Financial Management
Financial Management
BSAD 430
Analyzing Annual Reports
GENERAL INFORMATION
1. Obtain an annual report for a company of your choice. You can obtain annual reports from several sources. If you need help finding an annual report, let me know. Send me a copy of the annual report you plan on using. Please send it as soon as you select it.
2. Provide the following information:
a. Company Name: Textron
b. Location of Corporate Headquarters: Textron World Headquarters
40 Westminster Street
Providence, RI 02903
c. Fiscal Year end: 2006
d. What are the primary products or services (sources of income) of the company? Textron Inc. consists of numerous subsidiaries and operating divisions which are separate legal entities and responsible for the day-to-day operations of their businesses. It is a global multi-industry company that ranges from aircraft to industrial and finance businesses. The four business segments are Bell, Cessna, Industrial and Finance. Their most recent acquisitions are Columbia Aircraft and United Industrial Corporation.
e. When and where is the next annual stockholders’ meeting? Textron's annual meeting of shareholders was held on Wednesday, April 25, 2007 at The Westin Hotel in Providence, Rhode Island.
f. Using the quarterly data found in the annual report, graph (using Excel) the high selling prices of stock each quarter for the current year and previous year. Using a different color, graph the low selling prices of stock.
What has been the highest price of the common stock in the last two years? $98.30
What has been the lowest price of the common stock in the last two years? $65.85
Describe the trend in the price of the stock over the last two years (upward, downward, volatile, constant)? The trend on the price of the stock over the last two years has been pretty much a constant upward pattern.
g. Which security exchange is the common stock traded (NYSE, ASE, NASDAQ, etc)? Textron common stock is listed on the New York and Chicago Stock Exchanges. Textron's preferred stocks ($2.08 and $1.40) are traded only on the New York Stock Exchange.
h. What is the current market price of the common stock?
$69.05 per share, on December 02, 2007. The Board of Directors approved a two-for-one split of its shares of Common Stock on August 24, 2007. Textron's Stock began trading at the split-adjusted price on August 27, 2007.
i. What is the ticker symbol used to identify the corporation on the exchange?
TXT
INCOME STATEMENT ANALYSIS
1. Prepare a Common-Size Analysis of the Income Statement for the current year and previous year.
a. Did the percent of product costs (cost of goods sold) to sales change in the current year in comparison to the previous year? What are possible explanations for changes, if any, that may have occurred? The percent of cost of goods sold to sales indeed changed over the two years but only by 1%. A possible explanation is the increase in overtime by the employees to keep up with the deadlines.
b. Did the percentage of operating costs (selling and administrative expenses) to sales change in the current year in comparison to the previous year? What are possible explanations for changes, if any, that may have occurred? The percent of selling and administrative expenses to sales increased .05% compare to the previous year. A possible reason is the fact that the more money you make, the more it will cost the business but the company is doing a really good job at keeping cost down in this case.
c. How did the percentage of interest expense to sales compare to the previous year? What are possible explanations for changes, if any? The interest expenses to sales are exactly the same compare to the previous year. There is no explanation except that the company is a finely-tuned machine.
d. How did net income as a percentage of sales change in the current year? What items in the income statement explain the change in income from continuing operations as a percentage of sales?
The net income increased as a percentage of sales from 2.02% in 2005 to 5.23% in 2006. The decreased losses from discontinued operations and increased revenues of $1.4 billion with relatively stable expenses contributed to the increase. Profitability in the Cessna segment increased as profits from prior R&D expenditures began to be realized.
BALANCE SHEET ANALYSIS
1. Prepare a Common-Size Analysis of the Balance Sheet for the current year and previous year.
a. Calculate working capital for the current year and previous year. For 2006, working capital is calculated as followed: 4287-2994=1293 (millions). For the previous year of 2005, it’s as follows: 4975-3147=1828(millions).
b. By how much did the amount of working capital increase or decrease compared to the previous year? The working capital decreased in 2006 from 2005 by 535 million.
c. What balance sheet accounts explain the most significant changes in working capital? The inventories increase of $357 million and accrued liabilities of $209 million for 2006 over 2005 explain the most significant changes in working capital.
d. Based on your common-size analysis, which long-term balance sheet accounts had significant changes during the year? What are the potential implications of these changes for the corporation? Based on my common size analysis Accounts Payable increased by 137 million from 2005-2006. Assets of Discontinued Operations decreased by 1,049 million from 2005-2006. Another item I noticed was that the current portion of long and short term debt decrease by 195 million from 2005-2006 as well, which is a significant difference. To me this implies that Textron is doing extremely well to decrease their debts, both long term and short term by over 195 million dollars. On the other hand, Textron’s Accumulated other comprehensive loss has increased to (644) million in 2006, when in 2005 it was (78). This was primarily due to pension and postretirement benefit adjustments and does not indicate a continuing trend. Liabilities of discontinued operations decreased as a percentage of total liabilities from 3.37% to 0.95%, while finance group debt grew from 40.98% to 46.05% of total liabilities.
e. Identify the number of shares (authorized, treasury, outstanding) of each class of capital stock (common, preferred, other). Shares issued were as follows (in thousands):
- End of 2006:
$2.08 Preferred – 147
$1.40 Preferred – 527
Common – 208,984
- End of 2005:
$2.08 Preferred – 153
$1.40 Preferred – 534
Common – 205,613
- End of 2004:
$2.08 Preferred – 174
$1.40 Preferred – 537
Common – 203,361
Treasury Shares were: 4,740 in 2006 and 4,023 in 2005
CASH FLOW STATEMENT ANAYLSIS
1. What is the ending cash balance for the current year? $733 Million
2. List cash flows resulting from each of these activities. Be sure to indicate whether the cash flow was positive or negative.
Current Year Previous Year
Operations 1,409 1,225
Investments (1,769) (1,284)
Financing (1,070) (404)
Increase (decrease) in cash 1,391 587
3. What investing activity(ies) provided the largest source of cash in the current year? Repaid and Proceeds on receivables sales and Securitization sales.
4. What investing activity(ies) used the most cash during the current year? Finance Receivables- Originated or Purchased and Net Cash used in acquisitions.
5. What financing activity(ies) provided the largest source of cash in the current year? Proceeds from issuance of long term debt.
6. What financing activity(ies) used the most cash during the current year? Principal Payments, retirement of long term debt and mandatory redeemable preferred securities, and purchases of Textron common stock used the most cash.
DECISION MAKING
1. How would you assess the corporation’s sales and income performance over the last two years? Explain. Sales and income performance both increased in 2006 over 2005. Net income as a percentage of revenues was 5.23% in 2006 versus 2.02 percent in 2005. This is largely attributable to a high demand for Textron’s products and effective cost control measures, coupled with divestiture or discontinuation of non-core, less profitable ventures.
2. What factors (such as the economy, consumer demand, new products, etc.) will have the greatest influence on in the determination of next year’s sales? In what way would these factor(s) influence sales? Textron’s 2007 sales (and the next few years beyond) will be greatly influenced by consumer demand for its aviation products. Significant R&D spending in prior years is paying off with a high demand for its Cessna business jet products, and the company continues a high margin of R&D expenditure even with a large backlog of orders for its current products. Continued demand will help Textron’s Finance segment, as it manages customer debt for the majority of Cessna sales. The Global War on Terrorism will likely induce continued strong government purchases from its Bell and Textron Systems segments for military aviation and support.
3. How would you assess the company’s total asset growth rate (for example, rapid increase, stable increase, stagnant, declining)? Explain. Textron’s total asset growth has been stable for the past four years. Assets for each year were:
- 2003: 15,090
- 2004: 15,875 (5.2% year over year)
- 2005: 16,499 (3.93% year over year)
- 2006: 17,550 (6.37% year over year)
4. Do you expect total assets to increase, decrease, or remain relatively stable next year? Explain. Assets should continue to increase at a relatively stable 4% to 6% rate. The company’s current manufacturing backlog and long-term contracts make substantial negative asset changes unlikely. Positive growth in Textron’s core businesses should contribute to steady asset growth to meet production and working capital demands.
5. Do you believe the corporation will be able to meet the goals identified by management? Explain. Textron should be able to meet management goals for 2007. Management expected revenues of $12 billion, a .5 billion increase over 2006. This is far less than the actual 2006 revenue increase of $1.5 billion over 2005. As Textron continues to execute against its order backlogs in the commercial helicopter and business jet segments, cost of goods sold will continue to decline per item produced through continuing manufacturing efficiencies and economies of scale. Also, overhead costs for several U.S. government contracts were already declining at the close of 2006, and should continue into 2007, also decreasing expenditures per item produced. Finally, as production of more recently introduced aircraft matures, warranty costs will decline.
6. Do you believe the corporation will need additional financing in the future to meet its stated goals? If not, why not? If so, do you believe the corporation would be able to obtain financing easily? Explain. Textron will require future financing to meet its goals. Textron’s widely varied conglomerate operations require different financing methods for its two major groups, Manufacturing and Financing. The manufacturing group uses income from operations to finance nearly all of its operations. Conversely, the finance group uses borrowing as its primary source of funding. As such, access to favorable terms is critical to the continued competitive operation of the finance group. Because of the varied needs for financing instruments, the two groups are reported individually in the financials. Both the manufacturing and finance group maintain “A”-grade investments ratings as separate borrowing groups. As a direct result, both groups have wide access to financing instruments.
7. Identify what you believe to be the three strongest aspects of the corporation. Do you believe that the corporation will be able to maintain these strengths over the next few years? Explain. The three strongest aspects of Textron appear to be the Cessna Business Jet enterprise, the Bell commercial helicopter enterprise, and the ability to provide captive financing for both entities’ customers through the Financial Group._ The demand for Cessna’s business jets is termed by management as extraordinary; Cessna entered 2007 with a 34% increase in order backlog despite a 22% increase in business jet deliveries. Much of the required investment on the road to full-rate production for several Bell products has been made and expensed. As these programs continue to develop and ramp-up to production, profits in the Bell segment should increase significantly. Finally, the Textron Financial provides long-term financing options to customers of both the Cessna and Bell divisions. The growth of sales in those divisions have directly translated into higher revenues for the finance group. Strong customer demand for products will likely drive continued demand for Textron’s financing options.
Identify what you believe to be the three weakest aspects of the corporation. In what way might these weaknesses be overcome? Explain. The three weakest aspects of Textron appear to be its significant exposure to certain government contracts, general weakness in standard management effectiveness ratios versus the sector, and a growing percentage of long-term debt of overall capitalization. Several of Textron’s government contracts require significant initial capital investment without guaranteed return. Government contracts represented 19% of Textron revenues in 2006. These contracts face uncertain future funding and by their nature vary as to extension or termination. Textron’s overall management effectiveness ratios are weak compared to the sector:
Textron Sector
Return on Assets for Past 5 Years 2.9 5.1
Return on Investment for Past 5 Years 3.5 8.5
Return on Equity for Past 5 Years 13.2 20.2
Although these are likely to improve as recent infrastructure and R&D expenses pay off, management should be cognizant of these ratio’s impact in the financial markets. Finally, long-term debt as a percentage of overall capitalization has climbed from 59.9% in 2004 to 69.9 in 2007. This is largely due to the operations of the finance group, but strong revenue performance must be maintained to ensure continued profitability as these debts mature.
9. Are you optimistic or pessimistic concerning the future of the corporation? What specific corporate or industry characteristics influence your opinion? I am optimistic about the future of the corporation. Bell and Cessna are legendary names in their business segments, and Textron’s continuing R&D expenditures should ensure leading-edge products and strong demand for these brands. Textron financial group is a logical extension of Cessna and Bell core competencies; it makes sense to offer in-house financing and various financing plans to big-ticket customers. Textron’s identification and divestiture of non-core, non-profitable elements reflect prudent management. Finally, as the Global War on Terrorism continues, government contracts will continue to bolster suppliers’ bottom lines.
10. Go to finance. and find the current stock quote of your corporation. Describe the information provided in the stock quote.
|TEXTRON INC (NYSE:TXT) | |
| |
|After Hours: 72.86 [pic]0.62 (0.86%) as of 4:55PM ET on 12/05/07 |
| |
|Last Trade: | |Day's Range: | | |
|72.24 | |70.63 - 72.57 | | |
| | | | | |
|Trade Time: | |52wk Range: | | |
|4:03PM ET | |43.595 - 71.11 | | |
| | | | | |
|Change: | |Volume: | | |
|[pic]2.40 (3.44%) | |2,909,762 | | |
| | | | | |
|Prev Close: | |Avg Vol (3m): | | |
|69.84 | |1,956,800 | | |
| | | | | |
|Open: | |Market Cap: | | |
|70.63 | |18.01B | | |
| | | | | |
|Bid: | |P/E (ttm): | | |
|N/A | |21.53 | | |
| | | | | |
|Ask: | |EPS (ttm): | | |
|N/A | |3.355 | | |
| | | | | |
|1y Target Est: | |Div & Yield: | | |
|75.20 | |0.92 (1.30% | | |
| | | | | |
| | | | | |
| | | | | |
The per-share price of Textron was $72.24 at the close of trading on December 5, 2007. It traded in a price range of $70.63 to $72.57 for the day, with over 2.9 million shares changing hands. The closing price was an increase of $2.40 (3.44%) from the day prior. At the current price, the price to earnings ratio for the trailing twelve months (ttm) is 21.53 times earnings. Current earnings per share for the ttm is $3.35, and the dividend yield is 0.92%. Textron’s total market capitalization is $18.01 billion.
11. Would you invest in the capital stock or bonds of this corporation if you had sufficient funds? Would you rather invest in one of the corporation’s competitors? What are the reasons for your decision. Yes, I would invest in Textron. The company has positioned itself well for continued growth in its core businesses, demand is strong and growing in those areas, and Textron’s other business areas, in particular finance, are well poised to reap further revenue from the successes of Cessna and Bell. Textron’s stock price compared to its probable future cash flows leave room for investment appreciation and even greater dividends.
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