Textron Inc. 2009 Form 10-K Summary
Period note: The supplied filing is the annual report for the fiscal year ended January 2, 2010, not a 2008 fourth-quarter filing. It includes quarterly comparisons; figures below focus on fiscal 2009 versus fiscal 2008 unless stated otherwise. Dollar amounts are in millions unless noted.
Business context and reporting period
Textron is a diversified manufacturer and commercial finance company with five segments: Cessna, Bell, Textron Systems, Industrial and Finance. The company attributed weaker results primarily to the global recession, which reduced aircraft and industrial demand, and to losses in its Finance segment. It had approximately 32,000 employees at year-end.
Financial performance and key metrics
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Total revenue | $10,500 | $14,010 |
| Income (loss) from continuing operations | $(73) | $324 |
| Net income (loss) | $(31) | $486 |
| Diluted EPS from continuing operations | $(0.28) | $1.29 |
| Total segment profit | $475 | $1,451 |
| Operating cash flow, continuing operations | $1,032 | $764 |
| Manufacturing free cash flow, non-GAAP | $424 | $362 |
- Revenue fell 25%, primarily from lower Cessna and Industrial volume and reduced Finance revenue. Manufacturing cost of sales rose to 83.5% of manufacturing revenue from 79.6%, reflecting lower production, idle capacity and temporary shutdowns.
- Segment results: Cessna revenue/profit was $3,320/$198 (2008: $5,662/$905); Bell $2,842/$304 ($2,827/$278); Textron Systems $1,899/$240 ($1,880/$251); Industrial $2,078/$27 ($2,918/$67); Finance $361/$(294) ($723/$(50)).
- Year-end cash and cash equivalents totaled $1,892, comprising $1,748 in the Manufacturing group and $144 in Finance, versus consolidated cash of $547 at the prior year-end. Working-capital improvement, including inventory reduction, supported operating cash flow.
- Manufacturing group debt was $3,584, up from $2,569; Finance group debt was $5,667, down from $7,388. Manufacturing net debt-to-capital was 39.4% versus 46.3%; gross debt-to-capital was 55.9% versus 52.1%.
- Total assets were $18,940 and shareholders’ equity was $2,826 at year-end. The company drew its $3.0 billion committed bank lines in 2009; $1,167 was outstanding for Manufacturing and $1,740 for Finance, with facility borrowings due in April 2012.
Material changes versus the prior comparable period
- Cessna revenue declined $2.3 billion; Citation business jet deliveries fell to 289 from 467. Its year-end backlog dropped to $4,893 from $14,530.
- Industrial revenue declined $840, chiefly from recession-related lower demand. Bell profit increased by $26, supported by pricing and cost performance; Textron Systems revenue was broadly steady while profit fell $11.
- Finance segment losses widened to $294, reflecting higher portfolio losses, lower securitization gains, reduced interest rates and greater suspended earnings on nonaccrual receivables. Nonaccrual receivables rose to $1,040 from $277, and 60-plus-day delinquencies increased to 9.23% from 2.59%.
- Overall aircraft and defense backlog declined 41% to $13,507 from $22,988. U.S. Government backlog rose to $7,824 from $7,041, while commercial backlog fell to $5,683 from $15,947. Cessna cancellations included $2.1 billion related to ending Citation Columbus development and $1.3 billion from one customer.
- Special charges were $317, including $237 of restructuring and an $80 Industrial goodwill impairment; 2008 special charges were $526, including $462 related to the Finance exit plan. The 2009 continuing-operations tax benefit was $76; the reported effective tax rate was negative 51.0%.
- Quarterly data show Q4 2009 revenue of $2,813 and continuing-operations loss of $60 (diluted EPS $(0.22)), compared with Q4 2008 revenue of $3,549 and loss of $356 (diluted EPS $(1.47)).
Outlook, management commentary, risks and unusual items
- Management expected Cessna business-jet volumes and margins to remain pressured in 2010 and backlog conversion to stay volatile until economic conditions improved. First customer deliveries of the Citation CJ4 were scheduled for 2010.
- Textron expected Finance to continue operating at a loss in 2010 while winding down its non-captive commercial finance portfolio. It reduced managed finance receivables by approximately $3.8 billion in 2009, with a 94% cash conversion ratio; approximately $4.1 billion of non-captive managed receivables remained at year-end. Management forecast an approximately $1.6 billion net reduction in managed receivables in 2010 and substantial completion of the exit over two to three years, subject to market conditions.
- Restructuring had eliminated approximately 10,400 positions and closed 23 facilities by year-end; management expected about 10,800 positions to be eliminated by the end of 2010 and estimated a further $30 in 2010 restructuring costs. It also forecast $7–$17 of additional costs over two to three years to exit non-captive finance.
- Liquidity measures included $600 of convertible notes, $600 of senior notes and approximately $238 net proceeds from a common-stock offering. The company repurchased or tendered $1.3 billion of debt securities, reporting a net gain of $53. It cut the annual dividend to $0.08 per share from $0.92.
- Management said it expected available cash, manufacturing cash generation and continued Finance portfolio liquidation to meet future needs. That assessment depends on successful asset liquidations, Finance portfolio collections and access to funding. Moody’s moved its outlook to stable in February 2010; Fitch and S&P outlooks remained negative for Manufacturing, while Finance outlooks were negative at Fitch and developing at S&P.
- Material risks include continued aircraft cancellations and weak demand, falling collateral values and credit losses, difficulties or losses in liquidating Finance assets, capital-market access and refinancing, required support for TFC, government funding and contract performance, supplier disruption, and pension and benefit costs. The company reported $3.0 billion of aggregate credit-line borrowings due in 2012 and identified refinancing availability as a risk.
- Unusual items and contingencies include termination of the U.S. Army ARH program: the government denied Textron’s claim for LRIP costs, which it planned to appeal; reserves were $50. Environmental liabilities were estimated at $43–$173, with $77 reserved. The company disclosed shareholder securities, retirement-plan and derivative lawsuits and said it intended to defend them; it did not expect existing proceedings and claims to materially affect its financial position or results.
Most important facts for investors to verify
- Whether Cessna demand, aircraft deliveries, cancellations and backlog stabilize, and whether CJ4 delivery timing is achieved.
- Actual Finance portfolio liquidation proceeds and losses, nonaccrual and delinquency trends, collateral recoveries, and progress toward the stated runoff timetable.
- Available liquidity, compliance with TFC support and debt covenants, credit ratings, and refinancing of obligations due in 2012.
- Cash generation quality: distinguish consolidated operating cash flow from non-GAAP Manufacturing free cash flow and cash produced by Finance asset runoff.
- Resolution and financial exposure from the ARH reimbursement claim, environmental matters, litigation and other disclosed contingencies.
- Progress against restructuring targets and the impact of further restructuring, pension contributions and continuing weak industrial markets.