Textron Inc. (NYSE:TXT) Q3 2023 Earnings Call Transcript

Textron Inc. (NYSE:TXT) Q3 2023 Earnings Call Transcript October 26, 2023

Textron Inc. beats earnings expectations. Reported EPS is $1.49, expectations were $1.27.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Q3 2023 Textron Earnings Release Call. [Operator Instructions]. I would now like to turn the conference over to Eric Salander, Vice President of Investor Relations. Please go ahead.

Eric Salander: Thanks, Leah, 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 $3.3 billion, up $265 million last year’s third quarter. Segment profit in the quarter was $332 million, up $60 million from the third quarter of 2022. During this year’s third quarter, we reported income from continuing operations of $1.35 per share.

Adjusted income from continuing operations, a non-GAAP measure, was $1.49 per share compared to $1.15 per share in last year’s third quarter. Manufacturing cash flow before pension contributions, a non-GAAP measure totaled $205 million in the quarter compared to $292 million in the third quarter of 2022. With that, I’ll turn the call over to Scott.

Scott Donnelly: Thanks, Eric, and good morning, everyone. The third quarter was a strong quarter for Textron with revenues up at Aviation, Industrial and Systems, while revenues were flat at Bell versus the prior year. At Aviation in the quarter, we delivered 39 jets, flat with last year and 38 commercial turboprops, up from 33 in last year’s third quarter. Aviation solid demand across our jet and turboprop products resulted in our strongest order quarter of the year with a 12% increase over the third quarter of 2022. Backlog grew $521 million, ending the third quarter at $7.4 billion. In the quarter, Aviation announced a new fleet agreement with NetJets, extending our 40-plus year relationship and giving NetJets the option to purchase an additional 1,500 aircraft, including the Citation Latitude and Longitude for the next 15 years.

As part of this agreement, NetJets will also be the Fleet Watch customer for the newly announced Citation Ascend, which is expected to enter into service in 2025. Also in the quarter, Aviation received a special missions order for 17 King Air 360 to be used for flight inspection. Aviation also announced [indiscernible] favorability finalized its initial order for 20 grand caravans during the third quarter. On the new product front, Aviation wrapped up a successful NBAA show last week, where we announced 2 new product upgrades, the Citation CJ3 Gen 2 and the Citation M2 Gen 2, continuing our strategy of modernizing our existing aircraft portfolio while also investing in clean sheet aircraft. Moving to Bell. Overall, revenues were flat in the quarter with improved margin performance.

Bell had higher military revenues in the quarter, largely reflecting the continued ramp on the [indiscernible] program. On the commercial side, Bell delivered 23 helicopters, down from 49 in last year’s third quarter. The lower deliveries reflected manufacturing disruptions related to supply chain shortages. During the quarter, a rock order 15 505 aircraft to replace their pilot trading fleet, continuing with the success of Bell 505 as a military trainer throughout the world. Textron Systems, we saw higher revenues and margins in the quarter. During the quarter, Systems Aerosan Hybrid Quad was 1 of 2 competing unmanned aero systems that was awarded the second option agreement for the Army’s Future Tactical Unmanned Aircraft System or FTUAS program.

Onto the second option agreement, the 2 remaining competitors will work with the Army towards a critical design review, which includes establishing final system design and initial product baseline. Also during the quarter, Systems was 1 of 4 competitors to build light robotic combat vehicle prototype for the army. Prototypes are expected to be delivered in 2024. Systems also expanded its Aerosonde SUAS operations with the U.S. Navy with an award of additional 3 C-based systems aboard total combat ships. Moving to Industrial. We saw higher revenues in the quarter, driven by higher volume in both Specialized Vehicle and Kautex. Specialized Vehicles, we continue to see strong demand in the fleet gulf business. Within Kautex, we saw increased volumes year-over-year driven by the recovery in the North American auto market.

Moving to eAviation. Pipistrel Alpha Trainer continues to gain momentum with Mesa Air ordering 25 additional alpha train aircraft in the quarter, for use in the pilot development program. Also the first [indiscernible] prototype, our hybrid electric unmanned cargo vital aircraft is currently undergoing systems integration and has completed the initial installation of the battery and motor systems. We expect the prototype to enter vehicle ground testing phases by the end of the year. 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 $1.3 billion were up $171 million from last year’s third quarter, reflecting higher volume and mix of $89 million and higher pricing of $82 million. Segment profit was $160 million in the third quarter, up $29 million from a year ago, due to favorable pricing net of inflation of $39 million and a $23 million favorable impact from higher volume and mix, partially offset by an unfavorable impact from performance of $33 million, largely related to supply chain and labor inefficiencies. Backlog in the segment ended the quarter at $7.4 billion. Moving to Bell, revenues were $754 million, flat with the third quarter of 2022, with lower commercial helicopter volume largely offset by higher military volume.

Segment profit of $77 million was up $3 million from last year’s third quarter, primarily due to favorable platform performance of [indiscernible] million, largely reflecting a lower research and development costs, partially offset by lower volume and mix of $16 million. Backlog in the segment ended the quarter at $5.2 billion. At Textron Systems, revenues were $309 million, up $17 million from last year’s third quarter, largely reflecting higher volume. Segment profit of $41 million was up $10 million compared with the third quarter of 2022 primarily due to a favorable impact from performance of $8 million. Backlog in this segment ended the quarter of $2 billion. Industrial revenues were $922 million, up $73 million from last year’s third quarter, largely due to a higher volume and mix of $45 million at both product lines and an $18 million favorable impact from pricing.

Segment profit of $51 million was up $15 million from the third quarter of 2022. Textron eAviation segment revenues were $7 million and segment loss was $19 million in the quarter, primarily reflecting research and development costs. Finance segment revenues were $13 million and profit was $22 million, up $15 million from last year’s third quarter, largely due to a recovery of amounts that were previously written off related to one customer relationship. Moving below segment profit. Corporate expenses were $38 million. Net interest expense was $11 million, LIFO inventory provision was $26 million. Intangible asset amortization was $10 million and the non-service components of pension and postretirement income was $59 million. In the quarter, we repurchased approximately 3.1 million shares returning $235 million in cash to shareholders.

Year-to-date, we’ve repurchased approximately 12.5 million shares, returning $885 million in cash to shareholders. To wrap up with guidance, we are increasing our expected full year adjusted earnings per share to be in a range of $5.45 to $5.55, up from our prior range of $5.20 to $5.30. We’re also continuing to expect full year manufacturing cash flow before pension contributions of $900 million to $1 billion. That concludes our prepared remarks. So we can open the line for questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from Sheila Kahyaoglu with Jefferies.

Sheila Kahyaoglu: Maybe if we can talk about Aviation to start spot, competitors on pricing or mix at NBAA, but aviation still booked 7 points of gross price, 3 points of net price. What are you seeing in your backlog in terms of pricing? And I know everyone wants to nitpick on your backlog, but it was still up 15%. How much of that included NetJets?

Scott Donnelly: Sure, Sheila. I look — I would say that the price environment continues to be strong. Aircraft that are going into backlog continue to do so at good pricing. So we feel good about where that is in the marketplace. In terms of the NetJets, look, obviously, the extension of the contract that we’ve had with NetJets for a long time for 1,500 additional aircrafts is a huge deal for us. It’s really important to the future of the business. As you know, that’s a very diversified customer base. The business and the partnership that we have with NetJets is very, very important to us. In terms of the impact in the quarter, it wasn’t material. As you know, the way we treat the NetJets in terms of backlog is that we’re basically working with NetJets all the time and looking about a year out, which is the time line where they firm up the tails and put down deposits, and we commit the delivery dates to those aircraft.

So every quarter, we sell aircraft to NetJets and we add additional jets into the backlog. So generally speaking, it’s right around that one-to-one range. So again, it’s a huge really important thing for the future of the business, but not something that materially impacted the backlog in the quarter.

Sheila Kahyaoglu: No, that’s helpful. And then if you could talk about Bell margins, they posted another 10% margin. What’s going on there, maybe in particular on the R&D side with FLRAA and FARA now that you have [indiscernible]?

Scott Donnelly: So look, I think Bell performance in terms of the numbers and getting volume coming in, particularly as the FLRAA program ramps up is helpful. R&D is certainly a tailwind for us, and that’s helping us on the performance line. Largely driven by the fact that a year ago. We were still spending a good deal of our own IRAD money in programs like FLRAA, which are now in the fully funded category. So we do still have work going on, obviously, with FARA, as you mentioned, we did get the engine this week, which is great. Our team will proceed now to get that installed and start running preliminary integration tests. We will need to be waiting for the army to give the ground test release for that. And then ultimately, the flight test release, hopefully, as you get that aircraft flying in 2024. But performance was strong. And yes, for sure, part of that is reduced IRAD spending, as we now have more funded R&D under the FLRAA program.

Operator: We move on to David Strauss with Barclays.

David Strauss: Scott, could you just maybe give a little bit more color on the supply chain issues at Aviation? The performance hit, I think, was the biggest that we’ve seen there. So are things getting better or worse? And is it engines? Or what other color can you give?

Scott Donnelly: Well, David, I guess the color I would give is that, look, obviously, the business pays a lot of attention and tracks sort of trend data. And I would say that from a standpoint, is it getting better, the trend data would say, yes, it is getting better. The number of parts that come in late to PO has been declining through the course of the year. They look at labor, effectivity and efficiencies that has been getting, modestly better as we’re going through the year. But it’s still a problem, right? So it’s — I wouldn’t say we have any one big like engine that’s just driving this. As you get towards the end of the quarter, if you’re missing parts for aircraft, that’s — you still can’t deliver that aircraft. So it is I guess, getting better from a context of how many parts are late to PO, but parts are still late to PO.

And as we often say, David, every part is important on an airplane. So we’re continuing to see that challenge across the number of aircraft types. I think it will continue to — we certainly expect it to get better as we go through time, but it’s going to be something we’re going to fighting our way through. But I guess the only thing I would point out is despite all that, I mean, we obviously would like to have delivered some more aircraft in the quarter. And in particular, we have customers that would like to see us to deliver those aircraft in the quarter. But despite all that and the challenges and the headwinds around labor and supply, we’re still posting strong growth in the business and good strong margin expansion in the business. So I think despite a lot of these headwinds, the business performance is growing very well.

It’s growing and it’s continuing to drive improved profitability.

David Strauss: Okay. And maybe, Scott, if you could just level set us what we should expect for full year deliveries? Are we looking more kind of 175 to 180 in that range?

Scott Donnelly: Well, we’re not going to — we’re probably not going to give exact aircraft numbers, David, but it’s going to be in that neighborhood, I would expect.

Operator: Next, we move on to Noah Poponak with Goldman Sachs.

Noah Poponak: Scott, maybe you could just spend another minute on the demand environment, in Aviation and in the business jet market. It’s a pretty strong bookings number with a decent amount of uncertainty out there. So what are your customers saying? How much of that is just replacement so they have to do it kind of in a wide range of macro scenarios? How is October? Would just love to hear some more color from you.

Scott Donnelly: Look, Noah. The demand environment continues to be strong. I mean, this is a really strong — book-to-bill is very strong and just an absolute dollar flow of order activity in the quarter. So we just haven’t seen it slowing down. People are buying aircraft. And are they replacing older aircraft? Absolutely. Or in some cases, are the expanding fleet capacity, absolutely. We continue to see strong demand, obviously, part of the rationale behind the [indiscernible] program. As they continue to see very strong demand on the fractional side. So it’s really across the board. And it’s typical what we’ve been seeing for a while. It’s very strong jets in the U.S., although there’s certainly some good order activity with jets outside the U.S., it’s very strong across the turboprop product lines and both the King Airs, obviously, with SkyCourier and Caravans continue to perform well. So it just continues to be a strong demand environment.

Noah Poponak: Okay. And then just on the margin in Aviation, recognizing your point that it has expanded quite a bit from the trough. It’s down sequentially and the incremental — the year-over-year incremental, I think, is a little light of what you normally look for despite healthy unit and price. So — anything to note there? And I guess, what do we look for, for the Aviation margin to finish the year and maybe into next year?

Scott Donnelly: Well, look, I think we’re going to continue to see strong margin performance, Noah. We — without a doubt, are still being impacted by performance issues, just the amount of efficiencies that are driven by those parts that are showing up late and labor turnover, which I think everybody is experiencing. It’s a challenge in the industry still, and we’re going to continue to fight our way through it. But I think we’ll continue to do that with very healthy margins.

Noah Poponak: Can you be through that in full year 2024 numbers? Or are you likely to still be battling that into next year?

Scott Donnelly: Well, I think we’re going to battle that into next year. So — like you know, fourth quarter is traditionally a very high delivery quarter. I expect that it will be a high delivery quarter, and we’ll see conversion that will give us some additional margin is typical for us in Q4, and I would certainly expect that. I think we’re going to continue to fight this as we go into next year. But again, I mean, obviously, we’re not going to get to guidance just yet on 2024. But I think as we’ve seen in 2023, people should expect the business to deliver solid growth and strong margins.