Fitch Affirms Textron & Textron Financial's Ratings; Outlook Still Positive

Business Wire, Jan 26, 2007

NEW YORK & CHICAGO -- Fitch has affirmed the following ratings for Textron Inc. (NYSE:TXT):

-- Issuer Default Rating (IDR) 'A-';

-- Senior unsecured debt 'A-';

-- Bank facilities 'A-';

-- Preferred securities 'BBB ';

-- Commercial Paper (CP) programs 'F2'.

Fitch has also affirmed the following ratings for Textron Financial Corporation (TFC):

-- IDR 'A-';

-- Senior unsecured debt 'A-';

-- CP programs 'F2'.

The Rating Outlook is Positive for all of TXT's and TFC's debt and preferred securities, approximately $8.5 billion. Due to the existence of the support agreement and other factors, TFC's ratings are linked to TXT's ratings.

Fitch's affirmation of TXT's ratings reflect the company's diverse portfolio; competitive positions at Cessna and Bell; high defense spending levels; solid liquidity position; and pension situation. Concerns center on the performance of the H-1 and Armed Reconnaissance Helicopter (ARH) programs in the Bell segment; production ramp-up difficulties in Bell's commercial business; lower margins at Bell; high share repurchase spending; the Industrial segment's margin levels and growth rates; higher leverage targets at TFC; and the cyclical nature of some of TXT's business units.

Fitch revised TXT's Rating Outlook to Positive in late 2005, and Fitch believes many of the factors driving the Outlook revision remain in place. The Positive Outlook is supported by the strong performance and outlook at Cessna, the long-term growth potential at Bell due to positions on several large defense programs, strong operating performance at TFC, and the likelihood of higher operating margins across all segments in 2007. However, additional operating problems at Bell could lead Fitch to revise the Rating Outlook to Stable.

Cessna's performance in the past two years reflects the strong overall business jet market and Cessna's competitive position within the market. The segment's revenues rose 19% in 2006 and operating margins increased by 240 basis points to 15.5%. Cessna's business jet deliveries in 2006 rose 19% to approximately 300 aircraft, and deliveries should rise approximately 25% in 2007 to 375 aircraft, although there will be a mix shift to smaller jets. The company received 496 orders in 2006, and production in 2007 is sold out. Backlog at the end of 2006 rose to $8.5 billion from $6.3 billion at the end of 2005. Drivers of the strong market and Cessna's performance include healthy corporate profits, increased use of jet cards, replacement demand, increasing demand outside North America, and the introduction of new aircraft models. Risks to Cessna's outlook would include lower economic growth, supply chain constraints, potentially higher Federal Aviation Administration (FAA) user fees in the United States, continued losses at fractional jet operators, and new entrants.

Though Fitch believes Textron's Bell segment has a potentially strong long-term outlook due to several large defense programs (H-1, ARH, V-22, VH-71, and the Armored Security Vehicle) and rising commercial helicopter production, execution has been weak in the past year. Bell's revenues rose 18% in 2006 and 23% in 2005. Operating margins were expected to decline in 2006 because of development spending on new programs, but unexpected cost growth caused margins to fall a higher-than-expected 5.5 points to 7.3%, including charges for the H-1 and ARH programs. Bell is in a potential loss position on the first two lots of the ARH program because of design changes, and it is negotiating with its customer to resolve this risk. Failure to reach a resolution could lead to a material charge, which could result in a revision of the Rating Outlook.

As of Dec. 30, 2006, excluding TFC, TXT's liquidity position was approximately $1.85 billion, consisting of $733 million in cash and $1.2 billion in credit facilities, offset by $80 million of short-term debt and current maturities. Textron's free cash flow (cash from operations less capital expenditures) in 2006 was $691 million, which was better than expected due to the timing of some business that had been expected in early 2007. TXT's cash deployment in 2006 was focused on share repurchases and acquisitions, with approximately $750 million spent on share repurchases and approximately $350 million spent on acquisitions in the defense area. Debt reduction was $134 million in 2006, partially offsetting debt taken on at the end of 2005 to fund the repatriation of foreign earnings. Fitch's ratings incorporate expectations for continued share repurchases and acquisitions in 2007.

TXT's credit statistics improved in 2006 largely due to the strong performance at Cessna. Fitch estimates that TXT's leverage (total gross debt to EBITDA) for 2006, excluding TFC, was 1.6 times (x), compared with 1.9x for 2005. Fitch expects TXT's leverage to continue improving in 2007 as a result of higher revenues and margin improvement. Fitch expects debt levels to be flat in 2007.

TFC's operating performance continues its positive trend as its refined business model is producing good results. Profitability measures were driven in 2006 by good asset quality performance, portfolio growth, and improved operating efficiency. Profitability is expected to continue its positive trend but could face margin pressure and increased credit costs from current low levels.