Fitch Affirms Textron's Ratings at 'BBB-'; Outlook Stable
CHICAGO -- October 31, 2013
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 is Stable. TXT's short-term ratings have been
affirmed at 'F3'. A full rating list follows at the end of this release.
Key Rating Drivers:
TXT's ratings incorporate well-established market positions in the company's
aerospace, defense and industrial businesses; significant progress toward
exiting TFC's non-captive portfolio; adequate liquidity; and disciplined cash
deployment. Leverage is low for the current ratings, with debt/EBITDA at TXT's
manufacturing businesses of 1.8x at Sept. 28, 2013, unchanged compared with
the end of 2012. Other credit measures, including free cash flow (FCF) and
operating margins, are not as strong but could potentially improve and lead to
a positive rating action. However, TXT faces a number of near-term challenges
that constrain its financial performance. As these issues are resolved, the
company's FCF and financial flexibility should strengthen, but the timing will
be subject to conditions in the business jet market and TXT's realization of
ongoing operating improvements at Bell and Textron Systems.
Rating concerns include the lack of a meaningful recovery in industry demand
for business jets, particularly at the light end of the market where TXT's
Cessna business is concentrated. As a result, Cessna currently provides little
support to TXT's overall profitability and cash flow. Cessna's unit deliveries
and revenue appear likely to decline in 2013, with a return to modestly higher
industry demand possible in 2014.
Even if the market starts to recover, Cessna's volumes likely will remain
below peak levels for several years, partly reflecting the trend toward larger
jets. During 2013, Cessna reduced production to match lower demand but
reported a loss through the first three quarters. The fourth quarter could
improve, based on normal seasonality and initial deliveries of the new
Citation M2 and upgraded Sovereign business jets, which may return Cessna
close to break-even profitability for the full year if higher deliveries are
A near-term rating concern is manufacturing FCF which could be minimal for all
of 2013 compared to FCF in excess of $300 million during each of the past
several years. Weak FCF includes the impact of higher inventory at Cessna and
Bell due to a ramp-up of production for certain aircraft and lower than
expected demand at Cessna. Some of the increase in inventory is expected to
reverse due to the timing of deliveries which could increase in the fourth
quarter. Also, the conversion to a new enterprise resource planning (ERP)
system at Bell created delays in OEM and aftermarket parts shipments which are
gradually being caught up. Fitch estimates FCF will recover in 2014 toward
historical levels, or possibly higher, as a result of further inventory
reductions and stronger operating margins, but actual cash flow will be
sensitive to end-market conditions.
TXT plans to contribute $200 million to its pension plans in 2013, down from
$405 million in 2012 and $642 million in 2011. An increase in discount rates
during 2013 could potentially reduce the net pension liability as well as
future contributions. At the end of 2012, the pension deficit was $1.3 billion
(81% funded). Other uses of cash include capital expenditures which TXT
estimates at approximately $500 million in 2013, slightly higher than in 2012.
Acquisitions could potentially increase following several years of limited
transactions during which TXT has focused on product development, reduced
TFC's non-captive portfolio, and addressed operating challenges at Cessna.
At Sept. 28, 2013, liquidity at the manufacturing business included cash of
$444 million and a $1 billion five-year bank facility that expires in 2018 and
is available to back commercial paper. 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
at the end of the third quarter. Liquidity was offset by $104 million of debt
due within one year. TXT's long-term debt is well distributed; the earliest
maturity is in 2015 and maturities in any single year do not exceed $400
million. Liquidity can be affected by TXT's support for TFC through capital
contributions or intercompany loans, but these have been immaterial in 2013.
Fitch expects future support for TFC will be minimal.
At the manufacturing business, Bell's revenue and profitability have been
temporarily reduced by the implementation of a new ERP system earlier in 2013
and by production delays ahead of a new five-year UAW labor contract that was
signed in October 2013. The negative impact of these developments will decline
gradually but will not be fully eliminated until 2014. Stronger demand for
commercial helicopters, including new product introductions, mitigates
concerns about military revenue. Deliveries of the H-1 and V-22 military
aircraft programs should be generally stable through 2014, and a second
multi-year contract to deliver 99 V-22 units starting in late 2014 was
recently awarded. In addition, Bell has a substantial installed base which
could benefit from aftermarket spending and modernization programs.
Textron Systems' revenue has increased modestly, reflecting favorable volumes
in programs for unmanned air systems and precision munitions. The business
provides a broad mix of products that reduces its exposure to single programs.
Revenue at Textron Systems could be flat to slightly higher during the next
several years as foreign sales offset reduced defense spending. Margins have
been pressured in recent periods by delays on a UAS retrofit development
program and by execution problems on a fee-for-service UAS contract which is
effectively being performed at a break-even level.
Textron Financial Corporation:
The equalization of TFC's ratings with those of TXT reflects Fitch's view that
TFC is a core subsidiary to its parent. The rating linkages reflect the strong
operational and financial linkages between the two companies and the strategic
importance of TFC to its parent as illustrated through a support agreement.
The support agreement requires TXT to maintain full ownership in TFC and
ensure TFC has a 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
While non-captive receivables remain in the portfolio, TFC is prudently
managing the timely liquidation and sale of the golf mortgage and structured
assets. The non-captive portfolio totaled $210 million at Sept. 30, 2013,
compared to $370 million at Dec. 31, 2012. Fitch views positively the progress
TFC has made in liquidating the non-captive portfolio, and believes its
liquidation has significantly reduced credit risk in the portfolio. Asset
quality for the first nine months of 2013 improved as non-accrual finance
receivables declined 34.3% from Dec. 31, 2012. The structured portfolio, which
consists primarily of rail car leases, is the largest portion of the
non-captive segment. Fitch believes these leases have lower credit risk given
the strong credit quality of the lessee.
Cash collections on liquidated receivables and repayments of receivables have
continued to reduce TFC's debt balance. Fitch believes TFC has sufficient
liquidity to repay its outstanding debt obligations; however, if cash
generated from operations and receivable repayments and liquidations are less
than expected, TXT would need to provide further support to TFC. TFC's
leverage was 1.9x at Sept. 30, 2013, as estimated by Fitch, compared to 2.9x
at the end of 2012 and 4.5x at the end of 2011.
The Finance group's captive portfolio totaled $1,379 million, including $825
million at TFC as of Sept. 30, 2013, and consisted primarily of aviation
receivables. Non-accrual accounts were 10.7% of total captive receivables at
Sept. 30, 2013 compared to 8.3% at the end of fiscal 2012, due to a decline in
the receivables balance. Although the level of non-accrual accounts is
relatively high, potential concerns about credit quality in the captive
portfolio are mitigated by TFC's expertise managing aviation receivables.
Fitch could take a positive rating action if FCF recovers to consistently
stronger levels, Cessna's business jet market improves materially, TXT adjusts
effectively to lower levels of U.S. defense spending, and net pension
liabilities are reduced.
TFC's Stable Rating Outlook is linked to that of its parent. Positive ratings
will be limited by Fitch's view of TXT's credit profile. Fitch cannot envision
a scenario where the captive would be rated higher than its parent.
TXT's ratings could be negatively affected if FCF remains weak due to working
capital requirements or weak demand at Cessna, margins are negatively affected
by operating challenges, or liquidity is reduced by spending for acquisitions
or other discretionary uses. Any future material, unexpected support for TFC
would be a negative consideration, but this concern is much smaller than in
the past due to the significant reduction of TFC's non-captive portfolio in
A negative rating action at TFC could be driven by a change in the perceived
relationship between the parent and subsidiary, such as if Fitch believed that
TFC had become less core to the parent's strategic operations or adequate
financial support was not provided in a time of crisis. Additionally,
deterioration in asset quality, the generation of consistent operating losses,
a material increase in leverage beyond management's target of 7:1, and/or a
reduction in the company's liquidity profile could also yield negative rating
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'.
Textron Financial Corporation
--IDR at 'BBB-';
--Senior unsecured debt at 'BBB-';
--Junior subordinated notes at 'BB'.
At Sept. 28, 2013, there was approximately $3.3 billion of debt outstanding
including $2 billion at the manufacturing business and $1.3 billion in the
Finance group of which $856 million was at TFC.
Additional information is available at www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);
--'Finance and Leasing Companies Criteria' (Dec. 11, 2012);
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Rating FI Subsidiaries and Holding Companies
Global Financial Institutions Rating Criteria
Finance and Leasing Companies Criteria
Parent and Subsidiary Rating Linkage
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Eric Ause, +1-312-606-2302
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Craig Fraser, +1-212-908-0310
Mark Oline, +1-312-368-2073
Textron Financial Corporation
Katherine Hughes, +1-312-368-3123
Brendan Sheehy, +1-212-908-9138
Nathan Flanders, +1-212-908-0827
Brian Bertsch, +1-212-908-0549
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