tenq.htm


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
_______________

FORM 10-Q

(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 4, 2009
 
 
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
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
40 Westminster Street, Providence, RI
 
02903
(Address of principal executive offices)
 
(zip code)

(401) 421-2800
(Registrant’s Telephone Number, Including Area Code)


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ü   No   
 
Indicate by check mark whether the registrant 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes         No      
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  [  ü ]                                                         Accelerated filer  [   ]                                                 
 
Non-accelerated filer    [   ]                                                         Smaller reporting company   [   ]
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes        No   ü

 
Common stock outstanding at April 18, 2009 – 244,985,837 shares
 
 

 

 

TEXTRON INC.

INDEX


   
Page
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
 
3
 
4
 
5
 
7
Item 1A.
22
Item 2.
25
Item 3.
37
Item 4.
37
     
PART II.
OTHER INFORMATION
 
     
Item 6.
37
 
38
     



 

 

PART I.  FINANCIAL INFORMATION

 
Item 1.  FINANCIAL STATEMENTS

TEXTRON INC.
Consolidated Statements of Operations (Unaudited)
(In millions, except per share amounts)

   
Three Months Ended
 
   
April 4,
2009
   
March 29,
2008
 
Revenues
           
Manufacturing revenues
  $ 2,404     $ 3,092  
Finance revenues
    122       214  
Total revenues
    2,526       3,306  
Costs, expenses and other
               
Cost of sales
    1,999       2,434  
Selling and administrative
    346       391  
Interest expense, net
    82       115  
Provision for losses on finance receivables
    76       27  
Gain on sale of assets
    (50 )      
Special charges
    32        
Total costs, expenses and other
    2,485       2,967  
Income from continuing operations before income taxes
    41       339  
Income tax benefit (expense)
    2       (114 )
Income from continuing operations
    43       225  
Income from discontinued operations, net of income taxes
    43       6  
Net income
  $ 86     $ 231  
Basic earnings per share
               
Continuing operations
  $ 0.18     $ 0.90  
Discontinued operations
    0.17       0.03  
Basic earnings per share
  $ 0.35     $ 0.93  
Diluted earnings per share
               
Continuing operations
  $ 0.18     $ 0.88  
Discontinued operations
    0.17       0.03  
Diluted earnings per share
  $ 0.35     $ 0.91  
Dividends per share
               
$2.08 Preferred stock, Series A
  $ 0.52     $ 0.52  
$1.40 Preferred stock, Series B
  $ 0.35     $ 0.35  
Common stock
  $ 0.02     $ 0.23  

See Notes to the consolidated financial statements.

 
 
3

 

TEXTRON INC.
Consolidated Balance Sheets (Unaudited)
(Dollars in millions, except per share amounts)
   
April 4,
2009
   
January 3,
2009
 
Assets
           
Manufacturing group
           
Cash and cash equivalents
  $ 1,054     $ 531  
Accounts receivable, net
    854       894  
Inventories
    3,323       3,093  
Other current assets
    453       584  
Assets of discontinued operations
    53       334  
Total current assets
    5,737       5,436  
Property, plant and equipment, less accumulated
depreciation and amortization of $2,473 and $2,436
    2,068       2,088  
Goodwill
    1,688       1,698  
Other assets
    1,460       1,465  
Total Manufacturing group assets
    10,953       10,687  
Finance group
               
Cash and cash equivalents
    637       16  
Finance receivables held for investment, net
    7,052       6,724  
Finance receivables held for sale
    887       1,658  
Other assets
    987       946  
Total Finance group assets
    9,563       9,344  
Total assets
  $ 20,516     $ 20,031  
Liabilities and shareholders’ equity
               
Liabilities
               
Manufacturing group
               
Current portion of long-term debt and short-term debt
  $ 5     $ 876  
Accounts payable
    999       1,101  
Accrued liabilities
    2,471       2,609  
Liabilities of discontinued operations
    130       195  
Total current liabilities
    3,605       4,781  
Other liabilities
    2,973       2,926  
Long-term debt
    2,870       1,693  
Total Manufacturing group liabilities
    9,448       9,400  
Finance group
               
Other liabilities
    434       540  
Deferred income taxes
    212       337  
Debt
    7,954       7,388  
Total Finance group liabilities
    8,600       8,265  
Total liabilities
    18,048       17,665  
Shareholders’ equity
               
Capital stock:
               
Preferred stock
    2       2  
Common stock
    32       32  
Capital surplus
    1,127       1,229  
Retained earnings
    3,106       3,025  
Accumulated other comprehensive loss
    (1,423 )     (1,422 )
      2,844       2,866  
Less cost of treasury shares
    376       500  
Total shareholders’ equity
    2,468       2,366  
Total liabilities and shareholders’ equity
  $ 20,516     $ 20,031  
Common shares outstanding (in thousands)
    244,710       242,041  
 
 
See Notes to the consolidated financial statements.
 
4

 
TEXTRON INC.
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended April 4, 2009 and March 29, 2008, respectively
(In millions)
   
Consolidated
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Net income
  $ 86     $ 231  
Income from discontinued operations
    43       6  
Income from continuing operations
    43       225  
Adjustments to reconcile income from continuing operations to net cash
               
(used in) provided by operating activities:
               
Dividends received from the Finance group
           
Depreciation and amortization
    96       99  
Provision for losses on finance receivables
    76       27  
Special charges
    32        
Share-based compensation
    9       13  
Deferred income taxes
    (113 )     2  
Changes in assets and liabilities excluding those related to acquisitions and divestitures:
               
Accounts receivable, net
    41       (69 )
Inventories
    (248 )     (331 )
Other assets
    (13 )     87  
Accounts payable
    (97 )     155  
Accrued and other liabilities
    (43 )     (127 )
Captive finance receivables, net
    39       59  
Other operating activities, net
    17       4  
Net cash (used in) provided by operating activities of continuing operations
    (161 )     144  
Net cash used in operating activities of discontinued operations
    (8 )     (39 )
Net cash (used in) provided by operating activities
    (169 )     105  
Cash flows from investing activities:
               
Finance receivables originated or purchased
    (1,205 )     (2,846 )
Finance receivables repaid
    1,354       1,933  
Proceeds on receivables sales and securitization sales
    59       372  
Net cash used in acquisitions
          (100 )
Capital expenditures
    (69 )     (81 )
Proceeds from sale of property, plant and equipment
    1       1  
Proceeds from sale of repossessed assets and properties
    68       5  
Other investing activities, net
    12       3  
Net cash provided by (used in) investing activities of continuing operations
    220       (713 )
Net cash provided by (used in) investing activities of discontinued operations
    302       (3 )
Net cash provided by (used in) investing activities
    522       (716 )
Cash flows from financing activities:
               
(Decrease) increase in short-term debt
    (1,612 )     718  
Borrowing under line of credit facilities
    2,970        
Proceeds from issuance of long-term debt
    16       424  
Principal payments on long-term debt
    (578 )     (559 )
Intergroup financing
           
Proceeds from option exercises
          6  
Purchases of Textron common stock
          (96 )
Dividends paid
    (5 )     (57 )
Net cash provided by financing activities of continuing operations
    791       436  
Net cash used in financing activities of discontinued operations
          (2 )
Net cash provided by financing activities
    791       434  
Effect of exchange rate changes on cash and cash equivalents
          7  
Net increase (decrease) in cash and cash equivalents
    1,144       (170 )
Cash and cash equivalents at beginning of period
    547       531  
Cash and cash equivalents at end of period
  $ 1,691     $ 361  

See Notes to the consolidated financial statements.
 
5

 
TEXTRON INC.
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Three Months Ended April 4, 2009 and March 29, 2008, respectively
(In millions)
 
Manufacturing Group*
   
Finance Group*
 
 
2009
   
2008
   
2009
   
2008
 
Cash flows from operating activities:
                     
Net income (loss)
$ 139     $ 200     $ (53 )   $ 31  
Income from discontinued operations
  43       6              
Income (loss) from continuing operations
  96       194       (53 )     31  
Adjustments to reconcile income from continuing operations to net cash
                             
(used in) provided by operating activities:
                             
Dividends received from the Finance group
  84       142              
Depreciation and amortization
  88       89       8       10  
Provision for losses on finance receivables
              76       27  
Special charges
  29             3          
Share-based compensation
  9       13              
Deferred income taxes
  8             (121 )     2  
           Changes in assets and liabilities excluding those related to acquisitions
         and divestitures:
                             
Accounts receivable, net
  41       (69 )            
Inventories
  (245 )     (324 )            
Other assets
  (29 )     81       13       1  
Accounts payable
  (97 )     155              
Accrued and other liabilities
  (129 )     (115 )     86       (12 )
Captive finance receivables, net
                     
Other operating activities, net
  11       11       6       (7 )
Net cash (used in) provided by operating activities of continuing operations
  (134 )     177       18       52  
Net cash used in operating activities of discontinued operations
  (8 )     (39 )            
Net cash (used in) provided by operating activities
  (142 )     138       18       52  
Cash flows from investing activities:
                             
Finance receivables originated or purchased
              (1,325 )     (3,033 )
Finance receivables repaid
              1,513       2,092  
Proceeds on receivables sales and securitization sales
              59       459  
Net cash used in acquisitions
        (100 )            
Capital expenditures
  (69 )     (78 )           (3 )
Proceeds from sale of property, plant and equipment
  1       1              
Proceeds from sale of repossessed assets and properties
              68       5  
Other investing activities, net
  (21 )     (2 )     12       3  
Net cash (used in) provided by investing activities of continuing operations
  (89 )     (179 )     327       (477 )
Net cash provided by (used in) investing activities of discontinued operations
  302       (3 )            
Net cash provided by (used in) investing activities
  213       (182 )     327       (477 )
Cash flows from financing activities:
                             
(Decrease) increase in short-term debt
  (869 )     75       (743 )     643  
Borrowing under line of credit facilities
  1,230             1,740        
Proceeds from issuance of long-term debt
              16       424  
Principal payments on long-term debt
  (35 )     (46 )     (543 )     (513 )
Intergroup financing
  133             (112 )      
Proceeds from option exercises
        6              
Purchases of Textron common stock
        (96 )            
Dividends paid
  (5 )     (57 )     (84 )     (142 )
Net cash provided by (used in) financing activities of continuing operations
  454       (118 )     274       412  
Net cash used in financing activities of discontinued operations
        (2 )            
Net cash provided by (used in) financing activities
  454       (120 )     274       412  
Effect of exchange rate changes on cash and cash equivalents
  (2 )     7       2        
Net increase (decrease) in cash and cash equivalents
  523       (157 )     621       (13 )
Cash and cash equivalents at beginning of period
  531       471       16       60  
Cash and cash equivalents at end of period
$ 1,054     $ 314     $ 637     $ 47  
*Textron is segregated into a Manufacturing group and a Finance group as described in Note 1 to the consolidated financial statements. All significant transactions between the borrowing groups have been eliminated from the consolidated column provided on page 5.
 
See Notes to the consolidated financial statements.
6

 
 
TEXTRON INC.
Notes to the Consolidated Financial Statements (Unaudited)
 
Note 1:  Basis of Presentation
 
The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 3, 2009.  In the opinion of management, the interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair presentation of our consolidated financial position, results of operations and cash flows for the interim periods presented.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

Our financings are conducted through two separate borrowing groups. The Manufacturing group consists of Textron Inc. consolidated with all of its majority-owned subsidiaries that operate in the Cessna, Bell, Textron Systems and Industrial segments, except for the entities comprising the Finance group. The Finance group consists of Textron Financial Corporation along with the entities consolidated into it. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the consolidated financial statements.  All significant intercompany transactions are eliminated from the consolidated financial statements, including retail and wholesale financing activities for inventory sold by our Manufacturing group that is financed by our Finance group.
 
As discussed in Note 5: Discontinued Operations, on April 3, 2009, we sold HR Textron and in November 2008, we completed the sale of our Fluid & Power business unit.  Both of these businesses have been classified as discontinued operations, and all prior period information has been recast to reflect this presentation.

Note 2:  Special Charges

In the fourth quarter of 2008, we initiated a restructuring program to reduce overhead costs and improve productivity across the company, which includes corporate and segment direct and indirect workforce reductions and streamlining of administrative overhead, and announced the exit of portions of our commercial finance business.  We expect to eliminate approximately 8,300 positions worldwide representing approximately 19% of our global workforce at the inception of the program.  As of April 4, 2009, we have exited 9 facilities and plants under this program.

We record restructuring costs in special charges as these costs are generally of a nonrecurring nature and are not included in segment profit, which is our measure used for evaluating performance and for decision-making purposes. Severance costs related to an approved restructuring program are classified as special charges unless the costs are for volume-related reductions of direct labor that are deemed to be of a temporary or cyclical nature.   Severance costs provided for under our existing severance programs are accounted for under SFAS No. 112, “Employers’ Accounting for Postemployment Benefits,” when the costs are probable and estimable.  Special one-time termination benefits are accounted for under SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” at the time all of the criteria are met.
 
 
 
 
7

 

Restructuring costs by segment for the first quarter of 2009 are as follows:

(In millions)
 
Severance
Costs
   
Contract
Terminations
   
Total
Restructuring
 
Cessna
  $ 26     $     $ 26  
Industrial
    1             1  
Finance
    2       1       3  
Corporate
    2             2  
    $ 31     $ 1     $ 32  

Through April 4, 2009, we have incurred $96 million in restructuring costs in special charges with $74 million in severance, $20 million in asset impairment charges and $2 million in contract termination costs.  Since inception of the program, we have incurred restructuring charges of $30 million in the Finance segment, $26 million in the Industrial segment, $31 million at Cessna, $8 million at Corporate and $1 million at Textron Systems.  In the first quarter of 2009, we classified severance costs for certain volume-related direct labor reductions as special charges as these reductions were not considered to be of a seasonal/temporary nature.
 
An analysis of the restructuring program and related reserve account is summarized below:

(In millions)
 
Severance
Costs
   
Contract
Terminations
   
Total
 
Balance at January 3, 2009
  $ 36     $ 1     $ 37  
Provisions
    31       1       32  
Cash paid
    (27 )     -       (27 )
Balance at April 4, 2009
  $ 40     $ 2     $ 42  

The specific restructuring measures and associated estimated costs are based on our best judgment under prevailing circumstances.  We believe that the restructuring reserve balance of $42 million is adequate to cover the costs presently accruable relating to activities formally identified and committed to under approved plans as of April 4, 2009 and anticipate that all actions related to these liabilities will be completed within a 12-month period.

We estimate that we will incur approximately $43 million in additional pre-tax restructuring costs in 2009, largely related to workforce reductions at Cessna that will result in future cash outlays. We may have additional restructuring costs as a result of further headcount reductions and other actions; however, an estimate of additional charges cannot be made at this time. Due to the magnitude of the headcount reductions under this program, as well as additional reductions that may occur in 2009, we are currently assessing the potential curtailment impact such reductions may have on our pension and other postretirement benefit plans.
 
Note 3:  Share-Based Compensation
 
The compensation expense we recorded in net income for our share-based compensation plans is as follows:
 
   
Three Months Ended
 
 
(In millions)
 
April 4,
2009
   
March 29,
2008
 
Compensation income
  $ (2 )   $ (26 )
Hedge expense
    12       32  
Income tax expense
    1       11  
Total net compensation cost included in net income
  $ 11     $ 17  

Stock Options
The stock option compensation cost calculated under the fair value approach is recognized over the vesting period of the stock options.  The weighted-average fair value of options granted per share was $2 and $14 in the first quarter of 2009 and 2008, respectively. We estimate the fair value of options granted on the date of grant using the Black-Scholes option-pricing model.  Expected volatilities are based on implied volatilities from traded

 
8

 

options on our common stock, historical volatilities and other factors.  We use historical data to estimate option exercise behavior, adjusted to reflect anticipated changes in expected life.
 
The weighted-average assumptions used in our Black-Scholes option-pricing model for awards issued during the respective periods are as follows:

   
Three Months Ended
 
   
April 4, 
2009 
   
March 29, 
2008 
 
Dividend yield
    1 %     2 %
Expected volatility
    50 %     30 %
Risk-free interest rate
    2 %     3 %
Expected lives (In years)
    5.0       5.0  
 
Stock option activity under the 2007 Long-Term Incentive Plan for the first quarter of 2009 is as follows:
   
 
 
Number of
Options
(In thousands)
   
 
Weighted-
Average
Exercise
Price
   
Weighted-
Average
Remaining
Contractual
Life
(In years)
 
Outstanding at beginning of period
    9,021     $ 38.51       6.3  
Granted
    775       5.63          
Exercised
                   
Canceled, expired or forfeited
    (241 )     36.44          
Outstanding at end of period
    9,555     $ 35.89       6.4  
Exercisable at end of period
    7,124     $ 35.72       5.5  
 
At April 4, 2009 and January 3, 2009, our outstanding and exercisable options had no significant aggregate intrinsic value.

Restricted Stock Units
The fair value of a restricted stock unit paid in stock is based on the trading price of our common stock on the date of grant, less required adjustments for certain awards, to reflect the fair value of the award as dividends are not paid or accrued until those restricted stock units vest.  There were no grants of restricted stock units paid in stock in the first quarter of 2009.  The weighted-average grant date fair value of restricted stock units paid in stock that were granted in the first quarter of 2008 was approximately $54 per share.

Activity for restricted stock units paid in stock during the three months ended April 4, 2009 is as follows:

(Shares in thousands)
 
Number of
Shares
   
Weighted-
Average
Grant
Date Fair
Value
 
Outstanding at beginning of year, nonvested
    2,441     $ 43.83  
Granted
           
Vested
    (422 )     35.22  
Forfeited
    (145 )     43.75  
Outstanding at end of year, nonvested
    1,874     $ 45.77  

In the first quarter of 2009, we granted restricted stock units paid in cash, which vest ratably over five years.  The fair value of these units at each reporting period is based on the trading price of our common stock.

 
9

 

Share-Based Compensation Awards
The value of the share-based compensation awards that vested and/or were paid during the respective periods is as follows:
   
Three Months Ended
 
(In millions)
 
April 4,
2009
   
March 29,
2008
 
Subject only to service conditions:
           
Value of shares, options or units vested
  $ 34     $ 31  
Intrinsic value of cash awards paid
          4  
Subject to performance vesting conditions:
               
Intrinsic value of cash awards paid
    9       41  
Intrinsic value of amounts paid under Deferred Income Plan
          3  

Note 4:  Retirement Plans

We provide defined benefit pension plans and other postretirement benefits to eligible employees.  The components of net periodic benefit cost for these plans for the three months ended April 4, 2009 and March 29, 2008 are as follows:

   
Pension Benefits
   
Postretirement Benefits
Other Than Pensions
 
(In millions)
 
2009
   
2008
   
2009
   
2008
 
Service cost
  $ 33     $ 36     $ 2     $ 2  
Interest cost
    76       76       9       11  
Expected return on plan assets
    (97 )     (102 )     -       -  
Amortization of prior service cost (credit)
    5       5       (1 )     (1 )
Amortization of net loss
    6       4       2       4  
Net periodic benefit cost
  $ 23     $ 19     $ 12     $ 16  

Note 5:  Discontinued Operations

On April 3, 2009, we sold HR Textron, an operating unit previously reported within the Textron Systems segment, for $376 million in cash.  The sale resulted in an after-tax gain of $7 million and expected net after-tax proceeds of approximately $275 million.  This business meets the discontinued operations criteria and has been included in discontinued operations for all periods presented in our consolidated financial statements.

In November 2008, we completed the sale of our Fluid & Power business unit and received approximately $527 million in cash, a six-year note with a face value of $28 million and may receive up to $50 million based on final 2008 operating results that were to be determined by the end of the first quarter of 2009, which will be primarily payable in a six-year note.  During the first quarter of 2009, the final settlement of this transaction was extended and we now expect a final determination on the remaining amount due to us later in 2009.


 
10

 

The assets and liabilities of our discontinued businesses are as follows:

(In millions)
 
April 4,
2009
   
January 3,
2009
 
Accounts receivable, net
  $ -     $ 30  
Inventories
    -       66  
Property, plant and equipment, net
    -       27  
Goodwill
    -       167  
Other assets
    3       8  
Total assets of discontinued operations of HR Textron
    3       298  
Assets of discontinued operations of Fastening Systems and Fluid & Power
    50       36  
Total assets of discontinued operations
  $ 53     $ 334  
Accounts payable and accrued liabilities
    6       30  
Other liabilities
    12       15  
Total liabilities of discontinued operations of HR Textron
    18       45  
Liabilities of discontinued operations of Fastening Systems and Fluid & Power
    112       150  
Total liabilities of discontinued operations
  $ 130     $ 195  

Results of our discontinued businesses are as follows:

   
Three Months Ended
 
 
(In millions)
 
April 4,
2009
   
March 29,
2008
 
Revenue
  $ 48     $ 56  
                 
Income from discontinued operations of HR Textron, before income taxes
  $ 4     $ 4  
Income taxes
    1       1  
Income from discontinued operations of HR Textron, net of income taxes
    3       3  
Gain on sale, net of income taxes
    7       -  
Income from other discontinued operations, net of income taxes
    33       3  
Income from discontinued operations, net of income taxes
  $ 43     $ 6  

For the first quarter of 2009, income from other discontinued operations includes a $34 million tax benefit from the reduction in tax contingencies as a result of the HR Textron sale and a valuation allowance reversal on a previously established deferred tax asset.

Note 6:  Earnings per Share

We adopted Financial Accounting Standards Board Staff Position (FSP) No. EITF 03-6-1, “Determining Whether Instruments Granted In Share-Based Payment Transactions Are Participating Securities,” in the first quarter of 2009.  This FSP requires us to include any unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities in our computation of basic earnings per share pursuant to the two-class method as defined in Statement of Financial Accounting Standard No. 128, “Earnings Per Share.”  In 2008, we granted restricted stock units that include nonforfeitable rights to dividends. Accordingly, with the adoption of FSP No. EITF 03-6-1, these restricted stock units are considered participating securities and are included in our calculation of basic earnings per share using the two-class method.  Prior period basic and diluted weighted-average shares outstanding have been recast to conform to the new calculation; however, the adoption of this guidance did not impact our previously reported basic or diluted earnings per share for continuing or discontinued operations for the first quarter of 2008.
 
We calculate basic and diluted earnings per share based on income available to common shareholders, which approximates net income for each period, and the restricted stock unit participating securities.  We use the weighted-average number of common shares outstanding during the period, plus the restricted stock units discussed above, for the computation of basic earnings per share using the two-class method. Diluted earnings per share includes the dilutive effect of convertible preferred shares, stock options and restricted stock units in the

 
11

 

weighted-average number of common shares outstanding.  The 2008 restricted stock units are included in the diluted weighted-average shares outstanding by virtue of their inclusion in basic weighted-average shares outstanding using the two-class method as described above.  This result is more dilutive than if we had used the treasury stock method to calculate diluted weighted-average shares outstanding for these restricted stock units.
 
The weighted-average shares outstanding for basic and diluted earnings per share are as follows:

   
Three Months Ended
 
 
(In thousands)
 
April 4,
2009
   
March 29,
2008
 
Basic weighted-average shares outstanding
    243,988       249,315  
Dilutive effect of convertible preferred shares, stock options and restricted
stock units
    968       5,185  
Diluted weighted-average shares outstanding
    244,956       254,500  

Note 7. Accounts Receivable, Finance Receivables and Securitizations

Manufacturing Group
 
(In millions)
 
April 4,
2009
   
January 3,
2009
 
             
Accounts Receivable - Commercial
  $ 478     $ 496  
Accounts Receivable - U.S. Government contracts
    403       422  
      881       918  
Less allowance for doubtful accounts
    (27 )     (24 )
    $ 854     $ 894  

Finance Group

We evaluate finance receivables on a managed as well as owned basis since we retain subordinated interests in finance receivables sold in securitizations resulting in credit risk.  In contrast, we do not have a retained financial interest or credit risk in the performance of the serviced portfolio and, therefore, performance of these portfolios is limited to billing and collection activities.  Our Finance group manages and services finance receivables for a variety of investors, participants and third-party portfolio owners.  Managed and serviced finance receivables are summarized as follows:

(In millions)
 
April 4, 
2009 
   
January 3, 
2009 
 
Total managed and serviced finance receivables
  $ 11,201     $ 12,173  
Nonrecourse participations sold to independent investors
    (813 )     (820 )
Third-party portfolio servicing
    (493 )     (532 )
Total managed finance receivables
    9,895       10,821  
Securitized receivables
    (1,736 )     (2,248 )
Owned finance receivables
    8,159       8,573  
Finance receivables held for sale
    (887 )     (1,658 )
Finance receivables held for investment
    7,272       6,915  
Less allowance for loan losses
    (220 )     (191 )
    $ 7,052     $ 6,724  
 
Finance receivables held for investment at both April 4, 2009 and January 3, 2009 include approximately $1.1 billion of finance receivables that have been legally sold to special purpose entities and are consolidated subsidiaries of Textron Financial Corporation.  The assets of these special purpose entities are pledged as collateral for $675 million and $853 million of debt at April 4, 2009 and January 3, 2009, respectively, which is reflected as securitized on-balance sheet debt.

 
12

 

In connection with our fourth quarter 2008 plan to exit portions of the commercial finance business, we classified certain finance receivables as held for sale.  Following an effort to market the portfolios in the first quarter of 2009 and the progress made in liquidating our portfolios, we decided that we will be able to maximize the economic value of a portion of the finance receivables held for sale through liquidation rather than selling the portfolios.  Accordingly, since we now intend to hold a portion of these finance receivables for the foreseeable future, we have reclassified $654 million, net of a $157 million valuation allowance to adjust to fair value, from the held for sale classification to held for investment.  There was no significant change in the fair value of these reclassified finance receivables or the remaining $887 million of finance receivables that continue to be classified as held for sale at April 4, 2009.

Loan Impairment
We periodically evaluate finance receivables, excluding homogeneous loan portfolios and finance leases, for impairment.  A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans are classified as either nonaccrual or accrual loans.  Nonaccrual loans include accounts that are contractually delinquent by more than three months for which the accrual of interest income is suspended.  Impaired accrual loans represent loans with original terms that have been significantly modified to reflect deferred principal payments, generally at market interest rates, for which collection of principal and interest is not doubtful.

The impaired loans included within finance receivables held for investment and related reserves are as follows:

(In millions)
 
April 4,
2009
   
January 3,
2009
 
Impaired nonaccrual loans
  $ 388     $ 234  
Impaired accrual loans
    91       19  
Total impaired loans
    479       253  
Impaired nonaccrual loans with identified reserve requirements
    278       182  
Allowance for losses on impaired nonaccrual loans
    52       43  

At April 4, 2009, the impaired loans in the table above of $479 million included $278 million of nonaccrual loans for which we have established specific reserves based on our review of the loan and the estimated fair value of the collateral.  We have a $52 million allowance for losses established at April 4, 2009 for these loans.

Nonaccrual finance receivables include impaired nonaccrual loans and accounts in homogeneous loan portfolios that are contractually delinquent by more than three months. At April 4, 2009 and January 3, 2009, nonaccrual finance receivables totaled $444 million and $277 million, respectively. The increase is primarily attributable to several hotel and land development accounts within the resort finance business and to a significant increase in delinquent accounts, combined with weakening collateral values in the aviation finance business.

Securitizations
Our Finance group sells its distribution finance receivables to a qualified special purpose trust through securitization transactions. Distribution finance receivables represent loans secured by dealer inventories that typically are collected upon the sale of the underlying product. The Distribution Finance revolving securitization trust is a master trust that purchases inventory finance receivables from the Finance group and issues asset-backed notes to investors.   Through a revolving securitization, the proceeds from collection of the principal balance of these loans are used by the trust to purchase additional distribution finance receivables from us each month. Proceeds from securitizations include amounts received related to the incremental increase in the issuance of additional asset-backed notes to investors, and exclude amounts received related to the ongoing replenishment of the outstanding sold balance of these short-duration finance receivables.  We had no proceeds from securitizations in the first quarter of 2009, compared with $250 million in the first quarter of 2008. Net pre-tax (impairments) gains totaled $(6) million and $15 million in the first quarter of 2009 and 2008, respectively. Cash flows received on these retained interests totaled $8 million and $21 million in the first quarter of 2009 and 2008, respectively.

Generally, we retain an interest in the assets sold in the form of servicing responsibilities and subordinated interests, including interest-only securities, seller certificates and cash reserves. We had $182 million and $191 million of retained interests on our balance sheets associated with $1.7 billion and $2.2 billion of off-balance
 
 
 
13

 
 
sheet finance receivables in the Distribution Finance securitization trust as of April 4, 2009 and January 3, 2009, respectively. In addition, the trust held $502 million of cash as of April 4, 2009 that was accumulated by the trust from collections of finance receivables during the first quarter of 2009 to pay off $600 million of maturing asset-backed notes and $42 million of our retained interests in April 2009.
 
The interest-only securities within our retained interests are recorded at fair value in other assets. We review the fair values of the retained interests quarterly using updated assumptions and compare such amounts with the carrying value. When the carrying value exceeds the fair value, we determine whether the decline in fair value is other than temporary. When we determine that the value of the decline is other than temporary, we write down the carrying value to fair value with a corresponding charge to income. When a change in fair value of the interest-only securities is deemed temporary, we record a corresponding credit or charge to other comprehensive income for any unrealized gains or losses. During the first quarter of 2009, we recorded a $6 million impairment charge to income and a $2 million charge to other comprehensive income on the interest-only securities associated with the Distribution Finance revolving securitization.  There was no impairment charge recorded on the remaining retained interests, which are classified as held to maturity, as the $23 million shortfall between fair value and carrying value was deemed temporary.
 
At April 4, 2009, the key economic assumptions used in measuring the retained interests related to the Distribution Finance revolving securitization included an annual rate for expected credit losses of 1.89%, a monthly payment rate of 12.8% and a residual cash flow discount rate of 18.5%. A 20% adverse change in these rates would not have a significant impact on our results of operations.  Net charge-offs as a percentage of distribution finance receivables was 3.85% for first quarter of 2009, compared with 1.94% for the full year of 2008.   The 60+ days contractual delinquency percentage for distribution finance receivables was 2.71% and 2.08% at April 4, 2009 and January 3, 2009, respectively.
 
Note 8:  Inventories

 
(In millions)
 
April 4,
2009
   
January 3,
2009
 
Finished goods
  $ 1,321     $ 1,081  
Work in process
    1,946       1,866  
Raw materials
    696       765  
      3,963       3,712  
Less progress/milestone payments
    (640 )     (619 )
    $ 3,323     $ 3,093  

Note 9:  Guarantees and Indemnifications

As disclosed under the caption “Guarantees and Indemnifications” in Note 18 to the Consolidated Financial Statements in Textron’s 2008 Annual Report on Form 10-K, we have issued or are party to certain guarantees.  As of April 4, 2009, there has been no material change to these guarantees.

We provide limited warranty and product maintenance programs, including parts and labor, for certain products for periods ranging from one to five years.  We estimate the costs that may be incurred under warranty programs and record a liability in the amount of such costs at the time product revenue is recognized.  Factors that affect this liability include the number of products sold, historical and anticipated rates of warranty claims, and cost per claim.  We assess the adequacy of our recorded warranty and product maintenance liabilities periodically and adjust the amounts as necessary.
 
14

 

Changes in our warranty and product maintenance liabilities are as follows:

   
Three Months Ended
 
 
(In millions)
 
April 4,
2009
   
March 29,
2008
 
Accrual at the beginning of period
  $ 278     $ 312  
Provision
    40       45  
Settlements
    (63 )     (49 )
Adjustments to prior accrual estimates
    1       (11 )
Accrual at the end of period
  $ 256     $ 297  

Note 10:  Commitments and Contingencies

We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts; compliance with applicable laws and regulations; production partners; product liability; employment; and environmental, safety and health matters. Some of these legal proceedings and claims seek damages, fines or penalties in substantial amounts or remediation of environmental contamination. As a government contractor, we are subject to audits, reviews and investigations to determine whether our operations are being conducted in accordance with applicable regulatory requirements. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our being suspended or debarred from U.S. Government contracting for a period of time. On the basis of information presently available, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations.

The Internal Revenue Service (IRS) has challenged our tax positions related to certain lease transactions within the Finance segment. During the third quarter of 2008, the IRS made a settlement offer to numerous companies, including Textron, to resolve the disputed tax treatment of these leases.  Based on the terms of the offer and our decision to accept the offer, we revised our estimate of this tax contingency. Final resolution of this matter will result in the acceleration of future cash payments to the IRS, which we expect will occur over a period of years in connection with the conclusion of IRS examinations of the relevant tax years. At April 4, 2009, $199 million of federal tax liabilities were recorded in our balance sheet related to these leases.

ARH Program Termination
On October 16, 2008, we received notification from the U.S. Department of Defense that it would not certify the continuation of the Armed Reconnaissance Helicopter (ARH) program to Congress under the Nunn-McCurdy Act, resulting in the termination of the program for the convenience of the Government. The ARH program included a development phase, covered by the System Development and Demonstration (SDD) contract, and a production phase. We are in the process of establishing the termination costs for the SDD contract, which we believe will be fully recoverable from the U.S. Government.

Prior to termination of the program, we obtained inventory and incurred vendor obligations for long-lead time materials related to the anticipated Low Rate Initial Production (LRIP) contracts to maintain the program schedule based on our belief that the LRIP contracts would be awarded. We have since terminated these vendor contracts and have initiated negotiations to settle our termination obligations, which we estimate may cost up to approximately $80 million. We continue to evaluate the utility of the related inventory to other Bell programs, customers, or vendors. This review and the related discussions with vendors are ongoing. We estimate that our potential loss resulting from our LRIP-related vendor obligations will be between approximately $50 million and $80 million. At April 4, 2009, our reserves related to this program totaled $50 million. We intend to provide a termination proposal to the U.S. Government to request reimbursement of costs expended in support of the LRIP program.

Citation Columbus Development
At April 4, 2009, Cessna’s backlog includes $2.3 billion in orders for the Citation Columbus aircraft, which began development in 2008.  Subsequent to the end of the first quarter, we decided to suspend the development of the Citation Columbus due to current economic conditions.  Once economic conditions improve and overall demand for business jets strengthens, it is our intention to resume the development of this product.  We have begun the process of notifying suppliers and do not believe that winding down our contracts with suppliers will have a
 
15

 

material effect on our financial position or cash flows.  At April 4, 2009, we had $56 million in cash for deposits received on the Citation Columbus and approximately $50 million in capitalized tooling and facility costs and other deferred costs related to this development project.
 
Note 11:  Comprehensive Income
 
Our comprehensive income for the periods is provided below:

   
Three Months Ended
 
 
(In millions)
 
April 4,
2009
   
March 29,
2008
 
Net income
  $ 86     $ 231  
Other comprehensive income (loss):
               
Recognition of prior service cost and unrealized losses on
pension and postretirement benefits
    7       10  
Deferred losses on hedge contracts
    (10 )     (16 )
Foreign currency translation and other
    2       (18 )
Comprehensive income
  $ 85     $ 207  

Note 12:  Fair Values of Assets and Liabilities

In the first quarter of 2009, we adopted Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” for our nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis.  This adoption did not have a material impact on our financial position or results of operations.

In accordance with the provisions of SFAS No. 157, we measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The Statement prioritizes the assumptions that market participants would use in pricing the asset or liability (the “inputs”) into a three-tier fair value hierarchy.  This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exists, requiring companies to develop their own assumptions.  Observable inputs that do not meet the criteria of Level 1, and include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, are categorized as Level 2.  Level 3 inputs are those that reflect our estimates about the assumptions market participants would use in pricing the asset or liability, based on the best information available in the circumstances.  Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data.  These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

 
16

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The table below presents the assets and liabilities measured at fair value on a recurring basis categorized by the level of inputs used in the valuation of each asset and liability.

   
April 4, 2009
   
January 3, 2009
 
(In millions)
 
Quoted Prices in Active Markets
for Identical
Assets or
Liabilities
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant Unobservable
Inputs
(Level 3)
   
Quoted Prices in Active Markets
for Identical
Assets or
Liabilities
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant Unobservable
Inputs
(Level 3)
 
Assets
                                   
Manufacturing group
                                   
Foreign currency exchange contracts
  $     $ 3     $     $     $ 2     $  
Total Manufacturing group
          3                   2        
Finance group
                                               
Derivative financial instruments, net
          84                   112        
Interest-only securities
                3                   12  
Total Finance group
          84       3             112       12  
Total assets
  $     $ 87     $ 3     $     $ 114     $ 12  
Liabilities
                                               
Manufacturing group
                                               
Cash settlement forward contract
  $ 11     $     $