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Aircraft Bell Helicopter Annual Report 1998 Consistent Growth 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 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 $9,683 $8,683 12% Operating income $1,040 $ 917 13% Income from continuing operations $ 443 $ 372 19% Common Share Data Earnings per share from continuing operations $ 2.68 $ 2.19 22% Dividends per share $ 1.14 $ 1.00 14% Key Performance Ratios Operating margin 10.7% 10.6% Return on average shareholders’ equity 19.6% 17.5% Return on invested capital 13.7% 13.4% Debt to total capital (Textron Manufacturing) 43% 25% 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%) 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: P 22 percent increase in earnings per share – our sixth consecutive year of double-digit increases, and our ninth consecutive year of income growth P 12 percent increase in revenue – our third successive year of double-digit growth P Return on equity of 19.6 percent P 13.7 percent return on invested capital P 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 These financial achievements are especially impressive when you years of earnings 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 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 standards when evaluating balance to be completed by mid-1999 — and spent $570 million on acquisi- 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” P Strategically “fit” with acquisitions that complement our existing businesses and meet our well- other Textron businesses defined financial requirements. P Offer clear, long-term It is important to note that by repurchasing shares prior to the actual 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 P Contribute to EPS for our shareholders. immediately, or have significant earnings Market-leading Businesses Fuel Growth 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, P Achieve economic profit within three years supported equally by strategic acquisitions and internal growth — a balance we plan to maintain going forward. P 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 on developing technology-driven, integrated solutions as we continue to Strategy for globalize this business and achieve sustained operating improvements. To Consistent Growth 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 relationships worldwide. excellent returns to 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 introduction of innovative products, penetration of new markets and six strategy of internal 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 Industrial segment will continue to lead the company through acquisitions, an operating management 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, outstanding performance and are positioned for significant expansion. solid performance. P 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. P 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 $1 billion and provides an important platform for the future. P The Golf, Turf-Care and Specialty Products group is maximizing internal synergies while generating a steady stream of new products. P In Industrial Components, new technologies are being developed that support rapidly-expanding end-user markets such as the data, voice and CORE REVENUES telecommunications industries. ($ in billions) In the Finance segment, Textron Financial Corporation (TFC) is a well- AIRCRAFT established niche player in the commercial finance market. 1998 marked AUTOMOTIVE INDUSTRIAL TFC’s 20th consecutive year of continuous earnings improvement. We are FINANCE $9.7 committed to this business and, going forward, will
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