Textron Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 25, 2023

There are 16 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the 4th Quarter 2022 Textron Earnings Release Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, this conference is being recorded.

Operator

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

Speaker 1

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.

Speaker 1

Revenues in the quarter were $3,600,000,000 up from $3,300,000,000 in Segment profit in the quarter was $317,000,000 up $7,000,000 from the Q4 of 2021. During this year's 4th quarter, we reported income from continuing operations of $1.07 per share. Manufacturing cash flow before pension contributions totaled $368,000,000 in the quarter, up $70,000,000 from last year's Q4. For the full year, revenues were $12,900,000,000 up $487,000,000 from last year. In 2022, segment profit was $1,200,000,000 up $89,000,000 from 20.21.

Speaker 1

Income from continuing operations was $4.01 per share compared to $3.30 in 2021. Manufacturing cash flow before pension contributions was 1,200,000,000 up $29,000,000 from 2021. With that, I'll turn the call over to Scott.

Speaker 2

Thanks, Eric, and good morning, everyone. Our business has closed out the year with another strong quarter. In the quarter, Aviation grew revenue and segment profit, reflecting higher aircraft deliveries, Increased aftermarket volume and strong pricing net of inflation as compared to last year's Q4. Also in the quarter, we continue The solid order flow, customer demand across our aircraft product portfolio ended the year with $6,400,000,000 of backlog. For For the year, we delivered 178 jets, up from 167 last year and 146 commercial turboprops, up from 125 in 2021.

Speaker 2

Textron Aviation Defense delivered 10 T6 aircraft for the year, up from 5 a year ago. Throughout 2022, strong aircraft utilization within the Aviation product portfolio resulted in a 16% growth in aftermarket revenues. At Bell, as expected, revenues were down slightly in the quarter on lower military Revenue reflecting the continued wind down of the H1 program, partially offset by higher commercial revenues. In December, U. S.

Speaker 2

Army announced Bell's V-two eighty Valor was selected as the winner of the Future Long Range Salt Aircraft Program Competition. This award is a testament The hard work of the Bell team, the design, built and flew the V2 80 prototype over the last 10 years in support of this win. The initial FLR contract award of to $1,300,000,000 over the 1st 19 months with an initial funding of $232,000,000 for engineering and manufacturing development related activity Is currently on hold pending the outcome of protest was filed at year end by the competing vendor. On the commercial side of Bell, we delivered 179 Helicopters in 2022, up from 156 in 2021. Moving to Textron Systems, revenues were essentially flat with last year's Q4.

Speaker 2

During the Q4, Systems awarded another anti vehicle munition contract from the U. S. Army. The award is valued at $162,000,000 over a 5 year period of performance. In December, Systems announced delivery of the Cottonmouth to the U.

Speaker 2

S. Marine Corps for testing through 2023. This vehicle was purpose built for the Marines' Advanced Reconnaissance Vehicle Program. Also in the quarter, systems delivered to the 6th ship to shore connector to the U. S.

Speaker 2

Navy after its successful completion of its acceptance trials. Moving to industrial, we saw higher revenue in the quarter driven by higher volume at both Kaltex and Specialized Vehicles and favorable pricing principally of Specialized Vehicles. Moving to aviation, we delivered 6 Velasillectro aircraft in the Q4, including the first unit in Canada. For the year, Pipistrel delivered 61 aircraft following the completion of the acquisition in April 2022. In summary, we saw strong demand across our commercial product lines and the teams executed well despite Supply Chain and Labor Constraints.

Speaker 2

At Aviation, the team executed very well with a full year segment profit margin of 11.5%. It was above the high end of our original guidance range. Aviation's backlog grew 55 percent to $6,400,000,000 at year end on strong order activity and customer demand. On On the new product front, we received FAA certification for the Sustenance Sky carrier and delivered 6 units to our launch customer FedEx during 2022. At Textron Aviation Defense, the Light Attack AT-six Wolverine achieved military type certification from the U.

Speaker 2

S. Air Force, enabling the 1st international sale of 8 aircraft. At Bell, the December 2022 FLR contract award has solidified the long term outlook for the segment and should provide an increasing revenue stream that we expect will drive and will be in a listen only mode. On FARA, the 360 Invictus is nearly complete and we expect 1st flight 2023 pending delivery of the IPEP engine. At Textron Systems, we advanced our weapons programs with the award of our anti vehicle munitions programs, continued work on the robotic combat vehicle and armed reconnaissance vehicle development programs.

Speaker 2

Systems also obtained airworthiness certifications for 4 additional F-1s at ATAC, bringing the total operational F-one fleet to 23 aircraft in support of increased demand across U. S. Military tactical air programs. At Textron Specialized Vehicles, the company continued its leadership in the development and production of 0 emission golf vehicles, turf maintenance equipment and ground sport equipment markets. At Kaltex, in 2022, we were awarded contracts on 14 hybrid electric vehicle programs for our fuel systems.

Speaker 2

At Aviation, the Industrial Velas Electro continued to receive certifications from around the world and is now certified in more than 30 countries. Looking to 2023, at Aviation, Revenue growth in 2023 on higher military revenues from the FLOR program and higher commercial revenues. At Systems, we're expecting mid single digit revenue growth across our businesses. At Industrial, we're expecting revenue growth at Specialized Vehicles and Kaltex. At Aviation, we plan to continue investments in Development of technologies and products supporting sustainable flight solutions for unmanned cargo, next generation electric trainers, eVTOLs and general aviation.

Speaker 2

This overall backdrop, we're projecting revenues of about $14,000,000,000 for Textron's 2023 financial guidance, projecting adjusted EPS in the range of $5 $5.20 Manufacturing cash flow before pension contributions is expected to be in a range of $900,000,000 to 1,000,000,000 With that, I'll turn the call over to Frank.

Speaker 3

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed starting with Textron Aviation. Revenues at Textron Aviation of $1,600,000,000 were up $223,000,000 from a year ago, reflecting higher jet and defense volume and higher pricing. Segment profit was $169,000,000 in the 4th quarter, up $32,000,000 from last year's Q4 due to favorable pricing, Net of inflation of $29,000,000 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.

Speaker 3

Backlog in the segment ended the quarter at 6,400,000,000 Moving to Bell. Revenues were $816,000,000 down $42,000,000 from last year, reflecting lower military revenues, partially offset by higher commercial revenues. Segment profit was $71,000,000 of $71,000,000 was down $17,000,000 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 $4,800,000,000 At Textron Systems, revenues were $314,000,000 up $1,000,000 from last year's 4th quarter. Segment profit of $40,000,000 was down $5,000,000 from a year ago.

Speaker 3

Backlog in the segment ended the quarter at 2,100,000,000 Industrial revenues were $907,000,000 up $126,000,000 from last year, reflecting higher end volume and mix of 95,000,000 and a $59,000,000 favorable impact from pricing largely at Specialized Vehicles product line, partially offset by an unfavorable impact of $28,000,000 from foreign exchange rate fluctuations. Segment profit of $42,000,000 was up $4,000,000 from the Q4 of 2021, primarily due to higher volume and mix, partially offset by an unfavorable impact from performance. Textron E Aviation segment revenues were $6,000,000 and segment loss was $10,000,000 in the Q4 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 $11,000,000 and profit was $5,000,000 Moving below segment profit, corporate expenses For $43,000,000 in the 4th quarter, interest expense net for the manufacturing group was $17,000,000 Our manufacturing cash flow before pension contributions was to $368,000,000 in the quarter. For the year, manufacturing cash flow before pension contributions totaled $1,200,000,000 up $29,000,000 from the prior year despite higher cash tax payments of $284,000,000 in 2022 related to the R and D tax law change.

Speaker 3

In the quarter, we've repurchased approximately 3,300,000 shares, returning $228,000,000 in cash to shareholders. For the full year, we repurchased approximately 13,100,000 shares, returning $867,000,000 in cash to shareholders. Beginning in the Q1 of 2023, we will 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 post retirement income or expense. These items will be separately reported on the income statement below segment profit.

Speaker 3

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 Slides 1516, In the investor presentation posted to our website, you will find prior year results reflecting the recast of segment profit. Also effective with the Q1 of 2023 results, we will report earnings per share on an adjusted basis It 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.

Speaker 3

We're also expecting manufacturing cash flow before pension contributions to be about $900,000,000 to $1,000,000,000 Moving to segment outlook on Slide 11 and beginning with Textron Aviation, we're expecting revenues of about 5,700,000,000 Segment margin is expected to be in a range of approximately 12% to 13%. Looking to Bell, we expect revenues of about $3,300,000,000 We're forecasting a margin in a range of 8.25 percent to 9.25 percent. At Systems, we're estimating revenues of about $1,250,000,000 with a margin in a range of about 10.75% to 11.75%. At Industrial, we're expecting segment revenues of about $3,600,000,000 and margin to be in the range of about 5% to 6%. At e Aviation, we expect revenues of $45,000,000 and a segment loss of $65,000,000 largely reflecting our continued investments to Sustainable Aviation Solutions.

Speaker 3

Lastly, at Finance, we're forecasting profit of about $15,000,000 Looking at slide 12, we're projecting about $150,000,000 of corporate expense. We're also projecting about $90,000,000 of net interest expense, $130,000,000 of LIFO inventory provision, dollars 35,000,000 of intangible asset amortization and $235,000,000 of non service pension income. We expect a full year effective tax rate of approximately 17.5%. Turning to Slide 13. R and D is expected to be about $585,000,000 down from $601,000,000 last year.

Speaker 3

We're estimating CapEx will be about $425,000,000 up from $354,000,000 in 2022.

Speaker 2

Our

Speaker 3

outlook assumes an average share count of about 205,000,000 shares in 2023. That concludes our prepared remarks. So Greg, you can open the line for questions.

Operator

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

Speaker 4

You've definitely had a busy quarter between FLORA, so congratulations on that. And I think you threw in an Aerojet bid in for Fun 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?

Speaker 2

Well, I think so first of all, the quarter we knew that we were going to have some headwind with supply chain and obviously we brought a lot of New people on board, which is a good thing, but had a lot of impacts, just getting all those folks on and training and those kinds of interruptions. So in the quarter, we did take A lot of those unusual impacts right to expense in the quarter rather than putting it In inventory, so we did take a hit on that. LIFO was still in there, obviously, in that reported number. So obviously, on a recast basis going forward, that won't be there. But So I think when we think about what happens as we go into 2023, obviously, you're going to not have the LIFO in there.

Speaker 2

And I think we're already going to see again, we're guiding probably almost $500,000,000 of higher revenue And that converts at good margins. So I think we're pretty bullish on our ability to drive Higher margins as we go through 2023.

Speaker 4

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?

Speaker 2

Well, as you know, Sheila, based on analyst pressures, we've been To get above 10% margins in the Aviation business. So and we feel pretty good about that. So look, I think it's going to be very much volume driven. You guys know we tend to convert somewhere in that 20%, 25% range. I We can continue that as we go forward.

Speaker 2

Certainly, we're guiding that in our conversion for 2023. And as we go beyond that, we'll just have to see where the market is. The good news is demand has remained strong. The 4th quarter demand remained Strongly with good bookings in Q4. So environment, I think we feel pretty good about, but in terms of what margins do On a go forward basis, I think we kind of remain in that neighborhood of expecting sort of a 20%, 25% conversion on our revenue growth.

Speaker 4

Great. Thank you.

Speaker 2

Sure.

Operator

Your next question comes from the line of David Strauss from Barclays. Please go ahead.

Speaker 5

Thanks. Good morning.

Speaker 2

Good morning, David.

Speaker 5

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 FLORA? Is that assume you win it post the protest, just if you get out there?

Speaker 2

Sure, David, it does. So the protest period ends at the 1st week of April. So we've baked that into our estimates, Assuming that will be resolved by that period of time, obviously, the dynamics in terms of margin is that we will continue to see A decline on the military revenue side. There will be some offset on the commercial revenue side. We've had a good year in terms of bookings and expect to see nice growth on the commercial side.

Speaker 2

And then obviously, we'll have 3 quarters of the flower program coming in, which is good, but that is a lower margin No business. I mean, EMD programs tend to be lower margin and that's what we've forecast in our guide for you for 2023.

Speaker 5

Can you Scott, can you say specifically how much revenue is in there for Fluor and how would we expect to ramp beyond 2023 in terms of revenue.

Speaker 2

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 2024, 2025, 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 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 FAR program.

Speaker 5

Okay. And last one on the aero supply chain, can you just Your deliveries, I think, came in a fair amount lighter for the full year than we were originally anticipating at beginning of the year. So how many additional deliveries could you have done this year if you didn't have supply chain bottlenecks? Thanks.

Speaker 2

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 We would end up a few $100,000,000 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's 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 that was a we kind of anticipated that in the back half of the year. That's why we kind of tried to provide some color that we expected this to be a few $100,000,000 off of our guide.

Speaker 2

But I think that we've taken that into consideration. So as we think about next year's guide for 2023, it's There are still going to be supply chain challenges all along the way, but we're we think we've taken that into proper consideration in terms of the 2023 guide.

Speaker 5

Thanks very much.

Operator

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

Speaker 6

Thanks so much. Good morning.

Speaker 2

Good morning.

Speaker 6

I'll start with Frank. I was wondering if you could give us some sort of walk on the manufacturing cash Flo, and why expect it to modestly decline in 2023?

Speaker 3

Yes. It's just 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 and D tax credit change. And also we're just expecting Lower slightly lower V in deposit activity from commercial volume. So we're kind of Framing it in terms of kind of one to one 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.

Speaker 6

Okay. And then maybe one for Scott. There's been a lot of commentary around and about in the business jet industry about some of the lead indicators starting to slow. Have you seen any impact of, say, activity Leveling off of used inventory increasing, having any impact on order activity for you?

Speaker 2

No, we haven't seen that, Robert. I mean, I think our order rate in the 4th quarter was With the Q3, it remains quite healthy. I think when people look at some of these leading indicators, Look, 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?

Speaker 2

We think obviously the market has been very strong, so people are looking to put some aircraft on the market. They're So very low levels. So we're not seeing that the knock on effect into the 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, it's there's lots of people writing reports.

Speaker 2

It's Frankly, hard to understand sometimes there's so many comparisons of flying by region, by size of aircraft compared to 2019, compared to last quarter, compared to 2022. It's But it's in the round. So we haven't seen any of that have a meaningful impact on order activity.

Speaker 6

That's great. Thanks so much.

Speaker 2

Sure.

Operator

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

Speaker 7

Yes, thanks. Good morning, Scott, Frank. Scott, just circling back on David's question regarding just the supply chain and maybe just tacking in inflation. So it sounds like, I mean, It sounds like things are holding in there or are they getting a little better? And then just also just could you maybe talk a little bit Are you passing on any higher input costs right now?

Speaker 2

Well, look, as I said 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 won't 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.

Speaker 2

Our guys have to work through every day. So it's I think it's about the same, right? As I said, there's 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 that are We've been struggling all year and we're trying to get them back on schedule.

Speaker 2

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 No increase.

Speaker 2

We have to drive price to get that back. I think you guys are doing a pretty good job of that.

Speaker 7

And just as a quick follow-up on Systems, I mean, just could you talk a little bit post the AMOS bill and defense kind of looking funding pretty robust as we go forward? How are you looking at we're showing modest growth for systems this year, but how do you think longer term?

Speaker 2

Well, look, I think when we look at the PHY DAP 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 It 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.

Speaker 2

Obviously, we've had some new wins in the munitions 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 and C this year and start production deliveries.

Speaker 2

The ATEC business has had nice growth. Our electronics business has nice growth. It really is kind of across all of the businesses within systems and the omnibus budget that was appropriated It's consistent with obviously what we're guiding to you guys.

Speaker 7

Appreciate the color. Thanks. Thanks,

Speaker 8

Scott. Sure.

Operator

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

Speaker 9

Hey, good morning, guys. Good morning. Scott, fair to say, I think some of your businesses have a cyclical component to them. And I'm just wondering, I'm sure you guys see, I think the consensus out there for the macro guys is that we'll have some sort of mild recession this year, maybe later this year. So as you guys see that and whether you agree with it or not, is it prudent for you to maybe even Slow the top line growth in those type of businesses, maybe like Citation, maybe TSB to kind of protect your margins and not overhire.

Speaker 9

Are you guys thinking about your businesses that way or not necessarily right now?

Speaker 2

We absolutely look at that, Peter. I mean, as I said, there's Cali 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 2000 and 2009, 2010 kind of timeframe.

Speaker 2

But I don't think we have an economic situation that's going to lead to something like that. I'd say though, look, I think that 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 recessions, 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'll help you ride through it. And we haven't had that for A bunch of years, Peter, as you know.

Speaker 2

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.

Speaker 9

Okay. That's fair. Just one last one for me. Scott, are you guys any closer to Signing the A81 deal with Nigeria.

Speaker 2

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.

Speaker 9

Okay. Fair enough. Thank you.

Speaker 2

Sure.

Operator

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

Speaker 10

Good morning. Frank, if you could just fill in a couple of numbers. How much was aftermarket Up in the quarter.

Speaker 3

Well, at Aviation, aftermarket as a percent of the sales was 27%. So you can kind of do the V, based on that. It was 11%, 64% for the year. Yes.

Speaker 8

And I

Speaker 3

think it was 11% in the quarter. Yes. And aftermarket was 33% of total sales for the year at Aviation.

Speaker 10

Okay. And Scott, you didn't specifically mention, but I assume you're looking at deliveries based on the revenue forecast for 20 3, somewhere 200, 205 deliveries, is that fair?

Speaker 2

Yes. It's going to be in that neighborhood, George. And so that We've had a lot of dialogue, I think about when you're back to 2019. And obviously, the mix of aircraft is quite different, right? I mean, we're certainly heavier on the Super mids in the mids than we would have been a few years ago, but that's if you look at our revenue guide, it's probably going to be somewhere around that couple of 100 aircraft.

Speaker 10

And Scott, if you I looked at the 4th quarter and even if I added back the $16,000,000 that you mentioned for supply chain issues, The margin was still weaker than the last couple of quarters. So what else was going on there?

Speaker 2

Well, I know we're the 16 the inefficiencies that we took through and LIFO, which was around Probably about $10,000,000 or something impact is largely what drove us to the margin rates that we reported.

Speaker 10

Okay. Very good. That's it for me. Thanks.

Speaker 2

Okay. Thanks, George.

Operator

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

Speaker 11

Hi, good morning, everyone.

Speaker 2

Good morning, Austin.

Speaker 11

Scott, you've alluded to it, but your backlog is Several multiples of what it was just a few years ago and the production is not. So what's the Average wait time at this point and how are you thinking about managing how long you're making customers wait for an airplane?

Speaker 2

Well, I mean, it does vary from model to model, right? When you look at the longitudes and latitudes, the larger aircraft in the family, and we think those should be out a couple of years. And that's generally where they are. When you get into some of the smaller aircraft, those tend to be a shorter cycle Order deliveries, but again, those probably should be in that 12 to 18 month kind of window. So when we think about production volumes and what we're laying into Our forecast, which has been that then drives what our sales team has in terms of available slots and timeframes.

Speaker 2

That's kind of how we're managing it.

Speaker 11

Okay. How does pricing that's entering the backlog now compare to pricing that's hitting the P and L now in the Aviation Jet Business.

Speaker 2

It's better.

Speaker 11

Is that increasing or stable? I'm

Speaker 2

not sure. I mean, we don't measure A gap, you mean pricing of inflation, is that I

Speaker 11

guess what I'm wondering is, I know you've been taking price as the market's been stronger. Was there a period of time as the market was strengthening where you were not taking as much price to allow the backlog to extend first before you now take more price. Is that the strategy or has it been pretty consistent for the last few years?

Speaker 2

It's been pretty consistent. I think the pricing is obviously demand is strong, right, which is very helpful from a pricing standpoint. But our opinion, this market has been mispriced for a long time. I mean, this is a business, which as you guys know, it's a A lot of R and D, it's expensive to develop these things and get them through certifications and you need to have a fair pricing to generate these kind of margins. We always believe this business had to be back as a double digit profit margin business, and we've been driving price to make sure that that's the case.

Speaker 11

Okay. And what would be a credible protest case on FLARA from your competition?

Speaker 2

I don't think there would be one.

Speaker 8

Okay.

Speaker 2

Thank you. Sure.

Operator

Your next question comes from the line of Ron Epstein from Bank of America. Please go ahead.

Speaker 8

Hey, good morning guys. Just a quick one. Can you help me think through this LIFO adjustment you guys are making? I mean, isn't it sort of unfair to not include inflation in your costs

Speaker 2

Well, yes. So Ron, that's a good question. Look, just to make sure we understand the life of that. So actual inflation is still in the segments. That's very much a cash impact.

Speaker 2

It remains in the segment. The only thing we're taking out of the segment is this LIFO provisioning, right? So LIFO accounting, which again, I'm just a simple engineer on, but the LIFO provisioning The phenomenon is that I've bought parts at one price. I now I have a new contract with a supplier. I have a higher price for that part.

Speaker 2

As soon as that First part shows up. The LIFO provision is basically taking the actual price I paid for those other parts and raising them up to the price of that new part. So it's an accounting provisioning process. It's not an actual cost. So when I get to where that higher dollar part gets consumed by an aircraft, that's going to be in my That real inflation is in the segment, it is cash and it is in performance.

Speaker 2

It's only that provisioning Oh, that the nature of this last in first out accounting, that is what we're pulling out of the segment.

Speaker 8

But I guess another way to frame the question though is if we were to look at your margins pro form a back to GAAP for 2023, what would they be if you didn't do that adjustment?

Speaker 2

Well, you'll have that full disclosure, right? You'll see that LIFO number.

Speaker 3

You'll see the total LIFO. But Ron, no one else in our space is on LIFO. So we're on LIFO. For accounting, you need to conform that Between tax and accounting, so we derive a benefit from a tax standpoint by in an inflationary environment by essentially accelerating those Costs for book and tax purposes, but as Scott said, it's not a true economic cost. And we have basically hung up about $600,000,000 of effectively LIFO provision on our balance sheet that was Profit never realized because of this accounting that is not consistent with everyone else in the space.

Speaker 3

So as inflation has accelerated here and LIFO has become a bigger number, we felt it was important to highlight that and Certainly from a segment performance, take it out of the segment performance because it is not a true economic cost to the business. It is essentially a function of the accounting treatment that we have, but it will never that inflation, that LIFO inflation And we'll never turn into true economic cost in

Speaker 2

the business. So this Ron, this has been an issue. We've always been on LIFO. The Textron has always been on LIFO. So in a noninflationary environment, it's a relatively small it's always been a bit of a drive, it's a small number, it's not been An issue, but with an inflationary environment, all of a sudden, you have these big non economic bookings.

Speaker 2

And again, as Frank said, other companies, all everybody else in our space Does FIFO accounting instead of LIFO accounting. So we get a lot of questions from investors about what are these differences. And so I think taking this out Make sense. And look, the reality is we don't manage the business that way, right? I mean, when we sit down with the business, when we're doing our plans, we're managing, we do our operating calls That life it's not something they control, right?

Speaker 2

It's not economic. And so that's not how we manage the businesses, right? We don't look at that. So it makes sense They'll also not report that in that segment since that's not how we manage these guys either. They don't have they don't control that LIFO, they do control and they do get held accountable for actual real inflation on that on those higher par caps, right.

Speaker 2

So that's And we're not taking anything operational out of the segment, but managing it on what they control and the real financial impact.

Speaker 8

Got it. Got it. Okay. Thank you.

Operator

Your next question comes from the line of Cai von Rumohr from Cowen. Please go ahead.

Speaker 12

Yes. Thanks so much for taking the question. So, as Sheila mentioned, allegedly, you guys went You did buy Pipistrel. You've won FLARA. So it looks like your business is becoming more A and B.

Speaker 12

If we kind of look at valuations across the space, it looks like valuations Tend to be higher for pure plays, either you're doing aerospace, you're doing air conditioning, whatever. So as you think of your business, Scott, are you thinking of any strategic initiatives? At one point, I think you considered spinning off Kautex. How are you thinking about that now?

Speaker 2

Well, look, I don't think we're going to talk about portfolio shaping or changes as part of the Earnings call, it's something we're always looking at, and I think we'll leave it at that.

Speaker 12

Okay, Great. And can you give us any help on the I don't know, but What Lockheed's what the case Lockheed is making as to Why they're protesting? Because certainly on paper, it looks like your vehicle is very substantially better than theirs.

Speaker 2

Well, look, I mean, obviously, that process is going on between the Army and Lockheed. So we probably can't comment too much. I guess, I would just say that this As you all know, this process has been going on for a decade, right? There's been an enormous amount of work between both Suppliers and the Army from design, development, test, prototype, flight, it's been an unbelievably robust process. And so I don't it's hard for me to understand what flaw would have been in the process.

Speaker 2

It's Kind of inconceivable to me, but we'll leave that to the Army and Lockheed. And needless to say, we think they made the right choice. I'm proud of what our team did, and we're excited to get this thing behind us and get on with the program as I'm sure the Army is.

Speaker 12

Terrific. And the last one is cash deployment. I mean, you've got good cash flow even though down year over year. You've got a good balance You've basically been heavily focused on share repurchase, I mean, really a lot of leverage there. But you also bought Pipistrel.

Speaker 12

As you think about where the cash is going, maybe give us some thoughts about M and A versus share repurchase, dividends, all of that.

Speaker 2

Well, look, I mean, we always look at opportunities that are out there, Cai. And I would say relative to your earlier question, comment, yes, we would view our focus in the world to be within the A and D space in In terms of most of our capital deployment, Pipistrel has turned out to be a great little business, brought some great technology into the company and is now kind of Important to us in terms of the future of sustainable flight. But if opportunities like that come along, then that's great. We've done some other Smaller deals again in the A and D space and we would continue to look at that. But our principal deployment of our capital has been for the last number of years in the share buyback, We've been doing kind of 5%, 6%.

Speaker 2

We did another 5%, 6% this past year, and I would expect that's probably the track we're on in 2023

Speaker 5

as well.

Speaker 12

Thank you very much. Sure.

Operator

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

Speaker 13

Scott, for the demand environment for aviation, can you give us an update in terms of the Customer profile that you're seeing that are placing these aircraft orders, are they corporate, individuals, fractionals? Are they gearing more for growth, replacement or are they new buyers? Any additional context would be helpful in understanding the demand environment.

Speaker 2

Sure. We haven't seen much of a change. It continues to be that same mix. There's still new buyers coming into the marketplace. Fractional is certainly strong.

Speaker 2

There's a lot of buyers On the fractional side, it's a particularly attractive place, I think, for new people to go, right? It's not easy to necessarily know how to own this asset. Fractionals provide a great option for people that want to get in. That's doing well, but we still see robust whole aircraft Sales, it's a mix of public companies, private companies, family held companies. It really is kind of our usual customer base, I would say.

Speaker 2

It remains also kind of The same as we've seen around jets largely being driven by the North American market, probably seventythirty to eightytwenty in that range, which is normal. Total props are more robust internationally. Again, we see stronger activity, again, like 60% plus International versus domestic on King Airs, for instance. So the trend in terms of that, Who is that customer is kind of our traditional buyers.

Speaker 13

Great. Thanks for the color. And maybe following up on the supply chain issues that you mentioned, I mean, for some of these suppliers that continue to struggle for a few years now. What's the long term solution? What can you do to mitigate There are problems that you can actually deliver on the strong demand for bizjet.

Speaker 13

Are there other solutions like you need to Vertically integrate your supply chain or anything like that to alleviate some of the pressure, what other actions can you take?

Speaker 2

Yes, that's a good question. Look, it's a mix, right? I mean, in some cases, we have some smaller suppliers and technologies where they basically kind of were us, and we did acquire them and integrated them as part of our business. We have a good track record of doing that in the past around Some critical areas, interiors we did, that's been a home run for us. We just did a deal this past year in the actuation space.

Speaker 2

Yes, a very unique aerospace technology. Most of the volume was ours. It's a critical supplier and a critical technology for us in the future. And These aren't big numbers, but it was a great acquisition. And so far, it's working out really, really well for us.

Speaker 2

It's helped to get us back on track. But there's always going to be some guys out there that are suppliers where it's we're a small percentage of their sales. It's very capital intensive. It's a technology that It doesn't make sense for us to vertically integrate that. And so in those cases, we just keep working with those folks.

Speaker 2

I think those suppliers are all trying To get back up to speed, obviously, it's a good business for them. So there's I'd say, we don't have suppliers that I'm aware of that Are obstinate or don't want to perform. It's a matter of them getting the resources back in place and some tier suppliers getting in place. And No, those are folks that just take a fair bit of work, but I think they will get there again. We've seen some of them have already recovered, but there's still a couple of problem children out there that that are working on getting there.

Speaker 13

Great. Thanks, Scott.

Operator

Sure. Your next question comes from the line of Seth Seifman from JPMorgan. Please go ahead.

Speaker 14

Hey, thanks very much and good morning. I'll just stick to one here. Kind of a follow-up on the last Question Christine asked, I think from a mix perspective, while the deliveries in total are still down from 2019, I think the deliveries to NetJets are probably higher. And so as you think about delivery growth from here, do you think about the incremental growth coming More with that top customer or more kind of diversifying the mix a little bit more. And then I'd also imagine that the like the order for the for 200 latitudes, the Natchez has probably come into A conclusion pretty soon and whether you think about how you think about expectations for the next log of Latitudes from them?

Speaker 2

Well, so first of all, I don't know what percent of sales back to 2019 what it was on fractional versus today. But Look, I think fractional when you talk about diversification, the sale of a fractional aircraft is a more diversified sale, Frankly, than a single chat. Remember that this is not a concentration of a buyer in NetJets. Remember, NetJets is out there Selling that aircraft to 8 or so people, right? So every sale that we make The NetJet is a sale from NetJet to a whole bunch of different customers.

Speaker 2

So it's quite diversified. So I don't expect net jets or any fractional for that matter to track wildly different than the overall market demand, right? If the market is If people are wanting to fly private, you're going to see this mix of people that choose to do it through a fractional, which is actually a lot more people because again, they're buying a fraction of an aircraft, not a whole aircraft. So when I look at our mix, I think of the mix associated with the Netship business as being very good mix, Right. That's a very diversified sale.

Speaker 2

It's a very diversified market. And that's kind of that's what they do every day, right? They're out working and talking to Lots and lots of customers in a broad range of customer base for selling that fraction of an aircraft. And obviously, as you guys know, one of the things We work very closely with NetJets and looking out roughly about a year that these things come into backlog based How their sales team is doing out there selling these aircraft. So it's a great part of our backlog and it's a great part of our business.

Speaker 2

It is, as you guys know, tends to be at a lower margin because we it's kind of a wholesale sale, but they're the ones that are out there Spend the money on sales forces and reaching out and selling to that large customer population. Net just remains as do other fractionals are really important part of the business and it's a really, really important part of our As far as the deal with NetJets, we are In constant discussions in terms of forecasting unit volumes, as you get to where you get towards the end of a particular Quantity by, obviously, we'll work with NetJets to work on what comes next. But No, that's kind of a business arrangement between the 2 of us obviously, but the actual forecast and backlog that's Reflected in our numbers is really kind of a rolling 1 year process regardless of what the size of the overall Arrangement is between ourselves and NetJets on Latitude and Longitude volumes.

Speaker 14

Great. That's very helpful. Thanks, Scott.

Operator

Sure. And your last question today comes from the line of Doug Harned from Bernstein. Please go ahead.

Speaker 15

Good morning. Thank you. I wanted to go back to the discussion around the size of the backlog as it Clearly, it's grown quite a bit over the years. And when you look at backlog, it's slowed sequentially in this quarter. How do you compare the how do you contrast the demand you're seeing for new aviation sales to basically the wait time that's there.

Speaker 15

In other words, there's a point where you just flat out are going to lose customers if they have to wait too long. So Do you see a constraint on the growth from that at this point?

Speaker 2

Well, we really haven't seen that. I mean, I think the whole industry is in a similar situation, right? We were in a situation where you couldn't get an aircraft for 18 months to 2 years and somebody else had an aircraft they can get tomorrow, then yes, you could lose that customer. And I think, obviously, somebody could go buy a used aircraft or somebody in that nature. But I think right now, the whole industry In this situation, and frankly, it's where this industry should be, right?

Speaker 2

I mean, these are complicated assets. There are a lot of times customers already have aircraft. They need to sell their used aircraft. So, look, I think the remember, This industry actually worked like this way for a very, very, very long time. The aberration has been since 2008 to the last 2 years ago, where you didn't have much of a backlog in Generally speaking, this industry has been a backlog business and

Operator

it should

Speaker 2

be a backlog By the time you specify aircraft and configure aircraft and customize the aircraft, this is really where we're sitting today It is what normal should look like, not what we've seen in the past 10, 12 years.

Speaker 15

When you get to this situation though, which is clearly a good situation, the solution always is to add And we've seen that happen in past cycles as well. When you look out today, what things would you want to see to make material increases in your production capacity.

Speaker 2

Look, I don't think it's our production capacity so much. I mean, obviously, we're struggling through some Flyer issues and you don't hear tactically, but remember as we talk about the delivery times, what our teams out there As we look at that backlog, they're selling aircraft and serial numbers that are to be delivered at certain dates, right? So that's how you manage This backlog and then you've got to make sure that you dial in your production schedule to match what those committed delivery dates are. So if you start to see a softening in the order rate, then you're going to sell out fewer of those slots in the future and then you would adjust Your production, if you all of a sudden say, hey, 2025, it looks like you could have 5 more latitudes or 10 more M2s, then you do that and you modulate your production capacity accordingly. But I think as long as you're out there looking at these sort of 12, 18 month, 2 year kind of time lines, it gives you the ability to do that.

Speaker 2

And again, that's how this industry has always worked.

Speaker 15

Well, and just one last thing, when you look at the constraints coming from the supply chain, Are there some specific areas right now that you would point to as most difficult?

Operator

Yes. I mean,

Speaker 2

I could tell you a couple of part numbers that are our biggest challenges. We're not going to do that. I'm not going to throw particular suppliers under the bus. But Yes, there's a couple of particular products, a couple of particular technologies from a couple of particular suppliers that Our biggest constraint, I mean, there's always a bunch of little stuff going on, but for sure, if you get a couple of these guys back in line, that would be Very helpful. And again, that doesn't mean we turn that into all of a sudden delivering a lot more aircraft because again, we've committed dates to our customers.

Speaker 2

It's a lot more for us right now about Getting rid of all the inefficiencies in our production runs where we're having to build aircraft and swap parts around and do things out of sequence, it's very, very Harmful to running a good smooth production operation when you've got to go chase all the stuff around.

Speaker 8

Okay, great. Thank you.

Operator

Sure. Ladies and gentlemen, this conference will be available for replay after 10 am Eastern Time today through January 25, 2024. You may access the AT and T Executive Replay System at any time by dialing 1-eight 66 207-1041 and entering the access code 4,482,216. International participants dial 402-nine70-eight forty seven. Those numbers once again are 1-eight sixty six 207-1041 or 402-970-0847 with the access code 448 2,216.

Operator

That does conclude your conference for today. Thank you for your participation and for using AT and T Teleconference. You may now disconnect.

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Earnings Conference Call
Textron Q4 2022
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