Textron Inc. Form 10-Q Summary
Period clarification: The filing covers the quarter ended July 4, 2009, and the six months then ended—not 2008 Q2 as stated in the request metadata. The comparable periods ended June 28, 2008. Filed July 31, 2009.
Business context
Textron reports Cessna, Bell, Textron Systems, Industrial and Finance. Its manufacturing and Finance groups have separate borrowing structures. The company was restructuring operations and winding down most non-captive commercial finance activities amid recession-driven demand and capital-market pressures. HR Textron was sold in April 2009; Fluid & Power had been sold in November 2008. Both are reported as discontinued operations.
Financial results and liquidity
| Metric | Three months ended July 4, 2009 | Six months ended July 4, 2009 | Comparable 2008 period |
|---|---|---|---|
| Total revenue | $2.612 billion | $5.138 billion | $3.684 billion quarter; $6.990 billion half-year |
| Continuing-operations income (loss) before tax | $(120) million | $(79) million | $375 million quarter; $714 million half-year |
| Continuing-operations income (loss) | $(62) million | $(19) million | $250 million quarter; $475 million half-year |
| Net income (loss), including discontinued operations | $(58) million | $28 million | $258 million quarter; $489 million half-year |
| Diluted EPS | $(0.22) | $0.11 | $1.01 quarter; $1.92 half-year |
- Manufacturing revenue was $2.526 billion for the quarter, down 28% year over year; Finance revenue was $86 million, down 51%. Management attributed the overall revenue decline mainly to lower Cessna and Industrial volumes.
- Manufacturing cost of sales was 83.2% of manufacturing revenue in both the quarter and first half, versus 79.1% and 78.9%, respectively, in 2008. Lower production, temporary shutdowns and Cessna writedowns weighed on costs.
- Six-month cash from continuing operating activities was $8 million, versus $394 million in 2008; total operating cash flow, including discontinued operations, was negative $4 million. Continuing investing activities provided $819 million and financing activities provided $250 million.
- Cash and cash equivalents were $1.885 billion at July 4, 2009. Reported debt was $3.360 billion for Manufacturing and $7.057 billion for Finance. Manufacturing gross debt-to-capital was 54%; net debt-to-capital was 40%. The filing emphasizes that the groups’ financing is separate.
- Manufacturing assets were $11.325 billion and Finance assets $8.519 billion. Shareholders’ equity was $2.920 billion, up from $2.366 billion at January 3, 2009.
- Finance credit quality weakened: nonaccrual receivables rose to $683 million from $277 million at year-end; the allowance for loan losses was $284 million, up from $191 million. Six-month Finance segment loss was $165 million, versus $55 million profit in 2008.
Material changes and unusual items
- Quarterly revenue declined 29% and first-half revenue declined 27% year over year. Cessna accounted for about 60% of the decline and Industrial about 30%, according to management.
- Cessna quarterly revenue fell to $871 million from $1.501 billion and segment profit to $48 million from $262 million. It delivered 84 jets versus 117. Its backlog fell to $8.167 billion from $14.530 billion at January 3, 2009, including $2.1 billion of cancelled Citation Columbus orders.
- Industrial quarterly revenue fell to $508 million from $841 million and segment profit to $12 million from $44 million. Bell’s quarterly profit increased to $72 million from $68 million; Textron Systems’ fell to $55 million from $60 million.
- Special charges were $129 million for the quarter and $161 million for the first half, largely restructuring. Textron cancelled the Citation Columbus project and recorded a $43 million impairment. Since program inception, restructuring costs totaled $225 million; the remaining reserve was $55 million.
- First-half results included a $50 million pre-tax gain from the sale of CESCOM, $39 million of Finance debt-extinguishment gains, and $47 million of income from discontinued operations, including the HR Textron sale gain and tax benefits.
- On May 5, Textron issued $600 million of 4.50% convertible notes due 2013 and sold common shares and warrants. Net proceeds were approximately $775 million in aggregate; the notes’ effective interest rate, including discount amortization, is 11.72%.
Outlook, risks and contingencies
- Management expected economic uncertainty and capital-market turbulence to continue through 2009. It targeted at least $3.4 billion of net managed-receivables reduction by year-end, revising its prior target of $2.6 billion; $2.2 billion had been reduced in the first half. The Finance exit plan covered $5.4 billion of an $8.6 billion managed portfolio and was expected to take two to four years.
- Textron expected approximately $40 million of additional 2009 pre-tax restructuring costs, mainly cash severance, and expected the program to be substantially complete by year-end. The broader plan anticipated eliminating about 10,000 positions, approximately 23% of the workforce at inception.
- Aircraft and defense backlog totaled $16.0 billion, down from $22.9 billion at January 3. Management cautioned that timing of backlog conversion is uncertain and expected continued Cessna backlog volatility until economic conditions stabilized.
- The company said it believed planned cash-flow actions and manufacturing cash generation would meet future liquidity needs, while also pursuing other financing sources. It had drawn $3.0 billion under committed bank lines; commercial-paper access was unavailable following credit-rating downgrades. All three major agencies reported negative outlooks for Manufacturing; Finance outlooks were negative or developing.
- A July 14, 2009, post-quarter event established a $500 million Export-Import Bank facility for eligible aircraft purchases by non-U.S. buyers. Textron also made a further $109 million capital contribution to Textron Financial on July 10.
- Risks include further aircraft-order cancellations, weak industrial demand, worsening Finance delinquencies and collateral values, execution of the Finance liquidation and restructuring plans, funding availability, debt covenants and cross-default provisions, government-contract termination or recovery claims, and uncertain fair values of Finance assets. The filing notes that new 2010 accounting rules could require consolidation of securitization trusts; the impact was still being assessed.
- For the terminated ARH program, Textron estimated potential losses of $50 million to $80 million on production-related vendor obligations and had reserved $50 million. It was pursuing reimbursement from the U.S. Government. The U.S. Government also terminated the VH-71 program for convenience in June 2009; the filing reported no other material change to guarantees.
Important facts for investors to verify
- Confirm the reporting period and compare the filing with the correct 2008 periods; the metadata’s 2008 Q2 label conflicts with the filing.
- Track cash generation, working-capital needs, debt maturities, covenant compliance and the availability and terms of financing, including the post-quarter Ex-Im facility.
- Monitor Finance nonaccruals, delinquencies, reserves, collateral values, asset-sale proceeds and progress against the receivables-reduction target.
- Assess whether Cessna orders and backlog stabilize, and whether restructuring and production cuts restore manufacturing margins without further material charges.
- Review potential exposure from ARH and VH-71 terminations, tax matters, government-contract claims and the possible accounting effects of securitization consolidation.