tenq.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 quarterly period ended June 28, 2008
|
|
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
|
|
05-0315468
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
|
|
|
40
Westminster Street, Providence, RI
|
|
02903
|
(Address
of principal executive offices)
|
|
(zip
code)
|
(401)
421-2800
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ü No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “Large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [ ü
] Accelerated
filer [ ]
Non-accelerated
filer [
] Smaller
reporting company [ ]
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No
ü
Common
stock outstanding at July 12, 2008 - 248,538,061 shares
TEXTRON
INC.
INDEX
|
|
Page
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
7
|
Item
2.
|
|
15
|
Item
3.
|
|
24
|
Item
4.
|
|
24
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
2.
|
|
25
|
Item
4.
|
|
25
|
Item
6.
|
|
26
|
|
|
27
|
|
|
|
PART
I. FINANCIAL INFORMATION
Item 1. FINANCIAL
STATEMENTS
(In
millions, except per share amounts)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$ |
3,742 |
|
|
$ |
2,996 |
|
|
$ |
7,046 |
|
|
$ |
5,750 |
|
Finance
|
|
|
177 |
|
|
|
239 |
|
|
|
391 |
|
|
|
449 |
|
Total
revenues
|
|
|
3,919 |
|
|
|
3,235 |
|
|
|
7,437 |
|
|
|
6,199 |
|
Costs,
expenses and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
2,948 |
|
|
|
2,374 |
|
|
|
5,542 |
|
|
|
4,554 |
|
Selling
and administrative
|
|
|
439 |
|
|
|
429 |
|
|
|
868 |
|
|
|
801 |
|
Interest
expense, net
|
|
|
101 |
|
|
|
124 |
|
|
|
216 |
|
|
|
247 |
|
Provision
for losses on finance receivables
|
|
|
40 |
|
|
|
11 |
|
|
|
67 |
|
|
|
16 |
|
Total costs,
expenses and other
|
|
|
3,528 |
|
|
|
2,938 |
|
|
|
6,693 |
|
|
|
5,618 |
|
Income
from continuing operations before income taxes
|
|
|
391 |
|
|
|
297 |
|
|
|
744 |
|
|
|
581 |
|
Income
taxes
|
|
|
(130 |
) |
|
|
(82 |
) |
|
|
(247 |
) |
|
|
(168 |
) |
Income
from continuing operations
|
|
|
261 |
|
|
|
215 |
|
|
|
497 |
|
|
|
413 |
|
Loss
from discontinued operations, net of income taxes
|
|
|
(3 |
) |
|
|
(5 |
) |
|
|
(8 |
) |
|
|
(7 |
) |
Net
income
|
|
$ |
258 |
|
|
$ |
210 |
|
|
$ |
489 |
|
|
$ |
406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
1.04 |
|
|
$ |
0.86 |
|
|
$ |
1.99 |
|
|
$ |
1.65 |
|
Discontinued
operations
|
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
|
(0.03 |
) |
|
|
(0.03 |
) |
Basic
earnings per share
|
|
$ |
1.03 |
|
|
$ |
0.84 |
|
|
$ |
1.96 |
|
|
$ |
1.62 |
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
1.03 |
|
|
$ |
0.85 |
|
|
$ |
1.95 |
|
|
$ |
1.63 |
|
Discontinued
operations
|
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
|
(0.03 |
) |
|
|
(0.03 |
) |
Diluted
earnings per share
|
|
$ |
1.02 |
|
|
$ |
0.83 |
|
|
$ |
1.92 |
|
|
$ |
1.60 |
|
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
|
|
$ |
0.23 |
|
|
$ |
0.194 |
|
|
$ |
0.46 |
|
|
$ |
0.388 |
|
See
Notes to the consolidated financial statements.
(Dollars
in millions)
|
|
June
28,
2008
|
|
|
December
29,
2007
|
|
Assets
|
|
|
|
|
|
|
Manufacturing
group
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
424 |
|
|
$ |
471 |
|
Accounts
receivable, less allowance for doubtful accounts of $30 and
$34
|
|
|
1,209 |
|
|
|
1,083 |
|
Inventories
|
|
|
3,291 |
|
|
|
2,724 |
|
Other
current assets
|
|
|
482 |
|
|
|
568 |
|
Total current
assets
|
|
|
5,406 |
|
|
|
4,846 |
|
Property,
plant and equipment, less accumulated
depreciation and amortization
of $2,557 and $2,388
|
|
|
2,040 |
|
|
|
1,999 |
|
Goodwill
|
|
|
2,107 |
|
|
|
2,132 |
|
Other
assets
|
|
|
1,614 |
|
|
|
1,596 |
|
Total Manufacturing group
assets
|
|
|
11,167 |
|
|
|
10,573 |
|
Finance
group
|
|
|
|
|
|
|
|
|
Cash
|
|
|
56 |
|
|
|
60 |
|
Finance
receivables, less allowance for losses of $126 and $89
|
|
|
8,474 |
|
|
|
8,514 |
|
Goodwill
|
|
|
169 |
|
|
|
169 |
|
Other
assets
|
|
|
830 |
|
|
|
640 |
|
Total Finance group
assets
|
|
|
9,529 |
|
|
|
9,383 |
|
Total assets
|
|
$ |
20,696 |
|
|
$ |
19,956 |
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Manufacturing
group
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt and short-term debt
|
|
$ |
394 |
|
|
$ |
355 |
|
Accounts
payable
|
|
|
1,159 |
|
|
|
927 |
|
Accrued
liabilities
|
|
|
2,894 |
|
|
|
2,840 |
|
Total current
liabilities
|
|
|
4,447 |
|
|
|
4,122 |
|
Other
liabilities
|
|
|
2,147 |
|
|
|
2,289 |
|
Long-term
debt
|
|
|
1,805 |
|
|
|
1,793 |
|
Total Manufacturing group
liabilities
|
|
|
8,399 |
|
|
|
8,204 |
|
Finance
group
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
531 |
|
|
|
462 |
|
Deferred
income taxes
|
|
|
431 |
|
|
|
472 |
|
Debt
|
|
|
7,547 |
|
|
|
7,311 |
|
Total Finance group
liabilities
|
|
|
8,509 |
|
|
|
8,245 |
|
Total
liabilities
|
|
|
16,908 |
|
|
|
16,449 |
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
Capital
stock:
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
2 |
|
|
|
2 |
|
Common stock
|
|
|
32 |
|
|
|
32 |
|
Capital
surplus
|
|
|
1,253 |
|
|
|
1,193 |
|
Retained
earnings
|
|
|
3,140 |
|
|
|
2,766 |
|
Accumulated
other comprehensive loss
|
|
|
(403 |
) |
|
|
(400 |
) |
|
|
|
4,024 |
|
|
|
3,593 |
|
Less
cost of treasury shares
|
|
|
236 |
|
|
|
86 |
|
Total
shareholders’ equity
|
|
|
3,788 |
|
|
|
3,507 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
20,696 |
|
|
$ |
19,956 |
|
Common shares
outstanding (in thousands)
|
|
|
248,434 |
|
|
|
250,061 |
|
See
Notes to the consolidated financial statements.
For the
Six Months Ended June 28, 2008 and June 30, 2007,
respectively
(In
millions)
|
|
Consolidated
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
489 |
|
|
$ |
406 |
|
Less:
Loss from discontinued operations
|
|
|
(8 |
) |
|
|
(7 |
) |
Income
from continuing operations
|
|
|
497 |
|
|
|
413 |
|
Adjustments
to reconcile income from continuing operations to net cash
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Earnings of
Finance group, net of distributions
|
|
|
- |
|
|
|
- |
|
Depreciation
and amortization
|
|
|
206 |
|
|
|
153 |
|
Provision
for losses on finance receivables
|
|
|
67 |
|
|
|
16 |
|
Share-based
compensation
|
|
|
27 |
|
|
|
18 |
|
Deferred
income taxes
|
|
|
(33 |
) |
|
|
10 |
|
Changes in
assets and liabilities excluding those related to
acquisitions
|
|
|
|
|
|
|
|
|
and
divestitures:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(105 |
) |
|
|
(103 |
) |
Inventories
|
|
|
(668 |
) |
|
|
(447 |
) |
Other
assets
|
|
|
99 |
|
|
|
49 |
|
Accounts
payable
|
|
|
218 |
|
|
|
118 |
|
Accrued and
other liabilities
|
|
|
21 |
|
|
|
36 |
|
Captive
finance receivables, net
|
|
|
23 |
|
|
|
(171 |
) |
Other
operating activities, net
|
|
|
20 |
|
|
|
31 |
|
Net
cash provided by operating activities of continuing
operations
|
|
|
372 |
|
|
|
123 |
|
Net
cash used in operating activities of discontinued
operations
|
|
|
(9 |
) |
|
|
(3 |
) |
Net
cash provided by operating activities
|
|
|
363 |
|
|
|
120 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Finance
receivables:
|
|
|
|
|
|
|
|
|
Originated
or purchased
|
|
|
(5,818 |
) |
|
|
(5,964 |
) |
Repaid
|
|
|
5,257 |
|
|
|
5,463 |
|
Proceeds on
receivables sales and securitization sales
|
|
|
507 |
|
|
|
689 |
|
Net
cash used in acquisitions
|
|
|
(100 |
) |
|
|
- |
|
Capital
expenditures
|
|
|
(200 |
) |
|
|
(142 |
) |
Proceeds
from sale of property, plant and equipment
|
|
|
1 |
|
|
|
3 |
|
Purchase
of other marketable securities
|
|
|
(100 |
) |
|
|
- |
|
Other
investing activities, net
|
|
|
8 |
|
|
|
12 |
|
Net
cash (used in) provided by investing activities of continuing
operations
|
|
|
(445 |
) |
|
|
61 |
|
Net
cash provided by investing activities of discontinued
operations
|
|
|
- |
|
|
|
32 |
|
Net
cash (used in) provided by investing activities
|
|
|
(445 |
) |
|
|
93 |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Increase
(decrease) in short-term debt
|
|
|
34 |
|
|
|
(145 |
) |
Proceeds
from issuance of long-term debt
|
|
|
1,122 |
|
|
|
1,070 |
|
Principal payments
and retirements of long-term
debt
|
|
|
(935 |
) |
|
|
(992 |
) |
Proceeds
from option exercises
|
|
|
38 |
|
|
|
69 |
|
Purchases
of Textron common stock
|
|
|
(134 |
) |
|
|
(221 |
) |
Dividends
paid
|
|
|
(115 |
) |
|
|
(97 |
) |
Excess
tax benefits related to stock option exercises
|
|
|
9 |
|
|
|
12 |
|
Net
cash provided by (used in) financing activities
|
|
|
19 |
|
|
|
(304 |
) |
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
12 |
|
|
|
8 |
|
Net
decrease in cash and cash equivalents
|
|
|
(51 |
) |
|
|
(83 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
531 |
|
|
|
780 |
|
Cash
and cash equivalents at end of period
|
|
$ |
480 |
|
|
$ |
697 |
|
See
Notes to the consolidated financial statements.
TEXTRON
INC.
Consolidated
Statements of Cash Flows (Unaudited) (Continued)
For the
Six Months Ended June 28, 2008 and June 30, 2007, respectively
(In
millions)
|
|
Manufacturing
Group*
|
|
|
Finance
Group*
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
489 |
|
|
$ |
406 |
|
|
$ |
35 |
|
|
$ |
76 |
|
Less:
Loss from discontinued operations
|
|
|
(8 |
) |
|
|
(7 |
) |
|
|
- |
|
|
|
- |
|
Income
from continuing operations
|
|
|
497 |
|
|
|
413 |
|
|
|
35 |
|
|
|
76 |
|
Adjustments
to reconcile income from continuing operations to net cash
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of Finance group, net of
distributions
|
|
|
107 |
|
|
|
59 |
|
|
|
- |
|
|
|
- |
|
Depreciation and
amortization
|
|
|
187 |
|
|
|
134 |
|
|
|
19 |
|
|
|
19 |
|
Provision for losses on finance
receivables
|
|
|
- |
|
|
|
- |
|
|
|
67 |
|
|
|
16 |
|
Share-based compensation
|
|
|
27 |
|
|
|
18 |
|
|
|
- |
|
|
|
- |
|
Deferred income taxes
|
|
|
8 |
|
|
|
(2 |
) |
|
|
(41 |
) |
|
|
12 |
|
Changes in assets and liabilities excluding those
related to acquisitions
and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(105 |
) |
|
|
(103 |
) |
|
|
- |
|
|
|
- |
|
Inventories
|
|
|
(656 |
) |
|
|
(438 |
) |
|
|
- |
|
|
|
- |
|
Other assets
|
|
|
72 |
|
|
|
24 |
|
|
|
20 |
|
|
|
20 |
|
Accounts payable
|
|
|
218 |
|
|
|
118 |
|
|
|
- |
|
|
|
- |
|
Accrued and other
liabilities
|
|
|
29 |
|
|
|
24 |
|
|
|
(8 |
) |
|
|
12 |
|
Captive finance receivables,
net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other operating activities,
net
|
|
|
29 |
|
|
|
33 |
|
|
|
(9 |
) |
|
|
(2 |
) |
Net
cash provided by operating activities of continuing
operations
|
|
|
413 |
|
|
|
280 |
|
|
|
83 |
|
|
|
153 |
|
Net
cash (used in) operating activities of discontinued
operations
|
|
|
(9 |
) |
|
|
(3 |
) |
|
|
- |
|
|
|
- |
|
Net
cash provided by operating activities
|
|
|
404 |
|
|
|
277 |
|
|
|
83 |
|
|
|
153 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated or purchased
|
|
|
- |
|
|
|
- |
|
|
|
(6,338 |
) |
|
|
(6,489 |
) |
Repaid
|
|
|
- |
|
|
|
- |
|
|
|
5,690 |
|
|
|
5,795 |
|
Proceeds on receivables sales and securitization
sales
|
|
|
- |
|
|
|
- |
|
|
|
617 |
|
|
|
711 |
|
Net
cash used in acquisitions
|
|
|
(100 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Capital
expenditures
|
|
|
(194 |
) |
|
|
(138 |
) |
|
|
(6 |
) |
|
|
(4 |
) |
Proceeds
on sale of property, plant and equipment
|
|
|
1 |
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
Purchase
of other marketable securities
|
|
|
- |
|
|
|
- |
|
|
|
(100 |
) |
|
|
- |
|
Other
investing activities, net
|
|
|
- |
|
|
|
(2 |
) |
|
|
3 |
|
|
|
10 |
|
Net
cash (used in) provided by investing activities of continuing
operations
|
|
|
(293 |
) |
|
|
(137 |
) |
|
|
(134 |
) |
|
|
23 |
|
Net
cash provided by investing activities of discontinued
operations
|
|
|
- |
|
|
|
32 |
|
|
|
- |
|
|
|
- |
|
Net
cash (used in) provided by investing activities
|
|
|
(293 |
) |
|
|
(105 |
) |
|
|
(134 |
) |
|
|
23 |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in short-term debt
|
|
|
82 |
|
|
|
(44 |
) |
|
|
(48 |
) |
|
|
(101 |
) |
Proceeds
from issuance of long-term debt
|
|
|
- |
|
|
|
1 |
|
|
|
1,122 |
|
|
|
1,069 |
|
Principal
payments and retirements of long-term debt
|
|
|
(49 |
) |
|
|
(3 |
) |
|
|
(886 |
) |
|
|
(989 |
) |
Proceeds
from option exercises
|
|
|
38 |
|
|
|
69 |
|
|
|
- |
|
|
|
- |
|
Purchases
of Textron common stock
|
|
|
(134 |
) |
|
|
(221 |
) |
|
|
- |
|
|
|
- |
|
Dividends
paid
|
|
|
(115 |
) |
|
|
(97 |
) |
|
|
(142 |
) |
|
|
(135 |
) |
Excess
tax benefits related to stock option exercises
|
|
|
9 |
|
|
|
12 |
|
|
|
- |
|
|
|
- |
|
Net
cash (used in) provided by financing activities of continuing
operations
|
|
|
(169 |
) |
|
|
(283 |
) |
|
|
46 |
|
|
|
(156 |
) |
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
11 |
|
|
|
9 |
|
|
|
1 |
|
|
|
(1 |
) |
Net
(decrease) increase in cash and cash equivalents
|
|
|
(47 |
) |
|
|
(102 |
) |
|
|
(4 |
) |
|
|
19 |
|
Cash
and cash equivalents at beginning of
period
|
|
|
471 |
|
|
|
733 |
|
|
|
60 |
|
|
|
47 |
|
Cash
and cash equivalents at end of period
|
|
$ |
424 |
|
|
$ |
631 |
|
|
$ |
56 |
|
|
$ |
66 |
|
*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.
TEXTRON
INC.
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 a Form 8-K filed on April 28, 2008, which includes revised sections
of our Annual Report on Form 10-K for the year ended December 29, 2007 to
reflect a change in segment reporting. 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.
As
discussed in Note 11: Segment Information, we changed our segment structure
effective as of the beginning of fiscal 2008. Our segments now
include Cessna, Bell, Defense & Intelligence, Industrial and Finance. Prior
periods have been recast to reflect the new segment reporting
structure.
Our
financings are conducted through two separate borrowing groups. The
Manufacturing group consists of Textron Inc., consolidated with the entities
that operate in the Cessna, Bell, Defense & Intelligence 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.
In July
2007, our Board of Directors approved a two-for-one split of our common stock
which was effected in August 2007. The prior period financial
statements have been restated to reflect the effect of the split on share and
per share amounts.
Note
2: Inventories
(In
millions)
|
|
June
28,
2008
|
|
|
December
29,
2007
|
|
Finished
goods
|
|
$ |
1,061 |
|
|
$ |
762 |
|
Work
in process
|
|
|
1,983 |
|
|
|
1,868 |
|
Raw
materials
|
|
|
765 |
|
|
|
636 |
|
|
|
|
3,809 |
|
|
|
3,266 |
|
Less
progress/milestone payments
|
|
|
518 |
|
|
|
542 |
|
|
|
$ |
3,291 |
|
|
$ |
2,724 |
|
Note
3: Comprehensive Income
Our
comprehensive income for the periods is provided below:
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
Net
income
|
|
$ |
258 |
|
|
$ |
210 |
|
|
$ |
489 |
|
|
$ |
406 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of prior service
cost and unrealized losses on pension and postretirement
benefits
|
|
|
10 |
|
|
|
14 |
|
|
|
20 |
|
|
|
29 |
|
Net deferred (loss) gain on
hedge contracts
|
|
|
(1 |
) |
|
|
27 |
|
|
|
(17 |
) |
|
|
22 |
|
Other
|
|
|
13 |
|
|
|
26 |
|
|
|
(5 |
) |
|
|
29 |
|
Comprehensive
income
|
|
$ |
280 |
|
|
$ |
277 |
|
|
$ |
487 |
|
|
$ |
486 |
|
Note
4: 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 units in the
weighted-average number of common shares outstanding.
The
weighted-average shares outstanding for basic and diluted earnings per share are
as follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
thousands)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
Basic
weighted-average shares outstanding
|
|
|
249,430 |
|
|
|
249,703 |
|
|
|
249,322 |
|
|
|
250,026 |
|
Dilutive
effect of convertible preferred shares,
stock options and restricted
stock units
|
|
|
4,589 |
|
|
|
4,568 |
|
|
|
4,944 |
|
|
|
4,714 |
|
Diluted
weighted-average shares outstanding
|
|
|
254,019 |
|
|
|
254,271 |
|
|
|
254,266 |
|
|
|
254,740 |
|
Note
5: 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
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
Compensation
expense, net of hedge income or expense
|
|
$ |
17 |
|
|
$ |
28 |
|
|
$ |
23 |
|
|
$ |
41 |
|
Income
tax (benefit) expense
|
|
|
(3 |
) |
|
|
(17 |
) |
|
|
8 |
|
|
|
(19 |
) |
Total
net compensation cost included in net income
|
|
$ |
14 |
|
|
$ |
11 |
|
|
$ |
31 |
|
|
$ |
22 |
|
Stock
option activity under the 2007 Long-Term Incentive Plan for the six months ended
June 28, 2008 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 period
|
|
|
9,024 |
|
|
$ |
35.37 |
|
|
|
6.3 |
|
|
$ |
316 |
|
Granted
|
|
|
1,483 |
|
|
|
54.30 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,099 |
) |
|
|
34.55 |
|
|
|
|
|
|
|
|
|
Canceled,
expired or forfeited
|
|
|
(66 |
) |
|
|
40.92 |
|
|
|
|
|
|
|
|
|
Outstanding
at end of period
|
|
|
9,342 |
|
|
$ |
38.43 |
|
|
|
6.7 |
|
|
$ |
298 |
|
Exercisable
at end of period
|
|
|
6,099 |
|
|
$ |
32.61 |
|
|
|
5.5 |
|
|
$ |
230 |
|
There
were no significant issuances of stock options in the second quarter of 2008 or
2007.
Note
6: 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 28, 2008 and June 30, 2007 are as
follows:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
Other
Than Pensions
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$
|
37 |
|
|
$ |
34 |
|
|
$ |
3 |
|
|
$ |
2 |
|
Interest
cost
|
|
|
82 |
|
|
|
73 |
|
|
|
10 |
|
|
|
11 |
|
Expected
return on plan assets
|
|
|
(109 |
) |
|
|
(99 |
) |
|
|
- |
|
|
|
- |
|
Amortization
of prior service cost (credit)
|
|
|
5 |
|
|
|
5 |
|
|
|
(2 |
) |
|
|
(1 |
) |
Amortization
of net loss
|
|
|
6 |
|
|
|
12 |
|
|
|
4 |
|
|
|
5 |
|
Net
periodic benefit cost
|
|
$
|
21 |
|
|
$ |
25 |
|
|
$ |
15 |
|
|
$ |
17 |
|
The
components of net periodic benefit cost for the six months ended June 28, 2008
and June 30, 2007 are as follows:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
Other
Than Pensions
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
74 |
|
|
$ |
67 |
|
|
$ |
5 |
|
|
$ |
4 |
|
Interest
cost
|
|
|
164 |
|
|
|
146 |
|
|
|
21 |
|
|
|
21 |
|
Expected
return on plan assets
|
|
|
(218 |
) |
|
|
(198 |
) |
|
|
- |
|
|
|
- |
|
Amortization
of prior service cost (credit)
|
|
|
10 |
|
|
|
9 |
|
|
|
(3 |
) |
|
|
(2 |
) |
Amortization
of net loss
|
|
|
12 |
|
|
|
25 |
|
|
|
8 |
|
|
|
11 |
|
Net
periodic benefit cost
|
|
$ |
42 |
|
|
$ |
49 |
|
|
$ |
31 |
|
|
$ |
34 |
|
Note
7: 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.
The
Internal Revenue Service (IRS) has challenged our tax positions related to
certain leveraged and finance lease transactions within the Finance
segment. The leveraged lease transactions had an initial investment
of approximately $209 million and the finance lease transaction had an
investment balance of $34 million at June 28, 2008. Resolution of
these issues may result in an adjustment to the timing of taxable income and
deductions that reduce the effective yield of these lease transactions. In
addition, resolution of these issues could result in the acceleration of cash
payments to the IRS. Deferred tax liabilities of $216 million are
recorded on our consolidated balance sheet related to these leases at June 28,
2008. Despite certain recent court decisions, which were in favor of the IRS, we
believe that the proposed IRS adjustments are inconsistent with the tax law in
existence at the time the leases were originated.
Armed Reconnaissance Helicopter
(ARH) Program — The ARH program includes a development phase, covered by
the System Development and Demonstration (SDD) contract, and a production
phase. The SDD contract is a cost plus incentive fee contract under
which our eligibility to earn fees is reduced as total contract costs
increase. Since 2006, the costs of the SDD contract have exceeded the
threshold at which we are eligible to earn profit. In December 2007,
we agreed to expand the scope of the development contract efforts on a funded
basis. In April 2008, the SDD contract was modified to define the
additional scope, raising the total contract value to $589 million from the
original contract value of $210 million.
During
2007, we continued to restructure the production portion of this program through
negotiations with the U.S. Government, which included reducing the number of
units and modifying the pricing and delivery schedules. Based on the status of
the negotiations during the year and contractual commitments with our vendors
related to materials for the anticipated production units procured in advance of
the low-rate initial production (LRIP) contract awards, we established reserves
in 2007 representing our best estimate of the expected loss for this
program. At December 29, 2007, reserves for this program totaled $50
million.
Based on
the latest estimate of projected program costs, the ARH program is now required
to be certified under the Nunn-McCurdy Act in order for the program to
continue. The U.S. Government has begun the certification process,
which we expect will be completed by the end of 2008.
In the
second quarter of 2008, we submitted our proposal to the U.S. Government for the
first restructured LRIP program. We do not anticipate that any
contract awards will be finalized until the program is
certified. Based on our vendor obligations and current expectations
for the anticipated LRIP contracts, the $50 million reserve recorded in 2007
remains our best estimate of the expected loss at this time.
We expect
to continue to receive inventory and incur additional vendor obligations for
long-lead time materials related to the anticipated LRIP
contracts. ARH production inventory and vendor obligations are
anticipated to be in the range of an additional $7 million to $9 million each
month. The continued expenditure and recoverability of these
additional costs will be monitored and evaluated based on the progress of the
certification process.
R&D Arrangements - In
2008, we entered into a risk-sharing arrangement with a supplier for the
development of the Columbus aircraft. The arrangement requires
periodic contributions from the supplier totaling $50 million, which are due in
installments as the development effort reaches certain predetermined
milestones. The contributions will be recognized as a reduction of
research and development costs ratably as development costs are
incurred. Based on development activities completed and costs
incurred, we recorded income of less than $1 million in the second quarter of
2008.
We have also contracted with several other suppliers to perform
development efforts related to the Columbus aircraft on a fixed-price
basis. Our obligations to these suppliers are based on the progress
toward completion of
certain
predetermined milestones. The related development costs are accrued as the
milestones are completed. Based on the milestone progress achieved,
we recorded expense of $5 million in the second quarter of 2008 related to these
arrangements.
Note
8: Guarantees and Indemnifications
As
disclosed under the caption “Guarantees and Indemnifications” in Note 17 to the
Consolidated Financial Statements in Textron’s 2007 Annual Report on Form 10-K,
we have issued or are party to certain guarantees. As of June 28,
2008, 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 liabilities are as follows:
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
Accrual
at the beginning of period
|
|
$ |
321 |
|
|
$ |
315 |
|
Provision
|
|
|
97 |
|
|
|
93 |
|
Settlements
|
|
|
(98 |
) |
|
|
(89 |
) |
Adjustments
to prior accrual estimates
|
|
|
(7 |
) |
|
|
2 |
|
Other
adjustments
|
|
|
(3 |
) |
|
|
- |
|
Accrual
at the end of period
|
|
$ |
310 |
|
|
$ |
321 |
|
Note
9: Fair Values of Assets and Liabilities
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,”
effective for financial statements issued for fiscal years beginning after
November 15, 2007. SFAS No. 157 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. In
February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, which
delayed until the first quarter of 2009 the effective date of SFAS No. 157 for
nonfinancial assets and liabilities that are not recognized or disclosed at fair
value in the financial statements on a recurring basis.
The
adoption of SFAS No. 157 for our financial assets and liabilities in the first
quarter of 2008 did not have a material impact on our financial position or
results of operations. Our nonfinancial assets and liabilities that meet the
deferral criteria set forth in FSP No. 157-2 include goodwill, intangible
assets, property, plant and equipment and other long-term investments, which
primarily represent collateral that is received by the Finance group in
satisfaction of troubled loans. We do not expect that the adoption of
SFAS No. 157 for these nonfinancial assets and liabilities will have a material
impact on our financial position or results of operations.
In
accordance with the provisions of SFAS No. 157, 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 Statement prioritizes the assumptions that market
participants would use in pricing the asset or liability (the “inputs”) into a
three-tier fair value hierarchy. This fair value hierarchy gives the
highest priority (Level 1) to quoted prices in active markets for identical
assets or liabilities and the lowest priority (Level 3) to unobservable inputs
in which little or no market data exists, requiring companies to develop their
own assumptions. Observable inputs that do not meet the criteria of
Level 1, and include quoted prices for similar assets or liabilities in active
markets
or quoted prices for identical assets and liabilities in markets that are not
active, are categorized as Level 2. Level 3 inputs are those that
reflect our estimates about the assumptions market participants would use in
pricing the asset or liability, based on the best information available in the
circumstances. Valuation techniques for assets and liabilities
measured using Level 3 inputs may include methodologies such as the market
approach, the income approach or the cost approach, and may use unobservable
inputs such as projections, estimates and management’s interpretation of current
market data. These unobservable inputs are only utilized to the
extent that observable inputs are not available or cost-effective to
obtain.
Assets
and Liabilities Recorded at Fair Value on a Recurring Basis
The table
below presents the assets and liabilities measured at fair value on a recurring
basis at June 28, 2008 categorized by the level of inputs used in the valuation
of each asset and liability.
(In
millions)
|
|
Total
|
|
|
Quoted
Prices in Active Markets for Identical Assets or Liabilities
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
group
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange rate forward
contracts, net
|
|
$ |
26 |
|
|
$ |
- |
|
|
$ |
26 |
|
|
$ |
- |
|
Total Manufacturing
group
|
|
|
26 |
|
|
|
- |
|
|
|
26 |
|
|
|
- |
|
Finance group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only
strips
|
|
|
53 |
|
|
|
- |
|
|
|
- |
|
|
|
53 |
|
Derivative financial
instruments, net
|
|
|
22 |
|
|
|
- |
|
|
|
22 |
|
|
|
- |
|
Total Finance
group
|
|
|
75 |
|
|
|
- |
|
|
|
22 |
|
|
|
53 |
|
Total assets
|
|
$ |
101 |
|
|
$ |
- |
|
|
$ |
48 |
|
|
$ |
53 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash settlement forward
contract
|
|
$ |
34 |
|
|
$ |
34 |
|
|
$ |
- |
|
|
$ |
- |
|
Total Manufacturing
group
|
|
|
34 |
|
|
|
34 |
|
|
|
- |
|
|
|
- |
|
Total
liabilities
|
|
$ |
34 |
|
|
$ |
34 |
|
|
$ |
- |
|
|
$ |
- |
|
Valuation
Techniques
Manufacturing
Group
Foreign
exchange rate forward contracts are measured at fair value using the market
method valuation technique. The inputs to this technique utilize
current foreign exchange forward market rates published by third-party leading
financial news and data providers. This is observable data that
represents 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 hedges, in other comprehensive
income. If a contract does not qualify for hedge accounting or is designated as
a fair value hedge, changes in the fair value of the contract are recorded in
income.
Cash
settlement forward contracts on our common stock are used to manage the expense
related to stock-based compensation awards. The use of these forward
contracts modifies compensation expense exposure to changes in the stock price
with the intent of reducing potential variability. These contracts
are measured at fair value using the market method valuation
technique. Since the input to this technique is based on the quoted
price of our common stock at the measurement date, it is classified as Level
1. Gains or losses on these instruments are recorded as an adjustment
to compensation expense.
Finance
Group
Interest-only
strips are generally retained upon the sale of finance receivables to qualified
special purpose trusts. These interest-only strips are initially recorded at the
allocated carrying value, which is determined based on the relative fair values
of the finance receivables sold and the interests retained. We
estimate fair value upon the initial recognition of the retained interest based
on the present value of expected future cash flows using our best estimates of
key assumptions – credit losses, prepayment speeds, forward interest rate yield
curves and discount rates commensurate with the risks involved. These
inputs are classified as Level 3 since they reflect our own assumptions about
the assumptions market participants would use in pricing these assets based on
the best information available in the circumstances. We review the
fair values of the interest-only strips quarterly using a discounted cash flow
model and updated assumptions, and compare such amounts with the carrying value.
When a change in fair value is deemed temporary, we record a corresponding
credit or charge to other comprehensive income for any unrealized gains or
losses. If a decline in the fair value is determined to be other than
temporary, we record a corresponding charge to income.
Derivative
financial instruments are measured at fair value based on observable market
inputs for various interest and foreign currency rates published by third-party
leading financial news and data providers. This is observable data
that represents the rates used by market participants for instruments entered
into at that date; however, they are not based on actual transactions so they
are classified as Level 2. Changes in fair value for these instruments are
primarily recorded in interest expense.
Changes
in Fair Value for Unobservable Inputs
The table
below presents the change in fair value measurements for our interest-only
strips for which we used significant unobservable inputs (Level 3) during the
periods ended June 28, 2008:
(In
millions)
|
|
Three
Months Ended
June
28, 2008
|
|
|
Six
Months Ended
June
28, 2008
|
|
Balance,
beginning of period
|
|
$ |
52 |
|
|
$ |
43 |
|
Net
gains for the period:
|
|
|
|
|
|
|
|
|
Increase due to securitization
gains on sale of finance receivables
|
|
|
21 |
|
|
|
42 |
|
Change in value recognized in
Finance revenues
|
|
|
- |
|
|
|
1 |
|
Change in value recognized in
other comprehensive income
|
|
|
(2 |
) |
|
|
- |
|
Collections
|
|
|
(18 |
) |
|
|
(33 |
) |
Balance,
end of period
|
|
$ |
53 |
|
|
$ |
53 |
|
Note
10: Recently Issued Accounting Pronouncements
In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted In Share-Based Payment Transactions Are Participating
Securities.” This FSP concludes that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and must be included in
the computation of basic earnings per share using the two-class
method. This FSP is effective in the first quarter of 2009 and is to
be applied on a retrospective basis to all periods presented. In the
first quarter of 2008, we granted restricted stock units which include
nonforfeitable rights to dividends. Accordingly, restricted stock units awarded
since the beginning of 2008 will be considered participating securities and will
be included in our earnings per share calculation upon the adoption of this
FSP. The adoption of this FSP will not have a material impact on our
earnings per share and it will have no impact on our financial position or
results of operations.
Other new
pronouncements issued but not effective until after June 29, 2008 are not
expected to have a significant effect on our consolidated financial position or
results of operations.
Note
11: Segment Information
Effective
at the beginning of fiscal 2008, we changed our segment reporting by separating
the former Bell segment into two segments: the Bell segment and the Defense
& Intelligence segment. We now operate in, and will report
financial information for, the following five business segments: Cessna, Bell,
Defense & Intelligence, Industrial and Finance. These segments reflect the
manner in which we now manage our operations. Prior periods have been restated
to reflect the new segment reporting structure.
Segment
profit is an important measure used for evaluating 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.
Our
revenues by segment and a reconciliation of segment profit to income from
continuing operations before income taxes are as follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
MANUFACTURING:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cessna
|
|
$ |
1,501 |
|
|
$ |
1,203 |
|
|
$ |
2,747 |
|
|
$ |
2,171 |
|
Bell
|
|
|
698 |
|
|
|
596 |
|
|
|
1,272 |
|
|
|
1,176 |
|
Defense &
Intelligence
|
|
|
528 |
|
|
|
319 |
|
|
|
1,103 |
|
|
|
678 |
|
Industrial
|
|
|
1,015 |
|
|
|
878 |
|
|
|
1,924 |
|
|
|
1,725 |
|
|
|
|
3,742 |
|
|
|
2,996 |
|
|
|
7,046 |
|
|
|
5,750 |
|
FINANCE
|
|
|
177 |
|
|
|
239 |
|
|
|
391 |
|
|
|
449 |
|
Total
revenues
|
|
|
3,919 |
|
|
$ |
3,235 |
|
|
|
7,437 |
|
|
$ |
6,199 |
|
SEGMENT
OPERATING PROFIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MANUFACTURING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cessna
|
|
$ |
262 |
|
|
$ |
200 |
|
|
$ |
469 |
|
|
$ |
355 |
|
Bell
|
|
|
68 |
|
|
|
7 |
|
|
|
121 |
|
|
|
32 |
|
Defense &
Intelligence
|
|
|
67 |
|
|
|
52 |
|
|
|
138 |
|
|
|
118 |
|
Industrial
|
|
|
58 |
|
|
|
59 |
|
|
|
108 |
|
|
|
119 |
|
|
|
|
455 |
|
|
|
318 |
|
|
|
836 |
|
|
|
624 |
|
FINANCE
|
|
|
13 |
|
|
|
68 |
|
|
|
55 |
|
|
|
120 |
|
Segment
profit
|
|
|
468 |
|
|
|
386 |
|
|
|
891 |
|
|
|
744 |
|
Corporate
expenses and other, net
|
|
|
(48 |
) |
|
|
(66 |
) |
|
|
(88 |
) |
|
|
(116 |
) |
Interest
expense, net
|
|
|
(29 |
) |
|
|
(23 |
) |
|
|
(59 |
) |
|
|
(47 |
) |
Income
from continuing operations before
income taxes
|
|
$ |
391 |
|
|
$ |
297 |
|
|
$ |
744 |
|
|
$ |
581 |
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Consolidated
Results of Operations
Revenues
and Segment Profit
Second
Quarter of 2008
Revenues
increased $684 million, or 21%, to $3.9 billion in the second quarter of 2008,
compared with the second quarter in 2007. This increase is primarily
due to higher manufacturing volume and product mix of $371 million, revenues
from newly acquired businesses of $202 million, higher pricing of $109 million
and favorable foreign exchange in the Industrial segment of $64
million. These increases were partially offset by lower revenue for the
Finance segment of $62 million.
Segment
profit increased $82 million, or 21%, to $468 million in the second quarter of
2008, compared with the second quarter in 2007. This increase is
primarily due to the benefit from higher volume and mix of $72 million, higher
pricing in excess of inflation of $24 million, favorable cost performance of $22
million and the benefit from newly acquired businesses of $14 million, partially
offset by lower profit in the Finance segment of $55
million. Favorable cost performance includes the impact of a $48
million net charge related to Bell’s Armed Reconnaissance Helicopter
(“ARH”) program in the second quarter of 2007.
First
Half of 2008
Revenues
increased $1,238 million, or 20%, to $7.4 billion in the first half of 2008
compared with the first half of 2007. This increase is primarily due
to higher manufacturing volume and product mix of $551 million, revenues from
newly acquired businesses of $465 million, higher pricing of $192 million and
favorable foreign exchange in the Industrial segment of $116 million.
These increases were partially offset by lower revenue in the Finance Segment of
$58 million and the impact of last year’s reimbursement of costs related to
Hurricane Katrina of $28 million.
Segment
profit increased $147 million, or 20%, to $891 million in the first half of
2008, compared with the first half of 2007. This increase is
primarily due to the benefit from higher volume and mix of $98 million,
favorable cost performance of $42 million, higher pricing in excess of inflation
of $38 million and the benefit from newly acquired businesses of $27 million,
partially offset by lower profit in the Finance segment of $65
million. Favorable cost performance includes the impact of $73
million in net charges in 2007 related to the ARH program, partially
offset by last year’s reimbursement of costs related to Hurricane Katrina of $28
million.
Backlog
Backlog
in the aircraft and defense businesses grew by $4.7 billion to $23.5 billion at
the end of the second quarter of 2008, compared to the end of
2007. Approximately $3.4 billion of this increase was at Cessna and
$1.4 billion at Bell. At Cessna, approximately 70% of the new
business jet orders were from international customers in the first half of 2008,
compared with approximately 45% in the first half of
2007. Approximately $2.2 billion of Cessna’s backlog relates to the
Columbus aircraft with initial customer deliveries expected to begin in
2014. Bell’s backlog increased as a result of a multi-year
procurement contract entered into in March for the V-22 tiltrotor aircraft,
which added $1.1 billion to backlog for the first funded lot and certain
advanced procurement for additional lots. The remaining contract
value of $4.7 billion will be reflected in backlog as each subsequent production
lot is funded.
Corporate
Expenses and Other, net
Corporate
expenses and other, net decreased $18 million and $28 million in the second
quarter and first half of 2008, respectively, compared with the corresponding
periods of 2007, primarily due to lower pre-tax share-based compensation
expense largely attributable to depreciation in our stock price.
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
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
Federal
statutory income tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase
(decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income
taxes
|
|
|
0.3 |
|
|
|
1.4 |
|
|
|
1.2 |
|
|
|
1.3 |
|
Foreign tax rate
differential
|
|
|
(4.8 |
) |
|
|
(1.6 |
) |
|
|
(5.5 |
) |
|
|
(1.6 |
) |
Manufacturing
deduction
|
|
|
(1.3 |
) |
|
|
(1.6 |
) |
|
|
(1.3 |
) |
|
|
(1.6 |
) |
Equity hedge expense
(income)
|
|
|
1.0 |
|
|
|
(1.9 |
) |
|
|
2.1 |
|
|
|
(1.0 |
) |
Interest on tax
contingencies
|
|
|
3.8 |
|
|
|
1.2 |
|
|
|
2.6 |
|
|
|
1.2 |
|
Canadian functional
currency
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.3 |
) |
Favorable tax
settlements
|
|
|
- |
|
|
|
(3.3 |
) |
|
|
- |
|
|
|
(1.7 |
) |
Other, net
|
|
|
(0.8 |
) |
|
|
(1.6 |
) |
|
|
(0.9 |
) |
|
|
(2.4 |
) |
Effective
income tax rate
|
|
|
33.2 |
% |
|
|
27.6 |
% |
|
|
33.2 |
% |
|
|
28.9 |
% |
In the
second quarter of 2008, due to court decisions involving other companies
addressing the tax treatment of certain lease transactions, we increased the
accrual for interest on tax contingencies related to similar lease transactions
in the Finance segment. This change in assessment was also the
primary factor in lowering our state income taxes and increasing the foreign tax
rate differential.
Segment
Analysis
Effective
at the beginning of fiscal 2008, we changed our segment reporting by separating
the former Bell segment into two segments: the Bell segment and the Defense
& Intelligence segment. We now operate in, and report financial
information for, the following five business segments: Cessna, Bell, Defense
& Intelligence, Industrial and Finance. These segments reflect the manner in
which we now manage our operations. Prior periods have been recast to reflect
the new segment reporting structure.
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.
Cessna
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
Revenues
|
|
$ |
1,501 |
|
|
$ |
1,203 |
|
|
$ |
2,747 |
|
|
$ |
2,171 |
|
Segment
profit
|
|
$ |
262 |
|
|
$ |
200 |
|
|
$ |
469 |
|
|
$ |
355 |
|
In the
second quarter of 2008, Cessna’s revenues and segment profit increased $298
million and $62 million, respectively, compared with the second quarter of
2007. Revenues increased largely due to higher volume of $212
million, reflecting higher Citation business jet deliveries, improved
pricing of $69 million and a $17 million benefit from a newly acquired
business. We delivered 117 jets in the second quarter, compared with
95 jets in the second quarter of 2007. Segment profit increased
primarily due to the $63 million impact from higher volume and pricing in excess
of inflation of $31 million, partially offset by higher engineering and product
development expense of $16 million.
In the
first half of 2008, Cessna’s revenues and segment profit increased $576 million
and $114 million, respectively, compared with the first half of
2007. Revenues increased largely due to higher volume of $424
million, reflecting higher Citation business jet deliveries, improved pricing of
$127 million and a $25 million
benefit
from a newly acquired business. We delivered 212 jets in the first
half of 2008, compared with 162 jets in the first half of
2007. Segment profit increased primarily due to the $107 million
impact from higher volume, pricing in excess of inflation of $57 million and
favorable warranty performance of $16 million, partially offset
by higher engineering and product development expense of $34
million.
Bell
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
Revenues
|
|
$ |
698 |
|
|
$ |
596 |
|
|
$ |
1,272 |
|
|
$ |
1,176 |
|
Segment
profit
|
|
$ |
68 |
|
|
$ |
7 |
|
|
$ |
121 |
|
|
$ |
32 |
|
U.S.
Government Business
Revenues
and segment profit for Bell’s U.S. Government business increased $97 million and
$64 million, respectively, in the second quarter of 2008, compared with the
second quarter of 2007. The increase in revenues is mainly due
to higher H-1 program revenue of $47 million, higher V-22 volume of $30 million
and higher spares and service volume of $12 million. Segment profit
increased primarily due to improved cost performance of $59 million, largely due
to the impact of a $48 million net charge related to the ARH program in the
second quarter of 2007, and a $5 million contribution from higher volume
and mix.
In the
first half of 2008, revenues and segment profit for this business increased $147
million and $91 million, respectively, compared with the first half of
2007. The increase in revenues is mainly due to higher V-22 volume of
$79 million, higher H-1 program revenue of $36 million and higher spares and
service volume of $19 million. Segment profit increased primarily due
to improved cost performance of $78 million, largely due to the impact of $73
million in net charges related to the ARH program in the first half of 2007, and
a $13 million contribution from higher volume and mix.
ARH Program — The ARH program
includes a development phase, covered by the System Development and
Demonstration (SDD) contract, and a production phase. The SDD
contract is a cost plus incentive fee contract under which our eligibility to
earn fees is reduced as total contract costs increase. Since 2006,
the costs of the SDD contract have exceeded the threshold at which we are
eligible to earn profit. In December 2007, we agreed to expand the
scope of the development contract efforts on a funded basis. In April
2008, the SDD contract was modified to define the additional scope, raising the
total contract value to $589 million from the original contract value of $210
million.
During
2007, we continued to restructure the production portion of this program through
negotiations with the U.S. Government, which included reducing the number of
units and modifying the pricing and delivery schedules. Based on the status of
the negotiations during the year and contractual commitments with our vendors
related to materials for the anticipated production units procured in advance of
the low-rate initial production (LRIP) contract awards, we established reserves
in 2007 representing our best estimate of the expected loss for this
program. At December 29, 2007, reserves for this program totaled $50
million.
Based on
the latest estimate of projected program costs, the ARH program is now required
to be certified under the Nunn-McCurdy Act in order for the program to
continue. The U.S. Government has begun the certification process,
which we expect will be completed by the end of 2008.
In the
second quarter of 2008, we submitted our proposal to the U.S. Government for the
first restructured LRIP program. We do not anticipate that any
contract awards will be finalized until the program is
certified. Based on our vendor obligations and current expectations
for the anticipated LRIP contracts, the $50 million reserve recorded in 2007
remains our best estimate of the expected loss at this time.
We expect
to continue to receive inventory and incur additional vendor obligations for
long-lead time materials related to the anticipated LRIP
contracts. ARH production inventory and vendor obligations are
anticipated to be in the range of an additional $7 million to $9 million each
month. The continued expenditure and recoverability of these
additional costs will be monitored and evaluated based on the progress of the
certification process.
Commercial
Business
Revenues
for Bell’s commercial business increased $5 million, while segment profit
decreased $3 million in the second quarter of 2008, compared with the second
quarter of 2007. The increase in revenues for this business is
primarily due to higher pricing of $17 million and revenues from newly acquired
businesses of $5 million, partially offset by lower helicopter volume of $19
million. The decrease in segment profit reflects unfavorable cost
performance of $5 million and lower volume of $3 million, partially offset by
higher pricing in excess of inflation of $6 million.
In the
first half of 2008, revenues and segment profit for Bell’s commercial business
decreased $51 million and $2 million, respectively, compared with the first half
of 2007. The decrease in revenues for this business is primarily due
to lower helicopter volume of $95 million, partially offset by higher pricing of
$30 million and revenues from newly acquired businesses of $11 million. The
decrease in segment profit reflects lower volume of $20 million, partially
offset by favorable cost performance of $10 million and higher pricing in excess
of inflation of $9 million.
Defense
& Intelligence
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
Revenues
|
|
$ |
528 |
|
|
$ |
319 |
|
|
$ |
1,103 |
|
|
$ |
678 |
|
Segment
profit
|
|
$ |
67 |
|
|
$ |
52 |
|
|
$ |
138 |
|
|
$ |
118 |
|
Revenues
and segment profit increased $209 million and $15 million, respectively, in the
second quarter of 2008, compared with the second quarter of 2007. The
increase in revenues is primarily due to $175 million in revenues from our newly
acquired AAI business and $39 million in higher volume for our Armored
Security Vehicle (“ASV”) aftermarket products and Intelligent Battlefield
Systems, Joint Direct Attack Munitions and Lycoming products, partially offset
by lower Sensor Fused Weapon volume of $17 million. Segment profit
increased primarily due to the benefit from the newly acquired AAI business of
$16 million, partially offset by unfavorable cost performance of $6
million.
In the
first half of 2008, revenues and segment profit increased $425 million and $20
million, respectively, compared with the first half of 2007. The
increase in revenues is primarily due to $420 million in revenues from our newly
acquired AAI business and $55 million in higher volume for our ASV
aftermarket products and Lycoming, Intelligent Battlefield Systems and Joint
Direct Attack Munitions products, partially offset by lower Sensor Fused Weapon
volume of $31 million and a $28 million reimbursement of costs in the first half
of 2007 related to Hurricane Katrina.
Segment
profit increased in the first half of 2008 primarily due to the benefit from the
newly acquired AAI business of $34 million, partially offset by unfavorable cost
performance of $12 million. Cost performance reflects a 2007 cost
reimbursement related to Hurricane Katrina of $28 million, partially offset by
$17 million in favorable performance for the ASV, which includes $5 million
related to the resolution of several customer and vendor claims in the first
quarter of 2008.
Industrial
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
Revenues
|
|
$ |
1,015 |
|
|
$ |
878 |
|
|
$ |
1,924 |
|
|
$ |
1,725 |
|
Segment
profit
|
|
$ |
58 |
|
|
$ |
59 |
|
|
$ |
108 |
|
|
$ |
119 |
|
Revenues
in the Industrial segment increased $137 million, while segment profit decreased
$1 million in the second quarter of 2008, compared with the second quarter of
2007. Revenues increased primarily due to a favorable foreign
exchange impact of $65 million, higher volume of $56 million and higher pricing
of $12 million. Segment profit decreased primarily due to inflation
in excess of higher pricing of $18 million due to significant increases in
commodity prices, partially offset by a favorable foreign exchange impact of $6
million and improved cost performance of $5 million.
In the
first half of 2008, revenues in the Industrial segment increased $199 million,
while segment profit decreased $11 million compared to the first half of
2007. Revenues increased primarily due to a favorable foreign
exchange impact of $117 million, higher volume of $49 million and higher pricing
of $25 million. Segment profit decreased primarily due to inflation
in excess of higher pricing of $26 million, partially offset by improved cost
performance of $9 million and a favorable foreign exchange impact of $8
million.
Finance
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
Revenues
|
|
$ |
177 |
|
|
$ |
239 |
|
|
$ |
391 |
|
|
$ |
449 |
|
Segment
profit
|
|
$ |
13 |
|
|
$ |
68 |
|
|
$ |
55 |
|
|
$ |
120 |
|
Revenues
decreased $62 million and $58 million in the second quarter and first half of
2008, respectively, compared with the corresponding periods of 2007, primarily
due to the following:
(In
millions)
|
|
Quarter
|
|
|
First Half
|
|
Lower market interest
rates
|
|
$ |
(41 |
) |
|
$ |
(69 |
) |
Gains on the sale of
leveraged lease investment
|
|
|
(21 |
) |
|
|
(16 |
) |
Change in estimate for
leveraged lease transactions
|
|
|
(9 |
) |
|
|
(9 |
) |
Benefit from variable-rate
receivable interest rate floors
|
|
|
6 |
|
|
|
6 |
|
Higher securitization
gains
|
|
|
5 |
|
|
|
10 |
|
Leveraged lease residual value
impairments
|
|
|
(3 |
) |
|
|
8 |
|
In the
second quarter of 2008, our revenues and segment profit were reduced to
reflect a cumulative adjustment due to a change in estimate of the timing of
tax-related cash flows on our leveraged lease portfolio. This change
was based on court decisions involving other companies that addressed the tax
treatment of certain lease transactions challenged by the Internal Revenue
Service.
Segment
profit decreased $55 million and $65 million in the second quarter and first
half of 2008, respectively, compared with the corresponding periods of 2007,
primarily due to the following:
(In
millions)
|
|
Quarter
|
|
|
First Half
|
|
Increase in the provision for
loan losses
|
|
$ |
(29 |
) |
|
$ |
(51 |
) |
Gains on the sale of leveraged
lease investment
|
|
|
(21 |
) |
|
|
(16 |
) |
Higher borrowing costs
relative to market rates
|
|
|
(9 |
) |
|
|
(19 |
) |
Change in estimate for
leveraged lease transactions
|
|
|
(9 |
) |
|
|
(9 |
) |
Leveraged lease residual value
impairments
|
|
|
(3 |
) |
|
|
8 |
|
Higher securitization
gains
|
|
|
5 |
|
|
|
10 |
|
We have
experienced higher borrowing costs relative to various market rate indices due
to continued volatility in the credit markets. Dramatic reductions in
the target Federal Funds rate from January through April were generally
reflected in our finance receivable portfolio yield in advance of being
reflected in our borrowing costs. In addition, LIBOR rates, on which
the majority of our variable-rate debt portfolio is based, have remained high
relative to the Federal Funds rate and credit spreads have widened on issuances
of commercial paper and term debt as compared to 2007.
The
increase in the provision for loan losses in the second quarter of 2008 was
primarily driven by a $12 million reserve established for one account in the
golf finance portfolio and increased loan loss provisions in the distribution
finance portfolio as fuel costs and general U.S. economic conditions have
continued to impact borrowers in certain industries. In the first half of 2008,
the increase was primarily driven by a $15 million reserve established for one
account in the asset-based lending portfolio, a $12 million reserve established
for one account in the golf finance portfolio and increased loan loss provisions
in the distribution finance portfolio.
The
following table presents information about the Finance segment’s credit
performance:
|
|
June
28,
|
|
|
December
29,
|
|
(Dollars
in millions)
|
|
2008
|
|
|
2007
|
|
Nonperforming
assets
|
|
$ |
216 |
|
|
$ |
123 |
|
Nonaccrual
finance receivables
|
|
$ |
176 |
|
|
$ |
79 |
|
Allowance
for losses
|
|
$ |
126 |
|
|
$ |
89 |
|
Ratio
of nonperforming assets to total finance assets
|
|
|
2.31 |
% |
|
|
1.34 |
% |
Ratio
of allowance for losses on receivables to nonaccrual finance
receivables
|
|
|
71.8 |
% |
|
|
111.7 |
% |
60+
days contractual delinquency as a percentage of finance
receivables
|
|
|
0.61 |
% |
|
|
0.43 |
% |
The
increase in nonperforming assets and nonaccrual finance receivables is primarily
attributable to one account in the asset-based lending portfolio and one account
in the golf finance portfolio. In addition, nonperforming assets and
net charge-offs increased in the distribution finance portfolio reflecting
weakening U.S. economic conditions. For the first half of 2008, net charge-offs
totaled $30 million, compared with $23 million in the first half of
2007. For the remainder of 2008, we expect nonperforming
assets and charge-offs to remain high relative to the strong portfolio quality
performance of 2007.
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 Cessna, Bell, Defense & Intelligence 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.
We assess
liquidity for our Manufacturing group in terms of our ability to provide
adequate cash to fund our operating, investing and financing activities. Our
principal source of liquidity is operating cash flows. We also have liquidity
available to us via the commercial paper market and committed bank lines of
credit, as well as access to the public capital markets that provide us with
long-term capital at satisfactory terms.
Our
Finance group mitigates liquidity risk (i.e., the risk that we will be unable to
fund maturing liabilities or the origination of new finance receivables) by
developing and preserving reliable sources of capital. We use a variety of
financial resources to meet these capital needs. Cash for the Finance group is
provided from finance receivable collections, sales and securitizations, as well
as the issuance of commercial paper and term debt in the public and private
markets. This diversity of capital resources enhances its funding flexibility,
limits dependence on any one source of funds, and results in cost-effective
funding. The Finance group also can borrow from the Manufacturing group when the
availability of such borrowings creates an economic advantage to Textron in
comparison with borrowings from other sources. In making particular funding
decisions, management considers market conditions, prevailing interest rates and
credit spreads, and the maturity profile of its assets and
liabilities.
Manufacturing
Group Cash Flows of Continuing Operations
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
Operating
activities
|
|
$ |
413 |
|
|
$ |
280 |
|
Investing
activities
|
|
$ |
(293 |
) |
|
$ |
(137 |
) |
Financing
activities
|
|
$ |
(169 |
) |
|
$ |
(283 |
) |
Operating
cash flows for the Manufacturing group increased primarily due to earnings
growth. Changes in our working capital components resulted in a $442
million use of cash in the first half of 2008, compared to a $375 million use of
cash in the first half of 2007. Cash used for inventories continues
to be a significant use of operating cash due to increased production and
inventory build-up primarily to support increasing sales at Bell and
Cessna.
The
Manufacturing group used more cash for investing activities primarily due to
$100 million in cash payments made in 2008 largely related to the acquisition of
AAI at the end of 2007 and a $56 million increase in capital
expenditures.
Less cash
was used by the Manufacturing group for financing activities primarily due to an
$87 million reduction in cash used to repurchase our stock. Financing cash
outflows also decreased due to $79 million of incremental borrowings, partially
offset by $31 million in lower proceeds from stock option
exercises. The decrease in share repurchases is due to a 1 million
reduction in the number of shares repurchased in the first half of 2008 compared
with 2007, and due to the timing of cash payments. In the first half
of 2008, we repurchased 3.5 million shares for $190 million with $56 million in
unsettled transactions at June 28, 2008. In the first half of 2007, we
repurchased 4.5 million shares for $219 million with only $7 million payable at
the end of the quarter due to unsettled trades.
Based on
current market conditions, we plan to accelerate the pace of our share
repurchase program. In the second half of 2008, we expect to utilize up to
$500 million to repurchase common stock under our previously authorized share
repurchase program. We anticipate that these additional repurchases will
be funded through cash generated from operating activities, supplemented by the
issuance of debt, including commercial paper, as required.
Finance
Group Cash Flows of Continuing Operations
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
Operating
activities
|
|
$ |
83 |
|
|
$ |
153 |
|
Investing
activities
|
|
$ |
(134 |
) |
|
$ |
23 |
|
Financing
activities
|
|
$ |
46 |
|
|
$ |
(156 |
) |
For the
Finance group, lower earnings in the first half of 2008 resulted in less cash
provided by operating activities. The Finance group used more cash
for investing activities primarily due to the purchase of notes receivable
issued by securitization trusts of $98 million and the $48 million impact of
lower repayments and proceeds received from receivable sales, including
securitizations to fund originations. Financing activities generated
more cash for the Finance group primarily due to higher incremental borrowings
as we relied less on proceeds from receivable sales, including securitizations
to fund our growth in finance assets in the first half of 2008 compared with the
corresponding period of 2007.
Consolidated
Cash Flows of Continuing Operations
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
Operating
activities
|
|
$ |
372 |
|
|
$ |
123 |
|
Investing
activities
|
|
$ |
(445 |
) |
|
$ |
61 |
|
Financing
activities
|
|
$ |
19 |
|
|
$ |
(304 |
) |
Operating
cash flows increased primarily due to earnings growth in the Manufacturing group
and a $189 million increase in cash received from captive finance receivables,
partially offset by working capital growth.
Cash used
for investing activities increased primarily due to the $242 million impact of
lower repayments and proceeds received from receivable sales, including
securitizations to fund originations. In addition, we made $100
million in payments in 2008, largely related to the acquisition of AAI at the
end of 2007, purchased notes receivable issued by securitization trusts of $98
million in 2008 and spent an additional $56 million in capital
expenditures.
We
received more cash from financing activities during the first half of 2008,
compared with the first half of 2007, largely related to higher incremental
borrowings. In addition, we used $87 million less cash to repurchase our
stock.
Captive
Financing
Through
our Finance group, we provide diversified commercial financing to third parties.
In addition, this group finances retail purchases and leases for new and used
aircraft and equipment manufactured by our Manufacturing group, otherwise known
as captive financing. In the Consolidated Statements of Cash Flows, cash
received from customers or from securitizations is reflected as operating
activities when received from third parties. However, in the cash flow
information provided for the separate borrowing groups, cash flows related to
captive financing activities are reflected based on the operations of each
group. For example, when product is sold by our Manufacturing group to a
customer and is financed by the Finance group, the origination of the finance
receivable is recorded within investing activities as a cash outflow in the
Finance group’s Statement of Cash Flows. Meanwhile, in the Manufacturing group’s
Statement of Cash Flows, the cash received from the Finance group on the
customer’s behalf is recorded within operating cash flows as a cash inflow.
Although cash is transferred between the two borrowing groups, there is no cash
transaction reported in the consolidated cash flows at the time of the original
financing. These captive financing activities, along with all significant
intercompany transactions, are reclassified or eliminated from the Consolidated
Statements of Cash Flows.
Reclassification
and elimination adjustments included in the Consolidated Statement of Cash Flows
are summarized below:
|
|
Six
Months Ended
|
|
(In
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
Reclassifications
from investing activities:
|
|
|
|
|
|
|
Finance receivable originations
for Manufacturing group inventory sales
|
|
$ |
(520 |
) |
|
$ |
(525 |
) |
Cash received from customers,
sale of receivables and securitizations
|
|
|
543 |
|
|
|
354 |
|
Other
|
|
|
(5 |
) |
|
|
(4 |
) |
Total
reclassifications from investing activities
|
|
|
18 |
|
|
|
(175 |
) |
Dividends
paid by Finance group to Manufacturing group
|
|
|
(142 |
) |
|
|
(135 |
) |
Total
reclassifications and adjustments to operating activities
|
|
$ |
(124 |
) |
|
$ |
(310 |
) |
Capital
Resources
The debt
(net of cash)-to-capital ratio for our Manufacturing group was 32% at June 28,
2008 and December 29, 2007, and the gross debt-to-capital ratio at June 28, 2008
was 37% compared with 38% at December 29, 2007.
Under
separate shelf registration statements filed with the Securities and Exchange
Commission, the Manufacturing group may issue public debt and other securities
in one or more offerings up to a total maximum offering of $2.0 billion, and the
Finance group may issue an unlimited amount of public debt securities. At June
28, 2008, we had $1.2 billion available under our registration statement. During
the first half of 2008, the Finance group issued $675 million of term debt under
its registration statement.
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
lines of credit was drawn at June 28, 2008 or December 29, 2007.
Our
primary committed credit facilities at June 28, 2008 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 |
|
|
$ |
89 |
|
|
$ |
22 |
|
|
$ |
1,139 |
|
Finance
group — multi-year facility expiring in 2012
|
|
|
1,750 |
|
|
|
1,340 |
|
|
|
7 |
|
|
|
403 |
|
Total
|
|
$ |
3,000 |
|
|
$ |
1,429 |
|
|
$ |
29 |
|
|
$ |
1,542 |
|
*
The Finance group is permitted to borrow under this multi-year
facility.
At June
28, 2008, our Finance group had $2.7 billion in debt and $447 million in other
liabilities that are payable within the next 12 months.
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 2008, the impact of
foreign exchange rate changes from the first half of 2007 increased revenues by
approximately $117 million (1.9%) and increased segment profit by approximately
$8 million (1.0%).
Forward-Looking
Information
Certain
statements in this Quarterly Report on Form 10-Q and other oral and written
statements made by us from time to time are forward-looking statements,
including those that discuss strategies, goals, outlook or other non-historical
matters, or project revenues, income, returns or other financial measures. These
forward-looking statements speak only as of the date on which they are made, and
we undertake no obligation to update or revise any forward-looking statements.
These forward-looking statements are subject to risks and uncertainties that may
cause actual results to differ materially from those contained in the
statements, such as the Risk Factors contained in our 2007 Annual Report on Form
10-K 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 Global War on Terrorism; (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 defense operations; (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 where Textron Financial Corporation offers financing;
(l) changes in aircraft delivery schedules or cancellation 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) Textron Financial Corporation’s ability to
maintain portfolio credit quality; (t) Textron Financial Corporation’s access to
financing, including securitizations, at competitive rates; (u) uncertainty in
estimating contingent liabilities and establishing reserves to address such
contingencies; (v) 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; (w) the efficacy of research and development investments to
develop new products; (x) the launching of significant new products or programs
which could result in unanticipated expenses; and (y) 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.
Item
3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
|
There has
been no significant change in our exposure to market risk during the six months
ended June 28, 2008. For discussion of our exposure to market risk,
refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk
contained in Textron’s 2007 Annual Report on Form 10-K.
Item
4.
|
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 our internal control over financial reporting during the
fiscal quarter ended June 28, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Item
2.
|
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 (March 30, 2008, – May
3, 2008)
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
21,103,000 |
|
Month
2 (May 4, 2008 - May
31, 2008)
|
|
|
3,225 |
|
|
$ |
61.98 |
|
|
|
– |
|
|
|
21,103,000 |
|
Month
3 (June 1, 2008 - June
28, 2008)
|
|
|
1,886,000 |
|
|
|
50.12 |
|
|
|
1,886,000 |
|
|
|
19,217,000 |
|
Total
|
|
|
1,889,225 |
|
|
$ |
50.14 |
|
|
|
1,886,000 |
|
|
|
|
|
On July
18, 2007, our Board of Directors approved a new share repurchase plan under
which we are authorized to repurchase up to 24 million share of common
stock. The new plan has no expiration date and supersedes the
previous plan, which was cancelled.
Item
4.
|
SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS
|
|
At
Textron's annual meeting of shareholders held on April 23, 2008, the
following items were voted upon:
|
|
|
|
|
1.
|
The
following persons were elected to serve as directors in Class III for
three year terms expiring in 2011 and received the votes
listed.
|
|
|
Name
|
For
|
Against
|
Abstain
|
Broker Non-Votes
|
|
|
Paul
E. Gagne
|
215,241,252
|
5,579,849
|
2,826,955
|
2,586
|
|
|
Dain
M. Hancock
|
217,120,959
|
3,688,267
|
2,839,302
|
2,114
|
|
|
Lloyd
G. Trotter
|
217,061,534
|
3,703,441
|
2,883,551
|
2,116
|
|
|
Thomas
B. Wheeler
|
215,156,912
|
5,627,459
|
2,864,145
|
2,126
|
|
|
The
following directors have terms of office which continued after the
meeting: Class I expiring in 2009: Lewis B.
Campbell, Lawrence K. Fish and Joe T. Ford; Class II expiring in 2010:
Kathleen M. Bader, R. Kerry Clark, Ivor J. Evans, Lord Powell of Bayswater
KCMG and James L. Ziemer
|
|
|
|
|
2.
|
The
appointment of Ernst & Young LLP by the Audit Committee as Textron's
independent registered public accounting firm for 2008 was ratified by the
following vote:
|
|
|
For
|
Against
|
Abstain
|
Broker Non-Votes
|
|
|
217,616,286
|
3,854,998
|
2,177,241
|
2,117
|
|
|
|
|
3.
|
A
shareholder proposal relating to a report on foreign military sales was
rejected by the following vote:
|
|
|
For
|
Against
|
Abstain
|
Broker Non-Votes
|
|
|
12,733,432
|
160,940,977
|
22,259,329
|
27,716,904
|
|
4.
|
A shareholder
proposal relating to Tax Gross-up Payments to Senior Executives was
rejected by the following vote:
|
|
|
For
|
Against
|
Abstain
|
Broker
Non-Votes
|
|
|
86,560,502 |
105,858,881 |
3,514,350 |
27,716,909 |
|
|
|
|
|
10.1
|
Letter
Agreement between Textron and Scott C. Donnelly dated June 26,
2008
|
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
|
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
25, 2008
|
|
/s/Richard
L. Yates
|
|
|
|
Richard
L. Yates
Senior
Vice President and Corporate Controller
(principal
accounting officer)
|
LIST
OF EXHIBITS
The
following exhibits are filed as part of this report on Form 10-Q:
10.1
|
Letter
Agreement between Textron and Scott C. Donnelly dated June 26,
2008
|
|
|
|
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
|
|