Textron Inc Q3 FY2024 Earnings Call

Welcome to the Textron Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. This conference is being recorded for digitized replay and will be available after 10 AM Eastern Time today running through October 24, 2025. You may access the replay by dialing 866-207-1041 and entering the access code of 148-0019. I would now like to turn the conference over to David Rosenberg, Vice President, Investor Relations. Please go ahead.

Thanks, Kiely, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO, and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Revenues in the quarter were $3.4 billion, up from $3.3 billion in last year's third quarter. During this year's third quarter, adjusted income from continuing operations was $1.40 per share compared to $1.49 per share in last year's third quarter. Manufacturing cash flow before pension contributions totaled $147 million in the quarter compared to $205 million in the third quarter of 2023. With that, I'll turn the call over to Scott.

Thanks, David, and good morning, everyone. During the quarter, Aviation experienced a strike on the expiration of its existing labor agreement with the IAM. The work stoppage caused disruption to our aircraft production and service in our Wichita facilities. On October 20, the IAM ratified a new five-year contract ending a four-week strike. As employees return to work and production and delivery activities recover, resulting disruptions will impact our 2024 financial results. In the quarter, Aviation delivered 41 jets, up from 39 last year, and 25 commercial turboprops, down from 38 in last year's third quarter. Aftermarket revenues grew 5% for the third quarter of 2023 versus 2023, and our year-to-date aftermarket revenues were up 8% compared to the prior year. Aviation continued to see strong demand in the quarter, booking over $1 billion in new orders. Backlog grew $162 million, ending the third quarter at $7.6 billion. During the quarter, Aviation delivered the 400th Cessna Citation Latitude. Latitude has been the best-selling aircraft in the midsize jet segment since it was introduced into service in 2015. At NBAA this week, Aviation also announced the Gen3 updates of the Citation M2, CJ3 and CJ4, reflecting continued investments in this product portfolio. At Bell, revenues were $929 million, up $175 million over last year, and segment profit was $98 million, up $21 million compared to the third quarter last year. During the quarter, the U.S. Army announced approval of Milestone B for the FLRAA program. This significant milestone establishes FLRAA as a program of record and transitions the program to the engineering and manufacturing development phase. This phase includes continued digital modeling, detailed hardware and software design, and fabrication of hardware as Bell proceeds to critical design review and the first flight planned for 2026. As a result of Milestone B and the subsequent EMD award, Bell's backlog grew by $2.3 billion in the quarter, now totaling $6.5 billion. On the commercial side, Bell saw increased order activity in the quarter. Bell delivered 44 helicopters, up from 23 in last year's third quarter. Textron Systems revenues and profits were slightly lower compared to last year. In the quarter, Systems completed two major milestones in the Army's FTUAS program, a modular open systems approach conformance evaluation, and a prototype aircraft flight demonstration. The team will now proceed to option four of the competitive program, which includes delivery of a production representative aircraft system for Army testing and evaluation. Systems expanded its U.S. Navy Aerosonde operations with awards for two new land-based sites and three new maritime sites. Also in the quarter, Systems delivered two prototype Ripsaw M3 Robotic Vehicles to the U.S. Army for testing as part of Phase 1 of the Robotic Combat Vehicle program. The Army is expected to downselect the Phase 2 for production representative prototype in mid-2025. Moving to Industrial, the segment experienced lower revenues and operating profit in the quarter, driven by continuing softness in Specialized Vehicles end markets. Specialized Vehicles continue to take cost actions to align with lower production volumes. Moving to eAviation, the Nuuva 300 continued integration testing, including a full system power-on and flight simulation run conducted this quarter. The team is now focused on preparations for the aircraft's first hover flight, which is expected in Q4 of this year. Also during the quarter, the Nexus eVTOL program continued to progress on the wing and empennage assemblies and outfitting of the ground control station, preparation for the start of flight testing, which is expected to begin in 2025. Finally, as we announced yesterday, we're making some important executive changes at Textron. Our CFO, Frank Connor, has notified us that he intends to retire from the company on February 28, 2025. Dave Rosenberg, our current Vice President of Investor Relations, has been elected as our new Executive Vice President and Chief Financial Officer succeeding Frank. Dave has more than 24 years of experience in the aviation industry and has served in a series of finance and strategy positions at Textron Aviation, Beechcraft and its predecessor companies. In addition, Scott Hegstrom has been elected Vice President of Investor Relations, replacing Dave. Both elections are effective March 1, 2025. I want to thank Frank for his outstanding leadership and significant contributions to Textron during his 15 years, and to congratulate Dave and Scott on their new appointments. With that, I'll turn the call over to Frank.

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. In the third quarter of 2024, delayed aircraft deliveries along with unfavorable performance resulting from the IAM strike lowered Textron Aviation's revenues by about $50 million and segment profit by around $30 million. Revenue at Textron Aviation of $1.3 billion was essentially flat with the third quarter of 2023, with higher pricing of $36 million mostly offset by lower volume and mix of $35 million. Segment profit was $128 million in the third quarter, down $32 million from a year ago, largely due to lower volume and mix of $29 million. Backlog in the segment ended the quarter at $7.6 billion, up $162 million from the second quarter. Moving to Bell, revenues were $929 million, up $175 million from last year, largely reflecting higher volume and mix of $148 million. Volume and mix included higher military volume of $81 million, primarily related to the FLRAA program, and higher commercial volume and mix of $67 million, reflecting an increase in deliveries. Segment profit of $98 million was up $21 million from last year's third quarter, largely due to a favorable impact from performance of $17 million and favorable pricing, net of inflation, of $12 million. Backlog in the segment ended the quarter at $6.5 billion. At Textron Systems, revenues were $301 million, down $8 million from last year's third quarter, largely due to lower volume. Segment profit of $39 million was down $2 million from a year ago. Backlog in this segment ended the quarter at $1.9 billion. Industrial revenues were $840 million, down $82 million from last year's third quarter, mainly due to lower volume and mix of $86 million, principally in the Specialized Vehicles product line. Segment profit of $32 million was down $19 million from the third quarter of 2023, primarily due to lower volume and mix. Textron eAviation segment revenues were $6 million and segment loss was $18 million in the third quarter of 2024 compared with a segment loss of $19 million in the third quarter of 2023. Finance segment revenues were $12 million and profit was $5 million. Moving below segment profit, corporate expenses were $20 million, net interest expense from the manufacturing group was $22 million, LIFO inventory provision was $49 million, intangible asset amortization was $9 million, and the non-service components of pension and post-retirement income were $66 million. In the quarter, we repurchased approximately 2.4 million shares, returning $215 million in cash to shareholders. Year-to-date, we have repurchased approximately 10.1 million shares, returning $890 million in cash to shareholders. Textron is adjusting its full year outlook to include the expected impact of the aviation strike on its financial results. Textron now expects 2024 adjusted earnings per share from continuing operations to be in a range of $5.40 to $5.60 per share, down from its previous outlook of $6.20 to $6.40 per share. Manufacturing cash flow before pension contributions is now expected to be in a range of $650 million to $750 million as compared to its previous outlook of $900 million to $1 billion, with planned pension contributions of about $50 million. Looking to Aviation, we now expect total year revenue of about $5.5 billion, with an expected segment margin of around 11%. At Bell, while total year revenue outlook is unchanged, we expect an improved segment margin in the range of 10.5% to 11%. At Systems, the revenue outlook is unchanged, with a segment margin estimated at the top end or slightly above our original guidance range of 11% to 12%. Looking to Industrial, we now expect revenues to be about $3.5 billion, with an expected segment margin of around 4%. At eAviation, we now expect revenue to be about $35 million, with segment margin unchanged at a loss of around $75 million. At Finance, we now expect revenue to be about $50 million, with segment margin of around $30 million. Below segment profit, we now expect corporate expenses to be around $135 million, interest expense to be about $85 million, and a tax rate of 17.5%. That concludes our prepared remarks. So, operator, we can open the line for questions.

Thank you. And we'll go to the line of David Strauss with Barclays.

Good morning. Thanks, and congrats, Frank and Dave.

Thank you.

Scott, could you just maybe touch on how things are going at Aviation in terms of restarting production and kind of what have you assumed in the updated forecast for Aviation, I think, at $5.5 billion in revenue in terms of jet deliveries? Thanks.

Sure, David. So, look, I mean, obviously, we got the ratification last weekend, which was very important. Under the terms of the contract, the workforce has up to five days to come back in. So, we are starting to ramp and get things back in place. I think I talked to Ron yesterday; we probably had about 60% of the workforce back in yesterday. We expect that to continue to ramp and clearly expect to be at full representation on Monday. So, when we factor in the numbers, we think about that. That's why the $0.5 billion revenue drop; it's not really four weeks, it's more like a five-week strike, and then we've got to get all the ramping and get the line back up and running here as we get into the fourth quarter. I guess I'd say, David, the good news is that's what we're focused on. We have a five-year deal in place that's good for employees; it's good for us. Our total focus right now is getting things ramped up. We've spent, obviously, a lot of time here over the last four or five weeks continuing to work with our supply chains, making sure that parts are coming in and suppliers who have been late to PO are getting back to current. So, our complete focus right now is getting everybody back in the door and getting the factory up and running and hopefully more efficient than it's been over the past few years as we get better part flow.

Thank you for that information. Frank, regarding the lower forecast for free cash flow this year, it seems you might be experiencing a loss of about $125 million due to lower earnings. CapEx appears to be slightly reduced compared to your earlier forecast. What is responsible for the additional $200 million impact on free cash flow?

Yeah, we're going to have some inventory headwinds associated with kind of the slower ramp-up here and the impact of the production. As Scott said, it's kind of a five-week impact. We want to get healthy from a supply chain standpoint. So, we certainly looked at mitigating the cash impact of the strike, but we also want to make sure that we were healthy as we come out of this. So, that's really the impact and we'll then have that inventory, obviously, to burn through and sell in '25.

Thanks very much.

We'll go next to the line of Sheila Kahyaoglu with Jefferies.

Good morning, Scott, Frank and Dave, and congratulations, Frank, of course. So, just going back to the EPS cut of $0.80, I think Industrial is about $0.30; that's a headwind, but Bell is the $0.10 offset. How do we think about, I guess, Aviation into 2024 exiting Q4, and then also Industrial, just given a 4% margin to exit the year?

On the Industrial front, we've experienced softness throughout the year, and we've mentioned this every quarter. As we update our guidance, we aim to provide specifics for each segment, and our current expectation is that this weakness in the market will persist. As we've indicated in prior quarters, we're significantly reducing production volume to avoid flooding the market. We're not engaging with the market until we have a clearer understanding of interest rates and market conditions. This update helps clarify our overall outlook for this segment. The more pressing issue is ramping up the Aviation business again. As Frank noted, delays in deliveries mean we will carry more work-in-process inventory through the end of the year than usual for Q4. However, it's important to recognize that these sales aren't lost; they are simply delayed, and we will eventually deliver these aircraft. Looking to 2025, we anticipate revenue growth compared to our initial 2024 guidance. We're making progress, and with the contract behind us, we feel optimistic about achieving greater stability in our workforce and improving our position with suppliers. While recovering everything in one quarter is challenging, we expect to build positive momentum as we head into 2025.

And just on the contract, how do we think about the headwind in 2025 as we factor in the wage increase?

Well, that was largely baked into our plans. The deal was a little bit more than we expected, but direct labor is about 10% of our costs. So, I mean, our focus at this point will be making sure we can drive the right productivity and efficiency to compensate for that. But I think it's a fair deal. It's good for our employees. And our view is we want these to be the best jobs in town. We think this is a hugely important workforce. We need good people, we need to retain them, and we'd like to be that best job. And I think this makes us the best job in town. So, it's a good trade for us.

Thank you.

We'll go next to the line of Robert Stallard with Vertical Research.

Thanks so much. Good morning.

Good morning.

Good morning.

Just want to follow-up on David's question really and the recovery plan. It sounds like you've taken a fairly proactive approach to managing the supply chain that you haven't turned anyone off. In fact, you just kept things going, and you've built up this inventory. Is that a fair analysis?

Yeah. Look, I mean, in part shortages, while it has improved over the last few years, have still been problematic. I think it's gotten to be a smaller number of part numbers that are a problem, but they're still a problem. And that was continuing to drive a lot of out-of-station work and just significant inefficiencies in the factory. So, our view was, look, nobody wins a strike. A strike is not a good thing, but we certainly, during the period of the strike, were committed to continue to work with those suppliers and try to resolve that problem. So, again, from our perspective, this is all about how you move forward and expecting we'll get the workforce back in, which is now happening, that we would put ourselves in a better situation in terms of parts and back shops and these things so that we can be more efficient going forward. So, yeah, that's going to cost a little bit of inventory, but all that inventory is going to turn into airplanes. So, I'm not particularly worried about that.

Okay. And then, as a follow-up on Industrial, you mentioned that Specialty Vehicles have been having some demand challenges. What about at Kautex? Have you seen any softening on the European auto front?

Well, for sure, we have. I mean, auto is down around the world. Europe is probably the most challenged market, so the volumes are somewhat below where we would like them to be, but frankly, that team does a really good job of managing through and dealing with that and offsetting with productivity and pricing. And so, I think the Kautex guys actually have been performing quite well.

Okay. That's great. Thank you.

And next, we'll go to the line of Peter Arment with Baird.

Yeah. Thanks. Good morning, Scott. Congrats, Frank and Dave. Hey, Scott, maybe just to talk about, just on the heels of NBAA, you guys obviously saw some nice bookings this quarter. Can you talk maybe just about what you're seeing on the demand environment? It still seems obviously very favorable for a lot of your models.

Yeah, Peter, I think it has. I mean, we had over $1 billion here in Q3. As you know, Q3 is usually historically one of the lighter ones, right? The summer, July, August is usually quieter. I think it was a good quarter of order activity. We're very encouraged. The refreshes that the team is putting out in both M2, CJ3, the new CJ4. Of course, we have the Ascend, which we announced too long ago. That's coming along very well. So, the number of updates, which are pretty significant in terms of capability of the aircraft and safety, particularly with launching Autoland across all those single-pilot jet platforms, is driving strong demand. So, I think the end market continues to feel good. Order activity is flowing well. So, I think we're still feeling good about where the industry is.

Yeah. And just as a follow-up, on pricing, I guess, net of inflation, you guys have done pretty well all year. What's the latest there? I just assume, given that the demand environment is healthy.

Pricing remains strong in the marketplace, but as we've discussed, the price inflation is starting to narrow. I don't anticipate significant contributions from price increases beyond inflation. Our focus needs to be on improving productivity and efficiency in our factories to maintain our momentum. The pricing situation is stable, and that's not an issue. However, we have seen considerable price inflation spreads, which will decrease over time. We can't rely on this to achieve the margins and performance we need moving forward. Instead, our aim must be to enhance productivity and efficiency with the current volume.

The only thing I'd add on that is for this quarter and next quarter, with the lower volume, which is where price comes through, essentially inflation across all aspects of the cost structure, not just the aircraft but SG&A and other things, will put pressure on price versus net of inflation. So, for this quarter, it's net zero price, but that is certainly impacted by the lower volume associated with the strike, and that will have an impact on the price versus inflation on a net basis in the fourth quarter as well.

Appreciate all the color. Thanks, guys.

We'll go next to the line of Noah Poponak with Goldman Sachs.

Hey. Good morning, everybody.

Good morning.

Good morning, Noah.

Frank, congrats on the retirement. Thanks for all the help and the relationship over the years. And David, congrats on the move to the CFO.

Thanks.

How many Cessna jet deliveries are we expecting in the fourth quarter given the abnormal backdrop with the strike and the recovery?

Well, Noah, I mean, we've never given a number of jets. So, I think we'll probably just stick to revenue at this stage of the game. But I mean, it's $0.5 billion of revenue obviously adjustment, which is pretty significant; but yeah, I think that accounts for what's turning out to be really a kind of a five-week strike duration and then just the inefficiencies and just the time of getting it ramped back up and going.

Okay. And, Scott, I guess, in 2025, should we anticipate that January 1, when you're starting a year, you're pretty much recovered and it's a clean run rate production line, or could there be disruption that bleeds into the beginning of the year? And then, should we expect the aircraft that slip out of '24 to add what you previously had planned for '25, or does it kind of smooth out over a longer period of time?

First of all, we expect to be operating at normal productivity by January 1. Being late October, we have November and December to ensure everything is running smoothly. I believe that by the start of the year, the factory will be stable and performing well. While we're not ready to provide guidance for 2025 yet, I do think that considering our production ramp-up and future expectations, despite the challenges we face in 2024, we anticipate healthy revenue growth in 2025 that exceeds our original guidance for 2024.

Okay. And then, just lastly on the margin, at Aviation, should we all just continue to contemplate the incremental margin framework you've referenced in the past, or is cost now different enough, or is there still a lot of opportunity on the productivity front? How should we be thinking about that over the medium term?

Look, we still think about this business as converting at 20%-plus in terms of revenue given the kind of the mix of gross margin across the business. So, that's still, I think, an appropriate long-term guide.

Okay. Thank you.

Next, we'll go to the line of Myles Walton with Wolfe Research.

Thanks. Good morning. I was wondering if you could talk to Systems, and you mentioned the two contracts that are being decided next year, FTUAS and the Robotic Combat Vehicle. Is an outcome on those basically going to dictate whether or not Systems can start a real growth profile? It's been obviously flat here for a long, long time. And how critical are those two programs?

Yeah, absolutely. Look, I mean, these are programs that we've been investing in for a long time to position ourselves. They are key factors in driving growth for the business in the future. There's other programs, obviously. In fact, I think, frankly, if you look at 2024, that business is performing extraordinarily well. We did take a hit at the beginning of the year, which we did not anticipate around Machado getting pulled out of service. Other businesses within systems over the course of the year have grown to help to offset that. And as we said, even with that hit, which was not trivial to us, the businesses are hitting their original guide in terms of revenue, and they're going to be on the high side of their margin. So, I think the Systems team is performing very well. But yeah, absolutely, those programs like FTUAS and like RCV and of course, there's ARV in the year out and such are key drivers of growth in the future.

Okay. And just one quick one. Is the 525 still on track for 4Q cert, or is that slipping into '25?

We were just there yesterday. The flight test program is ongoing. I prefer not to specify dates since we don't certify them. The relationship and collaboration with the FAA are positive, and the flight test program is progressing well. If I had to guess, I would lean towards it being delayed into 2025 due to the considerable amount of documentation and approvals required before the official type certification can be issued. We are continuing our work on the flight tests and other necessary tasks on our end. Additionally, we are already reallocating resources towards various kits and capabilities that need to be integrated into the aircraft throughout its lifecycle. This work will proceed alongside the certification process.

All right. Thanks for the color.

Thank you. And we'll go next to the line of Seth Seifman for JPMorgan.

Hey. Thanks very much, and good morning.

Good morning.

And congratulations, Frank and Dave. Wanted to ask about the margin in Aviation. And so, ex the strike, it looks like it was kind of in the mid-11% range, which was kind of below the guidance range for the year. I know there's variability quarter to quarter, and you talked about Q2 being exceptionally strong, but just anything to point out there with regard to why we saw kind of a step down there versus what we've become accustomed to seeing in recent quarters?

The strikes have created some complications. When reviewing idle facilities, their impacts, total annual volumes, assumed overhead rates, and liquidation rates, it becomes clear that in this quarter and the year, we are dealing with a significant drop in volume alongside high costs, some of which are fixed. This contributes to the challenges reflected in both Q3 and our revised guidance for the entire year.

Okay. Got it. And then, I guess, maybe thinking about the margin at Bell and profitability coming in ahead of expectations this year, as FLRAA continues to grow, is this something where you can continue to maybe see some improvement here, given performance elsewhere, or should we still be thinking about maybe profit dollar growth but margin rate declines?

Yeah, look, we're still trying to drive the profit dollar growth. The FLRAA program is growing and will continue to grow next year fairly significantly, which is great obviously; but that is, as you know, had a lower margin mix. But the commercial market is strong, so that's helpful to us. The win in Nigeria, which is actually going to grow the H1 original equipment volumes here over the next couple of two, three years, is obviously helpful. So, there are some things in there mix-wise that are helping. But again, I still think given the significant growth of the FLRAA program, our focus really is how do we continue to be accretive and make sure that we're growing the margin dollars in these subsequent years.

Excellent. Thanks very much.

And we'll go next to the line of Doug Harned with Bernstein.

Good morning. Thank you. And also congrats to Frank and Dave. If you look forward from here, say over the next five years, and thinking about what you're going to be investing in on the Aviation side with respect to R&D and CapEx, how do you see that profile evolving? And are there specific areas where you really intend to be focusing there?

I don't anticipate making significant changes. I believe we will continue the approach we've been taking over the past several years, which includes a good balance of upgrading our existing products that have been well-received by our customers and occasionally introducing entirely new products. This strategy has proven effective for us, and I expect it will remain so. Regarding our R&D efforts, we aim for this to serve as a slight boost in terms of sales percentage. One of our margin challenges toward the end of the year arises when our R&D expenses remain relatively fixed while we may lose a large portion of revenue due to unusual circumstances like a strike. Nevertheless, I anticipate stable R&D spending, and we will increase our investments when justified by suitable programs, all while ensuring that this remains a positive factor for sales growth in the business.

As we look ahead to 2025 and set aside the strike for now, you mentioned that during the strike, you've made some progress in improving the supply chain. It appears that the main challenge in Aviation is not demand, but rather the supply chain itself. If you've managed to resolve some of the issues within the supply chain, could you explain the main bottlenecks currently? Additionally, do you anticipate a point in time when the limiting factor will shift away from supplier problems?

I believe the main issue has been related to some critical supply aspects. It's been about our resourcing, staffing, and the ramp-up process. However, when I look ahead to 2025, even with the disruptions we experienced in 2024, our plans for capacity expansion and increased product delivery are still on track, and we expect to see that reflected in our revenue growth in 2025, despite the interruptions in production in 2024. We have a ramp plan that is aligned with our suppliers and our internal resources, and that remains in effect. Therefore, you can anticipate revenue growth in 2025 that exceeds our original guidance for 2024.

Very good. Thank you.

We'll go next to the line of Jason Gursky with Citi.

Good morning. Frank, congratulations and good luck with the next phase. Dave, well done, you truly deserve it. I'm eager to collaborate more closely with you in that role. Scott, I have a couple of quick questions for you. You mentioned earlier that labor productivity could help mitigate some of the higher costs due to the strike. Can you provide some broader comments on labor productivity now compared to pre-pandemic levels, including what steps you're taking to boost it back to previous levels, and how long you think it might take to return to historic productivity levels?

There were two main reasons for the inefficiencies, especially in factory productivity. One was related to supplier parts. Running a production line often means dealing with missing parts, which leads to out-of-sequence work and rework between aircraft, causing significant disruption. Although it won't be perfect, we worked through the strike period to improve on-time deliveries and reduce the instances of unavailable parts when needed in the production process. The other factor is simply labor. Like many companies after COVID, we've experienced high turnover and brought in a lot of new hires, which has required extensive training, contributing to inefficiencies. This involves not only the new employees but also our senior staff, who assist in their training. I believe that finalizing the labor contract is important; it includes a significant wage increase, making these positions more appealing and strengthening our ability to attract and retain workers. Achieving stability in our workforce by ensuring that we have a consistent number of employees is crucial. I'm more optimistic about the parts issue as we've made considerable progress recently. With the wage increases in the market, these jobs are among the best available, helping us to attract and keep the workforce necessary for building aircraft, which is essential for improving efficiency and productivity in our factory.

Okay, that's helpful. The second question is more philosophical. If you could magically ensure a consistent backlog in the Aviation business, what would be your ideal target for managing the business over the long term?

If you consider our various products, it's somewhat different across our portfolio, but typically, being out 18 to 24 months is a strong position for us. This timeframe is crucial for several reasons. First, many of our customers already have aircraft, and knowing when to sell them and how to remarket them is essential. This period also allows us adequate time to specify the aircraft and their interiors, ensuring a smooth process so that when an aircraft is ready for production, we are clear on its configuration. While many aspects are standard, there are customizations that occur later in the process. Having everything well-defined helps us communicate with our suppliers effectively and maintain a consistent volume and delivery schedule, ultimately facilitating a smoother business operation with clear visibility over 18 to 24 months regarding volumes, product mix, and configurations.

Great. That's helpful. Appreciate it, guys.

And we'll go next to the line of Gavin Parsons with UBS.

Thanks. Good morning. And Frank and Dave, congrats.

Thanks.

Just wanted to ask a couple of margin questions. On Industrial, are you still seeing some benefit from the restructuring, or is that largely already in place at this point?

Well, I mean, I think, clearly, we've been restructuring through the course of the year, but I'd say there's more restructuring to come, for sure. I think the end markets, and particularly in a couple of segments of the business, are continuing to be soft, and I think they're going to be soft for a little while. So, we'll continue to do what we think is appropriate to restructure and maximize our performance in each of those business segments.

Got it. And on Aviation, can you just remind us how the performance accounting line works? If you have cost on aircraft this year that deliver next year, do we expect some margin headwind there?

The performance line has a lot of complexities. I'm not sure I can fully explain it. This quarter and for the entire year, there are unusual factors at play. We are facing factory inefficiencies, period expensing, and idle factory costs, which are not typical for us. Additionally, there are manufacturing variances, contributing to the many variables in this performance line.

Understood. Thank you.

And we'll go next to the line of Pete Skibitski of Alembic. Please go ahead.

Hey, good morning, guys.

Good morning.

I was wondering if we go back to FLRAA now that you had the Milestone B approval. I just wonder if you could put a finer point on the revenue line since it's so substantial. I think last I recall, you were thinking about $900 million in revenue this year. And Scott, you're talking about a substantial increase next year. Is there any way to put a finer point on that?

I believe $900 million is likely the correct figure for this year. Next year, it could be between $100 million and $200 million higher, based on our budget expectations. I want to be cautious about this since the funds are not yet appropriated; we don't actually have a finalized budget. However, once the budget is approved, I anticipate we will see some additional growth as we move into next year. There's ongoing discussion with the Army, who fully supports this initiative. The importance of progressing through CDR is significant, and I feel the customer is equally committed to moving this forward. Achieving that requires increased funding next year, and it seems everyone is aligned on that.

Okay. No, I appreciate it. And then just the decision to in-source the cabin from Spirit, what's the right way to think about sort of the technical and the schedule risk there? Obviously, it's probably easier than if you were kind of midstream in production, but can you give us a sense of how you guys are viewing that decision?

I believe that given the status of where we were, starting EMD made it a low-risk and straightforward process to execute. The Spirit team was very collaborative and closely worked with us throughout, and it's completed. We are now focused on moving forward and executing our plans, and so far, everything is going well.

Thank you. We have no further questions in queue at this time. And today's conference is being recorded for digitized replay and will be available after 10 AM Eastern Time today through October 24, 2025. You may access the replay by dialing 866-207-1041 and entering the access code of 148-0019. This does conclude the conference for today. Thank you for your participation. You may now disconnect.