Textron Q3 Earnings: Revenues And Earnings Miss; Guidance Revised Upwards As Aviation And Industrial Continue To Perform

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Textron (NYSE:TXT) reported earnings and revenue figures short of analyst estimates in Q3. The negative impact on sales at Bell and Textron Systems was partially offset by positive growth at Aviation and Industrial, reflecting in a marginal overall revenue increase of $71 million year on- year. Earnings suffered primarily due to higher than anticipated corporate expenses which reflected higher stock-based compensation and higher spending on the troubled Scorpion program. That said, the company’s stock price rallied upwards after the earnings call on the back of an optimistic guidance revision by Textron management.

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Aviation Remains Resilient In A Slumped Market:

In the recent past, the business jet market has remained soft on the back of slowing GDP growth rates worldwide and a dismal oil market. Since these factors have a direct impact on corporate profit growth, which has suffered in many sectors so far, business jet usage has slowed this year. However, despite the downturn, Cessna at Textron has managed to stay on top of things by making market share gains through some of its new business jet-programs and securing large orders.

Revenues at Aviation were up $39 million in the quarter primarily due to higher pre-owned aircraft volumes. The segment delivered 41 Jets as compared to 37 last year and 29 King Airs flat with last year. However, segment profit was $100 million down from $107 million year-on-year. Backlog in the segment remains at $1.1 billion flat with the second quarter.

We expect the NetJets orders to help float the segment in the near future until the market conditions improve again.

Sales At Industrial Shine Yet Again:

Revenues at Industrial increased by $58 million due to the impact of a newly acquired business and higher volumes in the automotive and specialised vehicle businesses. Segment profit increased by close to $5 million reflecting improved performance.

In the quarter, Textron acquired a Swedish De-Icer manufacturer, Safeaero. The acquisition will benefit the continually growing ground support equipment portfolio. Furthermore, last month, management announced a consolidation between Jacobson and a specialised vehicle business in order to optimise efficiency. Within the commercial business space, the company introduced a new line of Cushman Hauler utility vehicles. At Kautex, Textron’s selective catalytic reduction product line continues to drive growth above the current auto market.

We can expect Industrial to consistently perform going forward barring some seasonal factors that could reflect on sales.

The Dismal Oil And Gas Industry Continues To Weigh On Bell’s Top Line:

The current troubles in the helicopter manufacturing industry are testament to the fact that the downturn in the oil industry continues to have a domino effect across various sectors. Helicopters are the primary mode of transport used in the oil industry to ferry workers and cargo to oil platforms. Approximately 25% of the global helicopter fleet is deployed in the oil and gas sector. Bell has suffered majorly in this respect, with lower commercial deliveries more than offsetting higher military volumes. The segment managed to deliver only 25 commercial helicopters, down from 45 in the third quarter last year.

Furthermore, test flights on the Bell 525 are still suspended following the crash that took place in June, killing both the test pilots. Before the mishap, Textron was targeting its first delivery in 2017. However, the crash will likely create a variety of uncertainties and delays in FAA certification and, consequently, the delivery of the aircraft. This is bound to have a negative effect on the segment’s top-line.

Despite the negatives, Textron management revised guidance for FY 2016 up to  $2.65 to $2.75 a share, which corresponds to GAAP EPS of $3.06 to $3.21 per share. That said, the company lowered guidance for cash flow from continuing operations of the manufacturing group for pension contributions, from the $600 million to $700 million range to $500 million to $600 million range.

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