UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 2, 2011
OR
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 1-5480
Textron Inc.
(Exact name of registrant as specified in its charter)
Delaware | 05-0315468 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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 [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No ü
As of April 15, 2011, there were 276,619,984 shares of common stock outstanding.
INDEX
Page | |||
PART I. | FINANCIAL INFORMATION | ||
Item 1. | Financial Statements | ||
3 | |||
4 | |||
5 | |||
Notes to the Consolidated Financial Statements (Unaudited) | |||
Note 1: | Basis of Presentation | 7 | |
Note 2: | Special Charges | 7 | |
Note 3: | Retirement Plans | 8 | |
Note 4: | Share-Based Compensation | 8 | |
Note 5: | Comprehensive Income | 9 | |
Note 6: | Earnings Per Share and Shareholders’ Equity | 10 | |
Note 7: | Accounts Receivable and Finance Receivables | 10 | |
Note 8: | Inventories | 15 | |
Note 9: | Debt | 15 | |
Note 10: | Accrued Liabilities | 15 | |
Note 11: | Commitments and Contingencies | 15 | |
Note 12: | Derivative Instruments and Fair Value Measurements | 16 | |
Note 13: | Income Tax Expense | 18 | |
Note 14: | Segment Information | 18 | |
Item 2. | 20 | ||
Item 3. | 29 | ||
Item 4. | 29 | ||
PART II. | OTHER INFORMATION | ||
Item 5. | Other Information | 29 | |
Item 6. | 31 | ||
31 |
Item 1. | FINANCIAL STATEMENTS |
TEXTRON INC.
Consolidated Statements of Operations (Unaudited)
Three Months Ended | ||||||||
(In millions, except per share amounts) | April 2, 2011 | April 3, 2010 | ||||||
Revenues | ||||||||
Manufacturing revenues | $ | 2,453 | $ | 2,134 | ||||
Finance revenues | 26 | 76 | ||||||
Total revenues | 2,479 | 2,210 | ||||||
Costs, expenses and other | ||||||||
Cost of sales | 2,055 | 1,776 | ||||||
Selling and administrative expense | 304 | 285 | ||||||
Provision for losses on finance receivables | 12 | 55 | ||||||
Interest expense | 62 | 71 | ||||||
Special charges | — | 12 | ||||||
Total costs, expenses and other | 2,433 | 2,199 | ||||||
Income from continuing operations before income taxes | 46 | 11 | ||||||
Income tax expense | 15 | 15 | ||||||
Income (loss) from continuing operations | 31 | (4 | ) | |||||
Loss from discontinued operations, net of income taxes | (2 | ) | (4 | ) | ||||
Net income (loss) | $ | 29 | $ | (8 | ) | |||
Basic earnings per share | ||||||||
Continuing operations | $ | 0.11 | $ | (0.01 | ) | |||
Discontinued operations | (0.01 | ) | (0.02 | ) | ||||
Basic earnings per share | $ | 0.10 | $ | (0.03 | ) | |||
Diluted earnings per share | ||||||||
Continuing operations | $ | 0.10 | $ | (0.01 | ) | |||
Discontinued operations | (0.01 | ) | (0.02 | ) | ||||
Diluted earnings per share | $ | 0.09 | $ | (0.03 | ) | |||
Dividends per share | ||||||||
Common stock | $ | 0.02 | $ | 0.02 |
See Notes to the consolidated financial statements.
3
Consolidated Balance Sheets (Unaudited)
(Dollars in millions) | April 2, 2011 | January 1, 2011 | ||||||
Assets | ||||||||
Manufacturing group | ||||||||
Cash and equivalents | $ | 986 | $ | 898 | ||||
Accounts receivable, net | 910 | 892 | ||||||
Inventories | 2,453 | 2,277 | ||||||
Other current assets | 1,050 | 980 | ||||||
Total current assets | 5,399 | 5,047 | ||||||
Property, plant and equipment, less accumulated depreciation and amortization of $2,968 and $2,869 | 1,950 | 1,932 | ||||||
Goodwill | 1,643 | 1,632 | ||||||
Other assets | 1,659 | 1,722 | ||||||
Total Manufacturing group assets | 10,651 | 10,333 | ||||||
Finance group | ||||||||
Cash and equivalents | 36 | 33 | ||||||
Finance receivables held for investment, net | 3,566 | 3,871 | ||||||
Finance receivables held for sale | 237 | 413 | ||||||
Other assets | 569 | 632 | ||||||
Total Finance group assets | 4,408 | 4,949 | ||||||
Total assets | $ | 15,059 | $ | 15,282 | ||||
Liabilities and shareholders’ equity | ||||||||
Liabilities | ||||||||
Manufacturing group | ||||||||
Short-term debt and current portion of long-term debt | $ | 216 | $ | 19 | ||||
Accounts payable | 748 | 622 | ||||||
Accrued liabilities | 1,829 | 2,016 | ||||||
Total current liabilities | 2,793 | 2,657 | ||||||
Other liabilities | 2,986 | 2,993 | ||||||
Long-term debt | 2,333 | 2,283 | ||||||
Total Manufacturing group liabilities | 8,112 | 7,933 | ||||||
Finance group | ||||||||
Other liabilities | 352 | 391 | ||||||
Due to Manufacturing group | 391 | 326 | ||||||
Debt | 3,152 | 3,660 | ||||||
Total Finance group liabilities | 3,895 | 4,377 | ||||||
Total liabilities | 12,007 | 12,310 | ||||||
Shareholders’ equity | ||||||||
Common stock | 35 | 35 | ||||||
Capital surplus | 1,299 | 1,301 | ||||||
Retained earnings | 3,061 | 3,037 | ||||||
Accumulated other comprehensive loss | (1,280 | ) | (1,316 | ) | ||||
3,115 | 3,057 | |||||||
Less cost of treasury shares | 63 | 85 | ||||||
Total shareholders’ equity | 3,052 | 2,972 | ||||||
Total liabilities and shareholders’ equity | $ | 15,059 | $ | 15,282 | ||||
Common shares outstanding (in thousands) | 276,520 | 275,739 |
See Notes to the consolidated financial statements.
4
TEXTRON INC.
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended April 2, 2011 and April 3, 2010, respectively
Consolidated | ||||||||
(In millions) | 2011 | 2010 | ||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 29 | $ | (8 | ) | |||
Loss from discontinued operations | (2 | ) | (4 | ) | ||||
Income (loss) from continuing operations | 31 | (4 | ) | |||||
Adjustments to reconcile income (loss) from continuing operations to net cash | ||||||||
provided by (used in) operating activities: | ||||||||
Non-cash items: | ||||||||
Depreciation and amortization | 95 | 90 | ||||||
Provision for losses on finance receivables held for investment | 12 | 55 | ||||||
Portfolio losses on finance receivables | 23 | 28 | ||||||
Deferred income taxes | 79 | (13 | ) | |||||
Other, net | 21 | 31 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable, net | (4 | ) | (76 | ) | ||||
Inventories | (166 | ) | (211 | ) | ||||
Other assets | 2 | 7 | ||||||
Accounts payable | 119 | 184 | ||||||
Accrued and other liabilities | (229 | ) | (259 | ) | ||||
Captive finance receivables, net | 72 | 78 | ||||||
Other operating activities, net | — | 1 | ||||||
Net cash provided by (used in) operating activities of continuing operations | 55 | (89 | ) | |||||
Net cash provided by (used in) operating activities of discontinued operations | (1 | ) | 1 | |||||
Net cash provided by (used in) operating activities | 54 | (88 | ) | |||||
Cash flows from investing activities: | ||||||||
Finance receivables originated or purchased | (76 | ) | (145 | ) | ||||
Finance receivables repaid | 290 | 501 | ||||||
Proceeds on receivables sales | 168 | 277 | ||||||
Capital expenditures | (78 | ) | (38 | ) | ||||
Proceeds from sale of repossessed assets and properties | 28 | 32 | ||||||
Other investing activities, net | 23 | 12 | ||||||
Net cash provided by investing activities of continuing operations | 355 | 639 | ||||||
Cash flows from financing activities: | ||||||||
Increase in short-term debt | 203 | — | ||||||
Payments on long-term lines of credit | (250 | ) | — | |||||
Principal payments on long-term debt | (417 | ) | (936 | ) | ||||
Proceeds from issuance of long-term debt | 144 | 20 | ||||||
Proceeds from option exercises | 3 | — | ||||||
Dividends paid | (5 | ) | (5 | ) | ||||
Other financing activities, net | (5 | ) | — | |||||
Net cash used in financing activities of continuing operations | (327 | ) | (921 | ) | ||||
Effect of exchange rate changes on cash and equivalents | 9 | (13 | ) | |||||
Net increase (decrease) in cash and equivalents | 91 | (383 | ) | |||||
Cash and equivalents at beginning of period | 931 | 1,892 | ||||||
Cash and equivalents at end of period | $ | 1,022 | $ | 1,509 |
See Notes to the consolidated financial statements.
5
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Three Months Ended April 2, 2011 and April 3, 2010, respectively
Manufacturing Group | Finance Group | |||||||||||||||
(In millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | 60 | $ | 31 | $ | (31 | ) | $ | (39 | ) | ||||||
Loss from discontinued operations | (2 | ) | (4 | ) | — | — | ||||||||||
Income (loss) from continuing operations | 62 | 35 | (31 | ) | (39 | ) | ||||||||||
Adjustments to reconcile income (loss) from continuing operations to net cash | ||||||||||||||||
provided by (used in) operating activities: | ||||||||||||||||
Dividends received from TFC | 130 | 125 | — | — | ||||||||||||
Capital contribution paid to TFC | (63 | ) | (75 | ) | — | — | ||||||||||
Non-cash items: | ||||||||||||||||
Depreciation and amortization | 87 | 82 | 8 | 8 | ||||||||||||
Provision for losses on finance receivables held for investment | — | — | 12 | 55 | ||||||||||||
Portfolio losses on finance receivables | — | — | 23 | 28 | ||||||||||||
Deferred income taxes | 66 | 16 | 13 | (29 | ) | |||||||||||
Other, net | 32 | 27 | (11 | ) | 4 | |||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Accounts receivable, net | (4 | ) | (76 | ) | — | — | ||||||||||
Inventories | (169 | ) | (207 | ) | — | — | ||||||||||
Other assets | (1 | ) | 8 | — | (4 | ) | ||||||||||
Accounts payable | 119 | 184 | — | — | ||||||||||||
Accrued and other liabilities | (186 | ) | (186 | ) | (43 | ) | (73 | ) | ||||||||
Other operating activities, net | — | 1 | — | — | ||||||||||||
Net cash provided by (used in) operating activities of continuing operations | 73 | (66 | ) | (29 | ) | (50 | ) | |||||||||
Net cash provided by (used in) operating activities of discontinued operations | (1 | ) | 1 | — | — | |||||||||||
Net cash provided by (used in) operating activities | 72 | (65 | ) | (29 | ) | (50 | ) | |||||||||
Cash flows from investing activities: | ||||||||||||||||
Finance receivables originated or purchased | — | — | (125 | ) | (226 | ) | ||||||||||
Finance receivables repaid | — | — | 411 | 660 | ||||||||||||
Proceeds on receivables sales | — | — | 168 | 277 | ||||||||||||
Capital expenditures | (78 | ) | (38 | ) | — | — | ||||||||||
Proceeds from sale of repossessed assets and properties | — | — | 28 | 32 | ||||||||||||
Other investing activities, net | (43 | ) | (37 | ) | 31 | 28 | ||||||||||
Net cash provided by (used in) investing activities of continuing operations | (121 | ) | (75 | ) | 513 | 771 | ||||||||||
Cash flows from financing activities: | ||||||||||||||||
Payments on long-term lines of credit | — | — | (250 | ) | — | |||||||||||
Increase in short-term debt | 203 | — | — | — | ||||||||||||
Intergroup financing | (60 | ) | (150 | ) | 60 | 150 | ||||||||||
Principal payments on long-term debt | (7 | ) | (11 | ) | (410 | ) | (925 | ) | ||||||||
Proceeds from issuance of long-term debt | — | — | 144 | 20 | ||||||||||||
Proceeds from option exercises | 3 | — | — | — | ||||||||||||
Capital contributions paid to TFC under Support Agreement | — | — | 63 | 75 | ||||||||||||
Other capital contributions paid to Finance Group | — | — | 40 | 20 | ||||||||||||
Dividends paid | (5 | ) | (5 | ) | (130 | ) | (125 | ) | ||||||||
Other financing activities, net | (5 | ) | — | 1 | — | |||||||||||
Net cash provided by (used in) financing activities of continuing operations | 129 | (166 | ) | (482 | ) | (785 | ) | |||||||||
Effect of exchange rate changes on cash and equivalents | 8 | (12 | ) | 1 | (1 | ) | ||||||||||
Net increase (decrease) in cash and equivalents | 88 | (318 | ) | 3 | (65 | ) | ||||||||||
Cash and equivalents at beginning of period | 898 | 1,748 | 33 | 144 | ||||||||||||
Cash and equivalents at end of period | $ | 986 | $ | 1,430 | $ | 36 | $ | 79 |
See Notes to the consolidated financial statements.
6
TEXTRON INC.
Notes to the Consolidated Financial Statements (Unaudited)
Note 1: Basis of Presentation
Our consolidated financial statements include the accounts of Textron Inc. and its majority-owned subsidiaries. We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information. Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 1, 2011. 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. Certain prior period amounts have been reclassified to conform with the current year presentation.
Our financings are conducted through two separate borrowing groups. The Manufacturing group consists of Textron Inc. consolidated with its majority-owned subsidiaries that operate in the Cessna, Bell, Textron Systems and Industrial segments. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation (TFC), its consolidated subsidiaries and three other finance subsidiaries owned by Textron Inc. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the consolidated financial statements. All significant intercompany transactions are eliminated from the consolidated financial statements, including retail and wholesale financing activities for inventory sold by our Manufacturing group and financed by our Finance group.
Note 2: Special Charges
In 2010, special charges included restructuring costs incurred under a restructuring program that was completed at the end of 2010. There were no special charges in the first quarter of 2011.
Restructuring costs by segment and type for the three months ended April 3, 2010 are as follows:
(In millions) | Severance Costs | Contract Terminations | Total | |||||||||
Cessna | $ | 8 | $ | 2 | $ | 10 | ||||||
Bell | 1 | — | 1 | |||||||||
Finance | 3 | — | 3 | |||||||||
Corporate | (2 | ) | — | (2 | ) | |||||||
$ | 10 | $ | 2 | $ | 12 |
An analysis of our restructuring reserve activity is summarized below:
(In millions) | Severance Costs | Contract Terminations | Total | |||||||||
Balance at January 1, 2011 | $ | 57 | $ | 5 | $ | 62 | ||||||
Cash paid | (23 | ) | (1 | ) | (24 | ) | ||||||
Balance at April 2, 2011 | $ | 34 | $ | 4 | $ | 38 |
7
Note 3: 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 are as follows:
Pension Benefits | Postretirement Benefits Other Than Pensions | |||||||||||||||
(In millions) | April 2, 2011 | April 3, 2010 | April 2, 2011 | April 3, 2010 | ||||||||||||
Three Months Ended | ||||||||||||||||
Service cost | $ | 32 | $ | 31 | $ | 2 | $ | 2 | ||||||||
Interest cost | 82 | 79 | 8 | 8 | ||||||||||||
Expected return on plan assets | (98 | ) | (92 | ) | — | — | ||||||||||
Amortization of prior service cost (credit) | 4 | 4 | (1 | ) | (1 | ) | ||||||||||
Amortization of net loss | 19 | 9 | 3 | 3 | ||||||||||||
Net periodic benefit cost | $ | 39 | $ | 31 | $ | 12 | $ | 12 |
Note 4: Share-Based Compensation
Share-based compensation expense includes restricted stock and stock option awards, as well as performance share units, restricted stock units, and deferred income plan stock unit awards which are payable in cash. The compensation expense we recorded in net income (loss) for our share-based compensation plans is as follows:
Three Months Ended | ||||||||
(In millions) | April 2, 2011 | April 3, 2010 | ||||||
Compensation expense | $ | 36 | $ | 23 | ||||
Hedge income | — | (2 | ) | |||||
Income tax benefit | (13 | ) | (9 | ) | ||||
Total net compensation cost included in net income (loss) | $ | 23 | $ | 12 |
Stock Options
The stock option compensation cost calculated under the fair value approach is recognized over the vesting period of the stock options. The weighted-average fair value of options granted per share was $10 and $7 in the first quarter of 2011 and 2010, respectively. We estimate the fair value of options granted on the date of grant using the Black-Scholes option-pricing model. Expected volatilities consider implied volatilities from traded options on our common stock, historical volatilities and other factors. We use historical data to estimate option exercise behavior, adjusted to reflect anticipated changes in expected life. The weighted-average assumptions used in our Black-Scholes option-pricing model for awards issued during the respective periods are as follows:
Three Months Ended | ||||||||
April 2, 2011 | April 3, 2010 | |||||||
Dividend yield | 0.3 | % | 0.4 | % | ||||
Expected volatility | 38.0 | % | 37.0 | % | ||||
Risk-free interest rate | 2.4 | % | 2.6 | % | ||||
Expected lives (In years) | 5.5 | 5.5 |
Stock option activity for the first quarter of 2011 is as follows:
Shares Under Options (In thousands) | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life (In years) | ||||||||||
Outstanding at beginning of period | 6,926 | $ | 28.15 | 5.0 | ||||||||
Granted | 2,656 | 26.25 | ||||||||||
Exercised | (76 | ) | 18.59 | |||||||||
Canceled, expired or forfeited | (107 | ) | 28.69 | |||||||||
Outstanding at end of period | 9,399 | $ | 27.68 | 7.0 | ||||||||
Exercisable at end of period | 4,719 | $ | 31.48 | 4.7 |
8
Restricted Stock Units
The 2011 activity for restricted stock units payable in stock and for restricted stock units payable in cash is provided below:
Units Payable in Stock | Units Payable in Cash | |||||||||||||||
(Shares in thousands) | Number of Shares | Weighted-Average Grant Date Fair Value | Number of Shares | Weighted-Average Grant Date Fair Value | ||||||||||||
Outstanding at beginning of year, nonvested | 762 | $ | 47.55 | 3,472 | $ | 14.60 | ||||||||||
Granted | 278 | 26.25 | 663 | 26.25 | ||||||||||||
Vested | (290 | ) | (46.34 | ) | (769 | ) | (12.92 | ) | ||||||||
Forfeited | (21 | ) | (48.75 | ) | (89 | ) | (15.49 | ) | ||||||||
Outstanding at end of period, nonvested | 729 | $ | 39.87 | 3,277 | $ | 17.32 |
Performance Share Units
The fair value of share-based compensation awards accounted for as liabilities includes performance share units. The fair value of these awards is based on the trading price of our common stock, less adjustments to reflect the fair value of certain awards for which dividends are not paid or accrued until vested, and is remeasured at each reporting period date. The 2011 activity for our performance share units is as follows:
(Shares in thousands) | Number of Shares | Weighted-Average Grant Date Fair Value | ||||||
Outstanding at beginning of year, nonvested | 1,897 | $ | 9.59 | |||||
Granted | 411 | 26.25 | ||||||
Outstanding at end of period, nonvested | 2,308 | $ | 12.56 |
Share-Based Compensation Awards
The value of the share-based compensation awards that vested and/or were paid during the respective periods is as follows:
Three Months Ended | ||||||||
(In millions) | April 2, 2011 | April 3, 2010 | ||||||
Subject only to service conditions: | ||||||||
Value of shares, options or units vested | $ | 34 | $ | 36 | ||||
Intrinsic value of cash awards paid | 20 | 8 | ||||||
Subject to performance vesting conditions: | ||||||||
Value of units vested | — | — | ||||||
Intrinsic value of cash awards paid | 1 | 5 | ||||||
Intrinsic value of amounts paid under Deferred Income Plan | — | 8 |
Note 5: Comprehensive Income
Our comprehensive income, net of taxes, is provided below:
Three Months Ended | ||||||||
(In millions) | April 2, 2011 | April 3, 2010 | ||||||
Net income (loss) | $ | 29 | $ | (8 | ) | |||
Other comprehensive income (loss): | ||||||||
Recognition of prior service cost and unrealized losses on pension and postretirement benefits | 18 | 10 | ||||||
Deferred gains on hedge contracts | 6 | 7 | ||||||
Foreign currency translation and other | 12 | (9 | ) | |||||
Comprehensive income | $ | 65 | $ | — |
9
Note 6: Earnings Per Share and Shareholders’ Equity
Earnings Per Share
We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period. Basic earnings per share is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends. Diluted earnings per share considers the dilutive effect of all potential future common stock, including stock options, restricted stock units and the shares that could be issued upon the conversion of our 4.50% Convertible Notes and upon the exercise of the related warrants. The convertible note call options purchased in connection with the issuance of the 4.50% Convertible Notes are excluded from the calculation of diluted EPS as their impact is always anti-dilutive.
Upon conversion of our 4.50% Convertible Notes, as described in Note 9, the principal amount would be settled in cash and the excess of the conversion value, as defined, over the principal amount may be settled in cash and/or shares of our common stock. Therefore, only the shares of our common stock potentially issuable with respect to the excess of the notes’ conversion value over the principal amount, if any, are considered as dilutive potential common shares for purposes of calculating diluted EPS.
The weighted-average shares outstanding for basic and diluted earnings per share are as follows:
Three Months Ended | ||||||||
(In thousands) | April 2, 2011 | April 3, 2010 | ||||||
Basic weighted-average shares outstanding | 276,358 | 273,174 | ||||||
Dilutive effect of Convertible Notes, warrants, stock options and restricted stock units | 42,761 | — | ||||||
Diluted weighted-average shares outstanding | 319,119 | 273,174 |
Stock options to purchase 4 million and 7 million shares of common stock outstanding are excluded from our calculation of diluted weighted-average shares outstanding for the three months ended April 2, 2011 and April 3, 2010, respectively, as the exercise prices were greater than the average market price of our common stock for the periods. These securities could potentially dilute earnings per share in the future.
For the three months ended April 3, 2010, the potential dilutive effect of 28 million weighted-average shares of Convertible Notes, warrants, stock options and restricted stock units was excluded from the computation of diluted weighted-average shares outstanding as the shares would have an anti-dilutive effect on the loss from continuing operations.
Note 7: Accounts Receivable and Finance Receivables
Accounts Receivable
Accounts receivable is composed of the following:
(In millions) | April 2, 2011 | January 1, 2011 | ||||||
Commercial | $ | 607 | $ | 496 | ||||
U.S. Government contracts | 321 | 416 | ||||||
928 | 912 | |||||||
Allowance for doubtful accounts | (18 | ) | (20 | ) | ||||
$ | 910 | $ | 892 |
We have unbillable receivables on U.S. Government contracts that arise when the revenues we have appropriately recognized based on performance cannot be billed yet under terms of the contract. Unbillable receivables within accounts receivable totaled $155 million at April 2, 2011 and $195 million at January 1, 2011.
10
Finance Receivables
Finance receivables by product line, which includes both finance receivables held for investment and finance receivables held for sale, are presented in the following table:
(Dollars in millions) | April 2, 2011 | January 1, 2011 | ||||||||||||||
Aviation | $ | 2,028 | 49 | % | $ | 2,120 | 46 | % | ||||||||
Golf equipment | 192 | 4 | 212 | 5 | ||||||||||||
Golf mortgage | 818 | 20 | 876 | 19 | ||||||||||||
Timeshare | 622 | 15 | 894 | 19 | ||||||||||||
Structured capital | 317 | 8 | 317 | 7 | ||||||||||||
Other liquidating | 164 | 4 | 207 | 4 | ||||||||||||
Total finance receivables | 4,141 | 100 | % | 4,626 | 100 | % | ||||||||||
Less: Allowance for losses | 338 | 342 | ||||||||||||||
Less: Finance receivables held for sale | 237 | 413 | ||||||||||||||
Total finance receivables held for investment, net | $ | 3,566 | $ | 3,871 |
Credit Quality Indicators and Nonaccrual Finance Receivables
We internally assess the quality of our finance receivables held for investment portfolio based on a number of key credit quality indicators and statistics such as delinquency, loan balance to collateral value, the liquidity position of individual borrowers and guarantors, debt service coverage in the golf mortgage product line and default rates of our notes receivable collateral in the timeshare product line. Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans/portfolios into three categories based on the key credit quality indicators for the individual loan. These three categories are performing, watchlist and nonaccrual.
We classify finance receivables held for investment as nonaccrual if credit quality indicators suggest full collection is doubtful. In addition, we automatically classify accounts as nonaccrual that are contractually delinquent by more than three months unless collection is not doubtful. Cash payments on nonaccrual accounts, including finance charges, generally are applied to reduce the net investment balance. We resume the accrual of interest when the loan becomes contractually current through payment according to the original terms of the loan or, if a loan has been modified, following a period of performance under the terms of the modification, provided we conclude that collection of all principal and interest is no longer doubtful. Previously suspended interest income is recognized at that time.
Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain. All other finance receivables held for investment that do not meet the watchlist or nonaccrual categories are classified as performing.
A summary of finance receivables held for investment categorized based on the internally assigned credit quality indicators discussed above is as follows:
April 2, 2011 | January 1, 2011 | |||||||||||||||||||||||||||||||
(In millions) | Performing | Watchlist | Nonaccrual | Total | Performing | Watchlist | Nonaccrual | Total | ||||||||||||||||||||||||
Aviation | $ | 1,641 | $ | 219 | $ | 168 | $ | 2,028 | $ | 1,713 | $ | 238 | $ | 169 | $ | 2,120 | ||||||||||||||||
Golf equipment | 122 | 46 | 24 | 192 | 138 | 51 | 23 | 212 | ||||||||||||||||||||||||
Golf mortgage | 205 | 200 | 235 | 640 | 163 | 303 | 219 | 685 | ||||||||||||||||||||||||
Timeshare | 166 | 40 | 357 | 563 | 222 | 77 | 382 | 681 | ||||||||||||||||||||||||
Structured capital | 290 | 27 | — | 317 | 290 | 27 | — | 317 | ||||||||||||||||||||||||
Other liquidating | 98 | 14 | 52 | 164 | 130 | 11 | 57 | 198 | ||||||||||||||||||||||||
Total | $ | 2,522 | $ | 546 | $ | 836 | $ | 3,904 | $ | 2,656 | $ | 707 | $ | 850 | $ | 4,213 | ||||||||||||||||
% of Total | 64.6 | % | 14.0 | % | 21.4 | % | 63.0 | % | 16.8 | % | 20.2 | % |
We measure delinquency based on the contractual payment terms of our loans and leases. In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.
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Finance receivables held for investment by delinquency aging category is summarized in the tables below:
(In millions) | Less Than 31 Days Past Due | 31-60 Days Past Due | 61-90 Days Past Due | Greater Than 90 Days Past Due | Total | |||||||||||||||
April 2, 2011 | ||||||||||||||||||||
Aviation | $ | 1,857 | $ | 101 | $ | 28 | $ | 42 | $ | 2,028 | ||||||||||
Golf equipment | 162 | 10 | 4 | 16 | 192 | |||||||||||||||
Golf mortgage | 527 | 11 | 3 | 99 | 640 | |||||||||||||||
Timeshare | 326 | 38 | 80 | 119 | 563 | |||||||||||||||
Structured capital | 317 | — | — | — | 317 | |||||||||||||||
Other liquidating | 135 | 2 | 1 | 26 | 164 | |||||||||||||||
Total | $ | 3,324 | $ | 162 | $ | 116 | $ | 302 | $ | 3,904 | ||||||||||
January 1, 2011 | ||||||||||||||||||||
Aviation | $ | 1,964 | $ | 67 | $ | 41 | $ | 48 | $ | 2,120 | ||||||||||
Golf equipment | 171 | 13 | 9 | 19 | 212 | |||||||||||||||
Golf mortgage | 543 | 12 | 7 | 123 | 685 | |||||||||||||||
Timeshare | 533 | 14 | 6 | 128 | 681 | |||||||||||||||
Structured capital | 317 | — | — | — | 317 | |||||||||||||||
Other liquidating | 166 | 2 | 1 | 29 | 198 | |||||||||||||||
Total | $ | 3,694 | $ | 108 | $ | 64 | $ | 347 | $ | 4,213 |
At April 2, 2011, accrual status loans that were 90 days past due totaled $8 million. We had no accrual status loans that were 90 days past due at January 1, 2011. At April 2, 2011, the 60+ days contractual delinquency as a percentage of finance receivables held for investment was 10.71%, compared with 9.77% at January 1, 2011.
Impaired Loans
We evaluate individual finance receivables held for investment in non-homogeneous portfolios and larger accounts in homogeneous loan portfolios for impairment on a quarterly basis. Finance receivables classified as held for sale are reflected at the lower of cost or fair value and are excluded from these evaluations.
A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators discussed above. Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified. If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification. No significant interest income was recognized on impaired loans in the first quarter of 2011 or 2010.
The average recorded investment in impaired loans for the first quarter of 2011 and 2010 are provided below:
(In millions) | Aviation | Golf Equipment | Golf Mortgage | Timeshare | Other Liquidating | Total | ||||||||||||||||||
For the three months ended April 2, 2011 | ||||||||||||||||||||||||
Impaired loans with a related allowance for losses recorded | $ | 145 | $ | 5 | $ | 190 | $ | 341 | $ | 18 | $ | 699 | ||||||||||||
Impaired loans with no related allowance for losses recorded | 19 | — | 90 | 33 | 22 | 164 | ||||||||||||||||||
Total | $ | 164 | $ | 5 | $ | 280 | $ | 374 | $ | 40 | $ | 863 | ||||||||||||
For the three months ended April 3, 2010 | ||||||||||||||||||||||||
Impaired loans with a related allowance for losses recorded | $ | 240 | $ | 3 | $ | 186 | $ | 352 | $ | 27 | $ | 808 | ||||||||||||
Impaired loans with no related allowance for losses recorded | 12 | 1 | 111 | 54 | 63 | 241 | ||||||||||||||||||
Total | $ | 252 | $ | 4 | $ | 297 | $ | 406 | $ | 90 | $ | 1,049 |
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A summary of impaired finance receivables and related allowance for losses is provided below:
(In millions) | Aviation | Golf Equipment | Golf Mortgage | Timeshare | Other Liquidating | Total | ||||||||||||||||||
April 2, 2011 | ||||||||||||||||||||||||
Impaired loans with a related allowance for losses recorded: | ||||||||||||||||||||||||
Recorded investment | $ | 144 | $ | 6 | $ | 205 | $ | 327 | $ | 19 | $ | 701 | ||||||||||||
Unpaid principal balance | 146 | 6 | 215 | 367 | 25 | 759 | ||||||||||||||||||
Related allowance | 50 | 1 | 45 | 102 | 4 | 202 | ||||||||||||||||||
Impaired loans with no related allowance for losses recorded: | ||||||||||||||||||||||||
Recorded investment | 20 | — | 94 | 41 | 19 | 174 | ||||||||||||||||||
Unpaid principal balance | 20 | — | 98 | 41 | 75 | 234 | ||||||||||||||||||
Total impaired loans: | ||||||||||||||||||||||||
Recorded investment | 164 | 6 | 299 | 368 | 38 | 875 | ||||||||||||||||||
Unpaid principal balance | 166 | 6 | 313 | 408 | 100 | 993 | ||||||||||||||||||
Related allowance | 50 | 1 | 45 | 102 | 4 | 202 | ||||||||||||||||||
January 1, 2011 | ||||||||||||||||||||||||
Impaired loans with a related allowance for losses recorded: | ||||||||||||||||||||||||
Recorded investment | $ | 147 | $ | 4 | $ | 175 | $ | 355 | $ | 16 | $ | 697 | ||||||||||||
Unpaid principal balance | 144 | 5 | 178 | 385 | 15 | 727 | ||||||||||||||||||
Related allowance | 45 | 2 | 39 | 102 | 3 | 191 | ||||||||||||||||||
Impaired loans with no related allowance for losses recorded: | ||||||||||||||||||||||||
Recorded investment | 17 | — | 138 | 69 | 30 | 254 | ||||||||||||||||||
Unpaid principal balance | 21 | — | 146 | 74 | 89 | 330 | ||||||||||||||||||
Total impaired loans: | ||||||||||||||||||||||||
Recorded investment | 164 | 4 | 313 | 424 | 46 | 951 | ||||||||||||||||||
Unpaid principal balance | 165 | 5 | 324 | 459 | 104 | 1,057 | ||||||||||||||||||
Related allowance | 45 | 2 | 39 | 102 | 3 | 191 |
Allowance for Losses We maintain the allowance for losses on finance receivables held for investment at a level considered adequate to cover inherent losses in the portfolio based on management’s evaluation and analysis by product line. For larger balance accounts specifically identified as impaired, including large accounts in homogeneous portfolios, a reserve is established based on comparing the carrying value with either a) the expected future cash flows, discounted at the finance receivable’s effective interest rate; or b) the fair value, if the finance receivable is collateral dependent. The expected future cash flows consider collateral value; financial performance and liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs associated with the repossession/foreclosure and eventual disposal of collateral. When there is a range of potential outcomes, we perform multiple discounted cash flow analyses and weight the outcomes based on their relative likelihood of occurrence.
The evaluation of our portfolios is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the underlying collateral, which may differ from actual results. While our analysis is specific to each individual account, the most critical factors included in this analysis vary by product line. For the aviation product line, these factors include industry valuation guides, physical condition of the aircraft, payment history, and existence and financial strength of guarantors. For the golf equipment line, the critical factors are the age and condition of the collateral, while the factors for the golf mortgage line include historical golf course, hotel or marina cash flow performance; estimates of golf rounds and price per round or occupancy and room rates; market discount and capitalization rates; and existence and financial strength of guarantors. For the timeshare product line, the critical factors are the historical performance of consumer notes receivable collateral, real estate valuations, operating expenses of the borrower, the impact of bankruptcy court rulings on the value of the collateral, legal and other professional expenses and borrower’s access to capital.
We also establish an allowance for losses by product line to cover probable but specifically unknown losses existing in the portfolio. For homogeneous portfolios, including the aviation and golf equipment product lines, the allowance is established as a percentage of non-recourse finance receivables, which have not been identified as requiring specific reserves. The percentage is based on a combination of factors, including historical loss experience, current delinquency and default trends, collateral values, and both general economic and specific industry trends. For non-homogeneous portfolios, including the
golf mortgage and timeshare product lines, the allowance is established as a percentage of watchlist balances, as defined on page 11, which represents a combination of assumed default likelihood and loss severity based on historical experience, industry trends and collateral values. In establishing our allowance for losses to cover accounts not specifically identified, the most critical factors for the aviation product line include the collateral value of the portfolio, historical default experience and delinquency trends; for golf equipment, factors considered include historical loss experience and delinquency trends; and for golf mortgage, factors include an evaluation of individual loan credit quality indicators such as delinquency, loan balance to collateral value, debt service coverage, existence and financial strength of guarantors, historical progression from watchlist to nonaccrual status and historical loss severity. For the timeshare product line, we evaluate individual loan credit quality indicators such as borrowing base shortfalls for revolving notes receivable facilities, default rates of our notes receivable collateral, borrower’s access to capital, historical progression from watchlist to nonaccrual status and estimates of loss severity based on analysis of impaired loans in the product line.
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Finance receivables held for investment are written down to the fair value (less estimated costs to sell) of the related collateral at the earlier of the date when the collateral is repossessed or when no payment has been received for six months unless management deems the receivable collectable. Finance receivables are charged off when the remaining balance is deemed to be uncollectable.
A rollforward of the allowance for losses on finance receivables held for investment and a summary of its composition, based on how the underlying finance receivables are evaluated for impairment, is presented below. The finance receivables reported in the following table specifically exclude $279 million and $283 million of leveraged leases at April 2, 2011 and April 3, 2010, respectively, in accordance with authoritative accounting standards.
(In millions) | Aviation | Golf Equipment | Golf Mortgage | Timeshare | Structured Capital and Other Liquidating | Total | ||||||||||||||||||
For the three months ended April 2, 2011 | ||||||||||||||||||||||||
Allowance for losses | ||||||||||||||||||||||||
Beginning balance | $ | 107 | $ | 16 | $ | 79 | $ | 106 | $ | 34 | $ | 342 | ||||||||||||
Provision for losses | 11 | — | (1 | ) | — | 2 | 12 | |||||||||||||||||
Net charge-offs and transfers | (8 | ) | (3 | ) | (3 | ) | (1 | ) | (1 | ) | (16 | ) | ||||||||||||
Ending balance | $ | 110 | $ | 13 | $ | 75 | $ | 105 | $ | 35 | $ | 338 | ||||||||||||
Ending balance based on individual evaluations | 50 | 1 | 45 | 102 | 4 | 202 | ||||||||||||||||||
Ending balance based on collective evaluation | 60 | 12 | 30 | 3 | 31 | 136 | ||||||||||||||||||
Finance receivables | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 164 | $ | 6 | $ | 299 | $ | 368 | $ | 38 | $ | 875 | ||||||||||||
Collectively evaluated for impairment | 1,864 | 186 | 341 | 195 | 164 | 2,750 | ||||||||||||||||||
Balance at end of period | $ | 2,028 | $ | 192 | $ | 640 | $ | 563 | $ | 202 | $ | 3,625 | ||||||||||||
For the three months ended April 3, 2010 | ||||||||||||||||||||||||
Allowance for losses | ||||||||||||||||||||||||
Beginning balance | $ | 114 | $ | 9 | $ | 65 | $ | 79 | $ | 74 | $ | 341 | ||||||||||||
Provision for losses | 13 | 4 | 14 | 15 | 9 | 55 | ||||||||||||||||||
Net charge-offs and transfers | (10 | ) | (2 | ) | (11 | ) | — | (8 | ) | (31 | ) | |||||||||||||
Ending balance | $ | 117 | $ | 11 | $ | 68 | $ | 94 | $ | 75 | $ | 365 | ||||||||||||
Ending balance based on individual evaluations | 52 | 1 | 43 | 77 | 1 | 174 | ||||||||||||||||||
Ending balance based on collective evaluation | 65 | 10 | 25 | 17 | 74 | 191 | ||||||||||||||||||
Finance receivables | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 232 | $ | 6 | $ | 343 | $ | 434 | $ | 104 | $ | 1,119 | ||||||||||||
Collectively evaluated for impairment | 2,171 | 169 | 502 | 768 | 553 | 4,163 | ||||||||||||||||||
Balance at end of period | $ | 2,403 | $ | 175 | $ | 845 | $ | 1,202 | $ | 657 | $ | 5,282 |
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Note 8: Inventories
(In millions) | April 2, 2011 | January 1, 2011 | ||||||
Finished goods | $ | 922 | $ | 784 | ||||
Work in process | 2,261 | 2,125 | ||||||
Raw materials | 456 | 506 | ||||||
3,639 | 3,415 | |||||||
Progress/milestone payments | (1,186 | ) | (1,138 | ) | ||||
$ | 2,453 | $ | 2,277 |
Note 9: Debt
On May 5, 2009, we issued $600 million of 4.5% Convertible Notes with a maturity date of May 1, 2013 and concurrently purchased call options to acquire our common stock and sold warrants to purchase our common stock for the purpose of reducing the potential dilutive effect to our shareholders and/or our cash outflow upon the conversion of the Convertible Notes. For more information on these transactions, see Note 8 to the Consolidated Financial Statements in Textron’s 2010 Annual Report on Form 10-K. For at least 20 trading days during the 30 consecutive trading days ended March 31, 2011, our common stock price exceeded the $17.06 per share conversion threshold price set forth for these Convertible Notes. Accordingly, the notes are convertible at the holder’s option through June 30, 2011. We may deliver shares of common stock, cash or a combination of cash and shares of common stock in satisfaction of our obligations upon conversion of the Convertible Notes. We intend to settle the face value of the Convertible Notes in cash. Based on an April 2, 2011 stock price of $27.40, the "if converted value" exceeds the face amount of the notes by $652.6 million; however, after giving effect to the exercise of the call options and warrants, the incremental cash or share settlement in excess of the face amount would result in either a 19 million net share issuance or a cash payment of $532.6 million, or a combination of cash and stock, at our option. We have continued to classify these Convertible Notes as long-term based on our intent and ability to maintain the debt outstanding for at least one year through the use of various funding sources available to us.
Note 10: Accrued Liabilities
We provide limited warranty and product maintenance programs, including parts and labor, for certain products for periods ranging from one to five years. Changes in our warranty and product maintenance liabilities are as follows:
Three Months Ended | ||||||||
(In millions) | April 2, 2011 | April 3, 2010 | ||||||
Accrual at the beginning of period | $ | 242 | $ | 263 | ||||
Provision | 57 | 38 | ||||||
Settlements | (64 | ) | (58 | ) | ||||
Adjustments to prior accrual estimates | (6 | ) | (3 | ) | ||||
Accrual at the end of period | $ | 229 | $ | 240 |
Note 11: Commitments and Contingencies
We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts; compliance with applicable laws and regulations; production partners; product liability; employment; and environmental, safety and health matters. Some of these legal proceedings and claims seek damages, fines or penalties in substantial amounts or remediation of environmental contamination. As a government contractor, we are subject to audits, reviews and investigations to determine whether our operations are being conducted in accordance with applicable regulatory requirements. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our being suspended or debarred from U.S. Government contracting for a period of time. On the basis of information presently available, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations.
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Note 12. Derivative Instruments and Fair Value Measurements
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. We prioritize the assumptions that market participants would use in pricing the asset or liability into a three-tier fair value hierarchy. This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exist, requiring companies to develop their own assumptions. Observable inputs that do not meet the criteria of Level 1 and include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active are categorized as Level 2. Level 3 inputs are those that reflect our estimates about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are utilized only to the extent that observable inputs are not available or cost-effective to obtain.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The assets and liabilities that are recorded at fair value on a recurring basis consist primarily of our derivative financial instruments, which are categorized as Level 2 in the fair value hierarchy. The notional and fair value amounts of these instruments that are designated as hedging instruments are provided below:
Notional Amount | Asset (Liability) | ||||||||||||||||
(In millions) | Borrowing Group | April 2, 2011 | January 1, 2011 | April 2, 2011 | January 1, 2011 | ||||||||||||
Assets | |||||||||||||||||
Interest rate exchange contracts* | Finance | $ | 473 | $ | 628 | $ | 28 | $ | 34 | ||||||||
Investment in other marketable securities | Finance | 26 | 51 | 26 | 51 | ||||||||||||
Foreign currency exchange contracts | Manufacturing | 655 | 534 | 43 | 39 | ||||||||||||
Total | $ | 1,154 | $ | 1,213 | $ | 97 | $ | 124 | |||||||||
Liabilities | |||||||||||||||||
Interest rate exchange contracts* | Finance | $ | 469 | $ | 451 | $ | (3 | ) | $ | (6 | ) | ||||||
Foreign currency exchange contracts | Manufacturing | 86 | 101 | (2 | ) | (2 | ) | ||||||||||
Total | $ | 555 | $ | 552 | $ | (5 | ) | $ | (8 | ) |
*Interest rate exchange contracts represent fair value hedges.
The fair values of derivative instruments for the Manufacturing group are included in either other current assets or accrued liabilities in our balance sheet. For the Finance group, these instruments are included in either other assets or other liabilities.
The Finance group’s interest rate exchange contracts are not exchange traded and are measured at fair value utilizing widely accepted, third-party developed valuation models. The actual terms of each individual contract are entered into a valuation model, along with interest rate and foreign exchange rate data, which is based on readily observable market data published by third-party leading financial news and data providers. Credit risk is factored into the fair value of these assets and liabilities based on the differential between both our credit default swap spread for liabilities and the counterparty’s credit default swap spread for assets as compared with a standard AA-rated counterparty; however, this had no significant impact on the valuation at April 2, 2011.
Foreign currency exchange contracts are measured at fair value using the market method valuation technique. The inputs to this technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data providers. These are observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions so they are classified as Level 2.
Investments in other marketable securities represent investments in notes issued by securitization trusts that purchase timeshare notes receivables from timeshare developers and are classified as available for sale. Fair value for these notes was determined based on bids received from prospective purchasers and observable market inputs for similar securitization interests in markets that are relatively inactive compared with the market environment in which they were originally issued.
Fair Value Hedges
Our Finance group enters into interest rate exchange contracts to mitigate exposure to changes in the fair value of its fixed-rate receivables and debt due to fluctuations in interest rates. By using these contracts, we are able to convert our fixed-rate cash flows to floating-rate cash flows. The amount of ineffectiveness on our fair value hedges and the gain (loss) recorded in the Consolidated Statements of Operations were both insignificant in the first quarter of 2011 and 2010.
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We manufacture and sell our products in a number of countries throughout the world, and, therefore, we are exposed to movements in foreign currency exchange rates. The primary purpose of our foreign currency hedging activities is to manage the volatility associated with foreign currency purchases of materials, foreign currency sales of products, and other assets and liabilities in the normal course of business. We primarily utilize forward exchange contracts and purchased options with maturities of no more than 18 months that qualify as cash flow hedges. These are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses. At April 2, 2011, we had a net deferred gain of $29 million in OCI related to these cash flow hedges. As the underlying transactions occur, we expect to reclassify $15 million of after-tax gains into earnings in the next 12 months and $14 million of after-tax gains into earnings in the following 12-month period.
We hedge our net investment position in major currencies and generate foreign currency interest payments that offset other transactional exposures in these currencies. To accomplish this, we borrow directly in foreign currency and designate a portion of foreign currency debt as a hedge of net investments. We also may utilize currency forwards as hedges of our related foreign net investments. We record changes in the fair value of these contracts in other comprehensive income to the extent they are effective as cash flow hedges. If a contract does not qualify for hedge accounting or is designated as a fair value hedge, changes in the fair value of the contract are recorded in earnings. Currency effects on the effective portion of these hedges, which are reflected in the cumulative translation adjustment account within OCI, produced a $24 million after-tax gain in the first quarter of 2011, resulting in an accumulated net gain balance of $38 million at April 2, 2011. The ineffective portion of these hedges was insignificant.
Activity within accumulated other comprehensive loss and OCI related to the Manufacturing group’s foreign currency exchange contracts is provided in the following table:
Three Months Ended | |||||||||
(In millions) | Gain (Loss) Location | April 2, 2011 | April 3, 2010 | ||||||
Amount of gain recognized in OCI | $ | 6 | $ | 6 | |||||
Effective portion of derivative reclassified from accumulated other comprehensive loss into income | Cost of sales | 4 | 3 |
Assets Recorded at Fair Value on a Nonrecurring Basis
The table below presents those assets that are measured at fair value on a nonrecurring basis that had fair value measurement adjustments during the first quarter of 2011 and 2010. These assets were measured using significant unobservable inputs (Level 3) and include the following:
Gain (Loss) | ||||||||||||||||
Balance at | Three Months Ended | |||||||||||||||
(In millions) | April 2, 2011 | April 3, 2010 | April 2, 2011 | April 3, 2010 | ||||||||||||
Finance group | ||||||||||||||||
Impaired finance receivables | $ | 508 | $ | 510 | $ | (33 | ) | $ | (46 | ) | ||||||
Finance receivables held for sale | 237 | 598 | (11 | ) | (10 | ) | ||||||||||
Other assets | 54 | 67 | (6 | ) | (18 | ) |
Impaired Finance Receivables — Impaired nonaccrual finance receivables are included in the table above since the measurement of required reserves on our impaired finance receivables is significantly dependent on the fair value of the underlying collateral. Fair values of collateral are determined based on the use of appraisals, industry pricing guides, input from market participants, our recent experience selling similar assets or internally developed discounted cash flow models. Fair value measurements recorded on impaired finance receivables resulted in charges to provision for loan losses and primarily were related to initial fair value adjustments.
Finance Receivables Held for Sale — Finance receivables held for sale are recorded at the lower of cost or fair value. As a result of our plan to exit the non-captive Finance business certain finance receivables are classified as held for sale. At April 2, 2011, the finance receivables held for sale are primarily assets in the golf mortgage and timeshare product lines. Timeshare finance receivables classified as held for sale were identified at the individual loan level; whereas the majority of golf course mortgages were identified as a portion of a larger portfolio with common characteristics based on the intention to balance the sale of certain loans with the collection of others to maximize economic value. In the first quarter of 2011, certain golf course mortgages were identified at the individual loan level as a result of their inclusion in a portfolio sale subsequent to the end of the quarter. These finance receivables are recorded at fair value on a nonrecurring basis during periods in which the fair value is lower than the cost value.
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Other assets — Other assets include repossessed assets and properties, operating assets received in satisfaction of troubled finance receivables and other investments, which are accounted for under the equity method of accounting and have no active, quoted market prices. The fair value of these assets is determined based on the use of appraisals, industry pricing guides, input from market participants, our recent experience selling similar assets or internally developed discounted cash flow models. For our other investments, the discounted cash flow models incorporate assumptions specific to the nature of the investments’ business and underlying assets and include industry valuation benchmarks such as discount rates, capitalization rates and cash flow multiples.
Assets and Liabilities Not Recorded at Fair Value
The carrying value and estimated fair values of our financial instruments that are not reflected in the financial statements at fair value are as follows:
April 2, 2011 | January 1, 2011 | |||||||||||||||
(In millions) | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | ||||||||||||
Manufacturing group | ||||||||||||||||
Long-term debt, excluding leases | $ | (2,211 | ) | $ | (2,892 | ) | $ | (2,172 | ) | $ | (2,698 | ) | ||||
Finance group | ||||||||||||||||
Finance receivables held for investment, excluding leases | 3,052 | 2,875 | 3,345 | 3,131 | ||||||||||||
Debt | (3,152 | ) | (3,070 | ) | (3,660 | ) | (3,528 | ) |
Fair value for the Manufacturing group debt is determined using market observable data for similar transactions. At April 2, 2011 and January 2, 2010, approximately 35% and 33%, respectively, of the fair value of term debt for the Finance group was determined based on observable market transactions. The remaining Finance group debt was determined based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations. We utilize the same valuation methodologies to determine the fair value estimates for finance receivables held for investment as used for finance receivables held for sale.
Note 13: Income Tax Expense
Income tax expense for continuing operations of $15 million for both the first quarter of 2011 and 2010 equated to an effective income tax rate of 32.6% and 136.4%, respectively. The decrease in the rate was primarily attributable to the write-off of an $11 million deferred tax asset related to a change in the tax treatment of the Medicare Part D program due to U.S. health-care law enacted in the first quarter of 2010 which equated to an effective income tax rate impact of 98.2%.
Note 14: Segment Information
We operate in, and report financial information for, the following five business segments: Cessna, Bell, Textron Systems, Industrial and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses and special charges. The measurement for the Finance segment excludes special charges and includes interest income and expense, along with intercompany interest 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.
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Our revenues by segment and a reconciliation of segment profit to income from continuing operations before income taxes are as follows:
Three Months Ended | ||||||||
(In millions) | April 2, 2011 | April 3, 2010 | ||||||
REVENUES | ||||||||
Manufacturing Group | ||||||||
Cessna | $ | 556 | $ | 433 | ||||
Bell | 749 | 618 | ||||||
Textron Systems | 445 | 458 | ||||||
Industrial | 703 | 625 | ||||||
2,453 | 2,134 | |||||||
Finance Group | 26 | 76 | ||||||
Total revenues | $ | 2,479 | $ | 2,210 | ||||
SEGMENT OPERATING PROFIT | ||||||||
Manufacturing Group | ||||||||
Cessna | $ | (38 | ) | $ | (24 | ) | ||
Bell | 91 | 74 | ||||||
Textron Systems | 53 | 55 | ||||||
Industrial | 61 | 49 | ||||||
167 | 154 | |||||||
Finance Group | (44 | ) | (58 | ) | ||||
Segment profit | 123 | 96 | ||||||
Special charges | — | (12 | ) | |||||
Corporate expenses and other, net | (39 | ) | (37 | ) | ||||
Interest expense, net for Manufacturing group | (38 | ) | (36 | ) | ||||
Income from continuing operations before income taxes | $ | 46 | $ | 11 |
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Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Consolidated Results of Operations
Revenues
Three Months Ended | ||||||||
(Dollars in millions) | April 2, 2011 | April 3, 2010 | ||||||
Revenues | $ | 2,479 | $ | 2,210 | ||||
% change compared with prior period | 12 | % |
Revenues increased $269 million, 12%, in the first quarter of 2011, compared with the corresponding period of 2010. This increase was due to revenue increases in the Bell, Cessna and Industrial segments that were partially offset by lower revenue in the Finance and Textron Systems segments. The net revenue increase included the following factors:
· | Higher revenues of $131 million in the Bell segment, largely due to higher volume in the V-22 program; |
· | An increase in Cessna’s revenue of $123 million, primarily due to the mix of light- and mid-size Citation business jets sold during the quarter; and |
· | Higher Industrial segment revenues of $78 million, largely due to higher volume reflecting improvements in the automotive industry; |
· | Partially offset by lower revenues at the Finance segment of $50 million, primarily attributable to the lower average finance receivable portfolio balance resulting from the continued liquidation; and |
· | A decrease in Textron Systems’ revenue of $13 million, largely due to lower aftermarket volume in the Land and Marine Systems product line. |
Cost of Sales and Gross Margin
Three Months Ended | ||||||||
(Dollars in millions) | April 2, 2011 | April 3, 2010 | ||||||
Cost of sales | $ | 2,055 | $ | 1,776 | ||||
% change compared with prior period | 16 | % | ||||||
Gross margin percentage of Manufacturing revenues | 16.2 | % | 16.8 | % |
On a dollar basis, cost of sales increased $279 million, 16%, in 2011, largely due to the higher sales volumes. Cost of sales as a percentage of Manufacturing revenues was 83.8% in the first quarter of 2011 and 83.2% in the first quarter of 2010, primarily due to $17 million in higher research and development costs at Cessna and Bell in the first quarter of 2011, compared with the corresponding period of 2010.
Selling and Administrative Expense
Three Months Ended | ||||||||
(Dollars in millions) | April 2, 2011 | April 3, 2010 | ||||||
Selling and administrative expenses | $ | 304 | $ | 285 | ||||
% change compared with prior period | 7 | % |
Selling and administrative expense increased $19 million, 7%, in the first quarter of 2011, compared with the corresponding period of 2010, with a $29 million increase related to the Manufacturing businesses and Corporate, largely related to the impact of stock appreciation on compensation expense of $10 million and higher marketing, bid and proposal costs. This increase was partially offset by $10 million of lower expenses at the Finance segment reflecting lower compensation expense associated with a workforce reduction in the non-captive business.
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Interest Expense
Three Months Ended | ||||||||
(Dollars in millions) | April 2, 2011 | April 3, 2010 | ||||||
Interest expense | $ | 62 | $ | 71 | ||||
% change compared with prior period | (13 | )% |
Interest expense on the Consolidated Statement of Operations includes interest for both the Finance and Manufacturing borrowing groups with interest related to intercompany borrowings eliminated. Our consolidated interest expense decreased $9 million, 13%, in the first quarter of 2011, compared with the corresponding period of 2010, primarily due to a $6 million decrease for the Finance group, largely due to the reduction in its debt as it liquidates the non-captive commercial finance business.
Special Charges
Special charges of $12 million in the first quarter of 2010 represent restructuring costs incurred under the program that was completed at the end of 2010 and primarily represent severance costs. There were no special charges in the first quarter of 2011.
Backlog
Three Months Ended | ||||||||
(In millions) | April 2, 2011 | January 1, 2011 | ||||||
Bell | $ | 7,318 | $ | 7,199 | ||||
Cessna | 2,635 | 2,928 | ||||||
Textron Systems | 1,610 | 1,598 |
Backlog at Bell increased $119 million in the first quarter of 2011, compared with the corresponding period of 2010, primarily reflecting higher commercial aircraft orders in excess of deliveries, partially offset by higher deliveries related to the V-22 and H-1 programs. Backlog declined $293 million at Cessna primarily reflecting deliveries in excess of orders.
Segment Analysis
Segment profit is an important measure used to evaluate performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses and special charges. The measurement for the Finance segment excludes special charges and includes interest income and expense, along with intercompany interest expense.
Cessna
Three Months Ended | ||||||||||||
(Dollars in millions) | April 2, 2011 | April 3, 2010 | % Change | |||||||||
Revenues | $ | 556 | $ | 433 | 28 | % | ||||||
Operating expenses | 594 | 457 | 30 | % | ||||||||
Segment loss | (38 | ) | (24 | ) | (58 | )% | ||||||
Profit margin | (7 | )% | (6 | )% |
Cessna Revenues and Operating Expenses
The following factors contributed to the change in revenue from the prior year quarter:
(In millions) | 2011 versus 2010 | |||
Volume and mix | $ | 124 | ||
Other | (1 | ) | ||
Total change | $ | 123 |
In the first quarter of 2011, Cessna’s revenues increased $123 million, 28%, compared with the corresponding period of
2010, primarily due to the mix of light- and mid-size Citation business jets sold during the quarter. We delivered 31 Citation business jets in both the first quarter of 2011 and 2010.
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Operating expenses increased by $137 million, 30%, in the first quarter of 2011, compared with the corresponding period of 2010, largely due to a change in product mix with more higher-cost business jets sold in the quarter. In addition, operating expenses were negatively impacted by lower forfeited deposits of $9 million and higher engineering and development expenses of $9 million, primarily due to new product development.
Cessna Segment Loss
The following factors contributed to the change in segment loss from the prior year quarter:
(In millions) | 2011 versus 2010 | |||
Volume and mix | $ | 17 | ||
Inflation, net of pricing | (4 | ) | ||
Performance | (27 | ) | ||
Total change | $ | (14 | ) |
Cessna’s segment loss increased $14 million, 58%, in the first quarter of 2011, compared with the corresponding period of 2010, primarily due to unfavorable performance of $27 million and inflation in excess of pricing of $4 million. The unfavorable performance included lower forfeited deposits of $9 million, as well as higher engineering and development expenses of $9 million, primarily due to new product development. These factors were partially offset by a $17 million favorable impact from mix and volume, primarily related to business jet mix.
Bell
Three Months Ended | ||||||||||||
(Dollars in millions) | April 2, 2011 | April 3, 2010 | % Change | |||||||||
Revenues: | ||||||||||||
V-22 program | $ | 358 | $ | 210 | 70 | % | ||||||
Other military | 170 | 198 | (14 | )% | ||||||||
Commercial | 221 | 210 | 5 | % | ||||||||
Total revenues | 749 | 618 | 21 | % | ||||||||
Operating expenses | 658 | 544 | 21 | % | ||||||||
Segment profit | 91 | 74 | 23 | % | ||||||||
Profit margin | 12 | % | 12 | % |
Bell manufactures helicopters, tiltrotor aircraft, and related spare parts and provides services for military and/or commercial markets. Bell’s major U.S. Government programs at this time are the V-22 tiltrotor aircraft and the H-1 helicopter platforms, which are both in the production stage and represent a significant portion of Bell’s revenues from the U.S. Government. During 2011, we continued to ramp up production and deliveries to meet customer schedule requirements for these programs.
Bell Revenues and Operating Expenses
The following factors contributed to the change in revenue from the prior year quarter:
(In millions) | 2011 versus 2010 | |||
Volume | $ | 124 | ||
Other | 7 | |||
Total change | $ | 131 |
Bell’s revenues increased $131 million, 21%, in the first quarter of 2011, compared with the corresponding period of 2010, with volume representing 95% of the increase. Bell’s V-22 program revenues increased $148 million, 70%, in the first quarter of 2011 primarily reflecting higher aircraft deliveries. We delivered 9 V-22 aircraft during the first quarter of 2011, compared with 4 deliveries in the first quarter of 2010. Other military revenues decreased $28 million, 14%, in 2011 largely due to a $20 million decrease in aftermarket volume reflecting the completion of several non-recurring programs in 2010, along with timing of deliveries for other programs, partially offset by higher deliveries of H-1 aircraft. We delivered 4 H-1 aircraft in the first quarter of 2011, compared with 3 deliveries in the first quarter of 2010. Commercial revenues increased $11 million, primarily due to higher aftermarket volume. Bell delivered 15 commercial aircraft in the quarter, flat with deliveries in the first quarter of 2010.
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Bell Segment Profit
The following factors contributed to the change in segment profit from the prior year quarter:
(In millions) | 2011 versus 2010 | |||
Volume and mix | $ | 4 | ||
Pricing, net of inflation | 3 | |||
Performance | 10 | |||
Total change | $ | 17 |
Bell’s segment profit increased $17 million, 23%, in the first quarter of 2011, compared with the corresponding period of 2010, primarily due to improved performance, largely attributable to efficiencies achieved from higher production volume. Bell’s improved performance included $19 million related to the V-22 and H-1 programs, reflecting the impact from efficiencies realized in connection with the ramp-up of production lines and lower overhead and material costs, partially offset by higher research and development costs of $8 million.
Textron Systems
Three Months Ended | ||||||||||||
(Dollars in millions) | April 2, 2011 | April 3, 2010 | % Change | |||||||||
Revenues | $ | 445 | $ | 458 | (3 | )% | ||||||
Operating expenses | 392 | 403 | (3 | )% | ||||||||
Segment profit | 53 | 55 | (4 | )% | ||||||||
Profit margin | 12 | % | 12 | % |
Textron Systems Revenues and Operating Expenses
The following factors contributed to the change in revenue from the prior year quarter:
(In millions) | 2011 versus 2010 | |||
Volume | $ | (16 | ) | |
Other | 3 | |||
Total change | $ | (13 | ) |
Revenues at Textron Systems decreased $13 million, 3%, in the first quarter of 2011, compared with the corresponding period of 2010, primarily due to a $12 million decrease in our Land and Marine Systems product line, largely due to lower armored security vehicle aftermarket volumes.
Textron System’s operating expenses decreased $11 million, 3%, in the first quarter of 2011, compared with the corresponding period of 2010, primarily due to lower net sales volume.
Textron Systems Segment Profit
The following factors contributed to the change in segment profit from the prior year quarter:
(In millions) | 2011 versus 2010 | |||
Volume and mix | $ | (5 | ) | |
Other | 3 | |||
Total change | $ | (2 | ) |
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Industrial
Three Months Ended | ||||||||||||
(Dollars in millions) | April 2, 2011 | April 3, 2010 | % Change | |||||||||
Revenues: | ||||||||||||
Fuel systems and functional components | $ | 471 | $ | 406 | 16 | % | ||||||
Other industrial | 232 | 219 | 6 | % | ||||||||
Total revenues | 703 | 625 | 12 | % | ||||||||
Operating expenses | 642 | 576 | 11 | % | ||||||||
Segment profit | 61 | 49 | 24 | % | ||||||||
Profit margin | 9 | % | 8 | % |
Industrial Revenues and Operating Expenses
The following factors contributed to the change in revenue from the prior year quarter:
(In millions) | 2011 versus 2010 | |||
Volume | $ | 63 | ||
Foreign exchange | 7 | |||
Other | 8 | |||
Total change | $ | 78 |
Revenues at the Industrial segment increased $78 million, 12%, in the first quarter of 2011, compared with the corresponding period of 2010. Fuel systems and functional components revenue increased 16% in the first quarter of 2011, compared with the corresponding period of 2010, primarily due to higher volume of $59 million reflecting improvements in the automotive industry and a favorable foreign exchange impact of $8 million, largely due to fluctuations with the euro. Other industrial revenues also increased primarily due to higher volume in the powered tools, testing and measurement equipment product line.
The Industrial segment’s operating expenses increased $66 million, 11%, in the first quarter of 2011, compared with the corresponding period of 2010, primarily due to the cost of sales associated with the higher sales volumes and inflation, largely reflecting higher material and labor costs.
Industrial Segment Profit
The following factors contributed to the change in segment profit from the prior year quarter:
(In millions) | 2011 versus 2010 | |||
Volume | $ | 16 | ||
Inflation, net of pricing | (11 | ) | ||
Performance | 6 | |||
Other | 1 | |||
Total change | $ | 12 |
Segment profit for the Industrial segment increased $12 million, 24%, in the first quarter of 2011, compared with the corresponding period of 2010, primarily due to a $16 million impact from higher volume. Inflation in excess of pricing largely reflects higher material costs in all of the industrial businesses and higher labor cost in our fuel systems and functional components business. The improved cost performance largely reflects the timing of recoveries from customers related to engineering costs incurred in our fuel systems and functional components business.
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Finance
Three Months Ended | ||||||||||||
(Dollars in millions) | April 2, 2011 | April 3, 2010 | % Change | |||||||||
Revenues | $ | 26 | $ | 76 | (66 | )% | ||||||
Segment loss | (44 | ) | (58 | ) | 24 | % |
Our plan to exit the non-captive commercial finance business in our Finance segment is being effected through a combination of orderly liquidation and selected sales of the remaining non-captive finance receivables. The exit plan is expected to be substantially complete over the next three to five years.
Finance Revenues
Finance segment revenues decreased $50 million, 66%, in the first quarter of 2011, compared with the corresponding period of 2010, primarily due to the following factors:
· | $31 million attributable to the lower average finance receivable portfolio balance of $2.2 billion; |
· | $9 million in higher portfolio losses, net of gains; and |
· | $7 million of lower accretion of valuation allowance. |
Portfolio losses, net of gains increased primarily as a result of a $13 million gain on the sale of a distribution finance receivable portfolio in the first quarter of 2010 and higher portfolio losses in the timeshare portfolio in the first quarter of 2011, primarily the result of an early payoff of one significant notes receivable loan, partially offset by lower impairment charges in the structured capital portfolio.
Finance Segment Loss
Finance segment loss decreased $14 million, 24%, in the first quarter of 2011, compared with the corresponding period of 2010, primarily due to the following factors:
· | $43 million in lower provision for loan losses, primarily the result of a decline in the accounts identified as nonaccrual during the quarter as compared to last year; and |
· | $10 million in lower operating and administrative expenses, primarily due to lower compensation expense associated with a workforce reduction in the non-captive business; |
· | Partially offset by a $20 million reduction in interest margin resulting from the lower average finance receivable portfolio balance of $2.2 billion; |
· | $9 million in higher portfolio losses, net of gains; and |
· | $7 million of lower accretion of valuation allowance. |
Finance Portfolio Quality
The following table reflects information about the Finance segment’s credit performance related to finance receivables held for investment. Finance receivables held for sale are reflected at fair value on the Consolidated Balance Sheets. As a result, finance receivables held for sale are not included in the credit performance statistics below.
(Dollars in millions) | April 2, 2011 | January 1, 2011 | ||||||
Finance receivables held for investment | $ | 3,904 | $ | 4,213 | ||||
Nonaccrual finance receivables | $ | 836 | $ | 850 | ||||
Allowance for losses | $ | 338 | $ | 342 | ||||
Ratio of nonaccrual finance receivables to finance receivables held for investment | 21.40 | % | 20.17 | % | ||||
Ratio of allowance for losses on impaired nonaccrual finance receivables to impaired nonaccrual finance receivables | 25.55 | % | 23.82 | % | ||||
Ratio of allowance for losses on finance receivables to nonaccrual finance receivables held for investment | 40.41 | % | 40.30 | % | ||||
Ratio of allowance for losses on finance receivables to finance receivables held for investment | 8.65 | % | 8.13 | % | ||||
60+ days contractual delinquency as a percentage of finance receivables | 10.71 | % | 9.77 | % | ||||
60+ days contractual delinquency | $ | 418 | $ | 411 | ||||
Repossessed assets and properties | $ | 147 | $ | 157 | ||||
Operating assets received in satisfaction of troubled finance receivables | $ | 100 | $ | 107 |
At April 2, 2011, finance receivables held for investment included $1.7 billion of non-captive finance receivables, compared with $1.9 billion at the end of 2010. In addition, finance receivables held for sale by the non-captive business totaled $237 million at April 2, 2011, compared with $413 million at the end of 2010.
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Liquidity and Capital Resources
Our financings are conducted through two separate borrowing groups. The Manufacturing group consists of Textron Inc. consolidated with its majority-owned subsidiaries that operate in the Cessna, Bell, Textron Systems and Industrial segments. The Finance group, which also is the Finance segment, consists of TFC, its consolidated subsidiaries and three other finance subsidiaries owned by Textron Inc. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements.
Key information that is utilized in assessing our liquidity is summarized below:
(Dollars in millions) | April 2, 2011 | January 1, 2011 | ||||||
Manufacturing group | ||||||||
Cash and equivalents | $ | 986 | $ | 898 | ||||
Debt | 2,549 | 2,302 | ||||||
Shareholders’ equity | 3,052 | 2,972 | ||||||
Capital (debt plus shareholders’ equity) | 5,601 | 5,274 | ||||||
Net debt (net of cash and equivalents) to capital | 33.9 | % | 32.1 | % | ||||
Debt to capital | 45.5 | % | 43.6 | % | ||||
Finance group | ||||||||
Cash and equivalents | $ | 36 | $ | 33 | ||||
Debt | 3,152 | 3,660 |
We believe that our calculations of debt to capital and net debt to capital are useful measures as they provide a summary indication of the level of debt financing (i.e., leverage) that is in place to support our capital structure, as well as to provide an indication of the capacity to add further leverage. We believe that with our existing cash balances, coupled with the continued successful execution of the exit plan for the non-captive portion of the commercial finance business, and cash we expect to generate from our manufacturing operations, we will have sufficient cash to meet our future needs.
We maintain an effective shelf registration statement filed with the Securities and Exchange Commission that allows us to issue an unlimited amount of public debt and other securities.
On March 23, 2011, Textron Inc. entered into a senior unsecured revolving credit facility for an aggregate principal amount of $1.0 billion. This facility agreement expires in March 2015 and replaces the $1.25 billion 5-year facility that was scheduled to expire in April 2012. TFC also has a credit facility that expires in April 2012. During the first quarter of 2011, the borrowing capacity of TFC’s facility was reduced to an aggregate principal amount of $1.45 billion. At April 2, 2011, there were no amounts outstanding under the Textron Inc. facility and $1.2 billion outstanding under TFC’s facility.
In the first quarter of 2011, we liquidated $485 million of the Finance group’s finance receivables, net of originations. These finance receivable reductions occurred in both the non-captive and captive finance portfolios but were primarily driven by the non-captive portfolio in connection with our exit plan, including $272 million in the timeshare product line. These reductions resulted from the combination of scheduled finance receivable collections, sales, discounted payoffs, repossession of collateral, charge-offs and impairment charges recorded as portfolio losses, net of gains in our Consolidated Statements of Operations. At April 2, 2011, $1.9 billion of finance receivables remained in the non-captive portfolio.
In 2009, we issued $600 million of 4.5% Convertible Senior Notes with a maturity date of May 1, 2013 as discussed in Note 8 to the Consolidated Financial Statements. For at least 20 trading days during the 30 consecutive trading days ended March 31, 2011, our common stock price exceeded the $17.06 per share conversion threshold price set forth for these Convertible Notes. Accordingly, the notes are convertible at the holder’s option through June 30, 2011. We may deliver shares of
common stock, cash or a combination of cash and shares of common stock in satisfaction of our obligations upon conversion of the Convertible Notes. We intend to settle the face value of the Convertible Notes in cash. We have continued to classify these Convertible Notes as long term based on our intent and ability to maintain the debt outstanding for at least one year through the use of various funding sources available to us.
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Manufacturing Group Cash Flows
Cash flows from continuing operations for the Manufacturing group as presented in our Consolidated Statement of Cash Flows are summarized below:
Three Months Ended | ||||||||
(In millions) | April 2, 2011 | April 3, 2010 | ||||||
Operating activities | $ | 73 | $ | (66 | ) | |||
Investing activities | (121 | ) | (75 | ) | ||||
Financing activities | 129 | (166 | ) |
Cash flow from operating activities improved in the first quarter of 2011, compared with the corresponding period of 2010 primarily due to higher earnings for the Manufacturing group, adjusted for non-cash items such as depreciation and amortization. Cash used for restructuring activities totaled $22 million and $16 million in the first quarter of 2011 and 2010, respectively.
We used more cash for investing activities largely due to higher capital expenditures, which totaled $78 million and $38 million in the first quarter of 2011 and 2010, respectively.
In the first quarter of 2011, we began to issue commercial paper again for our short-term financing needs, ending the quarter with $203 million of outstanding borrowings. We also loaned $60 million to the Finance group in the first quarter of 2011, compared with $150 million in the first quarter of 2010.
Capital Contributions Paid To and Dividends Received From TFC
Under a Support Agreement between Textron Inc. and TFC, Textron Inc. is required to maintain a controlling interest in TFC. The agreement also requires Textron Inc. to ensure that TFC maintains fixed charge coverage of no less than 125% and consolidated shareholder’s equity of no less than $200 million. Cash contributions paid to TFC to maintain compliance with the Support Agreement and dividends paid by TFC to Textron Inc. are detailed below:
Three Months Ended | ||||||||
(In millions) | April 2, 2011 | April 3, 2010 | ||||||
Dividends paid by TFC to Textron Inc. | $ | 130 | $ | 125 | ||||
Capital contributions paid to TFC under Support Agreement | (63 | ) | (75 | ) |
Due to the nature of these contributions, we classify these contributions within cash flows used by operating activities for the Manufacturing group in the Consolidated Statement of Cash Flows. Capital contributions to support Finance group growth in the ongoing captive finance business are classified as cash flows from financing activities. The Finance group’s net income (loss) is excluded from the Manufacturing group’s cash flows, while dividends from the Finance group are included within cash flows from operating activities for the Manufacturing group as they represent a return on investment.
Finance Group Cash Flows
The cash flows from continuing operations for the Finance group are summarized below:
Three Months Ended | ||||||||
(In millions) | April 2, 2011 | April 3, 2010 | ||||||
Operating activities | $ | (29 | ) | $ | (50 | ) | ||
Investing activities | 513 | 771 | ||||||
Financing activities | (482 | ) | (785 | ) |
The Finance group used less cash for operating activities largely due to a $51 million payment made to the Manufacturing group in the first quarter of 2010 under the tax sharing agreement for which there were less than $1 million in tax payments
in the first quarter of 2011. This was partially offset by lower earnings for the Finance group after adjusting for non-cash items such as provision for losses on finance receivables.
27
Cash receipts from the collection of finance receivables continued to outpace finance receivable originations, which resulted in net cash inflow from investing activities in both quarters. Finance receivables repaid and proceeds from sales totaled $579 million and $937 million in the first quarter of 2011 and 2010, respectively, while cash outflows for originations declined to $125 million in the first quarter of 2011 from $226 million in the first quarter of 2010. These decreases were largely driven by the wind down of the non-captive finance receivable portfolio.
In the first quarter of 2011, TFC made a discretionary payment of $250 million against the outstanding balance on its bank line of credit; however, cash used for financing activities was lower in 2011 primarily due to $410 million in long-term debt repayments in the first quarter of 2011, compared with $925 million in the first quarter of 2010. In addition, the Finance group received $144 million in proceeds from the issuance of long-term debt in the first quarter of 2011, compared with $20 million in the first quarter of 2010.
TFC borrowed $60 million and $150 million from Textron Inc. with interest in the first quarter of 2011 and 2010, respectively, to pay down maturing debt. As of April 2, 2011 and January 1, 2011, the outstanding balance due to Textron Inc. for these borrowings was $375 million and $315 million, respectively.
Consolidated Cash Flows
The consolidated cash flows from continuing operations, after elimination of activity between the borrowing groups, are summarized below:
Three Months Ended | ||||||||
(In millions) | April 2, 2011 | April 3, 2010 | ||||||
Operating activities | $ | 55 | $ | (89 | ) | |||
Investing activities | 355 | 639 | ||||||
Financing activities | (327 | ) | (921 | ) |
Cash flow from operating activities improved in the first quarter of 2011, compared with the corresponding period of 2010 primarily due to higher earnings for the Manufacturing group, adjusted for non-cash items such as depreciation and amortization.
Cash receipts from the collection of finance receivables continued to outpace finance receivable originations, which resulted in net cash inflow from investing activities in both quarters. Finance receivables repaid and proceeds from sales totaled $458 million and $778 million in the first quarter of 2011 and 2010, respectively, while cash outflows for originations declined to $76 million in the first quarter of 2011 from $145 million in the first quarter of 2010. These decreases were largely driven by the wind down of the non-captive finance receivable portfolio. We also had higher capital expenditures of $78 million and $38 million in the first quarter of 2011 and 2010, respectively.
In the first quarter of 2011, we began to issue commercial paper again for our short-term financing needs, ending the quarter with $203 million of outstanding borrowings. The net proceeds from these borrowings were more than offset by a $250 million discretionary payment made by TFC against the outstanding balance on its bank line of credit. Total cash used for financing activities was lower in 2011 primarily due to lower repayments of long-term debt of $417 million in the first quarter of 2011, compared with $936 million in the first quarter of 2010. In addition, we received proceeds of $144 million in the first quarter of 2011 from the issuance of debt, compared with $20 million in the first quarter of 2010.
Captive Financing and Other Intercompany Transactions
The Finance group finances retail purchases and leases for new and used aircraft and equipment in support of 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.
28
Three Months Ended | ||||||||
(In millions) | April 2, 2011 | April 3, 2010 | ||||||
Reclassifications from investing activities: | ||||||||
Finance receivable originations for Manufacturing group inventory sales | $ | (49 | ) | $ | (81 | ) | ||
Cash received from customers and sale of receivables | 121 | 159 | ||||||
Other capital contributions made to Finance group | (40 | ) | (20 | ) | ||||
Other | 5 | (1 | ) | |||||
Total reclassifications from investing activities | 37 | 57 | ||||||
Reclassifications from financing activities: | ||||||||
Capital contribution paid by Manufacturing group to Finance group under Support Agreement | 63 | 75 | ||||||
Dividends received by Manufacturing group from Finance group | (130 | ) | (125 | ) | ||||
Other capital contributions made to Finance group | 40 | 20 | ||||||
Other | 1 | — | ||||||
Total reclassifications from financing activities | (26 | ) | (30 | ) | ||||
Total reclassifications and adjustments to cash flow from operating activities | $ | 11 | $ | 27 |
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There has been no significant change in our exposure to market risk during the three months ended April 2, 2011. For discussion of our exposure to market risk, refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk contained in Textron’s 2010 Annual Report on Form 10-K.
Item 4. | CONTROLS AND PROCEDURES |
We have carried out an evaluation, under the supervision and with the participation of our management, including our Chairman and Chief Executive Officer (CEO) and our Executive Vice President and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Act)) as of the end of the fiscal quarter covered by this report. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting during the fiscal quarter ended April 2, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 5. | OTHER INFORMATION |
(a) | The Annual Meeting of Shareholders of Textron Inc. was held on April 27, 2011 in Providence, Rhode Island. Of the 276,158,767 shares outstanding as of the record date, 240,389,315 shares (approximately 87%) were present or represented by proxy at the meeting. |
The results of the voting on the matters submitted to the shareholders are as follows:
1. | The following persons were elected to serve as directors until the next annual shareholders’ meeting and received the votes listed: |
For | Against | Abstain | Broker Non-Vote | |||||
James T. Conway | 204,515,287 | 5,944,022 | 3,896,211 | 26,033,795 | ||||
Paul E. Gagné | 195,314,749 | 15,101,512 | 3,939,259 | 26,033,795 | ||||
Dain M. Hancock | 203,499,840 | 6,831,360 | 4,024,319 | 26,033,796 | ||||
Lloyd G. Trotter | 197,299,657 | 12,969,982 | 4,085,882 | 26,033,794 |
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The following directors have terms of office which continued after the meeting: Class I expiring in 2012: Scott C. Donnelly, Lawrence K. Fish and Joe T. Ford and Class II expiring in 2013: Kathleen M. Bader, R. Kerry Clark, Ivor J. Evans, Lord Powell of Bayswater KCMG and James L. Ziemer. |
2. | The advisory vote on the compensation of our named executive officers, as disclosed in our proxy statement, was approved by the following vote: |
For | Against | Abstain | Broker Non-Vote | |||||
173,787,999 | 33,876,953 | 5,431,267 | 27,293,096 |
3. | The advisory vote on the frequency of advisory votes on executive compensation received the following votes: |
One Year | Two Years | Three Years | Abstain | Broker Non-Vote | ||||||
187,994,457 | 1,922,661 | 18,957,282 | 5,219,891 | 26,295,024 |
In light of these results, and consistent with the Board’s recommendation, the Board has determined that Textron will include a shareholder vote on the compensation of its named executive officers in its proxy materials annually until the next required vote on the frequency of shareholder votes on the compensation of executives. |
4. | The amendment to our Restated Certificate of Incorporation to provide a right for holders that have owned continuously for a period of at least one year not less than 25% of our outstanding shares of common stock to call a special meeting of shareholders was approved by the following vote: |
For | Against | Abstain | Broker Non-Vote | |||||
231,261,185 | 4,908,867 | 3,221,377 | 0 |
Also, the amendment to Section 2.03 of our Amended and Restated By-Laws, which was approved by the Board of Directors contingent upon shareholder approval of the special meeting amendment, has become effective; this amendment revises the By-Laws to establish procedures by which 25% shareholders may require our Corporate Secretary to call a special meeting. In addition, the By-Law amendment imposes certain procedural requirements on shareholders requesting such a meeting (including the provision of the same information required for shareholder proposals at annual meetings under our advance notice by-law provisions) and imposes qualifications designed to prevent duplicative and unnecessary meetings by eliminating proposals that: |
· | are not proper subjects for shareholder action under, or involve a violation of, applicable law; |
· | are received during the period beginning 90 days prior to the anniversary of the prior annual meeting of shareholders and ending on the date of the next annual meeting of shareholders; |
· | are substantially similar to another item, other than the election of directors, that was presented at a meeting of shareholders held within the prior 12 months, as determined in good faith by the Board; or |
· | are substantially similar to another item that is included in our notice as an item of business to be brought before a shareholder meeting that has been called but not yet held or that is called for a date within 90 days of the receipt of the request, as determined in good faith by the Board. |
5. | The appointment of Ernst & Young LLP by the Audit Committee as Textron's independent registered public accounting firm for 2011 was ratified by the following vote: |
For | Against | Abstain | Broker Non-Vote | |||||
233,624,826 | 2,438,471 | 3,328,128 | 0 |
(b) | On April 25, 2011, we entered into a Hangar License and Services Agreement with our Chief Executive Officer's limited liability company under which Mr. Donnelly's LLC subleases a portion of Textron’s leased hangar space for his personal airplane and may obtain certain aircraft maintenance and other services from Textron for his aircraft. Fees for hangar space, maintenance, fuel and all other services are set at market rates, and Mr. Donnelly fully reimburses us at such market rates and for any expenses incurred by the company. We also entered into a Hangar License and Services Agreement on the same date with our Chief Financial Officer's limited liability company under which Mr. Connor’s LLC leases a portion of our hangar |
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space for his personal airplane at a market rate. No other services are currently provided with respect to Mr. Connor’s aircraft |
Item 6. | EXHIBITS |
3.1 | Certificate of Amendment of Restated Certificate of Incorporation of Textron Inc., filed with the Secretary of State of Delaware on April 27, 2011 |
3.2 | Amended and Restated By-Laws of Textron Inc., effective April 28, 2010 and as further amended April 27, 2011 |
10.1 | Hangar License and Services Agreement made and entered into on April 25, 2011 to be effective as of December 5, 2010, between Textron Inc. and Mr. Donnelly’s limited liability company |
10.2 | Hangar License and Services Agreement made and entered into on April 25, 2011 to be effective as of December 5, 2010, between Textron Inc. and Mr. Connor’s limited liability company |
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. 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. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 | The following materials from Textron Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended April 2, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows and (iv) Notes to the Consolidated Financial Statements, tagged as blocks of text. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TEXTRON INC. | |||
Date: | April 28, 2011 | /s/Richard L. Yates | |
Richard L. Yates Senior Vice President and Corporate Controller (principal accounting officer) |
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LIST OF EXHIBITS
3.1 | Certificate of Amendment of Restated Certificate of Incorporation of Textron Inc., filed with the Secretary of State of Delaware on April 27, 2011 |
3.2 | Amended and Restated By-Laws of Textron Inc., effective April 28, 2010 and as further amended April 27, 2011 |
10.1 | Hangar License and Services Agreement made and entered into on April 25, 2011 to be effective as of December 5, 2010, between Textron Inc. and Mr. Donnelly’s limited liability company |
10.2 | Hangar License and Services Agreement made and entered into on April 25, 2011 to be effective as of December 5, 2010, between Textron Inc. and Mr. Connor’s limited liability company |
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. 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. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 | The following materials from Textron Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended April 2, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows and (iv) Notes to the Consolidated Financial Statements, tagged as blocks of text. |
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