Textron Inc. Q2 2003 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the fiscal quarter and six-month period ended June 28, 2003. Textron Inc. is a diversified industrial company operating through five segments: Bell, Cessna, Fastening Systems, Industrial, and Finance. In the second quarter of 2003, the company reorganized its reporting structure, combining Textron Systems and Lycoming with Bell Helicopter into a new Bell segment, separating Cessna Aircraft, and consolidating remaining industrial businesses into a new Industrial segment.
Key Financial Metrics
| Metric | Q2 2003 | Q2 2002 | 6-Mo 2003 | 6-Mo 2002 |
|---|---|---|---|---|
| Total Revenues ($ millions) | $2,599 | $2,824 | $5,056 | $5,242 |
| Net Income ($ millions) | $63 | $105 | $129 | $(326) |
| Diluted EPS ($) | $0.46 | $0.74 | $0.94 | $(2.30) |
| Segment Profit ($ millions) | $211 | $235 | $384 | $400 |
| Operating Cash Flow ($ millions) | N/A | N/A | $236 | $32 |
| Total Assets ($ millions) | $15,926 | N/A | N/A | N/A |
| Total Liabilities ($ millions) | $12,356 | N/A | N/A | N/A |
| Shareholders' Equity ($ millions) | $3,543 | N/A | N/A | N/A |
Note: The 2002 six-month net loss includes a $488 million after-tax cumulative effect of a change in accounting principle (SFAS No. 142) related to goodwill impairment. Excluding this item, 2002 six-month net income was $162 million.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 8% in Q2 and 4% in the first half of 2003 compared to 2002. The primary driver was a significant drop in Cessna Aircraft revenues due to lower business jet volumes.
- Profitability: Net income decreased 40% in Q2 2003 compared to Q2 2002. However, the six-month 2003 result ($129 million) compares favorably to the 2002 loss, which was distorted by the one-time accounting change charge.
- Special Charges: The company recorded $54 million in special charges for Q2 2003 (up from $29 million in Q2 2002) and $82 million for the six months ended June 28, 2003. These included a $30 million goodwill and intangible impairment charge related to the pending sale of the OmniQuip business.
- Cash Flow: Operating cash flow improved significantly to $236 million for the first six months of 2003, compared to $32 million in the same period of 2002, driven by working capital management and restructuring benefits.
Guidance, Outlook, and Risks
Outlook: Management anticipates markets will remain sluggish throughout 2003. Total revenues are expected to be down, primarily due to lower jet deliveries at Cessna (projected between 180 and 195 units). The company plans to realign costs at Cessna to mitigate margin pressure.
Restructuring: Textron continues a restructuring program initiated in 2000 and expanded in 2002. As of June 28, 2003, $324 million of the estimated $486 million total program cost has been incurred. The program aims to reduce the workforce by approximately 10,000 employees (17% of the global workforce) and is expected to be substantially complete by 2004.
Risks and Contingencies:
- Legal Proceedings: A class action lawsuit regarding ERISA fiduciary duties was dismissed in June 2003, but plaintiffs have appealed. Additionally, the Defense Contract Audit Agency (DCAA) has issued an initial finding regarding a $100 million payment from AgustaWestland, which Textron intends to contest.
- Product Recalls: Lycoming continues to monitor and manage costs related to a recall of turbocharged airplane engines and zinc-plated bolts. Management believes current reserves are adequate.
- Accounting Changes: Implementation of SFAS No. 150 will require the reclassification of mandatorily redeemable preferred securities from equity to debt, increasing the reported debt-to-capital ratio to approximately 35%.
- Credit Ratings: Fitch downgraded Textron's ratings in Q1 2003. Standard & Poor's affirmed Textron Finance's ratings but downgraded Textron Manufacturing's ratings to A- in Q2 2003, citing economic conditions.
Investor Verification Checklist
- OmniQuip Sale: Verify the final terms and accounting treatment of the OmniQuip business sale to JLG Industries, consummated August 1, 2003, and its impact on discontinued operations.
- Cessna Volume: Monitor actual jet delivery numbers against the guidance of 180-195 units for the full year to assess revenue recovery potential.
- Restructuring Costs: Track the remaining $162 million in estimated restructuring costs and the timeline for completion to ensure no further unexpected charges.
- Debt Reclassification: Review the impact of SFAS No. 150 on leverage ratios and debt covenants in the third quarter 2003 filing.
- Lycoming Reserves: Confirm that reserves for the engine crankshaft and bolt recall programs remain adequate as the program concludes.