2,027 | $ | 2,609 | ||||
|
|
||||||||
85
Table of Contents
Note 20. Segment and Geographic Data
We operate in, and report financial information for, the following five business segments:
Cessna, Bell, Textron Systems, Industrial and Finance. The accounting policies of the segments are
the same as those described in Note 1.
Cessna
products include Citation business jets, Caravan single engine turboprops, single engine
piston aircraft, and aftermarket services sold to a diverse base of corporate and individual
buyers.
Bell
products include military and commercial helicopters, tiltrotor aircraft and related spare
parts for U.S. and non-U.S. governments in the defense and aerospace industries and general
aviation markets.
Textron Systems
products include armored security vehicles, advanced marine craft, precision
weapons, airborne and ground-based surveillance systems and services, the Unmanned Aircraft System,
training and simulation systems and countersniper devices, intelligence and situational awareness
software for U.S. and non-U.S. governments in the defense and aerospace industries, and general
aviation markets.
Industrial
products and markets include the following:
| • | Kautex products include blow-molded fuel systems, marketed primarily to automobile original equipment manufacturers, as well as bottles and plastic containers for various uses; |
| • | Greenlee products include powered equipment, electrical and fiber optic assemblies, principally used in the electrical construction and maintenance, plumbing, wiring, telecommunications and data communications industries; and |
| • | E-Z-GO and Jacobsen products include golf cars, specialized turf-care vehicles that are marketed primarily to golf courses, resort communities, municipalities, sporting venues, and commercial and industrial users. |
Finance
provided secured commercial loans and leases primarily in North America to the aviation,
golf equipment, asset-based lending, distribution finance, golf mortgage, hotel, structured capital
and timeshare markets through the fourth quarter of 2008, when we announced a plan to exit the
non-captive portion of the commercial finance business of the segment, while retaining the captive
portion of the business that supports customer purchases of products that we manufacture.
Segment profit is an important measure used for evaluating performance and for decision-making
purposes. Segment profit for the manufacturing segments excludes interest expense, certain
corporate expenses and special charges. The measurement for the Finance segment includes interest
income and expense and excludes special charges. Provisions for losses on finance receivables
involving the sale or lease of our products are recorded by the selling manufacturing division when
our Finance group has recourse to the Manufacturing group.
Our revenues by segment, along with a reconciliation of segment profit to income from continuing
operations before income taxes, are as follows:
| Revenues | Segment Profit (Loss) | |||||||||||||||||||||||
| (In millions) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
|
Cessna
|
$ | 3,320 | $ | 5,662 | $ | 5,000 | $ | 198 | $ | 905 | $ | 865 | ||||||||||||
|
Bell
|
2,842 | 2,827 | 2,581 | 304 | 278 | 144 | ||||||||||||||||||
|
Textron Systems
|
1,899 | 1,880 | 1,114 | 240 | 251 | 174 | ||||||||||||||||||
|
Industrial
|
2,078 | 2,918 | 2,825 | 27 | 67 | 173 | ||||||||||||||||||
|
Finance
|
361 | 723 | 875 | (294 | ) | (50 | ) | 222 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | 10,500 | $ | 14,010 | $ | 12,395 | 475 | 1,451 | 1,578 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Special charges
|
(317 | ) | (526 | ) | — | |||||||||||||||||||
|
Corporate expenses and other, net
|
(164 | ) | (171 | ) | (257 | ) | ||||||||||||||||||
|
Interest expense, net for Manufacturing group
|
(143 | ) | (125 | ) | (87 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) from continuing operations before income taxes
|
$ | (149 | ) | $ | 629 | $ | 1,234 | |||||||||||||||||
|
|
||||||||||||||||||||||||
86
Table of Contents
Revenues by product type within each segment are summarized below:
| Revenues | ||||||||||||
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Cessna: Fixed-wing aircraft
|
$ | 3,320 | $ | 5,662 | $ | 5,000 | ||||||
|
Bell: Rotor aircraft
|
2,842 | 2,827 | 2,581 | |||||||||
|
Textron Systems: Armored vehicles, advanced military systems and piston aircraft engines
|
1,899 | 1,880 | 1,114 | |||||||||
|
Industrial:
|
||||||||||||
|
Fuel systems and functional components
|
1,287 | 1,763 | 1,723 | |||||||||
|
Powered tools, testing and measurement equipment and other
|
300 | 435 | 426 | |||||||||
|
Golf and turf-care products
|
491 | 720 | 676 | |||||||||
|
Finance
|
361 | 723 | 875 | |||||||||
|
|
||||||||||||
|
|
$ | 10,500 | $ | 14,010 | $ | 12,395 | ||||||
|
|
||||||||||||
Our revenues included sales to the U.S. Government of approximately $3.3 billion in 2009, $3.2
billion in 2008 and $2.4 billion in 2007, primarily in the Bell and Textron Systems segments.
Other information by segment is provided below:
| Assets | ||||||||
| (In millions) | 2009 | 2008 | ||||||
|
Cessna
|
$ | 2,427 | $ | 2,955 | ||||
|
Bell
|
2,059 | 2,167 | ||||||
|
Textron Systems
|
1,973 | 2,077 | ||||||
|
Industrial
|
1,623 | 1,788 | ||||||
|
Finance
|
7,512 | 9,344 | ||||||
|
Corporate
|
3,288 | 1,366 | ||||||
|
Discontinued operations
|
58 | 334 | ||||||
|
|
||||||||
|
|
$ | 18,940 | $ | 20,031 | ||||
|
|
||||||||
| Capital Expenditures | Depreciation and Amortization | |||||||||||||||||||||||
| (In millions) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
|
Cessna
|
$ | 65 | $ | 285 | $ | 163 | $ | 115 | $ | 105 | $ | 86 | ||||||||||||
|
Bell
|
101 | 138 | 78 | 83 | 71 | 59 | ||||||||||||||||||
|
Textron Systems
|
31 | 34 | 33 | 85 | 85 | 41 | ||||||||||||||||||
|
Industrial
|
38 | 69 | 83 | 76 | 83 | 79 | ||||||||||||||||||
|
Finance
|
— | 8 | 10 | 36 | 40 | 40 | ||||||||||||||||||
|
Corporate
|
3 | 11 | 12 | 14 | 16 | 17 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | 238 | $ | 545 | $ | 379 | $ | 409 | $ | 400 | $ | 322 | ||||||||||||
|
|
||||||||||||||||||||||||
Geographic Data
Presented below is selected financial information of our continuing operations by geographic
area:
| Revenues* | Property, Plant and Equipment, net** | |||||||||||||||||||
| (In millions) | 2009 | 2008 | 2007 | 2009 | 2008 | |||||||||||||||
|
United States
|
$ | 6,563 | $ | 8,609 | $ | 7,710 | $ | 1,594 | $ | 1,701 | ||||||||||
|
Europe
|
1,625 | 2,601 | 2,361 | 238 | 246 | |||||||||||||||
|
Canada
|
344 | 431 | 434 | 82 | 82 | |||||||||||||||
|
Latin America and Mexico
|
815 | 1,131 | 845 | 19 | 18 | |||||||||||||||
|
Asia and Australia
|
553 | 753 | 622 | 56 | 65 | |||||||||||||||
|
Middle East and Africa
|
600 | 485 | 423 | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 10,500 | $ | 14,010 | $ | 12,395 | $ | 1,989 | $ | 2,112 | ||||||||||
|
|
||||||||||||||||||||
| * | Revenues are attributed to countries based on the location of the customer. | |
| ** | Property, plant and equipment, net are based on the location of the asset. |
87
Table of Contents
Quarterly Data
(a)
| (Unaudited) | 2009 | 2008 | ||||||||||||||||||||||||||||||
| (Dollars in millions, except per share amounts) | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | ||||||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||||||||||||||
|
Cessna
|
$ | 769 | $ | 871 | $ | 825 | $ | 855 | $ | 1,246 | $ | 1,501 | $ | 1,418 | $ | 1,497 | ||||||||||||||||
|
Bell
|
742 | 670 | 628 | 802 | 574 | 698 | 702 | 853 | ||||||||||||||||||||||||
|
Textron Systems
|
418 | 477 | 502 | 502 | 519 | 467 | 441 | 453 | ||||||||||||||||||||||||
|
Industrial
|
475 | 508 | 523 | 572 | 753 | 841 | 726 | 598 | ||||||||||||||||||||||||
|
Finance
|
122 | 86 | 71 | 82 | 214 | 177 | 184 | 148 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total revenues
|
$ | 2,526 | $ | 2,612 | $ | 2,549 | $ | 2,813 | $ | 3,306 | $ | 3,684 | $ | 3,471 | $ | 3,549 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Segment profit
|
||||||||||||||||||||||||||||||||
|
Cessna
|
$ | 90 | $ | 48 | $ | 32 | $ | 28 | $ | 207 | $ | 262 | $ | 238 | $ | 198 | ||||||||||||||||
|
Bell
|
69 | 72 | 79 | 84 | 53 | 68 | 63 | 94 | ||||||||||||||||||||||||
|
Textron Systems
|
52 | 55 | 68 | 65 | 67 | 60 | 67 | 57 | ||||||||||||||||||||||||
|
Industrial
|
(9 | ) | 12 | 6 | 18 | 41 | 44 | 6 | (24 | ) | ||||||||||||||||||||||
|
Finance
|
(66 | ) | (99 | ) | (64 | ) | (65 | ) | 42 | 13 | 18 | (123 | ) | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total segment profit
|
136 | 88 | 121 | 130 | 410 | 447 | 392 | 202 | ||||||||||||||||||||||||
|
Special charges
(b)
|
(32 | ) | (129 | ) | (42 | ) | (114 | ) | — | — | — | (526 | ) | |||||||||||||||||||
|
Corporate expenses and other, net
|
(35 | ) | (45 | ) | (44 | ) | (40 | ) | (41 | ) | (43 | ) | (39 | ) | (48 | ) | ||||||||||||||||
|
Interest expense, net for Manufacturing group
|
(28 | ) | (34 | ) | (40 | ) | (41 | ) | (30 | ) | (29 | ) | (32 | ) | (34 | ) | ||||||||||||||||
|
Income tax benefit (expense)
|
2 | 58 | 11 | 5 | (114 | ) | (125 | ) | (116 | ) | 50 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Income (loss) from continuing operations
|
43 | (62 | ) | 6 | (60 | ) | 225 | 250 | 205 | (356 | ) | |||||||||||||||||||||
|
Income
(loss) from discontinued operations, net of income taxes
|
43 | 4 | (2 | ) | (3 | ) | 6 | 8 | 1 | 147 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net income (loss)
|
$ | 86 | $ | (58 | ) | $ | 4 | $ | (63 | ) | $ | 231 | $ | 258 | $ | 206 | $ | (209 | ) | |||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Basic earnings per share
|
||||||||||||||||||||||||||||||||
|
Continuing operations
|
$ | 0.18 | $ | (0.23 | ) | $ | 0.02 | $ | (0.22 | ) | $ | 0.90 | $ | 1.00 | $ | 0.85 | $ | (1.47 | ) | |||||||||||||
|
Discontinued operations
|
0.17 | 0.01 | (0.01 | ) | (0.01 | ) | 0.03 | 0.03 | — | 0.61 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Basic earnings per share
|
$ | 0.35 | $ | (0.22 | ) | $ | 0.01 | $ | (0.23 | ) | $ | 0.93 | $ | 1.03 | $ | 0.85 | $ | (0.86 | ) | |||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Basic average shares outstanding
(In thousands)
|
243,988 | 264,091 | 271,224 | 272,168 | 249,315 | 250,039 | 243,753 | 242,150 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Diluted earnings per share
(c)
|
||||||||||||||||||||||||||||||||
|
Continuing operations
|
$ | 0.18 | $ | (0.23 | ) | $ | 0.02 | $ | (0.22 | ) | $ | 0.88 | $ | 0.98 | $ | 0.83 | $ | (1.47 | ) | |||||||||||||
|
Discontinued operations
|
0.17 | 0.01 | (0.01 | ) | (0.01 | ) | 0.03 | 0.03 | — | 0.61 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Diluted earnings per share
|
$ | 0.35 | $ | (0.22 | ) | $ | 0.01 | $ | (0.23 | ) | $ | 0.91 | $ | 1.01 | $ | 0.83 | $ | (0.86 | ) | |||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Diluted average shares outstanding
(In thousands)
|
244,956 | 264,091 | 278,429 | 272,168 | 254,500 | 254,580 | 247,182 | 242,150 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Segment profit margins
|
||||||||||||||||||||||||||||||||
|
Cessna
|
11.7 | % | 5.5 | % | 3.9 | % | 3.3 | % | 16.6 | % | 17.4 | % | 16.8 | % | 13.2 | % | ||||||||||||||||
|
Bell
|
9.3 | 10.7 | 12.6 | 10.5 | 9.2 | 9.7 | 9.0 | 11.0 | ||||||||||||||||||||||||
|
Textron Systems
|
12.4 | 11.5 | 13.5 | 12.9 | 12.9 | 12.8 | 15.2 | 12.6 | ||||||||||||||||||||||||
|
Industrial
|
(1.9 | ) | 2.4 | 1.1 | 3.1 | 5.4 | 5.2 | 0.8 | (4.0 | ) | ||||||||||||||||||||||
|
Finance
|
(54.1 | ) | (115.1 | ) | (90.1 | ) | (79.3 | ) | 19.6 | 7.3 | 9.8 | (83.1 | ) | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Segment profit margin
|
5.4 | % | 3.4 | % | 4.7 | % | 4.6 | % | 12.4 | % | 12.1 | % | 11.3 | % | 5.7 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Common stock information
(c)
|
||||||||||||||||||||||||||||||||
|
Price range: High
|
$ | 16.52 | $ | 14.37 | $ | 20.99 | $ | 21.00 | $ | 71.69 | $ | 65.52 | $ | 49.90 | $ | 32.31 | ||||||||||||||||
|
Low
|
$ | 3.57 | $ | 7.13 | $ | 8.51 | $ | 17.55 | $ | 47.50 | $ | 47.03 | $ | 28.43 | $ | 10.09 | ||||||||||||||||
|
Dividends per share
|
$ | 0.02 | $ | 0.02 | $ | 0.02 | $ | 0.02 | $ | 0.23 | $ | 0.23 | $ | 0.23 | $ | 0.23 | ||||||||||||||||
| (a) | In the first quarter of 2009, we sold HR Textron, and in the third quarter of 2008, we completed the sale of our Fluid & Power business. Both of these businesses have been reclassified into discontinued operations, and all periods presented have been recast to reflect this presentation. | |
| (b) | Special charges in 2009 include restructuring charges of $237 million, primarily related to severance and asset impairment charges, and an $80 million goodwill impairment charge in the Industrial segment. Special charges in the fourth quarter of 2008 include restructuring charges of $64 million and charges related to strategic actions taken at the Finance segment totaling $462 million. During the fourth quarter of 2008, we announced our plans to exit portions of our commercial finance business. As a result, we recorded an impairment charge of $169 million for unrecoverable goodwill and designated a portion of our finance receivables as held for sale, resulting in an initial pre-tax mark-to-market adjustment of $293 million. | |
| (c) | For the second and fourth quarters of 2009 and the fourth quarter of 2008, the diluted earnings per share average share base excludes potential common shares (convertible preferred stock, convertible debt and related warrants, stock options and restricted stock units) due to their antidilutive effect resulting from the net loss. |
88
Table of Contents
Schedule II — Valuation and Qualifying Accounts
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Manufacturing Group
|
||||||||||||
|
Allowance for doubtful accounts
|
||||||||||||
|
Balance at beginning of year
|
$ | 24 | $ | 29 | $ | 29 | ||||||
|
Charged to costs and expenses
|
8 | 5 | 3 | |||||||||
|
Deductions from reserves*
|
(9 | ) | (10 | ) | (3 | ) | ||||||
|
|
||||||||||||
|
Balance at end of year
|
$ | 23 | $ | 24 | $ | 29 | ||||||
|
|
||||||||||||
|
Reserves for recourse liability to Finance group
|
||||||||||||
|
Balance at beginning of year
|
$ | 21 | $ | 22 | $ | 39 | ||||||
|
Charged to costs and expenses
|
6 | 5 | 2 | |||||||||
|
Cash paid
|
(9 | ) | (1 | ) | (20 | ) | ||||||
|
Net deductions from reserves*
|
(1 | ) | (5 | ) | 1 | |||||||
|
|
||||||||||||
|
Balance at end of year
|
$ | 17 | $ | 21 | $ | 22 | ||||||
|
|
||||||||||||
|
Inventory FIFO reserves
|
||||||||||||
|
Balance at beginning of year
|
$ | 114 | $ | 81 | $ | 68 | ||||||
|
Charged to costs and expenses
|
126 | 65 | 33 | |||||||||
|
Deductions from reserves*
|
(82 | ) | (32 | ) | (20 | ) | ||||||
|
|
||||||||||||
|
Balance at end of year
|
$ | 158 | $ | 114 | $ | 81 | ||||||
|
|
||||||||||||
|
Finance Group
|
||||||||||||
|
Allowance for losses on finance receivables held for investment
|
||||||||||||
|
Balance at beginning of year
|
$ | 191 | $ | 89 | $ | 93 | ||||||
|
Provision for losses
|
267 | 234 | 33 | |||||||||
|
Transfer to valuation allowance for finance receivables held for sale
|
(2 | ) | (44 | ) | — | |||||||
|
Deductions from reserves*
|
(115 | ) | (88 | ) | (37 | ) | ||||||
|
|
||||||||||||
|
Balance at end of year
|
$ | 341 | $ | 191 | $ | 89 | ||||||
|
|
||||||||||||
| * | Deductions primarily include uncollectible accounts written off (less recoveries), inventory disposals and currency translation adjustments. |
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures — We have carried out an evaluation, under the
supervision and with the participation of our management, including our President and Chief
Executive Officer (CEO) and our Executive Vice President and Chief Financial Officer (CFO), of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”)) as
of the end of the fiscal year covered by this report. Based upon that evaluation, our CEO and CFO
concluded that our disclosure controls and procedures are effective in providing reasonable
assurance that (a) the information required to be disclosed by us in the reports that we file or
submit under the Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b)
such information is accumulated and communicated to our management, including our CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
Report of Management —
See page 41.
Report of Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting —
See page 42.
89
Table of Contents
Changes in Internal Controls —
There have been no changes in our internal control over
financial reporting during the fourth quarter of the fiscal year covered by this report that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B. Other Information
On February 23, 2010, the Organization and Compensation Committee of the Board of Directors
of Textron Inc. approved the design of the annual and long-term incentive compensation program for
2010 with respect to Textron Inc.’s executive officers, including grant levels under these
arrangements, as well as the mix of grant type and the type of metrics to be used for performance
goals for 2010 and for the 2010-2012 performance share unit cycle. The Committee also set
applicable targets for the metrics used. Other than as described herein, awards of stock options,
restricted stock units and performance share units operate on substantially the same terms as those
granted in prior years.
Annual Incentive Compensation
Incentive payments to executive officers for 2010 under the Textron Inc. Short-Term Incentive Plan
(As amended and restated effective July 25, 2007) will be based on the following:
| • | Achievingefficiencytarget: 50% cash |
| • | Achieving earnings target: 45% |
| • | Achieving workforce diversity target: 5% |
“Cash efficiency” will be based (i) fifty percent (50%) upon goals relating to net targeted finance
receivable liquidations by Textron Financial Corporation versus
prescribed loss ratios, and (ii)
fifty percent (50%) upon targets relating to manufacturing cash flow.
Target payouts for the named executive officers range from 65% to 120% of the executive’s base
salary. The amount actually paid generally can range from zero, if the threshold level of actual
performance relating to target performance objectives is not achieved, to no more than twice the
target award level. Payouts are made in cash following review and certification of performance
results by the Committee.
Long-Term Incentive Compensation
For 2010 awards under the Textron Inc. 2007 Long-Term Incentive Plan (amended and restated as of
May 1, 2007), as amended, the mix of grant types will be redistributed such that 30% of the grant
value for each executive officer will be awards in the form of stock options, 30% in the form of
restricted stock units and 40% in the form of performance share units.
Restricted stock units awarded in 2010 to executive officers will vest in equal installments over
five years and will be settled in cash upon vesting. These awards will also receive dividend
equivalent payments on a quarterly basis prior to vesting.
Performance share units granted for the 2010-2012 cycle will be based 50% on achievement of
earnings targets and 50% on cash efficiency targets. The maximum payout on performance share units
will be 150%.
Failure to attain a minimum earnings performance level will result in the failure to earn any
performance share units related to the earnings portion of the award with respect to the related
year. Attainment between the minimum and maximum earnings goals will result in earning a portion of
the performance share units related to the earnings portion of the award as defined by a
pre-established mathematical formula. The Committee may determine an award less than that
determined by the formula but may not determine an award more than that derived by the formula.
The cash efficiency metric for the performance share units will work similarly to the earnings
metric, provided that no performance share units will be earned unless a minimum level of
performance is achieved and a portion of the units will be earned if performance is between the
minimum and maximum according to a mathematical formula.
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Table of Contents
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information appearing under “ELECTION OF DIRECTORS — Audit Committee,” “— Nominees for
Director,” “— Directors Continuing in Office,” “— Corporate Governance,” “— Code of Ethics” and
“SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in the Proxy Statement for our Annual
Meeting of Shareholders to be held on April 28, 2010 is incorporated by reference into this Annual
Report on Form 10-K.
Information regarding our executive officers is contained in Part I of this Annual Report on Form
10-K.
Item 11. Executive Compensation
The information appearing under “ELECTION OF DIRECTORS — Compensation of Directors,”
“COMPENSATION DISCUSSION AND ANALYSIS” and “EXECUTIVE COMPENSATION” in the Proxy Statement for our
Annual Meeting of Shareholders to be held on April 28, 2010 is incorporated by reference into this
Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information appearing under “SECURITY OWNERSHIP” and “EXECUTIVE COMPENSATION — Equity
Compensation Plan Information” in the Proxy Statement for our Annual Meeting of Shareholders to be
held on April 28, 2010 is incorporated by reference into this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information appearing under “ELECTION OF DIRECTORS — Director Independence” and
“EXECUTIVE COMPENSATION — Transactions with Related Persons” in the Proxy Statement for our Annual
Meeting of Shareholders to be held on April 28, 2010 is incorporated by reference into this Annual
Report on Form 10-K.
Item 14. Principal Accountant Fees and Services
The information appearing under “RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM — Fees to Independent Auditors” in the Proxy Statement for our Annual Meeting of
Shareholders to be held on April 28, 2010 is incorporated by reference into this Annual Report on
Form 10-K.
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Table of Contents
PART IV
Item 15. Exhibits and Financial Statement Schedules
Financial Statements and Schedules — See Index on Page 40.
| Exhibits | ||
|
|
||
|
3.1
|
Restated Certificate of Incorporation of Textron as filed January 29, 1998. Incorporated by reference to Exhibit 3.1 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 1998. | |
|
|
||
|
3.2
|
Amended and Restated By-Laws of Textron Inc. Incorporated by reference to Exhibit 3.1 to Textron’s Current Report on Form 8-K filed December 4, 2009. | |
|
|
||
|
4.1A
|
Indenture dated as of December 9, 1999, between Textron Financial Corporation and SunTrust Bank (formerly known as Sun Trust Bank, Atlanta) (including form of debt securities). Incorporated by reference to Exhibit 4.1 to Amendment No. 2 to Textron Financial Corporation’s Registration Statement on Form S-3 (No. 333-88509). | |
|
|
||
|
4.1B
|
First Supplemental Indenture dated November 16, 2006, between Textron Financial Corporation and U.S. Bank National Association (successor trustee to Sun Trust Bank) to Indenture dated as of December 9, 1999. Incorporated by reference to Exhibit 4.3 of Textron Financial Corporation’s Form S-3 (File No. 333-138755). | |
|
|
||
|
4.1C
|
Form of Medium-Term Note of Textron Financial Corporation. Incorporated by reference to Exhibit 4.3 to Textron Financial Corporation’s Current Report on Form 8-K filed November 17, 2006. | |
|
|
||
|
4.2A
|
Indenture dated as of November 30, 2001, between Textron Financial Canada Funding Corp. and SunTrust Bank, guaranteed by Textron Financial Corporation. Incorporated by reference to Exhibit 4.2 to Amendment No. 1 to Textron Financial Corporation’s Registration Statement on Form S-3 (No. 333-108464). | |
|
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||
|
4.2B
|
First Supplemental Indenture, dated November 16, 2006, between Textron Financial Canada Funding Corp., Textron Financial Corporation and U.S. Bank National Association (successor trustee to Sun Trust Bank) to Indenture dated November 30, 2001. Incorporated by reference to Exhibit 4.4 of Textron Financial Corporation’s Form S-3 (File No. 333-138755). | |
|
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||
|
4.2C
|
Form of Medium-Term Note of Textron Financial Canada Funding Corp. Incorporated by reference to Exhibit 4.4 to Textron Financial Corporation’s Current Report on Form 8-K filed November 17, 2006. | |
|
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||
|
4.3
|
Support Agreement dated as of May 25, 1994, between Textron Inc. and Textron Financial Corporation. Incorporated by reference to Exhibit 10.1 to Textron Financial Corporation’s Registration Statement on Form 10 (File No. 0-27559). | |
|
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||
|
NOTE:
|
Instruments defining the rights of holders of certain issues of long-term debt of Textron have not been filed as exhibits because the authorized principal amount of any one of such issues does not exceed 10% of the total assets of Textron and its subsidiaries on a consolidated basis. Textron agrees to furnish a copy of each such instrument to the Commission upon request. | |
|
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||
|
NOTE:
|
Exhibits 10.1 through 10.21 below are management contracts or compensatory plans, contracts or agreements. | |
|
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||
|
10.1A
|
Textron Inc. 2007 Long-Term Incentive Plan (amended and restated as of May 1, 2007). Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. | |
|
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||
|
10.1B
|
Amendment No.1 to Textron Inc. 2007 Long-Term Incentive Plan (amended and restated as of May 1, 2007), effective July 23, 2008. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 2008. | |
|
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||
|
10.1C
|
Form of Non-Qualified Stock Option Agreement. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. | |
|
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||
|
10.1D
|
Form of Incentive Stock Option Agreement. Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. | |
|
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||
|
10.1E
|
Form of Restricted Stock Unit Grant Agreement. Incorporated by reference to Exhibit 10.4 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. |
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Table of Contents
|
10.1F
|
Form of Restricted Stock Unit Grant Agreement with Dividend Equivalents. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2008. | |
|
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||
|
10.1G
|
Form of Cash-Settled Restricted Stock Unit Grant Agreement with Dividend Equivalents. Incorporated by reference to Exhibit 10.1G to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
|
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||
|
10.1H
|
Form of Performance Share Unit Grant Agreement. Incorporated by reference to Exhibit 10.1H to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
|
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||
|
10.1I
|
Performance Factors for Executive Officers for Performance Share Units under Textron Inc. 2007 Long-Term Incentive Plan. Incorporated by reference to Exhibit 99.2 to Textron’s Current Report on Form 8-K filed January 29, 2008. | |
|
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||
|
10.1J
|
Performance Factors for Executive Officers for Performance Share Units granted in 2009 under Textron Inc. 2007 Long-Term Incentive Plan. Incorporated by reference to Exhibit 99.2 to Textron’s Current Report on Form 8-K filed January 23, 2009. | |
|
|
||
|
10.1K
|
Form of Performance Cash Unit Grant Agreement. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 2009. | |
|
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||
|
10.2A
|
Textron Inc. Short-Term Incentive Plan (As amended and restated effective July 25, 2007). Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 2007. | |
|
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||
|
10.2B
|
Objectives for Executive Officers under Textron Inc. Short-Term Incentive Plan. Incorporated by reference to Exhibit 99.1 to Textron’s Current Report on Form 8-K filed January 23, 2009. | |
|
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||
|
10.3A
|
Textron Inc. 1999 Long-Term Incentive Plan for Textron Employees (Amended and Restated Effective July 25, 2007). Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 2007. | |
|
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||
|
10.3B
|
Form of Non-Qualified Stock Option Agreement. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 2004. | |
|
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||
|
10.3C
|
Form of Incentive Stock Option Agreement. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 2004. | |
|
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||
|
10.3D
|
Form of Restricted Stock Grant Agreement. Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 2004. | |
|
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||
|
10.4
|
Textron Spillover Savings Plan, effective January 1, 2009, including Appendix A, Defined Contribution Provisions of the Supplemental Benefits Plan for Textron Key Executives (As in effect before January 1, 2008). Incorporated by reference to Exhibit 10.5 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
|
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||
|
10.5
|
Textron Spillover Pension Plan, As Amended and Restated Effective January 1, 2009, including Appendix A (as amended and restated effective January 1, 2009), Defined Benefit Provisions of the Supplemental Benefits Plan for Textron Key Executives (As in effect before January 1, 2007). Incorporated by reference to Exhibit 10.6 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
|
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||
|
10.6
|
Supplemental Retirement Plan for Textron Key Executives, As Amended and Restated Effective January 1, 2009, including Appendix A, Provisions of the Supplemental Retirement Plan for Textron Key Executives (As in effect before January 1, 2008). Incorporated by reference to Exhibit 10.7 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
|
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||
|
10.7
|
Deferred Income Plan for Textron Executives, Effective January 1, 2009, including Appendix A, Provisions of the Deferred Income Plan for Textron Key Executives (As in effect before January 1, 2008). Incorporated by reference to Exhibit 10.8 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
|
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||
|
10.8
|
Deferred Income Plan for Non-Employee Directors, As Amended and Restated Effective January 1, 2009, including Appendix A, Prior Plan Provisions (As in effect before January 1, 2008). Incorporated by reference to Exhibit 10.9 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
|
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||
|
10.9
|
Survivor Benefit Plan for Textron Key Executives (As amended and restated effective July 25, 2007). Incorporated by reference to Exhibit 10.5 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 2007. Incorporated by reference to Exhibit 10.10 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. |
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|
10.10
|
Severance Plan for Textron Key Executives, As Amended and Restated Effective January 1, 2010. | |
|
|
||
|
10.11A
|
Form of Indemnity Agreement between Textron and its executive officers. Incorporated by reference to Exhibit A to Textron’s Proxy Statement for its Annual Meeting of Shareholders on April 29, 1987. | |
|
|
||
|
10.11B
|
Form of Indemnity Agreement between Textron and its non-employee directors (approved by the Nominating and Corporate Governance Committee of the Board of Directors on July 21, 2009 and entered into with all non-employee directors, effective as of August 1, 2009). Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 3, 2009. | |
|
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||
|
10.12
|
Amended and Restated Employment Agreement between Textron and Kenneth C. Bohlen dated as of February 26, 2008. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2008. | |
|
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||
|
10.13
|
Second Amended and Restated Employment Agreement between Textron and John D. Butler dated as of February 26, 2008. Incorporated by reference to Exhibit 10.3 to Textron’s Current Report on Form 8-K filed February 28, 2008. | |
|
|
||
|
10.14A
|
Amended and Restated Employment Agreement between Textron and Lewis B. Campbell dated as of February 26, 2008. Incorporated by reference to Exhibit 10.1 to Textron’s Current Report on Form 8-K filed February 28, 2008. | |
|
|
||
|
10.14B
|
Letter agreement between Textron and Lewis B. Campbell, dated September 22, 2009, along with clarification letter, dated September 30, 2009. Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 3, 2009. | |
|
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||
|
10.15A
|
Letter Agreement between Textron and Scott C. Donnelly, dated June 26, 2008. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 2008. | |
|
|
||
|
10.15B
|
Amendment to Letter Agreement between Textron and Scott C. Donnelly, dated December 16, 2008, together with Addendum No.1 thereto, dated December 23, 2008. Incorporated by reference to Exhibit 10.15B to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
|
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||
|
10.15C
|
Agreement between Textron and Scott C. Donnelly, dated May 1, 2009, related to Mr. Donnelly’s personal use of a portion of hangar space at T.F. Green Airport which is leased by Textron. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 2009. | |
|
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||
|
10.16
|
Amended and Restated Employment Agreement between Textron and Theodore R. French dated as of February 26, 2008. Incorporated by reference to Exhibit 10.2 to Textron’s Current Report on Form 8-K filed February 28, 2008. | |
|
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||
|
10.17
|
Second Amended and Restated Employment Agreement between Textron and Mary L. Howell dated as of February 26, 2008. Incorporated by reference to Exhibit 10.4 to Textron’s Current Report on Form 8-K filed February 28, 2008. | |
|
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||
|
10.18
|
Second Amended and Restated Employment Agreement between Textron and Terrence O’Donnell dated as of February 26, 2008. Incorporated by reference to Exhibit 10.5 to Textron’s Current Report on Form 8-K filed February 28, 2008. | |
|
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||
|
10.19
|
Letter Agreement between Textron and Frank Connor, dated July 27, 2009. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 3, 2009. | |
|
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||
|
10.20
|
Director Compensation. Incorporated by reference to Exhibit 10.21 to Textron’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007. | |
|
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||
|
10.21
|
Form of Aircraft Time Sharing Agreement between Textron and its executive officers. Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 2008. | |
|
|
||
|
10.22A
|
5-Year Credit Agreement, dated as of March 28, 2005, among Textron, the Banks listed therein, JPMorgan Chase Bank, N.A., as Administrative Agent, and Citibank, N.A., as Syndication Agent (the “5-Year Credit Agreement”). Incorporated by reference to Exhibit 10.1 to Textron’s Current Report on Form 8-K filed March 31, 2005. | |
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|
10.22B
|
Amendment No. 1, dated as of April 21, 2006, to 5-Year Credit Agreement. Incorporated by reference to Exhibit 10.1 to Textron’s Current Report on Form 8-K filed April 25, 2006. | |
|
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|
10.22C
|
Amendment No. 2, dated as of April 20, 2007 to 5-Year Credit Agreement. Incorporated by reference to Exhibit 10.1 to Textron’s Current Report on Form 8-K filed April 24, 2007. |
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|
10.23A
|
Five-Year Credit Agreement dated July 28, 2003 among Textron Financial Corporation, the Banks listed therein, and JPMorgan Chase Bank, as Administrative Agent. Incorporated by reference to Exhibit 10.2 to Textron Financial Corporation’s Current Report on Form 8-K as filed on August 26, 2003. | |
|
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||
|
10.23B
|
Amendment No. 1, dated as of July 25, 2005, to the Five-Year Credit Agreement dated as of July 28, 2003 among Textron Financial Corporation, the Banks listed therein, and JPMorgan Chase Bank N.A., as Administrative Agent. Incorporated by reference to Exhibit 10.1 of Textron Financial Corporation’s Current Report on Form 8-K filed July 27, 2005. | |
|
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||
|
10.23C
|
Amendment No. 2, dated as of April 28, 2006, to the Five-Year Credit Agreement dated as of July 28, 2003 among Textron Financial Corporation, the Banks listed therein, and JPMorgan Chase Bank N.A., as Administrative Agent. Incorporated by reference to Exhibit 10.1 of Textron Financial Corporation’s Current Report on Form 8-K filed May 1, 2006. | |
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||
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10.23D
|
Amendment No. 3, dated as of April 27, 2007, to the Five-Year Credit Agreement dated as of July 28, 2003 among Textron Financial Corporation, the Banks listed therein and JPMorgan Chase Bank as Administrative Agent. Incorporated by reference to Exhibit 10.1 of Textron Financial Corporation’s Current Report on Form 8-K dated April 27, 2007. | |
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|
10.24A
|
Master Services Agreement between Textron Inc. and Computer Sciences Corporation dated October 27, 2004. Confidential treatment has been requested for portions of this agreement. Incorporated by reference to Exhibit 10.26 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 1, 2005. | |
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10.24B
|
Amendment No. 4 to Master Services Agreement between Textron Inc. and Computer Sciences Corporation, dated July 1, 2007. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 2007. | |
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|
10.25A
|
Convertible Bond Hedge Transaction Confirmation, dated April 29, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.1 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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10.25B
|
Issuer Warrant Transaction Confirmation, dated April 29, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.2 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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10.25C
|
Convertible Bond Hedge Transaction Confirmation, dated April 29, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.3 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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||
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10.25D
|
Issuer Warrant Transaction Confirmation, dated April 29, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.4 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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|
10.25E
|
Convertible Bond Hedge Transaction Confirmation, dated April 30, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.5 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
|
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||
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10.25F
|
Issuer Warrant Transaction Confirmation, dated April 30, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.6 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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10.25G
|
Convertible Bond Hedge Transaction Confirmation, dated April 30, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.7 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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10.25H
|
Issuer Warrant Transaction Confirmation, dated April 30, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.8 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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||
|
10.25I
|
Issuer Warrant Transaction Reformation Agreement, dated May 4, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.9 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
|
10.25J
|
Issuer Warrant Transaction Reformation Agreement, dated May 4, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.10 to Textron’s Current Report on Form 8-K filed May 5, 2009. |
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|
10.25K
|
Additional Issuer Warrant Transaction Reformation Agreement, dated May 4, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.11 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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||
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10.25L
|
Additional Issuer Warrant Transaction Reformation Agreement, dated May 4, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.12 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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|
12.1
|
Computation of ratio of income to fixed charges of Textron Inc.’s Manufacturing group. | |
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12.2
|
Computation of ratio of income to fixed charges of Textron Inc., including all majority-owned subsidiaries. | |
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21
|
Certain subsidiaries of Textron. Other subsidiaries, which considered in the aggregate do not constitute a significant subsidiary, are omitted from such list. | |
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23
|
Consent of Independent Registered Public Accounting Firm. | |
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|
24
|
Power of attorney. | |
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|
31.1
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
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|
31.2
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
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|
32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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||
|
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
|
|
||
|
101
|
The following materials from Textron Inc.’s Annual Report on Form 10-K for the year ended January 2, 2010, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text and (vi) Schedule II - Valuation and Qualifying Accounts, tagged in block text format. |
Signatures
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on this 25th day of February 2010.
|
TEXTRON INC.
Registrant |
||||
| By: | /s/Frank T. Connor | |||
| Frank T. Connor | ||||
|
Executive Vice President and
Chief Financial Officer |
||||
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Table of Contents
Pursuant to the requirements of the Securities and Exchange Act of 1934, this Annual Report
on Form 10-K has been signed below on this 25th day of February 2010 by the following persons on
behalf of the registrant and in the capacities indicated:
| Name | Title | |
|
|
||
|
/s/ Scott C. Donnelly
|
President, Chief Executive Officer and | |
|
Scott C. Donnelly
|
Director (principal executive officer) | |
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||
|
*
|
Chairman and Director | |
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||
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*
|
Director | |
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*
|
Director | |
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*
|
Director | |
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*
|
Director | |
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*
|
Director | |
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*
|
Director | |
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*
|
Director | |
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*
|
Director | |
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*
|
Director | |
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*
|
Director | |
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||
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*
|
Director | |
|
|
||
|
/s/ Frank T. Connor
|
Executive Vice President and Chief Financial Officer | |
|
Frank T. Connor
|
(principal financial officer) | |
|
|
||
|
/s/ Richard L. Yates
|
Senior Vice President and Corporate Controller | |
|
Richard L. Yates
|
(principal accounting officer) |
|
*By:
|
/s/ Jayne M. Donegan
|
|||
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Jayne M. Donegan, Attorney-in-fact |
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Table of Contents
Exhibit Index
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3.1
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Restated Certificate of Incorporation of Textron as filed January 29, 1998. Incorporated by reference to Exhibit 3.1 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 1998. | |
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3.2
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Amended and Restated By-Laws of Textron Inc. Incorporated by reference to Exhibit 3.1 to Textron’s Current Report on Form 8-K filed December 4, 2009. | |
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4.1A
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Indenture dated as of December 9, 1999, between Textron Financial Corporation and SunTrust Bank (formerly known as Sun Trust Bank, Atlanta) (including form of debt securities). Incorporated by reference to Exhibit 4.1 to Amendment No. 2 to Textron Financial Corporation’s Registration Statement on Form S-3 (No. 333-88509). | |
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4.1B
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First Supplemental Indenture dated November 16, 2006, between Textron Financial Corporation and U.S. Bank National Association (successor trustee to Sun Trust Bank) to Indenture dated as of December 9, 1999. Incorporated by reference to Exhibit 4.3 of Textron Financial Corporation’s Form S-3 (File No. 333-138755). | |
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4.1C
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Form of Medium-Term Note of Textron Financial Corporation. Incorporated by reference to Exhibit 4.3 to Textron Financial Corporation’s Current Report on Form 8-K filed November 17, 2006. | |
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4.2A
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Indenture dated as of November 30, 2001, between Textron Financial Canada Funding Corp. and SunTrust Bank, guaranteed by Textron Financial Corporation. Incorporated by reference to Exhibit 4.2 to Amendment No. 1 to Textron Financial Corporation’s Registration Statement on Form S-3 (No. 333-108464). | |
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4.2B
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First Supplemental Indenture, dated November 16, 2006, between Textron Financial Canada Funding Corp., Textron Financial Corporation and U.S. Bank National Association (successor trustee to Sun Trust Bank) to Indenture dated November 30, 2001. Incorporated by reference to Exhibit 4.4 of Textron Financial Corporation’s Form S-3 (File No. 333-138755). | |
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4.2C
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Form of Medium-Term Note of Textron Financial Canada Funding Corp. Incorporated by reference to Exhibit 4.4 to Textron Financial Corporation’s Current Report on Form 8-K filed November 17, 2006. | |
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4.3
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Support Agreement dated as of May 25, 1994, between Textron Inc. and Textron Financial Corporation. Incorporated by reference to Exhibit 10.1 to Textron Financial Corporation’s Registration Statement on Form 10 (File No. 0-27559). | |
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NOTE:
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Instruments defining the rights of holders of certain issues of long-term debt of Textron have not been filed as exhibits because the authorized principal amount of any one of such issues does not exceed 10% of the total assets of Textron and its subsidiaries on a consolidated basis. Textron agrees to furnish a copy of each such instrument to the Commission upon request. | |
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NOTE:
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Exhibits 10.1 through 10.21 below are management contracts or compensatory plans, contracts or agreements. | |
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10.1A
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Textron Inc. 2007 Long-Term Incentive Plan (amended and restated as of May 1, 2007). Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. | |
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10.1B
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Amendment No.1 to Textron Inc. 2007 Long-Term Incentive Plan (amended and restated as of May 1, 2007), effective July 23, 2008. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 2008. | |
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10.1C
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Form of Non-Qualified Stock Option Agreement. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. | |
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10.1D
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Form of Incentive Stock Option Agreement. Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. | |
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10.1E
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Form of Restricted Stock Unit Grant Agreement. Incorporated by reference to Exhibit 10.4 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. |
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10.1F
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Form of Restricted Stock Unit Grant Agreement with Dividend Equivalents. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2008. | |
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10.1G
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Form of Cash-Settled Restricted Stock Unit Grant Agreement with Dividend Equivalents. Incorporated by reference to Exhibit 10.1G to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
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10.1H
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Form of Performance Share Unit Grant Agreement. Incorporated by reference to Exhibit 10.1H to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
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10.1I
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Performance Factors for Executive Officers for Performance Share Units under Textron Inc. 2007 Long-Term Incentive Plan. Incorporated by reference to Exhibit 99.2 to Textron’s Current Report on Form 8-K filed January 29, 2008. | |
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10.1J
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Performance Factors for Executive Officers for Performance Share Units granted in 2009 under Textron Inc. 2007 Long-Term Incentive Plan. Incorporated by reference to Exhibit 99.2 to Textron’s Current Report on Form 8-K filed January 23, 2009. | |
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10.1K
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Form of Performance Cash Unit Grant Agreement. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 2009. | |
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10.2A
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Textron Inc. Short-Term Incentive Plan (As amended and restated effective July 25, 2007). Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 2007. | |
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10.2B
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Objectives for Executive Officers under Textron Inc. Short-Term Incentive Plan. Incorporated by reference to Exhibit 99.1 to Textron’s Current Report on Form 8-K filed January 23, 2009. | |
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10.3A
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Textron Inc. 1999 Long-Term Incentive Plan for Textron Employees (Amended and Restated Effective July 25, 2007). Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 2007. | |
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10.3B
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Form of Non-Qualified Stock Option Agreement. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 2004. | |
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10.3C
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Form of Incentive Stock Option Agreement. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 2004. | |
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10.3D
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Form of Restricted Stock Grant Agreement. Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 2004. | |
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10.4
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Textron Spillover Savings Plan, effective January 1, 2009, including Appendix A, Defined Contribution Provisions of the Supplemental Benefits Plan for Textron Key Executives (As in effect before January 1, 2008). Incorporated by reference to Exhibit 10.5 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
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10.5
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Textron Spillover Pension Plan, As Amended and Restated Effective January 1, 2009, including Appendix A (as amended and restated effective January 1, 2009), Defined Benefit Provisions of the Supplemental Benefits Plan for Textron Key Executives (As in effect before January 1, 2007). Incorporated by reference to Exhibit 10.6 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
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10.6
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Supplemental Retirement Plan for Textron Key Executives, As Amended and Restated Effective January 1, 2009, including Appendix A, Provisions of the Supplemental Retirement Plan for Textron Key Executives (As in effect before January 1, 2008). Incorporated by reference to Exhibit 10.7 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
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10.7
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Deferred Income Plan for Textron Executives, Effective January 1, 2009, including Appendix A, Provisions of the Deferred Income Plan for Textron Key Executives (As in effect before January 1, 2008). Incorporated by reference to Exhibit 10.8 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
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10.8
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Deferred Income Plan for Non-Employee Directors, As Amended and Restated Effective January 1, 2009, including Appendix A, Prior Plan Provisions (As in effect before January 1, 2008). Incorporated by reference to Exhibit 10.9 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
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10.9
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Survivor Benefit Plan for Textron Key Executives (As amended and restated effective July 25, 2007). Incorporated by reference to Exhibit 10.5 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 2007. Incorporated by reference to Exhibit 10.10 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. |
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10.10
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Severance Plan for Textron Key Executives, As Amended and Restated Effective January 1, 2010. | |
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10.11A
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Form of Indemnity Agreement between Textron and its executive officers. Incorporated by reference to Exhibit A to Textron’s Proxy Statement for its Annual Meeting of Shareholders on April 29, 1987. | |
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10.11B
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Form of Indemnity Agreement between Textron and its non-employee directors (approved by the Nominating and Corporate Governance Committee of the Board of Directors on July 21, 2009 and entered into with all non-employee directors, effective as of August 1, 2009). Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 3, 2009. | |
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10.12
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Amended and Restated Employment Agreement between Textron and Kenneth C. Bohlen dated as of February 26, 2008. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2008. | |
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10.13
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Second Amended and Restated Employment Agreement between Textron and John D. Butler dated as of February 26, 2008. Incorporated by reference to Exhibit 10.3 to Textron’s Current Report on Form 8-K filed February 28, 2008. | |
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10.14A
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Amended and Restated Employment Agreement between Textron and Lewis B. Campbell dated as of February 26, 2008. Incorporated by reference to Exhibit 10.1 to Textron’s Current Report on Form 8-K filed February 28, 2008. | |
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10.14B
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Letter agreement between Textron and Lewis B. Campbell, dated September 22, 2009, along with clarification letter, dated September 30, 2009. Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 3, 2009. | |
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10.15A
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Letter Agreement between Textron and Scott C. Donnelly, dated June 26, 2008. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 2008. | |
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10.15B
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Amendment to Letter Agreement between Textron and Scott C. Donnelly, dated December 16, 2008, together with Addendum No.1 thereto, dated December 23, 2008. Incorporated by reference to Exhibit 10.15B to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. | |
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10.15C
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Agreement between Textron and Scott C. Donnelly, dated May 1, 2009, related to Mr. Donnelly’s personal use of a portion of hangar space at T.F. Green Airport which is leased by Textron. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 2009. | |
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10.16
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Amended and Restated Employment Agreement between Textron and Theodore R. French dated as of February 26, 2008. Incorporated by reference to Exhibit 10.2 to Textron’s Current Report on Form 8-K filed February 28, 2008. | |
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10.17
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Second Amended and Restated Employment Agreement between Textron and Mary L. Howell dated as of February 26, 2008. Incorporated by reference to Exhibit 10.4 to Textron’s Current Report on Form 8-K filed February 28, 2008. | |
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10.18
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Second Amended and Restated Employment Agreement between Textron and Terrence O’Donnell dated as of February 26, 2008. Incorporated by reference to Exhibit 10.5 to Textron’s Current Report on Form 8-K filed February 28, 2008. | |
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10.19
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Letter Agreement between Textron and Frank Connor, dated July 27, 2009. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 3, 2009. | |
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10.20
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Director Compensation. Incorporated by reference to Exhibit 10.21 to Textron’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007. | |
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10.21
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Form of Aircraft Time Sharing Agreement between Textron and its executive officers. Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 2008. | |
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10.22A
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5-Year Credit Agreement, dated as of March 28, 2005, among Textron, the Banks listed therein, JPMorgan Chase Bank, N.A., as Administrative Agent, and Citibank, N.A., as Syndication Agent (the “5-Year Credit Agreement”). Incorporated by reference to Exhibit 10.1 to Textron’s Current Report on Form 8-K filed March 31, 2005. | |
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10.22B
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Amendment No. 1, dated as of April 21, 2006, to 5-Year Credit Agreement. Incorporated by reference to Exhibit 10.1 to Textron’s Current Report on Form 8-K filed April 25, 2006. | |
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10.22C
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Amendment No. 2, dated as of April 20, 2007 to 5-Year Credit Agreement. Incorporated by reference to Exhibit 10.1 to Textron’s Current Report on Form 8-K filed April 24, 2007. |
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10.23A
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Five-Year Credit Agreement dated July 28, 2003 among Textron Financial Corporation, the Banks listed therein, and JPMorgan Chase Bank, as Administrative Agent. Incorporated by reference to Exhibit 10.2 to Textron Financial Corporation’s Current Report on Form 8-K as filed on August 26, 2003. | |
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10.23B
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Amendment No. 1, dated as of July 25, 2005, to the Five-Year Credit Agreement dated as of July 28, 2003 among Textron Financial Corporation, the Banks listed therein, and JPMorgan Chase Bank N.A., as Administrative Agent. Incorporated by reference to Exhibit 10.1 of Textron Financial Corporation’s Current Report on Form 8-K filed July 27, 2005. | |
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10.23C
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Amendment No. 2, dated as of April 28, 2006, to the Five-Year Credit Agreement dated as of July 28, 2003 among Textron Financial Corporation, the Banks listed therein, and JPMorgan Chase Bank N.A., as Administrative Agent. Incorporated by reference to Exhibit 10.1 of Textron Financial Corporation’s Current Report on Form 8-K filed May 1, 2006. | |
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10.23D
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Amendment No. 3, dated as of April 27, 2007, to the Five-Year Credit Agreement dated as of July 28, 2003 among Textron Financial Corporation, the Banks listed therein and JPMorgan Chase Bank as Administrative Agent. Incorporated by reference to Exhibit 10.1 of Textron Financial Corporation’s Current Report on Form 8-K dated April 27, 2007. | |
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10.24A
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Master Services Agreement between Textron Inc. and Computer Sciences Corporation dated October 27, 2004. Confidential treatment has been requested for portions of this agreement. Incorporated by reference to Exhibit 10.26 to Textron’s Annual Report on Form 10-K for the fiscal year ended January 1, 2005. | |
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10.24B
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Amendment No. 4 to Master Services Agreement between Textron Inc. and Computer Sciences Corporation, dated July 1, 2007. Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 2007. | |
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10.25A
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Convertible Bond Hedge Transaction Confirmation, dated April 29, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.1 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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10.25B
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Issuer Warrant Transaction Confirmation, dated April 29, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.2 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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10.25C
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Convertible Bond Hedge Transaction Confirmation, dated April 29, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.3 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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10.25D
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Issuer Warrant Transaction Confirmation, dated April 29, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.4 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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10.25E
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Convertible Bond Hedge Transaction Confirmation, dated April 30, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.5 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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10.25F
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Issuer Warrant Transaction Confirmation, dated April 30, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.6 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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10.25G
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Convertible Bond Hedge Transaction Confirmation, dated April 30, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.7 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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10.25H
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Issuer Warrant Transaction Confirmation, dated April 30, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.8 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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10.25I
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Issuer Warrant Transaction Reformation Agreement, dated May 4, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.9 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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10.25J
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Issuer Warrant Transaction Reformation Agreement, dated May 4, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.10 to Textron’s Current Report on Form 8-K filed May 5, 2009. |
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10.25K
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Additional Issuer Warrant Transaction Reformation Agreement, dated May 4, 2009, between Goldman, Sachs & Co. and Textron. Incorporated by reference to Exhibit 10.11 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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10.25L
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Additional Issuer Warrant Transaction Reformation Agreement, dated May 4, 2009, between JPMorgan Chase Bank, National Association and Textron. Incorporated by reference to Exhibit 10.12 to Textron’s Current Report on Form 8-K filed May 5, 2009. | |
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12.1
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Computation of ratio of income to fixed charges of Textron Inc.’s Manufacturing group. | |
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12.2
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Computation of ratio of income to fixed charges of Textron Inc., including all majority-owned subsidiaries. | |
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21
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Certain subsidiaries of Textron. Other subsidiaries, which considered in the aggregate do not constitute a significant subsidiary, are omitted from such list. | |
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23
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Consent of Independent Registered Public Accounting Firm. | |
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24
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Power of attorney. | |
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31.1
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Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
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31.2
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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
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32.1
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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32.2
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Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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101
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The following materials from Textron Inc.’s Annual Report on Form 10-K for the year ended January 2, 2010, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text and (vi) Schedule II - Valuation and Qualifying Accounts, tagged in block text format. |
TABLE OF CONTENTS
Part IprintItem 1. BusinessprintItem 1A. Risk FactorsprintItem 1B. Unresolved Staff CommentsprintItem 2. PropertiesprintItem 3. Legal ProceedingsprintItem 4. Submission Of Matters To A Vote Of Security HoldersprintPart IIprintItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesprintItem 6. Selected Financial DataprintItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 7A. Quantitative and Qualitative Disclosures About Market RiskprintItem 8. Financial Statements and Supplementary DataprintNote 1. Summary Of Significant Accounting PoliciesprintNote 2. Discontinued OperationsprintNote 3. Business Acquisitions, Goodwill and Intangible AssetsprintNote 4. Accounts ReceivableprintNote 5. Finance Receivables and SecuritizationsprintNote 6. InventoriesprintNote 7. Property, Plant and Equipment, NetprintNote 8. Debt and Credit FacilitiesprintNote 9. DerivativesprintNote 10. Fair Values Of Assets and LiabilitiesprintNote 11. Shareholders EquityprintNote 12. Special ChargesprintNote 13. Share-based CompensationprintNote 14. Retirement PlansprintPart DprintNote 15. Income TaxesprintNote 16. Commitments and ContingenciesprintNote 17. Research and DevelopmentprintNote 18. Guarantees and IndemnificationsprintNote 19. Supplemental Cash Flow and Other InformationprintNote 20. Segment and Geographic DataprintItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureprintItem 9A. Controls and ProceduresprintItem 9B. Other InformationprintPart IIIprintItem 10. Directors, Executive Officers and Corporate GovernanceprintItem 11. Executive CompensationprintItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersprintItem 13. Certain Relationships and Related Transactions and Director IndependenceprintItem 14. Principal Accountant Fees and ServicesprintPart IVprintItem 15. Exhibits and Financial Statement Schedulesprint