No Major Acquisitions Seen In Textron's Future

A day after unloading fastening systems business for $630 million, CEO Campbell says he's happy with how big manufacturer is positioned.

By Jeremy Herron
Associated Pres

NEW YORK (AP) - Textron Inc. Chairman and Chief Executive Lewis B. Campbell says he will forgo major acquisitions and continue to fine tune the strategy that turned the once unwieldy conglomerate into an integrated manufacturing company able to profit from prolonged bull markets in helicopters and business jets.

Campbell's approach has been to sell misfit operations and invest in development at some underperforming assets while trimming manufacturing costs and integrating back-office functions. His latest move came Thursday, when Textron announced the long-awaited sale of its troubled fastening systems business for $630 million in cash plus certain liabilities.

Textron had $545 million in cash and cash equivalents at the end of March, and the company expects to book about $670 million in cash proceeds from this latest deal. Even with the cash and an elevated stock price - it hit an all-time high of $98.96 earlier in May and continues to trade above $90 - Campbell said he won't use the cash for any significant purchases.

''Our mix of businesses is about right,'' he said in a recent interview with the Associated Press. ''We're not aggressively trying to acquire growth, but we keep our eyes wide open'' for a strategic acquisition to augment existing products.

Morningstar analyst Chris Lozier agreed with the approach. ''Textron has a great lineup of businesses,'' he said. ''I hope to not see them shopping around, because I like where they've arrived.''

Textron, based in Providence, R.I., makes Cessna business jets, Bell helicopters and armored military vehicles. It also operates industrial companies that build golf carts, plastic fuel systems and commercial lawn-care machines.

Campbell said the trick now is to grow the company internally by ''focus(ing) on the things we do best.''

What Textron currently does best is make Cessna business jets _ small and medium-sized aircraft that sell for less than $20 million. The unit posted a 35 percent gain in first-quarter operating income to $117 million, accounting for 41 percent of the company's total.

Lozier said the stock generally reacts to Cessna orders, so the recent surge in the price was not a surprise. As of Thursday's close, the stock was up about 22 percent so far in 2006.

Cessna has taken advantage of a market that quadrupled to $12 billion in the past decade, according to Richard Aboulafia, vice president of analysis at Teal Group, an aerospace research firm.

The unit sputtered in the last recession and played a large role in Campbell's decision to change Textron's approach to its operations. Previously, if a business struggled, Campbell said, ''it was on its own to turn things around.''

Campbell instead sold Textron assets with more than $4 billion in revenue and redirected some of the proceeds to develop new planes that were ready for the upswing in the business jet market.

Textron still has trouble spots, primarily in the industrial unit, where Campbell said costs can be trimmed. Materials-cost inflation sent the unit's first-quarter operating profits down 11 percent, despite higher selling prices.

''There is room to improve margins there,'' said Cowen & Co analyst Cai von Rumohr. ''If and when they can show better profits (across their businesses), then the market may be more OK with an acquisition.''

Campbell's goal is to make the unit more efficient, and Morningstar's Lozier said investors should look for improvements in the industrials unit to boost future earnings. The unit ''now it has a real chance to drive profit gains,'' he said. Von Rumohr's forecasts show industrials posting the largest percentage gain in earnings among Textron's businesses by 2008.

Lozier lauded the sale of the fastening unit, which he said was ''the black sheep in terms of margins,'' and ''a big distraction.''

At Bell, which makes H-1 ''Huey'' helicopters and is a co-developer of the V-22 Osprey attack aircraft, military contracts drove a 27 percent increase in first-quarter revenue, although operating earnings fell 8 percent because of cost overruns at the H-1 program.

That led Merrill Lynch analyst Ronald Epstein in April to caution that increased costs in the program ''will continue to hinder Bell operating margins over the next several quarters.''

Campbell downplayed the impact, saying Osprey will more than offset any problems at Bell, delivering $1 billion in revenue a year by the end of the decade.

Besides the cost issue, some analysts are concerned about how sweeping changes to the armed forces, known as the modernization program, might affect military funding, but Campbell expects Bell to weather any budget austerity. ''The programs we are in are alive and well,'' he said. ''I'd be surprised if we take heavy cuts, because the wars (the United States is) fighting need more helicopters.''

Even if Bell's military contracts slow, Campbell sees other opportunities. ''The oil industry flies (helicopters) a lot, so we're getting great spare parts business from them,'' Campbell said. ''That's a high-margin operation.''

Lozier would like to see Textron return some of its cash pile to shareholders in the form of a higher dividend. Campbell, though, plans to remain aggressive with his existing units. ''We're going to continue to tweak, modify and improve what we have,'' he said. For now, investors seem to like the strategy.

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