Business context and reporting period
Textron Inc. filed this Form 10-Q for the quarter ended April 4, 2015; the comparable quarter ended March 29, 2014. The filing describes five segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. The period is Q1 2015, notwithstanding the request metadata identifying 2014 Q1. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $3.073 billion | $2.847 billion |
| Income from continuing operations | $128 million | $87 million |
| Net income | $128 million | $85 million |
| Diluted EPS | $0.46 | $0.30 |
| Operating cash flow, consolidated | $(19) million | $(26) million |
Manufacturing gross margin was 17.8% of manufacturing revenue, up from 16.4%. Segment profit was $259 million, versus $219 million. Net income included no discontinued-operations loss, compared with a $2 million after-tax loss in Q1 2014. Comprehensive income was $84 million, down from $90 million, including a $56 million foreign-currency translation loss.
At April 4, 2015, total assets were $14.738 billion and shareholders’ equity was $4.390 billion. Manufacturing-group cash was $561 million and debt was $2.824 billion; its net-debt-to-capital ratio was 34%, versus 33% at year-end. Finance-group cash was $147 million and debt was $1.021 billion. Textron reported no borrowings against its $1.0 billion revolving credit facility. Consolidated cash and equivalents declined to $708 million from $822 million at January 3, 2015.
Operating cash use reflected the usual first-quarter outflow pattern, including incentive and deferred-compensation payments and pension contributions. Inventory increased $308 million from year-end to $4.236 billion. Capital expenditures were $79 million. Investing cash use was $57 million, compared with $1.520 billion in Q1 2014, which included the $1.5 billion Beechcraft acquisition.
Material changes versus the prior comparable period
- Revenue rose 8%, with Textron Aviation up $266 million, primarily from Beechcraft, and Industrial up $75 million. Bell revenue fell $60 million and Textron Systems revenue fell $48 million.
- Textron Aviation segment profit increased to $67 million from $14 million, reflecting acquisition benefits and integration of Beechcraft and Cessna. Bell profit declined to $76 million from $96 million; Textron Systems fell to $28 million from $39 million; Industrial rose to $82 million from $66 million; Finance rose to $6 million from $4 million.
- Q1 2014 included $16 million of Beechcraft-related acquisition and restructuring costs; none were recorded in Q1 2015. Beechcraft contributed $101 million of revenue in Q1 2014, but was included for only part of that quarter, limiting direct comparison.
- Total backlog was $9.511 billion, down from $9.679 billion at year-end. Bell backlog fell $237 million as deliveries exceeded orders; Textron Systems backlog rose $168 million.
- Finance portfolio indicators weakened: nonaccrual receivables increased to $92 million, or 7.53% of receivables, from $81 million, or 6.46%; receivables at least 60 days delinquent rose to 6.80% from 4.55%.
Outlook, risks and unusual items
Management expected positive operating cash flow for full-year 2015 and stated that available cash, expected manufacturing cash generation and other funding alternatives should be sufficient for future needs. The filing provides no specific full-year revenue or earnings guidance.
After quarter-end, on April 28, 2015, Textron announced Bell cost reductions in response to continued softness in the medium commercial helicopter market. The actions were expected to reduce headcount by about 1,100 and generate $40–$50 million of severance and pension-curtailment costs, with $30–$40 million of cash outlays expected in Q2 and Q3 2015. Management did not expect a significant full-year 2015 impact on Bell segment profit, citing anticipated savings and recovery of allowable costs through U.S. government contract rates.
Q1 long-term-contract estimate revisions increased pretax income by $18 million ($11 million after tax, or $0.04 per diluted share); gross favorable adjustments were $33 million and gross unfavorable adjustments were $15 million. These cumulative catch-up estimates depend on projected contract costs, delivery schedules and performance. The filing identifies risks including U.S. government funding and contract changes, defense-budget shifts, program execution and cost control, foreign exchange, supplier performance, demand softness, acquisitions and Finance portfolio credit quality. Management said existing legal proceedings and claims were not expected to materially affect financial position or results. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the period: the filing is for Q1 2015, not Q1 2014, and assess acquisition-related comparability.
- Track Bell’s announced workforce actions, expected charges, cash costs and whether projected savings materialize.
- Monitor Finance receivable delinquencies and nonaccruals, allowance adequacy and recoverability of collateral.
- Assess the sustainability of contract-profit estimate benefits and the assumptions behind management’s full-year cash-flow expectation.
- Review backlog conversion, particularly Bell delivery trends and Textron Systems order activity, alongside inventory growth and manufacturing-group leverage.