Textron Inc. Form 10-Q Summary
Period: Quarter ended September 28, 2013, with nine-month results compared with the periods ended September 29, 2012. The request metadata says 2012 Q3, but the filing itself reports 2013 Q3.
Business context and financial performance
Textron reports five segments: Cessna, Bell, Textron Systems, Industrial, and Finance. Manufacturing and Finance are presented as separate borrowing groups.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $2.904 billion | $3.000 billion | $8.598 billion | $8.875 billion |
| Income from continuing operations | $98 million | $142 million | $327 million | $435 million |
| Net income | $99 million | $151 million | $331 million | $441 million |
| Diluted EPS | $0.35 | $0.51 | $1.16 | $1.49 |
| Interest expense | $41 million | $52 million | $134 million | $160 million |
Manufacturing gross margin was 13.9% in Q3 and 15.3% for the first nine months, versus 15.7% and 16.9%, respectively, in the prior-year periods. The nine-month effective tax rate was 27.5%, reflecting international income and the reinstated federal R&D tax credit.
Material changes and segment results
- Revenue declined 3% in both Q3 and the first nine months. Lower Cessna and Finance revenue more than offset growth in Bell, Textron Systems, and Industrial.
- Cessna revenue fell 24% in Q3; the segment recorded a $23 million loss, versus $30 million profit a year earlier. Lower Citation jet volume and continued softness in the light-to-mid jet market were key factors. Nine-month segment loss was $81 million, including $28 million of severance costs.
- Bell revenue rose 8% in Q3, but segment profit fell 21% to $131 million. Nine-month profit declined 15% to $395 million. The filing attributes pressure largely to manufacturing inefficiencies related to labor disruptions and implementation of a new ERP system.
- Textron Systems’ nine-month revenue increased 8% and segment profit increased to $107 million from $96 million. Q3 included a $15 million charge related to the UAS fee-for-service program and engine-supplier quality issues.
- Industrial nine-month revenue rose 2% and segment profit rose 9% to $188 million, reflecting improved performance, partly offset by inflation.
- Finance revenue fell to $33 million in Q3 and $106 million year to date, mainly due to a smaller average receivables portfolio and the prior-year Timeshare account resolution.
Cash flow, debt, and liquidity
- Nine-month consolidated operating cash flow was negative $103 million, compared with positive $402 million in 2012. The filing cites working-capital needs, lower earnings, higher net tax payments, receivables growth, and inventory investment, particularly at Bell.
- Management expected working-capital improvement in Q4 and positive operating cash flow for full-year 2013, supported by higher expected Bell and Cessna deliveries.
- Capital expenditures were $300 million for the first nine months; acquisitions used $53 million. Consolidated cash declined to $637 million from $1.413 billion at year-end 2012.
- At September 28, manufacturing debt was $2.020 billion and Finance debt was $1.278 billion, compared with $2.301 billion and $1.686 billion, respectively, at year-end 2012. Manufacturing net debt to capital was 31%, up from 24%; debt to capital was 36%, down from 44%.
- On October 4, 2013, Textron entered a new $1.0 billion unsecured revolving credit facility, expiring in October 2018. No borrowings were outstanding on the replaced facility at quarter-end. Management stated it expected sufficient cash to meet future needs.
Outlook, risks, and unusual items
- The filing gives no specific earnings or revenue guidance. Management’s stated cash-flow outlook is positive full-year 2013 operating cash flow.
- Bell backlog fell $1.1 billion in the first nine months, primarily because V-22 and H-1 deliveries exceeded new orders. Cessna and Textron Systems backlog was $1.072 billion and $2.886 billion, respectively, at September 28.
- Management warned that U.S. defense sequestration and possible further budget reductions could lower revenue, profit, and cash flow. Other identified risks include government funding and contract performance, demand softness, supplier issues, foreign exchange and interest-rate movements, and Finance portfolio credit quality.
- The May 2013 maturity of convertible notes required a $215 million cash settlement of face value; conversion and related transactions resulted in a net issuance of 7.4 million shares. Textron also received $75 million on expiration of capped calls.
- A postretirement-plan amendment produced a $55 million pretax reduction in unrealized losses and prior service cost through other comprehensive income. Legal proceedings were not expected by management to materially affect financial position or results; an ERISA class-action settlement was preliminarily approved for an immaterial amount.
Key facts for investors to verify
- Whether Cessna demand and Citation deliveries recover, and how that affects segment profitability.
- Whether Bell’s labor and ERP-related inefficiencies abate and working-capital investment converts to cash as expected.
- U.S. defense budget actions, Bell order intake, and the trajectory of segment backlog.
- Finance portfolio credit trends, particularly the increase in 60-plus-day delinquencies to 5.87% from 4.65% at year-end 2012.
- Full-year operating cash flow versus management’s expectation, including the effects of inventory, customer deposits, and taxes.