Gavin Parsons

Gavin Parsons followed up on the discussion of lumpiness in aftermarket growth, seeking to clarify if the 5-6 percentage point lag compared to the broader market, with half attributed to lumpiness, implies a core aftermarket growth rate closer to 9-10%. He also asked about the timing of destocking last year.

Answer

CEO Mike Lisman explained that the 5-6 percentage point growth gap versus the broader market is roughly half due to underexposure on engine content and half due to lumpiness in distribution channels and at airlines, which is difficult to quantify precisely. He noted that destocking was fairly uniformly distributed throughout the prior fiscal year.

Gavin Parsons followed up on the 'lumpiness' in aftermarket growth, asking if the 5-6 percentage point gap below peer growth, attributed partly to lumpiness, implies a higher 'core' growth rate. He also asked if destocking last year was concentrated in the first or second half.

Answer

CEO Mike Lisman explained that the lumpiness stems from distributor and airline inventory fluctuations, which are difficult to quantify precisely, accounting for about half of the growth gap. He stated that destocking was fairly uniformly distributed throughout the year.

Gavin Parsons inquired if TransDigm acted as a buffer for its smaller suppliers during the Boeing work stoppage and asked about the expected lag time for a recovery in freight flights to translate into revenue growth.

Answer

Co-COO Mike Lisman suggested that operating units likely did support smaller suppliers to some extent, as is their practice. Regarding freight, he said it's hard to put a precise timeline on the revenue recovery but expects the market to 'turn the corner' and show positive growth in fiscal 2025, possibly a few quarters into the year.

Gavin Parsons asked for a breakdown of the assumed growth rates by aerospace subsegments for the year. He also questioned whether Woodward is capacity constrained, or if productivity initiatives are showing through, given turn times are limiting growth. Additionally, he inquired about the revenue and margin contribution mechanism for agreements with external MRO providers.

Answer

Chairman and CEO Chip Blankenship declined to give specific subsegment breakdowns but noted strong OEM demand (defense and commercial), good commercial services demand (on hard comps), and flattish defense services. He stated that Woodward is reaching capacity plans, with expansions at Prestwick and additional test cells in Rockford, and is partnering with external MROs to add capacity. He explained that these agreements involve Woodward providing technical support, materials, and repair support to MRO providers who contract directly with customers.

Gavin Parsons requested a breakdown of the assumed growth rates for the aerospace subsegments for the year. He also asked if Woodward was capacity constrained or if productivity initiatives were showing through, given investments in capacity and hiring. He then inquired about the revenue and margin contribution model for agreements with external MRO providers.

Answer

Chip Blankenship (Chairman and CEO, Woodward Inc) declined to provide specific subsegment growth rates, stating strong demand in OEM (defense and commercial), reasonably good demand in commercial services (despite hard comps), and flattish defense services. He confirmed reaching capacity plan limits, leading to expansion of the Prestwick facility and adding test cells in Rockford. He explained that partnerships with external MROs involve Woodward providing technical support, materials, and repair support, with the MRO contracting directly with customers and Woodward supplying spare parts and kits.

Gavin Parsons asked about Woodward's assumptions for OE de-stocking, requesting a breakdown by airframe and engine. He also questioned whether capital expenditures would normalize after the A350 build-out or if they would include investments for a new single aisle program.

Answer

Chairman and CEO Chip Blankenship indicated that while it's difficult to provide a detailed breakdown by customer, Woodward broadly expects OE de-stocking to be complete by the end of the first half of the fiscal year (around Q2) if airframe and engine customers meet their forecast rates. CFO Bill Lacey stated that the Spartanburg investment is causing the current CapEx peak, and a clearer view for 2027-2029, including next single aisle investments, will be provided in December. Mr. Blankenship added that the Spartanburg facility has additional capacity beyond A350 and land for a sister facility for NSA support, but no significant NSA capacity investment is planned yet.

Gavin Parsons asked about Woodward's assumptions for OE de-stocking, requesting a breakdown by airframe and engine. He also inquired whether capital expenditures are expected to normalize after the A350 build-out or if they will continue to be elevated for potential new single-aisle programs.

Answer

Chairman and CEO Chip Blankenship stated that while difficult to parse by individual customer, de-stocking is broadly expected to conclude around the second quarter or end of the first half of the fiscal year if airframe and engine customers meet their forecast rates. CFO Bill Lacey indicated that the Spartanburg investment is causing the current CapEx peak, with a clearer view for 2027-2029 to be provided in December. Mr. Blankenship added that Spartanburg has additional capacity beyond A350 for synergistic products and land for a sister facility for next single-aisle support, but no large NSA capacity investments are planned yet.

Gavin Parsons of UBS sought to distinguish between investments in working capital for existing programs versus CapEx for new wins like the A350. He also asked about the growth outlook for LEAP services and visibility on the JDAM contract.

Answer

CEO Chip Blankenship clarified the working capital increase supports current programs, while the multi-year CapEx increase is for the new A350 facility and integrating the recent Safran acquisition. He noted Woodward's LEAP service growth is tied more to hours and cycles than engine shop visits and confirmed the company has purchase orders for JDAM.

Gavin Parsons asked what factors would drive results to the high or low end of the aerospace guidance range and inquired about the visibility into price realization for the remainder of the year.

Answer

CEO Charles Blankenship identified supply chain performance as the key variable for the aerospace guidance, with strong execution leading to the high end and further headwinds pushing towards the low end. CFO William Lacey reaffirmed the full-year pricing expectation of approximately 5% for the total company, noting that Aerospace will realize stronger pricing than Industrial due to ongoing contract renegotiations.

Gavin Parsons asked if the wide aerospace guidance range for fiscal 2025 contained conservatism beyond Boeing's production rates and sought clarity on the core industrial margin outlook after a dip in Q4.

Answer

CEO Charles Blankenship confirmed the wide aerospace guidance reflects uncertainty not just from Boeing but also from broader supply chain challenges. He explained that the Q4 core industrial margin dip to 12% was due to a one-time unfavorable mix shift to support an OEM customer and that the business exited FY24 at 14.1%, supporting the FY25 guide of 14-15%.

Gavin Parsons sought more color on Hexcel's incremental margins, specifically regarding fixed versus variable costs, and how hiring expenses and utilization align with revenue. He also asked about the A350 production rate alignment with Airbus, inquiring if Hexcel would lead or be in lockstep.

Answer

Tom Gentile, Chairman, CEO, and President of Hexcel, discussed cost management strategies, including lower G&A, belt-tightening, and a reduction of 330 headcount positions in 2025, with selective hiring planned for 2026. For the A350, Gentile stated Hexcel is generally a little ahead of Airbus but in lockstep, with rates slightly leading due to material provision, and they are prepared for potential upside.

Gavin Parsons sought more details on Hexcel's fixed versus variable costs, how hiring expenses and utilization align with revenue, and the underlying components of the incremental margin schedule. He also inquired about Hexcel's A350 production rate alignment with Airbus and the typical 4-6 month lead time.

Answer

Tom Gentile, Chairman, CEO, and President, explained that Hexcel is managing corporate costs tightly, with G&A lower year-over-year due to belt-tightening. He noted a hiring freeze and headcount reduction (330 fewer positions than year-end 2024) through attrition and small staff reductions, with selective hiring only beginning mid-year, except for A350 support. Regarding A350, Gentile stated Hexcel is a 'little bit ahead' of Airbus but more in lockstep, with rates generally slightly leading the OEM, and an extra carbon fiber line was started to protect upside.

Gavin Parsons inquired if Hexcel's margins could be higher in 2026 if commercial aerospace revenue surpasses 2024 levels. He also asked about Hexcel's contingency plans if destocking continues longer than expected into 2026.

Answer

CEO Tom Gentile confirmed that margins can be higher in 2026, though efforts are needed to offset natural inflation. Regarding contingencies, he explained that Hexcel is lagging demand in terms of hiring, waiting for materialization, and utilizing its substantial inventory as a cushion for any unexpected short-term increases.

Gavin Parsons from UBS Group inquired about the strategic trade-off between Hexcel's active share repurchase program and its more forward-leaning commentary on M&A. He also asked for insights on the improvement timeline for the Kinston facility.

Answer

CEO Tom Gentile positioned M&A as a potential complement to organic growth but stressed a disciplined approach, with share buybacks continuing in the absence of suitable, accretive targets. Regarding the Kinston facility, he deferred to Airbus for specifics but noted Airbus expects to drive more productivity after taking full control.

Gavin Parsons of UBS asked about specific initiatives aimed at improving per-head efficiency beyond simply aligning headcount to revenue, and if there were non-labor cost-saving opportunities. He also sought clarification on whether the estimated tariff impact included potential reciprocal actions.

Answer

Chairman, CEO and President Tom Gentile highlighted the company's 'future factory initiative' and numerous continuous improvement projects using Lean and Six Sigma methodologies to drive efficiency. VP of Investor Relations Patrick Winterlich clarified that the $3 million to $4 million quarterly tariff estimate is only the direct impact Hexcel can currently foresee and does not include speculative indirect or reciprocal tariff effects.

Gavin Parsons asked if the inventory destocking consideration for the 737 MAX was also factored into guidance for other aircraft programs and when the company expects to return to more normal incremental margin performance.

Answer

Chairman, CEO & President Tom Gentile stated that destocking is a more significant factor for the MAX due to its production volatility, while other programs have tracked more closely with OEM rates. He reiterated that a return to normalized margins is tied to achieving higher operating leverage from increased revenues, which he anticipates when production rates near 2018 levels in 2026 or 2027.

Gavin Parsons of UBS asked if there has been any change or desire to shorten the typical six-month lead time Hexcel operates with ahead of OEM build rate increases, given the recent volatility in OEM schedules.

Answer

CEO Tom Gentile explained that the six-month lead time is fundamental to Hexcel's position as a materials supplier and is necessary to be out in front of the OEMs. He indicated there is no real ability or desire to shorten this lead time, despite the challenges of the current dynamic environment.

Gavin Parsons requested clarification on whether customer support or CapEx reimbursement is included in Lockheed Martin's operating cash flow and asked for more details on the structure of the PAC-3 and THAAD framework agreements, particularly regarding performance opportunities versus risks.

Answer

Evan Scott, CFO, confirmed that multi-year agreements involve customer partnering on cash flow terms to support investments, leading to an elevated working capital benefit or operational benefit to offset CapEx. Jim Taiclet, Chairman, President, and CEO, added that the agreements include incentives for outperformance, with profit-sharing mechanisms that reinvest increased profits back into programs for additional spare parts or factory equipment.

Gavin Parsons requested clarification on whether Lockheed Martin's operating cash flow includes customer support or CapEx reimbursement, and details on the structure of the PAC-3 and THAAD frameworks regarding performance opportunity versus risk.

Answer

Evan Scott, CFO, confirmed that multi-year agreements are designed as partnerships, implying elevated working capital benefits or operational benefits to offset CapEx. Jim Taiclet, Chairman, President and CEO, added that the PAC-3 and THAAD framework agreements include incentives for outperformance, with profit-sharing mechanisms that reinvest increased profits back into programs for additional spare parts or factory equipment, fostering a collaborative support model with the U.S. government.

Gavin Parsons of UBS requested a detailed bridge for the 2025 free cash flow guidance, similar to the helpful EBIT and EPS bridges provided in the presentation.

Answer

CFO Jesus Malave walked through the bridge from the 2024 adjusted cash flow of $6.1 billion to the 2025 midpoint of $6.7 billion. Key drivers include a nearly $1 billion benefit from F-35 inventory unwind, partially offset by the non-recurrence of ~$600 million in 2024 international advances, plus smaller benefits from lower R&D capitalization taxes and cash-based net income.

Gavin Parsons asked about the opportunity to add a larger aircraft to the Cessna family, given the current strength in the large cabin segment. He also inquired about the industrial segment's margins, which were light in 2025 but are expected to expand in 2026.

Answer

CEO Lisa Atherton noted that while three block point upgrades were introduced in 2025, the current focus for Textron Aviation is on the Beechcraft Denali development program and getting it into service. CFO David Rosenberg explained that Kautex performed well in 2025 despite market conditions, showing improved profitability. He acknowledged TSV's challenges with end markets and tariffs but expects overall industrial margin improvement in 2026 due to a steady golf business and ongoing cost reduction activities.

Gavin Parsons inquired about the opportunity to add a larger aircraft to the Cessna family given strong large cabin demand and the outlook for Industrial segment margins.

Answer

Lisa Atherton, CEO of Textron, stated that the focus for Textron Aviation is currently on getting the Beechcraft Denali into service, following three Block Point upgrades this year. She indicated a preference for one Block Point upgrade and one clean sheet aircraft at a time. David Rosenberg, CFO of Textron, explained that Industrial margins are expected to expand in 2026 due to Kautex's improved profitability despite market conditions, and cost reduction activities at TSV, offsetting challenges in the end market and tariff impacts.

Gavin Parsons from UBS asked if the second half of 2025 would represent a 'normal' baseline for Aviation margins going forward and inquired about potential new aircraft development opportunities after the Denali.

Answer

Scott C. Donnelly, Chairman, CEO & President, confirmed that the margin progression is playing out as expected, with disruptions from the strike now largely behind them, suggesting a return to healthier margins. He stated the business is on track to hit its full-year guide. However, he was not prepared to announce any new aircraft programs at this time.

Gavin Parsons asked for clarification on how much excess cost from disrupted 2024 deliveries is being absorbed in the 2025 Aviation margin guide and what the company expects for net price versus performance.

Answer

Chairman and CEO Scott Donnelly clarified that the excess costs from the strike were taken as a period expense in Q4 2024 and are not impacting the 2025 guidance, which is based on normal production volumes. He stated that the expected margin improvement in 2025 will be driven primarily by better factory performance and efficiency, rather than a significant spread between pricing and inflation.

Gavin Parsons asked if the Industrial segment is still seeing benefits from restructuring and if more actions are planned. He also inquired about the mechanics of performance accounting for aircraft with costs in one year and delivery in the next.

Answer

CEO Scott Donnelly stated that more restructuring is anticipated for the Industrial segment due to continued end-market softness. Regarding performance accounting, he described it as a complex line item currently impacted by unusual strike-related factors like idle factory costs, making a simple explanation difficult.

Gavin Parsons asked whether the CFO, Brian West, had been able to gain a full understanding of all BDS programs after previous restrictions on his involvement.

Answer

Brian West, EVP and Chief Financial Officer, confirmed that he started reviewing BDS programs in January after previous restrictions. He described his approach as holistic, focusing on strategic elements (capability, relevance, backlog), operational status (schedule, earned value metrics), and financial elements (EACs, risks, opportunities). He emphasized that his reviews are higher-level baselining, with specific EAC deep dives handled through regular processes, and noted positive initial impressions of the team's progress.

Gavin Parsons asked Jay Malave, Boeing's CFO, about his ability to conduct comprehensive reviews of all Boeing Defense, Space & Security (BDS) programs now that previous restrictions have been lifted.

Answer

Jay Malave, Boeing's Executive Vice President and Chief Financial Officer, confirmed that he began reviewing BDS programs in January, focusing on strategic, operational, and financial aspects. He clarified that these are holistic reviews to baseline his understanding of program capabilities, relevance, backlog, delivery profiles, and EACs, rather than deep-dive EACs designed to circumvent existing processes. Malave expressed satisfaction with the team's progress in driving customer requirements and meeting schedule and budget.

Gavin Parsons followed up on BCA margins, asking about the contribution from pricing, escalators, and program mix. He also asked for the total cash value tied up in both completed aircraft and work-in-progress inventory.

Answer

CFO Brian West noted that the backlog has embedded price escalation and that long-term supply contracts are in place, with productivity expected to offset inflation. He cited mix benefits from the 737-10 and 787-10 as future tailwinds. He disclosed a total company inventory of $87.5 billion, calling it 'too much' but a necessary investment in stability that will unwind into a significant cash flow benefit over the next few years.

Gavin Parsons asked if Northrop Grumman still has line of sight to $4 billion in free cash flow by 2028, despite absorbing higher CapEx this year. He also requested clarification on the $2-$3 billion B-21 investment, specifically if it's for acceleration.

Answer

Kathy Warden, Chair, CEO, and President of Northrop Grumman, stated it's too early to project 2028 free cash flow due to pending opportunities like B-21 acceleration, which would require more investment but lead to long-term revenue and earnings growth. She clarified that the $2-$3 billion B-21 investment is specifically for acceleration and would occur over a multi-year period.

Gavin Parsons asked if Northrop Grumman still has line of sight to $4 billion in free cash flow by 2028, despite absorbing higher CapEx in the current year's guidance. He also requested clarification on the $2-$3 billion B-21 investment comment, specifically whether it is before or after an acceleration agreement.

Answer

Chair, CEO, and President Kathy Warden stated it's too early to project 2028 free cash flow due to pending opportunities like B-21 acceleration and other potential awards that would require increased investment. She clarified that the $2-$3 billion B-21 investment is specifically for the acceleration, spread over a multi-year period, to achieve accelerated production rates.

Gavin Parsons asked if Northrop Grumman's higher CapEx spend compared to peers enables more than mid-single-digit growth over the long term.

Answer

Kathy Warden, Chair, CEO, and President, affirmed that the company believes its significant CapEx investments are intended to drive substantial growth, citing the Defense Systems (DS) segment's solid growth as a case study reflecting investments in munitions, tactical missiles, and R&D for innovative solutions like IBCS modernization.

Gavin Parsons of UBS Group asked for more detail on the B-21 program's potential acceleration, specifically regarding the need for further company investment and whether this would allow for reopening pricing on LRIP lots.

Answer

Chair, CEO & President Kathy Warden confirmed that the reconciliation bill provides funding for production capacity expansion. She stated that Northrop Grumman is in discussions with the Air Force for a fair business arrangement where the company would be incentivized to invest, which would include the opportunity to earn improved returns on both the remaining LRIP lots and future production units.

Gavin Parsons of UBS inquired about the Aeronautics segment's margin pressure from the B-21 ramp in 2025 and asked about the size of the microelectronics business.

Answer

CFO Ken Crews explained that while the B-21 ramp does create pressure, the Aeronautics team's efficiency and performance improvement initiatives allow them to maintain a mid- to high 9% margin level. CEO Kathy Warden described the microelectronics business as a critical internal supplier that feeds the broader portfolio, with its revenue largely showing up within the Space and Mission Systems segments, where it constitutes a significant portion of value creation.

Gavin Parsons inquired about CFM56 retirements trending lower than expected (at 2%) despite strong LEAP deliveries, asking if it's still anticipated to pick up to 3-4%, what factors have changed, and if the shop visit peak is still expected in 2027.

Answer

Chairman and CEO Larry Culp attributed lower retirements to strong airline demand keeping CFM56-powered planes in service. He noted 2025 retirements were about 1.5% (similar to 2024), and 2026 is expected around 2% (better than prior 2-3% range). He now anticipates 2,300-2,400 CFM56 shop visits through 2028, with a gradual decline by 2030, indicating CFM56 will be 'stronger for longer.'

Gavin Parsons inquired about the lower-than-expected CFM56 retirement rates (2%), asking if GE Aerospace still anticipates a pick-up to 3-4% and if the shop visit peak remains in 2027.

Answer

Chairman and CEO Larry Culp attributed the lower retirements to strong airline demand, keeping CFM56-powered planes in the air. He noted 2025 retirements were about 1.5% (in line with 2024), and 2026 is likely 2% (better than previous 2-3% guidance). He stated that shop visits are expected to remain in the 2,300-2,400 range through 2028, indicating CFM56 will be 'stronger for longer' with a gradual decline post-2030.

Gavin Parsons from UBS Group AG questioned if the conservative second-half outlook was due to observed changes in airline behavior or caution, and if the MAX/LEAP ramp was altering customer retirement plans.

Answer

Chairman & CEO Lawrence Culp clarified that their second-half view is consistent and perhaps slightly conservative, but they have not seen any changes in customer behavior regarding fleet plans or retirements. He noted that the extended use of foundational platforms is a key factor supporting the improved 2028 outlook.

Gavin Parsons sought more detail on remaining supply chain bottlenecks, given that internal shop visits were down in Q4, and asked if the improvement would be linear.

Answer

CEO H. Culp clarified that the challenges persist with a core group of about 15 critical suppliers. He described the progress as a 'game of inches' rather than a step-function improvement. While the new LEAP-1A durability kit will help, the primary focus remains on working intensely with the supply base. CFO Rahul Ghai added that engine output should improve sequentially through 2025.

Gavin Parsons asked about the level of integration between HEICO and Wencor's part and repair catalogs, and how long this integration and cross-selling can continue to be a growth tailwind for the company.

Answer

Victor Mendelson explained that while there is some overlap, HEICO offers a wide range of products, and customers can choose from either business. He stated that they have already taken advantage of many cross-selling opportunities, which has worked out well, and that they continue to find additional opportunities to work together.

Gavin Parsons asked about the level of integration between HEICO's and Wencor's part and repair catalogs and how long this integration can serve as a growth tailwind from cross-selling.

Answer

Victor Mendelson explained that while there is some overlap, the businesses offer many different products, and customers can buy from either. He believes they have already leveraged many cross-selling opportunities, which is reflected in the results, and that the approach works well.

Gavin Parsons asked about purchasing behavior trends in the Flight Support Group from March to May and whether recent tariff discussions might introduce volatility.

Answer

Co-CEO Eric Mendelson stated that purchasing has remained strong, as airlines are wisely stocking spares due to a lack of depth in the supply chain and cannot risk flight cancellations. He anticipates that despite tariff uncertainty, demand will continue to be very strong.

Gavin Parsons requested clarification on Leidos' assumptions for the Q4 shutdown impact and details on where the company is focusing its investments and how these will manifest in the financials.

Answer

CEO Tom Bell highlighted the team's resilience in overcoming shutdown and DOGE headwinds, leading to a second guidance raise and stable revenue guidance due to portfolio diversity. CFO Chris Cage explained that wider guidance ranges accommodate uncertainty, with a quick shutdown end pointing to the higher end of EPS/revenue guidance, though cash flow timing remains uncertain. He detailed increased technology investments, including an 'innovation fund,' AI, prototypes, and Huntsville facilities, to meet customer demand and accelerate 2026 growth.

Gavin Parsons sought clarification on the assumed impact of the government shutdown on Q4 results and details on Leidos' investment focus and its financial implications.

Answer

CEO Tom Bell praised Leidos employees for overcoming shutdown and DOGE headwinds, attributing resilience to the portfolio's diversity. CFO Chris Cage explained that wider guidance ranges accommodate uncertainty, with results trending higher if the shutdown ends quickly, but cash flow timing remains a risk. He detailed increased technology investments in prototypes, Huntsville facilities, and AI, funded by an 'innovation fund,' to meet customer demand and accelerate growth into 2026.

Gavin Parsons from UBS noted the healthy total book-to-bill ratio but lighter funded backlog trend, asking for an explanation of the dynamics and expectations for the government's fiscal year-end.

Answer

CFO Chris Cage attributed the lighter funded backlog to government procurement slowdowns and a shift toward incremental funding, but expects this 'logjam is breaking up.' CEO Thomas Bell added that the previous constraint on cash outflow from the administration is easing, and he is confident that funding will flow to key programs, making funded backlog not a current concern.

Gavin Parsons of UBS sought clarification on the sub-1% revenue impact from administration initiatives, asking if this amount has been removed from backlog and if the GSA review is complete.

Answer

CFO Chris Cage clarified that affected contracts have not been removed from backlog, though some de-scopes have occurred, and that discussions with the GSA are ongoing. CEO Tom Bell added that the potential for revenue degradation from these factors has already been factored into the reaffirmed 2025 guidance.

Gavin Parsons inquired whether Leidos could continue to grow EBITDA and free cash flow through the next-generation transition of the VBA medical exam contract.

Answer

CFO Chris Cage responded "absolutely," explaining that the company is building momentum in other growth pillars to complement the VBA business. He stated that Leidos expects to grow EBITDA over its long-term planning horizon and will continue to innovate within the VBA program to drive efficiency.

Gavin Parsons inquired about a good baseline for Aerojet Rocketdyne's margin, asking if legacy contracts are still a drag, if better capacity utilization will improve margins, or if the strong growth outlook might weigh on them.

Answer

SVP, CFO, and President of Aerojet Rocketdyne Kenneth Bedingfield stated that strong growth is not expected to weigh on margins. He explained that while legacy contracts are still being worked through, the business is transitioning to newer, more economically favorable contracts. He noted that the mix of development programs like Next Generation Interceptor and Sentinel Glide Phase Interceptor, which are crucial for future growth, keeps the margin in the mid-12s, with expectations for ramping in 2026 and beyond as new production lines come online.

Gavin Parsons asked for the size of the revenue growth drag from LHX NeXt savings and clarified if the 2026 targets still include the Commercial Aviation Solutions (CAS) business.

Answer

CFO Kenneth Bedingfield estimated that about half of the incremental LHX NeXt cost savings could act as a headwind to revenue growth on certain contracts. He explicitly clarified that while the CAS business is included in 2025 guidance, it is NOT included in the $23 billion revenue framework for 2026.

Gavin Parsons sought to understand the disconnect between awards and funding, asking if total backlog remains a good leading indicator of demand and growth, and for further details on the funding environment.

Answer

Horacio Rozanski (Chairman, CEO and President) clarified that while total backlog is a long-term indicator, funded backlog matters more in the short term. He noted that funding was down 9% year-over-year in Q1 and 3% in Q2, indicating an improved but not normalized funding environment, with shorter, more episodic funding increments. He also mentioned that new awards, despite their scale, are expected to ramp up slower than in the past.

Gavin Parsons sought further clarification on the disconnect between contract awards and actual funding, asking if total backlog remains a reliable leading indicator of demand and growth, especially given the current environment.

Answer

Horacio Rozanski (Chairman, CEO and President) acknowledged that total backlog is a long-term indicator, but short-term funded backlog is more critical. He noted that funding improved sequentially but did not normalize, and while new awards drive growth, their ramp-up is expected to be slower than historical levels, which is factored into guidance.

Gavin Parsons of Cantor Fitzgerald asked about Booz Allen's confidence in managing the impact of unpredictable contract descoping and cancellations, particularly in the current environment.

Answer

Horacio Rozanski, Chairman, CEO and President, explained that while the Civil business is undergoing a 'onetime reset' due to spending slowdowns, the Defense and Intelligence businesses remain strong. He noted that outright contract cancellations are rare, affecting about 1% of the portfolio, and the company has proactively restructured to position itself for future growth opportunities.

Gavin Parsons noted CACI's strong booking quarter and a dip in the submitted pipeline, asking if this implies a very strong win rate and whether bookings should be expected to take a breather in the next few quarters.

Answer

President and CEO John Mengucci affirmed the strong Q1 win rate, acknowledging the inherent lumpiness of bookings. He explained that while the 'awaiting decisions' number might dip after a strong awards quarter, the 'expected to submit' pipeline is up, indicating a balanced overall pipeline. Mengucci cautioned that the pace of awards might slow given the government shutdown, but emphasized the strength of the trailing 12-month book-to-bill and increased funded backlog.

Gavin Parsons inquired about the implications of CACI's strong Q1 bookings ($5 billion, 2.2x book-to-bill) given a dip in the submitted pipeline, suggesting a very strong win rate. He also asked if this performance indicates that bookings might take a breather in the upcoming quarters.

Answer

CEO John Mengucci acknowledged the strong Q1 win rate and the inherent lumpiness of bookings. He noted that while the 'awaiting decisions' pipeline might dip after strong awards, the 'expected to submit' pipeline is up. Mengucci cautioned that the pace of awards might slow due to the government shutdown but emphasized the robust trailing 12-month book-to-bill and record backlog as indicators of sustained strength.

Gavin Parsons of UBS Group asked for an update on the contract award environment, specifically if a reduction in contracting officers is causing delays, and inquired about the potential book-to-bill ratio for the upcoming year given the record pipeline.

Answer

President and CEO John Mengucci acknowledged modest impacts like longer award decisions but stated the company is adept at operating in this environment. He noted that a tighter procurement bandwidth could lead to extensions of current work. While not providing a specific book-to-bill forecast, Mengucci affirmed the team's expectation is to continue growing backlog and finish the year with a ratio greater than one.

Gavin Parsons asked if there was a common theme behind the administrative slowdowns at the customer level and whether the record $17 billion pipeline could be mathematically extrapolated to a future book-to-bill ratio.

Answer

CEO John Mengucci stated there is no material slowdown, but acknowledged that government officials are likely being extra cautious. CFO Jeff MacLauchlan added the minor delays are generalized, not specific to any customer. Regarding the pipeline, MacLauchlan explained it's a positive indicator but difficult to translate precisely into a book-to-bill ratio due to variability in timing and contract size.

Gavin Parsons asked about the 2026 free cash flow conversion, seeking a bridge of major moving pieces, and why the 2025 free cash flow guidance was reiterated despite other raised outlooks.

Answer

CFO Neil Mitchill confirmed comfort with the $7 billion to $7.5 billion free cash flow outlook for 2025, noting offsets for tariff headwinds (lower cash taxes). He mentioned stronger operating profit, less inventory reduction than planned (but still sequential reduction), strong Q3 collections, and accelerated advances. For 2026, he noted a baseline free cash flow of $8 billion to $8.5 billion (excluding powdered metal compensation), with expected lower powdered metal payments and continued working capital opportunities. CEO Chris Calio added that long-term, the business is positioned for 90-100% free cash flow conversion, driven by backlog, OE ramp, resilient air traffic, large aftermarket installed base, and defense spending growth.

Gavin Parsons asked for clarification on the 2026 free cash flow conversion and the major moving pieces, as well as why the 2025 free cash flow guidance was reiterated despite other raised outlooks.

Answer

CFO Neil Mitchill expressed comfort with the $7 billion-$7.5 billion free cash flow outlook for 2025, citing offsetting factors like tariff headwinds, lower cash taxes, inventory management, strong collections, and accelerated advances. He provided a baseline for 2026 free cash flow in the $8 billion-$8.5 billion range, anticipating reduced powdered metal compensation and working capital opportunities. CEO and Chairman Chris Calio reiterated a long-term target of 90-100% free cash flow conversion, supported by backlog, OE ramp, air traffic, and defense spending.

Gavin Parsons of UBS asked about the medium-term margin target for Pratt & Whitney and the key drivers, including GTF services, OE engine mix, V2500, and Pratt & Whitney Canada.

Answer

CFO Neil Mitchill stated that while the OE ramp creates a headwind, the aftermarket is expected to grow profitably above Pratt's composite margin, providing a tailwind. He also cited sustained profitability from the V2500 program and contributions from the high-margin Pratt & Whitney Canada and military engine businesses. He reiterated the long-term goal for Pratt to be a low-to-mid teens margin business.

Gavin Parsons asked if there was anything abnormal in Raytheon's strong Q1 margin performance and what might prevent the segment from achieving its long-term goal of 100 basis points of margin expansion from volume plus 100 from productivity.

Answer

CFO Neil Mitchill stated that while Q1 margins were strong and benefited from favorable mix, the business's full potential is in the 12%+ range. He confirmed the full-year productivity target of $100 million remains intact. He expressed confidence in the margin outlook, contingent on continued supply chain health and execution, but reserved some contingency given that mix can vary by quarter.

Gavin Parsons of UBS sought clarification on the impact of the Boeing work stoppage, asking if RTX had fully stopped shipments and whether a resumption would be immediate or potentially delayed by destocking.

Answer

Executive Christopher Calio clarified that RTX has not implemented a "cold turkey" stop. To maintain the health of the value stream, the company has continued to take in material and build products for certain high-volume programs. This proactive approach is designed to ensure RTX is ready to support Boeing's production ramp-up as soon as the stoppage ends. For other, less critical product lines, cost curtailment measures have been taken.

Gavin Parsons asked if the Engine Services segment was at 'peak dilution' from new programs, given stable H2 margin guidance, and inquired about the drivers and long-term potential for ramping up internal repairs.

Answer

CFO Dan Satterfield explained that while the dilutive revenue from new programs is growing, the core business's strong performance is offsetting it, and margins will improve as they move down the learning curve. CEO Russell Ford added that the ramp-up of internal repairs is driven by developing new repair capabilities and acquisitions, which expands their service catalog.

Gavin Parsons asked for a sense of the margin dilution being offset from the LEAP and CFM56 ramp-ups in 2025 and inquired about the breakdown between price versus volume as drivers of revenue growth.

Answer

CFO Dan Satterfield clarified that the ramp-up of the LEAP and CFM56 programs, which currently have very low single-digit margins, is diluting the overall Engine Services segment margin. Without these programs, the core business is seeing margin expansion. He also noted that while the company is seeing attractive pricing, particularly in component repair, they do not disclose specific shop visit volumes due to high variability in work scopes.

Gavin Parsons asked about the ramp-up to a normalized cash conversion level, inquiring about future working capital needs for the LEAP and CFM56 programs and the expected timing for normalization. He also asked about the company's philosophy on providing future guidance.

Answer

CFO Dan Satterfield detailed that Q3 cash flow was impacted by $25 million in one-time costs and $15 million in growth CapEx, which will not repeat at the same level. He noted that working capital as a percentage of revenue has declined and expects sequential free cash flow improvement, aided by over $130 million in annual interest savings. He also stated the company will begin providing annual guidance with its Q4 results.

Gavin Parsons of UBS Group inquired about the current operating environment, particularly customer feedback and budget priorities from the DoD, and whether the procurement environment has become more competitive.

Answer

CEO Toni Townes-Whitley stated that the environment has stabilized post-Doge scrutiny, but customer personnel turnover is causing procurement delays. She noted that the administration's focus on lethality and commercial tech aligns with SAIC's strategy. While expecting a more competitive environment for mission enterprise IT, she expressed confidence in their submission pipeline. CFO Prabu Natarajan added that procurement remains focused on "best value" rather than "lowest price technically acceptable" (LPTA).

Gavin Parsons of UBS asked what provided the confidence to raise the low end of FY'26 guidance amid market uncertainty and whether management's visibility into the business environment is improving.

Answer

CFO Prabu Natarajan pointed to strong recent performance, with organic growth of over 4% in Q3 and nearly 6% in Q4, and the effectiveness of their on-contract growth initiatives. CEO Toni Townes-Whitley added that the full-year Continuing Resolution (CR) provides some stability and that ongoing engagement with the administration is clarifying SAIC's mission-critical role, which is helping to improve visibility despite the mixed signals.

Gavin Parsons asked if the G700 margin in Q1 was better than planned and if a step-down is still expected in Q2 and Q3. He also inquired if any G800 orders were booked in the first quarter.

Answer

Phebe Novakovic, Chairman and CEO, confirmed that the company is holding to the margin progression outlined in the previous quarter's call, with any updates to be provided in Q2. She affirmed that G800 orders were booked in Q1 and expects the recent certification and the end of G650 production to further stimulate demand for the new model.

Gavin Parsons of UBS asked for the underlying production rate of the G700, distinct from deliveries. He also questioned how the company can maintain its forecast of a 600-700 basis point margin improvement on the G700 given the significant cost headwinds mentioned.

Answer

CEO Phebe Novakovic declined to provide a specific underlying production rate beyond the delivery forecast for the remainder of the year, noting some planes will shift to next year. Regarding margins, she reiterated the gross margin improvement will happen, potentially over the next year, and expects to see nice margin expansion starting in Q4 and continuing through next year and beyond as they move past the initial production challenges.

Gavin Parsons of UBS asked for details on how Spirit is aligning factory costs while retaining the ability to 'snap back' to higher production rates, including implications for suppliers and its workforce.

Answer

CEO Pat Shanahan explained they are performing a balancing act, creating buffer stocks with critical suppliers while trying to maintain their trained workforce, as teammates are not '100% variable with rate.' CFO Mark Suchinski added that protecting future production rates means carrying additional near-term costs, which will impact profitability and cash but is the correct long-term decision.

Gavin Parsons of UBS asked for details on balancing factory costs with the ability to 'snap back' to higher production rates, and also sought to confirm the full-year 737 MAX delivery forecast.

Answer

CEO Pat Shanahan explained they are creating buffer stocks and retaining trained talent to avoid quality issues upon rate recovery, which involves a balance of financials and talent retention. CFO Mark Suchinski added this means carrying extra costs in the near term. He also clarified the full-year delivery forecast is 'roughly 350-ish' units, not 372.