Business context and reporting period
Textron Inc. is a diversified manufacturer and financial-services company with Cessna, Bell, Textron Systems, Industrial and Finance segments. The supplied filing is a Form 10-Q for the quarter ended October 1, 2011, with comparisons to October 2, 2010; this differs from the request metadata’s “2010 Q3.” Amounts below are in millions of dollars unless otherwise indicated.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $2,814 | $2,479 | $8,021 | $7,398 |
| Income from continuing operations | $136 | $(48) | $259 | $29 |
| Net income (loss) | $142 | $(48) | $261 | $26 |
| Diluted EPS | $0.47 | $(0.17) | $0.83 | $0.09 |
| Operating cash flow, continuing operations | Not separately stated | Not separately stated | $663 | $767 |
Q3 manufacturing revenue rose 15% to $2,782; Finance revenue fell 46% to $32 as its receivables portfolio contracted. Manufacturing gross margin was 16.9% of revenue in both the quarter and year-to-date period, versus 15.8% and 16.7%, respectively, in 2010. Q3 selling and administrative expense declined 17% to $251. There were no special charges in 2011; the 2010 comparison included $114 of Q3 special charges, including a $91 non-cash currency-translation charge.
For the nine months, cash from investing activities was $648 (2010: $1,338) and cash used in financing was $700 (2010: $2,997). Cash and equivalents totaled $1,542 at October 1, 2011. Manufacturing group debt was $3,062, up from $2,302 at year-end; Finance group debt was $2,371, down from $3,660. Manufacturing net debt to capital was 31.8%, compared with 32.1% at year-end; debt to capital increased to 48.0% from 43.6%.
Material changes versus prior periods
- Revenue and earnings improved, led by higher Cessna business-jet deliveries and increased Bell military-program activity. Q3 Cessna deliveries were 47 Citation jets versus 26; Bell delivered 9 V-22 and 7 H-1 aircraft versus 7 and 5, respectively.
- Bell segment profit rose to $143 from $107 in Q3 and to $354 from $289 year to date, supported by improved military manufacturing performance. Cessna returned to Q3 profitability, with $33 segment profit versus a $31 loss; its year-to-date segment result was break-even versus a $52 loss.
- Textron Systems year-to-date revenue declined 6% to $1,359 and segment profit fell 15% to $149, primarily on lower UAS and mission-support volume. Industrial revenue rose 10% year to date, but segment profit was flat in Q3 amid material-cost inflation.
- Finance segment losses narrowed to $24 in Q3 and $101 year to date, from $51 and $180, respectively, mainly due to lower provisions and expenses. The smaller portfolio also reduced interest margin and revenue.
- Finance receivables held for investment fell to $3,302 from $4,213 at year-end. Nonaccrual receivables declined to $606 from $850, while the allowance for losses fell to $276 from $342. The nonaccrual share remained high at 18.35%.
- Backlog figures were revised after discovery of an error in Bell’s V-22 backlog reporting: Bell backlog at July 2, 2011 was reduced by $781. The filing reports October 1 backlog of $6,365 for Bell, $2,163 for Cessna and $1,528 for Textron Systems; Cessna’s backlog declined as deliveries exceeded orders.
Outlook, commentary, risks and unusual items
Management expected the plan to exit the non-captive commercial finance business to take another three to five years and said it expected liquidity to be sufficient, supported by cash, manufacturing cash generation and continued portfolio liquidation. This is not quantified earnings guidance. Management cautioned that the Finance portfolio’s nonaccrual percentage would generally remain high during liquidation and that liquidation may slow the reduction of nonaccrual balances.
In September 2011, Textron issued $500 of notes due 2016 and 2021, receiving $496 net proceeds. A post-quarter tender repurchased $225 principal amount of convertible notes for $342 cash; Textron expected to record a $34 pretax loss in Q4 and reduce equity by $108. Approximately $375 principal remained after settlement. Subsequent call-option and warrant amendments and capped-call transactions also affected equity and involved cash payments and receipts described in the filing.
Key risks cited include government defense spending and contract performance, Finance receivable collections and collateral values, access to capital markets, economic and foreign-exchange conditions, suppliers, commodity inflation, pensions, and new-product development and certification. The filing says existing legal proceedings were not expected to materially affect financial position or results, but reports an appeal of a dismissed securities class action and pending proceedings concerning the Textron Savings Plan. Management stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the filing covers the quarter ended October 1, 2011, not 2010 Q3.
- Review the Bell backlog correction and its implications for backlog reporting and controls.
- Track Finance portfolio credit quality, including nonaccrual levels, reserves, troubled restructurings and realized proceeds from asset sales.
- Assess the cash, earnings and equity effects of the convertible-note tender and related post-quarter transactions.
- Compare manufacturing demand, segment margins and backlog conversion with management’s expectations, particularly at Cessna and Textron Systems.