Textron Inc. — Form 10-Q Summary
Reporting period: The filing covers the three months ended March 30, 2013. Although the request identifies 2012 Q1, the filing itself is for 2013 Q1, compared with the three months ended March 31, 2012. Amounts are in millions of dollars unless noted.
Business context and results
Textron operates Cessna, Bell, Textron Systems, Industrial and Finance. Its Manufacturing and Finance groups use separate borrowing structures. Manufacturing includes aircraft, defense and industrial operations; Finance provides financing, including for Textron products.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $2,855 | $2,856 |
| Income before taxes from continuing operations | $143 | $177 |
| Income from continuing operations | $115 | $120 |
| Net income | $119 | $118 |
| Diluted EPS | $0.41 | $0.40 |
| Operating cash flow | $(399) | $(254) |
Manufacturing revenue was $2,813 versus $2,795; Finance revenue declined to $42 from $61. Manufacturing gross margin was 15.3%, down from 17.3%, with cost of sales rising 3% to $2,382. The effective tax rate fell to 19.8% from 32.4%, primarily reflecting the retroactive reinstatement of the federal R&D tax credit. Discontinued operations contributed $4 versus a $2 loss.
Segments and material changes
- Cessna: Revenue rose 6% to $708, but the segment loss widened to $8 from $6. Higher pre-owned aircraft sales were partly offset by lower Citation jet and CitationAir activity; 32 Citation jets were delivered versus 38.
- Bell: Revenue fell 5% to $949 and profit declined to $129 from $145, mainly on lower military program volume and commercial aftermarket sales. Backlog declined to $7,083 from $7,469, primarily as deliveries exceeded orders.
- Textron Systems: Revenue rose 14% to $429 and profit increased to $38 from $35. Higher UAS and Weapons and Sensors volume was partly offset by lower-margin contract mix.
- Industrial: Revenue fell 4% to $727 and profit decreased to $57 from $73, reflecting weaker automotive demand in Europe and Asia, unfavorable mix and cost inflation.
- Finance: Revenue fell to $42 from $61, while profit increased to $19 from $12, supported by lower loan-loss provisions and administrative costs. Nonaccrual receivables rose to $147 from $143; the nonaccrual ratio increased to 8.17% from 7.39%. Delinquencies 60+ days improved to 4.45% from 4.65%.
Cash, debt and liquidity
- Consolidated cash and equivalents were $791 at quarter-end, down from $1,413 at the beginning of the quarter. Manufacturing-group cash was $701 versus $1,378 at year-end; Finance-group cash was $90 versus $35.
- Manufacturing-group debt was $2,175 and Finance-group debt was $1,558. Manufacturing net debt to capital rose to 32% from 24%; debt to capital declined to 41% from 44%.
- Operating cash use increased to $399 from $254, driven by working-capital needs, including $254 of inventory investment, pension contributions and incentive-compensation payments. Capital expenditures were $77 versus $73.
- Financing cash use was $230, including $482 of principal payments on long-term and nonrecourse debt, partly offset by $205 of new short-term borrowings. Textron reported no borrowings on its $1.0 billion revolving facility, which expires in March 2015.
- Manufacturing inventory increased to $2,972 from $2,712. Management attributed much of the increase to Bell finished goods and spares, delayed military progress payments and delays associated with a new enterprise resource planning system.
Outlook, risks and unusual items
- In mid-April, Cessna adjusted production amid continued softness in the jet market. Management expected full-year jet deliveries to be below the prior year, with lower light-jet deliveries partly offset by midsize-jet growth.
- Cessna initiated workforce and other cost actions and expected approximately $25 million of severance costs in Q2 2013, primarily related to a voluntary separation program.
- The $215 million of convertible senior notes were due May 1, 2013. The company stated it would settle principal in cash and conversion value above principal in shares. Warrant settlements had resulted in issuance of 3.8 million shares during Q1, with 8.4 million warrants still outstanding at quarter-end.
- Long-term contract estimate changes increased Q1 2013 pretax income by $7 ($5 after tax, or $0.02 per diluted share); net program profit adjustments were $7 versus $4 in Q1 2012.
- Management said existing legal proceedings and claims were not expected to materially affect financial position or results, based on information then available. The company noted government-contract audits and the possibility of suspension or debarment in certain circumstances. Approximately 29% of 2012 revenue came from U.S. Government contracts.
- Management stated it expected available cash, manufacturing cash generation and other funding alternatives to be sufficient for future needs. The filing reported no significant change in market-risk exposure and concluded disclosure controls were effective. Bell’s ERP implementation modified some processes and financial-reporting controls.
Most important facts for investors to verify
- Confirm the reporting-period discrepancy: this filing is for Q1 2013, not Q1 2012.
- Track Cessna jet demand, delivery expectations and the execution and costs of planned workforce reductions.
- Assess whether Bell inventory, ERP-related delivery delays and cash conversion improve in subsequent quarters.
- Monitor manufacturing liquidity after the sharp cash decline, short-term borrowing and scheduled debt repayments.
- Review Finance portfolio credit quality, including rising nonaccrual ratios, allowance coverage and asset values.
- Verify the cash and share impact of the May 2013 convertible-note and warrant settlements.