Textron Inc. Form 10-Q Summary
Period discrepancy: The request metadata identifies 2018 Q3, but the filing is for the quarter ended September 28, 2019, with comparisons to 2018. This summary covers the filing period shown in the document.
Business context and reporting period
Textron reports five segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. The filing presents unaudited results for the three and nine months ended September 28, 2019. Manufacturing and Finance are reported as separate borrowing groups.
Financial results and liquidity
- Third quarter: Revenue was $3.259 billion, up 2% year over year. Net income was $220 million versus $563 million; diluted EPS was $0.95 versus $2.26. Income before tax was $241 million versus $628 million.
- First nine months: Revenue was $9.595 billion, down 6%. Net income was $616 million versus $976 million; diluted EPS was $2.64 versus $3.80.
- Margins: Manufacturing gross margin was 15.3% in Q3 versus 15.6%; it was 16.6% for both nine-month periods. Segment profit was $297 million in Q3 versus $245 million and $930 million year to date versus $870 million.
- Cash flow: Nine-month operating cash flow was $225 million, down from $697 million. The company attributed the decline mainly to working-capital needs, including increased inventory investment to support future commercial aircraft sales. Capital expenditures were $216 million. Cash and equivalents ended at $1.053 billion.
- Balance sheet and debt: Total assets were $15.062 billion and shareholders’ equity was $5.452 billion at September 28. Manufacturing-group debt was $3.477 billion; Finance-group debt was $695 million. Manufacturing net debt to capital was 32%, compared with 29% at year-end 2018.
- Working capital and credit: Manufacturing inventory rose to $4.436 billion from $3.818 billion at year-end. Finance receivables were $730 million net; nonaccrual receivables were 5.43% of receivables, and receivables 60 or more days past due were 4.77% versus 1.77% at year-end.
Material changes versus the prior comparable period
- Q3 revenue gains at Textron Aviation, Industrial and Bell were partly offset by lower Textron Systems revenue. Year-to-date revenue declined mainly because of lower Industrial and Textron Systems sales and the 2018 sale of Tools and Test Equipment.
- The sharp year-over-year decline in Q3 net income primarily reflects the absence of the 2018 business-disposition gain: Textron recorded a $444 million pretax gain ($410 million after tax) on the Tools and Test Equipment sale in Q3 2018.
- Q3 segment profit improved overall. Industrial profit rose to $47 million from $1 million, while Bell profit fell to $110 million from $113 million and Textron Systems profit increased to $31 million from $29 million.
- Textron repurchased $470 million of shares, or 9.3 million shares, in the first nine months of 2019, compared with $1.383 billion, or 21.6 million shares, in the prior-year period.
Outlook, commentary, risks and unusual items
- Backlog was $8.828 billion, down from $9.097 billion at December 29, 2018. The filing states that approximately 64% of remaining performance obligations of $8.8 billion were expected to be recognized through 2020, a further 29% through 2022, and the balance thereafter. The filing text does not provide a clear full-year earnings or revenue guidance figure.
- Management said it expected sufficient cash to meet future needs, citing cash balances, anticipated manufacturing cash generation and available funding alternatives. It also identified inventory investment as a significant cash-flow use.
- Textron issued $300 million of 3.90% notes due 2029. In October 2019, after quarter-end, it entered into a new $1.0 billion revolving credit facility, replacing a facility due to expire in 2021; no amounts were drawn on the existing facility at September 28.
- Q3 and nine-month 2019 tax rates were 8.7% and 15.8%, respectively, primarily reflecting $41 million and $53 million of benefits from additional prior-year research credits. The reserve for unrecognized tax benefits increased to $214 million from $141 million at year-end.
- Textron recognized an $18 million pretax gain in Q2 2019 related to contributing training-business assets to a newly formed venture in which it holds a 30% interest.
- Risks cited include U.S. Government funding and contract performance, defense-budget and export-policy changes, economic and demand volatility, foreign-exchange and interest-rate movements, supplier performance, pension assumptions, cyber threats, and Finance-segment credit quality. The filing also cites a review of strategic alternatives for Kautex.
- A shareholder class action filed in August 2019 alleges misleading statements concerning the Arctic Cat acquisition and integration; damages sought are unspecified. Textron said it intends to defend the lawsuit. Management did not believe existing proceedings and claims would materially affect financial position or results, based on information then available.
Important facts for investors to verify
- Confirm the intended period: the filing is Q3 2019, not Q3 2018.
- Assess whether elevated inventory converts into aircraft deliveries and operating cash flow as expected.
- Review the increase in Finance receivables more than 60 days past due and the nonaccrual portfolio.
- Separate recurring earnings from the prior-year disposition gain and 2019 research-credit benefits when comparing periods.
- Monitor backlog conversion, government-contract estimates and cumulative catch-up adjustments; these adjustments increased nine-month 2019 revenue and segment profit by $79 million.
- Review developments in the Arctic Cat litigation, Kautex strategic-alternatives process and the terms and covenant headroom of the new revolving facility.