Textron Inc. — Form 10-Q Summary
Period clarification: The filing cover identifies the quarter ended October 3, 2009, with comparisons to September 27, 2008. This differs from the request metadata’s “2008 Q3.” Figures below follow the filing.
Business context and reporting period
Textron reports five segments: Cessna, Bell, Textron Systems, Industrial and Finance. Its financing is organized into separate Manufacturing and Finance borrowing groups. This unaudited filing covers the third quarter and first nine months of 2009; prior-period results were recast for discontinued operations. Textron sold HR Textron in April 2009 and had sold Fluid & Power in November 2008.
Key financial metrics
| Metric | Three months ended Oct. 3, 2009 | Nine months ended Oct. 3, 2009 |
|---|---|---|
| Total revenue | $2.549 billion, down 27% year over year | $7.687 billion, down 27% |
| Income (loss) from continuing operations | $6 million; diluted EPS $0.02 | $(13) million; diluted EPS $(0.05) |
| Net income | $4 million; diluted EPS $0.01 | $32 million; diluted EPS $0.12 |
| Operating cash flow, continuing operations | Not separately presented for the quarter | $555 million, versus $653 million |
| Cash and cash equivalents | $2.576 billion at Oct. 3, 2009, versus $547 million at Jan. 3, 2009 | |
| Debt | Manufacturing: $3.758 billion; Finance: $6.668 billion at Oct. 3, 2009 |
Manufacturing cost of sales was 82.6% of manufacturing revenue for the quarter and 83.0% for the nine months, versus 78.9% in each 2008 comparable period. Total segment profit was $121 million for the quarter and $345 million year to date, compared with $392 million and $1.249 billion, respectively. Finance segment losses were $64 million for the quarter and $229 million year to date.
Quarterly revenue declines were concentrated in Cessna and Industrial. Cessna revenue fell to $825 million from $1.418 billion, and segment profit to $32 million from $238 million; Industrial revenue fell to $523 million from $726 million, with segment profit unchanged at $6 million. Bell’s quarterly segment profit rose to $79 million from $63 million; Textron Systems’ was $68 million versus $67 million.
Material changes versus prior comparable periods
- Quarterly net income fell to $4 million from $206 million; nine-month net income fell to $32 million from $695 million. Continuing-operations results were a $13 million loss year to date versus $680 million income in 2008.
- Lower Cessna aircraft demand, order cancellations and reduced production drove most of the revenue decline. Cessna delivered 68 jets in the quarter versus 124; its backlog fell to $6.887 billion from $14.530 billion at Jan. 3, 2009, including cancellation of $2.1 billion of Columbus orders.
- Finance performance deteriorated amid portfolio losses, higher credit-loss provisions, lower interest rates and receivables, fewer securitization gains, and suspended interest recognition on delinquent loans. Nine-month provision for finance-receivable losses was $206 million versus $101 million.
- Finance credit quality weakened: nonaccrual receivables were $838 million, or 13.74% of receivables held for investment, versus $277 million and 4.01% at Jan. 3. The allowance for loan losses rose to $302 million from $191 million.
- Cash rose substantially, while total debt composition shifted after new borrowing and repayments. Textron issued $600 million of senior notes in September and drew on committed credit lines; Manufacturing debt increased to $3.758 billion from $2.569 billion, while Finance debt declined to $6.668 billion from $7.388 billion.
Outlook, management commentary, risks and unusual items
- Management said cash, Finance-group liquidation actions and expected manufacturing cash generation should meet future liquidity needs. It reduced managed Finance receivables by about $3.0 billion through the first nine months and expected a reduction of at least $3.4 billion for 2009. This plan depends on collections, asset dispositions and market conditions; no specific consolidated earnings guidance is provided in the supplied filing text.
- A company-wide restructuring program targeted approximately 10,700 job eliminations; about 10,100 had been completed by Oct. 3, with 22 facilities exited. Textron recorded $203 million of restructuring costs in the first nine months, expected about $40 million more in fourth-quarter 2009, and anticipated substantial completion in 2010. Additional costs to exit non-captive Finance activities over two to three years were not reasonably estimable.
- Textron cancelled Cessna’s Citation Columbus development project and recorded a $43 million asset impairment. It also reported $54 million of asset impairment charges in the first nine months, including the Columbus charge.
- The terminated U.S. Army ARH program presents a contingency: Bell estimated potential losses of $50 million to $75 million on related production obligations and had reserved $50 million at Oct. 3. Textron said it believed development-contract termination costs were recoverable; reimbursement claims were submitted in October 2009.
- Credit ratings had been downgraded since year-end 2008, with negative outlooks for most ratings shown. Textron said the ratings prevented access to commercial paper markets and could worsen financing terms. It also made a further $73 million capital contribution to Textron Financial on Oct. 9, after quarter-end.
- Management identified recession-related demand, aircraft order cancellations, Finance-group credit deterioration and liquidity, execution of the Finance exit and restructuring plans, government-contract risks, and possible goodwill impairment at Golf & Turfcare and Kautex as significant areas of uncertainty. Management saw a reasonable possibility those two reporting units could fail the first step of a future goodwill impairment test if conditions worsen.
- Other unusual items included a $50 million first-quarter gain on the sale of Cessna’s CESCOM assets, a $34 million tax benefit related to HR Textron sale-related tax matters and a deferred tax valuation allowance reversal, and debt-extinguishment gains in Finance.
Most important facts for investors to verify
- Confirm the reporting period: the filing states October 3, 2009, notwithstanding the request metadata.
- Track Cessna order cancellations, deliveries, backlog conversion and production levels; backlog conversion timing is uncertain.
- Assess Finance-group delinquencies, nonaccruals, reserves, collateral values and liquidation proceeds, including the assumptions supporting receivable fair values.
- Review liquidity and refinancing needs, credit-line availability, debt maturities and the effects of the Finance exit plan and required support for Textron Financial.
- Monitor restructuring cash costs, ARH claim recoveries and potential losses, and impairment exposure at Golf & Turfcare and Kautex.