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 March 29, 1997 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 April 26, 1997 - 82,505,000 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 March 29, March 30, 1997 1996 Revenues <S> <C> <C> Manufacturing sales $ 2,021 $ 1,700 Finance revenues 530 514 Total revenues 2,551 2,214 Costs and expenses Cost of sales 1,656 1,393 Selling and administrative 362 331 Interest 183 183 Provision for losses on collection of finance receivables 64 53 Other 70 70 Total costs and expenses 2,335 2,030 Income from continuing operations before income taxes and distributions on preferred securities of subsidiary trust 216 184 Income taxes (85) (72) Distributions on preferred securities of subsidiary trust, net of income taxes (6) (3) Income from continuing operations 125 109 Discontinued operation, net of income taxes - (74) Net income $ 125 $ 35 Per common share*: Income from continuing operations $ .73 $ .63 Discontinued operation - (.43) Net income $ .73 $ .20 Average shares outstanding* 170,454,000 173,360,000 Dividends per share: $2.08 Preferred stock, Series A $ .52 $ .52 $1.40 Preferred stock, Series B $ .35 $ .35 Common stock* $ .25 $ .22 </TABLE> *Reflects the effect of the two-for-one stock split in the form of a stock dividend payable May 30, 1997 to shareholders of record on May 9, 1997. See notes to consolidated financial statements. Item 1. FINANCIAL STATEMENTS (Continued) <TABLE> TEXTRON INC. Condensed Consolidated Balance Sheet (unaudited) (Dollars in millions) <CAPTION> March 29, December 28, 1997 1996 Assets <S> <C> <C> Cash $ 140 $ 47 Investments 1,057 820 Receivables - net: Finance 10,074 9,856 Commercial and U.S. government 975 882 11,049 10,738 Inventories 1,373 1,192 Investment in discontinued operation - 770 Property, plant, and equipment, less accumulated depreciation of $1,758 and $1,664 1,701 1,539 Goodwill, less accumulated amortization of $412 and $404 1,801 1,609 Other (including net prepaid income taxes) 1,568 1,520 Total assets $ 18,689 $ 18,235 Liabilities and shareholders' equity Liabilities Accounts payable $ 900 $ 850 Accrued postretirement benefits other than pensions 820 817 Other accrued liabilities (including income taxes) 2,708 2,556 Debt: Parent Group 1,464 1,507 Finance Group 9,099 8,839 10,563 10,346 Total liabilities 14,991 14,569 Textron - obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Textron junior subordinated debt securities 483 483 Shareholders' equity Capital stock: Preferred stock 14 14 Common stock* 12 12 Capital surplus 811 793 Retained earnings 3,053 2,969 Other (28) 7 3,862 3,795 Less cost of treasury shares 647 612 Total shareholders' equity 3,215 3,183 Total liabilities and shareholders' equity $ 18,689 $ 18,235 *Common shares outstanding before stock split 83,091,000 82,809,000 </TABLE> See notes to consolidated financial statements. Item 1. FINANCIAL STATEMENTS (Continued) <TABLE> TEXTRON INC. Condensed Consolidated Statement of Cash Flows (Unaudited) (In millions) <CAPTION> Three Months Ended March 29, March 30, 1997 1996 Cash flows from operating activities: <S> <C> <C> Income from continuing operations $ 125 $ 109 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 102 92 Provision for losses on receivables 66 54 Changes in assets and liabilities excluding those related to acquisitions and divestitures: Increase in commercial and U.S. government receivables (8) (31) Increase in inventories (138) (82) Increase in other assets (8) (27) Increase (decrease) in accounts payable 14 (18) Decrease in accrued liabilities (23) (1) Other - net (25) 3 Net cash provided by operating activities 105 99 Cash flows from investing activities: Purchases of investments (50) (34) Proceeds from disposition of investments 34 12 Maturities and calls of investments 9 10 Finance receivables: Originated or purchased (1,776) (1,461) Repaid or sold 1,582 1,432 Cash used in acquisitions (348) (3) Cash received from dispositions 571 - Capital expenditures (88) (52) Other investing activities - net 13 (1) Net cash used by investing activities (53) (97) Cash flows from financing activities: Increase in short-term debt 240 130 Proceeds from issuance of long-term debt 798 456 Principal payments on long-term debt (966) (955) Issuance of Textron-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Textron junior subordinated debt securities - 483 Proceeds from exercise of stock options 16 18 Purchases of Textron common stock (6) (110) Dividends paid (41) (37) Net cash provided (used) by financing activities 41 (15) Net increase (decrease) in cash 93 (13) Cash at beginning of period 47 84 Cash at end of period $ 140 $ 71 </TABLE> See notes to consolidated financial statements. TEXTRON INC. Notes to 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 for the year ended December 28, 1996. 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 March 29, 1997, and its consolidated results of operations and cash flows for each of the respective three month periods ended March 29, 1997 and March 30, 1996. Textron completed the sale of Paul Revere to Provident Companies, Inc. on March 27, 1997. See Management's Discussion and Analysis for additional information. Note 2: Stock split in the form of a stock dividend At Textron's Annual Meeting on April 23, 1997, Textron's shareholders approved an increase in the authorized number of common shares from 250 to 500 million in connection with a two-for-one stock split of Textron common stock to be effected in the form of a stock dividend. The new shares will be distributed on May 30, 1997 to shareholders of record on the close of business on May 9, 1997. Average shares outstanding and per share amounts have been restated to reflect the stock split for all periods presented. Note 3: Earnings per Share In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," (FAS 128) which is effective for financial statements for both interim and annual periods ending after December 15, 1997. FAS 128 will require the presentation of "Basic" and "Diluted" EPS. On a proforma basis, Diluted EPS calculated in accordance with FAS 128 does not differ significantly from EPS as currently reported for the quarter ended March 29, 1997. The Basic EPS calculation does not consider the potential effects of potentially dilutive securities and on a proforma basis, is approximately $.02 per share higher then Diluted EPS for the first quarter of 1997 (post-split). Note 4: Inventories <TABLE> <CAPTION> March 29, December 28, 1997 1996 (In millions) <S> <C> <C> Finished goods $ 408 $ 364 Work in process 825 769 Raw materials 297 259 1,530 1,392 Less progress payments and customer deposits 157 200 $ 1,373 $ 1,192 </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 Lawsuits and other proceedings are pending or threatened against Textron and its subsidiaries. Some allege violations of federal government procurement regulations, involve environmental matters, or are or purport to be class actions. Some seek compensatory, treble or punitive damages in substantial amounts; fines, penalties or restitution; or remediation of contamination. 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 these suits and proceedings will not have a material effect on Textron's net income or financial condition. Note 7: Financial information by borrowing group Textron consists of two borrowing groups - the Textron Parent Company Borrowing Group (Parent Group) and Textron's finance subsidiaries (Finance Group). The Parent Group consists of all entities of Textron (primarily manufacturing) other than its wholly-owned finance subsidiaries. The Finance Group consists of Avco Financial Services (AFS) and Textron Financial Corporation (TFC). Summarized financial information for the Parent Group includes the Finance Group on a one- line basis under the equity method of accounting. Item 1 FINANCIAL STATEMENTS (Continued) Note 7: Financial information by borrowing group (continued) <TABLE> PARENT GROUP (unaudited) (In millions) <CAPTION> Three Months Ended March 29, March 30, Condensed Statement of Income 1997 1996 <S> <C> <C> Sales $ 2,021 $ 1,700 Costs and expenses Cost of sales 1,656 1,393 Selling and administrative 206 177 Interest 39 38 Total costs and expenses 1,901 1,608 120 92 Pretax income of Finance Group 96 92 Income from continuing operations before income taxes and distribution on preferred securities of subsidiary trust 216 184 Income taxes (85) (72) Distributions on preferred securities of subsidiary trust, net of income taxes (6) (3) Income from continuing operations 125 109 Discontinued operation, net of income taxes - (74) Net income $ 125 $ 35 </TABLE> <TABLE> <CAPTION> March 29, December 28, Condensed Balance Sheet 1997 1996 Assets <S> <C> <C> Cash $ 88 $ 24 Receivables - net 975 882 Inventories 1,373 1,192 Investments in Finance Group 1,595 1,600 Investment in discontinued operation - 770 Property, plant and equipment - net 1,615 1,454 Goodwill 1,648 1,466 Other assets (including net prepaid income taxes) 1,568 1,269 Total assets $ 8,862 $ 8,657 Liabilities and shareholders' equity Accounts payable and accrued liabilities (including income taxes) $ 3,700 $ 3,484 Debt 1,464 1,507 Textron - obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Textron junior subordinated debt securities 483 483 Shareholders' equity 3,215 3,183 Total liabilities and shareholders' equity $ 8,862 $ 8,657 </TABLE> Item 1. FINANCIAL STATEMENTS (Continued) Note 7: Financial information by borrowing group (continued) <TABLE> PARENT GROUP (continued) (Unaudited) (In millions) <CAPTION> Three Months Ended March 29, March 30, Condensed Statement of Cash Flows 1997 1996 Cash flows from operating activities: <S> <C> <C> Income from continuing operations $ 125 $ 109 Adjustments to reconcile income from continuing operations to net cash provided (used) by operating activities: Undistributed earnings of Finance Group (11) (26) Depreciation and amortization 70 60 Changes in assets and liabilities excluding those related to acquisitions and divestitures: Increase in receivables (8) (31) Increase in inventories (138) (82) Increase in other assets (25) (56) Increase (decrease) in accounts payable and accrued liabilities (6) 6 Other - net (8) 11 Net cash used by operating activities (1) (9) Cash flows from investing activities: Capital expenditures (81) (47) Cash used in acquisitions (324) (3) Cash received from dispositions 571 - Other investing activities - net 14 7 Net cash provided (used) by investing activities 180 (43) Cash flows from financing activities: Increase (decrease) in short-term debt 8 (5) Proceeds from issuance of long-term debt 690 328 Principal payments on long-term debt (781) (630) Issuance of Textron - obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Textron junior subordinated debt securities - 483 Proceeds from exercise of stock options 16 18 Purchases of Textron common stock (6) (110) Dividends paid (42) (37) Net cash provided (used) by financing activities (115) 47 Net increase (decrease) in cash 64 (5) Cash at beginning of period 24 56 Cash at end of period $ 88 $ 51 </TABLE> Item 1 FINANCIAL STATEMENTS (Continued) Note 7: Financial information by borrowing group (continued) <TABLE> FINANCE GROUP (unaudited) (In millions) <CAPTION> Three Months Ended March 31, March 31, Condensed Statement of Income 1997 1996 <S> <C> <C> Revenues $ 530 $ 514 Costs and expenses Selling and administrative 156 154 Interest 144 145 Provision for losses on collection of finance receivables 64 53 Other 70 70 Total costs and expenses 434 422 Income before income taxes 96 92 Income taxes (37) (36) Net income $ 59 56 </TABLE> <TABLE> <CAPTION> March 31, December 31, Condensed Balance Sheet 1997 1996 Assets <S> <C> <C> Cash $ 52 $ 23 Investments 808 814 Finance receivables - net 10,076 9,860 Other 750 712 Total assets $ 11,686 $ 11,409 Liabilities and equity Accounts payable and accrued liabilities (including income taxes) $ 992 $ 970 Debt 9,099 8,839 Equity 1,595 1,600 Total liabilities and equity $ 11,686 $ 11,409 </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 March 29, March 30, 1997 1996 REVENUES <S> <C> <C> MANUFACTURING: Aircraft $ 706 $ 654 Automotive 557 405 Industrial 620 477 Systems and Components 138 164 2,021 1,700 FINANCE 530 514 Total revenues $ 2,551 $ 2,214 INCOME MANUFACTURING: Aircraft $ 64 $ 56 Automotive 50 37 Industrial 67 54 Systems and Components 11 11 192 158 FINANCE 96 92 Segment operating income 288 250 Corporate expenses and other - net (33) (28) Interest expense - net (39) (38) Income from continuing operations before income taxes and distributions on preferred securities of subsidiary trust $ 216 $ 184 </TABLE> Financial Condition Parent Group: During the three months ended March 29, 1997, the Parent Group's cash flows used in operating activities were approximately the same as they were in the corresponding period of 1996. Operating cash flows for 1997 were affected by income from continuing operations offset by inventory buildup at Cessna on the Citation X, Bravo and Single Engine programs. The Group's debt decreased by $43 million principally as a result of cash from the sale of Paul Revere ($571 million) exceeding cash used for (a) acquisitions ($324 million), (b) capital expenditures ($81 million), and (c) payments of dividends ($42 million). The Parent Group's credit facilities not used or reserved as support for outstanding commercial paper or bank borrowings at March 29, 1997 were $1.2 billion. Textron had $511 million available at March 29,1997 under its shelf registration statements filed with the Securities and Exchange Commission. At March 29, 1997, approximately 35% and 32% of total foreign currency borrowings of $496 million under Textron's multi-currency credit agreements were denominated in Deutsche marks and French francs, respectively. On March 27, 1997, Textron completed the sale of its 83.3% owned subsidiary, The Paul Revere Corporation, to Provident Companies, Inc. Net proceeds to Textron after adjustments and contingent payments were approximately $800 million (including shares of Provident common stock valued at $245 million). Proceeds will be used to finance acquisitions, repurchase Textron common shares and reduce debt. In the first quarter of 1997, the Parent Group acquired the Germany-based Kautex Group, a worldwide supplier of blow-molded plastic fuel tanks and other automotive components and systems and Switzerland-based Maag Pump Systems AG and Italy-based Maag Italia S.p.A., manufacturers of gears, gear pumps and gear systems for an aggregate of approximately $390 million. 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-- will continue to be more than sufficient to meet its operating needs and to finance growth. Finance Group: The Finance Group paid dividends of $48 million and $30 million to the Parent Group during the three month periods ended March 29, 1997 and March 30, 1996, respectively. During the three months ended March 29, 1997, the Finance Group had $157 million of interest rate exchange agreements expire and $48 million of interest rate exchange agreements go into effect. The new agreements, which have a weighted average original term of 2.8 years and expire through 2000, had the effect of fixing the rate of interest at approximately 7.0% on $48 million of variable rate borrowings at March 29, 1997. Results of Operations - Three months ended March 29, 1997 vs. Three months ended March 30, 1996 Textron reported first quarter 1997 earnings per share from continuing operations of $0.73 per share, up 16% from first quarter 1996 earnings per share from continuing operations of $0.63. Income from continuing operations in 1997 of $125 million was up 15% from the 1996 amount of $109 million. Revenues increased 15% to $2.6 billion in 1997 from $2.2 billion in 1996. Net income in the first quarter 1997 was $125 million vs $35 million in 1996, which reflected the impact of a $74 million loss from a discontinued operation. The Aircraft segment's revenues and income increased $52 million (8%) and $8 million (14%), respectively, due to stronger results at Cessna Aircraft. Cessna's revenues and income increased due to higher sales of business jets, including the recently introduced Citation X and Citation Bravo. Bell Helicopter's revenues and income were slightly below last year as a result of lower revenues on the V-22 program ($46 million), partially offset by higher domestic and international commercial helicopter sales ($27 million), primarily its new model 407. The Automotive segment's revenues increased $152 million (38%), primarily as a result of the first quarter 1997 acquisition of Kautex and the 1996 acquisitions of Valeo Wiper Systems and the remaining 50% of a joint venture in Born, Netherlands. Stronger light truck sales to U.S. OEMs also contributed to the improved results. Income increased $13 million (35%), primarily as a result of the higher sales. Excluding the impact of the 1997 acquisition of Kautex, automotive sales are expected to be lower in 1997 than in 1996 as a result of the timing of replacement business and customer launches beginning in the second quarter 1997. In addition, second quarter 1997 income will be lower than last year's second quarter reflecting the impact of a strike at a U.S. OEM plant. The Industrial segment's revenues and income increased $143 million (30%) and $13 million (24%), respectively. These increases were due principally to higher sales in the fastening systems business ($108 million), including the second quarter 1996 acquisition of Textron Industries. In addition, results benefited from the first quarter 1997 acquisition of Maag Pump Systems and Maag Italia S.p.A., and higher sales and improved performance at E-Z-GO. The Systems and Components segment's revenues decreased $26 million (16%), reflecting the third quarter 1996 divestiture of Textron Aerostructures. This revenue decrease was partially offset by an increase in demand for aerospace components at Turbine Engine Components. Income remained unchanged as the benefit of the higher revenues and improved performance at Turbine Engine Components was partially offset by startup costs on a new program at Textron Systems. The Finance segment's revenues increased $16 million (3%), while income increased $4 million (4%). AFS' revenues increased $13 million, primarily as a result of an increase in average finance receivables ($7.179 billion in the first quarter 1997 vs $6.821 billion in the first quarter 1996), partially offset by a decrease in yields on finance receivables (18.08% in the first quarter 1997 vs 18.56% in the first quarter 1996). Income increased $3 million, due to those factors, a decrease in the average cost of borrowed funds (6.62% in first quarter 1997 vs 7.01% in the first quarter 1996) and a decrease in the ratio of insurance losses to earned insurance premiums. This favorable impact was partially offset by an increase in the provision for losses, resulting from the higher level of net credit losses to average finance receivables (3.06% in the first quarter 1997 vs 2.61% in the first quarter 1996). The general proliferation of credit cards has provided the consumer with an alternative source of funds, and as a result the increase in consumer debt in the U.S. and Canada has continued to burden the consumer finance customer, resulting in higher delinquencies and charge-offs. TFC's income increased by $1 million on higher revenues of $3 million, due to a higher level of average finance receivables ($3.139 billion in the first quarter 1997 vs $2.974 billion in the first quarter 1996) and higher other income, due principally to increases in arrangement fee income, partially offset by lower yields of finance receivables (9.84% in the first quarter 1997 vs 10.00% in the first quarter 1996), primarily on floating rate receivables. The income increase reflected the higher revenues in 1997 and a provision for real estate owned valuation allowance in 1996. Corporate expenses and other - net increased $5 million, due to litigation expenses related to a divested operation. Interest expense - net for the Parent Group approximated last year's level. A decreased average cost of borrowing was offset by a higher level of average borrowing, primarily related to acquisitions. PART II. OTHER INFORMATION Item 5. OTHER INFORMATION On February 26, Textron's Board of Directors declared a two-for- one split of Textron common stock in the form of a stock dividend, subject to shareholder approval of an increase in Textron's authorized number of common shares from 250 million to 500 million. Textron's shareholders approved this increase on April 23, 1997. Pursuant to the Board's action, Textron will, on May 30, 1997, distribute to Textron shareholders one additional share of Textron Common Stock for every share of Textron Common Stock owned at the close of business on May 9, 1997. Effective May 10, 1997, the number of shares of Common Stock issuable upon conversion of shares of Textron's outstanding Series A and Series B Preferred Stock is increased proportionately to reflect the two-for-one Common Stock split. Equitable adjustments also will be made by Textron under its employee benefit plans to reflect the split. Also, pursuant to Textron's shareholder rights plan, each share of Textron Common Stock will be accompanied by one-half of a preferred stock purchase right ("Right") instead of a full Right, but the exercise price of one full Right will be unchanged. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3 Restated Certificate of Incorporation of Textron Inc. 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 March 29, 1997, Textron filed the following reports on Form 8-K: (i) Current Report on Form 8-K filed with Securities and Exchange Commission dated March 28, 1997, filing, under Item 5 (Other Events) information concerning the completion of the sale of Textron's 83%-owned subsidiary, The Paul Revere Corporation, to Provident Companies, Inc. and under Item 7 (Financial Statements and Exhibits) a copy of a press release announcing the completion of such sale. (ii) Current Report on Form 8-K/A filed with Securities and Exchange Commission dated April 4, 1997, amending the above mentioned Current Report to report, under Item 2 (Acquisition or Disposition of Assets) and Item 7 (Financial Statements and Exhibits) additional information concerning the completion of the sale of Textron's 83%-owned subsidiary, The Paul Revere Corporation, to Provident Companies, Inc. 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: May 12, 1997 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: Name of Exhibit 3 Restated Certificate of Incorporation of Textron Inc. 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)