DBRS Confirms Textron Inc. at A (low) and R-1 (low)

DBRS has today confirmed the Senior Debt ratings for Textron Inc. (Textron or the Company), Textron Financial Corporation (TFC) and Textron Financial Canada Funding Corp. at A (low) and their Commercial Paper at R-1 (low). The trends remain Stable. The A (low) rating primarily reflects Textron’s strong market positions in its core businesses and revenue diversification, including business jets, helicopters, Defense and Intelligence, various Industrial segments and financial services. These factors help moderate the impact of industry cyclicality. The Commercial Paper rating is supported mainly by the Company’s solid liquidity position and consistent free cash flow generation.

Textron’s generated strong profitability over the past year, with growth in earnings and cash flow driven primarily by its Cessna Aircraft Company (Cessna) business jet division (61% of manufacturing operating earnings in 2007). Robust demand translated into higher prices and shipments, with a full order book through 2008 and significant backlog of $14.5 billion at March 31, 2008. International customers have accounted for an increasingly larger share of new orders, which reduces the reliance on the United States for future growth. With respect to Textron’s other manufacturing business segments, earnings modestly improved in 2007 but margins remain well below those at Cessna. The Company’s Bell helicopter (Bell) business notably benefited from increased U.S. government business (e.g., the V-22 tiltrotor), but tight capacity limited further growth.

Textron is expected to continue the trend of earnings growth over the near term. Strong Cessna results, mainly from rising volumes and prices, are likely to remain the primary contributor to earnings growth as global business jet demand is showing limited signs of easing.

Generally stable earnings are expected from the Company’s remaining divisions. While lower earnings are expected from TFC, following the recently announced guidance revision for 2008, the impact is not sufficient to warrant a rating action. However, rising costs, including raw materials, components and research and development to support new products (e.g., the recently unveiled Cessna Citation Columbus), will limit margin improvement. Weaker-than-expected U.S. economic conditions and higher raw material costs remain key risks to earnings, particularly those of its industrial division, but overall profitability should remain strong over the near to medium term.

Textron has consistently produced free cash flow (before working capital) since 2002, which provides financial flexibility. Free cash flow has been used mainly toward share repurchases and the $1.1 billion acquisition in 2007 of United Industrial Corporation (UIC), which operated through its wholly owned, subsidiary AAI Corporation (AAI). However, strong cash flow, large cash balances and continuing earnings growth limited the impact on the Company’s balance sheet. Debt-to-capital (adjusted) has remained in the low 40% range, debt-to-EBITDA is below 2.0 times, and cash flow-to-debt is strong, at more than 0.5 times. Textron’s balance sheet is expected to remain relatively stable, with modest improvement in its key credit metrics. The Company remains exposed to cyclical industry demand in most areas of its business, but downside risk to the rating is viewed as limited. DBRS would consider a positive rating action with future reductions in debt combined with favourable operating performance.

Note:
All figures are in U.S. dollars unless otherwise noted.