TEXTRON INC annual report, FY2014

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Textron Inc. — Form 10-K Summary

Reporting period: The supplied filing is for the fiscal year ended January 3, 2015, with comparisons to fiscal 2013 and 2012. It is not a 2013 Q4 filing; quarterly figures below are not the focus of this annual summary.

Business context

Textron is a diversified manufacturer and finance company with five segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. On March 14, 2014, it acquired Beechcraft and combined that business with Cessna as Textron Aviation. The results include Beechcraft only from the acquisition date.

Financial performance

  • Revenue: $13.878 billion, up 15% from $12.104 billion in 2013. The $1.5 billion contribution from Beechcraft was the main driver; higher Citation volume and Industrial acquisitions also contributed.
  • Profit and EPS: Income from continuing operations was $605 million, versus $498 million; diluted continuing-operations EPS was $2.15, versus $1.75. Net income was $600 million, including a $5 million loss from discontinued operations. Acquisition and restructuring costs were $52 million.
  • Margins and segment profit: Manufacturing gross margin was 17.1% of manufacturing revenue, up from 15.4%. Total segment profit rose 26% to $1.214 billion. Textron Aviation earned $234 million after a $48 million loss in 2013; Bell profit declined to $529 million from $573 million; Textron Systems increased to $150 million from $147 million; Industrial rose to $280 million from $242 million; Finance fell to $21 million from $49 million.
  • Cash flow: Cash from continuing operating activities was $1.211 billion, up from $813 million. Investing used $1.919 billion, including $1.628 billion for acquisitions; financing provided $335 million. Year-end cash was $822 million, down from $1.211 billion. Manufacturing-group operating cash flow was $1.097 billion.
  • Debt and liquidity: Manufacturing-group debt was $2.811 billion, versus $1.931 billion; Finance-group debt was $1.063 billion, versus $1.256 billion. Manufacturing net-debt-to-capital increased to 33% from 15%. Manufacturing cash was $731 million and Finance cash $91 million. A $1.0 billion revolving credit facility had no borrowings outstanding; $35 million of letters of credit were issued against it.
  • Other metrics: Total assets were $14.605 billion and shareholders’ equity $4.272 billion. Capital expenditures were $429 million; company-funded R&D was $694 million. Dividends declared were $0.08 per share.

Material changes versus 2013

  • Textron Aviation revenue rose 64% to $4.568 billion, mainly from the acquisition and higher Citation deliveries; its segment profit improved by $282 million. Beechcraft-related inventory fair-value amortization reduced 2014 segment profit by $63 million.
  • Bell revenue fell 6% to $4.245 billion and profit fell 8%; commercial aircraft deliveries declined to 178 from 213, and backlog decreased 14% to $5.524 billion.
  • Industrial revenue increased 11% to $3.338 billion, reflecting higher volume and acquisitions. Textron Systems revenue declined 2% to $1.624 billion, while profit edged up.
  • Finance receivables declined to $1.254 billion from $1.483 billion. Nonaccrual receivables improved to 6.46% of the portfolio from 7.08%; receivables 60 or more days delinquent fell to 4.55% from 5.39%.
  • Backlog totaled $9.679 billion, down from $10.271 billion. Approximately 52% was not expected to be filled in 2015; about 66% was with the U.S. Government.

Outlook, risks and unusual items

  • The filing gives no explicit consolidated earnings or revenue guidance. Management expected the Citation Latitude to enter service in 2015, the Citation Longitude in 2017, and the Bell 525 to make its first flight in 2015; timing and certification remain execution risks. Additional 2015 Beechcraft integration restructuring costs were expected but not expected to be material.
  • Management attributed growth to investment in products and complementary acquisitions, citing $1.6 billion invested in acquisitions and higher manufacturing cash flow. It also noted integration and cost-reduction efforts.
  • U.S. Government contracts generated approximately 28% of 2014 revenue. Funding, appropriations, contract termination, cost overruns, audits and procurement rules could affect results and cash flows.
  • Other stated risks include cyclical aircraft demand, supplier or subcontractor failures, acquisition integration, Finance portfolio collectability, foreign exchange and interest-rate movements, product certification and liability, cybersecurity, pensions, and legal or regulatory matters.
  • Pension and postretirement adjustments reduced other comprehensive income by $401 million after tax in 2014, compared with a $747 million gain in 2013. The pension funded deficit increased to $1.027 billion from $199 million, with actuarial assumptions and newly adopted mortality tables contributing to the reported obligation.
  • Environmental liabilities were estimated at $40 million to $160 million, with approximately $80 million reserved. The filing identifies a proposed $238,000 civil penalty concerning hazardous-material shipment; the company was negotiating its disposition. Management did not expect existing proceedings and claims, based on information then available, to materially affect financial position or results.

Most important facts for investors to verify

  • How much of reported growth and Textron Aviation profitability is sustainable apart from Beechcraft acquisition effects, inventory step-up amortization and integration benefits.
  • Whether Bell’s lower commercial activity and declining backlog stabilize, and how government program deliveries and funding affect future results.
  • Whether cash generation can support acquisition integration and elevated manufacturing debt while maintaining liquidity and planned investment.
  • Future pension funding needs and sensitivity to discount rates, asset returns and benefit assumptions.
  • Finance receivable credit quality, especially nonaccrual and delinquency trends, alongside the continuing reduction in portfolio size.
  • Progress on announced aircraft development and certification timelines, and any material changes in contract estimates, contingencies or acquisition accounting.

Audit and controls: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management reported effective disclosure controls.