Textron Inc. — Form 10-Q Summary
Period discrepancy: The request identifies 2015 Q3, but the supplied filing is for the quarter ended October 1, 2016, with comparisons to October 3, 2015. This summary reflects the filing supplied.
Business context and reporting period
Textron reports five segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. Results cover the three and nine months ended October 1, 2016. Amounts are in U.S. dollars; financial figures are in millions except per-share data.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $3,251 | $3,180 | $9,963 | $9,500 |
| Income from continuing operations before tax | $107 | $252 | $582 | $677 |
| Income from continuing operations | $299 | $176 | $628 | $473 |
| Net income | $421 | $176 | $748 | $471 |
| Diluted EPS | $1.55 | $0.63 | $2.75 | $1.68 |
| Operating cash flow, continuing operations | Not provided by quarter | Not provided by quarter | $145 | $419 |
- Manufacturing gross margin was 17.6% in Q3 versus 18.3% and 17.3% for the first nine months versus 18.1% in 2015.
- Segment profit for the first nine months was $918, up from $877. By segment: Aviation $254 (down from $262); Bell $260 (down from $276); Systems $133 (up from $88); Industrial $256 (up from $229); Finance $15 (down from $22).
- At October 1, manufacturing-group cash was $589 and debt $2,903; net debt to capital was 29%, versus 26% at year-end 2015. Finance-group cash was $150 and debt $919. Textron had a new $1.0 billion revolving credit facility with no borrowings outstanding.
- Total assets were $15,167; shareholders’ equity was $5,651. Manufacturing inventory was $4,791, up from $4,144 at January 2, 2016.
Material changes versus comparable periods
- Nine-month revenue rose 5%, led by Industrial, Textron Systems and Aviation; Bell revenue declined. Q3 revenue rose 2%.
- Pre-tax continuing income fell 58% in Q3 and 14% year to date, including $115 of special charges in Q3. Net income nevertheless increased substantially, principally because of tax-audit settlement benefits.
- The 2016 income tax benefit was $192 in Q3 and $46 for the first nine months. The IRS settlement generated a $206 benefit in continuing operations and a $113 benefit in discontinued operations.
- Operating cash flow from continuing operations declined to $145 from $419 for the first nine months. Management attributed the decrease mainly to working-capital changes, especially lower customer deposits on certain military contracts. Cash flow included $75 from corporate-owned life-insurance settlements.
- Backlog was $8,266 at October 1, down from $8,626 at January 2, 2016.
Outlook, risks and unusual items
- A restructuring plan recorded $115 of Q3 charges, including severance, asset impairments and contract termination costs. It targets approximately 1,700 positions, about 5% of the workforce, and includes discontinuing sensor-fuzed weapon production and consolidating facilities. Textron expects another $25–$55 of pre-tax charges and total restructuring cash outlays of $100–$120; completion was expected by March 2017.
- Management said existing cash, expected manufacturing cash generation and other funding alternatives should be sufficient for future needs. The filing provides no specific revenue or earnings guidance.
- Bell commercial aircraft deliveries weakened; the company cited difficulty securing required government approvals for sensor-fuzed weapon sales. Nonaccrual finance receivables rose to $90, or 9.16% of receivables, from $84, or 7.60%, at year-end; receivables 60 or more days delinquent rose to 8.65% from 6.24%.
- Textron reported a lawsuit seeking alleged fraudulent-transfer recovery of $316 and damages of $223, with potential trebled damages under Ohio law. An appellate court reversed dismissal in part and remanded certain claims; Textron said it would vigorously defend the case. Management did not believe existing proceedings would materially affect financial position or results.
- Key stated risks include U.S. government funding and defense priorities, government-contract performance and cost control, export policy, global demand, foreign exchange and interest rates, supplier performance, finance-portfolio credit quality, product launches, pensions and cybersecurity.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q3 2016, not Q3 2015.
- Separate recurring operating performance from the substantial IRS settlement benefits and the Q3 restructuring charges when evaluating earnings.
- Monitor conversion of earnings to cash, customer deposits, inventory growth and the change in manufacturing-group net leverage.
- Track restructuring charges, cash outlays, workforce reductions and the effects of ending sensor-fuzed weapon production.
- Review finance receivable delinquencies and the status and potential exposure of the Fair Finance litigation.