Textron Starts the Year Strong and Makes a Big Divestment

Textron Inc. (TXT 0.78%) released strong first-quarter 2018 results on Wednesday morning, led by stronger military volumes at Bell Helicopter, a return to growth at its Aviation subsidiary, and the surprise divestment of its Tools and Test business. 

With shares up nearly 7% Wednesday in response, let's take a closer look at how the industrial conglomerate kicked off the new year, and what investors should expect looking ahead.

Image source: Textron.

Textron's results: The raw numbers

Data source: Textron Inc. 

What happened with Textron this quarter?

• Textron didn't provide specific quarterly guidance when it last reported in late January. So for perspective -- and though we don't usually pay close attention to Wall Street's demands -- consensus estimates predicted significantly lower earnings of $0.48 per share on lower revenue of $3.08 billion.
• By segment:
  • Textron Aviation revenue grew 4% year over year, to $1.01 billion, including 36 jets delivered (up from 35 in the same year-ago period) and 29 commercial turboprops (up from 20 last year). Aviation segment backlog was $1.6 billion at the end of the quarter, and segment profit doubled year over year to $72 million driven by favorable volume, mix, performance, and price.
  • Bell revenue grew 8% to $752 million, as higher military volume was partially offset by lower commercial revenue. The latter was driven by product mix, as Bell delivered 46 commercial helicopters, up from 27 last year. Segment profit increased $4 million to $87 million.
  • Textron Systems revenue declined 7% to $387 million, primarily due to lower Weapons and Sensors volume driven by the discontinuation of Systems' Sensor Fuzed Weapon (SFW) production. Textron Systems backlog stood at $1.4 billion at the end of the quarter. Segment profit increased 150% to $50 million, driven by improved performance at Marine and Land.
  • Industrial revenue increased 14% to $1.131 billion, driven by a combination of favorable foreign exchange rates and the Artic Cat acquisition. Industrial segment profit declined 15.8%, primarily due to the timing of that acquisition last year.
  • Finance segment revenue declined $2 million to $16 million, while segment profit increased by half to $6 million.
• Returned $344 million to shareholders through share repurchases during the quarter.
• Announced a definitive agreement to divest the Tools and Test business -- notably including the Greenlee and Klauke brands -- to Emerson for $810 million in cash. 

What management had to say

"Operationally we achieved significant margin improvements at Textron Aviation and Textron Systems over this quarter last year and sustained margin strength at Bell, reflecting strong performance in these segments," added Textron CEO Scott Donnelly. "We are on track for a strong 2018 as we continue our focus on operational improvement and look to capitalize on improving end markets.

Looking forward

Assuming it passes regulatory muster, the divestiture of Textron's Tools and Test business is expected to close in the third quarter of 2018. Proceeds from the sale will be used to fund share repurchases to offset the expected impact to earnings related to the sale.

As such, Textron reiterated its full-year 2018 guidance for earnings per share from continuing operations of $2.95 to $3.15, as well as its outlook for cash flow from continuing manufacturing operations (before pension contributions) of $700 million to $800 million.

In the end, there was little not to like about this impressive start to 2018. And Textron's Tools and Test sale should enable the company to hone its focus and more effectively foster its more lucrative Bell, Aviation, Industrial, and Systems subsidiaries. Given its strong position as its end markets remain favorable, it should be no surprise to see the stock trading at a fresh 52-week high on Wednesday.