Q4 2022 Textron Inc Earnings Call

Speaker 1: 178 jets, up from 167 last year, and 146 commercial turbo props, 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 of the H-1 program, partially offset by higher commercial revenues. In December , US 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, flew the V-280 prototype over the last 10 years in support of this win. The initial Florida 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 that was 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 US Army. The award is valued at $162 million over a five-year period of performance. In December , systems announced the delivery of the cottonmouth of the US Marine Corps for testing through 2023. This vehicle was purpose-built for the Marines' Advanced Reconnaissance Vehicle Program. Also in the quarter, systems delivered to the sixth ship to shore connector to the US Navy after its successful completion of its acceptance trials. Moving to industrial, we saw higher revenue in the quarter driven by higher volume at both Caltex and specialized vehicles and favorable pricing principally of specialized vehicles. Moving to aviation, we delivered six Bell's Electro aircraft from the fourth quarter.

Speaker 2: including the first unit in Canada. For the year, Pipistrol 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 teams 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%. It was above the high end of our original guidance range.

Speaker 3: Aviation's backlog grew 55 percent to $6.4 billion at year end on strong order activity and customer demand.

Speaker 4: On the new product front, we received FDA certification for the Cessna Sky Carrier and delivered six units to our launch customer, FedEx, during 2022.

Speaker 5: In text-run aviation defense, the Light Attack AT-6 Wolverine achieved military-type certification from the U.S. Air Force, enabling the first international sailboat aircraft.

Speaker 6: At Bell, the December 2022 flower contract award has solidified the long-term outlook for the segment and should provide an increase in revenue stream that we expect will drive growth well into the future.

Speaker 7: On FARA, the 360 Invictus is nearly complete, and we expect first flight 2023, pending delivery of the ICP engine.

Speaker 8: At Textron Systems, we advanced our weapons programs with the award of our anti-vehicle munitions programs.

Speaker 9: continued work on the robotic combat vehicle and armed reconnaissance vehicle development programs.

Speaker 10: The 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 US military tactical air programs.

Speaker 11: At Textron Specialized Vehicles, the company continued its leadership in the development and production of zero-emission golf vehicles, turf maintenance equipment, and ground sport equipment markets.

Speaker 12: At Caltex in 2022, we were awarded contracts on 14 hybrid electric vehicle programs for our fuel systems.

Speaker 13: At e-aviation, the Pipistrel Velos Electro continued to receive certifications from around the world and is now certified in more than 30 countries.

Speaker 14: Looking to 2023 at aviation, we are projecting growth driven by increased deliveries across all product lines and higher aftermarket volume.

Speaker 15: At Bell, we're projecting revenue growth in 2023 on higher military revenues from the flower program and higher commercial revenues.

Speaker 16: At Systems, we're expecting mid-single-digit revenue growth across our businesses.

Speaker 17: At Industrial, we're expecting revenue growth at specialized vehicles and Caltechs.

Speaker 18: At e-aviation, we plan to continue investments in the development of technologies and products supporting sustainable flight solutions for unmanned cargo, next generation electric trainers, eVTOLs, and general aviation.

Speaker 19: This overall backdrop, we're projecting revenues of about $14 billion for Textron's 2023 financial guidance.

Speaker 20: projecting adjusted EPS in the range of $5 to $5.20.

Speaker 21: Manufacturing cash flow before pension contributions is expected to be in a range of $900 million to $1 billion. With that, I'll turn the call over to Frank. Thanks, Scott. Good morning, everyone.

Speaker 22: Let's review how each of the segments contributed starting with Textron Aviation.

Speaker 23: Revenues at Textron Aviation of 1.6 billion were up 223 million from a year ago, reflecting higher jet and defense volume and higher pricing.

Speaker 24: 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.

Speaker 25: and higher volume and mix partially offset by an unfavorable impact from performance.

Speaker 26: 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 cost.

Speaker 27: Backlog in the segment, end of the quarter at $6.4 billion.

Speaker 28: Moving to Bell, revenues were $816 million, down $42 million from last year, reflecting lower military revenues, partially offset by higher commercial revenues.

Speaker 29: Segment profit was 71 million. Of 71 million, it was down 17 million from a year ago, primarily reflecting lower military volume and mix, partially offset by a favorable impact from performance.

Speaker 30: Backlog in this segment, end of the quarter at $4.8 billion.

Speaker 31: At Textron Systems, revenues were $314 million, up $1 million from last year's fourth quarter.

Speaker 32: Segment profit of $40 million was down $5 million from a year ago. Backlog in the segment, end of the quarter at $2.1 billion.

Industrial revenues were 907 million, up 126 million from last year, reflecting higher in volume and mix of 95 million.

and a 59 million favorable impact from pricing, largely at 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 e-aviation segment revenues were $6 million and 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. The largest 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've 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 post-retirement 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 within our industry.

On slides 15 and 16 in the investor presentation posted to our website, you will find prior year results reflecting the recast of segment profit.

Also effective with the first quarter of 2023 results, we will report earnings per share on an adjusted basis that excludes the LIFO inventory provision and intangible asset amortization.

both non-cash items.

Turning now to our 2023 outlook on slide 9, 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 a billion dollars.

Moving to segment outlook on slide 11 and 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 percent.

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 3-quarters to an 11 3-quarters percent.

At Industrial, we're expecting segment revenues of about $3.6 billion and margin to be in a range of about 5 to 6 percent.

At e-aviation, 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

profit of about $15 million.

Looking at slide 12, we're projecting 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%.

Turning to slide 13, 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 outlooks is soon to come.

an average share count of about 205 million shares in 2023.

That concludes our prepared remarks, so Greg, you can open the line for questions.

Okay, once again if you have a question please press 1 then 0.

Your first question comes from the line of Sheila from Jeffries, please go ahead

You've definitely had a busy quarter between Florida, so congratulations on that. And I think you threw in an Aerojet bid in for fun 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. Sorry please don't mention the queue at the light.

How do we think about the walk to the 12.5% margins in 2023?

Well, I think so. So first of all, the quarter we knew that we were going to have some headwind with supply chain and obviously we brought a lot of new people on board, which is a good thing but had a lot of impacts.

just getting all those folks on and training and those kinds of interruptions. So in the quarter, we did take a lot of those unusual impacts, right to expense in the quarter rather than putting it into inventory. So we did take a hit on that. LIFO was still in there, obviously, in that reported number. So. Just

Obviously, on a retest basis going forward, that won't be there. But so I think when we think about what happens as we go into 2023, obviously, you're going to not have the LIFO in there. And I think we're really going to see, again, we're guiding probably almost a half a billion dollars of LIFO

of higher revenue and that converts at good margins. So I think we're pretty bullish on our ability to drive higher margins as we go 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. So I think 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 we're going to continue that as we go forward.

And, you know, because we go beyond that, we'll just have to, you know, see where the market is. The good news is demand has remained strong. The fourth quarter demand remains strong. We had good bookings in a Q4. So, environment I think we feel pretty good about, but you know, in terms of what margins do.

on a go-forward basis, I think we 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.

Thanks, good morning.

Good morning, David.

Scott, could you just talk through the forecast at Bell? So up revenue, down margins, decent amount. You mentioned it includes FLRRA. So what exactly is your assumption for FLRRA? Does that assume you win it post the protest? Just if you get out there.

Yeah, sure David it does. So the protest period ends at the first week of April , so 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 will 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 flour 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.

Can you say specifically how much revenue is in there for Flour and how would we expect to ramp beyond 2023 in terms of revenue?

No, we're not going to break out the specifics of the individual programs. But I think clearly it will ramp.

as we go into 24, 25.

And obviously, I think probably for quite some time. I mean, I think this program will be a terrific boon for the business. It's going to start out, obviously, with a lot of the CMD, which, as we said, is great volume and good revenue, but not a whole lot of margin. And then obviously, we'll expect to see it.

continue to grow and turn into better margins as you get into production programs and farm military sales and all the things that we would expect will come along with a successful farm program.

Okay, and last one on the Arrow supply chain, can you just update us there? And you know your deliveries I think you know came in a fair amount lighter for the full year than we were originally anticipating at the beginning of the year. So how many additional deliveries could you have done this year if you didn't have you know supply chain bottlenecks?

Well, I don't know if we'll go into express 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. I think labor has certainly improved through the balance of the year, although a lot of us new folks and train.

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. So as we think about next year's guide for 23, there are still going to be supply chain challenges all along the way.

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.

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

Yeah, it's just 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

lower, a slightly lower V in deposit activity from commercial volume. So we're kind of framing it in terms of kind of one-to-one book-to-bill type expectation as it relates to deposit activity. And that kind of has a little bit of a headwind on cash relative to where we have been.

Okay, and then maybe one for Scott. There's been a lot of commentary rounded about in the business jet industry about some of the lead indicators starting to slow. Have you seen any impact of, 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 you know quite healthy you know I think when people look at some of these you know the leading indicators.

You know, it's hard to keep track of when you see a little bit of an increase in used available for sale.

you know, what kind of aircraft are those, what are their vintages? You know, we think, you know, obviously the market's been very strong, so people are looking to put some aircraft on the market. They're still very low level, so we're not seeing that, you know, the knock-on effect into into the market for new aircraft.

So we haven't seen a material change in the level of activities going out there in terms of order activity.

There's lots of people writing reports.

Frankly, hard to understand sometimes. There's so many comparisons of.

flying by region, by size of aircraft, compared to 19, compared to last quarter, compared to 22. But it's in the round, so we haven't seen any of that have a meaningful impact on order activity.

That's great. Thanks very much.

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

Thanks, good morning Scott Frank. Scott, just circling back on David's question regarding just the supply chain and maybe just tacking in inflation. So it sounds like you know I mean.

but it sounds like things are holding in there, or are they getting a little better? And then just also, could you maybe talk a little bit about how you're passing on any higher input costs right now?

Well, as I said 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 getting better, but we have other areas where suppliers are still struggling. I mean, I don't want to go into too much detail, but it's very specific components, very specific suppliers. I don't want to go into too much detail, but it's very specific components, very specific suppliers.

Obviously we're working with them and trying to get them healthy and do a better job in terms of getting parts into the factory. And obviously from our standpoint we do lots of out-of-sequence work and swapping parts around. We'd like to stop doing that. It's an efficiency hit to us. Our guys have to work through every day. Always.

I think it's about the same, right? As I said, there's some suppliers that are getting better, but then you got one that's just having a hard time catching up. I don't know that we're seeing a lot of new suppliers coming in and say, hey, I got a big problem. We have a couple that we've been struggling all year.

we're trying to get them back on schedule, they're working at it, but they're just not quite there yet. And again, we've factored that into how we think.

you know, 2023 will play out. In terms of the pricing side of things, Peter, you know, we continue to get price, you know, net of inflation, we're very focused on that. You know, as these input costs, you know, increase, we have to drive price to get that back. And I think you guys are doing a pretty good job of that.

And just as a quick follow-up on systems, I mean, just because you talked a little bit post the OMS bill and kind of looking funny, pretty robust as we go forward, how are you looking at, you know, we're showing modest growth for systems this year, but how do you think longer term?

Well, look, I think when we look at the PHYDEP numbers, they seem fine to us. When you look at what came through on the omnibus in terms of the...

this current fiscal year of budget, you know, was in line with our expectations. So I think, you know, I think we're fine. The growth, the good news at systems is it's really kind of across almost all the product lines. It's not just one particular thing. Obviously we've had some new wins, you know, in the munitions side, which is great. That's what that business is back to growth.

Sentinel program continues to do well, our ship to shore. As I said, we've made deliveries. We'll start negotiating the next production buy here shortly, but we'll finish the DD&C this year and start production deliveries.

The ATAC business has had nice growth, our electronics business has had nice growth. It really is kind of across all of the businesses within systems and the ominous budget that was appropriated is consistent with obviously what we're guiding to you guys.

our electronics business and our nice growth, it really is kind of across all of the businesses within systems and the budget that was appropriated is consistent with obviously what we're guiding to you guys. Appreciate it, thanks.

Thanks, Scott. Your next question comes from the line of Pete Skibitsky from Olympic Global. Please go ahead.

Hey, good morning, guys. Hey, Scott, you know, fair to say, I think some of your businesses have a cyclical component to them. And I'm just wondering, I'm sure you guys see, I think the consensus out there for the macro guys is that we'll have some sort of mild recession this year, maybe later this year. So as you guys see that and whether you agree with it or not, you know, is.

Absolutely look at that, Peter. I mean, as I said, there's cyclicality in almost every business, right? So some have more than others, those that we think are gonna be more recession sensitive. We've kind of factored in thinking we'll have a mild recession. I don't think it's gonna be dramatic. We're certainly not thinking about something of the scope of back in 2009.

and slow down in the aviation business.

I think we're in a very different place than we've been in those previous sessions because we have a pretty significant backlog. So, you know, I think that, you know, the nature of that will allow us to, you know, even if you were to see a slowdown in bookings, which is entirely possible, I would expect that if you really go into a modest recession, you know, you'll see a slowdown in booking, but you've got, you know...

almost two years of backlog sitting there that you'll continue to execute on, and I think that'll help you ride through it. We haven't had that for a bunch of years, Peter, as you know. 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, that's very just one last one for me Scott. Are you guys any closer to signing that age one deal with Nigeria?

Well, I mean, it's in the kind of government contracting process, right? So that ends up being, because of the FMS nature of that, that would be signed between ourselves and the US government. And as you know, Peter, that can take a little while.

Well, I mean, it's in the kind of government contracting process, right? So that ends up being, because of the FMS nature of that, that would be signed between ourselves and the US government. And as you know, Peter, that can take a little while. Okay. Fair enough. Thank you.

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

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

Well, at aviation, aftermarket is a percent of the sales was 27%. So you can kind of do the V.

based on that it was 11 percent.

And it was an aftermarket was 33% of total sales for the year at Aviation.

Okay, and Scott, you didn't specifically mention, but I assume you're looking at deliveries based on the revenue forecast for 23, somewhere 200, 205 deliveries. Is that fair? Yeah, it's going to be in that neighborhood, George. And so that, you know, we've had a lot of dialogue about when you back to 19.

even if I added back to 16 million that you mentioned for supply chain issues the margin was still weaker than the last couple of quarters so what else was going on going on there?

Well, I'm aware of the 16, the inefficiencies that we took through.

And LIFO, which was around probably about $10 million or something in impact, is largely what drove us to the margin raise that we reported.

Okay, very good. That's it for me. Thanks. Okay, thanks George.

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

Hi, good morning everyone.

Scott, you've alluded to it, but your backlog is several multiples of what it was just a few years ago, and the production is not. So 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?

Well, I mean, it does vary from model to model, right? When you look at the longitudes and latitudes, the larger aircraft in the family, and we think those should be out a couple years. And that's generally where they are when you get into some of the smaller.

aircraft, those tend to be a shorter cycle order deliveries, but again, those probably should be in that 12-day, 10-month kind of window. So when we think about production volumes and what we're laying into our forecast, which is then, that then drives what our sales team has in terms of available slots.

and timeframes, that's kind of how we're managing it.

That's kind of how we're managing it. Okay.

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

Is the gap increasing or stable?

I'm not sure, I mean we don't measure a gap. You mean price net of inflation?

I guess what I'm wondering is, I know you've been taking price as the market's been stronger. Was there a period of time as the market was strengthening where you were not taking as much price to allow the backlog to extend first?

before you now take more price. Is that the strategy or has it been pretty consistent for the last few years? It's been pretty consistent. I think the pricing, obviously demand is strong, right, which is very helpful for more pricing.

standpoint. But you know our opinion this market has been mispriced for a long time. You know I mean this is a business which as you guys know it's a...

a lot of R&D, it's expensive to develop these things and get them through certifications and.

and you need to have fair pricing to generate these kind of margins. We always believe this business had to be back as a double-digit profit margin business, and we've been driving price to make sure that that's the case.

Okay.

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

I don't think there would be one.

Okay.

Thank you.

Sure.

Your next question comes from the line of Ron Epstein from Bank of America. Please go ahead. Hey, good morning guys. Just a quick one, can you help me think through this LIFO adjustment you guys are making? I mean isn't it sort of unfair to not include inflation in your costs? Well...

So Ron, that's a good question. Look, just to make sure we understand the life of the... So 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. So LIFO accounting, which again I'm just a simple engineer Ron, but the LIFO provisioning phenomenon is that I've bought parts.

at one price and now I have a new contract with a supplier, I have a higher price of that part. As soon as that first part shows up...

The LIFO provision is basically taking the actual price I paid for those other parts and raising them up to the price of that new part. So it's an accounting provisioning process.

an actual cost.

When I get to where that higher dollar part gets consumed by an aircraft, that's going to be in my cost. That real inflation is in the segment, it is cash, and it is in performance.

It's only that provisioning of the nature of this last in, first out.

accounting that is what we're pulling out of the segment.

But it's I guess another way to frame the question though is 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.

Well, you'll have that full disclosure, right? You'll see that LIFO number. You'll see the total LIFO.

But Ron, no one else in our space is on LIFO, so we're on LIFO for accounting. You need to conform that between tax and accounting. So we derive a benefit from a tax standpoint in an inflationary environment by essentially accelerating those costs.

for book and tax purposes, but as Scott said, it's not a true economic cost.

And we have basically hung up about $600 million of effectively LIFO provision on our balance sheet that was profit never realized because of this accounting that is not consistent.

with everyone else in the space.

So as inflation has accelerated here and LIFO has become a bigger number, we felt it was important to highlight that and certainly from a segment performance, take it out of the segment performance because it is not a true economic cost to the business. It is essentially a function of the accounting.

Textron has always been on LIFO. So in a noninflationary environment, it's a relatively small, it's always been a bit of a drive. It's a small number. It's not been an issue, but with an inflationary environment, all of a sudden you have these big non-economic bookings. And again, as Frank said, other companies, all, everybody else in our space does LIFO accounting instead of LIFO accounting. So.

We get a lot of questions from investors about what are these differences. I think taking this out makes sense. The reality is we don't manage the business that way. When we sit down with the business, when we're doing our plans, we're managing, we do our operating calls, it's not something they control. It's not economic.

That's not how we manage the businesses. We don't look at that. So it makes sense. So also not.

you know, report that in that segment since that's not how we manage these guys either. They don't have, they don't control that LIFO. They do control and they do get held accountable for actual real inflation on that, on those higher part counts, right? So that's, we're not taking anything operational out of the segment, but managing it.

on what they control and the real financial impact.

the real financial impact.

ever.

Your next question comes from the line of Kaivan Rumor from Cohen. Please go ahead.

Yes, thanks so much for taking the question. So as Sheila mentioned, you know, allegedly you guys went after AJRD, you did buy Pipistrel, you've won Flara. So it looks like, you know, your business is becoming more A&B.

If we kind of look at valuations across You know the space it looks like valuations tend to be higher for pure plays either you're doing aerospace Are you doing air conditioning whatever? So as you think of your business Scott, are you thinking of any strategic initiatives at one point?

I think you considered spinning off Caltechs. How are you thinking about that now? Well, I don't think we're going to talk about portfolio shaping or changes as part of the earnings call. It's something we're always looking at.

considered spinning off Caltechs. How are you thinking about that now? Well, I don't think we're going to talk about portfolio shaping or changes as part of the earnings call. It's something we're always looking at, and I think we'll leave it at that.

Okay, great. And can you give us any help on the...

I don't know, but you know.

what Lockheed's what the case Lockheed is making as to You know why they're protesting because certainly on paper It looks like your vehicle is very substantially better than theirs

Well, look, I mean, obviously the, you know, the process is going on between, you know, the army and Lockheed, so we probably can't comment too much. I guess I would just say that this...

as you all know, this process has been going on for a decade, right? There's been...

an enormous amount of work between both suppliers and the Army from design, development, test, prototype, flight, you know, it's been an unbelievably robust process and so...

I don't.

It's hard for me to understand what flaw would have been in the process.

kind of inconceivable to me, but we'll leave that to the Army and Lockheed. Needless to say, we're...

We think they made the right choice. I'm proud of what our team did and we're...

excited to get this thing behind us and get on with the program as I'm sure the Army is.

Terrific. And the last one is cash deployment. I mean, you've got good cash flow, even though down year over year, you've got a good balance sheet. You're basically heavily focused on share repurchase. I mean, really a lot of leverage there.

But you know, you also bought Pipistrel as you think about where the cash is going. Maybe give us some thoughts about, you know, M&A versus share repurchase, dividends, all of that.

Well, look, I mean, we always look at opportunities that are out there, Kai, and I would say relative to your earlier...

Question, comment, you know, yes, we would view our focus in the world to be within the A&D space in terms of most of our capital deployment. FIPA Strolls turned out to be a great little business, brought some great technology into the company and is now kind of important to us in terms of the future of sustainable flight.

But, you know, if opportunities like that come along, then that's great. We've done some other smaller deals, again, in the A&D space, and we would continue to look at that. But our principal deployment of our capital has been, you know, for the last number of years in the share buyback. We've been doing kind of 5, 6 percent. You know, we did another 5, 6 percent this past year, and I would expect that's probably 3 percent.

environment for aviation. Can you give us an update in terms of the customer profile that you're seeing that are placing these aircraft orders? Are they corporates, individuals, fractionals? Are they gearing more for growth, replacement, or are they new buyers? Any additional contact would be helpful in understanding the design environment.

Sure, we haven't seen much of a change. You know, it continues to be that same mix. There's still new buyers coming into the marketplace. Fractional is certainly strong. There's a lot of buyers.

On the fractional side, it's a particularly attractive place, I think, for new people to go, right? It's, you know, it's not

easy to necessarily know how to own this asset. The fractionals provide a great option for people that want to get in. That's doing well, but we still see robust whole aircraft sales. It's a mix of public companies, private companies, family-held companies.

It really is kind of our usual customer base, I would say. It remains also kind of the same as we've seen around jets largely being driven by the North American market, you know, probably 70, 30 to 80, 20 in that range, which is normal.

Turbo props are more robust internationally. Again, we see stronger activity, again, like 60% plus international versus domestic on king ears, for instance. So the trend in terms of that, who is that customer?

is kind of our traditional buyers. Susan Nussbaum Great, thanks for the color. And maybe following up on the supply chain issues that you mentioned, for some of these suppliers that continue to struggle for a few years now.

What's the long-term solution? What can you do to mitigate their problems so you can actually deliver on this strong demand for bizjets? Are there other solutions like you need to vertically integrate your supply chain or anything like that to alleviate some of the pressure? What other actions can you take?

Yeah, that's a good question. Look, it's a mix, right? I mean, in some cases, we have some smaller suppliers and technologies where they basically kind of were us. And we did acquire them and integrated them as part of our business. We have a good track record of doing that in the past around some critical areas, interiors we did. That's been a home run for us.

We just did a deal this past year in the actuation space, again, a very unique aerospace technology. Most of the volume was ours. It's a critical supplier and a critical technology for us in the future. These aren't big numbers, but it was a great acquisition, and so far it's working out really, really well for us. It helped to get us back on track.

But there's always going to be some guys out there that are suppliers where it's...

You know we're a small percentage of their sales. It's very capital intensive. It's a technology that you know doesn't make sense for us to vertically integrate that and so in those cases we just you know keep working those folks. I think those suppliers are all trying to...

to get back up to speed. Obviously, it's a good business for them. So there's, you know, I'd say, you know, we don't have suppliers that I'm aware of that are...

are obstinate or don't want to perform, you know, it's a matter of them getting their resources back in place and some tier suppliers getting in place. And those are folks that just take a fair bit of work. But I think they will get there. Again, we've seen some of them have already recovered. But there's still a couple of problem children out there that are working on getting there.

Great, thanks Scott. Your next question comes from the line of Seth Seifman from JP Morgan. Please go ahead.

Thanks very much and good morning. I'll just stick to one here. Kind of a follow-up on the last question Christina asked. I think from a mixed perspective, while the deliveries in total are still down from 2019, I think the deliveries to NetJets… Are still Geo Championship

are probably higher. And so as you think about delivery growth from here, do you think about the incremental growth coming more with that top customer, or more kind of diversifying the mix a little bit more? And then I'd also imagine that the…

the order for 200 latitudes that Natchez has probably come into a conclusion pretty soon, and whether you think about, how you think about expectations for the next log of latitudes from them. Well, so first of all, I don't know when I'll present a sales back to 2019, what it was on fractional versus today, but.

Look, I think fractional, when you talk about diversification.

The sale of a fractional aircraft is a more diversified sale frankly than a single jet. Remember that this is not a concentration of...

you know, a buyer in NetJets. Remember, NetJets is out there selling that aircraft to eight or so people, right? So every sale that we make...

The NetJet is a sale from NetJet to a whole bunch of different customers, so it's quite diversified.

So, you know, I don't expect net jets or any fractional for that matter to track wildly different than the overall market demand, right? If the market is strong and people are willing to fly private, you're going to see this mix of people that choose, you know, to do it through a fractional, which is actually a lot more people because, again, they're buying a fraction of an aircraft, not a whole aircraft. So when I look at our mix... We'll start again in the Ayll

I think of the mix associated with the Net Ship business as being a very good mix. That's a very diversified sale. It's a very diversified market. And that's what they do every day. They're out working and talking to lots and lots of customers in a broad range of...

customer base for selling that fraction of an aircraft. And obviously, as you guys know, one of the things we do now is we work very closely with NetJets and looking at roughly about a year that these things come into backlog based on how their sales team's doing out there selling these aircraft. Soley

It's a great part of our backlog and it's a great part of our business. It is, as you guys know, tends to be at a lower margin because it's kind of a wholesale sale, but they're the ones that are out there spending the money on sales forces and reaching out and selling to that large customer population.

NetJets remains, as do other fractionals, a really important part of the business. It's a really, really important part of our customer base, these fractional owners.

As far as the dealing with netchats, we are in constant discussions in terms of forecasting unit volumes. As you get to where you get towards the end of a particular quantity buy, obviously we'll work with netchats to work on what comes next.

Now that's kind of a business arrangement between the two of us obviously, but the actual forecast and backlog that's reflected in our numbers is really kind of a rolling one-year process regardless of what the size of the overall arrangement is between ourselves and that shuts on latitude and longitude volumes.

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

Sure.

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

Good morning. Thank you.

I wanted to go back to the discussion around the size of the backlog as it

It clearly has grown quite a bit over the years. And when you look at backlog as it slowed sequentially in this quarter, how do you compare the, how do you contrast the demand you're seeing for...

new aviation sales.

to basically the wait time that's there. In other words, there's a point where you just flat out.

are going to lose customers if they have to wait too long. So do you see a constraint on the growth from that at this point?

Well, you know, we really haven't seen that. You know, I mean, I think the whole industry is in a similar situation, right? If we were in a situation where you couldn't get an aircraft for 18 months to two years and somebody else had an aircraft they can get tomorrow.

then yeah, you could lose that customer. And I think, obviously, somebody could go buy a reused aircraft or...

something of that nature, but I think right now the whole industry is in this situation and frankly it's where this industry should be, right? I mean these are you know complicated assets. There are a lot of times customers already have aircraft. They need to sell their used aircraft. So, you know, look, I think the remember the this industry actually worked like this way for a very very very long time.

The aberration has been since 2008 to the last two years ago where you didn't have much of a backlog in this class. Generally speaking, you know this industry has been you know a backlog business. It should be a backlog business by the time you specify your craft.

and configure aircraft and customize the aircraft, this really where we're sitting today is what normal should look like, not what we've seen in the past.

10, 12 years.

Now, when you get to this situation, though, which is clearly a good situation,

The solution always is to add capacity and we've seen that happen in past cycles as well. When you look out today, what things would you want to see to make material increases in your production capacity?

Look, I don't think it's our production capacity so much. I mean, obviously, we're struggling through some of these supplier issues and you don't hear tactically. But remember, as we talk about the delivery times, what our team is out there selling is we look at that backlog, they're selling aircraft and serial numbers that are to be delivered at certain dates.

Right, so that's how you manage this backlog and then you've got to make sure that you dial in your production schedule to match what those committed delivery dates are.

So if you start to see a softening in the order rate, then you're gonna sell out fewer of those slots in the future and then you would adjust.

your production. If you all of a sudden say, hey, 2025 it looks like.

you know, you could have five more latitudes or, you know, 10 more M2s, then you do that and you modulate your production capacity accordingly. But I think as long as you're out there looking at these sort of 12, 18 month, two year kind of timelines, it gives you the ability to do that. And again, that's how this industry.

has always worked. Well, and just one last thing 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?

Well, and just one last thing. 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.

I could tell you a couple of part numbers that are our biggest challenges. We're not going to do that. I'm not going to throw particular suppliers under the bus, but yeah, there's a couple of particular products, a couple of particular technologies from a couple of particular...

suppliers that are our biggest constraint. I mean there's always a bunch of little stuff going on but...

for sure. If you get a couple of these guys back in line, that would be very helpful. Again, that doesn't mean we turn that into all of a sudden delivering a lot more aircraft, because again, we've committed dates.

to our customers. It's a lot more for us right now about getting rid of all the inefficiencies in our production runs where we're having to build aircraft and swap parts around and do things out of sequence. It's very, very...

harmful to running a good smooth production operation when you've got to go chase all the stuff around.

Okay, great. Thank you.

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