And ladies and gentlemen, thank you for standing by for the Textron third quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. If you wish to ask a question, please press 1, then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1, then 0 command. Once again, if you have a question, please press 1, then 0. As a reminder, today's conference is being recorded. If you should require assistance during the call, please press star, then zero. I would now like to turn the conference over to your host, Mr. Eric Salander, Vice President of Investor Relations. Please go ahead.

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 Conner, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Revenues in the quarter were $3 billion, up from $2.7 billion in last year's third quarter. During this year's third quarter, we reported income from continuing operations of $0.82 per share. Adjusted income from continuing operations, a non-GAAP measure, was $0.85 per share for the third quarter of 2021, compared to 53 cents per share in the third quarter of 2020. Segment profit in the quarter was $279 million, up $90 million from the third quarter of 2020. Manufacturing cash flow before pension contributions totaled $271 million in the quarter and $851 million year-to-date. With that, I'll turn the call over to Scott.

Thanks, Eric, and good morning, everyone. We continue to execute well across the company in the quarter. At Aviation, we continue to see a solid recovery in the general aviation market with strong commercial demand, increased deliveries in Citation jets and commercial total crops, and higher aftermarket volume. We delivered 49 jets, up from 25 last year, and 35 commercial total crops, up from 21 in last year's third quarter. Border activity in the quarter remained very strong, resulting in backlog growth of 721 million, bringing us to 3.5 billion at the quarter end. Also, in the third quarter, the Beechcraft King Air 360 and 260 achieved the OSS certification and began to deliver customers throughout the region. Continuing with our product strategy of upgrading existing models, at NBAA, we recently announced the Citation M2 Gen2 and the XLS Gen2 product upgrades. Also on the new product front, the Cessna Sky Courier is continuing to progress through certification with over 1,600 hours of flight test activity, and the Beechcraft Denali successfully completed its initial ground engine runs powered by GE's new catalyst engine. At Bell, revenues were down 3% in the quarter largely on lower military revenues. On the commercial side of Bell, we delivered 33 helicopters down 41 in last year's third quarter. Moving to future vertical lift, in September Bell submitted its proposal for the FARA program. A down selected award is expected in the second quarter of 2022. On FARA, Bell is about 60% of the way through its build of the 360 Invictus prototype and remains on schedule. Also in the quarter, Bell inducted the first US Air Force CV-22 for its nacelle improvement modifications. Moving to systems, we saw another strong quarter of execution with operating margins at 15.1%, up 190 basis points from last year's third quarter. ATAC continued to expand its fleet of certified F-1 aircraft with two additional aircraft entering service in the quarter, bringing the total fleet to and 19 aircraft at the end of the quarter. The fleet continued to support higher customer demand for adversary air services, driving higher revenues in the quarter. At Air Systems, the team booked 25 million in new orders in the quarter, including both fee-for-service activities as well as new hardware. Moving to industrial, overall revenues were lower in the quarter as we continued to experience manufacturing disruptions related to supply chain challenges. At Caltechs, we again saw order disruptions related to the global auto OEM supply chain shortages, which have directly impacted production scheduling and resulting in intermittent line shutdowns and manufacturing inefficiencies. At specialized vehicles, we saw continued strong demand in our end markets with higher pricing, which offset production disruptions from part shortages. To wrap up, Textron delivered a solid quarter with increased aviation backlog, improved manufacturing margins, and continued strong cash generation while working to minimize the impact of supply chain disruptions. With that, I'll turn the call over to Frank.

Thanks, Scott. Good morning, everyone. Let's review how each of the segments contributed starting with Textron Aviation. Revenues at Textron Aviation of $1.2 billion were up $386 million from a year ago, largely due to higher citation jet volume of $290 million, aftermarket volume of $62 million, and commercial turboprop volume of $48 million. Segment profit was $90 million in the third quarter, up $127 million from a year ago, largely due to the higher volume and mix of $96 million, and favorable pricing net of inflation of $22 million. Backlog in the segment ended the quarter at $3.5 billion. Moving to Bell, revenues were $769 million, down $24 million from last year, largely reflecting lower military revenues. Segment profit of $105 million was down $14 million, primarily due to lower military revenues. Backlog in the segment ended the quarter at $4.1 billion. At Textron Systems, revenues were $299 million, down $3 million from last year's third quarter due to lower volume of $39 million at Air Systems, which primarily reflected the impact from the U.S. Army's withdrawal from Afghanistan on its fee-for-service contracts, harshly offset by higher volume primarily at ATAC and electronic systems. Segment profit of $45 million was up $5 million due to a favorable impact from performance Backlog in the segment ended the quarter at $2.2 billion. Industrial revenues were $730 million, down $102 million from last year, reflecting lower volume and mix of $156 million, primarily at fuel systems and functional components, reflecting order disruptions related to the global auto OEM supply shortages, partially offset by favorable impact of $44 million from pricing, largely at specialized vehicles. Segment profit of $23 million was down $35 million from the third quarter of 2020, primarily due to the lower volume and mix described above, partially offset by higher pricing, net of inflation, and specialized vehicles. Finance segment revenues were $11 million and profit was $8 million. Moving below segment profit, corporate expenses were $23 million and interest expense was $28 million. with respect to our 2020 restructuring plan we recorded pre-tax charges of 10 million on special charges line our manufacturing cash flow before pension contributions was 271 million in the quarter and 851 million year-to-date as compared to 129 million for the corresponding nine-month period in 2020 year-to-date our cash generation reflects improved working capital management which includes more linearity in quarterly aircraft deliveries and higher customer deposits in aviation from an increased backlog. In the quarter, we repurchased approximately 4.2 million shares, returning 299 million in cash to shareholders. We're raising our expected full year guidance for adjusted DPS to a range of $3.20 to $3.30 per share. This includes revised tax guidance and effective rate of 15.5% for the full year. We're also raising our outlook for manufacturing cash flow before pension contributions to a range of $1 billion to $1 billion, up $200 million from our prior outlook, with planned pension contributions of $50 million. That concludes our prepared remarks, so we can open the line for questions.

And our first question goes to the line of Sheila Kealu with Jeffries. Please go ahead.

Thank you. Good morning, Scott, Frank, Eric. Backlog at aviation was at 3.5, I think, an all-time high since 2010. So maybe can you guys talk about who these customers are? Are they new? What's their rationale for buying a new jet? I'm sure $20 million jet buyers disclose all this info. So if you could share that with us a little bit.

Sure. I think the backlog is fairly broad in terms of the makeup of those customers. It still remains more U.S.-centric. I think when we look at order activity, you know, in the quarter on the jet side, it's probably, you know, roughly 70% or so domestic versus 30%, you know, international. So I think, you know, we'll continue to see the shift, you know, it's a little bit more international as Europe is starting to pick up and South America is starting to pick up. But it is still more North America centric. It's probably closer to 50-50 on the turboprops. That's usually been a market where it's the turboprops, king ears, and such. Caravans usually end up being more international. I think it will continue to shift that way, but right now it's closer to 50-50. Obviously, there's a mix of the next year or so of deliveries of what we have coming up with net jets, but we have very strong retail, individual customers in there. If I looked at the number of new customers, folks that are coming in and buying a jet who've not owned a jet before. That number probably is somewhere around the 20% or so kind of range, which is encouraging. We do see a lot of people, as you know, buying a jet when you've not had an aircraft before is a little bit of a daunting task. One of the things we do in our business is we have a whole dedicated team that helps someone who's not owned an aircraft like that before but wants to do that. We help them with the complex issues of pilots and hangars and insurance and all the things that you have to look at to do that, to successfully place that aircraft with a brand-new customer. But for sure, we're seeing a lot more interest and demand from those first-time buyers than we would historically see.

We do have a question from the line of David Strauss with Barclays. Please go ahead.

Thanks. Good morning.

Sure.

Scott, with the backlog at Aviation Now and your deliveries here today, I wanted to see if you could offer an update on, you know, how you're thinking about the production plan. I think you had said, you know, recovering half, you know, half of the 2020 drop. It looks like you're tracking well ahead of that. And then your, you know, your thoughts about going above 2019 levels, just, you know, given how extended your backlog is becoming.

Well, David, I mean, I think as we've been given color all year long, our expectation was that we would, you know, get kind of halfway there this year and get back to the 19 levels in in 2022 i think that's still good color to have on it obviously we won't guide you know until we get into the the january time frame but you know for sure the order activity you know which has been you know getting stronger as you know as we've worked our way through the year and remain strong you know supports that number and you know we'll we'll be looking hard at that backlog and that order rate as we finalize our production ramps in aviation i mean clearly right now we are we are in the process of ramping up production with uh the goals as we stated to get up to that 2019 level and you know there's probably room for a little bit beyond that but we'll uh we'll give you the final guys when we get into

january and we do have a question from the line of robert stallard with vertical research please go

ahead thanks so much good morning um scott on the aviation side maybe following up from sheila's question have you seen any differences in the order intake between the various aircraft models you have and also on the aircraft you know what's the sort of lead time looking at are you getting to the point where some of these planes you know you have to wait more than 12 months to get them so the strength is

really across the whole segment Robert I mean every model is I would say doing very well right now or activity and interest in all of them is is quite strong and part of that is you know we've been you know putting updates and upgrades. I mean, as I said, at NBAA, we put the M2, you know, Gen 2 version of that. The Gen 2 version of the XLS, which, you know, has been a fabulous aircraft for us for a long time, and it's a really nice update that I think is sparking even greater new interest in that aircraft as well. So it's really across the board, and look, we're not going to get into details on the, you know, model by model on the backlog, but as we've said before, I think, you know, this business, This industry, frankly, operates better if it's sort of looking at a 9- to 12-month sort of backlog. And that gives you – it gives a customer who has an aircraft time to sell the aircraft. It gives them time to specify the interiors and colors and paints. Obviously, it makes it much easier for us in terms of our production forecasting and smoother production line flow. And as you know, historically, that's how this industry works. You know, this last decade has been unusual where you're actually having to try to build a forecast instead. So I do think, you know, one of the things that we certainly keep in mind as we look at production rates is that, you know, we want this business, you know, to be out there as sort of a 9- to 12-month, you know, kind of a backlog business. It's a much healthier way to run the business. I think it's better for the customers, again, for their planning perspective and marketing of a used aircraft if they already have an aircraft, which is the majority of our customers. So I think that that's a healthy place for the business to be, and that's kind of where I feel like we are right now.

And we do have a question for the line of Ronald Epstein with Bank of America. Please go ahead.

Yeah, good morning. Good morning, guys. So Scott, what are you seeing on the pricing front? Meaning, I mean, there's demand, right? That's clear. But are your competitors behaving themselves? I mean, how is the broader pricing environment right now?

Well, it's always a competitive market, but for sure, I think we're seeing a positive pricing environment, as you would expect, right? You have very strong demand. You know, all of the dynamics that we look at in terms of the macro level of the market are extremely favorable, right? You've got used aircraft available for sale at record low numbers, particularly if you look at something that's sort of less than a 10-year-old aircraft. As you know, that was an issue in this business for a long time, and that's down to kind of below 1% of the fleet, and we're seeing the used aircraft valuations going up. So the dynamic overall in pricing is much better than it's been for a very long time. Flight activity is obviously very strong, so we see the demand from everything from charter to memberships to fractionals to whole aircraft. So I think, you know, you have a very, very strong demand environment, and you would expect to see better pricing in that environment.

And we do have a question from the line of George Shapiro with Shapiro Research. Please go ahead.

Good morning. Scott, on that, you mentioned you had a $22 million benefit in the quarter from pricing. The incremental margin was 33%, which is, you know, a very high number. Do you expect that kind of trend to continue?

Well, look, I think we're going to continue to see good pricing in the industry based on all the dynamics that I just talked about. Incremental leverage on volume in this business has typically been sort of in that 25% kind of range, so I think that's a reasonable expectation.

And we do have a question from the line of Noah Papanek with Goldman Sachs. Please go ahead. Hi. Good morning, everybody.

Scott I guess you know what is what is in aviation what is the you know absolute dollar backlog level or or backlog to production ratio you know that you feel you want to maintain sustainably in the business where do you want to keep that well no as I said I I think that

the the place we'd like to see this is kind of out in that nine to twelve months I think if you get you know beyond 12 you have too much beyond 12 months you know i mean customers are interested in new aircraft right i mean so i think there's a there's a limit to how far out someone's willing to say okay i'm going to wait you know for a year it's it's probably on the on that shorter side on on maybe a smaller aircraft where there's not as much customization it's a little quicker turn but i think on the larger aircraft you know you see it move out of that in more of that 12 months or so So, you know, there's not an absolute dollar number we look at, but we do look at demand model by model and, you know, where we think that backlog, that cycle time is reasonable in terms of where, how it fits with our production planning, how it fits with our customers' expectations. And as I said, I think that sits ideally somewhere in that 9 to 12 months with, again, some variability on the models, largely a smaller aircraft probably being on the shorter side of that and things like a longitude being in that more than 12 months or so kind of timeline.

And we do have a question from the line of Seth Steifman with J.P. Morgan. Please go ahead.

Hey, good morning. It's Tyler on for Seth. Just on SORA, can you just provide an update, just maybe where things stand today? what Textron is doing in the meantime and when we could expect the decision?

So the FLAWR program, the proposal went in back at the beginning of September, which was consistent with, you know, the Army schedules, you know, what they're, you know, they've announced is that they expect to have a, you know, an announcement, a decision and contract with that by the second quarter of next year. So by the end of next June is kind of our expectations. You know, remember that the FLAWR program, you know, FDL is a little unique in that we've obviously put an enormous amount of work into getting the proposal submitted, but in parallel with that, we still are under contract on an OTA, so we are continuing the design development activity towards PDR. Of course, that work is going on in parallel with the Army doing their proposal evaluation. The team obviously kind of worked a lot on the proposal, and now they're all back hard at work, you know, working towards that next milestone for the program, which will then dovetail into, you know, hopefully a program

We do have a question from the line of Kai Van Rumor with Cowan. Please go ahead.

Yes, thanks so much. So, Scott, obviously demand is strong in aviation. What are you seeing in terms of commodity price hikes and supplier disruptions that might limit your ability to kind of boost production next year well you know okay we're

not I mean look there's a part there's always a pop-up problem even in the best of times right with managing a supply chain I would say we're not seeing big issues right now in our in the supply chain associated with the A&D businesses you know my view is you know most of these suppliers also do defense work you know much like our company and so most of them didn't go through an entirely hard shutdown as you saw a lot of the commercial world doing also as you know a lot of these suppliers also you know have a lot of business that goes into the commercial aviation space with the air buses and the boeons of the world and those guys are not back anywhere near the you know the demand that they used to have so there's capacity available um you know in these supply chains so you know as we work you know our way through this thing you know most of our our critical suppliers in the A&D space are able to meet our demand. I'm not suggesting there's never an issue or a problem, but those things pop up here and there. It's also a longer cycle supply chain, so if you do have a problem or a challenge, you've got more time to work on it and go manage it and look for alternatives and work with the supplier around that, whereas in the industrial and commercial world, you tend to find out about a problem that's going to hurt you on Tuesday, the previous Friday. So we don't see as much of that in the A&D side. So I don't think, you know, when we look at this that we feel like we're going to be supplier constrained at this stage of the game. It's more around managing and making sure that we're doing the right thing here in terms of, you know, production rates versus, you know, long-term demand. And, again, managing, you know, to a backlog that works for us and works for our customers.

We do have a question for the line of Peter Arment with Baird. Please go ahead.

Good morning, Scott and Frank. Hey, Scott, just a quick one on, I guess, aviation. just you you've always kind of talked about you know this is eventually getting back to crossing over on the double digit margin front um you know it seems like you've got everything in place in terms of the overall demand and potentially higher production what what's what's key for us to see margins you know kind of cross over that 10 level is it just volume or is there other things you

need to see thanks well i'm looking at obviously volume is a huge contributor to that we've talked about that for a very long time and i think we'll see you know as you remember we were getting close to that level you know pre-pandemic and i think as our volumes are recovering you know back on track to where we were you know in 19 and and move beyond that we clearly have been working to drive to get double-digit margins and i think we're on track to be doing that we'll obviously give you more specifics in january but i feel pretty good about our our path to get there and we do have a

question for the line of pete skabitsky with alembic global please go ahead good morning guys

nice quarter um maybe to piggyback off kai's question a little bit um scott can you talk about kind of how you manage uh you know kind of the two businesses and industrial in this environment do you have much visibility at cautex you know would you guide us in any way cautex over the next couple of quarters and and that is a kind of you know it seems like the market is very strong and specialized vehicles but there's as you mentioned some supply chain issues there as well so I just wonder if you could give us a more color on how to think about that segment over the next couple of quarters sure I

will look obviously Pete they're a bit different right in the case of Caltex we're a tier one guy we're we're sort of following the OEM path right so we don't we don't independently set that it's you know one of the challenges frankly this year is you know there's been a lot of disruption that the OEMs have felt and changing model types and volumes through the course of the year as a result of other supply chain issues. Fortunately, you know, the Caltechs guys have done a nice job in not being the problem, right? I mean, we've been able to fulfill whatever demand is placed on us, and certainly we don't want to be the reason they can't run a line. So I think our guys have done a really nice job of that. But, you know, we look really at the IHS data, Pete, in terms of how it, you know, how we forecast. I mean, we obviously have to go down model by model. But, you know, I think, you know, And when you listen to what the OEMs are saying, they're starting to indicate that a lot of their other issues in their supply chain, which Semiconductor is the one that's obviously talked about the most, that that's going to start to abate. And I think if you look at IHS data right now, they're talking about probably a 10%, 11% increase in global auto volumes as you go from 21 to 22. So that's how we think about our business, right? We look at that IHS data. We don't really have an independent view, I suppose, of what's going on in that market. In the case of our vehicle business, we're the OEM. We're the end market guy, so we are a lot closer in having to make that call. As you indicated, the good news is demand is very strong. Everything we can build is going out in the channel and selling inventory levels or at, frankly, unhealthy low levels. you know we're working hard you know with our suppliers to get parts in and everything we can we can build we get out there and you know tends to be selling through strongly so um i think our guys in in the vehicle business frankly look we would love to have seen you know revenue growth you know in the quarter from year over year we couldn't get that just because we can't get the parts to do it but i think the team has managed you know price inflation disruption and all that sort of stuff so that at least we've you know we've been able to hold on to the the margin rates where we were and obviously is we can get the supply chain flowing better and and get the the revenue top line growing we think the margins will improve with it but you know our our dynamics in that business in terms of pricing um and the performance of the business was able to at least at a margin level overcome you know a lot of the interruptions and inefficiencies that we've seen in the factory so i think the business is being well run it just needs to be able to start to generate you know more top line and that's a supply issue and the demand is quite strong we've got great products out there and you know as a result we're getting good pricing for them but you know we would uh love to get higher revenues and i think we will we just got to work through the

supply chains and we do a question for the line from morgan stanley please go ahead hey good

morning guys scott you mentioned how longer lead time nature and aviation provides more visibility for the supply chain and right that makes sense in a normal environment um the vaccine executive order effective uh december 8th is a little different than what we've seen before how are you anticipating this executive order to affect labor your supply chain and ability to raise production and aviation and what mitigating actions can you take well look it's a good question

and all of our you know our business as well as obviously all of our key suppliers are you know tend to have that defense component and therefore are subject to the to the mandate it's a frankly it's a curveball we wish we didn't have but we're managing our way through it i think you know we and all of our peers and suppliers are are all sort of in the same in the same place here i feel like it's created a lot of noise it's not been terribly well received by a pretty sizable portion of our employees um but people are working their way through it you know it's it's the nature of you know i think people have accepted it's a fact of what they've got to go do and and uh you know in the end there's no question that we're going to lose some employees because of this but we're trying to ramp up our hiring and expectations of that and you know what we'll manage our way through it it's not the first challenge we've ever seen so and we do have a question for the

line of David Strauss with Barclays please go ahead great thanks for taking the fall I guess Frank question for you on working capital it looks like you're assuming for the full year a couple hundred million dollar benefit from working capital. I assume that's mainly or predominantly aviation advances. How should we think about working capital as we move into next year? That's my first question. Then any initial thoughts on pension income for next year as compared to, I think you're doing like 30 million or so in pension income this year. Thanks.

So on the – look, on the working capital front, I think, you know, as we said, we've had a strong year from an inventory management standpoint, and the aviation business being far more linear, obviously, is a really good thing there. So we've had, you know, kind of better seasonality of cash flow and good customer deposits. You know, the cash flow for the fourth quarter, implying the guy continues to be, you know, in the area of one to one or a little over one of you know kind of net relative to net income so we saw a lot of benefit this year you know kind of that will continue I think to see very strong working capital management next year I'm not ready to guide on it a lot of it will depend on order activity you know I think that on the inventory side and the linear view of the business will continue to see strong performance it will depend on you know kind of customer or deposit activity to some degree to how that ultimately works out look on the on the pension side we're not ready to you know kind of lay out numbers there we've we've had a good year so far on return on assets interest rates are up a little bit so as you sit here today I you know I don't think that we would expect to be we would expect pensions to continue to be a benefit as we go into 22 but we're not ready to quantify things and we do have a question for the

line of Robert Stallard that's vertical research please go ahead yeah thanks just to follow up from

me I was wondering if there's any changes on the divisional guidance to 2021 with one quarter to

go I don't think Robert that we're doing a formal update to you know to the to the guides at the segment level but you know clearly aviation and and Bell are you know strong performers and I think you know you'll see that you know versus the original guide obviously industrial with particularly with the auto OEMs, you know, volume down and challenges in the supply chain, you know, that'll be the sort of a bit of a mix shift, I suppose, between, you know, what we originally guided and where we'll land the year.

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

Hey, Frank, do you expect to be able to grow free cash flow from the manufacturing group next year versus the good performance this year? And then if you could just maybe touch on the system's margin, since that seems to have just kind of stepped up to a new level with all the programmatic and mixed changes you've had there. I mean, is that just now a sustainably high 14, low 15% business? Thank you.

Yeah, look, we're not going to guide 22. As I said, I believe we'll continue to see solid and strong working capital management next year. We had a lot of benefit this year of, you know, particularly at aviation, again, of getting the business, you know, kind of running the way Scott described, which is, you know, kind of with some visibility on delivery and order activity and run it into 22. But I'm not going to start kind of guiding. The second piece of that was systems margin. Look, on systems, we've talked about this. You know, kind of systems has had a very strong year. Defense businesses generally, you know, kind of present. We have made some investments in systems where we're seeing solid return on those investments. There are a number of businesses there where we have invested in a margin like the ATAC business, so we expect to see good execution on a go-forward basis out of the systems business. But these levels are performing relative to the general mix of those on a go-forward basis, but we've had a very good year.

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