David Rosenberg:

Thanks, Greg, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO, and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Revenues in the quarter were $3.5 billion, up from $3.4 billion in last year's second quarter. During this year's second quarter, adjusted income from continuing operations was $1.54 per share, compared to $1.46 per share in last year's second quarter. Manufacturing cash flow before pension contributions totaled $320 million in the quarter, compared to $242 million in the second quarter of 2023. With that, I'll turn the call over to Scott.

Frank Connor:

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed starting with Textron Aviation. Revenues at Textron Aviation of $1.5 billion were up $113 million from the second quarter of 2023, reflecting higher pricing of $57 million and higher volume and mix of $56 million. Segment profit was $195 million in the second quarter, up $24 million from a year ago, due to higher volume and mix of $35 million and favorable pricing net of inflation of $22 million, partially offset by an unfavorable impact from performance of $33 million. Backlog in the segment ended the quarter at $7.5 billion, up $118 million from the first quarter. Moving to Bell. Revenues were $794 million, up $93 million from last year, primarily due to higher military volume of $104 million as we continue to ramp the FLRAA program. Segment profit of $82 million was up $17 million from last year's second quarter, largely due to a favorable impact from performance of $39 million, which included lower research and development costs, partially offset by mix. Backlog in the segment ended the quarter at $4.2 billion. At Textron Systems, revenues were $323 million, up $17 million from last year's second quarter, largely due to higher volume of $14 million. Segment profit of $35 million was down $2 million from a year ago. Backlog in the segment ended the quarter at $1.7 billion. Industrial revenues were $914 million, down $112 million from last year's second quarter, mainly due to lower volume and mix of $119 million. Segment profit of $42 million was down $37 million from the second quarter of 2023, primarily due to lower volume and mix. Textron eAviation segment revenues were $9 million, and segment loss was $18 million in the second quarter of 2024, compared to a segment loss of $12 million in the second quarter of 2023. Finance segment revenues were $12 million, and profit was $7 million. Moving below segment profit. Corporate expenses were $17 million. Net interest expense for the manufacturing group was $20 million. LIFO inventory provision was $27 million. Intangible asset amortization was $9 million. Special charges related to the previously announced restructuring were $13 million, and the non-service components of pension and post-retirement income were $66 million. In the quarter, we repurchased approximately 4.1 million shares, returning $358 million in cash to shareholders. Year-to-date, we have repurchased approximately 7.7 million shares, returning $675 million in cash to shareholders. That concludes our prepared remarks. Greg, we can open the line for questions.

Peter Arment:

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

Peter Arment:

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

Peter Arment:

Appreciate the color. Thanks, guys.

David Strauss:

Thanks. Good morning.

David Strauss:

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

David Strauss:

Okay. Thanks for that. And your first half jet deliveries are relatively flat year-over-year. Are you still expecting higher, higher jet deliveries for the year? And could you maybe comment on latitude and specifically the deliveries were lighter year-over-year there, which is a bit surprising. Thanks.

David Strauss:

Great. Thanks very much.

Operator:

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

Scott Donnelly:

Look, Sheila, I do think the team is performing well, right? I mean, we've got revenues up, margin is up, backlog is up. So we feel pretty good about where the business is. As I said in my answer to David's question, it's not always easy. We're still dealing with challenges in supply chain and things of that nature. But I do think that we'll see continued strong margins on a year-over-year basis as we go through the balance of the year. And again, we're feeling good about where the business is. I wish it was easier, it's not, but the guys are working through it. And I do think that we'll see strong margins. I think we still feel good about our guide. We still think this is probably a $6 billion business this year. I think we'll be well within the guide on the margin front. As we said earlier in the year, I think the price inflation spread, you'll see that getting smaller as the year goes on. But again, I think that will be in part offset by the fact that we'll continue to drive better we'll continue to drive better efficiencies and performance of the factory.

Scott Donnelly:

So I think the balance of the military business outside of FLRAA is doing well, right? I mean, we did add the H-1s from Nigeria, so that's 12 aircraft. We're able to start ramping that. Here this year, we saw some benefit of that in the quarter as that program starts to ramp up. V-22 production is still going along. Obviously, the five aircraft that were in FY '24 have now been added. So we look at that as adding a little bit of base. Nacelle Improvement Program continues to go. I think we'll see broader adaptation of our acceptance of that here as we go into the future. So I think there's work going on in the FY '25 budget and beyond that will provide some upgrade opportunities on V-22 as well as H-1. So the announcements around SIEPU. So I do think while the production unit volumes obviously will continue to ramp down, we will see some good flow of upgrade and modernization efforts on both the H-1 and the V-22 lines that will help to make that, to keep that solid as we start to ramp and really more -- move towards the production mode of the FLRAA program.

Operator:

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

Scott Donnelly:

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

Scott Donnelly:

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

Scott Donnelly:

Sure.

Doug Harned:

Good morning. Thank you.

Doug Harned:

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

Doug Harned:

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

Doug Harned:

Okay. Very good. Thank you.

Seth Seifman:

Hey. Thanks very much, and good morning.

Seth Seifman:

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

Seth Seifman:

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

Seth Seifman:

Excellent. Well, thanks very much.

Operator:

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

Scott Donnelly:

Good morning, Noah.

Noah Poponak:

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

Noah Poponak:

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

Noah Poponak:

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

Noah Poponak:

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

Cai von Rumohr:

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

Cai von Rumohr:

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

Cai von Rumohr:

Thank you very much.

Ronald Epstein:

Yeah. Hello. Can you hear me?

Ronald Epstein:

Yeah. Great. Perfect. Sorry. Yeah. Maybe just a couple of quick ones. Could you do a bigger version of SkyCourier? Like is there any demand for that from your customers?

Ronald Epstein:

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

Ronald Epstein:

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

Ronald Epstein:

Okay, cool. Thank you very much.

Operator:

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

Scott Donnelly:

Well, Kristine, I guess what I would say is, look, some of the -- some of those performance items for sure are associated with these factory inefficiencies and we do expect over time for those things to get better. As we get better, the supply chain deliveries as our workforce becomes more seasoned again. So I do think there will continue to be underlying improvements going forward in those areas. But as I also said, some of these things around performance are also just fundamentally associated with the growth of the business, right? We are going to see more sales commissions when we have more sales. And we are going to see R&D, again, not necessarily a headwind from a percent of sales standpoint, but you're going to see higher R&D numbers as we continue to invest in the business. So, but look, I think the bottom-line answer to your question, Kristine, is we're not going to put a number out there right now, but clearly, over the last few years, we continue to see improvements in the margin performance of this business. And I think it's reasonable to expect that we'll continue to see that going forward.

Scott Donnelly:

Well, I mean, we do have a number of sales campaigns that go on in Europe. It's not, as you noted, has not been a huge part of our business in the past. I do think as you look at farm military sales opportunity, things like the FLRAA program, clearly that's a big part of where the army is focused is looking at partner countries around the world. And just as we saw for many, many decades, things like the Black Hawk become really important parts of those businesses from an international sales perspective, including Europe. We obviously will expect that to happen over time. And there's also some organic things. So again, if you look at rotorcraft again, I guess right now we've we did announce sort of a teeming relationship with Leonardo around pursuit of the European next generation rotorcraft opportunity. So that's kind of organic, but that would be a product that's tailored to that European market. So I do think there are opportunities out there and we are pursuing those and we'll compete for those going forward.

Operator:

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

Scott Donnelly:

Good morning, George.

Scott Donnelly:

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

Frank Connor:

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

Frank Connor:

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

Scott Donnelly:

Yeah.

Peter Skibitski:

Hey, good morning, guys.

Peter Skibitski:

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

Peter Skibitski:

Okay. Interesting. Last one for me, just on GBSD. It looks like sentinel (ph), it looks like it passed its [indiscernible] review. Any change that you guys expect in the program profile for you guys?

Peter Skibitski:

Okay. Thank you.

Operator:

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

Scott Donnelly:

Good morning.

Scott Donnelly:

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

Scott Donnelly:

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

Scott Donnelly:

Okay.

Scott Donnelly:

Thanks, David, and good morning, everyone. In the first quarter, we saw higher segment profit at Aviation, Bell and Systems. At Aviation in the quarter, we delivered 36 jets, up from 35 last year, 20 commercial turboprops, down from 34 last year's first quarter. Aviation continues to see strong demand across our product lines that resulted in backlog growth of $177 million and in the first quarter at $7.3 billion. Textron innovations fleet utilization remained strong in the quarter, contributing to aftermarket revenue growth of 6% as compared to last year's first quarter.

Operator:

[Operator Instructions] And we'll start with David Strauss with Barclays.

Scott Donnelly:

Sure. David, look I think that we certainly expect to see nice growth on a year-over-year basis. The supply chain does continue to improve the number of hours that we're able to get in the factory in terms of labor hours that are productive hours post training and whatnot does continue to improve. So I think we feel pretty good about how things progressed through the quarter.

Operator:

Next, we go to the line of Robert Stallard with Vertical Research.

Scott Donnelly:

Well, look, I think we talked last year Robert towards end of the year and in our guide that we expected to see the sort of high-end consumer dollars, sort of recreational personal transportation, stuff soften and we're seeing that. It's probably even a little bit softer than we would have expected. I think the automotive segment is pretty stable, which is fine. There are certainly some pieces in the vehicle business that are doing fine, but those high-dollar discretionary items have certainly softened.

Robert Stallard:

Right. And then maybe one for Frank. On the revised restructuring plan, do you -- how do you expect the cash impact of that to flow through? And do you expect the savings to be roughly equivalent to the restructuring charge?

Operator:

Next, we move on to Sheila Kahyaoglu with Jefferies.

Scott Donnelly:

Well, I think we'll probably still end up in that range, Sheila. We had a strong Q1, obviously. We did have, as we noted there, a settlement on initial property-related lawsuit that gave us a little bit of a boost in the quarter. But I would say the team is performing well. As you know, we did restructuring actions to try to deal with the loss of the FARA program. We were able in a number of cases to take some of the appropriate engineering count and move that over to the FARA program, which helped us ramp that program up.

Sheila Kahyaoglu:

Great. And then if I could ask one on Aviation, orders held up pretty well, book-to-bill above 1x. Maybe if you could provide any color on what you're seeing from your customers. One of your competitors noted interest rates are potentially prohibiting orders? If you could just comment on that?

Operator:

Next, we go to Myles Walton with Wolfe Research.

Scott Donnelly:

Sure. Look, the Bell supply chain continues to I would say, improve. We always have a number of parts that are sort of problem children. We're continuing to work that. But in general, I think we are able to manage our way through that. And I don't think there's anything new or surprising that would have, in any way, affect our guide as we think about Bell commercial volumes through the course of the year.

Scott Donnelly:

Yes. We haven't released a production rate on the 525.

Peter Arment:

Scott, nice results. Did you quantify what the settlement was in the Bell that affected the margins this quarter?

Peter Arment:

Okay. Okay. So I just want to clarify that. And then just a quick one for you, Frank. We expected that you would have higher corporate expenses in Q1. Just wondering, just from a modeling perspective calibrate the rest of The Street. Are we thinking more evenly spread for the balance of the year for your $160 million target?

Operator:

Next, we have a question from Cai von Rumohr with TD Cowen.

Scott Donnelly:

Cai, I mean I thought we feel pretty good about our deliveries. We always would like to get another couple of jets here and there, but I think we're doing pretty good and feeling good about where we are. On the labor front, where we expect it to be. So I don't see a problem with our labor situation in which [indiscernible] I think everybody has been challenged by higher turnover rates just in terms of the amount of churn.

Scott Donnelly:

Well, we're already ramping up the production side of the program to start to meet deliveries, but I suspect those deliveries will be in the late '25 sort of time frame. I think we're in a very good place in terms of the cycle, as you alluded to. Obviously, Equinor is an energy company, and those are for oil and gas offshore applications, and we have several other customers who were in, I'd say, positive latter stage negotiations that are primarily aimed at the oil and gas market right now. So it's certainly a favorable time to be getting these things through certification. And I think it fits a nice place in that end market.

Seth Seifman:

Thanks very much. Good morning, everyone. I guess, Scott, you called out the contribution to EBIT growth from pricing at Aviation, and we'll see more about the other components in the queue. It looks like the compares for pricing get somewhat tougher from here, should we think about I know you probably have some visibility into the backlog here. Should we think about the $14 million of year-on-year pricing being a relatively high level compared to what we're likely to see for the rest of the year given that those compares get harder?

Seth Seifman:

Okay. Okay. And then just a follow-up, I think you talked earlier about potentially some upside at Bell. I talked about being in good shape at Aviation. I mean when we think about where industrial came in, in the first quarter and where the guidance is, it looks like they're going to probably have a tough time getting to that guidance and then maintaining the overall guidance for the company of Aviation and Bell to fill in those gaps? Or that...

Operator:

Sorry about that. We will next go to the line of Noah Poponak with Goldman Sachs.

Scott Donnelly:

I think you'll still see some pressure in second quarter. No. Remember, a lot of these aircraft are inventories, a lot of that cost is inventory. So it usually takes the first half of the year to bleed out in the performance levels and productivity levels that we saw in the back half of the previous year in 2023 in this case. So I still think we see some pressure for that.

Noah Poponak:

Okay. That makes sense. And then I guess just a follow-up on the Bell margin. I know the FLRAA is still ramping and it will kind of exit the year at a different revenue run rate than it achieved in the first quarter. But it's also ramped a decent amount. And I think this year, you'll get pretty close to what the run rate is in the sort of medium term. And this Bell margin just keeps outperforming. I mean the amount of margin compression that was discussed out there in the market, I guess, in the medium term? Is that kind of off the table? Or I guess, how do you see this dollar margin hanging in '24, '25 or '26, just in the medium term as you continue to ramp FLRAA?

Frank Connor:

Well, I think that finance will be in the range of what we had thought. We talked about corporate expense was kind of significantly higher this first quarter due to share price performance. But we'll kind of stick with that type of range. I think interest expense relative to, I don't know what -- we didn't really guide interest expense, but our -- I guess, we're probably a little better on interest expense, excuse me, relative to the $90 million depending on what interest rates do for the year.

Operator:

Next, we have a question from Doug Harned with Bernstein.

Scott Donnelly:

Jeez, I don't know. I mean, obviously, I would say at a macro level, generally speaking, over very long periods of time, price inflation probably end up pretty close. I think we certainly went through a number of years in this industry where the prices were where the products were way under price. I mean it just doesn't make sense.

Douglas Harned:

Okay. And then just switching over to Bell for a moment on -- again, on margins. You've talked in the past, and I think as one would expect, initially, FLRAA is dilutive. But when you look at that trajectory now that you're moving forward, you're headed toward [ Milestone B ], I would expect long term, this is a very accretive program once you're in full rate production. Can you give us a sense of how you expect kind of the time line of FLRAA's contribution to margins to proceed?

Douglas Harned:

Okay. And that would be dilutive in that period.

Operator:

Next, we go to the line of Jason Gursky with Citigroup.

Scott Donnelly:

Sure. So look, I think there's obviously a couple of pieces that are in here, right? There's the Pivotal business, which I think is doing well. We're seeing -- we saw a significant increase in the number of deliveries here in Q1. I think demand for those products is strong. So we feel pretty good about where that is.

Jason Gursky:

And as you think about the size of the market that you're going after, you're putting investment dollars against what you expect to be volumes. And so I'm just kind of curious, when do you expect the payback period to start on these investments that you're making?

George Shapiro:

Scott, the incremental margin in Aviation, as people were talking about was, I mean, like 46%. And I recognize that revenue differences are small, so the numbers can get somewhat distorted. But given that you said inflation will probably pretty much be somewhat similar to the price benefit that you got this quarter. Why won't those incrementals for the rest of the year run somewhat higher than kind of your objective of 20%?

George Shapiro:

Okay. And one quick one for you, Frank. You bought a lot of stock in the first quarter, like 1.8% of the outstanding I guess it was pretty opportunistic? Or do we expect that you might buy more than 5% for this year?

Operator:

Next, we go to the line of Ron Epstein with Bank of America.

Scott Donnelly:

No, there's not. I mean we really haven't been in the in the guns and bullet business. So most of that stuff is not replenishments of things that we have. I do think there's opportunities in Ukraine over time when you look at things that are possibilities for Bell on some other things and systems, but not something that's directly tied to these supplementals.

Scott Donnelly:

Well, look, Ron, as we said, it's the randomness is part of what drives us crazy, right? It's -- and they change over time. But you're absolutely right. Windshields have been a problem now for several years. And it's, I'd say, probably getting better, but it's been a big problem. It's been a problem for us in terms of production builds. And frankly, it's been a big problem for us in terms of our customers.

Ronald Epstein:

Yes. When I heard that I was astonished, but yes, I guess the current suppliers shut down the other supplier, whatever.

Kristine Liwag:

Scott, earlier you mentioned on industrial, how you're seeing incremental weakness in the high-end consumer. Can you talk about the customer profile of those buyers? And if there are similarities to the customer profile for products like M2 or pistons or Couriers in aviation?

Gavin Parsons:

I just want to confirm if I heard the restructuring savings are expected at $185 million, given I think the initial plan was $75 million. And just what's driving the better number there?

Gavin Parsons:

Got it. Okay. What is the transition from shadow to FTUAS look like in terms of kind of revenue and margins over what time frame?

Operator:

This conference is being recorded for digitized replay and will be available after 10 a.m. Eastern Time today through April 25, 2025. You may access the replay by dialing (866) 207-1041 and enter the access code 8546032. This does conclude our conference for today. Thank you for your participation. You may now disconnect.

David Rosenberg:

Thanks, Leah, 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 $3.9 billion, up $3.6 billion in last year's fourth quarter. Segment profit in the quarter was $384 million, up $78 million from the fourth quarter of 2022. During this year's fourth quarter, adjusted income from continuing operations was $1.60 per share, compared to $1.23 per share in last year's fourth quarter. Manufacturing cash flow before pension contributions totaled $380 million in the quarter, up $12 million from last year's fourth quarter. For the full year, revenues were $13.7 billion, up $814 million from last year. In 2023, segment profit was $1.3 billion, up $191 million from '22. Adjusted income from continuing operations was $5.59 per share as compared to $4.45 per share in '22. Manufacturing cash flow before pension contributions was $931 million, down $247 million from '22. With that, I'll turn the call over to Scott.

Frank Connor:

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.5 billion were down $58 million from the fourth quarter of 2022, reflecting lower volume and mix of $158 million, partially offset by higher pricing of $100 million. Segment profit was $193 million in the fourth quarter, up $23 million from a year ago, reflecting a favorable impact from pricing net of inflation of $51 million, partially offset by lower volume and mix of $22 million. Backlog in the segment ended the quarter at $7.2 billion. Moving to Bell, revenues were $1.1 billion, up $255 million from last year's fourth quarter, reflecting higher commercial revenues of $171 million largely driven by increased deliveries and higher military revenues of $84 million related to the FARA program. Segment profit of $118 million was up $55 million from a year ago, primarily driven by higher volume and mix of $39 million. Backlog in the segment ended the quarter at $4.8 billion. At Textron Systems, revenues were $314 million and flat with last year's fourth quarter. Segment profit of $35 million was equal to last year's fourth quarter. Backlog in the segment ended the quarter at $2 billion. Industrial revenues were $961 million, up $54 million from last year's fourth quarter, largely reflecting higher volume and mix at Caltex and a favorable impact from pricing at Textron Specialized Vehicles. Segment profit of $57 million was up $14 million from the fourth quarter of 2022, primarily due to higher pricing net of inflation of $18 million. Textron eAviation segment revenues were $10 million and the segment loss was $23 million in the fourth quarter of '23, which reflected the research and development costs for the initiatives related to the development of sustainable aviation solutions. Finance segment revenues were $12 million and profit was $4 million. Moving below segment profit. Corporate expenses were $45 million, net interest expense was $13 million, LIFO inventory provision was $21 million, intangible asset amortization was $9 million, and the non-service components of pension and postretirement income was $60 million. In November, we announced a restructuring plan that resulted in pretax special charges of $126 million in the fourth quarter. We anticipate the restructuring plan will be substantially completed in the first half of 2024, resulting in annualized cost savings of approximately $75 million. Our manufacturing cash flow before pension contributions was $380 million in the quarter. For the year, manufacturing cash flow before pension contributions totaled $931 million, down $247 million from the prior year. In the quarter, we repurchased approximately 3.7 million shares, returning $283 million in cash to shareholders. For the full year, we repurchased approximately 16.2 million shares, returning $1.2 billion in cash to shareholders. Turning now to our 2024 outlook on Slide 7. We're expecting adjusted earnings per share to be in the range of $6.20 to $6.40 per share. We're also expecting manufacturing cash flow before pension contributions to be about $900 million to $1 billion. Moving to segment outlook on Slide 8 and beginning with Textron Aviation, we're expecting revenues of about $6 billion. Segment margin is expected to be in the range of approximately 12% to 13%. Looking to Bell, we expect revenues of about $3.5 billion. We're forecasting a margin in the range of 9.5% to 10.5%. At Systems, we're estimating revenues of about $1.25 billion, with a margin in the range of about 11% to 12%. At Industrial, we're expecting segment revenues of about $3.8 billion and a margin in a range of 6% to 7%. At eAviation, we're expecting revenues of $50 million and a segment loss of $25 million, reflecting our continued investment in sustainable aviation solutions. At Finance, we're forecasting segment profit of about $30 million. Looking to Slide 8, we're projecting about $160 million of corporate expense. We're also projecting about $90 million of net interest expense, $110 million of LIFO inventory provision, $35 million of intangible asset amortization and $265 million of nonservice pension income. We expect a full year effective tax rate of approximately 17.5%. Turning to Slide 10. R&D is expected to be about $550 million, down from $570 million last year. We're estimating CapEx will be about $425 million, up from $402 million in 2023. Our outlook assumes an average share count of about 191 million shares in 2024. That concludes our prepared remarks. So, Leah, we can open the line for questions.

Sheila Kahyaoglu:

Good morning, Scott, Frank, and welcome, David. Scott, maybe first one for you. How do we think about 2024 aviation deliveries and just book-to-bill in the context of your guidance?

Sheila Kahyaoglu:

Can we get to about 200 deliveries in '24? Do you think that's reasonable?

Sheila Kahyaoglu:

Got it. And if I could ask one on FLRAA, just good progress on the program with ITEP. But I think revenues were about $175 million in 2023, fell short of our expectations. And how do we think about 2024, we have about $850 million of FLRAA according to the budget. So…

Sheila Kahyaoglu:

Thank you.

Peter Arment:

Yeah. Good morning, Scott, Frank, David. Just maybe -- just circle back just on how you're thinking about kind of the margin leverage in Aviation, Scott, when you think about just because you called out some of the pricing that you continue to get. How are we thinking about just kind of that flowing through? I mean just given the margin outlook of 12% to 13% kind of at the low end of the range, it's flat, but at the upper end, obviously, 100 basis points. Just how are you thinking about that?

Peter Arment:

Got it. That's helpful. And then just Frank quickly, the interest expense increase, just maybe what's going on there specifically? Thanks.

Frank Connor:

Yeah, a little. We've got slightly higher borrowing costs from the bond deal that we did last year. So that's a little bit of the rollover on the financing. It assumes slightly lower cash balances and a little bit of conservatism around the interest rate that we earn on that excess cash.

Operator:

And next, we go to David Strauss with Barclays.

Scott Donnelly:

Good morning, David.

Scott Donnelly:

No, David, I don't think it's a material impact. The services, frankly, are using the opportunity -- the grounding to continue to do their maintenance activities and get aircraft ready to fly. So we probably can't say much more about that situation than that. But no, I don't expect it to be a material impact.

Frank Connor:

Yeah. From a cash standpoint, we obviously are anticipating volume growth in the year. So that's going to put a little continued pressure on inventory levels as we look kind of to '24 and '25 volume growth, not a lot. There is a little bit of working capital pressure with the timing of some customer payment activity, particularly on the military side. Bell, in particular, had a very good year in '23 in terms of the timing of payment activity that puts a little bit of a headwind on cash flow. And then as you heard a little higher CapEx guidance kind of -- in terms of the spend there. So it's not any one item. It's kind of a little bit of headwinds on working capital associated with the things I mentioned and a little bit higher levels of investment. But we still think we're -- there's still very solid cash flow performance for the year. In terms of the share count, we talked about 191 million average shares. So kind of roughly 5% or so reduction in average share count for the year.

Operator:

Next, we go to Jason Gursky with Citi. Please go ahead.

Scott Donnelly:

So the CR situation right now doesn't really worry me very much on the system side of things. As we indicated, Jason, we're going to be relatively flattish on the revenue in 2024, I'd say the pipeline is very strong. You look at some of these down selects on FTUAS, the ARV program, what used to be the [indiscernible] program. A lot of these things are significant opportunities for us are really important down selects that we achieved last year. We'll execute on those, and they're not big growth programs so they don't really have a CR impact that I'm too concerned about. And there are virtually all programs that will have their next significant contractual award down select in 2025. So that's why you see us kind of flattish. We had -- I think 2023 was a hugely important year for the down selects on those really important programs, execute this year and you start to see the revenue growth driven by ultimately being final selection awards, EMD programs that award in 2025.

Scott Donnelly:

Sure. Absolutely. Look, keep in mind, there's two things going on in that eAviation segment, right? There's Pipistrel, which is our current -- it's a real business, real sales, roughly doubling the volume of aircraft sales from '22 to '23, roughly doubling '23 to '24. So I think the product lineup at Pipistrel is doing quite well. We're expanding distribution channels. It's a relatively small business, but it's doing well. What's driving the losses is these investments in R&D, particularly around the Nexus program, that's something that won't generate revenue probably for several years and investment on, say, the Nuuva 300 which is our hybrid unmanned cargo, which again, this is a few years from revenue. And so that's part of why is we broke this thing out, right? So you guys see these investments, which are, frankly, not dependent or tied to the revenue within that segment. So the two big moving pieces in there in terms of the investment side are the Nuuva on the unmanned cargo and the Nexus on the sort of the EV tall side, which, again, I don't think that has to be necessarily dependent to urban air mobility, but just GA in general. Both of those teams are making great shape. I think we'll see first flight of the Nuuva in 2024. We've also begun the assembly and wings and fuselage build on the Nexus program in Wichita. So both programs are making very good progress, but they're both technology investment programs.

Scott Donnelly:

Sure.

Noah Poponak:

Hey, good morning, everyone.

Noah Poponak:

Scott, we've heard some discussion in the business jet end market that even though 2023 was a decent order year that there's actually maybe some pent-up demand because it was so consensus that there was going to be a recession or something like it. And that in 2024 if we're having an inflation decel and rate cuts and some version of a soft landing that you could have your normal underlying demand plus anybody that deferred from '23. And so I'm curious if you hear that from your customers or your sales force and there's an upside case for bookings? Or is that too aggressive and just stick with book to bill of 1?

Noah Poponak:

Okay. And I wondered if you could just maybe discuss a little more just how much better is supply chain, labor, your ability to get airplanes out the door. The delivery number was down in '23 despite all the demand, kind of to your point there on availability. Whatever the '24 delivery plan is, it's got to be up a lot to get to that revenue guidance. Do you feel like you really have that hitting the ground running in January here? And then as that pertains to the margin, why would price net of inflation not be better if that -- if pricing is still good, I know the rate of change matters, but if that -- if the cost inflation and disruption piece settles down significantly for you?

Noah Poponak:

Okay. That's good. I'm just going to ask one more. The Bell margin, pretty strong in the quarter, close to '23, well ahead of the initial plan. This '24 guide, 9.5% to 10.5%. Kind of flat year-over-year. There was a view that this was going to 7%, 8% as you ramped FLRAA, you're ramping FLRAA, that's not happening. Can you talk about how you're outperforming there and absorbing the FLRAA ramp? Is '24 the trough or does that still need to go down some number of hundreds of basis points before then going back up?

Noah Poponak:

Okay. All right. Thanks.

Myles Walton:

Thanks, good morning. I was hoping to circle on Aviation. In the last few quarters, there's been more discussion of this performance as a negative variance to the profit walk. That wasn't part of the conversation. It was clearly price offset by a little bit of volume. So is it fair to think that, that bucket of performance that you all cite has materially become nonmaterial?

Myles Walton:

Okay. And then on the restructuring program, you executed, I think, about 60% maybe was directed at Bell. Of the $75 million gross savings you talked about, how much net savings is Bell getting in '24? And also is Bell getting most of the lower R&D benefit?

Myles Walton:

And is R&D drop there mostly in Bell?

Myles Walton:

Makes sense. Thank you.

Robert Stallard:

Thanks so much. Good morning.

Robert Stallard:

Scott, I’d just like to follow up on Noah's question about the supply chain and the parts behind at the moment. Are any specific areas where you're seeing any problems like interiors that are holding things up?

Robert Stallard:

Yeah. Understood. And then secondly, there's been some press reports that Textron has been looking at some M&A competitions in recent months. I don't expect you to comment on that. But I was wondering if you could maybe reiterate your priorities for capital deployment as we start 2024?

Robert Stallard:

Okay. That’s great. Thanks, Scott.

Seth Seifman:

Hey, thanks very much and good morning, everyone. I guess just asking about the performance at Aviation and kind of the improvement in productivity and parts availability that you started to see in the fourth quarter. Does that mean that in the first quarter, we can expect to see kind of a nice increase in deliveries and something that would kind of affirm the notion of being on track for the revenue guide for the year?

Seth Seifman:

Okay. Okay. Great. And then maybe just following up a little bit different twist on Rob's question. I know you probably won't comment on specific M&A reports. But the reports that we have read tend to deal mainly with the space end market. I wonder if you could comment on -- do you view that as an important and/or attractive end market into which to expand?

Seth Seifman:

Fair enough. All right. Thank you very much.

Operator:

And next, we go to the line of Kristine Liwag with Morgan Stanley. Please go ahead.

Scott Donnelly:

Yep, we can hear you fine.

Scott Donnelly:

Well, Kristine, as we kind of put out there, there's a sizable piece that's going into Bell, and that's really aligning our cost structure with the lower production rates on some of the historic military programs like H1 and V-22. That's a very -- in terms of cost and the mix of people within the business, the ramp obviously is net positive, but it's largely in the engineering program side of the FLRAA program. So it's a necessary action to align costs with the old historic production programs. As we also indicated, we're just -- we're aligning some of our plans on the auto side to understand where is demand around the world and rationalizing where we think it's appropriate to keep that business healthy with a high return and cash flow. So just -- there's bits in a number of other places. But we believe on a run rate basis, it's going to be about $75 million a year positive impact to the business. And so that's, I think, a good return and why we decided to proceed with the program.

Scott Donnelly:

Look, I think what we saw this year, which was strong growth, 6.5% on the services side. Obviously, that's a mixture between volume and pricing. I expect we'll continue to see good demand on that side. We certainly have that baked into our forecast. Aircraft are flying. Our customers are running the aircraft. They're doing the necessary maintenance. So I think it will continue to be a healthy part. Certainly, what we've incorporated in the guide for next year is good growth in the service business, both our service centers as well as the parts. And as always, that's going to be a function of both volume increases as well as annual expected pricing in the aftermarket side.

Operator:

Next, we go to the line of George Shapiro with Shapiro Research. Please go ahead.

Scott Donnelly:

George.

Scott Donnelly:

Look, George, as you know, it takes many months to build an aircraft. So the improvements in both the labor side and the parts side takes a while to push through the system. So the higher cost and a lot of the impacts that we kind of saw through the course of the year were full year impact. So -- but I do feel like as we look at the numbers, and what we experience on a day-to-day basis, we did see improvements. And I think that's -- as a result, you'll start to see that improvement as you get into 2024.

Scott Donnelly:

George, I think it's largely timing. We always have a little bit of lumpiness in terms of when deposits are coming in on some of our larger customers, but there's -- I don't think there's anything concerning there. We've said all along, we expect there's going to be some quarters where it's going to be below 1:1, probably some quarters where it's above 1:1. But again, our assumption full year going all the way back through '23 was 1:1. We did better than that. Our assumption in 2024 is it's going to be 1:1, and obviously, we'll see how the market plays out. But I still think we feel good about the end market. We feel good about demand, and I think it's healthy.

Scott Donnelly:

George, I think we're continuing to see good margins on our military business, obviously outside of the FLRAA side. It certainly helps to have higher commercial deliveries. We -- I think we'll get some benefit of higher commercial deliveries as we talked about in 2024. But look, there's going to continue to be some pressure on the margin just because we are seeing significant growth in the FLRAA program. The reason we did the cost action and did the restructuring was to try to shore up the profitability of the business on the legacy production programs. And so part of the guide is, obviously, we continue to see some benefit of that. But again, there will be overall margin rate pressure going into the future. But I think as we talked about, even with that and the growth of the FLRAA program, we're going to see significant revenue growth, and we're going to see absolute up profit increases and accretion to EPS for the business. So I think as we work through a transition from legacy production to a new EMD program, I think we can manage our way through that well. And obviously, long term, it's going to be a great story for Bell.

Scott Donnelly:

Sure.

Pete Skibitski:

Hi, good morning, guys. Scott, can you expand on your opening comments regarding Caltex and your expectations there in 2024? It sounds like you think you might be a little bit weak there. Just was wondering what the drivers were?

Pete Skibitski:

Okay. Got it. And then I had a couple of questions on Aviation. Are you expecting Caravan sales deliveries to be up in '24? I know you delivered a lot of them to Asia, and we're seeing some softness in China. So just wondering what you're seeing there?

Pete Skibitski:

Okay, great. Thank you.

Cai von Rumohr:

Yes. Thanks so much. So, Scott, at Bell, are you looking for -- is part of the profit strength this year '24 coming from closeouts on the V-22 and the H1? And secondly, is there any risk to FLRAA volume from an extended CRR?

Cai von Rumohr:

Got it. And last one. At Aviation, can you give us some color in terms of where the order strength is in terms of fractionals versus high net worth versus corporate?

Cai von Rumohr:

Thank you very much.

Doug Harned:

Good morning, thank you. Scott, in the past, you commented on the supply chain that you'd actually seen more challenges at Bell than you had in Aviation. And given the strong margins at Bell, I mean, can you comment on where that stands today?

Doug Harned:

And then if I go back to the Aviation side and the end market, one of the things we've seen is more preowned airplanes out there for sale, higher percentage. We're still not back at kind of historical norms. But you were commenting that you're seeing a little bit less pricing benefit relative to inflation. I mean are you seeing any potential pressure here from pre-owned and as you look at your market?

Doug Harned:

Okay, very good. Thank you.

Gavin Parsons:

Thank you, good morning.

Gavin Parsons:

I just wanted to circle back to industrial margins and just get a better sense for what's driving that, given I think context had been the section segment underperforming. And then just thoughts on, it seems like in TSV, some of your recreational vehicle competitors are having headwinds. So what's driving the margins and growth there?

Gavin Parsons:

That's helpful. And maybe just circling back to the NetJets 1,500 over 15 years, I think typically, they firm up about a year out. But on average, that would be 100 deliveries a year. Is that something you need more visibility from them on over a decade of orders or…

Gavin Parsons:

That makes sense. Thank you.

Operator:

And ladies and gentlemen, as a reminder, this conference is available for digitized replay and will be available after 10 a.m. Eastern Time today through January 24, 2025. You may access the replay by dialing (866) 207-1041 and enter the access code of 4065507. And that does conclude your conference for today. Thank you for your participation. You may now disconnect.

Eric Salander:

Thanks, Leah, 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 $3.3 billion, up $265 million last year's third quarter. Segment profit in the quarter was $332 million, up $60 million from the third quarter of 2022. During this year's third quarter, we reported income from continuing operations of $1.35 per share. Adjusted income from continuing operations, a non-GAAP measure, was $1.49 per share compared to $1.15 per share in last year's third quarter. Manufacturing cash flow before pension contributions, a non-GAAP measure totaled $205 million in the quarter compared to $292 million in the third quarter of 2022. With that, I'll turn the call over to Scott.

Frank Connor:

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.3 billion were up $171 million from last year's third quarter, reflecting higher volume and mix of $89 million and higher pricing of $82 million. Segment profit was $160 million in the third quarter, up $29 million from a year ago, due to favorable pricing net of inflation of $39 million and a $23 million favorable impact from higher volume and mix, partially offset by an unfavorable impact from performance of $33 million, largely related to supply chain and labor inefficiencies. Backlog in the segment ended the quarter at $7.4 billion. Moving to Bell, revenues were $754 million, flat with the third quarter of 2022, with lower commercial helicopter volume largely offset by higher military volume. Segment profit of $77 million was up $3 million from last year's third quarter, primarily due to favorable platform performance of [indiscernible] million, largely reflecting a lower research and development costs, partially offset by lower volume and mix of $16 million. Backlog in the segment ended the quarter at $5.2 billion. At Textron Systems, revenues were $309 million, up $17 million from last year's third quarter, largely reflecting higher volume. Segment profit of $41 million was up $10 million compared with the third quarter of 2022 primarily due to a favorable impact from performance of $8 million. Backlog in this segment ended the quarter of $2 billion. Industrial revenues were $922 million, up $73 million from last year's third quarter, largely due to a higher volume and mix of $45 million at both product lines and an $18 million favorable impact from pricing. Segment profit of $51 million was up $15 million from the third quarter of 2022. Textron eAviation segment revenues were $7 million and segment loss was $19 million in the quarter, primarily reflecting research and development costs. Finance segment revenues were $13 million and profit was $22 million, up $15 million from last year's third quarter, largely due to a recovery of amounts that were previously written off related to one customer relationship. Moving below segment profit. Corporate expenses were $38 million. Net interest expense was $11 million, LIFO inventory provision was $26 million. Intangible asset amortization was $10 million and the non-service components of pension and postretirement income was $59 million. In the quarter, we repurchased approximately 3.1 million shares returning $235 million in cash to shareholders. Year-to-date, we've repurchased approximately 12.5 million shares, returning $885 million in cash to shareholders. To wrap up with guidance, we are increasing our expected full year adjusted earnings per share to be in a range of $5.45 to $5.55, up from our prior range of $5.20 to $5.30. We're also continuing to expect full year manufacturing cash flow before pension contributions of $900 million to $1 billion. That concludes our prepared remarks. So we can open the line for questions.

Sheila Kahyaoglu:

Maybe if we can talk about Aviation to start spot, competitors on pricing or mix at NBAA, but aviation still booked 7 points of gross price, 3 points of net price. What are you seeing in your backlog in terms of pricing? And I know everyone wants to nitpick on your backlog, but it was still up 15%. How much of that included NetJets?

Sheila Kahyaoglu:

No, that's helpful. And then if you could talk about Bell margins, they posted another 10% margin. What's going on there, maybe in particular on the R&D side with FLRAA and FARA now that you have [indiscernible]?

Operator:

We move on to David Strauss with Barclays.

Scott Donnelly:

Well, David, I guess the color I would give is that, look, obviously, the business pays a lot of attention and tracks sort of trend data. And I would say that from a standpoint, is it getting better, the trend data would say, yes, it is getting better. The number of parts that come in late to PO has been declining through the course of the year. They look at labor, effectivity and efficiencies that has been getting, modestly better as we're going through the year. But it's still a problem, right? So it's -- I wouldn't say we have any one big like engine that's just driving this. As you get towards the end of the quarter, if you're missing parts for aircraft, that's -- you still can't deliver that aircraft. So it is I guess, getting better from a context of how many parts are late to PO, but parts are still late to PO. And as we often say, David, every part is important on an airplane. So we're continuing to see that challenge across the number of aircraft types. I think it will continue to -- we certainly expect it to get better as we go through time, but it's going to be something we're going to fighting our way through. But I guess the only thing I would point out is despite all that, I mean, we obviously would like to have delivered some more aircraft in the quarter. And in particular, we have customers that would like to see us to deliver those aircraft in the quarter. But despite all that and the challenges and the headwinds around labor and supply, we're still posting strong growth in the business and good strong margin expansion in the business. So I think despite a lot of these headwinds, the business performance is growing very well. It's growing and it's continuing to drive improved profitability.

Scott Donnelly:

Well, we're not going to -- we're probably not going to give exact aircraft numbers, David, but it's going to be in that neighborhood, I would expect.

Noah Poponak:

Scott, maybe you could just spend another minute on the demand environment, in Aviation and in the business jet market. It's a pretty strong bookings number with a decent amount of uncertainty out there. So what are your customers saying? How much of that is just replacement so they have to do it kind of in a wide range of macro scenarios? How is October? Would just love to hear some more color from you.

Noah Poponak:

Okay. And then just on the margin in Aviation, recognizing your point that it has expanded quite a bit from the trough. It's down sequentially and the incremental -- the year-over-year incremental, I think, is a little light of what you normally look for despite healthy unit and price. So -- anything to note there? And I guess, what do we look for, for the Aviation margin to finish the year and maybe into next year?

Noah Poponak:

Can you be through that in full year 2024 numbers? Or are you likely to still be battling that into next year?

Operator:

Next, we go to Doug Harned with Bernstein.

Scott Donnelly:

No, it really hasn't. Look, I mean we did sort of set our base plan, expecting kind of 1:1, and look, I think eventually, the industry has to get to 1:1. It's not -- I don't really think it can continue to exceed that much for that long. But obviously, our sales teams are out there and customer demand is what it is. So if it's greater than 1:1, obviously, that's terrific for the business. And as you note, we have seen that through the course of the year. So we'll continue to kind of plan and look at production volumes and adjust accordingly as we go forward. But the mix is markedly different. As I said, we're still seeing strong jet demand, we're seeing across all the turbo product lines. We're seeing it virtually across all of our different aircraft types. Obviously, it's helped by having some new aircraft like the Sky Courier out there, it's helped by having some of these upgrade programs which always stimulates the market when you do a next version of CJ3, our next version of an M2. We have [indiscernible] announced out there. So there's a lot of things we're always doing to invest in the product lines to kind of continue to help drive that demand in the market. But for sure, versus our estimation at the beginning of the year 1:1, the end market continues to be stronger than even we would have expected, which is obviously a positive.

Scott Donnelly:

Yes. Well, look, we obviously continue to work with our supply chain to try to make necessary adjustments. And as I said, I think the trend line is improving. But it still comes down to a part. So I missing a few parts. I can't deliver an aircraft for missing one part I can't deliver an aircraft. So it is still a problem, but I do think it's trending in the right way. Obviously, as we adjust and think about our production rates going forward, we're working with those suppliers to kind of forecast to them, how we're going to adjust our rates into the future. But that's a real-time activity, right, that's going on all the time. So as I kind of indicated earlier, I think we'll expect to see increased deliveries again in 2024 versus 2023. And that's partly stronger demand, and it's partly getting some of the supply chain issues resolved and getting back to where we can make -- generate additional volume out of factory.

George Shapiro:

Maybe this one for Frank. The increase in guidance, I mean, this quarter, you got a big benefit from finance, somewhat offset, I guess, with eAviation being worse than what I would have expected and a lower tax rate. Was there operational benefits in that EPS increase you got? It was mainly these items I just mentioned.

George Shapiro:

Okay. And Scott, on the last call, I think there was a comment that maybe deliveries would be higher, closer to somewhere in the 40s from what we saw this quarter. So I assume that's all supply chain. I mean is that going to continue in the fourth quarter as well? So we'll see strong deliveries but maybe less than we would have thought 6 months ago. And does that bode for next year being a lot bigger than what you might have thought before?

Operator:

Next, we move on to Cai von Rumohr with TD Cowen.

Frank Connor:

On the 174, we had been following kind of what the guidance clarification resulted in. So we -- there is no change to -- from a cash tax standpoint. With regard to pension, as you know, we'll go through our year-end process around that. I would not expect it to be a headwind. So I think that kind of we shouldn't have a problem with pensions and from a headwind standpoint as we move into '24.

Scott Donnelly:

Well, I think where we are right now, Cai, I mean, obviously, we've just come up the SkyCourier program. We had Denali, which is in certification, that's coming along very nicely. I think that will be a spectacular product for us. We did just announce the Ascend which is a pretty big program. That's -- and so I think, I guess, strategically, Cai, I think where we are on the sort of that Latitude/Longitude family are in really good shape. Those are both relatively new aircraft. Certainly, there will be upgrades and enhancements to those programs as we go down the line but we sort of have turned from a long period of time, a decade really of making major investments in those mid- to super mid aircraft and have gone back now and we made some pretty good investments in some of the turboprop family. And again, that light to mid-sized jet, Ascend, I think, is going to be a fabulous product for us. That kind of fits that space where the XLS has lived in the XL before that for many years, home run product for us. And I think the Ascend is going to be kind of filling those shoes. So we're really excited about that. And again that Denali is going to be a great product that's, I think, doing well here and going through the certification process right now. So look, we're always -- as you know, there's always stuff on the drawing board and ideas and plans that we're always working on, but that's -- we don't have any new announcements for you beyond that stuff. We're pretty full up right now, actually.

Robert Stallard:

Scott, there's some concerns yet again about the outlook for the economy and higher interest rates and all that. And I was wondering, in the Aviation division, have you seen any of your customers starting to get a little more concerned about their ability to take jets and trying to defer things?

Robert Stallard:

And then similarly on the Industrial side of things, what sort of demand pool are you getting from your customers at both Kautex and Specialized Vehicles?

Operator:

Next, we move on to Kristine Liwag with Morgan Stanley.

Scott Donnelly:

Well, look, Kris, clearly, our focus and what we've communicated and what we've been executing on, we did again here in the third quarter, is really focusing our capital returns around share buyback. And we continue to do that here in the third quarter. So it was another quarter of strong turns. Obviously, we agree. I mean I think our balance sheet is a good place. We're generating strong cash flows, and we'll continue to use that on the share buyback. In terms of any acquisition opportunity, like we're always keeping an eye out for things. And if there's something that makes sense for us, obviously, we have a balance sheet and an ability that we can do that. Obviously, we have to convince ourselves that, that's something that's good for our shareholders. And there have been a couple of deals out there where we concluded that wouldn't be the right thing, but we certainly always keep an eye out and contrast that versus just continuing the share buyback program, which I think has been very successful.

Scott Donnelly:

Yes, I don't -- I'm not -- I don't know all the details of that. I mean, we're obviously -- we work very, very closely with our engine suppliers and making sure that there's great MRO capability for them. Obviously, there's engine programs, which we promote with those suppliers. But I mean we love our service business. Our service business has been growing. As you know, over the last decade, we've taken a lot of this and do a lot more direct service around our aircraft than we used to do, and that's been a big success for us. But getting into the engine MRO business is not something that I think would make any -- it would make any sense for us. I mean all cared about the engine in the world. The value in engine overhaul is in the parts and those parts come from those suppliers. So I think that's probably best left to them to manage.

Jason Gursky:

Scott, I was wondering if I get you to just put aside the supply chain issues for a moment and just assume that they weren't there. And talk a little bit about what you're hearing from your customer in Aviation and how long customers seem like they're willing to wait for it yet? And if you all could just kind of wave a magic wand and get your production to the right level for the right wait time for those customers, what would that wait time be? For 2-plus years today, we were less than 12 months prior to the pandemic. What's the right level that we should all be thinking about as things kind of settle out?

Jason Gursky:

Yes. I think what a lot of us are trying to figure out is, once these supply chain issues work their way through, how much we might see production rates across the industry come up over time? If we're 2 years now, is the sweet spot 18 months, and we can kind of back into what that would mean from a production rate perspective. I think it's what we're all trying to better understand.

Jason Gursky:

Maybe an easier one then on Industrial. Can you talk a little bit about the margin and the margin opportunity in that business over the longer term based on new product offerings and product development things that you're working on today? Just whether there's any structural opportunity for margins in that business over the longer term.

Operator:

Next, move on to Myles Walton with Wolfe Research.

Scott Donnelly:

So look, I want to probably [indiscernible] go into all of the gory details of the arrangement, but we've always worked with -- there's always been a factor in how we work with NetJets that takes in consideration market pricing. So it's not something that's a fixed price 15-year thing. I mean nobody could do that. I mean in the industry. So there's adjustments that are made that have to do with market pricing that's, frankly, a very fair equitable deal because, again, you really have to think of NetJets. I mean they're out selling aircraft into this marketplace. So we -- you think about, I guess, almost a wholesaling right of these aircraft to NetJets and then they have a spread for covering their costs and sales and running their business. So there is a market adjustment scheme that's incorporated into this thing. So nobody is trying to sit down and imagine what pricing is 15 years from now.

Scott Donnelly:

Yes, I think that's about right. I mean, again, it's an add-on, right? So we're -- it extends the agreement we already have, and we sit down obviously, every quarter and sort of true up what's that deliveries that are a year out. So -- but yes, I think if you looked at how many aircraft were left on the old agreement versus the new agreement, it's kind of phasing kind of '24, '25 time frame.

Frank Connor:

Yes. I mean, interest is expense is going to come in a little better than we had originally guided just given what's going on with, frankly, our investment in our cash balances and tax is probably going to be a little bit better also than we had guided, maybe 1 point better than our original guidance.

Peter Arment:

Scott and Frank, nice results. Scott, on Systems, the performance there continues to be really, really good, and there was obviously a bullish tone down the USA around just a lot of the modernization efforts. How are you feeling about the kind of visibility of that business going forward?

Peter Arment:

Appreciate that color. And then just Frank, a quick one on do you have the -- what services growth was in Aviation for the quarter?

Operator:

Next, we go to Ron Epstein with Bank of America.

Scott Donnelly:

Ron, I mean the way we're looking at industrial right now is us providing good growth and strong performance improvements and generate good cash. That's how we think about it.

Scott Donnelly:

We've never defined core or noncore. I certainly have never said that. Look, I get what we have said, Ron, is when we think about M&A activity in the company, we certainly would view that the places that we would additionally or add additional capital would probably be in our Aerospace and Defense portfolio. And that's kind of how we look at the M&A world as opposed to thinking that we should increase the size of our Industrial business. But certainly, to the extent that we can drive organic growth in these businesses, and make smart investments and generate good returns for shareholders. That's the best thing we can do for the shareholders is make sure there's performance. Those businesses are performing as well they can perform.

Scott Donnelly:

Yes, probably agnostic. We've done some small deals here in recent times, largely around expanding some of our services footprint. Obviously, we did the Pivotal deal, which has turned out to be, I think, a great acquisition for us to help grow our focus in the future for our Aviation business. Obviously, there's some opportunities there. There could be massive opportunities in the future or not. We don't know. But I think that's a nice acquisition that's given us some real additional capability in the company. Again, as I said, most of what we look at in terms of any material M&As in that A&D space. As you know, Rob, there's deals only come along so often, so you kind of keep an eye out. And look at things that come down the pike. So we'll -- that's what we've been doing, and we'll continue to do that. And if something makes sense, that we think is a great deal. It will be good for our shareholders, and we would certainly be willing to participate in that. We obviously have the capacity to do a fairly material deal, but it has to be something that financially makes sense.

Peter Skibitski:

Just want to follow up on Myles' question and maybe see if we can get into the gory details of the NetJets deal a little bit. But my main question is Scott, is there a minimum number of aircraft that they're obligated to take each year under this deal? And if so, how does that compare to the prior deal?

Peter Skibitski:

Okay. And how do you think about the high end -- I mean, on average, 100 aircraft a year would be more than 50% of your deliveries this year. How do you think about contemplating if you could ever get to the high end of that deal?

Operator:

And we have a follow-up from David Strauss with Barclays.

Scott Donnelly:

No, I wouldn't say there's a margin impact to it. But certainly, we're not ramped to that rate yet, David. I mean that will grow here as we go through '23 to '24. I would say the ramp is going well. I mean, a lot of our internal resources, ramping up the engineering activity is happening at a pretty good clip. But obviously, a lot of that is also getting all of our suppliers on board and getting a lot of key partners ramped up. It took some time from the original contract award to get those guys on to contract. So as you go through the rest of this year and particularly as you grow into 2024, there's the inside kind of Bell heads, if you will, but there's also a lot of ramp that's the pass-through to our partners on the program as well.

Scott Donnelly:

Yes, it's very similar issue, David. I mean they're -- it's very similar issues.

Cai von Rumohr:

Yes. So your deliveries were down 50% at Bell and Commercial. Maybe give us some color on like, what's the demand there? And what should we look like in the fourth quarter? Because your original guidance assumes a very big step-up that looks like it's going to be tough to hit and you also had talked about margins kind of coming down as FLRAA effort ramped? And maybe some color in terms of where the margins could be.

Operator:

And ladies and gentlemen, that does conclude the Q&A portion of today's conference. If you would like to access the digitized replay of this call, it will be available after 10 a.m. Eastern Time today through October 26, 2024 at midnight. You may access the replay by calling 866-207-1041 or 402-970-0847 and use the access code 5951112. Again, that's 866-207-1041 or 402-970-0847 with the access code 5951112. And that does conclude your conference for today. Thank you for your participation. You may now disconnect.

Eric Salander:

Thanks, Kaylie 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 $270 million from last year's second quarter. Segment profit in the quarter was $352 million, up $71 million from the second quarter of 2022. During this year's second quarter, we reported income from continuing operations of $1.30 per share. Adjusted income from continuing operations, a non-GAAP measure, was $1.46 per share compared to $1.11 per share in last year's second quarter. Manufacturing cash flow before pension contributions, a non-GAAP measure, totaled $242 million in the quarter compared to $309 million in the second quarter of 2022. With that, I'll turn the call over to Scott.

Frank Connor:

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.4 billion were up $78 million from the second quarter of 2022 reflecting higher pricing of $95 million, partially offset by lower volume and mix. Segment profit was $171 million in the second quarter, up $22 million from a year ago, largely due to favorable pricing net of inflation of $52 million, partially offset by an unfavorable impact from performance of $23 million. Performance included unfavorable manufacturing performance largely related to supply chain and labor inefficiencies. Backlog in the segment ended the quarter at $6.8 billion. Moving to Bell, revenues were $701 million, up $14 million from last year due to higher pricing of $21 million, partially offset by lower military revenue of $7 million. Segment profit of $65 million was up $11 million from last year's second quarter due to a favorable impact from performance of $13 million, largely reflecting lower research and development costs and a favorable impact from pricing net of inflation of $9 million, partially offset by lower volume and mix. Backlog in the segment ended the quarter at $5.6 billion. At Textron Systems, revenues were $306 million, up $13 million from last year's second quarter, largely reflecting higher volume. Segment profit of $37 million was down $1 million from a year ago. Backlog in the segment ended the quarter at $1.9 billion. Industrial revenues were $1 billion, up $155 million from last year's second quarter, largely due to higher volume and mix at both Kautex and Textron Specialized Vehicles of $121 million and a favorable impact from pricing of $37 million. Segment profit of $79 million was up $42 million from the second quarter of 2022, primarily due to higher volume and mix of $32 million and a favorable impact from pricing net of inflation of $17 million, principally at Kautex, partially offset by an unfavorable impact of $10 million from performance. Textron eAviation segment revenues were $11 million and segment loss was $12 million in the quarter, primarily reflecting research and development costs. Finance segment revenues were $18 million and profit was $12 million. Moving below segment profit, corporate expenses were $21 million, net interest expense was $16 million, LIFO inventory provision was $35 million, intangible asset amortization was $10 million and the non-service components of pension and postretirement income were $59 million. In the quarter, we repurchased approximately 4.2 million shares, returning $273 million in cash to shareholders. Year-to-date, we have repurchased approximately 9.4 million shares, returning $650 million in cash to shareholders. Earlier this week, Textron's Board of Directors approved a new authorization for the repurchase of up to 35 million shares under which the company intends to repurchase shares to offset the impact of dilution from stock-based compensation and benefit plans and for opportunistic capital management purposes. To wrap up with guidance, we are increasing our expected full year adjusted earnings per share to be in a range of $5.20 to $5.30 per share, up from our prior range of $5 to $5.20 per share. We also continue to expect full year manufacturing cash flow before pension contributions of $900 million to $1 billion. That concludes our remarks. So operator, we can open the line for questions.

Peter Arment:

Yes, good morning Scott, Frank.

Peter Arment:

Hi, Scott, I guess, start with Aviation, really strong performance on margins and the top line. Do you still kind of tracking, I mean, I guess, with the supply chain the way there's been so much volatility? How are you thinking about just kind of your delivery targets and just managing your skyline? I know you're probably sold out now much farther out, just given your backlog, maybe just some overall comments? Thanks.

Peter Arment:

I appreciate that. And just one quick follow-up. Frank, did you disclose what the aftermarket growth was in the quarter for Aviation at all?

Peter Arment:

I appreciate it. Thanks again.

Sheila Kahyaoglu:

Good morning, guys and thank you. Maybe just to start off a specific one on Bell, how do we think about the B-22 here? The House Appropriations Bill included about $700 million for potentially five B-22s, how do we think about how that could add legs to this program and transition to FLRAA?

Sheila Kahyaoglu:

That's great. Thank you for that color. And then maybe a bigger picture one. Frank, if you could start, and I know you'll be for both, so give Scott some time on this, too. You announced a pretty large repurchase program in the quarter. How are you thinking about capital allocation? And then Scott, obviously, with Ascent, capital allocation for repo versus new products?

Sheila Kahyaoglu:

Cool. Thank you.

Sheila Kahyaoglu:

Great, thank you.

Jason Gursky:

Hi, good morning, everybody.

Jason Gursky:

Scott, I was wondering if you could provide kind of a general update on the general aviation market. I think there was a show here recently up in Oshkosh. I was wondering if you had any general learnings from either that show or your general view of the general aviation market? And then second one would be just kind of an update from your perspective on the market for pilots both for, as they come in through the general aviation market and make their way maybe up into the biz jets and other aircraft that are more important to you?

Jason Gursky:

Great, thank you.

Bradley Barton:

Hi, good morning, Scott and Frank. This is Brad Barton on for David. Quickly starting off on Bell, looks like the quarter might have been a little light, can you just talk about how much FLRAA added in the quarter and how Bell’s going to ramp from here and hitting the $3.3 billion?

Bradley Barton:

Okay. And then just a follow-up, there has been some reports in the press about potential interest in some properties out there. Just wondering if you could talk a little bit how you see the portfolio shaping up?

Bradley Barton:

All right, thanks for the time.

Operator:

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

Scott Donnelly:

Hi, Noah.

Noah Poponak:

The aviation margin is -- that's one of the highest levels in a while and the incremental, I think, is a little higher than your kind of long-term framework. And I guess that's despite the performance number you cited. If I add that back, I'm more in the mid-teens. And so I guess, as I think about where that margin goes over time, obviously the labor and supply chain inefficiencies you're citing won't be solved immediately, but also won't last forever. So is it reasonable to think about the margin adjusted for that in the quarter as kind of a baseline plus an incremental for where you can go late next year into the middle of the decade?

Noah Poponak:

Well, you have a pretty big backlog in that business now.

Noah Poponak:

In the near-term, is it reasonable to expect that price net of inflation number to grow because I think your -- I think the pricing in your backlog is still better than what's hitting the P&L now, although correct me if that's wrong. And then if inflation is decelerating, it would seem like both the top and bottom end of that number would be widening.

Frank Connor:

Yes. Remember, we have some longer-term supply contracts, so we did a nice job of responding to any demand in the market and created a more appropriate pricing environment, but there is some lag effect associated with our contracts and just the flowing in of inflation. But we still feel very good about where we are price net of inflation, but there is a lagging impact on some of those cost inputs.

Scott Donnelly:

I don’t know. I have not run a first derivative on our price at this point, but I don't know. We probably won't go into that level, quite that level of detail, but suffice to say, we're still getting price and feel good about how that price demand is working in the market.

Operator:

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

Frank Connor:

Good morning.

Robert Stallard:

Scott, on industrials, a good quarter there, both on the top line and the margin. How sustainable do you think this is going forward? And do you just see this as a sign that the U.S. consumer is still holding in there pretty resilient?

Robert Stallard:

Yes. And then Frank, a technical question for you. You raised the EPS guide by $0.10, so can you give us some idea of where that's coming from within the operations?

Robert Stallard:

That’s great. Thanks so much.

George Shapiro:

Good morning and good numbers. Scott, are we -- do you think we still do 200 deliveries or we should not maybe call that 190 or something given that we seem to be missing a couple each quarter?

George Shapiro:

And at Bell, is the margin guide still good, assuming that this quarter was particularly strong because Florida hasn't fully built yet, so margins will weaken in subsequent quarters?

George Shapiro:

And then just one follow-up on Industrial, I mean it was particularly strong, I mean, I went back and looked, it was the best quarter since like Q2 of 2018 and that probably- the business wasn't even the same at that point, although Kautex is obviously there. So, can you comment anymore? I mean it would seem like the sales you could- would be $3.6 billion guide here for the year and the margin certainly would look like it could be based on what the margin was this quarter. So if you could comment a little bit more on that?

George Shapiro:

Okay, thanks very much.

Louis Raffetto:

Hi, you have Lou Raffetto on for Miles for you.

Louis Raffetto:

So I think you kind of covered this a little bit with the ongoing disruption, I guess, within Aviation, but at what point do you think that the pricing benefit will sort of overcome or more than overcome the sort of the negative on the performance side?

Louis Raffetto:

Okay. And then I think you mentioned, so is 190 the right number to think about or will you be maybe a little bit higher than that for the year?

Louis Raffetto:

Okay, thank you very much.

Operator:

Thank you. We'll go next to the line of Cai Von Rumohr with TD Cowen.

Scott Donnelly:

Well, it's a good question, Cai. Look we -- obviously, we'd like to be bigger. And I think that the approach we're taking here is investments that we've made in our existing businesses is driving a lot of that growth. So I think if you look at aviation, all the investments that we've made and continue to make in those new platforms, you referenced a couple of other names. Look, I think obviously, we've made a huge investment in FLRAA over the years. That's going to drive a ton of growth and shows that we can go head-to-head on a program-by-program basis and win, and drive a lot of organic growth. I think when you look at systems, some of the things that we talked around OMF or what's now referred to as XM30 and ARV with the Marine Corps, there's things out there that are potentially significant growth drivers. We're going head to head with some of the guys that are the biggest names in the business and I think we can win against them. So our focus continues to be making sure that we're making the right investments so we can drive the organic growth. And will we do acquisitions, if there's a right opportunity that comes along, absolutely. But we've got a cause I've always felt that you want to -- you don't want to have to do a deal, right? So I think that our strategy is continue to make the right investments on the organic side so that we can drive really good growth and if something comes along that makes sense from an extension [ph] standpoint, we're happy to look at that.

Scott Donnelly:

Well, look, I think, Cai, right now, it's primarily looking in the A&D space, things that would help diversify us in terms of our strength in A&D. I don't think it's likely that you see something that's specifically in the helicopter space. I just don't know that there is targets out there where you do that. And from a government standpoint and other standpoint, I don't think you would probably see much activity in that space. I'd be kind of surprised. But I think you look at complementary A&D capabilities, certainly where we bring technological capability where the target would bring technology capability that's some synergistic, but I think in large part, providing a more well-rounded, more diversified A&D company.

Operator:

Thank you. And our last question will come from the line of Kristine Liwag with Morgan Stanley.

Scott Donnelly:

Well, look, I think the demand environment is driven by the fact that people-- a particular people who have come into this market and started using aircraft and experienced what private aviation is all about, have had a great experience. I mean there are time machines, right? It allows you to do things that you just can't do if you're using commercial transportation. So the productivity, the efficiency, the ability to get from anywhere to anywhere on your time and in an expeditious way is something that the more and more people and I think, again, this is if you’re affected by COVID a lot of people got exposed to this market that had not in the past, and they're turning out to be a great tool. And so I think that’s what continues to fuel a lot of the demand in this marketplace. So it's obviously, we offer a lot of products across a broad range of price points and performance. And I think that's why we're seeing just a fundamentally very strong demand environment. And as you know, it's not just our company and our products, but across a very, very broad range of general aviation. .

Scott Donnelly:

No, I don't think there is. Look, we did look at one point, as you know when we stretch the top end of our platform. We did have programs at the time and for technical reasons and we ended up not doing those programs. I think that part of the market now, particularly as you go larger in that market, which is kind of the choice we were faced with, is a very well-served market. So I think we're better off focusing all of our R&D and our energy in our investments in sort of up to that super midsize on the Longitude. We've been doing, as you know, a lot of great upgrades to a lot of those programs, platforms all across our portfolio. And yes we continue to make the right investments. Denali is still in development, and that's going to be a homerun for us, is then which just announced. I mean, that's right in the sweet spot of our market, that's a segment of the market that we've had a great track record in the past with previous aircraft, and I think this end will be really well received and drive a ton of growth for us. So, this is -- I think that -- and we're very focused on making those investments across everything from our little Cessna 172s and now, of course, in the electric space with Pipistrel and eAviation up through Longitude. But I think that's a pretty good place for us to be and that's where we're going to focus our R&D efforts.

Operator:

Thank you. And ladies and gentlemen, today's conference will be available today, 10:00 a.m. Eastern Time running through July 27, 2024 at midnight. You may access the AT&T replay system by dialing 18662071041 and entering the access code of 8467989. International dialers may call 402-970-0847. Those numbers again are 18662071041 or 402-970-0847 with the access code of 8467989. That does conclude your conference for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.

Eric Salander:

Thanks, Bradley, 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 billion, up $23 million from last year's first quarter. Segment profit in the quarter was $259 million, down $18 million from the first quarter of 2022. During this year's first quarter, we reported net income of $0.92 per share. Adjusted net income, a non-GAAP measure, was $1.05 per share compared to $0.97 per share in last year's first quarter. Manufacturing cash flow before pension contributions, a non-GAAP measure, totaled $104 million in the quarter compared to $209 million in the first quarter of 2022. With that, I'll turn the call over to Scott.

Frank Connor:

Thank you, Scott. Good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.1 billion were up $109 million from the first quarter of 2022, reflecting higher pricing of $58 million at higher volume of $51 million, which included higher defense and aftermarket volume. Segment profit was $125 million in the first quarter, up $15 million from a year ago, largely due to favorable pricing net of inflation of $17 million and the impact from the higher volume and mix, partially offset by an unfavorable impact from performance of $17 million. Backlog in the segment ended the quarter at $6.5 billion. Moving to Bell, revenues were $621 million, down $213 million from last year, as expected, on lower military revenues, reflecting lower spares and support volume in V-22 and H-1 production volume. Segment profit of $60 million was down $31 million from last year's first quarter, primarily reflecting lower volume and mix, partially offset by a favorable impact from performance of $29 million, reflecting lower research and development costs. Backlog in the segment ended the quarter at $4.6 billion. At Textron Systems, revenues were $306 million, up $33 million from last year's first quarter, largely reflecting higher volume. Segment profit of $34 million was up $6 million from a year ago, primarily due to a favorable impact from performance. Backlog in this segment ended the quarter at $2 billion. Industrial revenues were $932 million, up $94 million from last year's first quarter, largely due to higher volume and mix at both Textron Specialized Vehicles and Kautex. Segment profit of $41 million was up $2 million from the first quarter of 2022, primarily due to higher volume and mix and a favorable impact from pricing, net of inflation, principally in the Specialized Vehicles product line, partially offset by an unfavorable impact from performance. Textron eAviation segment revenues were $4 million and segment loss was $9 million in the quarter, primarily reflecting research and development costs. Finance segment revenues were $12 million and profit was $8 million. Moving below segment profit. Corporate expenses were $39 million. Net interest expense was $17 million, LIFO inventory provision was $25 million, intangible asset amortization was $10 million, and the non-service component of pension and post-retirement income were $59 million. In the quarter, we repurchased approximately 5.2 million shares, returning $377 million in cash to shareholders. To wrap up with guidance, we are reiterating our expected full year adjusted earnings per share to be in a range of $5 to $5.20. We also continue to expect full year manufacturing cash flow before pension contributions of $900 million to $1 billion. That concludes our prepared remarks. So Bradley, we can open the line for questions. Bradley?

Sheila Kahyaoglu:

Thank you and good morning, guys.

Sheila Kahyaoglu:

I wanted to ask about Bell profitability. Frank, I think you mentioned some favorable performance in there. But with the FLRAA protest now cleared, how does this change the trajectory of Bell profit? And how are you thinking about the dilution just given the development work? And just thinking about the bid overall, Textron's development value was nearly two times Lockheed. So how do we think about this in terms of revenue contribution?

Sheila Kahyaoglu:

And then just maybe, Scott, one for you. How do we think about Aviation pricing? I think you mentioned $58 million of a gross price or 5%. Is that sort of what we should expect on the growth side and how do we think about that as the dynamics of the market are changing?

Sheila Kahyaoglu:

Thank you.

Operator:

And our next question comes from the line of Doug Harned with Bernstein. Please go ahead.

Scott Donnelly:

Good morning.

Scott Donnelly:

Look, I don't know that I would pin something specifically to Silicon Valley Bank, but when we had a positive greater than one-to-one book-to-bill in the quarter, which is good. We kind of guided to around a one-to-one book-to-bill. I think the lead time that we have right now in aircraft is in a pretty healthy place. And that's kind of what we're targeting. I guess I would say that any time you have financial disruption or adverse events out there in the economy in general, it's certainly easy for people to say, hey, look, let me think about it or wait a little bit. I think the good position we have right now is we have enough backlog out there that even if you have a quarter where you're down below one-to-one, that's not the end of the world. If somebody defers out there for a few months, that's not a problem. That's the beauty you have in the backlog. So unlike previous periods where you had some interruption and you'd see a delay, then that would hit you in terms of revenue and profit in the near term. I think we have sufficient backlog out there that even if you do have something where somebody waits a little bit, then that's fine.

Scott Donnelly:

Well, look, I think it's a lot more around utilization, right? So flight hours is more closely correlated with the growth in the aftermarket as opposed to necessarily the fleet numbers. I mean, our fleet is so huge that even adding small numbers in any given quarter doesn't make any real impact. So I think it's primarily driven around utilization and utilization in the fleet remains very high.

Scott Donnelly:

Sure.

Seth Seifman:

Okay. Thanks very much, and good morning. You saw the share repurchase amount step up nicely in the quarter. I guess, can you talk about your thinking around that and maybe where you expect share repo to come in for the year? I guess you guys might have some additional cash coming in from a recent verdict and so what your thoughts are on repo this year and whether maybe it's time to step things up.

Seth Seifman:

Okay, great. I'll leave it there this morning and pass it on. Thanks very much.

Operator:

And our next question comes from the line of Cai Von Rumohr with Cowen. Please go ahead.

Scott Donnelly:

So the supply chain side, Cai, is largely unchanged. I would say that kind of as we've talked about earlier, I think our labor position is in a much better place than it was. We did bring a lot of resources in the third and fourth quarter last year. Obviously, that does create some disruption, which, as you know, affects some of our conversion here is some of that inefficiency on lines here in the first half of this year. But we're largely staffed at the levels where we want to be. So I would say on that front, things are certainly improved. But we continue to have suppliers have issues that are causing us to do things out of sequence and driving still some inefficiencies in how we operate the plant. So it's -- I'd say it's not getting worse, but it's not necessarily getting better. Sometimes it's frustrating. If you get one kind of resolved and another supplier becomes a problem. And I -- we kind of expected that to be an ongoing issue through most of the balance of this year. So I don't think there's any big surprises there, but it's still a challenge. As far as order, look, our book-to-bill was greater than one. We feel good about that. It's -- we don't break it out down to the individual models or programs, but certainly, we're -- I'd say we're happy with how the demand is going in both jets and turboprops. So I think we're in a pretty good place.

Scott Donnelly:

Well, look, I think, again we're going to continue to press on this opportunistically, Cai, and we'll see how it plays out through the balance of the year. But I mean, as you know, it's not really formal guidance. We just kind of indicate to you guys how we're thinking. And there's no change in how we're thinking it continuing to be our primary means of returning value to shareholders.

Scott Donnelly:

Sure.

Robert Stallard:

Thanks so much. Good morning.

Frank Connor:

Good morning.

Frank Connor:

No, it's roughly in line with where we had been.

Scott Donnelly:

Well, look, it's something to keep an eye on. I'd say that we're kind of roughly to the plan that we thought. I think you're -- we certainly expect to see and have seen softness in some of the short-cycle consumer side of things. But we're seeing strong performance still or, let's say, in some of the industrial and commercial applications. And when we look at our production allocations, for instance, we're certainly pushing some of our capacity and our volume to serve commercial industrial applications more so than on some of the consumer side. So that's one where -- obviously, there's some uncertainty, we keep a close eye on it. But net of all those things, there's enough demand across all of the different markets that we serve to drive that kind of growth. And I think we'll continue to see that through the balance of the year.

Operator:

And our next question comes from the line of David Strauss with Barclays. Please go ahead.

Scott Donnelly:

Good morning.

Scott Donnelly:

Well, Dave, I mean, for sure, but it's a couple of aircraft, right? I mean I think it's something is going to pressure us all year long, but we also factored in, in terms of our plans, what we thought we would see in terms of headwinds. So I don't think we're very disconnected from what we indicated in terms of the guide for the year.

Scott Donnelly:

Most of the delays we're going to see through the course of the year are supply chain related just getting parts and being able to get things sequenced and through test. We haven't seen any real change in customer behavior that's impacted anything.

Scott Donnelly:

Sure. Well, look, I think Frank kind of indicated this as well. We certainly expect revenues to be increasing in Bell through the balance of the year and into next year as the FLRAA program is ramping up. So I think on the revenue growth side, we feel very good about that. Clearly, as we bring in a higher proportion of primarily cost plus development effort that's going to be at lower margins and those production program volumes on V-22 and H-1 that have been going down. So you do have that mix issue. That's kind of where that led us to the guide that we have out there this year and I think that's kind of where we would expect to be as we go forward. So we're going to get this thing back into a growth mode, but it is going to be heavily weighted towards a cost-plus relatively lower margin piece of the business that's going to be offsetting lost revenue that's a higher margin. But I think it's going to stay as a healthy business, but it's certainly not going to be at the margin levels that we've seen in the past number of years.

Scott Donnelly:

Sure.

Myles Walton:

Thanks. Good morning.

Myles Walton:

Scott, in the last 12 months, I guess, or 18 months, last two additions to your Board of Directors where a couple of defense executives and Richard Ambrose and Tom Kennedy. And I'm curious if sort of the trend there is indicative of where you want to be taking the portfolio directionally more towards defense? And if so, is it indicative of the organics with FLRAA obviously being a contributor or more inorganic from an M&A interest? Thanks.

Myles Walton:

Okay. Very good. And there was just 1 clarification, if I could. On the FLRAA disclosures from the protest, you talked about cost-plus incentive portion and fixed price incentive version. Can you just illuminate us on maybe where the fixed price risk you've taken on is and isn't? Thanks.

Myles Walton:

Thanks again.

Operator:

And our next question comes from the line of George Shapiro with Shapiro Research. Please go ahead.

Scott Donnelly:

Good morning, George.

Scott Donnelly:

Sure, George. Look, I think it will abate in the back half of the year. As we talked about, a lot of those efficiencies are things that were experienced in the back half of last year. A lot of that obviously goes through inventory. So that releases with the aircraft deliveries here in the first half of this year. Obviously, that anticipates that performance and disruption will be less in the first half of this year than it was in the last half of last year. And I think more or less so far, we're seeing that. I think our factory is running better. That's largely as I said, attributable to the fact that we've got the resources on board. There's still issues turnovers higher than we would like. There's still more churn than historical. But certainly, the plant is running in a more efficient way. Now supplier issues still pop up, as I said. But net of all that, I think that we will see better lower impacts of those efficiencies in the back half of the year than the first half of the year. So even with that 14%, which again is kind of where we expect it to be. I think for the total year, the overall conversion, which is sort of 24 so percent, which is appropriate for our business is still something we expect to realize for the total year.

Scott Donnelly:

No. Not really. I think we're still tracking to what we guided.

Scott Donnelly:

Thanks.

Peter Arment:

Yeah, thanks. Good morning, Scott. Frank. Nice results.

Peter Arment:

Hey, Scott, you've had a lot of questions on Aviation. I'll just ask one quick one. There's been a slight kind of increase in used aircraft out there. I'm sure it's in-production aircraft still remains very low. Just maybe any comments that you're watching or from your perspective on the used market?

Peter Arment:

Thanks so much. I appreciate the color.

Operator:

And our next question comes from the line of Pete Skibitski with Alembic Global. Please go ahead.

Scott Donnelly:

Sure, Peter. Look, I think the way the Army has conducted this acquisition, and as you guys know, this goes back a decade, really, right, of both guys going through design, development, producing prototype aircraft, flying them, lots of soldier touch points, Army pilots flying them. As you know, as we went even through the formalities of the formal RFP and during this whole period of time, the proposal valuation, there was ongoing effort under the OTA for the CRR program, which was continuing to reduce risk and finalize design activities and risk reduction even whilst the proposal evaluation was going on. And so I think the good news here is we have a really, really solid technical baseline for the aircraft itself. We have a great team that's in place, ready to go, that is being reassembled here to now go execute the EMD program. Obviously, there's a lot of new stuff here around the mission systems and development of that capability in the MOSA system for the - and ensures the architecture of the mission systems and how they accommodate changes over time. But I think that we have a really, really good technical baseline. The aircraft that we're about to go design and build and fly is very, very close to the aircraft that we've already designed and built and flown. So I think there's a big chunk of a risk that has been very effectively reduced and we're ready to go get at it.

Scott Donnelly:

Sure.

Kristine Liwag:

Hey, good morning. Scott, Frank, when you look at the portfolio today, it's clearly stronger this cycle versus the last. Aviation has got a backlog, Bell secured FLRAA, Industrials is stable now. With the balance sheet pretty low, what's your appetite to expand into another vertical and tap into secular growth markets?

Kristine Liwag:

Great. Thank you.

Operator:

And with that our last question comes from the line of Ron Epstein with Bank of America. Please go ahead.

Scott Donnelly:

Good morning, Ron.

Scott Donnelly:

Sure. Well, Ron, I would say that the FLRAA win on a stand-alone basis is hugely important to our future. I think our guys have done a great job over the past decade in investing and positioning for that. Obviously, as you know, the FLRAA program continues. It's a few years behind the FLRAA program, but one where, again, I think our team has made the right investments. We've got the right people that have developed a product that I think is going to be a home run. As you know, we're all kind of waiting on the engine side to have that thing fly. But again, the Army activity continues in risk reduction and further affinitizing that program. So clearly, I think that's a great opportunity. I think we have a great solution. There are activities, which, again, are publicly out there in terms of the future systems the Navy and the Marine Corps are looking at, which I think a lot of our technology, particularly in the tilt rotor space, will potentially be a great solution and can leverage off a lot of the investment that we've already made on the 280 program. Those were likely to be adaptations. But again, from a technological standpoint, I think we're in a really good place for some of those future opportunities. High-speed VTOL Bell arguably provide a little bit further off, but that's another step I think that leverages, our fundamental core capabilities to go to even higher speed, higher performing, longer range assets. So I think Bell in my view, Ron, I guess I would say I think we have a phenomenal franchise around tilt rotor, and I think we have a lot of opportunities to continue to grow that franchise on a number of different adaptations of that technology into the future. On the system side, okay, that's -- there's a lot of programs in there. I think we've -- the win on the Sentinel program with Northrop is a driver of growth for us going forward as that moves ultimately from EMD into its production phases here in the future. We have some great new wins on the munition side with XM204s and XM250s. Again a great franchise for us for a long time, which is really growing. I mentioned our down-select on FTUAS. Shadow continues to be a good program for us, but the Future Tactical UAS with the Army is certainly a big opportunity. There's a couple of big land vehicle programs, as you know, ARV on the Marine Corps side, OMFV on the Army side. So I mean I don't want to wrap up those stuff, but there's lots of opportunities out there for which we've either won or we've been down selected or I think we're certainly a viable competitor. You're not going to win all these things, but there's enough opportunity, and I think we're in good enough place that we can see a lot of organic growth being driven out of that business as well.

Scott Donnelly:

No, we're really not, Ron. We're not in that sort of munition space. I mean there has been some dialogue around some land vehicles, but they're largely EDA things that are in surplus in the army that would come out being refurbished and put over there. There's some talk of different UAS systems. So there's some -- there are -- we've had nothing so far. And there's probably some relatively speaking, smaller opportunities going forward, but it's not going to be a material impact to us.

Scott Donnelly:

Sure.

Eric Salander:

Thanks, Greg, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings, and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO, and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Revenues in the quarter were $3.6 billion, up $3.3 billion in last year's third quarter. Segment profit in the quarter was $317 million, up $7 million from the fourth quarter of '21. During this year's fourth quarter, we reported income from continuing operations of $1.07 per share. Manufacturing cash flow before pension contributions totaled $368 million in the quarter, up $70 million from last year's fourth quarter. For the full year, revenues were $12.9 billion up from $487 million from last year. In 2022, segment profit was $1.2 billion up $89 million from 2021. Income from continuing operations was $4.01 per share, compared to $3.30 in 2021. Manufacturing cash flow before pension contributions was $1.2 billion, up $29 million from 2021. With that, I'll turn the call over to Scott.

Frank Connor:

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.6 billion were up $223 million from a year ago, reflecting higher jet and defense volume and higher pricing. Segment profit was $169 million in the fourth quarter, up $32 million from last year's fourth quarter due to favorable pricing, net of inflation of $29 million and higher volume and mix, partially offset by an unfavorable impact from performance. Performance includes unfavorable manufacturing performance largely related to inefficiencies from supply chain disruptions and increased staffing associated with higher production, partially offset by lower selling and administrative costs. Backlog in the segment ended the quarter at $6.4 billion. Moving to Bell. Revenues were $816 million, down $42 million from last year, reflecting lower military revenues, partially offset by higher commercial revenues. Segment profit of $71 million was down $17 million from a year ago, primarily reflecting lower military volume and mix, partially offset by a favorable impact from performance. Backlog in the segment ended the quarter at $4.8 billion. At Textron Systems, revenues were $314 million, up $1 million from last year's fourth quarter. Segment profit of $40 million was down $5 million from a year ago. Backlog in the segment ended the quarter at $2.1 billion. Industrial revenues were $907 million, up $126 million from last year, reflecting higher in volume and mix of $95 million and a $59 million favorable impact from pricing largely at specialized vehicles product line, partially offset by an unfavorable impact of $28 million from foreign exchange rate fluctuations. Segment profit of $42 million was up $4 million from the fourth quarter of 2021, primarily due to higher volume and mix, partially offset by an unfavorable impact from performance. Textron eAviation segment revenues were $6 million and segment loss was $10 million in the fourth quarter of 2022, which reflected the operating results of Pipistrel along with research and development costs for initiatives related to the development of sustainable aviation solutions. Finance segment revenues were $11 million, and profit was $5 million. Moving below segment profit, corporate expenses were $43 million in the fourth quarter. Interest expense, net for the manufacturing group was $17 million. Our manufacturing cash flow before pension contributions was $368 million in the quarter. For the year, manufacturing cash flow before pension contributions totaled $1.2 billion, up $29 million from the prior year despite higher cash tax payments of $284 million in 2022 related to the R&D tax law change. In the quarter, we repurchased approximately 3.3 million shares, returning $228 million in cash to shareholders. For the full year, we repurchased approximately 13.1 million shares, returning $867 million in cash to shareholders. Beginning in the first quarter of 2023, we'll change how we measure our segment results. Going forward, we will exclude from segment profit, the LIFO inventory provision, intangible asset amortization and the non-service component of pension and postretirement income or expense. These items will be separately reported on the income statement below segment profit. We believe these changes will provide a more consistent method of measuring and evaluating business performance across our segments, while also aligning our reporting results more consistently with other companies within our industry. On Slide 15 and 16 in the investor presentation posted to our website, you will find prior year results, reflecting the recast of segment profit. Also effective with the first quarter of 2023 results we will report earnings per share on an adjusted basis that excludes the LIFO inventory provision and intangible asset amortization, both non-cash items. Turning now to our 2023 outlook on Slide 9. We're expecting adjusted earnings per share to be in a range of $5 to $5.20 per share. We're also expecting manufacturing cash flow before pension contributions to be about $900 million to $1 billion. Moving to segment outlook on Slide 11 and beginning with Textron Aviation. We're expecting revenues of about $5.7 billion; segment margin is expected to be in a range of approximately 12% to 13%. Looking to Bell, we expect revenues of about $3.3 billion. We're forecasting a margin in a range of 8.25% to 9.25%. At Systems, we're estimating revenues of about $1.25 billion with a margin in a range of about 10.75% to 11.75%. At Industrial, we're expecting segment revenues of about $3.6 billion and margin to be in the range of about 5% to 6%. At eAviation, we expect revenues of $45 million and a segment loss of $65 million, largely reflecting our continued investments in sustainable aviation solutions. Lastly, at finance, we're forecasting a profit of about $15 million. Looking at Slide 12, we're projecting about $150 million of corporate expense. We're also projecting about $90 million of net interest expense; $130 million of LIFO inventory provision; $35 million of intangible asset amortization; and $235 million of non-service pension income. We expect a full year effective tax rate of approximately 17.5%. Turning to Slide 13. R&D is expected to be about $585 million, down from $601 million last year. We're estimating CapEx will be about $425 million, up from $354 million in 2022. Our outlook assumes an average share count of about 205 million shares in 2023. That concludes our prepared remarks. So Greg, you can open the line for questions.

Sheila Kahyaoglu:

You've definitely had a busy quarter between FARA. So congratulations on that. And I think you threw in an Aerojet bid and [indiscernible] as well. So I wanted to focus on aviation margins. In Q4, I think you ended at 10.7%, potentially lower, including the recasting for LIFO. How do we think about the walk to the 12.5% margins in 2023?

Sheila Kahyaoglu:

And maybe just as a follow-up to that longer term, like how do you think about peak trough margins in aviation? Is it just steady as it goes from here? Can it just be a 20% incremental margin business?

Sheila Kahyaoglu:

Great. Thank you.

David Strauss:

Scott, could you just talk through the forecast at Bell, so up revenue, down margins, decent amount. You mentioned it includes FLRAA. So what exactly is your assumption for FLRAA? Does that assume you win it post protest? Just if you could help there.

David Strauss:

Scott, can you say specifically how much revenue is in there for FLRAA? And how would we expect to ramp beyond 2023 in terms of revenue? A - Scott Donnelly No. We're not going to break out the specifics of the individual programs, but I think clearly, it will ramp as we go into '24, '25 and obviously, I think probably for quite some time. I mean, I think this program will be a terrific boom for the business. It's going to start out, obviously, with a lot of the CMD, which as we said, is great volume and good revenue, but not a whole lot of margin. And then obviously, we'll expect to see it continue to grow and turn into better margins as you get into production programs and foreign military sales and all the things that we would expect will come along with a successful FLRAA program.

Scott Donnelly:

Well, I don't know if we'll go into express numbers, David. But look, we've been kind of forecasting here since the mid part of the year that we expected we would end up a few hundred million dollars light versus our initial guide based on the fact that we continue to see supply chain challenges and some labor issues. I think labor has certainly improved through the balance of the year, although a lot of that is new folks and training and it has an efficiency impact, but at least we're making some progress on that front. I think we've had a number of suppliers that were challenged or getting better, but you always have a couple out there that are still struggling. So we kind of anticipated that in the back half of the year. That's why we kind of try to provide some color that we expected this to be a few hundred million off of our guide. But I think that we've taken that into consideration. So as we think about next year's guide for '23, there are still going to be supply chain challenges all along the way. But we think we've taken that into proper consideration in terms of the '23 guide.

Operator:

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

Frank Connor:

Yes. It's a reflection of an expectation that we'll continue to see good performance from a working capital standpoint. But we do have the continuation of higher cash taxes associated with the R&D tax credit change. And also, we're just expecting a slightly lower V in deposit activity from commercial volume. So we're kind of framing it in terms of kind of 1:1 book-to-bill type expectation as it relates to deposit activity, and that kind of has a little bit of a headwind on cash relative to where we have been.

Scott Donnelly:

No, we haven't seen that, Robert. I mean, I think our order rate in the fourth quarter was consistent with the third quarter. It remains quite healthy. I think when people look at some of these leading indicators, like it's hard to keep track of what -- when you see a little bit of an increase in used available for sale, what kind of aircraft are those? What are their vintages? We think, obviously, the market has been very strong. So people are looking to put some aircraft on the market. They're still at very low levels. So we're not seeing the knock-on effect into market for new aircraft. So we haven't seen a material change in the level of activity that's going out there in terms of order activity. I mean, there's lots of people ready reports. It's frankly hard to understand. Sometimes there's so many comparisons of flying by region, by size of aircraft compared to '19 compared to last quarter, compared to '22 but it's in the round. So we haven't seen any of that have a meaningful impact on order activity.

Operator:

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

Scott Donnelly:

Well, on the supply chain side, Peter, I think we have some suppliers where we've had challenges, and we clearly see them getting healthy and getting better. But we have other areas where suppliers are still struggling. I mean, I don't want to go into too much detail, but it's very specific components, very specific suppliers. Obviously, we're working with them and trying to get them healthy and do a better job in terms of getting parts into the factory. And obviously, from our standpoint, we do lots of out-of-sequence work and swapping parts around. We'd like to stop doing that. It's an efficiency hit to us. Our guys have to work through every day. So I think it's about the same, right? As I said, there are some suppliers that are getting better but then you got one that's just having a hard time catching up. I don't know that we're seeing a lot of new suppliers coming in and say, hey, I got a big problem. We have a couple there we've been struggling all year, and we're trying to get them back on schedule. They're working at it, but they're just not quite there yet. And again, we factored that into how we think 2023 will play out. In terms of the pricing side of things, Peter, we continue to get price, net of inflation. We're very focused on that. As these input costs increase, we got to drive price to get that back. I think the guys are doing a pretty good job of that.

Scott Donnelly:

Well, look, I think when we look at the [indiscernible] numbers, they seem fine to us. When you look at what came through on the omnibus in terms of this current fiscal year's budget, was in line with our expectations. So I think we're fine. The growth, the good news at systems is it's really kind of across almost all the product lines. It's not just one particular thing. Obviously, we've had some new wins in the munition side, which is great. That's put that business back to growth. Sentinel program continues to do well. Our ship-to-shore, as I said, we've made deliveries. We'll start negotiating the next production by here shortly, but we'll finish the DD&C this year and start production deliveries. The ATAC business has had nice growth. Our electronics business has had a nice growth. It really is kind of across all of the businesses within systems. And the omnibus budget that was appropriated is consistent with obviously what we're guiding to you guys.

Operator:

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

Scott Donnelly:

We absolutely look at that, Peter. I mean, as I said, there's cyclicality in almost every business, right? So some have more than others. Those that we think are going to be more recession sensitive we've kind of factored in thinking we'll have a mild recession. I don't think it's going to be dramatic. We're certainly not thinking about something in the scope of back in the 2009, '10 kind of time frame. But I don't think we have an economic situation that's going to lead to something like that. I'd say, look, I think when you look back at previous modest recessions, the area that has always impacted us the most difficult has been a slowdown in the aviation business. And I think we're in a very different place than we've been in those previous sessions because we have a pretty significant backlog. So I think that the nature of that will allow us to -- even if you were to see a slowdown in bookings which is entirely possible. I would expect it if you really go into a modest recession, you'll see a slowdown in booking. But you've got almost 2 years of backlog sitting there that you'll continue to execute on. And I think that will help you ride through it. And we haven't had that for a bunch of years, Peter, as you know. So I think that it's one that would translate to a slowdown in bookings, but not something that would slow us down in terms of our revenue and margin generation.

Scott Donnelly:

Well, I mean it's in the kind of government contracting process, right? So that ends up being -- because of the FMS nature of that, that would be signed between ourselves and the U.S. government. And as you know, Peter, that can take a little while.