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| TXT > SEC Filings for TXT > Form 10-Q on 29-Oct-2008 | All Recent SEC Filings |
29-Oct-2008
Quarterly Report
Consolidated Results of Operations
Revenues and Segment Profit
Third Quarter of 2008
Revenues increased $423 million, or 14%, to $3.5 billion in the third quarter of
2008, compared with the third quarter in 2007. This increase is primarily due to
revenues from newly acquired businesses of $229 million, higher pricing of $100
million, higher manufacturing volume and product mix of $96 million, and
favorable foreign exchange in the Industrial segment of $28 million. These
increases were partially offset by lower revenue for the Finance segment of $30
million.
Segment profit decreased $1 million to $399 million in the third quarter of 2008, compared with the third quarter in 2007. This decrease is primarily due to unfavorable cost performance of $41 million and lower profit in the Finance segment of $36 million, which was substantially offset by the benefit from higher volume and mix of $39 million, the benefit from newly acquired businesses of $22 million and higher pricing in excess of inflation of $18 million.
First Nine Months of 2008
Revenues increased $1,616 million, or 18%, to $10.6 billion in the first nine
months of 2008 compared with the first nine months of 2007. This increase is
primarily due to revenues from newly acquired businesses of $693 million, higher
manufacturing volume and product mix of $627 million, higher pricing of $285
million and favorable foreign exchange in the Industrial segment of $127
million. These increases were partially offset by lower revenues in the Finance
Segment of $88 million and the impact of last year's reimbursement of costs
related to Hurricane Katrina of $28 million.
Segment profit increased $127 million, or 11%, to $1.3 billion in the first nine months of 2008, compared with the first nine months of 2007. This increase is primarily due to the benefit from higher volume and mix of $129 million, higher pricing in excess of inflation of $57 million and the benefit from newly acquired businesses of $49 million, partially offset by lower profit in the Finance segment of $101 million and unfavorable cost performance of $11 million.
Backlog
During the third quarter of 2008, backlog in our aircraft and defense businesses remained at the second quarter level of $23.5 billion, which represents a $4.7 billion increase from the end of 2007. Since the end of 2007, Cessna's backlog has grown approximately $3.0 billion, with approximately 68% of these new business jet orders from international customers, compared with approximately 51% in the corresponding period of 2007. Approximately $2.4 billion of Cessna's backlog relates to the Columbus aircraft with initial customer deliveries expected to begin in 2014. Bell's backlog has increased $1.5 billion since the end of 2007 primarily as a result of a multi-year procurement contract entered into in March for the V-22 tiltrotor aircraft, which added $1.2 billion to backlog for the first funded lot and certain advanced procurement for additional lots. The remaining contract value of $4.7 billion will be reflected in backlog as each subsequent production lot is funded.
Corporate Expenses and Other, net
Corporate expenses and other, net decreased $14 million and $48 million in the third quarter and first nine months of 2008, respectively, compared with the corresponding periods of 2007, primarily due to lower pre-tax share-based compensation expense largely attributable to depreciation in our stock price. We utilize cash settlement forward contracts on our common stock to modify compensation expense to reduce potential variability resulting from changes in our stock price. With these contracts, changes in our stock price have no significant impact on net income.
22.
Income Taxes
A reconciliation of the federal statutory income tax rate to the effective income tax rate is provided below:
Three Months Ended Nine Months Ended
September 27, September 29, September 27, September 29,
2008 2007 2008 2007
Federal statutory income tax rate 35.0 % 35.0 % 35.0 % 35.0 %
Increase (decrease) in taxes
resulting from:
State income taxes 3.2 0.8 1.8 1.1
Foreign tax rate differential (2.5 ) 0.6 (4.4 ) (0.3 )
Manufacturing deduction (1.6 ) (1.6 ) (1.6 ) (1.6 )
Equity hedge expense (income) 2.9 (1.5 ) 2.4 (1.2 )
Interest on tax contingencies 0.1 1.1 1.6 1.1
Favorable tax settlements - - - (1.0 )
Other, net (0.9 ) (2.8 ) (0.5 ) (3.0 )
Effective income tax rate 36.2 % 31.6 % 34.3 % 30.1 %
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Discontinued Operations
On September 10, 2008, we entered into an agreement to sell our Fluid & Power business unit to Clyde Blowers Limited, a UK-based worldwide leader in the areas of power, materials handling, intermodal transport and logistics and pump technologies. Included in the transaction is the sale of all four Textron Fluid & Power product lines - which are Gear Technologies, Hydraulics, Maag Pump Systems, Union Pump and each of their respective brands. Under the agreement, we will receive approximately $526 million in cash, a six-year note with a face value of $28 million and up to $50 million based on final 2008 operating results, primarily payable in a six-year note; in addition, certain liabilities will be assumed by Clyde Blowers Limited. The sale is subject to certain closing conditions and completion of the buyer's funding, and is scheduled to close in November, pending regulatory reviews and approvals.
Beginning with the third quarter of 2008, the results of this business, which were previously reported in the Industrial segment, have been presented as discontinued operations for all periods presented in our consolidated financial statements.
Results of our discontinued businesses, including the operating results of Fluid & Power, are as follows:
Three Months Ended Nine Months Ended
September 27, September 29, September 27, September 29,
(In millions) 2008 2007 2008 2007
Revenue $ 174 $ 153 $ 504 $ 438
Income from discontinued operations
of Fluid & Power, before
income taxes 17 24 36 30
Income taxes 7 7 11 7
Income from discontinued operations
of Fluid & Power, net of
income taxes 10 17 25 23
Transaction-related costs for Fluid &
Power disposal (8 ) - (8 ) -
(Loss) income from other discontinued
operations (6 ) 13 (14 ) 6
Income from discontinued operations,
net of income taxes $ (4 ) $ 30 $ 3 $ 29
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We expect the sale will generate after-tax cash proceeds of approximately $350 million and an after-tax gain of about $85 million. (Loss) income from other discontinued operations primarily relates to the resolution of certain retained liabilities of the Fastening Systems business.
23.
Segment Analysis
Effective at the beginning of fiscal 2008, we changed our segment reporting by separating the former Bell segment into two segments: the Bell segment and the Defense & Intelligence segment. We now operate in, and report financial information for, the following five business segments: Cessna, Bell, Defense & Intelligence, Industrial and Finance. These segments reflect the manner in which we now manage our operations. Prior periods have been recast to reflect the new segment reporting structure.
Segment profit is an important measure used to evaluate performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense and certain corporate expenses. The measurement for the Finance segment includes interest income and expense.
Cessna
Three Months Ended Nine Months Ended
September 27, September 29, September 27, September 29,
(In millions) 2008 2007 2008 2007
Revenues $ 1,418 $ 1,268 $ 4,165 $ 3,439
Segment profit $ 238 $ 222 $ 707 $ 577
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In the third quarter of 2008, Cessna's revenues and segment profit increased $150 million and $16 million, respectively, compared with the third quarter of 2007. Revenues increased largely due to higher pricing of $64 million, higher volume of $62 million and a benefit from a newly acquired business of $24 million. The higher volume primarily reflects higher jet and Caravan deliveries of $84 million partially offset by lower used aircraft sales of $36 million. We delivered 124 jets in the third quarter, compared with 103 jets in the third quarter of 2007. Segment profit increased primarily due to the $25 million impact from higher volume and $24 million in pricing in excess of inflation, partially offset by $17 million in higher engineering and product development expense, $9 million in higher overhead costs, $6 million in inventory write-downs for used aircraft and $5 million in inventory reserves.
In the first nine months of 2008, Cessna's revenues and segment profit increased $726 million and $130 million, respectively, compared with the first nine months of 2007. Revenues increased largely due to higher volume of $486 million, improved pricing of $191 million and a $49 million benefit from a newly acquired business. The higher volume primarily reflects higher jet and Caravan deliveries of $504 million, partially offset by lower used aircraft sales of $42 million. We delivered 336 jets in the first nine months of 2008, compared with 265 jets in the first nine months of 2007. Segment profit increased primarily due to the $132 million impact from higher volume, pricing in excess of inflation of $81 million and favorable warranty performance of $19 million, partially offset by higher engineering and product development expense of $51 million, higher overhead costs of $12 million, $11 million in inventory write-downs for used aircraft and $6 million in inventory reserves.
Bell
Three Months Ended Nine Months Ended
September 27, September 29, September 27, September 29,
(In millions) 2008 2007 2008 2007
Revenues $ 702 $ 650 $ 1,974 $ 1,826
Segment profit $ 63 $ 58 $ 184 $ 90
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U.S. Government Business
Revenues and segment profit for Bell's U.S. Government business decreased $44
million and $11 million, respectively in the third quarter of 2008, compared
with the third quarter of 2007. The decrease in revenues is mainly due to lower
V-22 volume of $53 million, partially offset by higher H-1 program revenue of
$14 million, and higher spares and service volume of $6 million. The lower V-22
volume is primarily due to the timing of deliveries compared to the third
quarter of 2007. Segment profit decreased primarily due to unfavorable cost
performance of $8 million, largely due to the 2007 recovery of $8 million in
Armed Reconnaissance Helicopter (ARH) System Development and Demonstration (SDD)
launch-related costs, and lower volume of $8 million.
24.
In the first nine months of 2008, revenues and segment profit for this business increased $103 million and $80 million, respectively, compared with the first nine months of 2007. The increase in revenues is mainly due to higher H-1 program revenue of $50 million, higher V-22 volume of $26 million and higher spares and service volume of $25 million. Segment profit increased primarily due to improved cost performance of $70 million and a $9 million contribution from higher volume and mix. The improved cost performance is largely due to $65 million in net charges related to the ARH program in the first nine months of 2007, which included a $73 million charge for the low-rate initial production (LRIP) program, partially offset by the $8 million cost recovery for the SDD program.
ARH Program Termination - The ARH program included a development phase, covered by the SDD contract, and a production phase. During 2007, we continued to restructure the production portion of this program through negotiations with the U.S. Government, which included reducing the number of units and modifying the pricing and delivery schedules. Based on the status of the negotiations during the year and contractual commitments with our vendors related to materials for the anticipated production units procured in advance of the LRIP contract awards, we established reserves in 2007 representing our best estimate of the expected loss for this program. At December 29, 2007, reserves for this program totaled $50 million. During 2008, we continued to receive inventory and incur additional vendor obligations for long-lead time materials related to the anticipated LRIP contracts.
In the second quarter of 2008, we learned that, based on estimated projected costs, the ARH program required recertification under the Nunn-McCurdy Act in order for the program to continue, and the U.S. Government began the certification process. At the end of the day on October 16, 2008, we received notification that the U.S. Government would not certify the continuation of this program to Congress under the Nunn-McCurdy Act and thus had decided to terminate the program for the convenience of the Government. We are in the process of establishing the termination costs for the SDD contract, which we believe will be fully recoverable from the U.S. Government.
At October 27, 2008, our LRIP-related vendor obligations are estimated to be up to approximately $80 million. We have begun the process of assessing the amount of the ultimate vendor liability, as well as evaluating the utility the related inventory has to other Bell programs, customers, or to the vendors. This review and the related discussions with vendors are ongoing. We estimate that our potential loss resulting from our LRIP-related vendor obligations will be between approximately $50 million and $80 million. Accordingly, no additional reserves are deemed necessary at this time.
Commercial Business
Revenues and segment profit for Bell's commercial business increased $96 million
and $16 million, respectively, in the third quarter of 2008, compared with the
third quarter of 2007. The increase in revenues for this business is primarily
due to higher helicopter volume of $60 million, higher pricing of $24 million
and revenues from newly acquired businesses of $9 million. The increase in
volume relates primarily to additional deliveries of 13 helicopters during the
third quarter of 2008 (primarily 412s and 407s), compared to the corresponding
period in 2007. The increase in segment profit reflects the impact of higher
volume and mix of $25 million and higher pricing in excess of inflation of $16
million, partially offset by unfavorable cost performance of $25 million. The
unfavorable cost performance primarily reflects an increase in selling and
administrative expense of $22 million, largely due to higher project-related
consulting expenses and the impact of the recovery of $5 million in ARH SDD
costs in 2007, and an increase in product liability costs of $7 million,
partially offset by $12 million of costs incurred in 2007 related to our exit of
certain models.
In the first nine months of 2008, revenues and segment profit for Bell's commercial business increased $45 million and $14 million, respectively, compared with the first nine months of 2007. The increase in revenues for this business is primarily due to higher pricing of $54 million and revenues from newly acquired businesses of $20 million, partially offset by lower helicopter volume of $35 million. The increase in segment profit primarily reflects higher pricing in excess of inflation of $25 million, partially offset by unfavorable cost performance of $15 million. The unfavorable cost performance primarily reflects an increase in selling and administrative expense of $14 million, largely due to higher project-related consulting expenses and the impact of the recovery of $5 million in ARH SDD costs in 2007, higher engineering and product development expense of $13 million
25.
and an increase in product liability costs of $9 million, partially offset by costs incurred in 2007 related to our exit of certain models of $13 million and higher royalty income of $9 million, primarily related to the Model A139.
Defense & Intelligence
Three Months Ended Nine Months Ended
September 27, September 29, September 27, September 29,
(In millions) 2008 2007 2008 2007
Revenues $ 503 $ 326 $ 1,606 $ 1,004
Segment profit $ 74 $ 43 $ 212 $ 161
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Revenues and segment profit increased $177 million and $31 million, respectively, in the third quarter of 2008, compared with the third quarter of 2007. The increase in revenues is primarily due to $188 million in revenues from our newly acquired AAI Corporation (AAI) business, partially offset by lower volume of $14 million. Segment profit increased primarily due to the benefit resulting from the AAI acquisition of $21 million and favorable cost performance of $14 million, largely related to the ASV program.
In the first nine months of 2008, revenues and segment profit increased $602 million and $51 million, respectively, compared with the first nine months of 2007. The increase in revenues is primarily due to $608 million in revenues from our newly acquired AAI business and $67 million in higher volume for our ASV aftermarket, Lycoming and Intelligent Battlefield Systems products, partially offset by lower Sensor Fused Weapon volume of $45 million and a $28 million reimbursement of costs in the first nine months of 2007 related to Hurricane Katrina. Segment profit increased in the first nine months of 2008 primarily due to the benefit from the newly acquired AAI business of $55 million and favorable performance for the ASV of $28 million, partially offset by a 2007 cost reimbursement related to Hurricane Katrina of $28 million.
Industrial
Three Months Ended Nine Months Ended
September 27, September 29, September 27, September 29,
(In millions) 2008 2007 2008 2007
Revenues $ 726 $ 652 $ 2,320 $ 2,092
Segment profit $ 6 $ 23 $ 91 $ 138
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Revenues in the Industrial segment increased $74 million, while segment profit decreased $17 million in the third quarter of 2008, compared with the third quarter of 2007. Revenues increased primarily due to higher volume of $31 million, a favorable foreign exchange impact of $28 million, the favorable impact of an acquisition of $9 million and higher pricing of $6 million. Segment profit decreased primarily due to inflation in excess of higher pricing of $21 million, largely due to significant increases in commodity prices, and unfavorable mix of $6 million, partially offset by improved cost performance of $11 million.
In the first nine months of 2008, revenues in the Industrial segment increased $228 million, while segment profit decreased $47 million compared to the first nine months of 2007. Revenues increased primarily due to a favorable foreign exchange impact of $126 million, higher volume of $61 million, higher pricing of $24 million and the favorable impact of an acquisition of $17 million. Segment profit decreased primarily due to inflation in excess of higher pricing of $46 million and unfavorable mix of $22 million, partially offset by improved cost performance of $8 million and a favorable foreign exchange impact of $5 million.
26.
Finance
Three Months Ended Nine Months Ended
September 27, September 29, September 27, September 29,
(In millions) 2008 2007 2008 2007
Revenues $ 184 $ 214 $ 575 $ 663
Segment profit $ 18 $ 54 $ 73 $ 174
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Revenues decreased $30 million and $88 million in the third quarter and first nine months of 2008, respectively, compared with the corresponding periods of 2007, primarily due to the following:
(In millions) Quarter Year-To-Date Lower market interest rates $ (42 ) $ (111 ) Benefit from higher volume 10 17 Benefit from variable-rate receivable interest rate floors 6 12 Gains on the sale of leveraged lease investment - (16 ) Leveraged lease residual value impairments - 8 |
Segment profit decreased $36 million and $101 million in the third quarter and first nine months of 2008, respectively, compared with the corresponding periods of 2007, primarily due to the following:
(In millions) Quarter Year-To-Date Increase in the provision for loan losses $ (28 ) $ (79 ) Higher borrowing costs relative to market rates (7 ) (26 ) Benefit from variable-rate receivable interest rate floors 6 12 Gains on the sale of leveraged lease investment - (16 ) Leveraged lease residual value impairments - 8 |
In the third quarter of 2008, the increase in the provision for loan losses was primarily attributable to increased loan loss provisions in the distribution finance division as general U.S. economic conditions have continued to impact borrowers. The increase in the provision for loan losses during the first nine months of 2008 was primarily driven by $43 million in higher loan loss provisions in the distribution finance division, a $16 million reserve established for one account in the asset-based lending division and a $16 million reserve established for one account in the golf finance division.
Our borrowing costs have increased relative to the Federal Funds target rate as a result of the continued volatility in the credit markets. Dramatic reductions in the Federal Funds target rate from January through April were generally reflected in our finance receivable portfolio yield in advance of being reflected in our borrowing costs. LIBOR rates, on which the majority of our variable-rate debt portfolio is based, have remained high relative to the Federal Funds rate and credit spreads have widened on issuances of commercial paper and term debt as compared to 2007. This increase in borrowing costs was partially offset by the benefit received from variable-rate receivables with interest rate floors, which began earning higher yields relative to market rate indices as market interest rates decreased compared to 2007. In the distribution finance division, the impact of higher borrowing costs relative to market rates was $7 million and $19 million for the three and nine months ended September 27, 2008, respectively, as its portfolio contains assets that earn interest primarily based on the Prime rate, while the portfolio is funded by debt obligations on which interest is based on commercial paper and LIBOR rates.
27.
The following table presents information about the Finance segment's credit performance:
September 27, December 29,
(Dollars in millions) 2008 2007
Nonperforming assets $ 250 $ 123
Nonaccrual finance receivables $ 189 $ 79
Allowance for losses $ 137 $ 89
Ratio of allowance for losses to finance receivables 1.60 % 1.03 %
Ratio of nonperforming assets to total finance assets 2.67 % 1.34 %
Ratio of allowance for losses to nonaccrual finance
receivables 72.7 % 111.7 %
60+ days contractual delinquency as a percentage of
finance receivables 1.06 % 0.43 %
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Portfolio quality statistics weakened during the first nine months of 2008, compared to year-end 2007. The increase in nonperforming assets is primarily the result of one troubled account in the asset-based lending business and one troubled account in the golf finance division; however, nonperforming assets and . . .
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