Textron Inc. — Form 10-Q Summary
Period: The supplied filing is for the quarter ended June 30, 2018, not 2017 Q2 as stated in the request metadata. Comparisons are with the quarter and six months ended July 1, 2017. Amounts are in U.S. dollars.
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. Results are unaudited interim results and may not indicate full-year performance.
Financial results and key metrics
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Total revenue | $3.726 billion | $3.604 billion | $7.022 billion | $6.697 billion |
| Income from continuing operations | $224 million | $153 million | $413 million | $253 million |
| Diluted EPS | $0.87 | $0.57 | $1.59 | $0.94 |
| Operating cash flow, continuing operations | Not provided by quarter | Not provided by quarter | $398 million | $267 million |
Q2 manufacturing gross margin was 17.1% of manufacturing revenue, versus 16.5%; first-half margin was 17.0%, versus 16.1%. First-half consolidated net income was $413 million, compared with $254 million including $1 million from discontinued operations in 2017.
At June 30, cash and equivalents were $731 million ($554 million Manufacturing group; $177 million Finance group). Manufacturing-group debt was $3.079 billion and Finance-group debt was $809 million. Manufacturing-group net debt to capital was 32%, up from 26% at December 30, 2017. A $1.0 billion revolving credit facility was undrawn. Textron said it expected existing cash, operating cash generation and other funding alternatives to meet future needs.
First-half capital expenditures were $159 million. Consolidated cash decreased $531 million to $731 million, principally reflecting $915 million of share repurchases; operating cash flow was $397 million including discontinued operations. Dividends paid were $10 million on the consolidated cash flow statement.
Material changes versus prior comparable periods
- Q2 revenue rose 3%; first-half revenue rose 5%. Textron Aviation and Industrial led growth, with Bell also higher in the first half; Textron Systems revenue declined.
- Q2 income from continuing operations increased to $224 million from $153 million. First-half income rose to $413 million from $253 million, while diluted EPS increased to $1.59 from $0.94.
- Textron Aviation first-half revenue increased 7% and segment profit rose to $176 million from $90 million, benefiting from commercial turboprop volume, mix and pricing. Industrial revenue increased 12%, but segment profit fell to $144 million from $158 million, partly reflecting Arctic Cat costs and product mix.
- Bell first-half revenue rose 4% and segment profit increased to $204 million from $195 million. Textron Systems revenue fell 14%, but segment profit rose to $90 million from $62 million, partly because 2017 included a $24 million unfavorable TAPV program adjustment.
- Operating cash flow from continuing operations rose $131 million year over year, primarily due to higher earnings, partly offset by lower cash flow from captive financing. Investing cash use was only $6 million versus $410 million in 2017, when acquisition-related payments included Arctic Cat.
Outlook, commentary, risks and unusual items
- Textron adopted ASC 606 in 2018; comparative 2017 figures were not restated. The change principally moved certain Bell U.S. Government contract revenue recognition to a cost-to-cost method. The filing’s reconciliation shows the standard reduced reported first-half 2018 revenue by $246 million and income from continuing operations by $32 million versus prior accounting; adoption increased opening retained earnings by $90 million.
- First-half cumulative catch-up adjustments on prior-period contract revenue and segment profit increased pretax income by $104 million ($79 million after tax, or $0.30 per diluted share). Management cautioned that long-term contract estimates are judgmental; cost overruns, changed specifications, engineering demands or missed milestones could materially reduce earnings. Approximately 80% of 2017 U.S. Government revenue was under fixed-price or fixed-price incentive contracts.
- Backlog/remaining performance obligations were $8.2 billion at June 30; the company expected to recognize approximately 67% through 2019, another 19% through 2021 and the balance thereafter. Bell’s backlog included its share of a new V-22 contract for 58 aircraft and related support through 2024.
- Textron completed the sale of its Tools and Test Equipment businesses on July 2, 2018, after quarter-end, for a stated purchase price of $810 million. It expected an after-tax gain of approximately $400 million in Q3, subject to post-closing adjustments. The sale was not presented as a discontinued operation.
- The 2018 effective tax rates were 13.8% for Q2 and 13.6% for the first half, including a $25 million benefit from reassessing uncertain tax reserves and benefits from audit settlements.
- No numerical full-year earnings or revenue guidance is provided in the supplied filing text. Risks include U.S. Government funding and contract performance, fixed-price cost exposure, demand and foreign-exchange volatility, supplier performance, finance-receivable credit quality, cybersecurity, and execution of acquisitions and new products. Management reported no significant change in market-risk exposure and stated disclosure controls were effective.
Important facts for investors to verify
- Confirm the period: this is the June 30, 2018 10-Q, despite the request’s 2017 Q2 label.
- Assess how ASC 606 and the favorable $104 million first-half contract catch-up adjustments affect year-over-year comparability and the sustainability of earnings.
- Monitor the Tools and Test sale proceeds, post-closing adjustments and expected Q3 gain, as well as the planned use of repurchase authorization; Textron repurchased 14.6 million shares for $915 million in the first half.
- Track backlog conversion, especially Bell program execution, and the effect of fixed-price contract cost estimates on margins.
- Review liquidity after substantial repurchases and changes in manufacturing-group leverage, and monitor Finance-group delinquencies: 60-plus-day delinquency rose to 6.57% of finance receivables from 4.00% at year-end, although nonaccrual receivables declined to 6.82% from 7.18%.