Textron Inc. — Form 10-K Summary
Reporting period: The supplied filing is Textron’s annual report for the fiscal year ended December 31, 2016, filed February 22, 2017. Although the request metadata says “2015 Q4,” this is not a 2015 quarterly filing; comparisons below use 2015 as the prior year.
Business context and results
Textron is a diversified manufacturer and finance company operating Textron Aviation, Bell, Textron Systems, Industrial and Finance. It reported approximately 36,000 employees and operated globally across aviation, defense, industrial products and captive aircraft financing.
| Metric (USD millions, except per-share data) | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $13,788 | $13,423 | +3% |
| Segment profit | $1,309 | $1,255 | +4% |
| Continuing-operations income | $843 | $698 | +21% |
| Net income | $962 | $697 | +38% |
| Diluted EPS, continuing operations | $3.09 | $2.50 | +24% |
| Diluted EPS, total | $3.53 | $2.50 | +41% |
| Gross margin as % of manufacturing revenue | 17.5% | 17.7% | Down 0.2 points |
| Consolidated operating cash flow, continuing operations | $1,014 | $1,094 | Down 7% |
| Capital expenditures | $446 | $420 | +6% |
Reported earnings benefited materially from a $319 million tax benefit related to the final IRS settlement of 1998–2008 tax years: $206 million was attributed to continuing operations and $113 million to discontinued operations. The effective tax rate was 3.8%, versus 28.1% in 2015. Discontinued operations contributed $119 million to 2016 net income.
Segments and material year-over-year changes
| Segment | 2016 revenue | 2016 segment profit | Notable change |
|---|---|---|---|
| Textron Aviation | $4,921 | $389 | Revenue +2%; profit down 3%. Higher Citation deliveries and acquired aftermarket business were offset by product mix, inflation and pricing. |
| Bell | $3,239 | $386 | Revenue down 6%; profit down 4%. Commercial deliveries fell to 114 from 175; V-22 deliveries fell to 22 from 24, partly offset by higher H-1 activity. |
| Textron Systems | $1,756 | $186 | Revenue +16%; profit +44%, reflecting higher Marine and Land Systems and Unmanned Systems volume and improved cost performance. Backlog fell 21%. |
| Industrial | $3,794 | $329 | Revenue +7%; profit +9%, mainly from volume and acquisitions, partly offset by foreign exchange. |
| Finance | $78 | $19 | Revenue and profit declined, primarily due to lower average finance receivables. |
Total backlog was $8.242 billion at year-end, down from $8.626 billion. Bell backlog rose 3% to $5.360 billion; Textron Systems backlog fell 21% to $1.841 billion and Aviation backlog was $1.041 billion. About 61% of backlog was with the U.S. Government, and 41% was not expected to be filled in 2017.
Cash, debt and liquidity
- Manufacturing group cash and equivalents were $1.137 billion, up from $946 million; debt was $2.777 billion, up from $2.697 billion. Net debt-to-capital improved to 23% from 26%.
- Finance group cash was $161 million and debt was $903 million. Finance receivables, net, were $935 million, compared with $1.087 billion.
- Consolidated cash from continuing operating activities was $1.014 billion. Management attributed the decline from 2015 largely to lower customer deposits, including a $257 million decrease related mainly to Bell military contracts.
- Textron spent $186 million on acquisitions, repurchased $241 million of shares and paid $22 million in dividends. It issued $350 million of 4.0% notes due 2026 and had no borrowings against its new $1.0 billion revolving credit facility at year-end.
Outlook, risks and unusual items
- Management said 2016 growth occurred despite weaker-than-expected business-jet and commercial-helicopter markets. The filing provides no clear consolidated 2017 revenue or earnings guidance.
- A company-wide restructuring and realignment plan generated $123 million of 2016 special charges. Textron expected another $17–$47 million of pretax charges, approximately $100–$120 million of total cash outlays, and completion substantially by the end of the first half of 2017. Expected reductions were approximately 1,700 positions.
- Bell suspended flight activity on the remaining 525 Relentless test aircraft after a test aircraft crashed in July 2016. Certification timing and entry into service depend on resumption of flight testing; other certification and production work continued.
- Textron planned to discontinue sensor-fuzed weapon production by the end of the first quarter of 2017, citing difficulty obtaining required approvals for international sales. Arctic Cat acquisition, valued at approximately $247 million plus assumed debt, was expected to close in March 2017, subject to customary conditions.
- Key exposures include U.S. Government funding, procurement and contract-performance risks; cyclical aircraft demand; supplier and cost-overrun risks; international and foreign-exchange exposure; finance-receivable collections; pension assumptions; cybersecurity; and acquisition integration. U.S. Government contracts generated approximately 25% of 2016 revenue; international business, including U.S. exports, generated approximately 38%.
- The Finance segment’s nonaccrual receivables rose to 9.20% of receivables from 7.60%, although receivables delinquent 60 or more days fell to 4.23% from 6.24%.
- The company disclosed a Fair Finance litigation matter seeking substantial damages; certain claims were remanded to the trial court in 2016, and Textron stated it would vigorously defend. Management did not believe existing proceedings would materially affect financial position or results, based on information then available. Environmental liabilities were estimated at $40–$150 million, with approximately $70 million reserved.
- Management expected adoption of the new revenue standard in 2018 to change accounting for certain U.S. Government long-term contracts, potentially recognizing revenue earlier. The new lease standard was expected to materially increase reported assets and liabilities when adopted in 2019.
Important facts for investors to verify
- How much of the 2016 earnings increase is sustainable excluding the IRS settlement benefit and discontinued-operations income?
- Whether Bell commercial demand, the 525 certification schedule and aircraft deliveries recover, and whether Textron Systems’ declining backlog converts into future sales.
- Restructuring execution: actual cash costs, savings achieved, workforce reductions and completion timing.
- Finance portfolio trends, particularly the higher nonaccrual ratio, collateral values and cross-border collection exposure.
- Cash conversion and working-capital trends, including customer deposits, alongside acquisition spending, share repurchases and debt maturities.
- Outcome and potential financial exposure from the Fair Finance litigation and environmental matters, and the closing and integration of the Arctic Cat acquisition.