Thank you for joining us. Welcome to the Q4 2021 Textron Earnings Release Conference Call. All participants are currently in listen-only mode. We will have a question-and-answer session later. As a reminder, this conference is being recorded. I will now hand it over to your host, Mr. Eric Salander, Vice President of Investor Relations. Please proceed.

Thanks, Brad. And good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO, and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Revenues in the quarter were $3.3 billion, down from $3.7 billion in last year's fourth quarter. During this year's fourth quarter, we reported income from continuing operations of $0.93 per share. In the quarter, we recorded $5 million in pretax special charges related to our 2020 restructuring plan, or $0.01 per share after tax. Excluding these special charges, adjusted income from continuing operations, a non-GAAP measure, was $0.94 per share for the fourth quarter of 2021 compared to $1.06 per share in the fourth quarter of 2020. Segment profit in the quarter was $310 million, down $14 million from the fourth quarter of 2020. Manufacturing cash flow before pension contributions totaled $298 million in the quarter. For the full year, revenues were $12.4 billion, up $731 million from last year. Adjusted income from continuing operations was $3.30 per share compared to $2.07 per share in 2020. Manufacturing cash flow before pension contributions was $1.1 billion, up from $596 million in 2020. With that, I'll turn the call over to Scott.

Thanks, Eric. And good morning, everyone. Our business closed out the year with another solid quarter. In Aviation, we continue to see favorable market conditions, including improved aircraft utilization, low pre-owned inventory levels, and strong customer demand. Order activity remained very strong, with backlog growth of $655 million in the quarter and $2.5 billion for the full year, resulting in a $4.1 billion backlog at year end. As a result, we delivered aircraft on a more linear trend for the year, which improved manufacturing efficiency and cash flow generation. Reflecting this improvement in the operating environment, and strong execution of our teams, Aviation achieved a segment margin of 10.1% in the fourth quarter. For the year, we delivered 167 jets, up from 132 last year, and 125 commercial turboprops, up from 113 in 2020. Also, in the year, we saw sequentially higher aftermarket revenue on a quarterly basis, driven by increased aircraft utilization. Moving to defense, aviation was awarded a $143 million contract for eight AT-6 aircraft, ground support equipment, spare parts, and training from the Royal Thai Air Force. This contract establishes Thailand as the international launch customer for the U.S. Air Force's latest light attack aircraft. On the new product front, the Beechcraft Denali completed its first flight in November, launching the start of the flight test program. At Bell, revenues were down slightly in the quarter, largely on lower military revenues as expected, reflecting the continued wind-down of the H1 production program, partially offset by higher commercial revenues. In December, Bell completed the first install improvement modifications on an Air Force CV-22 Osprey. This effort is part of an ongoing process to upgrade the Air Force's Osprey fleet. In January, the Bell Boeing program offices awarded a $1.6 billion contract over the next five years to support the V-22 Osprey currently in service with the U.S. military. On the commercial side of Bell, we delivered 156 helicopters in 2021, up from 140 in 2020. We also saw solid commercial order activity for the year, reflecting broad-based demand. Moving to Textron Systems, we saw another strong quarter of execution that contributed to a full-year margin of 14.8%, up 320 basis points from 2020. During the quarter, we delivered the fourth Ship-to-Shore Connector to the U.S. Navy after a successful completion of acceptance trials. On the Shadow program, Systems was awarded an $82 million logistics support contract for 2022. On our common unmanned surface vessel platform, we completed final testing related to the Unmanned Influence Sweep System program, setting up potential for a production contract award in the first quarter of 2022. Moving to Industrial, revenues were lower in the quarter as we continue to experience supply chain challenges, including order disruptions at Kautex related to global auto OEM production schedules. At Textron Specialized Vehicles, we continue to see a strong pricing environment and steady retail demand. Despite the ongoing supply chain challenges, both businesses saw sequential revenue improvements in the quarter. In summary, there were many items to highlight in 2021 across our segments. At Aviation, strong order activity and customer demand throughout the year drove $2.5 billion of backlog growth. On the new product front, we continued our product refresh strategy with the introduction of the Citation M2 XLS and CJ4 Gen2 aircraft. The Cessna SkyCourier completed the flight test program, with 2,100 hours of flight test activity, and we expect FAA certification in the first half of 2022. At Bell, we continued our work on the FDL programs. We submitted a proposal for the FLRAA program in September, and the U.S. Army is expected to award the FLRAA program contract in 2022. On FARA, we've made significant progress on the 360 Invictus prototype build, with 75% of the effort complete at year-end. We opened the Bell Manufacturing Technology Center, an innovative proving ground, to test and refine technologies and processes across Bell's core production capabilities. Textron Systems, ATAC, continued to grow its fleet of certified F1 aircraft in support of increased demand on U.S. Air Force, Navy and Marine Corps tactical air programs. We continued our innovation and development activities, with the rollout of the Ripsaw M5 prototype vehicle for the U.S. Army and the Cottonmouth ARV for the Marine Corps. At Textron Specialized Vehicles, we entered into a strategic collaboration with GM, which will assist our ground support equipment business in the electrification of baggage tractors, cargo tractors, and belt loaders for use in airports globally. We also introduced the Liberty, the industry's first PTV to offer four forward-facing seats in a compact golf car-sized platform powered by lithium-ion battery. At Kautex, in 2021, we were awarded eight contracts on new vehicle programs for our hybrid electric fuel systems. Looking to 2022, at Aviation, we're projecting growth driven by increased deliveries across all product lines and higher aftermarket volume. At Bell, 2022 represents the beginning of a transitional period as we expect lower revenues related to military production programs while awaiting a down-select and award on the FLRAA program. At Systems, we're expecting flat revenue with growth on ship-to-shore and tactical air programs, offset by lower fee-for-service volume. At Industrial, we're expecting revenue growth and margin improvement. Within Kautex, we expect increasing volumes from improving OEM auto production, while at Specialized Vehicles, we anticipate improving supply chain conditions and increasing volumes across our products. Earlier in 2021, we launched our eAviation initiative to leverage the resources and expertise across our aviation businesses to develop new opportunities in aircraft utilizing electric propulsion systems. In 2022, we plan to expand these efforts and increase our investment in developing technologies to accelerate the shift to sustainable flight, including eVTOL and fixed-wing aircraft. With this backdrop, we're projecting revenues of about $13.3 billion for Textron's 2022 financial guidance. We're projecting EPS in the range of $3.80 to $4 per share. Manufacturing cash flow before pension contributions is expected to be in the range of $700 million to $800 million. With that, I'll turn the call over to Frank.

Thanks, Scott. And good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.4 billion were down $201 million from a year ago, largely due to lower aircraft volume, partially offset by higher aftermarket volume. Segment profit was $137 million in the fourth quarter, up $29 million from last year's fourth quarter, largely due to favorable pricing net of inflation of $21 million and improved manufacturing performance. Backlog in the segment ended the quarter at $4.1 billion. Moving to Bell. Revenues were $858 million, down $13 million from last year, reflecting lower military revenues, partially offset by higher commercial revenues. Segment profit of $88 million was down $22 million, primarily due to lower military volume and mix. Backlog in the segment ended the quarter at $3.9 billion. At Textron Systems, revenues were $313 million, down $44 million from last year's fourth quarter due to lower volume, which included the impact from the U.S. Army's withdrawal from Afghanistan on the segment's fee-for-service contracts. Segment profit of $45 million was down $4 million from a year ago, largely due to the lower volume. Backlog in the segment ended the quarter at $2.1 billion. Industrial revenues were $781 million, down $85 million from last year, reflecting lower volume and mix of $133 million, largely in the fuel systems and functional components product line, reflecting order disruptions related to the global auto OEM supply chain shortages, partially offset by a favorable impact of $50 million for pricing, largely in the Specialized Vehicles product line. Segment profit of $38 million was down $17 million from the fourth quarter of 2020, primarily due to lower volume and mix, partially offset by favorable impact from performance. Finance segment revenues were $11 million and profit was $2 million. Moving below segment profit, corporate expenses and interest expense were each $29 million. Our manufacturing cash flow before pension contributions was $298 million in the quarter and $1.1 billion for the full year. In the quarter, we repurchased approximately 4.5 million shares, returning $335 million in cash to shareholders. For the full year, we repurchased approximately 13.5 million shares, returning $921 million of cash to shareholders. Turning now to our 2022 outlook. I'll begin with the segments on slide 8 of the earnings presentation. At Textron Aviation, we're expecting revenues of about $5.5 billion, reflecting higher deliveries across all our product lines and increased aftermarket volume. Segment margin is expected to be in the range of approximately 10% to 11%, reflecting higher volume, favorable pricing, and increased operating leverage. Looking to Bell, we expect revenues of about $3 billion, reflecting lower military volume primarily related to lower H1 production. We're forecasting a margin in the range of about 10% to 11%, largely due to the lower military volumes and continuing high levels of R&D investment. At Systems, we're estimating revenues of about $1.3 billion, with a margin in the range of about 13.5% to 14.5%. At Industrials, we're expecting segment revenues of about $3.5 billion on higher volumes at Kautex and Specialized Vehicles. We're estimating Industrial margins to be in the range of about 5.5% to 6.5%. At Finance, we're forecasting segment profits of about $15 million. Moving to slide 9, on a consolidated basis, we're expecting earnings per share to be in the range of $3.80 to $4 per share. We're also expecting manufacturing cash flow before pension contributions to be about $700 to $800 million, which includes an approximately $300 million impact from a change in the R&D tax law beginning in 2022. Looking to slide 10, we're projecting about $150 million of corporate expense, which includes $30 million of investment in eAviation. We're also projecting about $120 million of interest expense and a full-year effective tax rate of approximately 18%. Looking to the other items and turning to slide 11, we're estimating 2022 pension income to be about $120 million, up from $30 million last year. Turning to slide 12, R&D is expected to be about $585 million, down from $619 million last year. We're estimating CapEx will be about $425 million, up from $375 million in 2021. Our outlook assumes an average share count of about 219 million shares in 2022. That concludes our prepared remarks. So, Brad, we can open the line for questions.

Our first question today comes from Peter Arment with Baird.

Scott, maybe you could just describe kind of the level of where you think bizjet production or jet production is going to in 2022? In the fourth quarter, did you have any kind of challenges from the supply chain that had any jets move into the year 2022?

As we've talked about, we have been ramping up the production rate. We continue to do that and expect to continue to do that throughout the course of 2022. The backlog has been very strong. We still see robust demand in the marketplace. So, I think it remains very favorable from a market condition. We haven't had problems – I shouldn't say we haven't had problems. The guys always had to work through supplier issues here and there. But, no, we did not have that impact our production rates or impact any 2022 deliveries. The ramp rate continues. We're bringing people on board every month and training and continuing to bring them on our human resources in our own business. We continue to work with suppliers as they meet those ramp rates as well. I think as we look forward, again, look, we're coming out of the year with somewhere around 12-month backlog. We like that. I think that's very healthy for us. And I think it's very healthy for our customers, right? So, it's really how the business should run. It gives you much better visibility. It allows customers the opportunity to go sell their used aircraft for many of whom who are upgrading an aircraft. It gives them a lot more time to specify options, interiors, and paints, and all the things involved in that process. And it allows us to cut all those things into the production line in a very efficient way, rather than having a bunch of rework and changes towards the end to accommodate a customer need. So, I think keep an eye on that 12-month. Again, if that's kind of for our class of aircraft, that makes a lot of sense to us. And I think it makes sense to our customers. So, as the year goes on, and obviously, we will keep a close eye on the demand environment, and we'll continue to make adjustments as we see fit. But I think we're very happy with where we are at the backlog levels that we have. I think, as I said, it works for us. It makes for a much more efficient, cleaner, easier to operate, more linear business, and I think it's been good for customers as well.

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

I think – sure, I think, as we've been saying, we think we'll be back to those levels where we were in 2019. And we're probably a little early to guide on our 2023 volumes, but we'll keep an eye on it. But, yeah, for sure, we feel good that we're on track to get back above those 2019 levels. And I think you see that in the revenue guidance.

Just lastly on CR, if it goes the full year, have you quantified if there's any impact, if any?

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

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

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

There is no doubt that there is some margin compression at Bell. This is primarily due to the ongoing decline of the H1 program, which has been a significant source of production volume for us. However, we expect some offsets in other areas. We believe that this year will be strong for commercial aircraft deliveries and that the commercial aftermarket will continue to improve, though we anticipate some pressures. The military aftermarket tends to fluctuate, and that could present some challenges. Importantly, we have been heavily investing in R&D, especially concerning FARA and FLRAA. We expect that our U.S. Army customer remains on schedule with the FLRAA evaluation process, which is a major initiative requiring substantial effort from both sides, and they seem to be making good progress. Therefore, we think they are likely to announce something around the middle of the year as indicated. However, we have accounted for a reasonable expectation that this extensive program will take time to finalize contracts and generate revenue. Consequently, we anticipate maintaining a high level of R&D support for this program for most of the year.

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

You mentioned the FLRAA downselect in 2022. My understanding was, the expectation was they were going to make that decision by mid-year. Is that still your understanding?

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

And then, at Textron, I know that pricing, you mentioned, is strong, but did pricing improve in that quarter versus Q3? And maybe if you can tell us how many price hikes did you have in 2021 and where have you had one in 2022?

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

Frank, one for you. So, in kind of reading through the release, I think you mentioned that your cash flow numbers assume a $300 million hit from R&D credit amortization. So, you're basically assuming that, whereas Lockheed and RTX did not, is that correct?

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

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

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

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

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

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

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

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

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

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

So, you are moving towards the top end of that range, you say, is a fair assumption with this pricing coming through?

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

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

As a follow-up, in the industrial division, relative to what you said three months ago, have these got any better on the supply chain?

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

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

Scott and Frank, you mentioned Bell and the challenges it faces from the military. If Bell does not win FLRAA or FARA, what does the long-term outlook for its military business look like?

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

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

From a working capital standpoint, we're looking at kind of flattish working capital ex the tax number, which does impact working capital. But kind of as you look at the other elements from an inventory payables, receivables, things like that, we think we will likely see a little bit of inventory growth associated with ramp in the commercial businesses, but we think we can offset that in other places. So, continued good working capital performance. In terms of cash flow, cash deployment remains the same. Certainly, we look at, obviously, R&D and investment back into the business. We outlined that. So, we've modeled in some number for acquisition activity that we always do. But the rest of the free cash flow would go towards share repurchase activity. The number in our model in terms of share count actually has our share repurchase a little bit back-end loaded. So, we're roughly thinking about share repurchase that is in line with the – from a dollar standpoint, with the amount of repurchase activity that we undertook this past year.

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

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

Comparables going back to 2020, obviously, 2020 was a pretty extraordinary year. So, you would expect to see a lot better overall performance into 2021 as things kind of returned to normal. So, that's why I think we're back into that world where you're talking about these 20%, 25% incrementals on the business. We continue being in a strong pricing environment. We've been in a strong pricing environment all year, which obviously is helpful. And again, as I mentioned, having the strength of the backlog we hadn't seen in a very long time, it really has helped to run the plants much more efficiently and effectively. So, I think we have all those things – are tailwinds to us. But we've got our way into 2022 here and keep our heads down and keep delivering. And if we can drive additional margin, obviously, we have a reasonable way to do that.

Just one quick one, Frank. How much was aftermarket actually up in the quarter?

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

And our next question comes from the line of Peter Skibitski with Alembic Global.

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

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

Just one last one. Where are we in the commercial helicopter cycle? And will the 525 be certified this year?

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

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

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

I guess the color I could give is to say that jets leads the way. That's been the strongest demand environment. I would say that the demand is very robust in both the individual buyer, whether that's a corporation or a high net worth individual, as well as, obviously, the fractional market is very strong right now. So, we're seeing a lot of demand through our partnership with NetJets. So, again, jets, virtually, across the board, in terms of jet models, from entry level all the way up through longitudes, it's quite strong. Turboprops is also strong, but not as strong as jets. And I would say, part of that reason is, as you guys know, that our jet business is usually – the biggest chunk of that market is North America where we see very robust demand. A smaller part of that market is outside the U.S. They're still a little bit behind. There is demand there, but it's not quite as robust as North America. When you look at turboprops, and specifically when you look into the King Airs, for instance, now that's a market that for us historically is stronger outside the U.S. than inside the U.S. So, it's strong, but, frankly, it's marginally led right now by North America because, again, the North American recovery has been so strong. So, we have seen that outside of the U.S. market picking up and are seeing that demand, and so it is better than one to one, it's good. But I would say in terms of color, jets is certainly leading the way.

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

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

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

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

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

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

Look, I don't know. I won't go beyond probably 2022 guidance, but we've been saying for a very long time that we expect Bell as sort of a 10% to 12% margin business. We've obviously been well above that, as we had a lot of strong multi-year production programs where we could drive efficiencies and gain the benefits of that. But on the other side of that coin, when you see some of the ramp downs, it's more pressure to be in that range. And that's where you see us today. So, clearly, some of these programs, even when you talk about EMD programs of the magnitude like FLRAA, there's still pressure when you unwind some of these large production programs. But, again, I think it's too early, obviously, to think about how we would guide in the 2023 or 2024. It'll depend a lot on mix. There's still opportunities out there for increased production on some of our military programs. We don't know what the aftermarket is going to look like on some of those programs. So, we've got to kind of adjust every year. But I think 10% to 12% is what we've said for a long time. And I think that's probably the reality where that business will be.

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

Scott, I was wondering if you'd share some of your thoughts on eVTOL. We've seen some of the publicly traded eVTOL companies just get crushed. Boeing just dropped about half a billion dollars into risk. Arguably, you're probably one of the more experienced companies at this, given that you do have a vertical lift business. You do deal with kind of smaller vertical lift aircraft. Just curious what your sense is on the market and how you think about it for Textron?

Ron, I think we're in a better position than anyone to go execute on these market opportunities. We're doing that. I think the advantage for us is that we have already, in the company, the infrastructure and the talent to do these sorts of things. So, I don't need to announce half a billion dollar investments. I think we've indicated to you guys, we're going to probably have $30 million that we're putting in this year. But I can spend my money on actual engineering capability and designing stuff. I don't need to be building hangars and office spaces and test laboratories and all that sort of stuff. I have all that stuff, right? So, we have a lot of technology leverage that comes out of our flight controls side of Bell that's been doing tiltrotor, which is kind of what these guys look like, are baby tiltrotors. We know how to design and build and certify a Part 23 aircraft. Look, I just think our approach on here is spend the money we need to spend, to invest in the technology, we've talked before the battery density issues, I think you have to have a practical product. And so, we're working with a lot of different angles and battery cell suppliers to try to understand this thing. There's a number of things we're looking at to strengthen, frankly, that part of our business. We don't really need to strengthen the part of our business that knows how to do tiltrotors, that knows how to do fixed wing aircraft and that weight class and that certification type. But we do need to strengthen our capability on the battery, electric propulsion side of things. So, we're doing all that. I just don't think there's a reason for us to come out and throw dates around when this business model happens. And, frankly, look, I think there's every reason to believe that that eVTOL and urban air mobility could be a very big business. And I think we'd love to supply assets into that business. But I think electrification, frankly, is a lot more than that. Right? There's trainers, there's fixed wing stuff. It's not just all about eVTOL. That could be a monster market, that would be great. But I don't think it's the only market. So, we're taking probably a more pragmatic approach and making the right investments, I think, and looking at opportunities for us to be a big player in that. I think we should be the winner in that space. But I think we can do it with relatively modest investments and leverage the technology that we already have in our company.

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

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

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

Maybe following up on Kristine's Bell question, understand that there's no 2023 guidance at this point. But with a FLRAA win, can we assume that 2022 is an EBIT bottom at Bell?

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

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

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

We have made an effort to provide guidance and aim to meet our expectations. We'll monitor how the market evolves throughout the year, including order rates and our capacity for additional aircraft, provided that market demand and supplier capabilities align. We assess this daily, and if there are opportunities to enhance our delivery numbers, we will pursue them. However, I believe our guidance is suitable based on our current backlog, and that remains our focus.

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

Look, I don't know. We're looking at awfully strong ratios here in 2021. So, that would be another awfully big backlog build. Look, I'd love to see us continue some backlog build, but is it reasonable to expect, let's say, is that hot through a whole another year? I don't know. If it does, great. And if it does, obviously, we'll continue to tweak our production levels up and our delivery levels up. But that's something I think we'll just keep an eye on that as we go through the course of the year. I'd just be making stuff up to – it's going to be that strong for a whole another year. We'll see how it plays out. Certainly, it has remained robust. If we can sell more, then we'll do it.

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

Scott, the fourth quarter deliveries being 3 less than the third quarter, I know you talked about wanting to level load them this year, but I would have expected the fourth quarter to be a little bit bigger than the third. So, were there any deliveries that got pushed into 2022 as a result of that? Or that's just how it fell out and that's just what we expect in the future?

No, that's just how it fell out, George. It's not going to be the same number every quarter, obviously, but I think, look, we like the fact that there's a lot more linearity. If you can contrast that to going back and having a lower third quarter and then you get this big spike of tons of deliveries right at the end of our fourth quarter, again, it's not a very healthy way to run a business. So, would we like to be totally flat or a little bit better on sequentials? Okay. But I think at this point in the game, we're delivering to the customer new dates, and that's what we're going to continue to do as we go forward.

What is the lead time where you'd have to make a decision to deliver more planes this year? You have the first half of the year to be able to do that or what's the kind of lead time do you need?

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

And ladies and gentlemen, today's conference will be available for replay after today at 10 AM Eastern through April 27 at midnight. You may access the AT&T replay system at any time by dialing 1-866-207-1041, entering the access code 9339579. International participants may dial 402-970-0847. And those numbers again are 1-866-207-1041 and 402-970-0847. Again, entering the access code 9339579. That does conclude your conference for today. Thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.