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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________
FORM 10-Q
|
[X] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES |
|
OR |
|
|
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES |
Commission file number 1-5480
_______________
TEXTRON INC.
(Exact name of registrant as specified in its charter)
_______________
|
Delaware |
05-0315468 |
|
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 October 30, 1999 - 148,741,000 shares
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TEXTRON INC.
Condensed Consolidated Statement of Income (unaudited)
(Dollars in millions except per share amounts)
|
Three months ended |
Nine months ended |
|||
|
October 2, |
October 3, |
October 2, |
October 3, |
|
|
Textron Manufacturing |
||||
|
Revenues |
$2,587 |
$2,253 |
$8,023 |
$6,813 |
|
Cost and Expenses |
||||
|
Cost of sales |
2,108 |
1,833 |
6,565 |
5,545 |
|
Selling and administrative |
271 |
232 |
802 |
694 |
|
Gain on sale of division |
- |
- |
- |
(97) |
|
Special charges/(credits) |
(3) |
- |
(1) |
87 |
|
Interest expense |
11 |
37 |
27 |
106 |
|
Interest income |
(4) |
- |
(26) |
- |
|
Total costs and expenses |
2,383 |
2,102 |
7,367 |
6,335 |
|
Manufacturing income |
204 |
151 |
656 |
478 |
|
Textron Finance |
||||
|
Revenues |
122 |
99 |
322 |
275 |
|
Costs and Expenses |
||||
|
Interest |
45 |
40 |
135 |
116 |
|
Selling and administrative |
29 |
20 |
71 |
58 |
|
Provision for losses on collection of finance receivables |
10 |
6 |
22 |
16 |
|
Total costs and expenses |
84 |
66 |
228 |
190 |
|
Finance income |
38 |
33 |
94 |
85 |
|
Total Company |
||||
|
Income from continuing operations before income taxes and |
|
|
|
|
|
Income taxes |
(90) |
(70) |
(278) |
(221) |
|
Distributions on preferred securities of subsidiary trust, |
|
|
|
|
|
Income from continuing operations |
146 |
108 |
453 |
323 |
|
Discontinued operations, net of income taxes: |
||||
|
Income from operations |
- |
34 |
- |
125 |
|
Gain on disposal |
- |
- |
1,615 |
- |
|
- |
34 |
1,615 |
125 |
|
|
Income before extraordinary loss |
146 |
142 |
2,068 |
448 |
|
Extraordinary loss from debt retirement, net of income taxes |
- |
- |
(43) |
- |
|
Net income |
$146 |
$142 |
$2,025 |
$448 |
|
Per common share: |
||||
|
Basic: |
||||
|
Income from continuing operations |
$.97 |
$.67 |
$3.00 |
$1.99 |
|
Discontinued operations, net of income taxes |
- |
.20 |
10.68 |
.76 |
|
Extraordinary loss from debt retirement, net of |
|
|
|
|
|
Net income |
$.97 |
$.87 |
$13.40 |
$2.75 |
|
Diluted: |
||||
|
Income from continuing operations |
$.95 |
$.65 |
$2.93 |
$1.94 |
|
Discontinued operations, net of income taxes |
- |
.20 |
10.44 |
.74 |
|
Extraordinary loss from debt retirement, net of |
|
|
|
|
|
Net income |
$.95 |
$.85 |
$13.10 |
$2.68 |
|
Average shares outstanding: |
||||
|
Basic |
150,069,000 |
162,156,000 |
151,153,000 |
162,718,000 |
|
Diluted |
153,406,000 |
166,116,000 |
154,654,000 |
166,927,000 |
|
Dividends per share: |
||||
|
$2.08 Preferred stock, Series A |
$.52 |
$.52 |
$1.56 |
$1.56 |
|
$1.40 Preferred stock, Series B |
$.35 |
$.35 |
$1.05 |
$1.05 |
|
Common stock |
$.325 |
$.25 |
$.975 |
$.855 |
See notes to the condensed consolidated financial statements.
Item 1. FINANCIAL STATEMENTS (Continued)
TEXTRON INC.
Condensed Consolidated Balance Sheet (unaudited)
(Dollars in millions)
|
October 2, |
January 2, |
||
Assets |
|||
|
Textron Manufacturing |
|||
|
Cash and cash equivalents |
$356 |
$31 |
|
|
Commercial and U.S. government receivables - net |
1,388 |
1,160 |
|
|
Inventories |
1,968 |
1,640 |
|
|
Other current assets |
309 |
348 |
|
|
Investment in discontinued operations |
- |
1,176 |
|
|
Total current assets |
4,021 |
4,355 |
|
|
Property, plant, and equipment, less accumulated |
|
|
|
|
Goodwill, less accumulated amortization of $473 and |
|
|
|
|
Other (including net deferred income taxes) |
1,418 |
1,277 |
|
|
Total Textron Manufacturing assets |
10,415 |
9,936 |
|
|
Textron Finance |
|||
|
Cash |
54 |
22 |
|
|
Finance receivables - net |
4,334 |
3,528 |
|
|
Other assets |
295 |
235 |
|
|
Total Textron Finance assets |
4,683 |
3,785 |
|
|
Total assets |
$15,098 |
$13,721 |
|
|
Liabilities and shareholders' equity |
|||
|
Liabilities |
|||
|
Textron Manufacturing |
|||
|
Current portion of long-term debt and short-term debt |
$194 |
$1,735 |
|
|
Accounts payable |
1,104 |
1,010 |
|
|
Income taxes payable |
361 |
76 |
|
|
Other accrued liabilities |
1,215 |
1,098 |
|
|
Total current liabilities |
2,874 |
3,919 |
|
|
Accrued postretirement benefits other than pensions |
745 |
762 |
|
|
Other liabilities |
1,307 |
1,367 |
|
|
Long-term debt |
1,095 |
880 |
|
|
Total Textron Manufacturing liabilities |
6,021 |
6,928 |
|
|
Textron Finance |
|||
|
Other liabilities |
216 |
162 |
|
|
Deferred income taxes |
337 |
322 |
|
|
Debt |
3,603 |
2,829 |
|
|
Total Textron Finance liabilities |
4,156 |
3,313 |
|
|
Total liabilities |
10,177 |
10,241 |
|
|
Textron - obligated mandatorily redeemable |
|
|
|
|
Shareholders' equity |
|||
|
Capital stock: |
|||
|
Preferred stock |
12 |
13 |
|
|
Common stock |
24 |
24 |
|
|
Capital surplus |
991 |
931 |
|
|
Retained earnings |
5,665 |
3,786 |
|
|
Accumulated other comprehensive income (loss) |
(86) |
(96) |
|
|
6,606 |
4,658 |
||
|
Less cost of treasury shares |
2,168 |
1,661 |
|
|
Total shareholders' equity |
4,438 |
2,997 |
|
|
Total liabilities and shareholders' equity |
$15,098 |
$13,721 |
|
|
Common shares outstanding |
149,714,000 |
154,742,000 |
See notes to condensed consolidated financial statements
Item 1. FINANCIAL STATEMENTS (Continued)
TEXTRON INC.
Condensed Consolidated Statement of Cash Flows (Unaudited)
(In millions)
|
Nine Months Ended |
|||
|
October 2, |
October 3, |
||
|
Cash flows from operating activities: |
|||
|
Income from continuing operations |
$453 |
$323 |
|
|
Adjustments to reconcile income from continuing operations to |
|||
|
Depreciation |
255 |
205 |
|
|
Amortization |
63 |
56 |
|
|
Gain on sale of division |
- |
(97) |
|
|
Special charges/(credits) |
(1) |
87 |
|
|
Provision for losses on receivables |
23 |
17 |
|
|
Dividends from discontinued operations |
- |
140 |
|
|
Deferred income taxes |
43 |
(33) |
|
|
Changes in assets and liabilities excluding those related to acquisitions |
|||
|
(Increase) in commercial and U.S. government receivables |
(36) |
(131) |
|
|
(Increase) in inventories |
(139) |
(224) |
|
|
(Increase) in other assets |
(134) |
(143) |
|
|
Increase (decrease) in accounts payable |
36 |
(12) |
|
|
(Decrease) increase in accrued liabilities |
(57) |
224 |
|
|
Other - net |
(3) |
18 |
|
|
Net cash provided by operating activities |
503 |
430 |
|
|
Cash flows from investing activities: |
|||
|
Finance receivables: |
|||
|
Originated or purchased |
(3,455) |
(2,899) |
|
|
Repaid or sold |
2,808 |
2,613 |
|
|
Proceeds from sale of securitized assets |
- |
260 |
|
|
Cash used in acquisitions |
(692) |
(458) |
|
|
Investments in joint ventures |
(41) |
- |
|
|
Net proceeds from dispositions |
3,155 |
160 |
|
|
Capital expenditures |
(350) |
(302) |
|
|
Other investing activities - net |
45 |
17 |
|
|
Net cash provided (used) by investing activities |
1,470 |
(609) |
|
|
Cash flows from financing activities: |
|||
|
(Decrease) increase in short-term debt |
(1,802) |
633 |
|
|
Proceeds from issuance of long-term debt |
1,962 |
368 |
|
|
Principal payments and retirements on long-term debt |
(1,123) |
(430) |
|
|
Proceeds from exercise of stock options |
47 |
44 |
|
|
Purchases of Textron common stock |
(512) |
(281) |
|
|
Dividends paid |
(188) |
(138) |
|
|
Net cash (used) provided by financing activities |
(1,616) |
196 |
|
|
Net increase in cash and cash equivalents |
357 |
17 |
|
|
Cash and cash equivalents at beginning of period |
53 |
43 |
|
|
Cash and cash equivalents at end of period |
$410 |
$60 |
|
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 October 2, 1999, and its
consolidated results of operations and cash flows for each of the respective three and
nine month periods ended October 2, 1999 and October 3, 1998. Certain prior year
balances have been reclassified to conform to the current year presentation.
Consistent with prior periods, Textron Finance's third quarter ended on
September 30, 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
are expected to approximate $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%.
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 convertible preferred shares and stock options was
3,337,000 and 3,960,000 shares for the three month periods ended October 2, 1999
and October 3, 1998 and 3,501,000 and 4,209,000 shares for the nine month periods
ending October 2, 1999 and October 3, 1998, respectively. Income available to
common shareholders used to calculate both basic and diluted earnings per share
approximated net income for all 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
|
October 2, |
January 2, |
|||
|
(In millions) |
||||
|
Finished goods |
$659 |
$483 |
||
|
Work in process |
1,046 |
878 |
||
|
Raw materials |
489 |
454 |
||
|
2,194 |
1,815 |
|||
|
Less progress payments and customer deposits |
226 |
175 |
||
|
$1,968 |
$1,640 |
|||
|
Note 7: |
Textron-obligated mandatorily redeemable preferred securities of subsidiary |
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 nine months of 1999 and 1998, total comprehensive income
amounted to $2,035 million and $421 million, respectively. For the three month
period ended October 2, 1999 and October 3, 1998, total comprehensive income
amounted to $146 million and $145 million, respectively.
Note 10: Intercompany Financing
In the first quarter of 1999, Textron Manufacturing entered into a promissory note
agreement with Textron Finance, whereby Textron Finance could borrow up to
$1.25 billion from Textron Manufacturing. The maximum amount outstanding
under this agreement during the first nine months of 1999 was $1.0 billion. The
amount of interest expense/income incurred/earned by Textron Finance and Textron
Manufacturing, respectively, was approximately $15 million for the nine month
period ending October 2, 1999. Textron Finance's operating income includes
interest expense incurred under this agreement. This agreement was cancelled
during the second quarter of 1999.
Note 11: Special Charges/(Credits)
In the second quarter of 1999, the Company reassessed the remaining actions
anticipated in the 1998 program and determined that certain projects should be
delayed or cancelled while other provisions were no longer necessary. Specifically,
provisions for severance and exit costs associated with the decision to exit certain
automotive product lines were no longer required due to a decision to build different
products in a plant originally anticipated to be closed. In the Industrial segment,
certain cost reduction programs in the Fluid and Power Group have been suspended
as a result of management's evaluation of the opportunities presented by the David
Brown acquisition. Some smaller programs have been delayed as the Company re-
examines strategic alternatives. Others were completed at costs less than originally
anticipated.
Concurrently, the Company initiated a series of new cost reduction efforts in the
Industrial segment designed to significantly reduce headcount from levels at the
beginning of the year. Significant actions include the downsizing of an
underperforming plant in Europe and targeted headcount reductions across most
Industrial divisions. Headcount reductions were also effected at Bell Helicopter.
As a result of the above, in the second quarter the Company reversed approximately
$24 million of reserves no longer deemed necessary for the 1998 program and
recorded severance accruals of approximately $21 million and recorded a charge
related to asset impairment of $5 million.
In the third quarter, Textron recorded additional restructuring charges for the
Industrial segment, primarily for severance and asset impairment associated with the
announced closing of seven facilities. The Company continues to evaluate
additional programs and expects cost reduction efforts to continue over the next
year. Additional charges may be required in the future when such programs become
finalized. As of October 2, 1999, approximately 1,500 employees had been
terminated under these severance programs.
The following table summarizes the activity associated with 1998 and 1999
programs:
|
|
Asset |
Severance & |
|
|||
|
Balance January 1, 1999 |
$- |
$40 |
$40 |
|||
|
Utilized first half of 1999 |
- |
(3) |
(3) |
|||
|
No longer required |
- |
(24) |
(24) |
|||
|
Second quarter programs |
5 |
21 |
26 |
|||
|
Utilized third quarter of 1999 |
(5) |
(6) |
(11) |
|||
|
Third quarter programs |
9 |
7 |
16 |
|||
|
Utilized third quarter 1999 |
(9) |
(6) |
(15) |
|||
|
Balance October 2, 1999 |
$- |
$29 |
$29 |
Included in special charges/(credits) is a gain of $19 million as a result of shares
granted to Textron from Manulife Financial Corp.'s initial public offering on their
demutualization of the Manufacturers Life Insurance Company.
Note 12: New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) 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. In June 1999, the FASB issued FAS 137 which deferred
the effective date of FAS 133 to all fiscal quarters of all fiscal years beginning after
June 15, 2000. Textron is evaluating the potential impact of this pronouncement on
future reporting.
At the September 23, 1999 meeting, the EITF reached a consensus on Issue 99-5,
"Accounting for Pre-Production Costs Related to Long-Term Supply Arrangements."
The Issue addresses pre-production costs incurred by original equipment
manufacturers (OEM) suppliers (e.g., automotive manufacturers) to perform certain
services related to the design and development of the parts they will supply to the
OEM as well as the design and development costs to build molds, dies and other
tools that will be used in producing the parts. The consensus generally requires all
design and development costs for products to be sold under long term supply
arrangements to be expensed unless there is a contractual guarantee that provides for
specific required payments for design and development costs.
The Task Force concluded that the provisions of this consensus should be applied
prospectively for costs incurred after December 31, 1999 with the option to elect
adoption through a cumulative effect of change in accounting principle. At October
2, 1999, other assets includes approximately $87 million of customer engineering
costs for which customer reimbursement is anticipated but not contractually
guaranteed. Textron expects to comply with the provisions of this consensus by
writing-off all capitalized customer engineering costs that would not qualify for
capitalization as a cumulative effect of change in accounting principle in the first
quarter of fiscal 2000.
Note 13: 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 the Company'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 finances its operations by
borrowing from its own group of external creditors. Textron Manufacturing is
Textron Inc., the parent company, consolidated with the entities which operate in the
Aircraft, Automotive and Industrial business segments.
Item 1. FINANCIAL STATEMENTS (Continued)
Note 13: Financial information by borrowing group (continued)
Textron Manufacturing
(unaudited) (In millions)
|
Nine Months Ended |
|||
|
Condensed Statement of Cash Flows |
October 2, |
October 3, |
|
|
Cash flows from operating activities: |
|||
|
Income from continuing operations |
$454 |
$323 |
|
|
Adjustments to reconcile income from continuing |
|||
|
Earnings of Finance Group greater than |
|
|
|
|
Depreciation |
246 |
203 |
|
|
Amortization |
59 |
51 |
|
|
Gain on sale of division |
- |
(97) |
|
|
Special charges/(credits) |
(1) |
87 |
|
|
Dividends received from discontinued operation |
- |
140 |
|
|
Deferred taxes |
27 |
(27) |
|
|
Changes in assets and liabilities excluding those |
|||
|
(Increase) in receivables |
(36) |
(131) |
|
|
(Increase) in inventories |
(139) |
(224) |
|
|
(Increase) in other assets |
(123) |
(172) |
|
|
(Increase) decrease in accounts payable and accrued |
|
|
|
|
Other - net |
4 |
26 |
|
|
Net cash provided by operating activities |
411 |
322 |
|
|
Cash flows from investing activities: |
|||
|
Capital expenditures |
(343) |
(293) |
|
|
Cash used in acquisitions |
(588) |
(443) |
|
|
Investments in joint ventures |
(41) |
- |
|
|
Net proceeds from dispositions |
3,150 |
160 |
|
|
Other investing activities - net |
42 |
27 |
|
|
Net cash provided (used) by investing activities |
2,220 |
(549) |
|
|
Cash flows from financing activities: |
|||
|
(Decrease) increase in short-term debt |
(1,555) |
745 |
|
|
Proceeds from issuance of long-term debt |
794 |
7 |
|
|
Principal payments and retirements on long-term debt |
(858) |
(100) |
|
|
Proceeds from exercise of stock options |
47 |
44 |
|
|
Purchases of Textron common stock |
(512) |
(281) |
|
|
Dividends paid |
(188) |
(138) |
|
|
Contributions paid to Finance Group |
(34) |
(23) |
|
|
Net cash (used) provided by financing activities |
(2,306) |
254 |
|
|
Net increase in cash and cash equivalents |
325 |
27 |
|
|
Cash and cash equivalents at beginning of period |
31 |
30 |
|
|
Cash and cash equivalents at end of period |
$356 |
$57 |
|
|
Item 2. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION |
TEXTRON INC.
Revenues and Income by Business Segment
(In millions)
|
Three Months Ended |
Nine Months Ended |
||||||
|
October 2, |
October 3, |
October 2, |
October 3, |
||||
|
REVENUES |
|||||||
|
MANUFACTURING: |
|||||||
|
Aircraft |
$899 |
$826 |
$2,611 |
$2,340 |
|||
|
Automotive |
662 |
534 |
2,153 |
1,735 |
|||
|
Industrial |
1,026 |
893 |
3,259 |
2,738 |
|||
|
2,587 |
2,253 |
8,023 |
6,813 |
||||
|
FINANCE |
122 |
99 |
322 |
275 |
|||
|
Total revenues |
$2,709 |
$2,352 |
$8,345 |
$7,088 |
|||
|
INCOME |
|||||||
|
MANUFACTURING: |
|||||||
|
Aircraft |
$91 |
$91 |
$233 |
$243 |
|||
|
Automotive |
38 |
29 |
162 |
128 |
|||
|
Industrial |
116 |
103 |
371 |
306 |
|||
|
245 |
223 |
766 |
677 |
||||
|
FINANCE |
38 |
33 |
94 |
85 |
|||
|
283 |
256 |
860 |
762 |
||||
|
Gain on sale of division |
- |
- |
- |
97 |
|||
|
Special (charges)/credits * |
3 |
- |
1 |
(87) |
|||
|
Segment income |
286 |
256 |
861 |
772 |
|||
|
Corporate expenses and other - net |
(37) |
(35) |
(110) |
(103) |
|||
|
Interest income |
4 |
- |
26 |
- |
|||
|
Interest expense |
(11) |
(37) |
(27) |
(106) |
|||
|
Income from continuing |
|
|
|
|
|
|
|
|
The October 3, 1998 special (charges)/credits consist of ($10) million for the Aircraft |
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 10, respectively. Textron Manufacturing's operating cash
flow includes dividends received from Textron Finance of $36 million and $52 million during
the first nine months of 1999 and 1998, respectively. Dividend payments to shareholders for the
first nine months of 1999 include four payments as opposed to the first nine months of 1998
when three payments were made. Dividend payments to shareholders for the first nine months of
1999 amounted to $188 million, an increase of $50 million over the first nine months of 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 will approximate $2.9
billion, resulting in an after-tax gain of $1.6 billion.
During the first quarter of 1999, Textron retired $553 million of long-term high coupon debt and
terminated $479 million of interest rate exchange agreements designated as hedges of the retired
borrowings. As a result, Textron recorded, as an extraordinary item, an after-tax loss of $43
million.
Textron typically finances foreign acquisitions with domestic borrowings. In most cases, such
borrowings are converted synthetically into foreign currency borrowings by means of foreign
currency exchange agreements. Under the terms of the agreements, Textron is obligated to make
floating rate foreign currency interest payments to the counterparties, and the counterparties, in
turn, are obligated to make floating rate US dollar interest payments to Textron. These payments
are recorded as an adjustment to interest expense. In June 1999, Textron entered into fixed rate
interest rate exchange agreements to fix the interest rate on the above-noted foreign currency
exchange agreements and other floating rate debt. The purpose of the fixed rate interest rate
exchange agreements, which all mature by March 21, 2000, is to insulate Textron against
potentially higher interest rates around year end 1999. The fixed rate interest rate exchange
agreements have the following notional principal amounts: $323 million in euros; $352 million
in British Pound sterling; and, $437 million in US dollars.
Textron Manufacturing's debt to total capital ratio was 21% at October 2, 1999, down from 43%
at year end.
A summary of credit line facilities is as follows:
|
Credit Facilities |
|||||
|
Textron Manufacturing |
Textron Finance |
||||
|
|
January 2, |
October 2, |
December 31, |
September 30, |
|
|
Total lines |
$2,755 |
$1,266 |
$1,200 |
$1,200 |
|
|
Amount available |
1,084 |
1,161 |
114 |
365 |
|
Early in the third quarter, Textron issued $300 million of 6-3/8% senior notes which mature in
2004. The proceeds from the sale of notes will be used for general corporate purposes. Textron
entered into two $300 million interest rate swaps in connection with these notes. The first swap
effectively converts the fixed rate notes to floating rate. The second swap is to insulate Textron
against potentially higher floating rate interest rates around year end 1999. On August 5,
Textron filed a shelf registration statement with the Securities and Exchange Commission
registering up to $2 billion in common stock, preferred stock and debt securities of Textron and
preferred securities of trusts sponsored by Textron. During the third quarter Textron issued $500
million of 6.75% senior notes due 2002 under this registration. At October 2, 1999, Textron had
$1.5 billion available under its shelf registration statement.
During the first nine months of 1999, Textron Finance increased its medium-term note facility by
$1 billion and issued $1.4 billion under the facility. Remaining under this facility at September
30, 1999 was $92 million.
During the first nine months of 1999, Textron repurchased 6.5 million shares of common stock
under its Board authorized share repurchase program at an aggregate cost of $505 million.
During the first nine months of 1999, Textron acquired 10 companies and commenced two joint
ventures. The largest of these acquisitions were Flexalloy Inc., a provider of vendor managed
inventory services for the North American fastener markets, and Omniquip International, Inc., a
leading manufacturer of light construction equipment including telescopic material handlers,
aerial work platforms and skid steer loaders. The total cost of the acquisitions and investments
in joint ventures was approximately $947 million.
Management believes that Textron will continue to have adequate access to credit markets and
that its credit facilities, cash flows from operations 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 (excluding capital lease obligations), 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
October 2, 1999 and January 2, 1999. The following table illustrates the hypothetical change in
the fair value of the Company's financial instruments at October 2, 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.
|
October 2, 1999 |
January 2, 1999 |
|||||
|
|
|
|
Hypothetical |
|
|
Hypothetical |
|
Interest Rate Risk |
||||||
|
Textron Manufacturing: |
||||||
|
Debt |
$1,266 |
$1,269 |
$22 |
$2,615 |
$2,706 |
$27 |
|
Interest rate exchange agreements |
|
|
|
|
|
|
|
Textron Finance: |
||||||
|
Finance receivables |
3,457 |
3,515 |
34 |
2,774 |
2,837 |
28 |
|
Debt |
3,603 |
3,610 |
23 |
2,829 |
2,836 |
12 |
|
Interest rate exchange agreements |
|
|
|
|
|
|
|
Foreign Exchange Rate Risk |
||||||
|
Textron Manufacturing: |
||||||
|
Debt |
206 |
207 |
21 |
319 |
334 |
33 |
|
Foreign exchange contracts |
- |
(5) |
(11) |
- |
9 |
(23) |
|
Currency swaps |
(15) |
(5) |
105 |
14 |
10 |
84 |
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 |
|
|
Level II) |
The inventory of Year 2000 items has been completed. The priority of |
|
|
Level III) |
Planning has been completed. The prescribed actions are being |
|
|
Level IV) |
Items critical to operations have been remediated and have been put in |
|
|
Level V) |
Systems critical to operations have been tested. Audits and associated |
For systems critical to operations, Textron has fully reached Readiness Level V, except for assessments and
corrective actions at two business units that were acquired during the second quarter of 1999.
Textron has had 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. Except as previously noted, all assessments are complete.
The Readiness Level of the Major Elements items that have been inventoried as of October 2,
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 |
||||
|
III |
IV |
V |
|||
|
Business Systems |
0% |
1% |
99% |
||
|
Factory and Facilities Equipment |
0% |
0% |
100% |
||
|
End-Products |
0% |
0% |
100% |
||
|
Suppliers |
0% |
6% |
94% |
||
|
Customers |
8% |
21% |
71% |
||
Year 2000 Costs
The total cost of the Year 2000 Program for continuing operations is estimated to be
approximately $113 million. Approximately $59 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 October 2, 1999, total
expenditures were $102 million. The estimated future cost to complete the Program is expected
to be approximately $11 million including approximately $3 million for replacement systems.
These future costs relate to assessments and corrections at two business units acquired in the
second quarter of 1999, the planned remediation of items that are not critical to operations,
follow-up checking of vendors and customers and continued review of contingency plans. The
Company anticipates incurring costs related to remediation of these non-critical items during the
remainder of fiscal 1999 as well as in fiscal 2000. Funds for the Program have been provided
from special project appropriations 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.
Contingency plans to cover situations in which Year 2000 problems arise despite Textron's
efforts are substantially ready. Textron is monitoring the Year 2000 readiness of critical
suppliers and has identified qualified alternate suppliers that can be substituted if necessary.
Also, Textron is prepared to increase certain inventories prior to the end of 1999 if necessary to
assure timely deliveries to critical customers. Textron has established procedures to curtail and,
if necessary, shut down production at operations affected by disruptions in services provided by
utilities. Textron is preparing facilities, procedures and alternate utility sources to support critical
communications if there are disruptions in normal communications services.
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 October 2, 1999 vs Three months ended
October 3, 1998
Diluted earnings per share from continuing operations in the third quarter of 1999 were $0.95 per
share, up 46% from the 1998 amount of $0.65. Income from continuing operations in 1999 of
$146 million was up 35% from $108 million in 1998. Revenues increased 15% to $2.7 billion in
1999 from $2.4 billion in 1998. Net income was $146 million vs $142 million in 1998, which
included $34 million from a discontinued operation.
The Aircraft segment's revenues increased $73 million (9%), while income was unchanged.
Cessna Aircraft's revenues increased $33 million as a result of higher sales of business jets,
primarily the Citation Excel and the Citation X, and higher single engine aircraft sales. Its
income decreased as the contribution from the higher sales was more than offset by increased
manufacturing costs associated with the ramp-up in production of new aircraft, higher warranty
expense and increased new product development expense related to the Citation CJ2. Bell
Helicopter's revenues increased $40 million due to higher revenues on the Huey and Cobra
upgrade and V-22 production contracts and higher foreign military sales. Bell's income
increased due primarily to a change in product mix reflecting sales of higher margin commercial
aircraft and the recognition into income ($10 million) of cash received in the fourth quarter of
1998 on the formation of a joint venture on the 609 program. These benefits were partially offset
by favorable contract adjustments in 1998 related to the Bell-Boeing V-22 Engineering,
Manufacturing and Development contract and higher expense related to new product
development.
The Automotive segment's revenues increased $128 million (24%), while income increased $9
million (31%). The increase in revenues was due primarily to higher North American market
penetration by Kautex and higher sales at Trim, reflecting increased production at
DaimlerChrysler, Ford and General Motors, which was depressed in 1998 by a strike. The
increase in revenues also reflected the benefit of the Midland Industrial Plastics acquisition and
the Textron Breed Automotive S.r.l. joint venture. Despite customer price reductions, income
increased due to the contribution from higher organic sales and improved performance at Trim
and Kautex.
The Industrial segment's revenues and income increased $133 million (15%) and $13 million
(13%), respectively. These increases reflected the contribution from acquisitions, primarily
David Brown and Flexalloy, and organic growth at Greenlee, E-Z-GO and Fastening Systems
Americas. These factors were partially offset by lower sales at Fastening Systems Europe and
the remaining businesses, reflecting weaker demand, adverse foreign exchange impact and the
timing of scheduled shipments. Overall margins approximated last year's level as the impact of
lower margin acquisitions was offset by the gain on the sale of a product line.
The Finance segment's revenues increased $23 million (23%), while income increased $5
million (15%). Revenues increased due to a higher level of average receivables and a higher
yield, partially offset by a decrease in syndication income and operating lease revenues. Income
increased as the benefit of higher revenues more than offset higher expenses related to growth in
managed receivables and a higher provision for loan losses related to the revolving credit and
term loans and leases portfolios. Included in 1999 results is a gain on the sale of an investment
of $4.7 million; 1998 included a gain on portfolio securitization of $3.4 million.
Special charges (credits) - in the third quarter, Textron recorded additional restructuring
charges for the Industrial segment ($16 million), primarily for asset impairment ($9 million) and
severance ($7 million) associated with the announced closure of seven facilities. In addition, the
company recorded a gain of $19 million as a result of shares granted to Textron from Manulife
Financial Corp.'s initial public offering on their demutualization of Manufacturers Life Insurance
Company.
Corporate expenses and other - net increased to $37 million in the third quarter of 1999,
compared to $35 million in third quarter of 1998. Included in the third quarter 1999 expenses is
a $3 million contribution to the Textron Charitable Trust. Year to date contribution expense
totals $6 million. There was no contribution to the Textron Charitable Trust for the first nine
months of 1998.
Interest income and expense - net for Textron Manufacturing decreased $30 million as a result
of the proceeds received in January 1999 from the divestiture of Avco Financial Services.
Interest income increased $4 million, as a result of Textron's net investment position, while
interest expense decreased $26 million due to a lower level of average debt, resulting from the
pay down of debt with the Avco Financial Services proceeds.
Income taxes - the current quarter's effective income tax rate of 37.2% was lower than the
corresponding prior year rate of 38.0%, due primarily to the benefit of tax planning initiatives
that are being realized in 1999.
Results of Operations - Nine months ended October 2, 1999 vs Nine months ended
October 3, 1998
Diluted earnings per share from continuing operations for the first nine months of 1999 were
$2.93 per share, up 51% from the 1998 amount of $1.94. Income from continuing operations in
1999 of $453 million was up 40% from $323 million in 1998. Revenues increased 18% to $8.3
billion in 1999 from $7.1 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 $2.03 billion vs. $448 million in 1998, which included $125 million from a
discontinued operation.
The Aircraft segment's revenues increased $271 million (12%) while income decreased $10
million (4%). Cessna's revenues increased $225 million as a result of higher sales of business
jets, primarily the Citation Excel and the Citation X, and higher single engine aircraft sales. Its
income decreased slightly as the contribution from the higher sales was more than offset by
increased manufacturing costs associated with the ramp-up in production of new aircraft, lower
margins on increased fleet sales, higher warranty expense and increased new product
development expense related to the Citation CJ2. Bell Helicopter's revenues increased $46
million, due primarily to higher revenues on the V-22 production contract and the Huey and
Cobra upgrade contracts and higher foreign military sales, partially offset by lower commercial
and U. S. Government helicopter sales. Bell's income decreased slightly due primarily to
favorable contract adjustments in 1998 related to the Bell-Boeing V-22 Engineering,
Manufacturing and Development contract, a change in product mix, reflecting lower margin
U. S. Government business and higher expense related to new product development. This
unfavorable impact was partially offset by the recognition into income ($28 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 $418 million (24%), while income increased $34
million (27%). The increase in revenues was due primarily to higher North American market
penetration by Kautex and higher sales at Trim, reflecting increased production at
DaimlerChrysler, Ford and General Motors, which was depressed in 1998 by a strike. The
increase in revenues also reflected the benefit of the Midland Industrial Plastics acquisition and
the Textron Breed Automotive S.r.l. joint venture. Despite customer price reductions, income
increased due to the contribution from higher organic sales and improved performance at Trim
and Kautex.
The Industrial segment's revenues and income increased $521 million (19%) and $65 million
(21%), respectively. These increases reflected the contribution from acquisitions, primarily
David Brown, Flexalloy, Ring Screw Works, Ransomes and Sukosim, and higher organic growth
at Greenlee and E-Z-Go. In addition, 1998 results were depressed by a one-month strike at
Textron's Jacobsen plant and a strike at General Motors. These benefits were partially offset by
the divestiture of Fuel Systems in the second quarter 1998 and lower sales at Fastening Systems
Europe and the remaining businesses, reflecting weaker demand and adverse foreign exchange
impact. Overall margins approximated last year's level as the impact of lower margin
acquisitions was offset by the gain on the sale of a product line.
The Finance segment's revenues increased $47 million (17%), while income increased $9
million (11%). Revenues increased due to a higher level of average receivables and an increase
in servicing fee income, partially offset by lower yields on receivables and a decrease in
operating lease revenues. Income increased as the benefit of higher revenues more than offset
higher expenses related to growth in managed receivables and a higher provision for loan losses
related to the revolving credit and term loans and leases portfolios. Included in the 1999 results
is a gain on the sale of investment of $4.7 million; 1998 included a gain on portfolio
securitization of $3.4 million.
Special charges (credits) - in the second quarter of 1999, Textron reassessed the remaining
actions anticipated in the special charge recorded in the second quarter of 1998 and determined
that certain projects should be delayed or canceled while other provisions were no longer
necessary. Specifically, provisions for severance and exit costs associated with the decision to
exit certain automotive product lines were no longer required due to a decision to build different
products in a plant originally anticipated to be closed. In the Industrial segment, certain cost
reduction programs in the Fluid and Power Systems Group have been suspended as a result of
management's evaluation of the opportunities presented by the David Brown acquisition. Some
smaller programs have been delayed as Textron re-examines strategic alternatives. Others were
completed at costs less than originally anticipated.
Concurrently, Textron initiated a series of new cost reduction efforts in the Industrial segment
designed to significantly reduce headcount from levels at the beginning of the year. Significant
actions include the downsizing of an underperforming plant in Europe and targeted headcount
reductions across all Industrial divisions. Headcount reductions were also effected at Bell
Helicopter.
As a result of the above, in the second quarter Textron reversed approximately $24 million of
reserves no longer deemed necessary for the 1998 program and recorded a provision of
approximately $21 million for severance and write downs of approximately $5 million for
impaired assets.
In the third quarter, Textron recorded additional restructuring charges for the Industrial segment
($16 million), primarily for asset impairment ($9 million) and severance ($7 million) associated
with the announced closure of seven facilities. In addition, the Company recorded a gain of $19
million as a result of shares granted to Textron from Manulife Financial Corp.'s initial public
offering on their demutualization of Manufacturers Life Insurance Company. Textron continues
to evaluate additional programs and expects cost reduction efforts to continue over the next year.
Additional charges may be required in the future when such programs become finalized.
Interest income and expense - net for Textron Manufacturing decreased $105 million as a
result of the proceeds received in January 1999 from the divestiture of Avco Financial Services.
Interest income increased $26 million, as a result of Textron's net investment position, while
interest expense decreased $79 million due to a lower level of average debt, resulting from the
pay down of debt with the Avco Financial Services proceeds.
Income taxes - the effective income tax rate of 37.1% for the first nine months of 1999 was
lower than the corresponding prior year rate of 39.3%, due primarily to the nontax deductibility
of goodwill related to the second quarter 1998 divestiture of Fuel Systems Textron and the
benefit of tax planning initiatives that are being realized in 1999.
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 13 for updated information.
PART II. OTHER INFORMATION
|
Item 1. |
LEGAL PROCEEDINGS |
||
|
The previously reported proceeding brought by the U.S. Environmental |
|||
|
On August 13, 1999, Kautex Textron's Wilmington Ohio plant had an order |
|||
|
Item 6. |
EXHIBITS AND REPORTS ON FORM 8-K |
||
|
(a) |
Exhibits |
||
|
12.1 |
Computation of ratio of income to combined fixed charges |
||
|
12.2 |
Computation of ratio of income to combined fixed charges |
||
|
27 |
Financial Data Schedule (filed electronically only) |
||
|
(b) |
Reports on Form 8-K |
||
|
No reports on Form 8-K were filed during the third quarter ended |
|||
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: |
November 8, 1999 |
s/R. L. Yates |
|
|
R. L. Yates |
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 |
|
12.2 |
Computation of ratio of income to combined fixed charges and preferred securities |
|
27 |
Financial Data Schedule (filed electronically only) |
|
|