Textron Inc. Form 10-Q Summary
Period note: The filing covers the quarter ended July 2, 2016, and the six months ended July 2, 2016. This conflicts with the request metadata identifying 2015 Q2; the figures below follow the filing.
Business context and reporting period
Textron reports five segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. Its manufacturing and finance operations use separate borrowing groups. The filing is unaudited and states interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $3.511 billion | $3.247 billion | $6.712 billion | $6.320 billion |
| Income from continuing operations | $178 million | $169 million | $329 million | $297 million |
| Net income | $177 million | $167 million | $327 million | $295 million |
| Diluted EPS | $0.65 | $0.60 | $1.20 | $1.05 |
- Q2 revenue rose 8%; first-half revenue rose 6%. Q2 net income rose about 6%; first-half net income rose about 11%.
- Manufacturing gross margin was 17.2% in both Q2 and the first half, compared with 18.2% and 18.0%, respectively, in the prior-year periods. Textron attributed the decline chiefly to unfavorable Textron Aviation product mix.
- First-half consolidated operating cash flow was negative $31 million, versus positive $202 million a year earlier. Continuing-operations operating cash flow was negative $30 million, versus positive $205 million.
- First-half capital expenditures were $207 million; acquisition cash payments were $179 million. Cash and equivalents totaled $743 million at July 2, 2016.
- Manufacturing group debt was $3.063 billion and Finance group debt was $849 million. Manufacturing net debt to capital was 32%, up from 26% at January 2, 2016; debt to capital was 37%, versus 35%. The $1.0 billion revolving facility had no borrowings outstanding.
- Total assets were $15.034 billion and shareholders’ equity was $5.186 billion. Manufacturing inventories were $4.595 billion, up from $4.144 billion at year-end.
- Segment results for Q2: Textron Aviation revenue/profit $1.196 billion/$81 million; Bell $804 million/$81 million; Textron Systems $487 million/$60 million; Industrial $1.004 billion/$99 million; Finance $20 million/$7 million.
Material changes versus prior comparable periods
- Growth was led by Textron Systems, Industrial and Textron Aviation. Textron Systems Q2 revenue increased 51% and segment profit increased 186%, mainly from higher volume and favorable mix.
- Bell Q2 revenue declined 5% and segment profit declined 20%, primarily due to fewer commercial aircraft deliveries and lower favorable program adjustments. Bell backlog fell to $4.908 billion from $5.224 billion at year-end; total reported segment backlog declined to $8.339 billion from $8.626 billion.
- Textron Aviation revenue grew, including higher Citation jet volume, but segment profit fell to $81 million from $88 million; margin declined to 6.8% from 7.8%.
- Industrial revenue and profit increased, with acquired businesses contributing to revenue growth. Finance segment revenue and profit declined, primarily due to lower average finance receivables.
- First-half operating cash flow weakened mainly because of working-capital changes, particularly lower customer deposits tied to performance-based payments on certain military contracts. Cash flow included $60 million from corporate-owned life insurance settlements.
- First-half share repurchases were $215 million for 6.2 million shares, versus $87 million for 1.9 million shares in the prior-year period. Textron issued $350 million of 4.0% notes due 2026.
Outlook, commentary, risks and unusual items
- The filing does not provide clear full-year revenue or earnings guidance. Management said it expected sufficient cash for future needs, considering existing balances, expected manufacturing cash generation and other funding alternatives.
- On July 11, 2016, the IRS Appeals Office approved a settlement for tax years 1998–2008. Textron expected to record in Q3 a tax benefit of approximately $175 million, plus a favorable benefit from reversing approximately $140 million of accrued interest. These were subsequent events, not Q2 earnings; the filing allocates portions to continuing and discontinued operations.
- Long-term contract estimate changes increased pretax income by $10 million in Q2 and $39 million in the first half of 2016, compared with $36 million and $54 million, respectively, in 2015. These estimates are subject to revision as costs and contract performance evolve.
- Finance receivables classified as nonaccrual increased to $99 million, or 9.93% of receivables, from $84 million, or 7.60%, at year-end. Receivables delinquent 60 or more days were 5.72% of the portfolio, down from 6.24%.
- Risks identified include U.S. government funding, defense budgets and contract performance; demand and economic volatility; supplier performance; foreign exchange and interest rates; finance portfolio credit quality; product development and certification; pension assumptions; and cybersecurity. Management said existing legal proceedings and claims were not expected to have a material effect. A previously disclosed FAA matter was settled for a $190,000 penalty.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q2 2016, not Q2 2015.
- Review whether the anticipated Q3 tax and interest benefits were recorded as expected and how much affected continuing operations.
- Assess whether operating cash flow and working capital recovered, especially customer deposits and inventory growth.
- Monitor Bell deliveries, segment margins and backlog, and whether Textron Aviation product mix improves.
- Track Finance segment nonaccruals, credit-loss allowances and recoveries.
- Evaluate long-term contract estimate changes and their effect on reported segment profit.