Textron Inc. — Form 10-Q Summary
Reporting-period note: The request identifies 2009 Q3, but the supplied filing is for the quarter ended October 2, 2010, with comparisons to October 3, 2009. Amounts are in millions of dollars unless stated otherwise.
Business context and reporting period
Textron reports five segments: Cessna, Bell, Textron Systems, Industrial and Finance. The filing presents separate Manufacturing and Finance borrowing groups. Results cover the third quarter and first nine months of fiscal 2010.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $2,479 | $2,549 | $7,398 | $7,687 |
| Income (loss) from continuing operations | $(48) | $6 | $29 | $(13) |
| Net income (loss) | $(48) | $4 | $26 | $32 |
| Diluted EPS | $(0.17) | $0.01 | $0.09 | $0.12 |
| Cash from continuing operations | Not provided for quarter | Not provided for quarter | $767 | $555 |
Q3 cost of sales was 84.2% of Manufacturing revenue, versus 82.6% a year earlier; for the nine months, it was 83.3% versus 82.9%. Segment profit was $112 (4.5% of revenue) in Q3, compared with $121 (4.7%); year to date it was $369 (5.0%), compared with $345 (4.5%).
At October 2, 2010, total assets were $16,013 and total liabilities were $13,027. Manufacturing group cash was $802 and debt was $2,307; Finance group cash was $189 and debt was $4,062. Manufacturing net debt to capital was 33.5%, down from 39.4% at January 2, 2010. Consolidated cash was $991, down from $1,892 at the start of the period. Nine-month consolidated financing cash outflow was $2,997, largely reflecting debt and credit-line repayments.
Material changes versus comparable periods
- Q3 revenue declined 2.7%; nine-month revenue declined 3.8%. Cessna was the main drag, with lower aircraft deliveries; Industrial and Bell revenue increased.
- Q3 moved from a small profit to a $48 loss, mainly reflecting $114 of special charges, including a $91 non-cash currency-translation charge in Finance. The charge was $74 after tax and had no impact on shareholders’ equity.
- Nine-month continuing operations improved to $29 income from a $13 loss, while net income declined to $26 from $32, partly reflecting $45 of discontinued-operations income in 2009.
- Finance segment losses narrowed to $51 in Q3 from $64 and to $180 year to date from $229, aided by lower provisions and portfolio losses, but also affected by a shrinking receivables base.
- Manufacturing free cash flow, a company-defined non-GAAP measure, was $174 for the first nine months, compared with $68. Manufacturing operating cash flow improved, while inventory growth and customer-deposit liquidations used cash.
Outlook, commentary, risks and unusual items
- Management expected about $10 of restructuring costs in Q4 2010 and up to $15 in 2011. The program was expected to be substantially completed in 2010; approximately 11,100 employees had been terminated and 28 facilities exited by October 2.
- Management expected Finance receivables to decline by $2.4 billion for full-year 2010, net of originations. The exit plan applied to the remaining $2.6 billion non-captive portfolio. Management said cash resources, manufacturing cash generation and continued execution of the exit plan should meet future needs.
- Aircraft and defense backlog was approximately $11.6 billion, down from $13.5 billion at January 2. Cessna’s backlog declined amid weak general aviation demand and cancellations; Bell’s reflected deliveries under V-22 contracts.
- Finance credit remains a key risk: nonaccrual receivables were $876, or 18.51% of finance receivables, versus $1,040 and 16.75% at year-end. The allowance was $355. Management cited resolutions of troubled accounts but also new nonaccruals, particularly in golf, aircraft and marina-related exposures.
- Management expected a material increase in the year-end U.S. pension obligation due to lower discount rates, reducing equity through other comprehensive income rather than 2010 earnings.
- A jury verdict against Avco included $24.7 in compensatory and $64 in punitive damages; judgment was pending post-trial motions. Textron disputed the verdict and intended to appeal if necessary, and believed it probable the verdicts would be reversed.
- Other stated risks include aircraft demand and cancellations, government contract performance and defense budgets, supplier/customer disruptions, pension and healthcare costs, Finance portfolio values and funding, and execution of the commercial-finance exit.
Important facts for investors to verify
- Confirm the intended period: the supplied filing is Q3 2010, not Q3 2009.
- Assess the scale and cash/equity implications of Finance’s portfolio liquidation, support requirements and the post-quarter $155 contribution to TFC on October 12, 2010.
- Track nonaccrual and impaired receivables, reserve adequacy, collateral values and whether the Finance exit plan achieves expected cash conversion.
- Monitor Cessna deliveries, order cancellations and backlog, and whether Bell and Industrial growth offsets continuing weakness elsewhere.
- Evaluate the convertible notes, which were convertible through December 31, 2010; Textron intended to repay principal in cash, but excess conversion value could require cash and/or shares.
- Follow the Avco litigation and pension assumptions, as both could materially affect future results or equity.