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 January 3,
2009. 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 all of its
majority-owned subsidiaries that operate in the Cessna, Bell, Textron Systems
and Industrial segments, except for the entities comprising the Finance group.
The Finance group consists of Textron Financial Corporation along with the
entities consolidated into it. 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.
As
discussed in Note 5: Discontinued Operations, on April 3, 2009, we sold HR
Textron and in November 2008, we completed the sale of our Fluid & Power
business unit. Both of these businesses have been classified as
discontinued operations, and all prior period information has been recast to
reflect this presentation.
Note
2: Special Charges
In the
fourth quarter of 2008, we initiated a restructuring program to reduce overhead
costs and improve productivity across the company, which includes corporate and
segment direct and indirect workforce reductions and streamlining of
administrative overhead, and announced the exit of portions of our commercial
finance business. We expect to eliminate approximately 8,300
positions worldwide representing approximately 19% of our global workforce at
the inception of the program. As of April 4, 2009, we have
exited 9 facilities and plants under this program.
We record
restructuring costs in special charges as these costs are generally of a
nonrecurring nature and are not included in segment profit, which is our measure
used for evaluating performance and for decision-making purposes. Severance
costs related to an approved restructuring program are classified as special
charges unless the costs are for volume-related reductions of direct labor that
are deemed to be of a temporary or cyclical nature. Severance
costs provided for under our existing severance programs are accounted for under
SFAS No. 112, “Employers’ Accounting for Postemployment Benefits,” when the
costs are probable and estimable. Special one-time termination
benefits are accounted for under SFAS No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities,” at the time all of the criteria are
met.
Restructuring
costs by segment for the first quarter of 2009 are as follows:
(In
millions)
|
|
Severance
Costs
|
|
|
Contract
Terminations
|
|
|
Total
Restructuring
|
|
Cessna
|
|
$ |
26 |
|
|
$ |
— |
|
|
$ |
26 |
|
Industrial
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Finance
|
|
|
2 |
|
|
|
1 |
|
|
|
3 |
|
Corporate
|
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
|
|
$ |
31 |
|
|
$ |
1 |
|
|
$ |
32 |
|
Through
April 4, 2009, we have incurred $96 million in restructuring costs in special
charges with $74 million in severance, $20 million in asset impairment charges
and $2 million in contract termination costs. Since inception of the
program, we have incurred restructuring charges of $30 million in the Finance
segment, $26 million in the Industrial segment, $31 million at Cessna, $8
million at Corporate and $1 million at Textron Systems. In the first
quarter of 2009, we classified severance costs for certain volume-related direct
labor reductions as special charges as these reductions were not considered to
be of a seasonal/temporary nature.
An
analysis of the restructuring program and related reserve account is summarized
below:
(In
millions)
|
|
Severance
Costs
|
|
|
Contract
Terminations
|
|
|
Total
|
|
Balance
at January 3, 2009
|
|
$ |
36 |
|
|
$ |
1 |
|
|
$ |
37 |
|
Provisions
|
|
|
31 |
|
|
|
1 |
|
|
|
32 |
|
Cash
paid
|
|
|
(27 |
) |
|
|
- |
|
|
|
(27 |
) |
Balance
at April 4, 2009
|
|
$ |
40 |
|
|
$ |
2 |
|
|
$ |
42 |
|
The
specific restructuring measures and associated estimated costs are based on our
best judgment under prevailing circumstances. We believe that the
restructuring reserve balance of $42 million is adequate to cover the costs
presently accruable relating to activities formally identified and committed to
under approved plans as of April 4, 2009 and anticipate that all actions related
to these liabilities will be completed within a 12-month period.
We
estimate that we will incur approximately $43 million in additional pre-tax
restructuring costs in 2009, largely related to workforce reductions at Cessna
that will result in future cash outlays. We may have additional restructuring
costs as a result of further headcount reductions and other actions; however, an
estimate of additional charges cannot be made at this time. Due to the magnitude
of the headcount reductions under this program, as well as additional reductions
that may occur in 2009, we are currently assessing the potential curtailment
impact such reductions may have on our pension and other postretirement benefit
plans.
Note
3: Share-Based Compensation
The
compensation expense we recorded in net income for our share-based compensation
plans is as follows:
|
|
Three
Months Ended
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Compensation
income
|
|
$ |
(2 |
) |
|
$ |
(26 |
) |
Hedge
expense
|
|
|
12 |
|
|
|
32 |
|
Income
tax expense
|
|
|
1 |
|
|
|
11 |
|
Total
net compensation cost included in net income
|
|
$ |
11 |
|
|
$ |
17 |
|
Stock
Options
The stock
option compensation cost calculated under the fair value approach is recognized
over the vesting period of the stock options. The weighted-average
fair value of options granted per share was $2 and $14 in the first quarter of
2009 and 2008, respectively. We estimate the fair value of options granted on
the date of grant using the Black-Scholes option-pricing
model. Expected volatilities are based on implied volatilities from
traded
options
on our common stock, historical volatilities and other factors. We
use historical data to estimate option exercise behavior, adjusted to reflect
anticipated changes in expected life.
The
weighted-average assumptions used in our Black-Scholes option-pricing model for
awards issued during the respective periods are as follows:
|
|
Three
Months Ended
|
|
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Dividend
yield
|
|
|
1 |
% |
|
|
2 |
% |
Expected
volatility
|
|
|
50 |
% |
|
|
30 |
% |
Risk-free
interest rate
|
|
|
2 |
% |
|
|
3 |
% |
Expected
lives (In
years)
|
|
|
5.0 |
|
|
|
5.0 |
|
Stock
option activity under the 2007 Long-Term Incentive Plan for the first quarter of
2009 is as follows:
|
|
Number
of
Options
(In
thousands)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life
(In
years)
|
|
Outstanding
at beginning of period
|
|
|
9,021 |
|
|
$ |
38.51 |
|
|
|
6.3 |
|
Granted
|
|
|
775 |
|
|
|
5.63 |
|
|
|
|
|
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Canceled,
expired or forfeited
|
|
|
(241 |
) |
|
|
36.44 |
|
|
|
|
|
Outstanding
at end of period
|
|
|
9,555 |
|
|
$ |
35.89 |
|
|
|
6.4 |
|
Exercisable
at end of period
|
|
|
7,124 |
|
|
$ |
35.72 |
|
|
|
5.5 |
|
At April
4, 2009 and January 3, 2009, our outstanding and exercisable options had no
significant aggregate intrinsic value.
Restricted
Stock Units
The fair
value of a restricted stock unit paid in stock is based on the trading price of
our common stock on the date of grant, less required adjustments for certain
awards, to reflect the fair value of the award as dividends are not paid or
accrued until those restricted stock units vest. There were no grants
of restricted stock units paid in stock in the first quarter of
2009. The weighted-average grant date fair value of restricted stock
units paid in stock that were granted in the first quarter of 2008 was
approximately $54 per share.
Activity
for restricted stock units paid in stock during the three months ended April 4,
2009 is as follows:
(Shares
in thousands)
|
|
Number
of
Shares
|
|
|
Weighted-
Average
Grant
Date
Fair
Value
|
|
Outstanding
at beginning of year, nonvested
|
|
|
2,441 |
|
|
$ |
43.83 |
|
Granted
|
|
|
— |
|
|
|
— |
|
Vested
|
|
|
(422 |
) |
|
|
35.22 |
|
Forfeited
|
|
|
(145 |
) |
|
|
43.75 |
|
Outstanding
at end of year, nonvested
|
|
|
1,874 |
|
|
$ |
45.77 |
|
In the
first quarter of 2009, we granted restricted stock units paid in cash, which
vest ratably over five years. The fair value of these units at each
reporting period is based on the trading price of our common
stock.
Share-Based
Compensation Awards
The value
of the share-based compensation awards that vested and/or were paid during the
respective periods is as follows:
|
|
Three
Months Ended
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Subject
only to service conditions:
|
|
|
|
|
|
|
Value of shares, options or units
vested
|
|
$ |
34 |
|
|
$ |
31 |
|
Intrinsic value of cash awards
paid
|
|
|
— |
|
|
|
4 |
|
Subject
to performance vesting conditions:
|
|
|
|
|
|
|
|
|
Intrinsic value of cash awards
paid
|
|
|
9 |
|
|
|
41 |
|
Intrinsic
value of amounts paid under Deferred Income Plan
|
|
|
— |
|
|
|
3 |
|
Note
4: 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 April 4, 2009 and March 29, 2008 are as
follows:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
Other
Than Pensions
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
33 |
|
|
$ |
36 |
|
|
$ |
2 |
|
|
$ |
2 |
|
Interest
cost
|
|
|
76 |
|
|
|
76 |
|
|
|
9 |
|
|
|
11 |
|
Expected
return on plan assets
|
|
|
(97 |
) |
|
|
(102 |
) |
|
|
- |
|
|
|
- |
|
Amortization
of prior service cost (credit)
|
|
|
5 |
|
|
|
5 |
|
|
|
(1 |
) |
|
|
(1 |
) |
Amortization
of net loss
|
|
|
6 |
|
|
|
4 |
|
|
|
2 |
|
|
|
4 |
|
Net
periodic benefit cost
|
|
$ |
23 |
|
|
$ |
19 |
|
|
$ |
12 |
|
|
$ |
16 |
|
Note
5: Discontinued Operations
On April
3, 2009, we sold HR Textron, an operating unit previously reported within the
Textron Systems segment, for $376 million in cash. The sale resulted
in an after-tax gain of $7 million and expected net after-tax proceeds of
approximately $275 million. This business meets the discontinued
operations criteria and has been included in discontinued operations for all
periods presented in our consolidated financial statements.
In
November 2008, we completed the sale of our Fluid & Power business unit and
received approximately $527 million in cash, a six-year note with a face value
of $28 million and may receive up to $50 million based on final 2008 operating
results that were to be determined by the end of the first quarter of 2009,
which will be primarily payable in a six-year note. During the first
quarter of 2009, the final settlement of this transaction was extended and we
now expect a final determination on the remaining amount due to us later in
2009.
The
assets and liabilities of our discontinued businesses are as
follows:
(In
millions)
|
|
April
4,
2009
|
|
|
January
3,
2009
|
|
Accounts
receivable, net
|
|
$ |
- |
|
|
$ |
30 |
|
Inventories
|
|
|
- |
|
|
|
66 |
|
Property,
plant and equipment, net
|
|
|
- |
|
|
|
27 |
|
Goodwill
|
|
|
- |
|
|
|
167 |
|
Other
assets
|
|
|
3 |
|
|
|
8 |
|
Total
assets of discontinued operations of HR Textron
|
|
|
3 |
|
|
|
298 |
|
Assets
of discontinued operations of Fastening Systems and Fluid &
Power
|
|
|
50 |
|
|
|
36 |
|
Total
assets of discontinued operations
|
|
$ |
53 |
|
|
$ |
334 |
|
Accounts
payable and accrued liabilities
|
|
|
6 |
|
|
|
30 |
|
Other
liabilities
|
|
|
12 |
|
|
|
15 |
|
Total
liabilities of discontinued operations of HR Textron
|
|
|
18 |
|
|
|
45 |
|
Liabilities
of discontinued operations of Fastening Systems and Fluid &
Power
|
|
|
112 |
|
|
|
150 |
|
Total
liabilities of discontinued operations
|
|
$ |
130 |
|
|
$ |
195 |
|
Results
of our discontinued businesses are as follows:
|
|
Three
Months Ended
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Revenue
|
|
$ |
48 |
|
|
$ |
56 |
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations of HR Textron, before income
taxes
|
|
$ |
4 |
|
|
$ |
4 |
|
Income
taxes
|
|
|
1 |
|
|
|
1 |
|
Income
from discontinued operations of HR Textron, net of income
taxes
|
|
|
3 |
|
|
|
3 |
|
Gain
on sale, net of income taxes
|
|
|
7 |
|
|
|
- |
|
Income
from other discontinued operations, net of income taxes
|
|
|
33 |
|
|
|
3 |
|
Income
from discontinued operations, net of income taxes
|
|
$ |
43 |
|
|
$ |
6 |
|
For the
first quarter of 2009, income from other discontinued operations includes a $34
million tax benefit from the reduction in tax contingencies as a result of the
HR Textron sale and a valuation allowance reversal on a previously established
deferred tax asset.
Note
6: Earnings per Share
We
adopted Financial Accounting Standards Board Staff Position (FSP) No. EITF
03-6-1, “Determining Whether Instruments Granted In Share-Based Payment
Transactions Are Participating Securities,” in the first quarter of
2009. This FSP requires us to include any unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) as participating securities in our
computation of basic earnings per share pursuant to the two-class method as
defined in Statement of Financial Accounting Standard No. 128, “Earnings Per
Share.” In 2008, we granted restricted stock units that include
nonforfeitable rights to dividends. Accordingly, with the adoption of FSP No.
EITF 03-6-1, these restricted stock units are considered participating
securities and are included in our calculation of basic earnings per share using
the two-class method. Prior period basic and diluted weighted-average
shares outstanding have been recast to conform to the new calculation; however,
the adoption of this guidance did not impact our previously reported basic or
diluted earnings per share for continuing or discontinued operations for the
first quarter of 2008.
We
calculate basic and diluted earnings per share based on income available to
common shareholders, which approximates net income for each period, and the
restricted stock unit participating securities. We use the
weighted-average number of common shares outstanding during the period, plus the
restricted stock units discussed above, for the computation of basic earnings
per share using the two-class method. 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 2008 restricted stock units are included in the
diluted weighted-average shares outstanding by virtue of their inclusion in
basic weighted-average shares outstanding using the two-class method as
described above. This result is more dilutive than if we had used the
treasury stock method to calculate diluted weighted-average shares outstanding
for these restricted stock units.
The
weighted-average shares outstanding for basic and diluted earnings per share are
as follows:
|
|
Three
Months Ended
|
|
(In
thousands)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Basic
weighted-average shares outstanding
|
|
|
243,988 |
|
|
|
249,315 |
|
Dilutive
effect of convertible preferred shares, stock options and
restricted
stock units
|
|
|
968 |
|
|
|
5,185 |
|
Diluted
weighted-average shares outstanding
|
|
|
244,956 |
|
|
|
254,500 |
|
Note
7. Accounts Receivable, Finance Receivables and
Securitizations
Manufacturing
Group
(In
millions)
|
|
April
4,
2009
|
|
|
January
3,
2009
|
|
|
|
|
|
|
|
|
Accounts
Receivable - Commercial
|
|
$ |
478 |
|
|
$ |
496 |
|
Accounts
Receivable - U.S. Government contracts
|
|
|
403 |
|
|
|
422 |
|
|
|
|
881 |
|
|
|
918 |
|
Less
allowance for doubtful accounts
|
|
|
(27 |
) |
|
|
(24 |
) |
|
|
$ |
854 |
|
|
$ |
894 |
|
Finance
Group
We
evaluate finance receivables on a managed as well as owned basis since we retain
subordinated interests in finance receivables sold in securitizations resulting
in credit risk. In contrast, we do not have a retained financial
interest or credit risk in the performance of the serviced portfolio and,
therefore, performance of these portfolios is limited to billing and collection
activities. Our Finance group manages and services finance
receivables for a variety of investors, participants and third-party portfolio
owners. Managed and serviced finance receivables are summarized as
follows:
(In
millions)
|
|
April
4,
2009
|
|
|
January
3,
2009
|
|
Total
managed and serviced finance receivables
|
|
$ |
11,201 |
|
|
$ |
12,173 |
|
Nonrecourse
participations sold to independent investors
|
|
|
(813 |
) |
|
|
(820 |
) |
Third-party
portfolio servicing
|
|
|
(493 |
) |
|
|
(532 |
) |
Total
managed finance receivables
|
|
|
9,895 |
|
|
|
10,821 |
|
Securitized
receivables
|
|
|
(1,736 |
) |
|
|
(2,248 |
) |
Owned
finance receivables
|
|
|
8,159 |
|
|
|
8,573 |
|
Finance
receivables held for sale
|
|
|
(887 |
) |
|
|
(1,658 |
) |
Finance
receivables held for investment
|
|
|
7,272 |
|
|
|
6,915 |
|
Less
allowance for loan losses
|
|
|
(220 |
) |
|
|
(191 |
) |
|
|
$ |
7,052 |
|
|
$ |
6,724 |
|
Finance
receivables held for investment at both April 4, 2009 and January 3, 2009
include approximately $1.1 billion of finance receivables that have been legally
sold to special purpose entities and are consolidated subsidiaries of Textron
Financial Corporation. The assets of these special purpose entities
are pledged as collateral for $675 million and $853 million of debt at April 4,
2009 and January 3, 2009, respectively, which is reflected as securitized
on-balance sheet debt.
In
connection with our fourth quarter 2008 plan to exit portions of the commercial
finance business, we classified certain finance receivables as held for
sale. Following an effort to market the portfolios in the first
quarter of 2009 and the progress made in liquidating our portfolios, we decided
that we will be able to maximize the economic value of a portion of the finance
receivables held for sale through liquidation rather than selling the
portfolios. Accordingly, since we now intend to hold a portion of
these finance receivables for the foreseeable future, we have reclassified $654
million, net of a $157 million valuation allowance to adjust to fair value, from
the held for sale classification to held for investment. There was no
significant change in the fair value of these reclassified finance receivables
or the remaining $887 million of finance receivables that continue to be
classified as held for sale at April 4, 2009.
Loan
Impairment
We
periodically evaluate finance receivables, excluding homogeneous loan portfolios
and finance leases, for impairment. A loan is considered impaired
when it is probable that we will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Impaired loans are
classified as either nonaccrual or accrual loans. Nonaccrual loans
include accounts that are contractually delinquent by more than three months for
which the accrual of interest income is suspended. Impaired accrual
loans represent loans with original terms that have been significantly modified
to reflect deferred principal payments, generally at market interest rates, for
which collection of principal and interest is not doubtful.
The
impaired loans included within finance receivables held for investment and
related reserves are as follows:
(In
millions)
|
|
April
4,
2009
|
|
|
January
3,
2009
|
|
Impaired
nonaccrual loans
|
|
$ |
388 |
|
|
$ |
234 |
|
Impaired
accrual loans
|
|
|
91 |
|
|
|
19 |
|
Total
impaired loans
|
|
|
479 |
|
|
|
253 |
|
Impaired
nonaccrual loans with identified reserve requirements
|
|
|
278 |
|
|
|
182 |
|
Allowance
for losses on impaired nonaccrual loans
|
|
|
52 |
|
|
|
43 |
|
At April
4, 2009, the impaired loans in the table above of $479 million included $278
million of nonaccrual loans for which we have established specific reserves
based on our review of the loan and the estimated fair value of the
collateral. We have a $52 million allowance for losses established at
April 4, 2009 for these loans.
Nonaccrual
finance receivables include impaired nonaccrual loans and accounts in
homogeneous loan portfolios that are contractually delinquent by more than three
months. At April 4, 2009 and January 3, 2009, nonaccrual finance receivables
totaled $444 million and $277 million, respectively. The increase is primarily
attributable to several hotel and land development accounts within the resort
finance business and to a significant increase in delinquent accounts, combined
with weakening collateral values in the aviation finance business.
Securitizations
Our
Finance group sells its distribution finance receivables to a qualified special
purpose trust through securitization transactions. Distribution finance
receivables represent loans secured by dealer inventories that typically are
collected upon the sale of the underlying product. The Distribution Finance
revolving securitization trust is a master trust that purchases inventory
finance receivables from the Finance group and issues asset-backed notes to
investors. Through a revolving securitization, the proceeds
from collection of the principal balance of these loans are used by the trust to
purchase additional distribution finance receivables from us each month.
Proceeds from securitizations include amounts received related to the
incremental increase in the issuance of additional asset-backed notes to
investors, and exclude amounts received related to the ongoing replenishment of
the outstanding sold balance of these short-duration finance
receivables. We had no proceeds from securitizations in the first
quarter of 2009, compared with $250 million in the first quarter of 2008. Net
pre-tax (impairments) gains totaled $(6) million and $15 million in the first
quarter of 2009 and 2008, respectively. Cash flows received on these retained
interests totaled $8 million and $21 million in the first quarter of 2009 and
2008, respectively.
Generally,
we retain an interest in the assets sold in the form of servicing
responsibilities and subordinated interests, including interest-only securities,
seller certificates and cash reserves. We had $182 million and $191
million of retained interests on our balance sheets associated with $1.7 billion
and $2.2 billion of off-balance
sheet
finance receivables in the Distribution Finance securitization trust as of April
4, 2009 and January 3, 2009, respectively. In addition, the trust held $502
million of cash as of April 4, 2009 that was accumulated by the trust from
collections of finance receivables during the first quarter of 2009 to pay off
$600 million of maturing asset-backed notes and $42 million of our retained
interests in April 2009.
The
interest-only securities within our retained interests are recorded at fair
value in other assets. We review the fair values of the retained interests
quarterly using updated assumptions and compare such amounts with the carrying
value. When the carrying value exceeds the fair value, we determine whether the
decline in fair value is other than temporary. When we determine that the value
of the decline is other than temporary, we write down the carrying value to fair
value with a corresponding charge to income. When a change in fair value of the
interest-only securities is deemed temporary, we record a corresponding credit
or charge to other comprehensive income for any unrealized gains or losses.
During the first quarter of 2009, we recorded a $6 million impairment charge to
income and a $2 million charge to other comprehensive income on the
interest-only securities associated with the Distribution Finance revolving
securitization. There was no impairment charge recorded on the
remaining retained interests, which are classified as held to maturity, as the
$23 million shortfall between fair value and carrying value was deemed
temporary.
At April
4, 2009, the key economic assumptions used in measuring the retained interests
related to the Distribution Finance revolving securitization included an annual
rate for expected credit losses of 1.89%, a monthly payment rate of 12.8% and a
residual cash flow discount rate of 18.5%. A 20% adverse change in these rates
would not have a significant impact on our results of operations. Net
charge-offs as a percentage of distribution finance receivables was 3.85% for
first quarter of 2009, compared with 1.94% for the full year of
2008. The 60+ days contractual delinquency percentage for
distribution finance receivables was 2.71% and 2.08% at April 4, 2009 and
January 3, 2009, respectively.
Note
8: Inventories
(In
millions)
|
|
April
4,
2009
|
|
|
January
3,
2009
|
|
Finished
goods
|
|
$ |
1,321 |
|
|
$ |
1,081 |
|
Work
in process
|
|
|
1,946 |
|
|
|
1,866 |
|
Raw
materials
|
|
|
696 |
|
|
|
765 |
|
|
|
|
3,963 |
|
|
|
3,712 |
|
Less
progress/milestone payments
|
|
|
(640 |
) |
|
|
(619 |
) |
|
|
$ |
3,323 |
|
|
$ |
3,093 |
|
Note
9: Guarantees and Indemnifications
As
disclosed under the caption “Guarantees and Indemnifications” in Note 18 to the
Consolidated Financial Statements in Textron’s 2008 Annual Report on Form 10-K,
we have issued or are party to certain guarantees. As of April 4,
2009, 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:
|
|
Three
Months Ended
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Accrual
at the beginning of period
|
|
$ |
278 |
|
|
$ |
312 |
|
Provision
|
|
|
40 |
|
|
|
45 |
|
Settlements
|
|
|
(63 |
) |
|
|
(49 |
) |
Adjustments
to prior accrual estimates
|
|
|
1 |
|
|
|
(11 |
) |
Accrual
at the end of period
|
|
$ |
256 |
|
|
$ |
297 |
|
Note
10: Commitments and Contingencies
We are
subject to legal proceedings and other claims arising out of the conduct of our
business, including proceedings and claims relating to commercial and financial
transactions; government contracts; compliance with applicable laws and
regulations; production partners; product liability; employment; and
environmental, safety and health matters. Some of these legal proceedings and
claims seek damages, fines or penalties in substantial amounts or remediation of
environmental contamination. As a government contractor, we are subject to
audits, reviews and investigations to determine whether our operations are being
conducted in accordance with applicable regulatory requirements. Under federal
government procurement regulations, certain claims brought by the U.S.
Government could result in our being suspended or debarred from U.S. Government
contracting for a period of time. On the basis of information presently
available, we do not believe that existing proceedings and claims will have a
material effect on our financial position or results of operations.
The
Internal Revenue Service (IRS) has challenged our tax positions related to
certain lease transactions within the Finance segment. During the third quarter
of 2008, the IRS made a settlement offer to numerous companies, including
Textron, to resolve the disputed tax treatment of these leases. Based
on the terms of the offer and our decision to accept the offer, we revised our
estimate of this tax contingency. Final resolution of this matter will result in
the acceleration of future cash payments to the IRS, which we expect will occur
over a period of years in connection with the conclusion of IRS examinations of
the relevant tax years. At April 4, 2009, $199 million of federal tax
liabilities were recorded in our balance sheet related to these
leases.
ARH
Program Termination
On
October 16, 2008, we received notification from the U.S. Department of Defense
that it would not certify the continuation of the Armed Reconnaissance
Helicopter (ARH) program to Congress under the Nunn-McCurdy Act, resulting in
the termination of the program for the convenience of the Government. The ARH
program included a development phase, covered by the System Development and
Demonstration (SDD) contract, and a production phase. We are in the process of
establishing the termination costs for the SDD contract, which we believe will
be fully recoverable from the U.S. Government.
Prior to
termination of the program, we obtained inventory and incurred vendor
obligations for long-lead time materials related to the anticipated Low Rate
Initial Production (LRIP) contracts to maintain the program schedule based on
our belief that the LRIP contracts would be awarded. We have since terminated
these vendor contracts and have initiated negotiations to settle our termination
obligations, which we estimate may cost up to approximately $80 million. We
continue to evaluate the utility of the related inventory to other Bell
programs, customers, or vendors. This review and the related discussions with
vendors are ongoing. We estimate that our potential loss resulting from our
LRIP-related vendor obligations will be between approximately $50 million and
$80 million. At April 4, 2009, our reserves related to this program totaled $50
million. We intend to provide a termination proposal to the U.S. Government to
request reimbursement of costs expended in support of the LRIP
program.
Citation
Columbus Development
At April
4, 2009, Cessna’s backlog includes $2.3 billion in orders for the Citation
Columbus aircraft, which began development in 2008. Subsequent to the
end of the first quarter, we decided to suspend the development of the Citation
Columbus due to current economic conditions. Once economic conditions
improve and overall demand for business jets strengthens, it is our intention to
resume the development of this product. We have begun the process of
notifying suppliers and do not believe that winding down our contracts with
suppliers will have a
material effect on our financial position or cash
flows. At April 4, 2009, we had $56 million in cash for deposits
received on the Citation Columbus and approximately $50 million in capitalized
tooling and facility costs and other deferred costs related to this development
project.
Note 11: Comprehensive
Income
Our
comprehensive income for the periods is provided below:
|
|
Three
Months Ended
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Net
income
|
|
$ |
86 |
|
|
$ |
231 |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Recognition of prior service
cost and unrealized losses on
pension and postretirement
benefits
|
|
|
7 |
|
|
|
10 |
|
Deferred losses on hedge
contracts
|
|
|
(10 |
) |
|
|
(16 |
) |
Foreign currency translation
and other
|
|
|
2 |
|
|
|
(18 |
) |
Comprehensive
income
|
|
$ |
85 |
|
|
$ |
207 |
|
Note
12: Fair Values of Assets and Liabilities
In the
first quarter of 2009, we adopted Statement of Financial Accounting Standards
(SFAS) No. 157, “Fair Value Measurements,” for our nonfinancial assets and
liabilities that are not recognized or disclosed at fair value in the financial
statements on a recurring basis. This adoption did not 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 categorized by the level of inputs used in the valuation of each asset and
liability.
|
|
April
4, 2009
|
|
|
January 3,
2009
|
|
(In
millions)
|
|
Quoted
Prices in Active Markets
for
Identical
Assets
or
Liabilities
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
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
currency exchange contracts
|
|
$ |
— |
|
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
— |
|
Total Manufacturing
group
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
Finance
group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
financial instruments, net
|
|
|
— |
|
|
|
84 |
|
|
|
— |
|
|
|
— |
|
|
|
112 |
|
|
|
— |
|
Interest-only
securities
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
12 |
|
Total Finance
group
|
|
|
— |
|
|
|
84 |
|
|
|
3 |
|
|
|
— |
|
|
|
112 |
|
|
|
12 |
|
Total assets
|
|
$ |
— |
|
|
$ |
87 |
|
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
114 |
|
|
$ |
12 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
settlement forward contract
|
|
$ |
11 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
98 |
|
|
$ |
— |
|
|
$ |
— |
|
Foreign
currency exchange contracts
|
|
|
— |
|
|
|
41 |
|
|
|
— |
|
|
|
— |
|
|
|
84 |
|
|
|
— |
|
Total Manufacturing
group
|
|
|
11 |
|
|
|
41 |
|
|
|
— |
|
|
|
98 |
|
|
|
84 |
|
|
|
— |
|
Total
liabilities
|
|
$ |
11 |
|
|
$ |
41 |
|
|
$ |
— |
|
|
$ |
98 |
|
|
$ |
84 |
|
|
$ |
— |
|
Changes
in Fair Value for Unobservable Inputs
The table
below presents the change in fair value measurements for our interest-only
securities that used significant unobservable inputs (Level 3):
|
|
Three
Months Ended
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
Balance,
beginning of period
|
|
$ |
12 |
|
|
$ |
43 |
|
Net
gains for the period:
|
|
|
|
|
|
|
|
|
Increase due to securitization
gains on sale of finance receivables
|
|
|
— |
|
|
|
21 |
|
Change in value recognized in
Finance revenues
|
|
|
— |
|
|
|
1 |
|
Change in value recognized in
other comprehensive income
|
|
|
(3 |
) |
|
|
2 |
|
Impairments
|
|
|
(6 |
) |
|
|
— |
|
Collections
|
|
|
— |
|
|
|
(15 |
) |
Balance,
end of period
|
|
$ |
3 |
|
|
$ |
52 |
|
Assets
Recorded at Fair Value on a Nonrecurring Basis
Finance
receivables held for sale are recorded at the lower of cost or fair value. There
was no significant change in the fair value of the finance receivables held for
sale and no changes to the methodology used to determine fair value for these
receivables during the first quarter of 2009. See Note 7 regarding the change in
classification of certain finance receivables from held for sale to held for
investment during the first quarter of 2009.
Loan
impairment is measured by comparing the expected future cash flows discounted at
the loan’s effective interest rate, or the fair value of the collateral if the
loan is collateral dependent, to its carrying amount. If the carrying amount is
higher, we establish a reserve based on this difference. This evaluation is
inherently subjective, as it requires estimates, including the amount and timing
of future cash flows expected to be received on impaired
loans and the underlying collateral, which may
differ from actual results. The measurement of required reserves on these loans
is largely dependent on significant unobservable inputs (Level 3) including the
fair value of the underlying collateral, which are determined utilizing either
appraisals, industry pricing guides, input from market participants, our recent
experience selling similar assets or internally developed discounted cash flow
models. At April 4, 2009, impaired loans had a carrying value of $226 million,
net of a $52 million valuation allowance. Fair market value adjustments totaled
$32 million in the first quarter of 2009, primarily related to initial fair
value adjustments for loans impaired during the quarter.
Note
13. Derivatives
Fair
Value Hedges
Our
Finance group enters into interest rate exchange contracts to mitigate exposure
to changes in the fair value of its fixed-rate receivables and debt due to
fluctuations in interest rates. By using these contracts, we are able to convert
our fixed-rate cash flows to floating-rate cash flows.
Cash
Flow Hedges
We
experience variability in the cash flows we receive from our Finance group’s
investments in interest-only securities due to fluctuations in interest rates.
To mitigate our exposure to this variability, our Finance group enters into
interest rate exchange, cap and floor agreements. The combination of these
instruments converts net residual floating-rate cash flows expected to be
received by our Finance group to fixed-rate cash flows. Changes in the fair
value of these instruments are recorded net of the income tax effect in other
comprehensive income (OCI).
Our
exposure to loss from nonperformance by the counterparties to our derivative
agreements at April 4, 2009 is minimal. We do not anticipate nonperformance by
counterparties in the periodic settlements of amounts due. We have historically
minimized this potential for risk by entering into contracts exclusively with
major, financially sound counterparties having no less than a long-term bond
rating of A. The recent uncertainty in the financial markets has negatively
affected the bond ratings of all of our counterparties, and we continuously
monitor our exposures to ensure that we limit our risks. The credit risk
generally is limited to the amount by which the counterparties’ contractual
obligations exceed our obligations to the counterparty.
We
manufacture and sell our products in a number of countries throughout the world,
and, therefore, we are exposed to movements in foreign currency exchange rates.
The primary purpose of our foreign currency hedging activities is to manage the
volatility associated with foreign currency purchases of materials, foreign
currency sales of products, and other assets and liabilities created in the
normal course of business. We primarily utilize forward exchange contracts and
purchased options with maturities of no more than 18 months that qualify as cash
flow hedges. These are intended to offset the effect of exchange rate
fluctuations on forecasted sales, inventory purchases and overhead
expenses. At April 4, 2009, we had a deferred loss of $38 million in
OCI related to these cash flow hedges, which we expect to reclassify into
earnings in the next 18 months as the underlying transactions
occur.
Net
Investment Hedges
We hedge
our net investment position in major currencies and generate foreign currency
interest payments that offset other transactional exposures in these currencies.
To accomplish this, we borrow directly in foreign currency and designate a
portion of foreign currency debt as a hedge of net investments. We also may
utilize currency forwards as hedges of our related foreign net investments.
Currency effects on the effective portion of these hedges, which are reflected
in the cumulative translation adjustment account within OCI, produced a $13
million after-tax gain in the first quarter of 2009, leaving an accumulated net
gain balance of $16 million. In the first quarter of 2009, we
recognized a $6 million gain on the ineffective portion of these hedges in
selling and administrative expenses.
Stock-Based
Compensation Hedges
We manage the expense related to
certain stock-based compensation awards using cash settlement forward
contracts on our common stock. The use of these forward contracts modifies
compensation expense exposure to changes in the stock price with the intent to
reduce potential variability. Cash received or paid on the contract settlement
is included in cash flows from operating activities, consistent with the
classification of the cash flows on the underlying hedged compensation
expense.
Fair
Values of Derivative Instruments
|
|
Assets
|
|
|
Liabilities
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
January
3,
2009
|
|
|
April
4,
2009
|
|
|
January
3,
2009
|
|
Derivatives
designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
group:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate exchange contracts
|
|
$ |
97 |
|
|
$ |
112 |
|
|
$ |
(19 |
) |
|
$ |
(7 |
) |
Total
fair value hedges
|
|
|
97 |
|
|
|
112 |
|
|
|
(19 |
) |
|
|
(7 |
) |
Cash
flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency exchange contracts
|
|
|
2 |
|
|
|
2 |
|
|
|
(41 |
) |
|
|
(41 |
) |
Commodity
contracts
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
(4 |
) |
Forward
contracts for Textron Inc. stock
|
|
|
— |
|
|
|
— |
|
|
|
(11 |
) |
|
|
(98 |
) |
Finance
group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate exchange contracts
|
|
|
9 |
|
|
|
21 |
|
|
|
(1 |
) |
|
|
(1 |
) |
Total
cash flow hedges
|
|
|
11 |
|
|
|
23 |
|
|
|
(58 |
) |
|
|
(144 |
) |
Total
derivatives designated as hedging instruments
|
|
$ |
108 |
|
|
$ |
135 |
|
|
$ |
(77 |
) |
|
$ |
(151 |
) |
Derivatives
not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency exchange contracts
|
|
$ |
1 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(43 |
) |
Finance
group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate exchange contracts
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(13 |
) |
Total
derivatives not designated as hedging instruments
|
|
$ |
1 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(56 |
) |
The fair
values of derivative instruments for the Manufacturing group are included in
either other current assets or accrued liabilities in our balance sheets. For
the Finance group, they are included in either other assets or other
liabilities.
The
effect of derivative instruments in the statements of operations for the first
quarter of 2009 and 2008 is provided in the following tables:
|
|
|
Amount
of Gain(Loss)
|
|
(In
millions)
|
Gain(Loss)
Location
|
|
2009
|
|
|
2008
|
|
Fair
Value Hedges
|
|
|
|
|
|
|
|
Finance
group:
|
|
|
|
|
|
|
|
Interest
rate exchange contracts
|
Interest
expense, net
|
|
$ |
2 |
|
|
$ |
48 |
|
|
Reclassification
Adjustment
|
|
Amount
of Gain(Loss) in OCI
(Effective
Portion)
|
|
|
Reclassification
Adjustment
Gain(Loss)
Amount
|
|
(In
millions)
|
Gain(Loss)
Location
(Effective
Portion)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Cash
Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency exchange contracts
|
Cost
of sales
|
|
$ |
(33 |
) |
|
$ |
21 |
|
|
$ |
(5 |
) |
|
$ |
3 |
|
Commodity
contracts
|
Cost
of sales
|
|
|
(3 |
) |
|
|
3 |
|
|
|
— |
|
|
|
— |
|
Forward
contracts for Textron Inc. stock
|
Selling
and administrative
|
|
|
(8 |
) |
|
|
2 |
|
|
|
(2 |
) |
|
|
4 |
|
Finance
group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate exchange contracts
|
Interest
expense, net
|
|
|
1 |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
— |
|
The
amount of ineffectiveness on our fair value and cash flow hedges is
insignificant.
Our
Manufacturing group also enters into certain foreign currency derivative
instruments that do not meet hedge accounting criteria and primarily are
intended to protect against exposure related to intercompany financing
transactions. We reported a loss of $17 million and $8 million related to these
instruments in the first quarter of 2009 and 2008, respectively, in selling and
administrative expenses.
Note
14: Recently Issued Accounting Pronouncements
In March
2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) No. 115-2 and FAS 124-2 “Recognition and Presentation of
Other-Than-Temporary Impairments” to amend the other-than-temporary impairment
criteria associated with marketable debt securities and beneficial interests in
securitized financial assets. This FSP requires that an entity
evaluate for and record an other-than-temporary impairment when it concludes
that it does not intend to sell an impaired security and does not believe it
likely that it will be required to sell the security before recovery of the
amortized cost basis. Once an entity has determined that an
other-than-temporary impairment has occurred, it is required to record the
credit loss component of the difference between the security’s amortized cost
basis and the estimated fair value in earnings, whereas the remaining difference
is to be recognized as a component of other comprehensive income and amortized
over the remaining life of the security. The FSP is effective for
interim and annual reporting periods ending after June 15, 2009, and we are
currently evaluating the potential effect adoption may have on our financial
position and results of operations.
In March
2009, the FASB issued FSP No. 157-4 “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significant Decreased and
Identifying Transactions That Are Not Orderly.” The FSP requires
entities to evaluate the significance and relevance of market factors for fair
value inputs to determine if, due to reduced volume and market activity, the
factors are still relevant and substantive measures of fair
value. The FSP is effective for interim and annual reporting periods
ending after June 15, 2009, and we do not believe the adoption will have a
material effect on our financial position or results of operations.
Note
15: Segment Information
We
operate in, and report financial information for, the following five business
segments: Cessna, Bell, Textron Systems, Industrial and
Finance. Segment profit is an important measure used for evaluating
performance and for decision-making purposes. Segment profit for the
manufacturing segments excludes interest expense, certain corporate expenses and
special charges. The measurement for the Finance segment includes
interest income and expense and excludes special charges. 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
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
REVENUES
|
|
|
|
|
|
|
MANUFACTURING:
|
|
|
|
|
|
|
Cessna
|
|
$ |
769 |
|
|
$ |
1,246 |
|
Bell
|
|
|
742 |
|
|
|
574 |
|
Textron
Systems
|
|
|
418 |
|
|
|
519 |
|
Industrial
|
|
|
475 |
|
|
|
753 |
|
|
|
|
2,404 |
|
|
|
3,092 |
|
FINANCE
|
|
|
122 |
|
|
|
214 |
|
Total
revenues
|
|
$ |
2,526 |
|
|
$ |
3,306 |
|
SEGMENT
OPERATING PROFIT
|
|
|
|
|
|
|
|
|
MANUFACTURING:
|
|
|
|
|
|
|
|
|
Cessna (a)
|
|
$ |
90 |
|
|
$ |
207 |
|
Bell
|
|
|
69 |
|
|
|
53 |
|
Textron
Systems
|
|
|
52 |
|
|
|
67 |
|
Industrial
|
|
|
(9 |
) |
|
|
41 |
|
|
|
|
202 |
|
|
|
368 |
|
FINANCE
|
|
|
(66 |
) |
|
|
42 |
|
Segment
profit
|
|
|
136 |
|
|
|
410 |
|
Special
charges
|
|
|
(32 |
) |
|
|
— |
|
Corporate
expenses and other, net
|
|
|
(35 |
) |
|
|
(41 |
) |
Interest
expense, net for Manufacturing group
|
|
|
(28 |
) |
|
|
(30 |
) |
Income
from continuing operations before income taxes
|
|
$ |
41 |
|
|
$ |
339 |
|
(a)
During the first quarter of 2009, we sold the assets of CECOM, Cessna’s aircraft
maintenance tracking service line, resulting in a pre-tax gain of $50
million.
Our
business, financial condition and results of operations are subject to various
risks, including those discussed below and in our Annual Report on Form 10-K for
the fiscal year ended January 3, 2009, which may affect the value of our
securities. The risks discussed in our SEC filings are those that we believe
currently are the most significant, although additional risks not presently
known to us or that we currently deem less significant also may impact our
business, financial condition or results of operations, perhaps
materially.
Delays in aircraft delivery
schedules, cancellation of orders or decline in demand for our aircraft products may
adversely affect our financial results.
We
generally make sales of our commercial aircraft under purchase orders that are
subject to cancellation, modification or rescheduling. The current
weak economic environment has resulted in a substantial number of customer
requests for delayed delivery of ordered aircraft and cancellations of orders,
as well as reduced demand for our aircraft and a tightening of credit
availability for potential purchasers of our aircraft. Aircraft
customers, including sellers of fractional share interests, may continue to
respond to weak economic conditions by delaying delivery of orders or canceling
orders. Weakness in the economy may result in fewer hours flown on existing
aircraft and, consequently, lower demand for spare parts and maintenance. Weak
economic conditions also may continue to soften demand for new and used business
jets and helicopters and may
impact our decision to continue the investment necessary to proceed with
development of new products throughout their lengthy research and development
cycle. Suspension or cancellation of aircraft development programs
may result in the writeoff of some or all of our investment costs and the return
of customer deposits. In addition, both U.S. and foreign
governments and government agencies regulate the aviation industry; may impose
new regulations with additional regulatory, aircraft security or other
requirements or restrictions that may adversely impact demand for business jets
and/or helicopters. Continued delivery delays, cancellations of
orders and/or reduced demand for new and used aircraft, spare parts and
maintenance could significantly reduce our revenues, profitability and cash
flows.
Our international business is subject
to the risks of doing business in foreign countries.
Our
international business exposes us to certain unique and potentially greater
risks than our domestic business, and our exposure to such risks may increase if
our international business continues to grow. Our international business is
subject to U.S. and local government regulations and procurement policies and
practices, which may change from time to time, including regulations relating to
import-export control, investments, exchange controls and repatriation of
earnings or cash settlement challenges, as well as to varying currency,
geopolitical and economic risks. These international risks may be especially
significant with respect to sales of aerospace and defense
products. We also are exposed to risks associated with using foreign
representatives and consultants for international sales and operations and
teaming with international subcontractors and suppliers in connection with
international programs. Some international government customers
require contractors to agree to specific in-country purchases, manufacturing
agreements or financial support arrangements, known as offsets, as a condition
for a contract award. The contracts generally extend over several years
and may include penalties if we fail to meet the offset requirements which could
adversely impact our revenues, profitability and cash flows.
The levels of our reserves are
subject to many uncertainties and may not be adequate to cover writedowns or
losses.
In
addition to reserves at our Finance segment, we establish reserves in our
manufacturing segments to cover uncollectible accounts receivable, excess or
obsolete inventory, fair market value writedowns on used aircraft and golf cars,
recall campaigns, environmental remediation, warranty costs and litigation.
These reserves are subject to adjustment from time to time depending on actual
experience and/or current market conditions, and are subject to many
uncertainties, including bankruptcy or other financial problems at key customers
and changing market conditions.
Due to
the nature of our business, we may be subject to liability claims arising from
accidents involving our products, including claims for serious personal injuries
or death caused by climatic factors, or by pilot or driver error. In
the case of litigation matters for which reserves have not been established
because the loss is not deemed probable, it is reasonably possible that such
matters could be decided against us and could require us to pay
damages or make other expenditures in amounts that
are not presently estimable. In addition, we cannot be certain that our reserves
are adequate and that our insurance coverage will be sufficient to cover one or
more substantial claims. Furthermore, there can be no assurance that
we will be able to obtain insurance coverage at acceptable levels and costs in
the future.
Failure to perform by our
subcontractors or suppliers could adversely affect our performance.
We rely
on other companies to provide raw materials, major components and subsystems for
our products. Subcontractors also perform services that we provide to
our customers in certain circumstances. In addition, we outsource
certain support functions, including certain global information technology
infrastructure services to third-party service providers. We depend
on these vendors, subcontractors and service providers to meet our contractual
obligations to our customers and conduct our operations.
Our
ability to meet our obligations to our customers may be adversely affected if
suppliers do not provide the agreed-upon supplies or perform the agreed-upon
services in compliance with customer requirements and in a timely and
cost-effective manner. The risk of these adverse effects may be greater in
circumstances where we rely on only one or two subcontractors or suppliers for a
particular product or service. In particular, in the aircraft
industry, most vendor parts are certified by the regulatory agencies as part of
the overall Type Certificate for the aircraft being produced by the
manufacturer. If a vendor does not or cannot supply its parts, then the
manufacturer’s production line may be stopped until the manufacturer can design,
manufacture and certify a similar part itself or identify and certify another
similar vendor’s part, resulting in significant delays in the completion of
aircraft.
Such
events may adversely affect our financial results of operations or damage our
reputation and relationships with our customers. Likewise, any
disruption of our information technology systems or other outsourced processes
or functions could have a material adverse impact on our operations and our
financial results.
An
impairment of our goodwill and other intangible assets could negatively impact
our results of operations.
At April
4, 2009, we had goodwill and other intangible assets, net of accumulated
amortization, of approximately $2.1 billion, which represented approximately 10%
of our total assets. As part of our overall strategy, we, from time to time, may
acquire or make an investment in a business which will require us to record
goodwill based on the purchase price and the value of the acquired assets. After
acquisition, unforeseen issues could arise which adversely affect the
anticipated returns of the business or value of the intangible assets and
trigger an evaluation of the recoverability of the recorded goodwill and
intangible assets for such business. The company evaluates goodwill amounts for
impairment annually, or when evidence of potential impairment exists. The annual
impairment test is based on several factors requiring judgment. A significant
decrease in expected cash flows, changes in market conditions or a further
decline in our stock price may indicate potential impairment of recorded
goodwill and other intangible assets. A significant goodwill and/or other
intangible asset impairment charge could have a negative impact on our financial
results.
Our
ability to fund our captive financing activities at economically competitive
levels depends on our ability to borrow and the cost of borrowing in the credit
markets.
The
long-term viability and profitability of our Finance group’s business of the
financing of customer purchases of Textron-manufactured products are dependent,
in part, on our (and our Finance group’s) ability to borrow and the cost of
borrowing in the credit markets. This ability and cost, in turn, are dependent
on our credit ratings and are subject to credit market
volatility. With our recent lack of access to the credit markets, our
Finance group is currently funding our customer financing activity through a
combination of cash generated from operations, cash on hand from drawdown of our
bank credit line, revolving securitization facilities and third-party funding
arrangements. Our Finance group’s ability to continue to offer customer
financing for the products which we manufacture is largely dependent on our
ability to obtain funding at a reasonable cost. If we are unable to
continue to offer customer financing or if we are unable to offer competitive
customer financing, especially in the case of our competitors with affiliated
banking institutions, it could negatively impact our Manufacturing group’s
ability to generate sales which could adversely affect our results of operations
and financial condition.
If
our Finance group’s estimates or assumptions used in determining the fair value
of certain of its assets and its allowance for losses on finance receivables
prove to be incorrect, its cash flow, profitability, financial condition, and
business prospects could be materially adversely affected.
Our
Finance group uses estimates and various assumptions in determining the fair
value of certain of its assets, including finance receivables held-for-sale and
interest-only securities representing retained interests from securitizations of
receivables which do not have active, quoted market prices. Our
Finance group also uses estimates and assumptions in determining its allowance
for losses on finance receivables and in determining the residual values of
leased equipment and the value of repossessed assets and properties. It is
difficult to determine the accuracy of these estimates and assumptions, and our
Finance group’s actual experience may differ materially from these estimates and
assumptions. A material difference between our Finance group’s estimates and
assumptions and its actual experience may adversely affect our Finance group’s
cash flow, profitability, financial condition, and business
prospects.
If
we fail to comply with the covenants contained in our various debt agreements,
it may adversely affect our liquidity, results of operations and financial
condition.
Our
credit facility contains affirmative and negative covenants including
(i) limitations on creation of liens on assets of Textron or of its
manufacturing subsidiaries; (ii) maintenance of existence and properties;
and (iii) maintaining a maximum debt to capital ratio (as defined and excluding
our Finance group) of 65%. The indentures governing our outstanding
senior notes also contain covenants, including limitations on creation of liens
on certain principal manufacturing facilities and shares of stock of
subsidiaries which own such facilities and restrictions on sale and leaseback
transactions with respect to such facilities. In addition, both the
credit facility and the indentures provide that consolidations, mergers or sale
of all or substantially all of our assets may only be effected if certain
provisions are complied with. Some of these covenants may limit our
ability to engage in certain financing structures, create liens, sell assets or
effect a consolidation or merger.
In
addition, our credit facility contains a cross-default provision which would
trigger an event of default under the credit facility if we fail to pay or
otherwise have a continued default under other indebtedness of Textron or any
non-Finance group subsidiary of over $100 million. A bankruptcy or
monetary judgment in excess of $100 million against us or any of our
subsidiaries which accounts for more than five percent of our consolidated
revenues or our consolidated assets, including our Finance group, would also
result in an event of default under our credit facility.
Our
failure to comply with material provisions or covenants in the credit facility
or the indentures, or the failure of certain of our subsidiaries to comply with
their debt agreements, could have a material adverse effect on our liquidity,
results of operations and financial condition.
Consolidated
Results of Operations
Revenues
and Segment Profit
Revenues
decreased $780 million, or 24%, to $2.5 billion in the first quarter of 2009,
compared with the first quarter of 2008. This decrease is primarily
due to lower volume of $718 million, lower revenue in the Finance segment of $92
million and unfavorable foreign exchange in the Industrial Segment of $34
million, partially offset by higher pricing of $61 million.
Segment
profit decreased $274 million to $136 million in the first quarter of 2009,
compared with the first quarter of 2008. This decrease is primarily due to
$263 million in lower volume in our Manufacturing group, a $49 million increase
in the provision for loan losses at the Finance segment, $51 million in lower
securitization gains and other income at the Finance segment and $12 million of
higher inventory write-downs for used aircraft, partially offset by a $50
million gain on the sale of the assets of CESCOM and pricing in excess of
inflation of $27 million.
Backlog
Our
aircraft and defense business backlog totaled $21.1 billion at April 4, 2009 and
was primarily comprised of the following:
(In
millions)
|
|
April
4,
2009
|
|
|
January
3,
2009
|
|
Bell
|
|
$ |
6,118 |
|
|
$ |
6,192 |
|
Textron
Systems
|
|
|
1,996 |
|
|
|
2,192 |
|
Cessna
|
|
|
13,026 |
|
|
|
14,530 |
|
The
decrease in backlog at Cessna is mainly attributable to cancelled business jet
orders due to the deepening recession. Backlog does not take into
account the ability of our customers to take delivery of the aircraft and the
timing of such delivery due to the present credit scarcity and its effect on
financing availability. We have continued to experience cancellations since the
end of the first quarter of 2009 and expect ongoing volatility in our
Cessna backlog until economic conditions stabilize.
At April
4, 2009, Cessna’s backlog includes $2.3 billion in orders for the Citation
Columbus aircraft, which began development in 2008. Subsequent to the
end of the first quarter, we decided to suspend the development of the Citation
Columbus due to current economic conditions. Once economic conditions
improve and overall demand for business jets strengthens, it is our intention to
resume the development of this product. We have begun the process of
notifying suppliers and do not believe that winding down our contracts with
suppliers will have a material effect on our financial position or cash
flows. At April 4, 2009, we had $56 million in cash for deposits
received on the Citation Columbus and approximately $50 million in capitalized
tooling and facility costs and other deferred costs related to this development
project.
Special
Charges
In the
fourth quarter of 2008, we initiated a restructuring program to reduce overhead
costs and improve productivity across the company, which includes corporate and
segment direct and indirect workforce reductions and streamlining of
administrative overhead, and announced the exit of portions of our commercial
finance business. We expect to eliminate approximately 8,300
positions worldwide representing approximately 19% of our global workforce at
the inception of the program. As of April 4, 2009, we have
exited 9 facilities and plants under this program.
We record
restructuring costs in special charges as these costs are generally of a
nonrecurring nature and are not included in segment profit, which is our measure
used for evaluating performance and for decision-making purposes. Severance
costs related to an approved restructuring program are classified as special
charges unless the costs are for volume-related reductions of direct labor that
are deemed to be of a temporary or cyclical nature.
Through
April 4, 2009, we have incurred $96 million in restructuring costs in special
charges with $74 million in severance, $20 million in asset impairment charges
and $2 million in contract termination costs. Since inception of the
program, we have incurred restructuring charges of $30 million in the Finance
segment, $26 million in the Industrial segment, $31 million at Cessna, $8
million at Corporate and $1 million at Textron Systems. In the first
quarter of 2009, we classified severance costs for certain volume-related direct
labor reductions as special charges as these reductions were not considered to
be of a seasonal/temporary nature.
Restructuring
costs by segment for the first quarter of 2009 are as follows:
(In
millions)
|
|
Severance
Costs
|
|
|
Contract
Terminations
|
|
|
Total
Restructuring
|
|
Cessna
|
|
$ |
26 |
|
|
$ |
— |
|
|
$ |
26 |
|
Industrial
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Finance
|
|
|
2 |
|
|
|
1 |
|
|
|
3 |
|
Corporate
|
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
|
|
$ |
31 |
|
|
$ |
1 |
|
|
$ |
32 |
|
We
estimate that we will incur approximately $43 million in additional pre-tax
restructuring costs in the remainder of 2009, largely related to workforce
reductions at Cessna that will result in future cash outlays. We may have
additional restructuring costs as a result of further headcount reductions and
other actions; however, an estimate of additional charges cannot be made at this
time. Due to the magnitude of the headcount reductions under this program, as
well as additional reductions that may occur in 2009, we are currently assessing
the potential curtailment impact such reductions may have on our pension and
other postretirement benefit plans.
Corporate
Expenses and Other, net
Corporate
expenses and other, net decreased $6 million in the first quarter of 2009,
compared with 2008, primarily due to $10 million in lower executive compensation
and department expenses and a $6 million foreign exchange rate gain
realized on the ineffective portion of our net investment hedge, partially
offset by $11 million due to lower share based compensation
depreciation.
Income
Taxes
A
reconciliation of the federal statutory income tax rate to the effective income
tax rate is provided below:
|
|
Three
Months Ended
|
|
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Federal
statutory income tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase
(decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
State income
taxes
|
|
|
7.0 |
|
|
|
1.9 |
|
Valuation allowance on
contingent receipts
|
|
|
(16.5 |
) |
|
|
- |
|
Foreign tax rate
differential
|
|
|
(10.4 |
) |
|
|
(5.7 |
) |
Manufacturing
deduction
|
|
|
(5.2 |
) |
|
|
(1.4 |
) |
Equity hedge
loss
|
|
|
10.5 |
|
|
|
3.4 |
|
Tax contingencies and related
interest
|
|
|
(17.9 |
) |
|
|
1.2 |
|
Research
credit
|
|
|
(5.2 |
) |
|
|
- |
|
Other, net
|
|
|
(2.2 |
) |
|
|
(0.8 |
) |
Effective
income tax rate
|
|
|
(4.9 |
)% |
|
|
33.6 |
% |
In the
first quarter of 2009, the tax rate decreased significantly compared with
2008. The decrease was primarily attributable to the adoption, for
Canadian tax purposes, of the US dollar as the functional currency for one of
our wholly-owned Canadian subsidiaries, a reduction in unrecognized tax benefits
due to the recognition of a capital gain in connection with the sale of CESCOM
and a reduction in a valuation allowance related to contingent payments on a
prior year transaction.
Income
from discontinued operations, net of income taxes, increased $37 million to $43
million in the first quarter 2009, compared with the corresponding quarter of
2008, primarily due to a $7 million gain on the sale of HR Textron, the tax
benefit from the reduction in tax contingencies as a result of the HR Textron
sale and a valuation allowance reversal on a previously established deferred tax
asset.
Segment
Analysis
Segment
profit is an important measure used to evaluate performance and for
decision-making purposes. Segment profit for the manufacturing
segments excludes interest expense, certain corporate expenses and special
charges. The measurement for the Finance segment includes interest
income and expense and excludes special charges.
Cessna
|
|
Three
Months Ended
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Revenues
|
|
$ |
769 |
|
|
$ |
1,246 |
|
Segment
profit
|
|
$ |
90 |
|
|
$ |
207 |
|
In the
first quarter of 2009, Cessna’s revenues and segment profit decreased $477
million and $117 million, respectively, compared with the first quarter of
2008. Revenues decreased at Cessna primarily due to lower volume of
$504 million, partially offset by higher pricing of $27
million. Cessna’s volume reduction occurred in most of its product
lines and is largely due to the $404 million impact of delivering 69 jets in the
first quarter of 2009 compared with 95 jets in the first quarter of
2008.
Segment
profit decreased primarily due to the $176 million impact from lower volume and
$12 million in higher inventory write-downs for used aircraft, partially offset
by a $50 million gain on the sale of assets and $14 million in pricing in excess
of inflation. The gain on the sale of assets relates to CESCOM, which
provided maintenance tracking services to Cessna’s customers.
Bell
|
|
Three
Months Ended
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Revenues
|
|
$ |
742 |
|
|
$ |
574 |
|
Segment
profit
|
|
$ |
69 |
|
|
$ |
53 |
|
Revenues
and segment profit increased $168 million and $16 million, respectively, in the
first quarter of 2009, compared with the first quarter of
2008. Revenues increased at Bell primarily due to higher volume of
$149 million and higher pricing of $19 million. The volume increase
primarily related to the V-22 program, commercial aircraft and spares and
services.
Segment
profit increased primarily due to higher volume and mix of $24 million and
pricing in excess of inflation of $10 million, partially offset by higher
product development costs for the 429 program of $8 million and favorable 427
performance in the first quarter of 2008 of $6 million.
Textron
Systems
|
|
Three
Months Ended
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Revenues
|
|
$ |
418 |
|
|
$ |
519 |
|
Segment
profit
|
|
$ |
52 |
|
|
$ |
67 |
|
Revenues
and segment profit decreased $101 million and $15 million, respectively, in the
first quarter of 2009 compared with the first quarter of
2008. Revenues decreased primarily due to $46 million in lower
Unmanned
Aircraft Systems (UAS) volume, $26 million in lower
training and simulation systems business volume and a decline in aircraft engine
volume of $20 million. The lower UAS volume reflects the slippage of
units from the fourth quarter of 2007 into the first quarter of
2008. Segment profit decreased primarily due to the impact of the
lower volume of $21 million and inflation in excess of pricing of $10 million,
partially offset by favorable cost performance of $16 million.
Industrial
|
|
Three
Months Ended
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Revenues
|
|
$ |
475 |
|
|
$ |
753 |
|
Segment
profit
|
|
$ |
(9 |
) |
|
$ |
41 |
|
Revenues
and segment profit in the Industrial segment decreased $278 million and $50
million, respectively, in the first quarter of 2009, compared with the first
quarter of 2008. Revenues decreased primarily due to lower volume of
$260 million across all of the Industrial businesses and an unfavorable foreign
exchange impact of $34 million, partially offset by higher pricing of $13
million. Segment profit decreased primarily due to the impact of the
lower volume of $90 million, partially offset by higher pricing of $13 million
and improved cost performance of $18 million.
Finance
|
|
Three
Months Ended
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Revenues
|
|
$ |
122 |
|
|
$ |
214 |
|
Segment
profit
|
|
$ |
(66 |
) |
|
$ |
42 |
|
Revenues
and segment profit decreased $92 million and $108 million, respectively, in the
first quarter of 2009, compared with the first quarter of 2008, significant
drivers of these decreases include the following:
(In
millions)
|
|
Revenues
|
|
|
Segment
Profit
|
|
Lower
market interest rates
|
|
$ |
(39 |
) |
|
$ |
— |
|
Lower
securitization gains
|
|
|
(21 |
) |
|
|
(21 |
) |
Lower
other income, including asset impairments and prepayment
income
|
|
|
(19 |
) |
|
|
(19 |
) |
Acceleration
of deferred loan origination cost amortization
|
|
|
(8 |
) |
|
|
(8 |
) |
Lower
average finance receivables of $389 million
|
|
|
(7 |
) |
|
|
(7 |
) |
Increased
impairments of retained interests in securitizations
|
|
|
(6 |
) |
|
|
(6 |
) |
Gain
on the sale of a leveraged lease investment in 2008
|
|
|
(5 |
) |
|
|
(5 |
) |
Benefit
from variable-rate receivable interest rate floors
|
|
|
16 |
|
|
|
16 |
|
Increase
in the provision for loan losses
|
|
|
— |
|
|
|
(49 |
) |
Higher
borrowing costs relative to market rates
|
|
|
— |
|
|
|
(8 |
) |
The
higher provision for loan losses was primarily the result of increases in
general reserves due to the current economic environment
including: resort finance ($26 million), aviation finance ($20
million), marine ($6 million) and golf finance ($5 million). In
addition, specific reserving actions were taken on several accounts within these
portfolios totaling $30 million. These increases were partially
offset by a decrease related to the liquidation of certain finance
receivables.
Credit
Quality
For the
first quarter of 2009, we have decided to present nonaccrual finance
receivables, repossessed assets and properties and operating assets received in
satisfaction of troubled finance receivables separately as opposed to combining
these categories as nonperforming assets due to their increasing significance
and inherent differences. Nonaccrual finance receivables are carried
at their amortized cost, net of the allowance for losses, while repossessed
assets and properties and operating assets received in satisfaction of troubled
finance receivables are both initially recorded at the lower of their previous
carrying value or net realizable value. In addition, operating
assets received in satisfaction of troubled finance
receivables are assets we intend to operate for a substantial period of time
and/or make substantial improvements to prior to sale.
The
following table reflects information about the Finance segment’s credit
performance related to finance receivables held for
investment. Finance receivables held for sale are reflected at fair
value on the Consolidated Balance Sheets. As a result, finance
receivables held for sale are not included in the credit performance statistics
below.
(Dollars
in millions) |
|
April
4,
2009
|
|
|
January
3,
2009
|
|
Nonaccrual
finance receivables
|
|
$
|
444
|
|
|
$
|
277 |
|
Allowance
for losses
|
|
$
|
220
|
|
|
$
|
191 |
|
Ratio
of nonaccrual finance receivables to finance receivables held for
investment
|
|
|
6.11 |
% |
|
|
4.01 |
% |
Ratio
of allowance for losses on finance receivables to nonaccrual finance
receivables held for investment
|
|
|
49.6 |
% |
|
|
68.9 |
% |
Ratio
of allowance for losses on finance receivables to finance receivables held
for investment
|
|
|
3.03 |
% |
|
|
2.76 |
% |
60+
days contractual delinquency as a percentage of finance
receivables
|
|
|
4.29 |
% |
|
|
2.59 |
% |
Repossessed
assets and properties
|
|
$
|
94 |
|
|
$
|
70 |
|
Operating
assets received in satisfaction of troubled finance
receivables
|
|
$
|
167 |
|
|
$
|
84 |
|
We
believe that nonaccrual finance receivables generally will continue to increase
as we execute our liquidation plan under the current economic
conditions. The liquidation plan is also likely to result in a slower
rate of liquidation for nonaccrual finance receivables. The increase
in nonaccrual finance receivables is primarily attributable to a $122 million
increase in the resort finance portfolio related to several hotel and land
development accounts and to a significant increase in delinquent accounts,
combined with weakening collateral values in the aviation finance portfolio,
which accounted for $49 million of the increase.
The ratio
of allowance for losses to nonaccrual finance receivables held for investment
decreased primarily as a result of the resort and aviation accounts mentioned
above for which specific reserves were not considered necessary based on our
best estimate of loss upon a detailed review of our workout strategy and
estimates of collateral value.
The
increase in operating assets received in satisfaction of troubled finance
receivables primarily reflects golf courses for which ownership was transferred
from the borrower during the quarter. We intend to operate and
improve the performance of these properties prior to their eventual
disposition.
Liquidity
and Capital Resources
Borrowing
Group Presentation
Our
financings are conducted through two separate borrowing groups. The
Manufacturing group consists of Textron Inc. consolidated with all of its
majority-owned subsidiaries that operate in the Cessna, Bell, Textron Systems
and Industrial segments, except for the entities comprising the Finance group.
The Finance group consists of Textron Financial Corporation along with the
entities consolidated into it. We designed this framework to enhance our
borrowing ability 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.
Overview
Due to
unprecedented levels of volatility and disruption in the credit markets, we
experienced difficulty in accessing the commercial paper markets for our
short-term liquidity needs at favorable rates and terms. The adverse impact on
us of the credit market deterioration was exacerbated by the downgrades of our
credit ratings, which, in turn, have adversely impacted our ability to access
the term debt market. For these reasons, coupled with the risks
associated with the capital markets in general, on February 3, 2009, we drew on
the balance of the $3.0 billion committed bank credit lines available to Textron
and Textron Financial Corporation. We expect that
the borrowings under the bank lines, together with
the cash proceeds of planned liquidations and cash flow from our Manufacturing
group, will be more than sufficient to repay the Finance group’s maturing term
debt during 2009.
In the
fourth quarter of 2008, our Board of Directors approved a plan to exit all of
the commercial finance business of the Finance segment, other than that portion
of the business supporting customer purchases of Textron-manufactured products.
We made the decision to exit this business due to continued weakness in the
economy and in order to address our long-term liquidity position in light of
continuing disruption and instability in the capital markets. In
total, the exit plan will impact approximately $6.5 billion of the Finance
segment’s $9.9 billion managed receivable portfolio as of April 4, 2009. The
exit plan will be effected through a combination of orderly liquidation and
selected sales and is expected to be substantially complete over the next two to
four years.
Under the
exit plan, in 2009, we originally expected to reduce managed finance receivables
by at least $2.6 billion, net of originations, of which approximately $2.0
billion is to be used to pay down off-balance sheet securitized
debt. Most of the remainder of cash generated will be utilized to
repay a portion of the term debt issued by the Finance group that is maturing in
2009. In the first quarter of 2009, we reduced managed finance
receivables by $926 million. Repossession, foreclosure or the
maturity of leveraged leases with residual values represented $171 million of
the managed finance receivable reduction. We now expect to reduce
managed finance receivables by at least $3.0 billion, net of originations, by
the end of 2009.
We expect
the economic uncertainty and capital market turbulence to continue in 2009. In
order to ensure that we have sufficient liquidity to repay our maturing debt
obligations during the first quarter of 2010 and beyond, our focus will be the
maximization of cash flow through the following initiatives:
·
|
Liquidation
of finance receivables, including selected sales of finance receivables
held for sale by our Finance group;
|
·
|
Realignment
of production in our commercial manufacturing businesses to match lower
expected demand;
|
·
|
Cost
reduction activities, including reducing our workforce, freezing salaries,
plant/facility closures, curtailing most discretionary spending, including
some reductions in product development, and reducing most areas of
discretionary capital spending; and
|
·
|
Reduction
of working capital with a focus on inventory
management.
|
On
February 25, 2009, we announced that our Board of Directors voted to reduce our
quarterly dividend to $0.02 per share for the first quarter of 2009. This
decision was made to increase our liquidity in the long-term interest of our
shareholders. The decision to pay a dividend is reviewed quarterly and requires
declaration by our Board of Directors.
As
demonstrated by our recently announced offerings, we are continuing to
explore other potential avenues of liquidity, including additional funding
sources in the capital markets and are actively pursuing new financing
structures for the Finance group, which would be secured directly by its finance
receivable portfolio, as well as transfers of existing funding obligations to
new financing providers. Depending on the success of the above cash flow
initiatives and changes in external factors affecting the marketability and
value of our assets, we may consider the sale of additional assets in the
finance business or the sale of certain manufacturing businesses. We believe
that with the successful execution of the Finance group’s exit plan, combined
with other liquidity actions discussed above and the cash we expect to generate
from our manufacturing operations, we will have cash sufficient to meet our
future liquidity needs.
Contractual
Obligations
Manufacturing
Group
We
maintain defined benefit pension plans and postretirement benefit plans other
than pensions. Our funding policy is to contribute amounts sufficient to meet
minimum funding requirements as set forth in employee benefit and tax laws, plus
such additional amounts as we may determine to be appropriate. We expect to make
contributions to our funded pension plans of approximately $70 million in 2009.
Our annual contribution for 2010 is now estimated to be approximately $50
million to $55 million and approximately $375 million to $400 million
in each of the years from 2011 through 2013, under
the plan provisions in place at this time. These estimates may change
based on market conditions.
Finance
Group
We have
updated our Form 10-K disclosure of the Finance group’s contractual obligations,
as defined by reporting regulations, to provide an update on the status of our
liquidation plan. Due to the nature of finance companies, we believe
that it is meaningful to include contractual cash receipts that we expect to
receive in the future. The Finance group has historically borrowed funds at
various contractual maturities to match the maturities of its finance
receivables.
The
following table summarizes the Finance group’s liquidity position, including all
managed finance receivables and both on- and off-balance sheet funding sources
as of April 4, 2009, for the specified periods:
|
|
Payments/Receipts Due by
Period
|
|
(In
millions)
|
|
Less
than
1
year
|
|
|
1-2
Years
|
|
|
2-3
Years
|
|
|
3-4
Years
|
|
|
4-5
Years
|
|
|
More
than
5
years
|
|
|
Total
|
|
Payments
due: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-year
credit facilities and commercial paper
|
|
$ |
8 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,740 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,748 |
|
Other
short-term debt
|
|
|
16 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
Term
debt
|
|
|
2,075 |
|
|
|
2,211 |
|
|
|
53 |
|
|
|
203 |
|
|
|
428 |
|
|
|
147 |
|
|
|
5,117 |
|
Securitized
on-balance sheet debt (2)
|
|
|
218 |
|
|
|
67 |
|
|
|
79 |
|
|
|
87 |
|
|
|
71 |
|
|
|
153 |
|
|
|
675 |
|
Subordinated
debt
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
300 |
|
|
|
300 |
|
Securitized
off-balance sheet debt (2)
|
|
|
2,031 |
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31 |
|
|
|
2,067 |
|
Loan
commitments
|
|
|
42 |
|
|
|
6 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
66 |
|
|
|
116 |
|
Operating
lease rental payments
|
|
|
5 |
|
|
|
4 |
|
|
|
4 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
16 |
|
Total
payments due
|
|
|
4,395 |
|
|
|
2,293 |
|
|
|
138 |
|
|
|
2,031 |
|
|
|
500 |
|
|
|
698 |
|
|
|
10,055 |
|
Cash
and contractual receipts: (1)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
receivable held for investment
|
|
|
1,802 |
|
|
|
1,421 |
|
|
|
1,158 |
|
|
|
828 |
|
|
|
528 |
|
|
|
1,692 |
|
|
|
7,429 |
|
Finance
receivable held for sale
|
|
|
349 |
|
|
|
195 |
|
|
|
224 |
|
|
|
205 |
|
|
|
6 |
|
|
|
64 |
|
|
|
1,043 |
|
Securitized
off-balance sheet finance receivables and cash receipts
(2)
|
|
|
2,202 |
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31 |
|
|
|
2,238 |
|
Operating
lease rental receipts
|
|
|
30 |
|
|
|
26 |
|
|
|
22 |
|
|
|
16 |
|
|
|
9 |
|
|
|
22 |
|
|
|
125 |
|
Total
contractual receipts
|
|
|
4,383 |
|
|
|
1,647 |
|
|
|
1,404 |
|
|
|
1,049 |
|
|
|
543 |
|
|
|
1,809 |
|
|
|
10,835 |
|
Cash
|
|
|
637 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
637 |
|
Total
cash and contractual receipts
|
|
|
5,020 |
|
|
|
1,647 |
|
|
|
1,404 |
|
|
|
1,049 |
|
|
|
543 |
|
|
|
1,809 |
|
|
|
11,472 |
|
Net
cash and contractual receipts (payments)
|
|
$ |
625 |
|
|
$ |
(646 |
) |
|
$ |
1,266 |
|
|
$ |
(982 |
) |
|
$ |
43 |
|
|
$ |
1,111 |
|
|
$ |
1,417 |
|
Cumulative
net cash and contractual receipts (payments)
|
|
$ |
625 |
|
|
$ |
(21 |
) |
|
$ |
1,245 |
|
|
$ |
263 |
|
|
$ |
306 |
|
|
$ |
1,417 |
|
|
|
|
|
(1)
|
Contractual
receipts and payments exclude finance charges from receivables, debt
interest payments and other items.
|
(2)
|
Securitized
on-balance sheet and securitized off-balance sheet debt payments are based
on the contractual receipts of the underlying receivables, which are
remitted into the securitization structure when and as they are received.
These payments do not represent contractual obligations of the Finance
group, and we do not provide legal recourse to investors that purchase
interests in the securitizations beyond the credit enhancement inherent in
the retained subordinate interests.
|
(3)
|
Finance
receivable receipts are based on contractual cash flows only and do not
reflect any reserves for uncollectible amounts. These receipts could
differ due to prepayments, charge-offs and other factors, including the
inability of borrowers to repay the balance of the loan at the contractual
maturity date. Finance receivable receipts on the held for sale portfolio
represent the contractual balance of the finance receivables and therefore
exclude the potential negative impact from selling the portfolio at the
estimated fair value.
|
This
liquidity profile, combined with the excess cash generated by our borrowing
under committed credit facilities, is an indicator of the Finance group’s
ability to repay outstanding funding obligations, assuming contractual
collection of all finance receivables, absent access to new sources of liquidity
or origination of additional finance receivables. On April 4, 2009,
our Finance group also had $362 million in other liabilities, primarily accounts
payable and accrued expenses, that are payable within the next 12 months. The
future receipt of interest we charge borrowers on finance receivables and
payments of interest charged on debt obligations are excluded from this
liquidity profile. This profile also excludes cash that may be
generated by the disposal of operating lease residual assets and repossessed
assets, and cash that may be used to pay future income taxes, accrued interest
and other liabilities.
At April
4, 2009, the Finance group had $1.0 billion of unused commitments to fund new
and existing customers under revolving lines of credit. These loan commitments
generally have an original duration of less than three years, and funding under
these facilities is dependent on the availability of eligible collateral and
compliance with customary financial covenants. As these agreements may not be
used to the extent committed or may expire unused, the total commitment amount
does not necessarily represent future cash requirements. We also have ongoing
customer relationships, including manufacturers and dealers in the Distribution
Finance division, which do not contractually obligate us to provide funding,
however, we may choose to fund certain of these relationships to facilitate an
orderly liquidation and mitigate credit losses. Neither of these potential
fundings is included as contractual obligations in the table above.
Bank
Facilities and Other Sources of Capital
Our
aggregate $3.0 billion in committed bank lines of credit have historically been
in support of commercial paper and letters of credit issuances only. In February
2009, due to the unavailability of term debt and difficulty in accessing
sufficient commercial paper on a daily basis, we drew the available balance from
these credit facilities. Amounts borrowed under the credit facilities are not
due until April 2012. We used portions of the proceeds to repay our outstanding
commercial paper as it came due, with $8 million remaining commercial paper
outstanding at April 4, 2009.
The debt
(net of cash)-to-capital ratio for our Manufacturing group was 43% at April 4,
2009, compared with 46% at January 3, 2009, and the gross debt-to-capital ratio
at April 4, 2009 was 54%, compared with 52% at January 3, 2009.
We
maintain an effective shelf registration statement filed with the Securities and
Exchange Commission that allows us to issue an unlimited amount of public debt
and other securities, and the Finance group maintains an effective shelf
registration statement that allows it to issue an unlimited amount of public
debt securities. We have not issued any term debt under these
registration statements since the first quarter of 2008, when the Finance group
issued $275 million of term debt.
On April
28, 2009, we announced public offerings under our effective shelf
registration statement of $300 million aggregate principal amount of convertible
senior notes and 19 million shares of our common stock; in addition, we expect
to grant to the underwriters an option to purchase up to an additional 15%
of each of the respective securities being offered. The closing
of each offering is not contingent on the closing of the other,
and there can be no assurance that we will complete either offering
or, if completed, on what terms, including increases or decreases in
the securities being offered based on market conditions and other
factors. This information is not an offer to sell these securities
and is not soliciting an offer to buy these securities in any
jurisdiction.
Credit
Ratings
The major
rating agencies regularly evaluate both borrowing groups, and their ratings of
our long-term debt are based on a number of factors, including our financial
strength, and factors outside our control, such as conditions affecting the
financial services industry generally. Both our long- and short-term
credit ratings were downgraded in the first quarter of 2009. In
connection with these rating actions, the rating agencies have cited concerns
about the Finance group, including execution risks associated with our plan to
exit portions of our commercial finance business and the need for Textron Inc.
to make capital contributions to Textron Financial Corporation, as well as lower
than expected business and financial outlook for 2009, including Cessna's lower
earnings and cash flow,
the increase in outstanding debt resulting from the
borrowing under our credit facilities, weak economic conditions and continued
liquidity and funding constraints. Our current credit ratings prevent
us from accessing the commercial paper markets, and may adversely affect the
cost and other terms upon which we are able to obtain other financing as well as
our access to the capital markets.
The
credit ratings and outlooks of the debt-rating agencies at April 28, 2009 are as
follows:
|
|
Fitch
Ratings
|
|
|
Moody’s
|
|
|
Standard
& Poor’s
|
|
Long-term
ratings:
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
BB+
|
|
|
Baa3
|
|
|
BBB-
|
|
Finance
|
|
BB+
|
|
|
Baa3
|
|
|
BB+
|
|
Short-term
ratings:
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
B |
|
|
P3 |
|
|
A3 |
|
Finance
|
|
B |
|
|
P3 |
|
|
B |
|
Outlook
|
|
Negative
|
|
|
Negative
|
|
|
Developing
|
|
Manufacturing
Group Cash Flows of Continuing Operations
|
|
Three
Months Ended
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Operating
activities
|
|
$ |
(134 |
) |
|
$ |
177 |
|
Investing
activities
|
|
|
(89 |
) |
|
|
(179 |
) |
Financing
activities
|
|
|
454 |
|
|
|
(118 |
) |
Cash
flows from operating activities decreased for the Manufacturing group primarily
due to lower earnings, a decrease in accounts payable of $252 million that was
only partially offset by a decrease in accounts receivable of $110 million and a
$58 million decrease in dividends received from the Finance
group. During the first quarter of 2009, the Finance group paid the
Manufacturing group an $84 million cash dividend. Subsequently, on
April 14, 2009, the Manufacturing group made a capital contribution of $88
million to Textron Financial Corporation to maintain compliance with the fixed
charge coverage ratio required by the Support Agreement.
We used
less cash for investing activities primarily since we had no acquisitions in the
first quarter of 2009, while we used $100 million in cash in the first quarter
2008 in connection with our acquisition of AAI Corporation. We also used less
cash for capital expenditures which decreased to $69 million in the first
quarter of 2009, compared with $78 million in the first quarter of
2008.
Financing
activities provided more cash, primarily reflecting the draw on our bank credit
lines, in the first quarter of 2009, partially offset by less cash used for
share repurchases, as we did not repurchase any of our common stock in the first
quarter of 2009, while we had used $96 million for share repurchases in the
corresponding quarter of 2008. In addition, as a result of the
reduction in our dividend, we paid $52 million less in dividends to our
shareholders in the first quarter of 2009, compared with the first quarter of
2008.
Finance Group Cash Flows of
Continuing Operations
|
|
Three
Months Ended
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Operating
activities
|
|
$ |
18 |
|
|
$ |
52 |
|
Investing
activities
|
|
|
327 |
|
|
|
(477 |
) |
Financing
activities
|
|
|
274 |
|
|
|
412 |
|
The
decrease in cash flows from operating activities in the first quarter of 2009
was primarily due to a reduction in net interest margin, largely driven by lower
average finance receivables, higher borrowing costs and a reduction in other
income.
Cash flows provided by investing activities during
the first quarter of 2009 increased primarily due to a $1.7 billion decrease in
finance receivable originations resulting from our decision to exit portions of
our commercial finance business. These increases were partially
offset by a $579 million decrease in finance receivable collections and $400
million lower proceeds from receivable sales, including securitizations.
Cash
flows provided by financing activities decreased primarily due to the decrease
in managed finance receivables in connection with the exit plan, which reduced
the need to raise cash from financing activities.
Consolidated
Cash Flows of Continuing Operations
|
|
Three
Months Ended
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Operating
activities
|
|
$ |
(161 |
) |
|
$ |
144 |
|
Investing
activities
|
|
|
220 |
|
|
|
(713 |
) |
Financing
activities
|
|
|
791 |
|
|
|
436 |
|
Cash
flows from operating activities decreased primarily due to lower earnings, a
decrease in accounts payable of $252 million and a $100 million cash settlement
of our 2008 stock-based compensation hedge, partially offset by a decrease in
accounts receivable of $110 million.
Cash
flows provided by investing activities increased primarily due to a $1.7 billion
decrease in finance receivable originations resulting from our decision to exit
portions of our commercial finance business. We also used less cash
since we had no acquisitions in the first quarter of 2009, while we used $100
million in cash in the first quarter 2008 in connection with our acquisition of
AAI Corporation. These increases were partially offset by a $579 million
decrease in finance receivable collections and $400 million in lower proceeds
from receivable sales, including securitizations.
Financing
activities provided more cash as we increased our borrowing in the first quarter
of 2009. We also used less cash from financing activities due to the
suspension of our share repurchase plan at the end of 2008, as we did not
repurchase any of our common stock in the first quarter of 2009, while we had
used $96 million for share repurchases in the corresponding quarter of
2008. In addition, as a result of the reduction in our dividend, we
paid $52 million less in dividends to our shareholders in the first quarter of
2009, compared with the first quarter of 2008.
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:
|
|
Three
Months Ended
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Reclassifications
from investing activities:
|
|
|
|
|
|
|
Finance receivable originations
for Manufacturing group inventory sales
|
|
$ |
(120 |
) |
|
$ |
(187 |
) |
Cash received from customers,
sale of receivables and securitizations
|
|
|
159 |
|
|
|
246 |
|
Other
|
|
|
- |
|
|
|
(2 |
) |
Total
reclassifications from investing activities
|
|
|
39 |
|
|
|
57 |
|
Dividends
paid by Finance group to Manufacturing group
|
|
|
(84 |
) |
|
|
(142 |
) |
Total
reclassifications and adjustments to operating activities
|
|
$ |
(45 |
) |
|
$ |
(85 |
) |
Cash
Flows of Discontinued Operations
|
|
Three
Months Ended
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Operating
activities
|
|
$ |
(8 |
) |
|
$ |
(39 |
) |
Investing
activities
|
|
|
302 |
|
|
|
(3 |
) |
Financing
activities
|
|
|
- |
|
|
|
(2 |
) |
Cash flow
from investing activities increased for discontinued operations primarily due to
the receipt of $375 million in pre-tax net proceeds upon the sale of HR Textron
in the first quarter of 2009.
Off-Balance
Sheet Arrangements
As of
April 4, 2009 we have one significant off-balance sheet financing
arrangement. The Distribution Finance revolving securitization trust
is a master trust which purchases inventory finance receivables from the Finance
group and issues asset-backed notes to investors. These finance
receivables typically have short durations, which results in significant
collections of previously purchased finance receivables and significant
additional purchases of replacement finance receivables from the Finance group
on a monthly basis.
During
the first quarter of 2009, we recognized a $6 million other than temporary
impairment charge and a $2 million unrealized loss on our retained interests in
this trust. The trust had $2.2 billion of notes outstanding at April
4, 2009. We own $182 million of these notes, representing our
remaining retained interest. There was no impairment charge recorded
on these retained interests, which are classified as held to maturity, as the
$23 million shortfall between fair value and carrying value was deemed
temporary. In connection with the maturity of $642 million of the
notes in April 2009, including $42 million retained seller certificates owned by
the Finance group, the trust accumulated $502 million of cash during the first
quarter of 2009 from collections of finance receivables.
Critical
Accounting Estimate Update
Goodwill
We
evaluate the recoverability of goodwill annually in the fourth quarter or more
frequently if events or changes in circumstances, such as declines in sales,
earnings or cash flows, or material adverse changes in the business climate,
indicate that the carrying value of an asset might be impaired.
Our
market capitalization at April 4, 2009 was approximately $1.8 billion, compared
with approximately $3.7 billion at January 3, 2009. This market
capitalization is less than the sum of the fair values of our manufacturing
reporting units calculated in connection with our annual impairment test. We
believe that the differences between the fair value estimates of our
manufacturing reporting units and our market capitalization are primarily due to
the market’s view of risk in the Finance segment and concerns over our
liquidity, and that our fair value estimates for our manufacturing reporting
units are consistent with market participant assumptions.
The
continued deterioration in the automotive market in the first quarter of 2009
has led to a decline in Kautex’s forecasted revenue and profits for 2009, which
is considered to be a trigger event for a goodwill impairment test. Accordingly,
in the first quarter of 2009, we updated our evaluation of goodwill
recoverability for Kautex to include our revised projections and
outlook. We anticipate that revenues at Kautex will begin to recover
in 2010, although they will likely still be lower than historic
levels. For purposes of our impairment analysis, we have assumed that
the reduced 2009 forecast will recover at an average annual sales growth rate of
7% beginning in 2010 through 2013, with operating profit margins returning to
recent historical levels by 2013. Based on our analysis, we
determined that Kautex’s goodwill is not impaired at this
time. However, if sales growth and operating margin improvements are
not realized, an impairment charge may be required in the future. At
April 4, 2009, the goodwill allocated to Kautex totaled $121
million.
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 quarter of 2009, the impact
of foreign exchange rate changes from the first quarter of 2008 decreased
revenues by approximately $34 million (1%) and increased segment profit by
approximately $0.9 million (0.29%).
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 herein and in our 2008 Annual
Report on Form 10-K and including the following: (a) changes in worldwide
economic or 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 our
operations or demand for our products; (i) the ability to control costs and
successful implementation of various cost-reduction programs, including the
enterprise-wide restructuring program; (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 (TFC) offers financing; (l) changes in
aircraft delivery schedules, or cancellation or deferral 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) TFC’s ability to maintain portfolio credit
quality and certain minimum levels of financial performance required under its
committed credit facilities and under Textron’s support agreement with TFC; (t)
TFC’s access to financing, including securitizations, at competitive rates; (u)
our ability to successfully exit from TFC’s commercial finance business, other
than the captive finance business, including effecting an orderly liquidation or
sale of certain TFC portfolios and businesses; (v) uncertainty in estimating
market value of TFC’s receivables held for sale and reserves for TFC’s
receivables to be retained; (w) uncertainty in estimating contingent liabilities
and establishing reserves to address such contingencies; (x) 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; (y) the efficacy of research
and development investments to develop new products; (z) the launching of
significant new products or
programs which could result in unanticipated
expenses; (aa) 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; and (bb) continued volatility and
further deterioration of the capital markets.
There has
been no significant change in our exposure to market risk during the first
quarter of 2009. For discussion of our exposure to market risk, refer
to Item 7A. Quantitative and Qualitative Disclosures about Market Risk contained
in Textron’s 2008 Annual Report on Form 10-K.
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 Senior Vice President, Corporate Controller and Acting 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 April 4, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
|
|
|
|
|
|
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:
|
April
29, 2009
|
|
s/Richard
L. Yates
|
|
|
|
Richard
L. Yates
Senior
Vice President, Corporate Controller and
Acting
Chief Financial Officer
(principal
financial officer and principal accounting
officer)
|
LIST
OF EXHIBITS
The
following exhibits are filed as part of this report on Form 10-Q:
Name of
Exhibit
|
|
|
|
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
|