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textron annual report 1998

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textron annual report 1998

  1. 1. Annual Report 1998 Consistent Growth
  2. 2. Textron delivers Consistent Growth by leveraging its present strengths, building upon its past accomplishments, and focusing on a clear vision for the future. Strengths Balanced Mix of Market-leading Businesses Innovative New Products and Technologies Disciplined Strategic Acquisition Process Continuous Improvement: Operating Philosophy that Delivers Results Strong Financial Discipline Global Capabilities that Meet Customers’ Needs Committed Workforce that is Partnering for Growth
  3. 3. Textron is a $10 billion, global, multi-industry company with market-leading businesses in Aircraft, Automotive, Industrial and Finance. Textron has achieved an impressive nine-year track record of consistent growth in earnings and superior returns to shareholders. Textron is committed to repeating this performance well into the future. Financial Highlights % 1998 1997 change Operating Results ($ in millions) Revenues $8,683 12% $9,683 Operating income $ 917 13% $1,040 Income from continuing operations $ 372 19% $ 443 Common Share Data Earnings per share from continuing operations $ 2.19 22% $ 2.68 Dividends per share $ 1.00 14% $ 1.14 Key Performance Ratios Operating margin 10.6% 10.7% Return on average shareholders’ equity 17.5% 19.6% Return on invested capital 13.4% 13.7% Debt to total capital (Textron Manufacturing) 25% 43% 1998 Revenues by Business Segment AIRCRAFT Aircraft: Commercial and military helicopters, $3,189 (33%) tiltrotor aircraft, business jets, single-engine piston aircraft and utility turboprops AUTOMOTIVE Automotive: Interior and exterior trim, fuel $2,405 (25%) systems and functional components INDUSTRIAL Industrial: Fastening systems, fluid and $3,722 (38%) power systems, golf, turf-care and specialty products, and industrial components FINANCE Finance: Diversified commercial financing $367 (4%)
  4. 4. To Our Shareholders: 1998 was a defining year for Textron. Against a backdrop of significant global economic volatility and industry consolidations, we continued to position the company for long-term success while delivering on our promise of consistent growth. We achieved: 22 percent increase in earnings per share – our sixth consecutive year of double-digit increases, and our ninth consecutive year of income growth 12 percent increase in revenue – our third successive year of double-digit growth Return on equity of 19.6 percent 13.7 percent return on invested capital Free cash flow of $348 million, up from $234 million in 1997 Most importantly, our shareholders realized total returns of Accomplishments 24 percent. Over the past nine years, total annual returns to Textron shareholders have averaged 26 percent, compared to 18 percent for Textron has reported the S&P 500. nine consecutive $2.68 years of earnings These financial achievements are especially impressive when you growth, including consider that in 1998, we acquired and integrated nine companies, double-digit gains announced two divestitures and put in place the leadership team to in each of the guide our company into the 21st century. last six years. Textron’s outstanding performance was driven by the underlying strengths of our businesses combined with strategic actions that demonstrate our discipline in making tough decisions in the best interests of our shareholders. Most significant among these was the decision to sell Avco Financial Services, which enables us to redeploy capital to higher-growth opportunities. Strategic Divestiture — Managing the Mix for Higher Growth In early 1999, we completed the sale of Avco to The Associates First $.70 Capital Corporation for $3.9 billion, arguably one of the most impor- tant strategic moves in Textron’s 75-year history. Driving this critical decision was the continued consolidation of the consumer finance industry, the high premiums placed on successful consumer finance franchises, and our realization that significant capital investment would have been needed to generate the required returns from Avco. 89 90 91 92 93 94 95 96 97 98 EPS From Continuing Operations
  5. 5. Acquisition Criteria We have started to redeploy the $2.9 billion in after-tax proceeds by allocat- ing 40% to share buyback and 60% to acquisitions. Between the announcement Textron applies rigorous of the deal in August and year-end, we repurchased 10.2 million shares — the financial and strategic balance to be completed by mid-1999 — and spent $570 million on acquisi- standards when evaluating acquisitions. Our philosophy tions. At our present pace, we expect full redeployment of this capital by 2000. is to “buy good businesses Our disciplined approach to acquisitions has served us well over the past and make them better.” five years, and our rigorous criteria will be our guidepost as we intensify Key Criteria: activity in 1999. We will maintain a keen focus on making strategic, “bolt-on” Strategically “fit” with acquisitions that complement our existing businesses and meet our well- other Textron businesses defined financial requirements. It is important to note that by repurchasing shares prior to the actual Offer clear, long-term growth prospects while closing of the transaction, our debt-to-capital ratio and return on equity strengthening Textron’s were temporarily inflated. Return on invested capital, which is not affected market leadership by leverage, is a more consistent measure and will therefore become our positions primary benchmark for how effectively we invest capital and create value Contribute to EPS for our shareholders. immediately, or have Market-leading Businesses Fuel Growth significant earnings growth potential Our established goal of 8-11 percent top-line growth continues to be one of the key drivers of our performance. In 1998, revenues increased 12 percent, Achieve economic profit supported equally by strategic acquisitions and internal growth — a balance within three years we plan to maintain going forward. Have the potential to Last year, our company spent $1.1 billion on nine acquisitions. We expect reach or exceed to sustain this level of acquisition activity through 2001, complemented by 15% ROIC aggressive internal growth focused on developing innovative products and technologies, and penetrating new markets. Our Aircraft segment delivered a 5 percent increase in revenue and 8 percent improvement in operating profit, reflecting the continued strength of Cessna Aircraft. The introduction of four new aircraft highlights the power of Cessna’s internal growth strategy, a cornerstone to this segment’s future success. Bell Helicopter continues to invest in the development of break- through tiltrotor technology, which promises to be a key growth driver early in the next century. Thanks to its impressive array of new products and tech- nologies, the Aircraft segment now enjoys an unprecedented backlog of $5.9 billion – an indicator of the tremendous future that lies ahead. Automotive posted a strong year, with revenue increasing 13 percent and operating profit up 19 percent, led by Kautex’s outstanding growth and improving margins in our trim business. Looking ahead, our focus remains 2
  6. 6. Strategy for on developing technology-driven, integrated solutions as we continue to Consistent Growth globalize this business and achieve sustained operating improvements. To meet our objectives in this very challenging environment, we will work to Textron actively manages further expand our presence in higher-growth market segments through its business mix to deliver strategic partnerships, selected acquisitions and by leveraging key customer consistent growth and excellent returns to relationships worldwide. shareholders. The Industrial segment achieved an impressive 17 percent growth in revenues and 19 percent increase in operating profit, resulting from the A carefully implemented strategy of internal introduction of innovative products, penetration of new markets and six investment, acquisitions, strategic acquisitions in the U.S. and Europe which strengthened our divestitures and joint geographic, product and customer balance. As we look to the future, the ventures — combined with an operating management Industrial segment will continue to lead the company through acquisitions, process that focuses on new products and operational synergies supported by our global capabilities. results — positions our The four groups within the Industrial segment contributed to 1998’s company for sustained, solid performance. outstanding performance and are positioned for significant expansion. Textron Fastening Systems, this segment’s flagship group, is the global leader in its industry and is targeted to double in size over the next five years. The Fluid and Power Systems group reached an important milestone in 1998 with the acquisition of David Brown Group plc, which propelled the group’s annualized revenues to $1 billion and provides an important platform for the future. The Golf, Turf-Care and Specialty Products group is maximizing internal synergies while generating a steady stream of new products. In Industrial Components, new technologies are being developed that support rapidly-expanding end-user markets such as the data, voice and CORE REVENUES telecommunications industries. ($ in billions) In the Finance segment, Textron Financial Corporation (TFC) is a well- AIRCRAFT AUTOMOTIVE established niche player in the commercial finance market. 1998 marked INDUSTRIAL TFC’s 20th consecutive year of continuous earnings improvement. We are FINANCE $9.7 committed to this business and, going forward, will strategically invest in $8.3* growth opportunities. TFC will maintain its focus on developing business in 8-11% target faster-growing niche markets while sustaining its excellent operating perfor- mance and strong credit quality. 14% Anticipating increased global economic volatility, we have never been $4.5 more confident that our balanced, diverse mix of market-leading businesses 1992 1998 2003 is a strategic advantage that will continue to benefit our shareholders year Target after year, in a variety of economic conditions. Our performance in 1998 is a * Including non-core businesses, 1992 revenues were $8.3 billion. Grey area represents those busi- testimony to this strength. nesses that were divested between 1992 and 1998. 3
  7. 7. Financial Goals It is indeed a challenging time, and we have taken our contingency planning efforts very seriously. Our systematic, disciplined multi-year Setting and achieving planning process, comprehensive Y2K program and Euro strategy are ambitious financial goals is examples of how we are actively preparing for future events to ensure fundamental to Textron’s management process. consistent performance. In 1998, we continued to Seamless Leadership Transition deliver on our five financial targets: In 1998, we successfully completed our internal leadership transition, affirm- ing the company’s well-defined succession planning process. President and Double-Digit Earnings Chief Operating Officer John Janitz and I are dedicated to the vision estab- per Share Growth lished for the company in 1993, and to the principles of operating excellence Performance: Double-digit gains in each of the last six and continuous improvement that have become a way of life at Textron. years, 22% in 1998 One of my first priorities after becoming CEO was to create the Executive Annual Revenue Growth Leadership Team, comprised of the top 10 leaders at Textron. In today’s rapidly of 8-11% evolving business environment, it is imperative that we make decisions quickly Performance: 14% annual and in complete alignment with the company’s strategic direction. The forma- growth rate in core revenues over last six years, 12% tion of this group signals the increased teamwork and cooperation we expect increase in 1998 from every person in the organization to more effectively leverage our Operating Margins strengths and achieve the efficiencies demanded in today’s marketplace. Exceeding 12% People Make the Difference Performance: 10.7% in 1998, up from 9.2% in 1992 A company is only as strong as the performance of its people. Through the diligence and dedication of our 64,000 employees, Textron has been able to ROIC Exceeding 15% realize its impressive, nine-year record of achievement while building the Performance: 13.7% in 1998, up from 11% in 1992 foundation for future growth. As the global business environment contin- ues to evolve, success will require more ingenuity, speed and commitment Debt-to-Capital Ratio in Mid-30% Range than ever before. Our people provide the competitive edge that will drive Performance: 43% in 1998 Textron to achieve its vision and earn its place among the finest companies in the world. Special Thanks After nine years with Textron, Jim Hardymon retired this past January. Jim made a tremendous contribution to Textron. Through his leadership, we developed an operating discipline and a company-wide focus on business fundamentals, which are essential to the foundation of our operations management process and our focus on quarterly earnings improvement. Together, we established a vision, a management team and a record of performance that will serve us well for years to come. 4
  8. 8. Looking Ahead Vision As we approach the new millennium, Textron is a company poised for greatness. Textron’s Vision is to be: We are confident that we will deliver another year of solid, double-digit revenue One of the World’s Best and earnings-per-share growth in 1999. Managed Companies Our strategy is clear. We have a mix of businesses with significant global growth potential. Our management team is strong. Our leadership transition is Excellent Managers of Shareholder complete. Importantly, we have the infrastructure and processes in place to Resources help us realize our goals. Underlying all of these critical elements is our relentless commitment A Multi-industry to continuous improvement and operating excellence. With a strong Company with Global Leadership Positions in balance sheet and the additional financial resources from the sale of Avco, Each of Our Businesses we are very well-positioned to pursue opportunities that support Textron’s long-term growth. I look forward to leading Textron into the next century. Our company has never been stronger, our people never more committed. Together with your support and confidence, we will continue to grow our company, build futures for our people and add value for our shareholders. $776 Total Return to Shareholders $440 $100 Sincerely, 89 90 91 92 93 94 95 96 97 98 (year-end value of $100 invested at year-end 1989) Lewis B. Campbell Textron: 26% average annual return Chairman and Chief Executive Officer S&P 500: Index 18% average annual return 5
  9. 9. Actively managing the mix... 1992 1993 1994 1995 ($ in millions) $850 $320 $190 $310 ( pro forma revenues) ACQUISITIONS Aircraft Automotive Industrial Industrial Cessna Aircraft . . . . . . . . . .$770 Acustar Plastics . . . . . . . . . .$320 Avdel plc, U.K. . . . . . . . . . . .$180 Elco Industries . . . . . . . . . . .$260 Automotive ORAG International, Ltd, Friedr. Boesner GmbH, Switzerland . . . . . . . . . . . . . .$10 Germany . . . . . . . . . . . . . . . . .$50 Van Dresser . . . . . . . . . . . . . .$50 Industrial Fairmount Hydraulics . . . . . .$10 Wolverine . . . . . . . . . . . . . . . .$20 Cessna Aircraft Acustar Plastics Avdel plc Elco Industries $40 $840 ( pro forma revenues) DIVESTITURES Industrial Industrial Textron Filtration Systems sold Homelite Textron sold to to ESCO Electronics Deere & Co. Corporation Systems and Components Textron Lycoming Turbine Engine sold to AlliedSignal, Inc. $629 $741 $885 $914 INTERNAL INVESTMENT Research and Research and Research and Research and Development . . . . . . . . . . .$430 Development . . . . . . . . . . .$514 Development . . . . . . . . . . .$611 Development . . . . . . . . . . .$656 Capital Expenditures . . . . . .$199 Capital Expenditures . . . . . .$227 Capital Expenditures . . . . . .$274 Capital Expenditures . . . . . .$258 JOINT VENTURES 6
  10. 10. ...to deliver consistent growth. 1996 1997 1998 TOTAL $490 $695 $1,020 30 Acquisitions $4,900 Automotive Automotive Automotive Since 1992, Textron has acquired Washer Systems business Kautex Group, Germany . . . .$500 Midland Industrial 30 market-leading businesses of Valeo Wiper Systems Plastics, U.K. . . . . . . . . . . . . .$80 Kaywood Products Corp. . . . . .$5 totaling $3.9 billion in revenues. Ltd., U.K. . . . . . . . . . . . . . . . . .$20 Industrial General Rubber Industrial Because of the tremendous Ransomes plc, U.K. . . . . . . .$240 Goods, U.K. . . . . . . . . . . . . . . .$20 Klauke, Germany . . . . . . . . . .$40 Sükosim, Germany . . . . . . . . .$60 organic growth achieved during Industrial Valois Industries, Burkland Inc. . . . . . . . . . . . . .$20 Ring Screw Works . . . . . . . .$190 this time period, these businesses France . . . . . . . . . . . . . . . . . .$400 Mapri Industries, S.A., Peiner Umformtechnik now represent over $4.9 billion in Xact Products . . . . . . . . . . . . .$20 Brazil . . . . . . . . . . . . . . . . . . . .$90 GmbH, Germany . . . . . . . . . .$40 revenues, or 51 percent of The Bunton Company . . . . . .$10 Maag Pump Systems, David Brown Textron today. Switzerland and Group plc, U.K. . . . . . . . . . . .$370 Maag Italia SpA, Italy . . . . . . .$60 Datacom Technologies . . . . .$10 Finance Systran . . . . . . . . . . . . . . . . . .$10 Business Leasing Group . . . .$20 Valois Industries Kautex Ransomes plc David Brown Group plc $170 $1,590 $2,020 8 Divestitures $4,700 Systems and Components Insurance Industrial During the last seven years, Textron Aerostructures sold Paul Revere Corporation sold to Speidel Textron sold to Hermann Textron has divested eight to Carlyle Group Provident Companies, Inc. Hirsch USA, Inc. businesses totaling $4.7 billion Textron Fuel Systems sold to in revenues. Woodward Governor Company Finance Textron agrees to sell Avco Financial Services to The Associates First Capital Corporation. Sale completed January 1999 $888 $976 $1,088 $6,121 Internal Invsmt. Research and Research and Research and Research and Development . . . . . . . . . . . .$576 Development . . . . . . . . . . . .$602 Development . . . . . . . . . . . .$613 Development . . . . . . . . . . .$4,002 Capital Expenditures . . . . . . .$312 Capital Expenditures . . . . . . .$374 Capital Expenditures . . . . . . .$475 Capital Expenditures . . . . .$2,119 2 Joint Ventures Aircraft Textron enters into strategic joint Bell Helicopter Textron ventures that expand global and Agusta of Italy capabilities, add new markets Industrial Textron Fastening Systems and customers, and complement and Taiwan’s San Shing existing product lines. Hardware Co. Ltd. 7
  11. 11. aircraft Bell Helicopter New Technologies Bell Helicopter is the lead- ing helicopter manufacturer in the world because of its unparalleled product reliability and responsive customer service. But to stay number one in this competitive industry, Bell must stay at the forefront of new technology. Bell Bell Helicopter is employing new tiltrotor technology in its commercial Bell Agusta BA 609 Commercial Helicopter and military Bell Boeing V-22 tiltrotor aircraft. These aircraft will meet the Product Line needs of air travelers around the world by combining the speed and range of a fixed-wing aircraft with the flexibility of a helicopter. Bell 206B To our customers in search and rescue, oil exploration and government support roles, the BA 609 offers cost-effective, point-to-point transportation and excellent passenger comfort. These benefits are also attracting foreign Bell 206L-4 government orders, particularly in remote areas of the world where ground transportation is difficult. We have nearly 70 commitments from over 40 cus- tomers around the globe for this aircraft, scheduled for first delivery in 2002. Bell 407 The BA 609 program is a joint partnership with Agusta, Italy’s leading helicopter manufacturer. Agusta complements Bell’s strengths with its European marketing, engineering and manufacturing capabilities. Bell 427 In 1999, we will begin shipments of the military V-22 to the United States Marines. We expect to deliver 53 aircraft to the military over the next five Bell 430 years and more than 458 aircraft over the next 15 years, for a total contract value to Bell and Boeing of $15 billion. Bell continues to build its leadership position in the commercial helicopter Bell 412 industry, most recently with the introduction of the Bell 427, a light-twin helicopter that incorporates many of the same features found on the highly successful 407 — reliability, performance and value. Customers have placed BA 609 over 70 orders for the 427, scheduled for first delivery in 1999. TOTAL AIRCRAFT (dollars in millions) 1998 1997 % CHANGE 4% 6% $3,189 $3,025 5% REVENUES 65% 8% $ 338 $ 313 8% OPERATING INCOME 3% Bell Helicopter Geographic 2% 10.6% 10.3% OPERATING MARGIN Revenue by Destination 11% 1% 8
  12. 12. Bell Helicopter’s military V-22 and commercial BA 609 tiltrotor aircraft have the potential to redefine the way we fly. The Bell 427, the newest member in Bell’s family of commercial helicopters, is well equipped for a variety of applications including executive and commuter transport, cargo missions and emergency medical service. 9
  13. 13. aircraftCessna Aircraft New Products With a record backlog of $4 billion — a level that exceeds twice the company’s annual aircraft delivery rate — Cessna Aircraft continues to enjoy unprecedented growth and market accep- Cessna Citation Product Line tance. Recognized as the worldwide leader in the light- and mid-size business jet industry, Cessna will deliver its 3,000th Citation in 1999 — almost twice as Citation CJ1 many aircraft as any of its competitors. Cessna earned this leadership by offering a broad line of high-quality, reliable Citation business jets to meet customers’ needs and by providing factory-direct Citation CJ2 support through company-owned Citation Service Centers. In 1998, Cessna expanded its family of business jets from six models to eight with the announcement of two all-new aircraft — the Citation CJ2 and Citation Bravo the Citation Sovereign. Cessna also announced the Citation CJ1 as the suc- cessor to the popular CitationJet, and the Citation Ultra Encore as the next Citation Ultra generation of the Ultra, the best-selling business jet of the ’90s. Encore Combining proven systems with jet performance, the Citation CJ2 offers higher speeds, greater range and a larger cabin while maintaining the desirable charac- Citation Excel teristics of its predecessor, the CitationJet. First deliveries are expected in 2001. The Citation Sovereign is an all-new, mid-size business jet that delivers greater capability and comfort than its competitors, at a traditional mid-size price. The Sovereign combines versatility and excellent performance with many of the Citation VII same features that have made other members of the Citation family so popular. With extraordinarily positive market response to these two new products, Cessna has received more than 117 orders valued at $775 million. Citation Sovereign Cessna’s strategy of developing reliable, quality products extends to its family of single-engine piston aircraft. In 1996, Cessna officially reentered this important market segment. With five models already in production, Cessna is once again the number one single-engine piston aircraft manufacturer in the world. Citation X TOTAL AIRCRAFT (dollars in millions) 3% 1998 1997 % CHANGE 7% $3,189 $3,025 5% REVENUES 75% $ 338 $ 313 8% OPERATING INCOME 1% Cessna Aircraft 2% 10.6% 10.3% OPERATING MARGIN Geographic Revenue by Destination 11% 1% 10
  14. 14. A new addition to Cessna’s product lineup, the Citation Sovereign offers the largest cabin of any traditional mid-size business jet, great versatility and excellent performance. 11
  15. 15. automotive Proprietary Technologies. Growth Outpacing the Market. Global Balance. With its growth exceeding the automotive market, Textron Automotive Company (TAC) increased its revenues 13 percent in 1998. A cornerstone of this growth is customer satisfaction, evidenced by numerous awards received from DaimlerChrysler, General Motors, Ford, Audi and Volkswagen for quality, on-time delivery and technology. Achievements like these require a strategy that delivers results despite the challenges of a modest 2-3 percent overall automotive unit growth rate, customer pricing pressures and supplier consolidation. TAC meets these challenges by: • Developing proprietary technologies where the growth outpaces the market, Textron Automotive Company by Product Line • Enhancing our customer, geographic and product balance, illustrated by our recent acquisition of U.K.-based Midland Industrial Plastics, TRIM (62%) • Supplying complete systems, such as cockpit modules and fuel systems. Germany-based Kautex, the leader in the worldwide plastic fuel tank market, FUEL SYSTEMS drives TAC toward continued global growth. Kautex incorporates a co-extruded, and FUNCTIONAL COMPONENTS plastic-forming technology that creates a high integrity, lightweight and more (38%) environmentally friendly fuel tank. Kautex expects production to increase from 5.5 million units in 1998 to 8.1 million units in 2003. TAC’s Trim division is achieving success through innovative, proprietary technology evidenced by its 1998 Materials Category Award presented by the Automotive Division of the Society of Plastics Engineers. Trim’s Thermoplastic Urethane (TPU) instrument panel cover material offers a lighter weight and softer touch product over conventional instrument panel coverings. Used in DaimlerChrysler’s new ‘98 LH Series, instrument panels incorporating this material are sequenced to our customer as complete modular systems. Within the Functional Components Group, McCord Winn incorporates its award-winning innovative RITec™ technology, which integrates the fan shroud, washer fluid and radiator overflow reservoirs into a single molded unit. AUTOMOTIVE 15% (dollars in millions) 1998 1997 % CHANGE 24% $2,405 $2,127 13% REVENUES 55% $ 179 $ 150 19% OPERATING INCOME Automotive Geographic Revenue 6% 7.4% 7.1% OPERATING MARGIN by Destination 12
  16. 16. Textron Automotive Company develops break- through technologies to achieve growth. Innovations include a better-performing instrument panel, a RITec™ fan shroud that saves space under the hood and a more environmentally friendly plastic fuel tank. (clockwise, from top) 13
  17. 17. industrial Global Acquisitions. Innovative Products and Processes. Best Practices. Over the last three years, Textron’s Industrial segment has grown at a strong 14 percent rate, expanded into 19 new countries and significantly increased its customer base while improving operating margins. Textron achieves this impressive growth by developing innovative new products and processes, employing best practices and making strategic acquisitions. Acquisitions are central to our Industrial growth strategy, given the tremen- Cumulative Industrial Revenues from dous opportunities within our target markets. Since 1992, we have acquired Acquisitions 20 market-leading industrial businesses that complement our product lines, ($ in millions) extend our global reach and offer opportunities for synergies in four targeted $1,698 areas for growth. Within Textron Fastening Systems (TFS), a $2 billion leader in the engineered fastening systems market, recent acquisitions include Ring Screw Works, a $200 million supplier of automotive specialty threaded fasteners and winner of DaimlerChrysler’s Platinum Pentastar Award in 1997 and 1998. Ring $1,095 Screw brings an excellent reputation with the automotive OEMs and superb manufacturing processes. Germany-based Sükosim and Peiner — also $885 acquired in 1998 — offer market leadership and greater access to the European automotive and industrial markets. TFS is also partnering with Taiwan’s San Shing Hardware Co. Ltd., which adds a low-cost manufacturing base and a wide array of competitively priced products to TFS’ global capabilities. $312 Fluid and Power Systems, a $1 billion business focused on mechanical $158 power, fluid handling and motion control products, is building a strong global $27 $27 platform with the acquisition of David Brown, a leading manufacturer of 92 93 94 95 96 97 98 power transmission and fluid handling systems. In Golf, Turf-Care and Specialty Products, newly acquired Ransomes of the U.K. adds reputable brands like Cushman, Ryan, Steiner and Brouwer to our well-recognized brand names of E-Z-GO, Bunton and Jacobsen. Within Industrial Components, Germany-based Klauke and U.S.-based Datacom Technologies expand Greenlee’s product line, global reach and capabilities within the electrical equipment and cable testing markets. 14
  18. 18. David Brown products include industrial gears, fluid handling pumps and mechanical and hydraulic transmission systems used in a wide range of applications — from industrial machinery, such as conveyors (pictured here), to transportation applications, such as rail traction gears. Sükosim offers innovative stamping capabilities to its customers in the European automotive and construction markets. 15
  19. 19. ...industrial But acquisitions are just the first step. Our ability to share best practices and develop innovative products and processes is a core competency — one that will continue to fuel growth in the years ahead. Together, we are: Sharing best practices through groups like the TFS Electronics Team — a multinational, cross-divisional group focused on how to best serve our global customers in the electronics industry. This teaming process capitalizes on Industrial Revenues by the entire TFS organization and allows us to more effectively develop new Business Group business. Avdel Cherry’s established relationship with Intel led to Elco being named one of two licensed fastener manufacturers on Intel’s next-generation TEXTRON FASTENING SYSTEMS microprocessor. (47%) Developing innovative products and processes that meet customers’ FLUID and POWER SYSTEMS expectations. Within Turf-Care and Specialty Products, our facilities operate (17%) as centers of excellence by focusing on core technologies, products or GOLF, TURF-CARE processes. At our Johnson Creek, WI facility, for example, we excel in rotary and SPECIALTY PRODUCTS mowing technology supported by an innovative paperless manufacturing (19%) process. Throughout our entire Turf-Care and Specialty Product organization, INDUSTRIAL we are also consolidating product lines, engineering and manufacturing to COMPONENTS (17%) achieve greater operating efficiencies. Through process improvement and innovative thinking, we now offer a full range of successful products that service our customers from tee to green. Supporting each of these growth efforts is our intense focus on operational excellence and continuous improvement. Employees mea- sure their performance in cost, quality, speed, greatness, people and market share, as well as shareholder and customer satisfaction. This focus on operational excellence, combined with internal growth initiatives and a disciplined acquisition process, positions the Industrial segment to deliver strong double-digit annual revenue growth over the next five years. INDUSTRIAL 3% (dollars in millions) 1998 1997 % CHANGE 25% $3,722 $3,181 17% REVENUES 64% $ 410 $ 346 18% OPERATING INCOME 1% Industrial Geographic Revenue 3% 11.0% 10.9% OPERATING MARGIN by Destination 3% 1% 16
  20. 20. Avdel Cherry’s strong customer relationship with Intel, combined with superb manufacturing capabilities at Elco, led to new business at Elco, now one of two licensed fastener manufacturers on Intel’s next-generation Pentium® II processor. Turf-Care and Specialty Products’ Johnson Creek facility excels in rotary mowing technology and employs an innovative paperless manufacturing process to achieve success. 17
  21. 21. finance Experience. Service. Knowledge. 1998 marks Textron Financial Corporation’s (TFC’s) 20th consecutive year of continuous earnings improvement — an impressive record for a business known for delivering innovative commercial financing solutions. TFC’s success begins with a long-standing commitment to provide competi- Textron Financial Corporation Total Receivables - $3.6 billion tive financing to Textron customers for the purchase of Bell helicopters, Cessna aircraft, E-Z-GO golf cars, and Jacobsen and Ransomes turf-care equipment. REVOLVING CREDIT Since the mid-eighties, this success has extended into transactions outside of (28%) Textron’s family of products, which now represent two-thirds of TFC’s portfolio. AIRCRAFT Our strategy focuses on finding under-served niche markets and designing (21%) innovative, customized lending solutions. In TFC’s Golf Finance division, for EQUIPMENT example, we offer industry-specific knowledge necessary for an effective loan, (25%) as well as the flexibility to create a package that fits customers’ business needs. GOLF (16%) Our lending experience extends to a broad range of industries — from truck- ing and commercial printing to franchise businesses and timeshare resorts. The OTHER (10%) product knowledge we possess within TFC’s 15 divisions is unparalleled. Our ISO 9001-certified information systems technology helps us keep pace with rapid changes in the marketplace. This fast response time and our outstanding customer service are attributes that our competitors strive to replicate. At TFC, our reputation as a solid business institution gives us access to a large network of financial institutions with which we partner to meet the financial needs of a wide range of customers. And with strong credit quality as the fundamental tenet in our successful lending strategy, we are well posi- tioned to achieve many more years of excellent performance. $69.6 20 Consecutive Years of Income Growth ($ in millions) FINANCE (dollars in millions) 1998 1997 % CHANGE $ 367 $ 350 5% REVENUES $3,612 $3,069 18% RECEIVABLES 5% $ 113 $ 108 OPERATING INCOME OPERATING MARGIN 30.8% 30.9% $1.4 16.2% 16.8% RETURN ON EQUITY 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 18
  22. 22. Product expertise and quality service are corner- stones to every TFC lending transaction — from the financing of golf courses and related Textron products to the refinancing of a Dunkin’ Donuts® franchise. 19
  23. 23. educating the work force of tomorrow Textron’s commitment to excellence extends beyond our businesses Textron’s to our charitable giving program. In this area, we direct special attention Charitable Giving to educating the work force of tomorrow. EDUCATION for the ADVANCEMENT of Successful partnerships include the Textron Chamber of Commerce WOMEN and MINORITIES Academy, a Rhode Island-based school-to-work program for at-risk youths. (55%) HEALTHCARE Adopt-a-School tutors from Bell Helicopter are volunteering at a Fort Worth, (10%) Texas high school, while employees from Textron Automotive Company CULTURE AND are helping students from the city of Detroit compete in a national robotics THE ARTS (8%) contest. OTHER In the coming year, as a member of the Welfare-to-Work Partnership, (27%) Textron will build on the successful example of Cessna’s model 21st Street Campus to create additional opportunities for individuals seeking employment. 20
  24. 24. 1998 financial report Business Segment Data 22 Management’s Discussion and Analysis 23 Report of Management, Report of Independent Auditors 33 Consolidated Financial Statements 34 Quarterly Data 56 Selected Financial Information 57 Management Team 58 Textron Business Directory 60 1998 TEXTRON ANNUAL REPORT 21
  25. 25. Business Segment Data For a description of the businesses comprising each segment, see pages 60 through 62. Operating Revenues Operating Income Income Margins 1998 1997 1996 1998 1997 1996 1998 1997 1996 (In millions) Aircraft $3,025 $2,593 $ 313 $ 261 10.3% 10.1% $3,189 $ 338 10.6% Automotive 2,127 1,627 150 146 7.1 9.0 2,405 179 7.4 Industrial 3,181 2,959 346 300 10.9 10.1 3,722 410 11.0 Finance 350 327 108 96 30.9 29.4 367 113 30.8 $8,683 $7,506 917 803 10.6% 10.7% $9,683 1,040 10.7% Gain on sale of division – – 97 Special charges – – (87) Corporate expenses and other – net (140) (115) (127) Interest expense – net (129) (148) (160) Income from continuing operations before income taxes* $ 648 $ 540 $ 763 * Before distributions on preferred securities of subsidiary trust. Prior year amounts have been reclassified to conform to the current year’s segment presentation. 1998 Revenues – $9.7 billion 1998 Operating Income – $1.040 billion Identifiable Assets Capital Expenditures Depreciation (In millions) 1998 19971996 1998 19971996 1998 AIRCRAFT AIRCRAFT 19971996 $338 (33%) $3,189 (33%) Aircraft $ 0 $ 0$ 0 $ 0 AUTOMOTIVE AUTOMOTIVE $ 0$ 0 0% $179 (17%) $2,405 (25%) 0%0% Automotive 0 INDUSTRIAL INDUSTRIAL 00 0 $410 (39%) $3,722 (38%) 00 0 00 FINANCE FINANCE Industrial 0 $113 (11%) $367 (4%) 00 0 00 0 00 Finance 0 0 0 0 0 0 0 0 0 Corporate, including investment in discontinued operation in 1996 and 1995 0 0 0 0 0 0 0 0 0 Eliminations (0) (0) – – – – (0) – – $0 $0 $0 $0 $0 $0 $0 $0 $0 Prior year amounts have been reclassified to conform to the current year’s segment presentation. 1998 TEXTRON ANNUAL REPORT 22
  26. 26. Management’s Discussion and Analysis Results of Operations Textron Inc. 1998 vs. 1997 Revenues $9,683 $8,683 Diluted earnings per share from continuing operations for 1998 were $2.68 per $7,506 share, up 22% from the 1997 amount of $2.19. Income from continuing operations in 1998 of $443 million was up 19% from $372 million for 1997. Revenues increased 12% to $9.7 billion in 1998 from $8.7 billion in 1997. Net income including the results of AFS which is a discontinued operation was $608 million vs. $558 million in 1997. Operating income of Textron’s four business segments aggregated $1.040 billion in 1998, up 13% from 1997, as a result of continued improved financial results across all 96 97 98 business segments. 11% 16% 12% Total segment margins increased to 10.7% in 1998 from 10.6% in 1997. Earnings $2.68 per Share* Corporate expenses and other – net decreased $13 million due primarily to 1997 costs $2.19 associated with the termination of interest rate swap agreements no longer qualifying as $1.78 accounting hedges and 1997 litigation expenses related to a divested operation. The higher Textron manufacturing interest expense – net – $160 million in 1998 vs. $129 million in 1997 – was due to higher average debt resulting from the incremental debt associated with acquisitions and share repurchases, partially offset by the payment of debt with proceeds in 1997 from the divestiture of Paul Revere. 96 97 98 24% 23% 22% *Income from continuing operations - diluted 1997 vs. 1996 Diluted earnings per share from continuing operations for 1997 were $2.19, up 23% from the 1996 amount of $1.78. Income from continuing operations in 1997 of $372 million was up 22% from $306 million for 1996. Revenues increased 16% to $8.7 billion in 1997 from $7.5 billion in 1996. Net income in 1997 was $558 million versus $253 million in 1996, which reflected the impact of a $245 million loss from a discontinued operation (Paul Revere) that was disposed of early in 1997. Operating income of Textron’s four business segments aggregated $917 million in 1997, up 14% from 1996, as a result of continued improved financial results in the Aircraft, Industrial and Finance segments. Operating income in the Automotive segment was essentially unchanged. Total segment margins decreased to 10.6% in 1997 from 10.7% in 1996, due primarily to lower margins associated with the Kautex acquisition. Corporate expenses and other – net increased in 1997 by $25 million due to 1997 litiga- tion expenses related to a divested operation, higher 1997 expenses related to organiza- tional changes and higher support costs related to international expansion, and 1997 costs associated with the termination of interest rate swap agreements no longer qualify- ing as accounting hedges. The lower Textron manufacturing interest – $129 million in 1997 vs. $148 million in 1996 – was due to lower 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. Aircraft $3,189 Aircraft Revenues $3,025 $2,593 1998 vs. 1997 The Aircraft segment’s revenues increased $164 million (5%) and income before special charges increased $25 million (8%) due to higher results at Cessna Aircraft. Cessna Aircraft’s revenues increased $301 million, primarily as a result of higher sales of business jets, single-engine aircraft and Caravans. Income increased as a result of the higher sales combined with improved results in the single-engine piston aircraft business. 96 97 98 7% 17% 5% 1998 TEXTRON ANNUAL REPORT 23
  27. 27. Bell Helicopter’s revenues decreased $137 million, due primarily to the completion in Operating $338 Income $313 1997 of the Canadian Forces contract ($180 million), partially offset by higher commercial spares sales ($23 million) and higher revenues to the U.S. Government ($29 million). The $261 higher U.S. Government revenues were due to higher revenues on the V-22 program and the Huey and Cobra upgrade contracts ($140 million), partially offset by lower foreign military sales and lower revenues on other U.S. Government aircraft and spares ($111 million). Bell’s income decreased due to the lower revenues and a change in product mix, primarily resulting from lower margins on U.S. Government contracts. This unfavorable impact was partially offset by the benefit on the 609 program from a joint venture with an 96 97 98 international partner and a lower level of product development expense in 1998. 10% 20% 8% Under the joint venture agreement, Bell has received $100 million in cash and its partner has assumed a significant portion of product development effort for joint ven- ture aircraft. The benefit from the joint venture contribution in the fourth quarter 1998 ($10 million) has been recognized in relation to total projected product development spending. The quarter also benefited by $7 million for development spending that will be reimbursed by the venture partner. 1997 vs. 1996 The Aircraft segment’s revenues and income increased $432 million (17%) and $52 million (20%), respectively, due primarily to higher results at Cessna Aircraft. Bell Helicopter’s revenues increased $27 million primarily as a result of higher U.S. Government and commercial aircraft sales ($91 million) and higher revenues on the Huey upgrade contract for the U.S. Marines ($28 million), partially offset by lower revenues on the V-22 program ($80 million) and lower foreign military sales ($23 million). Bell’s com- mercial aircraft sales included the completion of the three-year contract for model 412 helicopters with the Canadian Forces. Its income increased slightly as a result of the high- er revenues, partially offset by higher product development expenses primarily related to its new commercial aircraft models. Cessna Aircraft’s revenues increased $405 million as a result of higher sales of business jets, including the Citation X and Bravo. Its income increased as a result of the higher revenues, partially offset by an increased level of expenses due to the intro- duction and support of new products. Automotive Automotive $2,405 Revenues 1998 vs. 1997 $2,127 The Automotive segment’s revenues increased $278 million (13%), while income before $1,627 special charges increased $29 million (19%). The revenue increase was due to higher volume at Kautex associated with capacity expansion in North America and higher sales at the Trim operations, due primarily to increased Chrysler production (which was depressed in 1997 by a strike at Chrysler in the second quarter of 1997) and the contribution from acquisitions. These revenue increases were partially offset by the 96 97 98 impact of a strike at General Motors in 1998 and the impact of customer price reductions. 6% 31% 13% The increase in income reflected the above factors and improved performance at Trim. 1997 vs. 1996 Operating $179 Income The Automotive segment’s revenues increased $500 million (31%), primarily as a result of $150 the first quarter 1997 acquisition of Kautex, the third quarter 1997 acquisition of the $146 General Rubber Goods division of Pirelli Tyres, Ltd., 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 replace- ment business and new model launches. Income approximated last year’s level, reflecting the above factors, increased costs related to new model launches and the impact of a 96 97 98 restructuring effort which began in the second quarter 1997. 8% 3% 19% 1998 TEXTRON ANNUAL REPORT 24
  28. 28. Industrial Industrial $3,722 Revenues 1998 vs. 1997 $3,181 $2,959 The Industrial segment’s revenues and income before special charges increased $541 mil- lion (17%) and $64 million (18%), respectively. These increases reflect the contribution from acquisitions, primarily Ransomes, Ring Screw Works, David Brown, Sükosim and Peiner, and internal growth combined with ongoing margin improvement. Internal growth was driven by higher sales in the Golf and Turf and Fluid & Power Systems businesses. These benefits were partially offset by the divestitures of Speidel in the fourth quarter 96 97 98 1997 and Fuel Systems in the second quarter 1998, the impact of a strike at General Motors 18% 8% 17% on Textron Fastening Systems and a one-month strike at a Textron Turf-Care & Specialty Products plant in 1998. Margins, although slightly higher than last year, were adversely impacted by the lower margins of acquisitions, the divestiture of higher margin businesses Operating $410 Income and unfavorable contract adjustments related to certain Industrial Component products. $346 $300 1997 vs. 1996 The Industrial segment’s revenues increased $222 million (8%). Income increased $46 million (15%), reflecting higher sales from both acquisitions and organic growth, and improved operating margins, principally in industrial components and fastening systems. The revenue and income increases were due primarily to higher sales in the fastening systems business ($143 million), including the second quarter 1996 acquisition of Textron 96 97 98 20% 15% 18% Industries S.A.S. In addition, results benefited from the 1997 acquisitions of Maag Pump Systems, Maag Italia, S.p.A., and Burkland Holding, Inc., an increase in demand for aero- space components and higher revenues on the sensor fuzed weapon contract, partially offset by the third quarter 1996 divestiture of Textron Aerostructures and lower revenues in marine and land systems products. Finance Revenues $367 Finance $350 $327 1998 vs. 1997 The Finance segment’s revenues increased $17 million (5%), as a result of a higher level of average receivables ($3.190 billion in 1998 vs. $3.128 billion in 1997) and an increase in residual, prepayment and portfolio servicing income. Income increased $5 million (5%) as the benefit of the higher revenues and a lower provision for losses was partially offset by higher expenses related to growth in managed receivables and growth in businesses with higher operating expense ratios. Both years included a gain of approximately $3 million 96 97 98 5% 7% 5% on the securitization of Textron-related receivables. 1997 vs. 1996 Operating $113 Income $108 The Finance Segment’s revenues increased $23 million (7%), due to a higher level of $96 average receivables ($3.128 billion in 1997 vs. $3.036 billion in 1996) and increases in other income, due primarily to the securitization of $401 million of Textron-related receivables and increased syndication fee income. Income increased $12 million (13%), 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. 96 97 98 Special charges 9% 13% 5% To enhance the competitiveness and profitability of its core businesses, Textron recorded a pretax charge of $87 million in the second quarter 1998 ($54 million after-tax or $0.32 per diluted share). This charge was recorded to cover asset impairments ($28 million), severance costs ($40 million), and other exit-related costs ($9 million) associated with its decision to exit several small, nonstrategic product lines in Automotive and the former Systems and Components divisions which did not meet Textron’s return criteria, and to realign certain operations in the Industrial segment. The pretax charges associated with the Automotive and Industrial segments were $25 million and $52 million, respectively, and also included the cost of a litigation settlement of $10 million associated with the Aircraft segment. 1998 TEXTRON ANNUAL REPORT 25
  29. 29. Discontinued Operations Discontinued Operations In August 1998, Textron announced that it had reached an agreement to sell Avco Financial Services (AFS) to Associates First Capital Corporation. The sale was completed on January 6, 1999. AFS has been classified as a discontinued operation for all periods. 1998 vs. 1997 Income from discontinued operations of $165 million was $21 million lower than 1997’s income from discontinued operations of $186 million. The decrease was due to (a) lower earnings in the U.S. Finance business as a result of an increase in the provision for receivables (receivables increased in 1998 while receivables decreased in 1997) and a decrease in the gain on sales of receivables, (b) lower earnings in Hong Kong due to a weakening economy and (c) the unfavorable impact of foreign exchange rates primarily in Australia and Canada. This unfavorable impact was partially offset by an increase in insurance earnings due to improved loss experience and an increase in capital gains. 1997 vs. 1996 Income from discontinued operations of $186 million was $6 million lower than 1996’s income from discontinued operations of $192 million. The decrease reflects first quarter 1996 income of $16 million related to Paul Revere which was disposed of in early 1997. Income from Avco Financial Services increased $10 million reflecting the benefit from the gains on the sale of certain underperforming branches, a higher level of finance receivables outstanding, improved independent insurance operations, and a decrease in the average cost of borrowed funds. These benefits were offset by an increase in the pro- vision for net credit losses, a decrease in the yields on finance receivables, and higher operating expenses related to international expansion and the start-up of centralized sales processing centers in the U.S. and Canada. Liquidity & The liquidity and capital resources of Textron’s (Textron or the Company) operations are best understood by separately considering its independent borrowing groups (Textron Capital Resources Manufacturing and Textron Finance). Textron Manufacturing consists of Textron’s manu- facturing businesses, whose financial results are a reflection of the ability to manage and finance the development, production and delivery of tangible goods and services. Textron Finance business involves commercial financing activities. Textron Finance’s financial results are a reflection of its ability to provide financial services in a competitive mar- ketplace, at the appropriate pricing, while managing the associated financial risks. The fundamental differences between each borrowing group’s activities result in different measures used by investors, rating agencies and analysts. Operating Cash Flows Textron’s financial position continued to be strong at the end of 1998. During 1998, cash flows from operations was the primary source of funds for operating needs and capital expenditures of Textron Manufacturing. Operating activities have generated increased cash flow in each of the past three years. The Statement of Cash Flows for each borrow- ing group detailing the changes in cash balances are on page 36. Textron Manufacturing’s operating cash flow includes dividends received from Textron Finance and from AFS which is a discontinued operation. In addition, 1998 operating cash flow includes $100 million received from a joint venture partner. Beginning in late 1997, the methodology used to determine the amount of dividends to be paid to Textron Manufacturing changed from payments based on a percentage of net income to payments based on Textron Finance maintaining a leverage ratio of 6.5 to 1. Now that Textron’s finance operations no longer include consumer finance, this leverage ratio will be re-evaluated in 1999. Financing Borrowings have historically been a secondary source of funds for Textron Manufacturing and, along with the collection of finance receivables, are a primary source of funds for Textron Finance. Both Textron Manufacturing and Textron Finance have 1998 TEXTRON ANNUAL REPORT 26

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