Textron Earnings Fall on Industrial Weakness

Textron Inc. (TXT 0.78%) 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.

IMAGE SOURCE: TEXTRON.

Textron's results: The raw numbers

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.