Textron Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 30, 2019, compared with the quarter ended March 31, 2018. This conflicts with the request metadata identifying 2018 Q1; the summary below reflects the filing itself.
Business context and results
Textron reports five segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. The filing presents unaudited results for the three months ended March 30, 2019.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $3.109 billion | $3.296 billion | Down 6% |
| Income before taxes | $212 million | $218 million | Down $6 million |
| Net income | $179 million | $189 million | Down $10 million |
| Diluted EPS | $0.76 | $0.72 | Up $0.04 |
| Gross margin as % of manufacturing revenue | 16.7% | 16.8% | Down 0.1 percentage point |
| Operating cash flow | $(216) million | $(85) million | Outflow increased $131 million |
Segment revenue and profit: Textron Aviation $1.134 billion and $106 million; Bell $739 million and $104 million; Textron Systems $307 million and $28 million; Industrial $912 million and $50 million; Finance $17 million and $6 million. Manufacturing segment profit totaled $288 million; Finance contributed $6 million.
Financial position, liquidity and cash flow
- At March 30, 2019, total assets were $14.480 billion and total liabilities were $9.247 billion; shareholders’ equity was $5.233 billion.
- Cash and equivalents totaled $742 million ($646 million Manufacturing group; $96 million Finance group), versus $1.107 billion at the start of the quarter.
- Manufacturing group debt was $3.175 billion, versus $3.066 billion at December 29, 2018. Its net debt-to-capital ratio was 33%, up from 29%; debt-to-capital was 38%, up from 37%. Finance group debt was $711 million, versus $718 million.
- Operating cash outflow reflected working-capital changes, particularly inventory. Inventory was $4.047 billion, up from $3.818 billion at year-end. Capital expenditures were $59 million. Financing included $202 million of share repurchases and $100 million of short-term borrowing.
- Textron had no borrowings under its $1.0 billion revolving credit facility, which expires in September 2021. Management said it expects sufficient cash from existing balances, manufacturing operations and other funding alternatives to meet future needs.
Material changes and notable items
- Revenue declined primarily because of the 2018 sale of Tools and Test Equipment, which reduced Industrial revenue by $128 million year over year, and lower volume in Industrial and Textron Systems. Textron Aviation revenue rose $124 million; Bell revenue fell $13 million.
- Segment profit improved at Textron Aviation by $34 million and Bell by $17 million, but declined $22 million at Textron Systems and $14 million at Industrial.
- Textron Aviation delivered 44 Citation jets and 44 commercial turboprops, compared with 36 and 29, respectively, a year earlier. Bell commercial helicopter deliveries were 30, versus 46.
- Backlog was $9.698 billion, up from $9.097 billion at year-end. The filing says approximately 70% of remaining performance obligations were expected to convert to revenue through 2020, another 23% through 2022 and the balance thereafter.
- Contract estimate adjustments increased revenue and segment profit by $31 million and net income by $23 million in Q1 2019, compared with $40 million and $30 million, respectively, in Q1 2018.
- The effective tax rate was 15.6%, versus 13.3%; the 2019 rate included a $12 million benefit for prior-year research credits. The reserve for unrecognized tax benefits was $175 million, up from $141 million.
- Textron adopted the new lease standard in 2019, recognizing $307 million of operating lease right-of-use assets and liabilities. Adoption had no impact on earnings or cash flows.
- On April 1, 2019, a training business was contributed to a newly formed joint venture in which Textron holds a 30% interest. The related $145 million of assets had been classified as held for sale at March 30.
Outlook, risks and contingencies
Management stated that first-quarter operating cash flow is typically negative and that it expects positive operating cash flow for the full year; the filing provides no specific earnings or revenue guidance. Key disclosed risks include U.S. government funding, defense budget and contract changes, contract execution and cost control, export and regulatory changes, demand and foreign-exchange volatility, supplier performance, finance receivable credit quality, product launches, pensions and cybersecurity. Finance receivables were $782 million gross; nonaccrual receivables were 3.96% of the balance, while 60-plus-day delinquencies were 2.69%, up from 1.77% at year-end. Textron said existing legal proceedings and claims were not expected to materially affect financial position or results, based on information then available.
Important facts for investors to verify
- Confirm the requested 2018 Q1 period against the filing’s actual March 30, 2019 reporting date.
- Assess whether the expected full-year positive operating cash flow is supported by working-capital trends, especially inventory and other liabilities.
- Evaluate whether backlog conversion and segment performance offset the revenue declines associated with divestiture and lower volume.
- Track rising manufacturing leverage, reduced cash, short-term borrowing and the pace of share repurchases.
- Monitor finance receivable delinquencies, prior-year tax-credit claims and the effect of contract estimate adjustments.