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Textron 2003 Annual Report
2003 Annual Report
Focused & Forward

Table of contents

  • Page 1
    Focused & Forward Textron 2003 Annual Report 2003 Annual Report

  • Page 2
    Delivering on our commitments, advancing our plan, accelerating our progress and building a strong foundation for future growth.

  • Page 3
    Transforming Textron to compete and win with powerful global brands supported by extraordinarily talented people and world-class processes such as Textron Six Sigma. Shanuah Beamon, President, Structured Finance Division, Textron Six Sigma Black Belt, Textron Financial Bruce Trudgeon, Operations ...

  • Page 4
    ... company. These efforts helped offset a $500 million decline in 2003 sales volume, reflecting a downturn in the business jet and key industrial markets.... Although we were not satisfied with our 2003 financial performance, the benefits of our transformation were apparent as we...

  • Page 5
    (Dollars in millions, except per share amounts) (1) 2003 $ $ $ $ 9,859 762 7.7% 401 483 8.6% 2002 $ 10,350 $ 898 8.7% $ 566 $ 314 9.4% ...Dividends per share Footnotes to this table can be found on the inside back cover of this annual report. $ $ $ 2.05 2.78 1.30 $ $ $ 2.62 3.20 1.30 We ...

  • Page 6
    ... with technological innovation, generating new products that promise impressive revenue and earnings growth through the end of the decade and beyond. In 2003 alone, we brought more than 120 new and upgraded products and services to market, creating opportunities for our customers to realize benefits...

  • Page 7
    ..., our new entry-level jet, in 2006. Based on the strength of our new model announcements, Cessna's backlog was $4.4 billion at the end of 2003, and we are well positioned to benefit as demand for business jets rebounds. Textron Fastening Systems has introduced the world's first Intelligent Fastening...

  • Page 8
    ...year as the leader in customer support according to Pro Pilot magazine's annual reader survey. Not satisfied to rest on such laurels, however, we...constantly seeking new ways to understand and delight our customers. In 2003, we designed a rigorous process for measuring and tracking customer ...

  • Page 9
    ... that matter most. Through these processes, employees and supervisors are held accountable to drive even higher individual and team performance. In 2003, we launched several new enterprise-wide development programs focused on our middle managers and supervisors, expanding access to more than 4,000...

  • Page 10
    ... Helicopter is using a new online system to recoup $1.5 million annually in previously unclaimed warranty costs from suppliers. And, Jacobsen and ... momentum and build capability supporting this critical long-term initiative. In 2003, we expanded our global sourcing offices in Poland and China, and...

  • Page 11
    ...which is furthest along, here's what we achieved in 2003: Saved $34 million through infrastructure consolidation, IT procurement leverage...streamlined portfolio of leading global brands, each generating $1 billion or more in annual revenue with returns of at least 400 basis points above our cost of ...

  • Page 12
    ... by realism, we are making progress and moving forward every day. I witnessed this momentum as I traveled to Textron facilities around the world in 2003. I met with many managers and employees who, like Textron itself, are focused and moving forward. They are a source of pride and inspiration for...

  • Page 13
    leaders will provide invaluable perspective and guidance as we continue to move down the path to premier status. 2003 was a year in which our Global Leadership Team locked arms and demonstrated remarkable resolve to make the tough decisions and hold themselves and their people ...

  • Page 14
    Textron's well-known brands deliver innovative, market-leading solutions that focus on the success of our customers. Bell is a leader in the global helicopter industry and the pioneer of tiltrotor aircraft. With Bell helicopters flying in more than 120 countries, Bell has earned a worldwide ...

  • Page 15
    Finance equipment and transportation markets. Products are marketed under brand names including David Brown, Union Pump, Guinard Pump, Maag Pump Systems, AB Benzlers, Radicon and Cone Drive. is the world's numberone manufacturer of vehicles for golf courses, resort communities, recreational ...

  • Page 16
    Textron's Directors provide perspective, guidance and oversight as we move forward on the path to premier status. Board of Directors (1) (2) (3,4) (2,4) Chairman, President and Chief Executive Officer Textron Inc. (2,4) Of Counsel, Womble, Carlyle, Sandridge & Rice (3) Vice Chairman of the ...

  • Page 17
    ... related to the redemption of mandatorily redeemable preferred shares in 2003. In 2003, special charges totaled $75 million in Fastening Systems, $...Business Segment Data Management's Discussion and Analysis Report of Management, Report of Independent Auditors Consolidated Financial Statements Notes ...

  • Page 18
    ...lower than in 2002, due to the weak financial stability experienced by many of its commercial finance customers. Other factors affecting operating results in 2003 included a decline in pension income of $61 million primarily due to the negative return on pension assets in 2001 and 2002 and a lower...

  • Page 19
    ... securities and subsequently realized a $3 million net loss on the sale of its remaining e-business securities. Corporate expenses and other, net was $119 million in 2003, compared with $114 million in 2002 and $152 million in 2001. The large decrease of $38 million in 2002 was primarily due to: $15...

  • Page 20
    ... that was paid in full in February 2004. In the fourth quarter of 2003, Textron Financial sold substantially all of its small business direct portfolio to MBNA ...no longer amortized and must be tested for impairment annually. In 2001, reported pro forma net income excluding amortization of goodwill ...

  • Page 21
    ... 2002, respectively, which was substantially all in the Bell segment. In June 2003, Textron reorganized its segments in order to streamline its management reporting structure. Under the new structure, Textron Systems and Lycoming have been combined with Bell Helicopter to form the new Bell segment...

  • Page 22
    ... Citation business jet volume of $49 million (307 jet deliveries in 2002, compared with 313 in 2001). Segment profit decreased $177 million in 2003, primarily due to reduced margin of $305 million from lower sales volume and inï¬,ation of $67 million, partially offset by improved cost performance...

  • Page 23
    ...to a favorable foreign exchange impact of $128 million, reï¬,ecting a weak U.S. dollar, partially offset by higher pricing concessions of $13 million in 2003 and lower volume primarily in the European industrial markets. In 2002, revenues decreased $29 million primarily due to the divestiture of non...

  • Page 24
    ...market, partially offset by lower sales volume of $130 million in the remaining businesses as a result of soft markets. Segment profit decreased $22 million in 2003 primarily due to lower profit of $52 million at E-Z-GO and Jacobsen, due to lower sales as a result of the depressed golf market, the...

  • Page 25
    ...113% at December 29, 2001. The decrease in the percentages in 2003 and 2002 reï¬,ects decreases in undercollateralized loans with identified reserve ...improvements of information systems and processes. Special charges of $159 million in 2003, $135 million in 2002 and $143 million in 2001 are more ...

  • Page 26
    ...Manufacturing's cash provided (used) by investing activities was $(214) million in 2003, $(191) million in 2002 and $69 million in 2001. The ...the Trim business in 2001. There were no significant acquisitions made in 2003, 2002 or 2001. In 2001, Textron Manufacturing acquired four companies for an ...

  • Page 27
    ... The increase in 2002 primarily reï¬,ects the utilization of proceeds from the sale of Automotive Trim. Textron's Board of Directors approved the annual dividend per common share of $1.30 in 2003, 2002 and 2001. Dividend payments to shareholders totaled $222 million, $182 million and $184 million in...

  • Page 28
    ... and the short-term debt ratings from F1 to F2 and affirmed its negative outlook for the ratings. In the second quarter of 2003, Standard & Poor's downgraded Textron Manufacturing's long-term and short-term ratings to A- and A2, respectively, and affirmed Textron Finance's longterm debt rating of...

  • Page 29
    Long-term debt and capital lease obligations included in the table above do not include interest payments. Textron maintains defined benefit pension plans and postretirement benefit plans other than pensions as discussed in Note 12 to the consolidated financial statements. Included in the table ...

  • Page 30
    ... enters into a forward contract in Textron common stock on an annual basis. The contract is intended to hedge the earnings and cash... the strike price and the prevailing Textron common stock price. At the end of 2003, this forward contract was for approximately 2 million shares with a strike price of ...

  • Page 31
    ... adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. We completed our annual impairment test in the fourth quarter of 2003 using the estimates from our long-term strategic plans. No adjustment was required to the carrying value of our goodwill or...

  • Page 32
    .... The trend in healthcare costs is difficult to estimate, and it has an important effect on postretirement liabilities. The 2003 healthcare 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 33
    ...The notional amount of outstanding foreign exchange contracts, foreign currency options and currency swaps was approximately $519 million at the end of 2003 and $721 million at the end of 2002. Textron utilizes a sensitivity analysis to quantify the market risk inherent in its financial instruments...

  • Page 34
    ...revised FIN 46 in the first quarter of 2004 when it applies to non-SPEs for entities created or interests obtained prior to February 2003. Both borrowing groups have substantially completed the process of evaluating the Interpretation and believe it will not have a material impact on its results of...

  • Page 35
    ...Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," to address the accounting and disclosure implications resulting from the ... issued. Forward-looking Information: Certain statements in this Annual Report and other oral and written statements made by Textron from...

  • Page 36
    ...integrity and objectivity of the financial data presented in this Annual Report. The consolidated financial statements have been prepared in conformity ... discussed in Note 10 to the consolidated financial statements, in 2003 Textron adopted Financial Accounting Standards No. 150, " Accounting for ...

  • Page 37
    For each of the years in the three-year period ended January 3, 2004 (In millions, except per share amounts) 2002 $ 9,287 572 9,859 7,669 1,294 270 81 159 (15) 9,458 401 (107) (13) 281 (22) 259 - $ 259 $ $ 9,766 584 10,350 7,961 1,305 297 111 135 (25) 9,784 566 (173) (26) 367 (3) 364 (488) (124) $...

  • Page 38
    ... except share data) 2002 Cash and cash equivalents Commercial and U.S. Government receivables (less allowance for doubtful accounts of $66 in 2003 and $48 in 2002) Inventories Income taxes receivable Other current assets Assets of discontinued operations Property, plant and equipment, net Goodwill...

  • Page 39
    ...13 (32) - 2 1 (35) (95) - 161 $ $ $ (2) (51) (64) $ (225) $ (223) 259 161 420 $ (124) $ (2) $ (126) $ 166 (51) 115 * Shares issued at the end of 2003, 2002, 2001 and 2000, were as follows (in thousands): $2.08 Preferred 181; 189; 202 and 212 shares, respectively; $1.40 Preferred - 540; 543; 549 and...

  • Page 40
    For each of the years in the three-year period ended January 3, 2004 (In millions) 2002 $ 281 $ 367 $ 2001 474 Income from continuing operations Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Earnings of Textron Finance greater than ...

  • Page 41
    2002 $ 281 $ 367 $ 2001 474 $ 79 $ 2002 76 $ 2001 120 (4) 304 7 - (15) 153 - (12) (23) 305 16 - (25) 135 - 268 (78) 372 83 - (342) 140 - 80 - 34 11 81 - 6 (15) (29) - 27 10 111 - - (28) 58 - 19 22 69 - 3 (43) 46 87 172 (233) (200) 101 40 681 (20) 97 (306) (136) (196) 13 495 (93) 62 (49) ...

  • Page 42
    ...'s equity in the income (loss) from joint ventures is not material, it is not separately reported and is included within cost of sales. Textron's loss from unconsolidated joint ventures totaled $7 million in 2003 and $10 million each year in 2002 and 2001. Textron's financings are conducted through...

  • Page 43
    ... long-lived assets, environmental and warranty reserves, and amounts reported under long-term contracts. Management's estimates are based on .... The development effort is substantially complete for new production releases in 2003 and revenue on those releases will be recognized as units are delivered...

  • Page 44
    revenues when receivables are sold or pre-paid. Accrual of interest income is suspended for accounts that are contractually delinquent by more than three months, unless collection is not doubtful. In addition, detailed reviews of loans may result in earlier suspension if collection is doubtful. ...

  • 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 established primarily using...

  • Page 46
    ...income (loss) Income (loss) per share: Basic - as reported Basic - pro forma Diluted - as reported Diluted - pro forma * Net of related cash settlement forward...SPEs for entities created or interests obtained prior to February 2003. Both borrowing groups have substantially completed the process of ...

  • Page 47
    ... implications resulting from the Act. FSB 106-1 is effective for financial statements for fiscal years ending after December 7, 2003 and provides a one-time election to delay reporting the effects of the Act until authoritative guidance on the accounting for the federal subsidy is issued. Textron...

  • Page 48
    ...50 22 32 54 86 $ 237 $ $ In the fourth quarter of 2003, Textron Finance sold substantially all of its small business direct portfolio to MBNA...general corporate overhead previously allocated to the division for segment reporting purposes. Operating results of the discontinued businesses are as ...

  • Page 49
    ...the C&A common stock held by Textron was revised. The C&A common stock was subsequently written down and sold as discussed in Note 14. In January 2003, Textron sold its remaining 50% interest in an Italian joint venture to C&A for a $12 million after-tax gain. Textron utilizes the purchase method of...

  • Page 50
    ... specify that Textron Finance has recourse to Textron Manufacturing for outstanding balances from some of these transactions. At the end of 2003 and 2002, the amounts guaranteed by Textron Manufacturing totaled $467 million and $562 million, respectively. In addition, Textron Finance has recourse...

  • Page 51
    ...due loans of $69 million and $85 million at the end of 2003 and 2002, respectively, that meet the non-accrual criteria but are ...securitizations, net Weighted average life (in years) Prepayment speed (annual rate) Expected credit losses (annual rate) Residual cash ï¬,ows discount rate $ 100 1.8 21.4%...

  • Page 52
    ... million at the end of 2003 and $11 million at the end of 2002. Long-term contract receivables at the end of 2003 and 2002 totaled $224 million...annual review for impairment. All existing goodwill as of December 30, 2001 was required to be tested for impairment on a reporting unit basis. The reporting...

  • Page 53
    ... 2001. For goodwill and intangible assets reported in connection with acquisitions made prior to ... 5 3 13 $ 65 $ 25 $ 40 $ 63 $ 16 $ 47 Amortization expense totaled $9 million in 2003 and in 2002, and $14 million in 2001. Amortization expense for fiscal years 2004, 2005, 2006, 2007 and...

  • Page 54
    ... of a fixed charges coverage ratio. The following table shows required payments during the next five years on debt outstanding at the end of 2003. The payment schedule excludes amounts that are payable under or supported by long-term credit facilities. (In millions) 2004 $ 316 1,181 $ 1,497 2005...

  • Page 55
    ... amortized into income over the remaining life of the debt. Textron Manufacturing entered into new swap agreements in November 2002 and in March 2003 and had interest rate swaps with a fair value liability of $1 million at January 3, 2004. Textron Finance enters into interest rate swap agreements in...

  • Page 56
    ... purchases and overhead expenses. The fair value of these instruments at January 3, 2004 was a $20 million asset. At year-end 2003, $14 million of after-tax gain was reported in accumulated OCL from qualifying cash ï¬,ow hedges. This loss is generally expected to be reclassified to earnings in the...

  • Page 57
    ... the holders of the preferred securities, when due, to the extent not paid by or on behalf of the trust or subsidiary. In July 2003, Textron redeemed its 7.92% Junior Subordinated Deferrable Interest Debentures due 2045. The debentures were held by Textron's wholly owned trust, and the proceeds from...

  • Page 58
    ...would have been reduced by $15 million or $0.11 per diluted share in 2003, $31 million or $0.22 per diluted share in 2002, and $26 ...405 4,261 2,449 $ 38.60 $ 49.09 $ 74.01 At the end of 2003, common stock reserved for the subsequent conversion of preferred stock and shares reserved for the exercise...

  • Page 59
    Each outstanding share of Textron common stock has attached to it one-half of a preferred stock purchase right. One preferred stock purchase right entitles the holder to buy one one-hundredth of a share of Series C Junior Participating Preferred Stock at an exercise price of $250. The rights become ...

  • Page 60
    ...fined contribution pension plans that together cover substantially all employees. The costs of the defined contribution plans amounted to approximately $22 million in 2003, $44 million in 2002 and $48 million in 2001. Defined benefits under salaried plans are based on salary and years of service...

  • Page 61
    ...9.25% 4.80% - - - - - - For measurement purposes, Textron assumed an annual healthcare cost trend rate of 10% for covered healthcare benefits in 2004. The rate was...care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in...

  • Page 62
    ...fit obligation or the net periodic postretirement benefit cost for 2003. Textron will evaluate the impact of the Act, including ... assumptions used to measure Textron's benefit obligation at the end of fiscal 2003. (In millions) 2004 2005 2006 2007 2008 2009 - 2013 $ 276 281 285 291 298 ...

  • Page 63
    Textron files a consolidated federal income tax return for all U.S. subsidiaries and separate returns for foreign subsidiaries. Income from continuing operations before income taxes and distributions on preferred securities of subsidiary trusts is as follows: (In millions) 2002 2001 United States ...

  • Page 64
    ..., would be increased by approximately $155 million. Cash payments for taxes, net of tax refunds received, for Textron Manufacturing totaled $(158) million in 2003, $42 million in 2002 and $122 million in 2001. Cash payments for taxes, net of tax refunds, for Textron Finance totaled $(6) million in...

  • Page 65
    ...at that time. Textron adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," as of the beginning of fiscal 2003 for projects initiated after December 28, 2002. Previously, certain costs related to restructuring that were not accruable under the prior standard were...

  • Page 66
    ...as of January 3, 2004, and anticipates that all actions related to these liabilities will be completed within a twelve-month period. In July 2003, Textron redeemed its 7.92% Junior Subordinated Deferrable Interest Debentures due 2045. The debentures were held by Textron's wholly owned trust, and the...

  • Page 67
    ... Agency (DCMA), Bell responded to the audit report. The DCMA contracting officer took the issue under advisement. On April 17, 2003, the DCMA sent Bell an "initial finding... contingent liability based on assumptions for annual credit losses and prepayment rates of 0.25% and 7.5%, respectively. 65

  • Page 68
    ...of its recorded warranty and product maintenance liabilities and adjusts the amounts as necessary. Changes in Textron's warranty and product maintenance liability in 2003 and 2002 are as follows: (In millions) December 28, 2002 $ 295 150 (151) 10 $ 304 $ 251 165 (156) 35 $ 295 Accrual at beginning...

  • Page 69
    ... Systems, Industrial and Finance. See Note 1 regarding Textron's reorganization of its segments in 2003 and Textron's principal markets, and pages 12 and 13 for products of the segments. Textron's reportable segments are strategically aligned based on the manner in which Textron manages its various...

  • Page 70
    .... ** Property, plant and equipment are based on the location of the asset. Revenues include sales to the U.S. Government of $1.4 billion in 2003 and $1.3 billion in 2002 and $1.2 billion in 2001. Revenues also include sales to DaimlerChrysler, primarily through the Automotive Trim business, of...

  • Page 71
    (Unaudited) 2002 Q4 $ 675 $ 521 $ 616 $ 536 620 516 575 588 457 404 447 429 793 654 750 706 154 136 142 140 $ 2,699 $ 2,231 $ 2,530 $ 2,399 $ 69 $ 69 $ 56 $ 40 43 31 66 59 17 10 21 18 44 23 40 34 52 24 23 23 225 157 206 174 (65) (42) (24) (28) 160 115 182 146 - - - 15 (38) (19) (30) (32) (26) (26) ...

  • Page 72
    (Dollars in millions, except per share amounts and where otherwise noted) 2002 $ 2,348 2,299 1,737 2,903 572 $ 9,859 $ 2,235 3,175 1,650 2,706 584 $ 10,350 $ 169 376 72 163 118 898 (135) 763 25 - (114) (108) (173) (26 367 2.64 2.62 1.30 24.87 53.17 32.49 42.16 2001 $ 2,243 3,043 1,679 4,330 681...

  • Page 73
    (1,2) (1,2 (1,2) Chairman, President and Chief Executive Officer Textron Inc. (2) President Jacobsen President and Chief Operating Officer Textron Financial Corporation President Textron Fastening Systems (2) Executive Vice President and Chief Financial Officer Textron Inc. President E-Z-GO ...

  • Page 74
    ... and $1.40) are traded only on the New York Stock Exchange. Investor Relations 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, visit the Textron web site at www. textron.com, call (888) TXT-LINE or send...

  • Page 75
    ... sale of fixed assets of $62 million, less capital expenditures of $301 million. (5) Textron's calculation of ROIC is as follows: (Dollars in millions) 2003 2002 $ 364 135 (25) (28) 3 (27) 26 7 67 28 $ $ 550 3,670 1,823 (264) (255) 485 387 $ 5,846 9.4% ROIC Income Income before cumulative effect...

  • Page 76
    Textron 2003 Annual Report Textron Inc. 40 Westminster Street Providence, Rhode Island 02903 (401) 421-2800 www.textron.com