Textron Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 29, 2014. The request metadata says 2013 Q1, but the filing is for 2014 Q1 and compares with the quarter ended March 30, 2013.
Business context and results
Textron operates manufacturing businesses—Textron Aviation, Bell, Textron Systems and Industrial—and a Finance segment. On March 14, 2014, it acquired Beechcraft and combined it with Cessna to form Textron Aviation. Beechcraft contributed results only from the acquisition date, including $101 million of revenue.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $2.847 billion | $2.855 billion |
| Income from continuing operations before tax | $125 million | $143 million |
| Income from continuing operations | $87 million | $115 million |
| Net income | $85 million | $119 million |
| Diluted EPS | $0.30 | $0.41 |
| Manufacturing gross margin | 16.4% | 15.3% |
| Operating cash flow | $(27) million | $(399) million |
Revenue was nearly flat year over year. Manufacturing revenue rose $5 million, while Finance revenue fell $13 million. The effective tax rate increased to 30.4% from 19.8%. Favorable long-term contract estimate changes added $21 million to pretax income in Q1 2014 ($13 million after tax, or $0.05 per diluted share), compared with $7 million pretax in Q1 2013.
Segment performance and material changes
- Textron Aviation: Revenue of $785 million, up $77 million; segment profit of $14 million versus an $8 million loss. The results include only a partial quarter of Beechcraft. Pricing and improved margins helped; lower pre-owned aircraft and CitationAir volumes weighed on revenue.
- Bell: Revenue fell $76 million to $873 million and segment profit declined $33 million to $96 million, mainly from lower commercial aircraft volume and an unfavorable delivery mix.
- Textron Systems: Revenue declined $66 million to $363 million, principally due to lower Unmanned Aircraft Systems volume. Segment profit edged up to $39 million from $38 million.
- Industrial: Revenue increased $70 million to $797 million and segment profit rose $9 million to $66 million, reflecting higher volume and acquisitions.
- Finance: Revenue decreased to $29 million from $42 million and segment profit to $4 million from $19 million, reflecting prior-year gains on receivable dispositions and higher loan-loss provisions.
Backlog at March 29, 2014 was $6.253 billion at Bell, $2.821 billion at Textron Systems and $1.521 billion at Textron Aviation. Aviation backlog increased $503 million from year-end, primarily because of the Beechcraft acquisition.
Cash flow, debt and liquidity
- Operating cash use was $27 million, an improvement from $399 million used a year earlier. Management attributed much of the improvement to lower incentive, deferred-compensation and pension payments, along with favorable working-capital changes, including a $168 million increase in Bell customer deposits.
- Investing cash use was $1.520 billion, including the approximately $1.5 billion Beechcraft acquisition payment. Capital expenditures were $66 million.
- Financing provided $1.116 billion, including $1.131 billion of long-term debt proceeds and $184 million of commercial paper issuance, partly offset by debt repayments and a $150 million share repurchase.
- Cash and equivalents were $780 million at quarter-end, versus $1.211 billion at the beginning of the quarter. Manufacturing-group debt was $3.225 billion versus $1.931 billion at year-end; net debt to capital rose to 37% from 15% and debt to capital to 43% from 31%. Finance-group debt was $1.247 billion.
- Acquisition funding included $600 million of senior notes and a fully drawn $500 million five-year term loan; the remaining purchase price was paid from cash on hand. The notes comprise $250 million at 3.65% due 2021 and $350 million at 4.30% due 2024.
Management said it expects positive operating cash flow for the full year and believes available cash, expected manufacturing cash generation and other funding alternatives will be sufficient for future needs. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
Outlook, risks and unusual items
- Textron estimated approximately $35 million of 2014 Beechcraft integration and restructuring charges, with additional 2015 costs expected to be immaterial. It recorded $16 million in acquisition and restructuring costs in Q1, including $11 million of transaction costs and $5 million of restructuring costs. A subsequent April 23 announcement of approximately 750 job reductions was expected to result in a $12 million Q2 charge.
- Preliminary Beechcraft purchase accounting included $214 million of goodwill and $594 million of intangible assets. The company cautioned that final fair-value adjustments could be material. Certain acquired intangible assets are expected to generate annual amortization of approximately $18 million to $32 million.
- Finance receivables showed mixed credit indicators: nonaccrual balances fell to $98 million from $105 million, but receivables 60 or more days delinquent rose to 8.76% of the portfolio from 5.39% at year-end.
- Key stated risks include U.S. Government budget and contract changes, contract cost and performance, demand softness, foreign-exchange and interest-rate volatility, supplier performance, finance-portfolio credit quality, product development and certification, pension costs, and acquisition integration and synergy realization.
- Management reported no material expected effect from existing legal proceedings and claims on financial position or results, based on information then available. Disclosure controls were deemed effective; Beechcraft was to be integrated into internal financial controls during the fiscal year.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers Q1 2014, not Q1 2013.
- Track finalized Beechcraft purchase accounting, acquired-business performance, integration costs and realization of expected synergies.
- Assess whether operating cash flow turns positive for the full year as management expected, and monitor working capital and customer-deposit movements.
- Monitor debt and leverage following the acquisition, including refinancing or funding needs and the effect of higher interest expense.
- Follow Finance-segment delinquency trends, loan-loss provisions and recoverability of receivables.
- Consider the contribution of favorable contract estimate adjustments to reported earnings and whether those adjustments recur.