Textron Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 28, 2013. The filing is an annual report, not a standalone 2012 Q4 filing; it includes unaudited quarterly comparisons. Amounts are in U.S. dollars unless noted.
Business context
Textron is a diversified manufacturer and finance company with approximately 32,000 employees. Its five segments are Cessna, Bell, Textron Systems, Industrial and Finance. About 30% of 2013 consolidated revenue came from U.S. Government contracts.
Financial results and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $12.104 billion | $12.237 billion |
| Income from continuing operations | $498 million | $581 million |
| Diluted EPS, continuing operations | $1.75 | $1.97 |
| Operating cash flow, continuing operations | $813 million | $935 million |
| Capital expenditures | $444 million | $480 million |
| Total assets | $12.944 billion | $13.033 billion |
| Shareholders’ equity | $4.384 billion | $2.991 billion |
- Manufacturing gross margin declined to 15.4% from 16.7%. Total segment profit fell to $963 million from $1.132 billion.
- Consolidated debt was $3.187 billion at year-end: $1.931 billion in Manufacturing and $1.256 billion in Finance. Manufacturing cash was $1.163 billion and Finance cash was $48 million. Manufacturing net-debt-to-capital improved to 15% from 24%.
- Consolidated cash and equivalents were $1.211 billion at year-end, down from $1.413 billion. The $813 million operating cash flow was offset by $264 million of investing outflows and $742 million of financing outflows.
- Fourth-quarter 2013 revenue was $3.506 billion versus $3.362 billion in Q4 2012; income from continuing operations was $171 million versus $146 million, and diluted EPS from continuing operations was $0.60 versus $0.50.
Material changes versus 2012
- Revenue declined 1%, primarily from Cessna (down $327 million), Finance (down $83 million) and Textron Systems (down $72 million); Bell (up $237 million) and Industrial (up $112 million) partly offset the declines.
- Cessna reported a $48 million segment loss, compared with $82 million profit. Citation jet deliveries fell to 139 from 181, while aftermarket revenue increased.
- Bell revenue grew 6%, but segment profit decreased 10% to $573 million. Labor disruptions and implementation of a new enterprise resource planning system contributed to production inefficiencies and lower margins.
- Industrial segment profit rose 13% to $242 million, aided by improved performance and acquisitions. Textron Systems profit increased 11% to $147 million despite lower revenue, partly because UAS fee-for-service charges were lower.
- Finance segment profit decreased to $49 million from $64 million. Its held-for-investment finance receivables fell to $1.483 billion from $1.934 billion; nonaccrual balances declined, but 60-plus-day delinquencies rose to 5.39% from 4.65% of receivables.
- Backlog decreased to $10.273 billion from $11.463 billion. Approximately 43% of year-end backlog was not expected to be filled in 2014.
Outlook, risks and unusual items
- Management estimated a 2014 effective tax rate of approximately 31.5%. The filing does not provide a specific consolidated revenue or earnings forecast.
- Planned product milestones included anticipated early-2014 certification of the Citation X+, a 2014 first flight for the Citation Latitude, and planned 2015 entry into service for the Latitude. These schedules are forward-looking and subject to certification and execution risks.
- Textron agreed to acquire Beechcraft’s parent for approximately $1.4 billion in cash, with closing expected in the first half of 2014 subject to customary conditions and regulatory approvals. The company arranged $600 million of notes and a $500 million term loan to help finance the acquisition; the notes include a redemption provision if the transaction does not close by the specified deadline.
- A new $1.0 billion revolving credit facility was undrawn at year-end, apart from $35 million of letters of credit. Management stated it expected available cash, manufacturing cash generation and other funding alternatives to meet future needs.
- Management cited U.S. defense-budget and appropriation uncertainty, contract performance and cost overruns, weak business-jet demand and used-aircraft values, Finance portfolio collectability, supplier performance, foreign-exchange and interest-rate changes, acquisitions, cybersecurity and regulatory compliance among material risks.
- Environmental liabilities were estimated within a $40 million–$170 million range; $74 million was reserved. Management did not expect existing proceedings and claims to materially affect financial position or results, based on information available.
- Notable items included $651 million of company-funded R&D, up 12%; $196 million spent on 2013 acquisitions; and a reduction in the reported unfunded pension liability to $199 million from $1.338 billion, reflecting investment returns and actuarial changes as well as contributions.
Investor verification priorities
- Verify the Beechcraft acquisition’s closing, total financing needs, integration costs and effect on leverage.
- Track Cessna business-jet demand, deliveries, backlog conversion and aftermarket growth.
- Assess Bell’s recovery from labor and system-related production inefficiencies and the effect of those costs on 2014 margins.
- Monitor U.S. Government funding and contract awards, especially the V-22 and other major programs, and compare funded backlog with expected deliveries.
- Review Finance portfolio delinquency trends, collateral values, loss reserves and runoff of non-captive receivables.
- Evaluate operating cash conversion, working-capital movements, pension assumptions and the sustainability of the improved pension funding position.