Textron Inc. Form 10-Q Summary
Business context and reporting period
This filing covers the quarter ended July 4, 2020, and the six months then ended. Although the request metadata says 2019 Q2, the filing is for 2020 Q2; comparisons are to the quarter ended June 29, 2019, and the comparable 2019 first half. Textron reports Textron Aviation, Bell, Textron Systems, Industrial, and Finance segments.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $2.472 billion | $3.227 billion | $5.249 billion | $6.336 billion |
| Income (loss) before tax | $(118) million | $279 million | $(49) million | $491 million |
| Net income (loss) | $(92) million | $217 million | $(42) million | $396 million |
| Diluted EPS | $(0.40) | $0.93 | $(0.18) | $1.69 |
| Manufacturing gross margin as % of manufacturing revenue | 8.4% | 17.8% | 11.1% | 17.2% |
- Q2 revenue declined 23%; first-half revenue declined 17%. Lower commercial demand and pandemic-related production interruptions drove the decline, partially offset by growth in Bell military programs and Textron Systems.
- Q2 segment profit was $82 million, versus $339 million a year earlier; first-half segment profit was $238 million, versus $633 million. Textron Aviation and Industrial reported segment losses in both 2020 periods.
- Operating cash flow was $(152) million for the first half, compared with $(60) million in 2019; investing cash flow was $(64) million, versus $(104) million. Financing provided $1.215 billion, versus a use of $89 million. Management separately reported $242 million of operating cash generation in Q2.
- Cash and equivalents were $2.346 billion at July 4 ($2.176 billion Manufacturing and $170 million Finance), up from $1.357 billion at the start of the year. The $1.0 billion revolving credit facility was undrawn.
- Manufacturing group debt was $4.062 billion, versus $3.124 billion at January 4; its debt-to-capital ratio rose to 42% from 36%. Net debt to capital was 25%, compared with 26%. Finance group debt was $670 million, versus $686 million.
- At July 4, backlog was $9.077 billion, down from $9.827 billion at January 4. Remaining performance obligations were $9.1 billion; management expected approximately 68% to convert to revenue through 2021 and a further 24% through 2023.
Material changes versus comparable periods
- Textron Aviation Q2 revenue fell 33% to $747 million; segment loss was $66 million, versus $105 million profit. Aircraft deliveries fell: 23 Citation jets and 15 commercial turboprops, versus 46 and 34.
- Industrial Q2 revenue fell 44% to $562 million and segment loss was $11 million, versus $76 million profit. First-half revenue fell 32% to $1.302 billion.
- Bell Q2 revenue increased 7% to $822 million and segment profit rose 15% to $118 million, reflecting higher military activity; lower commercial helicopter deliveries partly offset the gains.
- Textron Systems Q2 revenue increased 6% to $326 million, while segment profit fell 24% to $37 million. First-half profit also declined, partly reflecting a prior-year $18 million gain and weaker TRU performance.
- Finance segment profit fell to $4 million from $6 million for Q2 and to $7 million from $12 million for the first half.
Outlook, risks, contingencies, and unusual items
- Management said COVID-19 was expected to continue adversely affecting the business but could not reasonably estimate its duration, severity, or financial impact. It reported that substantially all manufacturing activities had resumed by the end of Q2.
- A COVID-19 restructuring plan is expected to cost $110 million to $130 million before tax and be substantially completed by year-end 2020. Up to approximately 1,950 positions (6% of the workforce) may be eliminated. The plan includes ceasing commercial air-transport simulator manufacturing at TRU’s Montreal facility.
- Textron recorded $78 million of special charges in Q2 and $117 million in the first half. A separate $55 million TRU inventory write-down was recorded in cost of sales. First-quarter impairment charges included $32 million for Beechcraft and King Air trade names and $7 million for the Arctic Cat trade name.
- Textron Aviation expected abnormally low production and additional idle-facility costs through the rest of 2020. Company-wide idle-facility costs were $61 million in Q2 and $86 million in the first half.
- Finance receivable credit indicators weakened: nonaccrual balances rose to $53 million, or 7.37% of receivables, from $39 million, or 5.52%, at year-end; receivables at least 60 days delinquent rose to $60 million, or 8.34%, from $17 million, or 2.40%. The company modified loans for 75 customers with $251 million outstanding and was discussing modifications on approximately $60 million more.
- Liquidity actions included issuing $650 million of 3.00% notes due 2030, borrowing $500 million under a 364-day term loan due March 31, 2021, and borrowing against life-insurance policies; $362 million remained outstanding on the latter at quarter-end. The term loan prohibits share repurchases while outstanding; repurchases were suspended.
- Management stated that existing proceedings and claims were not expected to materially affect financial position or results. A shareholder securities lawsuit concerning the Arctic Cat acquisition was dismissed on July 20, 2020, after the quarter ended.
- Management identified potential impairment sensitivity if the pandemic further weakens revenue, earnings, or cash-flow expectations. Textron Specialized Vehicles’ estimated fair value exceeded carrying value by 15%; a 50-basis-point higher discount rate would reduce that cushion to 8%.
Most important facts for investors to verify
- Confirm the filing period: it is the 10-Q for the quarter ended July 4, 2020, not 2019 Q2.
- Track commercial aviation and Industrial demand, deliveries, production rates, and idle-facility costs, alongside the timing and total cost of restructuring.
- Monitor Finance portfolio delinquencies, loan modifications, collateral values, and credit-loss allowances as pandemic-related customer stress evolves.
- Assess debt maturities and repayment capacity, particularly the $500 million term loan due March 2021, and the restrictions attached to it.
- Reconcile cash flow and liquidity: first-half operating cash flow was negative despite management’s reported positive Q2 operating cash generation.
- Evaluate backlog and remaining performance obligations for conversion, cancellations, and timing, especially as the commercial aviation outlook remains uncertain.