Why Textron’s Margins Are Likely To Shrink Slightly In 2020

by Trefis Team
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Textron’s (NYSE:TXT) total expenses have largely trended higher from around $12.9 billion in 2016 to an expected $13.1 billion in 2019. However, with the company’s revenue growth outpacing expense growth over 2016-19, the company’s net income margin figure is estimated to have improved from 6.1% to 6.6% in 2019. Going into 2020, though, as Textron’s Revenues see a 4.5% jump on the back of upbeat sales for its Cessna & Beechcraft Airplane as well as Bell Helicopter segments, the resulting spike in Cost of Sales for these low-margin businesses will result in Textron’s net income margin figure nudging slightly lower to 6.5% for the year. Trefis details trends in Textron’s Expenses over the years along with our forecast for 2019 and 2020 in an interactive dashboard, parts of which are highlighted below.

 

Textron’s Expenses Have Been Quite Stable As A Percentage Of Revenues

  • Textron’s total revenues grew at an average annual rate of 1.3% from $13.78 billion in 2016 to $13.97 billion in 2018, and they are estimated to grow at an average annual rate of 4.9% between 2018 and 2020.
  • Additional details about Textron’s Revenues can be found in a related interactive dashboard.
  • The company reported total Expenses of $12.94 billion in 2016 before the figure jumped to $13.89 billion in 2017 as a result on a one-time spike in tax expenses from the implementation of the U.S. Tax Act.
  • The figure came down to $13.1 billion in 2018.
  • Going forward, we expect expenses to grow at 4.2% on average to $13.7 billion by 2020.
  • Total Expenses as a % of Revenues stood at 94.1% in 2018, and is expected to drop to 93.4% by 2019. Thereafter it would slightly increase to 93.5% by 2020.

 

Breaking Down Textron’s Total Expenses:

 Cost of Sales:

  • Cost of Sales, which accounted for 88.2% of the company’s total expense in 2018, includes the company’s Research & Development costs, and the cost of procurement of material & wages.
  • Cost of Sales as % of revenue has been hovering from 82.2% in 2016 to 83% in 2018. Trefis estimates the metric to hover around the 82.1% mark in the near term.
  • Notably, the higher Cost of Sales for Textron’s aircraft and helicopter segments are likely to result in a slight reduction in margins for the company in 2020 as we detailed below.

Selling & Administrative Costs:

  • Selling and administrative accounted for 9.7% of the company’s total expenses in 2018, which made it the second-highest expense category.
  • This category includes expenses such as Share-Based Compensation Costs and Compensation paid to the employees.
  • It has hovered around 9% – 9.5% of revenues over the last few years , and we estimate it to remain in the same range going forward.

Additional details about trends in Textron’s Selling & Administrative Costs are available in our interactive dashboard.

 

Interest Expense:

  • Interest expense includes interest on bank borrowings for both finance and manufacturing segment of the company expense on company’s balance sheet. It accounted for 1.26% of the company’s total expenses in 2018.
  • The figure has hovered in the range of 1% to 1.3% of revenues over the last few years, and is expected to be in the same range in 2020.

 

Special Charges:

  • Special Charges accounted for -0.02% of the company’s total expenses in 2018.
  • Special charges includes all internal restructuring costs also includes income on account of change in assumptions related to employee benefits.
  • We do not expect Textron to report any special charges for 2019 or 2020.

 

Income Tax Expense:

Income Tax figure saw a sharp increase in 2017, due to the impact of the tax reform. The effective tax rate for Textron stood at 11.7% in 2018, however we estimate it to increase to 14% in the near term.

 

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