TXT

Textron Inc. 10-Q Summary: Quarter Ended April 4, 2009

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended April 4, 2009. Textron Inc. operates through two primary borrowing groups: a Manufacturing group (Cessna, Bell, Textron Systems, Industrial) and a Finance group (Textron Financial Corporation). The company is navigating a severe economic downturn, resulting in significant revenue declines, credit market disruptions, and a strategic decision to exit portions of its commercial finance business.

Key Financial Metrics

Note: Manufacturing group debt includes $2,875 million; Finance group debt includes $7,954 million.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 24% ($780 million) year-over-year, driven by a $718 million volume decrease, a $92 million drop in Finance segment revenue, and unfavorable foreign exchange.
• Profitability: Segment profit fell 67% to $136 million. The Finance segment swung from a $42 million profit to a $66 million loss, primarily due to a $49 million increase in loan loss provisions and lower securitization gains.
• Discontinued Operations: Net income from discontinued operations increased significantly to $43 million, largely due to a $7 million gain on the sale of HR Textron and a $34 million tax benefit.
• Liquidity Position: Cash and cash equivalents increased by $1,144 million to $1.69 billion. This increase was driven by a $2.97 billion draw on committed bank credit lines to replace commercial paper and term debt markets which became inaccessible.
• Restructuring: The company recorded $32 million in special charges related to a restructuring program initiated in late 2008, targeting the elimination of approximately 8,300 positions (19% of the global workforce).

Guidance, Outlook, and Risks

• Finance Exit Plan: Textron is executing a plan to exit its commercial finance business (excluding captive financing), targeting a reduction of managed finance receivables by at least $3.0 billion in 2009. This will be achieved through liquidation and selected sales over the next 2-4 years.
• Dividend Reduction: The Board reduced the quarterly common stock dividend to $0.02 per share to preserve liquidity.
• Product Suspension: Development of the Citation Columbus aircraft was suspended due to economic conditions, though the company intends to resume when demand strengthens. $56 million in customer deposits and $50 million in capitalized costs are associated with this program.
• Credit Ratings: Both long-term and short-term credit ratings were downgraded in Q1 2009 (e.g., S&P to BBB- for Manufacturing and BB+ for Finance) with negative outlooks, limiting access to commercial paper markets.
• Key Risks:
  • Continued volatility in credit markets and inability to fund the Finance group at competitive rates.
  • Further cancellations of aircraft orders and delays in deliveries due to the recession.
  • Increased loan loss provisions and nonaccrual receivables in the Finance segment (nonaccruals rose to $444 million).
  • Potential impairment of goodwill and intangible assets if market conditions do not improve.

Investor Verification Checklist

• Liquidity Sufficiency: Verify the company's ability to service $4.4 billion in debt payments due within one year using current cash reserves and the $3.0 billion credit line draw.
• Finance Segment Losses: Monitor the trajectory of loan loss provisions and the success of the liquidation plan for the commercial finance portfolio.
• Restructuring Costs: Track the execution of the $43 million in estimated additional restructuring costs for the remainder of 2009.
• Backlog Volatility: Assess the stability of the $21.1 billion backlog, particularly the $13.0 billion Cessna backlog, given the suspension of the Citation Columbus program and order cancellations.
• Capital Markets Access: Evaluate the success of the announced public offerings ($300 million convertible notes and 19 million common shares) to raise additional capital.