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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 1, 2005

Commission File Number 1-5480

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 12¹/₂¢ (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

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

(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

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.

*

Segment profit represents the measurement used by Textron to evaluate performance for decision-making purposes. Segment profit for manufacturing segments does not include interest expense, certain corporate expenses, special charges, and gains and losses from the disposition of significant business units. The measurement for the finance segment includes interest income, interest expense and distributions on preferred securities of Finance subsidiary trust, and excludes special charges.

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.

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.

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.

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.

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

$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