Textron to Fly Low

The Providence, Rhode Island-based diversified conglomerate, Textron Inc. (TXT) expects further headwinds in demand for its Cessna business jets. Exposure to continued weakness in new aircraft orders have resulted in the company adjusting aircraft production schedules and reducing headcount at its Cessna business unit.

Textron is a global multi-industry company that manufactures aircraft, automotive engine components and industrial tools. It is also a provider of solutions and services for aircraft, fastening systems, industrial products and components. The company’s products includes commercial and military helicopters, light- and mid-size business jets, plastic fuel tanks, automotive trim products, golf carts and utility vehicles, turf-care equipment, industrial pumps and gears, engineered fastening systems and solutions, and other industrial products. It also has a commercial finance company in select markets.

Textron however expects the retardation to be seen in its business jet’s performance only. The company anticipates solid performance in other businesses and reaffirmed its 2010 earnings per share from continuing operations in the range of 55 cents–65 cents. Free cash flow from continuing operations for 2010 is now expected to be approximately $400 million, compared to a previous range of $500 million–$550 million, reflecting lower expected jet deliveries.

Textron is increasing its focus on its core manufacturing business. In fiscal 2008, the company announced plans to exit the entire commercial finance business through a combination of orderly liquidation and selected sales, except for the portion of the business that supports the financing of customer purchases of Textron-manufactured products. The plan applies to approximately $7.5 billion of commercial finance business’ $11 billion managed receivable portfolio. Of this, the company liquidated receivables worth $3.75 billion in 2009, while maintaining a 94% cash conversion rate.

Textron expects higher finance receivable liquidations at commercial finance business’ should more than offset the lower than expected cash flow from manufacturing operations, as the company now expects to reduce receivables by $2.4 billion in 2010, up from its previous target of $2 billion. The company also continues to be on track to reduce net debt below $5.5 billion by the end of 2010.

Textron ended the first half of 2010 with cash and cash equivalents of approximately $1 billion, compared to $1.4 billion at the end of the year-ago period. The company generated $339 million of cash for operations in the second quarter of 2010, compared to $169 million in the year-ago quarter. Long-term debt decreased to $2.9 billion at the end of the first half of 2010 from $3.5 billion at the end of fiscal 2009.

Textron’s future success in the competitive defense industry depends upon its ability to develop and market its defense-related products and services to the U.S. Government, as well as its ability to provide people, technologies, facilities, equipment and financial capacity needed to deliver those products and services at maximum efficiency. In the near-term, the fortunes of the company will continue to be affected by aftershocks of the recession and order deferrals for Cessna. The company currently retains a Zacks #3 Rank (Hold). We also maintain a long-term Neutral rating on the stock.

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