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TXT > SEC Filings for TXT > Form 10-Q on 23-Jul-2014All Recent SEC Filings

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Form 10-Q for TEXTRON INC


23-Jul-2014

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview and Consolidated Results of Operations

On March 14, 2014, we completed the acquisition of Beech Holdings, LLC, which included Beechcraft Corporation and other subsidiaries, (collectively "Beechcraft"). The acquired Beechcraft business and the legacy Cessna segment were combined to form a new segment named Textron Aviation. The results of Beechcraft have been included in Textron's consolidated financial statements only for the period subsequent to the completion of the acquisition. As a result, the consolidated financial results for the six months ended June 28, 2014 do not reflect a full six months of Beechcraft operations.

An analysis of our consolidated operating results is set forth below. A more detailed analysis of our segments' operating results is provided in the Segment Analysis section on pages 22 to 27.

Revenues



                                        Three Months Ended         Six Months Ended
                                        June 28,     June 29,     June 28,     June 29,
(Dollars in millions)                       2014         2013         2014         2013
Revenues                                $  3,505      $ 2,839     $  6,352      $ 5,694
% change compared with prior period           23%                       12%

Revenues increased $666 million, 23%, in the second quarter of 2014, compared with the corresponding period of 2013, as revenue increases in the Textron Aviation, Bell and Industrial segments were partially offset by lower revenues in the Textron Systems and Finance segments. The net revenue increase included the following factors:

Higher Textron Aviation revenues of $623 million, primarily due to a $425 million impact from the Beechcraft acquisition and $191 million in higher volume, largely resulting from higher Citation jet deliveries.

Higher Bell revenues of $94 million, primarily reflecting $67 million in higher commercial and V-22 program volume due to an increase in deliveries and $41 million related to the settlement of the System Development and Demonstration (SDD) phase of the Armed Reconnaissance Helicopter (ARH) program, which was terminated in October 2008.

Higher Industrial segment revenues of $93 million, primarily due to higher volume of $39 million, largely in the Fuel Systems and Functional Components product line, and a $36 million impact from acquisitions.

Lower Textron Systems revenues of $140 million, primarily due to lower volume in the Marine and Land Systems product line of $78 million and Unmanned Aircraft Systems (UAS) product line of $41 million reflecting the timing of deliveries.

Lower Finance revenues of $4 million, primarily attributable to gains on the disposition of finance receivables held for sale during the second quarter of 2013.

Revenues increased $658 million, 12%, in the first half of 2014, compared with the corresponding period of 2013, as revenue increases in the Textron Aviation, Industrial and Bell segments were partially offset by lower revenues in the Textron Systems and Finance segments. The net revenue increase included the following factors:

Higher Textron Aviation revenues of $700 million, primarily due to a $526 million impact from the Beechcraft acquisition and $153 million in higher volume, largely resulting from higher Citation jet deliveries.

Higher Industrial segment revenues of $163 million, primarily due to higher volume of $77 million, largely in the Fuel Systems and Functional Components product line, and a $58 million impact from acquisitions.

Higher Bell revenues of $18 million, primarily due to $49 million related to the V-22 program reflecting product support and other volume, and an increase in other military volume, which included $41 million related to the ARH program as described above. These increases were partially offset by lower commercial revenue of $48 million, largely related to lower volumes.

Lower Textron Systems revenues of $206 million, largely due to lower volume in the Marine and Land Systems product line of $99 million and the UAS product line of $99 million reflecting the timing of deliveries.

Lower Finance revenues of $17 million, primarily attributable to gains on the disposition of finance receivables held for sale during the first half of 2013.


Table of Contents

Cost of Sales and Selling and Administrative Expense



                                            Three Months Ended         Six Months Ended
                                           June 28,     June 29,     June 28,     June 29,
(Dollars in millions)                          2014         2013         2014         2013
Operating expenses                          $ 3,228      $ 2,634      $ 5,887      $ 5,295
Cost of sales                                 2,875        2,338        5,232        4,720
% change compared with prior period              23%                       11%
Gross margin percentage of
Manufacturing revenues                         17.3%        16.7%        16.9%        16.0%
Selling and administrative expenses         $   353      $   296      $   655      $   575
% change compared with prior period              19%                       14%

Manufacturing cost of sales and selling and administrative expenses together comprise our operating expenses. Cost of sales increased $537 million, 23%, in the second quarter of 2014, and $512 million, 11%, in the first half of 2014, compared with the corresponding periods of 2013, largely due to the impact of acquired businesses, primarily Beechcraft, and higher net volume as described above. In the second quarter and first half of 2014, gross margin increased as a percentage of Manufacturing revenues largely due to improved leverage resulting from higher revenues primarily in the Textron Aviation segment.

Selling and administrative expense increased $57 million, 19%, in the second quarter of 2014, and $80 million, 14%, in the first half of 2014, compared with the corresponding periods of 2013, largely related to businesses acquired in the past year and compensation expense, which included the impact of changes in our stock price. This increase was partially offset by $28 million in severance costs incurred in 2013 in connection with a voluntary separation program in the legacy Cessna segment.

Acquisition and Restructuring Costs

In the second quarter and first half of 2014, we incurred $20 million and $36 million, respectively, in acquisition and restructuring costs related to the Beechcraft acquisition, which included severance costs of $20 million and $25 million, respectively, resulting from a restructuring program described below and transaction costs of $11 million incurred during the first quarter of 2014, primarily related to advisory services. These costs are not included in segment profit.

In connection with the integration of Beechcraft, we initiated a restructuring program in our Textron Aviation segment in the first quarter of 2014 to align the Cessna and Beechcraft businesses, reduce operating redundancies and maximize efficiencies. We expect to incur costs for this program related to employee terminations, facility consolidations, contract terminations and other transition-related costs, and estimate that this program will result in charges of approximately $35 million in 2014. We expect to incur additional costs in 2015, but do not expect these costs to be material.

Income Taxes

Income tax expense equated to an effective income tax rate of 31.0% and 30.7% in the second quarter and first half of 2014, respectively, compared with the U.S. federal statutory income tax rate of 35.0%. In the second quarter and first half of 2014, the difference between the statutory and the effective income tax rate was primarily due to benefits from income attributable to international operations in countries with lower tax rates.

Backlog



                    June 28,     December 28,
(In millions)           2014             2013
Bell                 $ 5,831     $      6,450
Textron Systems        3,007            2,803
Textron Aviation       1,421            1,018

Backlog increased $403 million at the Textron Aviation segment primarily as a result of the Beechcraft acquisition.


Table of Contents

Segment Analysis

We operate in, and report financial information for, the following five business segments: Textron Aviation, which consists of the legacy Cessna segment combined with the newly-acquired Beechcraft business, Bell, Textron Systems, Industrial and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses and acquisition and restructuring costs related to the Beechcraft acquisition. The measurement for the Finance segment includes interest income and expense along with intercompany interest expense.

In our discussion of comparative results for the Manufacturing group, changes in revenue and segment profit typically are expressed for our commercial business in terms of volume, pricing, foreign exchange and acquisitions. Additionally, changes in segment profit may be expressed in terms of mix, inflation and cost performance. Volume changes in revenue represent increases/decreases in the number of units delivered or services provided. Pricing represents changes in unit pricing. Foreign exchange is the change resulting from translating foreign-denominated amounts into U.S. dollars at exchange rates that are different from the prior period. Acquisitions refers to the revenues generated from businesses that were acquired within the previous 12 months. For segment profit, mix represents a change due to the composition of products and/or services sold at different profit margins. Inflation represents higher material, wages, benefits, pension or other costs. Performance reflects an increase or decrease in research and development, depreciation, selling and administrative costs, warranty, product liability, quality/scrap, labor efficiency, overhead, product line profitability, start-up, ramp up and cost-reduction initiatives or other manufacturing inputs.

Approximately 30% of our 2013 revenues were derived from contracts with the U.S. Government. For our segments that have significant contracts with the U.S. Government, we typically express changes in segment profit related to the government business in terms of volume, changes in program performance or changes in contract mix. Changes in volume that are discussed in net sales typically drive corresponding changes in our segment profit based on the profit rate for a particular contract. Changes in program performance typically relate to profit recognition associated with revisions to total estimated costs at completion that reflect improved or deteriorated operating performance or award fee rates. Changes in contract mix refers to changes in operating margin due to a change in the relative volume of contracts with higher or lower fee rates such that the overall average margin rate for the segment changes.

Textron Aviation



                           Three Months Ended        Six Months Ended
                           June 28,     June 29,    June 28,    June 29,
(Dollars in millions)          2014         2013        2014        2013
Revenues                 $    1,183     $    560    $  1,968    $  1,268
Operating expenses            1,155          610       1,926       1,326
Segment profit (loss)            28         (50)          42        (58)
Profit margin                   2.4 %      (8.9) %       2.1 %     (4.6) %

Textron Aviation Revenues and Operating Expenses

The following factors contributed to the change in Textron Aviation's revenues
for the periods:



                  Q2 2014    YTD 2014
                   versus      versus
(In millions)     Q2 2013    YTD 2013
Acquisition       $   425     $   526
Volume                191         153
Pricing                 7          21
Total change      $   623     $   700

In the second quarter of 2014, Textron Aviation's revenues increased $623 million, 111%, compared with the second quarter of 2013, primarily due to the impact of the Beechcraft acquisition of $425 million and higher volume of $191 million. The higher volume was primarily the result of higher Citation jet volume of $203 million and pre-owned aircraft volume of $20 million, partially offset by lower Caravan volume of $24 million and lower CitationAir volume of $19 million related to exiting our fractional share business. We delivered 36 Citation jets and 34 King Air turboprops in the second quarter of 2014, compared with 20 Citation jets in the second quarter of 2013. During the second quarter of 2014, the portion of the segment's revenues derived from aftermarket sales and services represented 32% of its total revenues, compared with 41% in the second quarter of 2013.


Table of Contents

In the first half of 2014, Textron Aviation's revenues increased $700 million, 55%, compared with the first half of 2013, primarily due to the impact of the Beechcraft acquisition of $526 million and higher volume of $153 million. The higher volume was primarily the result of higher Citation jet volume of $230 million, partially offset by lower pre-owned aircraft volume of $46 million and lower CitationAir volume of $44 million related to exiting our fractional share business. We delivered 71 Citation jets and 42 King Air turboprops in the first half of 2014, compared with 52 Citation jets in the first half of 2013. During the first half of 2014, the portion of the segment's revenues derived from aftermarket sales and services represented 33% of its total revenues, compared with 35% in the first half of 2013.

Textron Aviation's operating expenses increased by $545 million, 89%, and $600 million, 45%, in the second quarter and first half of 2014, respectively, compared with the corresponding period of 2013, primarily due to the incremental operating costs related to the Beechcraft acquisition, and higher net sales volume as described above. Textron Aviation's operating expenses exclude acquisition and restructuring costs incurred across the segment as a result of the Beechcraft integration, which are reported separately and are discussed in the Acquisition and Restructuring Costs section above.

Textron Aviation Segment Profit

The following factors contributed to the change in Textron Aviation's segment
profit for the periods:



                                     Q2 2014    YTD 2014
                                      Versus      versus
(In millions)                        Q2 2013    YTD 2013
Volume                                $   37     $    44
2013 Voluntary Separation Program         28          28
Pricing and inflation                      9          21
Performance and other                      4           7
Total change                          $   78     $   100

Textron Aviation segment profit increased $78 million and $100 million in the second quarter and first half of 2014, compared with the corresponding periods of 2013, primarily due to higher volume as described above and $28 million in severance costs incurred in 2013 in connection with a voluntary separation program. The cost structures of Beechcraft and Cessna were significantly integrated during the quarter, and as a result, Performance and other reflects the net profit impact of Beechcraft, including the benefit of the integrated cost structure. Performance and other also includes amortization of $33 million and $45 million in the second quarter and first half of 2014, respectively, related to fair value step-up adjustments of acquired inventories sold during the periods.

Bell



                           Three Months Ended         Six Months Ended
                           June 28,     June 29,    June 28,     June 29,
(Dollars in millions)          2014         2013        2014         2013
Revenues:
V-22 program              $     445      $   415     $   825      $   776
Other military                  268          241         483          466
Commercial                      406          369         684          732
Total revenues                1,119        1,025       1,992        1,974
Operating expenses              978          890       1,755        1,710
Segment profit                  141          135         237          264
Profit margin                  12.6 %       13.2 %      11.9 %       13.4 %

Bell manufactures helicopters, tiltrotor aircraft, and related spare parts and provides services for military and commercial markets. Bell's major U.S. Government programs at this time are the V-22 tiltrotor aircraft and the H-1 helicopter platforms, which are both in the production stage and represent a significant portion of Bell's revenues from the U.S. Government.


Table of Contents

Bell Revenues and Operating Expenses

The following factors contributed to the change in Bell's revenues for the
periods:



                   Q2 2014     YTD 2014
                    versus       versus
(In millions)      Q2 2013     YTD 2013
Volume and mix   $      81   $       (2 )
Other                   13           20
Total change     $      94   $       18

Bell's revenues increased $94 million, 9%, in the second quarter of 2014, compared with the second quarter of 2013, primarily due to higher volume, which included the following factors:

$37 million increase in commercial revenue, largely related to higher aircraft deliveries. Bell delivered 46 commercial aircraft in the second quarter of 2014, compared with 44 commercial aircraft in the second quarter of 2013.

$30 million increase in V-22 program volume, largely related to higher aircraft deliveries as we delivered 10 V-22 aircraft in the second quarter of 2014, compared with 9 aircraft in the second quarter of 2013.

$27 million increase in other military volume, primarily reflecting $41 million related to the settlement of the SDD phase of the ARH program, which was terminated in October 2008. Bell delivered 8 H-1 production aircraft in the second quarter of 2014, compared with 6 aircraft in the second quarter of 2013.

Bell's revenues increased $18 million, 1%, in the first half of 2014, compared with the first half of 2013, primarily due to the following factors:

$49 million increase in V-22 program revenue, primarily reflecting higher product support and other volume of $28 million. We delivered 18 V-22 aircraft in both the first half of 2014 and 2013.

$17 million increase in other military volume, primarily reflecting $41 million related to the ARH program as described above and $35 million in higher spares volume. These increases were partially offset by lower volume in other product lines, including the H-1 program. We delivered 13 H-1 production aircraft in the first half of 2014, compared with 12 aircraft in the first half of 2013.

$48 million decrease in commercial revenue, largely related to lower volumes. Bell delivered 80 commercial aircraft in the first half of 2014, compared with 84 commercial aircraft in the first half of 2013.

Bell's operating expenses increased $88 million, 10%, in the second quarter of 2014 compared with the second quarter of 2013, primarily due to higher net sales volume as discussed above.

Bell's operating expenses increased $45 million, 3%, in the first half of 2014, compared with the first half of 2013, primarily due to a higher proportion of Bell's revenues attributable to lower margin government programs in 2014.

Bell Segment Profit

The following factors contributed to the change in Bell's segment profit for the
periods:



                   Q2 2014    YTD 2014
                    versus      versus
(In millions)      Q2 2013    YTD 2013
Volume and mix   $      12   $     (19 )
Other                   (6 )        (8 )
Total change     $       6   $     (27 )

Bell's segment profit increased $6 million, 4%, in the second quarter of 2014, compared with the second quarter of 2013, primarily due to higher volume and mix, largely attributed to a $16 million favorable program profit adjustment related to the ARH program as described above.

Bell's segment profit decreased $27 million, 10%, in the first half of 2014, compared with the first half of 2013, primarily due to lower volume and mix reflecting an unfavorable mix of commercial aircraft deliveries and lower volume, partially offset by a $16 million favorable program profit adjustment related to the ARH program as described above.


Table of Contents

Textron Systems



                           Three Months Ended         Six Months Ended
                           June 28,     June 29,    June 28,     June 29,
(Dollars in millions)          2014         2013        2014         2013
Revenues                  $     282      $   422     $   645      $   851
Operating expenses              248          388         572          779
Segment profit                   34           34          73           72
Profit margin                  12.1 %        8.1 %      11.3 %        8.5 %

Textron Systems Revenues and Operating Expenses

The following factors contributed to the change in Textron Systems' revenues for
the periods:



                  Q2 2014     YTD 2014
                   versus       versus
(In millions)     Q2 2013     YTD 2013
Volume          $    (149 ) $     (220 )
Other                   9           14
Total change    $    (140 ) $     (206 )

Revenues at Textron Systems decreased $140 million, 33%, in the second quarter of 2014, compared with the second quarter of 2013, primarily due to lower volume in the Marine and Land Systems product line of $78 million and UAS product line of $41 million. Revenues at Textron Systems decreased $206 million, 24%, in the first half of 2014, compared with the first half of 2013, primarily due to lower volume in the Marine and Land Systems product line of $99 million and the UAS product line of $99 million. The lower volume in the Marine and Land Systems and UAS product lines largely reflects the timing of deliveries during the year.

Textron Systems' operating expenses decreased $140 million, 36%, and $207 million, 27%, in the second quarter and first half of 2014, respectively, compared with the corresponding period of 2013, primarily due to lower sales volume as discussed above.

Textron Systems Segment Profit

The following factors contributed to the change in Textron Systems' segment
profit for the periods:



                   Q2 2014     YTD 2014
                    versus       versus
 (In millions)     Q2 2013     YTD 2013
Performance      $      20   $       27
Volume                 (15 )        (19 )
Other                   (5 )         (7 )
Total change     $       -   $        1

Segment profit at Textron Systems was essentially unchanged from the corresponding periods, largely due to improved performance across all of our product lines which was mostly offset by lower volume as described above.

Industrial



                                            Three Months Ended         Six Months Ended
                                            June 28,     June 29,     June 28,    June 29,
(Dollars in millions)                           2014         2013         2014        2013
Revenues:
Fuel Systems and Functional Components     $     512      $   474     $  1,004     $   931
Other Industrial                                 382          327          687         597
Total revenues                                   894          801        1,691       1,528
Operating expenses                               800          722        1,531       1,392
Segment profit                                    94           79          160         136
Profit margin                                   10.5 %        9.9 %        9.5 %       8.9 %


Table of Contents

Industrial Revenues and Operating Expenses

The following factors contributed to the change in Industrial's revenues for the
periods:



                     Q2 2014    YTD 2014
                      versus      versus
(In millions)        Q2 2013    YTD 2013
Volume             $      39   $      77
Acquisitions              36          58
Foreign exchange          13          21
Other                      5           7
Total change       $      93   $     163

Industrial segment revenues increased $93 million, 12%, in the second quarter of 2014, compared with the second quarter of 2013, primarily due to higher volume of $39 million and the impact of acquisitions of $36 million. Higher volume was largely related to the Fuel Systems and Functional Components product line, principally reflecting automotive industry demand in North America and Asia.

Industrial segment revenues increased $163 million, 11%, in the first half of 2014, compared with the first half of 2013, primarily due to higher volume of $77 million and the impact of acquisitions of $58 million. Higher volume was largely related to the Fuel Systems and Functional Components product line, principally reflecting automotive industry demand in Asia, Europe and North America.

Operating expenses for the Industrial segment increased $78 million, 11%, and $139 million, 10%, in the second quarter and first half of 2014, respectively, compared with the corresponding periods of 2013, largely due to the impact from higher sales volume discussed above and additional operating expenses from recently acquired businesses.

Industrial Segment Profit

The following factors contributed to the change in Industrial's segment profit
for the periods:



                   Q2 2014     YTD 2014
                    versus       versus
(In millions)      Q2 2013     YTD 2013
Volume and mix   $       6   $       14
Other                    9           10
Total change     $      15   $       24

Segment profit for the Industrial segment increased $15 million, 19%, and $24 million, 18%, in the second quarter and first half of 2014, respectively, compared with the corresponding periods of 2013, primarily due to the impact from higher volume as described above.

Finance



                  Three Months Ended       Six Months Ended
. . .
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