Even though Textron Aviation delivered more Citation business jets in the third quarter of 2016 than it did a year ago, the market is pretty tough.
That’s what Textron Inc. chief executive Scott Donnelly said on a conference call Thursday with analysts.
Donnelly, on the call after the parent company of Textron Aviation released its third-quarter 2016 financial results, said that while business jets aren’t necessarily slumping, overall demand is less robust.
“I don’t think the market and segments we serve have gotten dramatically worse (this year), it just continues to be a stubbornly soft market,” he said.
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Textron Aviation’s revenue and jet deliveries were up but profits were down slightly in the third quarter of 2016.
In the quarter, Textron Aviation delivered 41 Cessna Citation jets and 29 Beechcraft King Air turboprops. That compares with 37 jets and 29 turboprops in the third quarter of 2015.
Revenue was up by $39 million compared with the year-ago quarter, and backlog was flat at $1.1 billion.
Profit was down 6.5 percent, from $107 million in the third quarter of 2015 to $100 million in the 2016 quarter.
For Textron as a whole, net income was $421 million on revenue of $3.25 billion, up from net income of $176 million on revenue of $3.18 billion in the third quarter of 2015.
At Textron Aviation, Donnelly said the market is toughest for deliveries of its legacy jets, including models such as the Citation XLS+ and Sovereign+, deliveries of which were down in the quarter.
“Most of our growth is driven by the new products coming onto the market,” he said. “That’s certainly true with the Latitude.”
That’s why the midsize Latitude, deliveries of which began in the third quarter last year, and the super midsize Longitude – which had its first flight about two weeks ago – will be key to Textron Aviation going forward.
New airplanes spur demand. It’s why the company has been on a rapid pace to develop new airplanes – including the Cessna Denali single-engine turboprop and the large-cabin Citation Hemisphere, both of which are expected to make their first flights in 2018 and 2019, respectively.
“At least in the market environment we exist in today, that’s the only way we drive growth,” Donnelly said of the impact of new airplanes on the company’s bottom line.
The softer business jet market is why Textron Inc. expanded its previously announced restructuring program to include Textron Aviation, he said. Last week, Textron Aviation announced it was laying off a “small number” of employees, though it refused to disclose how many workers were affected.
And last month, the company announced it was offering a voluntary retirement program to an unspecified number of employees, which Donnelly said Thursday “has been well received.”
The market conditions are such that Textron Aviation needed to cut costs to sustain profit margins, remain productive and competitive, and provide a return to shareholders, Donnelly said.
“It was the right time to take the action in aviation given the overall, weak demand environment in the industry,” he said.
For the first time in several quarters, there was a lot of discussion on the analyst call about the Scorpion military jet Textron AirLand is developing in Wichita.
Donnelly and chief financial officer Frank Connor said that Textron’s third-quarter corporate expenses were higher in part because of “accelerated” investment in the multirole tactical jet that was first unveiled in 2013.
That investment includes producing a limited number of jets so potential customers can fly them and Textron can validate its manufacturing processes for them. Donnelly also said the first flight of the first-production Scorpion is expected “very soon.”
But analysts voiced skepticism over the Scorpion because Textron has yet to announce a single order for the clean-sheet design jet.
Bank of America Merrill Lynch analyst Ron Epstein asked Donnelly on the call how he and other analysts should think about Textron’s investment in a defense program for which there is no government contract, U.S. or otherwise.
“This is still certainly not at a sure-bet standpoint,” Donnelly said of orders for the jet. “Do we see the opportunity as real? … I’d have to say ‘yes,’ or we wouldn’t have made the decisions to take some pressure on earnings and cash.”
Cowen and Co. analyst Cai von Rumohr said in an investor note after Thursday’s call that he liked the accelerated efforts on the Scorpion.
“Acceleration of Scorpion development/certification likely increases the chance of getting an order by late 2017,” he said in the note.