Textron Flubs Its Earnings Report

Another year, another earnings season for Textron (NYSE: TXT  ) .

On Wednesday, the Providence, R.I.-based defense contractor issued its first quarterly earnings release for fiscal 2013, and the news was -- there's really no way to sugarcoat it -- not great. Of course, you've probably already gathered that much from the stock's 13% sell-off, but here are the gory details:

  • Q1 revenues were essentially flat at $2.9 billion.
  • Income from continuing operations dropped 2.5% to $0.40 per share.
  • The company was cash flow-negative, burning through $425 million in Q1. Companywide, free cash flow for the first fiscal quarter came to negative $545 million -- more than twice last year's Q1 cash burn of $250 million.

Business jets were to blame for much of the weak performance. Summing up the quarter, Textron CEO Scott Donnelly called growth "strong" at the Bell, Textron Defense, and E-Z-GO segments but said the business jet market seems "soft." Deliveries were down, backlog shrank, and the company booked a loss for the quarter.

This led to warnings of further weakness ahead, with Textron cutting its guidance for b-jet deliveries this year, saying it will deliver fewer than it did in 2012. Going forward, it bodes ill for rival General Dynamics (NYSE: GD  ) , which has a big business jet division as well.

Meanwhile, for Textron, the news gets even worse. Call a division "strong" or "soft" -- whatever you prefer. Revenues still declined in every Textron division, but Textron Systems. Backlog sank at Cessna ... and also at Bell, at Industrial, and at Finance, with most divisions reporting lower profits as well.

Aside from that, Mrs. Lincoln, how was the play?
Now, it's not all bad news. For the year, Textron says it still expects to wind up free cash flow-positive, generating manufacturing cash flow of $400 million (albeit then turning around and spending $200 million of that on its pension plans). As for GAAP "profits," management says it should earn between $1.90 and $2.10 per share from continuing operations.

Still, what this leaves us with here is a stock costing perhaps 12.5 times what it might earn this year -- a higher valuation than rivals L-3 Communications (NYSE: LLL  ) or Lockheed Martin (NYSE: LMT  ) fetch, even if a discount to General Dynamics. Meanwhile, Textron's free cash flow projection suggests that the quality of its earnings (perhaps $540 million in total, judging from the guidance) may not be even as good as those of its cheaper rivals.

In short, you know all those people who were selling Textron today? They're not wrong.


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