Press Release: Fitch Ratings
August 12, 2002
NEW YORK, NY -- Fitch Ratings affirms Textron Inc.'s (TXT) 'A' senior unsecured debt and bank facilities ratings,
'A-' preferred securities rating, and 'F1' commercial paper rating. Fitch also affirms Textron Financial Corp.'s
(TFC) 'A' senior unsecured debt and 'F1' commercial paper ratings. Due to the existence of a support agreement
and other factors, TFC's ratings are linked to TXT's ratings. The Rating Outlook remains Negative due to Textron's
exposure to the weak economy. Approximately $7.7 billion of debt and preferred securities are covered by Fitch's
actions.
The debt ratings reflect Textron Inc.'s (TXT) diverse portfolio and market-leading positions; lower debt levels
resulting from divestiture proceeds; solid liquidity position; and the ongoing cost reduction program. The ratings
also consider management's commitment to maintaining strong ratings and financial flexibility. Fitch also notes
the overall improvement in TXT's credit profile during the past ten months, including sequential improvement in
the recently released second quarter earnings results.
Concerns center upon the challenging economic environment, softer profits at Textron Financial Corporation, weak
LTM credit statistics for the rating category, declining backlog, and the continuing pressure on Bell Helicopter's
V-22 tilt-rotor program. Concerns about the V-22 are mitigated by the fact that flight testing resumed in the second
quarter and the program accounts for less than 5% of total TXT sales. Bell was recently helped by the recertification
of the H-1 upgrade program after a Nunn-McCurdy review.
The Negative Rating Outlook assumes continued pressure from the weak economy. The effects of the weak economy are
partially offset by the company's restructuring program, which could generate annual savings of approximately $250
million, and lower interest expense resulting from debt reduction and the improved interest rate environment. Future
success in divesting non-core businesses and monetizing the securities received in the Automotive Trim sale could
improve the company's position within the rating category. However, failure to achieve improved performance and
to raise financial metrics to levels more appropriate for the rating category could jeopardize the company's rating.
In addition, continued weakness at TFC could pressure TXT's ratings given the support agreement between TXT and
TFC.
TXT's liquidity as of June 30, 2002, excluding TFC, was $1.56 billion, consisting of $595 million in cash and $1.5
billion of credit facility availability, offset by $537 million in current maturities and short-term debt. TXT
expects to generate $325 million in free cash flow before restructuring expenses in 2002, and approximately $215
million after restructuring expenses. TXT has $500 million of long-term debt maturing in September, which Fitch
expects to be funded with cash on hand and cash from operations.
The weak second half of 2001, particularly the very difficult third quarter, materially affected credit protection
measures for the last twelve months, illustrating the weak economy's impact on TXT's cyclical business units. Note
that Fitch conservatively includes TXT's trust preferred securities in the calculations of debt and interest expense,
although Fitch acknowledges certain equity-like benefits that these securities add to TXT's capital structure.
TXT's Debt to EBITDA ratio, excluding TFC, was 2.8x for the twelve months ending March 31, 2002, compared to 2.6x
and 1.7x for 2001 and 2000, respectively. Interest coverage for the twelve months ending March 31, 2002, was 4.3x,
compared to 4.5x and 8.0x for 2001 and 2000, respectively. Based on conservative assumptions, Fitch's analysis
indicates that TXT should re-establish solid 'A' credit metrics in 2003 and 2004 as a result of restructuring benefits
and significant interest expense reductions.
Despite the deterioration in credit statistics, Fitch believes that TXT's overall credit profile has improved from
the time Fitch changed TXT's outlook to Negative in October 2001. At that time, TXT was coming off one of the weakest
quarters in its recent history, the sale of the Automotive Trim business was uncertain, the V-22 was grounded,
other Bell programs faced challenges, and the events of September 11th had accelerated the weakness in both the
economy and the business aviation market. Finally, debt, including the trust preferred securities, peaked at approximately
$3.3 billion at the end of 2001's third quarter.
In the past ten months, TXT resolved many of these issues. TXT completed the Automotive Trim transaction for more
than $1.2 billion, the V-22 resumed flight testing, the H-1 helicopter upgrade program was recertified, Cessna's
results have been positive in a difficult business jet market, and the benefits of the restructuring program are
beginning to affect financial results. Textron has also significantly reduced debt, and Fitch estimates debt at
the end of the third quarter will be $2.1-2.2 billion, a reduction of more than a third from the $3.3 billion peak.
Textron reported second quarter 2002 results on July 18. Excluding TFC, sales versus 2Q01 were flat, but segment
profit fell 25%. On a sequential basis, manufacturing revenues rose 18%, segment profit rose 48%, and margins improved
160 basis points. All segments delivered sequential revenue improvement, and three of four manufacturing segments
showed profit improvement. TXT maintained its earnings and free cash flow guidance for the year.
TFC's ratings reflect the company's financial and operating relationships with TXT, diversified funding strategy,
and good historical asset quality. The ratings also consider concentrations in certain business lines, notably
golf, aircraft, and timeshare financing. Rating concerns center on the upward trend in financial leverage in recent
years, projected GAP maturity mismatch over the next two years, and the successful exit from businesses identified
as being noncore. While asset quality has weakened from the unsustainable levels achieved as recently as 2001,
TFC's revenue stream is currently strong enough to manage through these problems.
The relationship between TFC and Textron is governed by a support agreement. The support agreement requires that
TXT maintain TFC's net worth and fixed charge coverage at $200 million and 1.25 times (x) or higher, respectively,
at all times. As TFC continues to grow, the minimum net worth provision of this agreement becomes less relevant.
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Contact:
Fitch Ratings
Textron Inc.
Craig Fraser, 212/908-0310,
Mark Oline, 312/368-2073, or
Daniel Weinberg, 212/908-0707.
Textron Financial
Peter J. Shimkus, 312/368-2063, or
Philip S. Walker, Jr., CFA 212/908-0624.
Media Relations:
James Jockle, 212/908-0547, New York.