DBRS Rates Textron Inc. and Textron Financial Corporation at A (low) and R-1 (low)

Dominion Bond Rating Service (“DBRS”) has today assigned ratings to Textron Inc. (“Textron” or the “Company”) and Textron Financial Corporation (“Textron Finance”). The trends are Stable. Textron Finance’s ratings are supported by a support agreement from its 100% owner, Textron.

The ratings are underpinned by Textron’s leading market position in several of its major business lines, robust financial profile, and high barriers to entry. Textron is one of the pre-eminent manufacturers of business jets, single engine aircraft, helicopters (commercial and military), defence equipment, and other industrial goods. This position is reinforced with the Company’s focus on developing leading edge technology to manufacture innovative products, and leveraging the Cessna and Bell brand names. Contributions from financial services and parts and services help to reduce earnings volatility. In addition, Textron has very good financial flexibility, which enables it to manage challenging business conditions and cyclical downturns, and to invest organically.

Textron has benefited from two major trends in recent years. First, strong global economic expansion has bolstered demand for business jets and helicopters. Also, structural industry changes favour business jets over regional jets due to demand for efficiency, privacy, and safety. Second, the U.S. Department of Defense has increased its spending on military equipment given increasing global political tension. The U.S. Government accounts for 18% of Textron’s total revenue.

In addition, from an operational standpoint, Textron has improved materially with its transformation strategy that was implemented in 2001. This shift in strategy has aimed to create common processes across the enterprise with a singular purpose and to realign the business portfolio, divesting those that were underperforming or didn’t fit long-term strategic objectives. The recent sale of the fastener business is an example. DBRS believes that the restructuring program has yielded improved operating efficiencies due to consolidating facilities, rationalizing product lines, and divesting non-core assets. Still, more opportunities exist to gain efficiencies.

Despite these positive factors, the Company’s growth was constrained by the stagnant results of the industrial segment, which includes disparate businesses that in some cases still generate unsatisfactory profitability. This is underscored by DBRS, as this segment represents nearly a third of revenue and there are prospects for only modest profitability improvement in the near term. In addition, Textron remains selectively acquisitive, which carries integration risks, but a disciplined approach has mitigated adverse results. Lastly, the high cyclicality of Textron’s overall business tends to limit the Company’s rating upside.