Textron Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter ended April 3, 2010, compared with the quarter ended April 4, 2009. Although the request identifies 2009 Q1, the supplied filing is for 2010 Q1.
Business context and financial results
Textron reports five segments: Cessna, Bell, Textron Systems, Industrial and Finance. Manufacturing and Finance operate as separate borrowing groups. Dollar amounts are in millions except per-share data.
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total revenue | $2,210 | $2,526 |
| Income from continuing operations before tax | $11 | $41 |
| Income tax expense (benefit) | $15 | $(2) |
| Income (loss) from continuing operations | $(4) | $43 |
| Discontinued operations, net of tax | $(4) | $43 |
| Net income (loss) | $(8) | $86 |
| Diluted EPS | $(0.03) | $0.35 |
| Operating cash flow | $(88) | $(169) |
Manufacturing revenue was $2,134, down from $2,404; Finance revenue was $76, down from $122. Cost of sales was 83.2% of Manufacturing revenue in both periods. The continuing-operations effective tax rate was 136.4% in 2010; the filing attributes the unusually high rate in part to an $11 million deferred tax asset write-off following health-care legislation.
Changes, segments and cash flow
- Revenue fell 13%, primarily because of lower Cessna and Bell commercial aircraft deliveries and a smaller Finance receivables portfolio. Industrial and Textron Systems revenue increased.
- Cessna revenue declined to $433 from $769 and its segment loss was $24, versus $90 profit. It delivered 31 jets, compared with 69 a year earlier. Bell revenue fell to $618 from $742, while segment profit rose to $74 from $69. Textron Systems revenue and profit rose to $458 and $55, respectively. Industrial recovered to $625 revenue and $49 profit, compared with $475 and a $9 loss. Finance revenue was $76 and segment loss was $58, versus $122 and a $66 loss.
- Consolidated operating cash flow remained negative at $88 used, though improved from $169 used. Investing activities provided $639, while financing activities used $921, including $936 of long-term debt principal payments. Cash declined by $383 to $1,509.
- Manufacturing free cash flow, a company-defined non-GAAP measure, was negative $153, compared with negative $286. Manufacturing-group operating cash use improved to $66 from $134.
- Total assets were $18,110, down from $18,940 at January 2, 2010. Manufacturing-group cash was $1,430 and debt $3,546; its net debt-to-capital ratio increased to 42.7% from 39.4%. Finance-group cash was $79 and on-balance-sheet debt was $4,811, down from $5,667.
Outlook, risks and unusual items
- No specific full-year earnings or revenue guidance is stated in the supplied filing. Management expected approximately $20 million of additional restructuring costs during the rest of 2010, with the program substantially complete in 2010. A further $10–$15 million of costs to exit non-captive commercial finance was expected over two to three years.
- Management expected 2010 managed finance receivables to decline approximately $1.8 billion, net of originations; $769 million was reduced in Q1, with a 95% cash-conversion ratio. The exit plan covered the remaining $3.5 billion non-captive managed portfolio.
- Aircraft and defense backlog was $12.4 billion, down from $13.5 billion at January 2. Cessna backlog fell amid weak general aviation demand and order cancellations; Textron Systems backlog fell as deliveries exceeded orders in certain product lines.
- Finance credit quality remains a material concern: nonaccrual receivables were $1.032 billion, or 18.54% of receivables held for investment, versus 16.75% at year-end. The allowance rose to $365 million from $341 million. Finance receivables held for investment, net, were $5.2 billion.
- After quarter-end, Textron repaid approximately $250 million under its bank line and contributed a further $71 million to TFC to maintain compliance with its support agreement. Convertible notes became holder-convertible through June 30, 2010; Textron said it intended to settle their face value in cash.
- On April 6, 2010, a jury returned verdicts against Avco Corporation totaling $88.7 million in an aviation product-liability case. Judgment was pending post-trial motions; Textron disputed the verdict and said it would appeal if necessary, believing reversal probable.
- Other stated risks include aircraft demand and order cancellations, government-contract performance and defense budgets, finance portfolio credit quality and asset valuations, funding access, pension and health-care costs, foreign-market exposure, and execution of cost-reduction and finance-exit plans.
Important facts for investors to verify
- Confirm the correct period: this is a quarter ended April 3, 2010 filing, not a 2009 Q1 filing.
- Track Cessna deliveries, order cancellations and backlog, and whether Industrial’s recovery and defense segment performance persist.
- Monitor nonaccrual finance receivables, loss reserves, held-for-sale valuations, collections and progress of the non-captive portfolio exit.
- Assess liquidity and funding needs, including the TFC support agreement, the subsequent $71 million contribution, the debt repayment and convertible-note settlement.
- Follow restructuring cash costs and the outcome of the Avco verdict and other pending litigation.