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				Nine Months Ended
	September 28, 2002		September 29, 2001		September 28, 2002		September 29, 2001
Revenues
Manufacturing revenues	$	2,398	$	2,632	$	7,347	$	8,625
Finance revenues		156		178		449		513
Total revenues		2,554		2,810		7,796		9,138
Costs, expenses and other
Cost of sales		1,981		2,385		6,035		7,222
Selling and administrative		324		355		1,029		1,124
Interest, net		80		108		230		340
Provision for losses on finance receivables		45		20		100		43
Special charges		28		338		64		415
Gain on sale of division		-		(3)		(25)		(3)
Total costs, expenses and other		2,458		3,203		7,433		9,141
Income (loss) from operations before income taxes and distributions on preferred securities of subsidiary trusts		96		(393)		363		(3)
Income taxes		(19)		69		(111)		(69)
Distribution on preferred securities of subsidiary trusts, net of income taxes		(6)		(6)		(19)		(19)
Income (loss) before cumulative effect of change in accounting principle		71		(330)		233		(91)
Cumulative effect of change in accounting principle, net of income taxes		-		-		(488)		-
Net income (loss)	$	71	$	(330)	$	(255)	$	(91)
Per common share:
Basic:
Income (loss) before cumulative effect of change in accounting principle	$	.51	$	(2.34)	$	1.67	$	(.65)
Cumulative effect of change in accounting principle, net of income taxes		-		-		(3.50)		-
Net income (loss)	$	.51	$	(2.34)	$	(1.83)	$	(.65)
Diluted:
Income (loss) before cumulative effect of change in accounting principle	$	.51	$	(2.34)	$	1.66	$	(.65)
Cumulative effect of change in accounting principle, net of income taxes		-		-		(3.47)		-
Net income (loss)	$	.51	$	(2.34)	$	(1.81)	$	(.65)
Average shares outstanding:
Basic	137,848,000		141,196,000		139,234,000		140,985,000
Diluted	139,145,000		141,196,000		140,820,000		140,985,000
Dividends per share:
$2.08 Preferred stock, Series A	$	.52	$	.52	$	1.56	$	1.56
$1.40 Preferred stock, Series B	$	.35	$	.35	$	1.05	$	1.05
Common stock	$	.325	$	.325	$	.975	$	.975

	September 28, 2002		December 29, 2001
Assets
Textron Manufacturing
Cash and cash equivalents	$	184	$	241
Commercial and U.S. Government receivables, less allowance for doubtful accounts of $64 and $54	1,325		1,149
Inventories	1,773		1,727
Due from Textron Finance	-		510
Other current assets	434		390
Total current assets	3,716		4,017
Property, plant, and equipment, less accumulated depreciation of $2,122 and $1,929	1,979		2,044
Goodwill	1,356		1,821
Intangibles, net	84		144
Other assets	1,638		1,562
Total Textron Manufacturing assets	8,773		9,588
Textron Finance
Cash	19		19
Finance receivables, net	6,092		5,492
Goodwill	181		204
Other assets	737		749
Total Textron Finance assets	7,029		6,464
Total assets	$	15,802	$		16,052
Liabilities and shareholders' equity
Liabilities
Textron Manufacturing
Current portion of long-term debt and short-term debt	$	216	$		673
Accounts payable	889		994
Other accrued liabilities	1,378		1,408
Total current liabilities	2,483		3,075
Accrued postretirement benefits other than pensions	612		623
Other liabilities	1,150		1,219
Long-term debt	1,663		1,261
Total Textron Manufacturing liabilities	5,908		6,178
Textron Finance
Other liabilities	396		372
Deferred income taxes	406		357
Due to Textron Manufacturing	-		510
Debt	5,212		4,188
Total Textron Finance liabilities	6,014		5,427
Total liabilities	11,922		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	1,077		1,064
Retained earnings	5,439		5,829
Accumulated other comprehensive loss	(215)		(223)
	6,337		6,706
Less cost of treasury shares	2,969		2,772
Total shareholders' equity	3,368		3,934
Total liabilities and shareholders' equity	$	15,802	$	16,052
Common shares outstanding	137,345,000		141,251,000

	Nine Months Ended
	September 28, 2002		September 29, 2001
Cash flows from operating activities:
Net loss	$	(255)	$	(91)
Adjustments to reconcile net loss to net cash provided by operating activities:
Cumulative effect of change in accounting principle, net of income taxes		488		-
Depreciation		245		300
Amortization		22		91
Special charges		64		415
Provision for losses on finance receivables		100		43
Deferred income taxes		50		(35)
Gain on sale of division		(25)		(3)
Changes in assets and liabilities excluding those related to acquisitions and divestitures:
Commercial and U.S. Government receivables		(174)		(186)
Inventories		(44)		(149)
Other assets		(126)		(144)
Accounts payable		(71)		(75)
Other accrued liabilities		(70)		(47)
Other, net		(18)		(10)
Net cash provided by operating activities		186		109
Cash flows from investing activities:
Finance receivables:
Originated or purchased		(6,679)		(5,677)
Repaid		5,653		4,345
Proceeds from receivable sales and securitization sales		441		1,230
Cash used in acquisitions		(2)		(596)
Capital expenditures		(210)		(399)
Net proceeds from dispositions		39		41
Proceeds from sale of fixed assets		42		21
Proceeds from sale of investments		-		6
Other investing activities, net		22		(15)
Net cash used by investing activities		(694)		(1,044)
Cash flows from financing activities:
Increase in short-term debt		623		778
Proceeds from issuance of long-term debt		1,682		1,082
Principal payments and retirements on long-term debt		(1,533)		(757)
Proceeds from exercise of stock options		20		24
Purchases of Textron common stock		(204)		(44)
Dividends paid		(137)		(138)
Net cash provided by financing activities		451		945
Net increase (decrease) in cash and cash equivalents		(57)		10
Cash and cash equivalents at beginning of period		260		289
Cash and cash equivalents at end of period	$	203	$	299
Supplemental schedule of non-cash investing and financing activities:
Capital lease obligations incurred to finance future construction	$	79	$	-
Capital expenditures financed through capital leases	$	11	$	-

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 September 28, 2002, and its consolidated results of operations and cash flows for each of the respective three and nine month periods ended September 28, 2002 and September 29, 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 nine months ended September 28, 2002, Textron's loss from unconsolidated joint ventures and subsidiaries totaled $3 million and $6 million, respectively. For the three and nine months ended September 29, 2001, Textron's loss from unconsolidated joint ventures and subsidiaries totaled $3 million and $11 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 nine months ended September 29, 2001 was $23 million and $67 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". 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 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 nine months ended September 28, 2002 is as follows:

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.

The effect on net income of the transitional impairment charge and of excluding goodwill amortization expense is presented below:

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended September 28, 2002
	OR
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

(In millions)	September 28, 2002		December 29, 2001
Finished goods	$	873	$	719
Work in process		786		856
Raw materials		319		377
		1,978		1,952
Less progress payments and customer deposits		205		225
	$	1,773	$	1,727

(In millions)	Balance December 29, 2001		Reclassification of Intangible Assets		Transitional Impairment Charge		Foreign Currency Translation		Balance September 28, 2002
Aircraft	$	322	$	-	$	-	$	-	$	322
Fastening Systems		473		-		(100)		11		384
Industrial Products		646		41		(326)		2		363
Industrial Components		380		-		(111)		18		287
Finance		204		1		(24)		-		181
Total	$	2,025	$	42	$	(561)	$	31	$	1,537

	Three months ended				Nine months ended
(In millions, except per share data)	Sept. 28, 2002		Sept. 29, 2001		Sept. 28, 2002		Sept. 29, 2001

Income (loss) before cumulative effect of change in accounting principle	$	71	$	(330)	$	233	$	(91)
Add back: amortization, net of income taxes		-		23		-		67
Adjusted net income (loss) before cumulative effect of change in accounting principle		71		(307)		233		(24)