Textron Inc. 10-Q Summary
Reporting period: The filing covers the quarter ended July 2, 2011, and the six months then ended, with comparisons to July 3, 2010. This differs from the request metadata’s “2010 Q2.” Amounts are in millions of dollars except per-share data.
Business context and results
Textron reports Cessna, Bell, Textron Systems, Industrial and Finance. Its Manufacturing and Finance groups have separate borrowing structures. The Finance group is winding down its non-captive commercial finance business.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $2,728 | $2,709 | $5,207 | $4,919 |
| Income from continuing operations | $92 | $81 | $123 | $77 |
| Net income | $90 | $82 | $119 | $74 |
| Diluted EPS | $0.29 | $0.27 | $0.38 | $0.25 |
| Income before tax | $135 | $99 | $181 | $110 |
| Interest expense | $61 | $69 | $123 | $140 |
Financial position, cash flow and liquidity
- Manufacturing revenue rose 1.6% in Q2 and 7.5% year to date; Finance revenue fell 41% and 55%, respectively, as its average receivables portfolio contracted.
- Manufacturing gross margin was 17.4% in Q2 versus 17.5%, and 16.9% for the first half versus 17.2%. The effective tax rate was 32% for both 2011 periods; the 2010 rates were 18% for Q2 and 30% year to date.
- Six-month operating cash flow was $217, down from $247. Cash and equivalents ended at $651, down $280 from the start of the year. The company cited $170 of higher pension contributions as a major factor in lower operating cash generation.
- Capital expenditures were $169 versus $83 in the prior-year first half. Investing cash flow was $501, compared with $1,039; financing cash outflow was $1,009, compared with $1,974.
- At July 2, total debt was approximately $5,042: $2,543 in Manufacturing and $2,499 in Finance. Manufacturing net debt to capital was 37.9%, up from 32.1% at year-end; Finance debt declined from $3,660. The Manufacturing group had $610 cash and Finance had $41.
- A new $1.0 billion Textron revolving facility runs to March 2015 and had no borrowings outstanding. TFC’s reduced $700 million facility had $500 million drawn. The company said existing cash, manufacturing cash generation and execution of the Finance exit plan should provide sufficient funds for future needs.
Material changes and management commentary
- Bell revenue increased 6% in Q2 and 12% for the first half, supported by higher V-22 and H-1 deliveries; segment profit rose 11% and 16%, respectively, helped by military-program efficiencies.
- Cessna revenue increased 3% in Q2 and 13% year to date, but its first-half segment loss widened to $33 from $21. Higher engineering and development spending, lower forfeited-deposit income and costs associated with increased sales contributed to the deterioration.
- Textron Systems revenue declined 15% in Q2 and 10% year to date, mainly on lower UAS and Mission Support and Other volume. Segment profit fell to $49 from $70 in Q2 and to $102 from $125 for the first half.
- Industrial revenue grew 9% in Q2 and 11% year to date, with foreign exchange a significant contributor. Segment profit rose to $55 from $51 in Q2 and to $116 from $100 year to date; material inflation partly offset operating improvements.
- Finance segment loss narrowed to $33 in Q2 from $71 and to $77 for the first half from $129. Lower credit-loss provisions and reduced expenses were partly offset by lower interest margin. Finance receivables were reduced by $802 net of originations in the first half; the exit plan is expected to be substantially complete over three to five years.
- Backlog declined from year-end at Bell ($6,953 versus $7,199) and Cessna ($2,522 versus $2,928), principally reflecting deliveries exceeding orders. Textron Systems backlog was $1,550 versus $1,598.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management’s stated outlook includes completing the non-captive Finance exit over three to five years and an expectation of sufficient liquidity, subject to successful execution and manufacturing cash generation.
- Finance credit risk remains material: nonaccrual receivables were $696, or 19.1% of held-for-investment receivables, at July 2. Management expected the nonaccrual percentage to remain high during liquidation. The allowance for losses was $299, or 8.21% of those receivables.
- Approximately 34% of revenue was derived from U.S. Government contracts. The filing highlights possible defense budget and appropriation changes, payment delays amid the federal debt-ceiling issue, contract performance and termination risks, and possible suspension or debarment.
- Other cited risks include economic and foreign-exchange volatility, raw-material inflation, pension and benefit costs, access to capital, supplier performance, product development and launch execution, and the ability to realize value from Finance receivables and collateral.
- The $600 million convertible notes became holder-convertible through September 30, 2011 after the stock-price threshold was met. Textron intended to settle principal in cash; conversion could also require up to $374 million in cash, 15.6 million net shares, or a combination, at the company’s option.
- No 2011 special charges were recorded; 2010 included restructuring charges of $10 in Q2 and $22 in the first half. Legal proceedings and claims were not believed by management to have a material effect based on information then available. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the applicable period: the filed 10-Q is for Q2 2011, not Q2 2010.
- Track Finance portfolio runoff, nonaccrual and delinquency trends, allowance adequacy, asset-sale proceeds and progress against the three-to-five-year exit plan.
- Assess liquidity and refinancing needs, including the TFC facility, support obligations and potential cash or share settlement of convertible notes.
- Monitor Cessna’s return to profitability, Textron Systems’ volume and backlog, and Bell’s program execution and delivery schedule.
- Evaluate exposure to U.S. Government funding and payment delays, pension contributions, commodity inflation and foreign-exchange movements.