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Diversified U.S. conglomerate Textron Inc. (TXT - Analyst Report) reported third quarter 2013 earnings from continuing operation of 35 cents per share, missing the Zacks Consensus Estimate of 47 cents by 25.5%. The quarterly figure also came in below the year-ago level by 27.1%. The weak performance reflects lower contribution from Cessna, as the light-to-midsize business jet market remained soft.

Revenue

Total revenue in the quarter was $2,904.0 million, lower than the Zacks Consensus Estimate of $2,968.0 million and the year-ago figure of $3,000.0 million.

Manufacturing revenues were down 2.2% year over year to $2,871.0 million, while revenue from the Finance division declined 48.4% during the quarter.

Segment Performance

Cessna: The revenue from this division during the third quarter decreased 23.8% year over year to approximately $593.0 million. The significant decline reflects delivery of only 25 new Citation jets, compared with 41 in the prior-year period.

The segment registered a loss of $23 million versus a profit of $30 million in the third quarter of 2012. Cessna’s order backlog at the end of the third quarter was $1.07 billion, up sequentially by $61 million.

Bell: Segment revenue increased 8.1% to $1,162 million from the year-earlier level of $1,075.0 million. The growth reflects delivery of 54 commercial helicopters compared with 46 units in the prior-year period. Bell delivered 10 V-22’s and 7 H-1’s compared with 11 and 5 deliveries, respectively, a year ago.

However, segment profit declined 20.6% to $131 million in the quarter from $165 million reported in the same period last year, due to manufacturing inefficiencies associated with labor disruptions. Bell’s order backlog at the end of the quarter was $6.40 billion, down $543 million sequentially.

Textron Systems: The revenue from this division during the reported quarter was $405.0 million, representing a year-over-year increase of 1.3%. The results were driven by higher volumes at Weapons and Sensors product lines. These were, however, partially offset by lower deliveries at Unmanned Aircraft Systems and Marine & Land Systems.

Segment profit was $35 million, up from $21.0 million in the year-ago quarter, reflecting impressive performances across most product lines. Textron Systems’ backlog at the end of the third quarter was $2.89 billion, up $266 million sequentially.

Industrial: The revenue from this division increased 4.1% year over year to $711.0 million driven by higher volumes and acquisitions. Segment profit increased 36.8% year over year to $52.0 million driven by improved performance and higher volume.

Finance: The revenue from this division decreased 48.4% year over year to $33.0 million. Its segment profit also declined to $13.0 million from $28.0 million in the year-ago period.

Financial Condition

Textron ended third quarter 2013 with cash and cash equivalents of approximately $444 million, compared with $1,378.0 million at the end of 2012. The company’s cash from operating activities was $361.0 million compared with $316.0 million in the year-ago quarter.

Capital expenditure during the quarter was $110.0 million versus $156.0 million in the year-ago quarter. Long-term debt was $1,916 million at the end of the third quarter 2013 versus $1,766.0 million at the end of 2012.

Guidance

Textron lowered its earnings per share guidance from continuing operations to $1.75–$1.85 from its previous expectation of $1.90–$2.10. Cash flow from continuing operations before pension contributions is estimated to be in the band of $200–$300 million. The company anticipates planned pension contributions of about $200 million.

The cut in the guidance mainly reflects lower margins at Bell for manufacturing inefficiencies along with labor disruptions, and lower aircraft deliveries at Cessna.

Our Take

Textron missed the Zacks Consensus Estimate hurt by a weak performance at Cessna. The company, like its peers Raytheon Co. (RTN - Analyst Report) or Rockwell Collins Inc. (COL - Analyst Report), continues to face defense budget deficits and political uncertainty. Though the company received a number of contracts this quarter, those were not sizeable. Budget cuts from sequestration have reduced the number of contracts awarded by the Department of Defense. However, going forward, the company’s strong presence in diverse areas of general aviation aircraft, helicopter, aircraft engines, golf carts, turf maintenance equipment, electronic test equipment and blow-molded fuel tanks will likely fetch lucrative returns.
 
Zacks Rank

Based in Providence, the Rhode Island, Textron Inc. is a global multi-industry company that manufactures aircraft, automotive engine components, and industrial tools. The stock currently carries a Zacks Rank #3 (Hold). The stock to look out for in this space is 3M Company (MMM - Analyst Report) with a Zacks Rank #2 (Buy).
 

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