Textron Inc. (NYSE:TXT) Q2 2023 Earnings Call Transcript

Textron Inc. (NYSE:TXT) Q2 2023 Earnings Call Transcript July 27, 2023

Textron Inc. misses on earnings expectations. Reported EPS is $1 EPS, expectations were $1.11.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Q2, 2023 Textron Earnings Release. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today’s conference is being recorded. And I would now like to turn the conference over to your host, Vice President of Investor Relations, Eric Salander. Please go ahead.

Eric Salander: Thanks, Kaylie and good morning, everyone. Before we begin, I’d like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today’s press release. On the call today, we have Scott Donnelly, Textron’s Chairman and CEO; and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Revenues in the quarter were $3.4 billion, up $270 million from last year’s second quarter. Segment profit in the quarter was $352 million, up $71 million from the second quarter of 2022. During this year’s second quarter, we reported income from continuing operations of $1.30 per share.

Adjusted income from continuing operations, a non-GAAP measure, was $1.46 per share compared to $1.11 per share in last year’s second quarter. Manufacturing cash flow before pension contributions, a non-GAAP measure, totaled $242 million in the quarter compared to $309 million in the second quarter of 2022. With that, I’ll turn the call over to Scott.

Scott Donnelly: Thanks, Eric, and good morning, everyone. Second quarter was a strong quarter with revenue up across all our businesses and solid execution, generating a segment profit margin of 10.3%, up 140 basis points from the second quarter of 2022. At Aviation in the quarter, we delivered 44 jets, down from 48 last year and 37 commercial turboprops, up from 35 in last year’s second quarter. Aviation continues to see solid demand across jet and turboprop products. Backlog grew $315 million, ending the second quarter at $6.8 billion. In the quarter, Aviation received an order for 11 Special Mission King Air 360s expecting to deliver in 2024 and 2025. Also during the quarter, Aviation delivered the first passenger configured Cessna SkyCourier to Lāna’i Air for its Hawaiian interisland routes.

On the new product front, Aviation announced the Cessna Citation Ascend at Ebase ph in May. Ascend will feature the latest Garman 5000 avionics suite, 4-passenger range of 1900 nautical miles, comfortable cabin experience with large windows and a flat floor and the new Pratt 545D engine that features improved thrust and increased time between overhauls and enhanced fuel efficiency. The aircraft is expected to enter into service in 2025. Moving to Bell, revenues were slightly higher in the quarter. Bell began ramping activity on the FLRAA program, including on-boarding engineers, contracting with major suppliers and ordering long lead materials. Bell also added $1.2 billion of backlog related to the FLRAA contract during the quarter. Also in the quarter, Bell received an initial contract authorization for four additional V-22 aircraft.

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On the commercial side of Bell, we delivered 35 helicopters, up from 34 in last year’s second quarter. At Textron Systems, we saw a continued solid margin performance on slightly higher revenues. In June, Systems delivered Craft 107 to the U.S. Navy Ship-to-Shore Connector program, the Aircraft delivered to the Navy. Also during the quarter, Systems Aerosonde Hybrid Quad UAS was among four competing unmanned aerial systems that were awarded design contract under the first option of the Army’s Future Tactical Amend Aircraft Systems Program. Systems also advanced as part of Team Lynx led by American Rheinmetall in the next phase of the U.S. Army’s XM30 program. Textron Systems is a designated manufacturer of Team Lynx. The Army down selected two competitors for the next phase of the program, which includes detailed design and prototype builds.

Moving to Industrial, we saw higher revenues in the quarter, driven by higher volume in both Kautex and Specialized Vehicles. At Specialized Vehicles, we announced the new Liberty LSV, a street legal vehicle powered by our elite battery system with four forward-facing seats. Within Kautex, we saw increased volumes year-over-year across all our geographic end markets. Moving to Aviation, we began wind tunnel testing on the Nexus eVTOL aircraft. These tests represent a significant step in the aircraft development process and supporting design validation activities. Additionally, we continued the prototype assembly and systems integration of the Nuuva, our hybrid electric unmanned cargo VTOL aircraft at our facilities in Slovenia. With that, I’ll turn the call over to Frank.

Frank Connor: Thanks, Scott, and good morning, everyone. Let’s review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.4 billion were up $78 million from the second quarter of 2022 reflecting higher pricing of $95 million, partially offset by lower volume and mix. Segment profit was $171 million in the second quarter, up $22 million from a year ago, largely due to favorable pricing net of inflation of $52 million, partially offset by an unfavorable impact from performance of $23 million. Performance included unfavorable manufacturing performance largely related to supply chain and labor inefficiencies. Backlog in the segment ended the quarter at $6.8 billion. Moving to Bell, revenues were $701 million, up $14 million from last year due to higher pricing of $21 million, partially offset by lower military revenue of $7 million.

Segment profit of $65 million was up $11 million from last year’s second quarter due to a favorable impact from performance of $13 million, largely reflecting lower research and development costs and a favorable impact from pricing net of inflation of $9 million, partially offset by lower volume and mix. Backlog in the segment ended the quarter at $5.6 billion. At Textron Systems, revenues were $306 million, up $13 million from last year’s second quarter, largely reflecting higher volume. Segment profit of $37 million was down $1 million from a year ago. Backlog in the segment ended the quarter at $1.9 billion. Industrial revenues were $1 billion, up $155 million from last year’s second quarter, largely due to higher volume and mix at both Kautex and Textron Specialized Vehicles of $121 million and a favorable impact from pricing of $37 million.

Segment profit of $79 million was up $42 million from the second quarter of 2022, primarily due to higher volume and mix of $32 million and a favorable impact from pricing net of inflation of $17 million, principally at Kautex, partially offset by an unfavorable impact of $10 million from performance. Textron eAviation segment revenues were $11 million and segment loss was $12 million in the quarter, primarily reflecting research and development costs. Finance segment revenues were $18 million and profit was $12 million. Moving below segment profit, corporate expenses were $21 million, net interest expense was $16 million, LIFO inventory provision was $35 million, intangible asset amortization was $10 million and the non-service components of pension and postretirement income were $59 million.

In the quarter, we repurchased approximately 4.2 million shares, returning $273 million in cash to shareholders. Year-to-date, we have repurchased approximately 9.4 million shares, returning $650 million in cash to shareholders. Earlier this week, Textron’s Board of Directors approved a new authorization for the repurchase of up to 35 million shares under which the company intends to repurchase shares to offset the impact of dilution from stock-based compensation and benefit plans and for opportunistic capital management purposes. To wrap up with guidance, we are increasing our expected full year adjusted earnings per share to be in a range of $5.20 to $5.30 per share, up from our prior range of $5 to $5.20 per share. We also continue to expect full year manufacturing cash flow before pension contributions of $900 million to $1 billion.

That concludes our remarks. So operator, we can open the line for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question will come from the line of Peter Arment with Baird.

Peter Arment: Yes, good morning Scott, Frank.

Scott Donnelly: Good morning.

Peter Arment: Hi, Scott, I guess, start with Aviation, really strong performance on margins and the top line. Do you still kind of tracking, I mean, I guess, with the supply chain the way there’s been so much volatility? How are you thinking about just kind of your delivery targets and just managing your skyline? I know you’re probably sold out now much farther out, just given your backlog, maybe just some overall comments? Thanks.

Scott Donnelly: Sure, Peter. Look, I think on the order activity, the market is still quite strong and so I think we’ve posted a strong book-to-bill again in the quarter. It’s both jets and turboprops, so I think we continue to be really happy with how the market is behaving in terms of demand and pricing. So that’s all good. Okay, as I think you’re hearing from everybody the biggest challenge still remains on the supply chain side of things. I’d say it’s not getting worse, it’s probably modestly getting better but as you know, the challenge is every part is important, right? So, you may not have as many problems, but you still are kind of hit by that weakest link and hey, if you look at our numbers, we’re probably a few jets lighter each quarter than we would like to be.

That’s obviously creating a little bit of inventory, but these things ultimately will sell. But I think when we think about the guide and what’s going forward, we’re still very happy with the margins and execution performance despite inefficiencies and dealing with some of the supply chain issues. But I think for the year, it will be a little light on the revenue side versus where we would like to be, but those things will push into 2024, obviously. So net of everything, it’s still a good strong demand environment and we’ll continue to fight our way through some of the supply chain challenges through the course of the year.

Peter Arment: I appreciate that. And just one quick follow-up. Frank, did you disclose what the aftermarket growth was in the quarter for Aviation at all?

Frank Connor: So aftermarket for the quarter was about 3% growth and 32% of total revenue.

Peter Arment: I appreciate it. Thanks again.

Operator: Thank you. We’ll go next to the line of Sheila Kahyaoglu with Jefferies.

Sheila Kahyaoglu: Good morning, guys and thank you. Maybe just to start off a specific one on Bell, how do we think about the B-22 here? The House Appropriations Bill included about $700 million for potentially five B-22s, how do we think about how that could add legs to this program and transition to FLRAA?

Scott Donnelly: Well, so, what’s going on there, Sheila, is the Navy, of course, has now had a good while of deploying the CMV 22s into the Navy applications. As you know, that program was originally awarded and the program record was based on replacing the C2 COD [ph]. And so the number of aircraft was really sort of designed just to replace that mission. And what we’re hearing from the Navy, and they’ve been fairly public about this, there’s been some nice articles out there, is that as they’re getting the CMV-22 into the fleet, they’re realizing there’s a lot of things you can do with a V-22 that you couldn’t do with a COD, which was restricted to big deck carriers and airports onshore. So the versatility and the performance of the V-22 is leading the Navy to say, look, we’ve got other applications that would cause us to like to have more of these aircraft.