textron systems precision engagement strategy - overwatch...
TRANSCRIPT
1
New York CityInvestor Meeting
October 26, 2006
Growing Opportunity
Textron SystemsPrecision Engagement
Strategy -Overwatch Acquisition
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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.
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Ted R. FrenchEVP &
Chief Financial Officer
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Textron’s Transformation Strategy
A Simpler, More Focused Portfolio of Leading, Branded Businesses in
Attractive Industries
A Simpler, More Focused Portfolio of A Simpler, More Focused Portfolio of Leading, Branded Businesses in Leading, Branded Businesses in
Attractive IndustriesAttractive Industries
NETWORKED ENTERPRISENETWORKED ENTERPRISE
EnterpriseManagement
EnterpriseEnterpriseManagementManagement
How We Manage What We Own
PortfolioManagement
PortfolioPortfolioManagementManagement
WhatWe Own
VISION:To be the premier multi-industry company, recognized
for our network of powerful brands, world-class enterprise processes and talented people
VISION:VISION:To be To be thethe premier multipremier multi--industry company, recognized industry company, recognized
for our network of powerful brands, worldfor our network of powerful brands, world--class class enterprise processes and talented peopleenterprise processes and talented people
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BUSINESS STRENGTH
IND
US
TR
YA
TTR
AC
TIV
EN
ES
S
Low High
Low
High
Med
Med
0%
61%6%
15%3%15%
Portfolio Management2000 Revenue
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Divestitures since 2000Year Company / Business Name Year Company / Business Name2006 TFS - Detroit Heading (49% interest) 2003 Camelin2006 TFS - PFPD 2003 Omniquip - TRAK2006 Textron Fastening Systems 2003 E-Z-Go branch --Myrtle Beach2006 Jacobsen - Commercial Grounds Care 2003 Turf branch - Selby, UK2005 Intesys - Costa Mesa, Ireland, Empalme 2003 Sun Trust Small Business Direct Portfolio2005 Cessna Pacific 2002 Grand Blanc Processing2005 Micromatic - Gear Tools & RotoFlo 2002 Gear Tools2005 TFS - Greensburg 2002 Intesys Technologies Stockton (paint business)2005 Micromatic - Honing Tools and Abrasives 2002 Electroforge2005 TFS - Logansport/Flemingsburg 2002 Ransomes-Jacobsen - Gmbh2005 Micromatic Inc. - Actuators and Special Machines 2002 Snorkel2005 Kautex - PVC 2002 TFC-Media loan portfolio2005 TFS - Peiner 2001 Material Products - Carbon Product Line2004 E-Z-Go branch - Western Turf Branches 2001 McCord Winn - Electro-mechanical Business2004 Energy & Williams 2001 Turbine Engine Components Textron2004 InteSys Metagal 2001 DIY2004 Frenco (F&P) 2001 Material Products - Composites Product Line2004 Bell Avon (20% interest) 2001 Omniquip - Skid Steer Loaders Product Line2004 Intesys Monterrey 2001 TAC-Trim2003 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
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Acquisitions Last Five Years
Year Company / Business Name Segment2006 Electrolux Finance2006 IST (Innovative Survivability Technologies, Inc.) Bell2005 US Helicopter Bell2005 Kautex Keylex JV - 35% MI Industrial2004 Acadian Composites, LLC Bell2004 Citations Shares-25% interest Cessna2004 Rothenberger US JV Industrial2003 Diabline Industrial2002 Conseco-Outdoor Power Finance2002 EDCO/CIT Finance2002 Triquest Industrial2002 Carbide Bell
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BUSINESS STRENGTH
IND
US
TR
YA
TTR
AC
TIV
EN
ES
S
Low High
Low
High
Med
Med
0%
91%4%
0%3%2%
Portfolio Management2005 Revenue
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Share Repurchase Program History
30.9 million $2.1 billion
Total SharesTotal Dollars Spent
7.4 million 12 millionOngoingJan. 2006
12 million12 millionJan. 2006Oct. 2004
11.5 million12 millionOct. 2004Aug. 2001
SharesRepurchased*
SharesAuthorized
DateCompleted
DateAuthorized
*As of September 28, 2006
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Overwatch Meets Our Acquisition Criteria
+
1. Intrinsic Value Hurdle
Intrinsic Value ($B)
0.0
1.0
2.0
(Year 0) (Year 1) (Year 5)
Double Intrinsic Value
Every Five Years
BUSINESS STRENGTH
IND
US
TR
YA
TTR
AC
TIV
EN
ES
S
Low
High
Med
Low HighMed
2. Strategic Positioning
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Financial Overview
~22 %O.I. Margin After Amort. & Corp.
$ 72 MOperating Income after Additional Amortization & TXT Corp. Expenses
$ 10 MAdditional Amortization & TXT Corporate Expenses
~25 %~26 %Operating Income Margin
$82 M$27 MOperating Income
$325 M$105 MRevenues
2011 Forecast2006 Forecast
Financial Highlights
Earnings Per Share Impact
$0.29$0.21$0.14$0.07$0.00
20112010200920082007
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Overwatch Systems -Contribution to Intrinsic Value
PurchasePrice
2006Intrinsic Value
$325M$325M
$800M$800M
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Structurally Attractive Industry
Large and Consistently Profitable1. Source: Value Line; Defense companies include ATK, Armor, Boeing, Cubic, DRS, GenCorp, GD, Goodrich, L-3, Lockheed, Moog, Northrop, Raytheon,
Rockwell and Titan; *1997 EVA excludes Boeing2. Source: Public 2005 financials; assumed 35% tax rate; includes only defense-related business units3. Equivalent to 12% ROIC
2005 Defense Profitability2
2005 EVA Margin %
Revenue ($B)
(15%)
(10%)
(5%)
0%
5%
10%
15%
0 50 100 150 200
OshkoshTSC
AAIUDI
RockwellHarrisParkerHoneywell
ArmorITTBoeing
United TechATKLockheed
GoodrichBell
GD
MoogL-3
EDO
DRSCubicRaytheon
NorthropS&S
iRobot [-7%]Herley [-12%]
GenCorp
Avg = 1.4%3
TSC: ~2% of profit pool
1987-2005 Defense Profitability1
(1%)
0%
1%
2%
3%
Avg: 1.1%
EVA Margin %GlobalWar onTerrorCold War Peace Dividend
*
‘87 ‘89 ‘91 ‘93 ‘95 ‘97 ‘03‘01‘99 ‘05
Large and Consistently Profitable1. 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 Boeing2. Source: Public 2005 financials; assumed 35% tax rate; includes only defense-related business units3. Equivalent to 12% ROIC
Defense is Large and Consistently Profitable1. 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 Boeing2. Source: Public 2005 financials; assumed 35% tax rate; includes only defense-related business units3. Equivalent to 12% ROIC
2005 Defense Profitability2
2005 EVA Margin %
Revenue ($B)
(15%)
(10%)
(5%)
0%
5%
10%
15%
0 50 100 150 200
OshkoshTSC
AAIUDI
RockwellHarrisParkerHoneywell
ArmorITTBoeing
United TechATKLockheed
GoodrichBell
GD
MoogL-3
EDO
DRSCubicRaytheon
NorthropS&S
iRobot [-7%]Herley [-12%]
GenCorp
Avg = 1.4%3
TSC: ~2% of profit pool
2005 Defense Profitability2
2005 EVA Margin %
Revenue ($B)
(15%)
(10%)
(5%)
0%
5%
10%
15%
0 50 100 150 200
OshkoshTSC
AAIUDI
RockwellHarrisParkerHoneywell
ArmorITTBoeing
United TechATKLockheed
GoodrichBell
GD
MoogL-3
EDO
DRSCubicRaytheon
NorthropS&S
iRobot [-7%]Herley [-12%]
GenCorp
Avg = 1.4%3
TSC: ~2% of profit pool
1987-2005 Defense Profitability1
(1%)
0%
1%
2%
3%
Avg: 1.1%
EVA Margin %GlobalWar onTerrorCold War Peace Dividend
*
‘87 ‘89 ‘91 ‘93 ‘95 ‘97 ‘03‘01‘99 ‘05
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BUSINESS STRENGTH
IND
US
TR
YA
TTR
AC
TIV
EN
ES
S
Low High
Low
High
Med
Med
Textron Systems –Strategic Positioning
AircraftEngines
TextronSystems
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Overwatch Strategic AnalysisBusiness Strength
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 <0.25Niche player, often in sub role (excepting ASAS-L)
Share Rank #6 or Higher #3,4 or 5 #1 or #2Key supplier to Lockheed, Raytheon, GD and Boeing within the C4ISR niche.
Share as a % of total industry revenue <10% 10-20% >20% <10%Their sales account for less than 5% of 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
Customer Concentration # of customers accounting for 80% of sales <5 5-20 >20 >20
US DoD, DHS, Multiple intel agencies, GD, Lockheed, Boeing, GE
Supplier leverageBusiness unit relative strength versus suppliers Low Medium High Medium
Premier developer but subject to on-site due diligence
Technology:How proprietary is business unit's main technology Not Somewhat Highly Highly
IP is trade secret especially within classified intel community. Copyrights have been applied for.
Age of business unit's main technology vs. industry Older Same Newer Newer
They are supplying most up to date software to Classified Intel community - always in the forefront prior to general distribution to larger armed forces community
Intellectual Property: Patent or trade secret protected Low Medium High Medium
Limited patent protection. 2 patents, copy rights Trade secret protection; know how embedded within code.
Time remaining on patents (if applicable) <3years 3-7 years >7 years 18
20 years on patent 6441793 ; 18 years on patent 6329957
# countries where patented (if applicable) 1-2 3-5 >5 1-2
Compatibility with Textron platform
Fit with Textron core capabilities/strategy Low Medium High High
Excellent fit for TSC Local Battlefield situation awareness strategy, but business model
A. Business Model - Ability to Capture Industry Opportunity
Business Strength
Customer Focus% of customers surveyed indicating excellent service** <30% 30-70% >70% >70%
FCS contractor forum (only FCS sub to get 100% of award fee at all milestones)
Talent Development Employee satisfaction survey results** Low Medium High High Employee morale good
Innovation versus IndustryDifferential in % sales from new products vs. industry Below At % pts above % pts above
Enhanced visualization tools increases usage
Enterprise ExcellenceLevel of integration with rest of Textron Low Medium High Low
Their product is most applicable to TSW-IBS systems and customers
C. Financials
Organic Revenue Growth CAGR from last 3 years < GDP GDP to 8% >8% 38.2%Proforma for acquisitions. CAGR 2003 - 2005; 2006-15%
NOP MarginFY 2006 w/o one -timers & pension <11% 11-15% >15% >26% Projected 2006EBIT
ROICFY 2006 w/o one -timers & pension <11% 11-15% >15% 8.9%
Recent acquisitions (intelligence community focused acquisition strategy )
Capital Requirements***Ratio of capex versus depreciation >1 1 <1 1
Overall Rating of Business Unit
Industry Attractiveness
Assessment of individual values & strategic commentary Low Medium High High
TSC currently operates within the precision engagement chain and its related core local battlefield position
Business Strength
Assessment of individual values & strategic commentary Low Medium High High
Multiple customers, license protected, sub on major funded programs
B. Management Performance - Internal/External factors
Brand Strength
Enterprise Excellence
IndustryAttractiveness
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BUSINESS STRENGTH
IND
US
TR
YA
TTR
AC
TIV
EN
ES
S
Low High
Low
High
Med
Med
Textron Systems –Strategic Positioning
AircraftEngines
TextronSystems
OverwatchSystems
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BUSINESS STRENGTH
IND
US
TR
YA
TTR
AC
TIV
EN
ES
S
Low High
Low
High
Med
Med
Textron Systems –Strategic Positioning
AircraftEngines
Textron SystemsPlus
Overwatch
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Textron Systems: ~$1.0 Billion, 2006
Dick MillmanPresident, Textron Systems
15%
16%
Aircraft Products
Aircraft Engines
Precision Engagement
36%
Marine & Land
33%
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Textron Systems Delivers Growth
Poised for Continued 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
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Integrated Business Units
Hawaiian Islands~3600
Employees~4000
Employees
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Organizational Philosophy
CouncilsCouncilsTextron
FunctionsFunctions TS HeadquartersTS HeadquartersCU
STOM
ERS
CUST
OMER
S
CUSTOMERSCUSTOMERSCU
STOM
ERS
CUST
OMER
S
CUSTOMERS
CUSTOMERS
CUST
OMER
S
CUST
OMER
S
NewCoNewCo
TSW
TSW
HRTHRT
Lycoming
LycomingTM&LSTM&LS
Support Processes
Customer Leadership Processes
Operating Processes
TALENT
Optimized for efficient insertion of new acquisitions
Overwatch
Overwatch
Universal product/technology process
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Precision Engagement MissionLinking Sensors, Delivery Systems, and Effects
Observe Act
Precision Surveillance
Understand/Decide
Plan/Allocate
Precision EffectsPrecision Management & Control
Add Mass Fill Gaps Add Mass Fill GapsPortfolio Strategy . . .
Precision Engagement Phases
Battle Damage
Assessment
Target Location & Tracking
Intelligence Precision Strike
Situational Awareness
Mission PlanningSurveillance
Observe Act
Precision Surveillance
Understand/Decide
Plan/Allocate
Precision EffectsPrecision Management & Control
Observe Act
Precision Surveillance
Understand/Decide
Plan/Allocate
Precision EffectsPrecision Management & Control
Add Mass Fill Gaps Add Mass Fill GapsPortfolio Strategy . . .
Add Mass Fill Gaps Add Mass Fill GapsPortfolio Strategy . . .
Precision Engagement Phases
Battle Damage
Assessment
Target Location & Tracking
Intelligence Precision Strike
Situational Awareness
Mission PlanningSurveillance
Precision Engagement Phases
Battle Damage
Assessment
Target Location & Tracking
Intelligence Precision Strike
Situational Awareness
Mission PlanningSurveillance
Battle Damage
Assessment
Target Location & Tracking
Intelligence Precision Strike
Situational Awareness
Mission PlanningSurveillance
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Future: The Battlefield Is Flattening
Actionable Intelligence is Key to Modernization
Network Centric Warfare
1. All data enters the
network
2. Data fusion
Actionable intelligence
3. Push intelligence to
local commander and
individual soldier
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Overwatch Systems – Data Fusion Technologies Facilitate Actionable Intelligence
• Data Analysis & Fusion
• Multi-Source
Intelligence Solutions
• Visualization
• Integrated Software
Tools
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Overwatch Enables the Links
Mission
• Enable near-real-time actionable intelligence for the war-fighters, 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.
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Overwatch Systems –Business Lines and Products
Combat Systems
• Situation Awareness• Sensor Fusion
Intelligence Systems • Intelligence Analysis
CommSystems
• Satellite Ground Systems• Antennas• Radio Controlled Systems
Homeland Security
• Decision Support Tools• 3D Situational Awareness Tools
Fills Critical Gaps in Local Situation Awareness
Business Area Technologies/Capabilities
Business Area Technologies/Capabilities
Tactical Operations GeoSpacial Operations
ImagingSystems
Visual LearningSystems
MedicalNumerics
• Strategic Image Exploitation
• Tactical Image Exploitation
• Automatic Feature Extraction
• Medical Imaging
Sensor Systems
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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
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Overwatch Adds Critical Capabilities withinTextron Systems’ Precision Engagement
Portfolio
Battle Damage
Assessment
Target Location & Tracking
Intelligence Precision Strike
Situational Awareness
Mission Planning
Surveillance
Precision Engagement PhasesPrecision Engagement Phases
Textron Systems
Goal
Textron Systems Current
Textron +
Overwatch
Capabilities
No CapabilityBasic SkillsProficientHighly SkilledRecognized Expert
Closer to Providing Complete Solutions to the Warfighter
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A Product Portfolio Focused on Precision Engagement
WeaponsIntel., Surveillance & Recon.
Ground
Airborne
Unattended Ground Sensors Unattended Ground Munitions
Precision WeaponsAirborne Surveillance & Sensors
Wide AreaPrecision
Laser Weapons
Ballistic Re-Entry Vehicle
Anti-Personnel
Man-in-the-LoopControl Demolition
Anti-Vehicle
Deep Delivered
Remote
DisposableTactical Urban
Precision Engagement
Cobra Ball
LAVA War Ball
Theater Airborne Warning System
Non-Lethal
Mount Haleakala
Capabilities within:• Surveillance • Target Location
& Tracking• Precision Strike
Capabilities within:• Intelligence• Situational Awareness• BDA
Integrated Analysis & Data Fusion Tools
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Innovation Business ModelGrowth drivers in 2006: JDAM, ASV, SFW, IMS
ROIC >20%
IR&D > 4% of sales
Actual Actual Forecast Forecast2004 2005 2006 2010
$674 M
$852 M
$1.0 B
Revenues$1.6 B
Overwatch
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Strategy for Success
A Stronger Aerospace & Defense Position
• 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
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Q & A
33
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.
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Thank You