Textron Inc. — Form 10-Q Summary
Reporting period: Quarter ended July 3, 2010; comparisons are with the quarter ended July 4, 2009. The request metadata says “2009 Q2,” but the filing itself reports second-quarter 2010 results.
Business context and financial results
Textron reports five segments: Cessna, Bell, Textron Systems, Industrial and Finance. Its manufacturing and finance operations are financed through separate borrowing groups.
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Total revenue | $2.709 billion | $2.612 billion | $4.919 billion | $5.138 billion |
| Continuing pretax income (loss) | $99 million | ($120) million | $110 million | ($79) million |
| Continuing income (loss) | $81 million | ($62) million | $77 million | ($19) million |
| Net income (loss) | $82 million | ($58) million | $74 million | $28 million |
| Diluted EPS | $0.27 | ($0.22) | $0.25 | $0.11 |
Q2 revenue rose 4%; first-half revenue fell 4%. Manufacturing cost of sales was 82.5% of manufacturing revenue in Q2 and 82.8% in the first half, versus 83.1% in both comparable 2009 periods. The filing does not provide a consolidated operating-margin measure.
Cash flow, debt and liquidity
- First-half consolidated operating cash flow was $247 million, versus cash used of $4 million in 2009. Continuing-operations operating cash flow was $250 million versus $8 million.
- Manufacturing free cash flow, a company-defined non-GAAP measure, was $17 million versus negative $259 million. Capital expenditures were $83 million.
- Cash and equivalents were $1.191 billion at July 3, down from $1.892 billion at fiscal year-end. The balance sheet shows manufacturing cash of $1.021 billion and finance-group cash of $170 million.
- Balance-sheet debt was $3.036 billion for Manufacturing and $4.247 billion for Finance at July 3. Manufacturing net debt to capital was 40.9%, up from 39.4% at year-end; gross debt to capital was 51.0%, down from 55.9%.
- Total assets were $17.123 billion and shareholders’ equity was $2.914 billion. The Finance group had $821 million of debt and $362 million of other liabilities payable within 12 months.
Material changes and segment performance
- Cessna: Q2 revenue declined $236 million to $635 million; segment profit fell to $3 million from $48 million. Jet deliveries fell to 43 from 84. First-half revenue declined $572 million and segment profit was a $21 million loss.
- Bell: Q2 revenue increased $153 million to $823 million and segment profit rose to $108 million, mainly on defense deliveries, including V-22 and H-1. Profit included recognition of expected reimbursement of prior-year costs.
- Textron Systems: Q2 revenue increased $57 million to $534 million, primarily from higher Unmanned Aircraft Systems volume; segment profit was $70 million.
- Industrial: Q2 revenue increased $153 million to $661 million and segment profit rose to $51 million, reflecting higher volume as automotive markets improved.
- Finance: Q2 revenue declined $30 million to $56 million; segment loss improved to $71 million from $99 million. First-half finance receivables declined by $1.4 billion as the company continued exiting non-captive commercial finance.
- Aircraft and defense backlog was $12.4 billion at July 3. Cessna backlog fell to $3.744 billion from $4.893 billion, mainly due to business-jet cancellations and deliveries; Bell backlog increased to $7.075 billion.
Outlook, risks and unusual items
- Management expected $25 million of additional restructuring costs in the second half of 2010 and up to $7 million in 2011; the restructuring program was expected to be substantially completed in 2010. About 10,800 positions had been eliminated and 27 facilities exited by July 3.
- Management expected a non-cash after-tax charge of about $78 million in the second half of 2010 from reclassifying a Canadian entity’s cumulative currency translation adjustment into earnings; the company said this would not affect shareholders’ equity.
- For full-year 2010, management expected Finance receivables to decline by $2.0 billion, net of originations. It cited existing cash, manufacturing cash generation and execution of the Finance exit plan as sources expected to meet future needs, while noting the exit plan’s cash-conversion ratio was expected to decline.
- A $600 million 4.5% convertible note issue became convertible at holders’ option through September 30, 2010 after the share-price threshold was met. Textron said it intended to settle the face value in cash.
- On July 12, 2010, Textron made an additional $82 million capital contribution to TFC to maintain compliance with its support agreement’s fixed-charge coverage requirement.
- An aviation products-liability jury verdict against Avco totaled $24.7 million compensatory and $64 million punitive damages; judgment was pending post-trial motions. Textron disputed the verdict and expected it to be reversed on appeal. The company otherwise said existing proceedings were not expected to have a material financial effect.
- Key stated risks include economic and market weakness, aircraft order cancellations, defense-budget changes and contract execution, Finance portfolio credit quality and receivable valuations, access to financing, and successful completion of the commercial-finance exit.
Important facts for investors to verify
- Confirm the filing period: this is a 2010 Q2 10-Q, despite the request metadata stating 2009 Q2.
- Track Cessna deliveries, cancellations and backlog, and whether recovery in Industrial and defense demand continues.
- Review Finance-group credit quality, allowance adequacy, nonaccrual receivables, asset sales and cash conversion as the exit plan progresses.
- Assess liquidity and TFC’s support-agreement requirements, including the July $82 million contribution, and the convertible notes’ settlement and funding implications.
- Monitor the timing and accounting impact of the expected $78 million non-cash currency-translation charge, restructuring cash costs and the Avco litigation appeal.