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 July 4, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Commission file number 1-5480
_______________
TEXTRON INC.
(Exact name of registrant as specified in its charter)
_______________
Delaware 05-0315468
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) 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 August 1, 1998 - 163,880,000 shares
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
TEXTRON INC.
Condensed Consolidated Statement of Income (unaudited)
(Dollars in millions except per share amounts)
<CAPTION> Three Months Ended Six Months Ended
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues
Manufacturing sales $ 2,393 $2,117 $4,560 $4,138
Finance revenues 560 550 1,111 1,080
Total revenues 2,953 2,667 5,671 5,218
Costs and expenses
Cost of sales 1,947 1,730 3,712 3,386
Selling and administrative 409 380 798 742
Gain on sale of division (97) - (97) -
Special charges 87 - 87 -
Interest 191 180 380 363
Provision for losses on collection of
finance receivables 64 63 127 127
Other 66 67 139 137
Total costs and expenses 2,667 2,420 5,146 4,755
Income before income taxes and
distributions on preferred securities
of subsidiary trust 286 247 525 463
Income taxes (115) (95) (206) (180)
Distributions on preferred securities of
subsidiary trust, net of income taxes (7) (7) (13) (13)
Net income $ 164 $ 145 $ 306 $ 270
Earnings per common share:
Basic $ 1.00 $ .88 $ 1.87 $ 1.63
Diluted $ .98 $ .86 $ 1.83 $ 1.59
Average shares outstanding:
Basic 163,613,000 165,173,000 163,189,000 165,442,000
Diluted 168,027,000 169,797,000 167,541,000 169,993,000
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 $ .285 $ .25 $ .57 $ .50
</TABLE>
See notes to condensed consolidated financial statements.
Item 1. FINANCIAL STATEMENTS (Continued)
<TABLE>
TEXTRON INC.
Condensed Consolidated Balance Sheet (unaudited)
(Dollars in millions)
<CAPTION>
July 4, January 3,
1998 1998
<S> <C> <C>
Assets
Cash $ 132 $ 87
Investments 883 844
Receivables - net:
Finance 10,456 10,226
Commercial and U.S. government 1,077 920
11,533 11,146
Inventories 1,602 1,349
Property, plant, and equipment, less accumulated
depreciation of $1,917 and $1,827 2,016 1,860
Goodwill, less accumulated amortization of $495 and
$465 1,986 1,753
Other (including net prepaid income taxes) 1,827 1,571
Total assets $ 19,979 $ 18,610
Liabilities and shareholders' equity
Liabilities
Accounts payable $ 985 $ 963
Accrued postretirement benefits other than pensions 804 799
Other accrued liabilities (including income taxes) 2,840 2,641
Debt:
Parent Group 1,873 1,221
Finance Group 9,532 9,275
11,405 10,496
Total liabilities 16,034 14,899
Textron - obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely Textron junior subordinated debt securities 483 483
Shareholders' equity
Capital stock:
Preferred stock 13 13
Common stock 24 24
Capital surplus 881 830
Retained earnings 3,575 3,362
Accumulated other comprehensive income (92) (62)
4,401 4,167
Less cost of treasury shares 939 939
Total shareholders' equity 3,462 3,228
Total liabilities and shareholders' equity $ 19,979 $ 18,610
Common shares outstanding 163,772,000 162,343,000
</TABLE>
See notes to condensed consolidated financial statements.
Item 1. FINANCIAL STATEMENTS (Continued)
<TABLE>
TEXTRON INC.
Condensed Consolidated Statement of Cash Flows (Unaudited)
(In millions)
<CAPTION>
Six Months Ended
July 4, June 28,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 306 $ 270
Adjustments to reconcile net income to net cash
provided by
operating activities:
Depreciation 145 127
Amortization 88 83
Gain on sale of division (97) -
Special charges 87 -
Provision for losses on receivables 129 129
Changes in assets and liabilities excluding those
related to acquisitions and divestitures:
Increase in commercial and U.S. government (113) (61)
receivables
Increase in inventories (198) (171)
Increase in other assets (127) (66)
Increase (decrease) in accounts payable (40) 1
Increase in accrued liabilities 184 27
Other - net (69) (29)
Net cash provided by operating activities 295 310
Cash flows from investing activities:
Purchases of investments (264) (126)
Proceeds from disposition of investments 157 311
Maturities and calls of investments 67 34
Finance receivables:
Originated or purchased (5,302) (3,777)
Repaid or sold 4,886 3,349
Cash used in acquisitions (441) (367)
Cash received from dispositions 160 571
Capital expenditures (207) (156)
Other investing activities - net 9 21
Net cash used by investing activities (935) (140)
Cash flows from financing activities:
Increase (decrease) in short-term debt 900 (246)
Proceeds from issuance of long-term debt 1,126 778
Principal payments on long-term debt (1,286) (420)
Proceeds from exercise of stock options 39 27
Purchases of Textron common stock - (112)
Dividends paid (94) (83)
Net cash provided (used) by financing activities 685 (56)
Net increase in cash 45 114
Cash at beginning of period 87 47
Cash at end of period $ 132 $ 161
</TABLE>
See notes to condensed consolidated financial statements.
TEXTRON INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1: Basis of presentation
The 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 January 3, 1998. The 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 July 4,
1998, and its consolidated results of operations for each of the
respective three and six month periods ended July 4, 1998 and June 28,
1997 and consolidated cash flows for each of the six month periods
ended July 4, 1998 and June 28, 1997. The results of operations for
the six months ended July 4, 1998 are not necessarily indicative of
results for the full year. Business segment data has been
reclassified to reflect the transfer of Lycoming from the Aircraft
segment to the Industrial segment.
Note 2: Earnings per Share
In 1997, Textron adopted FAS 128 "Earnings Per Share." FAS 128
requires companies to present basic and diluted earnings per share
amounts. The dilutive effect of convertible preferred stock and stock
options was 4,352,000 and 4,551,000 shares for the six month periods
ending July 4, 1998 and June 28, 1997, respectively. Income available
to common shareholders used to calculate both basic and diluted
earnings per share approximated net income for both periods.
Note 3: Inventories
<TABLE>
<CAPTION>
July 4, January 3,
1998 1998
(In millions)
<S> <C> <C>
Finished goods $ 475 $ 454
Work in process 855 675
Raw materials 425 366
1,755 1,495
Less progress payments and customer 153 146
deposits
$1,602 $1,349
</TABLE>
Note 4: 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. The
amounts due to the trust under the debentures
Note 4: Textron-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely Textron junior subordinated debt
securities (continued)
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.
Note 5: Contingencies
Textron is subject to a number of lawsuits, investigations and claims
arising out of the conduct of its business, including those relating
to commercial transactions, government contracts, product liability,
and environmental, safety and health matters. Some seek compensatory,
treble or punitive damages in substantial amounts; fines, penalties or
restitution; or remediation of contamination. Some are or purport to
be class actions. Under federal government procurement regulations,
some could result in suspension or debarment of Textron or its
subsidiaries from U.S. government contracting for a period of time. On
the basis of information presently available, Textron believes that
any liability for these suits and proceedings would not have a
material effect on Textron's net income or financial condition.
Note 6: Comprehensive Income
In 1998, Textron adopted FAS 130,
"Reporting Comprehensive Income." FAS 130 establishes new rules for
the reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on Textron's net
income or shareholders' equity. FAS 130 requires unrealized gains or
losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were
reported separately in shareholders' equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of FAS 130.
During the first six months of 1998 and
1997, comprehensive income amounted to $276 million and $228 million,
respectively.
Note 7: New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued FAS 131
"Disclosures about Segments of an Enterprise and Related Information."
FAS 131 requires public companies to report financial and descriptive
information about its reportable operating segments. Operating
segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources
and in assessing performance. This statement is effective for
financial statements of fiscal years beginning after December 15,
1997. Textron is evaluating the impact of this statement on future
reporting.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires
that companies capitalize certain internal-use software once certain
criteria are met. This statement is effective for financial
statements of fiscal years beginning after December 15, 1998. Textron
is evaluating the impact of this statement on future reporting.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 will require all costs of start-up activities,
including organization costs, to be expensed as incurred. This
statement is effective for financial statements of fiscal years
beginning after December 15, 1998. SOP 98-5 will not have a material
effect on Textron's net income and financial condition.
In June 1998, the Financial Accounting Standards Board issued FAS 133
"Accounting for Derivative Instruments and Hedging Activities."
FAS 133 requires an entity to recognize all derivatives as either
assets or liabilities and measure those instruments at fair value.
This statement is effective for fiscal years beginning after June 15,
1999. Textron is evaluating the impact of this statement on future
reporting.
Note 8: Financial information by borrowing group
Textron consists of two borrowing groups - the Textron Parent Company
Borrowing Group (Parent Group) and Textron's finance subsidiaries
(Finance Group). The Parent Group consists of all entities of Textron
(primarily manufacturing) other than its wholly-owned finance
subsidiaries. The Finance Group consists of Avco Financial Services
(AFS) and Textron Financial Corporation (TFC). Summarized financial
information for the Parent Group includes the Finance Group on a one-
line basis under the equity method of accounting.
Item 1. FINANCIAL STATEMENTS (Continued)
Note 8: Financial information by borrowing group (continued)
<TABLE>
PARENT GROUP
(unaudited) (In millions)
<CAPTION>
Three Months Ended Six Months Ended
July 4, June 28, July 4, June 28,
Condensed Statement of Income 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Sales $2,393 $2,117 $4,560 $4,138
Costs and expenses
Cost of sales 1,947 1,730 3,712 3,386
Selling and administrative 234 211 455 417
Gain on sale of division (97) - (97) -
Special charges 87 - 87 -
Interest 40 30 76 69
Total costs and expenses 2,211 1,971 4,233 3,872
182 146 327 266
Pretax income on Finance Group 104 101 198 197
Income before income taxes and
distributions on preferred
securities of subsidiary trust 286 247 525 463
Income taxes (115) (95) (206) (180)
Distributions on preferred securities
of subsidiary trust, net of income
taxes (7) (7) (13) (13)
Net income $ 164 $ 145 $ 306 $ 270
</TABLE>
<TABLE>
<CAPTION>
July 4, January 3,
Condensed Balance Sheet 1998 1998
<S> <C> <C>
Assets
Cash $ 77 $ 30
Receivables - net 1,077 920
Inventories 1,602 1,349
Investments in Finance Group 1,617 1,620
Property, plant and equipment - net 1,917 1,761
Goodwill 1,807 1,567
Other assets (including net prepaid income taxes) 1,595 1,311
Total assets $9,692 $8,558
Liabilities and shareholders' equity
Accounts payable and accrued liabilities (including
income $3,874 $3,626
taxes)
Debt 1,873 1,221
Textron - obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
Textron junior subordinated debt securities 483 483
Shareholders' equity 3,462 3,228
Total liabilities and shareholders' equity $9,692 $8,558
</TABLE>
Item 1. FINANCIAL STATEMENTS (Continued)
Note 8: Financial information by borrowing group (continued)
<TABLE>
PARENT GROUP
(unaudited) (In millions)
<CAPTION>
Six Months Ended
July 4, June 28,
Condensed Statement of Cash Flows 1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 306 $ 270
Adjustments to reconcile net income to cash provided
by operating activities:
Earnings of Finance Group (greater than) less
than distributions to Parent Group 13 (40)
Depreciation 132 116
Amortization 30 28
Gain on sale of division (97) -
Special charges 87 -
Changes in assets and liabilities excluding
those related to acquisitions and divestitures:
Increase in receivables (113) (61)
Increase in inventories (198) (171)
Increase in other assets (188) (52)
Increase in accounts payable and accrued 109 22
liabilities
Other - net 2 12
Net cash provided by operating activities 83 124
Cash flows from investing activities:
Capital expenditures (191) (140)
Cash used in acquisitions (424) (324)
Cash received from disposition of businesses 160 571
Proceeds from disposition of investments - 245
Other investing activities - net 22 16
Net cash provided (used) by investing
activities (433) 368
Cash flows from financing activities:
Increase (decrease) in short-term debt 548 (461)
Proceeds from issuance of long-term debt 107 277
Principal payments on long-term debt (180) (58)
Proceeds from exercise of stock options 39 27
Purchases of Textron common stock - (112)
Dividends paid (94) (83)
Contributions paid to Finance Group (23) -
Net cash provided (used) by financing
activities 397 (410)
Net increase in cash 47 82
Cash at beginning of period 30 24
Cash at end of period $ 77 $ 106
</TABLE>
Item 1. FINANCIAL STATEMENTS (Continued)
Note 8: Financial information by borrowing group (continued)
<TABLE>
FINANCE GROUP
(unaudited) (In millions)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
Condensed Statement of Income 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues $ 560 $ 550 $1,111 $1,080
Costs and expenses
Selling and administrative 175 169 343 325
Interest 151 150 304 294
Provision for losses on collection of
finance receivables 64 63 127 127
Other 66 67 139 137
Total costs and expenses 456 449 913 883
Income before income taxes 104 101 198 197
Income taxes (40) (39) (76) (76)
Net income $ 64 $ 62 $ 122 $ 121
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
Condensed Balance Sheet 1998 1997
<S> <C> <C>
Assets
Cash $ 55 $ 57
Investments 883 844
Finance receivables - net 10,456 10,226
Other 803 783
Total assets $12,197 $11,910
Liabilities and equity
Accounts payable and accrued liabilities (including
income (taxes) $ 1,048 $ 1,015
Debt 9,532 9,275
Equity 1,617 1,620
Total liabilities and equity $12,197 $11,910
</TABLE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
TEXTRON INC.
Revenues and Income by Business Segment
(In millions)
<CAPTION>
Three Months Ended Six Months Ended
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES
Aircraft $ 858 $ 755 $1,514 $1,434
Automotive 583 523 1,201 1,080
Industrial 952 839 1,845 1,624
Finance 560 550 1,111 1,080
Total revenues $2,953 $2,667 $5,671 $5,218
INCOME
Aircraft $ 91 $ 79 $ 152 $ 139
Automotive 43 33 99 83
Industrial 108 94 203 176
Finance 104 101 198 197
346 307 652 595
Gain on sale of division* 97 - 97 -
Special charges* (87) - (87) -
Segment income 356 307 662 595
Corporate expenses and other - net (30) (30) (61) (63)
Interest expense - net (40) (30) (76) (69)
Income before income taxes
and distributions on
preferred securities of
subsidiary trust $ 286 $ 247 $ 525 $ 463
*Special charges include restructuring charges of $10 million for the Aircraft
segment, $25 million for the Automotive segment and $52 million for the
Industrial segment. The gain on sale of division relates to the Industrial
segment.
</TABLE>
Liquidity and Capital Resources
The Statements of Cash Flows for Textron Inc. and the Parent Group detailing the
changes in cash balances are on pages 4 and 9, respectively. The Parent Group's
operating cash flow includes dividends received from the Finance Group of $135
million and $81 million during the first six months of 1998 and 1997,
respectively.
The Parent Group's debt to total capital ratio was 32% at July 4, 1998, up from
25% at year end. The Parent Group has credit facilities outstanding at July 4,
1998 aggregating $2.0 billion, $895 million of which was not used or reserved as
support for outstanding commercial paper or bank borrowings. At June 30, 1998,
the Finance Group had credit facilities outstanding of approximately $5.4
billion, $88 million of which was available at quarter end. The Parent Group
and the Finance Group had $311 million and $607 million, respectively, available
at quarter end under their shelf registration statement with the Securities and
Exchange Commission and, for the Finance Group, the Canadian Provincial Security
Exchanges. During the six months ended June 30, 1998, the Finance Group issued
$719 million of unsecured debt securities, including $406 million under its
shelf registration statements. In the first six months of 1998, the Finance
Group increased its medium-term note facility by $750 million and issued $300
million medium-term notes under this facility. The Finance Group had $542
million available under the facility at June 30, 1998.
In the first quarter, Textron acquired the capital stock of Ransomes PLC, a UK-
based manufacturer of commercial turf-care machinery, and Sukosim, a German
fastener manufacturer. The cost of these acquisitions was approximately $290
million (including notes issued for approximately $80 million), plus the
assumption of debt. In the second quarter, Textron acquired Peiner, a
German-based fastener company, and Ring Screw Works, a Michigan-based supplier
of specialty threaded fasteners to the automotive industry. The cost of these
acquisitions was approximately $200 million, plus the assumption of debt.
In the first six months of 1998, the Finance Group had $267 million of interest
rate exchange agreements expire and $198 million of interest rate exchange
agreements go into effect. The new agreements, which have a weighted average
original term of 2.9 years and expire through 2002, had the effect of fixing the
rate of interest at approximately 6.5% on $198 million of variable rate
borrowings at June 30, 1998. Also, during the first six months, the Parent
Group terminated $275 million of fixed-pay interest rate exchange agreements.
In the second quarter of 1998, Textron announced that it is reviewing its
strategic alternatives for its consumer finance subsidiary, Avco Financial
Services (AFS). This review will include evaluation of a sale, spin-off, or
other disposition of AFS, and is targeted for completion in the third quarter of
1998.
Management believes that the Parent Group will continue to have adequate access
to credit markets and that its credit facilities and cash flows from operations
- -- including dividends received from Textron's Finance Group -- will continue to
be more than sufficient to meet its operating needs and to finance growth.
Results of Operations - Three months ended July 4, 1998 vs Three months ended
June 28, 1997
Diluted earnings per share in the second quarter 1998 were $0.98 per share, up
14% from the 1997 amount of $0.86. Net income in 1998 of $164 million was up
13% from $145 million for 1997. Revenues increased 11% to $3.0 billion in 1998
from $2.7 billion in 1997. During the second quarter, Textron recorded a gain on
sale of a division and special charges. On an after-tax basis, the net of these
two transactions had no impact on earnings per share.
Gain On Sale of Division -Fuel Systems Textron was sold to Woodward Governor
Company for $160 million in cash on June 15, 1998, at a pretax gain of $97
million ($54 million after-tax, or $0.32 per diluted share).
Special Charges - To enhance the competitiveness and profitability of its core
businesses, Textron recorded a pretax charge of $87 million in the second
quarter ($54 million after-tax or $0.32 per diluted share). This charge was
recorded to cover asset impairments ($28 million), severance costs ($40
million), and other exit-related costs ($9 million) associated with its decision
to exit several small, non-strategic product lines in Automotive and the former
Systems and Components divisions which did not meet Textron's return criteria,
and to realign certain operations in the Industrial segment. The pretax charges
recorded in the Automotive and Industrial segments were $25 million and $52
million, respectively, and also included the cost of a litigation settlement of
$10 million in the Aircraft segment.
The Aircraft segment's revenues increased $103 million (14%) and income before
special charges increased $12 million (15%). Cessna's revenues and income
increased as a result of higher sales of business jets, single engine aircraft
and Caravans. Bell's revenues increased due to higher commercial helicopter and
spares sales ($62 million) as well as increased revenues on the V-22 program and
other U.S. Government programs, primarily the Huey and Cobra upgrade contract
($44 million). These higher revenues were partially offset by the completion in
1997 of the three-year contract for model 412 helicopters with the Canadian
Forces ($44 million) and lower foreign military sales ($31 million). Bell's
income, however, decreased due to a change in product mix, primarily resulting
in lower margins on U.S. Government contracts.
The Automotive segment's revenues increased $60 million (11%), while income
before special charges increased $10 million (30%). The revenue increase was
due to higher volume at Kautex associated with capacity expansion in North
America and higher sales in the Trim operations, due primarily to increased
Chrysler production, which was depressed in 1997 by a strike at Chrysler. These
revenue increases were partially offset by the impact of a strike at General
Motors in 1998. Income increased due to the higher sales and improved
performance at Trim.
The Industrial segment's revenues increased $113 million (14%) and income before
special charges increased $14 million (15%). These increases reflected the
contribution from acquisitions, principally Ransomes PLC, Sukosim, and Ring
Screw Works, and internal growth combined with ongoing margin improvement.
Internal growth was driven by continued strength in the fluid & power systems
and industrial components businesses. These benefits were partially offset by
the fourth quarter 1997 divestiture of Speidel, the impact of a one-month strike
at Textron's Jacobsen plant and a strike at General Motors in 1998.
The Finance segment's revenues increased $10 million (2%), while income
increased $3 million (3%). AFS' revenues and income increased $9 million, and $3
million, respectively. Revenues in its finance and related insurance business
increased $9 million, due to a gain of $10 million on the sale of its
centralized real estate receivable portfolio, an increase in average finance
receivables, primarily in its commercial finance operations. The benefit of
these revenue increases was partially offset by a decrease in yields on finance
receivables, reflecting decreases in yields on both consumer and commercial
finance receivables and the impact of an increase in lower-yielding commercial
receivables. Income increased $6 million, due primarily to the benefit of the
higher revenues, a decrease in the ratio of insurance losses to earned premiums,
and an improvement in the ratio of net credit losses to average finance
receivables for both the consumer and commercial finance portfolios.
In AFS' nonrelated insurance business, revenues approximated last year's level
while income decreased $3 million, due to an increase in underwriting expenses,
primarily insurance losses.
TFC's revenues increased $1 million, due to higher yields on receivables and an
increase in other income, partially offset by a lower level of average
receivables, due primarily to the securitization of $401 million of Textron-
related receivables in the third quarter of 1997. The increase in other income
was due primarily to portfolio servicing income. Its income equaled last year's
level, as the benefit of the higher revenues and a lower provision for losses
was offset by growth in businesses with higher operating expense ratios.
Interest expense-net for the Parent Group increased $10 million, due to higher
average debt, resulting from the incremental debt associated with acquisitions.
Income taxes - the current quarter's effective income tax rate of 40.2% was
higher than the corresponding prior year rate of 38.5%, due primarily to the
nontax deductibility of goodwill related to the divestiture of Fuel Systems
Textron.
Results of Operations - Six months ended July 4, 1998 vs Six months ended
June 28, 1997
Diluted earnings per share in the first half of 1998 were $1.83 per share, up
15% from the 1997 amount of $1.59. Net income in 1998 of $306 million was up
13% from $270 million for 1997. Revenues increased 9% to $5.7 billion in 1998
from $5.2 billion in 1997.
The Aircraft segment's revenues increased $80 million (6%) and income before
special charges increased $13 million (9%). Cessna's revenues and income
increased as a result of higher sales of business jets and single engine
aircraft. Bell's revenues and income decreased, due primarily to the completion
in 1997 of the Canadian Forces contract ($99 million). The benefit of higher
commercial helicopter and spares sales ($33 million) and increased revenues on
the V-22 program and Huey and Cobra upgrade contracts ($54 million) was offset
by lower revenues ($26 million) and margins on other U.S. government contracts
and lower foreign military sales ($35 million). In addition, the impact of a
favorable profit adjustment on the V-22 EMD contract in 1997 was offset by a
lower level of product development expense in 1998.
The Automotive segment's revenues increased $121 million (11%), while income
before special charges increased $16 million (19%). The revenue increase was
due to higher volume at Kautex associated with capacity expansion in North
America and higher sales in the Trim operations, due primarily to increased
Chrysler production, which was depressed in 1997 by a strike at Chrysler. These
revenue increases were partially offset by the impact of a strike at General
Motors in 1998. Income increased due to the higher sales and improved
performance at Trim.
The Industrial segment's revenues increased $221 million (14%) and income before
special charges increased $27 million (15%). These increases reflected the
contribution from acquisitions, principally Ransomes PLC, Sukosim, and Ring
Screw Works, and internal growth combined with ongoing margin improvement.
Internal growth was driven by continued strength in the fastening systems, fluid
& power systems and industrial components businesses. These benefits were
partially offset by the fourth quarter 1997 divestiture of Speidel, the impact
of a one-month strike at Textron's Jacobsen plant and a strike at General Motors
in 1998.
The Finance segment's revenues increased $31 million (3%), while income
increased $1 million. AFS' revenues increased $27 million, while income equaled
last year's level. Revenues in its finance and related insurance business
increased $19 million, due to an increase in average finance receivables ($7.646
billion in the first half 1998 vs $7.322 billion in the first half 1997),
primarily in its commercial finance operations, a gain of $10 million on the
sale of its centralized real estate receivable portfolio, and higher gains from
the sale of certain underperforming branches ($8 million in the first half 1998
vs $3 million in the first half 1997). The benefit of these revenue increases
was partially offset by a decrease in yields on finance receivables (17.33% in
the first half 1998 vs 17.99% in the first half 1997), reflecting decreases in
yields on both consumer and commercial finance receivables and the impact of an
increase in lower-yielding commercial receivables. Income equaled last year's
level, as the benefit of the higher revenues and an improvement in the ratio of
net credit losses to average finance receivables (2.78% in the first half 1998
vs 2.98% in the first half 1997) was offset by the lower yields on finance
receivables. The decrease in the net credit losses to average finance
receivables was primarily attributable to the increase in commercial
receivables, which have a lower loss ratio.
In AFS' nonrelated insurance business, revenues increased $8 million due
primarily to higher premiums earned and an increase in investment income.
Income equaled last year's level, as the benefit of the higher revenues was
offset by an increase in underwriting expenses, primarily insurance losses.
TFC's revenues increased $4 million, due to an increase in other income, and
higher yields on receivables (10.13% in the first half 1998 vs 9.94% in the
first half 1997), partially offset by a lower level of average receivables
($3.129 billion in the first half 1998 vs $3.173 billion in the first half
1997), due primarily to the securitization of $401 million of Textron-related
receivables in the third quarter of 1997. The increase in other income is due
primarily to higher prepayment income, portfolio servicing income, and residual
income. Its income increased $1 million as the benefit of the higher revenues
and a lower provision for losses was offset by growth in businesses with higher
operating expense ratios.
Corporate expenses and other -net decreased $2 million due primarily to 1997
litigation costs related to a divested operation. Interest expense-net for the
Parent Group increased $7 million, due to higher average debt, resulting from
the incremental debt associated with acquisitions, partially offset by the
payment of debt with proceeds in 1997 from the divestiture of Paul Revere.
Income taxes - the effective income tax rate of 39.2% for the first half of 1998
was higher than the corresponding prior year rate of 38.9%, due primarily to the
nontax deductibility of goodwill related to the divestiture of Fuel Systems
Textron.
* * * * * *
FORWARD-LOOKING INFORMATION: CERTAIN STATEMENTS IN THIS REPORT, 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:
(I) CONTINUED MARKET DEMAND FOR THE TYPES OF PRODUCTS AND SERVICES PRODUCED
AND SOLD BY TEXTRON, (II) CHANGES IN WORLDWIDE ECONOMIC AND POLITICAL
CONDITIONS AND ASSOCIATED IMPACT ON INTEREST AND FOREIGN EXCHANGE RATES,
(III) THE LEVEL OF SALES BY ORIGINAL EQUIPMENT MANUFACTURERS OF VEHICLES
FOR WHICH TEXTRON SUPPLIES PARTS, (IV) THE SUCCESSFUL INTEGRATION OF
COMPANIES ACQUIRED BY TEXTRON, AND (V) CHANGES IN CONSUMER DEBT LEVELS.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the Company's most recent annual report filed on Form 10-K (Management's
Discussion and Analysis on pages 25 through 32 of Textron's Annual Report to
shareholders, incorporated by reference to the Form 10-K). There has been no
material change in this information.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Textron's annual meeting of shareholders held on April 22,
1998,
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 2001 and received
the votes listed.
Name For Withheld
Paul E. Gagne 135,497,850 1,979,923
James F. Hardymon 135,506,165 1,971,608
Dana G. Mead 135,539,871 1,937,902
Thomas B. Wheeler 134,609,274 2,868,499
The following directors have terms of office which continued
after the meeting: H. Jesse Arnelle, Teresa Beck, Lewis B.
Campbell, R. Stuart Dickson, John D. Macomber, Brian H. Rowe,
Sam F. Segnar, Jean Head Sisco, John W. Snow, and Martin D.
Walker.
2. The appointment of Ernst & Young LLP as Textron's independent
auditors for 1998 was ratified by the following vote:
For Against Abstain Broker Non-Votes
136,306,523 631,326 539,924 0
3. A shareholder proposal requesting that the Board of Directors
provide a report on Textron's foreign military sales was
rejected by the following vote:
For Against Abstain Broker Non-Votes
6,275,041 115,128,060 3,490,317 12,584,355
4. A shareholder proposal regarding executive compensation was
rejected by the following vote:
For Against Abstain Broker Non-Votes
12,263,414 110,271,249 2,343,275 12,599,835
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 Computation of ratio of income to combined fixed
charges and preferred securities dividends of
the Parent Group.
12.2 Computation of ratio of income to combined fixed
charges and preferred securities dividends of
Textron Inc. including all majority-owned
subsidiaries.
27 Financial Data Schedule (filed electronically
only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second
quarter ended July 4, 1998
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 10, 1998 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
12.1 Computation of ratio of income to combined fixed charges and preferred
securities dividends of the Parent Group
12.2 Computation of ratio of income to combined fixed charges and preferred
securities dividends of Textron Inc. including all majority-owned
subsidiaries
27 Financial Data Schedule (filed electronically only)
EXHIBIT 12.1
<TABLE>
PARENT GROUP
COMPUTATION OF RATIO OF INCOME TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(unaudited)
(In millions except ratio)
<CAPTION>
Six Months
Ended
July 4, 1998
<S> <C>
Fixed charges:
Interest expense $ 76
Distributions on preferred securities of subsidiary trust, net of income taxes 13
Estimated interest portion of rents 11
Total fixed charges $100
Income:
Income before income taxes and distributions on preferred
securities of subsidiary trust $525
Eliminate equity in undistributed pretax income of Finance Group 87
Fixed charges * (63)
Adjusted income $549
Ratio of income to fixed charges 5.49
* Adjusted to exclude distributions on preferred securities of subsidiary trust,
net of income taxes
</TABLE>
EXHIBIT 12.2
<TABLE>
TEXTRON INC. INCLUDING ALL MAJORITY-OWNED SUBSIDIARIES
COMPUTATION OF RATIO OF INCOME TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(unaudited)
(In millions except ratio)
Six Months
Ended
July 4,1998
<S> <C>
Fixed charges:
Interest expense $ 380
Distributions on preferred securities of subsidiary trust, net of income taxes 13
Estimated interest portion of rents 20
Total fixed charges $ 413
Income:
Income before income taxes and distributions on preferred
securities of subsidiary trust $ 525
Fixed charges * 400
Adjusted income $ 925
Ratio of income to fixed charges 2.24
* Adjusted to exclude distributions on preferred securities of subsidiary trust,
net of income taxes
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JUL-04-1998
<CASH> 132
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,620
<CURRENT-ASSETS> 0
<PP&E> 3,933
<DEPRECIATION> 1,917
<TOTAL-ASSETS> 19,979
<CURRENT-LIABILITIES> 0
<BONDS> 11,405
<COMMON> 24
0
13
<OTHER-SE> 3,425
<TOTAL-LIABILITY-AND-EQUITY> 19,979
<SALES> 4,560
<TOTAL-REVENUES> 5,671
<CGS> 3,712
<TOTAL-COSTS> 3,851
<OTHER-EXPENSES> 87
<LOSS-PROVISION> 127
<INTEREST-EXPENSE> 380
<INCOME-PRETAX> 525
<INCOME-TAX> 206
<INCOME-CONTINUING> 306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 306
<EPS-PRIMARY> 1.87
<EPS-DILUTED> 1.83
</TABLE>
