TEXTRON INC — Management Reports 2011

Mar 7, 2011

CORRESP 1 filename1.htm marchseventhseresponseletter.htm Licensed to: textron Document Created using EDGARizer 5.3.1.0 Copyright 1995 - 2011 Thomson Reuters. All rights reserved.

March 7, 2011

Mr. Lyn Shenk

Branch Chief

U.S. Securities and Exchange Commission

Division of Corporation Finance

100 F Street, N.E.

Washington, D.C. 20549-3561

Re: Textron Inc.

Form 10-K: For the fiscal year ended January 2, 2010

Filed February 25, 2010

Form 10-Q: For the quarterly period ended July 3, 2010

Filed July 29, 2010

File No. 001-05480

Dear Mr. Shenk:

We appreciate the staff’s time in reviewing our filings and discussing our disclosures with us. This letter is in response to your comment letter dated January 31, 2011 and based on subsequent discussions with you regarding the above filings.

We believe that the MD&A sections included in the above filings fully comply with Item 303 of Regulation S-K, including the interpretive releases issued by the Commission. As we endeavor to provide meaningful discussion and analysis of our business and material changes and trends, we have considered the staff’s comments regarding ways to enhance our disclosure and have made significant changes to our filings beginning with the Form 10-K that we filed on March 1, 2011. For your convenience, we have repeated the staff’s comments in the body of this letter, followed by our related response.

Form 10-K for Fiscal Year Ended January 2, 2010

Item 8. Financial Statements and Supplementary Data

Notes to Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Revenue Recognition, page 49

1. Please refer to your response to our prior comment five. Based upon your response, it appears that you do not intend to disclose comparative financial information regarding the amounts of revenue, net income, and assets that have been recognized in your financial statements in connection with your strategic alliance with The Boeing Company (“Boeing”). In this regard, we note that you do not believe that the disclosure of such comparative financial information would be appropriate as (i) you do not account for the strategic alliance under the equity method of accounting and (ii) you are not subject to the disclosure requirements of ASC 323-10-50-3. However, we also note that the manner in which you have accounted for the strategic alliance differs significantly from the accounting treatment customarily applied to joint ventures and/or other strategic arrangements. Furthermore, based upon the significance of the V-22 aircraft program to your Bell segment, it appears that the revenue recognized under your strategic alliance may be material to your Bell segment and, possibly, your consolidated results. For the reasons cited above, we continue to believe that the disclosures requested in our prior comment would be important to your investors’ understanding of your results and the related risks of this strategic alliance. In this regard, please tell us the amounts of revenue, net income, and assets that were recognized in your financial statements in connection with your strategic alliance for (a) each

of your last three fiscal years and (b) your most recent interim reporting period. We believe that this information will allow us to better assess the materiality of such financial information relative to Bell’s segment results and your consolidated financial statements. Please also expand the footnotes to your financial statements to summarize the requested information, if material.

Company Response to Comment #1

As discussed with the staff during our conference call, we will provide additional disclosure to enhance the investor’s understanding of this collaborative arrangement and how we account for it in our Consolidated Financial Statements. This new disclosure is included on page 47 in our 2010 Form 10-K. In addition, in future filings, we will provide revenues for the V-22 program in our MD&A.

Form 10-Q for Fiscal Quarter Ended October 2, 2010

Item 2. M anagement’s Discussion and Analysis of Financial Condition and Results of Operations

Segment Analysis

Revenues by Segment, page 22

1. Please refer to your response to our prior comment one. We note that you do not plan to provide additional disaggregated information regarding the revenue recognized by your Textron Systems segment. In this regard, you appear to be concerned with the granularity of the information that you believe was suggested in our prior comment. Please note that we concur with your conclusion that it would not be meaningful to provide separate revenue information for operating units that do not contribute materially to Textron Systems’ (i.e., the segment’s) total revenue. However, we do believe that it may be appropriate to disaggregate, quantify, and disclose Textron Systems’ revenue at a level that is both below total segment revenue and commensurate with how management already groups products for internal analyses. For example, it may be appropriate to separately quantify and discuss revenues for certain of the five operating units that were identified in your description of this segment on page two of the “Business” section of your Form 10-K. In this regard, it would appear unlikely that all five operating units produced less than six percent of the segment’s total revenue. Furthermore, to the extent that the revenue attributable to any of those operating units is determined to be immaterial relative to total segment revenue, we believe that it would be reasonable for you to aggregate and disclose such revenue as “other.” Please (I) revise your disclosure in future filings, as appropriate, and (II) provide your proposed expanded disclosure as part of your response. In addition, please clarify why it would not be meaningful to provide similar disaggregated information related to your Industrial segment in both your annual and quarterly reports.

Company Response to Comments #2, #3 and #4

As discussed during our call with you on February 15, 2011, we have provided additional revenue information in Item 1 of Form 10-K to provide investors with a better understanding of our business. Specifically, for Cessna, in our 2010 Form 10-K, we have provided revenues for aircraft sales and aftermarket services; for Textron Systems, we have provided revenues for its four major product lines. We have also agreed to provide revenues for Bell’s most significant program, the V-22 program, and for our largest product line in the Industrial segment, Fuel Systems and Functional Components, in our MD&A in future filings. In addition, we will include a discussion of any material changes in these components of revenue in future filings, along with a discussion of any known underlying factors and trends.

1. Please refer to your response to our prior comment one. We note that you do not believe that it is necessary for you to separately disclose the amount of revenue generated from Cessna’s aircraft sales versus aftermarket sales. In this regard, we acknowledge that, in your third quarter Form 10-Q, you identify lower sales volume for most of Cessna’s aircraft model lines as the primary driver of the decline in revenue generated by the segment, as well as the increase in aftermarket sales as a factor that partially offset the decline in revenues resulting from the lower aircraft deliveries. However, the disclosure in your third quarter Form 10-Q does not provide any context regarding (I) the magnitude of the decline in revenue generated from aircraft sales relative to sales revenue recognized in prior years (e.g., the decline as a percentage of prior year’s sales), (II) whether aftermarket sales represent a substantial portion of Cessna’s sales, or (III) whether the $42 million increase in revenue generated from aftermarket sales during the nine-month period ended October 2, 2010 (i.e., as compared to the nine-month period ended October 3, 2009) represented significant aftermarket revenue growth. Therefore, please quantify for us aircraft sales and aftermarket sales for Cessna for each of last three

fiscal years. Please note that we believe that separate quantification of the revenue generated from aircraft sales and aftermarket sales would provide investors with information that is meaningful for the assessment of revenue trends, revenue sustainability, and risk of further variability and/or decline – particularly, since current economic conditions and the declining backlog attributable to Cessna’s aircraft (as noted from page 4 of your fiscal year 2009 Form 10-K and page 22 of your Form 10-Q for the quarterly period ended October 2, 2010) suggest that aftermarket sales may have a significantly greater influence on Cessna’s revenue and results until the economy fully recovers. Furthermore, we believe that disaggregated information regarding the revenue generated from aircraft sales versus aftermarket sales may provide meaningful information regarding Cessna’s results and related trends, if the profit margins attributable to each source of revenue differ. Lastly, quantification of the revenue related to Cessna’s aircraft sales may provide meaningful information regarding the risk of the segment’s contracts, inventory, long-lived assets, or goodwill becoming impaired. For the reasons cited above, we believe that you should separately quantify and discuss revenue attributable to Cessna’s aircraft sales and Cessna’s aftermarket sales. Please expand your disclosure accordingly and provide your proposed expanded disclosure as part of your response.

Company Response

See response to Comment #2 above.

1. Please refer to your response to our prior comment two. Based upon your response, it appears that you plan to revise your MD&A disclosure regarding Bell’s revenue to quantify the number of V-22 tiltrotor aircraft and H-1 helicopters delivered during each of your comparable reporting periods. However, such disclosure was not the intent of our prior comment. Given that the purpose of the disclosure regarding Bell’s revenue is to contribute to a meaningful analysis of the comparable financial information reported for both that segment and your company’s consolidated operations, we believe that it would be appropriate for you to disclose the absolute amount of revenue generated by each of the major aircraft programs for your comparable reporting periods. We believe that this disclosure will provide additional context regarding the significance of the revenue growth attributed to the V-22 and H-1 programs, relative to the program revenues realized in prior periods. In this regard, we do not believe that your proposal to disclose the quantity of aircraft delivered during each of your comparable reporting periods will provide a similar perspective with regard to the programs’ revenue growth. Furthermore, given that (I) the Bell segment is the largest contributor to your consolidated revenues, (II) Bell’s U.S. government revenue for the nine-month period ended October 2, 2010 represented approximately 66.5% of the segment’s total revenue and 20.4% of your company’s consolidated revenue for that period, and (III) the V-22 and H-1 programs appear to contribute a substantial portion of Bell’s U.S. government revenue, we believe that quantification of the revenue generated by the V-22 and H-1 programs may be material to investors’ understanding of the results/performance of both the Bell segment and your consolidated operations. Based upon the observations noted above, please revise your MD&A to disclose the absolute amount of revenue generated by your V-22 and H-1 programs, rather than solely disclosing the amount by which revenues attributable to these programs changed between comparable reporting periods. Furthermore, expand your MD&A to provide supplemental narrative disclosure that focuses on both the underlying factors (e.g., timing of deliveries, changes in quantities ordered, realized efficiencies in production, etc.) and trends that have contributed to material volume/delivery variances realized with regard to the V-22 and H-1 programs, rather than solely quantifying the number of V-22 and H-1 aircraft delivered during each reporting period. In this regard, we believe that an analysis of the underlying factors and trends that contributed to volume changes will allow readers of your financial statements to more fully assess the extent to which the revenue and revenue growth attributable to each of your major aircraft programs can be expected to fluctuate in future reporting periods. Your current disclosure, which states that revenue increased due to increased customer demand, does not explain the underlying reason for the change in sales. Please provide your proposed expanded disclosure as part of your response.

Company Response

See response to Comment #2 above.

Segment Profit, page 24

1. We have reviewed your response to our prior comment three. However, we continue to believe that you should present, analyze, and discuss the significant components of costs incurred/recognized by each of your segments. In addition, we do not concur with your belief that your current MD&A presentation and analysis provides investors with a more meaningful understanding of the underlying factors that have affected segment profit and/or consolidated results. With regard to the conclusions that we reached in the paragraph above, we first note that one of the purposes of discussing and analyzing the results of your segments in MD&A is to further readers understanding of your consolidated results. Given that the costs reported on your consolidated statements of operations substantially reflect the aggregation of costs incurred by your individual reportable segments, we believe that this objective would be most effectively accomplished if your MD&A disclosure included quantification of each segment’s costs, and the material components thereof. Furthermore, given that your consolidated results only capture the net impact of any changes in the costs incurred by your individual segments, we believe that quantification of each segment’s costs would provide investors with an understanding of how changes in the costs incurred by specific segments, as well as your segments’ cost structures, directly impact your consolidated results. For example, we note that your company’s costs of sales, which consistently represent greater than 75% of your company’s total operating costs, declined by $144 million for the nine-month period ended October 2, 2010, as compared to the nine-month period ended October 3, 2010. However, based upon the revenue and segment profit reported for Cessna for each of those reporting periods, it can be inferred that (I) the decline in Cessna’s costs of sales was substantially greater than $144 million and (II) the decline in Cessna’s costs of sales must have been offset by increases in costs of sales at your other segments. In this regard, we believe that quantification of that costs incurred by each of your segments would not only allow investors to assess how fluctuations in each segments’ costs have directly impacted the consolidated costs reported in your financial statements, but also would allow investors to assess the significance of each segment’s costs to your company’s consolidated cost structure. We believe that this information is meaningful for purposes of analyzing trends and projecting future performance of your company as a whole. In addition, we believe that the presentation and discussion of the costs incurred by each of your segments would facilitate a more meaningful analysis of each segment’s results, and changes thereto. In this regard, it appears that you believe that isolating the impact that changes in volume have had on segment profit allows your disclosure to focus on non-volume related events and trends, as well as other material factors such as inventory write-downs and changes in warranty expense. However, we note that the presentation, quantification, and analysis of segment costs would not preclude, and presumably would include, a discussion of the impact that each identified factor, event, and trend – including changes in volume – has had on the various classifications of segment costs that you would present. In addition, we note that enhanced disclosure regarding segment costs would provide additional information regarding each of your segment’s cost structures and allow for the evaluation of factors and trends that are otherwise unobservable due to the nature and format of your current disclosure. For example, quantifying the impact that volume changes have had on segment profit or loss, without providing a direct analysis of segment costs, does not provide any insight regarding the fixed versus variable nature of the costs incurred by your segments. We believe that understanding the fixed versus variable nature of your segments’ cost structures – and more specifically, the extent to which costs are directly impacted by changes in sales volume – is (A) material to the assessment of trends and (B) necessary for readers to develop expectations with regard to your future results. Furthermore, we note that the quantification and presentation of segment costs may facilitate a more meaningful discussion and analysis of the impact of factors such as the cost saving initiatives implemented by your Industrial segment (as noted from your discussions of both consolidated costs of sales and segment profit for the Industrial segment in your Form 10-Q for the quarterly period ended October 2, 2010). In addition, we note your statement that segment profit is the measure that you use to evaluate the performance of your segments for compensation purposes. However, performance measures used for purposes of compensation are not necessarily the basis that investors should use to evaluate your results and not necessarily representative of the level at which results are analyzed internally for purposes of allocating resources and managing your reportable segments. Furthermore, your reference in MD&A to the cost reduction initiatives implemented at the Industrial segment suggests that costs are analyzed and evaluated in

connection with the management of your segments. For the reasons cited above, we believe that presenting, analyzing , and discussing the material cost categories recognized by each of your segments would be consistent with the MD&A objective to provide investors with a view of your company through the eyes of management and would be useful to investors. To the extent that you disagree, and in doing so, represent to us that management does not analyze costs for purposes of evaluating segment results and allocating resources, please provide us with a copy of the reports that management reviews as part of your response. Finally, we note your conclusion that reporting components of segment costs for each reporting period would not be meaningful, given that a significant portion of your revenue is earned under long-term government contracts that are accounted for under the percentage of completion method of accounting. However, we also note that you must perform detailed analyses of the costs incurred under your long-term contracts on a periodic basis (presumably each quarter), due to the accounting treatment that has been applied to such contracts. In this regard, it would appear reasonable to expect that management also uses such costs analyses for purposes such as (i) identifying trends, (ii) determining cost overruns and under-runs, (iii) estimating margins, and (iv) making decisions regarding the management of your segments, including the allocation of resources. Furthermore, we note from your response to our prior comment five that certain government contracts are fixed-price contracts. In this regard, it would appear that analyzing and managing the costs attributable to such contracts would be material to your effort to maximize the contracts’ profits. For the reasons cited above, we believe presenting, discussing, and analyzing the costs incurred by your segments that enter long-term contracts with the government would still be (a) appropriate and (b) consistent with MD&A objective to provide readers with a view of your company through the eyes of management. While we acknowledge your statement that contracts are reviewed and analyzed “based on detailed analyses of contract costs for the total contracts over the respective periods of performance and [are] not evaluated based on actual costs incurred in any particulate period,” it would appear that an analysis of the costs incurred during a particular period, as well as the changes thereto, would be necessary to ensure that revenue and cost recognition are appropriate for the reporting period. For the reasons cited above, please revise your MD&A disclosure regarding segment results to present, analyze, and discuss segment costs, as well as the material components thereof. In this regard, we continue to believe that the use of additional tables may allow for the most clear and concise presentation of such information. As stated in our prior comments, please give appropriate consideration to the level at which costs should be disaggregated for purposes of presentation in your tables, as well as for your discussion and analysis. For example, since costs of sales represent such a significant portion of each segment’s total operating expenses, further disaggregation would appear appropriate. Please provide your proposed expanded disclosure as part of your response.

Company Response to Comment #5

In reviewing segment performance, we utilize a causal analysis for revenue and segment profit that analyzes period over period changes and summarizes fluctuations into categories such as volume, pricing, inflation, foreign exchange and performance. The causal analysis provides management with meaningful and appropriate information upon which to manage segment operations. We prepare our MD&A utilizing this causal information to meet the objective of providing a narrative explanation of our results of operations that enables investors to see our company through the eyes of management. A similar causal analysis is not prepared for operating expenses as the impact of any material changes in operating expenses would already be included in the segment profit causal analysis and would not be consistent with the information management uses in reviewing segment operations.

In response to the staff’s suggestions and to enhance investor understanding of our segments, beginning with our 2010 Form 10-K, we have provided tables summarizing the causal information for revenue and segment profit but do not believe that extending these tables to include operating expenses is necessary or that it would be helpful disclosure. While the use of tables is not a required presentation technique, we acknowledge that summarizing information in tables can be helpful to investors. However, we believe too many tables with similar information may lead to confusion and we believe investors are most interested in the information we provide in our new segment profit tables, which is consistent with how our management manages the business. Our narrative discussion of operating expenses includes all material changes and trends in a clear and concise manner and we believe that this is the best format for this information. We do not believe that a table for operating expenses would provide investors with any additional meaningful information that is material to an understanding of the result of

operations for the segment beyond the information already provided, and we believe such a table would often be duplicative next to the segment profit table. Furthermore, we are concerned that providing a column for operating expenses next to the revenue and segment profit columns will imply that we are presenting a mini-income statement and thus give the wrong impression to the reader. By providing tables for only revenue and segment profit, while using a narrative format for the operating expense analysis, we believe we will eliminate any confusion and provide the investor with the clearest presentation.

Our decision as to what is meaningful to investors is driven by an analysis of our company and how we manage it. We also take into account our experience and interaction with investors regarding the information they request. In addition, we study the disclosure of our peers to determine whether they are employing more effective tools to make their disclosures. We firmly believe that our disclosure both fully comports with the SEC’s disclosure rules and provides investors with the information material to understanding our business results in a form that is consistent with how our management reviews those results.

We have carefully considered the staff’s suggestions to enhance our disclosure of segment cost data, and, in an effort to address the staff’s comments in this area, have incorporated significant changes to the MD&A which we have provided to you and included in the Form 10-K that was filed on March 1, 2011. This recent filing reflects the following changes to our MD&A that have been made based on our discussion with the staff:

· Added new tables for revenue and for segment profit to summarize material changes identified in the casual analysis that we currently use to manage our business;

· Inserted a line in our segment tables for operating expense and percentage changes;

· Enhanced our revenue and segment profit tables by segment by adding percentage change information;

· Added a discussion of operating expenses; and

· Enhanced our consolidated results of operation discussion by adding new lines to the consolidated table for Manufacturing cost of sales and selling and administrative expense, added new tables for expenses with percentage changes for prior periods, and improved our narrative discussion of material changes.

We believe that the discussion and analysis we have provided in our MD&A fully meets the objective of discussing material changes and trends in our results of operations at an appropriate level for our investors to understand and assess our business results and trends. In future filings, we will continue to strive to enhance our disclosure of any known underlying reasons for material changes and/or trends in segment operating expense, as appropriate. In addition, when there are multiple material factors driving a change, we agree to quantify such factors to the extent that we can accurately quantify the factors.

---

In connection with our responses above, we acknowledge that:

· The Company is responsible for the adequacy and accuracy of the disclosure in the filing;

· Staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and

· The Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.

If you have any questions or comments regarding these responses, please contact me at (401) 457-4412.

Sincerely, /s/ Frank T. Connor Frank T. Connor Chief Financial Officer

cc: Scott Donnelly, President and Chief Executive Officer Richard Yates, Senior Vice President and Corporate Controller Terrence O’Donnell, Executive Vice President and General Counsel Gerald Cohen, Ernst & Young LLP Steven Jacobs, Ernst & Young LLP Brian Lane, Gibson Dunn