| TEXTRON INC Item 1A Risk Factors Our business, financial condition and results of operations are subject to various risks, including those discussed below, which may affect the value of our securities |
| The risks discussed below are those that we believe are currently the most significant, although additional risks not presently known to us or that we currently deem less significant may also impact our business, financial condition and results of operations, perhaps materially |
| We may be unable to effectively mitigate pricing pressures |
| In some markets, particularly where we deliver component products and services to original equipment manufacturers, we face ongoing customer demands for price reductions, which are sometimes contractually obligated |
| In some cases, we are able to offset these reductions through technological advances or by lowering our cost base through improved operating and supply chain efficiencies |
| However, if we are unable to effectively mitigate future pricing pressures, our financial results of operations could be adversely affected |
| Delays in aircraft delivery schedules or cancellation of orders may adversely affect our financial results |
| Aircraft customers, including sellers of fractional share interests, may respond to weak economic conditions by delaying delivery of orders or canceling orders |
| Weakness in the economy may also result in fewer hours flown on existing aircraft and, consequently, lower demand for spare parts and maintenance |
| Weak economic conditions may also cause reduced demand for used business jets |
| We may accept used aircraft on trade-in that would be subject to fluctuations in the fair market value of the aircraft while in inventory |
| Reduced demand for new and used business jets, spare parts and maintenance can have an adverse effect on our financial results of operations |
| Developing new products and technologies entails significant risks and uncertainties |
| Delays or cost overruns in the development and acceptance of new products, or certification of new aircraft products and other products, could affect our financial results of operations |
| These delays could be caused by unanticipated technological hurdles, production changes to meet customer demands, coordination with joint venture partners or failure on the part of our suppliers to deliver components as agreed |
| We also could be adversely affected if the general efficacy of our research and development investments to develop products is less than expected |
| We have customer concentration with the US Government |
| During 2005, we derived approximately 18prca of our revenue from sales to a variety of US Government entities |
| Our ability to compete successfully for and retain this business is highly dependent on technical excellence, management proficiency, strategic alliances, cost-effective performance and the ability to recruit and retain key personnel |
| US Government programs are subject to uncertain future funding levels, which can 7 ______________________________________________________________________ result in the extension or termination of programs |
| Our business is also highly sensitive to changes in national and international priorities and US Government budgets |
| US Government contracts may be terminated at any time and may contain other unfavorable provisions |
| The US Government typically can terminate or modify any of its contracts with us either for its convenience or if we default by failing to perform under the terms of the applicable contract |
| A termination arising out of our default could expose us to liability and have an adverse effect on our ability to compete for future contracts and orders |
| If any of our contracts are terminated by the US Government, our backlog would be reduced by the expected value of the remaining terms of such contracts, and our financial condition and results of operations could be adversely affected |
| In addition, on those contracts for which we are teamed with others and are not the prime contractor, the US Government could terminate a prime contract under which we are a subcontractor, irrespective of the quality of our services as a subcontractor |
| In addition to unfavorable termination provisions, our US Government contracts contain provisions that allow the US Government to unilaterally suspend us from receiving new contracts pending resolution of alleged violations of procurement laws or regulations, reduce the value of existing contracts, issue modifications to a contract, and control and potentially prohibit the export of our products, services and associated materials |
| Cost overruns on US Government contracts could subject us to losses or adversely affect our future business |
| Contract and program accounting require judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues |
| Due to the size and nature of many of our contracts, the estimation of total revenues and cost at completion is complicated and subject to many variables |
| Assumptions have to be made regarding the length of time to complete the contract because costs include expected increases in wages and prices for materials |
| Incentives or penalties related to performance on contracts are considered in estimating sales and profit rates and are recorded when there is sufficient information for us to assess anticipated performance |
| Estimates of award fees are also used in estimating sales and profit rates based on actual and anticipated awards |
| Because of the significance of the estimates described above, it is likely that different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change |
| Changes in underlying assumptions, circumstances or estimates may adversely affect our future financial results of operations |
| Under fixed-price contracts, we receive a fixed price irrespective of the actual costs we incur, and consequently, any costs in excess of the fixed price are absorbed by us |
| Under time and materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses |
| Under cost reimbursement contracts, which are subject to a contract-ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based |
| However, if our costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we may not be able to obtain reimbursement for all such costs |
| Under each type of contract, if we are unable to control costs we incur in performing under the contract, our financial condition and results of operations could be adversely affected |
| Cost overruns also may adversely affect our ability to sustain existing programs and obtain future contract awards |
| We may make acquisitions that increase the risks of our business |
| We may enter into acquisitions in the future in an effort to enhance shareholder value |
| Acquisitions involve a certain amount of risks and uncertainties that could result in our not achieving expected benefits |
| Such risks include difficulties in integrating newly acquired businesses and operations in an efficient and cost-effective manner; challenges in achieving expected strategic objectives, cost savings and other benefits; the risk that the acquired businesses’ markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in those markets; the risk that we pay a purchase price that exceeds what the future results of operations would have merited; the potential loss of key employees of the acquired businesses; and the risk of diverting the attention of senior management from our existing operations |
| Our operations could be adversely affected by interruptions of production that are beyond our control |
| Our business and financial results may be affected by certain events that we cannot anticipate or that are beyond our control, such as natural disasters and national emergencies, that could curtail production at our facilities and cause delayed deliveries and cancelled orders |
| In addition, we purchase components and raw materials from numerous suppliers, and even if our facilities are not directly affected by such events, we could be affected by interruptions of production at such suppliers |
| Such suppliers may be less likely than our own facilities to be able to quickly recover from such events, and may be subject to additional risks such as financial problems that limit their ability to conduct their operations |
| 8 ______________________________________________________________________ Our business could be adversely affected by strikes or work stoppages and other labor issues |
| Approximately 18cmam500 of our employees are unionized, which represented approximately 40prca of our employees at December 31, 2005, including employees of the discontinued business of Textron Fastening Systems |
| As a result, we may experience work stoppages, which could negatively impact our ability to manufacture our products on a timely basis, resulting in strain on our relationships with our customers and a loss of revenues |
| In addition, the presence of unions may limit our flexibility in responding to competitive pressures in the marketplace, which could have an adverse effect on our financial results of operations |
| In addition to our workforce, the workforces of many of our customers and suppliers are represented by labor unions |
| Work stoppages or strikes at the plants of our key customers could result in delayed or cancelled orders for our products |
| Work stoppages and strikes at the plants of our key suppliers could disrupt our manufacturing processes |
| Any of these results could adversely affect our financial results of operations |
| Our Textron Finance borrowing group’s business is dependent on its continuing access to the capital markets |
| Our financings are conducted through two borrowing groups, Textron Finance and Textron Manufacturing |
| Textron Finance consists of Textron Financial Corporation and its subsidiaries, which are the entities through which we operate in the Finance segment |
| Textron Finance relies on its access to the capital markets to fund asset growth, fund operations and meet debt obligations and other commitments |
| Textron Finance raises funds through commercial paper borrowings, issuances of medium-term notes and other term debt securities, and syndication and securitization of receivables |
| Additional liquidity is provided to Textron Finance through bank lines of credit |
| If the credit ratings of Textron Finance were to be lowered, it might face higher borrowing costs, a disruption of its access to the capital markets or both |
| Textron Finance could also lose access to financing for other reasons, such as a general disruption of the capital markets |
| Any disruption of Textron Finance’s access to the capital markets could adversely affect its business and our profitability |
| If Textron Finance is unable to maintain portfolio credit quality, our financial performance could be adversely affected |
| A key determinant of financial performance at Textron Finance will be its ability to maintain the quality of loans, leases and other credit products in its finance asset portfolios |
| Portfolio quality may adversely be affected by several factors, including finance receivable underwriting procedures, collateral quality, geographic or industry concentrations, or general economic downturns |
| Any inability by Textron Finance to successfully collect its finance receivable portfolio and to resolve problem accounts may adversely affect our cash flow, profitability, and financial condition |
| We are subject to legal proceedings and other claims |
| We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to private sector transactions; government contracts; production partners; product liability; employment; and environmental contamination |
| Under federal government procurement regulations, certain claims brought by the US Government could result in our being suspended or debarred from US Government contracting for a period of time |
| On the basis of information presently available, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations |
| However, litigation is inherently unpredictable, and we could incur judgments or enter into settlements for current or future claims that could adversely affect our financial position or our results of operations in any particular period |
| The levels of our reserves are subject to many uncertainties and may not be adequate to cover writedowns or losses |
| In addition to reserves at Textron Finance, we establish reserves in our manufacturing segments to cover uncollectible accounts receivable, excess or obsolete inventory, fair market value writedowns on used aircraft and golf cars, recall campaigns, warranty costs and litigation |
| These reserves are subject to adjustment from time to time depending on actual experience and are subject to many uncertainties, including bankruptcy or other financial problems at key customers |
| In the case of litigation matters for which reserves have not been established because the loss is not deemed probable, it is reasonably possible such matters could be decided against us and could require us to pay damages or make other expenditures in amounts that are not presently estimable |
| The effect on our financial results of many of these factors depends in some cases on our ability to obtain insurance covering potential losses at reasonable rates |
| 9 ______________________________________________________________________ Currency, raw material price and interest rate fluctuations may adversely affect our results |
| We are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates, raw material prices and interest rates |
| We monitor and manage these exposures as an integral part of our overall risk management program |
| In some cases, we purchase derivatives or enter into contracts to insulate our financial results of operations from these fluctuations |
| Nevertheless, changes in currency exchange rates, raw material prices and interest rates can have substantial adverse effects on our financial results of operations |
| The increasing costs of certain employee and retiree benefits could adversely affect our results |
| Our earnings and cash flow may be impacted by the amount of income or expense we expend or record for employee benefit plans |
| This is particularly true for our pension plans, which are dependent on actual plan asset returns and factors used to determine the value and current costs of plan benefit obligations |
| In addition, medical costs are rising at a rate faster than the general inflation rate |
| Continued medical cost inflation in excess of the general inflation rate increases the risk that we will not be able to mitigate the rising costs of medical benefits |
| Increases to the costs of pension and medical benefits could have an adverse effect on our financial results of operations |
| Unanticipated changes in Textron’s tax rates or exposure to additional income tax liabilities could affect our profitability |
| We are subject to income taxes in both the United States and various foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of income among these different jurisdictions |
| Our effective tax rates could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or in tax laws, which could affect our profitability |
| In particular, the carrying value of deferred tax assets is dependent on our ability to generate future taxable income |
| In addition, the amount of income taxes we pay is subject to audits in various jurisdictions, and a material assessment by a tax authority could affect our profitability |