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 April 4, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 Commission file number 1-5480 _______________ TEXTRON INC. (Exact name of registrant as specified in its charter) _______________ Delaware 05-0315468 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 40 Westminster Street, Providence, RI 02903 401-421-2800 (Address and telephone number of principal executive offices) _______________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common stock outstanding at May 2, 1998 - 163,612,000 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 April 4, March 29, 1998 1997 <S> <C> <C> Revenues Manufacturing sales $ 2,167 $ 2,021 Finance revenues 551 530 Total revenues 2,718 2,551 Costs and expenses Cost of sales 1,765 1,656 Selling and administrative 389 362 Interest 189 183 Provision for losses on collection of finance 63 64 receivables Other 73 70 Total costs and expenses 2,479 2,335 Income before income taxes and distributions on preferred securities of subsidiary trust 239 216 Income taxes (91) (85) Distributions on preferred securities of subsidiary trust, net of income taxes (6) (6) Net income $ 142 $ 125 Earnings per common share: Basic $ .87 $ .75 Diluted .85 .73 Average shares outstanding: Basic 165,897,000 162,809,000 Diluted 170,388,000 167,155,000 Dividends per share: $2.08 Preferred stock, Series A $ .52 $ .52 $1.40 Preferred stock, Series B $ .35 $ .35 Common stock $ .285 $ .25 </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> April 4, January 3, 1998 1998 <S> <C> <C> Assets Cash $ 30 $ 87 Investments 909 844 Receivables - net: Finance 10,303 10,226 Commercial and U.S. government 1,050 920 11,353 11,146 Inventories 1,568 1,349 Property, plant, and equipment, less accumulated depreciation of $1,852 and $1,827 1,925 1,860 Goodwill, less accumulated amortization of $479 and $465 1,917 1,753 Other (including net prepaid income taxes) 1,794 1,571 Total assets $ 19,496 $ 18,610 Liabilities and shareholders' equity Liabilities Accounts payable $ 964 $ 963 Accrued postretirement benefits other than pensions 795 799 Other accrued liabilities (including income taxes) 2,785 2,641 Debt: Parent Group 1,706 1,221 Finance Group 9,401 9,275 11,107 10,496 Total liabilities 15,651 14,899 Textron - obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Textron junior subordinated debt securities 483 483 Shareholders' equity Capital stock: Preferred stock 13 13 Common stock 24 24 Capital surplus 865 830 Retained earnings 3,457 3,362 Accumulated other comprehensive income (58) (62) 4,301 4,167 Less cost of treasury shares 939 939 Total shareholders' equity 3,362 3,228 Total liabilities and shareholders' equity $ 19,496 $ 18,610 Common shares outstanding 163,361,000 162,343,000 </TABLE> See notes to condensed consolidated financial statements. Item 1. FINANCIAL STATEMENTS (Continued) <TABLE> TEXTRON INC. Condensed Consolidated Statement of Cash Flows (Unaudited) (In millions) <CAPTION> Three Months Ended April 4, March 29, 1998 1997 <S> <C> <C> Cash flows from operating activities: Net income $ 142 $ 125 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 70 60 Amortization 46 42 Provision for losses on receivables 65 66 Changes in assets and liabilities excluding those related to acquisitions and divestitures: Increase in commercial and U.S. government (90) (8) receivables Increase in inventories (156) (138) Increase in other assets (143) (8) Increase (decrease) in accounts payable (14) 14 Increase (decrease) in accrued liabilities 111 (1) Other - net 5 (25) Net cash provided by operating activities 36 127 Cash flows from investing activities: Purchases of investments (215) (50) Proceeds from disposition of investments 130 34 Maturities and calls of investments 24 9 Finance receivables: Originated or purchased (2,170) (1,776) Repaid or sold 2,105 1,582 Cash used in acquisitions (227) (348) Cash received from dispositions - 549 Capital expenditures (86) (88) Other investing activities - net (7) 13 Net cash used by investing activities (446) (75) Cash flows from financing activities: Increase (decrease) in short-term debt (101) 240 Proceeds from issuance of long-term debt 1,416 798 Principal payments on long-term debt (944) (966) Proceeds from exercise of stock options 30 16 Purchases of Textron common stock - (6) Dividends paid (48) (41) Net cash provided by financing activities 353 41 Net increase (decrease) in cash (57) 93 Cash at beginning of period 87 47 Cash at end of period $ 30 $ 140 </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 January 3, 1998. The financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of Textron's consolidated financial position at April 4, 1998, and its consolidated results of operations and cash flows for each of the respective three month periods ended April 4, 1998 and March 29, 1997. Business segment data has been reclassified to reflect the transfer of Lycoming from the Aircraft segment to the Industrial segment. Note 2: Earnings per Share In 1997, Textron adopted FAS 128 "Earnings Per Share." FAS 128 requires companies to present basic and diluted earnings per share amounts. The dilutive effect of convertible preferred stock and stock options was 4,436,000 and 4,491,000 shares for the three month periods ending April 4, 1998 and March 29, 1997, respectively. Income available to common shareholders used to calculate both basic and diluted earnings per share approximated net income for both periods. Note 3: Inventories <TABLE> <CAPTION> April 4, January 3, 1998 1998 (In millions) <S> <C> <C> Finished goods $ 458 $ 454 Work in process 865 675 Raw materials 420 366 1,743 1,495 Less progress payments and customer deposits 175 146 $1,568 $1,349 </TABLE> Note 4: 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. Note 4: Textron-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Textron junior subordinated debt securities (Continued) 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 5: Contingencies Textron is subject to a number of lawsuits, investigations and claims arising out of the conduct of its business, including those relating to commercial transactions, government contracts, product liability, and environmental, safety and health matters. Some seek compensatory, treble or punitive damages in substantial amounts; fines, penalties or restitution; or remediation of contamination. Some are or purport to be class actions. Under federal government procurement regulations, some could result in suspension or debarment of Textron or its subsidiaries from U.S. government contracting for a period of time. On the basis of information presently available, Textron believes that any liability for these suits and proceedings would not have a material effect on Textron's net income or financial condition. Note 6: Comprehensive Income In 1998, Textron adopted FAS 130, "Reporting Comprehensive Income." FAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on Textron's net income or shareholders' equity. FAS 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of FAS 130. During the first quarter of 1998 and 1997, total comprehensive income amounted to $146 million and $90 million, respectively. 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 April 4, March 29, Condensed Statement of Income 1998 1997 <S> <C> <C> Sales $2,167 $ 2,021 Costs and expenses Cost of sales 1,765 1,656 Selling and administrative 221 206 Interest 36 39 Total costs and expenses 2,022 1,901 145 120 Pretax income of Finance Group 94 96 Income before income taxes and distribution on preferred securities of subsidiary trust 239 216 Income taxes (91) (85) Distributions on preferred securities of subsidiary trust, net of income (6) (6) taxes Net income $ 142 $ 125 </TABLE> <TABLE> <CAPTION> April 4, January 3, Condensed Balance Sheet 1998 1998 Assets <S> <C> <C> Cash $ 7 $ 30 Receivables - net 1,050 920 Inventories 1,568 1,349 Investments in Finance Group 1,606 1,620 Property, plant and equipment - net 1,825 1,761 Goodwill 1,733 1,567 Other assets (including net prepaid income taxes) 1,517 1,311 Total assets $9,306 $8,558 Liabilities and shareholders' equity Accounts payable and accrued liabilities (including $3,755 $3,626 income taxes) Debt 1,706 1,221 Textron - obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Textron junior 483 483 subordinated debt securities Shareholders' equity 3,362 3,228 Total liabilities and shareholders' equity $9,306 $8,558 </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 April 4, March 29, Condensed Statement of Cash Flows 1998 1997 <S> <C> <C> Cash flows from operating activities: Net income $142 $ 125 Adjustments to reconcile net income to net cash provided (used) by operating activities: Earnings of Finance Group (greater than) less than distributions to Parent Group 44 (11) Depreciation 64 55 Amortization 16 15 Changes in assets and liabilities excluding those related to acquisitions and divestitures: Increase in receivables (90) (8) Increase in inventories (156) (138) Increase in other assets (149) (25) Increase in accounts payable and accrued 71 16 liabilities Other - net 32 (8) Net cash provided (used) by operating (26) 21 activities Cash flows from investing activities: Capital expenditures (82) (81) Cash used in acquisitions (210) (324) Cash received from dispositions - 549 Other investing activities - net 7 14 Net cash provided (used) by investing (285) 158 activities Cash flows from financing activities: Increase in short-term debt 23 8 Proceeds from issuance of long-term debt 645 690 Principal payments on long-term debt (339) (781) Proceeds from exercise of stock options 30 16 Purchases of Textron common stock - (6) Dividends paid (48) (42) Contributions paid to Finance Group (23) - Net cash provided (used) by financing 288 (115) activities Net increase (decrease) in cash (23) 64 Cash at beginning of period 30 24 Cash at end of period $ 7 $ 88 </TABLE> Item 1 FINANCIAL STATEMENTS (Continued) Note 7: Financial information by borrowing group (continued) <TABLE> FINANCE GROUP (unaudited) (In millions) <CAPTION> Three Months Ended Condensed Statement of Income March 31, March 31, <S> <C> <C> Revenues $ 551 $ 530 Costs and expenses Selling and administrative 168 156 Interest 153 144 Provision for losses on collection of finance 63 64 receivables Other 73 70 Total costs and expenses 457 434 Income before income taxes 94 96 Income taxes (36) (37) Net income $ 58 $ 59 <\TABLE\ </TABLE> <TABLE> <CAPTION> Condensed Balance Sheet March 31, December 31, 1998 1997 Assets <S> <C> <C> Cash $ 23 $ 57 Investments 909 844 Finance receivables - net 10,303 10,226 Other 820 783 Total assets $12,055 $ 11,910 Liabilities and equity Accounts payable and accrued liabilities (including income $1,048 $ 1,015 taxes) Debt 9,401 9,275 Equity 1,606 1,620 Total liabilities and equity $12,055 $ 11,910 </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 April 4, March 29, 1998 1997 <S> <C> <C> REVENUES MANUFACTURING: Aircraft $ 656 $ 679 Automotive 618 557 Industrial 893 785 2,167 2,021 FINANCE 551 530 Total revenues $2,718 $ 2,551 INCOME MANUFACTURING: Aircraft $ 61 $ 60 Automotive 56 50 Industrial 95 82 212 192 FINANCE 94 96 Segment operating income 306 288 Corporate expenses and other - net (31) (33) Interest expense - net (36) (39) Income before income taxes and distributions on preferred securities of subsidiary trust $ 239 $ 216 </TABLE> Liquidity and Capital Resources The Statements of Cash Flows for Textron Inc. and the Parent Group detailing the changes in cash balances are on pages 4 and 10, respectively. The Parent Group's operating cash flow includes dividends received from the Finance Group of $102 million and $48 million during the first quarters of 1998 and 1997, respectively. The Parent Group's debt to total capital ratio was 31% at April 4, 1998, up from 25% at year end. The Parent Group has credit facilities outstanding at April 4, 1998 aggregating $2.0 billion, $1.1 billion of which was not used or reserved as support for outstanding commercial paper or bank borrowings. At March 31, 1998, the Finance Group had credit facilities outstanding of approximately $5.4 billion, $750 million of which was available at quarter end. The Parent Group and the Finance Group had $311 million and $616 million, respectively, available at quarter end under their shelf registration statements with the Securities and Exchange Commission and, for the Finance Group, the Canadian Provincial Security Exchange. During the three months ended March 31, 1998, the Finance Group issued $471 million of unsecured debt securities, including $406 million under its shelf registration statements. In the first quarter, the Finance Group increased its medium-term note facility by $750 million and issued $300 million medium-term notes under this facility. The Finance Group had $542 million available under the facility at March 31, 1998. In the first quarter, Textron acquired the capital stock of Ransomes PLC, a UK- based manufacturer of commercial turf-care machinery, and Sukosim, a German fastener manufacturer. The cost of these acquisitions was approximately $290 million which includes notes issued for approximately $80 million, plus the assumption of debt. In the first quarter, the Finance Group had $83 million of interest rate exchange agreements expire and $50 million of interest rate exchange agreements go into effect. The new agreements, which have a weighted average original term of 3.2 years and expire through 2002, had the effect of fixing the rate of interest at approximately 7.2% on $50 million of variable rate borrowings at March 31, 1998. Also, during the first quarter, the Parent Group terminated $275 million of fixed-pay interest rate exchange agreements. 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. Results of Operations - Three months ended April 4, 1998 vs Three months ended March 29, 1997 Diluted earnings per share in the first quarter 1998 were $0.85 per share, up 16% from the 1997 amount of $0.73. Net income in 1998 of $142 million was up 14% from $125 million for 1997. Revenues increased 7% to $2.7 billion in 1998 from $2.6 billion in 1997. The Aircraft segment's revenues decreased $23 million (3%), while income increased $1 million (2%), due to higher results at Cessna Aircraft. Cessna's revenues and income increased as a result of higher sales of business jets and single engine aircraft. Bell Helicopter's revenues and income decreased due to lower commercial helicopter sales ($89 million), reflecting the completion in 1997 of the three-year contract for model 412 helicopters with the Canadian Forces, partially offset by higher revenues on the six-year contract to upgrade Huey and Cobra helicopters for the U.S. Marines ($14 million). The impact of a favorable profit adjustment on the V-22 EMD contract in 1997 was offset by a lower level of product development expense in 1998. The Automotive segment's revenues increased $61 million (11%), while income increased $6 million (12%). These revenue and income increases were due to higher volume at Kautex associated with capacity expansion in North America, and higher sales and improved performance in the Trim operations, reflecting increased production of models with Textron content, primarily at Chrysler. The Industrial segment's revenues and income increased $108 million (14%) and $13 million (16%), respectively, reflecting the contribution from acquisitions, principally Ransomes PLC., and internal growth combined with ongoing margin improvement. Internal growth was driven by continued strength in the fastening systems, aerospace components and contractor tools businesses. These benefits were partially offset by the fourth quarter 1997 divestiture of Speidel. The Finance segment's revenues increased $21 million (4%), while income decreased $2 million (2%). AFS' revenues increased $18 million, while income decreased $3 million. Revenues in its finance and related insurance business increased $11 million, due to an increase in average finance receivables ($7.683 billion in the first quarter 1998 vs $7.179 billion in the first quarter 1997), reflecting the benefit of the acquisition of $534 million of commercial receivables during 1997, and a gain of $4 million on the sale of certain underperforming branches in 1998. The benefit of these revenue increases was partially offset by a decrease in yields on finance receivables (17.18% in the first quarter 1998 vs 18.08% in the first quarter 1997), reflecting both decreases in yields on consumer finance receivables and the impact of an increase in lower-yielding commercial receivables. Income decreased $6 million, due primarily to the lower yields on finance receivables and a slight increase in the average cost of borrowed funds (6.55% in the first quarter 1998 vs 6.49% in the first quarter 1997), partially offset by the benefit of the revenue increases and a decrease in the provision for losses resulting from a decrease in the ratio of net credit losses to average finance receivables (2.86% in the first quarter 1998 vs 3.06% in the first quarter 1997). The decrease in the net credit losses to average finance receivables was attributable to the impact of the increase in commercial receivables, which have a lower loss ratio, partially offset by a slight increase in the loss ratio for the consumer finance business (3.20% in the first quarter 1998 vs 3.17% in the first quarter 1997). Delinquencies and charge-offs remain at higher than historical levels. AFS continued to reconfigure its branch network in the U.S. and sold nine additional underperforming branches in the first quarter. In AFS' nonrelated insurance business, revenues increased $7 million and income increased $3 million, due primarily to higher premiums earned and an increase in investment income, reflecting a higher level of invested assets and capital gains. TFC's revenues increased $3 million, due to an increase in other income, and higher yields on receivables (10.10% in the first quarter 1998 vs 9.84% in the first quarter 1997), partially offset by a lower level of average receivables ($3.059 billion in the first quarter 1998 vs $3.139 billion in the first quarter 1997), due primarily to the securitization of $401 million of Textron-related receivables in the third quarter of 1997. The increase in other income is due primarily to servicing fees related to securitized receivables, an increase in fee-based services and higher prepayment income, partially offset by lower arrangement fee income. Its income increased $1 million, due to the higher revenues and a lower provision for losses, partially offset by growth in businesses with higher operating expense ratios. Corporate expenses and other -net decreased $2 million due primarily to 1997 litigation costs related to a divested operation. Interest expense-net for the Parent Group decreased $3 million, due to lower average debt, resulting from the payment of debt with proceeds in 1997 from the divestiture of Paul Revere, partially offset by the incremental debt associated with acquisitions. Income taxes -the current quarter's effective income tax rate of 38.1% was lower than the corresponding prior year rate of 39.4%, due primarily to lower state income taxes and an increase in tax benefits on export sales. Forward-looking Information: Certain statements in this Report, and other oral and written statements made by Textron from time to time, are forward-looking statements, including those that discuss strategies, goals, outlook or other non- historical matters; or project revenues, income, returns or other financial measures. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements, including the following: (i) continued market demand for the types of products and services produced and sold by Textron, (ii) changes in worldwide economic and political conditions and associated impact on interest and foreign exchange rates, (iii) the level of sales by original equipment manufacturers of vehicles for which Textron supplies parts, (iv) the successful integration of companies acquired by Textron, and (v) changes in consumer debt levels. PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 364-Day Credit Agreement dated as of April 1, 1998, among Textron Inc., the Banks listed therein and Morgan Guaranty Trust Company of New York as Administrative Agent 10.2 5-Year Credit Agreement dated as of April 1, 1998, among Textron Inc., the Banks listed therein and Morgan Guaranty Trust Company of New York as Administrative Agent 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 No reports on Form 8-K were filed during the quarter ended April 4, 1998. 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 14, 1998 s/R. L. Yates R. L. Yates Vice President and Controller (principal accounting officer) LIST OF EXHIBITS 10.1 364-Day Credit Agreement dated as of April 1, 1998, among Textron Inc., the Banks listed therein and Morgan Guaranty Trust Company of New York as Administrative Agent. 10.2 5-Year Credit Agreement dated as of April 1, 1998, among Textron Inc., the Banks listed therein and Morgan Guaranty Trust Company of New York as Administrative Agent. 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).