Textron Inc. — Form 10-Q Summary
Period and metadata: The supplied filing is for the quarter ended April 1, 2017, compared with the quarter ended April 2, 2016. This conflicts with the request metadata of “2016 Q1”; the filing itself is for 2017 Q1.
Financial results
- Revenue: $3.093 billion, down 3% from $3.201 billion. Manufacturing revenue was $3.075 billion; Finance revenue was $18 million.
- Earnings: Continuing-operations pretax income was $121 million versus $215 million; net income was $101 million versus $150 million. Diluted EPS was $0.37 versus $0.55. The effective tax rate fell to 17.4% from 29.8%, reflecting audit-settlement benefits and excess tax benefits from share-based compensation.
- Margins: Manufacturing gross margin was 16.0% of manufacturing revenue, down from 17.2%. Segment profit was $219 million versus $280 million. Textron Aviation margin fell to 3.7% from 6.7%; Bell increased to 11.9% from 10.1%; Textron Systems fell to 4.8% from 9.0%; Industrial fell to 7.7% from 9.6%.
- Cash flow: Cash used in continuing operating activities was $169 million versus $150 million; including discontinued operations, total operating cash use was $194 million versus $150 million. Investing cash use was $366 million and financing provided $251 million. Cash and equivalents ended at $997 million, down $301 million during the quarter.
- Liquidity and debt: Manufacturing group cash was $858 million and debt $3.230 billion, compared with $1.137 billion and $2.777 billion at year-end 2016. Net debt to capital rose to 30% from 23%; debt to capital rose to 37% from 33%. Finance group cash was $139 million and debt $885 million. Textron reported no borrowings on its $1.0 billion revolving credit facility.
- Other metrics: Backlog was $8.394 billion, up from $8.242 billion at year-end. The company repurchased 3.925 million shares for $186 million. It paid a $0.02-per-share dividend.
Material changes and business drivers
- Revenue declines at Aviation and Bell—primarily lower military and commercial turboprop volume and fewer H-1 deliveries—were partly offset by growth at Textron Systems and Industrial.
- Textron Systems recorded a $24 million unfavorable estimate adjustment on the Tactical Armoured Patrol Vehicle (TAPV) contract after production failed to ramp as expected, causing inefficiencies and higher estimated costs.
- Textron acquired Arctic Cat on March 6, 2017, for approximately $316 million net of cash acquired and including debt repayment. Preliminary purchase accounting allocated $213 million to goodwill and $75 million to intangible assets.
- Gross program-profit adjustments were a net unfavorable $12 million in Q1 2017, compared with a net favorable $29 million in Q1 2016.
Outlook, risks and unusual items
- Management expects positive operating cash flow for the full year, noting that Q1 typically produces an operating cash outflow. It cited cash balances, expected manufacturing cash generation and other funding alternatives as sources of liquidity.
- The 2016 restructuring plan is expected to incur another $17–$32 million in pretax charges; management expects about 2,000 total position reductions and substantial completion by the end of Q2 2017. The Arctic Cat integration plan is expected to add $8 million of restructuring costs; estimated total Arctic Cat special charges are approximately $30 million.
- Total expected cash outlay for the two restructuring plans is estimated at $135–$150 million; $58 million had been paid through Q1, with the remainder expected by year-end 2017.
- Other key risks include U.S. government budget, funding and contract-performance risks; demand and foreign-exchange volatility; supplier and subcontractor performance; finance-portfolio credit quality; product launches; and acquisition integration and execution.
- The filing states that existing legal proceedings are not expected to have a material effect on financial position or results. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Confirm the requested period: the supplied 10-Q covers Q1 2017, not Q1 2016.
- Assess the TAPV contract’s remaining cost and delivery assumptions, and whether production issues or further estimate revisions could affect results.
- Monitor segment trends, particularly Aviation and Bell delivery volumes, and whether Systems and Industrial growth translates into improved profitability.
- Review Arctic Cat integration performance, final purchase accounting, and actual restructuring charges and cash outlays against management estimates.
- Track inventory, operating cash conversion, leverage and the deterioration in Finance receivables’ 60+ day delinquency ratio, which rose to 6.26% from 4.23% at year-end.