154020.cov 2/23/06 9:51 AM Page 1 Textron 2005 Annual Report 2005 Annual Textron Textron Inc. 40 Westminster Street Providence, Rhode Island 02903 (401) 421-2800 www.textron.com Growing Opportunity Annual Report 2005 154020.cov 8/31/06 11:34 AM Page 2 The following notes and calculation pertain to the table contained within the Chairman’s Letter: (1) In 2005, Textron's Board of Directors approved a plan to sell the Fastening Systems business. As a result, the financial results of the Fastening Systems business for the periods presented have been reclassified to discontinued operations for accounting purposes. (2) Segment profit represents the measurement used by Textron to evaluate performance for decision-making purposes. Segment profit does not include interest expense of the manufacturing segments, certain corporate expenses, special charges, and gains and losses from the disposition of significant business units. (3) Free cash flow in 2005 includes Textron Manufacturing’s net cash flow from operations of $894 million and proceeds from the sale of property, plant and equipment of $23 million, less capital expenditures of $356 million and capital lease additions of $15 million. Free cash flow in 2004 includes Textron Manufacturing’s net cash flow from operations of $973 million and proceeds from the sale of property, plant and equipment of $38 million, less capital expenditures of $238 million and capital lease additions of $44 million. (4) Textron’s calculation of ROIC is as follows: Used by permission. (Dollars in millions) 2005 2004 ROIC Income Net income $ 203 $ 365 Special charges* 112 59 Gain on sale of businesses/product lines (30) — Tax impact of special charges and gains on sale of businesses/product lines (13) (19) Loss from discontinued operations, net of income taxes 313 10 Adjustments to loss from discontinued operations, net of income taxes** (12) 56 Amortization of intangible assets, net of income taxes 2 3 Textron Manufacturing interest expense including discontinued operations, net of income taxes 58 60 ROIC Income $ 633 $ 534 Average Invested Capital Total shareholders’ equity $ 3,464 $ 3,671 Total Textron Manufacturing debt, including discontinued operations 1,872 1,909 Reaching beyond today, Textron is… Cash and cash equivalents for Textron Manufacturing, including discontinued operations (711) (546) Eliminate impact of 2005 charges 166 — Average Invested Capital $ 4,791 $ 5,034 ROIC 13.2% 10.6% * 2005 special charges exclude restructuring costs of $6 million. ** Amounts represent adjustments to ROIC income for certain operating (losses) and income included in discontinued operations. , and the underlying distinctive image of its golf holes are trademarks, service marks trade dress Pebble Beach Company. ® , Pebble Beach Golf Links ® Design: Inergy Group Wilton, CT Photo, pages 12-13: Pebble Beach 154020 2/16/06 10:31 AM Page 1 We’re creating opportunities to expand our potential. We foster learning and skill development at every level and encourage the transfer of talent within the enterprise. We’re developing an aptitude for excellence and an attitude that drives continuous improvement. Growing Knowledge… Textron University, instituted in 2005, will bring virtual learning and professional development programs to our employees around the globe. 1 154020 2/16/06 10:31 AM Page 2 We’re building strong, lasting bonds with customers. We understand their businesses and make achieving their goals our priority. And we share their pride as Textron products and services fuel our mutual success. Growing Relationships… A reflection of the new Citation Service Center, the largest general aviation facility ever built, is revealed in this view of our new Mustang jet. 2 154020 2/16/06 10:31 AM Page 3 We’re bringing new value to the industries we serve. We identify and act on the most critical drivers of success. Our focused, world-class processes increase our capacity to generate relevant and effective products, more proficiently than ever before. Growing Capability… The unique spherical design of Greenlee's subsurface electronic markers enhances range, accuracy and durability for customers working with buried utilities. 3 154020 2/22/06 8:59 AM Page 4 We’re aligning operations to generate consistent growth in shareholder value. We make tough decisions that strengthen our portfolio. We balance rigorous research and development with diligent execution in every part of the enterprise. Growing Performance… In 2005, Bell was selected to provide the U.S. Army's high-performance Armed Reconnaissance Helicopter, continuing a relationship of more than 50 years. 4 154020 2/22/06 8:59 AM Page 5 This is an exciting time for Textron. The progress we’ve made throughout transformation, combined with the promise that lies ahead for our future growth, is indeed exhilarating. and Growing Value. Lewis B. Campbell, Chairman, President and Chief Executive Officer To Our Shareowners, Employees and Customers: 2005 was a remarkable deliveries up 28 percent at Cessna, where we drove record margins year for Textron – with a host of significant operational and strategic and returns. We also saw strong revenue growth at Greenlee, Fluid & accomplishments, customer wins and new product launches and Power and E-Z-GO, while Textron Financial drove impressive growth developments. We also posted solid financial results with excellent in receivables. shareholder returns, fueled by our strategic actions, ramp-ups in a number of U.S. Government-related programs and improved outlook We cleared some major milestones and won critically important in our end markets. I simply cannot recall a time when we had customer contracts, such as the U.S. Army’s Armed Reconnaissance greater visibility into our future growth and performance than we do Helicopter (ARH) award. We also participated in the winning U.S. right now. Presidential Helicopter bid. Perhaps most notably, we earned the much-anticipated approval for full rate production of the Bell/Boeing Our transformation strategy has proven to be both value-creating and V-22 Osprey tiltrotor – a revolutionary advancement in the aviation enduring, as we delivered 19 percent organic growth in 2005, and – industry that will enable our customers to perform missions never for the first time since we embarked on our transformation journey – before thought possible. The V-22 program is expected to generate we exceeded our targeted rate of return on invested capital. more than $19 billion for Textron over the life of the program. Our investments in research and development continue to serve us Truly, this is an exciting time for Textron. The progress we’ve made well, as demand for commercial aircraft products flourished and throughout transformation, combined with the promise that lies orders were up at both Bell and Cessna. In addition, Bell’s ahead for our future growth, is indeed exhilarating. commercial helicopter deliveries were up 11 percent, with total 5 154020 2/28/06 12:17 PM Page 6 Customer Focus World-Class Processes Our customer commitment underpins our every action and our Textron Six Sigma (TSS) discipline of investing in innovative new customer solutions continues The breadth and depth of Textron Six Sigma Black Belts and Green to pay off. $2.5 billion – or more than 25 percent – of our 2005 sales Belts are driving both significant progress and true cultural change. came from new products and services developed or launched since Since launching the program in 2002, we’ve trained approximately our transformation began just five years ago. 800 Black Belts, and more than 350 certified Black Belts have been repatriated back into the Textron workforce – many of whom are in Our Customer Satisfaction and Loyalty Measurement System is critical positions driving key transformation efforts. We have also enabling our businesses to identify and execute against priority trained 3,000 Green Belts. Overall, Textron’s Six Sigma efforts customer loyalty drivers, strengthening our platform for growth. In generated more than 40 percent of our favorable cost performance 2005, both Cessna and Bell received top honors for customer this year. service and support in their respective categories from Pro Pilot magazine… Bell having done so for more than a decade running. In 2005, we also accelerated the development and implementation of Lean – a key element of Textron Six Sigma. One early yet powerful Market orientation and customer focus will continue to be top example of Lean in action in 2005 was a 15 percent improvement in priorities as we take a broader view of our capabilities – enhancing direct labor productivity in E-Z-GO’s fleet golf car production. growth leadership, talent, process, systems and organizational structures throughout the company. Supply Chain Management We’ve continued to enhance our Integrated Supply Chain (ISC) Talented People strategies and processes, particularly in helping to offset the impact Textron’s future growth is directly linked to our ability to harness and of rising material costs that have affected many of our markets. enhance the power and talent of our workforce. Our Global Technology Center (GTC) in Bangalore, India is already We’ve strengthened our talent programs and processes to bring contributing in a substantial way to the technology advancements added consistency and rigor. We are “building the bench” and at our businesses. For example, since its launch in mid-2004, the taking steps to ensure that we have the right people in the right jobs GTC has produced two winners of our prestigious