10-Q 1 tenq.htm SECURITIES AND EXCHANGE COMMISSION

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

_______________

FORM 10-Q

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended June 29, 2002
 

OR

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 1-5480

 

_______________

 

TEXTRON INC.

 

(Exact name of registrant as specified in its charter)

 

_______________

 

Delaware
(State or other jurisdiction of
incorporation or organization)

05-0315468
(I.R.S. Employer Identification No.)

 

40 Westminster Street, Providence, RI 02903
401-421-2800
(Address and telephone number of principal executive offices)

 

_______________

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

 

Yes  X  No   

 

Common stock outstanding at July 27, 2002 - 138,121,000 shares

2.

PART I. FINANCIAL INFORMATION


Item 1. FINANCIAL STATEMENTS



TEXTRON INC.
Condensed Consolidated Statements of Income (unaudited)
(Dollars in millions, except per share amounts)
 

Three Months Ended

Six Months Ended

  
 

June 29,
2002

June 30,
2001

June 29,
2002

June 30
2001

  

Revenues

                  

Manufacturing revenues

$

2,676

$

3,124

$

4,949

$

5,993

  

Finance revenues

  

148

 

164

 

293

 

335

  

   Total revenues

  

2,824

 

3,288

 

5,242

 

6,328

  

Costs, expenses and other

  

 

 

 

 

 

 

 

  

Cost of sales

  

2,175

 

2,524

 

4,054

 

4,837

  

Selling and administrative

  

375

 

402

 

705

 

769

  

Interest, net

  

73

 

110

 

150

 

232

  

Provision for losses on finance receivables

  

25

 

12

 

55

 

23

  

Special charges

  

26

 

35

 

36

 

77

  

Gain on sale of division

  

(25)

 

-

 

(25)

 

-

  

   Total costs, expenses and other

  

2,649

 

3,083

 

4,975

 

5,938

  

Income from operations before income taxes and
   distributions on preferred securities of subsidiary trusts

  


175

 


205

 


267

 


390

  

Income taxes

  

(63)

 

(72)

 

(92)

 

(138)

  

Distribution on preferred securities of
   subsidiary trusts, net of income taxes

  


(7)

 


(7)

 


(13)

 


(13)

  

Income before cumulative effect of change in
   accounting principle



105



126



162



239

  

Cumulative effect of change in accounting
   principle, net of income taxes

 


-



-



(488)



-

  

Net income (loss)

$

105

$

126

$

(326)

$

239

  

Per common share:

                  

Basic:

                  

   Income from operations

$

.75

$

.89

$

1.16

$

1.69

  

   Cumulative effect of change in accounting principle,
      net of income taxes

  


-

 


-

 


(3.49)

 


-

  

Net income (loss)

$

.75

$

.89

$

(2.33)

$

1.69

  

Diluted:

                  

   Income from operations

$

.74

$

.88

$

1.14

$

1.67

  

   Cumulative effect of change in accounting principle,
      net of income taxes

  


-

  


-

  


(3.44)

  


-

  

Net income (loss)

$

.74

$

.88

$

(2.30)

$

1.67

  

Average shares outstanding:

                  

   Basic

139,486,000

141,055,000

139,893,000

140,891,000

  

   Diluted

141,599,000

143,411,000

141,682,000

143,060,000

  

Dividends per share:

                  

   $2.08 Preferred stock, Series A

$

.52

$

.52

$

1.04

$

1.04

  

   $1.40 Preferred stock, Series B

$

.35

$

.35

$

.70

$

.70

  

   Common stock

$

.325

$

.325

$

.65

$

.65

  

See notes to the condensed consolidated financial statements.

 

3.

Item 1.   FINANCIAL STATEMENTS (Continued)

TEXTRON INC.
Condensed Consolidated Balance Sheets (unaudited)
(Dollars in millions)
 

June 29,
2002

  

December 29,
2001

  

Assets

        

Textron Manufacturing

        

Cash and cash equivalents

$

595

  

$

241

  

Commercial and U.S. Government receivables, less allowance for
   doubtful accounts of $58 and $54


1,293

  


1,149

  

Inventories

1,779

  

1,727

  

Due from Textron Finance

-

  

510

  

Other current assets

437

  

390

  

      Total current assets

4,104

  

4,017

  

Property, plant, and equipment, less accumulated
   depreciation of $2,067 and $1,929


2,014

  


2,044

  

Goodwill

1,355

  

1,821

  

Intangibles, net

87

  

144

  

Other assets

1,637

  

1,562

  

      Total Textron Manufacturing assets

9,197

  

9,588

  

Textron Finance

 

  

 

  

Cash

21

  

19

  

Finance receivables, net

5,836

  

5,492

  

Goodwill

180

  

204

  

Other assets

758

  

749

  

      Total Textron Finance assets

6,795

  

6,464

  

      Total assets

$

15,992

  

$

16,052

  

Liabilities and shareholders' equity

        

Liabilities

        

Textron Manufacturing

        

Current portion of long-term debt and short-term debt

$

537

  

$

673

  

Accounts payable

974

 

994

  

Other accrued liabilities

1,322

 

1,408

  

      Total current liabilities

2,833

 

3,075

  

Accrued postretirement benefits other than pensions

615

 

623

  

Other liabilities

1,150

 

1,219

  

Long-term debt

1,671

 

1,261

  

      Total Textron Manufacturing liabilities

6,269

 

6,178

  

Textron Finance

 

 

 

  

Other liabilities

377

 

372

  

Deferred income taxes

383

 

357

  

Due to Textron Manufacturing

-

 

510

  

Debt

5,037

 

4,188

  

      Total Textron Finance liabilities

5,797

 

5,427

  

      Total liabilities

12,066

 

11,605

  

Textron Finance - obligated mandatorily redeemable preferred
   securities of Finance subsidiary holding solely junior
   subordinated debentures



27

 



28

  

Textron - obligated mandatorily redeemable preferred
   securities of subsidiary trust holding solely Textron
   junior subordinated debt securities



485

 



485

  

Shareholders' equity

 

 

 

  

Capital stock:

 

 

 

  

   Preferred stock

11

 

11

  

   Common stock

25

 

25

  

Capital surplus

1,076

 

1,064

  

Retained earnings

5,413

 

5,829

  

Accumulated other comprehensive loss

(180)

 

(223)

  
 

6,345

 

6,706

  

   Less cost of treasury shares

2,931

 

2,772

  

   Total shareholders' equity

3,414

 

3,934

   Total liabilities and shareholders' equity

$

15,992

  

$

16,052

  

Common shares outstanding

138,301,000

  

141,251,000

See notes to condensed consolidated financial statements.

4.

Item 1.   FINANCIAL STATEMENTS (Continued)

TEXTRON INC.
Condensed Consolidated Statements of Cash Flows (unaudited)
(In millions)
 

Six Months Ended

  
 

June 29,
2002

  

June 30,
2001

  

Cash flows from operating activities:

            

Net (loss) income

$

(326)

  

$

239

  

Adjustments to reconcile net (loss) income to net cash provided (used)
    by operating activities:

            

      Cumulative effect of change in accounting principle,
         net of income taxes

  


488

 

 


-

  

      Depreciation

  

159

 

 

203

  

      Amortization

  

15

 

 

59

  

      Special charges

  

36

 

 

77

  

      Provision for losses on finance receivables

  

55

 

 

23

  

      Deferred income taxes

  

16

 

 

26

  

      Gain on sale of division

  

(25)

 

 

-

  

      Changes in assets and liabilities excluding those related to
         acquisitions and divestitures:

  

 

 

 

 

  

            Commercial and U.S. Government receivables

  

(142)

 

 

(204)

  

            Inventories

  

(52)

 

 

(210)

  

            Other assets

  

(92)

 

 

(153)

  

            Accounts payable

  

(57)

 

 

(35)

  

            Other accrued liabilities

  

(38)

 

 

(55)

  

      Other, net

  

8

 

 

9

  

   Net cash provided (used) by operating activities

  

45

 

 

(21)

  

Cash flows from investing activities:

  

 

 

 

 

  

Finance receivables:

  

 

 

 

 

  

   Originated or purchased

  

(4,301)

 

 

(3,655)

  

   Repaid

  

3,633

 

 

2,790

  

   Proceeds from receivable sales and securitization sales

  

356

 

 

818

  

Cash used in acquisitions

  

-

 

 

(550)

  

Capital expenditures

  

(146)

 

 

(273)

  

Net proceeds from disposition

  

39

 

 

-

  

Proceeds from sale of fixed assets

  

26

 

 

11

  

Other investing activities, net

  

25

 

 

1

  

   Net cash used by investing activities

  

(368)

 

 

(858)

  

Cash flows from financing activities:

  

 

 

 

 

  

Increase in short-term debt

  

149

 

 

1,041

  

Proceeds from issuance of long-term debt

  

1,596

 

 

611

  

Principal payments and retirements on long-term debt

  

(784)

 

 

(706)

  

Proceeds from exercise of stock options

  

19

 

 

21

  

Purchases of Textron common stock

  

(164)

 

 

(42)

  

Dividends paid

  

(137)

 

 

(92)

  

   Net cash provided by financing activities

  

679

 

 

833

  

Net increase (decrease) in cash and cash equivalents

  

356

 

 

(46)

  

Cash and cash equivalents at beginning of period

  

260

 

 

289

  

Cash and cash equivalents at end of period

$

616

 

$

243

  

Supplemental schedule of non-cash investing and financing
   activities:

  

 

 

 

 

  

      Capital lease obligations incurred to finance future construction

$

79

 

$

-

  

      Capital expenditures financed through capital leases

$

9

 

$

-

  

See notes to condensed consolidated financial statements.

5.

Item 1.   FINANCIAL STATEMENTS (Continued)

 

TEXTRON INC.
Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1. Basis of Presentation

The condensed consolidated financial statements should be read in conjunction with the financial statements included in Textron's Annual Report on Form 10-K for the year ended December 29, 2001. The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of Textron's consolidated financial position at June 29, 2002, and its consolidated results of operations and cash flows for each of the respective three and six month periods ended June 29, 2002 and June 30, 2001. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. In January 2002, management responsibility for certain divisions was reorganized to reflect the sale of the Automotive Trim business in December 2001. In connection with this change, Textron has reorganized under the following new segments: Aircraft, Fastening Systems, Industrial Products, Industrial Components and Finance. All prior period data has been appropriately reclassified.

Textron accounts for its interest in unconsolidated joint ventures and subsidiaries under the equity method of accounting. For the three and six month periods ended June 29, 2002, Textron's equity in income (loss) from unconsolidated joint ventures and subsidiaries totaled $(2) million and $(3) million, respectively. For the three and six month periods ended June 30, 2001, Textron's equity in income (loss) from unconsolidated joint ventures and subsidiaries totaled $(4) million and $(7) million, respectively.

Note 2. Inventories


(In millions)

June 29,
2002

  

December 29,
2001

  

Finished goods

$

856

  

$

719

  

Work in process

  

802

    

856

  

Raw materials

  

335

    

377

  
   

1,993

    

1,952

  

Less progress payments and customer deposits

  

214

    

225

  
 

$

1,779

  

$

1,727

  

Note 3. Goodwill and Other Intangible Assets

On December 30, 2001, Textron adopted SFAS No. 142, "Goodwill and Other Intangible Assets", which requires companies to stop amortizing goodwill and certain intangible assets with indefinite useful lives, and requires an annual review for impairment. Upon adoption, Textron discontinued the amortization of goodwill. Goodwill amortization expense for the three and six months ended June 30, 2001 was $22 million and $44 million, respectively, net of income taxes.

Under SFAS No. 142, Textron was required to test all existing goodwill for impairment as of December 30, 2001, on a "reporting unit" basis. The reporting unit represents the operating segment unless, at businesses one level below that operating segment (a "component"), discrete financial information is prepared and is reviewed by segment management, in which case such component is the reporting unit. In certain instances, components of an operating segment have been aggregated and deemed a single reporting unit based on similar economic characteristics of the components. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value. Fair values were primarily established using a discounted cash flow methodology. When available, comparative market multiples were used to corroborate discounted cash flow results.


6.

As a result of this impairment review of goodwill, Textron recorded an after-tax transitional impairment charge of $488 million ($561 million, pre-tax), which is reported in the caption "Cumulative effect of change in accounting principle, net of income taxes". The after-tax impairment charge relates to the following segments: $274 million in Industrial Products; $111 million in Industrial Components; $88 million in Fastening Systems; and $15 million in Finance. For Industrial Products, the primary factor resulting in the impairment charge was the difficult economic environment in the telecommunication industry which has experienced a significant decline in demand. This decline has resulted in lower sales and operating margins than originally anticipated with the acquisitions of InteSys and Tempo businesses. For Industrial Components and Fastening Systems, the primary factor was the decline in demand in certain industries in which these segments operate due to the economic slowdown. The Finance segment's impairment charge is in its franchise finance division and is primarily the result of decreasing loan volumes and an unfavorable securitization market. No impairment charge was appropriate for these segments under the previous goodwill impairment accounting standard, which Textron applied based on undiscounted cash flows.

A summary of changes in goodwill during the six months ended June 29, 2002 is as follows:




(In millions)


Balance
December 29,
2001


Reclassification
of Intangible
Assets


Transitional
Impairment
Charge


Foreign
Currency
Translation


Balance
June 29,
2002

  

Aircraft

$

322

$

-

$

-

$

-

$

322

  

Fastening Systems

  

473

  

-

  

(100)

  

12

  

385

  

Industrial Products

  

646

  

42

  

(326)

  

1

  

363

  

Industrial Components

  

380

  

-

  

(111)

  

16

  

285

  

Finance

  

204

  

-

  

(24)

  

-

  

180

  

   Total

$

2,025

$

42

$

(561)

$

29

$

1,535

  

Textron also adopted the remaining provisions of SFAS No. 141, "Business Combinations" on December 30, 2001. For goodwill and intangible assets reported in connection with acquisitions made prior to July 1, 2001, these provisions broaden the criteria for recording intangible assets separate from goodwill and require that certain intangible assets that do not meet the new criteria, such as assembled workforce and customer base, be reclassified into goodwill. Upon adoption of these provisions, intangible assets totaling $42 million, net of related deferred taxes, were reclassified into goodwill within the Industrial Products segment.

7.

The effect on earnings of the transitional impairment charge and of excluding goodwill amortization expense is presented below:

 

Three months ended

Six months ended

  


(In millions, except per share data)

June 29,
2002

June 30,
2001

June 29,
2002

June 30,
2001

  

Reported income before cumulative effect
   of change in accounting principle


$


105


$


126


$


162


$


239

  

   Add back:    amortization, net of income taxes

  

-

  

22

  

-

  

44

  

   Adjusted net earnings before cumulative effect
      of change in accounting principle

  


105

  


148

  


162

  


283

  

   Cumulative effect of change in accounting
      principle, net of income taxes

  


-

  


-

  


(488)

  


-

  

      Adjusted net income (loss)

$

105

$

148

$

(326)

$

283

  

Basic earnings per share:

  

 

  

 

  

 

  

 

  

   Reported earnings per share before cumulative
      effect of change in accounting principle


$


.75


$


.89


$


1.16


$


1.69

  

   Add back:    amortization, net of income taxes

  

-

  

.16

  

-

  

.32

  

   Adjusted net earnings before cumulative effect
      of change in accounting principle

  


.75

  


1.05

  


1.16

  


2.01

  

   Cumulative effect of change in accounting
      principle, net of income taxes

  


-

  


-

  


(3.49)

  


-

  

      Adjusted earnings (loss) per share - basic

$

.75

$

1.05

$

(2.33)

$

2.01

  

Diluted earnings per share:

  

 

  

 

          

   Reported earnings per share before cumulative
      effect of change in accounting principle


$


.74


$


.88


$


1.14


$


1.67

  

   Add back:    amortization, net of income taxes

  

-

  

.16

  

-

  

.31

  

   Adjusted net earnings before cumulative effect
      of change in accounting principle

  


.74

  


1.04

  


1.14

  


1.98

  

   Cumulative effect of change in accounting
      principle, net of income taxes

  


-

  


-

  


(3.44)

  


-

  

      Adjusted earnings (loss) per share - diluted

$

.74

$

1.04

$

(2.30)

$

1.98

  

For the three months ended March 30, 2002, the net loss after adjustment for the retroactive cumulative effect of change in accounting principle was $431 million, resulting in diluted loss per share of $3.04 and basic loss per share of $3.07.

All of Textron's acquired intangible assets are subject to amortization and are comprised of the following as of June 29, 2002:



(Dollars in millions)

Weighted Average
Amortization Period
(in years)

Gross
Carrying
Amount


Accumulated
Amortization



Net

  

   Trademarks

30

$

61

$

4

$

57

  

   Patents

8

  

17

  

5

  

12

  

   Non-compete

3

  

11

  

6

  

5

  

   Other

5

  

14

  

1

  

13

  
 

 

$

103

$

16

$

87

  

8.

Amortization expense for the three and six months ended June 29, 2002 totaled $3 million and $6 million, respectively, and is expected to be approximately $5 million for the remainder of 2002. Amortization expense for fiscal years 2003, 2004, 2005, 2006, and 2007 is estimated to be approximately $10 million, $6 million, $6 million, $4 million and $4 million, respectively.

Note 4. Textron Finance-Obligated Mandatorily Redeemable Preferred Securities of Finance Subsidiary Holding Solely Junior Subordinated Debentures

Litchfield Financial Corporation (Litchfield, a subsidiary of Textron Financial Corporation) was acquired by Textron Financial Corporation during 1999. Prior to the acquisition, a trust sponsored and wholly-owned by Litchfield issued $26 million of Series A Preferred Securities to the public. The trust subsequently invested the proceeds in $26 million aggregate principal amount of Litchfield's newly issued 10% Series A Junior Subordinated Debentures, due 2029. The debentures are the sole asset of the trust. The preferred securities were recorded by Textron Financial Corporation at fair value of $29 million as of the acquisition date. The amounts due to the trust under the subordinated debentures and the related income statement amounts have been eliminated in Textron's consolidated financial statements.

The preferred securities accrue and pay cash distributions quarterly at a rate of 10% per annum. The trust's obligation under the preferred securities are fully and unconditionally guaranteed by Litchfield. The trust will redeem all of the outstanding preferred securities when the debentures are paid at maturity on June 30, 2029, or otherwise become due. Litchfield will have the right to redeem 100% of the principal plus accrued and unpaid interest on or after June 30, 2004. As a result of its acquisition of Litchfield, Textron Financial Corporation has agreed to make payments to the holders of the preferred securities, when due, to the extent not paid by or on behalf of the trust or subsidiary.

Note 5. Textron-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Textron Junior Subordinated Debt Securities

In 1996, a trust sponsored and wholly-owned by Textron issued preferred securities to the public (for $500 million) and shares of its common securities to Textron (for $15.5 million), the proceeds of which were invested by the trust in $515.5 million aggregate principal amount of Textron's newly issued 7.92% Junior Subordinated Deferrable Interest Debentures, due 2045. The debentures are the sole asset of the trust and are callable at Textron's sole discretion. The proceeds from the issuance of the debentures were used by Textron for the repayment of long-term borrowings and for general corporate purposes. The amounts due to the trust under the debentures and the related income statement amounts have been eliminated in Textron's consolidated financial statements.

The preferred securities accrue and pay cash distributions quarterly at a rate of 7.92% per annum. Textron has guaranteed, on a subordinated basis, distributions and other payments due on the preferred securities. The guarantee, when taken together with Textron's obligations under the debentures and in the indenture pursuant to which the debentures were issued and Textron's obligations under the Amended and Restated Declaration of Trust governing the trust, provides a full and unconditional guarantee of amounts due on the preferred securities. The preferred securities are mandatorily redeemable upon the maturity of the debentures on March 31, 2045, or earlier to the extent of any redemption by Textron of any debentures. The redemption price in either such case will be $25 per share plus accrued and unpaid distributions to the date fixed for redemption.

9.

Note 6. Contingencies

Textron is subject to legal proceedings and other claims arising out of the conduct of Textron's business, including proceedings and claims relating to private transactions, government contracts, production partners, product liability, employment, and environmental, safety and health matters. Some of these legal proceedings and claims seek damages, fines or penalties in substantial amounts or remediation of environmental contamination. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in Textron's suspension or debarment from U.S. Government contracting for a period of time. On the basis of information presently available, Textron believes that these proceedings and claims will not have a material effect on Textron's financial position or results of operations.

Note 7. Accumulated Other Comprehensive Loss and Comprehensive Income (Loss)

The components of accumulated other comprehensive loss, net of related income taxes, are as follows:

   

Six Months Ended

 


(In millions)

  

June 29,
2002

    

June 30,
2001

  

Beginning of period

$

(223)

  

$

(172)

  

Currency translation adjustment

  

32

    

(47)

  

Transition adjustment due to change in accounting
   for derivative instruments and hedging activities

  


-

    


(15)

  

Net deferred gain (loss) on hedge contracts

  

16

    

(1)

  

Pension liability adjustment

  

(4)

    

-

  

Other, net

  

(1)

    

(1)

  

Other comprehensive income (loss)

  

43

    

(64)

  

End of period

$

(180)

  

$

(236)

  

Comprehensive income (loss) is summarized below:



Three Months Ended



Six Months Ended

  


(In millions)

  

June 29,
2002

  

June 30,
2001

  

June 29,
2002

  

June 30,
2001

  

Net income (loss)

$

105

$

126

$

(326)

$

239

  

Other comprehensive income
   (loss)

  


57

  


(16)

  


43

  


(64)

  

Comprehensive income (loss)

$

162

$

110

$

(283)

$

175

  

Note 8. Earnings per Share

The dilutive effect of convertible preferred shares and stock options was 2,113,000 and 2,356,000 shares for the three month periods ending June 29, 2002 and June 30, 2001 and 1,789,000 and 2,169,000 shares for the six month period ended June 29, 2002 and June 30, 2001, respectively. Income available to common shareholders used to calculate both basic and diluted earnings per share approximated net income for both periods.

10.

Note 9. Gain on Sale of Division

Pursuant to a settlement of post-closing obligations under the purchase and sale agreement for the sale of the Trim division, during the second quarter of 2002, Textron received $110 million from Collins & Aikman Products Company (C&A), resulting in an additional gain of $25 million, $9 million, net of income taxes. The proceeds included $95 million for the repurchase of $126 million of face value of C&A preferred shares and $15 million to settle all other matters under the purchase and sale agreement. In addition, the fair value of the C&A common stock was revised following C&A's recapitalization through a share offering in the quarter. Textron also received $5 million for accumulated preferred dividends in the second quarter of 2002.

Note 10. Special Charges

Special charges are comprised of the following:

 

Restructuring Expense

Fixed Asset

Intangible and

    
 

Severance

Facility and

Impairment

Investment

    

(In millions)

Costs

Other

Write-Downs

Write-Downs

Total

  

Three Months Ended June 29, 2002

  

Aircraft

$ 5

$ -

$ 2

$ -

$ 7

  

Fastening Systems

-

1

1

-

2

  

Industrial Products

3

1

7

-

11

  

Industrial Components

5

-

-

-

5

  

Finance

-

-

-

-

-

  

Corporate

1

-

-

-

1

  
 

$14

$ 2

$10

$ -

$26

  

Three Months Ended June 30, 2001

  

Aircraft

$ -

$ -

$ -

$ -

$-

  

Fastening Systems

10

-

6

1

17

  

Industrial Products

6

-

2

-

8

  

Industrial Components

4

-

2

-

6

  

Finance

2

-

-

-

2

  

Corporate

2

-

-

-

2

  
 

$24

$ -

$ 10

$ 1

$35

  

Six Months Ended June 29, 2002

  

Aircraft

$ 9

$ -

$ 2

$ -

$11

  

Fastening Systems

4

1

1

-

6

  

Industrial Products

2

2

9

-

13

  

Industrial Components

4

1

-

-

5

  

Finance

-

-

-

-

-

  

Corporate

1

-

-

-

1

  
 

$20

$ 4

$12

$ -

$36

  

Six Months Ended June 30, 2001

  

Aircraft

$ -

$ -

$ -

$ -

$-

  

Fastening Systems

17

1

14

1

33

  

Industrial Products

11

-

2

-

13

  

Industrial Components

20

-

4

-

24

  

Finance

1

1

-

-

2

  

Corporate

2

-

-

3

5

  
 

$51

$ 2

$20

$ 4

$77

  

11.

To improve returns at core businesses and to complete the integration of certain acquisitions, Textron approved and committed to a restructuring program in the fourth quarter of 2000 based upon targeted cost reductions. This program was further expanded in 2001 and is expected to be substantially completed within the next twelve months. The program includes corporate and segment direct and indirect workforce reductions, consolidation of facilities primarily in the United States and Europe, rationalization of certain product lines, outsourcing of non-core production activity, the divestiture of non-core businesses and streamlining of sales and administrative overhead.

Under this restructuring program, excluding Automotive Trim, Textron has reduced its workforce by approximately 5,900 employees through June 29, 2002 and has closed 60 facilities, including 28 manufacturing plants. Textron expects a total reduction of at least 7,500 employees, excluding Automotive Trim, representing approximately 13% of Textron's global workforce since the restructuring was first announced.

Restructuring costs and related asset impairment charges recorded in earnings have been included in special charges on the consolidated statement of income.

An analysis of Textron's special charges for restructuring and related reserve accounts is summarized below:


(In millions)

Asset
Impairments

Severance
Costs

Facilities
& Other


Total

  

Balance December 29, 2001

$   -

$  31

$   3

$  34

  

Additions

12

24

5

41

  

Reserves deemed unnecessary

-

(4)

(1)

(5)

  

Non-cash utilization

(12)

-

-

(12)

  

Cash paid

-

(26)

(1)

(27)

  

Balance June 29, 2002

$   -

$  25

$   6

$  31

  

Severance costs are generally paid on a monthly basis over the severance period granted to each employee or on a lump sum basis when required. Facilities and other costs represent lease termination costs and facility and plant clean-up costs. Lease termination costs are generally paid upon exiting the facility or over the remaining lease term and facility and plant clean-up costs are paid in accordance with normal payment terms.

The specific restructuring measures and associated estimated costs are based on Textron's best judgment under prevailing circumstances. Textron believes that the restructuring reserve balance of $31 million is adequate to carry out the restructuring activities formally identified and committed to as of June 29, 2002 and anticipates that all actions related to these liabilities will be completed within a twelve-month period.

12.

Textron also incurred costs related to the restructuring that have not been included in special charges. These expenses primarily consist of costs for outsourcing certain operations, plant rearrangement, machinery and equipment relocation, employee replacement and relocation costs, and are included in segment profit only as incurred. Costs related to these restructuring items are reflected in the consolidated statement of income as follows:

 

  


Three Months Ended

  


Six Months Ended


(In millions)

  

June 29,
2002

  

June 30,
2001

  

June 29,
2002

  

June 30,
2001

Cost of sales

$

1

$

11

$

3

$

12

Selling and administrative
   expenses

  


2

  


2

  


4

  


4

Total

$

3

$

13

$

7

$

16

Note 11. Financial Information by Borrowing Group

Textron's financings are conducted through two borrowing groups, Textron Finance and Textron Manufacturing. This framework is designed to enhance Textron's borrowing power by separating the Finance segment, which is a borrowing unit of a specialized business nature. Textron Finance consists of Textron Financial Corporation consolidated with its subsidiaries, which are the entities through which Textron operates its Finance segment. Textron Finance's operations are financed primarily by borrowing from its own group of external creditors. Textron Manufacturing is Textron Inc., the parent company, consolidated with the entities that operate in the Aircraft, Fastening Systems, Industrial Products and Industrial Components business segments.

13.

Note 11: Financial Information by Borrowing Group (continued)

Textron Manufacturing
(unaudited) (In millions)
 

Six Months Ended

  

Condensed Statements of Cash Flows

June 29, 2002

  

June 30, 2001

  

Cash flows from operating activities:

            

Net (loss) income

$

(326)

$

239

Adjustments to reconcile net (loss) income to net cash
   provided (used) by operating activities:

   Earnings of Textron Finance less than (greater than)
      distributions to Textron Manufacturing


36


(28)

   Cumulative effect of change in accounting principle,
      net of income taxes


488


-

   Depreciation

145

194

   Amortization

10

49

   Special charges

36

77

   Deferred income taxes

(10)

16

   Gain on sale of division

(25)

-

   Changes in assets and liabilities excluding those
      related to acquisitions and divestitures:

         Commercial and U.S. government receivables

(142)

(204)

         Inventories

(52)

(210)

         Other assets

(98)

(133)

         Accounts payable

(19)

(43)

         Other accrued liabilities

(25)

(46)

   Other - net

12

26

      Net cash provided (used) by operating activities

  

30

 

 

(63)

Cash flows from investing activities:

Capital expenditures

(133)

(267)

Cash used in acquisitions

-

(163)

Net proceeds from dispositions

39

-

Proceeds from sale of fixed assets

26

11

Due from Textron Finance

510

-

Other investing activities - net

(1)

4

      Net cash provided (used) by investing activities

 

441

 

 

(415)

Cash flows from financing activities:

Increase (decrease) in short-term debt

(134)

599

Proceeds from issuance of long-term debt

301

2

Principal payments and retirements on long-term debt

(2)

(33)

Proceeds from exercise of stock options

19

21

Purchases of Textron common stock

(164)

(42)

Dividends paid

(137)

(92)

Contributions paid to Textron Finance

-

(40)

      Net cash (used) provided by financing activities

 

(117)

 

 

415

Net increase (decrease) in cash and cash equivalents

354

(63)

Cash and cash equivalents at beginning of period

 

241

 

 

282

Cash and cash equivalents at end of period

   $

595

 

$

219

Supplemental schedule of non-cash investing and financing
   activities:

      Capital lease obligations incurred to finance future
         construction


$


79


$


-

      Capital expenditure financed through capital leases

 $

9

 

$

-

14.

Note 12: Segment Information
 

Three Months Ended

  

Six Months Ended

  


(In millions)

June 29,
2002

  

June 30,
2001

  

June 29,
2002

  

June 30,
2001

  

REVENUES

  

 

                    

MANUFACTURING:

  

 

                    

   Aircraft

$

1,323

  

$

1,258

  

$

2,370

  

$

2,280

  

   Fastening Systems

  

431

    

451

    

827

    

917

  

   Industrial Products

  

505

    

541

    

973

    

1,090

  

   Industrial Components

  

417

    

874

    

779

    

1,706

  
   

2,676

    

3,124

    

4,949

    

5,993

  

FINANCE

  

148

    

164

    

293

    

335

  

Total revenues

$

2,824

  

$

3,288

  

$

5,242

  

$

6,328

  

SEGMENT OPERATING PROFIT*

  

 

                    

MANUFACTURING:

  

 

                    

   Aircraft

$

147

  

$

120

  

$

226

  

$

227

  

   Fastening Systems

  

20

    

35

    

28

    

77

  

   Industrial Products

  

12

    

65

    

42

    

125

  

   Industrial Components

  

24

    

81

    

46

    

160

  
   

203

    

301

    

342

    

589

  

FINANCE

  

29

    

43

    

51

    

92

  

Segment profit

  

232

    

344

    

393

    

681

  

Special charges

  

(26)

    

(35)

    

(36)

    

(77)

  

Segment operating income

  

206

    

309

    

357

    

604

  

Gain on sale of division

  

25

    

-

    

25

    

-

  

Goodwill amortization**

  

-

    

(25)

    

-

    

(49)

  

Corporate expenses and other - net

  

(31)

    

(39)

    

(60)

    

(81)

  

Interest expense, net

  

(25)

    

(40)

    

(55)

    

(84)

  

Income from operations before income
   taxes and distributions on preferred
   securities of subsidiary trusts



$



175

  



$



205

  



$



267

  



$



390

  

*

Segment profit represents a measurement used by Textron to evaluate operating performance. Segment profit for manufacturing segments does not include interest, certain corporate expenses, special charges and gains and losses from the disposition of significant business units. The measurement for the Finance segment includes interest income, interest expense and distributions on preferred securities of Finance subsidiary trust, and excludes special charges.

**

Pursuant to SFAS No. 142, beginning on December 30, 2001, goodwill is no longer amortized. To reflect the adoption of this Statement and the fact that the Company does not include amortization of goodwill in its internal evaluation of segment performance, the Company has recast its segment data for comparability by reclassifying goodwill amortization out of segment profit in prior periods.

15.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of operations - Three months ended June 29, 2002 vs. Three months ended June 30, 2001

Revenues decreased to $2.8 billion in the second quarter 2002 from $3.3 billion in the second quarter 2001, primarily due to the divestitures of Automotive Trim (Trim), Turbine Engine Components Textron (TECT) and a number of other businesses that contributed $504 million to the decrease and softer sales in several of Textron's segments, partially offset by higher sales in the Aircraft segment, as more fully discussed below. Net income was $105 million in the second quarter 2002, compared to $126 million in the second quarter 2001. Diluted earnings per share were $0.74 in the second quarter 2002, compared to $0.88 in the second quarter 2001. These results included an after-tax gain of $9 million in the second quarter 2002 from transactions related to the divestiture of Trim.

In January 2002, Textron reorganized management responsibility for several divisions which were previously reported in the Automotive and Industrial Products segments into the newly created Industrial Components segment. The Industrial Components segment includes the Fluid and Power divisions, the former Automotive divisions and TECT. In addition, management responsibility for Textron Lycoming was transferred to the Aircraft segment.

Effective December 30, 2001, Textron adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". Under this Statement, goodwill and certain assets with indefinite lives are no longer amortized and must be tested for impairment annually. Textron also adopted the remaining provisions of SFAS No. 141 "Business Combinations" on December 30, 2001, which requires intangible assets that do not meet the new criteria set by this Statement to be classified as goodwill upon adoption. Amortization will continue to be recorded on other intangible assets not classified as goodwill. In the second quarter 2001, pro forma net income excluding amortization of goodwill was $148 million, or $1.04 per diluted share. To reflect the adoption of SFAS No. 142 and the fact that the Company does not include amortization of goodwill in its internal evaluation of segment performance, the Company has recast its segment data for comparability by reclassifying goodwill amortization from segment profit in prior periods.

During the second quarter 2002, Textron recorded an after-tax transitional goodwill impairment charge of $488 million, which is reported in the caption "Cumulative effect of change in accounting principle, net of income taxes" retroactive to the beginning of fiscal year 2002. This after-tax charge relates to the following segments: $274 million in Industrial Products; $111 million in Industrial Components; $88 million in Fastening Systems; and $15 million in Finance. For Industrial Products, the primary factor resulting in the impairment charge was the difficult economic environment in the telecommunication industry which has experienced a significant decline in demand. This decline has resulted in lower sales and operating margins than originally anticipated with the acquisitions of the InteSys and Tempo businesses. For Industrial Components and Fastening Systems, the primary factor was the decline in demand in certain industries in which these segments operate due to the economic slowdown. The Finance segment's impairment charge is in its franchise finance division and is primarily the result of decreasing loan volumes and an unfavorable securitization market. No impairment charge was appropriate for these segments under the previous goodwill impairment accounting standard, which Textron applied based on undiscounted cash flows.

16.

Segment profit of $232 million in the second quarter 2002 decreased $112 million from $344 million in the second quarter 2001 primarily due to a reduced contribution related to sales volume, the divestitures of Trim and TECT, which contributed $41 million to the decrease, an increase in reserves for receivables and inventory and low volume manufacturing inefficiencies, partially offset by the benefit of restructuring activities, as more fully discussed below. Segment profit represents a measurement used by Textron to evaluate operating performance. Segment profit for manufacturing segments does not include interest, certain corporate expenses, special charges and gains and losses from the disposition of significant business units. The measurement for the Finance segment includes interest income, interest expense and distributions on preferred securities of Finance subsidiary trust, and excludes special charges. For a reconciliation of segment profit to income from operations before income taxes and distributions on preferred securities of subsidiary trusts, see Note 12 of Textron's financial statements.

The Aircraft segment's revenues and profit increased $65 million and $27 million, respectively.

  • Cessna's revenues increased $61 million primarily due to higher used aircraft sales volume of $44 million, higher Citation business jet volume of $31 million, higher pricing of $17 million (net of $6 million in lower resale prices for trade-in aircraft) and higher spare parts and service sales of $5 million. These were partially offset by $34 million in lower sales volume of single engine piston aircraft and engines that have been affected by the weak economy. Profit increased $24 million primarily as a result of the higher pricing of $17 million, a benefit of $8 million from the changes in sales volume and a favorable mix, and lower engineering expenses of $6 million, partially offset by start-up costs of $7 million related to the new Sovereign business jet.

  • Bell Helicopter's revenues increased $4 million as higher revenues of $25 million from the U.S. Government, primarily on the V-22 program and the H-1 upgrade contracts, were partially offset by lower commercial sales of $13 million and lower foreign military sales of $8 million. Sales in the commercial business primarily reflected lower commercial aircraft sales of $41 million, partially offset by higher commercial spares and service sales of $23 million and higher sales of kits used to modernize older model Huey helicopters of $9 million. Bell's profit increased $3 million primarily as a result of 2001 expenses of $8 million associated with outsourcing certain operations and higher profit of $6 million in its U.S. Government business, primarily on the V-22 contract, partially offset by lower profit of $14 million in its commercial business.

The lower profit of $14 million in Bell's commercial business primarily reflected reduced pricing of $15 million related to one commercial helicopter model. Additionally, profit was lower due to a reduced contribution of $5 million from the lower commercial aircraft sales, increased costs of $3 million as a result of production line changes, higher warranty expense of $3 million, lower income of $3 million from a joint venture partner related to the BA609 program, costs of $2 million required to reconfigure two test aircraft and other cost increases of $5 million. These decreases in profit were partially offset by lower product development expenses of $11 million associated with the BA609 program and a benefit of $8 million related to the higher sales of commercial spares and service and Huey kits.

17.

As authorized by an Acquisition Decision Memorandum signed by the Department of Defense in December 2001, the V-22 program continues to proceed at low-rate production levels. Under the low-rate production, Textron continues to manufacture aircraft which will subsequently be modified for engineering changes required by the Department of Defense. On August 1, 2002, Bell was awarded a modification to its contract for the next two lots, totaling twenty aircraft. The V-22 returned to flight operations on May 29, 2002 for extensive flight testing which is a prerequisite for returning to operational use.

The delays experienced in the V-22 program have also slowed the development and certification of the BA609 civil tiltrotor aircraft. Management believes that the V-22 should lead tiltrotor technology into the marketplace and is currently working with its joint venture partner, suppliers and customers in the BA609 program to adjust the planned program arrangements and schedule for these delays.

The Fastening Systems segment's revenues and profit decreased $20 million and $15 million, respectively. The revenue decrease was primarily due to the divestiture of non-core product lines of $13 million, customer price reductions of $8 million and lower sales volume of $6 million from depressed markets, partially offset by the favorable impact of foreign exchange of $7 million in its European operations. Profit decreased primarily due to low volume manufacturing inefficiencies, customer price reductions of $8 million and a reduced contribution of $4 million from lower sales, partially offset by the benefit of $7 million from restructuring activities and the favorable impact of a $7 million customer warranty issue in the second quarter 2001.

The Industrial Products segment's revenues and profit decreased $36 million and $53 million, respectively. Revenues decreased in most of the segment's businesses primarily due to lower sales volume of $54 million from depressed markets and the divestiture of non-core product lines of $7 million during 2001, partially offset by higher revenues of $22 million in the aerospace and defense business. Profit decreased primarily due to a reduced contribution of $32 million from lower sales volume, an increase of $28 million in reserves for receivables and inventory and the nonrecurring impact of a gain of $5 million on the sale of a product line in 2001, partially offset by the benefit of $12 million from restructuring activities and higher contribution of $3 million from the higher aerospace and defense revenues.

The Industrial Components segment's revenues and profit decreased $457 million and $57 million, respectively. The divestitures of Trim and TECT as well as several small product lines in 2001 contributed $484 million and $41 million to the decreases in revenues and profit, respectively. Excluding the divestitures, revenues increased $27 million while profit decreased $16 million. The revenue increase was primarily due to higher volume of $47 million at Kautex as a result of new product launches and a stronger automotive market, partially offset by lower volume of $17 million in the other industrial businesses as a result of soft markets and $7 million of customer price reductions. Excluding the divestitures, the profit decrease was primarily due to low volume manufacturing inefficiencies, the nonrecurring impact of a gain of $7 million on the sale of a product line in 2001 and customer price reductions of $7 million, partially offset by the benefit of $5 million from restructuring activities. Despite the higher sales, contribution margin was essentially unchanged as a result of product mix.

18.

The Finance segment's revenues and profit decreased $16 million and $14 million, respectively. Revenues decreased primarily due to lower finance charges of $24 million from a lower average yield (7.6% in the second quarter 2002 compared to 9.5% in the second quarter 2001) reflecting a lower interest rate environment, partially offset by higher fee income of $6 million and higher operating lease revenue of $2 million. Profit decreased primarily due to a higher provision for loan losses of $13 million and higher operating expenses of $8 million, partially offset by higher interest margin of $6 million. The increase in the provision for losses reflected higher net charge-offs of $11 million, primarily related to small business finance revolving credit loans and exited businesses due to continued weak economic conditions, and the strengthening of the allowance for losses. Although management believes it has made adequate provision for anticipated losses, realization of finance assets remains subject to uncertainties. Subsequent evaluations of nonperforming assets, in light of factors then prevailing, including economic conditions, may require additional increases in the allowance for losses of such assets. The current economic conditions will likely put continued pressure on the performance of all finance receivable portfolios. Higher operating expenses were primarily due to higher legal and collection expenses of $5 million and higher expenses of $2 million related to growth in managed receivables.

Special charges and other costs related to restructuring for the second quarter 2002 were $26 million and $3 million, respectively, compared to $35 million and $13 million, respectively, in the second quarter 2001. The table below summarizes the special charges which include restructuring expenses associated a) with reducing overhead, and closing, consolidating and downsizing manufacturing facilities, b) corporate personnel reductions and c) consolidating operations and exiting non-core product lines.

 

Three Month Period Ended June 29, 2002

  
 

Restructuring Expense

Fixed Asset

Intangible and

    
 

Severance

Facility and

Impairment

Investment

    

(In millions)

Costs

Other

Write-Downs

Write-Downs

Total

  

Aircraft

$ 5

$ -

$ 2

$ -

$ 7

  

Fastening Systems

-

1

1

-

2

  

Industrial Products

3

1

7

-

11

  

Industrial Components

5

-

-

-

5

  

Finance

-

-

-

-

-

  

Corporate

1

-

-

-

1

  
 

$14

$ 2

$10

$ -

$26

  
 

Three Month Period Ended June 30, 2001

  

Aircraft

$ -

$ -

$ -

$ -

$ -

  

Fastening Systems

10

-

6

1

17

  

Industrial Products

6

-

2

-

8

  

Industrial Components

4

-

2

-

6

  

Finance

2

-

-

-

2

  

Corporate

2

-

-

-

2

  
 

$24

$ -

$10

$ 1

$35

  

Costs related to restructuring of $3 million in the second quarter 2002 and $13 million in the second quarter 2001 are included in segment profit. For the second quarter 2002, costs related to restructuring totaled $1 million each for Fastening Systems, Industrial Products and Industrial Components. For the second quarter 2001, costs related to restructuring totaled $8 million for Aircraft, $3 million for Industrial Components, $1 million for Fastening Systems, and $1 million for Industrial Products.

19.

Under the restructuring program (exclusive of Trim) Textron has reduced its workforce by approximately 5,900 employees through June 29, 2002, including approximately 2,100 in Industrial Products, 1,800 in Fastening Systems, 1,100 in Industrial Components, 700 in Aircraft and 200 in Finance and Corporate. The remaining workforce reduction of at least 1,600 employees should be substantially completed within the next twelve months. Textron expects a total reduction of at least 7,500, excluding Trim, representing approximately 13% of its global workforce since the restructuring was first announced. Through the consolidations, Textron is closing 80 facilities, including 36 manufacturing plants representing over 3.8 million square feet of manufacturing floor space. As of June 29, 2002, 60 facilities, including 28 manufacturing plants, have been closed primarily in the Industrial Components, Industrial Products and Fastening Systems segments.

Textron expects to incur total special charges and costs related to this restructuring program, excluding goodwill and e-business write-downs and Trim, of approximately $325 million, of which $191 million has been incurred as of June 29, 2002. Restructuring savings were $111 million for the first half 2002 and are expected to be at least $225 million in 2002 and $250 million in 2003.

Corporate expenses and other, net decreased $8 million, primarily due to the timing of expenditures related to transformation initiatives of $5 million and royalty income of $4 million in 2002 related to the divestiture of Trim.

Interest expense, net - decreased $15 million primarily due to the benefit of $9 million as a result of a lower level of average debt primarily as a result of the pay down of debt with the proceeds from the divestiture of Trim and the benefit of a lower interest rate environment and the receipt of $5 million for accumulated interest on the preferred shares that Collins & Aikman repurchased.

Income Taxes - The effective tax rate for the second quarter 2002 increased to 36.0% primarily due to the tax impact of the gain related to the divestiture of Trim. Excluding the impact of the gain, the effective tax rate was 31.5% compared to 35.2% in the second quarter 2001. The 3.7% decrease is primarily due to a decrease of 2.7% in the effective tax rate from the elimination of goodwill amortization under SFAS No. 142, which is primarily a non-tax deductible expense, and a favorable change in the tax law related to the deductibility of dividends paid on company stock held by an employee stock ownership plan that reduced the effective tax rate by 2.8% (1.5% of this reduction represents a nonrecurring benefit upon implementation of the new tax law). These were partially offset by an increase in the foreign tax rate of 2.3%.

Results of operations - Six months ended June 29, 2002 vs. Six months ended June 30, 2001

Revenues decreased to $5.2 billion in the first half 2002 from $6.3 billion in the first half 2001, primarily due to the divestitures of Trim, TECT and a number of other businesses that contributed $962 million to the decrease and softer sales in most of Textron's segments, partially offset by higher sales in the Aircraft segment, as more fully discussed below. Income before cumulative effect of change in accounting principle, net of income taxes, was $162 million for the first half 2002, compared to $239 million in the first half 2001. Diluted earnings per share before cumulative effect of change in accounting principle, net of income taxes, were $1.14 in the first half 2002, compared to $1.67 in the first half 2001.

Textron recorded a net loss of $326 million in the first half of 2002, compared to net income of $239 million in the first half 2001. Net income for the first half 2002 included the cumulative effect of a change in accounting principle, net of income taxes of $488 million. In the first half 2001, pro forma net income excluding amortization of goodwill was $283 million, or $1.98 per diluted share.

20.

Segment profit of $393 million in the first half 2002 decreased $288 million from $681 million in the first half 2001 primarily due to a reduced contribution related to lower sales volume, the divestitures of Trim and TECT, which contributed $79 million to the decrease, an increase in reserves for receivables and inventory, and low volume manufacturing inefficiencies, partially offset by the benefit of restructuring activities, as more fully discussed below.

The Aircraft segment's revenues increased $90 million, while profit decreased $1 million.

  • Cessna's revenues increased $107 million primarily due to higher used aircraft sales volume of $64 million, higher Citation business jet volume of $57 million, higher pricing of $36 million (net of $12 million in lower resale prices for trade-in aircraft) and higher spare parts and service sales of $9 million. These were partially offset by $54 million in lower sales volume of single engine piston aircraft and engines that have been affected by the weak economy. Profit increased $19 million primarily as a result of the higher pricing of $36 million, a benefit of $10 million from the changes in sales volume and a favorable mix and lower engineering expenses of $5 million, partially offset by start-up costs of $8 million related to the new Sovereign business jet, an increase in reserves for inventory of $7 million (including a write-down of $5 million for used aircraft valuations), a higher warranty reserve of $5 million related to piston aircraft engines, higher LIFO expense of $4 million and the impact of higher overhead rates.

  • Bell Helicopter's revenues decreased $17 million as higher revenues of $34 million from the U.S. Government, primarily on the V-22 program and the H-1 upgrade contracts, were more than offset by lower foreign military sales of $26 million and lower commercial sales of $25 million. Sales in the commercial business primarily reflected lower commercial aircraft sales of $45 million, partially offset by higher commercial spares and service sales of $32 million. Bell's profit decreased $20 million primarily as a result of lower profit of $30 million in its commercial business, partially offset by 2001 expenses of $8 million associated with outsourcing certain operations and higher profit of $2 million in its U.S. Government business.

The lower profit of $30 million in its commercial business primarily reflected reduced pricing of $15 million related to one commercial helicopter model, increased reserves for international receivables of $10 million, a reduced contribution of $8 million from the lower commercial aircraft sales, lower income of $5 million from a joint venture partner related to the BA609 program, increased costs of $3 million as a result of production line changes, higher warranty expense of $3 million, costs of $2 million required to reconfigure two test aircraft and other cost increases of $5 million. These decreases in profit were partially offset by lower product development expenses of $18 million associated with the BA609 program and a benefit of $8 million related to the higher commercial spares and service sales.

The Fastening Systems segment's revenues and profit decreased $90 million and $49 million, respectively. The revenue decrease was primarily due to lower sales volume of $47 million from depressed markets, the divestiture of non-core product lines of $24 million, customer price reductions of $16 million and the unfavorable impact of foreign exchange of $3 million in its European operations. Profit decreased primarily due to low volume manufacturing inefficiencies, a reduced contribution of $23 million from the lower sales and customer price reductions of $16 million, partially offset by the benefit of $17 million from restructuring activities and the favorable impact of a $7 million customer warranty issue in the second quarter 2001.

21.

The Industrial Products segment's revenues and profit decreased $117 million and $83 million, respectively. Revenues decreased in most of the segment's businesses primarily due to lower sales of $147 million from depressed markets and the divestiture of non-core product lines of $15 million during 2001, partially offset by higher revenues of $35 million in the aerospace and defense business and higher pricing of $8 million. Profit decreased primarily due to a reduced contribution of $79 million from the lower sales volume, an increase of $37 million in reserves for receivables and inventory and the nonrecurring impact of a gain of $5 million on the sale of a product line in 2001, partially offset by the benefit of $29 million from restructuring activities, higher pricing of $8 million, higher contribution of $5 million from the higher aerospace and defense revenues and the favorable impact of $5 million from losses recorded in 2001 related to divested product lines.

The Industrial Components segment's revenues and profit decreased $927 million and $114 million, respectively. The divestiture of Trim and TECT as well as several small product lines in 2001 contributed $923 million and $79 million to the decreases in revenue and profit, respectively. Excluding the divestitures, revenues and profit decreased $4 million and $35 million, respectively. The revenue decrease was primarily due to lower volume of $37 million in the industrial businesses as a result of soft markets, customer price reductions of $14 million and the unfavorable impact of foreign exchange of $8 million, partially offset by higher sales volume of $53 million at Kautex primarily as a result of new product launches and a stronger automotive market. Excluding the divestitures, the profit decrease was primarily due to low volume manufacturing inefficiencies, customer price reductions of $14 million, a reduced contribution of $7 million from changes in sales volume and the nonrecurring impact of a gain of $7 million on the sale of a product line in 2001, partially offset by the benefit of $13 million from restructuring activities.

The Finance segment's revenues and profit decreased $42 million and $41 million, respectively. Revenues decreased primarily due to lower finance charges of $58 million from a lower average yield (7.7% in the first half 2002 compared to 9.8% in the first half 2001) reflecting a lower interest rate environment, partially offset by higher fee income of $11 million and higher operating lease revenue of $5 million. Profit decreased primarily due to a higher provision for loan losses of $33 million and higher operating expenses of $20 million, partially offset by higher interest margin of $11 million. The increase in the provision for losses reflects higher net charge-offs of $23 million, and the strengthening of the allowance for losses. Higher net charge-offs were primarily related to exited businesses, structured capital loans, small business finance revolving credit loans, and aircraft finance loans. During the first half of 2002, nonperforming assets increased $70 million to 3.06% of finance assets from 2.13% at December 29, 2001. This increase included a $37 million increase in syndicated bank loans and a $32 million increase in highly-collateralized aircraft loans. Nonperforming assets include non-accrual accounts that are not guaranteed by Textron Manufacturing, for which interest has been suspended, and repossessed assets. Higher operating expenses were primarily related to higher legal and collection expenses of $8 million, higher expenses of $6 million related to growth in managed receivables and higher operating lease depreciation of $3 million.

 

22.

Special charges and other costs related to restructuring for the first half 2002 were $36 million and $7 million, respectively, compared to $77 million and $16 million, respectively, in the first half 2001. The table below summarizes the special charges which include restructuring expenses associated a) with reducing overhead, and closing, consolidating and downsizing manufacturing facilities, b) corporate personnel reductions and c) consolidating operations and exiting non-core product lines.

 

Six Month Period Ended June 29, 2002

  
 

Restructuring

Fixed Asset

Intangible and

    
 

Severance

Facility and

Impairment

Investment

    

(In millions)

Costs

Other

Write-Downs

Write-Downs

Total

  

Aircraft

$ 9

$ -

$ 2

$ -

$11

  

Fastening Systems

4

1

1

-

6

  

Industrial Products

2

2

9

-

13

  

Industrial Components

4

1

-

-

5

  

Finance

-

-

-

-

-

  

Corporate

1

-

-

-

1

  
 

$20

$ 4

$12

$ -

$36

  
 

Six Month Period Ended June 30, 2001

  

Aircraft

$ -

$ -

$ -

$ -

$ -

  

Fastening Systems

17

1

14

1

33

  

Industrial Products

11

-

2

-

13

  

Industrial Components

20

-

4

-

24

  

Finance

1

1

-

-

2

  

Corporate

2

-

-

3

5

  
 

$51

$2

$20

$ 4

$77

  

Costs related to restructuring of $7 million in the first half of 2002 and $16 million in the first half of 2001 are included in segment profit. For the first half of 2002, costs related to restructuring totaled $3 million for Fastening Systems, $2 million for Industrial Products and $2 million for Industrial Components. For the first half of 2001, costs related to restructuring totaled $8 million for Aircraft, $4 million for Industrial Components, $3 million for Industrial Products and $1 million for Fastening Systems.

Corporate expenses and other, net decreased $21 million primarily due to royalties of $7 million in 2002 related to the Trim divestiture, a favorable adjustment to incentive compensation accruals of $5 million and the timing of expenditures of $4 million related to transformation initiatives.

Interest expense, net - decreased $29 million primarily due to the benefit of $20 million as a result of a lower level of average debt primarily as a result of the pay down of debt with the proceeds from the divestiture of Trim and the benefit of a lower interest rate environment and the receipt of $5 million for accumulated interest on the preferred shares that Collins & Aikman repurchased.

23.

Income Taxes - The effective income tax rate for the first half 2002 increased to 34.5% primarily due to the tax impact of the gain in the second quarter 2002 related to the divestiture of Trim. Excluding the impact of this adjustment, the effective tax rate for the first half 2002 was 31.5% compared to 35.2% in the first half 2001. The 3.7% decrease is primarily due to a decrease of 2.7% in the effective tax rate from the elimination of goodwill and certain other intangible asset amortization under SFAS No. 142, which is primarily a non-tax deductible expense, and a favorable change in the tax law related to the deductibility of dividends paid on company stock held by an employee stock ownership plan that reduced the effective tax rate by 2.8% (1.5% of this reduction represents a nonrecurring benefit upon implementation of the new tax law). These were partially offset by an increase in the foreign tax rate of 2.3%.

Liquidity and Capital Resources

The Statements of Cash Flows for Textron Inc. and Textron Manufacturing detailing the changes in cash balances are on pages 4 and 13, respectively. Textron Manufacturing's operating cash flow includes dividends received from Textron Finance of $58 million and $30 million for the first six months of 2002 and 2001, respectively, net of capital contributions related to the preferred dividends of $5 million for each six month period. Dividend payments to shareholders for the first half of 2002 included the payment due on July 1, 2002 along with two other payments, as opposed to only two payments made in the first half of 2001. Dividend payments to shareholders for the first six months of 2002 amounted to $137 million, an increase of $45 million over the first six months of 2001.

Textron Manufacturing's debt (net of cash) to total capital ratio was 29% at June 29, 2002 up slightly from 28% at year end. This ratio is consistent with Textron Manufacturing's financial target ratio.

For liquidity purposes, Textron Manufacturing and Textron Finance have a policy of maintaining sufficient unused lines of credit to support their outstanding commercial paper. As of June 29, 2002, Textron Manufacturing had no outstanding commercial paper and its primary committed credit facilities of $1.5 billion were undrawn. During the second quarter of 2002, Textron Manufacturing entered into a new primary revolving credit facility for $1.5 billion, of which $500 million will expire in 2003 and $1 billion will expire in 2007. Under this revised facility, Textron Manufacturing has retained substantially the same financial covenants, but is no longer subject to a material adverse condition clause at every borrowing. Textron Finance has bank line of credit agreements of $1.5 billion, of which $500 million will expire in 2003 and $1 billion will expire in 2006. None of these lines of credit were used at June 29, 2002. Unused lines of credit not reserved as support for commercial paper were $557 million at June 29, 2002 compared to $875 million at December 29, 2001. The decrease in Textron Finance's unused lines of credit is attributable to the paydown and termination of the short-term revolving note agreement with Textron Manufacturing.

During the second quarter of 2002, Textron Manufacturing issued $300 million in notes under Textron Inc.'s existing shelf registration filed with the SEC, leaving $900 million available under this registration statement. The proceeds from the issuances are expected to be used for general corporate purposes.

Under a shelf registration statement filed with the SEC, Textron Finance may issue public debt securities in one or more offerings up to a total maximum offering of $3 billion. Under this facility, Textron Finance issued $1.2 billion of term notes in the first six months of 2002, primarily in the U.S. and Canadian markets, that mature in 2003 through 2007. The proceeds from the issuances were used to refinance maturing commercial paper and long-term debt at par. At June 29, 2002, Textron Finance had $1.8 billion available under this facility.

24.

During the first six months of 2002, Textron Finance received net proceeds from securitizations of $169 million of small business finance receivables (on a revolving basis), $75 million of floorplan finance receivables (on a revolving basis), $38 million of captive golf and turf finance receivables, $45 million of resort receivables and $5 million of land finance receivables. These securitizations provided Textron Finance with an alternate source of funding while maintaining desired debt-to-capital ratios. Textron Finance used the proceeds from the securitizations to retire commercial paper. In connection with a $220 million revolving securitization, Textron Finance is obligated to repurchase a certain class of loans if Textron Finance's credit rating drops below BBB. Such loans amounted to $41 million at June 29, 2002. Textron Finance has no other repurchase obligations in connection with any other securitization transactions. Textron Finance anticipates that it will enter into additional securitization transactions during the remainder of 2002.

During the fourth quarter of 2001, certain of Textron's commercial paper and long-term debt credit ratings were downgraded by one of the three rating agencies that rate Textron's credit facilities. Although Textron's borrowing spreads have increased as a result of the downgrades, Textron continues to have access to the commercial paper, long-term debt and securitization markets. Further downgrades in Textron's ratings could increase borrowing spreads or limit its access to the commercial paper, long-term debt and securitization markets. In addition, Textron's revolving bank line of credit agreements contain certain financial covenants with which Textron must comply in order to maintain its ability to borrow under the facilities. Textron was in full compliance with such covenants at June 29, 2002. Textron believes that it has adequate credit facilities and access to credit markets to meet its long-term financing needs.

During the second quarter of 2002, Textron Manufacturing renegotiated the terms of the equity forward contract in Textron stock that is intended to hedge the earnings and cash volatility of compensation granted in Textron stock. The new strike price is $49.09 for 2,262,667 shares. Textron Manufacturing's exposure under this hedge is approximately $5 million at June 29, 2002.

Under its Board authorized share repurchase program, Textron repurchased 3,534,500 shares of common stock during the first six months of 2002 at an aggregate cost of $160 million. Taking into consideration minor timing differences in settlement, Textron used $164 million in cash to purchase its common stock during the first six months of 2002. Textron utilized the proceeds of the sale of the Automotive Trim business for these repurchases.

During the second quarter 2002, Textron received $115 million in proceeds from C&A related to the sale of the Trim division, as discussed more fully in Note 9 of Textron's financial statements. The proceeds were utilized for general corporate purposes. As of June 29, 2002, Textron held 7.2 million shares of C&A common stock with a carrying value of $9 per share. Subsequent to June 29, 2002, the market price of C&A common stock experienced a decline to below $4 per share.

Management believes that Textron will continue to have adequate access to credit markets and that its credit facilities and cash flows from operations will continue to be more than sufficient to meet its operating needs and to finance growth.

25.

Forward-looking Information: Certain statements in this release and other oral and written statements made by Textron from time to time, are forward-looking statements, including those that discuss strategies, goals, outlook or other non-historical matters; or project revenues, income, returns or other financial measures. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements, including the following: (a) the extent to which Textron is able to achieve savings from its restructuring plans, (b) changes in worldwide economic and political conditions that impact interest and foreign exchange rates, (c) the occurrence of work stoppages and strikes at key facilities of Textron or Textron's customers or suppliers, (d) government funding and program approvals affecting products being developed or sold under government programs, (e) cost and delivery performance under various program and development contracts, (f) successful implementation of supply chain and other cost reduction programs, (g) the timing of certifications of new aircraft products, (h) the occurrence of further downturns in customer markets to which Textron products are sold or supplied, (i) Textron's ability to offset, through cost reductions, raw material price increases and pricing pressure brought by original equipment manufacturer customers, (j) the availability and cost of insurance, (k) pension plan income falling below current forecasts, and (l) Textron Financial's ability to maintain credit quality and control costs.

 

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  

There has been no significant change in the Textron's exposure to market risk during the first six months of 2002. For discussion of the Textron's exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, contained in the Company's Annual Report incorporated by reference in Form 10-K for the calendar year 2001.

26.

PART II. OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

  
 

Textron has received notice of a purported class action that was filed on July 26, 2002, naming Textron, the Textron Savings Plan and the Plan's trustee as defendants. The complaint, which was filed in federal district court in Rhode Island and which has not been served on any of the defendants, alleges breach of certain fiduciary duties under ERISA, based on the amount of Plan assets invested in Textron stock during 2000 and 2001. The plaintiff, Linda Lalonde, alleges that she participated in Textron's employee benefit plans during the applicable period; she claims to sue on her own behalf and on behalf of the employee benefit plans and their participants and beneficiaries during 2000 and 2001. Textron believes this lawsuit is without merit and intends to defend it vigorously.

  
 

As previously reported, on April 26, 2002, a lawsuit was filed in the United States District Court in Rhode Island on behalf of Joel Rosen, who claims to be a Textron shareholder, suing on his own behalf and on behalf of a proposed class of Textron shareholders, against Textron and certain present and former officers of Textron and Bell Helicopter. The lawsuit alleges that the defendants violated antifraud provisions of the federal securities laws by making material misrepresentations or omissions between October 19, 2000, and September 26, 2001, in connection with Bell Helicopter's V-22 and H-1 programs. The plaintiff seeks unspecified compensatory damages. An identical complaint was subsequently filed by another Textron shareholder. Motions have been filed to consolidate these two suits, and petitions have been filed by two parties seeking to be named lead plaintiff. Textron believes these lawsuits are without merit and intends to defend them vigorously.

  
 

As previously reported, on May 12, 2000, the Massachusetts Water Resources Authority issued a Notice of Violation to Textron Systems relating to industrial discharges to the Authority's sewer system from the Textron Systems Wilmington, Massachusetts, facility. On May 17, 2002, Textron Systems resolved this matter by entering into a consent agreement providing for a penalty of $328,000 and requiring that Textron Systems (1) file quarterly reports with the MWRA identifying regulated processes and anticipated changes to those processes, (2) maintain its treatment systems properly and (3) pay certain stipulated penalties for future discharge violations.

  

27.

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 


At Textron's annual meeting of shareholders held on April 24, 2002 the following items were voted upon:
 


1.


The following persons were elected to serve as directors in Class II for three year terms expiring in 2004 and received the votes listed.
   


Name


For


Withheld
   


H. Jesse Arnelle


117,694,619


5,043,414
   

Paul E. Gagné

117,748,250

4,989,783
   

Brian H. Rowe

117,879,167

4,858,866
   

Martin D. Walker

117,821,068

4,916,965
   

Thomas B. Wheeler

117,849,879

4,888,154
   


The following directors have terms of office which continued after the meeting: Teresa Beck, Lewis B. Campbell, R. Stuart Dickson, Lawrence K. Fish, Joe T. Ford, John D. Macomber, Lord Powell of Bayswater KCMG, and Sam F. Segnar.
 


2.


An amendment to the Textron 1999 Long-Term Incentive Plan was approved by the following vote:
   


For


Against


Abstain


Broker Non-Votes
   


106,064,928


14,508,242


2,164,863


0
 


3.


The appointment of Ernst & Young LLP as Textron's independent auditors for 2002 was ratified by the following vote:
   


For


Against


Abstain


Broker Non-Votes
   


116,825,890


4,510,842


1,401,301


0
 


4.


A shareholder proposal regarding Textron's military sales was rejected by the following vote:
   


For


Against


Abstain


Broker Non-Votes
   


8,926,620


92,492,058


4,816,233


16,503,122

28.

Item 6.

EXHIBITS AND REPORTS ON FORM 8-K

  
 


(a)


Exhibits

  
   


10.1


Amendment to Textron 1999 Long Term Incentive Plan

  
   


10.2


5-Year Credit Agreement dated as of April 1, 2002. Incorporated by reference to Exhibit 10.4 to Textron's Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2002

  
   


10.3


364-Day Credit Agreement dated as of April 1, 2002. Incorporated by reference to Exhibit 10.5 to Textron's Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2002

  
   


12.1


Computation of ratio of income to combined fixed charges and preferred securities dividends of Textron Manufacturing.

  
   


12.2


Computation of ratio of income to combined fixed charges and preferred securities dividends of Textron Inc. including all majority-owned subsidiaries.

  
   


99.1


Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  
   


99.2


Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  
   


NOTE:


Instruments defining the rights of holders of certain issues of long-term debt of Textron have not been filed as exhibits to this Report because the authorized principal amount of any one of such issues does not exceed 10% of the total assets of Textron and its subsidiaries on a consolidated basis. Textron agrees to furnish a copy of each such instrument to Commission upon request.

  
 


(b)


Reports on Form 8-K

  
   


On May 23, 2002, Textron filed a current report on Form 8-K (Items 5 and 7) to file certain exhibit to a Registration Statement on Form S-3.

  

29.

SIGNATURES

 

   Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

     

TEXTRON INC.
       

Date:

 August 12, 2002

  

s/R. L. Yates
     

R. L. Yates
Vice President and Controller
(principal accounting officer)

LIST OF EXHIBITS

 

The following exhibits are filed as part of this report on Form 10-Q:

Name of Exhibit

10.1

Amendment to Textron 1999 Long-Term Incentive Plan

 

10.2

5-Year Credit Agreement dated as of April 1, 2002. Incorporated by reference to Exhibit 10.4 to Textron's Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2002

 

10.3

364-Day Credit Agreement dated as of April 1, 2002. Incorporated by reference to Exhibit 10.5 to Textron's Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2002

 

12.1

Computation of ratio of income to combined fixed charges and preferred securities dividends of Textron Manufacturing

 

12.2

Computation of ratio of income to combined fixed charges and preferred securities dividends of Textron Inc. including all majority-owned subsidiaries

 

99.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

99.2

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002