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Remi Cossart

Dan Pan

Textron (NYSE: TXT) makes the best-selling Cessna small aircraft and military helicopters.^[1] Cessna represents 53% of net profits and has grown with increased industry demand for small aircraft. Textron's military segment, Bell, makes the Osprey Tilt-rotor aircraft and is dependent on U.S. military contracts, which account for 19% of total sales. The company acquired United Industrial (UIC) in 2007, expanding its business into the growing unmanned military market.^[2]

Textron also has a stable but low-margin plastic business that makes parts for use in a wide range of consumer products such cars, plumbing, and electrical connections.^[3] Textron competes against large companies like Boeing Company (BA) and Raytheon Company (RTN) for government contracts and Bombardier (BBD.B) and General Electric Company (GE) within the aircraft and Industrial supplies sector.

Business Overview

Although Textron has been able to grow sales abroad, the vast majority of sales are concentrated in the United States. On top of that, 19% of all revenue is from U.S. government contracts. In association with Boeing, Textron received a contract with the U.S. Military to produce 167 V-22 Osprey Tilt-rotor aircraft until 2012 in a deal worth $10.4 billion.^[4] This contract provides stability for the company but also insures that it will remain heavily dependent on government contracts and spending.

In October of 2007, Textron purchased United Industrial (UIC) which owns AAI Corp for $1.1B. AAI produces the Army's Shadow which is an unmanned tactical aerial surveillance used in Afghanistan and Iraq. This purchase provides Textron access to the growing unmanned military market which it previously was not involved in.^[2] This acquisition also reinforces the reliance Textron has and plans to have on U.S. government contracts.

^[5]

Because the majority of government contracts are long-term and are over the course of a few years, Textron has also been able to keep relatively low costs. The extended length of time allows Textron to lower cost through economies of scale while insuring a constant source of revenue.^[6]

^[7]

Business Segments

• Cessna (38%): Cessna is the world's largest manufacturer of general aircraft by total sales. It is Textron's largest segment and makes proportionally largest net profit. Cessna sells through 4 major lines: Citation business jets, Caravan single engine turboprops - a gas turbine engine often used in small aircraft, Cessna single engine piston aircraft, and aftermarket services.^[8] The Cessna segment has been able to receive proportionally higher profits from highly elevated prices for personal jets and airlines. In fact, the demand for these small aircrafts has increased so drastically that the price or market value is sometimes greater for a used jet than a new delivered one.^[9] Since 2006, Cessna has sold record levels of its small airplanes.^[10]

• Bell (29%):

V-22 Osprey Tilt-Rotor Aircraft

1. Bell Helicopter (19% of 2007 Sales) within Bell sells helicopters and helicopter parts to the U.S. Government and military customers abroad. Bell Helicopter, in association with Boeing Company (BA), is the only supplier of U.S. military tilt-rotor aircraft, like the one at right. Bell also provides helicopters for off-shore exploration, rescue, charter, and other such uses.
2. Textron Systems (10% of 2007 Sales) sells precision weapons, armored vehicles and turrets, air and ground-based surveillance, and aircraft engines. Textron Systems is the U.S. Air Force's largest supplier of Sensor Fuzed Weapons -- weapons with sensors built in to detect targets and destroy them or destroy itself if no target is found.^[11]

The Bell Segment experienced a proportionally smaller profit in 2007 because of higher research and development costs. Due to the nature of a government contract, the segment generally goes through 3 phases. First, it invests large sums of money to acquire the contract and the necessary technology and equipment for the project. Next, it is awarded the contract and begins production. Finally, the company streamlines the procedure overtime and improves production. The Bell Segment was in the first stage in 2007 as it competed for the V-22 tilt-rotor contract.^[12]

• Industrial (26%): Industrial produces blow-molded parts for the automotive industry, including such things as gears, pumps, electrical and fiber optic connections, golf carts, off-road utility vehicles, and professional turf care equipment. This segment provides Textron with diversification and stability through a market not based on aircraft or military needs^[13] The segment has historically received lower profit margins than the other 3 segments. Higher costs of raw materials and heavy competition in the market have lowered the net profits.^[14]

• Finance (7%): The Finance segment lends money within Textron to other segments and also makes mortgages to golf courses, extends loans to developers, and leases large scale equipment. This segment provides finances to make acquisitions and purchase expensive machinery. It also allows small growing developers to use necessary equipment on lease. Rather than refer customers to banks to purchase Textron's various expensive equipment, the Finance segment extends loans and finances the purchase.^[15]

Trends and Forces

The decrease in major airlines gives room to small aircraft

The cutback of flights and layoffs of major Airlines like Continental Airlines (CAL), Delta Air Lines Inc. (DAL), and JetBlue Airways (JBLU) has hurt large airline manufacturers such as Boeing Company (BA) and Airbus, while the demand for smaller aircrafts has increased. Because small, light airplanes are more fuel efficient and easy to maintain, businesses and high level personnel have elevated their demand for such aircraft.^[9] Sales of private jets increased by 18% in 2006 and increased by 185% since 10 years ago. Since 2006, Cessna has sold record levels of its small airplanes.^[10]

Textron relies on U.S. government contracts

19% of the 2007 revenue was from U.S. military contracts.^[16] The U.S. Department of Defense spending has increased over recent years with continued fighting in Afghanistan and Iraq. This increased spending has resulted in more and larger contracts for Textron. Decreased demand for U.S. military aircraft and vehicles will have a negative effect on Textron.^[17]

Off-shore drilling leads to increased demand for helicopters

The increase in sales of offshore drillers like Transocean (RIG), Diamond Offshore Drilling (DO) and Noble (NE) have led to a need for helicopters to go to and from off-shore rigs.^[18] Approximately 3 billion to 15 billion barrels of "sweet crude oil" have been discovered in the Gulf of Mexico.^[19] Many other sites such as off the coast of Brazil have led to speculation that future oil will be derived through off-shore drilling deepwater oil exploration.^[20] Because each rig requires at least 1 helicopter to service it with food, water, mail and other necessary supplies, the growth of offshore drilling will continue to expand the demand for helicopters and Bell Helicopters, already a top producer in the field. ^[21]

Exposure to financial market pressures

Textron uses its Finance department to lend money within the company and to extend loans to other organizations. In June 2008, Textron lowered its forecast of expected earnings per share by $.02 on the basis that the Finance Segment's net profit was lower than expected.^[22] The shortcomings of the Finance Segment were partly a result from a court ruling on the tax code which forced Textron to maintain a higher percentage of earnings for leases.^[23] The Finance segment also faces heavy competition from banks, leasing companies and insurance companies.^[24]

Competition

Textron competes against a wide variety of companies for government contracts and for private customers. Textron also competes against a large number of companies whose products rival the Bell, Cessna, and Industrial segments. These companies include:

• Boeing Company (BA) which competes against Textron's Cessna and Bell segments. Although the two companies work in association on some projects, like the V-22 Osprey, they compete for contracts and customers on most ventures.^[25] In 2005, the two companies competed for a $2.2B military contract to produce ARH (Armed Reconnaissance Helicopters). Textron won the contract, but Boeing remains a strong contender in the field.^[26]
• United Technologies (UTX) which owns Pratt and Whitney, the leader in terms of sales of business and small aircraft jet engines.^[27]
• Raytheon Company (RTN) competes for government contracts in the fields of defense systems and technological services.^[28] Raytheon and Textron compete for many of the same contracts. In 2006, Raytheon and Textron both competed for a $90M solid state laser contract - a laser weapon designed to 'revolutionize gunships' and tank warfare. Although Textron won part of the contract, the two companies continue to compete for similar contracts.^[29]
• Bombardier (BBD.B) is the 3rd largest producer of civilian aircraft and competes against the Cessna segment of Textron.^[30]
• Honeywell International (HON) produces automotive supplies, engines, and turbo chargers which compete with the Industrial segment of Textron. Honeywell broke its delivery record in 2007 with 1,000 small planes and has become a strong competitor.^[31]
• ITT Corporation (ITT) produces defense electronics for the U.S. military in addition to highly engineered products for military aircraft and gears and shock absorbers for general aviation.^[32]

The Finance segment of Textron competes against banks, insurance companies, lending and leasing companies, and other finance segments of rival companies such as General Electric Capital (GEC).^[33]

References

1. ↑ Google Finance:"Textron Inc"
2. ↑ ^{2.0 2.1} Boston Globe Business: "Textron buys United Industrial Unmanned Army aircraft target of $1.1b purchase"
3. ↑ TXT 10-K 2007 Item 1, "Industrial" p. 21.
4. ↑ Bloomberg.com News: "Boeing, Textron Get $10.4 Billion V-22 Aircraft Award"
5. ↑ TXT 10-K 2007 Item 8, "Geographic Data" p. 75.
6. ↑ TXT 10-K 2007 Item 1, "Consolidated Statements of Operations" p. 38.
7. ↑ TXT 10-K 2007 Item 1, "Segment Analysis" p. 17.
8. ↑ TXT 10-K 2007 Item 1, "Cessna Segment" p. 2.
9. ↑ ^{9.0 9.1} Seeking Alpha: "Airline Troubles Means More Demand for Private Jets"
10. ↑ ^{10.0 10.1} Business Week- Business "Best-Selling Private Jets: As the rich get richer, private jet travel is bigger than ever. Which planes are most popular with today’s tycoons?"
11. ↑ TXT 10-K 2007 Item 1, "Bell Segment" p. 1.
12. ↑ TXT 10-K 2007 Item 1, "Bell" p. 18.
13. ↑ TXT 10-K 2007 Item 1, "Industrial Segment" p. 3-4.
14. ↑ TXT 10-K 2007 Item 1, "Industrial" p. 21.
15. ↑ TXT 10-K 2007 Item 1, "Finance Segment" p. 4-5.
16. ↑ TXT 10-K 2007 Item 1, "U.S. Government Contracts" p. 5.
17. ↑ TXT 10-K 2007 Item 1A, "Risk Factors" p. 7.
18. ↑ CNNMoney.com Fortune "Copter Crisis"
19. ↑ The New York Times: World Business "Big Oil Find Is Reported Deep in Gulf"
20. ↑ World Net Daily: "Brazil's giant offshore oil discoveries"
21. ↑ SINLetter "'Copter Crisis:' Investment Opportunity?"
22. ↑ Associated Press:"Textron cuts top end of 2Q forecast"
23. ↑ Textron News Release "Exhibit 99"
24. ↑ TXT 10-K 2007 Item 1, "Finance Segment" p. 5.
25. ↑ Google Finance: "The Boeing Company"
26. ↑ Defense Industry Daily: "Bell Textron Wins $2.2B ARH Competition With 407 Variant"
27. ↑ Eclipse Aviation "Eclipse Finds an Engine for Its Jet"
28. ↑ Google Finance: "Raytheon Company"
29. ↑ Textron Defense Systems: "Defense Technology International: Solid-State Lasers; 100 Kilowatts or Bust; Rivals Vie To Develop Next Generation of Lasers"
30. ↑ Hoovers Bombardier Inc. "Bombardier Company Description"
31. ↑ Herald Tribune: "Buyout firms may buy Raytheon aircraft unit"
32. ↑ Reuters: ITT Corp
33. ↑ TXT 10-K 2007 Item 1, "Finance Segment" p. 5.