Textron (TXT) 10-K risk factor changes: FY2015 vs FY2013

During [removed: 2013,] [added: 2014,] we derived approximately [removed: 30%] [added: 28%] of our revenues from sales to a variety of U.S. Government entities.

Because our [added: U.S.] Government contracts generally require us to continue to perform even if the U.S. Government is unable to make timely payments; [removed: if] [added: if, for example,] the debt ceiling is not raised, and, as a result, [removed: the U.S. Government] [added: our customer] does not pay us on a timely basis, we would need to finance our continued performance of the impacted contracts from our [removed: available cash resources, credit facilities and/or access to the capital markets, if available.][added: other resources.]

We also enter into “fee for service” contracts with the U.S. [added: Government where we retain ownership of, and consequently the risk of loss on, aircraft and equipment supplied to perform under these contracts.]

Termination of these contracts [removed: for convenience or default] could materially and adversely impact our results of operations.

_As a U.S. Government contractor, we are subject to procurement rules and [removed: regulations as well as changes in the Department of Defense (DoD) acquisition practices._][added: regulations._]

Our U.S. Government contracts contain provisions that allow the U.S. Government to unilaterally suspend or debar us from receiving new contracts for a period of time, reduce the value of existing contracts, issue modifications to a contract, and control and potentially prohibit the export of our products, services and [removed: associated materials.]

These laws and regulations affect how we conduct business with our [added: government] customers and, in some instances, impose added costs on our business.

[removed: _Weak demand] [added: _Demand] for our aircraft products [removed: may continue to] [added: is cyclical and could] adversely affect our financial results._

[removed: The] [added: A key determinant of the] financial performance of our Finance segment [removed: depends on] [added: is] the quality of loans, leases and other assets in its [removed: finance asset portfolios.][added: portfolio.]

Portfolio quality may be adversely affected by several factors, including finance receivable underwriting procedures, [removed: collateral value, geographic or industry concentrations, and the effect of general economic conditions on our customers’ businesses.]

[removed: Although we currently have] [added: Our] access to the [added: debt] capital [removed: markets, our access] [added: markets] and the cost of borrowings are affected by a number of factors including market conditions and the strength of our credit ratings.

From time to [removed: time] [added: time,] we update and/or replace IT systems used by our businesses.

The implementation of new systems can present temporary disruptions of business activities as existing processes are transitioned to the new systems, resulting in productivity issues, [added: including] delays in production, shipments or other business operations.

Cybersecurity threats, such as malicious software, attempts to gain unauthorized access to [removed: information, and] [added: our confidential, classified or otherwise proprietary information or that of our employees or customers, as well as] other security breaches, are persistent, continue to evolve and require highly skilled IT resources.

While we have experienced [removed: cyber] [added: cybersecurity] attacks, we have not suffered any material losses relating to such attacks, and we believe our threat detection and mitigation processes and procedures are robust.

Due to the evolving nature of these security threats, the possibility of [removed: any] future material incidents cannot be completely mitigated.

An IT system failure, issues related to implementation of new IT systems or breach of data [removed: security] [added: security, whether of our systems or the systems of our service providers or other third parties who may have access to our data for business purposes,] could disrupt our operations, cause the loss of business information or compromise confidential information.

Changes in environmental laws and regulations, [removed: for example,] [added: including] those enacted in response to climate change concerns and other actions known as “green initiatives,” could lead to the necessity for new or additional investment in product designs or manufacturing processes and could increase environmental compliance expenditures, including costs to defend regulatory reviews.

We also could be adversely affected if our research and development investments are less successful than expected or if we do not adequately [removed: protect the intellectual property developed through these efforts.]

Furthermore, we cannot be sure that our competitors will not develop competing technologies which gain [added: superior] market acceptance [removed: in advance of] [added: compared to] our products.

A significant failure in our new product development efforts or the failure of our products or services to achieve market acceptance [removed: more rapidly than] [added: relative to] our [removed: competitors] [added: competitors’ products or services] could have an adverse effect on our financial condition and results of operations.

Conducting business internationally, including U.S. exports, exposes us to [removed: different and] additional risks than if we conducted our business solely within the U.S. [removed: Our exposure to such risks increases as our international business continues to grow.][added: We maintain manufacturing facilities, service centers, supply centers and other facilities worldwide, including in various emerging market countries.]

[removed: These international risks may be especially significant with respect to aerospace and defense products for which] [added: For example,] we sometimes initially must obtain licenses and authorizations from various U.S. Government agencies before we are permitted to sell [removed: our products outside the U.S. Any significant impairment] [added: certain] of our [removed: ability to sell] [added: aerospace and defense] products outside the U.S. [removed: could negatively impact our results of operations.][added: Both U.S. and foreign laws and regulations applicable to us have been increasing in scope and complexity.]

The contracts generally extend over several years and may include penalties if we fail to [removed: meet] [added: perform in accordance with] the offset [removed: requirements,] [added: requirements] which [removed: could adversely impact our results of operations.][added: are typically subjective.]

We expect that our [added: international business and our] investment in emerging market countries will continue to increase.

In addition, a violation of U.S. and/or foreign laws by one of our employees or business partners could subject us or our employees to civil or criminal penalties, including material monetary fines, or other adverse actions, [removed: including] [added: such as] denial of import or export privileges [removed: and] [added: and/or] debarment as a government [removed: contractor.][added: contractor which could damage our reputation and have an adverse effect on our business.]

We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts; alleged lack of compliance with applicable laws and [removed: regulations; production partners; product liability; patent and trademark infringement; employment disputes; and environmental, safety and health matters.]

Additionally, our intellectual property could be at risk due to various [removed: cyber] [added: cybersecurity] threats.

As a distributor of consumer products in the U.S., certain of our products also are subject to the Consumer Product Safety Act, which empowers the U.S. Consumer Product Safety Commission (CPSC) to exclude from the market products that are found to be [added: unsafe or hazardous.]

Approximately [removed: 6,000 of our U.S. employees,] [added: 7,100,] or [removed: 26%] [added: 28%,] of our [removed: total] U.S. [removed: employees,] [added: employees] are unionized, and [removed: approximately 2,900 of our non-U.S. employees, or 32%] [added: many] of our [removed: total] non-U.S. [removed: employees,] [added: employees] are represented by organized councils.

Currency variations also contribute to variations in sales of products and services in impacted [removed: jurisdictions.]

In some markets, particularly where we deliver component products and services to [removed: original equipment manufacturers,] [added: OEMs,] we face ongoing customer demands for price reductions, which sometimes are contractually obligated.

The funding of these programs is subject to congressional appropriation decisions and the U.S. Government budget process which includes enacting relevant legislation, such as appropriations bills and accords on the debt ceiling.

associated materials.

Additionally, U.S. Government procurement policies increasingly favor fixed-price incentive-based fee arrangements rather than traditional fixed-price contracts; these fee arrangements could negatively impact our profitability.

Other current U.S. Government policies could negatively impact our working capital and cash flow.

For example, the government has expressed a preference for requiring progress payments rather than performance based payments on new fixed-price contracts, which if implemented, delays our ability to recover a significant amount of costs incurred on a contract and thus affects the timing of our cash flows.

Demand for business jets, turbo props and commercial helicopters has been cyclical and difficult to forecast.

Therefore, future demand for these products could be significantly and unexpectedly less than anticipated and/or less than previous period deliveries.

Similarly, there is uncertainty as to when or whether our existing commercial backlog for aircraft products will convert to revenues as the conversion depends on production capacity, customer needs and credit availability.

Changes in economic conditions may cause customers to request that firm orders be rescheduled or cancelled.

Reduced demand for our aircraft products or delays or cancellations of orders could result in a material adverse effect on our cash flows, results of operations and financial condition.

_If our Finance segment is unable to maintain portfolio credit quality, our financial performance could be adversely affected__._

collateral value, geographic or industry concentrations, and the effect of general economic conditions.

In addition, a majority of the new originations in our finance receivable portfolio are cross-border transactions for aircraft sold outside of the U.S. Cross-border transactions present additional challenges and risks in realizing upon collateral in the event of borrower default, which may result in difficulty or delay in collecting on the related finance receivables.

If our Finance segment has difficulty successfully collecting its finance receivable portfolio, our cash flow, results of operations and financial condition could be adversely affected.

protect the intellectual property developed through these efforts.

Risks related to international operations include import, export and other trade restrictions; changing U.S. and foreign procurement policies and practices; restrictions on technology transfer; difficulties in protecting intellectual property; increasing complexity of employment and environmental, health and safety regulations; foreign investment laws; exchange controls; repatriation of earnings or cash settlement challenges, competition from foreign and multinational firms with home country advantages; economic and government instability, acts of terrorism and related safety concerns.

regulations; production partners; product liability; patent and trademark infringement; employment disputes; and environmental, safety and health matters.

jurisdictions.

The funding of these programs is subject to congressional appropriation decisions.

Notwithstanding the Bipartisan Budget Control Act of 2013, substantial spending cuts to the U.S. defense budget are likely in the future.

In addition, Congress and the Administration continue to debate the nation’s debt ceiling and other fiscal issues.

The outcome of that debate could have a significant impact on future defense spending plans.

Government where we retain ownership of, and consequently the risk of loss on, aircraft and equipment supplied to perform under these contracts.

In addition, the DoD’s “Better Buying Power Initiative,” which provides guidance for its acquisition workforce to obtain greater efficiency and productivity in defense spending, significantly affects the contracting environment in which we do business with our DoD customers and could have a significant impact on current programs, as well as new business opportunities.

Changes to the DoD acquisition system and contracting models could affect whether and, if so, how we pursue certain opportunities and the terms under which we are able to do so.

Continued worldwide economic softness has adversely impacted the business jet market in recent years.

As a result, we have experienced continued weak demand for our fixed-wing aircraft, particularly our business jets.

Soft demand for our jets could persist and could continue to adversely impact the pricing of new jets and the valuation of pre-owned jets, which comprise a significant portion of our inventory.

A prolonged weakness in the markets for our aircraft products could adversely impact our results of operations and our future prospects.

On December 26, 2013 we entered into an agreement and plan of merger pursuant to which we will acquire all outstanding equity interests in Beech Holdings, LLC (“Beech”), the parent of Beechcraft Corporation, for approximately $1.4 billion in cash.

Each of the foregoing risks may impact the success of the Beech acquisition.

We plan to finance the purchase of the equity in Beech and the repayment of Beech’s outstanding debt, which is required at closing, through a combination of available cash at Beech and Textron and up to $1.1 billion in new debt.

While we believe that these sources of funds will be sufficient to complete the transaction, it is possible that unanticipated cash requirements, for working capital or other business needs, either at Beech or at Textron, could cause us to incur borrowings in excess of what we currently anticipate.

_Difficult economic conditions could continue to affect the performance of our Finance segment and our losses may increase if we are unable to successfully collect our finance receivables or realize sufficient value from collateral._

Valuations of the types of collateral securing our finance asset portfolio, particularly valuations of pre-owned aircraft, have decreased over recent years and may continue to decrease if weak economic conditions continue.

Declining collateral values could result in greater delinquencies, credit losses and foreclosures if customers elect to discontinue payments on loan balances that exceed asset values.

Bankruptcy proceedings involving our borrowers may prevent or delay our ability to exercise our rights and remedies and realize the full value of our collateral.

Our international business is subject to U.S. and local government regulations and procurement policies and practices, which may change from time to time, including regulations relating to import-export control; technology transfer; environmental, health and safety; investments; exchange controls; and repatriation of earnings or cash settlement challenges, as well as to varying currency, geopolitical and economic risks.

Additionally, we are facing increasing competition in our international markets from foreign and multinational firms that may have certain home country advantages over us; as a result, our ability to compete successfully in those markets may be adversely affected, which could negatively impact our revenues and profitability.

We maintain manufacturing facilities, service centers, supply centers and other facilities worldwide, including in various emerging market countries.

Emerging market operations can present many risks in addition to those discussed above, including civil disturbances, economic and government instability, terrorism and related safety concerns, cultural differences in employment and business practices, difficulties in protecting intellectual property, and the imposition of exchange controls.

Both U.S. and foreign laws and regulations applicable to us have been increasing in scope and complexity.

These improper actions could damage our reputation and have an adverse effect on our business.

unsafe or hazardous.

· Invested [removed: $651] [added: $694] million in research and development [removed: costs, a 12% increase over the prior year,] [added: activities] demonstrating our [added: continued] commitment to [removed: expanding] [added: expand] our current product lines across [removed: all of] our businesses.

A more detailed analysis of our segments’ operating results is provided in the Segment Analysis section on pages [removed: 20] [added: 21] to 28.

| _(Dollars in millions)_ | | [removed: 2013] [added: 2014] | | [removed: 2012] | [added: 2013] | [removed: 2011] | | [added: 2012 |]

| Revenues | [removed: |] $ | [removed: 12,104] [added: 13,878] | [added: |] $ | [removed: 12,237] [added: 12,104] | [added: |] $ | [removed: 11,275] [added: 12,237] |

| _% change compared with prior period_ | | [removed: _(1)%_] [added: _15_] | [added: _%_] | [removed: _9%_] | [added: _(1)_] | [added: _%_] | | [added: |]

Revenues decreased $133 million, 1%, in 2013, compared with 2012, as [removed: revenue] decreases in the [removed: Cessna, Finance,] [added: Textron Aviation, Finance] and Textron Systems segments were partially offset by higher revenues in the Bell and Industrial segments.

· Lower [removed: Cessna] [added: Textron Aviation] revenues of $327 million, primarily due to lower Citation jet volume of $384 million and CitationAir volume of $114 million, partially offset by higher aftermarket volume of $65 million and higher pre-owned aircraft volume of $53 million.

· Lower Textron Systems revenues of $72 million, largely due to lower volume of $51 million in the Marine [removed: &] [added: and] Land [added: Systems] product line and lower volume of $28 million in the [removed: UAS] [added: Unmanned Systems] product line.

· Higher Industrial segment revenues of $112 million, primarily due to higher volume of $58 million and the impact [removed: of] [added: from] acquisitions of $46 million.

Revenues increased [removed: $962 million, 9%,] [added: $1.8 billion, 15%,] in [removed: 2012,] [added: 2014,] compared with [removed: 2011,] [added: 2013,] as increases in the [removed: Bell, Cessna, Industrial] [added: Textron Aviation] and [removed: Finance] [added: Industrial] segments were partially offset by [removed: a reduction] [added: lower revenues] in the [added: Bell,] Textron Systems [removed: segment.][added: and Finance segments.]

· [removed: Increased] [added: Higher] Industrial segment revenues of [removed: $115] [added: $326] million, primarily due to [removed: higher volume of $171 million, primarily reflecting] [added: $181 million in] higher [removed: market demand] [added: volume, largely] in the Fuel Systems and Functional Components [removed: and Golf, Turf Care] [added: product line,] and [removed: Light][added: a $142 million impact from acquisitions.]

| _(Dollars in millions)_ | | [removed: 2013] [added: 2014] | | [removed: 2012] [added: 2013] | | [removed: 2011] [added: 2012] | |

| Operating expenses | | $ | [removed: 11,257] [added: 12,782] | $ | [removed: 11,184] [added: 11,257] | $ | [removed: 10,503] [added: 11,184] |

| Cost of sales | | [removed: 10,131] [added: 11,421] | | [removed: 10,019] [added: 10,131] | | [removed: 9,308] [added: 10,019] | |

| _% change compared with prior period_ | | [removed: _1%_] [added: _13%_] | | [removed: _8%_] [added: _1%_] | | | |

| _Gross margin as a percentage of Manufacturing revenues_ | | [removed: _15.4%_] [added: _17.1%_] | | [removed: _16.7%_] [added: _15.4%_] | | _16.7%_ | |

| Selling and administrative expenses | | [removed: 1,126] [added: 1,361] | | [removed: 1,165] [added: 1,126] | | [removed: $] [added: 1,165] | [removed: 1,195] |

| _% change compared with prior period_ | | [removed: _(3)%_] [added: _21%_] | | _(3)%_ | | | |

[removed: Consolidated manufacturing] [added: Manufacturing] cost of sales increased $112 million, 1%, in 2013, compared with 2012, primarily due to higher [removed: sales] volume at Bell and the impact from businesses acquired in 2013, partially offset by lower sales at [removed: Cessna] [added: Textron Aviation] and Textron Systems.

In 2013, gross margin as a percentage of manufacturing revenues decreased 130 basis points primarily due to unfavorable performance at Bell, largely due to manufacturing inefficiencies associated with labor disruptions resulting from negotiations with bargained employees and with the implementation of a new enterprise resource planning system in the first quarter of 2013, as well as lower Citation jet and CitiationAir volume at [removed: Cessna.][added: Textron Aviation.]

Selling and administrative expense was also impacted by $28 million in severance costs incurred in 2013 at [removed: Cessna,] [added: Textron Aviation,] which were largely offset by a $27 million charge from an unfavorable arbitration award [removed: incurred] in 2012 at [removed: Cessna.][added: Textron Aviation.]

| _(Dollars in millions)_ | | [removed: 2013] [added: 2014] | | [removed: 2012] [added: 2013] | | [removed: 2011] [added: 2012] | |

| Interest expense | | $ | [removed: 173] [added: 191] | $ | [removed: 212] [added: 173] | $ | [removed: 246] [added: 212] |

| _% change compared with prior period_ | | [removed: _(18)%_] [added: _10%_] | | [removed: _(14)%_] [added: _(18)%_] | | | |

Interest expense on the Consolidated Statement of Operations includes interest for both the [removed: Finance and] Manufacturing [added: and Finance] borrowing groups with interest related to intercompany borrowings eliminated.

[removed: Interest expense] [added: The measurement] for the Finance segment [removed: is included within segment profit and] includes [added: interest income and expense along with] intercompany [removed: interest.][added: interest income and expense.]

[removed: Consolidated] [added: In 2013, consolidated] interest expense decreased $39 million, 18%, [removed: in 2013,] compared with 2012, [removed: and $34 million, 14%, in 2012 compared with 2011,] primarily due to lower average debt outstanding.

[removed: Our effective tax] [added: This] rate [removed: was 26.1% in 2013, 30.9% in 2012 and 28.1% in 2011, and] generally differs from the U.S. federal statutory tax rate of 35% due to certain earnings from [removed: our] operations in lower-tax jurisdictions throughout the world, as well as [added: the] research [removed: credits.][added: credit.]

The jurisdictions with favorable tax rates that have the most significant effective tax rate impact in the periods presented include [removed: primarily] Canada, Germany, Belgium and China.

We have not provided for U.S. taxes for those earnings because we plan to reinvest all of those earnings indefinitely outside of the U.S. [removed: Our effective tax rate will fluctuate based on the mix of earnings from our U.S. and non-U.S. operations.]

We operate in, and report financial information for, the following five business segments: [removed: Cessna,] [added: Textron Aviation, which consists of the legacy Cessna segment combined with the recently-acquired Beechcraft business,] Bell, Textron Systems, Industrial and Finance.

Segment profit for the manufacturing segments excludes interest [removed: expense and] [added: expense,] certain corporate [removed: expenses.][added: expenses and acquisition and restructuring costs related to the Beechcraft acquisition.]

In our discussion of comparative results for the Manufacturing group, changes in [removed: revenue] [added: revenues] and segment profit typically are expressed for our commercial business in terms of volume, pricing, foreign exchange and acquisitions.

Volume changes in [removed: revenue] [added: revenues] represent increases/decreases in the number of units delivered or services provided.

Acquisitions [removed: refer] [added: refers] to the [removed: results] [added: revenues] generated from businesses that were acquired within the previous 12 months.

[removed: Cost performance] [added: Performance] reflects an increase or decrease in research and development, depreciation, selling and administrative costs, warranty, product liability, quality/scrap, labor efficiency, overhead, product line profitability, start-up, ramp up and cost-reduction initiatives or other manufacturing inputs.

Approximately [removed: 30%] [added: 28%] of our [removed: 2013] [added: 2014] revenues were derived from contracts with the U.S. Government.

| _(Dollars in millions)_ | | [added: 2014 | |] 2013 | | 2012 | | [removed: 2011 |] [added: 2014] | 2013 | [removed: 2012 |]

| Revenues | | $ | [removed: 2,784] [added: 4,568] | $ | [removed: 3,111] [added: 2,784] | $ | [removed: 2,990] [added: 3,111] | [removed: (11)%] [added: 64%] | [removed: 4%] [added: (11)%] |

| Operating expenses | | [added: 4,334 | |] 2,832 | | 3,029 | | [removed: 2,930 |] [added: 53%] | (7)% | [removed: 3% |]

Our revenues increased 15% in 2014 reflecting the success of our strategy of investing in new products and complementary acquisitions.

Several highlights of the year include the following:

· Invested $1.6 billion in strategic acquisitions along with $429 million in capital expenditures.

· Delivered strong cash flow performance as manufacturing operating cash flows from continuing operations increased 67% to $1.1 billion.

· Grew segment profit by 26% to $1.2 billion.

· Raised diluted earnings per share from continuing operations by 23%.

On March 14, 2014, we completed the acquisition of Beech Holdings, LLC, which included Beechcraft Corporation and other subsidiaries, (collectively “Beechcraft”); this business and the legacy Cessna segment were combined to form a new segment named Textron Aviation.

We also made seven acquisitions in the Industrial and Textron Systems segments, which complemented our products and services.

The results of these acquisitions are included in Textron’s consolidated financial statements only for the period subsequent to the completion of each acquisition and do not reflect a full year of operations.

| --- | --- | --- | --- | --- | --- | --- | --- | --- |

· Higher Textron Aviation revenues of $1.8 billion, primarily due to a $1.5 billion impact from the Beechcraft acquisition and a $263 million increase in volume, largely related to Citation jets.

· Lower Bell revenues of $266 million, largely due to a $183 million decrease in commercial revenues reflecting lower sales activity across the commercial helicopter market, and $99 million in lower other military volume, largely related to the H-1 program reflecting lower aircraft deliveries and production support.

· Lower Textron Systems revenues of $41 million, primarily due to lower volume of $233 million in the Marine and Land Systems product line, reflecting lower vehicle deliveries, partially offset by higher volume of $130 million in the Unmanned Systems product line and a $62 million impact from acquisitions.

· Lower Finance revenues of $29 million, primarily attributable to gains on the disposition of finance receivables held for sale during 2013.

Cost of sales increased $1.3 billion, 13%, in 2014, compared with 2013, largely due to the impact of acquired businesses, primarily Beechcraft.

In 2014, gross margin as a percentage of manufacturing revenues increased 170 basis points largely due to improved leverage resulting from higher revenues primarily at Textron Aviation.

Selling and administrative expense increased $235 million, 21%, in 2014, compared with 2013, largely related to businesses acquired in the past year and compensation expense.

These increases were partially offset by $28 million in severance costs incurred in 2013 in connection with a voluntary separation program at Textron Aviation.

Acquisition and Restructuring Costs

In connection with the integration of Beechcraft, we initiated a restructuring program in our Textron Aviation segment in the first quarter of 2014 to align the Cessna and Beechcraft businesses, reduce operating redundancies and maximize efficiencies.

During 2014, we recorded charges of $41 million related to these restructuring activities that were included in the Acquisition and restructuring costs line on the Consolidated Statements of Operations.

In addition, we incurred transaction costs of $11 million in 2014 related to the acquisition that were also included in the Acquisition and restructuring costs line.

We expect to incur additional restructuring costs in 2015, but do not expect these costs to be material.

Consolidated interest expense increased $18 million, 10%, in 2014, compared with 2013, primarily due to a $31 million impact related to financing the Beechcraft acquisition, partially offset by $9 million of lower interest expense due to the maturity of our convertible notes in the second quarter of 2013.

Our effective tax rate was 29.1% in 2014, 26.1% in 2013 and 30.9% in 2012.

In 2013, our effective tax rate was reduced by approximately 4.0% due to the tax benefit recognized upon the retroactive reinstatement and extension of the Federal Research and Development Tax Credit for the period from January 1, 2012 to December 31, 2013.

In 2014, this credit was extended through the end of 2014, resulting in a 1.5% reduction in our effective tax rate.

Textron Aviation

| Acquisitions | | $ | 1,480 | |

| Pricing | | 41 | | |

Textron Aviation’s revenues increased by $1.8 billion, 64%, in 2014, compared with 2013, primarily due to the impact of the Beechcraft acquisition of $1.5 billion and higher volume of $263 million.

The increase in volume was primarily the result of higher Citation jet volume of $344 million, partially offset by lower CitationAir volume of $78 million related to exiting our fractional share business.

We delivered 159 Citation jets and 113 King Air turboprops in 2014, compared with 139 Citation jets in 2013.

Textron Aviation’s operating expenses increased by $1.5 billion, 53%, in 2014, compared with 2013, primarily due to the incremental operating costs related to the Beechcraft acquisition, and higher net volume as described above.

Textron Aviation’s operating expenses exclude acquisition and restructuring costs incurred across the segment as a result of the Beechcraft integration, which are reported separately and are discussed in the Acquisition and Restructuring Costs section above.

| Performance and other | | $ | 117 | |

| 2013 Voluntary Separation Program | | 28 | | |

Textron Aviation segment profit increased $282 million in 2014, compared with 2013, primarily due to an increase in Performance and other, higher volume as described above, favorable pricing and inflation and $28 million in severance costs incurred in 2013.

During the second quarter of 2014, the cost structures of Beechcraft and Cessna were significantly integrated, and as a result, Performance and other reflects the net profit impact of Beechcraft, including the benefit of the integrated cost structure.

Performance and other also includes amortization of $63 million in 2014, related to fair value step-up adjustments of acquired inventories sold during the periods.

For Textron, 2013 was an important year with significant new product introductions, strategic acquisitions and investments in the future of our businesses.

During 2013, we accomplished the following:

As a result, we brought new products to market in many of our businesses, including the certification of two new models of Cessna aircraft, the Citation M2 and the Sovereign+ jet.

· Acquired six companies, including two flight simulation and aircraft training product companies for the Textron Systems segment, two companies to augment our Greenlee business in the Industrial segment and two service centers at Cessna for an aggregate cash payment of $196 million.

· Made $204 million in contributions to our pension plans and ended the year with an unfunded pension plan liability of $199 million, compared to $1.3 billion at the end of 2012.

· Reduced our debt-to-capital, net of cash ratio to 15% from 24% in the prior year, in part due to the maturity of our convertible senior notes and the settlement of the related call option and warrants.

| | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | |

· Higher Bell revenues of $749 million, primarily due to higher commercial aircraft volume of $476 million and an increase in V-22 program volume of $231 million, largely due to higher deliveries.

· Higher Cessna revenues of $121 million, primarily due to higher pre-owned aircraft volume of $68 million and Citation jet revenues of $57 million, reflecting a change in mix of jets sold during the period.

Transportation Vehicles product lines, partially offset by an unfavorable foreign exchange impact of $80 million, primarily related to the weakening of the euro.

· Higher Finance revenues of $112 million as described more fully in the Segment Analysis below.

· Lower Textron Systems revenues of $135 million, primarily due to lower volume across all product lines.

| | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | |

Changes in operating expenses are more fully discussed in our Segment Analysis below.

Cost of sales as a percentage of manufacturing revenues was 84.6% in 2013, and 83.3% in both 2012 and 2011.

In 2012, consolidated manufacturing cost of sales increased $711 million, 8%, compared with 2011, principally due to higher net sales volume.

Cost of sales was reduced by $65 million in 2012 from foreign exchange fluctuations, primarily in the Industrial segment due to the weakening of the euro.

In addition, cost of sales included $37 million in charges related to our new UAS fee-for-service contracts at Textron Systems, which were offset by the impact of 2011 charges at Textron Systems of $60 million related to the impairment of intangible assets and severance costs.

Selling and administrative expense decreased $30 million, 3%, in 2012, compared with 2011.

The decrease was largely driven by lower operating expenses of $56 million at the Finance segment primarily associated with the exit of the non-captive business, partially offset by a $27 million charge at Cessna from an unfavorable arbitration award described more fully in the Segment Analysis below.

| | | | | | | | |

Valuation Allowance on Transfer of Golf Mortgage Portfolio to Held for Sale

In the fourth quarter of 2011, we determined that we no longer had the intent to hold the remaining Golf Mortgage portfolio for investment for the foreseeable future, and, accordingly, transferred $458 million of the remaining Golf Mortgage finance receivables, net of an $80 million allowance for loan losses, from the held for investment classification to the held for sale

classification.

These finance receivables were recorded at fair value at the time of the transfer, resulting in a $186 million charge recorded to Valuation allowance on transfer of Golf Mortgage portfolio to held for sale.

Other Losses, net

In 2011, other losses, net included $55 million in losses on the early extinguishment of a portion of our convertible notes which was largely offset by a $52 million gain from the collection on notes receivable in connection with the disposition of the Fluid & Power business in 2008.

In addition, the American Taxpayer Relief Act of 2012 was enacted on January 2, 2013 to retroactively reinstate and extend the Federal Research and Development Tax Credit from January 1, 2012 to December 31, 2013.

As a result our income tax provision for 2013 includes a tax benefit that reduced the annual effective tax rate by approximately four percent.

We estimate our full year annual effective tax rate in 2014 to be approximately 31.5%.

The measurement for the Finance segment includes interest income and expense along with intercompany interest expense.

Cessna

| | | | | |

| | | | | |

| | | | |

| --- | --- | --- | --- |

Foreign [added: Currency] Exchange Risks

We primarily use borrowings denominated in [removed: euro and] British pound sterling for these purposes.

In managing our foreign currency transaction exposures, we also enter into foreign currency [removed: forward] exchange [removed: and option] contracts.

The notional amount of outstanding foreign [added: currency] exchange contracts [removed: and foreign currency options] was approximately [removed: $636] [added: $696] million and [removed: $664] [added: $636] million at the end of [removed: 2013] [added: 2014] and [removed: 2012,] [added: 2013,] respectively.

The impact of foreign [added: currency] exchange rate changes [added: on revenues and segment profit] for [removed: 2013] [added: 2014] and [removed: 2012] [added: 2013] from the prior year [removed: for each period is provided below:][added: was not significant.]

For our Finance group, we limit our risk to changes in interest rates with a strategy of matching floating-rate assets with floating-rate [removed: liabilities that includes the use of interest rate exchange agreements.][added: liabilities.]

The financial instruments that are subject to market risk (interest rate risk and foreign exchange rate risk) include finance receivables (excluding [removed: lease receivables),] [added: leases),] debt (excluding lease [removed: obligations), interest rate exchange agreements] [added: obligations)] and foreign currency exchange contracts.

The following table illustrates the sensitivity to a hypothetical change in the fair value of the financial instruments assuming a 10% decrease in interest rates and a 10% strengthening in exchange rates against the U.S. [removed: dollar:][added: dollar.]

| (_In millions_) | | Carrying Value* | | | [removed: Fair Value*] [added: Fair Value*] | | Sensitivity of Fair [removed: Value to] [added: Value to] a [removed: 10% Change] [added: 10% Change] | | | | | Carrying Value* | | | [removed: Fair Value*] [added: Fair Value*] | | Sensitivity of Fair [removed: Value to] [added: Value to] a [removed: 10% Change] [added: 10% Change] | | | |

| Debt | | $ | [removed: (249] [added: (236] | ) | $ | [removed: (275] [added: (277] | ) | $ | [removed: (27] [added: (28] | ) | | $ | [removed: (564] [added: (249] | ) | $ | [removed: (598] [added: (275] | ) | $ | [removed: (60] [added: (27] | ) |

| Foreign currency exchange contracts | | [removed: (12] [added: (11] | | ) | [removed: (12] [added: (11] | | ) | [removed: 33] [added: 52] | | | | [removed: 6] [added: (12] | | [added: )] | [removed: 6] [added: (12] | | [added: )] | [removed: 34] [added: 33] | | |

| Debt | | $ | [removed: (1,854] [added: (2,742] | ) | $ | [removed: (2,027] [added: (2,944] | ) | $ | [removed: (13] [added: (21] | ) | | $ | [removed: (2,225] [added: (1,854] | ) | $ | [removed: (2,636] [added: (2,027] | ) | $ | [removed: (9] [added: (13] | ) |

| Finance receivables | | $ | [removed: 1,296] [added: 1,039] | | $ | [removed: 1,356] [added: 1,056] | | $ | [removed: 24] [added: 20] | | | $ | [removed: 1,766] [added: 1,296] | | $ | [removed: 1,793] [added: 1,356] | | $ | [removed: 36] [added: 24] | |

| Debt, including intergroup | | [removed: (1,256] [added: (1,063] | | ) | [removed: (1,244] [added: (1,051] | | ) | [removed: (4] [added: 9] | | [removed: )] | | [removed: (1,687] [added: (1,256] | | ) | [removed: (1,678] [added: (1,244] | | ) | [removed: (13] [added: (4] | | ) |

| | | 2014 | | | | | | | | | | 2013 | | | | | | | | |

| | | $ | (247 | ) | $ | (288 | ) | $ | 24 | | | $ | (261 | ) | $ | (287 | ) | $ | 6 | |

| _(In millions)_ | | 2013 | | | | 2012 | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Impact of foreign exchange rates increased (decreased): | | | | | | | | |

| Revenues | | $ | 6 | | | $ | (80 | ) |

| Segment profit | | (1 | | ) | | (10 | | ) |

| | | | | | | | | |

| | | 2013 | | | | | | | | | | 2012 | | | | | | | | |

| | | $ | (261 | ) | $ | (287 | ) | $ | 6 | | | $ | (558 | ) | $ | (592 | ) | $ | (26 | ) |

| | | $ | 40 | | $ | 112 | | $ | 20 | | | $ | 79 | | $ | 115 | | $ | 23 | |

We have approximately [removed: 32,000] [added: 34,000] employees worldwide.

We conduct our business through five operating segments: [removed: Cessna,] [added: Textron Aviation,] Bell, Textron Systems and Industrial, which represent our manufacturing businesses, and Finance, which represents our finance business.

Financial information by business segment and geographic area appears in Note 15 to the Consolidated Financial Statements on pages [removed: 75] [added: 72] through [removed: 76] [added: 73] of this Annual Report on Form 10-K.

The following description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages [removed: 18] [added: 19] through [removed: 37] [added: 36] of this Annual Report on Form 10-K.

Aftermarket [removed: services include parts,] [added: includes parts sales, and] maintenance, inspection and repair services.

Revenues in the [removed: Cessna] [added: Textron Aviation] segment accounted for approximately [removed: 23%, 25%] [added: 33%, 23%] and [removed: 26%] [added: 25%] of our total revenues in [removed: 2013, 2012] [added: 2014, 2013] and [removed: 2011,] [added: 2012,] respectively.

Revenues for [removed: Cessna’s] [added: Textron Aviation’s] principal lines of business were as follows:

| _(In millions)_ | | [removed: | 2013 |] [added: 2014] | | [added: 2013] | | 2012 | [removed: | | | | 2011 | | |]

| Aircraft sales | [added: $] | [added: 3,182] | $ | 1,868 | [removed: | | |] $ | 2,318 | [removed: | | | $ | 2,263 | |]

| Aftermarket | | [removed: | 916 |] [added: 1,386] | | [added: 916] | | 793 | [removed: | | | | 727 | | |]

The family of jets currently produced by [removed: Cessna] [added: Textron Aviation] includes the Mustang, Citation M2, Citation [removed: CJ2+, Citation CJ3,] [added: CJ3+,] Citation CJ4, Citation [removed: XLS+] [added: XLS+, Citation Sovereign+] and the [removed: new] [added: recently certified] Citation [removed: Sovereign+.][added: X+, the fastest civilian jet in the world.]

In addition, [removed: Cessna] [added: Textron Aviation] is developing the Citation Latitude, a midsize business jet [removed: scheduled for first flight in 2014 and] expected to enter into service in 2015, as well as the [added: larger] Citation [removed: Longitude, a super midsize business jet] [added: Longitude] expected to enter into service in 2017.

[removed: Caravans are] [added: The world’s best-selling utility turboprop, the Cessna Caravan, is] used in the United States primarily for overnight express package shipments and for personal transportation.

The Turbo Skylane JT-A, [removed: Cessna’s] [added: Textron Aviation’s] first Jet-A fueled piston [removed: aircraft,] [added: aircraft] is expected to be certified and [removed: to] begin delivering in [removed: 2014.][added: 2015.]

The [removed: Citation] [added: Textron Aviation] family of aircraft [removed: currently] is supported by [removed: 15 Citation Service Centers owned or] [added: a global network of 21 service centers] operated by [removed: Cessna,] [added: Textron Aviation,] two of which are co-located with Bell Helicopter, along with [added: 401] authorized independent service [removed: stations and] centers located in [removed: more than 25] [added: 49] countries throughout the world.

[removed: Cessna-owned Service Centers] [added: Textron Aviation-owned service centers] provide customers with 24-hour service and maintenance.

[removed: Cessna also] [added: Aviation] provides [added: its customers with] around-the-clock parts support [added: and also offers ServiceDirect®] for [removed: Citation] [added: Citation, King Air and Hawker] aircraft.

[removed: Cessna offers an array of service options for Citation aircraft, known as ServiceDirect®, which] [added: ServiceDirect®] delivers service capabilities directly to customer locations with a [removed: Mobile Service Unit] [added: mobile service unit] fleet [removed: of 22 vehicles] in the United States, Canada and Europe.

[removed: Cessna] [added: Textron Aviation] markets its products worldwide through its own sales force, as well as through a network of authorized independent sales representatives.

[removed: Cessna] [added: Textron Aviation] has several competitors domestically and internationally in various market segments.

[removed: Cessna’s] [added: Textron Aviation’s] aircraft compete with other aircraft that vary in size, speed, range, capacity and handling characteristics on the basis of price, product quality and reliability, direct operating costs, product support and reputation.

Revenues for Bell accounted for approximately [removed: 37%, 35%] [added: 31%, 37%] and [removed: 31%] [added: 35%] of our total revenues in [removed: 2013, 2012] [added: 2014, 2013] and [removed: 2011,] [added: 2012,] respectively.

| _(In millions)_ | | [removed: | 2013 |] [added: 2014] | | [added: 2013] | | 2012 | [removed: | | | | 2011 | | |]

| Military: | | | | | | | [removed: | | | | | | | | |]

| V-22 Program | [added: $] | [added: 1,771] | $ | 1,755 | [removed: | | |] $ | 1,611 | [removed: | | | $ | 1,380 | |]

| Other Military | | [removed: | 959 |] [added: 860] | | [added: 959] | | 940 | [removed: | | | | 919 | | |]

| Commercial | | [removed: | 1,797 |] [added: 1,614] | | [added: 1,797] | | 1,723 | [removed: | | | | 1,226 | | |]

The U.S. Marine Corps H-1 helicopter program includes a utility [removed: model] [added: model, the UH-1Y,] and an advanced attack model, the [removed: UH-1Y and the] AH-1Z, [removed: respectively,] which have 84% parts commonality between them.

[removed: Bell’s] [added: In addition, Bell continues to develop the] 525 Relentless, its first super medium commercial helicopter, [removed: is currently in development with a projected] [added: and] first flight [added: is expected] in [removed: 2014.][added: 2015.]

For both its military programs and its commercial products, Bell provides post-sale support and service for [removed: its] [added: an] installed base of approximately 13,000 helicopters through a network of [removed: 8] [added: eight] Bell-operated service centers, [removed: two of which are co-located with Cessna, 106] [added: four supply centers and over 100] independent service centers located in 34 [removed: countries and four supply centers that are located worldwide.][added: countries.]

Textron Systems’ product lines consist of unmanned aircraft systems, marine and land systems, weapons and [removed: sensors] [added: sensors, simulation, training] and [removed: a variety of] [added: other] defense and aviation mission support products and services.

Textron Systems is a supplier to the defense, [removed: aerospace, homeland security] [added: aerospace] and general aviation markets, and represents approximately [removed: 14%,] [added: 12%,] 14% and [removed: 17%] [added: 14%] of Textron’s revenues in [removed: 2013, 2012] [added: 2014, 2013] and [removed: 2011,] [added: 2012,] respectively.

[removed: While this] [added: This] segment sells [removed: most of] its products to U.S. Government [removed: customers, it also sells products] [added: customers and] to customers outside the U.S. through foreign military sales sponsored by the U.S. Government and directly through commercial sales channels.

| _(In millions)_ | | [removed: | 2013 |] [added: 2014] | | [added: 2013] | | 2012 | [removed: | | | | 2011 | | |]

| Unmanned [removed: Aircraft] Systems | [added: $] | [added: 797] | $ | 666 | [removed: | | |] $ | 694 | [removed: | | | $ | 701 | |]

| Marine and Land Systems | | [removed: | 392 |] [added: 158] | | [added: 392] | | 443 | [removed: | | | | 519 | | |]

| Weapons and Sensors | | [removed: | 311 |] [added: 264] | | [added: 311] | | 285 | [removed: | | | | 298 | | |]

| [removed: Mission Support] [added: Simulation, Training] and Other | | [removed: | 296 |] [added: 405] | | [added: 296] | | 315 | [removed: | | | | 354 | | |]

_Unmanned [removed: Aircraft] Systems_

Unmanned [removed: Aircraft] Systems [removed: (UAS)] consists of the [removed: AAI UAS] [added: Unmanned Systems] and [removed: AAI Logistics & Technical Services] [added: Support Solutions] businesses.

On March 14, 2014, we completed the acquisition of Beech Holdings, LLC, which included Beechcraft Corporation and other subsidiaries (collectively “Beechcraft”).

We combined Beechcraft with our legacy Cessna segment to form the Textron Aviation segment.

Textron Aviation Segment

Textron Aviation is a leader in general aviation.

Textron Aviation manufactures, sells and services Beechcraft and Cessna aircraft, and services the Hawker brand of business jets.

The segment has two principal product lines: aircraft sales and aftermarket.

Aircraft sales include business jets, turboprop aircraft, piston aircraft, and military trainer and defense aircraft.

| --- | --- | --- | --- | --- | --- | --- |

| Total revenues | $ | 4,568 | $ | 2,784 | $ | 3,111 |

Textron Aviation’s turboprop aircraft include the best-selling business turboprop family in the world, the King Air, which offers the King Air C90GTx, with recently announced performance enhancements, the King Air 250, available with a new payload upgrade and the King Air 350.

Textron Aviation’s single-engine piston aircraft include the Baron, Bonanza, Skyhawk SP, Turbo Stationair and the high performance TTx.

Textron Aviation also offers the T-6 trainer and AT-6 light attack military aircraft.

During 2014, Textron Aviation received new orders from the U.S. Government, Mexico and New Zealand for T-6 aircraft.

More than 25 countries now operate the T-6 aircraft as a part of their military training fleet.

Textron

| --- | --- | --- | --- | --- | --- | --- |

| Total revenues | $ | 4,245 | $ | 4,511 | $ | 4,274 |

The new 505 Jet Ranger X, a short-light single helicopter, achieved its first flight in late 2014.

| --- | --- | --- | --- | --- | --- | --- |

| Total revenues | $ | 1,624 | $ | 1,665 | $ | 1,737 |

_Simulation, Training and Other_

Simulation, Training and Other includes five businesses: TRU Simulation + Training, Lycoming, Electronic Systems, Advanced Information Solutions and Geospatial Solutions.

Through its training centers, TRU Simulation + Training provides initial type-rating and recurrency training for pilots.

| --- | --- | --- | --- | --- | --- | --- |

| Specialized Vehicles and Equipment | | 868 | | 713 | | 660 |

| Total revenues | $ | 3,338 | $ | 3,012 | $ | 2,900 |

_Specialized Vehicles and Equipment_

The Tools and Test Equipment product line includes products sold by businesses that design and manufacture powered equipment, electrical test and measurement instruments, mechanical and hydraulic tools, cable connectors, fiber optic assemblies, underground and aerial transmission and distribution products and power utility products.

The businesses operate 13 plants across four countries with almost 50% of their combined revenue coming from outside the United States.

| Bell | $ | 5,524 | $ | 6,450 |

| Textron Systems | | 2,790 | | 2,803 |

| Textron Aviation | | 1,365 | | 1,018 |

| Total backlog | $ | 9,679 | $ | 10,271 |

Some of these trademarks, trade names and service marks are used in this Annual Report on Form 10-K and other reports, including: Aeronautical Accessories; AAI; acAlert; Ascent; Aerosonde; AH-1Z; Ambush; Arc Horizon; AVCOAT; Bad Boy Buggies; Baron; BattleHawk; Beechcraft; Beechcraft T-6: Bell; Bell Helicopter; Bonanza; Bravo; Cadillac Gage; Caravan; Caravan Amphibian; Caravan 675; Cessna; Cessna 350; Cessna 400; Cessna Corvalis TTX; Cessna Turbo Skylane JT-A; Cessna Turbo Skyhawk JT-A; Citation; CITATION ALPINE EDITION; Citation Encore+; Citation Latitude; Citation Longitude; Citation M2; Citation Sovereign; Citation X; Citation X+; Citation XLS+; CJ1+; CJ2+; CJ3; CJ3+.

CJ4; Clairity; CLAW; Commando; Corvalis; Cushman; DataScout; Dixie Chopper; Eclipse; Excel; Extreme; Extreme Ti-METAL; E-Z-GO; Fury; GTS-1930 Saber, G3 Tugger; GatorEye; Gator Grips; GLOBAL MISSION SUPPORT; Grand Caravan; Greenlee; H-1; HDE; Hawker; Huey; Huey II; iCommand; IE2; Instinct; Integrated Command Suite; Jacobsen; Jet Ranger X; Kautex; King Air; King Air C90GTx; King Air

| --- | --- | --- | --- | --- |

counsel of Siemens AG for the Americas since 2008.

· Pension plan assumptions and future contributions;

Cessna Segment

Cessna is the world’s leading general aviation company based on unit sales with two principal lines of business: aircraft sales and aftermarket services.

Aircraft sales include Citation jets, Caravan single-engine utility turboprops and single-engine utility and high-performance piston aircraft.

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | $ | 2,784 | | | | $ | 3,111 | | | | $ | 2,990 | |

The new Citation X+, recently verified by the FAA as the fastest civilian jet in the world, is expected to be certified in early 2014.

The Cessna Caravan is the world’s best-selling utility turboprop.

Cessna also offers a single-engine piston product line that includes the Skyhawk SP, Stationair and the new high performance TTx which we began delivering during 2013.

Cessna Caravan and single-engine piston customers receive product support through independently owned service stations and around-the-clock parts support through Cessna.

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | $ | 4,511 | | | | $ | 4,274 | | | | $ | 3,525 | |

During 2013, the Bell Boeing V-22 program was awarded a five-year contract for the production and delivery of an additional 99 V-22 tiltrotor aircraft from 2014 through 2019.

Bell also continues to support the OH-58D Kiowa Warrior armed scout helicopter for the U.S. Army.

In addition, during 2013 Bell announced the development of the Bell SLS, a high performance, short-light single helicopter, which will reenter Bell into the market it created with the introduction of the original JetRanger.

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | $ | 1,665 | | | | $ | 1,737 | | | | $ | 1,872 | |

The Marine and Land Systems business is operated as Textron Marine & Land Systems (TMLS).

The Weapons and Sensors business is operated as Textron Defense Systems (TDS).

_Mission Support and Other_

Mission Support and Other includes three businesses: AAI Test & Training, Lycoming and Overwatch.

In December 2013, we acquired two flight simulation and aircraft training product companies, Mechtronix, Inc. and OPINICUS Corporation.

We intend to combine these businesses with our existing training and simulation business, currently included in the UAS product line, which serves the military aircraft market, to form Textron Simulation & Training Systems.

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Golf, Turf Care and Light Transportation Vehicles | | | 713 | | | | | 660 | | | | | 560 | | |

| | | | $ | 3,012 | | | | $ | 2,900 | | | | $ | 2,785 | |

In addition, Kautex produces cast iron engine camshafts in North America.

_Golf, Turf Care and Light Transportation Vehicles_

Our Greenlee business unit designs and manufactures powered equipment, electrical test and measurement instruments, mechanical and hydraulic tools, cable connectors, and fiber optic assemblies under the Greenlee, Klauke, Paladin Tools and Tempo brand names.

During 2013, our Greenlee business acquired Sherman & Reilly, Inc., a manufacturer of underground and aerial transmission and distribution products, and HD Electric Company, a designer and manufacturer of power utility products.

Through joint ventures in North America and China, Greenlee also sells its products to the plumbing, industrial manufacturing and related industries.

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| U.S. Government: | | | | | | | | | | |

| Bell | | | $ | 5,509 | | | | $ | 6,382 | |

| Textron Systems | | | 1,905 | | | | | 2,037 | | |

| Total U.S. Government backlog | | | 7,414 | | | | | 8,419 | | |

| Commercial: | | | | | | | | | | |

| Bell | | | 941 | | | | | 1,087 | | |

| Cessna | | | 1,018 | | | | | 1,062 | | |

| Textron Systems | | | 898 | | | | | 882 | | |

| Industrial | | | 2 | | | | | 13 | | |

We also are subject to [removed: other] actual and threatened legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts; alleged lack of compliance with applicable laws and regulations; production partners; product liability; patent and trademark infringement; employment disputes; and environmental, health and safety matters.

On October 7, 2014, the Federal Aviation Administration of the U.S. Department of Transportation (DOT) issued a Notice of Proposed Civil Penalty to McCauley Propeller Systems, a Division of Cessna Aircraft Company, for alleged violations of DOT’s hazardous materials shipment regulations in connection with the shipment of resin product by air from McCauley’s Columbus, GA facility.

The DOT has proposed a civil penalty of $238,000, and Cessna Aircraft Company is currently negotiating the disposition of the matter.

As previously reported in Textron’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010, on August 21, 2009, a purported class action lawsuit was filed in the United States District Court in Rhode Island by Dianne Leach, an alleged participant in the Textron Savings Plan.

Plaintiffs alleged that the company and certain of its present and former employees, officers and directors had violated the United States Employee Retirement Income Security Act (ERISA) by imprudently permitting participants in the Textron Savings Plan to invest in Textron common stock.

The complaints sought equitable relief and unspecified compensatory damages.

As reported in Textron’s Annual Report on Form 10-K for the fiscal year ended December 29, 2012, on December 13, 2012, as a result of a mediation process overseen by an independent mediator, the parties reached an agreement in principle, subject to settlement documentation and court approval, to settle the plaintiffs’ claims for an immaterial amount.

On August 21, 2013, the Court entered an order preliminarily approving the settlement, certifying a settlement class, and approving the form and manner of class notice.

On February 10, 2014, the Court entered an order giving final approval of the settlement and final judgment in the case.

Neither Textron nor any of the other defendants in the settlement admitted any wrongdoing with respect to the allegations in the case.

For the fiscal year ended [removed: December 28, 2013][added: January 3, 2015]

The aggregate market value of the registrant’s Common Stock held by non-affiliates at June 28, [removed: 2013] [added: 2014] was approximately [removed: $7.3] [added: $10.8] billion based on the New York Stock Exchange closing price for such shares on that date.

At February [removed: 1, 2014, 282,500,851] [added: 7, 2015, 276,834,630] shares of Common Stock were outstanding.

Part III of this Report incorporates information from certain portions of the registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders to be held on April [removed: 23, 2014.][added: 22, 2015.]

10-K 1 a14-26298_110k.htm 10-K

Textron Inc.

Index to Annual Report on Form 10-K

For the Fiscal Year Ended January 3, 2015

| [PART I](#Parti_080153 "Click to goto ") | | Page |

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| [Item 1.](#Item1_Business_080155) | [Business](#Item1_Business_080155) | 3 |

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| [Item 1A.](#Item1a_RiskFactors_081935) | [Risk Factors](#Item1a_RiskFactors_081935) | 10 |

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| [Item 1B.](#Item1b_UnresolvedStaffComments_082320) | [Unresolved Staff Comments](#Item1b_UnresolvedStaffComments_082320) | 15 |

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| [Item 2.](#Item2_Properties_082329) | [Properties](#Item2_Properties_082329) | 15 |

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| [Item 3.](#Item3_LegalProceedings_082331) | [Legal Proceedings](#Item3_LegalProceedings_082331) | 15 |

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| [Item 4.](#Item4_MineSafetyDisclosures_082347) | [Mine Safety Disclosures](#Item4_MineSafetyDisclosures_082347) | 15 |

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| [PART II](#Partii_082815 "Click to goto ") | | |

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| [Item 5.](#Item5_MarketForRegistrantsCommonE_082813) | [Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](#Item5_MarketForRegistrantsCommonE_082813) | 16 |

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| [Item 6.](#Item6_SelectedFinancialData_084536) | [Selected Financial Data](#Item6_SelectedFinancialData_084536) | 18 |

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| [Item 7.](#Item7_ManagementsDiscussionAndAna_084617) | [Management’s Discussion and Analysis of Financial Condition and Results of Operations](#Item7_ManagementsDiscussionAndAna_084617) | 19 |

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| [Item 7A.](#Item7a_QuantitativeAndQualitative_075333) | [Quantitative and Qualitative Disclosures About Market Risk](#Item7a_QuantitativeAndQualitative_075333) | 36 |

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| [Item 8.](#Item8_FinancialStatementsAndSuppl_075402) | [Financial Statements and Supplementary Data](#Item8_FinancialStatementsAndSuppl_075402) | 37 |

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| [Item 9.](#Item9_ChangesInAndDisagreementsWi_104009) | [Changes In and Disagreements With Accountants on Accounting and Financial Disclosure](#Item9_ChangesInAndDisagreementsWi_104009) | 76 |

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| [Item 9A.](#Item9a_ControlsAndProcedures_104048) | [Controls and Procedures](#Item9a_ControlsAndProcedures_104048) | 76 |

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| [Item 9B.](#Item9b_OtherInformation_104045) | [Other Information](#Item9b_OtherInformation_104045) | 76 |

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| [PART III](#Partiii_104042 "Click to goto ") | | |

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| [Item 10.](#Item10_DirectorsExecutiveOfficers_104041) | [Directors, Executive Officers and Corporate Governance](#Item10_DirectorsExecutiveOfficers_104041) | 76 |

10-K 1 a13-26941_110k.htm 10-K

On [removed: December 28, 2013,] [added: January 3, 2015,] we operated a total of [removed: 52] [added: 56] plants located throughout the U.S. and [removed: 52] [added: 54] plants outside the U.S. We own [removed: 53] [added: 59] plants and lease the remainder for a total manufacturing space of approximately [removed: 21.1] [added: 23.4] million square feet.

The principal market on which our common stock is traded is the New York Stock Exchange under the symbol “TXT.” At [removed: December 28, 2013,] [added: January 3, 2015,] there were approximately [removed: 11,500] [added: 10,700] record holders of Textron common stock.

| | | [removed: |] High | | | Low | | | Dividends per Share | | | | High | | | Low | | | Dividends per Share | | | [removed: |]

| First quarter | | [removed: |] $ | [removed: 31.30] [added: 40.18] | | $ | [removed: 23.94] [added: 34.28] | | $ | 0.02 | | | $ | [removed: 28.29] [added: 31.30] | | $ | [removed: 18.37] [added: 23.94] | | $ | 0.02 | | [removed: |]

| Second quarter | | [removed: | 30.22] [added: 40.93] | | | [removed: 24.87] [added: 36.96] | | | 0.02 | | | | [removed: 29.18] [added: 30.22] | | | [removed: 21.97] [added: 24.87] | | | 0.02 | | | [removed: |]

| Third quarter | | [removed: | 29.81] [added: 39.03] | | | [removed: 25.36] [added: 35.54] | | | 0.02 | | | | [removed: 28.80] [added: 29.81] | | | [removed: 22.15] [added: 25.36] | | | 0.02 | | | [removed: |]

| Fourth quarter | | [removed: | 37.43] [added: 44.23] | | | [removed: 26.17] [added: 32.28] | | | 0.02 | | | | [removed: 26.75] [added: 37.43] | | | [removed: 22.84] [added: 26.17] | | | 0.02 | | | [removed: |]

[removed: On January 23, 2013, the company announced the adoption of] [added: _(1) These shares were purchased pursuant to] a [removed: new] plan authorizing the repurchase of up to 25 million shares of Textron common [removed: stock.][added: stock that had been announced on January 23, 2013.]

This plan has no expiration [removed: date.][added: date._]

[removed: On] [added: In] February [removed: 5,] 2014, we entered into an [removed: accelerated share repurchase] [added: Accelerated Share Repurchase] agreement (ASR) with a counterparty [removed: to repurchase an aggregate of] [added: and repurchased] 4.3 million shares of our outstanding common stock from the counterparty for [added: an initial estimated purchase price of] $150 million.

The following graph compares the total return on a cumulative basis at the end of each year of $100 invested in our common stock on December 31, [removed: 2008] [added: 2009] with the Standard & Poor’s (S&P) 500 Stock Index, the S&P 500 Aerospace & Defense (A&D) Index and the S&P [removed: Industrial Conglomerates (IC) Index.][added: 500 Industrials Index, all of which include Textron.]

[removed: ][added: ]

| | | 2014 | | | | | | | | | | 2013 | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

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The following provides information about our fourth quarter 2014 repurchases of equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:

| Period _(shares in thousands)_ | | Total Number of Shares Purchased (1) | | Average Price Paid per Share (excluding commissions) | | | Total Number of Shares Purchased as part of Publicly Announced Plan (1) | | Maximum Number of Shares that may yet be Purchased under the Plan | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| September 28, 2014 – November 1, 2014 | | 225 | | $ | 35.90 | | 225 | | 16,399 | |

| November 2, 2014 – November 29, 2014 | | — | | — | | | — | | — | |

| November 30, 2014 – January 3, 2015 | | 320 | | 39.66 | | | 320 | | 16,079 | |

| Total | | 545 | | $ | 38.11 | | 545 | | | |

Final settlement of the ASR occurred in December 2014 and resulted in a final average price of $38.90 per share.

In 2014, we changed from the S&P Industrial Conglomerates Index to the S&P 500 Industrials Index, which we believe is a better comparator for the performance of our business.

We have provided the S&P Industrial Conglomerates Index in the graph below for comparison purposes only.

| | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Textron Inc. | | $ | 100.00 | | $ | 126.17 | | $ | 99.08 | | $ | 133.26 | | $ | 198.15 | | $ | 227.77 | |

| S&P 500 | | 100.00 | | | 115.06 | | | 117.49 | | | 136.30 | | | 180.44 | | | 205.10 | | |

| S&P 500 A&D | | 100.00 | | | 115.11 | | | 121.19 | | | 138.84 | | | 215.08 | | | 239.90 | | |

| S&P 500 Industrials | | 100.00 | | | 115.73 | | | 122.01 | | | 140.01 | | | 184.31 | | | 206.98 | | |

| S&P 500 Industrial Conglomerates | | 100.00 | | | 118.70 | | | 119.53 | | | 143.14 | | | 201.91 | | | 203.64 | | |

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | 2013 | | | | | | | | | | 2012 | | | | | | | | | |

| | | | | | | | | | | | | | | | | | | | | | | |

There were no shares purchased under the plan during 2013.

The ASR is scheduled to expire in December 2014.

Upon final settlement of the ASR, we may receive additional shares or pay additional cash or shares, at our option, based on the daily volume weighted average market price of our common stock over the course of a calculation period, less a discount.

We are included in both the S&P 500 and the S&P IC indices.

| (_Dollars in millions, except per share amounts_) | | [added: 2014 | | | |] 2013 | | [added: |] 2012 | | [added: |] 2011 | | [removed: 2010] | [added: 2010] | [removed: 2009] | |

| Revenues | | | | | | | | | | | | [added: | | | | | |]

| [removed: Cessna] [added: Textron Aviation] | | $ | [added: 4,568 | | | $ |] 2,784 | [added: |] $ | 3,111 | [added: |] $ | 2,990 | [added: |] $ | 2,563 | [removed: $] | [removed: 3,320 |]

| Bell | | [added: 4,245 | | | |] 4,511 | | [added: |] 4,274 | | [added: |] 3,525 | | [removed: 3,241] | [added: 3,241] | [removed: 2,842] | |

| Textron Systems | | [added: 1,624 | | | |] 1,665 | | [added: |] 1,737 | | [added: |] 1,872 | | [removed: 1,979] | [added: 1,979] | [removed: 1,899] | |

| Industrial | | [added: 3,338 | | | |] 3,012 | | [added: |] 2,900 | | [added: |] 2,785 | | [removed: 2,524] | [added: 2,524] | [removed: 2,078] | |

| Finance | | [added: 103 | | | |] 132 | | [added: |] 215 | | [added: |] 103 | | [removed: 218] | [added: 218] | [removed: 361] | |

| Total revenues | | $ | [added: 13,878 | | | $ |] 12,104 | [added: |] $ | 12,237 | [added: |] $ | 11,275 | [added: |] $ | 10,525 | [removed: $] | [removed: 10,500 |]

| Segment profit | | | | | | | | | | | | [added: | | | | | |]

| Bell | | [added: 529 | | | |] 573 | | [added: |] 639 | | [added: |] 521 | | [removed: 427] | [added: 427] | [removed: 304] | |

| Textron Systems | | [added: 150 | | | |] 147 | | [added: |] 132 | | [added: |] 141 | | [removed: 230] | [added: 230] | [removed: 240] | |

| Industrial | | [added: 280 | | | |] 242 | | [added: |] 215 | | [added: |] 202 | | [removed: 162] | [added: 162] | [removed: 27] | |

| Finance [removed: (a)] [added: (b)] | | [added: 21 | | | |] 49 | | [added: |] 64 | | [removed: (333)] | [added: (333] | [removed: (237)] | [added: )] | [removed: (294)] [added: (237] | | [added: ) |]

| Total segment profit | | [added: 1,214 | | | |] 963 | | [added: |] 1,132 | | [added: |] 591 | | [removed: 553] | [added: 553] | [removed: 475] | |

| Special charges [removed: (b)] [added: (d)] | | — | | [added: | |] — | | [added: |] — | | [removed: (190)] | [added: —] | [removed: (317)] | | [added: (190 | | ) |]

| Corporate expenses and other, net | | [removed: (166)] [added: (161] | | [removed: (148)] [added: )] | | [removed: (114)] [added: (166] | | [removed: (137)] [added: )] | [added: (148] | [removed: (164)] | [added: )] | [added: (114 | | ) | (137 | | ) |]

| Interest expense, net for Manufacturing group | | [removed: (123)] [added: (148] | | [removed: (143)] [added: )] | | [removed: (140)] [added: (123] | | [removed: (140)] [added: )] | [added: (143] | [removed: (143)] | [added: )] | [added: (140 | | ) | (140 | | ) |]

| Income tax (expense) benefit | | [removed: (176)] [added: (248] | | [removed: (260)] [added: )] | | [removed: (95)] [added: (176] | | [removed: 6] [added: )] | [added: (260] | [removed: 76] | [added: )] | [added: (95 | | ) | 6 | | |]

| Income [removed: (loss)] from continuing operations | | $ | [added: 605 | | | $ |] 498 | [added: |] $ | 581 | [added: |] $ | 242 | [added: |] $ | 92 | [removed: $] | [removed: (73) |]

| Per share of common stock | | | | | | | | | | | | [added: | | | | | |]

| Income [removed: (loss)] from continuing operations — basic | | $ | [added: 2.17 | | | $ |] 1.78 | [added: |] $ | 2.07 | [added: |] $ | 0.87 | [added: |] $ | 0.33 | [removed: $] | [removed: (0.28) |]

| Income [removed: (loss)] from continuing operations — diluted [removed: (c)] | | $ | [added: 2.15 | | | $ |] 1.75 | [added: |] $ | 1.97 | [added: |] $ | 0.79 | [added: |] $ | 0.30 | [removed: $] | [removed: (0.28) |]

| Dividends declared | | $ | 0.08 | [added: | |] $ | 0.08 | [added: |] $ | 0.08 | [added: |] $ | 0.08 | [added: |] $ | 0.08 | [added: |]

| Book value at year-end | | $ | [added: 15.45 | | | $ |] 15.54 | [added: |] $ | 11.03 | [added: |] $ | 9.84 | [added: |] $ | 10.78 | [removed: $] | [removed: 10.38 |]

| Common stock price: High | | $ | [added: 44.23 | | | $ |] 37.43 | [added: |] $ | 29.18 | [added: |] $ | 28.87 | [added: |] $ | 25.30 | [removed: $] | [removed: 21.00 |]

| Low | | $ | [added: 32.28 | | | $ |] 23.94 | [added: |] $ | 18.37 | [added: |] $ | 14.66 | [added: |] $ | 15.88 | [removed: $] | [removed: 3.57 |]

| Year-end | | $ | [added: 42.17 | | | $ |] 36.61 | [added: |] $ | 24.12 | [added: |] $ | 18.49 | [added: |] $ | 23.64 | [removed: $] | [removed: 18.81 |]

| Common shares outstanding _(In thousands)_ | | | | | | | | | | | | [added: | | | | | |]

| Basic average | | [added: 279,409 | | | |] 279,299 | | [added: |] 280,182 | | [added: |] 277,684 | | [removed: 274,452] | [added: 274,452] | [removed: 262,923] | |

| Diluted average [removed: (c)] | | [added: 281,790 | | | |] 284,428 | | [added: |] 294,663 | | [added: |] 307,255 | | [removed: 302,555] | [added: 302,555] | [removed: 262,923] | |

| Year-end | | [added: 276,582 | | | |] 282,059 | | [added: |] 271,263 | | [added: |] 278,873 | | [removed: 275,739] | [added: 275,739] | [removed: 272,272] | |

| Financial position | | | | | | | | | | | | [added: | | | | | |]

| Total assets | | $ | [added: 14,605 | | | $ |] 12,944 | [added: |] $ | 13,033 | [added: |] $ | 13,615 | [added: |] $ | 15,282 | [removed: $] | [removed: 18,940 |]

| Manufacturing group debt | | $ | [added: 2,811 | | | $ |] 1,931 | [added: |] $ | 2,301 | [added: |] $ | 2,459 | [added: |] $ | 2,302 | [removed: $] | [removed: 3,584 |]

| Finance group debt | | $ | [added: 1,063 | | | $ |] 1,256 | [added: |] $ | 1,686 | [added: |] $ | 1,974 | [added: |] $ | 3,660 | [removed: $] | [removed: 5,667 |]

| Shareholders’ equity | | $ | [added: 4,272 | | | $ |] 4,384 | [added: |] $ | 2,991 | [added: |] $ | 2,745 | [added: |] $ | 2,972 | [removed: $] | [removed: 2,826 |]

| Manufacturing group debt-to-capital (net of cash) | | [removed: 15%] [added: 33] | | [removed: 24%] [added: %] | | [removed: 37%] [added: 15] | | [removed: 32%] [added: %] | [added: 24] | [removed: 39%] | [added: %] | [added: 37 | | % | 32 | | % |]

| Manufacturing group debt-to-capital | | [removed: 31%] [added: 40] | | [removed: 44%] [added: %] | | [removed: 47%] [added: 31] | | [removed: 44%] [added: %] | [added: 44] | [removed: 56%] | [added: %] | [added: 47 | | % | 44 | | % |]

| Investment data | | | | | | | | | | | | [added: | | | | | |]

| Capital expenditures | | $ | [added: 429 | | | $ |] 444 | [added: |] $ | 480 | [added: |] $ | 423 | [added: |] $ | 270 | [removed: $] | [removed: 238 |]

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Textron Aviation (a) | | $ | 234 | | | $ | (48 | ) | $ | 82 | | $ | 60 | | $ | (29 | ) |

| Acquisition and restructuring costs (c) | | (52 | | ) | | — | | | — | | | — | | | — | | |

_(a)_ _In 2014, segment profit includes amortization of $63 million related to fair value step-up adjustments of Beechcraft acquired inventories sold during the period._

_(c)_ _Acquisition and restructuring costs are related to the acquisition of Beech Holdings, LLC, the parent of Beechcraft Corporation, which was completed on March 14, 2014._

| | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Cessna | | $ | (48) | $ | 82 | $ | 60 | $ | (29) | $ | 198 |

_(b)_ _Special charges include restructuring charges of $99 million and $237 million in 2010 and 2009, respectively, primarily related to severance and asset impairment charges.

In 2009, special charges include a goodwill impairment charge of $80 million in the Industrial segment._

_(c)_ _For 2009, the potential dilutive effect of stock options, restricted stock units and the shares that could have been issued upon the conversion of our convertible notes and upon the exercise of the related warrants was excluded from the computation of diluted weighted-average shares outstanding as the shares would have an anti-dilutive effect on the loss from continuing operations._

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| [Report of [removed: Management](#ReportOfManagement_005328] [added: Management](#ReportOfManagement_075423] "Click to goto ") | | [removed: 40] | [added: 38 |]

| [Reports of Independent Registered Public Accounting [removed: Firm](#ReportOfIndependentRegisteredPubl_005734] [added: Firm](#ReportOfIndependentRegisteredPubl_075429] "Click to goto ") | | [removed: 41] | [added: 39 |]

| [Consolidated Statements of Operations for each of the years in the three-year period ended [removed: December 28, 2013](#ConsolidatedStatementsOfOperation_012031] [added: January 3, 2015](#ConsolidatedStatementsOfOperation_080254] "Click to goto ") | | [removed: 43] | [added: 41 |]

| [Consolidated Statements of Comprehensive Income [removed: (Loss)] for each of the years in the three-year period ended [removed: December 28, 2013](#ConsolidatedStatementsOfComprehen_012036] [added: January 3, 2015](#ConsolidatedStatementsOfComprehen_080309] "Click to goto ") | | [removed: 44] | [added: 42 |]

| [Consolidated Balance Sheets as of [removed: December 28, 2013] [added: January 3, 2015] and December [removed: 29, 2012](#ConsolidatedBalanceSheets_012050] [added: 28, 2013](#ConsolidatedBalanceSheets_080811] "Click to goto ") | | [removed: 45] | [added: 43 |]

| [Consolidated Statements of Shareholders’ Equity for each of the years in the three-year period ended [removed: December 28, 2013](#ConsolidatedStatementsOfSharehold_012059] [added: January 3, 2015](#ConsolidatedStatementsOfSharehold_082139] "Click to goto ") | | [removed: 46] | [added: 44 |]

| [Consolidated Statements of Cash Flows for each of the years in the three-year period ended [removed: December 28, 2013](#ConsolidatedStatementsOfCashFlows_012101] [added: January 3, 2015](#ConsolidatedStatementsOfCashFlows_082934] "Click to goto ") | | [removed: 47] | [added: 45 |]

| [Notes to the Consolidated Financial [removed: Statements](#NotesToTheConsolidatedFinancialSt_012127] [added: Statements](#NotesToTheConsolidatedFinancialSt_170957] "Click to goto ") | | | [added: |]

| [Note [removed: 1. Summary] [added: 1.](#Note1_SummaryOfSignificantAccount_171001) | [Summary] of Significant Accounting [removed: Policies](#Note1_SummaryOfSignificantAccount_012136 "Click to goto ")] [added: Policies](#Note1_SummaryOfSignificantAccount_171001)] | | [removed: 49] [added: 47] |

| [Note [removed: 2. Business] [added: 2.](#Note2_BusinessAcquisitionsGoodwil_171016) | [Business] Acquisitions, Goodwill and Intangible [removed: Assets](#Note2_BusinessAcquisitionsGoodwil_012649 "Click to goto ")] [added: Assets](#Note2_BusinessAcquisitionsGoodwil_171016)] | | [removed: 53] [added: 52] |

| [Note [removed: 3. Accounts] [added: 3.](#Note3_AccountsReceivableAndFinanc_171110) | [Accounts] Receivable and Finance [removed: Receivables](#Note3_AccountsReceivableAndFinanc_012652 "Click to goto ")] [added: Receivables](#Note3_AccountsReceivableAndFinanc_171110)] | | [removed: 55] [added: 54] |

| [Note [removed: 4. Inventories](#Note4_Inventories_012653 "Click to goto ")] [added: 4.](#Note4_Inventories_171114)] | [added: [Inventories](#Note4_Inventories_171114)] | [removed: 58] | [added: 56 |]

| [Note [removed: 5. Property,] [added: 5.](#Note5_PropertyPlantAndEquipmentNe_171115) | [Property,] Plant and Equipment, [removed: Net](#Note5_PropertyPlantAndEquipmentNe_012655 "Click to goto ")] [added: Net](#Note5_PropertyPlantAndEquipmentNe_171115)] | | [removed: 58] [added: 56] |

| [Note [removed: 6. Accrued Liabilities](#Note6_AccruedLiabilities_012657 "Click to goto ")] [added: 6.](#Note6_AccruedLiabilities_171143)] | [added: [Accrued Liabilities](#Note6_AccruedLiabilities_171143)] | [removed: 58] | [added: 57 |]

| [Note [removed: 7. Debt] [added: 7.](#Note7_DebtAndCreditFacilities_171145) | [Debt] and Credit [removed: Facilities](#Note7_DebtAndCreditFacilities_012658 "Click to goto ")] [added: Facilities](#Note7_DebtAndCreditFacilities_171145)] | | [removed: 59] [added: 57] |

| [Note [removed: 8. Derivative] [added: 8.](#Note8_DerivativeInstrumentsAndFai_171149) | [Derivative] Instruments and Fair Value [removed: Measurements](#Note8_DerivativeInstrumentsAndFai_041119 "Click to goto ")] [added: Measurements](#Note8_DerivativeInstrumentsAndFai_171149)] | | [removed: 60] [added: 58] |

| [Note [removed: 9. Shareholders’ Equity](#Note9_ShareholdersEquity_041122 "Click to goto ")] [added: 9.](#Note9_ShareholdersEquity_171153)] | [added: [Shareholders’ Equity](#Note9_ShareholdersEquity_171153)] | [removed: 62] | [added: 59 |]

| [Note [removed: 10. Share-Based Compensation](#Note10_SharebasedCompensation_041125 "Click to goto ")] [added: 10.](#Note10_SharebasedCompensation_101137)] | [added: [Share-Based Compensation](#Note10_SharebasedCompensation_101137)] | [removed: 65] | [added: 62 |]

| [Note [removed: 11. Retirement Plans](#Note11_RetirementPlans_023300 "Click to goto ")] [added: 11.](#Note11_RetirementPlans_101144)] | [added: [Retirement Plans](#Note11_RetirementPlans_101144)] | [removed: 67] | [added: 64 |]

| [Note [removed: 12. Income Taxes](#Note12_IncomeTaxes_022111 "Click to goto ")] [added: 12.](#Note12_IncomeTaxes_100951)] | [added: [Income Taxes](#Note12_IncomeTaxes_100951)] | [removed: 71] | [added: 68 |]

| [Note [removed: 13. Contingencies] [added: 13.](#Note13_ContingenciesAndCommitment_171517) | [Contingencies] and [removed: Commitments](#Note13_ContingenciesAndCommitment_111702 "Click to goto ")] [added: Commitments](#Note13_ContingenciesAndCommitment_171517)] | | [removed: 74] [added: 71] |

| [Note [removed: 14. Supplemental] [added: 14.](#Note14_SupplementalCashFlowInform_171521) | [Supplemental] Cash Flow [removed: Information](#Note14_SupplementalCashFlowInform_111705 "Click to goto ")] [added: Information](#Note14_SupplementalCashFlowInform_171521)] | | [removed: 74] [added: 71] |

| [Note [removed: 15. Segment] [added: 15.](#Note15_SegmentAndGeographicData_171524) | [Segment] and Geographic [removed: Data](#Note15_SegmentAndGeographicData_111708 "Click to goto ")] [added: Data](#Note15_SegmentAndGeographicData_171524)] | | [removed: 75] [added: 72] |

| Supplementary Information: | | | [added: |]

| [Quarterly Data for [removed: 2013] [added: 2014] and [removed: 2012 (Unaudited)](#QuarterlyData_133134] [added: 2013 (Unaudited)](#QuarterlyData_171714] "Click to goto ") | | [removed: 77] | [added: 74 |]

| [Schedule II – Valuation and Qualifying [removed: Accounts](#ScheduleIiValuationAndQualifyingA_133140] [added: Accounts](#ScheduleIiValuationAndQualifyingA_171650] "Click to goto ") | | [removed: 78] | [added: 75 |]

With the participation of our management, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on [removed: the framework] [added: criteria established] in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission [removed: (1992] [added: (2013] Framework).

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 [removed: December 28, 2013.][added: January 3, 2015.]

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 Textron’s internal controls over financial reporting as of [removed: December 28, 2013,] [added: January 3, 2015,] as stated in its reports, which are included herein.

| [removed: February 14, 2014] [added: 2014] | | | [added: | | | | | | | |]

We have audited Textron Inc.’s internal control over financial reporting as of [removed: December 28, 2013,] [added: January 3, 2015,] based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission [removed: (1992] [added: (2013] Framework) (the COSO criteria).

In our opinion, Textron Inc. maintained, in all material respects, effective internal control over financial reporting as of [removed: December 28, 2013,] [added: January 3, 2015,] 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 [removed: December 28, 2013] [added: January 3, 2015] and December [removed: 29, 2012,] [added: 28, 2013,] and the related Consolidated Statements of Operations, Comprehensive [removed: Income (Loss),] [added: Income,] Shareholders’ Equity and Cash Flows for each of the three years in the period ended [removed: December 28, 2013] [added: January 3, 2015] of Textron Inc. and our report dated February [removed: 14, 2014] [added: 25, 2015] expressed an unqualified opinion thereon.

[added: |] /s/ Ernst & Young LLP [added: | |]

[added: |] Boston, Massachusetts [added: | |]

We have audited the accompanying Consolidated Balance Sheets of Textron Inc. as of [removed: December 28, 2013] [added: January 3, 2015] and December [removed: 29, 2012,] [added: 28, 2013,] and the related Consolidated Statements of Operations, Comprehensive [removed: Income (Loss),] [added: Income,] Shareholders’ Equity and Cash Flows for each of the three years in the period ended [removed: December 28, 2013.][added: January 3, 2015.]

Our audits also included the financial statement schedule contained on page [removed: 78.][added: 75.]

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Textron Inc. at [added: January 3, 2015 and] December 28, 2013 and [removed: December 29, 2012 and] the consolidated results of its operations and its cash flows for each of the three years in the period ended [removed: December 28, 2013,] [added: January 3, 2015,] in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Textron Inc.’s internal control over financial reporting as of [removed: December 28, 2013,] [added: January 3, 2015,] based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission [removed: (1992] [added: (2013] Framework) and our report dated February [removed: 14, 2014] [added: 25, 2015] expressed an unqualified opinion thereon.

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| February 25, 2015 | | |

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| February 25, 2015 | |

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| February 25, 2015 | |

| Acquisition and restructuring costs | | | 52 | | | | — | | | — | | |

| Treasury stock | | | (340 | | ) | | — | | |

| Net income | | | | | | | | | | | 600 | | | | | | 600 | | |

| Purchases of common stock | | | | | | | | (340 | | ) | | | | | | | (340 | | ) |

| Balance at January 3, 2015 | | $ | 36 | | $ | 1,459 | | $ | (340 | ) | $ | 4,623 | | $ | (1,506 | ) | $ | 4,272 | |

On March 14, 2014, we completed the acquisition of all of the outstanding equity interests in Beech Holdings, LLC, which included Beechcraft Corporation and other subsidiaries, (collectively “Beechcraft”).

The results of Beechcraft have been included in our consolidated financial statements only for the period subsequent to the completion of the acquisition.

As a result, the consolidated financial results for the year ended January 3, 2015 do not reflect a full year of Beechcraft operations.

$18 million and $9 million after tax, or $0.21, $0.06 and $0.03 per diluted share, respectively).

The increase in net program profit adjustments in 2014, compared with 2013, is largely driven by the Bell segment related to the impact of cost reduction activities in 2014 as well as unfavorable performance in 2013 related to manufacturing inefficiencies.

In addition, gross favorable program profit adjustments in 2014 included $16 million related to the settlement of the System Development and Demonstration phase of the Armed Reconnaissance Helicopter (ARH) program which was terminated in October 2008.

Inventoried costs related to long-term contracts are stated at

Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

Goodwill represents the excess of cost over the fair values assigned to intangible and other net assets of the acquired businesses.

Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment testing.

Acquired intangible assets with finite lives are subject to amortization.

Finance receivables primarily include loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters.

While our analysis is specific to each

Derivatives and Hedging Activities

Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties and through periodic settlements of positions.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers,” that outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.

Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption.

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February 14, 2014

February 14, 2014

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| Valuation allowance on transfer of Golf Mortgage portfolio to held for sale | | | — | | | | — | | | 186 | | |

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| | | | 4,384 | | | | 3,266 | | |

| Less cost of treasury shares | | | — | | | | 275 | | |

| Balance at January 1, 2011 | | $ | 35 | | $ | 1,301 | | $ | 3,037 | | $ | (85 | ) | $ | (1,316 | ) | $ | 2,972 | |

| Amendment of call option/warrant transactions and purchase of capped call | | | | | (30 | | ) | | | | | | | | | | (30 | | ) |

| Purchases/conversions of convertible notes | | 2 | | | 39 | | | | | | (41 | | ) | | | | — | | |

| Net income | | | $ | 498 | | | $ | 589 | | $ | 242 | |

| Portfolio losses on finance receivables | | | 29 | | | | 68 | | | 102 | | |

| Valuation allowance on finance receivables held for sale | | | (31 | | ) | | (76 | | ) | 202 | | |

| Goodwill and other asset impairment charges | | | — | | | | — | | | 59 | | |

| Finance receivables originated or purchased | | | (10 | | ) | | (22 | | ) | (187 | | ) |

| Proceeds from collection on notes receivable from a prior disposition | | | — | | | | — | | | 58 | | |

| Amendment of call option/warrant transactions and purchase of capped call | | | — | | | | — | | | (30 | | ) |

| Payments on long-term lines of credit | | | — | | | | — | | | (1,440 | | ) |

| Portfolio losses on finance receivables | | | — | | | | — | | | — | | | | 29 | | | | 68 | | | 102 | | |

| Valuation allowance on finance receivables held for sale | | | — | | | | — | | | — | | | | (31 | | ) | | (76 | | ) | 202 | | |

| Goodwill and other asset impairment charges | | | — | | | | — | | | 57 | | | | — | | | | — | | | — | | |

| Proceeds from collection on notes receivable from a prior disposition | | | — | | | | — | | | 58 | | | | — | | | | — | | | — | | |

| Amendment of call option/warrant transactions and purchase of capped call | | | — | | | | — | | | (30 | | ) | | — | | | | — | | | — | | |

| Payments on long-term lines of credit | | | — | | | | — | | | — | | | | — | | | | — | | | (1,440 | | ) |

| Capital contributions paid to Cessna Export Finance Corp. | | | — | | | | — | | | — | | | | — | | | | — | | | 60 | | |

| Other financing activities | | | (3 | | ) | | — | | | (23 | | ) | | (1 | | ) | | — | | | — | | |

Revenues on direct loan origination costs and fees received are deferred and amortized to finance revenues over the contractual lives of the respective receivables and credit lines using the interest method.

When receivables are sold or prepaid, unamortized amounts are recognized in finance revenues.

_Report of Management_ — See page [removed: 40.][added: 38.]

_Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting_ — See page [removed: 41.][added: 39.]

PART III

Effective February 25, 2015, the Board of Directors amended the Company’s Amended and Restated By-Laws by adding a forum selection provision as a new Article XV of the By-Laws.

The Amendment provides that, unless the Company consents in writing to the selection of an alternative forum, the Delaware Court of Chancery will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of the Company to the Company or its stockholders, (iii) any action asserting a claim against the Company or any director or officer or other employee of the Company arising pursuant to any provision of the Delaware General Corporation Law or the Company’s Certificate of Incorporation or By-Laws, or (iv) any action asserting a claim governed by the internal affairs doctrine.

The Amendment is designed to save the Company and its stockholders from the increased expense of defending against duplicative litigation brought in multiple courts, and also to provide that claims involving Delaware law are decided by Delaware courts.

The foregoing description of the Amendment does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Amendment, which is set forth as Article XV to the Company’s Amended and Restated By-Laws which are filed as Exhibit 3.2 to this Annual Report on Form 10-K.

PART III

The information appearing under “ELECTION OF DIRECTORS— Nominees for Director,” “—The Board of Directors— _Corporate Governance_,” “—The Board of Directors— _Code of Ethics_,” “–Board Committees— _Audit Committee_,” and “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in the Proxy Statement for our Annual Meeting of Shareholders to be held on April [removed: 23, 2014] [added: 22, 2015] is incorporated by reference into this Annual Report on Form 10-K.

[removed: The information appearing under “ELECTION OF DIRECTORS — The Board of Directors-- _Compensation of Directors_,” “ELECTION OF DIRECTORS — Board Committees-- _Compensation Committee Interlocks and Insider Participation_,”] “COMPENSATION COMMITTEE REPORT,” “COMPENSATION DISCUSSION AND ANALYSIS” and “EXECUTIVE COMPENSATION” in the Proxy Statement for our Annual Meeting of Shareholders to be held on April [removed: 23, 2014] [added: 22, 2015] is incorporated by reference into this Annual Report on Form 10-K.

The information appearing under “ELECTION OF DIRECTORS — The Board of Directors-- _Compensation of Directors_,” “ELECTION OF DIRECTORS — Board Committees-- _Compensation Committee Interlocks and Insider Participation_,”

The information appearing under “SECURITY OWNERSHIP” and “EXECUTIVE COMPENSATION – Equity Compensation Plan Information” in the Proxy Statement for our Annual Meeting of Shareholders to be held on April [removed: 23, 2014] [added: 22, 2015] is incorporated by reference into this Annual Report on Form 10-K.

The information appearing under “ELECTION OF DIRECTORS — The Board of Directors--_Director Independence_” and “EXECUTIVE COMPENSATION — Transactions with Related Persons” in the Proxy Statement for our Annual Meeting of Shareholders to be held on April [removed: 23, 2014] [added: 22, 2015] is incorporated by reference into this Annual Report on Form 10-K.

The information appearing under “RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM — Fees to Independent Auditors” in the Proxy Statement for our Annual Meeting of Shareholders to be held on April [removed: 23, 2014] [added: 22, 2015] is incorporated by reference into this Annual Report on Form 10-K.

Financial Statements and Schedules — See Index on Page [removed: 39.][added: 37.]

| Exhibits | | | [removed: |]

| 3.1A | | [removed: |] Restated Certificate of Incorporation of Textron as filed with the Secretary of State of Delaware on April 29, 2010. Incorporated by reference to Exhibit 3.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2010. |

| 3.1B | | [removed: |] Certificate of Amendment of Restated Certificate of Incorporation of Textron Inc., filed with the Secretary of State of Delaware on April 27, 2011. Incorporated by reference to Exhibit 3.1 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 2011. |

| [removed: 3.2 |] [added: 10.1A] | | [removed: Amended] [added: Textron Inc. 2007 Long-Term Incentive Plan (Amended] and Restated [removed: By-Laws] [added: as] of [removed: Textron Inc., effective] April 28, [removed: 2010 and further amended April 27, 2011 and July 23, 2013.] [added: 2010).] Incorporated by reference to Exhibit [removed: 3.2] [added: 10.1] to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended [removed: June 29, 2013.] [added: March 31, 2012.] |

| 4.1 | | [removed: |] Support Agreement dated as of May 25, 1994, between Textron Inc. and Textron Financial Corporation. Incorporated by reference to Exhibit 4.1 to Textron’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. |

| NOTE: | | [removed: |] 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: | | [removed: |] Exhibits 10.1 through 10.16 below are management contracts or compensatory plans, contracts or agreements. |

| [removed: 10.1A] | | [removed: | Textron Inc. 2007 Long-Term Incentive] [added: Benefits] Plan [removed: (Amended and Restated as of April 28, 2010).] [added: for Textron Key Executives (As in effect before January 1, 2007).] Incorporated by reference to Exhibit [removed: 10.1] [added: 10.4] to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended [removed: March 31, 2012.] [added: April 3, 2010.] |

| 10.1B | | [removed: |] Form of Non-Qualified Stock Option Agreement. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. [added: (SEC File No. 001-05480)] |

| 10.1C | | [removed: |] Form of Incentive Stock Option Agreement. Incorporated by reference to Exhibit 10.3 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. [added: (SEC File No. 001-05480)] |

| 10.1D | | [removed: |] Form of Restricted Stock Unit Grant Agreement. Incorporated by reference to Exhibit 10.4 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007. [added: (SEC File No. 001-05480)] |

| 10.1E | | [removed: |] Form of Restricted Stock Unit Grant Agreement with Dividend Equivalents. Incorporated by reference to Exhibit 10.2 to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2008. [added: (SEC File No. 001-05480)] |

| 10.1F | | [removed: |] Form of Cash-Settled Restricted Stock Unit Grant Agreement with Dividend Equivalents. Incorporated by reference to Exhibit 10.1G to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. [added: (SEC File No. 001-05480)] |

| 10.1G | | Form of Performance Share Unit Grant Agreement. Incorporated by reference to Exhibit 10.1H to Textron’s Annual Report on Form 10-K for the fiscal year ended January 3, 2009. [added: (SEC File No. 001-05480)] |

| [removed: 10.1H] [added: 10.1J] | | Form of Performance [removed: Cash] [added: Share] Unit Grant Agreement. Incorporated by reference to Exhibit [removed: 10.2] [added: 10.3] to Textron’s Quarterly Report on Form 10-Q for the fiscal quarter ended [removed: July 4, 2009.] [added: March 29, 2014.] |

| 10.4C | | Third Amendment to the Textron Spillover Savings Plan, dated October 7, 2013. [added: Incorporated by reference to Exhibit 10.4C to Textron’s Annual Report on Form 10-K for the fiscal year ended December 28, 2013.] |