Textron Inc. (TXT) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome to the Q2 2023 Textron earnings release. [Operator Instructions] As a reminder, today's conference is being recorded. And I would now like to turn the conference over to our host, Vice President of Investor Relations, Eric Salander. Please go ahead.

Thanks, Kiley, 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.

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, expected to deliver in 2024 and '25. Also during the quarter, Aviation delivered the first passenger configured Cessna SkyCourier to the Lãna'i Air for its Hawaiian interisland routes. On the new product front, Aviation announced the Cessna Citation Ascend at EBACE in May. Ascend will feature the latest Garmin 5000 avionics suite, 4-passenger, range of 1,900 nautical miles, comfortable cabin experience with large windows and a flat floor, the new Pratt 545D engine, features improved thrust, 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 onboarding 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 4 additional V-22 aircraft. On the commercial side of Bell, we delivered 35 helicopters, up from 34 in last year's second quarter. At Textron Systems, we saw 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 4 competing unmanned aerial systems that were awarded design contract under the first option of the Army's Future Tactical Unmanned 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 2 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 4 forward-facing seats. Within Kautex, we saw increased volumes year-over-year across all our geographic end markets. Moving to eAviation. 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 continue 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.

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.

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

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.

Sure, Peter. Look, I think on the order activity, the market is still quite strong. 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. 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 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 those 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.

I appreciate that. And just 1 quick follow-up. Frank, did you disclose what the aftermarket growth was in the quarter for Aviation at all?

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

We'll go next to the line of Sheila Kahyaoglu with Jefferies.

Maybe just to start off a specific 1 on Bell. How do we think about the V-22 here, the House Appropriation bill included about $700 million for potentially 5 V-22s, how do we think about how that could add legs to this program and transition to FLRAA?

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 C-2 COD. And so the number of aircraft was really sort of designed just to replace that mission. 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. That hasn't been formalized yet on the Navy side of things. I mean there's a lot of dialogue around that. But what you're seeing in the House Appropriations is those 5 CMV-22s, which would be above program of record is because of the versatility and the desire, ultimately, the Navy to have more of these crafts. So we'll see how this plays out over time, but we're obviously -- we're very happy with the performance of the aircraft. The Navy is very happy with the performance of the aircraft. And so hopefully, we'll see some continuing level of production now that we're sort of beyond the program of record.

That's great. And then maybe a bigger picture one. Frank, if you could start, and I know you'll be [ for both, ] so give Scott some time on this, too. You announced a pretty large repurchase program in the quarter. How are you thinking about capital allocation? And then Scott, obviously, with Ascend, capital allocation for repo versus new products?

So capital allocation, it really remains the same, Sheila. We've obviously continued to generate very good free cash flow. We've talked about, obviously, we invest significant capital back into the business in R&D and CapEx. That's going to continue. But beyond that, we're generating a lot of free cash flow that we've been returning through share repurchase activity. We talked about kind of baseline of 5% to 6% or so of our share base a year from a repurchase standpoint, we came out of the pandemic more liquid than we usually are and need to be. And you've seen in the first half of the year, we've repurchased a lot of stock, and we expect to continue to be in the market opportunistically and the 35 million reflects kind of the need to have the shares available, authorization available to do that. We were down to 2.7 million shares on the last repurchase and we're rolling through it pretty quickly.

As Frank said, Sheila, I mean, I certainly don't see it as a trade with R&D. As you know, we're a fairly high R&D company. We think investing in new products is the key to growth. I think we're seeing that play out right now. You look at Aviation with the investments in Latitudes and Longitudes, a lot of the upgrades of a lot of our current products, both on the jet and the turboprop side, Sky Courier now driving nice growth for us. The Ascend that we just announced, if you look at Bell, obviously, we've made a huge investment over the years in the FLRAA program. And the FLRAA program, that's obviously now turning into a great growth driver for us. So across all the businesses, we're not going to change our strategy here in terms of R&D. We'll keep making the investments that we think we need to make on the product side. But despite all that, we're obviously making strong profits and strong cash flow, and that gives us a great flexibility to allocate and drive some of that back through the share repurchase program and do what's right we think for the shareholders.

We'll go next to the line of Jason Gursky with Citi.

Scott, I was wondering if you could provide kind of a general update on the general aviation market. I think there was a show here recently at the Oshkosh, I was wondering if you had any general learnings from either that show or your general view of the general aviation market? And then second 1 would be just kind of an update from your perspective on the market for pilots both for, as they come in through the general aviation market and make their way maybe up into the biz jets and other aircraft that are more important to you?

Sure. Look, Jason, I think 1 of the nice parts about the market right now is this as much as we talk about the jets and turboprops and obviously, that's the bulk of our business. But when you look at an Oshkosh, which is really a show that's aimed around the propeller marketplace and Cessna 172s and Pipistrel electric aircraft and all that kind of good stuff. The demand is strong from top to bottom. I mean we were -- have a great book-to-bill and our 172s, 182s, 206s. So you see really, really strong demand from that GA customer that we've always had, there's very strong demand from trading schools. So if you kind of shift into your pilot discussion, there's no doubt people have talked for many, many years about the shortages of pilots is coming up, and we're seeing that, right? So the training schools are putting a lot of orders in, they're increasing the size of their fleet so they can get more pilots through. There's a lot of activity with frankly, some of the airlines buying a lot of aircraft so that they can get pilots, not just pilots that come into the industry, but pilots that need to get the hours in order to be eligible to fly for the actual airlines. And so those hours are best built by using less expensive per hour sorts of aircraft. And we have a lot of demand on that side as well. So like -- the nice part here is it's a robust market, everything from Cessna 172 or a small Pipistrel Velis all the way up through Longitude. So it's -- the demand is very, very broad.

We'll go next to the line of David Strauss with Barclays.

This is Brad Barton, on for David. Just quickly starting off on Bell. It looks like quarter might have been a little light. Can you just talk about how much FLRAA added in the quarter and how Bell's going to ramp from here and hitting the $3.3 billion.

Sure. Look, I think, Bell is pretty in line with where we expect them to be. The FLRAA program is certainly ramping. We've added a lot of engineering resource, and we were able to ramp reasonably quickly because we still had a lot of engineering talent that had been going through the FLRAA design, the CRR, risk reduction programs that we retained through that period. So I'd say the team is ramping really well. The Army has been great about working to quickly get authorizations out there for us to award contracts to our major subcontractors, which is a huge part of the program, obviously, as it goes out through the industrial base. They've authorized critical long-lead materials that we need to support the initial flight aircraft. So the program is probably ramping about as fast as I can imagine, ramping such a large program. So I think we still feel very comfortable with the guide that we provided in terms of where we're going to end up the year on revenue as that program drives a lot of the growth, frankly, that's ramping up. And look, as the way to think about this program is -- certainly it's ramping here as we go through 2023, but the JADOCS are out there, right, though, in the next few years, it's sort of a $1 billion year program. Obviously, part of that is retained by the government to run their program offices and things like that. But I think we'll very rapidly ramp up and be up -- how far exactly where we expect it to be, which is in that probably $800 million, $900 million a year of revenue.

Okay. And then just a follow-up, there has been some reports in the press about potential interest and some properties out there. Just wondering if you could talk a little bit how you see the portfolio shaping up.

We probably won't provide any commentary on various rumors that are out there in terms of M&A activity at this point.

We'll go next to the line of Noah Poponak with Goldman Sachs.

The aviation margin is -- that's 1 of the highest levels in a while. And the incremental, I think, is a little higher than your kind of long-term framework. And I guess that's despite the performance number you cited, if I add that back, I'm more in the mid-teens. And so I guess, as I think about where that margin goes over time, obviously, the labor and supply chain inefficiencies you're citing won't be solved immediately, but also won't last forever. So is it reasonable to think about the margin adjusted for that in the quarter as kind of a baseline plus an incremental for where you can go late next year into the middle of the decade?

Well, I'm probably not ready to guide into the middle of the decade, just yet, Noah.

Well, you have a pretty big backlog in that business now.

Well, look, there's -- look, I think, the margins are very good. The guys, you're right, are working through challenges, which we would certainly hope will abate somewhat over time. I mean obviously, there's inflation that's baked into the numbers at this stage of the game, but I think we'll probably avoid doing too much in terms of guiding out to the future other than that what, these are good gross margin products. I mean I think we'll be -- on the way to long term, think about this is going to be around that 20%, 25% conversion. And we're sort of looking at certainly growth as we look into 2024 and beyond. But again, it's going to be in some part, constrained by supply and also I was just looking and making sure that we're tracking to where the demand is in the marketplace. I think again, we've talked before about the health of this industry should be running with a substantial backlog, and we are now running with a substantial backlog, and that's a good place for the whole industry to be. So...

In the near term, is it reasonable to expect that price net of inflation number to grow because I think your -- I think the pricing in your backlog is still better than what's hitting the P&L now although correct me if that's wrong. And then if inflation is decelerating, it would seem like both the top and bottom end of that number would be widening.

Well, look, I think, we do feel good about the pricing that's going into the backlog, but we are still seeing inflationary pressures. The rate of inflation is certainly coming down, but there is still inflationary pressure out there.

Yes. Remember, we have some longer-term supply contracts. So we did a nice job of responding to a demand in the market. And created a more appropriate pricing environment, but there is some lag effect associated with our contracts and just the [ flowing in of ] inflation. But we still feel very good about where we are price net of inflation, but there is a lagging impact on some of those cost inputs.