Textron Systems Precision Engagement Strategy - Overwatch ...library.corporate-ir.net/library/11/110/110047/items/223417/Over... · Precision Engagement Strategy - Overwatch Acquisition

1

New York CityInvestor Meeting

October 26, 2006

Growing Opportunity

Textron SystemsPrecision Engagement

Strategy -Overwatch Acquisition

2

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.

3

Ted R. FrenchEVP &

Chief Financial Officer

4

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

5

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

6

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

7

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

8

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

9

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

13

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,


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,



2005 EVA Margin %

Revenue ($B)

(15%)

(10%)

(5%)

0%

5%

10%

15%

0 50 100 150 200

OshkoshTSC

AAIUDI


ArmorITTBoeing


GoodrichBell

GD

MoogL-3

EDO

DRSCubicRaytheon

NorthropS&S


GenCorp

Avg = 1.4%3



2005 EVA Margin %

Revenue ($B)

(15%)

(10%)

(5%)

0%

5%

10%

15%

0 50 100 150 200

OshkoshTSC

AAIUDI


ArmorITTBoeing


GoodrichBell

GD

MoogL-3

EDO

DRSCubicRaytheon

NorthropS&S


GenCorp

Avg = 1.4%3


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


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


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

21

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


Understand/Decide

Plan/Allocate


Observe Act


Understand/Decide

Plan/Allocate





Battle Damage

Assessment






Battle Damage

Assessment





Battle Damage

Assessment





23

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

25

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.

26

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

28

Overwatch Adds Critical Capabilities withinTextron Systems’ Precision Engagement

Portfolio

Battle Damage

Assessment




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

29

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

30

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

31

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

32

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

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Textron Systems Precision Engagement Strategy - Overwatch ...library.corporate-ir.net/library/11/110/110047/items/223417/Over... · Precision Engagement Strategy - Overwatch Acquisition