Fitch Affirms Textron's Ratings at 'BBB-'; Outlook Stable

  Fitch Affirms Textron's Ratings at 'BBB-'; Outlook Stable

Business Wire

NEW YORK -- November 19, 2012

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 rate.

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 debt maturities.

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 further.

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
receivables.

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:

TXT

--IDR at 'BBB-';

--Senior unsecured bank facilities at 'BBB-';

--Senior unsecured debt at 'BBB-';

--Short-term IDR at 'F3';

--Commercial paper at 'F3'.

TFC

--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.

Additional information is available at www.fitchratings.com'. The ratings
above were unsolicited and have been provided by Fitch as a service to
investors.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 8, 2012;

--'Parent and Subsidiary Rating Linkage', Aug. 8, 2012;

--'Global Financial Institutions Rating Criteria', Aug. 15, 2012;

--'Finance and Leasing Companies Criteria', Dec. 12, 2011;

--'Rating FI Subsidiaries and Holding Companies', Aug. 10, 2012;

--'Treatment of Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis', Dec. 15, 2011.

Applicable Criteria and Related Research:

Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656516

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=659834

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

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Contact:

Fitch Ratings
Textron Inc.
Primary Analyst
Eric Ause
Senior Director
+1-312-606-2302
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
Mark Oline
Managing Director
+1-312-368-2073
or
Textron Financial Corporation
Primary Analyst
Katherine Hughes
Associate Director
+1-312-368-3123
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Paul Ryndak
Director
+1-312-368-3194
or
Committee Chairperson
Meghan Neenan, CFA
Senior Director
+1-212-908-9121
or
Media Relations
Brian Bertsch
+1-212-908-0549
brian.bertsch@fitchratings.com
 
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