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 June 28, 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 July 26, 1997 - 164,988,000 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 Six Months Ended June 28, June 29, June 28, June 29, 1997 1996 1997 1996 <S> <C> <C> <C> <C> Revenues Manufacturing sales $2,117 $1,867 $4,138 $3,567 Finance revenues 550 517 1,080 1,031 Total revenues 2,667 2,384 5,218 4,598 Costs and expenses Cost of sales 1,730 1,520 3,386 2,913 Selling and administrative 380 342 742 673 Interest 180 183 363 366 Provision for losses on collection of finance receivables 63 54 127 107 Other 67 69 137 139 Total costs and expenses 2,420 2,168 4,755 4,198 Income from continuing operations before income taxes and distributions on preferred securities of subsidiary trust 247 216 463 400 Income taxes (95) (84) (180) (156) Distributions on preferred securities of subsidiary trust, net of income taxes (7) (7) (13) (10) Income from continuing operations 145 125 270 234 Discontinued operation, net of income taxes - - - (74) Net income $ 145 $ 125 $ 270 $ 160 Per common share*: Income from continuing operations $ .85 $ .72 $ 1.58 $ 1.35 Discontinued operation - - - (0.43) Net income $ .85 $ .72 $ 1.58 $ .92 Average shares outstanding* 170,405,000 173,150,000 170,695,000 173,194,000 Dividends per share: $2.08 Preferred stock, Series A $ .52 $ .52 $ 1.04 $ 1.04 $1.40 Preferred stock, Series B $ .35 $ .35 $ .70 $ .70 Common stock* $ .25 $ .22 $ .50 $ .44 *Reflects the effect of the two-for-one stock split in the form of a stock dividend paid May 30, 1997 to shareholders of record on May 9, 1997. See notes to condensed consolidated financial statements. </TABLE> Item 1. FINANCIAL STATEMENTS (Continued) <TABLE> TEXTRON INC. Condensed Consolidated Balance Sheet (unaudited) (Dollars in millions) <CAPTION> June 28, December 28, 1997 1996 Assets <C> <C> <C> Cash $ 161 $ 47 Investments 838 820 Receivables - net: Finance 10,268 9,856 Commercial and U.S. government 1,028 882 11,296 10,738 Inventories 1,416 1,192 Investment in discontinued operation - 770 Property, plant, and equipment, less accumulated depreciation of $1,802 and $1,664 1,681 1,539 Goodwill, less accumulated amortization of $427 and $404 1,777 1,609 Other (including net prepaid income taxes) 1,626 1,520 Total assets $ 18,795 $ 18,235 Liabilities and shareholders' equity Liabilities Accounts payable $ 883 $ 850 Accrued postretirement benefits other than pensions 816 817 Other accrued liabilities (including income taxes) 2,765 2,556 Debt: Parent Group 1,295 1,507 Finance Group 9,333 8,839 10,628 10,346 Total liabilities 15,092 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* 24 12 Capital surplus 813 793 Retained earnings 3,157 2,969 Other (35) 7 3,973 3,795 Less cost of treasury shares 753 612 Total shareholders' equity 3,220 3,183 Total liabilities and shareholders' equity $ 18,795 $ 18,235 *Common shares outstanding 164,887,000** 82,809,000 ** Reflects the effect of the two-for-one stock split in the form of a stock dividend paid May 30, 1997 to shareholders of record on May 9, 1997. See notes to condensed consolidated financial statements. </TABLE> Item 1. FINANCIAL STATEMENTS (Continued) <TABLE> TEXTRON INC. Condensed Consolidated Statement of Cash Flows (Unaudited) (In millions) <CAPTION> Six Months Ended June 28, June 29, 1997 1996 <S> <C> <C> Cash flows from operating activities: Income from continuing operations $ 270 $ 234 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 210 189 Provision for losses on receivables 129 109 Changes in assets and liabilities excluding those related to acquisitions and divestitures: Increase in commercial and U.S. government receivables (61) (1) Increase in inventories (171) (113) Increase in other assets (66) (49) Increase (decrease) in accounts payable 1 (11) Increase in accrued liabilities 27 84 Other - net (29) (31) Net cash provided by operating activities 310 411 Cash flows from investing activities: Purchases of investments (126) (71) Proceeds from disposition of investments 311 30 Maturities and calls of investments 34 27 Finance receivables: Originated or purchased (3,777) (3,221) Repaid or sold 3,349 3,027 Cash used in acquisitions (367) (111) Cash received from disposition of business 571 - Capital expenditures (156) (128) Other investing activities - net 21 (25) Net cash used by investing activities (140) (472) Cash flows from financing activities: Increase in short-term debt 229 463 Proceeds from issuance of long-term debt 1,377 867 Principal payments on long-term debt (1,494) (1,452) 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 27 25 Purchases of Textron common stock (112) (117) Purchases of Textron common stock from Paul Revere - (34) Dividends paid (83) (74) Net cash provided (used) by financing activities (56) 161 Net increase in cash 114 100 Cash at beginning of period 47 84 Cash at end of period $ 161 $ 184 See notes to condensed consolidated financial statements. </TABLE> 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 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 June 28, 1997, and its consolidated results of operations for each of the respective three and six month periods ended June 28, 1997 and June 29, 1996 and consolidated cash flows for each of the six month periods ended June 28, 1997 and June 29, 1996. The results of operations for the six months ended June 28, 1997 are not necessarily indicative of results for the full year. 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 million 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 were 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 pro forma basis, Diluted EPS calculated in accordance with FAS 128 does not differ significantly from EPS as currently reported for the quarter and six month periods ended June 28, 1997. The Basic EPS calculation does not consider the potential effects of potentially dilutive securities and on a pro forma basis, is approximately $.03 and $.05 per share higher than Diluted EPS for the second quarter and six month periods ended June 28, 1997, respectively. Note 4: Inventories June 28, December 28, 1997 1996 (In millions) Finished goods $311 $364 Work in process 811 769 Raw materials 430 259 1,552 1,392 Less progress payments and customer deposits 136 200 $1,416 $1,192 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 Six Months Ended June 28, June 29, June 28, June 29, Condensed Statement of Income 1997 1996 1997 1996 <S> <C> <C> <C> <C> Sales $2,117 $1,867 $4,138 $3,567 Costs and expenses Cost of sales 1,730 1,520 3,386 2,913 Selling and administrative 211 189 417 366 Interest 30 37 69 75 Total costs and expenses 1,971 1,746 3,872 3,354 146 121 266 213 Pretax income on Finance Group 101 95 197 187 Income from continuing operations before income taxes and distributions on preferred securities of subsidiary trust 247 216 463 400 Income taxes (95) (84) (180) (156) Distributions on preferred securities of subsidiary trust, net of income taxes (7) (7) (13) (10) Income from continuing operations 145 125 270 234 Discontinued operations, net of income taxes - - - (74) Net income $ 145 $ 125 $ 270 $ 160 </TABLE> <TABLE> <CAPTION> June 28, December 28, Condensed Balance Sheet 1997 1996 Assets <S> <C> <C> Cash $ 106 $ 24 Receivables - net 1,028 882 Inventories 1,416 1,192 Investments in Finance Group 1,621 1,600 Investment in discontinued operation - 770 Property, plant and equipment - net 1,591 1,454 Goodwill 1,617 1,466 Other assets (including net prepaid income taxes) 1,345 1,269 Total assets $8,724 $8,657 Liabilities and shareholders' equity Accounts payable and accrued liabilities (including income taxes) $3,726 $3,484 Debt 1,295 1,507 Textron - obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Textron junior subordinated debt securities 483 483 Shareholders' equity 3,220 3,183 Total liabilities and shareholders' equity $8,724 $8,657 </TABLE> Item 1. FINANCIAL STATEMENTS (Continued) Note 7: Financial information by borrowing group (continued) <TABLE> PARENT GROUP (continued) (Unaudited) (In millions) <CAPTION> Six Months Ended June 28, June 29, Condensed Statement of Cash Flows 1997 1996 <S> <C> <C> Cash flows from operating activities: Income from continuing operations $270 $234 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Undistributed earnings of Finance Group (40) (49) Depreciation and amortization 144 125 Changes in assets and liabilities excluding those related to acquisitions and divestitures: Increase in receivables (61) (1) Increase in inventories (171) (113) Increase in other assets (52) (55) Increase in accounts payable and accrued liabilities 22 91 Other - net 12 13 Net cash provided by operating activities 124 245 Cash flows from investing activities: Capital expenditures (140) (117) Cash used in acquisitions (324) (111) Cash received from disposition of business 571 - Proceeds from disposition of investment 245 - Other investing activities - net 16 (18) Net cash provided (used) by investing activities 368 (246) Cash flows from financing activities: Increase (decrease) in short-term debt 14 (38) Proceeds from issuance of long-term debt 876 666 Principal payments on long-term debt (1,132) (806) 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 27 25 Purchases of Textron common stock (112) (117) Purchase of Textron common stock from Paul Revere - (34) Dividends paid (83) (74) Net cash provided (used) by financing activities (410) 105 Net increase in cash 82 104 Cash at beginning of period 24 56 Cash at end of period $106 $160 </TABLE> Item 1. FINANCIAL STATEMENTS (Continued) Note 7: Financial information by borrowing group (continued) <TABLE> FINANCE GROUP (unaudited) (In millions) <CAPTION> Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, Condensed Statement of Income 1997 1996 1997 1996 <S> <C> <C> <C> <C> Revenues $ 550 $ 517 $1,080 $1,031 Costs and expenses Selling and administrative 169 153 325 307 Interest 150 146 294 291 Provision for losses on collection of finance receivables 63 54 127 107 Other 67 69 137 139 Total costs and expenses 449 422 883 844 Income before income taxes 101 95 197 187 Income taxes (39) (38) (76) (74) Net income $ 62 $ 57 $ 121 $ 113 </TABLE> <TABLE> <CAPTION> June 30, December 31, Condensed Balance Sheet 1997 1996 Assets <S> <C> <C> Cash $ 55 $ 23 Investments 831 814 Finance receivables - net 10,271 9,860 Other 766 712 Total assets $11,923 $11,409 Liabilities and equity Accounts payable and accrued liabilities (including income taxes) $ 969 $ 970 Debt 9,333 8,839 Equity 1,621 1,600 Total liabilities and equity $11,923 $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 Six Months Ended June 28, June 29, June 28, June 29, 1997 1996 1997 1996 REVENUES <S> <C> <C> <C> <C> MANUFACTURING: Aircraft $ 782 $ 649 $1,488 $1,303 Automotive 523 439 1,080 844 Industrial 660 604 1,280 1,081 Systems and Components 152 175 290 339 2,117 1,867 4,138 3,567 FINANCE 550 517 1,080 1,031 Total revenues $2,667 $2,384 $5,218 $4,598 INCOME MANUFACTURING: Aircraft $ 81 $ 67 $ 145 $ 123 Automotive 33 41 83 78 Industrial 76 64 143 118 Systems and Components 16 16 27 27 206 188 398 346 FINANCE 101 95 197 187 Segment operating income 307 283 595 533 Corporate expenses and other - net (30) (30) (63) (58) Interest expense - net (30) (37) (69) (75) Income from continuing operations before income taxes and distributions on preferred securities of subsidiary trust $ 247 $ 216 $ 463 $ 400 </TABLE> Financial Condition Parent Group: During the six months ended June 28, 1997, the Parent Group's operating activities provided cash of $124 million versus $245 million during the corresponding period of 1996. Operating cash flows for 1997 were affected by income from continuing operations offset by inventory builds associated with new Aircraft products and higher receivable balances. The Group's debt decreased by $212 million. 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 (which included shares of Provident common stock subsequently sold in May for $245 million). These proceeds exceeded cash used for (a) acquisitions ($324 million), (b) capital expenditures ($140 million), (c) purchases of Textron common stock ($112 million), and (d) payments of dividends ($83 million). Its ratio of debt to total capital was 26% at June 28, 1997, down from 29% at December 28, 1996. The Parent Group's credit facilities not used or reserved as support for outstanding commercial paper or bank borrowings at June 28, 1997 were $1.4 billion. Textron had $511 million available at June 28, 1997 under its shelf registration statements filed with the Securities and Exchange Commission. At June 28, 1997, approximately 37% and 28% of total foreign currency borrowings of $496 million under Textron's multi-currency credit agreements were denominated in Deutsche marks and French francs, respectively. In the first half 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 cost of approximately $390 million. Textron also announced an agreement to sell its Speidel division to Hermann Hirsch USA, Inc., an affiliate of Austria-based Hirsch Armbaender Ges.m.b.H. The transaction is expected to close on December 31, 1997. 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 $81 million and $64 million to the Parent Group during the six month periods ended June 28, 1997 and June 29, 1996, respectively. During the six months ended June 30, 1997, Avco Financial Services (AFS) issued $451 million of unsecured debt securities, including $136 million under its shelf registration statements. AFS had $947 million and $507 million available at June 30, 1997 for unsecured debt securities under its shelf registration statements with the Securities and Exchange Commission and Canadian provincial security exchanges, respectively. During the first half of 1997, the Finance Group had $291 million of interest rate exchange agreements expire and $405 million of interest rate exchange agreements go into effect. The new agreements, which have a weighted average original term of 2.3 years and expire through 2000, had the effect of fixing the rate of interest at approximately 6.7% on $405 million of variable rate borrowings at June 30, 1997. Textron Financial Corporation (TFC) issued $50 million medium-term notes on June 30, 1997 under its $500 million medium-term note facility under Rule 144A of the Securities Act of 1933, as amended. TFC had $242 million available under this facility at June 30, 1997. Results of Operations - Three months ended June 28, 1997 vs. Three months ended June 29, 1996 Textron reported second quarter 1997 earnings per share from continuing operations of $0.85 per share, up 18% from second quarter 1996 earnings per share from continuing operations of $0.72. Income from continuing operations in 1997 of $145 million was up 16% from the 1996 amount of $125 million. Revenues increased 12% to $2.7 billion in 1997 from $2.4 billion in 1996. The Aircraft segment's revenues and income increased $133 million (20%) and $14 million (21%), respectively. Bell Helicopter's revenues and income increased primarily as a result of higher commercial and U.S. Government aircraft sales ($56 million). Cessna's revenues increased as a result of higher sales of its recently introduced new business jets -- the Citation X and the Bravo. Its income increased as a result of the higher revenues, partially offset by an increased level of expenses due to the introduction and support of new products. The Automotive segment's revenues increased $84 million (19%), reflecting 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. The benefit of the higher sales from the acquisitions was partially offset by the unfavorable impact of a strike at a Chrysler engine plant and the timing of replacement business and new model launches. Income decreased $8 million (20%), reflecting the above factors and a decision to begin a restructuring effort to improve overall automotive margins. The Industrial segment's revenues and income increased $56 million (9%) and $12 million (19%), respectively. These increases were due principally to higher sales and improved performance in the fastening systems and the golf and turf- care businesses. In addition, results benefited from the first quarter 1997 acquisitions of Maag Pump Systems and Maag Italia S.p.A. and the third quarter 1996 acquisition of Klauke. The Systems and Components segment's revenues decreased $23 million (13%), reflecting the third quarter 1996 divestiture of Textron Aerostructures. This revenue decrease was partially offset by higher revenues on the sensor fuzed weapon contract and an increase in demand for aerospace components. Income remained unchanged as the benefit of the higher revenues was offset by the impact of the Aerostructures divestiture and lower performance in marine and land systems products. The Finance segment's revenues increased $33 million (6%), while income increased $6 million (6%). AFS' revenues and income increased $25 million and $2 million, respectively. Revenues in its finance and related insurance business increased $21 million, primarily as a result of an increase in average finance receivables, partially offset by a decrease in yields on finance receivables. Income decreased $4 million, due primarily to an increase in the provision for losses resulting from a higher level of net credit losses to average finance receivables, partially offset by the benefit of the higher revenues and a decrease in the average cost of borrowed funds. In AFS' nonfinance-related insurance business, revenues increased $4 million and income increased $6 million, due primarily to higher premiums earned and investment income, as well as improved underwriting expenses, principally lower insurance loss ratios. TFC's revenues increased $8 million, due to increases in syndication fee income and a higher level of average finance receivables. Its income increased $4 million, due to the higher revenues and a lower provision for loan losses related to the real estate portfolio, partially offset by growth in businesses with higher operating expense ratios. Interest Expense - Net for the Parent Group decreased $7 million due to a lower level of average debt, resulting from the payment of debt with proceeds from the divestiture of Paul Revere, partially offset by the incremental debt associated with acquisitions. Results of Operations - Six months ended June 28, 1997 vs. Six months ended June 29, 1996 Textron reported first half 1997 earnings per share from continuing operations of $1.58 per share, up 17% from first half 1996 earnings per share from continuing operations of $1.35. Income from continuing operations in 1997 of $270 million was up 15% from the 1996 amount of $234 million. Revenues increased 13% to $5.2 billion in 1997 from $4.6 billion in 1996. Net income in the first half 1997 was $270 million versus $160 million in 1996, which reflected the impact of a $74 million loss from a discontinued operation. The Aircraft segment's revenues and income increased $185 million (14%) and $22 million (18%), respectively. Bell Helicopter's revenues and income increased primarily as a result of higher commercial and U.S. Government aircraft sales ($79 million), partially offset by lower revenues on the V-22 program ($57 million). Cessna's revenues increased as a result of higher sales of its recently introduced new business jets --the Citation X and the Bravo. Its income increased as a result of the higher revenues, partially offset by an increased level of expenses due to the introduction and support of new products. The Automotive segment's revenues increased $236 million (28%), reflecting 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. The benefit of the higher sales from the acquisitions was partially offset by the unfavorable impact in the second quarter 1997 of a strike at a Chrysler engine plant and the timing of replacement business and new model launches. Income increased $5 million (6%), reflecting the above factors and the impact of the restructuring effort which began in the second quarter 1997. Second half automotive sales, excluding the Kautex acquisition, are expected to be lower in 1997 than in 1996 as a result of the timing of replacement business and new model launches. Total segment margins in the second half are expected to continue at a lower level than last year primarily as a result of the lower sales described above, lower margins attributable to the Kautex acquisition and the impact of the restructuring effort. The Industrial segment's revenues and income increased $199 million (18%) and $25 million (21%), respectively. These increases were due primarily to higher sales in fastening systems ($120 million), including the second quarter 1996 acquisition of Textron Industries. In addition, results benefited from the first quarter 1997 acquisitions of Maag Pump Systems and Maag Italia, S.p.A, the third quarter 1996 acquisition of Klauke, and higher sales and improved performance in the golf and turf-care businesses. The Systems and Components segment's revenues decreased $49 million (14%), reflecting the third quarter 1996 divestiture of Textron Aerostructures. This revenue decrease was partially offset by higher revenues on the sensor fuzed weapon contract and an increase in demand for aerospace components. Income remained unchanged as the benefit of the higher revenues was offset by the impact of the Aerostructures divestiture and lower performance in marine and land systems products. The Finance segment's revenues increased $49 million (5%), while income increased $10 million (5%). AFS' revenues and income increased $38 million and $5 million, respectively. Revenues in its finance and related insurance business increased $28 million, primarily as a result of an increase in average finance receivables ($7.322 billion in the first half 1997 versus $6.823 billion in the first half 1996), partially offset by a decrease in yields on finance receivables (17.99% in the first half 1997 vs. 18.59% in the first half 1996). Income decreased $5 million, due primarily to an increase in the provision for losses resulting from a higher level of net credit losses to average finance receivables (2.98% in the first half 1997 vs. 2.64% in the first half 1996), partially offset by the benefit of the higher revenues and a decrease in the average cost of borrowed funds (6.48% in the first half 1997 vs. 6.95% in the first half 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 finance consumer, resulting in higher delinquencies and charge-offs. In AFS' nonfinance- related insurance business, revenues and income both increased $10 million, due primarily to higher premiums earned and investment income, as well as improved underwriting expenses, principally lower insurance loss ratios. TFC's revenues increased $11 million, due to a higher level of average finance receivables ($3.173 billion in the first half 1997 vs. $3.019 billion in the first half 1996), and increases in syndication fee income, partially offset by lower yields of finance receivables (9.94% in the first half 1997 vs. 10.03% in the first half 1996), primarily on floating rate receivables. Its income increased $5 million, due to the higher revenues and a lower provision for loan losses related to the real estate portfolio, partially offset by growth in businesses with higher operating expense ratios. Corporate expenses and other - net increased $5 million, due to first quarter 1997 litigation expenses related to a divested operation. Interest Expense-net for the Parent Group decreased $6 million due to a lower level of average debt, resulting from the payment of debt with proceeds from the divestiture of Paul Revere, partially offset by the incremental debt associated with acquisitions. PART II. OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At Textron's annual meeting of shareholders held on April 23, 1997, the following items were voted upon: 1. The following persons were elected to serve as directors in Class I for three year terms expiring in 2000 and received the votes listed. There were no abstentions or broker non-votes applicable to the election of directors: Name For Withheld Teresa Beck 74,404,822 557,598 Lewis B. Campbell 74,404,045 558,375 R. Stuart Dickson 74,393,859 568,561 John D. Macomber 74,387,147 575,273 John W. Snow 74,402,952 559,468 The following directors have terms of office which continued after the meeting: H. Jesse Arnelle, Paul E. Gagne, James F. Hardymon, Dana G. Mead, Barbara Scott Preiskel, Brian H. Rowe, Sam F. Segnar, Jean Head Sisco, Martin D. Walker and Thomas B. Wheeler. 2. An amendment of Article Fourth of Textron's Restated Certificate of Incorporation to increase the number of authorized shares of Textron common stock to 500 million was approved by the following vote: For Against Abstain Broker Non-Votes 71,979,770 2,658,677 323,973 0 3. An amendment to Textron's 1994 Long-Term Incentive Plan was approved by the following vote: For Against Abstain Broker Non-Votes 71,694,654 2,481,407 786,359 0 4. The appointment of Ernst & Young LLP as Textron's independent auditors for 1997 was ratified by the following vote: For Against Abstain Broker Non-Votes 74,458,561 232,423 271,436 0 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10 Employment Agreement between Textron Inc. and John D. Butler dated June 10, 1997 12.1 Computation of ratio of income to fixed charges and preferred securities dividends of the Parent Group. 12.2 Computation of ratio of income to 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 No reports on Form 8-K were filed during the second quarter ended June 28, 1997. 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: August 5, 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 10 Employment Agreement between Textron Inc. and John D. Butler dated June 10, 1997 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)