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66 Textron Inc. Annual Report ● 2012
variability in both the quantitative and qualitative assumptions. Changes in the borrower’s ability to pay or the period of time
required to restructure and/or exit accounts may significantly increase or decrease the fair value of these finance receivables, and,
to a lesser extent, fluctuations in discount rates and/or revenue and earnings multiples could also change the fair value of these
finance receivables.
Impaired finance receivables — Impaired nonaccrual finance receivables represent assets recorded at fair value on a nonrecurring
basis since the measurement of required reserves on our impaired finance receivables is significantly dependent on the fair value of
the underlying collateral. For Captive impaired nonaccrual finance receivables, the fair values of collateral are determined
primarily based on the use of industry pricing guides. Timeshare impaired nonaccrual finance receivables largely consist of pools
of timeshare interval resort notes receivable. Fair values of collateral are estimated using cash flow models incorporating
estimates of credit losses in the consumer notes pools. Fair value measurements recorded on impaired finance receivables resulted
in charges to provision for loan losses and primarily related to initial fair value adjustments.
Other assets — Other assets in the table above primarily include repossessed golf and hotel properties and aviation assets. The fair
value of our golf and hotel properties is determined based on the use of discounted cash flow models, bids from prospective buyers
or inputs from market participants. The fair value of our aviation assets is largely determined based on the use of industry pricing
guides. If the carrying amount of these assets is higher than their estimated fair value, we record a corresponding charge to income
for the difference.
Intangible assets — In 2011, we recorded a $41 million pre-tax impairment charge to write down intangible assets in our Systems
segment primarily related to customer agreements and contractual relationships associated with AAI-Logistics & Technical Services and
AAI-Test & Training businesses. We determined the fair value of these assets using discounted cash flows related to each asset group and
a weighted-average cost of capital of approximately 10%. The impairment charge was recorded in cost of sales within segment profit.
Assets and Liabilities Not Recorded at Fair Value
The carrying value and estimated fair values of our financial instruments that are not reflected in the financial statements at fair
value are as follows:
December 29, 2012 December 31, 2011
(In millions)
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
Manufacturing group
Long-term debt, excluding leases $ (2,225) $ (2,636) $ (2,328) $ (2,561)
Finance group
Finance receivables held for investment, excluding leases 1,625 1,653 1,997 1,848
Debt (1,686) (1,678) (1,974) (1,854)
Fair value for the Manufacturing group debt is determined using market observable data for similar transactions or Level 2 inputs.
At December 29, 2012 and December 31, 2011, approximately 46% and 53%, respectively, of the fair value of term debt for the
Finance group was determined based on observable market transactions (Level 1). The remaining Finance group debt was
determined based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination
and credit default expectations (Level 2). Fair value estimates for finance receivables held for investment were determined based
on internally developed discounted cash flow models primarily utilizing significant unobservable inputs (Level 3), which include
estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants
combined with estimated loan cash flows based on credit losses, payment rates and expectations of borrowers’ ability to make
payments on a timely basis.