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 September 27, 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 October 25, 1997 - 164,322,000 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 September 27, September 28, September 27, September 28, 1997 1996 1997 1996 <S> <C> <C> <C> <C> Revenues Manufacturing sales $ 1,950 $1,722 $6,088 $5,289 Finance revenues 558 526 1,638 1,557 Total revenues 2,508 2,248 7,726 6,846 Costs and expenses Cost of sales 1,589 1,395 4,975 4,308 Selling and administrative 372 335 1,114 1,008 Interest 183 183 546 549 Provision for losses on collection of finance receivables 63 59 190 166 Other 71 69 208 208 Total costs and expenses 2,278 2,041 7,033 6,239 Income from continuing operations before income taxes and distributions on preferred securities of subsidiary trust 230 207 693 607 Income taxes (86) (81) (266) (237) Distributions on preferred securities of subsidiary trust, net of income taxes (6) (6) (19) (16) Income from continuing operations 138 120 408 354 Discontinued operation, net of income taxes - (155) - (229) Net income $ 138 $ (35) $ 408 $ 125 Per common share*: Income from continuing operations $ .81 $ .70 $ 2.39 $ 2.05 Discontinued operation - (.90) - (1.33) Net income $ .81 $ (.20) $ 2.39 $ .72 Average shares outstanding* 170,412,000 171,580,000 170,419,000 172,592,000 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* $ .25 $ .22 $ .75 $ .66 *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. </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> September 27, December 28, 1997 1996 <S> <C> <C> Assets Cash $ 89 $ 47 Investments 845 820 Receivables - net: Finance 9,877 9,856 Commercial and U.S. government 1,015 882 10,892 10,738 Inventories 1,435 1,192 Investment in discontinued operation - 770 Property, plant, and equipment, less accumulated depreciation of $1,803 and $1,664 1,713 1,539 Goodwill, less accumulated amortization of $442 and $404 1,773 1,609 Other (including net prepaid income taxes) 1,770 1,520 Total assets $18,517 $ 18,235 Liabilities and shareholders' equity Liabilities Accounts payable $ 866 $ 850 Accrued postretirement benefits other than pensions 806 817 Other accrued liabilities (including income taxes) 2,764 2,556 Debt: Parent Group 1,317 1,507 Finance Group 8,992 8,839 10,309 10,346 Total liabilities 14,745 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 13 14 Common stock* 24 12 Capital surplus 825 793 Retained earnings 3,253 2,969 Other (56) 7 4,059 3,795 Less cost of treasury shares 770 612 Total shareholders' equity 3,289 3,183 Total liabilities and shareholders' equity $18,517 $ 18,235 *Common shares outstanding 164,852,000** 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. </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 September 27, September 28, 1997 1996 <S> <C> <C> Cash flows from operating activities: Income from continuing operations $ 408 $ 354 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 316 286 Provision for losses on receivables 192 168 Changes in assets and liabilities excluding those related to acquisitions and divestitures: Increase in commercial and U.S. government receivables (60) (8) Increase in inventories (187) (150) Increase in other assets (150) (105) Decrease in accounts payable (18) (16) Increase in accrued liabilities 13 176 Other - net (58) (83) Net cash provided by operating activities 456 622 Cash flows from investing activities: Purchases of investments (178) (204) Proceeds from disposition of investments 336 143 Maturities and calls of investments 56 41 Finance receivables: Originated or purchased (5,674) (4,874) Repaid or sold 5,093 4,657 Proceeds from sale of securitized assets 373 - Cash used in acquisitions (398) (172) Cash received from disposition of business 571 180 Capital expenditures (254) (215) Other investing activities - net 31 (25) Net cash used by investing activities (44) (469) Cash flows from financing activities: Increase in short-term debt 120 230 Proceeds from issuance of long-term debt 1,604 1,222 Principal payments on long-term debt (1,872) (1,648) 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 32 29 Purchases of Textron common stock (130) (239) Purchases of Textron common stock from Paul Revere - (34) Dividends paid (124) (111) Net cash used by financing activities (370) (68) Net increase in cash 42 85 Cash at beginning of period 47 84 Cash at end of period $ 89 $ 169 </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 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 September 27, 1997, and its consolidated results of operations for each of the respective three and nine month periods ended September 27, 1997 and September 28, 1996 and consolidated cash flows for each of the nine month periods ended September 27, 1997 and September 28, 1996. The results of operations for the nine months ended September 27, 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. The Basic EPS calculation does not consider the potential effects of potentially dilutive securities and on a pro forma basis, is approximately $.03 and $.08 per share higher than Diluted EPS for the three and nine month periods ended September 27, 1997, respectively. On a pro forma basis, Diluted EPS calculated in accordance with FAS 128 does not differ significantly from EPS as currently reported for the three and nine month periods ended September 27, 1997. Note 4: Inventories <TABLE> <CAPTION> September 27, December 28, 1997 1996 (In millions) <S> <C> <C> Finished goods $ 434 $ 364 Work in process 800 769 Raw materials 350 259 1,584 1,392 Less progress payments and customer deposits 149 200 $1,435 $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 Nine Months Ended September 27, September 28, September 27, September 28, Condensed Statement of Income 1997 1996 1997 1996 <S> <C> <C> <C> <C> Sales $1,950 $1,722 $6,088 $5,289 Costs and expenses Cost of sales 1,589 1,395 4,975 4,308 Selling and administrative 203 182 620 548 Interest 32 36 101 111 Total costs and expenses 1,824 1,613 5,696 4,967 126 109 392 322 Pretax income on Finance Group 104 98 301 285 Income from continuing operations before income taxes and distributions on preferred securities of subsidiary trust 230 207 693 607 Income taxes (86) (81) (266) (237) Distributions on preferred securities of subsidiary trust, net of income taxes (6) (6) (19) (16) Income from continuing operations 138 120 408 354 Discontinued operations, net of income taxes - (155) - (229) Net income $ 138 $ (35) $ 408 $ 125 </TABLE> <TABLE> <CAPTION> September 27, December 28, Condensed Balance Sheet 1997 1996 <S> <C> <C> Assets Cash $ 61 $ 24 Receivables - net 1,015 882 Inventories 1,435 1,192 Investments in Finance Group 1,617 1,600 Investment in discontinued operation - 770 Property, plant and equipment - net 1,614 1,454 Goodwill 1,616 1,466 Other assets (including net prepaid income taxes) 1,436 1,269 Total assets $8,794 $8,657 Liabilities and shareholders' equity Accounts payable and accrued liabilities (including income taxes) $3,705 $3,484 Debt 1,317 1,507 Textron - obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Textron junior subordinated debt securities 483 483 Shareholders' equity 3,289 3,183 Total liabilities and shareholders' equity $8,794 $8,657 </TABLE> Item 1. FINANCIAL STATEMENTS (Continued) Note 7: Financial information by borrowing group (continued) <TABLE> PARENT GROUP (unaudited) (In millions) <CAPTION> Nine Months Ended September 27, September 28, Condensed Statement of Cash Flows 1997 1996 <S> <C> <C> Cash flows from operating activities: Income from continuing operations $ 408 $ 354 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Undistributed earnings of Finance Group (46) (80) Depreciation and amortization 215 188 Changes in assets and liabilities excluding those related to acquisitions and divestitures: Increase in receivables (60) (8) Increase in inventories (187) (150) Increase in other assets (138) (95) (Decrease) increase in accounts payable and accrued liabilities (1) 137 Other - net 6 (5) Net cash provided by operating activities 197 341 Cash flows from investing activities: Capital expenditures (222) (197) Cash used in acquisitions (355) (172) Cash received from disposition of businesses 571 180 Proceeds from disposition of investments 251 - Other investing activities - net 20 (24) Net cash provided (used) by investing activities 265 (213) Cash flows from financing activities: Increase (decrease) in short-term debt 11 (46) Proceeds from issuance of long-term debt 1,085 808 Principal payments on long-term debt (1,299) (947) 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 32 29 Purchases of Textron common stock (130) (239) Purchases of Textron common stock from Paul Revere - (34) Dividends paid (124) (111) Net cash used by financing activities (425) (57) Net increase in cash 37 71 Cash at beginning of period 24 56 Cash at end of period $ 61 $ 127 </TABLE> Item 1. FINANCIAL STATEMENTS (Continued) Note 7: 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 1997 1996 1997 1996 <S> <C> <C> <C> <C> Revenues $ 558 $ 526 $1,638 $1,557 Costs and expenses Selling and administrative 169 153 494 460 Interest 151 147 445 438 Provision for losses on collection of finance receivables 63 59 190 166 Other 71 69 208 208 Total costs and expenses 454 428 1,337 1,272 Income before income taxes 104 98 301 285 Income taxes (39) (38) (115) (112) Net income $ 65 $ 60 $ 186 $ 173 </TABLE> <TABLE> <CAPTION> September 30, December 31, Condensed Balance Sheet 1997 1996 <S> <C> <C> Assets Cash $ 28 $ 23 Investments 845 814 Finance receivables - net 9,880 9,860 Other 825 712 Total assets $11,578 $11,409 Liabilities and equity Accounts payable and accrued liabilities (including income taxes) $ 969 $ 970 Debt 8,992 8,839 Equity 1,617 1,600 Total liabilities and equity $11,578 $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 Nine Months Ended September 27, September 28, September 27, September 28, 1997 1996 1997 1996 <S> <C> <C> <C> <C> REVENUES MANUFACTURING: Aircraft $ 752 $ 638 $2,240 $1,941 Automotive 464 355 1,544 1,199 Industrial 584 554 1,864 1,635 Systems and Components 150 175 440 514 1,950 1,722 6,088 5,289 FINANCE 558 526 1,638 1,557 Total revenues $2,508 $2,248 $7,726 $6,846 INCOME MANUFACTURING: Aircraft $ 84 $ 69 $ 229 $ 192 Automotive 28 27 111 105 Industrial 65 58 208 176 Systems and Components 17 19 44 46 194 173 592 519 FINANCE 104 98 301 285 Segment operating income 298 271 893 804 Corporate expenses and other - net (36) (28) (99) (86) Interest expense - net (32) (36) (101) (111) Income from continuing operations before income taxes and distributions on preferred securities of subsidiary trust $ 230 $ 207 $ 693 $ 607 </TABLE> Financial Condition Parent Group: During the nine months ended September 27, 1997, the Parent Group's operating activities provided cash of $197 million versus $341 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, higher receivable balances, and the timing of prepaid expenses and customer tooling costs. The Group's debt decreased by $190 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). Cash provided by operating activities and the proceeds from the sale of Paul Revere were primarily used for (a) acquisitions ($355 million), (b) capital expenditures ($222 million), (c) purchases of Textron common stock ($130 million), and (d) payments of dividends ($124 million). Its ratio of debt to total capital was 26% at September 27, 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 September 27, 1997 were $1.3 billion. Textron had $511 million available at September 27, 1997 under its shelf registration statements filed with the Securities and Exchange Commission. At September 27, 1997, approximately 37% and 28% of total foreign currency borrowings of $482 million under Textron's multi-currency credit agreements were denominated in Deutsche marks and French francs, respectively. During the nine months ended September 27, 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. Several smaller acquisitions aggregating approximately $30 million also closed during the period. 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 $140 million and $93 million to the Parent Group during the nine month periods ended September 27, 1997 and September 28, 1996, respectively. During the nine months ended September 30, 1997, Avco Financial Services (AFS) issued $469 million of unsecured debt securities, including $155 million under its shelf registration statements. AFS had $947 million and $488 million available at September 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 nine months ended September 30, 1997, the Finance Group had $390 million of interest rate exchange agreements expire and $519 million of interest rate exchange agreements go into effect. The new agreements, which have a weighted average original term of 2.5 years and expire through 2002, had the effect of fixing the rate of interest at approximately 6.7% on $519 million of variable rate borrowings at September 30, 1997. Textron Financial Corporation (TFC) issued $50 million medium-term notes during the nine months ended September 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 September 30, 1997. Results of Operations - Three months ended September 27, 1997 vs. Three months ended September 28, 1996 Textron reported third quarter 1997 earnings per share from continuing operations of $0.81 per share, up 16% from third quarter 1996 earnings per share from continuing operations of $0.70. Income from continuing operations in 1997 of $138 million was up 15% from the 1996 amount of $120 million. Revenues increased 12% to $2.5 billion in 1997 from $2.2 billion in 1996. Net income in 1997 was $138 million versus a net loss of $35 million in 1996, which reflected the impact of a $155 million loss from a discontinued operation. The Aircraft segment's revenues and income increased $114 million (18%) and $15 million (22%), respectively, due primarily to higher results at Cessna Aircraft. Cessna's revenues increased as a result of higher sales of business jets, including its recently introduced Citation X and Citation Bravo. Its income increased from the higher revenues, partially offset by an increased level of expenses due to the introduction and support of new products. Bell Helicopter's revenues were slightly below last year and income approximated last year's level. Higher sales of U.S. Government aircraft and commercial spares aggregated $29 million, while lower revenues on the V-22 program and lower foreign military and commercial aircraft sales aggregated $37 million. The Automotive segment's revenues increased $109 million (31%), reflecting the first quarter 1997 acquisition of Kautex. Income increased $1 million (4%), reflecting the increased revenues, offset by the impact of new model launches and a restructuring effort which began in the second quarter of 1997. The Industrial segment's revenues and income increased $30 million (5%) and $7 million (12%), respectively. These increases were due principally to the first quarter 1997 acquisitions of Maag Pump Systems and Maag Italia S.p.A., and the third quarter 1997 acquisition of Burkland Holding, Inc. In addition, higher revenues and income in the fastening systems and contractor tool businesses were partially offset by lower performance in the golf and turf-care business. The Systems and Components segment's revenues and income decreased $25 million (14%) and $2 million (11%), respectively, reflecting the third quarter 1996 divestiture of Textron Aerostructures and lower revenues in marine and land systems products. These revenue and income decreases were partially offset by an increase in demand for aerospace components and higher revenues on the sensor fuzed weapon contract. The Finance segment's revenues increased $32 million (6%), while income increased $6 million (6%). AFS' revenues and income increased $23 million and $1 million, respectively. Revenues in its finance and related insurance business increased $19 million, due to an increase in investment and other income, and an increase in average finance receivables reflecting the benefit of the acquisition of approximately $580 million of consumer and commercial receivables in late 1996 and the first half of 1997. The increase in investment and other income was primarily attributable to an $8 million gain on the sale of certain underperforming branches. The benefit of these revenue increases were partially offset by lower yields on finance receivables (reflecting both decreases in yields on finance receivables and the impact of an increase in lower-yielding commercial receivables), and a decrease in capital gains. Income increased $1 million due to the benefit of the higher revenues and a decrease in the average cost of borrowed funds, partially offset by higher operating expenses related to international expansion and the start-up of centralized sales processing centers in the U.S. and Canada. In AFS' nonrelated insurance business, revenues increased $4 million, due primarily to higher premiums earned, partially offset by a decrease in capital gains. Its income equaled last year's level, due to the higher revenues and a decrease in underwriting expenses (primarily insurance losses) in relation to premiums earned, partially offset by a decrease in capital gains. TFC's revenues increased $9 million, due to a higher level of average receivables and an increase in other income, due primarily to a gain from the securitization of $401 million of Textron-related receivables. Its income increased $5 million, due to the higher revenues and a lower provision for loan losses related to the equipment portfolio, partially offset by an increase in the average cost of borrowed funds and growth in businesses with higher operating expense ratios. Corporate expenses and other - net increased $8 million, due to expenses related to organizational changes and higher support costs related to international expansion. Interest expense - net for the Parent Group decreased $4 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 and share repurchases. Results of Operations - Nine months ended September 27, 1997 vs. Nine months ended September 28, 1996 Earnings per share from continuing operations for the nine months were $2.39 per share, up 17% from the 1996 amount of $2.05. Income from continuing operations in 1997 of $408 million was up 15% from $354 million for 1996. Revenues increased 13% to $7.7 billion in 1997 from $6.8 billion in 1996. Net income in 1997 was $408 million versus $125 million in 1996, which reflected the impact of a $229 million loss from a discontinued operation. The Aircraft segment's revenues and income increased $299 million (15%) and $37 million (19%), respectively. Cessna Aircraft's revenues increased as a result of higher sales of business jets, including its recently introduced Citation X and Citation Bravo. Its income increased from the higher revenues, partially offset by an increased level of expenses due to the introduction and support of new products. Bell Helicopter's revenues and income increased primarily as a result of higher commercial and U.S. Government aircraft sales ($117 million), partially offset by lower revenues on the V-22 program ($71 million) and foreign military programs ($26 million). The Automotive segment's revenues increased $345 million (29%), 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 in the second quarter 1997 and the timing of replacement business and new model launches. Income increased $6 million (6%), reflecting the above factors and the impact of a restructuring effort which began in the second quarter 1997. Fourth quarter 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 fourth quarter 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 $229 million (14%) and $32 million (18%), respectively. These increases were due primarily to higher sales in fastening systems ($125 million), including the second quarter 1996 acquisition of Textron Industries. In addition, results benefited from the 1997 acquisitions of Maag Pump Systems, Maag Italia, S.p.A., and Burkland Holding, Inc., the third quarter 1996 acquisition of Klauke, and higher sales and improved performance in the contractor tool and golf and turf-care businesses. The Systems and Components segment's revenues and income decreased $74 million (14%) and $2 million (4%), respectively, reflecting the third quarter 1996 divestiture of Textron Aerostructures and lower revenues in marine and land systems products. These revenue and income decreases were partially offset by an increase in demand for aerospace components and higher revenues on the sensor fuzed weapon contract. The Finance segment's revenues increased $81 million (5%), while income increased $16 million (6%). AFS' revenues and income increased $61 million and $6 million, respectively. Revenues in its finance and related insurance business increased $48 million, due to an increase in investment and other income, and an increase in average finance receivables ($7.376 billion for the first nine months of 1997 vs $6.845 billion for the first nine months of 1996), reflecting the benefit of the acquisition of approximately $580 million of consumer and commercial receivables in late 1996 and the first half of 1997. The increase in investment and other income was primarily attributable to an $11 million gain on the sale of certain underperforming branches. The benefit of these revenue increases were partially offset by a decrease in yields on finance receivables (17.93% for the first nine months of 1997 vs 18.58% for the first nine months of 1996), reflecting both decreases in yields on finance receivables and the impact of an increase in lower-yielding commercial 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 (2.96% for the first nine months of 1997 vs 2.74% for the first nine months of 1996), partially offset by the benefit of the higher revenues, a decrease in the average cost of borrowed funds (6.45% for the first nine months of 1997 vs 6.93% for the first nine months of 1996), and a decrease in the ratio of insurance losses to earned premiums. 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 has continued to burden the finance customer, resulting in higher delinquencies and charge-offs. This is particularly true in the U.S. where charge-offs have increased and receivables outstanding have decreased. In order to make better use of its capital resources, AFS has undertaken a strategic review of its U.S. operations. This review, which encompasses underperforming branches, started in June 1997 and will take 12 to 18 months. When it is determined that underperforming branches will not meet certain profitability standards, they will be sold. It is not anticipated that these actions will result in any losses. In AFS' non-related insurance business, revenues increased $13 million, due primarily to higher premiums earned, partially offset by a decrease in capital gains. Income increased $10 million, due to the higher revenues and a decrease in underwriting expenses (primarily insurance losses) in relation to premiums earned. TFC's revenues increased $20 million, due to a higher level of average receivables ($3.194 billion in the first nine months of 1997 vs. $3.023 billion in the first nine months of 1996), and increases in other income, due primarily to the securitization of $401 million of Textron-related receivables and increased syndication fee income, partially offset by lower yields of receivables (9.96% in the first nine months of 1997 vs. 10.03% in the first nine months of 1996), primarily on floating rate receivables. Its income increased $10 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 $13 million, due 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 decreased $10 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 and share repurchases. PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 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 and 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 September 27, 1997, Textron filed the following report on Form 8-K: Current Report on Form 8-K filed with the Securities and Exchange Commission dated August 8, 1997, reporting under Item 5 (Other Events) and filing under Item 7 (Exhibits) (a) the consent of Cravath, Swaine & Moore, special tax counsel to Textron, to the filing of the opinion set forth in full under the caption, "United States Tax Considerations" in the Prospectus Supplement dated August 8, 1997 (relating to Medium-Term Notes Series D of Textron) to the Prospectus dated February 1, 1996, included in Registration Statement No. 33-63227, (b) the Form of Distribution Agreement for Medium-Term Senior Securities, (c) the Form of Fixed Interest Rate Medium-Term Senior Securities and (d) the Form of Floating Interest Rate Medium-Term Senior Securities. 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 7, 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 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)