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Washington, DC 20549

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Commission file number 1-5480

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40 Westminster Street, Providence, RI 02903
401-421-2800
(Address and telephone number of principal executive offices)

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  X  No

Common stock outstanding at July 27, 2002 - 138,121,000 shares

2.

5.

TEXTRON INC.
Notes to Condensed Consolidated Financial Statements (unaudited)

The condensed consolidated financial statements should be read in conjunction with the financial statements included in Textron's Annual Report on Form 10-K for the year ended December 29, 2001. The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of Textron's consolidated financial position at June 29, 2002, and its consolidated results of operations and cash flows for each of the respective three and six month periods ended June 29, 2002 and June 30, 2001. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. In January 2002, management responsibility for certain divisions was reorganized to reflect the sale of the Automotive Trim business in December 2001. In connection with this change, Textron has reorganized under the following new segments: Aircraft, Fastening Systems, Industrial Products, Industrial Components and Finance. All prior period data has been appropriately reclassified.

Textron accounts for its interest in unconsolidated joint ventures and subsidiaries under the equity method of accounting. For the three and six month periods ended June 29, 2002, Textron's equity in income (loss) from unconsolidated joint ventures and subsidiaries totaled $(2) million and $(3) million, respectively. For the three and six month periods ended June 30, 2001, Textron's equity in income (loss) from unconsolidated joint ventures and subsidiaries totaled $(4) million and $(7) million, respectively.

On December 30, 2001, Textron adopted SFAS No. 142, "Goodwill and Other Intangible Assets", which requires companies to stop amortizing goodwill and certain intangible assets with indefinite useful lives, and requires an annual review for impairment. Upon adoption, Textron discontinued the amortization of goodwill. Goodwill amortization expense for the three and six months ended June 30, 2001 was $22 million and $44 million, respectively, net of income taxes.

Under SFAS No. 142, Textron was required to test all existing goodwill for impairment as of December 30, 2001, on a "reporting unit" basis. The reporting unit represents the operating segment unless, at businesses one level below that operating segment (a "component"), discrete financial information is prepared and is reviewed by segment management, in which case such component is the reporting unit. In certain instances, components of an operating segment have been aggregated and deemed a single reporting unit based on similar economic characteristics of the components. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value. Fair values were primarily established using a discounted cash flow methodology. When available, comparative market multiples were used to corroborate discounted cash flow results.

6.

As a result of this impairment review of goodwill, Textron recorded an after-tax transitional impairment charge of $488 million ($561 million, pre-tax), which is reported in the caption "Cumulative effect of change in accounting principle, net of income taxes". The after-tax impairment charge relates to the following segments: $274 million in Industrial Products; $111 million in Industrial Components; $88 million in Fastening Systems; and $15 million in Finance. For Industrial Products, the primary factor resulting in the impairment charge was the difficult economic environment in the telecommunication industry which has experienced a significant decline in demand. This decline has resulted in lower sales and operating margins than originally anticipated with the acquisitions of InteSys and Tempo businesses. For Industrial Components and Fastening Systems, the primary factor was the decline in demand in certain industries in which these segments operate due to the economic slowdown. The Finance segment's impairment charge is in its franchise finance division and is primarily the result of decreasing loan volumes and an unfavorable securitization market. No impairment charge was appropriate for these segments under the previous goodwill impairment accounting standard, which Textron applied based on undiscounted cash flows.

A summary of changes in goodwill during the six months ended June 29, 2002 is as follows:

Textron also adopted the remaining provisions of SFAS No. 141, "Business Combinations" on December 30, 2001. For goodwill and intangible assets reported in connection with acquisitions made prior to July 1, 2001, these provisions broaden the criteria for recording intangible assets separate from goodwill and require that certain intangible assets that do not meet the new criteria, such as assembled workforce and customer base, be reclassified into goodwill. Upon adoption of these provisions, intangible assets totaling $42 million, net of related deferred taxes, were reclassified into goodwill within the Industrial Products segment.

7.

The effect on earnings of the transitional impairment charge and of excluding goodwill amortization expense is presented below:

For the three months ended March 30, 2002, the net loss after adjustment for the retroactive cumulative effect of change in accounting principle was $431 million, resulting in diluted loss per share of $3.04 and basic loss per share of $3.07.

All of Textron's acquired intangible assets are subject to amortization and are comprised of the following as of June 29, 2002:

Note 4. Textron Finance-Obligated Mandatorily Redeemable Preferred Securities of Finance Subsidiary Holding Solely Junior Subordinated Debentures

Litchfield Financial Corporation (Litchfield, a subsidiary of Textron Financial Corporation) was acquired by Textron Financial Corporation during 1999. Prior to the acquisition, a trust sponsored and wholly-owned by Litchfield issued $26 million of Series A Preferred Securities to the public. The trust subsequently invested the proceeds in $26 million aggregate principal amount of Litchfield's newly issued 10% Series A Junior Subordinated Debentures, due 2029. The debentures are the sole asset of the trust. The preferred securities were recorded by Textron Financial Corporation at fair value of $29 million as of the acquisition date. The amounts due to the trust under the subordinated debentures and the related income statement amounts have been eliminated in Textron's consolidated financial statements.

The preferred securities accrue and pay cash distributions quarterly at a rate of 10% per annum. The trust's obligation under the preferred securities are fully and unconditionally guaranteed by Litchfield. The trust will redeem all of the outstanding preferred securities when the debentures are paid at maturity on June 30, 2029, or otherwise become due. Litchfield will have the right to redeem 100% of the principal plus accrued and unpaid interest on or after June 30, 2004. As a result of its acquisition of Litchfield, Textron Financial Corporation has agreed to make payments to the holders of the preferred securities, when due, to the extent not paid by or on behalf of the trust or subsidiary.

In 1996, a trust sponsored and wholly-owned by Textron issued preferred securities to the public (for $500 million) and shares of its common securities to Textron (for $15.5 million), the proceeds of which were invested by the trust in $515.5 million aggregate principal amount of Textron's newly issued 7.92% Junior Subordinated Deferrable Interest Debentures, due 2045. The debentures are the sole asset of the trust and are callable at Textron's sole discretion. The proceeds from the issuance of the debentures were used by Textron for the repayment of long-term borrowings and for general corporate purposes. The amounts due to the trust under the debentures and the related income statement amounts have been eliminated in Textron's consolidated financial statements.

The preferred securities accrue and pay cash distributions quarterly at a rate of 7.92% per annum. Textron has guaranteed, on a subordinated basis, distributions and other payments due on the preferred securities. The guarantee, when taken together with Textron's obligations under the debentures and in the indenture pursuant to which the debentures were issued and Textron's obligations under the Amended and Restated Declaration of Trust governing the trust, provides a full and unconditional guarantee of amounts due on the preferred securities. The preferred securities are mandatorily redeemable upon the maturity of the debentures on March 31, 2045, or earlier to the extent of any redemption by Textron of any debentures. The redemption price in either such case will be $25 per share plus accrued and unpaid distributions to the date fixed for redemption.

9.

Note 6. Contingencies

Textron is subject to legal proceedings and other claims arising out of the conduct of Textron's business, including proceedings and claims relating to private transactions, government contracts, production partners, product liability, employment, and environmental, safety and health matters. Some of these legal proceedings and claims seek damages, fines or penalties in substantial amounts or remediation of environmental contamination. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in Textron's suspension or debarment from U.S. Government contracting for a period of time. On the basis of information presently available, Textron believes that these proceedings and claims will not have a material effect on Textron's financial position or results of operations.

The components of accumulated other comprehensive loss, net of related income taxes, are as follows:

Comprehensive income (loss) is summarized below:

The dilutive effect of convertible preferred shares and stock options was 2,113,000 and 2,356,000 shares for the three month periods ending June 29, 2002 and June 30, 2001 and 1,789,000 and 2,169,000 shares for the six month period ended June 29, 2002 and June 30, 2001, respectively. Income available to common shareholders used to calculate both basic and diluted earnings per share approximated net income for both periods.

10.

Note 10. Special Charges

Special charges are comprised of the following:

14.

15.

Revenues decreased to $2.8 billion in the second quarter 2002 from $3.3 billion in the second quarter 2001, primarily due to the divestitures of Automotive Trim (Trim), Turbine Engine Components Textron (TECT) and a number of other businesses that contributed $504 million to the decrease and softer sales in several of Textron's segments, partially offset by higher sales in the Aircraft segment, as more fully discussed below. Net income was $105 million in the second quarter 2002, compared to $126 million in the second quarter 2001. Diluted earnings per share were $0.74 in the second quarter 2002, compared to $0.88 in the second quarter 2001. These results included an after-tax gain of $9 million in the second quarter 2002 from transactions related to the divestiture of Trim.

In January 2002, Textron reorganized management responsibility for several divisions which were previously reported in the Automotive and Industrial Products segments into the newly created Industrial Components segment. The Industrial Components segment includes the Fluid and Power divisions, the former Automotive divisions and TECT. In addition, management responsibility for Textron Lycoming was transferred to the Aircraft segment.

Effective December 30, 2001, Textron adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". Under this Statement, goodwill and certain assets with indefinite lives are no longer amortized and must be tested for impairment annually. Textron also adopted the remaining provisions of SFAS No. 141 "Business Combinations" on December 30, 2001, which requires intangible assets that do not meet the new criteria set by this Statement to be classified as goodwill upon adoption. Amortization will continue to be recorded on other intangible assets not classified as goodwill. In the second quarter 2001, pro forma net income excluding amortization of goodwill was $148 million, or $1.04 per diluted share. To reflect the adoption of SFAS No. 142 and the fact that the Company does not include amortization of goodwill in its internal evaluation of segment performance, the Company has recast its segment data for comparability by reclassifying goodwill amortization from segment profit in prior periods.

During the second quarter 2002, Textron recorded an after-tax transitional goodwill impairment charge of $488 million, which is reported in the caption "Cumulative effect of change in accounting principle, net of income taxes" retroactive to the beginning of fiscal year 2002. This after-tax charge relates to the following segments: $274 million in Industrial Products; $111 million in Industrial Components; $88 million in Fastening Systems; and $15 million in Finance. For Industrial Products, the primary factor resulting in the impairment charge was the difficult economic environment in the telecommunication industry which has experienced a significant decline in demand. This decline has resulted in lower sales and operating margins than originally anticipated with the acquisitions of the InteSys and Tempo businesses. For Industrial Components and Fastening Systems, the primary factor was the decline in demand in certain industries in which these segments operate due to the economic slowdown. The Finance segment's impairment charge is in its franchise finance division and is primarily the result of decreasing loan volumes and an unfavorable securitization market. No impairment charge was appropriate for these segments under the previous goodwill impairment accounting standard, which Textron applied based on undiscounted cash flows.

16.

Segment profit of $232 million in the second quarter 2002 decreased $112 million from $344 million in the second quarter 2001 primarily due to a reduced contribution related to sales volume, the divestitures of Trim and TECT, which contributed $41 million to the decrease, an increase in reserves for receivables and inventory and low volume manufacturing inefficiencies, partially offset by the benefit of restructuring activities, as more fully discussed below. Segment profit represents a measurement used by Textron to evaluate operating performance. Segment profit for manufacturing segments does not include interest, certain corporate expenses, special charges and gains and losses from the disposition of significant business units. The measurement for the Finance segment includes interest income, interest expense and distributions on preferred securities of Finance subsidiary trust, and excludes special charges. For a reconciliation of segment profit to income from operations before income taxes and distributions on preferred securities of subsidiary trusts, see Note 12 of Textron's financial statements.

The Aircraft segment's revenues and profit increased $65 million and $27 million, respectively.

• Cessna's revenues increased $61 million primarily due to higher used aircraft sales volume of $44 million, higher Citation business jet volume of $31 million, higher pricing of $17 million (net of $6 million in lower resale prices for trade-in aircraft) and higher spare parts and service sales of $5 million. These were partially offset by $34 million in lower sales volume of single engine piston aircraft and engines that have been affected by the weak economy. Profit increased $24 million primarily as a result of the higher pricing of $17 million, a benefit of $8 million from the changes in sales volume and a favorable mix, and lower engineering expenses of $6 million, partially offset by start-up costs of $7 million related to the new Sovereign business jet.

• Bell Helicopter's revenues increased $4 million as higher revenues of $25 million from the U.S. Government, primarily on the V-22 program and the H-1 upgrade contracts, were partially offset by lower commercial sales of $13 million and lower foreign military sales of $8 million. Sales in the commercial business primarily reflected lower commercial aircraft sales of $41 million, partially offset by higher commercial spares and service sales of $23 million and higher sales of kits used to modernize older model Huey helicopters of $9 million. Bell's profit increased $3 million primarily as a result of 2001 expenses of $8 million associated with outsourcing certain operations and higher profit of $6 million in its U.S. Government business, primarily on the V-22 contract, partially offset by lower profit of $14 million in its commercial business.

The lower profit of $14 million in Bell's commercial business primarily reflected reduced pricing of $15 million related to one commercial helicopter model. Additionally, profit was lower due to a reduced contribution of $5 million from the lower commercial aircraft sales, increased costs of $3 million as a result of production line changes, higher warranty expense of $3 million, lower income of $3 million from a joint venture partner related to the BA609 program, costs of $2 million required to reconfigure two test aircraft and other cost increases of $5 million. These decreases in profit were partially offset by lower product development expenses of $11 million associated with the BA609 program and a benefit of $8 million related to the higher sales of commercial spares and service and Huey kits.

17.

As authorized by an Acquisition Decision Memorandum signed by the Department of Defense in December 2001, the V-22 program continues to proceed at low-rate production levels. Under the low-rate production, Textron continues to manufacture aircraft which will subsequently be modified for engineering changes required by the Department of Defense. On August 1, 2002, Bell was awarded a modification to its contract for the next two lots, totaling twenty aircraft. The V-22 returned to flight operations on May 29, 2002 for extensive flight testing which is a prerequisite for returning to operational use.

The delays experienced in the V-22 program have also slowed the development and certification of the BA609 civil tiltrotor aircraft. Management believes that the V-22 should lead tiltrotor technology into the marketplace and is currently working with its joint venture partner, suppliers and customers in the BA609 program to adjust the planned program arrangements and schedule for these delays.

The Fastening Systems segment's revenues and profit decreased $20 million and $15 million, respectively. The revenue decrease was primarily due to the divestiture of non-core product lines of $13 million, customer price reductions of $8 million and lower sales volume of $6 million from depressed markets, partially offset by the favorable impact of foreign exchange of $7 million in its European operations. Profit decreased primarily due to low volume manufacturing inefficiencies, customer price reductions of $8 million and a reduced contribution of $4 million from lower sales, partially offset by the benefit of $7 million from restructuring activities and the favorable impact of a $7 million customer warranty issue in the second quarter 2001.

The Industrial Products segment's revenues and profit decreased $36 million and $53 million, respectively. Revenues decreased in most of the segment's businesses primarily due to lower sales volume of $54 million from depressed markets and the divestiture of non-core product lines of $7 million during 2001, partially offset by higher revenues of $22 million in the aerospace and defense business. Profit decreased primarily due to a reduced contribution of $32 million from lower sales volume, an increase of $28 million in reserves for receivables and inventory and the nonrecurring impact of a gain of $5 million on the sale of a product line in 2001, partially offset by the benefit of $12 million from restructuring activities and higher contribution of $3 million from the higher aerospace and defense revenues.

The Industrial Components segment's revenues and profit decreased $457 million and $57 million, respectively. The divestitures of Trim and TECT as well as several small product lines in 2001 contributed $484 million and $41 million to the decreases in revenues and profit, respectively. Excluding the divestitures, revenues increased $27 million while profit decreased $16 million. The revenue increase was primarily due to higher volume of $47 million at Kautex as a result of new product launches and a stronger automotive market, partially offset by lower volume of $17 million in the other industrial businesses as a result of soft markets and $7 million of customer price reductions. Excluding the divestitures, the profit decrease was primarily due to low volume manufacturing inefficiencies, the nonrecurring impact of a gain of $7 million on the sale of a product line in 2001 and customer price reductions of $7 million, partially offset by the benefit of $5 million from restructuring activities. Despite the higher sales, contribution margin was essentially unchanged as a result of product mix.

18.

The Finance segment's revenues and profit decreased $16 million and $14 million, respectively. Revenues decreased primarily due to lower finance charges of $24 million from a lower average yield (7.6% in the second quarter 2002 compared to 9.5% in the second quarter 2001) reflecting a lower interest rate environment, partially offset by higher fee income of $6 million and higher operating lease revenue of $2 million. Profit decreased primarily due to a higher provision for loan losses of $13 million and higher operating expenses of $8 million, partially offset by higher interest margin of $6 million. The increase in the provision for losses reflected higher net charge-offs of $11 million, primarily related to small business finance revolving credit loans and exited businesses due to continued weak economic conditions, and the strengthening of the allowance for losses. Although management believes it has made adequate provision for anticipated losses, realization of finance assets remains subject to uncertainties. Subsequent evaluations of nonperforming assets, in light of factors then prevailing, including economic conditions, may require additional increases in the allowance for losses of such assets. The current economic conditions will likely put continued pressure on the performance of all finance receivable portfolios. Higher operating expenses were primarily due to higher legal and collection expenses of $5 million and higher expenses of $2 million related to growth in managed receivables.

Special charges and other costs related to restructuring for the second quarter 2002 were $26 million and $3 million, respectively, compared to $35 million and $13 million, respectively, in the second quarter 2001. The table below summarizes the special charges which include restructuring expenses associated a) with reducing overhead, and closing, consolidating and downsizing manufacturing facilities, b) corporate personnel reductions and c) consolidating operations and exiting non-core product lines.

Costs related to restructuring of $3 million in the second quarter 2002 and $13 million in the second quarter 2001 are included in segment profit. For the second quarter 2002, costs related to restructuring totaled $1 million each for Fastening Systems, Industrial Products and Industrial Components. For the second quarter 2001, costs related to restructuring totaled $8 million for Aircraft, $3 million for Industrial Components, $1 million for Fastening Systems, and $1 million for Industrial Products.

19.

Under the restructuring program (exclusive of Trim) Textron has reduced its workforce by approximately 5,900 employees through June 29, 2002, including approximately 2,100 in Industrial Products, 1,800 in Fastening Systems, 1,100 in Industrial Components, 700 in Aircraft and 200 in Finance and Corporate. The remaining workforce reduction of at least 1,600 employees should be substantially completed within the next twelve months. Textron expects a total reduction of at least 7,500, excluding Trim, representing approximately 13% of its global workforce since the restructuring was first announced. Through the consolidations, Textron is closing 80 facilities, including 36 manufacturing plants representing over 3.8 million square feet of manufacturing floor space. As of June 29, 2002, 60 facilities, including 28 manufacturing plants, have been closed primarily in the Industrial Components, Industrial Products and Fastening Systems segments.

Textron expects to incur total special charges and costs related to this restructuring program, excluding goodwill and e-business write-downs and Trim, of approximately $325 million, of which $191 million has been incurred as of June 29, 2002. Restructuring savings were $111 million for the first half 2002 and are expected to be at least $225 million in 2002 and $250 million in 2003.

Corporate expenses and other, net decreased $8 million, primarily due to the timing of expenditures related to transformation initiatives of $5 million and royalty income of $4 million in 2002 related to the divestiture of Trim.

Interest expense, net - decreased $15 million primarily due to the benefit of $9 million as a result of a lower level of average debt primarily as a result of the pay down of debt with the proceeds from the divestiture of Trim and the benefit of a lower interest rate environment and the receipt of $5 million for accumulated interest on the preferred shares that Collins & Aikman repurchased.

Income Taxes - The effective tax rate for the second quarter 2002 increased to 36.0% primarily due to the tax impact of the gain related to the divestiture of Trim. Excluding the impact of the gain, the effective tax rate was 31.5% compared to 35.2% in the second quarter 2001. The 3.7% decrease is primarily due to a decrease of 2.7% in the effective tax rate from the elimination of goodwill amortization under SFAS No. 142, which is primarily a non-tax deductible expense, and a favorable change in the tax law related to the deductibility of dividends paid on company stock held by an employee stock ownership plan that reduced the effective tax rate by 2.8% (1.5% of this reduction represents a nonrecurring benefit upon implementation of the new tax law). These were partially offset by an increase in the foreign tax rate of 2.3%.

Revenues decreased to $5.2 billion in the first half 2002 from $6.3 billion in the first half 2001, primarily due to the divestitures of Trim, TECT and a number of other businesses that contributed $962 million to the decrease and softer sales in most of Textron's segments, partially offset by higher sales in the Aircraft segment, as more fully discussed below. Income before cumulative effect of change in accounting principle, net of income taxes, was $162 million for the first half 2002, compared to $239 million in the first half 2001. Diluted earnings per share before cumulative effect of change in accounting principle, net of income taxes, were $1.14 in the first half 2002, compared to $1.67 in the first half 2001.

Textron recorded a net loss of $326 million in the first half of 2002, compared to net income of $239 million in the first half 2001. Net income for the first half 2002 included the cumulative effect of a change in accounting principle, net of income taxes of $488 million. In the first half 2001, pro forma net income excluding amortization of goodwill was $283 million, or $1.98 per diluted share.

20.

Segment profit of $393 million in the first half 2002 decreased $288 million from $681 million in the first half 2001 primarily due to a reduced contribution related to lower sales volume, the divestitures of Trim and TECT, which contributed $79 million to the decrease, an increase in reserves for receivables and inventory, and low volume manufacturing inefficiencies, partially offset by the benefit of restructuring activities, as more fully discussed below.

The Aircraft segment's revenues increased $90 million, while profit decreased $1 million.

• Cessna's revenues increased $107 million primarily due to higher used aircraft sales volume of $64 million, higher Citation business jet volume of $57 million, higher pricing of $36 million (net of $12 million in lower resale prices for trade-in aircraft) and higher spare parts and service sales of $9 million. These were partially offset by $54 million in lower sales volume of single engine piston aircraft and engines that have been affected by the weak economy. Profit increased $19 million primarily as a result of the higher pricing of $36 million, a benefit of $10 million from the changes in sales volume and a favorable mix and lower engineering expenses of $5 million, partially offset by start-up costs of $8 million related to the new Sovereign business jet, an increase in reserves for inventory of $7 million (including a write-down of $5 million for used aircraft valuations), a higher warranty reserve of $5 million related to piston aircraft engines, higher LIFO expense of $4 million and the impact of higher overhead rates.

• Bell Helicopter's revenues decreased $17 million as higher revenues of $34 million from the U.S. Government, primarily on the V-22 program and the H-1 upgrade contracts, were more than offset by lower foreign military sales of $26 million and lower commercial sales of $25 million. Sales in the commercial business primarily reflected lower commercial aircraft sales of $45 million, partially offset by higher commercial spares and service sales of $32 million. Bell's profit decreased $20 million primarily as a result of lower profit of $30 million in its commercial business, partially offset by 2001 expenses of $8 million associated with outsourcing certain operations and higher profit of $2 million in its U.S. Government business.

The lower profit of $30 million in its commercial business primarily reflected reduced pricing of $15 million related to one commercial helicopter model, increased reserves for international receivables of $10 million, a reduced contribution of $8 million from the lower commercial aircraft sales, lower income of $5 million from a joint venture partner related to the BA609 program, increased costs of $3 million as a result of production line changes, higher warranty expense of $3 million, costs of $2 million required to reconfigure two test aircraft and other cost increases of $5 million. These decreases in profit were partially offset by lower product development expenses of $18 million associated with the BA609 program and a benefit of $8 million related to the higher commercial spares and service sales.

The Fastening Systems segment's revenues and profit decreased $90 million and $49 million, respectively. The revenue decrease was primarily due to lower sales volume of $47 million from depressed markets, the divestiture of non-core product lines of $24 million, customer price reductions of $16 million and the unfavorable impact of foreign exchange of $3 million in its European operations. Profit decreased primarily due to low volume manufacturing inefficiencies, a reduced contribution of $23 million from the lower sales and customer price reductions of $16 million, partially offset by the benefit of $17 million from restructuring activities and the favorable impact of a $7 million customer warranty issue in the second quarter 2001.

21.

The Industrial Products segment's revenues and profit decreased $117 million and $83 million, respectively. Revenues decreased in most of the segment's businesses primarily due to lower sales of $147 million from depressed markets and the divestiture of non-core product lines of $15 million during 2001, partially offset by higher revenues of $35 million in the aerospace and defense business and higher pricing of $8 million. Profit decreased primarily due to a reduced contribution of $79 million from the lower sales volume, an increase of $37 million in reserves for receivables and inventory and the nonrecurring impact of a gain of $5 million on the sale of a product line in 2001, partially offset by the benefit of $29 million from restructuring activities, higher pricing of $8 million, higher contribution of $5 million from the higher aerospace and defense revenues and the favorable impact of $5 million from losses recorded in 2001 related to divested product lines.

The Industrial Components segment's revenues and profit decreased $927 million and $114 million, respectively. The divestiture of Trim and TECT as well as several small product lines in 2001 contributed $923 million and $79 million to the decreases in revenue and profit, respectively. Excluding the divestitures, revenues and profit decreased $4 million and $35 million, respectively. The revenue decrease was primarily due to lower volume of $37 million in the industrial businesses as a result of soft markets, customer price reductions of $14 million and the unfavorable impact of foreign exchange of $8 million, partially offset by higher sales volume of $53 million at Kautex primarily as a result of new product launches and a stronger automotive market. Excluding the divestitures, the profit decrease was primarily due to low volume manufacturing inefficiencies, customer price reductions of $14 million, a reduced contribution of $7 million from changes in sales volume and the nonrecurring impact of a gain of $7 million on the sale of a product line in 2001, partially offset by the benefit of $13 million from restructuring activities.

The Finance segment's revenues and profit decreased $42 million and $41 million, respectively. Revenues decreased primarily due to lower finance charges of $58 million from a lower average yield (7.7% in the first half 2002 compared to 9.8% in the first half 2001) reflecting a lower interest rate environment, partially offset by higher fee income of $11 million and higher operating lease revenue of $5 million. Profit decreased primarily due to a higher provision for loan losses of $33 million and higher operating expenses of $20 million, partially offset by higher interest margin of $11 million. The increase in the provision for losses reflects higher net charge-offs of $23 million, and the strengthening of the allowance for losses. Higher net charge-offs were primarily related to exited businesses, structured capital loans, small business finance revolving credit loans, and aircraft finance loans. During the first half of 2002, nonperforming assets increased $70 million to 3.06% of finance assets from 2.13% at December 29, 2001. This increase included a $37 million increase in syndicated bank loans and a $32 million increase in highly-collateralized aircraft loans. Nonperforming assets include non-accrual accounts that are not guaranteed by Textron Manufacturing, for which interest has been suspended, and repossessed assets. Higher operating expenses were primarily related to higher legal and collection expenses of $8 million, higher expenses of $6 million related to growth in managed receivables and higher operating lease depreciation of $3 million.

22.

Special charges and other costs related to restructuring for the first half 2002 were $36 million and $7 million, respectively, compared to $77 million and $16 million, respectively, in the first half 2001. The table below summarizes the special charges which include restructuring expenses associated a) with reducing overhead, and closing, consolidating and downsizing manufacturing facilities, b) corporate personnel reductions and c) consolidating operations and exiting non-core product lines.