Textron Inc. — 10-K Summary
Period clarification: The supplied filing is the annual report for the fiscal year ended January 1, 2011, covering fiscal 2010 and presenting 2009 comparisons. It is not a 2009 Q4 filing. Fourth-quarter figures below refer to Q4 2010 versus Q4 2009.
Business context and reporting period
Textron is a diversified manufacturer and finance company with five segments: Cessna, Bell, Textron Systems, Industrial and Finance. It had approximately 32,000 employees. The Finance segment was winding down its non-captive commercial finance business while retaining captive financing for Textron products.
Financial performance and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $10.525 billion | $10.500 billion |
| Income (loss) from continuing operations | $92 million | $(73) million |
| Net income (loss) | $86 million | $(31) million |
| Diluted EPS from continuing operations | $0.30 | $(0.28) |
| Cash from continuing operating activities | $993 million | $1.032 billion |
| Total debt: Manufacturing / Finance groups | $2.302 billion / $3.660 billion | $3.584 billion / $5.667 billion |
| Total assets / shareholders’ equity | $15.282 billion / $2.972 billion | $18.940 billion / $2.826 billion |
- Manufacturing gross margin was 16.5%, unchanged from 2009. Selling and administrative expense fell 8% to $1.231 billion; special charges were $190 million, including $99 million of restructuring and a $91 million non-cash foreign-exchange reclassification charge.
- Year-end cash was $931 million, down from $1.892 billion. Manufacturing-group cash was $898 million and Finance-group cash was $33 million. The Manufacturing group repaid its drawn $1.25 billion credit facility; the Finance group paid down $300 million of its facility and had $1.4 billion outstanding at year-end.
- Manufacturing-group net-debt-to-capital improved to 32.1% from 39.4%. Consolidated capital expenditures were $270 million; R&D was $702 million.
- Finance-group finance receivables held for investment were $4.213 billion. Nonaccrual receivables were $850 million, or 20.17% of the portfolio, compared with 16.75% a year earlier; 60+ day delinquency was 9.77%, versus 9.17%. The allowance for losses was $342 million.
Material changes versus 2009
- Total revenue was nearly flat, but segment trends diverged: Bell revenue rose 14% to $3.241 billion, Industrial rose 21% to $2.524 billion, and Textron Systems rose 4% to $1.979 billion. Cessna fell 23% to $2.563 billion and Finance fell 40% to $218 million.
- Cessna reported a $29 million segment loss, versus $198 million profit, as Citation deliveries declined to 179 from 289. Its backlog fell 40% to $2.928 billion.
- Bell segment profit rose to $427 million from $304 million, supported by higher V-22 and H-1 deliveries and improved program performance. Industrial profit increased to $162 million from $27 million. Textron Systems profit declined to $230 million from $240 million.
- Finance segment loss narrowed to $237 million from $294 million, but credit stress remained elevated. Finance receivables were reduced by approximately $2.4 billion during 2010, including $1.8 billion in non-captive receivables.
- Total backlog declined to $11.765 billion from $13.507 billion: U.S. Government backlog increased to $8.296 billion, while commercial backlog fell to $3.469 billion.
- Restructuring was completed, with approximately 12,100 positions eliminated—about 28% of the workforce—and 30 facilities exited since the program began in late 2008.
Fourth-quarter comparison, outlook and risks
- Q4 2010 revenue was $3.127 billion versus $2.813 billion in Q4 2009. Income from continuing operations was $63 million versus a $60 million loss; net income was $60 million versus a $63 million loss.
- Management said cost initiatives, stronger manufacturing cash generation and debt reduction improved the company’s position, while continuing economic challenges remained. It stated that available cash, manufacturing cash generation and continued Finance-portfolio liquidation were expected to meet future needs.
- The planned exit of the Finance segment’s non-captive portfolio was expected to be substantially completed over the next three to five years, depending on market conditions. The 2010 cash-conversion ratio on non-captive receivable reductions was 93%, versus 95% in 2009; management expected it to decline as the remaining portfolio mix shifted toward longer-term and nonaccrual assets.
- Management identified risks including continued weak aircraft demand and customer financing availability; dependence on U.S. Government appropriations and contract performance; Finance portfolio recoveries and funding access; debt refinancing and covenant compliance; pension and benefit costs; and execution, supplier, regulatory, currency and litigation risks.
- The filing reports $78 million of environmental reserves against estimated potential environmental liabilities of $40 million to $170 million. Management did not expect existing legal proceedings and claims to materially affect financial position or results, while noting litigation outcomes are inherently uncertain. Ernst & Young issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the intended period: the filing is for fiscal 2010, not 2009 Q4; compare the reported Q4 data with the relevant quarterly filing.
- Track Cessna demand, deliveries, cancellations, customer deposits and backlog conversion, alongside the performance of Bell’s major government programs.
- Assess Finance portfolio credit quality, collateral recoveries, allowance adequacy, cash conversion and the pace and economics of the non-captive wind-down.
- Review near-term debt maturities, the Finance group’s $1.4 billion credit-line balance, facility expiry in April 2012, and the convertibility and intended cash settlement of the 4.5% notes.
- Monitor pension funding needs, environmental exposure, contingent liabilities and the effect of restructuring and other special charges on recurring earnings and cash flow.