Textron Inc. Form 10-K Summary
Reporting-period note: The request metadata says “2010 Q4,” but the supplied filing is Textron’s Form 10-K for the fiscal year ended December 31, 2011. Comparisons below use fiscal 2010 unless noted.
Business context
Textron is a diversified manufacturer and finance company with approximately 32,000 employees. Its five segments are Cessna, Bell, Textron Systems, Industrial and Finance. The Finance segment is winding down most non-captive commercial lending while retaining financing that supports sales of Textron products.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $11.275 billion | $10.525 billion |
| Income from continuing operations | $242 million | $92 million |
| Diluted EPS from continuing operations | $0.79 | $0.30 |
| Segment profit | $591 million | $553 million |
| Continuing-operations operating cash flow | $1.068 billion | $993 million |
| Capital expenditures | $423 million | $270 million |
| Total assets | $13.615 billion | $15.282 billion |
| Shareholders’ equity | $2.745 billion | $2.972 billion |
Manufacturing gross margin was 16.7% of Manufacturing revenue, versus 16.5% in 2010. Consolidated interest expense declined to $246 million from $270 million. Income tax expense was $95 million, compared with a $6 million benefit in 2010; the effective tax rate was 28.1% versus negative 6.4%.
At year-end, Manufacturing group cash was $871 million and debt was $2.459 billion; debt-to-capital was 47.3%, up from 43.6%. Finance group cash was $14 million and debt was $1.974 billion, down from $3.660 billion. A $1.0 billion revolving facility expiring in March 2015 had no borrowings and $38 million of letters of credit outstanding. Total cash and equivalents were $885 million.
Consolidated cash provided by continuing operating activities was $1.068 billion; investing activities provided $843 million, largely reflecting finance-portfolio collections and sales; financing activities used $1.951 billion. Manufacturing group pension contributions were $642 million, up from $417 million. The company paid $22 million in dividends.
Material changes versus 2010
- Revenue grew 7%, led by Cessna (+17%), Bell (+9%) and Industrial (+10%); Textron Systems revenue fell 5%, and Finance revenue fell 53% as the portfolio contracted.
- Bell segment profit rose to $521 million from $427 million, supported by higher V-22 and H-1 deliveries and improved production efficiencies. Cessna returned to profit, at $60 million versus a $29 million loss, as aircraft volume recovered.
- Textron Systems profit fell 39% to $141 million, reflecting lower volume and $41 million of intangible-asset impairment plus approximately $19 million of severance costs. Industrial profit increased 25% to $202 million.
- Finance segment loss widened to $333 million from $237 million. Lower credit-loss provision and administrative costs were outweighed by a $186 million Golf Mortgage valuation charge and lower interest margin.
- Total backlog declined to $10.609 billion from $11.039 billion. Government backlog increased to $7.697 billion; commercial backlog decreased to $2.912 billion. Cessna backlog fell 35% to $1.889 billion.
Outlook, commentary, risks and unusual items
- Management described 2011 as a solid year, citing 7% revenue and segment-profit growth, higher volume in most businesses, and a 30% increase in company-funded research and development to $525 million.
- No consolidated numerical earnings or revenue guidance is provided in the supplied text. Product plans include Citation TEN deliveries expected in the second half of 2013, Citation M2 certification and deliveries expected in 2013, and Citation Latitude entry into service expected in 2015.
- The company expects continued liquidation of approximately $950 million of remaining non-captive finance receivables over several years, subject to market conditions. The 2011 transfer of Golf Mortgage receivables to held-for-sale status generated a $186 million charge.
- Textron Systems planned to eliminate over 10% of its segment workforce in 2012 in response to expected tighter defense opportunities. The company cited scheduled U.S. defense-budget reductions of approximately $600 billion over nine years beginning in 2013 as a material program-funding risk.
- Approximately 31% of 2011 revenue came from U.S. Government contracts. Other key risks include aircraft-market weakness and customer financing access, contract cost overruns or termination, finance-receivable and collateral losses, capital-market access, supplier performance, pension costs, foreign-exchange and commodity movements, product liability, and regulatory or cybersecurity events.
- Unusual items include the $186 million Golf Mortgage valuation charge, the $41 million Textron Systems intangible impairment, $55 million pretax loss on early extinguishment of convertible notes, and a $52 million gain on collection of notes from a prior business disposition. The convertible-note transactions reduced principal outstanding by 64%; $216 million remained at year-end and was convertible at holders’ option through March 31, 2012.
- A Fair Finance trustee lawsuit filed in February 2012 seeks $316 million in alleged fraudulent-transfer recovery and $223 million in other damages, plus potential trebled damages. Textron said it could not estimate a loss range at filing and intends to defend the case. An ERISA class action remained in discovery; a separate securities class action had been dismissed, with appeal pending. Management said existing proceedings were not expected to materially affect results, based on information then available.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Confirm the intended period: the supplied filing reports fiscal 2011, not 2010 Q4.
- Review the assumptions, valuation methods and eventual realization of the Golf Mortgage portfolio, including the $186 million charge and the remaining non-captive liquidation plan.
- Track U.S. defense appropriations, funded versus unfunded backlog, and contract performance, especially for Bell and Textron Systems.
- Assess whether Cessna’s recovery and backlog conversion can persist, given its sharply lower backlog and continuing sensitivity to business-jet demand and customer credit availability.
- Monitor Textron Systems’ margin recovery after impairments, severance and planned workforce reductions, and Industrial’s ability to offset material-cost inflation.
- Check pension funding needs and assumptions: the year-end pension obligation was $6.325 billion against $5.013 billion of plan assets; 2011 pension contributions were $642 million.
- Follow the Fair Finance litigation, convertible-note settlement and refinancing needs, and liquidity available after Finance group support contributions, including the additional $240 million paid to TFC in January 2012.