Textron Q4 2021 Earnings Call Transcript

Participants

Corporate Executives

• Eric Salander, Vice President, Investor Relations
• Scott C. Donnelly, Chairman, President and Chief Executive Officer
• Frank T. Connor, Executive Vice President and Chief Financial Officer

Analysts

• Peter Arment, Robert W. Baird & Co., Inc.
• Sheila Kahyaoglu, Jefferies Financial Group Inc.
• Cai von Rumohr, Cowen and Company LLC
• Noah Poponak, Goldman Sachs & Co. LLC
• Robert Stallard, Vertical Research Partners
• David Strauss, Barclays Capital
• George Shapiro, Shapiro Research
• Peter Skibitski, Alembic Global Advisors
• Robert Spingarn, Melius Research
• Kristine Liwag, Morgan Stanley & Co. LLC
• Ronald Epstein, BofA Securities
• Seth Seifman, JP Morgan Securities

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Q4 2021 Textron Earnings Release Conference Call. [Operator Instructions]

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

[Eric Salander, Vice President, Investor Relations at Textron]

Thanks, Brad. 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, down from $3.7 billion in last year's fourth quarter. During this year's fourth quarter, we reported income from continuing operations of $0.93 per share. In the quarter, we recorded $5 million in pre-tax special charges related to our 2020 restructuring plan, or $0.01 per share after tax. Excluding these special charges, adjusted income from continuing operations, a non-GAAP measure, was $0.94 per share for the fourth quarter of 2021 compared to a $1.06 per share in the fourth quarter of 2020. Segment profit in the quarter was $310 million, down $14 million from the fourth quarter of 2020. Manufacturing cash flow before pension contributions totaled $298 million in the quarter. For the full year, revenues were $12.4 billion, up $731 million from last year. Adjusted income from continuing operations was $3.30 per share compared to $2.07 per share in 2020. Manufacturing cash flow before pension contributions was $1.1 billion, up from $596 million in 2020.

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

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

Thanks, Eric. And good morning, everyone. Our business closed out the year with another solid quarter. In Aviation, we continue to see favorable market conditions, including improved aircraft utilization, low pre-owned inventory levels, and strong customer demand. Order activity remained very strong, with backlog growth of $655 million in the quarter and $2.5 billion for the full year, resulting in a $4.1 billion backlog at year end. As a result, we delivered aircraft on a more linear trend through the year, which improved manufacturing efficiency and cash flow generation. Reflecting this improvement operating environment, strong execution of our teams, Aviation achieved a segment margin of 10.1% in the fourth quarter. For the year, we delivered 167 jets, up from 132 last year, and 125 commercial turboprops, up from 113 in 2020. Also in the year, we saw sequentially higher aftermarket revenue on a quarterly basis, driven by increased aircraft utilization. Moving to defense, Aviation was awarded $143 million contract for eight AT-6 aircraft, ground support equipment, spare parts and training from the Royal Thai Air Force. This contract establishes Thailand as the international launch customer for the U.S. Air Force's latest light attack aircraft. On the new product front, the Beechcraft Denali completed its first flight in November launching the start of the flight test program.

At Bell, revenues were down slightly in the quarter, largely on lower military revenues, as expected, reflecting the continued wind down of the H-1 production program, partially offset by higher commercial revenues. In December, Bell completed the first Nacelle Improvements Modification on an Air Force CV-22 Osprey. This effort is part of an ongoing process to upgrade the Air Force's Osprey fleet. In January, the Bell Boeing Program Office was awarded a $1.6 billion contract over the next five years to support the V-22 Osprey currently in service with the U.S. military. On the commercial side of Bell, we delivered 156 helicopters in 2021, up from 140 in 2020. We also saw solid commercial order activity for the year, reflecting broad-based demand.

Moving to Textron Systems, we saw another strong quarter of execution that contributed to a full-year margin of 14.8%, up 320 basis points from 2020. During the quarter, we delivered the fourth Ship-to-Shore Connector to the U.S. Navy after a successful completion of acceptance trials. On the Shadow program, Systems was awarded an $82 million logistics support contract for 2022. On our Common Unmanned Surface Vessel platform, we completed final testing related to the Unmanned Influence Sweep System program, setting up potential for a production contract award in the first quarter of 2022.

Moving to Industrial, revenues were lower in the quarter as we continue to experience supply chain challenges, including order disruptions at Kautex related to global auto OEM production schedules. At Textron Specialized Vehicles, we continue to see a strong pricing environment and steady retail demand. Despite the ongoing supply chain challenges, both businesses saw sequential revenue improvements in the quarter.

In summary, there were many items to highlight in 2021 across our segments. At Aviation, strong order activity and customer demand throughout the year drove $2.5 billion of backlog growth. On the new product front, we continued our product refresh strategy with the introduction of the Citation M2, XLS, and CJ4 Gen2 aircraft. The Cessna SkyCourier completed the flight test program with 2,100 hours of flight test activity, and we expect FAA certification in the first half of 2022.

At Bell, we continued our work on the FVL programs. We submitted a proposal for the FLRAA program in September and the U.S. Army is expected to award the FLRAA program contract in 2022. On FARA, we've made significant progress on the 360 Invictus prototype build, with 75% of the effort complete at year-end. We opened the Bell Manufacturing Technology Center, an innovative proving ground to test and refine technologies and processes across Bell's core production capabilities.

Textron Systems' ATAC continued to grow its fleet of certified F1 aircraft in support of increased demand on U.S. Air Force, Navy and Marine Corps tactical air programs. We continued our innovation and development activities with the rollout of the RIPSAW M5 prototype vehicle for the U.S. Army and the Cottonmouth ARV for the Marine Corps.

At Textron Specialized Vehicles, we entered into a strategic collaboration with GM, which will assist our ground support equipment business in the electrification of baggage tractors, cargo tractors and belt loaders for use in airports globally. We also introduced the Liberty, the industry's first PTV to offer four forward-facing seats in a compact golf car-sized platform powered by lithium ion battery. At Kautex, in 2021, we were awarded eight contracts on new vehicle programs for our hybrid electric fuel systems.

Looking to 2022. At Aviation, we're projecting growth driven by increased deliveries across all product lines and higher aftermarket volume. At Bell, 2022 represents the beginning of a transitional period as we expect lower revenues related to military production programs, while awaiting a down-select and award on the FLRAA program. At Systems, we're expecting flat revenue with growth on Ship-to-Shore Connector and tactical air programs, offset by lower fee-for-service volume. At Industrial, we're expecting revenue growth and margin improvement. Within Kautex, we expect increasing volumes from improving OEM auto production, while at Specialized Vehicles, we anticipate improving supply chain conditions and increasing volumes across our products.

Earlier in 2021, we launched our eAviation initiative to leverage the resources and expertise across our aviation businesses to develop new opportunities in aircraft utilizing electric propulsion systems. In 2022, we plan to expand these efforts and increase our investment in developing technologies to accelerate the shift to sustainable flight, including eVTOL and fixed-wing aircraft. With this backdrop, we're projecting revenues of about $13.3 billion for Textron's 2022 financial guidance. We're projecting EPS in the range of $3.80 to $4.00 per share. Manufacturing cash flow before pension contributions is expected to be in the range of $700 million to $800 million.

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

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

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

Revenues at Textron Aviation of $1.4 billion were down $201 million from a year ago, largely due to lower aircraft volume, partially offset by higher aftermarket volume. Segment profit was $137 million in the fourth quarter, up $29 million from last year's fourth quarter, largely due to favorable pricing, net of inflation of $21 million and improved manufacturing performance. Backlog in the segment ended the quarter at $4.1 billion. Moving to Bell. Revenues were $858 million, down $13 million from last year, reflecting lower military revenues, partially offset by higher commercial revenues. Segment profit of $88 million and was down $22 million, primarily due to lower military volume and mix. Backlog in the segment ended the quarter at $3.9 billion. At Textron Systems, revenues were $313 million, down $44 million from last year's fourth quarter due to lower volume, which included the impact from the U.S. Army's withdrawal from Afghanistan on the segment's fee-for-service contracts. Segment profit of $45 million was down $4 million from a year ago, largely due to the lower volume. Backlog in the segment ended the quarter at $2.1 billion. Industrial revenues were $781 million, down $85 million from last year, reflecting lower volume and mix of $133 million, largely in the fuel systems and functional components product line, reflecting order disruptions related to the global auto OEM supply chain shortages, partially offset by a favorable impact of $50 million for pricing, largely in the Specialized Vehicles product line. Segment profit of $38 million was down $17 million from the fourth quarter of 2020, primarily due to lower volume and mix, partially offset by favorable impact from performance. Finance segment revenues were $11 million and profit was $2 million.

Moving below segment profit. Corporate expenses and interest expense were each $29 million. Our manufacturing cash flow before pension contributions was $298 million in the quarter and $1.1 billion for the full year. In the quarter, we repurchased approximately 4.5 million shares, returning $335 million in cash to shareholders. For the full year, we repurchased approximately 13.5 million shares, returning $921 million of cash to shareholders.

Turning now to our 2022 outlook. I'll begin with the segments on slide 8 of the earnings presentation. At Textron Aviation, we're expecting revenues of about $5.5 billion, reflecting higher deliveries across all our product lines and increased aftermarket volume. Segment margin is expected to be in the range of approximately 10% to 11%, reflecting higher volume, favorable pricing, and increased operating leverage. Looking to Bell, we expect revenues of about $3 billion, reflecting lower military volume primarily related to lower H-1 production. We're forecasting a margin in the range of about 10% to 11%, largely due to the lower military volumes and continuing high levels of R&D investment. At Systems, we're estimating revenues of about $1.3 billion, with a margin in the range of about 13.5% to 14.5%. At Industrials, we're expecting segment revenues of about $3.5 billion on higher volumes at Kautex and Specialized Vehicles. We're estimating Industrial margins to be in the range of about 5.5% to 6.5%. At Finance, we're forecasting segment profit of about $15 million.

Moving to slide 9, on a consolidated basis, we're expecting earnings per share to be in the range of $3.80 to $4.00 per share. We're also expecting manufacturing cash flow before pension contributions to be about $700 million to $800 million, which includes an approximately $300 million impact from a change in the R&D tax law beginning in 2022. Looking to slide 10, we're projecting about $150 million of corporate expense, which includes $30 million of investment in eAviation. We're also projecting about $120 million of interest expense and a full-year effective tax rate of approximately 18%. Looking to the other items and turning to slide 11, we're estimating 2022 pension income to be about $120 million, up from $30 million last year. Turning to slide 12. R&D is expected to be about $585 million, down from $619 million last year. We're estimating capex will be about $425 million, up from $375 million in 2021. Our outlook assumes an average share count of about 219 million shares in 2022.

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

Questions and Answers

[Operator]

[Operator Instructions] And our first question today comes from the line of Peter Arment with Baird. Please go ahead

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

Yes. Good morning, Scott, Frank, Eric. Nice results. Hey, Scott, maybe you could just describe the level of where you think bizjet production or jet production is going to in 2022? And if -- in the fourth quarter, did you have any challenges from the supply chain that had any jets move into the 2022? Thanks.

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

Sure, Peter. So as we've talked about, we have been ramping up the production rate. We continue to do that and expect to continue to do that throughout the course of 2022. The backlog has been very strong. We still see robust demand in the marketplace. So I think it remains very favorable from a market condition. We haven't had problems. I shouldn't say we haven't had problem. Guys always have to work through supplier issues here and there. But no, we do not have that impact our production rates or impact any 2022 deliveries. The ramp rate continues. We're bringing people onboard every month and training and continuing to bring them on our human resources and in our own business. We continue to work with suppliers as they meet those ramp rates as well.

I think as we look forward -- again, look, we're coming out of the year with somewhere around a 12-month backlog. We like that. I think that's very healthy for us, and I think it's very healthy for our customer, right. So it's really how the business should run. It gives you much better visibility. It allows customers the opportunity to go sell their used aircraft for many of whom who are upgrading an aircraft. It gives them a lot more time to specify options and interiors and paints and all of the things involved in that process. And it allows us to cut all those things into the production line in a very efficient way rather than having a bunch of rework and changes towards the end to accommodate a customer need. So I think keeping an eye on that 12 months, again, [Indecipherable] aircraft, that makes a lot of sense to us, and I think it makes sense to our customers. So, as the year goes on, and obviously, we'll keep a close eye on the demand environment, and we'll continue to make adjustments as we see fit. But I think we're very happy with where we are at the backlog levels that we have. I think, as I said, it works for us. It makes for a much more efficient and cleaner, easier-to-operate, more linear business. And I think it's been good for our customers as well, so.

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

Okay. Just as a follow-up to that, Scott. Just is it -- are you back now -- do you think to get back to the 200-plus jet level on production? Or should we not really look at it that way just given the mix?

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

Yeah. No, I think we should. I think, as we've been saying, we think we'll be back to those levels where we were in '19, and we're probably a little early to guide on our 2023 volumes, but we'll keep an eye on it. But yeah, for sure, we feel good that we're on track to get back above those 2019 levels, and I think you see that in our -- in the revenue guide, so.

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

Yeah. And just lastly, on just a CR, if it goes to full year, have you quantified if there's any impact with it, if any?

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

Peter, we really haven't. We're still going on the basis that the CR is going to resolve itself here probably in the end of February, into March. If it ends up being a full-year thing, I don't think we have any one specific thing we'd point at, but look, it's not healthy for the industry. It's not healthy for the government. I hope it gets resolved, but we continue to fight through it every day.

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

Appreciate the details. Thanks, Scott.

[Operator]

And our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

[Sheila Kahyaoglu, Analyst at Jefferies Financial Group]

Good morning, guys.

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

Good morning.

[Sheila Kahyaoglu, Analyst at Jefferies Financial Group]

On Bell, revenues were down 8% and margins contracted 158 bps [Phonetic]. How do we think about pension given it should be additive to that, as well as R&D is lower, and how does FLRAA factor into that?

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

Well, probably due to all the constituents parts, Sheila. But there's no doubt that there is some margin compression at Bell, and operationally, that's driven by the fact that we're going to continue to see the H-1 program winding down, so you're losing what's been important production volume for us. We will have some offsets there, obviously. I think we'll have a good year in terms of commercial aircraft deliveries. I think the commercial aftermarket will continue to be better. But I think we're going to see some pressures. Military aftermarket is always a little bit lumpy, but it probably will be a bit of a challenge. But most importantly here, as you know, we've been investing very heavily on the R&D side, particularly around FARA and FLRAA. And we do expect, given what we're seeing that the U.S. Army customer is staying on track with what they've said publicly about the FLRAA valuation process. It's a huge proposal. It's a lot of work on both sides, but they're -- I think it appears they're making good progress.

So I think they're probably on track to make an announcement towards the middle of the year as they've been saying. But I will say, what we put in our numbers is, I think, a reasonable expectation that this is a huge program, and it's going to take a little while for it to actually get under contract and turn into something that has revenue associated with it, right? So I think we're going to continue to see a pretty high level of R&D in support of that program throughout the balance of -- most of this year. So that's really what's going on operationally. We are, without a doubt, seeing a mix shift from good margin production volumes, particularly associated with the H-1 ramp down with continued high levels of R&D and a slow transition here even in the event of FLRAA win to revenue recognition on that program.

[Sheila Kahyaoglu, Analyst at Jefferies Financial Group]

Great. Thank you.

[Operator]

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

[Cai von Rumohr, Analyst at Cowen and Company LLC]

Yes. Thank you so much. So you mentioned the FLRAA down-select in 2022. My understanding was the expectation was they were going to make that decision by midyear. Is that still your understanding?

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

It is, Cai. All I was saying in the response to Sheila's question was that I think they're on track, from what we see in the evaluation notices and that process, but you normally are working through on a proposal of this magnitude. I think it's heading in that direction. But there's a difference between announcing who the winner is and actually getting under contract, right? This is a big program and I think it's going to realistically take some time. And so, therefore, I'm expecting that even though the announcement might come quite possibly at the end of Q2, let's say, transitioning that into actual being on contract is going to take a little bit of time, and our assumption is we're not going to go disband that team. So we're going to have to continue to do part of the cost share funding to retain that team until such time as we get under contract.

[Cai von Rumohr, Analyst at Cowen and Company LLC]

Got it. And then, at Textron, I know the pricing you mentioned is strong. But did pricing improve in that quarter versus Q3? And maybe if you can tell us how many price hikes did you have in 2021 and have you had one in '22?

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

Well, I guess the dialog really, Cai, surely, is around price realization, right? So we've -- for a long time, you're negotiating these deals. So yeah, pricing certainly continued to be strong in Q4. You'll see that in the K, there's about $29 million of positive price, and so well ahead of inflation. And yeah, we're still continuing to improve on our realized price. And I expect that to continue this year as well.

[Cai von Rumohr, Analyst at Cowen and Company LLC]

That's great. And then, Frank, one for you. So in reading through the release, I think you mentioned that your cash flow numbers assumes a $300 million hit from R&D credit amortization. So you're basically assuming that whereas Lockheed and RTX did not. Is that correct?

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

Yeah. It looks like different folks are handling this differently. There's some dialog around the interpretation of what might be capitalized and what might not be capitalized. I'd say that we are on -- we've taken an approach that is on a more conservative end of things, I think, in terms of looking at the cash impact and have included it in our guide. So it's $300 million, as I said. And that would be the full impact with the larger range of impact associated with how people are looking to assess how this gets implemented.

[Operator]

And our next question comes from the line of Noah Poponak with Goldman Sachs. Please go ahead.

[Noah Poponak, Analyst at Goldman Sachs & Co. LLC]

Hey. Good morning, everybody.

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

Good morning.

[Noah Poponak, Analyst at Goldman Sachs & Co. LLC]

Hey Frank, just to stay there for a sec. I understand if you're being conservative in laying out a forecast to all of us. But what did you think of what Lockheed said there? Because they had originally been talking about an impact similar in percentage terms as what you've laid out here. But now they're saying that it only applies to where they've had R&D tax credit in the past. Do you think that's incorrect, or it's just still being evaluated and that may be correct?

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

I think there's dialog in the tax community, as I understand it, around the interpretation of this. And I think we're all hoping it gets fixed is the real answer that we're -- there's a lot of dialog around this. This is not good for companies investing in R&D and the focus of the nation on continuing to invest for the future, and so we're all hopeful it gets fixed. But there are different interpretations that are being discussed in the tax community around the application of it.

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

Look, Noah, all we're trying to be is transparent, right? So if they do the right thing. Look, this is ridiculous, right? The whole purpose of the R&D tax credit is to incentivize R&D. And by not allowing you to do that, that defeats the whole purpose for this thing. So we're transparent. We're giving you guys the numbers. The day a bill passes that repeals it or removes it or some interpretation, we'll immediately add that to our guidance.

[Noah Poponak, Analyst at Goldman Sachs & Co. LLC]

But it can still be considerably smaller even without a bill that actually changes the law and where it's just a different accounting interpretation.

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

Well, look, I think you'd have to -- that would have to get resolved as we look at what our cash tax payments are and how we would handle that risk associated with that, right? So I'd say that as we sit here today, our expectation is that if the R&D tax credit does not get changed completely, that this will be our approach to the implementation of what is the law today

[Operator]

And our next question comes from the line of Robert Stallard with Vertical Research. Please go ahead.

[Robert Stallard, Analyst at Vertical Research Partners]

Thanks very much. Good morning.

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

Good morning, Robert.

[Robert Stallard, Analyst at Vertical Research Partners]

Scott or Frank, since I'm not sure who this is for. What you said so far about the Aviation outlook sounds pretty positive for margins, not just this year but in the future year as well in terms of pricing and a steadier production rate, longer lead times. What's your latest prognosis on incremental margins maybe over the, say, two, three-year period?

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

Robert, we've always said that these conversions ought to be somewhere in that 20%, 25%, then I think that's what we're realizing. So you look at the guide, you're getting a nice revenue increase and good leverage to the bottom line associated with that.

[Robert Stallard, Analyst at Vertical Research Partners]

So we're moving towards the top end of that range would you say is a fair assumption with this pricing coming through?

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

Well, I think as time goes on, we'll continue to see the margins expand if we continue to see this revenue growth because I do think we'll be able to convert in those 20%, 25% incrementals.

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

There're new programs coming in like SkyCourier and Denali over time and things -- that have impact on things. So there's some variability as we look at mix. But generally, as Scott said, it's consistent with what we've been talking about.

[Robert Stallard, Analyst at Vertical Research Partners]

Yeah. And then, as a follow-up, in the Industrial division, relative to what you said three months ago, have things gotten any better on the supply chain?

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

Look, I think they're where they were. I think we're expecting that we'll see a little bit of bad news of this Omicron is that, if you looked into our factories, our supplier factories, the last week or so of December into January you saw this crazy high spike which clearly has impacted operations. The good news here is we're seeing that line of cases come down just as dramatically as it went up. But I think, realistically speaking, we'll see some of the impact of that trickle through here in the first quarter or so. But I think as we progress through the year, it's certainly our expectation that we'll see that improve, and that's what we reflected in the guide, so you have probably a slower realization of that and certainly in the first quarter going to the second. But all in all, we'll see improvement as we go through the year.

[Operator]

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

[David Strauss, Analyst at Barclays Capital]

Good morning. Thanks.

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

Good morning.

[David Strauss, Analyst at Barclays Capital]

Good morning. Scott, Frank, so you touched on Bell and the pressure there from the military [Technical Issues]. If you were to happen to not win FLRAA or FARA, what is the longer-term outlook for the military business in Bell?

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

Look, if you don't win any new military programs, that's a challenge for the military program for sure. But look, we talk a lot about FLRAA, and I certainly don't want to underestimate the impact and the importance of FLRAA to the future of Bell. That's something we've been working very hard at. We think we're in a good place. But obviously, it's a competitive program. But as you noted, we're also working on FARA. We've got high-speed VTOL. There's a number of investments that we're making to -- there are opportunities. We've got maritime strike in the Navy and all our programs in the Marine Corps, and there's certainly a lot of other opportunities beyond FLRAA. But, look, FLRAA is an important program for us, for sure.

[David Strauss, Analyst at Barclays Capital]

Okay. Thanks. And Frank, can you -- obviously, you highlighted the R&D impact. What is your working capital assumption underlying that $700 million to $800 million free cash flow forecast? And then I guess it looks like capital deployment, you're talking about maybe buying back $500 million, $600 million in stock. But based on that, you're going to be 0.5 times levered by the end of the year. So how are you thinking about longer-term capital deployment and where you want the balance sheet to be? Thanks.

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

Yeah. Sure. So from a working capital standpoint, we're looking at flattish working capital, ex the tax number, which does impact working capital. But as you look at the other elements from an inventory payable, receivables, things like that, we think we will likely see a little bit of inventory growth associated with ramp in the commercial businesses, but we think we can offset that in other places. And so, continued good working capital performance.

In terms of cash flow, cash deployment remains the same. Certainly, we look at, obviously, R&D and investment back into the business. We outlined that. So we've modeled in some number for acquisition activity that we always do. But the rest of the free cash flow would go toward share repurchase activity. The number in our model in terms of share count actually has our share repurchase a little bit back-end loaded. So we're roughly thinking about share repurchases in line with the -- from a dollar standpoint with the amount of repurchase activity that we undertook this past year.

[Operator]

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

[George Shapiro, Analyst at Shapiro Research]

Yes. Good morning.

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

Hi, George.

[George Shapiro, Analyst at Shapiro Research]

Scott, last year, at this point, you projected Aviation revenue at 4.5%, so you guys were quite good on that. But you projected profitability of 5.5%. We wind up with 8.3%, and the incremental is effectively like 60%. For your current projection, you're in line with what you're saying, 24% incremental. But my question is, what caused last year to be so good, particularly the fourth quarter where revenues were down and profit was way up? And so is there upside to that 10% to 11% margin guide for this year?

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

Well, George, the comparables going back to 2020, obviously, 2020 was a pretty extraordinary year. So you would expect to see a lot better overall performance in the '21 as things returned to normal. So that's why I think we're back into that world where you're talking about this 20%, 25% incrementals on the business. We continue to be in a strong pricing environment. We've been in a strong pricing environment all year, which obviously is helpful. And again, as I mentioned, having the strength of a backlog that we hadn't seen in a very long time, it really has helped to run the plants much more efficiently and effectively. So I think we have all those things are tailwinds to us, but we'll get our way into 2022 here and keep our heads down and keep delivering. And if we can drive additional margin, obviously, we have no reason in the world to do that.

[George Shapiro, Analyst at Shapiro Research]

Okay. And one -- just one quick one, Frank. How much was the aftermarket actually up in the quarter?

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

Aftermarket, on a year-over-year basis was up at Aviation 20% year over year and sequentially was up 6%.

[George Shapiro, Analyst at Shapiro Research]

Okay. Thanks very much. Good numbers.

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

Yeah, thanks.

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

Thanks, George.

[Operator]

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

[Peter Skibitski, Analyst at Alembic Global Advisors]

Hey. Good morning, everyone.

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

Morning, Pete.

[Peter Skibitski, Analyst at Alembic Global Advisors]

Scott, just want to tease out how much visibility you have right now in the business jet marketplace with the incredible backlog growth you've seen this year and your delivery skyline that you have planned. Do you think you could work any of that backlog down this year by the end of the year, or could backlog stay flat, could it grow? Do you have any sense of how hot the market is?

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

Well, I would say the market is pretty hot. And you see that again in Q4 where we got 1.7 number, so that's good. All I would say, Pete, is I don't -- I think we like that visibility of being able to look at over a month and understand that skyline of deliveries by models. And again, it's so important to us to be able to work in an efficient way. But look, our sales people are out there selling hard every day. And so, if we get the visibility where we start looking at being booked out even further into the future, then we'll look at continuing to increase production rates. But I don't think we want to do something stupid and try to go -- radically accelerate production rates and then burn down backlog and then you're back where you were where you don't have that visibility and don't have those efficiencies. Again, I don't think it's healthy for the industry, the customers, our companies. So I think that's what we'll keep our eye on, right, is those timelines have come back to normal historicals in terms of what a customer's expectation is from the time that they start a process of buying and when they want to take a delivery for the aircraft, and I think we're in a good place right now and we should keep it there.

[Peter Skibitski, Analyst at Alembic Global Advisors]

Okay. Appreciate the color. And just one last one. Can you just -- where are we in the commercial helicopter cycle? And will the 525 Relentless be certified this year?

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

Well, look, I think the commercial helicopter is, as we've seen similar to what we've seen in Aviation, we've seen a nice solid demand. We saw good delivery increases. We'll see that again in what we've guided you in the 2022 numbers. Look, 525 Relentless clearly has been a disappointment for us in terms of our ability to get that through certification. I think there's been a lot of good work done this year. I think we're on a good path. You've probably seen some of the stuff that's been out there in the press where we're -- in addition to working the basic cert, we're starting the deice certification because so many of our customers will need that capability. So we're paralleling those tasks right now. And yeah, certainly, we expect to get that certification done this year.

[Operator]

And our next question comes from the line of Robert Spingarn with Melius. Please go ahead.

[Robert Spingarn, Analyst at Melius Research]

Good morning. Scott, would you be able to parse out the demand within Aviation, perhaps across the portfolio, where you see the strength? And then also talk about the different types of customers, the corporates versus the individuals versus the fleet operators.

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

Well, look, I think -- I guess, the color I could give is to say that jets leads the way. That's been the strongest demand environment. I would say that the demand is very robust in both the individual buyer, whether that's a corporation or a high-net worth individual, as well as, obviously, the fractional market is very strong right now. So, we're seeing a lot of demand through our partnership with NetJets. So again, look, jets, virtually across the board, in terms of jet models from entry-level all the way through longitudes, it's quite strong. Turboprops is also strong but not as strong as jets. And I would say part of that reason is, as you guys know, that our jet business is usually -- the biggest chunk of that market is North America where we see very robust demand. A smaller part of that market is outside the U.S. They're still a little bit behind. There is demand there, but it's not quite as robust as North America.

When you look at turboprops, and specifically when you look into the King Airs, for instance, now that's a market that, for us, historically is stronger outside the U.S. than inside the U.S. So it's strong, but frankly, it's marginally led right now by North America because, again, the North American recovery has been so strong. So we have seen that outside of the U.S. market picking up and are seeing that demand. But -- and so it is better than one-to-one. It's good. But I would say in terms of color, jets is certainly leading the way.

[Robert Spingarn, Analyst at Melius Research]

Okay. And then, just quickly on the Specialty Vehicle side, wanted to ask how the inventories are. I think you touched on it. But with the supply chain issues, it gets a little obscured. Is the takedown or the sell-through of snow mobiles has been good this season? And what's the outlook for the dirt market?

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

Yeah, it is. Look, the demand environment is very strong, guys. The only challenge we have is just supply chain. If I can get more parts and build more machines, the stuff sells through the market. It's our only frustration right now is being able to get more stuff out there to dealers. I'd say, look, on a year-over-year basis, we actually saw improved volumes through the tracker channel, which is terrific, but it could have been even better if we can get more machines out there. So this is most certainly not a demand problem. It's a supply chain problem.

[Operator]

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

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

Hey. Good morning, guys.

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

Good morning.

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

As the backlog builds in Aviation, can you talk about how you're managing potential inflation risk, especially if we see raw materials and labor prices at elevated level? How much is a straightforward pass-through in terms of escalation clauses and how much would you try to offset with lower cost?

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

Well, look, obviously, our intent here is to keep pricing, net of inflation, a positive number. And so, we do certainly see inflationary pressure. I think everybody in the world is seeing that come through to one degree or another. Some business have more long-term agreements than others, which helps you cushion that a little bit. Some are more exposed to logistics and transportation costs, which are virtually immediate. But we've responded to a lot of that. We're in the businesses where that's a problem. We put freight surcharges out there right away. So we're very, very conscious of inflationary pressures and have, I think, good plans and actions around prices and surcharge to try to more than offset that.

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

Thanks. And maybe on Bell, with the program roll off and with FLRAA, if you win that contract, upside is really further down the line. Is there a path back to a 12% sell margin in the next few years?

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

Well, look, guys. I don't know. I won't go beyond probably 2022 guidance, but we've been saying for a very long time that we expect Bell a 10% to 12% margin business. We've obviously been well above that as we had a lot of strong multiyear production programs where we could drive efficiencies and gain the benefits of that. But on the other side of that coin when you see some of the ramp downs, it's more pressured to be in that range, and that's where you see us today. So clearly, some of these programs, even when you talk about EMD programs of a magnitude like FLRAA, there's still pressure when you unwind some of these large production programs. But again, I think it's too early, obviously, to think about how we would guide in the '23 or '24. It will depend a lot on mix. There's still opportunities out there for increased production on some of our military programs. We don't know what the aftermarket is going to look like on some of those programs. So we got to adjust every year. But I think 10% to 12% is what we said for a long time, and I think that's probably the reality of where that business will be.

[Operator]

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

[Ronald Epstein, Analyst at BofA Securities]

Hey. Good morning, guys. Scott, I was wondering if you could share some of your thoughts on eVTOL. We've seen some of the publicly-traded eVTOL companies just get crushed. Boeing just dropped about $0.5 billion into Wisk. And arguably, you're probably one of the more experienced companies at this given that you do have a vertical lift business, you do deal with smaller vertical lift aircraft. And just curious what your sense is on that market and how you think about it for Textron.

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

Well, look, Ron, I think we're in a better position than anyone to go execute on these market opportunities. We're doing that. I think the advantage for us is that we have already in the company the infrastructure and the talent to do these sorts of things. So I don't need to make -- announce a $0.5 billion investments. I think we've indicated to you guys we're going to probably have $30 million that we're putting in this year. But I can spend my money on actual engineering capability and designing stuff. I don't need to be building hangars and office spaces and test laboratories and all that sort of stuff. I have all that stuff, right? So we have a lot of technology leverage that comes out of our flight control side of Bell that's been doing tiltrotor, which is what these guys look like are baby tiltrotors. We know how to design and build and certify Part 23 aircraft.

So, look, I just think our approach here is spend the money we need to spend to invest in the technology. We've talked before, the battery density issues. I think you have to have a practical product. And so, we're working with a lot of different angles and battery cell suppliers to try to understand those things. There's a number of things we're looking at to strengthen, frankly, that part of our business. I don't know how -- we don't really need to strengthen the part of our business that knows how to do tiltrotors, that knows how to do fixed-wing aircraft in that weight class and that certification type. But we do need to strengthen our capability on the battery electric propulsion side of things. So we're doing all that.

I just don't think there's a reason for us to come out and throw dates around when this business model happens, and frankly, look, I think there's every reason to believe that eVTOL and urban air mobility could be a very big business. And I think we'd love to supply assets into that business. But I think ElectraFly, frankly, is a lot more than that, right? There's trainers, there's fixed-wing stuff. It's not just all about eVTOL. That could be a monster market. That would be great, but I don't think it's the only market. So we're taking a probably more pragmatic approach and making the right investments, I think, and looking at opportunities for us to be a big player in that. I think we should be the winner in that space. But I think we can do it with relatively modest investments and leverage the technology that we already have in our company.

[Ronald Epstein, Analyst at BofA Securities]

Yeah, that makes a ton of sense. Thank you.

[Operator]

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

[Seth Seifman, Analyst at JP Morgan Securities]

Okay. Thanks very much. Good morning, everyone. I guess, Scott, I'm not totally sure, but I want to guess that you're probably at least three-quarters of the way through the NetJets agreement on Latitudes. And so, how do we think about where that goes from here and the demand level as you approach the end of that -- those 200 aircraft, given their importance as a Latitude customer?

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

Look, that's a good question. I don't recall exactly the numbers. It was a huge order. As you guys know, we put those into backlog as we work with NetJets every quarter on forecasting that 12- to 18-month window that's out there. I don't think we're close enough that we started to have to negotiate another deal. The provisions of how to manage that through the lifecycle of that couple hundred aircraft were already defined, and we're executing to that. I guess, all I would say is that I think that the performance of that airplane for NetJets, for their customers has been terrific. The relationship is very strong. It's very healthy. We enjoy working together. And I think when we get to the point where we got to say, all right, guys, where -- the term of that contract and the terms of the number of aircraft, and we'll -- I would have every reason to believe we'd negotiate an extension to it and keep ongoing.

[Seth Seifman, Analyst at JP Morgan Securities]

Right. Okay. Very good. And then maybe following up on Kristine's Bell questions. Understand that there's know '23 guidance at this point. But with a FLRAA win, can we assume that 2022 is an EBIT bottom at Bell?

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

Well, look, guys, again, I don't want to guide 2023 just yet. There's a lot of stuff that will happen here through the course of 2022 in terms of other programs and commercial aircraft and aftermarket and all those sorts of things. So there's a lot of moving parts in the mix that goes into what our EBIT levels look like at Bell and we certainly haven't delved into that at this point.

[Seth Seifman, Analyst at JP Morgan Securities]

Okay, great. Thanks very much.

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

Sure.

[Operator]

And we do have a follow-up question from the line of Noah Poponak with Goldman Sachs. Please go ahead.

[Noah Poponak, Analyst at Goldman Sachs & Co. LLC]

Scott, you first projected that you would recover half of the decline from 2019 to 2020 in Cessna deliveries in 2021. You essentially just reported exactly that, maybe actually slightly light of it. And you first projected 2022 would get back to 2019 for Cessna units with the fourth quarter of 2020 report. And now you're guiding to pretty much exactly that. But it seems like the market has strengthened considerably since you first provided those targets that span a two-year period about a year ago. And so it's -- the market is strong and understand you want to be prudent about how you -- where you go with the production rates here, and this has been cyclical in the past. But it seems like the strength -- the incremental strength of the last 12 months is not really coming through in those delivery numbers.

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

Well, look, we've tried to provide a guidance and try to hit the expectations on that guidance. We'll look at how the market plays out through the course of the year and what the order rates look like and what we can do that we think we can -- if we think we can do additional aircraft. In other words, if the market demand is there, the supply capability is there, it all -- look, we work that every day. So if there's an opportunity for us to improve upon that and service some of the deliveries, then obviously we'll go down that path. But I think that the guide is appropriate to what we've said. It's supported by the backlog and that's the plan that we're looking at today.

[Noah Poponak, Analyst at Goldman Sachs & Co. LLC]

Okay. And do you anticipate seeing bookings in excess of revenue at a rate through 2022 that was similar to what you saw in 2021?

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

Oh. Look, Noah, I don't know. We're looking at awfully strong ratios here in '21. So that would be another awfully big backlog build. In my book I'd love to see us continue some backlog build. But is it reasonable to expect it to stay that hot through whole another year? I don't know, right? If it does, great. And if it does, obviously, we'll continue to tweak our production levels up and our delivery levels up. But that's something I think we'll just keep an eye on that as we go through the course of the year. I wouldn't -- I'd just be making stuff up to say it's going to be that strong for a whole another year. But we'll see how it plays out. Certainly, it has remained robust. If we can sell more, then we'll do it.

[Operator]

And our last follow-up question is from the line of George Shapiro with Shapiro Research. Please go ahead.

[George Shapiro, Analyst at Shapiro Research]

Hi. Yeah, Scott, the fourth quarter deliveries being three less than the third quarter. I know you talked about wanting to level load them this year, but I would have expected the fourth quarter to be a little bit bigger than the third. So were there any deliveries that got pushed into '22 as a result of that, or is that just how it fell out and that's just what we expect in the future?

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

No. That's just how it fell out, George. We're going to have -- it's not going to be the same number every quarter, obviously. But I think we like the fact that there's a lot more linearity. If you contrast that to going back and having a lower third quarter. And then you get this big spike of tons of deliveries right at the end of fourth quarter, and yeah, it's not a very healthy way to run a business. So we'd like to be totally flat or a little bit better on sequentials.

[George Shapiro, Analyst at Shapiro Research]

Okay.

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

But I think at this point in the game, we're delivering to the customer [Indecipherable], and that's what we're going to continue to do as we go forward.

[George Shapiro, Analyst at Shapiro Research]

Okay. And then, what is the lead time where you'd have to make a decision to deliver more planes this year? You have the first half of the year to be able to do that, or what lead time do you need?

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

Well, look, George, we've always talked about these being 12- to 18-month kind of things on some of the longest lead. Obviously, we work with those suppliers to try to, again, go down another level or two levels, in some cases, to look at what are the longest lead times in their supply chains and try to mitigate some of those things so that it gives us a little more flexibility in ramping as we go through. But there are obviously limits to that. But -- so when we say it's 12 to 18 months is where we'd like to be, obviously, we've tried to mitigate some of those longest lead items so that we have some flexibility inside of that window. But, look, it's really hard to make much change inside of a six-month window, right? But we have a little bit of wiggle room in that three-year timeframe.

[Operator]

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