TEXTRON INC quarterly report, Q2 FY2019

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Textron Inc. Form 10-Q Summary

Period clarification: The supplied filing is for the quarter and six months ended June 29, 2019, not 2018 Q2 as stated in the request metadata. All amounts are U.S. dollars; financial figures below are in millions unless noted.

Business context and reporting period

Textron operates Textron Aviation, Bell, Textron Systems, Industrial and Finance. It reports separate Manufacturing and Finance borrowing groups. The filing compares Q2 and first-half 2019 with the corresponding 2018 periods. The Tools and Test Equipment business was sold in July 2018, reducing comparability for Industrial.

Financial performance and liquidity

  • Q2 revenue: $3,227, down 13% from $3,726. Manufacturing revenue was $3,211; Finance revenue was $16.
  • Q2 earnings: Income before taxes was $279 versus $260; net income was $217 versus $224. Diluted EPS increased to $0.93 from $0.87. The effective tax rate rose to 22.2% from 13.8%.
  • First-half results: Revenue was $6,336, down 10%; net income was $396 versus $413. Diluted EPS was $1.69 versus $1.59. Income before taxes was $491 versus $478.
  • Margins: Manufacturing gross margin was 17.8% in Q2 versus 17.1%, and 17.2% for the first half versus 17.0%. Segment profit was $339 in Q2 versus $346 and $633 for the first half versus $625.
  • Cash flow: First-half consolidated operating cash flow was negative $60 versus positive $398 in 2018. The company attributed the change mainly to working capital, including increased inventory investment. Capital expenditures were $135. Cash and equivalents ended at $857, down from $1,107 at the start of the year.
  • Debt and liquidity: Manufacturing group debt was $3,367 and cash was $775 at June 29; net debt-to-capital was 33%, up from 29% at year-end 2018. Finance group debt was $703 and cash was $82. Textron reported no borrowings on its $1.0 billion revolving credit facility.
  • Balance sheet: Total assets were $14,796 and shareholders’ equity was $5,336. Inventories rose to $4,311 from $3,818 at year-end.
  • Backlog: Manufacturing backlog was $9,257, up from $9,097 at year-end. Remaining performance obligations were $9.3 billion; the company expected to recognize approximately 68% through 2020 and a further 26% through 2022.

Material changes versus prior comparable periods

  • Q2 revenue declines were led by Industrial (down $213), Textron Aviation (down $153), Textron Systems (down $72) and Bell (down $60). Industrial’s decline included $120 from the Tools and Test Equipment disposition and $80 from lower volume and mix.
  • For the first half, Industrial revenue fell $432, including the $248 disposition impact; Textron Systems fell $152, Bell $73 and Textron Aviation $29.
  • Q2 segment profit rose at Textron Aviation to $105 from $104 and at Textron Systems to $49 from $40, but fell at Bell to $103 from $117 and Industrial to $76 from $80. First-half segment profit increased at Textron Aviation and Bell, but declined at Textron Systems and Industrial.
  • Lower selling and administrative expense reflected the Tools and Test Equipment disposition; Q2 expense also benefited from lower share-based compensation.

Outlook, commentary, risks and unusual items

  • Management expected the first-half working-capital increase—principally inventory supporting future Textron Aviation and Bell commercial aircraft sales—to reverse in the second half, producing positive operating cash flow for the full year as commercial aircraft deliveries increased.
  • Q2 included an $18 pre-tax gain tied to contributing training-business assets to a newly formed venture with FlightSafety International. Textron retained a 30% interest; the gain was subject to post-closing adjustments.
  • Net favorable cumulative contract estimate adjustments increased Q2 revenue and segment profit by $27 and net income by $21; first-half impacts were $58 and $44, respectively. These adjustments were lower than in 2018.
  • The 2019 first-half effective tax rate of 19.3% included a $12 benefit for prior-year research credits. The comparable 2018 rates benefited from a $25 uncertain-tax-position reserve reassessment and audit settlements.
  • Textron issued $300 of 3.90% fixed-rate notes due 2029, receiving $297 net proceeds. A Finance group $150 loan was extended to 2022, with its rate changed from 2.26% to 2.88%.
  • Management identified risks including U.S. Government funding and contract changes, defense-budget and foreign-market conditions, demand and supplier performance, cost control, product launches, foreign exchange and interest rates, pension assumptions, cybersecurity, and Finance portfolio credit quality. It said existing legal proceedings were not expected to materially affect financial position or results, based on information then available.
  • The filing provides no specific earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.

Important facts for investors to verify

  • Confirm the correct reporting period: this filing covers Q2 2019, despite the 2018 Q2 metadata.
  • Assess whether expected second-half inventory conversion and higher aircraft deliveries materialized, given negative first-half operating cash flow.
  • Track segment demand, delivery volumes and margins, especially commercial turboprops, helicopters, Textron Systems programs and Industrial products.
  • Evaluate the sustainability of earnings excluding the $18 gain and contract estimate adjustments, and compare tax rates without prior-year tax benefits.
  • Monitor debt, share repurchases, backlog conversion, and Finance receivable quality; nonaccrual receivables were $31, or 3.87% of receivables, at quarter-end.