Earnings Call Transcript - TXT Q1 2026

Operator, Operator

Thank you for standing by. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Textron First Quarter 2026 Earnings Release. I would now like to turn the conference over to Scott Hegstrom, Vice President of Investor Relations. You may begin.

Scott Hegstrom, VP, Investor Relations

Thanks, Joe, and good morning, everyone. Before we begin, I'd like to mention that we will be discussing forward-looking 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 releases. On the call today, we have Lisa Atherton, our Chief Executive Officer; and David Rosenberg, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. With that, I'll turn the call over to Lisa.

Lisa Atherton, Chief Executive Officer

Thank you, Scott. Good morning, everyone, and thank you for joining us. Today is an incredibly exciting and important day for Textron. Our first quarter results highlight a very strong start to the year. We generated $3.7 billion in revenue, representing 12% growth for the quarter. We also grew segment profit in the quarter by 10% to $320 million. This reflects strong performance across each of our aerospace and defense businesses, including robust commercial order activity at both Aviation and Bell. We also generated $1.45 of adjusted EPS, up 13% from a year ago. Turning now to Slide 5. In addition to announcing our first quarter results today, we also announced our intent to separate our Industrial segment from our aerospace and defense businesses. This is a consequential and exciting step in our evolution, establishing New Textron as a pure-play aerospace and defense company aligned to its core franchises of Textron Aviation, Bell and Textron Systems. In terms of structure, we intend to explore multiple paths to effect this planned separation, including a sale of the industrial businesses or a tax-free spin-off into a stand-alone publicly traded company. We will work through alternatives on the approach over the coming quarters and are targeting a completion of the separation within 12 to 18 months. In the interim, we will continue to operate in the normal course of business. Turning to Slide 6. We believe these actions will drive long-term value for our shareholders. First and foremost, this establishes New Textron as a pure-play aerospace and defense company. Each of our aerospace and defense franchises are aligned with highly attractive end markets with tremendous opportunities in front of them. For New Textron, this separation also enhances clarity around our capital allocation and investments as well as our strategic flexibility. The MV-75 Cheyenne program is a perfect example. We are pulling forward our investment as we support the program's acceleration, which is aligned with our long-term growth strategy. As for Industrial, these same principles apply. The business will benefit from a tailored capital allocation and new strategic flexibility. The investment in growth opportunities such as Pentatonic, Allegro and PACE technologies are good examples of this. While we've considered variations of this in the past, now is the right time as both our aerospace and defense and industrial businesses are well positioned for the future. In aerospace and defense, Textron Aviation is in a very strong position having increased its backlog by more than four times since pre-COVID from $1.7 billion in 2019 to $8 billion at the end of this quarter. Bell is advancing rapidly on the MV-75 Cheyenne and will soon move into prototype deliveries and Textron Systems is also showing solid growth across programs of record such as Ship-to-Shore and ATAC. In Industrial, Kautex continues to perform well and Textron Specialized Vehicles is operating from a stronger footing following last year's powersports divestiture. So overall, Textron is well positioned to pursue the separation of our aerospace and defense and industrial businesses. Turning to Slide 7. New Textron would have approximately $12 billion in revenue and $1.2 billion in segment profit as a pure-play company. Aviation is a leader in each of these segments and continues to see healthy demand and utilization across its portfolio. That is at the forefront of an outsized growth stage as the MV-75 Cheyenne program ramps — the business is positioned to significantly increase its revenue as we move from development to production over the next few years and benefit from the Army's planned production run of over 25 years. Systems has compelling growth drivers across several areas, including advanced materials for hypersonic applications, shipbuilding, manned and unmanned air, land and sea vehicles. The recently proposed federal fiscal year 2027 budget that calls for increased defense spending would be a strong tailwind for the industry, providing increased visibility and stability across our defense offerings. Moving to Slide 8. The separation significantly improves the financial profile for Textron. New Textron would have top-line growth approximately 150 basis points higher. Segment profit margin would be about 120 basis points higher, and our strong backlog of $19.2 billion is 100% related to the aerospace and defense businesses. On Page 9, we see New Textron's aerospace and defense franchises, each of which excel at turning advanced aerospace and defense capabilities into practical advantages for our customers and their missions. Some of these key offerings include the Citation Latitude, the number-one best-selling midsized business jet, the recently certified Citation Ascend and the upcoming Beechcraft Denali. The Beechcraft King Air franchise is the best-selling turboprop in history. The MV-75 Cheyenne flying twice as far and twice as fast is a fundamental step function for military aviation. The Ship-to-Shore Connector, the ATAC programs of record and our unique advanced material capabilities, which were most recently seen in action with the Artemis mission around the moon, are core to the Sentinel program. These all leverage our world-class engineering capabilities across design, test, certification and build with a long track record of innovation. Underlying these offerings, we have a large installed base, which supports a robust aftermarket business that has experienced steady growth over the last few years. Textron Aviation has built approximately 25,000 aircraft in its history and has the largest installed base in general aviation, nearly four times the next largest. Bell has an installed base of approximately 13,000 commercial and military aircraft. These significant installed bases drive an attractive aftermarket business that represents over 30% of New Textron revenue. We are very excited about how this positions New Textron to drive value going forward. On the military side, Textron sits where aerospace precision meets defense urgency, and this is exactly where our future is being built. As we continue to scale the MV-75 Cheyenne program and move toward production lots, we expect that the revenue and margin profile will follow. Beyond MV-75, we are well positioned on new opportunities that can leverage significant technology from the MV-75 like the U.S. Marine Corps Future Attack Reconnaissance program and other advanced programs. Flight School Next, a new program to train Army aviators at Fort Rucker for which we are competing, is also positioned as a potential growth opportunity for Bell leveraging our proven 505 helicopter. Systems is anchored by strong programs of record with growth drivers that include Ship-to-Shore, ATAC and Sentinel. In addition, the ARV preproduction contract advances a future growth opportunity for the business. The defense spending environment provides a very favorable backdrop for the longer term where our offerings are very well positioned. As this relates to the Textron Aviation and Bell commercial businesses, we are in a great place with the investments we have made over the last decade. Our product portfolio is second to none. Textron Aviation has a proven track record of clean-sheet development programs like the Latitude, the Longitude, SkyCourier and soon the Denali. We have also been very successful at upgrades like the recent Gen 2s and Ascend as well as the upcoming Gen 3s for the light jets. And at Bell, the 525 will be the first commercial fly-by-wire helicopter. Our sizable backlog illustrates the market demand for our products is significant and continuing to grow. Looking ahead, we are focused on increasing our operational efficiency and performance to drive growth and enhance profitability. We will do this by reallocating some of our R&D investment into our supply chains and factories. To be clear, there are no silver bullets there, but it is where we will be putting our focus. Turning now to Industrial on Slide 10. This is a $3-plus billion business with strong operations, well-established brands, leading market positions and real growth drivers. We believe it will thrive independent from New Textron. It is composed of Kautex and Specialized Vehicles. Kautex is a Tier 1 auto supplier. Its primary product line is fuel systems for the automotive industry. Kautex has also built a meaningful position in hybrid fuel tanks, which is a growing part of the industry. The Pentatonic battery and closure business supports EV and hybrid platforms, including the Rivian R1 and a major European OEM start of production plan for 2027. Its Allegro cleaning systems is another growth platform focused on solutions to clean autonomous vehicle cameras and sensors. Specialized Vehicles is anchored by the E-Z-GO golf car business. E-Z-GO is one of the most recognizable brands in golf. Specialized Vehicles also includes personal transportation vehicles, Ransomes Jacobsen turf equipment, Cushman vehicles and tug ground support equipment. This business stands to benefit from near-term growth driven by the lease renewal cycle and market recovery. Overall, our industrial businesses have well-established brands, product offerings and strong market positions. Before I turn it over to Dave to give you an update on our first quarter results, I'll quickly highlight a few of our achievements in the quarter, starting with Aviation on Slide 12. We got off to a strong start to the year with 37 jet deliveries and 35 commercial turboprop deliveries. These are both up nicely from a year ago as we continue to drive throughput in our factories. We also saw strong aftermarket performance, which resulted in 10% growth in aftermarket revenues. In terms of market conditions, order activity continues to be healthy as we grew our backlog in the quarter while also delivering double-digit growth in jets and commercial turboprops. Some notable wins for the team include Luminaire, a European jet operator placing a fleet order in the first quarter, which will bring its total to nine Latitudes, supporting its charter operations across Europe, and an order from Belgium's special operations forces for five SkyCouriers marking our first military order for the aircraft and highlighting the utility of the SkyCourier not only in the commercial market but also in defense and special missions applications. From an industry perspective, recent data underscores Textron Aviation's leadership in general aviation as we once again topped the industry in total business jet deliveries, total turbine aircraft deliveries and total turboprop deliveries. Moving to Bell on Slide 13. The Army has announced the name of the MV-75 aircraft as the Cheyenne. This underscores the continued commitment by the Army and marks a pivotal moment for the program. All subsystem critical design reviews, or CDRs, have been executed with the exception of completing the weapon system CDR later this summer. The Army is preparing for tilt-rotor operations with support from the V-22, helping the Army's 101st Airborne in training exercises to develop the tactics, techniques and procedures to take full advantage of the additional range and speed. Sales progress is supported by a series of investments Textron is making to support successful development and acceleration of production. As I mentioned earlier, the recently proposed 2027 budget calls for a significant increase in defense spending. As this relates to the MV-75 Cheyenne, the Future Years Defense Program, or FYDP, calls for $2.3 billion of funding for 2027 scaling to $3.8 billion in FY '31 across research, development, test and evaluation as well as procurement. The procurement budget also shows quantities of eight units in FY '28, scaling to 12 then 27 in FY '31, consistent with the Secretary of the Army's direction to accelerate the program. Regarding near-term funding for the MV-75 program, the Army has informed us that it is actively pursuing additional funding to support the acceleration profile for the remainder of the government fiscal year '26. This funding aligns with the Army's directive last summer to accelerate the program, which occurred after their FY '26 budget request was submitted. We remain confident in the Army's commitment to securing this funding as evidenced by the ongoing process and the strong funding request in the recently released fit-up. During the quarter, Bell completed the critical design review on the DARPA X-Plane program, which is now called the X-76. Bell will now begin building a brand-new X-plane with first-of-its-kind stow-fold technology. Bell was also recently down-selected to the fourth and final phase of the Flight School Next competition. As part of this phase, Bell conducted flight simulator and digital twin demonstrations at Redstone Arsenal. We expect the Army to select a winner for the competition later this summer. Turning to Slide 14. Systems also continues to grow its business. They generated double-digit growth in the quarter and continued to make progress on new pursuits. Earlier this month, Textron Systems received a preproduction development award from the U.S. Marine Corps for its advanced reconnaissance vehicle, or ARV, program. This $450 million award will include delivery of 16 vehicles, three systems integration labs and four blast holes. Textron Systems was also awarded a prototype agreement from the U.S. Army for the low-altitude stocking and strike ordnance program, or LASSO. Under the prototype agreement, Systems will deliver a loitering munition system and demonstrate it to the Army. As you can see on Slide 15, both Kautex and Textron Specialized Vehicles are executing very well and generating improving financial results. The segment had positive organic growth in the quarter, and Kautex secured its largest award to date for its hybrid plastic fuel tank offering. Overall, we had a very strong start to the year, and I'll now pass it over to Dave to provide some more details on the financials.

David Rosenberg, Chief Financial Officer

Thank you, Lisa, and good morning, everyone. Turning to Slide 18 of the earnings presentation. We had a strong start to the year with revenues in the quarter of $3.7 billion, up 12% or $389 million from last year's first quarter. Segment profit in the quarter was also strong at $320 million, up 10% or $30 million from the first quarter of 2025. During this year's first quarter, adjusted net income was $1.45 per share compared to $1.28 per share in last year's first quarter. Manufacturing cash flow before pension contributions reflected a use of cash of $228 million, compared to a use of $158 million in last year's first quarter. During the quarter, we repurchased approximately 1.8 million shares, returning $168 million in cash to shareholders. Before we get into the segments, I'd like to remind you that we realigned the Textron Aviation segment business across Textron Aviation, Textron Systems and corporate at the beginning of this year, eliminating Textron Aviation as a separate reporting segment. The results here reflect that realignment for 2026 for the 2025 comparison period on a recast basis. Now let's review how each of the segments contributed, starting with Textron Aviation. On Slide 19, revenues at Textron Aviation of $1.5 billion were up $269 million or 22% from the first quarter of 2025. Aircraft revenue in the quarter was $954 million, up $221 million or 30% from a year ago. This was driven by volume and mix as we increased Citation jet deliveries from 31 to 37 and commercial turboprop deliveries from 30 to 35. Aftermarket revenue in the quarter was $531 million, up $48 million or 10% from a year ago. Segment profit was $154 million in the quarter, up $32 million compared with the first quarter of 2025. This represents a profit margin of 10.4%. We also continue to see solid order flow and customer demand across our product lines, ending the quarter with $8 billion of backlog, up $276 million from the end of 2025. Looking at Bell, revenues of $1.1 billion were up $87 million or 9% from the first quarter of 2025. Military revenues were $795 million, up $161 million or 25% driven by growth on the MV-75 Cheyenne program, partially offset by reduced revenue on V-22 production and on our military sustainment programs. Commercial revenues were $275 million, down $74 million, reflecting lower volume and mix. Segment profit of $72 million was down $18 million from a year ago, primarily reflecting an unfavorable impact from the mix of military programs and lower commercial volume and mix. Backlog in the segment ended the quarter at $7.6 billion. At Textron Systems, we had a good start to the year with revenues of $338 million, up $39 million or 13% from last year's first quarter. Revenue growth was driven primarily by higher volume on the Ship-to-Shore program and military training programs provided by ATAC, partially offset by lower net volume on other programs. Backlog in the segment ended the quarter at $3.6 billion, an increase of $255 million in the quarter. Segment profit was $42 million in the first quarter, which generated a strong segment profit margin of 12.4%. Looking at Industrial, revenues were $786 million, down $6 million from last year's first quarter. Textron Specialized Vehicles revenue was $300 million, down $42 million, largely reflecting a $55 million impact from the divestiture of the powersports business in 2025. Kautex revenues were $486 million, up $36 million or 8% from a year ago, primarily due to a favorable impact of $20 million from foreign exchange rate fluctuations and higher volume and mix. On an organic basis, revenues in Industrial were up $29 million or 4% given the first quarter of last year still included the powersports business. Segment profit of $40 million was up $10 million from the first quarter of 2025, largely due to manufacturing efficiencies. Finance segment revenues were $16 million and profit was $12 million in the first quarter of 2026, as compared to segment revenues of $16 million and profit of $10 million in the first quarter of 2025. With that, I will turn it back to Lisa for closing remarks.

Lisa Atherton, Chief Executive Officer

Thanks, Dave. And as we wrap up, Slide 21 just highlights a few of the many attributes that make New Textron a compelling pure-play aerospace and defense business. We have the best-in-class brands and best-in-class products with leading segment positions. But I also want to highlight that we have the people in place to maximize our future with a deep bench of technical expertise and a track record of innovation and execution at scale. This concludes our prepared remarks, and we are happy to open the line now for questions.

Operator, Operator

The first question comes from Sheila Kahyaoglu of Jefferies.

Sheila Kahyaoglu, Analyst, Jefferies

Can you maybe — the industrial separation has been a long time coming. Can you maybe provide a little bit more on what led to the decision? Why now? Was it just the growth in the MV-75 portfolio at the Cheyenne and how you see that? If you could elaborate?

Lisa Atherton, Chief Executive Officer

Thanks, Sheila. Look, it's just — it's the right answer for both of our aerospace and defense and industrial businesses at this moment in time, and it provides clarity and simplification on our capital allocation and investments and, frankly, it also just aligns them both with their respective natural shareholder bases. And we're in a position, as you point out, why now as compared to a few years ago — it's a result of all the hard work and accomplishments that we've achieved over the last 10 years in order to position the various businesses to be able to stand on their own. We've won, we're scaling MV-75. As I mentioned, we've upgraded the aviation portfolio. We've got clean-sheet programs like the Latitude, Longitude, SkyCourier and Denali, upgrades such as Ascend and the Gen 2s, with Gen 3s coming for the light jets. Systems has key programs of record now scaling and a good pipeline. We just have the synergies and core context of all of those businesses to come together as a strong pure-play aerospace and defense company. What's different now is that Kautex and Specialized Vehicles are both very well run and their end markets are in a stronger place and in good positions right now, with the progress Kautex has made with offerings like Pentatonic and Allegro and how it is gaining customer traction and growth, as well as Specialized Vehicles being anchored by one of the most recognizable brands in golf with E-Z-GO. Candidly, the divestiture of Powersports just puts them in a better operating position. So we just believe that now is the right time in order to make this move, and we're excited to see what the future holds for us.

Operator, Operator

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

Myles Walton, Analyst, Wolfe Research

On aviation, can you speak to the market environment for order activity and anything that's changing given the ongoing Middle East conflicts? And then, Lisa, you mentioned repositioning some of your R&D funding into the supply chain. Could you just elaborate on what that means in quantity?

Lisa Atherton, Chief Executive Officer

Sure. Regarding order activity, we had a very strong quarter of order activity across both Aviation and Bell. They had their best Q1 bookings in four years, frankly, since Q1 of 2022. So really strong orders across the board. In Aviation, I highlighted the Luminaire and Belgium special forces wins in the prepared remarks, and we ended the quarter with our backlog at $8 billion for Aviation in particular. We also have some pretty strong bookings that they're working forward into Q2. Bell is also winning new business in the commercial market. They had a purchase order for the National Transmission Company of South Africa. On the defense side, Bell was down-selected to the final phase of Flight School Next. As I mentioned, the preproduction contract for the ARV and the Army's prototype agreement for LASSO all contribute to this strong order activity and a backlog of $19.2 billion across the business. When you ask about repositioning some of the funding toward the supply chain and factories, that's really the area that we need to focus on across our business. What we're signalling here is we're not looking to increase total investment. We're going to maintain the same levels of investment that we have across the business, but we're likely going to take a portion of that and focus it on making our factories much more effective. There are a lot of tools and capabilities available now that we need to enable our workforce to have better, more streamlined factory flow. We're looking at that as we go through this strategic review, and you'll see us start investing in that. Hopefully, we'll see the yield of that in better production output.

Operator, Operator

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

Robert Stallard, Analyst, Vertical Research

A couple of questions for you on Aviation. First, can you give us an update on what you think the cadence of deliveries will be in this division through the year and whether you expect this aftermarket growth rate to be maintained? And then secondly, on the Aviation supply chain: did you see any improvement in that in the first quarter?

David Rosenberg, Chief Financial Officer

Robert, as we look at Q1, this was expected that we're about 100 basis points below the midpoint of the guide. The key factor there is some of the inefficiencies from last year are rolling through the income statement in Q1, and that's causing a little bit of headwinds. As we think about the cadence for the rest of the year, we would expect sequential improvement each quarter with the margin peak being in Q4. You should expect deliveries to increase each quarter this year, and we'd also expect efficiencies to improve throughout the year, especially in the second half.

Lisa Atherton, Chief Executive Officer

On your supply chain question: we continue to work with our key suppliers. It's mainly around engines, as we mentioned on the call last quarter that we continue to work through those issues every day to get them in. But I will say we're not seeing as many systemic supply chain issues as we have over the past several years. We are starting to see things improve. If you look at our out-the-door statistics on some of our platforms, those are starting to improve. Things still get lumpy along the way and we still have issues pop up, but overall we're starting to see a trend of better performance at large. Teams are still fighting different little fires, but on-time delivery from suppliers and higher quality performance are improving.

Operator, Operator

Your next question comes from the line of Peter Arment of Baird.

Peter Arment, Analyst, Baird

Nice results. Lisa, maybe just quickly on the year — kind of a low point — maybe give us a little of the puts and takes you're thinking about for the year and when — given your annual guidance, how should we be thinking about it from here given the volume that you're seeing on the MV-75?

Lisa Atherton, Chief Executive Officer

I appreciate that. It was a strong start to the year. I think it's a little early for us to start thinking about changing the guide. If we continue to see strong performance, we'll evaluate that as we go forward for the back half of the year. On MV-75, I don't see us changing what we saw: we expect roughly flat year-over-year revenues for the program. We do continue to see that potential acceleration pull from the Army, as we mentioned. If they receive those additional funds, we'll see that kind of flow into the business, but we need to see the Army secure those additional funds as they go through their procedures.

Operator, Operator

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

Alex, Analyst, JPMorgan (on for Seth Seifman)

This is Alex on for Seth. A follow-up on the industrial situation: as you evaluate options between either selling the business or spinning it off, do you have any initial thoughts on which option is more likely at this point? And when thinking about the two businesses between Kautex and Specialized Vehicles, is the expectation that those would be spun off or sold together, or could they be broken up into separate pieces?

Lisa Atherton, Chief Executive Officer

I think you outlined the options we're looking at. We don't have a decided course of action yet that we're ready to declare. We are going to run the process and explore all of those alternatives. A spin is the longest path and provides certainty in the long term, and we're going to prepare for that, but we're also exploring sale options, whether selling the businesses together or separately. Those options are all on the table. As the process evolves and interest is received, we'll do what's in the best interest of our shareholders. We'll keep you posted as we make decisions.

Operator, Operator

Your next question comes from the line of John Godyn of Citi.

John Godyn, Analyst, Citi

Lisa, I wanted to think through the conflict in the Middle East and what that means for Textron. Fuel prices have doubled. On the aviation side, it's hard to believe that a doubling in fuel prices doesn't impact things. On the other hand, some of us remember the boom years in bizjet in '06/'07, which were positively correlated to oil prices. On the defense exposures, is anything pivoting on the back of what's going on in the Middle East? Any imminent demand signals or how the portfolio is expected to respond would be helpful.

Lisa Atherton, Chief Executive Officer

To date, we have not seen a material impact from the ongoing conflict. We monitor the impact of higher oil prices, and as you point out, that has both positives and negatives across our end markets. On aviation and helicopters in particular, there's some positive correlation to higher fuel prices. We're watching it closely, but it's a bit early to see the full effects in customer capital allocation. On the defense side, our programs continue to perform. The recent budget activity is a signal of increased investment and robustness across the defense portfolio. You're starting to see broad support across defense programs, which is favorable for our business, though I wouldn't point to any single program as a direct immediate effect right now.

Operator, Operator

Your next question comes from the line of Noah Poponak of Goldman Sachs.

Noah Poponak, Analyst, Goldman Sachs

Two questions. Lisa, on Aviation, your discussion around investing in supply chain and manufacturing improvements suggests a view that supply should be higher. How are you balancing wanting to grow and get customers' jets with protecting against downside cyclicality? How are you thinking about where you want supply over the medium term? And then, Dave, on Bell margin, can you give us more color on the year-over-year change and how it progresses to get to the guidance for the year?

Lisa Atherton, Chief Executive Officer

That's a great question. You're exactly right: we don't want to disrupt the very strong backlog we have. There are certain models where a focused investment could reduce lead times and better align with customer expectations. Some models are sold out for years, and if we could bring certain lead times closer to 18 months, that would be more attractive to customers. Those are the areas where we would do focused improvements in both factories and the supply chain.

David Rosenberg, Chief Financial Officer

So Noah, on Bell: looking at Q1 of this year versus last year, we're down on margin percent as well as dollars. Two factors to consider: we were down on commercial helicopter deliveries, partly due to timing of deliveries and contract milestones and some delays finishing helicopters for the quarter. We expect commercial to normalize throughout the year. We also had higher MV-75 revenue in the quarter, offset by some decline in our legacy military business. Net-net, that results in overall lower margins in Q1. You can expect improvement over the next three quarters, particularly with higher commercial volume, getting us toward our guide of between 8% and 9% margin for Bell.

Noah Poponak, Analyst, Goldman Sachs

Thanks. Lisa, if I took the entire portfolio to 18 months, it would imply roughly 200 total deliveries. Are you saying that's not everything should be at 18 months? Do you think the equilibrium is 200 or 220, or is that hard to put a number to?

Lisa Atherton, Chief Executive Officer

I think your ballpark is right around 200. I think that's an accurate estimate for the equilibrium.

Operator, Operator

Your next question comes from the line of David Strauss of Wells Fargo.

Josh Corin, Analyst, Wells Fargo (on for David Strauss)

I wanted to ask: I think you were planning on taking that charge on MV-75 later this year or early next as the program ramps. Is there any change to your expectation in the size or timing of the charge?

David Rosenberg, Chief Financial Officer

No change in our expectation on the size. The cumulative catch-up was $60 million to $110 million as we stated previously. The timing depends on when the LRIP is exercised by the government, and there's no change in our expectation that this could be as early as the second half of this year or possibly could flow into the first half of next year. Nothing has changed from our perspective as we sit today.

Operator, Operator

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

Gavin Parsons, Analyst, UBS

Lisa, you mentioned Textron considered strategic alternatives on Industrial in the past. What are the hurdles to getting this done? Is there a minimum return threshold you're looking for to ensure it's not a dilutive transaction?

Lisa Atherton, Chief Executive Officer

It's a little early to comment specifically on the level of dilution. It will depend on the structure and proceeds we would get. In addition to the benefits of clarity and flexibility, the businesses have different natural investor bases and different valuation frameworks. We will let the market assess the valuation, but I do think New Textron has higher growth and stronger margins, which should support stronger valuation over time. In the past, the timing wasn't right based on the strength of the industrial end markets. Now, given the positive growth and performance out of both Kautex and Specialized Vehicles, it makes sense to pursue this separation.

Operator, Operator

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

Kristine Liwag, Analyst, Morgan Stanley

Lisa, post the industrial separation, and with more time to allocate to the core aerospace and defense, can you talk more about how you're thinking about potential capital allocation within that core business? Are there platforms or capabilities you plan to spend more time on, and are there areas you're willing to lean in more versus potentially rationalize?

Lisa Atherton, Chief Executive Officer

Our intent is to lean in more on the aerospace and defense space rather than rationalize. With a pure-play structure anchored across commercial and military aircraft, we'll leverage the engineering capabilities we have across the business and look to be additive to the portfolio, particularly around Systems. We see an opportunity to grow that area more strongly.

Kristine Liwag, Analyst, Morgan Stanley

A follow-up on Systems: as the U.S. accelerates toward unmanned and there's a lot more nontraditional, lower-cost competitors, how do you balance cost, speed, autonomy with the performance the DoD wants today? What is the competitive dynamic like and where could Systems leverage strengths in that industry?

Lisa Atherton, Chief Executive Officer

Systems has decades and millions of hours of proven capabilities across unmanned platforms in three domains. Many lower-cost entrants supply simpler platforms, but our offerings address more complicated, technical aspects where customers need robustness and durability for repeated use. Examples include the Ripsaw platform we're designing for the Marine Corps and our loitering ISR capabilities that provide many hours of endurance. We also have growth in unmanned surface vehicles for mine hunting and other missions, and our systems integration capabilities are more complex than many entrants. We're also open to partnering with other entrants where appropriate, and you'll see Systems continue to pursue partnerships over time.

Operator, Operator

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

Ron Epstein, Analyst, Bank of America

When thinking about moving forward with an aerospace and defense-focused business, how are you factoring AI and AI-driven autonomy into Systems? On something like X-76, it seems like a platform that could generate a lot of interest. How are you thinking about that and the opportunity? Also, aerial unmanned systems: given your capabilities across propulsion and Aviation, is there more you could do in aerial unmanned systems?

Lisa Atherton, Chief Executive Officer

First, on collaboration and synergies across the businesses: we plan to combine engineering, technology and talent across Systems, Aviation and Bell to generate ideas, platforms and breakthroughs. On X-76, whether or not AI autonomy will be used as the brain of the platform remains to be seen; the current proving out of the X-76 centers on the stow-fold technology itself, and it will be an unmanned platform. As that program evolves, our expertise with MOSA architecture and other capabilities will naturally apply. There's considerable capability across Textron that we can bring together in this pure-play aerospace and defense space, and I plan to continue to drive that collaboration. We've done it in the past and will seek to do more.

Ron Epstein, Analyst, Bank of America

Culturally, how do you achieve this given organizational differences and independence across parts of the company? How do you shift culture to support collaboration across a core A&D engineering group that serves the whole company?

Lisa Atherton, Chief Executive Officer

Culture takes time to evolve, but we are on that journey. Part of my expectation is continued collaboration across the businesses, such as sharing strategic business reviews and creating exposure to what other parts of the company are doing. This helps teams identify where they can support each other. I expect this to continue to evolve and I'm optimistic the team is excited about working together.

Ron Epstein, Analyst, Bank of America

One quick financial detail: the industrial business over the years, we heard there'd be too much tax leakage to spin it. How should we think about the tax impact?

David Rosenberg, Chief Financial Officer

You have different considerations regarding tax impact. There's potential repatriation of cash to think about, transaction expenses and potential tax leakage on the transaction itself. We believe both of those can be managed in whatever structure we end up doing. As we mentioned in our release, in a spin scenario we believe it could be done on a tax-free basis.

Operator, Operator

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

Douglas Harned, Analyst, Bernstein

In Systems, looking out five years, what are the underlying differentiated capabilities and the types of programs you see yourselves best positioned for? Ship-to-Shore Connector has been going well, but longer term, what underpins Systems' advantage?

Lisa Atherton, Chief Executive Officer

First, Sentinel as a program continues to mature into production and we are a key Tier 1 supplier to Northrop Grumman on that program, so that will be a key underpinning of Systems' portfolio. Additionally, on the ground side, the Armored Reconnaissance Vehicle (ARV) as well as other competitions like the XM30 (if referenced in future) represent important opportunities; Textron Systems is competing in both and those decisions will occur in the next two to three years. I believe you'll see us in position on one or both of those programs. Those programs and the sustained pipeline underpin the go-forward performance in Systems.

Douglas Harned, Analyst, Bernstein

And for Bell, beyond MV-75, can you give a sense of timing and scale of potential new opportunities over the next few years and beyond MV-75?

Lisa Atherton, Chief Executive Officer

Flight School Next will be decided by the end of next quarter, so we'll have clarity within roughly 90 days and it could be a strong opportunity for Bell for the next 25 years. For the Marine Corps H-1 program and V-22 sustainment, there's ongoing work on nacelle improvements and electrical power upgrades which present upside. On the commercial side, certification and entry of the 525 into the commercial backlog will lead to stronger growth toward the back end of this decade and into the next.

Operator, Operator

And your last question comes from the line of Gautam Khanna of TD Cowen.

Gautam Khanna, Analyst, TD Cowen

Congratulations on the announcement. Are there any dis-synergies you can point to from the separation? You mentioned tax, but any sense of dis-synergies early on?

David Rosenberg, Chief Financial Officer

As part of the process we've analyzed potential dis-synergies. There would be a minimal level of stranded costs that we believe we can manage through. Otherwise, there is nothing of significant nature from a dis-synergy perspective; the stranded costs are very minimal.

Gautam Khanna, Analyst, TD Cowen

Lisa, is this the end of the portfolio review or might you continue to evaluate other assets? Are there parts of the aerospace and defense franchise you might scale back as part of this process?

Lisa Atherton, Chief Executive Officer

Great question. I would say we're looking to lean in and grow versus scaling back. The focus is on strengthening the aerospace and defense portfolio and pursuing growth opportunities within that franchise.

Operator, Operator

With no further questions, that concludes our Q&A session, and this also concludes today's conference call. You may now disconnect.