Textron Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended April 4, 2020 (first quarter 2020), not 2019 Q1. Comparatives are for the quarter ended March 30, 2019. Dollar amounts are in millions unless stated otherwise.
Business context and reporting period
Textron operates Textron Aviation, Bell, Textron Systems, Industrial and Finance segments. Its interim financial statements are unaudited. The quarter was materially affected by the COVID-19 pandemic, including reduced commercial demand, facility closures, workforce disruptions and aircraft delivery delays.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $2,777 | $3,109; down 11% |
| Manufacturing revenue | $2,763 | $3,092 |
| Income before taxes | $69 | $212 |
| Income tax expense / effective tax rate | $19 / 27.5% | $33 / 15.6% |
| Net income | $50 | $179 |
| Diluted EPS | $0.22 | $0.76 |
| Manufacturing gross margin as a percentage of manufacturing revenue | 13.6% | 16.7% |
| Operating cash flow | $(394) | $(216) |
| Capital expenditures | $50 | $59 |
- Revenue reductions were concentrated in Textron Aviation, down $262, and Industrial, down $172. Bell revenue increased $84, largely from military programs; Textron Systems revenue increased $21.
- Segment profit was $156 versus $294. Textron Aviation profit fell to $3 from $106; Industrial fell to $9 from $50. Bell rose to $115 from $104, while Textron Systems was $26 versus $28 and Finance was $3 versus $6.
- At April 4, 2020, consolidated cash and equivalents were $2,446, including $2,263 in the Manufacturing group and $183 in Finance. Manufacturing-group debt was $4,352; Finance-group debt was $682. Manufacturing-group debt-to-capital was 44%, versus 36% at January 4, 2020.
- The $1.0 billion revolving credit facility was undrawn. Total backlog was $9,210, down from $9,827 at January 4, 2020. Remaining performance obligations were $9.2 billion.
Material changes versus the prior comparable period
- Manufacturing gross margin declined 310 basis points, reflecting lower volume and mix, weaker performance in Aviation and Industrial, and idle-facility costs. Textron expensed approximately $25 of idle-facility costs in the quarter.
- Operating cash outflow increased by $178, primarily because of lower earnings and higher inventory-related cash outflows, particularly in Textron Aviation.
- Textron Aviation delivered 23 Citation jets and 16 commercial turboprops, compared with 44 and 44, respectively, in Q1 2019. Bell delivered 15 commercial helicopters versus 30.
- Backlog declined at Bell and Textron Aviation; Textron Systems backlog increased. Aviation backlog was affected by a fractional-jet customer reducing orders amid revised demand expectations.
Outlook, management commentary, risks and unusual items
- Management said COVID-19 would continue to adversely affect the business but could not reasonably estimate the pandemic’s duration, severity or full-year financial impact. No specific earnings or revenue guidance is provided in the supplied filing text.
- Management expects positive operating cash flow for the full year, noting that the first quarter typically produces an operating cash outflow. It stated that existing cash, expected manufacturing cash generation and available credit should be sufficient to meet needs.
- To preserve liquidity, Textron issued $650 of 3.00% notes due 2030, borrowed $500 under a 364-day term loan at a 3.00% rate at quarter-end, and borrowed $377 against corporate-owned life insurance policies. The term loan is due March 31, 2021 and restricts share repurchases while outstanding. The company also reduced costs and capital spending and deferred eligible U.S. payroll taxes.
- Textron recorded $39 of impairment charges: $32 for Beechcraft and King Air trade names and $7 to fully impair the Arctic Cat trade name. It reported no impairment for the Textron Aviation or Kautex reporting units; Textron Specialized Vehicles’ estimated fair value exceeded carrying value by 15%, but management said further impairment testing could be needed as pandemic effects develop.
- Finance receivables were $706 gross with a $25 allowance. Management was working on payment modifications for approximately 30% of Finance receivables. Watchlist balances rose to $115 from $4 at year-end, and balances at least 60 days delinquent rose to $55 from $17, largely due to one customer. Management said collateral values largely exceeded outstanding loan amounts and the allowance was adequate.
- Management identified risks from continued demand weakness, supply-chain and operating disruption, increased costs, customer financing and credit quality, and potential asset impairments. It also cited government-contracting, supplier, market, foreign-exchange and execution risks.
- Textron said existing legal proceedings were not expected to materially affect its financial position or results. A shareholder securities class action concerning the Arctic Cat acquisition and integration remained pending. In a separate Fair Finance matter, a jury ruled for Textron Financial and the trustee appealed.
Important facts for investors to verify
- Confirm the intended period: this filing covers Q1 2020, despite the request metadata identifying 2019 Q1.
- Track COVID-19 effects on aircraft and Industrial demand, facility utilization, deliveries, margins and backlog, as well as whether management’s full-year cash-flow expectation remains achievable.
- Assess liquidity and refinancing needs, including the March 2021 term-loan maturity, debt restrictions, revolving-credit availability and continued access to capital markets.
- Monitor Finance portfolio payment modifications, delinquencies, watchlist exposures, collateral values and allowance adequacy.
- Review impairment sensitivity and any further charges, particularly for Textron Specialized Vehicles and pandemic-exposed intangible assets.