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 27, 2003		September 28, 2002		September 27, 2003		September 28, 2002
Revenues
Manufacturing revenues	$	2,095	$	2,329	$	6,742	$	7,132
Finance revenues		148		156		454		449
Total revenues		2,243		2,485		7,196		7,581
Costs, expenses and other
Cost of sales		1,718		1,910		5,539		5,822
Selling and administrative		317		313		973		986
Interest, net		71		80		211		230
Provision for losses on finance receivables		25		45		86		100
Special charges		42		33		94		67
Gain on sale of business, net		-		-		(15)		(25)
Total costs, expenses and other		2,173		2,381		6,888		7,180
Income from continuing operations before income taxes and distributions on preferred securities of subsidiary trusts		70		104		308		401
Income taxes		(23)		(23)		(95)		(124)
Distribution on preferred securities of subsidiary trusts, net of income taxes		-		(6)		(13)		(19)
Income from continuing operations		47		75		200		258
Loss from discontinued operations, net of income taxes		-		(4)		(24)		(25)
Income before cumulative effect of change in accounting principle		47		71		176		233
Cumulative effect of change in accounting principle, net of income taxes		-		-		-		(488)
Net income (loss)	$	47	$	71	$	176	$	(255)
Per common share:
Basic:
Income from continuing operations	$	.35	$	.55	$	1.47	$	1.85
Loss from discontinued operations, net of income taxes		-		(.04)		(.17)		(.18)
Cumulative effect of change in accounting principle, net of income taxes		-		-		-		(3.50)
Net income (loss)	$	.35	$	.51	$	1.30	$	(1.83)
Diluted:
Income from continuing operations		.34	$	.55	$	1.46	$	1.83
Loss from discontinued operations, net of income taxes		-		(.04)		(.17)		(.17)
Cumulative effect of change in accounting principle, net of income taxes		-		-		-		(3.47)
Net income (loss)	$	.34	$	.51	$	1.29	$	(1.81)
Average shares outstanding (in thousands):
Basic		135,627		137,848		135,681		139,234
Diluted		136,828		139,145		136,761		140,820
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 27, 2003		December 28, 2002
Assets
Textron Manufacturing
Cash and cash equivalents	$	190	$	286
Commercial and U.S. Government receivables (less allowance for doubtful accounts of $60 and $48, respectively)		1,350		1,159
Inventories		1,525		1,566
Income taxes receivable		129		193
Other current assets		502		539
Assets of discontinued operations		-		237
Total current assets		3,696		3,980
Property, plant, and equipment (less accumulated depreciation of $2,345 and $2,171, respectively)		1,905		1,955
Goodwill		1,383		1,353
Other intangible assets, net		42		47
Other assets		1,618		1,525
Total Textron Manufacturing assets		8,644		8,860
Textron Finance
Cash		42		21
Finance receivables, net		5,827		5,589
Goodwill		181		181
Other assets		856		863
Total Textron Finance assets		6,906		6,654
Total assets	$	15,550	$	15,514
Liabilities and shareholders' equity
Liabilities
Textron Manufacturing
Current portion of long-term debt and short-term debt	$	313	$	25
Accounts payable		770		857
Accrued liabilities		1,354		1,324
Liabilities of discontinued operations		-		86
Total current liabilities		2,437		2,292
Accrued postretirement benefits other than pensions		598		611
Other liabilities		1,455		1,403
Long-term debt		1,661		1,683
Mandatorily redeemable preferred securities		-		485
Total Textron Manufacturing liabilities		6,151		6,474
Textron Finance
Other liabilities		461		369
Deferred income taxes		455		398
Debt		4,916		4,840
Obligated mandatorily redeemable preferred securities of Finance subsidiary holding solely junior subordinated debentures		27		27
Total Textron Finance liabilities		5,859		5,634
Total liabilities		12,010		12,108
Shareholders' equity
Capital stock:
Preferred stock		11		11
Common stock		25		25
Capital surplus		1,083		1,080
Retained earnings		5,569		5,526
Accumulated other comprehensive loss		(111)		(225)
		6,577		6,417
Less cost of treasury shares		3,037		3,011
Total shareholders' equity		3,540		3,406
Total liabilities and shareholders' equity	$	15,550	$	15,514
Common shares outstanding (in thousands)		135,769		136,500

	Nine Months Ended
	September 27, 2003		September 28, 2002
Cash flows from operating activities:
Income from continuing operations	$	200	$	258
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation		247		240
Amortization		13		20
Provision for losses on finance receivables		86		100
Gain on sale of businesses, net		(15)		(25)
Special charges		94		67
Deferred income taxes		42		48
Changes in assets and liabilities excluding those related to acquisitions and divestitures:
Commercial and U.S. Government receivables		(168)		(169)
Inventories		66		(74)
Other assets		42		(128)
Accounts payable		(116)		(69)
Other accrued liabilities		(61)		(87)
Other operating activities, net		25		(34)
Net cash provided by operating activities of continuing operations		455		147
Cash flows from investing activities:
Finance receivables:
Originated or purchased		(7,421)		(6,679)
Repaid		6,485		5,653
Proceeds from receivable sales and securitization sales		538		441
Capital expenditures		(200)		(209)
Net proceeds from sales of businesses		17		39
Proceeds from sale of property, plant and equipment		105		77
Other investing activities, net		64		(16)
Net cash used by investing activities of continuing operations		(412)		(694)
Cash flows from financing activities:
Increase in short-term debt		213		623
Proceeds from issuance of long-term debt		1,261		1,682
Principal payments on long-term debt		(1,596)		(1,532)
Proceeds from exercise of stock options		12		20
Purchases of Textron common stock		(64)		(204)
Dividends paid		(133)		(137)
Other financing activities, net		(8)		-
Net cash (used) provided by financing activities of continuing operations		(315)		452
Effect of exchange rate changes on cash and cash equivalents		11		14
Net cash used by continuing operations		(261)		(81)
Net proceeds and cash provided by discontinued operations		186		24
Net decrease in cash and cash equivalents		(75)		(57)
Cash and cash equivalents at beginning of period		307		260
Cash and cash equivalents at end of period	$	232	$	203
Supplemental schedule of non-cash investing and financing activities of continuing operations:
Capital lease obligations incurred to finance future construction	$	-	$	79
Capital expenditures financed through capital leases	$	11	$	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 28, 2002. These 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 27, 2003, and its consolidated results of operations and cash flows for each of the respective three- and nine-month periods ended September 27, 2003 and September 28, 2002. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Certain prior year balances have been reclassified to conform to the current year presentation.

On August 1, 2003, Textron sold its remaining OmniQuip business as disclosed in Note 10 "Dispositions". The OmniQuip business is accounted for as a discontinued operation under generally accepted accounting principles, and therefore, OmniQuip's results of operations and cash flows have been removed from Textron's results of continuing operations and cash flows for all periods presented. Prior period balance sheet amounts have been classified on separate lines as assets and liabilities of discontinued operations.

Textron reorganized its segments in the second quarter of 2003 in order to streamline its management structure. Under the new structure, Textron Systems and Textron Lycoming (Lycoming) have been combined with Bell Helicopter to form the new Bell segment and Cessna Aircraft is being reported separately as a new segment. The remaining Industrial Products and Industrial Components businesses have been combined to form the new Industrial segment. Textron now reports under the following segments: Bell, Cessna, Fastening Systems, Industrial and Finance. All prior period data has been appropriately reclassified.

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. Textron Manufacturing is Textron Inc., the parent company, consolidated with the entities that operate in the Bell, Cessna, Fastening Systems and Industrial business segments.

Textron accounts for its interests in unconsolidated joint ventures under the equity method of accounting. At September 27, 2003 and December 28, 2002, other assets includes $32 million and $35 million, respectively, attributable to investments in unconsolidated joint ventures. Since Textron's equity in income (loss) from these 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 $2 million and $6 million for the three and nine months ended September 27 2003, and $3 million and $6 million for the three and nine months ended September 28, 2002, respectively.

The Emerging Issues Task Force reached a consensus in May 2003 on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" (EITF 00-21) which became effective for revenue arrangements entered into in the third quarter of 2003. In an arrangement with multiple deliverables,

EITF 00-21 provides guidance to determine (a) how the arrangement consideration should be measured, (b) whether the arrangement should be divided into separate units of accounting, and (c) how the arrangement consideration should be allocated among the separate units of accounting. Textron adopted EITF 00-21 in the third quarter and amended its revenue recognition policy as described below. The adoption of EITF 00-21 did not have a material impact on Textron's results of operations or financial position.

When a sale arrangement involves multiple elements, such as sales of products that include customization services, the deliverables in the arrangement are evaluated to determine whether they represent separate units of accounting. This evaluation occurs at inception of the arrangement and as each item in the arrangement is delivered. The total fee from the arrangement is allocated to each unit of accounting based on its relative fair value, taking into consideration any performance, cancellation, termination, or refund type provisions. Fair value for each element is established generally based on the sales price charged when the same or similar element is sold separately. Revenue is recognized when revenue recognition criteria for each unit of accounting is met.

On December 30, 2001, Textron adopted SFAS No. 142 which required companies to stop amortizing goodwill and certain intangible assets with indefinite useful lives and requires an annual review for impairment. All existing goodwill as of December 30, 2001 was required to be tested for impairment on a reporting unit basis. 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.

With the implementation of SFAS No. 142, an after-tax transitional impairment charge of $488 million ($561 million, pre-tax) was taken in the second quarter and retroactively recorded in the first quarter in 2002. This retroactive restatement reduced basic and diluted earnings per share by $3.50 and $3.47, respectively, for the nine months ended September 28, 2002. The after-tax charge is included in the caption "Cumulative effect of change in accounting principle, net of income taxes" and relates to the following segments: $385 million in Industrial, $88 million in Fastening Systems and $15 million in Finance. For the Industrial and Fastening Systems segments, the primary factor was the decline in demand in certain industries in which these segments operate, especially the telecommunications industry, due to the economic slow down. The Finance segment's impairment charge related to the franchise finance division and was primarily the result of decreasing loan volumes and an unfavorable securitization market.

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended September 27, 2003
	OR
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

(In millions)	September 27, 2003		December 28, 2002
Finished goods	$	761	$	751
Work in process		691		810
Raw materials		205		191
		1,657		1,752
Less progress payments and customer deposits		132		186
	$	1,525	$	1,566

(In millions)		Balance December 28, 2002		Foreign Currency Translation		Balance September 27, 2003
Bell	$	101	$	-	$	101
Cessna		306		-		306
Fastening Systems		390		12		402
Industrial		556		18		574
Finance		181		-		181
Total	$