tenq.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
FORM
10-Q
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended September 27, 2008
|
|
OR
|
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number: 1-5480
Textron
Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
05-0315468
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
|
|
|
40
Westminster Street, Providence, RI
|
|
02903
|
(Address
of principal executive offices)
|
|
(zip
code)
|
(401)
421-2800
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ü No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “Large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [ ü
] Accelerated
filer [ ]
Non-accelerated
filer [
] Smaller
reporting company [ ]
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No
ü
Common
stock outstanding at October 18, 2008 – 241,096,617 shares
TEXTRON
INC.
INDEX
|
|
Page
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
7
|
Item
1A.
|
|
16
|
Item
2.
|
|
22
|
Item
3.
|
|
34
|
Item
4.
|
|
35
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
2.
|
|
35
|
Item
6.
|
|
36
|
|
|
36
|
PART
I. FINANCIAL INFORMATION
Item 1. FINANCIAL
STATEMENTS
TEXTRON
INC.
(In
millions, except per share amounts)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$ |
3,349 |
|
|
$ |
2,896 |
|
|
$ |
10,065 |
|
|
$ |
8,361 |
|
Finance
|
|
|
184 |
|
|
|
214 |
|
|
|
575 |
|
|
|
663 |
|
Total
revenues
|
|
|
3,533 |
|
|
|
3,110 |
|
|
|
10,640 |
|
|
|
9,024 |
|
Costs,
expenses and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
2,641 |
|
|
|
2,275 |
|
|
|
7,940 |
|
|
|
6,617 |
|
Selling
and administrative
|
|
|
427 |
|
|
|
383 |
|
|
|
1,227 |
|
|
|
1,117 |
|
Interest
expense, net
|
|
|
102 |
|
|
|
117 |
|
|
|
318 |
|
|
|
364 |
|
Provision
for losses on finance receivables
|
|
|
34 |
|
|
|
6 |
|
|
|
101 |
|
|
|
22 |
|
Total costs, expenses
and other
|
|
|
3,204 |
|
|
|
2,781 |
|
|
|
9,586 |
|
|
|
8,120 |
|
Income
from continuing operations before income taxes
|
|
|
329 |
|
|
|
329 |
|
|
|
1,054 |
|
|
|
904 |
|
Income
taxes
|
|
|
(119 |
) |
|
|
(104 |
) |
|
|
(362 |
) |
|
|
(272 |
) |
Income
from continuing operations
|
|
|
210 |
|
|
|
225 |
|
|
|
692 |
|
|
|
632 |
|
(Loss)
income from discontinued operations, net of income taxes
|
|
|
(4 |
) |
|
|
30 |
|
|
|
3 |
|
|
|
29 |
|
Net
income
|
|
$ |
206 |
|
|
$ |
255 |
|
|
$ |
695 |
|
|
$ |
661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.86 |
|
|
$ |
0.90 |
|
|
$ |
2.80 |
|
|
$ |
2.53 |
|
Discontinued
operations
|
|
|
(0.01 |
) |
|
|
0.12 |
|
|
|
0.02 |
|
|
|
0.12 |
|
Basic
earnings per share
|
|
$ |
0.85 |
|
|
$ |
1.02 |
|
|
$ |
2.82 |
|
|
$ |
2.65 |
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.85 |
|
|
$ |
0.88 |
|
|
$ |
2.75 |
|
|
$ |
2.48 |
|
Discontinued
operations
|
|
|
(0.01 |
) |
|
|
0.12 |
|
|
|
0.02 |
|
|
|
0.12 |
|
Diluted
earnings per share
|
|
$ |
0.84 |
|
|
$ |
1.00 |
|
|
$ |
2.77 |
|
|
$ |
2.60 |
|
Dividends
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.08
Preferred stock, Series A
|
|
$ |
0.52 |
|
|
$ |
0.52 |
|
|
$ |
1.56 |
|
|
$ |
1.56 |
|
$1.40
Preferred stock, Series B
|
|
$ |
0.35 |
|
|
$ |
0.35 |
|
|
$ |
1.05 |
|
|
$ |
1.05 |
|
Common
stock
|
|
$ |
0.23 |
|
|
$ |
0.23 |
|
|
$ |
0.69 |
|
|
$ |
0.62 |
|
See
Notes to the consolidated financial statements.
TEXTRON
INC.
(Dollars
in millions)
|
|
September
27,
2008
|
|
|
December
29,
2007
|
|
Assets
|
|
|
|
|
|
|
Manufacturing
group
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
221 |
|
|
$ |
471 |
|
Accounts
receivable, less allowance for doubtful accounts of $22 and
$29
|
|
|
1,045 |
|
|
|
958 |
|
Inventories
|
|
|
3,276 |
|
|
|
2,593 |
|
Other
current assets
|
|
|
427 |
|
|
|
540 |
|
Assets
of discontinued operations
|
|
|
624 |
|
|
|
607 |
|
Total current assets
|
|
|
5,593 |
|
|
|
5,169 |
|
Property,
plant and equipment, less accumulated
depreciation and amortization of $2,449 and
$2,245
|
|
|
1,979 |
|
|
|
1,918 |
|
Goodwill
|
|
|
1,869 |
|
|
|
1,916 |
|
Other
assets
|
|
|
1,583 |
|
|
|
1,605 |
|
Total Manufacturing group
assets
|
|
|
11,024 |
|
|
|
10,608 |
|
Finance
group
|
|
|
|
|
|
|
|
|
Cash
|
|
|
136 |
|
|
|
60 |
|
Finance
receivables, less allowance for losses of $137 and $89
|
|
|
8,437 |
|
|
|
8,514 |
|
Goodwill
|
|
|
169 |
|
|
|
169 |
|
Other
assets
|
|
|
920 |
|
|
|
640 |
|
Total Finance group assets
|
|
|
9,662 |
|
|
|
9,383 |
|
Total assets
|
|
$ |
20,686 |
|
|
$ |
19,991 |
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Manufacturing
group
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt and short-term debt
|
|
$ |
550 |
|
|
$ |
355 |
|
Accounts
payable
|
|
|
1,062 |
|
|
|
840 |
|
Accrued
liabilities
|
|
|
2,713 |
|
|
|
2,615 |
|
Liabilities
of discontinued operations
|
|
|
440 |
|
|
|
467 |
|
Total current liabilities
|
|
|
4,765 |
|
|
|
4,277 |
|
Other
liabilities
|
|
|
1,995 |
|
|
|
2,171 |
|
Long-term
debt
|
|
|
1,739 |
|
|
|
1,791 |
|
Total Manufacturing group
liabilities
|
|
|
8,499 |
|
|
|
8,239 |
|
Finance
group
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
558 |
|
|
|
462 |
|
Deferred
income taxes
|
|
|
445 |
|
|
|
472 |
|
Debt
|
|
|
7,645 |
|
|
|
7,311 |
|
Total Finance group
liabilities
|
|
|
8,648 |
|
|
|
8,245 |
|
Total liabilities
|
|
|
17,147 |
|
|
|
16,484 |
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
Capital
stock:
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
2 |
|
|
|
2 |
|
Common stock
|
|
|
32 |
|
|
|
32 |
|
Capital
surplus
|
|
|
1,254 |
|
|
|
1,193 |
|
Retained
earnings
|
|
|
3,291 |
|
|
|
2,766 |
|
Accumulated
other comprehensive loss
|
|
|
(487 |
) |
|
|
(400 |
) |
|
|
|
4,092 |
|
|
|
3,593 |
|
Less
cost of treasury shares
|
|
|
553 |
|
|
|
86 |
|
Total
shareholders’ equity
|
|
|
3,539 |
|
|
|
3,507 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
20,686 |
|
|
$ |
19,991 |
|
Common shares
outstanding (in thousands)
|
|
|
240,912 |
|
|
|
250,061 |
|
See
Notes to the consolidated financial
statements
|
For the
Nine Months Ended September 27, 2008 and September 29, 2007,
respectively
(In
millions)
|
|
Consolidated
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
695 |
|
|
$ |
661 |
|
Less:
Income from discontinued operations
|
|
|
3 |
|
|
|
29 |
|
Income
from continuing operations
|
|
|
692 |
|
|
|
632 |
|
Adjustments
to reconcile income from continuing operations to net cash
provided by operating
activities:
|
|
|
|
|
|
|
|
|
Earnings of Finance
group, net of distributions
|
|
|
- |
|
|
|
- |
|
Depreciation and
amortization
|
|
|
295 |
|
|
|
230 |
|
Provision for losses
on finance receivables
|
|
|
101 |
|
|
|
22 |
|
Share-based
compensation
|
|
|
39 |
|
|
|
30 |
|
Deferred income
taxes
|
|
|
(16 |
) |
|
|
22 |
|
Changes in assets and
liabilities excluding those related to acquisitions
and
divestitures:
|
|
|
|
|
|
|
|
|
Accounts receivable,
net
|
|
|
(89 |
) |
|
|
(96 |
) |
Inventories
|
|
|
(792 |
) |
|
|
(531 |
) |
Other
assets
|
|
|
76 |
|
|
|
34 |
|
Accounts
payable
|
|
|
218 |
|
|
|
168 |
|
Accrued and other
liabilities
|
|
|
106 |
|
|
|
200 |
|
Captive finance
receivables, net
|
|
|
(8 |
) |
|
|
(157 |
) |
Other operating
activities, net
|
|
|
28 |
|
|
|
40 |
|
Net
cash provided by operating activities of continuing
operations
|
|
|
650 |
|
|
|
594 |
|
Net
cash (used in) provided by operating activities of discontinued
operations
|
|
|
(18 |
) |
|
|
10 |
|
Net
cash provided by operating activities
|
|
|
632 |
|
|
|
604 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Finance
receivables:
|
|
|
|
|
|
|
|
|
Originated or
purchased
|
|
|
(8,766 |
) |
|
|
(8,915 |
) |
Repaid
|
|
|
8,000 |
|
|
|
8,491 |
|
Proceeds on
receivables sales and securitization sales
|
|
|
633 |
|
|
|
791 |
|
Net
cash used in acquisitions
|
|
|
(109 |
) |
|
|
- |
|
Capital
expenditures
|
|
|
(320 |
) |
|
|
(219 |
) |
Proceeds
from sale of property, plant and equipment
|
|
|
4 |
|
|
|
5 |
|
Purchase
of other marketable securities
|
|
|
(100 |
) |
|
|
- |
|
Other
investing activities, net
|
|
|
30 |
|
|
|
17 |
|
Net
cash (used in) provided by investing activities of continuing
operations
|
|
|
(628 |
) |
|
|
170 |
|
Net
cash (used in) provided by investing activities of discontinued
operations
|
|
|
(8 |
) |
|
|
55 |
|
Net
cash (used in) provided by investing activities
|
|
|
(636 |
) |
|
|
225 |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Increase
(decrease) in short-term debt
|
|
|
270 |
|
|
|
(691 |
) |
Proceeds
from issuance of long-term debt
|
|
|
1,461 |
|
|
|
1,430 |
|
Principal
payments and retirements of long-term debt
|
|
|
(1,245 |
) |
|
|
(1,121 |
) |
Proceeds
from options exercises
|
|
|
40 |
|
|
|
81 |
|
Purchases
of Textron common stock
|
|
|
(533 |
) |
|
|
(304 |
) |
Dividends
paid
|
|
|
(172 |
) |
|
|
(97 |
) |
Excess
tax benefits related to stock option exercises
|
|
|
10 |
|
|
|
16 |
|
Net
cash used in financing activities
|
|
|
(169 |
) |
|
|
(686 |
) |
Net
cash used in financing activities of discontinued
operations
|
|
|
(2 |
) |
|
|
(1 |
) |
Net
cash used in financing activities
|
|
|
(171 |
) |
|
|
(687 |
) |
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
1 |
|
|
|
20 |
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(174 |
) |
|
|
162 |
|
Cash
and cash equivalents at beginning of period
|
|
|
531 |
|
|
|
780 |
|
Cash
and cash equivalents at end of period
|
|
$ |
357 |
|
|
$ |
942 |
|
See
Notes to the consolidated financial statements.
TEXTRON INC.
Consolidated Statements of Cash Flows
(Unaudited) (Continued)
For the
Nine Months Ended September 27, 2008 and September 29, 2007,
respectively
(In
millions)
|
|
Manufacturing
Group*
|
|
|
Finance
Group*
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
695 |
|
|
$ |
661 |
|
|
$ |
49 |
|
|
$ |
108 |
|
Less:
Income from discontinued operations
|
|
|
3 |
|
|
|
29 |
|
|
|
- |
|
|
|
- |
|
Income
from continuing operations
|
|
|
692 |
|
|
|
632 |
|
|
|
49 |
|
|
|
108 |
|
Adjustments
to reconcile income from continuing operations to net cash
provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of Finance
group, net of distributions
|
|
|
93 |
|
|
|
27 |
|
|
|
- |
|
|
|
- |
|
Depreciation and
amortization
|
|
|
264 |
|
|
|
200 |
|
|
|
31 |
|
|
|
30 |
|
Provision for losses
on finance receivables
|
|
|
- |
|
|
|
- |
|
|
|
101 |
|
|
|
22 |
|
Share-based
compensation
|
|
|
39 |
|
|
|
30 |
|
|
|
- |
|
|
|
- |
|
Deferred income
taxes
|
|
|
11 |
|
|
|
6 |
|
|
|
(27 |
) |
|
|
16 |
|
Changes in assets and
liabilities excluding those related to acquisitions
and
divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable,
net
|
|
|
(89 |
) |
|
|
(96 |
) |
|
|
- |
|
|
|
- |
|
Inventories
|
|
|
(778 |
) |
|
|
(522 |
) |
|
|
- |
|
|
|
- |
|
Other
assets
|
|
|
57 |
|
|
|
5 |
|
|
|
11 |
|
|
|
22 |
|
Accounts
payable
|
|
|
218 |
|
|
|
168 |
|
|
|
- |
|
|
|
- |
|
Accrued and other
liabilities
|
|
|
112 |
|
|
|
157 |
|
|
|
(6 |
) |
|
|
43 |
|
Captive finance
receivables, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other operating
activities, net
|
|
|
33 |
|
|
|
42 |
|
|
|
(5 |
) |
|
|
(2 |
) |
Net
cash provided by operating activities of continuing
operations
|
|
|
652 |
|
|
|
649 |
|
|
|
154 |
|
|
|
239 |
|
Net
cash (used in) provided by operating activities of discontinued
operations
|
|
|
(18 |
) |
|
|
10 |
|
|
|
- |
|
|
|
- |
|
Net
cash provided by operating activities
|
|
|
634 |
|
|
|
659 |
|
|
|
154 |
|
|
|
239 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated or
purchased
|
|
|
- |
|
|
|
- |
|
|
|
(9,489 |
) |
|
|
(9,690 |
) |
Repaid
|
|
|
- |
|
|
|
- |
|
|
|
8,602 |
|
|
|
9,070 |
|
Proceeds on
receivables sales and securitization sales
|
|
|
- |
|
|
|
- |
|
|
|
746 |
|
|
|
830 |
|
Net
cash used in acquisitions
|
|
|
(109 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Capital
expenditures
|
|
|
(312 |
) |
|
|
(212 |
) |
|
|
(8 |
) |
|
|
(7 |
) |
Proceeds
on sale of property, plant and equipment
|
|
|
4 |
|
|
|
5 |
|
|
|
- |
|
|
|
- |
|
Purchase
of other marketable securities
|
|
|
- |
|
|
|
- |
|
|
|
(100 |
) |
|
|
- |
|
Other
investing activities, net
|
|
|
- |
|
|
|
(3 |
) |
|
|
24 |
|
|
|
18 |
|
Net
cash (used in) provided by investing activities of continuing
operations
|
|
|
(417 |
) |
|
|
(210 |
) |
|
|
(225 |
) |
|
|
221 |
|
Net
cash (used in) provided by investing activities of discontinued
operations
|
|
|
(8 |
) |
|
|
55 |
|
|
|
- |
|
|
|
- |
|
Net
cash (used in) provided by investing activities
|
|
|
(425 |
) |
|
|
(155 |
) |
|
|
(225 |
) |
|
|
221 |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in short-term debt
|
|
|
240 |
|
|
|
(36 |
) |
|
|
30 |
|
|
|
(655 |
) |
Proceeds
from issuance of long-term debt
|
|
|
- |
|
|
|
1 |
|
|
|
1,461 |
|
|
|
1,429 |
|
Principal
payments and retirements of long-term debt
|
|
|
(44 |
) |
|
|
(13 |
) |
|
|
(1,201 |
) |
|
|
(1,108 |
) |
Proceeds
from option exercises
|
|
|
40 |
|
|
|
81 |
|
|
|
- |
|
|
|
- |
|
Purchases
of Textron common stock
|
|
|
(533 |
) |
|
|
(304 |
) |
|
|
- |
|
|
|
- |
|
Dividends
paid
|
|
|
(172 |
) |
|
|
(97 |
) |
|
|
(142 |
) |
|
|
(135 |
) |
Excess
tax benefits related to stock option exercises
|
|
|
10 |
|
|
|
16 |
|
|
|
- |
|
|
|
- |
|
Net
cash (used in) provided by financing activities of continuing
operations
|
|
|
(459 |
) |
|
|
(352 |
) |
|
|
148 |
|
|
|
(469 |
) |
Net
cash (used in) financing activities of discontinued
operations
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
- |
|
|
|
- |
|
Net
cash (used in) provided by financing activities
|
|
|
(461 |
) |
|
|
(353 |
) |
|
|
148 |
|
|
|
(469 |
) |
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
2 |
|
|
|
17 |
|
|
|
(1 |
) |
|
|
3 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(250 |
) |
|
|
168 |
|
|
|
76 |
|
|
|
(6 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
471 |
|
|
|
733 |
|
|
|
60 |
|
|
|
47 |
|
Cash
and cash equivalents at end of period
|
|
$ |
221 |
|
|
$ |
901 |
|
|
$ |
136 |
|
|
$ |
41 |
|
*Textron
is segregated into a Manufacturing group and a Finance group, as described in
Note 1 to the consolidated financial statements. The Finance group’s pre-tax
income in excess of dividends paid is excluded from the Manufacturing group’s
cash flows. All significant transactions between the borrowing groups have been
eliminated from the consolidated column provided on page 5.
See
Notes to the consolidated financial statements. |
6.
|
Note
1: Basis of Presentation
The
consolidated interim financial statements included in this quarterly report
should be read in conjunction with the consolidated financial statements
included in a Form 8-K filed on April 28, 2008, which includes revised sections
of our Annual Report on Form 10-K for the year ended December 29, 2007 to
reflect a change in segment reporting. In the opinion of management,
the interim financial statements reflect all adjustments (consisting only of
normal recurring adjustments) that are necessary for the fair presentation of
our consolidated financial position, results of operations and cash flows for
the interim periods presented. The results of operations for the
interim periods are not necessarily indicative of the results to be expected for
the full year.
Our
financings are conducted through two separate borrowing groups. The
Manufacturing group consists of Textron Inc., consolidated with the entities
that operate in the Cessna, Bell, Defense & Intelligence and Industrial
segments, while the Finance group consists of the Finance segment, comprised of
Textron Financial Corporation and its subsidiaries. We designed this framework
to enhance our borrowing power by separating the Finance group. Our
Manufacturing group operations include the development, production and delivery
of tangible goods and services, while our Finance group provides financial
services. Due to the fundamental differences between each borrowing group’s
activities, investors, rating agencies and analysts use different measures to
evaluate each group’s performance. To support those evaluations, we present
balance sheet and cash flow information for each borrowing group within the
consolidated financial statements. All significant intercompany
transactions are eliminated from the consolidated financial statements,
including retail and wholesale financing activities for inventory sold by our
Manufacturing group that is financed by our Finance group.
As
discussed in Note 12: Segment Information, we changed our segment structure
effective as of the beginning of fiscal 2008. Our segments now
include Cessna, Bell, Defense & Intelligence, Industrial and Finance. Prior
periods have been recast to reflect the new segment reporting
structure.
As
discussed in Note 2: Discontinued Operations, in the third quarter of 2008, we
entered into an agreement to sell our Fluid & Power business
unit. As a result, this business is now classified as a
discontinued operation, and all prior period information has been recast to
reflect this presentation.
Note
2: Discontinued Operations
On
September 10, 2008, we entered into an agreement to sell our Fluid & Power
business unit to Clyde Blowers Limited, a UK-based worldwide leader in the areas
of power, materials handling, intermodal transport and logistics and pump
technologies. Included in the transaction is the sale of all four
Textron Fluid & Power product lines - which are Gear Technologies,
Hydraulics, Maag Pump Systems, Union Pump and each of their respective brands.
Under the agreement, we will receive approximately $526 million in cash, a
six-year note with a face value of $28 million and up to $50 million based on
final 2008 operating results, primarily payable in a six-year note; in addition,
certain liabilities will be assumed by Clyde Blowers Limited. We
expect the sale will generate after-tax cash proceeds of approximately $350
million and an after-tax gain of about $85 million. The sale is
subject to certain closing conditions and completion of the buyer's funding, and
is scheduled to close in November, pending regulatory reviews and
approvals. Beginning with the third quarter of 2008, the results of
this business, which was previously reported in the Industrial segment, have
been presented as discontinued operations for all periods presented in our
consolidated financial statements.
The
assets and liabilities of our discontinued businesses are as
follows:
(In
millions)
|
|
September
27,
2008
|
|
|
December
29,
2007
|
|
Accounts
receivable, net
|
|
$ |
127 |
|
|
$ |
125 |
|
Inventories
|
|
|
139 |
|
|
|
131 |
|
Other
current assets
|
|
|
18 |
|
|
|
20 |
|
Property,
plant and equipment, net
|
|
|
77 |
|
|
|
81 |
|
Goodwill
|
|
|
211 |
|
|
|
216 |
|
Other
assets
|
|
|
22 |
|
|
|
26 |
|
Total
assets of discontinued operations of Fluid & Power
|
|
|
594 |
|
|
|
599 |
|
Assets
of discontinued operations of Fastening Systems
|
|
|
30 |
|
|
|
8 |
|
Total
assets of discontinued operations
|
|
$ |
624 |
|
|
$ |
607 |
|
Accounts
payable and accrued liabilities
|
|
|
116 |
|
|
|
178 |
|
Accrued
postretirement benefits other than pensions
|
|
|
38 |
|
|
|
38 |
|
Other
liabilities
|
|
|
150 |
|
|
|
115 |
|
Long-term
debt
|
|
|
- |
|
|
|
2 |
|
Total
liabilities of discontinued operations of Fluid &
Power
|
|
|
304 |
|
|
|
333 |
|
Liabilities
of discontinued operations of Fastening Systems
|
|
|
136 |
|
|
|
134 |
|
Total
liabilities of discontinued operations
|
|
$ |
440 |
|
|
$ |
467 |
|
Results
of our discontinued businesses, including the operating results of Fluid &
Power, are as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
Revenue
|
|
$ |
174 |
|
|
$ |
153 |
|
|
$ |
504 |
|
|
$ |
438 |
|
Income
from discontinued operations of Fluid & Power,
before
income taxes
|
|
|
17 |
|
|
|
24 |
|
|
|
36 |
|
|
|
30 |
|
Income
taxes
|
|
|
7 |
|
|
|
7 |
|
|
|
11 |
|
|
|
7 |
|
Income
from discontinued operations of Fluid & Power,
net of
income taxes
|
|
|
10 |
|
|
|
17 |
|
|
|
25 |
|
|
|
23 |
|
Transaction-related
costs for Fluid & Power disposal
|
|
|
(8 |
) |
|
|
- |
|
|
|
(8 |
) |
|
|
- |
|
(Loss)
income from other discontinued operations
|
|
|
(6 |
) |
|
|
13 |
|
|
|
(14 |
) |
|
|
6 |
|
Income
from discontinued operations, net of income taxes
|
|
$ |
(4 |
) |
|
$ |
30 |
|
|
$ |
3 |
|
|
$ |
29 |
|
(Loss)
income from other discontinued operations primarily relates to the resolution of
certain retained liabilities of the Fastening Systems business.
Note
3: Inventories
(In
millions)
|
|
September
27,
2008
|
|
|
December
29,
2007
|
|
Finished
goods
|
|
$ |
968 |
|
|
$ |
728 |
|
Work
in process
|
|
|
2,056 |
|
|
|
1,819 |
|
Raw
materials
|
|
|
781 |
|
|
|
588 |
|
|
|
|
3,805 |
|
|
|
3,135 |
|
Less
progress/milestone payments
|
|
|
(529 |
) |
|
|
(542 |
) |
|
|
$ |
3,276 |
|
|
$ |
2,593 |
|
Note
4: Comprehensive Income
Our
comprehensive income for the periods is provided below:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
September
27, 2008
|
|
|
September
29, 2007
|
|
|
September
27, 2008
|
|
|
September
29, 2007
|
|
Net
income
|
|
$ |
206 |
|
|
$ |
255 |
|
|
$ |
695 |
|
|
$ |
661 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of prior service
cost and unrealized losses on pension and postretirement
benefits
|
|
|
8 |
|
|
|
15 |
|
|
|
28 |
|
|
|
44 |
|
Net deferred (loss) gain on
hedge contracts
|
|
|
(27 |
) |
|
|
13 |
|
|
|
(44 |
) |
|
|
35 |
|
Foreign currency translation
and other
|
|
|
(66 |
) |
|
|
25 |
|
|
|
(71 |
) |
|
|
54 |
|
Comprehensive
income
|
|
$ |
121 |
|
|
$ |
308 |
|
|
$ |
608 |
|
|
$ |
794 |
|
Note
5: Earnings per Share
We
calculate basic and diluted earnings per share based on income available to
common shareholders, which approximates net income for each
period. We use the weighted-average number of common shares
outstanding during the period for the computation of basic earnings per
share. Diluted earnings per share includes the dilutive effect of
convertible preferred shares, stock options and restricted stock units in the
weighted-average number of common shares outstanding.
The
weighted-average shares outstanding for basic and diluted earnings per share are
as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
thousands)
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
Basic
weighted-average shares outstanding
|
|
|
243,083 |
|
|
|
249,332 |
|
|
|
246,915 |
|
|
|
249,779 |
|
Dilutive
effect of convertible preferred shares,
stock options and restricted
stock units
|
|
|
3,441 |
|
|
|
4,989 |
|
|
|
4,401 |
|
|
|
4,818 |
|
Diluted
weighted-average shares outstanding
|
|
|
246,524 |
|
|
|
254,321 |
|
|
|
251,316 |
|
|
|
254,597 |
|
Note
6: Share-Based Compensation
The
compensation expense we recorded in net income for our share-based compensation
plans is as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
Compensation
expense
|
|
$ |
(23 |
) |
|
$ |
42 |
|
|
$ |
(45 |
) |
|
$ |
99 |
|
Hedge
expense (income) on forward contracts
|
|
|
27 |
|
|
|
(16 |
) |
|
|
72 |
|
|
|
(32 |
) |
Income
tax expense (benefit)
|
|
|
9 |
|
|
|
(14 |
) |
|
|
17 |
|
|
|
(33 |
) |
Total
net compensation cost included in net income
|
|
$ |
13 |
|
|
$ |
12 |
|
|
$ |
44 |
|
|
$ |
34 |
|
We
utilize cash settlement forward contracts on our common stock to modify
compensation expense to reduce potential variability resulting from changes in
our stock price. With these contracts, changes in our stock price
have no significant impact on net income.
Stock
option activity under the 2007 Long-Term Incentive Plan for the nine months
ended September 27, 2008 is as follows:
|
|
Number
of
Options
(In
thousands)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life
(In
years)
|
|
|
Aggregate
Intrinsic
Value
(In
millions)
|
|
Outstanding
at beginning of period
|
|
|
9,024 |
|
|
$ |
35.37 |
|
|
|
6.3 |
|
|
$ |
316 |
|
Granted
|
|
|
1,690 |
|
|
|
53.48 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,145 |
) |
|
|
34.29 |
|
|
|
|
|
|
|
|
|
Canceled,
expired or forfeited
|
|
|
(148 |
) |
|
|
45.12 |
|
|
|
|
|
|
|
|
|
Outstanding
at end of period
|
|
|
9,421 |
|
|
$ |
38.60 |
|
|
|
6.5 |
|
|
$ |
26 |
|
Exercisable
at end of period
|
|
|
6,048 |
|
|
$ |
32.64 |
|
|
|
5.3 |
|
|
$ |
26 |
|
In
connection with the appointment of our new Executive Vice President and Chief
Operating Officer, in the third quarter of 2008, we granted options to acquire
200,000 shares of our common stock with an exercise price of $47.84 per share
and 155,893 restricted stock units. The stock options have a
Black-Scholes grant date fair value of approximately $13 per option and vest in
20% annual installments beginning in 2010. The restricted stock units
have a grant date fair value of approximately $48 per unit and vest 25% on the
anniversary of the grant date in each of 2009, 2010 and 2011 and the remaining
25% will vest ratably in 2012, 2013 and 2016. Other than these
grants, there were no significant issuances of stock options or restricted stock
units during the third quarter of 2008 or 2007.
Note
7: Retirement Plans
We
provide defined benefit pension plans and other postretirement benefits to
eligible employees. The components of net periodic benefit cost for
these plans for the three months ended September 27, 2008 and September 29, 2007
are as follows:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
Other
Than Pensions
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
35 |
|
|
$ |
31 |
|
|
$ |
2 |
|
|
$ |
3 |
|
Interest
cost
|
|
|
75 |
|
|
|
67 |
|
|
|
11 |
|
|
|
10 |
|
Expected
return on plan assets
|
|
|
(101 |
) |
|
|
(91 |
) |
|
|
- |
|
|
|
- |
|
Amortization
of prior service cost (credit)
|
|
|
5 |
|
|
|
4 |
|
|
|
(1 |
) |
|
|
(2 |
) |
Amortization
of net loss
|
|
|
5 |
|
|
|
10 |
|
|
|
4 |
|
|
|
5 |
|
Net
periodic benefit cost
|
|
$ |
19 |
|
|
$ |
21 |
|
|
$ |
16 |
|
|
$ |
16 |
|
The
components of net periodic benefit cost for the nine months ended September 27,
2008 and September 29, 2007 are as follows:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
Other
Than Pensions
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
106 |
|
|
$ |
95 |
|
|
$ |
7 |
|
|
$ |
7 |
|
Interest
cost
|
|
|
227 |
|
|
|
202 |
|
|
|
32 |
|
|
|
31 |
|
Expected
return on plan assets
|
|
|
(304 |
) |
|
|
(275 |
) |
|
|
- |
|
|
|
- |
|
Amortization
of prior service cost (credit)
|
|
|
15 |
|
|
|
13 |
|
|
|
(4 |
) |
|
|
(4 |
) |
Amortization
of net loss
|
|
|
14 |
|
|
|
30 |
|
|
|
12 |
|
|
|
16 |
|
Net
periodic benefit cost
|
|
$ |
58 |
|
|
$ |
65 |
|
|
$ |
47 |
|
|
$ |
50 |
|
Note
8: Commitments and Contingencies
We are
subject to legal proceedings and other claims arising out of the conduct of our
business, including proceedings and claims relating to private sector
transactions; government contracts; compliance with applicable laws and
regulations; production partners; product liability; employment; and
environmental, safety and health matters. Some of these legal proceedings and
claims seek damages, fines or penalties in substantial amounts or remediation of
environmental contamination. As a government contractor, we are subject to
audits, reviews and investigations to determine whether our operations are being
conducted in accordance with applicable regulatory
requirements. Under federal government procurement regulations,
certain claims brought by the U.S. Government could result in our being
suspended or debarred from U.S. Government contracting for a period of time. On
the basis of information presently available, we do not believe that existing
proceedings and claims will have a material effect on our financial position or
results of operations.
The
Internal Revenue Service (IRS) has challenged our tax positions related to
certain 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 September 27, 2008, $219 million of federal deferred
tax liabilities were recorded on our Consolidated Balance Sheets related to
these leases.
Armed Reconnaissance Helicopter
(ARH) Program Termination — The ARH program included a development phase,
covered by the System Development and Demonstration (SDD) contract, and a
production phase. During 2007, we continued to restructure the
production portion of this program through negotiations with the U.S.
Government, which included reducing the number of units and modifying the
pricing and delivery schedules. Based on the status of the
negotiations during the year and contractual commitments with our vendors
related to materials for the anticipated production units procured in advance of
the low-rate initial production (LRIP) contract awards, we established reserves
in 2007 representing our best estimate of the expected loss for this
program. At December 29, 2007, reserves for this program totaled $50
million. During 2008, we continued to receive inventory and incur
additional vendor obligations for long-lead time materials related to the
anticipated LRIP contracts.
In the
second quarter of 2008, we learned that, based on estimated projected costs, the
ARH program required recertification under the Nunn-McCurdy Act in order for the
program to continue, and the U.S. Government began the certification
process. At the end of the day on October 16, 2008, we received
notification that the U.S. Government would not certify the continuation of this
program to Congress under the Nunn-McCurdy Act and thus had decided to terminate
the program for the convenience of the Government. 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.
At
October 27, 2008, our LRIP-related vendor obligations are estimated to be up to
approximately $80 million. We have begun the process of assessing the
amount of the ultimate vendor liability, as well as evaluating the utility the
related inventory has to other Bell programs, customers, or to the
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. Accordingly, no additional reserves are deemed necessary at
this time.
Forward Contract — We enter
into a forward contract in our common stock on an annual basis. The
contract is intended to modify the earnings and cash volatility of stock-based
incentive compensation indexed to our stock. The forward contract
requires annual cash settlement between the counterparties based upon a number
of shares multiplied by the difference between the strike price and the
prevailing common stock price. As of September 27, 2008, the contract
was for approximately 2.2 million shares with a strike price of
$63.28. The market price of the stock was $32.49 at September 27,
2008, resulting in a payable of $68 million, compared with a receivable of $62
million at December 29, 2007.
Note
9: Guarantees and Indemnifications
As
disclosed under the caption “Guarantees and Indemnifications” in Note 17 to the
Consolidated Financial Statements in Textron’s 2007 Annual Report on Form 10-K,
we have issued or are party to certain guarantees. As of September
27, 2008, there has been no material change to these guarantees.
We
provide limited warranty and product maintenance programs, including parts and
labor, for certain products for periods ranging from one to five
years. We estimate the costs that may be incurred under warranty
programs and record a liability in the amount of such costs at the time product
revenue is recognized. Factors that affect this liability include the
number of products sold, historical and anticipated rates of warranty claims,
and cost per claim. We assess the adequacy of our recorded warranty
and product maintenance liabilities periodically and adjust the amounts as
necessary.
Changes
in our warranty and product maintenance liability are as follows:
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
Accrual
at the beginning of period
|
|
$ |
315 |
|
|
$ |
310 |
|
Provision
|
|
|
146 |
|
|
|
138 |
|
Settlements
|
|
|
(150 |
) |
|
|
(134 |
) |
Adjustments
to prior accrual estimates
|
|
|
(12 |
) |
|
|
(6 |
) |
Reclassification
adjustments
|
|
|
(5 |
) |
|
|
- |
|
Accrual
at the end of period
|
|
$ |
294 |
|
|
$ |
308 |
|
Note
10: Fair Values of Assets and Liabilities
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,”
effective for financial statements issued for fiscal years beginning after
November 15, 2007. SFAS No. 157 replaces multiple existing
definitions of fair value with a single definition, establishes a consistent
framework for measuring fair value and expands financial statement disclosures
regarding fair value measurements. This Statement applies only to fair value
measurements that already are required or permitted by other accounting
standards and does not require any new fair value measurements. In
February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, which
delayed until the first quarter of 2009 the effective date of SFAS No. 157 for
nonfinancial assets and liabilities that are not recognized or disclosed at fair
value in the financial statements on a recurring basis.
The
adoption of SFAS No. 157 for our financial assets and liabilities in the first
quarter of 2008 did not have a material impact on our financial position or
results of operations. Our nonfinancial assets and liabilities that meet the
deferral criteria set forth in FSP No. 157-2 include goodwill, intangible
assets, property, plant and equipment and other long-term investments, which
primarily represent collateral that is received by the Finance group in
satisfaction of troubled loans. We do not expect that the adoption of
SFAS No. 157 for these nonfinancial assets and liabilities will have a material
impact on our financial position or results of operations.
In
accordance with the provisions of SFAS No. 157, we measure fair value at the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement
date. The Statement prioritizes the assumptions that market
participants would use in pricing the asset or liability (the “inputs”) into a
three-tier fair value hierarchy. This fair value hierarchy gives the
highest priority (Level 1) to quoted prices in active markets for identical
assets or liabilities and the lowest priority (Level 3) to unobservable inputs
in which little or no market data exists, requiring companies to develop their
own assumptions. Observable inputs that do not meet the criteria of
Level 1, and include quoted prices for similar assets or liabilities in active
markets or quoted prices for identical assets and liabilities in markets that
are not active, are categorized as Level 2. Level 3 inputs are those
that reflect our estimates about the assumptions market participants would use
in pricing the asset or liability, based on the best information available in
the circumstances. Valuation techniques for assets and liabilities
measured using Level 3 inputs may include methodologies such as the market
approach,
the
income approach or the cost approach, and may use unobservable inputs such as
projections, estimates and management’s interpretation of current market
data. These unobservable inputs are only utilized to the extent that
observable inputs are not available or cost-effective to obtain.
Assets
and Liabilities Recorded at Fair Value on a Recurring Basis
The table
below presents the assets and liabilities measured at fair value on a recurring
basis at September 27, 2008 categorized by the level of inputs used in the
valuation of each asset and liability.
(In
millions)
|
|
Total
|
|
|
Quoted
Prices in Active Markets for Identical Assets or Liabilities
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
group
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange rate
forwardcontracts, net
|
|
$ |
10 |
|
|
$ |
- |
|
|
$ |
10 |
|
|
$ |
- |
|
Total Manufacturing
group
|
|
|
10 |
|
|
|
- |
|
|
|
10 |
|
|
|
- |
|
Finance group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only
strips
|
|
|
48 |
|
|
|
- |
|
|
|
- |
|
|
|
48 |
|
Derivative financial
instruments, net
|
|
|
27 |
|
|
|
- |
|
|
|
27 |
|
|
|
- |
|
Total Finance
group
|
|
|
75 |
|
|
|
- |
|
|
|
27 |
|
|
|
48 |
|
Total assets
|
|
$ |
85 |
|
|
$ |
- |
|
|
$ |
37 |
|
|
$ |
48 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash settlement forward
contract
|
|
$ |
68 |
|
|
$ |
68 |
|
|
$ |
- |
|
|
$ |
- |
|
Total Manufacturing
group
|
|
|
68 |
|
|
|
68 |
|
|
|
- |
|
|
|
- |
|
Total
liabilities
|
|
$ |
68 |
|
|
$ |
68 |
|
|
$ |
- |
|
|
$ |
- |
|
Valuation
Techniques
Manufacturing
Group
Foreign
exchange rate forward contracts are measured at fair value using the market
method valuation technique. The inputs to this technique utilize
current foreign exchange forward market rates published by third-party leading
financial news and data providers. This is observable data that
represents the rates that the financial institution uses for contracts entered
into at that date; however, they are not based on actual transactions so they
are classified as Level 2. We record changes in the fair value of these
contracts, to the extent they are effective as hedges, in other comprehensive
income. If a contract does not qualify for hedge accounting or is designated as
a fair value hedge, changes in the fair value of the contract are recorded in
income.
Cash
settlement forward contracts on our common stock are used to manage the expense
related to stock-based compensation awards. The use of these forward
contracts modifies compensation expense exposure to changes in the stock price
with the intent of reducing potential variability. These contracts
are measured at fair value using the market method valuation
technique. Since the input to this technique is based on the quoted
price of our common stock at the measurement date, it is classified as Level
1. Gains or losses on these instruments are recorded as an adjustment
to compensation expense.
Finance
Group
Interest-only
strips are generally retained upon the sale of finance receivables to qualified
special purpose trusts. These interest-only strips are initially recorded at the
allocated carrying value, which is determined based on the relative fair values
of the finance receivables sold and the interests retained. We
estimate fair value upon the initial recognition of the retained interest based
on the present value of expected future cash flows using our best estimates of
key assumptions – credit losses, prepayment speeds, forward interest rate yield
curves and discount rates commensurate with the risks involved. These
inputs are classified as Level 3 since they reflect our own assumptions about
the assumptions market participants would use in pricing these assets based on
the best
information
available in the circumstances. We review the fair values of the
interest-only strips quarterly using a discounted cash flow model and updated
assumptions, and compare such amounts with the carrying value. When a change in
fair value is deemed temporary, we record a corresponding credit or charge to
other comprehensive income for any unrealized gains or losses. If a
decline in the fair value is determined to be other than temporary, we record a
corresponding charge to income.
Derivative
financial instruments are measured at fair value based on observable market
inputs for various interest and foreign currency rates published by third-party
leading financial news and data providers. This is observable data
that represents the rates used by market participants for instruments entered
into at that date; however, they are not based on actual transactions so they
are classified as Level 2. Changes in fair value for these instruments are
primarily recorded in interest expense.
Changes
in Fair Value for Unobservable Inputs
The table
below presents the change in fair value measurements for our interest-only
strips for which we used significant unobservable inputs (Level 3) during
2008:
(In
millions)
|
|
Three
Months Ended
September
27,
2008
|
|
|
Nine
Months Ended
September
27,
2008
|
|
Balance,
beginning of period
|
|
$ |
53 |
|
|
$ |
43 |
|
Net
gains for the period:
|
|
|
|
|
|
|
|
|
Securitization gains on sale of
finance receivables
|
|
|
17 |
|
|
|
59 |
|
Change in value recognized in
Finance revenues
|
|
|
1 |
|
|
|
2 |
|
Impairment
charge
|
|
|
(5 |
) |
|
|
(5 |
) |
Collections
|
|
|
(18 |
) |
|
|
(51 |
) |
Balance,
end of period
|
|
$ |
48 |
|
|
$ |
48 |
|
Note
11: Recently Issued Accounting Pronouncements
In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted In Share-Based Payment Transactions Are Participating
Securities.” This FSP concludes that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and must be included in
the computation of basic earnings per share using the two-class
method. This FSP is effective in the first quarter of 2009 and is to
be applied on a retrospective basis to all periods presented. In the
first quarter of 2008, we granted restricted stock units which include
nonforfeitable rights to dividends. Accordingly, restricted stock units awarded
since the beginning of 2008 will be considered participating securities and will
be included in our earnings per share calculation upon the adoption of this
FSP. The adoption of this FSP will not have a material impact on our
earnings per share and it will have no impact on our financial position or
results of operations.
Other new
pronouncements issued but not effective until after September 27, 2008 are not
expected to have a significant effect on our consolidated financial position or
results of operations.
Note
12: Segment Information
Effective
at the beginning of fiscal 2008, we changed our segment reporting by separating
the former Bell segment into two segments: the Bell segment and the Defense
& Intelligence segment. We now operate in, and will report
financial information for, the following five business segments: Cessna, Bell,
Defense & Intelligence, Industrial and Finance. These segments reflect the
manner in which we now manage our operations. Prior periods have been restated
to reflect the new segment reporting structure.
Segment
profit is an important measure used for evaluating performance and for
decision-making purposes. Segment profit for the manufacturing
segments excludes interest expense and certain corporate
expenses. The measurement for the Finance segment includes interest
income and expense. Provisions for losses on finance
receivables
involving the sale or lease of our products are recorded by the selling
manufacturing division when our Finance group has recourse to the Manufacturing
group.
Our
revenues by segment and a reconciliation of segment profit to income from
continuing operations before income taxes are as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
MANUFACTURING:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cessna
|
|
$ |
1,418 |
|
|
$ |
1,268 |
|
|
$ |
4,165 |
|
|
$ |
3,439 |
|
Bell
|
|
|
702 |
|
|
|
650 |
|
|
|
1,974 |
|
|
|
1,826 |
|
Defense &
Intelligence
|
|
|
503 |
|
|
|
326 |
|
|
|
1,606 |
|
|
|
1,004 |
|
Industrial
|
|
|
726 |
|
|
|
652 |
|
|
|
2,320 |
|
|
|
2,092 |
|
|
|
|
3,349 |
|
|
|
2,896 |
|
|
|
10,065 |
|
|
|
8,361 |
|
FINANCE
|
|
|
184 |
|
|
|
214 |
|
|
|
575 |
|
|
|
663 |
|
Total
revenues
|
|
|
3,533 |
|
|
|
3,110 |
|
|
|
10,640 |
|
|
|
9,024 |
|
SEGMENT
OPERATING PROFIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MANUFACTURING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cessna
|
|
$ |
238 |
|
|
$ |
222 |
|
|
$ |
707 |
|
|
$ |
577 |
|
Bell
|
|
|
63 |
|
|
|
58 |
|
|
|
184 |
|
|
|
90 |
|
Defense &
Intelligence
|
|
|
74 |
|
|
|
43 |
|
|
|
212 |
|
|
|
161 |
|
Industrial
|
|
|
6 |
|
|
|
23 |
|
|
|
91 |
|
|
|
138 |
|
|
|
|
381 |
|
|
|
346 |
|
|
|
1,194 |
|
|
|
966 |
|
FINANCE
|
|
|
18 |
|
|
|
54 |
|
|
|
73 |
|
|
|
174 |
|
Segment
profit
|
|
|
399 |
|
|
|
400 |
|
|
|
1,267 |
|
|
|
1,140 |
|
Corporate
expenses and other, net
|
|
|
(38 |
) |
|
|
(52 |
) |
|
|
(122 |
) |
|
|
(170 |
) |
Interest
expense, net
|
|
|
(32 |
) |
|
|
(19 |
) |
|
|
(91 |
) |
|
|
(66 |
) |
Income
from continuing operations before
income taxes
|
|
$ |
329 |
|
|
$ |
329 |
|
|
$ |
1,054 |
|
|
$ |
904 |
|
Note
13: Subsequent Events
In recent
weeks, volatility and disruption in the capital markets have reached
unprecedented levels. In light of current market conditions and in
order to reduce our capital requirements, on October 13, 2008, our Board of
Directors approved the recommendation of management to downsize the Finance
group. Under the approved plan, we will be exiting the Finance group’s
asset-based lending and structured capital divisions, and several additional
product lines, representing approximately $2 billion in managed finance
receivables. We plan to exit these divisions and product lines
through an orderly liquidation as market conditions allow, over the next two to
three years. The Finance group will also limit new originations in
its distribution finance, golf and resort portfolios.
As a
result of the decision to downsize the Finance group, we determined that an
impairment indicator exists for the Finance group’s goodwill and long-lived
assets. Based on internal analysis performed, we expect to take a
non-cash pre-tax impairment charge in the fourth quarter of up to $169 million
to eliminate substantially all of the segment’s goodwill. Also, in
October, we initiated a restructuring program to reduce overhead cost and
improve productivity across the enterprise. Including the Finance
group, we expect total restructuring charges of about $25 million, with most of
the charges expected to occur in the fourth quarter. We will continue
to assess our estimates of total impairment and restructuring charges and may
adjust such amounts as appropriate.
Our
business, financial condition and results of operations are subject to various
risks, including those discussed below, which may affect the value of our
securities. The risks discussed below are those that we believe currently are
the most significant, although additional risks not presently known to us or
that we currently deem less significant also may impact our business, financial
condition or results of operations, perhaps materially.
Risks Relating to the
Financial Services Industry and Financial Markets
Current
levels of market volatility are unprecedented, which may continue to increase
our Finance group’s cost of funds or disrupt our Finance group's access to the
capital markets.
Our
Finance group consists of the Finance segment, which is comprised of Textron
Financial Corporation and its subsidiaries. Our Finance segment relies on its
access to the capital markets to fund asset originations, fund operations and
meet debt obligations and other commitments. The Finance group raises funds
through commercial paper borrowings, issuances of medium-term notes and other
term debt securities and syndication and securitization of receivables.
Additional liquidity is provided to our Finance group through contractually
committed bank lines of credit. The recent unprecedented volatility
and disruptions in the capital markets have resulted in conditions that have
increased our Finance group’s cost of funds, adversely affecting its
profitability, due to the lack of immediate ability to pass on higher costs due
to contractual or market constraints. Recent access to the commercial
paper markets, including access by our Finance group, has been on less favorable
terms, and the commercial paper markets may not be a reliable source of
short-term financing for us in the future. Similarly, our Finance
group’s ability to engage in term debt, syndication and securitization
transactions on favorable terms, or at all, has been adversely affected, and it
may be unable to rely on these transactions as sources of financing in the
future. Continued volatility and disruption in the capital markets
could further increase our Finance group’s cost of funds, further eroding its
profitability, or further limit our Finance group’s access to the capital
markets. In the event of further limitations on our Finance group’s
access to the capital markets, our liquidity could be adversely affected. In
such event, we would seek to repay commercial paper as it becomes due and to
meet our other liquidity needs by drawing upon our contractually committed bank
lines of credit or by seeking other funding sources. However, under the current
extreme market conditions, these agreements and other funding sources may not be
available or sufficient to meet our needs. As a result, our Finance group's
business could be adversely affected and our cash flow, profitability and
financial condition also would suffer.
Measures
we are taking to reduce our Finance group’s capital requirements may not work,
and required capital contributions to the Finance group could restrict our use
of capital.
We cannot
assure you that we will be able to accomplish the orderly liquidation of the
divisions and product lines of our Finance group, which we have decided to exit
on a timely or successful basis or in a manner that will significantly reduce
our Finance group’s capital requirements. Moreover, our withdrawal from
these lines of business may reduce the income and cash flow generated by the
Finance group in future years. In addition, as a result of the decision to
downsize our Finance group and the resulting impairment charge in the fourth
quarter of 2008 of up to $169 million, we expect to be required, under the terms
of the Textron Inc. support agreement with the Finance group, to make a capital
contribution of up to $200 million to the Finance group by the end of the first
quarter of 2009. Textron Inc. may be required to make additional capital
contributions to the Finance group in the future. Required capital
contributions to the Finance group could restrict our allocation of available
capital for other purposes.
Difficult
conditions in the financial markets have adversely affected the business and
results of operations of our Finance group, and we do not expect these
conditions to improve in the near future.
The
financial performance of our Finance group depends on the quality of loans,
leases and other credit products in its finance asset
portfolios. Portfolio quality may be adversely affected by several
factors, including finance receivable underwriting procedures, collateral
quality or geographic or industry concentrations, as well as the recent
deterioration of the financial markets. Current financial market
conditions have resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities and major commercial and
investment banks. These write-downs, initially of mortgage-backed securities but
spreading to credit default swaps and other derivative securities, have caused
many financial institutions to seek additional capital, to merge with larger and
stronger institutions and, in some cases, to fail. Many lenders and
institutional
investors
have reduced and, in some cases, ceased to provide funding to borrowers,
including other financial institutions. This market turmoil and tightening of
credit have led to an increased level of commercial and consumer delinquencies
and defaults, lack of consumer confidence, increased market volatility and
widespread reduction of business activity. In addition, our credit
risk may be exacerbated when our collateral cannot be realized or is liquidated
at prices not sufficient to recover the full amount of our finance receivable
portfolio. Further deterioration of our Finance group’s ability to successfully
collect its finance receivable portfolio and to resolve problem accounts may
adversely affect our cash flow, profitability and financial
condition. As these current market conditions persist or worsen, we
could experience continuing or increased adverse effects on our financial
condition and results of operation.
The
soundness of our suppliers, customers and business partners could affect our
business and results of operations.
All of
our segments are exposed to risks associated with the creditworthiness of our
key suppliers, customers and business partners, including automobile
manufacturers and other industrial customers, customers of our Bell and Cessna
products and home improvement retailers and original equipment manufacturers,
many of which may be adversely affected by the volatile conditions in the
financial markets. These conditions could result in financial instability or
other adverse effects at any of our suppliers, customers or business
partners. The consequences of such adverse effects could include the
interruption of production at the facilities of our customers or
suppliers, the reduction, delay or cancellation of customer orders,
delays in or the inability of customers to obtain financing to purchase our
products, and bankruptcy of customers or other
creditors. Any of these events may adversely affect our cash flow,
profitability and financial condition.
The
soundness of financial institutions could adversely affect us.
We have
relationships with many financial institutions, including lenders under our
credit facilities, and, from time to time, we execute transactions with
counterparties in the financial services industry. As a result,
defaults by, or even rumors or questions about, financial institutions or the
financial services industry generally, could result in losses or defaults by
these institutions. In the event that the volatility of the financial
markets adversely affects these financial institutions or counterparties, we or
other parties to the transactions with us may be unable to access credit
facilities or complete transactions as intended, including the pending sale of
our Fluid & Power business or other divestitures that may be subject to
funding requirements on the part of the buyer, each of which could adversely
affect our business and results of operations.
Any
reduction in our credit rating could increase the cost of our funding from the
capital markets.
The major
rating agencies regularly evaluate us, including our Finance group, 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. Although our
long-term debt is currently rated investment grade by the major rating agencies,
in light of the difficulties in the financial services industry and the
financial markets, there can be no assurance that we will maintain our current
ratings at a level that is acceptable to investors. On October 13, 2008 and then
again on October 21, 2008, Fitch Ratings affirmed its ratings of Textron Inc.
and the Finance group, while lowering its ratings outlook for both groups to
“stable” from “positive”, and then from “stable” to “negative”, citing the
ongoing turmoil in the financial markets and our exposure to our Finance
group. Likewise, Moody’s Investors Service affirmed its ratings of
both groups’ debt, but lowered its outlook on both groups’ debt from “stable” to
“negative” because of challenging conditions facing the Finance group. On
October 16, 2008, Standard & Poor’s Ratings Services affirmed the short-term
ratings of both borrowing groups; however, it placed both groups’ long-term
debt ratings on “CreditWatch” with negative implications, which indicates that
we are being evaluated for possible downgrade if the Finance group fails to
show improvement in its financial and operating performance. Our
failure to maintain acceptable credit ratings could adversely affect the cost
and other terms upon which we are able to obtain funding.
Risks Relating to our
Business
We
have customer concentration with the U.S. Government.
During
2007, we derived approximately 19% of our revenues from sales to a variety of
U.S. Government entities. Our U.S. Government revenues have continued to grow
both organically and through acquisitions. Our ability to compete
successfully for and retain U.S. Government business is highly dependent on
technical excellence, management proficiency, strategic alliances,
cost-effective performance, and the ability to recruit and retain key
personnel. Our revenues from the U.S. Government largely result from
contracts awarded to us under various U.S. Government programs, primarily
defense-related programs. The funding of these programs is subject to
congressional appropriation decisions. Although multiple-year
contracts may be planned in connection with major procurements, Congress
generally appropriates funds on a fiscal year basis even though a program may
continue for several years. Consequently, programs often are only partially
funded initially, and additional funds are committed only as Congress makes
further appropriations. The reduction or termination of funding, or
changes in the timing of funding, for a U.S. Government program in which we
provide products or services would result in a reduction or loss of anticipated
future revenues attributable to that program, and could have a negative impact
on our results of operations. While the overall level of U.S.
defense spending has increased in recent years for numerous reasons, including
increases in funding of operations in Iraq and Afghanistan and the U.S.
Department of Defense’s military transformation initiatives, we can give no
assurance that such spending will continue to grow or not be
reduced. Significant changes in national and international priorities
for defense spending could impact the funding, or the timing of funding, of our
programs, which could negatively impact our results of operations and financial
condition.
U.S.
Government contracts may be terminated at any time and may contain other
unfavorable provisions.
The U.S.
Government typically can terminate or modify any of its contracts with us either
for its convenience or if we default by failing to perform under the terms of
the applicable contract. A termination arising out of our default could expose
us to liability and have an adverse effect on our ability to compete for future
contracts and orders. If any of our contracts are terminated by the
U.S. Government, our backlog would be reduced, in accordance with contract
terms, by the expected value of the remaining work under such contracts. In
addition, on those contracts for which we are teamed with others and are not the
prime contractor, the U.S. Government could terminate a prime contract under
which we are a subcontractor, irrespective of the quality of our products and
services as a subcontractor. In any such event, our financial
condition and results of operations could be adversely affected.
As
a U.S. Government contractor, we are subject to a number of procurement
rules and regulations.
We must
comply with and are affected by laws and regulations relating to the formation,
administration and performance of U.S. Government contracts. These laws and
regulations, among other things, require certification and disclosure of all
cost and pricing data in connection with contract negotiation, define allowable
and unallowable costs and otherwise govern our right to reimbursement under
certain cost-based U.S. Government contracts and restrict the use and
dissemination of classified information and the exportation of certain products
and technical data. Our U.S. Government contracts contain provisions that allow
the U.S. Government to unilaterally suspend us from receiving new contracts
pending resolution of alleged violations of procurement laws or regulations,
reduce the value of existing contracts, issue modifications to a contract and
control and potentially prohibit the export of our products, services and
associated materials. A violation of specific laws and regulations
could result in the imposition of fines and penalties or the termination of our
contracts and, under certain circumstances, suspension or debarment from future
contracts for a period of time. These laws and regulations affect how we do
business with our customers and, in some instances, impose added costs on our
business.
Cost
overruns on U.S. Government contracts could subject us to losses or adversely
affect our future business.
Contract
and program accounting require judgment relative to assessing risks, estimating
contract revenues and costs, and making assumptions for schedule and technical
issues. Due to the size and nature of many of our contracts, the estimation of
total revenues and cost at completion is complicated and subject to many
variables. Assumptions have to be made regarding the length of time to complete
the contract because costs include expected increases in wages and prices for
materials. Incentives or penalties related to performance on contracts are
considered in estimating sales and profit rates and are recorded when there is
sufficient information for us to
assess
anticipated performance. Estimates of award fees also are used in estimating
sales and profit rates based on actual and anticipated awards. Because of the
significance of these estimates, it is likely that different amounts could be
recorded if we used different assumptions or if the underlying circumstances
were to change. Changes in underlying assumptions, circumstances or estimates
may adversely affect our future financial results of operations.
Under
fixed-price contracts, we receive a fixed price irrespective of the actual costs
we incur, and, consequently, any costs in excess of the fixed price are absorbed
by us. Under time and materials contracts, we are paid for labor at negotiated
hourly billing rates and for certain expenses. Under cost reimbursement
contracts, which are subject to a contract-ceiling amount, we are reimbursed for
allowable costs and paid a fee, which may be fixed or performance based.
However, if our costs exceed the contract ceiling or are not allowable under the
provisions of the contract or applicable regulations, we may not be able to
obtain reimbursement for all such costs. Under each type of contract, if we are
unable to control costs we incur in performing under the contract, our financial
condition and results of operations could be adversely affected. Cost overruns
also may adversely affect our ability to sustain existing programs and obtain
future contract awards.
Delays
in aircraft delivery schedules or cancellation of orders may adversely affect
our financial results.
Aircraft
customers, including sellers of fractional share interests, may 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 cause reduced demand for used business jets or helicopters.
We may accept used aircraft on trade-in that would be subject to fluctuations in
the fair market value of the aircraft while in inventory. Reduced demand for new
and used aircraft, spare parts and maintenance can have an adverse effect on our
financial results of operations.
Developing
new products and technologies entails significant risks and
uncertainties.
Delays or
cost overruns in the development and acceptance of new products, or
certification of new aircraft products and other products, could affect our
financial results of operations. These delays could be caused by unanticipated
technological hurdles, production changes to meet customer demands,
unanticipated difficulties in obtaining required regulatory certifications of
new aircraft products, coordination with joint venture partners or failure on
the part of our suppliers to deliver components as agreed. We also could be
adversely affected if the general efficacy of our research and development
investments to develop products is less than expected. Furthermore,
because of the lengthy research and development cycle involved in bringing
certain of our products to market, we cannot predict the economic conditions
that will exist when any new product is complete. A reduction in
capital spending in the aerospace or defense industries could have a significant
effect on the demand for new products and technologies under development, which
could have an adverse effect on our financial performance or results of
operations.
We
have entered, and expect to continue to enter, into joint venture, teaming and
other arrangements, and these activities involve risks and
uncertainties.
We have
entered, and expect to continue to enter, into joint venture, teaming and other
arrangements, and these activities involve risks and uncertainties, including
the risk of the joint venture or related business partner failing to satisfy its
obligations, which may result in certain liabilities to us for guarantees and
other commitments, the challenges in achieving strategic objectives and expected
benefits of the business arrangement, the risk of conflicts arising between us
and our partners and the difficulty of managing and resolving such conflicts,
and the difficulty of managing or otherwise monitoring such business
arrangements.
We
may make acquisitions and dispositions that increase the risks of our
business.
We may
enter into acquisitions or dispositions in the future in an effort to enhance
shareholder value. Acquisitions or dispositions involve a certain amount of
risks and uncertainties that could result in our not achieving expected
benefits. With respect to acquisitions, such risks include
difficulties in integrating newly acquired businesses and operations in an
efficient and cost-effective manner; challenges in achieving expected strategic
objectives, cost savings and other benefits; the risk that the acquired
businesses’ markets do not evolve as anticipated and that the technologies
acquired do not prove to be those needed to be successful in those markets; the
risk that we pay a purchase price that exceeds what the future results of
operations would have merited; and the potential loss of key employees of the
acquired businesses. With respect to dispositions, the
decision
to dispose of a business or asset may result in a writedown of the related
assets if the fair market value of the assets, less costs of disposal, is less
than the book value. In addition, we may encounter difficulty in
finding buyers or alternative exit strategies at acceptable prices and terms and
in a timely manner. We may also underestimate the costs of retained liabilities
or indemnification obligations. In addition, unanticipated delays or
difficulties in effecting acquisitions or dispositions may divert the attention
of our management and resources from our existing operations.
Our
operations could be adversely affected by interruptions of production that are
beyond our control.
Our
business and financial results may be affected by certain events that we cannot
anticipate or that are beyond our control, such as natural disasters and
national emergencies that could curtail production at our facilities and cause
delayed deliveries and canceled orders. In addition, we purchase components and
raw materials and information technology and other services from numerous
suppliers, and, even if our facilities are not directly affected by such events,
we could be affected by interruptions at such suppliers. Such suppliers may be
less likely than our own facilities to be able to quickly recover from such
events and may be subject to additional risks such as financial problems that
limit their ability to conduct their operations.
Our
business could be adversely affected by strikes or work stoppages and other
labor issues.
Approximately
14,000 of our employees, or 32% of our total employees, are
unionized. As a result, we may experience work stoppages, which could
negatively impact our ability to manufacture our products on a timely basis,
resulting in strain on our relationships with our customers and a loss of
revenues. In addition, the presence of unions may limit our flexibility in
responding to competitive pressures in the marketplace, which could have an
adverse effect on our financial results of operations.
In
addition to our workforce, the workforces of many of our customers and suppliers
are represented by labor unions. Work stoppages or strikes at the plants of our
key customers could result in delayed or canceled orders for our products. Work
stoppages and strikes at the plants of our key suppliers could disrupt our
manufacturing processes. Any of these results could adversely affect our
financial results of operations.
Our
international business is subject to the risks of doing business in foreign
countries.
Our
international business exposes us to certain unique and potentially greater
risks than our domestic business, and our exposure to such risks may increase if
our international business continues to grow. Our international
business is subject to local government regulations and procurement policies and
practices, 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. 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.
We
are subject to legal proceedings and other claims.
We are
subject to legal proceedings and other claims arising out of the conduct of our
business, including proceedings and claims relating to private transactions;
government contracts; lack of compliance with applicable laws and regulations;
production partners; product liability; employment; and environmental, safety
and health matters. Under federal government procurement regulations, certain
claims brought by the U.S. Government could result in our being suspended or
debarred from U.S. Government contracting for a period of time. On the basis of
information presently available, we do not believe that existing proceedings and
claims will have a material effect on our financial position or results of
operations. However, litigation is inherently unpredictable, and we could incur
judgments or enter into settlements for current or future claims that could
adversely affect our financial position or our results of operations in any
particular period.
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 group, 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, warranty costs and litigation. These reserves are subject to
adjustment from time to time depending on actual experience and are subject to
many uncertainties, including bankruptcy or other financial problems at key
customers.
In the
case of litigation matters for which reserves have not been established because
the loss is not deemed probable, it is reasonably possible 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.
The
effect on our financial results of many of these factors depends, in some cases,
on our ability to obtain insurance covering potential losses at reasonable
rates.
Currency,
raw material price and interest rate fluctuations may adversely affect our
results.
We are
exposed to a variety of market risks, including the effects of changes in
foreign currency exchange rates, raw material prices and interest rates. We
monitor and manage these exposures as an integral part of our overall risk
management program. In some cases, we purchase derivatives or enter into
contracts to insulate our financial results of operations from these
fluctuations. Nevertheless, changes in currency exchange rates, raw material
prices and interest rates can have substantial adverse effects on our financial
results of operations.
We
may be unable to effectively mitigate pricing pressures.
In some
markets, particularly where we deliver component products and services to
original equipment manufacturers, we face ongoing customer demands for price
reductions, which sometimes are contractually obligated. In some cases, we are
able to offset these reductions through technological advances or by lowering
our cost base through improved operating and supply chain efficiencies. However,
if we are unable to effectively mitigate future pricing pressures, our financial
results of operations could be adversely affected.
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. We depend on these subcontractors and
vendors to meet our contractual obligations to our customers. 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. Such events may adversely affect our financial results of
operations or damage our reputation and relationships with our
customers. 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.
The
increasing costs of certain employee and retiree benefits could adversely affect
our results.
Our
earnings and cash flow may be impacted by the amount of income or expense we
expend or record for employee benefit plans. This is particularly true for our
pension plans, which are dependent on actual plan asset returns and factors used
to determine the value and current costs of plan benefit
obligations.
In
addition, medical costs are rising at a rate faster than the general inflation
rate. Continued medical cost inflation in excess of the general inflation rate
increases the risk that we will not be able to mitigate the rising costs of
medical benefits. Increases to the costs of pension and medical benefits could
have an adverse effect on our financial results of operations.
Unanticipated
changes in our tax rates or exposure to additional income tax liabilities could
affect our profitability.
We are
subject to income taxes in both the U.S. and various foreign jurisdictions, and
our domestic and international tax liabilities are subject to the allocation of
income among these different jurisdictions. Our effective tax rates could be
adversely affected by changes in the mix of earnings in countries with differing
statutory tax rates, changes in the valuation of deferred tax assets and
liabilities or changes in tax laws, which could affect our profitability. In
particular, the carrying value of deferred tax assets is dependent on our
ability to generate future taxable income. In addition, the amount of income
taxes we pay is subject to audits in various jurisdictions, and a material
assessment by a tax authority could affect our profitability.
Item 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated
Results of Operations
Revenues
and Segment Profit
Third
Quarter of 2008
Revenues
increased $423 million, or 14%, to $3.5 billion in the third quarter of 2008,
compared with the third quarter in 2007. This increase is primarily
due to revenues from newly acquired businesses of $229 million, higher pricing
of $100 million, higher manufacturing volume and product mix of $96 million, and
favorable foreign exchange in the Industrial segment of $28
million. These increases were partially offset by lower revenue for
the Finance segment of $30 million.
Segment
profit decreased $1 million to $399 million in the third quarter of 2008,
compared with the third quarter in 2007. This decrease is primarily
due to unfavorable cost performance of $41 million and lower profit in the
Finance segment of $36 million, which was substantially offset by the benefit
from higher volume and mix of $39 million, the benefit from newly acquired
businesses of $22 million and higher pricing in excess of inflation of $18
million.
First
Nine Months of 2008
Revenues
increased $1,616 million, or 18%, to $10.6 billion in the first nine months of
2008 compared with the first nine months of 2007. This increase is
primarily due to revenues from newly acquired businesses of $693 million, higher
manufacturing volume and product mix of $627 million, higher pricing of $285
million and favorable foreign exchange in the Industrial segment of $127
million. These increases were partially offset by lower revenues in
the Finance Segment of $88 million and the impact of last year’s reimbursement
of costs related to Hurricane Katrina of $28 million.
Segment
profit increased $127 million, or 11%, to $1.3 billion in the first nine months
of 2008, compared with the first nine months of 2007. This increase
is primarily due to the benefit from higher volume and mix of $129 million,
higher pricing in excess of inflation of $57 million and the benefit from newly
acquired businesses of $49 million, partially offset by lower profit in the
Finance segment of $101 million and unfavorable cost performance of $11
million.
Backlog
During
the third quarter of 2008, backlog in our aircraft and defense businesses
remained at the second quarter level of $23.5 billion, which represents a $4.7
billion increase from the end of 2007. Since the end of 2007,
Cessna’s backlog has grown approximately $3.0 billion, with approximately 68% of
these new business jet orders from international customers, compared with
approximately 51% in the corresponding period of
2007. Approximately $2.4 billion of Cessna’s backlog relates to the
Columbus aircraft with initial customer deliveries expected to begin in
2014. Bell’s backlog has increased $1.5 billion since the
end of 2007 primarily as a result of a multi-year procurement contract entered
into in March for the V-22 tiltrotor aircraft, which added $1.2 billion to
backlog for the first funded lot and certain advanced procurement for additional
lots. The remaining contract value of $4.7 billion will be reflected
in backlog as each subsequent production lot is funded.
Corporate
Expenses and Other, net
Corporate
expenses and other, net decreased $14 million and $48 million in the third
quarter and first nine months of 2008, respectively, compared with the
corresponding periods of 2007, primarily due to lower pre-tax share-based
compensation expense largely attributable to depreciation in our stock price. We
utilize cash settlement forward contracts on our common stock to modify
compensation expense to reduce potential variability resulting from changes in
our stock price. With these contracts, changes in our stock price
have no significant impact on net income.
Income
Taxes
A
reconciliation of the federal statutory income tax rate to the effective income
tax rate is provided below:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
Federal
statutory income tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase
(decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income
taxes
|
|
|
3.2 |
|
|
|
0.8 |
|
|
|
1.8 |
|
|
|
1.1 |
|
Foreign tax rate
differential
|
|
|
(2.5 |
) |
|
|
0.6 |
|
|
|
(4.4 |
) |
|
|
(0.3 |
) |
Manufacturing
deduction
|
|
|
(1.6 |
) |
|
|
(1.6 |
) |
|
|
(1.6 |
) |
|
|
(1.6 |
) |
Equity hedge expense
(income)
|
|
|
2.9 |
|
|
|
(1.5 |
) |
|
|
2.4 |
|
|
|
(1.2 |
) |
Interest on tax
contingencies
|
|
|
0.1 |
|
|
|
1.1 |
|
|
|
1.6 |
|
|
|
1.1 |
|
Favorable tax
settlements
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1.0 |
) |
Other, net
|
|
|
(0.9 |
) |
|
|
(2.8 |
) |
|
|
(0.5 |
) |
|
|
(3.0 |
) |
Effective
income tax rate
|
|
|
36.2 |
% |
|
|
31.6 |
% |
|
|
34.3 |
% |
|
|
30.1 |
% |
Discontinued
Operations
On
September 10, 2008, we entered into an agreement to sell our Fluid & Power
business unit to Clyde Blowers Limited, a UK-based worldwide leader in the areas
of power, materials handling, intermodal transport and logistics and pump
technologies. Included in the transaction is the sale of all four
Textron Fluid & Power product lines - which are Gear Technologies,
Hydraulics, Maag Pump Systems, Union Pump and each of their respective
brands. Under the agreement, we will receive approximately $526
million in cash, a six-year note with a face value of $28 million and up to $50
million based on final 2008 operating results, primarily payable in a six-year
note; in addition, certain liabilities will be assumed by Clyde Blowers
Limited. The sale is subject to certain closing conditions and
completion of the buyer's funding, and is scheduled to close in November,
pending regulatory reviews and approvals.
Beginning
with the third quarter of 2008, the results of this business, which were
previously reported in the Industrial segment, have been presented as
discontinued operations for all periods presented in our consolidated financial
statements.
Results
of our discontinued businesses, including the operating results of Fluid &
Power, are as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
Revenue
|
|
$ |
174 |
|
|
$ |
153 |
|
|
$ |
504 |
|
|
$ |
438 |
|
Income
from discontinued operations of Fluid & Power, before
income
taxes
|
|
|
17 |
|
|
|
24 |
|
|
|
36 |
|
|
|
30 |
|
Income
taxes
|
|
|
7 |
|
|
|
7 |
|
|
|
11 |
|
|
|
7 |
|
Income
from discontinued operations of Fluid & Power, net of
income
taxes
|
|
|
10 |
|
|
|
17 |
|
|
|
25 |
|
|
|
23 |
|
Transaction-related
costs for Fluid & Power disposal
|
|
|
(8 |
) |
|
|
- |
|
|
|
(8 |
) |
|
|
- |
|
(Loss)
income from other discontinued operations
|
|
|
(6 |
) |
|
|
13 |
|
|
|
(14 |
) |
|
|
6 |
|
Income
from discontinued operations, net of income taxes
|
|
$ |
(4 |
) |
|
$ |
30 |
|
|
$ |
3 |
|
|
$ |
29 |
|
We expect
the sale will generate after-tax cash proceeds of approximately $350 million and
an after-tax gain of about $85 million. (Loss) income from other discontinued
operations primarily relates to the resolution of certain retained liabilities
of the Fastening Systems business.
Segment
Analysis
Effective
at the beginning of fiscal 2008, we changed our segment reporting by separating
the former Bell segment into two segments: the Bell segment and the Defense
& Intelligence segment. We now operate in, and report financial
information for, the following five business segments: Cessna, Bell, Defense
& Intelligence, Industrial and Finance. These segments reflect the manner in
which we now manage our operations. Prior periods have been recast to reflect
the new segment reporting structure.
Segment
profit is an important measure used to evaluate performance and for
decision-making purposes. Segment profit for the manufacturing
segments excludes interest expense and certain corporate
expenses. The measurement for the Finance segment includes interest
income and expense.
Cessna
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
Revenues
|
|
$ |
1,418 |
|
|
$ |
1,268 |
|
|
$ |
4,165 |
|
|
$ |
3,439 |
|
Segment
profit
|
|
$ |
238 |
|
|
$ |
222 |
|
|
$ |
707 |
|
|
$ |
577 |
|
In the
third quarter of 2008, Cessna’s revenues and segment profit increased $150
million and $16 million, respectively, compared with the third quarter of
2007. Revenues increased largely due to higher pricing of $64
million, higher volume of $62 million and a benefit from a newly acquired
business of $24 million. The higher volume primarily reflects higher
jet and Caravan deliveries of $84 million partially offset by lower used
aircraft sales of $36 million. We delivered 124 jets in the third
quarter, compared with 103 jets in the third quarter of 2007. Segment
profit increased primarily due to the $25 million impact from higher volume and
$24 million in pricing in excess of inflation, partially offset by $17 million
in higher engineering and product development expense, $9 million in
higher overhead costs, $6 million in inventory write-downs for used aircraft and
$5 million in inventory reserves.
In the
first nine months of 2008, Cessna’s revenues and segment profit increased $726
million and $130 million, respectively, compared with the first nine months of
2007. Revenues increased largely due to higher volume of $486
million, improved pricing of $191 million and a $49 million benefit from a
newly acquired business. The higher volume primarily reflects higher
jet and Caravan deliveries of $504 million, partially offset by lower used
aircraft sales of $42 million. We delivered 336 jets in the first
nine months of 2008, compared with 265 jets in the first nine months of
2007. Segment profit increased primarily due to the $132 million
impact from higher volume, pricing in excess of inflation of $81 million and
favorable warranty performance of $19 million, partially offset by higher
engineering and product development expense of $51 million, higher overhead
costs of $12 million, $11 million in inventory write-downs for used aircraft and
$6 million in inventory reserves.
Bell
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
Revenues
|
|
$ |
702 |
|
|
$ |
650 |
|
|
$ |
1,974 |
|
|
$ |
1,826 |
|
Segment
profit
|
|
$ |
63 |
|
|
$ |
58 |
|
|
$ |
184 |
|
|
$ |
90 |
|
U.S.
Government Business
Revenues
and segment profit for Bell’s U.S. Government business decreased $44 million and
$11 million, respectively in the third quarter of 2008, compared with the third
quarter of 2007. The decrease in revenues is mainly due to lower
V-22 volume of $53 million, partially offset by higher H-1 program revenue of
$14 million, and higher spares and service volume of $6 million. The
lower V-22 volume is primarily due to the timing of deliveries compared to the
third quarter of 2007. Segment profit decreased primarily due to unfavorable
cost performance of $8 million, largely due to the 2007 recovery of $8 million
in Armed Reconnaissance Helicopter (ARH) System Development and Demonstration
(SDD) launch-related costs, and lower volume of $8 million.
In the
first nine months of 2008, revenues and segment profit for this business
increased $103 million and $80 million, respectively, compared with the first
nine months of 2007. The increase in revenues is mainly due to higher
H-1 program revenue of $50 million, higher V-22 volume of $26 million and higher
spares and service volume of $25 million. Segment profit increased
primarily due to improved cost performance of $70 million and a $9 million
contribution from higher volume and mix. The improved cost
performance is largely due to $65 million in net charges related to the ARH
program in the first nine months of 2007, which included a $73 million charge
for the low-rate initial production (LRIP) program, partially offset by the $8
million cost recovery for the SDD program.
ARH Program Termination — The
ARH program included a development phase, covered by the SDD contract, and a
production phase. During 2007, we continued to restructure the
production portion of this program through negotiations with the U.S.
Government, which included reducing the number of units and modifying the
pricing and delivery schedules. Based on the status of the
negotiations during the year and contractual commitments with our vendors
related to materials for the anticipated production units procured in advance of
the LRIP contract awards, we established reserves in 2007 representing our best
estimate of the expected loss for this program. At December 29, 2007,
reserves for this program totaled $50 million. During 2008, we
continued to receive inventory and incur additional vendor obligations for
long-lead time materials related to the anticipated LRIP contracts.
In the
second quarter of 2008, we learned that, based on estimated projected costs, the
ARH program required recertification under the Nunn-McCurdy Act in order for the
program to continue, and the U.S. Government began the certification
process. At the end of the day on October 16, 2008, we received
notification that the U.S. Government would not certify the continuation of this
program to Congress under the Nunn-McCurdy Act and thus had decided to terminate
the program for the convenience of the Government. 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.
At
October 27, 2008, our LRIP-related vendor obligations are estimated to be up to
approximately $80 million. We have begun the process of assessing the
amount of the ultimate vendor liability, as well as evaluating the utility the
related inventory has to other Bell programs, customers, or to the
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. Accordingly, no additional reserves are deemed necessary at
this time.
Commercial
Business
Revenues
and segment profit for Bell’s commercial business increased $96 million and $16
million, respectively, in the third quarter of 2008, compared with the third
quarter of 2007. The increase in revenues for this business is
primarily due to higher helicopter volume of $60 million, higher pricing of $24
million and revenues from newly acquired businesses of $9
million. The increase in volume relates primarily to additional
deliveries of 13 helicopters during the third quarter of 2008 (primarily 412s
and 407s), compared to the corresponding period in 2007. The increase
in segment profit reflects the impact of higher volume and mix of $25 million
and higher pricing in excess of inflation of $16 million, partially offset by
unfavorable cost performance of $25 million. The unfavorable cost
performance primarily reflects an increase in selling and administrative expense
of $22 million, largely due to higher project-related consulting expenses and
the impact of the recovery of $5 million in ARH SDD costs in 2007, and an
increase in product liability costs of $7 million, partially offset by $12
million of costs incurred in 2007 related to our exit of certain
models.
In the
first nine months of 2008, revenues and segment profit for Bell’s commercial
business increased $45 million and $14 million, respectively, compared with the
first nine months of 2007. The increase in revenues for this business
is primarily due to higher pricing of $54 million and revenues from newly
acquired businesses of $20 million, partially offset by lower helicopter volume
of $35 million. The increase in segment profit primarily reflects
higher pricing in excess of inflation of $25 million, partially offset by
unfavorable cost performance of $15 million. The unfavorable cost performance
primarily reflects an increase in selling and administrative expense of $14
million, largely due to higher project-related consulting expenses and the
impact of the recovery of $5 million in ARH SDD costs in 2007, higher
engineering and product development expense of $13 million
and an
increase in product liability costs of $9 million, partially offset by costs
incurred in 2007 related to our exit of certain models of $13 million and higher
royalty income of $9 million, primarily related to the Model A139.
Defense
& Intelligence
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
Revenues
|
|
$ |
503 |
|
|
$ |
326 |
|
|
$ |
1,606 |
|
|
$ |
1,004 |
|
Segment
profit
|
|
$ |
74 |
|
|
$ |
43 |
|
|
$ |
212 |
|
|
$ |
161 |
|
Revenues
and segment profit increased $177 million and $31 million, respectively, in the
third quarter of 2008, compared with the third quarter of 2007. The
increase in revenues is primarily due to $188 million in revenues from our newly
acquired AAI Corporation (AAI) business, partially offset by lower volume of $14
million. Segment profit increased primarily due to the benefit
resulting from the AAI acquisition of $21 million and favorable cost performance
of $14 million, largely related to the ASV program.
In the
first nine months of 2008, revenues and segment profit increased $602 million
and $51 million, respectively, compared with the first nine months of
2007. The increase in revenues is primarily due to $608 million in
revenues from our newly acquired AAI business and $67 million in higher volume
for our ASV aftermarket, Lycoming and Intelligent Battlefield Systems
products, partially offset by lower Sensor Fused Weapon volume of $45 million
and a $28 million reimbursement of costs in the first nine months of 2007
related to Hurricane Katrina. Segment profit increased in the first
nine months of 2008 primarily due to the benefit from the newly acquired AAI
business of $55 million and favorable performance for the ASV of $28 million,
partially offset by a 2007 cost reimbursement related to Hurricane Katrina of
$28 million.
Industrial
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
Revenues
|
|
$ |
726 |
|
|
$ |
652 |
|
|
$ |
2,320 |
|
|
$ |
2,092 |
|
Segment
profit
|
|
$ |
6 |
|
|
$ |
23 |
|
|
$ |
91 |
|
|
$ |
138 |
|
Revenues
in the Industrial segment increased $74 million, while segment profit decreased
$17 million in the third quarter of 2008, compared with the third quarter of
2007. Revenues increased primarily due to higher volume of $31
million, a favorable foreign exchange impact of $28 million, the favorable
impact of an acquisition of $9 million and higher pricing of $6
million. Segment profit decreased primarily due to inflation in
excess of higher pricing of $21 million, largely due to significant increases in
commodity prices, and unfavorable mix of $6 million, partially offset by
improved cost performance of $11 million.
In the
first nine months of 2008, revenues in the Industrial segment increased $228
million, while segment profit decreased $47 million compared to the first nine
months of 2007. Revenues increased primarily due to a favorable
foreign exchange impact of $126 million, higher volume of $61 million, higher
pricing of $24 million and the favorable impact of an acquisition of $17
million. Segment profit decreased primarily due to inflation in
excess of higher pricing of $46 million and unfavorable mix of $22 million,
partially offset by improved cost performance of $8 million and a favorable
foreign exchange impact of $5 million.
Finance
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
Revenues
|
|
$ |
184 |
|
|
$ |
214 |
|
|
$ |
575 |
|
|
$ |
663 |
|
Segment
profit
|
|
$ |
18 |
|
|
$ |
54 |
|
|
$ |
73 |
|
|
$ |
174 |
|
Revenues
decreased $30 million and $88 million in the third quarter and first nine months
of 2008, respectively, compared with the corresponding periods of 2007,
primarily due to the following:
(In
millions)
|
|
Quarter
|
|
|
Year-To-Date
|
|
Lower market interest
rates
|
|
$ |
(42 |
) |
|
$ |
(111 |
) |
Benefit from higher
volume
|
|
|
10 |
|
|
|
17 |
|
Benefit from variable-rate
receivable interest rate floors
|
|
|
6 |
|
|
|
12 |
|
Gains on the sale of leveraged
lease investment
|
|
|
- |
|
|
|
(16 |
) |
Leveraged lease residual value
impairments
|
|
|
- |
|
|
|
8 |
|
Segment
profit decreased $36 million and $101 million in the third quarter and first
nine months of 2008, respectively, compared with the corresponding periods of
2007, primarily due to the following:
(In
millions)
|
|
Quarter
|
|
|
Year-To-Date
|
|
Increase in the provision for
loan losses
|
|
$ |
(28 |
) |
|
$ |
(79 |
) |
Higher borrowing costs
relative to market rates
|
|
|
(7 |
) |
|
|
(26 |
) |
Benefit from variable-rate
receivable interest rate floors
|
|
|
6 |
|
|
|
12 |
|
Gains on the sale of leveraged
lease investment
|
|
|
- |
|
|
|
(16 |
) |
Leveraged lease residual value
impairments
|
|
|
- |
|
|
|
8 |
|
In the
third quarter of 2008, the increase in the provision for loan losses was
primarily attributable to increased loan loss provisions in the distribution
finance division as general U.S. economic conditions have continued to impact
borrowers. The increase in the provision for loan losses during the
first nine months of 2008 was primarily driven by $43 million in higher loan
loss provisions in the distribution finance division, a $16 million reserve
established for one account in the asset-based lending division and a $16
million reserve established for one account in the golf finance
division.
Our
borrowing costs have increased relative to the Federal Funds target rate as a
result of the continued volatility in the credit markets. Dramatic
reductions in the Federal Funds target rate from January through April were
generally reflected in our finance receivable portfolio yield in advance of
being reflected in our borrowing costs. LIBOR rates, on which the
majority of our variable-rate debt portfolio is based, have remained high
relative to the Federal Funds rate and credit spreads have widened on issuances
of commercial paper and term debt as compared to 2007. This increase
in borrowing costs was partially offset by the benefit received from
variable-rate receivables with interest rate floors, which began earning higher
yields relative to market rate indices as market interest rates decreased
compared to 2007. In the distribution finance division, the impact of higher
borrowing costs relative to market rates was $7 million and $19 million for the
three and nine months ended September 27, 2008, respectively, as its portfolio
contains assets that earn interest primarily based on the Prime rate, while the
portfolio is funded by debt obligations on which interest is based on commercial
paper and LIBOR rates.
The
following table presents information about the Finance segment’s credit
performance:
(Dollars
in millions)
|
|
|
|
|
|
|
Nonperforming
assets
|
|
$ |
250 |
|
|
$ |
123 |
|
Nonaccrual
finance receivables
|
|
$ |
189 |
|
|
$ |
79 |
|
Allowance
for losses
|
|
$ |
137 |
|
|
$ |
89 |
|
Ratio
of allowance for losses to finance receivables
|
|
|
1.60 |
% |
|
|
1.03 |
% |
Ratio
of nonperforming assets to total finance assets
|
|
|
2.67 |
% |
|
|
1.34 |
% |
Ratio
of allowance for losses to nonaccrual finance receivables
|
|
|
72.7 |
% |
|
|
111.7 |
% |
60+
days contractual delinquency as a percentage of finance
receivables
|
|
|
1.06 |
% |
|
|
0.43 |
% |
Portfolio
quality statistics weakened during the first nine months of 2008, compared to
year-end 2007. The increase in nonperforming assets is primarily the
result of one troubled account in the asset-based lending business and one
troubled account in the golf finance division; however, nonperforming assets and
net charge-offs also increased significantly in the distribution finance
division reflecting weakening U.S. economic conditions. We expect
nonperforming assets and charge-offs to remain high for the remainder of 2008
compared to the strong portfolio performance of 2007. As a result of
this trend, we have increased our allowance for losses on finance receivables by
$48 million, or 54%, during the first nine months of 2008.
The
increase in our allowance for losses represents management’s evaluation of the
recoverability of our finance receivables based on a number of factors as of
September 27, 2008. These factors include characteristics of the
existing accounts, historical loss experience, collateral values, borrower
specific information, industry trends and general economic conditions and
trends. The evaluation of our allowance for losses does not include
the potential long-term effect of prolonged changes in general economic
conditions and trends that have occurred or have become more severe subsequent
to the end of the quarter. Volatility in the credit markets has
reached an unprecedented level since the end of the third quarter. We
believe that a prolonged credit market disruption of this nature could have a
significant negative impact on many of the factors we utilize to evaluate the
allowance for losses and could result in a material increase in losses in future
periods. If our allowance for losses as a percentage of finance
receivables were to increase to our highest historical level of 2.74%, compared
to 1.60% at September 27, 2008, the corresponding impact would be a $98 million
increase in the provision for losses.
Liquidity
and Capital Resources
Our
financings are conducted through two separate borrowing groups. The
Manufacturing group consists of Textron Inc., consolidated with the entities
that operate in the Cessna, Bell, Defense & Intelligence and Industrial
segments, while the Finance group consists of the Finance segment, comprised of
Textron Financial Corporation and its subsidiaries. We designed this framework
to enhance our borrowing power by separating the Finance group. Our
Manufacturing group operations include the development, production and delivery
of tangible goods and services, while our Finance group provides financial
services. Due to the fundamental differences between each borrowing group’s
activities, investors, rating agencies and analysts use different measures to
evaluate each group’s performance. To support those evaluations, we present
balance sheet and cash flow information for each borrowing group within the
Consolidated Financial Statements.
We assess
liquidity for our Manufacturing group in terms of our ability to provide
adequate cash to fund our operating, investing and financing activities. The
principal source of liquidity for the Manufacturing group is operating cash
flows. We also have liquidity available to us via the commercial paper market
and committed bank lines of credit, as well as access to the public capital
markets for our long-term capital needs.
Our
Finance group mitigates liquidity risk (i.e., the risk that we will be unable to
fund maturing liabilities or the origination of new finance receivables) by
developing and preserving a variety of reliable sources of capital. Cash for the
Finance group is provided from finance receivable collections, sales and
securitizations, as well as the issuance of commercial paper and term debt in
the public and private markets. This diversity of capital resources is intended
to enhance its funding flexibility, limits dependence on any one source of
funds, and results in cost-
effective
funding. The Finance group also can borrow from the Manufacturing group when the
availability of such borrowings creates an economic advantage to Textron in
comparison with borrowings from other sources.
Recent
Developments
In recent
weeks, volatility and disruption in the capital markets have reached
unprecedented levels. In light of current market conditions and in
order to reduce our capital requirements, on October 13, 2008, our Board of
Directors approved the recommendation of management to downsize the Finance
group. Under the approved plan, we will be exiting the Finance group’s
asset-based lending and structured capital divisions, and several additional
product lines through an orderly liquidation as market conditions allow, over
the next two to three years. These assets total about $2 billion in
managed finance receivables within the Finance group’s $11.4 billion portfolio.
The Finance group will also limit new originations in its distribution finance,
golf and resort portfolios, which in combination with liquidations in the
businesses we are exiting, should result in a 10% reduction in managed
receivables by the end of 2009.
As a
result of the decision to downsize the Finance group, we expect to take a
non-cash impairment charge in the fourth quarter of up to $169 million, which
represents the current goodwill balance for the Finance group. This impairment
charge will likely result in a fixed charge coverage ratio, at the end of 2008
of less than the 1.25 times required under the Support Agreement dated as of May
25, 1994 between the two borrowing groups. As a result, the
Manufacturing group expects that, as required by the Support Agreement, it will
make a payment to the Finance group equaling the difference between pre-tax
earnings before extraordinary items plus Fixed Charges in the actual fixed
charge coverage calculation and the amount that would have been required for
pre-tax earnings before extraordinary items plus Fixed Charges to meet the 1.25
times requirement for the year ending January 3, 2009. This cash
payment is expected to be required by the end of the first quarter of 2009, and
we currently estimate that it will be for an amount up to $200
million.
In
October, as discussed on page 25, we received notification that the U.S.
Government would not certify the continuation of the ARH program and had decided
to terminate the program. We have ARH LRIP-related inventory and
vendor obligations that are estimated to be up to approximately $80 million for
which we could be required to begin making payments in the fourth quarter of
2008 and into 2009.
In July
2008, we announced our plan to utilize up to $500 million to repurchase our
common stock, and subsequently, we announced that approximately half of the
proceeds from the sale of the Fluid & Power business would be utilized for
share repurchases. In September, we suspended all share repurchase
activity until after financial markets stabilize. We expect that our
liquidity will be enhanced by the after-tax cash proceeds of approximately $350
million that we expect to receive upon the closing of the Fluid & Power
sale, which is anticipated in November.
Bank
Facilities and Other Sources of Capital
We have a
policy of maintaining unused committed bank lines of credit in an amount not
less than outstanding commercial paper balances. These facilities are in support
of commercial paper and letters of credit issuances only, and neither of these
lines of credit was drawn at September 27, 2008 or December 29,
2007.
Due to
the recent market turmoil that has resulted in an increase in interest rates and
a decrease in duration for commercial paper issuances, we plan to reduce our
total commercial paper outstanding with cash provided by operating activities, a
reduction in finance receivables, proceeds from the sale of the Fluid &
Power business, and if market conditions permit, from the issuance of longer
term debt, including securitizations.
At
September 27, 2008, we have the following primary committed credit facilities
with 18 banks:
(In
millions)
|
|
Facility
Amount
|
|
|
Commercial
Paper
Outstanding
|
|
|
Letters
of
Credit
Outstanding
|
|
|
Amount
Not Reserved as Support for Commercial Paper and Letters of
Credit
|
|
Manufacturing
group — multi-year facility expiring in 2012*
|
|
$ |
1,250 |
|
|
$ |
227 |
|
|
$ |
21 |
|
|
$ |
1,002 |
|
Finance
group — multi-year facility expiring in 2012
|
|
|
1,750 |
|
|
|
1,445 |
|
|
|
10 |
|
|
|
295 |
|
Total
|
|
$ |
3,000 |
|
|
$ |
1,672 |
|
|
$ |
31 |
|
|
$ |
1,297 |
|
*
The Finance group is permitted to borrow under this multi-year
facility.
Of the $3
billion facility amount, 100% is provided by banks with a Standard & Poor’s
rating of A or higher, and within that amount 71% is provided by banks with a
Standard & Poor’s rating of AA- or higher; 95% is provided by banks with a
Moody’s rating of A1 or higher, and within that amount, 85% is provided by banks
with a Moody’s rating of Aa3 or higher.
Borrowings
historically have been a secondary source of funds for our Manufacturing group
and, along with the collection of finance receivables, are a primary source of
funds for our Finance group. Both borrowing groups utilize a broad base of
financial sources for their respective liquidity and capital needs. For the
Manufacturing group, credit ratings are predominantly a function of its ability
to generate operating cash flows and satisfy certain financial
ratios. For the Finance group, credit ratings are a critical
component of its ability to access the public term debt and commercial paper
markets, and also impact the cost of those borrowings. Factors that
can affect our credit ratings include changes in our operating performance, the
economic environment, conditions in the industries in which we operate, our
financial position and changes in our business strategy. Since
high-quality credit ratings provide us with access to a broad base of global
investors at an attractive cost, we target a long-term A rating from the
independent debt-rating agencies. The credit ratings and outlooks of these three
debt-rating agencies by borrowing group are as follows:
|
|
Fitch
Ratings
|
|
|
Moody’s
|
|
|
Standard
& Poor’s
|
|
Long-term
ratings:
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
A- |
|
|
|
A3 |
|
|
|
A- |
|
Finance
|
|
|
A- |
|
|
|
A3 |
|
|
|
A- |
|
Short-term
ratings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
F2 |
|
|
|
P2 |
|
|
|
A2 |
|
Finance
|
|
|
F2 |
|
|
|
P2 |
|
|
|
A2 |
|
Outlook
|
|
Negative
|
|
|
Negative
|
|
|
Watch
(Negative)
|
|
On
October 13, 2008 and then again on October 21, 2008, Fitch Ratings affirmed its
ratings of both borrowing groups’ debt, while lowering its ratings outlook for
both groups to “stable” from “positive”, and then from “stable” to “negative”,
citing the ongoing turmoil in the financial markets and the Manufacturing
group’s exposure to the Finance group. Likewise, Moody’s affirmed its
ratings of both borrowing groups’ debt on October 22, 2008, but lowered its
outlook from “stable” to “negative” because of challenging conditions facing the
Finance group. On October 16, 2008, Standard & Poor’s affirmed the
short-term ratings of both borrowing groups; however, it placed both borrowing
groups’ long-term debt ratings on “CreditWatch” with negative implications,
which indicates that we are being evaluated for possible downgrade if the
Finance group fails to show improvement in its financial and operating
performance. Our failure to maintain acceptable credit ratings could adversely
affect the cost and other terms upon which we are able to obtain
funding.
The debt
(net of cash)-to-capital ratio for our Manufacturing group was 37% at September
27, 2008, compared with 32% at December 29, 2007, and the gross debt-to-capital
ratio at September 27, 2008 was 39% compared with 38% at December 29,
2007.
Under
separate shelf registration statements filed with the Securities and Exchange
Commission, the Manufacturing group may issue an unlimited amount of public debt
and other securities, and the Finance group may issue an unlimited amount of
public debt securities. During the first nine months of 2008, the Finance group
issued $675 million of term debt under its registration statement.
Finance
Group’s Contractual Obligations
We have
updated our 10-K disclosure of the Finance group’s contractual obligations, as
defined by reporting regulations. Due to the nature of finance
companies, we have also included contractual cash receipts that we expect to
receive in the future. The Finance group generally borrows 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 September 27, 2008, 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 (2)
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,445 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,445 |
|
Other
short-term debt
|
|
|
36 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
36 |
|
Term
debt
|
|
|
1,239 |
|
|
|
2,567 |
|
|
|
1,229 |
|
|
|
53 |
|
|
|
578 |
|
|
|
472 |
|
|
|
6,138 |
|
Off-balance
sheet debt
|
|
|
2,113 |
|
|
|
77 |
|
|
|
77 |
|
|
|
111 |
|
|
|
79 |
|
|
|
211 |
|
|
|
2,668 |
|
Total
payments due
|
|
|
3,388 |
|
|
|
2,644 |
|
|
|
1,306 |
|
|
|
1,609 |
|
|
|
657 |
|
|
|
683 |
|
|
|
10,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and contractual receipts: (1)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
receivable receipts
|
|
|
2,570 |
|
|
|
1,571 |
|
|
|
1,118 |
|
|
|
830 |
|
|
|
695 |
|
|
|
1,790 |
|
|
|
8,574 |
|
Off-balance
sheet finance receivable receipts
|
|
|
2,294 |
|
|
|
77 |
|
|
|
77 |
|
|
|
111 |
|
|
|
79 |
|
|
|
231 |
|
|
|
2,869 |
|
Total
contractual receipts
|
|
|
4,864 |
|
|
|
1,648 |
|
|
|
1,195 |
|
|
|
941 |
|
|
|
774 |
|
|
|
2,021 |
|
|
|
11,443 |
|
Cash
|
|
|
136 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
136 |
|
Total
cash and contractual receipts
|
|
|
5,000 |
|
|
|
1,648 |
|
|
|
1,195 |
|
|
|
941 |
|
|
|
774 |
|
|
|
2,021 |
|
|
|
11,579 |
|
Net
cash and contractual receipts (payments)
|
|
$ |
1,612 |
|
|
$ |
(996 |
) |
|
$ |
(111 |
) |
|
$ |
(668 |
) |
|
$ |
117 |
|
|
$ |
1,338 |
|
|
$ |
1,292 |
|
Cumulative
net cash and contractual receipts
(payments)
|
|
$ |
1,612 |
|
|
$ |
616 |
|
|
$ |
505 |
|
|
$ |
(163 |
) |
|
$ |
(46 |
) |
|
$ |
1,292 |
|
|
|
|
|
(1)
|
Contractual
receipts and payments exclude finance charges from receivables, debt
interest payments and other items.
|
(2)
|
Commercial
paper outstanding at September 27, 2008 is reflected as being repaid
in connection with the maturity of our $1.75 billion committed multi-year
credit facility in 2012. At September 27, 2008, this facility had
$295 million not reserved as support for commercial paper and letters of
credit. Actual commercial paper issuances generally are
outstanding for less than 90 days and are replaced by new commercial paper
borrowing based on current needs.
|
(3)
|
Finance
receivable receipts are based on contractual cash flows. These
amounts 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.
|
This
liquidity profile indicates the Finance group’s ability to repay outstanding
funding obligations through 2011, assuming contractual collection of all finance
receivables, absent access to new sources of liquidity or origination of
additional finance receivables. In addition, at September 27, 2008,
our Finance group had $481 million in other liabilities, primarily including
accounts payable and accrued expenses, that are payable within the next 12
months.
Manufacturing
Group Cash Flows of Continuing Operations
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
Operating
activities
|
|
$ |
652 |
|
|
$ |
649 |
|
Investing
activities
|
|
$ |
(417 |
) |
|
$ |
(210 |
) |
Financing
activities
|
|
$ |
(459 |
) |
|
$ |
(352 |
) |
Operating
cash flows for the Manufacturing group increased primarily due to earnings
growth, partially offset by higher working capital
requirements. Changes in our working capital components resulted in a
$480 million use of cash in the first nine months of 2008, compared to a $288
million use of cash in the corresponding period of 2007. Cash used
for inventories continues to be a significant use of operating cash due to
increased production and inventory build-up primarily to support increasing
sales at Bell and Cessna.
The
Manufacturing group used more cash for investing activities primarily due to
$109 million in cash payments made in 2008, largely related to the acquisition
of AAI at the end of 2007, and a $100 million increase in capital
expenditures.
More cash
was used by the Manufacturing group for financing activities primarily due to a
$229 million increase related to share repurchases, $75 million in higher
dividend payments due to the timing of quarterly payments and lower proceeds
from stock option exercises of $41 million. These decreases were partially
offset by an incremental increase in borrowings of $244 million.
The
increase in share repurchases is due to a 5.7 million increase in the number of
shares repurchased in the first nine months of 2008, compared with the
corresponding period of 2007. In the first nine months of 2008, we
repurchased 11.6 million shares for $533 million. In the first nine months of
2007, we repurchased 5.9 million shares for $295 million and settled a $9
million payable for unsettled trades from the prior year. As discussed above, we
have suspended all share repurchase activity until after financial markets
stabilize.
Finance
Group Cash Flows of Continuing Operations
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
Operating
activities
|
|
$ |
154 |
|
|
$ |
239 |
|
Investing
activities
|
|
$ |
(225 |
) |
|
$ |
221 |
|
Financing
activities
|
|
$ |
148 |
|
|
$ |
(469 |
) |
For the
Finance group, less cash was provided by operating activities primarily due to
the timing of payments of taxes and accrued liabilities. The Finance
group used more cash for investing activities primarily due to the $351 million
impact of lower repayments and proceeds received from receivable sales,
including securitizations to fund originations, and the purchase of notes
receivable issued by securitization trusts of $100 million. Financing
activities generated more cash for the Finance group primarily due to higher
incremental borrowings as we relied less on proceeds from receivable sales,
including securitizations to fund asset growth.
Consolidated
Cash Flows of Continuing Operations
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
Operating
activities
|
|
$ |
650 |
|
|
$ |
594 |
|
Investing
activities
|
|
$ |
(628 |
) |
|
$ |
170 |
|
Financing
activities
|
|
$ |
(169 |
) |
|
$ |
(686 |
) |
Operating
cash flows increased primarily due to earnings growth, a $149 million combined
increase related to higher repayments and lower originations of captive finance
receivables, partially offset by working capital growth, largely related to
growth in inventory levels due to increased production and inventory build-up in
support of increasing sales at Bell and Cessna.
We used
more cash for investing activities primarily due to the $351 million impact of
lower repayments and proceeds received from receivable sales, including
securitizations to fund originations, $109 million in payments in 2008, largely
related to the acquisition of AAI at the end of 2007, the 2008 purchase of $100
million in notes receivable issued by securitization trusts and a $100 million
increase in capital expenditures.
Cash
flows used for financing activities reflect higher incremental borrowings, which
were partially offset by a $229 million increase in cash used to repurchase our
stock and $75 million in higher dividend payments due to the timing of quarterly
payments.
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:
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
Reclassifications
from investing activities:
|
|
|
|
|
|
|
Finance receivable originations
for Manufacturing group inventory sales
|
|
$ |
(723 |
) |
|
$ |
(775 |
) |
Cash received from customers,
sale of receivables and securitizations
|
|
|
715 |
|
|
|
618 |
|
Other
|
|
|
(6 |
) |
|
|
(2 |
) |
Total
reclassifications from investing activities
|
|
|
(14 |
) |
|
|
(159 |
) |
Dividends
paid by Finance group to Manufacturing group
|
|
|
(142 |
) |
|
|
(135 |
) |
Total
reclassifications and adjustments to operating activities
|
|
$ |
(156 |
) |
|
$ |
(294 |
) |
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 nine months of 2008, the
impact of foreign exchange rate changes from the first nine months of 2007
increased revenues by approximately $127 million (1.4%) and increased segment
profit by approximately $5 million (0.4%).
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, including the risk factors contained herein and the following: (a)
changes in worldwide economic and political conditions that impact demand for
our products, interest rates and foreign exchange rates; (b) the interruption of
production at our facilities or our customers or suppliers; (c) performance
issues with key suppliers, subcontractors and business partners; (d) our ability
to perform as anticipated and to control costs under contracts with the U.S.
Government; (e) the U.S. Government’s ability to unilaterally modify or
terminate its contracts with us for the U.S. Government’s convenience or for our
failure to perform, to change applicable procurement and accounting policies,
and, under certain circumstances, to suspend or debar us as a contractor
eligible to receive future contract awards; (f) changing priorities or
reductions in the U.S. Government defense budget, including those related to
Operation Iraqi Freedom, Operation Enduring Freedom and the Global War on
Terrorism; (g) changes in national or international funding priorities, U.S. and
foreign military budget constraints and determinations, and government policies
on the export and import of military and commercial products; (h) legislative or
regulatory actions impacting defense operations; (i) the ability to control
costs and successful implementation of various cost-reduction programs; (j) the
timing of new product launches and certifications of new aircraft products; (k)
the occurrence of slowdowns or downturns in customer markets in which our
products are sold or supplied or where Textron Financial Corporation (TFC)
offers financing; (l) changes in aircraft delivery schedules or cancellation of
orders; (m) the impact of changes in tax legislation; (n) the extent to which we
are able to pass raw material price increases through to customers or offset
such price increases by reducing other costs; (o) our ability to offset, through
cost reductions, pricing pressure brought by original equipment manufacturer
customers; (p) our ability to realize full value of receivables; (q) the
availability and cost of insurance; (r) increases in pension expenses and other
postretirement employee costs; (s) 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 downsize TFC, including effecting an orderly
liquidation of certain TFC product lines; (v) uncertainty in estimating
contingent liabilities and establishing reserves to address such contingencies;
(w) 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; (x) the efficacy
of research and development investments to develop new products; (y) the
launching of significant new products or programs which could result in
unanticipated expenses; (z) 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 (aa) continued
volatility and further deterioration of the capital markets.
Item
3.
|
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
There has been no significant change in our exposure to market
risk during the nine months ended September 27, 2008. For discussion
of our exposure to market risk, refer to Item 7A. Quantitative and Qualitative
Disclosures about Market Risk contained in Textron’s 2007 Annual Report on Form
10-K.
We have carried out an evaluation, under the supervision and with
the participation of our management, including our Chairman, President and Chief
Executive Officer (the CEO) and our Executive Vice President and Chief Financial
Officer (the CFO), of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the Act)) as of the end
of the fiscal quarter covered by this report. Based upon that
evaluation, our CEO and CFO concluded that our disclosure controls and
procedures are effective in providing reasonable assurance that (a) the
information required to be disclosed by us in the reports that we file or submit
under the Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms,
and (b) such information is accumulated and communicated to our management,
including our CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
There
were no changes in our internal control over financial reporting during the
fiscal quarter ended September 27, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Item
2.
|
UNREGISTERED SALES OF
EQUITY SECURITIES AND USE OF
PROCEEDS
|
Issuer
Repurchases of Equity Securities
|
|
|
Total
Number
of
Shares
Purchased
|
|
|
Average
Price
Paid
per
Share
(Excluding
Commissions)
|
|
|
Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Plan**
|
|
|
Maximum
Number
of Shares
that
May Yet Be
Purchased
Under
the Plan**
|
|
Month
1 (June 29, 2008 – August
2, 2008)
|
|
|
6,573,910 |
|
|
|
42.52 |
|
|
|
6,573,910 |
|
|
|
12,643,090 |
|
Month
2 (August 3, 2008 – August
30, 2008)
|
|
|
1,240,000 |
|
|
|
41.23 |
|
|
|
1,240,000 |
|
|
|
11,403,090 |
|
Month
3 (August 31, 2008 – September
27, 2008)
|
|
|
300,000 |
|
|
|
38.59 |
|
|
|
300,000 |
|
|
|
11,103,090 |
|
Total
|
|
|
8,113,910 |
|
|
|
42.18 |
|
|
|
8,113,910 |
|
|
|
|
|
On July
18, 2007, our Board of Directors approved a new share repurchase plan under
which we are authorized to repurchase up to 24 million shares of common
stock. The new plan has no expiration date and supersedes the
previous plan, which was cancelled. In September, we suspended all share
repurchase activity until after financial markets stabilize.
|
EXHIBITS
|
10.1
|
Amendment
No. 1, effective July 23, 2008, to Textron Inc. 2007 Long-Term Incentive
Plan (Amended and Restated as of May 1, 2007)
|
|
|
10.2
|
Amendment
No. 1, dated July 23, 2008, to Textron Spillover Pension Plan, As Amended
and Restated Effective January 1, 2008
|
|
|
10.3
|
Form
of Aircraft Time Sharing Agreement between Textron Inc. and its executive
officers
|
|
|
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:
|
October
29, 2008
|
|
/s/Richard
L. Yates
|
|
|
|
Richard
L. Yates
Senior
Vice President and Corporate Controller
(principal
accounting officer)
|
|
|
|
|
LIST
OF EXHIBITS
The
following exhibits are filed as part of this report on Form 10-Q:
10.1
|
Amendment
No. 1, effective July 23, 2008, to Textron Inc. 2007 Long-Term Incentive
Plan (Amended and Restated as of May 1, 2007)
|
|
|
10.2
|
Amendment
No. 1, dated July 23, 2008, to Textron Spillover Pension Plan, As Amended
and Restated Effective January 1, 2008
|
|
|
10.3
|
Form
of Aircraft Time Sharing Agreement between Textron Inc. and its executive
officers
|
|
|
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
|