Textron Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended September 29, 2012, not 2011 Q3 as stated in the request metadata. Comparisons below are against the corresponding 2011 periods; balance-sheet comparisons are against December 31, 2011.
Business context and reporting period
Textron operates Cessna, Bell, Textron Systems, Industrial and Finance segments. Its financial statements separately present Manufacturing and Finance borrowing groups. The unaudited filing covers the third quarter and first nine months of 2012.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $3.000B | $2.814B | $8.875B | $8.021B |
| Income from continuing operations before tax | $209M | $186M | $641M | $367M |
| Income from continuing operations | $142M | $136M | $435M | $259M |
| Net income | $151M | $142M | $441M | $261M |
| Diluted EPS | $0.51 | $0.47 | $1.49 | $0.83 |
- Revenue increased 7% in Q3 and 11% year to date. Manufacturing revenue was $2.936B and $8.695B, respectively; Finance revenue was $64M and $180M.
- Manufacturing gross margin was 15.7% in Q3 2012 versus 16.9% a year earlier, and 16.9% for both nine-month periods. Q3 margin pressure included lower-margin Textron Systems deliveries and $14M of UAS contract charges.
- Consolidated cash from operating activities was $397M for the first nine months, down from $660M; continuing-operations operating cash flow was $402M versus $663M. Investing activities provided $339M versus $648M, while financing activities used $388M versus $700M. Capital expenditures were $314M.
- Cash and equivalents totaled $1.238B at September 29, 2012. Manufacturing-group cash was $1.232B and Finance-group cash $6M.
- Manufacturing-group debt was $2.338B, down from $2.459B at year-end; net debt to capital improved to 25.1% from 36.6%. Finance-group debt was $1.735B, down from $1.974B. The $1.0B revolving credit facility had no borrowings outstanding.
- Total assets were $13.065B, down from $13.615B at year-end. Shareholders’ equity rose to $3.308B from $2.745B.
Material changes versus prior comparable periods
- Bell: Q3 revenue rose 20% to $1.075B and segment profit rose 15% to $165M, mainly on stronger commercial aircraft deliveries. Nine-month revenue increased 24% to $3.125B and profit rose 31% to $462M.
- Cessna: Q3 revenue was nearly flat at $778M and segment profit fell to $30M from $33M. Nine-month revenue increased 12% to $2.210B; segment profit was $59M versus zero in the 2011 period.
- Textron Systems: Q3 revenue fell 13% to $400M and segment profit declined 55% to $21M. Nine-month revenue fell 14% to $1.166B and profit declined 36% to $96M, reflecting reduced volume and lower-margin deliveries.
- Industrial: Q3 revenue increased 4% to $683M and profit was $38M versus $37M. Nine-month revenue grew 6% to $2.194B and profit increased 12% to $172M. Foreign exchange, primarily euro weakness, reduced revenue.
- Finance: Segment profit was $28M in Q3 versus a $24M loss, and $62M for nine months versus a $101M loss. Improvement included better Golf Mortgage valuation results, lower portfolio losses and resolution of a significant Timeshare account. Finance receivables held for investment declined to $1.955B from $2.477B at year-end.
- Operating cash flow declined, largely due to a $182M reduction in customer deposits and a $156M cash use from increased Cessna pre-owned inventory.
Outlook, commentary, risks and unusual items
- Management said existing cash and expected cash generation from manufacturing operations should be sufficient for future needs. The filing provides no specific earnings or revenue guidance.
- Textron continued its planned exit from non-captive commercial finance through liquidation and selected asset sales. It expected to work down the remaining $458M of non-captive receivables over several years, depending on market conditions.
- Textron Systems recorded $14M in Q3 charges for new unmanned aircraft systems fee-for-service contracts, including an $11M program profit adjustment. Start-up and deployment problems required additional training, resources and cost-estimate revisions; initial task orders were expected to take about a year to complete.
- Q3 long-term contract estimate changes reduced pretax income by $6M; nine-month changes increased it by $10M. The filing notes these estimates are subject to revision as contract costs and performance evolve.
- A lawsuit against Textron Financial seeks $316M in alleged fraudulent-transfer recoveries and $223M in damages, with possible trebling under Ohio law. Textron intends to defend the case; it could not estimate a loss range because the litigation was at an early stage.
- Risks cited include U.S. and foreign government budget or contract changes, government-contract execution and cost control, finance-portfolio credit quality and asset recoveries, market access, supplier performance, product launches, cost inflation, pensions and economic or demand volatility.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is Q3 2012, not Q3 2011.
- Track whether Bell’s commercial delivery growth and Cessna’s aircraft demand persist, alongside the decline in Textron Systems revenue and backlog changes.
- Assess whether Textron Systems’ UAS start-up costs are contained and whether subsequent contract performance improves.
- Review Finance-group credit quality, valuation assumptions and progress in liquidating the remaining non-captive portfolio.
- Monitor operating cash generation, inventory and customer-deposit movements, and the timing of Manufacturing-group debt maturities.
- Follow the Fair Finance litigation, for which the company could not estimate a possible loss range.