Good day, ladies and gentlemen, and welcome to the Raytheon Technologies Third Quarter 2021 earnings conference call. My name is Mistie, and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. On the call today are Greg Hayes, Chairman and Chief Executive Officer, Neil Mitchill, Chief Financial Officer, and Jennifer Reed, Vice President of Investor Relations. This call is being carried live on the Internet. And there is a presentation available for download from Raytheon Technologies website at www.rtx.com. Please note except where otherwise noted, the Company will speak to results from continuing operations, excluding acquisition accounting adjustments, and net non-recurring and/or significant items, often referred to by management as other significant items. The Company also reminds listeners that the earnings and cash flow expectations and any other forward-looking statements provided in this call are subject to risks and uncertainties. Our TCS SEC filings including its Form 8-K, 10-Q, and 10-K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statement. Once the call becomes open for questions, we ask that you limit your first round to one question per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue as time permits. With that, I will turn the call over to Mr. Hayes.

Thank you, Mistie, and good morning, everyone. As you saw from our press release this morning, we delivered another solid quarter. A few comments before I turn to the highlights. We continue to feel good about the long-term fundamentals of our business and our ability to drive growth and margin expansion over the next several years. During the quarter, we made great progress on cost reduction, driving operational excellence through our businesses, and achieved some notable milestones which we'll touch on in just a moment. From a market perspective, commercial air traffic continued to recover despite some regional impacts from the COVID variants. The global ASMs are available; SEC miles estimated to have grown about 30% sequentially in Q3. And here in the U.S., passenger traffic through TSA checkpoints averaged about 1.9 million travelers per day in Q3. That's up from about 1.6 million per day in Q2. International borders, as we know, are starting to reopen, and that's another positive. And on the Defense side, the Fiscal Year '22 budget request was in line with our expectations. As we've said, defense spending is nonpartisan, and we're encouraged to see Congress supporting increases to the president's budget that are also aligned with our business and our investments in new technologies. Overall, we continue to be cautiously optimistic on both the Commercial and Defense trends that we're seeing. Okay. Let's move to slide 2, some highlights from the quarter. Adjusted EPS exceeded our expectations, free cash flow was in line with what we expected, and we delivered another quarter of top and bottom line growth on both a year-over-year and a sequential basis. As we capitalized on the commercial after-market recovery, our defense portfolio continues to grow. Based on our strong performance year-to-date, we are again increasing and tightening our adjusted EPS outlook for the year to $4.10 to $4.20 a share. That's up from our prior outlook of $3.85 to $4. Neil Mitchill will get you into the details on sales and free cash flow where we were also tightening our outlook in both areas. On the capital allocation front, we repurchased about $1 billion of RTX shares during the quarter, bringing our total for the year to $2 billion, which was our commitment that we talked about back in Q2. Before I turn it over to Neil, a couple more details on our results. Let me cover some strategic and operational highlights for the quarter where we continue to execute on our key programs. Starting with strategic highlights, we announced the acquisition of FlightAware, which will become a significant accelerator for Collins connected ecosystem strategy and enhances our capabilities in growth areas like aviation network services, digital solutions, and aerospace modernization. And we're organizing our business around optimizing these capabilities within Collins Aerospace. We also announced the acquisition of Seeker engineering, a leading provider of advanced Space Electronics Solutions. Seeker strengthens our offerings to solve our customers' most complex problems by expanding our space-based capabilities with the integration of Blue Canyon; this also enhances our IRS competitiveness and reliability of satellite bus hardware and customized space electronics. At the same time, we continue to divest non-core businesses. During the quarter, we announced an agreement to divest our global training and services business, which is part of RIS. On the operational side, the missiles and defense team and their industry partners successfully completed the first test of a scramjet powered hypersonic air-breathing weapon concept or HAWC with DARPA and the U.S. Air Force. The HAWC successfully sustained hypersonic speeds, offering faster time on target and greater maneuverability. The successful test puts us on track to deliver a prototype system to the U.S. Department of Defense. Lastly, at Pratt, the Columbus forge disk business continues to integrate critical operations to drive further quality performance and cost reduction. Utilizing our core operating system tools, the team in Columbus reduced the lead time of forgings by up to 35 days and reduced both cost and inventory. As you can see, driving operational excellence through our organization is key to our long-term success. With that, let me turn it over to Neil to take you through the quarter in detail.

Thanks, Greg. I'm on Slide 3. I'm pleased with our performance in the quarter where we saw strong year-over-year sales growth, adjusted earnings growth, and free cash flow. Sales of $16.2 billion were up 10% organically versus the prior year on an adjusted basis. Our performance was driven by the continued recovery of domestic and short-haul international air travel and continued growth in defense. That was partially offset by some supply chain pressures and lower 787 OE volume. While we expect these headwinds to continue in the near-term, we only see this as a timing issue. Nonetheless, we remain focused on our cost actions and program execution to drive continued earnings and cash flow growth. Adjusted earnings per share of $1.26 was ahead of our expectations, primarily driven by Collins, Pratt, and some corporate items. On a GAAP basis, EPS from continuing operations was $0.93 per share and included $0.33 of acquisition accounting adjustments and net significant and/or non-recurring items. It's worth noting that both GAAP and adjusted earnings per share benefited from about $0.16 of lower tax expense related to previously disclosed actions we took to optimize the Company's legal entity and operating structure in the quarter, as well as a pension-related benefit that was worth about $0.05. Free cash flow of $1.5 billion was in line with our expectations, keeping us on track for the full year. Before I hand it over to Jennifer, let me give you a little color on our synergy progress. During the quarter, we achieved about $165 million of incremental merger gross cost synergies. Given our strong performance, we are again increasing our 2021 target, and now expect to achieve over $700 million cost synergies this year. This will bring us to nearly $1 billion in cumulative gross cost synergies since the merger. We're well on our way to meeting our $1.5 billion commitment. So with that, let me hand it over to Jennifer to take you through the segment results.

Thanks, Neil. Starting with Collins Aerospace on Slide 4. Sales were $4.6 billion in the quarter, up 7% on an adjusted basis, and up 9% on an organic basis, driven primarily by the continued recovery in the commercial aerospace end markets. By channel, commercial aftermarket sales were up 38% driven by a 44% increase in parts and repair, a 43% increase in provisioning, and a 22% increase in modifications and upgrades. Sequentially, commercial aftermarket sales were up 4% roughly in line with our expectations. Commercial OE sales were down 3% with strength in narrow-body more than offset by lower wide-body deliveries, primarily 787. Military sales were down 5% on an adjusted basis and down 1% organically on a tough compare. Recall, Collins military sales were up 8% in the same period last year. Adjusted operating profit of $480 million was up $407 million from the prior year. Higher commercial aftermarket sales, favorable mix, and synergy capture more than offset lower military volume. Looking ahead, due to expected supply chain pressures and 787 OE delivery headwinds, we now expect Collins full-year sales to be down mid-single digits. However, given the continued recovery in the commercial aftermarket and the benefit of cost containment measures, we are increasing Collins full-year operating profit outlook to a new range of $250 million to $300 million versus 2020. Shifting to Pratt & Whitney on Slide 5. Sales of $4.7 billion were up 25% on an adjusted basis, and up 35% on an organic basis, primarily driven by the continued recovery of the commercial aerospace industry. Commercial aftermarket sales were up 56% in the quarter, with legacy large commercial engine shop visits up 49% and Pratt Canada shop visits up 18%. Sequentially, commercial aftermarket sales were up 17%. Commercial OE sales were up 22% driven by higher GTF deliveries within Pratt's large commercial business. The military business sales were up 2% on another tough compare. Recall, Pratt military sales were up 11% in the same period last year. Growth in the quarter was driven by a continued ramp in F135 sustainment, which was particularly offset through inputs on production and classified development programs. Adjusted operating profit of $189 million was better than expected and was up $232 million from the prior year. Drop-through on higher commercial aftermarket sales more than offsets the impact of higher Commercial OE volume and higher SG&A and E&D. Looking ahead, due to the continued commercial aerospace recovery, we now expect Pratt's full-year sales to be up mid-single digits. In addition, we are increasing Pratt's full-year operating profit outlook to a new range of flat to up $50 million versus 2020. Turning now to slide 6, RIS sales of $3.7 billion were in line with prior year results on an adjusted basis and down 1% on an organic basis, driven primarily by the timing of material input from suppliers. Adjusted operating profit in the quarter of $391 million was in line with expectations and was up $41 million year-over-year on an adjusted basis, driven primarily by higher program efficiencies. RIS had $2.9 billion of bookings in the quarter, resulting in a book-to-build of 0.4 as expected and a backlog of $18.7 billion. Significant bookings included approximately $1 billion on classified programs. It's worth noting that we expect RIS full-year book-to-bill to be greater than 1. Turning to RIS full-year outlook, due to the timing of material inputs from suppliers, we now see RIS sales growing low single digits. However, as a result of improved productivity, we continue to expect RIS's operating profit to grow $150 million to $175 million versus adjusted pro forma 2020. Turning now to slide seven. RMD sales were $3.9 billion up 7% on an adjusted basis, and up 5% on an organic basis, driven by liquidations of pre-contract costs on an AMRAAM award received in the quarter, and the expected ramp in our franchise. Adjusted operating profit of $490 million was in line with our expectations and was up $59 million versus the prior year primarily on higher sales volume. RMD's bookings in the quarter were approximately $3.9 billion, resulting in a book-to-bill of 1.02 and a backlog of $29.6 billion. Significant bookings in the quarter included an AMRAAM Lot 35 for $570 million, a Patriot GEM-T order for $432 million, as well as several other notable awards. We also expect RMD's full-year book-to-bill to be greater than 1. We remain confident in our full-year outlook for RMD, with sales growing low to mid-single-digit and operating profit growing $50 million to $75 million versus adjusted pro forma 2020. And now, I'll turn it back to Neil to provide some color on the rest of the year.

Thanks, Jennifer. I'm on Slide 8. As we look ahead at the fourth quarter, we continue to be encouraged by the recovery of commercial air travel that has driven sequential aftermarket growth so far this year. However, the recovery of long-haul international traffic continues to lag expectations. And on the OE side, 787 build rates have come down more than we had expected, resulting in a significant impact on our top-line outlook for the year. Additionally, we aren't immune to the global supply chain pressures that are seeing some isolated impacts from the supply chain, primarily at Collins and RIS. However, we are working with our suppliers to mitigate these timing issues. Finally, while we anticipate the pending vaccine mandate may put further pressure on the supply chain in the near-term, higher vaccination rates will continue to build confidence in the safety of air travel going forward. With that backdrop, we're adjusting our sales outlook and now see full-year sales of about $65 billion, slightly higher than the low end of our prior outlook. However, given the strong performance on cost control, synergy capture, and program execution, we are raising and tightening our adjusted EPS range to $4.10 to $4.20 per share, or up about $0.22 from the midpoint of our prior outlook. About $0.07 of the increase comes from the segments, Collins and Pratt and the remainder comes from improvements in corporate items. On the cash side, we are also raising the low-end of our free cash flow outlook and now see free cash flow of approximately $5 billion for the full year. It's worth mentioning that we've included an updated outlook for the segments and some below-the-line items in the webcast appendix. With that, I'll hand it back to Greg to wrap things up.

Okay. Thank you, Neil. We're on slide nine and this is just our view of the operating environment that we're facing going into 2022. We're not going to give specific guidance on 2022 today, other than to say that the trends that we talked about in our May Investor Conference are proving to be pretty much on track with what we're seeing for next year. On the positive side, obviously, we expect the commercial aerospace recovery to continue and we feel good about our ability to grow our Defense franchises with our robust $65 billion backlog in the bipartisan support for the Fiscal 22 budget. Of course, the international demand for our products and technologies continues to be strong. We're also laser-focused on driving operational excellence to deliver cost reductions and further margin improvements. This is really a part of our core operating system rollout. Again, it gives us confidence that we can continue to grow the margins along the trajectory that we talked about. On the challenges side, no real surprises here. We anticipate the global supply chain pressure will continue and that lower 787 build rates will carry into next year. Again, none of these are new to us; we'll manage through them, but it's something I think everybody is going to face in the industry. And of course, we are watching, monitoring the reopening of international borders. It all looks to be positive so far, but again, the COVID variants can change that in a hurry. The global tax and inflationary environment are also a concern as we think about next year. Lastly, the impact of the COVID vaccine mandate. As you know, all federal contractors are required by December 8th to have all of our employees vaccinated. We certainly expect that there will be some disruption in both the supply chain and with our customers as a result of this, but we're going to work our way through it. Before we get to the Q&A, let me just close by saying that I'm really pleased with our performance in the quarter. I'm confident in the strength of our businesses as we look ahead. I want to reiterate that we remain focused on supporting our employees, customers, suppliers, and our communities, but our most important mission is keeping our employees safe. The strength of our Balance Sheet, along with the cash-generating capabilities of our business, will continue to provide us with financial flexibility to support investments in our business while still returning capital to shareholders, including our commitment to return at least $20 billion to shareholders in the first four years following the merger. With that, Mistie, let's open it up for questions.

At this time, if you would like to ask a question, your first question comes from the line of Peter Arment.

Good morning, Greg, Neil, Jennifer. Nice report. Hey, Greg, maybe you could just talk a little bit about the lost sales in Defense. Maybe how you're thinking about how that recovers and do we expect to get all that back in 2022 and maybe just any color about the supply chain challenges that you're seeing in Defense.

So the lost sales on the Defense side, I would categorize into three categories of issues there. One, I think the pullout in Afghanistan, which had about a $75 million impact on full-year revenue. Not huge, but meaningful. That will not recover, obviously. Those are services that we were providing to the U.S. Government or the Afghan Government prior to the pullout, so that $75 million goes away. You've got another probably $275 million of actual supply chain and people issues. By 'people issues', I mean our inability to bring enough people on board to generate the revenue that we were expecting. The other aspect is the actual supply chain pressure where we're not getting the material in. As you know, Peter, when we get the material in on the Defense side, we bill that right away to the customer and recognize the revenue. So that piece will come back; the hiring piece will come back; the Afghanistan piece won't come back. I don't expect we'll see it clearly in the fourth quarter, but we aren’t going to lose it next year. I can't tell you what quarter it's going to be in, but we'll get that back.

I appreciate all the color and thanks, Greg.

The next question is from the line of David Strauss with Barclays.

Thanks. Good morning. Greg, want to ask you a couple of questions on the error rates. I guess, first of all, on that. This year you talked about 161, are you actually going to hit that? On 787, where are you exactly today? Are you actually producing anything? And on A320, I know Airbus is talking about a big ramp-up there, but if you look at their deliveries, it doesn't look like much is actually happening. Can you talk about where you are on A320 rates as well?

All right, David. Let's just try to unpack that. Let's start with 737. We still believe Boeing is going to deliver those aircraft. Keep in mind for the first half of this year, we were not really delivering material to Boeing because they had it in their inventory. We've just started ramping up the OE deliveries out of Collins again, and keep in mind that's about $2.5 million roughly the ship set of revenue on 737. So we still fully expect Boeing will be taking production up there, on 737 here as they work through their backlog of undelivered aircraft and they go through the ramp-up process. As for 787, that I think is maybe the big question that we have right now. We are not shipping anything today on 787. We had expected to be delivering about five a month. And keep in mind that's a $10 million revenue per aircraft impact. Part of the problem at Collins in Q4 will be 787 deliveries. Again, they'll catch back up, but probably not this year. As it relates to the A320, we think they're probably building at a rate of what? 43 a month, going up; we think a little bit next year, and continuing towards a goal, I believe, of rate 75. It's not clear we're going to get all the way to rate 75, but we clearly see demand strengthening for the A320. It's a great aircraft with great performance characteristics. As you know, we have just over 900 aircraft delivered and we've flown about 9.5 million hours. We've got a 99.9 dispatch reliability rate. The engine's great, and we continue to see opportunities to grow our market position on the A320. But we don't see any shortage of demand in the near term on the A320.

Thanks very much.

Your next question is from the line of Ron Epstein with Bank of America.

Hey, good morning.

Hey, Ron.

Good morning, Ron.

Can you guys talk a little bit about the F35 re-engining? There has been a lot of, I guess, noise and discussion in the Defense community around the re-engining, the adaptive engine transition program. There has been some talk on it on the hill. Where are you guys on that? And how do you defend yourself against the GE offering?

Sure, Ron. Let me clarify that. Both GE and Pratt Whitney have adaptive engines currently undergoing tests. We conducted ground tests this summer and are scheduled for flight tests early next year. There is consideration for re-engineering the F-35 around 2027 or 2028, which is quite ambitious. The challenge at the moment with the adaptive engine is its incompatibility with the navy and marine corps variants of the aircraft. The Air Force would need to cover the whole development cost of the new engine. Another concern is that this is a new technology. In contrast to the F135, which has accumulated millions of flight hours, we are dealing with a single-engine fighter, making it difficult to justify introducing a completely new engine to the F-35 in the near future. We need to engage with decision-makers about enhancing the existing 135 engine or upgrading the current F135 to offer improved cooling and thrust, which would be significantly less expensive than developing a new centerline engine. We will keep collaborating with the services on this matter. It's important to note that while introducing a new engine may be a challenging endeavor, we are actively seeking ways to enhance the current version, primarily by securing the necessary funding. As the Block-4 is implemented, we will require increased cooling and thrust, and we have a plan in place to tackle that with the Joint Program Office.

All right. Great. Thank you.

Your next question is from the line of Sheila Kahyaoglu with Jefferies.

Hey. Good morning, guys. Thank you so much for the time, Greg, Neil, and Jennifer. I want to maybe ask about the aftermarket. When we look at the two-year stack basis, Pratt aftermarket seems to be at 76% of 2019 levels. Collins is at 66%, also at a lower growth rate. Can you talk about what's driving some of that growth differential? Is it just engines versus airframe and overall program mix?

Sheila, let me start. Good morning. We're very pleased obviously with the aftermarket performance in the quarter. You saw Pratt up 56% year-over-year, 17% sequentially, and Collins at 38%, also in line with our expectations sequentially, almost 4%. The difference, I think, comes down to the product mix of offerings and frankly, as we've talked about, Collins has a fair share of wide-body, and that hasn't yet recovered. As we all know, we do expect that to be the next growth driver for Collins as we get into next year and the international routes start to reopen. On the Pratt side, we saw very good shop visit inductions. We had a 49% year-over-year increase in legacy shop visits, which is a little higher than the 30% to 35% we thought we would see. This upside contributed about $75 million of sales and is contributing to a full-year $100-million increase in the Pratt outlook for the rest of this year. So we're pleased with the narrow-body recovery. As we look to fourth quarter, we'll continue to see shop visits at Pratt on the legacy side up year-over-year, probably in the neighborhood of 20%. It's down a little bit sequentially because we had some pull-ahead into the third quarter, but still very solid there. We're well-positioned to support those inductions with parts and aftermarket. And at Collins, we'll continue to see the narrow-body perform quite well. As Greg just talked about, the 737 MAX is stepping up. By the middle of next year, we'll start to align the rates of our deliveries with Boeing's deliveries. That will come with aftermarket as well, and then we'll see the wide-body.

Thanks so much for the detail.

Your next question is from the line of Seth Seifman with JPMorgan.

Hey, thanks very much, and good morning everyone. Maybe I'll continue along the aftermarket line of questioning. The sequential growth at Collins was in line with the outlook, but I think Greg, you've spoken in September and I think, correctly or not, people came away with maybe a little bit more optimism. Was the pace of growth kind of slow towards the end of the quarter? And then if you could give us, at Collins, are you still looking for that mid-single-digit growth in the fourth quarter? Is there any kind of provisioning ahead of international travel returning in the U.S. that might help the way that domestic did earlier this year or any kind of update on how much the trends in Collins aftermarket improvement are being affected by both demand and supply issues?

Yes, as Neil mentioned, sequentially, Collins saw a 4% increase, which was slightly below our expectation of 5%. This slowdown can primarily be attributed to a dip we observed in mid-summer due to the challenges posed by the Delta variant of COVID. As we conclude the quarter and move into October, we anticipate a return to low single-digit growth of 4% to 5% in Q4. A significant concern for Collins, as pointed out by Neil, is their reliance on wide-body aircraft, which constitutes 40% to 45% of their aftermarket. We had hoped for a quicker reopening of international markets, but the pace has been relatively slow. While the North Atlantic routes are starting to open, we are still waiting for progress in Asia, which we do not expect until 2023. Consequently, a full recovery to 2019 levels for Collins may not happen until the end of 2023.

All right. Thanks very much.

Your next question is from the line of Noah Poponak with Goldman Sachs.

Good morning, everybody.

Morning, Noah.

Hi, Noah.

Neil, the updated full-year 2021 guidance indicates that the margin is down sequentially across every segment. I'm curious about how much of this reflects a conservative outlook versus specific challenges. In Collins specifically, the margin and EBITDA dollars are expected to decrease significantly in the fourth quarter, despite revenues remaining positive. Given the challenges you've mentioned, could you explain the reasons behind this?

Sure. Thanks. Not conservatism, I don't believe. I think we've got this reasonably calibrated, but let me take you through each business unit. At Collins, if you're doing the math, which it looks like you've done, Noah, you'll see margins in the 9% range in the fourth quarter. There were a couple items in the third quarter that helped Collins to the tune of about $0.02. We had a land sale; we also had a worker's comp adjustment that was favorable. Those two items, if you adjust for them, would put Collins' third-quarter margins in the neighborhood of 9%. So I think we see flattest margins for Collins between Q3 and Q4. Recall we've been talking about the ramp in R&D and some of the discretionary spend. We saw some of that happen in the third quarter. We'll see more of that in the fourth quarter, so that's the Collins story. At Pratt, it's a different story. The margins are sequentially down, largely because of higher A320 neo. In fact, all of our GTF deliveries will be higher in the fourth quarter than the third quarter, so the negative engine margin headwind will persist. We'll continue to see higher E&D and SG&A growing just a little bit. Both Collins and Pratt have done a really nice job to control spending, it was back-loaded as we positioned ourselves to adjust depending on how the year turned out. For RIS, we'll see margins around 10%. We should see continued productivity there. No major changes there. For R&D, they will exit the year around 12%, pretty much in line with the third quarter. I'll point out for both RIS and RMD, there are four fewer days in the fourth quarter of this year than there were last year; that will give us a little bit of a headwind, but of course, that's just timing.

Given your comments on wide-body, and then what's happening with the A320, should we calibrate our expectations for the aerospace business margins to a non-linear path to the 2025 targets, specifically for next year if wide-body remains a bit slow and the A320 ramps in Pratt?

Noah, I think we've been talking about this for almost two years now since the pandemic started, that the recovery is going to be, I'll call it lumpy, in fact, and that depends on the routes, and the airlines, including wide-body, is going to be a big piece of that. I do think there will be a little lumpiness to the margin trajectory. Keep in mind that Greg just talked about the 787; that's a huge revenue contributor, not a big margin contributor until you get into the aftermarket. I think that's a fair assumption. We'll certainly be back here in January to give a little more color on what '22 looks like for us based on what we see during the fourth quarter.

Okay. Thanks so much.

Your next question is from the line of Robert Stallard with Vertical Research.

Morning.

Good morning, Rob.

Good morning.

Greg, a couple of months ago, you sounded perhaps a little skeptical about Airbus A320 ramp plans, but today you sound a bit happy about it. I was wondering if you could elaborate on your latest thoughts on this and whether you feel more comfortable on the A320 now.

Rob, I would tell you, I remain somewhat skeptical about rate 75. I think that's just natural. You'll hear it from leasing companies out there that there's probably not demand unless it comes up from Boeing's. As Airbus ramps up production, Boeing will ramp up production. The question is, are we really going to see a market that will support 50 737s and 75 A320s on a monthly basis, or 125 airplanes a month? It could happen; we'll be ready to support Airbus, our customer, if indeed it does. But I would tell you that our plans don't anticipate getting to that kind of rate by 2024, 2025. Again, maybe we're being conservative. We will support the customer if the demand is there.

Your next question is from the line of Doug Harned with Bernstein.

Good morning. Thank you.

Hi, Doug.

I just wanted to follow up on what Rob was discussing. If you look at the A-320 family, there are two points to consider. You expressed some doubts about the planned rate increase a couple of months ago, and your CFM counterparts have also raised concerns. Some in the customer community and Boeing have as well. Everyone may have different reasons for their views. Moving forward, they have remained committed to this production plan. How does this change? In other words, when will you or your counterparts decide to support the move to 70 a month and make that investment? How does this process advance?

Keep in mind though the A320 family is a shared platform between CFM and Pratt & Whitney. Our goal here is to make sure that we have the most profitable piece share of that business. Again, we will continue to sell the engines where we think we can make the most money. We will be disciplined on pricing. If the demand is really there and if Airbus is correct, we will get our fair share. It might not be 50%; it might be 45%; it might be 40%, but we'll get our fair share of whatever the ultimate demand is.

And if I can just follow up on that, one other thing that's going on right now is that Airbus deliveries are lagging production today, and they probably have 130 plus airplanes parked and the majority would be in the A-320 family. How does that affect you if you have this gap in deliveries and production in Airbus in terms of your deliveries of engines to them and then your planning for the next few quarters?

We do not foresee a gap in our delivery profile for the Airbus engines. We're continuing to produce, and in fact, as I just said, in the fourth quarter, I expect them to go up sequentially. As you know, Airbus has a huge backlog for the A320 and they are working with their customers, as we are, to make sure they take delivery. Not going to get into predicting how many they will deliver, but we don't foresee any gaps in our engine delivery profile.

If you think about that though, Doug, we've got thousands of A320s in backlog, and the fact that there's a few parked is just the state of the airline industry today where some of the airlines are looking for financing. We don't see any interruption in the production rate. As Neil said, it will continue to go up both this year and next.

Our next question is from the line of Myles Walton with UBS.

Thanks. Good morning. Greg or Neil, I was wondering how are you quantifying the risk around the vaccine mandate, booking your operation and in the supply chain? And also, I guess what's the bigger supply chain issue that's hitting you now? Is it people? Is it raw materials? Is it the chips? What's the growing risk and what's the fading risk?

Myles, regarding the $275 million estimate we mentioned earlier about the supply chain impact for the year, about a third of that is related to workforce challenges. We anticipate some level of disruption and difficulties in the supply chain, not just with the primary contractors but also with our subcontractors who must comply with the mandate. We expect some minor disruptions. While this isn't significant compared to our total revenue of $64.5 billion, there will be some impact to consider. As the December 8th deadline approaches, these issues could increase. We are closely monitoring the situation and maintaining communication with our key suppliers and customers. In terms of shortages, while the workforce is a factor, we've also seen lead times for raw materials double, although chip supply is currently sufficient for us, it remains an area to monitor. The logistics of getting trucks to pick up and deliver materials is also challenging. Overall, I don't anticipate any major or material impact on us for the year. We are effectively managing this with a strong supply chain and operations team, and we will continue to address these challenges.

All right. Thank you.

Your next question comes from the line of Mike Maugeri with Wolfe Research.

Hey, good morning, and thank you for the time. Neil, can you spend a little bit more time on cash flow and working capital through the end of the year? And then how that sets up for your working capital into next year? And then related, on the Capex trim this year, is that pushing Capex or is that Capex going away?

Good morning. Thanks for the question. Let me share a couple of thoughts around the free cash flow. We obviously took the bottom end of the range up by $0.5 billion on a couple of things. One, improved profit and two, slightly lower capex as you pointed out. Year-to-date, working capital has been an outflow, and that's pretty typical for us. We're expecting the fourth quarter to see at least $1.5 billion of positive working capital. Again, a lot of that comes from the defense side of the business as we receive cash receipts from our customers. We feel pretty good that we'll continue to see a net working capital and it could be a little bit higher than the number we talked about at the beginning of the year as we ensure we have an appropriate buffer stock in some places. All in all, we are making really good progress. Just to give you a couple of thoughts, inventory has been a real bright spot. Collins, sequentially, their inventory was only up $30 million from Q2 to Q3. Pratt is, in fact, down nearly $100 million sequentially. So the teams are doing a fantastic job of managing inventory as we recover through this cycle. I'm happy with that. In terms of the timing of the Capex, we've got a big ramp in the fourth quarter, which is also typical for us. I think some of the savings we're seeing this year could slip into next year, particularly around our large structural projects. The good news is we're completing those projects within budget so it's all contained within our cash outlooks. I won't get into where we see free cash flow next year, but I do expect it to grow as we've discussed back at the Investor Day. We'll be back in January with more details on how that's expected to unfold.

Thank you.

Your next question is from the line of Matt Akers with Wells Fargo.

Hey. Thanks. Good morning.

Good morning.

Just to comment a little bit about fuel prices and just put the uptick year-to-date. Is that starting to flow through at all into your customer behavior on a commercial side, either kind of flying some of the older aircraft differently or maybe potential demand for new aircraft to kind of get the fuel efficiency savings? Is there anything you're seeing from your customers there?

Matt, not really any impact except we have seen pricing going up. If you're out buying a ticket today to fly anywhere, you're going to see that prices have increased significantly from what we saw this summer. While fuel prices are up, oil is north of $80 a barrel. We believe that the airlines are able to pass along those higher fuel costs in the form of higher ticket prices. If it's a prolonged increase, it does drive demand for next-generation aircraft. Right now, there's a lot of aircraft still sitting on the ground, so I wouldn't expect there would be a near-term impact like that, but clearly, the airlines are raising prices to compensate for the higher fuel costs.

Got it. Thank you.

Your next question comes from the line of Cai Von Rumohr with Cowen.

Yes. Thank you very much. Great results. So the F-35 peak production target, as you know, has been brought down and supply chain has emerged as a bigger issue recently. You mentioned $275 million, but maybe could you give us color on A, where the supply chain issues are the biggest worry? And secondly, what the F-35 rate impact does to you because clearly it looks like it does quite a bit to the prime.

As we consider reducing our output from around 16 engines a month to 13 engines a month, it will affect Pratt, but it's a minor part of our overall defense budget. We're discussing a $10 million engine, which means a potential monthly loss of $30 million and a possible decline of $350 million to $360 million in revenue going forward. However, in the context of a $65 billion defense backlog, this is not very significant. The prime contractor is much more impacted by these changes. Regarding specific supply chain challenges, I can't identify a single supplier; rather, it's the components and raw materials. We're seeing rising prices for aluminum and steel, and all the basic raw materials have extended lead times. It's increasingly difficult to receive materials on time. Additionally, labor shortages in our supply chain are contributing to delays. I expect this issue to persist into next year. The vaccine mandate may complicate things further, although it could benefit our commercial aerospace sector if everyone gets vaccinated. We're supportive of that initiative.

Cai, let me just add one thing on F135 rates. Keep in mind that there's the production engines, but there's also power mods and pieces that Pratt makes that support the aftermarket. You'll get 1, 1.5 equivalent engines per month on top of production rate. So it'll be a little below the 16 a month and all of that has been calibrated into our long-term outlooks that we talked about earlier this year. So certainly a little bit lower on the production side, but not a full drop.

Terrific. And then on the supply chain, Greg, you mentioned raw materials. To what extent do you have raw material price escalators in your contracts?

Typically, as you know, Cai, we've got protection from, say, abnormal escalation in our contracts. There's a dead-band in terms of inflation for most of the contracts. For most of those raw materials, we also have long-term supply agreements, which cover us for the vast majority of the materials. So we're not seeing the impact today of the spot prices for materials that you might otherwise be thinking about. Most of that's coming in under LTA. If these prices persist long term, we will see an impact. To the extent that that is greater than these dead-bands, we'll be able to pass that on and recover that through our contracts.

Just to put some numbers on that, Cai, 90% of Pratt's products are under LTA; probably 70% at Collins. On average, we're about 80% protected. In the near-term, it's not a major issue for us.

Terrific. Thank you very much.

You're welcome.

Your next question is from the line of Kristine Liwag with Morgan Stanley.

Hey, good afternoon, guys. Good morning.

Good morning.

With Defense stable and Aerospace recovery coming along nicely, can you discuss your capital deployment priorities? And how are you thinking about the portfolio and M&A at this point in time?

Sure. I think for us right now, there is no news and there is no change, I would say, in the focus on the portfolio. We're going to continue to look for investments like Seakr Engineering and FlightAware that can enhance the offerings we already have, especially in software and the space business. At the same time, we're going to continue to look at lower-margin, lower-growth businesses for divestiture. Nothing to announce today. We'll keep looking at the portfolio as we always do. As for capital allocation, I think first and foremost, we're going to invest in E&D and Capex. You should think about that number this year; it will be about $5 billion. Next year will probably be closer to $6 billion of investments between Capex and E&D. That is the first priority, to invest for the future of the business. At the same time, we'll continue to take up share buyback over the next couple of years. We've got to do another $6 billion of share buyback to hit that $20 billion target we have out there. We fully expect to be able to do that, if not a little bit more. We have a lot of flexibility with the Balance Sheet. We've got $7.5 billion of cash to be in there at the end of the third quarter. We have plenty of liquidity if we decide we want to make some other investments. But for now, we're going to focus on generating cash, investing in E&D, and growing the business.

Great. Thanks, Greg.

I would now like to turn the call back over to Mr. Hayes for closing remarks.

Okay. Thank you, Mistie, and thank you, everyone for listening in. A good quarter, I hope everyone would agree. Neil, Jennifer, and the team will be available all day today to take your questions. So thanks very much for listening and take care. Bye.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.