.
.
.
Exhibit 13
Business Segment Data
SEGMENT
(In millions) REVENUES SEGMENT PROFIT* PROFIT MARGINS
------------------------------ --------------------------- ----------------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
-------- -------- -------- ------ ------ ------ ------ ------ ------
Aircraft $ 4,922 $ 4,797 $ 4,537 $ 452 $ 338 $ 475 9.2% 7.0% 10.5%
Fastening Systems 1,650 1,679 1,996 68 62 192 4.1 3.7 9.6
Industrial Products 1,841 1,974 2,248 83 106 296 4.5 5.4 13.2
Industrial Components 1,615 3,162 3,618 115 215 341 7.1 6.8 9.4
Finance 630 709 691 117 205 202 18.6 28.9 29.2
------- ------- ------- ----- ----- ------ ---- ---- ----
$10,658 $12,321 $13,090 $ 835 $ 926 $1,506 7.8% 7.5% 11.5%
======= ======= ======= ==== ==== ====
Special charges** (128) (437) (483)
----- ----- ------
Segment operating income 707 489 1,023
Gain on sale of businesses, net 5 342 --
Goodwill amortization -- (98) (96)
Corporate expenses and other, net (114) (152) (164)
Interest expense, net (108) (162) (152)
----- ----- ------
Income before income taxes and distribution
on preferred securities $ 490 $ 419 $ 611
===== ===== ======
* Segment profit represents the measurement used by Textron to evaluate
performance for decision making purposes. Segment profit for manufacturing
segments does not include interest expense, certain corporate expenses,
goodwill amortization, special charges and gains and losses from the
disposition of significant business units. The measurement for the finance
segment includes interest income, interest expense and distributions on
preferred securities of Finance subsidiary trust, and excludes special
charges and goodwill amortization.
** Special charges includes goodwill, other intangible asset and investment
impairment write-downs and restructuring expenses. In 2002, special
charges totaled $34 million in Industrial Products, $28 million in
Aircraft, $18 million in Fastening Systems, $9 million in Industrial
Components and $39 million in Corporate. In 2001, special charges totaled
$337 million in Industrial Products, $44 million in Fastening Systems, $31
million in Industrial Components, $6 million in Aircraft, $3 million in
Finance and $16 million in Corporate. In 2000, special charges totaled
$214 million in Industrial Components, $128 million in Fastening Systems,
$24 million in Industrial Products and $117 million in Corporate.
2002 REVENUES
[PIE CHART]
Finance $630 6%
Industrial Products $1,841 17%
Aircraft $4,922 46%
Fastening Systems $1,650 16%
Industrial Components $1,615 15%
2002 SEGMENT PROFIT
[PIE CHART]
Finance $117 14%
Industrial Products $83 10%
Aircraft $452 54%
Fastening Systems $68 8%
Industrial Components $115 14%
FINANCIAL TABLE OF CONTENTS
18 Business Segment Data
19 Management's Discussion and Analysis
35 Report of Management, Report of Independent Auditors
36 Consolidated Financial Statements
41 Notes to Consolidated Financial Statements
68 Quarterly Data
69 Selected Financial Information
70 Textron Leadership
72 Shareholder Information
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Revenues
[BAR CHART]
00 10% $13,090
01 (6%) $12,321
02 (13%) $10,658
Earnings per Share *
[BAR CHART]
00 (53%) $1.90
01 (39%) $1.16
02 124% $2.60
* Income from operations - diluted
TEXTRON INC.
2002 vs. 2001
Revenues decreased to $10.7 billion in 2002 from $12.3 billion in 2001,
primarily due to the divestitures of Automotive Trim (Trim), Turbine Engine
Components Textron (TECT) and a number of other businesses that contributed
$1.7 billion to the decrease. Excluding the divestitures, higher sales in
Aircraft and Industrial Components were partially offset by lower sales in
Industrial Products and Finance, as more fully discussed in the segment
commentary that follows. Income before cumulative effect of change in
accounting principle, net of income taxes, was $364 million for 2002 compared
to $166 million for 2001. Diluted earnings per share before cumulative effect
of change in accounting principle, net of income taxes, were $2.60 in 2002
and $1.16 in 2001. Including the impact of the change in accounting
principle, Textron recorded a net loss of $124 million or $0.88 per share for
2002, compared to net income of $166 million or $1.16 per share for 2001.
During 2002, Textron recognized pre-tax special charges of $128 million, a
net pre-tax gain of $5 million on the sale of businesses and recorded a
cumulative effect of change in accounting principle, net of income taxes, of
$488 million. In 2001, Textron recognized pre-tax special charges of $437
million and a pre-tax gain of $342 million on the sale of two businesses.
Special charges of $128 million in 2002 included restructuring expense of $90
million and a write-down of $38 million related to Textron's common stock
holdings in Collins and Aikman Corp. Special charges of $437 million in 2001
included goodwill and other intangible asset impairment charges of $319
million, restructuring expense of $109 million and e-business investment
losses of $9 million.
Textron recorded a net $5 million pre-tax gain on the sale of businesses in
2002. In the second quarter of 2002, a $25 million pre-tax gain was recorded
from transactions related to the divestiture of Trim in 2001. In the fourth
quarter of 2002, a $20 million pre-tax loss was recorded on the sale of
Snorkel and the OmniQuip Textron Inc. holding company to Elwood Holdings,
LLC. This transaction created a tax benefit related to the goodwill write-off
of OmniQuip Textron Inc. in 2001, at which time only a portion of the tax
benefit was realized, resulting in an after-tax gain of $34 million. In 2001,
Textron recorded a $342 million gain on the sale of two businesses. In the
fourth quarter of 2001, a gain of $339 million was recorded on the sale of
Trim to Collins & Aikman Products Co., a subsidiary of Collins & Aikman
Corporation (C&A) and, in the third quarter of 2001, a gain of $3 million was
recorded on the sale of TECT.
In January 2002, Textron reorganized management responsibility for several
divisions which were previously reported in the Automotive and Industrial
Products segments into the newly created Industrial Components segment. The
Industrial Components segment includes the Fluid Handling Products and Power
Transmission Products divisions, the former Automotive divisions and TECT. In
addition, management responsibility for Textron Lycoming was transferred to
the Aircraft segment.
Effective December 30, 2001, Textron adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets".
Under this Statement, goodwill and certain assets with indefinite lives are
no longer amortized and must be tested for impairment annually. Textron also
adopted the remaining provisions of SFAS No. 141 "Business Combinations" on
December 30, 2001, which requires intangible assets that do not meet the new
criteria set by this Statement to be classified as goodwill upon adoption.
Amortization will continue to be recorded on other intangible assets not
classified as goodwill. In 2001, reported pro forma net income excluding
amortization of goodwill was $254 million, or $1.78 per diluted share. To
reflect the adoption of SFAS No. 142 and the fact that Textron does not
include amortization of goodwill in its internal evaluation of segment
performance, Textron has recast its segment data for comparability by
reclassifying goodwill amortization out of segment profit in prior periods.
During 2002, Textron recorded an after-tax transitional goodwill impairment
charge of $488 million, which is reported in the caption "Cumulative effect
of change in accounting principle, net of income taxes". This after-tax
charge relates to the following segments: $274 million in Industrial
Products; $111 million in Industrial Components; $88 million in Fastening
Systems; and $15 million in Finance. For Industrial Products, the primary
factor resulting in the impairment charge was the difficult economic
environment in the telecommunication industry which has experienced a
significant decline in demand. This decline has resulted in lower sales and
operating margins than originally anticipated with the acquisitions
19
of the InteSys and Tempo businesses. For Industrial Components and Fastening
Systems, the primary factor was the decline in demand in certain industries
in which these segments operate due to the economic slowdown. The Finance
segment's impairment charge was in its franchise finance division and was
primarily the result of decreasing loan volumes and an unfavorable
securitization market. No impairment charge was appropriate for these
segments under the previous goodwill impairment accounting standard, which
Textron applied based on undiscounted cash flows.
Segment profit of $835 million in 2002 decreased $91 million from $926
million in 2001 primarily due to low volume manufacturing inefficiencies, the
divestitures of Trim and TECT, which contributed $95 million to the decrease,
lower results in the Finance segment, changes in sales volume and an
unfavorable mix, the cost related to the recall, inspection and customer care
program at the aircraft engine business and an increase in reserves for
receivables and inventory. These decreases were partially offset by
unfavorable 2001 profit adjustments at Bell Helicopter, the benefit of
restructuring activities and higher pricing. The preceding items are
discussed more fully in the segment commentary that follows.
Corporate expenses and other, net decreased $38 million primarily due to $15
million in lower stock-based compensation and related hedge costs, royalty
income of $13 million in 2002 related to the Trim divestiture, lower costs of
$5 million as a result of organizational changes made in the third quarter of
2001 and higher income of $4 million related to retirement plans, partially
offset by an increase of $7 million in product liability reserves related to
exited businesses.
Interest expense, net decreased $54 million primarily due to the benefit of
$45 million as a result of a lower level of average debt primarily from the
pay down of debt with the proceeds from the divestiture of Trim, the benefit
of a lower interest rate environment and the receipt of $5 million for
accumulated interest on the preferred shares that C&A repurchased.
Income taxes - The effective tax rate for 2002 was 20.4% compared to the
federal statutory income tax rate of 35.0%. The lower effective rate was
primarily due to the tax impact of 9.5% related to the sale of the Snorkel
business and the OmniQuip Textron Inc. holding company, a favorable change in
the tax law related to the deductibility of dividends paid on company stock
held by an employee stock ownership plan of 3.7% (1.8% of this reduction
represents a nonrecurring benefit upon implementation of the new tax law), a
benefit of 2.5% for a tax refund as a result of the settlement of a prior
year tax dispute and 1.8% related to the benefit from export sales, partially
offset by the impact of 2.1% for state income taxes and 1.4% for permanent
items related to the divesture of Trim. The effective tax rate for 2001 was
54.2% compared to the federal statutory income tax rate of 35.0%. The higher
effective rate was primarily due to the impact of 22.3% for the non-tax
deductibility of goodwill written off in 2001, 2.7% for permanent items
related to the divesture of Trim and 2.7% for state income taxes, partially
offset by 2.9% related to the benefit from export sales.
OUTLOOK
At this time, there are no indications that the weakened economy has begun to
recover. Textron anticipates its markets will remain sluggish during 2003.
Total revenues are expected to be down about 6%, primarily as a result of
lower jet deliveries at Cessna Aircraft. To strengthen operating efficiencies
and better align its operations with current economic and market conditions,
Textron will continue to incur restructuring charges from its previously
announced program through 2004. As a result of strong cost reduction
programs, Textron expects to improve segment margins in 2003.
2001 vs. 2000
Revenues decreased to $12.3 billion in 2001 from $13.1 billion in 2000,
primarily due to softening sales in most short-cycle businesses and pricing
pressures, partially offset by higher aircraft sales. Net income was $166
million for 2001, down from $218 million in 2000. Diluted earnings per share
before the cumulative effect of change in accounting principle, net of income
taxes, were $1.16 in 2001 and $1.90 in 2000. During 2001, Textron recognized
special charges of $437 million and a gain of $342 million on the sale of
Trim and TECT. In 2000, Textron recognized $483 million in special charges
and recorded a cumulative effect of a change in accounting principle, net of
income taxes, of $59 million for the adoption of the EITF consensus on Issue
No. 99-5 "Accounting for Pre-Production Costs Related to Long Term Supply
Arrangements".
Special charges of $437 million in 2001 included goodwill and other
intangible asset impairment charges of $319 million, restructuring expense of
$109 million and e-business investment losses of $9 million. Special charges
of $483 million in 2000 included goodwill impairment charges of $349 million,
e-business investment losses of $117 million and restructuring expenses of
$17 million.
20
Segment profit of $926 million in 2001 decreased $580 million from $1,506
million in 2000 due to lower sales volumes and pricing pressures at
Industrial Components, Fastening Systems and Industrial Products, lower
profit at Bell Helicopter due primarily to reduced profitability on certain
military contracts and commercial helicopter programs, manufacturing
inefficiencies resulting from reduced production at Fastening Systems and
Industrial Products, and $34 million in costs related to restructuring
incurred in 2001. These negative factors were partially offset by higher
Citation business jet volume at Cessna Aircraft, the benefit of restructuring
and other cost reduction activities and an increase in syndication and
securitization income in the Finance segment. The preceding items are
discussed more fully in the segment commentary that follows.
Corporate expenses and other, net decreased $12 million, due primarily to the
impact of organizational changes made in 2000.
Interest expense, net for Textron Manufacturing increased $10 million.
Interest expense increased $4 million due to a higher level of average debt,
primarily as a result of lower cash flow from operations during the first
nine months of 2001, partially offset by the benefit of a lower interest rate
environment. Interest income decreased $6 million due to the settlement of a
note receivable in 2000.
Income Taxes - the effective tax rate for 2001 was 54.2% compared to the
federal statutory income tax rate of 35.0%. The higher effective rate was
primarily due to the impact of 22.3% for the non-tax deductibility of
goodwill written off in 2001, 2.7% for permanent items related to the
divesture of Trim and 2.7% for state income taxes, partially offset by 2.9%
related to the benefit from export sales. The effective tax rate for 2000 was
50.4% compared to the federal statutory income tax rate of 35.0%. The higher
effective rate was primarily due to the impact of 19.0% for the non-tax
deductibility of goodwill written-off during 2000 and 3.8% for state income
taxes, partially offset by 1.9% related to the benefit from export sales.
AIRCRAFT
Revenues
[BAR CHART]
00 9% $4,537
01 6% $4,797
02 3% $4,922
Segment Profit
[BAR CHART]
00 24% $475
01 (29%) $338
02 34% $452
AIRCRAFT
2002 vs. 2001
The Aircraft segment's revenues and profit increased $125 million and $114
million, respectively.
- - Cessna Aircraft's revenues increased $110 million primarily due to higher
sales volume of used aircraft of $125 million, higher pricing of $115 million
(including the favorable impact of $68 million related to the expiration of
lower introductory pricing on certain business jet models), higher spare
parts and service sales of $17 million and higher Caravan sales of $9
million. These increases were partially offset by $89 million in lower sales
volume of single engine piston aircraft and aircraft engines, lower Citation
business jet volume of $49 million and higher trade-in allowances of $15
million for used aircraft. Profit decreased $28 million reflecting cost of
$31 million related to the recall, inspection and customer care program at
the Lycoming aircraft engine business as described below. Excluding the
impact of the above program at Lycoming, profit increased $3 million due to
higher pricing of $115 million and the net benefit of $5 million from
restructuring activities, partially offset by inflation of $60 million, the
impact of $26 million for trade-in allowances and inventory write-downs
related to the valuation of used aircraft, an unfavorable sales mix of $19
million (due to higher volume of used aircraft at minimal contribution) and
start-up costs of $14 million for the new Sovereign business jet.
In August 2002, the Lycoming aircraft engine business recalled approximately
950 airplane engines to replace potentially faulty crankshafts manufactured
by a third party supplier. In conjunction with a Federal Aviation
Administration (FAA) directive, aircraft with these engines have been
grounded. After detecting a potentially defective crankshaft in an aircraft
beyond the group included in the August recall, Lycoming and the FAA mandated
inspection of all turbocharged aircraft with engines that use this specific
component. This precautionary measure applies to an additional 736 engines,
which are being tested in the field within the next 50 hours of operation or
within six months, whichever comes first. Lycoming anticipates that only a
portion of the crankshafts in the additional engines will need to be
replaced. Lycoming has initiated a comprehensive customer care program to
replace the defective crankshafts, make any necessary related repairs, and
compensate its customers for the loss of use of their aircraft during the
recall. Textron is continuing to monitor performance of the crankshafts
previously supplied by the third party supplier to ensure that the current
recall, inspection and customer care program adequately covers all engines
with potentially faulty crankshafts. It is possible that additional engines
outside of the current recall could potentially be affected. Lycoming also
initiated a program for the inspection and possible replacement of
potentially defective zinc-plated bolts manufactured by a third party
supplier for use in certain aircraft engines. Textron's reserves for the
recall, inspection and customer care program are based on management's best
estimate as of December 28, 2002. Actual costs could
21
vary depending upon the actual experience of the program, recoveries received
from third parties or an expansion of the existing program.
During 2002, Citation business jet deliveries decreased to 307 jets from a
record 313 in 2001 resulting in lower business jet volume. The current
downturn in the business jet market has caused Cessna to reduce its
production for 2003, scheduling about 220 jet deliveries. Cessna has
responded to the market downturn by realigning its cost structure to
anticipated market demand. Cessna's backlog as of December 28, 2002 includes
new Citation business jet models currently under development which are
scheduled to begin delivery in 2004. Cessna's wide array of products and its
strong backlog, combined with an improved cost structure should put Cessna in
a position to grow when its markets recover.
- - Bell Helicopter's revenues increased $15 million due to higher revenue of $93
million from the U.S. Government, partially offset by lower commercial sales
of $78 million. U. S. Government revenues increased primarily due to higher
revenue of $130 million on the V-22 program, partially offset by lower
revenue of $25 million on the Huey and Cobra upgrade contracts. Sales in the
commercial business primarily reflected lower commercial aircraft sales of
$96 million, partially offset by higher commercial spares and service sales
of $44 million. Bell's profit increased $142 million primarily as a result of
unfavorable 2001 profit adjustments of $149 million, including $124 million
related to reduced profitability expectations or losses on certain
development and production contracts and $25 million related primarily to
receivable and inventory reserve increases. Excluding the 2001 profit
adjustments, profit decreased $7 million as a result of lower profit of $30
million in the commercial business, partially offset by higher profit of $13
million in the U.S. Government business and $10 million in cost incurred in
2001 related to outsourcing the manufacture of certain parts. Lower profit of
$30 million in the commercial helicopter business primarily reflected reduced
pricing of $20 million related to one commercial helicopter model, increased
production and warranty costs of $20 million, increased reserves of $15
million related primarily to receivables, lower income of $11 million ($6
million in 2002 vs. $17 million is 2001) from a joint venture partner related
to the BA609 program, a lower contribution of $9 million from the decrease in
commercial helicopter sales and increased costs of $9 million on a foreign
military contract, partially offset by lower product development costs of $30
million and a benefit of $18 million related to the higher spares and service
sales.
In December 2000, the U.S. Marine Corps temporarily restricted use of their
V-22 tiltrotor aircraft pending an investigation by the Department of Defense
of a mishap. In April 2001, a Blue Ribbon Panel appointed by the U.S.
Secretary of Defense recommended specific changes to the software and
hydraulic systems and issued its unanimous recommendation for continuation of
the program. As authorized by an Acquisition Decision Memorandum signed by
the Department of Defense in December 2001, the V-22 program continues to
proceed at low-rate production levels. The V-22 returned to flight operations
in May 2002 for extensive flight testing which is a prerequisite for
returning to operational use. In August 2002, Bell was awarded a modification
to its contract for the next two lots, totaling twenty aircraft, and in
January 2003, a contract was awarded for long lead efforts on an additional
11 aircraft.
Revenues under the V-22 low-rate initial production contract are recorded as
costs are incurred, primarily due to the significant engineering effort
required over a lengthy period of time during the initial development stage
in relation to total contract volume. Under the low-rate production releases,
Textron continues to manufacture aircraft which may subsequently be modified
for engineering changes. Beginning with new production releases in 2003, the
development effort will be substantially completed. As a result, revenue on
new production releases will be recognized as units are delivered.
2001 vs. 2000
The Aircraft segment's revenues increased $260 million, while profit
decreased $137 million.
- - Cessna Aircraft's revenues increased $219 million due to higher sales volume
of Citation business jets of $223 million, higher pricing of $111 million and
higher spare parts and service sales of $16 million. These increases were
partially offset by lower sales of used aircraft of $47 million, lower sales
volume of single engine piston aircraft and aircraft engines of $25 million,
higher trade-in allowances of $25 million for used aircraft and lower Caravan
sales of $22 million. Profit increased $47 million primarily as a result of
higher pricing of $111 million, improved cost performance of $20 million and
the contribution of $14 million from the higher volume, partially offset by
inflation of $37 million, the impact of $34 million for trade-in allowances
and inventory write-downs related to the valuation of used aircraft and
higher product development expense of $27 million related to the Sovereign
business jet.
- - Bell Helicopter's revenues increased $41 million due to higher revenue of $79
million from the U.S. Government, partially offset by lower commercial sales
of $38 million. U.S. Government revenues increased primarily due to higher
revenue of $54 million on the V-22. Sales in the commercial business
primarily
22
reflected lower foreign military sales of $74 million, partially offset by
higher commercial spares and service sales of $21 million. Bell's profit
decreased $184 million primarily due to $124 million related to reduced
profitability expectations or losses on certain development and production
contracts and $25 million related primarily to receivable and inventory
reserve increases. The reduced profitability expectations were based on
program reviews in the second half of 2001, and reflect the clarification of
several matters including extended development schedules and planned design
changes on a number of programs, as well as ongoing development efforts.
Profit also decreased due to higher selling and administrative expense of $24
million, primarily related to hardware and software system upgrades, lower
income of $13 million ($17 million in 2001 vs. $30 million in 2000) from a
joint venture related to the BA609 program, $10 million of cost related to
outsourcing the manufacture of certain parts and the contribution of $9
million from lower foreign military sales, partially offset by a benefit of
$10 million related to the higher spares and service sales and a favorable
LIFO inventory reserve adjustment of $8 million from a reduction in
inventories.
FASTENING SYSTEMS
Revenues
[BAR CHART]
00 (3%) $1,996
01 (16%) $1,679
02 (2%) $1,650
Segment Profit
[BAR CHART]
00 (6%) $192
01 (68%) $62
02 10% $68
FASTENING SYSTEMS
2002 vs. 2001
The Fastening Systems segment's revenues decreased $29 million, while profit
increased $6 million. The revenue decrease was primarily due to the
divestiture of non-core product lines of $30 million and customer price
reductions of $29 million, partially offset by the favorable impact of
foreign exchange of $27 million in the European operations and higher sales
volume of $3 million. Profit increased primarily due to the improved cost
performance of $40 million and the impact of a $5 million loss on the sale of
non-core product lines in 2001, partially offset by customer price reductions
of $29 million and a reduced contribution of $11 million from an unfavorable
mix.
2001 vs 2000
The Fastening Systems segment's revenues and profit decreased $317 million
and $130 million, respectively. The revenue decrease was primarily due to
lower sales volume of $266 million as a result of depressed market demand in
most businesses, customer price reductions of $37 million and the unfavorable
impact of foreign exchange of $20 million in the European operations,
partially offset by the contribution of $6 million from acquisitions. Profit
decreased primarily due to a reduced contribution of $67 million from the
lower sales volume, customer price reductions of $37 million, unfavorable
cost performance of $11 million, a customer warranty issue of $7 million and
a $5 million loss on the sale of a non-core product line. The unfavorable
cost performance of $11 million related to low volume manufacturing
inefficiencies, primarily as a result of production decreases to reduce
inventory levels and the impact of smaller lot sizes, partially offset by the
net benefit of restructuring activities of $19 million.
INDUSTRIAL PRODUCTS
Revenues
[BAR CHART]
00 38% $2,248
01 (12%) $1,974
02 (7%) $1,841
Segment Profit
00 28% $296
01 (64%) $106
02 (22%) $83
INDUSTRIAL PRODUCTS
2002 vs. 2001
The Industrial Products segment's revenues and profit decreased $133 million
and $23 million, respectively. Revenues decreased in most of the segment's
businesses primarily due to lower sales of $133 million from depressed
markets and the divestiture of non-core product lines of $20 million during
2001, partially offset by higher revenues of $13 million in the aerospace and
defense business. Profit decreased primarily due to a reduced contribution of
$67 million from the lower sales volume, a $32 million increase in receivable
reserves and the nonrecurring impact of a gain of $5 million on the sale of a
product line in 2001, partially offset by improved cost performance of $72
million, including the benefit of $49 million from restructuring activities,
and the favorable impact of $7 million from losses recorded in 2001 related
to divested product lines.
2001 vs. 2000
The Industrial Products segment's revenues and profit decreased $274 million
and $190 million, respectively. Revenues decreased in most of the segment's
businesses primarily due to lower sales of $349 million from depressed
markets, with the largest decreases in the light construction equipment and
the golf car and turf care businesses, partially offset by the contribution
of $50 million from acquisitions and higher revenues of $27 million in the
aerospace and defense business. Profit decreased primarily due to unfavorable
cost performance of $102 million and a reduced contribution of $100 million
from the lower sales volume, partially offset by the contribution of $9
million from acquisitions and a $5 million gain on the sale of a small
product line. The unfavorable cost performance of $102 million, primarily in
the light construction, golf car and turf care businesses, was primarily
caused by manufacturing inefficiencies of $110 million resulting from reduced
production and the shut-down of certain facilities in an effort to reduce
inventory levels, a write-down of $16 million of used golf car and other
inventories, the impact of $12 million of higher rebates to stimulate sales
and an increase of $12 million in the reserve for receivables,
23
partially offset by the net benefit of $49 million from restructuring
activities. During 2001, Textron recorded an impairment charge at OmniQuip of
$317 million, including goodwill of $306 million and intangibles of $11
million, as discussed in the "Special Charges" section.
INDUSTRIAL COMPONENTS
Revenues
[BAR CHART]
00 2% $3,618
01 (13%) $3,162
02 (49%) $1,615
Segment Profit
[BAR CHART]
00 5% $341
01 (37%) $215
02 (47%) $115
INDUSTRIAL COMPONENTS
2002 vs. 2001
The Industrial Components segment's revenues and profit decreased $1,547
million and $100 million, respectively. Revenues and profit declined $1.666
billion and $94 million, respectively, due to the divestitures of Trim, TECT
and several small product lines in 2001. Excluding the divestitures, revenues
increased $119 million while profit decreased $6 million. The revenue
increase was primarily due to higher sales volume of $166 million at Kautex,
primarily as a result of new product launches and a stronger automotive
market, and the favorable impact of foreign exchange of $27 million,
partially offset by lower volume of $51 million in the industrial businesses
as a result of soft markets and customer price reductions of $23 million.
Excluding the divestitures, the profit decrease was primarily due to customer
price reductions of $23 million and the nonrecurring impact of a gain of $7
million on the sale of a product line in 2001, partially offset by improved
cost performance of $12 million and a contribution of $10 million from the
higher volume.
2001 vs. 2000
The Industrial Components segment's revenues and profit decreased $456
million and $126 million, respectively. Revenues decreased due to lower
volume of $334 million, primarily due to North American automotive original
equipment manufacturer production decreases, the divestiture of non-core
product lines of $92 million, customer price reductions of $75 million and
the unfavorable impact of foreign exchange of $20 million, partially offset
by the contribution from acquisitions of $65 million. Profit decreased due to
the reduced contribution of $99 million from the lower sales, customer price
reductions of $75 million, the lower contribution of $7 million from the sale
of non-core product lines and the unfavorable impact of $6 million from
foreign exchange, partially offset by improved cost performance of $52
million and a $7 million gain on the sale of a small product line.
FINANCE
Revenues
00 49% $691
01 3% $709
02 (11%) $630
Segment Profit
00 53% $202
01 1% $205
02 (43%) $117
FINANCE
2002 vs. 2001
The Finance segment's revenues and profit decreased $79 million and $88
million, respectively. Revenues decreased primarily due to lower average
yields on finance receivables of $95 million (7.7% in 2002, compared to 9.4%
in 2001) reflecting the lower interest rate environment, primarily due to
reductions in the prime rate, partially offset by $8 million due to higher
average finance receivables and higher operating lease revenue of $8 million.
Profit decreased due to a higher provision for losses of $57 million ($139
million in 2002 vs. $82 million in 2001), higher operating expenses of $21
million and lower interest margin (7.18% in 2002 and 7.55% in 2001) of $10
million, primarily due to higher relative borrowing costs. The increase in
the provision for losses reflects higher net charge-offs of $54 million and
the strengthening of the allowance for losses on receivables. Higher net
charge-offs reflect increases primarily in liquidating portfolios including
syndicated bank loans, principally related to the telecommunication industry,
and small business finance. The allowance for losses on receivables as a
percentage of total finance receivables was 2.9% at December 28, 2002,
compared to 2.6% at December 29, 2001. The increase in operating expenses was
primarily related to higher legal and collection expenses of $16 million and
higher expenses of $6 million related to growth in managed receivables.
The Finance segment's nonperforming assets include nonaccrual accounts that
are not guaranteed by Textron Manufacturing, for which interest has been
suspended, and repossessed assets. During 2002, nonperforming assets
increased $84 million to 3.33% of finance assets from 2.13% at December 29,
2001. The significant components of this increase include $35 million in
resort finance, $21 million in aircraft finance, $17 million in media finance
and $12 million in franchise finance. Textron Finance estimates that
nonperforming assets will generally be in the range of 2-4% of finance assets
depending on economic conditions. Textron Finance expects modest improvements
in portfolio quality as it liquidates certain portfolios. However, a
prolonged economic downturn could have a negative effect on the overall
portfolio quality. The allowance for losses on receivables as a percentage of
nonaccrual finance receivables was 92% at December 28, 2002, compared to 126%
at December 29, 2001. The decrease in the percentage represents an increase
in nonaccrual finance receivables at December 28, 2002, supported by strong
collateral.
24
2001 vs 2000
The Finance segment's revenues and profit increased $18 million and $3
million, respectively. Revenues increased primarily due to higher syndication
and securitization income of $31 million ($68 million in 2001 vs. $37 million
in 2000), a $14 million gain from a leveraged lease prepayment, higher
servicing fees of $12 million and higher investment and other income of $20
million, partially offset by a lower average yield of $66 million reflecting
the lower interest rate environment. Profit increased primarily due to higher
interest margin (7.55% in 2001 vs. 6.17% in 2000) of $82 million primarily
due to higher syndication and securitization gains, investment income and
other income, partially offset by a higher provision for losses of $45
million ($82 million in 2001 vs. $37 million in 2000) as a result of higher
net charge-offs of $29 million, and higher operating expenses of $35 million
primarily related to managed receivables.
SPECIAL CHARGES AND OTHER COSTS RELATED TO RESTRUCTURING
Textron recorded $128 million, $437 million and $483 million in special
charges in 2002, 2001 and 2000, respectively. The table below summarizes the
special charges which include the write-down of goodwill, other intangibles
and investments along with restructuring expenses associated with a) reducing
overhead, and closing, consolidating and downsizing manufacturing facilities,
b) corporate personnel reductions and c) outsourcing, consolidating
operations and exiting non-core product lines.
Restructuring Expense Goodwill,
-------------------------------------------------- Intangible and Total
Severance Facility Fixed Asset Investment Special
(In millions) Costs and Other Write-downs Total Impairment Charges
- ------------- --------- --------- ----------- ----- --------------- -------
2002
Aircraft $ 26 $-- $ 2 $ 28 $-- $ 28
Fastening Systems 12 2 4 18 -- 18
Industrial Products 13 2 19 34 -- 34
Industrial Components 6 1 2 9 -- 9
Finance -- -- -- -- -- --
Corporate 1 -- -- 1 38 39
---- -- ---- ---- ---- ----
$ 58 $5 $ 27 $ 90 $ 38 $128
==== == ==== ==== ==== ====
2001
Aircraft $ 6 $-- $ -- $ 6 $-- $ 6
Fastening Systems 22 2 18 42 2 44
Industrial Products 16 1 3 20 317 337
Industrial Components 24 -- 7 31 -- 31
Finance 2 1 -- 3 -- 3
Corporate 7 -- -- 7 9 16
---- -- ---- ---- ---- ----
$ 77 $4 $ 28 $109 $328 $437
==== == ==== ==== ==== ====
2000
Aircraft $-- $-- $ -- $-- $-- $--
Fastening Systems -- -- -- -- 128 128
Industrial Products 7 1 -- 8 16 24
Industrial Components 8 -- 1 9 205 214
Finance -- -- -- -- -- --
Corporate -- -- -- -- 117 117
---- -- ---- ---- ---- ----
$ 15 $1 $ 1 $ 17 $466 $483
==== == ==== ==== ==== ====
RESTRUCTURING PROGRAM
In the fourth quarter of 2000, Textron initiated its restructuring program to
strengthen operating efficiencies and better align its operations with
current economic and market conditions. Projects include corporate and
segment workforce reductions, consolidation of facilities primarily in the
United States and Europe, rationalization of certain product lines,
outsourcing of non-core production activity, the divestiture of non-core
businesses and streamlining of sales and administrative overhead. In October
2002, Textron announced an expansion of its restructuring program as part of
its strategic effort to improve operating efficiencies, primarily in its
industrial businesses. With this expanded program, Textron expects a total
reduction of at least 9,500 employees, excluding approximately 700 Trim
employees, representing approximately 16% of its global workforce since the
restructuring was first announced.
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As of December 28, 2002, Textron has reduced its workforce by approximately
8,100 employees, including approximately 2,500 in Industrial Products, 2,000
in Fastening Systems, 2,000 in Industrial Components, 1,400 in Aircraft and
200 in Finance and Corporate. Additionally, 81 facilities, including 36
manufacturing plants with 3.1 million square feet of floor space, have been
closed primarily in the Industrial Products, Industrial Components and
Fastening Systems segments.
Total program costs, including costs related to restructuring, are estimated
at $486 million and include $11 million related to Trim. As of December 28,
2002, $272 million has been incurred including $11 million related to Trim.
Restructuring savings were $253 million in 2002 and are expected to be at
least $325 million in 2003 and $400 million in 2004.
Other costs related to restructuring, but not accruable under EITF No. 94-3,
of $22 million in 2002 and $34 million in 2001 were included in segment
profit as incurred. For 2002, costs related to restructuring totaled $8
million in Industrial Products, $6 million in Industrial Components, and $4
million each for Aircraft and Fastening Systems. For 2001, costs related to
restructuring totaled $10 million for Aircraft and $8 million each for
Fastening Systems, Industrial Products and Industrial Components.
For projects initiated prior to December 28, 2002, the special charges
(restructuring costs accruable under EITF No. 94-3) were recorded as each
project was formally identified and committed to action. The other costs
related to restructuring were recorded in segment profit as incurred.
Projects initiated after December 28, 2002, will be accounted for in
accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities", which delays the recording of costs until they are
incurred, with an exception for one-time termination benefits and lease
termination costs. Accordingly, all costs related to restructuring will be
included in special charges beginning in 2003.
GOODWILL, INTANGIBLES AND INVESTMENT IMPAIRMENT SPECIAL CHARGES
In the fourth quarter of 2002, Textron recorded a write-down of $38 million
($23 million after-tax) of its holdings in C&A common stock in special
charges. Textron acquired this stock as a result of the disposition of the
Trim business. During the second half of 2002, the C&A common stock
experienced a decline in market value. In December 2002, Moody's lowered its
liquidity rating of C&A. Due to this indicator and the extended length of
time and extent to which the market value of the stock was less than the
carrying value, Textron determined that the decline in the market value of
the stock was other than temporary and wrote down its investment in the
stock.
At the end of 2000, the value of Textron's e-business investment portfolio
had fallen substantially. Textron determined that this decline in value was
other than temporary and recorded a pre-tax charge of $117 million to
write-down the portfolio to the current fair value. In 2001, Textron recorded
an additional $6 million impairment charge, and subsequently realized a $3
million net loss on the sale of its remaining e-business securities. Textron
had no remaining investments in e-business securities as of December 28,
2002.
During the third quarter of 2001, certain long-lived asset impairment
indicators were identified for OmniQuip which caused Textron to perform an
impairment review. Key impairment indicators included OmniQuip's operating
performance against plan despite restructuring efforts to improve operating
efficiencies and streamline operations. Additionally, the strategic review
process completed in August 2001 confirmed that the economic and market
conditions combined with the saturation of light construction equipment
handlers in the market had negatively impacted the projected results for the
foreseeable future. The impairment calculation resulted in an impairment
charge of $317 million, including goodwill of $306 million and other
intangible assets of $11 million.
In conjunction with the initiation of the 2000 restructuring program and
Textron's fourth quarter multi-year financial planning process, management
identified certain indicators of potential impairment of long-lived assets.
As a result, Textron performed an impairment review which identified impaired
goodwill of $205 million in Industrial Components, $128 million in Fastening
Systems and $16 million in Industrial Products, resulting in an aggregate
write-down of $349 million. The largest portions of the goodwill charge were
at TECT ($178 million) and Flexalloy ($96 million).
26
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity with
generally accepted accounting principles requires management to make complex
and subjective judgments in the selection and application of accounting
policies. The accounting policies that we believe are most critical to the
portrayal of Textron's financial condition and results of operations, and
that require management's most difficult, subjective and complex judgments in
estimating the effect of inherent uncertainties are listed below. This
section should be read in conjunction with Note 1 to the consolidated
financial statements which includes other significant accounting policies.
RECEIVABLE AND INVENTORY RESERVES
We evaluate the collectibility of our commercial and finance receivables
based on a combination of factors. In circumstances where we are aware of a
specific customer's inability to meet its short-term financial obligations to
us (e.g., bankruptcy filings, substantial down-grading of credit scores,
geographic economic conditions, etc.), we record a specific reserve for bad
debts for amounts we estimate to be potentially uncollectible. Receivables
are charged-off when they are deemed uncollectible. For homogenous loan pools
and all other receivables, we recognize reserves for bad debts based on
current delinquencies, the characteristics of the existing accounts,
historical loss experience, the value of underlying collateral and general
economic conditions and trends. Finance receivables are written down to the
fair value (less estimated costs to sell) of the related collateral at the
earlier of the date when the collateral is repossessed or when no payment has
been received for six months, unless we deem the receivable collectible.
Reserves on certain finance receivables are determined using estimates of
related collateral values based on historical recovery rates and current
market conditions. While we have no commercial customers that represent more
than 10% of sales in 2002, we do have significant collateralized finance
receivables with certain large customers, including national rental
companies. Market conditions for used equipment and aircraft inventories
could deteriorate if the current depressed economic conditions result in
either numerous or several large customer defaults, leading to large
quantities of used inventory being offered in the market. Such a
deterioration in market conditions would result in lower estimated collateral
values, increasing the amount of reserves required on related receivables and
used inventories on hand. Based on current market conditions, we believe our
reserves are adequate as of December 28, 2002.
LONG-TERM CONTRACTS
We recognize revenue and profit as work on certain government long-term
engineering, development and production contracts progresses using the
contract method of accounting, which relies on estimates of the total
contract cost and revenue. Estimated contract cost and revenue are based on
current contract specifications, expected engineering requirements and the
achievement of contract milestones, including product deliveries. Contract
costs are typically incurred over a period of several years, and the
estimation of these costs requires substantial judgments. The cost estimation
process is based on the professional knowledge and experience of engineers
and program managers along with finance professionals. The duration of the
contracts and the technical challenges included in certain contracts affect
our ability to estimate costs precisely. As a result, we update our
projections of costs at least semi-annually or when circumstances
significantly change. Adjustments to projected costs are recognized in net
earnings when determinable. Favorable changes in estimates result in
additional profit recognition, while unfavorable changes in estimates result
in the reversal of previously recognized earnings. Any anticipated losses on
contracts are charged to earnings when identified. Earnings on long-term
contracts could be reduced by a material amount resulting in a charge to
income if (a) total estimated contract costs are significantly higher than
expected due to changes in customer specifications prior to contract
amendment, (b) there is a change in engineering efforts required during the
development stage of the contract, or (c) we are unable to meet contract
milestones.
GOODWILL AND OTHER INTANGIBLE ASSETS
Upon the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", on
December 30, 2001, we recorded an after-tax transitional impairment charge of
$488 million as discussed in Note 7 to the consolidated financial statements.
This new accounting standard requires companies to evaluate goodwill and
other intangible assets for impairment on an annual basis. We evaluate the
recoverability of goodwill and other intangible assets annually in the fourth
quarter, or more frequently if events or changes in circumstances, such as
declines in sales, earnings or cash flows or material adverse changes in the
business climate, indicate that the carrying value of an asset might be
impaired. We completed our
27
annual impairment test in the fourth quarter of 2002 using the estimates from
our long-term strategic plans. No adjustment was required to the carrying
value of our goodwill or other intangible assets based on the analysis
performed.
Goodwill is considered to be impaired when the net book value of a reporting
unit exceeds its estimated fair value. Fair values are primarily established
using a discounted cash flow methodology. The determination of discounted
cash flows is based on the businesses' strategic plans and long-range
planning forecasts. The revenue growth rates included in the plans are
management's best estimates based on current and forecasted market
conditions, and the profit margin assumptions are projected by each segment
based on the current cost structure and anticipated cost reductions. If
different assumptions were used in these plans, the related undiscounted cash
flows used in measuring impairment could be different potentially resulting
in an impairment charge.
SECURITIZED TRANSACTIONS
Securitized transactions involve the sale of finance receivables to qualified
special purpose trusts. While the assets sold are no longer on our balance
sheet, our retained interests are included in other assets. We may retain an
interest in the transferred assets in the form of interest-only securities,
subordinated certificates, cash reserve accounts and servicing rights and
obligations. We do not provide legal recourse to third-party investors that
purchase interests in our securitizations beyond the credit enhancement
inherent in the retained interest-only securities, subordinated certificates
and cash reserve accounts. We estimate the fair value of the retained
interests based on the present value of future expected cash flows using our
best estimates of credit losses, prepayment speeds, forward interest rate
yield curves, and discount rates commensurate with the risks involved. These
assumptions are reviewed each quarter, and the retained interests are written
down when the carrying value exceeds the fair value and the decline is
estimated to be other than temporary. Based on our sensitivity analysis, as
discussed in Note 3 to the consolidated financial statements, a 20% adverse
change in either the prepayment speed, expected credit losses or the residual
cash flows discount rate would not result in a material charge to income.
PENSION AND OTHER POSTRETIREMENT BENEFITS
Assumptions used in determining projected benefit obligations and the fair
values of plan assets for our pension plans and other postretirement benefits
are evaluated periodically by management in consultation with outside
actuaries and investment advisors. Changes in assumptions are based on
relevant company data, such as the rate of increase in compensation levels
and the long-term rate of return on plan assets. Critical assumptions, such
as the discount rate used to measure the benefit obligations, the expected
long-term rate of return on plan assets and health care cost projections, are
evaluated and updated annually. We have assumed that the expected long-term
rate of return on plan assets will be 8.9%. Over the last ten- and twenty-
year periods, our pension plan assets have earned in excess of our current
assumed long-term rate of return on plan assets.
At the end of each year, we determine the discount rate that reflects the
current rate at which the pension liabilities could be effectively settled.
This rate should be in line with rates for high quality fixed income
investments available for the period to maturity of the pension benefits, and
changes as long-term interest rates change. At year-end 2002, we determined
this rate to be 6.75%. Postretirement benefit plan discount rates are the
same as those used by our defined benefit pension plan in accordance with the
provisions of SFAS No. 106.
In the fourth quarter of 2002, we recorded a non-cash adjustment to equity
through other comprehensive loss of $91 million to reflect additional minimum
pension liability. Based on our current assumptions, as well as the impact of
recent market declines in the value of our pension assets, we estimate that
our pension income, excluding curtailment gains, will decline from $95
million in 2002 to approximately $34 million in 2003.
The trend in health care costs is difficult to estimate and it has an
important effect on postretirement liabilities. The 2002 health care cost
trend rate, which is the weighted average annual projected rate of increase
in the per capita cost of covered benefits, was 10%. This rate is assumed to
decrease to 5.0% by 2006 and then remain at that level.
28
LIQUIDITY & CAPITAL RESOURCES
The liquidity and capital resources of Textron's operations are best
understood by separately considering its independent borrowing groups,
Textron Manufacturing and Textron Finance. Textron Manufacturing consists of
Textron Inc., the parent company, consolidated with the entities that operate
in the Aircraft, Fastening Systems, Industrial Components and Industrial
Products business segments, whose financial results are a reflection of the
ability to manage and finance the development, production and delivery of
tangible goods and services. Textron Finance consists of Textron's
wholly-owned commercial finance subsidiary, Textron Financial Corporation,
consolidated with its subsidiaries. The financial results of Textron
Financial are a reflection of its ability to provide financial services in a
competitive marketplace, at appropriate pricing, while managing the
associated financial risks. The fundamental differences between each
borrowing group's activities result in different measures used by investors,
rating agencies and analysts. Textron Inc. provides a support agreement to
Textron Finance that requires Textron Inc. to maintain 100% ownership of
Textron Finance. The agreement also requires Textron Finance to maintain
fixed charge coverage of 125% and consolidated shareholder's equity of no
less than $200 million. Textron Finance's bank agreements prohibit the
termination of the support agreement.
OPERATING CASH FLOWS
Textron's financial position continued to be strong at the end of 2002.
During 2002, cash flows from operations were the primary source of funds for
the operating needs, dividends and capital expenditures of Textron
Manufacturing. The statements of cash flows for each borrowing group
detailing the changes in cash balances are on pages 38 and 39. Management
analyzes operating cash flows by tracking Free Cash Flow, which is calculated
using net cash provided by operating activities, adding back after-tax cash
used for restructuring activities, and proceeds on the sale of fixed assets,
then subtracting capital expenditures, including those financed with capital
leases.
FINANCING
Textron Manufacturing's debt (net of cash) to total capital ratio as of
December 28, 2002 was 27%, down slightly from 28% at December 29, 2001.
Textron Manufacturing has established a target debt-to-capital ratio in the
mid to high 20% range. Consistent with the methodology used by members of the
financial community, leverage of the manufacturing operations excludes the
debt of Textron Finance. In addition, the obligated mandatorily redeemable
preferred securities are treated as equity capital for the purpose of
calculating leverage pursuant to Textron's financial targets. In turn,
Textron Finance evaluates its leverage by limiting borrowing so that its
leverage will not exceed a ratio of debt to tangible equity of 7.5 to 1. As a
result, surplus capital of Textron Finance is returned to Textron.
Borrowings have historically been a secondary source of funds for Textron
Manufacturing and, along with the collection of finance receivables, are a
primary source of funds for Textron Finance. Both Textron Manufacturing and
Textron Finance utilize a broad base of financial sources for their
respective liquidity and capital needs. Our credit ratings are predominantly
a function of our ability to generate operating cash flow and satisfy certain
financial ratios. Since high-quality credit ratings provide us with access to
a broad base of global investors at an attractive cost, we target a long-term
A rating from the independent debt-rating agencies. As of December 28, 2002,
our credit ratings remain strong from Standard & Poor's (Textron
Manufacturing: A long-term; A1 short-term; and Textron Finance: A- long-term;
A2 short-term). Our credit ratings for Textron Manufacturing and Textron
Finance are also strong from Moody's Investors Service (A3 long-term; P2
short-term) and Fitch (A long-term; F1 short-term).
During the second half of 2001, both Textron Manufacturing's and Textron
Finance's commercial paper and long-term debt credit ratings were downgraded
from a P1 to P2 and from an A-2 to A-3, respectively, by Moody's Investors
Service and both companies were placed on Negative Outlook by all three
ratings agencies. The economic environment and its potential impact on the
financial performance from the aerospace and financial services industries
were listed as contributing factors. While the actions of the rating agencies
caused our cost of capital to increase, it did not result in any loss of
access to capital. Textron did not experience any commercial paper or
long-term debt credit rating downgrades in 2002. Further downgrades in
Textron's ratings could increase borrowing spreads or limit its access to the
commercial paper, securitization and long-term debt markets. In addition,
Textron Finance's $1.5 billion revolving bank line of credit agreements
contain certain financial covenants that Textron Finance needs to comply with
to maintain its ability to borrow under the facilities. Textron Finance was
in full compliance with such covenants at December 28, 2002.
Textron believes that it has adequate credit facilities and access to credit
markets to meet its long-term financing needs.
29
SHORT-TERM FINANCING
For liquidity purposes, we maintain sufficient unused lines of credit to
support our outstanding commercial paper. None of these lines of credit were
used at December 28, 2002. Textron Manufacturing has a primary revolving
credit facility for $1.5 billion, of which $500 million will expire in 2003
and $1 billion will expire in 2007. Textron Finance has bank lines of credit
of $1.5 billion, of which $500 million expires in 2003 and $1 billion expires
in 2006. At December 28, 2002, the lines of credit not reserved as support
for commercial paper totaled $1.5 billion and $616 million for Textron
Manufacturing and Textron Finance, respectively. Both $500 million facilities
include one-year term out options that can effectively extend their
expiration into 2004.
Textron Finance utilizes the asset securitization market to manage asset
exposures and diversify funding sources. During the year, Textron Finance
received net proceeds from the securitizations of $299 million of aircraft
finance receivables, $185 of small business finance receivables (on a
revolving basis), $150 million of distribution finance receivables (on a
revolving basis), $131 million of resort finance receivables and $127 million
of golf equipment receivables. These securitizations provided Textron Finance
with an alternate source of liquidity. Textron Finance used the proceeds from
the securitizations to retire commercial paper. In connection with the
outstanding $229 million revolving securitization of small business finance
receivables, Textron Finance is obligated to repurchase a certain class of
loans if Textron Finance's credit rating drops below BBB. These loans
amounted to $41 million at December 28, 2002. Textron Finance has no other
repurchase obligations in connection with any other securitization
transactions. Textron Finance anticipates that it will enter into additional
securitization transactions in 2003.
LONG-TERM FINANCING
During 2002, Textron Manufacturing issued $300 million in medium-term notes
under Textron Inc.'s existing shelf registration filed with the Securities
and Exchange Commission, leaving $900 million available under this
registration statement. The proceeds from the issuances are expected to be
used for general corporate purposes. Textron Manufacturing also paid off $500
million of maturing notes in 2002 with a combination of cash and proceeds
from commercial paper issuances.
Under a shelf registration statement filed with the Securities and Exchange
Commission, Textron Finance may issue public debt securities in one or more
offerings up to a total maximum offering of $3 billion. Under this facility,
Textron Finance issued $1.9 billion of term notes during 2002, primarily in
U.S. and Canadian markets, that mature in 2003 through 2009. The proceeds
from the issuances were used to refinance maturing commercial paper and
long-term debt at par. At December 28, 2002, Textron Finance had $1.1 billion
available under this facility. Through private issuances in 2002, Textron
Finance also entered into $170 million of variable-rate notes maturing in
2004.
OFF-BALANCE SHEET AND OTHER ARRANGEMENTS
We participate in two joint ventures for the development of certain aircraft.
Bell Helicopter has partnered with The Boeing Company in the development of
the V-22 tiltrotor and with Agusta in the development of the BA609 and AB139.
These agreements enable us to share expertise and costs, and ultimately the
profits, with our partners in these ventures. We have not guaranteed any debt
obligations related to these ventures.
We do have certain other ventures where we have guaranteed an aggregate
amount of approximately $91 million. Included in this amount, is our
guarantee of one-half of CitationShare's debt and lease obligations up to a
maximum of $70 million. At year-end 2002, Textron's portion of the
outstanding debt and operating lease commitments covered by this guarantee
totaled $30 million. See Note 16 to the consolidated financial statements
regarding our joint ventures.
At December 28, 2002, Textron Finance had unused commitments to fund new and
existing customers under $1.5 billion of committed revolving lines of credit
and $1.0 billion of uncommitted revolving lines of credit. Since many of the
agreements will not be used to the extent committed or will expire unused,
the total commitment amount does not necessarily represent future cash
requirements. As a result of the sale of an equipment portfolio in 2001,
Textron Finance retained a contingent recourse liability that had a balance
of $17 million at December 28, 2002. In the event Textron Finance's credit
rating drops below a low BBB, Textron Finance is required to pledge related
equipment residuals of $9 million with a letter of credit up to $8 million.
Textron Manufacturing has entered into a forward contract in Textron common
stock. The contract is intended to hedge the earnings and cash volatility of
stock-based incentive compensation indexed to Textron stock. The forward
contract requires annual cash settlement between the counterparties.
30
Settlement is calculated based upon a number of shares multiplied by the
difference between the strike price and the prevailing Textron common stock
price. In 2002, Textron Manufacturing's primary forward contract was for
approximately two million shares with a strike price of $49.09. In December
2002, Textron Manufacturing paid $12 million in advance of the settlement
date for this contract of January 9, 2003. This prepayment reduced the
remaining liability for this contract to approximately $3 million at December
28, 2002. In January 2003, Textron Manufacturing entered into a new forward
contract for approximately 2.4 million shares at a strike price of $44.88.
DISPOSITIONS
In December 2001, Textron Manufacturing received approximately $582 million
in after-tax proceeds from the sale of the Automotive Trim business, along
with other consideration as described in Note 2 to the consolidated financial
statements. An additional $110 million was received in 2002 pursuant to the
settlement of post-closing obligations and the repurchase of C&A preferred
shares. The proceeds from this sale were primarily used to repurchase Textron
common stock and reduce debt.
In December 2002, Textron Manufacturing sold the Snorkel product line of its
OmniQuip business unit and the capital stock of the OmniQuip Textron Inc.
holding company for a pre-tax loss of $20 million with a tax benefit of $54
million. The tax benefit was primarily due to the write-off of OmniQuip
goodwill in the third quarter of 2001 at which time only a portion of the tax
benefit was realized. Approximately $100 million is expected to be collected
in 2003 due to this transaction, and the cash will be used for general
operating purposes.
USES OF CAPITAL
Acquisitions by Textron Manufacturing are evaluated on an enterprise basis,
so that the capital employed is equal to the price paid for the target
company's equity plus any debt assumed. During the past three years, Textron
acquired fifteen companies, acquired the minority interest of two entities
and entered into one joint venture for an aggregate cost of $333 million and
assumed debt of $38 million.
Acquisitions by Textron Finance are evaluated on the basis of the amount of
Textron Manufacturing capital that Textron would have to set aside so that
the acquisition could be leveraged at a debt-to-tangible equity ratio with
Textron Finance of 7.5 to 1. During the past three years, Textron Finance
acquired one significant loan portfolio for $387 million.
Capital spending in 2002 decreased to $319 million, which includes $23
million of expenditures purchased through capital leases, from $532 million
in 2001. This decrease was primarily due to the sale of the Automotive Trim
business in 2001 along with a planned decrease in capital spending. Aggregate
capital spending for the past three years totaled $1.4 billion.
In fiscal 2002, Textron repurchased 5,734,000 shares of common stock under
its Board authorized share repurchase program for a total cash payment of
$248 million.
Textron's Board of Directors approved the annual dividend per common share of
$1.30 in 2002. Dividend payments to shareholders in 2002 of $182 million were
$2 million less than amounts paid in 2001, primarily due to share
repurchases.
FINANCIAL RISK MANAGEMENT
INTEREST RATE RISKS
Textron's financial results are affected by changes in U.S. and foreign
interest rates. As part of managing this risk, Textron enters into interest
rate swap agreements to convert certain variable-rate debt to long-term
fixed-rate debt and vice versa. The overall objective of Textron's interest
rate risk management is to achieve a prudent balance between floating- and
fixed-rate debt. Textron's mix of floating- and fixed-rate debt is
continuously monitored by management and is adjusted, as necessary, based on
evaluation of internal and external factors. The difference between the rates
Textron Manufacturing received and the rates it paid on interest rate swap
agreements did not significantly impact interest expense in 2002 or 2001.
Textron Finance's strategy of matching interest-sensitive assets with
interest-sensitive liabilities limits its risk to changes in interest rates
and includes entering into interest rate swap agreements. At December 28,
2002, interest-sensitive assets in excess of interest-sensitive liabilities
were $629 million, net of $1.4 billion of interest rate swap agreements on
long-term debt and $219 million of interest rate swap agreements on finance
receivables. Interest-sensitive assets in excess of interest-sensitive
liabilities were $410 million at December 29, 2001, net of $370 million of
interest rate swap agreements on long-term debt and $97 million of interest
rate swap agreements on finance receivables. The increase in interest
31
rate swap agreements was directly related to the conversion of fixed-rate
debt to variable-rate debt at the time of issuance. The change in net
position does not reflect a change in management's match funding strategy.
FOREIGN EXCHANGE RISKS
Textron's financial results are affected by changes in foreign currency
exchange rates and economic conditions in the foreign markets in which
products are manufactured and/or sold. Textron Manufacturing's primary
currency exposures are the European Common Currency (Euro) and the British
Pound Sterling. Textron's results of operations were not materially affected
by foreign exchange exposures in 2002 or 2001.
Textron Manufacturing manages its exposures to foreign currency assets and
earnings primarily by funding certain foreign currency denominated assets
with liabilities in the same currency and, as such, certain exposures are
naturally offset. During 2002, Textron Manufacturing primarily used
borrowings denominated in Euro and British Pound Sterling for these purposes.
In addition, as part of managing its foreign currency transaction exposures,
Textron enters into foreign currency forward exchange and option contracts.
These contracts are generally used to fix the local currency cost of
purchased goods or services or selling prices denominated in currencies other
than the functional currency. The notional amount of outstanding foreign
exchange contracts, foreign currency options and currency swaps was
approximately $721 million at the end of 2002 and $605 million at the end of
2001.
QUANTITATIVE RISK MEASURES
Textron utilizes a sensitivity analysis to quantify the market risk inherent
in its financial instruments. Financial instruments held by Textron that are
subject to market risk (interest rate risk, foreign exchange rate risk and
equity price risk) include finance receivables (excluding lease receivables),
debt (excluding lease obligations), interest rate swap agreements, foreign
exchange contracts, marketable equity securities and marketable security
price forward contracts.
Presented below is a sensitivity analysis of the fair value of Textron's
financial instruments entered into for purposes other than trading at
year-end. The following table illustrates the hypothetical change in the fair
value of the financial instruments at year-end assuming a 10% decrease in
interest rates, a 10% strengthening in exchange rates against the U.S. dollar
and a 10% decrease in the quoted market prices of applicable marketable
equity securities. 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.
2002 2001
--------------------------------------- ------------------------------------
HYPOTHETICAL HYPOTHETICAL
CARRYING FAIR CHANGE IN CARRYING FAIR CHANGE IN
(In millions) VALUE* VALUE* FAIR VALUE VALUE* VALUE* FAIR VALUE
- ------------- -------- ------ ------------- -------- ------ ------------
INTEREST RATE RISK
Textron Manufacturing:
Debt $(1,711) $(1,839) $ (31) $(1,934) $(1,972) $ (29)
Interest rate swaps 4 4 3 -- -- --
Textron Finance:
Finance receivables 4,809 4,943 21 4,795 4,884 4
Interest rate swaps -
receivables (21) (21) (5) (8) (8) (1)
Debt (4,840) (4,935) (62) (4,188) (4,208) (36)
Interest rate swaps - debt 67 67 9 3 3 1
FOREIGN EXCHANGE RATE RISK
Textron Manufacturing:
Debt (631) (662) (66) (661) (655) (66)
Foreign currency exchange
contracts (4) (4) (21) (7) (7) (26)
EQUITY PRICE RISK
Textron Manufacturing:
Available for sale securities 30 30 (3) 90 90 (9)
Marketable security price
forward contracts (3) (3) (9) (11) (11) (8)
* Asset or (liability)
32
OTHER MATTERS
ENVIRONMENTAL
As with other industrial enterprises engaged in similar businesses, Textron
is involved in a number of remedial actions under various federal and state
laws and regulations relating to the environment that impose liability on
companies to clean up, or contribute to the cost of cleaning up, sites on
which hazardous wastes or materials were disposed or released. Expenditures
to evaluate and remediate contaminated sites approximated $16 million, $14
million and $11 million in 2002, 2001 and 2000, respectively. Textron
currently projects that expenditures for remediation will range between $12
million and $17 million for each of the years 2003 and 2004.
Textron's accrued estimated environmental liabilities are based on
assumptions that are subject to a number of factors and uncertainties.
Circumstances that can affect the accruals' reliability and precision include
identification of additional sites, environmental regulations, level of
cleanup required, technologies available, number and financial condition of
other contributors to remediation, and the time period over which remediation
may occur. Textron believes that any changes to the accruals that may result
from these factors and uncertainties will not have a material effect on
Textron's financial position or results of operations. Textron estimates that
its accrued environmental remediation liabilities will likely be paid over
the next five to ten years.
BACKLOG
Textron's commercial backlog was $6.1 billion and $6.5 billion at the end of
2002 and 2001, respectively, and U.S. Government backlog was $1.6 billion at
the end of 2002 and $1.0 billion at the end of 2001. Backlog for the Aircraft
segment was approximately 85% of Textron's commercial backlog at the end of
2002 and 2001, and 65% and 68% of Textron's U.S. Government backlog at the
end of 2002 and 2001, respectively. Included in commercial backlog is
approximately $500 million related to firm orders from CitationShares,
Textron's joint venture with TAG Aviation USA, Inc., discussed in Note 16.
FOREIGN MILITARY SALES
Certain Textron products are sold through the Department of Defense's Foreign
Military Sales Program. In addition, Textron sells directly to select foreign
military organizations. Sales under these programs totaled approximately 2.1%
of Textron's consolidated revenue in 2002 (0.1% in the case of foreign
military sales and 2.0% in the case of direct sales) and 1.2% in 2001 (0.4%
and 0.8%, respectively). Such sales include military and commercial
helicopters, armored vehicles, turrets, and spare parts. In 2002, these sales
were made primarily to the countries of Saudi Arabia (20%), United Kingdom
(16%), Mexico (15%) and Venezuela (10%). All sales are made in full
compliance with all applicable laws and in accordance with Textron's Code of
Conduct.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." This Statement nullifies
EITF No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)" and requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The provisions
of this Statement are to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. Costs related to restructuring
that were not accruable under EITF No. 94-3, were previously recorded by
Textron in segment profit as incurred. Beginning in 2003, Textron will
include all costs related to restructuring, for which this Statement applies,
in special charges. The adoption of this Statement is not expected to have a
material effect on Textron's results of operations or financial position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). Along with new disclosure
requirements, FIN 45 requires guarantors to recognize, at the inception of
certain guarantees, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This differs from the current practice
to record a liability only when a loss is probable and reasonably estimable.
The recognition and measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002.
The adoption of FIN 45 is not expected to have a material effect on Textron's
results of operations or financial position. Textron has adopted the
disclosure provisions as of December 28, 2002.
33
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" which amended SFAS No. 123,
"Accounting for Stock-Based Compensation". This Statement provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based compensation. It also amends the
disclosure provisions to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect
to stock-based employee compensation. The provisions of this Statement are to
be applied to financial statements for fiscal years ending after December 15,
2002. As permitted by the Statement, Textron does not plan to adopt the fair
value recognition provisions at this time. Textron has adopted the disclosure
provisions of this Statement as of December 28, 2002.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. Management is
currently evaluating the impact of the adoption of FIN 46 and does not
anticipate that it will have a material effect on Textron's results of
operations or financial position.
*********
Forward-looking Information: Certain statements in this Annual 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 to which Textron is able to achieve savings from its restructuring
plans, (b) uncertainty in estimating the amount and timing of restructuring
charges and related costs, (c) changes in worldwide economic and political
conditions that impact interest and foreign exchange rates, (d) the
occurrence of work stoppages and strikes at key facilities of Textron or
Textron's customers or suppliers, (e) government funding and program
approvals affecting products being developed or sold under government
programs, (f) cost and delivery performance under various program and
development contracts, (g) the adequacy of cost estimates for various
customer care programs including servicing warranties, (h) the ability to
control costs and successful implementation of various cost reduction
programs, (i) the timing of certifications of new aircraft products, (j) the
occurrence of further downturns in customer markets to which Textron products
are sold or supplied or where Textron Financial offers financing, (k)
Textron's ability to offset, through cost reductions, raw material price
increases and pricing pressure brought by original equipment manufacturer
customers, (l) the availability and cost of insurance, (m) pension plan
income falling below current forecasts, (n) Textron Financial's ability to
maintain portfolio credit quality, (o) Textron Financial's access to debt
financing at competitive rates; and (p) uncertainty in estimating contingent
liabilities and establishing reserves tailored to address such contingencies.
34
REPORT OF MANAGEMENT
Management is responsible for the integrity and objectivity of the financial
data presented in this Annual Report. The consolidated financial statements
have been prepared in conformity with accounting principles generally
accepted in the United States and include amounts based on management's best
estimates and judgments. The independent auditors, Ernst & Young LLP, have
audited the consolidated financial statements and have considered the
internal control structure to the extent they believed necessary to support
their report, which appears below.
We conduct our business in accordance with the standards outlined in the
Textron Business Conduct Guidelines which is communicated to all employees.
Honesty, integrity and high ethical standards are the core values of how we
conduct business. Every Textron division prepares and carries out an annual
Compliance Plan to ensure these values and standards are maintained. Our
internal control structure is designed to provide reasonable assurance, at
appropriate cost, that assets are safeguarded and that transactions are
properly executed and recorded. The internal control structure includes,
among other things, established policies and procedures, an internal audit
function, and the selection and training of qualified personnel. Textron's
financial managers are responsible for implementing effective internal
control systems and monitoring their effectiveness, as well as developing and
executing an annual internal control plan.
The Audit Committee of our Board of Directors, on behalf of the shareholders,
oversees management's financial reporting responsibilities. The Audit
Committee, comprised of six directors who are not officers or employees of
Textron, meets regularly with the independent auditors, management and our
internal auditors to review matters relating to financial reporting, internal
accounting controls and auditing. Both the independent auditors and the
internal auditors have free and full access to senior management and the
Audit Committee.
/s/Lewis B. Campbell
------------------------------
LEWIS B. CAMPBELL
Chairman, President and Chief
Executive Officer
January 23, 2003
/s/Ted R. French
------------------------------
TED R. FRENCH
Executive Vice President and
Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS TEXTRON INC.
We have audited the accompanying consolidated balance sheets of Textron Inc.
as of December 28, 2002 and December 29, 2001, and the related consolidated
statements of operations, cash flows and changes in shareholders' equity for
each of the three years in the period ended December 28, 2002. These
financial statements are the responsibility of Textron's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Textron Inc. at December 28, 2002 and December 29, 2001 and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 28, 2002, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 6 to the consolidated financial statements, in 2000
Textron changed its method of accounting for pre-production costs in
accordance with Emerging Issues Task Force No. 99-5, "Accounting for
Pre-Production Costs Related to Long-Term Supply Arrangements".
As discussed in Note 7 to the consolidated financial statements, in 2002
Textron adopted Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" and the remaining provisions of Financial Accounting
Standards No. 141, "Business Combinations."
/s/Ernst & Young LLP
Boston, Massachusetts
January 23, 2003
35
CONSOLIDATED STATEMENTS OF OPERATIONS
For each of the years in the three-year period ended December 28, 2002
(In millions, except per share amounts) 2002 2001 2000
- --------------------------------------- -------- -------- --------
REVENUES
Manufacturing revenues $ 10,028 $ 11,612 $ 12,399
Finance revenues 630 709 691
-------- -------- --------
Total revenues 10,658 12,321 13,090
-------- -------- --------
COSTS, EXPENSES AND OTHER
Cost of sales 8,221 9,760 10,028
Selling and administrative 1,382 1,532 1,445
Interest, net 304 433 486
Provision for losses on finance receivables 138 82 37
Special charges 128 437 483
Gain on sale of businesses, net (5) (342) --
-------- -------- --------
Total costs, expenses and other 10,168 11,902 12,479
-------- -------- --------
Income from operations before income taxes and
distributions on preferred securities of subsidiary trusts 490 419 611
Income taxes (100) (227) (308)
Distributions on preferred securities of subsidiary trusts, net of
income taxes (26) (26) (26)
-------- -------- --------
Income before cumulative effect of change in accounting principle 364 166 277
Cumulative effect of change in accounting principle, net of
income taxes (488) -- (59)
-------- -------- --------
NET INCOME (LOSS) $ (124) $ 166 $ 218
======== ======== ========
PER COMMON SHARE:
BASIC:
Income before cumulative effect of change in accounting principle $ 2.62 $ 1.17 $ 1.92
Cumulative effect of change in accounting principle, net of
income taxes (3.52) -- (.41)
-------- -------- --------
NET INCOME (LOSS) $ (.90) $ 1.17 $ 1.51
======== ======== ========
DILUTED:
Income before cumulative effect of change in accounting principle $ 2.60 $ 1.16 $ 1.90
Cumulative effect of change in accounting principle, net of
income taxes (3.48) -- (.41)
-------- -------- --------
NET INCOME (LOSS) $ (.88) $ 1.16 $ 1.49
======== ======== ========
See notes to the consolidated financial statements.
36
Consolidated Balance Sheets
As of December 28, 2002 and December 29, 2001
(Dollars in millions) 2002 2001
--------- ---------
ASSETS
TEXTRON MANUFACTURING
Cash and cash equivalents $ 286 $ 241
Commercial and U.S. Government receivables (less allowance for doubtful accounts of
$63 in 2002 and $54 in 2001) 1,180 1,149
Inventories 1,611 1,727
Due from Textron Finance -- 510
Income taxes receivable 247 --
Other current assets 563 390
--------- ---------
TOTAL CURRENT ASSETS 3,887 4,017
--------- ---------
Property, plant and equipment, net 1,981 2,044
Goodwill 1,368 1,821
Other intangibles assets, net 83 144
Other assets 1,532 1,562
--------- ---------
TOTAL TEXTRON MANUFACTURING ASSETS 8,851 9,588
--------- ---------
TEXTRON FINANCE
Cash 21 19
Finance receivables, net 5,589 5,492
Goodwill 181 204
Other assets 863 749
--------- ---------
TOTAL TEXTRON FINANCE ASSETS 6,654 6,464
--------- ---------
TOTAL ASSETS $ 15,505 $ 16,052
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
TEXTRON MANUFACTURING
Current portion of long-term debt and short-term debt $ 25 $ 673
Accounts payable 877 994
Accrued liabilities 1,337 1,408
--------- ---------
TOTAL CURRENT LIABILITIES 2,239 3,075
--------- ---------
Accrued postretirement benefits other than pensions 611 626
Other liabilities 1,444 1,216
Long-term debt 1,686 1,261
--------- ---------
TOTAL TEXTRON MANUFACTURING LIABILITIES 5,980 6,178
--------- ---------
TEXTRON FINANCE
Other liabilities 369 372
Deferred income taxes 398 357
Due to Textron Manufacturing -- 510
Debt 4,840 4,188
--------- ---------
TOTAL TEXTRON FINANCE LIABILITIES 5,607 5,427
--------- ---------
TOTAL LIABILITIES 11,587 11,605
--------- ---------
TEXTRON FINANCE - OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
FINANCE SUBSIDIARY HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES 27 28
--------- ---------
TEXTRON - OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY TEXTRON JUNIOR SUBORDINATED DEBT SECURITIES 485 485
--------- ---------
SHAREHOLDERS' EQUITY
Capital stock:
Preferred stock:
$2.08 Cumulative Convertible Preferred Stock, Series A (liquidation value $11) 5 5
$1.40 Convertible Preferred Dividend Stock, Series B (preferred only as to dividends) 6 6
Common stock (197,110,000 and 196,337,000 shares issued and 136,500,000 and
141,251,000 outstanding) 25 25
Capital surplus 1,080 1,064
Retained earnings 5,526 5,829
Accumulated other comprehensive loss (225) (223)
--------- ---------
6,417 6,706
Less cost of treasury shares 3,011 2,772
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 3,406 3,934
========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,505 $ 16,052
========= =========
See notes to the consolidated financial statements.
37
Statements of Cash Flows
For each of the years in the three-year period ended December 28, 2002 CONSOLIDATED
-------------------------------------------
(In millions) 2002 2001 2000
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before cumulative effect of change in accounting principle $ 364 $ 166 $ 277
Adjustments to reconcile income to net cash provided by operating activities:
Earnings of Textron Finance greater than distributions -- -- --
Depreciation 341 400 382
Amortization 27 114 112
Provision for losses on finance receivables 139 82 37
Gain on sale of businesses, net (5) (342) --
Special charges 128 437 483
Noncash gain on securitizations (28) (43) (22)
Deferred income taxes 330 96 9
Changes in assets and liabilities excluding those related to acquisitions
and divestitures:
Commercial and U.S. Government receivables 3 (102) 69
Inventories 120 103 5
Other assets (409) (72) (206)
Accounts payable (165) 166 (95)
Accrued liabilities (180) (27) (43)
Other - net 29 5 15
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 694 983 1,023
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Finance receivables:
Originated or purchased (9,263) (7,527) (7,032)
Repaid 7,739 5,750 5,233
Proceeds on receivables sales and securitization sales 1,151 2,019 1,556
Cash used in acquisitions (2) (596) (85)
Net proceeds from dispositions 30 608 (9)
Capital expenditures (296) (532) (527)
Proceeds on sale of fixed assets 67 83 56
Due (from) to Textron (Finance) Manufacturing -- -- --
Net decrease (increase) in investment securities -- 8 (134)
Other investing activities - net (27) (133) 20
------- ------- -------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (601) (320) (922)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt 72 (608) (450)
Proceeds from issuance of long-term debt 2,495 1,480 2,005
Principal payments and retirements on long-term debt (2,207) (1,360) (1,048)
Proceeds from exercise of stock options 24 27 14
Purchases of Textron common stock (248) (47) (353)
Dividends paid (182) (184) (189)
Dividends paid to Textron Manufacturing -- -- --
Capital contributions to Textron Finance -- -- --
------- ------- -------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (46) (692) (21)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 47 (29) 80
Cash and cash equivalents at beginning of year 260 289 209
------- ------- -------
Cash and cash equivalents at end of year $ 307 $ 260 $ 289
======= ======= =======
SUPPLEMENTAL INFORMATION:
Cash paid during the year for interest** $ 314 $ 421 $ 479
======= ======= =======
Net cash paid during the year for income taxes (includes $77 in 2002 and
$28 in 2001 related to the Automotive Trim sale and $2 in 2001 and
$9 in 2000 for AFS disposal) $ 11 $ 126 $ 327
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING & FINANCING ACTIVITIES:
Capital lease obligations incurred to finance future construction $ 79 $ -- $ --
======= ======= =======
Capital expenditures financed through capital leases $ 23 $ -- $ --
======= ======= =======
* Textron is segregated into two borrowing groups, Textron Manufacturing and
Textron Finance as described in Note 1 to the consolidated financial
statements along with the principles of consolidation. Textron
Manufacturing's cash flows include the pretax income from Textron Finance.
All significant transactions between Textron Manufacturing and Textron
Finance have been eliminated from the "Consolidated" column.
** Includes $8 and $16 paid by Textron Manufacturing to Textron Finance in
2002 and 2001, respectively.
See notes to the consolidated financial statements.
38
For each of the years in the three-year period ended December 28, 2002 TEXTRON MANUFACTURING*
-------------------------------------------
(In millions) 2002 2001 2000
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before cumulative effect of change in accounting principle $ 364 $ 166 $ 277
Adjustments to reconcile income to net cash provided by operating activities:
Earnings of Textron Finance greater than distributions (23) (79) (41)
Depreciation 313 381 365
Amortization 17 92 97
Provision for losses on finance receivables -- -- --
Gain on sale of businesses, net (5) (342) --
Special charges 128 437 483
Noncash gain on securitizations -- -- --
Deferred income taxes 272 50 (9)
Changes in assets and liabilities excluding those related to acquisitions
and divestitures:
Commercial and U.S. Government receivables 3 (102) 69
Inventories 120 103 5
Other assets (394) (86) (215)
Accounts payable (142) 126 (82)
Accrued liabilities (161) (44) (33)
Other - net 30 31 21
----- ----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 522 733 937
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Finance receivables:
Originated or purchased -- -- --
Repaid -- -- --
Proceeds on receivables sales and securitization sales -- -- --
Cash used in acquisitions (2) (209) (85)
Net proceeds from dispositions 30 695 (9)
Capital expenditures (279) (514) (513)
Proceeds on sale of fixed assets 67 83 56
Due (from) to Textron (Finance) Manufacturing 510 (510) --
Net decrease (increase) in investment securities -- 8 (134)
Other investing activities - net -- 2 24
----- ----- -----
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES 326 (445) (661)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt (156) (330) (77)
Proceeds from issuance of long-term debt 303 307 516
Principal payments and retirements on long-term debt (544) (62) (97)
Proceeds from exercise of stock options 24 27 14
Purchases of Textron common stock (248) (47) (353)
Dividends paid (182) (184) (189)
Dividends paid to Textron Manufacturing -- -- --
Capital contributions to Textron Finance -- (40) --
----- ----- -----
(803) (329) (186)
----- ----- -----
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 45 (41) 90
Cash and cash equivalents at beginning of year 241 282 192
----- ----- -----
Cash and cash equivalents at end of year $ 286 $ 241 $ 282
===== ===== =====
SUPPLEMENTAL INFORMATION:
Cash paid during the year for interest** $ 126 $ 156 $ 154
===== ===== =====
Net cash paid during the year for income taxes (includes $77 in 2002 and
$28 in 2001 related to the Automotive Trim sale and $2 in 2001 and $ 42 $ 111 $ 249
$9 in 2000 for AFS disposal) ===== ===== =====
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING & FINANCING ACTIVITIES:
Capital lease obligations incurred to finance future construction $ 79 $ -- $ --
===== ===== =====
Capital expenditures financed through capital leases $ 23 $ -- $ --
===== ===== =====
For each of the years in the three-year period ended December 28, 2002 TEXTRON FINANCE*
-------------------------------------------
(In millions) 2002 2001 2000
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before cumulative effect of change in accounting principle $ 76 $ 121 $ 118
Adjustments to reconcile income to net cash provided by operating activities:
Earnings of Textron Finance greater than distributions -- -- --
Depreciation 28 19 17
Amortization 10 22 15
Provision for losses on finance receivables 139 82 37
Gain on sale of businesses, net -- -- --
Special charges -- -- --
Noncash gain on securitizations (28) (43) (22)
Deferred income taxes 58 46 16
Changes in assets and liabilities excluding those related to acquisitions
and divestitures:
Commercial and U.S. Government receivables -- -- --
Inventories -- -- --
Other assets (15) 14 9
Accounts payable (23) 40 (13)
Accrued liabilities (19) 17 (10)
Other - net (1) (26) (2)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 225 292 165
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Finance receivables:
Originated or purchased (9,263) (7,614) (7,032)
Repaid 7,739 5,750 5,233
Proceeds on receivables sales and securitization sales 1,151 2,019 1,556
Cash used in acquisitions -- (387) --
Net proceeds from dispositions -- -- --
Capital expenditures (17) (18) (14)
Proceeds on sale of fixed assets -- -- --
Due (from) to Textron (Finance) Manufacturing (510) 510 --
Net decrease (increase) in investment securities -- -- --
Other investing activities - net (27) (135) (5)
------- ------- -------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (927) 125 (262)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt 228 (278) (373)
Proceeds from issuance of long-term debt 2,192 1,173 1,488
Principal payments and retirements on long-term debt (1,663) (1,298) (951)
Proceeds from exercise of stock options -- -- --
Purchases of Textron common stock -- -- --
Dividends paid -- -- --
Dividends paid to Textron Manufacturing (53) (42) (77)
Capital contributions to Textron Finance -- 40 --
------- ------- -------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES 704 (405) 87
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2 12 (10)
Cash and cash equivalents at beginning of year 19 7 17
------- ------- -------
Cash and cash equivalents at end of year $ 21 $ 19 $ 7
======= ======= =======
SUPPLEMENTAL INFORMATION:
Cash paid during the year for interest** $ 196 $ 282 $ 325
======= ======= =======
Net cash paid during the year for income taxes (includes $77 in 2002 and
$28 in 2001 related to the Automotive Trim sale and $2 in 2001 and
$9 in 2000 for AFS disposal) $ (31) $ 15 $ 78
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING & FINANCING ACTIVITIES:
Capital lease obligations incurred to finance future construction $ -- $ -- $ --
======= ======= =======
Capital expenditures financed through capital leases $ -- $ -- $ --
======= ======= =======
39
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED DECEMBER 28, 2002
SHARES OUTSTANDING* DOLLARS
(In thousands) (In millions)
-----------------------------------------------------------------------
2002 2001 2000 2002 2001 2000
------- ------- ------- --------- --------- ---------
$2.08 PREFERRED STOCK
Beginning balance 133 143 159 $ 5 $ 5 $ 5
Conversion to common stock (13) (10) (16) -- -- --
------- ------- ------- --------- --------- ---------
Ending balance 120 133 143 $ 5 $ 5 $ 5
======= ======= ======= ========= ========= =========
$1.40 PREFERRED STOCK
Beginning balance 62 67 74 $ 6 $ 7 $ 7
Conversion to common stock (6) (5) (7) -- (1) --
------- ------- ------- --------- --------- ---------
Ending balance 56 62 67 $ 6 $ 6 $ 7
======= ======= ======= ========= ========= =========
COMMON STOCK
Beginning balance 141,251 140,933 147,002 $ 25 $ 24 $ 24
Purchases (5,734) (738) (6,627) -- -- --
Exercise of stock options 689 882 430 -- -- --
Conversion of preferred stock to common stock 79 60 97 -- 1 --
Other issuances of common stock 215 114 31 -- -- --
------- ------- ------- --------- --------- ---------
Ending balance 136,500 141,251 140,933 $ 25 $ 25 $ 24
======= ======= ======= ========= ========= =========
CAPITAL SURPLUS
Beginning balance $ 1,064 $ 1,026 $ 1,009
Conversion of preferred stock to common stock -- -- 1
Exercise of stock options and other issuances 16 38 16
--------- --------- ---------
Ending balance $ 1,080 $ 1,064 $ 1,026
========= ========= =========
RETAINED EARNINGS
Beginning balance $ 5,829 $ 5,848 $ 5,817
Net income (loss) (124) 166 218
Dividends declared on common stock (per share: $1.30) (179) (185) (187)
--------- --------- ---------
Ending balance $ 5,526 $ 5,829 $ 5,848
========= ========= =========
TREASURY STOCK
Beginning balance $ 2,772 $ 2,744 $ 2,387
Purchases of common stock 249 34 358
Issuance of common stock (10) (6) (1)
--------- --------- ---------
Ending balance $ 3,011 $ 2,772 $ 2,744
========= ========= =========
ACCUMULATED OTHER COMPREHENSIVE LOSS
Beginning balance $ (223) $ (172) $ (98)
Currency translation adjustment 78 (20) (74)
Deferred gains (losses) on hedge contracts 13 (32) --
Unrealized gains on securities 2 1 --
Minimum pension liability adjustment (95) -- --
--------- --------- ---------
Other comprehensive loss (2) (51) (74)
--------- --------- ---------
Ending balance $ (225) $ (223) $ (172)
========= ========= =========
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ (124) $ 166 $ 218
Other comprehensive loss (2) (51) (74)
--------- --------- ---------
Comprehensive income (loss) $ (126) $ 115 $ 144
========= ========= =========
* Shares issued at the end of 2002, 2001, 2000 and 1999, were as follows (in
thousands): $2.08 Preferred - 189; 202; 212; and 228 shares, respectively;
$1.40 Preferred - 543; 549; 554; and 561 shares, respectively; Common -
197,110; 196,337; 195,394; and 194,858 shares, respectively.
See notes to the consolidated financial statements.
40
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
Textron is a global, multi-industry company with manufacturing and finance
operations primarily in America, Western Europe, South America and Asia/Pacific.
Textron's principal markets are summarized below by segment.
Segment Principal Markets
- ------- -----------------
Aircraft - Business jets
- Commercial and military helicopters
- General aviation
- Overnight express package carriers
- Humanitarian flights, tourism and freight
- --------------------------------------------------------------------------------
Fastening Systems - Aerospace
- Automotive
- Business, electrical and industrial equipment
- Non-Auto Transportation
- Construction
- Electronics
- --------------------------------------------------------------------------------
Industrial Products - Golf and turf-care products and specialized
industrial vehicles: golf courses, resort
communities and municipalities, and commercial and
industrial users
- Commercial aerospace and defense
- Light construction equipment: national rental
fleets, independent distributors and rental
centers
- Power hand tools, test and measurement equipment:
construction, maintenance and telecommunications
industries
- --------------------------------------------------------------------------------
Industrial Components - Automotive equipment: automotive original
equipment manufacturers and their suppliers
- Fluid and power systems: original equipment
manufacturers, distributors and end-users
- --------------------------------------------------------------------------------
Finance - Commercial loans and leases
- --------------------------------------------------------------------------------
The consolidated financial statements include the accounts of Textron and all of
its majority- and wholly owned subsidiaries. Investments in which Textron does
not have control, but has the ability to exercise significant influence over the
operating and financial policies, are accounted for under the equity method.
Textron's share of net earnings and losses from these investments is included in
the consolidated statement of operations.
Textron's financings are conducted through two borrowing groups, Textron Finance
and Textron Manufacturing. This framework is designed to enhance Textron's
borrowing power by separating the Finance segment. 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.
Certain intercompany transactions between borrowing groups have not been
eliminated in the consolidated financial statements. See "Due to Textron
Manufacturing" in Note 8 for further details. All other significant intercompany
transactions are eliminated.
Textron Manufacturing is Textron Inc., the parent company, consolidated with the
entities which operate in the Aircraft, Fastening Systems, Industrial Products
and Industrial Components business segments. In January 2002, management
responsibility for certain divisions was reorganized to reflect the sale of the
Automotive Trim business in December 2001. The former automotive divisions have
been included in the Industrial Components segment. All prior period data have
been appropriately reclassified.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in these statements and accompanying notes. Some of
the more significant estimates are made in the areas of receivable and inventory
reserves, long-term contracts, goodwill and other intangible assets,
securitized transactions and pension and other postretirement benefits.
Management's estimates are based
41
on the facts and circumstances available at the time estimates are made,
historical experience, risk of loss, general economic conditions and trends, and
management's assessments of the probable future outcome of these matters. Actual
results could differ from such estimates.
Certain prior period amounts have been reclassified to conform to the current
year presentation.
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.
REVENUE RECOGNITION
Revenue is generally recognized when products are delivered or services are
performed. With respect to aircraft, delivery is upon completion of
manufacturing, customer acceptance and the transfer of the risk and rewards of
ownership.
Revenue under fixed-price contracts is generally recorded as deliveries are
made. Certain long-term fixed-price contracts provide for periodic delivery
after a lengthy period of time over which significant costs are incurred or
require a significant amount of development effort in relation to total contract
volume. Revenues under those contracts and all cost-reimbursement-type contracts
are recorded as costs are incurred. Certain contracts are awarded with
fixed-price incentive fees. Incentive fees are considered when estimating
revenues and profit rates, and are recorded when these amounts are reasonably
determined. Long-term contract profits are based on estimates of total sales
value and costs at completion. Such estimates are reviewed and revised
periodically throughout the contract life. Revisions to contract profits are
recorded when the revisions to estimated sales value or costs are made.
Estimated contract losses are recorded when identified.
Revenues under the V-22 low-rate initial production contract are recorded as
costs are incurred, primarily due to the significant engineering effort required
over a lengthy period of time during the initial development stage in relation
to total contract volume. Under the low-rate production releases, Textron
continues to manufacture aircraft which may subsequently be modified for
engineering changes. Beginning with new production releases in 2003, the
development effort will be substantially completed. As a result, revenue on new
production releases will be recognized as units are delivered.
Revenue from certain qualifying non-cancelable aircraft and other product lease
contracts are accounted for as sales-type leases. The present value of all
payments (net of executory costs and any guaranteed residual values) is recorded
as revenue, and the related costs of the product are charged to cost of sales.
Generally, this lease financing is through Textron Finance and the associated
interest is recorded over the term of the lease agreement using the interest
method. Lease financing transactions which do not qualify as sales-type leases
are accounted for under the operating method wherein revenue is recorded as
earned over the lease period.
Finance revenues include interest on finance receivables which is recognized
using the interest method to provide a constant rate of return over the terms of
the receivables. Finance revenues also include direct loan origination costs and
fees received, which are deferred and amortized over the contractual lives of
the respective receivables using the interest method. Unamortized amounts are
recognized in revenues when receivables are sold or pre-paid. Accrual of
interest income is suspended for accounts that are contractually delinquent by
more than three months, unless collection is not doubtful. In addition, detailed
reviews of loans may result in earlier suspension if collection is doubtful.
Accrual of interest is resumed when the loan becomes contractually current, and
suspended interest income is recognized at that time.
ALLOWANCE FOR LOSSES ON FINANCE RECEIVABLES
Provisions for losses on finance receivables are charged to income in amounts
sufficient to maintain the allowance at a level considered adequate to cover
losses in the existing receivable portfolio. Management evaluates the allowance
by examining current delinquencies, the characteristics of the existing
accounts, historical loss experience, the value of the underlying collateral and
general economic conditions and trends. Finance receivables are charged off when
they are deemed to be uncollectible. Finance receivables are written down to the
fair value (less estimated costs to sell) of the related collateral at the
earlier of the date the collateral is repossessed or when no payment has been
received for six months, unless management deems the receivable collectible.
42
LOAN IMPAIRMENT
Textron Finance periodically evaluates finance receivables, excluding
homogeneous loan portfolios and finance leases, for impairment. A loan is
considered impaired when it is probable that Textron Finance will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Impairment is measured by comparing the fair value of a loan to its
carrying amount. Fair value is based on the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
observable market price or, if the loan is collateral dependent, at the fair
value of the collateral. If the fair value of the loan is less than its carrying
amount, Textron Finance establishes a reserve based on this difference. This
evaluation is inherently subjective, as it requires estimates, including the
amount and timing of future cash flows expected to be received on impaired
loans, that may differ from actual results.
SECURITIZED TRANSACTIONS
Textron Finance sells or securitizes loans and leases and retains servicing
responsibilities and subordinated interests, including interest-only securities,
subordinated certificates and cash reserves, all of which are retained interests
in the securitized receivables. These retained interests are subordinate to
other investors' interests in the securitizations. A gain or loss on the sale of
finance receivables depends in part on the previous carrying amount of the
finance receivables involved in the transfer, allocated between the assets sold
and the retained interests based on their relative fair values at the date of
transfer. Retained interests are recorded at fair value as a component of other
assets. Textron Finance estimates fair value based on the present value of
future expected cash flows using management's best estimates of key assumptions
- - credit losses, prepayment speeds, forward interest rate yield curves and
discount rates commensurate with the risks involved. Textron Finance reviews the
fair values of the retained interests quarterly using updated assumptions and
compares such amounts with the carrying value of the retained interests. When
the carrying value exceeds the fair value of the retained interests and the
decline in fair value is determined to be other than temporary, the retained
interest is written down to fair value. When a change in the fair value of the
retained interest is deemed temporary, any unrealized gains or losses are
included in shareholders' equity as a component of accumulated other
comprehensive loss (OCL).
INVESTMENT SECURITIES
Investments in marketable securities are classified as available for sale and
are recorded at fair value as a component of other assets. Unrealized gains and
losses on these securities, net of income taxes, are included in shareholders'
equity as a component of accumulated OCL. If a decline in the fair value of a
marketable security is judged to be other than temporary, the cost basis is
written down to fair value with a charge to earnings. Non-marketable equity
securities are accounted for under either the cost or equity method of
accounting.
INVENTORIES
Inventories are carried at the lower of cost or market. The cost of
approximately 71% of inventories is determined using the last-in, first-out
method. The cost of remaining inventories, other than those related to certain
long-term contracts, are generally valued by the first-in, first-out method.
Costs for commercial helicopters are determined on an average cost basis by
model considering the expended and estimated costs for the current production
release.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and are depreciated primarily
using the straight-line method. Land improvements and buildings are depreciated
primarily over estimated lives ranging from 5 to 40 years, while machinery and
equipment are depreciated primarily over 3 to 15 years. Expenditures for
improvements that increase asset values and extend useful lives are capitalized.
Expenditures for maintenance and repairs are expensed as incurred.
GOODWILL AND OTHER INTANGIBLE ASSETS
Management evaluates the recoverability of goodwill and other intangible assets
annually, or more frequently if events or changes in circumstances, such as
decline in sales, earnings or cash flows or material adverse changes in the
business climate, indicate that the carrying value of an asset might be
impaired. Goodwill is considered to be impaired when the net book value of a
reporting unit exceeds its estimated fair value. Fair values are primarily
established using a discounted cash flow methodology. The determination of
discounted cash flows is based on the businesses' strategic plans and long-range
planning forecasts.
43
DERIVATIVE FINANCIAL INSTRUMENTS
All derivative instruments are reported on the balance sheet at fair value.
Changes in the fair value of derivative financial instruments are either
recognized periodically in income or in shareholders' equity as a component of
comprehensive income (loss) depending on whether the derivative financial
instrument qualifies for hedge accounting, and if so, whether it qualifies as a
fair value, cash flow or net investment hedge. Upon the adoption of Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities," Textron recorded a cumulative transition
adjustment to increase accumulated OCL by approximately $15 million, net of
income taxes, to recognize the fair value of cash flow hedges as of December 31,
2000. The cumulative effect of adoption was not material to the consolidated
statement of operations.
Textron is exposed to market risk, primarily from changes in interest rates,
currency exchange rates and securities pricing. To manage the volatility
relating to these exposures, Textron nets the exposures on a consolidated basis
to take advantage of natural offsets. For the residual portion, Textron enters
into various derivative transactions pursuant to Textron's policies in such
areas as counterparty exposure and hedging practices. Designation is performed
on a specific exposure basis to support hedge accounting. Changes in fair value
of financial instruments qualifying as fair value hedges are recorded in income,
offset in part or in whole by corresponding changes in the fair value of the
underlying exposures being hedged. Changes in fair values of derivatives
accounted for as cash flow hedges, to the extent they are effective as hedges,
are recorded in OCL net of deferred taxes. Changes in fair value of derivatives
not qualifying as hedges are reported in income. Textron does not hold or issue
derivative financial instruments for trading or speculative purposes.
Prior to the adoption of SFAS No. 133, changes in market value of contracts that
hedged firm foreign currency commitments and intercompany transactions were
generally included in the basis of the transactions. Changes in the market value
of the contracts that hedged anticipated transactions were generally recognized
in net earnings.
Foreign currency denominated assets and liabilities are translated into U.S.
dollars with the adjustments from the currency rate changes being recorded in
the cumulative translation adjustment account in shareholders' equity until the
related foreign entity is sold or substantially liquidated. Foreign currency
financing transactions, including currency swaps, are used to effectively hedge
long-term investments in foreign operations with the same corresponding
currency. Foreign currency gains and losses on the hedge of the long-term
investments are recorded in the cumulative translation adjustment account in
accumulated OCL with the offset recorded as an adjustment to the non-U.S. dollar
financing liability.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash and cash equivalents, accounts receivable, accounts payable
and variable-rate receivables and debt approximate cost. The estimated fair
values of other financial instruments, including debt, equity and risk
management instruments, have been determined using available market information
and valuation methodologies, primarily discounted cash flow analysis or
independent investment bankers. The estimated fair value of nonperforming loans
included in finance receivables are based on discounted cash flow analyses using
risk-adjusted interest rates or the fair value of the related collateral.
Because considerable judgment is required in interpreting market data, the
estimates are not necessarily indicative of the amounts that could be realized
in a current market.
STOCK-BASED COMPENSATION
Textron's 1999 Long-Term Incentive Plan (1999 Plan) authorizes awards to key
employees. The 1999 Plan and related awards are described more in fully in Note
12. Stock-based compensation awards to employees under the 1999 Plan are
accounted for using the intrinsic value method prescribed in APB 25, "Accounting
for Stock Issued to Employees" and related Interpretations. No stock-based
employee compensation cost related to stock options awards is reflected in net
income as all options granted under the 1999 Plan had an exercise price equal to
the market value of the underlying common stock on the date of grant. Employee
compensation cost related to Textron's performance share program and restricted
stock awards is reflected in net income over the awards' vesting period. Textron
has entered into cash settlement forward contracts on its common stock to
mitigate the impact of stock price fluctuations on compensation expense. The
following table illustrates the effect on net income and earnings per share if
Textron had applied the fair-value recognition provisions of FASB Statement No.
123, "Accounting for Stock-Based Compensation", to stock-based employee
compensation.
44
(In millions, except per share data) 2002 2001 2000
---- ---- ----
Net income (loss), as reported $ (124) $ 166 $ 218
Add back: Stock-based employee compensation
expense included in reported net income (loss)* 9 22 20
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards* (40) (48) (45)
------- ------- -------
Pro forma net income (loss) $ (155) $ 140 $ 193
======= ======= =======
Income (loss) per share:
Basic - as reported $ (.90) $ 1.17 $ 1.51
Basic - pro forma $ (1.12) $ .99 $ 1.34
Diluted - as reported $ (.88) $ 1.16 $ 1.49
Diluted - pro forma $ (1.10) $ .98 $ 1.32
* Net of related cash settlement forward income or expense and related tax
effects
PRODUCT AND ENVIRONMENTAL LIABILITIES
Product liability claims are accrued on the occurrence method based on insurance
coverage and deductibles in effect at the date of the incident and management's
assessment of the probability of loss when reasonably estimable.
Environmental liabilities are recorded based on the most probable cost, if
known, or on the estimated minimum cost, determined on a site-by-site basis.
Textron's environmental liabilities are undiscounted and do not take into
consideration possible future insurance proceeds or significant amounts from
claims against other third parties.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement nullifies EITF No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)"
and requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. The provisions of this Statement are to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
Costs related to restructuring that were not accruable under EITF No. 94-3, were
previously recorded by Textron in segment profit as incurred. Beginning in 2003,
Textron will include all costs related to restructuring, for which this
Statement applies, in special charges. The adoption of this Statement is not
expected to have a material effect on Textron's results of operations or
financial position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). Along with new disclosure requirements, FIN 45
requires guarantors to recognize, at the inception of certain guarantees, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This differs from the current practice to record a liability only
when a loss is probable and reasonably estimable. The recognition and
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45 is
not expected to have a material effect on Textron's results of operations or
financial position. Textron has adopted the disclosure provisions as of December
28, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" which amended SFAS No. 123,
"Accounting for Stock-Based Compensation". This Statement provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. It also amends the disclosure
provisions to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. The provisions of this Statement are to be applied to
financial statements for fiscal years ending after December 15, 2002. As
permitted by the Statement, Textron does not plan to adopt the fair value
recognition provisions of SFAS No. 123 at this time. Textron has adopted the
disclosure provisions of this Statement as of December 28, 2002.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
45
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. Management is currently evaluating the impact of
the adoption of FIN 46 and does not anticipate that it will have a material
effect on Textron's results of operations or financial position.
NOTE 2
ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
During 2001, Textron Manufacturing acquired four companies at a total cost of
$209 million. Textron Manufacturing also made a $40 million capital contribution
to Textron Finance in support of its acquisition of a $387 million loan
portfolio. The largest of Textron Manufacturing's acquisitions was Tempo
Research Corporation in the Industrial Products segment.
During 2000, Textron Manufacturing acquired 11 companies and the minority
interests of two entities and entered into one joint venture at a total cost of
$121 million, including debt assumed of $36 million. One of the larger
acquisitions was Advantage Molding and Decorating - a leading supplier of
injection molded parts, tooling and pad-printed designs.
The purchase method of accounting has been used for all acquisitions during the
past three years. Pro forma results of operations have not been presented since
these acquisitions are not considered to be material.
DISPOSITIONS
On December 26, 2002, Textron sold the Snorkel product line of its OmniQuip
business unit and the capital stock of OmniQuip Textron Inc. holding company to
Elwood Holdings, LLC and recognized a pre-tax loss of $20 million with a tax
benefit of $54 million. The tax benefit was related to the writeoff of OmniQuip
goodwill in the third quarter of 2001 at which time only a portion of the tax
benefit was realized.
On December 20, 2001, Textron completed the sale of its Automotive Trim business
to Collins & Aikman Products Company, a subsidiary of Collins & Aikman
Corporation (C&A), for $668 million in cash, non-marketable preferred shares of
C&A valued at $147 million, 18 million shares of C&A common stock valued at $90
million and a transfer of $60 million in indebtedness. In addition, Textron
Automotive Trim entered into an $87 million lease agreement whereby equipment
used by the Automotive Trim business was retained by Textron and leased back to
the business through Textron Financial Corporation. Textron recognized a $339
million gain on the sale, and received after-tax proceeds of approximately $582
million, including the transfer of indebtedness. The proceeds were primarily
used to repurchase shares and reduce debt. The purchase and sale agreement
includes a provision that entitles Textron to an additional cash payment of up
to $125 million to be calculated based on C&A operating results for the
five-year period ending 2006.
As a part of the disposition, certain operating leases were transferred to C&A.
Textron has guaranteed C&A's payments under these operating leases up to an
aggregate amount of $21 million. Textron is required to make payments under
these guarantees upon a default by C&A under the lease agreements. These
guarantees expire along with the underlying lease agreements. Textron believes
it has sufficient recourse against C&A under the indemnity provisions of the
purchase and sale agreement should it be required to make any payments under
these guarantees.
In 2002, pursuant to a settlement of post-closing obligations under the purchase
and sale agreement for the sale of the Automotive Trim business, Textron
received $110 million from C&A and recorded an additional gain of $25 million.
The transaction included the repurchase of C&A preferred shares and the
settlement of all other matters under the purchase and sale agreement. In
conjunction with this transaction and following C&A's recapitalization through a
share offering, the carrying value of the C&A common stock held by Textron was
revised. The C&A common stock was subsequently written down as discussed in Note
15.
In January 2003, Textron sold its 50% interest in an Italian joint venture to
C&A for a $12 million after-tax gain.
46
NOTE 3
FINANCE RECEIVABLES AND SECURITIZATIONS
FINANCE RECEIVABLES
Textron Finance provides financial services primarily to the aircraft, golf,
vacation interval resort, dealer floorplan and middle market industries under a
variety of financing vehicles with various contractual maturities.
Installment contracts and finance leases have initial terms ranging from one to
20 years, and are primarily secured by the financed equipment. Finance leases
include residual values expected to be realized at contractual maturity.
Distribution finance and revolving loans generally mature within one to five
years. Distribution finance receivables are generally secured by the inventory
at the financed distributor, while revolving loans are secured by trade
receivables, inventory, plant and equipment, and pools of vacation interval
notes receivables, pools of residential and recreational land lots and the
underlying real property. Golf course mortgages have initial terms ranging from
five to seven years with amortization periods from 15 to 25 years. Resort
mortgages generally represent construction and inventory loans with terms up to
two years. Golf course and resort mortgages are secured by real property and are
generally limited to 75% or less of the property's appraised market value at
loan origination. Leveraged leases are secured by the ownership of the leased
equipment and real property and have initial terms up to 30 years.
At the end of 2002 and 2001, Textron Finance had nonaccrual finance receivables,
excluding receivables with recourse to the Manufacturing group, totaling $182
million and $114 million, respectively. Approximately $122 million and $54
million of these respective amounts were considered impaired, which excludes
finance leases and homogeneous loan portfolios. The allowance for losses on
finance receivables related to impaired loans was $33 million and $11 million at
the end of 2002 and 2001, respectively. The average recorded investment in
impaired loans during 2002 was $97 million, compared to $51 million in 2001.
The following table displays the contractual maturity of the finance
receivables. It does not necessarily reflect future cash collections because of
various factors including the repayment or refinancing of receivables prior to
contractual maturity. Cash collections of finance receivables, excluding
proceeds from receivable sales or securitizations, were $7.7 billion and $5.8
billion in 2002 and 2001, respectively. The ratio of cash collections (net of
finance charges) to average net receivables, excluding distribution finance
receivables and revolving loans, was approximately 54% in 2002 and 65% in 2001.
FINANCE RECEIVABLES
CONTRACTUAL MATURITIES OUTSTANDING
------------------------------------------ -------------------
(In millions) 2003 2004 2005 2006 Thereafter 2002 2001
- ------------- ------- ----- ---- ---- ---------- ------ ------
Installment contracts $ 275 $234 $187 $166 $ 966 $1,828 $2,047
Distribution finance 491 188 51 28 34 792 474
Revolving loans 447 208 115 233 363 1,366 1,579
Finance leases 29 54 40 17 207 347 319
Golf course and resort
mortgages 55 117 231 144 416 963 813
Leveraged leases (16) (19) 22 4 469 460 404
------ ---- ---- ---- ------ ----- -----
$1,281 $782 $646 $592 $2,455 5,756 5,636
====== ==== ==== ==== ======
Less allowance for credit losses 167 144
------ ------
$5,589 $5,492
====== ======
The net investment in finance leases and leveraged leases was as follows:
(In millions) 2002 2001
- ------------- ------ ------
Finance and leveraged lease receivables, net of nonrecourse debt $ 725 $ 490
Estimated residual values on leased assets 589 589
------ ------
1,314 1,079
Unearned income (507) (356)
------ ------
Investment in leases 807 723
Deferred income taxes (328) (258)
------ ------
Net investment in leases $ 479 $ 465
====== ======
47
The activity in the allowance for credit losses on finance receivables was as
follows:
(In millions) 2002 2001 2000
- ------------- ------ ------ -----
Balance at the beginning of the year $ 144 $ 116 $ 113
Provision for losses 139 82 37
Charge-offs (139) (82) (45)
Recoveries 11 8 7
Acquisitions and other 12 20 4
----- ----- -----
Balance at the end of the year $ 167 $ 144 $ 116
===== ===== =====
At December 28, 2002, Textron Finance had unused commitments to fund new and
existing customers under $1.5 billion of committed revolving lines of credit and
$1.0 billion of uncommitted revolving lines of credit. Generally, interest rates
on these commitments are not set until the loans are funded; therefore, Textron
Finance is not exposed to interest rate changes.
Textron Finance manages finance receivables for a variety of investors,
participants and third-party portfolio owners. The total managed and serviced
finance receivable portfolio, including owned finance receivables, was $9.4
billion at the end of 2002 and $9.3 billion at the end of 2001.
Owned and securitized finance receivables are primarily diversified
geographically across the United States, along with 4% held in South America and
9% in other international countries. At December 28, 2002, Textron Finance's
most significant collateral concentration was general aviation aircraft, which
accounted for 21% of owned and securitized receivables. Textron Finance also has
industry concentrations in the golf and vacation interval industries, which each
accounted for 15% of owned and securitized receivables at December 28, 2002.
TRANSACTIONS BETWEEN FINANCE AND MANUFACTURING GROUPS
A portion of Textron Finance's business involves financing retail purchases and
leases for new and used aircraft and equipment manufactured by Textron
Manufacturing's Aircraft and Industrial Products segments. In 2002, 2001 and
2000, Textron Finance paid Textron Manufacturing $1.1 billion, $1.3 billion, and
$1.4 billion, respectively, relating to the sale of manufactured products to
third-parties that were financed by Textron Finance and $104 million, $62
million and $50 million, respectively, for the purchase of operating lease
equipment. Operating agreements specify that Textron Finance has recourse to
Textron Manufacturing for outstanding balances from these transactions. At
year-end 2002 and 2001, the amounts guaranteed by Textron Manufacturing totaled
$562 million and $652 million, respectively. In addition, Textron Finance has
recourse to Textron Manufacturing for an $87 million lease with C&A and on $70
million in retained interests in securitizations at the end of 2002 and 2001.
Included in the finance receivables guaranteed by Textron Manufacturing are past
due loans of $85 million at the end of 2002 ($90 million at the end of 2001)
that meet the non-accrual criteria but are not classified as non-accrual by
Textron Finance due to the guarantee. Textron Finance continues to recognize
income on these loans. Concurrently, Textron Manufacturing is charged for their
obligation to Textron Finance under the guarantee so that there are no net
interest earnings for the loans on a consolidated basis. Textron Manufacturing
has established reserves for losses related to these guarantees which are
included in other current liabilities.
SECURITIZATIONS
Textron Finance received proceeds of $0.9 billion in 2002 and $1.3 billion in
2001 from the securitization and sale (with servicing rights retained) of
finance receivables. Gains from securitized trust sales were approximately $54
million in 2002 and $43 million in 2001. At the end of 2002, $2.6 billion in
securitized loans were outstanding with $78 million in past due loans. Textron
Finance has securitized certain receivables generated by Textron Manufacturing
for which it has retained full recourse to Textron Manufacturing.
Textron Finance retained subordinated interests in the trusts which are
approximately 2% to 10% of the total trust. Servicing fees range from 50 to 200
basis points. During 2002, key economic assumptions used in measuring the
retained interests at the date of each securitization included prepayment speeds
ranging from 7% to 23%, weighted average lives ranging from 0.3 to 5 years,
expected credit losses ranging from 0.3% to 4.5%, and residual cash flows
discount rates ranging from 4.7% to 11.5%. At
48
December 28, 2002, key economic assumptions used in measuring these retained
interests were as follows:
SMALL EQUIPMENT VACATION DISTRIBUTION
AIRCRAFT BUSINESS LOANS AND INTERVAL AND FINANCE
(Dollars in millions) LOANS LOANS LEASES LAND LOANS LOANS
- --------------------- -------- -------- --------- ------------ ------------
Carrying amount of retained
interests in securitizations, net $ 89 $ 58 $ 47 $ 40 $ 89
Weighted-average life (in years) 3.2 1.6 1.8 5.1-5.3 .3
Prepayment speed (annual rate) 22.0% 7.0% 7.0% 15.0-20.0% --
Expected credit losses (annual rate) 0.4% 4.5% 0.2% 0.5-1.5% 0.3%
Residual cash flows discount rate 6.6% 11.5% 7.4% 9.2-10.0% 5.8%
Hypothetical adverse changes of 10% and 20% to either the prepayment speed,
expected credit losses and residual cash flows discount rates assumptions would
not have a material impact on the current fair value of the residual cash flows
associated with the retained interests. These hypothetical sensitivities should
be used with caution as the effect of a variation in a particular assumption on
the fair value of the retained interest is calculated without changing any other
assumption. In reality, changes in one factor may result in another that may
magnify or counteract the sensitivities losses, such as increases in market
interest rates may result in lower prepayments and increased credit losses.
NOTE 4
INVENTORIES
DECEMBER 28, December 29,
(In millions) 2002 2001
------------ ------------
Finished goods $ 777 $ 719
Work in process 811 856
Raw materials 209 377
------ ------
1,797 1,952
------ ------
Less progress payments and customer deposits 186 225
------ ------
$1,611 $1,727
====== ======
Inventories aggregating $1.1 billion and $1.0 billion at the end of 2002 and
2001, respectively, were valued by the last-in, first-out (LIFO) method. Had
such LIFO inventories been valued at current costs, their carrying values would
have been approximately $228 million and $188 million higher at those respective
dates. The remaining inventories, other than those related to certain long-term
contracts, are valued primarily by the first-in, first-out method. Inventories
related to long-term contracts, net of progress payments and customer deposits,
were $11 million at the end of 2002 and $105 million at the end of 2001.
NOTE 5
LONG-TERM CONTRACTS
Long-term contract receivables at the end of 2002 and 2001 totaled $201 million
and $264 million, respectively. This includes $161 million and $220 million,
respectively, of unbilled costs and accrued profits that had not yet met the
contractual billing criteria. Long-term contract receivables do not include
significant amounts billed but unpaid due to contractual retainage provisions or
subject to collection uncertainty. During the second half of 2001, program
reviews on certain long-term development and production contracts indicated
reduced profitability expectations resulting in a $124 million charge to
earnings. The reduced profitability expectations reflected the clarification of
several matters including extended development schedules and planned design
changes on a number of programs, as well as ongoing development efforts.
NOTE 6
LONG-TERM ASSETS
Property, plant and equipment for Textron Manufacturing is comprised of the
following:
December 28, December 29,
(In millions) 2002 2001
- ------------- ------------ ------------
Land and buildings $1,056 $1,011
Machinery and equipment 3,113 2,962
------ ------
4,169 3,973
Less accumulated depreciation 2,188 1,929
------ ------
$1,981 $2,044
====== ======
49
In 2000, Textron adopted the EITF consensus, Issue No. 99-5 "Accounting for
Pre-Production Costs Related to Long-Term Supply Arrangements." This consensus
requires that all design and development costs for products sold under long-term
supply arrangements be expensed unless there is a contractual guarantee that
provides for specific required payments for these costs. Textron reported a
cumulative effect of a change in accounting principle of $59 million, net of
tax, upon the adoption.
NOTE 7
GOODWILL AND OTHER INTANGIBLE ASSETS
On December 30, 2001, Textron adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", which requires companies to stop amortizing goodwill and
certain intangible assets with indefinite useful lives, and requires an annual
review for impairment. Upon adoption, Textron discontinued the amortization of
goodwill.
Under SFAS No. 142, Textron was required to test all existing goodwill for
impairment as of December 30, 2001, on a "reporting unit" basis. The reporting
unit represents the operating segment unless, at businesses one level below that
operating segment (a "component"), discrete financial information is prepared
and is reviewed by segment management, in which case such component is the
reporting unit. In certain instances, components of an operating segment have
been aggregated and deemed a single reporting unit based on similar economic
characteristics of the components. Goodwill is considered to be impaired when
the net book value of a reporting unit exceeds its estimated fair value. Fair
values were primarily established using a discounted cash flow methodology. When
available, comparative market multiples were used to corroborate discounted cash
flow results.
As a result of this impairment review of goodwill, Textron recorded an after-tax
transitional impairment charge of $488 million ($561 million, pre-tax), which is
reported in the caption "Cumulative effect of change in accounting principle,
net of income taxes". This after-tax charge relates to the following segments:
$274 million in Industrial Products; $111 million in Industrial Components; $88
million in Fastening Systems; and $15 million in Finance. For Industrial
Products, the primary factor resulting in the impairment charge was the
difficult economic environment in the telecommunication industry which has
experienced a significant decline in demand. This decline has resulted in lower
sales and operating margins than originally anticipated with the acquisitions of
the InteSys and Tempo businesses. For Industrial Components and Fastening
Systems, the primary factor was the decline in demand in certain industries in
which these segments operate due to the economic slowdown. The Finance segment's
impairment charge is in its franchise finance division and was primarily the
result of decreasing loan volumes and an unfavorable securitization market. No
impairment charge was appropriate for these segments under the previous goodwill
impairment accounting standard, which Textron applied based on undiscounted cash
flows.
Changes in goodwill are summarized below:
Fastening Industrial Industrial
(In millions) Aircraft Systems Products Components Finance Total
- ------------- -------- ------- -------- ---------- ------- -----
Balance at December 30, 2000 $ 333 $ 497 $ 798 $ 577 $ 216 $ 2,421
----- ----- ----- ----- ----- -------
Acquisitions -- (2) 184 10 -- 192
Dispositions -- -- -- (181) -- (181)
Amortization (11) (16) (30) (21) (12) (90)
Impairment charge -- (2) (306) -- -- (308)
Foreign currency translation -- (4) -- (5) -- (9)
----- ----- ----- ----- ----- -------
Balance at December 29, 2001 322 473 646 380 204 2,025
----- ----- ----- ----- ----- -------
Reclassification of intangible assets -- -- 41 -- 1 42
Transitional impairment charge -- (100) (326) (111) (24) (561)
Foreign currency translation -- 17 2 24 -- 43
----- ----- ----- ----- ----- -------
Balance at December 28, 2002 $ 322 $ 390 $ 363 $ 293 $ 181 $ 1,549
===== ===== ===== ===== ===== =======
Textron also adopted the remaining provisions of SFAS No. 141, "Business
Combinations" on December 30, 2001. For goodwill and intangible assets reported
in connection with acquisitions made prior to July 1, 2001, these provisions
broaden the criteria for recording intangible assets separate from goodwill and
require that certain intangible assets that do not meet the new criteria, such
as assembled workforce and customer base, be reclassified into goodwill. Upon
adoption of these provisions, intangible assets totaling $42 million, net of
related deferred taxes, were reclassified into goodwill within the Industrial
Products and Finance segments.
50
The effect on net income of the transitional impairment charge and of excluding
goodwill amortization expense is presented below:
(In millions, except per share data) 2002 2001 2000
- ------------------------------------ ------ ----- -----
Income before cumulative effect of change in
accounting principle $ 364 $ 166 $ 277
Add back: amortization* -- 88 92
------ ----- -----
Adjusted net income before cumulative effect of change in
accounting principle 364 254 369
Cumulative effect of change in accounting principle* (488) -- (59)
------ ----- -----
Adjusted net income (loss) $ (124) $ 254 $ 310
====== ===== =====
Basic earnings per share:
Income before cumulative effect of change in
accounting principle $ 2.62 $1.17 $1.92
Add back: amortization* -- .63 .64
------ ----- -----
Adjusted net income before cumulative effect of change in
accounting principle 2.62 1.80 2.56
Cumulative effect of change in accounting principle* (3.52) -- (.41)
------ ----- -----
Adjusted income (loss) per share - basic $(0.90) $1.80 $2.15
====== ===== =====
Diluted earnings per share:
Income before cumulative effect of change in
accounting principle $ 2.60 $1.16 $1.90
Add back: amortization* -- .62 .63
------ ----- -----
Adjusted net income before cumulative effect of change in
accounting principle 2.60 1.78 2.53
Cumulative effect of change in accounting principle* (3.48) -- (.41)
------ ----- -----
Adjusted income (loss) per share - diluted $(0.88) $1.78 $2.12
====== ===== =====
*Net of income taxes
All of Textron's acquired intangible assets are subject to amortization and are
comprised of the following:
DECEMBER 28, 2002 December 29, 2001
------------------------------------- -------------------------------------
WEIGHTED
AVERAGE
AMORTIZATION GROSS GROSS
PERIOD CARRYING ACCUMULATED CARRYING ACCUMULATED
(Dollars in millions) (IN YEARS) AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
- --------------------- ---------- ------ ------------ --- ------ ------------ ---
Trademarks 30 $ 61 $ 5 $56 $ 61 $ 3 $ 58
Customer base 12 -- -- -- 47 8 39
Patents 8 17 6 11 17 4 13
Workforce 9 -- -- -- 20 7 13
Non-compete 3 10 7 3 10 3 7
Other 5 16 3 13 14 -- 14
---- --- --- ---- --- ----
$104 $21 $83 $169 $25 $144
==== === === ==== === ====
Amortization expense totaled $11 million and $17 million in 2002 and 2001,
respectively. Amortization expense for fiscal years 2003, 2004, 2005, 2006, and
2007 is estimated to be approximately $10 million, $6 million, $6 million, $4
million and $4 million, respectively.
51
NOTE 8
DEBT AND CREDIT FACILITIES
DECEMBER 28, December 29,
(In millions) 2002 2001
- ------------- ------------ ------------
TEXTRON MANUFACTURING:
Short-term debt:
Borrowings under or supported by long-term credit facilities* $ -- $ 146
Current portion of long-term debt 25 527
------- -------
Total short-term debt 25 673
------- -------
Long-term senior debt:
Medium-term notes due 2010-2011 (average rate - 9.85%) 17 16
6.750% due 2002 -- 500
6.375% due 2004 300 300
5.625% due 2005 308 270
6.375% due 2008 300 300
6.50% due 2012 300 --
6.625% due 2020 241 217
Other long-term debt (average rate - 6.49%) 245 185
------- -------
1,711 1,788
------- -------
Current portion of long-term debt (25) (527)
------- -------
Total long-term debt 1,686 1,261
------- -------
Total Textron Manufacturing debt $ 1,711 $ 1,934
======= =======
* The weighted average interest rates on these borrowings, before the effect of
interest rate exchange agreements, were 3.2% and 5.6% at year-end 2001 and
2000, respectively. Weighted average interest rates during the years 2002,
2001 and 2000 were 2.5%, 4.3% and 5.7%, respectively.
Textron Manufacturing maintains credit facilities with various banks for both
short- and long-term borrowings. Textron Manufacturing has a primary revolving
credit facility for $1.5 billion, of which $500 million will expire in 2003
and $1 billion will expire in 2007. The $500 million facility includes a
one-year term out option that can effectively extend its expiration into 2004.
At December 28, 2002, none of the lines of credit were used or reserved as
support for commercial paper.
DECEMBER 28, December 29,
(In millions) 2002 2001
- ------------- ------------ ------------
TEXTRON FINANCE:
Borrowings under or supported by credit facilities* $ 917 $ 688
6.25% average rate debt; due 2003 to 2009 2,586 1,512
2.16% average rate variable notes; due 2003 to 2007 1,337 1,988
------ ------
Total Textron Finance debt $4,840 $4,188
====== ======
* The weighted average interest rates on these borrowings, before the effect of
interest rate exchange agreements, were 1.7%, 2.4% and 6.7% at year-end 2002,
2001 and 2000, respectively. Weighted average interest rates during the years
2002, 2001 and 2000 were 2.1%, 4.1% and 6.4%, respectively.
Textron Finance has bank lines of credit of $1.5 billion, of which $500 million
expires in 2003 and $1 billion expires in 2006. Of these lines, $616 million
was not used or reserved as support for commercial paper or bank borrowings. The
$500 million facility includes a one-year term out option that can effectively
extend its expiration into 2004. Lending agreements limit Textron Finance's net
assets available for dividends and other payments to Textron Manufacturing to
approximately $449 million of Textron Finance's net assets of $1,020 million at
the end of 2002. These lending agreements also contain various restrictive
provisions regarding additional debt, minimum net worth, creation of liens and
the maintenance of a fixed charges coverage ratio.
The following table shows required payments during the next five years on debt
outstanding at the end of 2002. The payment schedule excludes amounts that are
payable under or supported by long-term credit facilities.
(In millions) 2003 2004 2005 2006 2007
- ------------- ---- ---- ---- ---- ----
Textron Manufacturing $ 25 $ 318 $314 $ 5 $ 37
Textron Finance 1,069 1,407 199 25 726
------ ------ ---- --- ----
$1,094 $1,725 $513 $30 $763
====== ====== ==== === ====
52
Textron Manufacturing has agreed to cause Textron Finance to maintain certain
minimum levels of financial performance. No payments from Textron
Manufacturing were necessary in 2002, 2001 or 2000 for Textron Finance to meet
these standards.
DUE TO TEXTRON MANUFACTURING
On December 20, 2001, Textron Manufacturing entered into a promissory demand
note agreement with Textron Finance. At the end of 2001, $510 million was
outstanding and has not been eliminated on the consolidated balance sheet. This
note was repaid in full in January 2002.
NOTE 9
DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
FAIR VALUE INTEREST RATE HEDGES
Textron Manufacturing's policy is to manage interest cost using a mix of fixed-
and variable-rate debt. To manage this mix in a cost efficient manner, Textron
Manufacturing will enter into interest rate swaps to agree to exchange, at
specified intervals, the difference between fixed and variable interest amounts
calculated by reference to an agreed upon notional principal amount. Since the
critical terms of the debt and the interest rate swap match and the other
conditions of SFAS No. 133 are met, the hedge is considered perfectly
effective. The mark-to-market values of both the fair value hedge instruments
and underlying debt obligations are recorded as equal and offsetting
unrealized gains and losses in interest expense. In November 2002 and in March
2001, Textron Manufacturing terminated all outstanding interest rate swaps and
recognized a gain of $15 million in each year. Hedge accounting was discontinued
at the date of the swap termination. The fair value adjustment on the debt
related to the discontinued hedge is being amortized into income over the
remaining life of the debt. Textron Manufacturing entered into new swap
agreements in November 2002 and had interest rate swaps with a fair value of $4
million at December 28, 2002.
Textron Finance enters into interest rate swap agreements to mitigate its
exposure to interest rate changes by converting certain of its fixed-rate
receivables and debt issues to floating rates. The agreements require Textron
Finance to make periodic fixed-rate payments in exchange for floating-rate
receipts and vice-versa based on specified notional amounts. In 2002, Textron
Finance also entered into a foreign currency exchange agreement to convert a Y6
billion fixed-rate note to a $45 million variable-rate note. Under this
agreement, Textron Finance is required to make U.S. dollar payments based on
LIBOR in exchange for fixed receipts of Yen at specified notional amounts.
Textron Finance has designated these agreements as fair value hedges. At
December 28, 2002, Textron Finance had interest swap agreements with a fair
value of $43 million designated as fair value hedges, compared to a liability of
$6 million at December 29, 2001. Textron Finance's fair value hedges are highly
effective resulting in an immaterial net impact to earnings due to hedge
ineffectiveness.
Interest rate swap agreements designated as fair value hedges are summarized as
follows:
DECEMBER 28, 2002 DECEMBER 29, 2001
----------------------------------- --------------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE WEIGHTED AVERAGE
AVERAGE REMAINING AVERAGE REMAINING
NOTIONAL INTEREST TERM NOTIONAL INTEREST TERM
(Dollars in millions) AMOUNT RATE (IN YEARS) AMOUNT RATE (IN YEARS)
- --------------------- -------- -------- ---------- -------- -------- ----------
TEXTRON MANUFACTURING:
Variable-pay swaps $ 300 4.6% 3.7 $ -- -- --
TEXTRON FINANCE:
Variable-pay swaps-foreign debt $ 77 2.3% .5 $ 33 2.8% 1.9
Variable-pay swaps - debt $1,240 2.1% 5.1 $370 1.9% 0.6
Variable-receive swaps -
receivables $ 219 1.9% 12.1 $ 97 3.1% 12.0
CASH FLOW INTEREST RATE HEDGES
Textron Finance enters into interest rate swap, cap and floor agreements to
mitigate its exposure on interest-only securities resulting from
securitizations. The swap agreements require Textron Finance to make periodic
variable-rate payments in exchange for periodic fixed-rate receipts and vice
versa based on specified notional amounts. The cap and floor agreements require
the payment of variable-rate amounts based on specified notional amounts if
interest rates exceed or fall below specified rates. In 2002, Textron Finance
also entered into foreign currency exchange agreements to convert $107 million
of variable-rate notes receivable to C$170 million of fixed-rate notes
receivable to manage foreign currency exposure by matching these notes to
Canadian-denominated debt. Under these agreements,
53
Textron Finance is required to make U.S. dollar payments based on LIBOR in
exchange for fixed receipts of Canadian dollars at specified notional amounts
with a weighted average interest rate of 6% over a remaining term of 2.1 years.
Textron Finance also utilizes interest rate agreements to protect against the
interest rate risk associated with its retained interest in securitized assets.
Textron Finance's interest rate swap, cap and floor agreements related to its
variable rate interest-only securities are summarized as follows:
DECEMBER 28, 2002 DECEMBER 29, 2001
----------------------------------- -----------------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE WEIGHTED AVERAGE
AVERAGE REMAINING AVERAGE REMAINING
NOTIONAL INTEREST TERM NOTIONAL INTEREST TERM
(Dollars in millions) AMOUNT RATE* (IN YEARS) AMOUNT RATE* (IN YEARS)
- --------------------- -------- -------- ---------- -------- -------- ----------
LIBOR-based swaps $407 4.79% 5.1 $371 5.71% 6.5
Prime-based swaps $ 77 9.07% 15.9 $112 9.00% 16.7
One-month LIBOR-based cap* $389 5.43% -- $337 6.35% --
Prime-based floor* $129 8.75% -- $148 8.73% --
Six-month LIBOR-based floor* -- -- -- $ 12 5.34% --
* Represents interest cap or floor rate
For cash flow hedges during 2002 and 2001, Textron Finance recorded an after-tax
charge of $4 million and $11 million, respectively, to accumulated OCL with no
impact to the statement of operations. Assuming no changes in interest rates,
Textron Finance expects $9 million of net deferred losses to be reclassified to
earnings over the next year to offset interest payments made or received, and
expects approximately $2 million, net of income taxes, to be reclassified to
earnings as a result of the amortization of deferred losses related to
discontinued hedges. Textron Finance has not incurred or recognized any gains or
losses in earnings as the result of the ineffectiveness or the exclusion from
its assessment of hedge effectiveness of its cash flow hedges.
Textron had minimal exposure to loss from nonperformance by the counterparties
to its interest rate swaps at the end of 2002, and does not anticipate
nonperformance by counterparties in the periodic settlements of amounts due.
Textron currently minimizes this potential for risk by entering into contracts
exclusively with major, financially sound counterparties having no less than a
long-term bond rating of "A," by continuously monitoring such credit ratings and
by limiting exposure with any one financial institution. The credit risk
generally is limited to the amount by which the counterparties' contractual
obligations exceed Textron's obligations to the counterparty.
CURRENCY RATE HEDGING
Textron manufactures and sells its products in a number of countries throughout
the world and, as a result, is exposed to movements in foreign currency exchange
rates. The primary purpose of Textron's foreign currency hedging activities is
to manage the volatility associated with foreign currency purchases of
materials, foreign currency sales of its products and other assets and
liabilities created in the normal course of business. Textron primarily
utilizes forward exchange contracts and purchased options with maturities of no
more than 18 months that qualify as cash flow hedges. These are intended to
offset the effect of exchange rate fluctuations on forecasted sales, inventory
purchases and overhead expenses. The fair value of these instruments at
December 28, 2002 was a $4 million liability. At year-end 2002, $3 million of
after-tax loss was reported in accumulated OCL from qualifying cash flow hedges.
This loss is generally expected to be reclassified to earnings in the next 12
months as the underlying transactions occur. Textron Manufacturing also enters
into certain foreign currency derivative instruments that do not meet hedge
accounting criteria, and are primarily intended to protect against exposure
related to intercompany financing transactions and income from international
operations. The fair value of these instruments at year-end 2002 and the net
impact of the related gains and losses on selling and administrative expense was
not material in 2002.
NET INVESTMENT HEDGING
Textron hedges its net investment position in major currencies and generates
foreign currency interest payments, that offset other transactional exposures in
these currencies. To accomplish this, Textron borrows directly in foreign
currency and designates a portion of foreign currency debt as a hedge of net
investments. In addition, certain currency forwards are designated as hedges of
Textron's related foreign net investments. Currency effects of these hedges
which are reflected in the cumulative translation adjustment account within OCL,
produced a $5 million after-tax gain during 2002, leaving an accumulated net
balance of $47 million.
54
The table below summarizes, by major currency, Textron Manufacturing's forward
exchange contracts in U.S. dollars. The buy and sell amounts represent the U.S.
dollar equivalent of commitments to purchase and sell foreign currencies. The
foreign currency amounts have been translated into a U.S. dollar equivalent
using the exchange rate at the balance sheet date.
BUY CONTRACTS SELL CONTRACTS
---------------------------- ---------------------------
CONTRACT UNREALIZED CONTRACT UNREALIZED
(In millions) AMOUNT GAIN/(LOSS) AMOUNT GAIN/(LOSS)
- ------------- -------- ----------- -------- -----------
DECEMBER 28, 2002
British Pound $ 7 $ -- $ 1 $--
Canadian Dollar 216 (4) 9 --
Euro 97 1 219 --
Other 85 (1) 87 1
---- ---- ---- ---
Total $405 $ (4) $316 $ 1
==== ==== ==== ===
DECEMBER 29, 2001
British Pound $ 7 $ -- $ -- $--
Canadian Dollar 217 (7) 23 --
Euro 23 (3) 67 --
Other 106 -- 162 --
---- ---- ---- ---
Total $353 $(10) $252 $--
==== ==== ==== ===
STOCK-BASED COMPENSATION HEDGING
Textron manages the expense related to stock-based compensation awards using
cash settlement forward contracts on its common stock. The use of these forward
contracts modifies Textron's compensation expense exposure to changes in the
stock price with the intent to reduce potential variability. The fair value of
these instruments at December 28, 2002 was a $3 million liability. Gains and
losses on these instruments are recorded as an adjustment to compensation
expense when the award is charged to expense. These contracts generated expense
of $4 million, $22 million and $69 million in 2002, 2001 and 2000, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of Textron's financial
instruments that are not reflected in the financial statements at fair value as
a matter of accounting policy, are as follows:
DECEMBER 28, 2002 DECEMBER 29, 2001
------------------------------- --------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
(In millions) VALUE VALUE VALUE VALUE
- ------------- -------- --------- -------- ---------
TEXTRON MANUFACTURING:
Debt $(1,711) $(1,839) $(1,934) $(1,972)
TEXTRON FINANCE:
Finance receivables 4,809 4,943 4,795 4,884
Debt (4,840) (4,935) (4,188) (4,208)
NOTE 10
TEXTRON FINANCE - OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
FINANCE SUBSIDIARY HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES
Litchfield Financial Corporation (Litchfield, a subsidiary of Textron Financial
Corporation) was acquired by Textron Financial Corporation during 1999. Prior to
the acquisition, a trust sponsored and wholly owned by Litchfield issued Series
A Preferred Securities to the public (for $26 million), the proceeds of which
were invested by the trust in $26 million aggregate principal amount of
Litchfield's newly issued 10% Series A Junior Subordinated Debentures (Series A
Debentures), due 2029. The debentures are the sole asset of the trust. The
preferred securities were recorded by Textron Financial Corporation at the fair
value of $29 million as of the acquisition date. The amounts due to the trust
under the subordinated debentures and the related income statement amounts have
been eliminated in Textron's consolidated financial statements.
The preferred securities accrue and pay cash distributions quarterly at a rate
of 10% per annum. The trust's obligation under the Series A Preferred Securities
is fully and unconditionally guaranteed by Litchfield. The trust will redeem all
of the outstanding Series A Preferred Securities when the Series A Debentures
are paid at maturity on June 30, 2029, or otherwise become due. Litchfield will
have the right to redeem 100% of the principal plus accrued and unpaid interest
on or after June 30, 2004. As a result of its acquisition of Litchfield, Textron
Financial Corporation has agreed to make payments to the holders of the
Preferred Securities when due, to the extent not paid by or on behalf of the
trust or subsidiary.
55
NOTE 11
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 proceeds from the issuance of the debentures
were used by Textron for the repayment of long-term borrowings and for general
corporate purposes. The amounts due to the trust under the debentures and the
related income statement amounts have been eliminated in Textron's consolidated
financial statements.
The preferred securities accrue and pay cash distributions quarterly at a rate
of 7.92% per annum. Textron has guaranteed, on a subordinated basis,
distributions and other payments due on the preferred securities. The guarantee,
when taken together with Textron's obligations under the debentures and in the
indenture pursuant to which the debentures were issued and Textron's obligations
under the Amended and Restated Declaration of Trust governing the trust,
provides a full and unconditional guarantee of amounts due on the preferred
securities. The preferred securities are mandatorily redeemable upon the
maturity of the debentures on March 31, 2045, or earlier to the extent of any
redemption by Textron of any debentures. The redemption price in either such
case will be $25 per share plus accrued and unpaid distributions to the date
fixed for redemption.
NOTE 12
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Textron has authorization for 15,000,000 shares of preferred stock and
500,000,000 shares of 12.5 cent per share par value common stock. Each share of
$2.08 Preferred Stock ($23.63 approximate stated value) is convertible into 4.4
shares of common stock and can be redeemed by Textron for $50 per share. Each
share of $1.40 Preferred Dividend Stock ($11.82 approximate stated value) is
convertible into 3.6 shares of common stock and can be redeemed by Textron for
$45 per share.
PERFORMANCE SHARE UNITS AND STOCK OPTIONS
Textron's 1999 Long-Term Incentive Plan (the "1999 Plan") authorizes awards to
key employees of Textron in three forms: (a) options to purchase Textron
shares; (b) performance share units and (c) restricted stock. In 2002,
Textron's shareholders approved an amendment to the 1999 Plan to revise the
maximum number of share awards authorized as follows: (a) 14,000,000 options
to purchase Textron shares; (b) 2,000,000 performance units and (c) 500,000
shares of restricted stock.
Pro forma information regarding net income and earnings per share has been
determined using the fair value method. For the purpose of developing the pro
forma information, the fair values of options granted after 1995 are estimated
at the date of grant using the Black-Scholes option-pricing model. The estimated
fair values are amortized to expense over the options' vesting period. Using
this methodology, net income would have been reduced by $31 million or $0.22 per
diluted share in 2002, $26 million or $0.18 per diluted share in 2001, and $25
million or $0.17 per diluted share in 2000.
The assumptions used to estimate the fair value of an option granted in 2002,
2001 and 2000, respectively, are approximately as follows: dividend yield of
3%, 3% and 3%; expected volatility of 36%, 34% and 27%; risk-free interest rates
of 4%, 4% and 5%, and weighted average expected lives of 3.7 years in 2002 and
3.5 years in 2001 and 2000. Under these assumptions, the weighted-average fair
value of an option to purchase one share granted in 2002, 2001 and 2000 was
approximately $10, $11 and $10, respectively.
At the end of 2002, 3,636,000 stock options were available for future grant
under the 1999 Plan as amended. Stock option activity is summarized as follows:
2002 2001 2000
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
(Shares in thousands) SHARES PRICE SHARES PRICE SHARES PRICE
- --------------------- ------- -------- ------- -------- ------- --------
Outstanding at beginning
of year 10,976 $ 53.50 12,631 $ 52.32 8,822 $ 55.26
Granted 5,135 41.29 315 50.93 4,618 46.31
Exercised (696) 34.25 (884) 30.20 (440) 30.67
Canceled (1,275) 57.89 (1,086) 58.01 (369) 76.41
------ ------- ------ ------- ------ -------
Outstanding at end of year 14,140 $ 49.62 10,976 $ 53.50 12,631 $ 52.32
====== ======= ====== ======= ====== =======
Exercisable at end of year 9,043 $ 54.08 8,653 $ 55.33 7,012 $ 53.25
====== ======= ====== ======= ====== =======
56
Stock options outstanding at the end of 2002 are summarized as follows (shares
in thousands):
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
- ------------------------ ----------- --------------- -------- ----------- --------
$22 - $40 1,442 3.9 $ 32.93 1,152 $ 31.32
$41 - $63 9,950 7.9 $ 45.20 5,143 $ 48.54
$64 - $94 2,748 6.4 $ 73.97 2,748 $ 73.97
- --------- ----- --- ------- ----- -------
RESERVED SHARES OF COMMON STOCK
At the end of 2002, common stock reserved for the subsequent conversion of
preferred stock and shares reserved for the exercise of stock options were
2,786,000 and 14,140,000, respectively.
PREFERRED STOCK PURCHASE RIGHTS
Each outstanding share of Textron common stock has attached to it one-half of a
preferred stock purchase right. One preferred stock purchase right entitles
the holder to buy one one-hundredth of a share of Series C Junior Participating
Preferred Stock at an exercise price of $250. The rights become exercisable
only under certain circumstances related to a person or group acquiring or
offering to acquire a substantial block of Textron's common stock. In certain
circumstances, holders may acquire Textron stock, or in some cases the stock of
an acquiring entity, with a value equal to twice the exercise price. The rights
expire in September 2005 but may be redeemed earlier for $.05 per right.
INCOME PER COMMON SHARE
A reconciliation of income from operations and basic to diluted share amounts is
presented below.
2002 2001 2000
---------------------- -------------------- --------------------
(Dollars in millions, AVERAGE AVERAGE AVERAGE
shares in thousands) INCOME SHARES INCOME SHARES INCOME SHARES
- -------------------- ------ ------- ------ ------- ------ -------
Income from operations $364 $166 $277
Less: Preferred stock dividends -- -- (1) --
---- ------- ---- ------- ---- -------
BASIC
Available to common shareholders 364 138,745 165 141,050 277 143,923
Dilutive effect of convertible
preferred stock and stock
options -- 1,507 1 1,887 -- 2,227
---- ------- ---- ------- ---- -------
DILUTED
Available to common
shareholders and
assumed conversions $364 140,252 $166 142,937 $277 146,150
==== ======= ==== ======= ==== =======
57
ACCUMULATED OTHER COMPREHENSIVE LOSS (OCL)
DEFERRED
UNREALIZED GAINS
CURRENCY GAINS PENSION (LOSSES)
TRANSLATION (LOSSES) LIABILITY ON HEDGE
(In millions) ADJUSTMENT ON SECURITIES ADJUSTMENT CONTRACTS TOTAL
- ------------- ----------- ------------- ---------- --------- ------
Balance at January 1, 2000 $ (96) $ -- $ (2) $ -- $ (98)
Change, net of income taxes (74) -- -- -- (74)
Net unrealized losses* -- (59) -- -- (59)
Reclassification adjustment* -- 59 -- -- 59
----- ---- ---- ---- -----
Balance at December 30, 2000 (170) -- (2) -- (172)
Transition adjustment due to
change in accounting, net of taxes -- -- -- (15) (15)
Change, net of income taxes (31) 1 -- (17) (47)
Automotive Trim disposal,net of income taxes 11 -- -- -- 11
Net unrealized losses* -- (6) -- -- (6)
Reclassification adjustment* -- 6 -- -- 6
----- ---- ---- ---- -----
Balance at December 29, 2001 (190) 1 (2) (32) (223)
Change, net of income taxes 78 2 (95) 13 (2)
Net unrealized losses* -- (25) -- -- (25)
Reclassification adjustment* -- 25 -- -- 25
----- ---- ---- ---- -----
Balance at December 28, 2002 $(112) $ 3 $(97) $(19) $(225)
===== ==== ==== ==== =====
* Net of income tax benefit of $13, $3 and $31 for 2002, 2001 and 2000,
respectively.
NOTE 13
PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Textron has defined benefit and defined contribution pension plans that together
cover substantially all employees. The costs of the defined contribution plans
amounted to approximately $44 million in 2002, $48 million in 2001 and $51
million in 2000. Defined benefits under salaried plans are based on salary and
years of service. Hourly plans generally provide benefits based on stated
amounts for each year of service. Textron's funding policy is consistent with
federal law and regulations. Pension plan assets consist principally of
corporate and government bonds and common stocks. Textron offers health care and
life insurance benefits for certain retired employees.
The following summarizes the change in the benefit obligation; the change in
plan assets; the funded status; and reconciliation to the amount recognized in
the balance sheet for the pension and postretirement benefit plans:
POSTRETIREMENT BENEFITS
PENSION BENEFITS OTHER THAN PENSIONS
----------------------------- ---------------------------
DECEMBER 28, December 29, DECEMBER 28, December 29,
(In millions) 2002 2001 2002 2001
- ------------- ------------ ------------ ------------ ------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 3,908 $ 3,941 $ 632 $ 612
Service cost 99 109 4 6
Interest cost 278 282 45 49
Amendments 12 34 1 (14)
Net effect of acquisitions/dispositions -- (220) -- (65)
Plan participants' contributions 4 4 5 5
Actuarial losses 262 28 51 113
Benefits paid (273) (258) (69) (70)
Foreign exchange rate changes 51 (11) 1 (1)
Curtailments 1 (1) 5 (3)
------- ------- ----- -----
Benefit obligation at end of year $ 4,342 $ 3,908 $ 675 $ 632
======= ======= ===== =====
58
POSTRETIREMENT BENEFITS
PENSION BENEFITS OTHER THAN PENSIONS
----------------------------- ---------------------------
DECEMBER 28, December 29, DECEMBER 28, December 29,
(In millions) 2002 2001 2002 2001
- ------------- ------------ ------------ ------------ ------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning
of year $ 4,480 $ 5,170 $ -- $ --
Actual return on plan assets (275) (218) -- --
Employer contributions 23 22 -- --
Plan participants' contributions 4 4 -- --
Net effect of acquisitions/dispositions -- (229) -- --
Benefits paid (273) (258) -- --
Foreign exchange rate changes 49 (11) -- --
------- ------- ----- -----
Fair value of plan assets at end of year $ 4,008 $ 4,480 $ -- $ --
======= ======= ===== =====
Funded status of the plan $ (334) $ 572 $(675) $(632)
Unrecognized actuarial loss (gain) 892 (133) 77 26
Unrecognized prior service cost (benefit) 151 162 (13) (20)
Unrecognized transition net asset (4) (23) -- --
------- ------- ----- -----
Net amount recognized in the balance
sheet $ 705 $ 578 $(611) $(626)
======= ======= ===== =====
Amounts recognized in the balance
sheet consists of:
Prepaid benefit cost $ 820 $ 745 $ -- $ --
Accrued benefit liability (270) (171) (611) (626)
Intangible asset 5 2 -- --
Minimum pension liability 150 2 -- --
------- ------- ----- -----
Net amount recognized in the balance
sheet $ 705 $ 578 $(611) $(626)
======= ======= ===== =====
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $714 million, $618 million and $365 million,
respectively, as of year-end 2002, and $248 million, $209 million and $42
million, respectively, as of year-end 2001.
The following summarizes the net periodic benefit cost for the pension benefits
and postretirement benefits plans:
POSTRETIREMENT BENEFITS
PENSION BENEFITS OTHER THAN PENSIONS
------------------------------------------- ------------------------------------------
DECEMBER 28, December 29, December 30, DECEMBER 28, December 29, December 30,
(In millions) 2002 2001 2000 2002 2001 2000
- ------------- ------------ ------------ ------------ ------------ ------------ ------------
COMPONENTS OF NET
PERIODIC BENEFIT COST
Service cost $ 99 $ 109 $ 101 $ 4 $ 6 $ 6
Interest cost 278 282 265 45 49 45
Expected return on
plan assets (454) (454) (423) -- -- --
Amortization of
unrecognized
transition asset (17) (17) (17) -- -- --
Recognized actuarial
(gain)/loss (16) (30) (24) 3 (2) (8)
Recognized prior
service cost 15 20 14 (4) (6) (4)
Curtailments (6) (6) -- 1 (5) (1)
----- ----- ----- ---- ---- ----
Net periodic benefit
cost $(101) $ (96) $ (84) $ 49 $ 42 $ 38
===== ===== ===== ==== ==== ====
Recognized actuarial (gain)/loss on net pension benefits is being amortized over
a twelve-year period.
59
Major actuarial assumptions used in accounting for defined benefit pension plans
are presented below.
DECEMBER 28, December 29, December 30, January 1,
2002 2001 2000 2000
------------ ------------ ------------ ----------
Discount rate 6.75% 7.25% 7.50% 7.50%
Expected rate of return on plan
assets 8.90 9.25 9.25 9.25
Annual rate of compensation
increase 4.20 4.50 4.80 4.80
Postretirement benefit plan discount rates are the same as those used by
Textron's defined benefit pension plans.
The 2002 health care cost trend rate, which is the weighted average annual
assumed rate of increase in the per capita cost of covered benefits, was 10% for
all retirees. This rate is assumed to decrease to 5% by 2006 and then remain at
that level. A one-percentage-point change in assumed health care cost trend rate
would have the following effects:
(In millions) 1% INCREASE 1% DECREASE
- ------------- ----------- -----------
Effect on total of service and interest cost components $ 4 $ (4)
Effect on postretirement benefit obligation $55 $(47)
NOTE 14
INCOME TAXES
Textron files a consolidated federal income tax return for all U.S. subsidiaries
and separate returns for foreign subsidiaries.
Income from operations before income taxes and distributions on preferred
securities of subsidiary trusts is as follows:
(In millions) 2002 2001 2000
- ------------- ---- ---- ----
United States $393 $451 $366
Foreign 97 (32) 245
---- ---- ----
Total $490 $419 $611
==== ==== ====
Income tax expense is summarized as follows:
(In millions) 2002 2001 2000
- ------------- ---- ---- ----
Federal:
Current $(13) $136 $246
Deferred 73 48 (37)
State 15 26 35
Foreign 25 17 64
---- ---- ----
Income tax expense $100 $227 $308
==== ==== ====
The following reconciles the federal statutory income tax rate to the effective
income tax rate reflected in the consolidated statements of income:
2002 2001 2000
---- ---- ----
Federal statutory income tax rate 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting from:
State income taxes 2.1 2.7 3.8
Goodwill -- 22.3 19.0
Permanent items from Automotive Trim disposition 1.4 2.7 --
Settlement of tax court case (2.5) -- --
Sale of Snorkel (9.5) -- --
ESOP dividends (3.7) -- --
Foreign tax rate differential (0.3) (0.9) (2.2)
Export sales benefit (1.8) (2.9) (1.9)
Other, net (0.3) (4.7) (3.3)
---- ---- ----
Effective income tax rate 20.4% 54.2% 50.4%
==== ==== ====
The tax effects of temporary differences that give rise to significant portions
of Textron's net deferred tax assets and liabilities were as follows:
60
DECEMBER 28, December 29,
(In millions) 2002 2001
- ------------- ------------ ------------
Deferred tax assets:
Self insured liabilities, (including environmental) $ 94 $ 110
Deferred compensation 140 140
Obligation for postretirement benefits 3 44
Investment securities 24 9
Allowance for credit losses 63 49
Amortization of goodwill and other intangibles 22 30
Non-U.S. net operating loss carryforwards 37 34
Other, principally timing of other expense deductions 230 270
----- -----
Total deferred tax assets $ 613 $ 686
----- -----
Valuation allowance for deferred tax assets (26) (24)
----- -----
$ 587 $ 662
===== =====
Deferred tax liabilities:
Textron Finance transactions, principally leasing $(390) $(387)
Fixed assets, principally depreciation (146) (150)
Inventory (32) (59)
Currency translation adjustment (21) (29)
----- -----
Total deferred tax liabilities (589) (625)
----- -----
Net deferred tax (liability) asset $ (2) $ 37
===== =====
At December 28, 2002 and December 29, 2001, Textron had non-U.S. net operating
loss carryforwards for income tax purposes of $111 million and $99 million,
respectively, of which $58 million and $70 million can be carried forward
indefinitely and the balance expires at various dates through 2013. A valuation
allowance at December 28, 2002 and December 29, 2001, of $26 million and $24
million, respectively, has been recognized to offset the related deferred tax
assets due to the uncertainty of realizing the benefits of the loss
carryforwards.
Deferred income taxes have not been provided for the undistributed earnings of
foreign subsidiaries, which approximated $618 million at the end of 2002.
Management intends to reinvest those earnings for an indefinite period, except
for distributions having an immaterial tax effect. If foreign subsidiaries'
earnings were distributed, 2002 taxes, net of foreign tax credits, would be
increased by approximately $89 million.
NOTE 15
SPECIAL CHARGES
Restructuring Expense Goodwill,
----------------------------------------------------- Intangible and Total
Severance Facility and Fixed Asset Investment Special
(In millions) Costs Other Write-downs Total Impairments Charges
- ------------- --------- ------------ ----------- ----- -------------- -------
2002
Aircraft $26 $-- $ 2 $ 28 $ -- $ 28
Fastening Systems 12 2 4 18 -- 18
Industrial Products 13 2 19 34 -- 34
Industrial Components 6 1 2 9 -- 9
Finance -- -- -- -- -- --
Corporate 1 -- -- 1 38 39
--- --- ---- ---- ---- ----
$58 $ 5 $ 27 $ 90 $ 38 $128
=== === ==== ==== ==== ====
2001
Aircraft $ 6 $-- $ -- $ 6 $ -- $ 6
Fastening Systems 22 2 18 42 2 44
Industrial Products 16 1 3 20 317 337
Industrial Components 24 -- 7 31 -- 31
Finance 2 1 -- 3 -- 3
Corporate 7 -- -- 7 9 16
--- --- ---- ---- ---- ----
$77 $ 4 $ 28 $109 $328 $437
=== === ==== ==== ==== ====
2000
Aircraft $-- $-- $ -- $ -- $ -- $ --
Fastening Systems -- -- -- -- 128 128
Industrial Products 7 1 -- 8 16 24
Industrial Components 8 -- 1 9 205 214
Finance -- -- -- -- -- --
Corporate -- -- -- -- 117 117
--- --- ---- ---- ---- ----
$15 $ 1 $ 1 $ 17 $466 $483
=== === ==== ==== ==== ====
61
RESTRUCTURING
To improve returns at core businesses and to complete the integration of certain
acquisitions, Textron approved and committed to a restructuring program in the
fourth quarter of 2000 based upon targeted cost reductions which was expanded in
2001. In October 2002, Textron announced a further expansion of its
restructuring program as part of its strategic effort to improve operating
efficiencies, primarily in its industrial business. Textron's restructuring
program includes corporate and segment workforce reductions, consolidation of
facilities primarily in the United States and Europe, rationalization of certain
product lines, outsourcing of non-core production activity, the divestiture of
non-core businesses and streamlining of sales and administrative overhead.
Under this restructuring program, Textron has reduced its workforce by
approximately 8,100 employees and has closed 81 facilities, including 36
manufacturing plants, primarily in the Industrial Products, Industrial
Components and Fastening Systems segments.
Restructuring costs that have been accrued in accordance with EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity," and related asset impairment charges are included in
special charges on the consolidated statement of operations. An analysis of the
special charges for restructuring and related reserve accounts is summarized
below:
ASSET FACILITIES
(In millions) IMPAIRMENTS SEVERANCE & OTHER TOTAL
- ------------- ----------- --------- ---------- -----
Charges $ 1 $ 15 $ 1 $ 17
Cash paid -- (1) -- (1)
Non-cash utilization (1) -- -- (1)
---- ---- --- -----
Balance at December 30, 2000 -- 14 1 15
Additions 28 79 4 111
Reserves deemed unnecessary -- (2) -- (2)
Non-cash utilization (28) (4) -- (32)
Cash paid -- (56) (2) (58)
---- ---- --- -----
Balance at December 29, 2001 -- 31 3 34
Additions 27 65 6 98
Reserves deemed unnecessary -- (7) (1) (8)
Non-cash utilization (27) -- -- (27)
Cash paid -- (65) (4) (69)
---- ---- --- -----
Balance at December 28, 2002 $ -- $ 24 $ 4 $ 28
==== ==== === =====
Severance costs are generally paid on a monthly basis over the severance period
granted to each employee or on a lump sum basis when required. Severance costs
include outplacement costs which are paid in accordance with normal payment
terms. Facilities and other costs represent lease termination costs and facility
and plant clean-up costs. Lease termination costs are generally paid upon
exiting the facility or over the remaining lease term and facility and plant
clean-up costs are paid in accordance with normal payment terms.
The specific restructuring measures and associated estimated costs are based on
Textron's best judgment under prevailing circumstances. Textron believes that
the restructuring reserve balance of $28 million is adequate to carry out the
restructuring activities formally identified and committed to as of December 28,
2002 and anticipates that all actions related to these liabilities will be
completed within a twelve-month period.
Textron also incurred costs related to restructuring that have not been included
in special charges and are included in segment profit only as incurred. While
these costs are incremental and directly related to the restructuring program,
they are expensed as incurred as they do not meet EITF Issue No. 94-3 criteria
for accrual.
62
Costs related to restructuring that are reflected in the consolidated statement
of operations include the following:
(In millions) 2002 2001
- ------------- ---- ----
Cost of sales:
Outsourcing operations $ 4 $ 9
Plant rearrangement and inventory disposal 4 9
Other 2 4
--- ---
10 22
--- ---
Selling and administrative expenses:
Machinery, equipment and inventory relocation 7 6
Employee replacement, relocation and related 3 5
Other 2 1
--- ---
12 12
--- ---
Total $22 $34
=== ===
GOODWILL AND OTHER INTANGIBLE ASSETS
In conjunction with Textron's restructuring activities and review of long-lived
assets, Textron wrote down goodwill and other intangible assets by $319 million
in 2001 and $349 million in 2000. For 2001, the impairment charge was primarily
related to goodwill and other intangible assets at OmniQuip within the
Industrial Products segment. For 2000, Textron recognized impairment charges for
goodwill only of $205 million in Industrial Components primarily related to
Turbine Engine Components Textron (TECT), $128 million in Fastening Systems
primarily related to Flexalloy, and $16 million in Industrial Products. See Note
7 regarding the after-tax transitional impairment charge of $488 million
reported under the caption "Cumulative effect of change in accounting principle,
net of income taxes" in 2002.
During the third quarter of 2001, certain long-lived asset impairment indicators
were identified for OmniQuip which caused Textron to perform an impairment
review. Key impairment indicators included OmniQuip's operating performance
against plan despite restructuring efforts to improve operating efficiencies and
streamline operations. Additionally, the strategic review process completed in
August 2001 confirmed that the economic and market conditions combined with the
saturation of light construction equipment handlers in the market had negatively
impacted the projected results for the foreseeable future. The undiscounted cash
flow projections performed were less than the carrying amount of OmniQuip's
long-lived assets indicating that there was an impairment. Textron used a
discounted pre-tax cash flow calculation in determining the fair value of the
long-lived assets utilizing the multi-year forecast to project future cash flows
and a risk-based rate of 11%. The calculation resulted in an impairment charge
of $317 million, including goodwill of $306 million and other intangible assets
of $11 million.
In 2000, a similar calculation was performed when indicators of potential
impairment of long-lived assets were identified in connection with multi-year
financial planning, as well as the initiation of the current restructuring
program. Based on the indicators, Textron performed an impairment review for the
applicable operating units. Key indicators with respect to TECT were
deteriorating margins and its inability to generate new contracts that had
resulted in a significantly decreased revenue base. Key indicators for Flexalloy
were its performance against plan and the negative effect on its vendor-managed
business model by other supply-chain competitors. The business is dependent upon
large customers, and the service level for larger customers cannot be easily
replicated over a large number of smaller customers without significant
additional investment. Also, the synergies within Fastening Systems, which were
initially viewed to be significant due to Textron's existing market share, were
considerably less than anticipated. Accordingly, future cash flow projections
were not expected to achieve the level of growth originally anticipated at the
time of Flexalloy's acquisition. Using a risk-based rate of 11%, the impairment
calculation resulted in a fourth quarter 2000 write down of goodwill for TECT of
$178 million, Flexalloy of $96 million and $75 million related to other
operating units.
INVESTMENTS
During the second half of 2002, the C&A common stock owned by Textron
experienced a decline in market value. Textron acquired this stock as a result
of the disposition of the Trim business. In December 2002, Moody's lowered its
liquidity rating of C&A. Due to this indicator and the extended length of time
and extent to which the market value of the stock was less than the carrying
value, Textron determined that the decline in the market value of the stock was
other than temporary and wrote down its investment in the stock. The write-down
resulted in a pre-tax loss of $38 million which is included in special charges.
63
During 2001, Textron recorded a $6 million impairment charge related to its
e-business securities, and subsequently realized a $3 million net loss on the
sale of its remaining e-business securities. In 2000, Textron recorded an
impairment charge of $117 million related to these investment securities when it
was determined that the decline in market value was other than temporary. These
charges are included in special charges on the consolidated statement of
operations. Textron had no remaining investments in e-business securities as of
December 28, 2002.
NOTE 16
JOINT VENTURES
In the normal course of business, Textron has entered into various joint venture
agreements. At December 28, 2002 and December 29, 2001, other assets includes
$35 million and $37 million, respectively, attributable to investments in
unconsolidated joint ventures. Textron accounts for its interest in these
ventures under the equity method of accounting. Since Textron's equity in income
(loss) from joint ventures is not material, this amount is reported in cost of
sales rather than as a separate line item. Textron's loss from unconsolidated
joint ventures totaled $10 million each year for 2002 and 2001, and $2 million
in 2000.
Textron has entered into an agreement with Agusta to share certain costs and
profits for the joint design, development, manufacture, marketing, sale,
customer training and product support of Bell Agusta Aerospace's BA609 and
AB139. These programs are currently in the development stage, and only certain
marketing costs are being charged to the venture. Bell Helicopter's share of the
development costs are being charged to earnings as a period expense. Bell
Helicopter has also partnered with The Boeing Company in the development and
production of the V-22 tiltrotor aircraft.
Textron has also entered into a joint venture with TAG Aviation USA, Inc. to
sell fractional share interests in small business jets. During 2002, 2001 and
2000, Textron recorded revenue of $101 million, $38 million and $26 million,
respectively, for the sale of aircraft to this venture through arm's length
transactions. Profit on these sales is initially deferred then recognized on a
pro-rata basis as fractional share interests are sold to third parties. Textron
has guaranteed one-half of the venture's debt and lease obligations up to a
maximum of $70 million. At December 28, 2002, Textron's portion of the
outstanding debt and operating lease commitments covered by this guarantee
totaled $30 million. Textron would be required to make payments under these
guarantees if the joint venture defaults under the related debt agreements.
While Textron has several other joint venture agreements that have external
financing arrangements, Textron has only guaranteed approximately $21 million in
debt obligations related to these ventures. Textron would be required to make
payments under these guarantees if a joint venture defaults under the debt
agreements.
NOTE 17
COMMITMENTS AND CONTINGENCIES
Textron is subject to legal proceedings and other claims arising out of the
conduct of Textron's business, including proceedings and claims relating to
private transactions, government contracts, production partners, product
liability, employment, and environmental, safety and health matters. Some of
these legal proceedings and claims seek damages, fines or penalties in
substantial amounts or remediation of environmental contamination. Under federal
government procurement regulations, certain claims brought by the U.S.
Government could result in Textron's suspension or debarment from U.S.
Government contracting for a period of time. On the basis of information
presently available, Textron believes that these proceedings and claims will not
have a material effect on Textron's financial position or results of operations.
In August 2002, Lycoming recalled approximately 950 airplane engines to replace
potentially faulty crankshafts manufactured by a third party supplier. In
conjunction with a Federal Aviation Administration (FAA) directive, aircraft
with these engines have been grounded. After detecting a potentially defective
crankshaft in an aircraft beyond the group included in the August recall,
Lycoming and the FAA mandated inspection of all turbocharged aircraft with
engines that use this specific component. This precautionary measure applies to
an additional 736 engines, which will be tested in the field within the next 50
hours of operation or within six months, whichever comes first. Lycoming
anticipates that only a portion of the crankshafts in the additional engines
will need to be replaced. Lycoming has initiated a comprehensive customer care
program to replace the defective crankshafts, make any necessary related
repairs, and compensate its customers for the loss of use of their aircraft
during the recall. Lycoming also initiated a program for the inspection and
possible replacement of potentially defective zinc-plated bolts manufactured by
a third party supplier for use in certain aircraft engines. Textron recorded $31
million in its Aircraft segment related to these matters. Textron is continuing
to monitor performance of the crankshafts previously supplied by the third party
supplier to ensure that the current recall, inspection and customer care program
adequately covers all engines with potentially faulty crankshafts. It is
possible that additional engines outside of the current recall could potentially
be affected. Textron's reserves
64
for the recall, inspection and customer care program are based on management's
best estimate as of December 28, 2002. Actual costs could vary depending upon
the actual experience of the current program, recoveries received from third
parties or an expansion of the existing program.
In the ordinary course of business, Textron enters into letters of credit and
other similar arrangements with financial institutions. The letters of credit
typically serve as a guarantee of payment or performance to certain third
parties in accordance with specified terms and conditions. Management knows of
no event of default that would require Textron to satisfy these guarantees at
the end of 2002.
In addition to its financing relationship with Textron Finance, OmniQuip also
utilizes third-party finance institutions to provide wholesale financing to
certain of its customers. While these finance receivables are not reflected on
Textron's balance sheet, the finance institutions generally have recourse to
OmniQuip and may require OmniQuip to repurchase equipment related to customer
defaults. OmniQuip generally obtains a secured interest in any equipment
repurchased. The balance of this portfolio at December 28, 2002 and December 29,
2001 was $47 million and $57 million, respectively.
Textron has a number of guaranteed minimum resale value contracts associated
with certain past aircraft sales. These guarantees require Textron to make
possible future payments to a customer in the event that the fair value of an
aircraft falls below a minimum guaranteed amount, or stipulate a minimum value
upon the trade-in for a new replacement aircraft. The agreements generally
include operating restrictions such as maximum usage over the guarantee period
or minimum maintenance requirements. The amount of resale value guaranteed at
December 28, 2002 was approximately $160 million. The estimated fair values of
the guaranteed aircraft prevailing at December 28, 2002 were greater than the
amount of Textron's guarantees. In addition, for aircraft representing $117
million of the guaranteed amounts, Textron has $97 million in residual value
insurance coverage that would reimburse Textron if the guaranteed value falls
below the insured level. The guarantee contracts expire as follows: $98 million
in 2003, $37 million in 2004, $5 million in 2005, $3 million in 2006, and $17
million in 2012. Of the related residual value insurance, $78 million expires in
2003 and $19 million expires in 2004.
LEASES
Rental expense approximated $92 million, $103 million and $101 million in 2002,
2001 and 2000, respectively. Future minimum rental commitments for
noncancellable operating leases in effect at the end of 2002 approximated $70
million for 2003; $54 million for 2004; $38 million for 2005; $28 million for
2006; $22 million for 2007; and a total of $198 million thereafter.
ENVIRONMENTAL REMEDIATION
Textron's accrued estimated environmental liabilities are based upon currently
available facts, existing technology and presently enacted laws and regulations
and are subject to a number of factors and uncertainties. Circumstances which
can affect the accruals' reliability and precision include identification of
additional sites, environmental regulations, level of cleanup required,
technologies available, number and financial condition of other contributors to
remediation, and the time period over which remediation may occur. Accrued
liabilities relate to disposal costs, U.S. Environmental Protection Agency
oversight costs, legal fees and operating and maintenance costs for both
currently and formerly owned or operated facilities. Textron believes that any
changes to the accruals that may result from these factors and uncertainties
will not have a material effect on Textron's financial position or results of
operations. Based upon information currently available, Textron estimates
potential environmental liabilities to be in the range of $38 million to $138
million. At the end of 2002, environmental reserves of approximately $80
million, of which $17 million are classified as current liabilities, have been
established to address these specific estimated potential liabilities. Textron
estimates that its accrued environmental remediation liabilities will likely be
paid over the next five to ten years.
NOTE 18
SUPPLEMENTAL FINANCIAL INFORMATION
ACCRUED LIABILITIES
Textron Manufacturing's accrued liabilities are comprised of the following:
DECEMBER 28, December 29,
(In millions) 2002 2001
- ------------- ------------ ------------
Customer deposits $ 193 $ 279
Warranty and product maintenance contracts 301 257
Salaries, wages and employer taxes 237 212
Contract reserves 153 113
Other 453 547
------ ------
Total accrued liabilities $1,337 $1,408
====== ======
65
WARRANTY AND PRODUCT MAINTENANCE CONTRACTS
Textron provides limited warranty and product maintenance programs, including
parts and labor, for certain products for periods ranging from one to five
years. Textron estimates the costs that may be incurred under these programs and
records a liability in the amount of such costs at the time product revenue is
recognized. Factors that effect this liability include the number of products
sold, historical and anticipated rates of warranty claims and cost per claim.
Textron periodically assesses the adequacy of its recorded warranty and product
maintenance liabilities and adjusts the amounts as necessary.
Changes in Textron's warranty and product maintenance liability in 2002 and 2001
are as follows:
DECEMBER 28, December 29,
(In millions) 2002 2001
- ------------- ------------ ------------
Accrual at beginning of year $ 257 $ 241
Provision 170 162
Settlement (161) (142)
Adjustments to pre-existing liabilities 35 (4)
----- -----
Accrual at end of year $ 301 $ 257
===== =====
For 2002, the adjustments to pre-existing liabilities include $31 million in
costs for the recall, inspection and customer care program at Lycoming described
in Note 17.
RESEARCH AND DEVELOPMENT COSTS
Company-funded research and development costs include amounts for
company-initiated programs, the cost sharing portions of customer-initiated
programs, and losses incurred on customer-initiated programs. Textron also
carries out research and development under contracts with others, primarily the
U.S. Government. A significant portion of company-initiated programs include
independent research and development related to government products and services
which is recoverable through overhead cost allowances.
Company-funded and customer-funded research and development costs are as
follows:
(In millions) 2002 2001 2000
- ------------- ---- ---- ----
Company-funded $207 $366 $307
Customer-funded 379 323 414
---- ---- ----
Total research and development $586 $689 $721
==== ==== ====
NOTE 19
SEGMENT REPORTING
Textron has five reportable segments: Aircraft, Fastening Systems, Industrial
Products, Industrial Components and Finance. See Note 1 for principal markets
and pages 16 through 17 for products of Textron's segments.
Textron's reportable segments are strategically aligned based on the manner in
which Textron manages its various operations. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies in Note 1. Textron evaluates segment performance based on
segment profit. Segment profit for Textron Manufacturing excludes interest
expense, certain corporate expenses, special charges and gains and losses from
the disposition of significant business units. Textron Finance includes interest
income, interest expense and distributions on preferred securities of Finance
subsidiary trust and excludes special charges as part of segment profit. To
reflect the adoption of SFAS No. 142 and the fact that Textron does not include
amortization of goodwill in its internal evaluation of segment performance,
Textron has recast its segment data for comparability by reclassifying goodwill
amortization out of segment profit in prior periods. Provisions for losses on
finance receivables involving the sale or lease of Textron products are recorded
by the selling manufacturing division.
The Aircraft segment is comprised of two product groups: fixed-wing aircraft and
rotor aircraft. Fixed-wing aircraft revenues were $3,286 million, $3,176 million
and $2,956 million in 2002, 2001 and 2000, respectively. Rotor aircraft revenues
were $1,636 million, $1,621 million and $1,581 million in 2002, 2001 and 2000,
respectively. The Industrial Products segment primarily includes defense
systems, golf car and turf care equipment and electrical and telecommunication
products. Defense systems revenues were $488 million, $490 million and $470
million in 2002, 2001 and 2000, respectively. Golf car and turf care equipment
revenues were $732 million, $738 million and $823 million in 2002, 2001 and
2000, respectively, and electrical and telecommunications products revenues were
$341 million, $430 million and $454 million, respectively.
66
REVENUES SEGMENT PROFIT
-------------------------------------------- -----------------------------------
(In millions) 2002 2001 2000 2002 2001 2000
- ------------- -------- -------- -------- ----- ----- ------
Aircraft $ 4,922 $ 4,797 $ 4,537 $ 452 $ 338 $ 475
Fastening Systems 1,650 1,679 1,996 68 62 192
Industrial Products 1,841 1,974 2,248 83 106 296
Industrial Components 1,615 3,162 3,618 115 215 341
Finance 630 709 691 117 205 202
------- ------- ------- ---- ----- ------
$10,658 $12,321 $13,090 835 926 1,506
======= ======= =======
Special charges (128) (437) (483)
---- ----- ------
Segment operating income 707 489 1,023
Gain on sale of businesses, net 5 342 --
Goodwill amortization -- (98) (96)
Corporate expenses and other, net (114) (152) (164)
Interest expense, net (108) (162) (152)
---- ----- ------
Income before income taxes and
distribution on preferred
securities $ 490 $ 419 $ 611
===== ===== ======
PROPERTY, PLANT AND
ASSETS EQUIPMENT EXPENDITURES
-------------------------------------------- -------------------------------
(In millions) 2002 2001 2000 2002 2001 2000
- ------------- --------- --------- -------- ---- ---- ----
Aircraft $ 2,857 $ 2,848 $ 2,612 $106 $175 $157
Fastening Systems 1,451 1,541 1,770 43 61 108
Industrial Products 1,484 1,886 2,089 91 93 98
Industrial Components 1,394 1,375 2,563 48 180 146
Finance 6,654 6,464 6,131 17 18 14
Corporate 3,287 4,119 3,351 14 5 4
Eliminations (1,622) (2,181) (2,146) -- -- --
------- ------- ------- ---- ---- ----
$15,505 $16,052 $16,370 $319 $532 $527
======= ======= ======= ==== ==== ====
AMORTIZATION DEPRECIATION
-------------------------------- ------------------------------
(In millions) 2002 2001 2000 2002 2001 2000
- ------------- ---- ---- ---- ---- ---- ----
Aircraft $-- $ 11 $ 10 $116 $116 $107
Fastening Systems 4 16 18 70 78 82
Industrial Products 11 48 32 69 60 56
Industrial Components -- 21 27 54 123 116
Finance 10 22 15 28 19 17
Corporate 2 (4) 10 4 4 4
---- ----- ---- ---- ---- ----
$ 27 $ 114 $112 $341 $400 $382
==== ===== ==== ==== ==== ====
GEOGRAPHIC DATA
Presented below is selected financial information by geographic area of
Textron's operations:
PROPERTY, PLANT
REVENUES* AND EQUIPMENT**
--------------------------------------- ------------------------------------
(In millions) 2002 2001 2000 2002 2001 2000
- ------------- ------- ------- ------- ------ ------ ------
United States $ 7,138 $ 8,022 $ 8,569 $1,434 $1,502 $1,791
Canada 383 692 798 63 78 127
Latin America and Mexico 526 826 790 28 45 121
Germany 611 613 584 198 183 165
Asia and Australia 412 518 603 41 12 13
United Kingdom 324 367 385 108 98 145
France 260 311 352 86 80 79
Other 1,004 972 1,009 73 90 164
------- ------- ------- ------ ------ ------
$10,658 $12,321 $13,090 $2,031 $2,088 $2,605
======= ======= ======= ====== ====== ======
* Revenues are attributed to countries based on the location of the customer.
** Property, plant and equipment is based on the location of the asset.
Revenues include sales to the U.S. Government of $1.3 billion in 2002 and $1.2
billion in both 2001 and 2000. Revenues also include sales to DaimlerChrysler,
primarily through the Automotive Trim Business, of $1.4 billion and $1.5 billion
in 2001 and 2000, respectively.
67
Quarterly Data
(Unaudited) 2002
- ----------- ----------------------------------------------------------
(Dollars in millions except
per share amounts) Q4 Q3 Q2 Q1
- --------------------------- ---------- ---------- ---------- ----------
REVENUES
Aircraft $ 1,396 $ 1,156 $ 1,323 $ 1,047
Fastening Systems 412 411 431 396
Industrial Products 436 432 505 468
Industrial Components 437 399 417 362
Finance 181 156 148 145
--------- --------- --------- ---------
TOTAL REVENUES $ 2,862 $ 2,554 $ 2,824 $ 2,418
========= ========= ========= =========
SEGMENT PROFIT (LOSS)
Aircraft $ 136 $ 90 $ 147 $ 79
Fastening Systems 19 21 20 8
Industrial Products 20 21 12 30
Industrial Components 40 29 24 22
Finance 47 19 29 22
--------- --------- --------- ---------
TOTAL SEGMENT PROFIT 262 180 232 161
Special charges (64) (28) (26) (10)
--------- --------- --------- ---------
Total segment operating income (loss) 198 152 206 151
Gain on sale of businesses, net (20) -- 25 --
Goodwill amortization -- -- -- --
Corporate expenses and other, net (28) (26) (31) (29)
Interest expense, net (23) (30) (25) (30)
Income taxes 11 (19) (63) (29)
Distribution on preferred securities
of manufacturing subsidiary trust,
net of income taxes (7) (6) (7) (6)
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 131 71 105 57
Cumulative effect of change in accounting
principle, net of income taxes*** -- -- -- (488)
--------- --------- --------- ---------
Net income (loss) $ 131 $ 71 $ 105 $ (431)
========= ========= ========= =========
EARNINGS PER COMMON SHARE
BASIC:
Income (loss) from operations $ .95 $ .51 $ .75 $ .41
Cumulative effect of change in accounting
principle, net of income taxes -- -- -- (3.48)
--------- --------- --------- ---------
Net income (loss) $ .95 $ .51 $ .75 $ (3.07)
========= ========= ========= =========
Average shares outstanding (in thousands) 137,173 137,848 139,486 140,403
--------- --------- --------- ---------
DILUTED:
Income (loss) from operations $ .95 $ .51 $ .74 $ .40
Cumulative effect of change in accounting
principle, net of income taxes -- -- -- (3.44)
--------- --------- --------- ---------
Net income (loss) $ .95 $ .51 $ .74 $ (3.04)
========= ========= ========= =========
Average shares outstanding (in thousands)** 138,362 139,145 141,599 141,961
--------- --------- --------- ---------
SEGMENT PROFIT MARGINS
Aircraft 9.7% 7.8% 11.1% 7.5%
Fastening Systems 4.6 5.1 4.6 2.0
Industrial Products 4.6 4.9 2.4 6.4
Industrial Components 9.2 7.3 5.8 6.1
Finance 26.0 12.2 19.6 15.2
SEGMENT PROFIT MARGIN 9.2 7.0 8.2 6.7
--------- --------- --------- ---------
COMMON STOCK INFORMATION
Price range: High $ 44.92 $ 45.81 $ 53.17 $ 51.10
Low $ 32.49 $ 34.41 $ 44.60 $ 38.98
Dividends per share $ .325 $ .325 $ .325 $ .325
--------- --------- --------- ---------
(Unaudited) 2001
- ----------- ----------------------------------------------------------
(Dollars in millions except
per share amounts) Q4 Q3 Q2 Q1
- --------------------------- --------- ---------- ---------- ----------
REVENUES
Aircraft $ 1,421 $ 1,096 $ 1,258 $ 1,022
Fastening Systems 373 389 451 466
Industrial Products 450 434 541 549
Industrial Components 743 713 874 832
Finance 196 178 164 171
--------- --------- --------- ---------
TOTAL REVENUES $ 3,183 $ 2,810 $ 3,288 $ 3,040
========= ========= ========= =========
SEGMENT PROFIT (LOSS)
Aircraft $ 136* $ (25)* $ 120 $ 107
Fastening Systems (20) 5 35 42
Industrial Products (7) (12) 65 60
Industrial Components 32 23 81 79
Finance 62 51 43 49
--------- --------- --------- ---------
TOTAL SEGMENT PROFIT 203 42 344 337
Special charges (22) (338) (35) (42)
--------- --------- --------- ---------
Total segment operating income (loss) 181 (296) 309 295
Gain on sale of businesses, net 339 3 -- --
Goodwill amortization (23) (26) (25) (24)
Corporate expenses and other, net (38) (33) (39) (42)
Interest expense, net (37) (41) (40) (44)
Income taxes (158) 69 (72) (66)
Distribution on preferred securities
of manufacturing subsidiary trust,
net of income taxes (7) (6) (7) (6)
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 257 (330) 126 113
Cumulative effect of change in accounting
principle, net of income taxes*** -- -- -- --
--------- --------- --------- ---------
Net income (loss) $ 257 $ (330) $ 126 $ 113
========= ========= ========= =========
EARNINGS PER COMMON SHARE
BASIC:
Income (loss) from operations $ 1.82 $ (2.34) $ .89 $ .80
Cumulative effect of change in accounting
principle, net of income taxes -- -- -- --
--------- --------- ---------
Net income (loss) $ 1.82 $ (2.34) $ .89 $ .80
========= ========= ========= =========
Average shares outstanding (in thousands) 141,256 141,196 141,055 140,733
--------- --------- --------- ---------
DILUTED:
Income (loss) from operations $ 1.81 $ (2.34) $ .88 $ .79
Cumulative effect of change in accounting
principle, net of income taxes -- -- -- --
--------- --------- --------- ---------
Net income (loss) $ 1.81 $ (2.34) $ .88 $ .79
========= ========= ========= =========
Average shares outstanding (in thousands)** 142,460 141,196 143,411 142,752
--------- --------- --------- ---------
SEGMENT PROFIT MARGINS
Aircraft 9.6% (2.3)% 9.5% 10.5%
Fastening Systems (5.4) 1.3 7.8 9.0
Industrial Products (1.6) (2.8) 12.0 10.9
Industrial Components 4.3 3.2 9.3 9.5
Finance 31.6 28.7 26.2 28.7
SEGMENT PROFIT MARGIN 6.4 1.5 10.5 11.1
--------- --------- --------- ---------
COMMON STOCK INFORMATION
Price range: High $ 42.40 $ 56.90 $ 59.89 $ 59.26
Low $ 31.65 $ 32.80 $ 52.95 $ 45.94
Dividends per share $ .325 $ .325 $ .325 $ .325
--------- --------- --------- ---------
* See Management's Discussion and Analysis for Bell Helicopter on pages 22 and
23.
** Assumes full conversion of outstanding preferred stock and exercise of
options. The average share base for the third quarter 2001 excludes
potentially dilutive common shares (convertible preferred stock and stock
options). These shares are excluded due to their antidilutive effect
resulting from the loss from operations.
*** Represents transitional goodwill impairment charge taken in the second
quarter 2002 and retroactively recorded in the first quarter 2002 as
permitted, see Note 7 to consolidated financial statements.
68
Selected Financial Information
(Dollars in millions except where otherwise
noted and per share amounts) 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
REVENUES
Aircraft $ 4,922 $ 4,797 $ 4,537 $ 4,147 $ 3,506
Fastening Systems 1,650 1,679 1,996 2,059 1,758
Industrial Products 1,841 1,974 2,248 1,629 1,412
Industrial Components 1,615 3,162 3,618 3,556 2,831
Finance 630 709 691 463 367
--------- --------- --------- --------- ---------
TOTAL REVENUES $ 10,658 $ 12,321 $ 13,090 $ 11,854 $ 9,874
========= ========= ========= ========= =========
SEGMENT PROFIT
Aircraft $ 452 $ 338 $ 475 $ 384 $ 358
Fastening Systems 68 62 192 204 200
Industrial Products 83 106 296 231 158
Industrial Components 115 215 341 325 270
Finance 117 205 202 132 113
--------- --------- --------- --------- ---------
TOTAL SEGMENT PROFIT 835 926 1,506 1,276 1,099
Special charges (128) (437) (483) 1 (87)
--------- --------- --------- --------- ---------
Total segment operating income 707 489 1,023 1,277 1,012
Gain on sale of businesses, net 5 342 -- -- 97
Goodwill amortization -- (98) (96) (75) (59)
Corporate expenses and other, net (114) (152) (164) (143) (141)
Interest expense, net (108) (162) (152) (29) (146)
Income taxes (100) (227) (308) (381) (294)
Distributions on preferred securities of
manufacturing subsidiary trust, net of
income taxes (26) (26) (26) (26) (26)
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS* $ 364 $ 166 $ 277 $ 623 $ 443
========= ========= ========= ========= =========
PER SHARE OF COMMON STOCK
Income from operations - basic* $ 2.62 $ 1.17 $ 1.92 $ 4.14 $ 2.74
Income from operations - diluted* $ 2.60 $ 1.16 $ 1.90 $ 4.05 $ 2.68
Dividends declared $ 1.30 $ 1.30 $ 1.30 $ 1.30 $ 1.14
Book value at year-end $ 24.87 $ 27.76 $ 28.24 $ 29.67 $ 19.27
Common stock price: High $ 53.17 $ 59.89 $ 74.94 $ 97.00 $ 80.31
Low $ 32.49 $ 31.65 $ 41.44 $ 68.44 $ 52.06
Year-end $ 42.16 $ 42.40 $ 46.50 $ 76.69 $ 75.94
Common shares outstanding (in thousands):
Basic average 138,745 141,050 143,923 150,389 161,254
Diluted average** 140,252 142,937 146,150 153,754 165,374
Year-end 136,500 141,251 140,933 147,002 154,742
--------- --------- --------- --------- ---------
FINANCIAL POSITION
Total assets $ 15,505 $ 16,052 $ 16,370 $ 16,393 $ 13,721
Debt:
Textron Manufacturing $ 1,711 $ 1,934 $ 2,084 $ 1,767 $ 2,615
Textron Finance $ 4,840 $ 4,188 $ 4,667 $ 4,551 $ 2,829
Obligated mandatorily redeemable preferred
securities of subsidiary trusts:
Textron Manufacturing $ 485 $ 485 $ 484 $ 483 $ 483
Textron Finance $ 27 $ 28 $ 28 $ 29 $ --
Shareholders' equity $ 3,406 $ 3,934 $ 3,994 $ 4,377 $ 2,997
Textron Manufacturing debt to total capital
(net of cash) 27% 28% 29% 25% 43%
--------- --------- --------- --------- ---------
INVESTMENT DATA
Capital expenditures $ 319 $ 532 $ 527 $ 532 $ 475
Depreciation $ 341 $ 400 $ 382 $ 349 $ 292
Research and development $ 586 $ 689 $ 721 $ 670 $ 613
--------- --------- --------- --------- ---------
OTHER DATA
Number of employees at year-end 49,000 51,000 71,000 68,000 64,000
Number of common shareholders at year-end 20,000 21,000 21,000 22,000 23,000
--------- --------- --------- --------- ---------
* Before cumulative effect of a change in accounting principle in 2002 and 2000.
** Assumes full conversion of outstanding preferred stock and exercise of stock
options.
69