item 14 exhibits financial statement schedules reports form 8k financial statements schedules consolidated financial statements supplementary information finan cial statement schedules listed accompanying index financial state ments financial statement schedules filed part report exhibits 31 restated certificate incorporation textron filed march 24 1988 incorporated reference exhibit 31 textrons annual report form 10k fiscal year ended january 2 1988 32 bylaws textron restated december 10 1992 incorporated reference exhibit 32 textrons annual report form 10k fiscal year ended january 2 1993 note exhibits 101 1019 management contracts compensatory plans contracts agreements 101a supplemental benefits plan textron key executives effec tive december 16 1987 supplemental plan incorporated reference exhibit 101 textrons annual report form 10k fiscal year ended january 2 1988 101b market square profit sharing plan schedule supplemental plan effective january 1 1989 amended restated december 10 1991 incorporated reference exhibit 101b textrons annual report form 10k fiscal year ended december 28 1991 101c amendment market square profit sharing plan schedule supplemental plan effective december 30 1992 incorporated reference exhibit 101f textrons annual report form 10k fiscal year ended january 2 1993 101d excello salaried retirement plan schedule supplemental plan effective july 1 1989 amended restated july 1 1991 incorporated reference exhibit 101c textrons annual report form 10k fiscal year ended december 28 1991 101e first amendment supplemental plan effective april 25 1990 incorporated reference exhibit 101d textrons annual report form 10k fiscal year ended december 29 1990 101f second amendment supplemental plan effective septem ber 25 1991 incorporated reference exhibit 101e textrons annual report form 10k fiscal year ended december 28 1991 102 survivor benefit plan textron key executives effective december 16 1987 incorporated reference exhibit 102 textrons annual report form 10k fiscal year ended january 2 1988 103a deferred income plan textron key executives effective december 16 1987 incorporated reference exhibit 103 textrons annual report form 10k fiscal year ended january 2 1988 103b first amendment deferred income plan textron key execu tives effective october 27 1992 incorporated refer ence exhibit 103b textrons annual report form 10k fiscal year ended january 2 1993 104a corporate office annual incentive compensation plan executed december 23 1987 incorporated reference exhibit 104 textrons annual report form 10k fiscal year ended january 2 1988 104b first amendment corporate office annual incentive compensa tion plan effective december 10 1992 incorporated reference exhibit 104b textrons annual report form 10k fiscal year ended january 2 1993 105a textron 1982 longterm incentive plan 1982 plan incorpo rated reference exhibit 105a textrons annual report form 10k fiscal year ended december 31 1988 105b first amendment 1982 plan effective february 25 1987 incorporated reference exhibit 105b textrons annual report form 10k fiscal year ended january 3 1987 105c second amendment 1982 plan effective december 16 1987 incorporated reference exhibit 105c textrons annual report form 10k fiscal year ended january 2 1988 106a textron 1987 longterm incentive plan 1987 plan effective february 25 1987 amended restated april 27 1988 incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1989 106b first amendment 1987 plan effective september 25 1991 incorporated reference exhibit 106b textrons annual report form 10k fiscal year ended december 28 1991 107a textron 1990 longterm incentive plan 1990 plan effective april 25 1990 incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1989 107b first amendment 1990 plan effective september 25 1991 incorporated reference exhibit 107b textrons annual report form 10k fiscal year ended december 28 1991 107c second amendment 1990 plan effective december 10 1992 incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended january 2 1993 108 employment agreement textron james f hardymon dated november 24 1989 employment agreement incorporat ed reference exhibit 109 textrons annual report form 10k fiscal year ended december 30 1989 109 employment agreement textron lewis b campbell dated september 22 1992 incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended january 2 1993 1010 employment agreement textron thomas p hollowell dated january 1 1993 incorporated reference exhibit 1010 textrons annual report form 10k fiscal year ended january 2 1993 1011 employment agreement textron mary l howell dated may 4 1993 1012 employment agreement textron richard mcwhirter dated february 16 1993 incorporated reference exhibit 1011 textrons annual report form 10k fiscal year ended january 2 1993 1013 employment agreement textron thomas soutter dated march 1 1985 amended amendment employ ment agreement dated february 1 1987 amendment employment agreement dated february 1 1988 incorporat ed reference exhibit 1011 textrons annual report form 10k fiscal year ended december 30 1989 1014 employment agreement textron william f wayland dated january 1 1989 incorporated reference exhibit 1012 textrons annual report form 10k fiscal year ended december 30 1989 1015 form indemnity agreement textron directors executive officers incorporated reference exhibit textrons proxy statement annual meeting shareholders april 29 1987 1016 textron executive severance plan effective december 16 1987 incorporated reference exhibit 1013 textrons annual report form 10k fiscal year ended january 2 1988 1017a pension plan directors originally effective march 8 1986 amended first amendment effective august 26 1987 incorporated reference exhibit 1014 textrons annual report form 10k fiscal year ended december 31 1988 1017b second amendment pension plan directors effective october 1 1990 incorporated reference exhibit 1016b textrons annual report form 10k fis cal year ended december 29 1990 1018 deferred income plan textron directors effective may 26 1993 1019 additional benefits certain executive officers incorpo rated reference exhibit 1016 textrons annual report form 10k fiscal year ended january 2 1988 1020a credit agreement dated november 1 1993 among textron lenders listed therein bankers trust company admin istrative agent 1020b line credit dated november 1 1993 among textron lenders listed therein bankers trust company administra tive agent 121 computation ratio income fixed charges textron parent company borrowing group 122 computation ratio income fixed charges textron inc including majorityowned subsidiaries 13 textrons 1993 annual report shareholders except pages items specifically incorporated reference herein textrons 1993 annual report shareholders furnished information commission filed part report 21 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list 23 consent independent auditors 241 power attorney 242 certified copy resolution board directors textron b reports form 8k reports form 8k filed last quarter period covered report signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 28th day march 1994 textron inc registrant sarnold friedman arnold friedman attorneyinfact pursuant requirements securities exchange act 1934 report signed 28th day march 1994 following persons behalf registrant capacities indicated name title chairman chief executive officer james f hardymon director principal executive officer president chief operating lewis b campbell officer director h jesse arnelle director joseph r carter director r stuart dickson director bf dolan director william ellinghaus director webb c hayes iii director john macomber director barbara scott preiskel director sam f segnar director jean head sisco director john w snow director j paul sticht director martin walker director thomas b wheeler executive vice president richard mcwhirter chief financial officer principal financial officer vice president controller william p janovitz principal accounting officer sarnold friedman arnold friedman attorneyinfact textron inc financial statement schedules item 14a form annual report textron inc 10k shareholders report independent auditors 38 consolidated statement income three years period ended january 1 39 consolidated balance sheet january 1 1994 january 2 1993 40 consolidated statement cash flows three years period ended january 1 41 consolidated statement changes shareholders equity three years period ended january 1 1994 42 summary significant accounting policies 43 45 notes consolidated financial statements 45 64 revenues income business segment 33 supplementary information unaudited quarterly financial information 1993 1992 65 financial statement schedules three years period ended january 1 iii condensed financial information 26 registrant viii valuation qualifying accounts 27 ix shortterm borrowings 28 x supplementary income statement 29 information schedules omitted conditions requiring filing thereof exist information required included financial statements notes thereto textron inc schedule iii condensed financial information registrant three years period ended january 1 1994 financial information registrant omitted condensed financial information textron parent company borrowing group includes registrant majorityowned subsidiaries finance insurance subsidiaries shown pages 6162 textrons annual report shareholders management believes disclosure financial information basis textron parent company borrowing group results meaningful presentation since group constitutes registrants basic borrowing entity restrictions net assets textrons subsidiaries relate finance insurance subsidiaries registrants investment finance insurance subsidiaries reflected caption investments finance insurance subsidiaries textron parent company borrowing group received dividends 935 million 784 million 782 million finance insurance subsidiaries 1993 1992 1991 respectively portion net assets textrons finance insurance subsidiaries available cash dividends payments textron parent company borrowing group restricted terms lending agreements insurance statutory requirements january 1 1994 approximately 311 million net assets 22 billion available transferred textron parent company borrowing group pursuant restrictions information concerning textron parent company borrowing groups longterm debt restrictions contained debt agreements see note 8 consolidated financial statements appearing pages 5051 textrons 1993 annual report shareholders textron inc schedule viii valuation qualifying accounts three years period ended january 1 1994 millions exclude effect recoveries accounts previously written 289 million 282 million 254 million 1993 1992 1991 respectively credited directly income b consist primarily receivables written textron inc schedule ix shortterm borrowings three years period ended january 1 1994 millions average amount outstanding year computed averaging daily ending balances year weighted average interest rate year determined based daily outstanding principal amounts excludes cost maintaining lines credit note schedule excludes borrowings supported longterm credit facilities textron parent company borrowing group textron inc schedule x supplementary income statement information three years period ended january 1 1994 millions textron inc index exhibits annual report form 10k fiscal year ended january 1 1994 exhibit description 1011 employment agreement textron mary l howell dated may 4 1993 1017 deferred income plan textron directors effective may 26 1993 1020a credit agreement dated november 1 1993 among textron lenders listed therein bankers trust company administrative agent 1020b line credit dated november 1 1993 among textron lenders listed therein bankers trust company administrative agent 121 computation ratio income fixed charges textron parent company borrowing group 122 computation ratio income fixed charges textron inc including majorityowned subsidiaries 13 textrons 1993 annual report shareholders except pages items specifically incorporated reference herein textrons annual report shareholders furnished information commission filed part report 21 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list 23 consent independent auditors 241 power attorney 242 certified copy resolution board directors textronitem 14 exhibits financial statement schedules reports form 8k financial statements schedules consolidated financial statements supplementary information financial statement schedules listed accompanying index financial statements financial statement schedules filed part report exhibits 31 restated certificate incorporation textron filed march 24 1988 incorporated reference exhibit 31 textrons annual report form 10k fiscal year ended january 2 1988 32 bylaws textron restated december 10 1992 incorporated reference exhibit 32 textrons annual report form 10k fiscal year ended january 2 1993 note exhibits 101 1021 management contracts compensatory plans contracts agreements 101 annual incentive compensation plan textron employees 102 deferred income plan textron key executives 103 severance plan textron key executives 104 special benefits textron key executives 105 supplemental benefits plan textron key executives market square profit sharing plan schedule 106 supplemental retirement plan textron key executives 107 survivor benefit plan textron key executives 108a textron 1982 longterm incentive plan 1982 plan incorporated reference exhibit 105a textrons annual report form 10k fiscal year ended december 31 1988 108b first amendment 1982 plan incorporated reference exhibit 105b textrons annual report form 10k fiscal year ended january 3 1987 108c second amendment 1982 plan incorporated reference exhibit 105c textrons annual report form 10k fiscal year ended january 2 1988 109a textron 1987 longterm incentive plan 1987 plan incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1989 109b first amendment 1987 plan incorporated reference exhibit 106b textrons annual report form 10k fiscal year ended december 28 1991 1010a textron 1990 longterm incentive plan 1990 plan incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1989 1010b first amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended december 28 1991 1010c second amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended january 2 1993 1011 textron 1994 longterm incentive plan incorporated reference exhibit 10 textrons quarterly report form 10q fiscal quarter ended july 2 1994 1012 form indemnity agreement textron directors executive officers incorporated reference exhibit textrons proxy statement annual meeting shareholders april 29 1987 1013a pension plan directors amended first amendment incorporated reference exhibit 1014 textrons annual report form 10 k fiscal year ended december 31 1988 1013b second amendment pension plan directors incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 29 1990 1014 deferred income plan textron directors incorporated reference exhibit 1018 textrons annual report form 10k fiscal year ended january 1 1994 1015a employment agreement textron james f hardymon dated november 24 1989 employment agreement incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended december 30 1989 1015b amendment dated december 15 1994 employment agreement incorporated reference exhibit 1010b textrons annual report form 10k fiscal year ended december 31 1994 1016a employment agreement textron lewis b campbell dated september 22 1992 incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended january 2 1993 1016b retention award granted lewis b campbell december 14 1995 1017 employment agreement textron mary l howell dated may 4 1993 incorporated reference exhibit 1011 textrons annual report form 10k fiscal year ended january 1 1994 1018 employment agreement textron wayne w juchatz dated november 1 1995 1019 employment agreement textron stephen l key dated november 1 1995 1020 employment agreement textron richard mcwhirter dated february 16 1993 incorporated reference exhibit 1011 textrons annual report form 10k fiscal year ended january 2 1993 1021 employment agreement textron william f wayland dated january 1 1989 incorporated reference exhibit 1012 textrons annual report form 10k fiscal year ended december 30 1989 1022a credit agreement dated november 1 1993 among textron lenders listed therein bankers trust company administrative agent credit agreement incorporated reference exhibit 1020a textrons annual report form 10k fiscal year ended january 1 1994 1022b first amendment dated october 30 1994 credit agreement incorporated reference exhibit 1022b textrons annual report form 10k fiscal year ended december 31 1994 1022c second amendment credit agreement dated july 1 1995 incorporated reference exhibit b 3 schedule 14d1 filed textron september 19 1995 121 computation ratio income fixed charges textron parent company borrowing group 122 computation ratio income fixed charges textron inc including majorityowned subsidiaries 13 portion pages 22 following textrons 1995 annual report shareholders except pages items specifically incorporated reference herein portion textrons 1995 annual report shareholders furnished information commission filed part report 21 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list 23 consent independent auditors 241 power attorney 242 certified copy resolution board directors textron 27 financial data schedule b reports form 8k reports form 8k filed last quarter period covered report signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 14th day march 1996 textron inc registrant michael cahn michael cahn attorneyinfact pursuant requirements securities exchange act 1934 report signed 14th day march 1996 following persons behalf registrant capacities indicated name title james f hardymon chairman chief executive officer director principal lewis b campbell president chief operating officer director h jesse arnelle director r stuart dickson director bf dolan director paul e gagne director john macomber director barbara scott preiskel director brian h rowe director sam f segnar director jean head sisco director john w snow director martin walker director thomas b wheeler director stephen l key executive vice president chief financial officer principal financial officer richard l yates vice president controller principal accounting officer michael cahn michael cahn attorneyinfact textron inc financial statement schedules item 14a form annual report textron inc 10k shareholders report independent auditors 31 consolidated statement income three years period ended december 30 1995 32 consolidated balance sheet december 30 1995 33 december 31 1994 consolidated statement cash flows 34 three years period ended december 30 consolidated statement changes shareholders 35 equity three years period ended december 30 1995 summary significant accounting policies 3638 notes consolidated financial statements 3850 revenues income business segment 22 supplementary information unaudited quarterly financial information 1995 1994 51 financial statement schedules three years period ended december 30 1995 condensed financial information 27 registrant ii valuation qualifying accounts 28 schedules omitted conditions requiring filing thereof exist information required included financial statements notes thereto textron inc schedule condensed financial information registrant three years period ended december 30 1995 financial information registrant omitted condensed financial information textron parent company borrowing group includes registrant majorityowned subsidiaries finance insurance subsidiaries shown page 30 textrons 1995 annual report shareholders management believes disclosure financial information basis textron parent company borrowing group results meaningful presentation since group constitutes registrants basic borrowing entity restrictions net assets textrons subsidiaries relate finance insurance subsidiaries registrants investment finance insurance subsidiaries shown page 30 textrons 1995 annual report shareholders caption investments finance insurance subsidiaries textron parent company borrowing group received dividends 126 million 115 million 94 million finance insurance subsidiaries 1995 1994 1993 respectively portion net assets textrons finance insurance subsidiaries available cash dividends payments textron parent company borrowing group restricted terms lending agreements insurance statutory requirements december 30 1995 approximately 376 million net assets 26 billion available transferred textron parent company borrowing group pursuant restrictions information concerning textron parent company borrowing groups longterm debt restrictions contained debt agreements see note 7 consolidated financial statements appearing pages 4243 textrons 1995 annual report shareholders textron inc schedule ii valuation qualifying accounts three years period ended december 30 1995 millions allowance credit losses changes allowance credit losses years indicated follows 1995 1994 1993 balance allowance credit losses biginning year 250 225 212 add charge income consumer 149 136 121 commercial 19 24 21 168 160 142 deduct balances charged gross charge offs consumer 177 142 138 commercial 25 27 20 202 169 158 recoveries consumer 33 28 26 commercial 4 3 37 31 29 net charge offs 165 138 129 17 3 balance allowance credit losses end year 270 250 225 balance allowance credit losses end year applicable consumer 195 181 155 commercial 75 69 70 270 250 225 textron inc index exhibits annual report form 10k fiscal year ended december 31 1994 exhibits description 31 restated certificate incorporation textron filed march 24 1988 incorporated reference exhibit 31 textrons annual report form 10k fiscal year ended january 2 1988 32 bylaws textron restated december 10 1992 incorporated reference exhibit 32 textrons annual report form 10k fiscal year ended january 2 1993 note exhibits 101 1021 management contracts compensatory plans contracts agreements 101 annual incentive compensation plan textron employees 102 deferred income plan textron key executives 103 severance plan textron key executives 104 special benefits textron key executives 105 supplemental benefits plan textron key executives market square profit sharing plan schedule 106 supplemental retirement plan textron key executives 107 survivor benefit plan textron key executives 108a textron 1982 longterm incentive plan 1982 plan incorporated reference exhibit 105a textrons annual report form 10k fiscal year ended december 31 1988 108b first amendment 1982 plan incorporated reference exhibit 105b textrons annual report form 10k fiscal year ended january 3 1987 108c second amendment 1982 plan incorporated reference exhibit 105c textrons annual report form 10k fiscal year ended january 2 1988 109a textron 1987 longterm incentive plan 1987 plan incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1989 109b first amendment 1987 plan incorporated reference exhibit 106b textrons annual report form 10k fiscal year ended december 28 1991 1010a textron 1990 longterm incentive plan 1990 plan incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1989 1010b first amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended december 28 1991 1010c second amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended january 2 1993 1011 textron 1994 longterm incentive plan incorporated reference exhibit 10 textrons quarterly report form 10q fiscal quarter ended july 2 1994 1012 form indemnity agreement textron directors executive officers incorporated reference exhibit textrons proxy statement annual meeting shareholders april 29 1987 1013a pension plan directors amended first amendment incorporated reference exhibit 1014 textrons annual report form 10k fiscal year ended december 31 1988 1013b second amendment pension plan directors incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 29 1990 1014 deferred income plan textron directors incorporated reference exhibit 1018 textrons annual report form 10k fiscal year ended january 1 1994 1015a employment agreement textron james f hardymon dated november 24 1989 employment agreement incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended december 30 1989 1015b amendment dated december 15 1994 employment agreement incorporated reference exhibit 1010b textrons annual report form 10k fiscal year ended december 31 1994 1016a employment agreement textron lewis b campbell dated september 22 1992 incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended january 2 1993 1016b retention award granted lewis b campbell december 14 1995 1017 employment agreement textron mary l howell dated may 4 1993 incorporated reference exhibit 1011 textrons annual report form 10k fiscal year ended january 1 1994 1018 employment agreement textron wayne w juchatz dated november 1 1995 1019 employment agreement textron stephen l key dated november 1 1995 1020 employment agreement textron richard mcwhirter dated february 16 1993 incorporated reference exhibit 1011 textrons annual report form 10k fiscal year ended january 2 1993 1021 employment agreement textron william f wayland dated january 1 1989 incorporated reference exhibit 1012 textrons annual report form 10k fiscal year ended december 30 1989 1022a credit agreement dated november 1 1993 among textron lenders listed therein bankers trust company administrative agent credit agreement incorporated reference exhibit 1020a textrons annual report form 10k fiscal year ended january 1 1994 1022b first amendment dated october 30 1994 credit agreement incorporated reference exhibit 1022b textrons annual report form 10k fiscal year ended december 31 1994 1022c second amendment credit agreement dated july 1 1995 incorporated reference exhibit b 3 schedule 14d1 filed textron september 19 1995 121 computation ratio income fixed charges textron parent company borrowing group 122 computation ratio income fixed charges textron inc including majorityowned subsidiaries 13 portion pages 22 following textrons 1995 annual report shareholders except pages items specifically incorporated reference herein portion textrons 1995 annual report shareholders furnished information commission filed part report 21 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list 23 consent independent auditors 241 power attorney 242 certified copy resolution board directors textron 27 financial data scheduleitem 14 exhibits financial statement schedules reports form 8k financial statements schedules consolidated financial statements supplementary information financial statement schedules listed accompanying index financial statements financial statement schedules filed part report exhibits 31 restated certificate incorporation textron filed january 29 1998 32 bylaws textron restated december 10 1992 incorporated reference exhibit 32 textrons annual report form 10k fiscal year ended january 2 1993 note exhibits 101 1021b management contracts compensatory plans contracts agreements 101 annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons annual report form 10k fiscal year ended december 30 1995 102 deferred income plan textron key executives incorporated reference exhibit 102 textrons annual report form 10k fiscal year ended december 30 1995 103 severance plan textron key executives incorporated reference exhibit 103 textrons annual report form 10k fiscal year ended december 30 1995 104 special benefits textron key executives incorporated reference exhibit 104 textrons annual report form 10k fiscal year ended december 30 1995 105 supplemental benefits plan textron key executives market square profit sharing plan schedule incorporated reference exhibit 105 textrons annual report form 10k fiscal year ended december 30 1995 106 supplemental retirement plan textron key executives incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1995 107 survivor benefit plan textron key executives incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1995 108a textron 1987 longterm incentive plan 1987 plan incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1989 108b first amendment 1987 plan incorporated reference exhibit 106b textrons annual report form 10k fiscal year ended december 28 1991 109a textron 1990 longterm incentive plan 1990 plan incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1989 109b first amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended december 28 1991 109c second amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended january 2 1993 1010 textron 1994 longterm incentive plan incorporated reference exhibit 10 textrons quarterly report form 10q fiscal quarter ended july 2 1994 1011 form indemnity agreement textron directors executive officers incorporated reference exhibit textrons proxy statement annual meeting shareholders april 29 1987 1012a pension plan directors amended first amendment discontinued september 30 1996 incorporated reference exhibit 1014 textrons annual report form 10k fiscal year ended december 31 1988 1012b second amendment pension plan directors discontinued september 30 1996 incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 29 1990 1013 deferred income plan nonemployee directors incorporated reference exhibit 1014 textrons annual report form 10k fiscal year ended december 28 1996 1014a employment agreement textron james f hardymon dated november 24 1989 employment agreement incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended december 30 1989 1014b amendment dated december 15 1994 employment agreement incorporated reference exhibit 1010b textrons annual report form 10k fiscal year ended december 31 1994 1015a employment agreement textron lewis b campbell dated september 22 1992 incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended january 2 1993 1015b retention award granted lewis b campbell december 14 1995 incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 30 1995 1016 employment agreement textron john butler dated june 10 1997 incorporated reference exhibit 10 textrons quarterly report form 10q fiscal quarter ended june 28 1997 1017 retention award granted herbert l henkel december 12 1996 1018 employment agreement textron mary l howell dated may 4 1993 incorporated reference exhibit 1011 textrons annual report form 10k fiscal year ended january 1 1994 1019a employment agreement textron wayne w juchatz dated november 1 1995 incorporated reference exhibit 1018 textrons annual report form 10k fiscal year ended december 30 1995 1019b description modified pension arrangement 1020a employment agreement textron stephen l key dated november 1 1995 incorporated reference exhibit 1019 textrons annual report form 10k fiscal year ended december 30 1995 1020b description stock equivalent grant 1021a employment agreement textron william f wayland dated january 1 1989 wfw agreement incorporated reference exhibit 1012 textrons annual report form 10k fiscal year ended december 30 1989 1021b supplement wfw agreement dated may 1 1997 1022a credit agreement dated november 1 1993 among textron lenders listed therein bankers trust company admin istrative agent credit agreement incorporated reference exhibit 1020a textrons annual report form 10k fiscal year ended january 1 1994 1022b first amendment dated october 30 1994 credit agreement incorporated reference exhibit 1022b textrons annual report form 10k fiscal year ended december 31 1994 1022c second amendment credit agreement dated july 1 1995 incorporated reference exhibit b 3 schedule 14d 1 filed textron september 19 1995 1022d third amendment credit agreement dated july 1 1996 incorporated reference exhibit 1021d textrons annual report form 10k fiscal year ended december 28 1996 121 computation ratio income combined fixed charges preferred stock dividends parent group 122 computation ratio income combined fixed charges preferred stock dividends textron inc including majorityowned subsidiaries 13 portion pages 24 59 textrons 1997 annual report shareholders 21 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list 23 consent independent auditors 241 power attorney 242 certified copy resolution board directors textron 27 financial data schedule b reports form 8k reports form 8k filed quarter ended january 3 1998 signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 16th day march 1998 textron inc registrant smichael cahn michael cahn attorneyinfact pursuant requirements securities exchange act 1934 report signed 16th day march 1998 following persons behalf registrant capacities indicated name title chairman chief executive officer james f hardymon director principal executive officer president chief operating officer lewis b campbell director h jesse arnelle director teresa beck director r stuart dickson director paul e gagne director john macomber director dana g mead director barbara scott preiskel director brian h rowe director sam f segnar director jean head sisco director john w snow director martin walker director thomas b wheeler executive vice president stephen l key chief financial officer principal financial officer vice president controller richard l yates principal accounting officer smichael cahn michael cahn attorneyinfact textron inc financial statement schedules item 14a form annual report textron inc 10k shareholders report independent auditors 33 consolidated statement income 34 three years period ended january 3 1998 consolidated balance sheet january 3 1998 36 consolidated statement cash flows 38 three years period ended january 3 consolidated statement changes shareholders 40 equity three years period ended january 3 1998 notes consolidated financial statements 4155 revenues income business segment 24 supplementary information unaudited quarterly financial information 1997 1996 56 financial statement schedules three years period ended january 3 1998 condensed financial information 28 registrant ii valuation qualifying accounts 29 schedules omitted conditions requiring filing thereof exist information required included financial statements notes thereto textron inc schedule condensed financial information registrant three years period ended january 3 1998 financial information registrant omitted condensed financial information parent group includes registrant majorityowned subsidiaries finance subsidiaries finance group shown pages 34 39 textrons 1997 annual report shareholders management believes disclosure financial information basis parent group results meaningful presentation since group constitutes registrants basic borrowing entity restrictions net assets textrons subsidiaries relate finance group registrants investment finance group shown pages 36 37 textrons 1997 annual report shareholders caption investments finance group parent group received dividends 221 million 124 million 117 million finance group 1997 1996 1995 respectively portion net assets textrons finance group available cash dividends payments parent group restricted terms lending agreements insurance statutory requirements january 3 1998 approximately 475 million net assets 16 billion available transferred parent group pursuant restrictions parent groups credit agreements contain provisions requiring maintain minimum level shareholders equity minimum interest coverage ratio additional information concerning parent groups longterm debt see note 9 consolidated financial statements appearing pages 46 47 textrons 1997 annual report shareholders information concerning textronobligated mandatorily redeemable preferred securities subsidiary trust holding solely textron junior subordinated debt securities see note 11 consolidated financial statements appearing page 48 textrons 1997 annual report shareholders textron inc schedule ii valuation qualifying accounts three years period ended january 3 millions allowance credit losses changes allowance credit losses years indicated follows 1997 1996 1995 balance allowance credit losses beginning year 293 270 250 add charged income consumer 229 203 149 commercial 27 20 256 230 169 deduct balances charged gross charge offs consumer 267 230 177 commercial 32 30 25 299 260 202 recoveries consumer 48 36 33 commercial 10 3 4 58 39 37 net charge offs 241 221 165 7 14 16 balance allowance credit losses end year 315 293 270 balance allowance credit losses end year applicable consumer 236 218 195 commercial 79 75 315 293 270 exhibit list exhibits 31 restated certificate incorporation textron filed january 29 1998 32 bylaws textron restated december 10 1992 incorporated reference exhibit 32 textrons annual report form 10k fiscal year ended january 2 1993 note exhibits 101 1021b management contracts compensatory plans contracts agreements 101 annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons annual report form 10k fiscal year ended december 30 1995 102 deferred income plan textron key executives incorporated reference exhibit 102 textrons annual report form 10k fiscal year ended december 30 1995 103 severance plan textron key executives incorporated reference exhibit 103 textrons annual report form 10k fiscal year ended december 30 1995 104 special benefits textron key executives incorporated reference exhibit 104 textrons annual report form 10k fiscal year ended december 30 1995 105 supplemental benefits plan textron key executives market square profit sharing plan schedule incorporated reference exhibit 105 textrons annual report form 10k fiscal year ended december 30 1995 106 supplemental retirement plan textron key executives incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1995 107 survivor benefit plan textron key executives incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1995 108a textron 1987 longterm incentive plan 1987 plan incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1989 108b first amendment 1987 plan incorporated reference exhibit 106b textrons annual report form 10k fiscal year ended december 28 1991 109a textron 1990 longterm incentive plan 1990 plan incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1989 109b first amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended december 28 1991 109c second amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended january 2 1993 1010 textron 1994 longterm incentive plan incorporated reference exhibit 10 textrons quarterly report form 10q fiscal quarter ended july 2 1994 1011 form indemnity agreement textron directors executive officers incorporated reference exhibit textrons proxy statement annual meeting shareholders april 29 1987 1012a pension plan directors amended first amendment discontinued september 30 1996 incorporated reference exhibit 1014 textrons annual report form 10k fiscal year ended december 31 1988 1012b second amendment pension plan directors discontinued september 30 1996 incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 29 1990 1013 deferred income plan nonemployee directors incorporated reference exhibit 1014 textrons annual report form 10k fiscal year ended december 28 1996 1014a employment agreement textron james f hardymon dated november 24 1989 employment agreement incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended december 30 1989 1014b amendment dated december 15 1994 employment agreement incorporated reference exhibit 1010b textrons annual report form 10k fiscal year ended december 31 1994 1015a employment agreement textron lewis b campbell dated september 22 1992 incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended january 2 1993 1015b retention award granted lewis b campbell december 14 1995 incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 30 1995 1016 employment agreement textron john butler dated june 10 1997 incorporated reference exhibit 10 textrons quarterly report form 10q fiscal quarter ended june 28 1997 1017 retention award granted herbert l henkel december 12 1996 1018 employment agreement textron mary l howell dated may 4 1993 incorporated reference exhibit 1011 textrons annual report form 10k fiscal year ended january 1 1994 1019a employment agreement textron wayne w juchatz dated november 1 1995 incorporated reference exhibit 1018 textrons annual report form 10k fiscal year ended december 30 1995 1019b description modified pension arrangement 1020a employment agreement textron stephen l key dated november 1 1995 incorporated reference exhibit 1019 textrons annual report form 10k fiscal year ended december 30 1995 1020b description stock equivalent grant 1021a employment agreement textron william f wayland dated january 1 1989 wfw agreement incorporated reference exhibit 1012 textrons annual report form 10k fiscal year ended december 30 1989 1021b supplement wfw agreement dated may 11997 1022a credit agreement dated november 1 1993 among textron lenders listed therein bankers trust company admin istrative agent credit agreement incorporated reference exhibit 1020a textrons annual report form 10k fiscal year ended january 1 1994 1022b first amendment dated october 30 1994 credit agreement incorporated reference exhibit 1022b textrons annual report form 10k fiscal year ended december 31 1994 1022c second amendment credit agreement dated july 1 1995 incorporated reference exhibit b 3 schedule 14d 1 filed textron september 19 1995 1022d third amendment credit agreement dated july 1 1996 incorporated reference exhibit 1021d textrons annual report form 10k fiscal year ended december 28 1996 121 computation ratio income combined fixed charges preferred stock dividends parent group 122 computation ratio income combined fixed charges preferred stock dividends textron inc including majorityowned subsidiaries 13 portion pages 24 59 textrons 1997 annual report shareholders 21 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list 23 consent independent auditors 241 power attorney 242 certified copy resolution board directors textron 27 financial data scheduleitem 14 exhibits financial statement schedules reports form 8k financial statements schedules consolidated financial statements supplementary information financial statement schedules listed accompanying index financial statements financial statement schedules filed part report exhibits 31 restated certificate incorporation textron filed january 29 1998 incorporated reference exhibit 31 textrons annual report form 10k fiscal year ended january 3 1998 32 bylaws textron note exhibits 101 1018 management contracts compensatory plans contracts agreements 101 annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons annual report form 10k fiscal year ended december 30 1995 102a deferred income plan textron key executives incorporated reference exhibit 102 textrons annual report form 10k fiscal year ended december 30 1995 102b amendments deferred income plan textron key executives 103 special benefits textron key executives incorporated reference exhibit 104 textrons annual report form 10k fiscal year ended december 30 1995 104a supplemental benefits plan textron key executives market square profit sharing plan schedule incorporated reference exhibit 105 textrons annual report form 10k fiscal year ended december 30 1995 104b amendments supplemental benefits plan textron key executives 105a supplemental retirement plan textron key executives incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1995 105b amendment supplemental retirement plan textron key executives 106 survivor benefit plan textron key executives incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1995 107a textron 1987 longterm incentive plan 1987 plan incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1989 107b first amendment 1987 plan incorporated reference exhibit 106b textrons annual report form 10k fiscal year ended december 28 1991 108a textron 1990 longterm incentive plan 1990 plan incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1989 108b first amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended december 28 1991 108c second amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended january 2 1993 109a textron 1994 longterm incentive plan 1994 plan incorporated reference exhibit 10 textrons quarterly report form 10q fiscal quarter ended july 2 1994 109b amendment 1994 plan 1010 form indemnity agreement textron directors executive officers incorporated reference exhibit textrons proxy statement annual meeting shareholders april 29 1987 1011 deferred income plan nonemployee directors incorporated reference exhibit 1014 textrons annual report form 10k fiscal year ended december 28 1996 1012 employment agreement textron john butler dated july 23 1998 incorporated reference exhibit 102 textrons quarterly report form 10 q fiscal quarter ended october 3 1998 1013a employment agreement textron lewis b campbell dated july 23 1998 incorporated reference exhibit 103 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1013b retention award granted lewis b campbell december 14 1995 incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 30 1995 1014a employment agreement textron james f hardymon dated november 24 1989 employment agreement incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended december 30 1989 1014b amendment dated december 15 1994 employment agreement incorporated reference exhibit 1010b textrons annual report form 10k fiscal year ended december 31 1994 1014c letter agreement textron james f hardymon dated november 16 1998 1015a employment agreement textron herbert l henkel dated august 12 1998 incorporated reference exhibit 104 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1015b retention award granted herbert l henkel december 12 1996 incorporated reference exhibit 1017 textrons annual report fiscal year ended january 3 1998 1016 employment agreement textron mary l howell dated july 23 1998 incorporated reference exhibit 105 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1017 employment agreement textron wayne w juchatz dated july 23 1998 incorporated reference exhibit 106 textrons quarterly report form 10 q fiscal quarter ended october 3 1998 1018 employment agreement textron stephen l key dated july 23 1998 incorporated reference exhibit 107 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1019 5year credit agreement dated april 1 1998 among textron banks listed therein morgan guaranty trust company new york administrative agent incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended april 4 1998 121 computation ratio income combined fixed charges preferred stock dividends textron manufacturing 122 computation ratio income combined fixed charges preferred stock dividends textron inc including majorityowned subsidiaries 13 portion pages 22 57 pages 60 62 textrons 1998 annual report shareholders 21 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list 23 consent independent auditors 241 power attorney 242 certified copy resolution board directors textron 27 financial data schedule filed electronically b reports form 8k quarter ended january 2 1999 textron filed following report form 8k securities exchange commission current report form 8k dated october 6 1998 reporting item 5 events item 7 financial statements exhibits textron restated financial statements reflect avco financial services inc unit discontinued operation signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 15th day march 1999 textron inc registrant smichael cahn michael cahn attorneyinfact pursuant requirements securities exchange act 1934 report signed 15th day march 1999 following persons behalf registrant capacities indicated name title chairman chief executive officer lewis b campbell director h jesse arnelle director teresa beck director r stuart dickson director lawrence k fish director joe ford director paul e gagne director john macomber director dana g mead director brian h rowe director sam f segnar director jean head sisco director john w snow director martin walker director thomas b wheeler executive vice president stephen l key chief financial officer principal financial officer vice president controller richard l yates principal accounting officer bysmichael cahn michael cahn attorneyinfact textron inc financial statement schedules item 14a form annual report textron inc 10k shareholders report independent auditors 33 consolidated statement income 34 three years period ended january 2 1999 consolidated balance sheet january 2 1999 35 consolidated statement cash flows 36 three years period ended january 2 consolidated statement changes shareholders 38 equity three years period ended january 2 1999 notes consolidated financial statements 3953 revenues income business segment 22 supplementary information unaudited 54 quarterly financial information 1998 1997 56 financial statement schedule three years period ended january 2 1999 condensed financial information 25 registrant schedules omitted conditions requiring filing thereof exist information required included financial statements notes thereto textron inc schedule condensed financial information registrant three years period ended january 2 financial information registrant omitted condensed financial information textron manufacturing includes registrant majorityowned subsidiaries finance subsidiaries textron finance shown pages 34 37 textrons 1998 annual report shareholders management believes disclosure financial information basis textron manufacturing results meaningful presentation since group constitutes registrants basic borrowing entity restrictions net assets textrons subsidiaries relate textron finance registrants investment textron finance 473 million 1998 406 million 1997 textron manufacturing received dividends 62 million 74 million 29 million textron finance 1998 1997 1996 respectively lending agreements limit textron finances net assets available cash dividends payments textron manufacturing approximately 169 million textron finances net assets 473 million yearend 1998 textron manufacturings credit agreements contain provisions requiring maintain minimum level shareholders equity minimum interest coverage ratio additional information concerning textron manufacturings longterm debt see note 7 consolidated financial statements appearing pages 43 44 textrons 1998 annual report shareholders information concerning textronobligated mandatorily redeemable preferred securities subsidiary trust holding solely textron junior subordinated debt securities see note 9 consolidated financial statements appearing page 46 textrons 1998 annual report shareholders list exhibits 31 restated certificate incorporation textron filed january 29 1998 incorporated reference exhibit 31 textrons annual report form 10k fiscal year ended january 3 1998 32 bylaws textron note exhibits 101 1018 management contracts compensatory plans contracts agreements 101 annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons annual report form 10k fiscal year ended december 30 1995 102a deferred income plan textron key executives incorporated reference exhibit 102 textrons annual report form 10k fiscal year ended december 30 1995 102b amendments deferred income plan textron key executives 103 special benefits textron key executives incorporated reference exhibit 104 textrons annual report form 10k fiscal year ended december 30 1995 104a supplemental benefits plan textron key executives market square profit sharing plan schedule incorporated reference exhibit 105 textrons annual report form 10k fiscal year ended december 30 1995 104b amendments supplemental benefits plan textron key executives 105a supplemental retirement plan textron key executives incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1995 105b amendment supplemental retirement plan textron key executives 106 survivor benefit plan textron key executives incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1995 107a textron 1987 longterm incentive plan 1987 plan incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1989 107b first amendment 1987 plan incorporated reference exhibit 106b textrons annual report form 10k fiscal year ended december 28 1991 108a textron 1990 longterm incentive plan 1990 plan incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1989 108b first amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended december 28 1991 108c second amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended january 2 1993 109a textron 1994 longterm incentive plan 1994 plan incorporated reference exhibit 10 textrons quarterly report form 10q fiscal quarter ended july 2 1994 109b amendment 1994 plan 1010 form indemnity agreement textron directors executive officers incorporated reference exhibit textrons proxy statement annual meeting shareholders april 29 1987 1011 deferred income plan nonemployee directors incorporated reference exhibit 1014 textrons annual report form 10k fiscal year ended december 28 1996 1012 employment agreement textron john butler dated july 23 1998 incorporated reference exhibit 102 textrons quarterly report form 10 q fiscal quarter ended october 3 1998 1013a employment agreement textron lewis b campbell dated july 23 1998 incorporated reference exhibit 103 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1013b retention award granted lewis b campbell december 14 1995 incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 30 1995 1014a employment agreement textron james f hardymon dated november 24 1989 employment agreement incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended december 30 1989 1014b amendment dated december 15 1994 employment agreement incorporated reference exhibit 1010b textrons annual report form 10k fiscal year ended december 31 1994 1014c letter agreement textron james f hardymon dated november 16 1998 1015a employment agreement textron herbert l henkel dated august 12 1998 incorporated reference exhibit 104 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1015b retention award granted herbert l henkel december 12 1996 incorporated reference exhibit 1017 textrons annual report fiscal year ended january 3 1998 1016 employment agreement textron mary l howell dated july 23 1998 incorporated reference exhibit 105 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1017 employment agreement textron wayne w juchatz dated july 23 1998 incorporated reference exhibit 106 textrons quarterly report form 10 q fiscal quarter ended october 3 1998 1018 employment agreement textron stephen l key dated july 23 1998 incorporated reference exhibit 107 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1019 5year credit agreement dated april 1 1998 among textron banks listed therein morgan guaranty trust company new york administrative agent incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended april 4 1998 121 computation ratio income combined fixed charges preferred stock dividends textron manufacturing 122 computation ratio income combined fixed charges preferred stock dividends textron inc including majorityowned subsidiaries 13 portion pages 22 57 pages 60 62 textrons 1998 annual report shareholders 21 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list 23 consent independent auditors 241 power attorney 242 certified copy resolution board directors textron 27 financial data schedule filed electronically onlyitem 14 exhibits financial statement schedules reports form 10k financial statements schedules consolidated financial statements supplementary information financial statement schedules listed accompanying index financial statements financial statement schedules filed part report exhibits 31 restated certificate incorporation textron filed january 29 1998 incorporated reference exhibit 31 textrons annual report form 10k fiscal year ended january 3 1998 32 bylaws textron incorporated reference exhibit 32 textrons annual report form 10k fiscal year ended january 1 2000 41 indenture dated december 9 1999 textron financial corporation sun trust bank atlanta including form debt securities incorporated reference exhibit 41 amendment 2 textron financial corporations registration statement form s3 33388509 42 support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 101 textron financial corporations registration statement form 10 note instruments defining rights holders certain issues longterm debt textron filed exhibits report authorized principal amount one issues exceed 10 total assets textron subsidiaries consolidated basis textron agrees furnish copy instrument commission upon request note exhibits 101 1017 management contracts compensatory plans contracts agreements 101a annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons annual report form 10k fiscal year ended december 30 1995 101b amendment annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons quarterly report form 10q fiscal quarter ended july 3 1999 102a deferred income plan textron key executives incorporated reference exhibit 102 textrons annual report form 10k fiscal year ended december 30 1995 102b amendments deferred income plan textron key executives incorporated reference exhibit 102b textrons annual report form 10k fiscal year ended january 2 1999 102c amendment deferred income plan textron key executives incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended july 3 1999 102d amendment deferred income plan textron key executives incorporated reference exhibit 102d textrons annual report form 10k fiscal year ended january 1 2000 103 special benefits textron key executives incorporated reference exhibit 104 textrons annual report form 10k fiscal year ended december 30 1995 104 supplemental benefits plan textron key executives market square profit sharing plan schedule 105a supplemental retirement plan textron key executives incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1995 105b amendment supplemental retirement plan textron key executives incorporated reference exhibit 105b textrons annual report form 10k fiscal year ended january 2 1999 105c amendment supplemental retirement plan textron key executives incorporated reference exhibit 104 textrons quarterly report form 10q fiscal quarter ended july 3 1999 105d amendment supplemental retirement plan textron key executives incorporated reference exhibit 105d textrons annual report form 10k fiscal year ended january 1 2000 106a survivor benefit plan textron key executives incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1995 106b amendment survivor benefit plan textron key executives incorporated reference exhibit 105 textrons quarterly report form 10q fiscal quarter ended july 3 1999 107a textron 1990 longterm incentive plan 1990 plan incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1989 107b first amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended december 28 1991 107c second amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended january 2 1993 108a textron 1994 longterm incentive plan 1994 plan incorporated reference exhibit 10 textrons quarterly report form 10q fiscal quarter ended july 2 1994 108b amendment 1994 plan incorporated reference exhibit 109b textrons annual report form 10k fiscal year ended january 2 1999 108c amendment 1994 plan incorporated reference exhibit 106 textrons quarterly report form 10q fiscal quarter ended july 3 1999 108d amendment 1994 plan incorporated reference exhibit 108d textrons annual report form 10k fiscal year ended january 1 2000 109 textron 1999 long term incentive plan incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended january 1 2000 1010 form indemnity agreement textron directors executive officers incorporated reference exhibit textrons proxy statement annual meeting shareholders april 29 1987 1011 deferred income plan nonemployee directors incorporated reference exhibit 1011 textrons annual report form 10k fiscal year ended january 1 2000 1012 employment agreement textron kenneth c bohlen dated july 18 2000 incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended july 1 2000 1013 employment agreement textron john butler dated july 23 1998 incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1014a employment agreement textron lewis b campbell dated july 23 1998 incorporated reference exhibit 103 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1014b retention award granted lewis b campbell december 14 1995 incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 30 1995 1014c retention award granted lewis b campbell june 1 1999 incorporated reference exhibit 1013c textrons annual report form 10k fiscal year ended january 1 2000 1014d retention award granted lewis b campbell january 1 2001 revision vesting schedule retention award granted june 1 1999 1015a employment agreement textron theodore r french dated december 21 2000 1015b retention award granted theodore r french january 1 2001 1016 employment agreement textron mary l howell dated july 23 1998 incorporated reference exhibit 105 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1017 employment agreement textron john janitz dated may 25 1999 incorporated reference exhibit 1015 textrons annual report form 10k fiscal year ended january 1 2000 1018 5year credit agreement dated april 1998 among textron banks listed therein morgan guaranty trust company new york administrative agent incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended april 4 1998 1018a employment agreement textron stephen l key dated july 23 1998 incorporated reference exhibit 107 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1018b amendment dated december 21 2000 employment agreement textron stephen l key 1019 employment agreement textron terrence odonnell dated march 10 2000 incorporated reference exhibit 101 textrons quarterly report form 10q fiscal quarter ended july 1 2000 121 computation ratio income combined fixed charges preferred stock dividends textron manufacturing 122 computation ratio income combined fixed charges preferred stock dividends textron inc including majorityowned subsidiaries 13 portion pages 20 60 textrons 2000 annual report shareholders 21 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list 23 consent independent auditors 241 power attorney 242 certified copy resolution board directors textron b reports form 8k reports form 8k filed quarter ended december 30 2000 signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 14th day march 2001 textron inc registrant michael cahn michael cahn attorneyinfact pursuant requirements securities exchange act 1934 report signed 14th day march 2001 following persons behalf registrant capacities indicated name title chairman chief executive officer director lewis b campbell president chief operating officer director john janitz director h jesse arnelle director teresa beck director r stuart dickson director lawrence k fish director joe ford director paul e gagne director john macomber director lord powell bayswater kcmg director brian h rowe director sam f segnar director martin walker director thomas b wheeler executive vice president chief financial officer theodore r french principal financial officer vice president controller principal accounting officer richard l yates michael cahn michael cahn attorneyinfact textron inc financial statement schedules item 14a schedules omitted conditions requiring filing thereof exist information required included financial statements notes thereto textron inc schedule condensed financial information registrant years threeyear period ended december 30 2000 financial information registrant omitted condensed financial information textron manufacturing includes registrant majorityowned subsidiaries finance subsidiaries textron finance shown pages 34 38 textrons 2000 annual report shareholders management believes disclosure financial information basis textron manufacturing results meaningful presentation since group constitutes registrants basic borrowing entity restrictions net assets textrons subsidiaries relate textron finance registrants investment textron finance 910 million 2000 868 million 1999 textron manufacturing received dividends 82 million 36 million 62 million textron finance 2000 1999 1998 respectively lending agreements limit textron finances net assets available cash dividends payments textron manufacturing approximately 351 million textron finances net assets 910 million yearend 2000 textron manufacturings credit agreements contain provisions requiring maintain minimum level shareholders equity minimum interest coverage ratio additional information concerning textron manufacturings longterm debt see note 8 consolidated financial statements appearing pages 45 46 textrons 2000 annual report shareholders information concerning textronobligated mandatorily redeemable preferred securities subsidiary trust holding solely textron junior subordinated debt securities see note 11 consolidated financial statements appearing page 48 textrons 2000 annual report shareholders exhibits 31 restated certificate incorporation textron filed january 29 1998 incorporated reference exhibit 31 textrons annual report form 10k fiscal year ended january 3 1998 32 bylaws textron incorporated reference exhibit 32 textrons annual report form 10k fiscal year ended january 1 2000 41 indenture dated december 9 1999 textron financial corporation sun trust bank atlanta including form debt securities incorporated reference exhibit 41 amendment 2 textron financial corporations registration statement form s3 33388509 42 support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 101 textron financial corporations registration statement form 10 note instruments defining rights holders certain issues longterm debt textron filed exhibits report authorized principal amount one issues exceed 10 total assets textron subsidiaries consolidated basis textron agrees furnish copy instrument commission upon request note exhibits 101 1017 management contracts compensatory plans contracts agreements 101a annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons annual report form 10k fiscal year ended december 30 1995 101b amendment annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons quarterly report form 10q fiscal quarter ended july 3 1999 102a deferred income plan textron key executives incorporated reference exhibit 102 textrons annual report form 10k fiscal year ended december 30 1995 102b amendments deferred income plan textron key executives incorporated reference exhibit 102b textrons annual report form 10k fiscal year ended january 2 1999 102c amendment deferred income plan textron key executives incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended july 3 1999 102d amendment deferred income plan textron key executives incorporated reference exhibit 102d textrons annual report form 10k fiscal year ended january 1 2000 103 special benefits textron key executives incorporated reference exhibit 104 textrons annual report form 10k fiscal year ended december 30 1995 104 supplemental benefits plan textron key executives market square profit sharing plan schedule 105a supplemental retirement plan textron key executives incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1995 105b amendment supplemental retirement plan textron key executives incorporated reference exhibit 105b textrons annual report form 10k fiscal year ended january 2 1999 105c amendment supplemental retirement plan textron key executives incorporated reference exhibit 104 textrons quarterly report form 10q fiscal quarter ended july 3 1999 105d amendment supplemental retirement plan textron key executives incorporated reference exhibit 105d textrons annual report form 10k fiscal year ended january 1 2000 106a survivor benefit plan textron key executives incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1995 106b amendment survivor benefit plan textron key executives incorporated reference exhibit 105 textrons quarterly report form 10q fiscal quarter ended july 3 1999 107a textron 1990 longterm incentive plan 1990 plan incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1989 107b first amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended december 28 1991 107c second amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended january 2 1993 108a textron 1994 longterm incentive plan 1994 plan incorporated reference exhibit 10 textrons quarterly report form 10q fiscal quarter ended july 2 1994 108b amendment 1994 plan incorporated reference exhibit 109b textrons annual report form 10k fiscal year ended january 2 1999 108c amendment 1994 plan incorporated reference exhibit 106 textrons quarterly report form 10q fiscal quarter ended july 3 1999 108d amendment 1994 plan incorporated reference exhibit 108d textrons annual report form 10k fiscal year ended january 1 2000 109 textron 1999 long term incentive plan incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended january 1 2000 1010 form indemnity agreement textron directors executive officers incorporated reference exhibit textrons proxy statement annual meeting shareholders april 29 1987 1011 deferred income plan nonemployee directors incorporated reference exhibit 1011 textrons annual report form 10k fiscal year ended january 1 2000 1012 employment agreement textron kenneth c bohlen dated july 18 2000 incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended july 1 2000 1013 employment agreement textron john butler dated july 23 1998 incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1014a employment agreement textron lewis b campbell dated july 23 1998 incorporated reference exhibit 103 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1014b retention award granted lewis b campbell december 14 1995 incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 30 1995 1014c retention award granted lewis b campbell june 1 1999 incorporated reference exhibit 1013c textrons annual report form 10k fiscal year ended january 1 2000 1014d retention award granted lewis b campbell january 1 2001 revision vesting schedule retention award granted june 1 1999 1015a employment agreement textron theodore r french dated december 21 2000 1015b retention award granted theodore r french january 1 2001 1016 employment agreement textron mary l howell dated july 23 1998 incorporated reference exhibit 105 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1017 employment agreement textron john janitz dated may 25 1999 incorporated reference exhibit 1015 textrons annual report form 10k fiscal year ended january 1 2000 1018 5year credit agreement dated april 1998 among textron banks listed therein morgan guaranty trust company new york administrative agent incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended april 4 1998 1018a employment agreement textron stephen l key dated july 23 1998 incorporated reference exhibit 107 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1018b amendment dated december 21 2000 employment agreement textron stephen l key 1019 employment agreement textron terrence odonnell dated march 10 2000 incorporated reference exhibit 101 textrons quarterly report form 10q fiscal quarter ended july 1 2000 121 computation ratio income combined fixed charges preferred stock dividends textron manufacturing 122 computation ratio income combined fixed charges preferred stock dividends textron inc including majorityowned subsidiaries 13 portion pages 20 60 textrons 2000 annual report shareholders 21 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list 23 consent independent auditors 241 power attorney 242 certified copy resolution board directors textronitem 14 exhibits financial statement schedules reports form 10k financial statements schedules consolidated financial statements supplementary information financial statement schedules listed accompanying index financial statements financial statement schedules filed part report exhibits 21 purchase agreement dated august 7 2001 amended restated november 30 2001 among textron inc collins aikman corporation collins aikman products co including exhibit 1 certificate designation series redeemable preferred stock series b redeemable preferred stock series c redeemable preferred stock exhibit 7 asset purchase agreement dated august 7 2001 amended restated november 30 2001 textron automotive exteriors inc jps automotive inc incorporated reference textrons current report form 8k filed january 4 2002 note table contents purchase agreement listed exhibit 21 contains list briefly identifying contents omitted schedules exhibits textron supplementally furnish copy omitted schedule exhibit commission upon request 31 restated certificate incorporation textron filed january 29 1998 incorporated reference exhibit 31 textrons annual report form 10k fiscal year ended january 3 1998 32 bylaws textron incorporated reference exhibit 32 textrons annual report form 10k fiscal year ended january 1 2000 41 indenture dated december 9 1999 textron financial corporation sun trust bank atlanta including form debt securities incorporated reference exhibit 41 amendment 2 textron financial corporations registration statement form s3 33388509 42 indenture dated november 30 2001 textron financial canada funding corp suntrust bank guaranteed textron financial corporation incorporated reference exhibit 42 textron financial corporations registration statement form s3 33388509 43 support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 101 textron financial corporations registration statement form 10 note instruments defining rights holders certain issues longterm debt textron filed exhibits report authorized principal amount one issues exceed 10 total assets textron subsidiaries consolidated basis textron agrees furnish copy instrument commission upon request note exhibits 101 1017 management contracts compensatory plans contracts agreements 101a annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons annual report form 10k fiscal year ended december 30 1995 101b amendment annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons quarterly report form 10q fiscal quarter ended july 3 1999 102 deferred income plan textron key executives 103 special benefits textron key executives incorporated reference exhibit 104 textrons annual report form 10k fiscal year ended december 30 1995 104 supplemental benefits plan textron key executives market square profit sharing plan schedule incorporated reference exhibit 104 textrons annual report form 10k fiscal year ended december 30 2000 105a supplemental retirement plan textron key executives incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1995 105b amendment supplemental retirement plan textron key executives incorporated reference exhibit 105b textrons annual report form 10k fiscal year ended january 2 1999 105c amendment supplemental retirement plan textron key executives incorporated reference exhibit 104 textrons quarterly report form 10q fiscal quarter ended july 3 1999 105d amendment supplemental retirement plan textron key executives incorporated reference exhibit 105d textrons annual report form 10k fiscal year ended january 1 2000 106a survivor benefit plan textron key executives incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1995 106b amendment survivor benefit plan textron key executives incorporated reference exhibit 105 textrons quarterly report form 10q fiscal quarter ended july 3 1999 107a textron 1990 longterm incentive plan 1990 plan incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1989 107b first amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended december 28 1991 107c second amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended january 2 1993 108a textron 1994 longterm incentive plan 1994 plan incorporated reference exhibit 10 textrons quarterly report form 10q fiscal quarter ended july 2 1994 108b amendment 1994 plan incorporated reference exhibit 109b textrons annual report form 10k fiscal year ended january 2 1999 108c amendment 1994 plan incorporated reference exhibit 106 textrons quarterly report form 10q fiscal quarter ended july 3 1999 108d amendment 1994 plan incorporated reference exhibit 108d textrons annual report form 10k fiscal year ended january 1 2000 109a textron 1999 long term incentive plan incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended january 1 2000 109b amendment 1999 plan 1010 form indemnity agreement textron directors executive officers incorporated reference exhibit textrons proxy statement annual meeting shareholders april 29 1987 1011 deferred income plan nonemployee directors incorporated reference exhibit 1011 textrons annual report form 10k fiscal year ended january 1 2000 1012 employment agreement textron kenneth c bohlen dated july 18 2000 incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended july 1 2000 1013 employment agreement textron john butler dated july 23 1998 incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1014a employment agreement textron lewis b campbell dated july 23 1998 incorporated reference exhibit 103 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1014b retention award granted lewis b campbell december 14 1995 incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 30 1995 1014c retention award granted lewis b campbell june 1 1999 incorporated reference exhibit 1013c textrons annual report form 10k fiscal year ended january 1 2000 1014d retention award granted lewis b campbell january 1 2001 revision vesting schedule retention award granted june 1 1999 incorporated reference exhibit 1014d textrons annual report form 10k fiscal year ended december 30 2000 1014e amendments retention awards granted lewis b campbell 1015a employment agreement textron theodore r french dated december 21 2000 incorporated reference exhibit 1015a textrons annual report form 10k fiscal year ended december 30 2000 1015b retention award granted theodore r french january 1 2001 incorporated reference exhibit 1015b textrons annual report form 10k fiscal year ended december 30 2000 1016 employment agreement textron mary l howell dated july 23 1998 incorporated reference exhibit 105 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1017 employment agreement textron terrence odonnell dated march 10 2000 incorporated reference exhibit 101 textrons quarterly report form 10q fiscal quarter ended july 1 2000 1018 5year credit agreement dated april 1998 among textron banks listed therein morgan guaranty trust company new york administrative agent incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended april 4 1998 121 computation ratio income combined fixed charges preferred stock dividends textron manufacturing 122 computation ratio income combined fixed charges preferred stock dividends textron inc including majorityowned subsidiaries 13 portion pages 18 61 textrons 2001 annual report shareholders 21 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list 23 consent independent auditors 241 power attorney 242 certified copy resolution board directors textron b reports form 8k following reports form 8k filed quarter ended december 29 2001 current reports form 8k items 5 7 filed november 9 2001 november 19 2001 file certain exhibits registration statement form s3 current report form 8k item 5 filed december 3 2001 report textron proceed sale automotive trim business revised terms signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 14th day march 2002 textron inc registrant michael cahn michael cahn attorneyinfact pursuant requirements securities exchange act 1934 report signed 14th day march 2002 following persons behalf registrant capacities indicated name title chairman president chief executive officer director lewis b campbell director h jesse arnelle director teresa beck director r stuart dickson director lawrence k fish director joe ford director paul e gagne director john macomber director lord powell bayswater kcmg director brian h rowe director sam f segnar director martin walker director thomas b wheeler executive vice president chief financial officer theodore r french principal financial officer vice president controller principal accounting officer richard l yates michael cahn michael cahn attorneyinfact textron inc financial statement schedules item 14a 2001 annual report shareholders page report independent auditors 33 consolidated statements income years 34 threeyear period ended december 29 2001 consolidated balance sheets december 29 2001 35 december 30 2000 statements cash flows years 36 threeyear period ended december 29 2001 consolidated statements changes shareholders equity 38 years threeyear period ended december 29 2001 notes consolidated financial statements 39 business segment data 18 supplementary information unaudited quarterly data 2001 2000 60 schedules omitted conditions requiring filing thereof exist information required included financial statements notes thereto exhibits 21 purchase agreement dated august 7 2001 amended restated november 30 2001 among textron inc collins aikman corporation collins aikman products co including exhibit 1 certificate designation series redeemable preferred stock series b redeemable preferred stock series c redeemable preferred stock exhibit 7 asset purchase agreement dated august 7 2001 amended restated november 30 2001 textron automotive exteriors inc jps automotive inc incorporated reference textrons current report form 8k filed january 4 2002 note table contents purchase agreement listed exhibit 21 contains list briefly identifying contents omitted schedules exhibits textron supplementally furnish copy omitted schedule exhibit commission upon request 31 restated certificate incorporation textron filed january 29 1998 incorporated reference exhibit 31 textrons annual report form 10k fiscal year ended january 3 1998 32 bylaws textron incorporated reference exhibit 32 textrons annual report form 10k fiscal year ended january 1 2000 41 indenture dated december 9 1999 textron financial corporation sun trust bank atlanta including form debt securities incorporated reference exhibit 41 amendment 2 textron financial corporations registration statement form s3 33388509 42 indenture dated november 30 2001 textron financial canada funding corp suntrust bank guaranteed textron financial corporation incorporated reference exhibit 42 textron financial corporations registration statement form s3 33388509 43 support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 101 textron financial corporations registration statement form 10 note instruments defining rights holders certain issues longterm debt textron filed exhibits report authorized principal amount one issues exceed 10 total assets textron subsidiaries consolidated basis textron agrees furnish copy instrument commission upon request note exhibits 101 1017 management contracts compensatory plans contracts agreements 101a annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons annual report form 10k fiscal year ended december 30 1995 101b amendment annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons quarterly report form 10q fiscal quarter ended july 3 1999 102 deferred income plan textron key executives 103 special benefits textron key executives incorporated reference exhibit 104 textrons annual report form 10k fiscal year ended december 30 1995 104 supplemental benefits plan textron key executives market square profit sharing plan schedule incorporated reference exhibit 104 textrons annual report form 10k fiscal year ended december 30 2000 105a supplemental retirement plan textron key executives incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1995 105b amendment supplemental retirement plan textron key executives incorporated reference exhibit 105b textrons annual report form 10k fiscal year ended january 2 1999 105c amendment supplemental retirement plan textron key executives incorporated reference exhibit 104 textrons quarterly report form 10q fiscal quarter ended july 3 1999 105d amendment supplemental retirement plan textron key executives incorporated reference exhibit 105d textrons annual report form 10k fiscal year ended january 1 2000 106a survivor benefit plan textron key executives incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1995 106b amendment survivor benefit plan textron key executives incorporated reference exhibit 105 textrons quarterly report form 10q fiscal quarter ended july 3 1999 107a textron 1990 longterm incentive plan 1990 plan incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1989 107b first amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended december 28 1991 107c second amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended january 2 1993 108a textron 1994 longterm incentive plan 1994 plan incorporated reference exhibit 10 textrons quarterly report form 10q fiscal quarter ended july 2 1994 108b amendment 1994 plan incorporated reference exhibit 109b textrons annual report form 10k fiscal year ended january 2 1999 108c amendment 1994 plan incorporated reference exhibit 106 textrons quarterly report form 10q fiscal quarter ended july 3 1999 108d amendment 1994 plan incorporated reference exhibit 108d textrons annual report form 10k fiscal year ended january 1 2000 109a textron 1999 long term incentive plan incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended january 1 2000 109b amendment 1999 plan 1010 form indemnity agreement textron directors executive officers incorporated reference exhibit textrons proxy statement annual meeting shareholders april 29 1987 1011 deferred income plan nonemployee directors incorporated reference exhibit 1011 textrons annual report form 10k fiscal year ended january 1 2000 1012 employment agreement textron kenneth c bohlen dated july 18 2000 incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended july 1 2000 1013 employment agreement textron john butler dated july 23 1998 incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1014a employment agreement textron lewis b campbell dated july 23 1998 incorporated reference exhibit 103 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1014b retention award granted lewis b campbell december 14 1995 incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 30 1995 1014c retention award granted lewis b campbell june 1 1999 incorporated reference exhibit 1013c textrons annual report form 10k fiscal year ended january 1 2000 1014d retention award granted lewis b campbell january 1 2001 revision vesting schedule retention award granted june 1 1999 incorporated reference exhibit 1014d textrons annual report form 10k fiscal year ended december 30 2000 1014e amendments retention awards granted lewis b campbell 1015a employment agreement textron theodore r french dated december 21 2000 incorporated reference exhibit 1015a textrons annual report form 10k fiscal year ended december 30 2000 1015b retention award granted theodore r french january 1 2001 incorporated reference exhibit 1015b textrons annual report form 10k fiscal year ended december 30 2000 1016 employment agreement textron mary l howell dated july 23 1998 incorporated reference exhibit 105 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1017 employment agreement textron terrence odonnell dated march 10 2000 incorporated reference exhibit 101 textrons quarterly report form 10q fiscal quarter ended july 1 2000 1018 5year credit agreement dated april 1998 among textron banks listed therein morgan guaranty trust company new york administrative agent incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended april 4 1998 121 computation ratio income combined fixed charges preferred stock dividends textron manufacturing 122 computation ratio income combined fixed charges preferred stock dividends textron inc including majorityowned subsidiaries 13 portion pages 18 61 textrons 2001 annual report shareholders 21 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list 23 consent independent auditors 241 power attorney 242 certified copy resolution board directors textronitem 14 controls procedures evaluation disclosure controls procedures within 90 days prior date report carried evaluation supervision participation management including chairman president chief executive officer ceo executive vice president chief financial officer cfo effectiveness design operation disclosure controls procedures defined rule 13a14c securities exchange act 1934 act based upon evaluation ceo cfo concluded disclosure controls procedures effective providing reasonable assurance information required disclosed us reports file submit act recorded processed summarized reported within time periods specified securities exchange commissions rules forms b information accumulated communicated management including ceo cfo appropriate allow timely decisions regarding required disclosure changes internal controls significant changes internal controls factors could significantly affect controls subsequent date evaluation part iv item 15item 14 principal accountant fees services information appearing “fees independent auditors” proxy statement annual meeting shareholders held april 28 2004 incorporated reference annual report form 10k part iv item 15item 14 principal accountant fees services information appearing “fees independent auditors” proxy statement annual meeting shareholders held april 26 2006 incorporated reference annual report form 10k item 15item 14 principal accountant fees services information appearing “fees independent auditors” proxy statement annual meeting shareholders held april 25 2007 incorporated reference annual report form 10k part iv item 15item 14 principal accountant fees services information appearing “ratification appointment independent registered public accounting firm fees independent auditors” proxy statement annual meeting shareholders held april 22 2009 incorporated reference annual report form 10k part iv item 15item 14 principal accountant fees services information appearing “ratification appointment independent registered public accounting firm fees independent auditors” proxy statement annual meeting shareholders held april 28 2010 incorporated reference annual report form 10k part iv item 15item 14 principal accountant fees services information appearing “ratification appointment independent registered public accounting firm fees independent auditors” proxy statement annual meeting shareholders held april 24 2013 incorporated reference annual report form 10k part iv item 15item 14 principal accountant fees services information appearing “ratification appointment independent registered public accounting firm fees independent auditors” proxy statement annual meeting shareholders held april 23 2014 incorporated reference annual report form 10k part iv item 15item 14 principal accountant fees services information appearing “ratification appointment independent registered public accounting firm fees independent auditors” proxy statement annual meeting shareholders held april 22 2015 incorporated reference annual report form 10k part iv item 15item 14 principal accountant fees services information appearing “ratification appointment independent registered public accounting firm fees independent auditors” proxy statement annual meeting shareholders held april 27 2016 incorporated reference annual report form 10k part iv item 15item 14 principal accountant fees services information appearing “ratification appointment independent registered public accounting firm fees independent auditors” proxy statement annual meeting shareholders held april 29 2020 incorporated reference annual report form 10k part iv item 15item 14 principal accountant fees services information appearing “ratification appointment independent registered public accounting firm fees independent auditors” proxy statement annual meeting shareholders held april 25 2018 incorporated reference annual report form 10k part iv item 15item 14 principal accountant fees services information appearing “ratification appointment independent registered public accounting firm fees independent auditors” proxy statement annual meeting shareholders held april 24 2019 incorporated reference annual report form 10k part iv item 15item 14 exhibits financial statement schedules reports form 8k financial statements schedules consolidated financial statements supplementary information financial statement schedules listed accompanying index financial statements financial statement schedules filed part report exhibits 31a restated certificate incorporation textron filed march 24 1988 incorporated reference exhibit 31 textrons annual report form 10k fiscal year ended january 2 1988 31b amendment certificate designations preferences rights series c junior participating preferred stock filed march 20 1996 32 bylaws textron restated december 10 1992 incorporated reference exhibit 32 textrons annual report form 10k fiscal year ended january 2 1993 note exhibits 101 1020 management contracts compensatory plans contracts agreements 101 annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons annual report form 10k fiscal year ended december 30 1995 102 deferred income plan textron key executives incorporated reference exhibit 102 textrons annual report form 10k fiscal year ended december 30 1995 103 severance plan textron key executives incorporated reference exhibit 103 textrons annual report form 10k fiscal year ended december 30 1995 104 special benefits textron key executives incorporated reference exhibit 104 textrons annual report form 10k fiscal year ended december 30 1995 105 supplemental benefits plan textron key executives market square profit sharing plan schedule incorporated reference exhibit 105 textrons annual report form 10k fiscal year ended december 30 1995 106 supplemental retirement plan textron key executives incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1995 107 survivor benefit plan textron key executives incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1995 108a textron 1982 longterm incentive plan 1982 plan incorporated reference exhibit 105a textrons annual report form 10k fiscal year ended december 31 1988 108b first amendment 1982 plan incorporated reference exhibit 105b textrons annual report form 10k fiscal year ended january 3 1987 108c second amendment 1982 plan incorporated reference exhibit 105c textrons annual report form 10k fiscal year ended january 2 1988 109a textron 1987 longterm incentive plan 1987 plan incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1989 109b first amendment 1987 plan incorporated reference exhibit 106b textrons annual report form 10k fiscal year ended december 28 1991 1010a textron 1990 longterm incentive plan 1990 plan incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1989 1010b first amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended december 28 1991 1010c second amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended january 2 1993 1011 textron 1994 longterm incentive plan incorporated reference exhibit 10 textrons quarterly report form 10q fiscal quarter ended july 2 1994 1012 form indemnity agreement textron directors executive officers incorporated reference exhibit textrons proxy statement annual meeting shareholders april 29 1987 1013a pension plan directors amended first amendment discontinued september 30 1996 incorporated reference exhibit 1014 textrons annual report form 10k fiscal year ended december 31 1988 1013b second amendment pension plan directors discontinued september 30 1996 incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 29 1990 1014 deferred income plan nonemployee directors 1015a employment agreement textron james f hardymon dated november 24 1989 employment agreement incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended december 30 1989 1015b amendment dated december 15 1994 employment agreement incorporated reference exhibit 1010b textrons annual report form 10 k fiscal year ended december 31 1994 1016a employment agreement textron lewis b campbell dated september 22 1992 incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended january 2 1993 1016b retention award granted lewis b campbell december 14 1995 incorporated reference exhibit 1016b textrons annual report form 10 k fiscal year ended december 30 1995 1017 employment agreement textron mary l howell dated may 4 1993 incorporated reference exhibit 1011 textrons annual report form 10k fiscal year ended january 1 1994 1018 employment agreement textron wayne w juchatz dated november 1 1995 incorporated reference exhibit 1018 textrons annual report form 10k fiscal year ended december 30 1995 1019 employment agreement textron stephen l key dated november 1 1995 incorporated reference exhibit 1019 textrons annual report form 10k fiscal year ended december 30 1995 1020 employment agreement textron william f wayland dated january 1 1989 incorporated reference exhibit 1012 textrons annual report form 10k fiscal year ended december 30 1989 1021a credit agreement dated november 1 1993 among textron lenders listed therein bankers trust company administrative agent credit agreement incorporated reference exhibit 1020a textrons annual report form 10 k fiscal year ended january 1 1994 1021b first amendment dated october 30 1994 credit agreement incorporated reference exhibit 1022b textrons annual report form 10 k fiscal year ended december 31 1994 1021c second amendment credit agreement dated july 1 1995 incorporated reference exhibit b 3 schedule 14d1 filed textron september 19 1995 1021d third amendment credit agreement dated july 1 1996 121 computation ratio income combined fixed charges preferred stock dividends parent group 122 computation ratio income combined fixed charges preferred stock dividends textron inc including majorityowned subsidiaries 13 portion pages 23 following textrons 1996 annual report shareholders except pages items specifically incorporated reference herein portion textrons 1996 annual report shareholders furnished information commission filed part report 21 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list 23 consent independent auditors 241 power attorney 242 certified copy resolution board directors textron 27 financial data schedule b reports form 8k quarter ended december 28 1996 textron filed securities exchange commission report form 8k dated november 8 1996 reporting item 5 events item 7 exhibits information regarding sale provident companies inc outstanding shares paul revere corporation 83 owned textron signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 14th day march 1997 textron inc registrant michael cahn michael cahn attorneyinfact pursuant requirements securities exchange act 1934 report signed 14th day march 1997 following persons behalf registrant capacities indicated name title chairman chief james f hardymon executive officer director principal executive officer president chief lewis b campbell operating officer director h jesse arnelle director teresa beck director r stuart dickson director paul e gagne director john macomber director dana g mead director barbara scott preiskel director brian h rowe director sam f segnar director jean head sisco director john w snow director martin walker director thomas b wheeler executive vice president stephen l key chief financial officer principal financial officer vice president controller richard l yates principal accounting officer bys michael cahn michael cahn attorneyinfact textron inc financial statement schedules item 14a form annual report textron inc 10k shareholders report independent auditors 31 consolidated statement income 32 three years period ended december 28 1996 consolidated balance sheet december 28 1996 34 december 30 1995 consolidated statement cash flows 36 three years period ended december 28 consolidated statement changes shareholders 38 equity three years period ended december 28 1996 notes consolidated financial statements 3951 revenues income business segment 23 supplementary information unaudited quarterly financial information 1996 1995 52 financial statement schedules three years period ended december 28 1996 condensed financial information 27 registrant ii valuation qualifying accounts 28 schedules omitted conditions requiring filing thereof exist information required included financial statements notes thereto textron inc schedule condensed financial information registrant three years period ended december 28 1996 financial information registrant omitted condensed financial information parent group includes registrant majorityowned subsidiaries finance subsidiaries finance group shown pages 32 37 textrons 1996 annual report shareholders management believes disclosure financial information basis parent group results meaningful presentation since group constitutes registrants basic borrowing entity restrictions net assets textrons subsidiaries relate finance group registrants investment finance group shown pages 34 35 textrons 1996 annual report shareholders caption investments finance group parent group received dividends 124 million 117 million 106 million finance group 1996 1995 1994 respectively portion net assets textrons finance group available cash dividends payments parent group restricted terms lending agreements insurance statutory requirements december 28 1996 approximately 473 million net assets 16 billion available transferred parent group pursuant restrictions parent groups credit agreements contain provisions requiring maintain minimum level shareholders equity minimum interest coverage ratio additional information concerning parent groups longterm debt see note 9 consolidated financial statements appearing pages 43 44 textrons 1996 annual report shareholders information concerning textronobligated mandatorily redeemable preferred securities subsidiary trust holding solely textron junior subordinated debt securities see note 11 consolidated financial statements appearing page 45 textrons 1996 annual report shareholders textron inc schedule ii valuation qualifying accounts three years period ended december 28 1996 millions allowance credit losses changes allowance credit losses years indicated follows 1996 1995 1994 balance allowance credit losses beginning year 270 250 225 add charged income consumer 203 149 136 commercial 27 20 26 230 169 162 deduct balances charged gross charge offs consumer 230 177 142 commercial 30 25 27 260 202 169 recoveries consumer 36 33 28 commercial 3 4 3 39 37 31 net charge offs 221 165 138 14 16 1 balance allowance credit losses end year 293 270 250 balance allowance credit losses end year applicable consumer 218 195 181 commercial 75 69 293 270 250 textron inc index exhibits annual report form 10k fiscal year ended december 28 1996 exhibits description 31a restated certificate incorporation textron filed march 24 1988 incorporated reference exhibit 31 textrons annual report form 10k fiscal year ended january 2 1988 31b amendment certificate designations preferences rights series c junior participating preferred stock filed march 20 1996 32 bylaws textron restated december 10 1992 incorporated reference exhibit 32 textrons annual report form 10k fiscal year ended january 2 1993 note exhibits 101 1020 management contracts compensatory plans contracts agreements 101 annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons annual report form 10 k fiscal year ended december 30 1995 102 deferred income plan textron key executives incorporated reference exhibit 102 textrons annual report form 10k fiscal year ended december 30 1995 103 severance plan textron key executives incorporated reference exhibit 103 textrons annual report form 10k fiscal year ended december 30 1995 104 special benefits textron key executives incorporated reference exhibit 104 textrons annual report form 10k fiscal year ended december 30 1995 105 supplemental benefits plan textron key executives market square profit sharing plan schedule incorporated reference exhibit 105 textrons annual report form 10k fiscal year ended december 30 1995 106 supplemental retirement plan textron key executives incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1995 107 survivor benefit plan textron key executives incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1995 108a textron 1982 longterm incentive plan 1982 plan incorporated reference exhibit 105a textrons annual report form 10k fiscal year ended december 31 1988 108b first amendment 1982 plan incorporated reference exhibit 105b textrons annual report form 10k fiscal year ended january 3 1987 108c second amendment 1982 plan incorporated reference exhibit 105c textrons annual report form 10k fiscal year ended january 2 1988 109a textron 1987 longterm incentive plan 1987 plan incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1989 109b first amendment 1987 plan incorporated reference exhibit 106b textrons annual report form 10k fiscal year ended december 28 1991 1010a textron 1990 longterm incentive plan 1990 plan incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1989 1010b first amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended december 28 1991 1010c second amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended january 2 1993 1011 textron 1994 longterm incentive plan incorporated reference exhibit 10 textrons quarterly report form 10q fiscal quarter ended july 2 1994 1012 form indemnity agreement textron directors executive officers incorporated reference exhibit textrons proxy statement annual meeting shareholders april 29 1987 1013a pension plan directors amended first amendment discontinued september 30 1996 incorporated reference exhibit 1014 textrons annual report form 10k fiscal year ended december 31 1988 1013b second amendment pension plan directors discontinued september 30 1996 incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 29 1990 1014 deferred income plan nonemployee directors 1015a employment agreement textron james f hardymon dated november 24 1989 employment agreement incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended december 30 1989 1015b amendment dated december 15 1994 employment agreement incorporated reference exhibit 1010b textrons annual report form 10k fiscal year ended december 31 1994 1016a employment agreement textron lewis b campbell dated september 22 1992 incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended january 2 1993 1016b retention award granted lewis b campbell december 14 1995 incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 30 1995 1017 employment agreement textron mary l howell dated may 4 1993 incorporated reference exhibit 1011 textrons annual report form 10k fiscal year ended january 1 1994 1018 employment agreement textron wayne w juchatz dated november 1 1995 incorporated reference exhibit 1018 textrons annual report form 10k fiscal year ended december 30 1995 1019 employment agreement textron stephen l key dated november 1 1995 incorporated reference exhibit 1019 textrons annual report form 10k fiscal year ended december 30 1995 1020 employment agreement textron william f wayland dated january 1 1989 incorporated reference exhibit 1012 textrons annual report form 10k fiscal year ended december 30 1989 1021a credit agreement dated november 1 1993 among textron lenders listed therein bankers trust company administrative agent credit agreement incorporated reference exhibit 1020a textrons annual report form 10k fiscal year ended january 1 1994 1021b first amendment dated october 30 1994 credit agreement incorporated reference exhibit 1022b textrons annual report form 10k fiscal year ended december 31 1994 1021c second amendment credit agreement dated july 1 1995 incorporated reference exhibit b 3 schedule 14d1 filed textron september 19 1995 1021d third amendment credit agreement dated july 1 1996 121 computation ratio income combined fixed charges preferred stock dividends parent group 122 computation ratio income combined fixed charges preferred stock dividends textron inc including majorityowned subsidiaries 13 portion pages 23 following textrons 1996 annual report shareholders except pages items specifically incorporated reference herein portion textrons 1996 annual report shareholders furnished information commission filed part report 21 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list 23 consent independent auditors 241 power attorney 242 certified copy resolution board directors textron 27 financial data scheduleitem 14 principal accountant fees services information appearing “ratification appointment independent registered public accounting firm fees independent auditors” proxy statement annual meeting shareholders held april 23 2008 incorporated reference annual report form 10k part iv item 15item 14 principal accountant fees services information appearing “ratification appointment independent registered public accounting firm fees independent auditors” proxy statement annual meeting shareholders held april 25 2012 incorporated reference annual report form 10k part iv item 15 item 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations contained financial review pages 29 37 textrons 1993 annual report shareholders pages incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations contained pages 23 29 textrons 1995 annual report shareholders pages incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis appearing pages 25 32 textrons 1997 annual report shareholders incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis appearing pages 23 32 textrons 1998 annual report shareholders incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis appearing pages 21 32 2000 annual report shareholders incorporated reference annual report form 10k item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis appearing pages 19 32 2001 annual report shareholders incorporated reference annual report form 10k item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis appearing pages 19 34 2002 annual report shareholders incorporated reference annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations “management’s discussion analysis” appearing pages 16 33 2003 annual report shareholders incorporated reference annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations business overview textron inc multiindustry company leverages global network businesses provide customers innovative solutions services four business segments bell cessna industrial finance textron known around world powerful brands spanning business jet aerospace defense plastic fuel systems golf car turfcare markets among others global economy continued grow major markets 2005 despite early weakness regions including parts europe us economy particular proved resilient face hurricanes katrina rita overall capital spending continued grow steady sustainable rate company’s performance strongly related key economic factor reflects investments longer lasting items equipment facilities vehicles strong sales 2005 particularly aerospace defense businesses able deliver exceptional organic growth gains existing business excluding effects acquisitions changes 19 result commitment bringing new products services customers orders strong notably bell steady flow military orders resulted continued spending defense sector received robust orders commercial helicopter business cessna also saw significant increase new business jet orders result strength aircraft sector popularity new model introductions finance segment experienced significant improvement portfolio credit quality fewer chargeoffs decrease nonperforming assets however industrial volumes slightly 2004 largely due downturn north american automotive industry impacted inflation higher pension costs 2005 able absorb impact factors primarily result increased volumes benefit transformation strategy reduce costs introduce new products enhance portfolio businesses continue execute transformation strategy position textron take advantage improved economic conditions strengthen overall position markets continued improve upon portfolio businesses 2005 sold interest model ab139 helicopter program agusta partner baac venture also purchased us helicopter increase bell’s ability provide aftersales service bought kautex’s japanese joint venture partner take advantage rapidly growing market set new joint venture german company rothenberger ag expand presence north american plumbing tools december 2005 board directors authorized management’s plan divestiture textron fastening systems business approval committed actively market business anticipate significant changes approved plan completion sale within next twelve months result business reclassified discontinued operations fourth quarter 2005 consolidated results operations revenues 100 billion segment profit 11 billion segment profit represents measurement used textron evaluate performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses special charges gains losses disposition significant business units measurement finance segment includes interest income expense excludes special charges revenues increased 17 billion 2005 primarily due higher manufacturing sales volume 13 billion higher pricing 159 million additional revenue 115 million acquisitions higher revenue finance segment 83 million revenues increased 263 million 2004 primarily due favorable foreign exchange 167 million additional revenue 76 million consolidation citationshares higher manufacturing volume 31 million higher pricing 30 million partially offset lower finance revenues 27 million segment profit segment profit increased 296 million 2005 primarily due higher sales volume 319 million higher pricing 159 million higher profit finance segment 26 million increases partially offset inflation 227 million segment profit increased 145 million 2004 primarily due 242 million costreduction initiatives 50 million benefit restructuring activities 30 million higher pricing increases partially offset inflation 167 million special charges special charges summarized restructuring program textron substantially completed companywide restructuring program end 2005 textron approved committed restructuring program fourth quarter 2000 improve returns core businesses complete integration certain acquisitions program expanded 2001 2002 part textron’s strategic effort improve operating efficiencies textron’s restructuring program included corporate segment direct indirect workforce reductions consolidation facilities rationalization certain product lines outsourcing noncore production activity divestiture noncore businesses streamlining sales administrative overhead program textron reduced workforce approximately 8000 employees continuing operations representing approximately 19 global workforce since program first announced closed 85 facilities december 31 2005 textron incurred total program costs 306 million composed 164 million severance costs 44 million contract termination costs 34 million asset impairment charges net gains sale fixed assets 64 million associated costs total program costs incurred segment include 219 million industrial segment 38 million cessna segment 29 million bell segment 9 million finance segment 11 million corporate charges gain textron records charges incurred gains realized connection 2001 disposition automotive trim business “trim” special charges connection disposition trim subsidiaries collins aikman corporation “ca” textron finance recourse textron manufacturing equipment leases subsidiaries outstanding balance leases totaled approximately 70 million december 31 2005 fourth quarter 2005 lease term leases expired ca failed make one lease payments textron finance currently negotiations ca renew leases textron manufacturing recorded additional reserve 10 million fourth quarter 2005 based uncertainties related leases addition textron finance equipment leases certain operating leases transferred assigned subsidiaries ca upon sale trim discussed note 18 consolidated financial statements textron guaranteed ca’s payments operating leases certain environmental matters may 2005 ca substantially us subsidiaries including ca products co “ca products” filed chapter 11 bankruptcy protection july 2005 ca’s european subsidiaries filed groupwide administration order united kingdom filings effectively reduced textron’s ability seek recourse ca indemnity provisions purchase sale agreement default occur based ca’s recent failure pay certain leases well negotiations entered part potential sale ca’s european operations textron recorded 11 million fourth quarter 2005 cover exposure leases along certain environmental workers’ compensation matters textron also acquired preferred stock ca products ca common stock connection trim disposition based ca products’ filing chapter 11 bankruptcy protection relevant market considerations textron recorded charges approximately 91 million 2005 write remaining book value investment preferred stock 2004 textron sold remaining investment ca common stock cash proceeds 34 million recorded pretax gain 12 million 2003 textron redeemed 792 junior subordinated deferrable interest debentures due 2045 debentures held textron’s wholly owned trust proceeds redemption used redeem 500 million textron capital trust preferred securities upon redemption 15 million unamortized issuance costs written recorded special charges corporate expenses net corporate expenses net increased 42 million 2005 principally due 16 million higher compensation pension costs 9 million corporate initiatives 7 million corporate portion sharebased compensation expense recorded newly adopted accounting standard corporate expenses net increased 34 million 2004 primarily due 14 million nonrecurring income 2003 6 million higher premiums directors officers insurance 5 million funding textron’s charitable trust 4 million higher executive compensation primarily related improved operating results nonrecurring income 2003 included 7 million related expired royalty agreement 7 million proceeds life insurance policies income continuing operations fluctuations income continuing operations primarily driven segment profit changes discussed addition textron recorded certain items affected comparability operating results last three years summarized table gain sale businesses includes gain 15 million sale textron’s remaining interest previously divested business sharebased compensation first quarter 2005 textron elected adopt provisions statement financial accounting standards “sfas” 123 revised 2004 “sharebased payment” “sfas 123r” using modified prospective method adoption resulted recognition sharebased compensation expense related primarily expensing stock options continuing operations approximately 14 million 10 million tax year ended december 31 2005 including net impact cumulative effect adoption approximately 1 million first quarter 2 million 1 million tax discontinued operations income taxes reconciliation federal statutory income tax rate effective income tax rate provided discontinued operations december 2005 board directors authorized divestiture textron fastening systems business approval committed actively market business anticipate significant changes approved plan completion sale within next twelve months discontinued operations include textron fastening systems intesys omniquip small business direct businesses discontinued operations net applicable income taxes periods presented accordance sfas 144 “accounting impairment disposal longlived assets” see note 2 consolidated financial statements additional discussion divestiture activities operating results discontinued businesses follows 2005 loss discontinued operations includes 335 million goodwill impairment charge related textron fastening systems business addition recorded aftertax charge approximately 52 million fourth quarter 2005 includes 37 million related previously deferred foreign currency translation losses 2 million tax charges related nonusbased business well 7 million related curtailment losses employee retirement plans charges management assessed estimated fair value business determined adjustment carrying value required addition approximately 6 million aftertax dealrelated costs primarily professional services advisory fees incurred fourth quarter 2003 loss discontinued operations includes 30 million goodwill intangible asset impairment charge related omniquip business 2005 textron recorded net 46 million gain disposal primarily related tax benefit recorded upon sale intesys gain loss sale omniquip small business direct businesses 2003 special charges represent restructuring costs incurred textron fastening systems intesys omniquip connection companywide restructuring program outlook expect higher revenues 2006 result revenue increases bell cessna finance industrial businesses expected slightly bell revenues expected increase primarily due higher commercial helicopter deliveries cessna expect increase revenue due higher sales jets based current delivery schedule textron’s commercial backlog unaffiliated customers 74 billion 63 billion end 2005 2004 respectively primarily related cessna us government backlog 33 billion end 2005 2004 substantially bell segment see “backlog” item 1 business textron page 6 information segment analysis bell segment supplier aircraft weapon systems providing advanced product service solutions military commercial customers bell helicopter leading manufacturer military helicopters tiltrotor aircraft us government commercial helicopters corporate offshore petroleum exploration development utility charter police fire rescue emergency medical customers textron systems primary supplier defense aerospace general aviation markets bell helicopter participates several major programs us government association boeing company bell helicopter supplier military tiltrotor aircraft v22 us government issued contracts 83 production v22 aircraft total requirement 458 aircraft september 2005 bell received authorization proceed fullrate production v22 bell helicopter nearing completion engineering manufacturing development “emd” phase h1 upgrade program us marine corps program produce advanced attack utility model helicopter ah1z uh1y respectively operational evaluation program planned begin shortly delivery remaining two aircraft 2006 us government also issued contracts production ten uh1y aircraft six ah1z aircraft low rate initial production contract additional lot along priced option another lot planned exercised second quarter 2006 additionally bell awarded contract system development demonstration army’s armed reconnaissance helicopter “arh” expected requirement 368 aircraft bell also participate production vh71 presidential helicopter fleet awb llc 2005 bell helicopter’s commercial business gained momentum increase orders deliveries bell continued invest commercial programs evidenced significant progress made 429 global ranger program upgrades response customer requests improve speed lower operating costs reduce noise textron systems’ principal strategy focus address emphasis placed us department defense network centric warfare leveraging advances information technology focusing development production advanced weapon systems additionally textron systems received orders deliver 1100 armored security vehicles “asv” currently production capacity ramping meet deliveries spite disruptions caused hurricane katrina bell revenues us government business us government revenues increased 491 million 2005 primarily due higher revenue 288 million v22 program higher asv volume 61 million benefit 36 million us helicopter acquisition higher military spares volume 32 million increased sales 20 million airlaunched weapons additionally bell recognized 21 million new arh contract us government revenues decreased 166 million 2004 largely due lower revenue 243 million v22 program primarily result lower effort production lots three six contracts neared completion decrease development activities lower sales 30 million related completion contract training aircraft 2003 11 million reduction revenue related final agreement us government settle overhead cost rate matter also contributed revenue decrease decreases revenue partially offset 34 million higher military spares volume increased sales 34 million airlaunched weapons higher h1 revenue 34 million commercial business commercial revenues increased 136 million 2005 primarily due higher aircraft sales 68 million higher spares volume 41 million higher international military sales 26 million due primarily higher asv deliveries foreign customers 58 million partially offset lower helicopter volume 32 million commercial revenues increased 72 million 2004 primarily due higher international military sales 64 million increased volume aircraft engine business 18 million higher spares volume 14 million increases partially offset lower huey ii kit sales 16 million lower aircraft sales 6 million bell segment profit us government business profit us government business increased 33 million 2005 principally due higher v22 volume 26 million reflecting delivery 12 aircraft lots 7 8 higher volume improved performance airlaunched weapons totaling 13 million increased asv deliveries improved performance 10 million increases partially offset 18 million costs associated hurricane katrina profit us government business decreased 31 million 2004 primarily due 20 million impact lower v22 revenue 11 million settlement us government lower volume training aircraft 11 million partially offset 10 million impact higher volume airlaunched weapons commercial business commercial profit increased 85 million 2005 primarily due 30 million gain sale interest model ab139 helicopter program 29 million impact higher international military volume improved performance higher spares volume 22 million 13 million impact upon resolution uncertainties receipt cash related prior year collaborative research development sharing agreement addition commercial profit reflected 16 million decrease net research development higher gross research development expenses 28 million offset commercial share reimbursements related risksharing agreements codevelopment partners increases partially offset 28 million higher selling administrative expense 18 million additional reserves recorded lycoming related retirement program discussed crankshaft service bulletins discussed note 17 consolidated financial statements fourth quarter 2005 lycoming developed plan institute retirement program approximately 5100 crankshafts representing remaining crankshafts manufactured former supplier using forging technique crankshafts covered prior service bulletins accordingly additional reserve 10 million recorded fourth quarter cover expected cost planned retirement program commercial profit increased 47 million 2004 primarily due 34 million impact higher international military sales favorable cost performance helicopter business 31 million including favorable resolution 6 million warranty issue provided 2003 9 million benefit favorable mix aircraft 5 million favorable impact nonrecurring 2003 charge related recall inspection customer care program aircraft engine business partially offset higher engineering expenses 28 million bell outlook bell’s revenues expected increase 2006 margins expected drop slightly due certain nonrecurring items benefited 2005 results us government business expected benefit increase asv volume well higher revenues arh vh71 program contracts expected partially offset lower v22 revenue based scheduled deliveries higher revenue expected commercial business largely due increased deliveries 2005 cessna aircraft company world’s largest manufacturer general aviation aircraft based unit sales cessna currently four major product lines citation business jets single engine turboprop caravans cessna single engine piston aircraft aftermarket services cessna provides dependable aircraft premier service corporate customers 75 countries cessna also engages business jet fractional ownership market citationshares venture tag aviation usa inc 2005 economy continued strengthen leading significant increase business jet single engine aircraft orders time cessna also realized benefit continued strategy investment new product development receiving faa certification cj1 cj2 2005 cessna also expects receive certification mustang 2006 cessna revenues cessna segment’s revenues increased 10 billion 2005 compared 2004 primarily due higher citation business jet volume 737 million higher pricing 82 million benefit consolidation citationshares 78 million citation business jet customer deliveries 252 2005 compared 179 jets 2004 cessna segment’s revenues increased 174 million 2004 compared 2003 primarily due 76 million increase consolidation citationshares 39 million higher pricing 12 million benefit lower used aircraft overtrade allowances citation business revenue jet deliveries 179 2004 compared 194 jets 2003 cessna segment profit segment profit increased 190 million 2005 compared 2004 largely due 229 million impact higher volume across product lines 82 million higher pricing partially offset 99 million inflation additionally cessna able significantly improve profit margins overcome challenges associated ramping production increasing research development expenses segment profit increased 68 million 2004 compared 2003 largely due 85 million improved cost performance 39 million higher pricing 18 million lower used aircraft valuation adjustments 12 million benefit lower used aircraft overtrade allowances 8 million benefit related expiration prior year residual value guarantees partially offset 70 million inflation unfavorable impact lower business jet volume unfavorable mix 20 million benefit lower used aircraft overtrade allowances valuation adjustments primarily due fewer tradeins stabilization market values used jets 2004 cessna outlook cessna anticipates another strong year business jet deliveries 2006 total revenues expected increase significantly indications 2007 strong delivery year well 2006 profit margins expected rise primarily driven increase revenue cessna continue invest new products encore mustang broadening product line take advantage improving business jet market industrial segment composed five businesses including ezgo jacobsen kautex greenlee fluid power businesses segment provides customers innovative solutions services including golf cars turfcare equipment plastic fuel systems wire cable installation equipment industrial pumps gears markets highly competitive price sensitive consequently significant cost reductions required offset inflation price concessions primarily kautex also improve margins industrial revenues industrial segment’s revenues increased 8 million 2005 compared 2004 higher pricing 36 million favorable foreign exchange 31 million largely offset lower volume 63 million lower sales volume primarily reflects decreases 80 million kautex largely due product model changeovers 39 million jacobsen primarily related strategic realignment north american commercial distribution network decreases partially offset higher volume 31 million greenlee industrial segment’s revenues increased 210 million 2004 compared 2003 primarily due favorable foreign exchange impact 167 million higher sales volume 61 million partially offset 17 million related divestiture noncore product line second quarter 2004 higher sales volume primarily reflects increase 44 million kautex largely due new product launches growth international markets lesser degree increases 18 million 12 million ezgo jacobsen respectively industrial segment profit segment profit decreased 44 million 2005 compared 2004 largely due inflation 84 million impact lower volume unfavorable mix 21 million partially offset higher pricing 36 million improved cost performance 24 million primarily kautex segment profit increased 44 million 2004 compared 2003 primarily due 92 million improved cost performance improved credit performance 16 million favorable foreign exchange impact 13 million 10 million impact higher volume lower fair market value adjustments 8 million used golf cars increases partially offset inflation 59 million lower profit 24 million north american kautex plant due increased costs manufacturing inefficiencies industrial outlook industrial revenues expected decrease 2006 segment margins forecasted improve slightly forecasted decrease revenues reflects decline kautex primarily result model changeovers divestiture product line 2005 expected partially offset growth greenlee lesser extent increases remaining businesses finance segment diversified commercial finance business core operations aircraft finance assetbased lending distribution finance golf finance resort finance structured capital financing activities confined almost exclusively secured lending leasing commercial markets within core operations segment also provides financing programs products manufactured textron 2005 management continued focus growing core business liquidating noncore assets finance revenues finance segment’s revenues increased 83 million 2005 compared 2004 increase primarily due higher finance charges discounts 95 million partially offset lower prepayment income 10 million increase finance charges discounts largely due higher interest rate environment accounted 98 million increase 62 million related higher average finance receivables 855 million partially offset lower relative receivable pricing 65 million increase average finance receivables primarily related growth distribution golf aircraft finance assetbased lending partially offset reductions liquidating noncore portfolios finance segment’s revenues decreased 27 million 2004 compared 2003 decrease primarily due lower finance charges discounts 35 million largely due continued liquidation noncore assets resulting lower average finance receivables 269 million reduction discount earnings distribution finance business decrease partially offset higher securitization gains 13 million primarily due improved yield 20 million increase average finance receivables sold distribution finance revolving conduit partially offset 6 million reduction resort finance gains finance segment profit segment profit increased 32 million 2005 compared 2004 primarily due 29 million decrease provision loan losses result sustained improvements portfolio quality 18 million increase net interest margin partially offset higher selling administrative expenses 15 million increase net interest margin primarily attributable portfolio growth selling administrative expenses increased primarily due 9 million higher variable compensation associated portfolio growth 5 million related improved profitability increased pension benefits cost segment profit increased 17 million 2004 compared 2003 primarily due 23 million decrease provision loan losses reflecting improvement portfolio quality partially offset lower net interest margin 10 million finance portfolio quality following table presents information credit quality finance segment’s portfolio finance segment experienced significant improvements portfolio quality past two years improvements credit quality evident lower nonperforming asset levels 60 days contractual delinquency textron finance’s nonperforming assets include nonaccrual accounts guaranteed textron manufacturing interest suspended repossessed assets nonperforming assets last three yearends business follows believe nonperforming assets generally range 1 4 finance assets depending economic conditions textron finance experienced significant improvement total nonperforming assets 29 million decrease 2005 22 million decrease 2004 decrease 2005 primarily attributable core businesses including 22 million resort finance 13 million golf finance largely related improved general economic conditions decreases partially offset increase liquidating portfolios noncore businesses continue compose disproportionate amount textron finance’s nonperforming assets accounting 41 total nonperforming assets comprising less 5 total finance assets december 31 2005 finance outlook 2006 expect finance segment’s profit increase primarily result improved net interest margin related higher average finance receivables special charges segment liquidity capital resources textron’s financings conducted two borrowing groups textron manufacturing textron finance framework designed enhance textron’s borrowing power separating finance segment support creditors evaluating separate borrowing groups textron presents separate balance sheets statements cash flows borrowing group textron manufacturing consists textron inc parent company consolidated entities operate bell cessna industrial business segments whose financial results reflection ability manage finance development production delivery tangible goods services textron finance consists textron’s wholly owned commercial finance subsidiary textron financial corporation consolidated subsidiaries financial results textron finance reflection ability provide financial services competitive marketplace appropriate pricing managing associated financial risks fundamental differences borrowing group’s activities result different measures used investors rating agencies analysts portion textron finance’s business involves financing retail purchases leases new used aircraft equipment manufactured textron manufacturing cash flows related captive financing activities reflected operating activities textron manufacturing investing activities textron finance based group’s operations captive financing transactions eliminated cash customers securitizations recognized operating activities within consolidated statements cash flows received textron inc provides support agreement textron finance requires textron inc maintain 100 ownership textron finance agreement also requires textron finance maintain fixed charge coverage less 125 consolidated shareholder’s equity less 200 million textron finance’s bank agreements prohibit termination support agreement textron’s financial position continued strong end 2005 included aggregate cash equivalents 796 million compared 697 million end 2004 2005 cash flows operations primary source funds operating needs dividends capital expenditures management analyzes operating cash flows textron manufacturing tracking free cash flow calculated using net cash provided operating activities adding back proceeds sale property plant equipment subtracting capital expenditures including financed capital leases operating cash flows continuing operations operating cash flows consolidated basis remained fairly consistent past years consolidated cash flows exclude net captive financing activity cash outflows finance receivable originations net cash inflows repayments sales securitizations textron manufacturing textron finance 2005 2004 net captive financing activity increased textron manufacturing’s separate cash flows 100 million 165 million respectively 2003 cash flows decreased 86 million excluding net changes textron manufacturing’s cash flows increase 2005 largely due increased income operations increase 2004 largely due increased customer deposits bell cessna segments resulting increase orders jets commercial helicopters textron manufacturing’s operating cash flows include aftertax cash used fund textron’s restructuring program 12 million 2005 24 million 2004 34 million 2003 program substantially completed end 2005 forecasted cash payments 2006 approximately 4 million investing cash flows continuing operations past three years textron’s consolidated cash flows used investing activities largely driven increase net financing activities textron finance 2005 2004 increases cash used investing activities consolidated cash flows reflect higher use cash resulting increase finance receivable originations net cash collections repayments sales securitizations 198 million 744 million respectively textron manufacturing increased use cash investing activities 204 million 2005 primarily 118 million increase capital expenditures 38 million decrease proceeds received 2004 sale ca common stock increase capital expenditures primarily related higher spending bell segment response increased production demands capital expenditures textron manufacturing totaled 371 million 2005 282 million 2004 272 million 2003 including expenditures purchased capital leases 15 million 2005 44 million 2004 26 million 2003 separate borrowing group cash flows textron finance reflect investing activities include 824 million 892 million 886 million noncash activity finance receivables originated connection sale textron manufacturing’s inventory 2005 2004 2003 respectively cash received customers securitizations related sale inventory also included within textron finance’s investing activities totaling 724 million 727 million 972 million 2005 2004 2003 respectively within consolidated statements cash flows amounts eliminated investing activities recorded net amount operating cash flows caption “captive finance receivables net” financing cash flows continuing operations 2005 increase cash provided financing activities consolidated cash flows largely due increase debt outstanding textron manufacturing textron finance increase textron manufacturing principally reflects retirement debt 300 million 2004 issuance 281 million short term debt 2005 textron finance increased debt outstanding fund asset growth increases partially offset higher cash outflows 182 million increase purchases textron common stock 81 million lower proceeds employee stock ownership plans 54 million increase dividend payments primarily due timing dividend payments four quarters paid 2005 three quarters paid 2004 decrease cash used financing activities consolidated cash flows principally reflects 715 million increase cash provided textron finance reflecting increase debt outstanding fund asset growth partially offset decrease textron manufacturing largely due higher cash outflows 351 million increase purchases textron common stock principal payments retirements longterm debt 2005 2004 2003 textron manufacturing made principal payments 417 million 360 million 503 million respectively 2005 2004 2003 textron finance made principal payments longterm debt 08 billion 13 billion 14 billion respectively stock repurchases january 26 2006 textron’s board directors authorized new 12millionshare repurchase program supercedes textron’s previous authorization exhausted january 2005 2004 2003 textron repurchased approximately 8035000 6534000 1951000 shares common stock respectively boardauthorized share repurchase programs aggregate cost 606 million 425 million 66 million respectively dividends textron’s board directors approved dividends 140 per common share 2005 january 26 2006 board directors authorized 015 per share increase textron’s annualized common stock dividend 155 per share accordingly quarterly dividend 03875 per share holders record close business march 10 2006 dividend payments shareholders totaled 189 million 135 million 222 million 2005 2004 2003 respectively 2003 payments include additional payment made fourth quarter dividend typically paid following year discontinued operations cash flows cash flows discontinued operations include textron manufacturing’s fastening systems omniquip intesys businesses textron finance’s small business finance operation see note 2 consolidated financial statements details concerning dispositions 2003 cash provided investing activities included receipt 421 million cash upon sale substantially small business finance operation 198 million tax refunds cash proceeds related sale omniquip business partially offset 197 million finance receivable originations net repayments capital resources textron manufacturing’s debt net cashtocapital ratio december 31 2005 26 compared 25 january 1 2005 textron manufacturing’s gross debttocapital ratio december 31 2005 37 compared 33 january 1 2005 textron manufacturing established gross debttocapital ratio target midthirties consistent methodology used members financial community leverage manufacturing operations excludes debt textron finance turn textron finance limits borrowings amount taking account risk profile assets consistent single credit rating surplus capital textron finance returned textron inc borrowings historically secondary source funds textron manufacturing along collection finance receivables primary source funds textron finance textron manufacturing textron finance utilize broad base financial sources respective liquidity capital needs credit ratings predominantly function ability generate operating cash flow satisfy certain financial ratios since highquality credit ratings provide us access broad base global investors attractive cost target longterm rating independent debtrating agencies november 2005 fitch upgraded outlook textron manufacturing textron finance positive moody’s standard poor’s assessed outlook groups stable credit ratings three debtratings agencies follows liquidity purposes textron manufacturing textron finance policy maintaining sufficient unused lines credit support outstanding commercial paper none lines credit used december 31 2005 january 1 2005 textron manufacturing primary revolving credit facilities 13 billion expire 2010 textron manufacturing’s credit facilities permit textron finance borrow facilities textron finance also 15 billion bank lines credit 500 million expires july 2006 10 billion expires 2010 textron finance’s facility expires 2006 includes oneyear term option effectively extends expiration 2007 december 31 2005 lines credit reserved support commercial paper letters credit 12 billion textron manufacturing 300 million textron finance shelf registration statement filed securities exchange commission textron finance may issue public debt securities one offerings total maximum offering 40 billion registration statement textron finance issued 14 billion term debt cad 01 billion term debt 2005 proceeds issuances used fund receivable growth repay shortterm debt december 31 2005 textron finance 18 billion available registration statement textron manufacturing may issue public debt securities one offerings total maximum offering 20 billion shelf registration statement filed securities exchange commission december 31 2005 textron manufacturing 16 billion available registration statement contractual obligations following table summarizes textron manufacturing’s known contractual obligations make future payments consideration pursuant certain contracts december 31 2005 well estimate timing obligations expected satisfied longterm debt capital lease obligations included table include interest payments operating leases represent undiscounted obligations noncancelable leases textron maintains defined benefit pension plans postretirement benefit plans pensions discussed note 14 consolidated financial statements included table discounted estimated benefit payments made textron related unfunded pension postretirement benefit plans actual benefit payments dependent number factors including mortality assumptions expected retirement age rate compensation increases medical trend rates subject change future years textron also expects make contributions funded pension plans range 25 million 30 million per year next five years reflected table longterm liabilities primarily include undiscounted amounts consolidated balance sheet december 31 2005 representing obligations deferred compensation arrangements estimated environmental remediation costs payments deferred compensation arrangements estimated based management’s assumptions expected retirement age mortality stock price rates return participant deferrals timing cash flows associated environmental remediation costs largely based historical experience purchase obligations represent undiscounted obligations textron committed purchase goods services december 31 2005 textron’s ultimate liability obligations may reduced based upon termination provisions included certain purchase contracts costs incurred date vendors contracts recourse firm contracts us government normal termination clauses effective january 2 2005 textron engaged thirdparty service provider assume oversight information technology infrastructure including maintenance operational oversight purchases hardware “it contract” contract covers 10year period subject variable pricing quantity provisions purchases computer hardware system design modifications textron retains right approve significant design equipment purchase related decisions service provider textron ability terminate contract prior full term would consequently subject variable termination fees decline time exceed 63 million 2006 addition amounts included textron manufacturing contractual obligations related certain businesses reported discontinued operations primarily related purchase obligations postretirement benefit obligations pensions amounts estimated paid follows 54 million less one year 11 million two years 1 million three years 1 million four years 1 million five years 27 million five years following table summarizes textron finance’s known contractual obligations make future payments due nature finance companies textron finance also contractual cash receipts received future textron finance generally borrows funds various contractual maturities match maturities finance receivables contractual payments receipts december 31 2005 detailed finance receivable receipts based contractual cash flows amounts could differ due prepayments chargeoffs factors contractual receipts payments exclude finance charges discounts receivables debt interest payments proceeds sale operating lease equipment items shown preceding table cash collections finance assets expected sufficient cover maturing debt contractual liabilities december 31 2005 textron finance 22 billion debt 439 million liabilities payable within next 12 months december 31 2005 textron finance unused commitments fund new existing customers 12 billion committed revolving lines credit compared 10 billion january 1 2005 since many agreements used extent committed expire unused total commitment amount necessarily represent future cash requirements offbalance sheet arrangements textron joint venture agreements external financing arrangements textron guaranteed approximately 15 million debt obligations including approximately 5 million related discontinued operations textron would required make payments guarantees joint venture defaults debt agreements bell helicopter agustawestland north america inc “awna” formed agustawestlandbell llc “awb llc” january 2004 joint design development manufacture sale customer training product support us101 helicopter recently designated vh71 helicopter certain variations derivatives thereof offered sold departments agencies us government march 2005 awb llc received 12 billion cost reimbursementtype subcontract lockheed martin system development demonstration phase us marine corps marine 1 helicopter squadron vh71 program march 11 2005 bell helicopter guaranteed lockheed martin due prompt performance awb llc obligations subcontract provided bell helicopter’s liability guaranty shall exceed 49 awb llc’s aggregate liability lockheed martin subcontract agustawestland nv awna’s parent company guaranteed remaining 51 lockheed martin bell helicopter agustawestland nv entered crossindemnification agreements party indemnifies related payments required agreements result indemnifying party’s workshare subcontracts received 2005 awb llc’s maximum obligation 20 total contract value equates 232 million based current contract value 12 billion 2006 awb llc’s maximum obligation increases 40 464 million thereafter increases 50 580 million accordingly maximum amount bell helicopter’s liability guarantee 114 million december 31 2005 227 million 2006 284 million thereafter completion textron manufacturing enters forward contract textron common stock annual basis contract intended hedge earnings cash volatility stockbased incentive compensation indexed textron stock forward contract requires annual cash settlement counterparties based upon number shares multiplied difference strike price prevailing textron common stock price december 31 2005 contract approximately 17 million shares strike price 7080 market price stock 7698 december 31 2005 resulting receivable 10 million compared receivable 31 million january 1 2005 textron finance sells finance receivables utilizing securitizations wholeloan sales result transactions finance receivables removed balance sheet proceeds received used reduce recorded debt levels despite reduction recorded balance sheet position textron finance generally retains subordinate interest finance receivables sold securitizations may affect operating results periodic fair value adjustments retained interests fully discussed securitizations section note 5 consolidated financial statements textron finance utilizes offbalance sheet financing arrangements primarily assetbacked securitizations diversify funding alternatives arrangements important source funding provided net proceeds continuing operations 361 million 394 million 2005 2004 respectively proceeds securitizations includes proceeds received related incremental increases level distribution finance receivables sold excludes amounts received related ongoing replenishment outstanding sold balance receivables short durations textron finance used proceeds arrangements fund origination new finance receivables retire commercial paper wholeloan finance receivable sales textron finance maintains continuing interest differ securitizations loans sold directly investors portion sale proceeds deferred limited credit enhancement typically provided transactions form contingent liability related finance receivable credit losses lesser extent prepayment risk textron finance contingent liability related sale equipment lease rents 2003 2001 maximum liability december 31 2005 42 million textron finance valued contingent liability based assumptions annual credit losses prepayment rates 025 750 respectively instantaneous 20 adverse change rates would insignificant impact valuation recourse liability termination textron finance’s offbalance sheet financing arrangements would significantly reduce shortterm funding alternatives arrangements contain provisions require textron finance repurchase significant balances receivables previously sold risks could reduce availability funding alternatives future potential barriers continued use arrangements include deterioration finance receivable portfolio quality downgrades textron finance’s debt credit ratings reduction new finance receivable originations businesses utilize funding arrangements textron finance expect factors material impact liquidity income continuing operations critical accounting policies preparation consolidated financial statements conformity generally accepted accounting principles requires management make complex subjective judgments selection application accounting policies accounting policies believe critical portrayal textron’s financial condition results operations listed believe policies require difficult subjective complex judgments estimating effect inherent uncertainties section read conjunction note 1 consolidated financial statements includes significant accounting policies receivable inventory reserves evaluate collectibility commercial finance receivables based combination factors larger balance commercial loans textron finance considers borrower specific information industry trends estimated discounted cash flows well factors reviewed homogeneous loan pools circumstances aware specific customer’s inability meet shortterm financial obligations us eg bankruptcy filings substantial downgrading credit scores geographic economic conditions etc record specific reserve bad debts amounts estimate potentially uncollectible receivables charged deemed uncollectible homogeneous loan pools receivables recognize reserves bad debts based current delinquencies characteristics existing accounts historical loss experience value underlying collateral general economic conditions trends textron finance estimates losses range 05 40 finance receivables depending specific homogeneous loan pool finance receivables written fair value less estimated costs sell related collateral earlier date collateral repossessed payment received six months unless deem receivable collectible reserves certain finance receivables determined using estimates related collateral values based historical recovery rates current market conditions management reviews market conditions used equipment aircraft inventories periodic basis deterioration market conditions resulting lower recovery rates would result lower estimated collateral values increasing amount reserves required related receivables used inventories hand based current market conditions recovery rates believe reserves adequate december 31 2005 longterm contracts recognize revenue profit work certain government longterm engineering development production contracts progresses using contract method accounting relies estimates total contract cost revenue estimated contract cost revenue based current contract specifications expected engineering requirements achievement contract milestones including product deliveries contract costs typically incurred period several years estimation costs requires substantial judgment cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments projected costs recognized net earnings determinable favorable changes estimates result additional profit recognition unfavorable changes estimates result reversal previously recognized earnings anticipated losses contracts charged earnings identified earnings longterm contracts could reduced material amount resulting charge income total estimated contract costs significantly higher expected due changes customer specifications prior contract amendment b total estimated contract costs significantly higher previously estimated due cost overruns inflation c change engineering efforts required development stage contract unable meet contract milestones goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value asset might impaired completed annual impairment test fourth quarter 2005 using estimates longterm strategic plans adjustment required carrying value goodwill based analysis performed goodwill considered impaired net book value reporting unit exceeds estimated fair value fair values primarily established using discounted cash flow methodology using assumptions consistent market participants determination discounted cash flows based businesses’ strategic plans longrange planning forecasts revenue growth rates included plans management’s best estimates based current forecasted market conditions profit margin assumptions projected reporting unit based current cost structure anticipated net cost reductions different assumptions used plans related undiscounted cash flows used measuring impairment could different potentially resulting impairment charge within industrial segment fluid handling products component assumed annual operating profit growth rate approximately 9 fiveyear planning period driven anticipated revenue growth approximately 4 annually along increased profit margins improvements resulting ongoing transformation efforts 100basispoint reduction estimated operating profit growth rate used discounted cash flow model approximately 8 would reduce estimated fair value approximately 20 million may result carrying value business exceeding estimated fair value potentially resulting impairment charge december 31 2005 goodwill allocated business totaled approximately 200 million securitized transactions securitized transactions involve sale finance receivables qualified special purpose trusts assets sold longer balance sheet retained interests included assets may retain interest transferred assets form interestonly securities seller certificates cash reserve accounts servicing rights obligations retained interests subordinate investors’ interests securitizations generally provide legal recourse thirdparty investors purchase interests securitizations beyond credit enhancement inherent retained interest securities seller certificates cash reserve accounts estimate fair value retained interests based present value future cash flows expected using best estimates prepayment speeds credit losses discount rates commensurate risks involved assumptions reviewed quarter retained interests written carrying value exceeds fair value based revised estimates decline estimated temporary based sensitivity analysis discussed note 5 consolidated financial statements 20 adverse change either prepayment speed expected credit losses residual cash flows discount rate would result material charge income pension postretirement benefits maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections assumptions evaluated updated annually management consultation outside actuaries investment advisors assumptions used include employee demographic factors retirement patterns mortality turnover rate compensation increases determine expected longterm rate return plan assets consider current expected asset allocation well historical expected returns plan asset class lower expected rate return plan assets increase pension expense 2005 reduced assumed expected longterm rate return plan assets used calculating pension expense 857 872 2004 past ten years returns largest pool managed retirement assets exceeded 997 weightedaverage expected longterm rate return assumption lowered reflect generally expected moderation longterm rates return financial markets well change investment portfolio mix qualified domestic plans compose 83 total pension obligations 2005 assumed rate return qualified domestic plans 875 50basispoint decrease longterm rate return would result 21 million annual increase pension expense qualified domestic plans discount rate enables us state expected future benefit payments present value measurement date reflecting current rate pension liabilities could effectively settled rate line rates highquality fixed income investments available period maturity pension benefits fluctuate longterm interest rates change lower discount rate increases present value benefit obligations increases pension expense 2005 decreased weightedaverage discount rate used calculating pension expense 569 617 2004 qualified domestic plans assumed discount rate 575 2005 50basispoint decrease discount rate would result 32 million annual increase pension expense qualified domestic plans estimated accumulated benefit obligations certain pension plans exceeded fair value plan assets december 31 2005 however strong asset returns contributions plans reduced shortfall 2005 accordingly recorded noncash adjustment shareholders’ equity minimum pension liability 34 million net income taxes fourth quarter 2005 trend healthcare costs difficult estimate important effect postretirement liabilities 2005 medical prescription drug healthcare cost trend rate weightedaverage annual projected rate increase per capita cost covered benefits 11 medical rate assumed decrease 5 2009 remain level prescription drug rate expected rise 12 2006 decrease 5 2013 remain level see note 14 consolidated financial statements impact onepercentagepoint change cost trend rate income taxes deferred tax assets liabilities determined based temporary differences financial reporting tax bases assets liabilities applying enacted tax rates expected effect year differences expected reverse based evaluation available evidence recognized future tax benefits net operating loss carryforwards extent believe likely realize benefits periodically assess likelihood able recover deferred tax assets reflect changes estimates valuation allowance corresponding adjustment earnings comprehensive income loss appropriate assessing need valuation allowance look future reversal existing taxable temporary differences taxable income prior carryback years feasibility tax planning strategies estimated future taxable income valuation allowance affected changes tax laws changes statutory tax rates changes future taxable income estimates see note 15 consolidated financial statements detail amount income taxes pay subject ongoing audits federal state foreign tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental believe adequately provided reasonably foreseeable outcome related matters however future results may include favorable unfavorable adjustments estimated tax liabilities due closure income tax examinations new regulatory judicial pronouncements relevant events result effective tax rate may fluctuate significantly quarterly basis recently adopted accounting pronouncements december 2004 financial accounting standards board issued sfas 123 revised 2004 “sharebased payment” “sfas 123r” replaces sfas 123 “accounting stockbased compensation” supercedes accounting principles board opinion 25 “accounting stock issued employees” sfas 123r requires companies measure compensation costs sharebased payments employees including stock options fair value expense compensation service period beginning first interim annual period june 15 2005 april 2005 securities exchange commission delayed transition date companies first fiscal year beginning june 15 2005 effectively delaying textron’s required adoption sfas 123r first quarter 2006 textron elected adopt sfas 123r first quarter 2005 using modified prospective method transition method compensation expense recognized 2005 includes compensation cost stock options restricted stock granted prior yet vested january 1 2005 based grantdate fair value estimated recognized accordance provisions sfas 123 b compensation cost stock options restricted stock granted subsequent january 1 2005 sharebased compensation awards accounted liabilities based upon measurement recognition provisions sfas 123r awards granted modified 2005 prospectively compensation costs awards service conditions vest ratably recognized straightline basis requisite service period separately vesting portion award compensation costs awards granted prior 2005 recognized using attribution methods required sfas 123 upon adoption textron remeasured sharebased compensation awards accounted liabilities fair value cumulative effect adoption upon remeasurement resulted increase net income approximately 1 million first quarter 2005 considered material recorded selling administrative expense adoption sfas 123r resulted recognition stock option costs 2005 stock option costs included primarily selling administrative expense totaled approximately 15 million continuing operations 2 million discontinued operations 2005 accordance modified prospective method prior periods restated compensation expense related stock option grants recorded consolidated statement operations 2003 2004 options granted exercise price equal market value underlying stock date grant december 31 2005 58 million represents total compensation cost associated unvested sharebased compensation awards subject service conditions yet recognized textron expects compensation recognized weightedaverage period approximately two years december 31 2005 25 million represents total compensation cost associated unvested sharebased compensation awards subject performance vesting conditions yet recognized textron expects compensation recognized weightedaverage period approximately two years sfas 123r requires excess tax benefits received related stock option exercises presented financing cash inflows 2005 14 million excess tax benefits presented cash provided financing activities consolidated statement cash flows valuation stock options requires numerous assumptions textron determines fair value option date grant using blackscholes optionpricing model requires inputs expected volatility textron’s common stock price expected life option expected dividend yield among others addition estimate number options expected eventually vest expected volatility estimates based implied volatilities traded options textron common stock historical volatilities factors textron uses historical data estimate option exercise behavior adjusted reflect anticipated increases expected life see note 13 consolidated financial statements additional details item 7aitem 7 management’s discussion analysis financial condition results operations business overview outlook strong year 2006 many notable accomplishments across enterprise financial perspective revenues earnings operating cash flows continuing operations significantly despite challenges bell h1 upgrade armed reconnaissance helicopter “arh” programs portfolio perspective completed several strategic actions strengthen product mix continued focus generation support organic growth strong investments engineering research development capacity expansion evident across enterprise example bell helicopter reinvigorated commercial line contributed 30 increase commercial deliveries 2006 optimistic continued helicopter growth large part due market’s enthusiasm recently introduced 429 model new products cessna also generating extraordinary customer interest expanding scope market year introduced two additions line citation jets xls cj4 also first certify deliver jet mustang new entrylevel jet category year booked 496 new jet orders demonstrates strength product line market general notable financial highlights 2006 include revenues increased 14 115 billon 2006 primarily driven growth aerospace defense finance businesses organic growth rate excludes effects acquisitions dispositions 15 earnings per share continuing operations increased 44 543 combination higher revenues ongoing costcontainment operational efficiency initiatives along decrease average diluted common shares outstanding translated growth rate triple revenue growth rate operating cash flows manufacturing businesses increased 25 11 billion strong operating cash flows solid balance sheet able make strategic business acquisitions return value shareholders follows · repurchased 86 million shares common stock 751 million · increased dividend 015 per share 155 per share resulting total dividend payments 244 million · added two companies innovative survivability technologies overwatch systems defense business 338 million · acquired distribution finance business electrolux finance segment 164 million commercial backlog increased 32 98 billion primarily related cessna addition us government backlog increased 6 35 billion primarily bell segment received 644 million proceeds related disposition noncore manufacturing businesses dispositions include sale fastening systems business jacobsen’s commercial grounds care business diluted earnings per share manufacturing cash provided operating activities continuing operations outlook looking ahead expect 2007 revenues excess 12 billion growth led aerospace defense businesses expect strong growth business jet deliveries deliver record backlog respond increasing global demand also preparing deliver commercial helicopters 2007 execute backlog market defense businesses expected remain strong continue support us government’s efforts iraq elsewhere expect segment profit increase reflecting improvements manufacturing segments consolidated results operations revenues 2006 revenues increased 15 billion primarily due higher manufacturing sales volume 10 billion higher pricing 274 million higher revenues finance segment 170 million 2005 revenues increased 17 billion primarily due higher manufacturing sales volume 13 billion higher pricing 159 million additional revenues 115 million acquisitions higher revenues finance segment 83 million segment profit 2006 segment profit increased 121 million primarily due higher pricing 274 million higher sales volume 198 million improved cost performance 54 million industrial segment favorable warranty performance cessna 39 million higher profit finance segment 39 million increases partially offset inflation 272 million higher spending engineering new product development 74 million higher overhead 55 million bell’s commercial business increased charges related h1 low rate initial production “lrip” contracts 68 million 2005 segment profit increased 296 million primarily due higher sales volume 319 million higher pricing 159 million higher profit finance segment 26 million increases partially offset inflation 227 million special charges special charges totaled 118 million 2005 included 112 million charges related 2001 disposition automotive trim business “trim” 6 million restructuring expense industrial segment 2004 special charges totaled 59 million included 71 million restructuring expense principally industrial segment partially offset 12 million gain sale common stock acquired connection trim disposition connection disposition trim subsidiaries collins aikman corporation “ca” acquired preferred stock ca products co “ca products” ca common stock first quarter 2005 recorded 52 million impairment charge write preferred stock based agreement sell stock third party second quarter 2005 based ca products’ filing chapter 11 bankruptcy protection relevant market considerations wrote remaining book value preferred stock 39 million connection trim disposition finance group recourse manufacturing group equipment leases subsidiaries ca outstanding balance leases totaled approximately 61 million december 30 2006 based uncertainties related leases manufacturing group recorded 10 million reserve special charges fourth quarter 2005 certain operating leases transferred assigned subsidiaries ca upon sale trim discussed note 17 consolidated financial statements guaranteed ca’s payments operating leases environmental matter fourth quarter 2005 based ca’s failure pay certain leases well negotiations entered time sale ca’s european operations recorded 11 million charge special charges cover exposure leases along certain environmental workers’ compensation matters substantially completed companywide restructuring program end 2005 see note 14 consolidated financial statements information program 2005 recorded 6 million restructuring expense program severance associated costs 2004 recorded 71 million restructuring expense program 37 million contract termination costs 28 million severance costs 6 million associated costs approximately 30 million restructuring reserves remaining end 2006 primarily related contract termination costs one lease industrial segment paid next 13 years corporate expenses net corporate expenses net increased 3 million 2006 principally due 7 million higher sharebased compensation expense 4 million higher incentive compensation partially offset 8 million lower expenses related corporate initiatives corporate expenses net increased 42 million 2005 principally due 16 million higher compensation pension costs 9 million corporate initiatives 7 million corporate portion sharebased compensation expense recorded upon adoption new accounting standard income taxes reconciliation federal statutory income tax rate effective income tax rate provided discontinued operations discontinued operations reflect aftertax results fastening systems intesys omniquip small business direct financing business sold see note 2 consolidated financial statements additional discussion divestiture activities operating results discontinued businesses primarily related fastening systems follows 2005 loss discontinued operations includes 335 million goodwill impairment charge related fastening systems business addition recorded aftertax charge approximately 52 million fourth quarter 2005 included 37 million related previously deferred foreign currency translation losses 7 million curtailment losses employee retirement plans charges assessed estimated fair value business determined adjustment carrying value required time second quarter 2006 recorded additional 120 million aftertax impairment charge record business estimated fair value less cost sell time based offers received potential purchasers 2005 recorded net 46 million gain disposal primarily related tax benefit recorded upon sale intesys segment analysis four reportable segments bell cessna industrial finance segments reflect manner manage operations segment profit important measure used evaluate performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses special charges measurement finance segment includes interest income expense excludes special charges segment’s revenues profit percentage consolidated revenues profit provided 2006 revenues 115 billion segment profit 13 billion bell helicopter currently early stages development production number government commercial programs anticipated significantly drive revenue profit growth future years government programs generally follow threephase cycle consisting development transition production fullrate production rampup phase specific risks operational challenges next years bell helicopter’s major government programs transitioning various phases cycle bell helicopter programs us government include v22 military tiltrotor aircraft h1 upgrade program arh program v22 program fullrate production delivered 16 aircraft 2006 h1 upgrade program transition production phase arh program system development demonstration “sdd” phase 2006 made significant investments conduct research development transition development contracts production increase production capacity implement improved operational systems manage anticipated growth bell helicopter’s programs investments negatively impacted financial results include significant ongoing production rampup primarily v22 program ongoing development efforts related primarily 429 model arh program h1’s transition production costs investing improved operational systems resulted higher overhead expenses 2006 higher overhead costs reflected lower 2006 earnings commercial business portion costs absorbed overhead government business due relatively long production cycle particularly v22 production inventory overhead costs anticipated moderate 2007 however v22 aircraft currently production delivered future periods 2006 overhead expenses reflected inventory result lower margins shipments textron systems continued experience strong growth us government business delivering 471 armored security vehicles “asv” 2006 support troops iraq elsewhere 2006 textron systems added offerings defense industry acquiring two businesses innovative survivability technologies overwatch systems bell revenues us government business 2006 revenues increased 376 million compared 2005 primarily due higher net volume mix 343 million benefit acquisitions 28 million volume increase primarily due higher asv deliveries 286 million higher arh sdd development revenue 94 million increased spares service sales 37 million additional intelligent battlefield systems volume 22 million partially offset lower v22 volume 80 million lower h1 revenue 18 million 2005 revenues increased 491 million compared 2004 primarily due higher revenue 288 million v22 program higher asv volume 61 million benefit 36 million us helicopter acquisition higher military spares volume 32 million increased sales 20 million airlaunched weapons additionally bell recognized 21 million arh sdd contract commercial business 2006 commercial revenues increased 151 million compared 2005 due higher volume 105 million pricing 46 million volume increase primarily due higher civil aircraft deliveries 176 million higher spares service sales 53 million additional deliveries huey ii kits 10 million partially offset lower international military deliveries 116 million 2005 commercial revenues increased 136 million compared 2004 primarily due higher aircraft sales 68 million higher spares volume 41 million higher international military sales 26 million international military sales increased primarily due higher asv deliveries foreign customers 58 million partially offset lower helicopter volume 32 million bell segment profit us government business 2006 profit us government business decreased 25 million compared 2005 decrease primarily due inflation 33 million unfavorable cost performance 24 million partially offset impact higher net volume mix 35 million unfavorable performance reflected higher anticipated costs h1 lrip contracts 68 million charges 14 million related arh sdd contract partially offset favorable program performance textron systems 34 million primarily related hurricane katrina 2005 profit us government business increased 33 million compared 2004 increase principally due higher v22 volume 26 million reflecting delivery 12 aircraft lots 7 8 higher volume improved performance airlaunched weapons totaling 13 million increased asv deliveries improved performance 10 million increases partially offset 18 million costs associated hurricane katrina h1 program h1 program continues development currently undergoing operational evaluation also entered three firm fixedprice lrip contracts us government program represent first h1 program production aircraft addition firm fixedprice option exists fourth production lot transition production phase anticipate incurring costs excess contractual reimbursement first two h1 lrip contracts anticipate initial h1 lrip aircraft delivered production operations validated costs moderate production configuration stabilized production inefficiencies resolved learning curve improvements realized 2006 estimated costs complete h1 lrip lot 1 would exceed contractual reimbursement third quarter 2006 recorded 29 million charges related h1 lrip lot 1 contract charges primarily reflected impact higher estimated incremental costs resources added meet contractual schedule requirements higher anticipated efforts final assembly end third quarter anticipated acceptance initial h1 lrip lot 1 aircraft us government would occur fourth quarter 2006 however acceptance delayed aircraft delivered delay due changes development engineering requirements identified final stages assembly acceptance testing due delay costs associated additional development efforts rework inprocess units resulting inefficiencies increased estimate completion costs fourth quarter accordingly recorded additional 20 million charge related h1 lrip lot 1 contract fourth quarter 2006 january 2007 us government accepted two aircraft expect remaining seven h1 lrip lot 1 units accepted later 2007 h1 lrip lot 2 contract early stages production first aircraft delivery anticipated second half 2007 anticipate disruption delays experienced h1 lrip lot 1 contract fourth quarter result increased costs h1 lrip lot 2 contract due delays completion well reduction previously anticipated learning curve improvements due higher cost estimates h1 lrip lot 2 contract loss position resulting fourth quarter charge 33 million net h1 program charge including favorable performance engineering manufacturing development contract 3 million 50 million fourth quarter 2006 arh program arh sdd contract cost plus incentive fee contract eligibility fees reduced total contract costs increase 2006 continued development activities program expensed 14 million unreimbursed costs related effort continue work us government development issues configuration changes schedule requirements longer eligible earn fees contract however anticipate subsequent cost increases reimbursable us government us government two firm fixedprice options program representing first two lrip lots delivery 24 48 aircraft certain development requirements arh sdd contract must met us government exercise options presently anticipate development requirements met mid2007 option first lrip lot 612 aircraft expired option second lot 1836 aircraft expires december 2007 fourth quarter 2006 completed certain phases critical design review arh sdd contract determined initial production configuration aircraft includes aircraft configuration changes required us government cost estimates based configuration include anticipated transition production costs exceed fixed pricing contained options currently discussions us government related possible reinstatement arh lot 1 option extension options delivery schedule number units exercised options possible additional aircraft contracted addition options revised pricing also reviewing ability claim equitable adjustment recovery us government related certain costs potentially could incurred related exercise options depending results sdd contract costcontainment efforts availability us government funding number aircraft exercised ultimately contracted resolution discussions us government currently estimate reasonably possible exposure could range loss possible loss 4 million per aircraft estimate excludes impact discussions us government potential recoveries including claims equitable adjustment contracts due uncertainty exposure ultimate outcome discussions believe loss probable guidelines established statement financial accounting standards “sfas” no5 “accounting contingencies” accordingly established reserve december 30 2006 commercial business 2006 commercial profit decreased 94 million compared 2005 primarily due unfavorable cost performance 140 million inflation 28 million partially offset higher pricing 46 million impact increased volume mix 42 million unfavorable cost performance reflected increased overhead costs 55 million impact 30 million gain sale interest model ab139 program 2005 higher net research development expense 29 million 13 million prior year impact resolution uncertainties receipt cash related collaborative research development agreement partially offset 18 million additional reserves recorded lycoming 2005 crankshaft retirement program related service bulletins 2005 commercial profit increased 85 million compared 2004 primarily due 30 million gain sale interest model ab139 helicopter program 29 million impact higher international military volume improved performance higher spares volume 22 million 13 million impact upon resolution uncertainties receipt cash related prior year collaborative research development sharing agreement addition commercial profit reflected 16 million decrease net research development higher gross research development expenses 28 million offset commercial share reimbursements related risksharing agreements codevelopment partners increases partially offset 28 million higher selling administrative expense 18 million additional reserves recorded lycoming 2005 crankshaft retirement program related service bulletins cessna demand business jet market continued strengthen 2006 reflected 34 increase backlog despite 22 increase business jet deliveries past three years cessna increased annual production rate continued focus improving margins investing engineering research development cessna’s continual effort bring new technology products market citation business jets largest component cessna’s revenues delivered 307 252 179 citation business jets 2006 2005 2004 respectively representing 77 76 72 cessna’s total revenues cessna revenues cessna increased 676 million 2006 compared 2005 due higher volume 493 million primarily related citation business jets favorable pricing 183 million 2005 cessna’s revenues increased 10 billion compared 2004 primarily due higher citation business jet volume 737 million higher pricing 82 million benefit consolidation citationshares 78 million cessna segment profit segment profit increased 188 million cessna 2006 compared 2005 primarily due higher pricing 183 million impact higher volume 102 million favorable warranty performance 39 million partially offset inflation 112 million higher engineering product development costs 41 million favorable warranty performance included 24 million impact lower estimated warranty costs aircraft sold 2006 well 15 million incremental benefit favorable warranty performance 2006 33 million benefit 2006 compared 18 million 2005 initial model launches cessna typically incurs higher warrantyrelated costs production process matures point warranty costs moderate based historical production warranty patterns management estimated sovereign cj3 production lines reached maturity level sovereign cj3 aircraft produced third fourth quarter 2006 would incur lower warranty costs earlier production aircraft 2006 cessna’s profit improved approximately 24 million result lower point sale warranty costs aircraft sold year primarily sovereign cj3 compared 2005 management expects improved performance models continue foreseeable future 2005 cessna’s segment profit increased 190 million compared 2004 largely due 229 million impact higher volume across product lines 82 million higher pricing partially offset 99 million inflation industrial segment composed five businesses including ezgo jacobsen kautex greenlee fluid power 2006 experienced positive organic growth segment’s businesses continued focus customers fluid power kautex increased presence china capitalize expanding market greenlee prepared launch new hand tool product line complement existing products golf turf care businesses completed sale commercial grounds care business allowing us focus core golf resort sport turf municipal markets industrial revenues industrial segment increased 74 million 2006 compared 2005 primarily due higher volume 89 million higher pricing 46 million favorable foreign exchange impact 10 million partially offset divestiture noncore product lines 72 million revenues industrial segment increased 8 million 2005 compared 2004 higher pricing 36 million favorable foreign exchange 31 million largely offset lower volume 63 million lower sales volume primarily reflected decreases 80 million kautex largely due product model changeovers 39 million jacobsen primarily related strategic realignment north american commercial distribution network decreases partially offset higher volume 31 million greenlee industrial segment profit segment profit industrial segment increased 13 million 2006 compared 2005 mainly due 54 million improved cost performance higher pricing 46 million 24 million impact higher net volume mix partially offset 100 million inflation 7 million impact divestitures noncore product lines segment profit industrial segment decreased 44 million 2005 compared 2004 largely due inflation 84 million impact lower volume unfavorable mix 21 million partially offset higher pricing 36 million improved cost performance 24 million primarily kautex finance 2006 finance segment generated significant growth owned managed finance receivables owned finance receivables grew 15 billion 23 2005 expect continued growth 2007 portfolio quality statistics reflected continued improvements 2006 nonperforming assets percentage total finance assets decreased 128 end 2006 compared 153 end 2005 218 end 2004 portfolio quality statistics continue improve collectibility segment’s finance receivable portfolio remains one significant business risks continued strength portfolio quality combined continued reductions level loan losses resulted reduction rate utilized establish allowance losses several portfolios 2006 resulted 7 million reduction provision losses 2006 expect relative stability portfolio statistics 2007 finance revenues finance segment increased 170 million 2006 compared 2005 increase primarily due 103 million increase related higher average finance receivables 90 million increase higher interest rate environment partially offset 18 million decrease income largely due lower fees securitization income average finance receivables increased 13 billion levels corresponding period 2005 primarily due growth distribution golf aviation finance businesses revenues finance segment increased 83 million 2005 compared 2004 increase primarily due higher finance charges discounts 95 million partially offset lower prepayment income 10 million increase finance charges largely due higher interest rate environment accounted 98 million increase 62 million related higher average finance receivables 855 million partially offset lower relative receivable pricing 65 million increase average finance receivables primarily related growth distribution golf aviation finance assetbased lending partially offset reductions liquidating noncore portfolios finance segment profit segment profit finance segment increased 39 million 2006 compared 2005 due increase net interest margin growth average finance receivables generated 54 million higher net margin partially offset 18 million decrease income segment profit finance segment increased 32 million 2005 compared 2004 primarily due 29 million decrease provision loan losses result sustained improvements portfolio quality 18 million increase net interest margin partially offset higher selling administrative expenses 15 million increase net interest margin primarily attributable portfolio growth selling administrative expenses increased primarily due 9 million higher variable compensation associated portfolio growth 5 million related improved profitability increased pension benefits cost finance portfolio quality following table presents information finance segment’s portfolio quality nonperforming assets business follows nonperforming assets include nonaccrual finance receivables repossessed assets guaranteed manufacturing group believe nonperforming assets generally range 1 4 finance assets depending economic conditions 2006 16 million increase golf finance primarily result two delinquent golf course mortgage loans whose operations affected prolonged effects hurricane katrina 10 million increase assetbased lending result two loans unrelated industries 27 million improvement resort finance liquidating portfolios 2006 principally reflected chargeoffs existing reserves remedial collection activity 2005 nonperforming assets decreased primarily due resort golf finance reflecting improvement general economic conditions partially offset increase liquidating portfolios due two loans noncore liquidating portfolios continue compose disproportionate amount nonperforming assets accounting 29 total nonperforming assets comprising less 2 total finance assets december 30 2006 liquidity capital resources financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated entities operate bell cessna industrial segments finance group consists finance segment comprised textron financial corporation subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements finance group provide diversified commercial financing third parties addition group finances retail purchases leases new used aircraft equipment manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers securitizations reflected operating activities received however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group records cash received finance group customer’s behalf within operating cash flows cash inflow manufacturing group’s statement cash flows although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidated statements cash flows detailed operating cash flows continuing operations section support agreement textron inc required maintain 100 ownership textron financial corporation agreement also requires textron inc ensure textron financial corporation maintains fixed charge coverage less 125 consolidated shareholder’s equity less 200 million operating cash flows continuing operations cash flows operations primary source funds operating needs dividends capital expenditures analyze operating cash flows manufacturing group tracking free cash flow calculate free cash flow using net cash provided operating activities adding back proceeds sale property plant equipment subtracting capital expenditures including financed capital leases manufacturing group’s operating cash flows increased 2006 compared 2005 primarily due increase income continuing operations decrease working capital components consolidated operating cash flows increased primarily due increase income continuing operations borrowing groups decrease working capital components partially offset 224 million increase net captive financing activity explained reclassification elimination adjustments finance receivable originations manufacturing group inventory sales increased 2006 compared 2005 primarily due financings related aircraft sales growth period however cash received captive receivables decreased 2006 higher cash receipts customers offset 126 million lower proceeds securitizations investing cash flows continuing operations past three years consolidated investing cash flows largely driven increases cash outflows finance group due higher noncaptive finance receivable originations net cash collections repayments sales securitizations 301 million 198 million 744 million respectively 380 million increase cash used manufacturing group 2006 largely due acquisition two businesses bell segment 338 million cash along increase capital expenditures 63 million 2005 manufacturing group increased use cash investing 204 million 118 million higher capital expenditures along 38 million decrease proceeds received 2004 sale ca common stock increases capital expenditures 2006 2005 primarily related higher spending bell segment response increased production demands capital expenditures related manufacturing operations totaled 435 million 2006 371 million 2005 282 million 2004 including expenditures purchased capital leases 16 million 2006 15 million 2005 44 million 2004 financing cash flows continuing operations manufacturing group used 669 million cash financing activities 2006 compared 2005 increase primarily due paydown 242 million shortterm debt 2006 compared issuance 281 million shortterm debt 2005 164 million increase purchases common stock manufacturing group used less cash financing activities 2005 2004 principally due issuance shortterm debt 2005 retirement debt 300 million 2004 partially offset 182 million increase purchases common stock 81 million lower proceeds employee stock ownership plans finance group continued increase debt outstanding past three years fund asset growth stock repurchases 2006 2005 2004 repurchased approximately 8574000 8035000 6534000 shares common stock respectively boardauthorized share repurchase programs aggregate cost 751 million 606 million 425 million respectively january 26 2006 board directors authorized new 12 millionshare repurchase program 44 million shares remained december 30 2006 dividends january 26 2006 board directors authorized 015 per share increase annualized common stock dividend 155 per share dividend payments shareholders totaled 244 million 189 million 135 million 2006 2005 2004 respectively timing quarterly dividend payments resulted five payments 2006 four payments 2005 three payments 2004 discontinued operations cash flows discontinued operations cash flows investing activities increased 2006 primarily due net cash proceeds 636 million related sale fastening systems business see note 2 consolidated financial statements details concerning discontinued operations capital resources debt net cashtocapital ratio manufacturing group december 30 2006 29 compared 26 december 31 2005 gross debttocapital ratio december 30 2006 40 compared 37 december 30 2005 2006 ratio reflects adoption sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment financial accounting standards board “fasb” statement nos 87 88 106 132r” manufacturing group targets gross debttocapital ratio consistent rated company consistent methodology used members financial community leverage manufacturing group excludes debt finance group turn finance group limits borrowings amount taking account risk profile assets consistent single credit rating surplus capital textron financial corporation returned textron inc borrowings historically secondary source funds manufacturing group along collection finance receivables primary source funds finance group borrowing groups utilize broad base financial sources respective liquidity capital needs credit ratings predominantly function ability generate operating cash flows satisfy certain financial ratios since highquality credit ratings provide us access broad base global investors attractive cost target longterm rating independent debtrating agencies credit ratings outlooks three debtrating agencies borrowing group follows policy maintaining unused committed bank lines credit amount less outstanding commercial paper balances facilities support commercial paper letters credit issuances neither primary lines credit drawn december 30 2006 december 31 2005 primary committed credit facilities december 30 2006 include following finance group permitted borrow multiyear facility shelf registration statement filed securities exchange commission manufacturing group may issue public debt securities one offerings total maximum offering 20 billion december 30 2006 16 billion available manufacturing group’s registration statement fourth quarter 2006 finance group renewed previously filed statement enable issue unlimited amount public debt finance group issued 18 billion term debt cad 100 million term debt 2006 registration statements used proceeds issuances fund receivable growth repay shortterm debt contractual obligations manufacturing group following table summarizes known contractual obligations manufacturing group make future payments consideration pursuant certain contracts december 30 2006 well estimate timing obligations expected satisfied longterm debt capital lease obligations exclude interest payments operating leases represent undiscounted obligations noncancelable leases b maintain defined benefit pension plans postretirement benefit plans pensions discussed note 12 consolidated financial statements included table discounted estimated benefit payments expect make related unfunded pension postretirement benefit plans actual benefit payments dependent number factors including mortality assumptions expected retirement age rate compensation increases medical trend rates subject change future years also expect make contributions funded pension plans range approximately 45 million 60 million per year next five years reflected table c longterm liabilities primarily include undiscounted amounts consolidated balance sheet december 30 2006 representing obligations deferred compensation arrangements estimated environmental remediation costs payments deferred compensation arrangements estimated based management’s assumptions expected retirement age mortality stock price rates return participant deferrals timing cash flows associated environmental remediation costs largely based historical experience many longterm liabilities excluded table due uncertainty timing payments combined absence historical trends used predictor payments excluded liabilities primarily include deferred income taxes purchase obligations represent undiscounted obligations committed purchase goods services december 30 2006 ultimate liability obligations may reduced based upon termination provisions included certain purchase contracts costs incurred date vendors contracts recourse firm contracts us government normal termination clauses january 2005 contracted thirdparty service provider oversight information technology infrastructure including maintenance operational oversight purchases hardware “it contract” contract covers 10year period subject variable pricing quantity provisions purchases computer hardware system design modifications retained right approve significant design equipment purchase related decisions service provider terminate contract convenience prior full term would consequently subject variable termination fees decline time exceed 59 million december 30 2006 finance group following table summarizes finance group’s known contractual obligations make future payments due nature finance companies also contractual cash receipts received future generally borrow funds various contractual maturities match maturities finance receivables contractual payments receipts december 30 2006 detailed finance receivable receipts related finance leases term loans based contractual cash flows finance receivable receipts related revolving loans based historical cash flow experience amounts could differ due prepayments chargeoffs factors receipts contractual payments exclude finance charges receivables debt interest payments proceeds sale operating lease equipment items shown preceding table cash receipts expected sufficient cover maturing debt contractual liabilities december 30 2006 finance group 29 billion debt 426 million liabilities payable within next 12 months december 30 2006 finance group unused commitments fund new existing customers 13 billion committed revolving lines credit compared 12 billion december 31 2005 loan commitments generally original duration less three years necessarily represent future cash requirements since many agreements used extent committed expire unused exposed interest rate changes commitments since interest rates set loans funded offbalance sheet arrangements guarantees extend variety financial performance guarantees third parties provided table agreements include uncapped guarantees described performance guarantee 2004 bell helicopter business formed agustawestlandbell llc “awb llc” agustawestland north america inc “awna” venture created joint design development manufacture sale customer training product support vh71 helicopter certain variations derivatives thereof offered sold departments agencies us government march 2005 awb llc received 12 billion cost reimbursementtype subcontract lockheed martin system development demonstration phase us marine corps helicopter squadron program guaranteed lockheed martin due prompt performance awb llc obligations subcontract provided liability guaranty shall exceed 49 awb llc’s aggregate liability lockheed martin subcontract agustawestland nv awna’s parent company guaranteed remaining 51 lockheed martin entered crossindemnification agreements agustawestland nv party indemnifies related payments required agreements result indemnifying party’s workshare subcontracts received 2006 awb llc’s maximum obligation 40 total contract value equates 464 million based current contract value 12 billion 2007 thereafter awb llc’s maximum obligation increases 50 580 million accordingly maximum amount liability guarantee 227 million december 30 2006 284 million thereafter completion guaranteed minimum resale contracts number guaranteed minimum resale value contracts associated certain past aircraft sales fair value aircraft falls minimum guaranteed amount may required make future payment customer provide minimum tradein value toward new aircraft agreements generally include operating restrictions maximum usage contract period minimum maintenance requirements also guaranteed minimum resale value certain customerowned aircraft anticipated traded upon completion model currently development contracts expire follows 2 million 2008 3 million 2009 3 million 2010 3 million 2011 19 million 2012 guarantees related dispositions guaranteed payment certain credit facilities bankissued letters credit guarantees fastening systems business total guarantee capped approximately 9 million buyer provided letter credit approximately 4 million collateral also guaranteed payment performance certain credit facilities leases fastening systems business totaling approximately 14 million also liable unpaid interest fees costs associated claims may arise guarantees potential interest fees capped monitoring provisions mitigate exposure additional costs buyer provided letter credit approximately 9 million collateral guarantees also indemnified purchaser fastening systems business remediation costs related preexisting environmental conditions extent exist sold locations estimated fair value indemnifications approximately 12 million potential payments obligations capped result maximum potential obligation cannot determined connection disposition trim subsidiaries ca certain equipment operating leases transferred assigned subsidiaries ca guaranteed ca’s payments leases environmental matter also obligations arising sales certain businesses including representations warranties related indemnities environmental health safety tax employment matters maximum potential payment related obligations specified amount number obligations contain financial caps losssharing agreements connection sale note receivable 2005 finance group indemnified purchaser potential losses limited circumstances maximum potential exposure indemnity estimated 29 million due extremely low probability occurrence several mitigating factors including specific indemnification original note issuer significant fair value attributed indemnity connection sale small business direct financing business 2003 finance group entered losssharing agreement required us reimburse purchaser 50 losses incurred portfolio 4 annual level liability 14 million originally recorded representing estimated fair value guarantee fourth quarter 2006 entered settlement agreement purchaser terminated obligation reimburse purchaser future losses settlement resulted 1 million loss net tax discontinued operations 2006 december 31 2005 finance group contingent liability related sale equipment lease streams maximum liability 42 million lease streams sold 2006 remaining liability end 2006 software indemnifications acquisition overwatch systems 2006 party software license agreements customers software license agreements generally include certain provisions indemnifying customers liabilities software products infringe third party’s intellectual property rights date incurred material costs result indemnifications accrued liabilities related obligations consolidated financial statements forward contract enter forward contract common stock annual basis contract intended hedge earnings cash volatility stockbased incentive compensation indexed stock forward contract requires annual cash settlement counterparties based upon number shares multiplied difference strike price prevailing common stock price december 30 2006 contract approximately 15 million shares strike price 7762 market price stock 9377 december 30 2006 resulting receivable 24 million compared receivable 10 million december 31 2005 finance receivable securitizations sales sell finance receivables utilizing securitizations wholeloan sales result transactions finance receivables removed balance sheet proceeds received used reduce recorded debt levels despite reduction recorded balance sheet position generally retain subordinated interest finance receivables sold securitizations may affect operating results periodic fair value adjustments retained interests fully discussed securitizations section note 5 consolidated financial statements utilize offbalance sheet financing arrangements primarily assetbacked securitizations diversify funding alternatives arrangements provided net proceeds operations 50 million 361 million 2006 2005 respectively proceeds securitizations include amounts received related incremental increases level distribution finance receivables sold exclude amounts received related ongoing replenishment outstanding sold balance shortduration receivables used proceeds arrangements fund origination new finance receivables retire commercial paper wholeloan finance receivable sales maintain continuing interest differ securitizations loans sold directly investors portion sale proceeds deferred limited credit enhancement occasionally provided transactions form contingent liability related finance receivable credit losses lesser extent prepayment risk december 30 2006 remaining contingent liabilities related credit losses prepayment risk associated wholeloan sales termination offbalance sheet financing arrangements would reduce shortterm funding alternatives arrangements contain provisions require us repurchase significant amounts receivables previously sold risks could reduce availability funding alternatives future potential barriers continued use arrangements include deterioration finance receivable portfolio quality downgrades finance group’s debt credit ratings reduction new finance receivable originations businesses utilize funding arrangements expect factors material impact liquidity income operations critical accounting policies prepare consolidated financial statements conformity generally accepted accounting principles must make complex subjective judgments selection application accounting policies accounting policies believe critical portrayal financial condition results operations listed believe policies require difficult subjective complex judgments estimating effect inherent uncertainties section read conjunction note 1 consolidated financial statements includes significant accounting policies allowance losses finance receivables allowance losses finance receivables intended provide losses inherent portfolio requires application estimates significant judgment ultimate outcome collection efforts realization collateral values among factors therefore changes economic conditions credit metrics including past due nonperforming accounts events affecting specific obligors industries may require additions reductions reserves evaluate collectibility finance receivables based combination factors homogeneous loan pools examine current delinquencies characteristics existing accounts historical loss experience underlying collateral value general economic conditions trends estimate losses range 03 60 finance receivables depending specific homogeneous loan pool larger balance commercial loans also consider borrower specific information industry trends estimated discounted cash flows process involves use estimates high degree management judgment believe consideration factors assumptions referred results accurate evaluation existing losses portfolio based prior trends experience changes assumptions trends within reasonable historical volatility may material impact allowance losses allowance losses finance receivables currently represents 11 total finance receivables last five years net chargeoffs percentage finance receivables ranged 038 208 longterm contracts make substantial portion sales government customers pursuant longterm contracts require development delivery products multiple years may contain fixedprice purchase options additional products accounted longterm contracts percentageofcompletion method accounting percentageofcompletion method estimate profit difference total estimated revenue total estimated cost contract recognize profit contract term based either input eg costs incurred costtocost method typically used development effort output eg units delivered unitsofdelivery method used production effort appropriate circumstances percentageofcompletion method accounting involves use various estimating techniques project costs completion cases includes estimates recoveries asserted customer changes specifications due size length time nature many contracts estimation total contract costs revenue completion complicated subject many variables relative outcome future events period several years required make numerous assumptions estimates relating items expected engineering requirements complexity design related development costs performance subcontractors availability cost materials labor productivity cost overhead capital costs manufacturing efficiencies achievement contract milestones including product deliveries cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments projected costs recognized earnings determinable anticipated losses contracts recognized full period losses become probable estimable due significance judgment estimation process described likely materially different revenues andor cost sales amounts could recorded used different assumptions underlying circumstances change earnings could reduced material amount resulting charge earnings total estimated contract costs significantly higher expected due changes customer specifications prior contract amendment b total estimated contract costs significantly higher previously estimated due cost overruns inflation c change engineering efforts required development stage contract unable meet contract milestones goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value asset might impaired completed annual impairment test fourth quarter 2006 using estimates longterm strategic plans adjustment required carrying value goodwill based analysis performed goodwill considered impaired net book value reporting unit exceeds estimated fair value fair values primarily established using discounted cash flow methodology using assumptions consistent market participants determination discounted cash flows based businesses’ strategic plans longrange planning forecasts revenue growth rates included forecasts represent best estimates based current forecasted market conditions profit margin assumptions projected reporting unit based current cost structure anticipated net cost reductions different assumptions used forecasts related undiscounted cash flows used measuring impairment could different potentially resulting impairment charge impact reducing fair value estimates 10 would impact goodwill assessment exception two reporting units described assuming 10 reduction fair value estimates carrying value reporting units would approximate exceed fair value operating plans projections anticipate investments capital expenditures fluid handling products reporting unit resolve current capacity issues well capture additional business oil gas markets next two years related volume increases anticipated result approximately 25 annual operating profit growth period remaining fiveyear planning period anticipate annual operating profit growth rate approximately 7 driven anticipated revenue growth 4 annually increased profit margins improvements resulting ongoing transformation efforts revenue growth rates next two years approximate historical levels estimated fair value would reduced approximately 50 million may result carrying value reporting unit exceeding estimated fair value potentially resulting impairment charge december 30 2006 goodwill allocated reporting unit totaled approximately 206 million operating plans projections golf turf care reporting unit anticipate operating margin improvements fiveyear planning period resulting high singledigit margins anticipated annual revenue growth approximately 4 100basispoint decline operating margin assumptions would reduce estimated fair value approximately 60 million may result carrying value reporting unit exceeding estimated fair value potentially resulting impairment charge december 30 2006 goodwill allocated reporting unit totaled approximately 141 million retirement benefits maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections evaluate update assumptions annually consultation thirdparty actuaries investment advisors also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases determine expected longterm rate return plan assets consider current expected asset allocation well historical expected returns plan asset class lower expected rate return plan assets increase pension expense 2006 assumed expected longterm rate return plan assets used calculating pension expense 854 compared 857 2005 2006 2005 assumed rate return qualified domestic plans represent approximately 82 total pension obligations 875 50basispoint decrease longterm rate return would result 20 million annual increase pension expense qualified domestic plans discount rate enables us state expected future benefit payments present value measurement date reflecting current rate pension liabilities could effectively settled rate line rates highquality fixed income investments available period maturity pension benefits fluctuate longterm interest rates change lower discount rate increases present value benefit obligations increases pension expense 2006 lowered weightedaverage discount rate used calculating pension expense 555 569 2005 qualified domestic plans assumed discount rate 565 2006 50basispoint decrease discount rate would result 29 million annual increase pension expense qualified domestic plans trend healthcare costs difficult estimate important effect postretirement liabilities 2006 medical prescription drug healthcare cost trend rates represent weightedaverage annual projected rate increase per capita cost covered benefits 2006 medical rate 8 assumed decrease 5 2009 remain level 2006 prescription drug rate 12 assumed decrease 5 2013 remain level see note 12 consolidated financial statements impact onepercentagepoint change cost trend rate income taxes deferred tax assets liabilities determined based temporary differences financial reporting tax bases assets liabilities applying enacted tax rates expect effect year expect differences reverse based evaluation available evidence recognize future tax benefits net operating loss carryforwards extent believe likely realize benefits periodically assess likelihood able recover deferred tax assets reflect changes estimates valuation allowance corresponding adjustment earnings comprehensive income loss appropriate assessing need valuation allowance look future reversal existing taxable temporary differences taxable income carryback years feasibility tax planning strategies estimated future taxable income valuation allowance affected changes tax laws changes statutory tax rates changes future taxable income estimates amount income taxes pay subject ongoing audits federal state foreign tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental believe adequately provided reasonably foreseeable outcome related matters however future results may include favorable unfavorable adjustments estimated tax liabilities due closure income tax examinations new regulatory judicial pronouncements relevant events result effective tax rate may fluctuate significantly quarterly basis recently announced accounting pronouncements july 2006 fasb issued interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” “fin 48” interpretation provides comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns adopt interpretation first quarter 2007 expect adoption material impact financial position results operations july 2006 fasb issued fasb staff position fas 132 “accounting change projected change timing cash flows relating income taxes generated leveraged lease transaction” staff position amends sfas 13 “accounting leases” requires recalculation returns leveraged leases change projected change timing cash flows related income taxes generated leveraged lease accordance guidance difference revised calculation earnings since lease inception actual amount cumulative earnings recognized recorded income continuing operations required adopt guidance first quarter 2007 upon adoption estimated change projected cash flows must reported adjustment retained earnings adoption staff position resulted 33 million reduction retained earnings beginning fiscal 2007 september 2006 fasb issued sfas 157 “fair value measurements” statement replaces multiple existing definitions fair value single definition establishes consistent framework measuring fair value expands financial statement disclosures regarding fair value measurements statement applies fair value measurements already required permitted accounting standards require new fair value measurements sfas 157 effective fiscal years beginning subsequent november 15 2007 adopt statement first quarter 2008 currently evaluating impact financial position results operations item 7aitem 7 management’s discussion analysis financial condition results operations business overview revenues increased 13 142 billion segment profit decreased 7 15 billion 2008 compared 2007 revenue increase largely due acquisition aai corporation aai higher volume aerospace defense businesses pricing decrease segment profit largely due higher loan loss provisions commercial finance business partially offset impact higher volume pricing see pages 18 27 discussion changes consolidated basis segment second half year turmoil capital markets deepening recession significantly impacted many businesses december 22 2008 announced current plan exit noncaptive commercial finance business finance segment also announced restructuring program designed reduce costs across company program together volumerelated reductions workforce announced january 2009 eliminate approximately 15 workforce worldwide result exit plan restructuring program incurred special charges totaling 526 million fourth quarter 2008 charges included 293 million charge marktomarket finance receivables designated held sale 169 million impairment charge write finance segment’s goodwill 64 million restructuring charges see page 19 discussion special charges earnings per share continuing operations decreased largely due special charges 31 million tax charge related change investment status canadian subsidiary finance segment combined impact 179 per share lower segment profit largely reflecting increase loan loss provisions finance segment backlog end 2008 totaled 233 billion 23 increase prior year bell’s backlog increased 24 billion 2008 largely due v22 multiyear contract cessna’s backlog increased 19 billion largely due orders received widebody longrange citation columbus jet cessna generally firm aircraft orders received deposits included backlog experienced deferrals delay delivery commercial aircraft later years well cancellations orders within backlog see “backlog” section page 5 information 2009 lowered planned jet production level based current estimates expect ongoing volatility timing fulfillment cessna backlog economic conditions stabilize industrial segment saw volume decline businesses demand softened largest decline kautex reflecting numerous automotive original equipment manufacturers oem factory shutdowns around world volume ezgo increased largely due increased fleet car sales related successful introduction new rxv model defense businesses buffered impact economy programs us government textron systems revenues increased largely due acquisition aai continued demand armored security vehicles asv products bell experienced loss armed reconnaissance helicopter arh program fourth quarter 2008 bell’s v22 h1 programs performing expected shipped four v22 aircraft two h1 aircraft 2008 compared 2007 due current economic environment experienced higher borrowing cost times limited access capital markets february 2009 drew balance 30 billion committed bank lines credit pay outstanding commercial paper provide us additional liquidity uncertain times see “recent developments” section pages 28 29 discussion liquidity capital resources consolidated results operations discussion comparative results manufacturing group changes revenue segment profit typically expressed terms volume pricing foreign exchange acquisitions additionally changes segment profit may expressed terms mix inflation costperformance volume represents changes number units delivered services provided pricing represents changes unit pricing foreign exchange change resulting translating foreigndenominated amounts us dollars exchange rates different prior period acquisitions refer results generated businesses acquired within previous 12 months segment profit mix represents change due composition products andor services sold different profit margins inflation represents higher material wages benefits costs cost performance reflects increase decrease research development depreciation warranty product liability qualityscrap labor efficiency overhead product line profitability startup rampup cost reduction initiatives manufacturing inputs us government business performance generally refers changes estimated contract rates changes typically relate profit recognition associated revisions total estimated costs complete contract reflect improved deteriorated operating performance contract recognized recording cumulative catchup adjustments current period revenues increased 16 billion 13 142 billion 2008 compared 2007 increase primarily due following factors manufacturing businesses partially offset lower revenues commercial finance business 152 million • additional revenues newly acquired businesses 820 million primarily acquisition aai textron systems • higher manufacturing volume 514 million reflecting 341 million higher volume cessna primarily related increase business jet deliveries 134 million higher volume bell largely related v22 h1 programs 101 million increased volume textron systems higher asv aftermarket lycoming intelligent battlefield systems ibs products partially offset 62 million decrease industrial segment principally due lower demand kautex revenues increased 16 billion 15 126 billion 2007 compared 2006 primary reasons increase • higher manufacturing volume 10 billion reflecting 631 million higher volume cessna primarily related increase business jet deliveries 112 million increase industrial segment principally due higher demand kautex 142 million higher volume bell largely related h1 program 93 million increased volume textron systems higher asv deliveries • higher pricing 320 million 212 million cessna 87 million bell’s commercial business 22 million industrial segment • additional revenues newly acquired businesses 166 million primarily acquisitions overwatch systems aai • favorable foreign exchange impact 115 million industrial segment • 66 million impact higher average finance receivables due growth aviation resort finance businesses finance segment profit segment profit decreased 116 million 7 15 billion 2008 compared 2007 decrease primarily due 272 million reduced profits finance segment largely due increase provision loan losses 201 million partially offset following factors • 73 million benefit higher volume mix reflecting 110 million higher volume cessna primarily related increase business jet deliveries offset 54 million lower volume mix industrial segment • 50 million profit newly acquired businesses • 43 million pricing excess inflation reflecting 82 million pricing excess inflation cessna 32 million bell partially offset 61 million inflation excess pricing industrial segment profit increased 342 million 27 16 billion 2007 compared 2006 increase primarily due following factors partially offset inflation 240 million special charges special charges year ended january 3 2009 include initial marktomarket adjustment 293 million made reclassified certain finance receivables held investment held sale goodwill impairment charge finance segment 169 million restructuring charges 64 million special charges fiscal 2007 2006 result volatility disruption credit markets order reduce reliance shortterm funding october 13 2008 board directors approved recommendation management downsize finance segment plan approved time entailed exiting finance group’s assetbased lending structured capital businesses well several additional product lines limiting new originations distribution finance golf finance resort finance businesses december 22 2008 board directors approved plan exit commercial finance business finance segment portion business supporting customer purchases textronmanufactured products made decision exit business due continued weakness economy order address longterm liquidity position light continuing disruption instability capital markets total actions impact approximately 73 billion finance segment’s 108 billion managed receivable portfolio end 2008 exit plan effected combination orderly liquidation selected sales expected substantially complete next two four years recorded pretax marktomarket adjustment 293 million owned receivables held sale due exit plan january 3 2009 approximately 29 billion liquidating receivables designated sale transfer 12 billion represent securitized receivables managed finance segment 17 billion represent owned receivables classified held sale based current market conditions plan downsize finance segment recorded 169 million pretax impairment charge fourth quarter 2008 eliminate goodwill finance segment october 2008 initiated restructuring program reduce overhead cost improve productivity across company december 22 2008 textron board directors approved expansion previously announced plan includes corporate segment direct indirect workforce reductions streamlining administrative overhead program along volumerelated reductions workforce fourth quarter 2008 january 2009 eliminates approximately 6300 positions worldwide representing approximately 15 global workforce recorded pretax restructuring costs 64 million fourth quarter 2008 related restructuring program finance segment exit plan excluding volumerelated direct labor reductions recorded segment profit first half 2009 estimate incur additional 40 million pretax restructuring costs largely related workforce reductions cessna may additional restructuring costs result headcount reductions actions however estimate additional charges cannot made time special charges segment year ended january 3 2009 follows corporate expenses net corporate expenses net decreased 86 million 2008 compared 2007 primarily due lower compensation expenses largely caused stock depreciation corporate expenses net increased 50 million 2007 compared 2006 primarily due 26 million higher compensation expenses largely related stock appreciation 14 million higher professional consulting fees corporate initiatives 11 million increased costs divested operations primarily due higher pension costs retained liabilities 6 million increase contribution textron charitable trust partially offset 8 million gain insurance settlement interest expense interest expense manufacturing group increased 38 million 125 million 2008 compared 2007 primarily due higher borrowing costs associated commercial paper borrowing 2008 income taxes following table reconciles federal statutory income tax rate effective income tax rate 2008 effective income tax rate significantly impacted plan announced fourth quarter 2008 exit portions finance segment’s business plan resulted impairment finance segment’s goodwill small portion deductible tax purposes addition due change investment status finance segment’s canadian subsidiary incurred 31 million additional tax expense discontinued operations november 2008 completed sale fluid power business unit clyde blowers limited ukbased worldwide leader areas power materials handling intermodal transport logistics pump technologies sale included gear technologies hydraulics maag pump union pump product lines along respective brands received approximately 527 million cash sixyear note face value 28 million 50 million based final 2008 operating results determined end first quarter 2009 primarily payable sixyear note recorded aftertax gain 111 million sale taxes dealrelated expenses paid expect total net aftertax proceeds sale approximately 380 million excluding payments due us related 2008 operating results august 2006 completed sale fastening systems business platinum equity private equity investment firm approximately 613 million cash assumption 16 million net indebtedness certain liabilities gain loss recorded upon completion sale prior consummation sale fastening systems business recorded impairment charge 120 million 2006 record business estimated fair value less cost sell fluid power fastening systems businesses met discontinued operations criteria included discontinued operations periods presented consolidated financial statements results fluid power business previously reported industrial segment revenue results operations gains disposal discontinued businesses follows segment analysis effective beginning fiscal 2008 operate report financial information following five business segments cessna bell textron systems industrial finance prior 2008 reported segment financial results within four segments bell cessna industrial finance changed segment reporting separate textron systems new segment initially named “defense intelligence” report bell helicopter segment bell reflect manner manage businesses periods presented herein recast reflect 2008 segment reporting structure segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses special charges measurement finance segment includes interest income expense excludes special charges cessna revenues cessna’s revenues increased 662 million 2008 compared 2007 due higher volume 341 million higher pricing 252 million benefit newly acquired business 69 million higher volume primarily reflects higher jet caravan deliveries 481 million partially offset lower used aircraft sales 98 million lower single engine sales 56 million citation business jets largest component cessna’s revenues delivered 467 387 307 citation business jets 2008 2007 2006 respectively however expect level revenue growth experienced last three years continue near future due recent deferrals 2009 deliveries cancellations discussed backlog section page 5 cessna reduced 2009 production plan 2008 levels result reduced production levels cessna announced reductions workforce approximately 750 employees fourth quarter 2008 additional 4100 employees january 2009 cessna’s backlog increased 19 billion primarily due 23 billion orders received widebody longrange citation columbus jet began multiyear development period 2008 2007 cessna’s revenues increased 844 million compared 2006 due higher volume 631 million primarily due higher citation business jet deliveries improved pricing 212 million cessna segment profit cessna’s segment profit increased 40 million 2008 compared 2007 primarily due impact higher volume 110 million pricing excess inflation 82 million favorable warranty performance 14 million partially offset increased engineering product development expense 45 million includes costs related development new citation models cj4 columbus inventory writedowns 51 million largely related used aircraft increased overhead costs 19 million favorable warranty performance primarily related lower estimated warranty costs aircraft sold 2008 segment profit also includes favorable warranty performance 28 million 2008 2007 cessna’s segment profit increased 220 million compared 2006 primarily due improved pricing 212 million along 139 million impact higher volume favorable warranty performance 14 million partially offset inflation 106 million increased engineering product development expense 41 million favorable warranty performance included 19 million impact lower estimated warranty costs aircraft sold 2007 related initial model launches discussed partially offset lower benefit 5 million favorable warranty performance 28 million benefit 2007 compared 33 million 2006 initial model launches cessna typically incurs higher warrantyrelated costs production process matures point warranty costs generally moderate sovereign cj3 models production lines reached maturity level based historical production warranty patterns resulting lower estimated warranty costs earlier production aircraft accordingly cessna favorable warranty performance past three years primarily due lower pointofsale warranty costs sovereign cj3 aircraft sold bell revenues bell’s revenues increased 246 million 2008 compared 2007 primarily due higher volume 134 million higher pricing 87 million revenues newly acquired businesses 26 million increase volume relates primarily higher v22 volume 125 million largely due delivery 18 aircraft 2008 compared 14 2007 higher h1 volume 47 million principally due delivery 12 aircraft 2008 compared 10 2007 increase spares service sales volume 28 million volume increases partially offset lower commercial helicopter volume 54 million lower arh program revenues 19 million result program’s termination october 2008 backlog bell increased 24 billion 2008 largely due funding v22 multiyear contract approved march 2008 bell’s revenues increased 234 million 2007 compared 2006 primarily due higher volume mix 141 million higher pricing 90 million increase volume relates primarily increase h1 program revenues 161 million principally due delivery first 10 production units increase v22 program revenues 70 million primarily due higher spares revenues higher commercial helicopter deliveries 50 million increases partially offset 92 million lower spares service sales aircraft v22 44 million lower huey ii kit deliveries bell segment profit bell’s segment profit increased 134 million 2008 compared 2007 primarily due favorable cost performance 78 million higher pricing excess inflation 32 million 21 million increased royalty revenues primarily related model a139 cost performance includes favorable cost performance 2008 partially offset 20 million increased selling administrative expenses due higher projectrelated consulting expenses 14 million increased research development expense bell’s segment profit increased 36 million 2007 compared 2006 primarily due higher pricing 90 million lower engineering research development expense 16 million partially offset inflation 48 million net impact unfavorable product mix 17 million cost performance moderate impact profit impacted following significant items arh program termination october 16 2008 received notification us department defense would certify continuation arh program congress nunnmccurdy act resulting termination program convenience government arh program included development phase covered sdd contract production phase process establishing termination costs sdd contract believe fully recoverable us government prior termination program obtained inventory incurred vendor obligations longlead time materials related anticipated lrip contracts maintain program schedule based belief lrip contracts would awarded since terminated vendor contracts initiated negotiations settle termination obligations estimate may cost approximately 80 million continue evaluate utility related inventory bell programs customers vendors review related discussions vendors ongoing estimate potential loss resulting lriprelated vendor obligations approximately 50 million 80 million january 3 2009 reserves related program totaled 50 million intend provide termination proposal us government request reimbursement costs expended support lrip program 2007 incurred net charges 32 million related program first quarter 2007 received correspondence us government created uncertainty whether would proceed production phase arh program accordingly provided losses 18 million supplier obligations longlead component production incurred risk support anticipated arh lrip contract awards maintain program schedule second quarter 2007 us army agreed replan arh program reached nonbinding memorandum understanding related aircraft specifications pricing methodology delivery schedules initial lrip aircraft also agreed conduct additional sdd activities funded basis based plan time related estimates aircraft production costs including costs related risks associated achieving learning curve schedule assumptions expected lose approximately 73 million production proposed initial lrip aircraft accordingly additional charge 55 million taken estimated lrip contract losses third quarter 2007 reached agreement customer recovered 18 million sdd launchrelated costs previously written december 2007 agreed expand scope development contract efforts funded basis based status negotiations us government contractual commitments vendors related materials anticipated production units time revised best estimate expected loss 50 million resulting 23 million reduction previously established reserves 2006 expensed 14 million unreimbursed costs incurred development phase program costs exceeded original contract amount program h1 program segment profit includes charges related h1 program 39 million 2007 82 million 2006 program still development phase concurrently working initial production aircraft firm fixedprice lrip contracts us government 2006 recorded 82 million charges based estimate costs complete lrip contracts would exceed contractual reimbursement due higher estimated incremental costs resources added meet contractual schedule requirements higher anticipated efforts final assembly delayed acceptance initial aircraft us government due changes development engineering requirements identified final stages assembly acceptance testing rework inprocess units resulting inefficiencies reduction previously anticipated learning curve improvements 2007 completed delivery lot 1 aircraft well first lot 2 aircraft manufacturing performance year substantially consistent expectations however anticipated cost increase primarily due anticipated delays receiving cabins supplier additionally fourth quarter committed higher pricing levels anticipated lot 5 contract estimated would likely result loss contract negotiations finalized primarily due higher cabin supplier costs accordingly fourth quarter 2007 recorded net charge 30 million reflect higher cost estimates existing contract completion resulting supplier delays well estimated loss resulting price commitment lot 5 contract 2008 production efficiencies improved resulting 6 million favorable cost performance delivered remaining lot 2 aircraft year expect deliver final lot 3 aircraft february 2009 also completed contract negotiations us government lot 5 consistent prior expectations textron systems textron systems revenues textron systems increased 782 million 2008 compared 2007 primarily due acquisition aai 2007 contributed 701 million revenues 2008 higher volume 101 million partially offset nonrecurrence 28 million cost reimbursement 2007 related losses incurred hurricane katrina volume increase primarily due 69 million higher volume asv aftermarket products 48 million higher volume ibs products 22 million higher volume lycoming partially offset 32 million lower sensor fused weapons sfw volume revenues textron systems increased 273 million 2007 compared 2006 primarily due newly acquired businesses contributed 163 million higher volume 93 million 21 million higher reimbursement costs related hurricane katrina volume increase primarily due 78 million higher asv revenues due 21 increase deliveries 576 units 2007 56 million higher revenues ibs 16 million increase sfw deliveries increases partially offset lower joint direct attack munitions volume 63 million textron systems segment profit segment profit textron systems increased 88 million 2008 compared 2007 primarily due acquisition aai contributed 62 million 2008 favorable cost performance 23 million favorable cost performance includes 39 million related asv program partially offset 2007 reimbursement 28 million impact losses incurred hurricane katrina asv cost performance primarily due improved labor efficiencies lower material costs segment profit textron systems increased 50 million 2007 compared 2006 primarily due improved cost performance 61 million 22 million profit contributions acquisitions partially offset net unfavorable impact inflation pricing 23 million favorable cost performance includes 21 million asv improvements resulting increased productivity lower indirect costs favorable impact hurricane katrina cost reimbursement 21 million industrial revenues industrial segment increased 93 million 2008 compared 2007 primarily due favorable foreign exchange impact 95 million higher pricing 34 million favorable impact acquisition 24 million partially offset lower volume 62 million volume declined kautex greenlee jacobsen businesses demand softened largest decline kautex slowing economy significant impact automotive sales second half 2008 resulting numerous automotive oem factory shutdowns around world ezgo volume increased 41 million largely due increased fleet car sales related successful introduction rxv model response significant decline anticipated volume throughout industrial reduced production plans 2009 announced fourth quarter 2008 planned headcount reductions approximately 600 employees revenues industrial segment increased 214 million 2007 compared 2006 primarily due favorable foreign exchange impact 115 million higher volume 112 million higher pricing 22 million partially offset 2006 divestiture noncore product lines 37 million industrial segment profit segment profit industrial segment decreased 106 million 2008 compared 2007 mainly due inflation excess pricing 61 million impact lower volume mix 54 million partially offset improved cost performance 13 million industrial segment profit increased 24 million 2007 compared 2006 mainly due improved cost performance 48 million higher pricing 22 million 17 million impact higher volume mix partially offset inflation 66 million improved cost performance primarily attributable cost reduction efforts kautex inflation largely reflects increases material costs finance december 22 2008 board directors approved plan exit commercial finance business finance segment portion business supporting customer purchases textronmanufactured products made decision exit business due continued weakness economy address longterm liquidity position light continuing disruption instability capital markets total actions impact approximately 73 billion finance segment’s 108 billion managed receivable portfolio exit plan effected combination orderly liquidation selected sales expected substantially complete next two four years finance group also announced restructuring program fourth quarter 2008 primarily related headcount reductions asset impairments resulting exit plan see “special charges” section page 19 regarding charges taken result exit plan reflected segment profit finance revenues finance segment decreased 152 million 2008 compared 2007 primarily due following • 163 million impact lower market interest rates • 20 million lower securitization gains net impairments • lower gain sale leveraged lease investment 16 million decreases partially offset 24 million benefit variablerate receivable interest rate floors 21 million impact higher average finance receivables 258 million revenues finance segment increased 77 million 2007 compared 2006 revenue growth primarily attributed following factors • higher average finance receivables 722 million primarily due growth aviation resort finance businesses resulted additional revenues 66 million • a21 million gain sale leveraged lease investment • a20 million increase securitization income primarily related 588 million increase level receivables sold distribution finance revolving securitization increases partially offset 17 million decrease portfolio yields related competitive pricing pressures 13 million lower leveraged lease earnings due unfavorable cumulative earnings adjustment attributable recognition residual value impairments 8 million reduction leveraged lease earnings adoption fsp 132 “accounting change projected change timing cash flows relating income taxes generated leveraged lease transaction” 2007 finance segment profit segment profit finance segment decreased 272 million 2008 compared 2007 primarily due 201 million increase provision loan losses 51 million impact higher borrowing costs relative market rates 20 million lower securitization gains net impairments 16 million lower gain sale leveraged lease investment partially offset 24 million benefit variablerate receivable interest rate floors increased allowance loan losses significantly 2008 response weakening general market conditions declining collateral values lack liquidity available borrowers customers also increased estimate credit losses result decision exit portions finance businesses fourth quarter believe negatively impact credit losses duration portfolio increases provision loan losses primarily result 81 million increase defaults marine recreational vehicles distribution finance portfolios 21 million increase resort finance portfolio 19 million reserve established one account golf finance portfolio 16 million reserve one account assetbased lending portfolio borrowing costs increased relative target federal funds rate credit market volatility significantly impacted historical relationships market indices increase primarily driven increase spread london interbank offered rate libor target federal funds rate increased borrowing spreads issuances commercial paper comparison 2007 increases partially offset increased receivable pricing result variablerate receivables interest rate floors segment profit finance segment increased 12 million 2007 compared 2006 primarily due 30 million increase net interest margin partially offset 11 million increase selling administrative expenses largely attributable finance receivable portfolio growth 7 million increase provision loan losses reflecting increase nonperforming assets net chargeoffs distribution finance portfolio net interest margin increased due number factors including following • increase 56 million securitization fee income described • increase 30 million related growth average finance receivables • partially offset 17 million decrease portfolio yields related competitive pricing pressures • lower leveraged lease earnings 13 million due unfavorable cumulative earnings adjustment attributable recognition residual value impairments • higher borrowing costs 11 million relative federal funds rate • reduction leveraged lease earnings 8 million adoption new accounting standard • lower leveraged lease earnings 7 million due gain 2006 sale option related leveraged lease asset finance portfolio quality following table presents information finance segment’s credit performance related finance receivables held investment finance receivables held sale reflected fair value 2008 included credit performance statistics 2007 2006 finance receivables held investment reflected performance statistics provided nonperforming assets include nonaccrual finance receivables repossessed assets guaranteed manufacturing group nonperforming assets business percentage owned finance assets held investment business follows believe nonperforming assets generally continue increase execute liquidation plan current economic conditions plan also likely result slower rate liquidation nonperforming assets increase nonperforming assets primarily attributable 110 million golf mortgage portfolio one golf mortgage account financing 14 golf courses representing 64 amount 74 million resort portfolio largely due one resort account financing eight resorts associated timeshare notes receivable represented 92 balance addition nonperforming assets net chargeoffs increased substantially distribution finance portfolio reflecting continued weakening us economic conditions 2007 increases nonperforming assets percentage owned finance assets assetbased lending distribution finance compared 2006 relate weakening us economic conditions began negative impact borrowers certain industries liquidity capital resources borrowing group presentation financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated majorityowned subsidiaries operate cessna bell textron systems industrial segments except textron financial corporation finance group consists textron financial corporation consolidated subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements recent developments historically principal source liquidity manufacturing group operating cash flows additional shortterm liquidity available us commercial paper market longterm capital needs able access public capital markets finance group historically funded operations commercial paper borrowings issuances mediumterm notes term debt securities syndication securitization receivables due unprecedented levels volatility disruption credit markets beginning second half 2008 experienced difficulty accessing commercial paper markets favorable rates terms several days early 2009 unable place sufficient amounts commercial paper meet finance group’s needs resulting finance group borrowing bank line credit adverse impact credit market deterioration us exacerbated recent downgrades credit ratings adversely impacted ability access term debt market given current economic environment risks associated capital markets general including current unavailability us public unsecured term debt difficulty accessing sufficient commercial paper daily basis february 3 2009 drew balance 30 billion committed bank credit lines available textron financial corporation repayment commercial paper outstanding provides us aggregate amount added cash liquidity approximately 12 billion together proceeds planned liquidations cash flow manufacturing group expect amount sufficient repay finance group’s maturing term debt 2009 early fourth quarter 2008 order reduce reliance short term funding board directors approved recommendation management downsize finance segment plan approved time entailed exiting finance group’s assetbased lending structured capital businesses well several additional product lines limiting new originations distribution finance golf finance resort finance businesses conditions continued worsen december 22 2008 board directors approved plan exit commercial finance business finance segment portion business supporting customer purchases textronmanufactured products made decision exit business due continued weakness economy order address longterm liquidity position light continuing disruption instability capital markets total exit plan impact approximately 73 billion finance segment’s 108 billion managed receivable portfolio end 2008 exit plan effected combination orderly liquidation selected sales expected substantially complete next two four years exit plan expect liquidate least 26 billion managed finance receivables net originations 2009 approximately 20 billion used pay offbalance sheet securitized debt remainder planned liquidations utilized repay portion term debt issued finance group maturing 2009 fourth quarter 2008 approved restructuring plan reduce costs improve productivity across company restructuring program along volumerelated reductions workforce fourth quarter 2008 january 2009 eliminates approximately 6300 positions worldwide representing approximately 15 global workforce expect economic uncertainty capital market turbulence continue 2009 order ensure sufficient liquidity repay maturing debt obligations first quarter 2010 beyond focus maximization cash flow following initiatives • liquidation finance receivables including selected sales finance receivables held sale finance group • realignment production commercial manufacturing businesses match lower expected demand • cost reduction activities including reducing workforce freezing salaries curtailing discretionary spending including reductions product development reducing areas discretionary capital spending • reduction working capital focus inventory management 2008 board directors declared quarterly dividends 023 per common share february 25 2009 announced board directors voted reduce quarterly dividend 002 per share first quarter 2009 decision intended increase liquidity longterm interest shareholders decision pay dividend reviewed quarterly requires declaration board directors addition continuing explore potential avenues liquidity including funding sources capital markets actively pursuing new financing structures finance group would secured directly finance receivable portfolio well extensions existing securitization vehicles december 2008 finance group extended revolving term aviation finance securitization one year estimated provide additional liquidity approximately 100 million 2009 current portfolio securing funding source matures replaced additional finance receivables depending success cash flow initiatives changes external factors affecting marketability value assets may consider sale additional assets finance business sale certain manufacturing businesses believe successful execution finance group’s exit plan combined liquidity actions discussed cash expect generate manufacturing operations able raise cash sufficient meet future liquidity needs bank facilities sources capital aggregate 30 billion committed bank lines credit historically support commercial paper letters credit issuances borrowings outstanding related manufacturing group’s 125 billion facility finance group’s 175 billion facility end 2008 2007 february 2009 due unavailability term debt difficulty accessing sufficient commercial paper daily basis drew available balance credit facilities amounts borrowed credit facilities due april 2012 portion proceeds used repay outstanding commercial paper comes due debt net cashtocapital ratio manufacturing group 46 january 3 2009 compared 32 december 29 2007 gross debttocapital ratio january 3 2009 52 compared 38 december 29 2007 manufacturing group maintains effective shelf registration statement filed securities exchange commission allows issue unlimited amount public debt securities finance group maintains effective shelf registration statement allows issue unlimited amount public debt securities first half 2008 finance group issued 675 million term debt registration statement contractual obligations finance group due nature finance companies believe meaningful include contractual cash receipts expect receive future finance group generally borrows funds various contractual maturities match maturities finance receivables following table summarizes finance group’s liquidity position including managed finance receivables offbalance sheet funding sources january 3 2009 specified periods 1 contractual receipts payments exclude finance charges receivables debt interest payments items 2 commercial paper outstanding textron intercompany loan reflected repaid connection maturity finance group’s 175 billion committed multiyear credit facility 2012 actual commercial paper issuances generally outstanding less 90 days however issuances replaced full drawdown multiyear credit facility february 2009 3 securitized onbalance sheet securitized offbalance sheet debt payments based contractual receipts underlying receivables remitted securitization structure received payments represent contractual obligations finance group provide legal recourse investors purchase interests securitizations beyond credit enhancement inherent retained subordinate interests 4 finance receivable receipts based contractual cash flows reflect reserves uncollectible amounts receipts could differ due prepayments chargeoffs factors including inability borrowers repay balance loan contractual maturity date finance receivable receipts held sale portfolio exclude potential negative impact selling portfolio estimated fair value reflects 293 million marktomarket adjustment net existing allowance loan losses 44 million discussed note 5 consolidated financial statements liquidity profile combined excess cash generated drawdown credit facilities indicator finance group’s ability repay outstanding funding obligations assuming contractual collection finance receivables absent access new sources liquidity origination additional finance receivables addition january 3 2009 finance group 338 million liabilities primarily including accounts payable accrued expenses payable within next 12 months january 3 2009 finance group 12 billion unused commitments fund new existing customers revolving lines credit compared 16 billion december 29 2007 loan commitments generally original duration less three years funding facilities dependent availability eligible collateral compliance customary financial covenants since many agreements used extent committed expire unused total commitment amount necessarily represent future cash requirements also ongoing customer relationships including manufacturers dealers distribution finance division contractually obligate us provide funding however may choose fund certain relationships facilitate orderly liquidation mitigate credit losses neither potential fundings included contractual obligations table manufacturing group following table summarizes known contractual obligations defined reporting regulations manufacturing group january 3 2009 well estimate timing obligations expected satisfied maintain defined benefit pension plans postretirement benefit plans pensions discussed note 14 consolidated financial statements included table discounted estimated benefit payments expect make related unfunded pension postretirement benefit plans actual benefit payments dependent number factors including mortality assumptions expected retirement age rate compensation increases medical trend rates subject change future years policy funding pension plans make contributions annually consistent applicable laws regulations however future contributions pension plans included table expect make contributions funded pension plans range approximately 50 million 55 million 2009 based current assumptions may change changes market conditions current annual contribution years 2010 2013 estimated approximately 375 million plan provisions place time longterm liabilities included table consist primarily undiscounted amounts consolidated balance sheet january 3 2009 representing obligations deferred compensation arrangements estimated environmental remediation costs payments deferred compensation arrangements estimated based management’s assumptions expected retirement age mortality stock price rates return participant deferrals timing cash flows associated environmental remediation costs largely based historical experience longterm liabilities deferred taxes unrecognized tax benefits excluded table due uncertainty timing payments combined absence historical trends used predictor payments operating leases represent undiscounted obligations noncancelable leases purchase obligations represent undiscounted obligations committed purchase goods services january 3 2009 ultimate liability obligations may reduced based upon termination provisions included certain purchase contracts costs incurred date vendors contracts recourse firm contracts us government normal termination clauses credit ratings credit ratings critical component ability access public term debt commercial paper markets also impact cost borrowings factors affect credit ratings include changes operating performance economic environment conditions industries operate financial position changes business strategy since highquality credit ratings provide us access broad base global investors attractive cost target longterm rating independent debtrating agencies historically able achieve target rating recent months longterm ratings borrowing groups downgraded several times debtrating agencies credit ratings outlooks debtrating agencies february 25 2009 follows major rating agencies regularly evaluate borrowing groups ratings longterm debt based number factors including financial strength factors outside control conditions affecting financial services industry generally longterm credit ratings downgraded several times recent months fitch ratings downgraded shortterm credit rating february 9 2009 connection rating actions rating agencies cited concerns finance group including execution risks associated current plan exit noncaptive finance businesses need textron inc make capital contributions textron financial corporation well lowerthanexpected business financial outlook 2009 increase outstanding debt resulting drawdown credit facilities weak economic conditions continued liquidity funding constraints failure maintain investment grade credit ratings acceptable investors would prevent us accessing commercial paper markets may adversely affect cost terms upon able obtain financing well access capital markets manufacturing group cash flows cash flows continuing operations manufacturing group summarized support agreement textron financial corporation textron inc textron inc required maintain controlling interest textron financial corporation agreement also requires textron inc ensure textron financial corporation maintains fixed charge coverage less 125 consolidated shareholder’s equity less 200 million due goodwill impairment charge 169 million textron financial corporation along charges resulting exit plan discussed december 29 2008 textron inc made cash payment 625 million textron financial corporation reflected capital contribution maintain compliance fixed charge coverage ratio required support agreement maintain leverage ratio required credit facility due nature contribution classified contribution within cash flows used operating activities manufacturing group resulting significant decline cash provided operating activities capital contributions support finance group growth classified cash flows financing activities finance group’s net income loss excluded manufacturing group’s cash flows dividends finance group included within cash flows operating activities manufacturing group represent return investment excluding capital contribution finance group cash provided operating activities totaled 1 billion reflecting consistent cash flow manufacturing group even continued investment working capital changes working capital components resulted 476 million 101 million use cash 2008 2007 respectively 123 million source cash 2006 significant use operating cash related increased production levels year inventory buildup bell cessna cash used inventories totaled 657 million 446 million 364 million 2008 2007 2006 respectively partially offsetting use cash inventories customer deposits within accrued liabilities provided significant source operating cash customer deposits increased 88 million 290 million 128 million 2008 2007 2006 respectively investing cash flows 2008 largely driven capital expenditures 542 million 2008 375 million 2007 407 million 2006 2009 plan reduce capital spending 315 million consistent reduced capacity requirements 2008 2007 paid 109 million 11 billion largely related aai acquisition 2006 paid 338 million primarily related acquisition overwatch systems 2008 financing activities include 867 million commercial paper borrowings portion used make cash payment capital contribution loan finance group experienced limited ability obtain financing favorable rates second half 2008 borrowed 222 million cash surrender value corporateowned officers’ life insurance policies 2008 cash inflows financing activities offset share repurchases 533 million maturity two bonds requiring payments 348 million dividends paid shareholders 284 million net lending finance group 133 million fourth quarter 2008 manufacturing group utilized commercial paper borrowings lend cash finance group portion intergroup borrowings repaid fourth quarter primarily funds 625 million capital contribution discussed january 3 2009 finance group owed manufacturing group 133 million related borrowings 2008 2007 2006 repurchased approximately 12 million 6 million 17 million shares common stock respectively boardauthorized share repurchase programs september 2008 suspended share repurchase activity used 996 million less cash financing activities 2007 compared 2006 decrease due principally issuance 350 million 10year notes 2007 paydown 241 million shortterm debt 2006 457 million decrease 2007 purchases common stock 2006 annual dividend increased 092 2008 085 2007 dividend payments shareholders totaled 284 million 154 million 244 million 2008 2007 2006 respectively timing quarterly dividend payments resulted four payments 2008 three payments 2007 five payments 2006 finance group cash flows cash flows continuing operations finance group summarized decrease cash provided operating activities 2008 2007 primarily due timing payments income taxes accrued interest liabilities cash flows used investing activities decreased 2008 primarily due 627 million decrease finance receivable originations net collections mostly result decision exit portions finance business resulting lower originations partially offset lower proceeds receivable sales including securitizations 363 million purchase notes receivable issued securitization trusts 100 million cash used investing activities decreased 2007 compared 2006 largely due 774 million decrease finance receivable originations net collections 481 million increase proceeds receivable sales including securitizations 164 million impact 2006 cash used acquisition proceeds receivable sales increased primarily due sale 588 million receivables distribution finance revolving securitization 2007 less cash provided financing activities 2008 primarily due lower proceeds borrowings related reduction managed receivable growth higher principal payments largely offset 625 million capital contribution received manufacturing group 2008 support agreement decrease financing cash inflows 2007 primarily reflects reduction borrowings due lower managed receivable growth comparison 2006 addition 2007 used proceeds receivable sales including securitizations fund asset growth instead additional borrowings consolidated cash flows consolidated cash flows continuing operations elimination activity borrowing groups summarized consolidated cash provided operating activities decreased primarily due investment working capital discussed detail within “manufacturing group cash flows” section herein cash used investing activities decreased due 11 billion cash used acquisitions 2007 primarily related aai cash used investing activities decreased 2007 compared 2006 largely due 786 million decrease finance receivable originations net collections excluding 12 million captive financing activities 424 million increase proceeds receivable sales securitizations collections excluding 57 million captive financing activities decreases partially offset 590 million higher cash outflows acquisitions 2007 acquired four businesses including aai total outflow 11 billion 2006 acquired three businesses 502 million including overwatch systems electrolux financial corporation received less cash financing activities 2008 primarily due 663 million lower proceeds borrowings net principal payments also used 229 million share repurchases 130 million dividend payments shareholders partially offset 222 million proceeds received borrowings cash surrender value corporateowned officers’ life insurance policies 2008 received less cash financing activities 2007 primarily due reduction borrowings largely result lower managed receivable growth comparison 2006 addition 2007 used proceeds sale receivables including securitizations fund asset growth instead additional borrowings decrease cash borrowed finance group 2007 2006 partially offset proceeds issuance 350 million 10year notes manufacturing group 2007 457 million decrease purchases common stock 90 million lower dividend payments due timing captive financing intercompany transactions finance group finances retail purchases leases new used aircraft equipment manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers securitizations reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidated statements cash flows reclassification elimination adjustments included consolidated statement cash flows summarized consolidated discontinued operations cash flows cash flows discontinued operations summarized fourth quarter 2008 received net cash proceeds sale fluid power business approximately 479 million recorded investing activities taxes dealrelated expenses paid expect total net aftertax proceeds sale approximately 380 million excludes cash proceeds related final payment determined based fluid power 2008 operating results 2007 cash flows investing activities primarily related realization cash tax benefits fastening systems business 2006 cash inflows investing activities include net cash proceeds 636 million sale fastening systems business see note 2 consolidated financial statements details concerning dispositions offbalance sheet arrangements performance guarantee 2004 bell helicopter business formed agustawestlandbell llc awb llc agustawestland north america inc awna venture created joint design development manufacture sale customer training product support vh71 helicopter certain variations derivatives thereof offered sold departments agencies us government march 2005 awb llc received 12 billion cost reimbursementtype subcontract lockheed martin system development demonstration phase us marine corps helicopter squadron program increased 14 billion december 2008 guaranteed lockheed martin due prompt performance awb llc obligations subcontract provided liability guaranty shall exceed 49 awb llc’s aggregate liability lockheed martin subcontract agustawestland nv awna’s parent company guaranteed remaining 51 lockheed martin entered crossindemnification agreements agustawestland nv party indemnifies related payments required agreements result indemnifying party’s workshare subcontracts received awb llc’s maximum obligation 50 total contract value 676 million maximum amount liability guarantee 331 million january 3 2009 completion current phase contract believe performance risk respect guarantee late january 2009 pentagon declared nunnmccurdy act breach program due cost overruns requiring recertification program enough information time make determination whether program recertified however program terminated believe guarantee triggered relates solely performance subcontract finance receivable sales securitizations finance group primarily sells finance receivables utilizing assetbacked securitization structures result transactions finance receivables removed balance sheet proceeds received used reduce recorded debt levels despite reduction recorded balance sheet position generally retain subordinated interest finance receivables sold securitizations may affect operating results periodic fair value adjustments utilize offbalance sheet financing arrangements diversify funding alternatives termination arrangements would reduce shortterm funding alternatives could result increased funding costs managed finance receivable portfolio arrangements contain provisions require us repurchase significant amounts receivables previously sold risks could reduce availability funding alternatives future potential barriers continued use offbalance sheet arrangements include deterioration finance receivable portfolio quality downgrades debt credit ratings reduction new finance receivable originations businesses utilize funding arrangements expect factors material impact liquidity income operations required consolidate arrangements would impact existing debt covenants january 3 2009 one significant offbalance sheet financing arrangement distribution finance revolving securitization trust master trust purchases inventory finance receivables finance group issues assetbacked notes investors receivables typically short durations results significant collections previously purchased receivables significant additional purchases replacement receivables us monthly basis arrangement provided net proceeds 125 million 2008 549 million 2007 50 million 2006 net pretax gains 36 million 58 million 42 million 2008 2007 2006 respectively proceeds securitizations include amounts received related issuance additional assetbacked notes investors exclude amounts received related ongoing replenishment outstanding sold balance shortduration receivables 2008 802 million outstanding notes issued distribution finance revolving securitization trust matured trust issued variable funding notes amount 559 million maturing september 2009 419 million maturing may 2009 retained 103 million notes interest rate equal commercial paper costs conduit purchasers addition trust holds 12 billion onemonth liborbased variablerate notes threeyear terms approximately 642 million notes mature april 2009 588 million mature march 2010 retained 80 million notes amount pretax gains recorded upon ongoing sale receivables arrangement value subordinated interest impacted pricing investor notes issued trust therefore increase pricing investor notes issued upon maturity existing notes could negative impact gains recognized finance group related future sales receivables critical accounting estimates prepare consolidated financial statements conformity generally accepted accounting principles must make complex subjective judgments selection application accounting policies accounting policies believe critical portrayal financial condition results operations listed believe policies require difficult subjective complex judgments estimating effect inherent uncertainties section read conjunction note 1 consolidated financial statements includes significant accounting policies allowance losses finance receivables held investment evaluate allowance losses finance receivables held investment based combination factors homogeneous loan pools examine current delinquencies characteristics existing accounts historical loss experience value underlying collateral general economic conditions trends potential impact lack liquidity available borrowers customers result current decision exit noncaptive finance businesses estimate losses range 075 100 finance receivables held investment depending specific homogeneous loan pool larger balance commercial loans also consider borrower specific information industry trends estimated discounted cash flows provision losses finance receivables held investment charged income amounts sufficient maintain allowance losses finance receivables held investment level considered adequate cover losses inherent owned finance receivable held investment portfolio based management’s evaluation analysis portfolio management believes consideration factors assumptions referred results accurate evaluation existing losses portfolio based prior trends experience changes assumptions trends within reasonable historical volatility may material impact allowance losses finance receivables held investment allowance losses finance receivables held investment currently represents 276 total finance receivables held investment last five years net chargeoffs percentage finance receivables held investment ranged 038 148 finance receivables held sale result exit plan 17 billion finance receivable portfolio classified held sale recorded lower cost fair value remaining 69 billion receivables finance receivable portfolio classified held investment upon initial reclassification receivables held sale estimated fair value 293 million less carrying value net 44 million allowance loan losses attributable portfolios net adjustment recorded fourth quarter 2008 finance receivables classified held sale based determination longer intend hold receivables foreseeable future maturity longer ability hold maturity decision classify certain finance receivables held sale based number factors including limited contractual duration type collateral credit strength borrowers existence continued contractual commitments perceived marketability receivables ability hold receivables maturity ongoing basis factors combined overall liquidation strategy determine finance receivables positive intent hold foreseeable future receivables hold sale current strategy based evaluation performance liquidity position changes external factors affecting value andor marketability finance receivables change strategy could result change classification finance receivables subsequently determine finance receivables classified held sale sold finance receivables reclassified held investment lower cost fair value time conversely determine finance receivables subsequently determine longer intend ability hold maturity receivables would designated held sale valuation allowance would established time necessary january 3 2009 classified additional finance receivables held sale valuation allowance would likely required time based fair value estimates completed footnote disclosure requirements see page 71 note 10 fair values assets liabilities consolidated financial statements table included carrying value fair value assets liabilities currently recorded fair value balance sheet finance receivables held sale carried lower cost fair value time transfer held sale classification establish valuation allowance shortfall carrying value net deferred fees costs fair value upon initial classification held sale shortfall recorded charge within special charges addition allowance loan losses previously allocated receivables reclassified valuation allowance account netted finance receivables held sale balance sheet valuation allowance initially established adjusted quarterly changes fair value receivables original carrying value subsequent adjustments included earnings within segment profit fair value changes occur based market interest rates market liquidity changes credit quality borrower value underlying loan collateral active quoted market prices finance receivables estimate fair value determined based use discounted cash flow models estimate exit price expect receive principal market type loan orderly transaction includes sale pools similar assets sale individual loans models used incorporate estimates rate return financing cost capital structure andor discount rate expectations prospective purchasers combined estimated loan cash flows based credit losses payment rates credit line utilization rates available assumptions related expectations prospective purchasers compared observable market inputs including bids prospective purchasers certain bond market indices loans similar perceived credit quality although utilize prioritize market observable inputs discounted cash flow models inputs rarely derived markets directly comparable loan structures industries collateral types therefore valuations finance receivables held sale involve significant management judgment result differences fair value estimates market participants longterm contracts make substantial portion sales government customers pursuant longterm contracts require development delivery products multiple years may contain fixedprice purchase options additional products account longterm contracts percentageofcompletion method accounting percentageofcompletion method estimate profit difference total estimated revenue cost contract recognize estimated profit contract term based either costs incurred costtocost method typically used development effort units delivered unitsofdelivery method used production effort appropriate circumstances percentageofcompletion method accounting involves use various estimating techniques project costs completion cases includes estimates recoveries asserted customer changes specifications due size length time nature many contracts estimation total contract costs revenue completion complicated subject many variables relative outcome future events period several years required make numerous assumptions estimates relating items expected engineering requirements complexity design related development costs performance subcontractors availability cost materials labor productivity cost overhead capital costs manufacturing efficiencies achievement contract milestones including product deliveries cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments projected costs recognized earnings determinable anticipated losses contracts recognized full period losses become probable estimable due significance judgment estimation process described likely materially different revenues andor cost sales amounts could recorded used different assumptions underlying circumstances change earnings could reduced material amount resulting charge earnings total estimated contract costs significantly higher expected due changes customer specifications prior contract amendment b total estimated contract costs significantly higher previously estimated due cost overruns inflation c change engineering efforts required development stage contract unable meet contract milestones goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value asset might impaired see “special charges” section page 19 discussion impairment goodwill finance segment subsequent impairment completed annual impairment test fourth quarter 2008 using estimates longterm strategic plans adjustment required carrying value goodwill based analysis performed market capitalization january 3 2009 approximately 37 billion compared approximately 179 billion december 29 2007 market capitalization less sum fair values manufacturing reporting units calculated connection annual impairment test believe differences fair value estimates manufacturing reporting units market capitalization primarily due market’s view risk finance segment noted fully impaired goodwill finance segment concerns liquidity believe fair value estimates manufacturing reporting units consistent market participant assumptions goodwill considered impaired net book value reporting unit exceeds estimated fair value fair values primarily established using discounted cash flow methodology using assumptions consistent market participants determination discounted cash flows based businesses’ strategic plans longrange planning forecasts revenue growth rates included forecasts represent best estimates based current forecasted market conditions profit margin assumptions projected reporting unit based current cost structure anticipated net cost reductions different assumptions used forecasts related undiscounted cash flows used measuring impairment could different potentially resulting impairment charge second half 2008 kautex negatively impacted significant downturn automotive industry caused deterioration revenues segment profit annual evaluation goodwill recoverability kautex extended include projections outlook automotive industry end fourth quarter believe carrying value reporting unit recoverable january 3 2009 anticipate volumes continue lower 2010 2009 2013 purposes goodwill analysis assumed average annual sales growth rate 6 operating profit margins returning recent historical levels 2013 operating profit margin improvements expected result significant restructuring activities including realignment excess capacity personnel reductions well higher volumes 50basispoint reduction estimated operating profit margins 2009 2013 period used discounted cash flow model would reduce estimated fair value kautex 60 million may result carrying value business exceeding estimated fair value potentially resulting impairment charge january 3 2009 goodwill allocated kautex totaled 130 million operating plans projections golf turfcare component anticipate operating margin improvements fiveyear planning period resulting high singledigit margins assume annual revenue growth approximately 4 100basispoint decline operating margin assumptions would reduce estimated fair value approximately 50 million may result carrying value component exceeding estimated fair value potentially resulting impairment charge january 3 2009 goodwill allocated component totaled approximately 141 million retirement benefits maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases evaluate update assumptions annually determine expected longterm rate return plan assets consider current expected asset allocation well historical expected returns plan asset class lower expected rate return plan assets increase pension expense 2008 assumed expected longterm rate return plan assets used calculating pension expense 866 compared 863 2007 2008 2007 assumed rate return qualified domestic plans represent approximately 95 total pension assets 875 874 respectively 50basispoint decrease longterm rate return would result 22 million annual increase pension expense qualified domestic plans discount rate enables us state expected future benefit payments present value measurement date reflecting current rate pension liabilities could effectively settled rate line rates highquality fixed income investments available period maturity pension benefits fluctuate longterm interest rates change lower discount rate increases present value benefit obligations increases pension expense 2008 weightedaverage discount rate used calculating pension expense 599 compared 563 2007 qualified domestic plans assumed discount rate 60 2008 compared 566 2007 50basispoint decrease discount rate would result 28 million annual increase pension expense qualified domestic plans trend healthcare costs difficult estimate important effect postretirement liabilities 2008 medical prescription drug healthcare cost trend rates represent weightedaverage annual projected rate increase per capita cost covered benefits 2008 medical rate 7 assumed decrease 5 2019 remain level 2008 prescription drug rate 10 assumed decrease 5 2019 remain level see note 14 consolidated financial statements impact onepercentagepoint change cost trend rate warranty liabilities provide limited warranty product maintenance programs including parts labor certain products periods ranging one five years significant portion liabilities arises commercial aircraft businesses also may incur costs related product recalls estimate costs may incurred warranty programs record liability amount costs time product revenue recognized factors affect liability include number products sold historical costs per claim contractual recoveries vendors historical anticipated rates warranty claims including production warranty patterns new models initial aircraft model launches typically incur higher warrantyrelated costs production process matures point warranty costs moderate assess adequacy recorded warranty product maintenance liabilities periodically adjust amounts necessary adjustments made accruals claim data actual experience warrant future warranty experience differ materially historical experience may required record additional warranty liabilities could material adverse effect results operations cash flows period additional liabilities required securitized transactions securitized transactions involve sale finance receivables qualified special purpose trusts may retain interest assets sold form interestonly securities seller certificates cash reserve accounts servicing rights obligations time sale gain loss recorded based difference proceeds received allocated carrying value finance receivables sold allocated carrying value determined based relative fair values finance receivables sold interests retained fair value estimate retained interests direct impact gain loss recorded estimate fair value based present value future cash flows using management’s best estimates key assumptions credit losses prepayment speeds discount rates forward interest rate yield curves commensurate risks involved review fair values retained interests quarterly using updated assumptions compare amounts carrying value carrying value exceeds fair value determine whether decline fair value temporary determine value decline temporary write securities fair value corresponding charge income change fair value interestonly securities deemed temporary record corresponding credit charge comprehensive income unrealized gains losses refer note 5 consolidated financial statements summary key assumptions used record initial gains related sale finance receivables securitizations measure current fair value interestonly securities income taxes deferred tax assets liabilities determined based temporary differences financial reporting tax bases assets liabilities applying enacted tax rates expected effect year expect differences reverse settle based evaluation available evidence recognize future tax benefits net operating loss carryforwards extent believe likely realize benefits periodically assess likelihood able recover deferred tax assets reflect changes estimates valuation allowance corresponding adjustment earnings comprehensive income loss appropriate assessing need valuation allowance look future reversal existing taxable temporary differences taxable income carryback years feasibility tax planning strategies estimated future taxable income amount income taxes pay subject ongoing audits federal state foreign tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental assess income tax positions record tax benefits years subject examination based upon evaluation facts circumstances information available reporting date tax positions likely tax benefit sustained record largest amount tax benefit greater 50 likelihood realized upon settlement taxing authority full knowledge relevant information interest penalties accrued applicable recognize net taxrelated interest penalties income tax expense believe likely tax benefit sustained tax benefit recognized however future results may include favorable unfavorable adjustments estimated tax liabilities due closure income tax examinations new regulatory judicial pronouncements relevant events result effective tax rate may fluctuate significantly quarterly annual basis item 7aitem 7 management’s discussion analysis financial condition results operations overview global economic recession 2009 significantly impacted many businesses consumers businesses reduced spending investment lower demand resulting environment contributed decline revenue 35 billion 105 billion decline segment profit 976 million 475 million declines largely due lower volume cessna industrial segments impact lower volume partially offset improved cost performance aligned workforce production levels demand restructuring program employee furloughs temporary plant shutdowns revenue segment profit also adversely impacted lower earnings resulting operating losses finance segment largely due increase portfolio losses lower market interest rates lower securitization income since restructuring program initiated end 2008 improved cost structure reducing workforce approximately 10400 employees representing approximately 24 workforce closing 23 leased owned facilities plants program contributed significant cost improvements businesses year continued execute plan exit noncaptive portion commercial finance business finance segment retaining captive portion business supports customer purchases products manufacture reduced managed finance receivables 38 billion 2009 discounted payoffs portfolio sales finance receivable amortization cash conversion ratio 94 reduction included approximately 450 million finance receivables captive finance business finance segment’s onand offbalance sheet debt reduced aggregate 38 billion largely due securitization payoffs debt maturities expect finance segment continue contribute operating losses 2010 liquidates noncaptive portfolio defense businesses continue perform well reflecting strong program performance textron systems revenues favorably impacted higher volume largely due higher shadow unmanned aircraft system sensor fused weapon deliveries partially offset lower aircraft engine volume aircraft manufacturers cut production levels response lower market demand bell higher military volumes v22 programs partially offset impact 2008 armed reconnaissance helicopter arh program cancellation lower commercial helicopter deliveries backlog aircraft defense businesses end 2009 totaled 135 billion 41 decline prior year primarily due 66 decrease backlog cessna decline backlog cessna reflects cancellation numerous business jet orders largely due economic recession includes 21 billion impact decision cancel development citation columbus aircraft 13 billion impact due cancellations one customer expect ongoing volatility backlog cessna economic conditions stabilize backlog increased bell segment largely related multiyear contract v22 2009 took several actions ensure adequate liquidity capital resources light turmoil capital markets summarized believe continued successful execution exit plan noncaptive business cash expect generate manufacturing operations sufficient cash meet future needs results operations discussion comparative results manufacturing group changes revenue segment profit typically expressed terms volume pricing foreign exchange acquisitions additionally changes segment profit may expressed terms mix inflation cost performance volume represents changes number units delivered services provided pricing represents changes unit pricing foreign exchange change resulting translating foreigndenominated amounts us dollars exchange rates different prior period acquisitions refer results generated businesses acquired within previous 12 months segment profit mix represents change due composition products andor services sold different profit margins inflation represents higher material wages benefits costs cost performance reflects increase decrease research development depreciation selling administrative costs warranty product liability qualityscrap labor efficiency overhead product line profitability startup rampup cost reduction initiatives manufacturing inputs us government business performance generally refers changes estimated contract rates changes typically relate profit recognition associated revisions total estimated costs complete contract reflect improved deteriorated operating performance contract recognized recording cumulative catchup adjustments current period revenues decreased 35 billion 25 105 billion 2009 compared 2008 decrease primarily due following factors • lower manufacturing volume 33 billion reflecting 24 billion decrease cessna primarily related fewer deliveries due economic recession 801 million decrease industrial segment principally due recessionrelated lower demand 79 million decrease bell largely related lower commercial helicopter volume result economic recession • lower finance segment revenues 362 million reflecting increase portfolio losses lower market interest rates lower securitization income • unfavorable foreign exchange impact 51 million industrial segment partially offset • higher pricing 155 million 94 million bell 48 million cessna revenues increased 16 billion 13 140 billion 2008 compared 2007 increase primarily due following factors manufacturing businesses partially offset lower revenues 152 million commercial finance business • additional revenues newly acquired businesses 820 million primarily acquisition aai textron systems • higher manufacturing volume 498 million reflecting 341 million higher volume cessna primarily related increase business jet deliveries 134 million higher volume bell largely related v22 h1 programs 85 million increased volume textron systems higher armored security vehicle aftermarket lycoming intelligent battlefield systems products partially offset 62 million decrease industrial segment principally due lower demand kautex cost sales cost sales percentage manufacturing revenues 835 796 790 2009 2008 2007 respectively increase 2009 primarily due impact lower production levels temporary plant shutdowns cessna industrial segments resulting increased conversion costs idle capacity increase 2008 largely due higher product development costs primarily cessna related development new citation models inventory writedowns taken cessna end 2008 largely related preowned aircraft selling administrative expense selling administrative expense decreased 262 million 1344 million 2009 compared 2008 primarily due workforce reductions furlough programs resulting lower compensation related costs lower sales commissions cessna decline professional service travel costs due cost reduction efforts 2008 selling administrative expense increased 61 million 1606 million compared 2007 primarily due increase commission expense higher business jet sales higher operating expenses resulting acquisition aai 2007 partially offset lower compensation expense largely caused stock depreciation special charges special charges include restructuring charges 237 million 64 million 2009 2008 respectively 2009 special charges also includes goodwill impairment charge 80 million industrial segment discussed page 67 note 10 consolidated financial statements 2008 incurred special charges 462 million finance segment connection decision exit noncaptive portion commercial finance business charges include initial marktomarket adjustment 293 million made classified certain finance receivables held investment held sale goodwill impairment charge 169 million special charges 2007 special charges segment follows restructuring program fourth quarter 2008 initiated restructuring program reduce overhead costs improve productivity across company includes corporate segment direct indirect workforce reductions streamlining administrative overhead announced exit portions commercial finance business program expanded 2009 include additional workforce reductions primarily cessna corporate bell cancellation citation columbus development project streamlining reorganization senior management consolidation certain operations cessna end 2010 expect eliminated approximately 10800 positions worldwide representing approximately 25 global workforce since inception program january 2 2010 terminated approximately 10400 employees exited 23 leased owned facilities plants program recorded net curtailment charges 25 million pension postretirement benefit plans second quarter 2009 analysis impact workforce reductions plans indicated curtailments occurred amounts could reasonably estimated curtailment charge pension plan primarily due recognition prior service costs previously amortized period years asset impairment charges included 43 million charge recorded second quarter 2009 write assets related citation columbus development project due prevailing adverse market conditions analysis business jet market related product offering cessna formally canceled citation columbus development project second quarter 2009 cessna began project early 2008 development allnew widebodied eightpassenger business jet designed international travel would extend cessna’s product offering largest business jet date development project capitalized costs related tooling partially constructed manufacturing facility 43 million considered recoverable since inception restructuring program incurred following costs january 2 2010 estimate incur approximately 30 million additional pretax restructuring costs 2010 result future cash outlays additional costs expected primarily include relocation costs cessna consolidates certain operations severance cessna segment 3 million severance finance segment expect program substantially completed 2010 however expect incur additional costs exit noncaptive portion commercial finance business next two three years estimated within range 7 million 17 million primarily attributable severance retention benefits interest expense interest expense includes interest finance manufacturing borrowing groups interest expense decreased 139 million 309 million 2009 compared 2008 primarily due reduced debt finance segment liquidates noncaptive business interest expense net manufacturing group increased 18 million 143 million 2009 compared 2008 primarily due 38 million interest convertible notes issued second quarter 2009 partially offset lower rates 2009 due borrowings bank lines credit interest expense finance segment included within segment profit 2008 interest expense decreased 59 million 448 million compared 2007 primarily due finance segment reflecting lower interest rates partially offset higher average debt outstanding lower interest rates primarily attributable decrease market rate indices partially offset increase borrowing spreads interest expense net manufacturing group increased 38 million 125 million 2008 compared 2007 primarily due higher borrowing costs associated commercial paper borrowings 2008 income taxes following table reconciles federal statutory income tax rate effective income tax rate 2009 effective tax rate favorably impacted adoption canadian tax purposes us dollar functional currency one canadian subsidiaries reduction unrecognized tax benefits due recognition capital gain connection sale cescom assets reduction valuation allowance related contingent payments prior year transaction partially offset writeoff nontax deductible goodwill industrial segment 2008 effective tax rate significantly impacted plan announced fourth quarter 2008 exit portions finance segment’s business plan resulted impairment finance segment’s goodwill small portion deductible tax purposes addition due change investment status finance segment’s canadian subsidiary incurred 31 million additional tax expense income discontinued operations net income taxes discontinued operations includes 8 million gain sale hr textron 2009 111 million gain sale fluid power business 2008 along income loss operations discontinued businesses prior disposition segment analysis operate report financial information following five business segments cessna bell textron systems industrial finance segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses special charges measurement finance segment includes interest income expense excludes special charges cessna deterioration global economy 2009 significantly impacted business jet market evidenced order cancellations decline new aircraft orders response conditions cessna reduced aircraft production schedule align output customer demand reduced headcount approximately 47 2009 see “special charges” section regarding restructuring program including cancellation citation columbus development program second quarter 2009 cessna revenues cessna’s revenues decreased 23 billion 2009 compared 2008 primarily due lower volume business jets aircraft reflecting impact fewer deliveries due economic recession delivered 289 467 387 citation business jets 2009 2008 2007 respectively cessna’s spare parts product support maintenance activities also experienced 152 million lower volume largely due decline aircraft utilization primarily result economic recession citationair lower volume 79 million primarily due lower demand expect 2010 business jet volumes margins continue impacted weakness general aviation industry 96 billion decrease backlog reflects cancellation numerous business jets orders largely due economic recession included 21 billion impact decision cancel development citation columbus aircraft 13 billion impact due cancellations one customer expect ongoing volatility backlog economic conditions begin recover 2008 cessna’s revenues increased 662 million compared 2007 due higher volume 341 million higher pricing 252 million benefit newly acquired business 69 million cessna segment profit cessna’s segment profit decreased 707 million 2009 compared 2008 primarily due 883 million impact lower sales volume 48 million due idle capacity related lower production levels temporary plant shutdowns decreases partially offset 131 million favorable cost performance 50 million gain first quarter 2009 sale assets related cescom provided maintenance tracking services cessna’s customers cessna’s favorable cost performance included 116 million lower engineering selling administrative expense largely due workforce reductions 2009 82 million forfeiture income order cancellations partially offset higher warranty expense 35 million 16 million increase writedowns preowned aircraft inventory reflecting lower fair market values due excess supply market unfavorable performance citationair 10 million 2008 cessna’s segment profit increased 40 million compared 2007 primarily due impact higher volume 110 million pricing excess inflation 82 million favorable warranty performance 14 million partially offset increased engineering product development expense 45 million included costs related development new citation models cj4 columbus inventory writedowns 51 million largely related used aircraft increased overhead costs 19 million bell revenues bell’s revenues increased 15 million 2009 compared 2008 due higher pricing 94 million primarily related certain commercial helicopters partially offset lower volume 79 million volume decreased 97 million commercial helicopters 30 million spares support services largely due decline demand along 76 million decrease related canceled arh program decreases partially offset increased volume programs us government including 80 million increase v22 delivered aircraft multiyear program backlog bell increased 711 million 2009 primarily due funding v22 program partially offset decline commercial aircraft orders largely due economic recession 2008 bell’s revenues increased 246 million compared 2007 primarily due higher volume 134 million higher pricing 87 million revenues newly acquired businesses 26 million increase volume related primarily higher v22 volume 125 million largely due delivery 18 aircraft 2008 compared 14 2007 higher h1 volume 47 million principally due delivery 12 aircraft 2008 compared 10 2007 increase spares service sales volume 28 million volume increases partially offset lower commercial helicopter volume 54 million lower arh program revenues 19 million result program’s termination october 2008 bell segment profit bell’s segment profit increased 26 million 2009 compared 2008 primarily due higher pricing excess inflation 47 million improved cost performance 19 million partially offset change product mix 22 million primarily due commercial helicopters lower volume 18 million improved cost performance primarily reflects • lower selling administrative expenses 26 million • lower research development 21 million • improvement v22 program 16 million primarily due prior year charges • 11 million gain canadian currency exchange contract hedged unwound third quarter due significant decline production activity partially offset • unfavorable adjustments 24 million 429 model primarily related pricing assumptions higher anticipated learning curve costs resulting inventory write downs • costs 11 million related termination certain commercial models • lower spares support performance 8 million 2008 bell’s segment profit increased 134 million compared 2007 primarily due favorable cost performance 78 million higher pricing excess inflation 32 million 21 million increased royalty revenues primarily related model a139 cost performance included • improved performance h1 lowrate initial production lrip program 46 million primarily resulting 30 million net charge recorded fourth quarter 2007 reflect higher costs estimates due supplier delays estimated loss resulting price commitment one contract 2008 production efficiencies improved resulting 6 million favorability • lower net charges 32 million arh program due estimated contract losses related supplier obligations longlead components • costs 26 million incurred 2007 related exit certain commercial models • 14 million impact improved commercial aircraft margins primarily due improved production efficiencies 412 407 models • improvement v22 program 11 million primarily due manufacturing efficiencies partially offset • increased selling administrative expenses 20 million due higher projectrelated consulting expenses • higher research development expense 14 million arh program termination october 16 2008 received notification us department defense would certify continuation arh program congress nunnmccurdy act resulting termination program convenience government arh program included development phase covered system development demonstration sdd contract production phase submitted claim termination costs sdd contract october 2009 believe costs fully recoverable us government prior termination program obtained inventory incurred vendor obligations longlead time materials related anticipated lrip contracts maintain program schedule based belief lrip contracts would awarded since terminated vendor contracts negotiating settle termination obligations october 2009 filed claim us government request reimbursement costs expended support lrip program december 17 2009 received decision contracting officer department army denied claim entirety plan appeal decision first quarter 2010 january 2 2010 reserves related program totaled 50 million believe adequate cover exposure textron systems textron systems revenues textron systems increased 19 million 2009 compared 2008 primarily due higher defense volumes including 83 million shadow unmanned aircraft systems 45 million sensor fused weapons 34 million armored security vehicles increases partially offset lower aircraft engine volume 73 million largely due decline aircraft production aircraft manufacturers cut production levels response lower demand lower armored security vehicle aftermarket volume 45 million 33 million impact largely due completion programs related laser missile technology development backlog textron systems decreased 526 million 2009 primarily due deliveries existing government contracts shadow unmanned aircraft systems armored security vehicles 2008 textron systems revenues increased 766 million compared 2007 primarily due acquisition aai 2007 contributed 701 million revenues 2008 higher volume 85 million partially offset nonrecurrence 28 million cost reimbursement 2007 related losses incurred hurricane katrina volume increase primarily due 69 million higher volume armored security vehicle aftermarket products 48 million higher volume intelligent battlefield system products 22 million higher volume lycoming partially offset 32 million lower sensor fused weapon volume textron systems segment profit segment profit textron systems decreased 11 million 2009 compared 2008 primarily due impact lower aircraft engine volume 38 million partially offset 29 million impact higher defense volumes 2008 textron systems segment profit increased 77 million compared 2007 primarily due acquisition aai contributed 62 million 2008 favorable cost performance 12 million favorable cost performance included 39 million related armored security vehicle program partially offset 2007 reimbursement 28 million impact losses incurred hurricane katrina armored security vehicle program cost performance primarily due improved labor efficiencies lower material costs industrial revenues industrial segment decreased 840 million 2009 compared 2008 primarily due 801 million lower volume reflecting lower demand due economic recession unfavorable foreign exchange impact 51 million largely due fluctuations euro partially offset 8 million higher pricing 2008 industrial segment revenues increased 93 million compared 2007 primarily due favorable foreign exchange impact 95 million higher pricing 34 million favorable impact acquisition 24 million partially offset lower volume 62 million volume declined kautex greenlee jacobsen businesses demand softened largest decline kautex slowing economy significant impact automotive sales second half 2008 resulting numerous factory shutdowns automotive original equipment manufacturers around world ezgo volume increased 41 million largely due increased fleet car sales related successful introduction rxv model industrial segment profit industrial segment profit decreased 40 million 2009 compared 2008 primarily due 265 million impact lower volume partially offset improved cost performance 211 million lower inflation 21 million cost performance improved largely due significant efforts made reduce costs workforce reductions employee furloughs temporary plant shutdowns lower selling administrative costs 2008 industrial segment profit decreased 106 million compared 2007 mainly due inflation excess pricing 61 million impact lower volume mix 54 million partially offset improved cost performance 13 million finance 2009 proceeded plan exit noncaptive commercial finance business finance segment made decision exit business fourth quarter 2008 order address longterm liquidity position light disruption instability capital markets plan effected combination orderly liquidation selected sales expected depending market conditions substantially complete next two three years finance segment also announced restructuring program fourth quarter 2008 primarily related headcount reductions asset impairments resulting exit plan see “special charges” section pages 18 20 regarding charges taken result exit plan reflected segment profit finance revenues finance segment revenues decreased 362 million 2009 compared 2008 primarily due following • 157 million impact higher portfolio losses • 92 million impact lower market interest rates • 70 million lower securitization gains net impairments • 62 million lower average finance receivables 10 billion • 37 million higher suspended earnings nonaccrual finance receivables partially offset • 55 million gains debt extinguishment portfolio losses recognized 2009 include discounts taken sale early termination finance assets including 60 million discounts associated liquidation distribution finance golf mortgage finance receivables 53 million impairment charges related automobile manufacturing equipment investments real estate associated matured leveraged leases 25 million higher impairment charges associated repossessed aircraft 2008 revenues finance segment decreased 152 million compared 2007 primarily due following • 163 million impact lower market interest rates • 20 million lower securitization gains net impairments • lower gain sale leveraged lease investment 16 million partially offset • 24 million benefit variablerate receivable interest rate floors • 21 million impact higher average finance receivables 258 million finance segment profit loss finance segment loss increased 244 million 2009 compared 2008 primarily due 157 million impact higher portfolio losses 70 million lower securitization gains net impairments 37 million higher suspended earnings nonaccrual finance receivables 33 million increase provision loan losses partially offset 55 million gains debt extinguishment 2008 segment profit finance segment decreased 272 million compared 2007 primarily due 201 million increase provision loan losses 51 million impact higher borrowing costs relative market rates 20 million lower securitization gains net impairments 16 million lower gain sale leveraged lease investment partially offset 24 million benefit variablerate receivable interest rate floors increased allowance loan losses significantly 2009 2008 response economic recession declining collateral values lack liquidity available borrowers customers also increased estimate credit losses result decision exit portions finance business fourth quarter 2008 believe negatively impact credit losses duration portfolio 2009 increase primarily due increase rate severity defaults resulting economic recession due declining aircraft values increase partially offset 73 million decrease provision distribution finance portfolio largely due liquidation 68 managed finance receivables 2009 2008 increase provision loan losses primarily result 81 million increase defaults marine recreational vehicles distribution finance portfolios 21 million increase resort finance portfolio 19 million reserve established one account golf mortgage finance portfolio 16 million reserve one account assetbased lending portfolio borrowing costs increased relative target federal funds rate credit market volatility significantly impacted historical relationships market indices increase primarily driven increase spread london interbank offered rate libor target federal funds rate increased borrowing spreads issuances commercial paper comparison 2007 increases partially offset increased receivable pricing result variablerate receivables interest rate floors finance portfolio quality following table reflects information finance segment’s credit performance related finance receivables held investment finance receivables held sale reflected fair value consolidated balance sheets result finance receivables held sale included credit performance statistics nonaccrual finance receivables include impaired finance receivables well accounts homogeneous loan portfolios considered impaired contractually delinquent three months believe percentage nonaccrual finance receivables generally remain high execute liquidation plan current economic conditions liquidation plan also likely result slower pace liquidations nonaccrual finance receivables ratio allowance losses nonaccrual finance receivables held investment decreased primarily result certain nonaccrual timeshare aviation accounts specific reserves either established due sufficient collateral values considerations established percentage outstanding balance based expectation partial recovery reflects best estimate loss based detailed review workout strategy estimates collateral value increase operating assets received satisfaction troubled finance receivables primarily reflects increase number golf courses ownership transferred us borrower 2009 intend operate improve performance properties prior eventual disposition summary finance receivables related allowance losses collateral type follows finance receivables collateralized primarily timeshare notes receivable also maybe collateralized certain real estate assets borrowers increase nonaccrual finance receivables primarily attributable lack liquidity available borrowers timeshare portfolio weaker general economic conditions depressed aircraft values increase timeshare notes receivable includes one 203 million account 120 million collateralized notes receivable 83 million collateralized several resort properties included resort constructioninventory line liquidity capital resources financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated majorityowned subsidiaries operate cessna bell textron systems industrial segments finance group also finance segment consists textron financial corporation tfc subsidiaries securitization trusts consolidated along two finance subsidiaries owned textron inc designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements key information utilized assessing liquidity summarized free cash flow represents nongaap measure see page 29 reconciliation gaap believe existing cash balances coupled continued successful execution exit plan noncaptive portion commercial finance business cash expect generate manufacturing operations sufficient cash meet future needs 2009 proceeded plan exit noncaptive commercial finance business finance segment made decision exit business fourth quarter 2008 order address longterm liquidity position light disruption instability capital markets plan effected combination orderly liquidation selected sales expected depending market conditions substantially complete next two three years reduced managed finance receivables 38 billion 2009 discounted payoffs portfolio sales finance receivable amortization included approximately 450 million finance receivables captive finance business managed finance receivables include owned finance receivables recorded balance sheets finance receivables sold securitizations retained credit risk extent subordinated interest may recorded balance sheets reduction managed finance receivables primarily driven accelerated pace liquidations distribution finance product line distribution finance receivables typically short duration associated sales pace equipment dealer inventory natural liquidation pattern accelerated asset sales discounted payoff programs transfer borrowers revolving credit lines new lenders measure progress exit plan part based percentage managed finance receivable finance asset reductions converted cash 2009 cash conversion ratio 94 expect cash conversion ratio decline duration exit plan due change mix shorter term assets distribution finance assetbased lending product lines longer term assets timeshare golf mortgage structured finance product lines existence higher concentration nonaccrual finance receivables end 2009 exit plan applied remaining 41 billion finance segment’s noncaptive managed finance receivables portfolio 2010 expect total reduction managed finance receivables approximately 16 billion net originations includes noncaptive finance receivables well captive finance receivables connection liquidation managed finance receivables reduced finance group’s offbalance sheet debt portfolio aggregate 38 billion largely due payoff distribution finance golf securitizations debt maturities february 2009 due unavailability term debt difficulty accessing sufficient commercial paper daily basis drew available balance aggregate 30 billion committed bank lines credit amounts borrowed credit facilities due april 2012 portion proceeds used repay outstanding commercial paper facilities historically support commercial paper letters credit issuances end 2008 borrowings outstanding related manufacturing group’s 125 billion facility finance group’s 175 billion facility 2009 capital markets improved able successfully access markets strengthen current future liquidity profile maintain effective shelf registration statement filed securities exchange commission allows us issue unlimited amount public debt securities may 5 2009 issued 600 million 450 convertible senior notes convertible notes registration statement see note 8 consolidated financial statement information convertible notes concurrently offering sale convertible notes also offered sold public registration statement 23805000 shares common stock net proceeds approximately 238 million lengthen maturity profile indebtedness september 14 2009 issued 600 million senior notes registration statement comprised 350 million 620 notes due 2015 250 million 725 notes due 2019 borrowing groups extinguished open market repurchases aggregate 745 million outstanding debt securities prior maturity 2009 resulting gains 54 million also 2009 borrowing groups completed separate cash tender offers 650 million aggregate principal amount five separate series outstanding debt securities maturity dates ranging november 2009 june 2012 completing tender offers extinguished aggregate 587 million outstanding debt securities maturity dates ranging 2009 2012 recognized loss 1 million 2009 also pursued new funding sources transfers existing funding obligations new financing providers july 2009 entered credit agreement exportimport bank united states established 500 million credit facility provide funding finance purchases cessna bell aircraft nonus customers take delivery new aircraft december 2010 second quarter transferred rights financing programs two large manufacturers lawn garden products distribution finance business reduce future originations similarly early april entered threeyear agreement financial service company provides financing third parties portion sales ezgo golf cars credit ratings major rating agencies regularly evaluate borrowing groups ratings debt based number factors including financial strength factors outside control conditions affecting financial services industry generally beginning 2009 credit ratings downgraded rating agencies cited concerns textron financial corporation including execution risks associated plan exit portions commercial finance business need textron inc make capital contributions textron financial corporation well lower expected earnings increase outstanding debt resulting borrowing bank lines credit weak economic conditions liquidity funding constraints february 2 2010 moody’s investors service affirmed ratings borrowing groups changed rating outlook stable negative reflecting improved liquidity textron inc better expected progress ongoing liquidation tfc’s noncaptive assets credit ratings outlooks debtrating agencies date filing follows current credit ratings may adversely affect cost terms upon able obtain financing access capital markets manufacturing group cash flows free cash flow measure generally used investors analysts management gauge company’s ability generate cash operations excess necessary reinvested sustain grow business definition manufacturing free cash flow uses net cash operating activities continuing operations subtracts dividends received finance group capital expenditures adds back capital contributions provided support agreement tfc discussed plus proceeds sale plant property equipment believe manufacturing free cash flow calculation provides relevant measure liquidity useful basis assessing ability fund operations measure financial measure generally accepted accounting principles gaap used conjunction gaap cash measures provided consolidated statement cash flows manufacturing free cash flow measure may comparable similarly titled measures reported companies definitive accounting standard measure calculated reconciliation net cash operating activities continuing operations presented consolidated statement cash flows manufacturing free cash flow provided manufacturing group’s free cash flow improved 62 million 2009 compared 2008 lower capital expenditures 299 million working capital improvements offset lower earnings increase cash paid restructuring activities cash used restructuring activities totaled 132 million 2009 compared 3 million 2008 none 2007 2008 free cash flow decreased 284 million largely due higher investment inventories related increased production levels inventory build bell cessna 168 million increase capital expenditures connection ramp production cash flows continuing operations manufacturing group presented consolidated statement cash flows summarized cash flow operating activities increased 331 million 2009 compared 2008 largely due 562 million lower capital contributions paid finance group net dividends received working capital improvements partially offset lower earnings used 48 million working capital 2009 compared 434 million 2008 largely related significant inventory reductions 2008 cash flow operating activities decreased primarily due 625 million capital contribution made finance group investing cash flows 2009 2008 2007 primarily include capital expenditures 238 million 537 million 369 million respectively decrease 2009 largely due reduction discretionary spending due economic recession addition 2008 2007 paid 109 million 11 billion respectively acquisitions primarily related aai financing activities provided cash 2009 compared 2008 primarily due draw 12 billion bank lines credit portion used repay outstanding commercial paper borrowings net proceeds 442 million issuance convertible notes net hedge 333 million cash issuance common stock common stock warrants 595 million net proceeds issuance senior notes decrease dividends paid increases cash provided partially offset 869 million decrease commercial paper borrowings 2009 compared 867 million increase borrowings 2008 addition made 412 million payments settle advances companyowned officer life insurance policies 2009 2008 received 222 million advances policies repurchased common stock connection executive compensation award since suspended share repurchase activity repurchase program september 2008 boardauthorized share repurchase programs spent 533 million 2008 304 million 2007 share repurchases representing approximately 12 million 6 million shares common stock respectively february 25 2009 announced board directors voted reduce quarterly dividend 002 per share first quarter 2009 effort increase liquidity longterm interest shareholders accordingly annual dividend decreased 008 2009 092 2008 dividend payments shareholders totaled 21 million 284 million 154 million 2009 2008 2007 respectively 2008 timing quarterly dividend payments resulted four payments compared three payments 2007 capital contributions paid dividends received finance group support agreement textron inc tfc textron inc required maintain controlling interest tfc agreement also requires textron inc ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 200 million due goodwill impairment charge 169 million tfc along charges resulting exit plan discussed december 29 2008 textron inc required make cash payment tfc reflected capital contribution maintain compliance fixed charge coverage ratio required support agreement maintain leverage ratio required credit facility cash contributions paid tfc dividends paid tfc textron inc detailed additional cash contribution 75 million made tfc january 12 2010 maintain compliance fixed charge coverage ratio required support agreement due nature contributions classify contributions within cash flows used operating activities manufacturing group consolidated statement cash flows capital contributions support finance group growth ongoing captive finance business classified cash flows financing activities finance group’s net income loss excluded manufacturing group’s cash flows dividends finance group included within cash flows operating activities manufacturing group represent return investment finance group cash flows cash flows continuing operations finance group summarized generated cash investing activities finance group new finance receivable originations declined 37 billion 2009 119 billion 2008 effected exit plan noncaptive business finance receivables repaid proceeds sales securitizations decreased 54 billion 2009 119 billion 2008 cash used investing activities decreased 2007 primarily due decrease finance receivable originations net collections sale proceeds largely related decision exit noncaptive business resulting lower originations finance group used cash financing activities 2009 compared 2008 primarily due repayment debt commercial paper 2009 totaling 45 billion compared 22 billion 2008 finance group’s financing outflows partially offset 17 billion proceeds first quarter 2009 drawdown bank lines credit 2008 proceeds issuance longterm debt totaled 15 billion 2009 2008 manufacturing group agreed lend finance group interest funds pay maturing debt january 2 2010 january 3 2009 outstanding balance due manufacturing group 447 million 133 million respectively finance group received 270 million capital contributions manufacturing group 2009 compared 625 million 2008 enable maintain compliance fixed charge coverage ratio required support agreement addition finance group paid 207 million dividends manufacturing group 2009 compared 2008 cash used financing activities 2008 compared 2007 primarily due increase debt payments partially offset 2008 capital contribution received manufacturing group lower proceeds borrowings related reduction managed receivable growth consolidated cash flows consolidated cash flows continuing operations elimination activity borrowing groups summarized consolidated cash provided operating activities increased primarily due working capital improvements largely related reduction inventory partially offset lower earnings increase cash used connection restructuring program received cash investing activities primarily due finance group’s exit plan resulted lower finance receivable originations 2007 11 billion cash used acquisitions primarily related aai cash used financing activities repaid 42 billion maturing longterm debt including early debt extinguishments compared 19 billion 2008 use partially offset receipt 30 billion drawing lines credit partially offset 16 billion decrease commercial paper borrowings 2009 compared 218 million increase net commercial paper borrowings 2008 also used cash 2008 stock repurchases dividend payments compared 2009 discussed “manufacturing group cash flow” section 2008 received less cash financing activities compared 2007 primarily due 663 million lower proceeds borrowings net principal payments captive financing intercompany transactions finance group finances retail purchases leases new used aircraft equipment manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers securitizations reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidated statements cash flows reclassification elimination adjustments included consolidated statement cash flows summarized 2009 captive finance receivable originations decreased largely due lower aircraft sales addition april 2009 signed threeyear agreement financial services company provides financing third parties portion sales ezgo golf cars expect agreement reduce future finance receivable originations business consolidated discontinued operations cash flows cash flows discontinued operations summarized 2009 cash flows investing activities primarily include approximately 280 million aftertax net proceeds upon sale hr textron partially offset 69 million tax payments related sale fluid power business fourth quarter 2008 received net cash proceeds sale fluid power business approximately 479 million 2007 cash flows investing activities primarily related realization cash tax benefits fastening systems business see note 2 consolidated financial statements details concerning dispositions contractual obligations finance group due nature finance companies believe meaningful include contractual cash receipts expect receive future following table summarizes finance group’s liquidity position including managed finance receivables offbalance sheet funding sources january 2 2010 specified years 1 excludes cash may generated disposal operating lease residual assets addition cash may used pay future income taxes accrued interest liabilities 2 securitized onbalance sheet securitized offbalance sheet debt payments based contractual receipts underlying receivables remitted securitization structure received payments represent contractual obligations finance group provide legal recourse investors purchase interests securitizations beyond credit enhancement inherent retained subordinate interests 3 interest payments receipts reflect current interest rate paid received related debt finance receivables include anticipated changes either market interest rates changes borrower performance could impact interest rate according terms related debt finance receivable contract 4 finance receivable receipts based contractual cash flows reflect reserves uncollectible amounts receipts could differ due sales prepayments chargeoffs factors including inability borrowers repay balance loan contractual maturity date finance receivable receipts held sale portfolio represent contractual balance finance receivable therefore exclude potential negative impact selling portfolio estimated fair value liquidity profile indicator finance group’s ability repay outstanding funding obligations assuming contractual collection finance receivables absent access new sources liquidity origination additional finance receivables addition january 2 2010 finance group 402 million liabilities primarily including accounts payable accrued expenses payable within next 12 months january 2 2010 finance group 350 million unused commitments fund new existing customers revolving lines credit construction loans equipment loans leases commitments generally original duration less three years funding facilities dependent availability eligible collateral compliance customary financial covenants since many agreements used extent committed expire unused total commitment amount necessarily represent future cash requirements also ongoing customer relationships including manufacturers dealers distribution finance product line contractually obligate us provide funding however may choose fund certain relationships facilitate orderly liquidation mitigate credit losses neither potential fundings included contractual obligations table manufacturing group following table summarizes known contractual obligations defined reporting regulations manufacturing group january 2 2010 well estimate timing obligations expected satisfied maintain defined benefit pension plans postretirement benefit plans pensions discussed note 14 consolidated financial statements included table discounted estimated benefit payments expect make related unfunded pension postretirement benefit plans actual benefit payments dependent number factors including mortality assumptions expected retirement age rate compensation increases medical trend rates subject change future years policy funding pension plans make contributions annually consistent applicable laws regulations however future contributions pension plans included table since future cash outflows uncertain expect make contributions funded pension plans approximately 20 million 2010 based current assumptions may change changes market conditions current contribution estimates years 2011 2014 estimated range approximately 200 million 400 million plan provisions place time longterm liabilities included table consist primarily undiscounted amounts consolidated balance sheet january 2 2010 representing obligations deferred compensation arrangements estimated environmental remediation costs payments deferred compensation arrangements estimated based management’s assumptions expected retirement age mortality stock price rates return participant deferrals timing cash flows associated environmental remediation costs largely based historical experience longterm liabilities deferred taxes unrecognized tax benefits product liability reserves excluded table due uncertainty timing payments combined absence historical trends used predictor payments operating leases represent undiscounted obligations noncancelable leases purchase obligations represent undiscounted obligations committed purchase goods services january 2 2010 ultimate liability obligations may reduced based upon termination provisions included certain purchase contracts costs incurred date vendors contracts recourse firm contracts us government normal termination clauses critical accounting estimates prepare consolidated financial statements conformity generally accepted accounting principles must make complex subjective judgments selection application accounting policies accounting policies believe critical portrayal financial condition results operations listed believe policies require difficult subjective complex judgments estimating effect inherent uncertainties section read conjunction note 1 consolidated financial statements includes significant accounting policies allowance losses finance receivables held investment evaluate allowance losses finance receivables held investment based combination factors homogeneous loan pools examine current delinquencies characteristics existing accounts historical loss experience value underlying collateral general economic conditions trends potential impact lack liquidity available borrowers customers result current decision exit noncaptive finance business estimate losses range 075 100 finance receivables held investment depending specific homogeneous loan pool larger balance commercial loans also consider borrowerspecific information industry trends estimated discounted cash flows provision losses finance receivables held investment charged income amounts sufficient maintain allowance losses finance receivables held investment level considered adequate cover losses inherent owned finance receivable held investment portfolio based management’s evaluation analysis portfolio management believes consideration factors assumptions referred result accurate evaluation existing losses portfolio based prior trends experience changes assumptions trends within reasonable historical volatility may material impact allowance losses finance receivables held investment allowance losses finance receivables held investment currently represents 549 total finance receivables held investment last five years net chargeoffs percentage finance receivables held investment ranged 038 182 finance receivables held sale finance receivables classified held sale based determination longer intend hold receivables foreseeable future maturity payoff longer ability hold maturity decision classify certain finance receivables held sale based number factors including limited contractual duration type collateral credit strength borrowers existence continued contractual commitments perceived marketability receivables ongoing basis factors combined overall liquidation strategy determine finance receivables positive intent hold foreseeable future receivables hold sale current strategy based evaluation performance liquidity position changes external factors affecting value andor marketability finance receivables change strategy could result change classification finance receivables result significant influence economic liquidity conditions business plans strategies rapid changes factors utilize determine assets classified held sale currently believe term “foreseeable future” represents time period six nine months also believe unanticipated changes internal external factors affecting financial performance liquidity position value andor marketability finance receivables could result modification assessment determine finance receivables classified held sale sold intent ability hold finance receivables foreseeable future maturity payoff finance receivables reclassified held investment lower cost fair value time conversely determine finance receivables determine longer intend ability hold maturity receivables would designated held sale valuation allowance would established time necessary january 2 2010 classified additional finance receivables held sale valuation allowance would likely required time based fair value estimates completed footnote disclosure requirements see page 68 note 10 consolidated financial statements table included carrying value fair value assets liabilities currently recorded fair value balance sheet finance receivables held sale carried lower cost fair value time transfer held sale classification establish valuation allowance shortfall carrying value net deferred fees costs fair value upon initial classification held sale shortfall recorded charge within special charges addition allowance loan losses previously allocated finance receivables reclassified valuation allowance account netted finance receivables held sale balance sheet valuation allowance initially established adjusted quarterly changes fair value receivables carrying value subsequent adjustments included earnings within segment profit fair value changes occur based market interest rates market liquidity changes credit quality borrower value underlying loan collateral active quoted market prices finance receivables estimate fair value determined based use discounted cash flow models estimate exit price expect receive principal market type loan orderly transaction includes sale pools similar assets sale individual loans models used incorporate estimates rate return financing cost capital structure andor discount rate expectations prospective purchasers combined estimated loan cash flows based credit losses payment rates credit line utilization rates available assumptions related expectations prospective purchasers compared observable market inputs including bids prospective purchasers certain bond market indices loans similar perceived credit quality although utilize prioritize market observable inputs discounted cash flow models inputs rarely derived markets directly comparable loan structures industries collateral types therefore valuations finance receivables held sale involve significant management judgment result differences fair value estimates market participants sale price may ultimately recover longterm contracts make substantial portion sales government customers pursuant longterm contracts require development delivery products multiple years may contain fixedprice purchase options additional products account longterm contracts percentageofcompletion method accounting percentageofcompletion method estimate profit difference total estimated revenues cost contract recognize estimated profit contract term based either costs incurred costtocost method typically used development effort units delivered unitsofdelivery method used production effort appropriate circumstances percentageofcompletion method accounting involves use various estimating techniques project costs completion cases includes estimates recoveries asserted customer changes specifications due size length time nature many contracts estimation total contract costs revenue completion complicated subject many variables relative outcome future events period several years required make numerous assumptions estimates relating items expected engineering requirements complexity design related development costs performance subcontractors availability cost materials labor productivity cost overhead capital costs manufacturing efficiencies achievement contract milestones including product deliveries cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments projected costs recognized earnings determinable anticipated losses contracts recognized full period losses become probable estimable due significance judgment estimation process described likely materially different revenues andor cost sales amounts could recorded used different assumptions underlying circumstances change earnings could reduced material amount resulting charge earnings total estimated contract costs significantly higher expected due changes customer specifications prior contract amendment b total estimated contract costs significantly higher previously estimated due cost overruns inflation c change engineering efforts required development stage contract unable meet contract milestones goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit might impaired goodwill reviewed potential impairment using twostep process step 1 companies required estimate fair value reporting units may done using various methodologies including income method using discounted cash flows estimated fair value exceeds carrying value reporting unit impaired analysis performed otherwise amount impairment must determined step 2 goodwill impairment test step 2 implied fair value goodwill determined assigning fair value reporting unit’s assets liabilities including unrecognized intangible assets reporting unit acquired business combination fair value carrying amount reporting unit goodwill exceeds implied fair value goodwill impairment loss would recognized amount equal excess fair values established primarily using discounted cash flows incorporate assumptions unit’s short longterm revenue growth rates operating margins discount rates represent best estimates current forecasted market conditions current cost structure anticipated net cost reductions implied rate return believe market participant would require investment company similar risks business characteristics reporting unit assessed revenue growth rates operating margins used discounted cash flow analysis based businesses’ strategic plans longrange planning forecasts longterm growth rate use determine terminal value business based assessment minimum expected terminal growth rate well past historical growth broader economic considerations gross domestic product inflation maturity markets serve utilize weightedaverage cost capital impairment analysis makes assumptions capital structure believe market participant would make include risk premium based assessment risks related projected cash flows reporting unit believe approach yields discount rate consistent implied rate return independent investor market participant would require investment company similar risks business characteristics reporting unit assessed discussed note 10 consolidated financial statements annual test fourth quarter 2009 resulted impairment charge 80 million golf turf reporting unit fair value reporting units exceeded carrying values believe reasonable possibility units might fail step 1 impairment test foreseeable future retirement benefits maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases evaluate update assumptions annually determine expected longterm rate return plan assets consider current expected asset allocation well historical expected returns plan asset class lower expected rate return plan assets increase pension expense 2009 assumed expected longterm rate return plan assets used calculating pension expense 858 compared 866 2008 2009 2008 assumed rate return domestic plans represent approximately 88 total pension assets 875 50basispoint decrease longterm rate return 2009 would resulted 22 million increase pension expense domestic plans discount rate enables us state expected future benefit payments present value measurement date reflecting current rate pension liabilities could effectively settled rate line rates highquality fixed income investments available period maturity pension benefits fluctuate longterm interest rates change lower discount rate increases present value benefit obligations increases pension expense 2009 weightedaverage discount rate used calculating pension expense 661 compared 599 2008 domestic plans assumed discount rate 657 2009 compared 60 2008 50basispoint decrease discount rate 2009 would resulted 32 million increase pension expense domestic plans trend healthcare costs difficult estimate important effect postretirement liabilities 2009 medical prescription drug healthcare cost trend rates represent weightedaverage annual projected rate increase per capita cost covered benefits 2009 medical rate 7 assumed decrease 5 2019 remain level 2009 prescription drug rate 10 assumed decrease 5 2019 remain level see note 14 consolidated financial statements impact onepercentagepoint change cost trend rate warranty liabilities provide limited warranty product maintenance programs including parts labor certain products periods ranging one five years significant portion liabilities arises commercial aircraft businesses also may incur costs related product recalls estimate costs may incurred warranty programs record liability amount costs time product revenue recognized factors affect liability include number products sold historical costs per claim contractual recoveries vendors historical anticipated rates warranty claims including production warranty patterns new models initial aircraft model launches typically incur higher warrantyrelated costs production process matures point warranty costs moderate assess adequacy recorded warranty product maintenance liabilities periodically adjust amounts necessary adjustments made accruals claim data actual experience warrant future warranty experience differ materially historical experience may required record additional warranty liabilities could material adverse effect results operations cash flows period additional liabilities required income taxes deferred tax assets liabilities determined based temporary differences financial reporting tax bases assets liabilities applying tax rates expected enacted year expect differences reverse settle based evaluation available evidence recognize future tax benefits net operating loss carryforwards extent believe likely realize benefits periodically assess likelihood able recover deferred tax assets reflect changes estimates valuation allowance corresponding adjustment earnings comprehensive income loss appropriate assessing need valuation allowance look future reversal existing taxable temporary differences taxable income carryback years feasibility tax planning strategies estimated future taxable income amount income taxes pay subject ongoing audits federal state foreign tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental assess income tax positions record tax benefits years subject examination based upon evaluation facts circumstances information available reporting date tax positions likely tax benefit sustained record largest amount tax benefit greater 50 likelihood realized upon settlement taxing authority full knowledge relevant information interest penalties accrued applicable recognize net taxrelated interest penalties continuing operations income tax expense believe likely tax benefit sustained tax benefit recognized however future results may include favorable unfavorable adjustments estimated tax liabilities due closure income tax examinations new regulatory judicial pronouncements relevant events result effective tax rate may fluctuate significantly quarterly annual basis item 7aitem 7 management’s discussion analysis financial condition results operations analysis consolidated operating results provided detailed analysis segments’ operating results provided segment analysis section pages 21 30 revenues increased 962 million 9 2012 compared 2011 increases bell cessna industrial finance segments partially offset reduction textron systems segment net revenue increase included following factors · higher bell revenues 749 million primarily due higher commercial aircraft volume 476 million increase v22 program volume 231 million largely due higher deliveries · higher cessna revenues 121 million primarily due higher preowned aircraft volume 68 million citation jet revenues 57 million reflecting change mix jets sold period · increased industrial segment revenues 115 million primarily due higher volume 171 million primarily reflecting higher market demand fuel systems functional components golf turf care light transportation vehicles product lines partially offset unfavorable foreign exchange impact 80 million primarily related weakening euro · higher finance revenues 112 million described fully segment analysis · lower textron systems revenues 135 million primarily due lower volume across product lines revenues increased 750 million 7 2011 compared 2010 primarily due 8 increase manufacturing revenues increases cessna bell industrial segments partially offset lower revenues textron systems segment net revenue increase included following factors · higher cessna revenues 427 million primarily due higher volume largely due impact higher citation jet volume mix light midsize jets sold period · higher bell revenues 284 million largely due higher volume military programs included deliveries v22 h1 aircraft · increased industrial segment revenues 261 million primarily due higher volume 138 million mostly reflecting higher automotive industry demand favorable foreign exchange impact 77 million largely related strengthening euro · lower revenues finance segment 115 million primarily attributable lower average finance receivable portfolio balance resulting continued liquidation · lower textron systems revenues 107 million primarily due 140 million lower volume uas mission support product lines partially offset higher volume land marine weapons sensors product lines 28 million cost sales selling administrative expense manufacturing cost sales selling administrative expenses together comprise operating expenses changes operating expenses fully discussed segment analysis cost sales percentage manufacturing revenues 833 2012 2011 835 2010 consolidated manufacturing cost sales increased 711 million 8 2012 compared 2011 principally due higher net sales volume cost sales reduced 65 million 2012 foreign exchange fluctuations primarily industrial segment due weakening euro addition cost sales included 37 million charges related new uas feeforservice contracts textron systems offset impact 2011 charges textron systems 60 million related impairment intangible assets severance costs selling administrative expense decreased 15 million 1 1168 million 2012 compared 2011 decrease largely driven lower operating expenses 56 million finance segment primarily associated exit noncaptive business partially offset 27 million charge cessna unfavorable arbitration award described fully segment analysis consolidated manufacturing cost sales increased 703 million 8 2011 compared 2010 principally due higher sales volume cessna bell industrial segments 2011 gross margin increased percentage revenues primarily due favorable product mix improved leverage manufacturing efficiencies higher volume cessna bell improvements partially offset 64 million increase engineering development expenses throughout manufacturing businesses 60 million charges textron systems related impairment certain intangible assets severance costs 2011 selling administrative expense decreased 48 million 4 12 billion compared 2010 primarily due 44 million lower operating expense finance segment largely reflecting progress towards exit noncaptive commercial finance business 23 million decrease corporate expense primarily due impact changes stock price compensation expense decreases partially offset higher bid proposal costs textron systems 2011 interest expense interest expense consolidated statement operations includes interest finance manufacturing borrowing groups interest related intercompany borrowings eliminated interest expense finance segment included within segment profit includes intercompany interest consolidated interest expense decreased 34 million 14 2012 compared 2011 primarily due lower average debt outstanding 2011 consolidated interest expense decreased 24 million 9 compared 2010 primarily due decrease finance group largely due reduction debt liquidations noncaptive portfolio valuation allowance transfer golf mortgage portfolio held sale fourth quarter 2011 determined longer intent hold remaining golf mortgage portfolio investment foreseeable future accordingly transferred 458 million remaining golf mortgage finance receivables net 80 million allowance loan losses held investment classification held sale classification finance receivables recorded fair value time transfer resulting 186 million charge recorded valuation allowance transfer golf mortgage portfolio held sale special charges amounts recorded within special charges 2012 2011 2010 special charges included restructuring charges totaling 99 million including 76 million severance costs charges related global restructuring program initiated fourth quarter 2008 reduce overhead costs improve productivity across company included announcement exit portions commercial finance business restructuring program substantially completed end 2011 2010 special charges also included 91 million noncash pretax charge reclassify foreign exchange loss equity statement operations result substantially liquidating canadian finance entity losses net 2011 losses net included 55 million losses early extinguishment portion convertible notes largely offset 52 million gain collection notes receivable connection disposition fluid power business 2008 discussed note 2 consolidated financial statements income tax expense benefit effective rate 309 2012 281 2011 64 2010 generally differs us federal statutory rate 35 due certain earnings operations lowertax jurisdictions throughout world jurisdictions favorable tax rates significant effective rate impact periods presented include primarily canada belgium china provided us taxes earnings plan reinvest earnings indefinitely outside united states effective rate fluctuate based mix earnings us foreign operations full reconciliation effective rate us federal statutory rate 35 see note 14 consolidated financial statements subsequent year end american taxpayer relief act 2012 enacted january 2 2013 retroactively reinstate extend federal research development tax credit january 1 2012 december 31 2013 result income tax provision first quarter 2013 include discrete tax benefit reduce annual effective tax rate approximately one percent segment analysis operate report financial information following five business segments cessna bell textron systems industrial finance segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses special charges measurement finance segment excludes special charges includes interest income expense along intercompany interest expense discussion comparative results manufacturing group changes revenue segment profit typically expressed commercial business terms volume pricing foreign exchange acquisitions additionally changes segment profit may expressed terms mix inflation cost performance volume changes revenue represent increasesdecreases number units delivered services provided pricing represents changes unit pricing foreign exchange change resulting translating foreigndenominated amounts us dollars exchange rates different prior period acquisitions refer results generated businesses acquired within previous 12 months segment profit mix represents change due composition products andor services sold different profit margins inflation represents higher material wages benefits pension costs cost performance reflects increase decrease research development depreciation selling administrative costs warranty product liability qualityscrap labor efficiency overhead product line profitability startup ramp costreduction initiatives manufacturing inputs approximately 29 revenues derived contracts us government 2012 segments significant contracts us government typically express changes segment profit related government business terms volume changes program performance changes contract mix changes volume discussed net sales typically drive corresponding changes segment profit based profit rate particular contract changes program performance typically relate profit recognition associated revisions total estimated costs completion reflect improved deteriorated operating performance award fee rates changes contract mix refers changes operating margin due change relative volume contracts higher lower fee rates overall average margin rate segment changes cessna revenues operating expenses factors contributing 2012 yearoveryear revenue change provided cessna delivered 181 citation jets 2012 compared 183 jets 2011 however revenues increased 121 million 4 2012 compared 2011 increase revenues primarily due 68 million impact higher preowned aircraft volume 57 million higher citation jet revenues reflecting change mix new jets sold period 2012 portion cessna’s revenues derived aftermarket sales services represented 25 cessna’s revenues compared 24 corresponding period 2011 cessna’s operating expenses increased 99 million 3 2012 compared 2011 primarily due following · 93 million higher direct material costs resulting increased preowned aircraft sales volume change mix jets sold period · 35 million cost inflation largely reflecting 22 million favorable benefit recorded 2011 related lastin firstout lifo method accounting inventories · 27 million charge unfavorable arbitration award described increases partially offset 33 million cost reductions improved factory efficiency 24 million lower engineering development expenses november 16 2012 arbitration proceeding initiated avcorp industries inc cessna arbitral panel entered award cessna amount 27 million dispute related alleged breach supply agreement avcorp made various components cessna aircraft although vigorously contesting award recorded charge 27 million fourth quarter 2012 factors contributing 2011 yearoveryear revenue change provided cessna’s revenues increased 427 million 17 2011 compared 2010 primarily due higher citation jet volume mix light midsize jets sold period 262 million impact higher preowned aircraft volume 76 million reflecting improved market demand higher aftermarket volume 62 million part due continued investment additional service offerings delivered 183 citation jets 2011 compared 179 jets 2010 2011 portion cessna’s revenues derived aftermarket sales services represented 24 cessna’s revenues compared 26 corresponding period 2010 cessna’s operating expenses increased 338 million 13 2011 compared 2010 principally due higher sales volume resulted 271 million increase direct material costs 27 million increase manufacturing overhead operating expenses also increased due higher engineering development expenses 28 million primarily due new product development cost inflation offset 45 million favorable benefit related lastin firstout lifo method accounting inventories 2011 cessna lifo benefit 22 million resulting operational improvements led reduction inventory levels compared expense 23 million 2010 cessna segment profit loss factors contributing 2012 yearoveryear segment profit change provided 2012 cessna’s segment profit increased 22 million 37 compared 2011 primarily due change mix citation jets sold period improved performance included following · 33 million improved factory efficiency · 24 million lower engineering development expenses · 27 million unfavorable arbitration award described · 19 million lower forfeiture income due fewer order cancellations 2012 inflation net pricing included 26 million unfavorable lifo impact largely due 22 million lifo benefit recorded 2011 factors contributing 2011 yearoveryear segment profit change provided cessna’s segment profit increased 89 million 2011 compared 2010 primarily due higher volume 85 million segment profit also impacted following contributing factors included within line · 28 million higher engineering development expenses primarily due new product development · 22 million cost improvements realized period driven factory efficiencies due higher production volume · 16 million lower preowned aircraft writedowns addition cost inflation offset 45 million favorable lifo benefit discussed cessna backlog cessna’s backlog decreased 827 million 44 2012 10 billion 35 2011 mainly attributable deliveries excess new orders canceled citation jet orders bell revenues operating expenses factors contributing 2012 yearoveryear revenue change provided bell’s revenues increased 749 million 21 2012 compared 2011 primarily due higher volume included following factors · 476 million increase commercial volume largely related higher deliveries reflecting investment new products increased focus commercial markets bell delivered 188 commercial aircraft 2012 compared 125 aircraft 2011 · 231 million increase volume related v22 program primarily reflecting higher deliveries based schedule requirements higher revenues related support fielded aircraft bell delivered 39 v22 aircraft 2012 compared 34 deliveries 2011 · 21 million increase military volume resulting higher deliveries services rendered several programs partially offset lower spares aftermarket volume bell delivered 24 h1 aircraft 2012 compared 25 aircraft 2011 bell’s operating expenses increased 631 million 21 2012 compared 2011 primarily due higher sales volume discussed factors contributing 2011 yearoveryear revenue change provided bell’s revenues increased 284 million 9 2011 compared 2010 primarily due higher volume included following factors · 225 million increase volume related v22 program primarily reflecting higher deliveries bell delivered 34 v22 aircraft 2011 compared 26 deliveries 2010 · 74 million increase military volume primarily reflecting higher h1 deliveries 25 h1 aircraft delivered 2011 compared 18 aircraft 2010 increase net 55 million decrease aftermarket volume largely due completion several nonrecurring programs 2010 · 41 million decrease commercial volume primarily reflecting lower deliveries bell delivered 125 commercial aircraft 2011 compared 131 aircraft 2010 bell’s operating expenses increased 190 million 7 2011 compared 2010 primarily due higher sales volume discussed partially offset improved cost performance improved cost performance primarily related military programs due efficiencies realized production rampup described bell segment profit factors contributing 2012 yearoveryear segment profit change provided bell’s segment profit increased 118 million 23 2012 compared 2011 primarily due impact higher volume commercial aircraft military businesses described performance reflects higher net research development expense 2012 26 million due rampup new product development higher selling administrative expenses largely due investment business system improvement upgrade activities partially offset favorable program performance military programs reflecting improved manufacturing efficiencies factors contributing 2011 yearoveryear segment profit change provided bell’s segment profit increased 94 million 22 2011 compared 2010 primarily due improved program performance 109 million partially offset unfavorable mix military commercial aircraft sold period bell’s improved performance included following · 122 million resulting improved manufacturing efficiencies military programs resulting efficiencies realized connection ramp production lines · 30 million unfavorable net change program profit adjustments change largely due 21 million adjustment recognized 2010 related recognition profit h1 v22 programs reimbursement prior year costs bell backlog 2012 2011 bell’s backlog reflected orders excess deliveries resulting 123 million 2 increase 2012 873 million 13 increase 2011 textron systems textron systems revenues operating expenses factors contributing 2012 yearoveryear revenue change provided revenues textron systems decreased 135 million 7 2012 compared 2011 primarily due lower volume reflecting following changes · lower land marine volume 76 million primarily related lower deliveries based current contract requirements · lower mission support product line volume 45 million primarily due completion certain contracts 2011 timing test training revenues · lower weapons sensors volume 13 million primarily due completion several contracts 2011 partially offset higher international sensor fuzed weapon volume 67 million textron systems’ operating expenses decreased 126 million 7 2012 compared 2011 primarily due lower volume operating expenses 2012 included 37 million charges discussed related new uas feeforservice contracts offset impact charges textron systems 60 million 2011 related impairment intangible assets severance costs 2012 awarded two indefinite delivery indefinite quantity idiq contracts separate us government customers uas feeforservice activities third quarter 2012 experienced startup issues began deployment first contracts meuas ii program required us augment training procedures add resources adjust certain estimated costs time took 18 million charge reflecting estimated loss awarded task orders contracts based deployment experience resulted changes certain assumptions also reflected higher subcontractor upfront training program management costs support rampup fourth quarter 2012 experienced propulsion performance issues systems result able perform within previous cost estimates based issues encountered increased estimate costs complete awarded task orders contracts completion orders recorded 19 million unfavorable program profit adjustment fourth quarter 2012 current financial guidance backlog reflect additional task orders meuas ii idiq contract current active orders conclude april 2013 factors contributing 2011 yearoveryear revenue change provided revenues textron systems decreased 107 million 5 2011 compared 2010 primarily due lower volume reflecting following changes · lower uas volume 84 million largely due lower deliveries timing revenues various programs · lower mission support product line volume 56 million largely due completion several test training programs lower intelligence systems volume · higher land marine volume 18 million primarily related armored security vehicles · higher weapons sensors revenues 10 million largely due higher sensor fuzed weapon volume textron systems’ operating expenses decreased 18 million 1 2011 compared 2010 primarily due lower volume partially offset 41 million intangible asset impairment charge 19 million primarily severance costs related workforce reduction taken 2011 textron systems segment profit factors contributing 2012 yearoveryear segment profit change provided segment profit textron systems decreased 9 million 6 2012 compared 2011 reflecting impact lower volume described deliveries lower margin contracts current period favorable performance reflects charge 2011 19 million primarily severance costs related workforce reductions 9 million lower amortization expense intangible assets 8 million lower net research development costs partially offset 37 million charges related uas feeforservice contracts described factors contributing 2011 yearoveryear segment profit change provided segment profit textron systems decreased 89 million 39 2011 compared 2010 primarily due impact lower volume described mix along 41 million intangible asset impairment charge approximately 19 million severance costs related workforce reduction included line textron systems backlog 2012 textron systems backlog increased 16 billion 118 largely due additional orders uas land marine product lines including canadian tapv contract 693 million received second quarter 2012 2011 textron systems backlog decreased 261 million reflecting deliveries excess new orders related various military programs industrial revenues operating expenses factors contributing 2012 yearoveryear revenue change provided industrial segment revenues increased 115 million 4 2012 compared 2011 higher volume resulted 93 million increase fuel systems functional components product line reflecting higher automotive industry demand north america 78 million increase industrial product lines largely related higher market demand golf turf care light transportation vehicles product line unfavorable foreign exchange impact mostly related weakening euro primarily impacted fuel systems functional components product line operating expenses industrial segment increased 102 million 4 2012 compared 2011 largely due 130 million higher direct material costs support higher sales volume 2012 operating expenses also impacted cost inflation 44 million primarily due higher material overhead costs partially offset lower costs due favorable foreign exchange impact 70 million resulting weakening euro factors contributing 2011 yearoveryear revenue change provided industrial segment revenues increased 261 million 10 2011 2010 volume increased mix improved largely due 117 million increase fuel systems functional components product line reflecting higher automotive industry demand 21 million industrial product lines largely related powered tools testing measurement equipment product line reflecting higher sales north america europe favorable foreign exchange impact primarily related strengthening euro mostly impacted fuel systems functional components product line higher industrial revenues 78 million included 27 million impact acquisitions improved pricing 20 million addition higher volume operating expenses industrial segment increased 221 million 9 2011 compared 2010 primarily due 115 million increase direct material costs due higher sales volume 68 million impact foreign exchange related strengthening euro 40 million inflation direct materials related various commodity material components throughout segment industrial segment profit factors contributing 2012 yearoveryear segment profit change provided segment profit industrial segment increased 13 million 6 2012 compared 2011 primarily due impact higher volume described partially offset cost inflation exceeded related price increases factors contributing 2011 yearoveryear segment profit change provided industrial segment profit increased 40 million 25 2011 2010 primarily due 34 million impact improved performance 31 million impact higher volume described partially offset inflation net pricing 35 million performance favorable period due continued cost reduction activities improved manufacturing leverage resulting higher volume inflation net pricing primarily due higher direct material costs commodity material components exceeded related price increases principally fuel systems functional components product line finance plan exit noncaptive commercial finance business finance segment effected combination orderly liquidation selected sales expect liquidate majority remaining 370 million finance receivables noncaptive portfolio next two years finance revenues finance segment revenues increased 112 million 2012 compared 2011 primarily attributable following factors · 90 million increase related valuation golf mortgage finance receivables held sale 2012 76 million favorable valuation adjustments compared unfavorable valuation adjustments 14 million 2011 · 42 million lower portfolio losses net gains primarily associated structured capital timeshare portfolios · 25 million increase due resolution one significant timeshare account returned accrual status subsequently paid third quarter 2012 · increases partially offset 61 million decrease attributable lower average finance receivables 12 billion finance segment revenues decreased 115 million 2011 compared 2010 primarily attributable impact 18 billion lower average finance receivable balance finance segment profit loss finance segment profit increased 397 million 2012 compared 2011 primarily due changes valuation adjustments lower portfolio losses net gains resolution one significant timeshare account discussed well lower administrative expense 56 million primarily associated exit noncaptive business addition recorded 186 million valuation allowance transfer golf mortgage portfolio held investment held sale classification fourth quarter 2011 increases partially offset 27 million decrease net interest margin attributable lower average finance receivables finance segment loss increased 96 million 2011 compared 2010 primarily due 186 million valuation allowance recorded transfer remaining golf mortgage portfolio held investment held sale classification fourth quarter 2011 61 million reduction interest margin resulting lower average finance receivable balance increases partially offset 131 million lower provision loan losses primarily result decline new troubled accounts noncaptive portfolio 2011 36 million reversal allowance losses related one significant account addition administrative expense declined 44 million primarily due lower compensation expense associated workforce reduction cost reductions related exit noncaptive business finance portfolio quality following table reflects information finance segment’s credit performance related finance receivables held investment finance receivables held sale reflected lower cost fair value consolidated balance sheets included credit performance statistics finance receivables held sale noncaptive portfolio totaled 140 million end 2012 compared 418 million end 2011 nonaccrual finance receivables decreased 178 million 55 2011 primarily due reductions 129 million timeshare portfolio 38 million captive portfolio decrease timeshare portfolio primarily due liquidation one significant account captive portfolio decreased mostly due repossession collateral cash collections partially offset new accounts identified nonaccrual 2012 liquidity capital resources financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated majorityowned subsidiaries operate cessna bell textron systems industrial segments finance group also finance segment consists tfc consolidated subsidiaries three finance subsidiaries owned textron inc designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements key information utilized assessing liquidity summarized believe calculations debt capital net debt capital useful measures provide summary indication level debt financing ie leverage place support capital structure well provide indication capacity add leverage believe existing cash equivalents along cash expect generate manufacturing operations sufficient cash meet future needs textron senior unsecured revolving credit facility expires march 2015 aggregate principal amount 10 billion 200 million available issuance letters credit december 29 2012 amounts borrowed facility 37 million letters credits issued also maintain effective shelf registration statement filed securities exchange commission allows us issue unlimited amount public debt securities december 29 2012 principal amount convertible notes outstanding 215 million terms indenture governs notes currently convertible holder’s option april 29 2013 second trading day preceding may 1 2013 maturity date may deliver shares common stock cash combination cash shares common stock satisfaction obligations upon conversion convertible notes intend settle face value convertible notes cash manufacturing group cash flows cash flows continuing operations manufacturing group presented consolidated statement cash flows summarized generated 958 million cash operating activities 2012 11 billion manufacturing group segment profit 534 million manufacturing group net income 26 increase cash flows operating activities 2011 largely due lower cash contributions made pension plans 2012 within working capital 117 million reduction cash resulting increase preowned inventory cessna segment primarily due higher tradein activities largely offset reduction net taxes paid made pension contributions 405 million 642 million 417 million 2012 2011 2010 respectively cash flows operating activities increased 2011 compared 2010 largely due higher earnings manufacturing group partially offset higher cash pension contributions investing cash flows 2012 2011 2010 primarily included capital expenditures 480 million 423 million 270 million respectively support new product development cost improvement strategies generated cash financing activities 2012 largely due receipt 490 million finance group payment intergroup borrowing partially offset share repurchases fourth quarter 2012 189 million payments outstanding debt 2011 financing activities primarily consisted 580 million payments related purchase cancellation convertible notes 175 million intergroup financing finance group partially offset 496 million proceeds issuance notes 2010 repaid 12 billion bank credit lines share repurchases fourth quarter 2012 2007 share repurchase authorization repurchased 111 million shares common stock total cost 272 million fully utilized available repurchase authorization january 22 2013 board directors approved new authorization program 25 million shares intend purchase shares common stock offset impact dilution sharebased compensation plans opportunistic capital management purposes dividends dividend payments shareholders totaled 17 million 22 million 22 million 2012 2011 2010 respectively capital contributions paid dividends received finance group support agreement textron inc tfc textron inc required maintain controlling interest tfc agreement also requires textron inc ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 200 million cash contributions paid tfc maintain compliance support agreement dividends paid tfc textron inc detailed due nature contributions classify contributions within cash flows used operating activities manufacturing group consolidated statement cash flows capital contributions support finance group growth ongoing captive finance business classified cash flows financing activities finance group’s net income loss excluded manufacturing group’s cash flows dividends finance group included within cash flows operating activities manufacturing group represent return investment finance group cash flows 2012 liquidated 821 million finance group’s finance receivables net originations finance receivable reductions occurred noncaptive captive finance portfolios primarily driven noncaptive portfolio connection exit plan including 241 million 218 million golf mortgage timeshare product lines respectively depending market conditions expect liquidate majority remaining 370 million finance receivables noncaptive portfolio next two years cash flows continuing operations finance group summarized cash flows operating activities decreased 2012 primarily due changes taxes paidreceived partially offset higher earnings net tax paymentsrefunds 43 million 65 million 101 million 2012 2011 2010 respectively net tax payments 2012 2010 included settlements related irs’s challenge tax deductions claimed prior years certain leveraged lease transactions cash receipts collection finance receivables continued outpace finance receivable originations resulted net cash inflow investing activities past three years finance receivables repaid proceeds sales totaled 11 billion 2012 18 billion 2011 30 billion 2010 cash outflows originations declined 331 million 2012 471 million 2011 866 million 2010 decreases largely driven wind noncaptive business cash used financing activities included principal payments longterm debt 04 billion 08 billion 21 billion 2012 2011 2010 respectively cash outflows partially offset proceeds issuance long term debt 106 million 430 million 231 million respectively 2012 finance group also made cash payments totaling 493 million manufacturing group related intergroup borrowings 2011 2010 finance group paid 14 billion 03 billion respectively outstanding balance bank line credit consolidated cash flows consolidated cash flows continuing operations elimination activity borrowing groups summarized cash flows operating activities decreased 2012 compared 2011 higher earnings offset changes working capital included lower net cash receipts captive financing activities 140 million increase preowned inventory cessna segment largely due higher tradein activities resulting cash reduction 117 million use cash working capital requirements partially offset 237 million lower cash pension contributions made 2012 cash flow operating activities increased 2011 compared 2010 primarily due higher earnings manufacturing group partially offset higher cash pension contributions made 2011 addition cash payments related restructuring program substantially completed end 2010 decreased 44 million 2011 72 million 2010 cash receipts collection finance receivables continued outpace finance receivable originations resulted net cash inflow investing activities past three years finance receivables repaid proceeds sales totaled 07 billion 2012 12 billion 2011 22 billion 2010 cash outflows originations declined 22 million 2012 187 million 2011 450 million 2010 decreases largely due ongoing exit noncaptive business investing activities also included capital expenditures 480 million 423 million 270 million 2012 2011 2010 respectively support new product development cost improvement strategies cash used financing activities included principal payments longterm debt 06 billion 08 billion 22 billion 2012 2011 2010 respectively 2011 2010 financing activities also included repayments 14 billion 15 billion respectively outstanding balance bank credit lines cash used financing activities also included 272 million share repurchases 2012 580 million payments related purchase convertible notes 2011 cash outflows partially offset proceeds issuance long term debt 106 million 926 million 231 million respectively captive financing intercompany transactions finance group finances retail purchases leases new used aircraft equipment manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers sale receivables reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidated statements cash flows reclassification elimination adjustments included consolidated statement cash flows summarized contractual obligations manufacturing group following table summarizes known contractual obligations defined reporting regulations manufacturing group december 29 2012 1 maintain defined benefit pension plans postretirement benefit plans pensions discussed note 13 consolidated financial statements included table discounted estimated benefit payments expect make related unfunded pension postretirement benefit plans actual benefit payments dependent number factors including mortality assumptions expected retirement age rate compensation increases medical trend rates subject change future years policy funding pension plans make contributions annually consistent applicable laws regulations however future contributions pension plans included table 2013 expect make contributions funded pension plans approximately 160 million approximately 22 million retirement account plan based current assumptions may change changes market conditions current contribution estimates years 2014 2017 estimated range approximately 100 million 200 million plan provisions place time 2 longterm liabilities included table consist primarily undiscounted amounts consolidated balance sheet december 29 2012 representing obligations deferred compensation arrangements estimated environmental remediation costs payments deferred compensation arrangements estimated based management’s assumptions expected retirement age mortality stock price rates return participant deferrals timing cash flows associated environmental remediation costs largely based historical experience longterm liabilities deferred taxes unrecognized tax benefits product liability litigation reserves excluded table due uncertainty timing payments combined absence historical trends used predictor payments 3 operating leases represent undiscounted obligations noncancelable leases 4 purchase obligations include undiscounted amounts committed legally enforceable contracts purchase orders goods services defined terms price quantity delivery dates approximately 40 purchase obligations disclose represent purchase orders issued goods services delivered firm contracts us government full recourse customary contract termination clauses finance group following table summarizes known contractual obligations defined reporting regulations finance group december 29 2012 1 securitized debt payments represent contractual obligations finance group provide legal recourse investors purchase interests securitizations beyond credit enhancement inherent retained subordinate interests 2 interest payments reflect current interest rate paid related debt include anticipated changes market interest rates could impact interest rate according terms related debt december 29 2012 finance group also 75 million liabilities primarily accounts payable accrued expenses payable within next 12 months critical accounting estimates prepare consolidated financial statements conformity generally accepted accounting principles must make complex subjective judgments selection application accounting policies accounting policies believe critical portrayal financial condition results operations listed believe policies require difficult subjective complex judgments estimating effect inherent uncertainties section read conjunction note 1 consolidated financial statements includes significant accounting policies longterm contracts make substantial portion sales government customers pursuant longterm contracts require development delivery products multiple years may contain fixedprice purchase options additional products account longterm contracts percentageofcompletion method accounting method estimate profit difference total estimated revenues cost contract percentageofcompletion method accounting involves use various estimating techniques project costs completion cases includes estimates recoveries asserted customer changes specifications due size length time nature many contracts estimation total contract costs revenues completion complicated subject many variables relative outcome future events period several years required make numerous assumptions estimates relating items expected engineering requirements complexity design related development costs product performance subcontractors availability cost materials labor productivity cost overhead capital costs manufacturing efficiencies achievement contract milestones including product deliveries technical requirements schedule cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments projected costs recognized earnings determinable anticipated losses contracts recognized full period losses become probable estimable due significance judgment estimation process described likely materially different revenues andor cost sales amounts could recorded used different assumptions underlying circumstances change earnings could reduced material amount resulting charge earnings total estimated contract costs significantly higher expected due changes customer specifications prior contract amendment b total estimated contract costs significantly higher previously estimated due cost overruns inflation c change engineering efforts required development stage contract unable meet contract milestones outset contract estimate initial profit booking rate initial profit booking rate contract considers risks surrounding ability achieve technical requirements example newlydeveloped product versus mature product schedule example number type milestone events costs contract requirements initial estimated costs completion profit booking rates may increase performance contract successfully retire risks surrounding technical schedule costs aspects contract likewise profit booking rate may decrease successful retiring risks result estimated costs completion increase estimates subject change performance contract therefore may affect profit booking rate adjustments required changes prior estimates recognized using cumulative catchup method impact change inceptiontodate recorded current period following table sets forth aggregate gross amount program profit adjustments included within segment profit three years ended december 29 2012 goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit might impaired reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics bell reporting unit performed qualitative assessment based economic industry companyspecific factors initial step annual goodwill impairment test based results qualitative assessment concluded likely unit’s fair value greater carrying amount next step impairment analysis required reporting units performed next step impairment analysis required us calculate fair value reporting unit fair values established primarily using discounted cash flows incorporated assumptions short longterm revenue growth rates operating margins discount rates represent best estimates current forecasted market conditions cost structure anticipated net cost reductions implied rate return believe market participant would require investment business similar risks characteristics reporting unit assessed revenue growth rates operating margins used discounted cash flow analysis based strategic plans longrange planning forecasts plans include potential impact sequestration budget cuts may businesses serve us government longterm growth rate use determine terminal value business based assessment minimum expected terminal growth rate well past historical growth broader economic considerations gross domestic product inflation maturity markets serve utilize weightedaverage cost capital impairment analysis makes assumptions capital structure believe market participant would make include risk premium based assessment risks related projected cash flows reporting unit believe approach yields discount rate consistent implied rate return independent investor market participant would require investment company similar risks business characteristics reporting unit assessed reporting unit’s estimated fair value exceeds carrying value reporting unit impaired analysis performed otherwise amount impairment must determined comparing carrying amount reporting unit’s goodwill implied fair value goodwill implied fair value goodwill determined assigning fair value reporting unit’s assets liabilities including unrecognized intangible assets reporting unit acquired business combination fair value carrying amount reporting unit goodwill exceeds implied fair value goodwill impairment loss would recognized amount equal excess based annual impairment reviews fair value reporting units exceeded carrying values believe reasonable possibility units might fail initial step impairment test foreseeable future retirement benefits maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases evaluate update assumptions annually determine weightedaverage expected longterm rate return plan assets consider current expected asset allocation well historical expected returns plan asset class lower expected rate return plan assets increase pension expense 2012 assumed expected longterm rate return plan assets used calculating pension expense 758 compared 784 2011 2012 2011 assumed rate return domestic plans represent approximately 90 total pension assets 775 800 respectively 50basispoint decrease longterm rate return 2012 would increased pension expense domestic plans approximately 24 million discount rate enables us state expected future benefit payments present value measurement date reflecting current rate pension liabilities could effectively settled rate line rates highquality fixed income investments available period maturity pension benefits fluctuate longterm interest rates change lower discount rate increases present value benefit obligations increases pension expense 2012 weightedaverage discount rate used calculating pension expense 494 compared 571 2011 domestic plans assumed discount rate 500 2012 compared 575 2011 50basispoint decrease discount rate 2012 would increased pension expense domestic plans approximately 27 million trend healthcare costs difficult estimate important effect postretirement liabilities 2012 medical prescription drug healthcare cost trend rates represent weightedaverage annual projected rate increase per capita cost covered benefits 2012 medical rate 840 assumed decrease 500 2021 remain level 2012 prescription drug rate 840 assumed decrease 500 2021 remain level see note 13 consolidated financial statements impact onepercentagepoint change cost trend rate warranty liabilities provide limited warranty product maintenance programs including parts labor certain products periods ranging one five years significant portion liabilities arises commercial aircraft businesses also may incur costs related product recalls estimate costs may incurred warranty programs record liability amount costs time product revenue recognized factors affect liability include number products sold historical costs per claim contractual recoveries vendors historical anticipated rates warranty claims including production warranty patterns new models initial aircraft model launches typically incur higher warrantyrelated costs production process matures point warranty costs moderate assess adequacy recorded warranty product maintenance liabilities periodically adjust amounts necessary adjustments made accruals claim data actual experience warrant future warranty experience differ materially historical experience may required record additional warranty liabilities could material adverse effect results operations cash flows period additional liabilities required allowance losses finance receivables held investment finance receivables held investment generally recorded amount outstanding principal less allowance losses maintain allowance losses finance receivables level considered adequate cover inherent losses portfolio based management’s evaluation larger balance accounts specifically identified impaired including large accounts homogeneous portfolios reserve established based comparing carrying value either expected future cash flows discounted finance receivable’s effective interest rate b fair value underlying collateral finance receivable collateral dependent expected future cash flows consider collateral value financial performance liquidity borrower existence financial strength guarantors estimated recovery costs including legal expenses costs associated repossessionforeclosure eventual disposal collateral range potential outcomes perform multiple discounted cash flow analyses weight outcomes based relative likelihood occurrence evaluation portfolio inherently subjective requires estimates including amount timing future cash flows expected received impaired finance receivables underlying collateral may differ actual results analysis specific individual account critical factors included analysis captive product line include industry valuation guides age physical condition collateral payment history existence financial strength guarantors also establish allowance losses cover probable specifically unknown losses existing portfolio captive product line allowance established percentage nonrecourse finance receivables identified requiring specific reserves percentage based combination factors including historical loss experience current delinquency default trends collateral values general economic specific industry trends income taxes deferred income tax balances reflect effects temporary differences financial reporting carrying amounts assets liabilities tax bases well net operating losses tax credit carryforwards stated enacted tax rates effect year taxes expected paid recovered deferred income tax assets represent amounts available reduce income taxes payable taxable income future years evaluate recoverability future tax deductions credits assessing adequacy future expected taxable income sources including future reversal existing taxable temporary differences taxable income carryback years available tax planning strategies estimated future taxable income recognize net taxrelated interest penalties continuing operations income tax expense amount income taxes pay subject ongoing audits federal state foreign tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental assess income tax positions record tax benefits years subject examination based upon evaluation facts circumstances information available reporting date tax positions likely tax benefit sustained record largest amount tax benefit greater 50 likelihood realized upon settlement taxing authority full knowledge relevant information interest penalties accrued applicable recognize net taxrelated interest penalties continuing operations income tax expense believe likely tax benefit sustained tax benefit recognized however future results may include favorable unfavorable adjustments estimated tax liabilities due settlement income tax examinations new regulatory judicial pronouncements relevant events result effective tax rate may fluctuate significantly quarterly annual basis item 7aitem 7 management’s discussion analysis financial condition results operations overview consolidated results operations textron 2013 important year significant new product introductions strategic acquisitions investments future businesses 2013 accomplished following · invested 651 million research development costs 12 increase prior year demonstrating commitment expanding current product lines across businesses result brought new products market many businesses including certification two new models cessna aircraft citation m2 sovereign jet · acquired six companies including two flight simulation aircraft training product companies textron systems segment two companies augment greenlee business industrial segment two service centers cessna aggregate cash payment 196 million · made 204 million contributions pension plans ended year unfunded pension plan liability 199 million compared 13 billion end 2012 · reduced debttocapital net cash ratio 15 24 prior year part due maturity convertible senior notes settlement related call option warrants analysis consolidated operating results set forth detailed analysis segments’ operating results provided segment analysis section pages 20 28 revenues decreased 133 million 1 2013 compared 2012 revenue decreases cessna finance textron systems segments partially offset higher revenues bell industrial segments net revenue decrease included following factors · lower cessna revenues 327 million primarily due lower citation jet volume 384 million citationair volume 114 million partially offset higher aftermarket volume 65 million higher preowned aircraft volume 53 million · lower finance revenues 83 million primarily attributable unfavorable impact 46 million lower average finance receivables decrease 25 million revenues related resolution timeshare account 2012 · lower textron systems revenues 72 million largely due lower volume 51 million marine land product line lower volume 28 million uas product line · higher bell revenues 237 million largely due higher volume 163 million military programs primarily reflecting higher v22 deliveries aftermarket volume 74 million higher commercial revenues largely due higher aircraft volume · higher industrial segment revenues 112 million primarily due higher volume 58 million impact acquisitions 46 million revenues increased 962 million 9 2012 compared 2011 increases bell cessna industrial finance segments partially offset reduction textron systems segment net revenue increase included following factors · higher bell revenues 749 million primarily due higher commercial aircraft volume 476 million increase v22 program volume 231 million largely due higher deliveries · higher cessna revenues 121 million primarily due higher preowned aircraft volume 68 million citation jet revenues 57 million reflecting change mix jets sold period · increased industrial segment revenues 115 million primarily due higher volume 171 million primarily reflecting higher market demand fuel systems functional components golf turf care light transportation vehicles product lines partially offset unfavorable foreign exchange impact 80 million primarily related weakening euro · higher finance revenues 112 million described fully segment analysis · lower textron systems revenues 135 million primarily due lower volume across product lines cost sales selling administrative expense manufacturing cost sales selling administrative expenses together comprise operating expenses changes operating expenses fully discussed segment analysis cost sales percentage manufacturing revenues 846 2013 833 2012 2011 consolidated manufacturing cost sales increased 112 million 1 2013 compared 2012 primarily due higher sales volume bell impact businesses acquired 2013 partially offset lower sales cessna textron systems 2013 gross margin percentage manufacturing revenues decreased 130 basis points primarily due unfavorable performance bell largely due manufacturing inefficiencies associated labor disruptions resulting negotiations bargained employees implementation new enterprise resource planning system first quarter 2013 well lower citation jet citiationair volume cessna selling administrative expenses decreased 39 million 3 2013 compared 2012 largely due reduction administrative expenses 26 million lower provision loan losses 20 million finance segment primarily associated noncaptive business selling administrative expense also impacted 28 million severance costs incurred 2013 cessna largely offset 27 million charge unfavorable arbitration award incurred 2012 cessna 2012 consolidated manufacturing cost sales increased 711 million 8 compared 2011 principally due higher net sales volume cost sales reduced 65 million 2012 foreign exchange fluctuations primarily industrial segment due weakening euro addition cost sales included 37 million charges related new uas feeforservice contracts textron systems offset impact 2011 charges textron systems 60 million related impairment intangible assets severance costs selling administrative expense decreased 30 million 3 2012 compared 2011 decrease largely driven lower operating expenses 56 million finance segment primarily associated exit noncaptive business partially offset 27 million charge cessna unfavorable arbitration award described fully segment analysis interest expense interest expense consolidated statement operations includes interest finance manufacturing borrowing groups interest related intercompany borrowings eliminated interest expense finance segment included within segment profit includes intercompany interest consolidated interest expense decreased 39 million 18 2013 compared 2012 34 million 14 2012 compared 2011 primarily due lower average debt outstanding valuation allowance transfer golf mortgage portfolio held sale fourth quarter 2011 determined longer intent hold remaining golf mortgage portfolio investment foreseeable future accordingly transferred 458 million remaining golf mortgage finance receivables net 80 million allowance loan losses held investment classification held sale classification finance receivables recorded fair value time transfer resulting 186 million charge recorded valuation allowance transfer golf mortgage portfolio held sale losses net 2011 losses net included 55 million losses early extinguishment portion convertible notes largely offset 52 million gain collection notes receivable connection disposition fluid power business 2008 income tax expense effective tax rate 261 2013 309 2012 281 2011 generally differs us federal statutory tax rate 35 due certain earnings operations lowertax jurisdictions throughout world well research credits jurisdictions favorable tax rates significant effective tax rate impact periods presented include primarily canada germany belgium china provided us taxes earnings plan reinvest earnings indefinitely outside us effective tax rate fluctuate based mix earnings us nonus operations addition american taxpayer relief act 2012 enacted january 2 2013 retroactively reinstate extend federal research development tax credit january 1 2012 december 31 2013 result income tax provision 2013 includes tax benefit reduced annual effective tax rate approximately four percent estimate full year annual effective tax rate 2014 approximately 315 full reconciliation effective tax rate us federal statutory tax rate 35 see note 12 consolidated financial statements segment analysis operate report financial information following five business segments cessna bell textron systems industrial finance segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses measurement finance segment includes interest income expense along intercompany interest expense discussion comparative results manufacturing group changes revenue segment profit typically expressed commercial business terms volume pricing foreign exchange acquisitions additionally changes segment profit may expressed terms mix inflation cost performance volume changes revenue represent increasesdecreases number units delivered services provided pricing represents changes unit pricing foreign exchange change resulting translating foreigndenominated amounts us dollars exchange rates different prior period acquisitions refer results generated businesses acquired within previous 12 months segment profit mix represents change due composition products andor services sold different profit margins inflation represents higher material wages benefits pension costs cost performance reflects increase decrease research development depreciation selling administrative costs warranty product liability qualityscrap labor efficiency overhead product line profitability startup ramp costreduction initiatives manufacturing inputs approximately 30 2013 revenues derived contracts us government segments significant contracts us government typically express changes segment profit related government business terms volume changes program performance changes contract mix changes volume discussed net sales typically drive corresponding changes segment profit based profit rate particular contract changes program performance typically relate profit recognition associated revisions total estimated costs completion reflect improved deteriorated operating performance award fee rates changes contract mix refers changes operating margin due change relative volume contracts higher lower fee rates overall average margin rate segment changes cessna revenues operating expenses factors contributing 2013 yearoveryear revenue change provided 2013 cessna’s revenues decreased 327 million 11 compared 2012 primarily due lower citation jet volume 384 million lower citationair volume 114 million largely related winddown fractional share business decreases partially offset higher aftermarket volume 65 million largely due increased service demand higher preowned aircraft volume 53 million delivered 139 citation jets 2013 compared 181 jets 2012 2013 portion cessna’s revenues derived aftermarket sales services increased 33 cessna’s revenues compared 25 corresponding period 2012 due higher aftermarket volume impact lower citation jet revenues cessna’s operating expenses decreased 197 million 7 2013 compared 2012 primarily due lower sales volume discussed volumerelated decrease operating expenses partially offset 37 million operating costs incurred service centers acquired beginning 2013 33 million inflation largely due higher pension expense 17 million operating expenses 2013 impacted 28 million severance costs incurred first half year connection voluntary separation program offered qualifying salaried employees reduction certain direct production positions due adjustment production schedule operating expenses 2012 included 27 million charge unfavorable arbitration award recorded fourth quarter factors contributing 2012 yearoveryear revenue change provided cessna delivered 181 citation jets 2012 compared 183 jets 2011 however revenues increased 121 million 4 2012 compared 2011 increase revenues primarily due 68 million impact higher preowned aircraft volume 57 million higher citation jet revenues reflecting change mix new jets sold period 2012 portion cessna’s revenues derived aftermarket sales services represented 25 cessna’s revenues compared 24 corresponding period 2011 cessna’s operating expenses increased 99 million 3 2012 compared 2011 primarily due following · 93 million higher direct material costs resulting increased preowned aircraft sales volume change mix jets sold period · 35 million cost inflation largely reflecting 22 million favorable benefit recorded 2011 related lastin firstout lifo method accounting inventories · 27 million charge recorded fourth quarter 2012 due unfavorable award arbitration panel entered cessna result alleged breach supply agreement increases partially offset 33 million cost reductions improved factory efficiency 24 million lower engineering development expenses cessna segment loss profit factors contributing 2013 yearoveryear segment loss profit change provided cessna’s segment profit decreased 130 million 2013 compared 2012 primarily due 99 million impact lower sales volume described 21 million inflation net pricing largely due higher pension expense 17 million segment profit also impacted 28 million severance costs incurred 2013 largely offset 27 million charge unfavorable arbitration award incurred 2012 described factors contributing 2012 yearoveryear segment profit change provided 2012 cessna’s segment profit increased 22 million 37 compared 2011 primarily due change mix citation jets sold period improved performance included following · 33 million improved factory efficiency · 24 million lower engineering development expenses · 27 million unfavorable arbitration award described · 19 million lower forfeiture income due fewer order cancellations 2012 inflation net pricing included 26 million unfavorable lifo impact largely due 22 million lifo benefit recorded 2011 cessna backlog cessna’s backlog decreased 44 million 4 2013 827 million 44 2012 decrease backlog 2012 mainly attributable deliveries excess new orders canceled citation jet orders bell’s major us government programs time v22 tiltrotor aircraft h1 helicopter platforms production stage represent significant portion bell’s revenues us government second quarter 2013 signed second multiyear v22 contract production delivery 99 units beginning late 2014 options 23 additional aircraft bell revenues operating expenses factors contributing 2013 yearoveryear revenue change provided bell’s revenues increased 237 million 6 2013 compared 2012 due following factors · 144 million increase v22 program volume largely due higher aircraft deliveries delivered 41 v22 aircraft 2013 compared 39 aircraft 2012 addition military aftermarket volume higher 35 million reflecting increased support fielded aircraft · 74 million increase commercial revenues largely due higher aircraft volume delivered 213 aircraft 2013 compared 188 aircraft 2012 increase partially offset lower commercial aftermarket revenue 50 million largely due lower volume part resulted conversion new enterprise resource planning system first quarter 2013 · 19 million increase military volume reflecting higher h1 deliveries delivered 25 h1 aircraft 2013 compared 24 h1 aircraft 2012 bell’s operating expenses increased 303 million 8 2013 respectively compared 2012 largely due higher volume described 68 million unfavorable performance included 27 million lower favorable profit adjustments longterm contracts unfavorable performance largely due manufacturing inefficiencies associated labor disruptions resulting negotiations bargained employees implementation new enterprise resource planning system first quarter 2013 october 13 2013 bell reached new fiveyear collective bargaining agreement united automobile aerospace agricultural implement workers america uaw local 218 represents employees impact disruptions expected continue depress bell’s margins 2014 costs inventories manufactured 2013 realized products delivered factors contributing 2012 yearoveryear revenue change provided bell’s revenues increased 749 million 21 2012 compared 2011 primarily due higher volume included following factors · 476 million increase commercial volume largely related higher deliveries reflecting investment new products increased focus commercial markets bell delivered 188 commercial aircraft 2012 compared 125 aircraft 2011 · 231 million increase volume related v22 program primarily reflecting higher deliveries based schedule requirements higher revenues related support fielded aircraft bell delivered 39 v22 aircraft 2012 compared 34 deliveries 2011 · 21 million increase military volume resulting higher deliveries services rendered several programs partially offset lower spares aftermarket volume bell delivered 24 h1 aircraft 2012 compared 25 aircraft 2011 bell’s operating expenses increased 631 million 21 2012 compared 2011 primarily due higher sales volume discussed bell segment profit factors contributing 2013 yearoveryear segment profit change provided bell’s segment profit decreased 66 million 10 2013 respectively compared 2012 primarily due unfavorable performance discussed segment profit also impacted unfavorable mix commercial aircraft deliveries factors contributing 2012 yearoveryear segment profit change provided bell’s segment profit increased 118 million 23 2012 compared 2011 primarily due impact higher volume commercial aircraft military businesses described performance reflects higher net research development expense 2012 26 million due rampup new product development higher selling administrative expenses largely due investment business system improvement upgrade activities partially offset favorable program performance military programs reflecting improved manufacturing efficiencies bell backlog decreased 10 billion 14 bell 2013 primarily due deliveries v22 h1 programs exceeded orders 2012 bell’s backlog increased 123 million 2 reflecting orders excess deliveries textron systems textron systems revenues operating expenses factors contributing 2013 yearoveryear revenue change provided revenues textron systems decreased 72 million 4 2013 compared 2012 primarily due lower volume marine land product line 51 million uas product line 28 million textron systems’ operating expenses decreased 87 million 5 2013 compared 2012 primarily due improved performance reflecting favorable impact lower profit adjustments including 22 million lower uas feeforservice program charges along cost reduction initiatives across product lines operating expenses also impacted lower sales volume described factors contributing 2012 yearoveryear revenue change provided revenues textron systems decreased 135 million 7 2012 compared 2011 primarily due lower volume marine land product line 76 million lower volume mission support product line 45 million lower volume weapons sensors 13 million textron systems’ operating expenses decreased 126 million 7 2012 compared 2011 primarily due lower volume operating expenses 2012 included 37 million charges discussed related uas feeforservice program offset impact charges textron systems 60 million 2011 related impairment intangible assets severance costs uas feeforservice program 2012 awarded two indefinite delivery indefinite quantity idiq contracts separate us government customers uas feeforservice activities third quarter 2012 experienced startup issues began deployment first contracts meuas ii program required us augment training procedures add resources adjust certain estimated costs time took 18 million charge reflecting estimated loss awarded task orders contracts based deployment experience resulted changes certain assumptions also reflected higher subcontractor upfront training program management costs support rampup fourth quarter 2012 experienced propulsion performance issues systems result able perform within previous cost estimates based issues encountered increased estimate cost complete awarded task orders contracts completion orders recorded 19 million unfavorable program profit adjustment fourth quarter 2012 2013 recorded 15 million charges uas feefor service program related estimate costs fulfill options exercised customer third quarter options extended period performance initial task orders contracts one year continued experience unacceptable quality engine supplier program decided third quarter transition manufacture engine lycoming business believe change allow us improve performance textron systems segment profit factors contributing 2013 yearoveryear segment profit change provided segment profit textron systems increased 15 million 11 2013 compared 2012 largely due improved performance reflecting favorable impact lower profit adjustments including 22 million lower uas feeforservice program charges along cost reduction initiatives across product lines improved performance partially offset lower volume described factors contributing 2012 yearoveryear segment profit change provided segment profit textron systems decreased 9 million 6 2012 compared 2011 reflecting impact lower volume described deliveries lower margin contracts current period favorable performance reflects charge 2011 19 million primarily severance costs related workforce reductions 9 million lower amortization expense intangible assets 8 million lower net research development costs partially offset 37 million charges related uas feeforservice program described textron systems backlog 2013 textron systems backlog decreased 116 million 4 largely due deliveries excess new orders 2012 textron systems backlog increased 16 billion 118 largely due additional orders uas marine land product lines including canadian tapv contract 693 million industrial revenues operating expenses factors contributing 2013 yearoveryear revenue change provided industrial segment revenues increased 112 million 4 2013 compared 2012 largely due higher volume 58 million impact newly acquired companies 46 million within powered tools testing measurement equipment product line higher volume resulted 32 million increase industrial product lines mostly due higher market demand golf turf care light transportation vehicle product line 26 million increase fuel systems functional components line reflecting higher automotive industry demand north america operating expenses industrial segment increased 85 million 3 2013 compared 2012 largely due higher volume 43 million impact newly acquired companies operating expenses also impacted improved performance 27 million associated fuel systems functional components product line partially offset 16 million inflation product line reflecting higher compensation material costs factors contributing 2012 yearoveryear revenue change provided industrial segment revenues increased 115 million 4 2012 compared 2011 higher volume resulted 93 million increase fuel systems functional components product line reflecting higher automotive industry demand north america 78 million increase industrial product lines largely related higher market demand golf turf care light transportation vehicles product line unfavorable foreign exchange impact mostly related weakening euro primarily impacted fuel systems functional components product line operating expenses industrial segment increased 102 million 4 2012 compared 2011 largely due 130 million higher direct material costs support higher sales volume 2012 operating expenses also impacted cost inflation 44 million primarily due higher material overhead costs partially offset lower costs due favorable foreign exchange impact 70 million resulting weakening euro industrial segment profit factors contributing 2013 yearoveryear segment profit change provided segment profit industrial segment increased 27 million 13 2013 compared 2012 primarily due improved performance 27 million associated fuel systems functional components product line 22 million unfavorable impact inflation net pricing primarily fuel systems functional components product line reflecting higher compensation material costs factors contributing 2012 yearoveryear segment profit change provided segment profit industrial segment increased 13 million 6 2012 compared 2011 primarily due impact higher volume described partially offset cost inflation exceeded related price increases finance revenues finance segment revenues decreased 83 million 2013 compared 2012 primarily attributable unfavorable impact 46 million attributable lower average finance receivables 834 million revenues 2013 also lower 25 million due resolution timeshare account returned accrual status 2012 finance segment revenues increased 112 million 2012 compared 2011 primarily attributable following factors · 90 million increase related valuation golf mortgage finance receivables held sale 2012 76 million favorable valuation adjustments compared unfavorable valuation adjustments 14 million 2011 · 42 million lower portfolio losses net gains primarily associated structured capital timeshare portfolios · 25 million increase due resolution one significant timeshare account returned accrual status subsequently paid third quarter 2012 · increases partially offset 61 million decrease attributable lower average finance receivables 12 billion finance segment profit loss finance segment profit decreased 15 million 2013 compared 2012 primarily resulting resolution timeshare account 2012 discussed well unfavorable impact 25 million net interest margin lower average finance receivables decreases partially offset lower administrative expenses 26 million lower provision loan losses 20 million largely related downsizing noncaptive business finance segment profit increased 397 million 2012 compared 2011 primarily due changes valuation adjustments lower portfolio losses net gains resolution one significant timeshare account discussed well lower administrative expense 56 million primarily associated exit noncaptive business addition recorded 186 million valuation allowance transfer golf mortgage portfolio held investment held sale classification fourth quarter 2011 increases partially offset 27 million decrease net interest margin attributable lower average finance receivables finance portfolio quality following table reflects information finance segment’s credit performance related finance receivables classified held investment liquidity capital resources financings conducted two separate borrowing groups manufacturing group consists textron consolidated majorityowned subsidiaries operate cessna bell textron systems industrial segments finance group also finance segment consists textron financial corporation tfc consolidated subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements key information utilized assessing liquidity summarized believe calculations debt capital net debt capital useful measures provide summary indication level debt financing ie leverage place support capital structure well provide indication capacity add leverage believe sufficient cash meet future needs based existing cash balances cash expect generate manufacturing operations available funding alternatives appropriate october 4 2013 textron entered senior unsecured revolving credit facility aggregate principal amount 10 billion 100 million available issuance letters credit facility expires october 2018 december 28 2013 amounts borrowed facility 35 million letters credits issued maintain effective shelf registration statement filed securities exchange commission allows us issue unlimited amount public debt securities january 30 2014 issued 250 million 365 notes due 2021 350 million 430 notes due 2024 registration statement plan use net proceeds issuance notes finance portion acquisition outstanding equity interests beech holdings llc parent beechcraft corporation agreed purchase approximately 14 billion cash transaction expected close first half 2014 subject customary closing conditions including regulatory approvals transaction completed related merger agreement terminated december 31 2014 required redeem outstanding 2021 notes redemption price equal 101 principal amount thereof plus accrued unpaid interest january 24 2014 order finance beechcraft acquisition also entered fiveyear term loan syndicate banks principal amount 500 million intend draw upon closing transaction manufacturing group cash flows cash flows continuing operations manufacturing group presented consolidated statement cash flows summarized generated 658 million cash operating activities 2013 914 million manufacturing group segment profit 470 million net income 300 million decrease cash flows operating activities 2012 largely due 429 million impact related working capital requirements 64 million lower income continuing operations partially offset 211 million lower contributions pension plans 2013 significant change within working capital 230 million unfavorable impact resulting net tax payments 223 million 2013 compared net tax refunds 7 million 2012 addition 165 million cash inflows related changes inventory levels largely cessna offset 264 million cash outflows changes accounts receivable accounts payable change inventory levels cessna primarily related lower preowned inventory partially offset higher inventory support new sales 2012 generated 958 million cash operating activities 11 billion manufacturing group segment profit 534 million manufacturing group net income 26 increase cash flows operating activities 2011 largely due lower cash contributions 237 million made pension plans 2012 within working capital 117 million reduction cash resulting increase preowned inventory cessna primarily due higher tradein activities largely offset reduction net taxes paid pension contributions 194 million 405 million 642 million 2013 2012 2011 respectively investing cash flows 2013 2012 2011 primarily included capital expenditures 444 million 480 million 423 million respectively cash flows investing activities also included 196 million cash used 2013 acquisitions four businesses within textron systems industrial segments two service centers cessna segment 2013 financing activities primarily consisted repayment 528 million outstanding debt including settlement convertible notes partially offset proceeds 150 million variablerate term loan agreement 2012 generated cash financing activities largely due receipt 490 million finance group payment intergroup borrowing partially offset 272 million share repurchases 189 million payments outstanding debt 2011 financing activities primarily consisted 580 million payments related purchase cancellation convertible notes 175 million intergroup financing finance group partially offset 496 million proceeds issuance notes dividends dividend payments shareholders totaled 22 million 17 million 22 million 2013 2012 2011 respectively share repurchases fourth quarter 2012 2007 share repurchase authorization repurchased 111 million shares common stock total cost 272 million fully utilized available repurchase authorization january 23 2013 board directors approved new authorization program 25 million shares intend purchase shares common stock offset impact dilution sharebased compensation plans beginning 2014 opportunistic capital management purposes february 5 2014 entered accelerated share repurchase agreement asr counterparty repurchase aggregate 43 million shares outstanding common stock counterparty 150 million asr scheduled expire december 2014 upon final settlement asr may receive additional shares pay additional cash shares option based daily volume weighted average market price common stock course calculation period less discount capital contributions paid dividends received finance group support agreement textron tfc textron required maintain controlling interest tfc agreement also requires textron ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 200 million cash contributions paid tfc maintain compliance support agreement dividends paid tfc textron inc detailed 2013 also made 1 million capital contribution tfc fund repurchase portion tfc’s 6 fixedtofloating rate junior subordinated notes due nature contributions classify contributions within cash flows used operating activities manufacturing group consolidated statements cash flows capital contributions support finance group growth ongoing captive finance business classified cash flows financing activities finance group’s net income loss excluded manufacturing group’s cash flows dividends finance group included within cash flows operating activities manufacturing group represent return investment finance group cash flows cash flows continuing operations finance group summarized 2013 2012 finance group’s cash flows operating activities primarily impacted changes net taxes receivedpaid impact earnings net tax refundspayments 49 million 43 million 65 million 2013 2012 2011 respectively net tax payments 2012 included settlement related internal revenue service’s challenge tax deductions claimed prior years certain leveraged lease transactions cash flows investing activities primarily included collections finance receivables proceeds sales finance receivables finance assets totaling 853 million 2013 13 billion 2012 19 billion 2011 partially offset financial receivable originations 271 million 2013 331 million 2012 471 million 2011 cash used financing activities included principal payments longterm debt 743 million 426 million 756 million 2013 2012 2011 respectively cash outflows partially offset proceeds long term debt 298 million 106 million 430 million respectively 2012 finance group also made cash payments totaling 493 million manufacturing group related intergroup borrowings 2011 finance group paid 14 billion outstanding balance bank line credit consolidated cash flows consolidated cash flows continuing operations elimination activity borrowing groups summarized cash flows operating activities decreased 122 million 2013 compared 2012 largely due 133 million impact related working capital requirements lower earnings partially offset 206 million impact lower contributions pension plans 2013 significant changes within working capital included 138 million unfavorable impact resulting net taxes paid periods net tax payments 174 million 36 million 2013 2012 respectively 264 million cash outflows related changes accounts receivable accounts payable cash outflows partially offset 198 million cash inflows related changes inventory levels largely cessna 141 million impact lower captive finance receivables cash flows operating activities decreased 2012 compared 2011 higher earnings offset changes working capital included lower net cash receipts captive financing activities 140 million increase preowned inventory cessna segment largely due higher tradein activities resulting cash reduction 117 million use cash working capital requirements partially offset 237 million lower cash pension contributions made 2012 cash flows investing activities included capital expenditures 444 million 480 million 423 million 2013 2012 2011 respectively collections finance receivables proceeds sales finance receivables finance assets totaled 368 million 2013 848 million 2012 14 billion 2011 cash flows investing activities also included 196 million cash used 2013 acquisitions four businesses within textron systems industrial segments two service centers cessna segment financing activities primarily consisted repayment outstanding longterm debt 13 billion 06 billion 14 billion 2013 2012 2011 respectively partially offset proceeds issuance longterm debt 448 million 106 million 926 million 2013 2012 2011 respectively cash used financing activities also included 272 million share repurchases 2012 repayments 14 billion outstanding balance bank credit lines 2011 captive financing intercompany transactions finance group finances retail purchases leases new used aircraft equipment manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers sale receivables reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidated statements cash flows reclassification elimination adjustments included consolidated statement cash flows summarized contractual obligations manufacturing group following table summarizes known contractual obligations defined reporting regulations manufacturing group december 28 2013 1 maintain defined benefit pension plans postretirement benefit plans pensions discussed note 11 consolidated financial statements included table discounted estimated benefit payments expect make related unfunded pension postretirement benefit plans actual benefit payments dependent number factors including mortality assumptions expected retirement age rate compensation increases medical trend rates subject change future years policy funding pension plans make contributions annually consistent applicable laws regulations however future contributions pension plans included table 2014 expect make contributions funded pension plans approximately 33 million approximately 19 million retirement account plan based current assumptions may change changes market conditions current contribution estimates years 2015 2018 estimated range approximately 75 million 130 million plan provisions place time 2 longterm liabilities included table consist primarily undiscounted amounts consolidated balance sheet december 28 2013 representing obligations deferred compensation arrangements estimated environmental remediation costs payments deferred compensation arrangements estimated based management’s assumptions expected retirement age mortality stock price rates return participant deferrals timing cash flows associated environmental remediation costs largely based historical experience longterm liabilities deferred taxes unrecognized tax benefits product liability warranty litigation reserves excluded table due uncertainty timing payments combined absence historical trends used predictor payments 3 operating leases represent undiscounted obligations noncancelable leases 4 purchase obligations include undiscounted amounts committed legally enforceable contracts purchase orders goods services defined terms price quantity delivery dates approximately 40 purchase obligations disclose represent purchase orders issued goods services delivered firm contracts us government full recourse customary contract termination clauses finance group following table summarizes known contractual obligations defined reporting regulations finance group december 28 2013 1 securitized debt payments represent contractual obligations finance group provide legal recourse investors purchase interests securitizations beyond credit enhancement inherent retained subordinate interests 2 interest payments reflect current interest rate paid related debt include anticipated changes market interest rates could impact interest rate according terms related debt december 28 2013 finance group also 93 million liabilities primarily accounts payable accrued expenses payable within next 12 months critical accounting estimates prepare consolidated financial statements conformity generally accepted accounting principles must make complex subjective judgments selection application accounting policies accounting policies believe critical portrayal financial condition results operations listed believe policies require difficult subjective complex judgments estimating effect inherent uncertainties section read conjunction note 1 consolidated financial statements includes significant accounting policies longterm contracts make substantial portion sales government customers pursuant longterm contracts require development delivery products multiple years may contain fixedprice purchase options additional products account longterm contracts percentageofcompletion method accounting method estimate profit difference total estimated revenues cost contract percentageofcompletion method accounting involves use various estimating techniques project costs completion cases includes estimates recoveries asserted customer changes specifications due size length time nature many contracts estimation total contract costs revenues completion complicated subject many variables relative outcome future events period several years required make numerous assumptions estimates relating items expected engineering requirements complexity design related development costs product performance subcontractors availability cost materials labor productivity cost overhead capital costs manufacturing efficiencies achievement contract milestones including product deliveries technical requirements schedule cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments projected costs recognized earnings determinable anticipated losses contracts recognized full period losses become probable estimable due significance judgment estimation process described likely materially different revenues andor cost sales amounts could recorded used different assumptions underlying circumstances change earnings could reduced material amount resulting charge earnings total estimated contract costs significantly higher expected due changes customer specifications prior contract amendment b total estimated contract costs significantly higher previously estimated due cost overruns inflation c change engineering efforts required development stage contract unable meet contract milestones outset contract estimate initial profit booking rate initial profit booking rate contract considers risks surrounding ability achieve technical requirements example newlydeveloped product versus mature product schedule example number type milestone events costs contract requirements initial estimated costs completion profit booking rates may increase performance contract successfully retire risks surrounding technical schedule costs aspects contract likewise profit booking rate may decrease successful retiring risks result estimated costs completion increase estimates subject change performance contract therefore may affect profit booking rate adjustments required changes prior estimates recognized using cumulative catchup method impact change inceptiontodate recorded current period following table sets forth aggregate gross amount program profit adjustments included within segment profit three years ended december 28 2013 goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit might impaired reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics calculate fair value reporting unit primarily using discounted cash flows cash flows incorporate assumptions short longterm revenue growth rates operating margins discount rates represent best estimates current forecasted market conditions cost structure anticipated net cost reductions implied rate return believe market participant would require investment business similar risks business characteristics reporting unit assessed revenue growth rates operating margins used discounted cash flow analysis based strategic plans longrange planning forecasts longterm growth rate use determine terminal value business based assessment minimum expected terminal growth rate well past historical growth broader economic considerations gross domestic product inflation maturity markets serve utilize weightedaverage cost capital impairment analysis makes assumptions capital structure believe market participant would make include risk premium based assessment risks related projected cash flows reporting unit believe approach yields discount rate consistent implied rate return independent investor market participant would require investment company similar risks business characteristics reporting unit assessed reporting unit’s estimated fair value exceeds carrying value reporting unit impaired analysis performed otherwise amount impairment must determined comparing carrying amount reporting unit’s goodwill implied fair value goodwill implied fair value goodwill determined assigning fair value reporting unit’s assets liabilities including unrecognized intangible assets reporting unit acquired business combination carrying amount goodwill exceeds implied fair value impairment loss would recognized amount equal excess based annual impairment review fair value reporting units exceeded carrying values believe reasonable possibility units might fail initial step impairment test foreseeable future retirement benefits maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases evaluate update assumptions annually determine weightedaverage expected longterm rate return plan assets consider current expected asset allocation well historical expected returns plan asset class lower expected rate return plan assets increase pension expense 2013 assumed expected longterm rate return plan assets used calculating pension expense 756 compared 758 2012 2013 2012 assumed rate return domestic plans represent approximately 90 total pension assets 775 50basispoint decrease longterm rate return 2013 would increased pension expense domestic plans approximately 25 million discount rate enables us state expected future benefit payments present value measurement date reflecting current rate pension liabilities could effectively settled rate line rates highquality fixed income investments available period maturity pension benefits fluctuate longterm interest rates change lower discount rate increases present value benefit obligations increases pension expense 2013 weightedaverage discount rate used calculating pension expense 423 compared 494 2012 domestic plans assumed discount rate 425 2013 compared 500 2012 50basispoint decrease discount rate 2013 would increased pension expense domestic plans approximately 31 million trend healthcare costs difficult estimate important effect postretirement liabilities 2013 medical prescription drug healthcare cost trend rates represent weightedaverage annual projected rate increase per capita cost covered benefits 2013 medical rate 720 assumed decrease 500 2021 remain level 2013 prescription drug rate 720 assumed decrease 500 2021 remain level see note 11 consolidated financial statements impact onepercentagepoint change cost trend rate warranty liabilities provide limited warranty product maintenance programs including parts labor certain products periods ranging one five years significant portion liabilities arises commercial aircraft businesses also may incur costs related product recalls estimate costs may incurred warranty programs record liability amount costs time product revenue recognized factors affect liability include number products sold historical costs per claim contractual recoveries vendors historical anticipated rates warranty claims including production warranty patterns new models initial aircraft model launches typically incur higher warrantyrelated costs production process matures point warranty costs moderate assess adequacy recorded warranty product maintenance liabilities periodically adjust amounts necessary adjustments made accruals claim data actual experience warrant future warranty experience differ materially historical experience may required record additional warranty liabilities could material adverse effect results operations cash flows period additional liabilities required finance receivables finance receivables generally recorded amount outstanding principal less allowance losses maintain allowance losses finance receivables level considered adequate cover inherent losses portfolio based management’s evaluation larger balance accounts specifically identified impaired including large accounts homogeneous portfolios reserve established based comparing expected future cash flows discounted finance receivable’s effective interest rate fair value underlying collateral finance receivable collateral dependent carrying amount expected future cash flows consider collateral value financial performance liquidity borrower existence financial strength guarantors estimated recovery costs including legal expenses costs associated repossession eventual disposal collateral range potential outcomes perform multiple discounted cash flow analyses weight potential outcomes based relative likelihood occurrence evaluation portfolio inherently subjective requires estimates including amount timing future cash flows expected received impaired finance receivables estimated fair value underlying collateral may differ actual results analysis specific individual account critical factors included analysis include industry valuation guides age physical condition collateral payment history existence financial strength guarantors also establish allowance losses cover probable specifically unknown losses existing portfolio allowance established percentage nonrecourse finance receivables identified requiring specific reserves percentage based combination factors including historical loss experience current delinquency default trends collateral values general economic specific industry trends income taxes deferred income tax balances reflect effects temporary differences financial reporting carrying amounts assets liabilities tax bases well net operating losses tax credit carryforwards stated enacted tax rates effect year taxes expected paid recovered deferred income tax assets represent amounts available reduce income taxes payable taxable income future years evaluate recoverability future tax deductions credits assessing adequacy future expected taxable income sources including future reversal existing taxable temporary differences taxable income carryback years available tax planning strategies estimated future taxable income amount income taxes pay subject ongoing audits federal state foreign tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental assess income tax positions record tax benefits years subject examination based upon evaluation facts circumstances information available reporting date tax positions likely tax benefit sustained record largest amount tax benefit greater 50 likelihood realized upon settlement taxing authority full knowledge relevant information interest penalties accrued applicable recognize net taxrelated interest penalties continuing operations income tax expense believe likely tax benefit sustained tax benefit recognized however future results may include favorable unfavorable adjustments estimated tax liabilities due settlement income tax examinations new regulatory judicial pronouncements relevant events result effective tax rate may fluctuate significantly quarterly annual basis item 7aitem 7 management’s discussion analysis financial condition results operations overview consolidated results operations revenues increased 15 2014 reflecting success strategy investing new products complementary acquisitions several highlights year include following · invested 694 million research development activities demonstrating continued commitment expand current product lines across businesses · invested 16 billion strategic acquisitions along 429 million capital expenditures · delivered strong cash flow performance manufacturing operating cash flows continuing operations increased 67 11 billion · grew segment profit 26 12 billion · raised diluted earnings per share continuing operations 23 march 14 2014 completed acquisition beech holdings llc included beechcraft corporation subsidiaries collectively “beechcraft” business legacy cessna segment combined form new segment named textron aviation also made seven acquisitions industrial textron systems segments complemented products services results acquisitions included textron’s consolidated financial statements period subsequent completion acquisition reflect full year operations analysis consolidated operating results set forth detailed analysis segments’ operating results provided segment analysis section pages 21 28 revenues increased 18 billion 15 2014 compared 2013 increases textron aviation industrial segments partially offset lower revenues bell textron systems finance segments net revenue increase included following factors · higher textron aviation revenues 18 billion primarily due 15 billion impact beechcraft acquisition 263 million increase volume largely related citation jets · higher industrial segment revenues 326 million primarily due 181 million higher volume largely fuel systems functional components product line 142 million impact acquisitions · lower bell revenues 266 million largely due 183 million decrease commercial revenues reflecting lower sales activity across commercial helicopter market 99 million lower military volume largely related h1 program reflecting lower aircraft deliveries production support · lower textron systems revenues 41 million primarily due lower volume 233 million marine land systems product line reflecting lower vehicle deliveries partially offset higher volume 130 million unmanned systems product line 62 million impact acquisitions · lower finance revenues 29 million primarily attributable gains disposition finance receivables held sale 2013 revenues decreased 133 million 1 2013 compared 2012 decreases textron aviation finance textron systems segments partially offset higher revenues bell industrial segments net revenue decrease included following factors · lower textron aviation revenues 327 million primarily due lower citation jet volume 384 million citationair volume 114 million partially offset higher aftermarket volume 65 million higher preowned aircraft volume 53 million · lower finance revenues 83 million primarily attributable unfavorable impact 46 million lower average finance receivables decrease 25 million revenues related resolution timeshare account 2012 · lower textron systems revenues 72 million largely due lower volume 51 million marine land systems product line lower volume 28 million unmanned systems product line · higher bell revenues 237 million largely due higher volume 163 million military programs primarily reflecting higher v22 deliveries aftermarket volume 74 million higher commercial revenues largely due higher aircraft volume · higher industrial segment revenues 112 million primarily due higher volume 58 million impact acquisitions 46 million cost sales selling administrative expense manufacturing cost sales selling administrative expenses together comprise operating expenses cost sales increased 13 billion 13 2014 compared 2013 largely due impact acquired businesses primarily beechcraft 2014 gross margin percentage manufacturing revenues increased 170 basis points largely due improved leverage resulting higher revenues primarily textron aviation selling administrative expense increased 235 million 21 2014 compared 2013 largely related businesses acquired past year compensation expense increases partially offset 28 million severance costs incurred 2013 connection voluntary separation program textron aviation manufacturing cost sales increased 112 million 1 2013 compared 2012 primarily due higher volume bell impact businesses acquired 2013 partially offset lower sales textron aviation textron systems 2013 gross margin percentage manufacturing revenues decreased 130 basis points primarily due unfavorable performance bell largely due manufacturing inefficiencies associated labor disruptions resulting negotiations bargained employees implementation new enterprise resource planning system first quarter 2013 well lower citation jet citiationair volume textron aviation selling administrative expenses decreased 39 million 3 2013 compared 2012 largely due reduction administrative expenses 26 million lower provision loan losses 20 million finance segment primarily associated noncaptive business selling administrative expense also impacted 28 million severance costs incurred 2013 textron aviation largely offset 27 million charge unfavorable arbitration award 2012 textron aviation acquisition restructuring costs connection integration beechcraft initiated restructuring program textron aviation segment first quarter 2014 align cessna beechcraft businesses reduce operating redundancies maximize efficiencies 2014 recorded charges 41 million related restructuring activities included acquisition restructuring costs line consolidated statements operations addition incurred transaction costs 11 million 2014 related acquisition also included acquisition restructuring costs line expect incur additional restructuring costs 2015 expect costs material interest expense interest expense consolidated statement operations includes interest manufacturing finance borrowing groups interest related intercompany borrowings eliminated consolidated interest expense increased 18 million 10 2014 compared 2013 primarily due 31 million impact related financing beechcraft acquisition partially offset 9 million lower interest expense due maturity convertible notes second quarter 2013 consolidated interest expense decreased 39 million 18 compared 2012 primarily due lower average debt outstanding income tax expense effective tax rate 291 2014 261 2013 309 2012 rate generally differs us federal statutory tax rate 35 due certain earnings operations lowertax jurisdictions throughout world well research credit jurisdictions favorable tax rates significant effective tax rate impact periods presented include canada germany belgium china provided us taxes earnings plan reinvest earnings indefinitely outside us 2013 effective tax rate reduced approximately 40 due tax benefit recognized upon retroactive reinstatement extension federal research development tax credit period january 1 2012 december 31 2013 2014 credit extended end 2014 resulting 15 reduction effective tax rate full reconciliation effective tax rate us federal statutory tax rate 35 see note 12 consolidated financial statements segment analysis operate report financial information following five business segments textron aviation consists legacy cessna segment combined recentlyacquired beechcraft business bell textron systems industrial finance segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses acquisition restructuring costs related beechcraft acquisition measurement finance segment includes interest income expense along intercompany interest income expense discussion comparative results manufacturing group changes revenues segment profit typically expressed commercial business terms volume pricing foreign exchange acquisitions additionally changes segment profit may expressed terms mix inflation cost performance volume changes revenues represent increasesdecreases number units delivered services provided pricing represents changes unit pricing foreign exchange change resulting translating foreigndenominated amounts us dollars exchange rates different prior period acquisitions refers revenues generated businesses acquired within previous 12 months segment profit mix represents change due composition products andor services sold different profit margins inflation represents higher material wages benefits pension costs performance reflects increase decrease research development depreciation selling administrative costs warranty product liability qualityscrap labor efficiency overhead product line profitability startup ramp costreduction initiatives manufacturing inputs approximately 28 2014 revenues derived contracts us government segments significant contracts us government typically express changes segment profit related government business terms volume changes program performance changes contract mix changes volume discussed net sales typically drive corresponding changes segment profit based profit rate particular contract changes program performance typically relate profit recognition associated revisions total estimated costs completion reflect improved deteriorated operating performance award fee rates changes contract mix refers changes operating margin due change relative volume contracts higher lower fee rates overall average margin rate segment changes textron aviation textron aviation revenues operating expenses factors contributing 2014 yearoveryear revenue change provided textron aviation’s revenues increased 18 billion 64 2014 compared 2013 primarily due impact beechcraft acquisition 15 billion higher volume 263 million increase volume primarily result higher citation jet volume 344 million partially offset lower citationair volume 78 million related exiting fractional share business delivered 159 citation jets 113 king air turboprops 2014 compared 139 citation jets 2013 2014 portion segment’s revenues derived aftermarket sales services represented 30 total revenues compared 33 2013 textron aviation’s operating expenses increased 15 billion 53 2014 compared 2013 primarily due incremental operating costs related beechcraft acquisition higher net volume described textron aviation’s operating expenses exclude acquisition restructuring costs incurred across segment result beechcraft integration reported separately discussed acquisition restructuring costs section factors contributing 2013 yearoveryear revenue change provided 2013 textron aviation’s revenues decreased 327 million 11 compared 2012 primarily due lower citation jet volume 384 million lower citationair volume 114 million largely related winddown fractional share business decreases partially offset higher aftermarket volume 65 million largely due increased service demand higher preowned aircraft volume 53 million delivered 139 citation jets 2013 compared 181 jets 2012 2013 portion textron aviation’s revenues derived aftermarket sales services increased 33 compared 25 2012 due higher aftermarket volume impact lower citation jet revenues textron aviation’s operating expenses decreased 197 million 7 2013 compared 2012 primarily due lower volume discussed volumerelated decrease operating expenses partially offset 37 million operating costs incurred service centers acquired beginning 2013 33 million inflation largely due higher pension expense 17 million operating expenses 2013 also impacted 28 million severance costs incurred first half year connection voluntary separation program offered qualifying salaried employees reduction certain direct production positions due adjustment production schedule operating expenses 2012 included 27 million charge unfavorable arbitration award textron aviation segment profit loss factors contributing 2014 yearoveryear segment profit loss change provided textron aviation segment profit increased 282 million 2014 compared 2013 primarily due increase performance higher volume described favorable pricing inflation 28 million severance costs incurred 2013 second quarter 2014 cost structures beechcraft cessna significantly integrated result performance reflects net profit impact beechcraft including benefit integrated cost structure performance also includes amortization 63 million 2014 related fair value stepup adjustments acquired inventories sold periods factors contributing 2013 yearoveryear segment profit loss change provided textron aviation’s segment profit decreased 130 million 2013 compared 2012 primarily due 99 million impact lower volume described 21 million inflation net pricing largely due higher pension expense 17 million segment profit also impacted 28 million severance costs incurred 2013 largely offset 27 million charge unfavorable arbitration award incurred 2012 textron aviation backlog textron aviation’s backlog increased 347 million 34 2014 decreased 44 million 4 2013 increase 2014 included beechcraft acquisition bell’s major us government programs time v22 tiltrotor aircraft h1 helicopter platforms production stage represent significant portion bell’s revenues us government bell revenues operating expenses factors contributing 2014 yearoveryear revenue change provided bell’s revenues decreased 266 million 6 2014 compared 2013 primarily due following factors · 183 million decrease commercial revenues largely related lower volume reflecting lower sales activity across commercial helicopter market bell delivered 178 commercial aircraft 2014 compared 213 commercial aircraft 2013 · 99 million decrease military volume primarily related h1 program largely reflecting lower aircraft deliveries production support lower volume partially offset 41 million recorded second quarter 2014 related settlement sdd phase arh program terminated october 2008 bell delivered 24 h1 aircraft 2014 compared 25 aircraft 2013 · 16 million increase v22 program revenues reflecting higher product support volume 115 million increase largely offset lower aircraft deliveries delivered 37 v22 aircraft 2014 compared 41 v22 aircraft 2013 bell’s operating expenses decreased 222 million 6 2014 compared 2013 primarily due lower net volume discussed addition bell experienced favorable profit adjustments longterm contracts primarily driven cost reduction activities 2014 well unfavorable performance 2013 discussed factors contributing 2013 yearoveryear revenue change provided bell’s revenues increased 237 million 6 2013 compared 2012 due following factors · 144 million increase v22 program volume largely due higher aircraft deliveries delivered 41 v22 aircraft 2013 compared 39 aircraft 2012 addition military aftermarket volume higher 35 million reflecting increased support fielded aircraft · 74 million increase commercial revenues largely due higher aircraft volume delivered 213 aircraft 2013 compared 188 aircraft 2012 increase partially offset lower commercial aftermarket revenues 50 million largely due lower volume part resulted conversion new enterprise resource planning system first quarter 2013 · 19 million increase military volume reflecting higher h1 deliveries delivered 25 h1 aircraft 2013 compared 24 h1 aircraft 2012 bell’s operating expenses increased 303 million 8 2013 respectively compared 2012 largely due higher volume described 68 million unfavorable performance included 27 million lower favorable profit adjustments longterm contracts unfavorable performance largely due manufacturing inefficiencies associated labor disruptions resulting negotiations bargained employees implementation new enterprise resource planning system first quarter 2013 october 13 2013 bell reached new fiveyear collective bargaining agreement united automobile aerospace agricultural implement workers america uaw local 218 represents employees bell segment profit factors contributing 2014 yearoveryear segment profit change provided bell’s segment profit decreased 44 million 8 2014 compared 2013 impact volume mix largely driven lower commercial volume unfavorable mix commercial aircraft deliveries partially offset 16 million favorable program profit adjustment related arh program described favorable performance primarily reflected cost reduction activities 2014 well unfavorable performance 2013 described factors contributing 2013 yearoveryear segment profit change provided bell’s segment profit decreased 66 million 10 2013 respectively compared 2012 primarily due unfavorable performance described segment profit also impacted unfavorable mix commercial aircraft deliveries bell backlog decreased 926 million 14 bell 2014 primarily due v22 aircraft deliveries excess orders 2013 bell’s backlog decreased 10 billion 14 primarily due deliveries v22 h1 programs exceeded orders textron systems textron systems revenues operating expenses factors contributing 2014 yearoveryear revenue change provided revenues textron systems decreased 41 million 2 2014 compared 2013 primarily due lower volume marine land systems product line 233 million reflecting fewer vehicle deliveries partially offset higher volume unmanned systems product line 130 million 62 million impact largely related acquisition two flight simulation training businesses december 2013 textron systems’ operating expenses decreased 44 million 3 2014 compared 2013 primarily due lower volume described well impact 15 million charge recorded 2013 related feeforservice program described operating expenses also included impact costs related acquisitions factors contributing 2013 yearoveryear revenue change provided revenues textron systems decreased 72 million 4 2013 compared 2012 primarily due lower volume marine land product line 51 million unmanned systems product line 28 million textron systems’ operating expenses decreased 87 million 5 2013 compared 2012 primarily due improved performance reflecting favorable impact lower profit adjustments including 22 million lower feeforservice program charges discussed along cost reduction initiatives across product lines operating expenses also impacted lower volume described 2013 2012 recorded 15 million 37 million respectively unfavorable program profit adjustments related startup engine performance issues unmanned system’s feeforservice program result engine performance issues third quarter 2013 transitioned manufacture engines lycoming business resulted improved performance textron systems segment profit factors contributing 2014 yearoveryear segment profit change provided segment profit textron systems increased 3 million 2 2014 compared 2013 primarily driven 22 million improved performance partially offset 12 million lower volume described performance primarily reflects impact unfavorable profit adjustments 2013 including 15 million charge related feeforservice program described factors contributing 2013 yearoveryear segment profit change provided segment profit textron systems increased 15 million 11 2013 compared 2012 largely due improved performance reflecting favorable impact lower profit adjustments including 22 million lower feeforservice program charges along cost reduction initiatives across product lines improved performance partially offset lower volume described industrial revenues operating expenses factors contributing 2014 yearoveryear revenue change provided industrial segment revenues increased 326 million 11 2014 compared 2013 primarily due higher volume 181 million impact acquisitions 142 million primarily within specialized vehicles equipment product line higher volume resulted 142 million increase fuel systems functional components product line principally reflecting automotive industry demand north america europe 39 million increase industrial product lines operating expenses industrial segment increased 288 million 10 2014 compared 2013 largely due impact higher volume described additional operating expenses recently acquired businesses factors contributing 2013 yearoveryear revenue change provided industrial segment revenues increased 112 million 4 2013 compared 2012 largely due higher volume 58 million impact acquisitions 46 million within tools test equipment product line higher volume resulted 32 million increase industrial product lines mostly due higher market demand specialized vehicles equipment product line 26 million increase fuel systems functional components line reflecting higher automotive industry demand north america operating expenses industrial segment increased 85 million 3 2013 compared 2012 largely due higher volume 43 million impact acquisitions operating expenses also impacted improved performance 27 million associated fuel systems functional components product line partially offset 16 million inflation product line reflecting higher compensation material costs industrial segment profit factors contributing 2014 yearoveryear segment profit change provided segment profit industrial segment increased 38 million 16 2014 compared 2013 largely due impact higher volume described profit also impacted improved performance 15 million primarily driven fuel systems functional components product line factors contributing 2013 yearoveryear segment profit change provided segment profit industrial segment increased 27 million 13 2013 compared 2012 primarily due improved performance 27 million associated fuel systems functional components product line 22 million unfavorable impact inflation net pricing primarily fuel systems functional components product line reflecting higher compensation material costs finance revenues finance segment revenues decreased 29 million 2014 compared 2013 primarily attributable 31 million impact gains disposition finance receivables held sale 2013 gains resulted payoff loans amounts sale loans prices excess values established previous periods finance segment revenues decreased 83 million 2013 compared 2012 primarily attributable unfavorable impact 46 million attributable lower average finance receivables 834 million revenues 2013 also lower 25 million due resolution timeshare account returned accrual status 2012 finance segment profit finance segment profit decreased 28 million 2014 compared 2013 primarily due change provision loan losses 29 million largely reflecting reserve reversals 2013 primarily related noncaptive business impact gains finance receivables held sale described decreases segment profit partially offset lower administrative expense 19 million 2014 primarily associated exit noncaptive business finance segment profit decreased 15 million 2013 compared 2012 primarily resulting resolution timeshare account 2012 described well unfavorable impact 25 million net interest margin lower average finance receivables decreases partially offset lower administrative expenses 26 million lower provision loan losses 20 million largely related downsizing noncaptive business finance portfolio quality following table reflects information finance segment’s credit performance related finance receivables liquidity capital resources financings conducted two separate borrowing groups manufacturing group consists textron consolidated majorityowned subsidiaries operate textron aviation bell textron systems industrial segments finance group also finance segment consists textron financial corporation consolidated subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements key information utilized assessing liquidity summarized believe calculations debt capital net debt capital useful measures provide summary indication level debt financing ie leverage place support capital structure well provide indication capacity add leverage believe sufficient cash meet future needs based existing cash balances cash expect generate manufacturing operations available funding alternatives appropriate textron senior unsecured revolving credit facility expires october 2018 aggregate principal amount 10 billion 100 million available issuance letters credit january 3 2015 amounts borrowed facility 35 million letters credits issued maintain effective shelf registration statement filed securities exchange commission authorizes us issue unlimited amount public debt securities shelf registration statement january 2014 issued 250 million 365 notes due 2021 350 million 430 notes due 2024 also entered fiveyear term loan agreement syndicate banks principal amount 500 million upon closing beechcraft acquisition march 14 2014 fully drew fiveyear term loan used cash along net proceeds notes issued finance portion acquisition balance beechcraft acquisition purchase price paid cash hand third quarter 2014 repaid 200 million fiveyear term loan also shelf registration statement november 2014 issued 350 million 3875 notes due 2025 subsequently prior yearend prepaid 350 million 62 notes due march 2015 manufacturing group cash flows cash flows continuing operations manufacturing group presented consolidated statement cash flows summarized cash flows operating activities increased 439 million 2014 compared 2013 largely due favorable change working capital higher income continuing operations 120 million lower contributions 118 million pension plans partially offset 175 million dividends received finance group 2013 working capital favorably impacted increase 226 million customer deposits primarily textron aviation 174 million increase cash accounts receivable largely bell partially offset increase net tax payments 43 million net tax payments 266 million 223 million 2014 2013 respectively generated 658 million cash operating activities 2013 914 million manufacturing group segment profit 470 million income continuing operations 300 million decrease cash flows operating activities 2012 largely due 429 million impact related working capital requirements 64 million lower income continuing operations partially offset 211 million lower contributions pension plans 2013 significant change within working capital 230 million unfavorable impact resulting net tax payments 223 million 2013 compared net tax refunds 7 million 2012 addition 165 million cash inflows related changes inventory levels largely textron aviation offset 264 million cash outflows changes accounts receivable accounts payable change inventory levels textron aviation primarily related lower preowned inventory partially offset higher inventory support new sales pension contributions 76 million 194 million 405 million 2014 2013 2012 respectively 2014 cash flows investing activities included 16 billion aggregate cash payment beechcraft seven acquisitions within industrial textron systems segments cash flows investing activities 2013 included 196 million cash used acquisitions businesses within industrial textron systems segments two service centers textron aviation segment cash flows investing activities also included capital expenditures 429 million 444 million 480 million 2014 2013 2012 respectively cash flows financing activities 2014 included proceeds longterm debt 14 billion used finance portion beechcraft acquisition partially offset repayment 559 million outstanding debt 2013 cash flows used financing activities primarily consisted repayment 528 million outstanding debt including settlement convertible notes partially offset proceeds longterm debt 150 million 2012 generated cash financing activities largely due receipt 490 million finance group payment intergroup borrowing partially offset 272 million share repurchases 189 million payments outstanding debt dividends dividend payments shareholders totaled 28 million 22 million 17 million 2014 2013 2012 respectively share repurchases 2014 2013 share repurchase authorization repurchased aggregate 89 million shares outstanding common stock 340 million 2012 2007 share repurchase authorization repurchased 111 million shares outstanding common stock 272 million capital contributions paid dividends received finance group support agreement textron tfc textron required maintain controlling interest tfc agreement also requires textron ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 200 million cash contributions paid tfc maintain compliance support agreement dividends paid tfc textron inc detailed due nature contributions classify contributions within cash flows used operating activities manufacturing group consolidated statements cash flows capital contributions support finance group growth ongoing captive finance business classified cash flows financing activities finance group’s net income excluded manufacturing group’s cash flows dividends finance group included within cash flows operating activities manufacturing group represent return investment finance group cash flows cash flows continuing operations finance group summarized 2014 2013 finance group’s cash flows operating activities primarily impacted changes net taxes paidreceived net tax paymentsreceipts 23 million 49 million 43 million 2014 2013 2012 respectively cash flows investing activities primarily included finance receivables repaid proceeds sales receivables finance assets totaling 499 million 853 million 13 billion 2014 2013 2012 respectively partially offset financial receivable originations 215 million 271 million 331 million respectively cash used financing activities included payments longterm nonrecourse debt 345 million 743 million 426 million 2014 2013 2012 respectively partially offset proceeds longterm debt 128 million 298 million 106 million respectively 2013 2012 dividend payments manufacturing group net capital contributions received totaled 174 million 105 million respectively 2012 finance group also made cash payments 493 million manufacturing group related intergroup borrowings consolidated cash flows consolidated cash flows continuing operations elimination activity borrowing groups summarized cash flows operating activities increased 398 million 2014 compared 2013 largely due favorable change working capital lower contributions 118 million pension plans higher income continuing operations 107 million working capital favorably impacted increase 226 million customer deposits primarily textron aviation 174 million increase cash accounts receivable largely bell partially offset increase net tax payments 115 million lower net cash receipts captive finance receivables 87 million net tax payments 289 million 174 million 2014 2013 respectively 2013 cash flows operating activities decreased 122 million compared 2012 largely due 133 million impact related working capital requirements lower earnings partially offset 206 million impact lower contributions pension plans 2013 significant changes within working capital included 138 million unfavorable impact resulting net taxes paid periods net tax payments 174 million 36 million 2013 2012 respectively 264 million cash outflows related changes accounts receivable accounts payable cash outflows partially offset 198 million cash inflows related changes inventory levels largely textron aviation 141 million impact lower captive finance receivables 2014 cash flows investing activities included 16 billion aggregate cash payment beechcraft seven acquisitions within industrial textron systems segments cash flows investing activities 2013 included 196 million cash used acquisitions businesses within industrial textron systems segments two service centers textron aviation segment cash flows investing activities also included capital expenditures 429 million 444 million 480 million 2014 2013 2012 respectively collections finance receivables proceeds sales finance receivables finance assets totaled 134 million 368 million 848 million 2014 2013 2012 cash flows financing activities 2014 included proceeds 16 billion longterm debt used finance portion beechcraft acquisition partially offset repayment 904 million outstanding debt 2013 2012 financing activities primarily consisted repayment outstanding longterm debt 13 billion 617 million respectively partially offset proceeds issuance longterm debt 448 million 106 million respectively cash used financing activities also included 340 million 272 million share repurchases 2014 2012 respectively captive financing intercompany transactions finance group finances retail purchases leases new preowned aircraft equipment manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers sale receivables reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidated statements cash flows reclassification elimination adjustments included consolidated statement cash flows summarized contractual obligations manufacturing group following table summarizes known contractual obligations defined reporting regulations manufacturing group january 3 2015 pension postretirement benefits maintain defined benefit pension plans postretirement benefit plans pensions discussed note 11 consolidated financial statements included table discounted estimated benefit payments expect make related unfunded pension postretirement benefit plans actual benefit payments dependent number factors including mortality assumptions expected retirement age rate compensation increases medical trend rates subject change future years policy funding pension plans make contributions annually consistent applicable laws regulations however future contributions pension plans included table 2015 expect make approximately 54 million contributions funded pension plans retirement account plan based current assumptions may change changes market conditions current contribution estimates years 2016 2019 estimated range approximately 65 million 155 million plan provisions place time longterm liabilities longterm liabilities included table consist primarily undiscounted amounts consolidated balance sheet january 3 2015 representing obligations deferred compensation arrangements estimated environmental remediation costs payments deferred compensation arrangements estimated based management’s assumptions expected retirement age mortality stock price rates return participant deferrals timing cash flows associated environmental remediation costs largely based historical experience longterm liabilities deferred taxes unrecognized tax benefits product liability warranty litigation reserves excluded table due uncertainty timing payments combined absence historical trends used predictor payments purchase obligations purchase obligations include undiscounted amounts committed legally enforceable contracts purchase orders goods services defined terms price quantity delivery dates approximately 33 purchase obligations disclose represent purchase orders issued goods services delivered firm contracts us government full recourse customary contract termination clauses finance group following table summarizes known contractual obligations defined reporting regulations finance group january 3 2015 securitized debt payments represent contractual obligations finance group provide legal recourse investors purchase interests securitizations beyond credit enhancement inherent retained subordinate interests january 3 2015 finance group also 33 million liabilities payable within next 12 months critical accounting estimates prepare consolidated financial statements conformity generally accepted accounting principles must make complex subjective judgments selection application accounting policies accounting policies believe critical portrayal financial condition results operations listed believe policies require difficult subjective complex judgments estimating effect inherent uncertainties section read conjunction note 1 consolidated financial statements includes significant accounting policies longterm contracts make substantial portion sales government customers pursuant longterm contracts require development delivery products multiple years may contain fixedprice purchase options additional products account longterm contracts percentageofcompletion method accounting method estimate profit difference total estimated revenues cost contract percentageofcompletion method accounting involves use various estimating techniques project costs completion cases includes estimates recoveries asserted customer changes specifications due size length time nature many contracts estimation total contract costs revenues completion complicated subject many variables relative outcome future events period several years required make numerous assumptions estimates relating items expected engineering requirements complexity design related development costs product performance subcontractors availability cost materials labor productivity cost overhead capital costs manufacturing efficiencies achievement contract milestones including product deliveries technical requirements schedule cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments projected costs recognized earnings determinable anticipated losses contracts recognized full period losses become probable estimable due significance judgment estimation process described likely materially different revenues andor cost sales amounts could recorded used different assumptions underlying circumstances change earnings could reduced material amount resulting charge earnings total estimated contract costs significantly higher expected due changes customer specifications prior contract amendment b total estimated contract costs significantly higher previously estimated due cost overruns inflation c change engineering efforts required development stage contract unable meet contract milestones outset contract estimate initial profit booking rate initial profit booking rate contract considers risks surrounding ability achieve technical requirements example newlydeveloped product versus mature product schedule example number type milestone events costs contract requirements initial estimated costs completion profit booking rates may increase performance contract successfully retire risks surrounding technical schedule costs aspects contract likewise profit booking rate may decrease successful retiring risks result estimated costs completion increase estimates subject change performance contract therefore may affect profit booking rate adjustments required changes prior estimates recognized using cumulative catchup method impact change inceptiontodate recorded current period following table sets forth aggregate gross amount program profit adjustments included within segment profit three years ended january 3 2015 goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit might impaired reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics calculate fair value reporting unit primarily using discounted cash flows cash flows incorporate assumptions short longterm revenue growth rates operating margins discount rates represent best estimates current forecasted market conditions cost structure anticipated net cost reductions implied rate return believe market participant would require investment business similar risks business characteristics reporting unit assessed revenue growth rates operating margins used discounted cash flow analysis based strategic plans longrange planning forecasts longterm growth rate use determine terminal value business based assessment minimum expected terminal growth rate well past historical growth broader economic considerations gross domestic product inflation maturity markets serve utilize weightedaverage cost capital impairment analysis makes assumptions capital structure believe market participant would make include risk premium based assessment risks related projected cash flows reporting unit believe approach yields discount rate consistent implied rate return independent investor market participant would require investment company similar risks business characteristics reporting unit assessed reporting unit’s estimated fair value exceeds carrying value reporting unit impaired analysis performed otherwise amount impairment must determined comparing carrying amount reporting unit’s goodwill implied fair value goodwill implied fair value goodwill determined assigning fair value reporting unit’s assets liabilities including unrecognized intangible assets reporting unit acquired business combination carrying amount goodwill exceeds implied fair value impairment loss would recognized amount equal excess based annual impairment review fair value reporting units exceeded carrying values believe reasonable possibility units might fail initial step impairment test foreseeable future retirement benefits maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases evaluate update assumptions annually determine weightedaverage expected longterm rate return plan assets consider current expected asset allocation well historical expected returns plan asset class lower expected rate return plan assets increase pension expense 2014 assumed expected longterm rate return plan assets used calculating pension expense 760 compared 756 2013 last three years assumed rate return domestic plans represent approximately 90 total pension assets 775 50basispoint decrease longterm rate return 2014 would increased pension expense domestic plans approximately 27 million discount rate enables us state expected future benefit payments present value measurement date reflecting current rate pension liabilities could effectively settled rate line rates highquality fixed income investments available period maturity pension benefits fluctuate longterm interest rates change lower discount rate increases present value benefit obligations increases pension expense 2014 weightedaverage discount rate used calculating pension expense 492 compared 423 2013 domestic plans assumed discount rate 500 2014 compared 425 2013 50basispoint decrease discount rate 2014 would increased pension expense domestic plans approximately 29 million trend healthcare costs difficult estimate important effect postretirement liabilities 2014 medical prescription drug healthcare cost trend rates represent weightedaverage annual projected rate increase per capita cost covered benefits 2014 assumed trend rate 660 medical prescription drug healthcare rates assumed rate would decrease 500 2021 remain level see note 11 consolidated financial statements impact onepercentagepoint change cost trend rate warranty product maintenance liabilities provide limited warranty product maintenance programs including parts labor certain products periods ranging one five years significant portion liabilities arises commercial aircraft businesses also may incur costs related product recalls estimate costs may incurred warranty programs record liability amount costs time product revenue recognized factors affect liability include number products sold historical costs per claim contractual recoveries vendors historical anticipated rates warranty claims including production warranty patterns new models initial aircraft model launches typically incur higher warrantyrelated costs production process matures point warranty costs moderate assess adequacy recorded warranty product maintenance liabilities periodically adjust amounts necessary adjustments made accruals claim data actual experience warrant future warranty experience differ materially historical experience may required record additional warranty liabilities could material adverse effect results operations cash flows period additional liabilities required income taxes deferred income tax balances reflect effects temporary differences financial reporting carrying amounts assets liabilities tax bases well net operating losses tax credit carryforwards stated enacted tax rates effect year taxes expected paid recovered deferred income tax assets represent amounts available reduce income taxes payable taxable income future years evaluate recoverability future tax deductions credits assessing adequacy future expected taxable income sources including future reversal existing taxable temporary differences taxable income carryback years available tax planning strategies estimated future taxable income amount income taxes pay subject ongoing audits federal state foreign tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental assess income tax positions record tax benefits years subject examination based upon evaluation facts circumstances information available reporting date tax positions likely tax benefit sustained record largest amount tax benefit greater 50 likelihood realized upon settlement taxing authority full knowledge relevant information interest penalties accrued applicable recognize net taxrelated interest penalties continuing operations income tax expense believe likely tax benefit sustained tax benefit recognized however future results may include favorable unfavorable adjustments estimated tax liabilities due settlement income tax examinations new regulatory judicial pronouncements relevant events result effective tax rate may fluctuate significantly quarterly annual basis item 7aitem 7 management’s discussion analysis financial condition results operations overview consolidated results operations textron 2015 year solid execution across business segments improved operational performance enabling us increase profitability despite overall decline revenues addition continued strategy development investment new products position businesses future growth several highlights 2015 include following · improved gross margin 60 basispoints 171 177 · grew segment profit 13 billion 3 increase despite 3 decline revenues · raised diluted earnings per share continuing operations 16 215 250 · generated 10 billion cash operating activities manufacturing businesses · increased investment research development activities 12 778 million · invested 420 million capital expenditures 81 million complementary acquisitions · returned 241 million shareholders share repurchases dividend payments · reduced debttocapital net cash ratio 26 33 analysis consolidated operating results set forth detailed analysis segments’ operating results provided segment analysis section pages 20 27 revenues decreased 455 million 3 2015 compared 2014 decreases bell textron systems segments partially offset higher revenues textron aviation industrial segments net revenue decrease included following factors · lower bell revenues 791 million largely due decrease 577 million v22 program revenues primarily reflecting lower aircraft deliveries decrease 193 million commercial revenues largely related change mix commercial aircraft sold period lower commercial aftermarket volume 92 million · lower textron systems revenues 104 million primarily due lower volume unmanned systems product line largely reflecting lower deliveries fourth quarter · higher textron aviation revenues 254 million primarily due first quarter impact beechcraft acquisition 219 million higher volume mix 35 million completed acquisition beechcraft march 14 2014 result 2014 reflect full twelve months revenues · higher industrial segment revenues 206 million primarily due higher volume 357 million largely fuel systems functional components product line impact acquisitions 103 million partially offset unfavorable foreign exchange impact 240 million revenues increased 18 billion 15 2014 compared 2013 increases textron aviation industrial segments partially offset lower revenues bell textron systems finance segments net revenue increase included following factors · higher textron aviation revenues 18 billion primarily due 15 billion impact beechcraft acquisition 263 million increase volume largely related citation jets · higher industrial segment revenues 326 million primarily due 181 million higher volume largely fuel systems functional components product line 142 million impact acquisitions · lower bell revenues 266 million largely due 183 million decrease commercial revenues reflecting lower sales activity across commercial helicopter market 99 million lower military volume largely related h1 program reflecting lower aircraft deliveries production support · lower textron systems revenues 41 million primarily due lower volume 233 million marine land systems product line reflecting lower vehicle deliveries partially offset higher volume 130 million unmanned systems product line 62 million impact acquisitions · lower finance revenues 29 million primarily attributable gains disposition finance receivables held sale 2013 cost sales selling administrative expense manufacturing cost sales selling administrative expenses together comprise operating expenses cost sales decreased 442 million 4 2015 compared 2014 largely due lower volume bell segment 217 million favorable foreign exchange impact mostly strengthening us dollar euro partially offset higher volume industrial segment increase acquired businesses primarily beechcraft 60 basispoint improvement gross margin largely driven textron aviation segment primarily reflecting net impact beechcraft acquisition includes benefit integrated cost structure beechcraft cessna lower amortization fair value stepup adjustments related acquired beechcraft inventories selling administrative expense decreased 57 million 4 2015 compared 2014 significant factors contributing decrease expense include favorable impact ongoing cost reduction activities bell segment lower sharebased compensation expense 22 million partially offset increase acquired businesses primarily beechcraft manufacturing cost sales increased 13 billion 13 2014 compared 2013 largely due impact acquired businesses primarily beechcraft 2014 gross margin percentage manufacturing revenues increased 170 basispoints largely due improved leverage resulting higher revenues primarily textron aviation segment selling administrative expense increased 235 million 21 2014 compared 2013 largely related businesses acquired past year compensation expense increases partially offset 28 million severance costs incurred 2013 connection voluntary separation program textron aviation segment acquisition restructuring costs 2014 executed restructuring program textron aviation segment align cessna beechcraft businesses reduce operating redundancies maximize efficiencies 2014 recorded charges 41 million related restructuring activities along 11 million transaction costs included acquisition restructuring costs line consolidated statements operations interest expense interest expense consolidated statements operations includes interest finance manufacturing borrowing groups interest related intercompany borrowings eliminated interest expense finance segment included within segment profit includes intercompany interest consolidated interest expense decreased 22 million 12 2015 compared 2014 primarily due favorable borrowing costs lower average debt outstanding 2014 consolidated interest expense increased 18 million 10 compared 2013 primarily due 31 million impact related financing beechcraft acquisition partially offset 9 million lower interest expense due maturity convertible notes second quarter 2013 income tax expense effective tax rate 281 291 261 2015 2014 2013 respectively rate generally differs us federal statutory tax rate 35 due certain earnings operations lowertax jurisdictions throughout world well domestic manufacturing deduction research development credit jurisdictions favorable tax rates significant effective tax rate impact periods presented include canada germany united kingdom belgium china provided us taxes earnings plan reinvest earnings indefinitely outside us 2013 effective tax rate reduced approximately 40 due tax benefit recognized upon retroactive reinstatement extension federal research development tax credit period january 1 2012 december 31 2013 credit subsequently extended 2014 2015 resulting 15 reduction effective tax rate year full reconciliation effective tax rate us federal statutory tax rate 35 see note 12 consolidated financial statements segment analysis operate report financial information following five business segments textron aviation bell textron systems industrial finance segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses acquisition restructuring costs related beechcraft acquisition measurement finance segment includes interest income expense along intercompany interest income expense discussion comparative results manufacturing group changes revenues segment profit typically expressed commercial business terms volume pricing foreign exchange acquisitions additionally changes segment profit may expressed terms mix inflation cost performance volume changes revenues represent increasesdecreases number units delivered services provided pricing represents changes unit pricing foreign exchange change resulting translating foreigndenominated amounts us dollars exchange rates different prior period revenues generated acquired businesses reflected acquisitions twelvemonth period segment profit mix represents change due composition products andor services sold different profit margins inflation represents higher material wages benefits pension costs performance reflects increase decrease research development depreciation selling administrative costs warranty product liability qualityscrap labor efficiency overhead product line profitability startup ramp costreduction initiatives manufacturing inputs approximately 24 2015 revenues derived contracts us government segments significant contracts us government typically express changes segment profit related government business terms volume changes program performance changes contract mix changes volume discussed net sales typically drive corresponding changes segment profit based profit rate particular contract changes program performance typically relate profit recognition associated revisions total estimated costs completion reflect improved deteriorated operating performance award fee rates changes contract mix refers changes operating margin due change relative volume contracts higher lower fee rates overall average margin rate segment changes textron aviation textron aviation revenues operating expenses factors contributing 2015 yearoveryear revenue change provided textron aviation’s revenues increased 254 million 6 2015 compared 2014 primarily due first quarter impact beechcraft acquisition 219 million higher volume mix 35 million delivered 166 citation jets 117 king air turboprops 2015 compared 159 citation jets 113 king air turboprops 2014 portion segment’s revenues derived aftermarket sales services represented 29 total revenues 2015 compared 30 2014 textron aviation’s operating expenses increased 88 million 2015 compared 2014 primarily due incremental operating costs related beechcraft acquisition higher volume partially offset lower amortization 51 million related fair value stepup adjustments acquired beechcraft inventories sold period factors contributing 2014 yearoveryear revenue change provided textron aviation’s revenues increased 18 billion 64 2014 compared 2013 primarily due impact beechcraft acquisition 15 billion higher volume 263 million increase volume primarily result higher citation jet volume 344 million partially offset lower citationair volume 78 million related exiting fractional share business delivered 159 citation jets 113 king air turboprops 2014 compared 139 citation jets 2013 2014 portion segment’s revenues derived aftermarket sales services represented 30 total revenues compared 33 2013 textron aviation’s operating expenses increased 15 billion 53 2014 compared 2013 primarily due incremental operating costs related beechcraft acquisition higher net volume described textron aviation’s operating expenses exclude acquisition restructuring costs incurred across segment result beechcraft integration reported separately discussed acquisition restructuring costs section textron aviation segment profit loss factors contributing 2015 yearoveryear segment profit change provided segment profit textron aviation increased 166 million 71 2015 compared 2014 primarily due increase performance reflecting net profit impact beechcraft acquisition includes benefit integrated cost structure beechcraft cessna lower amortization 51 million related fair value stepup adjustments described segment profit also favorably impacted higher volume well mix products sold factors contributing 2014 yearoveryear segment profit loss change provided textron aviation segment profit increased 282 million 2014 compared 2013 primarily due increase performance higher volume described favorable pricing inflation 28 million severance costs incurred 2013 second quarter 2014 cost structures beechcraft cessna significantly integrated result performance reflects net profit impact beechcraft including benefit integrated cost structure performance also includes amortization 63 million 2014 related fair value stepup adjustments acquired inventories sold periods textron aviation backlog textron aviation’s backlog decreased 291 million 21 2015 primarily due deliveries military contracts 2014 backlog increased 347 million 34 included impact beechcraft acquisition bell’s major us government programs time v22 tiltrotor aircraft h1 helicopter platforms production stage represent significant portion bell’s revenues us government bell revenues operating expenses factors contributing 2015 yearoveryear revenue change provided bell’s revenues decreased 791 million 19 2015 compared 2014 primarily due following factors · 577 million decrease v22 program revenues primarily reflecting lower aircraft deliveries delivered 24 v22 aircraft 2015 compared 37 v22 aircraft 2014 · 193 million decrease commercial revenues largely related change mix commercial aircraft sold period reflecting lower sales activity across commercial helicopter market 92 million lower aftermarket volume bell delivered 175 commercial aircraft 2015 compared 178 commercial aircraft 2014 · 21 million decrease military included 41 million recorded second quarter 2014 related settlement sdd phase arh program bell delivered 24 h1 aircraft periods bell’s operating expenses decreased 662 million 18 2015 compared 2014 primarily due lower net sales volume described favorable impact ongoing cost reduction activities result cost reduction actions announced april 2015 bell incurred approximately 40 million severance benefit costs second quarter 2015 initial impact restructuring bell’s segment profit second quarter 2015 significant due cost savings headcount reductions impact including portion costs indirect cost rates actions reduced bell’s headcount approximately 1100 employees representing approximately 12 bell workforce time factors contributing 2014 yearoveryear revenue change provided bell’s revenues decreased 266 million 6 2014 compared 2013 primarily due following factors · 183 million decrease commercial revenues largely related lower volume reflecting lower sales activity across commercial helicopter market bell delivered 178 commercial aircraft 2014 compared 213 commercial aircraft 2013 · 99 million decrease military volume primarily related h1 program largely reflecting lower aircraft deliveries production support lower volume partially offset 41 million recorded second quarter 2014 related settlement sdd phase arh program bell delivered 24 h1 aircraft 2014 compared 25 aircraft 2013 · 16 million increase v22 program revenues reflecting higher product support volume 115 million increase largely offset lower aircraft deliveries delivered 37 v22 aircraft 2014 compared 41 v22 aircraft 2013 bell’s operating expenses decreased 222 million 6 2014 compared 2013 primarily due lower net volume described addition bell experienced favorable profit adjustments longterm contracts primarily driven cost reduction activities 2014 well unfavorable performance 2013 bell segment profit factors contributing 2015 yearoveryear segment profit change provided bell’s segment profit decreased 129 million 24 2015 compared 2014 primarily due 223 million unfavorable impact lower volume mix 16 million favorable program profit adjustment 2014 related arh program described volume mix partially offset favorable performance 94 million largely related ongoing cost reduction activities factors contributing 2014 yearoveryear segment profit change provided bell’s segment profit decreased 44 million 8 2014 compared 2013 impact volume mix largely driven lower commercial volume unfavorable mix commercial aircraft deliveries partially offset 16 million favorable program profit adjustment related arh program described favorable performance primarily reflected cost reduction activities 2014 well unfavorable performance 2013 bell backlog 2015 bell’s backlog decreased 300 million 5 primarily related commercial business 2014 bell’s backlog decreased 926 million 14 primarily due v22 aircraft deliveries excess orders textron systems textron systems revenues operating expenses factors contributing 2015 yearoveryear revenue change provided revenues textron systems decreased 104 million 6 2015 compared 2014 primarily due lower volume unmanned systems product line textron systems’ operating expenses decreased 83 million 6 2015 compared 2014 primarily due lower volume described partially offset unfavorable mix products delivered 2015 factors contributing 2014 yearoveryear revenue change provided revenues textron systems decreased 41 million 2 2014 compared 2013 primarily due lower volume marine land systems product line 233 million reflecting fewer vehicle deliveries partially offset higher volume unmanned systems product line 130 million 62 million impact largely related acquisition two flight simulation training businesses december 2013 textron systems’ operating expenses decreased 44 million 3 2014 compared 2013 primarily due lower volume described well impact 15 million charge recorded 2013 related unmanned systems’ feeforservice program operating expenses also included impact costs related acquisitions textron systems segment profit factors contributing 2015 yearoveryear segment profit change provided textron systems’ segment profit decreased 21 million 14 2015 compared 2014 primarily resulting lower volume unfavorable product mix 2015 factors contributing 2014 yearoveryear segment profit change provided segment profit textron systems increased 3 million 2 2014 compared 2013 primarily driven 22 million improved performance partially offset 12 million lower volume described performance primarily reflects impact unfavorable profit adjustments 2013 including 15 million charge related unmanned systems’ feeforservice program systems backlog textron systems’ backlog decreased 462 million 17 2015 primarily due deliveries excess orders weapons sensors unmanned systems product lines industrial revenues operating expenses factors contributing 2015 yearoveryear revenue change provided industrial segment revenues increased 206 million 6 2015 compared 2014 primarily due higher volume 357 million impact acquisitions 103 million partially offset unfavorable foreign exchange impact 240 million mostly related strengthening us dollar primarily euro higher volume reflected 283 million increase fuel systems functional components product line primarily due automotive industry demand europe north america 74 million increase industrial product lines operating expenses industrial segment increased 184 million 6 2015 compared 2014 largely due impact higher volume described additional operating expenses acquisitions 105 million partially offset favorable impact 225 million changes foreign exchange rates factors contributing 2014 yearoveryear revenue change provided industrial segment revenues increased 326 million 11 2014 compared 2013 primarily due higher volume 181 million impact acquisitions 142 million primarily within specialized vehicles equipment product line higher volume resulted 142 million increase fuel systems functional components product line principally reflecting automotive industry demand north america europe 39 million increase industrial product lines operating expenses industrial segment increased 288 million 10 2014 compared 2013 largely due impact higher volume described additional operating expenses recently acquired businesses industrial segment profit factors contributing 2015 yearoveryear segment profit change provided segment profit industrial segment increased 22 million 8 2015 compared 2014 largely due impact higher volume described partially offset unfavorable performance 15 million unfavorable impact 15 million changes foreign exchange rates factors contributing 2014 yearoveryear segment profit change provided segment profit industrial segment increased 38 million 16 2014 compared 2013 largely due impact higher volume described profit also impacted improved performance 15 million primarily driven fuel systems functional components product line finance revenues finance segment revenues decreased 20 million 2015 compared 2014 primarily attributable average finance receivables lower 187 million finance segment revenues decreased 29 million 2014 compared 2013 primarily attributable 31 million impact gains disposition finance receivables held sale 2013 gains resulted payoff loans amounts sale loans prices excess values established previous periods finance segment profit finance segment profit increased 3 million 2015 compared 2014 primarily due lower provision loan losses finance segment profit decreased 28 million 2014 compared 2013 primarily due change provision loan losses 29 million largely reflecting reserve reversals 2013 primarily related noncaptive business impact gains finance receivables held sale described decreases segment profit partially offset lower administrative expense 19 million 2014 primarily associated exit noncaptive business finance portfolio quality following table reflects information finance segment’s credit performance related finance receivables excludes finance receivables held sale liquidity capital resources financings conducted two separate borrowing groups manufacturing group consists textron consolidated majorityowned subsidiaries operate textron aviation bell textron systems industrial segments finance group also finance segment consists textron financial corporation consolidated subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements key information utilized assessing liquidity summarized believe calculations debt capital net debt capital useful measures provide summary indication level debt financing ie leverage place support capital structure well provide indication capacity add leverage believe sufficient cash meet future needs based existing cash balances cash expect generate manufacturing operations available funding alternatives appropriate textron senior unsecured revolving credit facility expires october 2018 aggregate principal amount 10 billion 100 million available issuance letters credit january 2 2016 amounts borrowed facility 33 million letters credit issued also maintain effective shelf registration statement filed securities exchange commission authorizes us issue unlimited amount public debt securities manufacturing group cash flows cash flows continuing operations manufacturing group presented consolidated statement cash flows summarized cash flows provided operating activities 1038 million 2015 compared 1097 million 2014 decrease 5 decrease largely due change working capital partially offset higher income continuing operations 94 million dividends received finance group 63 million 2015 significant factor contributing decrease cash flows related working capital reduction customer deposits 304 million textron aviation largely reflecting advance deposits received military contracts 2014 2015 deliveries cash flows operating activities increased 439 million 2014 compared 2013 largely due change working capital higher income continuing operations 120 million lower contributions 118 million pension plans partially offset 175 million dividends received finance group 2013 working capital favorably impacted increase 226 million customer deposits primarily textron aviation 174 million increase cash accounts receivable largely bell partially offset increase net tax payments 43 million net tax payments 187 million 266 million 223 million 2015 2014 2013 respectively pension contributions 68 million 76 million 194 million 2015 2014 2013 respectively cash flows used investing activities included capital expenditures 420 million 429 million 444 million 2015 2014 2013 respectively 2014 investing cash flows also included 15 billion aggregate cash payment acquire beechcraft 2015 2014 2013 cash flows used financing activities included repayment outstanding debt 100 million 559 million 528 million respectively 2014 cash flows financing activities included proceeds longterm debt 14 billion used finance portion beechcraft acquisition share repurchases 2013 share repurchase authorization repurchased aggregate 52 million shares outstanding common stock 219 million 2015 aggregate 89 million shares outstanding common stock 340 million 2014 dividends dividend payments shareholders totaled 22 million 28 million 22 million 2015 2014 2013 respectively dividends finance group included within cash flows operating activities manufacturing group represent return investment dividends paid finance group 63 million 175 million 2015 2013 respectively finance group cash flows cash flows continuing operations finance group summarized 2015 2014 2013 finance group’s cash flows operating activities primarily impacted changes net taxes paidreceived net tax paymentsreceipts 11 million 23 million 49 million 2015 2014 2013 respectively cash flows investing activities primarily included collections finance receivables proceeds sales receivables finance assets totaling 389 million 499 million 853 million 2015 2014 2013 respectively partially offset financial receivable originations 194 million 215 million 271 million respectively cash used financing activities included payments longterm nonrecourse debt 256 million 345 million 743 million 2015 2014 2013 respectively partially offset proceeds longterm debt 61 million 128 million 298 million respectively 2015 2013 dividend payments manufacturing group totaled 63 million 175 million respectively consolidated cash flows consolidated cash flows continuing operations elimination activity borrowing groups summarized cash flows provided operating activities 1094 million 2015 compared 1211 million 2014 decrease 10 decrease largely due change working capital partially offset higher income continuing operations 93 million significant factor contributing decrease cash flows related working capital reduction customer deposits 304 million textron aviation largely reflecting advance deposits received military contracts 2014 2015 deliveries cash flows operating activities increased 398 million 2014 compared 2013 largely due change working capital lower contributions 118 million pension plans higher income continuing operations 107 million working capital favorably impacted increase 226 million customer deposits primarily textron aviation 174 million increase cash accounts receivable largely bell partially offset increase net tax payments 115 million lower net cash receipts captive finance receivables 87 million net tax payments 198 million 289 million 174 million 2015 2014 2013 respectively cash flows investing activities included capital expenditures 420 million 429 million 444 million 2015 2014 2013 respectively 2014 cash flows investing activities also included 15 billion aggregate cash payment acquire beechcraft collections finance receivables proceeds sales receivables finance assets totaled 105 million 134 million 368 million 2015 2014 2013 respectively cash used financing activities included 219 million 340 million share repurchases 2015 2014 respectively 2015 2014 2013 financing activities also include repayment outstanding longterm debt 356 million 904 million 13 billion respectively cash flows financing activities also included proceeds 16 billion longterm debt 2014 used finance portion beechcraft acquisition proceeds 448 million longterm debt 2013 captive financing intercompany transactions finance group finances retail purchases leases new preowned aircraft helicopters manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers sale receivables reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidated statements cash flows reclassification adjustments included consolidated statement cash flows summarized support agreement textron tfc textron required maintain controlling interest tfc agreement amended december 2015 also requires textron ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 125 million cash contributions required paid tfc 2015 2014 2013 maintain compliance support agreement contractual obligations manufacturing group following table summarizes known contractual obligations defined reporting regulations manufacturing group january 2 2016 pension postretirement benefits maintain defined benefit pension plans postretirement benefit plans pensions described note 11 consolidated financial statements included table discounted estimated benefit payments expect make related unfunded pension postretirement benefit plans actual benefit payments dependent number factors including mortality assumptions expected retirement age rate compensation increases medical trend rates subject change future years policy funding pension plans make contributions annually consistent applicable laws regulations however future contributions pension plans included table 2016 expect make approximately 33 million contributions funded pension plans retirement account plan based current assumptions may change changes market conditions current contribution years 2017 2020 estimated range approximately 60 million 125 million plan provisions place time longterm liabilities longterm liabilities consist undiscounted amounts consolidated balance sheets primarily include obligations deferred compensation arrangements estimated environmental remediation costs payments deferred compensation arrangements estimated based management’s assumptions expected retirement age mortality stock price rates return participant deferrals timing cash flows associated environmental remediation costs largely based historical experience certain longterm liabilities deferred taxes unrecognized tax benefits product liability warranty litigation reserves excluded table due uncertainty timing payments combined absence historical trends used predictor payments purchase obligations purchase obligations include undiscounted amounts committed legally enforceable contracts purchase orders goods services defined terms price quantity delivery dates approximately 30 purchase obligations disclose represent purchase orders issued goods services delivered firm contracts us government full recourse customary contract termination clauses finance group following table summarizes known contractual obligations defined reporting regulations finance group january 2 2016 securitized debt payments represent contractual obligations finance group provide legal recourse investors purchase interests securitizations beyond credit enhancement inherent retained subordinate interests january 2 2016 finance group also 28 million liabilities payable within next 12 months critical accounting estimates prepare consolidated financial statements conformity generally accepted accounting principles must make complex subjective judgments selection application accounting policies accounting policies believe critical portrayal financial condition results operations listed believe policies require difficult subjective complex judgments estimating effect inherent uncertainties section read conjunction note 1 consolidated financial statements includes significant accounting policies longterm contracts make substantial portion sales government customers pursuant longterm contracts require development delivery products multiple years may contain fixedprice purchase options additional products account longterm contracts percentageofcompletion method accounting method estimate profit difference total estimated revenues cost contract percentageofcompletion method accounting involves use various estimating techniques project costs completion cases includes estimates recoveries asserted customer changes specifications due size length time nature many contracts estimation total contract costs revenues completion complicated subject many variables relative outcome future events period several years required make numerous assumptions estimates relating items expected engineering requirements complexity design related development costs product performance subcontractors availability cost materials labor productivity cost overhead capital costs manufacturing efficiencies achievement contract milestones including product deliveries technical requirements schedule cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments projected costs recognized earnings determinable anticipated losses contracts recognized full period losses become probable estimable due significance judgment estimation process described likely materially different revenues andor cost sales amounts could recorded used different assumptions underlying circumstances change earnings could reduced material amount resulting charge earnings total estimated contract costs significantly higher expected due changes customer specifications prior contract amendment b total estimated contract costs significantly higher previously estimated due cost overruns inflation c change engineering efforts required development stage contract unable meet contract milestones outset contract estimate initial profit booking rate initial profit booking rate contract considers risks surrounding ability achieve technical requirements example newlydeveloped product versus mature product schedule example number type milestone events costs contract requirements initial estimated costs completion profit booking rates may increase performance contract successfully retire risks surrounding technical schedule costs aspects contract likewise profit booking rate may decrease successful retiring risks result estimated costs completion increase estimates subject change performance contract therefore may affect profit booking rate adjustments required changes prior estimates recognized using cumulative catchup method impact change inceptiontodate recorded current period following table sets forth aggregate gross amount program profit adjustments included within segment profit three years ended january 2 2016 goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit might impaired reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics calculate fair value reporting unit primarily using discounted cash flows cash flows incorporate assumptions short longterm revenue growth rates operating margins discount rates represent best estimates current forecasted market conditions cost structure anticipated net cost reductions implied rate return believe market participant would require investment business similar risks business characteristics reporting unit assessed revenue growth rates operating margins used discounted cash flow analysis based strategic plans longrange planning forecasts longterm growth rate use determine terminal value business based assessment minimum expected terminal growth rate well past historical growth broader economic considerations gross domestic product inflation maturity markets serve utilize weightedaverage cost capital impairment analysis makes assumptions capital structure believe market participant would make include risk premium based assessment risks related projected cash flows reporting unit believe approach yields discount rate consistent implied rate return independent investor market participant would require investment company similar risks business characteristics reporting unit assessed reporting unit’s estimated fair value exceeds carrying value impairment analysis performed otherwise amount impairment determined comparing carrying amount reporting unit’s goodwill implied fair value goodwill implied fair value goodwill determined assigning fair value reporting unit’s assets liabilities including unrecognized intangible assets reporting unit acquired business combination carrying amount goodwill exceeds implied fair value impairment loss recognized amount equal excess based annual impairment review fair value reporting units exceeded carrying values believe reasonable possibility units might fail initial step impairment test foreseeable future retirement benefits maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases evaluate update assumptions annually determine weightedaverage expected longterm rate return plan assets consider current expected asset allocation well historical expected returns plan asset class lower expected rate return plan assets increase pension expense 2015 assumed expected longterm rate return plan assets used calculating pension expense 757 compared 760 2014 last four years assumed rate return domestic plans represent approximately 91 total pension assets 775 50 basispoint decrease longterm rate return 2015 would increased pension cost domestic plans approximately 29 million discount rate enables us state expected future benefit payments present value measurement date reflecting current rate pension liabilities could effectively settled rate line rates highquality fixed income investments available period maturity pension benefits fluctuate longterm interest rates change lower discount rate increases present value benefit obligations increases pension expense 2015 weightedaverage discount rate used calculating pension expense 425 compared 492 2014 domestic plans assumed discount rate 425 2015 compared 500 2014 second quarter 2015 bell segment announced cost reduction actions resulted headcount reduction deemed curtailment result remeasured bell’s pension plan incorporating 50 basispoint increase discount rate 475 50 basispoint decrease weightedaverage discount rate includes remeasurement would increased pension cost domestic plans approximately 34 million 2015 trend healthcare costs difficult estimate important effect postretirement liabilities 2015 medical prescription drug healthcare cost trend rates represent weightedaverage annual projected rate increase per capita cost covered benefits 2015 assumed trend rate 750 medical prescription drug healthcare rates assumed rate would gradually decline 500 2024 remain level see note 11 consolidated financial statements impact onepercentagepoint change cost trend rate income taxes deferred income tax balances reflect effects temporary differences financial reporting carrying amounts assets liabilities tax bases well net operating losses tax credit carryforwards stated enacted tax rates effect year taxes expected paid recovered deferred income tax assets represent amounts available reduce income taxes payable taxable income future years evaluate recoverability future tax deductions credits assessing adequacy future expected taxable income sources including future reversal existing taxable temporary differences taxable income carryback years available tax planning strategies estimated future taxable income amount income taxes pay subject ongoing audits federal state foreign tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental assess income tax positions record tax benefits years subject examination based upon evaluation facts circumstances information available reporting date tax positions likely tax benefit sustained record largest amount tax benefit greater 50 likelihood realized upon settlement taxing authority full knowledge relevant information interest penalties accrued applicable recognize net taxrelated interest penalties continuing operations income tax expense believe likely tax benefit sustained tax benefit recognized however future results may include favorable unfavorable adjustments estimated tax liabilities due settlement income tax examinations new regulatory judicial pronouncements relevant events result effective tax rate may fluctuate significantly quarterly annual basis item 7aitem 7 management’s discussion analysis financial condition results operations overview business segments including discussion major products services refer item 1 business pages 3 9 following discussion read conjunction consolidated financial statements related notes included item 8 financial statements supplementary data analysis consolidated operating results set forth detailed analysis segments’ operating results provided segment analysis section pages 21 27 beginning 2018 adopted accounting standards update 201409 revenue contracts customers asc 606 using modified retrospective transition method applied contracts substantially complete end 2017 recorded 90 million adjustment increase retained earnings reflect cumulative impact adopting standard beginning 2018 primarily related certain longterm contracts bell segment us government converted costtocost method revenue recognition 2019 2018 revenues us government contracts primarily recognized costs incurred revenues 2017 primarily recognized units delivered comparative information 2017 restated reported accounting standards effect time 2019 financial highlights ●our manufacturing businesses generated 960 million net cash operating activities continuing operations ●invested 647 million research development activities 339 million capital expenditures ●returned 521 million shareholders share repurchases dividend payments ●backlog increased 8 98 billion includes new contracts us government spares logistic support v22 tiltrotor aircraft h1 helicopter programs bell segment consolidated results operations revenues decreased 342 million 2 2019 compared 2018 revenue decrease included following factors ●lower industrial revenues 493 million primarily reflecting 248 million impact 2018 disposition tools test equipment product line lower volume mix 233 million remaining product lines primarily specialized vehicles product line ●lower textron systems revenues 139 million largely reflecting lower volume 103 million marine land systems product line 41 million unmanned systems product line ●higher textron aviation revenues 216 million largely due higher citation jet volume 286 million primarily reflecting longitude’s entry service fourth quarter 2019 higher aftermarket volume 44 million partially offset lower defense volume ●higher bell revenues 74 million resulting increase commercial revenues 116 million largely reflecting higher deliveries partially offset lower military volume revenues decreased 226 million 2 2018 compared 2017 largely driven disposition tools test equipment product line within industrial segment net revenue decrease included following factors ●lower textron systems revenues 376 million primarily reflecting lower volume 159 million marine land systems product line along decrease due discontinuance sensorfuzed weapon product 2017 ●lower bell revenues 137 million due lower commercial revenues 91 million largely reflecting mix aircraft sold year lower military revenues 46 million ●higher textron aviation revenues 285 million due higher volume mix 185 million favorable pricing 100 million ●higher industrial revenues 5 million primarily due higher volume 149 million largely related specialized vehicles product line favorable impact 57 million foreign exchange impact arctic cat acquisition 49 million increases largely offset 246 million lower revenues due disposition tools test equipment product line cost sales selling administrative expense cost sales decreased 188 million 2 2019 compared 2018 largely resulting impact disposition tools test equipment product line improved performance favorable impact 48 million foreign exchange rate fluctuations partially offset unfavorable impact 94 million inflation gross margin percentage manufacturing revenues decreased 70 basis points 2019 compared 2018 primarily due lower margin textron aviation segment reflecting mix aircraft sold year selling administrative expense decreased 123 million 10 2019 compared 2018 primarily reflecting impact disposition tools test equipment product line cost reduction activities specialized vehicles product line 2018 cost sales decreased 233 million 2 compared 2017 largely resulting disposition tools test equipment product line lower net volume described selling administrative expense decreased 59 million 4 2018 compared 2017 primarily reflecting impact disposition tools test equipment product line interest expense interest expense consolidated statements operations includes interest finance manufacturing borrowing groups interest related intercompany borrowings eliminated interest expense finance segment included within segment profit includes intercompany interest consolidated interest expense increased 5 million 2019 compared 2018 primarily due higher average debt outstanding 2018 consolidated interest expense decreased 8 million compared 2017 primarily due lower average debt outstanding special charges special charges 72 million 73 million 130 million 2019 2018 2017 respectively primarily include restructuring activities described note 17 consolidated financial statements gain business disposition july 2 2018 completed sale businesses manufacture sell products tools test equipment product line within industrial segment recorded aftertax gain 419 million 2018 income taxes 2019 effective tax rate 135 lower us federal statutory tax rate 21 primarily due 61 million benefits recognized additional tax credits related prior years result completion research development tax credit analysis 2018 effective tax rate 117 lower us federal statutory tax rate 21 primarily due disposition tools test equipment product line resulted gain taxable primarily nonus jurisdictions partially exempt gains tax effective tax rate 2018 also reflects 25 million benefit recognized upon reassessment reserve uncertain tax positions based new information including interactions tax authorities recent audit settlements addition finalized 2017 impacts tax cut jobs act tax act recognized 14 million benefit fourth quarter 2018 effective tax rate 598 2017 higher us federal statutory tax rate 35 largely due impact tax act fourth quarter 2017 recorded provisional estimate 266 million onetime adjustments resulting tax act approximately 154 million provisional estimate represented charge resulting remeasurement us federal deferred tax assets liabilities remainder represented provision transition tax post1986 earnings profits previously deferred us income taxes full reconciliation effective tax rate us federal statutory tax rate see note 18 consolidated financial statements segment analysis operate report financial information following five business segments textron aviation bell textron systems industrial finance segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses gainslosses major business dispositions special charges measurement finance segment includes interest income expense along intercompany interest income expense operating expenses manufacturing segments include cost sales selling administrative expense nonservice components net periodic benefit costcredit exclude certain corporate expenses special charges discussion comparative results manufacturing group changes revenues segment profit commercial businesses typically expressed terms volume mix pricing foreign exchange acquisitions dispositions inflation performance revenues volume mix represents changes revenues increases decreases number units delivered services provided composition products andor services sold segment profit volume mix represents change due number units delivered services provided composition products andor services sold different profit margins pricing represents changes unit pricing foreign exchange change resulting translating foreigndenominated amounts us dollars exchange rates different prior period revenues generated acquired businesses reflected acquisitions twelvemonth period reductions revenues segment profit sale businesses reflected dispositions inflation represents higher material wages benefits pension service cost costs performance reflects increase decrease research development depreciation selling administrative costs warranty product liability qualityscrap labor efficiency overhead nonservice pension costcredit product line profitability startup ramp costreduction initiatives manufacturing inputs approximately 24 2019 revenues derived contracts us government including us governmentsponsored foreign military sales program segments contract us government changes revenues related contracts expressed terms volume changes segment profit contracts typically expressed terms volume mix performance include cumulative catchup adjustments associated revisions transaction price may reflect contract modifications changes assumptions related award fees variable consideration b changes total estimated costs completion due improved deteriorated operating performance textron aviation textron aviation revenues operating expenses factors contributing 2019 yearoveryear revenue change provided textron aviation’s revenues increased 216 million 4 2019 compared 2018 largely due higher volume mix 199 million volume mix includes higher citation jet volume 286 million primarily reflecting longitude’s entry service fourth quarter 2019 higher aftermarket volume 44 million partially offset lower defense volume delivered 206 citation jets 176 commercial turboprops 2019 compared 188 citation jets 186 commercial turboprops 2018 textron aviation’s operating expenses increased 212 million 5 2019 compared 2018 largely due higher net volume mix described unfavorable impact inflation partially offset improved manufacturing performance factors contributing 2018 yearoveryear revenue change provided textron aviation’s revenues increased 285 million 6 2018 compared 2017 due higher volume mix 185 million favorable pricing 100 million delivered 188 citation jets 186 commercial turboprops 2018 compared 180 citation jets 155 commercial turboprops 2017 textron aviation’s operating expenses increased 143 million 3 2018 compared 2017 largely due higher net volume described textron aviation segment profit factors contributing 2019 yearoveryear segment profit change provided textron aviation’s segment profit increased 4 million 2019 compared 2018 due favorable impact 49 million performance reflecting manufacturing efficiencies partially offset unfavorable impact 28 million inflation net pricing lower volume mix 17 million due mix products sold year factors contributing 2018 yearoveryear segment profit change provided segment profit textron aviation increased 142 million 47 2018 compared 2017 primarily due impact higher volume mix 65 million described favorable impact pricing net inflation textron aviation backlog textron aviation increased 611 million 52 2018 result orders excess deliveries bell’s major us government programs time v22 tiltrotor aircraft h1 helicopter platforms production support stage represent significant portion bell’s revenues us government bell revenues operating expenses factors contributing 2019 yearoveryear revenue change provided bell’s revenues increased 74 million 2 2019 compared 2018 reflecting higher commercial revenues 116 million partially offset lower military volume delivered 201 commercial helicopters 2019 compared 192 commercial helicopters 2018 bell’s operating expenses increased 64 million 2 2019 compared 2018 primarily due higher volume mix described factors contributing 2018 yearoveryear revenue change provided bell’s revenues decreased 137 million 4 2018 compared 2017 due lower commercial revenues 91 million largely reflecting mix aircraft sold year lower military revenues 46 million delivered 192 commercial helicopters 2018 compared 132 commercial helicopters 2017 bell’s operating expenses decreased 147 million 5 2018 compared 2017 primarily due lower volume mix described improved performance military programs described bell segment profit factors contributing 2019 yearoveryear segment profit change provided bell’s segment profit increased 10 million 2 2019 compared 2018 due favorable performance 6 million impact higher volume mix described performance includes improved manufacturing performance partially offset lower net favorable program adjustments factors contributing 2018 yearoveryear segment profit change provided bell’s segment profit increased 10 million 2 2018 compared 2017 due favorable impact 60 million performance partially offset unfavorable impact volume mix largely due mix commercial aircraft sold year impact performance largely result 77 million improved performance military programs included increase favorable profit adjustments reflecting retirements risk related cost estimates improved labor overhead rates partially offset higher research development costs bell backlog bell’s backlog increased 11 billion 18 2019 primarily reflecting new contracts us government spares logistic support v22 tiltrotor aircraft h1 helicopter programs excess revenues recognized bell’s backlog increased 12 billion 27 2018 new contracts received excess revenues recognized totaled 20 billion primarily reflected increase 24 billion bell’s portion third multiyear v22 contract production delivery 63 units along related supplies services 2024 partially offset decrease 760 million upon adoption asc 606 beginning 2018 largely resulting acceleration revenues upon conversion costtocost method revenue recognition textron systems textron systems revenues operating expenses factors contributing 2019 yearoveryear revenue change provided revenues textron systems decreased 139 million 9 2019 compared 2018 largely due lower volume 103 million marine land systems product line primarily reflecting lower armored vehicle deliveries 41 million unmanned systems product line textron systems’ operating expenses decreased 124 million 9 2019 compared 2018 primarily due lower volume described favorable impact 18 million gain discussed factors contributing 2018 yearoveryear revenue change provided revenues textron systems decreased 376 million 20 2018 compared 2017 primarily due lower volume 159 million marine land systems product line reflecting lower tactical armoured patrol vehicle program tapv deliveries along decrease due discontinuance sensorfuzed weapon product 2017 textron systems’ operating expenses decreased 393 million 23 2018 compared 2017 primarily due lower volume described decrease operating expenses 2018 also included impact unfavorable net program adjustments recorded 2017 described textron systems segment profit factors contributing 2019 yearoveryear segment profit change provided textron systems’ segment profit decreased 15 million 10 2019 compared 2018 primarily due unfavorable impact performance 9 million impact lower volume described performance includes impact lower net favorable program adjustments partially offset 18 million gain recognized second quarter 2019 related new training business formed flightsafety international inc discussed note 7 consolidated financial statements factors contributing 2018 yearoveryear segment profit change provided textron systems’ segment profit increased 17 million 12 2018 compared 2017 primarily due favorable performance 62 million partially offset lower volume described performance improved largely due unfavorable program adjustments 44 million recorded 2017 related tapv program 2017 program experienced inefficiencies resulting various production issues ramp subsequent production textron systems backlog 2019 backlog decreased 258 million 18 primarily marine land systems product line revenues recognized exceeded new contracts industrial revenues operating expenses factors contributing 2019 yearoveryear revenue change provided industrial segment revenues decreased 493 million 11 2019 compared 2018 largely due impact 248 million disposition tools test equipment product line 2018 233 million lower volume mix remaining product lines primarily specialized vehicles product line reduction volume specialized vehicles product line largely reflected management distribution channel related products arctic cat brand including reduction inventories sold channel operating expenses industrial segment decreased 492 million 12 2019 compared 2018 primarily due lower operating expenses 226 million disposition tools test equipment product line lower volume mix described improved performance described factors contributing 2018 yearoveryear revenue change provided industrial segment revenues increased 5 million 2018 compared 2017 higher volume 149 million largely related specialized vehicles product line favorable impact 57 million foreign exchange primarily related strengthening euro us dollar impact 49 million acquisition arctic cat march 6 2017 largely offset 246 million lower revenues due disposition tools test equipment product line operating expenses industrial segment increased 77 million 2 2018 compared 2017 primarily due higher volume described impact foreign exchange additional operating expenses arctic cat acquisition increases partially offset lower operating expenses disposition tools test equipment product line industrial segment profit factors contributing 2019 yearoveryear segment profit change provided segment profit industrial segment largely unchanged 2019 compared 2018 favorable performance 94 million principally specialized vehicles product line primarily reflecting cost reduction activities largely offset impact lower volume mix described performance also includes impact 17 million favorable adjustment recognized fourth quarter 2018 related patent infringement matter factors contributing 2018 yearoveryear segment profit change provided segment profit industrial segment decreased 72 million 25 2018 compared 2017 resulting impact disposition tools test equipment product line 22 million unfavorable impact pricing inflation 21 million unfavorable performance 16 million primarily related specialized vehicles product line unfavorable volume mix primarily due mix products sold year performance primarily included additional operating expenses first quarter 2018 due timing arctic cat acquisition seasonality outdoor power sports business unfavorable inventory adjustments specialized vehicles product line partially offset favorable impact 17 million recognized fourth quarter 2018 related patent infringement matter finance segment revenues unchanged segment profit increased 5 million 2019 compared 2018 finance segment revenues decreased 3 million segment profit increased 1 million 2018 compared 2017 following table reflects information finance segment’s credit performance related finance receivables liquidity capital resources financings conducted two separate borrowing groups manufacturing group consists textron consolidated majorityowned subsidiaries operate textron aviation bell textron systems industrial segments finance group also finance segment consists textron financial corporation consolidated subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements key information utilized assessing liquidity summarized believe calculations debt capital net debt capital useful measures provide summary indication level debt financing ie leverage place support capital structure well provide indication capacity add leverage believe sufficient cash meet future needs based existing cash balances cash expect generate manufacturing operations available funding alternatives appropriate october 18 2019 textron entered senior unsecured revolving credit facility aggregate principal amount 10 billion 100 million available issuance letters credit textron may elect increase aggregate amount commitments facility 13 billion designating additional lender existing lender agreeing increase commitment facility expires october 2024 subject two oneyear extensions textron’s option consent lenders representing majority commitments facility new facility replaced prior 5year facility scheduled expire september 2021 january 4 2020 december 29 2018 amounts borrowed either facility january 4 2020 10 million outstanding letters credit issued new facility december 29 2018 10 million outstanding letters credit issued prior facility also maintain effective shelf registration statement filed securities exchange commission allows us issue unlimited amount public debt securities registration statement may 2019 issued 300 million fixedrate notes due september 2029 annual interest rate 390 june 2019 amended finance group’s 150 million fixedrate loan due august 2019 extending maturity date june 2022 modifying annual interest rate prior rate 226 288 manufacturing group cash flows cash flows continuing operations manufacturing group presented consolidated statements cash flows summarized 2019 cash flows operating activities 960 million compared 1127 million 2018 decrease 167 million change cash flows included 364 million decrease changes inventories periods 133 million decrease liabilities primarily due changes salaries wages employer taxes payable partially offset 343 million increase cash flows changes accounts payable cash flows provided operating activities 2018 1127 million compared 930 million 2017 21 increase primarily reflecting lower pension contributions 306 million higher earnings dividend 50 million received finance group 2018 partially offset higher use net working capital 2018 largely reflecting 145 million cash outflow changes net taxes paidreceived net tax paymentsreceipts 120 million 129 million 16 million 2019 2018 2017 respectively pension contributions 51 million 52 million 358 million 2019 2018 2017 respectively 2017 pension contributions included 300 million discretionary contribution fund us pension plan 2019 investing cash flows included capital expenditures 339 million investing cash flows 2018 included net cash proceeds 807 million disposition tools test equipment product line net proceeds corporateowned life insurance policies 110 million partially offset capital expenditures 369 million 2017 cash flows used investing activities included capital expenditures 423 million 316 million aggregate cash payment arctic cat acquisition cash flows used financing activities 2019 primarily included 503 million cash paid repurchase aggregate 100 million shares outstanding common stock 2018 share repurchase authorization 252 million payments longterm debt partially offset net proceeds 301 million issuance longterm debt 2018 financing cash flows included 18 billion cash paid repurchase aggregate 291 million shares outstanding common stock 2018 authorization prior 2017 authorization financing cash flows 2017 included 582 million cash paid repurchase aggregate 119 million outstanding common stock prior share repurchase authorizations repayment outstanding debt 704 million partially offset proceeds longterm debt 992 million february 25 2020 board directors authorized repurchase 25 million shares common stock new plan allows us opportunistically repurchase shares continue practice repurchasing shares offset impact dilution shares issued compensation benefit plans 2020 plan replaces prior 2018 share repurchase authorization utilized 2019 2018 repurchases funded part net proceeds 08 billion disposition tools test product line dividend payments shareholders totaled 18 million 20 million 21 million 2019 2018 2017 respectively dividends received finance group totaled 50 million 2019 2018 included within cash flows operating activities manufacturing group represent return investment finance group cash flows cash flows continuing operations finance group presented consolidated statements cash flows summarized finance group’s cash flows operating activities included net tax payments 1 million 17 million 48 million 2019 2018 2017 respectively cash flows investing activities primarily included collections finance receivables totaling 277 million 226 million 273 million 2019 2018 2017 respectively partially offset finance receivable originations 184 million 177 million 174 million respectively cash flows used financing activities included payments longterm nonrecourse debt 51 million 126 million 137 million 2019 2018 2017 respectively dividend payments manufacturing group totaled 50 million 2019 2018 2017 financing cash flows also included proceeds longterm debt 44 million consolidated cash flows consolidated cash flows continuing operations elimination activity borrowing groups summarized consolidated cash flows operating activities 1016 million 2019 compared 1109 million 2018 decrease 93 million change cash flows included 333 million decrease changes inventories periods 125 million decrease liabilities primarily due changes salaries wages employer taxes payable partially offset 343 million increase cash flows changes accounts payable 2018 consolidated cash flows provided operating activities 1109 million compared 963 million 2017 15 increase primarily reflecting lower pension contributions 306 million higher earnings partially offset higher use net working capital 2018 reflecting 114 million increase net tax payments 45 million lower cash flows related captive financing activities net tax payments 121 million 146 million 32 million 2019 2018 2017 respectively pension contributions 51 million 52 million 358 million 2019 2018 2017 respectively 2017 pension contributions included 300 million discretionary contribution fund us pension plan 2019 investing cash flows included capital expenditures 339 million investing cash flows 2018 included net cash proceeds 807 million disposition tools test equipment product line net proceeds corporateowned life insurance policies 110 million partially offset capital expenditures 369 million 2017 cash flows used investing activities included capital expenditures 423 million 316 million aggregate cash payment arctic cat acquisition 2019 2018 2017 cash used financing activities included share repurchases 503 million 1783 million 582 million respectively repayment outstanding debt 303 million 131 million 841 million respectively 2019 2017 financing cash flows also included proceeds issuance longterm debt 301 million 1036 million respectively captive financing intercompany transactions finance group provides financing primarily purchasers new preowned textron aviation aircraft bell helicopters manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidated statements cash flows reclassification adjustments included consolidated statements cash flows summarized support agreement textron tfc textron required maintain controlling interest tfc agreement amended december 2015 also requires textron ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 125 million cash contributions required paid tfc 2019 2018 2017 maintain compliance support agreement contractual obligations manufacturing group following table summarizes known contractual obligations defined reporting regulations manufacturing group january 4 2020 pension postretirement benefits maintain defined benefit pension plans postretirement benefit plans pensions described note 16 consolidated financial statements included table discounted estimated benefit payments expect make related unfunded pension postretirement benefit plans actual benefit payments dependent number factors including mortality assumptions expected retirement age rate compensation increases medical trend rates subject change future years policy funding pension plans make contributions annually consistent applicable laws regulations however future contributions pension plans included table 2020 expect make approximately 25 million contributions funded pension plans retirement account plan based current assumptions may vary changes market conditions current contribution years 2021 2024 estimated approximately 50 million plan provisions place time longterm liabilities longterm liabilities consist undiscounted amounts consolidated balance sheets primarily include obligations deferred compensation arrangements estimated environmental remediation costs payments deferred compensation arrangements estimated based management’s assumptions expected retirement age mortality stock price rates return participant deferrals timing cash flows associated environmental remediation costs largely based historical experience certain longterm liabilities deferred taxes unrecognized tax benefits reserves product liability warranty product maintenance litigation excluded table due uncertainty timing payments combined absence historical trends used predictor payments purchase obligations purchase obligations include undiscounted amounts committed legally enforceable contracts purchase orders goods services defined terms price quantity delivery dates approximately 39 purchase obligations disclose represent purchase orders issued goods services delivered firm contracts us government full recourse customary contract termination clauses finance group following table summarizes known contractual obligations defined reporting regulations finance group january 4 2020 critical accounting estimates prepare consolidated financial statements conformity generally accepted accounting principles must make complex subjective judgments selection application accounting policies accounting policies believe critical portrayal financial condition results operations listed believe policies require difficult subjective complex judgments estimating effect inherent uncertainties section read conjunction note 1 consolidated financial statements includes significant accounting policies revenue recognition substantial portion revenues related longterm contracts us government including us governmentsponsored foreign military sales program design development manufacture modification aerospace defense products well related services beginning 2018 adopted asc 606 discussed note 1 consolidated financial statements adoption standard due continuous transfer control us government recognize revenue time perform contract selecting method measure progress towards completion requires judgment based nature products service provided generally use costtocost method measure progress contracts best depicts transfer control customer occurs incur costs contracts measure extent progress towards completion measured based ratio costs incurred date estimated costs completion performance obligation revenue recorded proportionally costs incurred prior asc 606 adoption accounted longterm contracts percentage completion method accounting method estimated profit difference total estimated revenues cost contract recognized estimated profit contract term based either unitsofdelivery method costtocost method typically used development effort costs incurred appropriate circumstances revenues fixed price contracts generally recorded using unitsofdelivery method revenues costreimbursement contracts recorded using costtocost method approximately 70 2019 revenues us government fixedprice incentive contracts extent actual costs vary estimates upon price negotiated generate less profit could potentially incur loss transaction price contracts represents best estimate consideration expect receive includes assumptions regarding variable consideration applicable certain longterm contracts contain incentive fees provisions either increase decrease transaction price variable amounts generally awarded upon achievement certain performance metrics program milestones cost targets based upon customer discretion include estimated amounts transaction price extent probable significant reversal cumulative revenue recognized occur uncertainty associated variable consideration resolved estimates variable consideration determination whether include estimated amounts transaction price based largely assessment anticipated performance historical performance information reasonably available us due number years may take complete many contracts scope nature work required performed contracts estimation total transaction price costs completion complicated subject many variables accordingly subject change estimating total costs completion required make numerous assumptions related complexity design related development work performed engineering requirements product performance subcontractor performance availability cost materials labor productivity availability cost overhead capital costs manufacturing efficiencies length time complete contract estimate increases wages prices materials costs satisfying offset obligations among variables cost estimation process based professional knowledge experience engineers program managers along finance professionals review update cost projections quarterly frequently circumstances significantly change estimates total costs incurred contract exceed estimates total sales earned provision entire loss contract recorded period loss determined outset contract estimate initial profit booking rate considering risks surrounding ability achieve technical requirements eg newlydeveloped product versus mature product schedule eg number type milestone events costs contract requirements initial estimated costs completion profit booking rates may increase performance contract successfully retire risks surrounding technical schedule cost aspects contract conversely profit booking rate may decrease successful retiring risks result estimated costs completion increase estimates subject change performance contract therefore may affect profit booking rate changes estimate total expected cost transaction price contract typically impact profit booking rate utilize cumulative catchup method accounting recognize impact changes profit booking rate contract method inceptiontodate impact profit adjustment contract recognized period adjustment identified impact cumulative catchup adjustments revenues segment profit recognized prior periods presented adoption asc 606 2018 significant portion contracts us government converted costtocost method revenue recognition units delivery method costtocost method generally results larger cumulative catchup adjustments since revenue recognized earlier contracts requiring estimation costs longer periods time units delivery method used many contracts 2017 time develop refine estimates required recognize revenue products delivered much later contract term due significance judgment estimation process described likely materially different revenues andor cost sales amounts could recorded used different assumptions underlying circumstances change earnings could reduced material amount resulting charge earnings total estimated contract costs significantly higher expected due changes customer specifications prior contract amendment b total estimated contract costs significantly higher previously estimated due cost overruns inflation c change engineering efforts required development stage contract unable meet contract milestones goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit might impaired reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics calculate fair value reporting unit primarily using discounted cash flows cash flows incorporate assumptions short longterm revenue growth rates operating margins discount rates represent best estimates current forecasted market conditions cost structure anticipated net cost reductions implied rate return believe market participant would require investment business similar risks business characteristics reporting unit assessed revenue growth rates operating margins used discounted cash flow analysis based strategic plans longrange planning forecasts longterm growth rate use determine terminal value business based assessment minimum expected terminal growth rate well past historical growth broader economic considerations gross domestic product inflation maturity markets serve utilize weightedaverage cost capital impairment analysis makes assumptions capital structure believe market participant would make include risk premium based assessment risks related projected cash flows reporting unit believe approach yields discount rate consistent implied rate return independent investor market participant would require investment company similar risks business characteristics reporting unit assessed reporting unit’s estimated fair value exceeds carrying value impairment analysis performed otherwise impairment loss recognized amount equal excess carrying value estimated fair value amount based annual impairment review fair value reporting units exceeded carrying values believe reasonable possibility units might fail initial step impairment test foreseeable future retirement benefits maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases evaluate update assumptions annually determine weightedaverage expected longterm rate return plan assets consider current expected asset allocation well historical expected returns plan asset class lower expected rate return plan assets increase pension expense 2019 assumed expected longterm rate return plan assets used calculating pension expense 755 compared 758 2018 last seven years assumed rate return domestic plans represent approximately 90 total pension assets 775 decrease 50 basispoints longterm rate return 2019 would increased pension cost domestic plans approximately 36 million discount rate enables us state expected future benefit payments present value measurement date reflecting current rate pension liabilities could effectively settled rate line rates highquality fixed income investments available period maturity pension benefits fluctuate longterm interest rates change lower discount rate increases present value benefit obligations increases pension expense 2019 weightedaverage discount rate used calculating pension expense 424 compared 367 2018 domestic plans assumed discount rate 435 2019 compared 375 2018 decrease 50 basispoints weightedaverage discount rate 2019 would increased pension cost domestic plans approximately 34 million trend healthcare costs difficult estimate important effect postretirement liabilities 2019 medical prescription drug cost trend rates represent weightedaverage annual projected rate increase per capita cost covered benefits 2019 assumed trend rate 7 medical prescription drug cost assumed rate would gradually decline 5 2024 remain level item 7aitem 7 management’s discussion analysis financial condition results operations overview consolidated results operations 2017 maintained focus investing businesses continued development new products services also completed strategic acquisition arctic cat platform expand grow textron specialized vehicles business addition continued take cost reduction actions execution restructuring plans integration activities order realign businesses improve overall operating efficiency better position businesses future activities support overall strategy longterm growth expansion product portfolio creation longterm shareholder value financial highlights 2017 include following · generated 947 million cash operating activities manufacturing businesses net 300 million discretionary contribution fund us pension plan · invested 634 million research development activities 423 million capital expenditures 316 million acquisition arctic cat · returned 603 million shareholders share repurchases dividend payments · continued execution 2016 restructuring plan restructuring integration arctic cat acquisition resulting special charges 130 million analysis consolidated operating results set forth detailed analysis segments’ operating results provided segment analysis section pages 21 28 revenues increased 410 million 3 2017 compared 2016 largely driven increases industrial textron systems bell segments partially offset lower revenues textron aviation segment net revenue increase included following factors · higher industrial revenues 492 million primarily due impact acquisition arctic cat described segment analysis section · higher textron systems revenues 84 million primarily due higher volume 176 million marine land systems product line partially offset lower volume products lines · higher bell revenues 78 million primarily due increase commercial revenues 89 million largely reflecting higher commercial aircraft deliveries · lower textron aviation revenues 235 million primarily due lower volume mix 307 million largely result lower military commercial turboprop volume revenues increased 365 million 3 2016 compared 2015 largely driven increases industrial textron systems textron aviation segments partially offset lower revenues bell segment net revenue increase included following factors · higher industrial revenues 250 million primarily due higher volume 168 million largely fuel systems functional components product line impact acquired businesses 121 million · higher textron systems revenues 236 million primarily due higher volume 106 million marine land systems product line 77 million unmanned systems product line · higher textron aviation revenues 99 million primarily due impact acquired business 66 million higher volume mix 42 million largely result higher citation jet volume 165 million partially offset lower commercial turboprop volume · lower bell revenues 215 million primarily due decrease commercial revenues 269 million largely reflecting lower commercial aircraft deliveries cost sales selling administrative expense 2017 cost sales increased 484 million 4 selling administrative expense increased 33 million 3 compared 2016 primarily due increase acquired businesses largely arctic cat gross margin percentage manufacturing revenues decreased 100 basis points 2016 primarily due lower margins textron systems segment largely reflecting unfavorable impact net program adjustments industrial segment included impact arctic cat acquisition cost sales increased 332 million 3 2016 compared 2015 largely due higher volume textron systems industrial textron aviation segments increase acquired businesses increases partially offset lower volume bell segment favorable cost performance across manufacturing segments interest expense interest expense consolidated statements operations includes interest finance manufacturing borrowing groups interest related intercompany borrowings eliminated interest expense finance segment included within segment profit includes intercompany interest consolidated interest expense increased 5 million 2016 compared 2015 primarily due higher average debt outstanding special charges 2016 initiated plan restructure realign businesses implementing headcount reductions facility consolidations actions order improve overall operating efficiency across textron plan textron systems discontinued production sensorfuzed weapon product within weapons sensors operating unit combined jacobsen business textron specialized vehicles business consolidating facilities general administrative functions reduced headcount textron aviation well businesses corporate functions december 2017 decided take additional restructuring actions consolidate operating facilities streamline product lines primarily within bell textron systems industrial segments resulted additional special charges 45 million fourth quarter 2017 recorded total special charges 213 million since inception 2016 plan included 97 million severance costs 84 million asset impairments 32 million contract terminations costs amounts 83 million incurred textron systems 63 million textron aviation 38 million industrial 28 million bell 1 million corporate total headcount reduction plan expected approximately 2100 positions representing 5 workforce connection acquisition arctic cat discussed note 2 consolidated financial statements initiated restructuring plan first quarter 2017 integrate business textron specialized vehicles business within industrial segment reduce operating redundancies maximize efficiencies arctic cat plan recorded restructuring charges 28 million 2017 included 19 million severance costs largely related changeofcontrol provisions 9 million contract termination costs addition recorded 12 million acquisitionrelated integration transaction costs 2017 special charges recorded plans follows income taxes 2017 effective tax rate significantly higher us federal statutory tax rate 35 largely due impact tax cuts jobs act “act” fourth quarter 2017 recorded provisional estimate 266 million onetime adjustments resulting act approximately 154 million provisional estimate represents charge resulting remeasurement us federal deferred tax assets liabilities remainder represents provision transition tax post1986 earnings profits previously deferred us income taxes addition act reduces us federal corporate tax rate 35 21 expected lower effective tax rate 2018 future years 2016 effective tax rate significantly lower us federal statutory tax rate 35 largely due settlement us internal revenue service office appeals 1998 2008 tax years settlement resulted 206 million benefit recognized continuing operations 113 million benefit discontinued operations full reconciliation effective tax rate us federal statutory tax rate 35 see note 13 consolidated financial statements segment analysis operate report financial information following five business segments textron aviation bell textron systems industrial finance segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses special charges measurement finance segment includes interest income expense along intercompany interest income expense discussion comparative results manufacturing group changes revenues segment profit typically expressed commercial business terms volume pricing foreign exchange acquisitions additionally changes segment profit may expressed terms mix inflation cost performance volume changes revenues represent increasesdecreases number units delivered services provided pricing represents changes unit pricing foreign exchange change resulting translating foreigndenominated amounts us dollars exchange rates different prior period revenues generated acquired businesses reflected acquisitions twelvemonth period segment profit mix represents change due composition products andor services sold different profit margins inflation represents higher material wages benefits pension costs performance reflects increase decrease research development depreciation selling administrative costs warranty product liability qualityscrap labor efficiency overhead product line profitability startup ramp costreduction initiatives manufacturing inputs approximately 22 2017 revenues derived contracts us government segments significant contracts us government typically express changes segment profit related government business terms volume changes program performance changes contract mix changes volume described net sales typically drive corresponding changes segment profit based profit rate particular contract changes program performance typically relate profit recognition associated revisions total estimated costs completion reflect improved deteriorated operating performance award fee rates changes contract mix refers changes operating margin due change relative volume contracts higher lower fee rates overall average margin rate segment changes textron aviation textron aviation revenues operating expenses factors contributing 2017 yearoveryear revenue change provided textron aviation’s revenues decreased 235 million 5 2017 compared 2016 primarily due lower volume mix 307 million largely result lower military commercial turboprop volume delivered 180 citation jets 86 king air turboprops 13 beechcraft t6 trainers 2017 compared 178 citation jets 106 king air turboprops 38 beechcraft t6 trainers 2016 portion segment’s revenues derived aftermarket sales services represented 34 total revenues 2017 compared 31 2016 textron aviation’s operating expenses decreased 149 million 3 2017 compared 2016 largely due lower net volume described factors contributing 2016 yearoveryear revenue change provided millions 2016 versus acquisitions volume mix 9 total change textron aviation’s revenues increased 99 million 2 2016 compared 2015 primarily due impact acquisition repair overhaul business first quarter 2016 higher volume mix 42 million increase volume mix largely due higher citation jet volume 165 million partially offset lower commercial turboprop volume delivered 178 citation jets 106 king air turboprops 2016 compared 166 citation jets 117 king air turboprops 2015 portion segment’s revenues derived aftermarket sales services represented 31 total revenues 2016 compared 29 2015 largely resulting acquisition textron aviation’s operating expenses increased 110 million 2 2016 compared 2015 largely due higher net volume described additional operating expenses resulting acquisition increases partially offset improved cost performance 64 million largely attributable lower research development costs lower compensation expense textron aviation segment profit factors contributing 2017 yearoveryear segment profit change provided segment profit textron aviation decreased 86 million 22 2017 compared 2016 primarily result lower net volume mix described favorable impact 56 million pricing net inflation largely offset unfavorable impact 43 million performance largely reflecting higher research development engineering costs included costs related scorpion program 2017 factors contributing 2016 yearoveryear segment profit change provided segment profit textron aviation decreased 11 million 3 2016 compared 2015 primarily result mix products sold unfavorable impact inflation pricing 27 million decreases partially offset favorable performance 65 million largely attributable lower research development costs lower compensation expense bell’s major us government programs time v22 tiltrotor aircraft h1 helicopter platforms production stage represent significant portion bell’s revenues us government bell revenues operating expenses factors contributing 2017 yearoveryear revenue change provided bell’s revenues increased 78 million 2 2017 compared 2016 primarily due 89 million increase commercial revenues largely due higher deliveries bell delivered 132 commercial aircraft 2017 compared 114 aircraft 2016 military deliveries largely unchanged 2017 compared 2016 delivered 22 v22 aircraft years 38 h1 aircraft 2017 compared 35 h1 aircraft 2016 bell’s operating expenses increased 49 million 2 2017 compared 2016 primarily due higher volume described factors contributing 2016 yearoveryear revenue change provided millions 2016 versus volume mix 225 total change 215 bell’s revenues decreased 215 million 6 2016 compared 2015 primarily due following factors · 269 million decrease commercial revenues primarily due lower aircraft deliveries delivered 114 commercial aircraft 2016 compared 175 aircraft 2015 · 43 million decrease v22 program revenues primarily due lower aircraft deliveries delivered 22 v22 aircraft 2016 compared 24 v22 aircraft 2015 · 97 million increase military revenues primarily reflecting higher h1 program revenues delivered 35 h1 aircraft 2016 compared 24 h1 aircraft 2015 bell’s operating expenses decreased 201 million 7 2016 compared 2015 primarily due lower net sales volume described bell segment profit factors contributing 2017 yearoveryear segment profit change provided bell’s segment profit increased 29 million 8 2017 compared 2016 reflecting favorable impact performance 66 million largely result improved manufacturing performance lower research development costs partially offset unfavorable impact volume mix 37 million factors contributing 2016 yearoveryear segment profit change provided millions 2016 versus volume mix 46 performance total change 14 bell’s segment profit decreased 14 million 4 2016 compared 2015 unfavorable impact volume mix primarily due lower commercial aircraft deliveries favorable performance largely result lower research development costs bell backlog bell’s backlog decreased 762 million 14 2017 increased 136 million 3 2016 decrease 2017 primarily due deliveries v22 h1 programs excess orders textron systems textron systems revenues operating expenses factors contributing 2017 yearoveryear revenue change provided revenues textron systems increased 84 million 5 2017 compared 2016 primarily due higher volume 176 million marine land systems product line partially offset lower volume product lines largely due final deliveries discontinued sensorfuzed weapon product first half 2017 textron systems’ operating expenses increased 131 million 8 2017 compared 2016 primarily due higher volume described unfavorable impact net program adjustments described factors contributing 2016 yearoveryear revenue change provided millions 2016 versus volume acquisitions total change revenues textron systems increased 236 million 16 2016 compared 2015 primarily due higher volume 106 million marine land systems product line 77 million unmanned systems product line impact acquisition 32 million textron systems’ operating expenses increased 179 million 13 2016 compared 2015 primarily due higher volume described textron systems segment profit factors contributing 2017 yearoveryear segment profit change provided textron systems’ segment profit decreased 47 million 25 2017 compared 2016 primarily due unfavorable performance reflects unfavorable impact net program adjustments compared 2016 largely due 44 million adjustments recorded 2017 related tactical armoured patrol vehicle program tapv 2017 program experienced inefficiencies resulting various production issues ramp subsequent production factors contributing 2016 yearoveryear segment profit change provided millions 2016 versus performance volume mix total change textron systems’ segment profit increased 57 million 44 2016 compared 2015 primarily due improved cost performance higher volume described textron systems backlog textron systems decreased 435 million 24 2017 primarily due deliveries excess orders marine land systems product line tapv deliveries near completion final deliveries discontinued sensorfuzed weapon product 2017 2016 backlog decreased 487 million 21 primarily due deliveries excess orders weapons sensors business unmanned systems product line industrial revenues operating expenses factors contributing 2017 yearoveryear revenue change provided industrial segment revenues increased 492 million 13 2017 compared 2016 primarily due impact acquired businesses 393 million largely related acquisition arctic cat described revenues also impacted higher volume 77 million primarily related fuel systems functional components product line favorable impact 27 million foreign exchange primarily related euro march 6 2017 acquired arctic cat manufacturer allterrain vehicles sidebysides snowmobiles addition related parts garments accessories arctic cat provides platform expand product portfolio increase distribution channel support growth within textron specialized vehicles business operating results arctic cat included financial results period subsequent completion acquisition see note 2 consolidated financial statements additional information regarding acquisition operating expenses industrial segment increased 531 million 15 2017 compared 2016 primarily due additional operating expenses acquired businesses increase operating expenses also due higher volume described factors contributing 2016 yearoveryear revenue change provided millions 2016 versus volume acquisitions foreign exchange 35 4 total change industrial segment revenues increased 250 million 7 2016 compared 2015 primarily due higher volume 168 million impact acquired businesses 121 million increase volume primarily related fuel systems functional components product line largely reflecting automotive industry demand europe operating expenses industrial segment increased 223 million 7 2016 compared 2015 primarily due impact higher volume described additional operating expenses acquired businesses industrial segment profit factors contributing 2017 yearoveryear segment profit change provided industrial’s segment profit decreased 39 million 12 2017 compared 2016 largely due unfavorable impact pricing inflation 23 million primarily fuel systems functional components product line unfavorable performance 10 million performance primarily included operating results arctic cat partially offset favorable performance fuel systems functional components product line factors contributing 2016 yearoveryear segment profit change provided millions 2016 versus inflation net pricing foreign exchange 12 volume performance total change segment profit industrial segment increased 27 million 9 2016 compared 2015 largely due 19 million favorable impact inflation net pricing primarily specialized vehicles product line higher volume described partially offset unfavorable impact 12 million changes foreign currency exchange rates finance segment revenues decreased 2017 2016 primarily attributable lower average finance receivables finance segment profit increased 2017 compared 2016 primarily due lower provision loan losses partially offset lower average finance receivables finance segment profit decreased 2016 compared 2015 primarily due lower average finance receivables finance portfolio quality following table reflects information finance segment’s credit performance related finance receivables excludes finance receivables held sale 30 million december 31 2016 liquidity capital resources financings conducted two separate borrowing groups manufacturing group consists textron consolidated majorityowned subsidiaries operate textron aviation bell textron systems industrial segments finance group also finance segment consists textron financial corporation consolidated subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements key information utilized assessing liquidity summarized believe calculations debt capital net debt capital useful measures provide summary indication level debt financing ie leverage place support capital structure well provide indication capacity add leverage believe sufficient cash meet future needs based existing cash balances cash expect generate manufacturing operations available funding alternatives appropriate textron senior unsecured revolving credit facility expires september 2021 aggregate principal amount 10 billion 100 million available issuance letters credit december 30 2017 amounts borrowed facility 11 million letters credit issued also maintain effective shelf registration statement filed securities exchange commission allows us issue unlimited amount public debt securities 2017 issued 10 billion public debt registration statement consisted 350 million 365 notes due march 2027 300 million 3375 notes due march 2028 350 million floating rate notes due november 2020 manufacturing group cash flows cash flows continuing operations manufacturing group presented consolidated statements cash flows summarized 2017 cash flows provided operating activities 947 million compared 988 million 2016 4 decrease higher pension contributions 308 million lower earnings largely offset improvements working capital significant factors contributing favorable change working capital included increase cash flows 769 million related changes inventory periods principally textron aviation textron systems segments 333 million related changes customer deposits 179 million changes net taxes paidreceived partially offset changes accounts payable accounts receivable increase cash flows customer deposits periods primarily related lower performancebased payments received certain military contracts bell segment 2016 cash flows provided operating activities 988 million 2016 compared 1038 million 2015 5 decrease primarily result changes working capital included lower customer deposits 257 million largely related performancebased payments certain military contracts bell segment along 34 million reduction dividends received finance group decreases partially offset 75 million increase cash proceeds settlements corporateowned life insurance policies 42 million lower payments taxes pension contributions disclosed net tax receiptspayments 16 million 163 million 187 million 2017 2016 2015 respectively pension contributions 358 million 50 million 68 million 2017 2016 2015 respectively 2017 pension contributions included 300 million discretionary contribution fund us pension plan investing cash flows included capital expenditures 423 million 446 million 420 million 2017 2016 2015 respectively 2017 cash flows investing activities included 316 million aggregate cash payment including repayment debt net cash acquired acquisition arctic cat investing cash flows also included cash used acquisitions 186 million 81 million 2016 2015 respectively total financing cash flows included proceeds longterm debt 992 million 345 million 2017 2016 respectively 2017 2016 2015 financing activities also included repayment outstanding debt 704 million 254 million 100 million respectively share repurchases january 25 2017 announced adoption plan authorizing repurchase 25 million shares textron common stock offset impact dilution sharebased compensation benefit plans opportunistic capital management purposes plan expiration date replaced previous plan adopted 2013 40 million remaining shares available repurchase 2017 repurchased aggregate 119 million shares outstanding common stock 582 million plan 2013 share repurchase authorization repurchased aggregate 69 million 52 million shares outstanding common stock 2016 2015 respectively 241 million 219 million respectively dividends dividend payments shareholders totaled 21 million 22 million 22 million 2017 2016 2015 respectively dividends received finance group totaled 29 million 63 million 2016 2015 respectively included within cash flows operating activities manufacturing group represent return investment finance group cash flows cash flows continuing operations finance group presented consolidated statements cash flows summarized finance group’s cash flows operating activities included net tax payments 48 million 11 million 11 million 2017 2016 2015 respectively cash flows investing activities primarily included collections finance receivables totaling 273 million 292 million 351 million 2017 2016 2015 respectively partially offset finance receivable originations 174 million 173 million 194 million respectively cash flows used financing activities included payments longterm nonrecourse debt 137 million 203 million 256 million 2017 2016 2015 respectively partially offset proceeds longterm debt 44 million 180 million 61 million respectively 2016 2015 dividend payments manufacturing group totaled 29 million 63 million respectively consolidated cash flows consolidated cash flows continuing operations elimination activity borrowing groups summarized consolidated cash flows provided operating activities 980 million 2017 compared 1014 million 2016 3 decrease higher pension contributions 308 million lower earnings largely offset improvements working capital significant factors contributing favorable change working capital included increase cash flows 764 million related changes inventory periods principally textron aviation textron systems segments 333 million related changes customer deposits 142 million lower net tax payments partially offset changes accounts payable accounts receivable increase cash flows customer deposits periods primarily related lower performancebased payments received certain military contracts bell segment 2016 cash flows provided operating activities 1014 million 2016 compared 1094 million 2015 7 decrease primarily result changes working capital included lower customer deposits 257 million largely related performancebased payments certain military contracts bell segment decreases partially offset 75 million increase cash proceeds settlements corporateowned life insurance policies 42 million lower payments taxes pension contributions disclosed net tax payments 32 million 174 million 198 million 2017 2016 2015 respectively pension contributions 358 million 50 million 68 million 2017 2016 2015 respectively 2017 pension contributions included 300 million discretionary contribution fund us pension plan investing cash flows included capital expenditures 423 million 446 million 420 million 2017 2016 2015 respectively 2017 cash flows investing activities included 316 million aggregate cash payment including repayment debt net cash acquired acquisition arctic cat investing cash flows also included cash used acquisitions 186 million 81 million 2016 2015 respectively 2017 2016 2015 cash used financing activities included repayment outstanding debt 841 million 457 million 356 million respectively share repurchases 582 million 241 million 219 million respectively partially offset proceeds longterm debt 10 billion 525 million 61 million respectively captive financing intercompany transactions finance group provides financing primarily purchasers new preowned textron aviation aircraft bell helicopters manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidated statements cash flows reclassification adjustments included consolidated statements cash flows summarized support agreement textron tfc textron required maintain controlling interest tfc agreement amended december 2015 also requires textron ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 125 million cash contributions required paid tfc 2017 2016 2015 maintain compliance support agreement contractual obligations manufacturing group following table summarizes known contractual obligations defined reporting regulations manufacturing group december 30 2017 pension postretirement benefits maintain defined benefit pension plans postretirement benefit plans pensions described note 11 consolidated financial statements included table discounted estimated benefit payments expect make related unfunded pension postretirement benefit plans actual benefit payments dependent number factors including mortality assumptions expected retirement age rate compensation increases medical trend rates subject change future years policy funding pension plans make contributions annually consistent applicable laws regulations however future contributions pension plans included table 2018 expect make approximately 27 million contributions funded pension plans retirement account plan based current assumptions may change changes market conditions current contribution years 2019 2022 estimated range approximately 50 million 55 million plan provisions place time longterm liabilities longterm liabilities consist undiscounted amounts consolidated balance sheets primarily include obligations deferred compensation arrangements estimated environmental remediation costs onetime transition tax disclosed note 13 consolidated financial statements paid eightyear period payments deferred compensation arrangements estimated based management’s assumptions expected retirement age mortality stock price rates return participant deferrals timing cash flows associated environmental remediation costs largely based historical experience certain longterm liabilities deferred taxes unrecognized tax benefits product liability warranty litigation reserves excluded table due uncertainty timing payments combined absence historical trends used predictor payments purchase obligations purchase obligations include undiscounted amounts committed legally enforceable contracts purchase orders goods services defined terms price quantity delivery dates approximately 33 purchase obligations disclose represent purchase orders issued goods services delivered firm contracts us government full recourse customary contract termination clauses finance group following table summarizes known contractual obligations defined reporting regulations finance group december 30 2017 december 30 2017 finance group also 38 million liabilities payable within next 12 months critical accounting estimates prepare consolidated financial statements conformity generally accepted accounting principles must make complex subjective judgments selection application accounting policies accounting policies believe critical portrayal financial condition results operations listed believe policies require difficult subjective complex judgments estimating effect inherent uncertainties section read conjunction note 1 consolidated financial statements includes significant accounting policies longterm contracts make substantial portion sales government customers pursuant longterm contracts require development delivery products multiple years may contain fixedprice purchase options additional products account longterm contracts percentageofcompletion method accounting method estimate profit difference total estimated revenues cost contract percentageofcompletion method accounting involves use various estimating techniques project costs completion cases includes estimates recoveries asserted customer changes specifications due size length time nature many contracts estimation total contract costs revenues completion complicated subject many variables relative outcome future events period several years required make numerous assumptions estimates relating items expected engineering requirements complexity design related development costs product performance subcontractors availability cost materials labor productivity cost overhead capital costs manufacturing efficiencies achievement contract milestones including product deliveries technical requirements schedule cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments projected costs recognized earnings determinable anticipated losses contracts recognized full period losses become probable estimable due significance judgment estimation process described likely materially different revenues andor cost sales amounts could recorded used different assumptions underlying circumstances change earnings could reduced material amount resulting charge earnings total estimated contract costs significantly higher expected due changes customer specifications prior contract amendment b total estimated contract costs significantly higher previously estimated due cost overruns inflation c change engineering efforts required development stage contract unable meet contract milestones outset contract estimate initial profit booking rate initial profit booking rate contract considers risks surrounding ability achieve technical requirements example newlydeveloped product versus mature product schedule example number type milestone events costs contract requirements initial estimated costs completion profit booking rates may increase performance contract successfully retire risks surrounding technical schedule costs aspects contract likewise profit booking rate may decrease successful retiring risks result estimated costs completion increase estimates subject change performance contract therefore may affect profit booking rate adjustments required changes prior estimates recognized using cumulative catchup method impact change inceptiontodate recorded current period following table sets forth aggregate gross amount program profit adjustments included within segment profit three years ended december 30 2017 goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit might impaired reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics calculate fair value reporting unit primarily using discounted cash flows cash flows incorporate assumptions short longterm revenue growth rates operating margins discount rates represent best estimates current forecasted market conditions cost structure anticipated net cost reductions implied rate return believe market participant would require investment business similar risks business characteristics reporting unit assessed revenue growth rates operating margins used discounted cash flow analysis based strategic plans longrange planning forecasts longterm growth rate use determine terminal value business based assessment minimum expected terminal growth rate well past historical growth broader economic considerations gross domestic product inflation maturity markets serve utilize weightedaverage cost capital impairment analysis makes assumptions capital structure believe market participant would make include risk premium based assessment risks related projected cash flows reporting unit believe approach yields discount rate consistent implied rate return independent investor market participant would require investment company similar risks business characteristics reporting unit assessed reporting unit’s estimated fair value exceeds carrying value impairment analysis performed otherwise amount impairment determined comparing carrying amount reporting unit’s goodwill implied fair value goodwill implied fair value goodwill determined assigning fair value reporting unit’s assets liabilities including unrecognized intangible assets reporting unit acquired business combination carrying amount goodwill exceeds implied fair value impairment loss recognized amount equal excess based annual impairment review fair value reporting units exceeded carrying values believe reasonable possibility units might fail initial step impairment test foreseeable future retirement benefits maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases evaluate update assumptions annually determine weightedaverage expected longterm rate return plan assets consider current expected asset allocation well historical expected returns plan asset class lower expected rate return plan assets increase pension expense 2017 assumed expected longterm rate return plan assets used calculating pension expense 757 compared 758 2016 last six years assumed rate return domestic plans represent approximately 91 total pension assets 775 50 basispoint decrease longterm rate return 2017 would increased pension cost domestic plans approximately 30 million discount rate enables us state expected future benefit payments present value measurement date reflecting current rate pension liabilities could effectively settled rate line rates highquality fixed income investments available period maturity pension benefits fluctuate longterm interest rates change lower discount rate increases present value benefit obligations increases pension expense 2017 weightedaverage discount rate used calculating pension expense 413 compared 466 2016 domestic plans assumed discount rate 425 2017 compared 475 2016 50 basispoint decrease weightedaverage discount rate would increased pension cost domestic plans approximately 37 million 2017 trend healthcare costs difficult estimate important effect postretirement liabilities 2017 medical prescription drug healthcare cost trend rates represent weightedaverage annual projected rate increase per capita cost covered benefits 2017 assumed trend rate 725 medical prescription drug healthcare rates assumed rate would gradually decline 5 2024 remain level see note 11 consolidated financial statements impact onepercentagepoint change cost trend rate item 7aitem 7 management’s discussion analysis financial condition results operations overview consolidated results operations overview business segments including discussion major products services refer item 1 business pages 3 9 following discussion read conjunction consolidated financial statements related notes included item 8 financial statements supplementary data analysis consolidated operating results set forth detailed analysis segments’ operating results provided segment analysis section pages 21 27 beginning 2018 adopted accounting standards update 201409 revenue contracts customers asc 606 using modified retrospective transition method applied contracts substantially complete end 2017 recorded 90 million adjustment increase retained earnings reflect cumulative impact adopting standard beginning 2018 primarily related certain longterm contracts bell segment us government converted costtocost method revenue recognition revenues 2018 us government contracts primarily recognized costs incurred revenues 2017 primarily recognized units delivered comparative information restated reported accounting standards effect periods reconciliation financial statement line items impacted 2018 asc 606 prior accounting standards provided note 12 2018 financial highlights · segment profit increased 8 13 billion · generated 11 billion net cash operating activities continuing operations manufacturing businesses · completed sale tools test equipment product line within industrial segment received 08 billion net cash proceeds · returned 18 billion shareholders share repurchases dividend payments · invested 643 million research development activities 369 million capital expenditures · backlog increased 27 91 billion backlog includes award third multiyear v22 contract bell 24 billion increased orders commercial aircraft textron aviation bell segments revenues decreased 226 million 2 2018 compared 2017 largely driven disposition tools test equipment product line within industrial segment net revenue decrease included following factors · lower textron systems revenues 376 million primarily reflecting lower volume 159 million marine land systems product line along decrease due discontinuance sensorfuzed weapon product 2017 · lower bell revenues 137 million primarily due lower commercial revenues 91 million largely reflecting mix aircraft sold year lower military revenues 46 million · higher textron aviation revenues 285 million due higher volume mix 185 million favorable pricing 100 million · higher industrial revenues 5 million primarily due higher volume 149 million largely related textron specialized vehicles product line favorable impact 57 million foreign exchange impact arctic cat acquisition 49 million increases largely offset 246 million lower revenues due disposition tools test equipment product line revenues increased 410 million 3 2017 compared 2016 largely driven increases industrial textron systems bell segments partially offset lower revenues textron aviation segment net revenue increase included following factors · higher industrial revenues 492 million primarily due impact acquisition arctic cat · higher textron systems revenues 84 million primarily due higher volume 176 million marine land systems product line partially offset lower volume products lines · higher bell revenues 78 million primarily due increase commercial revenues 89 million largely reflecting higher commercial aircraft deliveries · lower textron aviation revenues 235 million primarily due lower volume mix 307 million largely result lower military commercial turboprop volume cost sales selling administrative expense 2018 cost sales decreased 233 million 2 compared 2017 largely resulting disposition tools test equipment product line lower net volume described selling administrative expense decreased 59 million 4 2018 compared 2017 primarily reflecting impact disposition tools test equipment product line cost sales increased 490 million 4 selling administrative expense increased 17 million 1 2017 compared 2016 primarily due increase acquired businesses largely arctic cat gross margin percentage manufacturing revenues decreased 100 basis points 2016 primarily due lower margins textron systems segment largely reflecting unfavorable impact net program adjustments industrial segment included impact arctic cat acquisition interest expense interest expense consolidated statements operations includes interest finance manufacturing borrowing groups interest related intercompany borrowings eliminated interest expense finance segment included within segment profit includes intercompany interest consolidated interest expense decreased 8 million 2018 compared 2017 primarily due lower average debt outstanding gain business disposition july 2 2018 completed sale businesses manufacture sell products tools test equipment product line within industrial segment received net cash proceeds 807 million connection disposition recorded aftertax gain 419 million special charges fourth quarter 2018 recorded 73 million special charges connection plan restructure textron specialized vehicles businesses within industrial segment businesses undergone significant changes since acquisition arctic cat expanded product portfolio integrated manufacturing operations retail distribution third quarter 2018 operating results businesses significantly expectations dealer sellthrough lagged despite introduction new products dealer network based review assessment acquired dealer network gotomarket strategy textron road arctic cat brands fourth quarter 2018 along review businesses within product line initiated restructuring plan included product rationalization closure several factorydirect turfcare branch locations manufacturing facility headcount reductions plan recorded asset impairment charges 47 million primarily intangible assets related product rationalization contract termination costs 18 million severance costs 8 million headcount reductions totaled approximately 400 positions representing 10 textron specialized vehicles’ workforce actions taken plan substantially completed end 2018 2017 2016 recorded special charges 90 million 123 million respectively related plan initiated 2016 restructure realign businesses implementing headcount reductions facility consolidations actions order improve overall operating efficiency across textron 2016 plan completed 2017 special charges related plan included 97 million severance costs 84 million asset impairments 32 million contract terminations costs amounts 83 million incurred textron systems 63 million textron aviation 38 million industrial 28 million bell 1 million corporate total headcount reduction plan approximately 2100 positions representing 5 workforce connection acquisition arctic cat initiated restructuring plan first quarter 2017 recorded restructuring charges 28 million 2017 included 19 million severance costs largely related changeofcontrol provisions 9 million contract termination costs addition recorded 12 million acquisitionrelated integration transaction costs 2017 2016 special charges recorded segment type cost follows millions severance costs asset impairments contract terminations acquisition integration transaction costs total special charges industrial textron aviation bell textron systems 1 industrial textron aviation bell textron systems corporate income taxes 2018 effective tax rate lower us federal statutory tax rate 21 primarily due disposition tools test equipment product line resulted gain taxable primarily nonus jurisdictions partially exempt gains tax effective tax rate 2018 also reflects 25 million benefit recognized upon reassessment reserve uncertain tax positions based new information including interactions tax authorities recent audit settlements addition finalized 2017 impacts tax cut jobs act “tax act” recognized 14 million benefit fourth quarter 2018 effective tax rate 2017 higher us federal statutory tax rate 35 largely due impact tax act fourth quarter 2017 recorded provisional estimate 266 million onetime adjustments resulting tax act approximately 154 million provisional estimate represented charge resulting remeasurement us federal deferred tax assets liabilities remainder represented provision transition tax post1986 earnings profits previously deferred us income taxes 2016 effective tax rate lower us federal statutory tax rate 35 largely due settlement us internal revenue service office appeals 1998 2008 tax years settlement resulted 206 million benefit recognized continuing operations 113 million benefit discontinued operations full reconciliation effective tax rate us federal statutory tax rate see note 16 segment analysis operate report financial information following five business segments textron aviation bell textron systems industrial finance segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses gainslosses major business dispositions special charges measurement finance segment includes interest income expense along intercompany interest income expense operating expenses manufacturing segments include cost sales selling administrative expense nonservice components net periodic benefit costcredit exclude certain corporate expenses special charges discussion comparative results manufacturing group changes revenues segment profit typically expressed commercial business terms volume pricing foreign exchange acquisitions dispositions changes segment profit may expressed terms mix inflation cost performance volume changes revenues commercial business represent increases decreases number units delivered services provided pricing represents changes unit pricing foreign exchange change resulting translating foreigndenominated amounts us dollars exchange rates different prior period revenues generated acquired businesses reflected acquisitions twelvemonth period reductions revenues sale businesses reflected dispositions segment profit mix represents change due composition products andor services sold different profit margins inflation represents higher material wages benefits pension service cost costs performance reflects increase decrease research development depreciation selling administrative costs warranty product liability qualityscrap labor efficiency overhead nonservice pension costcredit product line profitability startup ramp costreduction initiatives manufacturing inputs approximately 24 2018 revenues derived contracts us government including us governmentsponsored foreign military sales program segments contract us government changes revenue related contracts expressed terms volume revenues 2018 us government contracts primarily recognized costs incurred revenues 2017 2016 primarily recognized units delivered changes segment profit typically expressed terms volume performance include cumulative catchup adjustments associated revisions transaction price may reflect contract modifications changes assumptions related award fees variable consideration b changes total estimated costs completion due improved deteriorated operating performance textron aviation textron aviation revenues operating expenses factors contributing 2018 yearoveryear revenue change provided textron aviation’s revenues increased 285 million 6 2018 compared 2017 due higher volume mix 185 million favorable pricing 100 million delivered 188 citation jets 186 commercial turboprops 2018 compared 180 citation jets 155 commercial turboprops 2017 textron aviation’s operating expenses increased 143 million 3 2018 compared 2017 largely due higher net volume described factors contributing 2017 yearoveryear revenue change provided millions 2017 versus volume mix 307 total change 235 textron aviation’s revenues decreased 235 million 5 2017 compared 2016 primarily due lower volume mix 307 million largely result lower military commercial turboprop volume delivered 180 citation jets 155 commercial turboprops 13 beechcraft t6 trainers 2017 compared 178 citation jets 190 commercial turboprops 38 beechcraft t6 trainers 2016 textron aviation’s operating expenses decreased 149 million 3 2017 compared 2016 largely due lower net volume described textron aviation segment profit factors contributing 2018 yearoveryear segment profit change provided segment profit textron aviation increased 142 million 47 2018 compared 2017 primarily due impact higher volume mix 65 million described favorable impact pricing net inflation factors contributing 2017 yearoveryear segment profit change provided millions 2017 versus volume mix 99 pricing net inflation performance 43 total change 86 segment profit textron aviation decreased 86 million 22 2017 compared 2016 primarily result lower net volume mix described favorable impact 56 million pricing net inflation largely offset unfavorable impact 43 million performance largely reflecting higher research development engineering costs included costs related scorpion program 2017 textron aviation backlog textron aviation increased 611 million 52 2018 result orders excess deliveries bell’s major us government programs time v22 tiltrotor aircraft h1 helicopter platforms production stage represent significant portion bell’s revenues us government bell revenues operating expenses factors contributing 2018 yearoveryear revenue change provided bell’s revenues decreased 137 million 4 2018 compared 2017 primarily due lower commercial revenues 91 million largely reflecting mix aircraft sold year lower military revenues 46 million delivered 192 commercial helicopters 2018 compared 132 commercial helicopters 2017 bell’s operating expenses decreased 147 million 5 2018 compared 2017 primarily due lower volume mix described improved performance military programs described factors contributing 2017 yearoveryear revenue change provided millions 2017 versus volume mix total change bell’s revenues increased 78 million 2 2017 compared 2016 primarily due 89 million increase commercial revenues largely due higher deliveries bell delivered 132 commercial aircraft 2017 compared 114 aircraft 2016 military deliveries largely unchanged 2017 compared 2016 delivered 22 v22 aircraft years 38 h1 aircraft 2017 compared 35 h1 aircraft 2016 bell’s operating expenses increased 49 million 2 2017 compared 2016 primarily due higher volume described bell segment profit factors contributing 2018 yearoveryear segment profit change provided bell’s segment profit increased 10 million 2 2018 compared 2017 due favorable impact 60 million performance partially offset unfavorable impact volume mix largely due mix commercial aircraft sold year impact performance largely result 77 million improved performance military programs included increase favorable profit adjustments reflecting retirements risk related cost estimates improved labor overhead rates partially offset higher research development costs factors contributing 2017 yearoveryear segment profit change provided millions 2017 versus performance volume mix 37 total change bell’s segment profit increased 29 million 8 2017 compared 2016 reflecting favorable impact performance 66 million largely result improved manufacturing performance lower research development costs partially offset unfavorable impact volume mix 37 million bell backlog bell’s backlog increased 12 billion 27 2018 new contracts received excess revenues recognized totaled 20 billion primarily reflected increase 24 billion bell’s portion third multiyear v22 contract production delivery 63 units along related supplies services 2024 partially offset decrease 760 million upon adoption asc 606 beginning 2018 largely resulting acceleration revenues upon conversion costtocost method revenue recognition bell’s backlog decreased 762 million 14 2017 primarily due deliveries v22 h1 programs excess orders textron systems textron systems revenues operating expenses factors contributing 2018 yearoveryear revenue change provided revenues textron systems decreased 376 million 20 2018 compared 2017 primarily due lower volume 159 million marine land systems product line reflecting lower tactical armoured patrol vehicle program tapv deliveries along decrease due discontinuance sensorfuzed weapon product 2017 textron systems’ operating expenses decreased 393 million 23 2018 compared 2017 primarily due lower volume described decrease operating expenses 2018 also included impact unfavorable net program adjustments recorded 2017 described factors contributing 2017 yearoveryear revenue change provided millions 2017 versus volume acquisitions total change revenues textron systems increased 84 million 5 2017 compared 2016 primarily due higher volume 176 million marine land systems product line partially offset lower volume product lines largely due final deliveries discontinued sensorfuzed weapon product first half 2017 textron systems’ operating expenses increased 131 million 8 2017 compared 2016 primarily due higher volume described unfavorable impact net program adjustments described textron systems segment profit factors contributing 2018 yearoveryear segment profit change provided textron systems’ segment profit increased 17 million 12 2018 compared 2017 primarily due favorable performance 62 million partially offset lower volume described performance improved largely due unfavorable program adjustments recorded 2017 discussed factors contributing 2017 yearoveryear segment profit change provided millions 2017 versus performance 28 volume mix 13 6 total change 47 textron systems’ segment profit decreased 47 million 25 2017 compared 2016 primarily due unfavorable performance reflects unfavorable impact net program adjustments compared 2016 largely due 44 million adjustments recorded 2017 related tapv program 2017 program experienced inefficiencies resulting various production issues ramp subsequent production textron systems backlog 2017 backlog decreased 435 million 24 primarily due deliveries excess orders marine land systems product line tapv deliveries neared completion final deliveries discontinued sensorfuzed weapon product 2017 industrial revenues operating expenses factors contributing 2018 yearoveryear revenue change provided industrial segment revenues increased 5 million 2018 compared 2017 higher volume 149 million largely related textron specialized vehicles product line favorable impact 57 million foreign exchange primarily related strengthening euro us dollar impact 49 million acquisition arctic cat march 6 2017 largely offset 246 million lower revenues due disposition tools test equipment product line operating expenses industrial segment increased 77 million 2 2018 compared 2017 primarily due higher volume described impact foreign exchange additional operating expenses arctic cat acquisition increases partially offset lower operating expenses disposition tools test equipment product line factors contributing 2017 yearoveryear revenue change provided millions 2017 versus acquisitions volume foreign exchange 5 total change industrial segment revenues increased 492 million 13 2017 compared 2016 primarily due impact acquired businesses 393 million largely related acquisition arctic cat described revenues also impacted higher volume 77 million primarily related fuel systems functional components product line favorable impact 27 million foreign exchange primarily related euro march 6 2017 acquired arctic cat manufacturer allterrain vehicles sidebysides snowmobiles addition related parts garments accessories operating results arctic cat included financial results period subsequent completion acquisition see note 2 additional information regarding acquisition operating expenses industrial segment increased 531 million 15 2017 compared 2016 primarily due additional operating expenses acquired businesses increase operating expenses also due higher volume described industrial segment profit factors contributing 2018 yearoveryear segment profit change provided segment profit industrial segment decreased 72 million 25 2018 compared 2017 resulting impact disposition tools test equipment product line 22 million unfavorable impact pricing inflation 21 million unfavorable performance 16 million primarily related textron specialized vehicles product line unfavorable volume mix primarily due mix products sold year performance primarily included additional operating expenses first quarter 2018 due timing arctic cat acquisition seasonality outdoor power sports business unfavorable inventory adjustments textron specialized vehicles product line partially offset favorable impact 17 million recognized fourth quarter 2018 related patent infringement matter factors contributing 2017 yearoveryear segment profit change provided millions 2017 versus pricing inflation 23 performance 10 volume mix 6 total change 39 industrial’s segment profit decreased 39 million 12 2017 compared 2016 largely due unfavorable impact pricing inflation 23 million primarily fuel systems functional components product line unfavorable performance 10 million performance primarily included operating results arctic cat partially offset favorable performance fuel systems functional components product line finance segment revenues decreased 3 million segment profit increased 1 million 2018 compared 2017 finance segment revenues decreased 9 million 2017 compared 2016 primarily attributable lower average finance receivables segment profit increased 3 million 2017 compared 2016 primarily due lower provision loan losses partially offset lower average finance receivables following table reflects information finance segment’s credit performance related finance receivables liquidity capital resources financings conducted two separate borrowing groups manufacturing group consists textron consolidated majorityowned subsidiaries operate textron aviation bell textron systems industrial segments finance group also finance segment consists textron financial corporation consolidated subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements key information utilized assessing liquidity summarized believe calculations debt capital net debt capital useful measures provide summary indication level debt financing ie leverage place support capital structure well provide indication capacity add leverage believe sufficient cash meet future needs based existing cash balances cash expect generate manufacturing operations available funding alternatives appropriate textron senior unsecured revolving credit facility expires september 2021 aggregate principal amount 10 billion 100 million available issuance letters credit december 29 2018 amounts borrowed facility 10 million letters credit issued also maintain effective shelf registration statement filed securities exchange commission allows us issue unlimited amount public debt securities manufacturing group cash flows cash flows continuing operations manufacturing group presented consolidated statements cash flows summarized 2018 cash flows provided operating activities 1127 million compared 930 million 2017 21 increase primarily reflecting lower pension contributions 306 million higher earnings dividend 50 million received finance group first quarter 2018 partially offset higher use net working capital 2018 largely reflecting 145 million cash outflow changes net taxes paidreceived cash flows provided operating activities 930 million 2017 compared 901 million 2016 3 increase improvements working capital largely offset higher pension contributions 308 million lower earnings significant factors contributing favorable change working capital included increase cash flows 769 million related changes inventory periods principally textron aviation textron systems segments 333 million related changes customer deposits 179 million changes net taxes paidreceived partially offset changes accounts payable accounts receivable increase cash flows customer deposits periods primarily related lower performancebased payments received certain military contracts bell segment 2016 net tax paymentsreceipts 129 million 16 million 163 million 2018 2017 2016 respectively pension contributions 52 million 358 million 50 million 2018 2017 2016 respectively 2017 pension contributions included 300 million discretionary contribution fund us pension plan 2018 investing cash flows included net cash proceeds 807 million disposition tools test equipment product line net proceeds corporateowned life insurance policies 110 million partially offset capital expenditures 369 million 2017 cash flows used investing activities included capital expenditures 423 million 316 million aggregate cash payment arctic cat acquisition investing cash flows 2016 included capital expenditures 446 million cash used acquisitions 186 million partially offset net proceeds corporateowned life insurance policies 87 million cash flows used financing activities 2018 primarily included 18 billion cash paid repurchase aggregate 291 million shares outstanding common stock new 2018 share repurchase authorization disclosed prior 2017 authorization 2017 2016 financing cash flows included 582 million 241 million cash paid respectively repurchase aggregate 119 million 69 million shares respectively outstanding common stock prior share repurchase authorizations total financing cash flows 2017 2016 also included repayment outstanding debt 704 million 254 million respectively proceeds longterm debt 992 million 345 million respectively april 16 2018 board directors authorized repurchase 40 million shares common stock repurchase plan utilized 2018 repurchases funded part net proceeds 08 billion disposition tools test product line addition plan allows us opportunistically repurchase shares continue practice repurchasing shares offset impact dilution shares issued compensation benefit plans dividend payments shareholders totaled 20 million 21 million 22 million 2018 2017 2016 respectively dividends received finance group totaled 50 million 29 million 2018 2016 respectively included within cash flows operating activities manufacturing group represent return investment finance group cash flows cash flows continuing operations finance group presented consolidated statements cash flows summarized finance group’s cash flows operating activities included net tax payments 17 million 48 million 11 million 2018 2017 2016 respectively cash flows investing activities primarily included collections finance receivables totaling 226 million 273 million 292 million 2018 2017 2016 respectively partially offset finance receivable originations 177 million 174 million 173 million respectively cash flows used financing activities included payments longterm nonrecourse debt 126 million 137 million 203 million 2018 2017 2016 respectively 2017 2016 cash flows financing activities also included proceeds longterm debt 44 million 180 million respectively 2018 2016 dividend payments manufacturing group totaled 50 million 29 million respectively consolidated cash flows consolidated cash flows continuing operations elimination activity borrowing groups summarized 2018 consolidated cash flows provided operating activities 1109 million compared 963 million 2017 15 increase primarily reflecting lower pension contributions 306 million higher earnings partially offset higher use net working capital 2018 reflecting 114 million increase net tax payments 45 million lower cash flows related captive financing activities consolidated cash flows provided operating activities 963 million 2017 compared 927 million 2016 4 increase improvements working capital largely offset higher pension contributions 308 million lower earnings significant factors contributing favorable change working capital included increase cash flows 764 million related changes inventory periods principally textron aviation textron systems segments 333 million related changes customer deposits 142 million lower net tax payments partially offset changes accounts payable accounts receivable increase cash flows customer deposits periods primarily related lower performancebased payments received certain military contracts bell segment 2016 net tax payments 146 million 32 million 174 million 2018 2017 2016 respectively pension contributions 52 million 358 million 50 million 2018 2017 2016 respectively 2017 pension contributions included 300 million discretionary contribution fund us pension plan investing cash flows 2018 included net cash proceeds 807 million disposition tools test equipment product line net proceeds corporateowned life insurance policies 110 million partially offset capital expenditures 369 million 2017 cash flows used investing activities included capital expenditures 423 million 316 million aggregate cash payment arctic cat acquisition investing cash flows 2016 included capital expenditures 446 million cash used acquisitions 186 million partially offset net proceeds corporateowned life insurance policies 87 million 2018 2017 2016 cash used financing activities included share repurchases 1783 million 582 million 241 million respectively repayment outstanding debt 131 million 841 million 457 million respectively total financing cash flows 2017 2016 also included proceeds longterm debt 1036 million 525 million respectively captive financing intercompany transactions finance group provides financing primarily purchasers new preowned textron aviation aircraft bell helicopters manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidated statements cash flows reclassification adjustments included consolidated statements cash flows summarized support agreement textron tfc textron required maintain controlling interest tfc agreement amended december 2015 also requires textron ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 125 million cash contributions required paid tfc 2018 2017 2016 maintain compliance support agreement contractual obligations manufacturing group following table summarizes known contractual obligations defined reporting regulations manufacturing group december 29 2018 pension postretirement benefits maintain defined benefit pension plans postretirement benefit plans pensions described note 14 included table discounted estimated benefit payments expect make related unfunded pension postretirement benefit plans actual benefit payments dependent number factors including mortality assumptions expected retirement age rate compensation increases medical trend rates subject change future years policy funding pension plans make contributions annually consistent applicable laws regulations however future contributions pension plans included table 2019 expect make approximately 25 million contributions funded pension plans retirement account plan based current assumptions may change changes market conditions current contribution years 2020 2023 estimated approximately 50 million plan provisions place time longterm liabilities longterm liabilities consist undiscounted amounts consolidated balance sheets primarily include obligations deferred compensation arrangements estimated environmental remediation costs payments deferred compensation arrangements estimated based management’s assumptions expected retirement age mortality stock price rates return participant deferrals timing cash flows associated environmental remediation costs largely based historical experience certain longterm liabilities deferred taxes unrecognized tax benefits product liability warranty litigation reserves excluded table due uncertainty timing payments combined absence historical trends used predictor payments purchase obligations purchase obligations include undiscounted amounts committed legally enforceable contracts purchase orders goods services defined terms price quantity delivery dates approximately 37 purchase obligations disclose represent purchase orders issued goods services delivered firm contracts us government full recourse customary contract termination clauses finance group following table summarizes known contractual obligations defined reporting regulations finance group december 29 2018 critical accounting estimates prepare consolidated financial statements conformity generally accepted accounting principles must make complex subjective judgments selection application accounting policies accounting policies believe critical portrayal financial condition results operations listed believe policies require difficult subjective complex judgments estimating effect inherent uncertainties section read conjunction note 1 includes significant accounting policies revenue recognition substantial portion revenues related longterm contracts us government including us governmentsponsored foreign military sales program design development manufacture modification aerospace defense products well related services beginning 2018 adopted accounting standards update asu 201409 revenue contracts customers asc 606 related amendments using modified retrospective transition method permitted comparative information restated standard primarily impacted contracts us government required convert certain contracts unitsofdelivery method costtocost method revenue recognition asc 606 timing revenue recognition changed many contracts number units accounting known performance obligations reduced prior standards process establishing reviewing revenue cost estimates consistent prior periods adoption asc 606 2018 due continuous transfer control us government recognize revenue time perform contract selecting method measure progress towards completion requires judgment based nature products service provided generally use costtocost method measure progress contracts best depicts transfer control customer occurs incur costs contracts measure extent progress towards completion measured based ratio costs incurred date estimated costs completion performance obligation revenue recorded proportionally costs incurred prior asc 606 adoption accounted longterm contracts percentage completion method accounting method estimated profit difference total estimated revenues cost contract recognized estimated profit contract term based either unitsofdelivery method costtocost method typically used development effort costs incurred appropriate circumstances revenues fixed price contracts generally recorded using unitsofdelivery method revenues costreimbursement contracts recorded using costtocost method approximately 80 2018 revenues us government fixedprice incentive contracts extent actual costs vary estimates upon price negotiated generate less profit could potentially incur loss transaction price contracts represents best estimate consideration expect receive includes assumptions regarding variable consideration applicable certain longterm contracts contain incentive fees provisions either increase decrease transaction price variable amounts generally awarded upon achievement certain performance metrics program milestones cost targets based upon customer discretion include estimated amounts transaction price extent probable significant reversal cumulative revenue recognized occur uncertainty associated variable consideration resolved estimates variable consideration determination whether include estimated amounts transaction price based largely assessment anticipated performance historical performance information reasonably available us due number years may take complete many contracts scope nature work required performed contracts estimation total transaction price costs completion complicated subject many variables accordingly subject change estimating total costs completion required make numerous assumptions related complexity design related development work performed engineering requirements product performance subcontractor performance availability cost materials labor productivity availability cost overhead capital costs manufacturing efficiencies length time complete contract estimate increases wages prices materials costs satisfying offset obligations among variables cost estimation process based professional knowledge experience engineers program managers along finance professionals review update cost projections quarterly frequently circumstances significantly change estimates total costs incurred contract exceed estimates total sales earned provision entire loss contract recorded period loss determined outset contract estimate initial profit booking rate considering risks surrounding ability achieve technical requirements eg newlydeveloped product versus mature product schedule eg number type milestone events costs contract requirements initial estimated costs completion profit booking rates may increase performance contract successfully retire risks surrounding technical schedule cost aspects contract conversely profit booking rate may decrease successful retiring risks result estimated costs completion increase estimates subject change performance contract therefore may affect profit booking rate increases decreases profit booking rates recognized current period reflect inceptiontodate effect changes profit booking rate due changes estimate total expected costs along changes transaction price recognized cumulative catchup method accounting method recognizes cumulative effect changes current prior periods impact change inceptiontodate recorded current period impact gross cumulative catchup adjustments revenues segment profit recognized prior periods presented adoption asc 606 beginning 2018 significant portion contracts us government converted costtocost method revenue recognition units delivery method costtocost method generally results larger cumulative catchup adjustments since revenue recognized earlier contracts requiring estimation costs longer periods time units delivery method used many contracts 2017 2016 time develop refine estimates required recognize revenue products delivered much later contract term due significance judgment estimation process described likely materially different revenues andor cost sales amounts could recorded used different assumptions underlying circumstances change earnings could reduced material amount resulting charge earnings total estimated contract costs significantly higher expected due changes customer specifications prior contract amendment b total estimated contract costs significantly higher previously estimated due cost overruns inflation c change engineering efforts required development stage contract unable meet contract milestones goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit might impaired reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics calculate fair value reporting unit primarily using discounted cash flows cash flows incorporate assumptions short longterm revenue growth rates operating margins discount rates represent best estimates current forecasted market conditions cost structure anticipated net cost reductions implied rate return believe market participant would require investment business similar risks business characteristics reporting unit assessed revenue growth rates operating margins used discounted cash flow analysis based strategic plans longrange planning forecasts longterm growth rate use determine terminal value business based assessment minimum expected terminal growth rate well past historical growth broader economic considerations gross domestic product inflation maturity markets serve utilize weightedaverage cost capital impairment analysis makes assumptions capital structure believe market participant would make include risk premium based assessment risks related projected cash flows reporting unit believe approach yields discount rate consistent implied rate return independent investor market participant would require investment company similar risks business characteristics reporting unit assessed reporting unit’s estimated fair value exceeds carrying value impairment analysis performed otherwise impairment loss recognized amount equal excess carrying value estimated fair value amount based annual impairment review fair value reporting units exceeded carrying values believe reasonable possibility units might fail initial step impairment test foreseeable future retirement benefits maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases evaluate update assumptions annually determine weightedaverage expected longterm rate return plan assets consider current expected asset allocation well historical expected returns plan asset class lower expected rate return plan assets increase pension expense 2018 assumed expected longterm rate return plan assets used calculating pension expense 758 compared 757 2017 last seven years assumed rate return domestic plans represent approximately 93 total pension assets 775 50 basispoint decrease longterm rate return 2018 would increased pension cost domestic plans approximately 33 million discount rate enables us state expected future benefit payments present value measurement date reflecting current rate pension liabilities could effectively settled rate line rates highquality fixed income investments available period maturity pension benefits fluctuate longterm interest rates change lower discount rate increases present value benefit obligations increases pension expense 2018 weightedaverage discount rate used calculating pension expense 367 compared 413 2017 domestic plans assumed discount rate 375 2018 compared 425 2017 50 basispoint decrease weightedaverage discount rate 2018 would increased pension cost domestic plans approximately 31 million trend healthcare costs difficult estimate important effect postretirement liabilities 2018 medical prescription drug cost trend rates represent weightedaverage annual projected rate increase per capita cost covered benefits 2018 assumed trend rate 7 medical prescription drug cost assumed rate would gradually decline 5 2024 remain level item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations contained pages 24 30 textrons 1996 annual report shareholders pages incorporated herein reference item 8item 7 management’s discussion analysis financial condition results operations business overview 2007 exceptional year many respects experienced strong sales organic growth particularly aerospace defense businesses cessna set new record 773 jet orders demand commercial helicopters remained strong bell helicopter recording 268 orders aircraft defense backlog increased 188 billion 45 year ago strategically acquired businesses complement core growth areas significant acquisition united industrial corporation “uic” uic operating wholly owned subsidiary aai corporation “aai” leading provider intelligent aerospace defense systems including unmanned aircraft ground control stations aircraft satellite test equipment training systems countersniper devices addition aai acquired certain assets cavair llc helicopter maintenance service center columbia aircraft manufacturing corporation produces highperformance single engine aircraft paladin tools provider tools accessories telecommunications industry paid approximately 11 billion cash four acquisitions also made considerable investments innovation new product development capacity expansion across businesses including continued development commercial aircraft product offerings bell model 429 cessna cj4 finance segment generated significant growth managed finance receivables portfolio quality statistics remained relatively stable july board directors approved twoforone stock split common stock increased annual dividend 19 092 per share continued repurchase common stock spending 295 million 2007 acquire approximately 6 million shares 30 increase income continuing operations 2007 share repurchases diluted earnings per share continuing operations increased 32 359 per share diluted earnings per share continuing operations consolidated results operations revenues increased 17 billion 15 132 billion 2007 compared 2006 primary reasons increase · higher manufacturing volume 10 billion 631 million cessna primarily related increase business jet deliveries 253 million bell’s us government business largely related h1 program higher armored security vehicle “asv” deliveries 148 million increase industrial segment principally due higher demand kautex · higher pricing 344 million 212 million cessna 94 million bell’s commercial business 46 million industrial segment · additional revenues newly acquired businesses 166 million primarily acquisitions overwatch systems aai bell segment · favorable foreign exchange impact 148 million industrial segment · 66 million impact higher average finance receivables due growth aviation resort finance businesses finance segment 2006 revenues increased 15 billion 14 compared 2005 primarily due higher manufacturing sales volume 10 billion higher pricing 274 million higher revenues finance segment 170 million segment profit segment profit increased 373 million 29 16 billion 2007 compared 2006 increase primarily due following factors partially offset inflation 256 million · higher pricing 344 million 212 million cessna 94 million bell’s commercial business 46 million industrial segment · favorable cost performance 164 million includes net charges 2007 armed reconnaissance helicopter “arh” low rate initial production “lrip” program 50 million 32 million favorable impact recovery arh system development demonstration “sdd” launchrelated costs written 2006 lower charges related h1 lrip program 43 million · 148 million net benefit higher volume partially offset unfavorable product mix · profit newly acquired businesses 20 million 2006 segment profit increased 121 million 11 compared 2005 primarily due higher pricing 274 million higher sales volume 198 million improved cost performance 54 million industrial segment favorable warranty performance cessna 39 million higher profit finance segment 39 million increases partially offset inflation 272 million higher spending engineering new product development 74 million higher overhead 55 million bell’s commercial business increased charges related h1 lrip program 68 million corporate expenses net corporate expenses net increased 51 million 2007 compared 2006 primarily due following · 26 million higher compensation expenses largely related stock appreciation · 14 million higher professional consulting fees related corporate initiatives · 11 million increased costs divested operations primarily due higher pension costs retained liabilities · 6 million increase contribution textron charitable trust · partially offset 8 million gain insurance settlement corporate expenses net increased 3 million 2006 compared 2005 principally due 7 million higher sharebased compensation expense 4 million higher incentive compensation partially offset 8 million lower expenses related corporate initiatives special charges special charges 2007 2006 2005 special charges totaled 118 million included 112 million related 2001 disposition automotive trim “trim” business 6 million restructuring expense industrial segment 2005 112 million special charges incurred connection disposition trim included 91 million impairment charges write preferred stock acquired disposition 21 million cover exposures related certain guarantees leases environmental workers’ compensation matters income taxes effective tax rate increased 296 2007 276 2006 comparison federal statutory rate 2007 17 less favorable impact attributed foreign tax rate differential 12 favorable impact 2006 rate related adoption canadian dollar functional currency us tax purposes one canadian subsidiaries 13 less favorable impact tax settlements 2007 compared settlements 2006 partially offset 13 impact lower state income taxes 1 benefit related manufacturing deduction effective tax rate decreased 276 2006 302 2005 largely due impact items 2006 effective tax rate discontinued operations discontinued operations primarily reflect aftertax results fastening systems business sold 2006 operating results discontinued businesses summarized note 2 consolidated financial statements 2006 loss discontinued operations primarily includes 120 million aftertax impairment charge fastening systems business based estimated fair value less cost sell time according offers received potential purchasers 2005 loss discontinued operations includes 335 million goodwill impairment charge related fastening systems business addition recorded aftertax charge approximately 52 million included 37 million related previously deferred foreign currency translation losses 7 million curtailment losses employee retirement plans gain disposal net income taxes 46 million 2005 primarily related tax benefit recorded upon sale intesys segment analysis four reportable segments bell cessna industrial finance segments reflect manner manage operations segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses special charges measurement finance segment includes interest income expense excludes special charges segment’s revenues profit percentage consolidated revenues profit provided bell helicopter early stages development production number government commercial programs anticipated significantly drive revenue profit growth future years government programs generally follow threephase cycle consisting development transition production fullrate production phase specific risks operational challenges next years segment’s major government programs transitioning various phases cycle bell helicopter programs us government include v22 tiltrotor h1 arh bell helicopter’s commercial business invested commercial version tiltrotor aircraft new model 429 2007 expect receive faa certification model 429 20082009 timeframe major programs textron systems include asv unmanned aircraft systems past two years made significant investments conduct research development transition development contracts production increase production capacity implement improved operational systems manage anticipated growth bell helicopter’s government programs commercial product lines costs investing improved operational systems resulted higher overhead expenses 2006 due shorter production cycle commercial business higher overhead costs 2006 reflected lower earnings year however since government business longer production cycle portion costs also absorbed workinprogress inventory particularly v22 accordingly v22 aircraft delivered 2007 overhead expenses reflected inventory resulted lower margins overhead expenses moderated 2007 expect higher overhead costs future largely due costs incurred support significant rampup fullrate production v22 aircraft 2007 textron systems successfully integrated fourth quarter 2006 acquisition overwatch systems business completed acquisition aai leading provider intelligent aerospace defense systems including unmanned aircraft ground control stations aircraft satellite test equipment training systems countersniper devices aai significantly augments product offering us government bell revenues us government business revenues increased 388 million 2007 us government business compared 2006 primarily due higher volume mix 253 million revenues newly acquired businesses 122 million volume increase primarily due following · 161 million higher h1 program revenue principally due delivery first 10 production units · 78 million higher asv revenue due 21 increase deliveries 576 units · 70 million increase v22 program revenue primarily due higher spares revenues · 56 million higher revenue intelligent battlefield systems · 16 million increase sensor fused weapon deliveries increases partially offset · lower spares service sales 74 million military helicopters v22 · lower joint direct attack munitions volume 63 million 2006 revenues increased 376 million compared 2005 primarily due higher net volume mix 343 million benefit acquisitions 28 million volume increase primarily due higher asv deliveries 286 million higher arh sdd development revenues 94 million increased spares service sales 37 million additional intelligent battlefield systems volume 22 million partially offset lower v22 volume 80 million lower h1 revenue 18 million commercial business 2007 revenues commercial business increased 119 million compared 2006 primarily due higher pricing 94 million revenues newly acquired businesses 43 million partially offset lower volume 17 million volume decreased higher helicopter deliveries 50 million offset lower huey ii kit deliveries 44 million lower spares service volume 18 million 2006 revenues increased 151 million commercial business compared 2005 due higher volume 105 million pricing 46 million volume increase primarily due higher civil aircraft deliveries 176 million higher spares service sales 53 million additional deliveries huey ii kits 10 million partially offset lower international military deliveries 116 million bell segment profit us government business segment profit us government business increased 39 million 2007 compared 2006 primarily due improved cost performance 64 million higher net volume mix 16 million benefit acquisitions 10 million partially offset impact inflation pricing 30 million improved cost performance primarily due · 43 million lower charges h1 lrip program discussed detail · 25 million lower costs related arh sdd contract due 14 million 2006 writeoff launchrelated costs 11 million impact subsequent partial recovery costs · 21 million improvements asv due improved productivity lower indirect costs · partially offset 50 million arh lrip 2007 charges discussed · 22 million lower v22 profitability largely due 15 million impact lower margin units unfavorably impacted higher overhead costs associated increasing production capacity 6 million award fee recognized 2006 profit us government business decreased 25 million compared 2005 decrease primarily due inflation 33 million unfavorable cost performance 24 million partially offset impact higher net volume mix 35 million unfavorable performance reflected higher anticipated costs h1 lrip contracts 68 million charges 14 million related arh sdd contract partially offset favorable program performance textron systems 34 million primarily related hurricane katrina h1 program h1 program continues development concurrently working initial production aircraft firm fixedprice lrip contracts us government 2006 recorded program charges 82 million related lrip contracts third quarter 2006 recorded 29 million charges based estimate costs complete would exceed contractual reimbursement transition production phase charges primarily reflected impact higher estimated incremental costs resources added meet contractual schedule requirements higher anticipated efforts final assembly fourth quarter 2006 acceptance initial aircraft us government delayed aircraft delivered delay result changes development engineering requirements identified final stages assembly acceptance testing due delay costs associated additional development efforts rework inprocess units resulting inefficiencies reduction previously anticipated learning curve improvements increased estimate completion costs recorded additional 53 million charge fourth quarter 2006 2007 production process continued mature completed delivery lot 1 aircraft well first lot 2 aircraft manufacturing performance year substantially consistent expectations prospectively costs anticipated increase primarily due anticipated delays receiving cabins supplier additionally fourth quarter committed higher pricing levels anticipated lot 5 contract likely result loss contract negotiations finalized primarily due higher cabin supplier costs accordingly fourth quarter 2007 recorded net charge 30 million reflect higher cost estimates existing contract completion resulting supplier delays well estimated loss resulting price commitment lot 5 contract arh program arh sdd contract cost plus incentive fee contract eligibility fees reduced total contract costs increase 2006 continued development activities costs exceeded original contract amount program expensed 14 million unreimbursed costs related effort third quarter 2007 reached agreement customer recovered 18 million launchrelated costs previously written amount included 11 million charged us government business 7 million charged commercial business overheads december 2007 agreed expand scope development contract efforts funded basis fourth quarter 2006 completed certain phases critical design review arh sdd contract determined initial production configuration aircraft including aircraft configuration changes required us government cost estimates based configuration included anticipated transition production costs exceeded fixed pricing contained two options us government program first two lrip lots option first lrip lot expired 2006 option second lot 1836 aircraft set expire december 2007 time discussions us government related possible reinstatement first option extension second option delivery schedule number units exercised options possible additional aircraft contracted addition options revised pricing end 2006 due uncertainty exposure ultimate outcome discussions us government believe loss probable guidelines established statement financial accounting standards “sfas” 5 “accounting contingencies” march 2007 received correspondence us government created uncertainty whether would proceed production phase arh program accordingly provided losses 18 million supplier obligations longlead component production incurred risk support anticipated arh lrip contract awards second quarter 2007 us army agreed replan arh program reached nonbinding memorandum understanding “mou” related aircraft specifications pricing methodology delivery schedules initial lrip aircraft also agreed conduct additional sdd activities funded basis based plan time related estimates aircraft production costs including costs related risks associated achieving learning curve schedule assumptions expected lose approximately 73 million production proposed initial lrip aircraft accordingly additional charge 55 million taken second quarter 2007 estimated lrip contract losses december 2007 us government’s remaining option related production aircraft original arh program expired unexercised continuing restructure program negotiations us government including reducing number units modifying pricing delivery schedules previously reached mou based current status negotiations contractual commitments vendors related materials anticipated production units procured risk revised best estimate expected loss 50 million resulting 23 million reduction previously established reserves expect initial lrip contract awards finalized mid2008 contract negotiations finalized including pricing aircraft specifications delivery schedules losses related future contract awards additional recovery vendor obligations uncertain commercial business 2007 profit increased 47 million compared 2006 primarily due higher pricing 94 million lower engineering research development expense 18 million partially offset inflation 44 million net impact unfavorable product mix 23 million lower overhead expense 36 million included 7 million recovery discussed related arh program offset higher costs 37 million streamlined legacy commercial product line resulting certain vendor termination costs 2006 profit decreased 94 million compared 2005 primarily due unfavorable cost performance 140 million inflation 28 million partially offset higher pricing 46 million impact increased volume mix 42 million unfavorable cost performance reflected increased overhead costs 55 million impact 30 million gain sale interest model ab139 program 2005 higher net research development expense 29 million 13 million prior year impact resolution uncertainties receipt cash related collaborative research development agreement partially offset 18 million additional reserves recorded lycoming 2005 crankshaft retirement program related service bulletins cessna demand business jet market continued strengthen 2007 reflected 49 increase backlog addition 26 increase business jet deliveries past three years cessna increased annual production rate continued focus improving margins investing engineering research development cessna’s continual effort bring new technology products market citation business jets largest component cessna’s revenues delivered 387 307 252 citation business jets 2007 2006 2005 respectively cessna revenues 2007 cessna’s revenues increased 844 million compared 2006 due higher volume 631 million primarily due higher citation business jet deliveries improved pricing 212 million 2006 revenues increased 676 million compared 2005 due higher volume 493 million primarily related citation business jets improved pricing 183 million cessna segment profit 2007 cessna’s segment profit increased 220 million compared 2006 primarily due improved pricing along 139 million impact higher volume favorable warranty performance 14 million partially offset inflation 106 million increased engineering product development expense 41 million favorable warranty performance included 19 million impact lower estimated warranty costs aircraft sold 2007 related initial model launches discussed partially offset lower benefit 5 million favorable warranty performance 28 million benefit 2007 compared 33 million 2006 segment profit increased 188 million cessna 2006 compared 2005 primarily due improved pricing 102 million impact higher volume favorable warranty performance 39 million partially offset inflation 112 million higher engineering product development costs 41 million favorable warranty performance included 24 million impact lower estimated warranty costs aircraft sold 2006 related initial model launches discussed well 15 million incremental benefit favorable warranty performance 2006 33 million benefit 2006 compared 18 million 2005 initial model launches cessna typically incurs higher warrantyrelated costs production process matures point warranty costs generally moderate sovereign cj3 production lines second half 2006 management estimated production lines reached maturity level based historical production warranty patterns resulting lower estimated warranty costs earlier production aircraft accordingly cessna favorable warranty performance past two years due lower pointofsale warranty costs sovereign cj3 aircraft sold management expects improved performance models continue foreseeable future industrial segment includes businesses kautex fluid power greenlee ezgo jacobsen 2007 experienced positive organic revenue growth largely due doubledigit increases fluid power greenlee including record sales fluid power fourth quarter greenlee expanded product offerings acquisition paladin tools ezgo introduced new energyefficient rxv golf car industrial revenues industrial segment increased 307 million 2007 compared 2006 primarily due higher volume 148 million favorable foreign exchange impact 148 million higher pricing 46 million partially offset 2006 divestiture noncore product lines 37 million revenues industrial segment increased 74 million 2006 compared 2005 primarily due higher volume 89 million higher pricing 46 million favorable foreign exchange impact 10 million partially offset divestiture noncore product lines 72 million industrial segment profit segment profit industrial segment increased 55 million 2007 compared 2006 mainly due improved cost performance 60 million higher pricing 46 million 20 million impact higher volume mix 15 million gain sale land partially offset inflation 83 million improved cost performance primarily attributable cost reduction efforts kautex inflation largely reflects increases material costs segment profit industrial segment increased 13 million 2006 compared 2005 mainly due 54 million improved cost performance higher pricing 46 million 24 million impact higher net volume mix partially offset 100 million inflation 7 million impact divestitures noncore product lines finance 2007 finance segment’s managed finance receivables grew 9 11 billion portfolio quality statistics remained relatively stable percentage finance receivables 60 day delinquency decreased 043 end 2007 077 end 2006 nonperforming assets percentage finance assets increased 134 128 respectively managed finance receivables include finance receivables owned reported balance sheet along securitized sold finance receivables risks ownership retained extent subordinated interests 2008 expect continued growth managed finance receivables moderate pace continued stability portfolio quality statistics disruption credit market second half 2007 minimal impact finance segment’s ability access capital markets refinance maturing debt obligations fund growth finance receivable portfolio however disruption credit markets result increase borrowing costs increase spread london interbank offered rate “libor” primary index variablerate debt priced federal funds rate 11 million negative impact borrowing spreads negative impact almost completely mitigated issuances new lower cost debt finance revenues finance segment increased 77 million 2007 compared 2006 revenue growth primarily attributed following factors · higher average finance receivables 722 million primarily due growth aviation resort finance businesses resulted additional revenues 66 million · 21 million gain sale leveraged lease investment · 20 million increase securitization income primarily related 588 million increase level receivables sold distribution finance revolving securitization increases partially offset following decreases · 17 million decrease portfolio yields related competitive pricing pressures · 13 million lower leveraged lease earnings due unfavorable cumulative earnings adjustment attributable recognition residual value impairments · 8 million reduction leveraged lease earnings adoption new accounting standard revenues finance segment increased 170 million 2006 compared 2005 increase primarily due 103 million increase related higher average finance receivables 90 million increase higher interest rate environment partially offset 18 million decrease income largely due lower fees securitization income average finance receivables increased 13 billion levels corresponding period 2005 primarily due growth distribution golf aviation finance businesses finance segment profit segment profit finance segment increased 12 million 2007 compared 2006 primarily due 30 million increase net interest margin partially offset 11 million increase selling administrative expenses largely attributable finance receivable portfolio growth 7 million increase provision loan losses reflecting increase nonperforming assets net chargeoffs distribution finance portfolio net interest margin increased due number factors including following · increase 56 million securitization fee income described · increase 30 million related growth average finance receivables · partially offset 17 million decrease portfolio yields related competitive pricing pressures · lower leveraged lease earnings 13 million due unfavorable cumulative earnings adjustment attributable recognition residual value impairments · higher borrowing costs 11 million relative federal funds rate · reduction leveraged lease earnings 8 million adoption new accounting standard · lower leveraged lease earnings 7 million due gain 2006 sale option related leveraged lease asset segment profit finance segment increased 39 million 2006 compared 2005 due increase net interest margin growth average finance receivables generated 54 million higher net margin partially offset 18 million decrease income finance portfolio quality following table presents information finance segment’s portfolio quality finance segment’s portfolio quality continues strong indicated low rates delinquency nonperforming assets net chargeoffs percentage average finance receivables also remain stable relatively low 045 2007 compared 038 051 2006 2005 respectively nonperforming assets business percentage owned finance assets business follows nonperforming assets include nonaccrual finance receivables repossessed assets guaranteed manufacturing group believe nonperforming assets generally range 1 4 finance assets depending economic conditions 2007 increases nonperforming assets percentage owned finance assets assetbased lending distribution finance compared 2006 relate weakening us economic conditions began negative impact borrowers certain industries 2006 16 million increase golf finance primarily result two delinquent golf course mortgage loans whose operations affected prolonged effects hurricane katrina 10 million increase assetbased lending result two loans unrelated industries liquidity capital resources financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated entities operate bell cessna industrial segments finance group consists finance segment comprised textron financial corporation subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements assess liquidity manufacturing group terms ability provide adequate cash fund operating investing financing activities principal source liquidity operating cash flows also liquidity available us via committed bank lines credit commercial paper market well access public capital markets provide us longterm capital satisfactory terms 2008 expect future significant uses cash manufacturing group include investments businesses new product development capital expenditures repurchases common stock dividends shareholders debt retirement 2008 expect capital expenditures 550 million stock repurchases range 3 million 4 million shares expect fund future uses cash generated operating activities finance group mitigates liquidity risk ie risk unable fund maturing liabilities origination new finance receivables developing preserving reliable sources capital use variety financial resources meet capital needs cash finance group provided finance receivable collections sales securitizations well issuance commercial paper term debt public private markets diversity capital resources enhances funding flexibility limits dependence one source funds results costeffective funding finance group also borrow manufacturing group availability borrowings creates economic advantage textron comparison borrowings sources making particular funding decisions management considers market conditions prevailing interest rates credit spreads maturity profile assets liabilities july 18 2007 board directors approved twoforone split common stock effected form 100 stock dividend additional shares resulting stock split distributed august 24 2007 shareholders record august 3 2007 also july 18 2007 board directors approved 19 increase annualized common stock dividend rate 0775 per share 092 per share authorized repurchase 24 million shares common stock rate expect repurchase shares authorization depend various factors including prevailing share price alternate uses cash manufacturing group cash flows continuing operations operating cash flows increased past three years primarily due earnings growth changes working capital components resulted 50 million use cash 2007 206 million source cash 2006 21 million use cash 2005 significant use operating cash related increased production inventory buildup primarily support increasing sales bell cessna cash used inventories totaled 473 million 379 million 181 million 2007 2006 2005 respectively partially offsetting use cash inventories also related increasing sales customer deposits within accrued liabilities provided significant source operating cash net cash received customers deposit totaled 297 million 141 million 28 million 2007 2006 2005 respectively investing cash flows largely driven cash outflows acquisitions totaled 11 billion 2007 largely due acquisition aai 338 million 2006 primarily due overwatch systems significant investing cash outflows include capital expenditures 391 million 2007 419 million 2006 356 million 2005 used 995 million less cash financing activities 2007 compared 2006 decrease due principally issuance 350 million 10year notes 2007 paydown 242 million shortterm debt 2006 457 million decrease 2007 purchases common stock 2006 2007 2006 2005 repurchased approximately 6 million 17 million 16 million shares common stock respectively boardauthorized share repurchase programs dividend payments shareholders totaled 154 million 244 million 189 million 2007 2006 2005 respectively timing quarterly dividend payments resulted three payments 2007 five payments 2006 four payments 2005 finance group cash flows continuing operations cash used investing activities decreased 2007 compared 2006 largely due 774 million decrease finance receivable originations net collections 481 million increase proceeds receivable sales securitizations 164 million impact 2006 cash used acquisition proceeds receivable sales increased primarily due sale 588 million receivables distribution finance revolving securitization first quarter 2007 2006 cash used investing activities resulting higher net cash outflows originations 655 million primarily due increased growth finance receivable portfolio partially offset higher proceeds receivable sales 130 million decrease financing cash inflows 2007 primarily reflects reduction borrowings due lower managed receivable growth comparison 2006 addition 2007 used proceeds sale receivables including securitizations fund asset growth instead additional borrowings 2006 cash obtained financing activities principally due increase debt outstanding fund asset growth consolidated cash flows continuing operations operating cash flows increased past three years primarily due earnings growth sources uses cash operating activities primarily related manufacturing group discussed detail within “manufacturing group cash flows continuing operations” section cash used investing activities decreased 2007 compared 2006 largely due 786 million decrease finance receivable originations net collections excluding 12 million captive financing activities 424 million increase proceeds receivable sales securitizations collections excluding 57 million captive financing activities decreases partially offset 590 million higher cash outflows acquisitions 2007 acquired four businesses including aai total outflow 11 billion 2006 acquired three businesses 502 million including overwatch systems electrolux financial corporation acquisitions received less cash financing activities 2007 primarily due reduction borrowings largely result lower managed receivable growth comparison 2006 addition 2007 used proceeds sale receivables including securitizations fund asset growth instead additional borrowings decrease cash borrowed finance group 2007 2006 partially offset proceeds issuance 350 million 10year notes manufacturing group 2007 457 million decrease purchases common stock 90 million lower dividend payments due timing captive financing finance group provide diversified commercial financing third parties addition group finances retail purchases leases new used aircraft equipment manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers securitizations reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidated statements cash flows reclassification elimination adjustments included consolidated statement cash flows summarized consolidated discontinued operations cash flows discontinued operations cash flows 2007 primarily related realization cash tax benefits 2006 cash inflows investing activities primarily due net cash proceeds 636 million sale fastening systems business see note 2 consolidated financial statements details concerning sale capital resources debt net cashtocapital ratio manufacturing group december 29 2007 32 compared 29 december 30 2006 gross debttocapital ratio december 29 2007 38 compared 40 december 30 2006 manufacturing group targets gross debttocapital ratio consistent rated company consistent methodology used members financial community leverage manufacturing group excludes debt finance group turn finance group limits borrowings amount taking account risk profile assets consistent single credit rating surplus capital textron financial corporation returned textron inc borrowings historically secondary source funds manufacturing group along collection finance receivables primary source funds finance group borrowing groups utilize broad base financial sources respective liquidity capital needs credit ratings predominantly function ability generate operating cash flows satisfy certain financial ratios since highquality credit ratings provide us access broad base global investors attractive cost target longterm rating independent debtrating agencies credit ratings outlooks three debtrating agencies borrowing group follows separate shelf registration statements filed securities exchange commission may issue public debt securities one offerings total maximum offering 20 billion finance group may issue unlimited amount public debt securities fourth quarter 2007 issued 350 million 10year notes registration statement december 29 2007 12 billion available registration statement 2007 finance group issued 14 billion term debt cad 220 million term debt registration statement addition finance group issued 300 million 6 fixedtofloating rate junior subordinated notes mature 2067 finance group right redeem notes par beginning 2017 obligated redeem notes beginning 2042 policy maintaining unused committed bank lines credit amount less outstanding commercial paper balances facilities support commercial paper letters credit issuances neither lines credit drawn december 29 2007 december 30 2006 primary committed credit facilities december 29 2007 include following finance group permitted borrow multiyear facility connection acquisition aai entered interim 750 million credit facility subsequently terminated january 2008 support agreement textron inc required maintain 100 ownership textron financial corporation agreement also requires textron inc ensure textron financial corporation maintains fixed charge coverage less 125 consolidated shareholder’s equity less 200 million contractual obligations manufacturing group following table summarizes known contractual obligations defined reporting regulations manufacturing group december 29 2007 well estimate timing obligations expected satisfied amounts exclude interest payments maintain defined benefit pension plans postretirement benefit plans pensions discussed note 12 consolidated financial statements included table discounted estimated benefit payments expect make related unfunded pension postretirement benefit plans actual benefit payments dependent number factors including mortality assumptions expected retirement age rate compensation increases medical trend rates subject change future years also expect make contributions funded pension plans range approximately 53 million 73 million per year next five years reflected table longterm liabilities included table consist primarily undiscounted amounts consolidated balance sheet december 29 2007 representing obligations deferred compensation arrangements estimated environmental remediation costs payments deferred compensation arrangements estimated based management’s assumptions expected retirement age mortality stock price rates return participant deferrals timing cash flows associated environmental remediation costs largely based historical experience longterm liabilities deferred taxes unrecognized tax benefits excluded table due uncertainty timing payments combined absence historical trends used predictor payments operating leases represent undiscounted obligations noncancelable leases purchase obligations represent undiscounted obligations committed purchase goods services december 29 2007 ultimate liability obligations may reduced based upon termination provisions included certain purchase contracts costs incurred date vendors contracts recourse firm contracts us government normal termination clauses january 2005 contracted thirdparty service provider oversight information technology infrastructure including maintenance operational oversight purchases hardware “it contract” contract covers 10year period subject variable pricing quantity provisions purchases computer hardware system design modifications retained right approve significant design equipment purchase related decisions service provider terminate contract convenience prior full term would consequently subject variable termination fees decline time exceed 46 million december 29 2007 finance group following table summarizes finance group’s known contractual obligations defined reporting regulations due nature finance companies also contractual cash receipts received future generally borrow funds various contractual maturities match maturities finance receivables contractual payments receipts december 29 2007 detailed finance receivable receipts related finance leases term loans based contractual cash flows receipts related revolving loans based historical cash flow experience amounts could differ due prepayments chargeoffs factors receipts contractual payments exclude finance charges receivables debt interest payments proceeds sale operating lease equipment items shown preceding table cash receipts expected sufficient cover maturing debt contractual liabilities next two years december 29 2007 finance group 27 billion debt 406 million liabilities payable within next 12 months december 29 2007 finance group unused commitments fund new existing customers 16 billion committed revolving lines credit compared 13 billion december 30 2006 loan commitments generally original duration less three years necessarily represent future cash requirements since many agreements used extent committed expire unused exposed interest rate changes commitments since interest rates set loans funded offbalance sheet arrangements performance guarantee 2004 bell helicopter business formed agustawestlandbell llc “awb llc” agustawestland north america inc “awna” venture created joint design development manufacture sale customer training product support vh71 helicopter certain variations derivatives thereof offered sold departments agencies us government march 2005 awb llc received 12 billion cost reimbursementtype subcontract lockheed martin system development demonstration phase us marine corps helicopter squadron program guaranteed lockheed martin due prompt performance awb llc obligations subcontract provided liability guaranty shall exceed 49 awb llc’s aggregate liability lockheed martin subcontract agustawestland nv awna’s parent company guaranteed remaining 51 lockheed martin entered crossindemnification agreements agustawestland nv party indemnifies related payments required agreements result indemnifying party’s workshare subcontracts received awb llc’s maximum obligation 50 total contract value equates 613 million maximum amount liability guarantee 300 million december 29 2007 completion finance receivable sales securitizations finance group sells finance receivables utilizing wholeloan sales securitizations primarily utilizing assetbacked securitization structures result transactions finance receivables removed balance sheet proceeds received used reduce recorded debt levels despite reduction recorded balance sheet position generally retain subordinated interest finance receivables sold securitizations may affect operating results periodic fair value adjustments retained interests fully discussed “securitizations” section note 5 consolidated financial statements utilize offbalance sheet financing arrangements diversify funding alternatives arrangements provided net proceeds 731 million 50 million 361 million 2007 2006 2005 respectively net pretax gains 62 million 42 million 49 million respectively proceeds securitizations include amounts received related incremental increases level distribution finance receivables sold revolving conduit exclude amounts received related ongoing replenishment outstanding sold balance shortduration receivables december 29 2007 finance group two significant offbalance sheet financing arrangements distribution finance revolving securitization trust aviation finance securitization trust distribution finance revolving securitization trust master trust purchases inventory finance receivables finance group issues assetbacked notes investors distribution finance revolving securitization trust 20 billion onemonth liborbased variablerate assetbacked notes outstanding december 29 2007 notes threeyear term mature may 2008 2009 2010 aviation finance securitization trust purchases finance leases installment contracts secured general aviation aircraft trust funded commercial paper conduit commitment 600 million revolving credit facility expires december 2008 december 31 2007 aviation securitization trust 433 million outstanding facility amount pretax gains recorded upon ongoing sale receivables arrangements value subordinated interest impacted pricing investor notes issued distribution finance securitization trust interest rate obtained commercial paper conduit funds aviation finance securitization trust trusts experienced material disruption funding however commercial paper conduit provides funding aviation finance securitization trust experience increase borrowing spreads 2007 critical accounting policies prepare consolidated financial statements conformity generally accepted accounting principles must make complex subjective judgments selection application accounting policies accounting policies believe critical portrayal financial condition results operations listed believe policies require difficult subjective complex judgments estimating effect inherent uncertainties section read conjunction note 1 consolidated financial statements includes significant accounting policies allowance losses finance receivables allowance losses finance receivables intended provide losses inherent portfolio requires application estimates significant judgment ultimate outcome collection efforts realization collateral values among factors therefore changes economic conditions credit metrics including past due nonperforming accounts events affecting specific obligors industries may require additions reductions reserves homogeneous loan pools examine current delinquencies characteristics existing accounts historical loss experience underlying collateral value general economic conditions trends estimate losses range 03 60 finance receivables depending specific homogeneous loan pool larger balance commercial loans also consider borrower specific information industry trends estimated discounted cash flows process involves use estimates high degree management judgment believe consideration factors assumptions referred results accurate evaluation existing losses portfolio based prior trends experience changes assumptions trends within reasonable historical volatility may material impact allowance losses allowance losses finance receivables currently represents 103 total finance receivables last five years net chargeoffs percentage average finance receivables ranged 038 208 longterm contracts make substantial portion sales government customers pursuant longterm contracts require development delivery products multiple years may contain fixedprice purchase options additional products account longterm contracts percentageofcompletion method accounting percentageofcompletion method estimate profit difference total estimated revenue cost contract recognize estimated profit contract term based either costs incurred costtocost method typically used development effort units delivered unitsofdelivery method used production effort appropriate circumstances percentageofcompletion method accounting involves use various estimating techniques project costs completion cases includes estimates recoveries asserted customer changes specifications due size length time nature many contracts estimation total contract costs revenue completion complicated subject many variables relative outcome future events period several years required make numerous assumptions estimates relating items expected engineering requirements complexity design related development costs performance subcontractors availability cost materials labor productivity cost overhead capital costs manufacturing efficiencies achievement contract milestones including product deliveries cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments projected costs recognized earnings determinable anticipated losses contracts recognized full period losses become probable estimable due significance judgment estimation process described likely materially different revenues andor cost sales amounts could recorded used different assumptions underlying circumstances change earnings could reduced material amount resulting charge earnings total estimated contract costs significantly higher expected due changes customer specifications prior contract amendment b total estimated contract costs significantly higher previously estimated due cost overruns inflation c change engineering efforts required development stage contract unable meet contract milestones goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value asset might impaired completed annual impairment test fourth quarter 2007 using estimates longterm strategic plans adjustment required carrying value goodwill based analysis performed goodwill considered impaired net book value reporting unit exceeds estimated fair value fair values primarily established using discounted cash flow methodology using assumptions consistent market participants determination discounted cash flows based businesses’ strategic plans longrange planning forecasts revenue growth rates included forecasts represent best estimates based current forecasted market conditions profit margin assumptions projected reporting unit based current cost structure anticipated net cost reductions different assumptions used forecasts related undiscounted cash flows used measuring impairment could different potentially resulting impairment charge impact reducing fair value estimates 10 would impact goodwill assessment exception fluid handling products “fhp” golf turfcare “gt” components assuming 10 reduction fair value estimates carrying value components may approximate exceed fair value operating plans projections anticipate continued investments capital expenditures fhp component capture additional business oil gas markets 2007 fhp achieved revenue growth 20 operating profit growth approximately 25 anticipate continued sales growth fiveyear planning period well operating margin improvements revenue growth rates operating margins planning period approximate historical levels estimated fair value would reduced approximately 50 million may result carrying value component exceeding estimated fair value potentially resulting impairment charge december 29 2007 goodwill allocated component totaled approximately 216 million operating plans projections gt component anticipate operating margin improvements fiveyear planning period resulting high singledigit margins assume annual revenue growth approximately 4 100basispoint decline operating margin assumptions would reduce estimated fair value approximately 35 million may result carrying value component exceeding estimated fair value potentially resulting impairment charge december 29 2007 goodwill allocated component totaled approximately 141 million retirement benefits maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases evaluate update assumptions annually determine expected longterm rate return plan assets consider current expected asset allocation well historical expected returns plan asset class lower expected rate return plan assets increase pension expense 2007 assumed expected longterm rate return plan assets used calculating pension expense 853 compared 854 2006 2007 2006 assumed rate return qualified domestic plans represent approximately 88 total pension assets 874 875 respectively 50basispoint decrease longterm rate return would result 22 million annual increase pension expense qualified domestic plans discount rate enables us state expected future benefit payments present value measurement date reflecting current rate pension liabilities could effectively settled rate line rates highquality fixed income investments available period maturity pension benefits fluctuate longterm interest rates change lower discount rate increases present value benefit obligations increases pension expense 2007 weightedaverage discount rate used calculating pension expense 559 compared 555 2006 qualified domestic plans assumed discount rate 566 2007 compared 565 2006 50basispoint decrease discount rate would result 34 million annual increase pension expense qualified domestic plans trend healthcare costs difficult estimate important effect postretirement liabilities 2007 medical prescription drug healthcare cost trend rates represent weightedaverage annual projected rate increase per capita cost covered benefits 2007 medical rate 8 assumed decrease 5 2015 remain level 2007 prescription drug rate 12 assumed decrease 5 2015 remain level see note 12 consolidated financial statements impact onepercentagepoint change cost trend rate warranty liabilities provide limited warranty product maintenance programs including parts labor certain products periods ranging one five years significant portion liabilities arises commercial aircraft businesses also may incur costs related product recalls estimate costs may incurred warranty programs record liability amount costs time product revenue recognized factors affect liability include number products sold historical costs per claim contractual recoveries vendors historical anticipated rates warranty claims including production warranty patterns new models initial aircraft model launches typically incur higher warrantyrelated costs production process matures point warranty costs moderate assess adequacy recorded warranty product maintenance liabilities periodically adjust amounts necessary adjustments made accruals claim data actual experience warrant future warranty experience differ materially historical experience may required record additional warranty liabilities could material adverse effect results operations cash flows period additional liabilities required securitized transactions securitized transactions involve sale finance receivables qualified special purpose trusts may retain interest assets sold form interestonly securities seller certificates cash reserve accounts servicing rights obligations time sale gain loss recorded based difference proceeds received allocated carrying value finance receivables sold allocated carrying value determined based relative fair values finance receivables sold interests retained fair value estimate retained interests direct impact gain loss recorded estimate fair value based present value future cash flows expected management’s best estimates key assumptions credit losses prepayment speeds discount rates commensurate risks involved retained interests recorded fair value component assets consolidated balance sheets review fair values retained interests quarterly using updated assumptions compare amounts carrying value retained interests carrying value exceeds fair value retained interests determine whether decline fair value temporary determine value decline temporary write retained interests fair value corresponding charge income change fair value retained interests deemed temporary record corresponding credit charge comprehensive income unrealized gains losses hypothetical adverse change 10 20 expected credit losses residual cash flows discount rates prepayment rate assumptions would material impact current value residual cash flows associated retained interests hypothetical sensitivities used caution effect variation particular assumption fair value retained interest calculated without changing assumption reality change one factor may magnify counteract sensitivities losses example increases interest rates may result lower prepayments increased credit losses income taxes deferred tax assets liabilities determined based temporary differences financial reporting tax bases assets liabilities applying enacted tax rates expect effect year expect differences reverse settle based evaluation available evidence recognize future tax benefits net operating loss carryforwards extent believe likely realize benefits periodically assess likelihood able recover deferred tax assets reflect changes estimates valuation allowance corresponding adjustment earnings comprehensive income loss appropriate assessing need valuation allowance look future reversal existing taxable temporary differences taxable income carryback years feasibility tax planning strategies estimated future taxable income valuation allowance affected changes tax laws changes statutory tax rates changes future taxable income estimates amount income taxes pay subject ongoing audits federal state foreign tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental assess income tax positions record tax benefits years subject examination based upon evaluation facts circumstances information available reporting date tax positions likely tax benefit sustained record amount greater 50 likelihood realized upon settlement taxing authority full knowledge relevant information interest penalties accrued applicable believe likely tax benefit sustained tax benefit recognized however future results may include favorable unfavorable adjustments estimated tax liabilities due closure income tax examinations new regulatory judicial pronouncements relevant events result effective tax rate may fluctuate significantly quarterly annual basis item 7aitem 7 management’s discussion analysis financial condition results operations 2011 solid year textron revenue segment profit growth 7 increase diluted eps continuing operations 163 volume increased businesses led higher revenues cessna military sales bell 2011 continued emphasize product development position businesses future growth evident 30 increase companyfunded research development expenditures analysis consolidated operating results provided detailed analysis segments’ operating results provided segment analysis section pages 22 31 revenues increased 750 million 7 2011 compared 2010 primarily due 8 increase manufacturing revenues increases cessna bell industrial segments partially offset lower revenues textron systems segment net revenue increase included following factors • higher cessna revenues 427 million primarily due higher volume largely due impact higher citation jet volume mix light midsize jets sold period • higher bell revenues 284 million largely due higher volume military programs included deliveries v22 h1 aircraft • increased industrial segment revenues 261 million primarily due higher volume 138 million mostly reflecting higher automotive industry demand favorable foreign exchange impact 77 million largely related strengthening euro partially offset • lower revenues finance segment 115 million primarily attributable lower average finance receivable portfolio balance resulting continued liquidation • lower textron systems revenues 107 million primarily due 140 million lower volume uas mission support product lines partially offset higher volume land marine weapons sensors product lines 28 million revenues increased 25 million 2010 compared 2009 increase due significant revenue increases industrial bell textron systems segments largely offset lower revenues cessna finance segments net revenue increase included following factors • higher revenues 446 million industrial segment largely due higher volume reflecting improvements automotive industry • higher bell revenues 399 million primarily due higher v22 h1 volume improved pricing commercial business • increased textron systems’ revenues 80 million primarily due higher uas volume partially offset • lower revenues cessna 757 million primarily due lower citation jet volume • reduced finance segment revenues 143 million largely due lower average finance receivables resulting continued liquidation cost sales selling administrative expense manufacturing cost sales selling administrative expenses together comprise operating expenses changes operating expenses fully discussed segment analysis consolidated manufacturing cost sales percentage manufacturing revenues 833 835 2011 2010 respectively dollar basis consolidated cost sales increased 703 million 8 2011 principally due higher sales volume cessna bell industrial segments 2011 gross margin increased percentage revenues primarily due favorable product mix improved leverage manufacturing efficiencies higher volume cessna bell improvements partially offset 64 million increase engineering development expenses throughout manufacturing businesses 60 million charges textron systems related impairment certain intangible assets severance costs 2011 consolidated basis selling administrative expense decreased 48 million 4 12 billion compared 2010 primarily due 44 million lower operating expense finance segment largely reflecting progress towards exit noncaptive commercial finance business 23 million decrease corporate expense primarily due impact changes stock price compensation expense decreases partially offset higher bid proposal costs textron systems 2011 2010 2009 cost sales percentage manufacturing revenues remained flat 835 dollar basis cost sales increased 137 million 2 2010 compared 2009 principally due net sales volume changes industrial bell cessna segments described well higher pension costs inflation 2010 favorable conversion costs bell industrial segments resulting improved leverage manufacturing efficiencies higher volumes offset increased conversion costs cessna conversion costs increased cessna cost reduction activities including workforce reductions facility consolidations fully offset impact lower production volumes 2010 selling administrative expense decreased 107 million 8 12 billion compared 2009 primarily due 41 million lower expenses finance segment reflecting lower compensation related costs due headcount reductions associated exit noncaptive commercial finance business 39 million lower commissions primarily resulting lower cessna sales volume 27 million lower corporate expenses interest expense interest expense consolidated statement operations includes interest finance manufacturing borrowing groups interest related intercompany borrowings eliminated interest expense finance segment included within segment profit includes intercompany interest consolidated interest expense decreased 24 million 9 2011 compared 2010 primarily due decrease finance group largely due reduction debt liquidates noncaptive portfolio 2010 consolidated interest expense decreased 39 million 13 compared 2009 primarily due 63 million decrease finance group largely due reduction debt liquidates noncaptive portfolio decrease partially offset higher interest expense manufacturing group 24 million primarily due fullyear impact 2010 convertible notes issued may 2009 provision losses finance receivables provision loan losses decreased 131 million 2011 2010 primarily due decline new troubled accounts finance segment’s noncaptive portfolio 2011 36 million reversal allowance losses related one significant timeshare account 2010 provision decreased 124 million 2009 primarily due decline accounts identified nonaccrual year valuation allowance transfer golf mortgage portfolio held sale periodic basis evaluate liquidation strategy noncaptive finance portfolios continue execute exit plan connection evaluation also review definition foreseeable future due relative stability golf market end 2011 believe foreseeable future extended period one two years opposed six ninemonth period previously used based change fourth quarter 2011 determined longer intent hold remaining golf mortgage portfolio investment foreseeable future accordingly transferred 458 million remaining golf mortgage finance receivables net 80 million allowance loan losses held investment classification held sale classification finance receivables recorded fair value time transfer resulting 186 million charge recorded valuation allowance transfer golf mortgage portfolio held sale special charges amounts recorded within special charges 2011 2010 2009 special charges included restructuring charges related global restructuring program totaled 99 million 237 million respectively primarily related severance costs asset impairment charges fourth quarter 2008 initiated restructuring program reduce overhead costs improve productivity across company announced exit portions commercial finance business restructuring program primarily included corporate segment direct indirect workforce reductions closure consolidation certain operations throughout company fourth quarter 2010 initiated final series restructuring actions program included workforce reductions bell textron systems industrial segments corporate along decision exit plant industrial segment upon completion program end 2010 terminated approximately 12100 positions worldwide representing approximately 28 global workforce since inception program exited 30 leased owned facilities plants 2010 special charges also included 91 million noncash pretax charge reclassify foreign exchange loss equity statement operations result substantially liquidating canadian finance entity 2009 special charges also include goodwill impairment charge 80 million industrial segment losses gains net 2011 losses gains net includes 55 million losses early extinguishment portion convertible notes largely offset 52 million gain collection notes receivable connection disposition fluid power business 2008 discussed note 2 consolidated financial statements 2009 recorded 50 million gain sale assets related cescom income tax expense benefit effective rate 281 2011 64 2010 510 2009 generally differs us federal statutory rate 35 due certain earnings operations lowertax jurisdictions throughout world jurisdictions favorable tax rates significant effective rate impact periods presented include primarily canada china provided us taxes earnings plan reinvest earnings indefinitely outside united states effective rate fluctuate based mix earnings us foreign operations full reconciliation effective rate us federal statutory rate 35 see note 14 consolidated financial statements segment analysis operate report financial information following five business segments cessna bell textron systems industrial finance segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses special charges measurement finance segment excludes special charges includes interest income expense along intercompany interest expense discussion comparative results manufacturing group changes revenue segment profit typically expressed commercial business terms volume pricing foreign exchange acquisitions additionally changes segment profit may expressed terms mix inflation cost performance volume changes revenue represent increasesdecreases number units delivered services provided pricing represents changes unit pricing foreign exchange change resulting translating foreigndenominated amounts us dollars exchange rates different prior period acquisitions refer results generated businesses acquired within previous 12 months segment profit mix represents change due composition products andor services sold different profit margins inflation represents higher material wages benefits pension costs cost performance reflects increase decrease research development depreciation selling administrative costs warranty product liability qualityscrap labor efficiency overhead product line profitability startup ramp costreduction initiatives manufacturing inputs approximately 31 revenues derived contracts us government segments significant contracts us government typically express changes segment profit related government business terms volume changes program performance changes contract mix changes volume discussed net sales typically drive corresponding changes segment profit based profit rate particular contract changes program performance typically relate profit recognition associated revisions total estimated costs completion reflect improved deteriorated operating performance award fee rates changes contract mix refers changes operating margin due change relative volume contracts higher lower fee rates overall average margin rate segment changes cessna revenues operating expenses factors contributing 2011 yearoveryear revenue change provided cessna’s revenues increased 427 million 17 2011 compared 2010 primarily due higher citation jet volume mix light midsize jets sold period 262 million impact higher preowned aircraft volume 76 million reflecting improved market demand higher aftermarket volume 62 million part due continued investment additional service offerings delivered 183 citation jets 2011 compared 179 jets 2010 2011 portion cessna’s revenue derived aftermarket sales services represented 24 cessna’s revenues compared 26 corresponding period 2010 cessna’s operating expenses increased 338 million 13 2011 compared 2010 principally due higher sales volume resulted 271 million increase direct material costs 27 million increase manufacturing overhead operating expenses also increased due higher engineering development expenses 28 million primarily due new product development cost inflation offset 45 million favorable benefit related lastin firstout lifo method accounting inventories 2011 cessna lifo benefit 22 million resulting operational improvements led reduction inventory levels compared expense 23 million 2010 factors contributing 2010 yearoveryear revenue change provided cessna’s revenues decreased 757 million 23 2010 compared 2009 primarily due lower volume citation jets reflecting continued downturn business jet market attributable economic recession delivered 179 citation jets 2010 compared 289 jets 2009 increased aircraft utilization investment additional service capacity 2010 contributed increased aftermarket volume cessna’s aftermarket revenues increased 80 million 14 2009 operating expenses decreased 530 million 17 2010 compared 2009 largely due decline direct material labor costs principally result reduced volume 2010 cessna’s cost reduction activities able fully offset lower volume cessna segment profit loss factors contributing 2011 yearoveryear segment profit change provided cessna’s segment profit increased 89 million 2011 compared 2010 primarily due higher volume 85 million segment profit also impacted following contributing factors included within line • 28 million higher engineering development expenses primarily due new product development • 22 million cost improvements realized period driven factory efficiencies due higher production volume • 16 million lower preowned aircraft writedowns addition cost inflation offset 45 million favorable lifo benefit discussed factors contributing 2010 yearoveryear segment profit change provided cessna’s segment profit decreased 227 million 115 2010 compared 2009 due 253 million impact lower volume nonrecurring 50 million gain 2009 sale cescom assets 19 million inflation net higher pricing partially offset improved performance 95 million improved performance included following contributing factors • 57 million lower engineering selling administrative expenses • 48 million lower inventory reserves preowned aircraft writedowns • 19 million lower tooling costs partially offset • 49 million lower deposit forfeiture income due fewer order cancellations 2010 cessna backlog cessna’s backlog decreased 10 billion 35 2011 20 billion 40 2010 mainly attributable deliveries excess new orders canceled citation jet orders bell manufactures helicopters tiltrotor aircraft related spare parts provides services military andor commercial markets bell’s major us government programs time v22 tiltrotor aircraft h1 helicopters production stage represent significant portion bell’s revenues us government 2011 continued ramp production deliveries meet customer schedule requirements programs bell revenues operating expenses factors contributing 2011 yearoveryear revenue change provided bell’s revenues increased 284 million 9 2011 compared 2010 primarily due higher volume included following factors • 225 million increase volume related v22 program primarily reflecting higher deliveries bell delivered 34 v22 aircraft 2011 compared 26 deliveries 2010 • 74 million increase military volume primarily reflecting higher h1 deliveries 25 h1 aircraft delivered 2011 compared 18 aircraft 2010 increase net 55 million decrease aftermarket volume largely due completion several nonrecurring programs 2010 • 41 million decrease commercial volume primarily reflecting lower deliveries bell delivered 125 commercial aircraft 2011 compared 131 aircraft 2010 bell’s operating expenses increased 190 million 7 2011 compared 2010 primarily due higher sales volume discussed partially offset improved cost performance improved cost performance primarily related military programs due efficiencies realized production rampup described factors contributing 2010 yearoveryear revenue change provided bell’s revenues increased 399 million 14 2010 compared 2009 primarily due higher volume included following factors • 230 million increase volume related v22 program primarily reflecting higher deliveries bell delivered 26 v22 aircraft 2010 compared 20 deliveries 2009 • 113 million increase military volume primarily reflecting higher h1 deliveries 18 h1 aircraft delivered 2010 compared 9 deliveries 2009 increase net 28 million impact revenues recognized 2009 canceled armed reconnaissance helicopter program • 11 million decrease commercial volume largely related lower commercial aircraft deliveries bell delivered 131 commercial aircraft 2010 compared 153 aircraft 2009 commercial revenues increased despite lower volume largely due improved pricing 2010 included line bell’s operating expenses increased 11 2010 2009 primarily due higher net sales volume partially offset improved cost performance improved performance primarily related v22 h1 programs unfavorable adjustments recorded 2009 429 program discussed partially offset 14 million higher research development costs bell segment profit factors contributing 2011 yearoveryear segment profit change provided bell’s segment profit increased 94 million 22 2011 compared 2010 primarily due improved program performance 109 million partially offset unfavorable mix military commercial aircraft sold period bell’s improved performance included following • 122 million resulting improved manufacturing efficiencies military programs resulting efficiencies realized connection ramp production lines partially offset • 30 million unfavorable net change program profit adjustments change largely due 21 million adjustment recognized 2010 related recognition profit h1 v22 programs reimbursement prior year costs factors contributing 2010 yearoveryear segment profit change provided bell’s segment profit increased 123 million 40 2010 compared 2009 primarily due improved performance 106 million higher pricing net inflation 23 million sales volume significant net impact segment profit due mix commercial military aircraft sold improved performance largely due following factors • 73 million attributable v22 h1 programs resulting 38 million favorable impact efficiencies realized connection rampup production lines 21 million profit recognized second quarter 2010 related reimbursement prior year costs 14 million lower material costs • 18 million net improvement unfavorable adjustments recorded 2009 429 program occur 2010 partially offset • 14 million higher research development costs bell backlog bell’s backlog increased 873 million 2011 13 reflecting orders excess deliveries 2010 bell’s backlog increased 281 million 5 largely related v22 h1 programs partially offset decline commercial backlog reflecting deliveries excess new orders textron systems textron systems sells many products us government business environment continues shaped policy budget decisions determined us government recent actions president congress indicate ongoing emphasis federal budget deficit reduction budget decisions president congress may considerably reduce discretionary spending defense constitutes significant share based continued deterioration environment results annual operating plan review included updated longrange forecast estimates loss certain contracts determined indicator potential asset impairment existed fourth quarter requiring us perform impairment tests based analysis determined certain intangible assets impaired recorded 41 million pretax impairment charge write intangible assets primarily related customer agreements contractual relationships associated aailogistics technical services aaitest training businesses also fourth quarter 2011 initiated workforce reduction textron systems streamline cost structure eliminate 10 segment’s workforce 2012 reduction intended improve ability efficiently execute compete potentially fewer opportunities department defense customers recorded 19 million charge primarily severance costs related action textron systems revenues operating expenses factors contributing 2011 yearoveryear revenue change provided revenues textron systems decreased 107 million 5 2011 compared 2010 primarily due lower volume reflecting following changes • lower uas volume 84 million largely due lower deliveries timing revenues various programs • lower mission support product line volume 56 million largely due completion several test training programs lower intelligence systems volume partially offset • higher land marine volume 18 million primarily related armored security vehicles • higher weapons sensors revenues 10 million largely due higher sensor fuzed weapon volume textron systems’ operating expenses decreased 18 million 1 2011 compared 2010 primarily due lower volume partially offset 41 million intangible asset impairment charge 19 million primarily severance costs related workforce reduction factors contributing 2010 yearoveryear revenue change provided revenues textron systems increased 80 million 4 2010 compared 2009 largely due 151 million increase uas product line revenues primarily due higher volume partially offset 55 million decrease land marine systems weapons sensors product lines textron system’s operating expenses increased 90 million 5 2010 compared 2009 primarily due higher net sales volume inflation mostly due higher pension costs textron systems segment profit factors contributing 2011 yearoveryear segment profit change provided segment profit textron systems decreased 89 million 39 2011 compared 2010 primarily due impact lower volume described mix along 41 million intangible asset impairment charge approximately 19 million severance costs related workforce reduction included line factors contributing 2010 yearoveryear segment profit change provided segment profit textron systems decreased 10 million 2010 4 compared 2009 26 million impact higher uas volume offset 19 million impact lower volumes land marine systems weapons sensors product lines 14 million inflation primarily due higher pension costs textron systems backlog 2011 textron systems backlog decreased 261 million 16 primarily due deliveries excess new orders related various military programs industrial revenues operating expenses factors contributing 2011 yearoveryear revenue change provided industrial segment sales increased 261 million 10 2011 2010 volume increased mix improved largely due 117 million increase fuel systems functional components product line reflecting higher automotive industry demand 21 million industrial product lines largely related powered tools testing measurement equipment product line reflecting higher sales north america europe favorable foreign exchange impact primarily related strengthening euro mostly impacted fuel systems functional components product line higher industrial revenues 78 million included 27 million impact acquisitions improved pricing 20 million addition higher volume operating expenses industrial segment increased 221 million 9 2011 compared 2010 primarily due 115 million increase direct material costs due higher sales volume 68 million impact foreign exchange related strengthening euro 40 million inflation direct materials related various commodity material components throughout segment factors contributing 2010 yearoveryear revenue change provided industrial segment sales increased 446 million 21 2010 2009 volume increased largely due 387 million fuel systems functional components product line reflecting improvements automotive industry 86 million industrial product lines unfavorable foreign exchange impact primarily related weakening euro industrial segment’s operating expenses increased 311 million 15 2010 compared 2009 primarily due higher sales volumes inflation partially offset improved cost performance largely due significant efforts made 2009 reduce costs workforce reductions initiatives industrial segment profit factors contributing 2011 yearoveryear segment profit change provided industrial segment profit increased 40 million 25 2011 2010 primarily due 34 million impact improved performance 31 million impact higher volume described partially offset inflation net pricing 35 million performance favorable period due continued cost reduction activities improved manufacturing leverage resulting higher volume inflation net pricing primarily due higher direct material costs commodity material components exceeded related price increases principally fuel systems functional components product line factors contributing 2010 yearoveryear segment profit change provided industrial segment profit increased 135 million 500 2010 compared 2009 primarily due 127 million impact higher volume 76 million improved performance partially offset inflation excess higher pricing 59 million improved cost performance 2010 largely due significant efforts made 2009 reduce costs workforce reductions initiatives along improved manufacturing leverage due higher volume finance plan exit noncaptive commercial finance business finance segment effected combination orderly liquidation selected sales depending market conditions expect continued progress liquidating remaining 950 million noncaptive portfolio next several years finance revenues finance segment revenues decreased 115 million 53 2011 compared 2010 primarily attributable impact 18 billion lower average finance receivable balance 2010 finance segment revenues decreased 143 million 40 compared 2009 primarily due 141 million impact lower average finance receivable balance 18 billion lower servicing fees investment income along 54 million lower gains debt extinguishments reductions partially offset 81 million impact lower net portfolio losses primarily result 40 million lower impairment charges structured capital portfolio 23 million gains sale two distribution finance portfolios 2010 21 million decrease discounts taken sale early termination finance assets associated liquidation distribution finance receivables partially offset 11 million increase impairment charges owned aircraft subject operating lease repossessed finance segment loss finance segment loss increased 96 million 41 2011 compared 2010 primarily due following factors • 186 million valuation allowance recorded transfer remaining golf mortgage portfolio held investment held sale classification fourth quarter 2011 • 61 million reduction interest margin resulting lower average finance receivable balance partially offset • 131 million lower provision loan losses primarily result decline new troubled accounts noncaptive portfolio 2011 36 million reversal allowance losses related one significant timeshare account • 44 million lower administrative expenses primarily due lower compensation expense associated workforce reduction cost reductions related exit noncaptive business 2010 finance segment loss decreased 57 million 19 compared 2009 primarily due following factors • 124 million lower provision loan losses primarily due decline accounts identified nonaccrual year • 81 million lower portfolio losses net gains • 41 million lower operating administrative expenses primarily due lower compensation expense associated workforce reduction • 28 million lower securitization losses net gains partially offset • 54 million lower gains debt extinguishments • 52 million reduction interest margin resulting lower average finance receivable balance 26 million impact related variable rate receivable interest rate floors • 39 million impact lower servicing fees investment income • 32 million impact lower interest rate debt lower accretion valuation allowance finance receivable held sale finance portfolio quality following table reflects information finance segment’s credit performance related finance receivables held investment finance receivables held sale reflected lower cost fair value consolidated balance sheets included credit performance statistics finance receivables held sale noncaptive portfolio totaled 418 million end 2011 compared 413 million end 2010 transfer remaining golf mortgage portfolio held investment held sale classification largely offset sales liquidations transfer also resulted 80 million reduction allowance loan losses end 2011 finance receivables reported table included 532 million finance receivables held investment noncaptive portfolio reflecting 13 billion reduction 2010 yearend balance portfolio primarily due liquidations transfer remaining golf mortgage portfolio nonaccrual finance receivables include accounts contractually delinquent three months unless collection principal interest doubtful well accounts whose credit quality indicators delinquency suggest full collection principal interest doubtful nonaccrual finance receivables decreased 529 million 62 yearend balance primarily due following reductions • 219 million golf mortgage portfolio primarily due transfer remaining portfolio held sale classification • 215 million timeshare portfolio largely due resolution several significant accounts cash collections several accounts factors also primary reason improvement 60 days contractual delinquency amount see note 4 consolidated financial statements detailed information nonaccrual finance receivables product line along summary finance receivables held investment based internally assigned credit quality indicators liquidity capital resources financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated majorityowned subsidiaries operate cessna bell textron systems industrial segments finance group also finance segment consists tfc consolidated subsidiaries three finance subsidiaries owned textron inc designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements key information utilized assessing liquidity summarized believe calculations debt capital net debt capital useful measures provide summary indication level debt financing ie leverage place support capital structure well provide indication capacity add leverage believe existing cash equivalents along cash expect generate manufacturing operations sufficient cash meet future needs 2011 textron inc entered senior unsecured revolving credit facility expires march 2015 aggregate principal amount 10 billion 200 million available issuance letters credit december 31 2011 amounts borrowed facility 38 million letters credits issued maintain effective shelf registration statement filed securities exchange commission allows us issue unlimited amount public debt securities september 2011 issued 250 million 4625 notes due 2016 250 million 5950 notes due 2021 registration statement september 2011 announced cash tender offer outstanding convertible notes accordance terms tender offer 1000 principal amount convertible notes tendered paid holder 1524 plus accrued unpaid interest october 13 2011 settlement date aggregate holders validly tendered 225 million principal amount 375 convertible notes subsequent tender offer also purchased 151 million principal amount convertible notes small number privately negotiated transactions retired another 8 million related holderinitiated conversion fourth quarter 2011 end 2011 paid approximately 580 million cash related transactions reduced principal amount convertible notes 64 december 31 2011 216 million principal amount convertible notes outstanding least 20 trading days 30 consecutive trading days ended december 31 2011 common stock price exceeded conversion threshold price convertible notes 1706 per share accordingly remaining notes convertible holder’s option march 31 2012 may deliver shares common stock cash combination cash shares common stock satisfaction obligations upon conversion convertible notes intend settle face value convertible notes cash continued classify convertible notes long term based intent ability maintain debt outstanding least one year use various funding sources available us 2011 reduced total finance receivable portfolio 17 billion primarily liquidations marktomarket adjustments certain portfolios impairments finance receivable reductions occurred noncaptive captive finance portfolios primarily driven noncaptive portfolio connection exit plan including 576 million 495 million timeshare golf mortgage product lines respectively depending market conditions expect continued progress liquidating remaining 950 million noncaptive portfolio next several years manufacturing group cash flows cash flows continuing operations manufacturing group presented consolidated statement cash flows summarized cash flows operating activities increased 2011 compared 2010 primarily due higher earnings manufacturing group addition cash payments related restructuring program substantially completed end 2010 decreased 38 million 2011 58 million 2010 132 million 2009 decreases partially offset 225 million higher cash contributions made pension plans made 642 million contributions pension plans 2011 compared 417 million contributions 2010 investing cash flows 2011 2010 2009 primarily included capital expenditures 423 million 270 million 238 million respectively increased investment areas new product development cost productivity improvements 2011 financing activities primarily consisted 580 million payments related purchase cancellation convertible notes originally issued 2009 described 175 million intergroup financing finance group partially offset 496 million proceeds issuance notes used significantly cash financing activities 2010 compared 2009 largely due repayment 12 billion bank credit lines 2010 drawn 2009 dividend payments shareholders totaled 22 million 22 million 21 million 2011 2010 2009 respectively capital contributions paid dividends received finance group support agreement textron inc tfc textron inc required maintain controlling interest tfc agreement also requires textron inc ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 200 million cash contributions paid tfc maintain compliance support agreement dividends paid tfc textron inc detailed additional cash contribution 240 million paid tfc january 17 2012 required support agreement january 20 2012 tfc paid additional 172 million dividends textron inc due nature contributions classify contributions within cash flows used operating activities manufacturing group consolidated statement cash flows capital contributions support finance group growth ongoing captive finance business classified cash flows financing activities finance group’s net income loss excluded manufacturing group’s cash flows dividends finance group included within cash flows operating activities manufacturing group represent return investment finance group cash flows cash flows continuing operations finance group summarized cash flows operating activities improved 2011 largely due 65 million tax refunds net payments received 2011 2010 finance group 101 million tax payments net refunds primarily attributable settlement irs’s challenge tax deductions took prior years certain leverage lease transactions 2009 tax refunds net payments totaled 75 million cash receipts collection finance receivables continued outpace finance receivable originations resulted net cash inflow investing activities past three years finance receivables repaid proceeds sales securitizations totaled 18 billion 2011 30 billion 2010 54 billion 2009 cash outflows originations declined 05 billion 2011 09 billion 2010 37 billion 2009 decreases largely due ongoing exit noncaptive business 2011 2010 financing activities include repayments 14 billion 03 billion respectively outstanding balance tfc’s bank line credit drawn 2009 october 2011 paid elected terminate bank line credit liquidate noncaptive business continued pay debt principal payments short longterm debt 08 billion 21 billion 45 billion 2011 2010 2009 respectively cash outflows partially offset proceeds issuance long term debt 04 billion 02 billion 03 billion respectively tfc borrowed funds textron inc 2011 2010 2009 interest pay maturing debt december 31 2011 january 1 2011 outstanding balance due textron inc borrowings 490 million 315 million respectively consolidated cash flows consolidated cash flows continuing operations elimination activity borrowing groups summarized cash flow operating activities increased 2011 compared 2010 primarily due higher earnings manufacturing group addition cash payments related restructuring program substantially completed end 2010 decreased 44 million 2011 72 million 2010 144 million 2009 decreases partially offset 225 million higher cash pension contributions made behalf manufacturing group 642 million contributions 2011 compared 417 million contributions 2010 cash receipts collection finance receivables continued outpace finance receivable originations resulted net cash inflow investing activities past three years finance receivables repaid proceeds sales securitizations totaled 12 billion 2011 22 billion 2010 46 billion 2009 cash outflows originations declined 02 billion 2011 05 billion 2010 30 billion 2009 decreases largely due ongoing exit noncaptive business also used cash investing activities current year due higher capital expenditures totaled 423 million 270 million 238 million 2011 2010 2009 respectively increased investment areas new product development cost productivity improvements 2011 2010 financing activities include repayments 14 billion 15 billion respectively outstanding balance bank line credit drawn 2009 also made principal payments shortand longterm debt 08 billion 22 billion 58 billion 2011 2010 2009 respectively reductions largely related liquidation noncaptive business debt maturities 2011 financing activities include 580 million payments related purchase convertible notes originally issued 2009 cash outflows partially offset proceeds issuance long term debt 09 billion 02 billion 09 billion respectively captive financing intercompany transactions finance group finances retail purchases leases new used aircraft equipment manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers sale receivables reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidated statements cash flows reclassification elimination adjustments included consolidated statement cash flows summarized consolidated discontinued operations cash flows cash flows discontinued operations 2009 primarily include approximately 280 million aftertax net proceeds upon sale hr textron partially offset 69 million tax payments related sale fluid power business see note 2 consolidated financial statements details concerning dispositions contractual obligations manufacturing group following table summarizes known contractual obligations defined reporting regulations manufacturing group december 31 2011 1 maintain defined benefit pension plans postretirement benefit plans pensions discussed note 13 consolidated financial statements included table discounted estimated benefit payments expect make related unfunded pension postretirement benefit plans actual benefit payments dependent number factors including mortality assumptions expected retirement age rate compensation increases medical trend rates subject change future years policy funding pension plans make contributions annually consistent applicable laws regulations however future contributions pension plans included table 2012 expect make contributions funded pension plans approximately 150 million approximately 25 million retirement account plan based current assumptions may change changes market conditions current contribution estimates years 2013 2016 estimated range approximately 50 million 400 million plan provisions place time 2 longterm liabilities included table consist primarily undiscounted amounts consolidated balance sheet december 31 2011 representing obligations deferred compensation arrangements estimated environmental remediation costs payments deferred compensation arrangements estimated based management’s assumptions expected retirement age mortality stock price rates return participant deferrals timing cash flows associated environmental remediation costs largely based historical experience longterm liabilities deferred taxes unrecognized tax benefits product liability litigation reserves excluded table due uncertainty timing payments combined absence historical trends used predictor payments 3 operating leases represent undiscounted obligations noncancelable leases 4 purchase obligations include undiscounted amounts committed legally enforceable contracts purchase orders goods services defined terms price quantity delivery dates approximately 35 purchase obligations disclose represent purchase orders issued goods services delivered firm contracts us government full recourse customary contract termination clauses finance group following table summarizes known contractual obligations defined reporting regulations finance group december 31 2011 1 securitized debt payments represent contractual obligations finance group provide legal recourse investors purchase interests securitizations beyond credit enhancement inherent retained subordinate interests 2 interest payments reflect current interest rate paid related debt include anticipated changes market interest rates could impact interest rate according terms related debt december 31 2011 finance group also 316 million liabilities primarily accounts payable accrued expenses payable within next 12 months critical accounting estimates prepare consolidated financial statements conformity generally accepted accounting principles must make complex subjective judgments selection application accounting policies accounting policies believe critical portrayal financial condition results operations listed believe policies require difficult subjective complex judgments estimating effect inherent uncertainties section read conjunction note 1 consolidated financial statements includes significant accounting policies allowance losses finance receivables held investment finance receivables held investment generally recorded amount outstanding principal less allowance losses maintain allowance losses finance receivables level considered adequate cover inherent losses portfolio based management’s evaluation analysis product line larger balance accounts specifically identified impaired including large accounts homogeneous portfolios reserve established based comparing carrying value either expected future cash flows discounted finance receivable’s effective interest rate b fair value finance receivable collateral dependent expected future cash flows consider collateral value financial performance liquidity borrower existence financial strength guarantors estimated recovery costs including legal expenses costs associated repossessionforeclosure eventual disposal collateral range potential outcomes perform multiple discounted cash flow analyses weight outcomes based relative likelihood occurrence evaluation portfolios inherently subjective requires estimates including amount timing future cash flows expected received impaired finance receivables underlying collateral may differ actual results analysis specific individual account certain critical factors included analysis product line discussed detail note 4 consolidated financial statements also establish allowance losses product line cover probable specifically unknown losses existing portfolio homogeneous portfolios including aviation golf equipment allowance established percentage nonrecourse finance receivables identified requiring specific reserves percentage based combination factors including historical loss experience current delinquency default trends collateral values general economic specific industry trends nonhomogeneous portfolios timeshare allowance established percentage watchlist balances represents combination assumed default likelihood loss severity based historical experience industry trends collateral values classify accounts watchlist based credit quality indicators discussed note 4 consolidated financial statements finance receivables finance receivables classified held investment intent ability hold receivable foreseeable future maturity payoff decision classify certain finance receivables held sale based number factors including limited contractual duration type collateral credit strength borrowers interest rates perceived marketability receivables ongoing basis factors combined overall liquidation strategy determine finance receivables intent hold foreseeable future finance receivables hold sale current strategy based evaluation performance liquidity position changes external factors affecting value andor marketability finance receivables change strategy could result change classification finance receivables determine finance receivables classified held sale sold intent ability hold finance receivables foreseeable future maturity payoff finance receivables transferred held investment lower cost fair value time conversely determine finance receivables subsequently determine longer intend ability hold maturity receivables would designated held sale valuation allowance would established time necessary december 31 2011 classified additional finance receivables held sale valuation allowance would likely required time based fair value estimates completed footnote disclosure requirements see page 68 note 9 consolidated financial statements table included carrying value fair value finance receivables held investment excluding leases currently recorded fair value consolidated balance sheet finance receivables held sale carried lower cost fair value active quoted market prices finance receivables estimate fair value determined based use discounted cash flow models estimate exit price expect receive principal market type loan orderly transaction includes sale pools similar assets sale individual loans models used incorporate estimates rate return financing cost capital structure andor discount rate expectations current market participants combined estimated loan cash flows based credit losses payment rates expectations borrowers’ ability make scheduled balloon payments timely basis available assumptions related expectations current market participants compared observable market inputs including bids prospective purchasers similar loans certain bond market indices loans perceived similar credit quality although utilize prioritize market observable inputs discounted cash flow models inputs typically derived markets directly comparable loan structures industries collateral types therefore valuations finance receivables held sale involve significant management judgment result differences fair value estimates market participants see page 67 note 9 consolidated financial statements impact changes fair value classification finance receivables past two years longterm contracts make substantial portion sales government customers pursuant longterm contracts require development delivery products multiple years may contain fixedprice purchase options additional products account longterm contracts percentageofcompletion method accounting method estimate profit difference total estimated revenues cost contract percentageofcompletion method accounting involves use various estimating techniques project costs completion cases includes estimates recoveries asserted customer changes specifications due size length time nature many contracts estimation total contract costs revenues completion complicated subject many variables relative outcome future events period several years required make numerous assumptions estimates relating items expected engineering requirements complexity design related development costs performance subcontractors availability cost materials labor productivity cost overhead capital costs manufacturing efficiencies achievement contract milestones including product deliveries cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments projected costs recognized earnings determinable anticipated losses contracts recognized full period losses become probable estimable due significance judgment estimation process described likely materially different revenues andor cost sales amounts could recorded used different assumptions underlying circumstances change earnings could reduced material amount resulting charge earnings total estimated contract costs significantly higher expected due changes customer specifications prior contract amendment b total estimated contract costs significantly higher previously estimated due cost overruns inflation c change engineering efforts required development stage contract unable meet contract milestones outset contract estimate initial profit booking rate initial profit booking rate contract considers risks surrounding ability achieve technical requirements example newlydeveloped product versus mature product schedule example number type milestone events costs contract requirements initial estimated costs completion profit booking rates may increase performance contract successfully retire risks surrounding technical schedule costs aspects contract likewise profit booking rate may decrease successful retiring risks result estimated costs completion increase estimates subject change performance contract therefore may affect profit booking rate adjustments required changes prior estimates recognized using cumulative catchup method impact change inceptiontodate recorded current period following table sets forth aggregate gross amount program profit adjustments included within segment profit two years ended december 31 2011 goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit might impaired reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics september 2011 financial accounting standards board issued guidance permits companies perform qualitative assessment based economic industry companyspecific factors initial step annual goodwill impairment test selected reporting units based results qualitative assessment companies required perform step 1 annual impairment test reporting unit company concludes likely unit’s fair value less carrying amount permitted adopted guidance fourth quarter 2011 reduce costs associated determining reporting unit’s fair value units likely fair value exceeds carrying amount reporting units elect perform qualitative assessment performed step 1 analysis required us calculate fair value reporting unit reporting unit’s estimated fair value exceeds carrying value reporting unit impaired analysis performed otherwise amount impairment must determined step 2 goodwill impairment test step 2 implied fair value goodwill determined assigning fair value reporting unit’s assets liabilities including unrecognized intangible assets reporting unit acquired business combination fair value carrying amount reporting unit goodwill exceeds implied fair value goodwill impairment loss would recognized amount equal excess fair values established primarily using discounted cash flows incorporate assumptions unit’s short longterm revenue growth rates operating margins discount rates represent best estimates current forecasted market conditions current cost structure anticipated net cost reductions implied rate return believe market participant would require investment company similar risks business characteristics reporting unit assessed revenue growth rates operating margins used discounted cash flow analysis based businesses’ strategic plans longrange planning forecasts longterm growth rate use determine terminal value business based assessment minimum expected terminal growth rate well past historical growth broader economic considerations gross domestic product inflation maturity markets serve utilize weightedaverage cost capital impairment analysis makes assumptions capital structure believe market participant would make include risk premium based assessment risks related projected cash flows reporting unit believe approach yields discount rate consistent implied rate return independent investor market participant would require investment company similar risks business characteristics reporting unit assessed based annual review fair value reporting units exceeded carrying values believe reasonable possibility units might fail step 1 impairment test foreseeable future retirement benefits maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases evaluate update assumptions annually determine weightedaverage expected longterm rate return plan assets consider current expected asset allocation well historical expected returns plan asset class lower expected rate return plan assets increase pension expense 2011 assumed expected longterm rate return plan assets used calculating pension expense 784 compared 826 2010 2011 2010 assumed rate return domestic plans represent approximately 90 total pension assets 800 850 respectively 50basispoint decrease longterm rate return 2011 would increased pension expense domestic plans approximately 22 million discount rate enables us state expected future benefit payments present value measurement date reflecting current rate pension liabilities could effectively settled rate line rates highquality fixed income investments available period maturity pension benefits fluctuate longterm interest rates change lower discount rate increases present value benefit obligations increases pension expense 2011 weightedaverage discount rate used calculating pension expense 571 compared 620 2010 domestic plans assumed discount rate 575 2011 compared 625 2010 50basispoint decrease discount rate 2011 would increased pension expense domestic plans approximately 23 million trend healthcare costs difficult estimate important effect postretirement liabilities 2011 medical prescription drug healthcare cost trend rates represent weightedaverage annual projected rate increase per capita cost covered benefits 2011 medical rate 9 assumed decrease 5 2021 remain level 2011 prescription drug rate 9 assumed decrease 5 2021 remain level see note 13 consolidated financial statements impact onepercentagepoint change cost trend rate warranty liabilities provide limited warranty product maintenance programs including parts labor certain products periods ranging one five years significant portion liabilities arises commercial aircraft businesses also may incur costs related product recalls estimate costs may incurred warranty programs record liability amount costs time product revenue recognized factors affect liability include number products sold historical costs per claim contractual recoveries vendors historical anticipated rates warranty claims including production warranty patterns new models initial aircraft model launches typically incur higher warrantyrelated costs production process matures point warranty costs moderate assess adequacy recorded warranty product maintenance liabilities periodically adjust amounts necessary adjustments made accruals claim data actual experience warrant future warranty experience differ materially historical experience may required record additional warranty liabilities could material adverse effect results operations cash flows period additional liabilities required income taxes deferred income tax balances reflect effects temporary differences financial reporting carrying amounts assets liabilities tax bases well net operating losses tax credit carryforwards stated enacted tax rates effect year taxes expected paid recovered deferred income tax assets represent amounts available reduce income taxes payable taxable income future years evaluate recoverability future tax deductions credits assessing adequacy future expected taxable income sources including future reversal existing taxable temporary differences taxable income carryback years available tax planning strategies estimated future taxable income recognize net taxrelated interest penalties continuing operations income tax expense amount income taxes pay subject ongoing audits federal state foreign tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental assess income tax positions record tax benefits years subject examination based upon evaluation facts circumstances information available reporting date tax positions likely tax benefit sustained record largest amount tax benefit greater 50 likelihood realized upon settlement taxing authority full knowledge relevant information interest penalties accrued applicable recognize net taxrelated interest penalties continuing operations income tax expense believe likely tax benefit sustained tax benefit recognized however future results may include favorable unfavorable adjustments estimated tax liabilities due settlement income tax examinations new regulatory judicial pronouncements relevant events result effective tax rate may fluctuate significantly quarterly annual basis item 7a nannannanitem 7a quantitative qualitative disclosures market risks quantitative risks measures appearing page 29 textrons 1998 annual report shareholders incorporated herein reference item 8item 7a quantitative qualitative disclosures market risks quantitative risks measures appearing page 30 2000 annual report shareholders incorporated reference annual report form 10k item 8item 7a quantitative qualitative disclosures market risks quantitative risks measures appearing page 30 2001 annual report shareholders incorporated reference annual report form 10k item 8item 7a quantitative qualitative disclosures market risks quantitative risks measures appearing page 32 2002 annual report shareholders incorporated reference annual report form 10k item 8item 7a quantitative qualitative disclosures market risk “quantitative risk measures” appearing page 31 2003 annual report shareholders incorporated reference annual report form 10k item 8item 7a quantitative qualitative disclosure market risk interest rate risks financial results affected changes us foreign interest rates part managing risk enter interest rate exchange agreements convert certain floatingrate debt fixedrate debt vice versa overall objective interest rate risk management achieve prudent balance floating fixedrate debt continuously monitor mix floating fixedrate debt adjust mix necessary based evaluation internal external factors difference rates textron manufacturing received rates paid interest rate exchange agreements significantly impact interest expense 2005 2004 2003 within finance segment strategy matching floatingrate assets floatingrate liabilities limits risk changes interest rates strategy includes use interest rate exchange agreements december 31 2005 floatingrate liabilities excess floatingrate assets 156 million net 29 billion interest rate exchange agreements effectively converted fixedrate debt floatingrate equivalent 122 million interest rate exchange agreements effectively converted fixedrate finance receivables floatingrate equivalent textron finance interest rate exchange agreements designated hedges debt effect decreasing interest expense 11 million 40 million 43 million 2005 2004 2003 respectively foreign exchange risks financial results affected changes foreign currency exchange rates economic conditions foreign markets products manufactured andor sold 2005 impact foreign exchange rate changes 2004 increased revenues approximately 31 million 04 decreased segment profit approximately 3 million 04 textron manufacturing manages exposures foreign currency assets earnings primarily funding certain foreign currency denominated assets liabilities currency certain exposures naturally offset 2005 textron manufacturing primarily used borrowings denominated euro british pound sterling purposes managing foreign currency transaction exposures textron manufacturing also enters foreign currency forward exchange option contracts generally used fix local currency cost purchased goods services selling prices denominated currencies functional currency notional amount outstanding foreign exchange contracts foreign currency options currency swaps approximately 699 million end 2005 493 million end 2004 quantitative risk measures normal course business enter financial instruments purposes trading quantify market risk inherent financial instruments utilize sensitivity analysis financial instruments subject market risk interest rate risk foreign exchange rate risk equity price risk include finance receivables excluding lease receivables debt excluding lease obligations interest rate exchange agreements foreign exchange contracts marketable equity securities marketable security price forward contracts presented sensitivity analysis fair value financial instruments outstanding yearend estimate fair value financial instruments using discounted cash flow analysis independent investment bankers sensitivity analysis likely indicative actual results future following table illustrates sensitivity hypothetical change fair value financial instruments assuming 10 decrease interest rates 10 strengthening exchange rates us dollar 10 decrease quoted market prices applicable marketable equity securities asset liability forwardlooking information certain statements annual report form 10k oral written statements made textron time forwardlooking statements including discuss strategies goals outlook nonhistorical matters project revenues income returns financial measures forwardlooking statements speak date made undertake obligation update revise forwardlooking statements forwardlooking statements subject risks uncertainties may cause actual results differ materially contained statements including following changes worldwide economic political conditions impact interest foreign exchange rates b interruption production textron facilities textron’s customers suppliers c textron’s ability perform anticipated control costs contracts us government us government’s ability unilaterally modify terminate contracts textron us government’s convenience textron’s failure perform change applicable procurement accounting policies certain circumstances suspend debar textron contractor eligible receive future contract awards e changes national international funding priorities government policies export import military commercial products f adequacy cost estimates various customer care programs including servicing warranties g ability control costs successful implementation various cost reduction programs h timing certifications new aircraft products occurrence slowdowns downturns customer markets textron products sold supplied textron financial offers financing j changes aircraft delivery schedules cancellation orders k impact changes tax legislation l extent textron able pass raw material price increases customers offset price increases reducing costs textron’s ability offset cost reductions pricing pressure brought original equipment manufacturer customers n textron’s ability realize full value receivables investments securities availability cost insurance p increases pension expenses related lower expected asset performance changes discount rates q textron financial’s ability maintain portfolio credit quality r textron financial’s access debt financing competitive rates uncertainty estimating contingent liabilities establishing reserves address contingencies performance acquisitions u efficacy research development investments develop new products v bankruptcy financial problems major suppliers customers could cause disruptions textron’s supply chain difficulty collecting amounts owed customers w textron’s ability execute planned dispositions item 8item 7a quantitative qualitative disclosures market risk interest rate risks financial results affected changes us foreign interest rates part managing risk enter interest rate exchange agreements convert certain floatingrate debt fixedrate debt vice versa overall objective interest rate risk management achieve prudent balance floating fixedrate debt continually monitor mix floating fixedrate debt adjust mix necessary based evaluation internal external factors difference rates manufacturing group received rates paid interest rate exchange agreements significantly impact interest expense 2006 2005 2004 finance group limits risk changes interest rates strategy matching floatingrate assets floatingrate liabilities strategy includes use interest rate exchange agreements december 30 2006 floatingrate liabilities excess floatingrate assets 431 million net 29 billion interest rate exchange agreements effectively converted fixedrate debt floatingrate equivalent 46 million interest rate exchange agreements effectively converted fixedrate finance receivables floatingrate equivalent interest rate exchange agreements designated hedges debt net effect increasing interest expense finance group 27 million 2006 decreasing interest expense 11 million 40 million 2005 2004 respectively foreign exchange risks financial results affected changes foreign currency exchange rates economic conditions foreign markets products manufactured andor sold 2006 impact foreign exchange rate changes 2005 increased revenues approximately 11 million 01 increased segment profit approximately 2 million 02 manufacturing operations manage exposures foreign currency assets earnings primarily funding certain foreign currency denominated assets liabilities currency certain exposures naturally offset primarily use borrowings denominated euro british pound sterling purposes managing foreign currency transaction exposures also enter foreign currency forward exchange option contracts generally used fix local currency cost purchased goods services selling prices denominated currencies functional currency notional amount outstanding foreign exchange contracts foreign currency options currency swaps approximately 765 million end 2006 699 million end 2005 quantitative risk measures normal course business enter financial instruments purposes trading quantify market risk inherent financial instruments utilize sensitivity analysis financial instruments subject market risk interest rate risk foreign exchange rate risk equity price risk include finance receivables excluding lease receivables debt excluding lease obligations interest rate exchange agreements foreign currency exchange contracts marketable security price forward contracts presented sensitivity analysis fair value financial instruments outstanding yearend estimate fair value financial instruments using discounted cash flow analysis independent investment bankers sensitivity analysis likely indicative actual results future following table illustrates sensitivity hypothetical change fair value financial instruments assuming 10 decrease interest rates 10 strengthening exchange rates us dollar 10 decrease quoted market price marketable equity security value represents asset liability forwardlooking information certain statements annual report form 10k oral written statements made textron time forwardlooking statements including discuss strategies goals outlook nonhistorical matters project revenues income returns financial measures forwardlooking statements speak date made undertake obligation update revise forwardlooking statements forwardlooking statements subject risks uncertainties may cause actual results differ materially contained statements including following changes worldwide economic political conditions impact demand products interest rates foreign exchange rates b interruption production textron facilities textron’s customers suppliers c textron’s ability perform anticipated control costs contracts us government us government’s ability unilaterally modify terminate contracts textron us government’s convenience textron’s failure perform change applicable procurement accounting policies certain circumstances suspend debar textron contractor eligible receive future contract awards e changes national international funding priorities government policies export import military commercial products f ability control costs successful implementation various costreduction programs g timing new product launches certifications new aircraft products h occurrence slowdowns downturns customer markets textron products sold supplied textron financial corporation offers financing changes aircraft delivery schedules cancellation orders j impact changes tax legislation k extent textron able pass raw material price increases customers offset price increases reducing costs l textron’s ability offset cost reductions pricing pressure brought original equipment manufacturer customers textron’s ability realize full value receivables n availability cost insurance increases pension expenses postretirement employee costs p textron financial corporation’s ability maintain portfolio credit quality q textron financial corporation’s access debt financing competitive rates r uncertainty estimating contingent liabilities establishing reserves address contingencies performance acquisitions efficacy research development investments develop new products u launching significant new products programs could result unanticipated expenses v bankruptcy financial problems major suppliers customers could cause disruptions textron’s supply chain difficulty collecting amounts owed customers information risks uncertainties may impact forwardlooking statements discussed “risk factors” pages 6 8 annual report form 10k item 8item 7a quantitative qualitative disclosures market risk interest rate risks financial results affected changes us foreign interest rates part managing risk enter interest rate exchange agreements convert certain floatingrate debt fixedrate debt vice versa overall objective interest rate risk management achieve prudent balance floating fixedrate debt continually monitor mix floating fixedrate debt adjust mix necessary based evaluation internal external factors difference rates manufacturing group received rates paid interest rate exchange agreements significantly impact interest expense 2008 2007 2006 finance group limits risk changes interest rates strategy matching floatingrate assets floatingrate liabilities strategy includes use interest rate exchange agreements january 3 2009 floatingrate liabilities excess floatingrate assets 30 billion net 21 billion interest rate exchange agreements effectively converted fixedrate debt floatingrate equivalent classified within fixedrate assets 30 billion floating rate loans index rate floors average 224 basis points applicable index rate predominately prime rate assets remain classified fixedrate prime rate increases floor rates benefited interest rate floor arrangements recent low rate environment however rising rate environment benefit dissipate prime rate exceeds floor rates embedded agreements net effect interest rate exchange agreements designated hedges debt decreased interest expense finance group 25 million 2008 increased interest expense 25 million 27 million 2007 2006 respectively foreign exchange risks financial results affected changes foreign currency exchange rates economic conditions foreign markets products manufactured andor sold 2008 impact foreign exchange rate changes 2007 increased revenues approximately 90 million 07 decreased segment profit approximately 2 million 01 manufacturing operations manage exposures foreign currency assets earnings primarily funding certain foreign currency denominated assets liabilities currency certain exposures naturally offset primarily use borrowings denominated euro british pound sterling purposes managing foreign currency transaction exposures also enter foreign currency forward exchange option contracts generally used fix local currency cost purchased goods services selling prices denominated currencies functional currency notional amount outstanding foreign currency exchange contracts foreign currency options approximately 10 billion end 2008 11 billion end 2007 quantitative risk measures normal course business enter financial instruments purposes trading quantify market risk inherent financial instruments utilize sensitivity analysis financial instruments subject market risk interest rate risk foreign exchange rate risk equity price risk include finance receivables excluding lease receivables debt excluding lease obligations interest rate exchange agreements foreign currency exchange contracts marketable security price forward contracts common stock utilize forward contracts common stock manage expense related stockbased compensation awards presented sensitivity analysis fair value financial instruments outstanding yearend estimate fair value financial instruments using discounted cash flow analysis indicative market pricing reported leading financial news data providers sensitivity analysis likely indicative actual results future following table illustrates sensitivity hypothetical change fair value financial instruments assuming 10 decrease interest rates 10 strengthening exchange rates us dollar 10 decrease quoted market price common stock value represents asset liability item 8item 7a quantitative qualitative disclosures market risk interest rate risks financial results affected changes us foreign interest rates part managing risk seek achieve prudent balance floating fixedrate exposures continually monitor mix floating fixedrate exposures adjust mix necessary sometimes entering interest rate exchange agreements based evaluation internal external factors manufacturing group enter interest rate exchange agreements 2009 difference rates received rates paid interest exchange agreements material impact interest expense 2008 2007 finance group limits risk changes interest rates strategy matching floatingrate assets floatingrate liabilities strategy includes use interest rate exchange agreements january 2 2010 floatingrate liabilities excess floatingrate assets 06 billion considering interest rate exchange agreements treatment 14 billion floatingrate loans indexrate floors fixedrate loans index rates average 219 basis points applicable index rate predominately prime rate finance group benefited interest rate floor agreements recent low rate environment however rising rate environment benefit dissipate prime rate exceeds floor rates embedded agreements net effect interest rate exchange agreements designated hedges debt decreased interest expense finance group 56 million 2009 25 million 2008 increased interest expense 25 million 2007 foreign exchange risks financial results affected changes foreign currency exchange rates economic conditions foreign markets products manufactured andor sold impact foreign exchange rate changes 2009 2008 prior year period provided manufacturing operations manage exposures foreign currency assets earnings primarily funding certain foreign currencydenominated assets liabilities currency certain exposures naturally offset primarily use borrowings denominated euro british pound sterling purposes managing foreign currency transaction exposures also enter foreign currency forward exchange option contracts generally used fix local currency cost purchased goods services selling prices denominated currencies functional currency notional amount outstanding foreign exchange contracts foreign currency options approximately 10 billion end 2009 quantitative risk measures normal course business enter financial instruments purposes trading quantify market risk inherent financial instruments utilize sensitivity analysis financial instruments subject market risk interest rate risk foreign exchange rate risk equity price risk include finance receivables excluding lease receivables debt excluding lease obligations interest rate exchange agreements foreign currency exchange contracts marketable security price forward contracts common stock historically utilized forward contracts common stock manage expense related stockbased compensation awards january 21 2010 settled forward contract elected enter new contract 2010 presented sensitivity analysis fair value financial instruments outstanding yearend estimate fair value financial instruments using discounted cash flow analysis indicative market pricing reported leading financial news data providers sensitivity analysis likely indicative actual results future following table illustrates sensitivity hypothetical change fair value financial instruments assuming 10 decrease interest rates 10 strengthening exchange rates us dollar 10 decrease quoted market price common stock value represents asset liability item 8item 7a quantitative qualitative disclosures market risk interest rate risks financial results affected changes us foreign interest rates part managing risk seek achieve prudent balance floating fixedrate exposures continually monitor mix exposures adjust mix necessary finance group limit risk changes interest rates captive business strategy matching floatingrate assets floatingrate liabilities includes use interest rate exchange agreements foreign exchange risks financial results affected changes foreign currency exchange rates various countries products manufactured andor sold manufacturing operations manage exposures foreign currency assets earnings primarily funding certain foreign currencydenominated assets liabilities currency certain exposures naturally offset primarily use borrowings denominated euro british pound sterling purposes managing foreign currency transaction exposures also enter foreign currency forward exchange option contracts generally used fix local currency cost purchased goods services selling prices denominated currencies functional currency notional amount outstanding foreign exchange contracts foreign currency options approximately 07 billion 06 billion end 2012 2011 respectively impact foreign exchange rate changes 2012 2011 prior year period provided quantitative risk measures normal course business enter financial instruments purposes trading quantify market risk inherent financial instruments utilize sensitivity analysis financial instruments subject market risk interest rate risk foreign exchange rate risk include finance receivables excluding lease receivables debt excluding lease obligations interest rate exchange agreements foreign currency exchange contracts presented sensitivity analysis fair value financial instruments outstanding yearend estimate fair value financial instruments using discounted cash flow analysis indicative market pricing reported leading financial news data providers sensitivity analysis likely indicative actual results future following table illustrates sensitivity hypothetical change fair value financial instruments assuming 10 decrease interest rates 10 strengthening exchange rates us dollar value represents asset liability item 8item 7a quantitative qualitative disclosures market risk foreign exchange risks financial results affected changes foreign currency exchange rates various countries products manufactured andor sold manufacturing operations manage exposures foreign currency assets earnings primarily funding certain foreign currencydenominated assets liabilities currency certain exposures naturally offset primarily use borrowings denominated euro british pound sterling purposes managing foreign currency transaction exposures also enter foreign currency forward exchange option contracts generally used fix local currency cost purchased goods services selling prices denominated currencies functional currency notional amount outstanding foreign exchange contracts foreign currency options approximately 636 million 664 million end 2013 2012 respectively impact foreign exchange rate changes 2013 2012 prior year period provided interest rate risks financial results affected changes interest rates part managing risk seek achieve prudent balance floating fixedrate exposures continually monitor mix exposures adjust mix necessary finance group limit risk changes interest rates strategy matching floatingrate assets floatingrate liabilities includes use interest rate exchange agreements quantitative risk measures normal course business enter financial instruments purposes trading quantify market risk inherent financial instruments utilize sensitivity analysis financial instruments subject market risk interest rate risk foreign exchange rate risk include finance receivables excluding lease receivables debt excluding lease obligations interest rate exchange agreements foreign currency exchange contracts presented sensitivity analysis fair value financial instruments outstanding yearend estimate fair value financial instruments using discounted cash flow analysis indicative market pricing reported leading financial news data providers sensitivity analysis likely indicative actual results future following table illustrates sensitivity hypothetical change fair value financial instruments assuming 10 decrease interest rates 10 strengthening exchange rates us dollar value represents asset liability item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange risks financial results affected changes foreign currency exchange rates various countries products manufactured andor sold manufacturing operations manage exposures foreign currency assets earnings primarily funding certain foreign currencydenominated assets liabilities currency certain exposures naturally offset primarily use borrowings denominated british pound sterling purposes managing foreign currency transaction exposures also enter foreign currency exchange contracts generally used fix local currency cost purchased goods services selling prices denominated currencies functional currency notional amount outstanding foreign currency exchange contracts approximately 696 million 636 million end 2014 2013 respectively impact foreign currency exchange rate changes revenues segment profit 2014 2013 prior year significant interest rate risks financial results affected changes interest rates part managing risk seek achieve prudent balance floating fixedrate exposures continually monitor mix exposures adjust mix necessary finance group limit risk changes interest rates strategy matching floatingrate assets floatingrate liabilities quantitative risk measures normal course business enter financial instruments purposes trading quantify market risk inherent financial instruments utilize sensitivity analysis financial instruments subject market risk interest rate risk foreign exchange rate risk include finance receivables excluding leases debt excluding lease obligations foreign currency exchange contracts presented sensitivity analysis fair value financial instruments outstanding yearend estimate fair value financial instruments using discounted cash flow analysis indicative market pricing reported leading financial news data providers sensitivity analysis likely indicative actual results future following table illustrates sensitivity hypothetical change fair value financial instruments assuming 10 decrease interest rates 10 strengthening exchange rates us dollar value represents asset liability item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange risks financial results affected changes foreign currency exchange rates various countries products manufactured andor sold manufacturing operations manage exposures foreign currency assets earnings primarily funding certain foreign currencydenominated assets liabilities currency certain exposures naturally offset primarily use borrowings denominated british pound sterling purposes managing foreign currency transaction exposures also enter foreign currency exchange contracts generally used fix local currency cost purchased goods services selling prices denominated currencies functional currency notional amount outstanding foreign currency exchange contracts approximately 706 million 696 million end 2015 2014 respectively foreign currency exchange rate changes decreased revenues segment profit 2015 244 million 20 million respectively impact foreign currency exchange rate changes revenues segment profit 2014 2013 significant interest rate risks financial results affected changes interest rates part managing risk seek achieve prudent balance floating fixedrate exposures continually monitor mix exposures adjust mix necessary finance group limit risk changes interest rates strategy matching floatingrate assets floatingrate liabilities quantitative risk measures normal course business enter financial instruments purposes trading financial instruments subject market risk include finance receivables excluding leases debt excluding capital lease obligations foreign currency exchange contracts quantify market risk inherent financial instruments utilize sensitivity analysis includes hypothetical change fair value assuming 10 decrease interest rates 10 strengthening foreign exchange rates us dollar fair value financial instruments estimated using discounted cash flow analysis indicative market pricing reported leading financial news data providers end year table provides carrying fair values financial instruments along sensitivity fair value hypothetical changes discussed sensitivity analysis likely indicative actual results future value represents asset liability item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange risk financial results affected changes foreign currency exchange rates various countries products manufactured andor sold manufacturing operations manage foreign currency transaction exposures entering foreign currency exchange contracts generally used fix local currency cost purchased goods services selling prices denominated currencies functional currency notional amount outstanding foreign currency exchange contracts 342 million 379 million january 4 2020 december 29 2018 respectively also manage exposures foreign currency assets earnings primarily funding certain foreign currencydenominated assets liabilities currency certain exposures naturally offset primarily use borrowings denominated british pound sterling purposes impact foreign currency exchange rate changes consolidated statements operations follows interest rate risk financial results affected changes interest rates part managing risk seek achieve prudent balance floating fixedrate exposures continually monitor mix exposures adjust mix necessary finance group generally limit risk changes interest rates strategy matching floatingrate assets floatingrate liabilities quantitative risk measures normal course business enter financial instruments purposes trading financial instruments subject market risk include finance receivables excluding leases debt excluding finance lease obligations foreign currency exchange contracts quantify market risk inherent financial instruments utilize sensitivity analysis includes hypothetical change fair value assuming 10 decrease interest rates 10 strengthening foreign exchange rates us dollar fair value financial instruments estimated using discounted cash flow analysis indicative market pricing reported leading financial news data providers end year table provides carrying fair values financial instruments along sensitivity fair value hypothetical changes discussed sensitivity analysis likely indicative actual results future value represents asset liability item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange risks financial results affected changes foreign currency exchange rates various countries products manufactured andor sold manufacturing operations manage foreign currency transaction exposures entering foreign currency exchange contracts generally used fix local currency cost purchased goods services selling prices denominated currencies functional currency notional amount outstanding foreign currency exchange contracts approximately 426 million 665 million december 30 2017 december 31 2016 respectively also manage exposures foreign currency assets earnings primarily funding certain foreign currencydenominated assets liabilities currency certain exposures naturally offset primarily use borrowings denominated british pound sterling purposes impact foreign currency exchange rate changes consolidated financial statements follows interest rate risks financial results affected changes interest rates part managing risk seek achieve prudent balance floating fixedrate exposures continually monitor mix exposures adjust mix necessary finance group limit risk changes interest rates strategy matching floatingrate assets floatingrate liabilities quantitative risk measures normal course business enter financial instruments purposes trading financial instruments subject market risk include finance receivables excluding leases debt excluding capital lease obligations foreign currency exchange contracts quantify market risk inherent financial instruments utilize sensitivity analysis includes hypothetical change fair value assuming 10 decrease interest rates 10 strengthening foreign exchange rates us dollar fair value financial instruments estimated using discounted cash flow analysis indicative market pricing reported leading financial news data providers end year table provides carrying fair values financial instruments along sensitivity fair value hypothetical changes discussed sensitivity analysis likely indicative actual results future value represents asset liability item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange risk financial results affected changes foreign currency exchange rates various countries products manufactured andor sold manufacturing operations manage foreign currency transaction exposures entering foreign currency exchange contracts generally used fix local currency cost purchased goods services selling prices denominated currencies functional currency notional amount outstanding foreign currency exchange contracts 379 million 426 million december 29 2018 december 30 2017 respectively also manage exposures foreign currency assets earnings primarily funding certain foreign currencydenominated assets liabilities currency certain exposures naturally offset primarily use borrowings denominated british pound sterling purposes impact foreign currency exchange rate changes consolidated statements operations follows interest rate risk financial results affected changes interest rates part managing risk seek achieve prudent balance floating fixedrate exposures continually monitor mix exposures adjust mix necessary finance group generally limit risk changes interest rates strategy matching floatingrate assets floatingrate liabilities quantitative risk measures normal course business enter financial instruments purposes trading financial instruments subject market risk include finance receivables excluding leases debt excluding capital lease obligations foreign currency exchange contracts quantify market risk inherent financial instruments utilize sensitivity analysis includes hypothetical change fair value assuming 10 decrease interest rates 10 strengthening foreign exchange rates us dollar fair value financial instruments estimated using discounted cash flow analysis indicative market pricing reported leading financial news data providers end year table provides carrying fair values financial instruments along sensitivity fair value hypothetical changes discussed sensitivity analysis likely indicative actual results future value represents asset liability item 8nanitem 7a quantitative qualitative disclosures market risk interest rate risks financial results affected changes us foreign interest rates part managing risk enter interest rate exchange agreements convert certain floatingrate debt fixedrate debt vice versa overall objective interest rate risk management achieve prudent balance floating fixedrate debt continually monitor mix floating fixedrate debt adjust mix necessary based evaluation internal external factors difference rates manufacturing group received rates paid interest rate exchange agreements significantly impact interest expense 2007 2006 2005 finance group limits risk changes interest rates strategy matching floatingrate assets floatingrate liabilities strategy includes use interest rate exchange agreements december 29 2007 floatingrate liabilities excess floatingrate assets 51 million net 23 billion interest rate exchange agreements effectively converted fixedrate debt floatingrate equivalent interest rate exchange agreements designated hedges debt net effect increasing interest expense finance group 25 million 2007 27 million 2006 decreasing interest expense 11 million 2005 foreign exchange risks financial results affected changes foreign currency exchange rates economic conditions foreign markets products manufactured andor sold 2007 impact foreign exchange rate changes 2006 increased revenues approximately 148 million 13 increased segment profit approximately 12 million 09 manufacturing operations manage exposures foreign currency assets earnings primarily funding certain foreign currency denominated assets liabilities currency certain exposures naturally offset primarily use borrowings denominated euro british pound sterling purposes managing foreign currency transaction exposures also enter foreign currency forward exchange option contracts generally used fix local currency cost purchased goods services selling prices denominated currencies functional currency notional amount outstanding foreign exchange contracts foreign currency options approximately 12 billion end 2007 765 million end 2006 quantitative risk measures normal course business enter financial instruments purposes trading quantify market risk inherent financial instruments utilize sensitivity analysis financial instruments subject market risk interest rate risk foreign exchange rate risk equity price risk include finance receivables excluding lease receivables debt excluding lease obligations interest rate exchange agreements foreign currency exchange contracts marketable security price forward contracts presented sensitivity analysis fair value financial instruments outstanding yearend estimate fair value financial instruments using discounted cash flow analysis indicative market pricing reported leading financial news data providers sensitivity analysis likely indicative actual results future following table illustrates sensitivity hypothetical change fair value financial instruments assuming 10 decrease interest rates 10 strengthening exchange rates us dollar 10 decrease quoted market price marketable equity security value represents asset liability item 8item 7a quantitative qualitative disclosures market risk interest rate risks financial results affected changes us foreign interest rates part managing risk seek achieve prudent balance floating fixedrate exposures continually monitor mix exposures adjust mix necessary finance group limit risk changes interest rates captive business strategy matching floatingrate assets floatingrate liabilities includes use interest rate exchange agreements foreign exchange risks financial results affected changes foreign currency exchange rates various countries products manufactured andor sold manufacturing operations manage exposures foreign currency assets earnings primarily funding certain foreign currencydenominated assets liabilities currency certain exposures naturally offset primarily use borrowings denominated euro british pound sterling purposes managing foreign currency transaction exposures also enter foreign currency forward exchange option contracts generally used fix local currency cost purchased goods services selling prices denominated currencies functional currency notional amount outstanding foreign exchange contracts foreign currency options approximately 06 billion end 2011 2010 impact foreign exchange rate changes 2011 2010 prior year period provided quantitative risk measures normal course business enter financial instruments purposes trading quantify market risk inherent financial instruments utilize sensitivity analysis financial instruments subject market risk interest rate risk foreign exchange rate risk equity price risk include finance receivables excluding lease receivables debt excluding lease obligations interest rate exchange agreements foreign currency exchange contracts presented sensitivity analysis fair value financial instruments outstanding yearend estimate fair value financial instruments using discounted cash flow analysis indicative market pricing reported leading financial news data providers sensitivity analysis likely indicative actual results future following table illustrates sensitivity hypothetical change fair value financial instruments assuming 10 decrease interest rates 10 strengthening exchange rates us dollar value represents asset liability item 8 item 8 financial statements supplementary data consolidated financial statements supplementary information listed accompanying index financial statements financial state ment schedules filed part report item 9item 8 financial statements supplementary data consolidated financial statements supplementary information listed accompanying index financial statements financial statement schedules filed part report item 9item 8 financial statements supplementary data consolidated financial statements supplementary information contained textrons 1997 annual report shareholders financial statement schedules listed accompanying index financial statements financial statement schedules incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements supplementary information contained textrons 1998 annual report shareholders financial statement schedules listed accompanying index financial statements financial statement schedules incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements supplementary information contained 2000 annual report shareholders financial statement schedules listed index financial statements financial statement schedules attached annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements together report thereon ernst young llp dated january 24 2002 supplementary information contained 2001 annual report shareholders financial statement schedules listed index financial statements financial statement schedules attached annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements together report thereon ernst young llp dated january 23 2003 supplementary information contained 2002 annual report shareholders financial statement schedules listed index financial statements financial statement schedules attached annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements together report thereon ernst young llp dated january 29 2004 supplementary information contained 2003 annual report shareholders financial statement schedules listed index financial statements financial statement schedules attached annual report form 10k incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements textron inc related reports textron’s independent registered public accounting firm thereon included annual report form 10k page indicated page report management report independent registered public accounting firm internal control financial reporting report independent registered public accounting firm consolidated financial statements schedule consolidated statements operations years threeyear period ended december 31 2005 consolidated balance sheets december 31 2005 january 1 2005 consolidated statements changes shareholders’ equity years threeyear period ended december 31 2005 consolidated statements cash flows years threeyear period ended december 31 2005 notes consolidated financial statements segment reporting geographic data supplementary information quarterly data 2005 2004 unaudited schedule ii valuation qualifying accounts schedules omitted either applicable required information included financial statements notes thereto report management responsible integrity objectivity financial data presented annual report form 10k consolidated financial statements prepared conformity accounting principles generally accepted united states include amounts based management’s best estimates judgments management also responsible establishing maintaining adequate internal control financial reporting textron inc term defined exchange act rules 13a15f participation management conducted evaluation effectiveness internal control financial reporting based framework internal control integrated framework issued committee sponsoring organizations treadway commission based evaluation framework internal control integrated framework concluded textron inc maintained material respects effective internal control financial reporting december 31 2005 independent registered public accounting firm ernst young llp audited consolidated financial statements textron inc issued attestation report assessment effectiveness textron’s internal control financial reporting december 31 2005 stated reports included herein conduct business accordance standards outlined textron business conduct guidelines communicated employees honesty integrity high ethical standards core values conduct business every textron business prepares carries annual compliance plan ensure values standards maintained internal control structure designed provide reasonable assurance appropriate cost assets safeguarded transactions properly executed recorded internal control structure includes among things established policies procedures internal audit function selection training qualified personnel textron’s management responsible implementing effective internal control systems monitoring effectiveness well developing executing annual internal control plan audit committee board directors behalf shareholders oversees management’s financial reporting responsibilities audit committee composed five directors officers employees textron meets regularly independent auditors management internal auditors review matters relating financial reporting internal accounting controls auditing independent auditors internal auditors free full access senior management audit committee lewis b campbell ted r french lewis b campbell ted r french chairman president chief executive vice president executive officer chief financial officer february 13 2006 report independent registered public accounting firm internal control financial reporting board directors shareholders textron inc audited management’s assessment included accompanying report management textron inc “company” maintained effective internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission “coso criteria” textron’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion management’s assessment textron inc maintained effective internal control financial reporting december 31 2005 fairly stated material respects based coso criteria also opinion textron inc maintained material respects effective internal control financial reporting december 31 2005 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets textron inc december 31 2005 january 1 2005 related consolidated statements operations cash flows changes shareholders’ equity three years period ended december 31 2005 textron inc report dated february 13 2006 expressed unqualified opinion thereon report independent registered public accounting firm consolidated financial statements schedule board directors shareholders textron inc audited accompanying consolidated balance sheets textron inc “company” december 31 2005 january 1 2005 related consolidated statements operations cash flows changes shareholders’ equity three years period ended december 31 2005 audits also included financial statement schedule contained page 77 financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position textron inc december 31 2005 january 1 2005 consolidated results operations cash flows three years period ended december 31 2005 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness textron inc’s internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 13 2006 expressed unqualified opinion thereon discussed note 13 consolidated financial statements 2005 textron adopted statement financial accounting standards sfas 123 revised 2004 “sharebased payment” discussed note 11 consolidated financial statements 2003 textron adopted sfas 150 “accounting certain financial instruments characteristics liabilities equity” consolidated statements operations years threeyear period ended december 31 see notes consolidated financial statements consolidated balance sheets december 31 2005 january 1 2005 see notes consolidated financial statements consolidated statements changes shareholders’ equity years threeyear period ended december 31 shares issued end 2005 2004 2003 follows thousands 208 preferred 153 174 181 shares respectively 140 preferred 534 537 540 shares respectively common 205613 203361 198957 shares respectively see notes consolidated financial statements consolidated statements cash flows years threeyear period ended december 31 textron segregated two borrowing groups textron manufacturing textron finance described note 1 consolidated financial statements along principles consolidation textron manufacturing’s cash flows exclude pretax income textron finance excess dividends paid textron manufacturing significant transactions textron manufacturing textron finance eliminated consolidated column see notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies nature operations textron inc “textron” global multiindustry company manufacturing finance operations primarily north america europe textron’s principal markets summarized segment principles consolidation financial statement presentation consolidated financial statements include accounts textron inc majorityowned subsidiaries 50 along variable interest entities required consolidated accordance financial accounting standards board “fasb” interpretation 46 “consolidation variable interest entitiesrevised” “fin 46r” fin 46r requires consolidation variable interest entities enterprise absorbs majority entity’s expected losses receives majority entity’s expected residual returns result ownership contractual financial interests entity variable interest entities defined entities level invested equity insufficient fund future activities operate standalone basis whose equity holders lack certain characteristics controlling financial interest entity meet definition variable interest entity fin 46r textron accounts entity provisions accounting principles board “apb” opinion 18 “the equity method accounting investments common stock” requires consolidation majorityowned subsidiaries company ability exercise control textron’s financings conducted two borrowing groups textron manufacturing textron finance framework designed enhance textron’s borrowing power separating finance segment support creditors evaluating separate borrowing groups textron presents separate balance sheets statements cash flows borrowing group textron manufacturing consists textron inc parent company consolidated entities operate bell cessna industrial business segments textron manufacturing’s cash flows include dividends received textron finance exclude pretax income textron finance consists textron’s wholly owned commercial finance subsidiary textron financial corporation consolidated subsidiaries entities textron operates finance segment textron finance obtains financing operations borrowing group external creditors portion textron finance’s business involves financing retail purchases leases new used aircraft equipment manufactured textron manufacturing cash flows related captive financing activities reflected operating activities textron manufacturing investing activities textron finance based group’s operations example product sold customer financed textron finance textron finance records origination finance receivable within investing activities cash outflow textron manufacturing records cash received textron finance customer’s behalf within operating activities although cash transferred businesses cash transaction consolidated group time original financing captive financing activities along significant intercompany transactions eliminated consolidated financial statements 2005 textron separately disclosed operating investing financing portions cash flows attributable discontinued operations prior periods reported combined basis single amount prior periods revised conform presentation use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported statements accompanying notes significant estimates include inventory valuation residual values leased assets allowance credit losses receivables product liability workers’ compensation actuarial assumptions pension postretirement plans estimates future cash flows associated goodwill longlived assets environmental warranty reserves amounts reported longterm contracts management’s estimates based facts circumstances available time estimates made historical experience risk loss general economic conditions trends management’s assessments probable future outcomes matters actual results could differ estimates cash equivalents cash equivalents consist cash shortterm highly liquid investments original maturities three months less revenue recognition revenue generally recognized products delivered services performed respect aircraft delivery upon completion manufacturing customer acceptance transfer risk rewards ownership sale arrangement involves multiple elements sales products include customization services deliverables arrangement evaluated determine whether represent separate units accounting evaluation occurs inception arrangement item arrangement delivered total fee arrangement allocated unit accounting based relative fair value taking consideration performance cancellation termination refund type provisions fair value element established generally based sales price charged similar element sold separately revenue recognized revenue recognition criteria unit accounting met revenue certain qualifying noncancelable aircraft product lease contracts accounted salestype leases present value payments net executory costs guaranteed residual values recorded revenue related costs product charged cost sales generally leases financed textron finance associated interest recorded term lease agreement using interest method lease financing transactions qualify salestype leases accounted operating method revenue recorded earned lease period aircraft sales guaranteed minimum resale values viewed leases accounted accordance emerging issues task force 951 “revenue recognition sales guaranteed minimum resale value” determine whether transaction classified operating lease salestype lease minimum lease payments generally represent difference proceeds upon equipment’s initial transfer present value residual value guarantee purchaser first exercise date guarantee residual value insurance obtained present value residual value insurance also included minimum lease payments textron assesses market values aircraft using industry publications well actual sales used aircraft fixedwing aircraft specific information related individual aircraft hours condition may available market value assessments adjusted accordingly rotor aircraft guarantee arrangements require certain physical condition minimums andor require aircraft covered extended maintenance plan rotor aircraft fair value estimates valued accordingly losses recorded currently estimated market value aircraft exercise date less guaranteed amount longterm contracts longterm contracts accounted american institute certified public accountants statement position 811 “accounting performance constructiontype certain productiontype contracts” revenue fixedprice contracts generally recorded deliveries made unitsofdelivery method certain longterm fixedprice contracts provide periodic delivery lengthy period time significant costs incurred require significant amount development effort relation total contract volume revenues contracts costreimbursementtype contracts recorded costs incurred costtocost method certain contracts awarded fixedprice incentive fees incentive fees considered estimating revenues profit rates recorded amounts reasonably determinable longterm contract profits based estimates total sales value costs completion estimates reviewed revised periodically throughout contract life revisions contract profits recorded revisions estimated sales value costs made estimated contract losses recorded identified bell helicopter joint venture boeing company “boeing” provide engineering development test services related v22 aircraft well produce v22 aircraft number separate contracts us government “v22 contracts” v22 contracts include development contract various production release contracts ie lots may run concurrently multiple earlier lots still produced new lots started development contract first three production lots costreimbursementtype contracts subsequent lots fixedpricetype contracts first three lots fixedprice incentive contracts accounted costtocost method primarily result significant engineering effort required lengthy period time initial development phase relation total contract volume production releases first six production lots include separately contracted modifications meet additional requirements us government’s blue ribbon panel beginning 2003 development effort considered substantially complete new production releases management believed consistent production specification met units incorporate many modifications production line accordingly revenue new production releases began 2003 recognized unitsofdelivery method finance revenues finance revenues include interest finance receivables recognized using interest method provide constant rate return terms receivables finance revenues also include direct loan origination costs fees received deferred amortized contractual lives respective receivables using interest method unamortized amounts recognized revenues receivables sold prepaid accrual interest income suspended accounts contractually delinquent three months unless collection doubtful addition detailed reviews loans may result earlier suspension collection doubtful accrual interest resumed loan becomes contractually current suspended interest income recognized time losses finance receivables provisions losses finance receivables charged income amounts sufficient maintain allowance level considered adequate cover losses existing receivable portfolio management evaluates allowance examining current delinquencies characteristics existing accounts historical loss experience value underlying collateral general economic conditions trends finance receivables charged deemed uncollectible finance receivables written fair value less estimated costs sell related collateral earlier date collateral repossessed payment received six months unless management deems receivable collectible loan impairment textron finance periodically evaluates finance receivables excluding homogeneous loan portfolios finance leases impairment loan considered impaired probable textron finance unable collect amounts due according contractual terms loan agreement addition textron finance identifies loans considered impaired due significant modification original loan terms reflect deferred principal payments generally market interest rates continue accrue finance charges since full collection principal interest doubtful impairment measured comparing fair value loan carrying amount fair value based present value expected future cash flows discounted loan’s effective interest rate loan’s observable market price loan collateral dependent fair value collateral less selling costs fair value loan less carrying amount textron finance establishes reserve based difference evaluation inherently subjective requires estimates including amount timing future cash flows expected received impaired loans may differ actual results securitized transactions textron finance sells securitizes loans leases may retain interest assets sold form servicing responsibilities subordinated interests including interestonly securities seller certificates cash reserves retained interests subordinate investors’ interests securitizations gain loss sale finance receivables depends part previous carrying amount finance receivables involved transfer allocated assets sold retained interests based relative fair values date transfer retained interests recorded fair value component assets textron finance estimates fair value based present value future expected cash flows using management’s best estimates key assumptions credit losses prepayment speeds forward interest rate yield curves discount rates commensurate risks involved textron finance reviews fair values retained interests quarterly using updated assumptions compares amounts carrying value retained interests carrying value exceeds fair value retained interests decline fair value determined temporary retained interest written fair value corresponding charge income change fair value retained interest deemed temporary unrealized gains losses included shareholders’ equity component accumulated comprehensive loss investments marketable equity securities classified available sale recorded fair value component assets unrealized gains losses securities net income taxes included shareholders’ equity component accumulated comprehensive loss investments nonmarketable equity securities accounted either cost equity method accounting textron periodically reviews investment securities impairment based criteria include duration market value decline textron’s ability hold recovery information regarding market industry trends investee’s business financial strength specific prospects investee investment analyst reports available decline fair value investment security judged temporary cost basis written fair value charge earnings normal course business textron entered various joint venture agreements controlled textron ability exercise significant influence operating financial policies textron’s investments ventures accounted equity method accounting december 31 2005 january 1 2005 textron manufacturing’s investment unconsolidated joint ventures totaled 16 million 13 million respectively included assets addition january 1 2005 distributions one joint ventures exceeded textron’s investment 18 million equity method textron’s share ventures’ net earnings losses included consolidated statement operations textron manufacturing’s share net income loss ventures totaled 1 million 2005 11 million 2004 14 million 2003 since amounts considered material separate presentation included within cost sales textron’s joint venture agreement boeing creates contractual rather ownership rights related v22 accordingly textron account joint venture equity method accounting textron accounts bell helicopter’s rights obligations specific requirements v22 contracts allocated bell helicopter joint venture agreement revenues cost sales reflect bell helicopter’s performance v22 contracts assets used performance v22 contracts owned bell helicopter including inventory unpaid receivables liabilities arising bell helicopter’s obligations v22 contracts included consolidated balance sheet inventories carried lower cost estimated net realizable value cost approximately 70 inventories determined using lastin firstout method “lifo” cost remaining inventories related certain longterm contracts generally valued firstin firstout method “fifo” costs commercial helicopters determined average cost basis model considering expended estimated costs current production release customer deposits recorded inventory right offset exists customer deposits recorded liabilities property plant equipment property plant equipment recorded cost depreciated primarily using straightline method land improvements buildings depreciated primarily estimated lives ranging five 40 years machinery equipment depreciated primarily three 15 years expenditures improvements increase asset values extend useful lives capitalized impairment longlived assets longlived assets including intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable management assesses recoverability cost asset based review projected undiscounted cash flows event impairment loss identified recognized based amount carrying value exceeds estimated fair value longlived asset held sale management reviews estimated fair value less cost sell fair value determined using pertinent market information including appraisals brokers’ estimates andor projected discounted cash flows goodwill management evaluates recoverability goodwill annually frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit indefinitelived intangible asset might impaired reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment “component” case component reporting unit certain instances components operating segment aggregated deemed single reporting unit based similar economic characteristics components goodwill considered impaired net book value reporting unit exceeds estimated fair value fair values established primarily using discounted cash flow methodology determination discounted cash flows based businesses’ strategic plans longrange planning forecasts available comparative market multiples used corroborate discounted cash flow results derivative financial instruments textron exposed market risk primarily changes interest rates currency exchange rates securities pricing manage volatility relating exposures textron nets exposures consolidated basis take advantage natural offsets residual portion textron enters various derivative transactions pursuant textron’s policies areas counterparty exposure hedging practices derivative instruments reported balance sheet fair value designation support hedge accounting performed specific exposure basis changes fair value financial instruments qualifying fair value hedges recorded income offset part whole corresponding changes fair value underlying exposures hedged changes fair values derivatives accounted cash flow hedges extent effective hedges recorded comprehensive loss income net deferred taxes changes fair value derivatives qualifying hedges reported income textron hold issue derivative financial instruments trading speculative purposes foreign currency denominated assets liabilities translated us dollars adjustments currency rate changes recorded cumulative translation adjustment account shareholders’ equity related foreign entity sold substantially liquidated foreign currency financing transactions including currency swaps used effectively hedge longterm investments foreign operations corresponding currency foreign currency gains losses hedge longterm investments recorded cumulative translation adjustment account accumulated comprehensive loss offset recorded adjustment nonus dollar financing liability fair values financial instruments fair values cash equivalents accounts receivable accounts payable variablerate receivables debt approximate carrying value estimated fair values financial instruments including debt equity risk management instruments determined using available market information valuation methodologies primarily discounted cash flow analysis independent investment bankers estimated fair value nonperforming loans included finance receivables based discounted cash flow analyses using riskadjusted interest rates fair value related collateral considerable judgment required interpreting market data estimates necessarily indicative amounts could realized current market product environmental liabilities product liability claims accrued occurrence method based insurance coverage deductibles effect date incident management’s assessment probability loss reasonably estimable accruals environmental matters recorded sitebysite basis probable liability incurred amount reasonably estimated textron’s environmental liabilities undiscounted take consideration possible future insurance proceeds significant amounts claims third parties research development costs research development costs specifically covered contracts related textron’s share research development activity connection costsharing arrangements charged expense incurred research development costs incurred contracts others reported cost sales period revenue recognized consistent textron’s contract accounting policy income taxes deferred tax assets liabilities determined based temporary differences financial reporting tax bases assets liabilities applying enacted tax rates expected effect year differences expected reverse based evaluation available evidence textron recognizes future tax benefits net operating loss carryforwards extent management believes likely benefits realized management periodically assesses likelihood textron able recover deferred tax assets reflects changes estimates valuation allowance corresponding adjustment earnings comprehensive income loss appropriate assessing need valuation allowance management looks future reversal existing taxable temporary differences taxable income prior carryback years feasibility tax planning strategies estimated future taxable income note 2 discontinued operations textron’s consolidated financial statements related footnote disclosures reflect textron fastening systems intesys omniquip small business direct businesses discontinued operations net applicable income taxes periods presented accordance statement financial accounting standards “sfas” 144 “accounting impairment disposal longlived assets” textron manufacturing generally uses centralized approach cash management financing operations accordingly allocate debt interest expense discontinued businesses debt related interest expense specific entity within business recorded respective entity general corporate overhead previously allocated businesses reporting purposes excluded amounts reported discontinued operations textron fastening systems 2005 textron fastening systems business experienced declining sales volumes profits volumes due soft demand automotive market operating difficulties profits due lower volumes lag ability recover higher steel costs inefficiencies associated consolidation manufacturing operations north america due continuation conditions softening demand north american automotive market expected decline european automotive market textron’s management committee initiated special review end august consider strategic alternatives segment including potential sale portions operations september 6 2005 textron’s board directors approved management’s recommendation explore strategic alternatives segment based approval recommendation likelihood execution textron determined september 6 2005 impairment indicator existed fastening systems’ goodwill longlived assets assessment potential impairment goodwill management estimated fair value business using independent thirdparty valuations fair value amount compared carrying amount segment carrying amount exceeded fair value management measured amount goodwill impairment loss excess fair value segment fair value amounts assigned assets liabilities represents implied fair value goodwill carrying amount goodwill exceeded implied fair value goodwill resulting impairment loss 335 million recorded third quarter 2005 december 2005 textron’s board directors authorized divestiture textron fastening systems business approval textron committed actively market segment anticipates significant changes approved plan completion sale within next twelve months textron recorded aftertax charge approximately 52 million fourth quarter 2005 includes 37 million related previously deferred foreign currency translation losses 2 million tax charges related nonusbased business well 7 million related curtailment losses employee retirement plans charges management assessed estimated fair value business determined adjustment carrying value required addition approximately 6 million aftertax dealrelated costs primarily professional services advisory fees incurred quarter intesys textron reached final decision fourth quarter 2004 sell remainder intesys operations previously included industrial segment carrying value business approximated fair value date decision sell textron sold business february 2005 recorded aftertax gain approximately 49 million primarily related tax benefit omniquip august 1 2003 textron consummated sale remaining omniquip business jlg industries inc 100 million prior consummation textron recorded 30 million impairment 15 million intangible assets 15 million goodwill based fair value implied sale price negotiation time textron manufacturing retained certain liabilities omniquip business liabilities totaled approximately 23 million december 31 2005 included reserves related recourse liability cover potential losses approximately 30 million finance receivables held textron finance see note 5 discussion transactions textron’s manufacturing finance borrowing groups small business direct 2003 textron finance sold small business direct portfolio 421 million cash based upon terms transaction gain loss recorded textron finance entered losssharing agreement related sale requires textron finance reimburse purchaser 50 losses incurred portfolio 4 annual level due nature losssharing agreement maximum guarantee amount related remaining 380 million portfolio textron finance originally recorded liability 14 million representing estimated fair value guarantee expires 2008 december 31 2005 textron finance reimbursed purchaser total 4 million agreement recorded additional 4 million liability based revisions estimated fair value guarantee revisions reflect management’s best estimate amounts potentially reimbursable purchaser based historical loss experience estimated attrition portfolio december 31 2005 estimated fair value guarantee 13 million liability assets liabilities discontinued businesses follows operating results discontinued businesses follows prior disposition businesses approximately 289 million restructuring costs related textron fastening systems intesys omniquip recorded special charges since inception textron’s restructuring program note 3 acquisitions textron joint venture citationshares tag aviation usa inc “tag” sell fractional share interests business jets limited advance purchase jet charter june 30 2004 textron acquired additional 25 interest citationshares tag cash assumption debt guarantees previously provided tag assets acquired 47 million included 22 million inventory primarily citation jets liabilities acquired 59 million included 47 million thirdparty debt immediately repaid result transaction textron owned 75 citationshares consolidated financial results prospectively june 30 2004 additional cash consideration may also payable tag based citationshares’ future operating results 2005 textron increased ownership interest 822 additional capital contributions 26 million tag right sell remaining interest textron years 2009 2011 textron right purchase remaining interest 2010 2011 amount based multiple earnings note 4 accounts receivable accounts receivable composed following unbillable receivables us government contracts arise revenues based performance attainment though appropriately recognized cannot billed yet terms contract unbillable receivables within accounts receivable totaled 125 million december 31 2005 133 million january 1 2005 longterm contract receivables due us government include significant amounts billed unpaid due contractual retainage provisions subject collection uncertainty note 5 finance receivables securitizations finance receivables textron finance provides financial services primarily aircraft golf vacation interval resort dealer floorplan middle market industries variety financing vehicles various contractual maturities installment contracts generally require customer pay significant payment along periodic scheduled principal payments reduce outstanding balance term loan finance leases include residual values expected realized contractual maturity finance leases significant residual value end contractual term classified installment contracts legal economic substance equivalent secured borrowing finance lease significant residual value installment contracts finance leases initial terms ranging two 20 years primarily secured financed equipment distribution finance receivables generally secured inventory financed distributor include floor plan financing thirdparty dealers inventory sold ezgo jacobsen businesses revolving loans secured trade receivables inventory plant equipment pools vacation interval notes receivables pools residential recreational land loans underlying property distribution finance revolving loans generally mature within one five years golf course resort mortgages secured real property generally limited 75 less property’s appraised market value loan origination golf course mortgages initial terms ranging five seven years amortization periods 15 25 years resort mortgages generally represent construction inventory loans terms two years leveraged leases secured ownership leased equipment real property initial terms approximately 30 years following table displays contractual maturity finance receivables necessarily reflect future cash collections various factors including repayment refinancing receivables prior contractual maturity contractual maturities finance leases classified installment contracts include minimum lease payments net unearned income recognized life lease total minimum lease payments unearned income related finance leases 751 million 164 million respectively december 31 2005 708 million 136 million respectively january 1 2005 minimum lease payments due contracts next five years follows 150 million 2006 125 million 2007 109 million 2008 108 million 2009 81 million 2010 textron finance’s net investment finance leases excluding leases classified installment contracts provided minimum lease payments due finance leases next five years follows 99 million 2006 87 million 2007 67 million 2008 37 million 2009 11 million 2010 net investment leveraged leases follows excluding receivables recourse textron manufacturing end 2005 2004 textron finance nonaccrual finance receivables totaling 89 million 119 million respectively 67 million 85 million respectively impaired addition textron finance impaired accrual finance receivables totaling 36 million december 31 2005 58 million january 1 2005 allowance losses finance receivables related impaired loans determined using assumptions related fair market value underlying collateral totaled 18 million 16 million end 2005 2004 respectively average recorded investment impaired loans 2005 113 million compared 145 million 2004 interest income recognized loans using cash basis method textron finance manages services finance receivables variety investors participants thirdparty portfolio owners total managed serviced finance receivable portfolio including owned finance receivables 99 billion end 2005 93 billion end 2004 managed receivables include owned finance receivables finance receivables sold securitizations private transactions textron finance retained element credit risk continues service portfolio december 31 2005 textron finance’s receivables primarily diversified geographically across united states along 14 countries significant collateral concentration general aviation aircraft accounted 19 managed receivables textron finance also industry concentrations golf vacation interval industries accounted 17 13 respectively managed receivables december 31 2005 transactions finance manufacturing groups portion textron finance’s business involves financing retail purchases leases new used aircraft equipment manufactured textron manufacturing captive finance receivables inventory sales included textron finance’s balance sheet composed following operating agreements specify textron finance recourse textron manufacturing certain uncollected amounts related transactions receivables collection guaranteed textron manufacturing reserves established losses textron manufacturing’s balance sheet recorded current longterm liabilities reserves established amounts potentially uncollectible collateral values may insufficient cover outstanding receivable account deemed uncollectible collateral repossessed textron finance charge textron manufacturing deficiency cases collateral repossessed textron finance receivable transferred textron manufacturing’s balance sheet additional collection efforts occurs related reserve previously established textron manufacturing reclassified current longterm liabilities contra asset account 2005 2004 2003 textron finance paid textron manufacturing 08 billion 09 billion 09 billion respectively relating sale manufactured products third parties financed textron finance 41 million 77 million 56 million respectively purchase equipment operating leases end 2005 2004 amounts guaranteed textron manufacturing totaled 344 million 384 million respectively addition end 2005 2004 textron finance recourse textron manufacturing leases collins aikman corporation “ca” totaling approximately 70 million 82 million respectively finance receivables guaranteed textron manufacturing textron finance continues recognize income pastdue loans meet nonaccrual criteria accordingly pastdue loans classified nonaccrual textron finance concurrently textron manufacturing charged obligation textron finance guarantee net interest earnings loans consolidated basis end 2005 2004 pastdue loans guaranteed textron manufacturing totaled 8 million 31 million respectively reserves losses related guarantees included textron manufacturing’s current liabilities totaled 36 million 48 million end 2005 2004 respectively securitizations textron finance received proceeds 04 billion 2005 2004 securitization sale servicing rights retained finance receivables gains securitized trust sales approximately 49 million 2005 56 million 2004 43 million 2003 end 2005 23 billion securitized loans outstanding 9 million pastdue loans textron finance securitized certain receivables retained full recourse textron manufacturing textron finance retained subordinated interests trusts approximately 2 10 total trust servicing fees range 75 150 basis points 2005 key economic assumptions used measuring retained interests date securitization included prepayment speeds ranging 175 243 weightedaverage lives ranging 03 32 years expected credit losses ranging 04 05 residual cash flows discount rates ranging 71 92 december 31 2005 key economic assumptions used measuring retained interests follows hypothetical adverse changes 10 20 either prepayment speed expected credit losses residual cash flows discount rates assumptions would material impact current fair value residual cash flows associated retained interests hypothetical sensitivities used caution effect variation particular assumption fair value retained interest calculated without changing assumption reality change one factor may result change another factor may magnify counteract sensitivities losses example increases market interest rates may result lower prepayments increased credit losses note 6 inventories composed following inventories aggregating 13 billion 11 billion end 2005 2004 respectively valued lifo method lifo inventories valued current costs carrying values would approximately 251 million 221 million higher respective dates remaining inventories related certain longterm contracts valued primarily fifo method inventories related longterm contracts net progressmilestone payments 350 million end 2005 259 million end 2004 note 7 property plant equipment net property plant equipment net textron manufacturing composed following note 8 goodwill intangible assets changes goodwill summarized textron’s acquired intangible assets subject amortization composed following amortization expense totaled 4 million 2005 6 million 2004 9 million 2003 next five years amortization expense estimated approximately 3 million note 9 debt credit facilities debt credit facilities composed following textron manufacturing maintains credit facilities various banks short longterm borrowings textron manufacturing primary revolving credit facilities 13 billion expire march 2010 textron manufacturing’s credit facilities permit textron finance borrow facilities december 31 2005 january 1 2005 none primary revolving credit facilities used reserved support commercial paper weightedaverage interest rates facilities 2005 2004 30 17 respectively weightedaverage interest rates borrowings effect interest rate exchange agreements 44 24 end 2005 2004 respectively 33 year 2005 16 year 2004 textron finance committed bank lines credit 15 billion 500 million expires july 2006 10 billion expires 2010 500 million facility includes oneyear term option effectively extend expiration 2007 textron finance’s lines credit reserved support outstanding commercial paper letters credit december 31 2005 300 million none lines credit used december 31 2005 january 1 2005 lending agreements limit textron finance’s net assets available dividends payments textron manufacturing approximately 384 million textron finance’s net assets 11 billion end 2005 lending agreements also contain various restrictive provisions regarding additional debt exceed 800 consolidated net worth qualifying subordinated obligations minimum net worth 200 million creation liens maintenance fixed charges coverage ratio less 125 following table shows required payments next five years debt outstanding end 2005 payment schedule excludes amounts payable supported primary revolving credit facilities revolving lines credit textron manufacturing agreed cause textron finance maintain certain minimum levels financial performance payments textron manufacturing necessary 2005 2004 2003 textron finance meet standards cash paid interest textron manufacturing totaled 108 million 106 million 113 million 2005 2004 2003 respectively included 5 million 4 million 5 million 2005 2004 2003 respectively paid textron finance cash paid interest textron finance totaled 204 million 157 million 182 million 2005 2004 2003 respectively note 10 derivatives financial instruments fair value interest rate hedges textron manufacturing manages interest cost using mix fixed variablerate debt manage mix cost efficient manner textron manufacturing enters interest rate exchange agreements swap specified intervals difference fixed variable interest amounts calculated reference agreed upon notional principal amount hedges considered perfectly effective since critical terms debt interest rate exchange match conditions sfas 133 “accounting derivative instruments hedging activities” met marktomarket values fair value hedge instruments underlying debt obligations recorded equal offsetting realized gains losses interest expense december 31 2005 textron manufacturing interest rate exchange agreements fair value liability 10 million addition textron manufacturing 5 million deferred gains related discontinued hedges amortized adjustment interest expense remaining life underlying debt 33 months textron finance enters interest rate exchange agreements order mitigate exposure changes fair value fixedrate portfolios receivables debt due fluctuations interest rates agreements convert fixedrate cash flows floatingrate cash flows december 31 2005 textron finance interest exchange agreements fair value liability 43 million designated fair value hedges compared 11 million january 1 2005 textron finance utilizes foreign currency interest rate exchange agreements hedge exposure canadian dollar functional currency subsidiary changes fair value 60 million us dollar denominated fixedrate debt result changes foreign currency exchange rates canadian banker’s acceptance rates december 31 2005 instruments fair value liability 9 million compared 6 million january 1 2005 textron finance’s fair value hedges highly effective resulting immaterial net impact earnings due hedge ineffectiveness cash flow interest rate hedges textron finance enters interest rate exchange cap floor agreements mitigate exposure variability cash flows received investments interestonly securities resulting securitizations caused fluctuations interest rates combination instruments convert net residual floatingrate cash flows expected received textron finance result securitization trust’s assets liabilities derivative instruments fixedrate cash flows changes fair value instruments recorded net income tax effect comprehensive income loss december 31 2005 instruments fair value liability 5 million compared 8 million january 1 2005 textron finance expects approximately 02 million net tax deferred gains reclassified earnings related hedge relationships 2006 december 31 2005 textron finance 4 million deferred losses net income taxes recorded comprehensive income loss related terminated forward starting interest rate exchange agreements executed hedge exposure variability cash flows anticipated future issuances fixedrate debt terminated upon issuance debt textron finance amortizing deferred losses interest expense remaining life hedged debt 26 months expects approximately 2 million deferred losses net income taxes reclassified earnings 2006 cash flow hedges textron finance recorded aftertax loss 5 million 2005 7 million 2004 gain 12 million 2003 accumulated comprehensive loss impact statements operations textron finance incurred recognized significant net gain loss earnings result ineffectiveness exclusion component assessment hedge effectiveness cash flow hedges 2005 2004 textron minimal exposure loss nonperformance counterparties interest rate exchange agreements end 2005 anticipate nonperformance counterparties periodic settlements amounts due textron currently minimizes potential risk entering contracts exclusively major financially sound counterparties less longterm bond rating “a” continuously monitoring credit ratings limiting exposure one financial institution credit risk generally limited amount counterparties’ contractual obligations exceed textron’s obligations counterparty cash flow foreign exchange rate hedges textron manufactures sells products number countries throughout world result exposed movements foreign currency exchange rates primary purpose textron’s foreign currency hedging activities manage volatility associated foreign currency purchases materials foreign currency sales products assets liabilities created normal course business textron primarily utilizes forward exchange contracts purchased options maturities 18 months qualify cash flow hedges intended offset effect exchange rate fluctuations forecasted sales inventory purchases overhead expenses fair value instruments december 31 2005 23 million receivable yearend 2005 21 million aftertax gain reported accumulated comprehensive loss qualifying cash flow hedges gain generally expected reclassified earnings next 12 months underlying transactions occur textron manufacturing also enters certain foreign currency derivative instruments meet hedge accounting criteria primarily intended protect exposure related intercompany financing transactions income international operations fair value instruments end 2005 net impact related gains losses selling administrative expense 2005 material net investment hedging textron hedges net investment position major currencies generates foreign currency interest payments offset transactional exposures currencies accomplish textron borrows directly foreign currency designates portion foreign currency debt hedge net investments textron may also utilize currency forwards hedges related foreign net investments currency effects hedges reflected cumulative translation adjustment account within comprehensive income loss produced 49 million aftertax gain 2005 leaving accumulated net income balance 30 million stockbased compensation hedging textron manages expense related stockbased compensation awards using cash settlement forward contracts common stock use forward contracts modifies compensation expense exposure changes stock price intent reduce potential variability fair value instruments december 31 2005 january 1 2005 receivable 10 million 31 million respectively gains losses instruments recorded adjustment compensation expense award charged expense contracts impacted net income 8 million 2005 28 million 2004 23 million 2003 cash received paid contract settlement included cash flows operating activities consistent classification cash flows underlying hedged compensation expense fair values financial instruments carrying amounts estimated fair values textron’s financial instruments reflected financial statements fair value follows finance receivables exclude fair value finance leveraged leases totaling 11 billion december 31 2005 09 billion january 1 2005 leases recorded fair value consolidated balance sheets note 11 mandatorily redeemable preferred securities textron adopted sfas 150 “accounting certain financial instruments characteristics liabilities equity” third quarter 2003 upon adoption textron finance classified obligated mandatorily redeemable preferred securities previously classified equity liability june 2004 textron financial corporation redeemed 26 million litchfield 10 series junior subordinated debentures due 2029 debentures held trust sponsored wholly owned litchfield financial corporation subsidiary textron financial corporation proceeds redemption used redeem 26 million litchfield capital trust 10 series trust preferred securities par value 10 per share gain loss redemption july 2003 textron redeemed 792 junior subordinated deferrable interest debentures due 2045 debentures held textron’s wholly owned trust proceeds redemption used redeem 500 million textron capital trust preferred securities 792 dividend yield upon redemption 15 million unamortized issuance costs written recorded special charges note 12 shareholders’ equity capital stock textron authorization 15000000 shares preferred stock 500000000 shares 125 cent per share par value common stock share 208 preferred stock 2363 approximate stated value convertible 44 shares common stock redeemed textron 50 per share 140 preferred dividend stock 1182 approximate stated value convertible 36 shares common stock redeemed textron 45 per share reserved shares common stock end 2005 common stock reserved subsequent conversion preferred stock shares reserved exercise stock options 2596000 8146000 respectively income per common share reconciliation income continuing operations basic diluted share amounts presented accumulated comprehensive loss included comprehensive income loss income tax expense benefit 12 million 22 million 3 million 2005 2004 2003 respectively note 13 sharebased compensation summary sharebased compensation plans textron’s 1999 longterm incentive plan “plan” authorizes awards key employees textron form options purchase textron shares restricted stock options purchase textron shares maximum term ten years beginning 2004 grants vest ratably threeyear period grants awarded prior 2004 vested ratably two years restricted stock grants vest onethird third fourth fifth year following grant maximum number shares authorized plan includes 175 million options purchase textron shares two million shares restricted stock textron also provides sharebased compensation awards payable cash including retention awards certain executives performance share units payouts performance share units vary based certain performance criteria measured threeyear period performance share units vest end three years deferred income plan textron key executives “dip” provides participants opportunity voluntarily defer 25 base salary 100 annual longterm incentive compensation elective deferrals may put either stock unit account interest bearing account textron generally contributes 10 premium amounts deferred stock unit account executives eligible participate dip achieved andor maintained required minimum stock ownership level required defer annual incentive compensation excess 100 executive’s annual target deferred stock unit account entitled 10 premium contribution amount deferred participants cannot move amounts two accounts actively employed textron cannot receive distributions termination employment change accounting sharebased compensation december 2004 fasb issued sfas 123 revised 2004 “sharebased payment” “sfas 123r” replaces sfas 123 “accounting stockbased compensation” supercedes accounting principles board opinion 25 “accounting stock issued employees” “apb 25” sfas 123r requires companies measure compensation costs sharebased payments employees including stock options fair value expense compensation service period beginning first interim annual period june 15 2005 april 2005 securities exchange commission delayed transition date companies first fiscal year beginning june 15 2005 effectively delaying textron’s required adoption sfas 123r first quarter 2006 prior 2005 textron accounted sharebased payments including stock options issued plan using intrinsic value method apb 25 textron elected adopt sfas 123r first quarter 2005 using modified prospective method transition method compensation expense recognized 2005 includes compensation cost stock options restricted stock granted prior yet vested january 1 2005 based grantdate fair value estimated recognized accordance provisions sfas 123 b compensation cost stock options restricted stock granted subsequent january 1 2005 sharebased compensation awards accounted liabilities based upon measurement recognition provisions sfas 123r awards granted modified 2005 prospectively compensation costs awards service conditions vest ratably recognized straightline basis requisite service period separately vesting portion award compensation costs awards granted prior 2005 recognized using attribution methods required sfas 123 upon adoption textron remeasured sharebased compensation awards accounted liabilities fair value cumulative effect adoption upon remeasurement resulted increase net income approximately 1 million first quarter 2005 considered material recorded selling administrative expense sfas 123r requires excess tax benefits received related stock option exercises presented financing cash inflows 2005 14 million excess tax benefits presented cash provided financing activities consolidated statement cash flows compensation expense recorded net income textron’s sharebased compensation plans follows included table net compensation costs recorded discontinued operations 2 million 2005 1 million 2004 sharebased compensation costs reflected primarily selling administrative expenses 2005 expense includes attribution fair value options issued well portion previously granted options requisite service rendered totaling approximately 17 million amount approximately 15 million recorded continuing operations 2 million discontinued operations net impact adoption follows year ended december 31 2005 impact sfas 123r adoption prior periods compensation expense related stock option grants recorded consolidated statements operations years ended january 1 2005 january 3 2004 options granted exercise price equal market value underlying stock date grant results prior periods restated following table illustrates effect net income earnings per share textron applied fair value recognition provisions required sfas 123r prior january 2 2005 net related taxes hedge income expense stock options stock option compensation cost calculated fair value approach recognized vesting period stock options weightedaverage fair value options granted per share 20 14 10 2005 2004 2003 respectively fair values options granted estimated date grant using blackscholes optionpricing model expected volatilities based implied volatilities traded options textron common stock historical volatilities factors textron uses historical data estimate option exercise behavior adjusted reflect anticipated increases expected life weightedaverage assumptions used textron’s blackscholes optionpricing model awards issued respective periods follows following table summarizes information related stock option activity respective periods stock option activity plan summarized follows options outstanding exercisable december 31 2005 follows restricted stock fair value restricted stock based trading price textron common stock date grant less required adjustments reflect fair value award dividends paid accrued restricted stock vests weightedaverage grantdate fair value restricted stock granted 2005 2004 2003 approximately 71 57 40 per share respectively restricted stock activity plan 2005 follows sharebased compensation awards accounted liabilities fair value sharebased compensation awards accounted liabilities includes performance share units retention awards dip stock unit awards fair value awards based trading price textron common stock less adjustments reflect fair value award dividends paid accrued vested remeasured reporting period date sharebased compensation awards value sharebased compensation awards vested andor paid respective periods follows december 31 2005 58 million represents total compensation cost associated unvested awards subject service conditions yet recognized textron expects compensation recognized weightedaverage period approximately two years december 31 2005 25 million represents total compensation cost associated unvested sharebased compensation awards subject performance vesting conditions yet recognized textron expects compensation recognized weightedaverage period approximately two years note 14 pension benefits postretirement benefits pensions textron defined benefit defined contribution pension plans together cover substantially employees cost defined contribution plans amounted approximately 45 million 2005 23 million 2004 15 million 2003 increase cost related defined contribution plans reflects changes textron’s matching contribution rate past three years april 2003 textron temporarily suspended matching contributions usbased defined contribution plans nonbargained employees effective january 1 2004 matching contributions partially reinstated textron matching 025 100 employee contribution maximum textron matching contribution 25 eligible compensation matching contributions raised original level 050 100 employee contribution maximum textron matching contribution 5 eligible compensation august 2004 defined benefits salaried plans based salary years service hourly plans generally provide benefits based stated amounts year service textron’s funding policy consistent federal law regulations textron also offers healthcare life insurance benefits certain retired employees included “postretirement benefits pensions” caption components textron’s net periodic benefit cost income follows obligations funded status following summarizes changes benefit obligation fair value plan assets provides reconciliation funded status amounts recognized balance sheet pension postretirement benefit plans along assumptions used determine benefit obligations pension benefits accumulated benefit obligation defined benefit pension plans 47 billion december 31 2005 50 billion january 1 2005 pension plans accumulated benefit obligations exceeding fair value plan assets follows yearend addition plans table january 1 2005 textron plans aggregate fair value plan assets 40 million projected benefit obligation 63 million accumulated benefit obligation 41 million textron’s pension assets invested objective achieving total rate return long term sufficient fund future pension obligations minimize future pension contributions textron willing tolerate commensurate level risk achieve objective based funded status plans longterm nature textron’s pension liability risk controlled maintaining portfolio assets diversified across variety asset classes investment styles investment managers assets managed external investment managers majority assets actively managed possible investment managers prohibited owning textron stock portfolios manage behalf textron us plan assets comprising majority plan assets asset allocation target ranges established consistent investment objectives assets rebalanced periodically expected longterm rate return plan assets determined based variety considerations including established asset allocation targets expectations asset classes historical returns plans’ assets advice outside advisors december 31 2005 target allocation range 44 70 equity securities 13 33 debt securities 7 13 real estate assets foreign plan assets allocations based expected cash flow needs assessments local markets textron’s percentages fair value total pension plan assets major category follows postretirement benefits pensions measurement purposes textron assumed annual medical prescription drug healthcare cost trend rate 11 covered healthcare benefits 2005 medical rate assumed decrease 5 2009 remain level prescription drug rate expected rise 12 2006 decrease 5 2013 remain level assumed healthcare cost trend rates significant effect amounts reported healthcare plans onepercentagepoint change assumed healthcare cost trend rates would following effects third quarter 2004 textron adopted fasb staff position 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” “act” act provides prescription drug benefit medicare “medicare part d” well federal subsidy sponsors retiree healthcare benefit plans provide benefits least actuarially equivalent medicare part textron determined benefits provides meet equivalency tests defined act included effects subsidy reduction accumulated projected benefit obligation approximately 50 million total impact subsidy net periodic benefit cost postretirement benefits pensions 2005 2004 approximately 10 million 7 million respectively estimated future cash flow impact 2006 textron expects contribute range 25 million 30 million fund qualified pension plans expect contribute postretirement benefit plans benefit payments provided reflect expected future employee service appropriate expected paid net estimated participant contributions benefit payments based assumptions used measure textron’s benefit obligation end fiscal 2005 pension benefit payments primarily made qualified pension trusts postretirement benefits pensions paid textron’s assets note 15 income taxes textron files consolidated federal income tax return us subsidiaries separate returns foreign subsidiaries income continuing operations income taxes distributions preferred securities subsidiary trusts follows income tax expense continuing operations summarized follows following reconciles federal statutory income tax rate effective income tax rate reflected consolidated statements operations tax effects temporary differences give rise significant portions textron’s net deferred tax assets liabilities follows december 31 2005 january 1 2005 textron nonus net operating loss carryforwards income tax purposes 95 million 94 million respectively 78 million 82 million respectively carried forward indefinitely balance expires various dates 2020 january 1 2005 textron us net operating loss carryforwards income tax purposes 64 million utilized 2005 december 31 2005 january 1 2005 textron federal state credit carryforwards income tax purposes 23 million 15 million respectively utilized federal state tax credit carryforwards begin expire 2015 valuation allowance december 31 2005 january 1 2005 116 million 125 million respectively recognized offset related deferred tax assets due uncertainty realizing benefits deferred tax assets decrease valuation allowance primarily related deferred tax assets resulting minimum pension liability adjustments recorded comprehensive income loss certain foreign jurisdictions currency translation adjustments partially offset valuation allowance related contingent receipts textron’s income taxes payable federal state purposes reduced tax benefits employee stock options textron receives income tax benefit certain stock options calculated difference fair market value stock issued time exercise option price tax effected see note 13 net tax benefits employee stock options undistributed earnings textron’s foreign subsidiaries tax provided approximated 530 million end 2005 considered indefinitely reinvested earnings foreign subsidiaries distributed taxes net foreign tax credits would increased approximately 111 million 2005 october 22 2004 american jobs creation act “ajca” signed law includes deduction 85 certain foreign earnings repatriated defined ajca 2005 textron repatriated 435 million cash foreign subsidiaries provision related continuing operations tax expense 09 million 11 million recognized 2005 2004 respectively related repatriation addition textron repatriated approximately 183 million cash related discontinued operations recorded related tax expense 2 million 2005 cash payments taxes net tax refunds received textron manufacturing excluding discontinued operations totaled 107 million 2005 16 million 2004 38 million 2003 cash payments taxes net tax refunds discontinued operations totaled 33 million 2005 16 million 2004 120 million 2003 cash payments taxes net tax refunds textron finance totaled 22 million 2005 61 million 2004 6 million 2003 note 16 special charges special charges summarized applicable segments restructuring program textron substantially completed companywide restructuring program end 2005 textron approved committed restructuring program fourth quarter 2000 improve returns core businesses complete integration certain acquisitions program expanded 2001 2002 part textron’s strategic effort improve operating efficiencies textron’s restructuring program included corporate segment direct indirect workforce reductions consolidation facilities rationalization certain product lines outsourcing noncore production activity divestiture noncore businesses streamlining sales administrative overhead program textron reduced workforce approximately 8000 employees continuing operations representing approximately 19 global workforce since program first announced closed 85 facilities december 31 2005 textron incurred total program costs 306 million composed 164 million severance costs 44 million contract termination costs 34 million asset impairment charges net gains sale fixed assets 64 million associated costs total program costs incurred segment include 219 million industrial segment 38 million cessna segment 29 million bell segment 9 million finance segment 11 million corporate analysis restructuring program related reserve account summarized severance costs generally paid monthly basis severance period granted employee lump sum basis required severance costs include outplacement costs paid accordance normal payment terms contract termination costs generally paid upon exiting facility remaining lease term associated costs primarily include outsourcing certain operations plant rearrangement machinery equipment relocation employee replacement relocation costs paid accordance normal payment terms charges gain connection disposition automotive trim subsidiaries collins aikman corporation “ca” textron finance recourse textron manufacturing equipment leases subsidiaries outstanding balance leases totaled approximately 70 million december 31 2005 fourth quarter 2005 lease term leases expired ca failed make one lease payments textron finance currently negotiations ca renew leases textron manufacturing recorded additional reserve 10 million fourth quarter 2005 based uncertainties related leases consistent carelated charges gains textron recorded charge special charges addition textron finance equipment leases certain operating leases transferred assigned subsidiaries ca upon sale trim discussed note 18 textron guaranteed ca’s payments operating leases certain environmental matters may 2005 ca substantially subsidiaries including ca products co “ca products” filed chapter 11 bankruptcy protection july 2005 ca’s european subsidiaries filed groupwide administration order united kingdom filings effectively reduced textron’s ability seek recourse ca indemnity provisions purchase sale agreement default occur based ca’s recent failure pay certain leases well negotiations entered part potential sale ca’s european operations textron recorded 11 million fourth quarter 2005 cover exposure leases along certain environmental workers’ compensation matters consistent carelated charges gains textron recorded charge special charges textron also acquired preferred stock ca products ca common stock connection trim disposition march 2005 textron agreed sell approximately 60 percent preferred stock ca products heartland industrial partners lp “heartland” combination cash consideration total value approximately 25 million heartland also option purchase remaining preferred shares aggregate price 20 million textron recorded pretax impairment charge approximately 52 million first quarter 2005 write preferred shares fair market value based value determined agreement market considerations ca products’ filing chapter 11 bankruptcy protection heartland’s obligation purchase preferred stock effectively terminated based relevant market considerations textron recorded approximately 39 million special charges second quarter 2005 write remaining book value investment preferred stock 2004 textron sold remaining investment ca common stock cash proceeds 34 million recorded pretax gain 12 million special charges 2003 textron redeemed 792 junior subordinated deferrable interest debentures due 2045 debentures held textron’s wholly owned trust proceeds redemption used redeem 500 million textron capital trust preferred securities upon redemption 15 million unamortized issuance costs written recorded special charges note 17 commitments contingencies textron subject legal proceedings claims arising conduct textron’s business including proceedings claims relating private sector transactions government contracts production partners product liability employment environmental safety health matters legal proceedings claims seek damages fines penalties substantial amounts remediation environmental contamination federal government procurement regulations certain claims brought us government could result textron’s suspension debarment us government contracting period time basis information presently available textron believes proceedings claims material effect textron’s financial position results operations 2002 lycoming aircraft engine business conjunction us federal aviation administration “faa” recalled approximately 950 turbocharged airplane engines mandated inspection another 736 engines replace potentially faulty crankshafts manufactured former thirdparty supplier lycoming initiated comprehensive customer care program replace defective crankshafts make necessary related repairs compensate customers loss use aircraft recall program completed textron continued monitor performance crankshafts previously supplied former supplier ensure continued suitability intended use ensure existing reserves adequate cover costs directly related potential crankshaft issues may specifically part prior recall program july 11 2005 lycoming issued service bulletin covering certain nonturbocharged aircraft engines replace crankshafts manufactured former supplier new faacertified crankshafts service bulletin covers approximately 1100 crankshafts requires affected crankshafts replaced within earlier next 50 hours operation six months additional 5 million accrued second quarter 2005 increase existing reserves matter november service bulletin amended include additional 325 engines additional 3 million recorded fourth quarter 2005 lycoming developed plan institute retirement program approximately 5100 crankshafts representing remaining crankshafts manufactured former supplier using forging technique crankshafts covered prior service bulletins program discussed faa expected implemented early 2006 accidents involving crankshafts subject recall additional reserve 10 million recorded fourth quarter cover expected cost planned retirement program december 31 2005 reserves cover costs directly related crankshafts provided former supplier totaled 23 million connection recall former supplier filed lawsuit lycoming claiming former supplier wrongly blamed aircraft engine failures resulting crankshaft forging process lycoming’s design cause engine failures february 2005 jury returned verdict lycoming 86 million punitive damages 27 million expert fees 17 million increased insurance costs jury also found former supplier’s claim incurred 53 million attorneys’ fees reasonable judgment entered verdict march 29 2005 awarding former supplier 97 million alleged compensatory damages attorneys’ fees 86 million alleged punitive damages ultimate outcome litigation cannot assured management strongly disagrees verdicts believes probable reversed appellate process research development arrangements part realignment bellagusta aerospace company llc “baac” see note 19 bell helicopter agusta spa two affiliated companies collectively “agusta” agreed share certain model ba609 development costs behalf baac agusta incur development costs enhance investment baac development costs recorded textron consolidation research development expense credit minority interest agusta’s share agusta may also make cash contributions reimburse portions bell helicopter’s development costs incurred behalf baac based development costs incurred bell received 43 million cash contributions agusta recorded income 2005 bell helicopter entered four separate risksharing arrangements two arrangements commercial participants development bell model 429 aircraft arrangements require contributions participants totaling 20 million due development effort reaches certain predetermined milestones well inkind development contributions one participant two arrangements canadian governmental organizations arrangements currently include model 429 aircraft may potentially include certain future aircraft require cash contributions cad 115 million participants based percentage qualifying research development costs incurred participants arrangements entitled payments bell helicopter commercial participants also entitled discounts based future sales model 429 aircraft addition certain requirements related production future model 429 aircraft canada one commercial participants entitled perform certain manufacturing functions model 429 aircraft based development activities completed costs incurred current prior periods december 31 2005 35 million recorded income related arrangements environmental remediation industrial enterprises engaged similar businesses textron involved number remedial actions various federal state laws regulations relating environment impose liability companies clean contribute cost cleaning sites hazardous wastes materials disposed released expenditures evaluate remediate contaminated sites approximated 6 million three years ended december 31 2005 textron’s accrued estimated environmental liabilities based upon currently available facts existing technology presently enacted laws regulations subject number factors uncertainties accrued liabilities relate disposal costs us environmental protection agency oversight costs legal fees operating maintenance costs currently formerly owned operated facilities circumstances affect reliability precision accruals include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur textron believes changes accruals may result factors uncertainties material effect textron’s financial position results operations based upon information currently available textron estimates potential environmental liabilities range 44 million 143 million end 2005 environmental reserves approximately 66 million 12 million classified current liabilities established address specific estimated potential liabilities textron estimates accrued environmental remediation liabilities likely paid next five ten years note 18 arrangements offbalance sheet risk textron enters arrangements offbalance sheet risk normal course business discussed guarantees textron joint venture agreements external financing arrangements textron guaranteed approximately 15 million debt obligations including approximately 5 million related discontinued operations textron would required make payments guarantees joint venture defaults debt agreements bell helicopter agustawestland north america inc “awna” formed agustawestlandbell llc “awb llc” january 2004 joint design development manufacture sale customer training product support us101 helicopter recently designated vh71 helicopter certain variations derivatives thereof offered sold departments agencies us government march 2005 awb llc received 12 billion cost reimbursementtype subcontract lockheed martin system development demonstration phase us marine corps marine 1 helicopter squadron vh71 program march 11 2005 bell helicopter guaranteed lockheed martin due prompt performance awb llc obligations subcontract provided bell helicopter’s liability guaranty shall exceed 49 awb llc’s aggregate liability lockheed martin subcontract agustawestland nv awna’s parent company guaranteed remaining 51 lockheed martin bell helicopter agustawestland nv entered crossindemnification agreements party indemnifies related payments required agreements result indemnifying party’s workshare subcontracts received 2005 awb llc’s maximum obligation 20 total contract value equates 232 million based current contract value 12 billion 2006 awb llc’s maximum obligation increases 40 464 million thereafter increases 50 580 million accordingly maximum amount bell helicopter’s liability guarantee 114 million december 31 2005 227 million 2006 284 million thereafter completion ordinary course business textron enters standby letters credit surety bonds financial institutions principally guarantee payment performance certain third parties accordance specified terms conditions december 31 2005 155 million standby letters credit outstanding 91 million surety bonds outstanding management knows event default would require textron satisfy guarantees end 2005 textron number guaranteed minimum resale value contracts associated certain past aircraft sales guarantees require textron make possible future payments customer event fair value aircraft falls minimum guaranteed amount stipulate minimum tradein value agreements generally include operating restrictions maximum usage guarantee period minimum maintenance requirements addition textron guaranteed minimum resale value certain customerowned aircraft anticipated traded upon completion model currently development textron recorded 3 million liability related estimated fair value guarantee agreements total amount resale value guaranteed agreements december 31 2005 approximately 31 million based estimated fair values guaranteed aircraft prevailing december 31 2005 additional liability related textron’s obligation agreements guarantee contracts expire follows 3 million 2006 2 million 2008 3 million 2009 2 million 2010 2 million 2011 19 million 2012 textron finance sells receivables wholeloan sales limited credit enhancement typically provided form contingent liability related finance receivable credit losses lesser extent prepayment risk textron finance contingent liability related sale equipment lease rental streams 2003 2001 maximum liability december 31 2005 42 million textron finance valued recourse liability based assumptions annual credit losses prepayment rates 025 750 respectively connection sale note receivable 2005 textron finance indemnified purchaser potential losses limited circumstances maximum potential exposure indemnity estimated 29 million due extremely low probability occurrence several mitigating factors including specific indemnification original note issuer significant fair value attributed indemnity connection disposition trim certain operating leases transferred assigned subsidiaries ca textron guaranteed ca’s payments operating leases environmental matter aggregate remaining amount approximately 24 million textron indemnification agreement ca textron’s guarantee third party related specific environmental matter discussed note 16 ca’s filing bankruptcy protection effectively reduced textron’s ability seek recourse ca indemnity provisions purchase sale agreement default occur third quarter 2005 textron received demand notice third party related specific environmental matter textron seek indemnification ca amounts required pay matter textron required make payments guarantees upon default ca textron received significant default notices related leases management believes ca continue make payments part ca’s announced plan sell european operations management anticipates ongoing negotiations related guarantee leased european facility management continue monitor ca’s performance textron’s reserves related matters textron reserved 8 million based management’s best estimate textron’s exposure guarantees leases rental expense approximated 89 million 89 million 86 million 2005 2004 2003 respectively future minimum rental commitments noncancelable operating leases effect end 2005 approximated 57 million 2006 42 million 2007 33 million 2008 30 million 2009 26 million 2010 total 120 million thereafter loan commitments december 31 2005 textron finance unused commitments fund new existing customers 12 billion committed revolving lines credit compared 10 billion january 1 2005 generally interest rates commitments set loans funded textron finance exposed interest rate changes since many agreements used extent committed expire unused total commitment amount necessarily represent future cash requirements note 19 variable interest entities baac joint venture established 1998 bell helicopter predecessor agusta spa share certain costs profits joint design development manufacture marketing sale customer training product support civil tiltrotor model ba609 december 2005 commercial helicopter model ab139 venture variable interest entity since relies partners fund development provide services substantially ventures’ operations december 20 2005 bell helicopter agusta entered realignment baac included sale bell helicopter 25 profit interest model ab139 medium twin helicopter program agusta assumed ownership aspects model ab139 program baac including existing customer obligations exchange interest bell helicopter received 10 million cash 20 million note contingent payments agusta based future model ab139 sales bell helicopter recognized 30 million pretax gain upon sale interest included segment profit contingent receipts expected begin aircraft deliveries 2008 recorded income prospectively future sales occur addition realignment allows agusta increase profit interest model ba609 original 25 maximum 40 increasing investment development phase development activities may include cash contributions reimburse bell helicopter certain development costs incurred behalf baac see note 17 yearend agusta’s profit interest approximately 31 prior realignment certain marketing administrative costs charged baac development costs recorded separately parties bell helicopter’s share development costs charged textron’s earnings period expense result realignment baac includes model ba609 tiltrotor bell helicopter controlling voting interest baac accordingly bell helicopter absorb half baac’s expected losses residual returns result textron consolidated baac prospectively december 20 2005 note 20 supplemental financial information accrued liabilities textron manufacturing’s accrued liabilities composed following warranty product maintenance contracts textron provides limited warranty product maintenance programs including parts labor certain products periods ranging one five years textron estimates costs may incurred warranty programs records liability amount costs time product revenue recognized factors affect liability include number products sold historical anticipated rates warranty claims cost per claim textron periodically assesses adequacy recorded warranty product maintenance liabilities adjusts amounts necessary changes textron’s warranty product maintenance liability follows research development costs companyfunded customerfunded research development costs follows 2005 78 million cost reimbursements companyfunded amounts received due risksharing partners resulting net companyfunded costs 248 million see note 17 additional information concerning risksharing arrangements customerfunded research development costs primarily related us government contracts including v22 h1 development contracts note 21 segment reporting geographic data textron four reportable segments bell cessna industrial finance see note 1 principal markets item 1 business textron pages 1 5 products segments textron’s reportable segments strategically aligned based manner textron manages various operations accounting policies segments described note 1 textron evaluates segment performance based segment profit segment profit textron manufacturing excludes interest expense certain corporate expenses special charges gains losses disposition significant business units textron finance includes interest income expense excludes special charges 2003 included distributions preferred securities finance subsidiary trust part segment profit provisions losses finance receivables involving sale lease textron products recorded selling manufacturing division textron finance recourse textron manufacturing includes capital expenditures financed capital leases following summarizes revenues product type revenues include sales us government 18 billion 2005 13 billion 2004 14 billion 2003 primarily bell segment geographic data presented selected financial information textron’s continuing operations geographic area revenues attributed countries based location customer property plant equipment net based location asset quarterly data schedule ii valuation qualifying accounts allowance doubtful accounts reserves textron manufacturing’s reserves recourse liability textron finance textron manufacturing’s inventory fifo reserves represents uncollectible accounts written less recoveries inventory disposals acquisitions translation adjustments item 9item 8 financial statements supplementary data consolidated financial statements related reports independent registered public accounting firm thereon included annual report form 10k pages indicated page report management report independent registered public accounting firm internal control financial reporting report independent registered public accounting firm consolidated financial statements schedule consolidated statements operations years threeyear period ended december 30 2006 consolidated balance sheets december 30 2006 december 31 2005 consolidated statements changes shareholders’ equity years threeyear period ended december 30 2006 consolidated statements cash flows years threeyear period ended december 30 2006 notes consolidated financial statements supplementary information quarterly data 2006 2005 unaudited schedule ii valuation qualifying accounts schedules omitted either applicable required information included financial statements notes thereto report management responsible integrity objectivity financial data presented annual report form 10k consolidated financial statements prepared conformity accounting principles generally accepted united states include amounts based management’s best estimates judgments management also responsible establishing maintaining adequate internal control financial reporting textron inc term defined exchange act rules 13a15f participation management conducted evaluation effectiveness internal control financial reporting based framework internal control integrated framework issued committee sponsoring organizations treadway commission based evaluation framework internal control integrated framework concluded textron inc maintained material respects effective internal control financial reporting december 30 2006 independent registered public accounting firm ernst young llp audited consolidated financial statements textron inc issued attestation report assessment effectiveness textron’s internal control financial reporting december 30 2006 stated reports included herein conduct business accordance standards outlined textron business conduct guidelines communicated employees honesty integrity high ethical standards core values conduct business every textron business prepares carries annual compliance plan ensure values standards maintained internal control structure designed provide reasonable assurance appropriate cost assets safeguarded transactions properly executed recorded internal control structure includes among things established policies procedures internal audit function selection training qualified personnel textron’s management responsible implementing effective internal control systems monitoring effectiveness well developing executing annual internal control plan audit committee board directors behalf shareholders oversees management’s financial reporting responsibilities audit committee composed four directors officers employees textron meets regularly independent auditors management internal auditors review matters relating financial reporting internal accounting controls auditing independent auditors internal auditors free full access senior management audit committee lewis b campbell ted r french lewis b campbell ted r french chairman president chief executive vice president executive officer chief financial officer february 14 2007 report independent registered public accounting firm internal control financial reporting board directors shareholders textron inc audited management’s assessment included accompanying report management textron inc maintained effective internal control financial reporting december 30 2006 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission “coso criteria” textron inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness textron inc’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion management’s assessment textron inc maintained effective internal control financial reporting december 30 2006 fairly stated material respects based coso criteria also opinion textron inc maintained material respects effective internal control financial reporting december 30 2006 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets textron inc december 30 2006 december 31 2005 related consolidated statements operations cash flows changes shareholders’ equity three years period ended december 30 2006 textron inc report dated february 14 2007 expressed unqualified opinion thereon ernst young llp boston massachusetts february 14 report independent registered public accounting firm consolidated financial statements schedule board directors shareholders textron inc audited accompanying consolidated balance sheets textron inc december 30 2006 december 31 2005 related consolidated statements operations cash flows changes shareholders’ equity three years period ended december 30 2006 audits also included financial statement schedule contained page 76 financial statements schedule responsibility textron inc’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position textron inc december 30 2006 december 31 2005 consolidated results operations cash flows three years period ended december 30 2006 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness textron inc’s internal control financial reporting december 30 2006 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 14 2007 expressed unqualified opinion thereon discussed note 12 consolidated financial statements 2006 textron inc adopted statement financial accounting standards “sfas” 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statement nos 87 88 106 132r” discussed note 11 consolidated financial statements 2005 textron inc adopted sfas 123 revised 2004 “sharebased payment” ernst young llp boston massachusetts february 14 consolidated statements operations years threeyear period ended december 30 2006 see notes consolidated financial statements consolidated balance sheets december 30 2006 december 31 2005 see notes consolidated financial statements consolidated statements changes shareholders’ equity years threeyear period ended december 30 2006 shares issued end 2006 2005 2004 follows thousands 208 preferred 147 153 174 shares respectively 140 preferred 527 534 537 shares respectively common 208984 205613 203361 shares respectively see notes consolidated financial statements consolidated statements cash flows years threeyear period ended december 30 2006 see notes consolidated financial statements textron segregated manufacturing group finance group described note 1 consolidated financial statements finance group’s pretax income excess dividends paid excluded manufacturing group’s cash flows significant transactions borrowing groups eliminated consolidated column see notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation financial statement presentation consolidated financial statements include accounts textron inc majorityowned subsidiaries variable interest entities required consolidated see note 18 variable interest entities included within consolidated financial statements financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated entities operate bell cessna industrial segments finance group consists finance segment comprised textron financial corporation subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements finance group provide diversified commercial financing third parties addition group finances retail purchases leases new used aircraft equipment manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers securitizations reflected operating activities received however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group records cash received finance group customer’s behalf within operating cash flows cash inflow manufacturing group’s statement cash flows although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidation certain amounts reclassified conform current year presentation use estimates prepare financial statements conformity generally accepted accounting principles require us make estimates assumptions affect amounts reported financial statements estimates used accounting among items longterm contracts inventory valuation residual values leased assets allowance credit losses receivables amount timing future cash flows expected received impaired loans product liability workers’ compensation actuarial assumptions pension postretirement plans future cash flows associated goodwill longlived asset valuations environmental warranty reserves estimates based facts circumstances available time estimates made historical experience risk loss general economic conditions trends assessments probable future outcomes matters actual results could differ estimates assumptions reviewed periodically effects changes reflected statement operations period determined cash equivalents cash equivalents consist cash shortterm highly liquid investments original maturities three months less revenue recognition generally recognize revenue sale products longterm contracts upon delivery commercial aircraft delivery upon completion manufacturing customer acceptance transfer risk rewards ownership service revenue recognized service performed sale arrangement involves multiple elements sales products include customization services evaluate arrangement determine whether separate items required delivered arrangement qualify recorded separate units accounting allocate total fee arrangement unit accounting based relative fair value taking consideration performance cancellation termination refund type provisions fair value generally established unit accounting using sales price charged similar items sold separately recognize revenue recognition criteria unit accounting met leases certain qualifying noncancelable aircraft product lease contracts accounted salestype leases upon delivery record present value payments net executory costs guaranteed residual values leases revenues related costs product charged cost sales lease financing transactions qualify salestype leases record revenue earned lease period aircraft sales guarantee customer minimum future resale value viewed leases accordance emerging issues task force 951 “revenue recognition sales guaranteed minimum resale value” determine whether transaction classified operating lease salestype lease minimum lease payments generally represent difference proceeds upon equipment’s initial transfer b present value residual value guarantee purchaser first exercise date guarantee less proceeds residual value insurance obtained assess market value aircraft use industry publications well actual sales used aircraft market value assessments adjusted based available information related individual aircraft physical condition minimums required arrangement losses recorded currently projected market value aircraft exercise date less guaranteed amount longterm contracts revenues longterm contracts accounted percentageofcompletion method accounting accordance american institute certified public accountants statement position 811 “accounting performance constructiontype certain productiontype contracts” percentageofcompletion method estimate profit difference total estimated revenue total estimated cost contract recognize profit contract term based either input eg costs incurred costtocost method typically used development effort output eg units delivered unitsofdelivery method used production effort appropriate circumstances revenues fixedprice contracts generally recorded using unitsofdelivery method however certain fixedprice contracts provide periodic delivery lengthy period time significant costs incurred require significant amount development effort relation total contract volume revenues contracts costreimbursementtype contracts recorded using costtocost method longterm contract profits based estimates total contract cost revenue utilizing current contract specifications expected engineering requirements achievement contract milestones including product deliveries certain contracts awarded fixedprice incentive fees also considered estimating revenues profit rates contract costs typically incurred period several years estimation costs requires substantial judgment review revise estimates periodically throughout contract term revisions contract profits recorded revisions estimated revenues costs made anticipated losses contracts recognized full period losses become probable estimable bell helicopter business joint venture boeing company “boeing” provide engineering development test services related v22 aircraft well produce v22 aircraft number separate contracts us government “v22 contracts” v22 contracts include development contract various production release contracts ie lots may run concurrently multiple earlier lots still produced new lots started development contract first three production lots costreimbursementtype contracts subsequent lots fixedpricetype contracts account first three fixedprice incentive contract lots using costtocost method primarily result significant engineering effort required lengthy period time initial development phase relation total contract volume production releases first six production lots include separately contracted modifications meet additional requirements us government’s blue ribbon panel development effort new production releases considered substantially complete beginning 2003 since consistent production specification met units incorporating many required modifications production line accordingly revenue recognized new production releases began 2003 using unitsofdelivery method joint venture agreement boeing creates contractual rather ownership rights related v22 accordingly account joint venture equity method accounting account rights obligations specific requirements v22 contracts allocated us joint venture agreement revenues cost sales reflect performance v22 contracts include assets used performance v22 contracts including inventory unpaid receivables liabilities arising obligations v22 contracts consolidated balance sheets finance revenues finance revenues include interest finance receivables direct loan origination costs fees received recognize interest using interest method provide constant rate return terms receivables revenues direct loan origination costs fees received deferred amortized finance revenues contractual lives respective receivables using interest method receivables sold prepaid unamortized amounts recognized revenues generally suspend accrual interest income accounts contractually delinquent three months addition detailed reviews loans may result earlier suspension resume accrual interest loan becomes contractually current recognize suspended interest income time cash payments nonaccrual accounts including finance charges generally applied reduce loan principal losses finance receivables provisions losses finance receivables charged income amounts sufficient maintain allowance level considered adequate cover losses existing receivable portfolio evaluate allowance examining current delinquencies characteristics existing accounts historical loss experience underlying collateral value general economic conditions trends addition larger balance commercial loans consider borrower specific information industry trends estimated discounted cash flows finance receivables generally written fair value less estimated costs sell related collateral earlier date collateral repossessed payment received six months finance receivables charged deemed uncollectible loan impairment periodically evaluate finance receivables excluding homogeneous loan portfolios finance leases impairment loan considered impaired probable unable collect amounts due according contractual terms loan agreement also identify loans considered impaired due significant modification original loan terms modified loans reflect deferred principal payments generally market interest rates continue accrue finance charges since collection principal interest doubtful measure impairment comparing fair value loan carrying amount fair value based present value expected future cash flows discounted loan’s effective interest rate loan’s observable market price loan collateral dependent fair value collateral less selling costs fair value loan less carrying amount establish reserve based difference securitized transactions securitized transactions involve sale finance receivables qualified special purpose trusts finance group sell securitize loans leases may retain interest assets sold form servicing responsibilities subordinated interests including interestonly securities seller certificates cash reserves retained interests subordinate investors’ interests securitizations gain loss sale loans leases depends part previous carrying amount finance assets involved transfer allocated assets sold retained interests based relative fair values date transfer retained interests recorded fair value assets estimate fair value based present value future expected cash flows using best estimates key assumptions credit losses prepayment speeds discount rates forward interest rate yield curves commensurate risks involved quarter review fair values retained interests using updated assumptions compare amounts carrying value retained interests carrying value exceeds fair value retained interests decline fair value determined temporary write retained interest fair value corresponding charge earnings change fair value retained interest deemed temporary unrealized gains losses included shareholders’ equity component accumulated comprehensive loss investments classify investments marketable equity securities available sale record investments fair value assets unrealized gains losses included shareholders’ equity component accumulated comprehensive loss net income taxes investments nonmarketable equity securities accounted either cost equity method accounting investments joint ventures control primary beneficiary ability exercise significant influence venture’s operating financial policies use equity method periodically review investment securities impairment based criterion include duration market value decline ability hold recovery information regarding market industry trends investee’s business investee’s financial strength specific prospects investment analyst reports available decline fair value investment security judged temporary write cost basis fair value corresponding charge earnings inventories stated lower cost estimated net realizable value inventories generally using firstin firstout method “fifo” lastin firstout “lifo” method certain qualifying inventories us determine costs commercial helicopters average cost basis model considering expended estimated costs current production release costs longterm contracts represent costs incurred production allocable operating overhead advances suppliers case contracts us government allocable research development general administrative expenses pursuant contract provisions agencies us government title security interest inventories related contracts result advances performancebased payments progress payments advances payments reflected offset related inventory balances accordance industry practice inventoried costs include amounts related contracts long production cycles portion expected realized within one year customer deposits recorded inventory right offset exists customer deposits recorded accrued liabilities property plant equipment property plant equipment recorded cost depreciated primarily using straightline method land improvements buildings depreciated primarily estimated lives ranging five 40 years machinery equipment depreciated primarily three 15 years capitalize expenditures improvements increase asset values extend useful lives longlived assets longlived assets including intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable carrying value asset held use exceeds sum undiscounted expected future cash flows carrying value asset written fair value longlived assets held sale stated lower cost fair value less cost sell fair value determined using pertinent market information including appraisals brokers’ estimates andor estimated future discounted cash flows goodwill evaluate recoverability goodwill annually frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit might impaired reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment “component” case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics goodwill considered potentially impaired net book value reporting unit exceeds estimated fair value fair values established primarily using discounted cash flow methodology determination discounted cash flows based businesses’ strategic plans longrange planning forecasts available comparative market multiples used corroborate discounted cash flow results derivative financial instruments exposed market risk primarily changes interest rates currency exchange rates securities pricing manage volatility relating exposures net exposures consolidated basis take advantage natural offsets residual portion enter various derivative transactions pursuant policies areas counterparty exposure hedging practices derivative instruments reported consolidated balance sheets fair value designation support hedge accounting performed specific exposure basis record changes fair value financial instruments qualifying fair value hedges income offset part whole corresponding changes fair value underlying exposures hedged changes fair values derivatives accounted cash flow hedges extent effective hedges recorded comprehensive loss income net deferred taxes report changes fair value derivatives qualifying hedges income hold issue derivative financial instruments trading speculative purposes foreign currency denominated assets liabilities translated us dollars adjustments currency rate changes recorded cumulative translation adjustment account shareholders’ equity related foreign entity sold substantially liquidated use foreign currency financing transactions including currency swaps effectively hedge longterm investments foreign operations corresponding currency foreign currency gains losses hedge longterm investments recorded cumulative translation adjustment account offset recorded adjustment nonus dollar financing liability fair values financial instruments fair value cash equivalents accounts receivable accounts payable variablerate receivables debt approximates carrying value financial instruments determine estimated fair values financial instruments including debt equity risk management instruments using available market information valuation methodologies primarily discounted cash flow analysis independent investment bankers product environmental liabilities accrue product liability claims occurrence method loss probable reasonably estimable based historical experience insurance coverage deductibles effect date incident liabilities environmental matters recorded sitebysite basis probable obligation incurred cost reasonably estimated environmental liabilities undiscounted take consideration possible future insurance proceeds significant amounts claims third parties research development costs research development costs either specifically covered contracts represent share costsharing arrangements charged expense incurred research development costs incurred contracts others reported cost sales period revenue recognized income taxes deferred tax assets liabilities determined based temporary differences financial reporting tax bases assets liabilities applying enacted tax rates expected effect year differences expected reverse based evaluation available evidence recognize future tax benefits net operating loss carryforwards extent believe likely realize benefits periodically assess likelihood able recover deferred tax assets reflect changes estimates valuation allowance corresponding adjustment earnings comprehensive income loss appropriate assessing need valuation allowance look future reversal existing taxable temporary differences taxable income carryback years feasibility tax planning strategies estimated future taxable income recently announced accounting pronouncements july 2006 financial accounting standards board “fasb” issued interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” “fin 48” interpretation provides comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns adopt interpretation first quarter 2007 expect adoption material impact financial position results operations july 2006 fasb issued fasb staff position fas 132 “accounting change projected change timing cash flows relating income taxes generated leveraged lease transaction” staff position amends statement financial accounting standards “sfas” 13 “accounting leases” requires recalculation returns leveraged leases change projected change timing cash flows related income taxes generated leveraged lease accordance guidance difference revised calculation earnings since lease inception actual amount cumulative earnings recognized recorded income continuing operations required adopt guidance first quarter 2007 upon adoption estimated change projected cash flows must reported adjustment retained earnings adoption staff position resulted 33 million reduction retained earnings beginning fiscal 2007 september 2006 fasb issued sfas 157 “fair value measurements” statement replaces multiple existing definitions fair value single definition establishes consistent framework measuring fair value expands financial statement disclosures regarding fair value measurements statement applies fair value measurements already required permitted accounting standards require new fair value measurements sfas 157 effective fiscal years beginning subsequent november 15 2007 adopt statement first quarter 2008 currently evaluating impact financial position results operations note 2 discontinued operations consolidated financial statements related footnote disclosures reflect sold businesses fastening systems intesys omniquip small business direct financing business discontinued operations net applicable income taxes periods presented accordance sfas 144 “accounting impairment disposal longlived assets” generally use centralized approach cash management financing manufacturing operations accordingly allocate debt interest expense discontinued businesses debt related interest expense specific entity within business recorded respective entity general corporate overhead previously allocated businesses reporting purposes excluded amounts reported discontinued operations august 2006 completed sale fastening systems business platinum equity private equity investment firm approximately 613 million cash assumption 16 million net indebtedness certain liabilities gain loss recorded upon completion sale purchase price subject final adjustment based audited net asset value net debt cash balances closing date currently negotiating platinum equity expect finalize purchase price early 2007 prior consummation sale fastening systems business recorded impairment charges 120 million 2006 387 million 2005 described september 2005 board directors approved management’s recommendation explore strategic alternatives fastening systems business based approval recommendation likelihood execution determined impairment indicator existed fastening systems’ goodwill longlived assets assessment potential impairment goodwill estimated fair value business using independent thirdparty valuations fair value amount compared carrying amount business carrying amount exceeded fair value measured amount goodwill impairment loss excess fair value business fair value amounts assigned assets liabilities represents implied fair value goodwill carrying amount goodwill exceeded implied fair value goodwill resulting impairment loss 335 million recorded third quarter 2005 december 2005 board directors authorized divestiture fastening systems business recorded aftertax charge approximately 52 million included 37 million related previously deferred foreign currency translation losses 7 million curtailment losses employee retirement plans charges assessed estimated fair value business determined adjustment carrying value required time second quarter 2006 recorded additional 120 million aftertax impairment charge record business estimated fair value less cost sell time based offers received potential purchasers 2005 recorded net 46 million gain disposal primarily related tax benefit recorded upon sale intesys operating results discontinued businesses primarily related fastening systems follows december 30 2006 assets discontinued operations included current assets 69 million related sale fastening systems business liabilities discontinued operations included current liabilities 57 million representing liabilities retained upon sale fastening systems business note 3 business acquisitions goodwill intangible assets business acquisitions 2006 acquired three businesses total cost 338 million bell segment 164 million finance segment paid cash acquisitions include following · overwatch systems “overwatch” developer provider intelligence analysis software tools defense industry acquired december 1 · innovative survivability technologies inc supplier innovative defensive systems military homeland security customers acquired july 19 · electrolux financial corporation’s dealer inventory finance business provides consumer appliance electronics dealers wholesale inventory financing acquired june 30 operating results businesses included consolidated financial statements since date respective acquisition pro forma information included amounts immaterial connection acquisitions recorded 259 million goodwill bell segment 112 million identifiable intangible assets intangible assets weightedaverage amortization periods follows 37 million unpatented technology nine years 35 million customer agreements 15 years 17 million trademarks nine years 23 million intangible assets five 10 years purchase price overwatch subject adjustment based actual working capital cash debt balances closing date allocated purchase price business estimated fair value net tangible intangible assets acquired excess recorded goodwill estimates preliminary end 2006 awaiting completion identification valuation intangible assets acquired expect analyzes completed first half 2007 along finalization purchase price citationshares joint venture tag aviation usa inc “tag” sell fractional share interests business jets limited advance purchase jet charter june 30 2004 acquired additional 25 interest citationshares tag cash assumption debt guarantees previously provided tag result transaction owned 75 citationshares consolidated financial results prospectively june 30 2004 2006 2005 ownership interest 86 82 result additional capital contributions 11 million 26 million respectively additional cash consideration also may payable tag based citationshares’ future operating results tag right sell remaining interest us years 2009 2011 right purchase remaining interest 2010 2011 amount based multiple earnings goodwill changes carrying amount goodwill segment follows intangible assets acquired intangible assets subject amortization composed following amortize intangible assets using straightline method useful lives assets amortization expense totaled 7 million 2006 4 million 2005 6 million 2004 amortization expense estimated approximately 15 million 2007 2008 14 million 2009 2010 12 million 2011 note 4 accounts receivable accounts receivable composed following unbillable receivables us government contracts arise revenues appropriately recognized based performance cannot billed yet terms contract unbillable receivables within accounts receivable totaled 144 million december 30 2006 125 million december 31 2005 longterm contract receivables due us government exclude significant amounts billed unpaid due contractual retainage provisions subject collection uncertainty note 5 finance receivables securitizations finance receivables finance group provide financial services primarily aircraft golf vacation interval resort dealer floorplan middle market industries variety financing vehicles various contractual maturities contractual maturities finance receivables outstanding december 30 2006 follows table necessarily reflect future cash collections receivables often repaid refinanced prior contractual maturity distribution finance receivables revolving loans generally mature within one five years distribution finance receivables generally secured inventory financed distributor include floorplan financing thirdparty dealers inventory sold ezgo jacobsen businesses revolving loans secured trade receivables inventory plant equipment pools vacation interval notes receivables pools residential recreational land loans underlying property installment contracts finance leases initial terms ranging two 20 years primarily secured financed equipment installment contracts generally require customer pay significant payment along periodic scheduled principal payments reduce outstanding balance term loan finance leases include residual values expected realized contractual maturity leases significant residual value end contractual term classified installment contracts legal economic substance equivalent secured borrowing finance lease significant residual value contractual maturities finance leases classified installment contracts table include minimum lease payments net unearned income recognized life lease total minimum lease payments unearned income related contracts 719 million 222 million respectively december 30 2006 751 million 164 million respectively december 31 2005 minimum lease payments due contracts next five years follows 132 million 2007 117 million 2008 104 million 2009 88 million 2010 97 million 2011 golf course resort mortgages secured real property generally limited 75 less propertys appraised market value loan origination golf course mortgages initial terms ranging five seven years amortization periods 15 25 years resort mortgages generally represent construction inventory loans terms two years leveraged leases secured ownership leased equipment real property initial terms approximately 30 years leveraged leases reflect contractual maturities net contractual nonrecourse debt payments include residual values expected realized contractual maturity net investments finance leases excluding leases classified installment contracts leveraged leases provided minimum lease payments due finance leases next five years follows 144 million 2007 104 million 2008 70 million 2009 34 million 2010 8 million 2011 finance group manages services finance receivables variety investors participants thirdparty portfolio owners total managed serviced finance receivable portfolio including owned finance receivables 114 billion end 2006 99 billion end 2005 managed receivables include owned finance receivables finance receivables sold securitizations private transactions retain element credit risk continue service portfolio finance receivables diversified across geographic region borrower industry type collateral december 30 2006 83 finance receivables distributed throughout united states compared 86 end 2005 significant collateral concentration general aviation accounted 19 managed receivables end 2006 2005 industry concentrations golf vacation interval industries accounted 16 13 respectively managed receivables december 30 2006 compared 17 13 respectively end 2005 transactions finance manufacturing groups portion finance group’s business involves financing retail purchases leases new used aircraft equipment manufactured manufacturing group captive finance receivables inventory sales included finance group’s balance sheets composed following operating agreements specify finance group recourse manufacturing group certain uncollected amounts related transactions manufacturing group established reserves losses balance sheet within accrued liabilities receivables guarantees reserves established amounts potentially uncollectible collateral values considered insufficient cover outstanding receivable account deemed uncollectible collateral repossessed finance group manufacturing group charged deficiency collateral repossessed receivable transferred finance group’s balance sheet manufacturing group’s balance sheet manufacturing group responsible additional collection efforts occurs related reserve previously established manufacturing group reclassified accrued liabilities netted receivable asset transferred finance group 2006 2005 2004 finance group paid manufacturing group 10 billion 08 billion 09 billion respectively related sale textronmanufactured products financed finance group manufacturing group also received proceeds years 63 million 41 million 77 million respectively sale equipment finance group use operating lease agreements end 2006 2005 amounts guaranteed manufacturing group totaled 335 million 414 million respectively included equipment leases collins aikman corporation “ca” outstanding balance 61 million end 2006 70 million end 2005 impairment nonaccrual finance receivables include accounts contractually delinquent three months accrual interest income suspended receivables considered impaired probable unable collect amounts due according contractual terms loan agreement impaired accrual finance receivables represent loans original loan terms significantly modified reflect deferred principal payments generally market interest rates collection principal interest doubtful impaired finance receivables related reserves end 2006 2005 follows average recorded investment impaired finance receivables 2006 142 million compared 106 million 2005 increase primarily reflects one restructured loan golf finance payments made table excludes finance receivables finance group recourse manufacturing group finance group continues recognize income pastdue receivables meet nonaccrual criteria guaranteed manufacturing group consolidated basis earnings receivables since manufacturing group charged obligation finance group end 2006 2005 pastdue loans totaled 2 million 8 million respectively addition ca continues make payments equipment leases considered impaired since ca currently bankruptcy protection lease terms expired manufacturing group total reserves losses guarantees finance group 39 million end 2006 40 million end 2005 securitizations received proceeds securitization sale servicing rights retained finance receivables 50 million 2006 361 million 2005 394 million 2004 gains securitized trust sales approximately 42 million 2006 49 million 2005 56 million 2004 securitizations 2006 key economic assumptions used measuring retained interests date securitization included weightedaverage life three months expected annual credit losses 02 residual cash flows discount rate 10 retain subordinated interests trusts approximately 2 10 total trust servicing fees range 75 150 basis points end 2006 21 billion securitized loans outstanding 13 million pastdue loans finance group securitized certain receivables retained full recourse manufacturing group end 2006 179 million retained interest recorded assets primarily included 111 million distribution finance receivables 56 million general aviation loans comparison retained interest totaled 208 million end 2005 cash flows received retained interests totaled 63 million 2006 64 million 2005 70 million 2004 end 2006 key economic assumptions used measuring retained interests follows distribution finance receivables weightedaverage life three months expected annual credit loss rate 02 residual cash flow discount rate 102 general aviation loans weightedaverage life 17 years annual prepayment speed 25 expected annual credit loss rate 03 residual cash flow discount rate 55 note 6 inventories composed following inventories valued lifo method totaled 15 billion 13 billion end 2006 2005 respectively lifo inventories valued current costs carrying values would approximately 276 million 251 million higher respective dates inventories related longterm contracts net progressmilestone payments 380 million end 2006 350 million end 2005 bell helicopter’s h1 program us government currently transitioning production phase program manufacturing first three production lots low rate initial production “lrip” aircraft inventories related h1 lrip lot 1 lot 2 contracts written net realizable value reflect charges related contracts discussed 2006 estimated costs complete h1 lrip lot 1 would exceed contractual reimbursement third quarter 2006 recorded 29 million charges related h1 lrip lot 1 contract charges primarily reflected impact higher estimated incremental costs resources added meet contractual schedule requirements higher anticipated efforts final assembly end third quarter anticipated acceptance initial h1 lrip lot 1 aircraft us government would occur fourth quarter 2006 however acceptance delayed aircraft delivered delay due changes development engineering requirements identified final stages assembly acceptance testing due delay costs associated additional development efforts rework inprocess units resulting inefficiencies increased estimate completion costs fourth quarter accordingly recorded additional 20 million charge related h1 lrip lot 1 contract fourth quarter 2006 january 2007 us government accepted two aircraft expect remaining seven h1 lrip lot 1 units accepted later 2007 h1 lrip lot 2 contract early stages production first aircraft delivery anticipated second half 2007 anticipate disruption delays experienced h1 lrip lot 1 contract fourth quarter result increased costs h1 lrip lot 2 contract due delays completion well reduction previously anticipated learning curve improvements due higher cost estimates h1 lrip lot 2 contract loss position resulting fourth quarter charge 33 million net h1 program charge including favorable performance engineering manufacturing development contract 3 million 50 million fourth quarter 2006 note 7 property plant equipment net manufacturing group’s property plant equipment net composed following depreciation expense manufacturing group totaled 243 million 2006 250 million 2005 229 million 2004 incurred asset retirement obligations primarily related costs remove dispose underground storage tanks asbestos materials used insulation adhesive fillers floor tiles legal requirement remove items currently plan remodel related facilities otherwise cause impacted items require disposal result asset retirement obligations estimable accordance provisions fasb interpretation 47 “conditional asset retirement obligations” recorded liability note 8 debt credit facilities debt credit facilities composed following weightedaverage interest rates borrowings effect interest rate exchange agreements 53 44 end 2006 2005 respectively 50 year 2006 33 year 2005 policy maintaining unused committed bank lines credit amount less outstanding commercial paper balances facilities support commercial paper letters credit issuances neither primary lines credit drawn december 30 2006 december 31 2005 manufacturing group commercial paper outstanding december 30 2006 december 31 2005 manufacturing group’s weightedaverage interest rate commercial paper borrowings throughout year 53 2006 30 2005 primary committed credit facilities december 30 2006 include following finance group permitted borrow multiyear facility lending agreements limit finance group’s net assets available dividends payments manufacturing group approximately 304 million finance group’s net assets 11 billion end 2006 lending agreements also contain various restrictive provisions regarding additional debt exceed 800 consolidated net worth qualifying subordinated obligations minimum net worth 200 million creation liens maintenance fixed charges coverage ratio less 125 following table shows required payments next five years debt outstanding end 2006 payment schedule excludes amounts payable supported primary revolving credit facilities revolving lines credit support agreement manufacturing group agreed ensure finance group maintains certain minimum levels financial performance payments ever required meet standards note 9 derivatives financial instruments fair value interest rate hedges manage interest cost manufacturing group using mix fixed variablerate debt manage mix cost efficient manner enter interest rate exchange agreements swap specified intervals difference fixed variable interest amounts calculated reference agreedupon notional principal amount hedges considered perfectly effective since critical terms debt interest rate exchange match conditions sfas 133 “accounting derivative instruments hedging activities” met marktomarket values fair value hedge instruments underlying debt obligations recorded equal offsetting amounts interest expense manufacturing group interest rate exchange agreements fair value liability 8 million end 2006 10 million end 2005 finance group enters interest rate exchange agreements mitigate exposure changes fair value fixedrate receivables debt due fluctuations interest rates using agreements able convert fixedrate cash flows floatingrate cash flows december 30 2006 finance group interest rate exchange agreements fair value liability 45 million designated fair value hedges compared 43 million liability december 31 2005 finance group canadian dollar functional currency subsidiary 60 million us dollardenominated fixedrate debt hedge exposure changes foreign currency exchange rates canadian banker’s acceptance rates utilize foreign currency interest rate exchange agreements december 30 2006 december 31 2005 instruments fair value liability 9 million fair value hedges highly effective resulting immaterial net impact earnings due hedge ineffectiveness cash flow interest rate hedges experience variability cash flows receive finance group’s investments interestonly securities due fluctuations interest rates mitigate exposure variability finance group enters interest rate exchange cap floor agreements combination instruments converts net residual floatingrate cash flows expected received finance group fixedrate cash flows changes fair value instruments recorded net income tax effect comprehensive income loss december 30 2006 instruments fair value liability less 1 million compared 5 million liability december 31 2005 expect significant amount deferred gains net tax reclassified earnings related hedge relationships 2007 cash flow hedges finance group recorded aftertax gain 1 million 2006 aftertax losses 5 million 7 million 2005 2004 respectively accumulated comprehensive loss impact statements operations incurred significant net gain loss earnings result ineffectiveness exclusion component assessment hedge effectiveness 2006 2005 exposure loss nonperformance counterparties interest rate exchange agreements end 2006 minimal anticipate nonperformance counterparties periodic settlements amounts due currently minimize potential risk entering contracts exclusively major financially sound counterparties less longterm bond rating “a” continuously monitoring credit ratings limiting exposure one financial institution credit risk generally limited amount counterparties’ contractual obligations exceed obligations counterparty cash flow foreign exchange rate hedges since manufacture sell products number countries throughout world exposed movements foreign currency exchange rates primary purpose foreign currency hedging activities manage volatility associated foreign currency purchases materials foreign currency sales products assets liabilities created normal course business primarily utilize forward exchange contracts purchased options maturities 18 months qualify cash flow hedges intended offset effect exchange rate fluctuations forecasted sales inventory purchases overhead expenses fair value instruments december 30 2006 13 million asset yearend 2006 8 million aftertax income reported accumulated comprehensive loss qualifying cash flow hedges income generally expected reclassified earnings next 12 months underlying transactions occur manufacturing group also enters certain foreign currency derivative instruments meet hedge accounting criteria primarily intended protect exposure related intercompany financing transactions income international operations fair value instruments end 2006 2005 net impact related gains losses selling administrative expense 2006 2005 material net investment hedging hedge net investment position major currencies generate foreign currency interest payments offset transactional exposures currencies accomplish borrow directly foreign currency designate portion foreign currency debt hedge net investments also may utilize currency forwards hedges related foreign net investments currency effects hedges reflected cumulative translation adjustment account within comprehensive income loss produced 49 million aftertax loss 2006 leaving accumulated net loss balance 19 million stockbased compensation hedging manage expense related stockbased compensation awards using cash settlement forward contracts common stock use forward contracts modifies compensation expense exposure changes stock price intent reduce potential variability fair value instruments december 30 2006 december 31 2005 receivable 24 million 10 million respectively gains losses instruments recorded adjustment compensation expense award charged expense contracts increased net income 21 million 2006 8 million 2005 28 million 2004 cash received paid contract settlement included cash flows operating activities consistent classification cash flows underlying hedged compensation expense fair values financial instruments carrying amounts estimated fair values financial instruments reflected financial statements fair value follows finance receivables exclude fair value finance leveraged leases totaling 12 billion december 30 2006 11 billion december 31 2005 leases recorded fair value consolidated balance sheets note 10 shareholders’ equity capital stock authorization 15000000 shares preferred stock 500000000 shares 125 cent per share par value common stock share 208 preferred stock 2363 approximate stated value convertible 44 shares common stock redeem 50 per share 140 preferred dividend stock 1182 approximate stated value convertible 36 shares common stock redeem 45 per share reserved shares common stock end 2006 common stock reserved subsequent conversion preferred stock shares reserved exercise stock options 2546000 5420000 respectively income per common share reconciliation income continuing operations basic diluted share amounts presented accumulated comprehensive loss components accumulated comprehensive loss presented included comprehensive income loss income tax benefit expense 359 million 12 million 22 million 2006 2005 2004 respectively 2006 pension postretirement benefit adjustments included 348 million income tax benefit related transition adjustment due adoption sfas 158 note 11 sharebased compensation summary sharebased compensation plans 1999 longterm incentive plan “plan” authorizes awards key employees form options purchase shares restricted stock options purchase shares maximum term 10 years vest ratably threeyear period restricted stock grants vest onethird third fourth fifth year following grant maximum number shares authorized plan includes 175 million options purchase shares 2 million shares restricted stock also provide sharebased compensation awards payable cash including retention awards certain executives performance share units payouts performance share units vary based certain performance criteria measured threeyear period performance share units vest end three years deferred income plan textron key executives “dip” provide participants opportunity voluntarily defer 25 base salary 100 annual longterm incentive compensation elective deferrals may put either stock unit account interest bearing account generally contribute 10 premium amounts deferred stock unit account executives eligible participate dip achieved andor maintained required minimum stock ownership level required defer annual incentive compensation excess 100 executive’s annual target deferred stock unit account entitled 10 premium contribution amount deferred participants cannot move amounts two accounts actively employed us cannot receive distributions termination employment change accounting sharebased compensation adopted sfas 123 revised 2004 “sharebased payment” “sfas 123r” replaces sfas 123 “accounting stockbased compensation” supersedes accounting principles board opinion 25 “accounting stock issued employees” “apb 25” first quarter 2005 using modified prospective transition method sfas 123r requires companies measure compensation costs sharebased payments employees including stock options fair value expense compensation service period transition method compensation expense recognized 2005 includes compensation cost stock options restricted stock granted prior yet vested january 1 2005 based grantdate fair value estimated recognized accordance provisions sfas 123 b compensation cost stock options restricted stock granted subsequent january 1 2005 sharebased compensation awards accounted liabilities based upon measurement recognition provisions sfas 123r awards granted modified 2005 prospectively compensation costs awards service conditions vest ratably recognized straightline basis requisite service period separately vesting portion award compensation costs awards granted prior 2005 recognized using attribution methods required sfas 123 prior 2005 accounted sharebased payments including stock options issued plan using intrinsic value method apb 25 upon adoption remeasured sharebased compensation awards accounted liabilities fair value cumulative effect adoption upon remeasurement increased net income approximately 1 million first quarter 2005 considered material recorded selling administrative expense sfas 123r requires excess tax benefits received related stock option exercises presented financing cash inflows 2006 2005 31 million 14 million respectively excess tax benefits presented cash provided financing activities consolidated statement cash flows compensation expense recorded net income sharebased compensation plans follows sharebased compensation costs reflected primarily selling administrative expenses 2006 2005 expense includes attribution fair value options issued well portion previously granted options requisite service rendered totaling approximately 16 million 2006 17 million 2005 amount approximately 18 million 15 million respectively recorded continuing operations 2 million 2 million respectively discontinued operations 2006 textron recorded approximately 4 million sharebased award forfeitures related discontinued operations net impact adoption sfas 123r follows year ended december 31 2005 impact sfas 123r adoption prior periods year ended january 1 2005 compensation expense related stock option grants recorded consolidated statements operations options granted exercise price equal market value underlying stock date grant results prior periods restated following table illustrates effect net income earnings per share applied fair value recognition provisions required sfas 123r prior january 2 2005 amounts net related taxes hedge income expense stock options stock option compensation cost calculated fair value approach recognized vesting period stock options weightedaverage fair value options granted per share 25 20 14 2006 2005 2004 respectively estimate fair value options granted date grant using blackscholes optionpricing model expected volatilities based implied volatilities traded options common stock historical volatilities factors use historical data estimate option exercise behavior adjusted reflect anticipated increases expected life weightedaverage assumptions used blackscholes optionpricing model awards issued respective periods follows following table summarizes information related stock option activity respective periods stock option activity plan summarized follows options outstanding exercisable december 30 2006 follows restricted stock fair value restricted stock based trading price common stock date grant less required adjustments reflect fair value award dividends paid accrued restricted stock vests weightedaverage grantdate fair value restricted stock granted 2006 2005 2004 approximately 82 71 57 per share respectively restricted stock activity plan 2006 follows forfeitures year relate primarily sale fastening systems business sharebased compensation awards accounted liabilities fair value sharebased compensation awards accounted liabilities includes performance share units retention awards dip stock unit awards fair value awards based trading price common stock less adjustments reflect fair value award dividends paid accrued vested remeasured reporting period date sharebased compensation awards value sharebased compensation awards vested andor paid respective periods follows december 30 2006 recognized 58 million total compensation cost associated unvested awards subject service conditions december 30 2006 recognized 28 million total compensation cost associated unvested sharebased compensation awards subject performance vesting conditions expect recognize compensation expense awards weightedaverage period approximately two years note 12 retirement plans defined benefit defined contribution pension plans together cover substantially employees defined contribution plans cost approximately 50 million 2006 45 million 2005 23 million 2004 2005 cost related defined contribution plans increased comparison 2004 primarily due changes matching contribution rate significant number usbased employees participate textron master retirement plan “tmrp” subject provisions employee retirement income security act 1974 primarily noncontributory defined benefit pension plan certain usbased employees also eligible supplemental pension benefit plans separately funded addition sponsor funded unfunded pension plans certain foreign subsidiaries also provide postretirement benefits pensions certain retired employees include healthcare life insurance benefits october 2006 transferred 281 million plan assets tmrp plan established purchaser fastening systems business settled obligation usbased employees business upon settlement recognized loss 35 million included discontinued operations obligations related fastening systems business’ foreign plans assumed purchaser impact adoption new accounting standard december 30 2006 adopted sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statement nos 87 88 106 132r” statement requires employer recognize statement financial position asset plan’s overfunded status liability plan’s underfunded status b measure plan’s assets obligations determine funded status end employer’s fiscal year c recognize changes funded status defined benefit postretirement plan year changes occur report changes comprehensive income measurement date provisions impact us plans measurement date december 30 current fiscal year impact implementing sfas 158 reduced total assets 313 million increased total liabilities 334 million reduced shareholders’ equity increase accumulated comprehensive loss 647 million net tax addition classified additional 92 million pension postretirement benefit liabilities current adoption affect consolidated balance sheet december 31 2005 consolidated statement operations three years period ended december 30 2006 adjustment accumulated comprehensive loss upon adoption sfas 158 represents net unrecognized actuarial losses unrecognized prior service costs credits unrecognized transition obligation remaining initial adoption sfas 87 amounts previously netted plan’s funded status consolidated balance sheet recognize amounts future periods net periodic pension cost pursuant accounting policy amortizing amounts addition adoption statement actuarial gains losses immediately recognized net periodic pension cost recognized component comprehensive loss amortized net periodic pension cost future periods periodic benefit cost income components net periodic benefit cost income amounts recognized comprehensive income follows estimate net loss prior service cost defined benefit pension plans amortized comprehensive income net periodic benefit costs 2007 47 million 18 million respectively estimated net loss prior service credit postretirement benefits pensions amortized comprehensive income net periodic benefit costs 2007 22 million 5 million respectively obligations funded status changes projected benefit obligation fair value plan assets along funded status follows amounts recognized balance sheets follows assumptions weightedaverage assumptions healthcare trend assumptions used postretirement plans follows 2006 estimate medical cost trend rate decline 5 2009 thereafter prescription drug cost trend rate decline 5 2013 thereafter assumed healthcare cost trend rates significant effect amounts reported postretirement benefits pensions onepercentagepoint change assumed healthcare cost trend rates would following effects pension benefits accumulated benefit obligation defined benefit pension plans 49 billion december 30 2006 47 billion december 31 2005 pension plans accumulated benefit obligations exceeding fair value plan assets follows addition plans table plans projected benefit obligation excess fair value plan assets yearend follows pension assets invest pension assets objective achieving total rate return long term sufficient fund future pension obligations minimize future pension contributions willing tolerate commensurate level risk achieve objective based funded status plans longterm nature pension liability risk controlled maintaining portfolio assets diversified across variety asset classes investment styles investment managers assets managed external investment managers majority assets actively managed possible investment managers prohibited owning stock portfolios manage behalf us plan assets comprising majority plan assets asset allocation target ranges established consistent investment objectives assets rebalanced periodically expected longterm rate return plan assets determined based variety considerations including established asset allocation targets expectations asset classes historical returns plans’ assets advice outside advisors december 30 2006 target allocation range 44 70 equity securities 13 33 debt securities 7 13 real estate alternative assets foreign plan assets allocations based expected cash flow needs assessments local practices markets percentages fair value total pension plan assets major category follows estimated future cash flow impact defined benefits salaried plans based salary years service hourly plans generally provide benefits based stated amounts year service funding policy consistent applicable laws regulations 2007 expect contribute range 45 million 50 million fund qualified pension plans expect contribute postretirement benefit plans benefit payments provided reflect expected future employee service appropriate expected paid net estimated participant contributions benefit payments based assumptions used measure benefit obligation end fiscal 2006 pension benefit payments primarily paid qualified pension trusts pay postretirement benefits pensions general corporate assets follows note 13 income taxes file consolidated federal income tax return us subsidiaries separate returns foreign subsidiaries income continuing operations income taxes follows income tax expense continuing operations summarized follows following table reconciles federal statutory income tax rate effective income tax rate amount income taxes pay subject ongoing audits federal state foreign tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental believe adequately provided reasonably foreseeable outcome related matters however future results may include favorable unfavorable adjustments estimated tax liabilities due closure income tax examinations new regulatory judicial pronouncements relevant events result effective tax rate may fluctuate significantly quarterly basis tax effects temporary differences give rise significant portions net deferred tax assets liabilities follows recognized valuation allowance december 30 2006 december 31 2005 159 million 116 million respectively offset certain deferred tax assets due uncertainty realizing related benefits net operating loss credit carryforwards end year follows income taxes payable federal state purposes reduced tax benefits receive employee stock options income tax benefits receive certain stock options calculated difference fair market value stock issued time exercise option price tax effected see note 11 net tax benefits employee stock options undistributed earnings foreign subsidiaries approximated 376 million end 2006 consider undistributed earnings taxes previously provided indefinitely reinvested therefore tax provided earnings tax provided distributed 2006 taxes net foreign tax credits would increased approximately 19 million october 22 2004 american jobs creation act “ajca” signed law includes deduction 85 certain foreign earnings repatriated defined ajca 2005 repatriated 435 million cash foreign subsidiaries provision related continuing operations tax expense 09 million 11 million recognized 2005 2004 respectively related repatriation addition repatriated approximately 183 million cash related discontinued operations recorded related tax expense 2 million 2005 note 14 special charges special charges totaled 118 million 2005 included 112 million charges related 2001 disposition automotive trim business “trim” 6 million restructuring expense industrial segment 2004 special charges totaled 59 million included 71 million restructuring expense principally industrial segment partially offset 12 million gain sale common stock acquired connection trim disposition connection disposition trim subsidiaries ca acquired preferred stock ca products co “ca products” ca common stock first quarter 2005 recorded 52 million impairment charge write preferred stock based agreement sell stock third party second quarter 2005 based ca products’ filing chapter 11 bankruptcy protection relevant market considerations wrote remaining book value preferred stock 39 million connection trim disposition finance group recourse manufacturing group equipment leases subsidiaries ca outstanding balance leases totaled approximately 61 million december 30 2006 based uncertainties related leases manufacturing group recorded 10 million reserve special charges fourth quarter 2005 certain operating leases transferred assigned subsidiaries ca upon sale trim discussed note 17 guaranteed ca’s payments operating leases environmental matter fourth quarter 2005 based ca’s failure pay certain leases well negotiations entered time sale ca’s european operations recorded 11 million charge cover exposure leases along certain environmental workers’ compensation matters restructuring companywide restructuring program substantially completed end 2005 approved committed restructuring program fourth quarter 2000 improve returns core businesses complete integration certain acquisitions program subsequently expanded part strategic effort improve operating efficiencies restructuring program included corporate segment direct indirect workforce reductions consolidation facilities rationalization certain product lines outsourcing noncore production activity divestiture noncore businesses streamlining sales administrative overhead program reduced workforce approximately 8000 employees continuing operations representing approximately 19 global workforce since program first announced closed 85 facilities since inception program december 31 2005 incurred total program costs 306 million composed 164 million severance costs 44 million contract termination costs 34 million asset impairment charges net gains sale fixed assets 64 million associated costs total program costs incurred segment include 219 million industrial segment 38 million cessna segment 29 million bell segment 9 million finance segment 11 million corporate analysis restructuring reserves summarized 2006 restructuring reserves reduced 30 million cash payments immaterial refinements previous estimates remaining reserve primarily related contract termination costs one lease industrial segment paid next 13 years note 15 commitments contingencies subject legal proceedings claims arising conduct business including proceedings claims relating private sector transactions government contracts compliance applicable laws regulations production partners product liability employment environmental safety health matters legal proceedings claims seek damages fines penalties substantial amounts remediation environmental contamination government contractor subject audits reviews investigations determine whether operations conducted accordance applicable regulatory requirements federal government procurement regulations certain claims brought us government could result suspended debarred us government contracting period time basis information presently available believe existing proceedings claims material effect financial position results operations connection 2002 recall certain lycoming turbocharged airplane engines former thirdparty supplier filed lawsuit lycoming claiming former supplier wrongly blamed aircraft engine failures resulting crankshaft forging process lycoming’s design cause engine failures february 2005 jury returned verdict lycoming 86 million punitive damages 27 million expert fees 17 million increased insurance costs jury also found former supplier’s claim incurred 53 million attorneys’ fees reasonable judgment entered verdict march 29 2005 awarding former supplier 97 million alleged compensatory damages attorneys’ fees 86 million alleged punitive damages ultimate outcome litigation cannot assured management strongly disagrees verdict believes probable reversed appellate process fourth quarter 2005 developed plan institute retirement program approximately 5100 crankshafts representing remaining crankshafts manufactured former supplier using forging technique crankshafts covered prior service bulletins service bulletin issued first quarter 2006 implementing plan requires retirement affected crankshaft next crankshaft access scheduled overhaul whichever occurs first exceed three years issuance service bulletin september 29 2006 us federal aviation administration issued airworthiness directive requiring compliance within 12 years date next access crankshafts subject recall december 30 2006 reserves cover costs program totaled 9 million internal revenue service “irs” challenged ability accelerate timing tax deductions amounts deductions related certain leveraged lease transactions within finance segment transactions along transactions similar characteristics initial investment approximately 209 million resolution issues may result adjustment timing taxable income deductions reduce effective yield leveraged lease transactions addition resolution issues could result acceleration cash payments irs december 30 2006 182 million deferred tax liabilities recorded consolidated balance sheets related leases believe proposed irs adjustments inconsistent tax law existence time leases originated intend vigorously defend position armed reconnaissance helicopter program armed reconnaissance helicopter “arh” system development demonstration “sdd” contract cost plus incentive fee contract eligibility fees reduced total contract costs increase 2006 continued development activities program expensed 14 million unreimbursed costs related effort continue work us government development issues configuration changes schedule requirements longer eligible earn fees contract however anticipate subsequent cost increases reimbursable us government us government two firm fixedprice options program representing first two lrip lots delivery 24 48 aircraft certain development requirements arh sdd contract must met us government exercise options presently anticipate development requirements met mid2007 option first lrip lot 612 aircraft expired option second lot 1836 aircraft expires december 2007 fourth quarter 2006 completed certain phases critical design review arh sdd contract determined initial production configuration aircraft includes aircraft configuration changes required us government cost estimates based configuration include anticipated transition production costs exceed fixed pricing contained options currently discussions us government related possible reinstatement arh lot 1 option extension options delivery schedule number units exercised options possible additional aircraft contracted addition options revised pricing also reviewing ability claim equitable adjustment recovery us government related certain costs potentially could incurred related exercise options depending results sdd contract costcontainment efforts availability us government funding number aircraft exercised ultimately contracted resolution discussions us government currently estimate reasonably possible exposure could range loss possible loss 4 million per aircraft estimate excludes impact discussions us government potential recoveries including claims equitable adjustment contracts due uncertainty exposure ultimate outcome discussions believe loss probable guidelines established sfas no5 “accounting contingencies” accordingly established reserve december 30 2006 environmental remediation industrial enterprises engaged similar businesses involved number remedial actions various federal state laws regulations relating environment impose liability companies clean contribute cost cleaning sites hazardous wastes materials disposed released expenditures evaluate remediate contaminated sites approximated 7 million 6 million 6 million 2006 2005 2004 respectively estimate accrued environmental liabilities using currently available facts existing technology presently enacted laws regulations subject number factors uncertainties accrued liabilities relate disposal costs us environmental protection agency oversight costs legal fees operating maintenance costs currently formerly owned operated facilities circumstances affect reliability precision accruals include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur believe changes accruals may result factors uncertainties material effect financial position results operations based upon information currently available estimate potential environmental liabilities within range 51 million 168 million end 2006 environmental reserves approximately 85 million 10 million classified current liabilities established address specific estimated potential liabilities estimate likely pay accrued environmental remediation liabilities next five 10 years leases rental expense approximated 89 million year 2006 2005 2004 future minimum rental commitments noncancelable operating leases effect end 2006 approximated 63 million 2007 54 million 2008 46 million 2009 39 million 2010 31 million 2011 total 202 million thereafter loan commitments december 30 2006 finance group unused commitments fund new existing customers 13 billion committed revolving lines credit compared 12 billion december 31 2005 loan commitments generally original duration less three years necessarily represent future cash requirements since many agreements used extent committed expire unused exposed interest rate changes commitments since interest rates set loans funded note 16 research development companyfunded customerfunded research development costs follows customerfunded research development costs primarily related us government contracts including arh v22 h1 development contracts part realignment bellagusta aerospace company llc “baac” see note 18 bell helicopter agusta spa two affiliated companies collectively “agusta” agreed share certain model ba609 development costs behalf baac agusta incur development costs enhance investment baac record development costs consolidation research development expense credit minority interest agusta’s share agusta also may make cash contributions reimburse portions bell helicopter’s development costs incurred behalf baac based development costs incurred bell helicopter received 19 million 43 million cash contributions agusta recorded income 2006 2005 respectively 2005 bell helicopter entered four separate risksharing arrangements two arrangements commercial participants development bell model 429 aircraft arrangements require contributions participants totaling 20 million due development effort reaches certain predetermined milestones well inkind development contributions one participant two arrangements canadian governmental organizations arrangements currently include model 429 aircraft may potentially include certain future aircraft require cash contributions cad 115 million participants based percentage qualifying research development costs incurred participants arrangements entitled payments bell helicopter commercial participants also entitled discounts based future sales model 429 aircraft addition certain requirements related production future model 429 aircraft canada one commercial participants entitled perform certain manufacturing functions model 429 aircraft based development activities completed costs incurred recorded income 22 million 2006 35 million 2005 related arrangements 2006 2005 received due receive 41 million 78 million respectively cost reimbursements companyfunded amounts risksharing partners based reimbursements net companyfunded costs totaled 310 million 2006 248 million 2005 note 17 guarantees indemnifications extend variety financial performance guarantees third parties provided table agreements include uncapped guarantees described performance guarantee 2004 bell helicopter business formed agustawestlandbell llc “awb llc” agustawestland north america inc “awna” venture created joint design development manufacture sale customer training product support vh71 helicopter certain variations derivatives thereof offered sold departments agencies us government march 2005 awb llc received 12 billion cost reimbursementtype subcontract lockheed martin system development demonstration phase us marine corps helicopter squadron program guaranteed lockheed martin due prompt performance awb llc obligations subcontract provided liability guaranty shall exceed 49 awb llc’s aggregate liability lockheed martin subcontract agustawestland nv awna’s parent company guaranteed remaining 51 lockheed martin entered crossindemnification agreements agustawestland nv party indemnifies related payments required agreements result indemnifying party’s workshare subcontracts received 2006 awb llc’s maximum obligation 40 total contract value equates 464 million based current contract value 12 billion 2007 thereafter awb llc’s maximum obligation increases 50 580 million accordingly maximum amount liability guarantee 227 million december 30 2006 284 million thereafter completion guaranteed minimum resale contracts number guaranteed minimum resale value contracts associated certain past aircraft sales fair value aircraft falls minimum guaranteed amount may required make future payment customer provide minimum tradein value toward new aircraft agreements generally include operating restrictions maximum usage contract period minimum maintenance requirements also guaranteed minimum resale value certain customerowned aircraft anticipated traded upon completion model currently development contracts expire follows 2 million 2008 3 million 2009 3 million 2010 3 million 2011 19 million 2012 guarantees related dispositions guaranteed payment certain credit facilities bankissued letters credit guarantees fastening systems business total guarantee capped approximately 9 million buyer provided letter credit approximately 4 million collateral also guaranteed payment performance certain credit facilities leases fastening systems business totaling approximately 14 million also liable unpaid interest fees costs associated claims may arise guarantees potential interest fees capped monitoring provisions mitigate exposure additional costs buyer provided letter credit approximately 9 million collateral guarantees also indemnified purchaser fastening systems business remediation costs related preexisting environmental conditions extent exist sold locations estimated fair value indemnifications approximately 12 million potential payments obligations capped result maximum potential obligation cannot determined connection disposition trim subsidiaries ca certain equipment operating leases transferred assigned subsidiaries ca guaranteed ca’s payments leases environmental matter also obligations arising sales certain businesses including representations warranties related indemnities environmental health safety tax employment matters maximum potential payment related obligations specified amount number obligations contain financial caps losssharing agreements connection sale note receivable 2005 finance group indemnified purchaser potential losses limited circumstances maximum potential exposure indemnity estimated 29 million due extremely low probability occurrence several mitigating factors including specific indemnification original note issuer significant fair value attributed indemnity connection sale small business direct financing business 2003 finance group entered losssharing agreement required us reimburse purchaser 50 losses incurred portfolio 4 annual level liability 14 million originally recorded representing estimated fair value guarantee fourth quarter 2006 entered settlement agreement purchaser terminated obligation reimburse purchaser future losses settlement resulted 1 million loss net tax discontinued operations 2006 december 31 2005 finance group contingent liability related sale equipment lease streams maximum liability 42 million lease streams sold 2006 remaining liability end 2006 software indemnifications acquisition overwatch systems 2006 party software license agreements customers software license agreements generally include certain provisions indemnifying customers liabilities software products infringe third party’s intellectual property rights date incurred material costs result indemnifications accrued liabilities related obligations consolidated financial statements forward contract enter forward contract common stock annual basis contract intended hedge earnings cash volatility stockbased incentive compensation indexed stock forward contract requires annual cash settlement counterparties based upon number shares multiplied difference strike price prevailing common stock price december 30 2006 contract approximately 15 million shares strike price 7762 market price stock 9377 december 30 2006 resulting receivable 24 million compared receivable 10 million december 31 2005 warranty product maintenance contracts provide limited warranty product maintenance programs including parts labor certain products periods ranging one five years estimate costs may incurred warranty programs record liability amount costs time product revenue recognized factors affect liability include number products sold historical anticipated rates warranty claims cost per claim assess adequacy recorded warranty product maintenance liabilities periodically adjust amounts necessary changes warranty product maintenance liability follows note 18 variable interest entities baac joint venture established 1998 bell helicopter unit predecessor agusta spa share certain costs profits joint design development manufacture marketing sale customer training product support civil tiltrotor model ba609 december 2005 commercial helicopter model ab139 venture variable interest entity since relies partners fund development provide services substantially venture’s operations december 20 2005 entered agreement agusta realign baac agreement sold 25 profit interest model ab139 medium twin helicopter program agusta assumed ownership aspects model ab139 program baac including existing customer obligations exchange interest received 10 million cash 20 million note contingent payments agusta based future model ab139 sales recognized 30 million pretax gain upon sale interest included segment profit contingent receipts expected begin aircraft deliveries 2008 recorded income prospectively future sales occur realignment also allows agusta increase profit interest model ba609 maximum 40 increasing investment development phase development activities may include cash contributions reimburse us certain development costs incurred behalf baac see note 16 yearend agusta’s profit interest approximately 30 prior realignment certain marketing administrative costs charged baac development costs recorded separately parties share development costs charged earnings period expense result realignment baac includes model ba609 tiltrotor controlling voting interest baac accordingly absorb half baac’s expected losses residual returns primary beneficiary consolidated baac prospectively december 20 2005 note 19 supplemental cash flow information supplemental cash flow information made following cash payments cash paid interest manufacturing group includes amounts paid finance group 4 million 5 million 4 million 2006 2005 2004 respectively cash paid manufacturing group includes excess tax benefit received sharebased payments 31 million 2006 14 million 2005 accrued liabilities accrued liabilities manufacturing group composed following note 20 segment geographic data four reportable segments bell cessna industrial finance segments reflect manner manage operations accounting policies segments described note 1 bell products include military commercial helicopters tiltrotor aircraft piston aircraft engines armored security vehicles “smart” weapons munitions airborne ground surveillance systems aircraft landing systems aircraft missile control actuators networking situational awareness intelligence analysis software us nonus governments defense aerospace industries general aviation markets cessna products include business jets single engine turboprop piston aircraft aftermarket services sold diverse base corporate individual buyers industrial products markets include following · kautex products include blowmolded fuel systems windshield headlamp washer systems metal fuel fillers engine camshafts parts marketed primarily automobile original equipment manufacturers · ezgo jacobsen products include golf cars professional turfmaintenance equipment offroad multipurpose utility specialized turf care vehicles marketed primarily golf courses resort communities municipalities commercial industrial users consumers · greenlee products include hand hydraulic electrically powered tools wire cable terminations electrical communications testingmeasurement bending pulling equipment principally used electrical construction maintenance telecommunications plumbing industries · fluid power products include industrial hydraulic pumps mechanical transmission systems gears extrusion equipment marketed original equipment manufacturers governments oil gas petrochemical desalinization industries finance provides secured commercial loans leases primarily north america assetbased lending aviation distribution finance golf finance resort finance structured capital markets segment profit important measure used evaluate performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses special charges measurement finance segment includes interest income expense excludes special charges provisions losses finance receivables involving sale lease products recorded selling manufacturing division finance group recourse manufacturing group revenues segment along reconciliation segment profit income continuing operations income taxes follows revenues product type within segment summarized revenues include sales us government approximately 22 billion 2006 18 billion 2005 13 billion 2004 primarily bell segment information segment provided capital expenditures includes amounts financed capital leases geographic data presented selected financial information continuing operations geographic area revenues attributed countries based location customer property plant equipment net based location asset quarterly data schedule ii valuation qualifying accounts represents uncollectible accounts written less recoveries inventory disposals acquisitions translation adjustments reserves exclude discontinued operations liabilities 6 million 2006 18 million 2005 22 million 2004 decline reserves primarily due writeoffs item 9item 8 financial statements supplementary data consolidated financial statements related reports independent registered public accounting firm thereon included annual report form 10k pages indicated schedules omitted either applicable required information included financial statements notes thereto report management responsible integrity objectivity financial data presented annual report form 10k consolidated financial statements prepared conformity us generally accepted accounting principles include amounts based management’s best estimates judgments management also responsible establishing maintaining adequate internal control financial reporting textron inc term defined exchange act rules 13a15f participation management conducted evaluation effectiveness internal control financial reporting based framework internal control integrated framework issued committee sponsoring organizations treadway commission based evaluation framework internal control integrated framework concluded textron inc maintained material respects effective internal control financial reporting january 3 2009 independent registered public accounting firm ernst young llp audited consolidated financial statements textron inc issued attestation report textron’s internal controls financial reporting january 3 2009 stated reports included herein conduct business accordance standards outlined textron business conduct guidelines communicated employees honesty integrity high ethical standards core values conduct business every textron business prepares carries annual compliance plan ensure values standards maintained internal control structure designed provide reasonable assurance appropriate cost assets safeguarded transactions properly executed recorded internal control structure includes among things established policies procedures internal audit function selection training qualified personnel textron’s management responsible implementing effective internal control systems monitoring effectiveness well developing executing annual internal control plan audit committee board directors behalf shareholders oversees management’s financial reporting responsibilities audit committee consists five directors officers employees textron meets regularly independent auditors management internal auditors review matters relating financial reporting internal accounting controls auditing independent auditors internal auditors free full access senior management audit committee lewis b campbell richard l yates chairman chief senior vice president corporate controller executive officer acting chief financial officer february 25 2009 report independent registered public accounting firm board directors shareholders textron inc audited textron inc’s internal control financial reporting january 3 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso criteria textron inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion textron inc maintained material respects effective internal control financial reporting january 3 2009 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets january 3 2009 december 29 2007 related consolidated statements operations shareholders’ equity cash flows three years period ended january 3 2009 textron inc report dated february 25 2009 expressed unqualified opinion thereon boston massachusetts february 25 2009 report independent registered public accounting firm board directors shareholders textron inc audited accompanying consolidated balance sheets textron inc january 3 2009 december 29 2007 related consolidated statements operations shareholders’ equity cash flows three years period ended january 3 2009 audits also included financial statement schedule contained page 91 financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position textron inc january 3 2009 december 29 2007 consolidated results operations cash flows three years period ended january 3 2009 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states textron inc’s internal control financial reporting january 3 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 25 2009 expressed unqualified opinion thereon discussed note 15 consolidated financial statements 2007 textron inc adopted fasb interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” discussed note 1 consolidated financial statements 2006 textron inc adopted statement financial accounting standards 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statement nos 87 88 106 132r” boston massachusetts february 25 2009 consolidated statements operations years threeyear period ended january 3 2009 see notes consolidated financial statements consolidated balance sheets january 3 2009 december 29 2007 see notes consolidated financial statements consolidated statements shareholders’ equity see notes consolidated financial statements consolidated statements cash flows years threeyear period ended january 3 2009 textron segregated manufacturing finance group described note 1 finance group’s pretax income loss excluded manufacturing group’s cash flow includes dividends finance group cash flow operating activities represent return investment fourth quarter 2008 manufacturing group required make cash payment finance group support agreement reflected capital contribution classified cash flow operating activities capital contributions support finance group growth classified cash flow financing activities significant transactions borrowing groups eliminated consolidated column see notes consolidated financial statements consolidated statements cash flows continued notes consolidated financial statements note 1 summary significant accounting policies principles consolidation financial statement presentation consolidated financial statements include accounts textron inc majorityowned subsidiaries along variable interest entities primary beneficiary normal course business entered various joint ventures investments entities qualify operating businesses generally ventures meet criteria exclusion scope financial accounting standards board fasb interpretation 46r “consolidation variable interest entities interpretation arb 51” discussed note 20 segment geographic data changed segment structure effective beginning fiscal 2008 report five segments cessna bell textron systems industrial finance prior periods consolidated financial statements recast reflect new segment reporting structure financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated majorityowned subsidiaries operate cessna bell textron systems industrial segments except textron financial corporation finance group consists textron financial corporation consolidated subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements finance group provides captive financing retail purchases leases new used aircraft equipment manufactured manufacturing group consolidated statements cash flows cash received customers securitizations reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidation use estimates prepare financial statements conformity generally accepted accounting principles require us make estimates assumptions affect amounts reported financial statements estimates used accounting among items finance receivables held sale longterm contracts inventory valuation residual values leased assets allowance credit losses receivables amount timing future cash flows expected received impaired loans product liability workers’ compensation actuarial assumptions pension postretirement plans future cash flows associated goodwill longlived asset valuations environmental warranty reserves estimates based facts circumstances available time estimates made historical experience risk loss general economic conditions trends assessments probable future outcomes matters actual results could differ estimates assumptions reviewed periodically effects changes reflected statement operations period determined cash equivalents cash equivalents consist cash shortterm highly liquid investments original maturities three months less revenue recognition generally recognize revenue sale products longterm contracts upon delivery commercial aircraft delivery upon completion manufacturing customer acceptance transfer risk rewards ownership sale arrangement involves multiple elements sales products include customization services evaluate arrangement determine whether separate items required delivered arrangement qualify separate units accounting total fee arrangement allocated unit accounting based relative fair value taking consideration performance cancellation termination refundtype provisions fair value generally established unit accounting using sales price charged similar items sold separately recognize revenue recognition criteria unit accounting met taxes collected customers remitted government authorities recorded statements operations net basis within cost sales longterm contracts revenues longterm contracts accounted percentageofcompletion method accounting accordance american institute certified public accountants statement position 811 “accounting performance constructiontype certain productiontype contracts” percentageofcompletion method estimate profit difference total estimated revenue cost contract recognize estimated profit contract term based either costs incurred costtocost method typically used development effort units delivered unitsofdelivery method used production effort appropriate circumstances revenues costreimbursement contracts recorded using costtocost method revenues fixedprice contracts generally recorded using unitsofdelivery method however contracts provide periodic delivery lengthy period time significant costs incurred require significant amount development effort relation total contract volume revenues recorded using costtocost method longterm contract profits based estimates total contract cost revenue utilizing current contract specifications expected engineering requirements achievement contract milestones including product deliveries certain contracts awarded fixedprice incentive fees also considered estimating revenues profit rates contract costs typically incurred period several years estimation costs requires substantial judgment review revise estimates periodically throughout contract term revisions contract profits recorded revisions estimated revenues costs made anticipated losses contracts recognized full period losses become probable estimable bell segment joint venture boeing company provide engineering development test services related v22 aircraft well produce v22 aircraft number separate contracts us government “v22 contracts” joint venture agreement creates contractual rather ownership rights related v 22 accordingly account joint venture equity method accounting account rights obligations specific requirements v22 contracts allocated us joint venture agreement revenues cost sales reflect performance v22 contracts revenues recognized using unitsofdelivery method include assets used performance v22 contracts including inventory unpaid receivables liabilities arising obligations v22 contracts balance sheet finance revenues finance revenues include interest finance receivables direct loan origination costs fees received recognize interest using interest method provide constant rate return terms receivables revenues direct loan origination costs fees received deferred amortized finance revenues contractual lives respective receivables using interest method receivables credit lines sold prepaid unamortized amounts recognized finance revenues generally suspend accrual interest income accounts contractually delinquent three months addition detailed reviews loans may result earlier suspension resume accrual interest loan becomes contractually current recognize suspended interest income time cash payments nonaccrual accounts including finance charges generally applied reduce loan principal leases certain qualifying noncancelable aircraft product lease contracts accounted salestype leases upon delivery record present value payments net executory costs guaranteed residual values leases revenues related costs product charged cost sales lease financing transactions qualify salestype leases record revenues earned lease period finance receivables held sale finance receivables classified held sale determine longer intent hold receivables maturity longer ability hold receivables maturity decision classify certain finance receivables held sale based number factors including limited contractual duration type collateral credit strength borrowers existence continued contractual commitments perceived marketability receivables ability hold finance receivables maturity ongoing basis factors combined overall liquidation strategy determine finance receivables positive intent hold foreseeable future receivables hold sale finance receivables held sale carried lower cost fair value time transfer held sale classification establish valuation allowance shortfall carrying value net deferred fees costs fair value upon initial classification held sale shortfall recorded charge within special charges addition allowance loan losses previously allocated receivables reclassified valuation allowance account netted finance receivables held sale balance sheet valuation allowance initially established adjusted quarterly changes fair value receivables original carrying value subsequent adjustments included earnings within segment profit fair value changes occur based market interest rates market liquidity changes credit quality borrower value underlying loan collateral finance receivables held investment finance receivables classified held investment intent ability hold receivable foreseeable future maturity payoff finance receivables held investment generally recorded amount outstanding principal less allowance loan losses finance receivables provisions losses finance receivables held investment charged income amounts sufficient maintain allowance level considered adequate cover losses portfolio evaluate allowance examining current delinquencies characteristics existing accounts historical loss experience underlying collateral value general economic conditions trends addition larger balance commercial loans consider borrower specific information industry trends estimated discounted cash flows finance receivables held investment generally written fair value less estimated costs sell related collateral earlier date collateral repossessed payment received six months finance receivables charged deemed uncollectible loan impairment periodically evaluate nonhomogeneous loan portfolios impairment loan considered impaired probable unable collect amounts due according contractual terms loan agreement also identify loans considered impaired due significant modification original loan terms modified loans reflect deferred principal payments generally market interest rates continue accrue finance charges since collection principal interest doubtful measure impairment comparing fair value loan carrying amount fair value based present value expected future cash flows discounted loan’s effective interest rate loan’s observable market price loan collateral dependent fair value collateral less selling costs fair value loan less carrying amount establish reserve based difference securitized transactions securitized transactions involve sale finance receivables qualified special purpose trusts finance group sell securitize loans leases may retain interest assets sold form interestonly securities seller certificates cash reserve accounts servicing rights obligations retained interests subordinate investors’ interests securitizations provide legal recourse thirdparty investors purchase interests securitizations beyond credit enhancement inherent retained interestonly securities seller certificates cash reserve accounts gain loss sale loans leases depends part previous carrying amount financial assets involved transfer allocated assets sold retained interests based relative fair values date transfer interestonly securities within retained interests recorded fair value assets estimate fair values based present value expected future cash flows using management’s best estimates key assumptions credit losses prepayment speeds discount rates forward interest rate yield curves commensurate risks involved review fair values retained interests quarterly using updated assumptions compare amounts carrying value carrying value exceeds fair value determine whether decline fair value temporary determine value decline temporary write carrying value fair value corresponding charge income change fair value interestonly securities deemed temporary record corresponding credit charge comprehensive income unrealized gains losses inventories stated lower cost estimated net realizable value inventories generally using firstin firstout method lastin firstout lifo method certain qualifying inventories us determine costs commercial helicopters average cost basis model considering expended estimated costs current production release costs longterm contracts represent costs incurred production allocable operating overhead advances suppliers case contracts us government allocable research development general administrative expenses since inventoried costs include amounts related contracts long production cycles portion costs expected realized within one year pursuant contract provisions agencies us government title security interest inventories related contracts result advances performancebased payments progress payments advances payments reflected offset related inventory balances customer deposits recorded inventory right offset exists customer deposits recorded accrued liabilities property plant equipment property plant equipment recorded cost depreciated primarily using straightline method land improvements buildings depreciated primarily estimated lives ranging four 40 years machinery equipment depreciated primarily one 15 years capitalize expenditures improvements increase asset values extend useful lives intangible longlived assets acquisition estimate record fair value purchased intangible assets primarily using discounted cash flow analysis anticipated cash flows reflecting incremental revenues andor cost savings resulting acquired intangible asset reflecting market participant assumptions amortization intangible assets finite lives recognized estimated useful lives using method amortization reflects pattern economic benefits intangible assets consumed otherwise realized approximately 40 gross intangible assets finite lives amortized using straightline method remaining assets primarily customer agreements amortized based cash flow streams used value asset longlived assets including intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable carrying value asset held use exceeds sum undiscounted expected future cash flows carrying value asset generally written fair value longlived assets held sale stated lower cost fair value less cost sell fair value determined using pertinent market information including estimated future discounted cash flows goodwill evaluate recoverability goodwill annually frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit might impaired reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment “component” case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics goodwill considered potentially impaired net book value reporting unit exceeds estimated fair value fair values established primarily using discounted cash flow methodology determination discounted cash flows based businesses’ strategic plans longrange planning forecasts available comparative market multiples used corroborate discounted cash flow results pension postretirement benefit obligations maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections evaluate update assumptions annually consultation thirdparty actuaries investment advisors also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases adopted statement financial accounting standards sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statement nos 87 88 106 132r” december 30 2006 accordance statement recognize overfunded underfunded status pension postretirement plans balance sheet recognize changes funded status defined benefit plans comprehensive income year occur actuarial gains losses immediately recognized net periodic pension cost recognized component comprehensive loss amortized net periodic pension cost future periods december 30 2006 impact implementing sfas 158 reduced total assets 313 million increased total liabilities 334 million reduced shareholders’ equity increase accumulated comprehensive loss 647 million net tax impact results operations adjustment accumulated comprehensive loss adoption represents net unrecognized actuarial losses unrecognized prior service costs credits unrecognized transition obligation remaining initial adoption sfas 87 “employers’ accounting pensions” previously netted plan’s funded status balance sheet pursuant provisions sfas 87 amounts amortized net periodic pension cost derivative financial instruments exposed market risk primarily changes interest rates currency exchange rates securities pricing hold issue derivative financial instruments trading speculative purposes manage volatility relating exposures net exposures consolidated basis take advantage natural offsets residual portion enter various derivative transactions pursuant policies areas counterparty exposure hedging practices derivative instruments reported balance sheets fair value designation support hedge accounting performed specific exposure basis financial instruments qualifying fair value hedges record changes fair value income offset part whole corresponding changes fair value underlying exposures hedged cash flow hedges record changes fair value derivatives extent effective hedges comprehensive loss income net deferred taxes changes fair value derivatives qualifying hedges recorded income foreign currency denominated assets liabilities translated us dollars adjustments currency rate changes recorded cumulative translation adjustment account shareholders’ equity related foreign entity sold substantially liquidated use foreign currency financing transactions including currency swaps effectively hedge longterm investments foreign operations corresponding currency foreign currency gains losses hedge longterm investments recorded cumulative translation adjustment account offset recorded adjustment nonus dollar financing liability fair values financial instruments fair values financial instruments based upon estimates balance sheet date price would received orderly transaction market participants use quoted market prices observable inputs available however inputs often available markets many assets cases typically perform discounted cash flow analysis using best estimates key assumptions credit losses prepayment speeds discount rates based historical experience interpretation comparable market data active markets utilized estimates subjective nature involve uncertainties significant judgment interpretation current market data accordingly fair values presented may differ amounts could realize settle currently product environmental liabilities accrue product liability claims related defense costs occurrence method loss probable reasonably estimable estimates generally based specifics claim incident best estimate probable loss using historical experience considering insurance coverage deductibles effect date incident liabilities environmental matters recorded sitebysite basis probable obligation incurred cost reasonably estimated estimate accrued environmental liabilities using currently available facts existing technology presently enacted laws regulations subject number factors uncertainties environmental liabilities undiscounted take consideration possible future insurance proceeds significant amounts claims third parties research development costs research development costs either specifically covered contracts represent share costsharing arrangements charged expense incurred research development costs incurred contracts others reported cost sales period revenue recognized income taxes deferred tax assets liabilities determined based temporary differences financial reporting tax bases assets liabilities applying enacted tax rates expected effect year expect differences reverse settle based evaluation available evidence recognize future tax benefits net operating loss carryforwards extent believe likely realize benefits periodically assess likelihood able recover deferred tax assets reflect changes estimates valuation allowance corresponding adjustment earnings comprehensive income loss appropriate assessing need valuation allowance look future reversal existing taxable temporary differences taxable income carryback years feasibility tax planning strategies estimated future taxable income recognize net taxrelated interest penalties income tax expense recently announced accounting pronouncements june 2008 fasb issued staff position fsp emerging issues task force 0361 “determining whether instruments granted sharebased payment transactions participating securities” fsp concludes unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities must included computation basic earnings per share using twoclass method fsp effective first quarter 2009 applied retrospective basis periods presented first quarter 2008 granted restricted stock units include nonforfeitable rights dividends accordingly restricted stock units awarded since beginning 2008 considered participating securities included earnings per share calculation upon adoption fsp adoption fsp material impact earnings per share impact financial position results operations new pronouncements issued effective january 3 2009 expected significant effect consolidated financial position results operations note 2 discontinued operations november 2008 completed sale fluid power business unit clyde blowers limited ukbased worldwide leader areas power materials handling intermodal transport logistics pump technologies sale included gear technologies hydraulics maag pump union pump product lines along respective brands received approximately 527 million cash sixyear note face value 28 million 50 million based final 2008 operating results determined end first quarter 2009 primarily payable sixyear note recorded aftertax gain 111 million sale taxes dealrelated expenses paid expect total net aftertax proceeds sale approximately 380 million excluding payments due us related 2008 operating results august 2006 completed sale fastening systems business platinum equity private equity investment firm approximately 613 million cash assumption 16 million net indebtedness certain liabilities gain loss recorded upon completion sale prior consummation sale fastening systems business recorded impairment charge 120 million 2006 record business estimated fair value less cost sell fluid power fastening systems businesses met discontinued operations criteria included discontinued operations periods presented consolidated financial statements results fluid power business previously reported industrial segment generally use centralized approach cash management financing manufacturing operations accordingly allocate debt interest expense discontinued businesses debt related interest expense specific entity within business recorded respective entity general corporate overhead previously allocated businesses reporting purposes excluded amounts reported discontinued operations assets liabilities discontinued businesses follows upon sale fluid power retained sponsorship defined benefit pension plan former employees retirees ukbased businesses additional benefits earned plan future cash contributions plan expected significant january 3 2009 fair value plan assets totaled 198 million projected benefit obligation totaled 188 million revenue results operations gains disposal discontinued businesses follows note 3 business acquisitions goodwill intangible assets goodwill changes carrying amount goodwill segment follows discussed note 12 special charges based current market conditions plan downsize finance segment recorded noncash pretax impairment charge fourth quarter 2008 169 million eliminate goodwill finance segment second half 2008 kautex negatively impacted significant downturn automotive industry caused deterioration revenues segment profit annual evaluation goodwill recoverability kautex extended include projections outlook automotive industry end fourth quarter believe carrying value reporting unit recoverable january 3 2009 anticipate volumes continue lower 2010 2009 2013 purposes goodwill analysis assumed average annual sales growth rate 6 operating profit margins returning recent historical levels 2013 operating profit margin improvements expected result significant restructuring activities including realignment excess capacity personnel reductions well higher volumes 50basispoint reduction estimated operating profit margins 2009 2013 period used discounted cash flow model would reduce estimated fair value kautex 60 million may result carrying value business exceeding estimated fair value potentially resulting impairment charge january 3 2009 goodwill allocated kautex totaled 130 million operating plans projections golf turfcare component anticipate operating margin improvements fiveyear planning period resulting high singledigit margins assume annual revenue growth approximately 4 100basispoint decline operating margin assumptions would reduce estimated fair value approximately 50 million may result carrying value component exceeding estimated fair value potentially resulting impairment charge january 3 2009 goodwill allocated component totaled approximately 141 million market capitalization january 3 2009 approximately 37 billion compared approximately 179 billion december 29 2007 market capitalization less sum fair values manufacturing group reporting units calculated connection annual impairment test believe differences fair value estimates manufacturing reporting units market capitalization primarily due market’s view risk finance segment noted fully impaired goodwill finance segment believe fair value estimates manufacturing group reporting units consistent market participant assumptions acquired intangible assets acquired intangible assets summarized amortization expense totaled 53 million 2008 23 million 2007 7 million 2006 amortization expense estimated approximately 52 million 52 million 51 million 50 million 47 million 2009 2010 2011 2012 2013 respectively 2007 business acquisitions 2007 acquired four businesses cash totaling 11 billion results operations acquired businesses included statement operations since date respective acquisition pro forma information included amounts immaterial november 14 2007 acquired majority ownership interest united industrial corporation uic publicly held company nyse uic pursuant cash tender offer 81 per share uic operates wholly owned subsidiary aai corporation aai leading provider intelligent aerospace defense systems including unmanned aircraft ground control stations aircraft satellite test equipment training systems countersniper devices uic integrated textron systems segment believe adds important capabilities existing aerospace defense businesses advances strategy deliver broader integrated solutions customers december 2007 completed acquisition obtained 100 ownership uic following table summarizes estimated fair values assets acquired liabilities assumed uic november 14 2007 effective date acquisition addition 655 million paid net assets acquired november 14 2007 paid approximately 240 million settle outstanding acquired debt obligations 157 million purchase minority interest december 2007 acquired intangible assets represent primarily customer agreements contractual relationships weightedaverage useful life 13 years allocated purchase price business estimated fair value net tangible intangible assets acquired excess recorded goodwill approximately 64 million goodwill deductible tax purposes 2008 goodwill intangible amounts adjusted reflect final fair value adjustments resulted reduction goodwill 49 million net deferred taxes increase intangible assets 14 million 2007 also acquired certain assets cavair llc columbia aircraft manufacturing corporation paladin tools cavair’s helicopter maintenance service center acquired bell segment columbia aircraft manufacturing corporation produces highperformance single engine aircraft integrated cessna segment paladin tools provider tools accessories telecommunications industry integrated industrial segment recorded 12 million goodwill 16 million intangible assets businesses 2006 business acquisitions acquired three businesses 2006 total cost 338 million textron systems segment 164 million finance segment paid cash operating results businesses included consolidated financial statements since date respective acquisition acquisitions include following • overwatch systems developer provider intelligence analysis software tools defense industry acquired december 2006 • innovative survivability technologies inc supplier innovative defensive systems military homeland security customers acquired july 2006 • electrolux financial corporation’s dealer inventory finance business provides consumer appliance electronics dealers wholesale inventory financing acquired june 2006 connection acquisitions 2006 recorded 259 million goodwill 112 million identifiable intangible assets primarily textron systems segment amounts adjusted 2007 reflect final fair value adjustments resulted reduction goodwill 14 million net deferred taxes increase intangible assets 21 million adjusted intangible assets weightedaverage amortization periods follows 84 million patents technology 15 years 33 million customer agreements 9 years 16 million intangible assets 4 years note 4 accounts receivable accounts receivable comprised following unbillable receivables us government contracts arise revenues appropriately recognized based performance cannot billed yet terms contract unbillable receivables within accounts receivable totaled 157 million january 3 2009 166 million december 29 2007 longterm contract receivables due us government exclude significant amounts billed unpaid due contractual retainage provisions note 5 finance receivables securitizations evaluate finance receivables managed well owned basis since retain subordinated interests finance receivables sold securitizations resulting credit risk contrast retained financial interest credit risk performance serviced portfolio therefore performance portfolios limited billing collection activities finance group manages services finance receivables variety investors participants thirdparty portfolio owners managed serviced finance receivables summarized follows finance receivables classified held investment intent ability hold receivable foreseeable future maturity payoff finance receivables classified held sale based determination longer intent hold receivable maturity result exit plan discussed note 12 special charges january 3 2009 approximately 29 billion managed liquidating finance receivables designated sale transfer 12 billion represent securitized receivables managed finance segment 17 billion represent owned finance receivables classified held sale owned finance receivables january 3 2009 include approximately 11 billion receivables legally sold special purpose entities spe consolidated subsidiaries textron financial corporation assets spes pledged collateral debt reflected securitized onbalance sheet debt note 8 debt credit facilities finance receivables diversified across geographic region borrower industry type collateral january 3 2009 77 finance receivables including held investment held sale portfolios distributed throughout us compared 78 end 2007 significant collateral concentration general aviation accounted 26 managed receivables end 2008 22 end 2007 industry concentrations golf vacation interval industries accounted 16 15 respectively managed receivables january 3 2009 compared 15 13 respectively end 2007 finance receivables include installment contracts revolving loans golf course resort mortgages distribution finance receivables finance leveraged leases installment contracts finance leases initial terms ranging two 20 years primarily secured financed equipment installment contracts generally require customer pay significant payment along periodic scheduled principal payments reduce outstanding balance term loan finance leases include residual values expected realized contractual maturity leases significant residual value end contractual term classified installment contracts legal economic substance equivalent secured borrowing finance lease significant residual value contractual maturities table “finance receivables held investment” section contractual maturities finance leases classified installment contracts represent minimum lease payments net unearned income recognized life lease total minimum lease payments unearned income related contracts 12 billion 299 million respectively january 3 2009 10 billion 315 million respectively december 29 2007 minimum lease payments due contracts next five years follows 202 million 2009 184 million 2010 177 million 2011 145 million 2012 140 million 2013 minimum lease payments due finance leases next five years follows 143 million 2009 110 million 2010 73 million 2011 37 million 2012 13 million 2013 revolving loans distribution finance receivables generally mature within one five years revolving loans secured trade receivables inventory plant equipment pools vacation interval resort notes receivables finance receivable portfolios pools residential recreational land loans underlying property distribution finance receivables generally secured inventory financed distributor include floorplan financing thirdparty dealers inventory sold ezgo jacobsen businesses golf course resort mortgages secured real property generally limited 75 less property’s appraised market value loan origination golf course mortgages initial terms ranging five 10 years amortization periods 15 25 years golf course mortgages consist loans average balance 6 million weightedaverage remaining contractual maturity five years resort mortgages generally represent construction inventory loans average balance 10 million weightedaverage remaining contractual maturity four years leveraged leases secured ownership leased equipment real property initial terms approximately 30 years leveraged leases reflect contractual maturities net contractual nonrecourse debt payments include residual values expected realized contractual maturity finance receivables held investment contractual maturities finance receivables held investment january 3 2009 follows finance receivables often repaid refinanced prior maturity accordingly tabulations regarded forecast future cash collections finance receivable receipts related distribution finance receivables revolving loans based historical cash flow experience net investments finance leases excluding leases classified installment contracts leveraged leases provided nonaccrual loans include accounts contractually delinquent three months accrual interest income suspended loans considered impaired probable unable collect amounts due according contractual terms loan agreement impaired accrual loans represent loans original terms significantly modified reflect deferred principal payments generally market interest rates collection principal interest doubtful past due loans finance group recourse manufacturing group considered impaired table loans totaled 08 million 3 million end 2008 2007 respectively impaired loans included within finance receivables held investment related reserves end 2008 2007 follows fourth quarter 2008 classified 17 billion finance receivables held sale receivables reflected fair value 2008 excluded loan impairment disclosures increase impaired nonaccrual finance receivables primarily reflects 71 million account golf finance division 68 million account resort finance division decrease impaired accrual finance receivables primarily reflects one account golf finance division moved impaired nonaccrual status two accounts assetbased lending division transferred finance receivables held sale classification captive intercompany financing finance group provides financing retail purchases leases new used aircraft equipment manufactured manufacturing group captive finance receivables inventory sales included finance group’s balance sheets summarized operating agreements specify finance group recourse manufacturing group certain uncollected amounts related transactions manufacturing group established reserves losses balance sheet within accrued liabilities receivables guarantees reserves established amounts potentially uncollectible collateral values considered insufficient cover outstanding receivable account deemed uncollectible collateral repossessed finance group manufacturing group charged deficiency collateral repossessed receivable transferred finance group’s balance sheet manufacturing group’s balance sheet manufacturing group responsible additional collection efforts occurs related reserve previously established manufacturing group reclassified accrued liabilities netted receivable asset transferred finance group 2008 2007 2006 finance segment paid manufacturing segments 10 billion 12 billion 10 billion respectively related sale textronmanufactured products financed cessna industrial segments also received proceeds years 18 million 27 million 63 million respectively sale equipment manufacturing operations finance segment use operating lease agreements end 2008 2007 amounts guaranteed manufacturing group totaled 206 million 254 million respectively manufacturing group total reserves losses 21 million end 2008 22 million end 2007 fourth quarter 2008 utilized commercial paper borrowings manufacturing group lend cash finance group portion borrowings repaid fourth quarter primarily funds 625 million cash payment made textron inc textron financial corporation reflected capital contribution january 3 2009 finance group owed manufacturing group 133 million related borrowings receivable recorded current assets balance sheet securitizations finance group sells distribution finance receivables qualified special purpose trust securitization transactions distribution finance receivables represent loans secured dealer inventories typically collected upon sale underlying product revolving securitization proceeds collection principal balance loans used trust purchase additional distribution finance receivables us month revolving securitization accounted approximately 86 93 securitization gains 2008 2007 respectively received proceeds securitizations 473 million 2008 731 million 2007 50 million 2006 revolving securitization proceeds include amounts received related incremental increases level receivables sold securitization gains securitizations approximately 42 million 2008 62 million 2007 42 million 2006 end 2008 past due securitized loans totaled 24 million compared 17 million end 2007 generally retain interest assets sold form servicing responsibilities subordinated interests including interestonly securities seller certificates cash reserves end 2008 200 million retained interest recorded assets included 191 million distribution finance receivables comparison retained interest totaled 203 million end 2007 cash flows received retained interests totaled 126 million 2008 71 million 2007 63 million 2006 key economic assumptions used measuring retained interests date sale follows weightedaverage life four months expected annual credit loss 10 residual cash flows discount rate 73 monthly payment rate 194 january 3 2009 key assumptions used follows weightedaverage life four months expected annual credit loss 13 residual cash flows discount rate 137 monthly payment rate 184 fourth quarter 2008 finance group modified terms aviation finance securitization permit repurchase receivables securitization trust modification provide additional flexibility management receivable portfolio also required consolidation securitization trust balance sheet result 589 million receivables 553 million debt held securitization trust reflected finance receivables held investment debt balance sheet modification also resulted reclassification 58 million retained interests securitizations associated structure finance receivables held investment assets also extended revolving term aviation finance securitization december 2008 one year expect provide additional liquidity approximately 100 million 2009 current portfolio securing funding source matures replaced additional finance receivables note 6 inventories comprised following inventories valued lifo method totaled 20 billion 17 billion end 2008 2007 respectively lifo inventories valued current costs carrying values would approximately 366 million 307 million higher respective dates inventories related longterm contracts net progressmilestone payments 741 million end 2008 710 million end 2007 note 7 property plant equipment net manufacturing group’s property plant equipment net comprised following depreciation expense manufacturing group totaled 305 million 2008 259 million 2007 232 million 2006 incurred asset retirement obligations primarily related costs remove dispose underground storage tanks asbestos materials used insulation adhesive fillers floor tiles legal requirement remove items currently plan remodel related facilities otherwise cause impacted items require disposal result asset retirement obligations estimable accordance provisions fasb interpretation 47 “conditional asset retirement obligations” recorded liability note 8 debt credit facilities debt credit facilities summarized manufacturing group yearend average interest rate commercial paper borrowings 64 weightedaverage interest rate throughout year 43 2008 520 2007 finance group average interest rate commercial paper borrowings 564 end 2008 502 end 2007 weightedaverage interest rate throughout year 363 2008 516 2007 december 2008 finance group amended terms aviation finance securitization resulting consolidation special purpose entity holds finance receivables previously sold well 553 million thirdparty notes revolving credit facility thirdparty notes reflected within securitized onbalance sheet debt 2007 finance group issued 300 million 6 fixedtofloating rate junior subordinated notes unsecured rank junior existing future senior debt notes mature february 15 2067 however right redeem notes par february 15 2017 obligated redeem notes beginning february 15 2042 finance group agreed replacement capital covenant redeem notes february 15 2047 unless receives capital contribution manufacturing group andor net proceeds sale certain replacement capital securities specified amounts interest notes fixed 6 february 15 2017 floats threemonth london interbank offered rate 1735 thereafter aggregate 3 billion committed bank lines credit historically support commercial paper letters credit issuances borrowings outstanding related manufacturing group’s 125 billion facility finance group’s 175 billion facility end 2008 2007 february 2009 due unavailability term debt difficulty accessing sufficient commercial paper daily basis drew available balance credit facilities amounts borrowed credit facilities due april 2012 portion proceeds used repay outstanding commercial paper comes due support agreement textron inc required ensure textron financial corporation maintains fixed charge coverage less 125 consolidated shareholder’s equity less 200 million addition textron financial corporation lending agreements contain provisions restricting additional debt exceed nine times consolidated net worth qualifying subordinated obligations due certain charges discussed note 12 special charges december 29 2008 textron inc made cash payment 625 million textron financial corporation reflected capital contribution maintain compliance fixed charge coverage ratio required support agreement maintain leverage ratio required credit facility following table shows required payments next five years debt outstanding end 2008 payment schedule excludes amounts payable supported primary revolving credit facilities revolving lines credit note 9 derivatives fair value hedges finance group enters interest rate exchange contracts mitigate exposure changes fair value fixedrate receivables debt due fluctuations interest rates using contracts able convert fixedrate cash flows floatingrate cash flows cash flow hedges experience variability cash flows receive finance group’s investments interestonly securities due fluctuations interest rates mitigate exposure variability finance group enters interest rate exchange cap floor agreements combination instruments converts net residual floatingrate cash flows expected received finance group fixedrate cash flows changes fair value instruments recorded net income tax effect comprehensive income oci exposure loss nonperformance counterparties derivative agreements end 2008 minimal anticipate nonperformance counterparties periodic settlements amounts due historically minimized potential risk entering contracts exclusively major financially sound counterparties less longterm bond rating recent uncertainty financial markets negatively affected bond ratings counterparties continuously monitor exposures ensure limit risks credit risk generally limited amount counterparties’ contractual obligations exceed obligations counterparty manufacture sell products number countries throughout world therefore exposed movements foreign currency exchange rates primary purpose foreign currency hedging activities manage volatility associated foreign currency purchases materials foreign currency sales products assets liabilities created normal course business primarily utilize forward exchange contracts purchased options maturities 18 months qualify cash flow hedges intended offset effect exchange rate fluctuations forecasted sales inventory purchases overhead expenses generally expected reclassified earnings next 18 months underlying transactions occur net investment hedges hedge net investment position major currencies generate foreign currency interest payments offset transactional exposures currencies accomplish borrow directly foreign currency designate portion foreign currency debt hedge net investments also may utilize currency forwards hedges related foreign net investments currency effects hedges reflected cumulative translation adjustment account within comprehensive income loss produced 46 million aftertax gain 2008 leaving accumulated net gain balance 3 million stockbased compensation hedges manage expense related stockbased compensation awards using cash settlement forward contracts common stock use forward contracts modifies compensation expense exposure changes stock price intent reduce potential variability cash received paid contract settlement included cash flows operating activities consistent classification cash flows underlying hedged compensation expense fair values derivative instruments fair values derivative instruments manufacturing group included either current assets accrued liabilities balance sheet finance group included either assets liabilities effect derivative instruments statements operations follows amount ineffectiveness fair value hedge foreign currency exchange contracts significant approximately 11 million ineffectiveness related forward contracts textron inc stock recorded selling administrative expense 2008 manufacturing group also enters certain foreign currency derivative instruments meet hedge accounting criteria primarily intended protect exposure related intercompany financing transactions reported loss 49 million 2008 12 million 2007 within selling administrative expenses related instruments note 10 fair values assets liabilities september 2006 fasb issued sfas 157 “fair value measurements” effective financial statements issued fiscal years beginning november 15 2007 sfas 157 replaces multiple existing definitions fair value single definition establishes consistent framework measuring fair value expands financial statement disclosures regarding fair value measurements statement applies fair value measurements already required permitted accounting standards require new fair value measurements february 2008 fasb delayed first quarter 2009 effective date sfas 157 nonfinancial assets liabilities recognized disclosed fair value financial statements recurring basis adoption sfas 157 financial assets liabilities first quarter 2008 material impact financial position results operations nonfinancial assets liabilities meet deferral criteria include goodwill intangible assets property plant equipment longterm investments primarily represent collateral received finance group satisfaction troubled loans expect adoption sfas 157 nonfinancial assets liabilities material impact financial position results operations accordance provisions sfas 157 measure fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date statement prioritizes assumptions market participants would use pricing asset liability “inputs” threetier fair value hierarchy fair value hierarchy gives highest priority level 1 quoted prices active markets identical assets liabilities lowest priority level 3 unobservable inputs little market data exist requiring companies develop assumptions observable inputs meet criteria level 1 include quoted prices similar assets liabilities active markets quoted prices identical assets liabilities markets active categorized level 2 level 3 inputs reflect estimates assumptions market participants would use pricing asset liability based best information available circumstances valuation techniques assets liabilities measured using level 3 inputs may include methodologies market approach income approach cost approach may use unobservable inputs projections estimates management’s interpretation current market data unobservable inputs utilized extent observable inputs available costeffective obtain assets liabilities recorded fair value recurring basis table presents assets liabilities measured fair value recurring basis january 3 2009 categorized level inputs used valuation asset liability valuation techniques manufacturing group foreign currency exchange contracts measured fair value using market method valuation technique inputs technique utilize current foreign currency exchange forward market rates published thirdparty leading financial news data providers observable data represent rates financial institution uses contracts entered date however based actual transactions classified level 2 record changes fair value contracts extent effective hedges comprehensive income contract qualify hedge accounting designated fair value hedge changes fair value contract recorded income cash settlement forward contracts common stock used manage expense related stockbased compensation awards use forward contracts modifies compensation expense exposure changes stock price intent reducing potential variability contracts measured fair value using market method valuation technique since input technique based quoted price common stock measurement date classified level 1 gains losses instruments recorded adjustment compensation expense finance group interestonly securities generally retained upon sale finance receivables qualified special purpose trusts interestonly securities initially recorded allocated carrying value determined based relative fair values finance receivables sold interests retained estimate fair value upon initial recognition retained interest based present value expected future cash flows using best estimates key assumptions credit losses prepayment speeds forward interest rate yield curves discount rates commensurate risks involved inputs classified level 3 since reflect assumptions market participants would use pricing assets based best information available circumstances active market assets review fair values interestonly securities quarterly using discounted cash flow model updated assumptions compare amounts carrying value change fair value deemed temporary record corresponding credit charge comprehensive income unrealized gains losses decline fair value determined temporary record corresponding charge income 2008 recognized impairment charges 15 million 6 million related distribution finance revolving securitization aviation finance securitization trust respectively due changes assumptions finance group’s derivative contracts exchangetraded derivative financial instruments measured fair value utilizing widely accepted thirdparty developed valuation models actual terms individual contract entered valuation model along interest rate foreign exchange rate data based readily observable market data published thirdparty leading financial news data providers credit risk factored fair value derivative assets liabilities based differential credit default swap spread liabilities counterparty’s credit default swap spread assets compared standard aarated counterparty however significant impact valuation january 3 2009 counterparties aarated vast majority derivative instruments asset position changes fair value unobservable inputs table presents change fair value measurements interestonly strips used significant unobservable inputs level 3 2008 assets recorded fair value nonrecurring basis table presents assets measured fair value nonrecurring basis finance group january 3 2009 categorized level inputs used valuation asset finance receivables held sale recorded lower cost fair value due current plan exit noncaptive commercial finance business combination orderly liquidation receivables mature selected sales classified 17 billion finance receivables held sale finance receivables held sale january 3 2009 include assetbased revolving lines credit dealer inventory financing golf resort mortgages majority finance receivables held sale identified individual loan level golf resort mortgages classified held sale identified portion larger portfolio common characteristics based intention balance sale certain loans collection others maximize economic value finance receivables held sale recorded fair value nonrecurring basis periods fair value lower cost value upon initial reclassification receivables held sale estimated fair value 293 million less carrying value net 44 million allowance loan losses attributable portfolios net adjustment recorded within special charges fourth quarter 2008 active quoted market prices finance receivables estimate fair value determined based use discounted cash flow models estimate exit price expect receive principal market type loan orderly transaction includes sale pools similar assets sale individual loans models used incorporate estimates rate return financing cost capital structure andor discount rate expectations current market participants combined estimated loan cash flows based credit losses payment rates credit line utilization rates available assumptions related expectations current market participants compared observable market inputs including bids prospective purchasers certain bond market indices loans similar perceived credit quality although utilize prioritize market observable inputs discounted cash flow models inputs rarely derived markets directly comparable loan structures industries collateral types therefore valuations finance receivables held sale involve significant management judgment result differences fair value estimates market participants loan impairment measured comparing expected future cash flows discounted loan’s effective interest rate fair value collateral loan collateral dependent carrying amount carrying amount higher establish reserve based difference evaluation inherently subjective requires estimates including amount timing future cash flows expected received impaired loans underlying collateral may differ actual results impaired nonaccrual loans also included table since measurement required reserves loans significantly dependent fair value underlying collateral fair values collateral determined utilizing either appraisals industry pricing guides input market participants recent experience selling similar assets internally developed discounted cash flow models assets liabilities recorded fair value carrying amounts estimated fair values financial instruments reflected financial statements fair value follows accordance disclosure requirements debt finance receivables held investment table exclude leases fair value manufacturing group debt determined using market observable data similar transactions utilize valuation methodologies determine fair value estimates finance receivables held investment described finance receivables held sale retained interests represent subordinated interest finance receivables sold qualified special purpose trusts interests classified heldtomaturity recorded allocated carrying value determined based relative fair values finance receivables sold interests retained estimate fair value upon initial recognition retained interest based present value expected future cash flows using best estimates key assumptions credit losses prepayment speeds forward interest rate yield curves discount rates commensurate risks involved inputs reflect judgment regarding assumptions market participants would use pricing assets based best information available circumstances active market assets investments marketable securities represent notes receivable issued securitization trusts purchase timeshare notes receivable timeshare developers notes classified heldtomaturity held cost estimate fair value based observable market inputs similar securitization interests markets currently inactive 2008 approximately 80 fair value term debt finance group determined based observable market transactions remaining finance group debt determined based discounted cash flow analyses using observable market inputs debt similar duration subordination credit default expectations fair values shortterm borrowings assumed approximate carrying values note 11 shareholders’ equity capital stock authorization 15 million shares preferred stock par value 500 million shares 0125 par value common stock share 208 cumulative convertible preferred stock series 2363 approximate stated value convertible 88 shares common stock redeem 50 per share end 2008 2007 2006 approximately 67000 72000 147000 shares respectively 208 cumulative convertible preferred stock series issued approximately 67000 72000 78000 shares outstanding respectively share 140 convertible preferred dividend stock series b 1182 approximate stated value preferred dividends convertible 72 shares common stock redeem 45 per share end 2008 2007 2006 approximately 34000 36000 527000 shares respectively 140 convertible preferred dividend stock series b issued approximately 34000 36000 41000 shares outstanding respectively july 18 2007 board directors approved twoforone split common stock effected form 100 stock dividend retirement 85 million shares treasury stock additional shares resulting stock split distributed august 24 2007 shareholders record august 3 2007 prior period share data per share data restated reflect stock split outstanding common stock activity three years ended january 3 2009 presented reserved shares common stock end 2008 common stock reserved subsequent conversion preferred stock shares reserved exercise outstanding stock options issuance shares upon vesting outstanding restricted stock units totaled 123 million shares income per common share reconciliation income continuing operations basic diluted share amounts presented accumulated comprehensive loss aftertax components accumulated comprehensive loss presented note 12 special charges special charges year ended january 3 2009 include initial marktomarket adjustment 293 million made classified certain finance receivables held investment held sale goodwill impairment charge finance segment 169 million restructuring charges 64 million special charges fiscal 2007 2006 result volatility disruption credit markets order reduce reliance shortterm funding october 13 2008 board directors approved recommendation management downsize finance segment plan approved time entailed exiting finance group’s assetbased lending structured capital businesses well several additional product lines limiting new originations distribution finance golf finance resort finance businesses december 22 2008 board directors approved plan exit commercial finance business finance segment portion business supporting customer purchases textronmanufactured products made decision exit business due continued weakness economy order address longterm liquidity position light continuing disruption instability capital markets total actions impact approximately 73 billion finance segment’s 108 billion managed receivable portfolio end 2008 exit plan effected combination orderly liquidation selected sales expected substantially complete next two four years recorded pretax marktomarket adjustment 293 million owned receivables held sale due exit plan january 3 2009 approximately 29 billion liquidating receivables designated sale transfer 12 billion represent securitized receivables managed finance segment 17 billion represent owned receivables classified held sale based current market conditions plan downsize finance segment recorded 169 million pretax impairment charge fourth quarter 2008 eliminate goodwill finance segment october 2008 initiated restructuring program reduce overhead cost improve productivity across company december 22 2008 textron board directors approved expansion previously announced plan includes corporate segment direct indirect workforce reductions streamlining administrative overhead program along volumerelated reductions workforce fourth quarter 2008 january 2009 eliminates approximately 6300 positions worldwide representing approximately 15 global workforce recorded pretax restructuring costs 64 million fourth quarter 2008 related restructuring program finance segment exit plan excluding volumerelated direct labor reductions recorded segment profit first half 2009 estimate incur additional 40 million pretax restructuring costs largely related workforce reductions cessna may additional restructuring costs result headcount reductions actions however estimate additional charges cannot made time special charges segment year ended january 3 2009 follows analysis restructuring program related reserve account summarized severance costs generally paid monthly basis severance period granted employee lump sum basis severance costs include outplacement costs paid accordance normal payment terms contract termination costs generally paid upon exiting facility remaining lease term specific restructuring measures associated estimated costs based best judgment prevailing circumstances believe restructuring reserve balance 37 million adequate cover costs presently accruable relating activities formally identified committed approved plans january 3 2009 anticipate actions related liabilities completed within 12month period note 13 sharebased compensation 2007 longterm incentive plan “plan” supersedes 1999 longterm incentive plan authorizes awards key employees form options purchase shares restricted stock restricted stock units stock appreciation rights performance stock awards options granted purchase shares maximum term 10 years generally vest ratably threeyear period restricted stock unit awards granted generally vest onethird third fourth fifth year following grant generally paid shares common stock maximum 12 million shares authorized issuance purposes plan plus shares become available upon cancellation forfeiture expiration awards granted 1999 longterm incentive plan 12 million shares may awarded pursuant incentive stock options 3 million shares may awarded pursuant restricted stock “full value” awards intended paid shares plan also authorizes performance share units paid cash payouts performance share units vary based certain performance criteria generally measured threeyear period performance share units vest end three years also provide sharebased compensation awards payable cash including retention awards certain executives restricted stock units deferred income plan textron key executives “dip” provide participants opportunity voluntarily defer 25 base salary 100 annual longterm incentive compensation effective january 1 2008 maximum deferred annual longterm incentive compensation decreased 80 elective deferrals may put either stock unit account interest bearing account generally contribute 10 premium amounts deferred stock unit account executives eligible participate dip achieved andor maintained required minimum stock ownership level required defer annual incentive compensation excess 100 executive’s annual target deferred stock unit account entitled 10 premium contribution amount deferred participants cannot move amounts two accounts actively employed us cannot receive distributions termination employment awards granted modified 2005 prospectively compensation costs awards service conditions vest ratably recognized straightline basis requisite service period separately vesting portion award compensation expense recorded net income sharebased compensation plans follows sharebased compensation costs reflected primarily selling administrative expenses compensation expense includes approximately 20 million 23 million 16 million 2008 2007 2006 respectively representing attribution fair value options issued portion previously granted options requisite service rendered 2006 recorded approximately 4 million sharebased award forfeitures related discontinued operations stock options stock option compensation cost calculated fair value approach recognized vesting period stock options weightedaverage fair value options granted per share 14 12 2008 2007 2006 respectively estimate fair value options granted date grant using blackscholes optionpricing model expected volatilities based implied volatilities traded options common stock historical volatilities factors use historical data estimate option exercise behavior adjusted reflect anticipated increases expected life weightedaverage assumptions used blackscholes optionpricing model awards issued respective periods follows following table summarizes information related stock option activity respective periods income taxes payable federal state purposes reduced tax benefits receive employee stock options income tax benefits receive certain stock options calculated difference fair market value stock issued time exercise option price tax effected tax impact tax deduction excess related deferred taxes presented consolidated statements cash flows financing activities stock option activity plan summarized follows january 3 2009 outstanding options significant aggregate intrinsic value weightedaverage remaining contractual life 63 years exercisable options significant aggregate intrinsic value weightedaverage remaining contractual life 51 years january 3 2009 restricted stock units fair value restricted stock unit paid stock based trading price common stock date grant less required adjustments certain awards reflect fair value award dividends paid accrued restricted stock unit vests weightedaverage grant date fair value restricted stock units paid stock granted 2008 2007 2006 approximately 53 45 41 per share respectively activity restricted stock units paid stock follows sharebased compensation awards value sharebased compensation awards vested andor paid respective periods follows january 3 2009 recognized 51 million total compensation cost associated unvested awards subject service conditions january 3 2009 recognized 3 million total compensation cost associated unvested sharebased compensation awards subject performance vesting conditions expect recognize compensation expense types awards weightedaverage period approximately two years fair value sharebased compensation awards accounted liabilities includes performance share units retention awards restricted stock units payable cash dip stock unit awards fair value awards based trading price common stock less adjustments reflect fair value certain awards dividends paid accrued vested remeasured reporting period date note 14 retirement plans defined benefit defined contribution plans cover substantially employees significant number usbased employees participate either textron master retirement plan tmrp bell helicopter textron master retirement plan bhtmrp subject provisions employee retirement income security act 1974 erisa tmrp defined benefit pension plan includes defined contribution component created 2007 called retirement account plan rap covers portion participants tmrp bhtmrp rap participants may make contributions plan eligible receive contributions textron 2 eligible compensation participants rap may receive pension benefits tmrp bhtmrp reduced benefits received rap also funded unfunded defined benefit pension plans cover certain us foreign employees several defined contribution plans also sponsored various businesses largest plan textron savings plan qualified 401k plan subject erisa significant number usbased employees participate defined contribution plans cost approximately 110 million 2008 82 million 2007 46 million 2006 increase cost 2007 2008 primarily relates contributions rap higher employee base largely due acquisitions also provide postretirement benefits pensions certain retired employees us include healthcare dental care medicare part b reimbursement life insurance benefits periodic benefit cost income components net periodic benefit cost income amounts recognized comprehensive income follows estimate net loss prior service cost defined benefit pension plans amortized comprehensive income net periodic benefit costs 2009 24 million 19 million respectively estimated net loss prior service credit postretirement benefits pensions amortized comprehensive income net periodic benefit costs 2009 9 million 6 million respectively comprehensive loss income also includes 9 million 13 million 11 million amortization net loss prior service cost 12 million 31 million 48 million net gain loss prior service costs arising 2008 2007 2006 respectively related discontinued operations obligations funded status plans measured fiscal yearend changes projected benefit obligation fair value plan assets along funded status follows amounts recognized balance sheets continuing operations follows assumptions weightedaverage assumptions use pension postretirement plans follows estimated initial medical cost trend rate 7 2008 assume decrease 5 2019 remain level initial prescription drug cost trend rate estimated rate 10 2008 assume decrease 5 2019 remain level assumed healthcare cost trend rates significant effect amounts reported postretirement benefits pensions onepercentagepoint change assumed healthcare cost trend rates would following effects pension benefits accumulated benefit obligation defined benefit pension plans 47 billion january 3 2009 december 29 2007 includes 297 million 271 million respectively accumulated benefit obligations unfunded plans funding permitted foreign environments funding feasible pension plans accumulated benefit obligations exceeding fair value plan assets follows addition plans table plans projected benefit obligation excess fair value plan assets yearend follows pension assets invest pension assets objective achieving total rate return long term sufficient fund future pension obligations minimize future pension contributions willing tolerate commensurate level risk achieve objective based funded status plans longterm nature pension liability risk controlled maintaining portfolio assets diversified across variety asset classes investment styles investment managers assets managed external investment managers majority assets actively managed possible investment managers prohibited owning stock portfolios manage behalf us plan assets comprising majority plan assets asset allocation target ranges established consistent investment objectives assets rebalanced periodically expected longterm rate return plan assets determined based variety considerations including established asset allocation targets expectations asset classes historical returns plans’ assets market considerations january 3 2009 target allocation range 38 63 equity securities 11 42 debt securities 14 33 real estate alternative assets foreign plan assets allocations based expected cash flow needs assessments local practices markets percentages fair value total us pension plan assets major category follows estimated future cash flow impact defined benefits salaried plans based salary years service hourly plans generally provide benefits based stated amounts year service funding policy consistent applicable laws regulations 2009 expect contribute range 50 million 55 million fund qualified pension plans foreign plans expect contribute postretirement benefit plans benefit payments provided reflect expected future employee service appropriate expected paid net estimated participant contributions benefit payments include medicare part subsidy expect receive benefit payments based assumptions used measure benefit obligation end fiscal 2008 pension benefit payments primarily paid qualified pension trusts pay postretirement benefits pensions general corporate assets follows note 15 income taxes conduct business globally result file numerous consolidated separate income tax returns federal jurisdiction various state nonus jurisdictions us subsidiaries file consolidated federal income tax return income continuing operations income taxes follows income tax expense continuing operations summarized follows following table reconciles federal statutory income tax rate effective income tax rate amount income taxes pay subject ongoing audits federal state nonus tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental assess income tax positions record tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting date tax positions likely tax benefit sustained record largest amount tax benefit greater 50 likelihood realized upon settlement taxing authority full knowledge relevant information interest penalties accrued applicable believe likely tax benefit sustained tax benefit recognized future results may include favorable unfavorable adjustments estimated tax liabilities due closure income tax examinations new regulatory judicial pronouncements relevant events result effective tax rate may fluctuate significantly quarterly annual basis adopted provisions fasb interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” fin 48 beginning fiscal 2007 resulted increase approximately 22 million december 31 2006 retained earnings balance fin 48 provides comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns unrecognized tax benefits represent tax positions reserves established unrecognized state tax benefits interest related unrecognized tax benefits reflected net applicable tax benefits reconciliation unrecognized tax benefits excluding accrued interest 2008 2007 follows january 3 2009 december 29 2007 approximately 210 million 205 million respectively unrecognized tax benefits recognized would favorably affect effective tax rate future period remaining 114 million 162 million respectively unrecognized tax benefits related discontinued operations reduced 2008 primarily due fluid power sale expect amount unrecognized tax benefits disclosed change significantly next 12 months normal course business subject examination taxing authorities throughout world including major jurisdictions belgium canada germany japan united kingdom us exceptions longer subject us federal state local nonus income tax examinations years 1997 major jurisdictions 2008 2007 2006 recognized net taxrelated interest expense approximately 23 million 11 million 18 million respectively tax expense end 2008 2007 59 million 37 million respectively accrued interest included liabilities balance sheet tax effects temporary differences give rise significant portions net deferred tax assets liabilities follows valuation allowance deferred tax assets due uncertainty realizing related benefits net deferred tax asset balance increased primarily due increase pension postretirement benefits liability principally related unrealized losses pension plan assets following table presents breakdown current longterm net deferred tax assets net operating loss credit carryforwards end year follows undistributed earnings nonus subsidiaries approximated 281 million end 2008 consider undistributed earnings taxes previously provided indefinitely reinvested therefore tax provided earnings practicable estimate amount tax might payable earnings event longer indefinitely reinvested note 16 commitments contingencies subject legal proceedings claims arising conduct business including proceedings claims relating commercial financial transactions government contracts compliance applicable laws regulations production partners product liability employment environmental safety health matters legal proceedings claims seek damages fines penalties substantial amounts remediation environmental contamination government contractor subject audits reviews investigations determine whether operations conducted accordance applicable regulatory requirements federal government procurement regulations certain claims brought us government could result suspended debarred us government contracting period time basis information presently available believe existing proceedings claims material effect financial position results operations internal revenue service irs challenged tax positions related certain lease transactions within finance segment third quarter 2008 irs made settlement offer numerous companies including textron resolve disputed tax treatment leases based terms offer decision accept offer revised estimate tax contingency final resolution matter result acceleration future cash payments irs expect occur period years connection conclusion irs examinations relevant tax years january 3 2009 199 million federal deferred tax liabilities recorded balance sheet related leases arh program termination october 16 2008 received notification us department defense would certify continuation armed reconnaissance helicopter arh program congress nunnmccurdy act resulting termination program convenience government arh program included development phase covered system development demonstration sdd contract production phase process establishing termination costs sdd contract believe fully recoverable us government prior termination program obtained inventory incurred vendor obligations longlead time materials related anticipated low rate initial production lrip contracts maintain program schedule based belief lrip contracts would awarded since terminated vendor contracts initiated negotiations settle termination obligations estimate may cost approximately 80 million continue evaluate utility related inventory bell programs customers vendors review related discussions vendors ongoing estimate potential loss resulting lriprelated vendor obligations approximately 50 million 80 million january 3 2009 reserves related program totaled 50 million intend provide termination proposal us government request reimbursement costs expended support lrip program environmental remediation industrial enterprises engaged similar businesses involved number remedial actions various federal state laws regulations relating environment impose liability companies clean contribute cost cleaning sites hazardous wastes materials disposed released accrued environmental liabilities relate disposal costs us environmental protection agency oversight costs legal fees operating maintenance costs currently formerly owned operated facilities circumstances affect reliability precision accruals include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur believe changes accruals may result factors uncertainties material effect financial position results operations based upon information currently available estimate potential environmental liabilities within range 48 million 170 million end 2008 environmental reserves approximately 78 million established address specific estimated potential liabilities including 17 million sites related discontinued operations estimate likely pay accrued environmental remediation liabilities next five 10 years classified 15 million current liabilities expenditures evaluate remediate contaminated sites continuing operations approximated 15 million 7 million 6 million 2008 2007 2006 respectively discontinued operations expenditures totaled 2 million 1 million 2008 2006 respectively forward contract enter forward contract common stock annual basis contract intended modify earnings cash volatility stockbased incentive compensation indexed stock forward contract requires annual cash settlement counterparties based upon number shares multiplied difference strike price prevailing common stock price january 3 2009 contract approximately 21 million shares strike price 6328 market price stock 1537 january 3 2009 resulting payable 98 million compared receivable 62 million december 29 2007 leases rental expense approximated 107 million 2008 101 million 2007 84 million 2006 future minimum rental commitments noncancelable operating leases effect end 2008 approximated 66 million 2009 55 million 2010 42 million 2011 33 million 2012 27 million 2013 total 179 million thereafter loan commitments january 3 2009 finance group 12 billion unused commitments fund new existing customers revolving lines credit compared 16 billion december 29 2007 loan commitments generally original duration less three years funding facilities dependent availability eligible collateral compliance customary financial covenants since many agreements used extent committed expire unused total commitment amount necessarily represent future cash requirements also ongoing customer relationships including manufacturers dealers distribution finance division contractually obligate us provide funding however may choose fund certain relationships facilitate orderly liquidation mitigate credit losses note 17 research development companyfunded customerfunded research development costs follows customerfunded research development costs primarily related us government contracts including development contracts v22 vh71 h1 intelligent battlefield systems unmanned aircraft systems prior termination arh bellagusta aerospace company llc baac bell helicopter agusta spa two affiliated companies collectively “agusta” share certain model ba609 development costs behalf baac agusta incur development costs enhance investment baac agusta also may make cash contributions reimburse portions development costs incurred behalf baac based development costs incurred received 8 million 11 million 19 million cash contributions agusta recorded income 2008 2007 2006 respectively 2005 bell helicopter entered four separate risksharing arrangements two arrangements commercial participants development bell model 429 aircraft 2007 one agreement modified reduce amount cash inkind development efforts required participant corresponding reductions entitlements participant may obtain upon future model 429 production sales arrangements require contributions participants totaling 14 million due development effort reaches certain predetermined milestones well inkind development contributions one participant two arrangements canadian governmental organizations arrangements currently include model 429 aircraft may potentially include certain future aircraft require cash contributions cad 115 million participants based percentage qualifying research development costs incurred participants arrangements entitled payments bell helicopter commercial participants also entitled discounts based future sales model 429 aircraft addition certain requirements related production future model 429 aircraft canada based development activities completed costs incurred recorded income 15 million 22 million 22 million 2008 2007 2006 respectively related arrangements cessna began developing citation columbus widebody eightpassenger business jet 2008 part development jet entered risksharing arrangement supplier development aircraft arrangement requires contributions supplier 50 million due development effort reaches certain predetermined milestones contributions recognized reduction research development costs ratably development costs incurred based development activities completed costs incurred contributions 3 million recognized offset research development expense 2008 also contracted several suppliers perform development efforts related columbus aircraft fixedprice basis obligations suppliers based progress toward completion certain predetermined milestones related development costs accrued milestones completed based milestone progress achieved recorded expense 17 million 2008 related arrangements 2008 2007 2006 received due receive 23 million 33 million 41 million respectively cost reimbursements companyfunded amounts risksharing partners based reimbursements net companyfunded costs totaled 453 million 332 million 310 million 2008 2007 2006 respectively note 18 guarantees indemnifications manufacturing group extends variety financial performance guarantees third parties provided table agreements include uncapped guarantees described performance guarantee 2004 bell helicopter business formed agustawestlandbell llc awb llc agustawestland north america inc awna venture created joint design development manufacture sale customer training product support vh71 helicopter certain variations derivatives thereof offered sold departments agencies us government march 2005 awb llc received 12 billion cost reimbursementtype subcontract lockheed martin system development demonstration phase us marine corps helicopter squadron program increased 14 billion december 2008 guaranteed lockheed martin due prompt performance awb llc obligations subcontract provided liability guaranty shall exceed 49 awb llc’s aggregate liability lockheed martin subcontract agustawestland nv awna’s parent company guaranteed remaining 51 lockheed martin entered crossindemnification agreements agustawestland nv party indemnifies related payments required agreements result indemnifying party’s workshare subcontracts received awb llc’s maximum obligation 50 total contract value 676 million maximum amount liability guarantee 331 million january 3 2009 completion current phase contract believe performance risk respect guarantee late january 2009 pentagon declared nunnmccurdy act breach program due cost overruns requiring recertification program enough information time make determination whether program recertified however program terminated believe guarantee triggered relates solely performance subcontract guaranteed minimum resale contracts number guaranteed minimum resale value contracts associated certain past aircraft sales fair value aircraft falls minimum guaranteed amount may required make future payment customer provide minimum tradein value toward new aircraft agreements generally include operating restrictions maximum usage contract period minimum maintenance requirements also guaranteed minimum resale value certain customerowned aircraft anticipated traded upon completion model currently development contracts expire follows 3 million year 2009 2010 2011 19 million 2012 2 million 2013 based upon expected guarantees exercised arrangements accrued liability 3 million january 3 2009 december 27 2007 guarantees related dispositions indemnified purchasers fastening systems fluid power businesses remediation costs related preexisting environmental conditions extent exist sold locations certain retained litigation matters estimated fair value indemnifications approximately 19 million potential payments obligations capped result maximum potential obligation cannot determined 2008 2007 incurred approximately 2 million 1 million respectively remediation costs also obligations capped arising sales certain businesses including representations warranties related indemnities environmental health safety tax employment matters maximum potential payment related obligations capped 17 million maximum potential payment obligations capped cannot determined january 3 2009 believe capped uncapped matters could significant adverse effect financial position results operations liquidity software indemnifications enter software license agreements customers overwatch systems business software license agreements generally include certain provisions indemnifying customers liabilities software products infringe third party’s intellectual property rights date incurred material costs result indemnifications accrued liabilities related obligations risk required perform indemnifications low warranty product maintenance contracts provide limited warranty product maintenance programs including parts labor certain products periods ranging one five years estimate costs may incurred warranty programs record liability amount costs time product revenue recognized factors affect liability include number products sold historical anticipated rates warranty claims cost per claim assess adequacy recorded warranty product maintenance liabilities periodically adjust amounts necessary changes warranty product maintenance liability follows adjustments include changes prior year estimates new issues prior year sales currency translation adjustments note 19 supplemental cash flow information supplemental cash flow information made following cash payments accrued liabilities accrued liabilities manufacturing group summarized note 20 segment geographic data effective beginning fiscal 2008 operate report financial information following five business segments cessna bell textron systems industrial finance prior 2008 reported segment financial results within four segments bell cessna industrial finance changed segment reporting separate textron systems new segment report bell helicopter segment bell reflect manner manage businesses accounting policies segments described note 1 summary significant account policies cessna products include citation business jets caravan single engine turboprops single engine piston aircraft aftermarket services sold diverse base corporate individual buyers bell products include military commercial helicopters tiltrotor aircraft us nonus governments defense aerospace industries general aviation markets textron systems products include armored security vehicles precision weapons airborne groundbased surveillance systems unmanned aircraft systems aircraft missile control actuators training simulation systems countersniper devices intelligence situational awareness software us nonus governments defense aerospace industries general aviation markets industrial products markets include following • kautex products include blowmolded fuel systems windshield headlamp washer systems metal fuel fillers engine camshafts parts marketed primarily automobile original equipment manufacturers • greenlee products include powered equipment electrical test measurement instruments hand hydraulic powered tools electrical fiber optic connectors principally used electrical construction maintenance plumbing wiring telecommunications data communications industries • ezgo jacobsen products include golf cars professional turfmaintenance equipment offroad multipurpose utility specialized turfcare vehicles marketed primarily golf courses resort communities municipalities sporting venues commercial industrial users finance provided secured commercial loans leases primarily north america assetbased lending aviation distribution finance golf finance resort finance structured capital markets december 22 2008 board directors approved plan exit commercial finance business portion business supporting customer purchases products manufacture aviation distribution golf finance divisions segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses special charges measurement finance segment includes interest income expense excludes special charges provisions losses finance receivables involving sale lease products recorded selling manufacturing division finance group recourse manufacturing group revenues segment along reconciliation segment profit income continuing operations income taxes follows revenues product type within segment summarized revenues include sales us government approximately 34 billion 2008 25 billion 2007 21 billion 2006 primarily bell textron systems segments information segment provided geographic data presented selected financial information continuing operations geographic area revenues attributed countries based location customer property plant equipment net based location asset quarterly data third quarter 2008 reached agreement sell fluid power business subsequently closed sale fourth quarter 2008 result fluid power reclassified industrial segment discontinued operations third quarter 2008 periods presented recast reflect presentation b special charges include restructuring charges 64 million charges related strategic actions taken finance segment totaling 462 million fourth quarter 2008 announced plans exit portions commercial finance business result recorded impairment charge 169 million unrecoverable goodwill designated portion finance receivables held sale resulting initial pretax marktomarket adjustment 293 million c prior period amounts restated reflect twoforone stock split third quarter 2007 q4 2008 diluted earnings per share average shares base excludes potential common shares convertible preferred stock options restricted stock due antidilutive effect resulting net loss schedule ii valuation qualifying accounts deductions primarily include uncollectible accounts written less recoveries inventory disposals currency translation adjustments item 9item 8 financial statements supplementary data consolidated financial statements related reports independent registered public accounting firm thereon included annual report form 10k pages indicated schedules omitted either applicable required information included financial statements notes thereto report management responsible integrity objectivity financial data presented annual report form 10k consolidated financial statements prepared conformity us generally accepted accounting principles include amounts based management’s best estimates judgments management also responsible establishing maintaining adequate internal control financial reporting textron inc term defined exchange act rules 13a15f participation management conducted evaluation effectiveness internal control financial reporting based framework internal control integrated framework issued committee sponsoring organizations treadway commission based evaluation framework internal control integrated framework concluded textron inc maintained material respects effective internal control financial reporting january 2 2010 independent registered public accounting firm ernst young llp audited consolidated financial statements textron inc issued attestation report textron’s internal controls financial reporting january 2 2010 stated reports included herein conduct business accordance standards outlined textron business conduct guidelines communicated employees honesty integrity high ethical standards core values conduct business every textron business prepares carries annual compliance plan ensure values standards maintained internal control structure designed provide reasonable assurance appropriate cost assets safeguarded transactions properly executed recorded internal control structure includes among things established policies procedures internal audit function selection training qualified personnel textron’s management responsible implementing effective internal control systems monitoring effectiveness well developing executing annual internal control plan audit committee board directors behalf shareholders oversees management’s financial reporting responsibilities audit committee consists five directors officers employees textron meets regularly independent auditors management internal auditors review matters relating financial reporting internal accounting controls auditing independent auditors internal auditors free full access senior management audit committee scott c donnelly frank connor president chief executive vice president executive officer chief financial officer february 25 2010 report independent registered public accounting firm board directors shareholders textron inc audited textron inc’s internal control financial reporting january 2 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso criteria textron inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion textron inc maintained material respects effective internal control financial reporting january 2 2010 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets january 2 2010 january 3 2009 related consolidated statements operations shareholders’ equity cash flows three years period ended january 2 2010 textron inc report dated february 25 2010 expressed unqualified opinion thereon boston massachusetts february 25 2010 report independent registered public accounting firm board directors shareholders textron inc audited accompanying consolidated balance sheets textron inc january 2 2010 january 3 2009 related consolidated statements operations shareholders’ equity cash flows three years period ended january 2 2010 audits also included financial statement schedule contained page 89 financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position textron inc january 2 2010 january 3 2009 consolidated results operations cash flows three years period ended january 2 2010 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein 2007 textron inc adopted fasb interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” also audited accordance standards public company accounting oversight board united states textron inc’s internal control financial reporting january 2 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 25 2010 expressed unqualified opinion thereon boston massachusetts february 25 2010 consolidated statements operations years threeyear period ended january 2 2010 see notes consolidated financial statements consolidated balance sheets see notes consolidated financial statements consolidated statements shareholders’ equity see notes consolidated financial statements consolidated statements cash flows years threeyear period ended january 2 2010 see notes consolidated financial statements consolidated statements cash flows continued notes consolidated financial statements note 1 summary significant accounting policies principles consolidation financial statement presentation consolidated financial statements include accounts textron inc majorityowned subsidiaries discussed note 2 april 3 2009 sold hr textron november 2008 completed sale fluid power business unit businesses classified discontinued operations prior period information recast reflect presentation financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated majorityowned subsidiaries operate cessna bell textron systems industrial segments finance group also finance segment consists textron financial corporation tfc subsidiaries securitization trusts consolidated along two finance subsidiaries owned textron inc designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements finance group provides captive financing retail purchases leases new used aircraft equipment manufactured manufacturing group consolidated statements cash flows cash received customers securitizations reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidation evaluated subsequent events time filing securities exchange commission february 25 2010 date financial statements issued use estimates prepare financial statements conformity generally accepted accounting principles require us make estimates assumptions affect amounts reported financial statements estimates used accounting among items finance receivables longterm contracts inventory valuation residual values leased assets allowance credit losses receivables amount timing future cash flows expected received impaired loans product liability workers’ compensation actuarial assumptions pension postretirement plans future cash flows associated goodwill longlived asset valuations environmental warranty reserves estimates based facts circumstances available time estimates made historical experience risk loss general economic conditions trends assessments probable future outcomes matters actual results could differ estimates assumptions reviewed periodically effects changes reflected consolidated statements operations period determined cash equivalents cash equivalents consist cash shortterm highly liquid investments original maturities three months less revenue recognition generally recognize revenue sale products longterm contracts upon delivery commercial aircraft delivery upon completion manufacturing customer acceptance transfer risk rewards ownership taxes collected customers remitted government authorities recorded net basis within cost sales sale arrangement involves multiple elements sales products include customization services evaluate arrangement determine whether separate items required delivered arrangement qualify separate units accounting total fee arrangement allocated unit accounting based relative fair value taking consideration performance cancellation termination refundtype provisions fair value generally established unit accounting using sales price charged similar items sold separately recognize revenue recognition criteria unit accounting met longterm contracts revenues longterm contracts accounted percentageofcompletion method accounting method estimate profit difference total estimated revenues cost contract recognize estimated profit contract term based either costs incurred costtocost method typically used development effort units delivered unitsofdelivery method used production effort appropriate circumstances revenues costreimbursement contracts recorded using costtocost method revenues fixedprice contracts generally recorded using unitsofdelivery method however contracts provide periodic delivery lengthy period time significant costs incurred require significant amount development effort relation total contract volume revenues recorded using costtocost method longterm contract profits based estimates total contract cost revenue utilizing current contract specifications expected engineering requirements achievement contract milestones including product deliveries certain contracts awarded fixedprice incentive fees also considered estimating revenues profit rates contract costs typically incurred period several years estimation costs requires substantial judgment review revise estimates periodically throughout contract term revisions contract profits recorded revisions estimated revenues costs made anticipated losses contracts recognized full period losses become probable estimable bell segment joint venture boeing company provide engineering development test services related v22 aircraft well produce v22 aircraft number separate contracts us government “v22 contracts” joint venture agreement creates contractual rather ownership rights related v 22 accordingly account joint venture equity method accounting account rights obligations specific requirements v22 contracts allocated us joint venture agreement revenues cost sales reflect performance v22 contracts revenues recognized using unitsofdelivery method include assets used performance v22 contracts including inventory unpaid receivables liabilities arising obligations v22 contracts consolidated balance sheets finance revenues finance revenues include interest finance receivables direct loan origination costs fees received capital leveraged lease earnings well portfolio gainslosses recognize interest using interest method provide constant rate return terms receivables generally suspend accrual interest income accounts contractually delinquent three months addition detailed reviews loans may result earlier suspension resume accrual interest loan becomes contractually current recognize suspended interest income time cash payments nonaccrual accounts including finance charges generally applied reduce loan principal revenues direct loan origination costs fees received deferred amortized finance revenues contractual lives respective receivables credit lines using interest method receivables sold prepaid unamortized amounts recognized finance revenues portfolio gainslosses include gainslosses sale early termination finance assets impairment charges related repossessed assets properties operating assets received satisfaction troubled finance receivables leases certain qualifying noncancelable aircraft product lease contracts accounted salestype leases upon delivery record present value payments net executory costs guaranteed residual values leases revenues related costs product charged cost sales lease financing transactions qualify salestype leases record revenues earned lease period finance receivables held sale finance receivables classified held sale based determination longer intent hold finance receivables foreseeable future maturity payoff longer ability hold finance receivables maturity decision classify certain finance receivables held sale based number factors including limited contractual duration type collateral credit strength borrowers existence continued contractual commitments perceived marketability finance receivables ongoing basis factors combined overall liquidation strategy determine finance receivables positive intent hold foreseeable future finance receivables hold sale current strategy based evaluation performance liquidity position changes external factors affecting value andor marketability finance receivables change strategy could result change classification finance receivables result significant influence economic liquidity conditions business plans strategies rapid changes factors utilize determine assets classified held sale currently believe term “foreseeable future” represents time period six nine months also believe unanticipated changes internal external factors affecting financial performance liquidity position value andor marketability finance receivables could result modification assessment finance receivables held sale carried lower cost fair value time transfer held sale classification establish valuation allowance shortfall carrying value net deferred fees costs fair value addition allowance loan losses previously allocated finance receivables reclassified valuation allowance account netted finance receivables held sale balance sheet valuation allowance adjusted quarterly earnings changes fair value finance receivables carrying value fair value changes occur based market interest rates market liquidity changes credit quality borrower value underlying loan collateral determine finance receivables classified held sale sold intent ability hold finance receivables foreseeable future maturity payoff finance receivables reclassified held investment lower cost fair value time finance receivables held investment finance receivables classified held investment intent ability hold receivable foreseeable future maturity payoff finance receivables held investment generally recorded amount outstanding principal less allowance loan losses provisions losses finance receivables held investment charged income amounts sufficient maintain allowance level considered adequate cover losses portfolio evaluate allowance examining current delinquencies characteristics existing accounts historical loss experience underlying collateral value general economic conditions trends addition larger balance commercial loans consider borrower specific information industry trends estimated discounted cash flows finance receivables held investment generally written fair value less estimated costs sell related collateral earlier date collateral repossessed payment received six months finance receivables charged deemed uncollectible inventories stated lower cost estimated net realizable value inventories generally using firstin firstout fifo method lastin firstout lifo method certain qualifying inventories lifo provides better matching costs revenues determine costs commercial helicopters average cost basis model considering expended estimated costs current production release costs longterm contracts represent costs incurred production allocable operating overhead advances suppliers case contracts us government allocable research development general administrative expenses since inventoried costs include amounts related contracts long production cycles portion costs expected realized within one year pursuant contract provisions agencies us government title security interest inventories related contracts result advances performancebased payments progress payments advances payments reflected offset related inventory balances customer deposits recorded inventory right offset exists customer deposits recorded accrued liabilities property plant equipment property plant equipment recorded cost depreciated primarily using straightline method land improvements buildings depreciated primarily estimated lives ranging four 40 years machinery equipment depreciated primarily one 15 years capitalize expenditures improvements increase asset values extend useful lives intangible longlived assets acquisition estimate record fair value purchased intangible assets primarily using discounted cash flow analysis anticipated cash flows reflecting incremental revenues andor cost savings resulting acquired intangible asset using market participant assumptions amortization intangible assets finite lives recognized estimated useful lives using method amortization reflects pattern economic benefits intangible assets consumed otherwise realized approximately 35 gross intangible assets amortized using straightline method remaining assets primarily customer agreements amortized based cash flow streams used value asset longlived assets including intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable carrying value asset held use exceeds sum undiscounted expected future cash flows carrying value asset generally written fair value longlived assets held sale stated lower cost fair value less cost sell fair value determined using pertinent market information including estimated future discounted cash flows goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit might impaired reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment “component” case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics goodwill considered potentially impaired carrying value reporting unit exceeds estimated fair value fair values established primarily using discounted cash flows incorporate assumptions unit’s short longterm revenue growth rates operating margins discount rates represent best estimates current forecasted market conditions current cost structure anticipated net cost reductions implied rate return believe market participant would require investment company similar risks business characteristics reporting unit assessed available comparative market multiples used corroborate discounted cash flow results pension postretirement benefit obligations maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections evaluate update assumptions annually consultation thirdparty actuaries investment advisors also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases recognize overfunded underfunded status pension postretirement plans consolidated balance sheets recognize changes funded status defined benefit plans comprehensive income year occur actuarial gains losses immediately recognized net periodic pension cost recognized component comprehensive loss income oci amortized net periodic pension cost future periods derivative financial instruments exposed market risk primarily changes interest rates currency exchange rates hold issue derivative financial instruments trading speculative purposes manage volatility relating exposures net exposures consolidated basis take advantage natural offsets residual portion enter various derivative transactions pursuant policies areas counterparty exposure hedging practices derivative instruments reported fair value consolidated balance sheets designation support hedge accounting performed specific exposure basis financial instruments qualifying fair value hedges record changes fair value earnings offset part whole corresponding changes fair value underlying exposures hedged cash flow hedges record changes fair value derivatives extent effective hedges oci net deferred taxes changes fair value derivatives qualifying hedges recorded earnings foreign currency denominated assets liabilities translated us dollars adjustments currency rate changes recorded cumulative translation adjustment account shareholders’ equity related foreign entity sold substantially liquidated use foreign currency financing transactions including currency swaps effectively hedge longterm investments foreign operations corresponding currency foreign currency gains losses hedge longterm investments recorded cumulative translation adjustment account offset recorded adjustment nonus dollar financing liability product environmental liabilities accrue product liability claims related defense costs occurrence method loss probable reasonably estimable estimates generally based specifics claim incident best estimate probable loss using historical experience considering insurance coverage deductibles effect date incident liabilities environmental matters recorded sitebysite basis probable obligation incurred cost reasonably estimated estimate accrued environmental liabilities using currently available facts existing technology presently enacted laws regulations subject number factors uncertainties environmental liabilities undiscounted take consideration possible future insurance proceeds significant amounts claims third parties research development costs research development costs either specifically covered contracts represent share costsharing arrangements charged expense incurred research development costs incurred contracts others reported cost sales period revenue recognized income taxes deferred tax assets liabilities determined based temporary differences financial reporting tax bases assets liabilities applying tax rates expected enacted year expect differences reverse settle based evaluation available evidence recognize future tax benefits net operating loss carryforwards extent believe likely realize benefits periodically assess likelihood able recover deferred tax assets reflect changes estimates valuation allowance corresponding adjustment earnings oci appropriate assessing need valuation allowance look future reversal existing taxable temporary differences taxable income carryback years feasibility tax planning strategies estimated future taxable income recognize net taxrelated interest penalties continuing operations income tax expense note 2 discontinued operations april 3 2009 sold hr textron operating unit previously reported within textron systems segment 376 million cash proceeds sale resulted aftertax gain 8 million final settlement net aftertax proceeds approximately 280 million november 2008 completed sale fluid power business unit recorded aftertax gain 111 million received approximately 527 million cash proceeds sale along sixyear note face value 28 million connection final settlement transaction third quarter 2009 also received fiveyear note face value 30 million significant impact net gain disposition notes recorded consolidated balance sheet net valuation allowance hr textron fluid power businesses met discontinued operations criteria included discontinued operations periods presented consolidated financial statements january 2 2010 assets liabilities discontinued businesses primarily relate income taxes january 3 2009 assets discontinued businesses included 167 million goodwill 66 million inventory 30 million accounts receivables 27 million property plant equipment 44 million assets liabilities discontinued operations january 3 2009 included accounts payable accrued expenses liabilities primarily related income taxes upon sale fluid power retained sponsorship defined benefit pension plan former employees retirees ukbased businesses additional benefits earned plan revenue results operations gains disposal discontinued businesses follows generally use centralized approach cash management financing manufacturing operations accordingly allocate debt interest expense discontinued businesses debt related interest expense specific entity within business recorded respective entity general corporate overhead previously allocated businesses reporting purposes excluded amounts reported discontinued operations note 3 business acquisitions goodwill intangible assets goodwill changes carrying amount goodwill segment follows recorded impairment charge 80 million 2009 based lower forecasted revenues profits related effects economic recession golf turfcare reporting unit 2008 based current market conditions plan downsize finance segment recorded impairment charge 169 million eliminate goodwill finance segment see notes 10 12 information charges acquired intangible assets acquired intangible assets summarized amortization expense totaled 52 million 2009 53 million 2008 23 million 2007 amortization expense estimated approximately 50 million 49 million 48 million 46 million 43 million 2010 2011 2012 2013 2014 respectively acquisitions november 14 2007 acquired majority ownership interest united industrial corporation uic publicly held company pursuant cash tender offer 81 per share uic operates wholly owned subsidiary aai corporation aai leading provider intelligent aerospace defense systems including unmanned aircraft ground control stations aircraft satellite test equipment training systems countersniper devices integrated textron systems segment december 2007 completed acquisition obtained 100 ownership uic total cost 10 billion results operations business included consolidated statements operations since acquisition date pro forma information included amounts immaterial intangible assets acquired uic represent primarily customer agreements contractual relationships weightedaverage useful life 13 years allocated purchase price business estimated fair value net tangible intangible assets acquired excess recorded goodwill approximately 64 million goodwill deductible tax purposes 2008 goodwill intangible amounts adjusted reflect final fair value adjustments resulted reduction goodwill 49 million net deferred taxes increase intangible assets 14 million note 4 accounts receivable accounts receivable comprised following unbillable receivables us government contracts arise revenues appropriately recognized based performance cannot billed yet terms contract unbillable receivables within accounts receivable totaled 170 million january 2 2010 157 million january 3 2009 longterm contract receivables due us government exclude significant amounts billed unpaid due contractual retainage provisions note 5 finance receivables securitizations finance group manages services finance receivables variety investors participants thirdparty portfolio owners retained financial interest credit risk performance serviced portfolio therefore performance portfolios limited billing collection activities reconciliation managed serviced finance receivables finance receivables held investment net provided finance receivables held investment january 2 2010 january 3 2009 include approximately 629 million 11 billion receivables legally sold special purpose entities spe consolidated subsidiaries tfc assets spes pledged collateral debt reflected securitized onbalance sheet debt note 8 thirdparty investors legal recourse tfc beyond credit enhancement provided assets spes finance receivables diversified across geographic region borrower industry type collateral january 2 2010 70 managed finance receivables distributed throughout us compared 77 end 2008 significant collateral concentration general aviation accounted 35 managed receivables end 2009 26 end 2008 industry concentrations resort golf industries accounted 19 18 respectively managed receivables january 2 2010 compared 13 16 respectively end 2008 finance receivables include installment contracts revolving loans golf course resort mortgages distribution finance receivables finance leveraged leases installment contracts finance leases initial terms ranging two 20 years secured financed equipment many instances personal guarantee principals recourse arrangements originating vendor installment contracts generally require customer pay significant payment along periodic scheduled principal payments reduce outstanding balance term loan finance leases include residual values expected realized contractual maturity leases significant residual value end contractual term classified installment contracts legal economic substance equivalent secured borrowing finance lease significant residual value contractual maturities table “finance receivables held investment” section contractual maturities finance leases classified installment contracts represent minimum lease payments net unearned income recognized life lease total minimum lease payments unearned income related contracts 10 billion 194 million respectively january 2 2010 12 billion 299 million respectively january 3 2009 minimum lease payments due contracts next five years follows 199 million 2010 182 million 2011 147 million 2012 121 million 2013 82 million 2014 minimum lease payments due finance leases next five years follows 88 million 2010 66 million 2011 41 million 2012 17 million 2013 9 million 2014 revolving loans distribution finance receivables generally mature within one five years times convert term loans contractually amortize additional one five years revolving loans secured trade receivables inventory plant equipment pools timeshare interval resort notes receivables finance receivable portfolios pools residential recreational land loans underlying property many instances personal guarantee principals distribution finance receivables generally secured inventory financed distributor include floorplan financing thirdparty dealers inventory sold ezgo jacobsen businesses golf course timeshare hotel mortgages secured real property generally limited 75 less property’s appraised market value loan origination golf course mortgages initial terms ranging five 10 years amortization periods 15 25 years golf course mortgages consist loans average balance 6 million weightedaverage remaining contractual maturity three years timeshare hotel mortgages generally represent construction inventory operating property loans average balance 9 million weightedaverage remaining contractual maturity three years leveraged leases secured ownership leased equipment real property initial terms approximately 30 years leveraged leases reflect contractual maturities net contractual nonrecourse debt payments include residual values expected realized contractual maturity finance receivables held investment contractual maturities finance receivables held investment january 2 2010 follows finance receivables often repaid refinanced prior maturity instances payment may delayed extended beyond scheduled maturity accordingly tabulations regarded forecast future cash collections finance receivable receipts related distribution finance receivables revolving loans based historical cash flow experience finance receivables held investment include certain amounts previously classified held sale 81 million valuation allowance net investments finance leases excluding leases classified installment contracts leveraged leases provided nonaccrual impaired finance receivables periodically evaluate finance receivables held investment excluding homogeneous loan portfolios finance leases impairment finance receivables classified held sale reflected fair value excluded assessment finance receivable considered impaired probable unable collect amounts due according contractual terms loan agreement impaired finance receivables classified either nonaccrual accrual loans nonaccrual finance receivables include accounts contractually delinquent three months accrual interest income suspended impaired accrual finance receivables represent loans original terms significantly modified reflect deferred principal payments generally market interest rates collection principal interest doubtful impaired finance receivables follows nonaccrual finance receivables include impaired finance receivables well accounts homogeneous loan portfolios considered impaired contractually delinquent three months summary finance receivables related allowance losses collateral type follows finance receivables collateralized primarily timeshare notes receivable also may collateralized certain real estate assets borrowers increase nonaccrual finance receivables primarily attributable lack liquidity available borrowers timeshare portfolio weaker general economic conditions depressed aircraft values increase timeshare notes receivable includes one 203 million account 120 million collateralized notes receivable 83 million collateralized several resort properties included resort constructioninventory line average recorded investment impaired nonaccrual finance receivables 603 million 2009 143 million 2008 53 million 2007 average recorded investment impaired accrual finance receivables amounted 136 million 2009 34 million 2008 31 million 2007 nonaccrual finance receivables resulted finance segment’s revenues reduced 53 million 16 million 7 million 2009 2008 2007 respectively captive intercompany financing finance group provides financing retail purchases leases new used aircraft equipment manufactured manufacturing group captive finance receivables inventory sales included finance group’s balance sheets summarized operating agreements specify finance group recourse manufacturing group certain uncollected amounts related transactions manufacturing group established reserves losses balance sheet within accrued liabilities receivables guarantees reserves established amounts potentially uncollectible collateral values considered insufficient cover outstanding receivable account deemed uncollectible collateral repossessed finance group manufacturing group charged deficiency collateral repossessed receivable transferred finance group’s balance sheet manufacturing group’s balance sheet manufacturing group responsible additional collection efforts occurs related reserve previously established manufacturing group reclassified accrued liabilities netted receivable asset transferred finance group 2009 2008 2007 finance group paid manufacturing group 06 billion 10 billion 12 billion respectively related sale textronmanufactured products third parties financed finance group cessna industrial segments also received proceeds years 13 million 18 million 27 million respectively sale equipment manufacturing operations finance group use operating lease agreements january 2 2010 january 3 2009 amounts guaranteed manufacturing group totaled 216 million 206 million respectively manufacturing group reserves losses 17 million 21 million respectively fourth quarter 2008 manufacturing group utilized commercial paper borrowings lend cash finance group 2009 manufacturing group agreed lend finance group interest funds pay maturing debt interest rate borrowings january 2 2010 january 3 2009 700 403 respectively january 2 2010 january 3 2009 outstanding balance due manufacturing group 447 million 133 million respectively amounts included current assets manufacturing group liabilities finance group consolidated balance sheets finance receivables held sale result plan reduce finance receivables 17 billion owned finance receivables classified held sale december 2008 2009 reclassified 878 million finance receivables net 188 million valuation allowance held sale held investment following efforts market portfolios progress made orderly liquidation also reclassified 421 million finance receivable portfolios net 43 million valuation allowance held investment held sale result unanticipated purchase inquiries due nature inquiries determined sale portfolios would consistent goal maximize economic value portfolio accelerate cash collections fourth quarter 2009 recorded certain finance receivables previously sold distribution finance securitization balance sheet discussed “securitizations” section connection finance receivables 359 million classified held sale sold quarter january 2 2010 819 million owned finance receivables classified held sale finance receivable sales accounted significant portion reduction finance receivables held sale primarily related distribution finance assetbased lending portfolios received proceeds approximating carrying value transactions remaining finance receivables held sale primarily comprised assets distribution finance golf mortgage assetbased lending portfolios include 84 million finance receivables golf equipment portfolio subsequent yearend january 2010 completed another sale distribution finance receivables reduced finance receivables approximately 200 million generated proceeds excess carrying value securitizations 2009 one significant offbalance sheet financing arrangement distribution finance revolving securitization trust master trust purchased inventory finance receivables finance group issued assetbacked notes investors approximately 14 billion outstanding notes issued distribution finance securitization trust repaid finance receivable collections fourth quarter 2009 reduction pace finance receivable collections triggered corresponding change required cash distributions provided us ability repurchase finance receivables resulting consolidation securitization trust balance sheet result finance receivables held securitization trust recorded fair value 720 million 635 million debt issued securitization trust recorded balance sheet 85 million retained interests removed balance sheet tfc made capital contribution trust sufficient repay 635 million outstanding debt following repayment remaining receivables legally conveyed tfc trust dissolved note 6 inventories comprised following inventories valued lifo method totaled 13 billion 20 billion january 2 2010 january 3 2009 respectively lifo inventories valued current costs carrying values would approximately 414 million 363 million higher respective dates inventories related longterm contracts net progressmilestone payments 366 million january 2 2010 741 million january 3 2009 note 7 property plant equipment net manufacturing group’s property plant equipment net comprised following assets capital leases totaled 218 million 194 million accumulated amortization 36 million 30 million end 2009 2008 respectively depreciation expense manufacturing group totaled 317 million 2009 302 million 2008 256 million 2007 incurred asset retirement obligations primarily related costs remove dispose underground storage tanks asbestos materials used insulation adhesive fillers floor tiles legal requirement remove items currently plan remodel related facilities otherwise cause impacted items require disposal since asset retirement obligations estimable related liability recorded consolidated balance sheets note 8 debt credit facilities debt credit facilities summarized manufacturing group weightedaverage interest rate commercial paper borrowings 46 43 2009 2008 respectively finance group weightedaverage interest rate commercial paper borrowings 437 363 2009 2008 respectively borrowing groups extinguished open market repurchases aggregate 745 million outstanding debt securities prior maturity 2009 resulting gains 54 million also 2009 borrowing groups completed separate cash tender offers 650 million aggregate principal amount five separate series outstanding debt securities maturity dates ranging november 2009 june 2012 completing tender offers extinguished aggregate 587 million outstanding debt securities maturity dates ranging 2009 2012 recognized loss 1 million 2009 following table shows required payments next five years debt outstanding january 2 2010 july 14 2009 finance subsidiary textron inc entered credit agreement exportimport bank united states established 500 million credit facility provide funding finance purchases aircraft nonus buyers cessna bell facility structured available financing sales international customers take delivery new aircraft december 2010 january 2 2010 179 million outstanding notes facility due 2015 thereafter aggregate 3 billion committed bank lines credit historically support commercial paper letters credit issuances february 2009 due unavailability term debt difficulty accessing sufficient commercial paper daily basis drew available balance credit facilities amounts borrowed credit facilities due april 2012 borrowings outstanding related lines credit end 2008 450 convertible senior notes may 5 2009 issued 600 million 450 convertible senior notes convertible notes maturity date may 1 2013 interest payable semiannually may 1 november 1 convertible notes convertible holder’s option certain circumstances shares common stock initial conversion rate 761905 shares common stock per 1000 principal amount convertible notes equivalent initial conversion price approximately 13125 per share upon conversion right settle conversion 1000 principal amount convertible notes three following alternatives 1 shares common stock 2 cash 3 combination cash shares common stock convertible notes convertible following certain circumstances 1 calendar quarter commencing june 30 2009 calendar quarter last reported sale price common stock least 20 trading days 30 consecutive trading days ending last trading day preceding calendar quarter 130 applicable conversion price per share common stock last trading day preceding calendar quarter 2 fivebusinessday period 10 consecutive trading day measurement period trading price per 1000 principal amount convertible notes day measurement period less 98 product last reported sale price common stock applicable conversion rate 3 specified distributions holders common stock made specified corporate transactions occur 4 time february 19 2013 common stock price exceeded conversion threshold price 1706 per share least 20 trading days 30 consecutive trading days ended december 31 2009 accordingly notes convertible holder’s option march 31 2010 may deliver shares common stock cash combination cash shares common stock satisfaction obligations upon conversion convertible notes intend settle face value convertible notes cash continued classify convertible notes longterm based intent ability maintain debt outstanding least one year use various funding sources available us net proceeds issuance convertible notes totaled approximately 582 million deducting discounts commissions expenses convertible notes accounted accordance generally accepted accounting principles require us separately account liability debt equity conversion option components convertible notes manner reflects nonconvertible debt borrowing rate accordingly recorded debt discount corresponding increase additional paidin capital approximately 135 million date issuance amortizing debt discount utilizing effective interest method life convertible notes increases effective interest rate convertible notes coupon rate 450 1172 transaction costs 18 million proportionately allocated liability equity components concurrently pricing convertible notes entered convertible note hedge transactions two counterparties including underwriter affiliate underwriter convertible notes purposes reducing potential dilutive effect upon conversion initial strike price convertible note hedge transactions 13125 per share common stock initial conversion price convertible notes subject certain customary adjustments convertible note hedge transactions cover 45714300 shares common stock subject antidilution adjustments may settle convertible note hedge transactions shares cash combination cash shares option cost convertible note hedge transactions 140 million recorded reduction additional paidin capital separately concurrently entering hedge transactions entered warrant transactions whereby sold warrants hedge counterparties acquire subject antidilution adjustments aggregate 45714300 shares common stock initial exercise price 1575 per share aggregate proceeds warrant transactions 95 million recorded increase additional paidin capital incurred cash noncash interest expense 38 million 2009 convertible notes january 2 2010 unamortized discount amount including issuance costs totaled 129 million resulting net carrying value 471 million liability component securitized onbalance sheet debt 2008 finance group amended terms aviation finance securitization resulting consolidation special purpose entity special purpose entity holds finance receivables previously sold well thirdparty notes revolving credit facility thirdparty notes reflected within securitized onbalance sheet debt 6 fixedtofloating rate junior subordinated notes 2007 finance group issued 300 million 6 fixedtofloating rate junior subordinated notes unsecured rank junior existing future senior debt notes mature february 15 2067 however right redeem notes par february 15 2017 obligated redeem notes beginning february 15 2042 finance group agreed replacement capital covenant redeem notes february 15 2047 unless receives capital contribution manufacturing group andor net proceeds sale certain replacement capital securities specified amounts interest notes fixed 6 february 15 2017 floats threemonth london interbank offered rate 1735 thereafter financial covenants support agreement textron inc required ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 200 million addition tfc lending agreements contain provisions restricting additional debt exceed nine times consolidated net worth qualifying subordinated obligations due certain charges discussed note 12 december 29 2008 textron inc made cash payment 625 million tfc reflected capital contribution maintain compliance fixed charge coverage ratio required support agreement maintain leverage ratio required credit facility additional cash payments 270 million 2009 75 million january 12 2010 paid tfc maintain compliance covenants note 9 derivatives exposure loss nonperformance counterparties derivative agreements end 2009 minimal anticipate nonperformance counterparties periodic settlements amounts due historically minimized potential risk entering contracts exclusively major financially sound counterparties less longterm bond rating credit risk generally limited amount counterparties’ contractual obligations exceed obligations counterparty continuously monitor exposures ensure limit risks fair value hedges finance group enters interest rate exchange agreements mitigate exposure changes fair value fixedrate receivables debt due fluctuations interest rates using agreements able convert fixedrate cash flows floatingrate cash flows cash flow hedges manufacture sell products number countries throughout world therefore exposed movements foreign currency exchange rates primary purpose foreign currency hedging activities manage volatility associated foreign currency purchases materials foreign currency sales products assets liabilities created normal course business primarily utilize forward exchange contracts purchased options maturities 18 months qualify cash flow hedges intended offset effect exchange rate fluctuations forecasted sales inventory purchases overhead expenses end 2009 net deferred gain 27 million oci related cash flow hedges underlying transactions occur expect reclassify 4 million gain earnings next 12 months 23 million gains following 12month period net investment hedges hedge net investment position major currencies generate foreign currency interest payments offset transactional exposures currencies accomplish borrow directly foreign currency designate portion foreign currency debt hedge net investments also may utilize currency forwards hedges related foreign net investments currency effects effective portion hedges reflected cumulative translation adjustment account within oci produced 15 million aftertax loss 2009 resulting accumulated net loss balance 12 million end 2009 ineffective portion hedges insignificant stockbased compensation hedges historically managed expense related certain stockbased compensation awards using cash settlement forward contracts common stock use forward contracts modifies compensation expense exposure changes stock price intent reduce potential variability cash received paid contract settlement included cash flows operating activities consistent classification cash flows underlying hedged compensation expense january 2010 discontinued hedging stockbased compensation awards enter new forward contracts fair values derivative instruments fair values derivative instruments manufacturing group included either current assets accrued liabilities balance sheet finance group derivative instruments included either assets liabilities notional fair value amounts derivative instruments provided fair value hedges effect derivative instruments recorded consolidated statements operations gain loss respective period provided following table cash flow hedges amount gain loss recognized oci amount reclassified accumulated comprehensive loss income period provided following table amount ineffectiveness fair value hedges insignificant third quarter 2009 certain foreign currency exchange contracts longer deemed effective cash flow hedges resulting gain 11 million contracts unwound purchase forward contracts directly offsetting terms undesignated hedges also enter certain foreign currency derivative instruments meet hedge accounting criteria primarily intended protect exposure related intercompany financing transactions instruments manufacturing group reported selling administrative expenses gain 14 million 2009 loss 49 million 2008 finance group reported loss 107 million 6 million selling administrative expenses 2009 2008 respectively largely offset gains resulting translation foreign currency denominated assets liabilities note 10 fair values assets liabilities measure fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date assumptions market participants would use pricing asset liability “inputs” prioritized threetier fair value hierarchy fair value hierarchy gives highest priority level 1 quoted prices active markets identical assets liabilities lowest priority level 3 unobservable inputs little market data exist requiring companies develop assumptions observable inputs meet criteria level 1 include quoted prices similar assets liabilities active markets quoted prices identical assets liabilities markets active categorized level 2 level 3 inputs reflect estimates assumptions market participants would use pricing asset liability based best information available circumstances valuation techniques assets liabilities measured using level 3 inputs may include methodologies market approach income approach cost approach may use unobservable inputs projections estimates management’s interpretation current market data unobservable inputs utilized extent observable inputs available costeffective obtain assets liabilities recorded fair value recurring basis table presents assets liabilities measured fair value recurring basis categorized level inputs used valuation asset liability valuation techniques foreign currency exchange contracts measured fair value using market method valuation technique inputs technique utilize current foreign currency exchange forward market rates published thirdparty leading financial news data providers observable data represent rates financial institution uses contracts entered date however based actual transactions classified level 2 record changes fair value contracts extent effective cash flow hedges oci contract qualify hedge accounting designated fair value hedge changes fair value contract recorded earnings cash settlement forward contracts measured fair value using market method valuation technique since input technique based quoted price common stock measurement date classified level 1 gains losses instruments recorded adjustment compensation expense finance group’s derivative contracts exchange traded derivative financial instruments measured fair value utilizing widely accepted thirdparty developed valuation models actual terms individual contract entered valuation model along interest rate foreign exchange rate data based readily observable market data published thirdparty leading financial news data providers credit risk factored fair value derivative assets liabilities based differential credit default swap spread liabilities counterparty’s credit default swap spread assets compared standard aarated counterparty however significant impact valuation end 2009 2008 counterparties aarated vast majority derivative instruments asset position assets recorded fair value nonrecurring basis table presents assets measured fair value nonrecurring basis measurement adjustments 2009 2008 assets measured using significant unobservable inputs level 3 include following end period measured fair value goodwill fourth quarter 2009 performed annual goodwill impairment test using annual operating plan 2010 along longrange forecast submitted management connection annual strategic planning process information indicated delayed recovery previous estimates golf turfcare reporting unit economic recovery proceeding slower originally anticipated golf membership revenue per round golf played continued decline north america new course construction significantly delayed rest world resulting negative impact golf turfcare reporting unit’s outlook using discounted cash flows determined fair value golf turfcare reporting unit dropped level carrying value accordingly performed required step 2 calculation determine fair value reporting unit’s assets liabilities order perform purchase price allocation performing analysis used assumptions believe market participant would utilize valuing assets liabilities business valuation methods used included income market approach depending nature assetliability calculation supported goodwill amount 61 million required impairment charge reduce carrying amount 80 million finance receivables held sale finance receivables held sale recorded lower cost fair value finance receivables held sale recorded fair value nonrecurring basis periods fair value lower cost value january 2 2010 finance receivables held sale recorded fair value 104 million valuation allowance fourth quarter 2008 upon initial reclassification receivables held sale estimated fair value 293 million less carrying value net 44 million allowance loan losses attributable portfolios net adjustment recorded within special charges 2008 see note 5 regarding change classification certain finance receivables 2009 majority finance receivables held sale identified individual loan level golf course timeshare hotel mortgages classified held sale identified portion larger portfolio common characteristics based intention balance sale certain loans collection others maximize economic value decrease fair value finance receivables held sale 14 million 2009 active quoted market prices finance receivables estimate fair value determined based use discounted cash flow models estimate exit price expect receive principal market type loan orderly transaction includes sale pools similar assets sale individual loans models used incorporate estimates rate return financing cost capital structure andor discount rate expectations current market participants combined estimated loan cash flows based credit losses payment rates credit line utilization rates available assumptions related expectations current market participants compared observable market inputs including bids prospective purchasers similar loans certain bond market indices loans similar perceived credit quality although utilize prioritize market observable inputs discounted cash flow models inputs rarely derived markets directly comparable loan structures industries collateral types therefore valuations finance receivables held sale involve significant management judgment result differences fair value estimates market participants impaired finance receivables finance receivable impairment measured comparing expected future cash flows discounted finance receivable’s effective interest rate fair value collateral receivable collateral dependent carrying amount carrying amount higher establish reserve based difference evaluation inherently subjective requires estimates including amount timing future cash flows expected received impaired finance receivables underlying collateral may differ actual results impaired nonaccrual finance receivables included table since measurement required reserves impaired finance receivables significantly dependent fair value underlying collateral fair values collateral determined based use appraisals industry pricing guides input market participants recent experience selling similar assets internally developed discounted cash flow models 2009 2008 fair value measurements recorded impaired finance receivables resulted 165 million 63 million respectively charge provision loan losses primarily related initial fair value adjustments assets include repossessed assets properties operating assets received satisfaction troubled finance receivables fair value assets determined based use appraisals industry pricing guides input market participants recent experience selling similar assets internally developed discounted cash flow models repossessed assets properties considered assets held sale carrying amount asset higher estimated fair value record corresponding charge income difference operating assets received satisfaction troubled finance receivables sum undiscounted cash flows estimated less carrying value record charge income shortfall estimated fair value carrying amount 2009 fair value measurements recorded assets resulted 41 million charge finance revenues consolidated statements operations connection cancellation citation columbus development program recorded 43 million impairment charge second quarter 2009 write capitalized costs related tooling partially constructed manufacturing facility longer consider recoverable fair value remaining assets determined using level 3 inputs less 1 million see note 12 detail regarding charges assets liabilities recorded fair value carrying amounts estimated fair values financial instruments reflected financial statements fair value follows fair value manufacturing group debt determined using market observable data similar transactions utilize valuation methodologies determine fair value estimates finance receivables held investment described finance receivables held sale investments marketable securities represent notes receivable issued securitization trusts purchase timeshare notes receivable timeshare developers notes classified heldtomaturity held cost estimate fair value based observable market inputs similar securitization interests markets currently inactive 2009 2008 approximately 54 82 respectively fair value term debt finance group determined based observable market transactions remaining finance group debt determined based discounted cash flow analyses using observable market inputs debt similar duration subordination credit default expectations note 11 shareholders’ equity capital stock authorization 15 million shares preferred stock par value 500 million shares 0125 par value common stock december 2009 elected redeem outstanding shares 208 cumulative convertible preferred stock series 140 convertible preferred dividend stock series b part redemption approximately 45600 21300 shares series b preferred stock respectively converted stated conversion rate 88 series 72 series b approximately 554000 shares common stock remaining unconverted shares paid cash stated redemption rate end 2008 2007 approximately 67000 72000 shares respectively series issued outstanding approximately 34000 36000 shares respectively series b issued outstanding common stock activity three years ended january 2 2010 presented reserved shares common stock end 2009 common stock reserved conversion convertible debt exercise outstanding stock options warrants issuance shares upon vesting outstanding restricted stock units totaled 143 million shares see “450 convertible senior notes” section note 8 information convertible debt income per common share first quarter 2009 adopted new accounting standard determining whether instruments granted sharebased payment transactions participating securities new standard requires us include unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities basic earnings per share calculation granted certain restricted stock units deemed participating securities new standard result prior period basic diluted weightedaverage shares outstanding recast conform new calculation adoption standard reduced basic diluted earnings per share 001 2008 impact 2007 calculate basic diluted earnings per share based net income approximates income available common shareholders period basic earnings per share calculated using twoclass method includes weightedaverage number common shares outstanding period restricted stock units paid stock deemed participating securities diluted earnings per share considers dilutive effect potential future common stock including convertible preferred shares convertible notes stock options warrants restricted stock units weightedaverage number common shares outstanding weightedaverage shares outstanding basic diluted earnings per share follows 2009 potential dilutive effect 8 million weightedaverage shares restricted stock units stock options warrants convertible preferred stock convertible notes excluded computation diluted weightedaverage shares outstanding shares would antidilutive effect loss continuing operations addition stock options purchase 7 million shares common stock outstanding excluded calculation diluted weightedaverage shares outstanding 2009 exercise prices greater average market price common stock periods securities could potentially dilute earnings per share future comprehensive income loss aftertax components oci presented accumulated comprehensive loss aftertax components accumulated comprehensive loss presented note 12 special charges special charges include restructuring charges 237 million 64 million 2009 2008 respectively 2009 special charges also includes goodwill impairment charge 80 million industrial segment fourth quarter 2008 connection decision sell noncaptive portion finance business incurred initial marktomarket adjustment 293 million made classified certain finance receivables held investment held sale goodwill impairment charge finance segment 169 million included special charges special charges 2007 special charges segment follows restructuring program fourth quarter 2008 initiated restructuring program reduce overhead costs improve productivity across company includes corporate segment direct indirect workforce reductions streamlining administrative overhead announced exit portions commercial finance business program expanded 2009 include additional workforce reductions primarily cessna corporate bell cancellation citation columbus development project streamlining reorganization senior management consolidation certain operations cessna end 2010 expect eliminated approximately 10 800 positions worldwide representing approximately 25 global workforce since inception program january 2 2010 terminated approximately 10400 employees exited 23 leased owned facilities plants program record restructuring costs special charges costs generally nonrecurring nature included segment profit measure used evaluating performance decisionmaking purposes severance costs related approved restructuring program classified special charges unless costs volumerelated reductions direct labor deemed temporary cyclical nature severance benefits provided existing severance programs associated costs accrued probable estimable special onetime termination benefits accounted approved plan communicated employees establishes terms benefit arrangement number employees terminated along job classification location expected completion date recorded net curtailment charges 25 million pension postretirement benefit plans second quarter 2009 analysis impact workforce reductions plans indicated curtailments occurred amounts could reasonably estimated curtailment charge pension plan primarily due recognition prior service costs previously amortized period years asset impairment charges include 43 million charge recorded second quarter 2009 write assets related citation columbus development project due prevailing adverse market conditions analysis business jet market related product offering cessna formally canceled citation columbus development project second quarter 2009 cessna began project early 2008 development allnew widebodied eightpassenger business jet designed international travel would extend cessna’s product offering largest business jet date development project capitalized costs related tooling partially constructed manufacturing facility 43 million considered recoverable since inception restructuring program incurred following costs january 2 2010 analysis restructuring reserve activity summarized severance costs generally paid lump sum basis monthly basis severance period granted employee include outplacement costs paid accordance normal payment terms contract termination costs generally paid upon exiting facility remaining lease term specific restructuring measures associated estimated costs based best judgment prevailing circumstances believe restructuring reserve balance 51 million adequate cover costs presently accruable relating activities formally identified committed approved plans january 2 2010 anticipate actions related liabilities completed within 12month period estimate incur approximately 30 million additional pretax restructuring costs 2010 result future cash outlays additional costs expected primarily include relocation costs cessna consolidates certain operations severance cessna segment 3 million severance finance segment expect program substantially completed 2010 however expect incur additional costs exit noncaptive portion commercial finance business next two three years estimated within range 7 million 17 million primarily attributable severance retention benefits charges fourth quarter 2009 recorded goodwill impairment charge 80 million golf turfcare reporting unit part industrial segment see note 10 information charge fourth quarter 2008 made decision exit noncaptive portion commercial finance business finance segment effected combination orderly liquidation selected sales expected depending market conditions substantially complete next two three years recorded pretax marktomarket adjustment 293 million owned receivables classified held sale due exit plan based estimate fair value receivables time addition based market conditions plan downsize finance segment recorded 169 million impairment charge eliminate goodwill finance segment note 13 sharebased compensation 2007 longterm incentive plan “plan” succeeds 1999 longterm incentive plan authorizes awards key employees form options purchase shares restricted stock restricted stock units stock appreciation rights performance stock awards options purchase shares maximum term 10 years generally vest ratably threeyear period restricted stock unit awards generally vest onethird third fourth fifth year following year grant awards generally paid shares common stock first quarter 2009 began issuing restricted stock units settled cash awards vest equal installments five years since 2008 restricted stock units issued right receive dividend equivalents maximum 12 million shares authorized issuance purposes plan plus shares become available upon cancellation forfeiture expiration awards granted 1999 longterm incentive plan 12 million shares may awarded pursuant incentive stock options 3 million shares may awarded pursuant restricted stock “full value” awards intended paid shares plan also authorizes performance share units paid cash based upon value common stock payouts performance share units vary based certain performance criteria generally measured threeyear period performance share units vest end three years deferred income plan textron executives “dip” provide participants opportunity voluntarily defer 25 base salary 100 annual longterm incentive compensation effective january 1 2008 maximum amount deferred annual longterm incentive compensation decreased 80 elective deferrals may put either stock unit account interest bearing account generally contribute 10 premium amounts deferred stock unit account executives eligible participate dip achieved andor maintained required minimum stock ownership level required defer annual incentive compensation excess 100 executive’s annual target deferred stock unit account entitled 10 premium contribution amount deferred participants cannot move amounts two accounts actively employed us cannot receive distributions termination employment compensation costs awards service conditions vest ratably recognized straightline basis requisite service period separately vesting portion award compensation expense recorded net income sharebased compensation plans follows sharebased compensation costs reflected primarily selling administrative expenses compensation expense includes approximately 9 million 20 million 23 million 2009 2008 2007 respectively representing attribution fair value options issued portion previously granted options requisite service rendered stock options stock option compensation cost calculated fair value approach recognized vesting period stock options weightedaverage fair value options granted per share 2 14 2009 2008 2007 respectively estimate fair value options granted date grant using blackscholes optionpricing model expected volatilities based implied volatilities traded options common stock historical volatilities factors use historical data estimate option exercise behavior adjusted reflect anticipated increases expected life weightedaverage assumptions used blackscholes optionpricing model awards issued respective periods follows following table summarizes information related stock option activity respective periods income taxes payable federal state purposes reduced tax benefits receive employee stock options income tax benefits receive certain stock options calculated difference fair market value stock issued time exercise option price tax effected tax impact tax deduction excess related deferred taxes presented consolidated statements cash flows financing activities stock option activity plan summarized follows january 2 2010 outstanding options aggregate intrinsic value 10 million weightedaverage remaining contractual life six years exercisable options significant aggregate intrinsic value weightedaverage remaining contractual life five years january 2 2010 restricted stock units restricted stock units paid stock issued prior 2008 fair value based trading price common stock grant date less required adjustments reflect fair value awards dividends paid accrued units restricted stock units vest restricted stock units issued 2009 2008 cash dividends paid quarterly basis prior vesting fair value units paid stock based solely trading price common stock grant date weightedaverage grant date fair value restricted stock units paid stock granted 2008 2007 approximately 53 45 per share respectively restricted stock units paid stock granted 2009 activity restricted stock units paid stock follows sharebased compensation awards value sharebased compensation awards vested andor paid respective periods follows january 2 2010 recognized 50 million total compensation cost associated unvested awards subject service conditions expect recognize compensation expense awards weightedaverage period approximately two years fair value sharebased compensation awards accounted liabilities includes performance share units retention awards restricted stock units payable cash dip stock unit awards fair value awards based trading price common stock less adjustments reflect fair value certain awards dividends paid accrued vested remeasured reporting period date note 14 retirement plans defined benefit defined contribution plans cover substantially employees significant number usbased employees participate textron retirement plan designed “flooroffset” arrangement defined benefit component defined contribution component defined benefit component arrangement includes textron master retirement plan tmrp bell helicopter textron master retirement plan bhtmrp defined contribution component retirement account plan rap defined benefit component provides minimum guaranteed benefit “floor” benefit rap participants eligible receive contributions textron 2 eligible compensation may make contributions plan upon retirement participants receive greater floor benefit value rap tmrp bhtmrp subject provisions employee retirement income security act 1974 erisa also domestic foreign funded unfunded defined benefit pension plans cover certain us foreign employees addition several defined contribution plans sponsored various businesses largest plan textron savings plan qualified 401k plan subject erisa significant number usbased employees participate defined contribution plans cost approximately 96 million 2009 110 million 2008 82 million 2007 also provide postretirement benefits pensions certain retired employees us include healthcare dental care medicare part b reimbursement life insurance benefits periodic benefit cost components net periodic benefit cost amounts recognized oci follows estimate net loss prior service cost defined benefit pension plans amortized oci net periodic benefit costs 2010 34 million 23 million respectively estimated net loss prior service credit postretirement benefits pensions amortized oci net periodic benefit costs 2010 11 million 4 million respectively oci also includes 1 million 9 million 13 million amortization net loss prior service cost 35 million 12 million 31 million net loss prior service costs arising 2009 2008 2007 respectively related discontinued operations obligations funded status plans measured fiscal yearend changes projected benefit obligation fair value plan assets along funded status follows amounts recognized balance sheets continuing operations follows assumptions weightedaverage assumptions use pension postretirement plans follows estimated initial medical cost trend rate 7 2009 assume decrease 5 2019 remain level initial prescription drug cost trend rate estimated rate 10 2009 assume decrease 5 2019 remain level assumed healthcare cost trend rates significant effect amounts reported postretirement benefits pensions onepercentagepoint change assumed healthcare cost trend rates would following effects pension benefits accumulated benefit obligation defined benefit pension plans 48 billion january 2 2010 47 billion january 3 2009 includes 317 million 297 million respectively accumulated benefit obligations unfunded plans funding permitted foreign environments funding feasible pension plans accumulated benefit obligations exceeding fair value plan assets follows pension assets expected longterm rate return plan assets determined based variety considerations including established asset allocation targets expectations asset classes historical returns plans’ assets market considerations invest pension assets objective achieving total rate return long term sufficient fund future pension obligations minimize future pension contributions willing tolerate commensurate level risk achieve objective based funded status plans longterm nature pension liability risk controlled maintaining portfolio assets diversified across variety asset classes investment styles investment managers assets managed external investment managers majority assets actively managed possible investment managers prohibited owning stock portfolios manage behalf us plan assets represent majority plan assets asset allocation target ranges established consistent investment objectives assets rebalanced periodically target allocation ranges 27 41 domestic equity securities 11 22 international equity securities 11 42 debt securities 5 11 private equity partnerships 9 15 real estate foreign plan assets allocations based expected cash flow needs assessments local practices markets target asset allocation ranges foreign plans 25 65 equity securities 25 53 debt securities 0 17 real estate fair value total pension plan assets major category level fair value hierarchy defined note 10 january 2 2010 follows cash equivalents equity debt securities include comingled funds represent investments funds offered institutional investors similar mutual funds provide diversification holding various debt equity securities since comingled funds quoted active market valued based relative dispersion underlying debt equity investments individual prices given time classified level 2 debt securities valued based day actual trading prices available prices available use matrix pricing model historical prices trends factors private equity partnerships represent investments funds turn invest stocks debt securities companies cases publicly traded partnerships valued using income market methods include cash flow projections market multiples various comparable companies real estate includes owned properties investments partnerships owned properties valued using certified appraisals least every three years updated least annually real estate investment manager considers current market trends available information appraisals generally use standard methods valuing real estate including forecasting income identifying current transactions comparable real estate arrive fair value real estate partnerships valued similar private equity partnerships general partner using standard real estate valuation methods value real estate properties securities held within fund portfolios believe assumptions consistent assumptions market participants would use valuing investments table presents reconciliation beginning ending balances fair value measurements use significant unobservable inputs level 3 major category estimated future cash flow impact defined benefits salaried plans based salary years service hourly plans generally provide benefits based stated amounts year service funding policy consistent applicable laws regulations 2010 expect contribute approximately 20 million fund qualified pension plans foreign plans expect contribute postretirement benefit plans benefit payments provided reflect expected future employee service appropriate expected paid net estimated participant contributions benefit payments include medicare part subsidy expect receive benefit payments based assumptions used measure benefit obligation end fiscal 2009 pension benefit payments primarily paid qualified pension trusts pay postretirement benefits pensions general corporate assets follows note 15 income taxes conduct business globally result file numerous consolidated separate income tax returns us federal various state nonus jurisdictions us subsidiaries file consolidated federal income tax return income loss continuing operations income taxes follows income tax expense benefit continuing operations summarized follows current federal state provisions 2009 include 85 million tax related sale certain leverage leases finance segment previously recorded significant deferred tax liabilities tax expected paid period years accordance prior settlement internal revenue service following table reconciles federal statutory income tax rate effective income tax rate amount income taxes pay subject ongoing audits us federal state nonus tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental assess income tax positions record tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting date tax positions likely tax benefit sustained record largest amount tax benefit greater 50 likelihood realized upon settlement taxing authority full knowledge relevant information interest penalties accrued applicable believe likely tax benefit sustained tax benefit recognized future results may include favorable unfavorable adjustments estimated tax liabilities due closure income tax examinations new regulatory judicial pronouncements relevant events result effective tax rate may fluctuate significantly quarterly annual basis unrecognized tax benefits represent tax positions reserves established unrecognized state tax benefits interest related unrecognized tax benefits reflected net applicable tax benefits reconciliation unrecognized tax benefits excluding accrued interest follows january 2 2010 january 3 2009 approximately 208 million 210 million respectively unrecognized tax benefits recognized would favorably affect effective tax rate future period remaining 86 million 114 million respectively unrecognized tax benefits related discontinued operations unrecognized tax benefits reduced 2009 2008 primarily due sale cescom assets hr textron fluid power sales expect amount unrecognized tax benefits disclosed change significantly next 12 months normal course business subject examination taxing authorities throughout world including major jurisdictions belgium canada germany japan united kingdom us exceptions longer subject us federal state local income tax examinations years 1997 longer subject nonus income tax examinations major jurisdictions years 2004 2009 2008 2007 recognized net taxrelated interest totaling approximately 12 million 31 million 20 million respectively consolidated statements operations january 2 2010 january 3 2009 total 114 million 102 million respectively net accrued interest included consolidated balance sheets tax effects temporary differences give rise significant portions net deferred tax assets liabilities follows accrued expenses includes warranty product maintenance reserves selfinsured liabilities interest restructuring charges valuation allowance deferred tax assets due uncertainty realizing related benefits deferred tax liabilities decreased 2009 primarily due sale certain leverage leases finance segment following table presents breakdown current longterm net deferred tax assets net operating loss credit carryforwards end year follows undistributed earnings nonus subsidiaries approximated 335 million january 2 2010 consider undistributed earnings taxes previously provided indefinitely reinvested therefore tax provided earnings practicable estimate amount tax might payable earnings event longer indefinitely reinvested note 16 commitments contingencies subject legal proceedings claims arising conduct business including proceedings claims relating commercial financial transactions government contracts compliance applicable laws regulations production partners product liability employment environmental safety health matters legal proceedings claims seek damages fines penalties substantial amounts remediation environmental contamination government contractor subject audits reviews investigations determine whether operations conducted accordance applicable regulatory requirements federal government procurement regulations certain claims brought us government could result suspended debarred us government contracting period time basis information presently available believe existing proceedings claims material effect financial position results operations arh program termination october 16 2008 received notification us department defense would certify continuation armed reconnaissance helicopter arh program congress nunnmccurdy act resulting termination program convenience government arh program included development phase covered system development demonstration sdd contract production phase submitted claim termination costs sdd contract october 2009 believe costs fully recoverable us government prior termination program obtained inventory incurred vendor obligations longlead time materials related anticipated low rate initial production lrip contracts maintain program schedule based belief lrip contracts would awarded since terminated vendor contracts negotiating settle termination obligations october 2009 filed claim us government request reimbursement costs expended support lrip program december 17 2009 received decision contracting officer department army denied claim entirety plan appeal decision first quarter 2010 january 2 2010 reserves related program totaled 50 million believe adequate cover exposure environmental remediation industrial enterprises engaged similar businesses involved number remedial actions various federal state laws regulations relating environment impose liability companies clean contribute cost cleaning sites hazardous wastes materials disposed released accrued environmental liabilities relate disposal costs us environmental protection agency oversight costs legal fees operating maintenance costs currently formerly owned operated facilities circumstances affect reliability precision accruals include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur believe changes accruals may result factors uncertainties material effect financial position results operations based upon information currently available estimate potential environmental liabilities within range 43 million 173 million january 2 2010 environmental reserves approximately 77 million established address specific estimated potential liabilities including 18 million sites related discontinued operations estimate likely pay accrued environmental remediation liabilities next five 10 years classified 15 million current liabilities expenditures evaluate remediate contaminated sites continuing operations approximated 7 million 15 million 7 million 2009 2008 2007 respectively discontinued operations expenditures totaled 4 million 2 million 2009 2008 respectively leases rental expense approximated 100 million 2009 106 million 2008 100 million 2007 future minimum rental commitments noncancelable operating leases effect january 2 2010 approximated 65 million 2010 51 million 2011 43 million 2012 33 million 2013 27 million 2014 total 167 million thereafter loan commitments january 2 2010 finance group 350 million unused commitments fund new existing customers revolving lines credit construction loans equipment loans leases commitments generally original duration less three years funding facilities dependent availability eligible collateral compliance customary financial covenants since many agreements used extent committed expire unused total commitment amount necessarily represent future cash requirements also ongoing customer relationships including manufacturers dealers distribution finance product line contractually obligate us provide funding however may choose fund certain relationships facilitate orderly liquidation mitigate credit losses note 17 research development companyfunded customerfunded research development costs follows customerfunded research development costs primarily related us government contracts including development contracts v22 h1 intelligent battlefield systems unmanned aircraft system prior termination arh vh71 note 18 guarantees indemnifications 2009 entered contracts sell used aircraft entitle customer resell aircraft back us predetermined values ranging 80 100 customer’s purchase price limited period time generally exceeding 24 months used aircraft 36 months used fractional share interests revenue recognition sales deferred totaled 186 million january 2 2010 connection disposition certain businesses indemnified purchasers remediation costs related preexisting environmental conditions extent exist sold locations certain retained litigation matters addition obligations arising sales businesses including representations warranties related indemnities tax employment matters estimated fair value uncapped indemnifications approximately 21 million reflected liability consolidated balance sheet maximum potential payment cannot determined uncapped indemnifications maximum potential payment related capped obligations 17 million fair value capped obligations estimated insignificant january 2 2010 believe capped uncapped matters could significant adverse effect financial position results operations liquidity 2009 2008 incurred approximately 5 million 2 million respectively environmental remediation costs related guarantees enter software license agreements customers overwatch systems business software license agreements generally include certain provisions indemnifying customers liabilities software products infringe third party’s intellectual property rights date incurred material costs result indemnifications accrued liabilities related obligations risk required perform indemnifications low june 2009 received notification vh71 helicopter program terminated convenience us government related performance guarantee canceled october 2009 warranty product maintenance contracts provide limited warranty product maintenance programs including parts labor certain products periods ranging one five years estimate costs may incurred warranty programs record liability amount costs time product revenue recognized factors affect liability include number products sold historical anticipated rates warranty claims cost per claim assess adequacy recorded warranty product maintenance liabilities periodically adjust amounts necessary additionally may establish warranty liabilities related issuance aircraft service bulletins aircraft longer covered limited warranty programs changes warranty product maintenance liability follows adjustments include changes prior year estimates new issues prior year sales currency translation adjustments note 19 supplemental cash flow information supplemental cash flow information made following cash payments cash paid interest manufacturing group includes amounts paid finance group 1 million 2 million 2008 2007 respectively cash paid interest finance group includes amounts paid manufacturing group 3 million 2009 2008 accrued liabilities accrued liabilities manufacturing group summarized note 20 segment geographic data operate report financial information following five business segments cessna bell textron systems industrial finance accounting policies segments described note 1 cessna products include citation business jets caravan single engine turboprops single engine piston aircraft aftermarket services sold diverse base corporate individual buyers bell products include military commercial helicopters tiltrotor aircraft related spare parts us nonus governments defense aerospace industries general aviation markets textron systems products include armored security vehicles advanced marine craft precision weapons airborne groundbased surveillance systems services unmanned aircraft system training simulation systems countersniper devices intelligence situational awareness software us nonus governments defense aerospace industries general aviation markets industrial products markets include following • kautex products include blowmolded fuel systems marketed primarily automobile original equipment manufacturers well bottles plastic containers various uses • greenlee products include powered equipment electrical fiber optic assemblies principally used electrical construction maintenance plumbing wiring telecommunications data communications industries • ezgo jacobsen products include golf cars specialized turfcare vehicles marketed primarily golf courses resort communities municipalities sporting venues commercial industrial users finance provided secured commercial loans leases primarily north america aviation golf equipment assetbased lending distribution finance golf mortgage hotel structured capital timeshare markets fourth quarter 2008 announced plan exit noncaptive portion commercial finance business segment retaining captive portion business supports customer purchases products manufacture segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses special charges measurement finance segment includes interest income expense excludes special charges provisions losses finance receivables involving sale lease products recorded selling manufacturing division finance group recourse manufacturing group revenues segment along reconciliation segment profit income continuing operations income taxes follows revenues product type within segment summarized revenues included sales us government approximately 33 billion 2009 32 billion 2008 24 billion 2007 primarily bell textron systems segments information segment provided geographic data presented selected financial information continuing operations geographic area revenues attributed countries based location customer property plant equipment net based location asset quarterly data first quarter 2009 sold hr textron third quarter 2008 completed sale fluid power business businesses reclassified discontinued operations periods presented recast reflect presentation b special charges 2009 include restructuring charges 237 million primarily related severance asset impairment charges 80 million goodwill impairment charge industrial segment special charges fourth quarter 2008 include restructuring charges 64 million charges related strategic actions taken finance segment totaling 462 million fourth quarter 2008 announced plans exit portions commercial finance business result recorded impairment charge 169 million unrecoverable goodwill designated portion finance receivables held sale resulting initial pretax marktomarket adjustment 293 million c second fourth quarters 2009 fourth quarter 2008 diluted earnings per share average share base excludes potential common shares convertible preferred stock convertible debt related warrants stock options restricted stock units due antidilutive effect resulting net loss schedule valuation qualifying accounts disclosure schedule ii valuation qualifying accounts deductions primarily include uncollectible accounts written less recoveries inventory disposals currency translation adjustments item 9item 8 financial statements supplementary data consolidated financial statements related reports independent registered public accounting firm thereon included annual report form 10k pages indicated page report management reports independent registered public accounting firm consolidated statements operations years threeyear period ended december 29 2012 consolidated statements comprehensive income loss years threeyear period ended december 29 2012 consolidated balance sheets december 29 2012 december 31 2011 consolidated statements shareholders’ equity years threeyear period ended december 29 2012 consolidated statements cash flows years threeyear period ended december 29 2012 notes consolidated financial statements note 1 summary significant accounting policies note 2 discontinued operations note 3 goodwill intangible assets note 4 accounts receivable finance receivables note 5 inventories note 6 property plant equipment net note 7 accrued liabilities note 8 debt credit facilities note 9 derivative instruments fair value measurements note 10 shareholders’ equity note 11 special charges note 12 sharebased compensation note 13 retirement plans note 14 income taxes note 15 contingencies commitments note 16 supplemental cash flow information note 17 segment geographic data supplementary information quarterly data 2012 2011 unaudited schedule ii valuation qualifying accounts schedules omitted either applicable required information included financial statements notes thereto report management responsible integrity objectivity financial data presented annual report form 10k consolidated financial statements prepared conformity us generally accepted accounting principles include amounts based management’s best estimates judgments management also responsible establishing maintaining adequate internal control financial reporting textron inc term defined exchange act rules 13a15f participation management conducted evaluation effectiveness internal control financial reporting based framework internal control integrated framework issued committee sponsoring organizations treadway commission based evaluation framework internal control integrated framework concluded textron inc maintained material respects effective internal control financial reporting december 29 2012 independent registered public accounting firm ernst young llp audited consolidated financial statements textron inc issued attestation report textron’s internal controls financial reporting december 29 2012 stated reports included herein conduct business accordance standards outlined textron business conduct guidelines communicated employees honesty integrity high ethical standards core values conduct business every textron business prepares carries annual compliance plan ensure values standards maintained internal control structure designed provide reasonable assurance appropriate cost assets safeguarded transactions properly executed recorded internal control structure includes among things established policies procedures internal audit function selection training qualified personnel textron’s management responsible implementing effective internal control systems monitoring effectiveness well developing executing annual internal control plan audit committee board directors behalf shareholders oversees management’s financial reporting responsibilities audit committee consists six directors officers employees textron meets regularly independent auditors management internal auditors review matters relating financial reporting internal accounting controls auditing independent auditors internal auditors free full access senior management audit committee scott c donnelly frank connor scott c donnelly frank connor chairman president chief executive officer executive vice president chief financial officer february 15 2013 report independent registered public accounting firm board directors shareholders textron inc audited textron inc’s internal control financial reporting december 29 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso criteria textron inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion textron inc maintained material respects effective internal control financial reporting december 29 2012 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets textron inc december 29 2012 december 31 2011 related consolidated statements operations comprehensive income loss shareholders’ equity cash flows three years period ended december 29 2012 textron inc report dated february 15 2013 expressed unqualified opinion thereon ernst young llp boston massachusetts february 15 2013 report independent registered public accounting firm board directors shareholders textron inc audited accompanying consolidated balance sheets textron inc december 29 2012 december 31 2011 related consolidated statements operations comprehensive income loss shareholders’ equity cash flows three years period ended december 29 2012 audits also included financial statement schedule contained page 83 financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position textron inc december 29 2012 december 31 2011 consolidated results operations cash flows three years period ended december 29 2012 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states textron inc’s internal control financial reporting december 29 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 15 2013 expressed unqualified opinion thereon ernst young llp boston massachusetts february 15 2013 consolidated statements operations years threeyear period ended december 29 2012 see notes consolidated financial statements consolidated statements comprehensive income loss years threeyear period ended december 29 2012 see notes consolidated financial statements consolidated balance sheets see notes consolidated financial statements consolidated statements shareholders’ equity see notes consolidated financial statements consolidated statements cash flows years threeyear period ended december 29 2012 see notes consolidated financial statements consolidated statements cash flows continued years threeyear period ended december 29 2012 see notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation financial statement presentation consolidated financial statements include accounts textron inc majorityowned subsidiaries financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated majorityowned subsidiaries operate cessna bell textron systems industrial segments finance group also finance segment consists textron financial corporation tfc consolidated subsidiaries three finance subsidiaries owned textron inc designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements finance group provides captive financing retail purchases leases new used aircraft equipment manufactured manufacturing group consolidated statements cash flows cash received customers sale receivables reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidation collaborative arrangements bell segment strategic alliance agreement boeing company boeing provide engineering development test services related v22 aircraft well produce v22 aircraft number separate contracts us government v22 contracts alliance created agreement legal entity employees assets true operations agreement creates contractual rights represent entity equity interest account alliance collaborative arrangement bell boeing reporting costs incurred revenues generated transactions us government company’s respective income statement neither bell boeing considered principal participant transactions recorded agreement profits costplus contracts allocated bell boeing 5050 basis negotiated profits fixedprice contracts also allocated 5050 however bell boeing responsible cost overruns entitled retain cost underruns based contractual arrangement established alliance bell accounts rights obligations specific requirements v22 contracts allocated bell work breakdown structure account rights obligations including warranty product contingent liabilities specific requirements v22 contracts allocated us agreement revenues cost sales reflect performance v22 contracts revenues recognized using unitsofdelivery method include assets used performance v22 contracts including inventory unpaid receivables liabilities arising obligations v22 contracts consolidated balance sheets use estimates prepare financial statements conformity generally accepted accounting principles require us make estimates assumptions affect amounts reported financial statements actual results could differ estimates assumptions reviewed periodically effects changes reflected consolidated statements operations period determined 2012 2011 2010 changed estimates revenues costs certain longterm contracts accounted percentageofcompletion method accounting changes estimates increased income continuing operations income taxes 2012 2011 2010 15 million 54 million 78 million respectively 9 million 34 million 49 million tax 003 011 016 per diluted share respectively 2012 2011 2010 gross favorable program profit adjustments totaled 88 million 83 million 98 million respectively 2012 2011 2010 gross unfavorable program profit adjustments totaled 73 million 29 million 20 million respectively cash equivalents cash equivalents consist cash shortterm highly liquid investments original maturities three months less revenue recognition generally recognize revenue sale products longterm contracts upon delivery commercial aircraft delivery upon completion manufacturing customer acceptance transfer risk rewards ownership taxes collected customers remitted government authorities recorded net basis sale arrangement involves multiple deliverables sales products include customization services evaluate arrangement determine whether separate items required delivered arrangement qualify separate units accounting arrangements typically involve customization services offer customers purchase bell helicopters services generally provided within first six months customer accepts aircraft assumes risk loss consider aircraft customization services separate units accounting allocate contract price two relative selling price basis using best evidence selling price arrangement deliverables typically reference price charged similar items sold separately us taking consideration performance cancellation termination refundtype provisions recognize revenue recognition criteria unit accounting met longterm contracts revenues longterm contracts accounted percentageofcompletion method accounting method estimate profit difference total estimated revenues cost contract recognize estimated profit contract term based either unitsofdelivery method costtocost method typically used development effort costs incurred appropriate circumstances revenues fixedprice contracts generally recorded using unitsofdelivery method revenues costreimbursement contracts recorded using costtocost method longterm contract profits based estimates total contract cost revenues utilizing current contract specifications expected engineering requirements achievement contract milestones product deliveries certain contracts awarded fixedprice incentive fees also considered estimating revenues profit rates contract costs typically incurred period several years estimation costs requires substantial judgment cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments required changes prior estimates recognized using cumulative catchup method impact change inceptiontodate recorded current period anticipated losses contracts recognized full period losses become probable estimable finance revenues finance revenues include interest finance receivables direct loan origination costs fees received capital leveraged lease earnings well portfolio gainslosses portfolio gainslosses include impairment charges related repossessed assets properties gainslosses sale early termination finance assets revenues direct loan origination costs fees received deferred amortized finance revenues contractual lives respective receivables credit lines using interest method receivables sold prepaid unamortized amounts recognized finance revenues recognize interest using interest method provides constant rate return terms receivables accrual interest income suspended credit quality indicators suggest full collection principal interest doubtful addition automatically suspend accrual interest income accounts contractually delinquent three months unless collection doubtful cash payments nonaccrual accounts including finance charges generally applied reduce net investment balance resume accrual interest loan becomes contractually current payment according original terms loan modified following period performance terms modification provided conclude collection principal interest longer doubtful previously suspended interest income recognized time finance receivables held investment allowance losses finance receivables classified held investment intent ability hold receivable foreseeable future maturity payoff finance receivables held investment generally recorded amount outstanding principal less allowance losses maintain allowance losses finance receivables held investment level considered adequate cover inherent losses portfolio based management’s evaluation larger balance accounts specifically identified impaired including large accounts homogeneous portfolios reserve established based comparing carrying value either expected future cash flows discounted finance receivable’s effective interest rate b fair value underlying collateral finance receivable collateral dependent expected future cash flows consider collateral value financial performance liquidity borrower existence financial strength guarantors estimated recovery costs including legal expenses costs associated repossessionforeclosure eventual disposal collateral range potential outcomes perform multiple discounted cash flow analyses weight potential outcomes based relative likelihood occurrence evaluation portfolio inherently subjective requires estimates including amount timing future cash flows expected received impaired finance receivables estimated fair value underlying collateral may differ actual results analysis specific individual account critical factors included analysis captive product line include industry valuation guides age physical condition collateral payment history existence financial strength guarantors also establish allowance losses cover probable specifically unknown losses existing portfolio captive product line allowance established percentage nonrecourse finance receivables identified requiring specific reserves percentage based combination factors including historical loss experience current delinquency default trends collateral values general economic specific industry trends finance receivables held investment charged earlier date collateral repossessed payment received six months unless management deems receivable collectible repossessed assets recorded fair value less estimated cost sell finance receivables held sale finance receivables classified held sale based determination longer intend hold receivables foreseeable future maturity payoff longer ability hold maturity decision classify certain finance receivables held sale based number factors including limited contractual duration type collateral credit strength borrowers interest rates perceived marketability receivables finance receivables held sale carried lower cost fair value time transfer held sale classification establish valuation allowance shortfall carrying value fair value addition allowance loan losses previously allocated finance receivables transferred valuation allowance account netted finance receivables held sale balance sheet valuation allowance adjusted quarterly fair value changes occur based market interest rates market liquidity changes credit quality borrower value underlying loan collateral inventories stated lower cost estimated net realizable value inventories generally using firstin firstout fifo method lastin firstout lifo method certain qualifying inventories lifo provides better matching costs revenues determine costs commercial helicopters average cost basis model considering expended estimated costs current production release inventoried costs related longterm contracts stated actual production costs including allocable operating overhead advances suppliers case contracts us government allocable research development general administrative expenses since inventoried costs include amounts related contracts long production cycles portion costs expected realized within one year pursuant contract provisions agencies us government title security interest inventories related contracts result advances performancebased payments progress payments advances payments reflected offset related inventory balances customer deposits recorded inventory right offset exists customer deposits recorded accrued liabilities property plant equipment property plant equipment recorded cost depreciated primarily using straightline method capitalize expenditures improvements increase asset values extend useful lives intangible longlived assets acquisition estimate record fair value purchased intangible assets primarily using discounted cash flow analysis anticipated cash flows reflecting incremental revenues andor cost savings resulting acquired intangible asset using market participant assumptions amortization intangible assets finite lives recognized estimated useful lives using method amortization reflects pattern economic benefits intangible assets consumed otherwise realized approximately 37 gross intangible assets amortized using straightline method remaining assets primarily customer agreements amortized based cash flow streams used value asset longlived assets including intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable carrying value asset held use exceeds sum undiscounted expected future cash flows carrying value asset generally written fair value longlived assets held sale stated lower cost fair value less cost sell fair value determined using pertinent market information including estimated future discounted cash flows goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit might impaired reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics may perform qualitative assessment based economic industry companyspecific factors initial step annual goodwill impairment test selected reporting units determine likely reporting unit’s fair value exceeds carrying value perform quantitative assessment reporting units calculate fair value reporting unit primarily using discounted cash flows discounted cash flows incorporate assumptions unit’s short longterm revenue growth rates operating margins discount rates represent best estimates current forecasted market conditions cost structure anticipated net cost reductions implied rate return believe market participant would require investment business similar risks business characteristics reporting unit assessed reporting unit’s estimated fair value exceeds carrying value reporting unit impaired analysis performed otherwise amount impairment must determined comparing carrying amount reporting unit goodwill implied fair value goodwill implied fair value goodwill determined assigning fair value reporting unit’s assets liabilities including unrecognized intangible assets reporting unit acquired business combination fair value carrying amount reporting unit goodwill exceeds implied fair value impairment loss would recognized amount equal excess pension postretirement benefit obligations maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections evaluate update assumptions annually consultation thirdparty actuaries investment advisors also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases recognize overfunded underfunded status pension postretirement plans consolidated balance sheets recognize changes funded status defined benefit plans comprehensive income year occur actuarial gains losses immediately recognized net periodic pension cost recognized component comprehensive loss income oci amortized net periodic pension cost future periods derivative financial instruments exposed market risk primarily changes interest rates currency exchange rates hold issue derivative financial instruments trading speculative purposes manage volatility relating exposures net exposures consolidated basis take advantage natural offsets residual portion enter various derivative transactions pursuant policies areas counterparty exposure hedging practices derivative instruments reported fair value consolidated balance sheets designation support hedge accounting performed specific exposure basis financial instruments qualifying fair value hedges record changes fair value earnings offset part whole corresponding changes fair value underlying exposures hedged cash flow hedges record changes fair value derivatives extent effective hedges oci net deferred taxes changes fair value derivatives qualifying hedges recorded earnings foreign currency denominated assets liabilities translated us dollars adjustments currency rate changes recorded cumulative translation adjustment account shareholders’ equity related foreign entity sold substantially liquidated use foreign currency financing transactions effectively hedge longterm investments foreign operations corresponding currency foreign currency gains losses hedge longterm investments recorded cumulative translation adjustment account offset recorded adjustment debt product liabilities accrue product liability claims related defense costs loss probable reasonably estimable estimates generally based specifics claim incident best estimate probable loss using historical experience environmental liabilities asset retirement obligations liabilities environmental matters recorded sitebysite basis probable obligation incurred cost reasonably estimated estimate accrued environmental liabilities using currently available facts existing technology presently enacted laws regulations subject number factors uncertainties environmental liabilities discounted take consideration possible future insurance proceeds significant amounts claims third parties incurred asset retirement obligations primarily related costs remove dispose underground storage tanks asbestos materials used insulation adhesive fillers floor tiles legal requirement remove items currently plan remodel related facilities otherwise cause impacted items require disposal since asset retirement obligations estimable related liability recorded consolidated balance sheets warranty product maintenance contracts provide limited warranty product maintenance programs including parts labor certain products periods ranging one five years estimate costs may incurred warranty programs record liability amount costs time product revenues recognized factors affect liability include number products sold historical anticipated rates warranty claims cost per claim assess adequacy recorded warranty product maintenance liabilities periodically adjust amounts necessary additionally may establish warranty liabilities related issuance aircraft service bulletins aircraft longer covered limited warranty programs research development costs customerfunded research development costs charged directly related contracts primarily consist us government contracts accordance government regulations recover portion companyfunded research development costs overhead rate charges us government contracts research development costs reimbursable contract us government another customer charged expense incurred companyfunded research development costs 584 million 525 million 403 million 2012 2011 2010 respectively included cost sales income taxes deferred income tax balances reflect effects temporary differences financial reporting carrying amounts assets liabilities tax bases well net operating losses tax credit carryforwards stated enacted tax rates effect year taxes expected paid recovered deferred income tax assets represent amounts available reduce income taxes payable taxable income future years evaluate recoverability future tax deductions credits assessing adequacy future expected taxable income sources including future reversal existing taxable temporary differences taxable income carryback years available tax planning strategies estimated future taxable income recognize net taxrelated interest penalties continuing operations income tax expense note 2 discontinued operations pursuing business strategies periodically divested certain noncore businesses several previouslydisposed businesses retained certain assets liabilities residual activity relating previouslydisposed businesses meet appropriate criteria included discontinued operations connection 2008 sale fluid power business unit received sixyear note face value 28 million fiveyear note face value 30 million recorded consolidated balance sheet net valuation allowance fourth quarter 2011 received full payment notes plus interest resulting gain 52 million recorded losses net note 3 goodwill intangible assets changes carrying amount goodwill segment follows intangible assets summarized fourth quarter 2011 recorded 41 million impairment charge write 37 million customer agreements contractual relationships 4 million patents technology see note 9 information charge amortization expense totaled 40 million 51 million 52 million 2012 2011 2010 respectively amortization expense estimated approximately 36 million 35 million 34 million 28 million 24 million 2013 2014 2015 2016 2017 respectively note 4 accounts receivable finance receivables accounts receivable accounts receivable composed following unbillable receivables primarily us government contracts arise revenues appropriately recognized based performance cannot billed yet terms contract unbillable receivables within accounts receivable totaled 149 million december 29 2012 192 million december 31 2011 finance receivables finance receivables product line includes finance receivables held investment finance receivables held sale presented following table captive primarily includes loans finance leases provided purchasers new used cessna aircraft bell helicopters also includes loans finance leases secured used aircraft produced manufacturers agreements typically initial terms ranging five ten years amortization terms ranging eight fifteen years average balance loans finance leases captive 1 million december 29 2012 loans generally require customer pay significant payment along periodic scheduled principal payments reduce outstanding balance term loan finance leases significant residual value end contractual term classified loans legal economic substance equivalent secured borrowing finance lease significant residual value captive also includes limited extent finance leases provided purchasers new ezgo jacobsen golf turfcare equipment golf mortgage primarily includes golf course mortgages also includes mortgages secured hotels marinas secured real property generally limited 75 less property’s appraised market value loan origination mortgages typically initial terms ranging five ten years amortization periods twenty thirty years december 29 2012 loans golf mortgage average balance 7 million weightedaverage contractual maturity two years loans portfolio classified held sale structured capital primarily includes leveraged leases secured ownership leased equipment real property timeshare includes pools timeshare interval resort notes typically terms ten twenty years well term loans secured timeshare interval inventory finance receivables diversified across geographic region borrower industry december 29 2012 45 finance receivables distributed throughout us compared 54 end 2011 finance receivables held investment composed primarily loans december 29 2012 december 31 2011 finance receivables included 341 million 559 million respectively receivables primarily captive product line legally sold special purpose entities spes consolidated subsidiaries tfc assets spes pledged collateral debt reflected securitized onbalance sheet debt note 8 thirdparty investors legal recourse tfc beyond credit enhancement provided assets spes received total proceeds 116 million 476 million sale finance receivables 2012 2011 respectively total gains resulting sales material 2012 2011 credit quality indicators nonaccrual finance receivables internally assess quality finance receivables held investment portfolio based number key credit quality indicators statistics delinquency loan balance estimated collateral value financial strength individual borrowers guarantors many indicators difficult apply across entire class receivables evaluate individual loans quarterly basis classify loans three categories based key credit quality indicators individual loan three categories performing watchlist nonaccrual classify finance receivables held investment nonaccrual credit quality indicators suggest full collection principal interest doubtful addition automatically classify accounts nonaccrual contractually delinquent three months unless collection principal interest doubtful cash payments nonaccrual accounts including finance charges generally applied reduce net investment balance resume accrual interest loan becomes contractually current payment according original terms loan modified following period performance terms modification provided conclude collection principal interest longer doubtful previously suspended interest income recognized time accounts classified watchlist credit quality indicators deteriorated compared typical underwriting criteria believe collection full principal interest probable certain finance receivables held investment meet watchlist nonaccrual categories classified performing summary finance receivables held investment categorized based credit quality indicators discussed follows noncaptive nonaccrual finance receivables primarily related timeshare portfolio measure delinquency based contractual payment terms loans leases determining delinquency aging category account anyall principal interest received applied pastdue principal andor interest amounts due significant portion contractually due payment delinquent entire finance receivable balance reported accordance pastdue delinquency aging category finance receivables held investment delinquency aging category summarized table accrual status loans greater 90 days past due december 29 2012 december 31 2011 december 29 2012 december 31 2011 60 days contractual delinquency percentage finance receivables held investment 465 670 respectively loan modifications troubled debt restructurings occur either modified contract terms finance receivables held investment borrowers experiencing financial difficulties accepted transfer assets full partial satisfaction loan balance types modifications typically make include extensions original maturity date contract extensions revolving borrowing periods delays timing required principal payments deferrals interest payments advances protect value collateral principal reductions contingent full repayment prior maturity date changes effected modifications made 2012 2011 finance receivables held investment material impaired loans evaluate individual finance receivables held investment nonhomogeneous portfolios larger accounts homogeneous loan portfolios impairment quarterly basis finance receivables classified held sale reflected lower cost fair value excluded evaluations finance receivable considered impaired probable unable collect amounts due according contractual terms loan agreement based review credit quality indicators discussed impaired finance receivables include nonaccrual accounts full collection principal interest remains probable account’s original terms expected significantly modified modification specifies interest rate equal greater market rate finance receivable comparable risk account considered impaired years subsequent modification significant interest income recognized impaired loans 2012 2011 summary impaired finance receivables excluding leveraged leases year end average recorded investment year provided noncaptive impaired loans primarily related timeshare portfolio summary allowance losses finance receivables evaluated individual collective basis provided finance receivables reported table specifically exclude 122 million 208 million leveraged leases december 29 2012 december 31 2011 respectively accordance authoritative accounting standards allowance losses rollforward allowance losses finance receivables held investment provided captive intercompany financing finance group provides financing retail purchases leases new used aircraft equipment manufactured manufacturing group captive finance receivables inventory sales included finance group’s balance sheets summarized 2012 2011 2010 finance group paid manufacturing group 309 million 284 million 416 million respectively related sale textronmanufactured products third parties financed finance group cessna industrial segments also received proceeds years 19 million 2 million 10 million respectively sale equipment manufacturing operations finance group use operating lease agreements operating agreements specify finance group recourse manufacturing group certain uncollected amounts related transactions december 29 2012 december 31 2011 finance receivables operating leases subject recourse manufacturing group totaled 83 million 88 million respectively manufacturing group established reserves losses balance sheet within accrued liabilities amounts guarantees textron lends tfc funds pay maturing debt average interest rate borrowings 43 50 2012 2011 respectively december 29 2012 outstanding balance due textron arrangement december 31 2011 outstanding balance due textron 490 million amounts included current assets manufacturing group due manufacturing group finance group consolidated balance sheets finance receivables held sale end 2012 2011 140 million 418 million finance receivables classified held sale december 29 2012 finance receivables held sale included entire golf mortgage portfolio 2011 transferred 458 million remaining golf mortgage portfolio net 80 million allowance loan losses held investment classification held sale classification finance receivables recorded fair value time transfer resulting 186 million charge recorded valuation allowance transfer golf mortgage portfolio held sale also 2011 transferred total 125 million timeshare finance receivables held sale classification based agreement sell portion portfolio sold fourth quarter 2011 interest portions portfolio received proceeds 109 million 383 million 2012 2011 respectively sale finance receivables held sale 207 million 10 million respectively payoffs collections note 5 inventories composed following inventories valued lifo method totaled 11 billion 10 billion end 2012 2011 respectively carrying values inventories would higher approximately 435 million 422 million respectively lifo inventories valued current costs inventories related longterm contracts net progressmilestone payments 382 million 414 million end 2012 2011 respectively note 6 property plant equipment net manufacturing group’s property plant equipment net composed following end 2012 2011 assets capital leases totaled 251 million accumulated amortization 51 million 47 million respectively manufacturing group’s depreciation expense included amortization expense capital leases totaled 315 million 317 million 308 million 2012 2011 2010 respectively note 7 accrued liabilities accrued liabilities manufacturing group summarized changes warranty product maintenance contract liability follows adjustments include changes prior year estimates new issues prior year sales currency translation adjustments note 8 debt credit facilities debt summarized table notes amortize quarterly semiannual basis textron inc senior unsecured revolving credit facility expires march 2015 aggregate principal amount 10 billion 200 million available issuance letters credit december 29 2012 amounts borrowed facility 37 million letters credits issued following table shows required payments next five years debt outstanding december 29 2012 450 convertible senior notes related transactions may 5 2009 issued 600 million convertible senior notes maturity date may 1 2013 interest payable semiannually convertible notes accounted accordance generally accepted accounting principles require us separately account liability debt equity conversion option components convertible notes manner reflected nonconvertible debt borrowing rate time issuance accordingly recorded debt discount corresponding increase additional paidin capital 134 million issuance date amortizing debt discount utilizing effective interest method life notes increases effective interest rate convertible notes coupon rate 450 1172 incurred cash noncash interest expense 25 million 2012 58 million 2011 60 million 2010 notes december 29 2012 face value convertible notes outstanding 215 million unamortized discount totaled 5 million terms indenture governs notes currently convertible holder’s option april 29 2013 second day preceding may 1 2013 maturity notes convertible shares common stock initial conversion rate 761905 shares common stock per 1000 principal amount convertible notes equivalent initial conversion price approximately 13125 per share upon conversion right settle conversion 1000 principal amount convertible notes three following alternatives 1 cash 2 shares common stock 3 combination cash shares common stock intend settle face value convertible notes cash based december 29 2012 stock price 2412 “if converted value” exceeded face amount notes 180 million however giving effect exercise call options warrants described incremental cash share settlement excess face amount would result either cash payment 137 million 57 million net share issuance combination cash stock option december 31 2011 face value notes totaled 216 million unamortized discount totaled 21 million september 2011 announced cash tender offer outstanding convertible notes aggregate holders validly tendered 225 million principal amount convertible notes subsequent tender offer also purchased 151 million principal amount convertible notes small number privately negotiated transactions retired another 8 million related holderinitiated conversion 2011 paid approximately 580 million cash related transactions accordance applicable authoritative accounting guidance determined fair value liability component convertible notes purchased tender offer subsequent transactions 398 million balance 182 million representing equity component carrying value convertible notes including unamortized issuance costs 343 million resulted pretax loss 55 million recorded losses net 2011 along 182 million reduction shareholders’ equity call option warrant transactions concurrently pricing convertible notes may 2009 entered transactions two counterparties including underwriter affiliate underwriter convertible notes pursuant purchased counterparties call options acquire common stock sold counterparties warrants purchase common stock entered transactions purposes reducing cash outflow andor potential dilutive effect shareholders upon conversion convertible notes october 25 2011 entered separate agreements counterparties call option warrant transactions adjust number shares common stock covered instruments reflect results tender offer accordingly reduced number common shares covered call options 457 million shares 286 million shares addition warrants amended reduce number shares covered warrants 280 million change expiration dates specified original agreement correspond final settlement period call options pursuant amendments received 135 million call option transaction paid 133 million warrant transaction net amount recorded within shareholders’ equity subsequently due additional repurchases convertible notes entered amendments counterparties reduce number shares common stock covered instruments accordingly reduced number common shares covered call options 286 million shares 165 million shares reduced number shares covered warrants 280 million shares 165 million shares net value 20 million related amendments used increase capped call position discussed aggregate reductions number shares subject call options warrants equated number shares common stock principal amount notes repurchased fourth quarter 2011 would convertible end 2012 outstanding purchased call options gave us right acquire counterparties 164 million shares common stock number shares remaining notes convertible exercise price 13125 per share initial conversion price notes subject adjustments mirror terms convertible notes call options terminate earlier maturity date related convertible notes last day related notes remain outstanding warrants give counterparties right acquire subject antidilution adjustments aggregate 164 million shares common stock exercise price 1575 per share may settle transactions cash shares combination cash shares option evaluated aggregate call options warrants effect increasing effective conversion price convertible notes 13125 1575 accordingly incur cash outflow dilution would experienced due increase share price 13125 per share 1575 per share entitled receive counterparties difference sale counterparties 164 million shares 1575 per share purchase shares counterparties 13125 per share based structure call options warrants contracts meet applicable accounting criteria equity classification applicable accounting standards classified shareholders’ equity consolidated balance sheet addition since contracts classified shareholders’ equity indexed common stock accounted derivatives accordingly recognize changes fair value capped call transactions october 25 2011 entered capped call transactions counterparties cost 32 million covered 171 million shares common stock subsequently amended capped call transactions cover additional 115 million shares common stock lieu 20 million would received counterparties related amendment option warrant transactions discussed december 29 2012 capped calls covered aggregate 287 million shares common stock number shares repurchased notes would convertible purchased capped calls order retain potential value original call option warrant transactions would otherwise given upon downsizing instruments capped calls strike price 13125 per share cap price 1575 per share entitles us receive may 2013 expiration date per share value stock price excess 13125 maximum stock price 1575 market price common stock expiration date less 13125 capped call expire value maximum value capped calls event stock price least 1575 expiration date approximately 75 million may elect settlement capped call transactions paid us shares common stock cash combination cash shares common stock based structure capped call transactions meet applicable accounting criteria equity classification classified within shareholders’ equity 6 fixedtofloating rate junior subordinated notes finance group’s 300 million 6 fixedtofloating rate junior subordinated notes unsecured rank junior existing future senior debt notes mature february 15 2067 however right redeem notes par february 15 2017 obligated redeem notes beginning february 15 2042 finance group agreed replacement capital covenant redeem notes february 15 2047 unless receives capital contribution manufacturing group andor net proceeds sale certain replacement capital securities specified amounts interest notes fixed 6 february 15 2017 floats threemonth london interbank offered rate 1735 thereafter support agreement support agreement textron inc required ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 200 million 2012 2011 2010 cash payments 240 million 182 million 383 million respectively paid tfc maintain compliance fixed charge coverage ratio note 9 derivative instruments fair value measurements measure fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date prioritize assumptions market participants would use pricing asset liability threetier fair value hierarchy fair value hierarchy gives highest priority level 1 quoted prices active markets identical assets liabilities lowest priority level 3 unobservable inputs little market data exist requiring companies develop assumptions observable inputs meet criteria level 1 include quoted prices similar assets liabilities active markets quoted prices identical assets liabilities markets active categorized level 2 level 3 inputs reflect estimates assumptions market participants would use pricing asset liability based best information available circumstances valuation techniques assets liabilities measured using level 3 inputs may include methodologies market approach income approach cost approach may use unobservable inputs projections estimates management’s interpretation current market data unobservable inputs utilized extent observable inputs available costeffective obtain assets liabilities recorded fair value recurring basis assets liabilities recorded fair value recurring basis consist primarily derivative financial instruments categorized level 2 fair value hierarchy fair value amounts instruments designated hedging instruments provided interest rate exchange contracts represent fair value hedges finance group’s interest rate exchange contracts exchange traded measured fair value utilizing widely accepted thirdparty developed valuation models actual terms individual contract entered valuation model along interest rate foreign exchange rate data based readily observable market data published thirdparty leading financial news data providers credit risk factored fair value assets liabilities based differential credit default swap spread liabilities counterparty’s credit default swap spread assets compared standard aarated counterparty however significant impact valuation december 29 2012 december 29 2012 december 31 2011 interest rate exchange contracts notional amounts upon contracts based 671 million 848 million respectively foreign currency exchange contracts measured fair value using market method valuation technique inputs technique utilize current foreign currency exchange forward market rates published thirdparty leading financial news data providers observable data represent rates financial institution uses contracts entered date however based actual transactions classified level 2 december 29 2012 december 31 2011 foreign currency exchange contracts notional amounts upon contracts based 664 million 645 million respectively fair value hedges finance group enters interest rate exchange contracts mitigate exposure changes fair value fixedrate receivables debt due fluctuations interest rates using contracts able convert fixedrate cash flows floatingrate cash flows amount ineffectiveness fair value hedges gain loss recorded consolidated statements operations insignificant 2012 2011 cash flow hedges manufacture sell products number countries throughout world therefore exposed movements foreign currency exchange rates primary purpose foreign currency hedging activities manage volatility associated foreign currency purchases materials foreign currency sales products assets liabilities normal course business primarily utilize forward exchange contracts purchased options maturities three years qualify cash flow hedges intended offset effect exchange rate fluctuations forecasted sales inventory purchases overhead expenses december 29 2012 net deferred gain 5 million accumulated comprehensive loss related cash flow hedges net gains losses recognized earnings accumulated comprehensive loss cash flow hedges including gains losses related hedge ineffectiveness material 2012 2011 expect amount gains losses accumulated comprehensive loss reclassified earnings next twelve months material hedge net investment position major currencies generate foreign currency interest payments offset transactional exposures currencies accomplish borrow directly foreign currency designate portion foreign currency debt hedge net investments also may utilize currency forwards hedges related foreign net investments record changes fair value contracts comprehensive income extent effective cash flow hedges contract qualify hedge accounting designated fair value hedge changes fair value contract recorded earnings currency effects effective portion hedges reflected foreign currency translation adjustment account within comprehensive income produced 14 million aftertax loss 2012 resulting accumulated net gain balance 4 million december 29 2012 ineffective portion hedges insignificant counterparty credit risk exposure loss nonperformance counterparties derivative agreements end 2012 minimal anticipate nonperformance counterparties periodic settlements amounts due historically minimized potential risk entering contracts exclusively major financially sound counterparties less longterm bond rating credit risk generally limited amount counterparties’ contractual obligations exceed obligations counterparty continuously monitor exposures ensure limit risks assets recorded fair value nonrecurring basis 2012 2011 certain assets measured fair value nonrecurring basis using significant unobservable inputs level 3 table sets forth balance assets end year fair value adjustment taken following table provides fair value adjustments recorded assets measured fair value nonrecurring basis 2012 2011 finance receivables held sale finance receivables held sale recorded fair value nonrecurring basis periods fair value lower cost value active quoted market prices finance receivables december 29 2012 finance receivables held sale included entire golf mortgage portfolio fair value portfolio determined based use discounted cash flow models estimate price expect receive principal market pool similar loans orderly transaction discount rates utilized models derived prevailing interest rate indices based nature assets discussions market participants experience actual disposition similar assets cash flow models also include use qualitative assumptions regarding borrower’s ability pay period time likely required restructure andor exit account acquisition underlying collateral utilize revenue earnings multiples determine expected value loan collateral range multiples used based bids prospective buyers inputs market participants prices sales transacted similar properties gains finance receivables held sale 2012 primarily result payoff loans amounts sale loans prices excess values established previous periods based qualitative assumptions separate loans three categories cash flow models first category include loans assume paid accordance contractual terms loan second category include loans perceive borrower less ability pay assume loan restructured resolved typically period one four years third category assume borrower default loan resolved within average 24 months fair values finance receivables sensitive variability quantitative qualitative assumptions changes borrower’s ability pay period time required restructure andor exit accounts may significantly increase decrease fair value finance receivables lesser extent fluctuations discount rates andor revenue earnings multiples could also change fair value finance receivables impaired finance receivables impaired nonaccrual finance receivables represent assets recorded fair value nonrecurring basis since measurement required reserves impaired finance receivables significantly dependent fair value underlying collateral captive impaired nonaccrual finance receivables fair values collateral determined primarily based use industry pricing guides timeshare impaired nonaccrual finance receivables largely consist pools timeshare interval resort notes receivable fair values collateral estimated using cash flow models incorporating estimates credit losses consumer notes pools fair value measurements recorded impaired finance receivables resulted charges provision loan losses primarily related initial fair value adjustments assets table primarily include repossessed golf hotel properties aviation assets fair value golf hotel properties determined based use discounted cash flow models bids prospective buyers inputs market participants fair value aviation assets largely determined based use industry pricing guides carrying amount assets higher estimated fair value record corresponding charge income difference intangible assets 2011 recorded 41 million pretax impairment charge write intangible assets systems segment primarily related customer agreements contractual relationships associated aailogistics technical services aaitest training businesses determined fair value assets using discounted cash flows related asset group weightedaverage cost capital approximately 10 impairment charge recorded cost sales within segment profit assets liabilities recorded fair value carrying value estimated fair values financial instruments reflected financial statements fair value follows fair value manufacturing group debt determined using market observable data similar transactions level 2 inputs december 29 2012 december 31 2011 approximately 46 53 respectively fair value term debt finance group determined based observable market transactions level 1 remaining finance group debt determined based discounted cash flow analyses using observable market inputs debt similar duration subordination credit default expectations level 2 fair value estimates finance receivables held investment determined based internally developed discounted cash flow models primarily utilizing significant unobservable inputs level 3 include estimates rate return financing cost capital structure andor discount rate expectations current market participants combined estimated loan cash flows based credit losses payment rates expectations borrowers’ ability make payments timely basis note 10 shareholders’ equity capital stock authorization 15 million shares preferred stock par value 001 500 million shares common stock par value 0125 outstanding common stock activity three years ended december 29 2012 presented reserved shares common stock end 2012 common stock reserved conversion convertible notes exercise outstanding stock options warrants issuance shares upon vesting outstanding restricted stock units totaled 63 million shares see “convertible senior notes related transactions” section note 8 information convertible debt income per common share calculate basic diluted earnings per share eps based net income approximates income available common shareholders period basic eps calculated using twoclass method includes weightedaverage number common shares outstanding period restricted stock units paid stock deemed participating securities provide nonforfeitable rights dividends diluted eps considers dilutive effect potential future common stock including stock options restricted stock units shares could issued upon conversion convertible notes discussed upon exercise related warrants convertible note call options purchased connection issuance convertible notes capped call transaction entered 2011 excluded calculation diluted eps impact always antidilutive upon conversion convertible notes described note 8 principal amount would settled cash excess conversion value defined principal amount may settled cash andor shares common stock therefore shares common stock potentially issuable respect excess notes’ conversion value principal amount considered dilutive potential common shares purposes calculating diluted eps weightedaverage shares outstanding basic diluted eps follows 2012 2011 2010 stock options purchase 7 million 5 million 7 million shares respectively common stock outstanding excluded calculation diluted weightedaverage shares outstanding exercise prices greater average market price common stock periods securities could potentially dilute eps future comprehensive income loss aftertax components comprehensive income loss presented components accumulated comprehensive loss note 11 special charges amounts recorded within special charges 2012 2011 2010 special charges included restructuring charges related global restructuring program totaled 99 million including 76 million severance costs 2008 initiated global restructuring program reduce overhead costs improve productivity across company announced exit portions commercial finance business record restructuring costs special charges costs generally nonrecurring nature included segment profit measure used evaluating performance decisionmaking purposes 2010 substantially liquidated assets held canadian entity within finance segment accordingly recorded noncash charge 91 million 74 million aftertax within special charges reclassify entity’s cumulative currency translation adjustment amount within comprehensive income statement operations reclassification amount impact shareholders’ equity analysis restructuring reserve activity summarized note 12 sharebased compensation 2007 longterm incentive plan supersedes 1999 longterm incentive plan authorizes awards key employees form options purchase shares restricted stock restricted stock units stock appreciation rights performance stock awards maximum 12 million shares authorized issuance purposes plan plus shares become available upon cancellation forfeiture expiration awards granted 1999 longterm incentive plan 12 million shares may awarded pursuant incentive stock options 3 million shares may awarded pursuant restricted stock units awards intended paid shares plan also authorizes performance share units paid cash based upon value common stock deferred income plan textron executives dip provide certain executives opportunity voluntarily defer 25 base salary 80 annual longterm incentive compensation elective deferrals may put either stock unit account interestbearing account generally contribute 10 premium amounts deferred stock unit account executives eligible participate dip achieved andor maintained required minimum stock ownership level required defer part subsequent longterm incentive compensation cash payout dip stock unit account ownership requirements satisfied deferrals entitled 10 premium contribution amount deferred participants cannot move amounts two accounts actively employed us cannot receive distributions termination employment intrinsic value amounts paid dip 2012 2011 2010 totaled 1 million 1 million 9 million respectively sharebased compensation costs reflected primarily selling administrative expenses compensation expense recorded net income sharebased compensation plans follows compensation expense included approximately 23 million 17 million 7 million 2012 2011 2010 respectively representing attribution fair value options issued portion previously granted options requisite service rendered compensation cost awards subject service conditions vest ratably recognized straightline basis requisite service period separately vesting portion award december 29 2012 recognized 62 million total compensation costs associated unvested awards subject service conditions expect recognize compensation expense awards weightedaverage period approximately 3 years stock options purchase shares maximum term 10 years generally vest ratably threeyear period stock option compensation cost calculated fair value approach recognized vesting period stock options estimate fair value options granted date grant using blackscholes optionpricing model expected volatilities based implied volatilities traded options common stock historical volatilities factors expected term based historical option exercise data adjusted reflect anticipated changes expected behavior weightedaverage fair value options granted past three years assumptions used optionpricing model grants follows stock option activity plan 2012 provided december 29 2012 outstanding options aggregate intrinsic value 12 million weightedaverage remaining contractual life 7 years exercisable options aggregate intrinsic value 10 million weightedaverage remaining contractual life 5 years december 29 2012 total intrinsic value options exercised 2012 2011 2010 amounted 11 million 2 million 1 million respectively restricted stock units 2012 issued restricted stock units settled cash stock vesting onethird third fourth fifth year following year grant included right receive dividend equivalents fair value units based solely trading price common stock grant date recognized ratably vesting period 2009 2011 issued restricted stock units settled cash vested equal installments five years 2008 restricted stock unit awards generally payable shares common stock vesting onethird third fourth fifth year following year grant 2012 activity restricted stock units provided fair value restricted stock awards vested andor amounts paid awards respective periods follows performance share units fair value sharebased compensation awards accounted liabilities includes performance share units paid cash first quarter year following vesting payouts performance share units vary based certain performance criteria generally set year threeyear performance period performance share units vest end three years fair value awards based trading price common stock remeasured reporting period date 2012 activity performance share units follows fair value performance share units vested andor amounts paid awards respective periods follows note 13 retirement plans defined benefit defined contribution plans cover substantially employees significant number usbased employees participate textron retirement plan designed “flooroffset” arrangement defined benefit component defined contribution component defined benefit component arrangement includes textron master retirement plan tmrp bell helicopter textron master retirement plan bhtmrp defined contribution component retirement account plan rap defined benefit component provides minimum guaranteed benefit “floor” benefit rap participants eligible receive contributions textron 2 eligible compensation may make contributions plan upon retirement participants receive greater floor benefit value rap tmrp bhtmrp subject provisions employee retirement income security act 1974 erisa effective january 1 2010 textron retirement plan closed new participants employees hired date receive additional 4 annual cash contribution textron savings plan account based eligible compensation also domestic foreign funded unfunded defined benefit pension plans cover certain us foreign employees addition several defined contribution plans sponsored various businesses largest plan textron savings plan qualified 401k plan subject erisa significant number usbased employees participate defined contribution plans cost approximately 88 million 85 million 88 million 2012 2011 2010 respectively amounts include 21 million 23 million 25 million respectively contributions rap also provide postretirement benefits pensions certain retired employees us include healthcare dental care medicare part b reimbursement life insurance benefits periodic benefit cost components net periodic benefit cost amounts recognized oci follows estimated amount amortized accumulated comprehensive loss net periodic pension costs 2013 follows obligations funded status plans measured fiscal yearend changes projected benefit obligation fair value plan assets along funded status follows amounts recognized balance sheets follows accumulated benefit obligation defined benefit pension plans 66 billion 60 billion december 29 2012 december 31 2011 respectively included 388 million 360 million respectively accumulated benefit obligations unfunded plans funding permitted foreign environments funding feasible pension plans accumulated benefit obligations exceeding fair value plan assets follows assumptions weightedaverage assumptions use pension postretirement plans follows assumed healthcare cost trend rates follows assumed healthcare cost trend rates significant effect amounts reported postretirement benefits pensions onepercentagepoint change assumed healthcare cost trend rates would following effects pension assets expected longterm rate return plan assets determined based variety considerations including established asset allocation targets expectations asset classes historical returns plans’ assets market considerations invest pension assets objective achieving total rate return long term sufficient fund future pension obligations minimize future pension contributions willing tolerate commensurate level risk achieve objective based funded status plans longterm nature pension liability risk controlled maintaining portfolio assets diversified across variety asset classes investment styles investment managers assets managed external investment managers majority assets actively managed possible investment managers prohibited owning stock portfolios manage behalf us plan assets represent majority plan assets asset allocation target ranges established consistent investment objectives assets rebalanced periodically foreign plan assets allocations based expected cash flow needs assessments local practices markets target allocation ranges follows us plan assets domestic equity securities 26 40 international equity securities 11 22 debt securities 26 34 private equity partnerships 5 11 real estate 7 13 hedge funds 0 5 foreign plan assets equity securities 36 70 debt securities 30 60 real estate 3 17 fair value total pension plan assets major category level fair value hierarchy defined note 9 follows cash equivalents equity debt securities include comingled funds represent investments funds offered institutional investors similar mutual funds provide diversification holding various equity debt securities since comingled funds quoted active market priced based relative value underlying equity debt investments individual prices given time accordingly classified level 2 debt securities valued based day actual trading prices available prices available use matrix pricing model historical prices trends factors private equity partnerships represent investments funds turn invest stocks debt securities companies cases publicly traded partnerships valued using income market methods include cash flow projections market multiples various comparable companies real estate includes owned properties investments partnerships owned properties valued using certified appraisals least every three years updated least annually real estate investment manager considers current market trends available information appraisals generally use standard methods valuing real estate including forecasting income identifying current transactions comparable real estate arrive fair value real estate partnerships valued similar private equity partnerships general partner using standard real estate valuation methods value real estate properties securities held within fund portfolios believe assumptions consistent assumptions market participants would use valuing investments hedge funds represent investment diversified fund hedge funds sole investor fund invests portfolio funds publicly traded managed various portfolio managers investments portfolio funds typically valued basis recent price valuation provided relevant fund’s administrator fund aggregates valuations assets liabilities calculate net asset value fund table presents reconciliation beginning ending balances fair value measurements use significant unobservable inputs level 3 major category estimated future cash flow impact defined benefits salaried plans based salary years service hourly plans generally provide benefits based stated amounts year service funding policy consistent applicable laws regulations 2013 expect contribute approximately 180 million fund qualified pension plans nonqualified plans foreign plans additionally expect contribute 22 million rap expect contribute postretirement benefit plans benefit payments provided reflect expected future employee service appropriate expected paid net estimated participant contributions payments based assumptions used measure benefit obligation end fiscal 2012 pension benefit payments primarily paid qualified pension trusts pay postretirement benefits pensions general corporate assets benefit payments expect pay follows note 14 income taxes conduct business globally result file numerous consolidated separate income tax returns within outside us subsidiaries file consolidated federal income tax return income continuing operations income taxes follows income tax expense benefit continuing operations summarized follows current federal state provisions 2012 2011 included 25 million 37 million respectively tax related sale certain leveraged leases finance segment previously recorded significant deferred tax liabilities following table reconciles federal statutory income tax rate effective income tax rate continuing operations amount income taxes pay subject ongoing audits us federal state nonus tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental assess income tax positions record tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting date tax positions likely tax benefit sustained record largest amount tax benefit greater 50 likelihood realized upon settlement taxing authority full knowledge relevant information interest penalties accrued applicable believe likely tax benefit sustained tax benefit recognized future results may include favorable unfavorable adjustments estimated tax liabilities due settlement income tax examinations new regulatory judicial pronouncements expiration statutes limitations relevant events result effective tax rate may fluctuate significantly quarterly annual basis unrecognized tax benefits represent tax positions reserves established unrecognized state tax benefits interest related unrecognized tax benefits reflected net applicable tax benefits reconciliation unrecognized tax benefits excluding accrued interest follows december 29 2012 december 31 2011 approximately 204 million 206 million respectively unrecognized tax benefits recognized would favorably affect effective tax rate future period remaining 86 million unrecognized tax benefits related discontinued operations based outcome appeals proceedings expiration statutes limitations possible certain audit cycles us foreign jurisdictions could completed next 12 months could result change balance unrecognized tax benefits aggregate tax effect differences tax return positions benefits recognized financial statements although outcome matters cannot determined believe adequate provision made potential unfavorable financial statement impact normal course business subject examination taxing authorities throughout world including major jurisdictions canada china germany japan us exceptions longer subject us federal state local income tax examinations years 1997 longer subject nonus income tax examinations major jurisdictions years 2005 2012 2011 2010 recognized net taxrelated interest expense totaling approximately 9 million 10 million 19 million respectively consolidated statements operations december 29 2012 december 31 2011 total 134 million 132 million respectively net accrued interest expense included consolidated balance sheets tax effects temporary differences give rise significant portions net deferred tax assets liabilities follows accrued expenses includes warranty product maintenance reserves selfinsured liabilities interest restructuring reserves believe earnings periods temporary differences become deductible sufficient realize related future income tax benefits jurisdictions expiration date tax carryforwards projected operating results indicate realization likely valuation allowance provided following table presents breakdown current longterm net deferred tax assets net operating loss credit carryforwards december 29 2012 follows undistributed earnings nonus subsidiaries approximated 604 million december 29 2012 consider undistributed earnings indefinitely reinvested therefore provided deferred tax liability residual us tax may due upon repatriation earnings effect us foreign tax credits practicable estimate amount tax might payable earnings event longer indefinitely reinvested note 15 contingencies commitments subject legal proceedings claims arising conduct business including proceedings claims relating commercial financial transactions government contracts compliance applicable laws regulations production partners product liability employment environmental safety health matters legal proceedings claims seek damages fines penalties substantial amounts remediation environmental contamination government contractor subject audits reviews investigations determine whether operations conducted accordance applicable regulatory requirements federal government procurement regulations certain claims brought us government could result suspended debarred us government contracting period time basis information presently available believe existing proceedings claims material effect financial position results operations ordinary course business enter standby letter credit agreements surety bonds financial institutions meet various performance obligations outstanding letter credit arrangements surety bonds aggregated approximately 323 million 260 million end 2012 2011 respectively environmental remediation industrial enterprises engaged similar businesses involved number remedial actions various federal state laws regulations relating environment impose liability companies clean contribute cost cleaning sites hazardous wastes materials disposed released accrued environmental liabilities relate installation remediation systems disposal costs us environmental protection agency oversight costs legal fees operating maintenance costs currently formerly owned operated facilities circumstances affect reliability precision accruals include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur believe changes accruals may result factors uncertainties material effect financial position results operations based upon information currently available estimate potential environmental liabilities within range 44 million 188 million december 29 2012 environmental reserves approximately 73 million established address specific estimated liabilities estimate likely pay accrued environmental remediation liabilities next five 10 years classified 20 million current liabilities expenditures evaluate remediate contaminated sites approximated 15 million 9 million 10 million 2012 2011 2010 respectively leases rental expense approximated 97 million 2012 93 million 2011 92 million 2010 future minimum rental commitments noncancelable operating leases effect december 29 2012 approximated 58 million 2013 46 million 2014 37 million 2015 31 million 2016 22 million 2017 total 150 million thereafter note 16 supplemental cash flow information made following cash payments cash paid interest finance group included amounts paid manufacturing group 11 million 26 million 32 million 2012 2011 2010 respectively 2012 2010 net taxes paid finance group included payments 111 million 103 million primarily settlements related irs’s challenge tax deductions claimed prior years certain leveraged lease transactions note 17 segment geographic data operate report financial information following five business segments cessna bell textron systems industrial finance accounting policies segments described note 1 cessna products include citation business jets caravan turboprops singleengine piston aircraft aftermarket services sold diverse base corporate individual buyers bell products include military commercial helicopters tiltrotor aircraft related spare parts services us nonus governments defense aerospace industries general aviation markets textron systems products include armored security vehicles advanced marine craft precision weapons airborne groundbased surveillance systems services unmanned aircraft systems training simulation systems countersniper devices intelligence situational awareness software us nonus governments defense aerospace industries general aviation markets industrial products markets include following · kautex products include blowmolded plastic fuel systems windshield headlamp washer systems selective catalytic reduction systems engine camshafts parts marketed primarily automobile original equipment manufacturers well plastic bottles containers various uses · greenlee products include powered equipment electrical test measurement instruments hand hydraulic powered tools electrical fiber optic assemblies principally used electrical construction maintenance plumbing wiring telecommunications data communications industries · ezgo jacobsen products include golf cars professional turfmaintenance equipment offroad utility light transportation specialized turfcare vehicles marketed primarily golf courses resort communities municipalities sporting venues commercial industrial users finance segment provides commercial loans leases new cessna aircraft bell helicopters limited extent new ezgo jacobsen equipment captive finance business segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses special charges measurement finance segment excludes special charges includes interest income expense along intercompany interest expense provisions losses finance receivables involving sale lease products recorded selling manufacturing division finance group recourse manufacturing group revenues segment along reconciliation segment profit loss income continuing operations income taxes follows revenues major product type summarized revenues included sales us government approximately 36 billion 35 billion 36 billion 2012 2011 2010 respectively primarily bell textron systems segments information segment provided geographic data presented selected financial information continuing operations geographic area revenues attributed countries based location customer property plant equipment net based location asset quarterly data fourth quarter 2012 included 27 million charge related award cessna arbitration proceeding b fourth quarter 2011 included 41 million impairment charge write certain intangible assets approximately 19 million severance costs related workforce reduction c fourth quarter 2011 included 186 million initial marktomarket adjustment remaining finance receivables golf mortgage portfolio transferred held sale classification fourth quarter 2011 potential dilutive effect stock options restricted stock units shares could issued upon conversion convertible senior notes upon exercise related warrants excluded computation diluted weightedaverage shares outstanding shares would antidilutive effect loss continuing operations schedule ii valuation qualifying accounts deductions primarily include amounts written uncollectable accounts less recoveries inventory disposals currency translation adjustments item 9item 8 financial statements supplementary data consolidated financial statements related reports independent registered public accounting firm thereon included annual report form 10k pages indicated page report management reports independent registered public accounting firm consolidated statements operations years threeyear period ended december 28 2013 consolidated statements comprehensive income loss years threeyear period ended december 28 2013 consolidated balance sheets december 28 2013 december 29 2012 consolidated statements shareholders’ equity years threeyear period ended december 28 2013 consolidated statements cash flows years threeyear period ended december 28 2013 notes consolidated financial statements note 1 summary significant accounting policies note 2 business acquisitions goodwill intangible assets note 3 accounts receivable finance receivables note 4 inventories note 5 property plant equipment net note 6 accrued liabilities note 7 debt credit facilities note 8 derivative instruments fair value measurements note 9 shareholders’ equity note 10 sharebased compensation note 11 retirement plans note 12 income taxes note 13 contingencies commitments note 14 supplemental cash flow information note 15 segment geographic data supplementary information quarterly data 2013 2012 unaudited schedule ii valuation qualifying accounts schedules omitted either applicable required information included financial statements notes thereto report management responsible integrity objectivity financial data presented annual report form 10k consolidated financial statements prepared conformity us generally accepted accounting principles include amounts based management’s best estimates judgments management also responsible establishing maintaining adequate internal control financial reporting textron inc term defined exchange act rules 13a15f participation management conducted evaluation effectiveness internal control financial reporting based framework internal control integrated framework issued committee sponsoring organizations treadway commission 1992 framework based evaluation framework internal control integrated framework concluded textron inc maintained material respects effective internal control financial reporting december 28 2013 independent registered public accounting firm ernst young llp audited consolidated financial statements textron inc issued attestation report textron’s internal controls financial reporting december 28 2013 stated reports included herein conduct business accordance standards outlined textron business conduct guidelines communicated employees honesty integrity high ethical standards core values conduct business every textron business prepares carries annual compliance plan ensure values standards maintained internal control structure designed provide reasonable assurance appropriate cost assets safeguarded transactions properly executed recorded internal control structure includes among things established policies procedures internal audit function selection training qualified personnel textron’s management responsible implementing effective internal control systems monitoring effectiveness well developing executing annual internal control plan audit committee board directors behalf shareholders oversees management’s financial reporting responsibilities audit committee consists six directors officers employees textron meets regularly independent auditors management internal auditors review matters relating financial reporting internal accounting controls auditing scott c donnelly frank connor scott c donnelly frank connor chairman president chief executive officer executive vice president chief financial officer february 14 2014 report independent registered public accounting firm board directors shareholders textron inc audited textron inc’s internal control financial reporting december 28 2013 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission 1992 framework coso criteria textron inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion textron inc maintained material respects effective internal control financial reporting december 28 2013 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets textron inc december 28 2013 december 29 2012 related consolidated statements operations comprehensive income loss shareholders’ equity cash flows three years period ended december 28 2013 textron inc report dated february 14 2014 expressed unqualified opinion thereon ernst young llp boston massachusetts february 14 2014 report independent registered public accounting firm board directors shareholders textron inc audited accompanying consolidated balance sheets textron inc december 28 2013 december 29 2012 related consolidated statements operations comprehensive income loss shareholders’ equity cash flows three years period ended december 28 2013 audits also included financial statement schedule contained page 78 financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position textron inc december 28 2013 december 29 2012 consolidated results operations cash flows three years period ended december 28 2013 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states textron inc’s internal control financial reporting december 28 2013 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission 1992 framework report dated february 14 2014 expressed unqualified opinion thereon ernst young llp boston massachusetts february 14 2014 consolidated statements operations years threeyear period ended december 28 2013 see notes consolidated financial statements consolidated statements comprehensive income loss years threeyear period ended december 28 2013 see notes consolidated financial statements consolidated balance sheets see notes consolidated financial statements consolidated statements shareholders’ equity see notes consolidated financial statements consolidated statements cash flows years threeyear period ended december 28 2013 see notes consolidated financial statements consolidated statements cash flows continued years threeyear period ended december 28 2013 see notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation financial statement presentation consolidated financial statements include accounts textron inc majorityowned subsidiaries financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated majorityowned subsidiaries operate cessna bell textron systems industrial segments finance group also finance segment consists textron financial corporation tfc consolidated subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements finance group provides captive financing retail purchases leases new used aircraft equipment manufactured manufacturing group consolidated statements cash flows cash received customers sale receivables reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidation collaborative arrangements bell segment strategic alliance agreement boeing company boeing provide engineering development test services related v22 aircraft well produce v22 aircraft number separate contracts us government v22 contracts alliance created agreement legal entity employees assets true operations agreement creates contractual rights represent entity equity interest account alliance collaborative arrangement bell boeing reporting costs incurred revenues generated transactions us government company’s respective income statement neither bell boeing considered principal participant transactions recorded agreement profits costplus contracts allocated bell boeing 5050 basis negotiated profits fixedprice contracts also allocated 5050 however bell boeing responsible cost overruns entitled retain cost underruns based contractual arrangement established alliance bell accounts rights obligations specific requirements v22 contracts allocated bell work breakdown structure account rights obligations including warranty product contingent liabilities specific requirements v22 contracts allocated us agreement revenues cost sales reflect performance v22 contracts revenues recognized using unitsofdelivery method include assets used performance v22 contracts including inventory unpaid receivables liabilities arising obligations v22 contracts consolidated balance sheets use estimates prepare financial statements conformity generally accepted accounting principles require us make estimates assumptions affect amounts reported financial statements actual results could differ estimates assumptions reviewed periodically effects changes reflected consolidated statements operations period determined 2013 2012 2011 changed estimates revenues costs certain longterm contracts accounted percentageofcompletion method accounting changes estimates increased income continuing operations income taxes 2013 2012 2011 29 million 15 million 54 million respectively 18 million 9 million 34 million tax 006 003 011 per diluted share respectively 2013 2012 2011 gross favorable program profit adjustments totaled 51 million 88 million 83 million respectively 2013 2012 2011 gross unfavorable program profit adjustments totaled 22 million 73 million 29 million respectively revenue recognition generally recognize revenue sale products longterm contracts upon delivery commercial aircraft delivery upon completion manufacturing customer acceptance transfer risk rewards ownership taxes collected customers remitted government authorities recorded net basis sale arrangement involves multiple deliverables sales products include customization services evaluate arrangement determine whether separate items required delivered arrangement qualify separate units accounting arrangements typically involve customization services offer customers purchase bell helicopters services generally provided within first six months customer accepts aircraft assumes risk loss consider aircraft customization services separate units accounting allocate contract price two relative selling price basis using best evidence selling price arrangement deliverables typically reference price charged similar items sold separately us taking consideration performance cancellation termination refundtype provisions recognize revenue recognition criteria unit accounting met longterm contracts revenues longterm contracts accounted percentageofcompletion method accounting method estimate profit difference total estimated revenues cost contract recognize estimated profit contract term based either unitsofdelivery method costtocost method typically used development effort costs incurred appropriate circumstances revenues fixedprice contracts generally recorded using unitsofdelivery method revenues costreimbursement contracts recorded using costtocost method longterm contract profits based estimates total contract cost revenues utilizing current contract specifications expected engineering requirements achievement contract milestones product deliveries certain contracts awarded fixedprice incentive fees also considered estimating revenues profit rates contract costs typically incurred period several years estimation costs requires substantial judgment cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments required changes prior estimates recognized using cumulative catchup method impact change inceptiontodate recorded current period anticipated losses contracts recognized full period losses become probable estimable finance revenues finance revenues include interest finance receivables direct loan origination costs fees received capital leveraged lease earnings well portfolio gainslosses portfolio gainslosses include impairment charges related repossessed assets properties gainslosses sale early termination finance assets revenues direct loan origination costs fees received deferred amortized finance revenues contractual lives respective receivables credit lines using interest method receivables sold prepaid unamortized amounts recognized finance revenues recognize interest using interest method provides constant rate return terms receivables accrual interest income suspended credit quality indicators suggest full collection principal interest doubtful addition automatically suspend accrual interest income accounts contractually delinquent three months unless collection doubtful cash payments nonaccrual accounts including finance charges generally applied reduce net investment balance resume accrual interest loan becomes contractually current payment according original terms loan modified following period performance terms modification provided conclude collection principal interest longer doubtful previously suspended interest income recognized time cash equivalents cash equivalents consist cash shortterm highly liquid investments original maturities three months less inventories stated lower cost estimated net realizable value inventories generally using firstin firstout fifo method lastin firstout lifo method certain qualifying inventories lifo provides better matching costs revenues determine costs commercial helicopters average cost basis model considering expended estimated costs current production release inventoried costs related longterm contracts stated actual production costs including allocable operating overhead advances suppliers case contracts us government allocable research development general administrative expenses since inventoried costs include amounts related contracts long production cycles portion costs expected realized within one year pursuant contract provisions agencies us government title security interest inventories related contracts result advances performancebased payments progress payments advances payments reflected offset related inventory balances customer deposits recorded inventory right offset exists customer deposits recorded accrued liabilities property plant equipment property plant equipment recorded cost depreciated primarily using straightline method capitalize expenditures improvements increase asset values extend useful lives goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit might impaired reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics calculate fair value reporting unit primarily using discounted cash flows discounted cash flows incorporate assumptions short longterm revenue growth rates operating margins discount rates represent best estimates current forecasted market conditions cost structure anticipated net cost reductions implied rate return believe market participant would require investment business similar risks business characteristics reporting unit assessed reporting unit’s estimated fair value exceeds carrying value reporting unit impaired analysis performed otherwise amount impairment must determined comparing carrying amount reporting unit’s goodwill implied fair value goodwill implied fair value goodwill determined assigning fair value reporting unit’s assets liabilities including unrecognized intangible assets reporting unit acquired business combination carrying amount goodwill exceeds implied fair value impairment loss would recognized amount equal excess intangible longlived assets acquisition estimate record fair value purchased intangible assets primarily using discounted cash flow analysis anticipated cash flows reflecting incremental revenues andor cost savings resulting acquired intangible asset using market participant assumptions amortization intangible assets finite lives recognized estimated useful lives using method amortization reflects pattern economic benefits intangible assets consumed otherwise realized approximately 64 gross intangible assets amortized based cash flow streams used value assets remaining assets amortized using straightline method longlived assets including intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable carrying value asset held use exceeds sum undiscounted expected future cash flows carrying value asset generally written fair value longlived assets held sale stated lower cost fair value less cost sell fair value determined using pertinent market information including estimated future discounted cash flows finance receivables finance receivables primarily include finance receivables classified held investment also include finance receivables classified held sale finance receivables classified held investment intent ability hold receivable foreseeable future maturity payoff finance receivables held investment generally recorded amount outstanding principal less allowance losses maintain allowance losses finance receivables level considered adequate cover inherent losses portfolio based management’s evaluation larger balance accounts specifically identified impaired including large accounts homogeneous portfolios reserve established based comparing expected future cash flows discounted finance receivable’s effective interest rate fair value underlying collateral finance receivable collateral dependent carrying amount expected future cash flows consider collateral value financial performance liquidity borrower existence financial strength guarantors estimated recovery costs including legal expenses costs associated repossession eventual disposal collateral range potential outcomes perform multiple discounted cash flow analyses weight potential outcomes based relative likelihood occurrence evaluation portfolio inherently subjective requires estimates including amount timing future cash flows expected received impaired finance receivables estimated fair value underlying collateral may differ actual results analysis specific individual account critical factors included analysis include industry valuation guides age physical condition collateral payment history existence financial strength guarantors also establish allowance losses cover probable specifically unknown losses existing portfolio allowance established percentage nonrecourse finance receivables identified requiring specific reserves percentage based combination factors including historical loss experience current delinquency default trends collateral values general economic specific industry trends finance receivables charged earlier date collateral repossessed payment received six months unless management deems receivable collectible repossessed assets recorded fair value less estimated cost sell finance receivables classified held sale based determination longer intend hold receivables foreseeable future maturity payoff longer ability hold maturity decision classify certain finance receivables held sale based number factors including limited contractual duration type collateral credit strength borrowers interest rates perceived marketability receivables carried lower cost fair value time transfer held sale classification establish valuation allowance shortfall carrying value fair value addition allowance loan losses previously allocated finance receivables transferred valuation allowance account adjusted quarterly fair value changes occur based market interest rates market liquidity changes credit quality borrower value underlying loan collateral pension postretirement benefit obligations maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections evaluate update assumptions annually consultation thirdparty actuaries investment advisors also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases recognize overfunded underfunded status pension postretirement plans consolidated balance sheets recognize changes funded status defined benefit plans comprehensive income year occur actuarial gains losses immediately recognized net periodic pension cost recognized component comprehensive income loss oci amortized net periodic pension cost future periods derivative financial instruments exposed market risk primarily changes currency exchange rates interest rates hold issue derivative financial instruments trading speculative purposes manage volatility relating exposures net exposures consolidated basis take advantage natural offsets residual portion enter various derivative transactions pursuant policies areas counterparty exposure hedging practices derivative instruments reported fair value consolidated balance sheets designation support hedge accounting performed specific exposure basis financial instruments qualifying fair value hedges record changes fair value earnings offset part whole corresponding changes fair value underlying exposures hedged cash flow hedges record changes fair value derivatives extent effective hedges oci net deferred taxes changes fair value derivatives qualifying hedges recorded earnings foreign currency denominated assets liabilities translated us dollars adjustments currency rate changes recorded cumulative translation adjustment account shareholders’ equity related foreign entity sold substantially liquidated use foreign currency financing transactions effectively hedge longterm investments foreign operations corresponding currency foreign currency gains losses hedge longterm investments recorded cumulative translation adjustment account product liabilities accrue product liability claims related defense costs loss probable reasonably estimable estimates generally based specifics claim incident best estimate probable loss using historical experience environmental liabilities asset retirement obligations liabilities environmental matters recorded sitebysite basis probable obligation incurred cost reasonably estimated estimate accrued environmental liabilities using currently available facts existing technology presently enacted laws regulations subject number factors uncertainties environmental liabilities discounted take consideration possible future insurance proceeds significant amounts claims third parties incurred asset retirement obligations primarily related costs remove dispose underground storage tanks asbestos materials used insulation adhesive fillers floor tiles legal requirement remove items currently plan remodel related facilities otherwise cause impacted items require disposal since asset retirement obligations estimable related liability recorded consolidated balance sheets warranty product maintenance contracts provide limited warranty product maintenance programs including parts labor certain products periods ranging one five years estimate costs may incurred warranty programs record liability amount costs time product revenues recognized factors affect liability include number products sold historical costs per claim contractual recoveries vendors historical anticipated rates warranty claims including production warranty patterns new models assess adequacy recorded warranty product maintenance liabilities periodically adjust amounts necessary additionally may establish warranty liabilities related issuance aircraft service bulletins aircraft longer covered limited warranty programs research development costs customerfunded research development costs charged directly related contracts primarily consist us government contracts accordance government regulations recover portion companyfunded research development costs overhead rate charges us government contracts research development costs reimbursable contract us government another customer charged expense incurred companyfunded research development costs 651 million 584 million 525 million 2013 2012 2011 respectively included cost sales income taxes deferred income tax balances reflect effects temporary differences financial reporting carrying amounts assets liabilities tax bases well net operating losses tax credit carryforwards stated enacted tax rates effect year taxes expected paid recovered deferred income tax assets represent amounts available reduce income taxes payable taxable income future years evaluate recoverability future tax deductions credits assessing adequacy future expected taxable income sources including future reversal existing taxable temporary differences taxable income carryback years available tax planning strategies estimated future taxable income recognize net taxrelated interest penalties continuing operations income tax expense note 2 business acquisitions goodwill intangible assets pending business acquisition december 26 2013 entered agreement plan merger pursuant acquire outstanding equity interests beech holdings llc “beech” parent beechcraft corporation approximately 14 billion cash beech designs builds supports aircraft including king air turboprops pistonengine baron bonanza t6 trainer at6 light attack military aircraft beech also global network factoryowned authorized service centers plan finance purchase equity beech repayment beech’s outstanding debt required closing combination available cash beech textron 11 billion new debt transaction expected close first half 2014 subject customary closing conditions including regulatory approvals 2013 business acquisitions 2013 acquired following businesses aggregate cash payment 196 million textron systems · mechtronix inc opinicus corporation acquired december 6 2013 design develop install provide maintenance advanced full flight simulators rotary fixedwing aircraft industrial · sherman reilly inc manufacturer underground aerial transmission distribution products acquired greenlee business may 1 2013 · hd electric company designer manufacturer power utility products test measure control electric power also acquired greenlee business december 18 2013 cessna · two service centers located zurich switzerland düsseldorf germany acquired december 31 2012 consideration paid businesses allocated tangible intangible assets acquired liabilities assumed based estimated fair values acquisition date assigned 75 million identifiable intangible assets primarily include platform technology trade names three acquisitions closed december 2013 made preliminary estimates fair value certain assets expect complete valuation assets first quarter 2014 acquired intangible assets amortized estimate lives range 7 11 years primarily using accelerated amortization methods based cash flow streams used value assets excess purchase price estimated fair value net assets acquired totaled 82 million recorded goodwill reflects expected revenue assembled workforce going concern nature businesses approximately 52 million goodwill deductible tax purposes operating results acquisitions included consolidated statement operations since respective closing dates pro forma information included business acquisitions results would materially different consolidated results changes carrying amount goodwill segment follows intangible assets summarized amortization expense totaled 37 million 40 million 51 million 2013 2012 2011 respectively amortization expense estimated approximately 43 million 42 million 36 million 32 million 25 million 2014 2015 2016 2017 2018 respectively note 3 accounts receivable finance receivables accounts receivable accounts receivable composed following unbillable receivables primarily us government contracts arise revenues appropriately recognized based performance cannot billed yet terms contract unbillable receivables within accounts receivable totaled 163 million december 28 2013 149 million december 29 2012 finance receivables finance receivables classification presented following table finance receivables held investment primarily includes loans finance leases provided purchasers new used cessna aircraft bell helicopters also includes loans finance leases secured used aircraft produced manufacturers agreements typically initial terms ranging five ten years amortization terms ranging eight fifteen years average balance loans finance leases 1 million december 28 2013 loans generally require customer pay significant payment along periodic scheduled principal payments reduce outstanding balance term loan finance leases significant residual value end contractual term classified loans legal economic substance equivalent secured borrowing finance lease significant residual value finance receivables held investment also includes leveraged leases secured ownership leased equipment real property finance receivables held sale includes noncaptive loan portfolio december 28 2013 finance receivables carried lower cost fair value included credit performance tables 2013 determined longer intent hold remaining noncaptive loan portfolio foreseeable future accordingly transferred 34 million remaining noncaptive loans net 1 million allowance losses held investment classification held sale classification received total proceeds 64 million 109 million 2013 2012 respectively sale finance receivables held sale 76 million 207 million respectively payoffs collections finance receivables diversified across geographic region borrower industry december 28 2013 41 finance receivables distributed throughout us compared 45 end 2012 december 28 2013 december 29 2012 finance receivables included 200 million 341 million respectively receivables legally sold special purpose entity spe consolidated subsidiary tfc assets spe pledged collateral debt reflected securitized onbalance sheet debt note 7 thirdparty investors legal recourse tfc beyond credit enhancement provided assets spe credit quality indicators nonaccrual finance receivables internally assess quality finance receivables based number key credit quality indicators statistics delinquency loan balance estimated collateral value financial strength individual borrowers guarantors many indicators difficult apply across entire class receivables evaluate individual loans quarterly basis classify loans three categories based key credit quality indicators individual loan three categories performing watchlist nonaccrual classify finance receivables nonaccrual credit quality indicators suggest full collection principal interest doubtful addition automatically classify accounts nonaccrual contractually delinquent three months unless collection principal interest doubtful recognition interest income suspended accounts cash collections used reduce net investment balance resume accrual interest loan becomes contractually current payment according original terms loan modified following period performance terms modification provided conclude collection principal interest longer doubtful previously suspended interest income recognized time accounts classified watchlist credit quality indicators deteriorated compared typical underwriting criteria believe collection full principal interest probable certain finance receivables meet watchlist nonaccrual categories classified performing summary finance receivables categorized based credit quality indicators discussed follows measure delinquency based contractual payment terms loans leases determining delinquency aging category account anyall principal interest received applied pastdue principal andor interest amounts due significant portion contractually due payment delinquent entire finance receivable balance reported accordance pastdue delinquency aging category finance receivables delinquency aging category summarized table accrual status loans greater 90 days past due totaled 5 million december 28 2013 accrual status loans greater 90 days past due december 29 2012 december 28 2013 december 29 2012 60 days contractual delinquency percentage finance receivables 539 465 respectively loan modifications troubled debt restructurings occur either modified contract terms finance receivables borrowers experiencing financial difficulties accepted transfer assets full partial satisfaction loan balance types modifications typically make include extensions original maturity date contract extensions revolving borrowing periods delays timing required principal payments deferrals interest payments advances protect value collateral principal reductions contingent full repayment prior maturity date changes effected modifications made 2013 2012 finance receivables held investment material impaired loans quarterly basis evaluate individual finance receivables impairment nonhomogeneous portfolios larger accounts homogeneous loan portfolios finance receivable considered impaired probable unable collect amounts due according contractual terms loan agreement based review credit quality indicators discussed impaired finance receivables include nonaccrual accounts full collection principal interest remains probable account’s original terms expected significantly modified modification specifies interest rate equal greater market rate finance receivable comparable risk account considered impaired years subsequent modification significant interest income recognized impaired loans 2013 2012 summary impaired finance receivables excluding leveraged leases year end average recorded investment year provided allowance losses rollforward allowance losses finance receivables summary composition based underlying finance receivables evaluated impairment provided finance receivables reported table specifically exclude 120 million 122 million leveraged leases december 28 2013 december 29 2012 respectively accordance authoritative accounting standards finance group provides financing retail purchases leases new used aircraft equipment manufactured manufacturing group finance receivables inventory sales included finance group’s balance sheets summarized 2013 2012 2011 finance group paid manufacturing group 248 million 309 million 284 million respectively related sale textronmanufactured products third parties financed finance group operating agreements specify finance group recourse manufacturing group certain uncollected amounts related transactions december 28 2013 december 29 2012 finance receivables operating leases subject recourse manufacturing group totaled 75 million 83 million respectively manufacturing group established reserves losses balance sheet within accrued liabilities amounts guarantees note 4 inventories composed following inventories valued lifo method totaled 13 billion 11 billion end 2013 2012 respectively carrying values inventories would higher approximately 461 million 435 million respectively lifo inventories valued current costs inventories related longterm contracts net progressmilestone payments 359 million 382 million end 2013 2012 respectively note 5 property plant equipment net manufacturing group’s property plant equipment net composed following end 2013 2012 assets capital leases totaled 247 million 251 million accumulated amortization 56 million 51 million respectively manufacturing group’s depreciation expense included amortization expense capital leases totaled 335 million 315 million 317 million 2013 2012 2011 respectively note 6 accrued liabilities accrued liabilities manufacturing group summarized changes warranty product maintenance contract liability follows adjustments include changes prior year estimates new issues prior year sales currency translation adjustments note 7 debt credit facilities debt summarized table notes amortize quarterly semiannual basis following table shows required payments next five years debt outstanding december 28 2013 fourth quarter 2013 textron entered senior unsecured revolving credit facility aggregate principal amount 10 billion 100 million available issuance letters credit facility expires october 2018 december 28 2013 amounts borrowed facility 35 million letters credit issued january 30 2014 issued 250 million 365 notes due 2021 350 million 430 notes due 2024 shelf registration statement plan use net proceeds issuance notes finance portion acquisition outstanding equity interests beech holdings llc parent beechcraft corporation agreed purchase approximately 14 billion cash transaction expected close first half 2014 subject customary closing conditions including regulatory approvals transaction completed related merger agreement terminated december 31 2014 required redeem outstanding 2021 notes redemption price equal 101 principal amount thereof plus accrued unpaid interest january 24 2014 order finance beechcraft acquisition also entered fiveyear term loan syndicate banks principal amount 500 million intend draw upon closing transaction 450 convertible senior notes related transactions may 5 2009 issued 600 million convertible senior notes maturity date may 1 2013 interest payable semiannually convertible notes accounted accordance generally accepted accounting principles required us separately account liability debt equity conversion option components convertible notes manner reflected nonconvertible debt borrowing rate time issuance accordingly recorded debt discount corresponding increase additional paidin capital 134 million issuance date amortized debt discount utilizing effective interest method life notes increased effective interest rate convertible notes coupon rate 450 1172 incurred cash noncash interest expenses 9 million 2013 25 million 2012 58 million 2011 notes may 1 2013 remaining convertible senior notes matured paid holders notes 215 million settlement face value notes addition issued 89 million shares common stock converting holders settlement excess conversion value face value notes however giving effect exercise related call options warrants discussed incremental share settlement excess face value notes resulted 74 million net share issuance concurrently pricing convertible notes may 2009 entered transactions two counterparties pursuant purchased counterparties call options acquire common stock sold counterparties warrants purchase common stock call options settled may 1 2013 warrants settled daily 45day period beginning february 27 2013 acquired 89 million shares common stock upon settlement call options issued aggregate 74 million shares common stock connection settlement warrants first half 2013 settlement call options warrants resulted 41 million net increase treasury stock 2013 october 25 2011 entered capped call transactions counterparties covered aggregate 287 million shares common stock end 2012 capped calls strike price 13125 per share cap price 1575 per share entitled us receive per share value stock price excess 13125 maximum stock price 1575 expiration date upon expiration capped calls market price common stock exceeded maximum stock price received 75 million cash counterparties second quarter 2013 6 fixedtofloating rate junior subordinated notes finance group’s 299 million 6 fixedtofloating rate junior subordinated notes unsecured rank junior existing future senior debt notes mature february 15 2067 however right redeem notes par february 15 2017 obligated redeem notes beginning february 15 2042 finance group agreed replacement capital covenant redeem notes february 15 2047 unless receives capital contribution manufacturing group andor net proceeds sale certain replacement capital securities specified amounts 2013 manufacturing group made capital contribution tfc repurchase 1 million notes interest notes fixed 6 february 15 2017 floats threemonth london interbank offered rate 1735 thereafter support agreement support agreement textron inc required ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 200 million cash payments 240 million 182 million made tfc 2012 2011 respectively maintain compliance fixed charge coverage ratio note 8 derivative instruments fair value measurements measure fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date prioritize assumptions market participants would use pricing asset liability threetier fair value hierarchy fair value hierarchy gives highest priority level 1 quoted prices active markets identical assets liabilities lowest priority level 3 unobservable inputs little market data exist requiring companies develop assumptions observable inputs meet criteria level 1 include quoted prices similar assets liabilities active markets quoted prices identical assets liabilities markets active categorized level 2 level 3 inputs reflect estimates assumptions market participants would use pricing asset liability based best information available circumstances valuation techniques assets liabilities measured using level 3 inputs may include methodologies market approach income approach cost approach may use unobservable inputs projections estimates management’s interpretation current market data unobservable inputs utilized extent observable inputs available costeffective obtain assets liabilities recorded fair value recurring basis manufacture sell products number countries throughout world therefore exposed movements foreign currency exchange rates utilize foreign currency exchange contracts manage volatility foreign currency exchange contracts measured fair value using market method valuation technique inputs technique utilize current foreign currency exchange forward market rates published thirdparty leading financial news data providers observable data represent rates financial institution uses contracts entered date however based actual transactions classified level 2 december 28 2013 december 29 2012 foreign currency exchange contracts notional amounts upon contracts based 636 million 664 million respectively december 28 2013 fair value amounts foreign currency exchange contracts 2 million asset 15 million liability december 29 2012 fair value amounts foreign currency exchange contracts 9 million asset 5 million liability primarily utilize forward exchange contracts maturities three years contracts qualify cash flow hedges intended offset effect exchange rate fluctuations forecasted sales inventory purchases overhead expenses december 28 2013 net deferred loss 10 million accumulated comprehensive loss related cash flow hedges net gains losses recognized earnings accumulated comprehensive loss cash flow hedges including gains losses related hedge ineffectiveness amounted 16 million net loss 2013 significant 2012 expect reclassify 10 million net loss accumulated comprehensive loss earnings next twelve months hedge net investment position major currencies generate foreign currency interest payments offset transactional exposures currencies accomplish borrow directly foreign currency designate portion foreign currency debt hedge net investment record changes fair value contracts comprehensive income extent effective cash flow hedges currency effects effective portion hedges reflected foreign currency translation adjustments within accumulated comprehensive loss produced 2 million aftertax gain 2013 resulting accumulated net gain balance 6 million december 28 2013 ineffectiveness recorded related hedges 2013 finance group entered interest rate exchange contracts mitigate exposure changes fair value fixedrate receivables debt due fluctuations interest rates interest rate exchange contracts exchange traded measured fair value utilizing widely accepted thirdparty developed valuation models actual terms individual contract entered valuation model along interest rate data based readily observable market data published thirdparty leading financial news data providers december 28 2013 december 29 2012 interest rate exchange contracts notional amounts upon contracts based 229 million 671 million respectively fair value amounts interest rate exchange contracts recorded december 28 2013 2 million asset 5 million liability december 29 2012 fair value amounts interest rate exchange contracts 8 million asset 8 million liability exposure loss nonperformance counterparties derivative agreements end 2013 minimal anticipate nonperformance counterparties periodic settlements amounts due historically minimized potential risk entering contracts exclusively major financially sound counterparties less longterm bond rating credit risk generally limited amount counterparties’ contractual obligations exceed obligations counterparty continuously monitor exposures ensure limit risks assets recorded fair value nonrecurring basis 2013 2012 certain assets finance group measured fair value nonrecurring basis using significant unobservable inputs level 3 table sets forth balance assets end year fair value adjustment taken following table represents fair value adjustments recorded asset class measured fair value nonrecurring basis 2013 2012 finance receivables held sale recorded fair value nonrecurring basis periods fair value lower cost value active quoted market prices finance receivables december 28 2013 finance receivables held sale included noncaptive loan portfolio fair values loan portfolio determined based combination discounted cash flow models recent thirdparty offers estimate price expect receive principal market loan orderly transaction gains finance receivables held sale 2013 2012 primarily result payoff loans amounts sale loans prices excess values established previous periods impaired nonaccrual finance receivables represent assets recorded fair value nonrecurring basis since measurement required reserves impaired finance receivables significantly dependent fair value underlying collateral impaired nonaccrual finance receivables secured aviation assets fair values collateral determined primarily based use industry pricing guides fair value measurements recorded impaired finance receivables resulted charges provision loan losses primarily related initial fair value adjustments assets table primarily include aviation assets repossessed golf hotel properties fair value aviation assets largely determined based use industry pricing guides fair value golf hotel properties determined based use discounted cash flow models bids prospective buyers inputs market participants carrying amount assets higher estimated fair value record corresponding charge income difference assets liabilities recorded fair value carrying value estimated fair values financial instruments reflected financial statements fair value follows fair value manufacturing group debt determined using market observable data similar transactions level 2 inputs december 28 2013 december 29 2012 approximately 30 46 respectively fair value term debt finance group determined based observable market transactions level 1 remaining finance group debt determined based discounted cash flow analyses using observable market inputs debt similar duration subordination credit default expectations level 2 fair value estimates finance receivables held investment determined based internally developed discounted cash flow models primarily utilizing significant unobservable inputs level 3 include estimates rate return financing cost capital structure andor discount rate expectations current market participants combined estimated loan cash flows based credit losses payment rates expectations borrowers’ ability make payments timely basis note 9 shareholders’ equity capital stock authorization 15 million shares preferred stock par value 001 500 million shares common stock par value 0125 outstanding common stock activity three years ended december 28 2013 presented earnings per share calculate basic diluted earnings per share eps based net income approximates income available common shareholders period basic eps calculated using twoclass method includes weightedaverage number common shares outstanding period restricted stock units paid stock deemed participating securities provide nonforfeitable rights dividends diluted eps considers dilutive effect potential future common stock including stock options restricted stock units prior maturity convertible notes may 1 2013 shares could issued upon conversion notes upon exercise related warrants weightedaverage shares outstanding basic diluted eps follows dilutive effect convertible notes warrants decreased significantly 2013 prior years due maturity convertible notes described note 7 intended settle face value notes cash excess conversion value face value cash andor shares common stock accordingly shares common stock potentially issuable respect excess notes’ conversion value face amount considered calculating diluted eps call options purchased connection issuance convertible notes capped call transaction excluded calculation diluted eps impact always antidilutive 2013 2012 2011 stock options purchase 5 million 7 million 5 million shares respectively common stock outstanding excluded calculation diluted weightedaverage shares outstanding effect would antidilutive accumulated comprehensive loss components accumulated comprehensive loss presented comprehensive income loss aftertax components comprehensive income loss presented components comprehensive income included computation net periodic pension cost see note 11 additional information note 10 sharebased compensation 2007 longterm incentive plan authorizes awards key employees form options purchase shares restricted stock restricted stock units stock appreciation rights performance stock awards maximum 12 million shares authorized issuance purposes plan plus shares become available upon cancellation forfeiture expiration awards granted 1999 longterm incentive plan 12 million shares may awarded pursuant incentive stock options 3 million shares may awarded pursuant restricted stock units awards intended paid shares plan also authorizes performance share units paid cash based upon value common stock deferred income plan textron executives dip provide certain executives opportunity voluntarily defer 25 base salary 80 annual longterm incentive compensation elective deferrals may put either stock unit account interestbearing account executives eligible participate dip achieved andor maintained required minimum stock ownership level required defer part subsequent longterm incentive compensation cash payout dip stock unit account ownership requirements satisfied participants cannot move amounts two accounts actively employed us cannot receive distributions termination employment intrinsic value amounts paid dip totaled 1 million three years ended december 28 2013 sharebased compensation costs reflected primarily selling administrative expenses compensation expense recorded net income sharebased compensation plans follows compensation expense included approximately 26 million 23 million 17 million 2013 2012 2011 respectively portion fair value options issued portion previously granted options requisite service rendered compensation cost awards subject service conditions vest ratably recognized straightline basis requisite service period separately vesting portion award december 28 2013 recognized 61 million total compensation costs associated unvested awards subject service conditions expect recognize compensation expense awards weightedaverage period approximately two years stock options purchase shares maximum term ten years generally vest ratably threeyear period stock option compensation cost calculated fair value approach recognized vesting period stock options estimate fair value options granted date grant using blackscholes optionpricing model expected volatilities based implied volatilities traded options common stock historical volatilities factors expected term based historical option exercise data adjusted reflect anticipated changes expected behavior weightedaverage fair value options granted past three years assumptions used optionpricing model grants follows stock option activity plan 2013 provided december 28 2013 outstanding options aggregate intrinsic value 88 million weightedaverage remaining contractual life six years exercisable options aggregate intrinsic value 47 million weightedaverage remaining contractual life five years december 28 2013 total intrinsic value options exercised 2013 2012 2011 amounted 10 million 11 million 2 million respectively restricted stock units 2013 2012 issued restricted stock units settled cash stock vesting onethird third fourth fifth year following year grant included right receive dividend equivalents fair value units based solely trading price common stock grant date recognized ratably vesting period 2009 2011 issued restricted stock units settled cash vested equal installments five years 2008 restricted stock unit awards generally payable shares common stock vesting onethird third fourth fifth year following year grant 2013 activity restricted stock units provided fair value restricted stock awards vested andor amounts paid awards respective periods follows performance share units fair value sharebased compensation awards accounted liabilities includes performance share units paid cash first quarter year following vesting payouts performance share units vary based certain performance criteria generally set year threeyear performance period performance share units vest end three years fair value awards based trading price common stock remeasured reporting period date 2013 activity performance share units follows fair value performance share units vested andor amounts paid awards respective periods follows note 11 retirement plans defined benefit defined contribution plans cover substantially employees significant number usbased employees participate textron retirement plan designed “flooroffset” arrangement defined benefit component defined contribution component defined benefit component arrangement includes textron master retirement plan tmrp bell helicopter textron master retirement plan bhtmrp defined contribution component retirement account plan rap defined benefit component provides minimum guaranteed benefit “floor” benefit rap participants eligible receive contributions textron 2 eligible compensation may make contributions plan upon retirement participants receive greater floor benefit value rap tmrp bhtmrp subject provisions employee retirement income security act 1974 erisa effective january 1 2010 textron retirement plan closed new participants employees hired date receive additional 4 annual cash contribution textron savings plan account based eligible compensation also domestic foreign funded unfunded defined benefit pension plans cover certain us foreign employees addition several defined contribution plans sponsored various businesses largest plan textron savings plan qualified 401k plan subject erisa defined contribution plans cost approximately 93 million 88 million 85 million 2013 2012 2011 respectively amounts include 19 million 21 million 23 million respectively contributions rap also provide postretirement benefits pensions certain retired employees us include healthcare dental care medicare part b reimbursement life insurance benefits periodic benefit cost components net periodic benefit cost amounts recognized oci follows estimated amount amortized accumulated comprehensive loss net periodic pension costs 2014 follows obligations funded status plans measured fiscal yearend changes projected benefit obligation fair value plan assets along funded status follows amounts recognized balance sheets follows accumulated benefit obligation defined benefit pension plans 61 billion 66 billion december 28 2013 december 29 2012 respectively included 359 million 388 million respectively accumulated benefit obligations unfunded plans funding permitted foreign environments funding feasible pension plans accumulated benefit obligations exceeding fair value plan assets follows assumptions weightedaverage assumptions use pension postretirement plans follows assumed healthcare cost trend rates follows assumed healthcare cost trend rates significant effect amounts reported postretirement benefits pensions onepercentagepoint change assumed healthcare cost trend rates would following effects pension assets expected longterm rate return plan assets determined based variety considerations including established asset allocation targets expectations asset classes historical returns plans’ assets market considerations invest pension assets objective achieving total rate return long term sufficient fund future pension obligations minimize future pension contributions willing tolerate commensurate level risk achieve objective based funded status plans longterm nature pension liability risk controlled maintaining portfolio assets diversified across variety asset classes investment styles investment managers assets managed external investment managers majority assets actively managed possible investment managers prohibited owning stock portfolios manage behalf us plan assets represent majority plan assets asset allocation target ranges established consistent investment objectives assets rebalanced periodically foreign plan assets allocations based expected cash flow needs assessments local practices markets target allocation ranges follows us plan assets domestic equity securities 26 40 international equity securities 11 22 debt securities 25 35 private equity partnerships 5 11 real estate 7 13 hedge funds 0 5 foreign plan assets equity securities 38 65 debt securities 29 38 real estate 3 14 fair value total pension plan assets major category level fair value hierarchy defined note 8 follows cash equivalents equity debt securities include comingled funds represent investments funds offered institutional investors similar mutual funds provide diversification holding various equity debt securities since comingled funds quoted active market priced based relative value underlying equity debt investments individual prices given time accordingly classified level 2 debt securities valued based day actual trading prices available prices available use matrix pricing model historical prices trends factors private equity partnerships represent investments funds turn invest stocks debt securities companies cases publicly traded partnerships valued using income market methods include cash flow projections market multiples various comparable companies real estate includes owned properties investments partnerships owned properties valued using certified appraisals least every three years updated least annually real estate investment manager based current market trends available information appraisals generally use standard methods valuing real estate including forecasting income identifying current transactions comparable real estate arrive fair value real estate partnerships valued similar private equity partnerships general partner using standard real estate valuation methods value real estate properties securities held within fund portfolios believe assumptions consistent assumptions market participants would use valuing investments hedge funds represent investment diversified fund hedge funds sole investor fund invests portfolio funds publicly traded managed various portfolio managers investments portfolio funds typically valued basis recent price valuation provided relevant fund’s administrator fund aggregates valuations assets liabilities calculate net asset value fund table presents reconciliation beginning ending balances fair value measurements use significant unobservable inputs level 3 major category estimated future cash flow impact defined benefits salaried plans based salary years service hourly plans generally provide benefits based stated amounts year service funding policy consistent applicable laws regulations 2014 expect contribute approximately 58 million fund nonqualified plans foreign plans 19 million rap expect contribute qualified pension plans postretirement benefit plans benefit payments provided reflect expected future employee service appropriate expected paid net estimated participant contributions payments based assumptions used measure benefit obligation end fiscal 2013 pension benefit payments primarily paid qualified pension trusts pay postretirement benefits pensions general corporate assets benefit payments expect pay follows note 12 income taxes conduct business globally result file numerous consolidated separate income tax returns within outside us subsidiaries file consolidated federal income tax return income continuing operations income taxes follows income tax expense continuing operations summarized follows current federal state provisions 2012 2011 included 25 million 37 million respectively tax related sale certain leveraged leases finance segment previously recorded significant deferred tax liabilities following table reconciles federal statutory income tax rate effective income tax rate continuing operations amount income taxes pay subject ongoing audits us federal state nonus tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental assess income tax positions record tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting date tax positions likely tax benefit sustained record largest amount tax benefit greater 50 likelihood realized upon settlement taxing authority full knowledge relevant information interest penalties accrued applicable believe likely tax benefit sustained tax benefit recognized future results may include favorable unfavorable adjustments estimated tax liabilities due settlement income tax examinations new regulatory judicial pronouncements expiration statutes limitations relevant events result effective tax rate may fluctuate significantly quarterly annual basis unrecognized tax benefits represent tax positions reserves established unrecognized state tax benefits interest related unrecognized tax benefits reflected net applicable tax benefits reconciliation unrecognized tax benefits excluding accrued interest follows december 28 2013 december 29 2012 approximately 204 million unrecognized tax benefits recognized would favorably affect effective tax rate future period remaining 80 million unrecognized tax benefits related discontinued operations reasonably possible within next 12 months unrecognized tax benefits exclusive interest may decrease range 0 213 million result conclusion audits related appeals review processes expiration statutes limitations additional worldwide uncertain tax positions potential decrease primarily relates uncertainties respect prior dispositions research tax credits however based process finalizing audits required review process relevant authorities difficult estimate timing amount potential changes unrecognized tax benefits although outcome matters cannot determined believe adequate provision made potential unfavorable financial statement impact normal course business subject examination taxing authorities throughout world including major jurisdictions canada china germany japan mexico us exceptions longer subject us federal state local income tax examinations years 1997 longer subject nonus income tax examinations major jurisdictions years 2005 2013 2012 2011 recognized net taxrelated interest expense totaling approximately 6 million 9 million 10 million respectively consolidated statements operations december 28 2013 december 29 2012 total 126 million 134 million respectively net accrued interest expense included consolidated balance sheets tax effects temporary differences give rise significant portions net deferred tax assets liabilities follows accrued expenses includes warranty product maintenance reserves selfinsured liabilities interest believe earnings periods temporary differences become deductible sufficient realize related future income tax benefits jurisdictions expiration date tax carryforwards projected operating results indicate realization likely valuation allowance provided following table presents breakdown current longterm net deferred tax assets net operating loss credit carryforwards december 28 2013 follows undistributed earnings nonus subsidiaries approximated 778 million december 28 2013 consider undistributed earnings indefinitely reinvested therefore provided deferred tax liability residual us tax may due upon repatriation earnings effect us foreign tax credits practicable estimate amount tax might payable earnings event longer indefinitely reinvested note 13 contingencies commitments subject legal proceedings claims arising conduct business including proceedings claims relating commercial financial transactions government contracts alleged lack compliance applicable laws regulations production partners product liability patent trademark infringement employment disputes environmental safety health matters legal proceedings claims seek damages fines penalties substantial amounts remediation environmental contamination government contractor subject audits reviews investigations determine whether operations conducted accordance applicable regulatory requirements federal government procurement regulations certain claims brought us government could result suspension debarment us government contracting period time basis information presently available believe existing proceedings claims material effect financial position results operations ordinary course business enter standby letter credit agreements surety bonds financial institutions meet various performance obligations outstanding letter credit arrangements surety bonds aggregated approximately 298 million 323 million december 28 2013 december 29 2012 respectively environmental remediation industrial enterprises engaged similar businesses involved number remedial actions various federal state laws regulations relating environment impose liability companies clean contribute cost cleaning sites hazardous wastes materials disposed released accrued environmental liabilities relate installation remediation systems disposal costs us environmental protection agency oversight costs legal fees operating maintenance costs currently formerly owned operated facilities circumstances affect reliability precision accruals include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur believe changes accruals may result factors uncertainties material effect financial position results operations based upon information currently available estimate potential environmental liabilities within range 40 million 170 million december 28 2013 environmental reserves approximately 74 million established address specific estimated liabilities estimate likely pay accrued environmental remediation liabilities next five ten years classified 21 million current liabilities expenditures evaluate remediate contaminated sites approximated 12 million 15 million 9 million 2013 2012 2011 respectively leases rental expense approximated 95 million 97 million 93 million 2013 2012 2011 respectively future minimum rental commitments noncancelable operating leases effect december 28 2013 approximated 64 million 2014 46 million 2015 36 million 2016 28 million 2017 21 million 2018 total 148 million thereafter note 14 supplemental cash flow information made following cash payments cash paid interest finance group included amounts paid manufacturing group 11 million 26 million 2012 2011 respectively cash paid interest finance group manufacturing group significant 2013 2012 net taxes paid finance group included payment 111 million primarily settlement related irs’s challenge tax deductions claimed prior years certain leveraged lease transactions note 15 segment geographic data operate report financial information following five business segments cessna bell textron systems industrial finance accounting policies segments described note 1 cessna products include citation jets caravan singleengine utility turboprops singleengine utility highperformance piston aircraft aftermarket services sold diverse base corporate individual buyers bell products include military commercial helicopters tiltrotor aircraft related spare parts services bell supplies military helicopters association boeing company military tiltrotor aircraft aftermarket services us nonus governments bell also supplies commercial helicopters aftermarket services corporate offshore petroleum exploration development utility charter police fire rescue emergency medical helicopter operators foreign governments textron systems products include unmanned aircraft systems marine land systems weapons sensors variety defense aviation mission support products services primarily us nonus governments december 2013 acquired two flight simulation aircraft training product businesses industrial products markets include following · kautex products include blowmolded plastic fuel systems windshield headlamp washer systems selective catalytic reduction systems engine camshafts marketed primarily automobile original equipment manufacturers well plastic bottles containers various uses · greenlee products include powered equipment electrical test measurement instruments mechanical hydraulic tools cable connectors fiber optic assemblies principally used construction maintenance telecommunications data communications utility plumbing industries 2013 acquired two businesses manufacturer underground aerial transmission distribution products designer manufacturer power utility products · ezgo jacobsen products include golf cars offroad utility light transportation vehicles professional turfmaintenance equipment specialized turfcare vehicles marketed primarily golf courses resort communities municipalities sporting venues consumers commercial industrial users finance segment provides commercial loans leases primarily new cessna aircraft bell helicopters well preowned cessna aircraft bell helicopters limited basis segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses measurement finance segment includes interest income expense along intercompany interest expense provisions losses finance receivables involving sale lease products recorded selling manufacturing segment finance group recourse manufacturing group revenues segment along reconciliation segment profit loss income continuing operations income taxes follows revenues major product type summarized revenues included sales us government approximately 37 billion 36 billion 35 billion 2013 2012 2011 respectively primarily bell textron systems segments information segment provided geographic data presented selected financial information continuing operations geographic area revenues attributed countries based location customer property plant equipment net based location asset quarterly data second quarter 2013 included 28 million severance costs fourth quarter 2012 included 27 million charge related award cessna arbitration proceeding schedule ii valuation qualifying accounts deductions primarily include amounts written uncollectable accounts less recoveries inventory disposals currency translation adjustments item 9item 8 financial statements supplementary data consolidated financial statements related reports independent registered public accounting firm thereon included annual report form 10k pages indicated schedules omitted either applicable required information included financial statements notes thereto report management responsible integrity objectivity financial data presented annual report form 10k consolidated financial statements prepared conformity us generally accepted accounting principles include amounts based management’s best estimates judgments management also responsible establishing maintaining adequate internal control financial reporting textron inc term defined exchange act rules 13a15f participation management conducted evaluation effectiveness internal control financial reporting based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission 2013 framework based evaluation framework internal control integrated framework concluded textron inc maintained material respects effective internal control financial reporting january 3 2015 independent registered public accounting firm ernst young llp audited consolidated financial statements textron inc issued attestation report textron’s internal controls financial reporting january 3 2015 stated reports included herein conduct business accordance standards outlined textron business conduct guidelines communicated employees honesty integrity high ethical standards core values conduct business every textron business prepares carries annual compliance plan ensure values standards maintained internal control structure designed provide reasonable assurance appropriate cost assets safeguarded transactions properly executed recorded internal control structure includes among things established policies procedures internal audit function selection training qualified personnel textron’s management responsible implementing effective internal control systems monitoring effectiveness well developing executing annual internal control plan audit committee board directors behalf shareholders oversees management’s financial reporting responsibilities audit committee consists six directors officers employees textron meets regularly independent auditors management internal auditors review matters relating financial reporting internal accounting controls auditing scott c donnelly frank connor scott c donnelly frank connor chairman president chief executive officer executive vice president chief financial officer february 25 2015 report independent registered public accounting firm board directors shareholders textron inc audited textron inc’s internal control financial reporting january 3 2015 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria textron inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion textron inc maintained material respects effective internal control financial reporting january 3 2015 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets textron inc january 3 2015 december 28 2013 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended january 3 2015 textron inc report dated february 25 2015 expressed unqualified opinion thereon ernst young llp boston massachusetts february 25 2015 report independent registered public accounting firm board directors shareholders textron inc audited accompanying consolidated balance sheets textron inc january 3 2015 december 28 2013 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended january 3 2015 audits also included financial statement schedule contained page 75 financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position textron inc january 3 2015 december 28 2013 consolidated results operations cash flows three years period ended january 3 2015 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states textron inc’s internal control financial reporting january 3 2015 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 25 2015 expressed unqualified opinion thereon ernst young llp boston massachusetts february 25 2015 consolidated statements operations years threeyear period ended january 3 2015 see notes consolidated financial statements consolidated statements comprehensive income years threeyear period ended january 3 2015 see notes consolidated financial statements consolidated balance sheets see notes consolidated financial statements consolidated statements shareholders’ equity see notes consolidated financial statements consolidated statements cash flows years threeyear period ended january 3 2015 see notes consolidated financial statements consolidated statements cash flows continued years threeyear period ended january 3 2015 see notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation financial statement presentation consolidated financial statements include accounts textron inc majorityowned subsidiaries march 14 2014 completed acquisition outstanding equity interests beech holdings llc included beechcraft corporation subsidiaries collectively “beechcraft” results beechcraft included consolidated financial statements period subsequent completion acquisition result consolidated financial results year ended january 3 2015 reflect full year beechcraft operations financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated majorityowned subsidiaries operate bell textron systems industrial segments textron aviation segment includes legacy cessna segment acquired beechcraft business finance group also finance segment consists textron financial corporation tfc consolidated subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements finance group provides captive financing retail purchases leases new preowned aircraft manufactured manufacturing group consolidated statements cash flows cash received customers sale receivables reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidation collaborative arrangements bell segment strategic alliance agreement boeing company boeing provide engineering development test services related v22 aircraft well produce v22 aircraft number separate contracts us government v22 contracts alliance created agreement legal entity employees assets true operations agreement creates contractual rights represent entity equity interest account alliance collaborative arrangement bell boeing reporting costs incurred revenues generated transactions us government company’s respective income statement neither bell boeing considered principal participant transactions recorded agreement profits costplus contracts allocated bell boeing 5050 basis negotiated profits fixedprice contracts also allocated 5050 however bell boeing responsible cost overruns entitled retain cost underruns based contractual arrangement established alliance bell accounts rights obligations specific requirements v22 contracts allocated bell work breakdown structure account rights obligations including warranty product contingent liabilities specific requirements v22 contracts allocated us agreement revenues cost sales reflect performance v22 contracts revenues recognized using unitsofdelivery method include assets used performance v22 contracts including inventory unpaid receivables liabilities arising obligations v22 contracts consolidated balance sheets use estimates prepare financial statements conformity generally accepted accounting principles require us make estimates assumptions affect amounts reported financial statements actual results could differ estimates assumptions reviewed periodically effects changes reflected consolidated statements operations period determined 2014 2013 2012 changed estimates revenues costs certain longterm contracts accounted percentageofcompletion method accounting changes estimates increased income continuing operations income taxes 2014 2013 2012 95 million 29 million 15 million respectively 60 million 18 million 9 million tax 021 006 003 per diluted share respectively 2014 2013 2012 gross favorable program profit adjustments totaled 132 million 51 million 88 million respectively 2014 2013 2012 gross unfavorable program profit adjustments totaled 37 million 22 million 73 million respectively increase net program profit adjustments 2014 compared 2013 largely driven bell segment related impact cost reduction activities 2014 well unfavorable performance 2013 related manufacturing inefficiencies addition gross favorable program profit adjustments 2014 included 16 million related settlement system development demonstration phase armed reconnaissance helicopter arh program terminated october 2008 revenue recognition generally recognize revenue sale products longterm contracts upon delivery commercial aircraft delivery upon completion manufacturing customer acceptance transfer risk rewards ownership taxes collected customers remitted government authorities recorded net basis sale arrangement involves multiple deliverables sales products include customization services evaluate arrangement determine whether separate items required delivered arrangement qualify separate units accounting arrangements typically involve customization services offer customers purchase bell helicopters services generally provided within first six months customer accepts aircraft assumes risk loss consider aircraft customization services separate units accounting allocate contract price two relative selling price basis using best evidence selling price arrangement deliverables typically reference price charged similar items sold separately us taking consideration performance cancellation termination refundtype provisions recognize revenue recognition criteria unit accounting met longterm contracts revenues longterm contracts accounted percentageofcompletion method accounting method estimate profit difference total estimated revenues cost contract recognize estimated profit contract term based either unitsofdelivery method costtocost method typically used development effort costs incurred appropriate circumstances revenues fixedprice contracts generally recorded using unitsofdelivery method revenues costreimbursement contracts recorded using costtocost method longterm contract profits based estimates total contract cost revenues utilizing current contract specifications expected engineering requirements achievement contract milestones product deliveries certain contracts awarded fixedprice incentive fees also considered estimating revenues profit rates contract costs typically incurred period several years estimation costs requires substantial judgment cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments required changes prior estimates recognized using cumulative catchup method impact change inceptiontodate recorded current period anticipated losses contracts recognized full period losses become probable estimable finance revenues finance revenues primarily include interest finance receivables capital lease earnings portfolio gainslosses portfolio gainslosses include impairment charges related repossessed assets properties gainslosses sale early termination finance assets recognize interest using interest method provides constant rate return terms receivables accrual interest income suspended credit quality indicators suggest full collection principal interest doubtful addition automatically suspend accrual interest income accounts contractually delinquent three months unless collection doubtful cash payments nonaccrual accounts including finance charges generally applied reduce net investment balance resume accrual interest loan becomes contractually current payment according original terms loan modified following period performance terms modification provided conclude collection principal interest longer doubtful previously suspended interest income recognized time cash equivalents cash equivalents consist cash shortterm highly liquid investments original maturities three months less inventories stated lower cost estimated net realizable value inventories generally using firstin firstout fifo method lastin firstout lifo method certain qualifying inventories lifo provides better matching costs revenues determine costs commercial helicopters average cost basis model considering expended estimated costs current production release inventoried costs related longterm contracts stated actual production costs including allocable operating overhead advances suppliers case contracts us government allocable research development general administrative expenses since inventoried costs include amounts related contracts long production cycles portion costs expected realized within one year pursuant contract provisions agencies us government title security interest inventories related contracts result advances performancebased payments progress payments advances payments reflected offset related inventory balances customer deposits recorded inventory right offset exists customer deposits recorded accrued liabilities property plant equipment property plant equipment recorded cost depreciated primarily using straightline method capitalize expenditures improvements increase asset values extend useful lives property plant equipment reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable carrying value asset exceeds sum undiscounted expected future cash flows asset generally written fair value goodwill intangible assets business acquisitions estimate fair value intangible assets primarily using discounted cash flow analysis anticipated cash flows reflecting incremental revenues andor cost savings resulting acquired intangible asset using market participant assumptions goodwill represents excess cost fair values assigned intangible net assets acquired businesses goodwill intangible assets deemed indefinite lives amortized subject annual impairment testing evaluate recoverability assets fourth quarter year frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate potential impairment annual impairment test calculate fair value reporting unit indefinitelived intangible asset primarily using discounted cash flows reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics goodwill impairment test discounted cash flows incorporate assumptions revenue growth operating margins discount rates represent best estimates current forecasted market conditions cost structure anticipated net cost reductions implied rate return believe market participant would require investment business similar risks characteristics reporting unit assessed reporting unit’s estimated fair value exceeds carrying value impairment otherwise amount impairment determined comparing carrying amount reporting unit’s goodwill implied fair value goodwill implied fair value goodwill determined assigning fair value reporting unit’s assets liabilities reporting unit acquired business combination carrying amount goodwill exceeds implied fair value impairment loss recognized amount equal excess acquired intangible assets finite lives subject amortization assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable amortization intangible assets finite lives recognized estimated useful lives using method amortization reflects pattern economic benefits intangible assets consumed otherwise realized approximately 76 gross intangible assets amortized based cash flow streams used value assets remaining assets amortized using straightline method finance receivables finance receivables primarily include loans provided purchasers new preowned textron aviation aircraft bell helicopters finance receivables generally recorded amount outstanding principal less allowance losses maintain allowance losses finance receivables level considered adequate cover inherent losses portfolio based management’s evaluation larger balance accounts specifically identified impaired reserve established based comparing expected future cash flows discounted finance receivable’s effective interest rate fair value underlying collateral finance receivable collateral dependent carrying amount expected future cash flows consider collateral value financial performance liquidity borrower existence financial strength guarantors estimated recovery costs including legal expenses costs associated repossession eventual disposal collateral range potential outcomes perform multiple discounted cash flow analyses weight potential outcomes based relative likelihood occurrence evaluation portfolio inherently subjective requires estimates including amount timing future cash flows expected received impaired finance receivables estimated fair value underlying collateral may differ actual results analysis specific individual account critical factors included analysis include industry valuation guides age physical condition collateral payment history existence financial strength guarantors also establish allowance losses cover probable specifically unknown losses existing portfolio allowance established percentage nonrecourse finance receivables identified requiring specific reserves percentage based combination factors including historical loss experience current delinquency default trends collateral values general economic specific industry trends finance receivables charged earlier date collateral repossessed payment received six months unless management deems receivable collectible repossessed assets recorded fair value less estimated cost sell pension postretirement benefit obligations maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections evaluate update assumptions annually consultation thirdparty actuaries investment advisors also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases recognize overfunded underfunded status pension postretirement plans consolidated balance sheets recognize changes funded status defined benefit plans comprehensive income year occur actuarial gains losses immediately recognized net periodic pension cost recognized component comprehensive income loss oci amortized net periodic pension cost future periods derivatives hedging activities exposed market risk primarily changes currency exchange rates interest rates hold issue derivative financial instruments trading speculative purposes manage volatility relating exposures net exposures consolidated basis take advantage natural offsets residual portion enter various derivative transactions pursuant policies areas counterparty exposure hedging practices credit risk related derivative financial instruments considered minimal managed requiring high credit standards counterparties periodic settlements positions derivative instruments reported fair value consolidated balance sheets designation support hedge accounting performed specific exposure basis financial instruments qualifying fair value hedges record changes fair value earnings offset part whole corresponding changes fair value underlying exposures hedged cash flow hedges record changes fair value derivatives extent effective hedges oci net deferred taxes changes fair value derivatives qualifying hedges recorded earnings foreign currency denominated assets liabilities translated us dollars adjustments currency rate changes recorded cumulative translation adjustment account shareholders’ equity related foreign entity sold substantially liquidated use foreign currency financing transactions effectively hedge longterm investments foreign operations corresponding currency foreign currency gains losses hedge longterm investments recorded cumulative translation adjustment account product liabilities accrue product liability claims related defense costs loss probable reasonably estimable estimates generally based specifics claim incident best estimate probable loss using historical experience environmental liabilities asset retirement obligations liabilities environmental matters recorded sitebysite basis probable obligation incurred cost reasonably estimated estimate accrued environmental liabilities using currently available facts existing technology presently enacted laws regulations subject number factors uncertainties environmental liabilities discounted take consideration possible future insurance proceeds significant amounts claims third parties incurred asset retirement obligations primarily related costs remove dispose underground storage tanks asbestos materials used insulation adhesive fillers floor tiles legal requirement remove items currently plan remodel related facilities otherwise cause impacted items require disposal since asset retirement obligations estimable related liability recorded consolidated balance sheets warranty product maintenance liabilities provide limited warranty product maintenance programs including parts labor certain products periods ranging one five years estimate costs may incurred warranty programs record liability amount costs time product revenues recognized factors affect liability include number products sold historical costs per claim contractual recoveries vendors historical anticipated rates warranty claims including production warranty patterns new models assess adequacy recorded warranty product maintenance liabilities periodically adjust amounts necessary additionally may establish warranty liabilities related issuance aircraft service bulletins aircraft longer covered limited warranty programs research development costs customerfunded research development costs charged directly related contracts primarily consist us government contracts accordance government regulations recover portion companyfunded research development costs overhead rate charges us government contracts research development costs reimbursable contract us government another customer charged expense incurred companyfunded research development costs 694 million 651 million 584 million 2014 2013 2012 respectively included cost sales income taxes deferred income tax balances reflect effects temporary differences financial reporting carrying amounts assets liabilities tax bases well net operating losses tax credit carryforwards stated enacted tax rates effect year taxes expected paid recovered deferred income tax assets represent amounts available reduce income taxes payable taxable income future years evaluate recoverability future tax deductions credits assessing adequacy future expected taxable income sources including future reversal existing taxable temporary differences taxable income carryback years available tax planning strategies estimated future taxable income recognize net taxrelated interest penalties continuing operations income tax expense new accounting pronouncements may 2014 financial accounting standards board issued accounting standards update asu 201409 “revenue contracts customers” outlines comprehensive fivestep revenue recognition model based principle entity recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services entities option using either full retrospective modified retrospective approach adoption asu effective company beginning fiscal 2017 early adoption permitted currently evaluating new guidance determine impact expected consolidated financial statements along transition method expect utilize note 2 business acquisitions goodwill intangible assets 2014 beechcraft acquisition march 14 2014 acquired beechcraft aggregate cash payment 15 billion included repayment portion beechcraft’s working capital credit facility closing acquisition beechcraft formation textron aviation segment provide increased scale complementary product offerings allowing us strengthen position across aviation industry enhance ability support customers financed portion purchase price issuance 600 million senior notes january 30 2014 drawing 500 million fiveyear term loan agreement entered january 24 2014 balance paid cash hand consideration paid business allocated preliminary basis assets acquired liabilities assumed based estimated fair values acquisition date january 3 2015 valuation process substantially complete however due size breadth acquisition additional time necessary complete valuation certain liabilities related income tax impact finalize purchase accounting within oneyear measurement period allowed generally accepted accounting principles allocation purchase price january 3 2015 presented goodwill 228 million primarily related expected synergies combining operations value existing workforce intangible assets 581 million included unpatented technology related original equipment manufactured parts designs customer relationships valued 373 million trade names valued 208 million unpatented technology customer relationships assets life 15 years resulting amortization expense range approximately 17 million 31 million annually substantially trade names indefinite life therefore subject amortization acquired taxdeductible goodwill approximately 260 million transaction connection integration beechcraft initiated restructuring program textron aviation segment first quarter 2014 align cessna beechcraft businesses reduce operating redundancies maximize efficiencies 2014 recorded charges 41 million related restructuring activities included acquisition restructuring costs line consolidated statements operations addition incurred transaction costs 11 million 2014 related acquisition also included acquisition restructuring costs line expect incur additional restructuring costs 2015 expect costs material acquisitions 2014 made aggregate cash payments 149 million seven acquisitions within industrial systems segments including tug technologies corporation manufacturer ground support equipment aviation industry made aggregate cash payments 196 million 2013 acquisitions four businesses within textron systems industrial segments two service centers textron aviation segment actual proforma impact 2014 acquisitions operating results 2014 acquisitions included consolidated statement operations since respective closing dates closing dates january 3 2015 revenues related acquisitions totaled 16 billion cost structures beechcraft cessna businesses significantly integrated since acquisition beechcraft therefore possible separately report earnings acquisition earnings related 2014 acquisitions significant period unaudited supplemental proforma data included table presents consolidated information 2014 acquisitions completed december 30 2012 proforma information considered indicative results would occurred acquisitions related financing consummated december 30 2012 necessarily indicative future results reflect potential realization cost savings synergies associated acquisitions certain proforma adjustments made reflect allocation preliminary purchase price acquired net assets included depreciation intangible amortization expense resulting valuation tangible intangible assets amortization inventory fair value stepup adjustments related tax effects proforma results 2013 also adjusted include transaction restructuring costs 52 million related beechcraft acquisition costs excluded 2014 proforma results addition proforma results exclude financial impact related beechcraft’s emergence bankruptcy 2013 goodwill changes carrying amount goodwill segment follows intangible assets intangible assets summarized trade names trademarks table include 204 million indefinitelived intangible assets january 3 2015 indefinitelived intangible assets december 28 2013 amortization expense totaled 62 million 37 million 40 million 2014 2013 2012 respectively amortization expense estimated approximately 61 million 62 million 62 million 59 million 57 million 2015 2016 2017 2018 2019 respectively note 3 accounts receivable finance receivables accounts receivable accounts receivable composed following unbillable receivables primarily us government contracts arise revenues appropriately recognized based performance cannot billed yet terms contract unbillable receivables within accounts receivable totaled 151 million january 3 2015 163 million december 28 2013 finance receivables finance receivables presented following table finance receivables primarily includes loans provided purchasers new preowned textron aviation aircraft bell helicopters agreements typically initial terms ranging five ten years amortization terms ranging eight fifteen years average balance loans 1 million january 3 2015 loans generally require customer pay significant payment along periodic scheduled principal payments reduce outstanding balance term loan finance receivables also includes held sale receivables 35 million 65 million january 3 2015 december 28 2013 respectively finance receivables held sale recorded fair value included portfolio quality tables finance receivables diversified across geographic region borrower industry january 3 2015 37 finance receivables distributed throughout us compared 41 end 2013 january 3 2015 december 28 2013 finance receivables included 113 million 200 million respectively receivables legally sold special purpose entity spe consolidated subsidiary tfc assets spe pledged collateral debt reflected securitized onbalance sheet debt note 7 thirdparty investors legal recourse tfc beyond credit enhancement provided assets spe addition end 2014 2013 finance receivables 565 million 610 million respectively pledged collateral debt credit quality indicators nonaccrual finance receivables internally assess quality finance receivables based number key credit quality indicators statistics delinquency loan balance estimated collateral value financial strength individual borrowers guarantors many indicators difficult apply across entire class receivables evaluate individual loans quarterly basis classify loans three categories based key credit quality indicators individual loan three categories performing watchlist nonaccrual classify finance receivables nonaccrual credit quality indicators suggest full collection principal interest doubtful addition automatically classify accounts nonaccrual contractually delinquent three months unless collection principal interest doubtful recognition interest income suspended accounts cash collections used reduce net investment balance resume accrual interest loan becomes contractually current payment according original terms loan modified following period performance terms modification provided conclude collection principal interest longer doubtful previously suspended interest income recognized time accounts classified watchlist credit quality indicators deteriorated compared typical underwriting criteria believe collection full principal interest probable certain finance receivables meet watchlist nonaccrual categories classified performing finance receivables categorized based credit quality indicators discussed summarized follows measure delinquency based contractual payment terms finance receivables determining delinquency aging category account anyall principal interest received applied pastdue principal andor interest amounts due significant portion contractually due payment delinquent entire finance receivable balance reported accordance pastdue delinquency aging category finance receivables delinquency aging category summarized table impaired loans quarterly basis evaluate individual finance receivables impairment nonhomogeneous portfolios larger balance accounts homogeneous loan portfolios finance receivable considered impaired probable unable collect amounts due according contractual terms loan agreement based review credit quality indicators discussed impaired finance receivables include nonaccrual accounts full collection principal interest remains probable account’s original terms expected significantly modified modification specifies interest rate equal greater market rate finance receivable comparable risk account considered impaired years subsequent modification interest income recognized impaired loans significant 2014 2013 summary impaired finance receivables average recorded investment provided allowance losses rollforward allowance losses finance receivables summary composition based underlying finance receivables evaluated impairment provided finance receivables reported table specifically exclude 121 million 120 million leveraged leases january 3 2015 december 28 2013 respectively accordance generally accepted accounting principles note 4 inventories composed following inventories valued lifo method totaled 14 billion 13 billion january 3 2015 december 28 2013 respectively carrying values inventories would higher approximately 468 million 461 million respectively lifo inventories valued current costs inventories related longterm contracts net progressmilestone payments 447 million 359 million january 3 2015 december 28 2013 respectively note 5 property plant equipment net manufacturing group’s property plant equipment net composed following january 3 2015 december 28 2013 assets capital leases totaled 279 million 247 million accumulated amortization 68 million 56 million respectively manufacturing group’s depreciation expense included amortization expense capital leases totaled 379 million 335 million 315 million 2014 2013 2012 respectively note 6 accrued liabilities accrued liabilities manufacturing group summarized changes warranty product maintenance contract liability follows adjustments include changes prior year estimates new issues prior year sales currency translation adjustments note 7 debt credit facilities debt summarized table notes amortize quarterly semiannual basis following table shows required payments next five years debt outstanding january 3 2015 textron senior unsecured revolving credit facility expires october 2018 aggregate principal amount 10 billion 100 million available issuance letters credit january 3 2015 amounts borrowed facility 35 million letters credit issued 6 fixedtofloating rate junior subordinated notes finance group’s 299 million 6 fixedtofloating rate junior subordinated notes unsecured rank junior existing future senior debt notes mature february 15 2067 however right redeem notes par february 15 2017 obligated redeem notes beginning february 15 2042 interest notes fixed 6 february 15 2017 floats threemonth london interbank offered rate 1735 thereafter support agreement support agreement textron inc required ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 200 million cash payments 240 million made tfc 2012 maintain compliance fixed charge coverage ratio note 8 derivative instruments fair value measurements measure fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date prioritize assumptions market participants would use pricing asset liability threetier fair value hierarchy fair value hierarchy gives highest priority level 1 quoted prices active markets identical assets liabilities lowest priority level 3 unobservable inputs little market data exist requiring companies develop assumptions observable inputs meet criteria level 1 include quoted prices similar assets liabilities active markets quoted prices identical assets liabilities markets active categorized level 2 level 3 inputs reflect estimates assumptions market participants would use pricing asset liability based best information available circumstances valuation techniques assets liabilities measured using level 3 inputs may include methodologies market approach income approach cost approach may use unobservable inputs projections estimates management’s interpretation current market data unobservable inputs utilized extent observable inputs available cost effective obtain assets liabilities recorded fair value recurring basis manufacture sell products number countries throughout world therefore exposed movements foreign currency exchange rates utilize foreign currency exchange contracts manage volatility foreign currency exchange contracts measured fair value using market method valuation technique inputs technique utilize current foreign currency exchange forward market rates published thirdparty leading financial news data providers observable data represent rates financial institution uses contracts entered date however based actual transactions classified level 2 january 3 2015 december 28 2013 foreign currency exchange contracts notional amounts upon contracts based 696 million 636 million respectively january 3 2015 fair value amounts foreign currency exchange contracts 16 million asset 26 million liability december 28 2013 fair value amounts foreign currency exchange contracts 2 million asset 15 million liability primarily utilize forward exchange contracts maturities three years contracts qualify cash flow hedges intended offset effect exchange rate fluctuations forecasted sales inventory purchases overhead expenses january 3 2015 net deferred loss 13 million accumulated comprehensive loss related cash flow hedges net gains losses recognized earnings accumulated comprehensive loss cash flow hedges including gains losses related hedge ineffectiveness significant periods presented hedge net investment position major currencies generate foreign currency interest payments offset transactional exposures currencies accomplish borrow directly foreign currency designate portion foreign currency debt hedge net investment record changes fair value contracts comprehensive income extent effective cash flow hedges currency effects effective portion hedges reflected foreign currency translation adjustments within accumulated comprehensive loss significant periods presented assets recorded fair value nonrecurring basis years ended january 3 2015 december 28 2013 finance group’s impaired nonaccrual finance receivable 49 million 45 million respectively measured fair value nonrecurring basis using significant unobservable inputs level 3 impaired nonaccrual finance receivables represent assets recorded fair value nonrecurring basis since measurement required reserves impaired finance receivables significantly dependent fair value underlying collateral impaired nonaccrual finance receivables secured aviation assets fair values collateral determined primarily based use industry pricing guides fair value measurements recorded impaired finance receivables resulted charges provision loan losses totaling 18 million 7 million 2014 2013 respectively assets liabilities recorded fair value carrying value estimated fair values financial instruments reflected financial statements fair value follows fair value manufacturing group debt determined using market observable data similar transactions level 2 january 3 2015 december 28 2013 approximately 75 70 respectively fair value term debt finance group determined based discounted cash flow analyses using observable market inputs debt similar duration subordination credit default expectations level 2 remaining finance group debt determined based observable market transactions level 1 fair value estimates finance receivables held investment determined based internally developed discounted cash flow models primarily utilizing significant unobservable inputs level 3 include estimates rate return financing cost capital structure andor discount rate expectations current market participants combined estimated loan cash flows based credit losses payment rates expectations borrowers’ ability make payments timely basis note 9 shareholders’ equity capital stock authorization 15 million shares preferred stock par value 001 500 million shares common stock par value 0125 outstanding common stock activity three years ended january 3 2015 presented earnings per share february 2014 entered accelerated share repurchase agreement asr counterparty repurchased 43 million shares outstanding common stock initial delivery shares asr resulted immediate reduction outstanding shares used calculate weighted average common shares basic diluted earnings per share settled asr december 2014 final purchase price 167 million calculate basic diluted earnings per share eps based net income approximates income available common shareholders period basic eps calculated using twoclass method includes weightedaverage number common shares outstanding period restricted stock units paid stock deemed participating securities provide nonforfeitable rights dividends diluted eps considers dilutive effect potential future common stock including stock options prior maturity convertible notes may 1 2013 shares could issued upon conversion notes upon exercise related warrants weightedaverage shares outstanding basic diluted eps follows 2014 2013 2012 stock options purchase 2 million 5 million 7 million shares respectively common stock outstanding excluded calculation diluted weightedaverage shares outstanding effect would antidilutive accumulated comprehensive loss components accumulated comprehensive loss presented comprehensive income loss aftertax components comprehensive income loss presented components comprehensive income included computation net periodic pension cost see note 11 additional information note 10 sharebased compensation 2007 longterm incentive plan authorizes awards key employees form options purchase shares restricted stock restricted stock units stock appreciation rights performance stock awards maximum 12 million shares authorized issuance purposes plan plus shares become available upon cancellation forfeiture expiration awards granted 1999 longterm incentive plan 12 million shares may awarded pursuant incentive stock options 3 million shares may awarded pursuant restricted stock units awards intended paid shares plan also authorizes performance share units paid cash based upon value common stock deferred income plan textron executives provide certain executives opportunity voluntarily defer 80 base salary along incentive compensation elective deferrals may put either stock unit account interestbearing account participants cannot move amounts two accounts actively employed us cannot receive distributions termination employment intrinsic value amounts paid deferred income plan totaled 3 million 1 million 1 million 2014 2013 2012 respectively sharebased compensation costs reflected primarily selling administrative expenses compensation expense included net income sharebased compensation plans follows compensation expense included approximately 21 million 26 million 23 million 2014 2013 2012 respectively portion fair value options issued portion previously granted options requisite service rendered compensation cost awards subject service conditions vest ratably recognized straightline basis requisite service period separately vesting portion award january 3 2015 recognized 54 million total compensation costs associated unvested awards subject service conditions expect recognize compensation expense awards weightedaverage period approximately two years stock options purchase shares maximum term ten years generally vest ratably threeyear period stock option compensation cost calculated fair value approach recognized vesting period stock options estimate fair value options granted date grant using blackscholes optionpricing model expected volatilities based implied volatilities traded options common stock historical volatilities factors expected term based historical option exercise data adjusted reflect anticipated changes expected behavior weightedaverage fair value options granted past three years assumptions used optionpricing model grants follows stock option activity 2014 provided january 3 2015 outstanding options aggregate intrinsic value 108 million weightedaverage remaining contractual life six years exercisable options aggregate intrinsic value 73 million weightedaverage remaining contractual life five years january 3 2015 total intrinsic value options exercised 2014 2013 2012 25 million 10 million 11 million respectively restricted stock units issue restricted stock units settled cash stock vesting onethird third fourth fifth year following year grant include right receive dividend equivalents fair value units based trading price common stock recognized ratably vesting period units settled stock use trading price grant date units settled cash remeasured using price reporting period date prior 2012 issued restricted stock units vested equal installments five years 2014 activity restricted stock units provided fair value restricted stock awards vested andor amounts paid awards follows performance share units fair value sharebased compensation awards accounted liabilities includes performance share units paid cash first quarter year following vesting payouts performance share units vary based certain performance criteria generally set year threeyear performance period performance share units vest end three years fair value awards based trading price common stock remeasured reporting period date 2014 activity performance share units follows fair value performance share units vested andor amounts paid awards follows note 11 retirement plans defined benefit defined contribution plans cover substantially employees significant number usbased employees participate textron retirement plan designed “flooroffset” arrangement defined benefit component defined contribution component defined benefit component arrangement includes textron master retirement plan tmrp bell helicopter textron master retirement plan bhtmrp defined contribution component retirement account plan rap defined benefit component provides minimum guaranteed benefit “floor” benefit rap participants eligible receive contributions textron 2 eligible compensation may make contributions plan upon retirement participants receive greater floor benefit value rap tmrp bhtmrp subject provisions employee retirement income security act 1974 erisa effective january 1 2010 textron retirement plan closed new participants employees hired date receive additional 4 annual cash contribution textron savings plan account based eligible compensation also funded unfunded defined benefit pension plans cover certain us foreign employees addition several defined contribution plans sponsored various businesses largest plan textron savings plan qualified 401k plan subject erisa defined contribution plans cost approximately 99 million 93 million 88 million 2014 2013 2012 respectively amounts include 16 million 19 million 21 million respectively contributions rap also provide postretirement benefits pensions certain retired employees us include healthcare dental care medicare part b reimbursement life insurance benefits periodic benefit cost components net periodic benefit cost amounts recognized oci follows estimated amount amortized accumulated comprehensive loss net periodic pension costs 2015 follows obligations funded status plans measured fiscal yearend changes projected benefit obligation fair value plan assets along funded status follows accumulated benefit obligation defined benefit pension plans 76 billion 61 billion january 3 2015 december 28 2013 respectively included 392 million 359 million respectively accumulated benefit obligations unfunded plans funding permitted foreign environments funding feasible pension plans accumulated benefit obligations exceeding fair value plan assets follows assumptions weightedaverage assumptions use pension postretirement plans follows 2014 society actuaries released new mortality tables reflect increased life expectancy previous tables incorporated new tables 2014 fair value measurement us pension plans resulted increase projected benefit obligation january 3 2015 assumed healthcare cost trend rate medical prescription drug cost 66 2014 72 2013 expect rate gradually decline 50 2021 assume remain assumed healthcare cost trend rates significant effect amounts reported postretirement benefits pensions onepercentagepoint change assumed healthcare cost trend rates would following effects pension assets expected longterm rate return plan assets determined based variety considerations including established asset allocation targets expectations asset classes historical returns plans’ assets market considerations invest pension assets objective achieving total rate return long term sufficient fund future pension obligations minimize future pension contributions willing tolerate commensurate level risk achieve objective based funded status plans longterm nature pension liability risk controlled maintaining portfolio assets diversified across variety asset classes investment styles investment managers possible investment managers prohibited owning stock portfolios manage behalf us plan assets represent majority plan assets asset allocation target ranges established consistent investment objectives assets rebalanced periodically foreign plan assets allocations based expected cash flow needs assessments local practices markets target allocation ranges follows us plan assets domestic equity securities 23 38 international equity securities 11 22 debt securities 27 38 private investment partnerships 5 11 real estate 7 13 hedge funds 0 5 foreign plan assets equity securities 49 67 debt securities 28 41 real estate 3 12 fair value total pension plan assets major category level fair value hierarchy defined note 8 follows cash equivalents equity debt securities include comingled funds represent investments funds offered institutional investors similar mutual funds provide diversification holding various equity debt securities since comingled funds quoted active market priced based relative value underlying equity debt investments individual prices given time accordingly classified level 2 debt securities valued based day actual trading prices available prices available use matrix pricing model historical prices trends factors private investment partnerships represent investments funds turn invest stocks debt securities companies cases publicly traded partnerships valued using income market methods include cash flow projections market multiples various comparable companies real estate includes owned properties investments partnerships owned properties valued using certified appraisals least every three years updated least annually real estate investment manager based current market trends available information appraisals generally use standard methods valuing real estate including forecasting income identifying current transactions comparable real estate arrive fair value real estate partnerships valued similar private investment partnerships general partner using standard real estate valuation methods value real estate properties securities held within fund portfolios believe assumptions consistent assumptions market participants would use valuing investments hedge funds represent investment diversified fund hedge funds sole investor fund invests portfolio funds publicly traded managed various portfolio managers investments portfolio funds typically valued basis recent price valuation provided relevant fund’s administrator fund aggregates valuations assets liabilities calculate net asset value fund table presents reconciliation beginning ending balances fair value measurements use significant unobservable inputs level 3 major category estimated future cash flow impact defined benefits salaried plans based salary years service hourly plans generally provide benefits based stated amounts year service funding policy consistent applicable laws regulations 2015 expect contribute approximately 80 million fund pension plans rap benefit payments provided reflect expected future employee service appropriate expected paid net estimated participant contributions payments based assumptions used measure benefit obligation end fiscal 2014 pension benefit payments primarily paid qualified pension trusts pay postretirement benefits pensions general corporate assets benefit payments expect pay follows note 12 income taxes conduct business globally result file numerous consolidated separate income tax returns within outside us subsidiaries file consolidated federal income tax return income continuing operations income taxes follows income tax expense continuing operations summarized follows current federal state provisions 2012 included 25 million tax related sale certain leveraged leases finance segment previously recorded significant deferred tax liabilities following table reconciles federal statutory income tax rate effective income tax rate continuing operations amount income taxes pay subject ongoing audits us federal state nonus tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental assess income tax positions record tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting date tax positions likely tax benefit sustained record largest amount tax benefit greater 50 likelihood realized upon settlement taxing authority full knowledge relevant information interest penalties accrued applicable believe likely tax benefit sustained tax benefit recognized future results may include favorable unfavorable adjustments estimated tax liabilities due settlement income tax examinations new regulatory judicial pronouncements expiration statutes limitations relevant events result effective tax rate may fluctuate significantly quarterly annual basis unrecognized tax benefits represent tax positions reserves established unrecognized state tax benefits interest related unrecognized tax benefits reflected net applicable tax benefits reconciliation unrecognized tax benefits excluding accrued interest follows january 3 2015 december 28 2013 approximately 305 million 204 million respectively unrecognized tax benefits recognized would favorably affect effective tax rate future period january 3 2015 december 28 2013 remaining 80 million unrecognized tax benefits related discontinued operations reasonably possible within next 12 months unrecognized tax benefits exclusive interest may decrease range approximately 0 215 million result conclusion audits related appeals review processes expiration statutes limitations additional worldwide uncertain tax positions potential decrease primarily relates uncertainties respect prior dispositions research tax credits however based process finalizing audits required review process relevant authorities difficult estimate timing amount potential changes unrecognized tax benefits although outcome matters cannot determined believe adequate provision made potential unfavorable financial statement impact normal course business subject examination taxing authorities throughout world including major jurisdictions canada china germany japan mexico us exceptions longer subject us federal state local income tax examinations years 1997 longer subject nonus income tax examinations major jurisdictions years 2009 2014 2013 2012 recognized net taxrelated interest expense totaling approximately 6 million 6 million 9 million respectively consolidated statements operations january 3 2015 december 28 2013 total 132 million 126 million respectively net accrued interest expense included consolidated balance sheets tax effects temporary differences give rise significant portions net deferred tax assets liabilities follows accrued expenses includes warranty product maintenance reserves selfinsured liabilities interest believe earnings periods temporary differences become deductible sufficient realize related future income tax benefits jurisdictions expiration date tax carryforwards projected operating results indicate realization likely valuation allowance provided following table presents breakdown current longterm net deferred tax assets net operating loss credit carryforwards january 3 2015 follows undistributed earnings nonus subsidiaries approximated 995 million january 3 2015 consider undistributed earnings indefinitely reinvested therefore provided deferred tax liability residual us tax may due upon repatriation earnings effect us foreign tax credits practicable estimate amount tax might payable earnings event longer indefinitely reinvested note 13 contingencies commitments subject legal proceedings claims arising conduct business including proceedings claims relating commercial financial transactions government contracts alleged lack compliance applicable laws regulations production partners product liability patent trademark infringement employment disputes environmental safety health matters legal proceedings claims seek damages fines penalties substantial amounts remediation environmental contamination government contractor subject audits reviews investigations determine whether operations conducted accordance applicable regulatory requirements federal government procurement regulations certain claims brought us government could result suspension debarment us government contracting period time basis information presently available believe existing proceedings claims material effect financial position results operations ordinary course business enter standby letter credit agreements surety bonds financial institutions meet various performance obligations outstanding letter credit arrangements surety bonds aggregated approximately 790 million 298 million january 3 2015 december 28 2013 respectively environmental remediation industrial enterprises engaged similar businesses involved number remedial actions various federal state laws regulations relating environment impose liability companies clean contribute cost cleaning sites hazardous wastes materials disposed released accrued environmental liabilities relate installation remediation systems disposal costs us environmental protection agency oversight costs legal fees operating maintenance costs currently formerly owned operated facilities circumstances affect reliability precision accruals include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur believe changes accruals may result factors uncertainties material effect financial position results operations based upon information currently available estimate potential environmental liabilities within range 40 million 160 million january 3 2015 environmental reserves approximately 80 million established address specific estimated liabilities estimate likely pay accrued environmental remediation liabilities next ten years classified 24 million current liabilities expenditures evaluate remediate contaminated sites approximated 13 million 12 million 15 million 2014 2013 2012 respectively leases rental expense approximated 121 million 95 million 97 million 2014 2013 2012 respectively future minimum rental commitments noncancelable operating leases effect january 3 2015 approximated 73 million 2015 57 million 2016 47 million 2017 37 million 2018 31 million 2019 193 million thereafter total future minimum rental receipts noncancelable subleases january 3 2015 approximated 23 million note 14 supplemental cash flow information made following cash payments cash paid interest finance group included amounts paid manufacturing group 11 million 2012 cash paid interest finance group manufacturing group significant 2014 2013 note 15 segment geographic data operate report financial information following five business segments textron aviation includes legacy cessna segment acquired beechcraft business bell textron systems industrial finance accounting policies segments described note 1 textron aviation products include citation jets king air turboprops caravan utility turboprops singleengine piston aircraft t6 at6 military aircraft aftermarket sales services sold diverse base corporate individual buyers bell products include military commercial helicopters tiltrotor aircraft related spare parts services bell supplies military helicopters association boeing company military tiltrotor aircraft aftermarket services us nonus governments bell also supplies commercial helicopters aftermarket services corporate offshore petroleum exploration development utility charter police fire rescue emergency medical helicopter operators foreign governments textron systems products include unmanned aircraft systems marine land systems weapons sensors simulation training defense aviation mission support products services primarily us nonus governments industrial products markets include following · kautex products include blowmolded plastic fuel systems windshield headlamp washer systems selective catalytic reduction systems engine camshafts marketed primarily automobile oems well plastic bottles containers various uses · tools test equipment products include powered equipment electrical test measurement instruments mechanical hydraulic tools cable connectors fiber optic assemblies underground aerial transmission distribution products power utility products principally used construction maintenance telecommunications data communications electrical utility plumbing industries · specialized vehicles equipment products include golf cars offroad utility light transportation vehicles aviation ground support equipment professional turfmaintenance equipment turfcare vehicles marketed primarily golf courses resort communities municipalities sporting venues consumers commercial industrial users finance segment provides financing primarily purchasers new preowned textron aviation aircraft bell helicopters segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses acquisition restructuring costs related beechcraft acquisition measurement finance segment includes interest income expense along intercompany interest income expense revenues segment along reconciliation segment profit income continuing operations income taxes follows revenues major product type summarized revenues included sales us government approximately 38 billion 37 billion 36 billion 2014 2013 2012 respectively primarily bell textron systems segments information segment provided geographic data presented selected financial information continuing operations geographic area revenues attributed countries based location customer property plant equipment net based location asset quarterly data includes amortization 12 million 33 million 10 million 8 million first second third fourth quarters 2014 respectively related fair value stepup adjustments beechcraft acquired inventories sold periods second quarter 2013 includes 28 million severance costs b acquisition restructuring costs include restructuring costs 5 million 20 million 3 million 13 million first second third fourth quarters 2014 respectively related acquisition beech holdings llc parent beechcraft corporation completed march 14 2014 transaction costs 11 million related beechcraft acquisition also included first quarter 2014 schedule ii valuation qualifying accounts deductions primarily include amounts written uncollectable accounts less recoveries inventory disposals currency translation adjustments item 9item 8 financial statements supplementary data consolidated financial statements related report independent registered public accounting firm thereon included annual report form 10k pages indicated page consolidated statements operations years threeyear period ended january 2 2016 consolidated statements comprehensive income years threeyear period ended january 2 2016 consolidated balance sheets january 2 2016 january 3 2015 consolidated statements shareholders’ equity years threeyear period ended january 2 2016 consolidated statements cash flows years threeyear period ended january 2 2016 notes consolidated financial statements note 1 summary significant accounting policies note 2 business acquisitions goodwill intangible assets note 3 accounts receivable finance receivables note 4 inventories note 5 property plant equipment net note 6 accrued liabilities note 7 debt credit facilities note 8 derivative instruments fair value measurements note 9 shareholders’ equity note 10 sharebased compensation note 11 retirement plans note 12 income taxes note 13 commitments contingencies note 14 supplemental cash flow information note 15 segment geographic data report independent registered public accounting firm supplementary information quarterly data 2015 2014 unaudited schedule ii valuation qualifying accounts schedules omitted either applicable required information included financial statements notes thereto consolidated statements operations years threeyear period ended january 2 2016 see notes consolidated financial statements consolidated statements comprehensive income years threeyear period ended january 2 2016 see notes consolidated financial statements consolidated balance sheets see notes consolidated financial statements consolidated statements shareholders’ equity see notes consolidated financial statements consolidated statements cash flows years threeyear period ended january 2 2016 see notes consolidated financial statements consolidated statements cash flows continued years threeyear period ended january 2 2016 see notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation financial statement presentation consolidated financial statements include accounts textron inc majorityowned subsidiaries financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated majorityowned subsidiaries operate textron aviation bell textron systems industrial segments finance group also finance segment consists textron financial corporation tfc consolidated subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements finance group provides captive financing retail purchases leases new preowned aircraft manufactured manufacturing group consolidated statements cash flows cash received customers sale receivables reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidation collaborative arrangements bell segment strategic alliance agreement boeing company boeing provide engineering development test services related v22 aircraft well produce v22 aircraft number separate contracts us government v22 contracts alliance created agreement legal entity employees assets true operations agreement creates contractual rights represent entity equity interest account alliance collaborative arrangement bell boeing reporting costs incurred revenues generated transactions us government company’s respective income statement neither bell boeing considered principal participant transactions recorded agreement profits costplus contracts allocated bell boeing 5050 basis negotiated profits fixedprice contracts also allocated 5050 however bell boeing responsible cost overruns entitled retain cost underruns based contractual arrangement established alliance bell accounts rights obligations specific requirements v22 contracts allocated bell work breakdown structure account rights obligations including warranty product contingent liabilities specific requirements v22 contracts allocated us agreement revenues cost sales reflect performance v22 contracts revenues recognized using unitsofdelivery method include assets used performance v22 contracts including inventory unpaid receivables liabilities arising obligations v22 contracts consolidated balance sheets use estimates prepare financial statements conformity generally accepted accounting principles require us make estimates assumptions affect amounts reported financial statements actual results could differ estimates assumptions reviewed periodically effects changes reflected consolidated statements operations period determined 2015 2014 2013 changed estimates revenues costs certain longterm contracts accounted percentageofcompletion method accounting changes estimates increased income continuing operations income taxes 2015 2014 2013 78 million 95 million 29 million respectively 49 million 60 million 18 million tax 018 021 006 per diluted share respectively 2015 2014 2013 gross favorable program profit adjustments totaled 111 million 132 million 51 million respectively 2015 2014 2013 gross unfavorable program profit adjustments totaled 33 million 37 million 22 million respectively increase net program profit adjustments 2014 compared 2013 largely driven bell segment related impact cost reduction activities 2014 well unfavorable performance 2013 related manufacturing inefficiencies addition gross favorable program profit adjustments 2014 included 16 million related settlement system development demonstration phase armed reconnaissance helicopter arh program terminated october 2008 revenue recognition generally recognize revenue sale products longterm contracts upon delivery commercial aircraft delivery upon completion manufacturing customer acceptance transfer risk rewards ownership taxes collected customers remitted government authorities recorded net basis sale arrangement involves multiple deliverables sales products include customization services evaluate arrangement determine whether separate items required delivered arrangement qualify separate units accounting arrangements typically involve customization services offer customers purchase bell helicopters services generally provided within first six months customer accepts aircraft assumes risk loss consider aircraft customization services separate units accounting allocate contract price two relative selling price basis using best evidence selling price arrangement deliverables typically reference price charged similar items sold separately us taking consideration performance cancellation termination refundtype provisions recognize revenue recognition criteria unit accounting met longterm contracts revenues longterm contracts accounted percentageofcompletion method accounting method estimate profit difference total estimated revenues cost contract recognize estimated profit contract term based either unitsofdelivery method costtocost method typically used development effort costs incurred appropriate circumstances revenues fixedprice contracts generally recorded using unitsofdelivery method revenues costreimbursement contracts recorded using costtocost method longterm contract profits based estimates total contract cost revenues utilizing current contract specifications expected engineering requirements achievement contract milestones product deliveries certain contracts awarded fixedprice incentive fees also considered estimating revenues profit rates contract costs typically incurred period several years estimation costs requires substantial judgment cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments required changes prior estimates recognized using cumulative catchup method impact change inceptiontodate recorded current period anticipated losses contracts recognized full period losses become probable estimable finance revenues finance revenues primarily include interest finance receivables capital lease earnings portfolio gainslosses portfolio gainslosses include impairment charges related repossessed assets properties gainslosses sale early termination finance assets recognize interest using interest method provides constant rate return terms receivables accrual interest income suspended credit quality indicators suggest full collection principal interest doubtful addition automatically suspend accrual interest income accounts contractually delinquent three months unless collection doubtful cash payments nonaccrual accounts including finance charges generally applied reduce net investment balance conclude collection principal interest longer doubtful resume accrual interest recognize previously suspended interest income time either loan becomes contractually current payment according original terms loan b loan modified following period performance terms modification cash equivalents cash equivalents consist cash shortterm highly liquid investments original maturities three months less inventories stated lower cost estimated net realizable value inventories generally using firstin firstout fifo method lastin firstout lifo method certain qualifying inventories lifo provides better matching costs revenues determine costs commercial helicopters average cost basis model considering expended estimated costs current production release inventoried costs related longterm contracts stated actual production costs including allocable operating overhead advances suppliers case contracts us government allocable research development general administrative expenses since inventoried costs include amounts related contracts long production cycles portion costs expected realized within one year pursuant contract provisions agencies us government title security interest inventories related contracts result advances performancebased payments progress payments advances payments reflected offset related inventory balances customer deposits recorded inventory right offset exists customer deposits recorded accrued liabilities property plant equipment property plant equipment recorded cost depreciated primarily using straightline method capitalize expenditures improvements increase asset values extend useful lives property plant equipment reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable carrying value asset exceeds sum undiscounted expected future cash flows asset generally written fair value goodwill intangible assets business acquisitions estimate fair value intangible assets primarily using discounted cash flow analysis anticipated cash flows reflecting incremental revenues andor cost savings resulting acquired intangible asset using market participant assumptions goodwill represents excess cost fair values assigned intangible net assets acquired businesses goodwill intangible assets deemed indefinite lives amortized subject annual impairment test evaluate recoverability assets fourth quarter year frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate potential impairment test calculate fair value reporting unit indefinitelived intangible asset primarily using discounted cash flows reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics goodwill impairment test discounted cash flows incorporate assumptions revenue growth operating margins discount rates represent best estimates current forecasted market conditions cost structure anticipated net cost reductions implied rate return believe market participant would require investment business similar risks characteristics reporting unit assessed reporting unit’s estimated fair value exceeds carrying value impairment otherwise amount impairment determined comparing carrying amount reporting unit’s goodwill implied fair value goodwill implied fair value goodwill determined assigning fair value reporting unit’s assets liabilities reporting unit acquired business combination carrying amount goodwill exceeds implied fair value impairment loss recognized amount equal excess indefinitelived intangible assets carrying amount intangible asset exceeds fair value impairment loss recognized amount equal excess acquired intangible assets finite lives subject amortization assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable amortization intangible assets recognized estimated useful lives using method reflects pattern economic benefits intangible assets consumed otherwise realized approximately 76 gross intangible assets amortized based cash flow streams used value assets remaining assets amortized using straightline method finance receivables finance receivables primarily include loans provided purchasers new preowned textron aviation aircraft bell helicopters finance receivables generally recorded amount outstanding principal less allowance losses maintain allowance losses finance receivables level considered adequate cover inherent losses portfolio based management’s evaluation larger balance accounts specifically identified impaired reserve established based comparing expected future cash flows discounted finance receivable’s effective interest rate fair value underlying collateral finance receivable collateral dependent carrying amount expected future cash flows consider collateral value financial performance liquidity borrower existence financial strength guarantors estimated recovery costs including legal expenses costs associated repossession eventual disposal collateral range potential outcomes perform multiple discounted cash flow analyses weight potential outcomes based relative likelihood occurrence evaluation portfolio inherently subjective requires estimates including amount timing future cash flows expected received impaired finance receivables estimated fair value underlying collateral may differ actual results analysis specific individual account critical factors included analysis include industry valuation guides age physical condition collateral payment history existence financial strength guarantors also establish allowance losses cover probable specifically unknown losses existing portfolio allowance established percentage nonrecourse finance receivables identified requiring specific reserves percentage based combination factors including historical loss experience current delinquency default trends collateral values general economic specific industry trends finance receivables charged earlier date collateral repossessed payment received six months unless management deems receivable collectible repossessed assets recorded fair value less estimated cost sell pension postretirement benefit obligations maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections evaluate update assumptions annually consultation thirdparty actuaries investment advisors also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases recognize overfunded underfunded status pension postretirement plans consolidated balance sheets recognize changes funded status defined benefit plans comprehensive income year occur actuarial gains losses immediately recognized net periodic pension cost recognized component comprehensive income loss oci amortized net periodic pension cost future periods derivatives hedging activities exposed market risk primarily changes currency exchange rates interest rates hold issue derivative financial instruments trading speculative purposes manage volatility relating exposures net exposures consolidated basis take advantage natural offsets residual portion enter various derivative transactions pursuant policies areas counterparty exposure hedging practices credit risk related derivative financial instruments considered minimal managed requiring high credit standards counterparties periodic settlements positions derivative instruments reported fair value consolidated balance sheets designation support hedge accounting performed specific exposure basis financial instruments qualifying cash flow hedges record changes fair value derivatives extent effective hedges oci net deferred taxes changes fair value derivatives qualifying hedges recorded earnings foreign currency denominated assets liabilities translated us dollars adjustments currency rate changes recorded cumulative translation adjustment account shareholders’ equity related foreign entity sold substantially liquidated use foreign currency financing transactions effectively hedge longterm investments foreign operations corresponding currency foreign currency gains losses hedge longterm investments recorded cumulative translation adjustment account product liabilities accrue product liability claims related defense costs loss probable reasonably estimable estimates generally based specifics claim incident best estimate probable loss using historical experience environmental liabilities asset retirement obligations liabilities environmental matters recorded sitebysite basis probable obligation incurred cost reasonably estimated estimate accrued environmental liabilities using currently available facts existing technology presently enacted laws regulations subject number factors uncertainties environmental liabilities discounted take consideration possible future insurance proceeds significant amounts claims third parties incurred asset retirement obligations primarily related costs remove dispose underground storage tanks asbestos materials used insulation adhesive fillers floor tiles legal requirement remove items currently plan remodel related facilities otherwise cause impacted items require disposal since asset retirement obligations estimable related liability recorded consolidated balance sheets warranty product maintenance liabilities provide limited warranty product maintenance programs certain products periods ranging one five years significant portion liabilities arises commercial aircraft businesses product maintenance contracts revenue recognized straightline basis contract period unless sufficient historical evidence indicates cost providing services incurred basis straightline circumstances revenue recognized contract period proportion costs expected incurred performing service warranty programs estimate costs may incurred record liability amount costs time product revenues recognized factors affect liability include number products sold historical costs per claim contractual recoveries vendors historical anticipated rates warranty claims including production warranty patterns new models assess adequacy recorded warranty liability periodically adjust amounts necessary additionally may establish warranty liability related issuance aircraft service bulletins aircraft longer covered limited warranty programs research development costs customerfunded research development costs charged directly related contracts primarily consist us government contracts accordance government regulations recover portion companyfunded research development costs overhead rate charges us government contracts research development costs reimbursable contract us government another customer charged expense incurred companyfunded research development costs 778 million 694 million 651 million 2015 2014 2013 respectively included cost sales income taxes deferred income tax balances reflect effects temporary differences financial reporting carrying amounts assets liabilities tax bases well net operating losses tax credit carryforwards stated enacted tax rates effect year taxes expected paid recovered deferred income tax assets represent amounts available reduce income taxes payable taxable income future years evaluate recoverability future tax deductions credits assessing adequacy future expected taxable income sources including future reversal existing taxable temporary differences taxable income carryback years available tax planning strategies estimated future taxable income recognize net taxrelated interest penalties continuing operations income tax expense new accounting pronouncements may 2014 financial accounting standards board fasb issued accounting standards update asu 201409 revenue contracts customers outlines comprehensive fivestep revenue recognition model based principle entity recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services july 2015 fasb approved oneyear deferral effective date standard beginning 2018 public companies option would permit companies adopt standard early original effective date 2017 new standard may adopted either retrospectively modified retrospective basis whereby would applied new contracts existing contracts remaining performance obligations effective date cumulative catchup adjustment recorded beginning retained earnings effective date contracts currently evaluating impacts adoption consolidated financial position results operations related disclosures along implementation approach used note 2 business acquisitions goodwill intangible assets 2015 acquisitions 2015 made aggregate cash payments acquisitions 81 million included three businesses within industrial textron aviation segments 2014 beechcraft acquisition march 14 2014 completed acquisition outstanding equity interests beech holdings llc included beechcraft corporation subsidiaries collectively “beechcraft” aggregate cash payment 15 billion acquisition beechcraft formation textron aviation segment provided increased scale complementary product offerings allowing us strengthen position across aviation industry enhance ability support customers financed 11 billion purchase price issuance longterm debt remaining balance paid cash hand consideration paid business allocated assets acquired liabilities assumed based estimated fair values acquisition date presented goodwill 228 million primarily related expected synergies combining operations value existing workforce intangible assets 581 million included unpatented technology related original equipment manufactured parts designs customer relationships valued 373 million trade names valued 208 million unpatented technology customer relationships assets life 15 years resulting amortization expense range approximately 17 million 31 million annually substantially trade names indefinite life therefore subject amortization acquired taxdeductible goodwill approximately 260 million transaction executed restructuring program textron aviation segment align cessna beechcraft businesses reduce operating redundancies maximize efficiencies 2014 recorded charges 41 million related restructuring activities along 11 million transaction costs included acquisition restructuring costs line consolidated statements operations 2014 acquisitions 2014 also made aggregate cash payments 149 million seven acquisitions within industrial systems segments including tug technologies corporation manufacturer ground support equipment aviation industry actual proforma impact 2014 acquisitions operating results 2014 acquisitions included consolidated statement operations since respective closing dates closing dates january 3 2015 revenues related acquisitions totaled 16 billion cost structures beechcraft cessna businesses significantly integrated since acquisition beechcraft therefore possible separately report earnings acquisition earnings related 2014 acquisitions significant period unaudited supplemental proforma data included table presents consolidated information 2014 acquisitions completed beginning year prior acquisition proforma data considered indicative results would occurred acquisitions related financing consummated beginning year prior acquisition necessarily indicative future results reflect potential realization cost savings synergies associated acquisitions certain proforma adjustments made reflect purchase price allocated acquired net assets business including depreciation intangible amortization expense resulting valuation tangible intangible assets amortization inventory fair value stepup adjustments related tax effects proforma results 2013 also adjusted include transaction restructuring costs 52 million related beechcraft acquisition costs excluded 2014 proforma results addition proforma results exclude financial impact related beechcraft’s emergence bankruptcy 2013 goodwill changes carrying amount goodwill segment follows intangible assets intangible assets summarized trade names trademarks table include 204 million indefinitelived intangible assets january 2 2016 january 3 2015 amortization expense totaled 61 million 62 million 37 million 2015 2014 2013 respectively amortization expense estimated approximately 64 million 64 million 60 million 59 million 55 million 2016 2017 2018 2019 2020 respectively note 3 accounts receivable finance receivables accounts receivable accounts receivable composed following unbillable receivables primarily us government contracts arise revenues appropriately recognized based performance cannot billed yet terms contract unbillable receivables within accounts receivable totaled 135 million january 2 2016 151 million january 3 2015 finance receivables finance receivables presented following table includes finance receivables held sale 30 million 35 million january 2 2016 january 3 2015 respectively finance receivables primarily includes loans provided purchasers new preowned textron aviation aircraft bell helicopters loans typically initial terms ranging five ten years amortization terms ranging eight fifteen years average balance 1 million january 2 2016 loans generally require customer pay significant payment along periodic scheduled principal payments reduce outstanding balance term loan finance receivables diversified across geographic region borrower industry january 2 2016 38 finance receivables distributed throughout us compared 37 end 2014 january 2 2016 january 3 2015 finance receivables 493 million 565 million respectively pledged collateral tfc’s debt 352 million 434 million respectively addition january 2 2016 january 3 2015 finance receivables included 51 million 113 million respectively receivables legally sold special purpose entity spe consolidated subsidiary tfc assets spe pledged collateral debt reflected securitized onbalance sheet debt note 7 thirdparty investors legal recourse tfc beyond credit enhancement provided assets spe finance receivable portfolio quality credit quality indicators nonaccrual finance receivables internally assess quality finance receivables based number key credit quality indicators statistics delinquency loan balance estimated collateral value financial strength individual borrowers guarantors many indicators difficult apply across entire class receivables evaluate individual loans quarterly basis classify loans three categories based key credit quality indicators individual loan three categories performing watchlist nonaccrual classify finance receivables nonaccrual credit quality indicators suggest full collection principal interest doubtful addition automatically classify accounts nonaccrual contractually delinquent three months unless collection principal interest doubtful accounts classified watchlist credit quality indicators deteriorated compared typical underwriting criteria believe collection full principal interest probable certain finance receivables meet watchlist nonaccrual categories classified performing delinquency measure delinquency based contractual payment terms finance receivables determining delinquency aging category account anyall principal interest received applied pastdue principal andor interest amounts due significant portion contractually due payment delinquent entire finance receivable balance reported accordance pastdue delinquency aging category finance receivables categorized based credit quality indicators delinquency aging category summarized follows impaired loans quarterly basis evaluate individual finance receivables impairment nonhomogeneous portfolios larger balance accounts homogeneous loan portfolios finance receivable considered impaired probable unable collect amounts due according contractual terms loan agreement based review credit quality indicators described impaired finance receivables include nonaccrual accounts full collection principal interest remains probable account’s original terms expected significantly modified modification specifies interest rate equal greater market rate finance receivable comparable risk account considered impaired years subsequent modification interest income recognized impaired loans significant 2015 2014 summary impaired finance receivables excluding leveraged leases average recorded investment provided allowance losses rollforward allowance losses finance receivables summary composition based underlying finance receivables evaluated impairment provided finance receivables reported table specifically exclude 118 million 121 million leveraged leases january 2 2016 january 3 2015 respectively accordance us generally accepted accounting principles note 4 inventories composed following inventories valued lifo method totaled 16 billion 14 billion january 2 2016 january 3 2015 respectively carrying values inventories would higher approximately 463 million 468 million respectively lifo inventories valued current costs inventories related longterm contracts net progressmilestone payments 611 million 447 million january 2 2016 january 3 2015 respectively note 5 property plant equipment net manufacturing group’s property plant equipment net composed following january 2 2016 january 3 2015 assets capital leases totaled 275 million 279 million respectively accumulated amortization 87 million 68 million respectively manufacturing group’s depreciation expense included amortization expense capital leases totaled 383 million 379 million 335 million 2015 2014 2013 respectively note 6 accrued liabilities accrued liabilities manufacturing group summarized changes warranty liability follows adjustments include changes prior year estimates new issues prior year sales currency translation adjustments note 7 debt credit facilities debt summarized table notes amortize quarterly semiannual basis b notes secured finance receivables described note 3 following table shows required payments next five years debt outstanding january 2 2016 textron senior unsecured revolving credit facility expires october 2018 aggregate principal amount 10 billion 100 million available issuance letters credit january 2 2016 amounts borrowed facility 33 million letters credit issued 6 fixedtofloating rate junior subordinated notes finance group’s 299 million 6 fixedtofloating rate junior subordinated notes unsecured rank junior existing future senior debt notes mature february 15 2067 however right redeem notes par february 15 2017 obligated redeem notes beginning february 15 2042 interest notes fixed 6 february 15 2017 floats threemonth london interbank offered rate 1735 thereafter support agreement support agreement amended december 2015 textron inc required ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 125 million cash contributions required paid tfc 2015 2014 2013 maintain compliance support agreement note 8 derivative instruments fair value measurements measure fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date prioritize assumptions market participants would use pricing asset liability threetier fair value hierarchy fair value hierarchy gives highest priority level 1 quoted prices active markets identical assets liabilities lowest priority level 3 unobservable inputs little market data exist requiring companies develop assumptions observable inputs meet criteria level 1 include quoted prices similar assets liabilities active markets quoted prices identical assets liabilities markets active categorized level 2 level 3 inputs reflect estimates assumptions market participants would use pricing asset liability based best information available circumstances valuation techniques assets liabilities measured using level 3 inputs may include methodologies market approach income approach cost approach may use unobservable inputs projections estimates management’s interpretation current market data unobservable inputs utilized extent observable inputs available cost effective obtain assets liabilities recorded fair value recurring basis manufacture sell products number countries throughout world therefore exposed movements foreign currency exchange rates utilize foreign currency exchange contracts manage volatility foreign currency exchange contracts measured fair value using market method valuation technique inputs technique utilize current foreign currency exchange forward market rates published thirdparty leading financial news data providers observable data represent rates financial institution uses contracts entered date however based actual transactions classified level 2 january 2 2016 january 3 2015 foreign currency exchange contracts notional amounts upon contracts based 706 million 696 million respectively january 2 2016 fair value amounts foreign currency exchange contracts 7 million asset 28 million liability january 3 2015 fair value amounts foreign currency exchange contracts 16 million asset 26 million liability primarily utilize forward exchange contracts maturities three years contracts qualify cash flow hedges intended offset effect exchange rate fluctuations forecasted sales inventory purchases overhead expenses january 2 2016 net deferred loss 24 million accumulated comprehensive loss related cash flow hedges net gains losses recognized earnings accumulated comprehensive loss cash flow hedges including gains losses related hedge ineffectiveness significant periods presented hedge net investment position major currencies generate foreign currency interest payments offset transactional exposures currencies accomplish borrow directly foreign currency designate portion foreign currency debt hedge net investment record changes fair value contracts comprehensive income extent effective cash flow hedges currency effects effective portion hedges reflected foreign currency translation adjustments within accumulated comprehensive loss significant periods presented assets recorded fair value nonrecurring basis years ended january 2 2016 january 3 2015 finance group’s impaired nonaccrual finance receivables 45 million 49 million respectively measured fair value nonrecurring basis using significant unobservable inputs level 3 impaired nonaccrual finance receivables represent assets recorded fair value nonrecurring basis since measurement required reserves impaired finance receivables significantly dependent fair value underlying collateral impaired nonaccrual finance receivables secured aviation assets fair values collateral determined primarily based use industry pricing guides fair value measurements recorded impaired finance receivables resulted charges provision loan losses totaling 13 million 18 million 2015 2014 respectively assets liabilities recorded fair value carrying value estimated fair value financial instruments reflected financial statements fair value follows fair value manufacturing group debt determined using market observable data similar transactions level 2 january 2 2016 january 3 2015 approximately 74 75 respectively fair value term debt finance group determined based discounted cash flow analyses using observable market inputs debt similar duration subordination credit default expectations level 2 remaining finance group debt determined based observable market transactions level 1 fair value estimates finance receivables determined based internally developed discounted cash flow models primarily utilizing significant unobservable inputs level 3 include estimates rate return financing cost capital structure andor discount rate expectations current market participants combined estimated loan cash flows based credit losses payment rates expectations borrowers’ ability make payments timely basis note 9 shareholders’ equity capital stock authorization 15 million shares preferred stock par value 001 500 million shares common stock par value 0125 outstanding common stock activity three years ended january 2 2016 presented earnings per share calculate basic diluted earnings per share eps based net income approximates income available common shareholders period basic eps calculated using twoclass method includes weightedaverage number common shares outstanding period restricted stock units paid stock deemed participating securities provide nonforfeitable rights dividends diluted eps considers dilutive effect potential future common stock including stock options prior maturity convertible notes may 1 2013 shares could issued upon conversion notes upon exercise related warrants addition diluted eps 2014 includes impact initial delivery shares accelerated share repurchase agreement asr february 2014 entered asr counterparty repurchased 43 million shares outstanding common stock settled asr december 2014 final purchase price 167 million weightedaverage shares outstanding basic diluted eps follows 2015 2014 2013 options purchase 2 million 2 million 5 million shares respectively common stock excluded calculation diluted weightedaverage shares outstanding effect would antidilutive accumulated comprehensive loss components accumulated comprehensive loss presented comprehensive income loss aftertax components comprehensive income loss presented components comprehensive income loss included computation net periodic pension cost see note 11 additional information note 10 sharebased compensation 2015 longterm incentive plan replaced 2007 longterm incentive plan april 2015 authorizes awards selected employees form stock options restricted stock restricted stock units stock appreciation rights performance stock performance share units awards maximum 17 million shares authorized issuance purposes plan plus shares become available upon cancellation forfeiture expiration awards granted 2007 longterm incentive plan 17 million shares may awarded pursuant incentive stock options 425 million shares may issued pursuant awards restricted stock restricted stock units performance stock awards payable shares deferred income plan textron executives provide certain executives opportunity voluntarily defer 80 base salary along incentive compensation elective deferrals may put either stock unit account interestbearing account participants cannot move amounts two accounts actively employed us cannot receive distributions termination employment intrinsic value amounts paid deferred income plan significant 2015 2014 2013 sharebased compensation costs reflected primarily selling administrative expenses compensation expense included net income sharebased compensation plans follows compensation expense included approximately 21 million 21 million 26 million 2015 2014 2013 respectively portion fair value options issued portion previously granted options requisite service rendered compensation cost awards subject service conditions vest ratably recognized straightline basis requisite service period separately vesting portion award january 2 2016 recognized 48 million total compensation costs associated unvested awards subject service conditions expect recognize compensation expense awards weightedaverage period approximately two years stock options purchase shares maximum term ten years generally vest ratably threeyear period stock option compensation cost calculated fair value approach recognized vesting period stock options estimate fair value options granted date grant using blackscholes optionpricing model expected volatilities based implied volatilities traded options common stock historical volatilities factors expected term based historical option exercise data adjusted reflect anticipated changes expected behavior weightedaverage fair value options granted past three years assumptions used optionpricing model grants follows stock option activity 2015 provided january 2 2016 outstanding options aggregate intrinsic value 86 million weightedaverage remaining contractual life six years exercisable options aggregate intrinsic value 75 million weightedaverage remaining contractual life five years january 2 2016 total intrinsic value options exercised 2015 2014 2013 23 million 25 million 10 million respectively restricted stock units issue restricted stock units settled cash stock vesting onethird third fourth fifth year following year grant include right receive dividend equivalents fair value units based trading price common stock recognized ratably vesting period units payable stock use trading price grant date units payable cash remeasured using price reporting period date prior 2012 issued restricted stock units vested equal installments five years 2015 activity restricted stock units provided fair value restricted stock awards vested andor amounts paid awards follows performance share units fair value sharebased compensation awards accounted liabilities includes performance share units paid cash first quarter year following vesting payouts performance share units vary based certain performance criteria generally set year threeyear performance period performance share units vest end three years fair value awards based trading price common stock remeasured reporting period date 2015 activity performance share units follows fair value performance share units vested andor amounts paid awards follows note 11 retirement plans defined benefit defined contribution plans cover substantially employees significant number usbased employees participate textron retirement plan designed “flooroffset” arrangement defined benefit component defined contribution component defined benefit component arrangement includes textron master retirement plan tmrp bell helicopter textron master retirement plan bhtmrp defined contribution component retirement account plan rap defined benefit component provides minimum guaranteed benefit “floor” benefit rap participants eligible receive contributions textron 2 eligible compensation may make contributions plan upon retirement participants receive greater floor benefit value rap tmrp bhtmrp subject provisions employee retirement income security act 1974 erisa effective january 1 2010 textron retirement plan closed new participants employees hired date receive additional 4 annual cash contribution textron savings plan account based eligible compensation also funded unfunded defined benefit pension plans cover certain us nonus employees addition several defined contribution plans sponsored various businesses largest plan textron savings plan qualified 401k plan subject erisa defined contribution plans cost approximately 103 million 99 million 93 million 2015 2014 2013 respectively amounts include 12 million 16 million 19 million respectively contributions rap also provide postretirement benefits pensions certain retired employees us include healthcare dental care medicare part b reimbursement life insurance benefits periodic benefit cost components net periodic benefit cost amounts recognized oci follows estimated amount amortized accumulated comprehensive loss net periodic pension costs 2016 follows obligations funded status plans measured fiscal yearend changes projected benefit obligation fair value plan assets along funded status follows accumulated benefit obligation defined benefit pension plans 71 billion 76 billion january 2 2016 january 3 2015 respectively included 371 million 392 million respectively accumulated benefit obligations unfunded plans funding permitted foreign environments funding feasible pension plans accumulated benefit obligations exceeding fair value plan assets follows assumptions weightedaverage assumptions use pension postretirement plans follows assumed healthcare cost trend rate medical prescription drug cost 75 2015 66 2014 expect rate gradually decline 50 2024 assume remain assumed healthcare cost trend rates significant effect amounts reported postretirement benefits pensions onepercentagepoint change assumed healthcare cost trend rates would following effects pension assets expected longterm rate return plan assets determined based variety considerations including established asset allocation targets expectations asset classes historical returns plans’ assets market considerations invest pension assets objective achieving total rate return long term sufficient fund future pension obligations minimize future pension contributions willing tolerate commensurate level risk achieve objective based funded status plans longterm nature pension liability risk controlled maintaining portfolio assets diversified across variety asset classes investment styles investment managers possible investment managers prohibited owning stock portfolios manage behalf us plan assets represent majority plan assets asset allocation target ranges established consistent investment objectives assets rebalanced periodically nonus plan assets allocations based expected cash flow needs assessments local practices markets target allocation ranges follows us plan assets domestic equity securities 23 38 international equity securities 11 22 debt securities 27 38 real estate 7 13 private investment partnerships 5 11 hedge funds 0 5 nonus plan assets equity securities 51 74 debt securities 26 46 real estate 4 15 fair value pension plan assets major category valuation method follows cash equivalents equity debt securities include comingled funds represent investments funds offered institutional investors similar mutual funds provide diversification holding various equity debt securities since comingled funds quoted active market priced based relative value underlying equity debt investments individual prices given time accordingly classified level 2 debt securities valued based day actual trading prices available prices available use matrix pricing model historical prices trends factors private investment partnerships represent investments funds turn invest stocks debt securities companies cases publicly traded partnerships valued using income market methods include cash flow projections market multiples various comparable companies real estate includes owned properties investments partnerships owned properties valued using certified appraisals least every three years updated least annually real estate investment manager based current market trends available information appraisals generally use standard methods valuing real estate including forecasting income identifying current transactions comparable real estate arrive fair value real estate partnerships valued similar private investment partnerships general partner using standard real estate valuation methods value real estate properties securities held within fund portfolios believe assumptions consistent assumptions market participants would use valuing investments hedge funds represent investment diversified fund hedge funds sole investor fund invests portfolio funds publicly traded managed various portfolio managers investments portfolio funds typically valued basis recent price valuation provided relevant fund’s administrator fund aggregates valuations assets liabilities calculate net asset value fund fair value measurements plan assets real estate category use significant unobservable inputs level 3 changed due following estimated future cash flow impact defined benefits salaried plans based salary years service hourly plans generally provide benefits based stated amounts year service funding policy consistent applicable laws regulations 2016 expect contribute approximately 60 million fund pension plans rap benefit payments provided reflect expected future employee service appropriate expected paid net estimated participant contributions payments based assumptions used measure benefit obligation end fiscal 2015 pension benefit payments primarily paid qualified pension trusts pay postretirement benefits pensions general corporate assets benefit payments expect pay undiscounted basis follows note 12 income taxes conduct business globally result file numerous consolidated separate income tax returns within outside us subsidiaries file consolidated federal income tax return income continuing operations income taxes follows income tax expense continuing operations summarized follows following table reconciles federal statutory income tax rate effective income tax rate continuing operations includes favorable impact 07 2015 02 2014 related valuation allowance releases b includes favorable impact 14 2015 06 2014 20 2013 related net change valuation allowances amount income taxes pay subject ongoing audits us federal state nonus tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental assess income tax positions record tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting date tax positions likely tax benefit sustained record largest amount tax benefit greater 50 likelihood realized upon settlement taxing authority full knowledge relevant information interest penalties accrued applicable believe likely tax benefit sustained tax benefit recognized future results may include favorable unfavorable adjustments estimated tax liabilities due settlement income tax examinations new regulatory judicial pronouncements expiration statutes limitations relevant events result effective tax rate may fluctuate significantly quarterly annual basis unrecognized tax benefits represent tax positions reserves established unrecognized state tax benefits interest related unrecognized tax benefits reflected net applicable tax benefits reconciliation unrecognized tax benefits excluding accrued interest follows january 2 2016 january 3 2015 approximately 321 million 305 million respectively unrecognized tax benefits recognized would favorably affect effective tax rate future period january 2 2016 january 3 2015 remaining 80 million unrecognized tax benefits related discontinued operations reasonably possible within next 12 months unrecognized tax benefits exclusive interest may decrease range approximately 0 215 million result conclusion audits related appeals review processes expiration statutes limitations additional worldwide uncertain tax positions potential decrease primarily relates uncertainties respect prior dispositions research tax credits however based process finalizing audits required review process relevant authorities difficult estimate timing amount potential changes unrecognized tax benefits although outcome matters cannot determined believe adequate provision made potential unfavorable financial statement impact normal course business subject examination taxing authorities throughout world including major jurisdictions canada china germany mexico united kingdom us exceptions longer subject us federal state local income tax examinations years 1997 longer subject nonus income tax examinations major jurisdictions years 2010 2015 2014 2013 recognized net taxrelated interest expense totaling approximately 7 million 6 million 6 million respectively consolidated statements operations january 2 2016 january 3 2015 total 139 million 132 million respectively net accrued interest expense included consolidated balance sheets tax effects temporary differences give rise significant portions net deferred tax assets liabilities follows accrued expenses includes warranty reserves selfinsured liabilities interest believe earnings periods temporary differences become deductible sufficient realize related future income tax benefits jurisdictions expiration date tax carryforwards projected operating results indicate realization likely valuation allowance provided following table presents breakdown net deferred tax assets 2015 fasb issued asu 201517 income taxes requires deferred tax assets liabilities classified noncurrent statement financial position elected adopt standard fourth quarter 2015 reclassified 259 million deferred tax assets january 3 2015 current assets conform current year presentation net operating loss credit carryforwards january 2 2016 follows intend reinvest undistributed earnings nonus subsidiaries indefinitely therefore provided deferred taxes related us income foreign withholding taxes undistributed earnings nonus subsidiaries subject us tax approximated 12 billion january 2 2016 effect us foreign tax credits practicable estimate amount tax might payable earnings event longer indefinitely reinvested note 13 commitments contingencies subject legal proceedings claims arising conduct business including proceedings claims relating commercial financial transactions government contracts alleged lack compliance applicable laws regulations production partners product liability patent trademark infringement employment disputes environmental safety health matters legal proceedings claims seek damages fines penalties substantial amounts remediation environmental contamination government contractor subject audits reviews investigations determine whether operations conducted accordance applicable regulatory requirements federal government procurement regulations certain claims brought us government could result suspension debarment us government contracting period time basis information presently available believe existing proceedings claims material effect financial position results operations ordinary course business enter standby letter credit agreements surety bonds financial institutions meet various performance obligations outstanding letter credit arrangements surety bonds aggregated approximately 612 million 790 million january 2 2016 january 3 2015 respectively environmental remediation industrial enterprises engaged similar businesses involved number remedial actions various federal state laws regulations relating environment impose liability companies clean contribute cost cleaning sites hazardous wastes materials disposed released accrued environmental liabilities relate installation remediation systems disposal costs us environmental protection agency oversight costs legal fees operating maintenance costs currently formerly owned operated facilities circumstances affect reliability precision accruals include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur believe changes accruals may result factors uncertainties material effect financial position results operations based upon information currently available estimate potential environmental liabilities within range 40 million 160 million january 2 2016 environmental reserves approximately 75 million established address specific estimated liabilities estimate likely pay accrued environmental remediation liabilities next ten years classified 17 million current liabilities expenditures evaluate remediate contaminated sites approximated 15 million 13 million 12 million 2015 2014 2013 respectively leases rental expense approximated 113 million 121 million 95 million 2015 2014 2013 respectively future minimum rental commitments noncancelable operating leases effect january 2 2016 approximated 74 million 2016 57 million 2017 44 million 2018 36 million 2019 38 million 2020 131 million thereafter total future minimum rental receipts noncancelable subleases january 2 2016 approximated 22 million note 14 supplemental cash flow information made following cash payments note 15 segment geographic data operate report financial information following five business segments textron aviation bell textron systems industrial finance accounting policies segments described note 1 textron aviation products include citation jets king air turboprops caravan utility turboprops piston engine aircraft t6 at6 military aircraft aftermarket sales services sold diverse base corporate individual buyers bell products include military commercial helicopters tiltrotor aircraft related spare parts services bell supplies military helicopters association boeing company military tiltrotor aircraft aftermarket services us nonus governments bell also supplies commercial helicopters aftermarket services corporate offshore petroleum exploration development utility charter police fire rescue emergency medical helicopter operators foreign governments textron systems products include unmanned aircraft systems marine land systems weapons sensors simulation training defense aviation mission support products services primarily us nonus governments industrial products markets include following · kautex products include blowmolded plastic fuel systems windshield headlamp washer systems selective catalytic reduction systems engine camshafts marketed primarily automobile oems well plastic bottles containers various uses · specialized vehicles equipment products include golf cars offroad utility light transportation vehicles aviation ground support equipment professional turfmaintenance equipment turfcare vehicles marketed primarily golf courses resort communities municipalities sporting venues consumers commercial industrial users · tools test equipment products include powered equipment electrical test measurement instruments mechanical hydraulic tools cable connectors fiber optic assemblies underground aerial transmission distribution products power utility products principally used construction maintenance telecommunications data communications electrical utility plumbing industries finance segment provides financing primarily purchasers new preowned textron aviation aircraft bell helicopters segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses acquisition restructuring costs related beechcraft acquisition measurement finance segment includes interest income expense along intercompany interest income expense revenues segment along reconciliation segment profit income continuing operations income taxes follows revenues major product type summarized revenues included sales us government approximately 32 billion 38 billion 37 billion 2015 2014 2013 respectively primarily bell textron systems segments information segment provided geographic data presented selected financial information continuing operations geographic area revenues attributed countries based location customer property plant equipment net based location asset report independent registered public accounting firm board directors shareholders textron inc audited accompanying consolidated balance sheets textron inc january 2 2016 january 3 2015 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended january 2 2016 audits also included financial statement schedule contained page 70 financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position textron inc january 2 2016 january 3 2015 consolidated results operations cash flows three years period ended january 2 2016 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states textron inc’s internal control financial reporting january 2 2016 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 24 2016 expressed unqualified opinion thereon ernst young llp boston massachusetts february 24 2016 quarterly data schedule ii valuation qualifying accounts deductions primarily include amounts written uncollectable accounts less recoveries inventory disposals currency translation adjustments item 9item 8 financial statements supplementary data consolidated financial statements related report independent registered public accounting firm thereon included annual report form 10k pages indicated page consolidated statements operations years threeyear period ended january 4 2020 consolidated statements comprehensive income years threeyear period ended january 4 2020 consolidated balance sheets january 4 2020 december 29 2018 consolidated statements shareholders’ equity years threeyear period ended january 4 2020 consolidated statements cash flows years threeyear period ended january 4 2020 notes consolidated financial statements note 1 summary significant accounting policies note 2 business disposition acquisition note 3 goodwill intangible assets note 4 accounts receivable finance receivables note 5 inventories note 6 property plant equipment net note 7 assets note 8 current liabilities note 9 leases note 10 debt credit facilities note 11 derivative instruments fair value measurements note 12 shareholders’ equity note 13 segment geographic data note 14 revenues note 15 sharebased compensation note 16 retirement plans note 17 special charges note 18 income taxes note 19 commitments contingencies note 20 supplemental cash flow information report independent registered public accounting firm supplementary information quarterly data 2019 2018 unaudited schedule ii valuation qualifying accounts schedules omitted either applicable required information included financial statements notes thereto consolidated statements operations years threeyear period ended january 4 2020 see notes consolidated financial statements consolidated statements comprehensive income years threeyear period ended january 4 2020 see notes consolidated financial statements consolidated balance sheets see notes consolidated financial statements consolidated statements shareholders’ equity see notes consolidated financial statements consolidated statements cash flows years threeyear period ended january 4 2020 see notes consolidated financial statements consolidated statements cash flows continued years threeyear period ended january 4 2020 see notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation financial statement presentation consolidated financial statements include accounts textron inc majorityowned subsidiaries financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated majorityowned subsidiaries operate textron aviation bell textron systems industrial segments finance group also finance segment consists textron financial corporation tfc consolidated subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements finance group provides financing primarily purchasers new preowned textron aviation aircraft bell helicopters manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidation beginning 2019 adopted accounting standards update asu 201602 leases asc topic 842 requires lessees recognize leases term greater 12 months balance sheet rightofuse assets lease liabilities upon adoption significant impact recognition 307 million rightofuse assets lease liabilities operating leases accounting finance leases remained unchanged applied provisions standard existing leases adoption date using retrospective transition method adjust comparative periods cumulative transition adjustment retained earnings significant adoption impact earnings cash flows elected practical expedients permitted transition guidance allowed us carryforward historical lease classification apply hindsight evaluating options within contract resulting extension lease term certain existing leases adopted asu 201409 revenue contracts customers asc topic 606 related amendments collectively referred asc 606 beginning 2018 adopted asc 606 using modified retrospective transition method applied contracts substantially complete end 2017 recorded 90 million adjustment increase retained earnings reflect cumulative impact adopting standard beginning 2018 primarily related certain longterm contracts bell segment us government converted costtocost method revenue recognition comparative information 2017 included financial statements notes restated reported accounting standards effect time based policies described note collaborative arrangements bell segment strategic alliance agreement boeing company boeing provide engineering development test services related v22 aircraft well produce v22 aircraft number separate contracts us government v22 contracts alliance created agreement legal entity employees assets true operations agreement creates contractual rights represent entity equity interest account alliance collaborative arrangement bell boeing reporting costs incurred revenues generated transactions us government company’s respective income statement neither bell boeing considered principal participant transactions recorded agreement profits costplus contracts allocated bell boeing 5050 basis negotiated profits fixedprice contracts also allocated 5050 however bell boeing responsible cost overruns entitled retain cost underruns based contractual arrangement established alliance bell accounts rights obligations specific requirements v22 contracts allocated bell work breakdown structure account rights obligations including warranty product contingent liabilities specific requirements v22 contracts allocated us agreement revenues cost sales reflect performance v22 contracts revenues recognized using costtocost method upon adoption asc 606 include assets used performance v22 contracts liabilities arising obligations v22 contracts consolidated balance sheets use estimates prepare financial statements conformity generally accepted accounting principles require us make estimates assumptions affect amounts reported financial statements actual results could differ estimates assumptions reviewed periodically effects changes reflected consolidated statements operations period determined revenue recognition 2019 2018 adoption asc 606 beginning 2018 revenue recognized control goods services promised contract transferred customer either point time eg upon delivery time eg perform contract account contract approval commitment parties rights payment terms parties identified contract commercial substance collectability consideration probable contracts reviewed determine whether one multiple performance obligations performance obligation promise transfer distinct good service customer represents unit accounting revenue recognition contracts multiple performance obligations expected consideration transaction price allocated performance obligation identified contract based relative standalone selling price performance obligation revenue recognized transaction price allocated performance obligation control promised goods services underlying performance obligation transferred contract consideration adjusted effects significant financing component contract inception period control transfers customer pay good service one year less commercial contracts majority contracts commercial customers single performance obligation one good service promised promise transfer goods services distinct separately identifiable promises contract revenue primarily recognized point time generally customer obtains control asset upon delivery customer acceptance contract modifications provide additional distinct goods services standalone selling price treated separate contracts commercial aircraft contract customers sell fully outfitted fixedwing aircraft may include configuration options aircraft typically represents single performance obligation revenue recognized upon customer acceptance delivery commercial helicopters customers generally contract us fully functional basic configuration aircraft control transferred upon customer acceptance delivery times customers may separately contract us installation accessories customization basic aircraft contracts entered near time basic aircraft contract assess whether contracts meet criteria combined contracts combined basic aircraft accessories customization typically considered distinct therefore separate performance obligations contracts revenue recognized basic aircraft upon customer acceptance transfer title risk loss accessories customization upon delivery customer acceptance utilize observable prices determine standalone selling prices allocating transaction price performance obligations transaction price commercial contracts reflects estimate returns rebates discounts based historical current forecasted information amounts billed customers shipping handling included transaction price generally treated separate performance obligations costs fulfill promise transfer product customer taxes collected customers remitted government authorities recorded net basis primarily provide standard warranty programs products commercial businesses periods typically range one five years assurancetype programs typically cannot purchased separately meet criteria considered performance obligation us government contracts us government generally include design development manufacture modification aerospace defense products well related services contracts also include us governmentsponsored foreign military sales program accounted approximately 24 total revenues 2019 customer typically contracts us provide significant service integrating complex set tasks components single project capability often results delivery multiple units accordingly entire contract accounted one performance obligation certain circumstances contract may include production support services logistics parts plans considered distinct context contract represent separate performance obligations contract separated one performance obligation generally utilize expected cost plus margin approach determine standalone selling prices allocating transaction price contracts frequently modified changes contract specifications requirements contract modifications us government goods services distinct existing contract due significant integration service provided context contract accounted part existing contract effect contract modifications estimates recognized using cumulative catchup method accounting contracts us government generally contain clauses provide lien rights workinprocess along clauses allow customer unilaterally terminate contract convenience pay us costs incurred plus reasonable profit take control workinprocess due continuous transfer control us government recognize revenue time perform contract selecting method measure progress towards completion requires judgment based nature products service provided generally use costtocost method measure progress contracts best depicts transfer control customer occurs incur costs contracts measure extent progress towards completion measured based ratio costs incurred date estimated costs completion performance obligation revenue recorded proportionally costs incurred transaction price contracts represents best estimate consideration receive includes assumptions regarding variable consideration applicable certain longterm contracts contain incentive fees provisions either increase decrease transaction price variable amounts generally awarded upon achievement certain performance metrics program milestones cost targets based upon customer discretion include estimated amounts transaction price extent probable significant reversal cumulative revenue recognized occur uncertainty associated variable consideration resolved estimates variable consideration determination whether include estimated amounts transaction price based largely assessment anticipated performance historical performance information reasonably available us total contract cost estimated utilizing current contract specifications expected engineering requirements contract costs typically incurred period several years estimation costs requires substantial judgment cost estimation process based professional knowledge experience engineers program managers along finance professionals review update projections costs quarterly frequently circumstances significantly change approximately 70 2019 revenues us government fixedprice incentive contracts typical payment terms contracts customer pays us either performancebased progress payments performancebased payments represent interim payments 90 contract price based quantifiable measures performance achievement specified events milestones progress payments interim payments 80 costs incurred work progresses customer retains small portion contract price completion contract contracts generally result revenue recognized excess billings present contract assets consolidated balance sheets amounts billed due customers classified accounts receivable net portion payments retained customer final contract settlement considered significant financing component intent protect customer costtype contracts generally paid actual costs incurred within short period time revenue recognition 2017 prior adoption asc 606 generally recognized revenue sale products longterm contracts upon delivery commercial aircraft considered delivered upon completion manufacturing customer acceptance transfer risk rewards ownership sale arrangement involved multiple deliverables sales products include customization services evaluated arrangement determine whether separate items required delivered arrangement qualify separate units accounting arrangements typically involved customization services offer customers purchase bell helicopters services generally provided within first six months customer acceptance aircraft risk loss assumption aircraft customization services considered separate units accounting allocated contract price two relative selling price basis using best evidence selling price deliverables typically reference price charged similar items sold separately us revenue recognized recognition criteria unit accounting met revenues longterm contracts accounted percentageofcompletion method accounting method estimated profit difference total estimated revenues cost contract recognized estimated profit contract term based either unitsofdelivery method costtocost method typically used development effort costs incurred appropriate circumstances revenues fixedprice contracts generally recorded using unitsofdelivery method revenues costreimbursement contracts recorded using costtocost method finance revenues finance revenues primarily include interest finance receivables finance lease earnings portfolio gainslosses portfolio gainslosses include impairment charges related repossessed assets properties gainslosses sale early termination finance assets recognize interest using interest method provides constant rate return terms receivables accrual interest income suspended credit quality indicators suggest full collection principal interest doubtful addition automatically suspend accrual interest income accounts contractually delinquent three months unless collection doubtful cash payments nonaccrual accounts including finance charges generally applied reduce net investment balance conclude collection principal interest longer doubtful resume accrual interest recognize previously suspended interest income time either loan becomes contractually current payment according original terms loan b loan modified following period performance terms modification contract estimates contracts revenue recognized time recognize changes estimated contract revenues costs profits using cumulative catchup method accounting method recognizes cumulative effect changes current prior periods impact change inceptiontodate recorded current period anticipated losses contracts recognized full period losses become probable estimable 2019 2018 2017 cumulative catchup adjustments increased segment profit 91 million 196 million 5 million respectively net income 69 million 149 million 3 million respectively 030 059 001 per diluted share respectively 2019 2018 recognized revenue performance obligations satisfied prior periods 97 million 190 million related changes profit booking rates impacted revenue 2019 2018 2017 gross favorable adjustments totaled 173 million 249 million 92 million respectively 2018 favorable adjustments included 145 million largely related overhead rate improvements risk retirements associated contracts bell segment 2019 2018 2017 gross unfavorable adjustments totaled 82 million 53 million 87 million respectively contract assets liabilities contract assets arise contracts revenue recognized time amount revenue recognized exceeds amount billed customer amounts included contract assets right payment longer conditional events passage time included current assets consolidated balance sheet contract liabilities primarily included current liabilities include deposits largely commercial aviation customers billings excess revenue recognized incremental costs obtaining contract customer expected recovered expensed incurred period benefitted one year less accounts receivable net accounts receivable net includes amounts billed customers right payment unconditional maintain allowance doubtful accounts provide estimated amount accounts receivable collected based assessment customer creditworthiness historical payment experience age outstanding receivable collateral value cash equivalents cash equivalents consist cash shortterm highly liquid investments original maturities three months less inventories stated lower cost estimated net realizable value inventories generally using firstin firstout fifo method lastin firstout lifo method certain qualifying inventories lifo provides better matching costs revenues determine costs commercial helicopters average cost basis model considering expended estimated costs current production release property plant equipment property plant equipment recorded cost depreciated primarily using straightline method capitalize expenditures improvements increase asset values extend useful lives property plant equipment reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable carrying value asset exceeds sum undiscounted expected future cash flows asset written fair value goodwill intangible assets goodwill represents excess consideration paid acquisition business fair values assigned intangible net assets acquired business goodwill intangible assets deemed indefinite lives amortized subject annual impairment test evaluate recoverability assets fourth quarter year frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate potential impairment test calculate fair value reporting unit using discounted cash flows reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics discounted cash flows incorporate assumptions revenue growth operating margins discount rates represent best estimates current forecasted market conditions cost structure anticipated net cost reductions implied rate return believe market participant would require investment business similar risks characteristics reporting unit assessed fair value indefinitelived intangible assets primarily determined using relief royalty method based forecasted revenues royalty rates estimated fair value reporting unit indefinitelived intangible asset exceeds carrying value impairment otherwise impairment loss recognized amount carrying value exceeds estimated fair value acquired intangible assets finite lives subject amortization assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable amortization intangible assets recognized estimated useful lives using method reflects pattern economic benefits intangible assets consumed otherwise realized approximately 85 gross intangible assets amortized based cash flow streams used value assets remaining assets amortized using straightline method finance receivables finance receivables primarily include loans provided purchasers new preowned textron aviation aircraft bell helicopters finance receivables generally recorded amount outstanding principal less allowance losses maintain allowance losses finance receivables level considered adequate cover inherent losses portfolio based management’s evaluation larger balance accounts specifically identified impaired reserve established based comparing expected future cash flows discounted finance receivable’s effective interest rate fair value underlying collateral finance receivable collateral dependent carrying amount expected future cash flows consider collateral value financial performance liquidity borrower existence financial strength guarantors estimated recovery costs including legal expenses costs associated repossession eventual disposal collateral range potential outcomes perform multiple discounted cash flow analyses weight potential outcomes based relative likelihood occurrence evaluation portfolio inherently subjective requires estimates including amount timing future cash flows expected received impaired finance receivables estimated fair value underlying collateral may differ actual results analysis specific individual account critical factors included analysis include industry valuation guides age physical condition collateral payment history existence financial strength guarantors also establish allowance losses cover probable specifically unknown losses existing portfolio allowance established percentage nonrecourse finance receivables identified requiring specific reserves percentage based combination factors including historical loss experience current delinquency default trends collateral values general economic specific industry trends finance receivables charged earlier date collateral repossessed payment received six months unless management deems receivable collectible repossessed assets recorded fair value less estimated cost sell pension postretirement benefit obligations maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections evaluate update assumptions annually consultation thirdparty actuaries investment advisors also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases yearend measurement defined benefit plan assets obligations measured monthend date closest fiscal yearend recognize overfunded underfunded status pension postretirement plans consolidated balance sheets recognize changes funded status defined benefit plans comprehensive income year occur actuarial gains losses immediately recognized net periodic pension cost recognized component comprehensive income loss oci amortized net periodic pension cost future periods derivatives hedging activities exposed market risk primarily changes currency exchange rates interest rates hold issue derivative financial instruments trading speculative purposes manage volatility relating exposures net exposures consolidated basis take advantage natural offsets residual portion enter various derivative transactions pursuant policies areas counterparty exposure hedging practices credit risk related derivative financial instruments considered minimal managed requiring high credit standards counterparties periodic settlements positions derivative instruments reported fair value consolidated balance sheets designation support hedge accounting performed specific exposure basis financial instruments qualifying cash flow hedges record changes fair value derivatives extent effective hedges oci net deferred taxes changes fair value derivatives qualifying hedges recorded earnings foreign currency denominated assets liabilities translated us dollars adjustments currency rate changes recorded cumulative translation adjustment account shareholders’ equity related foreign entity sold substantially liquidated use foreign currency financing transactions effectively hedge longterm investments foreign operations corresponding currency foreign currency gains losses hedge longterm investments recorded cumulative translation adjustment account leases identify leases evaluating contracts determine contract conveys right use identified asset stated period time exchange consideration specifically consider whether control underlying asset right obtain substantially economic benefits outputs asset contracts contain lease components eg fixed payments including rent real estate taxes insurance costs nonlease components eg commonarea maintenance costs goodsservices allocate consideration contract component based standalone price leases terms greater 12 months classified either operating finance leases commencement date leases capitalize lesser present value minimum lease payments lease term b fair value asset rightofuse asset offsetting lease liability discount rate used calculate present value minimum lease payments typically incremental borrowing rate implicit lease generally known determinable lease term includes noncancelable period right use asset may include options extend terminate lease reasonably certain exercise option operating leases recognized single lease cost straightline basis lease term finance lease cost recognized separately amortization interest expense product liabilities accrue product liability claims related defense costs loss probable reasonably estimable estimates generally based specifics claim incident best estimate probable loss using historical experience environmental liabilities asset retirement obligations liabilities environmental matters recorded sitebysite basis probable obligation incurred cost reasonably estimated estimate accrued environmental liabilities using currently available facts existing technology presently enacted laws regulations subject number factors uncertainties environmental liabilities discounted take consideration possible future insurance proceeds significant amounts claims third parties incurred asset retirement obligations primarily related costs remove dispose underground storage tanks asbestos materials used insulation adhesive fillers floor tiles legal requirement remove items currently plan remodel related facilities otherwise cause impacted items require disposal since asset retirement obligations estimable related liability recorded consolidated balance sheets warranty liabilities assurancetype warranty programs estimate costs may incurred record liability amount costs time product revenues recognized factors affect liability include number products sold historical costs per claim length warranty period contractual recoveries vendors historical anticipated rates warranty claims including production warranty patterns new models assess adequacy recorded warranty liability periodically adjust amounts necessary additionally may establish warranty liability related issuance aircraft service bulletins aircraft longer covered limited warranty programs research development costs customerfunded research development costs charged directly related contracts primarily consist us government contracts accordance government regulations recover portion companyfunded research development costs overhead rate charges us government contracts research development costs reimbursable contract us government another customer charged expense incurred companyfunded research development costs 647 million 643 million 634 million 2019 2018 2017 respectively included cost sales income taxes provision income tax expense calculated reported income continuing operations income taxes based current tax law includes current period cumulative effect changes tax rates used previously determining deferred tax assets liabilities tax laws may require items included determination taxable income different times items reflected financial statements deferred tax balances reflect effects temporary differences financial reporting carrying amounts assets liabilities tax bases well net operating losses tax credit carryforwards stated enacted tax rates effect year taxes expected paid recovered deferred tax assets represent tax benefits tax deductions credits available future years require certain estimates assumptions determine whether likely portion benefit realized recoverability future tax deductions credits determined assessing adequacy future expected taxable income sources including future reversal existing taxable temporary differences taxable income carryback years estimated future taxable income available tax planning strategies change facts circumstances lead change judgment ultimate recoverability deferred tax asset record adjust related valuation allowance period change facts circumstances occurs along corresponding increase decrease income tax expense record tax benefits uncertain tax positions based upon management’s evaluation information available reporting date recognized financial statements tax position must meet morelikelythannot threshold position sustained upon examination tax authority based technical merits assuming tax authority full knowledge relevant information positions meeting recognition threshold benefit measured largest amount benefit meets morelikelythannot threshold sustained periodically evaluate tax positions based latest available information tax positions meet threshold requirement recognize net taxrelated interest penalties continuing operations income tax expense accounting pronouncements yet adopted 2016 fasb issued asu 201613 financial instruments credit losses financial assets trade receivables loans instruments standard changes current incurred loss model forwardlooking expected credit loss model generally result earlier recognition allowances losses new standard effective company beginning 2020 entities required apply provisions standard cumulativeeffect adjustment retained earnings effective date completed evaluation standard determined impact consolidated financial statements significant note 2 business disposition acquisition july 2 2018 completed sale businesses manufacture sell products tools test equipment product line within industrial segment emerson electric co net cash proceeds 807 million recorded aftertax gain 419 million related disposition march 6 2017 completed acquisition arctic cat inc arctic cat publiclyheld company nasdaq acat pursuant cash tender offer 1850 per share followed shortform merger cash paid business including repayment debt net cash acquired totaled 316 million arctic cat incorporated textron specialized vehicles business industrial segment operating results included consolidated statements operations since closing date note 3 goodwill intangible assets goodwill changes carrying amount goodwill segment follows see note 7 additional information intangible assets intangible assets summarized trade names trademarks table include 208 million indefinitelived intangible assets january 4 2020 december 29 2018 amortization expense totaled 59 million 66 million 69 million 2019 2018 2017 respectively amortization expense estimated approximately 55 million 53 million 54 million 37 million 32 million 2020 2021 2022 2023 2024 respectively note 4 accounts receivable finance receivables accounts receivable accounts receivable composed following finance receivables finance receivables presented following table finance receivables primarily includes loans provided purchasers new preowned textron aviation aircraft bell helicopters loans typically initial terms ranging five twelve years amortization terms ranging eight fifteen years average balance 1 million january 4 2020 loans generally require customer pay significant payment along periodic scheduled principal payments reduce outstanding balance term loan finance receivables diversified across geographic region borrower industry january 4 2020 december 29 2018 59 finance receivables distributed internationally 41 throughout us january 4 2020 december 29 2018 finance receivables 148 million 201 million respectively pledged collateral tfc’s debt 87 million 119 million respectively finance receivable portfolio quality internally assess quality finance receivables based number key credit quality indicators statistics delinquency loan balance estimated collateral value financial strength individual borrowers guarantors many indicators difficult apply across entire class receivables evaluate individual loans quarterly basis classify loans three categories based key credit quality indicators individual loan three categories performing watchlist nonaccrual classify finance receivables nonaccrual credit quality indicators suggest full collection principal interest doubtful addition automatically classify accounts nonaccrual contractually delinquent three months unless collection principal interest doubtful accounts classified watchlist credit quality indicators deteriorated compared typical underwriting criteria believe collection full principal interest probable certain finance receivables meet watchlist nonaccrual categories classified performing measure delinquency based contractual payment terms finance receivables determining delinquency aging category account anyall principal interest received applied pastdue principal andor interest amounts due significant portion contractually due payment delinquent entire finance receivable balance reported accordance pastdue delinquency aging category finance receivables categorized based credit quality indicators delinquency aging category summarized follows quarterly basis evaluate individual larger balance accounts impairment finance receivable considered impaired probable unable collect amounts due according contractual terms loan agreement based review credit quality indicators described impaired finance receivables include nonaccrual accounts full collection principal interest remains probable account’s original terms expected significantly modified modification specifies interest rate equal greater market rate finance receivable comparable risk account considered impaired years subsequent modification summary impaired finance receivables excluding leveraged leases average recorded investment provided summary allowance losses finance receivables based underlying finance receivables evaluated impairment provided finance receivables reported table specifically exclude 104 million 101 million leveraged leases january 4 2020 december 29 2018 respectively accordance us generally accepted accounting principles note 5 inventories composed following inventories valued lifo method totaled 25 billion 22 billion january 4 2020 december 29 2018 respectively carrying values inventories would higher approximately 475 million 457 million respectively lifo inventories valued current costs note 6 property plant equipment net manufacturing group’s property plant equipment net composed following manufacturing group’s depreciation expense included amortization expense finance leases totaled 346 million 358 million 362 million 2019 2018 2017 respectively note 7 assets april 1 2019 tru simulation training inc business within textron systems segment contributed assets associated training business flightsafety textron aviation training llc company formed flightsafety international inc tru provide training solutions textron aviation’s commercial business general aviation aircraft 30 interest newly formed company investment accounted equity method accounting contributed assets carrying value 69 million company primarily included property plant equipment addition 71 million textron systems segment’s goodwill allocated transaction based fair value share business recorded pretax net gain 18 million 2019 cost sales consolidated statements operations note 8 current liabilities current liabilities manufacturing group summarized changes warranty liability follows adjustments include changes prior year estimates new issues prior year sales business dispositions currency translation adjustments note 9 leases primarily lease certain manufacturing plants offices warehouses training service centers various locations worldwide classified either operating finance leases remaining lease terms 30 years include options extend lease term periods 25 years reasonably certain option exercised 2019 operating lease cost totaled 64 million finance lease cost variable shortterm lease costs significant cash paid operating lease liabilities 2019 totaled 62 million classified cash flows operating activities balance sheet information related leases follows december 29 2018 assets finance leases totaled 168 million accumulated amortization 47 million maturities lease liabilities january 4 2020 follows note 10 debt credit facilities debt summarized table anotes amortize quarterly semiannual basis bnotes secured finance receivables described note 4 following table shows required payments next five years debt outstanding january 4 2020 october 18 2019 textron entered senior unsecured revolving credit facility aggregate principal amount 10 billion 100 million available issuance letters credit textron may elect increase aggregate amount commitments facility 13 billion designating additional lender existing lender agreeing increase commitment facility expires october 2024 subject two oneyear extensions textrons option consent lenders representing majority commitments facility new facility replaced prior 5year facility scheduled expire september 2021 january 4 2020 december 29 2018 amounts borrowed either facility january 4 2020 10 million outstanding letters credit issued new facility december 29 2018 10 million outstanding letters credit issued prior facility fixedtofloating rate junior subordinated notes finance group’s 299 million fixedtofloating rate junior subordinated notes unsecured rank junior existing future senior debt notes mature february 15 2067 however right redeem notes par time obligated redeem notes beginning february 15 2042 interest notes fixed 6 february 15 2017 variable threemonth london interbank offered rate 1735 support agreement support agreement amended december 2015 textron inc required ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 125 million cash contributions required paid tfc 2019 2018 2017 maintain compliance support agreement note 11 derivative instruments fair value measurements measure fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date prioritize assumptions market participants would use pricing asset liability threetier fair value hierarchy fair value hierarchy gives highest priority level 1 quoted prices active markets identical assets liabilities lowest priority level 3 unobservable inputs little market data exist requiring companies develop assumptions observable inputs meet criteria level 1 include quoted prices similar assets liabilities active markets quoted prices identical assets liabilities markets active categorized level 2 level 3 inputs reflect estimates assumptions market participants would use pricing asset liability based best information available circumstances valuation techniques assets liabilities measured using level 3 inputs may include methodologies market approach income approach cost approach may use unobservable inputs projections estimates management’s interpretation current market data unobservable inputs utilized extent observable inputs available cost effective obtain assets liabilities recorded fair value recurring basis manufacture sell products number countries throughout world therefore exposed movements foreign currency exchange rates primarily utilize foreign currency exchange contracts maturities three years manage volatility contracts qualify cash flow hedges intended offset effect exchange rate fluctuations forecasted sales inventory purchases overhead expenses net gains losses recognized earnings accumulated comprehensive loss cash flow hedges including gains losses related hedge ineffectiveness significant periods presented foreign currency exchange contracts measured fair value using market method valuation technique inputs technique utilize current foreign currency exchange forward market rates published thirdparty leading financial news data providers observable data represent rates financial institution uses contracts entered date however based actual transactions classified level 2 january 4 2020 december 29 2018 foreign currency exchange contracts notional amounts upon contracts based 342 million 379 million respectively january 4 2020 fair value amounts foreign currency exchange contracts 2 million asset 2 million liability december 29 2018 fair value amounts foreign currency exchange contracts 2 million asset 10 million liability hedge net investment position certain major currencies generate foreign currency interest payments offset transactional exposures currencies accomplish borrow directly foreign currency designate portion debt hedge net investment record changes fair value contracts comprehensive income extent effective cash flow hedges currency effects effective portion hedges reflected foreign currency translation adjustments within accumulated comprehensive loss significant periods presented assets liabilities recorded fair value carrying value estimated fair value financial instruments reflected financial statements fair value follows fair value manufacturing group debt determined using market observable data similar transactions level 2 fair value finance group debt determined primarily based discounted cash flow analyses using observable market inputs debt similar duration subordination credit default expectations level 2 fair value estimates finance receivables determined based internally developed discounted cash flow models primarily utilizing significant unobservable inputs level 3 include estimates rate return financing cost capital structure andor discount rate expectations current market participants combined estimated loan cash flows based credit losses payment rates expectations borrowers’ ability make payments timely basis note 12 shareholders’ equity capital stock authorization 15 million shares preferred stock par value 001 500 million shares common stock par value 0125 outstanding common stock activity presented earnings per share calculate basic diluted earnings per share eps based net income approximates income available common shareholders period basic eps calculated using twoclass method includes weightedaverage number common shares outstanding period restricted stock units paid stock deemed participating securities provide nonforfeitable rights dividends diluted eps considers dilutive effect potential future common stock including stock options weightedaverage shares outstanding basic diluted eps follows 2019 2018 2017 stock options purchase 43 million 13 million 16 million shares respectively common stock excluded calculation diluted weightedaverage shares outstanding effect would antidilutive accumulated comprehensive loss components accumulated comprehensive loss presented 2018 fasb issued asu 201802 income statement reporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income allows entities reclassify stranded tax effects resulting tax cuts jobs act accumulated comprehensive loss retained earnings stranded tax effects comprised tax amounts included accumulated comprehensive loss previous us federal corporate tax rate 35 related deferred tax asset liability remeasured new us federal corporate tax rate 21 fourth quarter 2017 adoption standard resulted increase accumulated comprehensive loss 257 million offsetting increase retained earnings comprehensive income loss aftertax components comprehensive income loss presented components comprehensive income loss included computation net periodic pension cost see note 16 additional information note 13 segment geographic data operate report financial information following five business segments textron aviation bell textron systems industrial finance accounting policies segments described note 1 textron aviation products include citation jets king air caravan turboprop aircraft piston engine aircraft military trainer defense aircraft aftermarket part sales services sold diverse base corporate individual buyers bell products include military commercial helicopters tiltrotor aircraft related spare parts services bell supplies military helicopters association boeing company military tiltrotor aircraft aftermarket services us nonus governments bell also supplies commercial helicopters aftermarket services corporate offshore petroleum exploration development utility charter police fire rescue emergency medical helicopter operators foreign governments textron systems products include unmanned aircraft surface systems marine craft armored vehicles specialty vehicles advanced flight training devices defense aviation mission support products services primarily us nonus governments industrial products markets include following ●kautex products consist blowmolded plastic fuel systems including conventional plastic fuel tanks pressurized fuel tanks hybrid applications clearvision systems plastic tanks selective catalytic reduction systems marketed primarily automobile oems ●specialized vehicles products include golf cars offroad utility vehicles recreational sidebyside allterrain vehicles snowmobiles light transportation vehicles aviation ground support equipment professional turfmaintenance equipment turfcare vehicles marketed primarily golf courses resorts government agencies municipalities consumers outdoor enthusiasts commercial industrial users july 2 2018 sold tools test equipment businesses previously included industrial segment discussed note 2 finance segment provides financing primarily purchasers new preowned textron aviation aircraft bell helicopters segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses gainslosses major business dispositions special charges measurement finance segment includes interest income expense along intercompany interest income expense revenues segment along reconciliation segment profit income continuing operations income taxes follows information segment provided geographic data presented selected financial information continuing operations geographic area revenues attributed countries based location customer property plant equipment net based location asset note 14 revenues disaggregation revenues disaggregated major product type presented 2019 2018 revenues segments customer type geographic location presented 2017 revenues included sales us government approximately 31 billion primarily bell textron systems segments remaining performance obligations remaining performance obligations equivalent backlog represent expected transaction price allocated contracts expect recognize revenue future periods perform contracts remaining obligations exclude unexercised contract options potential orders orderingtype contracts indefinite delivery indefinite quantity contracts january 4 2020 98 billion remaining performance obligations expect recognize revenues approximately 75 2021 additional 20 2023 balance thereafter contract assets liabilities assets liabilities related contracts customers reported contractbycontract basis end reporting period january 4 2020 december 29 2018 contract assets totaled 567 million 461 million respectively contract liabilities totaled 830 million 974 million respectively changes balances 2019 resulted timing differences revenue recognized billings payments customers largely related v22 program bell segment 2019 2018 recognized revenues 590 million 817 million respectively included contract liability balance beginning year reconciliation asc 606 prior accounting standards amount financial statement line item affected 2018 result applying accounting standard discussed note 1 presented note 15 sharebased compensation 2015 longterm incentive plan replaced 2007 longterm incentive plan april 2015 authorization provide awards selected employees nonemployee directors form stock options restricted stock restricted stock units stock appreciation rights performance stock performance share units awards maximum 17 million shares authorized issuance purposes plan plus shares become available upon cancellation forfeiture expiration awards granted 2007 longterm incentive plan 17 million shares may awarded pursuant incentive stock options 425 million shares may issued pursuant awards restricted stock restricted stock units performance stock awards payable shares 2019 2018 2017 awards granted plan primarily included stock options restricted stock units performance share units deferred income plan textron executives provide certain executives opportunity voluntarily defer 80 base salary along incentive compensation elective deferrals may put either stock unit account interestbearing account participants cannot move amounts two accounts actively employed us cannot receive distributions termination employment intrinsic value amounts paid deferred income plan significant 2019 2018 2017 sharebased compensation costs reflected primarily selling administrative expense compensation expense included net income sharebased compensation plans follows compensation cost awards subject service conditions vest ratably recognized straightline basis requisite service period separately vesting portion award awards include continued vesting provisions retirement eligible employees upon reaching retirement eligibility service requirement individuals considered satisfied compensation expense future awards recognized date grant january 4 2020 recognized 27 million total compensation costs associated unvested awards subject service conditions expect recognize compensation expense awards weightedaverage period approximately two years stock options stock option compensation expense 22 million 23 million 20 million 2019 2018 2017 respectively options purchase shares maximum term ten years generally vest ratably threeyear period stock option compensation cost calculated fair value approach using blackscholes optionpricing model determine fair value options granted date grant expected volatility used model based implied volatilities traded options common stock historical volatilities factors expected term based historical option exercise data adjusted reflect anticipated changes expected behavior weightedaverage fair value options granted assumptions used optionpricing model grants follows stock option activity 2019 provided january 4 2020 outstanding options aggregate intrinsic value 45 million weightedaverage remaining contractual life 57 years exercisable options aggregate intrinsic value 45 million weightedaverage remaining contractual life 45 years january 4 2020 total intrinsic value options exercised 2019 2018 2017 22 million 62 million 29 million respectively restricted stock units issue restricted stock units settled cash stock vesting onethird third fourth fifth year following year grant include right receive dividend equivalents fair value units based trading price common stock units payable stock use trading price grant date units payable cash remeasured using price reporting period date 2019 activity restricted stock units provided fair value restricted stock unit awards vested andor amounts paid awards follows performance share units fair value sharebased compensation awards accounted liabilities includes performance share units paid cash first quarter year following vesting payouts performance share units vary based certain performance criteria generally set year threeyear performance period performance share units vest end three years fair value units based trading price common stock remeasured reporting period date 2019 activity performance share units follows fair value performance share units vested andor amounts paid awards follows note 16 retirement plans defined benefit contribution plans cover substantially employees significant number usbased employees participate textron retirement plan designed “flooroffset” arrangement defined benefit component defined contribution component defined benefit component arrangement includes textron master retirement plan tmrp bell helicopter textron master retirement plan bhtmrp defined contribution component retirement account plan rap defined benefit component provides minimum guaranteed benefit “floor” benefit rap participants eligible receive contributions textron 2 eligible compensation may make contributions plan upon retirement participants receive greater floor benefit value rap tmrp bhtmrp subject provisions employee retirement income security act 1974 erisa effective january 1 2010 textron retirement plan closed new participants employees hired date receive additional 4 annual cash contribution textron savings plan account based eligible compensation also funded unfunded defined benefit pension plans cover certain us nonus employees addition several defined contribution plans sponsored various businesses largest plan textron savings plan qualified 401k plan subject erisa defined contribution plans cost 130 million 125 million 123 million 2019 2018 2017 respectively included 13 million contributions rap year also provide postretirement benefits pensions certain retired employees us include healthcare dental care medicare part b reimbursement life insurance periodic benefit cost credit components net periodic benefit cost credit amounts recognized oci follows 2018 adopted asu 201707 improving presentation net periodic pension cost net periodic postretirement benefit cost standard requires companies present service cost component net periodic benefit cost operating income line compensation costs arising services rendered pertinent employees period nonservice components net periodic benefit cost must presented separately service cost excluded operating income addition service cost component eligible capitalization inventory change amount capitalized inventory applied prospectively using practical expedient nonservice components net periodic benefit cost credit previously disclosed 29 million 2017 reclassified cost sales selling administrative expense nonservice components pension postretirement income net consolidated statements operations obligations funded status plans measured fiscal yearend changes projected benefit obligation fair value plan assets along funded status follows actuarial losses gains reflected table 2019 2018 largely result changes discount rate utilized amounts recognized balance sheets follows accumulated benefit obligation defined benefit pension plans 85 billion 75 billion january 4 2020 december 29 2018 respectively included 404 million 369 million respectively accumulated benefit obligations unfunded plans funding permitted foreign environments funding feasible pension plans accumulated benefit obligation exceeding fair value plan assets follows pension plans projected benefit obligation exceeding fair value plan assets follows assumptions weightedaverage assumptions use pension postretirement plans follows assumed healthcare cost trend rate medical prescription drug cost 700 2019 2018 expect rate gradually decline 5 2024 assume remain pension assets expected longterm rate return plan assets determined based variety considerations including established asset allocation targets expectations asset classes historical returns plans’ assets market considerations invest pension assets objective achieving total rate return long term sufficient fund future pension obligations minimize future pension contributions willing tolerate commensurate level risk achieve objective based funded status plans longterm nature pension liability risk controlled maintaining portfolio assets diversified across variety asset classes investment styles investment managers possible investment managers prohibited owning securities portfolios manage behalf us plan assets represent majority plan assets asset allocation target ranges established consistent investment objectives assets rebalanced periodically nonus plan assets allocations based expected cash flow needs assessments local practices markets target allocation ranges follows fair value pension plan assets major category valuation method follows cash equivalents equity securities debt securities include comingled funds represent investments funds offered institutional investors similar mutual funds provide diversification holding various equity debt securities since comingled funds quoted active market priced based relative value underlying equity debt investments individual prices given time funds subject leveling within fair value hierarchy debt securities valued based day actual trading prices available prices available use matrix pricing model historical prices trends factors private investment partnerships represents interests funds invest equity debt financial assets funds generally publicly traded interests therein valued using income market methods include cash flow projections market multiples various comparable investments real estate includes owned properties limited partnership interests real estate partnerships owned properties valued using certified appraisals least every three years updated least annually real estate investment manager based current market trends available information appraisals generally use standard methods valuing real estate including forecasting income identifying current transactions comparable real estate arrive fair value limited partnership interests real estate partnerships valued similarly private investment partnerships general partner using standard real estate valuation methods value real estate properties securities held within portfolios neither private investment real estate partnerships subject leveling within fair value hierarchy table presents reconciliation fair value measurements owned real estate properties use significant unobservable inputs level 3 estimated future cash flow impact defined benefits salaried plans based salary years service hourly plans generally provide benefits based stated amounts year service funding policy consistent applicable laws regulations 2020 expect contribute approximately 50 million pension plans rap benefit payments provided reflect expected future employee service appropriate expected paid net estimated participant contributions payments based assumptions used measure benefit obligation end 2019 pension benefit payments primarily paid qualified pension trusts pay postretirement benefits pensions general corporate assets benefit payments expect pay undiscounted basis follows note 17 special charges special charges recorded segment type cost follows december 2019 recorded 72 million special charges primarily connection restructuring plan designed reduce costs improve overall operating efficiency headcount reductions facility consolidations actions industrial textron aviation segments industrial segment connection strategic review kautex business cost reduction measures initiated maximize operating margin took cost cutting actions textron specialized vehicles business textron aviation segment conducted review ongoing workforce requirements resulting targeted headcount reductions actions realign cost structure headcount reductions totaled approximately 1000 positions included business support administrative functions within segments headcount reductions textron aviation primarily related engineering positions reflecting completion longitude certification activities reduced requirements ongoing development programs plan substantially completed end 2019 fourth quarter 2018 recorded 73 million special charges connection plan restructure textron specialized vehicles businesses within industrial segment plan recorded asset impairment charges 47 million primarily intangible assets related product rationalization contract termination costs 18 million severance costs 8 million headcount reductions totaled approximately 400 positions representing 10 textron specialized vehicles’ workforce plan substantially completed end 2018 2017 special charges totaled 130 million largely reflecting 90 million related enterprisewide restructuring plan initiated 2016 28 million restructuring plan initiated first quarter 2017 connection acquisition arctic cat discussed note 2 plans completed 2017 acquisition integration transaction costs include 5 million 2019 related strategic review kautex business 12 million 2017 related arctic cat acquisition restructuring reserve restructuring reserve activity summarized majority remaining cash outlays 65 million expected paid first half 2020 severance costs generally paid lumpsum basis include outplacement costs paid accordance normal payment terms note 18 income taxes conduct business globally result file numerous consolidated separate income tax returns within outside us subsidiaries file consolidated federal income tax return income continuing operations income taxes follows income tax expense continuing operations summarized follows following table reconciles federal statutory income tax rate effective income tax rate continuing operations 2019 effective tax rate favorably impacted 61 million benefits recognized additional tax credits related prior years result completion research development tax credit analysis 2018 effective tax rate favorably impacted 25 million upon reassessment reserves uncertain tax positions related research development tax credits tax cuts jobs act tax act enacted december 22 2017 among things tax act reduced us federal corporate tax rate 35 21 required companies pay onetime transition tax earnings certain foreign subsidiaries previously tax deferred reasonably estimated effects tax act recorded provisional amounts fourth quarter 2017 totaling 266 million provisional estimate included 154 million charge remeasure us federal deferred tax assets liabilities based rates expected reverse future generally 21 addition provisional estimate included 112 million expense onetime transition tax based approximately 16 billion post1986 earnings profits previously deferred us income taxes amount earnings held cash specified net assets 2018 finalized 2017 impacts tax act specifically remeasurement us federal deferred tax assets liabilities post1986 earnings profits transition tax resulted 14 million benefit unrecognized tax benefits unrecognized tax benefits represent tax positions reserves established unrecognized state tax benefits reflected net applicable tax benefits end 2019 2018 2017 unrecognized tax benefits recognized future periods would favorably impact effective tax rate reconciliation unrecognized tax benefits follows 2019 additional tax positions primarily reflect completion research development tax credit analysis tax credits related prior years 2018 certain tax positions related research development tax credits reduced 25 million based new information including interactions tax authorities recent audit settlements normal course business subject examination tax authorities throughout world generally longer subject us federal tax examinations years 2014 state local income tax examinations years 2012 nonus income tax examinations years 2011 2019 filed us federal amended returns 2012 2013 additional research development tax credits subject examination deferred taxes significant components net deferred tax assetsliabilities provided aat january 4 2020 us operating loss tax credit carryforward benefits 206 million expire 2039 utilized 29 million may carried forward indefinitely baccrued liabilities include warranty reserves selfinsured liabilities interest cwith adoption asc 842 2019 discussed note 1 established deferred tax asset operating lease liabilities deferred tax liability rightofuse assets dat january 4 2020 nonus operating loss tax credit carryforward benefits 20 million expire 2039 utilized 32 million may carried forward indefinitely believe earnings period temporary differences become deductible sufficient realize related future income tax benefits jurisdictions expiration date tax carryforwards projected operating results indicate realization likely valuation allowance provided following table presents breakdown deferred taxes nonus us state income taxes provided basis differences certain investments primarily result unremitted earnings foreign subsidiaries totaling 17 billion january 4 2020 16 billion december 29 2018 indefinitely reinvested earnings distributed future form dividends otherwise would subject withholding income taxes payable various nonus jurisdictions us states determination deferred tax liability associated indefinitely reinvested earnings practicable due multiple factors including complexity nonus tax laws tax treaty interpretations exchange rate fluctuations uncertainty available credits exemptions us federal state tax laws note 19 commitments contingencies subject legal proceedings claims arising conduct business including proceedings claims relating commercial financial transactions government contracts alleged lack compliance applicable laws regulations production partners product liability patent trademark infringement employment disputes environmental safety health matters legal proceedings claims seek damages fines penalties substantial amounts remediation environmental contamination government contractor subject audits reviews investigations determine whether operations conducted accordance applicable regulatory requirements federal government procurement regulations certain claims brought us government could result suspension debarment us government contracting period time basis information presently available believe existing proceedings claims material effect financial position results operations ordinary course business enter standby letter credit agreements surety bonds financial institutions meet various performance obligations outstanding letter credit arrangements surety bonds aggregated approximately 247 million 333 million january 4 2020 december 29 2018 respectively environmental remediation industrial enterprises engaged similar businesses involved number remedial actions various federal state laws regulations relating environment impose liability companies clean contribute cost cleaning sites hazardous wastes materials disposed released accrued environmental liabilities relate installation remediation systems disposal costs us environmental protection agency oversight costs legal fees operating maintenance costs currently formerly owned operated facilities circumstances affect reliability precision accruals include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur believe changes accruals may result factors uncertainties material effect financial position results operations based upon information currently available estimate potential environmental liabilities within range 40 million 150 million january 4 2020 environmental reserves approximately 76 million established address specific estimated liabilities estimate likely pay accrued environmental remediation liabilities next ten years classified 14 million current liabilities expenditures evaluate remediate contaminated sites 13 million 13 million 18 million 2019 2018 2017 respectively note 20 supplemental cash flow information cash payments receipts follows report independent registered public accounting firm shareholders board directors textron inc opinion financial statements audited accompanying consolidated balance sheets textron inc company january 4 2020 december 29 2018 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended january 4 2020 related notes financial statement schedule contained page 77 collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company january 4 2020 december 29 2018 results operations cash flows three years period ended january 4 2020 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting january 4 2020 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 25 2020 expressed unqualified opinion thereon adoption accounting standards update asu 201409 revenue contracts customers topic 606 discussed note 1 consolidated financial statements company changed method recognizing revenue result adoption asu 201409 revenue contracts customers topic 606 related amendments effective december 31 2017 basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit consolidated financial statements communicated required communicated audit committee 1 relate accounts disclosures material consolidated financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate long term contracts description matter described note 1 consolidated financial statements revenues longterm contracts us government generally recognized time using costtocost method accounting method extent progress towards completion measured based ratio costs incurred date estimated costs completion revenue recorded proportionally costs incurred contract costs estimated utilizing current contract specifications expected engineering requirements typically incurred period several years estimation costs completion requires substantial judgment company’s cost estimation process based professional knowledge experience engineers program managers along finance professionals company updates projections costs quarterly frequently circumstances significantly change adjustments required changes prior estimates recognized using cumulative catchup method impact change inceptiontodate contract recorded current period required disclosure provided consolidated financial statements anticipated losses contracts recognized full period losses become probable estimable auditing company’s estimated costs completion challenging complex due judgement involved evaluating management’s assumptions key estimates duration longterm contracts estimated costs completion consider risks surrounding company’s ability achieve technical requirements specifications contract schedule cost elements contract depend whether company able successfully retire risks surrounding aspects contract addressed matter audit obtained understanding evaluated design tested operating effectiveness controls related company’s revenue recognition process including controls management’s review estimated costs completion related key assumptions management’s review data underlying estimated costs completion complete accurate test accuracy company’s estimated costs completion audit procedures included among others evaluating key assumptions used management determine estimate included evaluating historical accuracy management’s estimates comparing planned costs actual costs incurred date also tested completeness accuracy underlying data back source documents contracts defined benefit pension obligations description matter described note 16 consolidated financial statements january 4 2020 aggregate qualified defined benefit pension obligation 89 billion exceeded fair value pension plan assets 81 billion resulting unfunded defined benefit pension obligation 809 million explained note 1 consolidated financial statements company updates estimates used measure defined benefit pension obligation plan assets annually fourth quarter upon remeasurement event reflect actual return plan assets updated actuarial assumptions auditing defined benefit pension obligations complex due highly judgmental nature actuarial assumptions eg discount rate mortality rate longevity expected return plan assets used measurement process assumptions significant effect projected benefit obligation addressed matter audit obtained understanding evaluated design tested operating effectiveness controls address risks material misstatement relating measurement valuation defined benefit pension obligation example tested controls management’s review defined benefit pension obligation actuarial calculations significant actuarial assumptions data inputs provided actuaries test defined benefit pension obligation audit procedures included among others evaluating methodology used significant actuarial assumptions discussed underlying data used management actuaries compared actuarial assumptions used management historical trends evaluated change defined benefit pension obligation prior year due change service cost interest cost benefit payments actuarial gains losses contributions new longevity assumptions plan amendments applicable addition involved actuarial specialist assist evaluating management’s methodology determining discount rate reflects maturity duration benefit payments used measure defined benefit pension obligation part assessment compared projected cash flows prior year compared current year benefits paid prior year projected cash flows evaluate mortality rate longevity assessed whether information consistent publicly available information entityspecific data also tested completeness accuracy underlying data including participant data provided company’s actuaries lastly evaluate expected return plan assets assessed whether management’s assumption consistent range returns portfolio comparative investments ernst young llp served company’s auditor since 1957 boston massachusetts february 25 2020 quarterly data fourth quarter 2019 special charges 72 million recorded restructuring plan principally impacting industrial textron aviation segments special charges 73 million recorded fourth quarter 2018 restructuring plan textron specialized vehicles businesses within industrial segment initiated december 2018 bon july 2 2018 completed sale tools test equipment product line resulted aftertax gain 419 million schedule ii valuation qualifying accounts deductions primarily include amounts written uncollectable accounts less recoveries inventory disposals changes prior year estimates business dispositions currency translation adjustments item 9item 8 financial statements supplementary data consolidated financial statements related report independent registered public accounting firm thereon included annual report form 10k pages indicated page consolidated statements operations years threeyear period ended december 30 2017 consolidated statements comprehensive income years threeyear period ended december 30 2017 consolidated balance sheets december 30 2017 december 31 2016 consolidated statements shareholders’ equity years threeyear period ended december 30 2017 consolidated statements cash flows years threeyear period ended december 30 2017 notes consolidated financial statements note 1 summary significant accounting policies note 2 business acquisitions goodwill intangible assets note 3 accounts receivable finance receivables note 4 inventories note 5 property plant equipment net note 6 accrued liabilities note 7 debt credit facilities note 8 derivative instruments fair value measurements note 9 shareholders’ equity note 10 sharebased compensation note 11 retirement plans note 12 special charges note 13 income taxes note 14 commitments contingencies note 15 supplemental cash flow information note 16 segment geographic data report independent registered public accounting firm supplementary information quarterly data 2017 2016 unaudited schedule ii valuation qualifying accounts schedules omitted either applicable required information included financial statements notes thereto consolidated statements operations years threeyear period ended december 30 2017 see note 13 consolidated financial statements additional information regarding year ended december 31 2016 see notes consolidated financial statements consolidated statements comprehensive income years threeyear period ended december 30 2017 see notes consolidated financial statements consolidated balance sheets see notes consolidated financial statements consolidated statements shareholders’ equity see notes consolidated financial statements consolidated statements cash flows years threeyear period ended december 30 2017 see notes consolidated financial statements consolidated statements cash flows continued years threeyear period ended december 30 2017 see notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation financial statement presentation consolidated financial statements include accounts textron inc majorityowned subsidiaries financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated majorityowned subsidiaries operate textron aviation bell textron systems industrial segments finance group also finance segment consists textron financial corporation tfc consolidated subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements finance group provides financing primarily purchasers new preowned textron aviation aircraft bell helicopters manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidation collaborative arrangements bell segment strategic alliance agreement boeing company boeing provide engineering development test services related v22 aircraft well produce v22 aircraft number separate contracts us government v22 contracts alliance created agreement legal entity employees assets true operations agreement creates contractual rights represent entity equity interest account alliance collaborative arrangement bell boeing reporting costs incurred revenues generated transactions us government company’s respective income statement neither bell boeing considered principal participant transactions recorded agreement profits costplus contracts allocated bell boeing 5050 basis negotiated profits fixedprice contracts also allocated 5050 however bell boeing responsible cost overruns entitled retain cost underruns based contractual arrangement established alliance bell accounts rights obligations specific requirements v22 contracts allocated bell work breakdown structure account rights obligations including warranty product contingent liabilities specific requirements v22 contracts allocated us agreement revenues cost sales reflect performance v22 contracts revenues currently recognized using unitsofdelivery method include assets used performance v22 contracts including inventory unpaid receivables liabilities arising obligations v22 contracts consolidated balance sheets use estimates prepare financial statements conformity generally accepted accounting principles require us make estimates assumptions affect amounts reported financial statements actual results could differ estimates assumptions reviewed periodically effects changes reflected consolidated statements operations period determined periodically change estimates revenues costs certain longterm contracts accounted percentageofcompletion method accounting changes estimates increased income continuing operations income taxes 5 million 83 million 78 million 2017 2016 2015 respectively 3 million 52 million 49 million tax respectively 001 019 018 per diluted share respectively 2017 2016 2015 gross favorable program profit adjustments totaled 92 million 106 million 111 million respectively gross unfavorable program profit adjustments totaled 87 million 23 million 33 million respectively gross unfavorable program adjustments 2017 included 44 million related tactical armoured patrol vehicle program 2017 program experienced inefficiencies resulting various production issues ramp subsequent production revenue recognition generally recognize revenue sale products longterm contracts upon delivery commercial aircraft delivery upon completion manufacturing customer acceptance transfer risk rewards ownership taxes collected customers remitted government authorities recorded net basis sale arrangement involves multiple deliverables sales products include customization services evaluate arrangement determine whether separate items required delivered arrangement qualify separate units accounting arrangements typically involve customization services offer customers purchase bell helicopters services generally provided within first six months customer accepts aircraft assumes risk loss consider aircraft customization services separate units accounting allocate contract price two relative selling price basis using best evidence selling price deliverables typically reference price charged similar items sold separately us also consider performance cancellation termination refundtype provisions revenue recognized recognition criteria unit accounting met longterm contracts revenues longterm contracts accounted percentageofcompletion method accounting method estimate profit difference total estimated revenues cost contract recognize estimated profit contract term based either unitsofdelivery method costtocost method typically used development effort costs incurred appropriate circumstances revenues fixedprice contracts generally recorded using unitsofdelivery method revenues costreimbursement contracts recorded using costtocost method longterm contract profits based estimates total contract cost revenues utilizing current contract specifications expected engineering requirements achievement contract milestones product deliveries certain contracts awarded fixedprice incentive fees also considered estimating revenues profit rates contract costs typically incurred period several years estimation costs requires substantial judgment cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments required changes prior estimates recognized using cumulative catchup method impact change inceptiontodate recorded current period anticipated losses contracts recognized full period losses become probable estimable finance revenues finance revenues primarily include interest finance receivables capital lease earnings portfolio gainslosses portfolio gainslosses include impairment charges related repossessed assets properties gainslosses sale early termination finance assets recognize interest using interest method provides constant rate return terms receivables accrual interest income suspended credit quality indicators suggest full collection principal interest doubtful addition automatically suspend accrual interest income accounts contractually delinquent three months unless collection doubtful cash payments nonaccrual accounts including finance charges generally applied reduce net investment balance conclude collection principal interest longer doubtful resume accrual interest recognize previously suspended interest income time either loan becomes contractually current payment according original terms loan b loan modified following period performance terms modification cash equivalents cash equivalents consist cash shortterm highly liquid investments original maturities three months less inventories stated lower cost estimated net realizable value inventories generally using firstin firstout fifo method lastin firstout lifo method certain qualifying inventories lifo provides better matching costs revenues determine costs commercial helicopters average cost basis model considering expended estimated costs current production release inventories include costs related longterm contracts stated actual production costs including allocable operating overhead advances suppliers case contracts us government allocable research development general administrative expenses since inventoried costs include amounts related contracts long production cycles portion costs expected realized within one year pursuant contract provisions agencies us government title security interest inventories related contracts result advances performancebased payments progress payments accordingly advances payments reflected offset related inventory balances remaining amounts recorded liability customer deposits customer deposits recorded inventory right offset exists customer deposits recorded accrued liabilities property plant equipment property plant equipment recorded cost depreciated primarily using straightline method capitalize expenditures improvements increase asset values extend useful lives property plant equipment reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable carrying value asset exceeds sum undiscounted expected future cash flows asset written fair value goodwill intangible assets goodwill represents excess consideration paid acquisition business fair values assigned intangible net assets acquired business goodwill intangible assets deemed indefinite lives amortized subject annual impairment test evaluate recoverability assets fourth quarter year frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate potential impairment test calculate fair value reporting unit indefinitelived intangible asset primarily using discounted cash flows reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics goodwill impairment test discounted cash flows incorporate assumptions revenue growth operating margins discount rates represent best estimates current forecasted market conditions cost structure anticipated net cost reductions implied rate return believe market participant would require investment business similar risks characteristics reporting unit assessed reporting unit’s estimated fair value exceeds carrying value impairment otherwise amount impairment determined comparing carrying amount reporting unit’s goodwill implied fair value goodwill implied fair value goodwill determined assigning fair value reporting unit’s assets liabilities reporting unit acquired business combination carrying amount goodwill exceeds implied fair value impairment loss recognized amount equal excess indefinitelived intangible assets carrying amount intangible asset exceeds fair value impairment loss recognized amount equal excess acquired intangible assets finite lives subject amortization assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable amortization intangible assets recognized estimated useful lives using method reflects pattern economic benefits intangible assets consumed otherwise realized approximately 78 gross intangible assets amortized based cash flow streams used value assets remaining assets amortized using straightline method finance receivables finance receivables primarily include loans provided purchasers new preowned textron aviation aircraft bell helicopters finance receivables generally recorded amount outstanding principal less allowance losses maintain allowance losses finance receivables level considered adequate cover inherent losses portfolio based management’s evaluation larger balance accounts specifically identified impaired reserve established based comparing expected future cash flows discounted finance receivable’s effective interest rate fair value underlying collateral finance receivable collateral dependent carrying amount expected future cash flows consider collateral value financial performance liquidity borrower existence financial strength guarantors estimated recovery costs including legal expenses costs associated repossession eventual disposal collateral range potential outcomes perform multiple discounted cash flow analyses weight potential outcomes based relative likelihood occurrence evaluation portfolio inherently subjective requires estimates including amount timing future cash flows expected received impaired finance receivables estimated fair value underlying collateral may differ actual results analysis specific individual account critical factors included analysis include industry valuation guides age physical condition collateral payment history existence financial strength guarantors also establish allowance losses cover probable specifically unknown losses existing portfolio allowance established percentage nonrecourse finance receivables identified requiring specific reserves percentage based combination factors including historical loss experience current delinquency default trends collateral values general economic specific industry trends finance receivables charged earlier date collateral repossessed payment received six months unless management deems receivable collectible repossessed assets recorded fair value less estimated cost sell pension postretirement benefit obligations maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections evaluate update assumptions annually consultation thirdparty actuaries investment advisors also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases yearend measurement defined benefit plan assets obligations measured monthend date closest fiscal yearend recognize overfunded underfunded status pension postretirement plans consolidated balance sheets recognize changes funded status defined benefit plans comprehensive income year occur actuarial gains losses immediately recognized net periodic pension cost recognized component comprehensive income loss oci amortized net periodic pension cost future periods derivatives hedging activities exposed market risk primarily changes currency exchange rates interest rates hold issue derivative financial instruments trading speculative purposes manage volatility relating exposures net exposures consolidated basis take advantage natural offsets residual portion enter various derivative transactions pursuant policies areas counterparty exposure hedging practices credit risk related derivative financial instruments considered minimal managed requiring high credit standards counterparties periodic settlements positions derivative instruments reported fair value consolidated balance sheets designation support hedge accounting performed specific exposure basis financial instruments qualifying cash flow hedges record changes fair value derivatives extent effective hedges oci net deferred taxes changes fair value derivatives qualifying hedges recorded earnings foreign currency denominated assets liabilities translated us dollars adjustments currency rate changes recorded cumulative translation adjustment account shareholders’ equity related foreign entity sold substantially liquidated use foreign currency financing transactions effectively hedge longterm investments foreign operations corresponding currency foreign currency gains losses hedge longterm investments recorded cumulative translation adjustment account product liabilities accrue product liability claims related defense costs loss probable reasonably estimable estimates generally based specifics claim incident best estimate probable loss using historical experience environmental liabilities asset retirement obligations liabilities environmental matters recorded sitebysite basis probable obligation incurred cost reasonably estimated estimate accrued environmental liabilities using currently available facts existing technology presently enacted laws regulations subject number factors uncertainties environmental liabilities discounted take consideration possible future insurance proceeds significant amounts claims third parties incurred asset retirement obligations primarily related costs remove dispose underground storage tanks asbestos materials used insulation adhesive fillers floor tiles legal requirement remove items currently plan remodel related facilities otherwise cause impacted items require disposal since asset retirement obligations estimable related liability recorded consolidated balance sheets warranty product maintenance liabilities provide limited warranty product maintenance programs certain products periods ranging one five years significant portion liabilities arises commercial aircraft businesses product maintenance contracts revenue recognized straightline basis contract period unless sufficient historical evidence indicates cost providing services incurred basis straightline circumstances revenue recognized contract period proportion costs expected incurred performing service warranty programs estimate costs may incurred record liability amount costs time product revenues recognized factors affect liability include number products sold historical costs per claim contractual recoveries vendors historical anticipated rates warranty claims including production warranty patterns new models assess adequacy recorded warranty liability periodically adjust amounts necessary additionally may establish warranty liability related issuance aircraft service bulletins aircraft longer covered limited warranty programs research development costs customerfunded research development costs charged directly related contracts primarily consist us government contracts accordance government regulations recover portion companyfunded research development costs overhead rate charges us government contracts research development costs reimbursable contract us government another customer charged expense incurred companyfunded research development costs 634 million 677 million 778 million 2017 2016 2015 respectively included cost sales income taxes provision income tax expense calculated reported income continuing operations income taxes based current tax law includes current period cumulative effect changes tax rates used previously determining deferred tax assets liabilities tax laws may require items included determination taxable income different times items reflected financial statements deferred tax balances reflect effects temporary differences financial reporting carrying amounts assets liabilities tax bases well net operating losses tax credit carryforwards stated enacted tax rates effect year taxes expected paid recovered deferred tax assets represent tax benefits tax deductions credits available future years require certain estimates assumptions determine whether likely portion benefit realized recoverability future tax deductions credits determined assessing adequacy future expected taxable income sources including future reversal existing taxable temporary differences taxable income carryback years estimated future taxable income available tax planning strategies change facts circumstances lead change judgment ultimate recoverability deferred tax asset record adjust related valuation allowance period change facts circumstances occurs along corresponding increase decrease income tax expense record tax benefits uncertain tax positions based upon management’s evaluation information available reporting date recognized financial statements tax position must meet morelikelythannot threshold position sustained upon examination tax authority based technical merits assuming tax authority full knowledge relevant information positions meeting recognition threshold benefit measured largest amount benefit meets morelikelythannot threshold sustained periodically evaluate tax positions based latest available information tax positions meet threshold requirement recognize net taxrelated interest penalties continuing operations income tax expense new accounting standards revenue recognition may 2014 financial accounting standards board fasb issued accounting standards update asu 201409 revenue contracts customers outlines fivestep revenue recognition model based principle entity recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services new standard became effective us beginning 2018 adopted using modified retrospective transition method record cumulative effect adopting new standard first quarter 2018 based review analysis contracts standard primarily impacts bell textron systems segments longterm production contracts us government prior adoption new standard revenue generally recognized contracts units delivered new standard revenue recognized time principally costs incurred change generally result acceleration revenue contracts adoption date impact recognizing revenues new standard historical periods ending prior december 31 2017 result cumulative aftertax transition adjustment increase retained earnings approximately 90 million largely related bell segment addition transition adjustment establish contract assets approximately 350 million corresponding decreases inventory approximately 200 million contract liabilities deferred revenue customer deposits accounts receivables primarily reflecting conversion contracts costtocost method change expected significant impact future operating results revenues would recognized unitsofdelivery method future years essentially replaced acceleration revenue contracts earlier periods using costtocost method new standard impact cash flows affect economics underlying customer contracts standard significant impact revenue recognition textron aviation industrial segments continue primarily recognize revenue point time customer accepts delivery goods provided end 2017 backlog excluded amounts funding us government formally appropriated new standard backlog generally include unfunded amounts backlog equivalent transaction price allocated remaining performance obligations represents revenue expect recognize contracts future periods work yet performed adoption increase backlog unfunded amounts fully offset decrease due acceleration revenues transition adjustment expect backlog bell segment decrease approximately 15 adoption date partially offset increase approximately 7 textron systems segment updated accounting policies affected standard redesigned related internal controls financial reporting expanding disclosures included first quarter form 10q meet new requirements standards march 2017 fasb issued asu 201707 improving presentation net periodic pension cost net periodic postretirement benefit cost standard requires companies present service cost component net periodic benefit costs operating income line employee compensation costs components net periodic benefit costs must excluded operating income addition service cost component eligible capitalization inventory standard effective company beginning 2018 reclassification components net periodic benefit cost operating income must applied retrospectively change amount companies may capitalize inventory applied prospectively standard material impact consolidated financial statements change segment reporting february 2016 fasb issued asu 201602 leases requires lessees recognize leases term greater 12 months balance sheet righttouse assets lease liabilities lease expenses would continue recognized statement operations manner similar current accounting guidance current accounting guidance required recognize assets liabilities arising operating leases balance sheet new standard effective company beginning 2019 early adoption permitted entities must adopt standard modified retrospective basis whereby would applied beginning earliest comparative year continue evaluate impact standard consolidated financial statements expect materially increase assets liabilities consolidated balance sheet recognize rights corresponding obligations related operating leases june 2016 fasb issued asu 201613 financial instruments credit losses financial assets trade receivables loans instruments standard changes current incurred loss model forwardlooking expected credit loss model generally result earlier recognition allowances losses new standard effective company beginning 2020 early adoption permitted beginning 2019 entities required apply provisions standard cumulativeeffect adjustment retained earnings effective date currently evaluating impact standard consolidated financial statements note 2 business acquisitions goodwill intangible assets 2017 acquisitions march 6 2017 completed acquisition arctic cat inc arctic cat publiclyheld company nasdaq acat pursuant cash tender offer 1850 per share followed shortform merger arctic cat manufactures markets allterrain vehicles sidebysides snowmobiles addition related parts garments accessories cash paid business including repayment debt net cash acquired totaled 316 million arctic cat provides platform expand product portfolio increase distribution channel support growth within textron specialized vehicles business industrial segment operating results arctic cat included consolidated statements operations since closing date allocated consideration paid business preliminary basis assets acquired liabilities assumed based estimated fair values acquisition date expect finalize purchase accounting first quarter 2018 based preliminary allocation 230 million allocated goodwill related expected synergies value assembled workforce 75 million intangible assets included 18 million indefinitelived assets related tradenames definitelived intangible assets primarily related customerdealer relationships technology amortized 8 20 years determined value intangible assets using relieffromroyalty multiperiod excess earnings methods utilize significant unobservable inputs level 3 inputs defined fair value hierarchy valuation methods required make estimates assumptions sales operating margins growth rates royalty rates discount rates based anticipated cash flows marketplace data approximately 5 million goodwill deductible tax purposes 2016 2015 acquisitions 2016 paid 186 million cash assumed debt 19 million acquire six businesses net cash acquired holdbacks acquisition able engineering component services inc able aerospace inc first quarter 2016 represented largest businesses included textron aviation segment 2015 made aggregate cash payments acquisitions 81 million included three businesses within industrial textron aviation segments goodwill changes carrying amount goodwill segment follows intangible assets intangible assets summarized trade names trademarks table include 222 million 204 million indefinitelived intangible assets december 30 2017 december 31 2016 respectively amortization expense totaled 69 million 66 million 61 million 2017 2016 2015 respectively amortization expense estimated approximately 68 million 66 million 61 million 58 million 58 million 2018 2019 2020 2021 2022 respectively note 3 accounts receivable finance receivables accounts receivable accounts receivable composed following unbillable receivables primarily us government contracts arise revenues appropriately recognized based performance cannot billed yet terms contract unbillable receivables within accounts receivable totaled 179 million december 30 2017 178 million december 31 2016 finance receivables finance receivables presented following table included finance receivables held sale 30 million december 31 2016 finance receivables primarily includes loans provided purchasers new preowned textron aviation aircraft bell helicopters loans typically initial terms ranging five ten years amortization terms ranging eight fifteen years average balance 1 million december 30 2017 loans generally require customer pay significant payment along periodic scheduled principal payments reduce outstanding balance term loan finance receivables diversified across geographic region borrower industry december 30 2017 56 finance receivables distributed internationally 44 throughout us compared 61 39 respectively end 2016 december 30 2017 december 31 2016 finance receivables 257 million 411 million respectively pledged collateral tfc’s debt 175 million 244 million respectively finance receivable portfolio quality credit quality indicators nonaccrual finance receivables internally assess quality finance receivables based number key credit quality indicators statistics delinquency loan balance estimated collateral value financial strength individual borrowers guarantors many indicators difficult apply across entire class receivables evaluate individual loans quarterly basis classify loans three categories based key credit quality indicators individual loan three categories performing watchlist nonaccrual classify finance receivables nonaccrual credit quality indicators suggest full collection principal interest doubtful addition automatically classify accounts nonaccrual contractually delinquent three months unless collection principal interest doubtful accounts classified watchlist credit quality indicators deteriorated compared typical underwriting criteria believe collection full principal interest probable certain finance receivables meet watchlist nonaccrual categories classified performing delinquency measure delinquency based contractual payment terms finance receivables determining delinquency aging category account anyall principal interest received applied pastdue principal andor interest amounts due significant portion contractually due payment delinquent entire finance receivable balance reported accordance pastdue delinquency aging category finance receivables categorized based credit quality indicators delinquency aging category summarized follows impaired loans quarterly basis evaluate individual finance receivables impairment nonhomogeneous portfolios larger balance accounts homogeneous loan portfolios finance receivable considered impaired probable unable collect amounts due according contractual terms loan agreement based review credit quality indicators described impaired finance receivables include nonaccrual accounts full collection principal interest remains probable account’s original terms expected significantly modified modification specifies interest rate equal greater market rate finance receivable comparable risk account considered impaired years subsequent modification interest income recognized impaired loans significant 2017 2016 summary impaired finance receivables excluding leveraged leases average recorded investment provided allowance losses rollforward allowance losses finance receivables summary composition based underlying finance receivables evaluated impairment provided finance receivables reported table specifically exclude 98 million 99 million leveraged leases december 30 2017 december 31 2016 respectively accordance us generally accepted accounting principles note 4 inventories composed following inventories valued lifo method totaled 22 billion 19 billion december 30 2017 december 31 2016 respectively carrying values inventories would higher approximately 452 million 457 million respectively lifo inventories valued current costs inventories related longterm contracts net progressmilestone payments 387 million 557 million december 30 2017 december 31 2016 respectively note 5 property plant equipment net manufacturing group’s property plant equipment net composed following december 30 2017 december 31 2016 assets capital leases totaled 290 million 284 million respectively accumulated amortization 94 million 85 million respectively manufacturing group’s depreciation expense included amortization expense capital leases totaled 362 million 368 million 383 million 2017 2016 2015 respectively note 6 accrued liabilities accrued liabilities manufacturing group summarized changes warranty liability follows adjustments include changes prior year estimates new issues prior year sales currency translation adjustments note 7 debt credit facilities debt summarized table notes amortize quarterly semiannual basis b notes secured finance receivables described note 3 following table shows required payments next five years debt outstanding december 30 2017 millions manufacturing group finance group total textron senior unsecured revolving credit facility expires september 2021 aggregate principal amount 10 billion 100 million available issuance letters credit december 30 2017 amounts borrowed facility 11 million letters credit issued fixedtofloating rate junior subordinated notes finance group’s 299 million fixedtofloating rate junior subordinated notes unsecured rank junior existing future senior debt notes mature february 15 2067 however right redeem notes par time obligated redeem notes beginning february 15 2042 interest notes fixed 6 february 15 2017 variable threemonth london interbank offered rate 1735 support agreement support agreement amended december 2015 textron inc required ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 125 million cash contributions required paid tfc 2017 2016 2015 maintain compliance support agreement note 8 derivative instruments fair value measurements measure fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date prioritize assumptions market participants would use pricing asset liability threetier fair value hierarchy fair value hierarchy gives highest priority level 1 quoted prices active markets identical assets liabilities lowest priority level 3 unobservable inputs little market data exist requiring companies develop assumptions observable inputs meet criteria level 1 include quoted prices similar assets liabilities active markets quoted prices identical assets liabilities markets active categorized level 2 level 3 inputs reflect estimates assumptions market participants would use pricing asset liability based best information available circumstances valuation techniques assets liabilities measured using level 3 inputs may include methodologies market approach income approach cost approach may use unobservable inputs projections estimates management’s interpretation current market data unobservable inputs utilized extent observable inputs available cost effective obtain assets liabilities recorded fair value recurring basis manufacture sell products number countries throughout world therefore exposed movements foreign currency exchange rates primarily utilize foreign currency exchange contracts maturities three years manage volatility contracts qualify cash flow hedges intended offset effect exchange rate fluctuations forecasted sales inventory purchases overhead expenses net gains losses recognized earnings accumulated comprehensive loss cash flow hedges including gains losses related hedge ineffectiveness significant periods presented foreign currency exchange contracts measured fair value using market method valuation technique inputs technique utilize current foreign currency exchange forward market rates published thirdparty leading financial news data providers observable data represent rates financial institution uses contracts entered date however based actual transactions classified level 2 december 30 2017 december 31 2016 foreign currency exchange contracts notional amounts upon contracts based 426 million 665 million respectively december 30 2017 fair value amounts foreign currency exchange contracts 13 million asset 7 million liability december 31 2016 fair value amounts foreign currency exchange contracts 7 million asset 17 million liability hedge net investment position major currencies generate foreign currency interest payments offset transactional exposures currencies accomplish borrow directly foreign currency designate portion foreign currency debt hedge net investment record changes fair value contracts comprehensive income extent effective cash flow hedges currency effects effective portion hedges reflected foreign currency translation adjustments within accumulated comprehensive loss significant periods presented assets liabilities recorded fair value carrying value estimated fair value financial instruments reflected financial statements fair value follows fair value manufacturing group debt determined using market observable data similar transactions level 2 fair value finance group debt determined primarily based discounted cash flow analyses using observable market inputs debt similar duration subordination credit default expectations level 2 fair value estimates finance receivables determined based internally developed discounted cash flow models primarily utilizing significant unobservable inputs level 3 include estimates rate return financing cost capital structure andor discount rate expectations current market participants combined estimated loan cash flows based credit losses payment rates expectations borrowers’ ability make payments timely basis note 9 shareholders’ equity capital stock authorization 15 million shares preferred stock par value 001 500 million shares common stock par value 0125 outstanding common stock activity presented earnings per share calculate basic diluted earnings per share eps based net income approximates income available common shareholders period basic eps calculated using twoclass method includes weightedaverage number common shares outstanding period restricted stock units paid stock deemed participating securities provide nonforfeitable rights dividends diluted eps considers dilutive effect potential future common stock including stock options weightedaverage shares outstanding basic diluted eps follows 2017 2016 2015 stock options purchase 16 million 20 million 21 million shares respectively common stock excluded calculation diluted weightedaverage shares outstanding effect would antidilutive accumulated comprehensive loss components accumulated comprehensive loss presented comprehensive income loss aftertax components comprehensive income loss presented components comprehensive income loss included computation net periodic pension cost see note 11 additional information note 10 sharebased compensation 2015 longterm incentive plan replaced 2007 longterm incentive plan april 2015 authorizes awards selected employees form stock options restricted stock restricted stock units stock appreciation rights performance stock performance share units awards maximum 17 million shares authorized issuance purposes plan plus shares become available upon cancellation forfeiture expiration awards granted 2007 longterm incentive plan 17 million shares may awarded pursuant incentive stock options 425 million shares may issued pursuant awards restricted stock restricted stock units performance stock awards payable shares deferred income plan textron executives provide certain executives opportunity voluntarily defer 80 base salary along incentive compensation elective deferrals may put either stock unit account interestbearing account participants cannot move amounts two accounts actively employed us cannot receive distributions termination employment intrinsic value amounts paid deferred income plan significant 2017 2016 2015 sharebased compensation costs reflected primarily selling administrative expense compensation expense included net income sharebased compensation plans follows compensation expense included 20 million 20 million 21 million 2017 2016 2015 respectively portion fair value stock options issued portion previously granted options requisite service rendered compensation cost awards subject service conditions vest ratably recognized straightline basis requisite service period separately vesting portion award december 30 2017 recognized 45 million total compensation costs associated unvested awards subject service conditions expect recognize compensation expense awards weightedaverage period approximately two years stock options purchase shares maximum term ten years generally vest ratably threeyear period stock option compensation cost calculated fair value approach recognized vesting period stock options estimate fair value options granted date grant using blackscholes optionpricing model expected volatilities based implied volatilities traded options common stock historical volatilities factors expected term based historical option exercise data adjusted reflect anticipated changes expected behavior weightedaverage fair value options granted past three years assumptions used optionpricing model grants follows stock option activity 2017 provided options thousands number options weighted average exercise price outstanding beginning year 9264 3361 granted 1840 5034 exercised 1626 3199 forfeited expired 240 4192 outstanding end year 9238 3702 exercisable end year 5865 3279 december 30 2017 outstanding options aggregate intrinsic value 181 million weightedaverage remaining contractual life six years exercisable options aggregate intrinsic value 140 million weightedaverage remaining contractual life five years december 30 2017 total intrinsic value options exercised 2017 2016 2015 29 million 15 million 23 million respectively restricted stock units issue restricted stock units settled cash stock vesting onethird third fourth fifth year following year grant include right receive dividend equivalents fair value units based trading price common stock recognized ratably vesting period units payable stock use trading price grant date units payable cash remeasured using price reporting period date 2017 activity restricted stock units provided fair value restricted stock unit awards vested andor amounts paid awards follows performance share units fair value sharebased compensation awards accounted liabilities includes performance share units paid cash first quarter year following vesting payouts performance share units vary based certain performance criteria generally set year threeyear performance period performance share units vest end three years fair value awards based trading price common stock remeasured reporting period date 2017 activity performance share units follows units thousands number units weighted average grant date fair value outstanding beginning year nonvested 3913 granted 4958 vested 262 4415 forfeited 19 3918 outstanding end year nonvested 4134 fair value performance share units vested andor amounts paid awards follows note 11 retirement plans defined benefit contribution plans cover substantially employees significant number usbased employees participate textron retirement plan designed “flooroffset” arrangement defined benefit component defined contribution component defined benefit component arrangement includes textron master retirement plan tmrp bell helicopter textron master retirement plan bhtmrp defined contribution component retirement account plan rap defined benefit component provides minimum guaranteed benefit “floor” benefit rap participants eligible receive contributions textron 2 eligible compensation may make contributions plan upon retirement participants receive greater floor benefit value rap tmrp bhtmrp subject provisions employee retirement income security act 1974 erisa effective january 1 2010 textron retirement plan closed new participants employees hired date receive additional 4 annual cash contribution textron savings plan account based eligible compensation also funded unfunded defined benefit pension plans cover certain us nonus employees addition several defined contribution plans sponsored various businesses largest plan textron savings plan qualified 401k plan subject erisa defined contribution plans cost 123 million 110 million 103 million 2017 2016 2015 respectively included 13 million 10 million 12 million respectively contributions rap also provide postretirement benefits pensions certain retired employees us include healthcare dental care medicare part b reimbursement life insurance periodic benefit cost credit components net periodic benefit cost credit amounts recognized oci follows estimated amount amortized accumulated comprehensive loss net periodic pension costs 2018 follows millions pension benefits postretirement benefits pensions net actuarial loss gain 1 prior service cost credit 6 total 7 obligations funded status plans measured fiscal yearend changes projected benefit obligation fair value plan assets along funded status follows 2017 employer contributions included 300 million discretionary contribution fund us pension plan amounts recognized balance sheets follows accumulated benefit obligation defined benefit pension plans 81 billion 76 billion december 30 2017 december 31 2016 respectively included 404 million 387 million respectively accumulated benefit obligations unfunded plans funding permitted foreign environments funding feasible pension plans accumulated benefit obligations exceeding fair value plan assets follows assumptions weightedaverage assumptions use pension postretirement plans follows assumed healthcare cost trend rate medical prescription drug cost 725 2017 2016 expect rate gradually decline 5 2024 assume remain onepercentagepoint change assumed healthcare cost trend rates would following effects millions one percentage point increase one percentage point decrease effect total service interest cost components 1 effect postretirement benefit obligations pensions 11 pension assets expected longterm rate return plan assets determined based variety considerations including established asset allocation targets expectations asset classes historical returns plans’ assets market considerations invest pension assets objective achieving total rate return long term sufficient fund future pension obligations minimize future pension contributions willing tolerate commensurate level risk achieve objective based funded status plans longterm nature pension liability risk controlled maintaining portfolio assets diversified across variety asset classes investment styles investment managers possible investment managers prohibited owning securities portfolios manage behalf us plan assets represent majority plan assets asset allocation target ranges established consistent investment objectives assets rebalanced periodically nonus plan assets allocations based expected cash flow needs assessments local practices markets target allocation ranges follows us plan assets domestic equity securities 20 35 international equity securities 8 19 global equities 0 12 debt securities 27 38 real estate 7 13 private investment partnerships 5 11 hedge funds 0 5 nonus plan assets equity securities 58 61 debt securities 31 34 real estate 8 fair value pension plan assets major category valuation method follows cash equivalents equity securities debt securities include comingled funds represent investments funds offered institutional investors similar mutual funds provide diversification holding various equity debt securities since comingled funds quoted active market priced based relative value underlying equity debt investments individual prices given time funds subject leveling within fair value hierarchy debt securities valued based day actual trading prices available prices available use matrix pricing model historical prices trends factors private investment partnerships represents interests funds invest equity debt financial assets funds generally publicly traded interests therein valued using income market methods include cash flow projections market multiples various comparable investments real estate includes owned properties limited partnership interests real estate partnerships owned properties valued using certified appraisals least every three years updated least annually real estate investment manager based current market trends available information appraisals generally use standard methods valuing real estate including forecasting income identifying current transactions comparable real estate arrive fair value limited partnership interests real estate partnerships valued similarly private investment partnerships general partner using standard real estate valuation methods value real estate properties securities held within portfolios neither private investment real estate partnerships subject leveling within fair value hierarchy hedge funds category represents investment diversified fund hedge funds sole investor fund invests portfolio funds publicly traded managed various portfolio managers investments portfolio funds typically valued basis recent price valuation provided fund’s administrator fund aggregates valuations assets liabilities calculate value fund subject leveling within fair value hierarchy table presents reconciliation fair value measurements owned real estate properties use significant unobservable inputs level 3 estimated future cash flow impact defined benefits salaried plans based salary years service hourly plans generally provide benefits based stated amounts year service funding policy consistent applicable laws regulations 2018 expect contribute approximately 55 million fund pension plans rap benefit payments provided reflect expected future employee service appropriate expected paid net estimated participant contributions payments based assumptions used measure benefit obligation end 2017 pension benefit payments primarily paid qualified pension trusts pay postretirement benefits pensions general corporate assets benefit payments expect pay undiscounted basis follows millions 20232027 pension benefits 2352 postretirement benefits pensions note 12 special charges 2016 initiated plan restructure realign businesses implementing headcount reductions facility consolidations actions order improve overall operating efficiency across textron plan textron systems discontinued production sensorfuzed weapon product within weapons sensors operating unit combined jacobsen business textron specialized vehicles business consolidating facilities general administrative functions reduced headcount textron aviation well businesses corporate functions december 2017 decided take additional restructuring actions consolidate operating facilities streamline product lines primarily within bell textron systems industrial segments resulted additional special charges 45 million fourth quarter 2017 recorded total special charges 213 million since inception 2016 plan included 97 million severance costs 84 million asset impairments 32 million contract terminations costs amounts 83 million incurred textron systems 63 million textron aviation 38 million industrial 28 million bell 1 million corporate total headcount reduction plan expected approximately 2100 positions representing 5 workforce connection acquisition arctic cat discussed note 2 initiated restructuring plan first quarter 2017 integrate business textron specialized vehicles business within industrial segment reduce operating redundancies maximize efficiencies arctic cat plan recorded restructuring charges 28 million 2017 included 19 million severance costs largely related changeofcontrol provisions 9 million contract termination costs addition recorded 12 million acquisitionrelated integration transaction costs 2017 special charges recorded plans follows analysis restructuring reserve activity plans summarized primarily related favorable contract negotiations textron systems segment 2016 plan arctic cat plan substantially completed majority remaining cash outlays 44 million expected paid first half 2018 severance costs generally paid lumpsum basis include outplacement costs paid accordance normal payment terms note 13 income taxes conduct business globally result file numerous consolidated separate income tax returns within outside us subsidiaries file consolidated federal income tax return income continuing operations income taxes follows income tax expense continuing operations summarized follows following table reconciles federal statutory income tax rate effective income tax rate continuing operations included favorable impact 14 2015 related net change valuation allowances us tax reform tax cuts jobs act “act” enacted december 22 2017 among things act reduces us federal corporate tax rate 35 21 requires companies pay onetime transition tax earnings certain foreign subsidiaries previously tax deferred reasonably estimated effects act recorded provisional amounts fourth quarter 2017 totaling 266 million provisional estimate included 154 million charge remeasure us federal deferred tax assets liabilities based rates expected reverse future generally 21 addition provisional estimate included 112 million expense onetime transition tax based approximately 16 billion post1986 earnings profits previously deferred us income taxes amount earnings held cash specified net assets us government state tax authorities expected continue issue guidance regarding act may result adjustments provisional estimates continuing analyze certain aspects act may refine estimates could potentially affect measurement net deferred tax assets give rise new deferred tax amounts final determination remeasurement net deferred tax assets transition tax completed additional information becomes available later one year enactment date additional income taxes related outside basis differences provided amounts continue indefinitely reinvested foreign operations earnings distributed future form dividends otherwise would subject withholding taxes payable various nonus jurisdictions us states practicable determine amount unrecognized deferred tax liability related undistributed foreign earnings continue assess ability intent repatriate earnings measurement period federal tax settlement 1998 2008 2016 provision income taxes included benefit 319 million reflect settlement us internal revenue service office appeals 1998 2008 tax years resulted 206 million benefit attributable continuing operations 113 million attributable discontinued operations unrecognized tax benefits unrecognized tax benefits represent tax positions reserves established unrecognized state tax benefits interest related unrecognized tax benefits reflected net applicable tax benefits reconciliation unrecognized tax benefits follows end 2017 2016 unrecognized tax benefits recognized future periods would favorably impact effective tax rate normal course business subject examination tax authorities throughout world longer subject us federal tax examinations years 2012 us state local income tax examinations years 1997 nonus income tax examinations years 2011 deferred taxes tax effects temporary differences give rise significant portions net deferred tax assets liabilities provided accrued expenses included warranty reserves selfinsured liabilities interest believe earnings period temporary differences become deductible sufficient realize related future income tax benefits jurisdictions expiration date tax carryforwards projected operating results indicate realization likely valuation allowance provided 2017 recorded 46 million deferred tax assets along 33 million valuation allowance related state loss carryforwards likelihood able utilize carryforwards longer deemed remote predominately due consolidated filing election made year following table presents breakdown net deferred tax assets net operating loss credit carryforwards december 30 2017 follows millions nonus net operating loss expiration nonus net operating loss expiring 2036 us federal net operating losses expiring 2036 state net operating loss tax credits net tax benefits expiring 2036 note 14 commitments contingencies subject legal proceedings claims arising conduct business including proceedings claims relating commercial financial transactions government contracts alleged lack compliance applicable laws regulations production partners product liability patent trademark infringement employment disputes environmental safety health matters legal proceedings claims seek damages fines penalties substantial amounts remediation environmental contamination government contractor subject audits reviews investigations determine whether operations conducted accordance applicable regulatory requirements federal government procurement regulations certain claims brought us government could result suspension debarment us government contracting period time basis information presently available believe existing proceedings claims material effect financial position results operations ordinary course business enter standby letter credit agreements surety bonds financial institutions meet various performance obligations outstanding letter credit arrangements surety bonds aggregated approximately 380 million 525 million december 30 2017 december 31 2016 respectively environmental remediation industrial enterprises engaged similar businesses involved number remedial actions various federal state laws regulations relating environment impose liability companies clean contribute cost cleaning sites hazardous wastes materials disposed released accrued environmental liabilities relate installation remediation systems disposal costs us environmental protection agency oversight costs legal fees operating maintenance costs currently formerly owned operated facilities circumstances affect reliability precision accruals include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur believe changes accruals may result factors uncertainties material effect financial position results operations based upon information currently available estimate potential environmental liabilities within range 40 million 140 million december 30 2017 environmental reserves approximately 65 million established address specific estimated liabilities estimate likely pay accrued environmental remediation liabilities next ten years classified 13 million current liabilities expenditures evaluate remediate contaminated sites 18 million 15 million 15 million 2017 2016 2015 respectively leases rental expense 122 million 126 million 113 million 2017 2016 2015 respectively future minimum rental commitments noncancelable operating leases effect december 30 2017 totaled 80 million 2018 64 million 2019 51 million 2020 35 million 2021 30 million 2022 137 million thereafter total future minimum rental receipts noncancelable subleases december 30 2017 totaled 19 million note 15 supplemental cash flow information cash payments receipts follows note 16 segment geographic data operate report financial information following five business segments textron aviation bell textron systems industrial finance accounting policies segments described note 1 textron aviation products include citation jets king air caravan turboprop aircraft piston engine aircraft military turboprop aircraft aftermarket part sales services sold diverse base corporate individual buyers bell products include military commercial helicopters tiltrotor aircraft related spare parts services bell supplies military helicopters association boeing company military tiltrotor aircraft aftermarket services us nonus governments bell also supplies commercial helicopters aftermarket services corporate offshore petroleum exploration development utility charter police fire rescue emergency medical helicopter operators foreign governments textron systems products include unmanned aircraft systems marine land systems simulation training defense aviation mission support products services primarily us nonus governments industrial products markets include following · kautex products include blowmolded plastic fuel systems clearvision systems selective catalytic reduction systems cast iron engine components marketed primarily automobile oems well plastic bottles containers various uses · specialized vehicles products include golf cars offroad utility vehicles recreational sidebyside allterrain vehicles snowmobiles light transportation vehicles aviation ground support equipment professional turfmaintenance equipment turfcare vehicles marketed primarily golf courses resorts government agencies municipalities consumers commercial industrial users · tools test equipment products include powered equipment electrical test measurement instruments mechanical hydraulic tools cable connectors fiber optic assemblies underground aerial transmission distribution products power utility products principally used construction maintenance telecommunications data communications electrical utility plumbing industries finance segment provides financing primarily purchasers new preowned textron aviation aircraft bell helicopters segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses special charges measurement finance segment includes interest income expense along intercompany interest income expense revenues segment along reconciliation segment profit income continuing operations income taxes follows revenues major product type summarized revenues included sales us government approximately 31 billion 34 billion 32 billion 2017 2016 2015 respectively primarily bell textron systems segments information segment provided geographic data presented selected financial information continuing operations geographic area revenues attributed countries based location customer property plant equipment net based location asset report independent registered public accounting firm board directors shareholders textron inc opinion financial statements audited accompanying consolidated balance sheets textron inc company december 30 2017 december 31 2016 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended december 30 2017 related notes financial statement schedule contained page 71 collectively referred “financial statements” opinion financial statements present fairly material respects consolidated financial position company december 30 2017 december 31 2016 consolidated results operations cash flows three years period ended december 30 2017 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 30 2017 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 15 2018 expressed unqualified opinion thereon basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion ernst young llp served company’s auditor since 1957 boston massachusetts february 15 2018 quarterly data special charges related 2016 restructuring plan 15 million 12 million 15 million 48 million first second third fourth quarters 2017 respectively 115 million 8 million third fourth quarters 2016 respectively addition recorded special charges 22 million 1 million 10 million 7 million first second third fourth quarters 2017 respectively related arctic cat acquisition included restructuring integration transaction costs b income tax expense fourth quarter 2017 included 266 million charge reflect provisional estimate net impact tax cuts jobs act enacted december 22 2017 third quarter 2016 included income tax benefit 319 million inclusive interest 206 million attributable continuing operations 113 million attributable discontinued operations benefit result final settlement internal revenue service office appeals 1998 2008 tax years c fourth quarter 2017 diluted average shares outstanding excluded potential common shares stock options restricted stock units due antidilutive effect resulting net loss schedule ii valuation qualifying accounts deductions primarily include amounts written uncollectable accounts less recoveries inventory disposals changes prior year estimates currency translation adjustments item 9item 8 financial statements supplementary data consolidated financial statements related report independent registered public accounting firm thereon included annual report form 10k pages indicated page consolidated statements operations years threeyear period ended december 29 2018 consolidated statements comprehensive income years threeyear period ended december 29 2018 consolidated balance sheets december 29 2018 december 30 2017 consolidated statements shareholders’ equity years threeyear period ended december 29 2018 consolidated statements cash flows years threeyear period ended december 29 2018 notes consolidated financial statements note 1 summary significant accounting policies note 2 business disposition acquisitions note 3 goodwill intangible assets note 4 accounts receivable finance receivables note 5 inventories note 6 property plant equipment net note 7 current liabilities note 8 debt credit facilities note 9 derivative instruments fair value measurements note 10 shareholders’ equity note 11 segment geographic data note 12 revenues note 13 sharebased compensation note 14 retirement plans note 15 special charges note 16 income taxes note 17 commitments contingencies note 18 supplemental cash flow information report independent registered public accounting firm supplementary information quarterly data 2018 2017 unaudited schedule ii valuation qualifying accounts schedules omitted either applicable required information included financial statements notes thereto consolidated statements operations years threeyear period ended december 29 2018 2016 see note 16 additional information see notes consolidated financial statements consolidated statements comprehensive income years threeyear period ended december 29 2018 see notes consolidated financial statements consolidated balance sheets see notes consolidated financial statements consolidated statements shareholders’ equity see notes consolidated financial statements consolidated statements cash flows years threeyear period ended december 29 2018 see notes consolidated financial statements consolidated statements cash flows continued years threeyear period ended december 29 2018 see notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation financial statement presentation consolidated financial statements include accounts textron inc majorityowned subsidiaries financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated majorityowned subsidiaries operate textron aviation bell textron systems industrial segments finance group also finance segment consists textron financial corporation tfc consolidated subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements finance group provides financing primarily purchasers new preowned textron aviation aircraft bell helicopters manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidation beginning 2018 adopted accounting standards update asu 201409 revenue contracts customers asc topic 606 related amendments collectively referred asc 606 adopted asc 606 using modified retrospective transition method applied contracts substantially complete end 2017 recorded 90 million adjustment increase retained earnings reflect cumulative impact adopting standard beginning 2018 primarily related certain longterm contracts bell segment us government converted costtocost method revenue recognition comparative information included financial statements notes restated reported accounting standards effect periods based policies described note applicable year also adopted asu 201615 statement cash flows classification certain cash receipts cash payment beginning 2018 standard provides guidance classification certain cash flows requires companies classify cash proceeds received settlement corporateowned life insurance cash inflows investing activities standard required adopted retrospective basis prior adoption standard classified proceeds operating activities consolidated statements cash flows upon adoption reclassified 17 million 87 million net cash proceeds 2017 2016 respectively operating activities investing activities collaborative arrangements bell segment strategic alliance agreement boeing company boeing provide engineering development test services related v22 aircraft well produce v22 aircraft number separate contracts us government v22 contracts alliance created agreement legal entity employees assets true operations agreement creates contractual rights represent entity equity interest account alliance collaborative arrangement bell boeing reporting costs incurred revenues generated transactions us government company’s respective income statement neither bell boeing considered principal participant transactions recorded agreement profits costplus contracts allocated bell boeing 5050 basis negotiated profits fixedprice contracts also allocated 5050 however bell boeing responsible cost overruns entitled retain cost underruns based contractual arrangement established alliance bell accounts rights obligations specific requirements v22 contracts allocated bell work breakdown structure account rights obligations including warranty product contingent liabilities specific requirements v22 contracts allocated us agreement revenues cost sales reflect performance v22 contracts revenues recognized using costtocost method upon adoption asc 606 include assets used performance v22 contracts liabilities arising obligations v22 contracts consolidated balance sheets use estimates prepare financial statements conformity generally accepted accounting principles require us make estimates assumptions affect amounts reported financial statements actual results could differ estimates assumptions reviewed periodically effects changes reflected consolidated statements operations period determined revenue recognition 2018 adoption asc 606 beginning 2018 revenue recognized control goods services promised contract transferred customer either point time eg upon delivery time eg perform contract account contract approval commitment parties rights payment terms parties identified contract commercial substance collectability consideration probable contracts reviewed determine whether one multiple performance obligations performance obligation promise transfer distinct good service customer represents unit accounting revenue recognition contracts multiple performance obligations expected consideration transaction price allocated performance obligation identified contract based relative standalone selling price performance obligation revenue recognized transaction price allocated performance obligation control promised goods services underlying performance obligation transferred contract consideration adjusted effects significant financing component contract inception period control transfers customer pay good service one year less commercial contracts majority contracts commercial customers single performance obligation one good service promised promise transfer goods services distinct separately identifiable promises contract revenue primarily recognized point time generally customer obtains control asset upon delivery customer acceptance contract modifications provide additional distinct goods services standalone selling price treated separate contracts commercial aircraft contract customers sell fully outfitted fixedwing aircraft may include configuration options aircraft typically represents single performance obligation revenue recognized upon customer acceptance delivery commercial helicopters customers generally contract us fully functional basic configuration aircraft control transferred upon customer acceptance delivery times customers may separately contract us installation accessories customization basic aircraft contracts entered near time basic aircraft contract assess whether contracts meet criteria combined contracts combined basic aircraft accessories customization typically considered distinct therefore separate performance obligations contracts revenue recognized basic aircraft upon customer acceptance transfer title risk loss accessories customization upon delivery customer acceptance utilize observable prices determine standalone selling prices allocating transaction price performance obligations transaction price commercial contracts reflects estimate returns rebates discounts based historical current forecasted information amounts billed customers shipping handling included transaction price generally treated separate performance obligations costs fulfill promise transfer product customer taxes collected customers remitted government authorities recorded net basis primarily provide standard warranty programs products commercial businesses periods typically range one five years assurancetype programs typically cannot purchased separately meet criteria considered performance obligation us government contracts us government generally include design development manufacture modification aerospace defense products well related services contracts also include us governmentsponsored foreign military sales program accounted approximately 24 total revenues 2018 customer typically contracts us provide significant service integrating complex set tasks components single project capability often results delivery multiple units accordingly entire contract accounted one performance obligation certain circumstances contract may include production support services logistics parts plans considered distinct context contract represent separate performance obligations contract separated one performance obligation generally utilize expected cost plus margin approach determine standalone selling prices allocating transaction price contracts frequently modified changes contract specifications requirements contract modifications us government goods services distinct existing contract due significant integration service provided context contract accounted part existing contract effect contract modifications estimates recognized using cumulative catchup method accounting contracts us government generally contain clauses provide lien rights workinprocess along clauses allow customer unilaterally terminate contract convenience pay us costs incurred plus reasonable profit take control workinprocess due continuous transfer control us government recognize revenue time perform contract selecting method measure progress towards completion requires judgment based nature products service provided generally use costtocost method measure progress contracts best depicts transfer control customer occurs incur costs contracts measure extent progress towards completion measured based ratio costs incurred date estimated costs completion performance obligation revenue recorded proportionally costs incurred transaction price contracts represents best estimate consideration receive includes assumptions regarding variable consideration applicable certain longterm contracts contain incentive fees provisions either increase decrease transaction price variable amounts generally awarded upon achievement certain performance metrics program milestones cost targets based upon customer discretion include estimated amounts transaction price extent probable significant reversal cumulative revenue recognized occur uncertainty associated variable consideration resolved estimates variable consideration determination whether include estimated amounts transaction price based largely assessment anticipated performance historical performance information reasonably available us total contract cost estimated utilizing current contract specifications expected engineering requirements contract costs typically incurred period several years estimation costs requires substantial judgment cost estimation process based professional knowledge experience engineers program managers along finance professionals review update projections costs quarterly frequently circumstances significantly change approximately 80 2018 revenues us government fixedprice incentive contracts typical payment terms contracts customer pays us either performancebased progress payments performancebased payments represent interim payments 90 contract price based quantifiable measures performance achievement specified events milestones progress payments interim payments 80 costs incurred work progresses customer retains small portion contract price completion contract contracts generally result revenue recognized excess billings present contract assets consolidated balance sheets amounts billed due customers classified accounts receivable net portion payments retained customer final contract settlement considered significant financing component intent protect customer costtype contracts generally paid actual costs incurred within short period time revenue recognition 2017 2016 prior adoption asc 606 2018 generally recognized revenue sale products longterm contracts upon delivery commercial aircraft delivery upon completion manufacturing customer acceptance transfer risk rewards ownership sale arrangement involved multiple deliverables sales products include customization services evaluated arrangement determine whether separate items required delivered arrangement qualify separate units accounting arrangements typically involved customization services offer customers purchase bell helicopters services generally provided within first six months customer accepts aircraft assumes risk loss aircraft customization services considered separate units accounting allocated contract price two relative selling price basis using best evidence selling price deliverables typically reference price charged similar items sold separately us also considered performance cancellation termination refundtype provisions revenue recognized recognition criteria unit accounting met taxes collected customers remitted government authorities recorded net basis revenues longterm contracts accounted percentageofcompletion method accounting method estimated profit difference total estimated revenues cost contract recognized estimated profit contract term based either unitsofdelivery method costtocost method typically used development effort costs incurred appropriate circumstances revenues fixedprice contracts generally recorded using unitsofdelivery method revenues costreimbursement contracts recorded using costtocost method longterm contract profits based estimates total contract cost revenues utilizing current contract specifications expected engineering requirements achievement contract milestones product deliveries certain contracts awarded fixedprice incentive fees also considered estimating revenues profit rates contract costs typically incurred period several years estimation costs requires substantial judgment cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments required changes prior estimates recognized using cumulative catchup method impact change inceptiontodate recorded current period anticipated losses contracts recognized full period losses became probable estimable finance revenues finance revenues primarily include interest finance receivables capital lease earnings portfolio gainslosses portfolio gainslosses include impairment charges related repossessed assets properties gainslosses sale early termination finance assets recognize interest using interest method provides constant rate return terms receivables accrual interest income suspended credit quality indicators suggest full collection principal interest doubtful addition automatically suspend accrual interest income accounts contractually delinquent three months unless collection doubtful cash payments nonaccrual accounts including finance charges generally applied reduce net investment balance conclude collection principal interest longer doubtful resume accrual interest recognize previously suspended interest income time either loan becomes contractually current payment according original terms loan b loan modified following period performance terms modification contract estimates contracts revenue recognized time recognize changes estimated contract revenues costs profits using cumulative catchup method accounting method recognizes cumulative effect changes current prior periods impact change inceptiontodate recorded current period anticipated losses contracts recognized full period losses become probable estimable 2018 2017 2016 cumulative catchup adjustments increased segment profit 196 million 5 million 83 million respectively net income 149 million 3 million 52 million respectively 059 001 019 per diluted share respectively 2018 recognized revenue performance obligations satisfied prior periods approximately 190 million related changes profit booking rates impacted revenue 2018 2017 2016 gross favorable adjustments totaled 249 million 92 million 106 million respectively 2018 favorable adjustments included 145 million largely related overhead rate improvements risk retirements associated contracts bell segment 2018 2017 2016 gross unfavorable adjustments totaled 53 million 87 million 23 million respectively 2017 unfavorable adjustments included 44 million related tactical armoured patrol vehicle program related inefficiencies resulting various production issues ramp subsequent production contract assets liabilities asc 606 contract assets arise contracts revenue recognized time amount revenue recognized exceeds amount billed customer amounts included contract assets right payment longer conditional events passage time december 29 2018 contract assets included current assets consolidated balance sheet contract liabilities primarily included current liabilities include deposits largely commercial aviation customers billings excess revenue recognized incremental costs obtaining contract customer expected recovered expensed incurred period benefitted one year less accounts receivable net accounts receivable net includes amounts billed customers right payment unconditional maintain allowance doubtful accounts provide estimated amount accounts receivable collected based assessment customer creditworthiness historical payment experience age outstanding receivable collateral value cash equivalents cash equivalents consist cash shortterm highly liquid investments original maturities three months less inventories stated lower cost estimated net realizable value inventories generally using firstin firstout fifo method lastin firstout lifo method certain qualifying inventories lifo provides better matching costs revenues determine costs commercial helicopters average cost basis model considering expended estimated costs current production release property plant equipment property plant equipment recorded cost depreciated primarily using straightline method capitalize expenditures improvements increase asset values extend useful lives property plant equipment reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable carrying value asset exceeds sum undiscounted expected future cash flows asset written fair value goodwill intangible assets goodwill represents excess consideration paid acquisition business fair values assigned intangible net assets acquired business goodwill intangible assets deemed indefinite lives amortized subject annual impairment test evaluate recoverability assets fourth quarter year frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate potential impairment test calculate fair value reporting unit indefinitelived intangible asset primarily using discounted cash flows reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics goodwill impairment test discounted cash flows incorporate assumptions revenue growth operating margins discount rates represent best estimates current forecasted market conditions cost structure anticipated net cost reductions implied rate return believe market participant would require investment business similar risks characteristics reporting unit assessed estimated fair value reporting unit indefinitelived intangible asset exceeds carrying value impairment otherwise impairment loss recognized amount carrying value exceeds estimated fair value acquired intangible assets finite lives subject amortization assets reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable amortization intangible assets recognized estimated useful lives using method reflects pattern economic benefits intangible assets consumed otherwise realized approximately 84 gross intangible assets amortized based cash flow streams used value assets remaining assets amortized using straightline method finance receivables finance receivables primarily include loans provided purchasers new preowned textron aviation aircraft bell helicopters finance receivables generally recorded amount outstanding principal less allowance losses maintain allowance losses finance receivables level considered adequate cover inherent losses portfolio based management’s evaluation larger balance accounts specifically identified impaired reserve established based comparing expected future cash flows discounted finance receivable’s effective interest rate fair value underlying collateral finance receivable collateral dependent carrying amount expected future cash flows consider collateral value financial performance liquidity borrower existence financial strength guarantors estimated recovery costs including legal expenses costs associated repossession eventual disposal collateral range potential outcomes perform multiple discounted cash flow analyses weight potential outcomes based relative likelihood occurrence evaluation portfolio inherently subjective requires estimates including amount timing future cash flows expected received impaired finance receivables estimated fair value underlying collateral may differ actual results analysis specific individual account critical factors included analysis include industry valuation guides age physical condition collateral payment history existence financial strength guarantors also establish allowance losses cover probable specifically unknown losses existing portfolio allowance established percentage nonrecourse finance receivables identified requiring specific reserves percentage based combination factors including historical loss experience current delinquency default trends collateral values general economic specific industry trends finance receivables charged earlier date collateral repossessed payment received six months unless management deems receivable collectible repossessed assets recorded fair value less estimated cost sell pension postretirement benefit obligations maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections evaluate update assumptions annually consultation thirdparty actuaries investment advisors also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases yearend measurement defined benefit plan assets obligations measured monthend date closest fiscal yearend recognize overfunded underfunded status pension postretirement plans consolidated balance sheets recognize changes funded status defined benefit plans comprehensive income year occur actuarial gains losses immediately recognized net periodic pension cost recognized component comprehensive income loss oci amortized net periodic pension cost future periods derivatives hedging activities exposed market risk primarily changes currency exchange rates interest rates hold issue derivative financial instruments trading speculative purposes manage volatility relating exposures net exposures consolidated basis take advantage natural offsets residual portion enter various derivative transactions pursuant policies areas counterparty exposure hedging practices credit risk related derivative financial instruments considered minimal managed requiring high credit standards counterparties periodic settlements positions derivative instruments reported fair value consolidated balance sheets designation support hedge accounting performed specific exposure basis financial instruments qualifying cash flow hedges record changes fair value derivatives extent effective hedges oci net deferred taxes changes fair value derivatives qualifying hedges recorded earnings foreign currency denominated assets liabilities translated us dollars adjustments currency rate changes recorded cumulative translation adjustment account shareholders’ equity related foreign entity sold substantially liquidated use foreign currency financing transactions effectively hedge longterm investments foreign operations corresponding currency foreign currency gains losses hedge longterm investments recorded cumulative translation adjustment account product liabilities accrue product liability claims related defense costs loss probable reasonably estimable estimates generally based specifics claim incident best estimate probable loss using historical experience environmental liabilities asset retirement obligations liabilities environmental matters recorded sitebysite basis probable obligation incurred cost reasonably estimated estimate accrued environmental liabilities using currently available facts existing technology presently enacted laws regulations subject number factors uncertainties environmental liabilities discounted take consideration possible future insurance proceeds significant amounts claims third parties incurred asset retirement obligations primarily related costs remove dispose underground storage tanks asbestos materials used insulation adhesive fillers floor tiles legal requirement remove items currently plan remodel related facilities otherwise cause impacted items require disposal since asset retirement obligations estimable related liability recorded consolidated balance sheets warranty liabilities assurancetype warranty programs estimate costs may incurred record liability amount costs time product revenues recognized factors affect liability include number products sold historical costs per claim length warranty period contractual recoveries vendors historical anticipated rates warranty claims including production warranty patterns new models assess adequacy recorded warranty liability periodically adjust amounts necessary additionally may establish warranty liability related issuance aircraft service bulletins aircraft longer covered limited warranty programs research development costs customerfunded research development costs charged directly related contracts primarily consist us government contracts accordance government regulations recover portion companyfunded research development costs overhead rate charges us government contracts research development costs reimbursable contract us government another customer charged expense incurred companyfunded research development costs 643 million 634 million 677 million 2018 2017 2016 respectively included cost sales income taxes provision income tax expense calculated reported income continuing operations income taxes based current tax law includes current period cumulative effect changes tax rates used previously determining deferred tax assets liabilities tax laws may require items included determination taxable income different times items reflected financial statements deferred tax balances reflect effects temporary differences financial reporting carrying amounts assets liabilities tax bases well net operating losses tax credit carryforwards stated enacted tax rates effect year taxes expected paid recovered deferred tax assets represent tax benefits tax deductions credits available future years require certain estimates assumptions determine whether likely portion benefit realized recoverability future tax deductions credits determined assessing adequacy future expected taxable income sources including future reversal existing taxable temporary differences taxable income carryback years estimated future taxable income available tax planning strategies change facts circumstances lead change judgment ultimate recoverability deferred tax asset record adjust related valuation allowance period change facts circumstances occurs along corresponding increase decrease income tax expense record tax benefits uncertain tax positions based upon management’s evaluation information available reporting date recognized financial statements tax position must meet morelikelythannot threshold position sustained upon examination tax authority based technical merits assuming tax authority full knowledge relevant information positions meeting recognition threshold benefit measured largest amount benefit meets morelikelythannot threshold sustained periodically evaluate tax positions based latest available information tax positions meet threshold requirement recognize net taxrelated interest penalties continuing operations income tax expense new accounting standards yet adopted lease accounting february 2016 financial accounting standards board fasb issued asu 201602 leases requiring lessees recognize leases term greater 12 months balance sheet rightofuse assets lease liabilities current accounting guidance required recognize assets liabilities arising operating leases balance sheet 2018 fasb issued additional guidance provide alternate transition method adoption method entities may record balance sheet amounts cumulative effect adopting standard retained earnings effective date without adjustment comparative periods new standard becomes effective us beginning 2019 adopted using alternate transition method adoption date approximately 300 million rightofuse assets lease liabilities recognized related operating leases cumulative transition adjustment retained earnings resulting adoption significant plan elect practical expedients permitted transition guidance within new standard among things allows us carryforward historical lease classification allows hindsight evaluating options within contract resulting extension lease term certain existing leases adoption date updated accounting policies affected standard redesigned related internal controls financial reporting expanding disclosures included first quarter 2019 form 10q meet new requirements standard impact liquidity debtcovenant compliance current agreements expected significant impact results operations credit losses june 2016 fasb issued asu 201613 financial instruments credit losses financial assets trade receivables loans instruments standard changes current incurred loss model forwardlooking expected credit loss model generally result earlier recognition allowances losses new standard effective company beginning 2020 entities required apply provisions standard cumulativeeffect adjustment retained earnings effective date currently evaluating impact standard consolidated financial statements note 2 business disposition acquisitions disposition july 2 2018 completed sale businesses manufacture sell products tools test equipment product line within industrial segment emerson electric co net cash proceeds 807 million recorded aftertax gain 419 million related disposition carrying amounts major classes assets liabilities disposition follows millions july 2 assets accounts receivable net inventories property plant equipment net goodwill assets total assets liabilities accounts payable current liabilities total liabilities acquisitions march 6 2017 completed acquisition arctic cat inc arctic cat publiclyheld company nasdaq acat pursuant cash tender offer 1850 per share followed shortform merger cash paid business including repayment debt net cash acquired totaled 316 million arctic cat incorporated textron specialized vehicles business industrial segment operating results included consolidated statements operations since closing date allocated consideration paid business assets acquired liabilities assumed based fair values recorded 230 million goodwill related expected synergies value assembled workforce 75 million intangible assets 2016 paid 186 million cash assumed debt 19 million acquire six businesses net cash acquired holdbacks acquisition able engineering component services inc able aerospace inc first quarter 2016 represented largest businesses included textron aviation segment note 3 goodwill intangible assets goodwill changes carrying amount goodwill segment follows intangible assets intangible assets summarized connection 2018 restructuring plan discussed note 15 recognized intangible asset impairment charges 38 million fourth quarter 2018 primarily included 20 million patents technology 14 million trade names trademarks trade names trademarks table include 208 million 222 million indefinitelived intangible assets december 29 2018 december 30 2017 respectively amortization expense totaled 66 million 69 million 66 million 2018 2017 2016 respectively amortization expense estimated approximately 60 million 56 million 54 million 54 million 38 million 2019 2020 2021 2022 2023 respectively note 4 accounts receivable finance receivables accounts receivable accounts receivable composed following upon adoption asc 606 unbilled receivables primarily related us government contracts totaling 203 million reclassified accounts receivable contract assets contract liabilities based net position contract discussed note 12 addition 71 million accounts receivable net sold third quarter 2018 result business disposition disclosed note 2 finance receivables finance receivables presented following table finance receivables primarily includes loans provided purchasers new preowned textron aviation aircraft bell helicopters loans typically initial terms ranging five twelve years amortization terms ranging eight fifteen years average balance 1 million december 29 2018 loans generally require customer pay significant payment along periodic scheduled principal payments reduce outstanding balance term loan finance receivables diversified across geographic region borrower industry december 29 2018 59 finance receivables distributed internationally 41 throughout us compared 56 44 respectively december 30 2017 december 29 2018 december 30 2017 finance receivables 201 million 257 million respectively pledged collateral tfc’s debt 119 million 175 million respectively finance receivable portfolio quality internally assess quality finance receivables based number key credit quality indicators statistics delinquency loan balance estimated collateral value financial strength individual borrowers guarantors many indicators difficult apply across entire class receivables evaluate individual loans quarterly basis classify loans three categories based key credit quality indicators individual loan three categories performing watchlist nonaccrual classify finance receivables nonaccrual credit quality indicators suggest full collection principal interest doubtful addition automatically classify accounts nonaccrual contractually delinquent three months unless collection principal interest doubtful accounts classified watchlist credit quality indicators deteriorated compared typical underwriting criteria believe collection full principal interest probable certain finance receivables meet watchlist nonaccrual categories classified performing measure delinquency based contractual payment terms finance receivables determining delinquency aging category account anyall principal interest received applied pastdue principal andor interest amounts due significant portion contractually due payment delinquent entire finance receivable balance reported accordance pastdue delinquency aging category finance receivables categorized based credit quality indicators delinquency aging category summarized follows quarterly basis evaluate individual larger balance accounts impairment finance receivable considered impaired probable unable collect amounts due according contractual terms loan agreement based review credit quality indicators described impaired finance receivables include nonaccrual accounts full collection principal interest remains probable account’s original terms expected significantly modified modification specifies interest rate equal greater market rate finance receivable comparable risk account considered impaired years subsequent modification summary impaired finance receivables excluding leveraged leases average recorded investment provided summary allowance losses finance receivables based underlying finance receivables evaluated impairment provided finance receivables reported table specifically exclude 101 million 98 million leveraged leases december 29 2018 december 30 2017 respectively accordance us generally accepted accounting principles note 5 inventories composed following upon adoption asc 606 199 million inventories net progress payments primarily related us government contracts reclassified inventories contract assets contract liabilities based net position contract discussed note 12 addition 100 million inventories sold third quarter 2018 result business disposition disclosed note 2 inventories valued lifo method totaled 22 billion december 29 2018 december 30 2017 respectively carrying values inventories would higher approximately 457 million 452 million respectively lifo inventories valued current costs note 6 property plant equipment net manufacturing group’s property plant equipment net composed following december 29 2018 december 30 2017 assets capital leases totaled 168 million 176 million respectively accumulated amortization 47 million 46 million respectively manufacturing group’s depreciation expense included amortization expense capital leases totaled 358 million 362 million 368 million 2018 2017 2016 respectively note 7 current liabilities current liabilities manufacturing group summarized upon adoption asc 606 reclassified customer deposits certain current liabilities totaling 1166 million contract liabilities contract assets based net position contract discussed note 12 changes warranty liability follows adjustments include changes prior year estimates new issues prior year sales business dispositions currency translation adjustments note 8 debt credit facilities debt summarized table notes amortize quarterly semiannual basis b notes secured finance receivables described note 4 following table shows required payments next five years debt outstanding december 29 2018 millions manufacturing group finance group total textron senior unsecured revolving credit facility expires september 2021 aggregate principal amount 10 billion 100 million available issuance letters credit december 29 2018 amounts borrowed facility 10 million letters credit issued fixedtofloating rate junior subordinated notes finance group’s 299 million fixedtofloating rate junior subordinated notes unsecured rank junior existing future senior debt notes mature february 15 2067 however right redeem notes par time obligated redeem notes beginning february 15 2042 interest notes fixed 6 february 15 2017 variable threemonth london interbank offered rate 1735 support agreement support agreement amended december 2015 textron inc required ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 125 million cash contributions required paid tfc 2018 2017 2016 maintain compliance support agreement note 9 derivative instruments fair value measurements measure fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date prioritize assumptions market participants would use pricing asset liability threetier fair value hierarchy fair value hierarchy gives highest priority level 1 quoted prices active markets identical assets liabilities lowest priority level 3 unobservable inputs little market data exist requiring companies develop assumptions observable inputs meet criteria level 1 include quoted prices similar assets liabilities active markets quoted prices identical assets liabilities markets active categorized level 2 level 3 inputs reflect estimates assumptions market participants would use pricing asset liability based best information available circumstances valuation techniques assets liabilities measured using level 3 inputs may include methodologies market approach income approach cost approach may use unobservable inputs projections estimates management’s interpretation current market data unobservable inputs utilized extent observable inputs available cost effective obtain assets liabilities recorded fair value recurring basis manufacture sell products number countries throughout world therefore exposed movements foreign currency exchange rates primarily utilize foreign currency exchange contracts maturities three years manage volatility contracts qualify cash flow hedges intended offset effect exchange rate fluctuations forecasted sales inventory purchases overhead expenses net gains losses recognized earnings accumulated comprehensive loss cash flow hedges including gains losses related hedge ineffectiveness significant periods presented foreign currency exchange contracts measured fair value using market method valuation technique inputs technique utilize current foreign currency exchange forward market rates published thirdparty leading financial news data providers observable data represent rates financial institution uses contracts entered date however based actual transactions classified level 2 december 29 2018 december 30 2017 foreign currency exchange contracts notional amounts upon contracts based 379 million 426 million respectively december 29 2018 fair value amounts foreign currency exchange contracts 2 million asset 10 million liability december 30 2017 fair value amounts foreign currency exchange contracts 13 million asset 7 million liability hedge net investment position certain major currencies generate foreign currency interest payments offset transactional exposures currencies accomplish borrow directly foreign currency designate portion debt hedge net investment record changes fair value contracts comprehensive income extent effective cash flow hedges currency effects effective portion hedges reflected foreign currency translation adjustments within accumulated comprehensive loss significant periods presented assets liabilities recorded fair value carrying value estimated fair value financial instruments reflected financial statements fair value follows fair value manufacturing group debt determined using market observable data similar transactions level 2 fair value finance group debt determined primarily based discounted cash flow analyses using observable market inputs debt similar duration subordination credit default expectations level 2 fair value estimates finance receivables determined based internally developed discounted cash flow models primarily utilizing significant unobservable inputs level 3 include estimates rate return financing cost capital structure andor discount rate expectations current market participants combined estimated loan cash flows based credit losses payment rates expectations borrowers’ ability make payments timely basis note 10 shareholders’ equity capital stock authorization 15 million shares preferred stock par value 001 500 million shares common stock par value 0125 outstanding common stock activity presented earnings per share calculate basic diluted earnings per share eps based net income approximates income available common shareholders period basic eps calculated using twoclass method includes weightedaverage number common shares outstanding period restricted stock units paid stock deemed participating securities provide nonforfeitable rights dividends diluted eps considers dilutive effect potential future common stock including stock options weightedaverage shares outstanding basic diluted eps follows 2018 2017 2016 stock options purchase 13 million 16 million 20 million shares respectively common stock excluded calculation diluted weightedaverage shares outstanding effect would antidilutive accumulated comprehensive loss components accumulated comprehensive loss presented 2018 fasb issued asu 201802 income statement reporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income allows entities reclassify stranded tax effects resulting tax cuts jobs act “tax act” accumulated comprehensive loss retained earnings stranded tax effects comprised tax amounts included accumulated comprehensive loss previous us federal corporate tax rate 35 related deferred tax asset liability remeasured new us federal corporate tax rate 21 fourth quarter 2017 elected early adopt standard fourth quarter 2018 resulted increase accumulated comprehensive loss 257 million offsetting increase retained earnings comprehensive income loss aftertax components comprehensive income loss presented components comprehensive income loss included computation net periodic pension cost see note 14 additional information note 11 segment geographic data operate report financial information following five business segments textron aviation bell textron systems industrial finance accounting policies segments described note 1 textron aviation products include citation jets king air caravan turboprop aircraft piston engine aircraft military turboprop aircraft aftermarket part sales services sold diverse base corporate individual buyers bell products include military commercial helicopters tiltrotor aircraft related spare parts services bell supplies military helicopters association boeing company military tiltrotor aircraft aftermarket services us nonus governments bell also supplies commercial helicopters aftermarket services corporate offshore petroleum exploration development utility charter police fire rescue emergency medical helicopter operators foreign governments textron systems products include unmanned aircraft systems marine land systems simulation training defense aviation mission support products services primarily us nonus governments industrial products markets include following · kautex products include blowmolded plastic fuel systems advanced fuel systems including pressurized fuel tanks hybrid applications clearvision systems selective catalytic reduction systems cast iron engine components fuel system components marketed primarily automobile oems well plastic bottles containers various uses · specialized vehicles products include golf cars offroad utility vehicles recreational sidebyside allterrain vehicles snowmobiles light transportation vehicles aviation ground support equipment professional turfmaintenance equipment turfcare vehicles marketed primarily golf courses resorts government agencies municipalities consumers commercial industrial users july 2 2018 sold tools test equipment businesses previously included industrial segment discussed note 2 finance segment provides financing primarily purchasers new preowned textron aviation aircraft bell helicopters segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses gainslosses major business dispositions special charges measurement finance segment includes interest income expense along intercompany interest income expense revenues segment along reconciliation segment profit income continuing operations income taxes follows information segment provided geographic data presented selected financial information continuing operations geographic area revenues attributed countries based location customer property plant equipment net based location asset note 12 revenues disaggregation revenues disaggregated major product type presented 2018 revenues segments customer type geographic location presented 2017 2016 revenues included sales us government approximately 31 billion 34 billion respectively primarily bell textron systems segments remaining performance obligations remaining performance obligations equivalent backlog represent expected transaction price allocated contracts expect recognize revenue future periods perform contracts remaining obligations exclude unexercised contract options potential orders orderingtype contracts indefinite delivery indefinite quantity contracts december 29 2018 91 billion remaining performance obligations expect recognize revenues approximately 75 2020 additional 14 2022 balance thereafter contract assets liabilities assets liabilities related contracts customers reported contractbycontract basis end reporting period december 29 2018 contract assets contract liabilities totaled 461 million 974 million respectively upon adoption asc 606 december 31 2017 contract assets contract liabilities related contracts customers 429 million 10 billion respectively 2018 recognized 817 million revenues included contract liability balance adoption date reconciliation asc 606 prior accounting standards amount financial statement line item affected 2018 result applying new accounting standard discussed note 1 presented note 13 sharebased compensation 2015 longterm incentive plan replaced 2007 longterm incentive plan april 2015 authorization provide awards selected employees form stock options restricted stock restricted stock units stock appreciation rights performance stock performance share units awards maximum 17 million shares authorized issuance purposes plan plus shares become available upon cancellation forfeiture expiration awards granted 2007 longterm incentive plan 17 million shares may awarded pursuant incentive stock options 425 million shares may issued pursuant awards restricted stock restricted stock units performance stock awards payable shares 2018 2017 2016 awards granted plan primarily included stock options restricted stock units performance share units deferred income plan textron executives provide certain executives opportunity voluntarily defer 80 base salary along incentive compensation elective deferrals may put either stock unit account interestbearing account participants cannot move amounts two accounts actively employed us cannot receive distributions termination employment intrinsic value amounts paid deferred income plan significant 2018 2017 2016 sharebased compensation costs reflected primarily selling administrative expense compensation expense included net income sharebased compensation plans follows compensation cost awards subject service conditions vest ratably recognized straightline basis requisite service period separately vesting portion award december 29 2018 recognized 30 million total compensation costs associated unvested awards subject service conditions expect recognize compensation expense awards weightedaverage period approximately two years stock options purchase shares maximum term ten years generally vest ratably threeyear period stock option compensation cost calculated fair value approach recognized vesting period stock options 2018 2017 2016 compensation expense included 23 million 20 million 20 million respectively stock options estimate fair value options granted date grant using blackscholes optionpricing model expected volatilities based implied volatilities traded options common stock historical volatilities factors expected term based historical option exercise data adjusted reflect anticipated changes expected behavior weightedaverage fair value options granted past three years assumptions used optionpricing model grants follows stock option activity 2018 provided options thousands number options weighted average exercise price outstanding beginning year 9238 3702 granted 1353 5822 exercised 2098 3530 forfeited expired 209 5049 outstanding end year 8284 4058 exercisable end year 5391 3495 december 29 2018 outstanding options aggregate intrinsic value 66 million weightedaverage remaining contractual life six years exercisable options aggregate intrinsic value 60 million weightedaverage remaining contractual life five years december 29 2018 total intrinsic value options exercised 2018 2017 2016 62 million 29 million 15 million respectively restricted stock units issue restricted stock units settled cash stock vesting onethird third fourth fifth year following year grant include right receive dividend equivalents fair value units based trading price common stock recognized ratably vesting period units payable stock use trading price grant date units payable cash remeasured using price reporting period date 2018 activity restricted stock units provided fair value restricted stock unit awards vested andor amounts paid awards follows performance share units fair value sharebased compensation awards accounted liabilities includes performance share units paid cash first quarter year following vesting payouts performance share units vary based certain performance criteria generally set year threeyear performance period performance share units vest end three years fair value awards based trading price common stock remeasured reporting period date 2018 activity performance share units follows units thousands number units weighted average grant date fair value outstanding beginning year nonvested 4134 granted 5802 vested 257 3450 forfeited 25 4674 outstanding end year nonvested 5363 fair value performance share units vested andor amounts paid awards follows note 14 retirement plans defined benefit contribution plans cover substantially employees significant number usbased employees participate textron retirement plan designed “flooroffset” arrangement defined benefit component defined contribution component defined benefit component arrangement includes textron master retirement plan tmrp bell helicopter textron master retirement plan bhtmrp defined contribution component retirement account plan rap defined benefit component provides minimum guaranteed benefit “floor” benefit rap participants eligible receive contributions textron 2 eligible compensation may make contributions plan upon retirement participants receive greater floor benefit value rap tmrp bhtmrp subject provisions employee retirement income security act 1974 erisa effective january 1 2010 textron retirement plan closed new participants employees hired date receive additional 4 annual cash contribution textron savings plan account based eligible compensation also funded unfunded defined benefit pension plans cover certain us nonus employees addition several defined contribution plans sponsored various businesses largest plan textron savings plan qualified 401k plan subject erisa defined contribution plans cost 125 million 123 million 110 million 2018 2017 2016 respectively included 13 million 13 million 10 million respectively contributions rap also provide postretirement benefits pensions certain retired employees us include healthcare dental care medicare part b reimbursement life insurance periodic benefit cost credit components net periodic benefit cost credit amounts recognized oci follows first quarter 2018 adopted asu 201707 improving presentation net periodic pension cost net periodic postretirement benefit cost standard requires companies present service cost component net periodic benefit cost operating income line compensation costs arising services rendered pertinent employees period nonservice components net periodic benefit cost must presented separately service cost excluded operating income addition service cost component eligible capitalization inventory change amount capitalized inventory applied prospectively using practical expedient nonservice components net periodic benefit cost credit previously disclosed reclassified separate line retrospective basis prior periods result reclassified 29 million 39 million nonservice components 2017 2016 respectively cost sales selling administrative expense nonservice components pension postretirement income net consolidated statements operations obligations funded status plans measured fiscal yearend changes projected benefit obligation fair value plan assets along funded status follows 2017 employer contributions included 300 million discretionary contribution fund us pension plan actuarial gains losses reflected table 2018 2017 result changes discount rate utilized asset return rate experienced compared assumptions amounts recognized balance sheets follows accumulated benefit obligation defined benefit pension plans 75 billion 81 billion december 29 2018 december 30 2017 respectively included 369 million 404 million respectively accumulated benefit obligations unfunded plans funding permitted foreign environments funding feasible pension plans accumulated benefit obligation exceeding fair value plan assets follows pension plans projected benefit obligation exceeding fair value plan assets follows assumptions weightedaverage assumptions use pension postretirement plans follows assumed healthcare cost trend rate medical prescription drug cost 700 725 2018 2017 respectively expect rate gradually decline 5 2024 assume remain pension assets expected longterm rate return plan assets determined based variety considerations including established asset allocation targets expectations asset classes historical returns plans’ assets market considerations invest pension assets objective achieving total rate return long term sufficient fund future pension obligations minimize future pension contributions willing tolerate commensurate level risk achieve objective based funded status plans longterm nature pension liability risk controlled maintaining portfolio assets diversified across variety asset classes investment styles investment managers possible investment managers prohibited owning securities portfolios manage behalf us plan assets represent majority plan assets asset allocation target ranges established consistent investment objectives assets rebalanced periodically nonus plan assets allocations based expected cash flow needs assessments local practices markets target allocation ranges follows us plan assets domestic equity securities 17 33 international equity securities 8 19 global equities 5 17 debt securities 27 38 real estate 7 13 private investment partnerships 5 11 hedge funds 0 nonus plan assets equity securities 51 74 debt securities 26 46 real estate 0 13 fair value pension plan assets major category valuation method follows cash equivalents equity securities debt securities include comingled funds represent investments funds offered institutional investors similar mutual funds provide diversification holding various equity debt securities since comingled funds quoted active market priced based relative value underlying equity debt investments individual prices given time funds subject leveling within fair value hierarchy debt securities valued based day actual trading prices available prices available use matrix pricing model historical prices trends factors private investment partnerships represents interests funds invest equity debt financial assets funds generally publicly traded interests therein valued using income market methods include cash flow projections market multiples various comparable investments real estate includes owned properties limited partnership interests real estate partnerships owned properties valued using certified appraisals least every three years updated least annually real estate investment manager based current market trends available information appraisals generally use standard methods valuing real estate including forecasting income identifying current transactions comparable real estate arrive fair value limited partnership interests real estate partnerships valued similarly private investment partnerships general partner using standard real estate valuation methods value real estate properties securities held within portfolios neither private investment real estate partnerships subject leveling within fair value hierarchy table presents reconciliation fair value measurements owned real estate properties use significant unobservable inputs level 3 estimated future cash flow impact defined benefits salaried plans based salary years service hourly plans generally provide benefits based stated amounts year service funding policy consistent applicable laws regulations 2019 expect contribute approximately 50 million pension plans rap benefit payments provided reflect expected future employee service appropriate expected paid net estimated participant contributions payments based assumptions used measure benefit obligation end 2018 pension benefit payments primarily paid qualified pension trusts pay postretirement benefits pensions general corporate assets benefit payments expect pay undiscounted basis follows millions 20242028 pension benefits 2379 postretirement benefits pensions note 15 special charges 2018 restructuring plan fourth quarter 2018 recorded 73 million special charges connection plan restructure textron specialized vehicles businesses within industrial segment businesses undergone significant changes since acquisition arctic cat expanded product portfolio integrated manufacturing operations retail distribution third quarter 2018 operating results businesses significantly expectations dealer sellthrough lagged despite introduction new products dealer network based review assessment acquired dealer network gotomarket strategy textron road arctic cat brands fourth quarter 2018 along review businesses within product line initiated restructuring plan included product rationalization closure several factorydirect turfcare branch locations manufacturing facility headcount reductions plan recorded asset impairment charges 47 million primarily intangible assets related product rationalization contract termination costs 18 million severance costs 8 million headcount reductions totaled approximately 400 positions representing 10 textron specialized vehicles’ workforce actions taken plan substantially completed end 2018 2017 2016 restructuring plans 2017 2016 recorded special charges 90 million 123 million respectively related plan initiated 2016 restructure realign businesses implementing headcount reductions facility consolidations actions order improve overall operating efficiency across textron 2016 plan completed 2017 special charges related plan included 97 million severance costs 84 million asset impairments 32 million contract terminations costs amounts 83 million incurred textron systems 63 million textron aviation 38 million industrial 28 million bell 1 million corporate total headcount reduction plan approximately 2100 positions representing 5 workforce connection acquisition arctic cat discussed note 2 initiated restructuring plan first quarter 2017 recorded restructuring charges 28 million 2017 included 19 million severance costs largely related changeofcontrol provisions 9 million contract termination costs addition recorded 12 million acquisitionrelated integration transaction costs 2017 2016 special charges recorded segment type cost follows millions severance costs asset impairments contract terminations acquisition integration transaction costs total special charges industrial textron aviation bell textron systems 1 industrial textron aviation bell textron systems corporate restructuring reserve restructuring reserve activity summarized primarily related favorable contract negotiations textron systems segment majority remaining cash outlays 40 million expected paid 2019 severance costs generally paid lumpsum basis include outplacement costs paid accordance normal payment terms note 16 income taxes conduct business globally result file numerous consolidated separate income tax returns within outside us subsidiaries file consolidated federal income tax return income continuing operations income taxes follows income tax expense continuing operations summarized follows following table reconciles federal statutory income tax rate effective income tax rate continuing operations includes favorable impact 18 2018 reassessment reserves uncertain tax positions tax cuts jobs act “tax act” enacted december 22 2017 among things tax act reduced us federal corporate tax rate 35 21 required companies pay onetime transition tax earnings certain foreign subsidiaries previously tax deferred reasonably estimated effects tax act recorded provisional amounts fourth quarter 2017 totaling 266 million provisional estimate included 154 million charge remeasure us federal deferred tax assets liabilities based rates expected reverse future generally 21 addition provisional estimate included 112 million expense onetime transition tax based approximately 16 billion post1986 earnings profits previously deferred us income taxes amount earnings held cash specified net assets 2018 finalized 2017 impacts tax act specifically remeasurement us federal deferred tax assets liabilities post1986 earnings profits transition tax resulted 14 million benefit 2016 provision income taxes included benefit 319 million reflect settlement us internal revenue service office appeals 1998 2008 tax years resulted 206 million benefit attributable continuing operations 113 million attributable discontinued operations unrecognized tax benefits unrecognized tax benefits represent tax positions reserves established unrecognized state tax benefits reflected net applicable tax benefits reconciliation unrecognized tax benefits follows 2018 certain tax positions related research credits reduced 25 million based new information including interactions tax authorities recent audit settlements end 2018 2017 2016 unrecognized tax benefits recognized future periods would favorably impact effective tax rate normal course business subject examination tax authorities throughout world longer subject us federal tax examinations years 2014 state local income tax examinations years 2009 nonus income tax examinations years 2011 deferred taxes significant components net deferred tax assetsliabilities provided accrued expenses included warranty reserves selfinsured liabilities interest b december 29 2018 us operating loss tax credit carryforward benefits 186 million expire 2038 utilized 26 million may carried forward indefinitely c december 29 2018 nonus operating loss tax credit carryforward benefits 16 million expire 2038 utilized 53 million may carried forward indefinitely believe earnings period temporary differences become deductible sufficient realize related future income tax benefits jurisdictions expiration date tax carryforwards projected operating results indicate realization likely valuation allowance provided following table presents breakdown deferred taxes december 29 2018 december 30 2017 nonus us state income taxes provided basis differences certain investments primarily result 16 billion unremitted earnings foreign subsidiaries indefinitely reinvested earnings distributed future form dividends otherwise would subject withholding income taxes payable various nonus jurisdictions us states determination deferred tax liability associated indefinitely reinvested earnings practicable due multiple factors including complexity nonus tax laws tax treaty interpretations exchange rate fluctuations uncertainty available credits exemptions us federal state tax laws note 17 commitments contingencies subject legal proceedings claims arising conduct business including proceedings claims relating commercial financial transactions government contracts alleged lack compliance applicable laws regulations production partners product liability patent trademark infringement employment disputes environmental safety health matters legal proceedings claims seek damages fines penalties substantial amounts remediation environmental contamination government contractor subject audits reviews investigations determine whether operations conducted accordance applicable regulatory requirements federal government procurement regulations certain claims brought us government could result suspension debarment us government contracting period time basis information presently available believe existing proceedings claims material effect financial position results operations ordinary course business enter standby letter credit agreements surety bonds financial institutions meet various performance obligations outstanding letter credit arrangements surety bonds aggregated approximately 333 million 380 million december 29 2018 december 30 2017 respectively environmental remediation industrial enterprises engaged similar businesses involved number remedial actions various federal state laws regulations relating environment impose liability companies clean contribute cost cleaning sites hazardous wastes materials disposed released accrued environmental liabilities relate installation remediation systems disposal costs us environmental protection agency oversight costs legal fees operating maintenance costs currently formerly owned operated facilities circumstances affect reliability precision accruals include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur believe changes accruals may result factors uncertainties material effect financial position results operations based upon information currently available estimate potential environmental liabilities within range 45 million 150 million december 29 2018 environmental reserves approximately 81 million established address specific estimated liabilities estimate likely pay accrued environmental remediation liabilities next ten years classified 14 million current liabilities expenditures evaluate remediate contaminated sites 13 million 18 million 15 million 2018 2017 2016 respectively leases rental expense 114 million 122 million 126 million 2018 2017 2016 respectively future minimum rental commitments noncancelable operating leases effect december 29 2018 totaled 64 million 2019 45 million 2020 32 million 2021 26 million 2022 19 million 2023 115 million thereafter total future minimum rental receipts noncancelable subleases december 29 2018 totaled 18 million note 18 supplemental cash flow information cash payments receipts follows report independent registered public accounting firm board directors shareholders textron inc opinion financial statements audited accompanying consolidated balance sheets textron inc company december 29 2018 december 30 2017 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended december 29 2018 related notes financial statement schedule contained page 75 collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company december 29 2018 december 30 2017 results operations cash flows three years period ended december 29 2018 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 29 2018 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 14 2019 expressed unqualified opinion thereon adoption accounting standards update asu 201409 revenue contracts customers topic 606 discussed note 1 consolidated financial statements company changed method recognizing revenue result adoption asu 201409 revenue contracts customers topic 606 related amendments effective december 31 2017 basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion ernst young llp served company’s auditor since 1957 boston massachusetts february 14 2019 quarterly data beginning 2018 adopted asc 606 using modified retrospective basis result comparative information restated reported accounting standards effect periods see note 1 consolidated financial statements additional information b special charges 73 million recorded fourth quarter 2018 restructuring plan textron specialized vehicles businesses within industrial segment initiated december 2018 special charges related 2016 restructuring plan 15 million 12 million 15 million 48 million first second third fourth quarters 2017 respectively addition recorded special charges 22 million 1 million 10 million 7 million first second third fourth quarters 2017 respectively related arctic cat acquisition included restructuring integration transaction costs c july 2 2018 textron completed sale tools test equipment product line resulted aftertax gain 419 million income tax expense fourth quarter 2017 included 266 million charge reflect provisional estimate net impact tax cuts jobs act completed analysis legislation fourth quarter 2018 recorded 14 million income tax benefit e fourth quarter 2017 diluted average shares outstanding excluded potential common shares stock options due antidilutive effect resulting net loss schedule ii valuation qualifying accounts deductions primarily include amounts written uncollectable accounts less recoveries inventory disposals changes prior year estimates business dispositions currency translation adjustments item 9item 8 financial statements supplementary data consolidated financial statements supplementary information listed accompanying index financial statements financial statement schedules filed part report item 9item 8 financial statements supplementary data consolidated financial statements related reports independent registered public accounting firm thereon included annual report form 10k pages indicated report management responsible integrity objectivity financial data presented annual report form 10k consolidated financial statements prepared conformity accounting principles generally accepted united states include amounts based management’s best estimates judgments management also responsible establishing maintaining adequate internal control financial reporting textron inc term defined exchange act rules 13a15f participation management conducted evaluation effectiveness internal control financial reporting based framework internal control integrated framework issued committee sponsoring organizations treadway commission based evaluation framework internal control integrated framework concluded textron inc maintained material respects effective internal control financial reporting december 29 2007 independent registered public accounting firm ernst young llp audited consolidated financial statements textron inc issued attestation report textron’s internal controls financial reporting december 29 2007 stated reports included herein conduct business accordance standards outlined textron business conduct guidelines communicated employees honesty integrity high ethical standards core values conduct business every textron business prepares carries annual compliance plan ensure values standards maintained internal control structure designed provide reasonable assurance appropriate cost assets safeguarded transactions properly executed recorded internal control structure includes among things established policies procedures internal audit function selection training qualified personnel textron’s management responsible implementing effective internal control systems monitoring effectiveness well developing executing annual internal control plan audit committee board directors behalf shareholders oversees management’s financial reporting responsibilities audit committee consists four directors officers employees textron meets regularly independent auditors management internal auditors review matters relating financial reporting internal accounting controls auditing independent auditors internal auditors free full access senior management audit committee lewis b campbell ted r french chairman president chief executive vice president executive officer chief financial officer february 13 2008 report independent registered public accounting firm internal control financial reporting board directors shareholders textron inc audited textron inc’s internal control financial reporting december 29 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso criteria textron inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion textron inc maintained material respects effective internal control financial reporting december 29 2007 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets december 29 2007 december 30 2006 related consolidated statements operations shareholders’ equity cash flows three years period ended december 29 2007 textron inc report dated february 13 2008 expressed unqualified opinion thereon boston massachusetts february 13 2008 report independent registered public accounting firm consolidated financial statements schedule board directors shareholders textron inc audited accompanying consolidated balance sheets textron inc december 29 2007 december 30 2006 related consolidated statements operations shareholders’ equity cash flows three years period ended december 29 2007 audits also included financial statement schedule contained page 77 financial statements schedule responsibility textron inc’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position textron inc december 29 2007 december 30 2006 consolidated results operations cash flows three years period ended december 29 2007 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states textron inc’s internal control financial reporting december 29 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 13 2008 expressed unqualified opinion thereon discussed note 5 consolidated financial statements 2007 textron inc adopted financial accounting standards board “fasb” staff position 132 “accounting change projected change timing cash flows relating income taxes generated leverage lease transaction” discussed note 13 consolidated financial statements 2007 textron inc adopted fasb interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” discussed note 1 consolidated financial statements 2006 textron inc adopted statement financial accounting standards 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statement nos 87 88 106 132r” boston massachusetts february 13 2008 consolidated statements operations years threeyear period ended december 29 2007 see notes consolidated financial statements consolidated balance sheets december 29 2007 december 30 2006 see notes consolidated financial statements consolidated statements shareholders’ equity see notes consolidated financial statements consolidated statements cash flows years threeyear period ended december 29 2007 see notes consolidated financial statements consolidated statements cash flows continued years threeyear period ended december 29 2007 textron segregated manufacturing group finance group described note 1 consolidated financial statements finance group’s pretax income excess dividends paid excluded manufacturing group’s cash flows significant transactions borrowing groups eliminated consolidated column see notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation financial statement presentation consolidated financial statements include accounts textron inc majorityowned subsidiaries along variable interest entities primary beneficiary financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated entities operate bell cessna industrial segments finance group consists finance segment comprised textron financial corporation subsidiaries designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements finance group provide diversified commercial financing third parties addition group finances retail purchases leases new used aircraft equipment manufactured manufacturing group otherwise known captive financing consolidated statements cash flows cash received customers securitizations reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidation july 2007 board directors approved twoforone split common stock financial statements prior periods presented restated reflect effect split share per share amounts use estimates prepare financial statements conformity generally accepted accounting principles require us make estimates assumptions affect amounts reported financial statements estimates used accounting among items longterm contracts inventory valuation residual values leased assets allowance credit losses receivables amount timing future cash flows expected received impaired loans product liability workers’ compensation actuarial assumptions pension postretirement plans future cash flows associated goodwill longlived asset valuations environmental warranty reserves estimates based facts circumstances available time estimates made historical experience risk loss general economic conditions trends assessments probable future outcomes matters actual results could differ estimates assumptions reviewed periodically effects changes reflected statement operations period determined cash equivalents cash equivalents consist cash shortterm highly liquid investments original maturities three months less revenue recognition generally recognize revenue sale products longterm contracts upon delivery commercial aircraft delivery upon completion manufacturing customer acceptance transfer risk rewards ownership sale arrangement involves multiple elements sales products include customization services evaluate arrangement determine whether separate items required delivered arrangement qualify separate units accounting total fee arrangement allocated unit accounting based relative fair value taking consideration performance cancellation termination refundtype provisions fair value generally established unit accounting using sales price charged similar items sold separately recognize revenue recognition criteria unit accounting met leases certain qualifying noncancelable aircraft product lease contracts accounted salestype leases upon delivery record present value payments net executory costs guaranteed residual values leases revenues related costs product charged cost sales lease financing transactions qualify salestype leases record revenue earned lease period longterm contracts revenues longterm contracts accounted percentageofcompletion method accounting accordance american institute certified public accountants statement position 811 “accounting performance constructiontype certain productiontype contracts” percentageofcompletion method estimate profit difference total estimated revenue cost contract recognize estimated profit contract term based either costs incurred costtocost method typically used development effort units delivered unitsofdelivery method used production effort appropriate circumstances revenues costreimbursement contracts recorded using costtocost method revenues fixedprice contracts generally recorded using unitsofdelivery method however contracts provide periodic delivery lengthy period time significant costs incurred require significant amount development effort relation total contract volume revenues recorded using costtocost method longterm contract profits based estimates total contract cost revenue utilizing current contract specifications expected engineering requirements achievement contract milestones including product deliveries certain contracts awarded fixedprice incentive fees also considered estimating revenues profit rates contract costs typically incurred period several years estimation costs requires substantial judgment review revise estimates periodically throughout contract term revisions contract profits recorded revisions estimated revenues costs made anticipated losses contracts recognized full period losses become probable estimable bell helicopter business joint venture boeing company “boeing” provide engineering development test services related v22 aircraft well produce v22 aircraft number separate contracts us government “v22 contracts” joint venture agreement creates contractual rather ownership rights related v22 accordingly account joint venture equity method accounting account rights obligations specific requirements v22 contracts allocated us joint venture agreement revenues cost sales reflect performance v22 contracts revenue production lots beginning seventh lot recognized using unitsofdelivery method include assets used performance v22 contracts including inventory unpaid receivables liabilities arising obligations v22 contracts consolidated balance sheets finance revenues finance revenues include interest finance receivables direct loan origination costs fees received recognize interest using interest method provide constant rate return terms receivables revenues direct loan origination costs fees received deferred amortized finance revenues contractual lives respective receivables using interest method receivables sold prepaid unamortized amounts recognized finance revenues generally suspend accrual interest income accounts contractually delinquent three months addition detailed reviews loans may result earlier suspension resume accrual interest loan becomes contractually current recognize suspended interest income time cash payments nonaccrual accounts including finance charges generally applied reduce loan principal losses finance receivables provisions losses finance receivables charged income amounts sufficient maintain allowance level considered adequate cover losses existing receivable portfolio evaluate allowance examining current delinquencies characteristics existing accounts historical loss experience underlying collateral value general economic conditions trends addition larger balance commercial loans consider borrower specific information industry trends estimated discounted cash flows finance receivables generally written fair value less estimated costs sell related collateral earlier date collateral repossessed payment received six months finance receivables charged deemed uncollectible loan impairment periodically evaluate nonhomogeneous loan portfolios impairment loan considered impaired probable unable collect amounts due according contractual terms loan agreement also identify loans considered impaired due significant modification original loan terms modified loans reflect deferred principal payments generally market interest rates continue accrue finance charges since collection principal interest doubtful measure impairment comparing fair value loan carrying amount fair value based present value expected future cash flows discounted loan’s effective interest rate loan’s observable market price loan collateral dependent fair value collateral less selling costs fair value loan less carrying amount establish reserve based difference securitized transactions securitized transactions involve sale finance receivables qualified special purpose trusts finance group sell securitize loans leases may retain interest assets sold form interestonly securities seller certificates cash reserve accounts servicing rights obligations retained interests subordinate investors’ interests securitizations provide legal recourse thirdparty investors purchase interests securitizations beyond credit enhancement inherent retained interestonly securities seller certificates cash reserve accounts gain loss sale loans leases depends part previous carrying amount financial assets involved transfer allocated assets sold retained interests based relative fair values date transfer retained interests recorded fair value assets estimate fair values based present value expected future cash flows using management’s best estimates key assumptions credit losses prepayment speeds discount rates commensurate risks involved review fair values retained interests quarterly using updated assumptions compare amounts carrying value retained interests carrying value exceeds fair value retained interests determine whether decline fair value temporary determine value decline temporary write retained interests fair value corresponding charge income change fair value retained interests deemed temporary record corresponding credit charge comprehensive income unrealized gains losses investments classify investments marketable equity securities available sale record investments fair value assets unrealized gains losses related investments included shareholders’ equity component accumulated comprehensive loss investments nonmarketable equity securities accounted either cost equity method accounting investments joint ventures control primary beneficiary ability exercise significant influence venture’s operating financial policies use equity method inventories stated lower cost estimated net realizable value inventories generally using firstin firstout “fifo” method lastin firstout “lifo” method certain qualifying inventories us determine costs commercial helicopters average cost basis model considering expended estimated costs current production release costs longterm contracts represent costs incurred production allocable operating overhead advances suppliers case contracts us government allocable research development general administrative expenses since inventoried costs include amounts related contracts long production cycles portion costs expected realized within one year pursuant contract provisions agencies us government title security interest inventories related contracts result advances performancebased payments progress payments advances payments reflected offset related inventory balances customer deposits recorded inventory right offset exists customer deposits recorded accrued liabilities property plant equipment property plant equipment recorded cost depreciated primarily using straightline method land improvements buildings depreciated primarily estimated lives ranging four 40 years machinery equipment depreciated primarily one 15 years capitalize expenditures improvements increase asset values extend useful lives intangible longlived assets acquisition estimate record fair value purchased intangible assets primarily using discounted cash flow analysis anticipated cash flows reflecting incremental revenues andor cost savings resulting acquired intangible asset reflecting market participant assumptions amortization intangible assets finite lives recognized estimated useful lives using method amortization reflects pattern economic benefits intangible assets consumed otherwise realized approximately 40 gross intangible assets finite lives amortized using straightline method remaining assets primarily customer agreements amortized based cash flow streams used value asset longlived assets including intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable carrying value asset held use exceeds sum undiscounted expected future cash flows carrying value asset generally written fair value longlived assets held sale stated lower cost fair value less cost sell fair value determined using pertinent market information including estimated future discounted cash flows goodwill evaluate recoverability goodwill annually frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit might impaired reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment “component” case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics goodwill considered potentially impaired net book value reporting unit exceeds estimated fair value fair values established primarily using discounted cash flow methodology determination discounted cash flows based businesses’ strategic plans longrange planning forecasts available comparative market multiples used corroborate discounted cash flow results pension postretirement benefit obligations maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections evaluate update assumptions annually consultation thirdparty actuaries investment advisors also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases adopted statement financial accounting standards “sfas” 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statement nos 87 88 106 132r” december 30 2006 accordance statement recognize overfunded underfunded status pension postretirement plans balance sheet recognize changes funded status defined benefit plans comprehensive income year occur actuarial gains losses immediately recognized net periodic pension cost recognized component comprehensive loss amortized net periodic pension cost future periods december 30 2006 impact implementing sfas 158 reduced total assets 313 million increased total liabilities 334 million reduced shareholders’ equity increase accumulated comprehensive loss 647 million net tax addition classified 92 million pension postretirement benefit liabilities current adoption affect consolidated statement operations adjustment accumulated comprehensive loss adoption represents net unrecognized actuarial losses unrecognized prior service costs credits unrecognized transition obligation remaining initial adoption sfas 87 “employers’ accounting pensions” previously netted plan’s funded status balance sheet pursuant provisions sfas 87 amounts subsequently amortized net periodic pension cost future periods derivative financial instruments exposed market risk primarily changes interest rates currency exchange rates securities pricing hold issue derivative financial instruments trading speculative purposes manage volatility relating exposures net exposures consolidated basis take advantage natural offsets residual portion enter various derivative transactions pursuant policies areas counterparty exposure hedging practices derivative instruments reported balance sheets fair value designation support hedge accounting performed specific exposure basis financial instruments qualifying fair value hedges record changes fair value income offset part whole corresponding changes fair value underlying exposures hedged cash flow hedges record changes fair value derivatives extent effective hedges comprehensive loss income net deferred taxes changes fair value derivatives qualifying hedges recorded income foreign currency denominated assets liabilities translated us dollars adjustments currency rate changes recorded cumulative translation adjustment account shareholders’ equity related foreign entity sold substantially liquidated use foreign currency financing transactions including currency swaps effectively hedge longterm investments foreign operations corresponding currency foreign currency gains losses hedge long term investments recorded cumulative translation adjustment account offset recorded adjustment nonus dollar financing liability fair values financial instruments fair value cash equivalents accounts receivable accounts payable variablerate receivables debt approximates carrying value financial instruments determine estimated fair values financial instruments including debt equity risk management instruments using available market information valuation methodologies primarily discounted cash flow analysis independent investment bankers product environmental liabilities accrue product liability claims related defense costs occurrence method loss probable reasonably estimable based historical experience insurance coverage deductibles effect date incident liabilities environmental matters recorded sitebysite basis probable obligation incurred cost reasonably estimated estimate accrued environmental liabilities using currently available facts existing technology presently enacted laws regulations subject number factors uncertainties environmental liabilities undiscounted take consideration possible future insurance proceeds significant amounts claims third parties research development costs research development costs either specifically covered contracts represent share costsharing arrangements charged expense incurred research development costs incurred contracts others reported cost sales period revenue recognized income taxes deferred tax assets liabilities determined based temporary differences financial reporting tax bases assets liabilities applying enacted tax rates expected effect year expect differences reverse settle based evaluation available evidence recognize future tax benefits net operating loss carryforwards extent believe likely realize benefits recognize interest penalties related unrecognized tax benefits income tax expense periodically assess likelihood able recover deferred tax assets reflect changes estimates valuation allowance corresponding adjustment earnings comprehensive income loss appropriate assessing need valuation allowance look future reversal existing taxable temporary differences taxable income carryback years feasibility tax planning strategies estimated future taxable income recently announced accounting pronouncements september 2006 financial accounting standards board “fasb” issued sfas 157 “fair value measurements” sfas no157 replaces multiple existing definitions fair value single definition establishes consistent framework measuring fair value expands financial statement disclosures regarding fair value measurements statement applies fair value measurements already required permitted accounting standards require new fair value measurements sfas 157 effective first quarter 2008 expect adoption material impact financial position results operations february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities including amendment fasb statement 115” sfas 159 allows companies choose measure eligible assets liabilities fair value changes value recognized earnings fair value treatment may elected either upon initial recognition eligible asset liability existing asset liability event triggers new basis accounting sfas 159 effective first quarter 2008 expect elect remeasure existing financial assets liabilities provisions note 2 discontinued operations august 2006 completed sale fastening systems business platinum equity private equity investment firm approximately 613 million cash assumption 16 million net indebtedness certain liabilities gain loss recorded upon completion sale prior consummation sale fastening systems business recorded impairment charges 120 million 2006 387 million 2005 described results business accounted discontinued operations consolidated financial statements periods presented herein september 2005 board directors approved management’s recommendation explore strategic alternatives fastening systems business based approval recommendation likelihood execution determined impairment indicator existed fastening systems’ goodwill longlived assets assessment potential impairment goodwill estimated fair value business based current market data fair value amount compared carrying amount business carrying amount exceeded fair value measured amount goodwill impairment loss excess fair value business fair value amounts assigned assets liabilities represents implied fair value goodwill carrying amount goodwill exceeded implied fair value goodwill resulting impairment loss 335 million 2005 board directors authorized divestiture fastening systems business december 2005 recorded aftertax charge approximately 52 million charge included 37 million related previously deferred foreign currency translation losses 7 million curtailment losses employee retirement plans charges assessed estimated fair value business determined adjustment carrying value required time second quarter 2006 recorded additional 120 million aftertax impairment charge record business estimated fair value less cost sell time based offers received potential purchasers operating results discontinued businesses primarily related fastening systems follows gain disposal net income taxes primarily related tax benefit recorded sale intesys business 2005 generally use centralized approach cash management financing manufacturing operations accordingly allocate debt interest expense discontinued businesses debt related interest expense specific entity within business recorded respective entity general corporate overhead previously allocated businesses reporting purposes excluded amounts reported discontinued operations december 29 2007 assets liabilities discontinued operations primarily relate sale fastening systems business 2007 cash flows provided operating investing activities primarily related taxes note 3 business acquisitions goodwill intangible assets 2007 business acquisitions 2007 acquired four businesses cash totaling 11 billion results operations acquired businesses included consolidated statement operations since dates respective acquisition pro forma information included amounts immaterial november 14 2007 acquired majority ownership interest united industrial corporation “uic” publicly held company nyse uic pursuant cash tender offer 81 per share uic operates wholly owned subsidiary aai corporation “aai” aai leading provider intelligent aerospace defense systems including unmanned aircraft ground control stations aircraft satellite test equipment training systems countersniper devices uic integrated bell segment believe adds important capabilities existing aerospace defense businesses advances strategy deliver broader integrated solutions customers december completed acquisition obtained 100 ownership uic following table summarizes estimated fair values assets acquired liabilities assumed uic november 14 2007 effective date acquisition addition 655 million paid net assets acquired november 14 2007 paid approximately 240 million settle outstanding acquired debt obligations 157 million purchase minority interest december acquired intangible assets represent primarily customer agreements contractual relationships weightedaverage useful life 13 years allocated purchase price business estimated fair value net tangible intangible assets acquired excess recorded goodwill approximately 64 million goodwill deductible tax purposes estimates preliminary end 2007 awaiting completion identification valuation intangible assets acquired expect analyses completed first half 2008 2007 also acquired certain assets cavair llc columbia aircraft manufacturing corporation paladin tools cavair’s helicopter maintenance service center acquired bell segment columbia aircraft manufacturing corporation produces highperformance single engine aircraft integrated cessna segment paladin tools provider tools accessories telecommunications industry integrated industrial segment recorded 12 million goodwill 16 million intangibles businesses 2006 business acquisitions acquired three businesses 2006 total cost 338 million bell segment 164 million finance segment paid cash operating results businesses included consolidated financial statements since date respective acquisition acquisitions include following · overwatch systems “overwatch” developer provider intelligence analysis software tools defense industry acquired december 1 · innovative survivability technologies inc supplier innovative defensive systems military homeland security customers acquired july 19 · electrolux financial corporation’s dealer inventory finance business provides consumer appliance electronics dealers wholesale inventory financing acquired june 30 connection acquisitions 2006 recorded 259 million goodwill 112 million identifiable intangible assets primarily bell segment amounts adjusted 2007 reflect final fair value adjustments resulted reduction goodwill 14 million net deferred taxes increase intangible assets 21 million adjusted intangible assets weightedaverage amortization periods follows 84 million patents technology 15 years 33 million customer agreements 9 years 16 million intangible assets 4 years goodwill changes carrying amount goodwill segment follows acquired intangible assets acquired intangible assets summarized amortization expense totaled 23 million 2007 7 million 2006 4 million 2005 amortization expense estimated approximately 67 million 65 million 60 million 53 million 48 million 2008 2009 2010 2011 2012 respectively note 4 accounts receivable accounts receivable comprised following unbillable receivables us government contracts arise revenues appropriately recognized based performance cannot billed yet terms contract unbillable receivables within accounts receivable totaled 166 million december 29 2007 144 million december 30 2006 longterm contract receivables due us government exclude significant amounts billed unpaid due contractual retainage provisions note 5 finance receivables securitizations finance receivables finance group provide financial services primarily aviation golf vacation interval resort dealer floorplan middle market industries variety financing vehicles various contractual maturities contractual maturities finance receivables outstanding december 29 2007 follows table necessarily reflect future cash collections receivables often repaid refinanced prior contractual maturity revolving loans distribution finance receivables generally mature within one five years revolving loans secured trade receivables inventory plant equipment pools vacation interval notes receivables pools residential recreational land loans underlying property distribution finance receivables generally secured inventory financed distributor include floorplan financing thirdparty dealers inventory sold ezgo jacobsen businesses installment contracts finance leases initial terms ranging two 20 years primarily secured financed equipment installment contracts generally require customer pay significant payment along periodic scheduled principal payments reduce outstanding balance term loan finance leases include residual values expected realized contractual maturity leases significant residual value end contractual term classified installment contracts legal economic substance equivalent secured borrowing finance lease significant residual value contractual maturities finance leases classified installment contracts table represent minimum lease payments net unearned income recognized life lease total minimum lease payments unearned income related contracts 10 billion 315 million respectively december 29 2007 719 million 222 million respectively december 30 2006 minimum lease payments due contracts next five years follows 173 million 2008 149 million 2009 132 million 2010 141 million 2011 106 million 2012 minimum lease payments due finance leases next five years follows 156 million 2008 113 million 2009 75 million 2010 46 million 2011 8 million 2012 golf course resort mortgages secured real property generally limited 75 less property’s appraised market value loan origination golf course mortgages initial terms ranging five 10 years amortization periods 15 25 years golf course mortgages totaling 11 billion consist loans average balance 5 million weightedaverage remaining contractual maturity five years resort mortgages generally represent construction inventory loans terms five years leveraged leases secured ownership leased equipment real property initial terms approximately 30 years leveraged leases reflect contractual maturities net contractual nonrecourse debt payments include residual values expected realized contractual maturity net investments finance leases excluding leases classified installment contracts leveraged leases provided first quarter 2007 adopted fasb staff position “fsp” 132 “accounting change projected change timing cash flows relating income taxes generated leveraged lease transaction” “fsp 132” fsp 132 requires recalculation returns leveraged leases change projected change timing cash flows related income taxes generated leveraged leases impact estimated change projected cash flows must reported adjustment net leveraged lease investment retained earnings date adoption finance group leveraged leases initial investment balance 209 million estimate could impacted changes timing cash flows related income taxes upon adoption reduced retained earnings 33 million cumulative effect change accounting principle reduced investment leveraged leases 50 million deferred income tax liabilities 17 million finance group manages services finance receivables variety investors participants thirdparty portfolio owners total managed serviced finance receivable portfolio including owned finance receivables 125 billion end 2007 115 billion end 2006 managed receivables include owned finance receivables finance receivables sold securitizations private transactions retain element credit risk continue service portfolio finance receivables diversified across geographic region borrower industry type collateral december 29 2007 78 finance receivables distributed throughout united states compared 83 end 2006 significant collateral concentration general aviation accounted 22 managed receivables end 2007 19 end 2006 industry concentrations golf vacation interval industries accounted 15 13 respectively managed receivables december 29 2007 compared 16 13 respectively end 2006 transactions finance manufacturing groups portion finance group’s business involves financing retail purchases leases new used aircraft equipment manufactured manufacturing group captive finance receivables inventory sales included finance group’s balance sheets summarized operating agreements specify finance group recourse manufacturing group certain uncollected amounts related transactions manufacturing group established reserves losses balance sheet within accrued liabilities receivables guarantees reserves established amounts potentially uncollectible collateral values considered insufficient cover outstanding receivable account deemed uncollectible collateral repossessed finance group manufacturing group charged deficiency collateral repossessed receivable transferred finance group’s balance sheet manufacturing group’s balance sheet manufacturing group responsible additional collection efforts occurs related reserve previously established manufacturing group reclassified accrued liabilities netted receivable asset transferred finance group 2007 2006 2005 finance group paid manufacturing group 12 billion 10 billion 08 billion respectively related sale textronmanufactured products financed finance group manufacturing group also received proceeds years 27 million 63 million 41 million respectively sale equipment finance group use operating lease agreements end 2007 2006 amounts guaranteed manufacturing group totaled 254 million 335 million respectively manufacturing group total reserves losses 22 million end 2007 39 million end 2006 impairment nonaccrual finance receivables include accounts contractually delinquent three months accrual interest income suspended receivables considered impaired probable unable collect amounts due according contractual terms loan agreement impaired accrual finance receivables represent loans original loan terms significantly modified reflect deferred principal payments generally market interest rates collection principal interest doubtful past due loans finance group recourse manufacturing group considered impaired table loans totaled 3 million 2 million end 2007 2006 respectively average recorded investment impaired finance receivables 2007 84 million compared 142 million 2006 impaired finance receivables related reserves end 2007 2006 follows securitizations finance group sells primarily distribution finance receivables general aviation loans qualified special purpose trusts securitization transactions distribution finance receivables represent loans secured dealer inventories typically collected upon sale underlying product revolving securitization proceeds collection principal balance loans used trust purchase additional distribution finance receivables us month revolving securitization accounted approximately 93 securitization gains 2007 received proceeds securitizations 731 million 2007 50 million 2006 361 million 2005 revolving securitization proceeds include amounts received related incremental increases level receivables sold securitization gains securitizations approximately 62 million 2007 42 million 2006 49 million 2005 end 2007 25 billion securitized loans outstanding 17 million pastdue loans generally retain interest assets sold form servicing responsibilities subordinated interests including interestonly securities seller certificates cash reserves end 2007 203 million retained interest recorded assets included 152 million distribution finance receivables 41 million general aviation loans comparison retained interest totaled 179 million end 2006 cash flows received retained interests totaled 71 million 2007 63 million 2006 64 million 2005 key economic assumptions used measuring retained interests follows note 6 inventories comprised following inventories valued lifo method totaled 17 billion 15 billion end 2007 2006 respectively lifo inventories valued current costs carrying values would approximately 307 million 276 million higher respective dates inventories related longterm contracts net progressmilestone payments 710 million end 2007 380 million end 2006 note 7 property plant equipment net manufacturing group’s property plant equipment net comprised following depreciation expense manufacturing group totaled 270 million 2007 243 million 2006 250 million 2005 incurred asset retirement obligations primarily related costs remove dispose underground storage tanks asbestos materials used insulation adhesive fillers floor tiles legal requirement remove items currently plan remodel related facilities otherwise cause impacted items require disposal result asset retirement obligations estimable accordance provisions fasb interpretation 47 “conditional asset retirement obligations” recorded liability note 8 debt credit facilities debt credit facilities summarized weightedaverage interest rates borrowings effect interest rate exchange agreements 502 530 end 2007 2006 respectively 516 year 2007 502 year 2006 end 2007 2006 variablerate notes totaled 25 billion 18 billion respectively 2007 finance group issued 300 million 6 fixedtofloating rate junior subordinated notes unsecured rank junior existing future senior debt notes mature february 15 2067 however right redeem notes par february 15 2017 obligated redeem notes beginning february 15 2042 finance group agreed replacement capital covenant redeem notes february 15 2047 unless receives capital contribution manufacturing group andor net proceeds sale certain replacement capital securities specified amounts interest notes fixed 6 february 15 2017 floats threemonth london interbank offered rate 1735 thereafter policy maintaining unused committed bank lines credit amount less outstanding commercial paper balances facilities support commercial paper letters credit issuances neither primary lines credit drawn december 29 2007 december 30 2006 manufacturing group commercial paper outstanding december 29 2007 december 30 2006 weightedaverage interest rate commercial paper borrowings throughout year 520 2007 530 2006 primary committed credit facilities december 29 2007 include following finance group permitted borrow multiyear facility lending agreements limit finance group’s net assets available dividends payments manufacturing group approximately 249 million finance group’s net assets 11 billion end 2007 lending agreements also contain various restrictive provisions regarding additional debt exceed 800 consolidated net worth qualifying subordinated obligations minimum net worth 200 million creation liens maintenance fixed charges coverage ratio less 125 following table shows required payments next five years debt outstanding end 2007 payment schedule excludes amounts payable supported primary revolving credit facilities revolving lines credit support agreement manufacturing group agreed ensure finance group maintains certain minimum levels financial performance payments ever required meet standards note 9 derivatives financial instruments fair value interest rate hedges manage interest cost manufacturing group using mix fixed variablerate debt manage mix costefficient manner periodically enter interest rate exchange agreements swap specified intervals difference fixed variable interest amounts calculated reference agreedupon notional principal amount generally hedges considered perfectly effective since critical terms debt interest rate exchange match conditions sfas 133 “accounting derivative instruments hedging activities” met marktomarket values fair value hedge instruments underlying debt obligations recorded equal offsetting amounts interest expense december 2007 manufacturing group terminated outstanding interest rate exchange agreements fair value liability 2 million marktomarket adjustment carrying value underlying debt instrument amortized remaining life agreements fair value liability 8 million end 2006 finance group enters interest rate exchange agreements mitigate exposure changes fair value fixedrate receivables debt due fluctuations interest rates using agreements able convert fixedrate cash flows floatingrate cash flows december 29 2007 finance group interest rate exchange agreements fair value asset 18 million designated fair value hedges compared 45 million liability december 30 2006 cash flow interest rate hedges experience variability cash flows receive finance group’s investments interestonly securities due fluctuations interest rates mitigate exposure variability finance group enters interest rate exchange cap floor agreements combination instruments converts net residual floatingrate cash flows expected received finance group fixedrate cash flows changes fair value instruments recorded net income tax effect comprehensive income loss december 29 2007 december 30 2006 instruments insignificant value expect significant amount deferred gains net tax reclassified earnings related hedge relationships 2008 cash flow hedges finance group recorded aftertax loss 3 million 2007 aftertax gain 1 million 2006 aftertax loss 5 million 2005 accumulated comprehensive loss impact statements operations incurred significant net gain loss earnings result ineffectiveness exclusion component assessment hedge effectiveness 2007 2006 exposure loss nonperformance counterparties interest rate exchange agreements end 2007 minimal anticipate nonperformance counterparties periodic settlements amounts due currently minimize potential risk entering contracts exclusively major financially sound counterparties less longterm bond rating continuously monitoring credit ratings limiting exposure one financial institution credit risk generally limited amount counterparties’ contractual obligations exceed obligations counterparty cash flow foreign exchange rate hedges since manufacture sell products number countries throughout world exposed movements foreign currency exchange rates primary purpose foreign currency hedging activities manage volatility associated foreign currency purchases materials foreign currency sales products assets liabilities created normal course business primarily utilize forward exchange contracts purchased options maturities 18 months qualify cash flow hedges intended offset effect exchange rate fluctuations forecasted sales inventory purchases overhead expenses fair value instruments 40 million 13 million asset end 2007 2006 respectively yearend 2007 34 million aftertax income reported accumulated comprehensive loss qualifying cash flow hedges income generally expected reclassified earnings next 18 months underlying transactions occur manufacturing group also enters certain foreign currency derivative instruments meet hedge accounting criteria primarily intended protect exposure related intercompany financing transactions fair value instruments end 2007 2006 net impact related gains losses selling administrative expense 2007 2006 material net investment hedging hedge net investment position major currencies generate foreign currency interest payments offset transactional exposures currencies accomplish borrow directly foreign currency designate portion foreign currency debt hedge net investments also may utilize currency forwards hedges related foreign net investments currency effects hedges reflected cumulative translation adjustment account within comprehensive income loss produced 24 million aftertax loss 2007 leaving accumulated net loss balance 43 million stockbased compensation hedging manage expense related stockbased compensation awards using cash settlement forward contracts common stock use forward contracts modifies compensation expense exposure changes stock price intent reduce potential variability fair value instruments december 29 2007 december 30 2006 receivable 62 million 24 million respectively gains losses instruments recorded adjustment compensation expense award charged expense contracts increased net income 53 million 2007 21 million 2006 8 million 2005 cash received paid contract settlement included cash flows operating activities consistent classification cash flows underlying hedged compensation expense fair values financial instruments carrying amounts estimated fair values financial instruments reflected financial statements fair value follows finance receivables table exclude fair value finance leveraged leases totaling 12 billion december 29 2007 december 30 2006 leases recorded fair value consolidated balance sheets note 10 shareholders’ equity capital stock authorization 15 million shares preferred stock par value 500 million shares 0125 par value common stock share 208 cumulative convertible preferred stock series 2363 approximate stated value 1100 liquidation value convertible 88 shares common stock redeem 50 per share end 2007 2006 2005 approximately 72000 147000 153000 shares respectively 208 cumulative convertible preferred stock series issued approximately 72000 78000 84000 shares outstanding share 140 convertible preferred dividend stock series b 1182 approximate stated value preferred dividends convertible 72 shares common stock redeem 45 per share end 2007 2006 2005 approximately 36000 527000 534000 shares respectively 140 convertible preferred dividend stock series b issued approximately 36000 41000 47000 shares outstanding july 18 2007 board directors approved twoforone split common stock effected form 100 stock dividend retirement 85 million shares treasury stock additional shares resulting stock split distributed august 24 2007 shareholders record august 3 2007 prior period share data per share data restated reflect stock split outstanding common stock activity three years ended december 29 2007 presented reserved shares common stock end 2007 common stock reserved subsequent conversion preferred stock shares reserved exercise outstanding stock options issuance shares upon vesting outstanding restricted stock units totaled 124 million shares income per common share reconciliation income continuing operations basic diluted share amounts presented accumulated comprehensive loss aftertax components accumulated comprehensive loss presented note 11 sharebased compensation 2007 longterm incentive plan “plan” supersedes 1999 longterm incentive plan authorizes awards key employees form options purchase shares restricted stock restricted stock units stock appreciation rights performance stock awards options granted purchase shares maximum term 10 years vest ratably threeyear period restricted stock unit awards granted vest onethird third fourth fifth year following grant maximum 12 million shares authorized issuance purposes plan plus shares become available upon cancellation forfeiture expiration awards granted 1999 longterm incentive plan 12 million shares may awarded pursuant incentive stock options 3 million shares may awarded pursuant restricted stock “full value” awards intended paid shares plan also authorizes performance share units paid cash payouts performance share units vary based certain performance criteria measured threeyear period performance share units vest end three years also provide sharebased compensation awards payable cash including retention awards certain executives restricted stock units deferred income plan textron key executives “dip” provide participants opportunity voluntarily defer 25 base salary 100 annual longterm incentive compensation elective deferrals may put either stock unit account interest bearing account generally contribute 10 premium amounts deferred stock unit account executives eligible participate dip achieved andor maintained required minimum stock ownership level required defer annual incentive compensation excess 100 executive’s annual target deferred stock unit account entitled 10 premium contribution amount deferred participants cannot move amounts two accounts actively employed us cannot receive distributions termination employment adopted sfas 123 revised 2004 “sharebased payment” “sfas 123r” replaces sfas 123 “accounting stockbased compensation” first quarter 2005 using modified prospective transition method sfas 123r requires companies measure compensation costs sharebased payments employees including stock options fair value expense compensation service period transition method compensation expense recognized 2005 includes compensation cost stock options restricted stock granted units payable shares prior yet vested january 1 2005 based grant date fair value estimated recognized accordance provisions sfas 123 b compensation cost stock options restricted stock units payable shares granted subsequent january 1 2005 sharebased compensation awards accounted liabilities based upon measurement recognition provisions sfas 123r awards granted modified 2005 prospectively compensation costs awards service conditions vest ratably recognized straightline basis requisite service period separately vesting portion award compensation costs awards granted prior 2005 recognized using attribution methods required sfas 123 compensation expense recorded net income sharebased compensation plans follows sharebased compensation costs reflected primarily selling administrative expenses compensation expense includes approximately 23 million 16 million 17 million 2007 2006 2005 respectively representing attribution fair value options issued portion previously granted options requisite service rendered 2006 recorded approximately 4 million sharebased award forfeitures related discontinued operations stock options stock option compensation cost calculated fair value approach recognized vesting period stock options weightedaverage fair value options granted per share 14 12 10 2007 2006 2005 respectively estimate fair value options granted date grant using blackscholes optionpricing model expected volatilities based implied volatilities traded options common stock historical volatilities factors use historical data estimate option exercise behavior adjusted reflect anticipated increases expected life weightedaverage assumptions used blackscholes optionpricing model awards issued respective periods follows following table summarizes information related stock option activity respective periods stock option activity plan summarized follows december 29 2007 outstanding options aggregate intrinsic value 316 million weightedaverage remaining contractual life 63 years exercisable options aggregate intrinsic value 220 million weightedaverage remaining contractual life 48 years december 29 2007 restricted stock units fair value restricted stock unit paid stock based trading price common stock date grant less required adjustments reflect fair value award dividends paid accrued restricted stock unit vests weightedaverage grant date fair value restricted stock units paid stock granted 2007 2006 2005 approximately 45 41 36 per share respectively activity restricted stock units paid stock follows sharebased compensation awards value sharebased compensation awards vested andor paid respective periods follows december 29 2007 recognized 61 million total compensation cost associated unvested awards subject service conditions december 29 2007 recognized 35 million total compensation cost associated unvested sharebased compensation awards subject performance vesting conditions expect recognize compensation expense types awards weightedaverage period approximately two years fair value sharebased compensation awards accounted liabilities includes performance share units retention awards restricted stock units payable cash dip stock unit awards fair value awards based trading price common stock less adjustments reflect fair value award dividends paid accrued vested remeasured reporting period date note 12 retirement plans defined benefit defined contribution plans cover substantially employees significant number usbased employees participate textron master retirement plan “tmrp” bell helicopter textron master retirement plan “bhtmrp” subject provisions employee retirement income security act 1974 “erisa” tmrp defined benefit pension plan includes new defined contribution component called retirement account plan “rap” covers portion participants tmrp bhtmrp created 2007 rap participants eligible receive 2 annual compensation contributions textron participants rap may make contributions plan participants rap may receive pension benefits tmrp bhtmrp reduced benefits received rap also funded unfunded defined benefit pension plans cover certain us foreign employees several defined contribution plans also sponsored various businesses largest plan textron savings plan “tsp” qualified 401k plan subject erisa significant number usbased employees participate defined contribution plans cost approximately 85 million 2007 50 million 2006 45 million 2005 increase cost 2007 primarily relates contributions 24 million rap higher employee base largely due acquisitions also provide postretirement benefits pensions certain retired employees us south africa include healthcare dental care medicare part b reimbursement life insurance benefits periodic benefit cost income components net periodic benefit cost income amounts recognized comprehensive income follows estimate net loss prior service cost defined benefit pension plans amortized comprehensive income net periodic benefit costs 2008 17 million 18 million respectively estimated net loss prior service credit postretirement benefits pensions amortized comprehensive income net periodic benefit costs 2008 16 million 4 million respectively obligations funded status plans measured fiscal yearend changes projected benefit obligation fair value plan assets along funded status follows amounts recognized consolidated balance sheets follows october 2006 transferred 281 million plan assets tmrp plan established purchaser fastening systems business settled obligation usbased employees business upon transfer recognized settlement loss 35 million included discontinued operations obligations related fastening systems business’ foreign plans assumed purchaser assumptions weightedaverage assumptions use postretirement plans follows estimate initial medical rate 8 2007 assume decrease 5 2015 remain level estimate initial prescription drug rate 12 2007 assume decrease 5 2015 remain level assumed healthcare cost trend rates significant effect amounts reported postretirement benefits pensions onepercentagepoint change assumed healthcare cost trend rates would following effects pension benefits accumulated benefit obligation defined benefit pension plans 51 billion december 29 2007 49 billion december 30 2006 pension plans accumulated benefit obligations exceeding fair value plan assets follows addition plans table plans projected benefit obligation excess fair value plan assets yearend follows pension assets invest pension assets objective achieving total rate return long term sufficient fund future pension obligations minimize future pension contributions willing tolerate commensurate level risk achieve objective based funded status plans longterm nature pension liability risk controlled maintaining portfolio assets diversified across variety asset classes investment styles investment managers assets managed external investment managers majority assets actively managed possible investment managers prohibited owning stock portfolios manage behalf us plan assets comprising majority plan assets asset allocation target ranges established consistent investment objectives assets rebalanced periodically expected longterm rate return plan assets determined based variety considerations including established asset allocation targets expectations asset classes historical returns plans’ assets market considerations december 29 2007 target allocation range 44 70 equity securities 13 33 debt securities 7 13 real estate alternative assets foreign plan assets allocations based expected cash flow needs assessments local practices markets percentages fair value total us pension plan assets major category follows estimated future cash flow impact defined benefits salaried plans based salary years service hourly plans generally provide benefits based stated amounts year service funding policy consistent applicable laws regulations 2008 expect contribute range 53 million 57 million fund qualified pension plans foreign plans expect contribute postretirement benefit plans benefit payments provided reflect expected future employee service appropriate expected paid net estimated participant contributions include medicare part subsidy expect receive benefit payments based assumptions used measure benefit obligation end fiscal 2007 pension benefit payments primarily paid qualified pension trusts pay postretirement benefits pensions general corporate assets follows note 13 income taxes conduct business globally result file numerous consolidated separate income tax returns us federal jurisdiction various state foreign jurisdictions us subsidiaries file consolidated federal income tax return income continuing operations income taxes follows income tax expense continuing operations summarized follows following table reconciles federal statutory income tax rate effective income tax rate amount income taxes pay subject ongoing audits federal state foreign tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental assess income tax positions record tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting date tax positions likely tax benefit sustained record amount greater 50 likelihood realized upon settlement taxing authority full knowledge relevant information interest penalties accrued applicable believe likely tax benefit sustained tax benefit recognized however future results may include favorable unfavorable adjustments estimated tax liabilities due closure income tax examinations new regulatory judicial pronouncements relevant events result effective tax rate may fluctuate significantly quarterly annual basis adopted provisions fasb interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” “fin 48” beginning fiscal 2007 resulted increase approximately 22 million december 31 2006 retained earnings balance fin 48 provides comprehensive model financial statement recognition measurement presentation disclosure uncertain tax positions taken expected taken income tax returns unrecognized tax benefits represent tax positions reserves established unrecognized state tax benefits interest related unrecognized tax benefits reflected net applicable tax benefits reconciliation unrecognized tax benefits excluding accrued interest 2007 follows december 29 2007 approximately 241 million unrecognized tax benefits recognized would favorably affect effective tax rate future period remaining 126 million unrecognized tax benefits related discontinued operations expect amount unrecognized tax benefits disclosed change significantly next 12 months normal course business subject examination taxing authorities throughout world including major jurisdictions belgium canada germany united kingdom united states exceptions longer subject us federal state local nonus income tax examinations years 1997 major jurisdictions 2007 2006 2005 recognized approximately 28 million 23 million 14 million respectively interest end 2007 2006 101 million 77 million respectively accrued interest included liabilities consolidated balance sheet tax effects temporary differences give rise significant portions net deferred tax assets liabilities follows following table presents breakdown current longterm net deferred tax assets recognized valuation allowance december 29 2007 december 30 2006 192 million 159 million respectively offset certain deferred tax assets due uncertainty realizing related benefits net operating loss credit carryforwards end year follows income taxes payable federal state purposes reduced tax benefits receive employee stock options income tax benefits receive certain stock options calculated difference fair market value stock issued time exercise option price tax effected excess net tax benefits related employee stock options presented consolidated statements cash flows financing activities undistributed earnings foreign subsidiaries approximated 542 million end 2007 consider undistributed earnings taxes previously provided indefinitely reinvested therefore tax provided earnings tax provided distributed 2007 taxes net foreign tax credits would increased approximately 32 million note 14 special charges special charges 2007 2006 2005 special charges totaled 118 million included 112 million related 2001 disposition automotive trim “trim” business 6 million restructuring expense industrial segment 2005 112 million special charges incurred connection disposition trim included 91 million impairment charges write preferred stock acquired disposition 21 million cover exposures related certain guarantees leases environmental workers’ compensation matters note 15 commitments contingencies subject legal proceedings claims arising conduct business including proceedings claims relating private sector transactions government contracts compliance applicable laws regulations production partners product liability employment environmental safety health matters legal proceedings claims seek damages fines penalties substantial amounts remediation environmental contamination government contractor subject audits reviews investigations determine whether operations conducted accordance applicable regulatory requirements federal government procurement regulations certain claims brought us government could result suspended debarred us government contracting period time basis information presently available believe existing proceedings claims material effect financial position results operations internal revenue service “irs” challenged ability accelerate timing tax deductions amounts deductions related certain leveraged lease transactions within finance segment transactions along transactions similar characteristics initial investment approximately 209 million resolution issues may result adjustment timing taxable income deductions reduce effective yield leveraged lease transactions addition resolution issues could result acceleration cash payments irs december 29 2007 180 million deferred tax liabilities recorded consolidated balance sheets related leases believe proposed irs adjustments inconsistent tax law existence time leases originated intend vigorously defend position arh program armed reconnaissance helicopter “arh” system development demonstration “sdd” contract cost plus incentive fee contract eligibility fees reduced total contract costs increase fourth quarter 2006 completed certain phases critical design review arh sdd contract determined initial production configuration aircraft including aircraft configuration changes required us government cost estimates based configuration included anticipated transition production costs exceeded fixed pricing contained two options us government program first two low rate initial production “lrip” lots option first lrip lot expired 2006 option second lot 1836 aircraft set expire december 2007 time discussions us government related possible reinstatement first option extension second option delivery schedule number units exercised options possible additional aircraft contracted addition options revised pricing end 2006 due uncertainty exposure ultimate outcome discussions us government believe loss probable guidelines established sfas 5 “accounting contingencies” march 2007 received correspondence us government created uncertainty whether would proceed production phase arh program accordingly provided losses 18 million supplier obligations longlead component production incurred risk support anticipated arh lrip contract awards second quarter 2007 us army agreed replan arh program reached nonbinding memorandum understanding “mou” related aircraft specifications pricing methodology delivery schedules initial lrip aircraft also agreed conduct additional sdd activities funded basis based plan time related estimates aircraft production costs including costs related risks associated achieving learning curve schedule assumptions expected lose approximately 73 million production proposed initial lrip aircraft accordingly additional charge 55 million taken second quarter 2007 estimated lrip contract losses december 2007 us government’s remaining option related production aircraft original arh program expired unexercised continuing restructure program negotiations us government including reducing number units modifying pricing delivery schedules previously reached mou based current status negotiations contractual commitments vendors related materials anticipated production units procured risk revised best estimate expected loss 50 million resulting 23 million reduction previously established reserves expect initial lrip contract awards finalized mid2008 environmental remediation industrial enterprises engaged similar businesses involved number remedial actions various federal state laws regulations relating environment impose liability companies clean contribute cost cleaning sites hazardous wastes materials disposed released accrued environmental liabilities relate disposal costs us environmental protection agency oversight costs legal fees operating maintenance costs currently formerly owned operated facilities circumstances affect reliability precision accruals include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur believe changes accruals may result factors uncertainties material effect financial position results operations based upon information currently available estimate potential environmental liabilities within range 42 million 156 million end 2007 environmental reserves approximately 87 million 10 million classified current liabilities established address specific estimated potential liabilities estimate likely pay accrued environmental remediation liabilities next five 10 years expenditures evaluate remediate contaminated sites approximated 7 million 7 million 6 million 2007 2006 2005 respectively leases rental expense approximated 107 million 2007 89 million year 2006 2005 future minimum rental commitments noncancelable operating leases effect end 2007 approximated 66 million 2008 57 million 2009 47 million 2010 36 million 2011 28 million 2012 total 173 million thereafter loan commitments december 29 2007 finance group unused commitments fund new existing customers 16 billion committed revolving lines credit compared 13 billion december 30 2006 loan commitments generally original duration less three years necessarily represent future cash requirements since many agreements used extent committed expire unused exposed interest rate changes commitments since interest rates set loans funded note 16 research development companyfunded customerfunded research development costs follows customerfunded research development costs primarily related us government contracts including arh v22 vh71 h1 development contracts part realignment bellagusta aerospace company llc “baac” see note 18 bell helicopter agusta spa two affiliated companies collectively “agusta” agreed share certain model ba609 development costs behalf baac agusta incur development costs enhance investment baac agusta also may make cash contributions reimburse portions development costs incurred behalf baac based development costs incurred received 11 million 19 million 43 million cash contributions agusta recorded income 2007 2006 2005 respectively 2005 bell helicopter entered four separate risksharing arrangements two arrangements commercial participants development bell model 429 aircraft 2007 one agreement modified reduce amount cash inkind development efforts required participant corresponding reductions entitlements participant may obtain upon future model 429 production sales arrangements require contributions participants totaling 14 million due development effort reaches certain predetermined milestones well inkind development contributions one participant two arrangements canadian governmental organizations arrangements currently include model 429 aircraft may potentially include certain future aircraft require cash contributions cad 115 million participants based percentage qualifying research development costs incurred participants arrangements entitled payments bell helicopter commercial participants also entitled discounts based future sales model 429 aircraft addition certain requirements related production future model 429 aircraft canada based development activities completed costs incurred recorded income 22 million 22 million 35 million 2007 2006 2005 respectively related arrangements 2007 2006 2005 received due receive 33 million 41 million 78 million respectively cost reimbursements companyfunded amounts risksharing partners based reimbursements net companyfunded costs totaled 332 million 310 million 248 million 2007 2006 2005 respectively note 17 guarantees indemnifications extend variety financial performance guarantees third parties provided table agreements include uncapped guarantees described performance guarantee 2004 bell helicopter business formed agustawestlandbell llc “awb llc” agustawestland north america inc “awna” venture created joint design development manufacture sale customer training product support vh71 helicopter certain variations derivatives thereof offered sold departments agencies us government march 2005 awb llc received 12 billion cost reimbursementtype subcontract lockheed martin system development demonstration phase us marine corps helicopter squadron program guaranteed lockheed martin due prompt performance awb llc obligations subcontract provided liability guaranty shall exceed 49 awb llc’s aggregate liability lockheed martin subcontract agustawestland nv awna’s parent company guaranteed remaining 51 lockheed martin entered crossindemnification agreements agustawestland nv party indemnifies related payments required agreements result indemnifying party’s workshare subcontracts received awb llc’s maximum obligation 50 total contract value equates 613 million maximum amount liability guarantee 300 million december 29 2007 completion guaranteed minimum resale contracts number guaranteed minimum resale value contracts associated certain past aircraft sales fair value aircraft falls minimum guaranteed amount may required make future payment customer provide minimum tradein value toward new aircraft agreements generally include operating restrictions maximum usage contract period minimum maintenance requirements also guaranteed minimum resale value certain customerowned aircraft anticipated traded upon completion model currently development contracts expire follows 3 million year 2008 2009 2010 2011 18 million 2012 guarantees related dispositions indemnified purchaser fastening systems business remediation costs related preexisting environmental conditions extent exist sold locations estimated fair value indemnifications approximately 28 million potential payments obligations capped result maximum potential obligation cannot determined also obligations capped arising sales certain businesses including representations warranties related indemnities environmental health safety tax employment matters maximum potential payment related obligations capped 17 million maximum potential payment obligations capped cannot determined losssharing agreements connection sale note receivable 2005 finance group indemnified purchaser potential losses limited circumstances maximum potential exposure indemnity estimated 29 million due extremely low probability occurrence several mitigating factors including specific indemnification original note issuer significant fair value attributed indemnity software indemnifications enter software license agreements customers overwatch systems business software license agreements generally include certain provisions indemnifying customers liabilities software products infringe third party’s intellectual property rights date incurred material costs result indemnifications accrued liabilities related obligations forward contract enter forward contract common stock annual basis contract intended hedge earnings cash volatility stockbased incentive compensation indexed stock forward contract requires annual cash settlement counterparties based upon number shares multiplied difference strike price prevailing common stock price december 29 2007 contract approximately 25 million shares strike price 4728 market price stock 7162 december 29 2007 resulting receivable 62 million compared receivable 24 million december 30 2006 warranty product maintenance contracts provide limited warranty product maintenance programs including parts labor certain products periods ranging one five years estimate costs may incurred warranty programs record liability amount costs time product revenue recognized factors affect liability include number products sold historical anticipated rates warranty claims cost per claim assess adequacy recorded warranty product maintenance liabilities periodically adjust amounts necessary changes warranty product maintenance liability follows adjustments include changes prior year estimates new issues prior year sales currency translation adjustments note 18 variable interest entities normal course business entered various joint ventures investments entities qualify operating businesses generally ventures meet criteria exclusion scope fasb interpretation 46r “consolidation variable interest entities interpretation arb 51” ventures investments within scope interpretation consolidate primary beneficiary variable interest entities absorb majority entity’s expected losses receive majority entity’s expected losses result contractual financial interests entity baac joint venture established 1998 bell helicopter unit predecessor agusta spa share certain costs profits joint design development manufacture marketing sale customer training product support civil tiltrotor model ba609 december 2005 commercial helicopter model ab139 venture variable interest entity since relies partners fund development provide services substantially venture’s operations became primary beneficiary baac december 20 2005 obtained controlling voting interest venture along right absorb half expected losses residual returns baac consolidated prospectively financial statements december 20 2005 december 20 2005 entered agreement agusta realign baac agreement sold 25 profit interest model ab139 medium twin helicopter program agusta assumed ownership aspects model ab139 program baac including existing customer obligations exchange interest received 10 million cash 20 million note contingent payments agusta based future model ab139 sales recognized 30 million pretax gain upon sale interest included segment profit contingent receipts expected begin aircraft deliveries 2008 recorded income prospectively future sales occur end 2007 2006 agusta’s profit interest model ba609 approximately 32 30 respectively note 19 supplemental cash flow information supplemental cash flow information made following cash payments cash paid interest manufacturing group includes amounts paid finance group 2 million 4 million 5 million 2007 2006 2005 respectively accrued liabilities accrued liabilities manufacturing group summarized note 20 segment geographic data four reportable segments bell cessna industrial finance segments reflect manner manage operations accounting policies segments described note 1 bell products include military commercial helicopters tiltrotor aircraft armored security vehicles precision weapons airborne groundbased surveillance systems unmanned aircraft systems aircraft missile control actuators training simulation systems countersniper devices intelligence situational awareness software us nonus governments defense aerospace industries general aviation markets cessna products include citation business jets caravan single engine turboprops single engine piston aircraft aftermarket services sold diverse base corporate individual buyers industrial products markets include following · kautex products include blowmolded fuel systems parts windshield headlamp washer systems metal fuel fillers engine camshafts parts marketed primarily automobile original equipment manufacturers · fluid power products include industrial hydraulic pumps mechanical transmission systems gears extrusion equipment marketed original equipment manufacturers engineering contractors governments oil gas petrochemical nuclear mining desalinization industries · greenlee products include powered equipment electrical test measurement instruments hand hydraulic powered tools electrical fiber optic connectors principally used electrical construction maintenance plumbing wiring telecommunications data communications industries · ezgo jacobsen products include golf cars professional turfmaintenance equipment offroad multipurpose utility specialized turfcare vehicles marketed primarily golf courses resort communities municipalities sporting venues commercial industrial users finance provides secured commercial loans leases primarily north america assetbased lending aviation distribution finance golf finance resort finance structured capital markets segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses special charges measurement finance segment includes interest income expense excludes special charges provisions losses finance receivables involving sale lease products recorded selling manufacturing division finance group recourse manufacturing group revenues segment along reconciliation segment profit income continuing operations income taxes follows revenues product type within segment summarized revenues include sales us government approximately 25 billion 2007 22 billion 2006 18 billion 2005 primarily bell segment information segment provided capital expenditures include amounts financed capital leases geographic data presented selected financial information continuing operations geographic area revenues attributed countries based location customer property plant equipment net based location asset quarterly data prior period amounts restated reflect twoforone stock split third quarter 2007 schedule ii valuation qualifying accounts deductions generally included uncollectible accounts written less recoveries payments inventory disposals currency translation adjustments reserves exclude discontinued operations liabilities 3 million 2007 6 million 2006 18 million 2005 decline reserves primarily due collections 2007 writeoffs 2006 item 9item 8 financial statements supplementary data consolidated financial statements related reports independent registered public accounting firm thereon included annual report form 10k pages indicated schedules omitted either applicable required information included financial statements notes thereto report management responsible integrity objectivity financial data presented annual report form 10k consolidated financial statements prepared conformity us generally accepted accounting principles include amounts based management’s best estimates judgments management also responsible establishing maintaining adequate internal control financial reporting textron inc term defined exchange act rules 13a15f participation management conducted evaluation effectiveness internal control financial reporting based framework internal control integrated framework issued committee sponsoring organizations treadway commission based evaluation framework internal control integrated framework concluded textron inc maintained material respects effective internal control financial reporting december 31 2011 independent registered public accounting firm ernst young llp audited consolidated financial statements textron inc issued attestation report textron’s internal controls financial reporting december 31 2011 stated reports included herein conduct business accordance standards outlined textron business conduct guidelines communicated employees honesty integrity high ethical standards core values conduct business every textron business prepares carries annual compliance plan ensure values standards maintained internal control structure designed provide reasonable assurance appropriate cost assets safeguarded transactions properly executed recorded internal control structure includes among things established policies procedures internal audit function selection training qualified personnel textron’s management responsible implementing effective internal control systems monitoring effectiveness well developing executing annual internal control plan audit committee board directors behalf shareholders oversees management’s financial reporting responsibilities audit committee consists six directors officers employees textron meets regularly independent auditors management internal auditors review matters relating financial reporting internal accounting controls auditing independent auditors internal auditors free full access senior management audit committee scott c donnelly frank connor scott c donnelly chairman president chief executive officer frank connor executive vice president chief financial officer february 23 2012 report independent registered public accounting firm board directors shareholders textron inc audited textron inc’s internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso criteria textron inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion textron inc maintained material respects effective internal control financial reporting december 31 2011 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets textron inc december 31 2011 january 1 2011 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2011 textron inc report dated february 23 2012 expressed unqualified opinion thereon ernst young llp boston massachusetts february 23 2012 report independent registered public accounting firm board directors shareholders textron inc audited accompanying consolidated balance sheets textron inc december 31 2011 january 1 2011 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2011 audits also included financial statement schedule contained page 86 financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position textron inc december 31 2011 january 1 2011 consolidated results operations cash flows three years period ended december 31 2011 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states textron inc’s internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 23 2012 expressed unqualified opinion thereon ernst young llp boston massachusetts february 23 2012 consolidated statements operations years threeyear period ended december 31 2011 see notes consolidated financial statements consolidated balance sheets see notes consolidated financial statements consolidated statements shareholders’ equity see notes consolidated financial statements consolidated statements cash flows years threeyear period ended december 31 2011 see notes consolidated financial statements consolidated statements cash flows continued years threeyear period ended december 31 2011 see notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation financial statement presentation consolidated financial statements include accounts textron inc majorityowned subsidiaries financings conducted two separate borrowing groups manufacturing group consists textron inc consolidated majorityowned subsidiaries operate cessna bell textron systems industrial segments finance group also finance segment consists textron financial corporation tfc consolidated subsidiaries three finance subsidiaries owned textron inc designed framework enhance borrowing power separating finance group manufacturing group operations include development production delivery tangible goods services finance group provides financial services due fundamental differences borrowing group’s activities investors rating agencies analysts use different measures evaluate group’s performance support evaluations present balance sheet cash flow information borrowing group within consolidated financial statements finance group provides captive financing retail purchases leases new used aircraft equipment manufactured manufacturing group consolidated statements cash flows cash received customers sale receivables reflected operating activities received third parties however cash flow information provided separate borrowing groups cash flows related captive financing activities reflected based operations group example product sold manufacturing group customer financed finance group origination finance receivable recorded within investing activities cash outflow finance group’s statement cash flows meanwhile manufacturing group’s statement cash flows cash received finance group customer’s behalf recorded within operating cash flows cash inflow although cash transferred two borrowing groups cash transaction reported consolidated cash flows time original financing captive financing activities along significant intercompany transactions reclassified eliminated consolidation collaborative arrangements bell segment strategic alliance agreement boeing company boeing provide engineering development test services related v22 aircraft well produce v22 aircraft number separate contracts us government v22 contracts alliance created agreement legal entity employees assets true operations agreement creates contractual rights represent entity equity interest account alliance collaborative arrangement bell boeing reporting costs incurred revenues generated transactions us government company’s respective income statement neither bell boeing considered principal participant transactions recorded agreement profits costplus contracts allocated bell boeing 5050 basis negotiated profits fixedprice contracts also allocated 5050 however bell boeing responsible cost overruns entitled retain cost underruns based contractual arrangement established alliance bell accounts rights obligations specific requirements v22 contracts allocated bell work breakdown structure account rights obligations including warranty product contingent liabilities specific requirements v22 contracts allocated us agreement revenues cost sales reflect performance v22 contracts revenues recognized using unitsofdelivery method include assets used performance v22 contracts including inventory unpaid receivables liabilities arising obligations v22 contracts consolidated balance sheets use estimates prepare financial statements conformity generally accepted accounting principles require us make estimates assumptions affect amounts reported financial statements actual results could differ estimates assumptions reviewed periodically effects changes reflected consolidated statements operations period determined 2011 2010 changed estimates revenues costs certain longterm contracts accounted percentageofcompletion method accounting primarily bell v22 h1 programs changes estimates increased income continuing operations income taxes 2011 2010 54 million 78 million respectively 34 million 49 million tax 011 016 per diluted share respectively changes primarily related favorable cost operational performance 2011 2010 gross favorable program profit adjustments totaled 83 million 98 million respectively 2011 2010 gross unfavorable program profit adjustments totaled 29 million 20 million respectively cash equivalents cash equivalents consist cash shortterm highly liquid investments original maturities three months less revenue recognition generally recognize revenue sale products longterm contracts upon delivery commercial aircraft delivery upon completion manufacturing customer acceptance transfer risk rewards ownership taxes collected customers remitted government authorities recorded net basis sale arrangement involves multiple deliverables sales products include customization services evaluate arrangement determine whether separate items required delivered arrangement qualify separate units accounting arrangements typically involve customization services offer customers purchase bell helicopters services generally provided within first six months customer accepts aircraft assumes risk loss consider aircraft customization services separate units accounting allocate contract price two relative selling price basis using best evidence selling price arrangement deliverables typically reference price charged similar items sold separately us taking consideration performance cancellation termination refundtype provisions recognize revenue recognition criteria unit accounting met longterm contracts revenues longterm contracts accounted percentageofcompletion method accounting method estimate profit difference total estimated revenues cost contract recognize estimated profit contract term based either unitsofdelivery method costtocost method typically used development effort costs incurred appropriate circumstances revenues fixedprice contracts generally recorded using unitsofdelivery method revenues costreimbursement contracts recorded using costtocost method longterm contract profits based estimates total contract cost revenues utilizing current contract specifications expected engineering requirements achievement contract milestones product deliveries certain contracts awarded fixedprice incentive fees also considered estimating revenues profit rates contract costs typically incurred period several years estimation costs requires substantial judgment cost estimation process based professional knowledge experience engineers program managers along finance professionals update projections costs least semiannually circumstances significantly change adjustments required changes prior estimates recognized using cumulative catchup method impact change inceptiontodate recorded current period anticipated losses contracts recognized full period losses become probable estimable finance revenues finance revenues include interest finance receivables direct loan origination costs fees received capital leveraged lease earnings well portfolio gainslosses portfolio gainslosses include gainslosses sale early termination finance assets impairment charges related repossessed assets properties operating assets received satisfaction troubled finance receivables revenues direct loan origination costs fees received deferred amortized finance revenues contractual lives respective receivables credit lines using interest method receivables sold prepaid unamortized amounts recognized finance revenues recognize interest using interest method provides constant rate return terms receivables accrual interest income suspended credit quality indicators suggest full collection principal interest doubtful addition automatically suspend accrual interest income accounts contractually delinquent three months unless collection doubtful cash payments nonaccrual accounts including finance charges generally applied reduce net investment balance resume accrual interest loan becomes contractually current payment according original terms loan modified following period performance terms modification provided conclude collection principal interest longer doubtful previously suspended interest income recognized time finance receivables held sale finance receivables classified held sale based determination longer intend hold receivables foreseeable future maturity payoff longer ability hold maturity decision classify certain finance receivables held sale based number factors including limited contractual duration type collateral credit strength borrowers interest rates perceived marketability receivables ongoing basis factors combined overall liquidation strategy determine finance receivables intent hold foreseeable future finance receivables hold sale current strategy based evaluation performance liquidity position changes external factors affecting value andor marketability finance receivables change strategy could result change classification finance receivables finance receivables held sale carried lower cost fair value time transfer held sale classification establish valuation allowance shortfall carrying value fair value addition allowance loan losses previously allocated finance receivables transferred valuation allowance account netted finance receivables held sale balance sheet valuation allowance adjusted quarterly fair value changes occur based market interest rates market liquidity changes credit quality borrower value underlying loan collateral determine finance receivables classified held sale sold intent ability hold finance receivables foreseeable future maturity payoff finance receivables transferred held investment classification lower cost fair value finance receivables held investment allowance losses finance receivables classified held investment intent ability hold receivable foreseeable future maturity payoff finance receivables held investment generally recorded amount outstanding principal less allowance losses maintain allowance losses finance receivables held investment level considered adequate cover inherent losses portfolio based management’s evaluation analysis product line larger balance accounts specifically identified impaired including large accounts homogeneous portfolios reserve established based comparing carrying value either expected future cash flows discounted finance receivable’s effective interest rate b fair value underlying collateral finance receivable collateral dependent expected future cash flows consider collateral value financial performance liquidity borrower existence financial strength guarantors estimated recovery costs including legal expenses costs associated repossessionforeclosure eventual disposal collateral range potential outcomes perform multiple discounted cash flow analyses weight outcomes based management’s estimate relative likelihood occurrence evaluation portfolios inherently subjective requires estimates including amount timing future cash flows expected received impaired finance receivables estimated fair value underlying collateral may differ actual results analysis specific individual account critical factors included analysis vary product line include following • aviationindustry valuation guides physical condition aircraft payment history existence financial strength guarantors • golf equipmentage condition collateral • timesharehistorical performance consumer notes receivable collateral real estate valuations operating expenses borrower impact bankruptcy court rulings value collateral legal professional expenses borrower’s access capital also establish allowance losses product line cover probable specifically unknown losses existing portfolio homogeneous portfolios including aviation golf equipment allowance established percentage nonrecourse finance receivables identified requiring specific reserves percentage based combination factors including historical loss experience current delinquency default trends collateral values general economic specific industry trends nonhomogeneous portfolios timeshare allowance established percentage watchlist balances defined page 58 represents combination assumed default likelihood loss severity based historical experience industry trends collateral values estimating allowance losses cover accounts specifically identified critical factors vary product line include following • aviationthe collateral value portfolio historical default experience delinquency trends • golf equipmenthistorical loss experience delinquency trends • timeshareindividual loan credit quality indicators borrowing base shortfalls revolving notes receivable facilities default rates notes receivable collateral borrower’s access capital historical progression watchlist nonaccrual status estimates loss severity based analysis impaired loans product line finance receivables held investment written fair value less estimated costs sell related collateral repossessed charged remaining balance deemed uncollectable inventories stated lower cost estimated net realizable value inventories generally using firstin firstout fifo method lastin firstout lifo method certain qualifying inventories lifo provides better matching costs revenues determine costs commercial helicopters average cost basis model considering expended estimated costs current production release inventoried costs related longterm contracts stated actual production costs including allocable operating overhead advances suppliers case contracts us government allocable research development general administrative expenses since inventoried costs include amounts related contracts long production cycles portion costs expected realized within one year pursuant contract provisions agencies us government title security interest inventories related contracts result advances performancebased payments progress payments advances payments reflected offset related inventory balances customer deposits recorded inventory right offset exists customer deposits recorded accrued liabilities property plant equipment property plant equipment recorded cost depreciated primarily using straightline method capitalize expenditures improvements increase asset values extend useful lives intangible longlived assets acquisition estimate record fair value purchased intangible assets primarily using discounted cash flow analysis anticipated cash flows reflecting incremental revenues andor cost savings resulting acquired intangible asset using market participant assumptions amortization intangible assets finite lives recognized estimated useful lives using method amortization reflects pattern economic benefits intangible assets consumed otherwise realized approximately 36 gross intangible assets amortized using straightline method remaining assets primarily customer agreements amortized based cash flow streams used value asset longlived assets including intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable carrying value asset held use exceeds sum undiscounted expected future cash flows carrying value asset generally written fair value longlived assets held sale stated lower cost fair value less cost sell fair value determined using pertinent market information including estimated future discounted cash flows goodwill evaluate recoverability goodwill annually fourth quarter frequently events changes circumstances declines sales earnings cash flows material adverse changes business climate indicate carrying value reporting unit might impaired reporting unit represents operating segment unless discrete financial information prepared reviewed segment management businesses one level operating segment case component reporting unit certain instances aggregated components operating segment single reporting unit based similar economic characteristics september 2011 financial accounting standards board issued guidance permits companies perform qualitative assessment based economic industry companyspecific factors initial step annual goodwill impairment test selected reporting units based results qualitative assessment companies required perform step 1 annual impairment test reporting unit company concludes likely unit’s fair value less carrying amount permitted adopted guidance fourth quarter 2011 reduce costs associated determining reporting unit’s fair value units likely fair value exceeds carrying amount reporting units elect perform qualitative assessment calculated fair value reporting unit primarily using discounted cash flows incorporate assumptions unit’s short longterm revenue growth rates operating margins discount rates represent best estimates current forecasted market conditions current cost structure anticipated net cost reductions implied rate return believe market participant would require investment company similar risks business characteristics reporting unit assessed goodwill considered potentially impaired carrying value reporting unit exceeds estimated fair value pension postretirement benefit obligations maintain various pension postretirement plans employees globally plans include significant pension postretirement benefit obligations calculated based actuarial valuations key assumptions used determining obligations related expenses include expected longterm rates return plan assets discount rates healthcare cost projections evaluate update assumptions annually consultation thirdparty actuaries investment advisors also make assumptions regarding employee demographic factors retirement patterns mortality turnover rate compensation increases recognize overfunded underfunded status pension postretirement plans consolidated balance sheets recognize changes funded status defined benefit plans comprehensive income year occur actuarial gains losses immediately recognized net periodic pension cost recognized component comprehensive loss income oci amortized net periodic pension cost future periods derivative financial instruments exposed market risk primarily changes interest rates currency exchange rates hold issue derivative financial instruments trading speculative purposes manage volatility relating exposures net exposures consolidated basis take advantage natural offsets residual portion enter various derivative transactions pursuant policies areas counterparty exposure hedging practices derivative instruments reported fair value consolidated balance sheets designation support hedge accounting performed specific exposure basis financial instruments qualifying fair value hedges record changes fair value earnings offset part whole corresponding changes fair value underlying exposures hedged cash flow hedges record changes fair value derivatives extent effective hedges oci net deferred taxes changes fair value derivatives qualifying hedges recorded earnings foreign currency denominated assets liabilities translated us dollars adjustments currency rate changes recorded cumulative translation adjustment account shareholders’ equity related foreign entity sold substantially liquidated use foreign currency financing transactions effectively hedge longterm investments foreign operations corresponding currency foreign currency gains losses hedge longterm investments recorded cumulative translation adjustment account offset recorded adjustment debt product liabilities accrue product liability claims related defense costs loss probable reasonably estimable estimates generally based specifics claim incident best estimate probable loss using historical experience considering insurance coverage deductibles effect date incident environmental liabilities asset retirement obligations liabilities environmental matters recorded sitebysite basis probable obligation incurred cost reasonably estimated estimate accrued environmental liabilities using currently available facts existing technology presently enacted laws regulations subject number factors uncertainties environmental liabilities discounted take consideration possible future insurance proceeds significant amounts claims third parties incurred asset retirement obligations primarily related costs remove dispose underground storage tanks asbestos materials used insulation adhesive fillers floor tiles legal requirement remove items currently plan remodel related facilities otherwise cause impacted items require disposal since asset retirement obligations estimable related liability recorded consolidated balance sheets warranty product maintenance contracts provide limited warranty product maintenance programs including parts labor certain products periods ranging one five years estimate costs may incurred warranty programs record liability amount costs time product revenues recognized factors affect liability include number products sold historical anticipated rates warranty claims cost per claim assess adequacy recorded warranty product maintenance liabilities periodically adjust amounts necessary additionally may establish warranty liabilities related issuance aircraft service bulletins aircraft longer covered limited warranty programs research development costs customerfunded research development costs charged directly related contracts primarily consist us government contracts accordance government regulations recover portion companyfunded research development costs overhead rate charges us government contracts research development costs reimbursable contract us government another customer charged expense incurred companyfunded research development costs 525 million 403 million 401 million 2011 2010 2009 respectively included cost sales income taxes deferred income tax balances reflect effects temporary differences financial reporting carrying amounts assets liabilities tax bases well net operating losses tax credit carryforwards stated enacted tax rates effect year taxes expected paid recovered deferred income tax assets represent amounts available reduce income taxes payable taxable income future years evaluate recoverability future tax deductions credits assessing adequacy future expected taxable income sources including future reversal existing taxable temporary differences taxable income carryback years available tax planning strategies estimated future taxable income recognize net taxrelated interest penalties continuing operations income tax expense note 2 discontinued operations pursuing business strategies periodically divested certain noncore businesses several previouslydisposed businesses retained certain assets liabilities residual activity relating previouslydisposed businesses meet appropriate criteria included discontinued operations connection 2008 sale fluid power business unit received sixyear note face value 28 million fiveyear note face value 30 million recorded consolidated balance sheet net valuation allowance fourth quarter 2011 received full payment notes plus interest resulting gain 52 million recorded losses gains net april 3 2009 sold hr textron operating unit previously reported within textron systems segment connection sale recorded aftertax gain 8 million net cash proceeds approximately 376 million 2009 note 3 goodwill intangible assets changes carrying amount goodwill segment follows 2010 acquired four companies bell textron systems industrial segments aggregate cost 57 million recorded 22 million goodwill 14 million intangible assets 2009 recorded 80 million impairment charge industrial segment’s golf turf care reporting unit based lower forecasted revenues profits related effects economic recession intangible assets summarized fourth quarter 2011 recorded 41 million impairment charge write 37 million customer agreements contractual relationships 4 million patents technology see note 9 information charge amortization expense totaled 51 million 52 million 52 million 2011 2010 2009 respectively amortization expense estimated approximately 39 million 37 million 35 million 33 million 28 million 2012 2013 2014 2015 2016 respectively note 4 accounts receivable finance receivables accounts receivable accounts receivable composed following unbillable receivables us government contracts arise revenues appropriately recognized based performance cannot billed yet terms contract unbillable receivables within accounts receivable totaled 192 million december 31 2011 195 million january 1 2011 finance receivables finance receivables product line includes finance receivables held investment finance receivables held sale presented following table product line aviation primarily includes installment contracts finance leases provided purchasers new used cessna aircraft bell helicopters also includes installment contracts finance leases secured used aircraft produced manufacturers agreements typically initial terms ranging five ten years amortization terms ranging eight fifteen years average balance installment contracts finance leases aviation 1 million december 31 2011 installment contracts generally require customer pay significant payment along periodic scheduled principal payments reduce outstanding balance term loan finance leases significant residual value end contractual term classified installment contracts legal economic substance equivalent secured borrowing finance lease significant residual value golf equipment primarily includes finance leases provided purchasers new ezgo jacobsen golf turfcare equipment golf mortgage primarily includes golf course mortgages also includes mortgages secured hotels marinas mortgages product line secured real property generally limited 75 less property’s appraised market value loan origination mortgages typically initial terms ranging five ten years amortization periods 20 30 years december 31 2011 loans golf mortgage average balance 6 million weightedaverage contractual maturity three years loans portfolio classified held sale december 31 2011 timeshare includes pools timeshare interval resort notes receivable revolving loans secured pools timeshare interval resort notes receivable timeshare interval notes receivable typically terms 10 20 years timeshare also includes constructioninventory mortgages secured timeshare interval inventory real property many instances personal guarantee principals constructioninventory mortgages typically crosscollateralized revolving notes receivable loans borrower loans portfolio typically initial revolving terms one three years final maturity terms additional one five years structured capital primarily includes leveraged leases secured ownership leased equipment real property finance receivables diversified across geographic region borrower industry type collateral december 31 2011 54 finance receivables distributed throughout us compared 67 end 2010 finance receivables held investment composed following types financing vehicles december 31 2011 january 1 2011 finance receivables included approximately 559 million 635 million respectively receivables legally sold special purpose entities spe consolidated subsidiaries tfc assets spes pledged collateral debt reflected securitized onbalance sheet debt note 8 thirdparty investors legal recourse tfc beyond credit enhancement provided assets spes received total proceeds 476 million 655 million sale finance receivables 2011 2010 respectively resulting total gains 4 million 31 million respectively credit quality indicators nonaccrual finance receivables internally assess quality finance receivables held investment portfolio based number key credit quality indicators statistics delinquency loan balance estimated collateral value liquidity position individual borrowers guarantors default rates notes receivable collateral timeshare product line golf mortgage also utilized debt service coverage prior transfer discussed many indicators difficult apply across entire class receivables evaluate individual loans quarterly basis classify loans three categories based key credit quality indicators individual loan three categories performing watchlist nonaccrual classify finance receivables held investment nonaccrual credit quality indicators suggest full collection doubtful addition automatically classify accounts nonaccrual contractually delinquent three months unless collection doubtful cash payments nonaccrual accounts including finance charges generally applied reduce net investment balance resume accrual interest loan becomes contractually current payment according original terms loan modified following period performance terms modification provided conclude collection principal interest longer doubtful previously suspended interest income recognized time accounts classified watchlist credit quality indicators deteriorated compared typical underwriting criteria believe collection full principal interest probable certain finance receivables held investment meet watchlist nonaccrual categories classified performing summary finance receivables held investment categorized based credit quality indicators discussed follows nonaccrual finance receivables decreased 529 million 2011 primarily due transfer remaining golf mortgage portfolio held sale classification 215 million reduction timeshare largely due resolution several significant accounts cash collections several accounts factors also primary reason improvement contractual delinquencies reported measure delinquency based contractual payment terms loans leases determining delinquency aging category account anyall principal interest received applied pastdue principal andor interest amounts due significant portion contractually due payment delinquent entire finance receivable balance reported accordance pastdue delinquency aging category finance receivables held investment delinquency aging category summarized table recorded investment accrual status loans greater 90 days past due 2011 2010 year ended december 31 2011 january 1 2011 60 days contractual delinquency percentage finance receivables held investment 670 977 respectively impaired loans evaluate individual finance receivables held investment nonhomogeneous portfolios larger accounts homogeneous loan portfolios impairment quarterly basis finance receivables classified held sale reflected lower cost fair value excluded evaluations finance receivable considered impaired probable unable collect amounts due according contractual terms loan agreement based review credit quality indicators discussed impaired finance receivables include nonaccrual accounts full collection principal interest remains probable account’s original terms expected significantly modified modification specifies interest rate equal greater market rate finance receivable comparable risk account considered impaired years subsequent modification significant interest income recognized impaired loans either 2011 2010 summary impaired finance receivables excluding leveraged leases year end average recorded investment year provided loan modifications troubled debt restructurings occur either modified contract terms finance receivables held investment borrowers experiencing financial difficulties accepted transfer assets full partial satisfaction loan balance modifications often arise golf mortgage timeshare result lack financing available borrowers industries golf mortgage loans typically structured amortization periods 20 30 years contractual maturities 5 10 years resulting significant balloon payment modify significant portion loans near maturity date result structure types modifications typically make include extensions original maturity date contract extensions revolving borrowing periods delays timing required principal payments deferrals interest payments advances protect value collateral principal reductions contingent full repayment prior maturity date finance receivables held investment modified 2011 categorized troubled debt restructurings excluding related allowances loan losses summarized december 31 2011 recorded investment balance golf mortgage reflects transfer finance receivables held investment held sale classification modifications included resulted reduction provision losses 36 million due reversal allowance losses related one significant timeshare account partially offset net portfolio losses 15 million modified finance receivables classified impaired loans evaluated individual basis determine whether reserves required reserve evaluation includes estimate likelihood borrower able perform contractual terms modification subsequent payment defaults delinquency trends finance receivables modified troubled debt restructurings also factored evaluation impaired loans reserving purposes default decreases likelihood borrower able perform terms future modifications 2011 three customer defaults timeshare finance receivables modified troubled debt restructurings within previous twelve months recorded investment customers totaled 113 million excluding related allowances doubtful accounts end 2011 may foreclose repossess receive collateral customer longer ability make payment transfers assets full partial satisfaction loan balance also considered troubled debt restructurings fair value assets transferred less recorded investment similar troubled debt restructurings described loans typically classified impaired loans prior asset transfer therefore reserves already established related loan result 2011 chargeoffs 73 million upon transfer assets largely offset previously established reserves troubled debt restructurings resulting transfers assets satisfaction loan balance occurred 2011 follows allowance losses rollforward allowance losses finance receivables held investment provided summary allowance losses finance receivables evaluated individual collective basis provided finance receivables reported table specifically exclude 208 million 279 million leveraged leases december 31 2011 january 1 2011 respectively accordance authoritative accounting standards captive intercompany financing finance group provides financing retail purchases leases new used aircraft equipment manufactured manufacturing group captive finance receivables inventory sales included finance group’s balance sheets summarized 2011 2010 2009 finance group paid manufacturing group 284 million 416 million 654 million respectively related sale textronmanufactured products third parties financed finance group cessna industrial segments also received proceeds years 2 million 10 million 13 million respectively sale equipment manufacturing operations finance group use operating lease agreements operating agreements specify finance group recourse manufacturing group certain uncollected amounts related transactions december 31 2011 january 1 2011 amounts guaranteed manufacturing group totaled 88 million 69 million respectively manufacturing group established reserves losses balance sheet within accrued liabilities receivables guarantees 2009 textron inc agreed lend tfc funds pay maturing debt interest rate borrowing 5 december 31 2011 7 january 1 2011 december 31 2011 january 1 2011 outstanding balance due textron inc borrowings 490 million 315 million respectively amounts included current assets manufacturing group liabilities finance group consolidated balance sheets finance receivables held sale end 2011 2010 approximately 418 million 413 million finance receivables classified held sale december 31 2011 finance receivables held sale primarily include entire golf mortgage portfolio portion timeshare portfolio periodic basis evaluate liquidation strategy noncaptive finance portfolios continue execute exit plan connection evaluation also review definition foreseeable future due relative stability golf market end 2011 believe foreseeable future extended period one two years opposed six ninemonth period previously used based change fourth quarter 2011 determined longer intent hold remaining golf mortgage portfolio investment foreseeable future accordingly transferred 458 million remaining golf mortgage finance receivables net 80 million allowance loan losses held investment classification held sale classification finance receivables recorded fair value time transfer resulting 186 million charge recorded valuation allowance transfer golf mortgage portfolio held sale also 2011 transferred total 125 million timeshare finance receivables held sale classification based agreement sell portion portfolio sold fourth quarter 2011 interest portions portfolio 2010 transferred 219 million timeshare finance receivables held sale classification result unanticipated inquiry received purchase finance receivables determined sale finance receivables would consistent goal maximize economic value portfolio accelerate cash collections received proceeds 383 million 582 million 2011 2010 respectively sale finance receivables held sale 10 million 86 million respectively collections note 5 inventories composed following inventories valued lifo method totaled 10 billion 13 billion end 2011 2010 respectively carrying values inventories would approximately 422 million 441 million respectively higher lifo inventories valued current costs inventories related longterm contracts net progressmilestone payments 414 million 322 million end 2011 2010 respectively note 6 property plant equipment net manufacturing group’s property plant equipment net composed following assets capital leases totaled 251 million 248 million accumulated amortization 47 million 40 million end 2011 2010 respectively manufacturing group’s depreciation expense includes amortization expense capital leases totaled 317 million 308 million 317 million 2011 2010 2009 respectively note 7 accrued liabilities accrued liabilities manufacturing group summarized changes warranty product maintenance contract liability follows adjustments include changes prior year estimates new issues prior year sales currency translation adjustments note 8 debt credit facilities debt credit facilities summarized variablerate notes totaled approximately 100 million 271 million december 31 2011 january 1 2011 respectively 2011 textron inc entered senior unsecured revolving credit facility expires march 2015 aggregate principal amount 10 billion 200 million available issuance letters credit december 31 2011 amounts borrowed facility 38 million letters credits issued october 2011 finance group repaid outstanding balance credit facility elected terminate facility following table shows required payments next five years debt outstanding december 31 2011 convertible senior notes related transactions may 5 2009 issued 600 million convertible senior notes maturity date may 1 2013 interest payable semiannually convertible notes accounted accordance generally accepted accounting principles require us separately account liability debt equity conversion option components convertible notes manner reflected nonconvertible debt borrowing rate time issuance accordingly recorded debt discount corresponding increase additional paidin capital 134 million issuance date amortizing debt discount utilizing effective interest method life notes increases effective interest rate convertible notes coupon rate 450 1172 notes convertible holder’s option certain circumstances shares common stock initial conversion rate 761905 shares common stock per 1000 principal amount convertible notes equivalent initial conversion price approximately 13125 per share upon conversion right settle conversion 1000 principal amount convertible notes three following alternatives 1 cash 2 shares common stock 3 combination cash shares common stock notes convertible following circumstances 1 calendar quarter last reported sale price common stock least 20 trading days 30 consecutive trading days ending last trading day preceding calendar quarter 130 applicable conversion price per share common stock last trading day preceding calendar quarter 2 fivebusinessday period 10 consecutive trading day measurement period trading price per 1000 principal amount convertible notes day measurement period less 98 product last reported sale price common stock applicable conversion rate 3 specified distributions holders common stock made specified corporate transactions occur 4 time february 19 2013 september 2011 announced cash tender offer outstanding convertible notes accordance terms tender offer 1000 principal amount convertible notes tendered paid holder 1524 plus accrued unpaid interest october 13 2011 settlement date aggregate holders validly tendered 225 million principal amount 375 convertible notes subsequent tender offer also purchased 151 million principal amount convertible notes small number privately negotiated transactions retired another 8 million related holderinitiated conversion fourth quarter 2011 end 2011 paid approximately 580 million cash related transactions reduced principal amount convertible notes 64 accordance applicable authoritative accounting guidance determined fair value liability component convertible notes purchased tender offer subsequent transactions 398 million balance 182 million representing equity component carrying value convertible notes including unamortized issuance costs 343 million resulted pretax loss 55 million recorded losses gains net fourth quarter 2011 along 182 million reduction shareholders’ equity incurred cash noncash interest expense 58 million 2011 60 million 2010 notes end 2011 2010 face value notes totaled 216 million 600 million respectively unamortized discount totaled 21 million 96 million respectively based december 31 2011 stock price 1849 “if converted value” exceeded face amount notes 88 million however giving effect exercise call options warrants described incremental cash share settlement excess face amount would result either cash payment 45 million 24 million net share issuance combination cash stock option common stock price exceeded conversion threshold price 1706 per share least 20 trading days 30 consecutive trading days ended december 31 2011 accordingly notes convertible holder’s option march 31 2012 may deliver cash shares common stock combination cash shares common stock satisfaction obligations upon conversion convertible notes intend settle face value convertible notes cash continued classify convertible notes long term based intent ability maintain debt outstanding least one year use various funding sources available us call option warrant transactions concurrently pricing convertible notes may 2009 entered transactions two counterparties including underwriter affiliate underwriter convertible notes pursuant purchased counterparties call options acquire common stock sold counterparties warrants purchase common stock entered transactions purposes reducing cash outflow andor potential dilutive effect shareholders upon conversion convertible notes october 25 2011 entered separate agreements counterparties call option warrant transactions adjust number shares common stock covered instruments reflect results tender offer accordingly reduced number common shares covered call options 457 million shares 286 million shares addition warrants amended reduce number shares covered warrants 280 million change expiration dates specified original agreement correspond final settlement period call options pursuant amendments received 135 million call option transaction paid 133 million warrant transaction net amount recorded within shareholders’ equity subsequently due additional repurchase convertible notes entered separate agreements counterparties reduce number shares common stock covered instruments accordingly reduced number common shares covered call options 286 million shares 165 million shares reduced number shares covered warrants 280 million shares 165 million shares net value 20 million related amendments used increase capped call position discussed aggregate reductions number shares subject call options warrants equated number shares common stock 384 million principal amount notes repurchased fourth quarter 2011 would convertible end 2011 outstanding purchased call options give us right acquire counterparties 165 million shares common stock number shares remaining notes convertible exercise price 13125 per share initial conversion price notes subject adjustments mirror terms convertible notes call options terminate earlier maturity date related convertible notes last day related notes remain outstanding warrants give counterparties right acquire subject antidilution adjustments aggregate 165 million shares common stock exercise price 1575 per share may settle transactions cash shares combination cash shares option evaluated aggregate call options warrants effect increasing effective conversion price convertible notes 13125 1575 accordingly incur cash outflow dilution would experienced due increase share price 13125 per share 1575 per share entitled receive counterparties difference sale counterparties 165 million shares 1575 per share purchase shares counterparties 13125 per share based structure call options warrants contracts meet applicable accounting criteria equity classification applicable accounting standards classified shareholders’ equity consolidated balance sheet addition since contracts classified shareholders’ equity indexed common stock accounted derivatives accordingly recognize changes fair value capped call transactions october 25 2011 entered capped call transactions counterparties cost 32 million covered 171 million shares common stock subsequently amended capped call transactions cover additional 115 million shares common stock lieu 20 million would received counterparties related amendment option warrant transactions discussed december 31 2011 capped calls covered aggregate 286 million shares common stock number shares repurchased notes would convertible purchased capped calls order retain potential value original call option warrant transactions would otherwise given upon downsizing instruments capped calls strike price 13125 per share cap price 1575 per share entitles us receive may 2013 expiration date per share value stock price excess 13125 maximum stock price 1575 market price common stock expiration date less 13125 capped call expire value maximum value capped calls event stock price least 1575 expiration date approximately 75 million may elect settlement capped call transactions paid us shares common stock cash combination cash shares common stock based structure capped call transactions meet applicable accounting criteria equity classification classified within shareholders’ equity 6 fixedtofloating rate junior subordinated notes finance group’s 300 million 6 fixedtofloating rate junior subordinated notes unsecured rank junior existing future senior debt notes mature february 15 2067 however right redeem notes par february 15 2017 obligated redeem notes beginning february 15 2042 finance group agreed replacement capital covenant redeem notes february 15 2047 unless receives capital contribution manufacturing group andor net proceeds sale certain replacement capital securities specified amounts interest notes fixed 6 february 15 2017 floats threemonth london interbank offered rate 1735 thereafter support agreement support agreement textron inc required ensure tfc maintains fixed charge coverage less 125 consolidated shareholder’s equity less 200 million 2011 2010 2009 cash payments 182 million 383 million 270 million respectively paid tfc maintain compliance fixed charge coverage ratio addition paid 240 million january 17 2012 note 9 derivative instruments fair value measurements measure fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date prioritize assumptions market participants would use pricing asset liability threetier fair value hierarchy fair value hierarchy gives highest priority level 1 quoted prices active markets identical assets liabilities lowest priority level 3 unobservable inputs little market data exist requiring companies develop assumptions observable inputs meet criteria level 1 include quoted prices similar assets liabilities active markets quoted prices identical assets liabilities markets active categorized level 2 level 3 inputs reflect estimates assumptions market participants would use pricing asset liability based best information available circumstances valuation techniques assets liabilities measured using level 3 inputs may include methodologies market approach income approach cost approach may use unobservable inputs projections estimates management’s interpretation current market data unobservable inputs utilized extent observable inputs available costeffective obtain assets liabilities recorded fair value recurring basis assets liabilities recorded fair value recurring basis consist primarily derivative financial instruments categorized level 2 fair value hierarchy fair value amounts instruments designated hedging instruments provided interest rate exchange contracts represent fair value hedges finance group’s interest rate exchange contracts exchange traded measured fair value utilizing widely accepted thirdparty developed valuation models actual terms individual contract entered valuation model along interest rate foreign exchange rate data based readily observable market data published thirdparty leading financial news data providers credit risk factored fair value assets liabilities based differential credit default swap spread liabilities counterparty’s credit default swap spread assets compared standard aarated counterparty however significant impact valuation december 31 2011 december 31 2011 january 1 2011 interest rate exchange contracts notional amounts upon contracts based 08 billion 11 billion respectively foreign currency exchange contracts measured fair value using market method valuation technique inputs technique utilize current foreign currency exchange forward market rates published thirdparty leading financial news data providers observable data represent rates financial institution uses contracts entered date however based actual transactions classified level 2 december 31 2011 january 1 2011 foreign currency exchange contracts notional amounts upon contracts based 645 million 635 million respectively finance group also investments marketable securities totaling 21 million 51 million december 31 2011 january 1 2011 respectively classified available sale investments classified level 2 fair value notes determined based observable market inputs similar securitization interests markets relatively inactive compared market environment originally issued fair value hedges finance group enters interest rate exchange contracts mitigate exposure changes fair value fixedrate receivables debt due fluctuations interest rates using contracts able convert fixedrate cash flows floatingrate cash flows amount ineffectiveness fair value hedges gain loss recorded consolidated statements operations insignificant 2011 2010 cash flow hedges manufacture sell products number countries throughout world therefore exposed movements foreign currency exchange rates primary purpose foreign currency hedging activities manage volatility associated foreign currency purchases materials foreign currency sales products assets liabilities normal course business primarily utilize forward exchange contracts purchased options maturities three years qualify cash flow hedges intended offset effect exchange rate fluctuations forecasted sales inventory purchases overhead expenses december 31 2011 net deferred gain 8 million accumulated comprehensive loss related cash flow hedges net gains losses recognized earnings accumulated comprehensive loss cash flow hedges including gains losses related hedge ineffectiveness material 2011 2010 expect amount gains losses accumulated comprehensive loss reclassified earnings next twelve months material hedge net investment position major currencies generate foreign currency interest payments offset transactional exposures currencies accomplish borrow directly foreign currency designate portion foreign currency debt hedge net investments also may utilize currency forwards hedges related foreign net investments record changes fair value contracts comprehensive income extent effective cash flow hedges contract qualify hedge accounting designated fair value hedge changes fair value contract recorded earnings currency effects effective portion hedges reflected foreign currency translation adjustment account within oci produced 4 million aftertax gain 2011 resulting accumulated net gain balance 18 million december 31 2011 ineffective portion hedges insignificant counterparty credit risk exposure loss nonperformance counterparties derivative agreements end 2011 minimal anticipate nonperformance counterparties periodic settlements amounts due historically minimized potential risk entering contracts exclusively major financially sound counterparties less longterm bond rating credit risk generally limited amount counterparties’ contractual obligations exceed obligations counterparty continuously monitor exposures ensure limit risks assets recorded fair value nonrecurring basis table presents assets measured fair value nonrecurring basis fair value measurement adjustments 2011 2010 assets measured using significant unobservable inputs level 3 include following impaired finance receivables impaired nonaccrual finance receivables included table since measurement required reserves impaired finance receivables significantly dependent fair value underlying collateral fair values collateral determined based use appraisals industry pricing guides input market participants recent experience selling similar assets internally developed discounted cash flow models fair value measurements recorded impaired finance receivables resulted charges provision loan losses primarily related initial fair value adjustments finance receivables held sale finance receivables held sale recorded fair value nonrecurring basis periods fair value lower cost value result plan exit noncaptive finance business certain finance receivables classified held sale december 31 2011 finance receivables held sale include entire golf mortgage portfolio majority transferred finance receivables held sale classification fourth quarter 2011 portion timeshare portfolio due transfer finance receivables recorded fair value resulting 186 million charge recorded valuation allowance transfer golf mortgage portfolio held sale active quoted market prices finance receivables estimate fair value determined based use discounted cash flow models estimate exit price expect receive principal market type loan orderly transaction includes sale pools similar assets sale individual loans models used incorporate estimates rate return financing cost capital structure andor discount rate expectations current market participants combined estimated loan cash flows based credit losses payment rates credit line utilization rates available assumptions related expectations current market participants compared observable market inputs including bids prospective purchasers similar loans certain bond market indices loans perceived similar credit quality although utilize prioritize market observable inputs discounted cash flow models inputs typically derived markets directly comparable loan structures industries collateral types therefore valuations finance receivables held sale involve significant management judgment result differences fair value estimates market participants assets include repossessed assets properties operating assets received satisfaction troubled finance receivables investments accounted equity method accounting active quoted market prices fair value assets determined based use appraisals industry pricing guides input market participants recent experience selling similar assets internally developed discounted cash flow models investments discounted cash flow models incorporate assumptions specific nature investments’ business underlying assets include industry valuation benchmarks discount rates capitalization rates cash flow multiples intangible assets fourth quarter 2011 determined indicator potential asset impairment textron systems segment textron systems sells many products us government business environment continues shaped policy budget decisions determined us government recent actions president congress indicate ongoing emphasis federal budget deficit reduction budget decisions president congress may considerably reduce discretionary spending defense constitutes significant share based continued deterioration environment results annual operating plan review included updated longrange forecast estimates loss certain contracts determined indicator potential asset impairment existed fourth quarter requiring us perform impairment tests based analysis determined certain intangible assets impaired recorded 41 million pretax impairment charge write intangible assets primarily related customer agreements contractual relationships associated aailogistics technical services aaitest training businesses determined fair value assets using discounted cash flows related asset group weightedaverage cost capital approximately 10 impairment charge recorded cost sales within segment profit assets liabilities recorded fair value carrying value estimated fair values financial instruments reflected financial statements fair value follows fair value manufacturing group debt determined using market observable data similar transactions december 31 2011 january 1 2011 approximately 53 33 respectively fair value term debt finance group determined based observable market transactions remaining finance group debt determined based discounted cash flow analyses using observable market inputs debt similar duration subordination credit default expectations utilize valuation methodologies determine fair value estimates finance receivables held investment used finance receivables held sale note 10 shareholders’ equity capital stock authorization 15 million shares preferred stock par value 001 500 million shares common stock par value 0125 outstanding common stock activity three years ended december 31 2011 presented reserved shares common stock end 2011 common stock reserved conversion convertible notes exercise outstanding stock options warrants issuance shares upon vesting outstanding restricted stock units totaled 62 million shares see “convertible senior notes related transactions” section note 8 information convertible debt income per common share calculate basic diluted earnings per share eps based net income approximates income available common shareholders period basic eps calculated using twoclass method includes weightedaverage number common shares outstanding period restricted stock units paid stock deemed participating securities provide nonforfeitable rights dividends diluted eps considers dilutive effect potential future common stock including stock options restricted stock units shares could issued upon conversion convertible notes discussed upon exercise related warrants convertible note call options purchased connection issuance convertible notes excluded calculation diluted eps impact always antidilutive upon conversion convertible notes described note 8 principal amount would settled cash excess conversion value defined principal amount may settled cash andor shares common stock therefore shares common stock potentially issuable respect excess notes’ conversion value principal amount considered dilutive potential common shares purposes calculating diluted eps weightedaverage shares outstanding basic diluted eps follows 2011 2010 stock options purchase 5 million 7 million shares respectively common stock outstanding excluded calculation diluted weightedaverage shares outstanding exercise prices greater average market price common stock periods securities could potentially dilute eps future 2009 potential dilutive effect 8 million weightedaverage shares stock options restricted stock units shares could issued upon conversion convertible notes upon exercise related warrants excluded computation diluted weightedaverage shares outstanding shares would antidilutive effect loss continuing operations comprehensive income loss aftertax components comprehensive income loss presented components accumulated comprehensive loss note 11 special charges amounts recorded within special charges 2011 2010 2009 special charges included restructuring charges related global restructuring program totaled 99 million 237 million respectively fourth quarter 2008 initiated restructuring program reduce overhead costs improve productivity across company announced exit portions commercial finance business restructuring program primarily included corporate segment direct indirect workforce reductions closure consolidation certain operations completion program end 2010 terminated approximately 12100 positions worldwide representing approximately 28 global workforce since inception program exited 30 leased owned facilities plants total program cost 400 million record restructuring costs special charges costs generally nonrecurring nature included segment profit measure used evaluating performance decisionmaking purposes third quarter 2010 substantially liquidated assets held canadian entity within finance segment accordingly recorded noncash charge 91 million 74 million aftertax within special charges reclassify entity’s cumulative currency translation adjustment amount within comprehensive income statement operations reclassification amount impact shareholders’ equity fourth quarter 2009 recorded goodwill impairment charge 80 million connection annual goodwill impairment test golf turf care reporting unit part industrial segment special charges segment 2010 2009 follows analysis restructuring reserve activity summarized note 12 sharebased compensation 2007 longterm incentive plan supersedes 1999 longterm incentive plan authorizes awards key employees form options purchase shares restricted stock restricted stock units stock appreciation rights performance stock awards maximum 12 million shares authorized issuance purposes plan plus shares become available upon cancellation forfeiture expiration awards granted 1999 longterm incentive plan 12 million shares may awarded pursuant incentive stock options 3 million shares may awarded pursuant restricted stock units awards intended paid shares plan also authorizes performance share units paid cash based upon value common stock deferred income plan textron executives dip provide schedule participants opportunity voluntarily defer 25 base salary 80 annual longterm incentive compensation elective deferrals may put either stock unit account interest bearing account generally contribute 10 premium amounts deferred stock unit account executives eligible participate dip achieved andor maintained required minimum stock ownership level required defer part subsequent longterm incentive compensation cash payout dip stock unit account ownership requirements satisfied deferrals entitled 10 premium contribution amount deferred participants cannot move amounts two accounts actively employed us cannot receive distributions termination employment sharebased compensation costs reflected primarily selling administrative expenses compensation expense recorded net income sharebased compensation plans follows compensation expense includes approximately 17 million 7 million 9 million 2011 2010 2009 respectively representing attribution fair value options issued portion previously granted options requisite service rendered stock options purchase shares maximum term 10 years generally vest ratably threeyear period stock option compensation cost calculated fair value approach recognized vesting period stock options weightedaverage fair value options granted per share 10 7 2 2011 2010 2009 respectively estimate fair value options granted date grant using blackscholes optionpricing model expected volatilities based implied volatilities traded options common stock historical volatilities factors use historical data estimate option exercise behavior adjusted reflect anticipated increases expected life 2010 executed onetime stock option exchange program provided eligible employees executive officers opportunity exchange certain outstanding stock options exercise prices substantially current market price common stock lesser number stock options exercise price set current market value fair value approximately 15 lower fair value “out money” options replaced result program 26 million outstanding eligible stock options exchanged 10 million new options exercise price 2076 new options vested july 30 2011 later original vesting date eligible stock option exchanged new options treated modification accounting guidance equitybased compensation accordingly since discounted fair value new options 15 fair value options exchanged incur incremental expense associated modification weightedaverage assumptions used blackscholes optionpricing model awards issued respective periods follows stock option activity plan 2011 provided december 31 2011 outstanding options aggregate intrinsic value 8 million weightedaverage remaining contractual life six years exercisable options aggregate intrinsic value 5 million weightedaverage remaining contractual life three years december 31 2011 restricted stock units restricted stock unit awards generally payable shares common stock vesting onethird third fourth fifth year following year grant first quarter 2009 began issuing restricted stock units settled cash vesting equal installments five years 2011 issued restricted stock units settled cash stock vesting equal installments five years since 2008 restricted stock units issued right receive dividend equivalents restricted stock units paid stock issued prior 2008 fair value based trading price common stock grant date less required adjustments reflect fair value awards dividends paid accrued units restricted stock units vest restricted stock units paid cash stock issued 2008 later fair value units based solely trading price common stock grant date 2011 activity restricted stock units provided performance share units fair value sharebased compensation awards accounted liabilities includes performance share units typically paid cash first quarter year following vesting payouts performance share units vary based certain performance criteria generally measured threeyear period performance share units vest end three years fair value awards based trading price common stock less adjustments reflect fair value certain awards dividends paid accrued vested remeasured reporting period date 2011 activity performance share units follows sharebased compensation awards value sharebased compensation awards vested andor paid respective periods follows compensation cost awards subject service conditions vest ratably recognized straightline basis requisite service period separately vesting portion award december 31 2011 recognized 45 million total compensation costs associated unvested awards subject service conditions expect recognize compensation expense awards weightedaverage period approximately 22 years note 13 retirement plans defined benefit defined contribution plans cover substantially employees significant number usbased employees participate textron retirement plan designed “flooroffset” arrangement defined benefit component defined contribution component defined benefit component arrangement includes textron master retirement plan tmrp bell helicopter textron master retirement plan bhtmrp defined contribution component retirement account plan rap defined benefit component provides minimum guaranteed benefit “floor” benefit rap participants eligible receive contributions textron 2 eligible compensation may make contributions plan upon retirement participants receive greater floor benefit value rap tmrp bhtmrp subject provisions employee retirement income security act 1974 erisa effective january 1 2010 textron retirement plan closed new participants employees hired date receive additional 4 annual cash contribution textron savings plan account based eligible compensation also domestic foreign funded unfunded defined benefit pension plans cover certain us foreign employees addition several defined contribution plans sponsored various businesses largest plan textron savings plan qualified 401k plan subject erisa significant number usbased employees participate defined contribution plans cost approximately 85 million 88 million 90 million 2011 2010 2009 respectively amounts include 23 million 25 million 28 million respectively contributions rap also provide postretirement benefits pensions certain retired employees us include healthcare dental care medicare part b reimbursement life insurance benefits periodic benefit cost components net periodic benefit cost amounts recognized oci follows estimated amount amortized accumulated comprehensive loss net periodic pension costs 2012 follows obligations funded status plans measured fiscal yearend changes projected benefit obligation fair value plan assets along funded status follows amounts recognized balance sheets follows accumulated benefit obligation defined benefit pension plans 60 billion 55 billion december 31 2011 january 1 2011 respectively includes 360 million 334 million respectively accumulated benefit obligations unfunded plans funding permitted foreign environments funding feasible pension plans accumulated benefit obligations exceeding fair value plan assets follows assumptions weightedaverage assumptions use pension postretirement plans follows assumed healthcare cost trend rates follows assumed healthcare cost trend rates significant effect amounts reported postretirement benefits pensions onepercentagepoint change assumed healthcare cost trend rates would following effects pension assets expected longterm rate return plan assets determined based variety considerations including established asset allocation targets expectations asset classes historical returns plans’ assets market considerations invest pension assets objective achieving total rate return long term sufficient fund future pension obligations minimize future pension contributions willing tolerate commensurate level risk achieve objective based funded status plans longterm nature pension liability risk controlled maintaining portfolio assets diversified across variety asset classes investment styles investment managers assets managed external investment managers majority assets actively managed possible investment managers prohibited owning stock portfolios manage behalf us plan assets represent majority plan assets asset allocation target ranges established consistent investment objectives assets rebalanced periodically foreign plan assets allocations based expected cash flow needs assessments local practices markets target allocation ranges follows fair value total pension plan assets major category level fair value hierarchy defined note 9 follows cash equivalents equity debt securities include comingled funds represent investments funds offered institutional investors similar mutual funds provide diversification holding various equity debt securities since comingled funds quoted active market priced based relative value underlying equity debt investments individual prices given time accordingly classified level 2 debt securities valued based day actual trading prices available prices available use matrix pricing model historical prices trends factors private equity partnerships represent investments funds turn invest stocks debt securities companies cases publicly traded partnerships valued using income market methods include cash flow projections market multiples various comparable companies real estate includes owned properties investments partnerships owned properties valued using certified appraisals least every three years updated least annually real estate investment manager considers current market trends available information appraisals generally use standard methods valuing real estate including forecasting income identifying current transactions comparable real estate arrive fair value real estate partnerships valued similar private equity partnerships general partner using standard real estate valuation methods value real estate properties securities held within fund portfolios believe assumptions consistent assumptions market participants would use valuing investments hedge funds represent investment diversified fund hedge funds sole investor fund invests portfolio funds publicly traded managed various portfolio managers investments portfolio funds typically valued basis recent price valuation provided relevant fund’s administrator fund aggregates valuations assets liabilities calculate net asset value fund table presents reconciliation beginning ending balances fair value measurements use significant unobservable inputs level 3 major category estimated future cash flow impact defined benefits salaried plans based salary years service hourly plans generally provide benefits based stated amounts year service funding policy consistent applicable laws regulations 2012 expect contribute approximately 175 million fund qualified pension plans nonqualified plans foreign plans additionally expect contribute 25 million rap expect contribute postretirement benefit plans benefit payments provided reflect expected future employee service appropriate expected paid net estimated participant contributions include medicare part subsidy expect receive payments based assumptions used measure benefit obligation end fiscal 2011 pension benefit payments primarily paid qualified pension trusts pay postretirement benefits pensions general corporate assets benefit payments expect pay follows note 14 income taxes conduct business globally result file numerous consolidated separate income tax returns within outside us subsidiaries file consolidated federal income tax return income loss continuing operations income taxes follows income tax expense benefit continuing operations summarized follows current federal state provisions 2011 2009 include 37 million 85 million respectively tax related sale certain leverage leases finance segment previously recorded significant deferred tax liabilities substantial portion 85 million paid 2010 following table reconciles federal statutory income tax rate effective income tax rate continuing operations amount income taxes pay subject ongoing audits us federal state nonus tax authorities may result proposed assessments estimate potential outcome uncertain tax issue highly judgmental assess income tax positions record tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting date tax positions likely tax benefit sustained record largest amount tax benefit greater 50 likelihood realized upon settlement taxing authority full knowledge relevant information interest penalties accrued applicable believe likely tax benefit sustained tax benefit recognized future results may include favorable unfavorable adjustments estimated tax liabilities due settlement income tax examinations new regulatory judicial pronouncements expiration statutes limitations relevant events result effective tax rate may fluctuate significantly quarterly annual basis unrecognized tax benefits represent tax positions reserves established unrecognized state tax benefits interest related unrecognized tax benefits reflected net applicable tax benefits reconciliation unrecognized tax benefits excluding accrued interest follows december 31 2011 january 1 2011 approximately 206 million 197 million respectively unrecognized tax benefits recognized would favorably affect effective tax rate future period remaining 88 million unrecognized tax benefits related discontinued operations unrecognized tax benefits reduced 2011 2010 primarily related favorable tax audit resolutions based outcome appeals proceedings expiration statutes limitations possible certain audit cycles us foreign jurisdictions could completed next 12 months could result change balance unrecognized tax benefits aggregate tax effect differences tax return positions benefits recognized financial statements although outcome matters cannot determined believe adequate provision made potential unfavorable financial statement impact normal course business subject examination taxing authorities throughout world including major jurisdictions belgium canada germany japan us exceptions longer subject us federal state local income tax examinations years 1997 longer subject nonus income tax examinations major jurisdictions years 2005 2011 2010 2009 recognized net taxrelated interest expense totaling approximately 10 million 19 million 12 million respectively consolidated statements operations december 31 2011 january 1 2011 total 132 million 122 million respectively net accrued interest expense included consolidated balance sheets tax effects temporary differences give rise significant portions net deferred tax assets liabilities follows accrued expenses includes warranty product maintenance reserves selfinsured liabilities interest restructuring reserves believe earnings periods temporary differences become deductible sufficient realize related future income tax benefits jurisdictions expiration date tax carryforwards projected operating results indicate realization likely valuation allowance provided following table presents breakdown current longterm net deferred tax assets net operating loss credit carryforwards december 31 2011 follows undistributed earnings nonus subsidiaries approximated 470 million december 31 2011 consider undistributed earnings indefinitely reinvested therefore provided deferred tax liability residual us tax may due upon repatriation earnings effect us foreign tax credits practicable estimate amount tax might payable earnings event longer indefinitely reinvested note 15 contingencies commitments subject legal proceedings claims arising conduct business including proceedings claims relating commercial financial transactions government contracts compliance applicable laws regulations production partners product liability employment environmental safety health matters legal proceedings claims seek damages fines penalties substantial amounts remediation environmental contamination government contractor subject audits reviews investigations determine whether operations conducted accordance applicable regulatory requirements federal government procurement regulations certain claims brought us government could result suspended debarred us government contracting period time basis information presently available believe existing proceedings claims material effect financial position results operations february 7 2012 lawsuit filed united states bankruptcy court northern district ohio eastern division akron brian bash chapter 7 trustee fair finance company tfc fortress credit corp fair facility llc tfc provided revolving line credit 175 million fair finance company 2002 2007 complaint alleges numerous counts tfc fair finance company’s working capital lender including receipt fraudulent transfers assisting fraud perpetrated fair finance investors trustee seeks avoidance recovery alleged fraudulent transfers amount 316 million well damages 223 million claims trustee also seeks trebled damages claims ohio law action filed recently therefore still process reviewing complaint assessing claims intend vigorously defend lawsuit estimate range possible loss cannot made time due early stage litigation ordinary course business enter standby letter credit agreements surety bonds financial institutions meet various performance obligations outstanding letter credit arrangements surety bonds aggregated approximately 260 million 325 million end 2011 2010 respectively environmental remediation industrial enterprises engaged similar businesses involved number remedial actions various federal state laws regulations relating environment impose liability companies clean contribute cost cleaning sites hazardous wastes materials disposed released accrued environmental liabilities relate installation remediation systems disposal costs us environmental protection agency oversight costs legal fees operating maintenance costs currently formerly owned operated facilities circumstances affect reliability precision accruals include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur believe changes accruals may result factors uncertainties material effect financial position results operations based upon information currently available estimate potential environmental liabilities within range 48 million 192 million december 31 2011 environmental reserves approximately 79 million established address specific estimated liabilities estimate likely pay accrued environmental remediation liabilities next five 10 years classified 25 million current liabilities expenditures evaluate remediate contaminated sites approximated 9 million 10 million 11 million 2011 2010 2009 respectively leases rental expense approximated 93 million 2011 92 million 2010 100 million 2009 future minimum rental commitments noncancelable operating leases effect december 31 2011 approximated 58 million 2012 46 million 2013 38 million 2014 31 million 2015 27 million 2016 total 138 million thereafter note 16 supplemental cash flow information made following cash payments cash paid interest finance group includes amounts paid manufacturing group 26 million 32 million 3 million 2011 2010 2009 respectively 2010 taxes paid net refunds received finance group includes 103 million taxes paid primarily attributable settlement related challenge tax deductions took prior years certain leverage lease transactions note 17 segment geographic data operate report financial information following five business segments cessna bell textron systems industrial finance accounting policies segments described note 1 cessna products include citation business jets caravan singleengine turboprops singleengine piston aircraft aftermarket services sold diverse base corporate individual buyers bell products include military commercial helicopters tiltrotor aircraft related spare parts services us nonus governments defense aerospace industries general aviation markets textron systems products include armored security vehicles advanced marine craft precision weapons airborne groundbased surveillance systems services unmanned aircraft system training simulation systems countersniper devices intelligence situational awareness software us nonus governments defense aerospace industries general aviation markets industrial products markets include following • kautex products include blowmolded plastic fuel systems windshield headlamp washer systems selective catalytic reduction systems engine camshafts parts marketed primarily automobile original equipment manufacturers well plastic bottles containers various uses • greenlee products include powered equipment electrical test measurement instruments hand hydraulic powered tools electrical fiber optic assemblies principally used electrical construction maintenance plumbing wiring telecommunications data communications industries • ezgo jacobsen products include golf cars professional turfmaintenance equipment offroad multipurpose utility specialized turfcare vehicles marketed primarily golf courses resort communities municipalities sporting venues commercial industrial users finance segment provided secured commercial loans leases primarily north america aviation golf equipment assetbased lending distribution finance golf mortgage hotel structured capital timeshare markets fourth quarter 2008 announced plan exit noncaptive portion commercial finance business segment retaining captive portion business supports customer purchases products manufacture segment profit important measure used evaluating performance decisionmaking purposes segment profit manufacturing segments excludes interest expense certain corporate expenses special charges measurement finance segment excludes special charges includes interest income expense along intercompany interest expense provisions losses finance receivables involving sale lease products recorded selling manufacturing division finance group recourse manufacturing group revenues segment along reconciliation segment profit income continuing operations income taxes follows revenues major product type summarized revenues included sales us government approximately 35 billion 36 billion 33 billion 2011 2010 2009 respectively primarily bell textron systems segments information segment provided geographic data presented selected financial information continuing operations geographic area revenues attributed countries based location customer property plant equipment net based location asset schedule quarterly data fourth quarter 2011 includes 41 million impairment charge write certain intangible assets approximately 19 million severance costs related workforce reduction segment b fourth quarter 2011 includes 186 million initial marktomarket adjustment remaining finance receivables golf mortgage portfolio transferred held sale classification quarter c special charges include restructuring charges 99 million 2010 primarily related severance asset impairment charges addition third quarter 2010 special charges include 91 million charge reclassify foreign exchange loss equity income statement result substantially liquidating finance segment entity fourth quarter 2011 first third quarters 2010 potential dilutive effect stock options restricted stock units shares could issued upon conversion convertible senior notes upon exercise related warrants excluded computation diluted weightedaverage shares outstanding shares would antidilutive effect loss continuing operations schedule valuation qualifying accounts schedule ii valuation qualifying accounts deductions primarily include amounts written uncollectable accounts less recoveries inventory disposals currency translation adjustments item 9 nannannannannannanitem 15 exhibits financial statement schedules reports form 8k financial statements schedules consolidated financial statements supplementary information financial statement schedules listed accompanying index financial statements financial statement schedules filed part report exhibits 31 restated certificate incorporation textron filed january 29 1998 incorporated reference exhibit 31 textrons annual report form 10k fiscal year ended january 3 1998 32 bylaws textron incorporated reference exhibit 32 textrons annual report form 10k fiscal year ended january 1 2000 41 indenture dated december 9 1999 textron financial corporation suntrust bank formerly known sun trust bank atlanta including form debt securities incorporated reference exhibit 41 amendment 2 textron financial corporations registration statement form s3 33388509 42 indenture dated november 30 2001 textron financial canada funding corp suntrust bank guaranteed textron financial corporation incorporated reference exhibit 42 amendment 1 textron financial corporations registration statement form s3 33372676 43 support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 101 textron financial corporations registration statement form 10 note instruments defining rights holders certain issues longterm debt textron filed exhibits report authorized principal amount one issues exceed 10 total assets textron subsidiaries consolidated basis textron agrees furnish copy instrument commission upon request note exhibits 101 1017 management contracts compensatory plans contracts agreements 101a annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons annual report form 10k fiscal year ended december 30 1995 101b amendment annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons quarterly report form 10q fiscal quarter ended july 3 1999 102 deferred income plan textron key executives incorporated reference exhibit 102 textrons annual report form 10k fiscal year ended december 29 2001 103 supplemental benefits plan textron key executives market square profit sharing plan schedule incorporated reference exhibit 104 textrons annual report form 10k fiscal year ended december 30 2000 104a supplemental retirement plan textron key executives incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1995 104b amendment supplemental retirement plan textron key executives incorporated reference exhibit 105b textrons annual report form 10k fiscal year ended january 2 1999 104c amendment supplemental retirement plan textron key executives incorporated reference exhibit 104 textrons quarterly report form 10q fiscal quarter ended july 3 1999 104d amendment supplemental retirement plan textron key executives incorporated reference exhibit 105d textrons annual report form 10k fiscal year ended january 1 2000 105a survivor benefit plan textron key executives incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1995 105b amendment survivor benefit plan textron key executives incorporated reference exhibit 105 textrons quarterly report form 10q fiscal quarter ended july 3 1999 106a textron 1990 longterm incentive plan 1990 plan incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1989 106b first amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended december 28 1991 106c second amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended january 2 1993 107a textron 1994 longterm incentive plan 1994 plan incorporated reference exhibit 10 textrons quarterly report form 10q fiscal quarter ended july 2 1994 107b amendment 1994 plan incorporated reference exhibit 109b textrons annual report form 10k fiscal year ended january 2 1999 107c amendment 1994 plan incorporated reference exhibit 106 textrons quarterly report form 10q fiscal quarter ended july 3 1999 107d amendment 1994 plan incorporated reference exhibit 108d textrons annual report form 10k fiscal year ended january 1 2000 108a textron 1999 long term incentive plan incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended january 1 2000 108b amendment 1999 plan incorporated reference exhibit 109b textrons annual report form 10k fiscal year ended december 29 2001 109 form indemnity agreement textron directors executive officers incorporated reference exhibit textrons proxy statement annual meeting shareholders april 29 1987 1010 deferred income plan nonemployee directors 1011 employment agreement textron kenneth c bohlen dated july 18 2000 incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended july 1 2000 1012a employment agreement textron john butler dated july 23 1998 incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1012b restricted stock equivalent award granted john butler january 15 2002 incorporated reference exhibit 101 textrons quarterly report form 10q fiscal quarter ended march 30 2002 1013a employment agreement textron lewis b campbell dated july 23 1998 incorporated reference exhibit 103 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1013b retention award granted lewis b campbell december 14 1995 incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 30 1995 1013c retention award granted lewis b campbell june 1 1999 incorporated reference exhibit 1013c textrons annual report form 10k fiscal year ended january 1 2000 1013d retention award granted lewis b campbell january 1 2001 revision vesting schedule retention award granted june 1 1999 incorporated reference exhibit 1014d textrons annual report form 10k fiscal year ended december 30 2000 1013e amendments retention awards granted lewis b campbell incorporated reference exhibit 1014d textrons annual report form 10k fiscal year ended december 29 2001 1014a employment agreement textron theodore r french dated december 21 2000 incorporated reference exhibit 1015a textrons annual report form 10k fiscal year ended december 30 2000 1014b retention award granted theodore r french january 1 2001 incorporated reference exhibit 1015b textrons annual report form 10k fiscal year ended december 30 2000 1015a employment agreement textron mary l howell dated july 23 1998 incorporated reference exhibit 105 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1015b restricted stock equivalent award granted mary l howell january 15 2002 incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended march 30 2002 1016a employment agreement textron terrence odonnell dated march 10 2000 incorporated reference exhibit 101 textrons quarterly report form 10q fiscal quarter ended july 1 2000 1016b restricted stock equivalent award granted terrence odonnell january 15 2002 incorporated reference exhibit 103 textrons quarterly report form 10q fiscal quarter ended march 30 2002 1017 director stock awards 1018 5year credit agreement dated april 1998 among textron banks listed therein morgan guaranty trust company new york administrative agent incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended april 4 1998 121 computation ratio income combined fixed charges preferred stock dividends textron manufacturing 122 computation ratio income combined fixed charges preferred stock dividends textron inc including majorityowned subsidiaries 13 portion pages 18 69 textrons 2002 annual report shareholders 21 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list 23 consent independent auditors 24 power attorney 991 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 992 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 b reports form 8k reports form 8k filed quarter ended december 28 2002 signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 27th day february 2003 textron inc registrant sted r french ted r french executive vice president chief financial officer pursuant requirements securities exchange act 1934 report signed 27th day february 2003 following persons behalf registrant capacities indicated smichael cahn michael cahn attorneyinfact certifications lewis b campbell chairman president chief executive officer textron inc company certify 1 reviewed annual report form 10k textron inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date february 27 2003 slewis b campbell lewis b campbell chairman president chief executive officer ted r french executive vice president chief financial officer textron inc company certify 1 reviewed annual report form 10k textron inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date february 27 2003 sted r french ted r french executive vice president chief financial officer textron inc financial statement schedules item 15a schedules omitted conditions requiring filing thereof exist information required included financial statements notes thereto exhibit list exhibits 31 restated certificate incorporation textron filed january 29 1998 incorporated reference exhibit 31 textrons annual report form 10k fiscal year ended january 3 1998 32 bylaws textron incorporated reference exhibit 32 textrons annual report form 10k fiscal year ended january 1 2000 41 indenture dated december 9 1999 textron financial corporation suntrust bank formerly known sun trust bank atlanta including form debt securities incorporated reference exhibit 41 amendment 2 textron financial corporations registration statement form s3 33388509 42 indenture dated november 30 2001 textron financial canada funding corp suntrust bank guaranteed textron financial corporation incorporated reference exhibit 42 amendment 1 textron financial corporations registration statement form s3 33372676 43 support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 101 textron financial corporations registration statement form 10 note instruments defining rights holders certain issues longterm debt textron filed exhibits report authorized principal amount one issues exceed 10 total assets textron subsidiaries consolidated basis textron agrees furnish copy instrument commission upon request note exhibits 101 1017 management contracts compensatory plans contracts agreements 101a annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons annual report form 10k fiscal year ended december 30 1995 101b amendment annual incentive compensation plan textron employees incorporated reference exhibit 101 textrons quarterly report form 10q fiscal quarter ended july 3 1999 102 deferred income plan textron key executives incorporated reference exhibit 102 textrons annual report form 10k fiscal year ended december 29 2001 103 supplemental benefits plan textron key executives market square profit sharing plan schedule incorporated reference exhibit 104 textrons annual report form 10k fiscal year ended december 30 2000 104a supplemental retirement plan textron key executives incorporated reference exhibit 106 textrons annual report form 10k fiscal year ended december 30 1995 104b amendment supplemental retirement plan textron key executives incorporated reference exhibit 105b textrons annual report form 10k fiscal year ended january 2 1999 104c amendment supplemental retirement plan textron key executives incorporated reference exhibit 104 textrons quarterly report form 10q fiscal quarter ended july 3 1999 104d amendment supplemental retirement plan textron key executives incorporated reference exhibit 105d textrons annual report form 10k fiscal year ended january 1 2000 105a survivor benefit plan textron key executives incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1995 105b amendment survivor benefit plan textron key executives incorporated reference exhibit 105 textrons quarterly report form 10q fiscal quarter ended july 3 1999 106a textron 1990 longterm incentive plan 1990 plan incorporated reference exhibit 107 textrons annual report form 10k fiscal year ended december 30 1989 106b first amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended december 28 1991 106c second amendment 1990 plan incorporated reference exhibit 107c textrons annual report form 10k fiscal year ended january 2 1993 107a textron 1994 longterm incentive plan 1994 plan incorporated reference exhibit 10 textrons quarterly report form 10q fiscal quarter ended july 2 1994 107b amendment 1994 plan incorporated reference exhibit 109b textrons annual report form 10k fiscal year ended january 2 1999 107c amendment 1994 plan incorporated reference exhibit 106 textrons quarterly report form 10q fiscal quarter ended july 3 1999 107d amendment 1994 plan incorporated reference exhibit 108d textrons annual report form 10k fiscal year ended january 1 2000 108a textron 1999 long term incentive plan incorporated reference exhibit 109 textrons annual report form 10k fiscal year ended january 1 2000 108b amendment 1999 plan incorporated reference exhibit 109b textrons annual report form 10k fiscal year ended december 29 2001 109 form indemnity agreement textron directors executive officers incorporated reference exhibit textrons proxy statement annual meeting shareholders april 29 1987 1010 deferred income plan nonemployee directors 1011 employment agreement textron kenneth c bohlen dated july 18 2000 incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended july 1 2000 1012a employment agreement textron john butler dated july 23 1998 incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1012b restricted stock equivalent award granted john butler january 15 2002 incorporated reference exhibit 101 textrons quarterly report form 10q fiscal quarter ended march 30 2002 1013a employment agreement textron lewis b campbell dated july 23 1998 incorporated reference exhibit 103 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1013b retention award granted lewis b campbell december 14 1995 incorporated reference exhibit 1016b textrons annual report form 10k fiscal year ended december 30 1995 1013c retention award granted lewis b campbell june 1 1999 incorporated reference exhibit 1013c textrons annual report form 10k fiscal year ended january 1 2000 1013d retention award granted lewis b campbell january 1 2001 revision vesting schedule retention award granted june 1 1999 incorporated reference exhibit 1014d textrons annual report form 10k fiscal year ended december 30 2000 1013e amendments retention awards granted lewis b campbell incorporated reference exhibit 1014d textrons annual report form 10k fiscal year ended december 29 2001 1014a employment agreement textron theodore r french dated december 21 2000 incorporated reference exhibit 1015a textrons annual report form 10k fiscal year ended december 30 2000 1014b retention award granted theodore r french january 1 2001 incorporated reference exhibit 1015b textrons annual report form 10k fiscal year ended december 30 2000 1015a employment agreement textron mary l howell dated july 23 1998 incorporated reference exhibit 105 textrons quarterly report form 10q fiscal quarter ended october 3 1998 1015b restricted stock equivalent award granted mary l howell january 15 2002 incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended march 30 2002 1016a employment agreement textron terrence odonnell dated march 10 2000 incorporated reference exhibit 101 textrons quarterly report form 10q fiscal quarter ended july 1 2000 1016b restricted stock equivalent award granted terrence odonnell january 15 2002 incorporated reference exhibit 103 textrons quarterly report form 10q fiscal quarter ended march 30 2002 1017 director stock awards 1018 5year credit agreement dated april 1998 among textron banks listed therein morgan guaranty trust company new york administrative agent incorporated reference exhibit 102 textrons quarterly report form 10q fiscal quarter ended april 4 1998 121 computation ratio income combined fixed charges preferred stock dividends textron manufacturing 122 computation ratio income combined fixed charges preferred stock dividends textron inc including majorityowned subsidiaries 13 portion pages 18 69 textrons 2002 annual report shareholders 21 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list 23 consent independent auditors 24 power attorney 991 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 992 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002item 15 exhibits financial statement schedules reports form 8k financial statements schedules consolidated financial statements supplementary information financial statement schedules listed accompanying index financial statements financial statement schedules filed part annual report form 10k b reports form 8k october 15 2003 submitted current report form 8k reporting historical results 1998 second quarter 2003 recast reflect sale omniquip business october 16 2003 submitted current report form 8k incorporating items 9 12 october 16 2003 press release announcing third quarter 2003 earnings december 17 2003 submitted current report form 8k incorporating item 9 december 16 2003 press release announcing revised earnings estimates 2003 reports deemed “filed” purposes section 18 securities exchange act 1934 incorporated reference herein filing securities act 1933 exchange act signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 27th day february 2004 textron inc registrant ted r french ted r french executive vice president chief financial officer pursuant requirements securities exchange act 1934 annual report form 10k signed 27th day february 2004 following persons behalf registrant capacities indicated textron inc financial statement schedules item 15a schedules omitted conditions requiring filing thereof exist information required included financial statements notes thereto exhibit listitem 15 exhibits financial statements schedules financial statements schedules see index page 35 105 survivor benefit plan textron key executives amended incorporated reference exhibit 105 textron’s annual report form 10k fiscal year ended january 3 2004 106a textron 1994 longterm incentive plan “1994 plan” incorporated reference exhibit 10 textron’s quarterly report form 10q fiscal quarter ended july 2 1994 106b amendment 1994 plan incorporated reference exhibit 109b textron’s annual report form 10k fiscal year ended january 2 1999 106c amendment 1994 plan incorporated reference exhibit 106 textron’s quarterly report form 10q fiscal quarter ended july 3 1999 106d amendment 1994 plan incorporated reference exhibit 108d textron’s annual report form 10k fiscal year ended january 1 2000 107a textron 1999 longterm incentive plan textron employees april 26 2005 restatement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 2 2005 107b form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 107c form incentive stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 107d form restricted stock grant agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 108a performance share unit plan textron employees incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 2 2005 108b performance factors executive officers performance share units 109 form indemnity agreement textron directors executive officers incorporated reference exhibit textron’s proxy statement annual meeting shareholders april 29 1987 1010 deferred income plan nonemployee directors incorporated reference exhibit 101 textron’s annual report form 10k fiscal year ended december 28 2002 1011a employment agreement textron john butler dated july 23 1998 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended october 3 1998 1011b restricted stock equivalent award granted john butler january 15 2002 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 30 2002 1012a employment agreement textron lewis b campbell dated july 23 1998 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended october 3 1998 1012b amendment dated may 6 2005 employment agreement textron lewis b campbell incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended april 2 2005 1012c retention award granted lewis b campbell december 14 1995 incorporated reference exhibit 1016b textron’s annual report form 10k fiscal year ended december 30 1995 1012d retention award granted lewis b campbell june 1 1999 incorporated reference exhibit 1013c textron’s annual report form 10k fiscal year ended january 1 2000 1012e retention award granted lewis b campbell january 1 2001 revision vesting schedule retention award granted june 1 1999 incorporated reference exhibit 1014d textron’s annual report form 10k fiscal year ended december 30 2000 1012f amendments retention awards granted lewis b campbell incorporated reference exhibit 1014d textron’s annual report form 10k fiscal year ended december 29 2001 1013a employment agreement textron ted r french dated december 21 2000 incorporated reference exhibit 1015a textron’s annual report form 10k fiscal year ended december 30 2000 1013b retention award granted ted r french january 1 2001 incorporated reference exhibit 1015b textron’s annual report form 10k fiscal year ended december 30 2000 1014a employment agreement textron mary l howell dated july 23 1998 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended october 3 1998 1014b restricted stock equivalent award granted mary l howell january 15 2002 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 30 2002 1015a employment agreement textron terrence o’donnell dated march 10 2000 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 1 2000 1015b restricted stock equivalent award granted terrence o’donnell january 15 2002 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended march 30 2002 1016 director remuneration package 1017 director stock awards incorporated reference exhibit 1017 textron’s annual report form 10k fiscal year ended december 28 2002 1018 citationshares director’s evaluation program incorporated reference exhibit 1017 textron’s annual report form 10k fiscal year ended january 1 2005 1019 amendment 13 plans comply american jobs creation act 2004 incorporated reference exhibit 1018 textron’s annual report form 10k fiscal year ended january 1 2005 1020 5year credit agreement dated march 28 2005 among textron banks listed therein jpmorgan chase bank na administrative agent citibank na syndication agent incorporated reference exhibit 101 textron’s current report form 8k filed march 31 2005 1021 364day credit agreement dated march 31 2003 among textron inc banks listed therein jpmorgan chase bank administrative agent “364day credit agreement” incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended march 29 2003 1022 amendment 5year credit agreement 364day credit agreement incorporated reference exhibit 1019 textron’s annual report form 10k fiscal quarter ended january 3 2004 1023 amendment 2 364day credit agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 3 2004 1024a 364day credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed august 26 2003 1024b amendment 364day credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 101 textron financial corporation’s quarterly report form 10q fiscal quarter ended september 30 2004 1024c amendment 2 dated july 25 2005 364day credit agreement dated july 28 2003 among textron financial banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 102 textron financial corporation’s current report form 8k dated july 25 2005 1025a fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 102 textron financial corporation’s current report form 8k filed august 26 2003 1025b amendment 1 dated july 25 2005 fiveyear credit agreement dated july 28 2003 among textron financial banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k dated july 25 2005 1026 master services agreement textron inc computer sciences corporation dated october 27 2004 confidential treatment requested portions agreement incorporated reference exhibit 1026 textron’s annual report form 10k fiscal year ended january 1 2005 121 computation ratio income combined fixed charges preferred stock dividends textron manufacturing 122 computation ratio income combined fixed charges preferred stock dividends textron including majorityowned subsidiaries certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list consent independent registered public accounting firm power attorney 311 certification chief executive officer pursuant rule 13a14a 312 certification chief financial officer pursuant rule 13a14a 321 certification chief executive officer pursuant 18 usc 1350 322 certification chief financial officer pursuant 18 usc 1350 signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 24th day february 2006 pursuant requirements securities exchange act 1934 annual report form 10k signed 24th day february 2006 following persons behalf registrant capacities indicated exhibit index 105 survivor benefit plan textron key executives amended incorporated reference exhibit 105 textron’s annual report form 10k fiscal year ended january 3 2004 106a textron 1994 longterm incentive plan “1994 plan” incorporated reference exhibit 10 textron’s quarterly report form 10q fiscal quarter ended july 2 1994 106b amendment 1994 plan incorporated reference exhibit 109b textron’s annual report form 10k fiscal year ended january 2 1999 106c amendment 1994 plan incorporated reference exhibit 106 textron’s quarterly report form 10q fiscal quarter ended july 3 1999 106d amendment 1994 plan incorporated reference exhibit 108d textron’s annual report form 10k fiscal year ended january 1 2000 107a textron 1999 longterm incentive plan textron employees april 26 2005 restatement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 2 2005 107b form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 107c form incentive stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 107d form restricted stock grant agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 108a performance share unit plan textron employees incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 2 2005 108b performance factors executive officers performance share units 109 form indemnity agreement textron directors executive officers incorporated reference exhibit textron’s proxy statement annual meeting shareholders april 29 1987 1010 deferred income plan nonemployee directors incorporated reference exhibit 101 textron’s annual report form 10k fiscal year ended december 28 2002 1011a employment agreement textron john butler dated july 23 1998 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended october 3 1998 1011b restricted stock equivalent award granted john butler january 15 2002 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 30 2002 1012a employment agreement textron lewis b campbell dated july 23 1998 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended october 3 1998 1012b amendment dated may 6 2005 employment agreement textron lewis b campbell incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended april 2 2005 1012c retention award granted lewis b campbell december 14 1995 incorporated reference exhibit 1016b textron’s annual report form 10k fiscal year ended december 30 1995 1012d retention award granted lewis b campbell june 1 1999 incorporated reference exhibit 1013c textron’s annual report form 10k fiscal year ended january 1 2000 1012e retention award granted lewis b campbell january 1 2001 revision vesting schedule retention award granted june 1 1999 incorporated reference exhibit 1014d textron’s annual report form 10k fiscal year ended december 30 2000 1012f amendments retention awards granted lewis b campbell incorporated reference exhibit 1014d textron’s annual report form 10k fiscal year ended december 29 2001 1013a employment agreement textron ted r french dated december 21 2000 incorporated reference exhibit 1015a textron’s annual report form 10k fiscal year ended december 30 2000 1013b retention award granted ted r french january 1 2001 incorporated reference exhibit 1015b textron’s annual report form 10k fiscal year ended december 30 2000 1014a employment agreement textron mary l howell dated july 23 1998 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended october 3 1998 1014b restricted stock equivalent award granted mary l howell january 15 2002 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 30 2002 1015a employment agreement textron terrence o’donnell dated march 10 2000 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 1 2000 1015b restricted stock equivalent award granted terrence o’donnell january 15 2002 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended march 30 2002 1016 director remuneration package 1017 director stock awards incorporated reference exhibit 1017 textron’s annual report form 10k fiscal year ended december 28 2002 1018 citationshares director’s evaluation program incorporated reference exhibit 1017 textron’s annual report form 10k fiscal year ended january 1 2005 1019 amendment 13 plans comply american jobs creation act 2004 incorporated reference exhibit 1018 textron’s annual report form 10k fiscal year ended january 1 2005 1020 5year credit agreement dated march 28 2005 among textron banks listed therein jpmorgan chase bank na administrative agent citibank na syndication agent incorporated reference exhibit 101 textron’s current report form 8k filed march 31 2005 1021 364day credit agreement dated march 31 2003 among textron inc banks listed therein jpmorgan chase bank administrative agent “364day credit agreement” incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended march 29 2003 1022 amendment 5year credit agreement 364day credit agreement incorporated reference exhibit 1019 textron’s annual report form 10k fiscal quarter ended january 3 2004 1023 amendment 2 364day credit agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 3 2004 1024a 364day credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed august 26 2003 1024b amendment 364day credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 101 textron financial corporation’s quarterly report form 10q fiscal quarter ended september 30 2004 1024c amendment 2 dated july 25 2005 364day credit agreement dated july 28 2003 among textron financial banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 102 textron financial corporation’s current report form 8k dated july 25 2005 1025a fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 102 textron financial corporation’s current report form 8k filed august 26 2003 1025b amendment 1 dated july 25 2005 fiveyear credit agreement dated july 28 2003 among textron financial banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k dated july 25 2005 1026 master services agreement textron inc computer sciences corporation dated october 27 2004 confidential treatment requested portions agreement incorporated reference exhibit 1026 textron’s annual report form 10k fiscal year ended january 1 2005 121 computation ratio income combined fixed charges preferred stock dividends textron manufacturing 122 computation ratio income combined fixed charges preferred stock dividends textron including majorityowned subsidiaries certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list consent independent registered public accounting firm power attorney 311 certification chief executive officer pursuant rule 13a14a 312 certification chief financial officer pursuant rule 13a14a 321 certification chief executive officer pursuant 18 usc 1350 322 certification chief financial officer pursuant 18 usc 1350item 15 exhibits financial statement schedules financial statements schedules see index page 32 exhibits 31 restated certificate incorporation textron filed january 29 1998 incorporated reference exhibit 31 textron’s annual report form 10k fiscal year ended january 3 1998 32 bylaws textron incorporated reference exhibit 31 textron’s current report form 8k filed april 29 2006 41a indenture dated december 9 1999 textron financial corporation suntrust bank formerly known sun trust bank atlanta including form debt securities incorporated reference exhibit 41 amendment 2 textron financial corporation’s registration statement form s3 33388509 41b first supplemental indenture dated november 16 2006 textron financial corporation us bank national association successor trustee sun trust bank indenture dated december 9 1999 incorporated reference exhibit 43 textron financial corporation’s form s3 file 333138755 41c form mediumterm note textron financial corporation incorporated reference exhibit 43 textron financial corporation’s current report form 8k filed november 17 2006 42a indenture dated november 30 2001 textron financial canada funding corp suntrust bank guaranteed textron financial corporation incorporated reference exhibit 42 amendment 1 textron financial corporation’s registration statement form s3 333108464 42b first supplemental indenture dated november 16 2006 textron financial canada funding corp textron financial corporation us bank national association successor trustee sun trust bank indenture dated november 30 2001 incorporated reference exhibit 44 textron financial corporation’s form s3 file 333138755 42c form mediumterm note textron financial canada funding corp incorporated reference exhibit 44 textron financial corporation’s current report form 8k filed november 17 2006 43a amended restated indenture dated may 26 2005 textron financial floorplan master note trust bank new york indenture trustee incorporated herein reference exhibit 41 textron financial corporation’s current report form 8k filed june 1 2005 43b amended restated series 20011 supplement dated may 26 2005 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial servicer incorporated herein reference exhibit 42 textron financial corporation’s current report form 8k filed june 1 2005 43c series 2005a supplement dated may 26 2005 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial servicer incorporated herein reference exhibit 43 textron financial corporation’s current report form 8k filed june 1 2005 43d series 2006a supplement dated april 19 2006 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial servicer incorporated herein reference exhibit 41 textron financial corporation’s current report form 8k filed april 24 2006 44 support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 101 textron financial corporation’s registration statement form 10 file 027559 note instruments defining rights holders certain issues longterm debt textron filed exhibits authorized principal amount one issues exceed 10 total assets textron subsidiaries consolidated basis textron agrees furnish copy instrument commission upon request note exhibits 101 1020 management contracts compensatory plans contracts agreements 101a annual incentive compensation plan textron employees incorporated reference exhibit 101 textron’s annual report form 10k fiscal year ended december 30 1995 101b amendment annual incentive compensation plan textron employees incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 1999 101c objectives executive officers annual incentive compensation plan textron employees 102 deferred income plan textron key executives incorporated reference exhibit 102 textron’s annual report form 10k fiscal year ended january 3 2004 103 description textron spillover pension plan incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 30 2006 104 supplemental retirement plan textron key executives incorporated reference exhibit 104 textron’s annual report form 10k fiscal year ended january 3 2004 105 survivor benefit plan textron key executives amended incorporated reference exhibit 105 textron’s annual report form 10k fiscal year ended january 3 2004 106a textron 1994 longterm incentive plan “1994 plan” incorporated reference exhibit 10 textron’s quarterly report form 10q fiscal quarter ended july 2 1994 106b amendment 1994 plan incorporated reference exhibit 109b textron’s annual report form 10k fiscal year ended january 2 1999 106c amendment 1994 plan incorporated reference exhibit 106 textron’s quarterly report form 10q fiscal quarter ended july 3 1999 106d amendment 1994 plan incorporated reference exhibit 108d textron’s annual report form 10k fiscal year ended january 1 2000 107a textron 1999 longterm incentive plan textron employees april 26 2005 restatement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 2 2005 107b form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 107c form incentive stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 107d form restricted stock grant agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 108a performance share unit plan textron employees incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 2 2005 108b performance factors executive officers performance share units 109 form indemnity agreement textron directors executive officers incorporated reference exhibit textron’s proxy statement annual meeting shareholders april 29 1987 1010 deferred income plan nonemployee directors incorporated reference exhibit 101 textron’s annual report form 10k fiscal year ended december 28 2002 1011a amended restated employment agreement textron john butler dated may 4 2006 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 1 2006 1011b restricted stock equivalent award granted john butler january 15 2002 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 30 2002 1012a employment agreement textron lewis b campbell dated july 23 1998 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended october 3 1998 1012b amendment dated may 6 2005 employment agreement textron lewis b campbell incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended april 2 2005 1012c second amendment dated may 4 2006 employment agreement textron lewis b campbell incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended april 1 2006 1012d retention award granted lewis b campbell december 14 1995 incorporated reference exhibit 1016b textron’s annual report form 10k fiscal year ended december 30 1995 1012e retention award granted lewis b campbell june 1 1999 incorporated reference exhibit 1013c textron’s annual report form 10k fiscal year ended january 1 2000 1012f retention award granted lewis b campbell january 1 2001 revision vesting schedule retention award granted june 1 1999 incorporated reference exhibit 1014d textron’s annual report form 10k fiscal year ended december 30 2000 1012g amendments retention awards granted lewis b campbell incorporated reference exhibit 1014d textron’s annual report form 10k fiscal year ended december 29 2001 1013a employment agreement textron ted r french dated december 21 2000 incorporated reference exhibit 1015a textron’s annual report form 10k fiscal year ended december 30 2000 1013b retention award granted ted r french january 1 2001 incorporated reference exhibit 1015b textron’s annual report form 10k fiscal year ended december 30 2000 1014a amended restated employment agreement textron mary l howell dated may 4 2006 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 1 2006 1014b restricted stock equivalent award granted mary l howell january 15 2002 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 30 2002 1015a amended restated employment agreement textron terrence o’donnell dated may 4 2006 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended april 1 2006 1015b restricted stock equivalent award granted terrence o’donnell january 15 2002 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended march 30 2002 1016 employment agreement textron kenneth c bohlen dated july 18 2000 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 1 2000 1017 director compensation 1018 director stock awards incorporated reference exhibit 1017 textron’s annual report form 10k fiscal year ended december 28 2002 1019 citationshares director’s evaluation program incorporated reference exhibit 1017 textron’s annual report form 10k fiscal year ended january 1 2005 1020 amendment 13 plans comply american jobs creation act 2004 incorporated reference exhibit 1018 textron’s annual report form 10k fiscal year ended january 1 2005 1021a 5year credit agreement dated march 28 2005 among textron banks listed therein jpmorgan chase bank na administrative agent citibank na syndication agent “5year credit agreement incorporated reference exhibit 101 textron’s current report form 8k filed march 31 2005 1021b amendment 1 dated april 21 2006 5year credit agreement incorporated reference exhibit 101 textron’s current report form 8k filed april 25 2006 1022a 364day credit agreement dated march 31 2003 among textron inc banks listed therein jpmorgan chase bank administrative agent “364day credit agreement” incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended march 29 2003 1022b amendment dated july 28 2003 364day credit agreement incorporated reference exhibit 1019 textron’s annual report form 10k fiscal year ended january 3 2004 1022c amendment 2 dated march 29 2004 364day credit agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 3 2004 1023a 364day credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed august 26 2003 1023b amendment dated july 26 2004 364day credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 101 textron financial corporation’s quarterly report form 10q fiscal quarter ended september 30 2004 1023c amendment 2 dated july 25 2005 364day credit agreement dated july 28 2003 among textron financial banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 102 textron financial corporation’s current report form 8k filed july 27 2005 1024a fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 102 textron financial corporation’s current report form 8k filed august 26 2003 1024b amendment 1 dated july 25 2005 fiveyear credit agreement dated july 28 2003 among textron financial banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed july 27 2005 1024c amendment 2 dated april 28 2006 fiveyear credit agreement dated july 28 2003 among textron financial banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed may 1 2006 1025 master services agreement textron inc computer sciences corporation dated october 27 2004 confidential treatment requested portions agreement incorporated reference exhibit 1026 textron’s annual report form 10k fiscal year ended january 1 2005 121 computation ratio income combined fixed charges preferred stock dividends textron manufacturing 122 computation ratio income combined fixed charges preferred stock dividends textron including majorityowned subsidiaries certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list consent independent registered public accounting firm power attorney 311 certification chief executive officer pursuant rule 13a14a 312 certification chief financial officer pursuant rule 13a14a 321 certification chief executive officer pursuant 18 usc section 1350 322 certification chief financial officer pursuant 18 usc section 1350 signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 21st day february 2007 pursuant requirements securities exchange act 1934 annual report form 10k signed 21st day february 2007 following persons behalf registrant capacities indicated name title lewis b campbell chairman president chief executive officer lewis b campbell director h jesse arnelle director kathleen bader director r kerry clark director ivor j evans director lawrence k fish director joe ford director paul e gagné director dain hancock director lord powell bayswater kcmg director thomas b wheeler director ted r french executive vice president ted r french chief financial officer principal financial officer richard l yates senior vice president corporate controller richard l yates principal accounting officer michael cahn michael cahn attorneyinfact exhibit index exhibits 31 restated certificate incorporation textron filed january 29 1998 incorporated reference exhibit 31 textron’s annual report form 10k fiscal year ended january 3 1998 32 bylaws textron incorporated reference exhibit 31 textron’s current report form 8k filed april 29 2006 41a indenture dated december 9 1999 textron financial corporation suntrust bank formerly known sun trust bank atlanta including form debt securities incorporated reference exhibit 41 amendment 2 textron financial corporation’s registration statement form s3 33388509 41b first supplemental indenture dated november 16 2006 textron financial corporation us bank national association successor trustee sun trust bank indenture dated december 9 1999 incorporated reference exhibit 43 textron financial corporation’s form s3 file 333138755 41c form mediumterm note textron financial corporation incorporated reference exhibit 43 textron financial corporation’s current report form 8k filed november 17 2006 42a indenture dated november 30 2001 textron financial canada funding corp suntrust bank guaranteed textron financial corporation incorporated reference exhibit 42 amendment 1 textron financial corporation’s registration statement form s3 333108464 42b first supplemental indenture dated november 16 2006 textron financial canada funding corp textron financial corporation us bank national association successor trustee sun trust bank indenture dated november 30 2001 incorporated reference exhibit 44 textron financial corporation’s form s3 file 333138755 42c form mediumterm note textron financial canada funding corp incorporated reference exhibit 44 textron financial corporation’s current report form 8k filed november 17 2006 43a amended restated indenture dated may 26 2005 textron financial floorplan master note trust bank new york indenture trustee incorporated herein reference exhibit 41 textron financial corporation’s current report form 8k filed june 1 2005 43b amended restated series 20011 supplement dated may 26 2005 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial servicer incorporated herein reference exhibit 42 textron financial corporation’s current report form 8k filed june 1 2005 43c series 2005a supplement dated may 26 2005 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial servicer incorporated herein reference exhibit 43 textron financial corporation’s current report form 8k filed june 1 2005 43d series 2006a supplement dated april 19 2006 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial servicer incorporated herein reference exhibit 41 textron financial corporation’s current report form 8k filed april 24 2006 44 support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 101 textron financial corporation’s registration statement form 10 file 027559 note instruments defining rights holders certain issues longterm debt textron filed exhibits authorized principal amount one issues exceed 10 total assets textron subsidiaries consolidated basis textron agrees furnish copy instrument commission upon request note exhibits 101 1020 management contracts compensatory plans contracts agreements 101a annual incentive compensation plan textron employees incorporated reference exhibit 101 textron’s annual report form 10k fiscal year ended december 30 1995 101b amendment annual incentive compensation plan textron employees incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 1999 101c objectives executive officers annual incentive compensation plan textron employees 102 deferred income plan textron key executives incorporated reference exhibit 102 textron’s annual report form 10k fiscal year ended january 3 2004 103 description textron spillover pension plan incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 30 2006 104 supplemental retirement plan textron key executives incorporated reference exhibit 104 textron’s annual report form 10k fiscal year ended january 3 2004 105 survivor benefit plan textron key executives amended incorporated reference exhibit 105 textron’s annual report form 10k fiscal year ended january 3 2004 106a textron 1994 longterm incentive plan “1994 plan” incorporated reference exhibit 10 textron’s quarterly report form 10q fiscal quarter ended july 2 1994 106b amendment 1994 plan incorporated reference exhibit 109b textron’s annual report form 10k fiscal year ended january 2 1999 106c amendment 1994 plan incorporated reference exhibit 106 textron’s quarterly report form 10q fiscal quarter ended july 3 1999 106d amendment 1994 plan incorporated reference exhibit 108d textron’s annual report form 10k fiscal year ended january 1 2000 107a textron 1999 longterm incentive plan textron employees april 26 2005 restatement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 2 2005 107b form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 107c form incentive stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 107d form restricted stock grant agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 108a performance share unit plan textron employees incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 2 2005 108b performance factors executive officers performance share units 109 form indemnity agreement textron directors executive officers incorporated reference exhibit textron’s proxy statement annual meeting shareholders april 29 1987 1010 deferred income plan nonemployee directors incorporated reference exhibit 101 textron’s annual report form 10k fiscal year ended december 28 2002 1011a amended restated employment agreement textron john butler dated may 4 2006 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 1 2006 1011b restricted stock equivalent award granted john butler january 15 2002 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 30 2002 1012a employment agreement textron lewis b campbell dated july 23 1998 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended october 3 1998 1012b amendment dated may 6 2005 employment agreement textron lewis b campbell incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended april 2 2005 1012c second amendment dated may 4 2006 employment agreement textron lewis b campbell incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended april 1 2006 1012d retention award granted lewis b campbell december 14 1995 incorporated reference exhibit 1016b textron’s annual report form 10k fiscal year ended december 30 1995 1012e retention award granted lewis b campbell june 1 1999 incorporated reference exhibit 1013c textron’s annual report form 10k fiscal year ended january 1 2000 1012f retention award granted lewis b campbell january 1 2001 revision vesting schedule retention award granted june 1 1999 incorporated reference exhibit 1014d textron’s annual report form 10k fiscal year ended december 30 2000 1012g amendments retention awards granted lewis b campbell incorporated reference exhibit 1014d textron’s annual report form 10k fiscal year ended december 29 2001 1013a employment agreement textron ted r french dated december 21 2000 incorporated reference exhibit 1015a textron’s annual report form 10k fiscal year ended december 30 2000 1013b retention award granted ted r french january 1 2001 incorporated reference exhibit 1015b textron’s annual report form 10k fiscal year ended december 30 2000 1014a amended restated employment agreement textron mary l howell dated may 4 2006 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 1 2006 1014b restricted stock equivalent award granted mary l howell january 15 2002 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 30 2002 1015a amended restated employment agreement textron terrence o’donnell dated may 4 2006 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended april 1 2006 1015b restricted stock equivalent award granted terrence o’donnell january 15 2002 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended march 30 2002 1016 employment agreement textron kenneth c bohlen dated july 18 2000 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 1 2000 1017 director compensation 1018 director stock awards incorporated reference exhibit 1017 textron’s annual report form 10k fiscal year ended december 28 2002 1019 citationshares director’s evaluation program incorporated reference exhibit 1017 textron’s annual report form 10k fiscal year ended january 1 2005 1020 amendment 13 plans comply american jobs creation act 2004 incorporated reference exhibit 1018 textron’s annual report form 10k fiscal year ended january 1 2005 1021a 5year credit agreement dated march 28 2005 among textron banks listed therein jpmorgan chase bank na administrative agent citibank na syndication agent “5year credit agreement incorporated reference exhibit 101 textron’s current report form 8k filed march 31 2005 1021b amendment 1 dated april 21 2006 5year credit agreement incorporated reference exhibit 101 textron’s current report form 8k filed april 25 2006 1022a 364day credit agreement dated march 31 2003 among textron inc banks listed therein jpmorgan chase bank administrative agent “364day credit agreement” incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended march 29 2003 1022b amendment dated july 28 2003 364day credit agreement incorporated reference exhibit 1019 textron’s annual report form 10k fiscal year ended january 3 2004 1022c amendment 2 dated march 29 2004 364day credit agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 3 2004 1023a 364day credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed august 26 2003 1023b amendment dated july 26 2004 364day credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 101 textron financial corporation’s quarterly report form 10q fiscal quarter ended september 30 2004 1023c amendment 2 dated july 25 2005 364day credit agreement dated july 28 2003 among textron financial banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 102 textron financial corporation’s current report form 8k filed july 27 2005 1024a fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 102 textron financial corporation’s current report form 8k filed august 26 2003 1024b amendment 1 dated july 25 2005 fiveyear credit agreement dated july 28 2003 among textron financial banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed july 27 2005 1024c amendment 2 dated april 28 2006 fiveyear credit agreement dated july 28 2003 among textron financial banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed may 1 2006 1025 master services agreement textron inc computer sciences corporation dated october 27 2004 confidential treatment requested portions agreement incorporated reference exhibit 1026 textron’s annual report form 10k fiscal year ended january 1 2005 121 computation ratio income combined fixed charges preferred stock dividends textron manufacturing 122 computation ratio income combined fixed charges preferred stock dividends textron including majorityowned subsidiaries certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list consent independent registered public accounting firm power attorney 311 certification chief executive officer pursuant rule 13a14a 312 certification chief financial officer pursuant rule 13a14a 321 certification chief executive officer pursuant 18 usc section 1350 322 certification chief financial officer pursuant 18 usc section 1350item 15 exhibits financial statement schedules financial statements schedules see index page 42 43c series 2005a supplement dated may 26 2005 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial corporation servicer incorporated reference exhibit 43 textron financial corporation’s current report form 8k filed june 1 2005 43d series 2006a supplement dated april 19 2006 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial corporation servicer incorporated reference exhibit 41 textron financial corporation’s current report form 8k filed april 24 2006 43e series 2007a supplement dated march 29 2007 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial corporation servicer incorporated reference exhibit 41 textron financial corporation’s current report form 8k filed march 29 2007 43f series 2008cp1 supplement dated march 20 2008 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial corporation servicer incorporated reference exhibit 41 textron financial corporation’s current report form 8k filed march 26 2008 43g amendment 1 dated may 13 2008 series 2008cp1 supplement dated march 20 2008 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial corporation servicer incorporated reference exhibit 42 textron financial corporation’s current report form 8k filed may 16 2008 43h series 2008cp2 supplement dated may 13 2008 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial corporation servicer incorporated reference exhibit 41 textron financial corporation’s current report form 8k filed may 16 2008 44 support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 101 textron financial corporation’s registration statement form 10 file 027559 note instruments defining rights holders certain issues longterm debt textron filed exhibits authorized principal amount one issues exceed 10 total assets textron subsidiaries consolidated basis textron agrees furnish copy instrument commission upon request note exhibits 101 1021 management contracts compensatory plans contracts agreements 101a textron inc 2007 longterm incentive plan amended restated may 1 2007 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 101b amendment no1 textron inc 2007 longterm incentive plan amended restated may 1 2007 effective july 23 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 27 2008 101c form nonqualified stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 101d form incentive stock option agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 101e form restricted stock unit grant agreement incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 101f form restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 29 2008 101g form cashsettled restricted stock unit grant agreement dividend equivalents 101h form performance share unit grant agreement 101i performance factors executive officers performance share units textron inc 2007 longterm incentive plan incorporated reference exhibit 992 textron’s current report form 8k filed january 23 2009 102a textron inc shortterm incentive plan amended restated effective july 25 2007 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 102b objectives executive officers textron inc shortterm incentive plan incorporated reference exhibit 991 textron’s current report form 8k filed january 23 2009 103a textron inc 1999 longterm incentive plan textron employees amended restated effective july 25 2007 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 103b form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 103c form incentive stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 103d form restricted stock grant agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 104a performance share unit plan textron employees july 25 2007 incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 104b performance factors executive officers performance share units incorporated reference exhibit 108b textron’s annual report form 10k fiscal year ended december 30 2006 105 textron spillover savings plan effective january 1 2009 including appendix defined contribution provisions supplemental benefits plan textron key executives effect january 1 2008 106 textron spillover pension plan amended restated effective january 1 2009 including appendix amended restated effective january 1 2009 defined benefit provisions supplemental benefits plan textron key executives effect january 1 2007 107 supplemental retirement plan textron key executives amended restated effective january 1 2009 including appendix provisions supplemental retirement plan textron key executives effect january 1 2008 108 deferred income plan textron executives effective january 1 2009 including appendix provisions deferred income plan textron key executives effect january 1 2008 109 deferred income plan nonemployee directors amended restated effective january 1 2009 including appendix prior plan provisions effect january 1 2008 1010 survivor benefit plan textron key executives amended restated effective july 25 2007 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 1011 form indemnity agreement textron directors executive officers incorporated reference exhibit textron’s proxy statement annual meeting shareholders april 29 1987 1012 amended restated employment agreement textron kenneth c bohlen dated february 26 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 29 2008 1013 second amended restated employment agreement textron john butler dated february 26 2008 incorporated reference exhibit 103 textron’s current report form 8k filed february 28 2008 1014 amended restated employment agreement textron lewis b campbell dated february 26 2008 incorporated reference exhibit 101 textron’s current report form 8k filed february 28 2008 1015a letter agreement textron scott c donnelly dated june 26 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended june 28 2008 1015b amendment letter agreement textron scott c donnelly dated december 16 2008 together addendum 1 thereto dated december 23 2008 1016 amended restated employment agreement textron theodore r french dated february 26 2008 incorporated reference exhibit 102 textron’s current report form 8k filed february 28 2008 1017 second amended restated employment agreement textron mary l howell dated february 26 2008 incorporated reference exhibit 104 textron’s current report form 8k filed february 28 2008 1018 second amended restated employment agreement textron terrence o’donnell dated february 26 2008 incorporated reference exhibit 105 textron’s current report form 8k filed february 28 2008 1019a restricted stock awards granted lewis b campbell january 1 2001 incorporated reference exhibit 1014d textron’s annual report form 10k fiscal year ended december 30 2000 1019b amendments retention awards granted lewis b campbell incorporated reference exhibit 1014e textron’s annual report form 10k fiscal year ended december 29 2001 1020 director compensation incorporated reference exhibit 1021 textron’s annual report form 10k fiscal year ended december 29 2007 1021 form aircraft time sharing agreement textron executive officers incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 27 2008 1022a 5year credit agreement dated march 28 2005 among textron banks listed therein jpmorgan chase bank na administrative agent citibank na syndication agent “5year credit agreement” incorporated reference exhibit 101 textron’s current report form 8k filed march 31 2005 1022b amendment 1 dated april 21 2006 5year credit agreement incorporated reference exhibit 101 textron’s current report form 8k filed april 25 2006 1022c amendment 2 dated april 20 2007 5year credit agreement incorporated reference exhibit 101 textron’s current report form 8k filed april 24 2007 1023a fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 102 textron financial corporation’s current report form 8k filed august 26 2003 1023b amendment 1 dated july 25 2005 fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed july 27 2005 1023c amendment 2 dated april 28 2006 fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed may 1 2006 1023d amendment 3 dated april 27 2007 fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k dated april 27 2007 1024a master services agreement textron inc computer sciences corporation dated october 27 2004 confidential treatment requested portions agreement incorporated reference exhibit 1026 textron’s annual report form 10k fiscal year ended january 1 2005 1024b amendment 4 master services agreement textron inc computer services corporation dated july 1 2007 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 121 computation ratio income fixed charges textron inc’s manufacturing group 122 computation ratio income fixed charges textron inc including majorityowned subsidiaries certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list consent independent registered public accounting firm power attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 26th day february 2009 textron inc registrant srichard l yates richard l yates senior vice president corporate controller acting chief financial officer pursuant requirements securities exchange act 1934 annual report form 10k signed 26th day february 2009 following persons behalf registrant capacities indicated jayne donegan jayne donegan attorneyinfact exhibit index 43c series 2005a supplement dated may 26 2005 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial corporation servicer incorporated reference exhibit 43 textron financial corporation’s current report form 8k filed june 1 2005 43d series 2006a supplement dated april 19 2006 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial corporation servicer incorporated reference exhibit 41 textron financial corporation’s current report form 8k filed april 24 2006 43e series 2007a supplement dated march 29 2007 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial corporation servicer incorporated reference exhibit 41 textron financial corporation’s current report form 8k filed march 29 2007 43f series 2008cp1 supplement dated march 20 2008 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial corporation servicer incorporated reference exhibit 41 textron financial corporation’s current report form 8k filed march 26 2008 43g amendment 1 dated may 13 2008 series 2008cp1 supplement dated march 20 2008 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial corporation servicer incorporated reference exhibit 42 textron financial corporation’s current report form 8k filed may 16 2008 43h series 2008cp2 supplement dated may 13 2008 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial corporation servicer incorporated reference exhibit 41 textron financial corporation’s current report form 8k filed may 16 2008 44 support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 101 textron financial corporation’s registration statement form 10 file 027559 note instruments defining rights holders certain issues longterm debt textron filed exhibits authorized principal amount one issues exceed 10 total assets textron subsidiaries consolidated basis textron agrees furnish copy instrument commission upon request note exhibits 101 1021 management contracts compensatory plans contracts agreements 101a textron inc 2007 longterm incentive plan amended restated may 1 2007 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 101b amendment no1 textron inc 2007 longterm incentive plan amended restated may 1 2007 effective july 23 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 27 2008 101c form nonqualified stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 101d form incentive stock option agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 101e form restricted stock unit grant agreement incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 101f form restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 29 2008 101g form cashsettled restricted stock unit grant agreement dividend equivalents 101h form performance share unit grant agreement 101i performance factors executive officers performance share units textron inc 2007 longterm incentive plan incorporated reference exhibit 992 textron’s current report form 8k filed january 23 2009 102a textron inc shortterm incentive plan amended restated effective july 25 2007 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 102b objectives executive officers textron inc shortterm incentive plan incorporated reference exhibit 991 textron’s current report form 8k filed january 23 2009 103a textron inc 1999 longterm incentive plan textron employees amended restated effective july 25 2007 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 103b form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 103c form incentive stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 103d form restricted stock grant agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 104a performance share unit plan textron employees july 25 2007 incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 104b performance factors executive officers performance share units incorporated reference exhibit 108b textron’s annual report form 10k fiscal year ended december 30 2006 105 textron spillover savings plan effective january 1 2009 including appendix defined contribution provisions supplemental benefits plan textron key executives effect january 1 2008 106 textron spillover pension plan amended restated effective january 1 2009 including appendix amended restated effective january 1 2009 defined benefit provisions supplemental benefits plan textron key executives effect january 1 2007 107 supplemental retirement plan textron key executives amended restated effective january 1 2009 including appendix provisions supplemental retirement plan textron key executives effect january 1 2008 108 deferred income plan textron executives effective january 1 2009 including appendix provisions deferred income plan textron key executives effect january 1 2008 109 deferred income plan nonemployee directors amended restated effective january 1 2009 including appendix prior plan provisions effect january 1 2008 1010 survivor benefit plan textron key executives amended restated effective july 25 2007 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 1011 form indemnity agreement textron directors executive officers incorporated reference exhibit textron’s proxy statement annual meeting shareholders april 29 1987 1012 amended restated employment agreement textron kenneth c bohlen dated february 26 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 29 2008 1013 second amended restated employment agreement textron john butler dated february 26 2008 incorporated reference exhibit 103 textron’s current report form 8k filed february 28 2008 1014 amended restated employment agreement textron lewis b campbell dated february 26 2008 incorporated reference exhibit 101 textron’s current report form 8k filed february 28 2008 1015a letter agreement textron scott c donnelly dated june 26 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended june 28 2008 1015b amendment letter agreement textron scott c donnelly dated december 16 2008 together addendum 1 thereto dated december 23 2008 1016 amended restated employment agreement textron theodore r french dated february 26 2008 incorporated reference exhibit 102 textron’s current report form 8k filed february 28 2008 1017 second amended restated employment agreement textron mary l howell dated february 26 2008 incorporated reference exhibit 104 textron’s current report form 8k filed february 28 2008 1018 second amended restated employment agreement textron terrence o’donnell dated february 26 2008 incorporated reference exhibit 105 textron’s current report form 8k filed february 28 2008 1019a restricted stock awards granted lewis b campbell january 1 2001 incorporated reference exhibit 1014d textron’s annual report form 10k fiscal year ended december 30 2000 1019b amendments retention awards granted lewis b campbell incorporated reference exhibit 1014e textron’s annual report form 10k fiscal year ended december 29 2001 1020 director compensation incorporated reference exhibit 1021 textron’s annual report form 10k fiscal year ended december 29 2007 1021 form aircraft time sharing agreement textron executive officers incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 27 2008 1022a 5year credit agreement dated march 28 2005 among textron banks listed therein jpmorgan chase bank na administrative agent citibank na syndication agent “5year credit agreement” incorporated reference exhibit 101 textron’s current report form 8k filed march 31 2005 1022b amendment 1 dated april 21 2006 5year credit agreement incorporated reference exhibit 101 textron’s current report form 8k filed april 25 2006 1022c amendment 2 dated april 20 2007 5year credit agreement incorporated reference exhibit 101 textron’s current report form 8k filed april 24 2007 1023a fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 102 textron financial corporation’s current report form 8k filed august 26 2003 1023b amendment 1 dated july 25 2005 fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed july 27 2005 1023c amendment 2 dated april 28 2006 fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed may 1 2006 1023d amendment 3 dated april 27 2007 fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k dated april 27 2007 1024a master services agreement textron inc computer sciences corporation dated october 27 2004 confidential treatment requested portions agreement incorporated reference exhibit 1026 textron’s annual report form 10k fiscal year ended january 1 2005 1024b amendment 4 master services agreement textron inc computer services corporation dated july 1 2007 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 121 computation ratio income fixed charges textron inc’s manufacturing group 122 computation ratio income fixed charges textron inc including majorityowned subsidiaries certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list consent independent registered public accounting firm power attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002item 15 exhibits financial statement schedules financial statements schedules see index page 40 101f form restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 29 2008 101g form cashsettled restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 101g textron’s annual report form 10k fiscal year ended january 3 2009 101h form performance share unit grant agreement incorporated reference exhibit 101h textron’s annual report form 10k fiscal year ended january 3 2009 101i performance factors executive officers performance share units textron inc 2007 longterm incentive plan incorporated reference exhibit 992 textron’s current report form 8k filed january 29 2008 101j performance factors executive officers performance share units granted 2009 textron inc 2007 longterm incentive plan incorporated reference exhibit 992 textron’s current report form 8k filed january 23 2009 101k form performance cash unit grant agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 4 2009 102a textron inc shortterm incentive plan amended restated effective july 25 2007 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 102b objectives executive officers textron inc shortterm incentive plan incorporated reference exhibit 991 textron’s current report form 8k filed january 23 2009 103a textron inc 1999 longterm incentive plan textron employees amended restated effective july 25 2007 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 103b form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 103c form incentive stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 103d form restricted stock grant agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 104 textron spillover savings plan effective january 1 2009 including appendix defined contribution provisions supplemental benefits plan textron key executives effect january 1 2008 incorporated reference exhibit 105 textron’s annual report form 10k fiscal year ended january 3 2009 105 textron spillover pension plan amended restated effective january 1 2009 including appendix amended restated effective january 1 2009 defined benefit provisions supplemental benefits plan textron key executives effect january 1 2007 incorporated reference exhibit 106 textron’s annual report form 10k fiscal year ended january 3 2009 106 supplemental retirement plan textron key executives amended restated effective january 1 2009 including appendix provisions supplemental retirement plan textron key executives effect january 1 2008 incorporated reference exhibit 107 textron’s annual report form 10k fiscal year ended january 3 2009 107 deferred income plan textron executives effective january 1 2009 including appendix provisions deferred income plan textron key executives effect january 1 2008 incorporated reference exhibit 108 textron’s annual report form 10k fiscal year ended january 3 2009 108 deferred income plan nonemployee directors amended restated effective january 1 2009 including appendix prior plan provisions effect january 1 2008 incorporated reference exhibit 109 textron’s annual report form 10k fiscal year ended january 3 2009 109 survivor benefit plan textron key executives amended restated effective july 25 2007 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 incorporated reference exhibit 1010 textron’s annual report form 10k fiscal year ended january 3 2009 1010 severance plan textron key executives amended restated effective january 1 2010 1011a form indemnity agreement textron executive officers incorporated reference exhibit textron’s proxy statement annual meeting shareholders april 29 1987 1011b form indemnity agreement textron nonemployee directors approved nominating corporate governance committee board directors july 21 2009 entered nonemployee directors effective august 1 2009 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 1012 amended restated employment agreement textron kenneth c bohlen dated february 26 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 29 2008 1013 second amended restated employment agreement textron john butler dated february 26 2008 incorporated reference exhibit 103 textron’s current report form 8k filed february 28 2008 1014a amended restated employment agreement textron lewis b campbell dated february 26 2008 incorporated reference exhibit 101 textron’s current report form 8k filed february 28 2008 1014b letter agreement textron lewis b campbell dated september 22 2009 along clarification letter dated september 30 2009 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 1015a letter agreement textron scott c donnelly dated june 26 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended june 28 2008 1015b amendment letter agreement textron scott c donnelly dated december 16 2008 together addendum no1 thereto dated december 23 2008 incorporated reference exhibit 1015b textron’s annual report form 10k fiscal year ended january 3 2009 1015c agreement textron scott c donnelly dated may 1 2009 related mr donnelly’s personal use portion hangar space tf green airport leased textron incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 4 2009 1016 amended restated employment agreement textron theodore r french dated february 26 2008 incorporated reference exhibit 102 textron’s current report form 8k filed february 28 2008 1017 second amended restated employment agreement textron mary l howell dated february 26 2008 incorporated reference exhibit 104 textron’s current report form 8k filed february 28 2008 1018 second amended restated employment agreement textron terrence o’donnell dated february 26 2008 incorporated reference exhibit 105 textron’s current report form 8k filed february 28 2008 1019 letter agreement textron frank connor dated july 27 2009 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 1020 director compensation incorporated reference exhibit 1021 textron’s annual report form 10k fiscal year ended december 29 2007 1021 form aircraft time sharing agreement textron executive officers incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 27 2008 1022a 5year credit agreement dated march 28 2005 among textron banks listed therein jpmorgan chase bank na administrative agent citibank na syndication agent “5year credit agreement” incorporated reference exhibit 101 textron’s current report form 8k filed march 31 2005 1022b amendment 1 dated april 21 2006 5year credit agreement incorporated reference exhibit 101 textron’s current report form 8k filed april 25 2006 1022c amendment 2 dated april 20 2007 5year credit agreement incorporated reference exhibit 101 textron’s current report form 8k filed april 24 2007 1023a fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 102 textron financial corporation’s current report form 8k filed august 26 2003 1023b amendment 1 dated july 25 2005 fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed july 27 2005 1023c amendment 2 dated april 28 2006 fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed may 1 2006 1023d amendment 3 dated april 27 2007 fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k dated april 27 2007 1024a master services agreement textron inc computer sciences corporation dated october 27 2004 confidential treatment requested portions agreement incorporated reference exhibit 1026 textron’s annual report form 10k fiscal year ended january 1 2005 1024b amendment 4 master services agreement textron inc computer sciences corporation dated july 1 2007 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 1025a convertible bond hedge transaction confirmation dated april 29 2009 goldman sachs co textron incorporated reference exhibit 101 textron’s current report form 8k filed may 5 2009 1025b issuer warrant transaction confirmation dated april 29 2009 goldman sachs co textron incorporated reference exhibit 102 textron’s current report form 8k filed may 5 2009 1025c convertible bond hedge transaction confirmation dated april 29 2009 jpmorgan chase bank national association textron incorporated reference exhibit 103 textron’s current report form 8k filed may 5 2009 1025d issuer warrant transaction confirmation dated april 29 2009 jpmorgan chase bank national association textron incorporated reference exhibit 104 textron’s current report form 8k filed may 5 2009 1025e convertible bond hedge transaction confirmation dated april 30 2009 goldman sachs co textron incorporated reference exhibit 105 textron’s current report form 8k filed may 5 2009 1025f issuer warrant transaction confirmation dated april 30 2009 goldman sachs co textron incorporated reference exhibit 106 textron’s current report form 8k filed may 5 2009 1025g convertible bond hedge transaction confirmation dated april 30 2009 jpmorgan chase bank national association textron incorporated reference exhibit 107 textron’s current report form 8k filed may 5 2009 1025h issuer warrant transaction confirmation dated april 30 2009 jpmorgan chase bank national association textron incorporated reference exhibit 108 textron’s current report form 8k filed may 5 2009 1025i issuer warrant transaction reformation agreement dated may 4 2009 goldman sachs co textron incorporated reference exhibit 109 textron’s current report form 8k filed may 5 2009 1025j issuer warrant transaction reformation agreement dated may 4 2009 jpmorgan chase bank national association textron incorporated reference exhibit 1010 textron’s current report form 8k filed may 5 2009 1025k additional issuer warrant transaction reformation agreement dated may 4 2009 goldman sachs co textron incorporated reference exhibit 1011 textron’s current report form 8k filed may 5 2009 1025l additional issuer warrant transaction reformation agreement dated may 4 2009 jpmorgan chase bank national association textron incorporated reference exhibit 1012 textron’s current report form 8k filed may 5 2009 121 computation ratio income fixed charges textron inc’s manufacturing group 122 computation ratio income fixed charges textron inc including majorityowned subsidiaries certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list consent independent registered public accounting firm power attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 following materials textron inc’s annual report form 10k year ended january 2 2010 formatted xbrl extensible business reporting language consolidated statements operations ii consolidated balance sheets iii consolidated statements shareholders’ equity iv consolidated statements cash flows v notes consolidated financial statements tagged blocks text vi schedule ii valuation qualifying accounts tagged block text format signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 25th day february 2010 pursuant requirements securities exchange act 1934 annual report form 10k signed 25th day february 2010 following persons behalf registrant capacities indicated jayne donegan jayne donegan attorneyinfact exhibit index 101f form restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 29 2008 101g form cashsettled restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 101g textron’s annual report form 10k fiscal year ended january 3 2009 101h form performance share unit grant agreement incorporated reference exhibit 101h textron’s annual report form 10k fiscal year ended january 3 2009 101i performance factors executive officers performance share units textron inc 2007 longterm incentive plan incorporated reference exhibit 992 textron’s current report form 8k filed january 29 2008 101j performance factors executive officers performance share units granted 2009 textron inc 2007 longterm incentive plan incorporated reference exhibit 992 textron’s current report form 8k filed january 23 2009 101k form performance cash unit grant agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 4 2009 102a textron inc shortterm incentive plan amended restated effective july 25 2007 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 102b objectives executive officers textron inc shortterm incentive plan incorporated reference exhibit 991 textron’s current report form 8k filed january 23 2009 103a textron inc 1999 longterm incentive plan textron employees amended restated effective july 25 2007 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 103b form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 103c form incentive stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 103d form restricted stock grant agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 104 textron spillover savings plan effective january 1 2009 including appendix defined contribution provisions supplemental benefits plan textron key executives effect january 1 2008 incorporated reference exhibit 105 textron’s annual report form 10k fiscal year ended january 3 2009 105 textron spillover pension plan amended restated effective january 1 2009 including appendix amended restated effective january 1 2009 defined benefit provisions supplemental benefits plan textron key executives effect january 1 2007 incorporated reference exhibit 106 textron’s annual report form 10k fiscal year ended january 3 2009 106 supplemental retirement plan textron key executives amended restated effective january 1 2009 including appendix provisions supplemental retirement plan textron key executives effect january 1 2008 incorporated reference exhibit 107 textron’s annual report form 10k fiscal year ended january 3 2009 107 deferred income plan textron executives effective january 1 2009 including appendix provisions deferred income plan textron key executives effect january 1 2008 incorporated reference exhibit 108 textron’s annual report form 10k fiscal year ended january 3 2009 108 deferred income plan nonemployee directors amended restated effective january 1 2009 including appendix prior plan provisions effect january 1 2008 incorporated reference exhibit 109 textron’s annual report form 10k fiscal year ended january 3 2009 109 survivor benefit plan textron key executives amended restated effective july 25 2007 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 incorporated reference exhibit 1010 textron’s annual report form 10k fiscal year ended january 3 2009 1010 severance plan textron key executives amended restated effective january 1 2010 1011a form indemnity agreement textron executive officers incorporated reference exhibit textron’s proxy statement annual meeting shareholders april 29 1987 1011b form indemnity agreement textron nonemployee directors approved nominating corporate governance committee board directors july 21 2009 entered nonemployee directors effective august 1 2009 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 1012 amended restated employment agreement textron kenneth c bohlen dated february 26 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 29 2008 1013 second amended restated employment agreement textron john butler dated february 26 2008 incorporated reference exhibit 103 textron’s current report form 8k filed february 28 2008 1014a amended restated employment agreement textron lewis b campbell dated february 26 2008 incorporated reference exhibit 101 textron’s current report form 8k filed february 28 2008 1014b letter agreement textron lewis b campbell dated september 22 2009 along clarification letter dated september 30 2009 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 1015a letter agreement textron scott c donnelly dated june 26 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended june 28 2008 1015b amendment letter agreement textron scott c donnelly dated december 16 2008 together addendum no1 thereto dated december 23 2008 incorporated reference exhibit 1015b textron’s annual report form 10k fiscal year ended january 3 2009 1015c agreement textron scott c donnelly dated may 1 2009 related mr donnelly’s personal use portion hangar space tf green airport leased textron incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 4 2009 1016 amended restated employment agreement textron theodore r french dated february 26 2008 incorporated reference exhibit 102 textron’s current report form 8k filed february 28 2008 1017 second amended restated employment agreement textron mary l howell dated february 26 2008 incorporated reference exhibit 104 textron’s current report form 8k filed february 28 2008 1018 second amended restated employment agreement textron terrence o’donnell dated february 26 2008 incorporated reference exhibit 105 textron’s current report form 8k filed february 28 2008 1019 letter agreement textron frank connor dated july 27 2009 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 1020 director compensation incorporated reference exhibit 1021 textron’s annual report form 10k fiscal year ended december 29 2007 1021 form aircraft time sharing agreement textron executive officers incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 27 2008 1022a 5year credit agreement dated march 28 2005 among textron banks listed therein jpmorgan chase bank na administrative agent citibank na syndication agent “5year credit agreement” incorporated reference exhibit 101 textron’s current report form 8k filed march 31 2005 1022b amendment 1 dated april 21 2006 5year credit agreement incorporated reference exhibit 101 textron’s current report form 8k filed april 25 2006 1022c amendment 2 dated april 20 2007 5year credit agreement incorporated reference exhibit 101 textron’s current report form 8k filed april 24 2007 1023a fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 102 textron financial corporation’s current report form 8k filed august 26 2003 1023b amendment 1 dated july 25 2005 fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed july 27 2005 1023c amendment 2 dated april 28 2006 fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed may 1 2006 1023d amendment 3 dated april 27 2007 fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k dated april 27 2007 1024a master services agreement textron inc computer sciences corporation dated october 27 2004 confidential treatment requested portions agreement incorporated reference exhibit 1026 textron’s annual report form 10k fiscal year ended january 1 2005 1024b amendment 4 master services agreement textron inc computer sciences corporation dated july 1 2007 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 1025a convertible bond hedge transaction confirmation dated april 29 2009 goldman sachs co textron incorporated reference exhibit 101 textron’s current report form 8k filed may 5 2009 1025b issuer warrant transaction confirmation dated april 29 2009 goldman sachs co textron incorporated reference exhibit 102 textron’s current report form 8k filed may 5 2009 1025c convertible bond hedge transaction confirmation dated april 29 2009 jpmorgan chase bank national association textron incorporated reference exhibit 103 textron’s current report form 8k filed may 5 2009 1025d issuer warrant transaction confirmation dated april 29 2009 jpmorgan chase bank national association textron incorporated reference exhibit 104 textron’s current report form 8k filed may 5 2009 1025e convertible bond hedge transaction confirmation dated april 30 2009 goldman sachs co textron incorporated reference exhibit 105 textron’s current report form 8k filed may 5 2009 1025f issuer warrant transaction confirmation dated april 30 2009 goldman sachs co textron incorporated reference exhibit 106 textron’s current report form 8k filed may 5 2009 1025g convertible bond hedge transaction confirmation dated april 30 2009 jpmorgan chase bank national association textron incorporated reference exhibit 107 textron’s current report form 8k filed may 5 2009 1025h issuer warrant transaction confirmation dated april 30 2009 jpmorgan chase bank national association textron incorporated reference exhibit 108 textron’s current report form 8k filed may 5 2009 1025i issuer warrant transaction reformation agreement dated may 4 2009 goldman sachs co textron incorporated reference exhibit 109 textron’s current report form 8k filed may 5 2009 1025j issuer warrant transaction reformation agreement dated may 4 2009 jpmorgan chase bank national association textron incorporated reference exhibit 1010 textron’s current report form 8k filed may 5 2009 1025k additional issuer warrant transaction reformation agreement dated may 4 2009 goldman sachs co textron incorporated reference exhibit 1011 textron’s current report form 8k filed may 5 2009 1025l additional issuer warrant transaction reformation agreement dated may 4 2009 jpmorgan chase bank national association textron incorporated reference exhibit 1012 textron’s current report form 8k filed may 5 2009 121 computation ratio income fixed charges textron inc’s manufacturing group 122 computation ratio income fixed charges textron inc including majorityowned subsidiaries certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list consent independent registered public accounting firm power attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 following materials textron inc’s annual report form 10k year ended january 2 2010 formatted xbrl extensible business reporting language consolidated statements operations ii consolidated balance sheets iii consolidated statements shareholders’ equity iv consolidated statements cash flows v notes consolidated financial statements tagged blocks text vi schedule ii valuation qualifying accounts tagged block text formatitem 15 exhibits financial statement schedules financial statements schedules see index page 40 exhibits 31a restated certificate incorporation textron filed secretary state delaware april 29 2010 incorporated reference exhibit 31 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 31b certificate amendment restated certificate incorporation textron inc filed secretary state delaware april 27 2011 incorporated reference exhibit 31 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 32 amended restated bylaws textron inc effective april 28 2010 amended april 27 2011 incorporated reference exhibit 32 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 41 support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 41 textron’s annual report form 10k fiscal year ended december 31 2011 note instruments defining rights holders certain issues longterm debt textron filed exhibits authorized principal amount one issues exceed 10 total assets textron subsidiaries consolidated basis textron agrees furnish copy instrument commission upon request note exhibits 101 1019 management contracts compensatory plans contracts agreements 101a textron inc 2007 longterm incentive plan amended restated april 28 2010 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 31 2012 101b form nonqualified stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 101c form incentive stock option agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 101d form restricted stock unit grant agreement incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 101e form restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 29 2008 101f form cashsettled restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 101g textron’s annual report form 10k fiscal year ended january 3 2009 101g form performance share unit grant agreement incorporated reference exhibit 101h textron’s annual report form 10k fiscal year ended january 3 2009 101h form performance cash unit grant agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 4 2009 102 textron inc shortterm incentive plan amended restated effective january 3 2010 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 103a textron inc 1999 longterm incentive plan textron employees amended restated effective april 28 2010 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 2010 103b form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 sec file 00105480 103c form incentive stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 sec file 00105480 104a textron spillover savings plan effective january 3 2010 including appendix defined contribution provisions supplemental benefits plan textron key executives effect january 1 2008 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 104b second amendment textron spillover savings plan dated december 21 2012 105a textron spillover pension plan amended restated effective january 3 2010 including appendix amended restated effective january 3 2010 defined benefit provisions supplemental benefits plan textron key executives effect january 1 2007 incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 105b amendments textron spillover pension plan dated october 12 2011 incorporated reference exhibit 105b textron’s annual report form 10k fiscal year ended december 31 2011 106 supplemental retirement plan textron key executives amended restated effective january 3 2010 including appendix provisions supplemental retirement plan textron key executives effect january 1 2008 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 107 deferred income plan textron executives effective january 3 2010 including appendix provisions deferred income plan textron key executives effect january 1 2008 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 108a deferred income plan nonemployee directors amended restated effective january 1 2009 including appendix prior plan provisions effect january 1 2008 incorporated reference exhibit 109 textron’s annual report form 10k fiscal year ended january 3 2009 108b amendment 1 deferred income plan nonemployee directors amended restated effective january 1 2009 dated november 6 2012 109 survivor benefit plan textron key executives amended restated effective january 3 2010 incorporated reference exhibit 106 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 1010a severance plan textron key executives amended restated effective january 1 2010 incorporated reference exhibit 1010 textron’s annual report form 10k fiscal year ended january 2 2010 1010b first amendment severance plan textron key executives dated october 26 2010 incorporated reference exhibit 1010b textron’s annual report form 10k fiscal year ended january 1 2011 1011 form indemnity agreement textron executive officers incorporated reference exhibit textron’s proxy statement annual meeting shareholders april 29 1987 sec file 00105480 1012 form indemnity agreement textron nonemployee directors approved nominating corporate governance committee board directors july 21 2009 entered nonemployee directors effective august 1 2009 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 1013a second amended restated employment agreement textron john butler dated february 26 2008 incorporated reference exhibit 103 textron’s current report form 8k filed february 28 2008 1013b letter agreement textron john butler dated june 4 2012 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended june 30 2012 1014a letter agreement textron scott c donnelly dated june 26 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended june 28 2008 1014b amendment letter agreement textron scott c donnelly dated december 16 2008 together addendum no1 thereto dated december 23 2008 incorporated reference exhibit 1015b textron’s annual report form 10k fiscal year ended january 3 2009 1014c agreement textron scott c donnelly dated may 1 2009 related mr donnelly’s personal use portion hangar space tf green airport leased textron incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 4 2009 1014d hangar license services agreement made entered april 25 2011 effective december 5 2010 textron inc mr donnelly’s limited liability company incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 1015a letter agreement textron frank connor dated july 27 2009 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 1015b hangar license services agreement made entered april 25 2011 effective december 5 2010 textron inc mr connor’s limited liability company incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 1016 letter agreement textron cheryl h johnson dated june 12 2012 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended june 30 2012 1017a letter agreement textron e robert lupone dated december 22 2011 incorporated reference exhibit 1017 textron’s annual report form 10k fiscal year ended december 31 2011 1017b amendment letter agreement textron e robert lupone dated july 27 2012 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended september 29 2012 1018 director compensation incorporated reference exhibit 1021 textron’s annual report form 10k fiscal year ended december 29 2007 sec file 00105480 1019 form aircraft time sharing agreement textron executive officers incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 27 2008 1020a credit agreement dated march 23 2011 among textron lenders listed therein jpmorgan chase bank na administrative agent citibank na bank america na syndication agents deutsche bank securities inc bank tokyomitsubishi ufj ltd documentation agents incorporated reference exhibit 101 textron’s current report form 8k filed march 28 2011 1020b amendment 1 dated april 13 2011 credit agreement dated march 23 2011 among textron lenders listed therein jpmorgan chase bank na administrative agent citibank na bank america na syndication agents deutsche bank securities inc bank tokyomitsubishi ufj ltd documentation agents incorporated reference exhibit 101 textron’s current report form 8k filed april 15 2011 1021a master services agreement textron inc computer sciences corporation dated october 27 2004 incorporated reference exhibit 1026 textron’s annual report form 10k fiscal year ended january 1 2005 sec file 00105480 1021b amendment 4 master services agreement textron inc computer sciences corporation dated july 1 2007 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 1021c amendment 5 master services agreement textron inc computer sciences corporation dated march 13 2008 incorporated reference exhibit 1022c textron’s annual report form 10k fiscal year ended january 1 2011 1021d amendment 6 master services agreement textron inc computer sciences corporation dated june 17 2009 incorporated reference exhibit 1022d textron’s annual report form 10k fiscal year ended january 1 2011 1021e amendment 7 master services agreement textron inc computer sciences corporation dated september 30 2010 incorporated reference exhibit 1022e textron’s annual report form 10k fiscal year ended january 1 2011 1022a convertible bond hedge transaction confirmation dated april 29 2009 goldman sachs co textron incorporated reference exhibit 101 textron’s current report form 8k filed may 5 2009 1022b issuer warrant transaction confirmation dated april 29 2009 goldman sachs co textron incorporated reference exhibit 102 textron’s current report form 8k filed may 5 2009 1022c convertible bond hedge transaction confirmation dated april 29 2009 jpmorgan chase bank national association textron incorporated reference exhibit 103 textron’s current report form 8k filed may 5 2009 1022d issuer warrant transaction confirmation dated april 29 2009 jpmorgan chase bank national association textron incorporated reference exhibit 104 textron’s current report form 8k filed may 5 2009 1022e bond hedge amendment termination agreement dated october 25 2011 respect convertible bond hedge transaction confirmations dated april 29 2009 april 30 2009 textron goldman sachs co incorporated reference exhibit 101 textron’s current report form 8k filed october 25 2011 1022f warrant amendment termination agreement dated october 25 2011 respect issuer warrant transaction confirmations dated april 29 2009 april 30 2009 reformed textron goldman sachs co incorporated reference exhibit 102 textron’s current report form 8k filed october 25 2011 1022g bond hedge amendment termination agreement dated october 25 2011 convertible bond hedge transaction confirmations dated april 29 2009 april 30 2009 textron jpmorgan chase bank national association incorporated reference exhibit 103 textron’s current report form 8k filed october 25 2011 1022h warrant amendment termination agreement dated october 25 2011 issuer warrant transaction confirmations dated april 29 2009 april 30 2009 reformed textron jpmorgan chase bank national association incorporated reference exhibit 104 textron’s current report form 8k filed october 25 2011 1022i issuer warrant transaction reformation agreement dated may 4 2009 goldman sachs co textron incorporated reference exhibit 109 textron’s current report form 8k filed may 5 2009 1022j issuer warrant transaction reformation agreement dated may 4 2009 jpmorgan chase bank national association textron incorporated reference exhibit 1010 textron’s current report form 8k filed may 5 2009 1022k amendment base bond hedge transaction dated june 29 2012 goldman sachs co textron inc incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 29 2012 1022l amendment base warrant transaction dated june 29 2012 goldman sachs co textron inc incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended september 29 2012 1022m amendment base bond hedge transaction dated june 29 2012 jpmorgan chase bank national association textron inc incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 29 2012 1022n amendment base warrant transaction dated june 29 2012 jpmorgan chase bank national association textron inc incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended september 29 2012 121 computation ratio income fixed charges textron inc’s manufacturing group 122 computation ratio income fixed charges textron inc including majorityowned subsidiaries certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list consent independent registered public accounting firm power attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 following materials textron inc’s annual report form 10k year ended december 29 2012 formatted xbrl extensible business reporting language consolidated statements operations ii consolidated statements comprehensive income loss iii consolidated balance sheets iv consolidated statements shareholders’ equity v consolidated statements cash flows vi notes consolidated financial statements vii schedule ii valuation qualifying accounts confidential treatment requested portions document signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 15th day february 2013 pursuant requirements securities exchange act 1934 annual report form 10k signed 15th day february 2013 following persons behalf registrant capacities indicateditem 15 exhibits financial statement schedules financial statements schedules see index page 39 101g form performance share unit grant agreement incorporated reference exhibit 101h textron’s annual report form 10k fiscal year ended january 3 2009 101h form performance cash unit grant agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 4 2009 102 textron inc shortterm incentive plan amended restated effective january 3 2010 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 103a textron inc 1999 longterm incentive plan textron employees amended restated effective april 28 2010 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 2010 103b form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 sec file 00105480 103c form incentive stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 sec file 00105480 104a textron spillover savings plan effective january 3 2010 including appendix defined contribution provisions supplemental benefits plan textron key executives effect january 1 2008 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 104b second amendment textron spillover savings plan dated december 21 2012 incorporated reference exhibit 104b textron’s annual report form 10k fiscal year ended december 29 2012 104c third amendment textron spillover savings plan dated october 7 2013 105a textron spillover pension plan amended restated effective january 3 2010 including appendix amended restated effective january 3 2010 defined benefit provisions supplemental benefits plan textron key executives effect january 1 2007 incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 105b amendments textron spillover pension plan dated october 12 2011 incorporated reference exhibit 105b textron’s annual report form 10k fiscal year ended december 31 2011 105c second amendment textron spillover pension plan dated october 7 2013 106a deferred income plan textron executives effective january 3 2010 including appendix provisions deferred income plan textron key executives effect january 1 2008 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 106b first amendment deferred income plan textron executives dated november 7 2013 107a deferred income plan nonemployee directors amended restated effective january 1 2009 including appendix prior plan provisions effect january 1 2008 incorporated reference exhibit 109 textron’s annual report form 10k fiscal year ended january 3 2009 107b amendment 1 deferred income plan nonemployee directors amended restated effective january 1 2009 dated november 6 2012 incorporated reference exhibit 108b textron’s annual report form 10k fiscal year ended december 29 2012 108a severance plan textron key executives amended restated effective january 1 2010 incorporated reference exhibit 1010 textron’s annual report form 10k fiscal year ended january 2 2010 108b first amendment severance plan textron key executives dated october 26 2010 incorporated reference exhibit 1010b textron’s annual report form 10k fiscal year ended january 1 2011 109 form indemnity agreement textron executive officers incorporated reference exhibit textron’s proxy statement annual meeting shareholders april 29 1987 sec file 00105480 1010 form indemnity agreement textron nonemployee directors approved nominating corporate governance committee board directors july 21 2009 entered nonemployee directors effective august 1 2009 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 1011a letter agreement textron scott c donnelly dated june 26 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended june 28 2008 1011b amendment letter agreement textron scott c donnelly dated december 16 2008 together addendum no1 thereto dated december 23 2008 incorporated reference exhibit 1015b textron’s annual report form 10k fiscal year ended january 3 2009 1011c agreement textron scott c donnelly dated may 1 2009 related mr donnelly’s personal use portion hangar space tf green airport leased textron incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 4 2009 1011d hangar license services agreement made entered april 25 2011 effective december 5 2010 textron inc mr donnelly’s limited liability company incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 1012a letter agreement textron frank connor dated july 27 2009 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 1012b hangar license services agreement made entered april 25 2011 effective december 5 2010 textron inc mr connor’s limited liability company incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 1013 letter agreement textron cheryl h johnson dated june 12 2012 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended june 30 2012 1014a letter agreement textron e robert lupone dated december 22 2011 incorporated reference exhibit 1017 textron’s annual report form 10k fiscal year ended december 31 2011 1014b amendment letter agreement textron e robert lupone dated july 27 2012 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended september 29 2012 1015 director compensation incorporated reference exhibit 1021 textron’s annual report form 10k fiscal year ended december 29 2007 sec file 00105480 1016 form aircraft time sharing agreement textron executive officers incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 27 2008 1017 credit agreement dated october 4 2013 among textron lenders listed therein jpmorgan chase bank na administrative agent citibank na bank america na syndication agents bank tokyomitsubishi ufj ltd documentation agent incorporated reference exhibit 101 textron’s current report form 8k filed october 4 2013 1018a master services agreement textron inc computer sciences corporation dated october 27 2004 incorporated reference exhibit 1026 textron’s annual report form 10k fiscal year ended january 1 2005 sec file 00105480 1018b amendment 4 master services agreement textron inc computer sciences corporation dated july 1 2007 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 1018c amendment 5 master services agreement textron inc computer sciences corporation dated march 13 2008 incorporated reference exhibit 1022c textron’s annual report form 10k fiscal year ended january 1 2011 1018d amendment 6 master services agreement textron inc computer sciences corporation dated june 17 2009 incorporated reference exhibit 1022d textron’s annual report form 10k fiscal year ended january 1 2011 1018e amendment 7 master services agreement textron inc computer sciences corporation dated september 30 2010 incorporated reference exhibit 1022e textron’s annual report form 10k fiscal year ended january 1 2011 1019 agreement plan merger among beech holdings llc sky intermediate merger sub llc textron inc textron acquisition llc dated december 26 2013 1020 term credit agreement dated january 24 2014 among textron jpmorgan chase bank na administrative agent citibank na bank america na syndication agents bank tokyomitsubishi ufj ltd documentation agent lenders named therein 121 computation ratio income fixed charges textron inc’s manufacturing group 122 computation ratio income fixed charges textron inc including majorityowned subsidiaries certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list consent independent registered public accounting firm power attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 following materials textron inc’s annual report form 10k year ended december 28 2013 formatted xbrl extensible business reporting language consolidated statements operations ii consolidated statements comprehensive income loss iii consolidated balance sheets iv consolidated statements shareholders’ equity v consolidated statements cash flows vi notes consolidated financial statements vii schedule ii valuation qualifying accounts confidential treatment requested portions document signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 14th day february 2014 pursuant requirements securities exchange act 1934 annual report form 10k signed 14th day february 2014 following persons behalf registrant capacities indicateditem 15 exhibits financial statement schedules financial statements schedules see index page 37 exhibits 31a restated certificate incorporation textron filed secretary state delaware april 29 2010 incorporated reference exhibit 31 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 31b certificate amendment restated certificate incorporation textron inc filed secretary state delaware april 27 2011 incorporated reference exhibit 31 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 32 amended restated bylaws textron inc effective april 28 2010 amended april 27 2011 july 23 2013 february 25 2015 41 support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 41 textron’s annual report form 10k fiscal year ended december 31 2011 note instruments defining rights holders certain issues longterm debt textron filed exhibits authorized principal amount one issues exceed 10 total assets textron subsidiaries consolidated basis textron agrees furnish copy instrument commission upon request note exhibits 101 1016 management contracts compensatory plans contracts agreements 101a textron inc 2007 longterm incentive plan amended restated april 28 2010 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 31 2012 101b form nonqualified stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 sec file 00105480 101c form incentive stock option agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 sec file 00105480 101d form restricted stock unit grant agreement incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 sec file 00105480 101e form restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 29 2008 sec file 00105480 101f form cashsettled restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 101g textron’s annual report form 10k fiscal year ended january 3 2009 sec file 00105480 101g form performance share unit grant agreement incorporated reference exhibit 101h textron’s annual report form 10k fiscal year ended january 3 2009 sec file 00105480 101h form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 101i form stocksettled restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 101j form performance share unit grant agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 102 textron inc shortterm incentive plan amended restated effective january 3 2010 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 103a textron inc 1999 longterm incentive plan textron employees amended restated effective april 28 2010 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 2010 103b form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 sec file 00105480 103c form incentive stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 sec file 00105480 104a textron spillover savings plan effective january 3 2010 including appendix defined contribution provisions supplemental benefits plan textron key executives effect january 1 2008 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 104b second amendment textron spillover savings plan dated december 21 2012 incorporated reference exhibit 104b textron’s annual report form 10k fiscal year ended december 29 2012 104c third amendment textron spillover savings plan dated october 7 2013 incorporated reference exhibit 104c textron’s annual report form 10k fiscal year ended december 28 2013 105a textron spillover pension plan amended restated effective january 3 2010 including appendix amended restated effective january 3 2010 defined benefit provisions supplemental benefits plan textron key executives effect january 1 2007 incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 105b amendments textron spillover pension plan dated october 12 2011 incorporated reference exhibit 105b textron’s annual report form 10k fiscal year ended december 31 2011 105c second amendment textron spillover pension plan dated october 7 2013 incorporated reference exhibit 105c textron’s annual report form 10k fiscal year ended december 28 2013 106a deferred income plan textron executives effective january 3 2010 including appendix provisions deferred income plan textron key executives effect january 1 2008 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 106b first amendment deferred income plan textron executives dated november 7 2013 incorporated reference exhibit 106b textron’s annual report form 10k fiscal year ended december 28 2013 106c second amendment deferred income plan textron executives dated march 24 2014 incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 106d third amendment deferred income plan textron executives dated december 12 2014 107a deferred income plan nonemployee directors amended restated effective january 1 2009 including appendix prior plan provisions effect january 1 2008 incorporated reference exhibit 109 textron’s annual report form 10k fiscal year ended january 3 2009 sec file 00105480 107b amendment 1 deferred income plan nonemployee directors amended restated effective january 1 2009 dated november 6 2012 incorporated reference exhibit 108b textron’s annual report form 10k fiscal year ended december 29 2012 108a severance plan textron key executives amended restated effective january 1 2010 incorporated reference exhibit 1010 textron’s annual report form 10k fiscal year ended january 2 2010 sec file 00105480 108b first amendment severance plan textron key executives dated october 26 2010 incorporated reference exhibit 1010b textron’s annual report form 10k fiscal year ended january 1 2011 108c second amendment severance plan textron key executives dated march 24 2014 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 109 form indemnity agreement textron executive officers incorporated reference exhibit textron’s proxy statement annual meeting shareholders april 29 1987 sec file 00105480 1010 form indemnity agreement textron nonemployee directors approved nominating corporate governance committee board directors july 21 2009 entered nonemployee directors effective august 1 2009 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 sec file 00105480 1011a letter agreement textron scott c donnelly dated june 26 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended june 28 2008 sec file 00105480 1011b amendment letter agreement textron scott c donnelly dated december 16 2008 together addendum no1 thereto dated december 23 2008 incorporated reference exhibit 1015b textron’s annual report form 10k fiscal year ended january 3 2009 sec file 00105480 1011c agreement textron scott c donnelly dated may 1 2009 related mr donnelly’s personal use portion hangar space tf green airport leased textron incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 4 2009 sec file 00105480 1011d hangar license services agreement made entered april 25 2011 effective december 5 2010 textron inc mr donnelly’s limited liability company incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 1012a letter agreement textron frank connor dated july 27 2009 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 sec file 00105480 1012b hangar license services agreement made entered april 25 2011 effective december 5 2010 textron inc mr connor’s limited liability company incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 1013 letter agreement textron cheryl h johnson dated june 12 2012 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended june 30 2012 1014a letter agreement textron e robert lupone dated december 22 2011 incorporated reference exhibit 1017 textron’s annual report form 10k fiscal year ended december 31 2011 1014b amendment letter agreement textron e robert lupone dated july 27 2012 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended september 29 2012 1015 director compensation incorporated reference exhibit 1021 textron’s annual report form 10k fiscal year ended december 29 2007 sec file 00105480 1016 form aircraft time sharing agreement textron executive officers incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 27 2008 sec file 00105480 1017 credit agreement dated october 4 2013 among textron lenders listed therein jpmorgan chase bank na administrative agent citibank na bank america na syndication agents bank tokyomitsubishi ufj ltd documentation agent incorporated reference exhibit 101 textron’s current report form 8k filed october 4 2013 1018a master services agreement textron inc computer sciences corporation dated october 27 2004 incorporated reference exhibit 1026 textron’s annual report form 10k fiscal year ended january 1 2005 sec file 00105480 1018b amendment 4 master services agreement textron inc computer sciences corporation dated july 1 2007 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 sec file 00105480 1018c amendment 5 master services agreement textron inc computer sciences corporation dated march 13 2008 incorporated reference exhibit 1022c textron’s annual report form 10k fiscal year ended january 1 2011 1018d amendment 6 master services agreement textron inc computer sciences corporation dated june 17 2009 incorporated reference exhibit 1022d textron’s annual report form 10k fiscal year ended january 1 2011 1018e amendment 7 master services agreement textron inc computer sciences corporation dated september 30 2010 incorporated reference exhibit 1022e textron’s annual report form 10k fiscal year ended january 1 2011 1019 agreement plan merger among beech holdings llc sky intermediate merger sub llc textron inc textron acquisition llc dated december 26 2013 incorporated reference exhibit 1019 textron’s annual report form 10k fiscal year ended december 28 2013 1020 term credit agreement dated january 24 2014 among textron jpmorgan chase bank na administrative agent citibank na bank america na syndication agents bank tokyomitsubishi ufj ltd documentation agent lenders named therein incorporated reference exhibit 1020 textron’s annual report form 10k fiscal year ended december 28 2013 121 computation ratio income fixed charges textron inc’s manufacturing group 122 computation ratio income fixed charges textron inc including majorityowned subsidiaries certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list consent independent registered public accounting firm power attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 following materials textron inc’s annual report form 10k year ended january 3 2015 formatted xbrl extensible business reporting language consolidated statements operations ii consolidated statements comprehensive income iii consolidated balance sheets iv consolidated statements shareholders’ equity v consolidated statements cash flows vi notes consolidated financial statements vii schedule ii valuation qualifying accounts confidential treatment requested portions document signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 25th day february 2015 pursuant requirements securities exchange act 1934 annual report form 10k signed 25th day february 2015 following persons behalf registrant capacities indicateditem 15 exhibits financial statement schedules financial statements schedules see index page 35 exhibits 31a restated certificate incorporation textron filed secretary state delaware april 29 2010 incorporated reference exhibit 31 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 sec file 00105480 31b certificate amendment restated certificate incorporation textron inc filed secretary state delaware april 27 2011 incorporated reference exhibit 31 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 32 amended restated bylaws textron inc effective april 28 2010 amended april 27 2011 july 23 2013 february 25 2015 incorporated reference exhibit 32 textron’s annual report form 10k fiscal year ended january 3 2015 41a support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 41 textron’s annual report form 10k fiscal year ended december 31 2011 41b amendment support agreement dated december 23 2015 textron inc textron financial corporation note instruments defining rights holders certain issues longterm debt textron filed exhibits authorized principal amount one issues exceed 10 total assets textron subsidiaries consolidated basis textron agrees furnish copy instrument commission upon request note exhibits 101 1016 management contracts compensatory plans contracts agreements 101a textron inc 2007 longterm incentive plan amended restated april 28 2010 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 31 2012 101b form nonqualified stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 sec file 00105480 101c form incentive stock option agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 sec file 00105480 101d form restricted stock unit grant agreement incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 sec file 00105480 101e form restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 29 2008 sec file 00105480 101f form cashsettled restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 101g textron’s annual report form 10k fiscal year ended january 3 2009 sec file 00105480 101g form performance share unit grant agreement incorporated reference exhibit 101h textron’s annual report form 10k fiscal year ended january 3 2009 sec file 00105480 101h form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 101i form stocksettled restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 101j form performance share unit grant agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 102a textron inc shortterm incentive plan amended restated effective january 3 2010 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 sec file 00105480 102b amendment 1 textron inc shortterm incentive plan amended restated effective january 3 2010 dated july 22 2015 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended october 3 2015 103 textron inc 2015 longterm incentive plan incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 4 2015 104 textron spillover savings plan effective october 5 2015 105a textron spillover pension plan amended restated effective january 3 2010 including appendix amended restated effective january 3 2010 defined benefit provisions supplemental benefits plan textron key executives effect january 1 2007 incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 sec file 00105480 105b amendments textron spillover pension plan dated october 12 2011 incorporated reference exhibit 105b textron’s annual report form 10k fiscal year ended december 31 2011 105c second amendment textron spillover pension plan dated october 7 2013 incorporated reference exhibit 105c textron’s annual report form 10k fiscal year ended december 28 2013 106 deferred income plan textron executives effective october 5 2015 107a deferred income plan nonemployee directors amended restated effective january 1 2009 including appendix prior plan provisions effect january 1 2008 incorporated reference exhibit 109 textron’s annual report form 10k fiscal year ended january 3 2009 sec file 00105480 107b amendment 1 deferred income plan nonemployee directors amended restated effective january 1 2009 dated november 6 2012 incorporated reference exhibit 108b textron’s annual report form 10k fiscal year ended december 29 2012 108a severance plan textron key executives amended restated effective january 1 2010 incorporated reference exhibit 1010 textron’s annual report form 10k fiscal year ended january 2 2010 sec file 00105480 108b first amendment severance plan textron key executives dated october 26 2010 incorporated reference exhibit 1010b textron’s annual report form 10k fiscal year ended january 1 2011 sec file 00105480 108c second amendment severance plan textron key executives dated march 24 2014 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 109 form indemnity agreement textron executive officers incorporated reference exhibit textron’s proxy statement annual meeting shareholders april 29 1987 sec file 00105480 1010 form indemnity agreement textron nonemployee directors approved nominating corporate governance committee board directors july 21 2009 entered nonemployee directors effective august 1 2009 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 sec file 00105480 1011a letter agreement textron scott c donnelly dated june 26 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended june 28 2008 sec file 00105480 1011b amendment letter agreement textron scott c donnelly dated december 16 2008 together addendum no1 thereto dated december 23 2008 incorporated reference exhibit 1015b textron’s annual report form 10k fiscal year ended january 3 2009 sec file 00105480 1011c agreement textron scott c donnelly dated may 1 2009 related mr donnelly’s personal use portion hangar space tf green airport leased textron incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 4 2009 sec file 00105480 1011d hangar license services agreement made entered april 25 2011 effective december 5 2010 textron inc mr donnelly’s limited liability company incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 1011e amended restated hangar license services agreement made entered october 1 2015 textron inc mr donnelly’s limited liability company incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended october 3 2015 1012a letter agreement textron frank connor dated july 27 2009 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 sec file 00105480 1012b hangar license services agreement made entered april 25 2011 effective december 5 2010 textron inc mr connor’s limited liability company incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 1012c amended restated hangar license services agreement made entered july 24 2015 textron inc mr connor’s limited liability company incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended october 3 2015 1013 letter agreement textron cheryl h johnson dated june 12 2012 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended june 30 2012 1014a letter agreement textron e robert lupone dated december 22 2011 incorporated reference exhibit 1017 textron’s annual report form 10k fiscal year ended december 31 2011 1014b amendment letter agreement textron e robert lupone dated july 27 2012 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended september 29 2012 1015 director compensation 1016 form aircraft time sharing agreement textron executive officers incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 27 2008 sec file 00105480 1017 credit agreement dated october 4 2013 among textron lenders listed therein jpmorgan chase bank na administrative agent citibank na bank america na syndication agents bank tokyomitsubishi ufj ltd documentation agent incorporated reference exhibit 101 textron’s current report form 8k filed october 4 2013 1018a master services agreement textron inc computer sciences corporation dated october 27 2004 incorporated reference exhibit 1026 textron’s annual report form 10k fiscal year ended january 1 2005 sec file 00105480 1018b amendment 4 master services agreement textron inc computer sciences corporation dated july 1 2007 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 sec file 00105480 1018c amendment 5 master services agreement textron inc computer sciences corporation dated march 13 2008 incorporated reference exhibit 1022c textron’s annual report form 10k fiscal year ended january 1 2011 sec file 00105480 1018d amendment 6 master services agreement textron inc computer sciences corporation dated june 17 2009 incorporated reference exhibit 1022d textron’s annual report form 10k fiscal year ended january 1 2011 sec file 00105480 1018e amendment 7 master services agreement textron inc computer sciences corporation dated september 30 2010 incorporated reference exhibit 1022e textron’s annual report form 10k fiscal year ended january 1 2011 sec file 00105480 1019 agreement plan merger among beech holdings llc sky intermediate merger sub llc textron inc textron acquisition llc dated december 26 2013 incorporated reference exhibit 1019 textron’s annual report form 10k fiscal year ended december 28 2013 1020 term credit agreement dated january 24 2014 among textron jpmorgan chase bank na administrative agent citibank na bank america na syndication agents bank tokyomitsubishi ufj ltd documentation agent lenders named therein incorporated reference exhibit 1020 textron’s annual report form 10k fiscal year ended december 28 2013 121 computation ratio income fixed charges textron inc’s manufacturing group 122 computation ratio income fixed charges textron inc including majorityowned subsidiaries certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list consent independent registered public accounting firm power attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 following materials textron inc’s annual report form 10k year ended january 2 2016 formatted xbrl extensible business reporting language consolidated statements operations ii consolidated statements comprehensive income iii consolidated balance sheets iv consolidated statements shareholders’ equity v consolidated statements cash flows vi notes consolidated financial statements vii schedule ii valuation qualifying accounts confidential treatment requested portions document signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 24th day february 2016 pursuant requirements securities exchange act 1934 annual report form 10k signed 24th day february 2016 following persons behalf registrant capacities indicateditem 15 exhibits financial statement schedules financial statements schedules see index page 36 exhibits 31a restated certificate incorporation textron filed secretary state delaware april 29 2010 incorporated reference exhibit 31 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 sec file 15480 31b certificate amendment restated certificate incorporation textron inc filed secretary state delaware april 27 2011 incorporated reference exhibit 31 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 sec file 15480 32 amended restated bylaws textron inc effective april 28 2010 amended april 27 2011 july 23 2013 february 25 2015 december 6 2016 incorporated reference exhibit 32 textron’s current report form 8k filed december 8 2016 41a support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 41 textron’s annual report form 10k fiscal year ended december 31 2011 sec file 15480 41b amendment support agreement dated december 23 2015 textron inc textron financial corporation incorporated reference exhibit 41b textron’s annual report form 10k fiscal year ended january 2 2016 46 description registrant’s securities note instruments defining rights holders certain issues longterm debt textron filed exhibits authorized principal amount one issues exceed 10 total assets textron subsidiaries consolidated basis textron agrees furnish copy instrument commission upon request note exhibits 101 1017 management contracts compensatory plans contracts agreements 101a textron inc 2007 longterm incentive plan amended restated april 28 2010 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 31 2012 sec file 15480 101b form nonqualified stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 sec file 15480 101c form incentive stock option agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 sec file 15480 101d form restricted stock unit grant agreement incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 sec file 15480 101e form restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 29 2008 sec file 15480 101f form performance share unit grant agreement incorporated reference exhibit 101h textron’s annual report form 10k fiscal year ended january 3 2009 sec file 15480 101g form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 sec file 15480 101h form stocksettled restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 sec file 15480 101i form performance share unit grant agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 sec file 15480 102 textron inc shortterm incentive plan incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 1 2017 103a textron inc 2015 longterm incentive plan incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 4 2015 103b form nonqualified stock option agreement 2015 longterm incentive plan incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 2 2016 103c form stocksettled restricted stock unit dividend equivalents grant agreement 2015 longterm incentive plan incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 2 2016 103d form performance share unit grant agreement 2015 longterm incentive plan incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended april 2 2016 104 textron spillover savings plan effective october 5 2015 incorporated reference exhibit 104 textron’s annual report form 10k fiscal year ended january 2 2016 105a textron spillover pension plan amended restated effective january 3 2010 including appendix amended restated effective january 3 2010 defined benefit provisions supplemental benefits plan textron key executives effect january 1 2007 incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 sec file 15480 105b amendments textron spillover pension plan dated october 12 2011 incorporated reference exhibit 105b textron’s annual report form 10k fiscal year ended december 31 2011 sec file 15480 105c second amendment textron spillover pension plan dated october 7 2013 incorporated reference exhibit 105c textron’s annual report form 10k fiscal year ended december 28 2013 sec file 15480 106 deferred income plan textron executives effective october 5 2015 incorporated reference exhibit 106 textron’s annual report form 10k fiscal year ended january 2 2016 107a deferred income plan nonemployee directors amended restated effective january 1 2009 including appendix prior plan provisions effect january 1 2008 incorporated reference exhibit 109 textron’s annual report form 10k fiscal year ended january 3 2009 sec file 15480 107b amendment 1 deferred income plan nonemployee directors amended restated effective january 1 2009 dated november 6 2012 incorporated reference exhibit 108b textron’s annual report form 10k fiscal year ended december 29 2012 sec file 15480 107c amendment 2 deferred income plan nonemployee directors amended restated effective january 1 2009 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 1 2017 107d amendment 3 deferred income plan nonemployee directors amended restated effective january 1 2009 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 29 2018 107e amendment 4 deferred income plan nonemployee directors amended restated effective january 1 2009 108a severance plan textron key executives amended restated effective january 1 2010 incorporated reference exhibit 1010 textron’s annual report form 10k fiscal year ended january 2 2010 sec file 15480 108b first amendment severance plan textron key executives dated october 26 2010 incorporated reference exhibit 1010b textron’s annual report form 10k fiscal year ended january 1 2011 sec file 15480 108c second amendment severance plan textron key executives dated march 24 2014 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 sec file 15480 109 form indemnity agreement textron executive officers incorporated reference exhibit 109 textron’s annual report form 10k fiscal year ended december 30 2017 1010 form indemnity agreement textron nonemployee directors approved nominating corporate governance committee board directors july 21 2009 entered nonemployee directors effective august 1 2009 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 sec file 15480 1011a letter agreement textron scott c donnelly dated june 26 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended june 28 2008 sec file 15480 1011b amendment letter agreement textron scott c donnelly dated december 16 2008 together addendum no1 thereto dated december 23 2008 incorporated reference exhibit 1015b textron’s annual report form 10k fiscal year ended january 3 2009 sec file 15480 1011c amended restated hangar license services agreement made entered october 1 2015 textron inc mr donnelly’s limited liability company incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended october 3 2015 1011d aircraft dry lease agreement made entered december 18 2018 mr donnelly’s limited liability company textron inc incorporated reference exhibit 1011d textrons annual report form 10k fiscal year ended december 29 2018 1012a letter agreement textron frank connor dated july 27 2009 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 sec file 15480 1012b amended restated hangar license services agreement made entered july 24 2015 textron inc mr connor’s limited liability company incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended october 3 2015 1013 letter agreement textron julie g duffy dated july 27 2017 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 30 2017 1014a letter agreement textron e robert lupone dated december 22 2011 incorporated reference exhibit 1017 textron’s annual report form 10k fiscal year ended december 31 2011 sec file 15480 1014b amendment letter agreement textron e robert lupone dated july 27 2012 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended september 29 2012 sec file 15480 1015 textron inc 2015 longterm incentive plan equity program nonemployee directors 1016 director compensation 1017 form aircraft time sharing agreement textron executive officers incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 27 2008 sec file 15480 1018 credit agreement dated october 18 2019 among textron lenders listed therein jpmorgan chase bank na administrative agent bank america na citibank na syndication agents mufg bank ltd documentation agent incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 28 2019 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list consent independent registered public accounting firm power attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 following materials textron inc’s annual report form 10k year ended january 4 2020 formatted inline xbrl extensible business reporting language consolidated statements operations ii consolidated statements comprehensive income iii consolidated balance sheets iv consolidated statements shareholders’ equity v consolidated statements cash flows vi notes consolidated financial statements vii schedule ii valuation qualifying accounts cover page interactive data file formatted inline xbrl contained exhibit 101 item 16 form 10k summary applicable signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 25th day february 2020 textron inc registrant frank connor frank connor executive vice president chief financial officer pursuant requirements securities exchange act 1934 annual report form 10k signed 25th day february 2020 following persons behalf registrant capacities indicated name title scott c donnelly scott c donnelly chairman president chief executive officer principal executive officer kathleen bader director r kerry clark director james conway director lawrence k fish director paul e gagné director ralph heath director deborah lee james director lionel l nowell iii director lloyd g trotter director james l ziemer director maria zuber director frank connor frank connor executive vice president chief financial officer principal financial officer mark bamford mark bamford vice president corporate controller principal accounting officer jayne donegan jayne donegan attorneyinfactitem 15 exhibits financial statement schedules financial statements schedules see index page 36 exhibits 31a restated certificate incorporation textron filed secretary state delaware april 29 2010 incorporated reference exhibit 31 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 sec file 15480 31b certificate amendment restated certificate incorporation textron inc filed secretary state delaware april 27 2011 incorporated reference exhibit 31 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 sec file 15480 32 amended restated bylaws textron inc effective april 28 2010 amended april 27 2011 july 23 2013 february 25 2015 december 6 2016 incorporated reference exhibit 32 textron’s current report form 8k filed december 8 2016 41a support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 41 textron’s annual report form 10k fiscal year ended december 31 2011 sec file 15480 41b amendment support agreement dated december 23 2015 textron inc textron financial corporation incorporated reference exhibit 41b textron’s annual report form 10k fiscal year ended january 2 2016 note instruments defining rights holders certain issues longterm debt textron filed exhibits authorized principal amount one issues exceed 10 total assets textron subsidiaries consolidated basis textron agrees furnish copy instrument commission upon request note exhibits 101 1016 management contracts compensatory plans contracts agreements 101a textron inc 2007 longterm incentive plan amended restated april 28 2010 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 31 2012 sec file 15480 101b form nonqualified stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 sec file 15480 101c form incentive stock option agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 sec file 15480 101d form restricted stock unit grant agreement incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 sec file 15480 101e form restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 29 2008 sec file 15480 101f form performance share unit grant agreement incorporated reference exhibit 101h textron’s annual report form 10k fiscal year ended january 3 2009 sec file 15480 101g form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 101h form stocksettled restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 101i form performance share unit grant agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 102 textron inc shortterm incentive plan incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 1 2017 103a textron inc 2015 longterm incentive plan incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 4 2015 103b form nonqualified stock option agreement 2015 longterm incentive plan incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 2 2016 103c form stocksettled restricted stock unit dividend equivalents grant agreement 2015 longterm incentive plan incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 2 2016 103d form performance share unit grant agreement 2015 longterm incentive plan incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended april 2 2016 104 textron spillover savings plan effective october 5 2015 incorporated reference exhibit 104 textron’s annual report form 10k fiscal year ended january 2 2016 105a textron spillover pension plan amended restated effective january 3 2010 including appendix amended restated effective january 3 2010 defined benefit provisions supplemental benefits plan textron key executives effect january 1 2007 incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 sec file 15480 105b amendments textron spillover pension plan dated october 12 2011 incorporated reference exhibit 105b textron’s annual report form 10k fiscal year ended december 31 2011 sec file 15480 105c second amendment textron spillover pension plan dated october 7 2013 incorporated reference exhibit 105c textron’s annual report form 10k fiscal year ended december 28 2013 106 deferred income plan textron executives effective october 5 2015 incorporated reference exhibit 106 textron’s annual report form 10k fiscal year ended january 2 2016 107a deferred income plan nonemployee directors amended restated effective january 1 2009 including appendix prior plan provisions effect january 1 2008 incorporated reference exhibit 109 textron’s annual report form 10k fiscal year ended january 3 2009 sec file 15480 107b amendment 1 deferred income plan nonemployee directors amended restated effective january 1 2009 dated november 6 2012 incorporated reference exhibit 108b textron’s annual report form 10k fiscal year ended december 29 2012 sec file 15480 107c amendment 2 deferred income plan nonemployee directors amended restated effective january 1 2009 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 1 2017 108a severance plan textron key executives amended restated effective january 1 2010 incorporated reference exhibit 1010 textron’s annual report form 10k fiscal year ended january 2 2010 sec file 15480 108b first amendment severance plan textron key executives dated october 26 2010 incorporated reference exhibit 1010b textron’s annual report form 10k fiscal year ended january 1 2011 sec file 15480 108c second amendment severance plan textron key executives dated march 24 2014 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 109 form indemnity agreement textron executive officers 1010 form indemnity agreement textron nonemployee directors approved nominating corporate governance committee board directors july 21 2009 entered nonemployee directors effective august 1 2009 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 sec file 15480 1011a letter agreement textron scott c donnelly dated june 26 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended june 28 2008 sec file 15480 1011b amendment letter agreement textron scott c donnelly dated december 16 2008 together addendum no1 thereto dated december 23 2008 incorporated reference exhibit 1015b textron’s annual report form 10k fiscal year ended january 3 2009 sec file 15480 1011c agreement textron scott c donnelly dated may 1 2009 related mr donnelly’s personal use portion hangar space tf green airport leased textron incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 4 2009 sec file 15480 1011d hangar license services agreement made entered april 25 2011 effective december 5 2010 textron inc mr donnelly’s limited liability company incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 sec file 15480 1011e amended restated hangar license services agreement made entered october 1 2015 textron inc mr donnelly’s limited liability company incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended october 3 2015 1012a letter agreement textron frank connor dated july 27 2009 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 sec file 15480 1012b hangar license services agreement made entered april 25 2011 effective december 5 2010 textron inc mr connor’s limited liability company incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 sec file 15480 1012c amended restated hangar license services agreement made entered july 24 2015 textron inc mr connor’s limited liability company incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended october 3 2015 1013 letter agreement textron julie g duffy dated july 27 2017 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 30 2017 1014a letter agreement textron e robert lupone dated december 22 2011 incorporated reference exhibit 1017 textron’s annual report form 10k fiscal year ended december 31 2011 sec file 15480 1014b amendment letter agreement textron e robert lupone dated july 27 2012 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended september 29 2012 sec file 15480 1015 director compensation 1016 form aircraft time sharing agreement textron executive officers incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 27 2008 sec file 15480 1017 credit agreement dated september 30 2016 among textron lenders listed therein jpmorgan chase bank na administrative agent citibank na bank america na syndication agents bank tokyomitsubishi ufj ltd documentation agent incorporated reference exhibit 101 textron’s current report form 8k filed october 3 2016 121 computation ratio income fixed charges textron inc’s manufacturing group 122 computation ratio income fixed charges textron inc including majorityowned subsidiaries certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list consent independent registered public accounting firm power attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 following materials textron inc’s annual report form 10k year ended december 30 2017 formatted xbrl extensible business reporting language consolidated statements operations ii consolidated statements comprehensive income iii consolidated balance sheets iv consolidated statements shareholders’ equity v consolidated statements cash flows vi notes consolidated financial statements vii schedule ii valuation qualifying accounts confidential treatment requested portions document item 16 form 10k summary applicable signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 15th day february 2018 pursuant requirements securities exchange act 1934 annual report form 10k signed 15th day february 2018 following persons behalf registrant capacities indicateditem 15 exhibits financial statement schedules financial statements schedules see index page 36 exhibits 31a restated certificate incorporation textron filed secretary state delaware april 29 2010 incorporated reference exhibit 31 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 sec file 15480 31b certificate amendment restated certificate incorporation textron inc filed secretary state delaware april 27 2011 incorporated reference exhibit 31 textron’s quarterly report form 10q fiscal quarter ended april 2 2011 sec file 15480 32 amended restated bylaws textron inc effective april 28 2010 amended april 27 2011 july 23 2013 february 25 2015 december 6 2016 incorporated reference exhibit 32 textron’s current report form 8k filed december 8 2016 41a support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 41 textron’s annual report form 10k fiscal year ended december 31 2011 sec file 15480 41b amendment support agreement dated december 23 2015 textron inc textron financial corporation incorporated reference exhibit 41b textron’s annual report form 10k fiscal year ended january 2 2016 101a textron inc 2007 longterm incentive plan amended restated april 28 2010 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 31 2012 sec file 15480 101b form nonqualified stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 sec file 15480 101c form incentive stock option agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 sec file 15480 101d form restricted stock unit grant agreement incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 sec file 15480 101e form restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 29 2008 sec file 15480 101f form performance share unit grant agreement incorporated reference exhibit 101h textron’s annual report form 10k fiscal year ended january 3 2009 sec file 15480 101g form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 sec file 15480 101h form stocksettled restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 sec file 15480 101i form performance share unit grant agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 sec file 15480 102 textron inc shortterm incentive plan incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 1 2017 103a textron inc 2015 longterm incentive plan incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 4 2015 103b form nonqualified stock option agreement 2015 longterm incentive plan incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 2 2016 103c form stocksettled restricted stock unit dividend equivalents grant agreement 2015 longterm incentive plan incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 2 2016 103d form performance share unit grant agreement 2015 longterm incentive plan incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended april 2 2016 104 textron spillover savings plan effective october 5 2015 incorporated reference exhibit 104 textron’s annual report form 10k fiscal year ended january 2 2016 105a textron spillover pension plan amended restated effective january 3 2010 including appendix amended restated effective january 3 2010 defined benefit provisions supplemental benefits plan textron key executives effect january 1 2007 incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended april 3 2010 sec file 15480 105b amendments textron spillover pension plan dated october 12 2011 incorporated reference exhibit 105b textron’s annual report form 10k fiscal year ended december 31 2011 sec file 15480 105c second amendment textron spillover pension plan dated october 7 2013 incorporated reference exhibit 105c textron’s annual report form 10k fiscal year ended december 28 2013 sec file 15480 106 deferred income plan textron executives effective october 5 2015 incorporated reference exhibit 106 textron’s annual report form 10k fiscal year ended january 2 2016 107a deferred income plan nonemployee directors amended restated effective january 1 2009 including appendix prior plan provisions effect january 1 2008 incorporated reference exhibit 109 textron’s annual report form 10k fiscal year ended january 3 2009 sec file 15480 107b amendment 1 deferred income plan nonemployee directors amended restated effective january 1 2009 dated november 6 2012 incorporated reference exhibit 108b textron’s annual report form 10k fiscal year ended december 29 2012 sec file 15480 107c amendment 2 deferred income plan nonemployee directors amended restated effective january 1 2009 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 1 2017 108a severance plan textron key executives amended restated effective january 1 2010 incorporated reference exhibit 1010 textron’s annual report form 10k fiscal year ended january 2 2010 sec file 15480 108b first amendment severance plan textron key executives dated october 26 2010 incorporated reference exhibit 1010b textron’s annual report form 10k fiscal year ended january 1 2011 sec file 15480 108c second amendment severance plan textron key executives dated march 24 2014 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended march 29 2014 sec file 15480 109 form indemnity agreement textron executive officers incorporated reference exhibit 109 textron’s annual report form 10k fiscal year ended december 30 2017 1010 form indemnity agreement textron nonemployee directors approved nominating corporate governance committee board directors july 21 2009 entered nonemployee directors effective august 1 2009 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 sec file 15480 1011a letter agreement textron scott c donnelly dated june 26 2008 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended june 28 2008 sec file 15480 1011b amendment letter agreement textron scott c donnelly dated december 16 2008 together addendum no1 thereto dated december 23 2008 incorporated reference exhibit 1015b textron’s annual report form 10k fiscal year ended january 3 2009 sec file 15480 1011c amended restated hangar license services agreement made entered october 1 2015 textron inc mr donnelly’s limited liability company incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended october 3 2015 1011d aircraft dry lease agreement made entered december 18 2018 mr donnelly’s limited liability company textron inc 1012a letter agreement textron frank connor dated july 27 2009 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended october 3 2009 sec file 15480 1012b amended restated hangar license services agreement made entered july 24 2015 textron inc mr connor’s limited liability company incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended october 3 2015 1013 letter agreement textron julie g duffy dated july 27 2017 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 30 2017 1014a letter agreement textron e robert lupone dated december 22 2011 incorporated reference exhibit 1017 textron’s annual report form 10k fiscal year ended december 31 2011 sec file 15480 1014b amendment letter agreement textron e robert lupone dated july 27 2012 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended september 29 2012 sec file 15480 1015 director compensation incorporated reference exhibit 1015 textron’s annual report form 10k fiscal year ended december 30 2017 1016 form aircraft time sharing agreement textron executive officers incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 27 2008 sec file 15480 1017 credit agreement dated september 30 2016 among textron lenders listed therein jpmorgan chase bank na administrative agent citibank na bank america na syndication agents bank tokyomitsubishi ufj ltd documentation agent incorporated reference exhibit 101 textron’s current report form 8k filed october 3 2016 certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list consent independent registered public accounting firm power attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 following materials textron inc’s annual report form 10k year ended december 29 2018 formatted xbrl extensible business reporting language consolidated statements operations ii consolidated statements comprehensive income iii consolidated balance sheets iv consolidated statements shareholders’ equity v consolidated statements cash flows vi notes consolidated financial statements vii schedule ii valuation qualifying accounts item 16 form 10k summary applicable signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 14th day february 2019 pursuant requirements securities exchange act 1934 annual report form 10k signed 14th day february 2019 following persons behalf registrant capacities indicatednanitem 15 exhibits financial statement schedules financial statements schedules see index page 34 exhibits 31 restated certificate incorporation textron filed january 29 1998 incorporated reference exhibit 31 textron’s annual report form 10k fiscal year ended january 3 1998 32 amended restated bylaws textron inc incorporated reference exhibit 31 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 41a indenture dated december 9 1999 textron financial corporation suntrust bank formerly known sun trus tbank atlanta including form debt securities incorporated reference exhibit 41 amendment 2 textron financial corporation’s registration statement form s3 33388509 41b first supplemental indenture dated november 16 2006 textron financial corporation us bank national association successor trustee sun trust bank indenture dated december 9 1999 incorporated reference exhibit 43 textron financial corporation’s form s3 file 333138755 41c form mediumterm note textron financial corporation incorporated reference exhibit 43 textron financial corporation’s current report form 8k filed november 17 2006 42a indenture dated november 30 2001 textron financial canada funding corp suntrust bank guaranteed textron financial corporation incorporated reference exhibit 42 amendment 1 textron financial corporation’s registration statement form s3 333108464 42b first supplemental indenture dated november 16 2006 textron financial canada funding corp textron financial corporation us bank national association successor trustee sun trust bank indenture dated november 30 2001 incorporated reference exhibit 44 textron financial corporation’s form s3 file 333138755 42c form mediumterm note textron financial canada funding corp incorporated reference exhibit 44 textron financial corporation’s current report form 8k filed november 17 2006 43a amended restated indenture dated may 26 2005 textron financial floorplan master note trust bank new york indenture trustee incorporated herein reference exhibit 41 textron financial corporation’s current report form 8k filed june 1 2005 43b amended restated series 20011 supplement dated may 26 2005 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial corporation servicer incorporated herein reference exhibit 42 textron financial corporation’s current report form 8k filed june 1 2005 43c series 2005a supplement dated may 26 2005 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial corporation servicer incorporated herein reference exhibit 43 textron financial corporation’s current report form 8k filed june 1 2005 43d series 2006a supplement dated april 19 2006 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial corporation servicer incorporated herein reference exhibit 41 textron financial corporation’s current report form 8k filed april 24 2006 43e series 2007a supplement dated march 29 2007 amended restated indenture dated may 26 2005 among textron financial floorplan master note trust bank new york indenture trustee textron financial corporation servicer incorporated herein reference exhibit 41 textron financial corporation’s current report form 8k filed march 29 2007 44 support agreement dated may 25 1994 textron inc textron financial corporation incorporated reference exhibit 101 textron financial corporation’s registration statement form 10 file 027559 note instruments defining rights holders certain issues longterm debt textron filed exhibits authorized principal amount one issues exceed 10 total assets textron subsidiaries consolidated basis textron agrees furnish copy instrument commission upon request note exhibits 101 1021 management contracts compensatory plans contracts agreements 101a textron inc 2007 longterm incentive plan amended restated may 1 2007 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 101b form nonqualified stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 101c form incentive stock option agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 101d form restricted stock unit grant agreement incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 101e form restricted stock unit grant agreement dividend equivalents incorporated reference exhibit 995 textron’s current report form 8k filed january 29 2008 101f form performance share unit grant agreement 101g performance factors executive officers performance share units textron inc 2007 longterm incentive plan incorporated reference exhibit 992 textron’s current report form 8k filed january 29 2008 102a textron inc shortterm incentive plan amended restated effective july 25 2007 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 102b objectives executive officers textron inc shortterm incentive plan incorporated reference exhibit 991 textron’s current report form 8k filed january 29 2008 103a textron inc 1999 longterm incentive plan textron employees amended restated effective july 25 2007 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 103b form nonqualified stock option agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 103c form incentive stock option agreement incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 103d form restricted stock grant agreement incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended july 3 2004 104a performance share unit plan textron employees july 25 2007 incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 104b performance factors executive officers performance share units incorporated reference exhibit 108b textron’s annual report form 10k fiscal year ended december 30 2006 105a textron spillover savings plan incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended june 30 2007 105b amendment textron spillover savings plan effective july 25 2007 106 textron spillover pension plan amended restated effective january 1 2008 including appendix defined benefit provisions supplemental benefits plan textron key executives effect january 1 2007 incorporated reference exhibit 106 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 107 supplemental retirement plan textron key executives amended restated effective january 1 2008 including appendix provisions supplemental retirement plan textron key executives effect january 1 2008 incorporated reference exhibit 107 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 108 deferred income plan textron executives effective january 1 2008 including appendix provisions deferred income plan textron key executives effect january 1 2008 incorporated reference exhibit 108 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 109 severance plan textron key executives amended restated effective january 1 2008 incorporated reference exhibit 109 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 1010 deferred income plan nonemployee directors amended restated effective january 1 2008 including appendix prior plan provisions effect january 1 2008 incorporated reference exhibit 1010 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 1011 survivor benefit plan textron key executives amended restated effective july 25 2007 incorporated reference exhibit 105 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 1012a textron 1994 longterm incentive plan “1994 plan” incorporated reference exhibit 10 textron’s quarterly report form 10q fiscal quarter ended july 2 1994 1012b amendment 1994 plan incorporated reference exhibit 109b textron’s annual report form 10k fiscal year ended january 2 1999 1012c amendment 1994 plan incorporated reference exhibit 106 textron’s quarterly report form 10q fiscal quarter ended july 3 1999 1012d amendment 1994 plan incorporated reference exhibit 108d textron’s annual report form 10k fiscal year ended january 1 2000 1013 form indemnity agreement textron directors executive officers incorporated reference exhibit textron’s proxy statement annual meeting shareholders april 29 1987 1014 amended restated employment agreement textron john butler dated may 4 2006 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended april 1 2006 1015a employment agreement textron lewis b campbell dated july 23 1998 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended october 3 1998 1015b amendment dated may 6 2005 employment agreement textron lewis b campbell incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended april 2 1015c second amendment dated may 4 2006 employment agreement textron lewis b campbell incorporated reference exhibit 104 textron’s quarterly report form 10q fiscal quarter ended april 1 2006 1016 employment agreement textron ted r french dated december 21 2000 incorporated reference exhibit 1015a textron’s annual report form 10k fiscal year ended december 30 2000 1017 amended restated employment agreement textron mary l howell dated may 4 2006 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 1 2006 1018 amended restated employment agreement textron terrence o’donnell dated may 4 2006 incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended april 1 2006 1019 employment agreement textron kenneth c bohlen dated july 18 2000 incorporated reference exhibit 102 textron’s quarterly report form 10q fiscal quarter ended july 1 2000 1020a restricted stock awards granted lewis b campbell january 1 2001 incorporated reference exhibit 1014d textron’s annual report form 10k fiscal year ended december 30 2000 1020b amendments retention awards granted lewis b campbell incorporated reference exhibit 1014d textron’s annual report form 10k fiscal year ended december 29 2001 1021 director compensation 1022a 5year credit agreement dated march 28 2005 among textron banks listed therein jpmorgan chase bank na administrative agent citibank na syndication agent “5year credit agreement” incorporated reference exhibit 101 textron’s current report form 8k filed march 31 2005 1022b amendment 1 dated april 21 2006 5year credit agreement incorporated reference exhibit 101 textron’s current report form 8k filed april 25 2006 1022c amendment 2 dated april 20 2007 5year credit agreement incorporated reference exhibit 101 textron’s current report form 8k filed april 24 2007 1023a 364day credit agreement dated march 31 2003 among textron inc banks listed therein jpmorgan chase bank na administrative agent “364day credit agreement” incorporated reference exhibit 103 textron’s quarterly report form 10q fiscal quarter ended march 29 2003 1023b amendment dated july 28 2003 364day credit agreement incorporated reference exhibit 1019 textron’s annual report form 10k fiscal year ended january 3 2004 1023c amendment 2 dated march 29 2004 364day credit agreement incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended april 3 2004 1024a 364day credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed august 26 2003 1024b amendment dated july 26 2004 364day credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 101 textron financial corporation’s quarterly report form 10q fiscal quarter ended september 30 2004 1024c amendment 2 dated july 25 2005 364day credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 102 textron financial corporation’s current report form 8k filed july 27 2005 1025a fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 102 textron financial corporation’s current report form 8k filed august 26 2003 1025b amendment 1 dated july 25 2005 fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed july 27 2005 1025c amendment 2 dated april 28 2006 fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank na administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k filed may 1 2006 1025d amendment 3 dated april 27 2007 fiveyear credit agreement dated july 28 2003 among textron financial corporation banks listed therein jpmorgan chase bank administrative agent incorporated reference exhibit 101 textron financial corporation’s current report form 8k dated april 27 2007 1026a master services agreement textron inc computer sciences corporation dated october 27 2004 confidential treatment requested portions agreement incorporated reference exhibit 1026 textron’s annual report form 10k fiscal year ended january 1 2005 1026b amendment 4 master services agreement textron inc computer services corporation dated july 1 2007 incorporated reference exhibit 101 textron’s quarterly report form 10q fiscal quarter ended september 29 2007 121 computation ratio income combined fixed charges preferred stock dividends textron manufacturing 122 computation ratio income combined fixed charges preferred stock dividends textron including majorityowned subsidiaries certain subsidiaries textron subsidiaries considered aggregate constitute significant subsidiary omitted list consent independent registered public accounting firm power attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 20th day february 2008 pursuant requirements securities exchange act 1934 annual report form 10k signed 20th day february 2008 following persons behalf registrant capacities indicateditem 15 exhibits financial statement schedules financial statements schedules see index page 41 confidential treatment requested portions document signatures pursuant requirement section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 23rd day february 2012 textron inc registrant frank connor frank connor executive vice president chief financial officer pursuant requirements securities exchange act 1934 annual report form 10k signed 23rd day february 2012 following persons behalf registrant capacities indicated name title scott c donnelly scott c donnelly chairman president chief executive officer principal executive officer kathleen bader director r kerry clark director james conway director ivor j evans director lawrence k fish director joe ford director paul e gagné director dain hancock director lord powell bayswater kcmg director lloyd g trotter director james l ziemer director frank connor frank connor executive vice president chief financial officer principal financial officer richard l yates richard l yates senior vice president corporate controller principal accounting officer jayne donegan jayne donegan attorneyinfact