Textron Inc Q3 FY2025 Earnings Call

Good morning, everyone, and welcome to the Textron Third Quarter 2025 Earnings Release. I would now like to hand the conference over to Scott Hegstrom. Please proceed.

Thanks, Rob, 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 David Rosenberg, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Revenues in the quarter were $3.6 billion, up 5% or $175 million from last year's third quarter. Segment profit in the quarter was $357 million, up 26% or $73 million from the third quarter of 2024. Adjusted income from continuing operations was $1.55 per share compared to $1.40 per share in last year's third quarter. Manufacturing cash flow before pension contributions totaled $281 million in the quarter compared to $147 million in last year's third quarter. With that, I'll turn the call over to Scott.

Thanks, Scott. Good morning, everybody. Let me just start with yesterday's announcement. I'm sure you've all read by now that yesterday, we elected Lisa Atherton to become our new President and CEO, effective at the beginning of January. At that point in time, I'll transition to be the Executive Chair. This is the result of a long, thorough process that we worked with on the Board. I think Lisa, who's been with our company for about 18 years, is an outstanding leader. She's had a number of really important roles in the company over the years. She was the President and CEO of our Textron Systems business for about 5 years. Most recently, obviously, she's the President and CEO of Bell, where she's been very involved in both the capture, the win, and now the execution of the ramp on MV-75. She's a fabulous leader. She knows the team. She's surrounded by a great team at the business level across the company. So we're proud of the fact that we had a great internal promotion, and I think she'll just do a fabulous job leading the company into the future. So with that, let me go ahead and talk about the quarter. Overall, revenue was higher, driven by strong growth across our aerospace and defense businesses. Aviation had higher segment revenues and profit compared to the third quarter of last year. We delivered 42 jets and 39 commercial turboprops compared to 41 jets and 25 commercial turboprops in last year's third quarter. Textron Aviation's fleet utilization remained strong in the quarter, contributing to an aftermarket revenue growth of 5% as compared to last year's third quarter. Aviation backlog ended the third quarter at $7.7 billion as demand remains strong. Earlier this month, Textron Aviation completed the certification of the CJ3 Gen2 and autothrottles on the M2 Gen2. Also this month, the Citation Ascend made its debut as it landed in Las Vegas for the NBAA exhibition. We are nearing completion of the certification process and continue to expect deliveries this quarter. During the quarter, the Latitude received FAA certification for new features of the Garmin 5000 avionics suite. These features include Synthetic Vision Guidance Systems and improved approach capabilities down to 150 feet and a new taxiway routing feature. We continue to implement Starlink high-speed Internet connectivity onto our aircraft. With the recent announcement of the Latitude and Longitude supplemental type certifications, Starlink is now available on 14 platforms across Aviation's product portfolio. On the defense side, Aviation announced a partnership with Leonardo to launch the Beechcraft M-346N as a solution for the United States Navy Undergraduate Jet Training System competition. Throughout the quarter, Aviation participated in a nationwide demo tour to highlight the capabilities of this aircraft. At Bell, increased revenues were driven by higher military volume, reflecting the continued ramp and acceleration of the MV-75 program. In the quarter, Bell exceeded their 90% engineering release milestone, enabling continued fabrication and procurement activity for the prototype aircraft. Fabrication and assembly work on the program is continuing across numerous sites, including wing assembly at our Amarillo, Texas site, fuselage assembly at our Wichita, Kansas site, in addition to ongoing fabrication of critical rotor and drive system components in our Fort Worth operations. On the commercial side of Bell, we delivered 30 helicopters, down from 44 in last year's third quarter. Bell continues to see strong demand across its commercial product portfolio. Bell announced a purchase agreement with Global Medical Response for 7 429s and an option for 8 additional helicopters with deliveries expected to begin in 2026. Moving to Systems. Revenues were up as compared to last year. During the quarter, Systems received new contract awards for several programs, leading to an increase in backlog of about $1 billion in the quarter. These awards included ATAC awards for both the United States Navy and the United States Marine Corps, a new contract award for the U.S. Army to provide 65 mobile strike force vehicles in support of the Ukraine Security Systems Initiative and increased quantities for the Ship-to-Shore Connector program. In the weapons business, Systems completed delivery of the first production lot of XM204 anti-vehicle terrain shaping systems to the U.S. Army in support of operations in Europe. Moving to Industrial. We saw lower revenues, reflecting the divestiture of the Powersports business. At Aviation, we continue to make progress on several of our core development efforts. The team completed the hover flight test envelope for the Nuuva V300 and set the stage for Air Vehicle 2 to enter the flight test program. As disclosed in our 8-K filing, Textron will be eliminating the Textron Aviation segment as a separate reporting segment, realigning the eAviation business activities across Textron Aviation and Textron Systems to leverage our existing sales and business development capabilities. This change will be effective at the beginning of fiscal year 2026. With that, I'll turn the call over to David.

Thank you, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.5 billion were up 10% or $138 million from the third quarter of 2024, reflecting higher aircraft revenues of $116 million and higher aftermarket parts and service revenues of $22 million. The increase in aircraft revenues was largely due to higher volume mix, which included higher Citation jet and commercial turboprop volume, partially offset by lower defense volume. Segment profit was $179 million in the third quarter, up 40% or $51 million from a year ago, largely due to higher volume and mix. Backlog in the segment ended the quarter at $7.7 billion. Moving to Bell. Revenues were $1 billion, up 10% or $97 million from the third quarter of 2024. The revenue increase was driven by higher military revenues of $128 million, primarily due to higher volume from the U.S. Army's MV-75 program, partially offset by lower commercial volume of $31 million. Segment profit of $92 million was down $6 million from last year's third quarter. Backlog in the segment ended the quarter at $8.2 billion, an increase of $1.3 billion from the prior quarter, primarily reflecting the award for the prototype testing and evaluation phase of the MV-75 program. At Textron Systems, revenues were $307 million, up 2% or $6 million from last year's third quarter, which included higher volume on the Ship-to-Shore Connector program. Segment profit of $52 million was up $13 million compared with the third quarter of 2024, largely due to a gain resulting from the early termination of a vendor contract. Backlog in the segment ended the quarter at $3.2 billion, an increase of $980 million from the prior quarter, reflecting new contract awards for the Ship-to-Shore Connector land vehicles in the adversary air business. Industrial revenues were $761 million, down $79 million from last year's third quarter, driven by Textron Specialized Vehicles. This reflects $88 million in lower revenues related to the divestiture of the Powersports business. Textron eAviation segment revenues were $5 million in the third quarter of 2025 as compared to $6 million in last year's third quarter, and segment loss was $15 million as compared with a segment loss of $18 million in the third quarter of 2024. Finance segment revenues were $26 million and profit was $18 million in the third quarter of 2025 as compared to segment revenues of $12 million and profit of $5 million in the third quarter of 2024. The increase in revenues and segment profit was largely due to gains on the disposition of non-captive assets. Moving below segment profit. Corporate expenses were $26 million. Net interest expense for the manufacturing group was $26 million. LIFO inventory provision was $48 million. Intangible asset amortization was $8 million and the non-service components of pension and postretirement income were $67 million. As expected, our adjusted effective tax rate for the third quarter of 2025 was 25.5%, largely reflecting the impact of the One Big Beautiful Bill Act. We now expect our full-year adjusted effective tax rate to be approximately 21%. During the quarter, we repurchased approximately 2.6 million shares, returning $206 million in cash to shareholders. Year-to-date, we have repurchased approximately 8.4 million shares, returning $635 million to shareholders. To wrap up with guidance, we are reiterating our expected full-year adjusted earnings per share to be in the range of $6 to $6.20 and maintaining our expected full-year manufacturing cash flow before pension contributions to be in the range of $900 million to $1 billion. That concludes our prepared remarks. So operator, we can open the line for questions.

Your first question today comes from the line of Peter Arment from Baird.

Congratulations, Scott. I appreciate all the help over the years. Regarding the MV-75, can you provide details about the recent Army announcement on accelerating the fielding of Version 2? How will that impact the cost profile, if at all?

It won't change anything in the near term, Peter. I mean, obviously, part of the strategy on the program, which has been there all along was to start with a very basic aircraft and focus on the critical parameters around speed and range and basic aerostructure. But as you know, part of the incorporation of MOSA in terms of the architecture of this aircraft allows you to do that and then build out variants and derivatives and capabilities in different variants going forward. So our focus, obviously, right now is very much around the acceleration, getting the first prototype aircraft going. Those will be the first variant. But there's already a lot of work clearly going on in the Army around what future capabilities they'll want to put on the aircraft, but that's enabled by the MOSA architecture. So it doesn't affect or impact the work that's going on around the basic aircraft today.

That's helpful. Could you provide any highlights regarding the strong demand in Aviation, particularly in the biz jet market, whether it's regionally or in general?

It's really across the whole portfolio, Peter. I mean we continue to see strong retail demand. People are flying. The end market industry remains robust, I would say, everywhere that we see it. The performance of the business is improving, obviously, as we talked about every quarter, improving margins. We had a lot of certification activity in the quarter. We would have originally planned probably to get the M2, the CJ3, and the Ascend in Q3. It's turned out. Of course, we now have the M2 and the CJ3, but those happened right at the beginning of Q4. And Ascend, we should have wrapped up here by the end of the month. The FAA, despite the shutdown is supporting us in that effort, which is great. So I think the market is strong. Our product portfolio is in a good place. So we feel pretty good about where things are.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies.

Congratulations to Scott on a successful tenure and on promoting both Dave and Lisa from within the company. I think this reflects positively on the organization. I would like to follow up on the MV-75 question for Peter. Can you provide an update on the program? I understand you've completed 215 flight hours and are scheduled to deliver six test articles over the next year and a half. What is the next step with the Army, and how should we view the timeline for a potential contract signing?

Sure. The current program has some misunderstandings regarding its status and how it operates. Many people are comparing it to the large fixed-price programs we've seen with other defense contractors, like the Ship-to-Shore Connector. While that program faced challenges due to its fixed-price structure, our current initiative is primarily based on cost-plus development, with some fixed-price elements included. We’ve accounted for the fixed-price LUT aircraft in our program estimates and will include LRIP 8 once the government exercises that option. The program’s foundation is largely cost-plus, with fixed-price components for LUT and LRIP. Discussions about accelerating the program focus on bringing LRIP forward, which we believe poses low risk, especially given our extensive flight hours on the V-280. The team is making significant progress by constructing key components and preparing the first prototype test aircraft. We aim to produce six prototypes along with two LUTs. The risk of advancing LRIP is minimal, as the first LRIP aircraft roughly corresponds to serial number ten when accounting for previous models and those under cost-plus. The team is executing well, coordinating closely with the Army. We are actively building wings, fuselages, and gearboxes, and the execution is proceeding smoothly. There seems to be some confusion about the program dynamics, which involve substantial performance obligations. This was evident last year when we adjusted our booking rate after adding LUTs. Despite a cumulative catch that had negative implications at that time, this quarter we saw an increase in our booking rate when the government exercised a large contract on the cost-plus side. We expect fluctuations throughout the program but don’t foresee entering any losses like in large fixed-price development programs. Instead, we anticipate continued bookings at a low margin, maintaining a solid position for the future of the company.

Your next question comes from the line of Gavin Parsons from UBS.

This is João Santos on behalf of Gavin Parsons. You have talked before about improving Aviation profitability. What is the long-term margin target that you are aiming for? And what are the main levers to get there? Is it volume, pricing, or more of a mix?

The dynamics vary across our different businesses, but overall, we maintain good gross margins across all product lines. The key factor in improving performance is volume and how it impacts our bottom line. Most of our product investments focus on ensuring we have high-demand products that can achieve strong volume and good pricing. We've experienced positive feedback on pricing over the last several years.

Great. And then in Aviation bookings have been fairly steady each quarter this year, even through the 2Q tariff uncertainty. Do you think long lead times are holding back new orders? And if production ramps, could that actually drive bookings higher?

Well, look, there is some connection between news. There's no doubt if you get out too far out in timeline that it's difficult for people to make that commitment. But as you said, look, I think that the market demand remains strong. It has been pretty steady. We've guided a 1:1 book-to-bill through the course of the year. I still feel good about that. And certainly, we do have plans where you'll see incremental volume in 2026 as opposed to 2025. So we're not obviously quite ready to guide 2026 here, but we certainly expect, as manufacturing continues to ramp, we will see additional output in terms of the number of aircraft.

Your next question comes from the line of Robert Stallard from Vertical Research.

Congratulations, Scott, on the move up. But my first question is actually in relation to that and how you and Lisa expect to divide the role going forward because you will be Executive Chairman.

Sure, Robert. I believe this is a fairly standard transition in our business. I've been collaborating with Lisa for a long time in her important roles. She has worked directly for me for the past eight years, managing the Systems business and then the Bell business. To be clear, she becomes the President and CEO and will be running the company, and she is fully prepared for this role. I will assist with some processes we've yet to navigate, such as regulatory matters and year-end tasks. However, I have complete confidence that she is ready to lead the company, and she will officially take on this responsibility on January 4. I will support her in any way she needs and continue to oversee the Board. I anticipate a smooth transition, as we have worked closely for a long time. I will be present, but there should be no doubts—she will be running the company.

Okay. And then as a follow-up on Aviation, we've seen some recent signs of biz jet activity actually picking up in terms of year-on-year growth. Are you starting to see this flow through in terms of your aftermarket activity?

Yes. We had a good quarter on the aftermarket side. There's no doubt utilization is strong. People are flying, which is a great indicator. Obviously, it's really important in terms of helping to continue to drive growth in the aftermarket side of the business. But I think it also bodes well just for demand for aircraft, which again, we're seeing the retail, the level of interest, inquiries, orders, bookings remain strong. So I think the industry right now probably is as healthy as we've ever seen it.

Your next question comes from the line of Myles Walton from Wolfe Research.

Scott, on the retirement or move to Executive Chairman. You're not retired yet. Work to do. On the Aviation side, can you comment on the supply chain and how that's coming along and whether or not that's an impediment to hitting the $6.1 billion revenue placeholder within the forecast?

There are still supply chain issues that we have discussed. While the number of affected part numbers has decreased, some critical suppliers are still facing challenges. This does impact various models at different times, causing some production inefficiencies and flow issues, especially with out-of-station work. However, it's not as severe as it once was, and we are seeing improvements. There are still some critical components that we monitor closely with a limited number of essential suppliers. Overall, the situation has improved, but the team addresses these challenges daily. There are still some problematic areas, which reflects the current state we are in. That said, I believe that as we look at our trajectory towards achieving the $6.1 billion target, we feel optimistic about our path forward.

Okay. Great. And then just a follow-up on Systems, great bookings. Is this the point of inflection for growth after a long time of relatively flat revenue?

Yes. Look, I think so. The bookings were very strong. You guys know we started the year with a bit of a challenge with things like RCV and FTUAS getting restructured and changed. I do still think there's opportunities there in our participation in those kinds of programs. There's a lot of interest in a lot of the technology we developed around FTUAS. And so that stuff will play out. But for sure, what you're seeing, despite not getting those bookings, the growth in the rest of the business has kind of overcome that. Our ATAC business is just doing great. Those guys are performing really, really well. They've won a ton of new programs. Ship-to-Shore continues to grow. And as I said earlier, with Sheila, the program is healthy. Volumes are there. The team is executing really well. We continue to see growth in the Sentinel program. So I think when you look across that business, despite some of the challenges around a couple of those programs, it's good growth. And absolutely, we feel good about sort of that inflection point you referred to. This business has been executing, performing really, really well for a number of years. The only thing that's lacked, as you guys know, is growth. And I do think we're hitting that inflection point where we'll start to see it growing here as we go forward.

Your next question comes from the line of Seth Seifman from JPMorgan.

Congratulations, Scott. Just wanted to ask, starting off about Aviation, and you just spoke to kind of the revenue. When we think about the margin, it's a pretty significant uptick in profitability in the fourth quarter and kind of what enables that.

Yes, I believe we are observing a positive trend as the year progresses. Traditionally, the fourth quarter shows strong volume, and I anticipate that will be the case again. There are still some challenges, but the team is improving each quarter in terms of managing flow. We are expecting a notable increase in volume this quarter, which should lead to better margins as well.

Okay. Excellent. And then maybe one more on MV-75. When we think about the LRIP units and bringing those forward, are there kind of additional contractual provisions that you can get to protect the company from concurrency risk?

The LRIP has always been included, so I don't anticipate any contractual changes regarding that. To be honest, we're not too concerned about the associated risks. The base configuration of the aircraft is very solid, as it is derived from our work on the V-280. While there are some changes, we are aware of them. We're currently fabricating the first prototype aircraft. By the time we start building the first LRIP aircraft, we will have already built the original V-280 along with eight other aircraft: six EMD and two LUT. Additionally, there has been significant ground testing and component-level testing, and we are already in the process of fabricating parts. We feel confident about addressing any issues that may arise during the initial EMD aircraft phase well before we start on the LRIP aircraft.

Your next question comes from the line of Ron Epstein from Bank of America.

Yes, I’d like to revisit the topic of Systems. How is the unmanned portfolio performing, particularly with unmanned land systems, Shadow, Aerosonde, and others? We’ve observed a significant increase in demand for unmanned technologies. I’m interested in how that’s progressing for your team and whether you have any upcoming developments to further expand in this market.

I believe the Aerosonde program is progressing well. We faced some challenges as we transitioned out of Afghanistan, where many of our aircraft were deployed. Most of those have now been redeployed to different theaters and marine applications, which is performing very well. While we initially expected significant advancements with the FTUAS program, that did not materialize as planned, which was disappointing. However, there remains a strong need for ISR within the brigades, and the frustration regarding delays has prompted a more direct approach, allowing us to provide these systems straight to the brigades, which will drive demand. Though FTUAS won't proceed as it was supposed to, I am optimistic about the opportunities we have to sell this technology directly to the warfighter. There are also international opportunities, as well as prospects with customs and border patrol. Regarding our core platform, Aerosonde, and its transition into the FTUAS configuration, I anticipate we will see notable growth. On the new platforms we are developing, our eAviation segment team at Pipistrel has made progress on the unmanned cargo aircraft, the Nuuva 300, which is currently in flight testing. We have completed tests on Article 1 and are preparing for the final build-out of Article 2, which includes advanced flight control systems. Moving forward, our Textron Systems business will take the lead in bringing these products to market, including the Nuuva unmanned cargo aircraft. Additionally, Pipistrel has established a niche in high-altitude, long-duration unmanned surveillance products, and we are working on new developments in that area as well. These offerings will now be primarily marketed through Textron Systems, enhancing our capabilities in unmanned aircraft.

Your next question comes from the line of Kristine Liwag from Morgan Stanley.

Scott, congrats on your next chapter. I guess over the years, there's always been discussions and conversations with you about the broader Textron portfolio and if it should all belong together or if there are other ways to unlock shareholder value. At this point, all reporting segments are fairly stable. The balance sheet is very strong and the company generates solid free cash flow. I wanted to check with you to see if this management change also signals a reevaluation of the portfolio once again and how you think about it now?

I don't think we would say that the change is driving that. We are always assessing the portfolio. To your point, while we don’t have an urgent issue, we would certainly consider both disposing of or acquiring assets. This is a process that has been ongoing for a while. Earlier this year, we completed the sales related to the Powersports business, which was something we felt was necessary to position the company for the future. We are still looking at other opportunities and I believe we will keep doing that regardless of the leadership change.

Your next question comes from the line of Doug Harned from Bernstein.

If you look at the mix of deliveries across business jets, it's been pretty stable over the last two years. I would have expected more of a shift toward the Latitude and Longitude, but that might have been an incorrect assumption. Are you seeing demand shifts across your portfolio? Is the mix there constrained more by where demand is or by your capacity?

Right now, it's likely more of a capacity issue. The end market demand has been steady. Whether it's the Longitude or Latitude, demand has been pretty stable, often influenced by new products. For example, when we launched the new CJ4 Gen2, we observed a significant increase in order activity, which extended the lead time as people were quite excited about that product. We've seen similar trends with the CJ3 Gen2s and the Ascend. Overall, the end market appears stable, and demand remains strong across our entire product portfolio. Typically, these spikes in order activity can be influenced by the launch of new products, and we’ve had several recently.

Yes. When examining the demand environment you mentioned earlier, how would you describe the mix of demand between corporate clients and high net worth individuals from the beginning of the year to now? Have you noticed any changes? The economic outlook has certainly been quite dynamic over the past nine months.

Yes, it's quite remarkable that despite all the market noise, we're not seeing any impact on demand. There hasn't been any change in any segment or interest due to current events. I think part of this is because people are looking beyond the current noise, as they won't take delivery of their new aircraft for 18 months or so. This has somewhat muted the effect. So, despite everything happening around us, the demand remains stable.

Ladies and gentlemen, this concludes the Textron Third Quarter 2025 Earnings Call. Thank you for joining us today. You may now disconnect.