Textron Inc Q3 FY2023 Earnings Call

Thanks, Leah, 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, up $265 million from last year's third quarter. Segment profit in the quarter was $332 million, up $60 million from the third quarter of 2022. During this year's third quarter, we reported income from continuing operations of $1.35 per share. Adjusted income from continuing operations, a non-GAAP measure, was $1.49 per share compared to $1.15 per share in last year's third quarter. Manufacturing cash flow before pension contributions, a non-GAAP measure, totaled $205 million in the quarter compared to $292 million in the third quarter of 2022. With that, I'll turn the call over to Scott.

Thanks, Eric, and good morning, everyone. The third quarter was a strong quarter for Textron with revenues up at Aviation, Industrial and Systems, while revenues were flat at Bell compared to the prior year. At Aviation in the quarter, we delivered 39 jets, flat with last year and 38 commercial turboprops, up from 33 in last year's third quarter. Aviation solid demand across our jet and turboprop products resulted in our strongest order quarter of the year with a 12% increase over the third quarter of 2022. Backlog grew $521 million, ending the third quarter at $7.4 billion. In the quarter, Aviation announced a new fleet agreement with NetJets, extending our 40-plus year relationship and giving NetJets the option to purchase an additional 1,500 aircraft, including the Citation Latitude and Longitude for the next 15 years. As part of this agreement, NetJets will also be the Fleet Watch customer for the newly announced Citation Ascend, which is expected to enter into service in 2025. Also in the quarter, Aviation received a special missions order for 17 King Air 360 to be used for flight inspection. Aviation also finalized its initial order for 20 grand caravans during the third quarter. On the new product front, Aviation wrapped up a successful NBAA show last week, where we announced 2 new product upgrades, the Citation CJ3 Gen 2 and the Citation M2 Gen 2, continuing our strategy of modernizing our existing aircraft portfolio while also investing in new aircraft. Moving to Bell. Overall, revenues were flat in the quarter with improved margin performance. Bell had higher military revenues in the quarter, largely reflecting the continued ramp on the military program. On the commercial side, Bell delivered 23 helicopters, down from 49 in last year's third quarter. The lower deliveries reflected manufacturing disruptions related to supply chain shortages. During the quarter, a rock ordered 15 505 aircraft to replace their pilot training fleet, continuing the success of Bell 505 as a military trainer throughout the world. At Textron Systems, we saw higher revenues and margins in the quarter. During the quarter, the Systems Aerosan Hybrid Quad was one of two competing unmanned aerial systems that were awarded the second option agreement for the Army's Future Tactical Unmanned Aircraft System or FTUAS program. Under the second option agreement, the two remaining competitors will work with the Army towards a critical design review, which includes establishing final system design and initial product baseline. Also during the quarter, Systems was one of four competitors to build a light robotic combat vehicle prototype for the Army. Prototypes are expected to be delivered in 2024. Systems also expanded its Aerosonde SUAS operations with the U.S. Navy with an award of three additional C-based systems aboard total combat ships. Moving to Industrial, we saw higher revenues in the quarter, driven by higher volume in both Specialized Vehicle and Kautex. Specialized Vehicles continue to see strong demand in the fleet gulf business. Within Kautex, we saw increased volumes year-over-year driven by the recovery in the North American auto market. Moving to eAviation, Pipistrel Alpha Trainer continues to gain momentum with Mesa Air ordering 25 additional alpha trainer aircraft in the quarter for use in the pilot development program. Also, the first prototype of our hybrid electric unmanned cargo vital aircraft is currently undergoing systems integration and has completed the initial installation of the battery and motor systems. We expect the prototype to enter vehicle ground testing phases by the end of the year. 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 $1.3 billion were up $171 million from last year's third quarter, reflecting higher volume and mix of $89 million and higher pricing of $82 million. Segment profit was $160 million in the third quarter, up $29 million from a year ago, due to favorable pricing net of inflation of $39 million and a $23 million favorable impact from higher volume and mix, partially offset by an unfavorable impact from performance of $33 million, largely related to supply chain and labor inefficiencies. Backlog in the segment ended the quarter at $7.4 billion. Moving to Bell, revenues were $754 million, flat with the third quarter of 2022, with lower commercial helicopter volume largely offset by higher military volume. Segment profit of $77 million was up $3 million from last year's third quarter, primarily due to favorable platform performance, largely reflecting lower research and development costs, partially offset by lower volume and mix of $16 million. Backlog in the segment ended the quarter at $5.2 billion. At Textron Systems, revenues were $309 million, up $17 million from last year's third quarter, largely reflecting higher volume. Segment profit of $41 million was up $10 million compared with the third quarter of 2022, primarily due to a favorable impact from performance of $8 million. Backlog in this segment ended the quarter at $2 billion. Industrial revenues were $922 million, up $73 million from last year's third quarter, largely due to a higher volume and mix of $45 million at both product lines and an $18 million favorable impact from pricing. Segment profit of $51 million was up $15 million from the third quarter of 2022. Textron eAviation segment revenues were $7 million and segment loss was $19 million in the quarter, primarily reflecting research and development costs. Finance segment revenues were $13 million and profit was $22 million, up $15 million from last year's third quarter, largely due to a recovery of amounts that were previously written off related to one customer relationship. Moving below segment profit. Corporate expenses were $38 million. Net interest expense was $11 million. LIFO inventory provision was $26 million. Intangible asset amortization was $10 million, and the non-service components of pension and postretirement income was $59 million. In the quarter, we repurchased approximately 3.1 million shares, returning $235 million in cash to shareholders. Year-to-date, we've repurchased approximately 12.5 million shares, returning $885 million in cash to shareholders. To wrap up with guidance, we are increasing our expected full year adjusted earnings per share to be in a range of $5.45 to $5.55, up from our prior range of $5.20 to $5.30. We're also continuing to expect full year manufacturing cash flow before pension contributions of $900 million to $1 billion. That concludes our prepared remarks. So we can open the line for questions.

Maybe if we can talk about Aviation to start, Scott. Competitors on pricing or mix at NBAA, but aviation still booked 7 points of gross price, 3 points of net price. What are you seeing in your backlog in terms of pricing? And I know everyone wants to nitpick on your backlog, but it was still up 15%. How much of that included NetJets?

Sure, Sheila. I would say that the price environment continues to be strong. Aircraft that are going into backlog continue to do so at good pricing. So we feel good about where that is in the marketplace. In terms of the NetJets, look, obviously, the extension of the contract that we've had with NetJets for a long time for 1,500 additional aircraft is a huge deal for us. It's really important to the future of the business. As you know, that's a very diversified customer base. The business and the partnership that we have with NetJets is very, very important to us. In terms of the impact in the quarter, it wasn't material. As you know, the way we treat the NetJets in terms of backlog is that we're basically working with NetJets all the time and looking about a year out, which is the timeline where they firm up the tails and put down deposits, and we commit the delivery dates to those aircraft. So every quarter, we sell aircraft to NetJets and we add additional jets into the backlog. So generally speaking, it's right around that one-to-one range. So again, it's a huge, really important thing for the future of the business, but not something that materially impacted the backlog in the quarter.

No, that's helpful. And then if you could talk about Bell margins, they posted another 10% margin. What's going on there, maybe in particular on the R&D side with FLRAA and FARA now that you have?

So look, I think Bell's performance in terms of the numbers and getting volume coming in, particularly as the FLRAA program ramps up is helpful. R&D is certainly a tailwind for us, and that's helping us on the performance line. Largely driven by the fact that a year ago, we were still spending a good deal of our own IRAD money in programs like FLRAA, which are now in the fully funded category. So we do still have work going on, obviously, with FARA, as you mentioned, we did get the engine this week, which is great. Our team will proceed now to get that installed and start running preliminary integration tests. We will need to be waiting for the army to give the ground test release for that. And then ultimately, the flight test release, hopefully, as you get that aircraft flying in 2024. But performance was strong. And yes, for sure, part of that is reduced IRAD spending, as we now have more funded R&D under the FLRAA program.

Scott, could you just maybe give a little bit more color on the supply chain issues at Aviation? The performance hit, I think, was the biggest that we've seen there. So are things getting better or worse? And is it engines? Or what other color can you give?

Well, David, I want to emphasize that the business is closely monitoring trend data. Overall, it appears that things are improving, as indicated by the decreasing number of parts arriving late to purchase orders throughout the year. Labor effectiveness and efficiency have also seen modest improvements. However, challenges remain. If parts are missing for aircraft at the end of the quarter, those aircraft cannot be delivered. While we are observing some progress in the context of late parts, they are still an issue. As we've mentioned before, every part is crucial for an airplane, and we're continuing to face this challenge across various aircraft types. We expect the situation to improve over time, but it remains a struggle. Despite these obstacles, we would have preferred to deliver more aircraft this quarter, and our customers share that sentiment. Nonetheless, even with the challenges in labor and supply, we are achieving strong growth and margin expansion in the business. So, despite these headwinds, the business is performing well and driving increased profitability.

Okay. And maybe, Scott, if you could just level set us what we should expect for full year deliveries? Are we looking more kind of 175 to 180 in that range?

Well, we're probably not going to give exact aircraft numbers, but I would expect it to be in that neighborhood.

Scott, maybe you could just spend another minute on the demand environment, in Aviation and in the business jet market. It's a pretty strong bookings number with a decent amount of uncertainty out there. So what are your customers saying? How much of that is just replacement so they have to do it kind of in a wide range of macro scenarios? How is October? Would just love to hear some more color from you.

The demand environment remains robust. The book-to-bill ratio is very strong, and there is significant order activity this quarter. We haven't observed any slowdown. Customers are purchasing aircraft, whether to replace older models or to expand their fleet capacity. The strong demand is evident, particularly in the fractional ownership segment, and it's consistent with what we've been experiencing for some time. The demand for jets is particularly strong in the U.S., although there are also notable orders for jets outside the U.S. The turboprop product lines are performing well too, with the King Airs, SkyCourier, and Caravans showing strong performance. Overall, the demand environment continues to be very strong.

Okay. Regarding the margin in Aviation, I recognize that it has significantly improved from its lowest point. However, it has decreased sequentially, and the year-over-year increase is somewhat below what is typically expected, even with solid unit and price performance. Is there anything specific to mention about this? Additionally, what should we anticipate for the Aviation margin as we approach the end of the year and into next year?

I believe we will continue to see strong margin performance, Noah. We are undoubtedly still affected by performance issues, particularly due to late parts and labor turnover, which is a challenge everyone in the industry is facing. We will keep working through these challenges, but I am confident we can maintain healthy margins.

Can you be through that in full year 2024 numbers? Or are you likely to still be battling that into next year?

Well, I think we're going to battle that into next year. So like you know, fourth quarter is traditionally a very high delivery quarter. I expect that it will be a high delivery quarter, and we'll see conversion that will give us some additional margin is typical for us in Q4, and I would certainly expect that. I think we're going to continue to fight this as we go into next year. But again, I mean, obviously, we're not going to get to guidance just yet on 2024. But I think as we've seen in 2023, people should expect the business to deliver solid growth and strong margins.

I wanted to continue on the strong backlog topic. When you started the year, it looked like I think you were thinking kind of a 1:1 book-to-bill for the year. And clearly, it's been much better than that. Could you talk about how your expectations have changed over time? And has the mix shifted at all?

No, it really hasn't. We initially set our baseline plan expecting a 1:1 ratio, and I believe the industry needs to reach that point eventually. I doubt it can maintain a ratio significantly above that for an extended period. However, our sales teams are actively engaged, and customer demand is as it is. If demand exceeds 1:1, that’s certainly great for the business. As you've observed, we have seen this throughout the year. We will continue to plan production volumes and adjust as necessary moving forward. The mix is notably different. We are still witnessing strong demand for jets across all turbo product lines and nearly all our aircraft types. The introduction of new aircraft like the SkyCourier, along with upgrade programs for models such as the CJ3 and M2, has stimulated the market. We consistently invest in our product lines to drive demand. Compared to our initial expectation of a 1:1 ratio at the year’s start, the end market has proven to be stronger than we anticipated, which is definitely a positive outcome.

Yes, it is positive, but I'm curious about how you manage the situation with supply chain delays and the significant backlog. How far out are you scheduling deliveries now? Could this become an issue if it persists? As you mentioned, it should ideally reach a 1:1 ratio at some point.

Yes. Well, look, we obviously continue to work with our supply chain to try to make necessary adjustments. And as I said, I think the trend line is improving. But it still comes down to a part. So if I'm missing a few parts, I can't deliver an aircraft for missing one part I can't deliver an aircraft. So it is still a problem, but I do think it's trending in the right way. Obviously, as we adjust and think about our production rates going forward, we're working with those suppliers to kind of forecast to them how we're going to adjust our rates into the future. But that's a real-time activity, right, that's going on all the time. So as I kind of indicated earlier, I think we'll expect to see increased deliveries again in 2024 versus 2023. And that's partly stronger demand, and it's partly getting some of the supply chain issues resolved and getting back to where we can generate additional volume out of the factory.

Maybe this one for Frank. The increase in guidance, I mean, this quarter, you got a big benefit from finance, somewhat offset, I guess, with eAviation being worse than what I would have expected and a lower tax rate. Was there operational benefits in that EPS increase you got? It was mainly these items I just mentioned.

No, we're seeing, as Scott said. I mean, we're seeing strong performance across Bell. And so I think Bell is going to come in at higher margins than we would have originally guided. We're seeing strong performance at Systems. They'll be at least the top end of our original guidance range, we're seeing, frankly, better volumes and solid and strong margin performance in the Industrial segment. And then at Aviation, we're also seeing, despite some of the volume headwinds, we're seeing strong profit growth and kind of a strong overall year-over-year growth. So those are certainly the operational aspects. GFC is an operational thing. It can always be a recovery from a write-off from many years ago. So a good solid performance out of the businesses.

Okay. And Scott, on the last call, I think there was a comment that maybe deliveries would be higher, closer to somewhere in the 40s from what we saw this quarter. So I assume that's all supply chain. I mean is that going to continue in the fourth quarter as well? So we'll see strong deliveries but maybe less than we would have thought 6 months ago. And does that bode for next year being a lot bigger than what you might have thought before?

We are indeed delivering fewer aircraft than we initially anticipated, mainly due to ongoing supply chain issues. We've adjusted our manufacturing operations and have reduced some of the units accordingly. There have been aircraft scheduled to move from the third quarter to the fourth quarter, and I expect some may also shift from the fourth quarter to the first quarter. The impact of these changes on our original plans for 2024 will be reflected in our guidance when we update it. While we are still analyzing the numbers, I anticipate good growth compared to 2023, driven by overall demand and the transitions of deliveries from 2023 to 2024. Therefore, 2024 is expected to be a strong year for us.

And good quarter. Frank, could you talk a little bit about whether we get any benefit from the latest IRS clarification of Section 174? And should we be concerned about pensions being a significant headwind next year?

We have been monitoring the implications of the guidance clarification for Section 174. There are no changes regarding cash tax. As for pensions, we will go through our year-end process, and I don't expect it to be a significant concern. Thus, we shouldn’t face problems with pensions as we head into 2024.

Got it. Okay. And then, Scott, strategically, I mean, you've announced a couple of new updates at NBAA, but you haven't done a major new clean sheet in a while. Not that the rest of your competitors have done anything. But what's your thinking looking out a couple of years? Obviously, you've got good demand now. You've got some nice smaller new products coming. But do you think that you need to start something bigger for the next 3 to 5 years?

I think at this point, we have made significant progress with the SkyCourier program and the Denali, which is currently in the certification process and is looking promising. The Ascend has also been announced, representing a substantial initiative for us. Strategic wise, I believe we are in an excellent position with our Latitude/Longitude aircraft family, both of which are relatively new. There will definitely be upgrades and enhancements as we advance, but we have shifted from a prolonged period of significant investments in mid- to super mid-aircraft to making good investments in the turboprop segment. The Ascend, in particular, is set to be an outstanding product for us, occupying a similar space to the XLS and XL, which have historically performed very well. We're enthusiastic about this development; additionally, the Denali is expected to be a strong product as it progresses through certification. While we are continuously developing new ideas and plans, we don't have any further announcements at this time and are fully engaged with our current initiatives.

Scott, there's some concerns yet again about the outlook for the economy and higher interest rates and all that. And I was wondering, in the Aviation division, have you seen any of your customers starting to get a little more concerned about their ability to take jets and trying to defer things?

No, we really haven't. If there's been a cancellation here or there, I'm not aware of it lately. I think demand is strong, and people are considering a potential 12- to 18-month soft period in the economy. However, discussions are focused on deliveries that extend well beyond that timeframe due to the backlog. We certainly haven't seen any impacts from any short-term economic concerns affecting deliveries. Customers are taking their aircraft, and we have not encountered any issues there. Moreover, from an order standpoint, timelines stretch well beyond any period that might raise concerns. We've been experiencing a very strong year. The Kautex division, particularly in North America, has seen growth. Europe has also grown. We have noticed significant increases in volume growth here in 2023, and I anticipate that will continue into 2024. There have been concerns about the UAW situation, but this morning Ford announced a tentative agreement, which is positive. So far, we haven't felt much impact from that, and we hope for a swift resolution before it affects us materially. We serve a wide range of OEMs, especially in North America, including many Toyotas, BMWs, and Mercedes in the southern region. Overall, Kautex continues to see volume growth, and we've also observed solid volume growth in the vehicle business. We closely monitor the high-end consumer segment to adjust if there's a slowdown. However, both the golf market and the commercial market remain strong, even though the consumer market isn't as robust as it was in 2021 and 2022. Nonetheless, its performance is still quite strong compared to historical standards. I believe the intersection of all these factors is contributing to our positive growth.

Scott and Frank, leverage on the balance sheet is pretty low at less than 1 turn of EBITDA. Free cash flow is pretty solid. You mentioned the demand environment is strong. I guess looking at the stability and the strength of your business, what's your appetite for either an incremental outsized capital return to shareholders in excess of your existing share repurchase plan or some sort of transformative deal?

Well, look, Kris, clearly, our focus and what we've communicated and what we've been executing on, we did again here in the third quarter, is really focusing our capital returns around share buyback. And we continue to do that here in the third quarter. So it was another quarter of strong returns. Obviously, we agree. I mean I think our balance sheet is a good place. We're generating strong cash flows, and we'll continue to use that on the share buyback. In terms of any acquisition opportunity, like we're always keeping an eye out for things. And if there's something that makes sense for us, obviously, we have a balance sheet and an ability that we can do that. Obviously, we have to convince ourselves that that's something that's good for our shareholders. And there have been a couple of deals out there where we concluded that wouldn't be the right thing, but we certainly always keep an eye out and contrast that versus just continuing the share buyback program, which I think has been very successful.

Great. And maybe following up on what we've seen in the industry, Embraer signed a 20-year licensing agreement to service Pratt GTF engines including the Airbus A320neo, considering your strength in services for business jets, what's your appetite to join that engine MRO ecosystem and expand your addressable market?

I don't have all the details on that. However, we work closely with our engine suppliers to ensure they have strong maintenance, repair, and operations capabilities. We also promote engine programs with these suppliers. We are very proud of our service business, which has been growing. Over the last decade, we've shifted to providing more direct service for our aircraft than we previously did, and that has been very successful for us. However, entering the engine maintenance, repair, and overhaul business does not seem practical for us. The value in engine overhaul lies in the parts, which come from our suppliers. Therefore, it is probably best for them to manage that area.

Scott, I was wondering if I could get you to just put aside the supply chain issues for a moment and just assume that they weren't there. And talk a little bit about what you're hearing from your customers in Aviation and how long customers seem like they're willing to wait for it yet? And if you all could just kind of wave a magic wand and get your production to the right level for the right wait time for those customers, what would that wait time be? For 2-plus years today, we were less than 12 months prior to the pandemic. What's the right level that we should all be thinking about as things kind of settle out?

It's a good question, Jason. There's no definitive answer to that. Right now, we have customers who would prefer earlier delivery dates than we can currently promise. For a long time, customers were accustomed to getting new aircraft delivered in a very short period, but that's not the case anymore. We're experiencing a challenging phase where customers expect quicker delivery, but the reality is that it typically takes a couple of years now. The market is adjusting, and customers are becoming aware of the industry's order backlogs. They're starting to realize that when planning their fleet and considering upgrades, they need to account for a timeline of a couple of years rather than assuming they can complete the transaction within a few months or even a year. Although customers are looking for earlier delivery dates, they are adapting to this longer timeframe. This shift can also benefit them as they can better plan the sale of their used aircraft, creating a more favorable market environment for everyone involved. While there's no specific answer, two years is indeed a significant wait, and it requires proper planning from everyone at this stage.

Yes, I think what a lot of us are trying to figure out is, once these supply chain issues work their way through, how much we might see production rates across the industry come up over time? If we're 2 years now, is the sweet spot 18 months, and we can kind of back into what that would mean from a production rate perspective. I think it's what we're all trying to better understand.

No, I believe there are still opportunities for margin improvement. This business should achieve a high single-digit margin. It includes a significant amount of automotive work, and Kautex is performing well by generating solid cash flow and margins. Currently, we are working to restore some of the automotive volumes globally, and we have the capacity to do that. Improved utilization and efficiency of this capacity would certainly be beneficial, and that is contributing to the margin improvement this year. The vehicle business is experiencing strong demand across most product lines, although some are still recovering from the post-COVID period and facing ongoing supplier and labor challenges, similar to what we see in aviation. There are still inefficiencies in some factories as we navigate through these issues. I do believe there is potential for further margin growth in the future.

Scott, I was wanting to lead off on the NetJets agreement. And I realize it's not in backlog. So maybe this is a little bit of a carton from the horse. But when you sign up to deliver or agree upon 1,500 jets per 15 years in a pre-inflationary market, I imagine that's probably a little bit more straightforward maybe. I just wonder, how do you do that in a very volatile potentially inflationary backdrop? How do you put the constraints and guardrails in place on those realized sale prices? And just to confirm, does this start to fold in, in '25?

I want to avoid diving into all the specifics of the arrangement, but we've always taken market pricing into account when working with NetJets. It's not a fixed price over 15 years; that's not feasible in this industry. Adjustments are made based on market pricing, which leads to a very fair and equitable deal. NetJets is actively selling aircraft in the marketplace, so you can think of it as almost wholesaling these aircraft to them, who then cover their costs and run their business. Therefore, there’s a market adjustment mechanism built into the process. No one is trying to predict pricing 15 years into the future.

And then in terms of the initiation of the contract, is it a '25 start deliveries with the last one running through '24?

Yes, I think that's about right. It's an add-on, so we're extending the existing agreement we have. We meet every quarter to adjust the delivery schedule for the upcoming year. If you look at how many aircraft are left under the old agreement compared to the new one, it transitions around the 2024 to 2025 timeframe.

Yes. I mean, interest is expense is going to come in a little better than we had originally guided just given what's going on with, frankly, our investment in our cash balances and tax is probably going to be a little bit better also than we had guided, maybe 1 point better than our original guidance.

Scott and Frank, nice results. Scott, on Systems, the performance there continues to be really, really good, and there was obviously a bullish tone down in the USA around just a lot of the modernization efforts. How are you feeling about the kind of visibility of that business going forward?

Peter, I believe they're in a strong position. Many of our long-term initiatives are finally starting to align. We experienced significant growth this quarter, largely due to projects like XM250, which are the result of decade-long investments in IRAD for new munition systems that are performing well. The Sentinel program, where we partner with Northrop Grumman, continues to expand effectively. We also had key selections in this quarter regarding the RCV program with the Army, the ARV program with the Marine Corps, and the FUS down select with the Army. Overall, the business is doing well, margins are robust, and we've returned to a phase of growth. There are also several substantial opportunities ahead, though I can’t guarantee we will win all of them. However, we have about four to five significant opportunities that we expect to secure in the coming years. The business is executing effectively, delivering on existing programs, and we have numerous substantial growth prospects in the pipeline.

Yes, it was 3%, and aftermarket was 33% of revenue for the quarter.

The Industrials business did well. So my question is this. In the past, Scott, I think you've intimated or maybe more direct than that, that it's core. Is that still how you're thinking about it or not? I mean how do we think about the Industrials business in the context of the greater Textron, which seems to be evolving quickly towards a bigger A&D company?

Ron, I mean the way we're looking at industrial right now is us providing good growth and strong performance improvements and generating good cash. That's how we think about it.

So, is it core or not?

We've never defined core or noncore. I certainly have never said that. Look, I get what we have said, Ron, is when we think about M&A activity in the company, we certainly would view that the places that we would additionally or add additional capital would probably be in our Aerospace and Defense portfolio. And that's kind of how we look at the M&A world as opposed to thinking that we should increase the size of our Industrial business. But certainly, to the extent that we can drive organic growth in these businesses and make smart investments and generate good returns for shareholders. That's the best thing we can do for the shareholders is make sure there's performance. Those businesses are performing as well they can perform. Yes, fair enough. And then on the M&A front like you mentioned. What's it like out there right now? Are there opportunities? Are there directions that you want to go in terms of A&D? Are you more A focused or D focused or agnostic? How should... Yes, we are probably open to various opportunities. Recently, we have made some small deals to expand our service offerings. The Pivotal acquisition has proven to be an excellent move for us, particularly in enhancing our future focus in the Aviation sector. There are definitely opportunities we can pursue, which could potentially be significant down the line, although we can't predict that at this point. This acquisition has provided us with valuable capabilities within the company. As I mentioned, we primarily focus on any substantial mergers and acquisitions in the A&D sector. Deals are not frequent, so we remain vigilant for suitable opportunities. We will continue this approach, and if an enticing deal arises that benefits our shareholders, we would certainly consider it. We have the capacity for a significant acquisition, but it needs to make financial sense.

Just want to follow up on Myles' question and maybe see if we can get into the gory details of the NetJets deal a little bit. But my main question is Scott, is there a minimum number of aircraft that they're obligated to take each year under this deal? And if so, how does that compare to the prior deal?

No, they don't. Look, guys, the relationship and the way this works is that I mean, our friends at NetJets are out every day selling aircraft. And they're selling those shares. And by the way, I think that's a very robust strong market right now, which is fabulous but they sit down with us in real time. I mean, every quarter, looking out a year out and given where the market is and what sales activity looks like, firming up. Those aircraft that we're going to deliver in roughly that 1-year window. So when the market is strong, they're selling. We expect that thing to continue to grow. If there was a slowdown, and we expect to see that number come down. So it's a total 100% alignment around that end market. Yes, I think that's about right. It's an add-on, so we're extending our existing agreement, and we meet every quarter to adjust the deliveries scheduled for the upcoming year. If you compare the number of aircraft left under the old agreement to the new agreement, it's transitioning to the 2024-2025 timeframe.

Our next question comes from David Strauss with Barclays.

I wanted to ask specifically about FLRAA. You've mentioned an annual revenue run rate of $800 million to $900 million for FLRAA. Are you fully ramped up to that rate in Q3? If not, could that be related to the Bell margin performing better than we expected?

No, I wouldn't say there's a margin impact to it. But certainly, we're not ramped to that rate yet, David. I mean that will grow here as we go through '23 to '24. I would say the ramp is going well. I mean, a lot of our internal resources ramping up the engineering activity is happening at a pretty good clip. But obviously, a lot of that is also getting all of our suppliers on board and getting a lot of key partners ramped up. It took some time from the original contract award to get those guys on to contract. So as you go through the rest of this year and particularly as you grow into 2024, there's the inside kind of Bell heads, if you will, but there's also a lot of ramp that's the pass-through to our partners on the program as well.

And I apologize if you've already touched on this, and I may have missed it, but the supply chain issues that you called out on the commercial helicopter side. How do those compare to kind of what you're seeing on the Aviation or jet side? I think you hadn't really highlighted supply chain as a challenge on the Bell commercial side prior to today.

Yes, it's a very similar issue, David. I mean they're very similar issues.

Yes. So your deliveries were down 50% at Bell and Commercial. Maybe give us some color on like, what's the demand there? And what should we look like in the fourth quarter? Because your original guidance assumes a very big step-up that looks like it's going to be tough to hit and you also had talked about margins kind of coming down as FLRAA effort ramped? And maybe some color in terms of where the margins could be.

Yes, I'm not sure I have a whole lot of additional color on the margin side, Cai, that we certainly expect it to be, given the performance through the course of the year that it will be over the top end of what we originally guided. So I think we still feel that the Bell will finish out a very strong year. But the numbers are significant, and I appreciate that, and it certainly looks like a big ramp. We had a couple of issues very specific around our 505, which is a fairly high-volume product, but a relatively speaking, lower dollar per unit volume. So a lot of the numbers miss and a lot of the challenge, frankly, in Q4 in terms of the units are around those 505. So obviously, we would like to get them out. Customers want us to get them out. But the miss on a number of those very light helicopters won't have a big material impact on the performance overall at Bell.

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