Textron Pricing Spineometer: 3 of 5 Vertebrae

Textron, an industrial conglomerate in the aviation, defense, automotive supply, golf cart, and other industrials, had a mixed Q3 2024. Revenue rose 2.5% to $3.4 billion while operating income fell 16% to $252 million over the same period last year.

A review of Textron’s 24 October 2024 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

Weighing on performance was a Wichita, Kansas machinist union strike within the Textron Aviation segment that lasted from 23 September till 20 October 2024. This recent labor dispute has been resolved.

Remarks by Scott Donnelly, CEO of Textron, indicate a prioritization of efficiency and productivity over pricing. He stated, “I would not expect to see big contributions in necessarily price over inflation. What we really got to be doing is driving productivity and efficiency in the factories to continue to maintain that momentum.” His comments were largely echoed by Frank Connor, CFO of Textron.

Scott Donnelly is also a board member of Medtronic, a company known for its strong pricing capability. As such, it is likely he is aware of the value of pricing to corporate performance.

Textron has six operating divisions.

1. Textron Aviation, 40% of revenue, manufactures and supports the maintenance of products like the Cessna and Beechcraft aircraft sold to fractional aircraft operators, corporate fleets, and government operators.
2. Bell, known for its helicopters sold to military, government agencies, and other individuals and companies, comprises 23% of revenue. This too has aftermarket support operations.
3. Textron Systems, 9% of revenue, delivers electronic systems and drones to military and commercial customers.
4. Their Industrial division, 28% of revenue, delivers a wide variety products that range from Kautex inputs to automotive manufacturers to golf carts and power sports products.
5. Textron eAviation, though small at 0.2% of revenue, offers and is developing promising electric and combustion engine light aircraft and touts the first and only electric aircraft to receive full certification from the EU.
6. The Finance segment, at 0.4% of revenue, provides financing for the purchase of their aircraft.

Of the 35,000 employees at Textron, industry benchmarks would suggest a staff of 28 to 140 pricing professionals.

1. Due to the significant cost-plus portion of Textron revenue related to government contracts, a lower end of the pricing professional headcount range could be expected as project managers perform much of this necessary pricing function for government contract business.
2. A significant portion of Textron’s revenue derives from aftermarket parts, support, and service. While the service component may be priced using prevailing wage rates for the industry, aftermarket parts for other transportation supplier companies have been demonstrated to be an area where price increases, year over year at or above the rate of inflation, can be taken with little loss of demand up to a point. Textron would benefit from pricing professionals creating hypotheses and statistically measuring the impacts of price changes in the aftermarket parts businesses.
3. Textron produces high-value, low-volume aircraft. The pricing of these products would benefit from calculating the Economic Value to Customer, which incorporates the differential value of their product compared to each other as well as competitors. From the Economic Value to Customer, estimates can be made regarding the expected price capture for setting sales targets.
4. Sales at Textron are through both direct and indirect sales channels. Statistically defined price expectations at the account level are often developed by pricing professionals in related industries. These provide salespeople guidance on what a good, expected, and poor price result of negotiation are, preventing unnecessary price concessions and price wars, enabling business resiliency.
5. Textron’s revenue bridge, a variance analysis taught in managerial accounting, is intended to attribute changes in revenue between two periods to changes in underlying marketing factors of price, volume, and mix. Confusingly, it contains only two factors: (1) the impact of price changes and (2) the impact of volume and mix changes. In most divisions, the impact from Volume-Mix changes was negative while that from Price changes was positive. Given their presentation of data, it is impossible to fully determine if customers are trading down to cheaper alternatives as Textron raised prices or if the overall demand has been reduced. As detailed in a recent research paper, aggregating mix and volume changes to a single factor can result in confusion and misleading interpretations. Rather, revenue bridges should either contain all three factors separately or, if finance desires to publish only two factors, they should be the impact of (1) price and mix changes and (2) volume changes. Changes in mix can impact the weighted average price captured while no real change in production volume occurred. See Smith, Tim J. Normative decomposition of the profit bridge into the impact of changes in marketing variables. J Revenue Pricing Manag 20, 530–545 (2021). Here is another area where the pricing professional’s approach differs from that taught in other fields and it can meaningfully contribute to management understanding and decision-making.
6. Economic, regulatory, and geopolitical factors impact demand at Textron. The analysis of these factors and implications for pricing and marketing benefit from applied economics.
7. Acquisition activity benefits from price reviews and adjustments potentially requiring significant and pricing specific statistical analysis techniques or the quantification of the Economic Value to Customers.
8. Relative industry stability, outside of the emerging alternative energy aviation markets, would support a lower-than-average headcount in pricing however the geographic dispersion and complexity of offerings would suggest a higher-than-average headcount in pricing.

Research into the investment by Textron in pricing yielded encouraging results.

1. Although Textron is not currently searching for pricing professionals to join their team, the number of pricing professionals at Textron is within the lower range of industry benchmarks.
2. Roles for pricing professionals at Textron range from analyst, supervisor, and manager to director. No vice president of pricing was identified within any of their divisions.
3. Pricing appears to be heavily focused on analytics, both on aftermarket parts and on new product sales. People specializing in price setting, albeit via Economic Value to Customer or other market research or competitive benchmark approaches, were not identified. Nor were pricing professionals identified within the acquisition team.

Given the importance and capability of pricing at Textron as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of January 2025.

Textron Pricing Spineometer: 3 out of 5 Vertebrae. Pricing excellence appears to be being built at Textron but the buildout is incomplete and opportunities for improvement exist. For pricing analysis and suggestions to be respected by powerful peers in a sales driven organization and therefore meaningfully contribute to decision-making as a responsible contributor rather than simply an analyst whose insights are easily disregarded, a vice president of pricing in the Aviation and Bell divisions would be useful. Textron would also likely benefit from pricing professionals engaged in new product development as well as acquisitions.

TXT (Textron Inc.) fell from 86 the day prior to their earnings call to 81 one week later. FY 2023 revenue of $13.7 billion with a 8% operating margin on continuing operations and P/E ratio near 18.

For FY 2023, a 1% improvement in price would yield a 13% improvement in operating profits holding all else constant at Textron.