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2002 Annual Report
Textron: Action & Results

Table of contents

  • Page 1
    Textron: Action & Results 2002 Annual Report

  • Page 2
    We're implementing our strategy...Fundamentally transforming our company into a networked enterprise of strong, global businesses and powerful brands in attractive industries by: > Strengthening our "customer-first" culture > Reengineering the enterprise to leverage the collective power of Textron ...

  • Page 3
    We're taking action...> Instilling Textron Six Sigma methodologies and philosophies throughout the organization > Aggressively managing the supply chain and making the most of our global footprint to drive down costs, improve efficiencies and deliver quality products and services > Sharpening our ...

  • Page 4
    And we're delivering results. > Achieved cash and earnings targets while strengthening our balance sheet > Trained nearly 700 employees in Textron Six Sigma, including 225 full-time Black Belts, and completed more than 100 projects in the program's first year > Launched scores of new products and ...

  • Page 5
    ... progress despite adverse market conditions - one of the most prolonged economic downturns of recent decades. More importantly, the actions we took in 2002 are delivering improved returns to shareholders while setting the stage for the future growth of our businesses. Transformation is working In...

  • Page 6
    ... Footnotes to this table can be found on the inside back cover of this annual report. A steady focus on strategic & financial priorities In last year's Letter to ...in a down economy Many of our businesses performed well in 2002, while building a solid base for growth and profitability when ...

  • Page 7
    ...unveiled the new Mustang model, accumulating over 325 orders as this annual report went to press. All told, Cessna recorded more than 525 jet orders in 2002, including 164 orders for the new CJ3 model, which was also unveiled in 2002. The combined backlog for Bell and Cessna exceeds $6 billion as we...

  • Page 8
    ...developing common enterprise systems. Delivering on our commitments In 2002 we made meaningful progress in strengthening our businesses and ...Steve Loranger joined our senior management team as Chief Operating Officer in 2002. A 21-year veteran of Honeywell, Steve brings strong leadership ...

  • Page 9
    Textron: Action & Results 2002 was marked by action and results. Illustrated by photos of the men and women of Textron as they work to advance our goals, the following ...

  • Page 10
    ... our processes, Textron Six Sigma is also enabling our businesses to forge new bonds through a shared language and a common problem-solving approach. In 2002 alone, we achieved what took many other companies years. Hundreds of Textron Six Sigma Black Belts and Green Belts, coming together from all...

  • Page 11
    ... achieve significant savings on testing, but it will also generate new revenue by licensing the technology. Kautex continued to innovate in 2002 by introducing breakthrough plastic fuel systems that will help auto manufacturers meet the toughest emissions requirements in the world, the Partial Zero...

  • Page 12
    Textron companies are working together in new ways to maximize our approach to the supply chain. One example: Bell Helicopter and Cessna Aircraft Company are negotiating jointly with vendors to help cut costs on raw materials. Leveraging the Supply Chain The supply chain received significant ...

  • Page 13
    ... its operations and assets, and move beyond commodity fastening parts to offer customers more comprehensive, value-adding fastening solutions. In 2002 Textron Fastening Systems reorganized to create a new global technology, sales and marketing team equipped to coordinate customer requirements on...

  • Page 14
    ... this year Cessna joined Bell in being ranked number one in their respective industries in customer service by the "Professional Pilot" annual independent survey. Across the enterprise we're gaining rich, data-driven customer insight through the Textron Brand Asset Management methodology, a rigorous...

  • Page 15
    ... has established itself as the worldwide leader in general aviation by consistently introducing new products that redefine standards for aircraft design. In 2002, Cessna again raised the bar by introducing two new business jets designed to broaden the market and make these aircraft accessible to...

  • Page 16
    ... being adopted across the enterprise. Growing the Best & Brightest Attracting and developing top talent is among Textron's strategic priorities, and in 2002 we made major strides in enabling employees' continued development and helping them reach their potential. Our new enterprise-wide Performance...

  • Page 17
    Several Textron companies are well suited to support the U.S. strategy for Homeland Security with products such as the Motor Lifeboat, currently in service with the U.S. Coast Guard. Defending Freedom Textron has long provided leading-edge products and systems to the U.S. military and allied ...

  • Page 18
    Aircraft Includes Bell Helicopter, an international leader in vertical takeoff and landing aircraft for the commercial and military markets, and Cessna Aircraft Company, the world's largest manufactur- Fastening Systems Textron Fastening Systems is an integrated fastening solutions provider, ...

  • Page 19
    Industrial Components Includes Kautex, leading global supplier of automotive plastic fuel tank systems and blow-molded functional components; Textron Fluid Handling Products, Industrial Products Includes E-Z-GO, the #1 golf car manufacturer in the world; Greenlee, leading manufacturer of products ...

  • Page 20
    ...% 2002 Segment Profit Finance $117 Industrial Products $83 Aircraft $452 Fastening Systems $68 Industrial Components $115 14% 10% 54% 8% 14% Industrial Components $1,615 15% Financial Table of Contents 18 19 35 36 41 68 69 70 72 Business Segment Data Management's Discussion and Analysis Report...

  • Page 21
    ...sale of TECT. In January 2002, Textron reorganized management responsibility for several divisions which were previously reported in the Automotive and Industrial ... lives are no longer amortized and must be tested for impairment annually. Textron also adopted the remaining provisions of SFAS No. 141 ...

  • Page 22
    ... other, net decreased $38 million primarily due to $15 million in lower stockbased compensation and related hedge costs, royalty income of $13 million in 2002 related to the Trim divestiture, lower costs of $5 million as a result of organizational changes made in the third quarter of 2001 and higher...

  • Page 23
    ...benefit from export sales. Aircraft Revenues $4,537 $4,797 $4,922 Aircraft 2002 vs. 2001 The Aircraft segment's revenues and profit increased $125 ...14 million for the new Sovereign business jet. In August 2002, the Lycoming aircraft engine business recalled approximately 950 airplane engines ...

  • Page 24
    vary depending upon the actual experience of the program, recoveries received from third parties or an expansion of the existing program. During 2002, Citation business jet deliveries decreased to 307 jets from a record 313 in 2001 resulting in lower business jet volume. The current downturn in the ...

  • Page 25
    ...activities of $19 million. Industrial Products 00 $62 01 (6%) (68%) 10% Industrial Products Revenues $2,248 $68 02 00 38% 01 02 2002 vs. 2001 The Industrial Products segment's revenues and profit decreased $133 million and $23 million, respectively. Revenues decreased in most of the segment...

  • Page 26
    ...Finance $3,162 $215 01 (37%) (47)% Segment Profit $341 00 5% $115 02 $1,615 Finance Revenues $691 $709 00 49% 01 3% 02 (11%) 2002 vs. 2001 The Finance segment's revenues and profit decreased $79 million and $88 million, respectively. Revenues decreased primarily due to lower average yields...

  • Page 27
    .... Special Charges and Other Costs Related to Restructuring Textron recorded $128 million, $437 million and $483 million in special charges in 2002, 2001 and 2000, respectively. The table below summarizes the special charges which include the write-down of goodwill, other intangibles and investments...

  • Page 28
    ...million net loss on the sale of its remaining e-business securities. Textron had no remaining investments in e-business securities as of December 28, 2002. During the third quarter of 2001, certain long-lived asset impairment indicators were identified for OmniQuip which caused Textron to perform an...

  • Page 29
    ...conditions, we believe our reserves are adequate as of December 28, 2002. Long-Term Contracts We recognize revenue and profit as work on certain... assets for impairment on an annual basis. We evaluate the recoverability of goodwill and other intangible assets annually in the fourth quarter, or...

  • Page 30
    .... The trend in health care costs is difficult to estimate and it has an important effect on postretirement liabilities. The 2002 health care cost trend rate, which is the weighted average annual projected rate of increase in the per capita cost of covered benefits, was 10%. This rate is assumed to...

  • Page 31
    ...result in any loss of access to capital. Textron did not experience any commercial paper or long-term debt credit rating downgrades in 2002. Further downgrades in Textron's ratings could increase borrowing spreads or limit its access to the commercial paper, securitization and long-term debt markets...

  • Page 32
    ...'s debt and lease obligations up to a maximum of $70 million. At year-end 2002, Textron's portion of the outstanding debt and operating lease commitments covered by this guarantee totaled...Textron stock. The forward contract requires annual cash settlement between the counterparties. Settle- 30

  • Page 33
    ...share repurchase program for a total cash payment of $248 million. Textron's Board of Directors approved the annual dividend per common share of $1.30 in 2002. Dividend payments to shareholders in 2002 of $182 million were $2 million less than amounts paid in 2001, primarily due to share repurchases...

  • Page 34
    .... The notional amount of outstanding foreign exchange contracts, foreign currency options and currency swaps was approximately $721 million at the end of 2002 and $605 million at the end of 2001. Quantitative Risk Measures Textron utilizes a sensitivity analysis to quantify the market risk inherent...

  • Page 35
    ... an exit or disposal plan. The provisions of this Statement are to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Costs related to restructuring that were not accruable under EITF No. 94-3, were previously recorded by Textron in segment profit as incurred...

  • Page 36
    ...be applied to financial statements for fiscal years ending after December 15, 2002. As permitted by the Statement, Textron does not plan to adopt the... position. ********* Forward-looking Information: Certain statements in this Annual Report and other oral and written statements made by Textron from ...

  • Page 37
    ...and objectivity of the financial data presented in this Annual Report. The consolidated financial statements have been prepared in ...material respects, the consolidated financial position of Textron Inc. at December 28, 2002 and December 29, 2001 and the consolidated results of its operations and ...

  • Page 38
    Consolidated Statements of Operations For each of the years in the three-year period ended December 28, 2002 (In millions, except per share amounts) 2002 2001 $ 11,612 709 12,321 9,760 1,532 433 82 437 (342) 11,902 419 (227) (26) 166 - $ 166 $ 2000 $ 12,399 691 13,090 ...

  • Page 39
    ... 2001 Assets Textron Manufacturing Cash and cash equivalents Commercial and U.S. Government receivables (less allowance for doubtful accounts of $63 in 2002 and $54 in 2001) Inventories Due from Textron Finance Income taxes receivable Other current assets Total current assets Property, plant and...

  • Page 40
    ... at end of year Supplemental information: Cash paid during the year for interest** Net cash paid during the year for income taxes (includes $77 in 2002 and $28 in 2001 related to the Automotive Trim sale and $2 in 2001 and $9 in 2000 for AFS disposal) Supplemental schedule of non-cash investing...

  • Page 41
    ... Finance* 2001 $ 166 (79) 381 92 - (342) 437 - 50 $ 2000 277 (41) 365 97 - - 483 - (9) $ 2002 2001 $ 121 - 19 22 82 - - (43) 46 $ 2000 118 - 17 15 37 - - (22) 16 $ 364 (23) 313 17 - (5) 128 - 272 76 - 28 10 139 - - (28) ...

  • Page 42
    ...(2) $ (126) $ 166 $ (51) 115 $ 218 (74) 144 Net income (loss) Other comprehensive loss Comprehensive income (loss) * Shares issued at the end of 2002, 2001, 2000 and 1999, were as follows (in thousands): $2.08 Preferred - 189; 202; 212; and 228 shares, respectively; $1.40 Preferred - 543; 549; 554...

  • Page 43
    ..., Industrial Products and Industrial Components business segments. In January 2002, management responsibility for certain divisions was reorganized to reflect the...management to make estimates and assumptions that affect the amounts reported in these statements and accompanying notes. Some of the more...

  • Page 44
    on the facts and circumstances available at the time estimates are made, historical experience, risk of loss, general economic conditions and trends, and management's assessments of the probable future outcome of these matters. Actual results could differ from such estimates. Certain prior period ...

  • Page 45
    ... Management evaluates the recoverability of goodwill and other intangible assets annually, or more frequently if events or changes in circumstances, ...is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value. Fair values are primarily established using...

  • Page 46
    ... they are effective as hedges, are recorded in OCL net of deferred taxes. Changes in fair value of derivatives not qualifying as hedges are reported in income. Textron does not hold or issue derivative financial instruments for trading or speculative purposes. Prior to the adoption of SFAS No. 133...

  • Page 47
    (In millions, except per share amounts) 2002 2001 $ 166 22 $ 2000 218 20 Net income (loss), as reported Add back: Stock-based employee compensation expense included in reported net income (loss)* Deduct: Total stock-based employee compensation expense determined under fair value based method for...

  • Page 48
    ... the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. Management is currently evaluating the impact ... are not considered to be material. Dispositions On December 26, 2002, Textron sold the Snorkel product line of its OmniQuip business unit...

  • Page 49
    ...leases are secured by the ownership of the leased equipment and real property and have initial terms up to 30 years. At the end of 2002 and 2001, Textron Finance had nonaccrual finance receivables, excluding receivables with recourse to the Manufacturing group, totaling $182 million and $114 million...

  • Page 50
    ...Charge-offs Recoveries Acquisitions and other Balance at the end of the year $ 144 139 (139) 11 12 167 $ $ $ At December 28, 2002, Textron Finance had unused commitments to fund new and existing customers under $1.5 billion of committed revolving lines of credit and $1.0 billion of uncommitted...

  • Page 51
    ..., net Weighted-average life (in years) Prepayment speed (annual rate) Expected credit losses (annual rate) Residual cash flows discount rate $ 89 3.2 22...$ 1,611 Inventories aggregating $1.1 billion and $1.0 billion at the end of 2002 and 2001, respectively, were valued by the last-in, first-out (...

  • Page 52
    ...indefinite useful lives, and requires an annual review for impairment. Upon adoption, ... million ($561 million, pre-tax), which is reported in the caption "Cumulative effect of change in...impairment charge Foreign currency translation Balance at December 28, 2002 $ $ 390 $ 363 $ 293 $ 181 ...

  • Page 53
    ... 47 17 20 10 14 169 $ 3 8 4 7 3 - 25 $ 58 39 13 13 7 14 144 $ $ $ $ $ $ Amortization expense totaled $11 million and $17 million in 2002 and 2001, respectively. Amortization expense for fiscal years 2003, 2004, 2005, 2006, and 2007 is estimated to be approximately $10 million, $6 million...

  • Page 54
    ... senior debt: Medium-term notes due 2010-2011 (average rate - 9.85%) 6.750% due 2002 6.375% due 2004 5.625% due 2005 6.375% due 2008 6.50% due 2012 6.625... during the next five years on debt outstanding at the end of 2002. The payment schedule excludes amounts that are payable under or supported by...

  • Page 55
    ...2001, $510 million was outstanding and has not been eliminated on the consolidated balance sheet. This note was repaid in full in January 2002. Note 9 Derivatives and Other Financial Instruments Fair Value Interest Rate Hedges Textron Manufacturing's policy is to manage interest cost using a mix of...

  • Page 56
    ... sales, inventory purchases and overhead expenses. The fair value of these instruments at December 28, 2002 was a $4 million liability. At year-end 2002, $3 million of after-tax loss was reported in accumulated OCL from qualifying cash flow hedges. This loss is generally expected to be reclassified...

  • Page 57
    ... reduce potential variability. The fair value of these instruments at December 28, 2002 was a $3 million liability. Gains and losses on these instruments are recorded... expense of $4 million, $22 million and $69 million in 2002, 2001 and 2000, respectively. Fair Values of Financial Instruments The ...

  • Page 58
    ...would have been reduced by $31 million or $0.22 per diluted share in 2002, $26 million or $0.18 per diluted share in 2001, and $25 ...2000. The assumptions used to estimate the fair value of an option granted in 2002, 2001 and 2000, respectively, are approximately as follows: dividend yield of 3%, 3%...

  • Page 59
    ...97 1,152 5,143 2,748 $ 31.32 $ 48.54 $ 73.97 At the end of 2002, common stock reserved for the subsequent conversion of preferred stock and shares reserved for the exercise of ... and basic to diluted share amounts is presented below. 2002 (Dollars in millions, shares in thousands) Income Average ...

  • Page 60
    ...74) (59) 59 (172) (15) (47) 11 (6) 6 (223) (2) (25) 25 $ (112) $ 3 $ (97) $ (19) $ (225) * Net of income tax benefit of $13, $3 and $31 for 2002, 2001 and 2000, respectively. Note 13 Pension Benefits and Postretirement Benefits Other Than Pensions Textron has defined benefit and defined...

  • Page 61
    ... plans with accumulated benefit obligations in excess of plan assets were $714 million, $618 million and $365 million, respectively, as of year-end 2002, and $248 million, $209 million and $42 million, respectively, as of year-end 2001. The following summarizes the net periodic benefit cost for...

  • Page 62
    ... 4.80 Postretirement benefit plan discount rates are the same as those used by Textron's defined benefit pension plans. The 2002 health care cost trend rate, which is the weighted average annual assumed rate of increase in the per capita cost of covered benefits, was 10% for all retirees. This rate...

  • Page 63
    ... $58 million and $70 million can be carried forward indefinitely and the balance expires at various dates through 2013. A valuation allowance at December 28, 2002 and December 29, 2001, of $26 million and $24 million, respectively, has been recognized to offset the related deferred tax assets due to...

  • Page 64
    ... targeted cost reductions which was expanded in 2001. In October 2002, Textron announced a further expansion of its restructuring program as part...restructuring activities formally identified and committed to as of December 28, 2002 and anticipates that all actions related to these liabilities will be...

  • Page 65
    ... Products. See Note 7 regarding the after-tax transitional impairment charge of $488 million reported under the caption "Cumulative effect of change in accounting principle, net of income taxes" in 2002. During the third quarter of 2001, certain long-lived asset impairment indicators were identified...

  • Page 66
    ...in income (loss) from joint ventures is not material, this amount is reported in cost of sales rather than as a separate line item. Textron's ...lease obligations up to a maximum of $70 million. At December 28, 2002, Textron's portion of the outstanding debt and operating lease commitments covered by ...

  • Page 67
    ... terms and conditions. Management knows of no event of default that would require Textron to satisfy these guarantees at the end of 2002. In addition to its financing relationship with Textron Finance, OmniQuip also utilizes third-party finance institutions to provide wholesale financing to certain...

  • Page 68
    ...end of year $ 257 170 (161) 35 301 $ $ For 2002, the adjustments to pre-existing liabilities include $31 million in costs for ... development $ $ 207 379 586 Note 19 Segment Reporting Textron has five reportable segments: Aircraft, Fastening Systems, Industrial Products, Industrial Components...

  • Page 69
    ... 4 341 $ Geographic Data $ $ $ $ $ Presented below is selected financial information by geographic area of Textron's operations: Revenues* (In millions) Property, Plant and Equipment** 2002 2001 $ 8,022 692 826 613 518 367 311 972 $12,321 2000 $ 8,569 798 790 584 603 385 352 1,009 $13,090...

  • Page 70
    Quarterly Data (Unaudited) (Dollars in millions except per share amounts) 2002 Q4 Q3 Q2 Q1 2001 Q4 Q3 Q2 Q1 Revenues Aircraft ...goodwill impairment charge taken in the second quarter 2002 and retroactively recorded in the first quarter 2002 as permitted, see Note 7 to consolidated financial...

  • Page 71
    Selected Financial Information (Dollars in millions except where otherwise noted and per share amounts) 2002 2001 $ 4,797 1,679 1,974 3,162 709 $ 12,321 $ 338 ...cumulative effect of a change in accounting principle in 2002 and 2000. **Assumes full conversion of outstanding preferred stock and ...

  • Page 72
    Transformation Leadership Team Lewis B. Campbell (1,2) Ted R. French (1,2) Steven R. Loranger (1,2) Chairman, President and Chief Executive Officer Textron Inc. Kirk W. Aubry (2) Executive Vice President and Chief Financial Officer Textron Inc. Stephen A. Giliotti Executive Vice President and ...

  • Page 73
    Board of Directors Lewis B. Campbell (1) Joe T. Ford (3,4) Martin D.Walker (2,3) Chairman, President and Chief Executive Officer Textron Inc. H. Jesse Arnelle (2,4) Chairman ALLTEL Corporation Paul E. Gagné (1,2) Principal MORWAL Investments Thomas B.Wheeler (3,4) Of Counsel Womble Carlyle ...

  • Page 74
    ...($2.08 and $1.40) are traded only on the New York Stock Exchange. To receive a copy of Textron's Forms 10-K and 10-Q, proxy statement, Annual Report or the most recent company news and earnings press releases, call (888) TXT-LINE or send your written request to Textron's Communications and Investor...

  • Page 75
    ... restructuring activities of $67 million, proceeds on sale of fixed assets of $83 million, less capital expenditures of $514 million. (4) Textron ROIC (Dollars in millions) 2002 $ 364 128 22 (5) (87) 26 7 67 28 $ $ 550 3,670 1,823 (264) (255) $ $ 2001 $166 437 34 (339) 34 26 94 101 31 584 3,964...

  • Page 76
    Textron Inc. 40 Westminster Street Providence, Rhode Island 02903 (401) 421-2800 www.textron.com The people shown in the pages of this annual report are the men and women of Textron, working every day to create value and reach their potential. They are listed, from left to right, as ...