Nov 19 - Fitch Ratings has affirmed the Issuer Default Rating (IDR) and
long-term debt ratings for Textron Inc. (TXT) and Textron Financial
Corporation (TFC) at 'BBB-'. The Rating Outlook for both is Stable. In
addition, TXT's short-term ratings have been affirmed at 'F3'. A full rating
list follows at the end of this release.
TXT's ratings reflect the company's well-established market positions in its
aerospace, defense and industrial businesses; improved liquidity; positive
annual free cash flow (FCF); and improving risk profile at TFC which continues
to exit its non-captive portfolio. Debt/EBITDA at TXT's manufacturing businesses
declined to 1.9x at Sept. 29, 2012 from 2.1x at the end of 2011 and nearly 2.4x
at the end of 2010. Leverage and other credit metrics could improve further as
performance at TXT's manufacturing businesses improves over the long term.
The possibility of a positive rating action is reduced in the near term by
concerns including pressure on U.S. defense spending, which is an important part
of the Bell and Textron Systems businesses, low unit deliveries and margins at
Cessna, execution problems on several unmanned aerial programs at Textron
Systems, and expectations for weaker demand in Kautex's automotive markets in
Europe and Asia. These concerns are exacerbated by uncertainty surrounding the
fiscal cliff and the effect of possible sequestration on defense spending.
If the U.S. addresses these fiscal issues effectively in the near term,
visibility could improve in TXT's aerospace and defense related businesses. The
possible favorable impact of improved visibility, combined with TXT's priority
for debt reduction (approximately $500 million is scheduled to mature in the
first half of 2013), could potentially lead to a positive rating action in the
next few quarters.
Fitch estimates FCF after dividends could improve to a range of $400 million -
$500 million in 2012 compared to $311 million in 2011. The increase largely
reflects substantially lower pension contributions. FCF was slightly negative
through the first nine months of 2012, reflecting lower advance payments on
military contracts related to timing, and higher used-business-jet inventory due
to trade-ins. FCF could be strong in the fourth quarter and will depend on
business jet deliveries, which can be seasonal, and on an improvement in the
pace of advance payments on military contracts. FCF could be lower than expected
if the tepid recovery in demand for business jets limits deliveries.
TXT contributed $642 million to its pension plans in 2011 and $181 million
through the first nine months of 2012. The company plans to contribute a total
of $200 million in 2012. At the end of 2011, the pension deficit was $1.3
billion (79% funded). TXT estimates the unfunded position will be stable at the
end of 2012 as contributions offset the negative impact of a lower discount
Other uses of cash include product development expenditures at Cessna and Bell,
and the possible resumption of higher dividend payments which have been low for
several years while TXT addressed challenges at TFC's non-captive portfolio.
Also, acquisition activity has been modest for several years but has the
potential to increase.
At Cessna, deliveries of business jets are up modestly from the previous year,
but the business jet recovery has been slower than anticipated. Demand is
weakest in the light end of the business jet market where Cessna's deliveries
are concentrated, and the market could be weak through much of 2013. As a
result, Cessna's backlog has declined to $1.3 billion, increasing the risk that
Cessna could cut production if orders weaken further. Margins are low due to
weak sales, pricing pressure, and product mix, including recent sales of used
jets, which typically generate little profit.
Helicopter sales at Bell are benefiting from a recovery in demand for commercial
helicopters, with segment revenue up more than 20% through the first three
quarters of 2012. Concerns about military spending are mitigated by Bell's
position on the H-1 and V-22 aircraft programs where deliveries should be
generally stable through 2014. Also, Bell has a substantial installed base which
could benefit from aftermarket spending and modernization programs.
At Textron Systems, results are likely to be negatively affected by delays in
certain programs and by execution challenges on unmanned aerial programs that
could depress margins for several quarters before they are fully resolved.
However, Textron Systems provides a broad mix of products that reduces exposure
to single programs.
TXT's Industrial segment performance has improved modestly during 2012, but the
automotive fuel systems business could be challenged in the near term by lower
automotive production in Europe and lower sales by Japanese OEM customers in
China. The Industrial segment's golf and turf markets have begun to improve;
construction remains weak but could potentially benefit from the beginning of a
recovery in residential construction.
At Sept. 29, 2012, TXT's liquidity included manufacturing cash of $1.2 billion
and a $1 billion four-year bank facility that expires in 2015. The facility
includes a maximum debt to capitalization covenant of 65% and a requirement that
TFC's leverage not exceed 9:1. Fitch calculates these covenants were well within
compliance. Manufacturing cash balances could increase by the end of 2012 if TXT
generates strong seasonal FCF in the fourth quarter.
Liquidity is offset by scheduled debt maturities at TXT's manufacturing
business, including EUR239 million of notes due in March 2013 and $215 million
face value of convertible notes due in May, including debt discount. The amount
of convertible notes excludes approximately $214 million conversion value of the
notes which TXT may pay in cash or shares. There are no other material debt
maturities owed by the manufacturing business until 2015.
Liquidity is also affected by TXT's support for TFC through capital
contributions and intercompany loans. However, TFC's liquidity has been
sufficient to pay dividends to TXT in excess of capital contributions. TFC has
also repaid much of the intercompany loans during 2012 previously borrowed from
TXT. Fitch expects future support for TXT, net of dividends, to be minimal
although loans may be required temporarily in 2013 to help fund TFC's scheduled
TFC's non-captive portfolio was less than $500 million at Sept. 30, 2012. Fitch
views positively the progress TFC has made in liquidating the non-captive
portfolio, but believes risks remain. Asset quality for the first nine months of
2012 improved as non-accrual finance receivables declined 55% from Dec. 31,
2011. However, golf mortgage receivables, which typically have 20+ year
maturities, continue to account for the largest portion of the portfolio.
Cash collections on liquidated receivables have supported a reduction in debt.
However, if cash generated from the liquidation of TFC's non-captive portfolio
is less than expected as a result of higher credit losses or discounting, TXT
would need to provide further support to TFC. TFC's leverage was 3.4x at Sept.
30, 2012, as estimated by Fitch, compared to 4.5x at the end of 2011 and 4.8x at
the end of 2010.
Fitch believes the amount and timing of some of TFC's debt maturities and asset
liquidations in 2013 could be mismatched and expects TFC may borrow against the
intercompany facility to repay a portion of its 2013 debt maturities. However,
Fitch expects the impact on TXT will be limited as TXT has sufficient cash
balances and operating cash flow to support TFC at its current size. Fitch's
concerns about liquidity should decline as the non-captive portfolio shrinks
TFC's captive portfolio totaled $1.7 billion at Sept. 30, 2012, and consisted
primarily of aviation receivables. Non-accrual accounts were 5.5% of total
captive receivables at Sept. 30, 2012 compared to 7.0% at the end of fiscal
2011. Although the level of non-accrual accounts is relatively high, potential
concerns about credit quality in the captive portfolio are mitigated by an
improving trend in the level of accruals and TFC's expertise managing aviation
Fitch could take a positive rating action if Cessna's business jet market
improves materially, TXT adjusts effectively to lower defense-related revenue at
Bell and Textron Systems, net pension liabilities are reduced, and TFC continues
to liquidate the non-captive portfolio successfully. Also, the repayment of
approximately $500 million of near-term debt maturities in 2013 would further
reduce leverage and support a positive rating action. The ratings could be
negatively affected if TFC requires material support from TXT in excess of
temporary support anticipated by Fitch during 2013, revenue and margins at the
manufacturing businesses are impaired by an economic downturn, or spending for
acquisitions or other discretionary uses significantly reduces TXT's liquidity.
TFC's ratings are equalized with TXT's ratings as Fitch believes TFC is a core
subsidiary to its parent as illustrated through a support agreement and other
factors. The support agreement requires TXT to maintain full ownership, minimum
net worth of $200 million and fixed-charge coverage of 1.25x. Other factors
supporting the rating linkage include a shared corporate identity, common
management, and the extension of intercompany loans to TFC.
Fitch has affirmed the ratings for TXT and TFC as follows:
--IDR at 'BBB-';
--Senior unsecured bank facilities at 'BBB-';
--Senior unsecured debt at 'BBB-';
--Short-term IDR at 'F3';
--Commercial paper at 'F3'.
--IDR at 'BBB-';
--Senior unsecured debt at 'BBB-';
--Junior subordinated notes at 'BB'.
Approximately $4.1 billion of debt outstanding at Sept. 30, 2012 is affected by
the ratings, including nearly $2.4 billion at TXT and $1.7 billion at TFC.