q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
FORM
10-Q
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934
For
the fiscal quarter ended June 30, 2007
|
|
OR
|
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
Commission
file number 1-5480
_______________
TEXTRON
INC.
(Exact
name of registrant as specified in its charter)
_______________
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
|
05-0315468
(I.R.S.
Employer Identification No.)
|
40
Westminster Street, Providence, RI 02903
401-421-2800
(Address
and telephone number of principal executive offices)
_______________
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements
for
the past 90 days. Yes ü No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer
ü Accelerated
filer ___ Non-accelerated filer ___
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
__ No ü
Common
stock outstanding at July 14, 2007 – 124,865,625 shares
TEXTRON
INC.
INDEX
|
|
Page
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
7
|
Item
2.
|
|
14
|
Item
3.
|
|
23
|
Item
4.
|
|
23
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
2.
|
|
24
|
Item
4.
|
|
25
|
Item
5.
|
|
26
|
Item
6.
|
|
26
|
|
|
27
|
|
|
|
PART
I. FINANCIAL INFORMATION
Item
1. FINANCIAL STATEMENTS
Consolidated
Statements of Operations (Unaudited)
(In
millions, except per share amounts)
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
revenues
|
|
$ |
2,996
|
|
|
$ |
2,628
|
|
|
$ |
5,750
|
|
|
$ |
5,078
|
|
Finance
revenues
|
|
|
239
|
|
|
|
192
|
|
|
|
449
|
|
|
|
374
|
|
Total
revenues
|
|
|
3,235
|
|
|
|
2,820
|
|
|
|
6,199
|
|
|
|
5,452
|
|
Costs,
expenses and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
2,374
|
|
|
|
2,081
|
|
|
|
4,554
|
|
|
|
4,036
|
|
Selling
and administrative
|
|
|
429
|
|
|
|
376
|
|
|
|
801
|
|
|
|
737
|
|
Interest
expense, net
|
|
|
124
|
|
|
|
109
|
|
|
|
247
|
|
|
|
203
|
|
Provision
for losses on finance receivables
|
|
|
11
|
|
|
|
(1 |
) |
|
|
16
|
|
|
|
8
|
|
Total
costs, expenses and
other
|
|
|
2,938
|
|
|
|
2,565
|
|
|
|
5,618
|
|
|
|
4,984
|
|
Income
from continuing operations before income taxes
|
|
|
297
|
|
|
|
255
|
|
|
|
581
|
|
|
|
468
|
|
Income
taxes
|
|
|
(82 |
) |
|
|
(78 |
) |
|
|
(168 |
) |
|
|
(133 |
) |
Income
from continuing operations
|
|
|
215
|
|
|
|
177
|
|
|
|
413
|
|
|
|
335
|
|
Loss
from discontinued operations, net of income taxes
|
|
|
(5 |
) |
|
|
(108 |
) |
|
|
(7 |
) |
|
|
(98 |
) |
Net
income
|
|
$ |
210
|
|
|
$ |
69
|
|
|
$ |
406
|
|
|
$ |
237
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
1.72
|
|
|
$ |
1.38
|
|
|
$ |
3.30
|
|
|
$ |
2.59
|
|
Discontinued
operations, net of
income taxes
|
|
|
(0.03 |
) |
|
|
(0.84 |
) |
|
|
(0.05 |
) |
|
|
(0.76 |
) |
Basic
earnings per share
|
|
$ |
1.69
|
|
|
$ |
0.54
|
|
|
$ |
3.25
|
|
|
$ |
1.83
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
1.69
|
|
|
$ |
1.34
|
|
|
$ |
3.24
|
|
|
$ |
2.53
|
|
Discontinued
operations, net of
income taxes
|
|
|
(0.03 |
) |
|
|
(0.81 |
) |
|
|
(0.05 |
) |
|
|
(0.74 |
) |
Diluted
earnings per share
|
|
$ |
1.66
|
|
|
$ |
0.53
|
|
|
$ |
3.19
|
|
|
$ |
1.79
|
|
Dividends
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.08
Preferred stock, Series
A
|
|
$ |
0.52
|
|
|
$ |
0.52
|
|
|
$ |
1.04
|
|
|
$ |
1.04
|
|
$1.40
Preferred stock, Series
B
|
|
$ |
0.35
|
|
|
$ |
0.35
|
|
|
$ |
0.70
|
|
|
$ |
0.70
|
|
Common
stock
|
|
$ |
0.3875
|
|
|
$ |
0.3875
|
|
|
$ |
0.775
|
|
|
$ |
0.775
|
|
See
Notes to the consolidated financial statements.
3.
Consolidated
Balance Sheets (Unaudited)
(Dollars
in millions)
|
|
June
30,
2007
|
|
|
December
30,
2006
|
|
Assets
|
|
|
|
|
|
|
Manufacturing
group
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
631
|
|
|
$ |
733
|
|
Accounts
receivable, less allowance for doubtful accounts of $34 and
$34
|
|
|
1,075
|
|
|
|
964
|
|
Inventories
|
|
|
2,518
|
|
|
|
2,069
|
|
Other
current assets
|
|
|
510
|
|
|
|
521
|
|
Total
current
assets
|
|
|
4,734
|
|
|
|
4,287
|
|
Property,
plant and equipment, less accumulated
depreciation
and amortization
of $2,258 and $2,147
|
|
|
1,807
|
|
|
|
1,773
|
|
Goodwill
|
|
|
1,262
|
|
|
|
1,257
|
|
Other
assets
|
|
|
1,264
|
|
|
|
1,233
|
|
Total
Manufacturing group
assets
|
|
|
9,067
|
|
|
|
8,550
|
|
Finance
group
|
|
|
|
|
|
|
|
|
Cash
|
|
|
66
|
|
|
|
47
|
|
Finance
receivables, less allowance for losses of $86 and $93
|
|
|
8,253
|
|
|
|
8,217
|
|
Goodwill
|
|
|
169
|
|
|
|
169
|
|
Other
assets
|
|
|
568
|
|
|
|
567
|
|
Total
Finance group
assets
|
|
|
9,056
|
|
|
|
9,000
|
|
Total
assets
|
|
$ |
18,123
|
|
|
$ |
17,550
|
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Manufacturing
group
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt and short-term debt
|
|
$ |
86
|
|
|
$ |
80
|
|
Accounts
payable
|
|
|
936
|
|
|
|
814
|
|
Accrued
liabilities
|
|
|
2,135
|
|
|
|
2,100
|
|
Total
current
liabilities
|
|
|
3,157
|
|
|
|
2,994
|
|
Other
liabilities
|
|
|
2,328
|
|
|
|
2,329
|
|
Long-term
debt
|
|
|
1,709
|
|
|
|
1,720
|
|
Total
Manufacturing group
liabilities
|
|
|
7,194
|
|
|
|
7,043
|
|
Finance
group
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
567
|
|
|
|
499
|
|
Deferred
income taxes
|
|
|
492
|
|
|
|
497
|
|
Debt
|
|
|
6,937
|
|
|
|
6,862
|
|
Total
Finance group
liabilities
|
|
|
7,996
|
|
|
|
7,858
|
|
Total
liabilities
|
|
|
15,190
|
|
|
|
14,901
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
Capital
stock:
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
10
|
|
|
|
10
|
|
Common
stock
|
|
|
26
|
|
|
|
26
|
|
Capital
surplus
|
|
|
1,893
|
|
|
|
1,786
|
|
Retained
earnings
|
|
|
6,509
|
|
|
|
6,211
|
|
Accumulated
other comprehensive loss
|
|
|
(564 |
) |
|
|
(644 |
) |
|
|
|
7,874
|
|
|
|
7,389
|
|
Less
cost of treasury shares
|
|
|
4,941
|
|
|
|
4,740
|
|
Total
shareholders’ equity
|
|
|
2,933
|
|
|
|
2,649
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
18,123
|
|
|
$ |
17,550
|
|
Common
shares outstanding (in thousands)
|
|
|
124,855
|
|
|
|
125,596
|
|
|
See
Notes to the consolidated financial
statements.
|
4.
Consolidated
Statements of Cash Flows (Unaudited)
For
the
Six Months Ended June 30, 2007 and July 1, 2006, respectively
(In
millions)
|
|
Consolidated
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
406
|
|
|
$ |
237
|
|
Loss
from discontinued operations
|
|
|
7
|
|
|
|
98
|
|
Income
from continuing operations
|
|
|
413
|
|
|
|
335
|
|
Adjustments
to reconcile income from continuing operations to net cash provided
by
operating activities:
|
|
|
|
|
|
|
|
|
Earnings
of Finance group, net
of distributions
|
|
|
-
|
|
|
|
-
|
|
Depreciation
and
amortization
|
|
|
153
|
|
|
|
138
|
|
Provision
for losses on
finance receivables
|
|
|
16
|
|
|
|
8
|
|
Share-based
compensation
|
|
|
18
|
|
|
|
17
|
|
Deferred
income
taxes
|
|
|
10
|
|
|
|
2
|
|
Changes
in assets and
liabilities excluding those related to acquisitions and
divestitures:
|
|
|
|
|
|
|
|
|
Accounts
receivable,
net
|
|
|
(103 |
) |
|
|
(109 |
) |
Inventories
|
|
|
(447 |
) |
|
|
(398 |
) |
Other
assets
|
|
|
49
|
|
|
|
25
|
|
Accounts
payable
|
|
|
118
|
|
|
|
257
|
|
Accrued
and other
liabilities
|
|
|
36
|
|
|
|
58
|
|
Captive
finance receivables,
net
|
|
|
(171 |
) |
|
|
(205 |
) |
Other
operating activities,
net
|
|
|
31
|
|
|
|
32
|
|
Net
cash provided by operating
activities of continuing operations
|
|
|
123
|
|
|
|
160
|
|
Net
cash (used in) provided by
operating activities of discontinued operations
|
|
|
(3 |
) |
|
|
65
|
|
Net
cash provided by operating
activities
|
|
|
120
|
|
|
|
225
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Finance
receivables:
|
|
|
|
|
|
|
|
|
Originated
or
purchased
|
|
|
(5,964 |
) |
|
|
(5,475 |
) |
Repaid
|
|
|
5,463
|
|
|
|
4,658
|
|
Proceeds
on receivables sales
and securitization sales
|
|
|
689
|
|
|
|
50
|
|
Capital
expenditures
|
|
|
(142 |
) |
|
|
(134 |
) |
Proceeds
on sale of property, plant and equipment
|
|
|
3
|
|
|
|
3
|
|
Other
investing activities, net
|
|
|
12
|
|
|
|
38
|
|
Net
cash provided by (used in)
investing activities of continuing operations
|
|
|
61
|
|
|
|
(860 |
) |
Net
cash provided by (used in)
investing activities of discontinued operations
|
|
|
32
|
|
|
|
(21 |
) |
Net
cash provided by (used in)
investing activities
|
|
|
93
|
|
|
|
(881 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
(Decrease)
increase in short-term debt
|
|
|
(145 |
) |
|
|
389
|
|
Proceeds
from issuance of long-term debt
|
|
|
1,070
|
|
|
|
1,034
|
|
Principal
payments and retirements of long-term debt
|
|
|
(992 |
) |
|
|
(655 |
) |
Proceeds
from employee stock ownership plans
|
|
|
69
|
|
|
|
143
|
|
Purchases
of Textron common stock
|
|
|
(221 |
) |
|
|
(598 |
) |
Dividends
paid
|
|
|
(97 |
) |
|
|
(147 |
) |
Dividends
paid to Manufacturing group
|
|
|
-
|
|
|
|
-
|
|
Capital
contributions paid to Finance group
|
|
|
-
|
|
|
|
-
|
|
Excess
tax benefits related to stock option exercises
|
|
|
12
|
|
|
|
18
|
|
Net
cash (used in) provided by
financing activities of continuing operations
|
|
|
(304 |
) |
|
|
184
|
|
Net
cash used in financing
activities of discontinued operations
|
|
|
-
|
|
|
|
(6 |
) |
Net
cash (used in) provided by
financing activities
|
|
|
(304 |
) |
|
|
178
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
8
|
|
|
|
7
|
|
Net
decrease in cash and cash equivalents
|
|
|
(83 |
) |
|
|
(471 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
780
|
|
|
|
796
|
|
Cash
and cash equivalents at end of period
|
|
$ |
697
|
|
|
$ |
325
|
|
Supplemental
schedule of non-cash investing and financing activities from continuing
operations:
|
|
|
|
|
|
|
|
|
Capital
expenditures financed through capital leases
|
|
$ |
22
|
|
|
$ |
5
|
|
See
Notes to the consolidated financial statements.
5.
TEXTRON
INC.
Consolidated
Statements of Cash Flows (Unaudited) (Continued)
For
the
Six Months Ended June 30, 2007 and July 1, 2006, respectively
(In
millions)
|
|
Manufacturing
Group*
|
|
|
Finance
Group*
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
406
|
|
|
$ |
237
|
|
|
$ |
76
|
|
|
$ |
67
|
|
Loss
from discontinued operations
|
|
|
7
|
|
|
|
98
|
|
|
|
-
|
|
|
|
-
|
|
Income
from continuing operations
|
|
|
413
|
|
|
|
335
|
|
|
|
76
|
|
|
|
67
|
|
Adjustments
to reconcile income from continuing operations to net cash provided
by
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
of Finance group, net
of distributions
|
|
|
59
|
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation
and
amortization
|
|
|
134
|
|
|
|
119
|
|
|
|
19
|
|
|
|
19
|
|
Provision
for losses on
finance receivables
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
8
|
|
Share-based
compensation
|
|
|
18
|
|
|
|
17
|
|
|
|
-
|
|
|
|
-
|
|
Deferred
income
taxes
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
12
|
|
|
|
5
|
|
Changes
in assets and
liabilities excluding those related to acquisitions and
divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable,
net
|
|
|
(103 |
) |
|
|
(109 |
) |
|
|
-
|
|
|
|
-
|
|
Inventories
|
|
|
(438 |
) |
|
|
(356 |
) |
|
|
-
|
|
|
|
-
|
|
Other
assets
|
|
|
24
|
|
|
|
18
|
|
|
|
20
|
|
|
|
1
|
|
Accounts
payable
|
|
|
118
|
|
|
|
257
|
|
|
|
-
|
|
|
|
-
|
|
Accrued
and other
liabilities
|
|
|
24
|
|
|
|
7
|
|
|
|
12
|
|
|
|
51
|
|
Captive
finance receivables,
net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
operating activities,
net
|
|
|
33
|
|
|
|
28
|
|
|
|
(2 |
) |
|
|
4
|
|
Net
cash provided by operating
activities of continuing operations
|
|
|
280
|
|
|
|
326
|
|
|
|
153
|
|
|
|
155
|
|
Net
cash (used in) provided by
operating activities of discontinued operations
|
|
|
(3 |
) |
|
|
69
|
|
|
|
-
|
|
|
|
(4 |
) |
Net
cash provided by operating
activities
|
|
|
277
|
|
|
|
395
|
|
|
|
153
|
|
|
|
151
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated
or
purchased
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,489 |
) |
|
|
(5,996 |
) |
Repaid
|
|
|
-
|
|
|
|
-
|
|
|
|
5,795
|
|
|
|
4,974
|
|
Proceeds
on receivables sales
and securitization sales
|
|
|
-
|
|
|
|
-
|
|
|
|
711
|
|
|
|
50
|
|
Capital
expenditures
|
|
|
(138 |
) |
|
|
(129 |
) |
|
|
(4 |
) |
|
|
(5 |
) |
Proceeds
on sale of property, plant and equipment
|
|
|
3
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
Other
investing activities, net
|
|
|
(2 |
) |
|
|
(4 |
) |
|
|
10
|
|
|
|
6
|
|
Net
cash (used in) provided by
investing activities of continuing operations
|
|
|
(137 |
) |
|
|
(130 |
) |
|
|
23
|
|
|
|
(971 |
) |
Net
cash provided by (used in)
investing activities of discontinued operations
|
|
|
32
|
|
|
|
(21 |
) |
|
|
-
|
|
|
|
-
|
|
Net
cash (used in) provided by
investing activities
|
|
|
(105 |
) |
|
|
(151 |
) |
|
|
23
|
|
|
|
(971 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in short-term debt
|
|
|
(44 |
) |
|
|
(123 |
) |
|
|
(101 |
) |
|
|
512
|
|
Proceeds
from issuance of long-term debt
|
|
|
1
|
|
|
|
-
|
|
|
|
1,069
|
|
|
|
1,034
|
|
Principal
payments and retirements of long-term debt
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(989 |
) |
|
|
(652 |
) |
Proceeds
from employee stock ownership plans
|
|
|
69
|
|
|
|
143
|
|
|
|
-
|
|
|
|
-
|
|
Purchases
of Textron common stock
|
|
|
(221 |
) |
|
|
(598 |
) |
|
|
-
|
|
|
|
-
|
|
Dividends
paid
|
|
|
(97 |
) |
|
|
(147 |
) |
|
|
-
|
|
|
|
-
|
|
Dividends
paid to Manufacturing group
|
|
|
-
|
|
|
|
-
|
|
|
|
(135 |
) |
|
|
(80 |
) |
Capital
contributions paid to Finance Group
|
|
|
-
|
|
|
|
(18 |
) |
|
|
-
|
|
|
|
18
|
|
Excess
tax benefits related to stock option exercises
|
|
|
12
|
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
Net
cash (used in) provided by
financing activities of continuing operations
|
|
|
(283 |
) |
|
|
(728 |
) |
|
|
(156 |
) |
|
|
832
|
|
Net
cash used in financing
activities of discontinued operations
|
|
|
-
|
|
|
|
(6 |
) |
|
|
-
|
|
|
|
-
|
|
Net
cash (used in) provided by
financing activities
|
|
|
(283 |
) |
|
|
(734 |
) |
|
|
(156 |
) |
|
|
832
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
9
|
|
|
|
6
|
|
|
|
(1 |
) |
|
|
1
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(102 |
) |
|
|
(484 |
) |
|
|
19
|
|
|
|
13
|
|
Cash
and cash equivalents at beginning of period
|
|
|
733
|
|
|
|
786
|
|
|
|
47
|
|
|
|
10
|
|
Cash
and cash equivalents at end of period
|
|
$ |
631
|
|
|
$ |
302
|
|
|
$ |
66
|
|
|
$ |
23
|
|
Supplemental
schedule of non-cash investing and financing activities from continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures financed through capital leases
|
|
$ |
22
|
|
|
$ |
5
|
|
|
$ |
-
|
|
|
$ |
-
|
|
*Textron
is segregated into a Manufacturing group and a Finance group, as described
in
Note 1 to the consolidated financial statements. The Finance group’s pre-tax
income in excess of dividends paid is excluded from the Manufacturing group’s
cash flows. All significant transactions between the borrowing groups have
been
eliminated from the consolidated column provided on page 5.
See
Notes to the consolidated financial statements.
6.
Notes
to the Consolidated Financial Statements (Unaudited)
Note
1: Basis of Presentation
The
consolidated interim financial statements included in this quarterly report
should be read in conjunction with the consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 30,
2006. In the opinion of management, the interim financial statements
reflect all adjustments (consisting only of normal recurring adjustments) that
are necessary for the fair presentation of our consolidated financial position,
results of operations and cash flows for the interim periods
presented. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full
year.
Our
financings are conducted through two separate borrowing groups. The
Manufacturing group consists of Textron Inc., consolidated with the entities
that operate in the Bell, Cessna and Industrial segments, while the Finance
group consists of the Finance segment, comprised of Textron Financial
Corporation and its subsidiaries. We designed this framework to enhance our
borrowing power by separating the Finance group. Our
Manufacturing group operations include the development, production and delivery
of tangible goods and services, while our Finance group provides financial
services. Due to the fundamental differences between each borrowing group’s
activities, investors, rating agencies and analysts use different measures
to
evaluate each group’s performance. To support those evaluations, we present
balance sheet and cash flow information for each borrowing group within the
consolidated financial statements. All significant intercompany
transactions are eliminated from the consolidated financial statements,
including retail and wholesale financing activities for inventory sold by our
Manufacturing group that is financed by our Finance group.
Note
2: Inventories
(In
millions)
|
|
June
30,
2007
|
|
|
December
30,
2006
|
|
Finished
goods
|
|
$ |
785
|
|
|
$ |
665
|
|
Work
in process
|
|
|
1,794
|
|
|
|
1,562
|
|
Raw
materials
|
|
|
463
|
|
|
|
435
|
|
|
|
|
3,042
|
|
|
|
2,662
|
|
Less
progress/milestone payments
|
|
|
524
|
|
|
|
593
|
|
|
|
$ |
2,518
|
|
|
$ |
2,069
|
|
Note
3: Finance Receivables
In
the
first quarter of 2007, we adopted Financial Accounting Standards Board (“FASB”)
Staff Position No. 13-2 “Accounting for a Change or Projected Change in the
Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease
Transaction” (“FSP 13-2”). FSP 13-2 requires a recalculation of
returns on leveraged leases if there is a change or projected change in the
timing of cash flows related to income taxes generated by the leveraged
leases. The impact of any estimated change in projected cash flows
must be reported as an adjustment to the net leveraged lease investment and
retained earnings at the date of adoption. Our Finance group has
leveraged leases with an initial investment balance of $209 million that we
estimate could be impacted by changes in the timing of cash flows related to
income taxes. Upon the adoption, we reduced retained earnings for the
$33 million cumulative effect of a change in accounting principle, and reduced
our investment in these leveraged leases by $50 million and deferred income
tax
liabilities by $17 million.
7.
Note
4: Comprehensive Income
Our
comprehensive income for the periods is provided below:
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
Net
income
|
|
$ |
210
|
|
|
$ |
69
|
|
|
$ |
406
|
|
|
$ |
237
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
translation
adjustment
|
|
|
27
|
|
|
|
-
|
|
|
|
29
|
|
|
|
(3 |
) |
Net
deferred gain on hedge
contracts
|
|
|
27
|
|
|
|
12
|
|
|
|
22
|
|
|
|
14
|
|
Recognition
of prior service
cost and unrealized losses on
pension
and postretirement
benefits
|
|
|
14
|
|
|
|
-
|
|
|
|
29
|
|
|
|
-
|
|
Other
|
|
|
(1 |
) |
|
|
(4 |
) |
|
|
-
|
|
|
|
(2 |
) |
Comprehensive
income
|
|
$ |
277
|
|
|
$ |
77
|
|
|
$ |
486
|
|
|
$ |
246
|
|
Note
5: Earnings per Share
We
calculate basic and diluted earnings per share based on income available to
common shareholders, which approximates net income for each
period. We use the weighted-average number of common shares
outstanding during the period for the computation of basic earnings per share.
Diluted earnings per share includes the dilutive effect of convertible preferred
shares, stock options and restricted stock in the weighted-average number of
common shares outstanding.
The
weighted-average shares outstanding for basic and diluted earnings per share
are
as follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
thousands)
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
Basic
weighted-average shares outstanding
|
|
|
124,851
|
|
|
|
128,453
|
|
|
|
125,013
|
|
|
|
129,185
|
|
Dilutive
effect of convertible preferred shares, stock options
and
restricted
stock
|
|
|
2,285
|
|
|
|
2,841
|
|
|
|
2,357
|
|
|
|
2,817
|
|
Diluted
weighted-average shares outstanding
|
|
|
127,136
|
|
|
|
131,294
|
|
|
|
127,370
|
|
|
|
132,002
|
|
Note
6: Share-Based Compensation
The
compensation expense we recorded in net income for our share-based compensation
plans is as follows:
|
|
Three
Months Ended
|
|
|
Six
Month Ended
|
|
(In
millions)
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
Compensation
expense, net of hedge income or expense
|
|
$ |
28
|
|
|
$ |
18
|
|
|
$ |
41
|
|
|
$ |
40
|
|
Income
tax benefit
|
|
|
(17 |
) |
|
|
(5 |
) |
|
|
(19 |
) |
|
|
(18 |
) |
Total
net compensation cost included in net income
|
|
$ |
11
|
|
|
$ |
13
|
|
|
$ |
22
|
|
|
$ |
22
|
|
Net
compensation costs included in discontinued operations
|
|
$ |
-
|
|
|
$ |
1
|
|
|
$ |
-
|
|
|
$ |
2
|
|
Net
compensation costs included in continuing operations
|
|
$ |
11
|
|
|
$ |
12
|
|
|
$ |
22
|
|
|
$ |
20
|
|
8.
Stock
option activity under the 1999 Long-Term Incentive Plan for the six months
ended
June 30, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Options
(In
thousands)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life
(In
years)
|
|
|
Aggregate
Intrinsic
Value
(In
millions)
|
|
Outstanding
at beginning of year
|
|
|
5,420
|
|
|
$ |
63.77
|
|
|
|
|
|
|
|
Granted
|
|
|
929
|
|
|
|
91.70
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,159 |
) |
|
|
59.25
|
|
|
|
|
|
|
|
Canceled,
expired or forfeited
|
|
|
(65 |
) |
|
|
78.25
|
|
|
|
|
|
|
|
Outstanding
at end of period
|
|
|
5,125
|
|
|
$ |
69.67
|
|
|
|
6.52
|
|
|
$ |
104
|
|
Exercisable
at end of period
|
|
|
3,275
|
|
|
$ |
59.49
|
|
|
|
5.12
|
|
|
$ |
99
|
|
There
were no significant issuances of stock options in the second quarter of 2007
or
2006.
Note
7: Retirement Plans
We
provide defined benefit pension plans and other postretirement benefits to
eligible employees. The components of net periodic benefit cost for
these plans for the three months ended June 30, 2007 and July 1, 2006 are as
follows:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
Other
Than Pensions
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
cost
|
|
$ |
34
|
|
|
$ |
36
|
|
|
$ |
2
|
|
|
$ |
3
|
|
Interest
cost
|
|
|
73
|
|
|
|
69
|
|
|
|
11
|
|
|
|
10
|
|
Expected
return on plan assets
|
|
|
(99 |
) |
|
|
(96 |
) |
|
|
-
|
|
|
|
-
|
|
Amortization
of prior service cost (credit)
|
|
|
5
|
|
|
|
4
|
|
|
|
(1 |
) |
|
|
(2 |
) |
Amortization
of net loss
|
|
|
12
|
|
|
|
12
|
|
|
|
5
|
|
|
|
5
|
|
Net
periodic benefit cost
|
|
$ |
25
|
|
|
$ |
25
|
|
|
$ |
17
|
|
|
$ |
16
|
|
The
components of net periodic benefit cost for the six months ended June 30, 2007
and July 1, 2006 are as follows:
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
Other
Than Pensions
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
cost
|
|
$ |
67
|
|
|
$ |
71
|
|
|
$ |
4
|
|
|
$ |
5
|
|
Interest
cost
|
|
|
146
|
|
|
|
138
|
|
|
|
21
|
|
|
|
20
|
|
Expected
return on plan assets
|
|
|
(198 |
) |
|
|
(192 |
) |
|
|
-
|
|
|
|
-
|
|
Amortization
of prior service cost (credit)
|
|
|
9
|
|
|
|
9
|
|
|
|
(2 |
) |
|
|
(3 |
) |
Amortization
of net loss
|
|
|
25
|
|
|
|
24
|
|
|
|
11
|
|
|
|
11
|
|
Net
periodic benefit cost
|
|
$ |
49
|
|
|
$ |
50
|
|
|
$ |
34
|
|
|
$ |
33
|
|
Note
8: Income Taxes
We
adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109” (“FIN
48”) at the beginning of fiscal 2007, which resulted in an increase of
approximately $22 million to our December 31, 2006 retained earnings
balance. FIN 48 provides a comprehensive model for the financial
statement recognition, measurement, presentation and disclosure of uncertain
tax
positions taken or expected to be taken in income tax
returns. Unrecognized tax benefits represent tax positions for which
reserves have been established.
9.
As
of the
date of adoption, our unrecognized tax benefits totaled approximately $356
million, of which $225 million in benefits, if recognized, would favorably
affect our effective tax rate in any future period. The remaining
$131 million in unrecognized tax benefits are related to discontinued
operations. We do not believe that it is reasonably possible that our
estimates of unrecognized tax benefits will change significantly in the next
12
months.
We
conduct business globally and, as a result, file numerous consolidated and
separate income tax returns in the U.S. federal jurisdiction and various state
and foreign jurisdictions. In the normal course of business, we are
subject to examination by taxing authorities throughout the world, including
such major jurisdictions as Belgium, Canada, Germany, the United Kingdom and
the
U.S. With few exceptions, we are no longer subject to U.S. federal,
state and local, or non-U.S. income tax examinations for years before 1997
in
these major jurisdictions.
We
recognize interest and penalties related to unrecognized tax benefits in income
tax expense in our consolidated statements of operations. At the date
of adoption, we had $77 million of accrued interest included in other
liabilities on our consolidated balance sheet.
Note
9: 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 private sector
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.
In
connection with the 2002 recall of certain of our Lycoming turbocharged airplane
engines, a former third-party supplier filed a lawsuit against Lycoming claiming
that the former supplier had been wrongly blamed for aircraft engine failures
resulting from its crankshaft forging process and that Lycoming’s design was the
cause of the engine failures. In February 2005, a jury returned a verdict
against Lycoming for $86 million in punitive damages, $2.7 million in expert
fees and $1.7 million in increased insurance costs. The jury also found that
the
former supplier’s claim that it had incurred $5.3 million in attorneys’ fees was
reasonable. Judgment was entered on the verdict on March 29, 2005,
awarding the former supplier $9.7 million in alleged compensatory damages and
attorneys’ fees and $86 million in alleged punitive damages. While
the ultimate outcome of the litigation cannot be assured, management strongly
disagrees with the verdict and believes that it is probable that the verdict
will be reversed through the appellate process.
The
Internal Revenue Service (“IRS”) has challenged both the ability to accelerate
the timing of tax deductions and the amounts of those deductions related to
certain leveraged lease transactions within the Finance
segment. These transactions, along with other transactions with
similar characteristics, have an initial investment of approximately $209
million. Resolution of these issues may result in an adjustment to
the timing of taxable income and deductions that reduce the effective yield
of
the leveraged lease transactions. In addition, resolution of these issues could
result in the acceleration of cash payments to the IRS. Deferred tax
liabilities of $172 million are recorded on our consolidated balance sheet
related to these leases at June 30, 2007. We believe that the proposed IRS
adjustments are inconsistent with the tax law in existence at the time the
leases were originated and intend to vigorously defend our
position.
Armed
Reconnaissance Helicopter Program
Bell
Helicopter is performing under a U.S. Government contract for System Development
and Demonstration (“SDD”) of the Armed Reconnaissance Helicopter
(“ARH”). In March 2007, we received correspondence from the U.S.
Government that indicated limitations of funding on the ARH SDD
contract. Accordingly, in the first quarter of 2007 we provided for
losses of $25 million related to the ARH program, consisting of $7 million
in
SDD costs and supplier obligations which exceeded the original SDD contract
funding limit and $18 million in supplier obligations incurred in the first
quarter for long-lead, low-rate initial production (“LRIP”) ARH component
production.
10.
In
the
second quarter of 2007, the Army agreed to re-plan the ARH program and we
reached a non-binding memorandum of understanding (“MOU”) related to aircraft
specifications, pricing methodology and delivery schedules for 62 LRIP aircraft
in two lots. The re-planned program also included additional funding for SDD
costs through the end of the second quarter of 2007, which resulted in recovery
of the $7 million in SDD costs previously expensed in the first
quarter. Further, we have agreed to conduct additional SDD activities
on a funded-basis.
Based
on
the plan outlined in the MOU and our related estimates of aircraft production
costs, including costs related to risks associated with achieving learning
curve
and schedule assumptions, it is our best estimate at this time that we will
lose
approximately $73 million on the production of the 62 LRIP
aircraft. Accordingly, a net charge of $48 million was recorded in
the second quarter, reflecting an additional charge of $55 million for
LRIP-related costs, offset by the $7 million of SDD cost recovery. We
anticipate that the contract awards will be finalized beginning in 2008, and
we
expect that these awards will be based on the terms outlined in the
MOU.
The
U.S.
Government continues to have an option related to production of 18 to 36
aircraft under the original ARH program. However, it is unlikely that the option
would be exercised before its term expires in December 2007 due to certain
additional development requirements under the SDD contract that must be met
before the option can be exercised. As a result, the U.S. Government
has agreed in the MOU to include the units under this option within the 62
LRIP
aircraft specified in the MOU.
Note
10: Guarantees and Indemnifications
As
disclosed under the caption “Guarantees and Indemnifications” in Note 17 to the
consolidated financial statements in our 2006 Annual Report on Form 10-K, we
have issued or are party to certain guarantees. As of June 30, 2007,
there has been no material change to these guarantees.
We
provide limited warranty and product maintenance programs, including parts
and
labor, for certain products for periods ranging from one to five
years. We estimate the costs that may be incurred under warranty
programs and record a liability in the amount of such costs at the time product
revenue is recognized. Factors that affect this liability include the
number of products sold, historical and anticipated rates of warranty claims,
and cost per claim. We assess the adequacy of our recorded warranty
and product maintenance liabilities periodically and adjust the amounts as
necessary.
Changes
in our warranty and product maintenance liability are as follows:
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
Accrual
at the beginning of period
|
|
$ |
315
|
|
|
$ |
318
|
|
Provision
|
|
|
93
|
|
|
|
95
|
|
Settlements
|
|
|
(89 |
) |
|
|
(73 |
) |
Adjustments
to prior accrual estimates
|
|
|
2
|
|
|
|
(19 |
) |
Accrual
at the end of period
|
|
$ |
321
|
|
|
$ |
321
|
|
Note
11: Recently Announced Accounting
Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements.” This Statement replaces multiple
existing definitions of fair value with a single definition, establishes a
consistent framework for measuring fair value and expands financial statement
disclosures regarding fair value measurements. This Statement applies only
to
fair value measurements that already are required or permitted by other
accounting standards and does not require any new fair value measurements.
SFAS
No. 157 is effective for the first quarter of 2008, and we currently are
evaluating the impact of adoption on our financial position and results of
operations.
11.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment to FASB
Statement No. 115.” SFAS 159 allows companies to choose to measure
eligible assets and liabilities at fair value with changes in value recognized
in earnings. Fair value treatment for eligible assets and liabilities
may be elected either prospectively upon initial recognition, or if an event
triggers a new basis of accounting for an existing asset or
liability. SFAS 159 is effective in the first quarter of 2008, and we
currently are evaluating the impact of adoption on our financial position and
results of operations.
Note
12: Segment Information
Our
four
reportable segments are: Bell, Cessna, Industrial and Finance. These
segments reflect the manner in which we manage our operations. Segment profit
is
an important measure used to evaluate performance and for decision-making
purposes. Segment profit for the manufacturing segments excludes
interest expense and certain corporate expenses. The measurement for
the Finance segment includes interest income and expense. 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.
A
summary
of continuing operations by segment is provided below:
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
MANUFACTURING:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bell
|
|
$ |
915
|
|
|
$ |
805
|
|
|
$ |
1,854
|
|
|
$ |
1,588
|
|
Cessna
|
|
|
1,203
|
|
|
|
1,005
|
|
|
|
2,171
|
|
|
|
1,874
|
|
Industrial
|
|
|
878
|
|
|
|
818
|
|
|
|
1,725
|
|
|
|
1,616
|
|
|
|
|
2,996
|
|
|
|
2,628
|
|
|
|
5,750
|
|
|
|
5,078
|
|
FINANCE
|
|
|
239
|
|
|
|
192
|
|
|
|
449
|
|
|
|
374
|
|
Total
revenues
|
|
$ |
3,235
|
|
|
$ |
2,820
|
|
|
$ |
6,199
|
|
|
$ |
5,452
|
|
SEGMENT
OPERATING PROFIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MANUFACTURING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bell
|
|
$ |
59
|
|
|
$ |
65
|
|
|
$ |
150
|
|
|
$ |
134
|
|
Cessna
|
|
|
200
|
|
|
|
153
|
|
|
|
355
|
|
|
|
270
|
|
Industrial
|
|
|
59
|
|
|
|
54
|
|
|
|
119
|
|
|
|
103
|
|
|
|
|
318
|
|
|
|
272
|
|
|
|
624
|
|
|
|
507
|
|
FINANCE
|
|
|
68
|
|
|
|
56
|
|
|
|
120
|
|
|
|
105
|
|
Segment
profit
|
|
|
386
|
|
|
|
328
|
|
|
|
744
|
|
|
|
612
|
|
Corporate
expenses and other, net
|
|
|
(66 |
) |
|
|
(48 |
) |
|
|
(116 |
) |
|
|
(97 |
) |
Interest
expense, net
|
|
|
(23 |
) |
|
|
(25 |
) |
|
|
(47 |
) |
|
|
(47 |
) |
Income
from continuing operations before
income
taxes
|
|
$ |
297
|
|
|
$ |
255
|
|
|
$ |
581
|
|
|
$ |
468
|
|
12.
Note
13: Subsequent Events
On
July
18, 2007, the Board of Directors approved a two-for-one split of our common
stock, which will be effected in the form of a 100% stock dividend to be
distributed on August 24, 2007 to shareholders of record on August 3,
2007. As a result of the stock split, we will issue approximately 125
million additional shares of common stock to our shareholders. The
stock split will require restatement of all historical shares and per share
data
in the third quarter of 2007.
Pro
forma
earnings per share for income from continuing operations amounts on a post-split
basis for the three years ended December 30, 2006 would be as
follows:
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Basic
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$ |
5.53
|
|
|
$ |
3.86
|
|
|
$ |
2.73
|
|
Pro
forma
(unaudited)
|
|
$ |
2.76
|
|
|
$ |
1.93
|
|
|
$ |
1.37
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$ |
5.43
|
|
|
$ |
3.78
|
|
|
$ |
2.68
|
|
Pro
forma
(unaudited)
|
|
$ |
2.71
|
|
|
$ |
1.89
|
|
|
$ |
1.34
|
|
Quarterly
unaudited pro forma earnings per share for income from continuing operations
amounts on a post-split basis would be as follows:
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$ |
1.72
|
|
|
$ |
1.38
|
|
|
$ |
3.30
|
|
|
$ |
2.59
|
|
Pro
forma
|
|
$ |
0.86
|
|
|
$ |
0.69
|
|
|
$ |
1.65
|
|
|
$ |
1.30
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$ |
1.69
|
|
|
$ |
1.34
|
|
|
$ |
3.24
|
|
|
$ |
2.53
|
|
Pro
forma
|
|
$ |
0.85
|
|
|
$ |
0.67
|
|
|
$ |
1.62
|
|
|
$ |
1.27
|
|
The
Board
of Directors also approved the retirement of approximately 85 million shares
of
treasury stock to reduce annual exchange listing costs. The retirement will
result in a reduction in treasury stock of approximately $4.9 billion, which
is
offset by reductions in capital surplus of approximately $764 million and
retained earnings of approximately $4.1 billion, with no impact on total
shareholders’ equity.
13.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Consolidated
Results of Operations
Revenues
and Segment Profit
Second
Quarter of 2007
Revenues
increased $415 million, or 15%, to $3.2 billion in the second quarter of 2007
compared with the corresponding quarter in 2006. This increase is
primarily due to higher manufacturing volume and product mix of $240 million,
higher pricing of $83 million, more revenues in our Finance segment of $47
million, favorable foreign exchange impact of $30 million in the Industrial
segment and the benefit from acquisitions of $32 million, largely due to
Overwatch Systems. These increases were partially offset by the 2006
divestiture of non-core product lines of $16 million in the Industrial
segment.
Segment
profit increased $58 million, or 18%, to $386 million in the second quarter
of
2007, compared with the corresponding period in 2006. This increase
is primarily due to higher pricing of $83 million, a net benefit from higher
volume and product mix of $34 million and more profit in the Finance segment
of
$12 million. These increases were partially offset by inflation of
$60 million and unfavorable cost performance of $20 million, which included
a
charge for Bell Helicopter’s Armed Reconnaissance Helicopter (“ARH”)
program of $48 million in the second quarter of 2007.
First
Half of 2007
Revenues
increased $747 million, or 14%, to $6.2 billion in the first half of 2007
compared with the corresponding period in 2006. This increase is
primarily due to higher manufacturing volume and product mix of $397 million,
higher pricing of $154 million, more revenues in our Finance segment of $75
million, favorable foreign exchange impact of $65 million in the Industrial
segment and the benefit from acquisitions of $59 million, largely due to
Overwatch Systems, and the reimbursement of costs related to Hurricane Katrina
of $28 million. These increases were partially offset by the 2006
divestiture of non-core product lines of $32 million in the Industrial
segment.
Segment
profit increased $132 million, or 22%, to $744 million in the second half of
2007, compared with the corresponding period in 2006. This increase
is primarily due to higher pricing of $154 million, a net benefit from higher
volume and product mix of $48 million, favorable cost performance of $23 million
and more profit in the Finance segment of $15 million. These
increases were partially offset by inflation of $110 million. Our
favorable cost performance includes the reimbursement of costs related to
Hurricane Katrina of $28 million and is net of a charge for Bell Helicopter’s
ARH program of $73 million.
Backlog
Backlog
in the Cessna and Bell Helicopter businesses grew to $14.0 billion at the end
of
second quarter of 2007, compared to the end of 2006, reflecting an increase
of
approximately $1.9 billion at Cessna and $500 million at Bell Helicopter,
primarily for the V-22 Lot 11 contract. At Cessna, new business jet
orders outpaced deliveries by 2.5 to 1 in the first half of 2007, essentially
filling out the 2008 delivery plan of approximately 470 jets. In
comparison, we expect to deliver about 380 jets in 2007.
Corporate
Expenses and Other, net
Corporate
expenses and other, net increased $18 million in the second quarter of 2007,
compared with 2006, primarily due to $12 million of higher compensation
expenses, primarily as a result of our stock price appreciation, and $4 million
of higher professional fees.
14.
Corporate
expenses and other, net increased $19 million in the first half of 2007 compared
with 2006, primarily due to $5 million of higher compensation expenses, $5
million of increased costs for divested operations and $5 million of higher
professional fees.
Income
Taxes
A
reconciliation of the federal statutory income tax rate to the effective income
tax rate is provided below:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
Federal
statutory income tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase
(decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
income
taxes
|
|
|
1.4
|
|
|
|
1.6
|
|
|
|
1.3
|
|
|
|
1.6
|
|
Foreign
tax rate
differential
|
|
|
(1.6 |
) |
|
|
(3.7 |
) |
|
|
(1.6 |
) |
|
|
(3.7 |
) |
Manufacturing
deduction
|
|
|
(1.6 |
) |
|
|
(0.6 |
) |
|
|
(1.6 |
) |
|
|
(0.6 |
) |
Equity
hedge
income
|
|
|
(1.9 |
) |
|
|
(1.0 |
) |
|
|
(1.0 |
) |
|
|
(0.9 |
) |
Export
sales
benefit
|
|
|
-
|
|
|
|
(1.1 |
) |
|
|
-
|
|
|
|
(1.1 |
) |
Canadian
functional
currency
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.3 |
) |
|
|
-
|
|
Favorable
tax
settlements
|
|
|
(3.3 |
) |
|
|
-
|
|
|
|
(1.7 |
) |
|
|
(2.6 |
) |
Other,
net
|
|
|
(0.4 |
) |
|
|
0.4
|
|
|
|
(1.2 |
) |
|
|
0.7
|
|
Effective
income tax rate
|
|
|
27.6 |
% |
|
|
30.6 |
% |
|
|
28.9 |
% |
|
|
28.4 |
% |
The
effective tax rate for the full year is expected to be in the range of 31%
to
32%.
Segment
Analysis
Our
four
reportable segments are: Bell, Cessna, Industrial and Finance. These
segments reflect the manner in which we manage our operations. Segment profit
is
an important measure used to evaluate performance and for decision-making
purposes. Segment profit for the manufacturing segments excludes
interest expense and certain corporate expenses. The measurement for
the Finance segment includes interest income and expense.
Bell
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
Revenues
|
|
$ |
915
|
|
|
$ |
805
|
|
|
$ |
1,854
|
|
|
$ |
1,588
|
|
Segment
profit
|
|
|
59
|
|
|
|
65
|
|
|
|
150
|
|
|
|
134
|
|
U.S.
Government Business
In
the
second quarter of 2007, revenues increased $70 million, compared with 2006
primarily due to higher net volume of $50 million and the benefit from
acquisitions of $22 million. The volume increase is primarily due to higher
V-22 volume of $47 million, more Armored Security Vehicle (“ASV”) deliveries
worth $31 million and higher Intelligent Battlefield Systems (“IBS”) volume of
$11 million, partially offset by $26 million in lower helicopter spares and
service sales, and lower volume of $17 million for Joint Direct Attack
Munitions (“JDAM”). Our ASV deliveries are well ahead of last year and a
recent order from the U.S. Army will allow us to continue current production
levels well into 2008.
In
the
second quarter of 2007, profit in our U.S. Government business decreased $40
million, compared with 2006, primarily due to unfavorable performance of $45
million. We recorded a $48 million charge in the second quarter of 2007 for
the
ARH program resulting in higher charges of $42 million over the corresponding
quarter of 2006. In addition, we had lower profitability for the V-22
program of $12 million that was partially offset by
15.
favorable
ASV performance of $11 million. The lower
profitability in the V-22 program is primarily due to a $7 million award fee
received in 2006. Additionally, higher overhead costs incurred and absorbed
into inventory in 2006 have negatively impacted current year V-22 margins.
V-22
aircraft delivered in 2007 were in production during 2006 and absorbed higher
overhead costs resulting from our prior year investments to improve operational
systems. Improved ASV performance reflects overhead improvements of $5 million
as well as other manufacturing efficiencies.
In
the
first half of 2007, revenues increased $199 million, compared with 2006
primarily due to higher net volume and mix of $137 million, the benefit
from acquisitions of $38 million and a cost reimbursement related to Hurricane
Katrina of $28 million. The volume increase is primarily due to more ASV
deliveries of $94 million, higher H-1 revenue of $59 million, higher V-22 volume
of $39 million and higher IBS volume of $26 million, partially offset by $42
million in lower helicopter spares and service sales, and lower volume of $31
million for JDAM.
In
the
first half of 2007, profit in our U.S. Government business decreased $28
million, compared with 2006. The decrease was primarily due to unfavorable
performance of $31 million and the net impact from inflation and pricing of
$13
million, partially offset by higher net volume and mix of $13 million. The
unfavorable performance reflected higher charges recorded for the ARH program
of
$64 million and lower V-22 profitability of $20 million, partially offset
by the Hurricane Katrina cost reimbursement of $28 million and favorable
ASV performance of $11 million.
ARH
Program - Bell Helicopter is performing under a U.S. Government contract
for System Development and Demonstration (“SDD”) of the ARH. In March
2007, we received correspondence from the U.S. Government that indicated
limitations of funding on the ARH SDD contract. Accordingly, in the
first quarter of 2007 we provided for losses of $25 million related to the
ARH
program, consisting of $7 million in SDD costs and supplier obligations which
exceeded the original SDD contract funding limit and $18 million in supplier
obligations incurred in the first quarter for long-lead, low-rate initial
production (“LRIP”) ARH component production.
In
the
second quarter of 2007, the Army agreed to re-plan the ARH program and we
reached a non-binding memorandum of understanding (“MOU”) related to aircraft
specifications, pricing methodology and delivery schedules for 62 LRIP aircraft
in two lots. The re-planned program also included additional funding for SDD
costs through the end of the second quarter of 2007, which resulted in recovery
of the $7 million in SDD costs previously expensed in the first
quarter. Further, we have agreed to conduct additional SDD activities
on a funded-basis.
Based
on
the plan outlined in the MOU and our related estimates of aircraft production
costs, including costs related to risks associated with achieving learning
curve
and schedule assumptions, it is our best estimate at this time that we will
lose
approximately $73 million on the production of the 62 LRIP
aircraft. Accordingly, a net charge of $48 million was recorded in
the second quarter, reflecting an additional charge of $55 million for
LRIP-related costs, offset by the $7 million of SDD
cost recovery. We anticipate that the contract awards will be
finalized beginning in 2008, and we expect that these awards will be based
on
the terms outlined in the MOU. We expect that any contracts for lots
subsequent to the initial two LRIP lots will be priced to fully recover costs
plus a reasonable profit.
The
U.S.
Government continues to have an option related to production of 18 to 36
aircraft under the original ARH program. However, it is unlikely that the option
would be exercised before its term expires in December 2007 due to certain
additional development requirements under the SDD contract that must be met
before the option can be exercised. As a result, the U.S. Government
has agreed in the MOU to include the units under this option within the 62
LRIP aircraft specified in the MOU.
Commercial
Business
In
the
second quarter of 2007, commercial revenues increased $40 million, compared
with
2006 primarily due to higher pricing of $21 million, the benefit from
acquisitions of $10 million and higher volume of $9 million. Higher volume
reflects more helicopter deliveries of $39 million, partially offset
by lower spares and service volume of $13 million and lower Huey II
kit deliveries of $12 million.
16.
In
the
second quarter of 2007, commercial profit increased $34 million, compared with
2006 primarily due to higher pricing of $21 million, favorable cost performance
of $15 million and lower engineering, research and development expense of $13
million, partially offset by inflation of $10 million. The lower
engineering, research and development expense resulted from the delay of
spending for such cost to the second half of 2007.
In
the
first half of 2007, commercial revenues increased $67 million, compared with
2006 primarily due to higher pricing of $40 million and the benefit from
acquisitions of $21 million. Volume increased slightly as higher helicopter
deliveries of $52 million were partially offset by lower Huey II kit deliveries
of $34 million and lower spares and service volume of $11 million.
In
the
first half of 2007, commercial profit increased $44 million, compared with
2006
primarily due to higher pricing of $40 million, favorable cost performance
of $22 million and lower engineering, research and development expense of
$17 million, partially offset by inflation of $19 million and the net impact
of
unfavorable product mix of $14 million.
Cessna
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
Revenues
|
|
$ |
1,203
|
|
|
$ |
1,005
|
|
|
$ |
2,171
|
|
|
$ |
1,874
|
|
Segment
profit
|
|
|
200
|
|
|
|
153
|
|
|
|
355
|
|
|
|
270
|
|
Cessna
has continued to grow its revenues and segment profit due, in part, to its
increased international deliveries, as over half of our 95 Citation
business jets in the second quarter of 2007 went to international customers,
primarily in Europe and Latin America. We delivered a total of 76 jets in the
second quarter of 2006. In May, the Mustang became the first new-generation
entry level jet to be certified in Europe. We have continued to ramp up our
Mustang production with 10 aircraft delivered in the second quarter of
2007.
Revenues
at Cessna increased $198 million in the second quarter of 2007, compared with
2006 due to higher volume of $147 million, primarily related to Citation
business jets, and higher pricing of $51 million. Segment profit
increased $47 million at Cessna in the second quarter of 2007, compared
with 2006 primarily due to higher pricing of $51 million and the impact of
the
higher volume of $31 million, partially offset by inflation of $26 million
and
increased product development expense of $9
million. Favorable warranty performance of $9 million
resulting from lower point of sale warranty costs for aircraft sold during
the
second quarter of 2007, compared with 2006, was offset by other favorable
warranty performance of $10 million recorded in 2006.
Revenues
at Cessna increased $297 million in the first half of 2007, compared with 2006
due to higher volume of $202 million, primarily related to Citation business
jets, and higher pricing of $95 million. Segment profit increased $85 million
at
Cessna in the first six months of 2007, compared with 2006 primarily due to
higher pricing of $95 million and the impact of the higher volume of $47
million, partially offset by inflation of $44 million and increased product
development expense of $16 million. Favorable warranty performance of $16
million resulting from lower point of sale warranty costs for aircraft sold
during the first half of 2007, compared with 2006, was offset by other favorable
warranty performance of $19 million recorded in 2006.
Industrial
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
Revenues
|
|
$ |
878
|
|
|
$ |
818
|
|
|
$ |
1,725
|
|
|
$ |
1,616
|
|
Segment
profit
|
|
|
59
|
|
|
|
54
|
|
|
|
119
|
|
|
|
103
|
|
17.
Revenues
in the Industrial segment increased $60 million in the second quarter of 2007,
compared with 2006 primarily due to higher volume of $34 million, favorable
foreign exchange impact of $30 million and higher pricing of $13 million,
partially offset by the divestiture of non-core product lines of $16
million. Profit in the Industrial segment increased $5 million in the
second quarter of 2007, compared with 2006 mainly due to $13 million of higher
pricing, $7 million of improved cost performance and $2 million each in higher
volume and favorable foreign exchange, partially offset by $19 million of
inflation.
Revenues
in the Industrial segment increased $109 million in the first half of 2007,
compared with 2006 primarily due to favorable foreign exchange impact of $65
million, higher volume of $52 million and higher pricing of $23 million,
partially offset by the divestiture of non-core product lines of $32
million. Profit in the Industrial segment increased $16 million in
the first half of 2007, compared with 2006 mainly due to $26 million of improved
cost performance and higher pricing of $23 million, partially offset by $38
million of inflation.
Finance
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
Revenues
|
|
$ |
239
|
|
|
$ |
192
|
|
|
$ |
449
|
|
|
$ |
374
|
|
Segment
profit
|
|
|
68
|
|
|
|
56
|
|
|
|
120
|
|
|
|
105
|
|
The
Finance segment continued to grow its managed finance receivables with a 5%,
or
$507 million, increase since the end of 2006. In addition, our
already strong portfolio quality statistics continued to improve.
Revenues
in the Finance segment increased $47 million in the second quarter of 2007,
compared with 2006. The increase was primarily due to a $26 million increase
related to higher average finance receivables and a $21 million gain on the
sale
of a leveraged lease investment. Average finance receivables increased primarily
due to growth in the aviation, distribution and resort finance businesses,
partially offset by an increase in the level of distribution finance receivables
sold.
Profit
in
the Finance segment increased $12 million in the second quarter of 2007,
compared with 2006 primarily due to a $21 million gain on the sale of a
leveraged lease investment and a $12 million increase related to higher
average finance receivables, partially offset by a $12 million increase in
the
provision for losses and $8 million related to the impact of competitive pricing
pressures. The increase in provision for losses is primarily attributable to
$5
million of higher provision for losses related to specific reserving actions
taken on one account in the media finance portfolio, and a $6 million reduction
in 2006 in the rate utilized to establish the allowance for losses in several
portfolios due to improvements in credit quality.
Revenues
in the Finance segment increased $75 million in the first half of 2007, compared
with 2006. The increase was primarily due to a $59 million increase related
to
higher average finance receivables, a $21 million gain on the sale of a
leveraged lease investment and a $15 million increase from a higher interest
rate environment, partially offset by $13 million in lower leveraged lease
earnings due to an unfavorable cumulative earnings adjustment attributable
to
the recognition of residual value impairments. Average finance receivables
increased primarily due to growth in the aviation, distribution and resort
finance businesses, partially offset by an increase in the level of distribution
finance receivables sold.
Profit
in
the Finance segment increased $15 million in the first half of 2007, compared
with 2006 primarily due to a $28 million increase related to higher average
finance receivables and a $21 million gain on the sale of a leveraged lease
investment, partially offset by $13 million in lower leveraged lease earnings
due to an unfavorable cumulative earnings adjustment attributable to the
recognition of residual value impairments, $12 million related to the impact
of
competitive pricing pressures and an $8 million increase in the provision for
losses, largely due to one account.
18.
The
following table presents information about the Finance segment’s portfolio
quality:
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
30,
|
|
(Dollars
in millions)
|
|
2007
|
|
|
2006
|
|
Nonperforming
assets
|
|
$ |
89
|
|
|
$ |
113
|
|
Nonaccrual
finance receivables
|
|
$ |
51
|
|
|
$ |
75
|
|
Allowance
for losses
|
|
$ |
86
|
|
|
$ |
93
|
|
Ratio
of nonperforming assets to total finance assets
|
|
|
1.00 |
% |
|
|
1.28 |
% |
Ratio
of allowance for losses on receivables to nonaccrual finance
receivables
|
|
|
171.3 |
% |
|
|
123.1 |
% |
60+
days contractual delinquency as a percentage of finance
receivables
|
|
|
0.56 |
% |
|
|
0.77 |
% |
The
Finance segment has continued to sustain improvements in portfolio quality
as
indicated by an improved nonperforming assets percentage and 60+ days
contractual delinquency percentage. Net charge-offs as a percentage
of average finance receivables increased to 0.52% during the first half of
2007
as compared with 0.35% for the corresponding period of 2006. The
increase in the percentage reflects charge-off activity in 2007 that primarily
relates to accounts for which a specific allowance for losses had been
established in previous periods. As a result of these charge-offs,
the allowance for losses on receivables decreased by $7 million in the first
half of 2007. This decrease corresponds with a $24 million decrease
in nonaccrual finance receivables during the same period and results in an
increase in the allowance for losses as a percentage of nonaccrual finance
receivables.
Liquidity
and Capital Resources
Our
financings are conducted through two separate borrowing groups. The
Manufacturing group consists of Textron Inc., consolidated with the entities
that operate in the Bell, Cessna and Industrial segments, while the Finance
group consists of the Finance segment, comprised of Textron Financial
Corporation and its subsidiaries. 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.
Through
our Finance group, we provide diversified commercial financing to third
parties. In addition, this group finances retail purchases and leases
for new and used aircraft and equipment manufactured by our Manufacturing group,
otherwise known as captive financing. In the consolidated statements
of cash flows, cash received from customers or from securitizations is reflected
as operating activities when received. 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 that
is
financed by the Finance group, the origination of the finance receivable is
recorded within investing activities as a cash outflow on our Finance group’s
statement of cash flows. Meanwhile, the Manufacturing group records
the cash received from the Finance group on the customer’s behalf within
operating cash flows as a cash inflow on our Manufacturing group’s statement of
cash flows. 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, as detailed below in the operating cash
flows of continuing operations section.
19.
The
debt
(net of cash)-to-capital ratio for our Manufacturing group as of June 30, 2007
was 28%, compared with 29% at December 30, 2006, and the gross debt-to-capital
ratio as of June 30, 2007 was 38%, compared with 40% at December 30,
2006. Our Manufacturing group targets a gross debt-to-capital ratio
that is consistent with an A rated company.
We
have a
policy of maintaining unused committed bank lines of credit in an amount not
less than outstanding commercial paper balances. These facilities are
in support of commercial paper and letters of credit issuances only, and neither
of these primary lines of credit was drawn at June 30, 2007 or December 30,
2006.
Our
primary committed credit facilities at June 30, 2007 include the
following:
(In
millions)
|
|
Facility
Amount
|
|
|
Commercial
Paper
Outstanding
|
|
|
Letters
of Credit
Outstanding
|
|
|
Amount
Not Reserved as Support for Commercial Paper and Letters of
Credit
|
|
Manufacturing
group – multi-year
facility
expiring in
2012*
|
|
$ |
1,250
|
|
|
$ |
-
|
|
|
$ |
20
|
|
|
$ |
1,230
|
|
Finance
group - multi-year
facility
expiring in 2012
|
|
$ |
1,750
|
|
|
$ |
1,624
|
|
|
$ |
12
|
|
|
$ |
114
|
|
*The
Finance group is permitted to
borrow under this multi-year facility.
At
June
30, 2007, our Finance group had $2.7 billion in debt and $475 million in other
liabilities that are payable within the next 12 months.
Operating Cash Flows
of Continuing Operations
|
|
|
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
30, 2007
|
|
|
July
1, 2006
|
|
Manufacturing
group
|
|
$ |
280
|
|
|
$ |
326
|
|
Finance
group
|
|
|
153
|
|
|
|
155
|
|
Reclassifications
and elimination adjustments
|
|
|
(310 |
) |
|
|
(321 |
) |
Consolidated
|
|
$ |
123
|
|
|
$ |
160
|
|
Our
consolidated operating cash flows decreased in the first half of 2007 compared
with the first half of 2006 primarily due to the timing of payments of accounts
payable for the Manufacturing group, as well as a $49 million increase in
inventory levels to support continued growth in our Cessna and Bell Helicopter
businesses, partially offset by an increase in income from continuing operations
and a $40 million decrease in accounts receivable and captive finance
receivables.
Reclassifications
between operating and investing cash flows and eliminations adjustments are
summarized below:
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
30, 2007
|
|
|
July
1, 2006
|
|
Reclassifications
from investing activities:
|
|
|
|
|
|
|
Finance
receivable originations
for Manufacturing group
inventory
sales
|
|
$ |
(525 |
) |
|
$ |
(521 |
) |
Cash
received from customers and
securitizations for
captive
financing
|
|
|
354
|
|
|
|
316
|
|
Other
|
|
|
(4 |
) |
|
|
(36 |
) |
Total
reclassifications from investing activities
|
|
|
(175 |
) |
|
|
(241 |
) |
Dividends
paid by Finance group to Manufacturing group
|
|
|
(135 |
) |
|
|
(80 |
) |
Total
reclassifications and adjustments
|
|
$ |
(310 |
) |
|
$ |
(321 |
) |
20.
In
the
first quarter of 2007, the Finance group paid a $135 million dividend to the
Manufacturing group compared to $80 million paid in 2006, representing the
distribution of its retained earnings to achieve its targeted leverage
ratio.
Investing Cash Flows
of Continuing Operations
|
|
|
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
30, 2007
|
|
|
July
1, 2006
|
|
Manufacturing
group
|
|
$ |
(137 |
) |
|
$ |
(130 |
) |
Finance
group
|
|
|
23
|
|
|
|
(971 |
) |
Reclassifications
to operating activities
|
|
|
175
|
|
|
|
241
|
|
Consolidated
|
|
$ |
61
|
|
|
$ |
(860 |
) |
Our
consolidated investing cash flows increased largely due to a $639 million
increase in proceeds from receivable sales and securitizations, including the
sale of $588 million of receivables into the distribution finance revolving
securitization, and a net increase of $316 million in finance receivable
collections, net of originations.
Financing Cash Flows
of Continuing Operations
|
|
|
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
30, 2007
|
|
|
July
1, 2006
|
|
Manufacturing
group
|
|
$ |
(283 |
) |
|
$ |
(728 |
) |
Finance
group
|
|
|
(156 |
) |
|
|
832
|
|
Dividends
paid by Finance group to Manufacturing group
|
|
|
135
|
|
|
|
80
|
|
Consolidated
|
|
$ |
(304 |
) |
|
$ |
184
|
|
Cash
flows received from consolidated financing activities decreased during the
first
half of 2007 primarily due a reduction in short-term debt borrowings in the
Finance group of $613 million and higher payments on long-term debt in the
Finance group of $337 million. These amounts were partially offset by
less cash used to repurchase our stock of $377 million and a reduction in the
cash used to pay dividends of $50 million due to the timing of
payments.
Stock Repurchases
In
the
first half of 2007 and 2006, we repurchased 2,271,292 and 6,979,672 shares
of
common stock, respectively, under Board-authorized share repurchase programs
for
an aggregate cost of $219 million and $610 million, respectively.
Dividends
We
paid a
quarterly dividend of $0.3875 per share in the first and second quarters of
2007
and 2006. Dividend payments to shareholders totaled $97 million in the first
half of 2007, compared with $147 million in the first half of
2006. The decrease in dividend payments reflects the fourth quarter
2005 dividend that was paid in the first half of 2006, while the fourth quarter
2006 dividend was paid in the fourth quarter.
On
July
18, 2007, the Board of Directors approved a two-for-one split of our common
stock, which will be effected in the form of a 100% stock dividend to be
distributed on August 24, 2007 to shareholders of record on August 3,
2007. Accordingly, we will issue approximately 125 million additional
shares of common stock to our shareholders. The Board of Directors
also approved the retirement of approximately 85 million shares of treasury
stock to reduce annual exchange listing costs, which will result in a reduction
in treasury stock of approximately $4.9 billion, which is offset by reductions
in capital surplus of approximately $764 million and retained earnings of
approximately $4.1 billion, with no impact on total shareholders’
equity.
Also
on
July 18, 2007, the Board of Directors approved a 19% increase in our annualized
common stock dividend rate from $1.55 per share to $1.84 per share ($0.775
per
share to $0.92 per share on a post-split basis) and authorized the repurchase
of
up to 24 million shares of our common stock on a post-split basis.
21.
Capital
Resources
Under
a
shelf registration statement previously filed with the Securities and Exchange
Commission, our Manufacturing group may issue public debt and other securities
in one or more offerings up to a total maximum offering of $2.0
billion. At June 30, 2007, we had $1.6 billion available under this
registration statement.
Under
a
previously filed registration statement, the Finance group may issue an
unlimited amount of public debt. Our Finance group issued $640
million of term debt and CAD 140 million of term debt during the first half
of
2007 under this registration statement. In addition, during the first
quarter of 2007, the Finance group issued $300 million of 6% Fixed-to-Floating
Rate Junior Subordinated Notes, which mature in 2067. The Finance
group has the right to redeem the notes at par beginning in 2017, and is
obligated to redeem the notes beginning in 2042.
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. For the first half of 2007, the impact of
foreign exchange rate changes from the first half of 2006 increased revenues
by
approximately $65 million (1.2%) and increased segment profit by approximately
$4 million (0.7%).
Recently
Announced Accounting
Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements.” This Statement replaces multiple existing definitions of fair
value with a single definition, establishes a consistent framework for measuring
fair value and expands financial statement disclosures regarding fair value
measurements. This Statement applies only to fair value measurements that
already are required or permitted by other accounting standards and does not
require any new fair value measurements. SFAS No. 157 is effective for the
first
quarter of 2008, and we currently are evaluating the impact of adoption on
our
financial position and results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment to FASB
Statement No. 115.” SFAS 159 allows companies to choose to measure
eligible assets and liabilities at fair value with changes in value recognized
in earnings. Fair value treatment for eligible assets and liabilities
may be elected either prospectively upon initial recognition, or if an event
triggers a new basis of accounting for an existing asset or
liability. SFAS 159 is effective in the first quarter of 2008, and we
currently are evaluating the impact of adoption on our financial position and
results of operations.
Forward-Looking
Information
Certain
statements in this Quarterly Report on Form 10-Q and other oral and written
statements made by Textron 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, 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 Textron facilities
or Textron’s customers or suppliers; [c] Textron’s ability to perform as
anticipated and to control costs under contracts with the U.S. Government;
[d]
the U.S. Government’s ability to unilaterally modify or terminate its contracts
with Textron for the U.S. Government’s convenience or for Textron’s failure to
perform, to change applicable procurement and accounting policies, and, under
certain circumstances, to suspend or debar Textron as a contractor eligible
to
receive future contract awards; [e] changes in national or international funding
priorities and government policies on the export and import of military and
commercial products; [f] the ability to control costs and successful
implementation of various cost-reduction programs; [g] the timing of new product
launches and
22.
certifications
of new aircraft products; [h] the occurrence of slowdowns or downturns in
customer markets in which Textron products are sold or supplied or where Textron
Financial Corporation offers financing; [i] changes in aircraft delivery
schedules or cancellation of orders; [j] the impact of changes in tax
legislation; [k] the extent to which Textron is able to pass raw material price
increases through to customers or offset such price increases by reducing other
costs; [l] Textron’s ability to offset, through cost reductions, pricing
pressure brought by original equipment manufacturer customers; [m] Textron’s
ability to realize full value of receivables; [n] the availability and cost
of
insurance; [o] increases in pension expenses and other postretirement employee
costs; [p] Textron Financial Corporation’s ability to maintain portfolio credit
quality; [q] Textron Financial Corporation’s access to debt financing at
competitive rates; [r] uncertainty in estimating contingent liabilities and
establishing reserves to address such contingencies; [s] performance of
acquisitions; [t] the efficacy of research and development investments to
develop new products; [u] the launching of significant new products or programs
which could result in unanticipated expenses; and [v] bankruptcy or other
financial problems at major suppliers or customers that could cause disruptions
in Textron’s supply chain or difficulty in collecting amounts owed by such
customers.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
|
There
has been no significant change in Textron’s exposure to market risk during
the six months ended
June
30, 2007. For discussion of Textron’s exposure to market risk,
refer to Item 7A. Quantitative and Qualitative Disclosures About
Market
Risk contained in Textron’s 2006 Annual Report on Form 10-K.
|
|
|
CONTROLS
AND PROCEDURES
|
|
We
have carried out an evaluation, under the supervision and with the
participation of our management, including our Chairman, President
and
Chief Executive Officer (the “CEO”) and our Executive Vice President and
Chief Financial Officer (the “CFO”), of the effectiveness of the design
and operation of our disclosure controls and procedures (as defined
in
Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as
amended (the “Act”)) as of the end of the fiscal quarter covered by this
report. Based upon that evaluation, our CEO and CFO concluded
that our disclosure controls and procedures are effective in providing
reasonable assurance that (a) the information required to be disclosed
by
us in the reports that we file or submit under the Act is recorded,
processed, summarized and reported within the time periods specified
in
the Securities and Exchange Commission’s rules and forms, and (b) such
information is accumulated and communicated to our management, including
our CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
|
|
There
were no changes in Textron’s internal control over financial reporting
during the fiscal quarter ended June 30, 2007 that have materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
|
|
23.
PART
II. OTHER INFORMATION
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
|
|
ISSUER
REPURCHASES OF EQUITY
SECURITIES
|
|
|
Total
Number
of
Shares
Purchased
|
|
|
Average
Price
Paid
per
Share
(Excluding
Commissions)
|
|
|
Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Plan**
|
|
|
Maximum
Number
of Shares
that
May Yet Be
Purchased
Under
the Plan**
|
|
Month
1 (April 1, 2007 –
May
5, 2007)
|
|
|
53,731 |
* |
|
$ |
103.15
|
|
|
|
50,000 |
* |
|
|
2,575,208
|
|
Month
2 (May 6, 2007 -
June
2, 2007)
|
|
|
107,700
|
|
|
$ |
105.82
|
|
|
|
107,700
|
|
|
|
2,467,508
|
|
Month
3 (June 3, 2007 -
June
30, 2007)
|
|
|
351,000
|
|
|
$ |
108.57
|
|
|
|
351,000
|
|
|
|
2,116,508
|
|
Total
|
|
|
512,431
|
|
|
$ |
107.42
|
|
|
|
508,700
|
|
|
|
|
|
*
|
During
the first month of the second quarter of 2007, Textron received a
total of
3,731 shares as payments for the exercise price of employee stock
options,
which are not included in the publicly announced repurchase
plan.
|
|
|
**
|
These
shares were purchased pursuant to a plan authorizing the repurchase
of up
to 12 million shares of Textron common stock that had been announced
on
January 26, 2006, and had no expiration date. On July 18, 2007,
Textron’s Board of Directors approved a new share repurchase plan under
which Textron is authorized to repurchase up to 24 million shares
of
common stock (equivalent of 12 million shares prior to the two-for-one
stock split in the form of a stock dividend to be distributed on
August
24, 2007). The new plan has no expiration date and supercedes
the existing repurchase plan, which was cancelled effective July
18,
2007.
|
24.
|
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
|
|
|
At
Textron’s annual meeting of shareholders held on April 25, 2007, the
following items were voted upon:
|
|
|
1.
|
|
|
|
The
following persons were elected to serve as directors in Class II
for three
year terms expiring in 2010 and received the votes listed.
|
|
|
|
|
|
|
Name
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
|
|
|
|
Kathleen
M. Bader
|
|
|
106,395,916
|
|
|
|
4,099,063
|
|
|
|
1,408,580
|
|
|
|
|
|
|
R.
Kerry Clark
|
|
|
77,636,120
|
|
|
|
31,651,038
|
|
|
|
2,616,399
|
|
|
|
|
|
|
Ivor
J. Evans
|
|
|
77,145,801
|
|
|
|
32,069,071
|
|
|
|
2,688,955
|
|
|
|
|
|
|
Lord
Powell of Bayswater KCMG
|
|
|
74,350,733
|
|
|
|
34,935,484
|
|
|
|
2,617,614
|
|
|
|
|
|
|
James
L. Ziemer
|
|
|
106,568,550
|
|
|
|
3,792,374
|
|
|
|
1,542,908
|
|
|
|
|
|
|
The
following directors have terms of office which continued after the
meeting: H. Jesse Arnelle, Paul E. Gagne, Dain M. Hancock, Thomas
B.
Wheeler, Lewis B. Campbell, Lawrence K. Fish and Joe T.
Ford.
|
|
|
2.
|
|
|
The
Textron Inc. Short-Term Incentive Plan was approved by the following
vote:
|
|
|
|
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
Broker
Non-Votes
|
|
|
|
|
|
|
104,270,558
|
|
|
|
6,448,285
|
|
|
|
1,184,508
|
|
|
|
0
|
|
|
3.
|
|
|
The
Textron Inc. 2007 Long-Term Incentive Plan was approved by the following
vote:
|
|
|
|
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
Broker
Non-Votes
|
|
|
|
|
|
|
85,343,991
|
|
|
|
11,142,924
|
|
|
|
1,138,657
|
|
|
|
14,278,263
|
|
|
4.
|
|
|
The
appointment of Ernst & Young LLP by the Audit Committee as Textron’s
independent registered public accounting firm for 2007 was ratified
by the
following vote:
|
|
|
|
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
Broker
Non-Votes
|
|
|
|
|
|
|
109,058,147
|
|
|
|
1,821,746
|
|
|
|
1,023,667
|
|
|
|
0
|
|
|
5.
|
|
|
A
shareholder proposal relating to a report related to foreign military
sales was rejected by the following vote:
|
|
|
|
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
Broker
Non-Votes
|
|
|
|
|
|
|
6,662,476
|
|
|
|
78,399,832
|
|
|
|
12,564,073
|
|
|
|
14,277,454
|
|
25.
|
OTHER
INFORMATION
|
Because
this Quarterly Report on Form 10-Q is being filed within four business
days from the date of the reportable event, we have elected to make
the
following disclosure in this Quarterly Report on Form 10-Q instead
of in a
Current Report on Form 8-K under Item 5.03 - Amendments to Articles
of
Incorporation or Bylaws; Change in Fiscal Year.
|
Effective
as of July 25, 2007, Textron’s Board of Directors amended and restated
Textron’s By-Laws to allow Textron’s securities to be eligible for
issuance under the direct registration system to comply with paragraph
501.00(b) of the New York Stock Exchange Listed Company Manual, to
reflect
changes previously made in corporate governance practices at Textron,
to
update the By-Laws and to revise them to be
gender-neutral.
|
|
EXHIBITS
|
|
3.1
|
Amended
and Restated By-Laws of Textron Inc.
|
|
10.1
|
Textron
Inc. 2007 Long-Term Incentive Plan (amended and restated as of May
1,
2007)
|
|
10.2
|
Form
of Non-Qualified Stock Option Agreement
|
|
10.3
|
Form
of Incentive Stock Option Agreement
|
|
10.4
|
Form
of Restricted Stock Unit Grant Agreement
|
|
10.5
|
Textron
Spillover Savings Plan
|
|
12.1
|
Computation
of ratio of income to fixed charges of Textron Inc. Manufacturing
Group
|
|
12.2
|
Computation
of ratio of income to fixed charges of Textron Inc. including all
majority-owned subsidiaries
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
26.
Pursuant
to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to
be signed on its behalf by the undersigned thereunto duly
authorized.
|
|
|
TEXTRON
INC.
|
Date:
|
July
27, 2007
|
|
/s/R.
L. Yates
|
|
|
|
R.
L. Yates
Senior
Vice President and Corporate Controller
(principal
accounting officer)
|
|
|
|
|
27.
LIST
OF EXHIBITS
The
following exhibits are filed as part of this report on Form 10-Q:
Name
of Exhibit
3.1
|
Amended
and Restated By-Laws of Textron Inc.
|
|
10.1
|
Textron
Inc. 2007 Long-Term Incentive Plan (amended and restated as of May
1,
2007)
|
|
10.2
|
Form
of Non-Qualified Stock Option Agreement
|
|
10.3
|
Form
of Incentive Stock Option Agreement
|
|
10.4
|
Form
of Restricted Stock Unit Grant Agreement
|
|
10.5
|
Textron
Spillover Savings Plan
|
|
12.1
|
Computation
of ratio of income to fixed charges of Textron Inc. Manufacturing
Group
|
|
12.2
|
Computation
of ratio of income to fixed charges of Textron Inc. including all
majority-owned subsidiaries
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|