Earnings Call Transcript - TXT Q3 2022

Operator, Operator

Thank you for joining us for the Q3 2022 Textron Earnings Release Conference Call. All participants are in listen-only mode. Today's call is being recorded. Now, I will hand it over to the Vice President of Investor Relations, Eric Salander. Please proceed.

Eric Salander, Vice President of Investor Relations

Thanks, Brad, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings, and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO, and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Revenues in the quarter were $3.1 billion, up $88 million from last year's third quarter. Segment profit in the quarter was $299 million, up $20 million from the third quarter of 2021. Income from continuing operations for the quarter was $1.06 per share, compared to $0.85 per share on an adjusted basis in last year's third quarter. Manufacturing cash flow before pension contributions totaled $292 million in the quarter, up $21 million from the third quarter of 2021. With that, I'll turn the call over to Scott.

Scott Donnelly, Chairman and CEO

Thanks, Eric. And good morning, everyone. Overall, we had a solid quarter across our manufacturing businesses with higher net operating profit and cash generation as compared to last year's third quarter despite ongoing supply chain labor challenges. Aviation generated segment profit margins of 11.9% up from 8.3% in the third quarter 2021 on slightly lower revenues reflecting a favorable revenue mix with higher aftermarket volume and strong pricing net of inflation. We continue to see solid demand across our jet and turboprop products resulting in backlog growth of $524 million in the quarter. We delivered strong performance even as we continue to experience supply chain disruptions throughout the year that have impacted production schedules. In the quarter we delivered 39 jets down from 49 last year and 33 commercial turboprops down from 35 in last year's third quarter. Last week at NBAA, we also announced two large fleet orders that included an agreement with flyExclusive for eight XLS Gen2 aircraft; we expect deliveries in 2024 and up to six Longitude aircraft with deliveries expected to begin in 2025. FlyExclusive also exercised its option to purchase an additional five CJ3+ aircraft from its order earlier in the year with deliveries expected to occur in 2024. We also had an agreement with Fly Alliance for four XLS Gen2 aircraft and options for an additional 16 aircraft with deliveries expected to begin in 2023. At Bell, revenues were down in the quarter on lower military revenues partially offset by higher commercial revenue. On the commercial side of Bell, we delivered 49 helicopters up from 33 in last year's third quarter, including the 400 Bell 505 aircraft. During the quarter, we continue to see solid commercial demand across all our models. Moving to Future Vertical Lift, we continue to await a Florida contract award announcement in the U.S. Army. Textron systems revenues were slightly lower in the quarter. During the quarter, ATAC announced a five-year IDIQ contract with the U.S. Navy to provide Chase Flight Services for the F-35 program. Systems were also recently awarded a contract to provide Aerosonde operational support on its fourth maritime site services that are expected to begin in 2023. Moving to industrial, we saw higher revenues in the quarter driven by higher volume at both Kautex and Specialized Vehicles and favorable pricing principally in Specialized Vehicles. Kautex, while revenues were higher in the quarter as compared to the prior year, we continue to experience order disruptions related to the global auto OEM supply chain shortages. Moving to Aviation, we're seeing increased order activity for our training aircraft like the Alpha Trainer, which is a low-cost pilot development platform. In the future, we will look to expand this training option to include the Alpha variant as we work to achieve NFA research. Also last week at NBAA, we unveiled our new Nexus eVTOL model aircraft. Our updated design reflects our ongoing investment in the underlying research and development supporting Textron's long-term strategy to offer a family of sustainable aircraft for urban air mobility, general aviation, and cargo with special mission roles. To wrap up, we continue to see strong demand in our end-markets and our teams are executing well in a challenging environment. With that, I'll turn the call over to Frank.

Frank Connor, Chief Financial Officer

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed starting with Textron Aviation. Revenues of Textron Aviation of $1.2 billion were down $14 million from the third quarter of 2021 largely due to lower Citation jet and pre-owned volume partially offset by favorable pricing and higher aftermarket volume. Segment profit was $139 million in the third quarter, up $41 million from a year ago, largely due to favorable pricing, net of inflation of $31 million. Backlog in the segment ended the quarter at $6.4 billion. Moving to Bell, revenues were $754 million down $15 million from last year due to lower military revenues of $112 million, primarily in the H1 program due to lower aircraft and spares volume offset by higher commercial revenues of $97 million. Segment profit of $85 million was down $20 million from last year's third quarter, primarily reflecting lower volume and mix partially offset by favorable pricing net of inflation. Backlog in the segment ended the quarter at $4.9 billion. At Textron Systems, revenues were $292 million, down $7 million from last year's third quarter. Segment profit of $37 million was down $8 million from a year ago primarily due to lower volume and mix. Backlog in the segment ended the quarter at $2 billion. Industrial revenues were $849 million up $119 million from last year's third quarter, primarily due to higher volume and mix of $95 million and a $58 million favorable impact from pricing principally in specialized vehicles partially offset by an unfavorable impact of $34 million from foreign exchange rate fluctuations. Segment profit of $39 million was up $16 million from the third quarter of 2021 primarily due to higher volume and mix. Textron eAviation segment revenues were $5 million and segment loss was $8 million in the quarter, which reflected the operating results of Pipistrel and costs for initiatives related to the development of sustainable aviation solutions. Finance segment revenues were $11 million and profit was $7 million. Moving below segment profit corporate expenses were $14 million and net interest expense was $21 million. Our manufacturing cash flow before pension contributions was $292 million in the quarter, up $21 million from last year's third quarter. Year-to-date manufacturing cash flow before pension contributions totaled $810 million. In the quarter we repurchased approximately 3.1 million shares returning $200 million in cash to shareholders. Year-to-date share repurchases totaled $639 million. To wrap up, we now expect our full-year capital expenditures will be about $375 million, and the full-year tax rate to be about 16%. For the full year, we are narrowing our earnings per share guidance to a range of $3.90 to $4 per share. Also, we are increasing our full-year manufacturing cash flow before pension contribution guidance to be at a range of $1.1 billion to $1.2 billion, up $300 million from our prior outlook. That concludes our prepared remarks. So Brad, we can open the line for questions.

Operator, Operator

Of course. And our first question today comes from the line of Robert Stallard with Vertical Research. Please go ahead.

Robert Stallard, Analyst

Thanks so much. Good morning.

Scott Donnelly, Chairman and CEO

Good morning.

Robert Stallard, Analyst

A couple of questions from me. Maybe my numbers were wrong, but it looks like revenues in Aviation and Systems were a bit lower than what we'd anticipated in the third quarter. I was wondering if you could perhaps go into a bit more detail with what you experienced in the quarter if it was supply chain issues and whether this has pushed some deliveries to the right?

Scott Donnelly, Chairman and CEO

Yes, Robert, I think that's safe to say, you know we've been ramping up our production volumes through the course of the year, we continue to do that. But we have been hit by a number of supply chain challenges that have resulted in aircraft pushing out to the right, our guys are managing through that. And we'll continue to work hard to make deliveries and we'll continue to work on that ramp as we go into 2023 as well. So, in general case seeing some very strong demand environment. Aftermarket has also been very strong driven by high utilization but for sure we're continuing to see some difficulties around getting parts, labor ramp is, I'd say picking up and doing reasonably well. But we've had some critical part impacts.

Robert Stallard, Analyst

So Scott, does this impact your division by division guidance expectations for the year?

Scott Donnelly, Chairman and CEO

Well, as we've said before, on the last call, Robert, I think we expect Aviation probably is going to come in about $300 million below what we originally guided, I think we're still on track to do that. I think we'll still make strong margin performance as the team has executed well. As I said, it's a tough market, but we're to our tough situation, but they're executing very well. So I think we'll be solid on the margin side, but a little bit late on the top line. I think at Systems, you also mentioned, well Systems was pretty close. I mean, they're flattish. We still had a little bit of impact on that year-over-year from Afghanistan. But I think as we get into the fourth quarter here, you'll start to see some slight growth in that business and obviously we expect that to continues into 2023.

Robert Stallard, Analyst

Okay, then just a technical one, Frank. On the corporate and other big decline year-on-year, what sort of run rate should we expect on that line going forward?

Frank Connor, Chief Financial Officer

Yes, I believe we should anticipate around $110 million for the year. The fourth quarter is expected to be higher than what we've been experiencing, although some of this will depend on share price, but it should be in that range.

Robert Stallard, Analyst

Okay, that's great. Thank you very much.

Operator, Operator

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

David Strauss, Analyst

Thanks. Good morning guys.

Scott Donnelly, Chairman and CEO

Good morning, David.

David Strauss, Analyst

Scott, can you maybe touch on your manufacturing footprint in Europe, how you feel about things there from kind of an energy perspective? And also how we should think about obviously, in the quarter you had a pretty big FX impact there? How we should think about the FX impact, given the euro, dollar parity at the moment?

Scott Donnelly, Chairman and CEO

Yes, the FX has been obviously quite a dry primarily in our Kautex business. And, I mean, obviously, we expect that to continue, but we'll manage our way through that. I think on the factory front, most of the impacts we've seen in that footprint in Europe had been driven really just by auto OEM issues around hitting their volumes, it hasn't been energy related at this point. Most of what I'm reading here lately is actually the energy situation seems to be a bit better than they expected heading into the winter. So we haven't had any indications yet that anyone's going to back off on their auto manufacturing based on that energy. It's really more of these other supply chain issues that they're continuing to just impact us. And look, David, we go kind of by IHS data, in terms of how we think about and forecasting volumes going forward. So clearly, the year has been disappointing in terms of what was originally thought the volume we achieve. But right now, it's looking like IHS is probably forecasting sort of a mid to high single-digit growth next year on top of some growth we saw this year. So that's kind of how we think about the volumes and the business including the European footprint.

David Strauss, Analyst

Got it. Thanks. And Scott, I guess your latest update on Florida and the timing you're expecting now for a decision? And what kind of incremental spending are you looking at for the rest of year to carry on your effort? Thanks.

Scott Donnelly, Chairman and CEO

Sure. So like the latest we're hearing is it's probably a November timeframe. Obviously, we continue to work with the customer. And we got to make sure we've been worked on this, as you guys know for a very long time, we're not going to do anything that's other than supportive and doing the right thing for the program, making sure we keep the team together and keep making forward progress. Obviously, we still feel good about the program. And I think that there's obviously still some uncertainty around this. I mean, we don't know an exact date, but we're doing the right thing by the programs for the people. And while there is some uncertainty I would say that we're pretty comfortable that we incorporated any impacts over the total year from where we were on our plan in our guidance. So I think that we're comfortable that we'll land inside that guidance, despite the impacts we've seen on the FLRAA delay.

David Strauss, Analyst

Thanks very much.

Operator, Operator

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

Sheila Kahyaoglu, Analyst

Hi, good morning guys, and thank you.

Scott Donnelly, Chairman and CEO

Good morning.

Sheila Kahyaoglu, Analyst

Just a follow-up on the last point, Scott. How do you think about Bell without a FLRAA win? What would sort of the scenarios look like their Bell without FLRAA or potentially FLRAA? And maybe can you remind us of the R&D investment impact for FLRAA associated with 2022?

Scott Donnelly, Chairman and CEO

So I don't think about Bell without FLRAA. Because I think we're in a good place, we will let the performance of our product stand and just kind of work through the process, obviously, the Army is going through a very, very rigorous process here. So we'll bear with them and let this thing play out. But we're pretty bullish on that program. And we'll leave it at that, I suppose. On 2022, the R&D has actually been down a little bit, because we've had more of the crusher activity both on the FLRAA program and the FARA program. So even with some of the impacts that we've seen on some of the delays, I think we'll be fine there. We're working our way through it, and clearly the FARA program is going to continue to extend and like say hopefully here, compared to all the years we've been working on this thing FARA delays a relatively short period of time so.

Sheila Kahyaoglu, Analyst

Great. That's helpful. And then glad you don't think about Bell without FLRAA. But switching gears to aviation, when we look at year-to-date deliveries, they're like, you mentioned supply chain. How long does that linger and how do we think about jet deliveries for '22 in total? And does it linger into '23?

Scott Donnelly, Chairman and CEO

Sure. Look it's a good question. And I think the way we're starting to lay out the years that we've been planning on ramping production all through the year, we've been achieving that. I mean, we have been increasing the number of hours and labor and activity in the factory. We're clearly not going to get to the number, just that we were originally hoping to be based on some of these delays. But we're going to keep that ramping activity going through 2023. So when you look at the incremental volumes that we had in 2022, we're not ready to guide '23 yet, but it's not unreasonable to expect we'll see a similar increase in volumes in 2023 from what we saw from the '21 to '22 timeframe.

Sheila Kahyaoglu, Analyst

Great. Thank you.

Scott Donnelly, Chairman and CEO

Sure.

Operator, Operator

And our next question comes from the line of Seth Seifman was JPMorgan. Please go ahead.

Seth Seifman, Analyst

Hey, good morning, everybody.

Scott Donnelly, Chairman and CEO

Good morning, Seth.

Seth Seifman, Analyst

I guess just to follow-up on that question, Scott, when you think about the strong backlog that you've been able to build here, and you think about where deliveries might ultimately go. I mean, I assume the aim would be to be back to kind of the 200 plus level, maybe in 2023. Kind of the level that had been anticipated for 2022 before the supply chain issues. And then when you think about moving higher from there. Would it make more sense to kind of focus on keeping that backlog, maybe expanding margins even a little further from this low double-digit range? And having a more steady delivery pace, as we head toward mid-decade?

Scott Donnelly, Chairman and CEO

First of all, Seth, I think your thoughts on volume here in the near-term are correct. We obviously would have liked to have had more than in 2022, but it's probably reasonable to expect that what we hope to achieve in 2022 will materialize by the end of 2023. So we should be back to that kind of 200ish number in the 2023 timeframe. Beyond that, we'll continue to monitor demand in the marketplace, which remains strong as long as we see that kind of growing backlog in a robust environment; then we'll maintain that ramp. However, it’s going to be a slow and steady ramp. We believe it's better for our company, our customers, and the entire market to operate with clearer visibility around the backlog over an 18-month timeframe. Currently, the demand is very robust. We are experiencing significant order activity in that 18-plus timeline. We will adjust production accordingly to meet that demand unless the market starts to slow down. If that happens, we can reduce the ramp, but I certainly don’t foresee that occurring throughout 2023 given the current backlog and demand environment.

Seth Seifman, Analyst

Okay, great. And just to follow up, very strong cash this year. And when you think about next year, other than what we might assume on the P&L. Are there any things you'd note about cash flow, either headwinds or tailwinds heading into '23?

Scott Donnelly, Chairman and CEO

I believe we have demonstrated effective management of our working capital this year, similar to last year. We have once again benefited from strong customer activity and deposits. However, there are no unusual working capital or cash flow impacts compared to our past performance.

Seth Seifman, Analyst

Okay, great. Thanks very much.

Operator, Operator

And our next question comes from the line of Pete Skibitski with Alembic Global. Please go ahead.

Peter Skibitski, Analyst

Hey, good morning, guys.

Scott Donnelly, Chairman and CEO

Good morning.

Peter Skibitski, Analyst

Hey Scott. I just wanted to beat a dead horse a little bit on the aviation. Just because even at a little bit of a lower guidance number there is still applies a pretty good hockey stick in the fourth quarter. So I'm just wondering kind of on the risk assessment front. Do you have the engines in house already that you need and the parts and the labor trained up? Or is there still some risk to that number do you think given the ramp?

Scott Donnelly, Chairman and CEO

Well, Peter, there's always some risk to the number. However, our team is working diligently on this every day and tracking all the critical components. The number I provided you, which is probably a few hundred million under our original guidance, is still holding, but there is some risk involved. One challenge we face is that supplier issues can emerge daily. We're in a good position regarding labor and the aspects we can control, but unexpected issues can arise. I believe we have a strong chance of reaching the number we discussed. If we do miss it, it would likely be due to a few aircraft related to a specific part that comes up unexpectedly. Our team is working tirelessly, and I think the guidance is solid. While there may be risks in any environment, our team is on top of it.

Peter Skibitski, Analyst

Okay, I appreciate it. Just one follow-up on the same segment, kind of post NBAA, how are you guys feeling about the health of your customer base in the aviation, how the conversations go? And obviously, I'm sure the macro backdrop was part of the conversations down there. I'm just wondering kind of what your net assessment is?

Scott Donnelly, Chairman and CEO

I'd say very positive. I think that, we're continuing to see some new people coming into the market, we're seeing some of our historical corporate customers that are doing fleet refreshes, they're putting aircraft orders in, which obviously, deliveries are ways out, but they're refreshing their fleets, obviously, the level of flight activity in the industry continues to have kind of charter and fractional customers, very motivated to bring additional assets online. So I'd say all in all, it's really strong and again I also put against the backdrop of hardly a bubble, right, I mean, we're talking about, jet delivery volumes that are kind of back even still maybe below historical norms. So, I don't think there's this euphoric bubble burst, but people are refreshing fleets and investing in our aircraft. We don't see this big pull-in, right, it's just the market is strong, and volume is strong, which is critical.

Peter Skibitski, Analyst

I was going to say, your exposure to Europe is still fairly limited, like it used to be I think it was only, I don't know 20% to 25% of your citation volume, is that still the case?

Scott Donnelly, Chairman and CEO

Yes, it is. I mean look, we're seeing kind of relatively normal from what we've seen historically, jets are probably 80%, roughly U.S., 20% International, the other sales lines are typically the other way around. And that's what we're seeing. We're seeing maybe like 40% U.S., 60% International. So in terms of the good news here is that the demand across pretty much all the models is strong. And we're seeing mix in terms of international versus domestic fleet operations that are kind of what we've normally seen historically.

Peter Skibitski, Analyst

Okay, great. Thank you.

Operator, Operator

And our next question comes from the line of Noah Poponak with Goldman Sachs, please go ahead.

Noah Poponak, Analyst

Hey, good morning, everyone.

Scott Donnelly, Chairman and CEO

Good morning, Noah.

Noah Poponak, Analyst

Scott, what are you now planning for 2022 Cessna jet units?

Scott Donnelly, Chairman and CEO

No, we never give a specific number. I think from the top line, you're looking at probably about $300 million off of our original guide. And virtually all of that is jet deliveries really so.

Noah Poponak, Analyst

Okay, okay. So we can back into that. And then you're saying, if I heard it correctly, you're saying, think about that growth rate in units, does that imply for '22 repeating in '23 approximately?

Scott Donnelly, Chairman and CEO

Yes, that's good.

Noah Poponak, Analyst

Okay, and then how much visibility do you have beyond '23?

Scott Donnelly, Chairman and CEO

Well, pretty good visibility. I mean, it's most of the aircraft, I mean, we have larger aircraft, frankly we're out in 2025 right now and the mix of lighter and midsize are certainly through '23, well into '24, towards the end of '24. So again this backlog is obviously very helpful to us in terms of having the kind of visibility we need to run the operations. And obviously, we'd like to do a little more efficiently without some of the supply chain challenges, but I think we're in a pretty good place, as we've had in a very long time, obviously, in terms of the visibility of the business.

Noah Poponak, Analyst

Okay. So I guess that's all positive and really kind of major structural change in the business. But where the bookings are running, if they hang around in the zone that they're in now, you'd continue to run the bookings pretty far in excess of the revenue and which would build the backlog even further. So when do you get to the point where that's going too far and customers are going elsewhere have to wait too long? Or is it just with the macro level of supply chain bottlenecks, everybody's in the same boat. And is there any?

Scott Donnelly, Chairman and CEO

No, I think you just said it. Everybody's in the same boat, right? I mean, I don't know where that equilibrium point is when it gets out too far. But this is not like some other supplier OEM that says they have aircraft sitting around. So I think this is an industry dynamic, rather than something to just keep an eye on. Obviously, I feel great about how our team is performing from a profitability standpoint. This business is in fabulous condition, with a great backlog, good visibility, generating strong margins and very strong cash flow. I know that every day is challenging with supply chain issues, but our team is fighting through it every day. I'm not sure we need to apologize for these kinds of margins, cash flow, and strong backlog. Our team is working hard every day and performing exceptionally well.

Noah Poponak, Analyst

Great, just lastly on price in the business. Are you actually now increasing price more, in terms of a year-over-year rate of change than you were 12, 18 months ago, when the market first strengthened, I get the sense that the price increases early in this strong demand environment weren't that big because you wanted to build the backlog? And now that you've done so you can actually accelerate the pricing? Is that a fair assessment?

Scott Donnelly, Chairman and CEO

Well, I guess, yes, I am not sure I would do. I don't do the first derivative on the pricing every day. But look I think for sure this market has changed over the last 18 months or so as it's gotten stronger and the competitive market, obviously. So pricing and what competition is doing matters. But I think everybody, I mean the whole industry has seen stronger pricing. So, again we've looked at this kind of on a model by model basis, and what's going on with the competitive environment and it's not as I'm not sure, I can give a simple answer on the slope of the curve, but it's strong. And I would say, we continue to obviously very much focus on making sure we're getting price in advance of inflation, we think about this a lot when you start thinking about, obviously we're taking contracts on aircraft that are in '23, and '24, and '25. And so you've got to make appropriate assumptions in terms of inflation between here and there and make sure to price accordingly, I think that we are.

Noah Poponak, Analyst

Okay, thank you.

Operator, Operator

And our next question comes from the line of Peter Arment with Baird. Please go ahead.

Peter Arment, Analyst

Yes, thanks. Good morning, Scott, Frank.

Scott Donnelly, Chairman and CEO

Good morning, Peter.

Peter Arment, Analyst

Hey, Scott. You've been discussing supply chain disruptions throughout the year. With your extensive experience in engines, do you still believe that the biggest shortage in aviation is related to engines, or are there other components like chips that you would highlight? Additionally, could you provide any insights on the engine shortages?

Scott Donnelly, Chairman and CEO

Engine performance is under pressure. One specific model has faced challenges related to the sanctions involving Russia and Ukraine, but we believe it is on the path to recovery, and we are optimistic about its rebound. However, it can be frustrating for our team because issues arise constantly. Overall, our avionics suppliers have been performing well, especially Garmin, which is essential for us and has been meeting delivery timelines despite the semiconductor challenges they face. They've handled it effectively, yet this industry requires attention to every component since each part is crucial. While the engine issue should resolve in the next six to nine months, new challenges emerge weekly as part of our reality. Our team is accustomed to this situation; they continue to address each problem as it arises.

Peter Arment, Analyst

It's helpful color and just Frank just quickly, could you tell us what the aftermarket was up in the quarter and any comments on pricing? Thanks.

Frank Connor, Chief Financial Officer

Yes, aftermarket remains strong. It was up 18% year-over-year, 37% of total volume for the quarter. So really, kind of continued as Scott said, we see strong buying activity and therefore strong volumes in the business.

Peter Arment, Analyst

Terrific. Thanks.

Operator, Operator

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

Cai von Rumohr, Analyst

Yes, thanks so much. So how much of the goodness in cash flow that 300 million came from deposits on aircraft and thinking about next year, you've had such a big gusher from that source this year? How should we think about cash flow, if book-to-bill goes back to about 1.0?

Frank Connor, Chief Financial Officer

We're not going to kind of break out separately that the cash items, I mean, offsetting the deposit activities, we have seen a little bit of inventory growth as we've had these supply chain issues, and we've seen some kind of slowdown in our ability to deliver. So there has been some offset. But kind of with a book-to-bill above one and strong commercial at aviation strong commercial demand at Bell, we've benefited from that. Frankly, we benefited also from strong cash performance on the military programs as Bell. So it hasn't been all that. We've talked in the past about kind of generally, the business over time wants to be around one-to-one cash flow to profitability, right. So we certainly have benefited kind of this year and last year from strong cash performance relative to that. And it'll depend on lots of factors, kind of when we get to a slower kind of booking rate, but it will migrate back towards that one-to-one, as we do at.

Scott Donnelly, Chairman and CEO

I want to highlight that we are aware of the situation. There is a benefit from strong commercial deposits in aviation and also in the Bells commercial business, which has seen significant demand. However, we still need to focus on effectively managing the business, including working capital and capital expenditures. While it is clear that you are benefiting from this situation, we are performing well beyond a one-to-one cash flow to profitability ratio. This is due to the businesses successfully managing their cash and benefiting from positive customer activities as well. That summarizes our current status.

Cai von Rumohr, Analyst

Terrific. And given this extra cash goodness, how are you thinking about deploying the cash?

Frank Connor, Chief Financial Officer

We have been actively repurchasing stock, buying approximately $640 million so far this year, which is an increase from the same period last year when we repurchased just under $900 million. We expect to maintain similar rates for the rest of the year. Currently, we are buying back around 5% of our stock on an annual basis, which is a good rate to consider.

Cai von Rumohr, Analyst

Thank you very much.

Operator, Operator

And our next question comes from the line of Rob Spingarn with Melius Research. Please go ahead.

Robert Spingarn, Analyst

Hi, good morning. Just wanted to turn to a couple of the other segments for a moment. But in the past, you've talked about systems being a low double-digit margin business, but it's been outperforming that last year and this year. So can we talk a little bit about the trend there? Is it going to stay more in the mid-teens?

Scott Donnelly, Chairman and CEO

It's a good question, but we're not quite ready to provide guidance for next year. The business has always performed well and has various components. For example, with fixed price government contracts, we can't adjust prices, so we'll experience some inflation pressure there. However, we also have a steady stream of new programs and strong execution, which has allowed us to deliver strong double-digit margins, and I expect that to continue.

Robert Spingarn, Analyst

Okay, and Scott, sticking with these other businesses, industrial was clearly strong. And I think you call that specialty vehicles. Can we talk about the forward trends there?

Scott Donnelly, Chairman and CEO

Sure. I believe the specialized vehicle business is performing well. Some parts of that business, particularly support equipment, faced challenges during the COVID period but are now seeing a significant resurgence in activity. We're also seeing strong pricing in our golf and specialized PTVs. Our product lineup is excellent, and the team has done a commendable job. Of course, we continue to encounter supply chain issues, but the team is managing them effectively. I expect to see steady improvements moving forward.

Robert Spingarn, Analyst

And you haven't really seen any evidence of this recession. How do you feel hitting that business? I would imagine that business is somewhat sensitive.

Scott Donnelly, Chairman and CEO

Some segments are more sensitive than others. In the powersports sector, we closely monitor inventory levels, which remain significantly lower than usual due to supply chain challenges. It's important to restore those levels to a healthy state, and we are vigilant in this regard as that segment, although small for us, is quite sensitive to recession. However, other areas, such as municipal equipment and ground support, along with golf, have historically shown resilience during economic downturns. We are well positioned in these larger segments of our business.

Robert Spingarn, Analyst

Of course. Thank you very much.

Scott Donnelly, Chairman and CEO

Sure.

Operator, Operator

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

George Shapiro, Analyst

Yes. Good morning. Scott, on a supply chain issues, it seems like it's affecting your business more than say like Gulfstream at the high end. Is there any differentiation you can say as to why?

Scott Donnelly, Chairman and CEO

I haven't, George. I have a list of all the parts we're currently missing. I could call Mark and see if he has any extras. However, I think this is the reality we face. We have challenges, but I believe our team has handled the situation well. I expect a strong fourth quarter, although there may be some risks with parts occasionally becoming a concern. I'm not sure how to clarify the difference in commentary between some of the high-end products and our situation, but it's something we'll manage through, and it will be fine.

George Shapiro, Analyst

Okay. And Frank, can you provide some comments on what you see for pension next year, given the big changes we're seeing in DR and asset returns?

Frank Connor, Chief Financial Officer

Yes, we don't expect it to be a headwind. We're obviously, we've got a lot of work to do in fourth quarter and calculating the numbers and everything, but it should not be a headwind for us.

George Shapiro, Analyst

Okay. And then one last one. Is Scott, you've been saying that the delay in FLRAA has been a cost to you in terms of carrying all the people. Can you quantify it all? How much of a cost it was to Bell in the quarter, because the margin at Bell still look pretty good this quarter?

Scott Donnelly, Chairman and CEO

Yes, Bell had a very strong quarter in the commercial sector, and I believe we will continue to see strong performance in our commercial business. We've discussed aviation quite a bit, but the commercial helicopter business is also experiencing significant demand and is performing well. This solid performance is helping to offset the decline in our historical military programs, which are gradually decreasing. Regarding the FLRAA, it remains in line with our initial guidance, and that’s why we are observing lower absorption. We anticipated being under contract at this point, but we are managing through this situation. While I can't provide a specific number, I can say that we are confident we can operate within our guidance based on our current position and expectations for announcements later this year.

George Shapiro, Analyst

Okay, thanks very much.

Operator, Operator

And our next question comes from the line of Kristine Liwag with Morgan Stanley. Please go ahead.

Kristine Liwag, Analyst

Hey, good morning. Scott, I mean you mentioned pretty strong session, that pretty strong orders and incremental interest you're seeing from corporate buyers. And book-to-bill is pretty solid at 1.5x. So from your conversations with your customers and potential customers. What's the key impetus for the incremental order? Is it replacement capacity increase or new customers to biz jet? And how sensitive are they from the financing environment?

Scott Donnelly, Chairman and CEO

Well, we've observed a bit of everything, Kristine. We have corporate customers who placed orders this quarter to replenish their aircraft fleets. Corporates typically plan their fleet refreshes over an 18-month to two-year timeline, so the current lead times are within their expectations and align with their plans. We are witnessing ongoing activity, including new interest. There are definitely new buyers entering the market, purchasing entire aircraft, and we also see strong demand from newcomers utilizing fractional or charter operations. Overall, the demand is robust across the board, which is very positive for the industry.

Kristine Liwag, Analyst

Thank you for the insights. Switching topics, Scott, in the past, your involvement with Sensor Fused Weapons, although limited to support over the last few years and now discontinued, may have restricted the European owner of your SOC. Now that you seem to have exited the Sensor Fused Weapon business entirely and with the only electric aircraft certified for passenger use, your portfolio appears to be more appealing from an ESG perspective. Are you noticing any acknowledgment of this portfolio shift? Are you seeing increased interest from European asset managers and ESG investors? How do you view this evolution?

Scott Donnelly, Chairman and CEO

Well, it's a good question, Kristine. And I don't know specifically, those funds that have historically not wanted to invest in the company, in large part because of the SFW exposure. And as you know, that doesn't exist anymore. So I think that's not an issue on the overall ESG front, without a doubt, there you're going to see certain funds out there that are going to be more oriented towards companies they think are investing in that future in terms of particularly electric transportation. And I think we have a very good story. I mean, obviously, aviation is an area we're investing and frankly, particularly as a result of that Pipistrel deal are a leader in that field. And we're also very strong on the electric side in terms of our vehicle businesses, right. I mean, we've pioneered over the years, a lot of that electrification, and frankly, that's spreading out across that business in a big way, including ground support equipment and turf care equipment, it's, that trend is going to continue to happen. So I can't speak specifically to the European funds. But I absolutely and consciously, obviously, on our part, we think we're engaging in strategies that will help make us more attractive to funds that have ESG criteria.

Kristine Liwag, Analyst

Great. Thank you, Scott.

Operator, Operator

And our next question comes from the line of Ron Epstein with Bank of America, please go ahead.

Ronald Epstein, Analyst

Hey, good morning.

Scott Donnelly, Chairman and CEO

Good morning, Ron.

Ronald Epstein, Analyst

There's been a ton of focus on Florida for obvious reasons. But could you walk through some of the opportunities beyond Florida, then the Navy is looking for some helicopters down the road as the Air Force and you guys talked about a bit of AUSA but not everybody was there. So I was wondering if you could kind of walk through some of those other opportunities that are beyond Florida?

Scott Donnelly, Chairman and CEO

Sure, absolutely, Ron. Look I mean, you're right. We everybody asked a lot about Florida, we're obviously very, very interested in the outcome of Florida. But that was hardly a one trick pony, right. I mean, there's a lot of other stuff going on. I think when you think about the maritime strike, and or like there's active AOA activity going on right now in the Department of Navy thinking about what they do with their future of aircraft replacement programs. Obviously, we think that our offering, which is in that tiltrotor space is very attractive to them. I mean these are services that obviously today operate V-22s and they need aircraft and assets that can keep up with V-22s. So it's I think we feel like the tiltrotor solution is a good answer in that space. These programs are relatively early on, I say they're doing their analysis alternatives, and that'll lead to more acquisition activity here in the next couple two, three years. So we're very close to those programs obviously. Air Force, as has been fairly public is talking about what they want to do for, frankly, higher speed vehicles, right? So even beyond the kinds of speeds we see today, it'd be in 22 or in be 280 class of aircraft we're highly engaged with the Air Force on those sorts of programs. So I think there's no doubt that what we're seeing with the Army. And obviously that's a huge opportunity to replace that for the Black Hawk class of aircraft, that you will see similar programs in the Navy, Marine Corps and in the Air Force in one form or fashion and our guys are highly engaged in those program opportunities.

Ronald Epstein, Analyst

Got it. And then maybe shifting gears back to Cessna. Bigger picture question. When you look at the portfolio of Cessna airplanes, is there any place that you think you need to do a refresh or not? And how are you thinking about new product development, given that the businesses in a healthier place than it was just a couple of years ago?

Scott Donnelly, Chairman and CEO

I believe we have a strong array of refresh programs. We've introduced several Gen2 and Gen1 modification programs, and we have more planned for the future. It's essential for us to implement these updates regularly. Currently, we have a few in development that have not yet been announced. Additionally, we're making progress on the Denali program, which is still in development. When considering both jet and turboprop segments, there's significant activity happening. I'm very proud of our product lineup at the moment. The Longitude and Latitude have clearly performed exceptionally well in the market, and the Sky Courier is just beginning to ramp up production, also with strong demand. I believe that will be a standout product as well. The Denali is also a promising addition for us, and we will introduce several refresh programs in the coming years.

Ronald Epstein, Analyst

Got it. Thank you.

Operator, Operator

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

David Strauss, Analyst

Thanks for taking the follow-up. Sure, I just wanted to ask about the H-1 and how that kind of rolls off from here and what sort of headwind we should be thinking about to Bell as that program runs off? Thanks.

Scott Donnelly, Chairman and CEO

Sure. H-1 is about to wrap up. It's program a record in terms of the U.S. sales. We have some FMS programs that are still under production, but those clearly won't be ramping down here over the next couple of years. Service programs continue to run. But no question, David, that program will continue to ramp down here in the next couple of years.

David Strauss, Analyst

And Scott, could you quantify how much in revenue each one currently accounts for?

Scott Donnelly, Chairman and CEO

No, we don't break out the individual programs, David. But look, obviously, our plan is largely based on the fact that you'll see a ramp up in FLRAA program activities that will largely replace overseeing in the ramp down on H-1 program.

David Strauss, Analyst

Got it. Thank you.

Eric Salander, Vice President of Investor Relations

Okay, Brad, that completes the call.

Operator, Operator

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