Growing Opportunity Textron Systems Precision Engagement Strategy - Overwatch Acquisition New York City Investor Meeting October 26, 2006 1
Forward-Looking Information Certain statements in today's discussion will be forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements. Please see the full disclosure of risk factors and discussion at the end of this presentation. 2
Ted R. French EVP & Chief Financial Officer 3
Textron s Transformation Strategy VISION: To be the premier multi-industry industry company, recognized for our network of powerful brands, world-class enterprise processes and talented people NETWORKED ENTERPRISE A Simpler, More Focused Portfolio of Leading, Branded Businesses in Attractive Industries Enterprise Management How We Manage What We Own Portfolio Management What We Own 4
Portfolio Management 2000 Revenue High 0% INDUSTRY ATTRACTIVENESS Med 6% 15% 61% 3% 15% Low Low Med BUSINESS STRENGTH High 5
Divestitures since 2000 Year Company / Business Name Year Company / Business Name 2006 TFS - Detroit Heading (49% interest) 2003 Camelin 2006 TFS - PFPD 2003 Omniquip - TRAK 2006 Textron Fastening Systems 2003 E-Z-Go branch --Myrtle Beach 2006 Jacobsen - Commercial Grounds Care 2003 Turf branch - Selby, UK 2005 Intesys - Costa Mesa, Ireland, Empalme 2003 Sun Trust Small Business Direct Portfolio 2005 Cessna Pacific 2002 Grand Blanc Processing 2005 Micromatic - Gear Tools & RotoFlo 2002 Gear Tools 2005 TFS - Greensburg 2002 Intesys Technologies Stockton (paint business) 2005 Micromatic - Honing Tools and Abrasives 2002 Electroforge 2005 TFS - Logansport/Flemingsburg 2002 Ransomes-Jacobsen - Gmbh 2005 Micromatic Inc. - Actuators and Special Machines 2002 Snorkel 2005 Kautex - PVC 2002 TFC-Media loan portfolio 2005 TFS - Peiner 2001 Material Products - Carbon Product Line 2004 E-Z-Go branch - Western Turf Branches 2001 McCord Winn - Electro-mechanical Business 2004 Energy & Williams 2001 Turbine Engine Components Textron 2004 InteSys Metagal 2001 DIY 2004 Frenco (F&P) 2001 Material Products - Composites Product Line 2004 Bell Avon (20% interest) 2001 Omniquip - Skid Steer Loaders Product Line 2004 Intesys Monterrey 2001 TAC-Trim 2003 TAC-Italy 2000 Kautex Heating Oil Tank Product Line 2000 McCord Winn Seating Comfort Product Line Over $4.5 billion in annual mfg revenues $1.5 billion in TFC non-core finance receivables 6
Acquisitions Last Five Years Year Company / Business Name Segment 2006 Electrolux Finance 2006 IST (Innovative Survivability Technologies, Inc.) Bell 2005 US Helicopter Bell 2005 Kautex Keylex JV - 35% MI Industrial 2004 Acadian Composites, LLC Bell 2004 Citations Shares-25% interest Cessna 2004 Rothenberger US JV Industrial 2003 Diabline Industrial 2002 Conseco-Outdoor Power Finance 2002 EDCO/CIT Finance 2002 Triquest Industrial 2002 Carbide Bell 7
Portfolio Management 2005 Revenue High 0% INDUSTRY ATTRACTIVENESS Med 4% 2% 91% 3% 0% Low Low Med BUSINESS STRENGTH High 8
Share Repurchase Program History Date Authorized Date Completed Shares Authorized Shares Repurchased* Aug. 2001 Oct. 2004 12 million 11.5 million Oct. 2004 Jan. 2006 12 million 12 million Jan. 2006 Ongoing 12 million 7.4 million Total Shares Total Dollars Spent 30.9 million $2.1 billion *As of September 28, 2006 9
Overwatch Meets Our Acquisition Criteria Intrinsic Value ($B) 2.0 1.0 Double Intrinsic Value Every Five Years + INDUSTRY ATTRACTIVENESS High Med Low Low Med BUSINESS STRENGTH High 0.0 (Year 0) (Year 1) (Year 5) 1. Intrinsic Value Hurdle 2. Strategic Positioning 10
Financial Overview Revenues Operating Income Operating Income Margin Additional Amortization & TXT Corporate Expenses Operating Income after Additional Amortization & TXT Corp. Expenses O.I. Margin After Amort. & Corp. Financial Highlights 2006 Forecast $105 M $27 M ~26 % 2011 Forecast $325 M $82 M ~25 % $ 10 M $ 72 M ~22 % Earnings Per Share Impact 2007 2008 2009 2010 2011 $0.00 $0.07 $0.14 $0.21 $0.29 11
Overwatch Systems - Contribution to Intrinsic Value $800M $325M Purchase Price 2006 Intrinsic Value 12
Structurally Attractive Industry 1987-2005 Defense Profitability 1 2005 Defense Profitability 2 EVA Margin % 3% Cold War 2% Avg: 1.1% 1% 0% Peace Dividend * Global War on Terror 2005 EVA Margin % 15% Oshkosh TSC UDI AAI 10% Rockwell Harris Parker Honeywell Armor 5% ITT Boeing 0% (5%) (10%) TSC: ~2% of profit pool United Tech ATK Lockheed Goodrich Bell Moog L-3 GD EDO Avg = 1.4% 3 DRS Cubic Raytheon Northrop S&S irobot [-7%] Herley [-12%] GenCorp (1%) (15%) 87 89 91 93 95 97 99 01 03 05 0 50 100 150 200 Revenue ($B) Defense Large is Large and Consistently and Consistently Profitable Profitable 1. Source: Value Line; Defense companies include ATK, Armor, Boeing, Cubic, DRS, GenCorp, GD, Goodrich, L-3, Lockheed, Moog, Northrop, Raytheon, Rockwell and Titan; *1997 EVA excludes Boeing 2. Source: Public 2005 financials; assumed 35% tax rate; includes only defense-related business units 3. Equivalent to 12% ROIC 13
Textron Systems Strategic Positioning High INDUSTRY ATTRACTIVENESS Med Textron Systems Low Aircraft Engines Low Med BUSINESS STRENGTH High 14
Overwatch Strategic Analysis Business Strength A. Business Model - Ability to Capture Industry Opportunity Revenue Stream Characteristics % total revenue from service / supply contracts etc. <10% 10-30% >30% 16.0% Brand strength: Relative Share (#2 = 1.0) <0.25 0.25-1.0 >1.0 <0.25 Niche player, often in sub role (excepting ASAS-L) Key supplier to Lockheed, Raytheon, GD and Share Rank #6 or Higher #3,4 or 5 #1 or #2 Boeing within the C4ISR niche. Their sales account for less than 5% of Share as a % of total industry revenue <10% 10-20% >20% <10% spending in their addressable market niche Price differential to industry Below At Above At Customer Loyalty % of sales from repeat customers <30% 30-70% >70% 75% US Military & Commercial licenses to multiple users # of customers accounting for 80% of US DoD, DHS, Multiple intel agencies, GD, Customer Business Concentration Strength sales <5 5-20 >20 >20 Lockheed, Boeing, GE Business unit relative strength versus Premier developer but subject to on-site due Supplier B. leverage Management suppliers Performance - Internal/External factors Low Medium High Medium diligence IP is trade secret FCS especially contractor within forum classified (only FCS sub to How proprietary % is of business customers unit's surveyed main intel community. get Copyrights 100% of award have been fee at all Technology: Customer Focus technology indicating excellent service** Not <30% Somewhat 30-70% Highly >70% Highly >70% applied for. milestones) Employee satisfaction survey They are supplying most up to date software to Classified Intel community - always in the Talent Development results** Low Medium High High Employee morale good Age of business unit's main technology forefront prior to general distribution to larger Differential in % sales from Enhanced visualization tools increases vs. industry Older Same Newer Newer armed forces community Innovation versus Industry new products vs. industry Below At % pts above % Limited pts above patent usage protection. 2 patents, copy Level of integration with rest of rights Trade secret Their protection; product is know most how applicable to Intellectual Enterprise Property: Excellence Patent or trade Textron secret protected Low Low Medium Medium High High Medium Low embedded within TSW-IBS code. systems and customers Time remaining on patents (if 20 years on patent 6441793 ; 18 years on C. Financials applicable) <3years 3-7 years >7 years 18 patent 6329957 Proforma for acquisitions. CAGR 2003 - # countries where patented (if Organic Revenue Growth applicable) CAGR from last 3 years 1-2 < GDP3-5 GDP >5 to 8% >8% 1-2 38.2% 2005; 2006-15% FY 2006 w/o one -timers & Compatibility NOP Margin with Textron platform Fit with Textron pension core capabilities/strategy Low <11% Medium 11-15% High >15% High >26% Excellent fit for Projected TSC Local 2006EBIT Battlefield situation awareness strategy, Recent but acquisitions business model (intelligence community focused acquisition ROIC strategy ) Capital Requirements*** FY 2006 w/o one -timers & pension <11% 11-15% >15% 8.9% Ratio of capex versus depreciation >1 1 <1 1 Overall Rating of Business Unit Assessment of individual values & strategic Industry Attractiveness commentary Low Medium High High Assessment of individual values & strategic Business Strength commentary Low Medium High High TSC currently operates within the precision engagement chain and its related core local battlefield position Multiple customers, license protected, sub on major funded programs Brand Strength Enterprise Excellence Industry Attractiveness 15
Textron Systems Strategic Positioning High Overwatch Systems INDUSTRY ATTRACTIVENESS Med Textron Systems Low Aircraft Engines Low Med BUSINESS STRENGTH High 16
Textron Systems Strategic Positioning High INDUSTRY ATTRACTIVENESS Med Textron Systems Plus Overwatch Low Aircraft Engines Low Med BUSINESS STRENGTH High 17
Textron Systems: ~$1.0 Billion, 2006 15% Aircraft Products Dick Millman President, Textron Systems Precision Engagement 33% 36% Marine & Land 16% Aircraft Engines 18
Textron Systems Delivers Growth Integrated group of 4 major businesses Strong record of value creation - - growth, returns Structurally attractive aerospace and defense industry Rich set of additional opportunities Poised for Continued Growth 19
Integrated Business Units Hawaiian Islands ~3600 ~4000 Employees 20
Organizational Philosophy Functions CUSTOMERS CUSTOMERS CUSTOMERS CUSTOMERS TM&LS HRT Textron TS Headquarters Support Processes Optimized for efficient Customer Leadership Processes insertion of new acquisitions Operating Processes TALENT TSW Lycoming Overwatch NewCo Councils CUSTOMERS CUSTOMERS Universal product/technology process CUSTOMERS CUSTOMERS CUSTOMERS 21
Precision Engagement Mission Linking Sensors, Delivery Systems, and Effects Observe Precision Surveillance Understand/ Plan/ Decide Allocate Precision Management & Control Act Precision Effects Precision Engagement Phases Surveillance Target Location & Tracking Intelligence Situational Awareness Mission Planning Precision Strike Battle Damage Assessment Portfolio Strategy... Add Mass Fill Gaps Add Mass Fill Gaps 22
Future: The Battlefield Is Flattening Network Centric Warfare 1. All data enters the network 2. Data fusion Actionable intelligence 3. Push intelligence to local commander and individual soldier Actionable Intelligence is Key to Modernization 23
Overwatch Systems Data Fusion Technologies Facilitate Actionable Intelligence Data Analysis & Fusion Multi-Source Intelligence Solutions Visualization Integrated Software Tools 24
Mission Overwatch Enables the Links Enable near-real-time actionable intelligence for the warfighters, first responders and policy makers Provide low-cost, easy to use, rapidly deployable approaches to multi-source intelligence Enable meaningful interoperability / information sharing between intelligence agencies and organizations Key Products: Tools for all intelligence analysts. Tools to support automated multi-source analysis. Tools that merge national and tactical intelligence sources Communications systems to support network centric capabilities. 25
Business Area Combat Systems Tactical Operations Overwatch Systems Business Lines and Products Technologies/Capabilities Situation Awareness Sensor Fusion GeoSpacial Operations Business Area Sensor Systems Technologies/Capabilities Strategic Image Exploitation Intelligence Systems Intelligence Analysis Imaging Systems Tactical Image Exploitation Comm Systems Satellite Ground Systems Antennas Radio Controlled Systems Visual Learning Systems Automatic Feature Extraction Homeland Security Decision Support Tools 3D Situational Awareness Tools Medical Numerics Medical Imaging Fills Critical Gaps in Local Situation Awareness 26
Synergistic Growth Potential Near-term: Strengthens core local battlefield position Fills critical gaps in networking, communications and visualization Recognized expert: proven products and reputation Mid-term: Broadens our product and service offerings Extends Textron into future growth areas Adds multi-source information fusion, battlefield visualization, organic turn-key local battlefield solution Expands domestic and international customer base Deepens relationship with intelligence community, homeland security and foreign militaries 27
Overwatch Adds Critical Capabilities within Textron Systems Precision Engagement Portfolio Precision Engagement Phases Surveillance Target Location & Tracking Intelligence Situational Awareness Mission Planning Precision Strike Battle Damage Assessment Capabilities Textron Systems Current Textron Systems Goal Textron + Overwatch Recognized Expert Highly Skilled Proficient Basic Skills No Capability Closer to Providing Complete Solutions to the Warfighter 28
A Product Portfolio Focused on Precision Engagement Precision Engagement Intel., Surveillance & Recon. Unattended Ground Sensors Weapons Unattended Ground Munitions Ground Tactical Urban Remote Disposable Deep Delivered Airborne Surveillance & Sensors Anti-Personnel Man-in-the-Loop Control Non-Lethal Anti-Vehicle Precision Weapons Demolition Capabilities within: Surveillance Target Location & Tracking Precision Strike Airborne Cobra Ball LAVA War Ball Theater Airborne Warning System Mount Haleakala Wide Area Precision Laser Weapons Ballistic Re-Entry Vehicle Integrated Analysis & Data Fusion Tools Capabilities within: Intelligence Situational Awareness BDA 29
Innovation Business Model Growth drivers in 2006: JDAM, ASV, SFW, IMS ROIC >20% Revenues IR&D > 4% of sales $1.6 B Overwatch $1.0 B $674 M $852 M 2004 2005 2006 2010 Actual Actual Forecast Forecast 30
Strategy for Success Extend applications and maximize growth Build on systems integration capabilities Build services and logistics capabilities Optimize execution as a full solution prime & first tier supplier Appropriately sized, optimally shaped A Stronger Aerospace & Defense Position 31
Q & A 32
Forward-looking Information Certain statements in this report and other oral and written statements made by Textron from time to time are forward-looking statements, including those that discuss strategies, goals, outlook or other non-historical matters; or project revenues, income, returns or other financial measures. These forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update or revise any forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements, including the following: [a] changes in worldwide economic and political conditions that impact interest and foreign exchange rates; [b] the interruption of production at Textron facilities or Textron s customers or suppliers; [c] Textron's ability to perform as anticipated and to control costs under contracts with the U.S. Government; [d] the U.S. Government's ability to unilaterally modify or terminate its contracts with Textron for the Government's convenience or for Textron's failure to perform, to change applicable procurement and accounting policies, and, under certain circumstances, to suspend or debar Textron as a contractor eligible to receive future contract awards; [e] changes in national or international funding priorities and government policies on the export and import of military and commercial products; [f] the adequacy of cost estimates for various customer care programs including servicing warranties; [g] the ability to control costs and successful implementation of various cost reduction programs; [h] the timing of certifications of new aircraft products; [i] the occurrence of slowdowns or downturns in customer markets in which Textron products are sold or supplied or where Textron Financial offers financing; [j] changes in aircraft delivery schedules or cancellation of orders; [k] the impact of changes in tax legislation; [l] the extent to which Textron is able to pass raw material price increases through to customers or offset such price increases by reducing other costs; [m] Textron s ability to offset, through cost reductions, pricing pressure brought by original equipment manufacturer customers; [n] Textron's ability to realize full value of receivables and investments in securities; [o] the availability and cost of insurance; [p] increases in pension expenses related to lower than expected asset performance or changes in discount rates; [q] Textron Financial s ability to maintain portfolio credit quality; [r] Textron Financial s access to debt financing at competitive rates; [s] uncertainty in estimating contingent liabilities and establishing reserves to address such contingencies; [t] performance of acquisitions; [u] the efficacy of research and development investments to develop new products; [v] bankruptcy or other financial problems at major suppliers or customers that could cause disruptions in Textron s supply chain or difficulty in collecting amounts owed by such customers; and [w] Textron s ability to execute planned dispositions. 33
Thank You 34