Textron (TXT)

Q4 2011 Earnings Call

January 25, 2012 8:00 am ET

Executives

Douglas R. Wilburne - Vice President of Investor Relations

Scott C. Donnelly - Chairman, Chief Executive Officer, President and Member of Management Committee

Frank T. Connor - Chief Financial Officer and Executive Vice President

Analysts

George D. Shapiro - Access 3:42, LLC

Robert Stallard - RBC Capital Markets, LLC, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Jason M. Gursky - Citigroup Inc, Research Division

C. Stephen Tusa - JP Morgan Chase & Co, Research Division

Carter Copeland - Barclays Capital, Research Division

Heidi R. Wood - Morgan Stanley, Research Division

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

Julian Mitchell - Crédit Suisse AG, Research Division

Jeffrey T. Sprague - Vertical Research Partners Inc.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Cai Von Rumohr - Cowen and Company, LLC, Research Division

David E. Strauss - UBS Investment Bank, Research Division

Presentation

Operator

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Ladies and gentlemen, thank you for standing by. Welcome to the Textron Fourth Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. We will now like to turn the conference over to our host, Doug Wilburne, Vice President of Investor Relations. Please go ahead.

Douglas R. Wilburne

Thank you, Terry, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release.

On the call today, we have Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website.

Moving now to fourth quarter results, starting with Slide #3. Revenues in the quarter were $3.3 billion, up 4.1% from a year ago. On a GAAP basis, we recorded a loss from continuing operations of $0.06 per share, which compares to earnings per share of $0.20 in the fourth quarter of 2010. Last year's EPS included $0.13 in special charges. Because we're reporting a loss in the quarter, the per-share loss is based on a basic share count of 279 million shares.

Looking at Slide 4. This year's results included a number of onetime items, which resulted in a $0.55 reduction to fourth quarter EPS. Before we go through each of the items, let me point out that the amounts on this schedule are based on fully diluted shares, specifically 292.5 million shares for the fourth quarter and 307.3 million shares for the full year.

So starting with the first item. We recorded a $186 million pretax mark-to-market charge in the Golf Mortgage portfolio and our Finance segment in the quarter. We also recorded a $55 million pretax loss in corporate expenses reflecting the impact of convertible note purchases we completed during the quarter. As you may recall, we received $225 million in face value of notes in response to our public tender offer. Subsequent to the tender, we purchased another $159 million of notes. So on a full year basis, the total after tax impact of the convertible purchases was $0.13 per share, $0.08 of which related to the tender notes, and was included in our most recent full year guidance.

We also recorded $60 million in pretax charges at Textron Systems. This included a $41 million charge for intangible impairments and an approximate $90 million charge for severance costs. Working in the opposite direction was $59 million in pretax income resulting from a payment of a note receivable from the company's 2008 sale of its Fluid & Power business. $52 million of this amount was recorded as an offset to corporate expense and $7 million was recorded as an offset to interest expense.

So after adjusting for these items, our fourth quarter earnings were $0.49 per share with full year at $1.31.

Moving to cash flow. Fourth quarter manufacturing cash flow before pension contributions was $545 million, bringing our full year amount to $1 billion. Full year pension contributions were $642 million.

And with that, I'll turn it over to Scott.

Scott C. Donnelly

Thanks, Doug, and good morning everybody. Capped off the year with a solid fourth quarter with Cessna segment profit up $37 million; Bell up $29 million; and Industrial, up $24 million. We all saw a continued progress with another $386 million in liquidations at Textron Financial. That brings our full year liquidation to $1.5 billion. At the end of the quarter, we also moved the remaining Golf Mortgage portfolio into the held-for-sale category. As a result of the mark, we are now projecting the Finance segment will be approximately breakeven for the year.

Looking at Slide 5, our non-captive portfolio is now below the $1 billion mark at $950 million, with about $380 million in Golf Mortgage and about $320 million in timeshare. For the smaller portfolio, our annual liquidations will also be smaller, so we're anticipating about $250 million in non-captive receivable liquidations in 2012.

Moving to systems. Revenues were down slightly in the quarter, consistent with what we've been seeing through the entire year as a result of DoD program delays and project cancellations. Looking at 2012, with continued DoD spending pressures, we're expecting a relatively flat top line for the year.

As a result, we're executing a rightsizing plan at Systems, which is reflected in the severance charge we recorded in the fourth quarter. We're taking these actions to improve our cost competitiveness in a tighter budget environment. We'll continue to invest in new products, DoD opportunities and prospects for foreign military sales.

In the meantime, we have a number of important program proposals, which will be decided this year and should clarify the growth outlook for Systems. In terms of 2012, we anticipate flat revenues and margins in the 10% range.

Shifting to Industrial. We continue to see good volume expansion in the quarter with Greenlee and Kautex, with Golf volumes relatively flat. We saw margin improvement at the segment with fourth quarter margins at 6.9% versus 3.9% last year and 5.6% in third quarter.

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