Textron Reports Fourth Quarter 2018 Results; Announces 2019 Financial Outlook

 

TEXTRON INC.
Revenues by Segment and Reconciliation of Segment Profit to Net Income (Loss)
(Dollars in millions, except per share amounts)
(Unaudited)

                   

 

 
Three Months Ended Twelve Months Ended

December 29, 2018

   

December 30, 2017

December 29, 2018

   

December 30, 2017

REVENUES

               
MANUFACTURING:
Textron Aviation $ 1,552 $ 1,391 $ 4,971 $ 4,686
Bell 827 983 3,180 3,317
Textron Systems 345 489 1,464 1,840
Industrial   1,008     1,139     4,291     4,286  
3,732 4,002 13,906 14,129
 
FINANCE   18     15     66     69  

Total revenues

$ 3,750   $ 4,017   $ 13,972   $ 14,198  
 

SEGMENT PROFIT

MANUFACTURING:
Textron Aviation $ 170 $ 120 $ 445 $ 303
Bell 108 114 425 415
Textron Systems 37 37 156 139
Industrial   73       83     218     290  
388 354 1,244 1,147
 
FINANCE   9     6     23     22  
Segment Profit 397 360 1,267 1,169
 
Corporate expenses and other, net (12 ) (44 ) (119 ) (132 )
Interest expense, net for Manufacturing group (34 ) (38 ) (135 ) (145 )
Gain on business disposition (a) - - 444 -
Special charges (b)   (73 )   (55 )   (73 )   (130 )
 
Income from continuing operations before income taxes 278 223 1,384 762
Income tax expense (c)   (32 )   (329 )   (162 )   (456 )
 
Income (loss) from continuing operations 246 (106 ) 1,222 306
Discontinued operations, net of income taxes   -     -     -     1  
Net income (loss) $ 246   $ (106 ) $ 1,222   $ 307  
 
Earnings per share:
Income (loss) from continuing operations (d) $ 1.02 $ (0.40 ) $ 4.83 $ 1.14
Discontinued operations, net of income taxes   -     -     -     -  
Net income (loss) $ 1.02   $ (0.40 ) $ 4.83   $ 1.14  
 
Average shares outstanding (d)     242,569,000           263,295,000       253,237,000           268,750,000  
 
At the beginning of 2018, we adopted the new revenue recognition accounting standard using a modified retrospective transition method applied to contracts that were not substantially complete at the end of 2017. We recorded a $90 million adjustment to increase retained earnings to reflect the cumulative impact of adopting this standard at the beginning of 2018, primarily related to long-term contracts with the U.S. Government. Revenues associated with these contracts in 2018 are primarily recognized as costs are incurred, while revenues for 2017 were primarily recognized as units were delivered. The comparative information has not been restated and is reported under the accounting standards in effect for those periods.

Income (Loss) from Continuing Operations and Diluted Earnings Per Share (EPS) GAAP to Non-GAAP Reconciliation:

                   

 

Three Months Ended

 

Twelve Months Ended

 

December 29, 2018

   

December 30, 2017

 

December 29, 2018

 

 

December 30, 2017

Income (loss) from continuing operations - GAAP $ 246     $ (106 ) $ 1,222   $ 306

Gain on business disposition, net of income tax expense (benefit) of

$(9) million and $25 million, respectively (a)

(9

)

- (419 ) -

Special charges, net of income taxes of $17 million, $18 million,

$17 million and $44 million, respectively (b)

56 37 56 86
Income tax expense (benefit) resulting from the Tax Cuts and Jobs Act (c)   (14 )   266     (14 )   266
Adjusted income from continuing operations - Non-GAAP (e) $ 279   $ 197   $ 845   $ 658
 

Earnings per share:

Income (loss) from continuing operations - GAAP (d) $ 1.02 $ (0.40 ) $ 4.83 $ 1.14
Gain on business disposition, net of taxes (0.04 ) - (1.65 ) -
Special charges, net of taxes 0.23 0.14 0.22 0.32
Income tax expense (benefit) resulting from the Tax Cuts and Jobs Act   (0.06 )   1.00     (0.06 )   0.99
Adjusted income from continuing operations - Non-GAAP (e) $ 1.15   $ 0.74   $ 3.34   $ 2.45
 
(a)     On July 2, 2018, Textron completed the sale of the Tools & Test Equipment product line which resulted in an after-tax gain of $419 million.
 
(b) On December 4, 2018, our Board of Directors approved a plan to restructure the Textron Specialized Vehicles businesses within our Industrial segment. We incurred special charges of $73 million in the fourth quarter of 2018 under this plan, which included asset impairment charges of $47 million, contract termination and other costs of $18 million and severance and related costs of $8 million. Special charges for the three and twelve months ended December 30, 2017 included $48 million and $90 million, respectively, related to a 2016 restructuring plan, and $7 million and $40 million, respectively, of restructuring, integration and transaction costs related to the Arctic Cat acquisition.
 
(c) On December 22, 2017, the U.S. Government enacted tax reform legislation known as the Tax Cuts and Jobs Act (the "Tax Act"). Income tax expense for the three and twelve months ended December 30, 2017 included a $266 million one-time charge to reflect our provisional estimate of the net impact of the Tax Act. The charge is primarily related to remeasurement of U.S. federal net deferred tax assets due to the lower enacted tax rate and the Tax Act’s transition tax on previously unremitted earnings of non-U.S. subsidiaries. We completed our analysis of this legislation in the fourth quarter of 2018 and recorded a $14 million income tax benefit.
 
(d) For the three months ended December 30, 2017, the diluted average shares used to calculated EPS on a GAAP basis excluded potential common shares (stock options), due to their antidilutive effect resulting from the net loss. For the three and twelve months ended December 29, 2018 and the twelve months ended December 30, 2017, fully dilutive shares were used to calculate EPS.
 
(e) Adjusted income from continuing operations and adjusted diluted earnings per share are non-GAAP financial measures as defined in "Non-GAAP Financial Measures" attached to this release. The non-GAAP per share information for the three months ended December 30, 2017 is calculated using diluted average shares outstanding of 266,099,000.
 
 
Textron Inc.
Condensed Consolidated Balance Sheets
(In millions)
(Unaudited)
                       

December 29,
2018

   

December 30,
2017

Assets (a)    
Cash and equivalents $ 987 $ 1,079
Accounts receivable, net 1,024 1,363
Inventories 3,818 4,150
Other current assets 785 435
Net property, plant and equipment 2,615 2,721
Goodwill 2,218 2,364
Other assets 1,800 2,059
Finance group assets   1,017       1,169
Total Assets $ 14,264     $ 15,340
 
 
Liabilities and Shareholders' Equity (a)
Short-term debt and current portion of long-term debt $ 258 $ 14
Current liabilities 3,248 3,646
Other liabilities 1,932 2,006
Long-term debt 2,808 3,074
Finance group liabilities   826       953
Total Liabilities 9,072 9,693
 
Total Shareholders' Equity   5,192       5,647
Total Liabilities and Shareholders' Equity $ 14,264     $ 15,340
 
(a)     At the beginning of 2018, we adopted the new revenue recognition accounting standard using a modified retrospective transition method applied to contracts that were not substantially complete at the end of 2017. We recorded a $90 million adjustment to increase retained earnings to reflect the cumulative impact of adopting this standard at the beginning of 2018, primarily related to long-term contracts with the U.S. Government. Revenues associated with these contracts in 2018 are primarily recognized as costs are incurred, while revenues for 2017 were primarily recognized as units were delivered. The comparative information has not been restated and is reported under the accounting standards in effect for those periods.
 
TEXTRON INC.
MANUFACTURING GROUP
Condensed Schedule of Cash Flows
(In millions)
(Unaudited)
                                 
Three Months Ended Twelve Months Ended

December 29,

    December 30, December 29,     December 30,
2018     2017 2018     2017
Cash flows from operating activities:
Income (loss) from continuing operations $ 239 $ (152 ) $ 1,198 $ 247
Depreciation and amortization 113 113 429 435
Gain on business disposition - - (444 ) -
Changes in working capital (a) 1 364 (203 ) 96
Changes in other assets and liabilities and non-cash items (a) 40 278 97 152
Dividends received from TFC   -         -     50         -  
Net cash from operating activities of continuing operations (a)   393         603     1,127         930  
Cash flows from investing activities:
Net proceeds from business disposition - - 807 -
Capital expenditures (136 ) (147 ) (369 ) (423 )
Net proceeds from corporate-owned life insurance policies (a) 12 (3 ) 110 17
Proceeds from the sale of property, plant and equipment 2 1 14 7
Net cash used in acquisitions (20 ) (1 ) (23 ) (331 )
Other investing activities, net   -         1     -         2  
Net cash from investing activities (a)   (142 )       (149 )   539         (728 )
Cash flows from financing activities:
Proceeds from long-term debt - 347 - 992
Principal payments on long-term debt (1 ) (701 ) (5 ) (704 )
Purchases of Textron common stock (400 ) (131 ) (1,783 ) (582 )
Other financing activities, net   (3 )       5     50         28  
Net cash from financing activities   (404 )       (480 )   (1,738 )       (266 )
Total cash flows from continuing operations (153 ) (26 ) (72 ) (64 )
Total cash flows from discontinued operations (1 ) (3 ) (2 ) (27 )
Effect of exchange rate changes on cash and equivalents   (9 )       4     (18 )       33  
Net change in cash and equivalents (163 ) (25 ) (92 ) (58 )
Cash and equivalents at beginning of period   1,150         1,104     1,079         1,137  
Cash and equivalents at end of period $ 987       $ 1,079   $ 987       $ 1,079  
 
Manufacturing Cash Flow GAAP to Non-GAAP Reconciliation:
       
Net cash from operating activities of continuing operations - GAAP (a) $ 393 $ 603 $ 1,127 $ 930
Less: Capital expenditures (136 ) (147 ) (369 ) (423 )
Dividends received from TFC - - (50 ) -
Plus: Total pension contributions 15 20 52 358
Taxes paid on gain on business disposition 10 - 10 -
Proceeds from the sale of property, plant and equipment   2         1     14         7  
Manufacturing cash flow before pension contributions - Non-GAAP (a) (b) $ 284       $ 477   $ 784       $ 872  
 
(a)     For the three and twelve months ended December 30, 2017, $(3) million and $17 million, respectively, of net proceeds from the settlement of corporate-owned life insurance policies were reclassified from operating activities to investing activities as a result of the adoption of a new accounting standard at the beginning of 2018.
 
(b) Manufacturing cash flow before pension contributions is a non-GAAP financial measure as defined in "Non-GAAP Financial Measures" attached to this release.
 
 
TEXTRON INC.
Condensed Consolidated Schedule of Cash Flows
(In millions)
(Unaudited)
                       
Three Months Ended Twelve Months Ended
December 29,     December 30, December 29,     December 30,
2018     2017 2018     2017
Cash flows from operating activities:
Income (loss) from continuing operations $ 246 $ (106 ) $ 1,222 $ 306
Depreciation and amortization 115 115 437 447
Gain on business disposition - - (444 ) -
Changes in working capital (a) 12 352 (202 ) 107
Changes in other assets and liabilities and non-cash items (a)   39         237     96         103  
Net cash from operating activities of continuing operations (a)   412         598     1,109         963  
Cash flows from investing activities:
Net proceeds from business disposition - - 807 -
Capital expenditures (136 ) (147 ) (369 ) (423 )
Net proceeds from corporate-owned life insurance policies (a) 12 (3 ) 110 17
Finance receivables repaid 2 5 27 32
Net cash used in acquisitions (20 ) (1 ) (23 ) (331 )
Other investing activities, net   28         12     68         60  
Net cash from investing activities (a)   (114 )       (134 )   620         (645 )
Cash flows from financing activities:
Proceeds from long-term debt - 354 - 1,036
Principal payments on long-term debt and nonrecourse debt (71 ) (725 ) (131 ) (841 )
Purchases of Textron common stock (400 ) (131 ) (1,783 ) (582 )
Other financing activities, net   (3 )       5     50         27  
Net cash from financing activities   (474 )       (497 )   (1,864 )       (360 )
Total cash flows from continuing operations (176 ) (33 ) (135 ) (42 )
Total cash flows from discontinued operations (1 ) (3 ) (2 ) (27 )
Effect of exchange rate changes on cash and equivalents   (9 )       4     (18 )       33  
Net change in cash and equivalents (186 ) (32 ) (155 ) (36 )
Cash and equivalents at beginning of period   1,293         1,294     1,262         1,298  
Cash and equivalents at end of period $ 1,107       $ 1,262   $ 1,107       $ 1,262  
 
(a)     For the three and twelve months ended December 30, 2017, $(3) million and $17 million, respectively, of net proceeds from the settlement of corporate-owned life insurance policies were reclassified from operating activities to investing activities as a result of the adoption of a new accounting standard at the beginning of 2018.
 
 
TEXTRON INC.
Non-GAAP Financial Measures
(Dollars in millions, except per share amounts)
 
We supplement the reporting of our financial information determined under U.S. generally accepted accounting principles (GAAP) with certain non-GAAP financial measures. These non-GAAP financial measures exclude certain significant items that may not be indicative of, or are unrelated to, results from our ongoing business operations. We believe that these non-GAAP measures may be useful for period-over-period comparisons of underlying business trends and our ongoing business performance, however, they should be used in conjunction with GAAP measures. Our non-GAAP measures should not be considered in isolation or as a substitute for the related GAAP measures, and other companies may define similarly named measures differently. We encourage investors to review our financial statements and publicly-filed reports in the entirety and not to rely on any single financial measure. We utilize the following definitions for the non-GAAP financial measures included in this release:
 

Adjusted income from continuing operations and adjusted diluted earnings per share

Adjusted income from continuing operations and adjusted diluted earnings per share both exclude Gain on business disposition, net of taxes, Special charges, net of taxes, and the income tax expense (benefit) resulting from the Tax Cuts and Jobs Act (the "Tax Act"). The Gain on business disposition is not considered indicative of ongoing operations as it is a significant one-time transaction. We consider items recorded in Special charges such as enterprise-wide restructuring and acquisition-related restructuring, integration and transaction costs, to be of a non-recurring nature that is not indicative of ongoing operations. In addition, the impact from the Tax Act is not considered to be indicative of ongoing operations since it represents a one-time adjustment related to a significant tax reform of a non-recurring nature.

 

Manufacturing cash flow before pension contributions

Manufacturing cash flow before pension contributions adjusts net cash from operating activities of continuing operations (GAAP) for the following:

• Deducts capital expenditures and includes proceeds from the sale of property, plant and equipment to arrive at the net capital investment required to support ongoing manufacturing operations;

• Excludes dividends received from Textron Financial Corporation (TFC) and capital contributions to TFC provided under the Support Agreement and debt agreements as these cash flows are not representative of manufacturing operations;

• Adds back pension contributions as we consider our pension obligations to be debt-like liabilities. Additionally, these contributions can fluctuate significantly from period to period and we believe that they are not representative of cash used by our manufacturing operations during the period.

• For the 2018 periods presented, Manufacturing cash flow before pension contributions excludes taxes paid related to the gain realized on the Tools and Test business disposition. We have made this adjustment to the non-GAAP measure because we believe this use of cash is not representative of cash used by our manufacturing operations.

 
While we believe this measure provides a focus on cash generated from manufacturing operations, before pension contributions, and may be used as an additional relevant measure of liquidity, it does not necessarily provide the amount available for discretionary expenditures since we have certain non-discretionary obligations that are not deducted from the measure.
 
Income (loss) from Continuing Operations and Earnings Per Share (EPS) GAAP to Non-GAAP Reconciliation:
                             

Three Months Ended

Twelve Months Ended

 

December 29, 2018

 

 

December 30, 2017

December 29, 2018

 

December 30, 2017

Income (loss) from continuing operations - GAAP $ 246   $ (106 ) $ 1,222 $ 306

Gain on business disposition, net of income tax expense (benefit) of

$(9) million and $25 million, respectively

(9 ) - (419 ) -

Special charges, net of income taxes of $17 million, $18 million,

$17 million and $44 million, respectively

56 37 56 86
Income tax expense (benefit) resulting from the Tax Cuts and Jobs Act   (14 )   266     (14 )   266  
Adjusted income from continuing operations - Non-GAAP $ 279   $ 197   $ 845   $ 658  
 
Earnings per share:
Income (loss) from continuing operations - GAAP $ 1.02 $ (0.40 ) $ 4.83 $ 1.14
Gain on business disposition, net of taxes (0.04 ) - (1.65 ) -
Special charges, net of income taxes 0.23 0.14 0.22 0.32
Income tax expense (benefit) resulting from the Tax Cuts and Jobs Act   (0.06 )   1.00     (0.06 )   0.99  
Adjusted income from continuing operations - Non-GAAP $ 1.15   $ 0.74   $ 3.34   $ 2.45  
 
Manufacturing Cash Flow Before Pension Contributions GAAP to Non-GAAP Reconciliation and 2019 Outlook:
             

Three Months Ended

Twelve Months Ended

December 29, 2018

 

 

December 30, 2017

December 29, 2018

 

December 30, 2017

Net cash from operating activities of continuing operations - GAAP $ 393 $ 603 $ 1,127 $ 930
Less: Capital expenditures (136 ) (147 ) (369 ) (423 )
Dividends received from TFC - - (50 ) -
Plus: Total pension contributions 15 20 52 358
Taxes paid on gain on business disposition 10 - 10 -
Proceeds from the sale of property, plant and equipment   2     1     14     7  
Manufacturing cash flow before pension contributions - Non-GAAP $ 284   $ 477   $ 784   $ 872  
 
     

2019 Outlook

Net cash from operating activities of continuing operations - GAAP

$

1,020

- $ 1,120
Less: Capital expenditures

 

(380)

Plus: Total pension contributions

 

50

Taxes paid on gain on business disposition

 

10

 
Manufacturing cash flow before pension contributions - Non-GAAP $ 700   - $ 800  

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