Textron Inc. — 2017 Form 10-K Summary
Period clarification: The supplied filing is the annual report for the fiscal year ended December 30, 2017, not a 2016 Q4 filing. It includes unaudited quarterly data for Q4 2017 and Q4 2016.
Business context
Textron is a diversified manufacturer and finance company operating through Textron Aviation, Bell, Textron Systems, Industrial and Finance. It reported approximately 37,000 employees. About 22% of 2017 revenue came from U.S. Government contracts and approximately 38% from international business.
Financial performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $14.198 billion | $13.788 billion |
| Income from continuing operations | $306 million | $843 million |
| Diluted EPS, continuing operations | $1.14 | $3.09 |
| Operating cash flow, continuing operations | $980 million | $1.014 billion |
| Capital expenditures | $423 million | $446 million |
| Total assets | $15.340 billion | $15.358 billion |
| Shareholders’ equity | $5.647 billion | $5.574 billion |
- Manufacturing gross margin declined to 16.5% from 17.5%. Total segment profit was $1.169 billion, down from $1.309 billion.
- Manufacturing group debt rose to $3.088 billion from $2.777 billion; Finance group debt declined to $824 million from $903 million. Manufacturing debt-to-capital was 35% (33% in 2016), or 26% net of cash (23% in 2016).
- Year-end cash and equivalents were $1.262 billion across the two borrowing groups. Textron had an undrawn $1.0 billion revolving credit facility, with $11 million of letters of credit issued against it.
- Manufacturing current assets were $7.027 billion and current liabilities were $3.660 billion. The company said it expected existing cash, manufacturing cash generation and other funding alternatives to cover future needs.
Changes and quarterly results
- Revenue grew 3%, mainly from Industrial, Textron Systems and Bell, partly offset by lower Textron Aviation revenue. Industrial’s increase included Arctic Cat, acquired in March 2017.
- Continuing-operations income and diluted EPS fell sharply, principally reflecting a $266 million provisional tax-reform charge in 2017 versus a $206 million continuing-operations tax benefit from the IRS settlement in 2016. The 2017 effective tax rate was 59.8%, compared with 3.8%; the company expected the new 21% federal corporate rate to reduce its effective tax rate in 2018 and later years.
- By segment, 2017 revenue and profit were: Aviation $4.686 billion and $303 million; Bell $3.317 billion and $415 million; Systems $1.840 billion and $139 million; Industrial $4.286 billion and $290 million; Finance $69 million and $22 million. Aviation, Systems and Industrial segment profit fell year over year; Bell and Finance profit increased.
- Backlog declined to $7.184 billion from $8.242 billion. Bell backlog fell 14% to $4.598 billion, and Systems backlog fell 24% to $1.406 billion. About 38% of total backlog was not expected to be filled in 2018.
- Q4 2017 revenue was $4.017 billion versus $3.825 billion in Q4 2016. Q4 2017 reported a $106 million loss from continuing operations, compared with $215 million of income in Q4 2016; the 2017 quarter included the $266 million tax-reform charge.
- Operating cash flow from continuing operations declined 3%. The company cited higher pension contributions, including a discretionary $300 million U.S. pension contribution, and lower earnings, partly offset by working-capital improvements.
Management commentary, outlook and risks
- Management highlighted product development, the Arctic Cat acquisition and restructuring intended to improve efficiency and support long-term growth. No numerical 2018 earnings or revenue guidance is provided in the supplied filing text.
- 2017 special charges totaled $130 million, including restructuring and Arctic Cat integration and transaction costs. Restructuring actions were expected to reduce headcount by approximately 2,100 positions; $44 million of remaining restructuring reserves was expected to be paid mainly in the first half of 2018.
- Textron Systems recorded $44 million of unfavorable 2017 adjustments on the Tactical Armoured Patrol Vehicle program, citing production ramp-up inefficiencies and other production issues.
- Arctic Cat purchase accounting was preliminary; $230 million was allocated to goodwill and $75 million to intangible assets, with finalization expected in the first quarter of 2018.
- Beginning in 2018, revenue recognition changes were expected to accelerate recognition on certain Bell and Systems government contracts. The company estimated an approximately $90 million after-tax increase to opening retained earnings and a $350 million increase in contract assets; it said the change would not affect cash flows or contract economics.
- Key risks include U.S. Government appropriations, contract performance and termination, aircraft demand cyclicality, supplier execution, cost overruns and program estimates, international and foreign-exchange exposure, pension assumptions, cybersecurity, acquisition integration and Finance portfolio collectability. The company reported no material losses from past cyberattacks.
- Textron disclosed the Fair Finance litigation, including claims seeking $316 million in alleged transfers and $223 million in other damages, with possible treble damages; the company is defending the case. It stated that existing proceedings were not expected to materially affect financial position or results. Estimated environmental liabilities were $40 million to $140 million, with $65 million reserved.
Important facts for investors to verify
- Reconcile the annual-report period with the requested “2016 Q4” metadata and use the correct period for comparisons.
- Assess recurring earnings excluding the 2017 tax-reform charge and the unusually large 2016 IRS-settlement benefit; monitor final tax-reform adjustments.
- Track conversion and replenishment of backlog, particularly Bell and Systems, and the performance of the TAPV program.
- Review the profitability and integration progress of Arctic Cat, including final purchase accounting and restructuring cash costs.
- Monitor pension funding requirements, debt maturities and liquidity, and credit quality in Textron Finance.
- Follow the Fair Finance litigation and environmental exposures for changes in probability, reserve levels or potential materiality.