Textron Beats Q3 Earnings Estimates, Lifts 2014 Outlook

Diversified U.S. conglomerate Textron Inc. (TXT) reported third-quarter 2014 earnings from continuing operations of 60 cents per share, beating the Zacks Consensus Estimate by 13.2% and exceeding the year-ago figure of 35 cents by 71.4%. The improved performance reflects higher contribution from most of its business segments.

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Revenue

Total revenue in the quarter was $3.43 billion, missing the Zacks Consensus Estimate of $3.6 billion by 5.6%. However, revenues increased 18.1% from the year-ago figure of $2.9 billion primarily on account of higher contribution from Beechcraft which was acquired by the company in Mar 2014.

Manufacturing revenues climbed 18.6% year over year to $3.4 billion, while revenues from the Finance division declined 24.2% during the quarter.

Segment Performance

Textron Aviation: Revenues from this division during the third quarter increased significantly to $1,080.0 million from $593.0 million in the year-ago quarter. This improvement reflects the impact of the Beechcraft acquisition along with higher volume of jet deliveries. The company delivered 30 King Air turboprops and 33 new jets in the quarter, compared with 25 jets in the prior-year period.

The segment registered a profit of $62.0 million versus a $23.0 million loss prior-year quarter. Segment order backlog at the end of the third quarter was $1.4 billion, flat sequentially.

Bell: Segment revenues increased 1.7% to $1.18 billion from the year-ago level of $1.16 billion due to higher volume registered on V-22 program, partially offset by lower H-1 and commercial deliveries.

The segment delivered 41 commercial helicopters compared with 54 units in the prior-year period. Bell also delivered 12 V-22s and 4 H-1s compared with the year-ago delivery of 10 units and 7 units, respectively.

Segment profit also increased 11.5% year over year to $146.0 million in the quarter on account of a strong performance in the reported quarter.

Bell’s order backlog at the end of the quarter was $5.3 billion, down $499.0 million sequentially.

Textron Systems: Revenues from this division during the reported quarter were $358.0 million, representing a year-over-year decrease of 11.6%. Revenues were hurt by lower overall volumes.

Segment profit at $27.0 million registered a year-over-year decline of 22.9%, reflecting lower volumes.

Textron Systems’ backlog at the end of the third quarter was $3.1 billion, up $119.0 million from second quarter-end.

Industrial: Segment revenues increased 10.4% year over year to $785.0 million driven by higher volumes and the positive impact of acquisitions. Segment profit increased $1.0 million to $53.0 million driven by higher volume, partially offset by lower revenue mix in the reported quarter.

Finance: Revenues from this division decreased 24.2% year over year to $25.0 million. The segment profit dropped 61.5% to $5.0 million from the year-ago level of $13.0 million. The poor performance is attributed to difficult comparisons. The prior-year period included loan loss reversals and gains on the finance receivables dispositions.

Financials

Textron ended the September-quarter with cash and cash equivalents of $430.0 million, compared with $1,163.0 million as of Dec 28, 2013.

Capital expenditure during the quarter was $83.0 million versus $110.0 million in the year-ago quarter. Long-term debt was $2.47 billion as of Sep 27, 2014 versus $1.92 billion as of Dec 28, 2013.

Guidance

Textron lifted its 2014 earnings per share from continuing operations guidance in the band of $2.05-$2.15 from the previous guidance of $1.92–$2.12.

Cash flow from continuing operations before pension contributions is estimated in the band of $700.0–$800.0 million.

Other Upcoming Release

The Boeing Company (BA) is expected to release its third quarter results on Oct 22, 2014. The Zacks Consensus Estimate for the quarter is $1.97 per share.

Air Industries Group (AIRI) is expected to release its third quarter results on Nov 10, 2014. The Zacks Consensus Estimate for the quarter is 9 cents per share.

General Dynamics Corp. (GD) is expected to release its third quarter results on Oct 22, 2014. The Zacks Consensus Estimate for the quarter is $1.91 per share

Our Take

Textron reported a strong third quarter. Accretive acquisitions along with its focus on investments in new products helped it achieve higher earnings.

The current sequestration wave has driven defense players like Textron to resort to acquisitions. Textron has completed quite a few acquisitions this year, including TUG Technologies Corp. and Beech Holdings, LLC. The acquisition of Beech Holdings’ businesses has boosted the revenues of the company in this quarter. It is expected to contribute roughly $1.5 billion to the company’s 2014 revenues under the Textron Aviation division. Earlier, Textron had acquired Sherman & Reilly, Inc. and HD Electric Company.

The strategic acquisition program will enable the company to leverage its existing distribution network to gain market share and realize synergies.

The stock currently carries a Zacks Rank #4 (Sell).

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