Textron 2Q profit tops outlook, but forecast weak

PROVIDENCE, R.I.—Strong demand for Cessna jets, Bell helicopters and E-Z-GO golf carts drove Textron Inc.'s second-quarter profit above expectations, but the conglomerate's shares fell Thursday on news that lackluster performance in its finance and industrial segments will weigh on third-quarter results.

Providence, R.I.-based Textron said net income climbed to $258 million, or $1.02 per share, from $210 million, or 83 cents per share, a year ago. Income from continuing operations totaled $1.03 per share in the latest period.

Revenue for the three months ended June 28 rose 21 percent to $3.92 billion from $3.24 billion. Sales were helped by a delivery of 117 business jets, plus additional orders of the H-1, a light attack helicopter, and the V-22 Osprey, a tilt-rotor aircraft used by the Marine Corps.

The results beat estimates of analysts surveyed by Thomson Financial, who expected adjusted profit of 96 cents per share on revenue of $3.75 billion. However, Textron said weakness in its industrial and financial segments will eat into strong aerospace results in the third quarter, and forecast profit of 80 cents to 90 cents per share -- well below Wall Street's 99-cent average estimate.

"The percent of EPS (earnings per share) we have forecast in this third quarter as a percent of the full year is dead on our normal performance," said Lewis Campbell, Textron's chief executive and chairman, in a conference call with analysts. "The third quarter is always the challenging quarter for our businesses."

The company backed its outlook for 2008 operating earnings between $3.80 and $4 per share. The $3.90 midpoint falls well below Wall Street's $3.98 average target.

Shares of Textron tumbled $2.73, or 5.9 percent, to close at $43.25, after reaching $40.58 earlier in the session -- the stock's lowest point since September 2006.

Higher prices for oil and other commodities have stressed both U.S. and global economies, directly impacting Textron's industrial segment, Campbell said.

Textron's industrial segment is comprised of five business units, which make a variety of products including industrial pumps and gearboxes, turf maintenance equipment and plastic fuel systems. The segment saw increased sales to non-NAFTA countries in the second quarter, but rising commodity prices and a substantial drop in North American sales hampered the unit's performance.

"We're taking appropriate cost actions to react to the volume falloffs and implementing a pricing strategy to protect us for future commodity exposure," said Ted French, Textron's chief financial officer, on the conference call. Textron declined to elaborate on which products saw a drop in sales volumes.

As a result of sustained challenges in the credit market, Textron also reduced its outlook for its financial services unit for the rest of year. The unit provides financing for new and used Cessna business jets, revolving credit facilities, mortgage loans to acquire and refinance golf courses, as well as extend loans to developers of vacation interval resorts.

The company plans to hold a conference call with investors on Aug. 6 to provide further insight into its portfolio.

Even as investors sent the stock tumbling, some on Wall Street appeared unfazed by Textron's cautious third-quarter outlook. In a note to clients, Citigroup analyst Jeffrey Sprague said Textron's forecast may be largely attributable to timing of orders and deliveries at Bell helicopters.

The company said its outlook for its Bell Helicopter unit remains "positive," despite plans by the Army to review and possibly cancel its armed helicopter program due to significant cost increases.

"This (the review) is the next required step to get this program approved for full rate production, and given that the design has evolved ... the cost has risen," said Textron's Campbell. "We're working with our customer to expedite the review."

For Cessna, Textron anticipates it will meet its delivery target of 470 jets this year. To date, it has booked 437 orders in the first half of the year. However, the company expects Cessna orders will slow compared with rates for the past seven quarters, and said 2009 orders could drop precipitously depending on how the global economy develops over the next 18 months.