Textron Misses Earnings on Lower Volume - Analyst Blog

Diversified U.S. conglomerate Textron Inc. TXT reported first quarter 2014 earnings from continuing operations of 31 cents per share, missing the Zacks Consensus Estimate and lower than the year-ago number of 40 cents by 22.5%. The lackluster performance reflects lower contribution from Bell and Textron Systems.

Notably, the company completed its acquisition of Beech Holdings, LLC, the parent of Beechcraft Corporation, in March this year. Per this transaction, it acquired all outstanding equity interests in Beech Holdings for approximately $1.4 billion in cash.

As a result of this take over, its Cessna division now includes Beechcraft to form a new reporting segment called Textron Aviation.

Revenue

Total revenue in the quarter was $2,847.0 million, below the Zacks Consensus Estimate of $2,984.0 million by 4.6% and slipped marginally from year-ago figure of $2,855.0 million by 0.3%.

Manufacturing revenues climbed 0.2% year over year to $2,818.0 million, while revenue from the Finance division declined almost 31.0% during the quarter.

Segment Performance

Textron Aviation (formerly known as Cessna): The revenue from this division during the first quarter increased 10.9% year over year to $785.0 million. The improvement reflects the impact of the Beechcraft acquisition, higher jet deliveries and higher after market sales. The company delivered 8 King Air turboprops as well as 35 new jets in the quarter, compared with 32 jets in the prior-year period.

The segment registered a profit of $14 million versus $8 million loss in the first quarter of 2013. Segment's order backlog at the end of the first quarter was $1.5 billion, up from $1.0 billion at 2013-end.

Bell: Segment revenue decreased 8.0% to $873.0 million from the year-earlier level of $949.0 million, due to lower commercial and military aircraft deliveries. The company delivered 34 commercial helicopters compared with 40 units in the prior-year period. Bell also delivered 8 V-22's and 5 H-1's compared with 9 and 6 delivered, respectively, a year ago.

However, segment profit decreased 25.6% year over year to $96.0 million in the quarter. This dull performance was due to lower volumes and unfavorable mix of commercial aircraft deliveries.

Bell's order backlog at the end of the quarter was $6.3 billion, down $197.0 million sequentially.

Textron Systems: The revenue from this division during the reported quarter was $363.0 million, representing a year-over-year decrease of 15.4%. Revenues were hurt by lower volumes from Unmanned Aircraft Systems and Marine and Land Systems.

Segment profit was $39.0 million, almost at par with the year-ago level of $38 million. Favorable performance across the majority product lines were partly offset by lower volume.

Textron Systems' backlog at the end of the first quarter was $2.8 billion, flat from 2013-end.

Industrial: The revenue from this division increased 9.6% year over year to $797.0 million driven by higher automotive industry demand in Europe and Asia, accompanied by the impact of acquisitions. Segment profit increased 15.8% year over year to $66.0 million driven by higher volume.

Finance: The revenue from this division decreased 31.0% year over year to $29.0 million. Its segment profit dropped 78.9% to $4 million from the year-ago level of $19 million. This poor performance marks the impact from gains on the disposition of finance receivables held for sale during the first quarter of 2013.

Financials

Textron ended the March quarter with cash and cash equivalents of $682.0 million, compared with $1,163.0 million at the end of 2013. The company's cash from operating activities was $64.0 million in the quarter compared with $468.0 million in the year-ago quarter.

Capital expenditure during the quarter was $66.0 million versus $77.0 million in the year-ago quarter. Long-term debt was $2,682.0 million at the end of Mar 31, 2014 versus $1,923 million at the end of 2013.

Guidance

Textron expects earnings per share from continuing operations in the band of $1.92–$2.12 for 2014, taking into consideration the Beechcraft acquisition. Cash flow from continuing operations before pension contributions is estimated in the band of $600–$700 million.

Our Take

Textron is a global multi-industry company that manufactures aircraft, automotive engine components, and industrial tools. The company's geographically-diverse network of aircraft, defense & intelligence, industrial and finance businesses negates any specific business risk.

Textron is known to acquire assets having the same line of business, which are immediately accretive. Acquisitions in the past have helped the company to expand its core offerings.

Although it failed to meet the consensus estimates on top and bottom lines for the first quarter, we expect the current acquisition of Beech Holdings, LLC to aid the company in future, given Beech Holdings' wide array of product offerings. Textron can match its Caravan and Citation jet line-up with Beech Holdings' King Air product line.

The acquisition will also enable the company to experience operational synergy in terms of improving research and development expertise and enhancing the service network. We note that this is the third acquisition deal signed by Textron in the final quarter of 2013.

2013 as a whole was a year of important new product introductions and investments in future growth for Textron. Investor focus in 2014 would be on the potential synergies from these investments.

However, Textron, alike its peers has to ward off defense budget cuts and political uncertainty.
 
Zacks Rank

The stock currently carries a Zacks Rank #2 (Buy). Stocks to look out for in this space are The Boeing Co. BA, Northrop Grumman Corp. NOC and Huntington Ingalls Industries, Inc. HII, all with a Zacks Rank #2 (Buy).