SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 _______________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended October 3, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 Commission file number 1-5480 _______________ TEXTRON INC. (Exact name of registrant as specified in its charter) _______________ Delaware 05-0315468 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 40 Westminster Street, Providence, RI 02903 401-421-2800 (Address and telephone number of principal executive offices) _______________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common stock outstanding at October 31, 1998 - 158,438,000 shares PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS <TABLE> TEXTRON INC. Condensed Consolidated Statement of Income (unaudited) (Dollars in millions except per share amounts) <CAPTION> Three Months Ended Nine Months Ended October 3, September 27, October 3, September 27, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Revenues Manufacturing sales $ 2,253 $ 1,950 $ 6,813 $ 6,088 Finance revenues 99 92 275 264 Total revenues 2,352 2,042 7,088 6,352 Costs and expenses Cost of sales 1,833 1,589 5,545 4,975 Selling and administrative 249 221 742 670 Gain on sale of division - - (97) - Special charges - - 87 - Interest 80 72 232 218 Provision for losses on collection of finance receivables 6 5 16 17 Total costs and expenses 2,168 1,887 6,525 5,880 Income from continuing operations before income taxes and distributions on preferred securities of subsidiary trust 184 155 563 472 Income taxes (70) (58) (221) (182) Distributions on preferred securities of subsidiary trust, net of income taxes (6) (6) (19) (19) Income from continuing operations 108 91 323 271 Income from discontinued operation, net of income taxes 34 47 125 137 Net income $ 142 $ 138 $ 448 $ 408 Earning per share: Basic: Income from continuing operations $ .67 $ .55 $ 1.99 $ 1.64 Income from discontinued operations .20 .28 .76 0.82 Net income $ .87 $ .83 $ 2.75 $ 2.46 Diluted: Income from continuing operations $ .65 $ .54 $ 1.94 $ 1.60 Income from discontinued operations .20 .27 .74 .80 Net income $ .85 $ .81 $ 2.68 $ 2.40 Average shares outstanding: Basic 162,156,000 164,912,000 162,718,000 165,286,000 Diluted 166,116,000 169,675,000 166,927,000 169,909,000 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 $ .285 $ .25 $ .855 $ .75 </TABLE> See notes to condensed consolidated financial statements. Item 1. FINANCIAL STATEMENTS (Continued) <TABLE> TEXTRON INC. Condensed Consolidated Balance Sheet (unaudited) (Dollars in millions) <CAPTION> October 3, January 3, 1998 1998 <S> <C> <C> Assets Parent Group: Cash $ 57 $ 30 Commercial and U.S. government receivables 1,102 920 Inventories 1,650 1,349 Investment in discontinued operation 1,193 1,214 Other current assets 300 185 Total Parent Group current assets 4,302 3,698 Property, plant, and equipment, less accumulated depreciation of $1,829 and $1,676 1,994 1,761 Goodwill, less accumulated amortization of $371 and $329 1,847 1,567 Other 1,265 1,126 Total Parent Group assets 9,408 8,152 Finance Group: Cash 3 13 Finance receivables - net 3,011 2,993 Other assets 212 172 Total Finance Group assets 3,226 3,178 Total Company assets $ 12,634 $ 11,330 Liabilities and shareholders' equity Liabilities Parent Group: Current portion of long-term debt and short-term debt $ 1,232 $ 476 Accounts payable 837 812 Accrued liabilities 1,070 853 Total Parent Group current liabilities 3,139 2,141 Accrued postretirement benefits other than pensions 769 766 Other liabilities 1,283 1,195 Long-term debt 876 745 Total Parent Group liabilities 6,067 4,847 Finance Group: Other liabilities 183 88 Deferred income taxes 313 319 Debt 2,301 2,365 Total Finance Group liabilities 2,797 2,772 Total Company liabilities 8,864 7,619 Textron - obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Textron junior subordinated debt securities 483 483 Shareholders' equity Capital stock: Preferred stock 13 13 Common stock 24 24 Capital surplus 888 830 Retained earnings 3,671 3,362 Accumulated other comprehensive income (89) (62) 4,507 4,167 Less cost of treasury shares 1,220 939 Total shareholders' equity 3,287 3,228 Total liabilities and shareholders' equity $ 12,634 $ 11,330 Common shares outstanding 159,769,000 162,343,000 </TABLE> See notes to condensed consolidated financial statements. Item 1. FINANCIAL STATEMENTS (Continued) <TABLE> TEXTRON INC. Condensed Consolidated Statement of Cash Flows (Unaudited) (In millions) <CAPTION> Nine Months Ended October 3, September 27, 1998 1997 <S> <C> <C> Cash flows from operating activities: Income from continuing operations $ 323 $ 271 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation 205 176 Amortization 56 47 Provision for losses on receivables 17 19 Special charges 87 - Gain on sale of business (97) - Dividends received from discontinued operation 140 75 Changes in assets and liabilities excluding those related to acquisitions and divestitures: Increase in commercial and U.S. government receivables (131) (60) Increase in inventories (224) (187) Increase in other assets (143) (136) Decrease in accounts payable (12) (21) Increase in accrued liabilities 224 52 Other - net (15) 4 Net cash provided by operating activities 430 240 Cash flows from investing activities: Proceeds from disposition of investments - 251 Finance receivables: Originated or purchased (2,899) (1,928) Repaid or sold 2,613 1,753 Proceeds from sale of securitized assets 260 373 Cash used in acquisitions (458) (355) Cash received from dispositions 160 549 Capital expenditures (302) (227) Other investing activities - net 17 30 Net cash provided (used) by investing activities (609) 446 Cash flows from financing activities: Parent Group: Increase (decrease) in short-term debt 745 (128) Proceeds from issuance of long-term debt 7 16 Principal payments on long-term debt (100) (91) Finance Group: Decrease in short-term debt (112) (134) Proceeds from issuance of long-term debt 361 50 Principal payments on long-term debt (330) (145) Proceeds from exercise of stock options 44 32 Purchases of Textron common stock (281) (130) Dividends paid (138) (124) Net cash provided (used) by financing activities 196 (654) Net increase in cash 17 32 Cash at beginning of period 43 31 Cash at end of period $ 60 $ 63 </TABLE> See notes to condensed consolidated financial statements. TEXTRON INC. Notes to Condensed Consolidated Financial Statements (unaudited) Note 1: Basis of presentation The financial statements should be read in conjunction with the financial statements included in Textron's Annual Report on Form 10-K and the restated financial statements included on Form 8-K dated October 6, 1998 for the year ended January 3, 1998. The financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of Textron's consolidated financial position at October 3, 1998, and its consolidated results of operations for each of the respective three and nine month periods ended October 3, 1998 and September 27, 1997 and consolidated cash flows for each of the nine month periods ended October 3, 1998 and September 27, 1997. The results of operations for the nine months ended October 3, 1998 are not necessarily indicative of results for the full year. Business segment data has been reclassified to reflect the transfer of Lycoming from the Aircraft segment to the Industrial segment. Note 2: Discontinued Operation On August 11, 1998, Textron announced that it had reached an agreement to sell Avco Financial Services (AFS) to Associates First Capital Corporation for $3.9 billion in cash. This transaction is subject to regulatory approvals and it is expected to close by the end of 1998 or early 1999. AFS has been presented herein as a discontinued operation. Summarized operating results of AFS are represented below: <TABLE> <CAPTION> Three months ended Nine months ended October 3, September 27, October 3, September 27, 1998 1997 1998 1997 (In millions) <S> <C> <C> <C> <C> Revenues $ 461 $ 463 $1,391 $1,366 Cost and expenses 407 388 1,190 1,145 Income before income taxes 54 75 201 221 Income taxes (20) (28) (76) (84) Net income $ 34 $ 47 $ 125 $ 137 </TABLE> Presented below is a summary of AFS' financial position at October 3, 1998 and January 3, 1998: <TABLE> <CAPTION> October 3, January 3, 1998 1998 (In millions) <S> <C> <C> Assets: Investments $ 933 $ 844 Finance receivables - net 7,438 7,234 Other 657 654 Total assets $9,028 $8,732 Liabilities: Accounts payable $ 100 $ 123 Accrued liabilities, including income taxes 388 485 Debt 7,347 6,910 Total equity 1,193 1,214 Total liabilities and equity $9,028 $8,732 </TABLE> Note 3: Earnings per Share In 1997, Textron adopted FAS 128 "Earnings Per Share." FAS 128 requires companies to present basic and diluted earnings per share amounts. The dilutive effect of convertible preferred stock and stock options was 4,209,000 and 4,623,000 shares for the nine month periods ending October 3, 1998 and September 27, 1997, respectively. Income available to common shareholders used to calculate basic and diluted earnings per share approximated net income for both periods. Note 4: Inventories <TABLE> <CAPTION> October 3, January 3, 1998 1998 (In millions) <S> <C> <C> Finished goods $ 479 $ 454 Work in process 904 675 Raw materials 442 366 1,825 1,495 Less progress payments and customer deposits 175 146 $1,650 $1,349 </TABLE> Note 5: 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 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 6: Contingencies Textron is subject to a number of lawsuits, investigations and claims arising out of the conduct of its business, including those relating to commercial transactions, government contracts, product liability, and environmental, safety and health matters. Some seek compensatory, treble or punitive damages in substantial amounts; fines, penalties or restitution; or remediation of contamination. Some are or purport to be class actions. Under federal government procurement regulations, some could result in suspension or debarment of Textron or its subsidiaries from U.S. government contracting for a period of time. On the basis of information presently available, Textron believes that any liability for these suits and proceedings would not have a material effect on Textron's net income or financial condition. See Part II, Item 1., LEGAL PROCEEDINGS. Note 7: Comprehensive Income In 1998, Textron adopted FAS 130, "Reporting Comprehensive Income." FAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on Textron's net income or shareholders' equity. FAS 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of FAS 130. During the first nine months of 1998 and 1997, total comprehensive income amounted to $421 million and $345 million, respectively. For the three month period ending October 3, 1998 and September 27, 1997 total comprehensive income amounted to $145 million and $117 million, respectively. Note 8: New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued FAS 131 "Disclosures about Segments of an Enterprise and Related Information." FAS 131 requires public companies to report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. This statement is effective for financial statements of fiscal years beginning after December 15, 1997. In March 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires that companies capitalize certain internal-use software once certain criteria are met. This statement is effective for financial statements of fiscal years beginning after December 15, 1998. In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 will require all costs of start-up activities, including organization costs, to be expensed as incurred. This statement is effective for financial statements of fiscal years beginning after December 15, 1998. In June 1998, the Financial Accounting Standards Board issued FAS 133 "Accounting for Derivative Instruments and Hedging Activities." FAS 133 requires an entity to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. This statement is effective for fiscal years beginning after June 15, 1999. Textron is evaluating the potential impact of these pronouncements on future reporting. Note 9: Financial information by borrowing group Textron consists of two borrowing groups - the Textron Parent Company Borrowing Group (Parent Group) and Textron's commercial finance subsidiary (Finance Group). The Parent Group consists of all entities of Textron (primarily manufacturing) other than its wholly-owned commercial finance subsidiary. The Finance Group consists of Textron Financial Corporation (TFC). Summarized financial information (Statement of Income and Statement of Cash Flows) for the Parent Group reflects the Finance Group on a one-line basis under the equity method of accounting. Item 1. FINANCIAL STATEMENTS (Continued) Note 9: Financial information by borrowing group (continued) <TABLE> PARENT GROUP (unaudited) (In millions) <CAPTION> Three Months Ended Nine Months Ended October 3, September 27, October 3, September 27, Condensed Statement of Income 1998 1997 1998 1997 <S> <C> <C> <C> <C> Sales $2,253 $1,950 $6,813 $6,088 Costs and expenses Cost of sales 1,833 1,589 5,545 4,975 Selling and administrative 229 203 684 620 Gain on sale of division - - (97) - Special charges - - 87 - Interest 40 32 116 101 Total costs and expenses 2,102 1,824 6,335 5,696 151 126 478 392 Pretax income on Finance Group 33 29 85 80 Income from continuing operations before income taxes and distributions on preferred securities of subsidiary trust 184 155 563 472 Income taxes (70) (58) (221) (182) Distributions on preferred securities of subsidiary trust, net of income taxes (6) (6) (19) (19) Income from continuing operations 108 91 323 271 Income from discontinued operation net of income taxes 34 47 125 137 Net income $ 142 $ 138 $ 448 $ 408 </TABLE> Item 1. FINANCIAL STATEMENTS (Continued) Note 9: Financial information by borrowing group (continued) <TABLE> PARENT GROUP (unaudited) (In millions) <CAPTION> Nine Months Ended October 3, September 27, Condensed Statement of Cash Flows 1998 1997 <S> <C> <C> Cash flows from operating activities: Income from continuing operations $ 323 $ 271 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Earnings of Finance Group greater than distributions to Parent Group - 15 Depreciation 203 174 Amortization 51 41 Gain on sale of division (97) - Special charges 87 - Dividends received from discontinued operation 140 75 Changes in assets and liabilities excluding those related to acquisitions and divestitures: Increase in receivables (131) (60) Increase in inventories (224) (187) Increase in other assets (172) (138) Increase in accounts payable and accrued liabilities 143 21 Other - net (1) 7 Net cash provided by operating activities 322 219 Cash flows from investing activities: Capital expenditures (293) (222) Cash used in acquisitions (443) (355) Cash received from disposition of businesses 160 549 Proceeds from disposition of investments - 251 Other investing activities - net 27 20 Net cash provided (used) by investing activities (549) 243 Cash flows from financing activities: Increase (decrease) in short-term debt 745 (128) Proceeds from issuance of long-term debt 7 16 Principal payments on long-term debt (100) (91) Proceeds from exercise of stock options 44 32 Purchases of Textron common stock (281) (130) Dividends paid (138) (124) Contributions paid to Finance Group (23) - Net cash provided (used) by financing 254 (425) activities Net increase in cash 27 37 Cash at beginning of period 30 24 Cash at end of period $ 57 $ 61 </TABLE> Item 1. FINANCIAL STATEMENTS (Continued) Note 9: Financial information by borrowing group (continued) <TABLE> FINANCE GROUP (unaudited) (In millions) <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, Condensed Statement of Income 1998 1997 1998 1997 <S> <C> <C> <C> <C> Revenues $ 99 $ 92 $ 275 $ 264 Costs and expenses Selling and administrative 20 18 58 50 Interest 40 40 116 117 Provision for losses on collection of finance receivables 6 5 16 17 Total costs and expenses 66 63 190 184 Income before income taxes 33 29 85 80 Income taxes (13) (10) (33) (30) Net income $ 20 $ 19 $ 52 $ 50 </TABLE> Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS <TABLE> TEXTRON INC. Revenues and Income by Business Segment (In millions) <CAPTION> Three Months Ended Nine Months Ended October 3, September 27, October 3, September 27, 1998 1997 1998 1997 <S> <C> <C> <C> <C> REVENUES Aircraft $ 826 $ 725 $2,340 $2,159 Automotive 534 464 1,735 1,544 Industrial 893 761 2,738 2,385 Finance 99 92 275 264 Total revenues $2,352 $2,042 $7,088 $6,352 INCOME Aircraft $ 91 $ 79 $ 243 $ 218 Automotive 29 28 128 111 Industrial 103 87 306 263 Finance 33 29 85 80 256 223 762 672 Gain on sale of division* - - 97 - Special charges* - - (87) - Segment income 256 223 772 672 Corporate expenses and other - net (32) (36) (93) (99) Interest expense - net (40) (32) (116) (101) Income from continuing operations before income taxes and distributions on preferred securities of subsidiary trust $ 184 $ 155 $ 563 $ 472 </TABLE> *Special charges include restructuring charges of $10 million for the Aircraft segment, $25 million for the Automotive segment and $52 million for the Industrial segment. The gain on sale of division relates to the Industrial segment. Liquidity and Capital Resources The Statements of Cash Flows for Textron Inc. and the Parent Group detailing the changes in cash balances are on pages 4 and 10, respectively. The Parent Group's operating cash flow includes dividends received from the Finance Group of $52 million and $65 million during the first nine months of 1998 and 1997, respectively, and dividends received from AFS of $140 million and $75 million, respectively. The Parent Group's debt to total capital ratio was 36% at October 3, 1998, up from 25% at year end. In the third quarter, the Parent Group entered into credit agreements with six banks for an aggregate of $990 million. The termination date is March 31, 1999. The Parent Group has credit facilities outstanding at October 3, 1998 aggregating $2.8 billion, $1.6 billion of which was not used or reserved as support for outstanding commercial paper or bank borrowings. At September 30, 1998, the Finance Group had credit facilities outstanding of approximately $1.2 billion, $319 million of which was available at quarter end. The Parent Group had $311 million available at quarter end under their shelf registration statement with the Securities and Exchange. In the first nine months of 1998, the Finance Group increased its medium-term note facility by $750 million and issued $300 million medium-term notes under this facility. The Finance Group had $542 million available under the facility at September 30, 1998. During the first nine months of 1998, Textron's Parent Group acquired six companies: - Ransomes PLC - A UK-based manufacturer of commercial turf care machinery; - Sukosim - a German-based fastener manufacturer; - Peiner - a German-based fastener company; - Ring Screw Works - a Michigan-based supplier of specialty threaded fasteners to the automotive industry; - Datacom Technologies - a Washington-based manufacturer of cable test instruments, and - Midland Industrial Plastics - a UK-based manufacturer of automotive interior and exterior trim. The total cost of these acquisitions was approximately $590 million, including notes issued for approximately $150 million, plus the assumption of debt. Early in the fourth quarter, Textron completed the acquisition of the entire issued capital stock of David Brown Group PLC for approximately $326 million, plus the assumption of debt. David Brown Group PLC is a UK-based designer and manufacturer of industrial gears and mechanical and hydraulic transmission systems. In the first nine months of 1998, the Finance Group had $50 million of interest rate exchange agreements expire. Also, during the first nine months, the Parent Group terminated $275 million of fixed-pay interest rate exchange agreements. On August 11, 1998, Textron announced that its Board of Directors had authorized a new 25 million share repurchase program that supersedes the 8 million shares that remained under its previous authorization. Approximately 4.2 million shares were repurchased in the third quarter. Management believes that the Parent Group will continue to have adequate access to credit markets and that its credit facilities and cash flows from operations - -- including dividends received from Textron's Finance Group -- and expected proceeds from the sale of AFS, will continue to be more than sufficient to meet its operating needs and to finance growth. Year 2000 Readiness Disclosure Introduction Much of the world's computer hardware and software is not designed to process date information after 1999. This is largely because computer programs have historically used only two digits to identify the year in a date, but problems related to processing of date information also may arise because some software assigns special meaning to certain dates. This Year 2000 problem could, if uncorrected, cause computers and other equipment used and manufactured by Textron and Textron's suppliers and customers to fail to operate properly. Year 2000 Program In early 1997, Textron began a company-wide program (the "Program") to assess the possible vulnerability of Textron to the Year 2000 problem and to minimize the effect of the problem on Textron's operations. The Program is centrally directed from the Year 2000 Program Office at Textron's corporate headquarters and is executed at each Textron business unit. The Program addresses five "Major Elements" at the corporate headquarters and each business unit: - Business Systems: management information systems and personal computer applications, including the computing environments that support them. - Factory and Facilities Equipment: equipment that uses a computer to control its operation either for producing an end-product or providing services. - End-Products: software products, delivered either alone or as a component of another product, that are supplied to Textron customers. - Suppliers: assurance that those who sell goods and services to Textron will not interrupt Textron operations due to the Year 2000 problem. - Customers: assurance that those who buy goods and services from Textron will not interrupt Textron operations due to the Year 2000 problem. For each of the Major Elements, the Program measures five "Readiness Levels": <TABLE> <S> <C> Level I) Management has become aware of the issue. An inventory is being taken of the Items that the Year 2000 problem may affect. Level II) The inventory of Year 2000 items has been completed. The priority of each Item is being assessed. Actions are being planned to assure that each Item is ready for the Year 2000. Resources are being committed to do the work. Level III) Planning has been completed. The prescribed actions are being performed, including testing to verify that the actions are effective. Suppliers and customers are being surveyed and their progress is being tracked. Level IV) Items critical to operations have been remediated and have been put in normal operation. Surveys of critical suppliers and customers have been completed. Core business systems continue to be tested. Follow-up checking of suppliers and customers is in process. Contingency plans are being prepared. Audits to verify readiness are being performed. Remediation of Items that are important to operations, but not critical, is being performed. Level V) Systems critical to operations have been tested. Audits and associated corrective actions have been completed. Contingency plans have been completed. Follow-up checking of suppliers and customers has been completed. In all material respects, Textron is ready for Year 2000. </TABLE> Based on information currently available, Textron estimates that it will substantially reach Readiness Level IV by December 31, 1998, and achieve full Readiness Level IV by June 30, 1999. Textron estimates that it will substantially reach Readiness Level V by June 30, 1999, and achieve full Readiness Level V by September 30, 1999. Textron intends to have independent parties complete an assessment of the implementation of the Program at the corporate headquarters and each business unit by March 31, 1999. The Readiness Level of the Major Elements Items that have been inventoried as of September 1, 1998, is shown in the following table. Major Element inventories are under continuous review, and additional Items may be identified in the future. For the Major Elements of "Suppliers" and "Customers" the indicated Readiness Level refers to Textron's progress in reviewing the readiness of customers and suppliers, and not to Textron's assessment of their readiness. Major Element Percent of Identified Major Element Items at Readiness Level II III IV V Business Systems 4% 27% 33% 36% Factory and Facilities Equipment 5% 22% 27% 46% End-Products 1% 3% 1% 96% Suppliers 16% 37% 23% 24% Customers 20% 33% 19% 27% Year 2000 Costs The total cost of the Year 2000 Program for continuing operations is estimated to be approximately $125 million. Approximately $70 million is for modifications to existing Items and other program expenses and $55 million is for replacement systems which have been or are expected to be capitalized in accordance with Company policy. Through August 31, 1998, total expenditures were $72 million. The estimated future cost to complete the Program is expected to be approximately $53 million including approximately $19 million for replacement systems. Funds for the Program are provided from special project appropriations totaling approximately $24 million and from normal operating and capital budgets. The Year 2000 Program has delayed certain other Textron information management projects. Delay of these projects is not expected to have an adverse impact on Textron. Risks and Contingency Plans Year 2000 issues have the potential, if not remediated, to severely disrupt Textron's business operations and to adversely affect Textron's financial condition. The Year 2000 Program is expected to significantly reduce Textron's exposure to these issues, particularly with respect to Textron's Business Systems, Factory & Facilities Equipment, and End-Products. However, it is possible that unanticipated problems may arise in the course of Textron's implementation of the Year 2000 Program. In addition, while monitoring of Year 2000 readiness by Textron's suppliers and customers is a major part of the Year 2000 Program, Textron has very limited ability to ensure Year 2000 readiness by such parties. Textron could also be affected by failure of government agencies, in the U.S. and elsewhere, to maintain governmental services that are essential to Textron's operations. Textron is developing contingency plans to cover situations in which Year 2000 problems arise despite Textron's efforts. Such plans are expected to be substantially ready by June 30, 1999. Forward-looking statements contained in this report relating to Year 2000 issues, including expectations of readiness, possible effects on Textron and similar matters, are subject to the risks described in this section. Results of Operations - Three months ended October 3, 1998 vs Three months ended September 27, 1997 Diluted earnings per share from continuing operations in the third quarter 1998 were $0.65 per share, up 20% from the 1997 amount of $0.54. Income from continuing operations in 1998 of $108 million was up 19% from $91 million in 1997. Revenues increased 15% to $2.4 billion in 1998 from $2.0 billion in 1997. Net income was $142 million versus $138 million in 1997. In August, 1998, Textron announced that it had reached an agreement to sell Avco Financial Services (AFS) to Associates First Capital Corporation for $3.9 billion in cash. This transaction is subject to regulatory approvals and it is expected to close by the end of 1998 or early 1999. Textron has restated its financial statements as presented herein to treat AFS as a discontinued operation. See Note 2 to the condensed consolidated financial statements for additional information. The Aircraft segment's revenues and income increased $101 million (14%) and $12 million (15%), respectively, due to higher results at Cessna Aircraft. Cessna's revenues and income increased as a result of higher sales of business jets and single engine aircraft. Bell Helicopter's revenues decreased, due primarily to the completion in 1997 of the three-year contract for model 412 helicopters with the Canadian Forces ($43 million) and lower commercial helicopter and spares sales ($10 million), partially offset by higher revenues on the V-22 program and Huey and Cobra upgrade contracts ($45 million). Bell's income decreased as a result of the lower sales, partially offset by favorable contract adjustments in 1998 related to the V-22 program. The Automotive segment's revenues increased $70 million (15%), while income increased $1 million (4%). The revenue increase was due to higher volume at Kautex associated with capacity expansion in North America, higher sales at the Trim operations, due primarily to increased Chrysler production, and the contribution from acquisitions. These revenue increases were partially offset by the impact of a strike at General Motors in 1998. The increase in income reflected the above factors, partially offset by new product development costs and the impact of the introduction of a major replacement program with significant additional content. The Industrial segment's revenues increased $132 million (17%) and income increased $16 million (18%). These increases reflected the contribution from acquisitions, primarily Ransomes PLC., Ring Screw Works and Sukosim, and internal growth combined with ongoing margin improvement. Internal growth was driven primarily by continued strength in the Fluid & Power Systems business. These benefits were partially offset by the divestitures of Speidel in the fourth quarter 1997 and Fuel Systems in the second quarter 1998 and the impact of a strike at General Motors on the Fastening Systems business. The Finance segment's revenues increased $7 million (8%), while income increased $4 million (14%). The results benefited from higher average yields on receivables and higher other income, reflecting increases in residual income, syndication income and portfolio servicing income. These benefits were partially offset by a higher provision for losses and higher expenses related to an acquisition of a receivable factoring company, growth in managed receivables, and growth in businesses with higher operating expense ratios. Both years included a gain of approximately $3 million on the securitization of Textron- related receivables. Corporate expenses and other - net decreased $4 million, due primarily to 1997 expenses related to organizational changes and higher support costs related to international expansion. Interest expense - net for the Parent Group increased $8 million, due to higher average debt resulting from the incremental debt associated with acquisitions and share repurchases. Income taxes - the current quarter's effective income tax rate of 38.0% was slightly higher than the corresponding prior year rate of 37.4%. Discontinued operation - Income from discontinued operations of $34 million was $13 million lower than 1997's income from discontinued operation of $47 million. The decrease was due primarily to (a) a gain in 1997 on the sale of underperforming branches in the U.S., (b) lower earnings in Hong Kong due to a weakening economy and (c) an increase in the provision for loan losses in the U.S., due to higher growth in consumer finance receivables. Results of Operations - Nine months ended October 3, 1998 vs Nine months ended September 27, 1997 Diluted earnings per share from continuing operations for the first nine months were $1.94 per share, up 21% from the 1997 amount of $1.60. Income from continuing operations in 1998 of $323 million was up 19% from $271 million in 1997. Revenues increased 12% to $7.1 billion in 1998 from $6.4 billion in 1997. Net income was $448 million versus $408 million in 1997. The Aircraft segment's revenues increased $181 million (8%) and income before special charges increased $25 million (11%), due to higher results at Cessna Aircraft. Cessna's revenues and income increased as a result of higher sales of business jets, single engine aircraft and Caravans. Bell Helicopter's revenues decreased, due primarily to the completion in 1997 of the Canadian Forces contract ($142 million). These lower revenues were partially offset by higher commercial helicopter and spares sales ($23 million) and higher revenues to the U.S. Government ($21 million) as increased revenues on the V-22 program and Huey and Cobra upgrade contracts ($99 million) more than offset lower foreign military sales ($40 million) and lower revenues on other U.S. Government contracts ($38 million). Bell's income decreased due to the lower sales, and a change in product mix, primarily resulting from lower margins on U.S. Government contracts. This unfavorable impact was partially offset by a lower level of product development expense in 1998. The Automotive segment's revenues increased $191 million (12%), while income before special charges increased $17 million (15%). The revenue increase was due to higher volume at Kautex associated with capacity expansion in North America, higher sales at the Trim operations, due primarily to increased Chrysler production (which was depressed in 1997 by a strike at Chrysler in the second quarter of 1997), and the contribution from acquisitions. These revenue increases were partially offset by the impact of a strike at General Motors in 1998. The increase in income reflected the above factors, partially offset by new product development costs and the impact of the introduction of a major replacement program with significant additional content. The Industrial segment's revenues and income before special charges increased $353 million (15%) and $43 million (16%), respectively. These increases reflected the contribution from acquisitions, primarily Ransomes PLC., Ring Screw Works and Sukosim, and internal growth combined with ongoing margin improvement. Internal growth was driven by continued strength in the Fastening Systems and Fluid & Power Systems businesses. These benefits were partially offset by the divestitures of Speidel in the fourth quarter 1997 and Fuel Systems in the second quarter 1998, the impact of a strike at General Motors and a one-month strike at Textron's Jacobsen plant in 1998. Margins, although slightly higher than last year, were adversely impacted by the lower margins of acquisitions, the divestitures of higher margin businesses and unfavorable contract adjustments related to marine and land systems products. The Finance segment's revenues increased $11 million (4%), as a result of higher average yields on receivables (10.10% in the first nine months of 1998 vs. 9.96% in the first nine months of 1997) and higher other income, reflecting increases in residual income, prepayment income, syndication income and portfolio servicing income, partially offset by a lower level of average receivables ($3.173 billion in the first nine months of 1998 vs. $3.194 billion in the first nine months of 1997). Its income increased $5 million (6%) as the benefit of the higher revenues and a lower provision for losses were partially offset by higher expenses related to an acquisition of a receivable factoring company, growth in managed receivables and growth in businesses with higher operating expense ratios. Both years included a gain of approximately $3 million on the securitization of Textron-related receivables. Gain on sale of division Fuel Systems Textron was sold to Woodward Governor Company for $160 million in cash in June 1998, at a pretax gain of $97 million ($54 million after-tax, or $0.32 per diluted share). Special charges: To enhance the competitiveness and profitability of its core businesses, Textron recorded a pretax charge of $87 million in the second quarter 1998 ($54 million after-tax or $0.32 per diluted share). This charge was recorded to cover asset impairments ($28 million), severance costs ($40 million), and other exit-related costs ($9 million) associated with its decision to exit several small, nonstrategic product lines in Automotive and the former Systems and Components divisions which did not meet Textron's return criteria, and to realign certain operations in the Industrial segment. The pretax charges recorded in the Automotive and Industrial segments were $25 million and $52 million, respectively, and also included the cost of a litigation settlement of $10 million in the Aircraft segment. Corporate expenses and other - net decreased $6 million due primarily to first quarter 1997 litigation expenses related to a divested operation and higher third quarter 1997 expenses related to organizational changes and higher support costs related to international expansion. Interest expense - net for the Parent Group increased $15 million, due to higher average debt resulting from the incremental debt associated with acquisitions and share repurchases, partially offset by the payment of debt with proceeds in 1997 from the divestiture of Paul Revere. Income taxes - the effective income tax rate of 39.3% for the nine months was higher than the corresponding prior year rate of 38.6%, due primarily to the nontax deductibility of goodwill related to the divestiture of Fuel Systems Textron partially offset by the favorable resolution of certain matters with taxing authorities. Discontinued operation - Income from discontinued operations of $125 million was $12 million lower than 1997's income from discontinued operation of $137 million. The decrease was due primarily to (a) weakness in the U.S. Finance business, (b) lower earnings in Hong Kong due to a weakening economy and (c) the unfavorable impact of foreign exchange rates primarily in Australia and Canada, partially offset by (d) the benefits of a gain from the sale of the centralized real estate portfolio and higher capital gains. * * * * * * Forward-looking Information: Certain statements in this Report, and other oral and written statements made by Textron from time to time, are forward-looking statements, including those that discuss strategies, goals, outlook or other non-historical matters; or project revenues, income, returns or other financial measures. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements, including the following: (i) continued market demand for the types of products and services produced and sold by Textron, (ii)changes in worldwide economic and political conditions and associated impact on interest and foreign exchange rates, (iii) the level of sales by original equipment manufacturers of vehicles for which Textron supplies parts, (iv) the successful integration of companies acquired by Textron. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See the Company's most recent Restated Financial Statements and Restated Financial Information filed on Form 8-K (dated 10/6/98) Exhibit 99.1 pages 3 through 9. There has been no material change in this information. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS On September 30, 1998, the Director of the Water Division of Region 5 of United States Environmental Protection Agency in Chicago, Illinois, issued an administrative Complaint alleging that Textron's CWC Castings Division violated the Clean Water Act. The Complaint alleges that CWC exceeded wastewater discharge limits contained in the sewer permit for its Muskegon, Michigan, facility and that its sampling protocol did not conform to applicable federal regulations. The Complaint proposes a penalty of $137,000. Textron has filed an Answer to the Complaint in which it contests the allegations and the appropriateness of the amount of the proposed penalty and requests a hearing. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Asset Purchase Agreement Among Textron Inc., Avco Financial Services, Inc. and Associates First Capital Corporation dated as of August 11, 1998 10.2 Employment Agreement between Textron and John D. Butler dated July 23, 1998 10.3 Employment Agreement between Textron and Lewis B. Campbell dated July 23, 1998 10.4 Employment Agreement between Textron and Herbert L. Henkel dated August 12, 1998 10.5 Employment Agreement between Textron and Mary L. Howell dated July 23, 1998 10.6 Employment Agreement between Textron and Wayne W. Juchatz dated July 23, 1998 10.7 Employment Agreement between Textron and Stephen L. Key dated July 23, 1998 12.1 Computation of ratio of income to combined fixed charges and preferred securities dividends of the Parent Group 12.2 Computation of ratio of income to combined fixed charges and preferred securities dividends of Textron Inc. including all majority-owned subsidiaries 27 Financial Data Schedule (filed electronically only) (b) Reports on Form 8-K During the quarter ended October 3, 1998, Textron filed the following reports on Form 8-K: Current Report on Form 8-K filed with the Securities and Exchange Commission dated August 11, 1998, reporting under Item 5 (Other Events) and filing under Item 7 (Exhibits) a press release announcing that Textron reached an agreement to sell its Avco Financial Services, Inc. unit ("AFS") to Associates First Capital Corporation for $3.9 billion in cash. Current Report on Form 8-K filed with the Securities and Exchange Commission dated October 6, 1998, reporting under Item 5 (Other Events) and filing under Item 7 (Exhibits) restated financial statements to reflect AFS as a discontinued operation. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEXTRON INC. Date: November 12, 1998 s/R. L. Yates R. L. Yates Vice President and Controller (principal accounting officer) LIST OF EXHIBITS The following exhibits are filed as part of this report on Form 10-Q: <TABLE> Name of Exhibit <C> <S> 10.1 Asset Purchase Agreement Among Textron Inc., Avco Financial Services, Inc. and Associates First Capital Corporation dated as of August 11, 1998 10.2 Employment Agreement between Textron and John D. Butler dated July 23, 1998 10.3 Employment Agreement between Textron and Lewis B. Campbell dated July 23, 1998 10.4 Employment Agreement between Textron and Herbert L. Henkel dated August 12, 1998 10.5 Employment Agreement between Textron and Mary L. Howell dated July 23, 1998 10.6 Employment Agreement between Textron and Wayne W. Juchatz dated July 23, 1998 10.7 Employment Agreement between Textron and Stephen L. Key dated July 23, 1998 12.1 Computation of ratio of income to combined fixed charges and preferred securities dividends of the Parent Group 12.2 Computation of ratio of income to combined fixed charges and preferred securities dividends of Textron Inc. including all majority-owned subsidiaries 27 Financial Data Schedule (filed electronically only) </TABLE>