Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Textron Earnings Fall on Industrial Weakness

By Steve Symington - Oct 18, 2018 at 6:04PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Though the industrial conglomerate's sales fell on a broad basis, missteps from its Arctic Cat business were the biggest culprit in this earnings miss.

Textron Inc. ( TXT 3.32% ) announced third-quarter 2018 results early Thursday, contrasting the relatively solid performance of its larger Aviation and Bell businesses with disappointing showings from its other core subsidiaries. The industrial conglomerate also detailed the successful divestiture of one of its product lines, and narrowed its full-year financial guidance.

With shares down around 11% on the day in response, let's take a closer look at the underlying drivers of Textron's results this quarter, as well as what to expect for the rest of the year.

Man in full gear riding an ATV up a dirt incline

IMAGE SOURCE: TEXTRON.

Textron's results: The raw numbers

Metric Q2 2018 Q2 2017 Year-Over-Year Change

Revenue

$3.200 billion

$3.484 billion

(8.2%)

GAAP net income

$563 million

$159 million

254.1%

GAAP earnings per share

$2.26

$0.60

276.7%

DATA SOURCE: TEXTRON QUARTERLY FILINGS. GAAP = generally accepted accounting principles. 

What happened with Textron this quarter?

  • On an adjusted (non-GAAP) basis, which notably excludes restructuring expenses and a $1.65-per-share gain on the on the recent sale of Textron's Tools & Test product lines, earnings from continuing operations arrived at $0.61 per share, down $0.65 per share in the same year-ago period.
  • Textron doesn't provide specific quarterly financial guidance. So, for perspective -- and while we don't usually pay close attention to Wall Street's demands -- these results were well below consensus estimates, which called for adjusted earnings of $0.76 per share on revenue of $3.53 billion.
  • By segment:
    • Textron Aviation revenue dipped 2% year over year to $1.133 billion, including delivery of 41 jets, flat with last year, and 43 commercial turboprops, down from 57 last year. Aviation backlog was $1.8 billion at the end of the quarter, and segment profit climbed by $6 million to $99 million, helped by favorable pricing and operational performance.
    • Bell revenue tumbled 5% year over year to $770 million, driven primarily by commercial mix (with 43 commercial helicopters sold, up from 39 last year), and partially offset by military revenue growth. Bell backlog was $5.7 billion at the end of the quarter, and segment profit climbed $7 million to $113 million.
    • Textron Systems revenue fell 23.1% to $352 million, due to lower TAPV deliveries from marine and land systems and lower volume from simulation, training and other products. Systems' backlog was $1.1 billion at the end of the quarter, while segment profit declined $11 million to $29 million. 
    • Industrial revenue went down 10.7% to $930 million, mostly driven by the sale of the Tools & Test product line. But segment profit arrived at a slim $1 million, down from $49 million in the same year-ago period, driven primarily by unfavorable pricing and performance and, to a lesser extent, the sale of the Tools & Test business.
    • Finance revenue dropped by $3 million to $15 million, and finance segment profit fell from $7 million a year ago to $3 million this quarter.
  • Textron repurchased $468 million in shares this quarter.
  • Subsequent to the end of the quarter, on Oct. 15, 2018, Textron Aviation announced fleet agreements with NetJets to purchase up to $175 super-midsize Cessna Citation Longitude aircraft, and up to 150 Cessna Citation Hemisphere aircraft.

What management had to say

"Revenues were lower in the quarter, largely reflecting declines at Industrial and Textron Systems," stated Textron Chairman and CEO Scott Donnelly. "Operationally, we achieved margin improvements at Aviation and Bell, reflecting strong execution within those segments."

During the subsequent conference call, Donnelly explained that the steep decline in industrial segment profit was primarily related to an "unfavorable operating performance in specialized vehicles." This was specifically related to Textron's management of the Arctic Cat brand, which it acquired in 2017.

Donnelly elaborated:

Specialized vehicles has undergone significant change over the past two years as we've expanded the product portfolio. While we've seen increasing revenue in the segment, we haven't seen the planned level of growth or delivered the operating leverage necessary to support the expected returns. We've made progress on new product introductions and continue to be encouraged by the favorable trends in the power sports market, but we need to work on our go-to-market strategy and focus on cost performance. We're focused on driving improvements in this business and believe it will be a valuable part of our portfolio moving forward.

Looking forward

Textron now expects full-year earnings per share from continuing operations of $4.81 to $4.91, and adjusted earnings of $3.20 to $3.30 per share (narrowed from its previous range of $3.15 to $3.35). Textron also reaffirmed its outlook for cash flow from continuing operations of the manufacturing group (before pension contributions) in the range of $750 million to $850 million.

In the end, that's not to say this was as bad a quarter from Textron as today's decline seems to indicate -- and its modestly narrowed earnings guidance in spite of its quarterly shortfall relative to expectations demonstrates as much. But while it's tempting to give the company the benefit of the doubt as it relates to realizing the fruits of its acquisition of Arctic Cat, it's disappointing to see these operational hiccups as it relates to the leading powersports brand. Until Textron can show it's capable of firing on all cylinders and return to sustained, profitable growth from each of its business segments, it's no surprise to see the stock pulling back.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Textron Inc. Stock Quote
Textron Inc.
TXT
$74.65 (3.32%) $2.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
624%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/06/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.