Textron Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2018, compared primarily with the three months ended April 1, 2017. The request metadata says 2017 Q1, but the filing itself is for 2018 Q1.
Business context and financial performance
Textron reports Textron Aviation, Bell, Textron Systems, Industrial and Finance. The filing presents separate Manufacturing and Finance borrowing groups. Unless noted, amounts below are in millions of dollars.
| Metric | Q1 2018 | Comparable period |
|---|---|---|
| Total revenue | $3,296 | $3,093 |
| Income before taxes | $218 | $121 |
| Net income | $189 | $101 |
| Diluted EPS | $0.72 | $0.37 |
| Gross margin as % of Manufacturing revenue | 16.8% | 15.7% |
| Operating cash flow | $(85) | $(191) |
| Capital expenditures | $77 | $76 |
Revenue increased 7%; net income rose to $189 million. The effective tax rate was 13.3%, versus 17.4%, with 2018 benefits primarily from audit settlements. The reported Q1 2018 diluted EPS was $0.72; under prior revenue-accounting rules, it would have been $0.65.
Segment revenue and profit: Textron Aviation $1,010 and $72 (prior $970 and $36); Bell $752 and $87 (prior $697 and $83); Textron Systems $387 and $50 (prior $416 and $20); Industrial $1,131 and $64 (prior $992 and $76); Finance $16 and $6 (prior $18 and $4). Segment profit is a company-defined measure and excludes specified corporate costs, interest and special charges for manufacturing segments.
Liquidity, debt and capital allocation
At March 31, 2018, total assets were $14,968 and shareholders’ equity was $5,692. Manufacturing group cash was $688, down from $1,079 at year-end 2017; Finance group cash was $148, down from $183. Manufacturing debt was $3,099 and Finance debt was $819. Manufacturing net debt to capital was 30%, versus 26% at year-end; debt to capital was 35%. Textron had no borrowings under its $1.0 billion revolving credit facility.
Consolidated cash declined $426 to $836 during the quarter. The company used $344 to repurchase 5.9 million shares and paid $5 in dividends. Management said first-quarter operating cash flow is typically negative and expected positive operating cash flow for full-year 2018; no full-year amount was provided.
Material changes, outlook and risks
- Revenue accounting: Textron adopted ASC 606 in 2018. Government-contract revenue is now primarily recognized as costs are incurred, while 2017 was primarily recognized on delivery. Reported Q1 2018 revenue was $221 higher and pretax income $23 higher than under prior accounting; comparisons and backlog are affected. Adoption increased opening retained earnings by $90.
- Revenue drivers: Industrial growth reflected foreign exchange (+$52), Arctic Cat (+$49) and volume (+$34). Bell benefited from military programs; Aviation from pricing and higher volume/mix. Systems revenue declined largely following discontinuation of its sensor-fuzed weapon product.
- Profit items: Q1 2018 contract-estimate catch-up adjustments increased pretax income by $40 million ($30 million after tax, or $0.12 per diluted share), compared with a $12 million pretax decrease in Q1 2017. The prior-year period included a $24 million TAPV program loss. No special charges were recorded in Q1 2018; Q1 2017 included $37 million.
- Backlog: Remaining performance obligations were $6.5 billion at March 31; approximately 90% was expected to be recognized through 2019. Reported backlog was down from $7.184 billion at year-end to $6.543 billion, with Bell’s decrease substantially affected by ASC 606.
- Subsequent transactions: On April 18, Textron agreed to sell its Tools and Test Equipment businesses for approximately $810 million cash, expected to close in Q3 2018 subject to approvals and other conditions. Proceeds are expected to fund additional repurchases. The board separately authorized repurchases of up to 40 million shares on April 16.
- Key risks: Textron highlights government funding, contract performance and cost estimates, fixed-price contract exposure, supplier performance, demand and foreign-exchange volatility, finance-receivable credit quality, acquisitions, tax-law changes, and the timing and completion of the announced sale. Management said existing legal proceedings were not expected to materially affect financial position or results, based on information then available.
Important facts for investors to verify
- Confirm the intended period: this filing covers Q1 2018, not Q1 2017.
- Assess comparability under ASC 606, especially government-contract revenue, EPS and backlog; the filing’s prior-accounting reconciliation is not a restatement of 2017.
- Track whether positive full-year operating cash flow materializes after the first-quarter outflow and share repurchases.
- Monitor fixed-price contract cost estimates and cumulative catch-up adjustments, including performance on major government programs.
- Verify closing conditions, timing and net proceeds from the Tools and Test Equipment sale, and subsequent use of proceeds for share repurchases.