Textron Q2 2024 Earnings Call Transcript

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Textron Second Quarter 2024 Earnings Release Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host, Vice President, Investor Relations, Mr. Dave Rosenberg. Please go ahead.

[David Rosenberg, Vice President, Investor Relations at Textron]

Thanks, Greg, 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 $3.5 billion, up from $3.4 billion in last year's second quarter. During this year's second quarter, adjusted income from continuing operations was $1.54 per share, compared to $1.46 per share in last year's second quarter. Manufacturing cash flow before pension contributions totaled $320 million in the quarter, compared to $242 million in the second quarter of 2023.

With that, I'll turn the call over to Scott.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Thanks, David, and good morning, everyone. Aviation had higher segment revenues of $1.5 billion, generating a profit of $195 million, up $24 million from the second quarter 2023. We delivered 44 commercial turboprops, up from 37 last year, and 42 jets, down from 44 in last year's second quarter, while aftermarket revenues grew 13%. Aviation continued to see strong demand across all product lines. Backlog ended the quarter at $7.5 billion, up $118 million from the first quarter of this year.

In the quarter, Aviation began deliveries of the King Air 260 under the multiengine training systems contract for the U.S. Navy. To date, we've been awarded 35 aircraft of a possible 64 on the program. Also, during the quarter, Aviation certified a third variant of the Cessna SkyCourier. Combi version allows operators to transport passengers and cargo simultaneously. Combined with the previously certified passenger and cargo variants, this latest variant continues to demonstrate the versatility of the aircraft to our customers.

In June, Aviation completed the first flight of a Cessna Citation Ascend. The aircraft is the first conforming production flight test aircraft and represents a significant milestone for the program. To date, we have completed over 400 hours of flight testing.

At Bell, revenues and profit in the quarter were up as compared to the second quarter last year. On the commercial side, Bell delivered 32 helicopters, down from 35 in last year's second quarter. Moving to military, Bell completed the FLRAA preliminary design review while also continuing to release engineering drawings and place orders for long lead material as the program continues to ramp.

In the quarter, Bell was down-selected as one of two companies for the next phase of DARPA's Speed and Runway-Independent Technologies X-Plane Program to create a prototype high-speed vertical takeoff and landing aircraft for the U.S. Military. This program builds on Bell's success as the leader in tiltrotor technology.

Textron Systems realized higher revenues, while continuing to pursue new program opportunities in the quarter. Systems was awarded Options 3 and 4 for the FTUAS program in the second quarter. This award includes the delivery of an Aerosonde Hybrid Quad system to the U.S. Army for test and evaluation. As part of the Army's Robotic Combat Vehicle competition, we announced a collaboration with Kodiak Robotics. Kodiak will integrate its industry-leading autonomous system into a Textron Systems' purpose-built uncrewed military vehicle to demonstrate the autonomous operations later in 2024.

Moving to Industrial, we experienced lower revenues and operating profit in the quarter. As expected, we continue to see softer demand in our consumer and automotive end markets. We continue to execute on our cost reduction plan to position the cost structure for a lower-volume environment. As a result, we saw a sequential margin improvement in Q2, and expect to see this improvement in the second half of 2024.

Moving to Aviation, during the quarter, we completed the acquisition of Amazilia Aerospace. The Amazilia team has expertise in digital flight controls, flight guidance, and vehicle management systems for manned and unmanned aircraft. We plan on integrating their products and capabilities into our new platforms, such as the Nuuva and Surveyor. Nuuva program reached a significant milestone with the completion of vehicle one assembly. The prototype vehicle has entered ground testing, which supports anticipated hover flight later this year.

With that, I'll turn the call over to Frank.

[Frank T. Connor, Executive Vice President And Chief Financial Officer at Textron]

Thanks, 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 $113 million from the second quarter of 2023, reflecting higher pricing of $57 million and higher volume and mix of $56 million. Segment profit was $195 million in the second quarter, up $24 million from a year ago, due to higher volume and mix of $35 million and favorable pricing net of inflation of $22 million, partially offset by an unfavorable impact from performance of $33 million. Backlog in the segment ended the quarter at $7.5 billion, up $118 million from the first quarter.

Moving to Bell. Revenues were $794 million, up $93 million from last year, primarily due to higher military volume of $104 million as we continue to ramp the FLRAA program. Segment profit of $82 million was up $17 million from last year's second quarter, largely due to a favorable impact from performance of $39 million, which included lower research and development costs, partially offset by mix. Backlog in the segment ended the quarter at $4.2 billion.

At Textron Systems, revenues were $323 million, up $17 million from last year's second quarter, largely due to higher volume of $14 million. Segment profit of $35 million was down $2 million from a year ago. Backlog in the segment ended the quarter at $1.7 billion.

Industrial revenues were $914 million, down $112 million from last year's second quarter, mainly due to lower volume and mix of $119 million. Segment profit of $42 million was down $37 million from the second quarter of 2023, primarily due to lower volume and mix.

Textron eAviation segment revenues were $9 million, and segment loss was $18 million in the second quarter of 2024, compared to a segment loss of $12 million in the second quarter of 2023. Finance segment revenues were $12 million, and profit was $7 million.

Moving below segment profit. Corporate expenses were $17 million. Net interest expense for the manufacturing group was $20 million. LIFO inventory provision was $27 million. Intangible asset amortization was $9 million. Special charges related to the previously announced restructuring were $13 million, and the non-service components of pension and post-retirement income were $66 million.

In the quarter, we repurchased approximately 4.1 million shares, returning $358 million in cash to shareholders. Year-to-date, we have repurchased approximately 7.7 million shares, returning $675 million in cash to shareholders.

That concludes our prepared remarks. Greg, we can open the line for questions.

Questions and Answers

[Operator]

[Operator Instructions] Your first question comes from the line of Peter Arment from Baird. Please go ahead.

[Peter Arment, Analyst at Robert W. Baird & Co., Inc.]

Yeah, good morning, Scott and Frank. Nice results. Scott, your book to bill over 1 in Aviation. Maybe you could just give us a little color on what you're seeing in the market environment and any color on pricing and what aftermarket also did in the quarter.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Sure, Peter. Yeah, look, I think the end market continues to be robust. We're seeing strong demand in jets, turboprops. It's pretty much across all models and across the whole family of products, which is great. Strong response to a lot of the upgrades that we've done here recently in terms of existing models. And obviously, we'll expect, as we go in the back half of the year, to see continued strength in new launches like the Ascend and such.

So, I would say, again, as much as we've seen for the last couple of years, we're still targeting that 1:1 area, but robust demand, which is great. Aircraft are flying, so we continue to see strength in the service business as well. 13% is particularly strong in the quarter, but we feel good about where that's been performing. So, again, for us, I think the whole portfolio is doing pretty good in terms of the end market.

[Peter Arment, Analyst at Robert W. Baird & Co., Inc.]

That's great. And then just a quick one for Frank. Your capex, I think you're $140 million for the first half of the year. I think your guidance is $425 million. So, are you coming in at a slower pace than the guidance or plans to step up? And outside of maybe FLRAA, what are the main drivers of the step-up? Thanks.

[Frank T. Connor, Executive Vice President And Chief Financial Officer at Textron]

Well, we'll continue to see growth in the second half of the year. Obviously, as reflected in those numbers, we're a little slower in the first half than we expected. We tend to be a bit back-end loaded in capex, though. So, we will see growth in the second half. There's probably a little opportunity in that full-year number, given the pace. But for now, that's a number we'll stick with.

[Peter Arment, Analyst at Robert W. Baird & Co., Inc.]

Appreciate the color. Thanks, guys.

[Operator]

Your next question comes from the line of David Strauss from Barclays. Please go ahead.

[David Strauss, Analyst at Barclays Capital]

Thanks. Good morning.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Morning, David.

[David Strauss, Analyst at Barclays Capital]

Morning. Scott, can you just give us an update on supply chain at both Aviation and Bell?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Sure, David. Look, it's still problematic. There are fewer problems, probably, than we used to have, but there are still parts that are from suppliers that continue to give us some heartache with late deliveries. And that does create some of these issues around flow in the factory and rework and [Indecipherable] sequence kind of things. But we've been managing through that, unfortunately, now for a number of years. It does continue to drag on our performance in the Aviation business, particularly. The performance numbers, continue to see factory deficiencies that we would like to get resolved. But I think the team, all in all, is working through that. We're still able to drive higher revenue and higher profit margins.

So, I think, all in all, the business is performing well, despite what's still a tough environment. I think you see most companies reporting and continue to see some challenges in the supply chain. Still a lot of new people, a lot of training inefficiencies, and things like that. But we're working our way through it.

Same thing at Bell. We have a number of deliveries that we miss. We're missing some key components, but we're working with those suppliers. And as I said, the number of them are getting smaller, but in this industry, every part is important. So, we're continuing to have to work our way around, some late deliveries of parts coming in. But as I said, I think, all in all, our team is operational, are fighting through that and getting most of their deliveries done and continue to drive good margins. So, we'll keep our heads down and keep fighting through that through the course of the year, I think.

[David Strauss, Analyst at Barclays Capital]

Okay. Thanks for that. And your first half jet deliveries are relatively flat year over year. Are you still expecting higher jet deliveries for the year? And can you maybe comment on Latitude specifically? The deliveries were lighter year over year there, which was a bit surprising? Thanks.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Look, I think we are still expecting to have higher unit deliveries in '24 than we had in '23. I would say for sure, David, we're a little behind where we would like to be on a couple of these models. Latitude is one in particular where we had a few deliveries towards the end of the quarter that we didn't get out. They've now gone. But we're working those lines hard and addressing some of the issues. Latitude specifically had one item that we had to manage our way through. And I do think we'll see improved performance on that line through the balance of the year. So, the bottom line is that we will have higher unit deliveries and I think overall good mix in the performance of the business. Despite all that, we'll show strong margin performance on a year-over-year basis.

[David Strauss, Analyst at Barclays Capital]

Great, thanks very much.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Sure.

[Operator]

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

[Sheila Kahyaoglu, Analyst at Jefferies & Company, Inc.]

Good morning, guys. Thank you so much. Scott, maybe to start on Aviation. Aviation profitability has been really good, 13.2% in the quarter, I think 150 basis points of net price. So, how do we think about the puts and takes as we go into the second half? And is this low-teens a new level for Aviation profitability?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Look, Sheila, I do think the team is performing well, right? We've got revenues up, margins up, backlog is up. So, we feel pretty good about where the business is. As I said my answer to David's question, it's not always easy. We're still dealing with challenges in supply chain and things of that nature. But I do think that we'll see continued strong margins on a year-over-year basis as we go through the balance of the year. And again, we're feeling good about where the business is. I wish it was easier. It's not, but the guys are working through it.

And I do think that we'll see strong margins. I think we still feel good about our guide. We still think this is probably a $6 billion business this year. I think we'll be well within the guide on the margin front. As we said earlier in the year, I think the price inflation spread, you'll see that getting smaller as the year goes on. But again, I think that'll be in part offset by the fact that we'll continue to drive better efficiencies and performance through the factory.

[Sheila Kahyaoglu, Analyst at Jefferies & Company, Inc.]

Great. And then maybe one on Bell and just the military portfolio there outside of FLRAA. How do you think about V-22 and opportunities there or elsewhere on the military side?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

So, I think the balance of the military business outside of FLRAA is doing well, right? We did add the H-1s from Nigeria. So, that's 12 aircraft. We're able to start ramping that here this year. We saw some benefit of that in the quarter as that program starts to ramp up. V-22 production is still going along. Obviously, the five aircraft that were in FY '24 have now been added. So, we look at that as adding a little bit of base. So, improvement program continues to go.

I think we'll see broader adaptation or acceptance of that here as we go into the future. So, I think there's work going on in the FY '25 budget and beyond that will provide some upgrade opportunities on V-22 as well as H-1. You saw the announcements around SIEPU. So, I do think while the production unit volumes obviously will continue to ramp down, we will see some good flow of upgrade and modernization efforts on both the H-1 and the V-22 lines that will help to keep that solid as we start to ramp and really move towards a production mode of the FLRAA program.

[Sheila Kahyaoglu, Analyst at Jefferies & Company, Inc.]

Great. Thank you.

[Operator]

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

[Myles Walton, Analyst at Wolfe Research]

Thanks. Good morning. I was wondering, Scott, if you could talk about the aftermarket growth. You mentioned 13%, which is a pretty good acceleration given utilization is decelerating. Was there anything or is there anything that's driving that, whether that's non-typical on the military side or mandates or anything of that nature??

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

I think, all in all, Myles, we're continuing to see good growth in the aftermarket business. Demand continues to be strong. Aircraft are flying. We did have a strong military quarter in particular as we build the spares pool around the METS program for the Navy contract, but it's just in general strong on the aftermarket side. Demand is there. Again, people are flying, so consumption is up. People are doing shop visits, so I think we're in a very good place in terms of the aftermarket overall.

[Myles Walton, Analyst at Wolfe Research]

Okay. And then I guess on the performance disclosure, the $33 million drag, I know this can get a little bit apples to oranges comparison, but does that imply that performance actually deteriorated sequentially or didn't improve as much as you had in your baseline plan?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Myles, the performance category is a messy one, as you know, right? So there's a lot of stuff in there. For sure, some of it is just some of those efficiencies that we talked about, right? We're still not at our standard cost, where we would like to be. So, part of that number for sure reflects some manufacturing variance. But, as you know, there's also a lot of other stuff in there, right? The business continues to grow. So, if you look at on a year-over-year basis, SG&A, IRAD, these numbers which are in line on a percent of sales basis, but those actual dollar values on a year-over-year basis also go through that performance line. So, there's natural growth in SG&A, there's natural growth in IRAD, there was a legal settlement in there this quarter. So there's always lots of $3 million, $4 million, $5 million things that go through there, most of which you expect in a business that's growing and continuing to invest.

[Myles Walton, Analyst at Wolfe Research]

Okay, got it. Thanks so much.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Sure.

[Operator]

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

[Douglas Harned, Analyst at AllianceBernstein]

Good morning. Thank you.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Morning.

[Douglas Harned, Analyst at AllianceBernstein]

On the Ascend, you introduced the Ascend at EBACE, and I thought that was interesting. Europe's only, I think, about 7% of Aviation revenues. How are you looking at international markets, particularly Europe, Asia? Do you see those for Aviation as potentially offering a bigger share of your total revenues?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

So, Doug, I don't know if it will change dramatically that overall share of revenue. The jet business obviously has always been more North American-centric. South America has usually been our second-biggest market, then Europe third behind that. So, specifically as you look at Ascend, I think we'll see a similar spread of share, much as we saw over many years with the XLS family. The Ascend, in essence, takes that historical product, which has been a homerun for us, probably the most popular business jet in the world, and modernizes it, gives us great new cockpits, a little bit of thrust bump in the engine side, a much better cabin with a flat floor and larger windows. I think customers will love everything about that aircraft, from crews to passengers, performance.

But I would expect we will see the same kind of share because it really is the product that is hugely strong in that mid-sized bizjet market. But that is still largely a North American market and then secondarily South American and then European. So I would expect we'll see that same kind of share position across all those key segments with the Ascend, as we used to see with the XLS family.

[Douglas Harned, Analyst at AllianceBernstein]

And then on SkyCourier, SkyCourier you're expanding the envelope in which it can serve. How do you ultimately see that market in terms of scale? And how large could the SkyCourier fleet ultimately be?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Well, I think it's going to be a very big market. If you look at the acceptance of that product, right now we're just trying to make them as fast as we can make them. The demand has been really strong. And it's been great to see, Doug, it's everything from the pure cargo version, this thing is a beast in terms of moving cargo around the world. We're seeing a lot of acceptance on small regional airlines, 19-pax seating. And then, obviously, what we did here most recently with the Combi is you have a lot of markets where they need to move pax, but they also need to move cargo. And that's exactly what the Combi was aimed at. So right now, I think, both domestic and international markets, cargo-pax, now the Combi. The issue for us with SkyCourier is to continue to ramp up the production volumes. The demand is there across all those segments and a lot of different geographies.

[Douglas Harned, Analyst at AllianceBernstein]

Okay. Very good. Thank you.

[Operator]

Your next question comes from the line of Seth Seifman from J.P. Morgan. Please go ahead.

[Seth Seifman, Analyst at J.P. Morgan Securities]

Hey, thanks very much and good morning.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Morning, Seth.

[Seth Seifman, Analyst at J.P. Morgan Securities]

I was wondering if you could talk a little bit more about the potential where the margin can go in the Industrial segment in the second half. How much of the benefit of the cost-cutting program you felt like we saw in the second quarter, and how much is still on the come?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Look, Seth, I don't know if I'll give an exact number, but we expect to see it continue to grow as we move through the year. We're not expecting a miraculous turnaround in the end-market demand. We're watching that very closely. So if you look at the numbers Frank went through, we've done about a third of the restructuring costs incurred here in Q2. We'll see another big chunk of that for the most part in the back half of this year as we continue to take costs out of the business to align with that volume. But I think when you look at that, it's probably going to generate -- we're probably still running 100 basis points or something below where we should be. And I think the cost actions that we're taking will square that away. So the strategy right now is keep taking the cost actions, don't assume that you see some miraculous turnaround in terms of that end-consumer demand, and just keep driving sequentially improved margins.

[Seth Seifman, Analyst at J.P. Morgan Securities]

Okay. Great. And then maybe just as a quick follow-up. Very good order activity year-to-date in Aviation. Is there anything you'd say to distinguish where the order activity is coming from with regard to either fleet customers versus individual customers?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

No, we're still seeing the spread is strong pretty much across all the customer base, and both jet and turboprop. So, it's pretty well across all characteristics, no matter how you want to sauce, slice, and dice. It's looking to be continually strong demand.

[Seth Seifman, Analyst at J.P. Morgan Securities]

Excellent. Well, thanks very much.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Sure.

[Operator]

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

[Noah Poponak, Analyst at The Goldman Sachs Group]

Hey, good morning, everyone.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Morning, Noah.

[Frank T. Connor, Executive Vice President And Chief Financial Officer at Textron]

Morning, Noah.

[Noah Poponak, Analyst at The Goldman Sachs Group]

The business jet output just remains, I guess, low relative to how strong demand is and where the backlog is. Are lead times getting long enough that it's an issue for some customers, and you're losing some sales on that, or do you just not care about that because you're managing to price and the margins are good, and you're okay on that front?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Well, I think largely, Noah, this is an industry phenomenon, right? If you're out there, if you had a dramatically different lead time, you might be disadvantaged, but I think everybody is dealing with the same issue. So, we're still out there, obviously, with a book to bill above 1. We're selling, but -- we're delivering aircraft, but we're continuing to take orders into those out years. So, I'd say right now, it's pretty well balanced, and I don't think we're at a competitive advantage or disadvantage right now in terms of availability. We're all out competing, but in the timeline, obviously, based on the backlog, it's out there a 1.5 year, two years in many cases.

[Noah Poponak, Analyst at The Goldman Sachs Group]

Okay. The additional H-1 orders at Bell, can you speak to roughly what that adds annually and how far out in the future that will go?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

No, I don't think so, Noah. The Nigerian order was 12 aircraft. The upgrade programs like SIEPU, that'll go on for quite a number of years, but those aren't all appropriated, so I don't think I would get into that. And the same, I would say on the V-22 program, we think there's missile improvement opportunities. There's a number of other things that are in dialog with our V-22 customers on enhancements. Everybody knows that aircraft's going to be around for a very, very long time. And so, like any military platform, you would expect ongoing investment, upgrades, enhancements, but these are all dialogs and programs that will flow over the years. So, I don't think I would necessarily start to get into a multi-year forecast on those.

[Noah Poponak, Analyst at The Goldman Sachs Group]

Okay. And then, just the last one. Does it make sense to walk through the math on the Shadow decommission, just so that's modeled correctly? How much comes out? What does it do to the margins? Did that affect the second quarter? Any clarity you can provide there?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

So, look, from a modeling standpoint, Noah, this is about a $50 million business or something like that, right? So, we've already obviously worked our way through most of what the revenue is going to be this year as we wound down from Q1 to Q2. So, I'd say it's fairly de minimis as we go through the balance of the year.

Again, I think this is one where if you look at that team from our original guide absorbed that loss of the Shadow, which came out of nowhere, obviously, from our perspective. And we've seen enough growth in all of the other business within Systems to try to make up for that revenue and obviously continue to hold a good margin business. So, I think the team has largely got -- Shadow, unfortunately, is largely behind us, and the team managed their way through that and has positioned us to at least continue to operate the business well, and again, most importantly, probably in Systems focus on those new programs like the FTUASs, RCVs, ARV, XM30. There's a lot of stuff going on in that business that has opportunity. But I would say largely what you model is we have absorbed the loss of the Shadow program.

[Noah Poponak, Analyst at The Goldman Sachs Group]

Okay. Yeah, that looked mathematically a little tough to do, at least in the very near term. So, yeah, that's impressive. Okay. Thank you.

[Operator]

Your next question comes from the line of Cai von Rumohr from Cowen & Co. Please go ahead.

[Cai von Rumohr, Analyst at TD Cowen]

Yeah. Thanks so much. So, Scott, you guys have been warning about margins. Don't get ahead of yourself because the inefficiencies that we experienced in the second half of last year are going to flow through inventory into the P&L, and that will restrain margins. Looks like that didn't really occur, although I know mix was a plus. And as presumably your efficiencies are improving, even if not as much as we'd hoped, should we be looking for a good improvement in the second half from diminishing flow through of inefficiencies so that even though I assume the mix is negative, given you got more Latitudes, but so you could basically sustain this 13% type margin?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Well, look, I think that the 13% is extremely strong, right? I'm not sure I would say that we're going to maintain 13% as we go through the balance of the year. But I think it's going to be solidly in that mid-12s range. So, for sure, we will have some, as I said earlier, probably less price inflation spread than we had. And part of that, frankly, is some mix. We do have a lot of Latitude deliveries, a number of which are heavy on the fractional side, particularly in Q3.

And as those have lower margin than a retail Latitude. So, there's always some headwinds, but there's also good things that are going on. So, I think this business is well within the guide that we put out there, despite the ongoing inefficiencies. And at a mid-12s percent margin, we feel like this business is performing well, generating strong margin, generating good revenue growth, generating continuing strong backlog. So, I think the guide that we had out there, which I think we're clearly still on track to deliver, shows that business in a very good place.

[Cai von Rumohr, Analyst at TD Cowen]

Terrific. And then secondly, you continue to be aggressive, actually even more aggressive in terms of share repurchase. You bought 358 million, 4.1 million shares. So, you're basically whacking away at a 5% rate. What should we expect in terms of the repo in the second half?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

I think we'll continue to focus on that repo, Cai. We're generating, we're getting good, strong cash flow. We feel very good about where the business is on a cash standpoint. Look, we do some small acquisitions like Amazilia, relatively small dollars, but add some real capability to the eAviation business. Frankly, technology that will help not just the eAviation, but I think also at Textron Aviation, as well as future opportunities at Bell. But these are small dollars. Clearly, the bulk of the strong cashflow generation that we have right now, we're allocating to the buyback, and I think we'll continue to do that.

[Cai von Rumohr, Analyst at TD Cowen]

Thank you very much.

[Operator]

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

[Ronald Epstein, Analyst at BofA Securities]

Yeah, hello, can you hear me?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Morning, Ron. We can hear you.

[Ronald Epstein, Analyst at BofA Securities]

Yeah, good. Perfect. Sorry. Yeah, maybe just a couple quick ones. Could you do a bigger version of SkyCourier? Is there any demand for that from your customers?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Ron, I don't know that we need to do a bigger version of it. It's a big aircraft. You just have to get up next to one of those guys. But just from a regulatory standpoint, where it sits, first of all, it fits really, really well in that short haul cargo market. Obviously, we work very closely with FedEx, particularly on designing that aircraft. So, it was really designed to be in that three LD3 container space where it fits really, really well. And then on the pax side from regulatory standpoint, you hit that 19 pax line, and this thing comfortably takes care of 19 passengers. So, I think to do anything bigger than that, now you start to step up into the ATR world and things like that. And I don't think that's really our space.

I think where there was a huge gap in the market was really when you went from our Caravan, which obviously has been a homerun in that smaller cargo and pax market, and then up into that light air transport side. We felt like SkyCourier is in the sweet spot of that. And we're seeing that from a market demand standpoint.

[Ronald Epstein, Analyst at BofA Securities]

Got it. And then on Aviation. How do I frame this? It seems like we're in a unique environment where for you guys, I don't want to put words in your mouth, but everybody that -- you have no white tails. Everything going down lines is owned. Have you ever experienced that before, if that's the case?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Well, I think you have to probably go back to 2007, Ron, to be there. But look, this is a business -- and we talked about this for years, Ron. This shouldn't be a white tail business, right? It wasn't in most of the history of business jets was not a white tail business. I think what happened post-financial crisis wasn't how that business should operate. This business should operate off of a -- depending on the model types, anywhere from 12, 18 months to two-year a backlog, so that you know when an aircraft is rolling down that line where it's going. And that's where we are. And I think that's where the industry should stay. And again, this is not a new idea, right? This is how this industry worked for decades, and certainly good to have it back where it's supposed to be.

[Ronald Epstein, Analyst at BofA Securities]

Yeah, that's great. And then, if I can, just one last quick one. Just curious, you mentioned that the Aviation, some of the technology investments you might make inorganically could flow back to just broader Textron Aviation. Can you highlight anything that you're learning in that business that could actually help outside of the Aviation, just broader aviation?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Sure. I like the nature of what we're doing, particularly with unmanned things like Nuuva, and when you look at the levels of automation that we believe need to be in things like Nexus these are very highly automated fly-by-wire, digital flight control, almost autonomous. Even if there is a person in the cockpit, like in the Nexus case, it's still in essence the capability of the aircraft is inherently autonomous.

So, when you look at the Amazilia guys, this is an area of expertise that they had, but we've done this. We've done a lot of fly-by-wire on V-22, for instance. Obviously, the V-280 is all fly-by-wire. The 525 is the first commercial helicopter in the world that's fly-by-wire.

So, we have capability in the company to do this, but I think as we go forward, not just for these things like Nexus and Nuuva, but future families of products or enhancements, upgrades to products is going to see more and more levels of fly-by-wire, digital control, quasi-autonomous capability, but it needs to be at a much lower price point than what you've seen in these high-end, very expensive systems. And so, that's the technology that we're using, developing, and working both through the acquisition and the implementation on things like Nuuva and Nexus are fundamental technologies that will, I believe, you'll start to see in the lower price point both fixed-wing and rotorcraft markets in the future.

[Ronald Epstein, Analyst at BofA Securities]

Okay, cool. Thank you very much.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Sure.

[Operator]

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

[Kristine Liwag, Analyst at Morgan Stanley & Co. LLC]

Hey, good morning, everyone. Scott and Frank, the strength in Aviation, it's clear, Scott, you mentioned on Ron's questioned that, look, we're almost back at that pre-financial crisis levels, regarding the backlog. If you take out the performance headwind that you highlighted in the quarter, margins at Aviation would have been 15.5%. This is also back to pre-financial crisis levels margin. So, I guess when the performance headwinds tail off and the backlog continues to hold secure, is the mid-teens margin the new normal in Aviation?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Well, Kristine, I guess what I would say is, look, some of those performance items for sure are associated with these factory inefficiencies. And we do expect over time for those things to get better. As we get better supply chain deliveries, as our workforce becomes more seasoned again, so I do think there will continue to be underlying improvements going forward in those areas. But as I also said, some of these things around performance are also just fundamentally associated with the growth of the business, right? We are going to see more sales commissions when we have more sales. And we are going to see R&D, again, not necessarily a headwind from a percent of sales standpoint, but you're going to see higher R&D numbers as we continue to invest in the business.

So, look, I think the bottom line answer to your question, Kristine, is we're not going to put a number out there right now, but clearly over the last few years, we continue to see improvements in the margin performance of this business. And I think it's reasonably expected, we'll continue to see that going forward.

[Kristine Liwag, Analyst at Morgan Stanley & Co. LLC]

Thank you. That's really helpful context. And then maybe pivoting to a defense question. The European defense budget seems to be moving higher, a little faster and steeper than the U.S. defense budget. I guess, how do you think about opportunities for European sales? It hasn't been a huge part of your portfolio historically, but with the leverage of the business pretty low, what's also your interest in expanding European capabilities, either organically or inorganically?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Well, we do have a number of sales campaigns that go on in Europe. It's not, as you noted, has not been a huge part of our business in the past. I do think as you look at foreign military sales opportunity, things like the FLRAA program, clearly that's a big part of where the Army is focused is looking at partner countries around the world and just as we saw for many, many decades, things like the Blackhawk become really important parts of those businesses from international sales perspective, including Europe. We obviously, will expect that to happen over time.

There's also some organic things. So, again, if you look at rotorcraft, again, I guess right now we've we did announce a teaming relationship with Leonardo around pursuit of the European next-generation rotorcraft opportunity. So, that's organic, but that would be a product that's tailored to that European market. So, I do think there are opportunities out there, and we're pursuing those and we'll compete for those going forward.

[Kristine Liwag, Analyst at Morgan Stanley & Co. LLC]

Great. Thank you.

[Operator]

Your next question comes from the line of George Shapiro from Shapiro Research. Please go ahead.

[George Shapiro, Analyst at Shapiro Research]

Good morning.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Morning, George.

[George Shapiro, Analyst at Shapiro Research]

Scott, the year-to-date orders have been about $3 billion in Aviation, about the same as last year's first half. You think you can reach the $1.86 billion of orders that you had in last year's third quarter, which was particularly strong?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

George, I don't know. As we guided, we think this is going to end up as a 1:1 year. That's still our view. So, if you look at order activities last year, they were stronger than that. But I do think we're -- again, our expectation is we're in a more normalized world here where 1:1 is a good book-to-bill target. We are coming through the first half of the year strong, which is great. I'd love to see that continue, obviously, but I don't think necessarily $1.6 billion in a quarter is probably pretty sporty [Phonetic].

[George Shapiro, Analyst at Shapiro Research]

Okay. And then maybe one for you, Frank. The inventories year-to-date are up like $467 million, obviously less than the second quarter with better deliveries, but still up to $110 million in the second quarter. For the end of the year, do you expect that inventory level to come down to close to where it was at the end of last year, or we're going to stay $200 million above it? Thanks.

[Frank T. Connor, Executive Vice President And Chief Financial Officer at Textron]

Well, we'll certainly expect to liquidate inventory in the back half of the year, but in order to grow the business for next year, we need inventory in order to sell products. So, we expect we'll see some inventory growth on a year-over-year basis at year end, but not at the levels you've seen to date. I'd say, overall, obviously, that offsets from working capital in other areas. So, we think working capital is a flattish-type number for the year. So, obviously there are offsets in payables and other things associated with that, but we do need some inventory growth in order to grow the business.

[George Shapiro, Analyst at Shapiro Research]

And one last one. Industrial, in the first quarter, you pretty much said, it was primarily weak because of special vehicles. This quarter, you didn't say that. So, do we assume that both Caltex and special vehicles were relatively weak in this quarter?

[Frank T. Connor, Executive Vice President And Chief Financial Officer at Textron]

Well, Caltex was down on a year-over-year basis, but it wasn't particularly weak. It was just we had a very strong second quarter last year, frankly, both in specialized vehicles and Caltex. So, you had a really tough compare from both a volume standpoint as well as a margin standpoint. But Caltex on a sequential basis was up quarter-over-quarter, but it was down a bit on a year-over-year basis. But specialized vehicle was down more on a year-over-year basis, coming off a very strong second quarter last year.

[George Shapiro, Analyst at Shapiro Research]

Okay. Thanks very much.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Sure.

[Operator]

Your next question comes from the line of Peter Skibitski from Alembic Global. Please go ahead.

[Peter Skibitski, Analyst at Alembic Global Advisors]

Hey, good morning, guys.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Morning, Pete.

[Peter Skibitski, Analyst at Alembic Global Advisors]

Hey. Scott, as we think about some of the softness in the consumer that you're experiencing at TSV, maybe to your Caltex comments as well, less so. But you guys aren't seeing that extent to any of your Aviation customers at all. Not even on the pistons or the turboprops. I'm asking in particular because it seems like deliveries on your lighter jets and Aviation, that Citation in the first half, where we're a little bit lighter year-over-year versus the larger jets. So, I just wanted to understand how you're seeing the health of your customers there. Obviously, they have bigger balance sheets, but I just want to get a sense.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Yeah, Pete, I'd say when you look at our lighter aircraft M2, CJ3, CJ4, we're seeing strong demand. So, book-to-bill on those guys is good. Even pistons, for the most part, we're just trying to make them faster, right? Now, the piston aircraft training demand remains very high, right? It's very hard to find a 172 anywhere. So, I think the piston side of the business is good. The light jet side of the business is good. It's that -- again, these are people with stronger balance sheets, obviously, and looking out over time, and there's backlogs. So, you can't even get one for a year, 18 months, whatever it may be, even in the lighter jet side of things.

So, we continue to see good order flow there. It's that discretionary point-of-sale consumer you generally finance market that's down. As I said, we're aligning costs around that. As Frank said, it's tough, particularly this quarter. We had a really strong quarter for a lot of those products a year ago. It's softer now, and so we made necessary cost and production volume alignments to match that, but no, we're absolutely not seeing that behavior when you look at light jets or Bell 505s, Bell 407s, the market for those, even the lower price point jets and rotorcraft, continue to do very well.

[Peter Skibitski, Analyst at Alembic Global Advisors]

Okay, interesting. Last one for me, just on GBSD, Sentinel looks like it passed its Nunn-McCurdy review. Any change that you guys expect to the program profile for you guys?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

No, I don't. We're continuing to work very closely with Northrop. I think the program is progressing well. We've had a number of things that have added scope to what we originally had bid on the program. So, I think we have a great relationship with these guys. That piece of the program is going well.

As you guys know in the media, a lot of the cost issues around the infrastructure as opposed to the missile itself have been a big issue. So, for sure, there's schedule challenges, which I think are well documented. Northrop talks about them, their customer talks about them, but we continue to, I think, execute well on the program, see scope increases on the program, and continue to make good progress on our piece of the overall weapons system.

[Peter Skibitski, Analyst at Alembic Global Advisors]

Okay. Thank you.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Sure.

[Operator]

And your final question today comes from the line of Gavin Parsons from UBS. Please go ahead.

[Gavin Parsons, Analyst at UBS Securities]

Thank you, morning.

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Morning.

[Gavin Parsons, Analyst at UBS Securities]

Sounded like Aviation guide in line with the initial thoughts, Industrial margin may be a little below, but can you just go around the horn a little bit and update what's tracking above or below to allow you to stay in the guidance range?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Yeah, Gavin, I think you actually did a pretty good job there. I think the Aviation guys are well within, in their guide and having a great year. I think that Bell and Systems will probably come in a little bit above their guide. Strong performance in both those businesses. And as we've talked about, we'll probably be a little below the guide on the Industrial segment just because of lower volume, particularly in that consumer space. But in that, I think we feel pretty good about where things are, and most businesses are performing really well.

[Gavin Parsons, Analyst at UBS Securities]

Okay. Appreciate it. And then maybe just on pricing on orders, seems like you're still getting maybe mid-single digits on deliveries. Is it a similar level what's going into the backlog today?

[Scott C. Donnelly, Chairman, President and Chief Executive Officer at Textron]

Yeah, well we're probably not going to give price forecasting, but I would certainly say price continues to be strong in the marketplace, so.

[Gavin Parsons, Analyst at UBS Securities]

Okay. Thank you.

[Operator]

Ladies and gentlemen, this conference will be available for replay after 10 a.m. Eastern time today through July 18th, 2025. You may access the AT&T Executive Replay System at any time by dialing 1-866-207-1041 and entering the access code 4306608. International participants dial 402-970-0847. Those numbers, once again, are 1-866-207-1041 or 402-970-0847 with the access code 4306608.

That does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.

Participants

Corporate Executives

• David Rosenberg, Vice President, Investor Relations
• Scott C. Donnelly, Chairman, President and Chief Executive Officer
• Frank T. Connor, Executive Vice President And Chief Financial Officer

Analysts

• Peter Arment, Robert W. Baird & Co., Inc.
• David Strauss, Barclays Capital
• Sheila Kahyaoglu, Jefferies & Company, Inc.
• Myles Walton, Wolfe Research
• Douglas Harned, AllianceBernstein
• Seth Seifman, J.P. Morgan Securities
• Noah Poponak, The Goldman Sachs Group, Inc.
• Cai von Rumohr, TD Cowen
• Ronald Epstein, BofA Securities
• Kristine Liwag, Morgan Stanley & Co. LLC
• George Shapiro, Shapiro Research
• Peter Skibitski, Alembic Global Advisors
• Gavin Parsons, UBS Securities