TEXTRON INC - 10-Q Quarterly Report

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

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

	Three Months Ended				Six Months Ended
	June 29, 2002		June 30, 2001		June 29, 2002		June 30 2001
Revenues
Manufacturing revenues	$	2,676	$	3,124	$	4,949	$	5,993
Finance revenues		148		164		293		335
Total revenues		2,824		3,288		5,242		6,328
Costs, expenses and other
Cost of sales		2,175		2,524		4,054		4,837
Selling and administrative		375		402		705		769
Interest, net		73		110		150		232
Provision for losses on finance receivables		25		12		55		23
Special charges		26		35		36		77
Gain on sale of division		(25)		-		(25)		-
Total costs, expenses and other		2,649		3,083		4,975		5,938
Income from operations before income taxes and distributions on preferred securities of subsidiary trusts		175		205		267		390
Income taxes		(63)		(72)		(92)		(138)
Distribution on preferred securities of subsidiary trusts, net of income taxes		(7)		(7)		(13)		(13)
Income before cumulative effect of change in accounting principle		105		126		162		239
Cumulative effect of change in accounting principle, net of income taxes		-		-		(488)		-
Net income (loss)	$	105	$	126	$	(326)	$	239
Per common share:
Basic:
Income from operations	$	.75	$	.89	$	1.16	$	1.69
Cumulative effect of change in accounting principle, net of income taxes		-		-		(3.49)		-
Net income (loss)	$	.75	$	.89	$	(2.33)	$	1.69
Diluted:
Income from operations	$	.74	$	.88	$	1.14	$	1.67
Cumulative effect of change in accounting principle, net of income taxes		-		-		(3.44)		-
Net income (loss)	$	.74	$	.88	$	(2.30)	$	1.67
Average shares outstanding:
Basic	139,486,000		141,055,000		139,893,000		140,891,000
Diluted	141,599,000		143,411,000		141,682,000		143,060,000
Dividends per share:
$2.08 Preferred stock, Series A	$	.52	$	.52	$	1.04	$	1.04
$1.40 Preferred stock, Series B	$	.35	$	.35	$	.70	$	.70
Common stock	$	.325	$	.325	$	.65	$	.65

	June 29, 2002		December 29, 2001
Assets
Textron Manufacturing
Cash and cash equivalents	$	595	$	241
Commercial and U.S. Government receivables, less allowance for doubtful accounts of $58 and $54	1,293		1,149
Inventories	1,779		1,727
Due from Textron Finance	-		510
Other current assets	437		390
Total current assets	4,104		4,017
Property, plant, and equipment, less accumulated depreciation of $2,067 and $1,929	2,014		2,044
Goodwill	1,355		1,821
Intangibles, net	87		144
Other assets	1,637		1,562
Total Textron Manufacturing assets	9,197		9,588
Textron Finance
Cash	21		19
Finance receivables, net	5,836		5,492
Goodwill	180		204
Other assets	758		749
Total Textron Finance assets	6,795		6,464
Total assets	$	15,992	$		16,052
Liabilities and shareholders' equity
Liabilities
Textron Manufacturing
Current portion of long-term debt and short-term debt	$	537	$		673
Accounts payable	974		994
Other accrued liabilities	1,322		1,408
Total current liabilities	2,833		3,075
Accrued postretirement benefits other than pensions	615		623
Other liabilities	1,150		1,219
Long-term debt	1,671		1,261
Total Textron Manufacturing liabilities	6,269		6,178
Textron Finance
Other liabilities	377		372
Deferred income taxes	383		357
Due to Textron Manufacturing	-		510
Debt	5,037		4,188
Total Textron Finance liabilities	5,797		5,427
Total liabilities	12,066		11,605
Textron Finance - obligated mandatorily redeemable preferred securities of Finance subsidiary holding solely junior subordinated debentures	27		28
Textron - obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Textron junior subordinated debt securities	485		485
Shareholders' equity
Capital stock:
Preferred stock	11		11
Common stock	25		25
Capital surplus	1,076		1,064
Retained earnings	5,413		5,829
Accumulated other comprehensive loss	(180)		(223)
	6,345		6,706
Less cost of treasury shares	2,931		2,772
Total shareholders' equity	3,414		3,934
Total liabilities and shareholders' equity	$	15,992	$	16,052
Common shares outstanding	138,301,000		141,251,000

	Six Months Ended
	June 29, 2002		June 30, 2001
Cash flows from operating activities:
Net (loss) income	$	(326)	$	239
Adjustments to reconcile net (loss) income to net cash provided (used) by operating activities:
Cumulative effect of change in accounting principle, net of income taxes		488		-
Depreciation		159		203
Amortization		15		59
Special charges		36		77
Provision for losses on finance receivables		55		23
Deferred income taxes		16		26
Gain on sale of division		(25)		-
Changes in assets and liabilities excluding those related to acquisitions and divestitures:
Commercial and U.S. Government receivables		(142)		(204)
Inventories		(52)		(210)
Other assets		(92)		(153)
Accounts payable		(57)		(35)
Other accrued liabilities		(38)		(55)
Other, net		8		9
Net cash provided (used) by operating activities		45		(21)
Cash flows from investing activities:
Finance receivables:
Originated or purchased		(4,301)		(3,655)
Repaid		3,633		2,790
Proceeds from receivable sales and securitization sales		356		818
Cash used in acquisitions		-		(550)
Capital expenditures		(146)		(273)
Net proceeds from disposition		39		-
Proceeds from sale of fixed assets		26		11
Other investing activities, net		25		1
Net cash used by investing activities		(368)		(858)
Cash flows from financing activities:
Increase in short-term debt		149		1,041
Proceeds from issuance of long-term debt		1,596		611
Principal payments and retirements on long-term debt		(784)		(706)
Proceeds from exercise of stock options		19		21
Purchases of Textron common stock		(164)		(42)
Dividends paid		(137)		(92)
Net cash provided by financing activities		679		833
Net increase (decrease) in cash and cash equivalents		356		(46)
Cash and cash equivalents at beginning of period		260		289
Cash and cash equivalents at end of period	$	616	$	243
Supplemental schedule of non-cash investing and financing activities:
Capital lease obligations incurred to finance future construction	$	79	$	-
Capital expenditures financed through capital leases	$	9	$	-

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

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

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

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

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

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

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

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

(In millions)	June 29, 2002		December 29, 2001
Finished goods	$	856	$	719
Work in process		802		856
Raw materials		335		377
		1,993		1,952
Less progress payments and customer deposits		214		225
	$	1,779	$	1,727

(In millions)	Balance December 29, 2001		Reclassification of Intangible Assets		Transitional Impairment Charge		Foreign Currency Translation		Balance June 29, 2002
Aircraft	$	322	$	-	$	-	$	-	$	322