Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter 2022 Textron Earnings Release Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Vice President, Investor Relations, Mr. Eric Salander. Please go ahead.

Thanks, Greg, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings, and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO, and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Revenues in the quarter were $3.6 billion, up from $3.3 billion in last year's third quarter. Segment profit in the quarter was $317 million, up $7 million from the fourth quarter of '21. During this year's fourth quarter, we reported income from continuing operations of $1.07 per share. Manufacturing cash flow before pension contributions totaled $368 million in the quarter, up $70 million from last year's fourth quarter. For the full year, revenues were $12.9 billion, up from $487 million from last year. In 2022, segment profit was $1.2 billion, up $89 million from 2021. Income from continuing operations was $4.01 per share, compared to $3.30 in 2021. Manufacturing cash flow before pension contributions was $1.2 billion, up $29 million from 2021. With that, I'll turn the call over to Scott.

Thanks, Eric, and good morning, everyone. Our business closed out the year with another strong quarter. In the quarter, aviation grew revenue and segment profit reflecting high record deliveries, increased aftermarket volume, and strong pricing net of inflation as compared to last year's fourth quarter. Also in the quarter, we continued to see solid order flow. Customer demand across our aircraft product portfolio ended the year with $6.4 billion of backlog. For the year, we delivered 178 jets, up from 167 last year, and 146 commercial turboprops, up from 125 in 2021. Textron aviation defense delivered 10 T6 aircraft for the year, up from five a year ago. Throughout 2022, strong aircraft utilization within the Textron aviation product portfolio resulted in a 16% growth in aftermarket revenues. At Bell, as expected, revenues were down slightly in the quarter on lower military revenue reflecting the continued wind down on the H1 program, partially offset by higher commercial revenue. In December, the U.S. Army announced that Bell's V-280 Valor was selected as the winner of the future long range assault aircraft program competition. This award is a testament to the hard work of the Bell team that designed, built, and flew the V-280 prototype over the last 10 years in support of this win. The initial flyer contract award of up to $1.3 billion over the first 19 months, with an initial funding of $232 million for engineering and manufacturing development related activity, is currently on hold pending the outcome of a protest filed at year-end by the competing vendor. On the commercial side of Bell, we delivered 179 helicopters in 2022, up from 156 in 2021. Moving to Textron Systems, revenues were essentially flat with last year's fourth quarter. During the fourth quarter, Systems awarded another anti-vehicle munition contract from the U.S. Army. The award is valued at $162 million over a five-year performance period. In December, Systems announced the delivery of the Cottonmouth to the U.S. Marine Corps for testing through 2023. This vehicle was purpose-built for the Marines Advanced Reconnaissance Vehicle Program. Also in the quarter, Systems delivered the Ship-to-Shore Connector to the U.S. Navy after the successful completion of sea trials. Moving to industrial, we saw high revenue in the quarter driven by higher volume in both Caltex and Specialized Vehicles and favorable pricing, principally in specialized vehicles. Moving to aviation, we delivered six Bell aircraft in the fourth quarter, including the first unit into Canada. For the year, we delivered 61 aircraft following the completion of the acquisition in April 2022. In summary, we saw strong demand across our commercial product lines and the team executed well despite supply chain and labor constraints. At aviation, the team executed very well with a full-year segment profit margin of 11.5%, which was above the high end of our original guidance range. Aviation's backlog grew 55% to $6.4 billion at year-end on strong order activity and customer demand. On the new product front, we received FAA certification for the Cessna SkyCourier and delivered six units to our launch customer, FedEx, during 2022. Textron Aviation Defense, the Light-Attack 86 Wolverine achieved military type certification from the U.S. Air Force, enabling the first international sale of eight aircraft. At Bell, the December 2022 FLRAA contract award has solidified the long-term outlook for the segment and should provide an increasing revenue stream that we expect will drive growth well into the future. On FLRAA, the 360 Invictus is nearly complete, and we expect the first flight in 2023, pending delivery of the ICAP engine. At Textron Systems, we advanced our weapons programs with the award of our anti-vehicle munitions program, continued work on the robotic combat vehicle, and Armor Reconnaissance Vehicle Development Programs. Systems also obtained airworthiness certifications for four additional F1s at ATAC, bringing the total operational F1 fleet to 23 aircraft in support of increased demand across U.S. military tactical air programs. At Textron Specialized Vehicles, the company continued its leadership in the development and production of zero-emission golf vehicles, turf maintenance equipment, and ground support equipment to markets. At Caltex in 2022, we were awarded contracts on 14 hybrid electric vehicle programs for our fuel systems. At Aviation, the Pipistrel Velis Electro continued to receive certifications from around the world and is now certified in more than 30 countries. Looking to 2023, at Aviation, we are projecting growth driven by increased deliveries across all product lines and higher aftermarket volume. At Bell, we're projecting revenue growth in 2023 on higher military revenues from the FARA program and higher commercial revenues. At Systems, we're expecting mid-single-digit revenue growth across our businesses. At Industrial, we're expecting revenue growth at specialized vehicles and Caltex. At Aviation, we plan to continue investments in the development of technologies and products supporting sustainable flight solutions for unmanned cargo, next-generation electric trainers, EV tolls, and general aviation. With this overall backdrop, we're projecting revenues of about $14 billion for Textron's 2023 financial guidance, projecting adjusted EPS in the range of $5 to $5.20. Manufacturing cash flow before pension contributions is expected to be in the range of $900 million to $1 billion. 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 were $1.6 billion, up $223 million from a year ago, reflecting higher jet and defense volume and higher pricing. Segment profit was $169 million in the fourth quarter, up $32 million from last year's fourth quarter due to favorable pricing, net of inflation of $29 million and higher volume and mix, partially offset by an unfavorable impact from performance. Performance includes unfavorable manufacturing performance largely related to inefficiencies from supply chain disruptions and increased staffing associated with higher production, partially offset by lower selling and administrative costs. Backlog in the segment ended the quarter at $6.4 billion. Moving to Bell, revenues were $816 million, down $42 million from last year, reflecting lower military revenues, partially offset by higher commercial revenues. Segment profit of $71 million was down $17 million from a year ago, primarily reflecting lower military volume and mix, partially offset by a favorable impact from performance. Backlog in the segment ended the quarter at $4.8 billion. At Textron Systems, revenues were $314 million, up $1 million from last year's fourth quarter. Segment profit of $40 million was down $5 million from a year ago. Backlog in the segment ended the quarter at $2.1 billion. Industrial revenues were $907 million, up $126 million from last year, reflecting higher volume and mix of $95 million and a $59 million favorable impact from pricing, largely at the specialized vehicles product line, partially offset by an unfavorable impact of $28 million from foreign exchange rate fluctuations. Segment profit of $42 million was up $4 million from the fourth quarter of 2021, primarily due to higher volume and mix, partially offset by an unfavorable impact from performance. Textron eAviation segment revenues were $6 million and the segment loss was $10 million in the fourth quarter of 2022, which reflected the operating results of Pipistrel along with research and development costs for initiatives related to the development of sustainable aviation solutions. Finance segment revenues were $11 million, and profit was $5 million. Moving below segment profit, corporate expenses were $43 million in the fourth quarter. Interest expense, net for the manufacturing group was $17 million. Our manufacturing cash flow before pension contributions was $368 million in the quarter. For the year, manufacturing cash flow before pension contributions totaled $1.2 billion, up $29 million from the prior year, despite higher cash tax payments of $284 million in 2022 related to the R&D tax law change. In the quarter, we repurchased approximately 3.3 million shares, returning $228 million in cash to shareholders. For the full year, we repurchased approximately 13.1 million shares, returning $867 million in cash to shareholders. Beginning in the first quarter of 2023, we'll change how we measure our segment results. Going forward, we will exclude from segment profit the LIFO inventory provision, intangible asset amortization, and the non-service component of pension and postretirement income or expense. These items will be separately reported on the income statement below segment profit. We believe these changes will provide a more consistent method of measuring and evaluating business performance across our segments, while also aligning our reporting results more consistently with other companies in our industry. Turning now to our 2023 outlook. We're expecting adjusted earnings per share to be in a range of $5 to $5.20 per share. We're also expecting manufacturing cash flow before pension contributions to be about $900 million to $1 billion. Moving to segment outlook, beginning with Textron Aviation, we're expecting revenues of about $5.7 billion; segment margin is expected to be in a range of approximately 12% to 13%. Looking to Bell, we expect revenues of about $3.3 billion. We're forecasting a margin in a range of 8.25% to 9.25%. At Systems, we're estimating revenues of about $1.25 billion with a margin in a range of about 10.75% to 11.75%. At Industrial, we're expecting segment revenues of about $3.6 billion and margin to be in the range of about 5% to 6%. At eAviation, we expect revenues of $45 million and a segment loss of $65 million, largely reflecting our continued investments in sustainable aviation solutions. Lastly, at finance, we're forecasting a profit of about $15 million. Looking at our projections, we're estimating about $150 million of corporate expense. We're also projecting about $90 million of net interest expense; $130 million of LIFO inventory provision; $35 million of intangible asset amortization; and $235 million of non-service pension income. We expect a full-year effective tax rate of approximately 17.5%. R&D is expected to be about $585 million, down from $601 million last year. We're estimating CapEx will be about $425 million, up from $354 million in 2022. Our outlook assumes an average share count of about 205 million shares in 2023. That concludes our prepared remarks.

Greg, you can open the line for questions. Your first question comes from the line of Sheila Kahyaoglu from Jefferies. Please go ahead.

You've definitely had a busy quarter between FARA. So congratulations on that. And I think you mentioned an Aerojet bid as well. So I wanted to focus on aviation margins. In Q4, I think you ended at 10.7%, potentially lower, including the recasting for LIFO. How do we think about the walk to the 12.5% margins in 2023?

I believe, Sheila, that we anticipated some challenges with the supply chain this quarter. Bringing on many new team members was beneficial but also caused disruptions as we worked to get everyone trained. As a result, we recorded many of these unusual impacts directly as expenses instead of accounting for them in inventory, which affected our results. LIFO was included in the reported figure, but going forward, that will not be a factor in our recalculations. We are projecting nearly $0.5 billion in higher revenue, which should convert to strong margins. Overall, I feel optimistic about our ability to improve margins as we progress through 2023.

And maybe just as a follow-up to that longer term, how do you think about peak trough margins in aviation? Is it just steady as it goes from here? Can it just be a 20% incremental margin business?

Well, as you know, Sheila, based on analyst pressures, we've been striving to get above 10% margins in the aviation business, and we feel pretty good about that. It’s going to be very much volume driven. You guys know we tend to convert somewhere in that 20%, 25% range. I expect we can continue that as we go forward. Certainly, we're guiding that in our conversion for 2023, and as we go beyond that, we'll just have to see where the market is. The good news is demand has remained strong. The fourth-quarter demand remained strong, and we had good bookings in Q4. So, in terms of what margins do on a go-forward basis, I think we would kind of remain in that neighborhood of expecting sort of a 20%, 25% conversion on our revenue growth.

Great. Thank you.

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

Scott, could you just talk through the forecast at Bell? Revenue is up, but margins are down to a decent amount. You mentioned it includes FLRAA. What exactly is your assumption for FLRAA? Does that assume you win it post protest? Just if you could help there.

Sure, David. It does. The protest period ends in the first week of April, and we've baked that into our estimates, assuming that will be resolved by that period of time. Obviously, the dynamics in terms of margin is that we will continue to see a decline on the military revenue side. There'll be some offset on the commercial revenue side. We've had a good year in terms of bookings and expect to see nice growth on the commercial side. And then obviously, we'll have three- quarters of the FLRAA program coming in, which is good, but that is a lower margin business. EMD programs tend to be lower margin, and that's what we've forecast in our guide for you for '23.

Okay. And last one on the aerospace supply chain. Could you just update us there? Your deliveries came in later for the full year than we were originally anticipating at the beginning of the year. How many additional deliveries could you have made this year if you didn't have supply chain bottlenecks? Thanks.

Well, I don't know if we'll go into expressing numbers, David. But look, we've been kind of forecasting here since the mid part of the year that we expected we would end up a few hundred million dollars light versus our initial guide based on the fact that we continue to see supply chain challenges and some labor issues. Labor has certainly improved through the balance of the year, although a lot of that is new folks and training and it has an efficiency impact, but at least we're making some progress on that front. I think we've had a number of suppliers that were challenged who are getting better, but you always have a couple out there that are still struggling. So we anticipated that in the back half of the year, and that's why we try to provide some color that we expected this to be a few hundred million off of our guide. But I think that we've taken that into consideration. As we think about next year's guide for '23, there are still going to be supply chain challenges, but we think we've taken that into proper consideration in terms of the '23 guide.

Thanks very much.

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

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

It's a reflection of an expectation that we'll continue to see good performance from a working capital standpoint. But we do have the continuation of higher cash taxes associated with the R&D tax credit change. And also, we're just expecting a slightly lower volume in deposit activity from commercial volume. So we're framing it in terms of kind of a 1:1 book-to-bill type expectation as it relates to deposit activity, and that has a bit of a headwind on cash relative to where we have been.

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

No, we haven't seen that, Robert. I mean, I think our order rate in the fourth quarter was consistent with the third quarter. It remains quite healthy. I think when people look at some of these leading indicators, it’s hard to track what kind of aircraft are available. We think, obviously, the market has been very strong. So people are looking to put some aircraft on the market. They're still at very low levels, so we're not seeing the knock-on effect into the market for new aircraft. We haven't seen a material change in the level of activity that's going on in terms of order activity.

That's great. Thanks so much.

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

Scott, just circling back on David's question regarding the supply chain. Are things holding in there, or are they getting a little better? And could you maybe talk a little bit about how you're passing in the higher input costs right now?

Well, on the supply chain side, Peter, I think we have some suppliers where we've had challenges, and we clearly see them getting healthy and better. But we have other areas where suppliers are still struggling. It’s very specific components from specific suppliers, and obviously, we're working with them and trying to help them get back on schedule. It's about the same. Our guys have to work through every day, but there’s a couple of particular products and suppliers that are still struggling to get back to speed. In terms of pricing, we continue to get price, net of inflation. We're very focused on that. As these input costs increase, we’ve got to drive price to get that back. I think the guys are doing a pretty good job of that.

And just as a quick follow-up on systems, could you talk a little bit about the outlook, given that defense funding is looking pretty robust as we go forward?

Look, I think when we look at the defense numbers, they seem fine to us. When you look at what's coming through on the budget for this fiscal year, it was in line with our expectations. The good news at systems is that growth is really across almost all the product lines. It’s not just one thing. Obviously, we've had some new wins in the munition side, which is great. That's put that business back to growth. The Sentinel program continues to do well. Our ship-to-shore, as I said, we've made deliveries. The ATAC business has had nice growth too. It really is kind of across all businesses within systems.

Appreciate the color. Thanks, Scott.

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

Scott, fair to say, I think some of your businesses have a cyclical component to them. As you guys see the consensus out there for the macro guys is that we'll have some sort of mild recession this year. Are you guys thinking about your businesses that way or not necessarily right now?

We absolutely look at that, Peter. I mean, as I said, there’s cyclicality in almost every business. Those that we think are going to be more recession sensitive, we've factored in thinking we’ll have a mild recession. I don't think it's going to be dramatic. We’re certainly not considering something in the scope of back in that 2009 to 2010 timeframe. I'd say the area that has always impacted us the most difficultly has been a slowdown in aviation. We haven't had that for a bunch of years. So I think that it’s one that would translate to a slowdown in bookings, but not something that would slow us down in terms of our revenue and margin generation.

Okay, fair enough. Thank you.

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

Frank, if you could just fill in a couple of numbers. How much was aftermarket up in the quarter?

At aviation, aftermarket as a percent of sales was 27%. For the year, aftermarket was 33% of total sales for the aviation segment.

Okay. And Scott, I assume you're looking at deliveries based on the revenue forecast for '23, somewhere around 200, 205 deliveries. Is that fair?

Yes, it's going to be in that neighborhood, George. We've got a lot of dialogue. When you look at our revenue guide, it's probably around that couple of hundred aircraft.

And Scott, I looked at the fourth quarter, even if I added back the $16 million that you mentioned for supply chain issues, the margin was still weaker than the last couple of quarters. What else was going on there?

Well, the inefficiencies that we took through and LIFO, which was around probably about $10 million or something impact is largely what drove us to the margin rate that we reported.

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

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

It does vary from model to model. When you look at the larger aircraft in the family, we think those should be out a couple of years. The smaller aircraft should be in that 12- to 18-month kind of window. As we think about production volumes and our forecast, that then drives what our sales team has in terms of available slots and time frames, that's kind of how we're managing it.

How does pricing that’s entering the backlog now compare to pricing that's hitting the P&L now in the aviation jet business?

It's better.

So is it increasing or stable?

It's been pretty consistent, Noah. The pricing obviously, demand is strong, which is helpful from a pricing standpoint. We always believed the business had to be back as a double-digit profit margin business, and we've been driving price to ensure that.

And what would be a credible protest case on FLRAA from your competition?

I don't think there would be one.

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

Can you help me think through this LIFO adjustment you guys are making? Isn't it sort of unfair to not include inflation in your costs?

Yes. To clarify, actual inflation is still in the segments. That's very much a cash impact. It remains in the segment. The only thing we're taking out of the segment is this LIFO provisioning. It’s not a true economic cost.

There are no other companies in our space using LIFO, which can be challenging because of this accounting. It doesn’t reflect the true economic conditions.

We’re taking this out of the segment performance because it's not how we manage the business.

So if we were to look at your margins pro forma back to GAAP for 2023, what would they be if you didn’t do that adjustment?

You'll see that LIFO number. Again, there's a lot of interest from investors about these differences. Taking this out makes sense, as we don’t manage the business based on LIFO.

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

As Sheila mentioned, it looks like your business is becoming more aerospace and defense oriented. As you think of your business, Scott, are you considering any strategic initiatives? At one point, I think you considered spinning off Caltex. How are you thinking about that now?

I don’t think we're going to discuss portfolio shaping or changes as part of the earnings call. It's something we’re always looking at.

Okay. Great. And can you give us any insight into Lockheed’s case regarding the FLRAA?

It's hard for me to understand what flaw would have been in the process. We've been in this for a decade now. I think they made the right choice, and I'm proud of what our team did.

The last one is about cash deployment. You’ve got good cash flow, a good balance sheet, and you’ve heavily focused on share repurchase. What are your thoughts on M&A versus share repurchase, dividends?

We're always looking at opportunities. Pipistrel has turned out to be a great business. If opportunities like that come along, we’ll evaluate. Our principal deployment has been toward share buybacks, and I’d expect that to continue in 2023.

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

Scott, for the demand environment in aviation, can you give us an update in terms of the customer profile that you're seeing that are placing these aircraft orders? Are you seeing more corporate, individual fractionals, etc.?

Sure. We haven't seen much of a change. It continues to be that same mix. There's still new buyers coming into the marketplace. Fractionals are strong. We see a mix of public and private companies and family-held companies. It's a very robust market.

Great. Thanks for the color. What are some long-term solutions for the suppliers that continue to struggle?

In some cases, we’ve integrated suppliers into our business to stabilize operations. We do have some small suppliers struggling and we're helping them get back on schedule, but this is a long-term solution.

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

Scott, as you think about delivery growth from here, do you think more growth is coming from that top customer or diversifying the mix?

I think fractional, when you think about diversification, is a more diversified sale. Every fractional aircraft is a sale to many different customers. So I don’t expect NetJets or any fractional to track wildly different than overall market demand.

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

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

When you look at the backlog and how it slowed down sequentially this quarter, do you see a constraint on the growth from that at this point?

We really haven't seen that. The whole industry is in this situation. This industry has historically operated on a backlog business. It should be normal to have a backlog. That’s how the industry works.

What things would you want to see to make material increases in your production capacity?

It's not our production capacity but managing committed delivery dates to customers. If we see a slowdown in the order rate, we will adjust production accordingly. As long as we see demand at 12- to 18-month timelines, we can control that.

When you look at the constraints coming from the supply chain, are there some specific areas right now that you would point to as most difficult?

Yes, there are a couple of specific products and technologies from certain suppliers that are our biggest constraints. But it’s about getting rid of inefficiencies in our production runs.

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