Textron Inc. — 2018 Form 10-K Summary
Period note: The request metadata says “2017 Q4,” but the supplied filing is Textron’s Form 10-K for the fiscal year ended December 29, 2018. The summary below covers fiscal 2018 and compares it primarily with fiscal 2017.
Business context and reporting period
Textron is a diversified manufacturer and finance company operating through Textron Aviation, Bell, Textron Systems, Industrial and Finance. Its businesses include aircraft and helicopters, defense systems, automotive components, specialized vehicles and financing for Textron aircraft and helicopters. The company had approximately 35,000 employees. The financial statements were audited by Ernst & Young, which issued an unqualified opinion; management and the auditor also reported effective internal control over financial reporting.
Financial results and key metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $13.972 billion | $14.198 billion |
| Income from continuing operations | $1.222 billion | $306 million |
| Diluted EPS from continuing operations | $4.83 | $1.14 |
| Total segment profit | $1.267 billion | $1.169 billion |
| Operating cash flow from continuing operations | $1.109 billion | $963 million |
| Capital expenditures | $369 million | $423 million |
| Cash and equivalents, consolidated | $1.107 billion | $1.262 billion |
| Manufacturing group debt | $3.066 billion | $3.088 billion |
| Finance group debt | $718 million | $824 million |
| Shareholders’ equity | $5.192 billion | $5.647 billion |
| Backlog | $9.097 billion | $7.184 billion |
Reported 2018 income includes a $444 million pre-tax gain on the Tools and Test Equipment sale, recorded as a gain on disposition; the company reported the gain as $419 million after tax. The effective tax rate was 11.7%, compared with 59.8% in 2017, when tax expense included a $266 million provisional Tax Act charge. Manufacturing gross margin was 16.6% of manufacturing revenue, versus 16.3% in 2017. The company spent $643 million on company-funded research and development.
Consolidated cash flow from investing activities was positive $620 million, including $807 million net proceeds from the business sale; financing activities used $1.864 billion, including $1.783 billion for share repurchases. Cash dividends paid were $20 million. The Manufacturing group’s net debt-to-capital ratio was 29%, up from 26%; its debt-to-capital ratio was 37%, up from 35%. Textron reported an undrawn $1.0 billion revolving credit facility, with $10 million of letters of credit issued against it.
Material changes versus the prior comparable period
- Revenue declined about 2%, mainly reflecting the Tools and Test Equipment disposition and lower Textron Systems and Bell revenue. Textron Aviation revenue rose 6%, supported by higher deliveries, mix and pricing.
- Segment profit rose 8%. Textron Aviation profit increased 47% to $445 million; Bell increased 2% to $425 million; Textron Systems increased 12% to $156 million after weaker program performance in 2017; Industrial fell 25% to $218 million. Finance profit was $23 million.
- Textron Aviation delivered 188 Citation jets and 186 commercial turboprops, compared with 180 and 155, respectively, in 2017. Bell delivered 192 commercial helicopters, compared with 132.
- Backlog grew 27%, including Bell’s $2.4 billion share of a new multi-year V-22 contract for 63 aircraft and associated supplies and services through 2024. Backlog comparisons are affected by 2018 adoption of ASC 606, which changed recognition timing and backlog measurement.
- Textron sold its Tools and Test Equipment businesses on July 2, 2018, receiving $807 million net cash proceeds. The sale reduced Industrial revenue, but generated the reported gain.
- Operating cash flow increased 15%; management cited lower pension contributions and higher earnings, partly offset by greater working-capital use. Pension contributions were $52 million, versus $358 million in 2017, which included a $300 million discretionary contribution.
Outlook, management commentary, risks and unusual items
- Outlook: The supplied filing text does not provide a clear consolidated earnings or revenue guidance range. Management expected approximately 75% of the $9.1 billion remaining performance obligations at year-end to be recognized through 2020, with a further 14% through 2022. Product milestones included early-2019 Citation Longitude deliveries following provisional certification, and targeted 2019 certification for Bell’s 525 helicopter; timing and certification are subject to risk.
- Accounting comparability: Textron adopted ASC 606 in 2018 using a modified retrospective method and did not restate comparative periods. The change shifted certain U.S. Government contract revenue recognition to cost-to-cost and affected reported 2018 revenue, profit and backlog. Adoption increased opening retained earnings by $90 million; the filing’s reconciliation shows 2018 revenue would have been $201 million lower under prior accounting.
- Restructuring and operating issues: Textron recorded $73 million in fourth-quarter charges to restructure Specialized Vehicles after dealer sell-through lagged expectations. The plan included product rationalization, facility closures and about 400 job reductions. Charges included $47 million of asset impairment, $18 million of contract termination and other costs, and $8 million of severance.
- Contract estimates: Cumulative catch-up adjustments increased segment profit by $196 million in 2018, versus $5 million in 2017. Management highlighted the judgment involved in estimating long-term contract costs, variable consideration and completion timing; fixed-price contracts comprised about 80% of 2018 U.S. Government revenue.
- Risks: About 24% of revenue was generated by or resulted from U.S. Government contracts, exposing results and cash flow to appropriations, program changes, contract termination and performance requirements. Other significant risks include cyclical aircraft demand, supplier performance, international and currency exposure, cybersecurity, regulation, pension assumptions, product liability and Finance portfolio collectability.
- Finance portfolio: Net finance receivables were $760 million. Nonaccrual receivables declined to $40 million, or 5.07% of receivables, from $61 million and 7.18%; receivables 60 or more days delinquent were 1.77%, versus 4.00%.
- Contingencies: Textron disclosed the Fair Finance litigation, in which remaining claims include a portion of an intentional fraudulent-transfer claim; the company said it would continue to defend the case. It did not believe existing proceedings would materially affect financial position or results. Environmental liabilities were estimated at $45 million to $150 million, with $81 million reserved.
- Other notable items: The company returned $1.8 billion to shareholders through repurchases and dividends and repurchased 29.1 million shares during 2018. The filing states that existing or pending climate-change measures were not expected to have a material foreseeable effect, while noting it would monitor developments.
Most important facts for investors to verify
- Confirm the intended reporting period: this is a fiscal 2018 10-K, not a 2017 Q4 filing.
- Assess earnings excluding the Tools and Test Equipment disposition gain and distinguish this one-time item from ongoing segment performance.
- Account for ASC 606’s effect when comparing 2018 revenue, profit, backlog and contract assets or liabilities with 2017.
- Monitor Specialized Vehicles dealer sell-through, restructuring execution and the potential for further impairments or costs.
- Review V-22 and other government contract funding, program execution and cost-estimate changes, including the effect of cumulative catch-up adjustments.
- Track aircraft demand and conversion of backlog to deliveries, particularly certification and launch timing for new products.
- Evaluate cash deployment, leverage and pension funding needs alongside operating cash flow, repurchases and future investment requirements.
- Follow the Fair Finance matter, environmental remediation estimates and the quality of Textron Financial’s receivables.