Textron Stalls Amid Defense Order Delays, Narrowed Earnings Guidance

Textron (TXT 1.93%) released third-quarter 2019 results early Thursday, detailing a reasonably strong quarter led by modest top-line growth from three of its four core business segments. 

Still, the industrial conglomerate's performance was technically mixed relative to Wall Street's consensus estimates. And after Textron followed by revising its full-year earnings guidance partly to reflect delays in orders for its defense-centric offerings, shares plunged around 9% to end the week as the market absorbed the news.

IMAGE SOURCE: TEXTRON.

Here's a closer look at Textron's results (based on generally accepted accounting principles, or GAAP) relative to the same year-ago period.

Data source: Textron quarterly filings.

Perspective is in order

First, investors should note Textron's earnings in last year's third quarter included both restructuring expenses and a $1.65-per-share gain on the sale of its Tools & Test product lines. Excluding these one-time items, Textron's earnings of $0.95 per share would have represented 56% year-over-year growth. For perspective -- and keeping mind that Textron doesn't provide specific quarterly guidance -- most analysts were modeling lower earnings of $0.85 per share, but on higher revenue of $3.34 billion.

Primarily driving Textron's top line was 6% growth in aviation segment revenue, to $1.201 billion, as lower defense volumes were more than offset by growth in jets and aftermarket products. That translated to a 5.1% increase in aviation segment profit, to $104 million. 

Meanwhile, Textron's Bell segment saw sales climb 1.7% to $783 million, again as lower military volumes were all but offset by an increase in commercial revenue -- a trend driven by pricing and mix, as Bell delivered 42 commercial helicopters (one fewer than in last year's third quarter) over the past three months.

Next, Industrial segment revenue grew 2.2% to $950 million, driven by favorable pricing from within its specialized vehicle product line, which notably includes E-Z-GO golf carts and sales stemming from Textron's 2017 acquisition of Arctic Cat. That operating leverage and improved specialized vehicle performance helped Industrial segment profits soar to $47 million this quarter, up from just $1 million a year ago.

Finally, at Textron Systems, sales declined 11.6% to $311 million, hurt by lower armored vehicle volumes at its Textron Marine & Land Systems subsidiary. Still, the systems segment managed to increase its profit by 6.9% to $31 million in the process -- a testament to what Textron Chairman and CEO Scott Donnelly more broadly described as "good execution with solid margin performance across our businesses."

Digging deeper and looking ahead

During the subsequent conference call, Donnelly called the aviation segment's mid-single-digit growth "solid." And regarding Bell, he reminded investors of The Czech Republic's recent announcement of its intent to acquire a mixed fleet of 8 Bell UH-1Y utility and 4 Bell AH-1Z attack helicopters worth a total of $620 million, noting that it was "one of the several military opportunities for the H1 platform that we're continuing to pursue."

He also stated while Marine & Land endured lower armored vehicle sales during the quarter, Textron Systems remains one of three companies from which the U.S. Army requested new prototypes for its next-gen squad weapon program.

The picture could be rosier, however; Textron not only saw some of its expected Cessna Longitude jet deliveries pushed into 2020 due to required modifications from recently granted certifications, but also -- as Donnelly put it -- "experienced some delays in defense order activity and volume compared to our original plan."

Still, Textron didn't revise its full-year revenue outlook, which was provided at the start of 2019 and calls for revenue to be approximately flat at $14 billion. But it did narrow its bottom-line guidance for full-year earnings per share to range from $3.70 to $3.80, compared with $3.65 to $3.85 before. Textron also lowered both ends of its target range for 2019 manufacturing cash flow from continuing operations of the manufacturing group (before pension contributions) by $100 million, resulting in a new range of $600 million to $700 million.

This explains why Textron stock effectively gave up its 10% year-to-date gain over the past two trading sessions. But in the end, assuming those pushed aircraft orders and delayed military volumes don't eventually turn into actual lost opportunities, I suspect Textron's relative underperformance this quarter will have little bearing on its long-term success.