TEXTRON INC — Annual Report 2004

Feb 24, 2005

10-K 1 a05-3904_110k.htm 10-K

*UNITED STATES SECURITIES AND EXCHANGE COMMISSION*

*Washington, D.C. 20549*

*Form 10-K*

ý
For the fiscal year ended January 1, 2005
Commission File Number 1-5480

*Textron Inc.*

(Exact name of registrant as specified in charter)

Delaware	05-0315468
(State or other
jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
40 Westminster Street,
Providence, R.I. 02903 (401) 421-2800
(Address and telephone
number of principal executive offices)
Securities registered
pursuant to Section 12(b) of the Act:

Title of Class	Name of Each Exchange on Which Registered
Common Stock – par value 12 1 / 2 ¢
(135,156,872	New York
Stock Exchange
shares outstanding at February 12, 2005);	Pacific
Stock Exchange
Preferred Stock Purchase Rights	Chicago
Stock Exchange
$2.08 Cumulative Convertible Preferred
Stock,	New York
Stock Exchange
Series A – no par value
$1.40 Convertible Preferred Dividend Stock,
Series B	New York
Stock Exchange
(preferred only as to dividends) – no par
value

| Securities
registered pursuant to Section 12(g) of the Act: |
| --- |
| None |

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 ý . No o .

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2.) Yes ý . No o .

The aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of Textron’s most recently completed second fiscal quarter, July 3, 2004, was approximately $8,024,486,784. Textron has no non-voting common equity.

Portions of Textron’s Proxy Statement for its Annual Meeting of Shareholders to be held on April 27, 2005, are incorporated by reference in Part III of this Report.

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*PART I*

Item 1. Business of Textron

| | Textron Inc. is a global multi-industry company with more than 44,000
employees and operations in nearly 40 countries. Our business was founded in
1923 and reincorporated in Delaware on July 31, 1967. Today, we leverage our
global network of aircraft, industrial and finance businesses to provide
customers with innovative solutions and services. |
| --- | --- |
| Business Segments | |
| | We operate in five business segments – Bell, Cessna, Fastening
Systems, Industrial and Finance. Our business segments include operations
that are unincorporated divisions of Textron Inc. or its subsidiaries and
others that are separately incorporated subsidiaries. A description of the
business done and intended to be done by each of our business segments is set
forth below. Financial information by business segment and geographic area
appears in Note 18 of the consolidated financial statements on pages 67 through
69 of this Annual Report on Form 10-K. |
| Bell Segment | The Bell segment is composed of Bell Helicopter and Textron Systems. |
| | Bell Helicopter |
| | Bell Helicopter is one of the largest suppliers of helicopters,
tiltrotors, and helicopter-related spare parts and services in the
world. Bell Helicopter manufactures
for both military and commercial applications. Bell Helicopter’s revenues
accounted for approximately 16%, 18% and 16% of our total revenues in 2004,
2003 and 2002, respectively. |
| | Bell Helicopter supplies advanced military helicopters and support
(including spare parts, support equipment, technical data, trainers, pilot
and maintenance training, component repairs, aircraft modifications,
contractor maintenance and field and product support engineering services) to
the U.S. Government and to military customers outside the U.S. Bell
Helicopter is one of the leading suppliers of helicopters to the U.S.
Government and, in association with The Boeing Company, the only supplier of
military tiltrotors. Bell Helicopter is teamed with The Boeing Company to
develop, produce and support the V-22 Osprey tiltrotor aircraft for the U.S.
Department of Defense. Tiltrotor aircraft are designed to provide the
benefits of both helicopters and fixed-wing aircraft. Through Production Lot
9, the U.S. Government has issued contracts for 83 production V-22 aircraft.
An expanded V-22 flight test program is ongoing in preparation for the
Operational Evaluation (“OPEVAL”) that is scheduled to commence in the first
half of 2005. |
| | Bell Helicopter is nearing completion of the engineering and
manufacturing development phase of the H-1 upgrade program for the U.S.
Marine Corps. This program will produce an advanced attack and a utility
model helicopter, the AH-1Z and UH-1Y, respectively, both of which are
designed to have 84% parts commonality, which meets the U.S. Government’s
intent to reduce operational life cycle costs. In December 2003, Bell
Helicopter received a contract from the U.S. Government to furnish six UH-1Y
aircraft and three AH-1Z aircraft for Low Rate Initial Production (“LRIP”)
Lot 1. This contract includes an option to acquire additional aircraft for
LRIP Lot 2, and this option may be exercised in early 2005. |
| | Bell Helicopter is also a leading supplier of commercially certified
helicopters to corporate, offshore petroleum exploration and development, utility,
charter, police, fire, rescue and emergency medical helicopter operators. |
| | Bell Helicopter is a member of Bell/Agusta Aerospace Company, L.L.C.,
a joint venture with Agusta, a leading helicopter manufacturer based in
Italy, for the design, manufacture, sale and customer support of a new medium
twin-engine helicopter, the AB139, and a commercial tiltrotor, the BA609. The
AB139 received IFR certification from the Italian airworthiness authorities
in June 2003, and received U.S. Federal Aviation Administration certification
in December 2004. Ground run testing of the BA609 commenced in December 2002
and the aircraft achieved its maiden flight on March 7, 2003, in helicopter
mode. The aircraft is now undergoing manufacturing modification to add equipment
and upgraded software for additional flight testing to be conducted beginning
in 2005. |

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| | Bell Helicopter and AgustaWestland North America Inc. formed the
AgustaWestlandBell Limited Liability Company (“AWB LLC”) in January 2004 for
the joint design, development, manufacture, sale, customer training and
product support of the US101 helicopter and certain variations and
derivatives thereof, to be offered and sold to departments or agencies of the
U.S. Government. On January 28, 2005, Lockheed Martin, with AWB LLC as its
principal subcontractor, was selected to design, develop, manufacture and
support the Presidential helicopter for the U.S. Marine Corps Marine 1
Helicopter Squadron (VXX) Program. Bell Helicopter will assemble the
production aircraft at its Assembly & Integration Center in Amarillo,
Texas. |
| --- | --- |
| | Bell’s helicopter business competes against a number of competitors
based in the United States and other countries, and its spare parts business competes
against numerous competitors around the world. Competition is based primarily
on price, quality, product support, performance, reliability and reputation. |
| | Textron Systems |
| | Textron Systems is a primary supplier to the defense and aerospace
markets. Its principal strategy and focus are to address the emphasis being
placed by the United States Department of Defense on network centric warfare
and the leveraging of advances in information technology by focusing on the
development and production of networked sensors, weapons and the associated
algorithms and software. Textron Systems manufactures “smart” weapons,
airborne and ground-based surveillance systems, aircraft landing systems,
hovercraft, search and rescue vessels, armored vehicles and turrets,
reciprocating piston aircraft engines, and aircraft and missile control
actuators, valves and related components. Textron Systems is involved in
supplying the U.S. Air Force with some of its premier smart weapons as prime
contractor for the Sensor Fuzed Weapon (“SFW”) and is a subcontractor to The
Boeing Company for tail actuation systems on the Joint Direct Attack Munition
(“JDAM”). Textron Systems is a tier one supplier of unattended ground sensors
and intelligent munitions systems for the U.S. Army’s Future Combat System.
While Textron Systems sells most of its products directly to U.S. customers,
it also sells an increasing number of products in over 35 other countries
through a growing, global network of sales representatives and distributors. |
| | Actuation products for the aerospace, defense and industrial markets
are sold under trade names of HR Textron and APCO. Specialty marine, land
vehicle, and turret products are sold under the trade names of Textron Marine
& Land Systems and Cadillac Gage. The recognized need for armored
vehicles for secure transport of United States and other armed forces has
resulted in increased demand for the highly protected and cost effective
vehicles offered by Textron Systems. Weapons, surveillance, and landing systems
are sold under the Textron Systems name. Reciprocating piston aircraft
engines are sold under the Lycoming name directly to general aviation
airframe manufacturers and in the aftermarket through domestic and
international distributors. Lycoming also is the exclusive supplier of
engines for Cessna’s product line of new single engine aircraft. |
| | Textron Systems competes against a number of competitors in the United
States and other countries on the basis of technology, performance, price,
quality and reliability, product support, installed base and reputation. |
| Cessna Segment | Based on unit sales, Cessna Aircraft Company is the world’s largest
manufacturer of general aviation aircraft. Cessna currently has four major
product lines: Citation business jets, single engine turboprop Caravans,
Cessna single engine piston aircraft and after-market services. Revenues in
the Cessna segment accounted for approximately 24%, 23% and 31% of our total
revenues in 2004, 2003 and 2002, respectively. |
| | The family of business jets currently produced by Cessna includes the
Citation CJ1, Citation CJ2, Citation CJ3, Citation Bravo, Citation Encore,
Citation XLS, Citation Sovereign and Citation X. The Citation X is the
world’s fastest business jet with a maximum operating speed of Mach .92. By
the end of 2004, Cessna had delivered its 4,250th business jet. Under
development is the entry-level Citation Mustang, which will be built at
Cessna’s plant in Independence, Kansas. First customer deliveries of the
Citation CJ1+, an upgrade to the CJ1, are scheduled to commence in 2005, and
customer deliveries of the Citation CJ2+, an upgrade to the CJ2, and the
Mustang are scheduled to commence in 2006. |
| | The Cessna Caravan is the world’s best selling utility turboprop.
Through the end of 2004, more than 1,478 Caravans have been sold by Cessna
since the first Caravan was delivered in 1985. Caravans are offered in four
models: the Grand Caravan, the Super Cargomaster, the Caravan Floatplane and
the Caravan 675. Caravans are used in the U.S. primarily to carry overnight
express package shipments, and also are used for personal transportation.
International uses of Caravans include commercial transportation,
humanitarian flights, tourism and freight. |

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| | Cessna now has six models in its single engine piston product line:
the four-place 172 Skyhawk, 172 Skyhawk SP, 182 Skylane and Turbo 182
Skylane, and the six-place 206 Stationair and T206 Turbo Stationair. In 2004,
certification of the Garmin 1000 (“G1000”) avionics package was completed for
all models other than the 172 Skyhawk, and aircraft deliveries commenced with
the G1000 installed. Certification of the G1000 avionics package for the
Skyhawk is expected in 2005. By the end of 2004, Cessna had delivered 5,582
single engine piston aircraft since deliveries were restarted in 1997,
marking the delivery of the 150,000th single engine aircraft since Cessna
aircraft production began. Reliability and product support are significant
factors in the sale of these aircraft. |
| --- | --- |
| | The Citation family of aircraft is currently supported by a total of
10 Citation Service Centers owned and operated by Cessna, along with
authorized independent service stations and centers in more than 16 countries
throughout the world. In 2004, Cessna opened new Citation Service Centers in
Orlando, Florida, and Wichita, Kansas, increasing Cessna’s hangar capacity
for aircraft service by 42%. The Wichita Citation Service Center is the
world’s largest general aviation maintenance facility. The Cessna-owned
Service Centers provide customers 24-hour service and maintenance. Cessna
Caravan and single engine piston customers receive product support through
independently owned service stations and 24-hour spare parts support through
Cessna. |
| | Cessna markets its products worldwide primarily through its own sales
force, as well as through a network of authorized independent sales
representatives, depending upon the product line. Cessna has several
competitors in the business jet market. Cessna’s aircraft compete with other
aircraft that vary in size, speed, range, capacity, handling characteristics
and price. |
| | Cessna engages in the business jet fractional ownership sales through
a joint venture with TAG Aviation USA, Inc., a worldwide aircraft management
and charter enterprise. This joint venture, called CitationShares, began in
late 2000 and offers shares of Citation aircraft for operation in the entire
contiguous United States. On June 30, 2004, Cessna acquired an additional 25%
interest in CitationShares for a total ownership interest of 75%.
CitationShares achieved Part 135 status and is currently offering its
customers the ability to purchase jet aircraft charter time in advance
through the Vector card program. |
| Fastening Systems Segment | Our Fastening Systems segment, Textron Fastening Systems (“TFS”),
offers a full range of fastening technologies – which include fasteners,
engineered assemblies and automation equipment – to global customers in the
aerospace, automotive, computer, construction, electronics, electrical
equipment, industrial equipment, non-automotive transportation,
telecommunications and white good markets. Its customers are global and
regional original equipment manufacturers, contract producers, component
manufacturers and distributors. TFS provides products, services and solutions
that simplify manufacturing processes and maximize efficiencies resulting in
lower total system costs to its customers. Revenues of TFS accounted for approximately
19%, 18%, and 16% of our total revenues in 2004, 2003 and 2002, respectively. |
| | TFS is headquartered in Troy, Michigan, and has facilities located in
the following 17 countries: Australia, Austria, Brazil, Canada, China,
France, Germany, Italy, Japan, Korea, Malaysia, Mexico, Singapore, Spain,
Taiwan, the U.K. and the U.S. |
| | TFS took significant steps in the completion of its global
restructuring activity during 2004, including the consolidation of production
from three plants in Michigan and Illinois, primarily into a refurbished
300,000 sq. ft. facility in Greenville, Mississippi. By October, the plant
had begun production for customers. |
| | Capping a sequence of new-product introductions, TFS launched the
Intevia intelligent fastening technology through a license agreement with
Telezygology Inc. (“TZ”), a wholly owned subsidiary of TZ Limited. The
agreement provides TFS exclusive global rights to develop, commercialize and
manufacture products using TZ-developed proprietary intelligent fastening
technology. |
| | TFS produces engineered threaded fasteners, fastening automation and
installation tools, cold formed components, engineered and laser welded
assemblies, blind fastening systems and metal stampings. TFS’ Full Service
Provider approach integrates its product offering with supply chain
management services such as vendor managed inventory programs, plant provider
programs and global sourcing. TFS provides a wide range of design and
engineering services to its customers, and also derives a portion of its
revenue from licensing selected intellectual property assets to third
parties. |
| | TFS has hundreds of competitors in the global fastener market, in
essentially three tiers: global multinationals with a global market presence,
typically strong in a market or in one or more product lines; mid-sized
regionals with some global activity but primarily focused on regional markets;
and small local firms with a limited range within a particular product
category. Competition is based |

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| | primarily on price, quality, delivery, service, support and
reputation. In addition, larger customers of fastening systems and engineered
assemblies primarily tend to procure products and services from the larger
suppliers. TFS’ broad range of products, customers and markets reduces its
risk of a business loss that would have a material adverse effect on Textron. |
| --- | --- |
| Industrial Segment | The Industrial Segment is composed of our E-Z-GO, Jacobsen, Kautex, Greenlee
and Fluid & Power businesses. |
| | E-Z-GO |
| | E-Z-GO designs, manufactures and sells golf cars and off-road utility
vehicles powered by electric and internal combustion engines under the E-Z-GO
name, as well as multipurpose utility vehicles under the E-Z-GO and Cushman
brand names. |
| | E-Z-GO’s commercial customers consist primarily of golf courses,
resort communities and municipalities, as well as commercial and industrial
users such as airports and factories. E-Z-GO’s off-road utility vehicles and
golf cars are also sold into the consumer market. Sales are made through a
network of distributors and directly to end users. Many of E-Z-GO’s sales are
financed through Textron Financial Corporation. |
| | E-Z-GO has two major competitors for golf cars and several other
competitors for utility vehicles. Competition is based primarily on price,
quality, product support, performance, reliability and reputation. |
| | Jacobsen |
| | Jacobsen designs, manufactures and sells professional turf maintenance
equipment, lawn care machinery and specialized industrial vehicles. Major
brand names include Ransomes, Jacobsen, Cushman, Ryan, Steiner, Brouwer,
Bunton and Bob-Cat. |
| | Jacobsen’s commercial customers consist primarily of golf courses,
resort communities and municipalities, as well as commercial and industrial
users such as airports, factories and professional lawn care services. Sales
are made through a network of distributors and directly to end-users. Many
sales are financed through Textron Financial Corporation. |
| | Jacobsen has two major competitors for professional turf maintenance
equipment and several other competitors for specialized industrial vehicles
and professional lawn care machinery. Competition is based primarily on
price, quality, product support, performance, reliability and reputation. |
| | Kautex |
| | Kautex, headquartered in Bonn, Germany, is a leading global
manufacturer of blow-molded fuel systems and other blow-molded parts for
automobile original equipment manufacturers and other industrial customers.
Kautex operates plants in all major markets around the world. Kautex is also
a leading supplier of windshield and headlamp washer systems in the original
equipment automobile market. In North America, Kautex also produces metal fuel
fillers and engine camshafts for the automotive market and automatic assembly
machines and systems, perishable tools and abrasives, and hydraulic
components for industrial markets. In Germany, Kautex produces plastic
containers and sheeting for household and industrial uses. |
| | Revenues of Kautex accounted for approximately 15%, 15% and 12% of our
total revenues in 2004, 2003 and 2002, respectively. |
| | Kautex has a number of competitors worldwide, some of whom are owned
by the automotive original equipment manufacturers that compose Kautex’s
targeted customer base. Competition is typically based on a number of factors
including price, quality, reputation, prior experience and available
manufacturing capacity. |
| | Greenlee |
| | Greenlee consists of Greenlee, Klauke and Tempo. These companies
manufacture powered equipment, electrical test and measurement instruments,
hand and hydraulic powered tools, and electrical and fiber optic connectors
under the Greenlee, Fairmont, Klauke and Tempo brand names. The products are
principally used in the electrical construction and maintenance,
telecommunications and plumbing industries, and are distributed through a
global network of sales representatives and distributors, and also directly
to home improvement retailers and original equipment manufacturers. The
Greenlee businesses face competition from numerous manufacturers based
primarily on price, quality, performance, reliability, delivery and
reputation. On December 31, 2004, Textron entered into a joint venture,
Rothenberger LLC, with Rothenberger AG to manufacture and sell plumbing tools
in the U.S. and Canada. Through a series of transactions during 2004 and
concluding in February 2005, Textron divested its InteSys Technologies
business, a manufacturer of injection molded components and assemblies for
telecommunications and other markets. |

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	Fluid & Power
	Fluid & Power consists of four business units: Engineered
Products, Hydrocarbon Processing Products, Polymer Systems and Standard
Products. Engineered Products designs and manufactures industrial gears,
mechanical transmission systems, gear motors, and gear sets under the David
Brown brand name. Hydrocarbon Processing Products designs and manufactures industrial
pumps for the oil, gas, petrochemical and desalinization industries under the
David Brown Union Pump and David Brown Guinard Pump brands. Polymer Systems
designs and manufactures industrial pumps, extrusion equipment and screen
changers for the polymer industry under the Maag brand name. Standard
Products designs and manufactures industrial gears and gear sets, double
enveloping worm gear speed reducers, screwjacks and hydraulic products under
the Benzlers, Cone Drive, Radicon and David Brown Hydraulics brands. These
products are sold to a variety of customers, including original equipment
manufacturers, governments, distributors and end users. Fluid & Power
faces competition from other manufacturers based primarily on price, quality,
product support, performance, reliability, delivery and reputation.
Finance Segment	Our Finance segment consists of Textron Financial Corporation and its
subsidiaries. Textron Financial Corporation is a diversified commercial
finance company with core operations in six markets:
•	Aircraft Finance provides financing for new and used Cessna
business jets, Caravans and piston-engine airplanes, Bell helicopters and
other general aviation aircraft;
•	Asset-Based Lending provides asset-based loans to middle-market
companies that manufacture or distribute finished goods and provides
factoring arrangements for freight companies;
•	Distribution Finance offers inventory finance programs for
dealers of Textron manufactured products and for dealers of a variety of
other household, housing, leisure, agricultural and technology products;
•	Golf Finance makes mortgage loans for the acquisition and
refinancing of golf courses and provides term financing for E-Z-GO golf cars
and Jacobsen turf-care equipment;
•	Resort Finance extends loans to developers of vacation
interval resorts, secured primarily by notes receivable and interval
inventory; and
•	Structured Capital engages in tax-oriented, long-term leases of
large-ticket equipment and real estate, primarily with investment grade
lessees.
	Textron Financial Corporation’s other financial services and products
include transaction syndication, equipment appraisal and disposition, and
portfolio servicing offered through TBS Business Services, Inc.
	Textron Financial Corporation’s financing activities are confined
almost exclusively to secured lending and leasing to commercial markets.
Textron Financial Corporation’s services are offered primarily in the United
States and Canada. However, Textron Financial Corporation finances Textron
products worldwide, principally Bell helicopters and Cessna aircraft.
	In 2004, 2003 and 2002, Textron Financial Corporation paid Textron
$0.9 billion, $0.9 billion and $1.0 billion, respectively, relating to the
sale of manufactured products to third parties that were financed by Textron
Financial Corporation. Textron also received proceeds in those years of $77
million, $56 million and $104 million from the sale of equipment from its
manufacturing operations to Textron Financial for use under operating lease
agreements.
	The commercial finance environment in which Textron Financial
Corporation operates is highly fragmented and extremely competitive. Textron
Financial Corporation is subject to competition from various types of
financing institutions, including banks, leasing companies, insurance
companies, commercial finance companies and finance operations of equipment
vendors. Competition within the commercial finance industry is primarily
focused on price, terms, structure and service.
	Textron Financial Corporation’s largest business risk is the
collectibility of its finance receivable portfolio. See “Finance Portfolio
Quality” in Management’s Discussion and Analysis of Financial Condition and Results
of Operations on page 19 for a detailed discussion of the credit quality of
this portfolio.

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| Backlog |
| --- |
| U.S. Government backlog was $3.3 billion and $1.9 billion at the end
of 2004 and 2003, respectively, including backlog at Bell Helicopter of $2.5
billion in 2004 and $1.2 billion in 2003. The increase in U.S. Government
backlog is primarily related to approximately $1 billion of increased
production contracts for the V-22. Approximately 97% of the 2004 backlog was
funded at January 1, 2005. Unfunded backlog represents the award value of
U.S. Government contracts received, generally related to cost-plus type
contracts, in excess of the funding formally appropriated by the U.S.
Government. The U.S. Government is obligated only up to the funded amount of
the contract. Additional funding is appropriated as the contract progresses. |
| Commercial backlog from unaffiliated customers was $6.8 billion and
$5.0 billion at the end of 2004 and 2003, respectively, including backlog at
Cessna of $5.3 billion in 2004 and $3.9 billion in 2003. The increase in
Cessna’s backlog is primarily related to increased orders for recently
introduced Citation jet models, including XLS, CJ1+ and CJ2+ models. A
significant portion of Cessna’s backlog represents orders from a major
fractional jet customer. Orders from this fractional aircraft operator are
included in backlog when the customer enters into a definitive master
agreement and has established preliminary delivery dates for the aircraft.
Preliminary delivery dates are subject to change through amendment to the
master agreement. Final delivery dates are established approximately 12 to 18
months prior to delivery. Orders from other customers are included in backlog
upon the customer entering into a definitive purchase order and receipt of
required deposits. |
| The 2004 year-end backlog with the major fractional jet customer was
approximately $1.3 billion. The major fractional jet customer also has an
option to acquire 50 additional aircraft, which will be placed into backlog
upon execution of a definitive master agreement and establishment of
preliminary delivery dates. The remaining $4 billion of Cessna’s backlog at
the end of 2004 is with other commercial customers covering a wide spectrum
of industries. This backlog includes $0.6 billion in orders for the new
Mustang aircraft that is scheduled to begin its first deliveries to customers
in 2006. |
| Approximately 49% of our total backlog of $10.1 billion at January 1,
2005 represents orders which are not expected to be filled within our 2005
fiscal year. |
| U.S. Government Contracts |
| In 2004, 12% of our consolidated revenues were generated by or
resulted from contracts with the U.S. Government. U.S. Government business is
subject to competition, changes in procurement policies and regulations, the
continuing availability of Congressional appropriations, world events, and
the size and timing of programs in which we may participate. |
| Our contracts with the U.S. Government generally may be terminated by
the U.S. Government for convenience or default in whole or in part. If the
U.S. Government terminates a contract for convenience, we normally will be
entitled to payment for the cost of contract work performed before the
effective date of termination plus reasonable profit on such work, adjusted
to reflect any rate of loss had the contract been completed, plus reasonable
costs of settlement of the work terminated. If, however, the U.S. Government
terminates a contract for default, generally: (a) we will be paid the
contract price for completed supplies delivered and accepted, an agreed upon
amount for manufacturing materials delivered and accepted and for the
protection and preservation of property, and for partially completed products
accepted by the U.S. Government; (b) the U.S. Government will not be liable
for our costs with respect to unaccepted items and will be entitled to
repayment of advance payments and progress payments related to the terminated
portions of the contract; and (c) we may be liable for excess costs incurred
by the U.S. Government in procuring undelivered items from another source. |
| Research and Development |
| Information regarding our research and development expenditures is
contained in Note 17 to the consolidated financial statements on page 67 of
this Annual Report on Form 10-K. |
| Patents and Trademarks |
| We own, or are licensed under, numerous patents throughout the world
relating to products, services and methods of manufacturing. Patents have
been of value in the past and are expected to be of value in the future.
However, the loss of any single patent or group of patents would not, in our
opinion, materially affect the conduct of our business. |

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| We also own or license trademarks, trade names and service marks that
are important to our business. Some of these trademarks, trade names and
service marks are used in this Annual Report on Form 10-K and other reports, including
: AB139; AB Benzlers; APCO; BA609; Bell Helicopter; Bob-Cat; Boesner;
Brouwer; Brouwer RoboMax; Bunton; Cadillac Gage; Caravan 675; Caravan
Floatplane; Cessna; Cessna Aircraft Company; Cessna Caravan; Cherry; Cherry
Rivetless Nut Plate; Citation Bravo; Citation CJ1; Citation CJ1+; Citation
CJ2; Citation CJ2+; Citation CJ3; Citation Encore; Citation Mustang;
CitationShares; Citation Sovereign; Citation X; Citation XLS; Cone Drive;
Cushman; David Brown; David Brown Guinard Pumps; David Brown Hydraulics; David
Brown Union Pumps; E-Z-GO; Fairmont; Grand Caravan; Greenlee; HR Textron;
Intevia; Jacobsen; Kautex; Klauke; Lycoming; M1117 Armored Security Vehicle; Maag;
MagKnife; Maxibolt Plus; Radicon; Ransomes; Ryan; 172 Skyhawk; 172 Skyhawk
SP; 182 Skylane; ST 4X4; 206 Stationair; Steiner; Super Cargomaster; T206
Turbo Stationair; Tempo; Textron; Textron Fastening Systems; Textron
Financial Corporation; Textron Fluid & Power; Textron Marine & Land
Systems; Textron Systems; Turbo 182 Skylane; V-22 Osprey; and Vector. These
marks and their related trademark designs and logotypes (and variations of
the foregoing) are trademarks, trade names or service marks of Textron Inc.,
its subsidiaries, affiliates, or joint ventures. |
| --- |
| Environmental Considerations |
| Our operations are subject to numerous laws and regulations designed
to protect the environment. Compliance with these laws and expenditures for
environmental control facilities have not had a material effect on our
capital expenditures, earnings or competitive position. Additional
information regarding environmental matters is contained in Note 15 to the
consolidated financial statements on pages 64 and 65 of this Annual Report on
Form 10-K. |
| Employees |
| At January 1, 2005, we had approximately 44,000 employees. |
| Available Information |
| We make available free of charge on our Internet website
(http://www.textron.com) our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the Securities and Exchange Commission. |
| Forward-Looking Information |
| Forward-looking Information: Certain statements in this report and
other oral and written statements made by Textron from time to time are
forward-looking statements, including those that discuss strategies, goals,
outlook or other non-historical matters; or project revenues, income, returns
or other financial measures. These forward-looking statements speak only as
of the date on which they are made, and we undertake no obligation to update
or revise any forward-looking statements. These forward-looking statements
are subject to risks and uncertainties that may cause actual results to
differ materially from those contained in the statements, including the
following: (a) the extent to which Textron is able to achieve savings from
its restructuring plans; (b) uncertainty in estimating the amount and timing
of restructuring charges and related costs; (c) changes in worldwide economic
and political conditions that impact interest and foreign exchange rates; (d)
the occurrence of work stoppages and strikes at key facilities of Textron or
Textron’s customers or suppliers; (e) Textron’s ability to perform as
anticipated and to control costs under contracts with the U.S. Government;
(f) the U.S. Government’s ability to unilaterally modify or terminate its contracts
with Textron for the Government’s convenience or for Textron’s failure to
perform, to change applicable procurement and accounting policies, and, under
certain circumstances, to suspend or debar Textron as a contractor eligible
to receive future contract awards; (g) changes in national or international
funding priorities and government policies on the export and import of
military and commercial products; (h) the adequacy of cost estimates for
various customer care programs including servicing warranties; (i) the
ability to control costs and successful implementation of various cost
reduction programs; (j) the timing of certifications of new aircraft
products; (k) the occurrence of slowdowns or downturns in customer markets in
which Textron products are sold or supplied or where Textron Financial offers
financing; (l) changes in aircraft delivery schedules or cancellation of
orders; (m) the impact of changes in tax legislation; (n) the extent to which
Textron is able to pass raw material price increases through to customers or
offset such price increases by reducing other costs; (o)Textron’s ability to
offset, through cost reductions, pricing pressure brought by original
equipment manufacturer customers; (p) Textron’s ability to realize full value
of receivables and investments in securities; (q) the availability and cost
of insurance; (r) increases in pension expenses related to lower than
expected asset performance or changes in discount rates; (s) Textron
Financial’s ability to maintain portfolio credit quality; (t) Textron
Financial’s access to debt financing at competitive rates; (u) uncertainty in
estimating contingent liabilities and establishing reserves to address such
contingencies; (v) performance of acquisitions; and (w) the efficacy of research
and development investments to develop new products. |

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| Item 2. Properties |
| --- |
| On January 1, 2005, we operated a total of 128 plants located
throughout the U.S. and 86 plants outside the U.S. Of the total of 214
plants, we owned 128 and the balance were leased. In the aggregate, the total
manufacturing space was approximately 29 million square feet. |
| In addition, we own or lease offices, warehouse and other space at
various locations throughout the U.S. and outside the U.S. We consider the
productive capacity of the plants operated by each of our business segments
to be adequate. In general, our facilities are in good condition, are
considered to be adequate for the uses to which they are being put, and are
substantially in regular use. |
| Item 3. Legal Proceedings |
| Two identical lawsuits purporting to be class actions were filed in
2002 in the United States District Court in Rhode Island against Textron and
certain present and former officers of Textron and Bell Helicopter by Textron
shareholders suing on their own behalf and on behalf of a purported class of
Textron shareholders. A consolidated amended complaint alleges that the
defendants failed to make certain accounting adjustments in response to
alleged problems with Bell Helicopter’s V-22 and H-1 programs and that the
company failed to timely write down certain assets of its OmniQuip unit. The
complaint seeks unspecified compensatory damages. On June 15, 2004, the
District Court ruled that the plaintiffs could not maintain the claims that
were based on allegations relating to the H-1 program or to OmniQuip, and
also ruled that all claims against one of the individual defendants should be
dismissed. The lawsuit will continue with respect to the remaining claims.
Textron believes the lawsuit is without merit and intends to continue to
defend it vigorously. |
| Two identical lawsuits, purporting to be class actions on behalf of
Textron benefit plans and participants and beneficiaries of those plans
during 2000 and 2001, were filed in 2002 in the United States District Court
in Rhode Island against Textron, the Textron Savings Plan and the Plan’s
trustee. A consolidated amended complaint alleges breach of certain fiduciary
duties under ERISA, based on the amount of Plan assets invested in Textron
stock during 2000 and 2001. The complaint seeks equitable relief and
compensatory damages on behalf of various Textron benefit plans and the
participants and beneficiaries of those plans during 2000 and 2001 to
compensate for alleged losses relating to Textron stock held as an asset of
those plans. Textron’s Motion to Dismiss the consolidated amended complaint
was granted on June 24, 2003. On May 7, 2004, the United States Court of
Appeals for the First Circuit affirmed dismissal of all claims against the
Plan’s trustee and against the Plan itself, and also affirmed dismissal of
certain other claims against Textron. However, the Court of Appeals ruled
that plaintiffs should be permitted to attempt to develop their breach of
fiduciary duty claims, and remanded those claims to the District Court.
Textron believes this lawsuit is without merit and intends to defend this
action vigorously. |
| We are subject to actual and threatened legal proceedings arising out
of the conduct of our business. These proceedings include claims arising from
private transactions, government contracts, product liability, employment and
environmental, safety and health matters. Some of these legal proceedings
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
our suspension or debarment from U.S. Government contracting for a period of
time. On the basis of information presently available, we believe that these
legal proceedings will not have a material effect on our financial position
or results of operations. |

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Item 4. Submission of Matters to a Vote of Security Holders

| No matters were submitted to a vote of our security holders during the
last quarter of the period covered by this Annual Report on Form 10-K. | | |
| --- | --- | --- |
| Executive Officers of the Registrant | | |
| The following table sets forth certain information concerning our
executive officers as of February 25, 2005. All of our executive officers are
members of our Management Committee and Transformation Leadership Team. | | |
| Name | Age | Current
Position with Textron Inc. |
| Lewis B. Campbell | 58 | Chairman, President and Chief Executive Officer; Director |
| John D. Butler | 57 | Executive Vice President Administration and Chief Human Resources
Officer |
| Ted R. French | 50 | Executive Vice President and Chief Financial Officer |
| Mary L. Howell | 52 | Executive Vice President Government, Strategy Development and
International, Communications and Investor Relations |
| Terrence O’Donnell | 60 | Executive Vice President and General Counsel |
| Mr. Campbell joined Textron in September 1992 as Executive Vice
President and Chief Operating Officer. He was named Chief Executive Officer
in July 1998 and appointed Chairman of our Board of Directors in February
1999. Mr. Campbell served as President and Chief Operating Officer from
January 1994 to July 1998, and reassumed the position of President in
September 2001. Mr. Campbell has been a Director of Textron since January
1994, and is Chairman of our International Advisory Council. | | |
| Mr. Butler joined Textron in July 1997 as Executive Vice President and
Chief Human Resources Officer, and became Executive Vice President
Administration and Chief Human Resources Officer in January 1999. | | |
| Mr. French joined Textron in December 2000 as Executive Vice President
and Chief Financial Officer of Textron Inc. and assumed the additional
position of Chairman and Chief Executive Officer of Textron Financial
Corporation in January 2004. Prior to joining Textron, Mr. French served as
President, Financial Services and Chief Financial Officer for CNH Global NV,
which was created through the 1999 merger of Case Corporation and New Holland
NV. Prior to the merger, he spent 10 years with Case Corporation in various
executive positions. | | |
| Ms. Howell has been Executive Vice President Government, Strategy
Development and International, Communications and Investor Relations since
October 2000 and serves on our International Advisory Council. Ms. Howell
joined Textron in 1980 and became an Executive Vice President in August 1995. | | |
| Mr. O’Donnell joined Textron as Executive Vice President and General
Counsel in March 2000. Mr. O’Donnell is a Senior Partner in the Washington,
D.C.-based law firm of Williams & Connolly, which he first joined in
1977. From 1989 to 1992, he served as General Counsel of the Department of
Defense. | | |

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PART II
Item 5. Markets for the Registrant’s Common Equity, Related
Stockholder Matters and Issuer Repurchases of Equity Securities
Our common stock is traded on the New York, Chicago and Pacific Stock
Exchanges. At January 1, 2005, there were approximately 18,000 holders of
Textron common stock. The high and low common stock prices per share as
reported on the New York Stock Exchange, and the dividends paid per share, in
each case for the periods described below, were as follows:
	2004			2003
	High	Low	Dividends Per Share	High	Low	Dividends Per Share
First quarter	$ 58.28	$ 50.84	$ 0.325	$ 45.45	$ 26.85	$ 0.325
Second quarter	59.43	52.45	0.325	38.69	27.46	0.325
Third quarter	65.47	57.38	0.325	45.53	38.07	0.325
Fourth quarter	74.63	63.04	0.350	57.70	39.45	0.325
Issuer Repurchases of Equity Securities
Fourth Quarter	Total Number of Shares Purchased	Average Price Paid per Share (Excluding Commissions)	Total Number of Shares Purchased as Part of Publicly Announced Plan*			Maximum Number of Shares that May Be Purchased Under the Plan
Month 1 (October 3, 2004 – November 6, 2004)	923,200	$ 68.26	923,200			11,076,800
Month 2 (November 7, 2004 – December 4, 2004)	959,200	$ 72.50	959,200			10,117,600
Month 3 (December 5, 2004 – January 1, 2005)	1,122,463	$ 73.03	1,121,100		**	8,996,500
Total	3,004,863	$ 71.39	3,003,500

| * | On October 21, 2004, Textron’s Board of Directors
authorized a new share repurchase plan under which Textron is authorized to
repurchase up to 12 million shares of Textron common stock. Shares purchased
since October 21, 2004 were purchased under this new plan. This new plan
supercedes the previously existing plan. Prior to October 21, 2004, Textron
was authorized to repurchase up to 12 million shares of Textron common stock
under a plan that had been announced on August 3, 2001, and had no expiration
date. Under this previously existing plan, there were no shares purchased
during the period from October 3, 2004 through October 20, 2004, and no
additional shares are eligible for repurchase. |
| --- | --- |
| ** | Reflects the surrender of 1,363 shares of Textron
common stock to pay the exercise price of employee stock options. |

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Item 6. Selected Financial Data

| (Dollars in millions, except
per share amounts and where otherwise noted) | 2004 | | 2003 | | 2002 | | 2001 | | 2000 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Revenues | | | | | | | | | | |
| Bell | $ 2,254 | | $ 2,348 | | $ 2,235 | | $ 2,243 | | $ 2,194 | |
| Cessna | 2,473 | | 2,299 | | 3,175 | | 3,043 | | 2,814 | |
| Fastening Systems | 1,924 | | 1,737 | | 1,650 | | 1,679 | | 1,996 | |
| Industrial | 3,046 | | 2,836 | | 2,627 | | 4,221 | | 4,753 | |
| Finance | 545 | | 572 | | 584 | | 681 | | 691 | |
| Total revenues | $ 10,242 | | $ 9,792 | | $ 10,271 | | $ 11,867 | | $ 12,448 | |
| Segment profit | | | | | | | | | | |
| Bell | $ 250 | | $ 234 | | $ 169 | | $ 93 | | $ 264 | |
| Cessna | 267 | | 199 | | 376 | | 344 | | 300 | |
| Fastening Systems | 53 | | 66 | | 72 | | 70 | | 192 | |
| Industrial | 194 | | 150 | | 169 | | 289 | | 513 | |
| Finance | 139 | | 122 | | 118 | | 203 | | 202 | |
| Total segment profit | 903 | | 771 | | 904 | | 999 | | 1,471 | |
| Special charges | (131 | ) | (152 | ) | (131 | ) | (141 | ) | (483 | ) |
| Total segment operating income | 772 | | 619 | | 773 | | 858 | | 988 | |
| Gain on sale of businesses | — | | 15 | | 25 | | 342 | | — | |
| Goodwill amortization | — | | — | | — | | (86 | ) | (83 | ) |
| Corporate expenses and other, net | (149 | ) | (119 | ) | (114 | ) | (152 | ) | (164 | ) |
| Interest expense, net | (95 | ) | (98 | ) | (108 | ) | (162 | ) | (152 | ) |
| Income taxes | (155 | ) | (112 | ) | (176 | ) | (287 | ) | (295 | ) |
| Distributions on preferred securities, net
of income taxes | — | | (13 | ) | (26 | ) | (26 | ) | (26 | ) |
| Income from continuing operations | $ 373 | | $ 292 | | $ 374 | | $ 487 | | $ 268 | |
| Per share of common stock | | | | | | | | | | |
| Income from continuing operations – basic | $ 2.72 | | $ 2.15 | | $ 2.69 | | $ 3.45 | | $ 1.86 | |
| Income from continuing operations –
diluted | $ 2.66 | | $ 2.13 | | $ 2.66 | | $ 3.40 | | $ 1.84 | |
| Dividends declared | $ 1.33 | | $ 1.30 | | $ 1.30 | | $ 1.30 | | $ 1.30 | |
| Book value at year-end | $ 26.91 | | $ 26.81 | | $ 24.87 | | $ 27.76 | | $ 28.24 | |
| Common stock price: High | $ 74.63 | | $ 57.70 | | $ 53.17 | | $ 59.89 | | $ 74.94 | |
| Low | $ 50.84 | | $ 26.85 | | $ 32.49 | | $ 31.65 | | $ 41.44 | |
| Year-end | $ 73.80 | | $ 57.19 | | $ 42.16 | | $ 42.40 | | $ 46.50 | |
| Common shares outstanding (In thousands): | | | | | | | | | | |
| Basic average | 137,337 | | 135,875 | | 138,745 | | 141,050 | | 143,923 | |
| Diluted average* | 140,169 | | 137,217 | | 140,252 | | 142,937 | | 146,150 | |
| Year-end | 135,373 | | 137,238 | | 136,500 | | 141,251 | | 140,933 | |
| Financial position | | | | | | | | | | |
| Total assets | $ 15,875 | | $ 15,171 | | $ 15,672 | | $ 16,335 | | $ 16,370 | |
| Debt: | | | | | | | | | | |
| Textron Manufacturing | $ 1,791 | | $ 2,027 | | $ 1,708 | | $ 1,930 | | $ 2,080 | |
| Textron Finance | $ 4,783 | | $ 4,407 | | $ 4,840 | | $ 4,188 | | $ 4,667 | |
| Mandatorily redeemable preferred securities
trusts: | | | | | | | | | | |
| Textron Manufacturing | $ — | | $ — | | $ 485 | | $ 485 | | $ 484 | |
| Textron Finance | $ — | | $ 26 | | $ 27 | | $ 28 | | $ 28 | |
| Shareholders’ equity | $ 3,652 | | $ 3,690 | | $ 3,406 | | $ 3,934 | | $ 3,994 | |
| Textron Manufacturing debt to total capital
(net of cash) | 25 | % | 30 | % | 36 | % | 36 | % | 36 | % |
| Investment data | | | | | | | | | | |
| Capital expenditures, including capital
leases | $ 346 | | $ 323 | | $ 315 | | $ 523 | | $ 512 | |
| Depreciation | $ 338 | | $ 336 | | $ 330 | | $ 389 | | $ 372 | |
| Research and development | $ 594 | | $ 587 | | $ 583 | | $ 684 | | $ 721 | |
| Other data | | | | | | | | | | |
| Number of employees at year-end | 44,000 | | 42,000 | | 47,000 | | 50,000 | | 68,000 | |
| Number of common shareholders at year-end | 18,000 | | 19,000 | | 20,000 | | 21,000 | | 21,000 | |

*** Before cumulative effect of a change in accounting principle in 2002 and 2000**

** Assumes full conversion of outstanding preferred stock and exercise of stock options

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

*Business Overview*

| Textron Inc. is a multi-industry company that leverages its global
network of businesses to provide customers with innovative solutions and
services in five business segments: Bell, Cessna, Fastening Systems,
Industrial and Finance. Textron is known around the world for its powerful
brands spanning the business jet, aerospace and defense, fastening systems,
plastic fuel systems, golf car and turf-care markets, among others. |
| --- |
| Economic conditions improved in 2004, with the majority of our end
markets benefiting from the turnaround. Sales volumes in our manufacturing
businesses reflected this recovery. Most notably, a steady flow of military
orders at Bell resulted from increased spending in the defense sector, while
Cessna saw a significant increase in new business jet orders as a result of
improvements in the aircraft sector. In addition, our Finance segment
experienced significant improvement in its portfolio credit quality with
fewer charge-offs and a decrease in nonperforming assets. |
| Textron was, however, affected by commodity inflation in most of its
businesses during 2004, including the sharp rise in steel prices which had an
$81 million unfavorable impact, primarily in our Fastening Systems and
Industrial segments. As a result of escalating steel prices, we took actions
to raise prices and impose surcharges on many of our steel products,
primarily in our Fastening Systems segment, to mitigate the impact of the
higher material costs. While many of these actions were taken in 2004, we
believe it will take a few quarters to determine what impact our pricing
actions will have on our customers and volumes. |
| In addition to the higher commodity costs, pension expense increased
$36 million. We were able to absorb the impact of these factors primarily as
a result of our transformation strategy through ongoing cost-reduction
initiatives, lean manufacturing, integrated supply chain and restructuring.
We intend to continue to execute our transformation strategy and strengthen
our portfolio through the divestiture of non-core businesses and strategic
acquisitions to further position Textron to take advantage of the improved
economic conditions. |

*Consolidated Results of Operations*

2004 Revenues – $10.2 Billion 2004 Segment Profit* – $903 Million

| * |
| --- |
| Revenues |
| Revenues increased $450 million in 2004 primarily due to the favorable
foreign exchange impact of $287 million, higher volume of $93 million in the
manufacturing businesses, the additional revenue of $76 million from the
consolidation of CitationShares and higher pricing of $45 million. |
| The decrease of $479 million in 2003 was primarily due to lower
Citation business jet volume of $876 million at Cessna, due to a depressed
market and the reduction of 2003 deliveries by a major fractional jet
customer, and lower sales volume of $123 million at E-Z-GO and Jacobsen, due
to a depressed golf market. These decreases were partially offset by a
favorable foreign exchange impact of $313 million in the Industrial and
Fastening Systems segments and increased volume of $131 million at Kautex. |
| Segment Profit |
| Segment profit increased $132 million in 2004 primarily due to $303
million in cost-reduction initiatives, a $77 million benefit from
restructuring activities and $45 million of higher pricing. These increases
were partially offset by inflation of $254 million. |

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| The decrease of $133 million in 2003 was primarily due to lower profit
of $177 million at Cessna and $52 million at E-Z-GO and Jacobsen largely due
to lower sales. These decreases were partially offset by higher profit of $65
million at Bell primarily in its aircraft engine and commercial helicopter
businesses due to certain costs incurred in 2002, as described in the Bell
segment section. | | | | |
| --- | --- | --- | --- | --- |
| Special Charges | | | | |
| Special charges are summarized below: | | | | |
| (In millions) | 2004 | | 2003 | 2002 |
| Restructuring | $ 143 | | $ 137 | $ 93 |
| Unamortized issuance costs on preferred securities | — | | 15 | — |
| Gain on sale of C&A common stock | (12 | ) | — | — |
| C&A common stock impairment | — | | — | 38 |
| Total special charges | $ 131 | | $ 152 | $ 131 |
| Restructuring Program | | | | |
| To improve returns at core businesses and to complete the integration
of certain acquisitions, Textron approved and committed to a restructuring
program in the fourth quarter of 2000 based upon targeted cost reductions.
This program was expanded in 2001, and in October 2002 Textron announced a
further expansion of the program as part of its strategic effort to improve
operating efficiencies, primarily in its industrial businesses. Textron’s
restructuring program includes corporate and segment direct and indirect
workforce reductions, consolidation of facilities primarily in the United
States and Europe, rationalization of certain product lines, outsourcing of
non-core production activity, the divestiture of non-core businesses, and
streamlining of sales and administrative overhead. Under this restructuring
program, Textron has reduced its workforce by approximately 11,000 employees
from continuing operations, representing approximately 19% of its global
workforce since the restructuring was first announced. A total of 107
facilities have been closed under this program, including 45 manufacturing
plants, primarily in the Industrial and Fastening Systems segments. | | | | |
| In total, Textron estimates that the entire program for continuing
operations will be approximately $540 million (including $11 million related
to the divested Automotive Trim business (“Trim”)). As of January 1, 2005,
$519 million of cost has been incurred relating to continuing operations
(including $11 million related to Trim), with $213 million in the Industrial
segment, $219 million in the Fastening Systems segment, $38 million in the
Cessna segment, $29 million in the Bell segment, $9 million in the Finance
segment and $11 million at Corporate. Costs incurred through January 1, 2005
include $268 million in severance costs, $98 million in asset impairment
charges (net of gains on the sale of fixed assets), $54 million in contract
termination costs and $99 million in other associated costs. | | | | |
| Unamortized Issuance Costs | | | | |
| In July 2003, Textron redeemed its 7.92% Junior Subordinated
Deferrable Interest Debentures due 2045. The debentures were held by
Textron’s wholly owned trust, and the proceeds from their redemption were
used to redeem all of the $500 million Textron Capital I trust preferred securities.
Upon the redemption, $15 million of unamortized issuance costs were written
off. | | | | |
| C&A Common Stock | | | | |
| During the second half of 2002, the Collins & Aikman Corporation
common stock owned by Textron experienced a decline in market value. Textron
acquired this stock as a result of the disposition of the Trim business to
various operating subsidiaries of Collins & Aikman Corporation (collectively
“C&A”). In December 2002, Moody’s Investor Services (“Moody’s”) lowered
its liquidity rating of C&A. Due to this indicator and the extended
length of time and extent to which the market value of the stock was less
than the carrying value, Textron determined that the decline in the market
value of the stock was other than temporary and wrote down its investment in
the stock for a pre-tax loss of $38 million. Textron sold its remaining
investment in C&A common stock for cash proceeds of $34 million and
recorded a pre-tax gain of $12 million in the first quarter of 2004. | | | | |
| Corporate Expenses | | | | |
| Corporate expenses and other, net increased $30 million in 2004
primarily due to nonrecurring income in 2003 and increases in certain
expenses in 2004. The nonrecurring income in 2003 included $7 million related
to an expired royalty agreement and $7 million in proceeds from life
insurance policies. In 2004, we also experienced higher premiums for
Directors and Officers insurance of $6 million, provided $5 million in
funding to Textron’s charitable trust and had $4 million in higher executive
compensation primarily related to improved operating results. | | | | |

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Income from Continuing Operations
Fluctuations in income from continuing operations are primarily driven
by segment profit changes as discussed above. In addition, Textron recorded
certain items that affected the comparability of operating results in the
last three years which are summarized in the table below:
(In millions)	2004		2003		2002
Special charges	$ 131		$ 152		$ 131
Gain on sale of businesses	—		(15	)	(25	)
	131		137		106
Income tax benefit on above items	(35	)	(41	)	(27	)
	$ 96		$ 96		$ 79
Gain on sale of businesses includes a gain of $15 million on the sale
of Textron’s remaining interest in an Italian automotive joint venture to
C&A in 2003 and a $25 million gain in 2002 from transactions related to
the divestiture of Trim.
Income Taxes
A reconciliation of the federal statutory income tax rate to the
effective income tax rate is provided below:
	2004		2003		2002
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in taxes resulting from:
State income taxes	1.6		2.3		1.8
Special foreign dividend	2.1		—		—
Permanent items from Trim
divestiture	—		—		1.2
Favorable tax settlements	—		(3.1	)	(2.1	)
ESOP dividends	(1.6	)	(2.2	)	(3.1	)
Foreign tax rate
differential	(5.9	)	(2.1	)	(0.5	)
Export sales benefit	(1.1	)	(1.4	)	(1.5	)
Other, net	(0.7	)	(1.6	)	(0.2	)
Effective income tax rate	29.4	%	26.9	%	30.6	%
We expect our effective tax rate for 2005 will remain consistent with
2004.
Discontinued Operations
During the fourth quarter of 2004, Textron reached a final decision to
sell the remainder of its InteSys operations. As a result of these actions,
financial results of these businesses, net of income taxes, are now reported
as discontinued operations. Discontinued operations also reflect the
after-tax gain in the second quarter of 2004 from the sale of InteSys’ two
Brazilian-based joint ventures. In the third quarter of 2003, Textron sold
certain assets and liabilities related to its remaining OmniQuip business to
JLG Industries, Inc. for $90 million in cash and a $10 million note that was
paid in full in February 2004. In the fourth quarter of 2003, Textron
Financial sold substantially all of its small business direct portfolio to
MBNA America Bank, N.A. for $421 million in cash. The InteSys and OmniQuip
businesses were previously reported within the Industrial segment and the
small business direct portfolio was previously reported within the Finance
segment.
Cumulative Effect of Change in Accounting Principle
During 2002, Textron recorded an after-tax transitional impairment
charge of $488 million upon the adoption of Statement of Financial Accounting
Standard No. 142, “Goodwill and Other Intangible Assets” as more fully
discussed in Note 7 to the consolidated financial statements.
Outlook
We expect a modest increase in revenues in 2005 with higher revenue at
Bell, Cessna and Finance, while the industrial businesses are expected to be
relatively flat. At Bell, the expected revenue increase is primarily related
to higher V-22 revenue from new production releases (recorded on an
as-delivered basis), which is expected to more than offset lower engineering-
and development-based revenues (recorded on a cost-incurred basis). At
Cessna, we expect an increase in revenue due to higher sales of jets based on
our current backlog. Overall segment profit and margins are expected to
increase as Textron continues to realize the benefits of its cost-reduction
initiatives and substantially completed restructuring program.

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| | Textron’s commercial backlog from unaffiliated customers was $6.8
billion and $5.0 billion at the end of 2004 and 2003, respectively, and is
primarily related to Cessna. U.S. Government backlog was $3.3 billion and
$1.9 billion at the end of 2004 and 2003, respectively, which was substantially
all in the Bell segment. See “Backlog” in Item 1. Business of Textron on page
6 for more information. | | | |
| --- | --- | --- | --- | --- |
| Segment Analysis | | | | |
| Bell | (Dollars in millions) | 2004 | 2003 | 2002 |
| | Revenues | $ 2,254 | $ 2,348 | $ 2,235 |
| | Segment profit | $ 250 | $ 234 | $ 169 |
| | Profit margin | 11 % | 10 % | 8 % |
| | Backlog | $ 3,775 | $ 2,197 | $ 1,815 |
| | Bell is a leading manufacturer of advanced military helicopters and
tiltrotor aircraft for the U.S. Government and commercial helicopters for
corporate, offshore petroleum exploration and development, utility, charter,
police, fire, rescue and emergency medical customers. Additionally, Bell is a
primary supplier of advanced weapon systems to meet the demanding needs of
the aerospace and defense markets and the leading manufacturer of piston
aircraft engines. | | | |
| | Bell Helicopter has two major programs with the U.S. Government – the
V-22 and the H-1 Upgrade Program. The V-22 is the pioneer program for
tiltrotor technology with a current requirement of 458 aircraft. Bell expects
to receive authorization to proceed to full-rate production of the V-22 in
2005. The H-1 Upgrade Program is a major contract to remanufacture the U.S.
Marine Corps’ fleet of AH-1W SuperCobra and UH-1N utility helicopters to an
advanced configuration featuring common avionics and flight dynamics. Bell
expects to receive authorization to proceed to full-rate production in 2006
for 100 UH-1N and 180 AH-1W helicopters. Bell currently has orders for six
UH-1Y aircraft and three AH-1Z aircraft, and expects to begin deliveries in
2006. | | | |
| | Bell Helicopter continues to manufacture aircraft under the V-22
low-rate initial production releases that began prior to 2003. Revenues under
those releases are recorded on a cost incurred basis primarily as a result of
the significant engineering effort required over a lengthy period of time
during the initial development phase in relation to total contract volume.
Revenues for those releases are expected to decline through 2007 as the
remaining effort is completed. The development effort was substantially
complete for new production releases in 2003, and revenue on those releases
will be recognized as units are delivered, which is expected to begin in
2005. Accordingly, during 2005, V-22 program revenues related to new production
releases recorded on an as-delivered basis are expected to more than offset
lower revenues associated with the diminishing development revenues recorded
as costs are incurred. | | | |
| | During 2004, Bell Helicopter’s commercial business rebounded with
increases in orders, deliveries and backlog. Bell continued to invest in
commercial programs as evidenced by the significant progress made on the
newly announced 429 light twin aircraft and other program upgrades in
response to customer requests to improve speed, lower operating costs and
reduce noise. In December 2004, the Bell/Agusta Aerospace Company, L.L.C.
received U.S. Federal Aviation Administration certification of the AB139
helicopter. | | | |
| | Additionally, Textron Systems has received orders to deliver over 200
armored security vehicles (“ASV”) in 2005 with additional orders expected.
Currently, production capacity is ramping up to meet these deliveries. | | | |
| | Bell Revenues | | | |
| | The Bell segment’s revenues decreased $94 million in 2004, compared with
2003, due to lower revenue of $166 million in the U.S. Government business,
partially offset by higher commercial sales of $72 million. U.S. Government
sales decreased primarily due to lower revenue of $243 million on the V-22
program and lower sales of $30 million related to a contract for training
aircraft completed in 2003. In addition, revenue was reduced by $11 million
related to a final agreement with the U.S. Government to settle an overhead
cost rate matter. These decreases in revenue were partially offset by $34
million of higher military spares volume, increased sales of $34 million for
air-launched weapons and higher H-1 revenue of $34 million. Commercial
revenues increased primarily due to higher foreign military sales of $64
million, increased volume in the aircraft engine business of $18 million and
higher spares volume of $14 million. These increases were partially offset by
lower Huey II kit sales of $16 million and lower sales of commercial aircraft
of $6 million. The lower V-22 revenue was primarily due to lower effort of
$170 million on production lots three through six as these contracts near
completion and decreasing development activities of $98 million. | | | |

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| | The Bell segment’s revenues increased $113 million in 2003, compared
with 2002, due to higher U.S. Government revenue of $62 million primarily due
to the ongoing development efforts on the V-22 program and higher foreign
military sales volume of $35 million related to a contract that began
shipments during the third quarter of 2002. | | | |
| --- | --- | --- | --- | --- |
| | Bell Segment Profit | | | |
| | Segment profit increased $16 million in 2004, compared with 2003, due
to higher profit of $47 million in the commercial business, partially offset
by the impact of lower revenue of $31 million in the U.S. Government
business. Commercial profit increased primarily due to the $34 million impact
of the higher foreign military sales, favorable cost performance in the
commercial helicopter business of $31 million (including the favorable
resolution of a $6 million warranty issue provided for in 2003), the $9
million benefit from a favorable mix of commercial aircraft and the $5
million favorable impact of a nonrecurring 2003 charge related to a recall,
inspection and customer care program at the aircraft engine business,
partially offset by higher engineering expenses of $28 million. Profit in the
U.S. Government business decreased primarily due to the $20 million impact of
lower V-22 revenue, an $11 million settlement with the U.S. Government and
lower volume of training aircraft of $11 million, partially offset by the $10
million impact of higher volume of air-launched weapons. | | | |
| | Segment profit in 2003 was $65 million greater than in 2002 primarily
because 2002 included $31 million of costs related to the recall, inspection
and customer care programs at the aircraft engine business and higher profit
of $22 million in the commercial helicopter business. The higher profit in
the commercial helicopter business in 2003 was primarily due to lower
receivable reserve provisions of $16 million and reduced pricing of $20
million in 2002 related to one commercial helicopter model. | | | |
| | Bell Outlook | | | |
| | Bell’s revenues are expected to increase about 7% in 2005 largely due
to higher V-22 and ASV deliveries. V-22 revenue is expected to increase as
deliveries of new production releases (recorded on an as-delivered basis) are
expected to more than offset lower engineering- and development-based
revenues (recorded on a cost-incurred basis). Margins are expected to remain
relatively consistent as a result of ramp up costs for V-22 production. | | | |
| Cessna | (Dollars in millions) | 2004 | 2003 | 2002 |
| | Revenues | $ 2,473 | $ 2,299 | $ 3,175 |
| | Segment profit | $ 267 | $ 199 | $ 376 |
| | Profit margin | 11 % | 9 % | 12 % |
| | Backlog | $ 5,352 | $ 3,947 | $ 4,474 |
| | Cessna is a leading manufacturer of general aviation aircraft and the
largest manufacturer of light and mid-sized business jets. Cessna provides
dependable aircraft and premier service to corporate customers in over 75
countries. Cessna also participates in the fractional jet ownership business
through its sales to a major fractional jet customer, as well as through
CitationShares, Textron’s joint venture with Tag Aviation USA, Inc. During
2004, the economy strengthened after a prolonged downturn, leading to a
significant increase in business jet and single engine aircraft orders. At
the same time, Cessna also realized the benefit of its continued strategy of
investment in new product development, receiving FAA certification for the
Citation XLS, Sovereign and CJ3 business jets and introducing upgrades to the
CJ1 and CJ2, the CJ1+ and the CJ2+. | | | |
| | Cessna Revenues | | | |
| | The Cessna segment’s revenues increased $174 million in 2004, compared
with 2003, primarily due the $76 million increase from the consolidation of
CitationShares, $39 million of higher pricing and a $12 million benefit from
lower used aircraft overtrade allowances. Citation business revenue jet
deliveries were 179 in 2004, compared with 194 jets in 2003. | | | |
| | The Cessna segment’s revenues decreased $876 million in 2003, compared
with 2002, due to lower Citation business jet volume (194 revenue jet
deliveries in 2003, compared with 306 in 2002). Lower used aircraft volume of
$87 million and lower Caravan volume of $32 million as a result of lower
demand were essentially offset by higher spare parts and service volume of
$48 million, higher pricing of $45 million related to the last remnants of
introductory pricing on certain business jet models and a $27 million benefit
from lower used aircraft overtrade allowances. | | | |
| | Cessna Segment Profit | | | |
| | Segment profit increased $68 million in 2004, compared with 2003,
largely due to $85 million of improved cost performance, $39 million of
higher pricing, $18 million of lower used aircraft valuation adjustments, a
$12 million benefit from lower used aircraft overtrade allowances and an $8
million benefit related to the expiration of prior year residual value
guarantees, partially offset by | | | |

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| | $70 million of inflation and the unfavorable impact of lower business
jet volume and unfavorable mix of $20 million. The benefit from lower used
aircraft overtrade allowances and valuation adjustments was primarily due to
fewer trade-ins and a stabilization in market values for used jets in 2004. | | | | |
| --- | --- | --- | --- | --- | --- |
| | Segment profit decreased $177 million in 2003, compared with 2002,
primarily due to reduced margin of $305 million from lower sales volume and
inflation of $67 million, partially offset by improved cost performance of
$125 million and higher pricing of $45 million related to the last remnants
of introductory pricing on certain business jet models and a $27 million
benefit from lower used aircraft overtrade allowances. | | | | |
| | Cessna Outlook | | | | |
| | We expect Cessna’s revenues to increase in 2005 due to higher sales of
jets based on our current backlog. Margins are also expected to increase
primarily as a result of the higher business jet volume. Cessna plans to
continue its investment in new products such as the CJ1+, CJ2+ and Mustang,
broadening its product line to take advantage of the improving business jet
market. | | | | |
| Fastening Systems | (Dollars in millions) | 2004 | | 2003 | 2002 |
| | Revenues | $ 1,924 | | $ 1,737 | $ 1,650 |
| | Segment profit | $ 53 | | $ 66 | $ 72 |
| | Profit margin | 3 | % | 4 % | 4 % |
| | Textron Fastening Systems is one of the world’s largest providers of
integrated fastening systems solutions and offers a full range of fastening
technologies, including fasteners, engineered assemblies and automation
equipment. Major markets served include aerospace, automotive, computer,
construction, electronics, electrical equipment, industrial equipment,
non-automotive transportation, telecommunications and white good markets. These
markets are highly competitive, and suppliers are often required to make
price concessions to win new business and maintain existing customers.
Consequently, significant cost reductions are required not only to offset
inflation and price concessions, but also to improve margins. | | | | |
| | During 2004, an increase in the global demand for steel resulted in
significantly higher prices for materials used in the manufacturing process
at Fastening Systems, a major supplier of steel fasteners. As a result, Fastening
Systems took action to raise prices and impose surcharges on its steel
products to mitigate the impact of higher raw material costs. There has been
about a six-month lag between the increases in cost and full implementation
of the new customer pricing programs. These price increases for steel have
been partially offset by price concessions required to win new business and
retain existing customers. | | | | |
| | Fastening Systems Revenues | | | | |
| | The Fastening Systems segment’s revenues increased $187 million in
2004, compared with 2003, primarily due to favorable foreign exchange of $116
million, higher volume of $57 million, largely due to improvements in many of
its end markets, and $20 million of higher pricing. The Fastening Systems
segment’s revenues increased $87 million in 2003, compared with 2002,
primarily due to a favorable foreign exchange impact of $128 million,
reflecting a weak U.S. dollar, partially offset by higher pricing concessions
of $13 million in 2003 and lower volume primarily in the European industrial
markets. | | | | |
| | Fastening Systems Segment Profit | | | | |
| | Segment profit decreased $13 million in 2004, compared with 2003,
primarily due to inflation of $88 million, partially offset by improved cost
performance of $35 million, pricing of $20 million, the impact of the higher
sales volume of $10 million and favorable foreign exchange of $10 million.
Inflation includes $62 million of higher steel prices, which were partially
offset by $35 million in price increases and surcharges to customers. Segment
profit in 2003 remained relatively flat with some deterioration, compared
with 2002, reflecting the soft demand for the segment’s products and higher
pricing concessions of $13 million. | | | | |
| | Fastening Systems Outlook | | | | |
| | We expect revenues at Fastening Systems will remain relatively flat in
2005 with a slight improvement in profit margin as we begin to realize the
full benefit of our substantially completed restructuring program and other
process improvements. | | | | |
| Industrial | (Dollars in millions) | 2004 | 2003 | | 2002 |
| | Revenues | $ 3,046 | $ 2,836 | | $ 2,627 |
| | Segment profit | $ 194 | $ 150 | | $ 169 |
| | Profit margin | 6 % | 5 | % | 6 % |

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| | The Industrial segment is composed of five businesses, including
E-Z-GO, Jacobsen, Kautex, Greenlee and Fluid & Power. Through these
businesses, the segment provides its customers with innovative solutions and
services, including golf cars and turf-care equipment, plastic fuel systems,
wire and cable installation equipment, and industrial pumps and gears. These
markets are highly competitive and price sensitive. Consequently, significant
cost reductions are required not only to offset inflation and price
concessions but also to improve margins. | | | |
| --- | --- | --- | --- | --- |
| | Industrial Revenues | | | |
| | The Industrial segment’s revenues increased $210 million in 2004,
compared with 2003, primarily due to a favorable foreign exchange impact of
$167 million and higher sales volume of $61 million, partially offset by $17
million related to the divestiture of a non-core product line during the
second quarter of 2004. The higher sales volume primarily reflects an
increase of $44 million at Kautex, largely due to new product launches and
growth in its international markets, and to a lesser degree increases of $18
million and $12 million at E-Z-GO and Jacobsen, respectively. | | | |
| | The Industrial segment’s revenues increased $209 million in 2003,
compared with 2002, primarily due to a favorable foreign exchange impact of
$185 million and higher sales volume of $131 million at Kautex as a result of
new product launches and a continued strong automotive market. These
increases were partially offset by lower sales volume of $123 million at
E-Z-GO and Jacobsen, reflecting reduced demand that was largely attributable
to a depressed golf market. | | | |
| | Industrial Segment Profit | | | |
| | Segment profit increased $44 million in 2004, compared with 2003,
primarily due to $92 million of improved cost performance, improved credit
performance of $16 million, the favorable foreign exchange impact of $13
million, the $10 million impact of higher volume and lower fair market value
adjustments of $8 million for used golf cars. These increases were partially
offset by inflation of $59 million and lower profit of $24 million at a North
American Kautex plant due to increased costs from manufacturing
inefficiencies. | | | |
| | Segment profit decreased $19 million in 2003, compared with 2002,
primarily due to lower profit of $52 million at E-Z-GO and Jacobsen, due to
lower sales as a result of the depressed golf market, the impact of adjusting
production schedules to the lower demand and $12 million in higher bad debt
provisions as a result of a financially weakened customer base. This decrease
was partially offset by $33 million related to improved results in each of
the other businesses primarily as a result of improved cost performance. | | | |
| | Industrial Outlook | | | |
| | Industrial revenues are expected to remain flat in 2005, with slightly
lower revenues at Kautex, as a result of model changeovers, expected to be
offset with modest growth in the remaining businesses. Segment margins are
forecasted to increase to about 7%, as the segment continues to realize the
benefit of its substantially completed restructuring program and other
process improvements. | | | |
| Finance | (Dollars in millions) | 2004 | 2003 | 2002 |
| | Revenues | $ 545 | $ 572 | $ 584 |
| | Segment profit | $ 139 | $ 122 | $ 118 |
| | Profit margin | 26 % | 21 % | 20 % |
| | The Finance segment is a diversified commercial finance business with
core operations in aircraft finance, asset-based lending, distribution
finance, golf finance, resort finance and structured capital. Its financing
activities are confined almost exclusively to secured lending and leasing to
commercial markets. Within these core operations, this segment also provides
financing programs for products manufactured by Textron. In 2004, management
continued its focus on growing its core business while liquidating non-core
assets. | | | |
| | Finance Revenues | | | |
| | The Finance segment’s revenues decreased $27 million in 2004, compared
with 2003. The decrease was primarily due to lower finance charges and
discounts of $35 million, largely due to the continued liquidation of
non-core assets resulting in lower average finance receivables of $269
million, and a reduction of discount earnings in the distribution finance
business. The decrease was partially offset by higher securitization gains of
$13 million, primarily due to improved yield, and $20 million from an
increase in average finance receivables sold to the distribution finance
revolving conduit, partially offset by a $6 million reduction in resort
finance gains. | | | |

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| The Finance segment’s revenues decreased $12 million in 2003, compared
with 2002, primarily due to lower finance charges and discounts of $9 million
from lower average finance receivables and a decline in syndication income
due to a nonrecurring gain in 2002 of $9 million on the sale of a franchise
finance portfolio. | | | |
| --- | --- | --- | --- |
| Finance Segment Profit | | | |
| Segment profit increased $17 million in 2004, compared with 2003,
primarily due to a $23 million decrease in the provision for loan losses,
reflecting an improvement in portfolio quality, partially offset by lower net
interest margin of $10 million. | | | |
| Segment profit increased $4 million in 2003, compared with 2002,
primarily due to a lower provision for loan losses of $30 million ($81
million in 2003 vs. $111 million in 2002), partially offset by higher
operating expense of $26 million. The 27% decrease in the provision for loan
losses reflects an improvement in portfolio quality as measured by
improvements in nonperforming assets as discussed below and, to a lesser
extent, declining portfolio growth. The higher operating expense includes $12
million in higher legal and collection expense primarily related to the
continued resolution of nonperforming accounts and the accrual of settlement
costs associated with litigation during 2003. | | | |
| Finance Portfolio Quality | | | |
| The following table presents information about the credit quality of
the Finance segment’s portfolio: | | | |
| (In millions, except for ratios) | 2004 | 2003 | 2002 |
| Provision for loan losses | $ 58 | $ 81 | $ 111 |
| Nonperforming assets | $ 140 | $ 162 | $ 214 |
| Ratio of nonperforming
assets to total finance assets | 2.18 % | 2.80 % | 3.41 % |
| Allowance for losses on
finance receivables recorded on balance sheet | $ 99 | $ 119 | $ 145 |
| Ratio of allowance for
losses on receivables to nonaccrual finance receivables | 83.7 % | 78.4 % | 81.7 % |
| Net charge-offs | $ 79 | $ 117 | $ 103 |
| 60+ days contractual
delinquency as a percentage of finance receivables | 1.47 % | 2.39 % | 2.86 % |
| During the last two years, the Finance segment has experienced
improvements in portfolio quality as indicated by improved credit quality
measures and a lower provision for losses. The improvements in credit quality
were evident through lower nonperforming asset levels and 60+ days
contractual delinquency. | | | |
| Textron Finance’s nonperforming assets include nonaccrual accounts
that are not guaranteed by Textron Manufacturing, for which interest has been
suspended, and repossessed assets. Nonperforming assets for each of the last
three year-ends by business are as follows: | | | |
| (In millions) | 2004 | 2003 | 2002 |
| Resort finance | $ 53 | $ 55 | $ 45 |
| Aircraft finance | 12 | 26 | 34 |
| Golf finance | 26 | 22 | 15 |
| Distribution finance | 5 | 11 | 21 |
| Asset-based lending | 7 | 6 | 13 |
| Other | 37 | 42 | 86 |
| Total nonperforming assets | $ 140 | $ 162 | $ 214 |
| We believe that nonperforming assets will generally be in the range of
2% to 4% of finance assets depending on economic conditions. Textron Finance
experienced significant improvement in total nonperforming assets with a $22
million decrease in 2004 and a $52 million decrease in 2003. The decrease in
2004 was primarily attributable to the core businesses, including $14 million
in aircraft finance and $6 million in distribution finance, largely related
to improved general economic conditions. Excluding an increase of $13 million
in nonperforming assets related to one customer within its golf mortgage
portfolio, the golf finance business experienced improvements of $7 million
in its golf mortgage portfolio and $2 million in its golf equipment finance
portfolio. The non-core businesses within the other line continued to
decrease with a $5 million reduction in telecommunications, $10 million in
media finance and $7 million in other liquidating portfolios, partially
offset by a $22 million increase in franchise finance primarily related to
one customer. These non-core businesses continue to compose a
disproportionate amount of Textron Finance’s nonperforming assets accounting
for 27% of total nonperforming assets, while composing only 7% of the total
finance assets at January 1, 2005. Overall, we expect continued modest
improvement as these portfolios liquidate. | | | |

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	Finance Outlook
	In 2005, we expect the Finance segment’s profit to increase primarily
as a result of improved interest margin due to higher average finance
receivables and lower relative borrowing costs.
Special Charges	Special charges are more fully discussed on page 13 and are summarized
below by segment:
by Segment
		Restructuring Expense
	(In millions)	Severance Costs	Contract Terminations	Fixed
Asset Impairments		Other Associated Costs	Total		Other Charges		Total Special Charges
	2004
	Bell	$ —	$ —	$ (1	)	$ —	$ (1	)	$ —		$ (1	)
	Cessna	—	—	—		—	—		—		—
	Fastening Systems	37	7	9		19	72		—		72
	Industrial	28	37	1		6	72		—		72
	Finance	—	—	—		—	—		—		—
	Corporate	—	—	—		—	—		(12	)	(12	)
		$ 65	$ 44	$ 9		$ 25	$ 143		$ (12	)	$ 131
	2003
	Bell	$ 2	$ —	$ —		$ —	$ 2		$ —		$ 2
	Cessna	8	—	1		—	9		—		9
	Fastening Systems	34	—	34		7	75		—		75
	Industrial	17	2	10		13	42		—		42
	Finance	4	—	2		—	6		—		6
	Corporate	3	—	—		—	3		15		18
		$ 68	$ 2	$ 47		$ 20	$ 137		$ 15		$ 152
	2002
	Bell	$ 4	$ —	$ 1		$ 1	$ 6		$ —		$ 6
	Cessna	23	—	2		4	29		—		29
	Fastening Systems	12	2	4		4	22		—		22
	Industrial	14	2	6		13	35		—		35
	Finance	—	—	—		—	—		—		—
	Corporate	1	—	—		—	1		38		39
		$ 54	$ 4	$ 13		$ 22	$ 93		$ 38		$ 131
Liquidity & Capital Resources
	Textron’s financings are conducted through two borrowing groups:
Textron Manufacturing and Textron Finance. This framework is designed to
enhance Textron’s borrowing power by separating the Finance segment. Textron
Manufacturing consists of Textron Inc., the parent company, consolidated with
the entities that operate in the Bell, Cessna, Fastening Systems and
Industrial business segments, 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 consists of Textron’s wholly
owned commercial finance subsidiary, Textron Financial Corporation,
consolidated with its subsidiaries. The financial results of Textron Finance
are a reflection of its ability to provide financial services in a
competitive marketplace, at 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.
	A portion of Textron Finance’s business involves financing retail
purchases and leases for new and used aircraft and equipment manufactured by
Textron Manufacturing’s Bell, Cessna and Industrial segments. The cash flows
related to these captive financing activities are reflected as operating
activities (by Textron Manufacturing) and as investing activities (by Textron
Finance) based on each group’s operations. These captive financing
transactions have been eliminated and cash from customers or from
securitizations is recognized in operating activities within the consolidated
statement of cash flows when received.

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| Textron Inc. provides a support agreement to Textron Finance that
requires Textron Inc. to maintain 100% ownership of Textron Finance. The
agreement also requires Textron Finance to maintain fixed charge coverage of
no less than 125% and consolidated shareholder’s equity of no less than $200
million. Textron Finance’s bank agreements prohibit the termination of the
support agreement. | | | | | | |
| --- | --- | --- | --- | --- | --- | --- |
| Textron’s financial position continued to be strong at the end of 2004
and included cash and cash equivalents of $732 million, compared with $838 million
at the end of 2003. During 2004, cash flows from operations were the primary
source of funds for the operating needs, restructuring activities, dividends
and capital expenditures. Management analyzes operating cash flows for
Textron Manufacturing by tracking free cash flow, which is calculated using
net cash provided by operating activities, adding back after-tax cash used
for restructuring activities and proceeds on the sale of fixed assets, then
subtracting capital expenditures, including those financed with capital
leases. | | | | | | |
| Operating Cash Flows | | | | | | |
| (In
millions) | 2004 | | 2003 | | 2002 | |
| Consolidated | $ 949 | | $ 985 | | $ 676 | |
| Textron Manufacturing | $ 973 | | $ 691 | | $ 481 | |
| Textron Finance | $ 161 | | $ 242 | | $ 198 | |
| On a consolidated basis, operating cash flows have remained fairly
consistent over the past two years.Textron Manufacturing’s operating cash
flows have increased significantly over the past two years, reflecting
improved operating performance and enterprise management initiatives. The
$282 million increase in Textron Manufacturing’s operating cash flows is
largely due to a decrease in working capital of $205 million in 2004,
compared with a $65 million increase in working capital in 2003. A
significant portion of this decrease was due to an increase in customer
deposits in the Bell and Cessna segments largely due to an increase in orders
for jets and commercial helicopters. Textron Manufacturing’s operating cash
flows include after-tax cash used to finance Textron’s restructuring program
totaling $67 million in 2004, $54 million in 2003 and $57 million in 2002.
Operating cash flows in 2003 included a $109 million tax refund received in
2003. | | | | | | |
| Investing Cash Flows | | | | | | |
| (In
millions) | 2004 | | 2003 | | 2002 | |
| Consolidated | $ (844 | ) | $ (65 | ) | $ (734 | ) |
| Textron Manufacturing | $ (202 | ) | $ (210 | ) | $ 324 | |
| Textron Finance | $ (756 | ) | $ 272 | | $ (1,008 | ) |
| On a consolidated basis, investing cash flows are largely driven by
Textron Finance. Textron Finance increased its use of cash for investing
activities primarily due to a $768 million decrease in proceeds from the sale
of finance receivables and securitizations and a $227 million increase in
finance receivable originations, net of repayments. The reduction in proceeds
from receivable sales was largely attributable to the sale of a small-ticket
equipment portfolio in 2003 for $329 million, a $130 million increase in the
utilization of the distribution finance conduit and franchise portfolio sales
of $123 million in 2003. The significant increase in 2003 was primarily due
to a $389 million decrease in finance receivable originations, net of
repayments, $196 million in higher proceeds from finance receivable sales and
a nonrecurring $510 million repayment in 2002 of an advance made to Textron
Manufacturing. | | | | | | |
| Excluding the nonrecurring repayment in 2002 of an advance of $510
million from Textron Finance, Textron Manufacturing’s use of cash for
investing activities has been fairly consistent and is largely driven by
capital expenditures. Capital expenditures for Textron Manufacturing totaled
$334 million in 2004, $306 million in 2003 and $298 million in 2002,
including expenditures purchased through capital leases of $44 million in
2004, $26 million in 2003 and $23 million in 2002. | | | | | | |
| Textron Finance’s investing activities include $892 million, $886
million and $969 million in non-cash activity for finance receivables
originated in connection with the sale of inventory in 2004, 2003 and 2002,
respectively. Cash received from customers and securitizations related to the
sale of inventory is also included within Textron Finance’s investing
activities totaling $727 million, $972 million and $1,059 million, in 2004,
2003 and 2002, respectively. Within the consolidated statement of cash flows
these amounts have been eliminated from investing activities and are recorded
as a net amount in operating cash flows under the caption “Captive finance
receivables, net.” | | | | | | |

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| Financing Cash Flows — (In
millions) | 2004 | | 2003 | | 2002 | |
| --- | --- | --- | --- | --- | --- | --- |
| Consolidated | $ (276 | ) | $ (746 | ) | $ 36 | |
| Textron Manufacturing | $ (708 | ) | $ (469 | ) | $ (803 | ) |
| Textron Finance | $ 361 | | $ (354 | ) | $ 786 | |
| On a consolidated basis, the changes in financing cash flows over the
past few years are largely driven by changes in the cash flows for Textron
Finance. The increase in cash provided by financing activities in 2004 at
Textron Finance is primarily due to a net increase in commercial paper and
other short-term debt to fund asset growth. The cash used in 2003 primarily
relates to the pay-down of commercial paper and other short-term debt from
the proceeds received from finance receivable sales. In addition, in 2003,
under new and existing shelf registration statements, Textron Finance issued
$1.2 billion of term notes, primarily in U.S. and Canadian markets. In 2002,
Textron Finance issued $2.0 billion of term notes to refinance maturing term
debt and to repay the 2001 advance of $510 million from Textron
Manufacturing. | | | | | | |
| During 2004, Textron Manufacturing repaid a $300 million 6.375% note
using cash and proceeds from commercial paper issuances. During 2003, Textron
Manufacturing issued $250 million in term notes under Textron Inc.’s existing
shelf registration filed with the Securities and Exchange Commission and used
the proceeds for the redemption of $500 million in mandatorily redeemable
preferred securities in July 2003. | | | | | | |
| Proceeds from the exercise of stock options increased $120 million to
$187 million in 2004 as more options were exercised primarily due to the
increasing stock price. | | | | | | |
| Principal Payments and Retirements of Long-Term Debt
and Mandatorily Redeemable Preferred Securities | | | | | | |
| In 2004, 2003 and 2002, Textron Manufacturing made principal payments
of $362 million, $508 million and $544 million, respectively. In 2004, 2003
and 2002, Textron Finance made principal payments on long-term debt of $1.3
billion, $1.4 billion and $1.7 billion, respectively. | | | | | | |
| Stock Repurchases | | | | | | |
| In October 2004, Textron’s Board of Directors authorized a new
12-million-share repurchase program. This program supercedes Textron’s
previous authorization, under which less than one million shares remained. In
2004, 2003 and 2002, Textron repurchased approximately 6,396,000, 1,951,000
and 5,734,000 shares of common stock, respectively, under its Board
authorized share repurchase programs for an aggregate cost of $415 million,
$66 million and $248 million, respectively. | | | | | | |
| Dividends | | | | | | |
| In October 2004, the Board of Directors authorized a $0.10 per share
increase in Textron’s annualized common stock dividend, from $1.30 per share
to $1.40 per share. The first increased dividend payment was paid on January
3, 2005 to holders of record at the close of business on December 10, 2004,
resulting in an annual dividend per common share of $1.325 in 2004, compared
with $1.30 each in 2003 and 2002. Dividend payments to shareholders totaled
$135 million, $222 million and $182 million in 2004, 2003 and 2002,
respectively. The 2003 payments include an additional payment made for the
fourth quarter dividend, which is typically paid in the following year. | | | | | | |
| Discontinued Operations Cash Flows | | | | | | |
| Net cash provided by discontinued operations for Textron Manufacturing
includes the OmniQuip and InteSys businesses and totaled $32 million in 2004,
$158 million in 2003 and $20 million in 2002. In 2003, Textron Manufacturing
received a $90 million cash payment upon the sale of its remaining OmniQuip
business and a $108 million tax refund related to the sale of the Snorkel
product line and the capital stock of the OmniQuip Textron Inc. holding
company. | | | | | | |
| Net cash provided by discontinued operations for Textron Finance
includes the small business finance operation and totaled $175 million in
2003 and $27 million in 2002. In the fourth quarter of 2003, Textron Finance
sold substantially all of its small business direct portfolio for $421
million in cash. | | | | | | |
| Capital Resources | | | | | | |
| Textron Manufacturing’s debt (net of cash) to total capital ratio as
of January 1, 2005 was 25%, compared with 30% at January 3, 2004. Textron
Manufacturing has established a long-term debt-to-capital ratio target in the
mid-thirties. Consistent with the methodology used by members of the
financial community, leverage of the manufacturing operations excludes the
debt of Textron Finance. In turn, Textron Finance limits its borrowings to an
amount, taking into account the risk profile of its assets, consistent with a
single A credit rating. Surplus capital of Textron Finance is returned to
Textron Inc. | | | | | | |

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| 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 utilize a broad base of financial sources for their
respective liquidity and capital needs. Our credit ratings are predominantly
a function of our ability to generate operating cash flow and satisfy certain
financial ratios. Since high-quality credit ratings provide us with access to
a broad base of global investors at an attractive cost, we target a long-term
A rating from the independent debt-rating agencies. As of January 1, 2005,
our credit ratings are as follows: | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- |
| | | | Fitch | Moody’s | | Standard & Poor’s | |
| Long-term: | | | | | | | |
| Textron Manufacturing | | | A- | A3 | | A- | |
| Textron Finance | | | A- | A3 | | A- | |
| Short-term: | | | | | | | |
| Textron Manufacturing | | | F2 | P2 | | A2 | |
| Textron Finance | | | F2 | P2 | | A2 | |
| For liquidity purposes, Textron Manufacturing and Textron Finance have
a policy of maintaining sufficient unused lines of credit to support their
outstanding commercial paper. None of these lines of credit were used at
January 1, 2005 or at January 3, 2004. Textron Manufacturing has primary
revolving credit facilities of $1.25 billion, of which $1.0 billion will
expire in 2007 and $0.25 billion will expire in March 2005. Textron
Manufacturing’s credit facilities permit Textron Finance to borrow under
those facilities. Textron Finance also has bank lines of credit of $1.5
billion, of which $500 million expires in July 2005 and $1.0 billion expires
in 2008. The facilities that expire in 2005 both include one-year term out
options that effectively extend their expirations into 2006. At January 1,
2005, the lines of credit not reserved as support for commercial paper and
letters of credit were $1.2 billion for Textron Manufacturing and $187
million for Textron Finance. | | | | | | | |
| Under a shelf registration statement filed with the Securities and
Exchange Commission, Textron Finance may issue public debt securities in one
or more offerings up to a total maximum offering of $4.0 billion. Under this
registration statement, Textron Finance issued $370 million of term notes
during 2004. The proceeds from these issuances were used to refinance
maturing debt. At January 1, 2005, Textron Finance had $3.3 billion available
under this registration statement. Under a shelf registration statement filed
with the Securities and Exchange Commission that became effective on August
4, 2004, Textron Manufacturing may issue public debt and other securities in
one or more offerings up to a total maximum offering of $2.0 billion. At
January 1, 2005, Textron Manufacturing had $2.0 billion available under this
registration statement. | | | | | | | |
| Contractual Obligations | | | | | | | |
| The following table summarizes Textron Manufacturing’s known
contractual obligations to make future payments or other consideration
pursuant to certain contracts as of January 1, 2005, as well as an estimate
of the timing in which these obligations are expected to be satisfied: | | | | | | | |
| | Payment
Due by Period | | | | | | |
| | Less
than | | | | | More
than | |
| (In millions) | 1 Year | 2 Years | 3 Years | 4 Years | 5 Years | 5 Years | Total |
| Textron Manufacturing: | | | | | | | |
| Liabilities reflected in balance sheet: | | | | | | | |
| Long-term debt | $ 427 | $ 4 | $ 34 | $ 346 | $ — | $ 848 | $ 1,659 |
| Capital lease obligations | 6 | 4 | 3 | 2 | 3 | 114 | 132 |
| Pension benefits for unfunded plans | 15 | 14 | 13 | 14 | 13 | 150 | 219 |
| Postretirement benefits other than pensions | 60 | 61 | 59 | 58 | 54 | 455 | 747 |
| Other long-term liabilities | 135 | 74 | 51 | 33 | 30 | 246 | 569 |
| Liabilities not reflected in balance sheet: | | | | | | | |
| Operating leases | 70 | 55 | 37 | 28 | 28 | 127 | 345 |
| Purchase obligations | 1,412 | 132 | 35 | 7 | — | 12 | 1,598 |
| Total Textron Manufacturing | $ 2,125 | $ 344 | $ 232 | $ 488 | $ 128 | $ 1,952 | $ 5,269 |
| Long-term debt and capital lease obligations included in the table
above do not include interest payments. | | | | | | | |

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| Textron maintains defined benefit pension plans and postretirement
benefit plans other than pensions as discussed in Note 12 to the consolidated
financial statements. Included in the table above are discounted estimated
benefit payments to be made by Textron related to unfunded pension and other
postretirement benefit plans. Actual benefit payments are dependent on a
number of factors, including mortality assumptions, expected retirement age,
rate of compensation increases and medical trend rates, which are subject to
change in future years. Textron also expects to make contributions to its
funded pension plans in the range of $30 million to $35 million per year over
the next five years, which are not reflected in this table. | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Other long-term liabilities primarily include undiscounted amounts on
the consolidated balance sheet as of January 1, 2005 representing obligations
under deferred compensation arrangements and estimated environmental
remediation costs. Payments under deferred compensation arrangements have
been estimated based on management’s assumptions of expected retirement age,
mortality, stock price and rates of return on participant deferrals. Timing
of cash flows associated with environmental remediation costs are largely
based on historical experience. | | | | | | | | | | |
| Operating leases represent undiscounted obligations under
noncancelable leases. | | | | | | | | | | |
| Purchase obligations represent undiscounted obligations for which
Textron is committed to purchase goods and services as of January 1, 2005.
Textron’s ultimate liability for these obligations may be reduced based upon
termination provisions included in certain purchase contracts, the costs
incurred to date by vendors under these contracts or by recourse under firm
contracts with the U.S. Government under normal termination clauses. | | | | | | | | | | |
| Effective January 2, 2005, Textron engaged a third-party service
provider to assume oversight of its information technology infrastructure,
including maintenance, operational oversight and purchases of hardware (the
“IT Contract”). The IT Contract covers a ten-year period and is subject to
variable pricing and quantity provisions for both purchases of computer
hardware and system design modifications. Textron retains the right to approve
significant design, equipment purchase and related decisions by the service
provider. Textron has the ability to terminate the IT Contract prior to its
full-term and would consequently be subject to variable termination fees that
decline over time and do not exceed $70 million in 2005. | | | | | | | | | | |
| The following table summarizes Textron Finance’s known contractual
obligations to make future payments. Due to the nature of finance companies,
Textron Finance also has contractual cash receipts that will be received in
the future. Textron Finance generally borrows funds at various contractual
maturities to match the maturities of its finance receivables. The
contractual payments and receipts as of January 1, 2005 are detailed below: | | | | | | | | | | |
| | Payment
Due by Period | | | | | | | | | |
| | Less
than | | | | | | | | More
than | |
| (In millions) | 1 Year | 2 Years | | 3 Years | | 4 Years | 5 Years | | 5 Years | Total |
| Textron Finance: | | | | | | | | | | |
| Contractual payments: | | | | | | | | | | |
| Commercial paper and other short-term debt | $ 1,307 | $ — | | $ — | | $ — | $ — | | $ — | $ 1,307 |
| Term debt | 656 | 985 | | 983 | | 42 | 542 | | 268 | 3,476 |
| Operating leases | 5 | 5 | | 4 | | 4 | 2 | | 3 | 23 |
| Total contractual payments | 1,968 | 990 | | 987 | | 46 | 544 | | 271 | 4,806 |
| Contractual receipts: | | | | | | | | | | |
| Finance receivables | 2,303 | 683 | | 526 | | 516 | 397 | | 1,412 | 5,837 |
| Operating leases | 27 | 19 | | 16 | | 12 | 10 | | 24 | 108 |
| Total contractual receipts | 2,330 | 702 | | 542 | | 528 | 407 | | 1,436 | 5,945 |
| Cash | 127 | — | | — | | — | — | | — | 127 |
| Total cash and contractual receipts | 2,457 | 702 | | 542 | | 528 | 407 | | 1,436 | 6,072 |
| Net cash and contractual receipts (payments) | $ 489 | $ (288 | ) | $ (445 | ) | $ 482 | $ (137 | ) | $ 1,165 | $ 1,266 |
| Cumulative net cash and contractual receipts
(payments) | $ 489 | $ 201 | | $ (244 | ) | $ 238 | $ 101 | | $ 1,266 | |
| Finance receivables are based on contractual cash flows. These amounts
could differ due to prepayments, charge-offs and other factors. Contractual
receipts and payments exclude finance charges and discounts from receivables,
debt interest payments, proceeds from sale of operating lease equipment and
other items. | | | | | | | | | | |

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| As shown in the preceding table, cash collections from finance assets
are expected to be sufficient to cover maturing debt and other contractual
liabilities. At January 1, 2005, Textron Finance had $2.0 billion in debt and
$399 million in other liabilities that are payable within the next twelve
months. |
| --- |
| At January 1, 2005, Textron Finance had unused commitments to fund new
and existing customers under $1.0 billion of committed revolving lines of
credit, compared with $1.1 billion at January 3, 2004. The decrease is
largely related to the continued liquidation of the non-core syndicated bank
loan portfolio in 2004. Since many of the agreements will not be used to the
extent committed or will expire unused, the total commitment amount does not
necessarily represent future cash requirements. |
| Off-Balance Sheet Arrangements |
| Textron has certain ventures where we have guaranteed debt up to an
aggregate amount of approximately $18 million. Textron also has other
guarantee arrangements as more fully discussed in Notes 4 and 16 to the
consolidated financial statements. |
| Bell Helicopter has partnered with The Boeing Company in the
development of the V-22 tiltrotor, with Agusta Aerospace Corporation in the
development of the AB139 and BA609, and with AgustaWestland North America
Inc. (“AWNA”) in the development of the US101. These agreements enable us to
share expertise and costs, and ultimately the profits, with our partners.
Bell and AWNA formed the AgustaWestlandBell Limited Liability Company (“AWB
LLC”) for the joint design, development, manufacture, sale, customer training
and product support of the US101 Helicopter. |
| Lockheed Martin, with AWB LLC as its principal subcontractor, has been
selected to design, develop, manufacture and support the Presidential
helicopter for the U.S. Marine Corps Marine 1 Helicopter Squadron (VXX)
Program. Bell Helicopter has guaranteed to Lockheed Martin 49% of the
performance of AWB LLC under subcontracts received by AWB LLC from Lockheed
Martin as more fully discussed in Note 16 to the consolidated financial
statements. |
| Textron Manufacturing enters into a forward contract in Textron common
stock on an annual basis. The contract is intended to hedge the earnings and
cash volatility of stock-based incentive compensation indexed to Textron
stock. The forward contract requires annual cash settlement between the
counter parties based upon a number of shares multiplied by the difference
between the strike price and the prevailing Textron common stock price. As of
January 1, 2005, the contract was for approximately 2 million shares with a
strike price of $57.51. The market price of the stock was $73.80 at January 1,
2005, resulting in a receivable of $31 million, compared with a receivable of
$25 million at January 3, 2004. |
| Textron Finance sells finance receivables utilizing both
securitizations and whole-loan sales. As a result of these transactions,
finance receivables are removed from the balance sheet, and the proceeds
received are used to reduce the recorded debt levels. Despite the reduction
in the recorded balance sheet position, Textron Finance generally retains a
subordinate interest in the finance receivables sold through securitizations,
which may affect operating results through periodic fair value adjustments.
These retained interests are more fully discussed in the securitizations
section of Note 4 to the consolidated financial statements. Textron Finance
utilizes these off-balance sheet financing arrangements (primarily
asset-backed securitizations) to further diversify funding alternatives.
These arrangements are an important source of funding that provided net
proceeds from continuing operations of $394 million and $765 million in 2004
and 2003, respectively. Textron Finance has used the proceeds from these
arrangements to fund the origination of new finance receivables and to retire
commercial paper. |
| Whole-loan finance receivable sales in which Textron Finance maintains
a continuing interest differ from securitizations as loans are sold directly
to investors and no portion of the sale proceeds is deferred. Limited credit
enhancement is typically provided for these transactions in the form of a
contingent liability related to finance receivable credit losses and, to a
lesser extent, prepayment risk. Textron Finance has a contingent liability
related to the sale of equipment lease rental streams in 2003 and 2001. The
maximum liability at January 1, 2005 was $42 million, and in the event
Textron Finance’s credit rating falls below BBB, it is required to pledge a
related pool of equipment residuals that amount to $10 million. Textron
Finance has valued this contingent liability based on assumptions for annual
credit losses and prepayment rates of 0.25% and 7.50%, respectively. An
instantaneous 20% adverse change in these rates would have an insignificant
impact on the valuation of this contingent liability. |
| Termination of Textron Finance’s off-balance sheet financing
arrangements would significantly reduce its short-term funding alternatives.
While these arrangements do not contain provisions that require Textron
Finance to repurchase significant balances of receivables previously sold, there
are risks that could reduce the availability of these funding alternatives in
the future. Potential barriers to the continued use of these arrangements
include deterioration in finance receivable portfolio quality, downgrades in
Textron Finance’s debt credit ratings and a reduction of new finance
receivable originations in the businesses that utilize these funding
arrangements. Textron Finance does not expect any of these factors to have a
material impact on its liquidity or income from continuing operations. |

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| Critical Accounting Policies |
| --- |
| The preparation of our consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
complex and subjective judgments in the selection and application of
accounting policies. The accounting policies that we believe are most
critical to the portrayal of Textron’s financial condition and results of
operations, and that require management’s most difficult, subjective and
complex judgments in estimating the effect of inherent uncertainties, are
listed below. This section should be read in conjunction with Note 1 to the
consolidated financial statements, which includes other significant
accounting policies. |
| Receivable and Inventory Reserves |
| We evaluate the collectibility of our commercial and finance
receivables based on a combination of factors. In circumstances where we are
aware of a specific customer’s inability to meet its short-term financial
obligations to us (e.g., bankruptcy filings, substantial downgrading of
credit scores, geographic economic conditions, etc.), we record a specific
reserve for bad debts for amounts we estimate to be potentially
uncollectible. Receivables are charged off when deemed uncollectible. For
homogeneous loan pools and all other receivables, we recognize reserves for
bad debts based on current delinquencies, the characteristics of the existing
accounts, historical loss experience, the value of underlying collateral, and
general economic conditions and trends. Finance receivables are written down
to the fair value (less estimated costs to sell) of the related collateral at
the earlier of the date when the collateral is repossessed or when no payment
has been received for six months, unless we deem the receivable collectible. |
| Reserves on certain finance receivables are determined using estimates
of related collateral values based on historical recovery rates and current
market conditions. Management reviews the market conditions for used
equipment and aircraft inventories on a periodic basis. A deterioration in
market conditions resulting in lower recovery rates would result in lower
estimated collateral values, increasing the amount of reserves required on
related receivables and used inventories on hand. Based on current market
conditions and recovery rates, we believe our reserves are adequate as of
January 1, 2005. |
| Long-Term Contracts |
| We recognize revenue and profit as work on certain government long-term
engineering, development and production contracts progresses using the
contract method of accounting, which relies on estimates of the total
contract cost and revenue. Estimated contract cost and revenue are based on
current contract specifications, expected engineering requirements and the
achievement of contract milestones, including product deliveries. Contract
costs are typically incurred over a period of several years, and the
estimation of these costs requires substantial judgments. The cost estimation
process is based on the professional knowledge and experience of engineers
and program managers along with finance professionals. We update our
projections of costs at least semiannually or when circumstances
significantly change. Adjustments to projected costs are recognized in net
earnings when determinable. Favorable changes in estimates result in
additional profit recognition, while unfavorable changes in estimates result
in the reversal of previously recognized earnings. Any anticipated losses on
contracts are charged to earnings when identified. Earnings on long-term
contracts could be reduced by a material amount resulting in a charge to
income if (a) total estimated contract costs are significantly higher than
expected due to changes in customer specifications prior to contract
amendment, (b) total estimated contract costs are significantly higher than
previously estimated due to cost overruns or inflation, (c) there is a change
in engineering efforts required during the development stage of the contract
or (d) we are unable to meet contract milestones. |
| Goodwill |
| We evaluate the recoverability of goodwill annually in the fourth
quarter or more frequently if events or changes in circumstances, such as
declines in sales, earnings or cash flows or material adverse changes in the
business climate, indicate that the carrying value of an asset might be
impaired. We completed our annual impairment test in the fourth quarter of
2004 using the estimates from our long-term strategic plans. No adjustment
was required to the carrying value of our goodwill based on the analysis
performed. |
| Goodwill is considered to be impaired when the net book value of a
reporting unit exceeds its estimated fair value. Fair values are primarily
established using a discounted cash flow methodology using assumptions
consistent with market participants. The determination of discounted cash
flows is based on the businesses’ strategic plans and long-range planning
forecasts. The revenue growth rates included in the plans are management’s
best estimates based on current and forecasted market conditions, and the
profit margin assumptions are projected by each reporting unit based on the
current cost structure and anticipated net cost reductions. If different
assumptions were used in these plans, the related undiscounted cash flows
used in measuring impairment could be different, potentially resulting in an
impairment charge. |

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| Securitized Transactions |
| --- |
| Securitized transactions involve the sale of finance receivables to
qualified special purpose trusts. While the assets sold are no longer on our
balance sheet, our retained interests are included in other assets. We may
retain an interest in the transferred assets in the form of interest-only
securities, subordinated certificates, cash reserve accounts, and servicing
rights and obligations. Our retained interests are subordinate to other
investors’ interests in the securitizations. Generally, we do not provide
legal recourse to third-party investors that purchase interests in our
securitizations beyond the credit enhancement inherent in the retained
interest-only securities, subordinated certificates and cash reserve
accounts. However, Textron Manufacturing has provided a guarantee on a
limited basis to a certain securitization trust sponsored by a third-party
financial institution that purchases timeshare note receivables from Textron
Finance, as discussed more fully in Note 4 to the consolidated financial
statements. |
| We estimate the fair value of the retained interests based on the
present value of future cash flows expected using our best estimates of
credit losses, prepayment speeds and discount rates commensurate with the
risks involved. These assumptions are reviewed each quarter, and the retained
interests are written down when the carrying value exceeds the fair value
based on revised estimates and the decline is estimated to be other than
temporary. Based on our sensitivity analysis, as discussed in Note 4 to the
consolidated financial statements, a 20% adverse change in either the
prepayment speed, expected credit losses or the residual cash flows discount
rate would not result in a material charge to income. |
| Pension and Other Postretirement Benefits |
| We maintain various pension and postretirement plans for our employees
globally. These plans include significant pension and postretirement benefit
obligations which are calculated based on actuarial valuations. Key
assumptions used in determining these obligations and related expenses
include expected long-term rates of return on plan assets, discount rates and
healthcare cost projections. These assumptions are evaluated and updated
annually by management in consultation with outside actuaries and investment
advisors. Other assumptions used include employee demographic factors such as
retirement patterns, mortality, turnover and the rate of compensation
increases. |
| To determine the expected long-term rate of return on plan assets, we
consider the current and expected asset allocation, as well as historical and
expected returns on each plan asset class. A lower expected rate of return on
plan assets will increase pension expense. For 2004, we have reduced the
assumed expected long-term rate of return on plan assets used in calculating
pension expense to 8.65% from 8.71% in 2003. While historical rates have
exceeded 8.75%, the expected long-term rate of return assumption was lowered
to reflect the generally expected moderation of long-term rates of return in
the financial markets. Our qualified domestic plans compose over 80% of our
total pension obligations. In 2004, the assumed rate of return for our
qualified domestic plans was 8.9%. A 50-basis-point decrease in this
long-term rate of return would result in a $20 million increase in pension
expense. |
| The discount rate enables us to state expected future benefit payments
as a present value on the measurement date, reflecting the current rate at
which the pension liabilities could be effectively settled. This rate should
be in line with rates for high-quality fixed income investments available for
the period to maturity of the pension benefits and changes as long-term
interest rates change. A lower discount rate increases the present value of
the benefit obligations and increases pension expense. In 2004, we decreased
our weighted-average discount rate used in calculating pension expense to
6.14% in 2004 from 6.61% in 2003. For our qualified domestic plans, the
assumed discount rate was 6.25% for 2004. A 50-basis-point decrease in this
discount rate would result in a $10 million increase in pension expense. |
| The estimated accumulated benefit obligations for the pension plans
exceeded the fair value of the plan assets at January 1, 2005 as a result of
a reduction in the discount rate and changes in foreign exchange rates which
more than offset the favorable impact of strong pension asset returns and the
contributions made by us during 2004. Accordingly, we recorded a non-cash
adjustment to shareholders’ equity for the minimum pension liability of $131
million, net of income taxes, in the fourth quarter of 2004. |
| The trend in healthcare costs is difficult to estimate, and it has an
important effect on postretirement liabilities. The 2004 healthcare cost
trend rate, which is the weighted-average annual projected rate of increase
in the per capita cost of covered benefits, was 11%. This rate is assumed to
decrease to 5% by 2009 and then remain at that level. See Note 12 to the
consolidated financial statements for the impact of a one-percentage-point
change in the cost trend rate. |
| Income Taxes |
| Deferred tax assets and liabilities are determined based on temporary
differences between the financial reporting and tax bases of assets and liabilities,
applying enacted tax rates expected to be in effect for the year in which the
differences are expected to |

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| |
| --- |
| In assessing the need for a valuation allowance, we look to the future
reversal of existing taxable temporary differences, taxable income in prior
carryback years, the feasibility of tax planning strategies and estimated
future taxable income. The valuation allowance can be affected by changes to
tax laws, changes to statutory tax rates and changes to future taxable income
estimates. See Note 13 to the consolidated financial statements for further
detail. |
| The amount of income taxes we pay is subject to ongoing audits by
federal, state and foreign tax authorities, which may result in proposed
assessments. Our estimate for the potential outcome for any uncertain tax
issue is highly judgmental. We believe we have adequately provided for any
reasonably foreseeable outcome related to these matters. However, our future
results may include favorable or unfavorable adjustments to our estimated tax
liabilities due to closure of income tax examinations, new regulatory or
judicial pronouncements, or other relevant events. As a result, our effective
tax rate may fluctuate significantly on a quarterly basis. |
| Recently Issued Accounting Pronouncements |
| In December 2004, the Financial Accounting Standards Board issued SFAS
No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123-R”), which replaces
SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and
supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees.” SFAS 123-R requires companies to measure compensation
costs for share-based payments to employees, including stock options, at fair
value and expense such compensation over the service period beginning with
the first interim or annual period after June 15, 2005. The pro forma
disclosures previously permitted under SFAS 123 will no longer be an
alternative to financial statement recognition. Textron is required to adopt
SFAS 123-R in the third quarter of fiscal 2005. Under SFAS 123-R, companies
must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the
transition method to be used at date of adoption. The transition methods
include prospective and retroactive adoption options. Management is
evaluating the requirements of SFAS 123-R. Management believes the impact of
adopting SFAS 123-Rwill result in additional expense of approximately $15
million, net of income taxes, for 2005. This estimate is subject to change
based on a number of factors, including the actual number of stock option
awards granted, changes in assumptions underlying the option value estimates,
such as the risk-free interest rate, and tax deductions for employee
disqualifying dispositions, if any. |
| Item 7A. Quantitative and Qualitative Disclosure About Market Risk |
| Interest Rate Risks |
| Textron’s financial results are affected by changes in U.S. and
foreign interest rates. As part of managing this risk, Textron enters into
interest rate exchange agreements to convert certain floating-rate debt to
fixed-rate debt and vice versa. The overall objective of Textron’s interest
rate risk management is to achieve a prudent balance between floating- and
fixed-rate debt. Textron’s mix of floating- and fixed-rate debt is
continuously monitored by management and is adjusted, as necessary, based on
evaluation of internal and external factors. The difference between the rates
Textron Manufacturing received and the rates it paid on interest rate
exchange agreements did not significantly impact interest expense in 2004,
2003 or 2002. |
| Within its Finance segment, Textron’s strategy of matching
floating-rate assets with floating-rate liabilities limits its risk to
changes in interest rates. This strategy includes the use of interest rate
exchange agreements. At January 1, 2005, floating-rate liabilities in excess
of floating-rate assets were $421 million, net of $2.0 billion of interest
rate exchange agreements on fixed-rate long-term debt and $168 million of
interest rate exchange agreements on fixed-rate finance receivables. For
Textron Finance, interest rate exchange agreements designated as hedges of
debt had the effect of decreasing interest expense by $40 million, $43
million and $20 million in 2004, 2003 and 2002, respectively. |

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Foreign Exchange Risks
Textron’s financial results are affected by changes in foreign
currency exchange rates and economic conditions in the foreign markets in
which products are manufactured and/or sold. For 2004, the impact of foreign
exchange rate changes from 2003 increased revenues by approximately $287
million (2.9%) and increased segment profit by approximately $27 million
(3.5%).
Textron Manufacturing manages its exposures to foreign currency assets
and earnings primarily by funding certain foreign currency denominated assets
with liabilities in the same currency and, as such, certain exposures are
naturally offset. During 2004, Textron Manufacturing primarily used
borrowings denominated in Euro and British Pound Sterling for these purposes.
In addition, as part of managing its foreign currency transaction exposures,
Textron Manufacturing enters into foreign currency forward exchange and
option contracts. These contracts are generally used to fix the local
currency cost of purchased goods or services or selling prices denominated in
currencies other than the functional currency. The notional amount of
outstanding foreign exchange contracts, foreign currency options and currency
swaps was approximately $493 million at the end of 2004 and $519 million at
the end of 2003.
Quantitative Risk Measures
Textron utilizes a sensitivity analysis to quantify the market risk
inherent in its financial instruments. Financial instruments held by Textron
that are subject to market risk (interest rate risk, foreign exchange rate
risk and equity price risk) include finance receivables (excluding lease
receivables), debt (excluding lease obligations), interest rate exchange
agreements, foreign exchange contracts, marketable equity securities and
marketable security price forward contracts.
Presented below is a sensitivity analysis of the fair value of
Textron’s financial instruments entered into for purposes other than trading
at year-end. The following table illustrates the sensitivity to a
hypothetical change in the fair value of the financial instruments at year-end
assuming a 10% decrease in interest rates, a 10% strengthening in exchange
rates against the U.S. dollar and a 10% decrease in the quoted market prices
of applicable marketable equity securities. The estimated fair value of the
financial instruments was determined by discounted cash flow analysis and by
independent investment bankers. This sensitivity analysis is most likely not
indicative of actual results in the future.
	2004						2003
(In
millions)	Carrying Value*		Fair Value*		Sensitivity of Fair Value to a 10% change		Carrying Value*		Fair Value*		Sensitivity of Fair Value to a 10% change
Interest
Rate Risk
Textron
Manufacturing:
Debt	$ (1,791	)	$ (1,902	)	$ (34	)	$ (2,027	)	$ (2,177	)	$ (38	)
Interest rate exchanges	(2	)	(2	)	4		(1	)	(1	)	5
Textron Finance:
Finance receivables	4,888		4,842		42		4,313		4,274		43
Interest rate exchanges — receivables	12		12		4		(15	)	(15	)	(6	)
Debt	(4,783	)	(4,864	)	(66	)	(4,407	)	(4,552	)	(48	)
Interest rate exchanges — debt	3		3		10		22		22		7
Foreign
Exchange Rate Risk
Textron
Manufacturing:
Debt	(779	)	(817	)	(82	)	(683	)	(751	)	(75	)
Foreign currency exchange contracts	34		34		36		20		20		48
Equity
Price Risk
Textron
Manufacturing:
Available for sale securities	—		—		—		24		24		(2	)
Marketable security price forward contracts	31		31		(14	)	25		25		(12	)
* Asset or (liability)

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Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of Textron Inc. and the related
reports of Textron’s independent registered public accounting firm thereon
are included in this Annual Report on Form 10-K on the page indicated below.
	Page
Report of Management	31
Report
of Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting	32
Report
of Independent Registered Public Accounting Firm on the Consolidated
Financial Statements and Schedule	33
Consolidated
Statements of Operations for each of the years in the three-year period ended
January 1, 2005	34
Consolidated Balance
Sheets at January 1, 2005 and January 3, 2004	35
Consolidated
Statements of Changes in Shareholders’ Equity for each of the years in the
three-year period ended January 1, 2005	36
Consolidated Statements of
Cash Flows for each of the years in the three-year period ended January 1,
2005	37
Notes to
Consolidated Financial Statements	39
Business
Segment Data	67
Supplementary Information:
Quarterly Data for 2004 and 2003
(Unaudited)	70
Schedule
II — Valuation and Qualifying Accounts	71
All other schedules are omitted either because they are not applicable
or not required or because the required information is included in the
financial statements or notes thereto.

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Report of Management

| Management is responsible for the integrity and objectivity of the
financial data presented in this Annual Report on Form 10-K. The consolidated
financial statements have been prepared in conformity with accounting
principles generally accepted in the United States and include amounts based
on management’s best estimates and judgments. Management is also responsible
for establishing and maintaining adequate internal control over financial
reporting for Textron Inc., as such term is defined in Exchange Act Rules
13a-15(f). With the participation of our management, we conducted an
evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control –
Integrated Framework, we have concluded that Textron Inc. maintained, in all
material respects, effective internal control over financial reporting as of
January 1, 2005. | |
| --- | --- |
| The independent registered public accounting firm, Ernst & Young
LLP, has audited the consolidated financial statements of Textron Inc. and
has issued an attestation report on our assessment of the effectiveness of
Textron’s internal control over financial reporting as of January 1, 2005, as
stated in its reports, which are included herein. | |
| We conduct our business in accordance with the standards outlined in
the Textron Business Conduct Guidelines, which is communicated to all
employees. Honesty, integrity and high ethical standards are the core values
of how we conduct business. Every Textron business prepares and carries out
an annual Compliance Plan to ensure these values and standards are maintained.
Our internal control structure is designed to provide reasonable assurance,
at appropriate cost, that assets are safeguarded and that transactions are
properly executed and recorded. The internal control structure includes,
among other things, established policies and procedures, an internal audit
function, and the selection and training of qualified personnel. Textron’s
management is responsible for implementing effective internal control systems
and monitoring their effectiveness, as well as developing and executing an
annual internal control plan. | |
| The Audit Committee of our Board of Directors, on behalf of the
shareholders, oversees management’s financial reporting responsibilities. The
Audit Committee, comprised of five directors who are not officers or
employees of Textron, meets regularly with the independent auditors,
management and our internal auditors to review matters relating to financial
reporting, internal accounting controls and auditing. Both the independent
auditors and the internal auditors have free and full access to senior
management and the Audit Committee. | |
| /s/ Lewis B. Campbell | /s/ Ted R. French |
| Lewis B. Campbell | Ted R. French |
| Chairman, President and Chief Executive Officer | Executive Vice President and Chief Financial Officer |
| February 16, 2005 | |

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Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

| To the Board of Directors and Shareholders of Textron Inc. |
| --- |
| We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management’s
assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for
our opinion. |
| A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements. |
| Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate. |
| In our opinion, management’s assessment that Textron Inc. maintained
effective internal control over financial reporting as of January 1, 2005, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, Textron Inc. maintained, in all material respects, effective
internal control over financial reporting as of January 1, 2005, based on the
COSO criteria. |
| We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Textron Inc. as of January 1, 2005 and January 3, 2004, and the
related consolidated statements of operations, cash flows and changes in
shareholders’ equity for each of the three years in the period ended January
1, 2005. Textron Inc. and our report dated February 16, 2005 expressed an
unqualified opinion thereon. |
| /s/ Ernst & Young LLP |
| Boston, Massachusetts February 16, 2005 |

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Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements and Schedule

| To the Board of Directors and Shareholders of Textron Inc. |
| --- |
| We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion. |
| In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Textron Inc. at January 1, 2005 and January 3, 2004 and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended January 1, 2005, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein. |
| We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
Textron Inc.’s internal control over financial reporting as of January 1,
2005, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 16, 2005 expressed an unqualified
opinion thereon. |
| As discussed in Note 7 to the consolidated financial statements, in
2002 Textron adopted Financial Accounting Standards No. 142, “Goodwill and
Other Intangible Assets” and the remaining provisions of Financial Accounting
Standards No. 141, “Business Combinations.” |
| As discussed in Note 10 to the consolidated financial statements, in
2003 Textron adopted Financial Accounting Standards No. 150, “Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity.” |
| /s/ Ernst & Young LLP |
| Boston, Massachusetts February 16, 2005 |

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Consolidated Statements of Operations

For each of the years in the three-year period ended January 1, 2005

| (In millions, except per share
amounts) | 2004 | | 2003 | | 2002 | |
| --- | --- | --- | --- | --- | --- | --- |
| Revenues | | | | | | |
| Manufacturing revenues | $ 9,697 | | $ 9,220 | | $ 9,687 | |
| Finance revenues | 545 | | 572 | | 584 | |
| Total revenues | 10,242 | | 9,792 | | 10,271 | |
| Costs, expenses and other | | | | | | |
| Cost of sales | 7,894 | | 7,595 | | 7,893 | |
| Selling and administrative | 1,383 | | 1,287 | | 1,286 | |
| Interest expense, net | 248 | | 275 | | 299 | |
| Provision for losses on finance receivables | 58 | | 81 | | 111 | |
| Special charges | 131 | | 152 | | 131 | |
| Gain on sale of businesses | — | | (15 | ) | (25 | ) |
| Total costs, expenses and other | 9,714 | | 9,375 | | 9,695 | |
| Income from continuing operations before
income taxes and distributions on preferred securities of subsidiary trusts | 528 | | 417 | | 576 | |
| Income taxes | (155 | ) | (112 | ) | (176 | ) |
| Distributions on preferred securities of
subsidiary trusts, net of income taxes | — | | (13 | ) | (26 | ) |
| Income from continuing operations | 373 | | 292 | | 374 | |
| Loss from discontinued operations, net of
income taxes | (8 | ) | (33 | ) | (10 | ) |
| Income before cumulative effect of change
in accounting principle | 365 | | 259 | | 364 | |
| Cumulative effect of change in accounting
principle, net of income taxes | — | | — | | (488 | ) |
| Net income (loss) | $ 365 | | $ 259 | | $ (124 | ) |
| Per common share: | | | | | | |
| Basic: | | | | | | |
| Income from continuing operations | $ 2.72 | | $ 2.15 | | $ 2.69 | |
| Loss from discontinued operations, net of
income taxes | (.06 | ) | (.24 | ) | (.07 | ) |
| Cumulative effect of change in accounting
principle, net of income taxes | — | | — | | (3.52 | ) |
| Net income (loss) | $ 2.66 | | $ 1.91 | | $ (.90 | ) |
| Diluted: | | | | | | |
| Income from continuing operations | $ 2.66 | | $ 2.13 | | $ 2.66 | |
| Loss from discontinued operations, net of
income taxes | (.05 | ) | (.24 | ) | (.06 | ) |
| Cumulative effect of change in accounting
principle, net of income taxes | — | | — | | (3.48 | ) |
| Net income (loss) | $ 2.61 | | $ 1.89 | | $ (.88 | ) |

See notes to the consolidated financial statements.

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Consolidated Balance Sheets

As of January 1, 2005 and January 3, 2004

| (Dollars in millions, except
share data) | 2004 | | 2003 | |
| --- | --- | --- | --- | --- |
| Assets | | | | |
| Textron Manufacturing | | | | |
| Cash and cash equivalents | $ 605 | | $ 481 | |
| Accounts receivable, net | 1,211 | | 1,124 | |
| Inventories | 1,742 | | 1,503 | |
| Other current assets | 581 | | 525 | |
| Assets of discontinued operations | 29 | | 72 | |
| Total current assets | 4,168 | | 3,705 | |
| Property, plant and equipment, net | 1,922 | | 1,901 | |
| Goodwill | 1,439 | | 1,420 | |
| Other intangible assets, net | 44 | | 39 | |
| Other assets | 1,564 | | 1,773 | |
| Total Textron Manufacturing assets | 9,137 | | 8,838 | |
| Textron Finance | | | | |
| Cash | 127 | | 357 | |
| Finance receivables, net | 5,738 | | 5,016 | |
| Goodwill | 169 | | 169 | |
| Other assets | 704 | | 791 | |
| Total Textron Finance assets | 6,738 | | 6,333 | |
| Total assets | $ 15,875 | | $ 15,171 | |
| Liabilities and Shareholders’ Equity | | | | |
| Liabilities | | | | |
| Textron Manufacturing | | | | |
| Current portion of long-term debt and
short-term debt | $ 433 | | $ 316 | |
| Accounts payable | 719 | | 689 | |
| Accrued liabilities | 1,818 | | 1,311 | |
| Liabilities of discontinued operations | 5 | | 21 | |
| Total current liabilities | 2,975 | | 2,337 | |
| Accrued postretirement benefits other than
pensions | 564 | | 590 | |
| Other liabilities | 1,623 | | 1,519 | |
| Long-term debt | 1,358 | | 1,711 | |
| Total Textron Manufacturing liabilities | 6,520 | | 6,157 | |
| Textron Finance | | | | |
| Other liabilities | 467 | | 501 | |
| Deferred income taxes | 453 | | 390 | |
| Debt | 4,783 | | 4,407 | |
| Mandatorily redeemable preferred securities | — | | 26 | |
| Total Textron Finance liabilities | 5,703 | | 5,324 | |
| Total liabilities | 12,223 | | 11,481 | |
| Shareholders’ equity | | | | |
| Capital stock: | | | | |
| Preferred stock: | | | | |
| $2.08 Cumulative Convertible Preferred
Stock, Series A (liquidation value $11) | 4 | | 4 | |
| $1.40 Convertible Preferred Dividend Stock,
Series B (preferred only as to dividends) | 6 | | 6 | |
| Common stock (203,360,698 and 198,957,000
shares issued and 135,373,000 and 137,238,000 outstanding) | 25 | | 25 | |
| Capital surplus | 1,369 | | 1,148 | |
| Retained earnings | 5,792 | | 5,606 | |
| Accumulated other comprehensive loss | (97 | ) | (64 | ) |
| | 7,099 | | 6,725 | |
| Less cost of treasury shares | 3,447 | | 3,035 | |
| Total shareholders’ equity | 3,652 | | 3,690 | |
| Total liabilities and shareholders’ equity | $ 15,875 | | $ 15,171 | |

See notes to the consolidated financial statements.

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Consolidated Statements of Changes in Shareholders’ Equity

For each of the years in the three-year period ended January 1, 2005

	Shares Outstanding* (In thousands) — 2004		2003		2002		Dollars (In millions) — 2004		2003		2002
$ 2.08 Preferred stock
Beginning balance	112		120		133		$ 4		$ 5		$ 5
Conversion to common stock	(7	)	(8	)	(13	)	—		(1	)	—
Ending balance	105		112		120		$ 4		$ 4		$ 5
$ 1.40 Preferred stock
Beginning balance	52		56		62		$ 6		$ 6		$ 6
Conversion to common stock	(2	)	(4	)	(6	)	—		—		—
Ending balance	50		52		56		$ 6		$ 6		$ 6
Common stock
Beginning balance	137,238		136,500		141,251		$ 25		$ 25		$ 25
Purchases	(6,534	)	(1,951	)	(5,734	)	—		—		—
Exercise of stock options	4,351		1,788		689		—		—		—
Conversion of preferred stock to common
stock	41		48		79		—		—		—
Other issuances of common stock	277		853		215		—		—		—
Ending balance	135,373		137,238		136,500		$ 25		$ 25		$ 25
Capital surplus
Beginning balance							$ 1,148		$ 1,080		$ 1,064
Conversion of preferred stock to common
stock							—		—		—
Exercise of stock options and other
issuances							221		68		16
Ending balance							$ 1,369		$ 1,148		$ 1,080
Retained earnings
Beginning balance							$ 5,606		$ 5,526		$ 5,829
Net income (loss)							365		259		(124	)
Dividends declared ($1.33, $1.30 and $1.30
per share, respectively)							(179	)	(179	)	(179	)
Ending balance							$ 5,792		$ 5,606		$ 5,526
Treasury stock
Beginning balance							$ 3,035		$ 3,011		$ 2,772
Purchases of common stock							425		66		249
Issuance of common stock							(13	)	(42	)	(10	)
Ending balance							$ 3,447		$ 3,035		$ 3,011
Accumulated other comprehensive loss
Beginning balance							$ (64	)	$ (225	)	$ (223	)
Currency translation adjustment							97		159		78
Deferred gains on hedge contracts							4		37		13
Unrealized (losses) gains on securities							(3	)	—		2
Minimum pension liability adjustment							(131	)	(35	)	(95	)
Other comprehensive (loss) income							(33	)	161		(2	)
Ending balance							$ (97	)	$ (64	)	$ (225	)
Comprehensive income (loss)
Net income (loss)							$ 365		$ 259		$ (124	)
Other comprehensive (loss) income							(33	)	161		(2	)
Comprehensive income (loss)							$ 332		$ 420		$ (126	)

*Shares issued at the end of 2004, 2003, 2002 and 2001, were as follows (In thousands): $2.08 Preferred 174; 181; 189 and 202 shares, respectively; $1.40 Preferred – 537; 540; 543 and 549 shares, respectively; Common – 203,361; 198,957; 197,110 and 196,337 shares, respectively.

See notes to the consolidated financial statements.

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Consolidated Statements of Cash Flows

For each of the years in the three-year period ended January 1, 2005

(In millions)	Consolidated — 2004		2003		2002
Cash flows from operating activities:
Income from continuing operations	$ 373		$ 292		$ 374
Adjustments to reconcile income from
continuing operations to net cash provided by operating activities:
Earnings of Textron Finance greater than
distributions	—		—		—
Depreciation	338		336		330
Amortization	15		18		26
Provision for losses on finance receivables	58		81		111
Gain on sale of businesses	—		(15	)	(25	)
Special charges	131		152		131
Non-cash gain on securitizations, net	2		(15	)	(28	)
Deferred income taxes	29		(41	)	326
Changes in assets and liabilities excluding
those related to acquisitions and divestitures:
Accounts receivable, net	(41	)	82		(20	)
Inventories	(222	)	279		—
Other assets	6		(208	)	(311	)
Accounts payable	5		(201	)	(160	)
Accrued liabilities	340		95		(178	)
Captive finance receivables, net	(105	)	86		90
Other, net	20		44		10
Net cash provided by operating activities
of continuing operations	949		985		676
Cash flows from investing activities:
Finance receivables:
Originated or purchased	(9,725	)	(8,938	)	(7,905	)
Repaid	8,762		8,137		6,703
Proceeds on receivables sales and
securitization sales	264		846		658
Cash used in acquisitions	(5	)	—		—
Net proceeds from sale of businesses	3		14		27
Capital expenditures	(302	)	(297	)	(292	)
Proceeds on sale of property, plant and
equipment	24		24		41
Proceeds on sale of investments	38		—		—
Due (from) to Textron (Finance)
Manufacturing	—		—		—
Other investing activities, net	97		149		34
Net cash (used) provided by investing
activities of continuing operations	(844	)	(65	)	(734	)
Cash flows from financing activities:
Increase (decrease) in short-term debt	790		(321	)	154
Proceeds from issuance of long-term debt	963		1,682		2,495
Principal payments and retirements of
long-term debt and mandatorily redeemable preferred securities	(1,666	)	(1,882	)	(2,207	)
Proceeds from employee stock ownership
plans	187		67		24
Purchases of Textron common stock	(415	)	(64	)	(248	)
Dividends paid	(135	)	(222	)	(182	)
Dividends paid to Textron Manufacturing	—		—		—
Other financing activities, net	—		(8	)	—
Net cash (used) provided by financing
activities of continuing operations	(276	)	(748	)	36
Effect of exchange rate changes on cash and
cash equivalents	33		32		17
Net cash (used) provided by continuing
operations	(138	)	204		(5	)
Net cash provided by discontinued
operations	32		333		47
Net (decrease) increase in cash and cash
equivalents	(106	)	537		42
Cash and cash equivalents at beginning of
year	838		301		259
Cash and cash equivalents at end of year	$ 732		$ 838		$ 301
Supplemental schedule of non-cash investing
and financing activities:
Capital lease obligations incurred to
finance future construction	$ —		$ —		$ 79
Capital expenditures financed through
capital leases	$ 44		$ 26		$ 23

*Textron is segregated into two borrowing groups, Textron Manufacturing and Textron Finance, as described in Note 1 to the consolidated financial statements along with the principles of consolidation. Textron Manufacturing’s cash flows exclude the pre-tax income from Textron Finance in excess of dividends paid to Textron Manufacturing. All significant transactions between Textron Manufacturing and Textron Finance have been eliminated from the “Consolidated” column as discussed in Note 1 to the consolidated financial statements.

See notes to the consolidated financial statements.

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| (In millions) | Textron
Manufacturing — 2004 | | 2003 | | 2002 | | Textron
Finance — 2004 | | 2003 | | 2002 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Cash
flows from operating activities: | | | | | | | | | | | | |
| Income from
continuing operations | $ 373 | | $ 292 | | $ 374 | | $ 94 | | $ 79 | | $ 76 | |
| Adjustments to
reconcile income from continuing operations to net cash provided by operating
activities: | | | | | | | | | | | | |
| Earnings of
Textron Finance greater than distributions | (23 | ) | (4 | ) | (23 | ) | — | | — | | — | |
| Depreciation | 302 | | 302 | | 303 | | 36 | | 34 | | 27 | |
| Amortization | 5 | | 7 | | 16 | | 10 | | 11 | | 10 | |
| Provision for
losses on finance receivables | — | | — | | — | | 58 | | 81 | | 111 | |
| Gain on sale of
businesses | — | | (15 | ) | (25 | ) | — | | — | | — | |
| Special charges | 131 | | 146 | | 131 | | — | | 6 | | — | |
| Non-cash gain on
securitizations, net | — | | — | | — | | 2 | | (15 | ) | (28 | ) |
| Deferred income
taxes | (40 | ) | (12 | ) | 268 | | 69 | | (29 | ) | 58 | |
| Changes in assets
and liabilities excluding those related to acquisitions and divestitures: | | | | | | | | | | | | |
| Accounts
receivable, net | (41 | ) | 82 | | (20 | ) | — | | — | | — | |
| Inventories | (192 | ) | 257 | | 55 | | — | | — | | — | |
| Other assets | (17 | ) | (223 | ) | (312 | ) | 2 | | (4 | ) | (14 | ) |
| Accounts payable | 5 | | (202 | ) | (137 | ) | — | | 1 | | (23 | ) |
| Accrued
liabilities | 450 | | 21 | | (159 | ) | (110 | ) | 74 | | (19 | ) |
| Captive finance
receivables, net | — | | — | | — | | — | | — | | — | |
| Other, net | 20 | | 40 | | 10 | | — | | 4 | | — | |
| Net cash
provided by operating activities of continuing operations | 973 | | 691 | | 481 | | 161 | | 242 | | 198 | |
| Cash
flows from investing activities: | | | | | | | | | | | | |
| Finance
receivables: | | | | | | | | | | | | |
| Originated or
purchased | — | | — | | — | | (10,617 | ) | (9,824 | ) | (8,874 | ) |
| Repaid | — | | — | | — | | 9,359 | | 8,793 | | 7,454 | |
| Proceeds on
receivables sales and securitization sales | — | | — | | — | | 394 | | 1,162 | | 966 | |
| Cash used in
acquisitions | (5 | ) | — | | — | | — | | — | | — | |
| Net proceeds from
sale of businesses | 3 | | 14 | | 27 | | — | | — | | — | |
| Capital
expenditures | (290 | ) | (280 | ) | (275 | ) | (12 | ) | (17 | ) | (17 | ) |
| Proceeds on sale
of property, plant and equipment | 46 | | 55 | | 62 | | — | | — | | — | |
| Proceeds on sale
of investments | 38 | | — | | — | | — | | — | | — | |
| Due (from) to
Textron (Finance) Manufacturing | — | | — | | 510 | | — | | — | | (510 | ) |
| Other investing
activities, net | 6 | | 1 | | — | | 120 | | 158 | | (27 | ) |
| Net cash
(used) provided by investing activities of continuing operations | (202 | ) | (210 | ) | 324 | | (756 | ) | 272 | | (1,008 | ) |
| Cash
flows from financing activities: | | | | | | | | | | | | |
| Increase
(decrease) in short-term debt | 3 | | (10 | ) | (156 | ) | 787 | | (311 | ) | 310 | |
| Proceeds from
issuance of long-term debt | 14 | | 246 | | 303 | | 949 | | 1,436 | | 2,192 | |
| Principal
payments and retirements of long-term debt and mandatorily redeemable
preferred securities | (362 | ) | (508 | ) | (544 | ) | (1,304 | ) | (1,374 | ) | (1,663 | ) |
| Proceeds from
employee stock ownership plans | 187 | | 67 | | 24 | | — | | — | | — | |
| Purchases of
Textron common stock | (415 | ) | (64 | ) | (248 | ) | — | | — | | — | |
| Dividends paid | (135 | ) | (222 | ) | (182 | ) | — | | — | | — | |
| Dividends paid to
Textron Manufacturing | — | | 30 | | — | | (71 | ) | (105 | ) | (53 | ) |
| Other financing
activities, net | — | | (8 | ) | — | | — | | — | | — | |
| Net cash
(used) provided by financing activities of continuing operations | (708 | ) | (469 | ) | (803 | ) | 361 | | (354 | ) | 786 | |
| Effect of
exchange rate changes on cash and cash equivalents | 29 | | 31 | | 18 | | 4 | | 1 | | (1 | ) |
| Net cash (used)
provided by continuing operations | 92 | | 43 | | 20 | | (230 | ) | 161 | | (25 | ) |
| Net cash provided
by discontinued operations | 32 | | 158 | | 20 | | — | | 175 | | 27 | |
| Net
(decrease) increase in cash and cash equivalents | 124 | | 201 | | 40 | | (230 | ) | 336 | | 2 | |
| Cash and cash
equivalents at beginning of year | 481 | | 280 | | 240 | | 357 | | 21 | | 19 | |
| Cash and cash
equivalents at end of year | $ 605 | | $ 481 | | $ 280 | | $ 127 | | $ 357 | | $ 21 | |
| Supplemental
schedule of non-cash investing and financing activities: | | | | | | | | | | | | |
| Capital lease
obligations incurred to finance future construction | $ — | | $ — | | $ 79 | | $ — | | $ — | | $ — | |
| Capital
expenditures financed through capital leases | $ 44 | | $ 26 | | $ 23 | | $ — | | $ — | | $ — | |

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Notes to Consolidated Financial Statements

*Note 1 Summary of Significant Accounting Policies*

Nature of Operations
Textron Inc. (“Textron”) is a global, multi-industry company with
manufacturing and finance operations primarily in North America, Western
Europe, South America and Asia/Pacific. Textron’s principal markets are
summarized below by segment:
Segment	Principal
Markets
Bell	• Commercial and
military helicopters and tiltrotors
	• Defense and
aerospace
	• Piston aircraft
engines
Cessna	• General
aviation aircraft
	• Business jets
including fractional ownership
	• Commercial transportation, humanitarian
flights, tourism and freight
Fastening Systems	• Aerospace
	• Automotive
	• Computer,
electronics, electrical and industrial equipment
	• Construction
	• Non-automotive
transportation
	• Telecommunications
Industrial	• Automotive original equipment manufacturers
and other industrial suppliers
	• Golf courses, resort communities and
municipalities, and commercial and industrial users
	• Original equipment manufacturers,
governments, distributors and end users of fluid and power systems
	• Electrical construction and maintenance,
telecommunications and plumbing industries
Finance	• Secured
commercial loans and leases
Principles of Consolidation and Financial Statement
Presentation
The consolidated financial statements include the accounts of Textron
Inc. and all of its majority-owned subsidiaries (more than 50%) along with
entities that are required to be consolidated in accordance with Textron’s
consolidation policy. This policy requires the consolidation of variable
interest entities in which Textron is designated as the primary beneficiary
in accordance with Financial Accounting Standards Board (“FASB”)
Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN
46”), as amended. FIN 46 requires the consolidation of variable interest
entities in which an enterprise absorbs a majority of the entity’s expected
losses, receives a majority of the entity’s expected residual returns, or
both, as a result of ownership, contractual or other financial interests in
the entity. Variable interest entities are defined as entities with a level
of invested equity insufficient to fund future activities to operate on a
standalone basis, or whose equity holders lack certain characteristics of a
controlling financial interest. If an entity does not meet the definition of
a variable interest entity under FIN 46, Textron accounts for the entity
under the provisions of Accounting Principles Board (“APB”) Opinion No. 18,
“The Equity Method of Accounting for Investments in Common Stock,” which
requires the consolidation of all majority-owned subsidiaries where the
company has the ability to exercise control.
Textron’s financings are conducted through two borrowing groups:
Textron Manufacturing and Textron Finance. This framework is designed to
enhance Textron’s borrowing power by separating the Finance segment. To
support creditors in evaluating the separate borrowing groups, Textron
presents separate balance sheets and statements of cash flows for each
borrowing group. Textron Manufacturing consists of Textron Inc., the parent
company, consolidated with the entities that operate in the Bell, Cessna,
Fastening Systems and Industrial business segments. Textron Finance consists
of Textron’s wholly owned commercial finance subsidiary, Textron Financial
Corporation, consolidated with its subsidiaries, which are the entities
through which Textron operates its Finance segment. Textron Finance finances
its operations by borrowing from its own group of external creditors. All
significant intercompany transactions are eliminated, including retail and
wholesale financing activities for inventory sold by Textron Manufacturing
financed by Textron Finance.
Reclassifications
A portion of Textron Finance’s business involves financing retail
purchases and leases for new and used aircraft and equipment manufactured by
Textron Manufacturing’s Bell, Cessna and Industrial segments. The cash flows
related to these captive financing activities are reflected as operating
activities (by Textron Manufacturing) and as investing activities (by Textron
Finance) based on each group’s operations. For example, when product is sold
to a customer and financed by Textron Finance, Textron Finance

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| records the origination of the finance receivable within investing
activities as a cash outflow. Textron Manufacturing records the cash received
from Textron Finance on the customer’s behalf within operating activities.
Although cash is transferred between the businesses, there is no cash
transaction for the consolidated group at the time of the original financing. | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- |
| Historically, Textron’s consolidated statement of cash flows has
presented a combination of the cash flows of both borrowing groups with no
elimination of the captive financing activity. Based on recent views
expressed by the staff of the Securities and Exchange Commission about this
industry-wide practice followed by companies with captive finance companies,
in 2004, management elected to change the consolidated classification of
these cash flows. Accordingly, the captive financing transactions have been
eliminated, and cash from customers and securitizations is recognized in
operating activities within the consolidated statement of cash flows when
received. Prior period amounts reported in the consolidated statement of cash
flows have been reclassified to conform with this new presentation; however,
the separate cash flow presentations of Textron Manufacturing and Textron
Finance are unchanged. | | | | | | | |
| The impact of the reclassification of these cash flows between
investing and operating activities, on a consolidated basis, for the prior
periods presented is as follows: | | | | | | | |
| | Year Ended January 3, 2004 | | | Year Ended December 28, 2002 | | | |
| (In millions) | As Reported | As Reclassified | | As Reported | | As Reclassified | |
| Net cash provided by operating activities | $ 858 | $ 985 | | $ 626 | | $ 676 | |
| Net cash provided (used) by investing
activities | $ 62 | $ (65 | ) | $ (684 | ) | $ (734 | ) |
| Certain other prior period amounts have been reclassified to conform
with the current year presentation. | | | | | | | |
| Use of Estimates | | | | | | | |
| The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in these statements and
accompanying notes. Some of the more significant estimates include inventory
valuation, residual values of leased assets, allowance for credit losses on
receivables, product liability, workers’ compensation, actuarial assumptions
for the pension and postretirement plans, estimates of future cash flows
associated with long-lived assets, environmental and warranty reserves, and
amounts reported under long-term contracts. Management’s estimates are based
on the facts and circumstances available at the time estimates are made,
historical experience, risk of loss, general economic conditions and trends,
and management’s assessments of the probable future outcomes of these
matters. Actual results could differ from such estimates. | | | | | | | |
| Cash and Cash Equivalents | | | | | | | |
| Cash and cash equivalents consist of cash and short-term, highly
liquid investments with original maturities of three months or less. | | | | | | | |
| Revenue Recognition | | | | | | | |
| Revenue is generally recognized when products are delivered or
services are performed. With respect to aircraft, delivery is upon completion
of manufacturing, customer acceptance, and the transfer of the risk and
rewards of ownership. | | | | | | | |
| When a sale arrangement involves multiple elements, such as sales of
products that include customization and other services, the deliverables in
the arrangement are evaluated to determine whether they represent separate
units of accounting. This evaluation occurs at inception of the arrangement
and as each item in the arrangement is delivered. The total fee from the
arrangement is allocated to each unit of accounting based on its relative
fair value, taking into consideration any performance, cancellation,
termination or refund type provisions. Fair value for each element is
established generally based on the sales price charged when the same or
similar element is sold separately. Revenue is recognized when revenue
recognition criteria for each unit of accounting are met. | | | | | | | |
| Revenue from certain qualifying noncancelable aircraft and other
product lease contracts are accounted for as sales-type leases. The present
value of all payments (net of executory costs and any guaranteed residual
values) is recorded as revenue, and the related costs of the product are charged
to cost of sales. Generally, these leases are financed through Textron
Finance, and the associated interest is recorded over the term of the lease
agreement using the interest method. Lease financing transactions that do not
qualify as sales-type leases are accounted for under the operating method
wherein revenue is recorded as earned over the lease period. | | | | | | | |

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| Aircraft sales with guaranteed minimum resale values are viewed as
leases and are accounted for in accordance with Emerging Issues Task Force
No. 95-1, “Revenue Recognition on Sales with a Guaranteed Minimum Resale
Value.” To determine whether the transaction should be classified as an
operating lease or as a sales-type lease, the minimum lease payments
generally represent the difference between the proceeds upon the equipment’s
initial transfer and the present value of the residual value guarantee to the
purchaser as of the first exercise date of the guarantee. If residual value
insurance is obtained, the present value of the residual value insurance is
also included in the minimum lease payments. Textron assesses the market
values of the aircraft using both industry publications as well as actual
sales of used aircraft. For fixed-wing aircraft, specific information related
to the individual aircraft such as hours and condition may be available, and
market value assessments are appropriately adjusted accordingly. For rotor
aircraft, the guarantee arrangements require certain physical condition minimums,
and/or require the aircraft to be covered under an extended maintenance plan.
Rotor aircraft fair value estimates are valued accordingly. Losses are
recorded currently if the estimated market value of the aircraft at the
exercise date is less than the guaranteed amount. |
| --- |
| Long-Term Contracts |
| Long-term contracts are accounted for under American Institute of
Certified Public Accountants Statement of Position No. 81-1, “Accounting for
Performance of Construction-Type and Certain Production-Type Contracts.”
Revenue under fixed-price contracts is generally recorded as deliveries are
made under the units-of-delivery method. Certain long-term fixed-price
contracts provide for periodic delivery after a lengthy period of time over
which significant costs are incurred or require a significant amount of
development effort in relation to total contract volume. Revenues under those
contracts and all cost-reimbursement-type contracts are recorded as costs are
incurred under the cost-to-cost method. Certain contracts are awarded with
fixed-price incentive fees. Incentive fees are considered when estimating
revenues and profit rates and are recorded when these amounts are reasonably
determined. Long-term contract profits are based on estimates of total sales
value and costs at completion. Such estimates are reviewed and revised
periodically throughout the contract life. Revisions to contract profits are
recorded when the revisions to estimated sales value or costs are made.
Estimated contract losses are recorded when identified. |
| Bell Helicopter has a joint venture with The Boeing Company (“Boeing”)
to provide engineering, development and test services related to the V-22
aircraft, as well as to produce the V-22 aircraft, under a number of separate
contracts with the U.S. Government (the “V-22 Contracts”). The V-22 Contracts
include the development contract and various production release contracts
(i.e., lots) that may run concurrently with multiple earlier lots still being
produced as new lots are started. The development contract and the first
three production lots are under cost-reimbursement-type contracts, while
subsequent lots are under fixed-price incentive contracts. The first three
lots under fixed-price incentive contracts have been accounted for under the
cost-to-cost method, primarily as a result of the significant engineering
effort required over a lengthy period of time during the initial development
phase in relation to total contract volume. The production releases on the
first six production lots include separately contracted modifications to meet
the additional requirements of the U.S. Government’s Blue Ribbon Panel. In
2003, the development effort was considered substantially complete for the
new production releases beginning in 2003 and management believed a
consistent production specification had been met as these units incorporate
many of these modifications on the production line. Accordingly, revenue on
the new production releases that began in 2003 is recognized under the
units-of-delivery method. |
| Finance Revenues |
| Finance revenues include interest on finance receivables, which is
recognized using the interest method to provide a constant rate of return
over the terms of the receivables. Finance revenues also include direct loan
origination costs and fees received, which are deferred and amortized over
the contractual lives of the respective receivables using the interest
method. Unamortized amounts are recognized in revenues when receivables are
sold or prepaid. Accrual of interest income is suspended for accounts that
are contractually delinquent by more than three months unless collection is
not doubtful. In addition, detailed reviews of loans may result in earlier
suspension if collection is doubtful. Accrual of interest is resumed when the
loan becomes contractually current, and suspended interest income is
recognized at that time. |
| Losses on Finance Receivables |
| Provisions for losses on finance receivables are charged to income in
amounts sufficient to maintain the allowance at a level considered adequate
to cover losses in the existing receivable portfolio. Management evaluates
the allowance by examining current delinquencies, the characteristics of the
existing accounts, historical loss experience, the value of the underlying
collateral and general economic conditions and trends. Finance receivables
are charged off when they are deemed to be uncollectible. Finance receivables
are written down to the fair value (less estimated costs to sell) of the
related collateral at the earlier of the date the collateral is repossessed
or when no payment has been received for six months unless management deems
the receivable collectible. |

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| Loan Impairment |
| --- |
| Textron Finance periodically evaluates finance receivables, excluding
homogeneous loan portfolios and finance leases, for impairment. A loan is
considered impaired when it is probable that Textron Finance will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. In addition, Textron Finance identifies loans that are considered
impaired due to the significant modification of the original loan terms to
reflect deferred principal payments generally at market interest rates but
which continue to accrue finance charges since full collection of principal
and interest is not doubtful. Impairment is measured by comparing the fair
value of a loan with its carrying amount. Fair value is based on the present
value of expected future cash flows discounted at the loan’s effective
interest rate, the loan’s observable market price or, if the loan is
collateral dependent, at the fair value of the collateral, less selling
costs. If the fair value of the loan is less than its carrying amount,
Textron Finance establishes a reserve based on this difference. This
evaluation is inherently subjective, as it requires estimates, including the
amount and timing of future cash flows expected to be received on impaired loans,
that may differ from actual results. |
| Securitized Transactions |
| Textron Finance sells or securitizes loans and leases and retains
servicing responsibilities and subordinated interests, including
interest-only securities, subordinated certificates and cash reserves, all of
which are retained interests in the securitized receivables. These retained
interests are subordinate to other investors’ interests in the
securitizations. A gain or loss on the sale of finance receivables depends,
in part, on the previous carrying amount of the finance receivables involved
in the transfer, allocated between the assets sold and the retained interests
based on their relative fair values at the date of transfer. Retained
interests are recorded at fair value as a component of other assets. |
| Textron Finance estimates fair value based on the present value of
future expected cash flows using management’s best estimates of key
assumptions: credit losses, prepayment speeds, forward interest rate yield
curves and discount rates commensurate with the risks involved. Textron
Finance reviews the fair values of the retained interests quarterly using
updated assumptions and compares such amounts with the carrying value of the
retained interests. When the carrying value exceeds the fair value of the
retained interests and the decline in fair value is determined to be other
than temporary, the retained interest is written down to fair value. When a
change in the fair value of the retained interest is deemed temporary, any
unrealized gains or losses are included in shareholders’ equity as a
component of accumulated other comprehensive loss. |
| Investments |
| Investments in marketable equity securities are classified as
available for sale and are recorded at fair value as a component of other
assets. Unrealized gains and losses on these securities, net of income taxes,
are included in shareholders’ equity as a component of accumulated other
comprehensive loss. Investments in non-marketable equity securities are accounted
for under either the cost or equity method of accounting. Textron
periodically reviews investment securities for impairment based on criteria
that include the duration of the market value decline, Textron’s ability to
hold to recovery, information regarding the market and industry trends for
the investee’s business, the financial strength and specific prospects of the
investee, and investment analyst reports, if available. If a decline in the
fair value of an investment security is judged to be other than temporary,
the cost basis is written down to fair value with a charge to earnings. |
| In the normal course of business, Textron has entered into various
joint venture agreements that are not controlled by Textron, but where
Textron has the ability to exercise significant influence over the operating
and financial policies. Textron’s investments in these ventures are accounted
for under the equity method of accounting. At January 1, 2005 and January 3,
2004, the investment in these unconsolidated joint ventures totaled $14
million and $26 million, respectively, and is included in other assets. Under
the equity method, only Textron’s share of the ventures’ net earnings and
losses is included in the consolidated statement of operations. The net loss
totaled $11 million in 2004, $12 million in 2003 and $13 million in 2002.
Since these losses are not considered material for separate presentation,
they are included within cost of sales. |
| Textron’s joint venture agreement with Boeing creates contractual,
rather than ownership, rights related to the V-22. Accordingly, Textron does
not account for this joint venture under the equity method of accounting.
Textron accounts for all of Bell Helicopter’s rights and obligations under
the specific requirements of the V-22 Contracts allocated to Bell Helicopter
under the joint venture agreement. Revenues and cost of sales reflect Bell
Helicopter’s performance under the V-22 Contracts. All assets used in
performance of the V-22 Contracts owned by Bell Helicopter, including
inventory and unpaid receivables, and all liabilities arising from Bell
Helicopter’s obligations under the V-22 Contracts, are included in the
consolidated balance sheet. |

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| Inventories |
| --- |
| Inventories are carried at the lower of cost or estimated net
realizable value. The cost of approximately 65% of inventories is determined
using the last-in, first-out method. The cost of remaining inventories, other
than those related to certain long-term contracts, is generally valued by the
first-in, first-out method. Costs for commercial helicopters are determined
on an average cost basis by model considering the expended and estimated
costs for the current production release. Customer deposits are recorded
against inventory when the right of offset exists. All other customer
deposits are recorded as liabilities. |
| Property, Plant and Equipment |
| Property, plant and equipment are recorded at cost and are depreciated
primarily using the straight-line method. Land improvements and buildings are
depreciated primarily over estimated lives ranging from 5 to 40 years, while
machinery and equipment are depreciated primarily over 3 to 15 years.
Expenditures for improvements that increase asset values and extend useful
lives are capitalized. |
| Impairment of Long-Lived Assets |
| Long-lived assets, including intangible assets subject to
amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. Management assesses the recoverability of the cost of the asset
based on a review of projected undiscounted cash flows. In the event an
impairment loss is identified, it is recognized based on the amount by which
the carrying value exceeds the estimated fair value of the long-lived asset.
If an asset is held for sale, management reviews its estimated fair value
less cost to sell. Fair value is determined using pertinent market
information, including appraisals or brokers’ estimates, and/or projected
discounted cash flows. |
| Goodwill |
| Management evaluates the recoverability of goodwill annually or more
frequently if events or changes in circumstances, such as declines in sales,
earnings or cash flows, or material adverse changes in the business climate,
indicate that the carrying value of a reporting unit or indefinite-lived
intangible asset might be impaired. The reporting unit represents the
operating segment unless discrete financial information is prepared and
reviewed by segment management for businesses one level below that operating
segment (a “component”), in which case such component is the reporting unit.
In certain instances, components of an operating segment have been aggregated
and deemed to be 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 are established primarily using a discounted cash flow methodology.
The determination of discounted cash flows is based on the businesses’
strategic plans and long-range planning forecasts. When available,
comparative market multiples are used to corroborate discounted cash flow
results. |
| Derivative Financial Instruments |
| Textron is exposed to market risk primarily from changes in interest
rates, currency exchange rates and securities pricing. To manage the
volatility relating to these exposures, Textron nets the exposures on a consolidated
basis to take advantage of natural offsets. For the residual portion, Textron
enters into various derivative transactions pursuant to Textron’s policies in
areas such as counterparty exposure and hedging practices. All derivative
instruments are reported on the balance sheet at fair value. Designation to
support hedge accounting is performed on a specific exposure basis. Changes
in fair value of financial instruments qualifying as fair value hedges are
recorded in income, offset in part or in whole, by corresponding changes in
the fair value of the underlying exposures being hedged. Changes in fair
values of derivatives accounted for as cash flow hedges, to the extent they
are effective as hedges, are recorded in other comprehensive (loss) income,
net of deferred taxes. Changes in fair value of derivatives not qualifying as
hedges are reported in income. Textron does not hold or issue derivative
financial instruments for trading or speculative purposes. |
| Foreign currency denominated assets and liabilities are translated
into U.S. dollars with the adjustments from the currency rate changes
recorded in the cumulative translation adjustment account in shareholders’
equity until the related foreign entity is sold or substantially liquidated.
Foreign currency financing transactions, including currency swaps, are used
to effectively hedge long-term investments in foreign operations with the
same corresponding currency. Foreign currency gains and losses on the hedge
of the long-term investments are recorded in the cumulative translation
adjustment account in accumulated other comprehensive loss with the offset
recorded as an adjustment to the non-U.S. dollar financing liability. |

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Fair Values of Financial Instruments
Fair values of cash and cash equivalents, accounts receivable,
accounts payable and variable-rate receivables and debt approximate carrying
value. The estimated fair values of other financial instruments, including
debt, equity and risk management instruments, have been determined using
available market information and valuation methodologies, primarily
discounted cash flow analysis or independent investment bankers. The
estimated fair value of nonperforming loans included in finance receivables
is based on discounted cash flow analyses using risk-adjusted interest rates
or the fair value of the related collateral. Because considerable judgment is
required in interpreting market data, the estimates are not necessarily
indicative of the amounts that could be realized in a current market.
Stock-Based Compensation
Textron’s 1999 Long-Term Incentive Plan (“1999 Plan”) authorizes
awards to key employees. The 1999 Plan and related awards are described more
fully in Note 11. Stock-based compensation awards to employees under the 1999
Plan are accounted for using the intrinsic value method prescribed in APB
Opinion No. 25, “Accounting for Stock Issued to Employees” and related
Interpretations. No stock-based employee compensation cost related to stock
options awards is reflected in net income, as all options granted under the
1999 Plan had an exercise price equal to the market value of the underlying
common stock on the date of grant. Employee
compensation cost related to Textron’s performance share program and
restricted stock awards is reflected in net income over the awards’ vesting
period. Textron has entered into cash settlement forward contracts on its
common stock to mitigate the impact of stock price fluctuations on compensation
expense. The following table illustrates the effect on net income and
earnings per share if Textron had applied the fair value recognition
provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123,
“Accounting for Stock-Based Compensation,” to stock-based employee
compensation:
(Dollars in millions, except
per share data)	2004		2003		2002
Net income (loss), as reported	$ 365		$ 259		$ (124	)
Add back: Stock-based employee compensation
expense included in reported net income (loss)*	20		14		9
Deduct: Total stock-based employee
compensation expense determined under fair value based method for all awards*	(26	)	(29	)	(40	)
Pro forma net income (loss)	$ 359		$ 244		$ (155	)
Income (loss) per share:
Basic - as reported	$ 2.66		$ 1.91		$ (0.90	)
Basic - pro forma	$ 2.61		$ 1.80		$ (1.12	)
Diluted - as reported	$ 2.61		$ 1.89		$ (0.88	)
Diluted - pro forma	$ 2.56		$ 1.78		$ (1.10	)
* Net of related cash settlement forward income or
expense and related tax effects
The compensation cost calculated under the fair value approach shown
above is recognized over the vesting period of the stock options. The fair
value of options granted after 1995 are estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
	2004	2003		2002
Dividend yield	2 %	3	%	3		%
Expected volatility	37 %	38	%	36		%
Risk-free interest rate	3 %	3	%	4		%
Expected lives (years)	3.7	3.6		3.7
Under these assumptions, the weighted-average fair value of an option
to purchase one share granted in 2004 was approximately $14 and approximately
$10 in 2003 and in 2002.
Product and Environmental Liabilities
Product liability claims are accrued on the occurrence method based on
insurance coverage and deductibles in effect at the date of the incident and
management’s assessment of the probability of loss when reasonably estimable.

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| |
| --- |
| Research and Development Costs |
| Research and development costs not specifically covered by contracts
and those related to Textron’s share of research and development activity in
connection with cost sharing arrangements are charged to expense as
incurred. Research and development
costs incurred under contracts with others are reported as cost of sales over
the period that revenue is recognized, consistent with Textron’s contract
accounting policy. |
| Recently Issued Accounting Pronouncements |
| In December 2004, the FASB issued SFAS No. 123 (Revised 2004),
“Share-Based Payment” (“SFAS 123-R”), which replaces SFAS No. 123,
“Accounting for Stock-Based Compensation” (“SFAS 123”) and supercedes APB
Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123-R
requires companies to measure compensation costs for share-based payments to
employees, including stock options, at fair value and expense such
compensation over the service period beginning with the first interim or
annual period after June 15, 2005. The pro forma disclosures previously
permitted under SFAS 123 will no longer be an alternative to financial
statement recognition. Textron is required to adopt SFAS 123-R in the third
quarter of fiscal 2005. Under SFAS 123-R, companies must determine the
appropriate fair value model to be used for valuing share-based payments, the
amortization method for compensation cost and the transition method to be
used at date of adoption. The transition methods include prospective and
retroactive adoption options. Management is evaluating the requirements of
SFAS 123-R. Management believes the impact of adopting SFAS 123-R will result
in additional expense of approximately $15 million, net of income taxes, for
2005. This estimate is subject to change based on a number of factors,
including the actual number of stock option awards granted, changes in
assumptions underlying the option value estimates, such as the risk-free
interest rate, and tax deductions for employee disqualifying dispositions, if
any. |
| Note 2 Acquisitions and Dispositions |
| Acquisitions |
| Textron has a joint venture, CitationShares, with TAG Aviation USA,
Inc. (“TAG”) to sell fractional share interests in business jets. On June 30,
2004, Textron acquired an additional 25% interest in CitationShares from TAG
for cash and the assumption of debt guarantees previously provided by TAG.
Additional cash consideration may also be payable to TAG based on
CitationShares’ future operating results. TAG has the right to sell its
remaining 25% interest to Textron in the years 2009 through 2011, and Textron
has the right to purchase the remaining interest in 2010 or 2011, for an
amount based on a multiple of earnings. |
| As a result of this transaction, Textron owns 75% of CitationShares
and has consolidated its financial results prospectively as of June 30, 2004.
Assets acquired of $47 million included $22 million of inventory, primarily
Citation jets, and liabilities acquired of $59 million included $47 million
of third-party debt that was immediately repaid. Additionally, CitationShares
had approximately $31 million of operating lease obligations as of the
acquisition date that Textron has fully guaranteed. |
| Discontinued Operations |
| During the fourth quarter of 2004, Textron reached a final decision to
sell the remainder of its InteSys operations, and as a result, financial
results of this business, net of income taxes, are now reported as
discontinued operations. The carrying value of this business approximated
fair value at the date of the decision to sell. Textron’s consolidated
statements of operations and related footnote disclosures have been recast to
reflect the InteSys business, previously included in the Industrial segment,
as a discontinued operation for the periods presented. The amounts exclude
general corporate overhead previously allocated to the business for reporting
purposes. Textron uses a centralized approach to the cash management and
financing of its operations, and accordingly, does not allocate debt or
interest expense to its discontinued businesses. |

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| The assets and liabilities of the InteSys discontinued business are as
follows: — (In millions) | January 1, 2005 | | January 3, 2004 | | | |
| --- | --- | --- | --- | --- | --- | --- |
| Accounts receivable, net | $ 12 | | $ 11 | | | |
| Inventories | 2 | | 9 | | | |
| Property, plant and equipment, net | — | | 24 | | | |
| Other assets | 15 | | 28 | | | |
| Total assets | $ 29 | | $ 72 | | | |
| Accounts payable and accrued liabilities | $ 4 | | $ 14 | | | |
| Other liabilities | 1 | | 7 | | | |
| Total liabilities | $ 5 | | $ 21 | | | |
| Discontinued operations also include the results of OmniQuip and the
small business direct portfolio which were both sold in 2003. Operating
results of the discontinued businesses are as follows: | | | | | | |
| (In millions) | 2004 | | 2003 | | 2002 | |
| Revenue | $ 70 | | $ 236 | | $ 386 | |
| Income (loss) from discontinued operations
before special charges | 12 | | (6 | ) | (66 | ) |
| Special charges | (19 | ) | (36 | ) | (19 | ) |
| Loss from discontinued operations | (7 | ) | (42 | ) | (85 | ) |
| Income tax (expense) benefit | (1 | ) | 9 | | 75 | |
| Loss from discontinued operations, net of
income taxes | $ (8 | ) | $ (33 | ) | $ (10 | ) |
| Discontinued operations include a second quarter 2004 pre-tax gain of
$7 million from the sale of InteSys’ interest in two Brazilian-based joint
ventures. Prior to the disposition of these businesses, approximately $32
million and $27 million in restructuring costs related to InteSys and
OmniQuip, respectively, were recorded in special charges since the inception
of Textron’s restructuring program. | | | | | | |
| On August 1, 2003, Textron consummated the sale of its remaining
OmniQuip business to JLG Industries, Inc. for $90 million in cash and a $10
million promissory note that was paid in full in February 2004. In the second
quarter of 2003, Textron recorded $30 million in special charges for the
impairment of $15 million in intangible assets and $15 million in goodwill
based on the fair value implied by the sale price of OmniQuip under
negotiation at that time. There was no further gain or loss recorded upon the
consummation of the sale. | | | | | | |
| Textron Manufacturing has retained certain non-operating assets and
liabilities of the OmniQuip business. These remaining assets and liabilities
are included in the consolidated balance sheet as of January 1, 2005 and are
composed of assets of approximately $3 million and liabilities of
approximately $27 million. The liabilities retained include $22 million in
reserves related to a recourse liability to cover potential losses on
approximately $52 million in finance receivables held by Textron Finance. See
Note 4 for further discussion on transactions between Textron’s Manufacturing
and Finance borrowing groups. | | | | | | |
| Other Dispositions | | | | | | |
| During 2004, Textron sold its Energy Manufacturing and Williams
Machine and Tool business in the Industrial segment. There was no gain or
loss on the sale as the proceeds received approximated book value, including
goodwill. During 2003, Textron sold its remaining 50% interest in an Italian
joint venture to Collins & Aikman Corporation for a $12 million after-tax
gain. | | | | | | |
| On December 19, 2003, Textron Finance sold its small business direct
portfolio for $421 million in cash.
Based upon the terms of the transaction, no gain or loss was recorded.
Textron Finance entered into a loss sharing agreement related to the sale,
which requires Textron Finance to reimburse the purchaser for a portion of
losses incurred on the portfolio above a predetermined level. Textron Finance
originally recorded a liability of $14 million representing the estimated
fair value of the guarantee, which expires in 2008. At January 1, 2005, the
estimated fair value of the guarantee was a $13 million liability. | | | | | | |

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The purchase and sale agreement provided for an adjustment to the
selling price based on an audit of the closing balance sheet in 2002.
Pursuant to the audit and final settlement of the post-closing obligations
under the purchase and sale agreement, Textron received $110 million from
C&A. The final negotiated settlement provided C&A the ability to
repurchase a portion of its preferred stock in advance of the original terms,
and C&A repurchased those preferred shares in June 2002. As of January 1,
2005, Textron had 200,000 shares remaining of the original preferred stock
valued at $90 million. In conjunction with this transaction and following
C&A’s recapitalization through a share offering, the carrying value of
the C&A common stock held by Textron was revised. An additional gain of
$25 million was recorded in 2002 upon the final settlement of the
post-closing obligations and valuation of the common stock received from
C&A. The C&A common stock was subsequently written down and sold as
discussed in Note 14.
Note 3 Accounts Receivable
Accounts receivable is composed of the following:
(In
millions)	January
1, 2005	January
3, 2004
Commercial and customers	$ 1,055	$ 966
U.S. Government contracts	220	224
	1,275	1,190
Less allowance for doubtful accounts	64	66
	$ 1,211	$ 1,124
Unbillable receivables on U.S. Government contracts arise when the
revenues based on performance attainment, though appropriately recognized,
cannot be billed yet under terms of the contract. Unbillable receivables within
accounts receivable totaled $133 million at January 1, 2005 and $126 million
at January 3, 2004. Long-term contract receivables due from the U.S.
Government do not include significant amounts billed but unpaid due to
contractual retainage provisions or subject to collection uncertainty.
Note 4 Finance Receivables and Securitizations
Finance Receivables
Textron Finance provides financial services primarily to the aircraft,
golf, vacation interval resort, dealer floorplan and middle market industries
under a variety of financing vehicles with various contractual maturities.
Installment contracts generally require the customer to pay a
significant down payment, along with periodic scheduled principal payments
that reduce the outstanding balance through the term of the loan. Finance
leases include residual values expected to be realized at contractual
maturity. Finance leases with no significant residual value at the end of the
contractual term are classified as installment contracts, as their legal and
economic substance is more equivalent to a secured borrowing than a finance
lease with a significant residual value. Installment contracts and finance
leases have initial terms ranging from two to 20 years and are primarily
secured by the financed equipment.
Distribution finance receivables are generally secured by the
inventory of the financed distributor and include floor plan financing for
third party dealers for inventory sold by E-Z-GO and Jacobsen businesses.
Revolving loans are secured by trade receivables, inventory, plant and
equipment, pools of vacation interval notes receivables, pools of residential
and recreational land loans, and the underlying property. Distribution
finance and revolving loans generally mature within one to five years.

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| Golf course and resort mortgages are secured by real property and are
generally limited to 75% or less of the property’s appraised market value at
loan origination. Golf course mortgages
have initial terms ranging from five to seven years with amortization periods
from 15 to 25 years. Resort mortgages generally represent construction and
inventory loans with terms up to two years. Leveraged leases are secured by
the ownership of the leased equipment and real property and have initial
terms up to approximately 30 years. | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| The following table displays the contractual maturity of the finance
receivables. It does not necessarily reflect future cash collections because
of various factors, including the repayment or refinancing of receivables
prior to contractual maturity: | | | | | | | | | | |
| | Contractual Maturities | | | | | | | | Finance Receivables Outstanding | |
| (In millions) | 2005 | | 2006 | 2007 | | 2008 | 2009 | Thereafter | 2004 | 2003 |
| Installment contracts | $ 226 | | $ 176 | $ 159 | | $ 182 | $ 142 | $ 570 | $ 1,455 | $ 1,396 |
| Distribution finance | 1,020 | | 6 | — | | — | — | — | 1,026 | 778 |
| Revolving loans | 754 | | 201 | 169 | | 64 | 70 | 144 | 1,402 | 1,194 |
| Finance leases | 140 | | 53 | 55 | | 59 | 17 | 86 | 410 | 309 |
| Golf course and resort mortgages | 168 | | 245 | 152 | | 138 | 130 | 172 | 1,005 | 945 |
| Leveraged leases | (5 | ) | 2 | (9 | ) | 73 | 38 | 440 | 539 | 513 |
| | $ 2,303 | | $ 683 | $ 526 | | $ 516 | $ 397 | $ 1,412 | 5,837 | 5,135 |
| Less allowance for credit losses | | | | | | | | | 99 | 119 |
| | | | | | | | | | $ 5,738 | $ 5,016 |
| Contractual maturities for finance leases classified as installment
contracts include the minimum lease payments, net of the unearned income to
be recognized over the life of the lease. Total minimum lease payments and
unearned income related to these finance leases were $708 million and $136
million, respectively, at January 1, 2005, and $670 million and $99 million,
respectively, at January 3, 2004. Minimum lease payments due under these
contracts for each of the next five years are as follows: $137 million in
2005, $120 million in 2006, $101 million in 2007, $92 million in 2008 and $92
million in 2009. | | | | | | | | | | |
| Textron Finance’s net investment in finance leases, excluding leases
classified as installment contracts, is provided below: | | | | | | | | | | |
| (In millions) | | | | | | | 2004 | | 2003 | |
| Total minimum lease payments receivable | | | | | | | $ 383 | | $ 287 | |
| Estimated residual values of leased
equipment | | | | | | | 205 | | 188 | |
| | | | | | | | 588 | | 475 | |
| Less unearned income | | | | | | | (178 | ) | (166 | ) |
| Net investment in finance leases | | | | | | | $ 410 | | $ 309 | |
| Minimum lease payments due under finance leases for each of the next
five years are as follows: $83 million in 2005, $54 million in 2006, $47
million in 2007, $29 million in 2008 and $10 million in 2009. | | | | | | | | | | |
| The net investment in leveraged leases was as follows: | | | | | | | | | | |
| (In millions) | | | | | | | 2004 | | 2003 | |
| Rental receivable, net of nonrecourse debt | | | | | | | $ 545 | | $ 457 | |
| Estimated residual values on leased assets | | | | | | | 286 | | 389 | |
| | | | | | | | 831 | | 846 | |
| Unearned income | | | | | | | (292 | ) | (333 | ) |
| Investment in leveraged leases | | | | | | | 539 | | 513 | |
| Deferred income taxes | | | | | | | (358 | ) | (353 | ) |
| Net investment in leveraged leases | | | | | | | $ 181 | | $ 160 | |
| Excluding receivables with recourse to Textron Manufacturing, at the
end of 2004 and 2003 Textron Finance had nonaccrual finance receivables
totaling $119 million and $152 million, respectively, of which $85 million
and $99 million, respectively, were | | | | | | | | | | |

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| impaired. In addition, Textron Finance had impaired accrual finance
receivables totaling $58 million at January 1, 2005 and $137 million at
January 3, 2004. The allowance for losses on finance receivables related to
impaired loans is determined using assumptions related to the fair market
value of the underlying collateral, and totaled $16 million and $18 million
at the end of 2004 and 2003, respectively. The average recorded investment in
impaired loans during 2004 was $123 million, compared with $201 million in
2003. No interest income was recognized on these loans using the cash basis
method. | | |
| --- | --- | --- |
| Textron Finance manages and services finance receivables for a variety
of investors, participants and third-party portfolio owners. The total
managed and serviced finance receivable portfolio, including owned finance
receivables, was $9.3 billion at the end of 2004 and $8.8 billion at the end
of 2003. Managed receivables include owned finance receivables and finance
receivables sold in securitizations and private transactions where Textron
Finance has retained some element of credit risk and continues to service the
portfolio. | | |
| At January 1, 2005, Textron Finance’s receivables were primarily
diversified geographically across the United States, along with 13% in other
countries. The most significant collateral concentration was in general
aviation aircraft, which accounted for 20% of managed receivables. Textron
Finance also has industry concentrations in the golf and vacation interval
industries, which each accounted for 18% and 14%, respectively, of managed
receivables at January 1, 2005. | | |
| Transactions between Finance and Manufacturing Groups | | |
| A portion of Textron Finance’s business involves financing retail
purchases and leases for new and used aircraft and equipment manufactured by
Textron Manufacturing’s Bell, Cessna and Industrial segments. The captive finance
receivables for these inventory sales included in Textron Finance’s balance
sheet are composed of the following: | | |
| (In millions) | January
1, 2005 | January
3, 2004 |
| Installment contracts | $ 628 | $ 627 |
| Distribution finance | 42 | 31 |
| Finance leases | 279 | 139 |
| Total | $ 949 | $ 797 |
| Operating agreements specify that Textron Finance has recourse to
Textron Manufacturing for outstanding balances from some of these
transactions. For those receivables for which collection has been guaranteed
by Textron Manufacturing, reserves have been established for losses on
Textron Manufacturing’s balance sheet and are recorded in current or long-term
liabilities. These reserves are established for amounts that are potentially
uncollectible or if the collateral values may be insufficient to cover the
outstanding receivable. If an account is deemed uncollectible and the
collateral is repossessed, Textron Finance will charge Textron Manufacturing
for any deficiency. In some cases, the collateral is not repossessed by
Textron Finance, and the receivable is transferred to Textron Manufacturing’s
balance sheet for additional collection efforts. When this occurs, any
related reserve previously established is reclassified from Textron
Manufacturing’s current or long-term liabilities and is netted against either
accounts receivable or notes receivable within other assets. | | |
| In 2004, 2003 and 2002, Textron Finance paid Textron Manufacturing
$0.9 billion, $0.9 billion and $1.0 billion, respectively, relating to the
sale of manufactured products to third parties that were financed by Textron
Finance, and $77 million, $56 million and $104 million, respectively, for the
purchase of operating lease equipment. At the end of 2004 and 2003, the
amounts guaranteed by Textron Manufacturing totaled $384 million and $467
million, respectively. In addition, at the end of 2004 and 2003, Textron
Finance had recourse to Textron Manufacturing for a lease with C&A
totaling $82 million and $87 million, respectively. | | |
| Included in the finance receivables guaranteed by Textron
Manufacturing are past due loans of $31 million and $41 million at the end of
2004 and 2003, respectively, that meet the nonaccrual criteria but are not
classified as nonaccrual by Textron Finance due to the guarantee. Textron
Finance continues to recognize income on these loans. Concurrently, Textron
Manufacturing is charged for their obligation to Textron Finance under the
guarantee so that there are no net interest earnings for the loans on a
consolidated basis. Textron Manufacturing has established reserves for losses
related to these guarantees that are included in other current liabilities.
Textron Manufacturing’s reserves for these recourse liabilities to Textron
Finance totaled $48 million and $64 million at the end of 2004 and 2003,
respectively. | | |

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Textron Finance received proceeds of $0.4 billion in 2004 and $0.7
billion in 2003 from the securitization and sale (with servicing rights
retained) of finance receivables. Pre-tax gains from securitized trust sales
were approximately $56 million in 2004, $43 million in 2003 and $45 million
in 2002. At the end of 2004, $2.3 billion in securitized loans were
outstanding, with $17 million in past due loans. Textron Finance has
securitized certain receivables generated by Textron Manufacturing for which
it has retained full recourse to Textron Manufacturing.
Textron Manufacturing provides a guarantee to a securitization trust
sponsored by a third-party financial institution that purchases timeshare
note receivables from Textron Finance. The guarantee requires Textron Manufacturing
to make payments to the trust should the cash flows from the timeshare notes
fall below a minimum level. The maximum potential payment required under the
credit enhancement agreement is $31 million. At January 1, 2005, Textron has
a fair value liability recorded of approximately $0.2 million that was
established upon the sale of additional timeshare note receivables into the
trust. Textron has not been required to make any payments to the trust under
the credit enhancement agreement, and based on historical experience with the
collateral in the trust, no additional liability is considered necessary.
Textron Finance retained subordinated interests in the trusts which
are approximately 2% to 10% of the total trust. Servicing fees range from 75
to 150 basis points. During 2004, key economic assumptions used in measuring
the retained interests at the date of each securitization included prepayment
speeds ranging from 12.4% to 23.0%, weighted-average lives ranging from 0.3
to 3.3 years, expected credit losses ranging from 0.5% to 2.8%, and residual
cash flows discount rates ranging from 5.0% to 7.3%. At January 1, 2005, key
economic assumptions used in measuring these retained interests were as
follows:
(Dollars in millions)	Aircraft Loans	Distribution Finance Receivables	Vacation Interval Loans
Carrying amount of retained interests in
securitizations, net	$ 98	$ 121	$ 14
Weighted-average life (years)	2.4	0.3	2.0
Prepayment speed (annual rate)	23.0 %	—	20.0 %
Expected credit losses (annual rate)	0.2 %	0.7 %	3.7 %
Residual cash flows discount rate	4.2 %	4.8 %	4.5 %
Hypothetical adverse changes of 10% and 20% to either the prepayment
speed, expected credit losses or residual cash flows discount rates
assumptions would not have a material impact on the current fair value of the
residual cash flows associated with the retained interests. These
hypothetical sensitivities should be used with caution, as the effect of a
variation in a particular assumption on the fair value of the retained
interest is calculated without changing any other assumption. In reality, a
change in one factor may result in a change in another factor that may
magnify or counteract the sensitivities losses. For example, increases in
market interest rates may result in lower prepayments and increased credit
losses.
Note 5 Inventories
(In millions)	January 1, 2005	January 3, 2004
Finished goods	$ 643	$ 686
Work in process	1,206	681
Raw materials	231	202
	2,080	1,569
Less progress/milestone payments	338	66
	$ 1,742	$ 1,503
Inventories aggregating $1.1 billion and $1.0 billion at the end of
2004 and 2003, respectively, were valued by the last-in, first-out (“LIFO”)
method. Had such LIFO inventories been valued at current costs, their
carrying values would have been approximately $238 million and $224 million
higher at those respective dates. The remaining inventories, other than those
related to certain long-term contracts, are valued primarily by the first-in,
first-out (“FIFO”) method. Inventories related to long-term contracts, net of
progress/milestone payments were $259 million at the end of 2004 and $137
million at the end of 2003.

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Note 6 Property, Plant and Equipment, net
Property, plant and equipment, net for Textron Manufacturing is
composed of the following:
(In millions)		January 1, 2005				January 3, 2004
Land and buildings		$	1,210			$	1,084
Machinery and equipment		3,364				3,256
		4,574				4,340
Less accumulated depreciation and
amortization		2,652				2,439
		$	1,922			$	1,901
Note 7 Goodwill and Other Intangible Assets
On December 30, 2001, Textron adopted SFAS No. 142, “Goodwill and
Other Intangible Assets,” which required companies to stop amortizing
goodwill and certain intangible assets with indefinite useful lives and
requires an annual review for impairment. All existing goodwill as of
December 30, 2001 was required to be tested for impairment on a reporting
unit basis. With the implementation in 2002, an after-tax transitional
impairment charge of $488 million ($561 million, a pre-tax) was taken in the
second quarter and retroactively recorded in the first quarter. The after-tax
charge is included in the caption “Cumulative effect of change in accounting
principle, net of income taxes” and relates to the following segments: $385
million in Industrial, $88 million in Fastening Systems and $15 million in
Finance. For the Industrial and Fastening Systems segments, the primary
factor resulting in the impairment charge was the decline in demand in
certain industries in which these segments operate, especially the
telecommunications industry, due to the economic slowdown. The Finance
segment’s impairment charge related to the franchise finance division and was
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.
Textron also adopted the remaining provisions of SFAS No. 141,
“Business Combinations,” on December 30, 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 $37 million, net of
related deferred taxes, were reclassified into goodwill within the Industrial
and Finance segments.
Changes in goodwill are summarized below:
(In millions)	Bell	Cessna	Fastening Systems		Industrial		Finance		Total
Balance at December 29, 2001	$ 101	$ 306	$ 473		$ 931		$ 192		$ 2,003
Reclassification of intangible assets	—	—	—		36		1		37
Transitional impairment charge	—	—	(100	)	(437	)	(24	)	(561	)
Foreign currency translation	—	—	17		26		—		43
Balance at December 28, 2002	$ 101	$ 306	$ 390		$ 556		$ 169		$ 1,522
Foreign currency translation	—	—	30		37		—		67
Balance at January 3, 2004	$ 101	$ 306	$ 420		$ 593		$ 169		$ 1,589
Acquisitions/dispositions	—	16	—		(20	)	—		(4	)
Foreign currency translation	—	—	20		20		—		40
Other	—	—	(3	)	(14	)	—		(17	)
Balance at January 1, 2005	$ 101	$ 322	$ 437		$ 579		$ 169		$ 1,608

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	Weighted- Average Amortization Period (In years)	January 1, 2005			January
3, 2004
(Dollars in millions)		Gross Carrying Amount	Accumulated Amortization	Net	Gross Carrying Amount	Accumulated Amortization	Net
Trademarks	20	$ 28	$ 5	$ 23	$ 28	$ 4	$ 24
License	15	10	—	10	—	—	—
Patents	8	12	7	5	12	5	7
Other	5	13	7	6	12	4	8
		$ 63	$ 19	$ 44	$ 52	$ 13	$ 39
Amortization expense totaled $6 million in 2004 and $9 million in both
2003 and 2002. Amortization expense for fiscal years 2005, 2006, 2007, 2008
and 2009 is estimated to be approximately $5 million, $4 million, $4 million,
$3 million and $3 million, respectively.
Note 8 Debt and Credit Facilities
(In millions)					January 1, 2005		January 3, 2004
Textron Manufacturing:
Long-term senior debt:
Medium-term notes due 2010 to 2011 (average
rate of 9.85%)					$ 17		$ 17
6.375% due 2004					—		300
5.625% due 2005					406		372
6.375% due 2008					300		300
4.50% due 2010					250		250
6.50% due 2012					300		300
6.625% due 2020					288		265
Other long-term debt (average rate of 6.1%
and 6.5%, respectively)					230		223
Total debt					$ 1,791		$ 2,027
Current portion of long-term debt					(433	)	(316	)
Total long-term debt					$ 1,358		$ 1,711
Textron Manufacturing
maintains credit facilities with various banks for both short- and long-term
borrowings. Textron Manufacturing has primary revolving credit facilities of
$1.25 billion, of which $1.0 billion will expire in 2007 and $250 million
will expire in March 2005. The $250 million facility includes a one-year term
out option that can effectively extend its expiration into 2006. Textron
Manufacturing’s credit facilities permit Textron Finance to borrow under
these facilities. At January 1, 2005 and January 3, 2004, none of the lines
of credit were used or reserved as support for commercial paper. The
weighted-average interest rates for these facilities in 2004 and 2003 were
1.7% and 1.3%, respectively.
(In millions)					January 1, 2005		January 3, 2004
Textron Finance:
Borrowings under or supported by credit
facilities*					$ 1,307		$ 520
Fixed-rate debt at average rate of 4.95%
and 6.36%, respectively					2,360		2,831
Variable-rate notes at average rate of
3.04% and 2.29%, respectively					1,116		1,056
Total Textron Finance debt					$ 4,783		$ 4,407
* The
weighted-average interest rates on these borrowings, before the effect of
interest rate exchange agreements, were 2.4% and 1.3% at year-end 2004 and
2003, respectively. Weighted-average interest rates during the years 2004 and
2003 were 1.6% and 1.5%, respectively.

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The following table shows
required payments during the next five years on debt outstanding at the end
of 2004. The payment schedule excludes amounts that are payable under or
supported by long-term credit facilities:
(In millions)	2005	2006	2007	2008	2009
Textron Manufacturing	$ 433	$ 8	$ 37	$ 348	$ 3
Textron Finance	656	985	983	42	542
	$ 1,089	$ 993	$ 1,020	$ 390	$ 545
Textron Manufacturing has
agreed to cause Textron Finance to maintain certain minimum levels of
financial performance. No payments from Textron Manufacturing were necessary
in 2004, 2003 or 2002 for Textron Finance to meet these standards.
Cash paid for interest by
Textron Manufacturing totaled $109 million, $117 million and $125 million in
2004, 2003 and 2002, respectively, and included $4 million, $5 million and $8
million in 2004, 2003 and 2002, respectively, paid to Textron Finance. Cash
paid for interest by Textron Finance totaled $157 million, $182 million and
$196 million in 2004, 2003 and 2002, respectively.
Note 9
Derivatives and Other Financial Instruments
Fair Value
Interest Rate Hedges
Textron Manufacturing’s
policy is to manage interest cost using a mix of fixed- and variable-rate
debt. To manage this mix in a cost efficient manner, Textron Manufacturing
will enter into interest rate exchange agreements to agree to exchange, at
specified intervals, the difference between fixed and variable interest
amounts calculated by reference to an agreed upon notional principal amount.
Since the critical terms of the debt and the interest rate exchange match and
the other conditions of SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities,” are met, the hedge is considered perfectly effective.
The mark-to-market values of both the fair value hedge instruments and
underlying debt obligations are recorded as equal and offsetting unrealized
gains and losses in interest expense. At January 1, 2005, Textron
Manufacturing had $6 million of deferred gains related to discontinued
hedges. The deferred gains are being amortized as an adjustment to interest
expense over the remaining life of the underlying debt of 45 months. Textron
Manufacturing has interest rate exchange agreements with a fair value
liability of $2 million at January 1, 2005.
Textron Finance enters into
interest rate exchange agreements in order to mitigate exposure to changes in
the fair value of its fixed-rate portfolios of receivables and debt due to
changes in interest rates. These agreements convert the fixed-rate cash flows
to floating rates. At January 1, 2005, Textron Finance had interest exchange
agreements with a fair value of $11 million designated as fair value hedges,
compared with a fair value of $8 million at January 3, 2004.
Textron Finance utilizes
foreign currency interest rate exchange agreements to hedge its exposure, in
a Canadian dollar functional currency subsidiary, to changes in the fair
value of $60 million U.S. dollar denominated fixed-rate debt as a result of
changes in both foreign currency exchange rates and Canadian Banker’s
Acceptance rates. At January 1, 2005, these instruments had a fair value
liability of $6 million, compared with $1 million at January 3, 2004. Textron
Finance’s fair value hedges are highly effective, resulting in an immaterial
net impact to earnings due to hedge ineffectiveness.
Cash Flow
Interest Rate Hedges
Textron Finance enters into
interest rate exchange, cap and floor agreements to mitigate its exposure to
variability in the cash flows received from its investments in interest-only
securities resulting from securitizations, which is caused by fluctuations in
interest rates. The combination of these instruments convert net residual
floating-rate cash flows expected to be received by Textron

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| Finance as a result of the
securitization trust’s assets, liabilities and derivative instruments to
fixed-rate cash flows. Changes in the fair value of these instruments are
recorded net of the tax effect in other comprehensive (loss) income. At
January 1, 2005, these instruments had a fair value liability of $8 million,
compared with $14 million at January 3, 2004. Textron Finance expects
approximately $1 million of net tax deferred gains to be reclassified to
earnings related to these hedge relationships in 2005. |
| --- |
| Textron Finance utilizes
foreign currency interest rate exchange agreements to hedge the exposure
through March 2005, in a Canadian dollar functional currency subsidiary, to
fluctuations in the cash flows to be received on $107 million of LIBOR based
U.S. dollar variable rate notes receivable as a result of changes in both
foreign currency exchange rates and LIBOR. At January 1, 2005, these instruments
had a fair value of $42 million, compared with $26 million at January 3,
2004. Textron Finance expects approximately $0.3 million of net tax deferred
gains to be reclassified to earnings related to these hedge relationships in
2005. |
| At January 1, 2005, Textron
Finance had $6 million of net tax deferred losses recorded in other
comprehensive (loss) income related to terminated forward starting interest
rate exchange agreements. These agreements were executed to hedge the
exposure to the variability in cash flows from anticipated future issuances
of fixed-rate debt and were terminated upon issuance of the debt. Textron
Finance is amortizing the deferred losses into interest expense over the
remaining life of the hedged debt of 38 months and expects approximately $2
million, net of income taxes, in deferred losses to be reclassified to
earnings in 2005. |
| For cash flow hedges,
Textron Finance recorded an after-tax loss of $7 million in 2004, a gain of
$12 million in 2003, and a loss of $4 million in 2002 to accumulated other
comprehensive loss with no impact to the statement of operations. Textron
Finance has not incurred or recognized any gains or losses in earnings as the
result of the ineffectiveness or the exclusion from its assessment of hedge
effectiveness of its cash flow hedges. |
| Textron had minimal
exposure to loss from nonperformance by the counterparties to its interest
rate exchange agreements at the end of 2004 and does not anticipate
nonperformance by counterparties in the periodic settlements of amounts due.
Textron currently minimizes this potential for risk by entering into
contracts exclusively with major, financially sound counterparties having no
less than a long-term bond rating of “A,” by continuously monitoring such
credit ratings and by limiting exposure to any one financial institution. The
credit risk generally is limited to the amount by which the counterparties’
contractual obligations exceed Textron’s obligations to the counterparty. |
| Cash Flow
Foreign Exchange Rate Hedges |
| Textron manufactures and
sells its products in a number of countries throughout the world and, as a
result, is exposed to movements in foreign currency exchange rates. The
primary purpose of Textron’s foreign currency hedging activities is to manage
the volatility associated with foreign currency purchases of materials,
foreign currency sales of its products, and other assets and liabilities
created in the normal course of business. Textron primarily utilizes forward
exchange contracts and purchased options with maturities of no more than 18
months that qualify as cash flow hedges. These are intended to offset the
effect of exchange rate fluctuations on forecasted sales, inventory purchases
and overhead expenses. The fair value of these instruments at January 1, 2005
was a $32 million asset. At year-end 2004, $21 million of after-tax gain was
reported in accumulated other comprehensive loss from qualifying cash flow
hedges. This gain is generally expected to be reclassified to earnings in the
next 12 months as the underlying transactions occur. Textron Manufacturing
also enters into certain foreign currency derivative instruments that do not
meet hedge accounting criteria, and are primarily intended to protect against
exposure related to intercompany financing transactions and income from
international operations. The fair value of these instruments at the end of
2004 and the net impact of the related gains and losses on selling and
administrative expense in 2004 were not material. |
| Net
Investment Hedging |
| Textron hedges its net
investment position in major currencies and generates foreign currency
interest payments that offset other transactional exposures in these
currencies. To accomplish this, Textron borrows directly in foreign currency
and designates a portion of foreign currency debt as a hedge of net
investments. In addition, certain currency forwards are designated as hedges
of Textron’s related foreign net investments. Currency effects of these
hedges, which are reflected in the cumulative translation adjustment account
within other comprehensive (loss) income, produced a $32 million after-tax
loss during 2004, leaving an accumulated net loss balance of $19 million. |
| Stock-Based
Compensation Hedging |
| Textron manages the expense
related to stock-based compensation awards using cash settlement forward
contracts on its common stock. The use of these forward contracts modifies
compensation expense exposure to changes in the stock price with the intent
to reduce potential variability. The fair value of these instruments at
January 1, 2005 and January 3, 2004 was a receivable of |

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Fair
Values of Financial Instruments
The carrying amounts and
estimated fair values of Textron’s financial instruments that are not
reflected in the financial statements at fair value are as follows:
	January 1, 2005				January 3, 2004
(In millions)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Textron Manufacturing:
Debt	$ (1,791	)	$ (1,902	)	$ (2,027	)	$ (2,177	)
Textron Finance:
Finance receivables	$ 4,888		$ 4,842		$ 4,313		$ 4,274
Debt	$ (4,783	)	$ (4,864	)	$ (4,407	)	$ (4,552	)
Finance receivables exclude
the fair value of finance and leveraged leases totaling $949 million at
January 1, 2005 and $822 million at January 3, 2004, as these leases are
recorded at fair value in the consolidated balance sheet.
Note 10
Mandatorily Redeemable Preferred Securities
Textron adopted SFAS No.
150, “Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity,” in the third quarter of 2003. Upon adoption,
Textron Finance classified its obligated mandatorily redeemable preferred
securities previously classified as equity as a liability.
In June 2004, Textron
Financial Corporation redeemed all of its $26 million Litchfield 10% Series A
Junior Subordinated Debentures, due 2029. The debentures were held by a trust
sponsored and wholly owned by Litchfield Financial Corporation, a subsidiary
of Textron Financial Corporation. The proceeds from the redemption were used
to redeem all of the $26 million Litchfield Capital Trust I 10% Series A
Trust Preferred Securities at par value of $10 per share. There was no gain
or loss on the redemption.
In July 2003, Textron
redeemed its 7.92% Junior Subordinated Deferrable Interest Debentures, due
2045. The debentures were held by Textron’s wholly owned trust, and the proceeds
from their redemption were used to redeem all of the $500 million Textron Capital
I trust preferred securities with a 7.92% dividend yield. Upon the
redemption, $15 million in unamortized issuance costs were written off and
recorded in special charges.
Note 11 Shareholders’ Equity
Capital
Stock
Textron has authorization
for 15,000,000 shares of preferred stock and 500,000,000 shares of 12.5 cent
per share par value common stock. Each share of $2.08 Preferred Stock ($23.63
approximate stated value) is convertible into 4.4 shares of common stock and
can be redeemed by Textron for $50 per share. Each share of $1.40 Preferred
Dividend Stock ($11.82 approximate stated value) is convertible into 3.6
shares of common stock and can be redeemed by Textron for $45 per share.
Performance
Share Units and Stock Options
Textron’s 1999 Long-Term Incentive Plan (the “1999 Plan”) authorizes
awards to key employees of Textron in three forms: (a) options to purchase
Textron shares, (b) performance share units and (c) restricted stock. Options
to purchase Textron shares have a maximum term of ten years and vest ratably
over a three-year period, beginning with the 2003 grants. Prior grants vested
ratably over two years. Restricted stock grants vest one-third each in the
third, fourth and fifth year following the grant. In 2004 and 2003, Textron’s
shareholders approved amendments to the 1999 Plan to revise the maximum
number of shares authorized to 17,500,000 options to purchase Textron shares,
2,000,000 performance units and 2,000,000 shares of restricted stock.

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| At the end of 2004,
5,196,760 stock options were available for future grant under the 1999 Plan,
as amended. Stock option activity is summarized as follows: | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | 2004 | | | 2003 | | | 2002 | | |
| (Shares in thousands) | Number
of Options | | Weighted- Average Exercise Price | Number
of Options | | Weighted- Average Exercise Price | Number
of Options | | Weighted- Average Exercise Price |
| Outstanding at beginning of year | 13,158 | | $ 49.24 | 14,140 | | $ 49.62 | 10,976 | | $ 53.50 |
| Granted | 1,532 | | 54.07 | 1,905 | | 39.67 | 5,135 | | 41.29 |
| Exercised | (4,363 | ) | 42.48 | (1,797 | ) | 39.59 | (696 | ) | 34.25 |
| Canceled or expired | (1,066 | ) | 59.52 | (1,090 | ) | 53.29 | (1,275 | ) | 57.89 |
| Outstanding at end of year | 9,261 | | $ 52.05 | 13,158 | | $ 49.24 | 14,140 | | $ 49.62 |
| Exercisable at end of year | 7,176 | | $ 52.70 | 9,115 | | $ 53.02 | 9,043 | | $ 54.08 |
| Stock options outstanding
at the end of 2004 are summarized as follows: | | | | | | | | | |
| (Shares in thousands) | | Options Outstanding | | | | | Options Exercisable | | |
| Range of Exercise Prices | | Number | | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | | Number | Weighted- Average Exercise Price | |
| $27 - $41 | | 3,509 | | 7.22 Years | $ | 39.89 | 2,745 | $ | 40.25 |
| $42 - $57 | | 3,227 | | 6.95 Years | $ | 49.82 | 1,917 | $ | 45.90 |
| $58 - $95 | | 2,525 | | 4.27 Years | $ | 71.44 | 2,514 | $ | 71.45 |
| | | 9,261 | | | | | 7,176 | | |
| In 2004 and 2003, Textron
granted 459,000 and 408,000 shares, respectively, of restricted stock at a
weighted-average grant price of $57.30 and $40.61, respectively. There were no restricted shares granted in
2002. | | | | | | | | | |
| Reserved
Shares of Common Stock | | | | | | | | | |
| At the end of 2004, common
stock reserved for the subsequent conversion of preferred stock and shares
reserved for the exercise of stock options were 2,698,000 and 9,261,000,
respectively. | | | | | | | | | |
| Preferred
Stock Purchase Rights | | | | | | | | | |
| Each outstanding share of
Textron common stock has attached to it one-half of a preferred stock
purchase right. One preferred stock purchase right entitles the holder to buy
one one-hundredth of a share of Series C Junior Participating Preferred Stock
at an exercise price of $250. The rights become exercisable only under
certain circumstances related to a person or group acquiring or offering to
acquire a substantial block of Textron’s common stock. In certain
circumstances, holders may acquire Textron stock, or in some cases the stock
of an acquiring entity, with a value equal to twice the exercise price. The
rights expire in September 2005 but may be redeemed earlier for $0.05 per
right. | | | | | | | | | |
| Income per
Common Share | | | | | | | | | |
| A reconciliation of income
from continuing operations and basic to diluted share amounts is presented
below: | | | | | | | | | |
| | | 2004 | | | 2003 | | 2002 | | |
| (Dollars in millions, shares in
thousands) | | Income | | Average Shares | Income | Average Shares | Income | | Average Shares |
| Income from continuing operations available
to common shareholders | | $ | 373 | 137,337 | $ 292 | 135,875 | $ 374 | | 138,745 |
| Dilutive effect of convertible preferred stock
and stock options | | — | | 2,832 | — | 1,342 | — | | 1,507 |
| Available to common shareholders and assumed
conversions | | $ | 373 | 140,169 | $ 292 | 137,217 | $ 374 | | 140,252 |

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(In millions)	Currency Translation Adjustment		Unrealized Gains (Losses) on Securities		Pension Liability Adjustment		Deferred Gains (Losses) on Hedge Contracts		Total
Balance at December 29, 2001	$ (190	)	$ 1		$ (2	)	$ (32	)	$ (223	)
Other comprehensive income (loss), net of
tax	78		2		(95	)	13		(2	)
Net unrealized losses, net of tax	—		(25	)	—		—		(25	)
Reclassification adjustment, net of tax	—		25		—		—		25
Balance at December 28, 2002	$ (112	)	$ 3		$ (97	)	$ (19	)	$ (225	)
Other comprehensive income (loss), net of
tax	159		—		(35	)	37		161
Balance at January 3, 2004	$ 47		$ 3		$ (132	)	$ 18		$ (64	)
Other comprehensive income (loss), net of
tax	97		—		(131	)	4		(30	)
Reclassification adjustment, net of tax	—		(3	)	—		—		(3	)
Balance at January 1, 2005	$ 144		$ —		$ (263	)	$ 22		$ (97	)
Included in other
comprehensive income (loss) is an income tax (expense) benefit of $(22)
million, $3 million and $55 million in 2004, 2003 and 2002, respectively.
Note 12
Pension Benefits and Postretirement Benefits Other Than Pensions
Textron has defined benefit
and defined contribution pension plans that together cover substantially all
employees. The costs of the defined contribution plans amounted to
approximately $29 million in 2004, $22 million in 2003 and $44 million in
2002. Defined benefits under salaried plans are based on salary and years of
service. Hourly plans generally provide benefits based on stated amounts for
each year of service. Textron’s funding policy is consistent with federal law
and regulations. Textron also offers healthcare and life insurance benefits
for certain retired employees which are included in the “Postretirement
Benefits Other Than Pensions” caption.
The components of Textron’s
net periodic benefit costs (income) are as follows:

| (In millions) | Pension
Benefits — 2004 | | 2003 | | 2002 | | Postretirement
Benefits Other Than Pensions — 2004 | | 2003 | | 2002 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Service cost | $ 119 | | $ 105 | | $ 99 | | $ 9 | | $ 7 | | $ 4 | |
| Interest cost | 291 | | 283 | | 278 | | 39 | | 41 | | 45 | |
| Expected return on plan assets | (431 | ) | (432 | ) | (454 | ) | — | | — | | — | |
| Amortization of unrecognized transition asset | 1 | | (6 | ) | (17 | ) | — | | — | | — | |
| Amortization of prior service cost | 17 | | 16 | | 15 | | (10 | ) | (8 | ) | (4 | ) |
| Amortization of net loss (gain) | 7 | | 2 | | (16 | ) | 9 | | 4 | | 3 | |
| Curtailments | — | | — | | (6 | ) | (1 | ) | — | | 1 | |
| Net periodic benefit costs (income) | $ 4 | | $ (32 | ) | $ (101 | ) | $ 46 | | $ 44 | | $ 49 | |
| Weighted-average assumptions used to
determine net periodic benefit costs (income): | | | | | | | | | | | | |
| Discount rate | 6.14 | % | 6.61 | % | 7.06 | % | 6.25 | % | 6.75 | % | 7.25 | % |
| Expected long-term rate of return on plan
assets | 8.65 | % | 8.71 | % | 8.72 | % | — | | — | | — | |
| Rate of compensation increase | 4.20 | % | 4.20 | % | 4.50 | % | — | | — | | — | |

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| Obligations
and Funded Status |
| --- |
| The following summarizes
the changes in the benefit obligation and in the fair value of plan assets
and provides a reconciliation of the funded status to the amounts recognized
in the balance sheet for the pension and postretirement benefit plans, along
with the assumptions used to determine benefit obligations: |

(In millions)	Pension Benefits — 2004		2003		Postretirement Benefits Other Than Pensions — 2004		2003
Change in benefit obligation:
Beginning balance	$ 4,813		$ 4,342		$ 681		$ 675
Service cost	119		105		9		7
Interest cost	291		283		39		41
Amendments	2		33		(1	)	(41	)
Plan participants’ contributions	4		4		7		6
Actuarial losses	452		277		40		68
Benefits paid	(296	)	(297	)	(78	)	(76	)
Foreign exchange rate changes	67		68		1		1
Curtailments	—		(2	)	(3	)	—
Ending balance	$ 5,452		$ 4,813		$ 695		$ 681
Change in fair value of plan assets:
Beginning balance	$ 4,583		$ 4,008		$ —		$ —
Actual return on plan assets	532		790		—		—
Employer contributions	45		29		—		—
Plan participants’ contributions	4		4		—		—
Benefits paid	(296	)	(297	)	—		—
Foreign exchange rate changes	50		49		—		—
Ending balance	$ 4,918		$ 4,583		$ —		$ —
Reconciliation of funded status:
Funded status	$ (534	)	$ (230	)	$ (695	)	$ (681	)
Unrecognized actuarial loss	1,209		839		168		137
Unrecognized prior service cost (benefit)	148		163		(37	)	(46	)
Unrecognized transition net asset	1		2		—		—
Net amount recognized	$ 824		$ 774		$ (564	)	$ (590	)
Amounts recognized in the balance sheet consist
of:
Prepaid benefit cost asset	$ 836		$ 892		$ —		$ —
Accrued benefit liability	(376	)	(312	)	(564	)	(590	)
Intangible assets	59		4		—		—
Accumulated other comprehensive loss	305		190		—		—
Net amount recognized	$ 824		$ 774		$ (564	)	$ (590	)
Weighted-average assumptions used to determine
benefit obligations at year-end:
Discount rate	5.67	%	6.14	%	5.75	%	6.25	%
Rate of compensation increase	4.50	%	4.20	%	—		—

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Pension Benefits
The accumulated benefit
obligation for all defined benefit pension plans was $5.0 billion at January
1, 2005 and $4.4 billion at January 3, 2004. Pension plans with accumulated
benefit obligations exceeding the fair value of plan assets were as follows
at year-end:
(In millions)	2004	2003
Projected benefit obligation	$ 2,282	$ 798
Accumulated benefit obligation	$ 2,053	$ 716
Fair value of plan assets	$ 1,700	$ 417
In addition to the plans in
the above table, Textron has plans with the projected benefit obligation in
excess of plan assets as follows:
(In millions)	2004	2003
Projected benefit obligation	$ 67	$ 1,238
Accumulated benefit obligation	$ 44	$ 1,129
Fair value of plan assets	$ 44	$ 1,167
Textron’s pension assets
are invested with the objective of achieving a total rate of return over the
long term, sufficient to fund future pension obligations and to minimize
future pension contributions. Textron is willing to tolerate a commensurate
level of risk to achieve this objective based on the funded status of the
plans and the long-term nature of Textron’s pension liability. Risk is
controlled by maintaining a portfolio of assets that is diversified across a
variety of asset classes, investment styles and investment managers. All of
the assets are managed by external investment managers, and the majority of
the assets are actively managed. Where possible, investment managers are
prohibited from owning Textron stock in the portfolios that they manage on
behalf of Textron.
Asset allocation target
ranges were established consistent with the investment objectives, and the
assets are rebalanced periodically. The expected long-term rate of return on
plan assets was determined based on a variety of considerations, including
the established asset allocation targets and expectations for those asset
classes, historical returns of the plans’ assets and the advice of outside
advisors. At January 1, 2005, the target allocation range is 44%-70% for
equity securities, 13%-33% for debt securities and 7%-13% for both real
estate and for other assets.

| Textron’s percentages of
the fair value of total pension plan assets by major category are as follows: — Asset Category | January 1, 2005 | January 3, 2004 |
| --- | --- | --- |
| Equity securities | 59 % | 61 % |
| Debt securities | 24 % | 24 % |
| Real estate | 8 % | 7 % |
| Other | 9 % | 8 % |
| Total | 100 % | 100 % |

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| Other
Postretirement Benefits | | | | |
| --- | --- | --- | --- | --- |
| For measurement purposes,
Textron has assumed an annual healthcare cost trend rate of 11% for covered
healthcare benefits in 2005. The rate was assumed to decrease gradually to 5%
in 2009 and remain at that level thereafter. Assumed healthcare cost trend
rates have a significant effect on the amounts reported for the healthcare
plans. A one-percentage-point change in assumed healthcare cost trend rates
would have the following effects: | | | | |
| (In millions) | | One- Percentage- Point Increase | One- Percentage- Point Decrease | |
| Effect on total of service and interest
cost components | | $ 5 | $ (4 | ) |
| Effect on postretirement benefit obligations
other than pensions | | $ 59 | $ (51 | ) |
| During the third quarter of
2004, Textron adopted FASB Staff Position No. 106-2, “Accounting and
Disclosure Requirements related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003” (the “Act”). The Act provides for
a prescription drug benefit under Medicare (“Medicare Part D”) as well as a
federal subsidy to sponsors of retiree healthcare benefit plans that provide
benefits that are at least actuarially equivalent to Medicare Part D. Textron
has determined that the benefits it provides meet the equivalency tests as
defined in the Act and has included the effects of the subsidy as a reduction
to the accumulated projected benefit obligation of approximately $50 million.
The total impact of the subsidy on the net periodic benefit cost for
postretirement benefits other than pensions in 2004 is approximately $7
million. | | | | |
| Estimated
Future Cash Flow Impact | | | | |
| In 2005, Textron expects to
contribute in the range of $30 million to $35 million to fund its qualified
pension plans and does not expect to contribute to its other postretirement
benefit plans. The benefit payments provided below reflect expected future
employee service, as appropriate, that are expected to be paid, net of estimated
participant contributions. The benefit payments are based on the same
assumptions used to measure Textron’s benefit obligation at the end of fiscal
2004. Pension benefit payments will primarily be made out of qualified
pension trusts. Postretirement benefits other than pensions are paid out of
Textron’s assets. | | | | |
| (In millions) | Pension Benefits | Post- retirement Benefits Other Than Pensions | Expected Medicare Part D Subsidy | |
| 2005 | $ 292 | $ 62 | $ — | |
| 2006 | 296 | 66 | (4 | ) |
| 2007 | 301 | 68 | (4 | ) |
| 2008 | 307 | 70 | (5 | ) |
| 2009 | 314 | 70 | (5 | ) |
| 2010 – 2014 | 1,678 | 324 | (23 | ) |

| Note 13
Income Taxes | | | |
| --- | --- | --- | --- |
| Textron files a
consolidated federal income tax return for all U.S. subsidiaries and separate
returns for foreign subsidiaries. Income from continuing operations before
income taxes and distributions on preferred securities of subsidiary trusts
is as follows: | | | |
| (In
millions) | 2004 | 2003 | 2002 |
| United States | $ 296 | $ 253 | $ 475 |
| Foreign | 232 | 164 | 101 |
| Total | $ 528 | $ 417 | $ 576 |

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| Income tax expense for
continuing operations is summarized as follows: — (In
millions) | 2004 | | 2003 | | 2002 | |
| --- | --- | --- | --- | --- | --- | --- |
| Federal: | | | | | | |
| Current | $ 33 | | $ 40 | | $ 54 | |
| Deferred | 61 | | 8 | | 82 | |
| State | 13 | | 15 | | 15 | |
| Foreign | 48 | | 49 | | 25 | |
| Income tax expense | $ 155 | | $ 112 | | $ 176 | |
| The following reconciles
the federal statutory income tax rate to the effective income tax rate
reflected in the consolidated statements of operations: | | | | | | |
| | 2004 | | 2003 | | 2002 | |
| Federal statutory income tax rate | 35.0 | % | 35.0 | % | 35.0 | % |
| Increase (decrease) in taxes resulting
from: | | | | | | |
| State income taxes | 1.6 | | 2.3 | | 1.8 | |
| Special foreign dividend | 2.1 | | — | | — | |
| Permanent items from Trim divestiture | — | | — | | 1.2 | |
| Favorable tax settlements | — | | (3.1 | ) | (2.1 | ) |
| ESOP dividends | (1.6 | ) | (2.2 | ) | (3.1 | ) |
| Foreign tax rate differential | (5.9 | ) | (2.1 | ) | (0.5 | ) |
| Export sales benefit | (1.1 | ) | (1.4 | ) | (1.5 | ) |
| Other, net | (0.7 | ) | (1.6 | ) | (0.2 | ) |
| Effective income tax rate | 29.4 | % | 26.9 | % | 30.6 | % |

| The tax effects of
temporary differences that give rise to significant portions of Textron’s net
deferred tax assets and liabilities were as follows: — (In
millions) | January
1, 2005 | | January
3, 2004 | |
| --- | --- | --- | --- | --- |
| Deferred tax assets: | | | | |
| Deferred revenue | $ 31 | | $ 15 | |
| Restructuring reserve | 25 | | 11 | |
| Warranty and product maintenance reserves | 99 | | 110 | |
| Self-insured liabilities, including
environmental | 98 | | 90 | |
| Deferred compensation | 166 | | 156 | |
| Obligation for postretirement benefits | 30 | | 31 | |
| Investment securities | — | | 20 | |
| Allowance for credit losses | 75 | | 77 | |
| Amortization of goodwill and other
intangibles | 35 | | 52 | |
| Loss carryforwards | 91 | | 52 | |
| Other, principally timing of other expense
deductions | 132 | | 59 | |
| Total deferred tax assets | 782 | | 673 | |
| Valuation allowance for deferred tax assets | (155 | ) | (74 | ) |
| | $ 627 | | $ 599 | |
| Deferred tax liabilities: | | | | |
| Textron Finance transactions, principally
leasing | $ (505 | ) | $ (442 | ) |
| Property, plant and equipment, principally
depreciation | (130 | ) | (113 | ) |
| Inventory | (48 | ) | (24 | ) |
| Currency translation adjustment | (3 | ) | (6 | ) |
| Total deferred tax liabilities | (686 | ) | (585 | ) |
| Net deferred tax (liability) asset | $ (59 | ) | $ 14 | |

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| At January 1, 2005 and
January 3, 2004, Textron had non-U.S. net operating loss carryforwards for
income tax purposes of $165 million and $162 million, respectively, of which
$148 million and $140 million, respectively, can be carried forward
indefinitely. The balance expires at various dates through 2013. At January
1, 2005, Textron had U.S. federal net operating loss carryforwards for income
tax purposes of $64 million that expire in 2025. |
| --- |
| A valuation allowance at
January 1, 2005 and January 3, 2004 of $155 million and $74 million,
respectively, has been recognized to offset the related deferred tax assets
due to the uncertainty of realizing the benefits of the deferred tax assets.
The increase in the valuation allowance was primarily related to deferred tax
assets resulting from minimum pension liability adjustments recorded in other
comprehensive (loss) income in certain foreign jurisdictions. |
| The undistributed earnings
of Textron’s foreign subsidiaries on which tax is not provided, which
approximated $910 million at the end of 2004, are considered to be
indefinitely reinvested. If the
earnings of foreign subsidiaries were distributed, taxes, net of foreign tax
credits, would be increased by approximately $219 million in 2004. |
| On October 22, 2004, the
American Jobs Creation Act (“AJCA”) was signed into law and includes a
deduction of 85% of certain foreign earnings that are repatriated, as defined
in the AJCA. Textron intends to repatriate approximately $200 million in
non-U.S. cash and has recognized a related tax expense of $11 million in the
fourth quarter of 2004. Textron is
continuing to evaluate the effects of the AJCA and expects to complete this
evaluation in 2005. It is possible
that Textron may repatriate an additional amount within the range of zero to
$200 million in 2005, resulting in an income tax expense within the range of
zero to $11 million. |
| Cash payments for taxes,
net of tax refunds received, for Textron Manufacturing including discontinued
operations totaled $(32) million in 2004, $(158) million in 2003 and $42
million in 2002. Cash payments for taxes, net of tax refunds, for Textron
Finance totaled $61 million in 2004, $(6) million in 2003 and $(31) million
in 2002. |

| Note 14
Special Charges | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Special charges are
summarized below for the applicable segments: | | | | | | | | | | | |
| | Restructuring
Expense | | | | | | | | | | |
| (In
millions) | Severance Costs | Contract Terminations | Fixed
Asset Impairments | | Other Associated Costs | Total | | Other Charges | | Total Special Charges | |
| 2004 | | | | | | | | | | | |
| Bell | $ — | $ — | $ (1 | ) | $ — | $ (1 | ) | $ — | | $ (1 | ) |
| Cessna | — | — | — | | — | — | | — | | — | |
| Fastening Systems | 37 | 7 | 9 | | 19 | 72 | | — | | 72 | |
| Industrial | 28 | 37 | 1 | | 6 | 72 | | — | | 72 | |
| Finance | — | — | — | | — | — | | — | | — | |
| Corporate | — | — | — | | — | — | | (12 | ) | (12 | ) |
| | $ 65 | $ 44 | $ 9 | | $ 25 | $ 143 | | $ (12 | ) | $ 131 | |
| 2003 | | | | | | | | | | | |
| Bell | $ 2 | $ — | $ — | | $ — | $ 2 | | $ — | | $ 2 | |
| Cessna | 8 | — | 1 | | — | 9 | | — | | 9 | |
| Fastening Systems | 34 | — | 34 | | 7 | 75 | | — | | 75 | |
| Industrial | 17 | 2 | 10 | | 13 | 42 | | — | | 42 | |
| Finance | 4 | — | 2 | | — | 6 | | — | | 6 | |
| Corporate | 3 | — | — | | — | 3 | | 15 | | 18 | |
| | $ 68 | $ 2 | $ 47 | | $ 20 | $ 137 | | $ 15 | | $ 152 | |
| 2002 | | | | | | | | | | | |
| Bell | $ 4 | $ — | $ 1 | | $ 1 | $ 6 | | $ — | | $ 6 | |
| Cessna | 23 | — | 2 | | 4 | 29 | | — | | 29 | |
| Fastening Systems | 12 | 2 | 4 | | 4 | 22 | | — | | 22 | |
| Industrial | 14 | 2 | 6 | | 13 | 35 | | — | | 35 | |
| Finance | — | — | — | | — | — | | — | | — | |
| Corporate | 1 | — | — | | — | 1 | | 38 | | 39 | |
| | $ 54 | $ 4 | $ 13 | | $ 22 | $ 93 | | $ 38 | | $ 131 | |

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| To improve returns at core
businesses and to complete the integration of certain acquisitions, Textron
approved and committed to a restructuring program in the fourth quarter of
2000 based upon targeted cost reductions. This program was expanded in 2001,
and in October 2002 Textron announced a further expansion of the program as
part of its strategic effort to improve operating efficiencies, primarily in
its industrial businesses. Textron’s restructuring program includes corporate
and segment direct and indirect workforce reductions, consolidation of
facilities primarily in the United States and Europe, rationalization of
certain product lines, outsourcing of non-core production activity, the
divestiture of non-core businesses, and streamlining of sales and
administrative overhead. Under this restructuring program, Textron has
reduced its workforce by approximately 11,000 employees from continuing
operations, representing approximately 19% of its global workforce since the
restructuring was first announced. A total of 107 facilities have been closed
under this program, including 45 manufacturing plants, primarily in the
Industrial and Fastening Systems segments. |
| --- |
| In total, Textron estimates
that the entire program for continuing operations will be approximately $540
million (including $11 million related to the divested Automotive Trim
business (“Trim”)). As of January 1, 2005, $519 million of cost has been
incurred relating to continuing operations (including $11 million related to
Trim), with $213 million in the Industrial segment, $219 million in the
Fastening Systems segment, $38 million in the Cessna segment, $29 million in
the Bell segment, $9 million in the Finance segment and $11 million at
Corporate. Costs incurred through January 1, 2005 include $268 million in
severance costs, $98 million in asset impairment charges (net of gains on the
sale of fixed assets), $54 million in contract termination costs and $99
million in other associated costs. |

| An analysis of the
restructuring program and related reserve account is summarized below: — (In
millions) | Severance Costs | | Contract Terminations | | Other Associated Costs | | Fixed
Asset Impairments | | Total | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Balance at December 29, 2001 | $ 28 | | $ 3 | | $ — | | $ — | | $ 31 | |
| Additions | 60 | | 5 | | 22 | | 13 | | 100 | |
| Reserves deemed unnecessary | (6 | ) | (1 | ) | — | | — | | (7 | ) |
| Non-cash utilization | — | | — | | — | | (13 | ) | (13 | ) |
| Cash paid | (60 | ) | (4 | ) | (22 | ) | — | | (86 | ) |
| Balance at December 28, 2002 | $ 22 | | $ 3 | | $ — | | $ — | | $ 25 | |
| Additions | 69 | | 2 | | 20 | | 47 | | 138 | |
| Reserves deemed unnecessary | (1 | ) | — | | — | | — | | (1 | ) |
| Non-cash utilization | — | | — | | — | | (47 | ) | (47 | ) |
| Cash paid | (58 | ) | (2 | ) | (20 | ) | — | | (80 | ) |
| Balance at January 3, 2004 | $ 32 | | $ 3 | | $ — | | $ — | | $ 35 | |
| Additions | 67 | | 44 | | 25 | | 13 | | 149 | |
| Reserves deemed unnecessary | (2 | ) | — | | — | | — | | (2 | ) |
| Gains on sale of fixed assets | — | | — | | — | | (4 | ) | (4 | ) |
| Non-cash utilization | — | | — | | — | | (9 | ) | (9 | ) |
| Cash paid | (66 | ) | (4 | ) | (25 | ) | — | | (95 | ) |
| Balance at January 1, 2005 | $ 31 | | $ 43 | | $ — | | $ — | | $ 74 | |
| Severance costs are
generally paid on a monthly basis over the severance period granted to each
employee or on a lump sum basis when required. Severance costs include
outplacement costs, which are paid in accordance with normal payment terms.
Contract termination costs are generally paid upon exiting the facility or
over the remaining lease term. Other associated costs primarily include
outsourcing certain operations, plant rearrangement, machinery and equipment
relocation, and employee replacement and relocation costs, which are paid in
accordance with normal payment terms. | | | | | | | | | | |
| The specific restructuring
measures and associated estimated costs are based on Textron’s best judgment
under prevailing circumstances. Textron believes that the restructuring
reserve balance of $74 million is adequate to cover the costs presently
accruable relating to activities formally identified and committed to under
approved plans as of January 1, 2005 and anticipates that all actions related
to these liabilities will be completed within a twelve-month period. | | | | | | | | | | |

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| |
| --- |
| In July 2003, Textron
redeemed its 7.92% Junior Subordinated Deferrable Interest Debentures due
2045. The debentures were held by Textron’s wholly owned trust, and the
proceeds from their redemption were used to redeem all of the $500 million
Textron Capital I trust preferred securities. Upon the redemption, $15
million of unamortized issuance costs were written off and recorded in
special charges. |
| During the second half of
2002, the C&A common stock owned by Textron experienced a decline in
market value. Textron acquired this stock as a result of the disposition of
the Trim business. In December 2002, Moody’s lowered its liquidity rating of
C&A. Due to this indicator and the extended length of time and extent to
which the market value of the stock was less than the carrying value, Textron
determined that the decline in the market value of the stock was other than
temporary and wrote down its investment in the stock. The write-down resulted
in a pre-tax loss of $38 million, which is included in special charges.
Textron sold its remaining investment in C&A common stock for cash
proceeds of $34 million and recorded a pre-tax gain of $12 million in the
first quarter of 2004. |
| Note 15
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 sector
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. |

| During 2002, the Lycoming
aircraft engine business, in conjunction with the U.S. Federal Aviation
Administration (“FAA”), recalled approximately 950 turbocharged airplane
engines and mandated the inspection of another 736 engines to replace
potentially faulty crankshafts manufactured by a third-party supplier.
Lycoming initiated a comprehensive customer care program to replace the
defective crankshafts, make any necessary related repairs, and compensate its
customers for the loss of use of their aircraft during the recall. This
program is substantially complete. It is possible, however, that additional
engines outside of the current recall could potentially be affected.
Accordingly, Textron has continued to monitor the performance of the
crankshafts previously supplied by the third-party to ensure that the reserve
adequately covers all engines with potentially faulty crankshafts. Textron
has reserves of $11 million for costs directly related to potential
crankshaft issues that may not specifically be a part of the recall program. |
| --- |
| In connection with the recall, the third-party supplier filed a
lawsuit against Lycoming claiming that the supplier had been wrongly blamed
for aircraft engine failures resulting from its crankshaft forging process
and that Lycoming’s design was the cause of the engine failures. On February
14, 2005, a jury returned a verdict against Lycoming for $1.7 million in
increased insurance costs and $2.7 million in expert fees. The following day
the jury returned a verdict for $86 million in punitive damages. The court
may also award attorneys’ fees, based upon a jury finding that $5.3 million
in fees incurred by the supplier was reasonable. While the ultimate outcome
of the litigation cannot be assured, management disagrees with the verdicts
and believes that it is probable that they will be reversed through the
appellate process. |
| On September 20, 2004, the
third-party supplier filed for bankruptcy protection and ceased delivering
crankshafts to Lycoming. Management estimates that current crankshaft
inventories on hand should be adequate to cover planned production
requirements through early 2005. In conjunction with the FAA, Lycoming is in
the process of certifying a new supplier. The new supplier has begun
manufacturing crankshafts pending completion of the certification process.
Textron is working with the FAA and the supplier, and is not aware of any
issues with the certification process at this time. Based on the current
status of the certification process and the forecasted production
requirements, the transition to the new supplier is not expected to have a
material impact on Textron’s results of operations or financial position. |
| Environmental
Remediation |
| As with other industrial
enterprises engaged in similar businesses, Textron is involved in a number of
remedial actions under various federal and state laws and regulations
relating to the environment that impose liability on companies to clean up,
or contribute to the cost of cleaning up, sites on which hazardous wastes or
materials were disposed or released. Expenditures to evaluate and remediate
contaminated sites approximated $6 million, $6 million and $16 million in
2004, 2003 and 2002, respectively. |

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| |
| --- |
| Note 16
Arrangements with Off-Balance Sheet Risk |
| Textron enters into
arrangements with off-balance sheet risk in the normal course of business, as
discussed below. |
| Guarantees |
| Textron has joint venture
agreements with external financing arrangements for which Textron has
guaranteed approximately $18 million in debt obligations. Textron would be
required to make payments under these guarantees if a joint venture defaults
under the debt agreements. |
| Bell Helicopter and
AgustaWestland North America Inc. (“AWNA”) formed the AgustaWestlandBell
Limited Liability Company (“AWB LLC”) in January 2004 for the joint design,
development, manufacture, sale, customer training and product support of the US101
helicopter and certain variations and derivatives thereof, to be offered and
sold to departments or agencies of the U.S. Government. It is anticipated
that AWB LLC will contract with either Bell Helicopter or AWNA for any
workshare required under any US101 contracts received. |
| Bell Helicopter has guaranteed
to Lockheed Martin, the prime contractor for the U.S. Marine Corps Marine 1
Helicopter Squadron (VXX) Program (“VXX Program”), the due and prompt
performance of AWB LLC’s obligations under any subcontracts received from
Lockheed Martin, not to exceed 49% of AWB LLC’s aggregate liability.
AgustaWestland N.V., AWNA’s parent company, has guaranteed the remaining 51%
to Lockheed Martin. Bell Helicopter and AgustaWestland N.V. have entered into
cross-indemnification agreements in which each party indemnifies the other
related to any payments required under these agreements that result from the
indemnifying party’s workshare under any subcontracts received. |
| The maximum amount that
Bell Helicopter could be required to pay related to this guarantee is
dependent on the value of subcontracts received by AWB LLC from Lockheed
Martin. As of January 1, 2005, AWB LLC had completed work under subcontracts
received in 2004. On January 28, 2005, Lockheed Martin, with AWB LLC as its
principal subcontractor, was selected to design, develop, manufacture and
support the helicopters for the VXX Program; a subcontract for this effort is
expected to be issued in the first quarter of 2005. |
| In the ordinary course of
business, Textron enters into standby letters of credit and surety bonds with
financial institutions, principally to guarantee payment or performance to
certain third parties in accordance with specified terms and conditions. At
January 1, 2005, there were $168 million of standby letters of credit outstanding
and $81 million of surety bonds outstanding. Management knows of no event of
default that would require Textron to satisfy these guarantees at the end of
2004. |
| Textron has a number of
guaranteed minimum resale value contracts associated with certain past
aircraft sales. These guarantees require Textron to make possible future
payments to a customer in the event that the fair value of an aircraft falls
below a minimum guaranteed amount or to stipulate a minimum trade-in value.
The agreements generally include operating restrictions such as maximum usage
over the guarantee period or minimum maintenance requirements. In addition,
Textron has guaranteed the minimum resale value of certain customer-owned
aircraft anticipated to be traded in upon completion of a model currently
under development. Textron has recorded a $2 million liability related to the
estimated fair value of the guarantee under these agreements. The total amount of resale value guaranteed
under these agreements at January 1, 2005 was approximately $33 million.
Based on the estimated fair values of the guaranteed aircraft prevailing at
January 1, 2005, there is no additional liability related to Textron’s
obligation under these agreements. The guarantee contracts expire as follows:
$2 million in 2005, $3 million in 2006, $2 million in 2008, $3 million in
2009, $2 million in 2010, $2 million in 2011 and $19 million in 2012. |

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| Textron Finance sells
receivables in whole-loan sales where limited credit enhancement is typically
provided in the form of a contingent liability related to finance receivable
credit losses and, to a lesser extent, prepayment risk. Textron Finance has a
contingent liability related to the sale of equipment lease rental streams in
2003 and 2001. The maximum liability at January 1, 2005 was $42 million, and
in the event Textron Finance’s credit rating falls below BBB, it is required
to pledge a related pool of equipment residuals that amount to $10 million. Textron
Finance has valued this contingent liability based on assumptions for annual
credit losses and prepayment rates of 0.25% and 7.5%, respectively. |
| --- |
| In connection with the sale
of Trim, certain operating leases were transferred to C&A. Textron has
guaranteed C&A’s payments under these operating leases up to an aggregate
remaining amount of $13 million. Textron is required to make payments under
these guarantees upon a default by C&A under the lease agreements. These
guarantees expire along with the underlying lease agreements. Textron
believes it has sufficient recourse against C&A under the indemnity
provisions of the purchase and sale agreement should it be required to make
any payments under these guarantees. |
| Variable
Interest Entities |
| Textron entered into an
agreement with Agusta Aerospace Corporation in November 1998 to share certain
costs and profits for the joint design, development, manufacture, marketing,
sale, customer training and product support of the commercial tiltrotor Model
BA609 and the Model AB139. As of the end of 2004, only certain marketing and
administrative costs are charged to the venture, while development costs are
recorded separately by the partners. Bell’s share of the development costs
are charged to Textron’s earnings as a period expense. This venture is a
variable interest entity as it relies on its partners to fund the development
and provide services for substantially all of the venture’s operations. Since
Bell does not absorb more than half of this venture’s expected losses or
residual returns, it is not the primary beneficiary and cannot consolidate
this venture. Bell is not obligated to continue funding this venture other
than to execute existing contracts. As of January 1, 2005, this venture had
total assets of approximately $41 million and no debt. |

Rental expense approximated
$102 million, $105 million and $102 million in 2004, 2003 and 2002,
respectively. Future minimum rental commitments for noncancelable operating
leases in effect at the end of 2004 approximated $75 million for 2005, $60
million for 2006, $41 million for 2007, $32 million for 2008, $30 million for
2009 and a total of $130 million thereafter.
Loan
Commitments
At January 1, 2005, Textron
Finance had unused commitments to fund new and existing customers under $1.0
billion of committed revolving lines of credit, compared with $1.1 billion at
January 3, 2004. Generally, interest rates on these commitments are not set
until the loans are funded so Textron Finance is not exposed to interest rate
changes. Since many of the agreements will not be used to the extent
committed or will expire unused, the total commitment amount does not
necessarily represent future cash requirements.
Note 17 Supplemental
Financial Information
Accrued
Liabilities
Textron Manufacturing’s
accrued liabilities are composed of the following:
(In millions)	January 1, 2005	January 3, 2004
Customer deposits	$ 549	$ 253
Warranty and product maintenance contracts	282	304
Salaries, wages and employer taxes	281	254
Deferred revenue	114	95
Accrued interest	52	48
Dividends payable	48	2
Other	492	355
Total accrued liabilities	$ 1,818	$ 1,311

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| Warranty
and Product Maintenance Contracts | | | | | | |
| --- | --- | --- | --- | --- | --- | --- |
| Textron provides limited
warranty and product maintenance programs, including parts and labor, for
certain products for periods ranging from one to five years. Textron
estimates the costs that may be incurred under warranty programs and records
a liability in the amount of such costs at the time product revenue is
recognized. Factors that affect this liability include the number of products
sold, historical and anticipated rates of warranty claims and cost per claim.
Textron periodically assesses the adequacy of its recorded warranty and
product maintenance liabilities and adjusts the amounts as necessary. | | | | | | |
| Changes in Textron’s
warranty and product maintenance liability are as follows: | | | | | | |
| (In millions) | 2004 | | 2003 | | 2002 | |
| Accrual at beginning of year | $ 304 | | $ 295 | | $ 251 | |
| Provision | 147 | | 150 | | 165 | |
| Settlements | (152 | ) | (151 | ) | (156 | ) |
| Adjustments to prior accrual estimates | (17 | ) | 10 | | 35 | |
| Accrual at end of year | $ 282 | | $ 304 | | $ 295 | |
| For 2002, the adjustments
to prior accrual estimates include $31 million in costs for the recall,
inspection and customer care program at Lycoming described in Note 15. | | | | | | |

Company-funded and
customer-funded research and development costs are as follows:
(In millions)	2004	2003	2002
Company-funded	$ 307	$ 255	$ 204
Customer-funded	283	332	379
Total research and development	$ 590	$ 587	$ 583
Customer-funded research
and development costs are primarily related to U.S. Government contracts,
including the V-22 and H-1 development contracts.
Note 18 Segment Reporting and Geographic
Data
Textron has five reportable
segments: Bell, Cessna, Fastening Systems, Industrial and Finance. See Note 1
for the principal markets, and Item 1. Business of Textron on pages 1 through
5 for products, of the segments.
Textron’s reportable
segments are strategically aligned based on the manner in which Textron
manages its various operations. The accounting policies of the segments are
the same as those described in the summary of significant accounting policies
in Note 1. Textron evaluates segment performance based on segment profit.
Segment profit for Textron Manufacturing excludes interest expense, certain
corporate expenses, special charges, and gains and losses from the
disposition of significant business units. Textron Finance includes interest
income, interest expense and distributions on preferred securities of Finance
subsidiary trust, and excludes special charges as part of segment profit.
Provisions for losses on finance receivables involving the sale or lease of
Textron products are recorded by the selling manufacturing division.

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(In millions)	Revenues — 2004	2003	2002	Segment Profit — 2004		2003		2002
Bell	$ 2,254	$ 2,348	$ 2,235	$ 250		$ 234		$ 169
Cessna	2,473	2,299	3,175	267		199		376
Fastening Systems	1,924	1,737	1,650	53		66		72
Industrial	3,046	2,836	2,627	194		150		169
Finance	545	572	584	139		122		118
	$ 10,242	$ 9,792	$ 10,271	903		771		904
Special charges				(131	)	(152	)	(131	)
Segment operating income				772		619		773
Gain on sale of businesses				—		15		25
Corporate expenses and other, net				(149	)	(119	)	(114	)
Interest expense, net				(95	)	(98	)	(108	)
Income from continuing operations before income taxes and distributions on preferred securities				$ 528		$ 417		$ 576
	Assets			Property, Plant and Equipment Expenditures*
(In
millions)	2004	2003	2002	2004		2003		2002
Bell	$ 1,674	$ 1,496	$ 1,556	$ 62		$ 50		$ 29
Cessna	1,751	1,622	1,823	98		99		92
Fastening Systems	1,585	1,464	1,451	52		34		43
Industrial	2,601	2,468	2,304	100		105		120
Finance	6,738	6,333	6,383	12		17		17
Corporate	1,497	1,716	1,580	22		18		14
Discontinued operations	29	72	575	—		4		3
	$ 15,875	$ 15,171	$ 15,672	$ 346		$ 327		$ 318
*
Includes capital expenditures financed through capital leases

| (In
millions) | Amortization — 2004 | | 2003 | | 2002 | Depreciation — 2004 | 2003 | 2002 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Bell | $ 2 | | $ 2 | | $ 1 | $ 47 | $ 52 | $ 48 |
| Cessna | — | | — | | — | 71 | 75 | 78 |
| Fastening Systems | — | | — | | 4 | 73 | 76 | 70 |
| Industrial | 6 | | 9 | | 9 | 101 | 93 | 103 |
| Finance | 10 | | 11 | | 10 | 36 | 34 | 27 |
| Corporate | (3 | ) | (4 | ) | 2 | 10 | 6 | 4 |
| | $ 15 | | $ 18 | | $ 26 | $ 338 | $ 336 | $ 330 |

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| The following summarizes
revenues by type of products: | | | | | | |
| --- | --- | --- | --- | --- | --- | --- |
| | | Revenues | | | | |
| (In millions) | | 2004 | 2003 | | 2002 | |
| Bell: | | | | | | |
| Rotor aircraft | | $ 1,615 | $ | 1,755 | $ 1,636 | |
| Other | | 639 | 593 | | 599 | |
| Cessna: fixed-wing aircraft | | 2,473 | 2,299 | | 3,175 | |
| Fastening Systems | | 1,924 | 1,737 | | 1,650 | |
| Industrial: | | | | | | |
| Fuel systems and functional components | | 1,582 | 1,454 | | 1,226 | |
| Golf and turf-care products | | 708 | 665 | | 756 | |
| Fluid & Power | | 463 | 446 | | 383 | |
| Other | | 293 | 271 | | 262 | |
| Finance | | 545 | 572 | | 584 | |
| | | $ 10,242 | $ | 9,792 | $ 10,271 | |
| Revenues include sales to
the U.S. Government of $1.3 billion in 2004, $1.4 billion in 2003 and $1.3
billion in 2002, primarily in the Bell segment. | | | | | | |
| Geographic
Data | | | | | | |
| Presented below is selected
financial information by geographic area of Textron’s operations: | | | | | | |
| | Revenues | | | Property, Plant and Equipment, net* | | |
| (In millions) | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 |
| United States | $ 6,069 | $ 6,093 | $ 6,790 | $ 1,283 | $ 1,281 | $ 1,384 |
| Canada | 348 | 364 | 383 | 71 | 74 | 63 |
| Latin America and Mexico | 509 | 466 | 511 | 32 | 34 | 27 |
| Germany | 866 | 822 | 611 | 252 | 231 | 198 |
| Asia and Australia | 670 | 471 | 396 | 66 | 54 | 41 |
| United Kingdom | 356 | 317 | 324 | 82 | 95 | 108 |
| France | 374 | 350 | 260 | 93 | 91 | 86 |
| Other | 1,050 | 909 | 996 | 84 | 88 | 72 |
| | $ 10,242 | $ 9,792 | $ 10,271 | $ 1,963 | $ 1,948 | $ 1,979 |
| *
Revenues are attributed to countries based on the location of the customer | | | | | | |
| **
Property, plant and equipment, net are based on the location of the asset. | | | | | | |

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Quarterly Data

| (Unaudited) — (Dollars in millions, except
per share amounts) | | 2004 — Q4 | | Q3 | | Q2 | | Q1 | | 2003 — Q4 | | Q3 | | Q2 | | Q1 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Revenues | | | | | | | | | | | | | | | | | |
| Bell | | $ 590 | | $ 570 | | $ 587 | | $ 507 | | $ 675 | | $ 521 | | $ 616 | | $ 536 | |
| Cessna | | 856 | | 699 | | 500 | | 418 | | 620 | | 516 | | 575 | | 588 | |
| Fastening Systems | | 479 | | 454 | | 494 | | 497 | | 457 | | 404 | | 447 | | 429 | |
| Industrial | | 763 | | 697 | | 805 | | 781 | | 773 | | 639 | | 734 | | 690 | |
| Finance | | 145 | | 129 | | 137 | | 134 | | 154 | | 136 | | 142 | | 140 | |
| Total revenues | | $ 2,833 | | $ 2,549 | | $ 2,523 | | $ 2,337 | | $ 2,679 | | $ 2,216 | | $ 2,514 | | $ 2,383 | |
| Segment profit | | | | | | | | | | | | | | | | | |
| Bell | | $ 68 | | $ 59 | | $ 71 | | $ 52 | | $ 69 | | $ 69 | | $ 56 | | $ 40 | |
| Cessna | | 119 | | 82 | | 44 | | 22 | | 43 | | 31 | | 66 | | 59 | |
| Fastening Systems | | 8 | | 1 | | 24 | | 20 | | 17 | | 10 | | 21 | | 18 | |
| Industrial | | 47 | | 42 | | 57 | | 48 | | 44 | | 26 | | 43 | | 37 | |
| Finance | | 44 | | 28 | | 36 | | 31 | | 52 | | 24 | | 23 | | 23 | |
| Total segment profit | | 286 | | 212 | | 232 | | 173 | | 225 | | 160 | | 209 | | 177 | |
| Special charges | | (46 | ) | (16 | ) | (17 | ) | (52 | ) | (63 | ) | (41 | ) | (21 | ) | (27 | ) |
| Total segment operating income | | 240 | | 196 | | 215 | | 121 | | 162 | | 119 | | 188 | | 150 | |
| Gain on sale of businesses | | — | | — | | — | | — | | — | | — | | — | | 15 | |
| Corporate expenses and other, net | | (48 | ) | (30 | ) | (36 | ) | (35 | ) | (38 | ) | (19 | ) | (30 | ) | (32 | ) |
| Interest expense, net | | (22 | ) | (23 | ) | (25 | ) | (25 | ) | (26 | ) | (26 | ) | (22 | ) | (24 | ) |
| Income taxes | | (48 | ) | (42 | ) | (45 | ) | (20 | ) | (12 | ) | (25 | ) | (41 | ) | (34 | ) |
| Distribution on preferred securities of manufacturing subsidiary
trust, net of income taxes | | — | | — | | — | | — | | — | | — | | (7 | ) | (6 | ) |
| Income from continuing operations | | 122 | | 101 | | 109 | | 41 | | 86 | | 49 | | 88 | | 69 | |
| Income (loss) from discontinued operations, net of income taxes | | 3 | | 2 | | (9 | ) | (4 | ) | (3 | ) | (2 | ) | (25 | ) | (3 | ) |
| Net income | | $ 125 | | $ 103 | | $ 100 | | $ 37 | | $ 83 | | $ 47 | | $ 63 | | $ 66 | |
| Earnings per common share | | | | | | | | | | | | | | | | | |
| Basic: | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ 0.90 | | $ 0.73 | | $ 0.79 | | $ 0.30 | | $ 0.63 | | $ 0.36 | | $ 0.65 | | $ 0.51 | |
| Income (loss) from discontinued operations | | 0.02 | | 0.02 | | (0.07 | ) | (0.03 | ) | (0.02 | ) | (0.01 | ) | (0.18 | ) | (0.03 | ) |
| Net income | | $ 0.92 | | $ 0.75 | | $ 0.72 | | $ 0.27 | | $ 0.61 | | $ 0.35 | | $ 0.47 | | $ 0.48 | |
| Average shares outstanding (In thousands) | | 136,571 | | 137,896 | | 137,749 | | 137,380 | | 136,335 | | 135,627 | | 135,380 | | 135,991 | |
| Diluted: | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ 0.87 | | $ 0.72 | | $ 0.78 | | $ 0.29 | | $ 0.62 | | $ 0.36 | | $ 0.65 | | $ 0.50 | |
| Income (loss) from discontinued operations | | 0.02 | | 0.01 | | (0.07 | ) | (0.03 | ) | (0.02 | ) | (0.02 | ) | (0.19 | ) | (0.02 | ) |
| Net income | | $ 0.89 | | $ 0.73 | | $ 0.71 | | $ 0.26 | | $ 0.60 | | $ 0.34 | | $ 0.46 | | $ 0.48 | |
| Average shares outstanding (In thousands) | | 139,704 | | 140,618 | | 140,287 | | 140,229 | | 138,326 | | 136,828 | | 136,257 | | 137,059 | |
| Segment profit margins | | | | | | | | | | | | | | | | | |
| Bell | | 11.5 | % | 10.4 | % | 12.1 | % | 10.3 | % | 10.2 | % | 13.2 | % | 9.1 | % | 7.5 | % |
| Cessna | | 13.9 | | 11.7 | | 8.8 | | 5.3 | | 6.9 | | 6.0 | | 11.5 | | 10.0 | |
| Fastening Systems | | 1.7 | | 0.2 | | 4.9 | | 4.0 | | 3.7 | | 2.5 | | 4.7 | | 4.2 | |
| Industrial | | 6.2 | | 6.0 | | 7.1 | | 6.1 | | 5.6 | | 4.1 | | 5.9 | | 5.4 | |
| Finance | | 30.3 | | 21.7 | | 26.3 | | 23.1 | | 33.8 | | 17.6 | | 16.2 | | 16.4 | |
| Segment profit margin | | 10.1 | | 8.3 | | 9.2 | | 7.4 | | 8.4 | | 7.2 | | 8.3 | | 7.4 | |
| Common stock information | | | | | | | | | | | | | | | | | |
| Price range: | High | $ 74.63 | | $ 65.47 | | $ 59.43 | | $ 58.28 | | $ 57.70 | | $ 45.53 | | $ 38.69 | | $ 45.45 | |
| | Low | $ 63.04 | | $ 57.38 | | $ 52.45 | | $ 50.84 | | $ 39.45 | | $ 38.07 | | $ 27.46 | | $ 26.85 | |
| Dividends per share | | $ 0.350 | | $ 0.325 | | $ 0.325 | | $ 0.325 | | $ 0.325 | | $ 0.325 | | $ 0.325 | | $ 0.325 | |

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Schedule II – Valuation and Qualifying Accounts

(In millions)	2004		2003		2002
Textron Manufacturing:
Balance at beginning of year	$ 66		$ 48		$ 50
Charged to costs and expenses	22		43		23
Deductions from reserves*	(24	)	(25	)	(25	)
Balance at end of year	$ 64		$ 66		$ 48
Textron Finance:
Balance at beginning of year	$ 119		$ 145		$ 125
Charged to costs and expenses	58		81		111
Deduction from reserves*	(78	)	(107	)	(91	)
Balance at end of year	$ 99		$ 119		$ 145
Textron
Manufacturing’s Reserves for Recourse Liability to Textron Finance
(In millions)	2004		2003		2002
Balance at beginning of year	$ 64		$ 59		$ 60
Charged to costs and expenses	10		37		47
Reclassifications to other assets	(14	)	(4	)	(20	)
Reclassification from discontinued
operations line	—		21		—
Deductions from reserves*	(12	)	(49	)	(28	)
Balance at end of year	$ 48		$ 64		$ 59
Textron
Manufacturing’s Inventory FIFO Reserves
(In millions)	2004		2003		2002
Balance at beginning of year	$ 124		$ 139		$ 131
Charged to costs and expenses	38		52		81
Deductions from reserves*	(46	)	(67	)	(73	)
Balance at end of year	$ 116		$ 124		$ 139
*	Represents
uncollectible accounts written off (less recoveries), inventory disposals, acquisitions
and translation adjustments.
Item 9. Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and
Procedures
Disclosure
Controls and Procedures - We have carried out an evaluation, under the supervision and the
participation of our management, including our Chairman, President and Chief Executive
Officer (our “CEO”) and our Executive Vice President and Chief Financial
Officer (our “CFO”), of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”)
as of the end of the fiscal year covered by this report. Based upon that
evaluation, our CEO and CFO concluded that our disclosure controls and
procedures are effective in providing reasonable assurance that (a) the
information required to be disclosed by us in the reports that we

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| |
| --- |
| Report of
Management – See
page 31 |
| Report of
Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting –
See page 32. |
| Changes in Internal Controls – There has
been no change in our internal control over financial reporting during the
fourth fiscal quarter of the fiscal year covered by this report that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. |
| Item 9B.
Other Information |
| None |
| PART III |
| Item 10.
Directors and Executive Officers of the Registrant |
| The
information appearing under “Audit Committee,” “Nominees for Director,”
“Directors Continuing in Office,” “Corporate Governance,” “Code of Ethics”
and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy
Statement for our Annual Meeting of Shareholders to be held on April 27,
2005, is incorporated by reference into this Annual Report on Form 10-K. |
| Information regarding our
executive officers is contained in Part I of this Annual Report on Form 10-K. |
| Item 11. Executive
Compensation |
| The information appearing
under “Compensation of Directors,” “Report of the Organization and
Compensation Committee on Executive Compensation,” “Executive Compensation”
and “Performance Graph” in the Proxy Statement for our Annual Meeting of
Shareholders to be held on April 27, 2005, is incorporated by reference into
this Annual Report on Form 10-K. |
| Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters |
| The information appearing
under “Security Ownership of Certain Beneficial Holders,” “Security Ownership
of Management,” and “Equity Compensation Plan Information ” in the Proxy
Statement for our Annual Meeting of Shareholders to be held on April 27,
2005, is incorporated by reference into this Annual Report on Form 10-K. |

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| Item 13. Certain
Relationships and Related Transactions | |
| --- | --- |
| The information appearing
under “Transactions with Management and Others” in the Proxy Statement for
our Annual Meeting of Shareholders to be held on April 27, 2005, is
incorporated by reference into this Annual Report on Form 10-K. | |
| Item 14. Principal Accountant
Fees and Services | |
| The information appearing
under “Fees to Independent Auditors” in the Proxy Statement for our Annual
Meeting of Shareholders to be held on April 27, 2005, is incorporated by
reference into this Annual Report on Form 10-K. | |
| PART IV | |
| Item 15. Exhibits and
Financial Statement and Schedules | |
| Financial Statements and
Schedules – See Index on Page 30 | |
| Exhibits | |
| 3.1 | Restated Certificate of Incorporation of Textron as filed January 29,
1998. Incorporated by reference to Exhibit 3.1 to Textron’s Annual Report on
Form 10-K for the fiscal year ended January 3, 1998. |
| 3.2 | By-Laws of Textron. Incorporated by reference to Exhibit 3.2 to
Textron’s Annual Report on Form 10-K for the fiscal year ended January 1,
2000. |
| 4.1 | Indenture dated as of December 9, 1999, between Textron Financial
Corporation and SunTrust Bank (formerly known as Sun Trust Bank, Atlanta)
(including form of debt securities). Incorporated by reference to Exhibit 4.1
to Amendment No. 2 to Textron Financial Corporation’s Registration Statement
on Form S-3 (No. 333-88509). |
| 4.2 | Indenture dated as of November 30, 2001, between Textron Financial
Canada Funding Corp. and SunTrust Bank, guaranteed by Textron Financial
Corporation. Incorporated by reference to Exhibit 4.2 to Amendment No. 1 to
Textron Financial Corporation’s Registration Statement on Form S-3 (No.
333-108464). |
| 4.3 | Support Agreement dated as of May 25, 1994, between Textron Inc. and Textron
Financial Corporation. Incorporated by reference to Exhibit 10.1 to Textron
Financial Corporation’s Registration Statement on Form 10. |
| NOTE: | Instruments defining the rights of holders of certain issues of
long-term debt of Textron have not been filed as exhibits because the
authorized principal amount of any one of such issues does not exceed 10% of
the total assets of Textron and its subsidiaries on a consolidated basis.
Textron agrees to furnish a copy of each such instrument to the Commission
upon request. |
| NOTE: | Exhibits 10.1 through 10.18 below are management contracts or
compensatory plans, contracts or agreements. |
| 10.1A | Annual Incentive Compensation Plan for Textron Employees. Incorporated
by reference to Exhibit 10.1 to Textron’s Annual Report on Form 10-K for the
fiscal year ended December 30, 1995. |
| 10.1B | Amendment to Annual Incentive Compensation Plan for Textron Employees.
Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on
Form 10-Q for the fiscal quarter ended July 3, 1999. |
| 10.1C | 2005 Objectives for Executive Officers Under Annual Incentive
Compensation Plan for Textron Employees. Incorporated by reference to Exhibit
99.1 to Textron’s Current Report on Form 8-K filed January 31, 2005. |

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| 10.2 | Deferred Income Plan for Textron Key Executives. Incorporated by
reference to Exhibit 10.2 to Textron’s Annual Report on Form 10-K for the
fiscal year ended January 3, 2004. |
| --- | --- |
| 10.3 | Supplemental Benefits Plan for Textron Key Executives, as amended.
Incorporated by reference to Exhibit 10.3 to Textron’s Annual Report on Form
10-K for the fiscal year ended January 3, 2004. |
| 10.4 | Supplemental Retirement Plan for Textron Key Executives. Incorporated
by reference to Exhibit 10.4 to Textron’s Annual Report on Form 10-K for the
fiscal year ended January 3, 2004. |
| 10.5 | Survivor Benefit Plan For Textron Key Executives, as amended.
Incorporated by reference to Exhibit 10.5 to Textron’s Annual Report on Form
10-K for the fiscal year ended January 3, 2004. |
| 10.6A | Textron 1994 Long-Term Incentive Plan (“1994 Plan”). Incorporated by
reference to Exhibit 10 to Textron’s Quarterly Report on Form 10-Q for the
fiscal quarter ended July 2, 1994. |
| 10.6B | Amendment to 1994 Plan. Incorporated by reference to Exhibit 10.9B to
Textron’s Annual Report on Form 10-K for the fiscal year ended January 2,
1999. |
| 10.6C | Amendment to 1994 Plan. Incorporated by reference to Exhibit 10.6 to
Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 3,
1999. |
| 10.6D | Amendment to 1994 Plan. Incorporated by reference to Exhibit 10.8D to
Textron’s Annual Report on Form 10-K for the fiscal year ended January 1,
2000. |
| 10.7 | Textron 1999 Long-Term Incentive Plan (2003 Restatement). Incorporated
by reference to Exhibit 10 to Textron’s Quarterly Report on Form 10-Q for the
fiscal quarter ended June 28, 2003. |
| 10.7A | Form of Non-Qualified Stock Option Agreement. Incorporated by
reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the
fiscal quarter ended July 3, 2004. |
| 10.7B | Form of Incentive Stock Option Agreement. Incorporated by reference to
Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal
quarter ended July 3, 2004. |
| 10.7C | Form of Restricted Stock Grant Agreement. Incorporated by reference to
Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal
quarter ended July 3, 2004. |
| 10.7D | Performance Factors for Executive Officers for 2005 – 2007 Cycle for
Performance Share Units Issued under the Textron 1999 Long-Term Incentive
Plan. Incorporated by reference to Exhibit 99.2 to Textron’s Current Report
on Form 8- K filed January 31, 2005. |
| 10.8 | Form of Indemnity Agreement between Textron and its directors and
executive officers. Incorporated by reference to Exhibit A to Textron’s Proxy
Statement for its Annual Meeting of Shareholders on April 29, 1987. |
| 10.9 | Deferred Income Plan for Non-Employee Directors. Incorporated by
reference to Exhibit 10.1 to Textron’s Annual Report on Form 10-K for the
fiscal year ended December 28, 2002. |
| 10.10A | Employment Agreement between Textron and John D. Butler dated July 23,
1998. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report
on Form 10-Q for the fiscal quarter ended October 3, 1998. |
| 10.10B | Restricted Stock Equivalent Award granted to John Butler on January
15, 2002. Incorporated by reference to Exhibit 10.1 of Textron’s Quarterly
Report on Form 10-Q for the fiscal quarter ended March 30, 2002. |
| 10.11A | Employment Agreement between Textron and Lewis B. Campbell dated July
23, 1998. Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly
Report on Form 10-Q for the fiscal quarter ended October 3, 1998. |
| 10.11B | Retention Award granted to Lewis B. Campbell on December 14, 1995.
Incorporated by reference to Exhibit 10.16B to Textron’s Annual Report on
Form 10-K for the fiscal year ended December 30, 1995. |
| 10.11C | Retention Award granted to Lewis B. Campbell on June 1, 1999.
Incorporated by reference to Exhibit 10.13C to Textron’s Annual Report on
Form 10-K for the fiscal year ended January 1, 2000. |

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| 10.11D | Retention Award granted to Lewis B. Campbell on January 1, 2001, and
revision of vesting schedule for the Retention Award granted on June 1, 1999.
Incorporated by reference to Exhibit 10.14D to Textron’s Annual Report on
Form 10-K for the fiscal year ended December 30, 2000. |
| --- | --- |
| 10.11E | Amendments to Retention Awards granted to Lewis B. Campbell.
Incorporated by reference to Exhibit 10.14D to Textron’s Annual Report on
Form 10-K for the fiscal year ended December 29, 2001. |
| 10.12A | Employment Agreement between Textron and Ted R. French dated December
21, 2000. Incorporated by reference to Exhibit 10.15A to Textron’s Annual Report
on Form 10-K for the fiscal year ended December 30, 2000. |
| 10.12B | Retention Award granted to Ted R. French on January 1, 2001.
Incorporated by reference to Exhibit 10.15B to Textron’s Annual Report on
Form 10-K for the fiscal year ended December 30, 2000. |
| 10.13A | Employment Agreement between Textron and Mary L. Howell dated July 23,
1998. Incorporated by reference to Exhibit 10.5 to Textron’s Quarterly Report
on Form 10-Q for the fiscal quarter ended October 3, 1998. |
| 10.13B | Restricted Stock Equivalent Award granted to Mary L. Howell on January
15, 2002. Incorporated by reference to Exhibit 10.2 of Textron’s Quarterly
Report on Form 10-Q for the fiscal quarter ended March 30, 2002. |
| 10.14 | Employment Agreement between Textron and Steven R. Loranger dated
February 6, 2003. Incorporated by reference to Exhibit 10.1 to Textron’s
Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2003. |
| 10.15A | Employment Agreement between Textron and Terrence O’Donnell dated
March 10, 2000. Incorporated by reference to Exhibit 10.1 to Textron’s
Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 2000. |
| 10.15B | Restricted Stock Equivalent Award granted to Terrence O’Donnell on January
15, 2002. Incorporated by reference to Exhibit 10.3 of Textron’s Quarterly
Report on Form 10-Q for the fiscal quarter ended March 30, 2002. |
| 10.16 | Director Stock Awards. Incorporated by reference to Exhibit 10.17 to
Textron’s Annual Report on Form 10-K for the fiscal year ended December 28,
2002. |
| 10.17 | CitationShares Director’s Evaluation Program. |
| 10.18 | Amendment to 13 plans to comply with the American Jobs Creation Act of
2004. |
| 10.19 | 5-Year Credit Agreement dated as of April 1, 2002, among Textron, the
Banks listed therein and JPMorgan Chase Bank as Administrative Agent (the
“5-year Credit Agreement”) . Incorporated by reference to Exhibit 10.2 to
Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended March
29, 2003. |
| 10.20 | 364-day Credit Agreement dated March 31, 2003, among Textron Inc., the
Banks listed therein and JPMorgan Chase Bank as Administrative Agent (the
“364-day Credit Agreement”). Incorporated by reference to Exhibit 10.3 to
Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended March
29, 2003. |
| 10.21 | Amendment to the 5-Year Credit Agreement and the 364-day Credit
Agreement. Incorporated by reference to Exhibit 10.19 to Textron’s Annual
Report on Form 10-K for the fiscal year ended January 3, 2004. |
| 10.22 | Amendment No. 2 to the 364-day Credit Agreement. Incorporated by
reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the
fiscal quarter ended April 3, 2004. |
| 10.23 | 364-Day Credit Agreement dated July 28, 2003, among Textron Financial
Corporation, the Banks listed therein, and JPMorgan Chase Bank, as
Administrative Agent. Incorporated by reference to Exhibit 10.1 to Textron
Financial Corporation’s Current Report on Form 8-K as filed on August 26,
2003. |
| 10.24 | Amendment to 364-Day Credit Agreement dated July 28, 2003, among
Textron Financial Corporation, the Banks listed therein, and JPMorgan Chase
Bank, as Administrative Agent. Incorporated by reference to Exhibit 10.1 to
Textron Financial Corporation’s Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2004. |
| 10.25 | Five-Year Credit Agreement dated July 28, 2003 among Textron Financial
Corporation, the Banks listed therein, and JPMorgan Chase Bank, as
Administrative Agent. Incorporated by reference to Exhibit 10.2 to Textron
Financial Corporation’s Current Report on Form 8-K as filed on August 26,
2003. |

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| 12.1 | Master Services Agreement between Textron Inc. and Computer Sciences
Corporation dated October 27, 2004. Confidential treatment has been requested
for portions of this agreement. — Computation of ratio of income to combined fixed charges and preferred
stock dividends of Textron Manufacturing. | |
| --- | --- | --- |
| 12.2 | Computation of ratio of income to combined fixed charges and preferred
stock dividends of Textron including all majority-owned subsidiaries. | |
| 21 | Certain subsidiaries of Textron. Other subsidiaries, which considered
in the aggregate do not constitute a significant subsidiary, are omitted from
such list. | |
| 23 | Consent of Independent Registered Public Accounting Firm. | |
| 24 | Power of attorney. | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a). | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a). | |
| 32.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(b)
and 18 U.S.C. 1350. | |
| 32.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(b)
and 18 U.S.C. 1350. | |
| Signatures | | |
| Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized on this 24th day of February 2005. | | |
| | | TEXTRON INC. |
| | | Registrant |
| | By: | /s/Ted R. French |
| | | Ted R. French |
| | | Executive Vice President |
| | | and Chief Financial Officer |

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| Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below on this 24th day of
February 2005, by the following persons on behalf of the registrant and in
the capacities indicated: — Name | | Title |
| --- | --- | --- |
| | /s/Lewis B. Campbell | Chairman, President and Chief Executive Officer, |
| | Lewis B. Campbell | Director |
| | * | Director |
| | H. Jesse Arnelle | |
| | * | Director |
| | Kathleen M. Bader | |
| | * | Director |
| | R. Kerry Clark | |
| | * | Director |
| | Ivor J. Evans | |
| | * | Director |
| | Lawrence K. Fish | |
| | * | Director |
| | Joe T. Ford | |
| | * | Director |
| | Paul E. Gagné | |
| | * | Director |
| | Lord Powell of Bayswater KCMG | |
| | * | Director |
| | Brian H. Rowe | |
| | * | Director |
| | Martin D. Walker | |
| | * | Director |
| | Thomas B. Wheeler | |
| | /s/Ted R. French | Executive Vice President and |
| | Ted R. French | Chief Financial Officer |
| | | (principal financial officer) |
| | /s/Richard L. Yates | Senior Vice President and Controller |
| | Richard L. Yates | (principal accounting officer) |
| *By: | /s/Michael D. Cahn | |
| | Michael D. Cahn | |
| | Attorney-in-fact | |

77

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*Index to Exhibits*

Exhibits	Description
3.1	Restated Certificate of Incorporation of Textron as filed January 29,
1998. Incorporated by reference to Exhibit 3.1 to Textron’s Annual Report on
Form 10-K for the fiscal year ended January 3, 1998.
3.2	By-Laws of Textron. Incorporated by reference to Exhibit 3.2 to Textron’s
Annual Report on Form 10-K for the fiscal year ended January 1, 2000.
4.1	Indenture dated as of December 9, 1999, between Textron Financial
Corporation and SunTrust Bank (formerly known as Sun Trust Bank, Atlanta)
(including form of debt securities). Incorporated by reference to Exhibit 4.1
to Amendment No. 2 to Textron Financial Corporation’s Registration Statement
on Form S-3 (No. 333-88509).
4.2	Indenture dated as of November 30, 2001, between Textron Financial
Canada Funding Corp. and SunTrust Bank, guaranteed by Textron Financial
Corporation. Incorporated by reference to Exhibit 4.2 to Amendment No. 1 to
Textron Financial Corporation’s Registration Statement on Form S-3 (No.
333-108464).
4.3	Support Agreement dated as of May 25, 1994, between Textron Inc. and
Textron Financial Corporation. Incorporated by reference to Exhibit 10.1 to
Textron Financial Corporation’s Registration Statement on Form 10.
NOTE:	Instruments defining the rights of holders of certain issues of
long-term debt of Textron have not been filed as exhibits because the
authorized principal amount of any one of such issues does not exceed 10% of
the total assets of Textron and its subsidiaries on a consolidated basis.
Textron agrees to furnish a copy of each such instrument to the Commission
upon request.
NOTE:	Exhibits 10.1 through 10.18 below are management contracts or
compensatory plans, contracts or agreements.
10.1A	Annual Incentive Compensation Plan for Textron Employees. Incorporated
by reference to Exhibit 10.1 to Textron’s Annual Report on Form 10-K for the
fiscal year ended December 30, 1995.
10.1B	Amendment to Annual Incentive Compensation Plan for Textron Employees.
Incorporated by reference to Exhibit 10.1 to Textron’s Quarterly Report on
Form 10-Q for the fiscal quarter ended July 3, 1999.
10.1C	2005 Objectives for Executive Officers Under Annual Incentive
Compensation Plan for Textron Employees. Incorporated by reference to Exhibit
99.1 to Textron’s Current Report on Form 8-K filed January 31, 2005.

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| 10.2 | Deferred Income Plan for Textron Key Executives. Incorporated by
reference to Exhibit 10.2 to Textron’s Annual Report on Form 10-K for the
fiscal year ended January 3, 2004. |
| --- | --- |
| 10.3 | Supplemental Benefits Plan for Textron Key Executives, as amended.
Incorporated by reference to Exhibit 10.3 to Textron’s Annual Report on Form
10-K for the fiscal year ended January 3, 2004. |
| 10.4 | Supplemental Retirement Plan for Textron Key Executives. Incorporated
by reference to Exhibit 10.4 to Textron’s Annual Report on Form 10-K for the
fiscal year ended January 3, 2004. |
| 10.5 | Survivor Benefit Plan For Textron Key Executives, as amended.
Incorporated by reference to Exhibit 10.5 to Textron’s Annual Report on Form
10-K for the fiscal year ended January 3, 2004. |
| 10.6A | Textron 1994 Long-Term Incentive Plan (“1994 Plan”). Incorporated by
reference to Exhibit 10 to Textron’s Quarterly Report on Form 10-Q for the
fiscal quarter ended July 2, 1994. |
| 10.6B | Amendment to 1994 Plan. Incorporated by reference to Exhibit 10.9B to
Textron’s Annual Report on Form 10-K for the fiscal year ended January 2,
1999. |
| 10.6C | Amendment to 1994 Plan. Incorporated by reference to Exhibit 10.6 to
Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 3,
1999. |
| 10.6D | Amendment to 1994 Plan. Incorporated by reference to Exhibit 10.8D to
Textron’s Annual Report on Form 10-K for the fiscal year ended January 1,
2000. |
| 10.7 | Textron 1999 Long-Term Incentive Plan (2003 Restatement). Incorporated
by reference to Exhibit 10 to Textron’s Quarterly Report on Form 10-Q for the
fiscal quarter ended June 28, 2003. |
| 10.7A | Form of Non-Qualified Stock Option Agreement. Incorporated by
reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the
fiscal quarter ended July 3, 2004. |
| 10.7B | Form of Incentive Stock Option Agreement. Incorporated by reference to
Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal
quarter ended July 3, 2004. |
| 10.7C | Form of Restricted Stock Grant Agreement. Incorporated by reference to
Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal
quarter ended July 3, 2004. |
| 10.7D | Performance Factors for Executive Officers for 2005 – 2007 Cycle for
Performance Share Units Issued under the Textron 1999 Long-Term Incentive
Plan. Incorporated by reference to Exhibit 99.2 to Textron’s Current Report
on Form 8- K filed January 31, 2005. |
| 10.8 | Form of Indemnity Agreement between Textron and its directors and
executive officers. Incorporated by reference to Exhibit A to Textron’s Proxy
Statement for its Annual Meeting of Shareholders on April 29, 1987. |
| 10.9 | Deferred Income Plan for Non-Employee Directors. Incorporated by
reference to Exhibit 10.1 to Textron’s Annual Report on Form 10-K for the
fiscal year ended December 28, 2002. |
| 10.10A | Employment Agreement between Textron and John D. Butler dated July 23,
1998. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report
on Form 10-Q for the fiscal quarter ended October 3, 1998. |
| 10.10B | Restricted Stock Equivalent Award granted to John Butler on January
15, 2002. Incorporated by reference to Exhibit 10.1 of Textron’s Quarterly
Report on Form 10-Q for the fiscal quarter ended March 30, 2002. |
| 10.11A | Employment Agreement between Textron and Lewis B. Campbell dated July
23, 1998. Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly
Report on Form 10-Q for the fiscal quarter ended October 3, 1998. |
| 10.11B | Retention Award granted to Lewis B. Campbell on December 14, 1995.
Incorporated by reference to Exhibit 10.16B to Textron’s Annual Report on
Form 10-K for the fiscal year ended December 30, 1995. |
| 10.11C | Retention Award granted to Lewis B. Campbell on June 1, 1999.
Incorporated by reference to Exhibit 10.13C to Textron’s Annual Report on Form
10-K for the fiscal year ended January 1, 2000. |

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| 10.11D | Retention Award granted to Lewis B. Campbell on January 1, 2001, and
revision of vesting schedule for the Retention Award granted on June 1, 1999.
Incorporated by reference to Exhibit 10.14D to Textron’s Annual Report on
Form 10-K for the fiscal year ended December 30, 2000. |
| --- | --- |
| 10.11E | Amendments to Retention Awards granted to Lewis B. Campbell.
Incorporated by reference to Exhibit 10.14D to Textron’s Annual Report on
Form 10-K for the fiscal year ended December 29, 2001. |
| 10.12A | Employment Agreement between Textron and Ted R. French dated December
21, 2000. Incorporated by reference to Exhibit 10.15A to Textron’s Annual
Report on Form 10-K for the fiscal year ended December 30, 2000. |
| 10.12B | Retention Award granted to Ted R. French on January 1, 2001.
Incorporated by reference to Exhibit 10.15B to Textron’s Annual Report on
Form 10-K for the fiscal year ended December 30, 2000. |
| 10.13A | Employment Agreement between Textron and Mary L. Howell dated July 23,
1998. Incorporated by reference to Exhibit 10.5 to Textron’s Quarterly Report
on Form 10-Q for the fiscal quarter ended October 3, 1998. |
| 10.13B | Restricted Stock Equivalent Award granted to Mary L. Howell on January
15, 2002. Incorporated by reference to Exhibit 10.2 of Textron’s Quarterly
Report on Form 10-Q for the fiscal quarter ended March 30, 2002. |
| 10.14 | Employment Agreement between Textron and Steven R. Loranger dated
February 6, 2003. Incorporated by reference to Exhibit 10.1 to Textron’s
Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2003. |
| 10.15A | Employment Agreement between Textron and Terrence O’Donnell dated
March 10, 2000. Incorporated by reference to Exhibit 10.1 to Textron’s
Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 2000. |
| 10.15B | Restricted Stock Equivalent Award granted to Terrence O’Donnell on
January 15, 2002. Incorporated by reference to Exhibit 10.3 of Textron’s
Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2002. |
| 10.16 | Director Stock Awards. Incorporated by reference to Exhibit 10.17 to
Textron’s Annual Report on Form 10-K for the fiscal year ended December 28,
2002. |
| 10.17 | CitationShares Director’s Evaluation Program. |
| 10.18 | Amendment to 13 plans to comply with the American Jobs Creation Act of
2004. |
| 10.19 | 5-Year Credit Agreement dated as of April 1, 2002, among Textron, the
Banks listed therein and JPMorgan Chase Bank as Administrative Agent (the
“5-year Credit Agreement”) . Incorporated by reference to Exhibit 10.2 to
Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended March
29, 2003. |
| 10.20 | 364-day Credit Agreement dated March 31, 2003, among Textron Inc., the
Banks listed therein and JPMorgan Chase Bank as Administrative Agent (the
“364-day Credit Agreement”). Incorporated by reference to Exhibit 10.3 to
Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended March
29, 2003. |
| 10.21 | Amendment to the 5-Year Credit Agreement and the 364-day Credit
Agreement. Incorporated by reference to Exhibit 10.19 to Textron’s Annual
Report on Form 10-K for the fiscal year ended January 3, 2004. |
| 10.22 | Amendment No. 2 to the 364-day Credit Agreement. Incorporated by
reference to Exhibit 10.1 to Textron’s Quarterly Report on Form 10-Q for the
fiscal quarter ended April 3, 2004. |
| 10.23 | 364-Day Credit Agreement dated July 28, 2003, among Textron Financial
Corporation, the Banks listed therein, and JPMorgan Chase Bank, as
Administrative Agent. Incorporated by reference to Exhibit 10.1 to Textron
Financial Corporation’s Current Report on Form 8-K as filed on August 26,
2003. |
| 10.24 | Amendment to 364-Day Credit Agreement dated July 28, 2003, among
Textron Financial Corporation, the Banks listed therein, and JPMorgan Chase
Bank, as Administrative Agent. Incorporated by reference to Exhibit 10.1 to
Textron Financial Corporation’s Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2004. |
| 10.25 | Five-Year Credit Agreement dated July 28, 2003 among Textron Financial
Corporation, the Banks listed therein, and JPMorgan Chase Bank, as
Administrative Agent. Incorporated by reference to Exhibit 10.2 to Textron
Financial Corporation’s Current Report on Form 8-K as filed on August 26,
2003. |

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| 10.26 | Master Services Agreement between Textron Inc. and Computer Sciences
Corporation dated October 27, 2004. Confidential treatment has been requested
for portions of this agreement. |
| --- | --- |
| 12.1 | Computation of ratio of income to combined fixed charges and preferred
stock dividends of Textron Manufacturing. |
| 12.2 | Computation of ratio of income to combined fixed charges and preferred
stock dividends of Textron including all majority-owned subsidiaries. |
| 21 | Certain subsidiaries of Textron. Other subsidiaries, which considered
in the aggregate do not constitute a significant subsidiary, are omitted from
such list. |
| 23 | Consent of Independent Registered Public Accounting Firm. |
| 24 | Power of attorney. |
| 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a). |
| 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a). |
| 32.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(b)
and 18 U.S.C. 1350. |
| 32.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(b)
and 18 U.S.C. 1350. |

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