Textron Inc. 10-Q Summary: Quarter Ended September 27, 2003
Business Context and Reporting Period
This Form 10-Q covers the fiscal quarter and nine-month period ended September 27, 2003. Textron Inc. is a diversified industrial company operating through five segments: Bell, Cessna, Fastening Systems, Industrial, and Finance. During the second quarter of 2003, the company reorganized its reporting structure, combining Textron Systems and Lycoming with Bell Helicopter into the new Bell segment, while Cessna and Industrial segments were redefined. The OmniQuip business was sold on August 1, 2003, and is reported as a discontinued operation.
Key Financial Metrics
| Metric (in millions) | Q3 2003 | Q3 2002 | 9M 2003 | 9M 2002 |
|---|---|---|---|---|
| Total Revenues | $2,243 | $2,485 | $7,196 | $7,581 |
| Net Income | $47 | $71 | $176 | $(255) |
| Diluted EPS (Continuing Ops) | $0.34 | $0.55 | $1.46 | $1.83 |
| Operating Cash Flow (9M) | $455 (2003) vs $147 (2002) | |||
| Total Assets | $15,550 (Sep 27, 2003) | |||
| Total Liabilities | $12,010 (Sep 27, 2003) | |||
| Debt (Manufacturing + Finance) | ~$7.2B (Long-term $6.57B + Current $313M) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 9.7% in Q3 and 5.1% in the first nine months of 2003 compared to 2002. This was driven primarily by lower volumes in the Cessna (business jets) and Industrial segments, partially offset by favorable foreign exchange impacts in the Industrial and Fastening Systems segments.
- Profitability: Income from continuing operations dropped from $75 million to $47 million in Q3. However, the nine-month net income turned positive ($176 million) compared to a net loss of $255 million in 2002, which included a $488 million non-cash charge for a change in accounting principle (SFAS 142 goodwill impairment).
- Segment Performance:
- Bell: Profit increased significantly ($36 million in Q3) due to lower recall-related costs in 2002 and higher U.S. Government revenue.
- Cessna: Profit decreased $53 million in Q3 due to reduced jet delivery volumes and inflation.
- Finance: Profit increased $5 million in Q3 driven by a lower provision for loan losses ($19 million decrease), despite lower average receivables.
- Discontinued Operations: The sale of OmniQuip resulted in a $24 million loss for the nine months ended September 27, 2003, primarily due to goodwill and intangible asset impairments.
Guidance, Outlook, and Risks
- Outlook: Management expects total revenues for 2003 to be down, primarily due to lower jet deliveries at Cessna (estimated at 195 units). The company is realigning costs to match lower production levels for 2004.
- Restructuring: Textron is executing a restructuring program estimated to cost approximately $486 million in total, with about $135 million remaining to be incurred. The program aims to reduce the workforce by approximately 16% and is expected to be substantially complete by 2004.
- Accounting Changes: The company adopted SFAS 150, reclassifying mandatorily redeemable preferred securities as debt. It also adopted EITF 00-21 for revenue recognition, though the impact was not material.
- Risks and Contingencies:
- Legal: A potential government claim regarding a $100 million payment from a joint venture partner (Agusta) to Bell Helicopter; management intends to contest this.
- Product Liability: Ongoing monitoring of Lycoming engine crankshaft and bolt recalls, though reserves are deemed adequate.
- Market Risk: Exposure to foreign exchange rates and interest rate fluctuations. Credit ratings were downgraded by Fitch and S&P in early 2003, though access to capital remains adequate.
Investor Verification Checklist
- Cessna Volume: Verify the impact of the reduced jet delivery forecast (195 units) on future revenue and margin compression.
- Restructuring Costs: Monitor the remaining $135 million in estimated restructuring costs and the timeline for completion in 2004.
- Finance Segment Quality: Review the trend in nonperforming assets (2.9% of finance assets) and the provision for loan losses.
- Legal Contingency: Track the status of the Defense Contract Audit Agency (DCAA) finding regarding the $100 million Agusta payment.
- Debt Structure: Confirm the impact of the SFAS 150 adoption on leverage ratios and the company's ability to service its ~$7.2 billion debt load.