Note: More details to come; changes are highlighted. Except where highlighted, no other section of this report has been updated.
Reason for Report: FLASH UPDATE: 2Q13 Earnings Update
Prev. Ed.: Mar. 28, 2013, 4Q12 and FY12 Earnings Update (share price and broker material are as of Feb. 15, 2013)
Flash News Update [Note: earnings update in progress; final report to follow]
On July 17, 2013, Textron Inc. (TXT) reported second quarter 2013 earnings from continuing operation of $0.40 per share, beating the Zacks Consensus Estimate of $0.38 per share. However, the quarterly figure came below the year-ago level by 31%. The year-over-year decline reflects lower business jet deliveries.
Revenue
Total revenue in the quarter was $2,839.0 million, lower than the Zacks Consensus Estimate of $3,000.0 million and the year-ago figure of $3,019.0 million.
Manufacturing revenues were down 6% year over year to $2,839.0 million, while revenue from the Finance division declined 43.6% during the quarter.
Segment Performance
Cessna: The revenue from this division during the second quarter decreased 26.6% year over year to approximately $560 million. The significant decline reflects delivery of only 20 new Citation jets, compared with 49 in prior-year period.
The segment registered a loss of $50 million versus a profit of $35 million in the second quarter of 2012. Cessna’s order backlog at the end of the second quarter was $1.01 billion, down sequentially by $23 million.
Bell: The revenue from this division decreased 2.9% to $1,025 million from the year-earlier level of $1,056.0 million. The decline reflects delivery of 44 commercial helicopters compared with 47 units in the prior-year period. Bell delivered 9 V-22’s and 6 H-1’s, flat year over year.
Segment profit declined 11.2% to $135 million in the quarter from $152 million reported in the same period last year. Bell’s order backlog at the end of the quarter was $6.95 billion, down $137 million sequentially.
Textron Systems: The revenue from this division during the reported quarter was $422.0 million, representing a year-over-year increase of 8.5%. The results were driven by higher volumes in the Unmanned Aircraft Systems and Weapons and Sensors product lines. These were, however, partially offset by lower deliveries at Marine & Land and Mission Support.
Segment profit was $34 million, down 15% year over year due to a higher mix of lower-margin service contracts. Textron Systems’ backlog at the end of the second quarter was $2.62 billion, which was down $165 million quarter over quarter.
Industrial: The revenue from this division increased 6% year over year to $801.0 million driven by higher volumes. Segment profit increased 29.5% year over year to $79 million driven by improved performance and higher volume.
Finance: The revenue from this division decreased 43.6% year over year to $31 million. However, the segment registered a profit of $15 million, which represents a year-over-year improvement of 31.8%.
Financial Condition
Textron ended the second quarter 2013 with cash and cash equivalents of approximately $459 million, compared with $898 million at the second quarter 2012 end. The company’s cash used in operating activities was ($274) million compared to cash generated from operating activities of $258 million in the year-ago quarter.
Capital expenditure during the quarter was $113 million versus $85 million in the year-ago quarter. Long-term debt was $1,904 million at the end of the second quarter 2013 versus $1,809.0 million at the end of the prior-year period.
Guidance
Textron expects earnings per share from continuing operations in the band of $1.90–$2.10. Cash flow from continuing operations before pension contributions is estimated to be $400 million. The company anticipates planned pension contributions of about $200 million.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON TXT.
Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]
Textron Inc. (TXT) operates in the aircraft, industrial, and finance industries worldwide. It operates through five segments: Bell, Defense & Intelligence, Cessna, Industrial, and Finance. The company sells its products through a network of sales representatives, distributors, and authorized independent sales representatives.
Of the 9 firms covering the stock, 7 assigned positive ratings and 2 firms provided neutral ratings. Target prices range from $28.00 (¯ $2.00 from the previous report and 8.9% upside from the current price) to $34.00 (unchanged from the previous report and 32.2% upside from the current price) with an average target price of $29.88 (¯ $1.41 from the previous report and 16.2% upside from the current price).
Bulls (Positive or Equivalent) – (77.8%; 7 out of 9): The bullish firms believe that Textron is a multi-industrial company with a specialized niche in aerospace & defense. The firms believe that the company’s investment in Citation Ten, M2, Latitude, and Longitude will eradicate the gaps in the current market and would prove successful eventually. These firms are positive as they expect to see a turn in order bookings at Cessna. They see a multi-year turnaround of the company led by a strong management team. They are also positive on the company’s defense exposure as they expect the company to see a V-22 multi-year contract in the near term. According to these firms, any upturn in the economy, particularly outside the U.S., could be profitable for the company.
Cautious (Neutral or Equivalent) – (22.2%; 2 out of 9): These firms expect significant incremental earnings power at Cessna. However, these firms expect Bell to experience headwinds that will offset overall growth. Also, the firms contend that the lack of positive catalysts on the business jet demand front could pressure near-term performance. These firms prefer to remain on the sidelines due to the continued weakness in the lower-end bizjet market.
May 24, 2013
Overview [Note: Only highlighted material has been changed.]
Key investment considerations as identified by the analysts are as follows:
Key Positive Arguments / Key Negative ArgumentsBetter Positioning of Bell: Bell enjoys a resurgence of commercial demand, driven by the utilitarian role of helicopters in serving industries such as oil and gas exploration, mining, pipelines, and electric utilities. Bell also experiences strong demand from military customers.
Renewed Portfolio: The company has simplified its business by selling off unprofitable businesses and by improving its portfolio. Bell and Cessna are poised to grow in the double digits in the coming years, driven by new government contracts and new commercial product introductions.
Improved Cash Generation: Increased customer deposits for Citation orders are producing strong cash generation, resulting in stable free cash flow. / Commodity Costs Risk: Escalating commodity costs could put margins under pressure if demand decreases, limiting the company’s ability to raise prices.
Curtailment of Programs: Slowdown in defense budget is expected to curtail some programs, hampering long-term growth.
Macroeconomic Factors: Deteriorating financing environment, shift in government spending for military helicopters and an exogenous event, such as an act of terrorism, could impact the company’s end markets.
Textron Inc. (TXT) is a multi-industry company that leverages its global network of aircraft, defense, industrial and finance businesses to provide customers with innovative solutions and services. It conducts its business through five operating segments: Cessna, Bell, Textron Systems and Industrial, which together represent the manufacturing businesses, and the Finance group, which is the Finance segment that consists of Textron Financial Corporation, its subsidiaries and the securitization trusts consolidated into it along with three other finance subsidiaries owned by Textron Inc. Textron is known for its powerful brands such as Bell Helicopter, Cessna Aircraft Company, Jacobsen, Kautex, Lycoming, E-Z-GO, Greenlee, and Textron Systems. The company’s fiscal year coincides with the calendar year. Further information on the company is available at its website: www.textron.com.
May 24, 2013
Long-Term Growth [Note: Only highlighted material has been changed.]
Operations at Textron Inc. encompass several diverse sectors, including defense, aerospace, commercial financing, and industrial products. The industry is highly competitive and is subject to fluctuations in defense spending and national security priorities.
The company’s Bell helicopters provide civilian assistance and are used for air ambulance, law enforcement and transportation services. Bell helicopters have expanded its geographical footprint in countries like Argentina, Brazil, Chile, Ecuador, Australia, Canada, China, India, Malaysia, Mexico, New Zealand, Nigeria, Thailand, Venezuela and Vietnam.
The company believes that the global business jet market still has significant long-term growth potential. It indicated that it remains committed to new product plans, which include introduction of the M2, and new Sovereign and Citation X models later this year, as well as the Latitude in 2015 and the Longitude in 2017. However, with respect to Cessna, a few firms believe that the segment faces an increasingly competitive market due to new entrants, such as Embraer. Though the segment currently has a significant product development pipeline, the firms are concerned about the survival of the segment in the current scenario.
The company pursues several significant international opportunities. The company’s sustained focus on operating productivity and ongoing investments in its businesses should position it well in the near term. Going forward, the firms expect the company to continue to invest in its businesses to drive organic growth from new products. According to the firms, stabilizing end markets and continued aggressive overhead reduction will likely drive meaningful revenue and profit growth as the economy recovers.
May 24, 2013
Target Price/Valuation [Note: Only highlighted material has been changed.]
Rating DistributionPositive / 77.8%¯
Neutral / 22.2%
Negative / 0.0%
Avg. Target Price / $29.88¯
Highest Target Price / $34.00
Lowest Target Price / $28.00¯
Analysts with Target Price/Total / 8/9
Risks that could impede the achievement of the target price include execution risks around V-22, further production cuts at Cessna, changes to the global airline sector and business jet market, changes to the U.S. defense budget, macroeconomic developments, and unexpected results on major programs or competition.
Recent Events [Note: Only highlighted material has been changed.]
On May 15, 2013, Bell Helicopter clinched an $85.0 million contract from the Department of Defense ("DOD") to offer engineering and support capabilities to two of America’s close allies, Iraq and Taiwan. The Bell helicopters provide civilian assistance and are used for air ambulance, law enforcement and transportation services. Iraq currently operates 30 Bell 407 helicopters. Taiwan on the other hand has a manufacturing unit of the UH-1H "Huey" military helicopters licensed under Textron.
On May 13, 2013, AAI received a $19.6 million modification contract for the supply of Universal Test Sets to the U.S. Navy's Explosive Ordnance Division. Universal Test Set is an important part of the Counter Remote Control Improvised Explosive Device (RCIED) Electronic Warfare, or CREW, system. It is used to confirm that the electronic jamming equipment, used by Marines to prevent a signal getting through to detonate an improvised explosive device, is operational.
On Apr 24, 2013, Textron Inc. announced that it will pay a quarterly dividend of $0.02 on Jul 1, 2013 to holders of record at the close of business on Jun 14, 2013.
On Apr 17, 2013, Diversified U.S. conglomerate, Textron Inc. reported first-quarter 2013 earnings from continuing operation of $0.40 per share, missing the Zacks Consensus Estimate of $0.47 by 14.9%. The quarterly figure also came below the year-ago level by a penny. Weak demand in the business jet market was mainly responsible for the lower numbers. The total revenue in the quarter was $2,855.0 million, below the Zacks Consensus Estimate of $2,911.0 million. However, the reported number came almost at par with the year-ago quarterly revenues of $2,856.0 million.
Revenue [Note: Only highlighted material has been changed.]
Provided below is a summary of revenue as compiled by Zacks Research Digest:
Total Revenue ($ in million) / 1Q12A / 4Q12A / 1Q13A / 2Q13E / 2012A / 2013E / 2014E / 2015EDigest High / $2,856.0 / $3,362.0 / $2,855.0 / $3,103.1 / $12,237.0 / $12,577.6¯ / $13,182.0¯ / $13,640.0
Digest Low / $2,856.0 / $3,362.0 / $2,855.0 / $3,003.0 / $12,237.0 / $12,320.0¯ / $12,922.0¯ / $13,640.0
Digest Average / $2,856.0 / $3,362.0 / $2,855.0 / $3,050.2 / $12,237.0 / $12,457.8¯ / $13,048.2¯ / $13,640.0
Y/Y Growth / 15.2% / 3.3% / 0.0% / 1.0% / 8.5% / 1.8% / 4.7% / 4.5%
Q/Q Growth / -12.2% / 12.1% / -15.1% / 6.8%
According to the company and Zacks Digest model, 1Q13 total revenue was $2,855.0 million, up flat year over year but down 15.1% sequentially. The results reflect weak demand in the business jet market.
The details of the segment revenues in 1Q13 as per Zacks Digest are as follows:
Bell (33.2% of 1Q13 total revenue): The Bell segment manufactures and supplies helicopters, tiltrotor aircraft, and helicopter-related spare parts and services worldwide for both military and commercial applications. It also manufactures weapons, airborne and ground-based surveillance systems, aircraft landing systems, hovercraft, search and rescue vessels, armored vehicles and turrets, reciprocating piston aircraft engines, aircraft and missile control actuators, valves, and related components.
In 1Q13, segment revenues were $949.0 million, down 4.5% year over year. The decline reflects lower military unit deliveries and lower commercial aftermarket sales. As of Mar 31, 2013, segment backlog at was $7.08 billion, down $386 million from the year-end 2012. Bell delivered 9 V-22’s, 6 H-1’s and 40 commercial aircrafts in the reported quarter compared with 10 V-22’s, 7 H-1’s and 30 commercial units in 1Q12.
The company experienced a decline in aftermarket deliveries during 1Q13. However, the global commercial original equipment demand environment and underlying aftermarket order flow remained quite strong. The company introduced 2 new products, the Bell 412 EPI and the Bell 407 GT in 1Q13. During the quarter, the company also featured Relentless 525 flight simulator at HAI which indicates that the company is making steady progress towards the first flight in 2014. The company signed 50 new commercial orders, which includes an agreement with Air Medical Group to deliver 30 helicopters over the next several years. Also, the company introduced the V280 Valor as entry to the Army's request for joint multi-role future vertical lift aircraft.