Textron Inc

NYSE:TXT

Earnings Call Analysis

Textron Faces Challenges but Anticipates Recovery in 2025

In Q3 2024, Textron reported revenues of $3.4 billion, slightly up from last year, despite a $50 million decline from aviation disruptions due to a four-week strike. The strike limited profits to $128 million, down by $32 million year-over-year, but the aviation segment backlog rose to $7.6 billion. Adjusted EPS guidance fell to $5.40-$5.60 from $6.20-$6.40. Aviation anticipates $5.5 billion in annual revenue with margins around 11%. Overall, Textron expects healthy revenue growth in 2025, with improved production and supply chain stability ahead.

Navigating Challenges: Textron's Q3 Performance

Textron faced notable hurdles in the third quarter of 2024, primarily due to a strike that disrupted its aviation segment. The quarter's revenues reached $3.4 billion, a modest increase from $3.3 billion in the third quarter of 2023. However, this increase came alongside a dip in adjusted income from continuing operations at $1.40 per share, down from $1.49 per share. Manufacturing cash flow before pension contributions also dropped to $147 million from $205 million year-over-year. The strike negatively impacted Textron Aviation’s revenues and profits, reducing them by approximately $50 million and $30 million, respectively.

Segment Highlights: The Good and the Bad

In terms of segment performance, Textron Aviation generated $1.3 billion in revenue, roughly flat compared to last year, despite seeing a positive pricing impact of $36 million. However, lower volume and mix offset this increase, leading to a segment profit of $128 million, down from $160 million a year ago. The segment's backlog increased to $7.6 billion, growing by $162 million compared to the previous quarter, reflecting strong new orders over $1 billion during the quarter. Conversely, Bell saw its revenues rise to $929 million, a significant $175 million increase owing to higher military volume, particularly from the FLRAA program, and improved commercial activity. Bell’s segment profit was up to $98 million, demonstrating solid operational performance in spite of challenges faced by Textron Aviation. Textron Systems reported revenues of $301 million, slightly down year-over-year, while the Industrial segment dropped to $840 million, influenced by continuing weaknesses in specialized vehicle markets.

Strategic Moves Amidst Obstacles

The company's strategy remains focused on recovery from the strike, with the 5-year contract ratified by the IAM in October indicating positive labor relations moving forward. This should facilitate a smoother ramp-up in production following a five-week work stoppage. Scott Donnelly, Textron's CEO, expressed optimism about achieving stability, expecting a return to full workforce productivity soon. On the innovation front, Textron continued to advance with products like the Cessna Citation Latitude, celebrating the 400th delivery. New updates to the Citation M2, CJ3, and CJ4 were announced, reflecting ongoing investment in their aircraft portfolio.

Guidance Adjustments and Future Outlook

Textron revised its full-year guidance due to the strike's impact, expecting adjusted earnings per share ranging from $5.40 to $5.60, significantly lower than the prior forecast of $6.20 to $6.40. Manufacturing cash flow expectations were similarly adjusted, now predicted to be between $650 million and $750 million, down from the previous $900 million to $1 billion range. Looking ahead to 2025, Textron anticipates strong momentum based on current recovery trends, with a projected revenue of approximately $5.5 billion for Aviation, expecting a segment margin of around 11%. Bell’s revenue outlook remains unchanged, but with an improved segment margin projected between 10.5% and 11%. Industrial revenues are expected to drop to about $3.5 billion, reflecting continued challenges.

Investments in the Future: Innovation and Infrastructure

Textron remains committed to investing in R&D, particularly within its aviation segment, aiming to maintain substantial growth through product upgrades and new innovations. The focus in 2025 will also emphasize supply chain stabilization to mitigate past disruptions, with the company expressing confidence in its ability to meet increased demand moving forward. Key programs like the FLRAA and various military contracts are pivotal to Textron's growth strategy, as a successful roll-out of these projects could significantly enhance their revenue profile. Management highlighted a commitment to leveraging productivity improvements as a fundamental driver for long-term profitability.

Capital Return to Shareholders

In a show of confidence in its potential recovery and future prospects, Textron repurchased approximately 2.4 million shares, returning about $215 million in cash to shareholders during the quarter, with a total year-to-date share buyback amounting to approximately 10.1 million shares and $890 million in cash returned. This illustrates Textron’s commitment to enhancing shareholder value even amidst challenges.

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by. Welcome to the Textron Third Quarter 2024 Earnings Call. [Operator Instructions] This conference is being recorded for digitized replay and will be available after 10 a.m. Eastern Time today running through October 24, 2025. You may access the replay by dialing 866-207-1041 and entering the access code of 1480019.

I would now like to turn the conference over to David Rosenberg, Vice President, Investor Relations. Please go ahead.

[David Rosenberg, executive]

Thanks, Kelly, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release.

On the call today, we have Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website.

Revenues in the quarter were $3.4 billion, up from $3.3 billion in last year's third quarter. During this year's third quarter, adjusted income from continuing operations was $1.40 per share compared to $1.49 per share in last year's third quarter. Manufacturing cash flow before pension contributions totaled $147 million in the quarter compared to $205 million in the third quarter of 2023.

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

[Scott Donnelly, executive]

Thanks, David, and good morning, everyone. During the quarter, aviation experienced a strike upon the expiration of its existing labor agreement with the IAM. Work stoppage caused disruption towards aircraft production and service in our Wichita facilities.

On October 20, the IAM ratified a new 5-year contract, ending a 4-week strike. As employees return to work and production and delivery activities recover, resulting disruptions will impact our 2024 financial results.

In the quarter, Aviation delivered 41 jets, up from 39 last year, and 25 commercial turboprops, down from 38 in last year's third quarter. Aftermarket revenues grew 5% for the third quarter versus 2023, and our year-to-date aftermarket revenues were up 8% as compared to prior year.

Aviation continues to see strong demand in the quarter, booking over $1 billion in new orders. Backlog grew $162 million, ending the third quarter at $7.6 billion. During the quarter, Aviation delivered the 400th Cessna Citation Latitude. Latitude has been the best-selling aircraft in the midsized jet segment since it was introduced into service in 2015. At NBAA this week, Aviation also announced the Gen 3 updates of the Citation M2, CJ3 and CJ4, reflecting continued investments in this product portfolio.

At Bell, revenues were $929 million, up $175 million over last year, and segment profit was $98 million, up $21 million as compared to the third quarter last year. During the quarter, the U.S. Army announced approval of Milestone B for the FLRAA program.

This significant milestone established as FLRAA as a program of record and transition the program to the engineering and manufacturing development phase. This phase includes continued digital modeling, detailed hardware and software design and fabrication of hardware as Bell proceeds to critical design review and the first flight planned for 2026.

As a result of Milestone B and the subsequent EMD award, Bell's backlog grew by $2.3 billion in the quarter, now totaling $6.5 billion. On the commercial side, Bell saw increased order activity in the quarter. Bell delivered 44 helicopters, up from 23 in last year's third quarter.

Textron Systems revenues and profits were slightly lower compared to last year. In the quarter, Systems completed 2 major milestones in the Army's FTUAS program, a modular open systems approach conformance evaluation and a prototype aircraft flight demonstration.

The team will now proceed to option 4 of the competitor program, which includes delivery of a production representative aircraft system for Army testing evaluation. Systems expanded its U.S. Navy Aerosonde operations with awards for 2 new land-based sites and 3 new maritime sites.

Also in the quarter, Systems delivered 2 prototype Ripsaw and 3 robotic vehicles to the U.S. Army for testing as part of Phase 1 of the Robotic Combat Vehicle program. The Army is expected to down select Phase 2 for production representative prototype in mid-2025.

Moving to Industrial, the segment experienced lower revenues and operating profit in the quarter, driven by continuing softness in specialized vehicles end markets. Specialized vehicles has continued to take cost action to align with lower production volumes.

Moving to eAviation, the Nuuva 300 continued integration testing, including a full system power on and flight simulation run conducted this quarter. The team is now focused on preparations for the aircraft's first hover flight, which is expected in Q4 of this year.

Also during the quarter, the Nexus eVTOL program continued to progress on the wing and [indiscernible] assemblies and outfitting of the ground control station, preparation for the start of flight testing, which is expected to begin in 2025.

Finally, as we announced yesterday, we are making some important executive changes at Textron. Our CFO, Frank Connor, has notified us that he intends to retire from the company on February 28, 2025. Dave Rosenberg, our current Vice President in Investor Relations, has been elected as our new Executive Vice President and Chief Financial Officer, succeeding Frank.

Dave has more than 24 years of experience in the aviation industry and has served in a series of finance and strategy positions at Textron Aviation, Beechcraft and its predecessor companies.

In addition, Scott [ Hegstrom ] has been elected Vice President of Investor Relations, replacing Dave. Both elections are effective March 1, 2025. I want to thank Frank for his outstanding leadership and significant contributions to Textron during [ 15 ] years and to congratulate Dave and Scott on the new appointments.

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

[Frank Connor, executive]

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation.

In the third quarter of 2024, delayed aircraft deliveries along with unfavorable performance resulting from the IAM strike lowered Textron Aviation's revenues by about $50 million and segment profit by around $30 million. Revenue at Textron Aviation of $1.3 billion were essentially flat with the third quarter of 2023, with higher pricing of $36 million, mostly offset by lower volume and mix of $35 million.

Segment profit was $128 million in the third quarter down $32 million from a year ago, largely due to lower volume and mix of $29 million. Backlog in the segment ended the quarter at $7.6 billion, up $162 million from the second quarter.

Moving to Bell, revenues were $929 million, up $175 million from last year, largely reflecting higher volume and mix of $148 million. Volume and mix included higher military volume of $81 million, primarily related to the FLRAA program, and higher commercial volume and mix of $67 million, reflecting an increase in deliveries.

Segment profit of $98 million was up $21 million from last year's third quarter, largely due to a favorable impact from performance of $17 million and favorable pricing net of inflation of $12 million. Backlog segment ended the quarter at $6.5 billion.

At Textron Systems, revenues were $301 million, down $8 million from last year's third quarter, largely due to lower volume. Segment profit of $39 million was down $2 million from a year ago. Backlog in this segment ended the quarter at $1.9 billion.

Industrial revenues were $840 million, down $82 million from last year's third quarter, mainly due to lower volume and mix of $86 million, principally in the Specialized Vehicles product line. Segment profit of $32 million was down $19 million from the third quarter of 2023, primarily due to lower volume and mix.

Textron eAviation segment revenues were $6 million and segment loss was $18 million in the third quarter of 2024 compared with a segment loss of $19 million in the third quarter of 2023. Finance segment revenues were $12 million and profit was $5 million.

Moving below segment profit, corporate expenses were $20 million. Net interest expense from the manufacturing group was $22 million. LIFO inventory provision was $49 million. Intangible asset amortization was $9 million and the non-service components of pension and postretirement income of $66 million.

In the quarter, we repurchased approximately 2.4 million shares, returning $215 million in cash to shareholders. Year-to-date, we have repurchased approximately 10.1 million shares, returning $890 million in cash to shareholders.

Textron is adjusting its full-year outlook to include the expected impact of the Aviation strike on its financial results. Textron now expects 2024 adjusted earnings per share from continuing operations to be in a range of $5.40 to $5.60 per share, down from the previous outlook of $6.20 to $6.40 per share.

Manufacturing cash flow before pension contributions is now expected to be in the range of $650 million to $750 million as compared to its previous outlook of $900 million to $1 billion, with planned pension contributions of about $50 million.

Looking to Aviation, we now expect total year revenue of about $5.5 billion with an expected segment margin of around 11%. At Bell, while total year revenue outlook is unchanged, we expect an improved segment margin in the range of 10.5% to 11%. At Systems, the revenue outlook is unchanged with a segment margin estimated at the top end or slightly above our original guidance range of 11% to 12%.

Looking to Industrial, we now expect revenues to be about $3.5 billion with an expected segment margin of around 4%. At eAviation, we now expect revenue to be about $35 million, with segment margin unchanged at a loss of around $75 million. At Finance, we now expect revenue to be about $50 million with segment margin of around $30 million.

Below segment profit, we now expect corporate expenses to be around $135 million, interest expense to be about $85 million and a tax rate of 17.5%.

That concludes our prepared remarks. So operator, we can open line for questions.

[Operator]

[Operator Instructions] And we'll go to the line of David Strauss with Barclays.

[David Strauss, analyst]

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

[Scott Donnelly, executive]

Sure, David. So look, I mean, obviously, we got the ratification last weekend, which was very important under the terms of the contract. The workforce has up to 5 days to come back in. So we are starting to ramp and get things back in place. I think I talked to Ron yesterday, we probably had about 60% of the workforce that was back in yesterday. We expect that to continue to ramp and clearly expect to be at full representation on Monday.

So when we factor in the numbers, we kind of think about that. That's why the [ $0.5 billion ] revenue drop. It's not really 4 weeks, it's more like a 5-week strike, and then we've got to get all the ramping and get the line back up and running here as we get in the fourth quarter.

But I guess I'd say, David, the good news is that's what we're focused on, right? We have a 5-year deal in place that's good for employees. It's good for us. Our total focus right now is getting things ramped up. We've spent obviously a lot of time here over the last 4 or 5 weeks, continuing to work with our supply chain to make sure that parts are coming in and suppliers who have been late to PO are getting back to current.

So our complete focus right now is everybody back in the door and getting the factory up and running and hopefully more efficient than it's been over the past few years as we get better part flow.

[David Strauss, analyst]

Okay. And Frank, in terms of the lower forecast for free cash flow for the year, it looks like maybe you're losing about $125 million from lower earnings. CapEx, I think, is a little bit lower than you had previously forecasted. What accounts for -- it looks like $200 million of -- the additional $200 million hit on the free cash flow side.

[Frank Connor, executive]

Yes, we're going to have some inventory headwinds associated with kind of the slower kind of ramp-up here and the impact of the production. As Scott said, it's kind of a 5-week impact. We want to get healthy from a supply chain standpoint.

So we certainly looked at kind of mitigating the cash impact of the strike, but we also want to make sure that we were healthy as we come out of this. So that's really the impact. And we'll then have that inventory, obviously, to burn through and sell in '25.

[Operator]

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

[Sheila Kahyaoglu, analyst]

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

[Scott Donnelly, executive]

On the Industrial front, Sheila, we've been -- we've seen softness all year. We've talked about that each quarter. So I think as we've revised the guidance, beyond just giving color, we're trying to give you guys some specific to each one of the segments. And so I think our expectation right now is that those softnesses in that end market are going to continue.

As we've talked about in previous quarters, we're just cutting way back on production volume. We don't want to put stuff out in the channel. I don't think dealers want things in the channel until we get better perspective and view on where things are going in terms of interest rates and their end market. So I think this was just -- we're just kind of firming up our view on the total guide on that segment.

The bigger issue for us, obviously, is we've got to get the Aviation business ramp back up again here, as Frank talked about. We're -- given the delays in some of these deliveries, we're going to certainly carry out more inventory through the end of the year of work in process than we would normally have coming out of the Q4.

But I guess, important to note, these sales aren't lost, right? I mean these are pushed, and we're going to ultimately deliver these aircraft. So as we think about 2025, we clearly expect we're going to see revenue progression over what our original 2024 guide was.

We're continuing to ramp. And I think now with contract behind us, we're optimistic about seeing more stability in the workforce, clearly, a better position on supplier parts. And it's tough to recover all that in one quarter, but I think we'll have good momentum as we go into 2025.

[Sheila Kahyaoglu, analyst]

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

[Scott Donnelly, executive]

No, that was largely baked into our plans. Look, the deal was a little bit more than we expected, but it's -- direct labor is about 10% of our costs. So I mean, our focus at this point will be making sure we can drive the right productivity and efficiency to compensate for that.

But again, I think it's a fair deal, it's good for our employees. And look, our view is we want these to be the best jobs in town. We think it's -- this is a hugely important workforce. We need good people, we need to retain them. And we'd like to be that best job. And I think this makes us the best job in town. So it's a good trade for us.

[Operator]

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

[Robert Stallard, analyst]

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

[Scott Donnelly, executive]

Yes. Look, I mean, part shortages, while it has improved over the last few years, has still been problematic, I think, for everybody in the industry. It's gotten to be a smaller number of part numbers that are a problem, but they're still a problem, and that was continuing to drive a lot of out-of-station work and just significant inefficiencies in the factory.

So our view was look, nobody wins a strike. The strike is not a good thing. But we certainly, during the period of strike, we're committed to go continue to work with those suppliers and try to resolve that problem.

So again, from our perspective, this is all about how you move forward and expecting we'll get the workforce back in, which is now happening that we would put ourselves in a better situation in terms of parts and back shops and these things so that we can be more efficient going forward. So yes, that's going to cost us a little bit of inventory, but all that inventory is going to turn into airplanes. So I'm not particularly worried about that.

[Robert Stallard, analyst]

Okay. And then as a follow-up on Industrial, you mentioned that specialty vehicles have been having some demand challenges. What about [ Caltex ]? Have you seen any softening on the European auto front?

[Scott Donnelly, executive]

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

[Operator]

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

[Peter Arment, analyst]

Scott, maybe just to talk about just on the heels of NBAA. You guys obviously saw some nice bookings this quarter. Can you talk maybe just about what you're seeing on the demand environment, still seems obviously very favorable for a lot of your models?

[Scott Donnelly, executive]

Yes, Peter, I think it has. I mean we had over $1 billion here in Q3. As you know, Q3 is usually historically one of the lighter ones, right, the summer, July, August is kind of usually quieter. I think it was a good quarter of order activity. We're very encouraged with the refreshes that the team is putting out in both M2, CJ3, the new CJ4. Of course, we have the Ascend, which we announced too long, that's coming along very well.

So the number of updates, which are pretty significant in terms of capability of the aircraft and safety, particularly with launching [ Autoland ] across all those single-pilot jet platforms is driving strong demand. So I think the end market continues to feel good. Order activity is -- flow is good. So I think we're still feeling good about where the industry is.

[Peter Arment, analyst]

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

[Scott Donnelly, executive]

Yes. Pricing is still good, Peter, in the marketplace. But as we've talked about, I think the price inflation number is compressing, right? I mean so I would not expect to see big contributions and necessary price over inflation. What we've really got to be doing is driving productivity and efficiency in the factories to continue to maintain that momentum.

So testing dynamic is good, that's not a problem. But you had this pretty significant price inflation spreads. And again, that will -- as we've talked about before, that will be coming down. But we're not banking on that to drive the kind of margin and performance that we need to see going forward. We've really got to drive good old-fashioned productivity and efficiencies on that volume.

[Frank Connor, executive]

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

[Operator]

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

[Noah Poponak, analyst]

Frank, congrats on the retirement. Thanks for all the help and the relationship over the years. And David, congrats on becoming the CFO. How many Cessna jet deliveries are we expecting in the fourth quarter, given the abnormal backdrop with the strike and the recovery?

[Scott Donnelly, executive]

No. I mean we've never given a number yet. So I think we'll probably just stick to revenue at this stage of the game, but I mean, it's $0.5 billion of revenue, obviously, adjustment, which is pretty significant. But yes, I think that accounts for what's turning out to be really a kind of a 5-week strike duration and then just the inefficiencies and just the time of getting it ramped back up and going.

[Noah Poponak, analyst]

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

[Scott Donnelly, executive]

Well, so first of all, we certainly expect by January 1, we're running at normal productivity and a smooth rate. I mean. We're here in late October, we've got November, December here to get things ramped and operating smoothly. So I certainly expect by the start of the year, the factory will be stable and doing well.

I guess, the only -- I mean, we're kind of probably not ready to guide 2025 yet. But as I said -- no, I do think if you look at what we were doing in production ramp and our expectations in terms of where we were going to be in 2025 while the 2024 is obviously an issue and impacted, we certainly expect to see good, healthy revenue growth in '25 above what we originally guided in '24.

[Noah Poponak, analyst]

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

[Scott Donnelly, executive]

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

[Operator]

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

[Myles Walton, analyst]

I was wondering if you could talk to Systems, and you mentioned the 2 contracts that are being decided next year FTUAS and the Robotic Combat Vehicle. Is an outcome on those basically going to dictate whether or not Systems can start a real growth profile? It's been obviously flattish for a long, long time. And how critical are those 2 programs?

[Scott Donnelly, executive]

Absolutely. Look, I mean, these are programs that we've been investing for a long time to position ourselves. They are key factors of driving growth for the business in the future. There's other programs, obviously. In fact, I think, frankly, if you look at 2024, that business is performing extraordinarily well. We did take a hit at the beginning of the year, which we did not anticipate around the Shadow getting pulled out of service.

Other businesses within Systems over the course of the year have grown to help to offset that. And as we said, even with a hit, which was not trivial to us, the businesses are hitting their original guide in terms of revenue, and they're going to be on the high side of their margins.

So I think the Systems team is performing very well. But yes, absolutely, those programs like FTUAS and like RCV, and of course, there's ARV in the year out, such are key drivers of growth in the future.

[Myles Walton, analyst]

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

[Scott Donnelly, executive]

I were -- we're actually just down there yesterday. Look, the flight test program is continuing. I hate to put dates out there because we don't certify that, right? I mean it's -- I'd say, the relationship and the work going on with FAA is good.

Flight test program is going well. Whether it gets this year, if I were to guess, I would obviously say, it would slip into 2025 just because of just the sheer amount of documentation and paperwork and number of approvals that need to flow through before the official TC gets put on there. So we continue to do the work on the flight test and all the work that we have to do on our side.

And of course, we're already moving a lot of resource into various kits and capabilities that need to be added on to the aircraft over its life cycle. So -- and that work will go on in parallel with the certification process.

[Operator]

And we'll go next to the line of Seth Seifman with JPMorgan.

[Seth Seifman, analyst]

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

[Scott Donnelly, executive]

Well, look, I mean, strikes are a bit messy, right, when you go back and you look at idle facility and impacts and total year volumes and assumed overhead rates and liquidation rates.

So part of what you're seeing in the quarter and the year is you've got to factor in a lot of significantly lower volume all of a sudden with a lot of cost, which -- some of which is not variable. And so that's part of why you see that drag in both Q3 as well as in our updated guidance for the full year.

[Seth Seifman, analyst]

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

[Scott Donnelly, executive]

Yes. Look, we're still trying to drive the profit dollar growth. The FLRAA program is growing and will continue to grow next year fairly significantly, which is great, obviously. But that is -- as you know, had a lower margin mix. But the commercial market is strong. So that's helpful to us.

The win in Nigeria, which is actually going to grow the H1 original equipment volumes here over the next -- couple 2, 3 years is obviously helpful. So there are some things in there mix-wise that are helping. But again, I still think given the significant growth of the FLRAA program, our focus really is how do we continue to be accretive and make sure that we're growing margin dollars in the subsequent years.

[Operator]

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

[Douglas Harned, analyst]

Congrats to Frank and Dave. If you look forward from here, say, over the next 5 years and thinking about what you're going to be investing in on the Aviation side with respect to R&D and CapEx, how do you see that profile evolving? And are there specific areas where you really intend to be focusing there?

[Scott Donnelly, executive]

Well, look, I mean, I think that I don't see us making a big change. I think what we've been doing for the last number of years and I would expect we continue to do in the future is a nice mix of upgrade programs to our existing portfolio, which, as we talked about earlier, drives healthy growth. And it's very well received, I'd say, on the customer front with occasional new product clean sheet that drops in. So that is a formula that has worked for us, and I think we'll continue to make that.

From an R&D perspective, we've talked about kind of making this at or a slight tailwind in terms of -- on a percent of sales basis. Part of our margin challenge towards the end of the year is we've -- you assume that you're -- what you're doing on the R&D front is fairly fixed over the course of the year. So if you lose a big chunk of revenue, obviously, in the strike, that kind of hurts you a little bit. But I mean, that's an unusual circumstance obviously.

So I think we'll see fairly stable R&D, and we'll raise it appropriately when we have the right programs to invest. But I'd say, generally speaking, we view that it should be a tailwind in terms of a percent of sales for the business while making the right investments to keep growing the business.

[Douglas Harned, analyst]

And then separately, when we go into 2025 and if we put the strike aside for the moment, you said that during the strike, you've been able to make some progress with respect to the supply chain it seemed that really the limiting factor for you in Aviation is not demand. It is really -- it may be really just the supply chain.

So if you've been able to narrow some -- the issues within the supply chain, can you describe where the bottlenecks are now, the principal bottlenecks? And if there's a point you see where you think you can get back to a world when the limiting factor is no longer dealing with the supplier issues?

[Scott Donnelly, executive]

Well, I think the limited factor -- I mean, it has been some critical supply things. It's been our own resourcing and staffing and the ramp. But as I said, I think that when I think about how you look at 2025, despite the interruptions that we've had here in 2024, I think our plans in terms of expanding capacity and delivering more product, increasing our revenue that, that thesis is still on track, and you'll see that in 2025, despite the fact that we had a trusting production here in 2024.

So we have had a ramp plan that was coordinated with suppliers and our own internal resourcing and staffing. And I think that's still in place, and that's why you should expect that we'll see revenue growth in '25 above the '24 original guidance.

[Operator]

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

[Jason Gursky, analyst]

Frank, congrats on -- and good luck with the next phase. And Dave, congratulations, well deserved. I look forward to working with you more closely in that role.

Scott, couple of quick questions for you. You mentioned labor productivity earlier as a way to offset maybe some of the higher costs associated with the strike. I'm just curious if you can make some bigger picture generalized comments about labor productivity, maybe now versus where we were prior to the pandemic and kind of the things that you are doing to drive labor productivity back to maybe where we were, if it was better back then? And how much longer do you think it takes for labor productivity to kind of return to historic levels?

[Scott Donnelly, executive]

Well, look, there were 2 major contributors to the inefficiencies, which certainly manifest themselves largely in productivity in the factory, part of it was certainly supplier parts. When you're looking at running a production line and you've got lots of holes in your part bin, you start doing stuff that's out of sequence and having to rework things and swap things between aircraft, and there is a lot of disruption that comes from that.

As I said, I think while it won't be perfect, what we did work through the strike period to try to get the on-time to PO and supplier delivery to where we have many, many, many fewer of these instances where we don't have the part available at the time that we need to consume that part in the various stages of the production line.

The other, frankly, is just pure labor, right? I mean, like most companies, coming out of COVID, we saw a lot of turnover. We have a lot of hiring of new people. So there's been a lot of training. And clearly, that drives a lot of inefficiencies. It's not just that new person, it's our senior people who participate in helping to train and develop these new people.

So I do think that labor contract and getting that behind us. And yes, it's a significant GWI, but it makes these jobs even more attractive in that market. which we think is -- makes us as an employer more attractive and hopefully, stronger on the retention side. So stabilizing that, not just adding the numbers of people, but getting it towards a stable number and it's the same people that are coming in; is a huge part of that.

So I think that the parts thing, I feel much better about. We worked that really hard over the last month or so to get that in a much healthier place. And again, I think with the GWIs that are out there, these are the best jobs in town. And I think that will help us not just attract but also retain that hourly workforce that builds these aircraft, which is critical to driving that efficiency and productivity in our factory.

[Jason Gursky, analyst]

Okay. Great. That's helpful. And then the second question was just more of maybe a philosophical one. If you could wave a magic wand and always have this be the case, I know this is difficult to control, but kind of months of backlog in the Aviation business, what is the North Star for you all? What do you -- where would you like to try to manage the business to on a pretty consistent basis over the longer term?

[Scott Donnelly, executive]

I think if you look at -- it's a little bit different across different products in our product portfolio. But I would say, generally speaking, being out there 18, 24 months is a very healthy place for us to be for a couple of reasons. One, many of our customers already own aircraft, and their ability to remarket their aircraft and manage and have -- know what their timeline is and when a window of time to go sell their aircraft is important.

And it also gives us the right amount of time to specify aircraft and interiors and go through a very smooth process, where we know when that aircraft hit the line, what is that aircraft or what's the configuration. A lot of stuff is standard, obviously, but there are customizations that happen towards the latter part of the process.

And having that all set and well understood, being able to signal and have a consistent volume and delivery dates with our suppliers, I mean it really helps to make a business where it can run smoothly when you can see out that 18 to 24 months on volumes and product mix and product configuration.

[Operator]

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

[Gavin Parsons, analyst]

And Frank and Dave, congrats. Just wanted to ask a couple of bridging questions. On Industrial, are you still seeing some benefit of the restructuring? Or is that largely already in place at this point?

[Scott Donnelly, executive]

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

[Gavin Parsons, analyst]

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

[Scott Donnelly, executive]

The performance line is -- there's a lot of stuff in performance line, I don't know if I could walk through it. I mean, clearly, this quarter and for the full year, you've got unusual things in there, right? I mean factory inefficiency or [ period ] expensing, idle factory costs, which is not a normal thing for us. Obviously, manufacturing variances go through that. It's -- there's a lot of moving parts in that so-called performance line.

[Operator]

And we'll go next to the line of Peter Skibitski of Alembic.

[Peter Skibitski, analyst]

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

[Scott Donnelly, executive]

Pete, I think $900 million is probably around the right number this year. It's probably going to be $100 million to $200 million higher than that next year, just based on what's in the budget. I mean I have a little bit -- I always try to be a little careful here at any of these things are appropriated, right? They're not appropriated yet. We don't actually have a budget.

So -- but I -- if you look at what's in the appropriations process, I guess, once they pass the budget, I would expect that we'll see some additional ramp as we go into next year. And I think as you talk about the Army, there's full support for this. I mean, obviously, the criticality of getting through [ CDR ] is huge. And so I think the customer is just as committed as we are to keep driving this thing forward, and that will -- that only happens with some increased funding next year, and I think everybody is on board with that.

[Peter Skibitski, analyst]

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

[Scott Donnelly, executive]

Well, look, I think that the -- as you kind of know, Peter, given the status of where that was, right, kind of just starting EMD, made it a fairly low risk, easy process to execute, the Spirit team was highly collaborative and worked very closely with us in that process, and it's done. So we're focused on going forward. We're executing to that, and so far so good.

[Operator]

We have no further questions in queue at this time. Today's conference is being recorded for digitized replay and will be available after 10 a.m. Eastern Time today through October 24, 2025. You may access the replay by [phone] and entering the access code of 1480019. This does conclude the conference for today. Thank you for your participation. You may now disconnect.