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 April 3, 1999
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 May 1, 1999 - 150,782,000 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
April 3, April 4,
1999 1998
<S> <C> <C>
Textron Manufacturing
Revenues $ 2,653 $ 2,167
Cost and Expenses
Cost of sales 2,236 1,765
Selling and administrative 204 224
Interest expense 13 33
Interest income (16) -
Total costs and expenses 2,437 2,022
Manufacturing income 216 145
Textron Finance
Revenues 96 85
Costs and Expenses
Interest 41 37
Selling and administrative 23 18
Provision for losses on collection of finance
receivables 6 5
Total costs and expenses 70 60
Finance income 26 25
Total Company
Income from continuing operations before income
taxes and distributions on preferred securities
of subsidiary trust 242 170
Income taxes (91) (65)
Distributions on preferred securities of subsidiary
trust, net of income taxes (6) (6)
Income from continuing operations 145 99
Discontinued operations, net of income taxes:
Income from operations - 43
Gain on disposal 1,615 -
1,615 43
Income before extraordinary loss 1,760 142
Extraordinary loss from debt retirement, net of
income taxes (43) -
Net income $ 1,717 $ 142
Per common share:
Basic:
Income from continuing operations $ .95 $ .60
Discontinued operations, net of income taxes 10.59 .27
Extraordinary loss from debt retirement, net of
income taxes (.28) -
Net income $ 11.26 $ .87
Diluted:
Income from continuing operations $ .93 $ .59
Discontinued operations, net of income taxes 10.34 .26
Extraordinary loss from debt retirement, net of
income taxes (.27) -
Net income $ 11.00 $ .85
Average shares outstanding:
Basic 152,517,000 162,809,000
Diluted 156,112,000 167,155,000
Dividends per share:
$2.08 Preferred stock, Series A $ .52 $ .52
$1.40 Preferred stock, Series B $ .35 $ .35
Common stock $ .325 $ .285
</TABLE>
See notes to the condensed consolidated financial statements.
Item 1. FINANCIAL STATEMENTS (Continued)
<TABLE>
TEXTRON INC.
Condensed Consolidated Balance Sheet (unaudited)
(Dollars in millions)
<CAPTION>
April 3, January 2,
1999 1999
<S> <C> <C>
Assets
Textron Manufacturing
Cash and cash equivalents $ 390 $ 31
Commercial and U.S. government receivables - net 1,253 1,160
Inventories 1,700 1,640
Investment in discontinued operations - 1,176
Note receivable due from Textron Finance (Note 10) 730 -
Other current assets 313 348
Total current assets 4,386 4,355
Property, plant, and equipment, less accumulated
depreciation of $1,940 and $1,874 2,150 2,185
Goodwill, less accumulated amortization of $404 and
$388 2,060 2,119
Other (including net deferred income taxes) 1,362 1,277
Total Textron Manufacturing assets 9,958 9,936
Textron Finance
Cash 23 22
Finance receivables - net 3,754 3,528
Other assets 243 235
Total Textron Finance assets 4,020 3,785
Total assets $ 13,978 $ 13,721
Liabilities and shareholders' equity
Liabilities
Textron Manufacturing
Current portion of long-term debt and short-term debt $ 181 $ 1,735
Accounts payable 933 1,010
Income taxes payable 1,017 76
Other accrued liabilities 1,121 1,098
Total current liabilities 3,252 3,919
Accrued postretirement benefits other than pensions 759 762
Other liabilities 1,286 1,367
Long-term debt 313 880
Total Textron Manufacturing liabilities 5,610 6,928
Textron Finance
Other liabilities 193 162
Deferred income taxes 327 322
Note payable due to Textron Manufacturing (Note 10) 730 -
Debt 2,284 2,829
Total Textron Finance liabilities 3,534 3,313
Total liabilities 9,144 10,241
Textron - obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely Textron junior subordinated debt securities 483 483
Shareholders' equity
Capital stock:
Preferred stock 12 13
Common stock 24 24
Capital surplus 961 931
Retained earnings 5,454 3,786
Accumulated other comprehensive income (loss) (79) (96)
6,372 4,658
Less cost of treasury shares 2,021 1,661
Total shareholders' equity 4,351 2,997
Total liabilities and shareholders' equity $ 13,978 $ 13,721
Common shares outstanding 150,753,000 154,742,000
</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>
Three Months Ended
April 3, April 4,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Income from continuing operations $ 145 $ 99
Adjustments to reconcile income from continuing
operations to net cash provided (used)
by operating activities:
Depreciation 81 65
Amortization 18 17
Provision for losses on receivables 7 7
Dividends from discontinued operation - 90
Changes in assets and liabilities excluding
those related to acquisitions and
divestitures:
(Increase) in commercial and U.S.
government receivables (68) (88)
(Increase) in inventories (30) (154)
(Increase) in other assets (99) (123)
Increase (decrease) in accounts payable 1 (13)
(Decrease) increase in accrued
liabilities (66) 118
Other - net 10 21
Net cash (used) provided by operating activities (1) 39
Cash flows from investing activities:
Finance receivables:
Originated or purchased (955) (801)
Repaid or sold 792 749
Cash used in acquisitions (52) (227)
Net proceeds from dispositions 3,845 -
Capital expenditures (98) (82)
Other investing activities - net 12 (5)
Net cash provided (used) by investing
activities 3,544 (366)
Cash flows from financing activities:
Increase (decrease) in short-term debt (2,245) 350
Proceeds from issuance of long-term debt 200 300
Principal payments and retirements on
long-term debt (700) (329)
Proceeds from exercise of stock options 26 30
Purchases of Textron common stock (373) -
Dividends paid (91) (47)
Net cash (used) provided by financing activities (3,183) 304
Net increase (decrease) in cash 360 (23)
Cash and cash equivalents at beginning of period 53 43
Cash and cash equivalents at end of period $ 413 $ 20
</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 2, 1999. 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 April 3,
1999, and its consolidated results of operations and cash flows for
each of the respective three month periods ended April 3, 1999 and
April 4, 1998. Certain prior year balances have been reclassified to
conform to the current year presentation. Consistent with prior
periods, Textron Finance's first quarter ended on March 31, 1999.
Note 2: Disposition
On August 11, 1998, Textron announced that it had reached an agreement
to sell Avco Financial Services (AFS) to Associates First Capital
Corporation for $3.9 billion in cash. The sale was completed on
January 6, 1999. Net after-tax proceeds were approximately $2.9
billion, resulting in an after-tax gain of $1.6 billion. Textron has
presented AFS as a discontinued operation in these financial
statements.
Note 3: Extraordinary Loss from Debt Retirement
During the first quarter of 1999, Textron retired $168 million of
6.625% debentures originally due 2007, $165 million of 8.75%
debentures originally due 2022, $146 million of medium term notes with
interest rates ranging from 9.375% to 10.01% and other debt totaling
$74 million with interest rates ranging from 3.5% to 10.04% for a
total of $553 million. As a result of these transactions, Textron
recorded an after-tax loss of $43 million, which has been reflected in
the condensed consolidated statement of income as an extraordinary
item.
Note 4: Earnings per Share
FAS 128 requires companies to present basic and diluted earnings per
share amounts. The dilutive effect of stock options was 3,595,000 and
4,346,000 shares for the three month periods ending April 3, 1999 and
April 4, 1998, respectively. Income available to common shareholders
used to calculate both basic and diluted earnings per share
approximated net income for both periods.
Note 5: Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly
liquid securities with original maturities of ninety days or less.
Note 6: Inventories
<TABLE>
<CAPTION>
April 3, January 2,
1999 1999
(In millions)
<S> <C> <C>
Finished goods $ 529 $ 483
Work in process 942 878
Raw materials 454 454
1,925 1,815
Less progress payments and customer
deposits 225 175
$ 1,700 $ 1,640
</TABLE>
Note 7: 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 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 8: 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 9: Comprehensive Income
During the first quarter of 1999 and 1998, total comprehensive income
amounted to $1,734 million and $146 million, respectively.
Note 10: Intercompany Financing
Textron Manufacturing has entered into a promissory note agreement
with Textron Finance, whereby Textron Finance can borrow up to $1.25
billion from Textron Manufacturing. As of April 3, 1999, the amount
outstanding under this agreement is $730 million. The maximum amount
outstanding under this agreement during the first quarter was $1.0
billion. The amounts outstanding under this agreement are due on
demand and the interest rate is at a rate equivalent to the Federal
Reserve Banks' A2/P2 commercial paper rate on the date the funds are
drawn down upon. The amount of interest expense/income earned by
Textron Finance and Textron Manufacturing, respectively, was
approximately $9 million for the three months ending April 3, 1999.
Amounts outstanding under this agreement as of April 3, 1999 have not
been eliminated and, therefore, are included in total assets and total
liabilities on the condensed consolidated balance sheet. Textron
Finance's operating income included interest expense incurred under
this agreement.
Note 11: Restructuring Charges
To enhance the competitiveness and profitability of its core
businesses, Textron recorded a pretax charge of $87 million in 1998
($54 million after-tax or $.32 per diluted share). This charge was
recorded based on the decision to exit several small, nonstrategic
product lines in Automotive and the former Systems and Components
divisions which did not meet Textron return criteria, and to realign
certain operations in the Industrial segment. The pretax charges
associated with the Automotive and Industrial segments were $25
million and $52 million, respectively. The charge also included the
cost of a litigation settlement of $10 million related to the Aircraft
segment. Severance costs for approximately 1,800 personnel were
included in special charges and are based on established policies and
practices. The provision does not include costs associated with the
transfer of equipment and personnel, inventory obsolescence, or other
normal operating costs associated with the realignment actions.
Approximately 815 personnel had been terminated by April 3, 1999.
Most of the remaining terminations are expected to be completed by the
end of 1999.
The following table summarizes the spending associated with the 1998
programs (excluding the litigation settlement):
<TABLE>
<CAPTION>
Asset Severance
impairments costs Other Total
<S> <C> <C> <C> <C>
Initial charge $ 28 $ 40 $ 9 $ 77
Utilized (28) (11) (1) (40)
Balance April 3, 1999 $ - $ 29 $ 8 $ 37
</TABLE>
Note 12: Accounting for Internal Use Software
In 1999, Textron adopted 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. SOP 98-1 has not had a
material effect on Textron's net income and financial condition.
Note 13: Cost of Start-Up Activities
In 1999, Textron adopted Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities." SOP 98-5 requires all costs of
start-up activities, including organization costs, to be expensed as
incurred. SOP 98-5 has not had a material effect on Textron's net
income and financial condition.
Note 14: New Accounting Pronouncements
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 potential impact of this
pronouncement on future reporting.
Note 15: Financial information by borrowing group
Textron consists of two borrowing groups - the Textron Parent Company
Borrowing Group (Textron Manufacturing) and Textron's finance
subsidiaries (Textron Finance). Textron Manufacturing consists of all
entities of Textron (primarily manufacturing) other than its wholly-
owned finance subsidiaries. Textron Finance consists of Textron
Financial Corporation (TFC). Textron Manufacturing's cash flow
statement includes Textron Finance under the equity method of
accounting.
Item 1. FINANCIAL STATEMENTS (Continued)
Note 15: Financial information by borrowing group (continued)
<TABLE>
Textron Manufacturing
(Unaudited) (In millions)
<CAPTION>
Three Months Ended
April 3, April 4,
Condensed Statement of Cash Flows 1999 1998
<S> <C> <C>
Cash flows from operating activities:
Income from continuing operations $ 145 $ 99
Adjustments to reconcile income from continuing
operations to net cash used by operating
activities:
Earnings of Textron Finance greater than
distributions to Textron Manufacturing (5) (3)
Dividends received from discontinued operation - 90
Depreciation 78 64
Amortization 17 16
Changes in assets and liabilities excluding
those related to acquisitions and
divestitures:
(Increase) in receivables (68) (88)
(Increase) in inventories (30) (154)
(Increase) in other assets (96) (149)
(Decrease) increase in accounts payable
and accrued liabilities (96) 76
Other - net 3 22
Net cash used by operating activities (52) (27)
Cash flows from investing activities:
Capital expenditures (95) (82)
Cash used in acquisitions - (210)
Note receivable due from Textron Finance (730) -
Net proceeds from dispositions 3,845 -
Other investing activities - net 14 7
Net cash provided (used) by investing
activities 3,034 (285)
Cash flows from financing activities:
(Decrease) increase in short-term debt (1,542) 374
Principal payments and retirements on long-term
debt (635) (45)
Proceeds from exercise of stock options 26 30
Purchases of Textron common stock (373) -
Dividends paid (91) (47)
Contributions paid to Textron Finance (8) (23)
Net cash (used) provided by financing
activities (2,623) 289
Net increase (decrease) in cash 359 (23)
Cash and cash equivalents at beginning of period 31 30
Cash and cash equivalents at end of period $ 390 $ 7
</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
April 3, April 4,
1999 1998
<S> <C> <C>
REVENUES
MANUFACTURING:
Aircraft $ 827 $ 656
Automotive 734 618
Industrial 1,092 893
2,653 2,167
FINANCE 96 85
Total revenues $ 2,749 $ 2,252
OPERATING INCOME
MANUFACTURING:
Aircraft $ 67 $ 61
Automotive 62 56
Industrial 122 95
251 212
FINANCE 26 25
Segment operating income 277 237
Corporate expenses and other - net (38) (34)
Interest income (expense) - net 3 (33)
Income from continuing operations before
income taxes and distributions on preferred
securities of subsidiary trust $ 242 $ 170
</TABLE>
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 9, respectively.
Textron Manufacturing's operating cash flow includes dividends received from
Textron Finance of $11 million and $12 million during the first three months of
1999 and 1998, respectively. Dividend payments to shareholders for the first
quarter 1999 includes two payments as opposed to the first quarter 1998 when one
payment was made. Dividend payments to shareholders in the first quarter 1999
amounted to $91 million, an increase of $44 million over first quarter 1998.
On January 6, 1999 Textron completed its sale of Avco Financial Services to
Associates First Capital Corporation for $3.9 billion in cash. Net after-tax
proceeds were approximately $2.9 billion, resulting in an after-tax gain of $1.6
billion.
Proceeds from the AFS disposition have already had a significant short-term
impact on Textron's capital structure. Textron determined the potential
incremental benefits that it could earn from investing the AFS proceeds (within
the Company's established investment policies) versus the interest cost
avoidance from the retirement of borrowings and determined that the latter
provided the greatest value to shareholders. Therefore, as more fully described
below, Textron has started to utilize the proceeds to repay long-term and short-
term borrowings, as well as, repurchase shares and fund new acquisitions.
During the first quarter of 1999, Textron retired a total of $553 million of
long-term high coupon debt. As a result, Textron recorded an after-tax loss of
$43 million. In addition, interest rate exchange agreements designated as
hedges of the retired borrowings were also terminated in the amount of $479
million.
Textron Manufacturing has entered into a promissory note agreement with Textron
Finance, whereby Textron Finance can borrow up to $1.25 billion from Textron
Manufacturing. As of April 3, 1999, the amount outstanding under this agreement
is $730 million. Textron Finance utilized the proceeds received under this
agreement to fund working capital needs as an alternative to incurring new third
party indebtedness.
Textron Manufacturing's debt to total capital ratio was 9% at April 3, 1999,
down from 43% at year end. Textron Manufacturing has credit facilities
outstanding at April 3, 1999 aggregating $1.3 billion, $1.2 billion of which was
not used or reserved as support for outstanding commercial paper or bank
borrowings. During the first quarter, Textron Manufacturing cancelled $1.5
billion of credit facilities. At March 31, 1999, Textron Finance had credit
facilities outstanding of approximately $2.5 billion including the credit
facility with Textron Manufacturing, $1.1 billion of which was available at
quarter end. Textron Manufacturing had $311 million available at quarter end
under its shelf registration statement with the Securities and Exchange
Commission. During the first quarter of 1999, Textron Finance issued $200
million under its medium-term note facility. Textron Finance had $272 million
available under the facility at March 31, 1999.
During the first quarter of 1999, Textron Inc. repurchased 4.8 million shares of
common stock under its Board authorized share repurchase program at an aggregate
cost of $363 million.
In April 1999, Textron acquired LCI Corporation International's Fluid Systems
Division, a North Carolina-based manufacturer and assembler of gear pumps,
filtration systems and accessory equipment for the polymer, extrusion and
industrial pump industry, and Flexalloy, an Ohio-based distributor and provider
of vendor managed inventory services for the North American fastener market.
Management believes that Textron Manufacturing will continue to have adequate
access to credit markets and that its credit facilities, cash flows from
operations -- including dividends received from Textron Finance -- and proceeds
from the sale of AFS, will continue to be more than sufficient to meet its
operating needs and to finance growth.
Quantitative Risk Measures
Textron has used a sensitivity analysis to quantify the market risk inherent in
its financial instruments. Financial instruments held by the Company that are
subject to market risk (interest rate risk and foreign exchange rate risk)
include finance receivables (excluding lease receivables), debt, interest rate
exchange agreements, foreign exchange contracts and currency swaps.
Presented below is a sensitivity analysis of the fair value of Textron's
financial instruments for April 3, 1999 and January 2, 1999. This analysis has
been presented for the first quarter in order to outline the change in the
composition of Textron's financial instruments resulting from the utilization of
the AFS sale proceeds. The following table illustrates the hypothetical change
in the fair value of the Company's financial instruments at April 3, 1999 and
year-end assuming a 10% decrease in interest rates and a 10% strengthening in
exchange rates against the U.S. dollar. The estimated fair value of the
financial instruments was determined by discounted cash flow analysis and by
independent investment bankers. This sensitivity analysis is most likely not
indicative of actual results in the future.
<TABLE>
<CAPTION>
April 3, 1999 January 2, 1999
Hypothetical Hypothetical
Carrying Fair Change Carrying Fair Change
(In millions) Value Value In Fair Value Value Value In Fair Value
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Risk
Textron Manufacturing:
Debt $ 494 $ 521 $ 7 $2,615 $ 2,706 $ 27
Interest rate exchange
agreements - 1 (4) - (11) (18)
Textron Finance:
Finance receivables 2,978 3,026 29 2,774 2,837 28
Debt 2,284 2,285 14 2,829 2,836 12
Interest rate exchange
agreements - 1 - - 1 1
Foreign Exchange Rate Risk
Textron Manufacturing:
Debt 244 252 25 319 334 33
Foreign exchange contracts - 2 (22) - 9 (23)
Currency swaps (22) (29) 100 14 10 84
</TABLE>
Year 2000 Readiness Disclosure
Introduction
Much of the world's computer hardware and software is not designed to process
date information after 1999. This is largely because computer programs have
historically used only two digits to identify the year in a date, but problems
related to processing of date information also may arise because some software
assigns special meaning to certain dates. This Year 2000 problem could, if
uncorrected, cause computers and other equipment used and manufactured by
Textron and Textron's suppliers and customers to fail to operate properly.
Year 2000 Program
In early 1997, Textron began a company-wide program (the "Program") to assess
the possible vulnerability of Textron to the Year 2000 problem and to minimize
the effect of the problem on Textron's operations. The Program is centrally
directed from the Year 2000 Program Office at Textron's corporate headquarters
and is executed at each Textron business unit. The Program addresses five
"Major Elements" at the corporate headquarters and each business unit:
- Business Systems: management information systems and personal computer
applications, including the computing environments that support them.
- Factory and Facilities Equipment: equipment that uses a computer to
control its operation either for producing an end-product or providing
services.
- End-Products: software products, delivered either alone or as a
component of another product, that are supplied to Textron customers.
- Suppliers: assurance that those who sell goods and services to Textron
will not interrupt Textron operations due to the Year 2000 problem.
- Customers: assurance that those who buy goods and services from
Textron will not interrupt Textron operations due to the Year 2000
problem.
For each of the Major Elements, the Program measures five "Readiness Levels":
Level I) Management has become aware of the issue. An inventory
is being taken of the items that the Year 2000 problem
may affect.
Level II) The inventory of Year 2000 items has been completed.
The priority of each item is being assessed. Actions
are being planned to assure that each item is ready for
the Year 2000. Resources are being committed to do the
work.
Level III) Planning has been completed. The prescribed actions
are being performed, including testing to verify that
the actions are effective. Suppliers and customers are
being surveyed and their progress is being tracked.
Level IV) Items critical to operations have been remediated and
have been put in normal operation. Surveys of critical
suppliers and customers have been completed. Core
business systems continue to be tested. Follow-up
checking of suppliers and customers is in process.
Contingency plans are being prepared. Audits to verify
readiness are being performed. Remediation of items
that are important to operations, but not critical, is
being performed.
Level V) Systems critical to operations have been tested.
Audits and associated corrective actions have been
completed. Contingency plans have been completed.
Follow-up checking of suppliers and customers has been
completed. In all material respects, Textron is ready
for Year 2000.
Textron has substantially reached Readiness Level IV. Based on information
currently available, Textron estimates that it will achieve full Readiness Level
IV by June 30, 1999, except for four projects that are on-schedule and are
expected to be complete by August 31, 1999. Textron estimates that it will
substantially reach Readiness Level V by June 30, 1999, and achieve full
Readiness Level V by September 30, 1999. Textron is having a combination of
independent parties and Textron personnel complete an assessment of the
implementation of the Program at the corporate headquarters and each business
unit. As of mid-April 1999, twenty-four of thirty planned assessments are
complete.
The Readiness Level of the Major Elements items that have been inventoried as of
January 31, 1999 is shown in the following table. Major Element inventories are
under continuous review and additional items may be identified in the future.
For the Major Elements of "Suppliers" and "Customers" the indicated Readiness
Level refers to Textron's progress in reviewing the readiness of customers and
suppliers, and not to Textron's assessment of their readiness.
Major Element Percent of Identified Major Element Items
at Readiness Level
II III IV V
Business Systems 1% 8% 38% 53%
Factory and Facilities
Equipment 1% 11% 26% 62%
End-Products 0% 1% 1% 98%
Suppliers 1% 10% 75% 14%
Customers 4% 41% 51% 4%
Year 2000 Costs
The total cost of the Year 2000 Program for continuing operations is estimated
to be approximately $115 million. Approximately $61 million is for
modifications to existing items and other program expenses and $54 million is
for replacement systems which have been or are expected to be capitalized in
accordance with Company policy. Through April 3, 1999, total expenditures were
$86 million. The estimated future cost to complete the Program is expected to
be approximately $29 million including approximately $11 million for replacement
systems. Funds for the Program are provided from special project appropriations
totaling approximately $24 million and from normal operating and capital
budgets. The Year 2000 Program has delayed certain other Textron information
management projects. Delay of these projects is not expected to have an adverse
impact on Textron.
Risks and Contingency Plans
Year 2000 issues have the potential, if not remediated, to severely disrupt
Textron's business operations and to adversely affect Textron's financial
condition. The Year 2000 Program is expected to significantly reduce Textron's
exposure to these issues, particularly with respect to Textron's Business
Systems, Factory & Facilities Equipment, and End-Products. However, it is
possible that unanticipated problems may arise in the course of Textron's
implementation of the Year 2000 Program. In addition, while monitoring of Year
2000 readiness by Textron's suppliers and customers is a major part of the Year
2000 Program, Textron has very limited ability to ensure Year 2000 readiness by
such parties. Textron could also be affected by failure of government agencies,
in the U.S. and elsewhere, to maintain governmental services that are essential
to Textron's operations. Textron cannot identify all possible scenarios.
However, the most reasonably likely worst case scenario would be the inability
of third parties, including utilities, to deliver supplies and services that are
critical to Textron's operations and that could not quickly be replaced by other
suppliers or internally. In such situation, operations at the affected Textron
facilities could be interrupted, with adverse effects on Textron's financial
results.
Textron is developing contingency plans to cover situations in which Year 2000
problems arise despite Textron's efforts. Such plans are expected to be
substantially ready by June 30, 1999.
Forward-looking statements contained in this report relating to Year 2000
issues, including expectations of readiness, possible effects on Textron and
similar matters, are subject to the risks described in this section.
Results of Operations - Three months ended April 3, 1999 vs Three months ended
April 4, 1998
Diluted earnings per share from continuing operations in the first quarter 1999
were $0.93 per share, up 58% from the 1998 amount of $0.59. Income from
continuing operations in 1999 of $145 million was up 46% from $99 million in
1998. Revenues increased 22% to $2.7 billion in 1999 from $2.3 billion in 1998.
In August, 1998, Textron announced that it had reached an agreement to sell Avco
Financial Services (AFS) to Associates First Capital Corporation for $3.9
billion in cash. The sale of AFS was completed on January 6, 1999 and a gain of
$1.62 billion on the sale of AFS was recorded in the first quarter 1999.
Textron also recorded an extraordinary loss of $43 million on the early
retirement of debt in the first quarter 1999. Net income, including the gain
and extraordinary loss, was $1.717 billion vs $142 million in 1998.
The Aircraft segment's revenues and income increased $171 million (26%) and $6
million (10%), respectively, due to higher results at Cessna Aircraft. Cessna's
revenues increased $116 million mainly as a result of higher sales of business
jets, primarily the Citation X and the recently introduced Citation Excel. Its
income increased as a result of the higher business jet sales, partially offset
by lower margins on increased fleet sales, costs associated with the ramp-up in
production of new aircraft and increased product development expense related to
the Citation CJ2 - a larger, faster version of the CitationJet.
Bell Helicopter's revenues increased $55 million, driven by an increase in U. S.
government revenues, primarily on the V-22 contract and the Huey and Cobra
upgrade contracts as well as higher foreign military sales. However, income for
Bell decreased due to higher product development expense for the BA 609
commercial tiltrotor aircraft and a change in product mix, reflecting lower
margins on commercial aircraft and spares sales. This unfavorable impact was
partially offset by the higher U. S. government revenues and the recognition
into income ($9 million) of cash received in the fourth quarter of 1998 on the
formation of a joint venture on the 609 program.
The Automotive segment's revenues increased $116 million (19%), while income
increased $6 million (11%). The increase in revenue reflected higher volume at
Kautex associated with capacity expansion in North America, higher sales at Trim
and the contribution from the Midland Industrial Plastics acquisition. Income
for the quarter increased due to the contribution from higher organic sales, as
well as improved performance at Trim. These benefits were partially offset by
customer price reductions. The margin decline reflected the impact of the
acquisition and a higher proportion of lower margin Kautex sales.
The Industrial segment's revenues and income increased $199 million (22%) and
$27 million (28%), respectively. These increases reflect the contribution from
acquisitions, primarily David Brown, Ring Screw Works, Ransomes, Sukosim and
Peiner, and internal growth combined with ongoing margin improvement. Internal
growth was driven by higher sales in the Golf and Turf and Fluid & Power Systems
businesses. These benefits were partially offset by the divestiture of Fuel
Systems in the second quarter of 1998 and lower organic sales in Textron
Fastening Systems and Industrial Components.
The Finance segment's revenues increased $11 million (13%), while income
increased $1 million (4%). Revenues increased due to a higher level of average
receivables and an increase in syndication and portfolio servicing income,
partially offset by lower yields on receivables. Income increased as the
benefit of higher revenues was partially offset by higher expenses related to
growth in the service and fee-related business, businesses with higher operating
expense ratios, and a higher provision for loan losses related to the real
estate portfolio.
Interest income and expense - net for Textron manufacturing decreased $36
million as a result of the proceeds received in January 1999 from the
divestiture of AFS. Interest income increased $16 million, as a result of our
net investment position, while interest expense decreased $20 million due to a
lower level of average debt, resulting from the payment of debt with the AFS
proceeds.
Income taxes - the current quarter's effective income tax rate of 37.6% was
lower than the corresponding prior year rate of 38.2%.
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: (a) the extent which Textron is able to successfully integrate
acquisitions, (b) changes in worldwide economic and political conditions and
associated impact on 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) the extent to which the Company
is able to successfully develop, introduce, and launch new
products and enter new markets, (e) the level of government funding for Textron
products and (f) Textron's ability to complete Year 2000 conversion without
unexpected complications and the ability of its suppliers and customers to
successfully modify their own programs. For the Aircraft Segment: (a) the timing
of certifications of new aircraft products and (b) the occurrence of a severe
downturn in the U.S. economy that discourages businesses from purchasing
business jets. For the Automotive Segment: (a) the level of consumer demand for
the vehicle models for which Textron supplies parts to automotive original
equipment manufacturers ("OEM's") and (b) the ability to offset, through cost
reductions, pricing pressure brought by automotive OEM customers. For the
Industrial Segment: the ability of Textron Fastening Systems to offset, through
cost reductions, pricing pressure brought by automotive OEM customers. For the
Finance Segment: (a) the level of sales of Textron products for which TFC offers
financing and (b) the ability of TFC to maintain credit quality and control
costs when entering new markets.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the Company's Management Discussion and Analysis "Quantitative Risk
Measures" section on page 12 for updated information.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On April 7, 1999, the U.S. Environmental Protection Agency
informed Textron's Bell Helicopter susbsidiary that it was
proposing a penalty of $253,000 for alleged violations of the
Clean Air Act and the Resource Conservation and Recovery Act
relating to operations at one of Bell's plants in Fort Worth,
Texas. These alleged violations involve past record keeping,
reporting and maintenance of certain controls. Bell is
negotiating a resolution of this matter with the EPA.
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 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
27 Financial Data Schedule (filed electronically
only)
(b) Reports on Form 8-K
On January 6, 1999, Textron filed a report on Form 8-K,
reporting under Item 2 (Acquisition or Disposition of
Assets) that it had completed the sale of substantially
all the assets of its Avco Financial Services, Inc. unit
and filing under Item 7 (Exhibits) the Asset Purchase
Agreement, as amended, related to such sale.
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: May 12, 1999 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 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
27 Financial Data Schedule (filed electronically only)
EXHIBIT 12.1
TEXTRON MANUFACTURING
COMPUTATION OF RATIO OF INCOME TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(unaudited)
(In millions except ratio)
Three Months
Ended
April 3, 1999
Fixed charges:
Interest expense $ 13
Distributions on preferred securities of subsidiary trust,
net of income taxes 6
Estimated interest portion of rents 7
Total fixed charges $ 26
Income:
Income before income taxes and distributions on preferred
securities of subsidiary trust $ 242
Less Textron Finance pre-tax income greater than Textron
Finance dividends (15)
Fixed charges (1) 20
Adjusted income $ 247
Ratio of income to fixed charges 9.50
(1) Adjusted to exclude distributions on preferred securities of subsidiary
trust, net of income taxes.
EXHIBIT 12.2
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)
Three Months
Ended
April 3, 1999
Fixed charges:
Interest expense $ 45
Distributions on preferred securities of
subsidiary trust, net of income taxes 6
Estimated interest portion of rents 7
Total fixed charges $ 58
Income:
Income before income taxes and distributions on
preferred securities of subsidiary trust $ 242
Fixed charges (1) 52
Adjusted income $ 294
Ratio of income to fixed charges 5.07
(1) Adjusted to exclude distributions on preferred securities of subsidiary
trust, net of income taxes.
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