Textron Inc. — Form 10-K Summary
Period note: The supplied filing is Textron’s audited annual report for the fiscal year ended December 29, 2012, not a 2011 Q4 filing. Comparisons below are primarily 2012 versus 2011; the filing also includes quarterly data.
Business context and reporting period
Textron is a diversified manufacturer and finance company with five segments: Cessna, Bell, Textron Systems, Industrial and Finance. Its businesses span aircraft, defense, industrial products and customer financing. Approximately 29% of 2012 revenue came from U.S. Government contracts.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $12.237 billion | $11.275 billion |
| Income from continuing operations | $581 million | $242 million |
| Net income | $589 million | $242 million |
| Diluted EPS from continuing operations | $1.97 | $0.79 |
| Cash from continuing operating activities | $935 million | $1.068 billion |
| Capital expenditures | $480 million | $423 million |
- Revenue rose 9%; income from continuing operations more than doubled. The 2011 comparison was weighed down by a $186 million Finance segment valuation charge on Golf Mortgage receivables transferred to held-for-sale.
- Manufacturing gross margin was 16.7%, versus 16.7% in 2011. Consolidated interest expense declined to $212 million from $246 million.
- Year-end cash was $1.413 billion, including $1.378 billion in the Manufacturing group and $35 million in Finance. Debt was $2.301 billion in Manufacturing and $1.686 billion in Finance, down from $2.459 billion and $1.974 billion, respectively, in 2011.
- Manufacturing debt-to-capital was 44% (47% in 2011), and net debt-to-capital was 24% (37%). A $1.0 billion revolving facility had no borrowings outstanding; $37 million of letters of credit were issued against it.
- Total backlog was $11.463 billion, up from $10.609 billion. About 56% was not expected to be filled in 2013; U.S. Government backlog includes only funded amounts.
Material changes versus the prior comparable period
- Bell: Revenue increased 21% to $4.274 billion and segment profit rose 23% to $639 million, supported by higher commercial helicopter and V-22 deliveries.
- Cessna: Revenue increased 4% to $3.111 billion and segment profit rose to $82 million from $60 million. Backlog fell 44% to $1.062 billion, mainly from deliveries exceeding new orders and cancellations.
- Textron Systems: Revenue declined 7% to $1.737 billion and segment profit declined 6% to $132 million, reflecting lower volume. Backlog more than doubled to $2.919 billion, including a $693 million Canadian armored-vehicle contract.
- Industrial: Revenue increased 4% to $2.900 billion and segment profit rose 6% to $215 million. Higher demand was partly offset by unfavorable euro translation and cost inflation.
- Finance: Revenue rose to $215 million from $103 million and segment profit was $64 million versus a $333 million loss. Improvement reflected favorable Golf Mortgage valuation changes, lower portfolio losses and expenses, and the prior-year $186 million valuation charge. The non-captive portfolio continued to run off.
Outlook, commentary, risks and unusual items
- The filing provides no consolidated numerical financial guidance. Product timing expectations included Citation M2 deliveries in the second half of 2013, an updated Citation X and upgraded Citation Sovereign planned for late 2013, Citation Latitude service entry in 2015, and Longitude in 2017.
- Textron expected to liquidate most of the remaining $370 million non-captive Finance portfolio over the next two years, subject to market conditions.
- Management warned that sequestration, as then scheduled, was expected to reduce revenue, profit and cash flow; the company said specific impacts were difficult to determine. Other key risks include continued softness in business aviation, U.S. defense funding and contract performance, customer access to financing, aircraft collateral values, suppliers, foreign exchange and pension assumptions.
- Textron Systems recorded $37 million of charges on new unmanned-aircraft fee-for-service contracts after startup and propulsion-performance issues. Its guidance and backlog did not include additional MEUAS II task orders after active orders were expected to conclude in April 2013.
- Cessna recorded a $27 million charge for an arbitration award it was contesting. A purported savings-plan class action reached an agreement in principle to settle for an immaterial amount, subject to documentation and court approval. TFC was dismissed from the Fair Finance lawsuit in November 2012.
- Environmental reserves were approximately $73 million against an estimated potential liability range of $44 million to $188 million. The company said existing legal proceedings and claims were not expected to materially affect its financial position or results.
- Defined-benefit pension obligations were underfunded by $1.338 billion at year-end. Textron expected 2013 pension contributions of approximately $180 million to its qualified, non-qualified and foreign plans, plus $22 million to its Retirement Account Plan.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers fiscal 2012, despite the request metadata specifying 2011 Q4.
- Assess whether the improvement in earnings is repeatable, particularly Finance’s return to segment profit and the effects of valuation changes and prior-year charges.
- Monitor UAS contract performance and costs, Cessna order cancellations and backlog conversion, and the pace and value of Finance portfolio liquidations.
- Review 2013 debt maturities, including $1.172 billion of scheduled debt payments, and the planned cash settlement of the $215 million convertible notes due May 2013.
- Track defense appropriations and sequestration exposure, pension funding needs, and aircraft collateral values that could affect Finance credit losses.