Textron Q3 2021 Earnings Report

Textron EPS Results

• Actual EPS: $0.85
• Consensus EPS: $0.78
• Beat/Miss: Beat by +$0.07
• One Year Ago EPS: $0.53

Textron Revenue Results

• Actual Revenue: $2.99 billion
• Expected Revenue: $3.17 billion
• Beat/Miss: Missed by -$179.61 million
• YoY Revenue Growth: +9.30%

Textron Announcement Details

• Quarter: Q3 2021
• Date: 10/28/2021
• Time: Before Market Opens
• Conference Call Date: Wednesday, October 27, 2021
• Conference Call Time: 8:00PM ET

Textron (NYSE:TXT) (NYSE: TXT) is a diversified industrial company that develops and manufactures aircraft, defense systems, specialized vehicles, and industrial products. Its portfolio includes businesses serving the aviation, defense, aerospace, and commercial sectors, with operations and customers in the United States and international markets.

Textron Aviation produces business jets, turboprop aircraft, and general aviation aircraft under brands including Beechcraft, Cessna, and Hawker. Bell designs and manufactures military and commercial helicopters, tiltrotor aircraft, and related support services. Textron Systems provides unmanned aircraft, advanced marine craft, simulation and training systems, electronic systems, and other defense technologies.

Through its Industrial segment, Textron manufactures products such as specialized vehicles, fuel systems, and other equipment for commercial and industrial customers. The company’s brands in this area include E-Z-GO, Jacobsen, Arctic Cat, and Textron Fleet Management. Textron also provides financing and related support for certain aviation products through Textron Financial.

Textron traces its origins to 1923, when Royal Little founded a textile business that later adopted the Textron name as it diversified into multiple industries. Scott C. Donnelly has served as Textron’s chairman and chief executive officer since 2009. The company is headquartered in Providence, Rhode Island.

Textron Q3 2021 Earnings Call Transcript

Key Takeaways

• Third-quarter revenue rose to $3B from $2.7B year-ago, delivering income from continuing operations of $0.82 per share (adjusted $0.85 vs. $0.53 in Q3 2020).
• Textron Aviation saw a solid recovery, delivering 49 jets (vs. 25) and 35 turboprops (vs. 21), growing backlog by $721M to $3.5B and launching upgrades like the Citation M2 Gen 2 and Beechcraft King Air updates.
• Bell Aerospace posted a 3% revenue decline on lower military volumes, delivered 33 helicopters, advanced its FLRA proposal (award expected Q2 2022) and progressed the 360 Invictus prototype to 60% completion.
• Textron Systems achieved 15.1% operating margins (up 190 bps), expanded its ATAC adversary fleet to 19 aircraft and booked $25M of new Aerosystems orders on strong defense aftermarket demand.
• Industrial revenues fell $102M amid auto OEM supply-chain disruptions at Kautex, while Specialized Vehicles offset shortages with higher pricing; manufacturing cash flow was $271M in Q3 ($851M YTD), prompting a raise in full-year adjusted EPS guidance to $3.20–3.30 and cash-flow outlook to $1.0–1.1B.

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by for Textron third quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If you wish to ask a question, please press one then zero on your telephone keypad. You may withdraw your question at any time by repeating the one then zero command.

[Operator]

Once again, if you have a question, please press one and then zero. As a reminder, today's conference is being recorded. If you should require assistance during the call, please press star then zero. I would now like to turn the conference over to your host, Mr. Eric Salander, Vice President of Investor Relations. Please go ahead.

[Eric Salander, VP of Investor Relations at Textron]

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.

[Eric Salander, VP of Investor Relations at Textron]

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 billion, up from $2.7 billion in last year's third quarter.

[Eric Salander, VP of Investor Relations at Textron]

During this year's third quarter, we reported income from continuing operations of $0.82 per share. Adjusted income from continuing operations, a non-GAAP measure, was $0.85 per share for the third quarter of 2021 compared to $0.53 per share in the third quarter of 2020.

[Eric Salander, VP of Investor Relations at Textron]

Segment profit in the quarter was $279 million, up $90 million from the third quarter of 2020. Manufacturing cash flow before pension contributions totaled $271 million in the quarter and $851 million year to date. With that, I'll turn the call over to Scott.

[Scott Donnelly, Chairman and CEO at Textron]

Thanks, Eric, and good morning, everyone. We continued to execute well across the company in the quarter. At Aviation, we continued to see a solid recovery in the general aviation market with strong commercial demand, increased deliveries in Citation jets and commercial turboprops, and higher aftermarket volume.

[Scott Donnelly, Chairman and CEO at Textron]

We delivered 49 jets, up from 25 last year, and 35 commercial turboprops, up from 21 in last year's third quarter. Order activity in the quarter remained very strong, resulting in backlog growth of $721 million, bringing us to $3.5 billion at the quarter end.

[Scott Donnelly, Chairman and CEO at Textron]

Also in the third quarter, the Beechcraft King Air 360 and 260 achieved EASA certification and began to deliver to customers throughout the region. Continuing with our product strategy of upgrading existing models, at NBAA we recently announced the Citation M2 Gen 2 and the XLS Gen 2 product upgrades.

[Scott Donnelly, Chairman and CEO at Textron]

Also on the new product front, Cessna SkyCourier is continuing to progress through certification with over 1,600 hours of flight test activity, and the Beechcraft Denali successfully completed its initial ground engine runs powered by GE's new Catalyst engine. At Bell, revenues were down 3% in the quarter, largely on lower military revenues. On the commercial side of Bell, we delivered 33 helicopters, down from 41 in last year's third quarter.

[Scott Donnelly, Chairman and CEO at Textron]

Moving to future vertical lift, in September, Bell submitted its proposal for the FLRAA program. A down-selected award is expected in the second quarter of 2022. On FARA, Bell's about 60% of the way through its build of the 360 Invictus prototype and remains on schedule. Also in the quarter, Bell inducted the first U.S. Air Force CV-22 for its nacelle improvement modifications.

[Scott Donnelly, Chairman and CEO at Textron]

Moving to Systems, we saw another strong quarter of execution with operating margins at 15.1%, up 190 basis points from last year's third quarter. ATAC continued to expand its fleet of certified F1 aircraft, with two additional aircraft entering service in the quarter, bringing the total fleet to 19 aircraft at the end of the quarter.

[Scott Donnelly, Chairman and CEO at Textron]

The fleet continued to support higher customer demand for adversary air services, driving higher revenues in the quarter. At Air Systems, the team booked $25 million in new orders in the quarter, including both fee-for-service activities as well as new hardware. Moving to Industrial, overall revenues were lower in the quarter as we continue to experience manufacturing disruptions related to supply chain challenges.

[Scott Donnelly, Chairman and CEO at Textron]

At Kautex, we again saw order disruptions related to the global auto OEM supply chain shortages, which have directly impacted production scheduling and resulting in intermittent line shutdowns and manufacturing inefficiencies. At Specialized Vehicles, we saw continued strong demand in our end markets with higher pricing, which offset production disruptions from part shortages.

[Scott Donnelly, Chairman and CEO at Textron]

To wrap up, Textron delivered a solid quarter with increased aviation backlog, improved manufacturing margins, and continued strong cash generation while working to minimize the impact of supply chain disruptions. With that, I'll turn the call over to Frank.

[Frank Connor, EVP and CFO at Textron]

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.2 billion were up $386 million from a year ago, largely due to higher Citation jet volume of $290 million, aftermarket volume of $62 million, and commercial turboprop volume of $48 million.

[Eric Salander, VP of Investor Relations at Textron]

Segment profit was $90 million in the third quarter, up $127 million from a year ago, largely due to the higher volume and mix of $96 million and favorable pricing net of inflation of $22 million. Backlog in the segment ended the quarter at $3.5 billion. Moving to Bell, revenues were $769 million, down $24 million from last year, largely reflecting lower military revenues.

[Eric Salander, VP of Investor Relations at Textron]

Segment profit of $105 million was down $14 million, primarily due to lower military revenues. Backlog in the segment ended the quarter at $4.1 billion. At Textron Systems, revenues were $299 million, down $3 million from last year's third quarter due to lower volume of $39 million at Air Systems, which primarily reflected the impact from the U.S.

[Eric Salander, VP of Investor Relations at Textron]

Army's withdrawal from Afghanistan on its fee-for-service contracts, partially offset by higher volume, primarily at ATAC and Electronic Systems. Segment profit of $45 million was up $5 million due to a favorable impact from performance and other. Backlog in the segment ended the quarter at $2.2 billion.

[Frank Connor, EVP and CFO at Textron]

Industrial revenues were $730 million, down $102 million from last year, reflecting lower volume and mix of $156 million, primarily at Fuel Systems and Functional Components, reflecting order disruptions related to the global auto OEM supply shortages, partially offset by favorable impact of $44 million from pricing, largely at Specialized Vehicles.

[Frank Connor, EVP and CFO at Textron]

Segment profit of $23 million was down $35 million from the third quarter of 2020, primarily due to the lower volume and mix described above, partially offset by higher pricing, net of inflation at Specialized Vehicles. Finance segment revenues were $11 million, and profit was $8 million. Moving below segment profit, corporate expenses were $23 million, and interest expense was $28 million.

[Frank Connor, EVP and CFO at Textron]

With respect to our 2020 restructuring plan, we recorded pre-tax charges of $10 million on the special charges line. Our manufacturing cash flow before pension contributions was $271 million in the quarter and $851 million year-to-date as compared to $129 million for the corresponding nine-month period in 2020.

[Frank Connor, EVP and CFO at Textron]

Year-to-date, our cash generation reflects improved working capital management, which includes more linearity in quarterly aircraft deliveries and higher customer deposits at aviation from an increased backlog. In the quarter, we repurchased approximately 4.2 million shares, returning $299 million in cash to shareholders. We're raising our expected full year guidance for adjusted EPS to a range of $3.20-$3.30 per share.

[Frank Connor, EVP and CFO at Textron]

This includes revised tax guidance, an effective rate of 15.5% for the full year. We're also raising our outlook for manufacturing cash flow before pension contributions to a range of $1 billion-$1.1 billion, up $200 million from our prior outlook, with planned pension contributions of $50 million. That concludes our prepared remarks, so we can open the line for questions.

[Operator]

Our first question goes to the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

[Sheila Kahyaoglu, Managing Director at Jefferies]

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

[Scott Donnelly, Chairman and CEO at Textron]

Sure. I think the backlog is fairly broad in terms of the makeup of those customers. It still remains, you know, more U.S.-centric. I think when we look at order activity, you know, in the quarter on the jet side, it's probably, you know, roughly 70% or so domestic versus 30%, you know, international. I think, you know, we'll continue to see the shift.

[Scott Donnelly, Chairman and CEO at Textron]

You know, it's a little bit more international as Europe is starting to pick up and South America is starting to pick up, but it is still more North America-centric. It's probably closer to 50/50 on the turboprops. That's usually been a market where it's the turboprops, King Airs and such, Caravans are usually end up being more international.

[Scott Donnelly, Chairman and CEO at Textron]

I again think it will continue to shift that way, but right now it's closer to 50/50. Like, obviously there's a mix of, you know, the next year or so of deliveries of what we have coming up with NetJets, but we have very strong retail, individual customers in there.

[Scott Donnelly, Chairman and CEO at Textron]

If I looked at the number of, you know, new customers, you know, folks that are coming in buying a jet who've not owned a jet before, that number probably is somewhere around the 20% or so, you know, kind of a range. You know, which is encouraging. We do see a lot of people, you know, as you know, buying a, you know, buying a jet when you've not had an aircraft before is, you know, a little bit of a daunting task.

[Scott Donnelly, Chairman and CEO at Textron]

One of the things we do in our business is we have a whole dedicated team that helps someone who's not owned an aircraft like that before, but wants to do that. You know, we help them with the complex issues of pilots and hangars and insurance and all the things that you have to look at to do that, to successfully place that aircraft with a brand new customer. For sure, we're seeing a lot more interest and demand from those first time buyers than we would historically see.

[Operator]

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

[David Strauss, Managing Director at Barclays]

Thanks. Good morning.

[Scott Donnelly, Chairman and CEO at Textron]

Sure.

[David Strauss, Managing Director at Barclays]

Scott, with the backlog at aviation now and your deliveries year to date, I wanted to see if you could offer an update on how you're thinking about the production plan. I think you had said recovering half of the 2020 drop. It looks like you're tracking well ahead of that. Your thoughts about going above 2019 levels just, you know, given how extended your backlog's becoming. Thanks.

[Scott Donnelly, Chairman and CEO at Textron]

Sure. Well, look, David, I mean, I think as we've been giving color all year long, our expectation was that we would, you know, get kind of halfway there this year and get back to the 2019 levels in 2022. I think that's still good color to have on it. Obviously, we won't guide, you know, until we get into the January timeframe.

[Scott Donnelly, Chairman and CEO at Textron]

But, you know, for sure, the order activity, you know, which has been, you know, getting stronger as, you know, as we've worked our way through the year and remained strong, you know, supports that number. You know, we'll be looking hard at that backlog and that order rate as we finalize our production ramps in aviation.

[Scott Donnelly, Chairman and CEO at Textron]

I mean, clearly right now we are in the process of ramping up production with the goal is, as we stated, to get up to that 2019 level. You know, there's probably room for a little bit beyond that, but we'll give you the final guidance when we get into January.

[Operator]

We do have a question from the line of Robert Stallard with Vertical Research. Please go ahead.

[Robert Stallard, Partner at Vertical Research Partners]

Thanks so much. Good morning.

[Scott Donnelly, Chairman and CEO at Textron]

Thanks, Robert.

[Robert Stallard, Partner at Vertical Research Partners]

Scott, on the aviation side, maybe following up from Sheila's question, have you seen any differences in the order intake between the various aircraft models you have? Also, on the aircraft, you know, what's the sort of lead time looking at? Are you getting to the point where some of these planes, you know, you have to wait more than 12 months to get them?

[Scott Donnelly, Chairman and CEO at Textron]

The strength is really across the whole segment, Robert. I mean, every model is, I would say, doing very well right now. Order activity and interest in all of them is quite strong. Part of that is, you know, we've been, you know, putting updates and upgrades. I mean, as I said at NBAA, we put the M2, you know, Gen2 version of that, the Gen2 version of the XLS, which you know, has been a fabulous aircraft for us for a long time, and it's a really nice update that I think is sparking even greater new interest in that aircraft as well. It's really across the board.

[Scott Donnelly, Chairman and CEO at Textron]

Look, we're not gonna get into details on the model by model on the backlog, but as we've said before, I think this business, this industry, frankly, operates better if it's sort of looking at a nine-12 month backlog. That gives you it gives a customer who has an aircraft time to sell the aircraft. It gives them time to specify the interiors and colors and paints.

[Scott Donnelly, Chairman and CEO at Textron]

Obviously, it makes it much easier for us in terms of our production forecasting and then smoother production line flow. As you know, that historically, that's how that this industry works. This last decade has been unusual where you're actually having to try to build to a forecast instead.

[Scott Donnelly, Chairman and CEO at Textron]

I do think, you know, one of the things that we certainly keep in mind as we look at production rates is that, you know, we want this business, you know, to be out there as sort of a nine-12 month, you know, kind of a backlog business.

[Scott Donnelly, Chairman and CEO at Textron]

It's a much healthier way to run the business. I think it's better for the customers, again, for their planning perspective and marketing of a used aircraft if they already have an aircraft, which is the majority of our customers. I think that that's a healthy place for the business to be, and that's kind of where I feel like we are right now.

[Operator]

We do have a question from the line of Ronald Epstein with Bank of America. Please go ahead.

[Ronald Epstein, Managing Director at Bank of America]

Yeah. Good morning. Good morning, guys.

[Scott Donnelly, Chairman and CEO at Textron]

Good morning.

[Ronald Epstein, Managing Director at Bank of America]

Scott, what are you seeing on the pricing front? Meaning, I mean, there's demand, right? That's clear. Are your competitors behaving themselves? I mean, how is the broader pricing environment right now?

[Scott Donnelly, Chairman and CEO at Textron]

Well, look, it's always a competitive market, Ron, but for sure, I think we're seeing a positive pricing environment as you would expect, right? You have, you know, very strong demand. You know, all of the dynamics that we look at in terms of the macro level of the market are extremely favorable, right?

[Scott Donnelly, Chairman and CEO at Textron]

You've got used aircraft available for sale at record low numbers, particularly if you look at something that's sort of less than a 10-year-old aircraft. As you know, that was an issue in this business for a long time, and that's down to kind of below 1% of the fleet, and we're seeing the used aircraft valuations going up, right? The dynamic overall in pricing is much better than it's been for a very long time.

[Scott Donnelly, Chairman and CEO at Textron]

Flight activity is obviously very strong. You know, we see the demand from everything from charter to memberships, to fractionals, to whole aircraft. I think, you know, you have a very, very strong demand environment, and you would expect to see better pricing in that environment.

[Operator]

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

[George Shapiro, Managing Partner at Shapiro Research]

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

[Scott Donnelly, Chairman and CEO at Textron]

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

[Operator]

We do have a question from the line of Noah Poponak with Goldman Sachs. Please go ahead.

[Noah Poponak, Managing Director at Goldman Sachs]

Hi, good morning, everybody.

[Scott Donnelly, Chairman and CEO at Textron]

Morning.

[Noah Poponak, Managing Director at Goldman Sachs]

Scott, I guess, you know, in aviation, what is the absolute dollar backlog level or backlog to production ratio, you know, that you feel you want to maintain sustainably in the business? Where do you wanna keep that?

[Scott Donnelly, Chairman and CEO at Textron]

Well, Noah, as I said, I think that the place we'd like to see this is kind of out in that nine-12 months. I think if you get, you know, beyond 12. You get too much beyond 12 months, you know what I mean? Customers are interested in new aircraft, right?

[Scott Donnelly, Chairman and CEO at Textron]

I mean, I think there's a limit to how far out someone's willing to say, "Okay, I'm gonna wait, you know, for a year." It's probably on the shorter side, on maybe a smaller aircraft where there's not as much customization. It's a little quicker turn. I think on the larger aircraft, you know, you see it move out into that in more of that 12 months or so.

[Scott Donnelly, Chairman and CEO at Textron]

you know, there's not an absolute dollar number we look at, but we do look at demand model by model and, you know, where we think that backlog, that cycle time is reasonable in terms of where, how it fits with our production planning, how it fits with our customers' expectations.

[Scott Donnelly, Chairman and CEO at Textron]

I said, I think that sits, you know, ideally somewhere in that nine-12 months with, you know, again, some variability on the models, largely, you know, a smaller aircraft probably being on the shorter side of that, and things like a Longitude being in that more that 12 months or so kind of timeline.

[Operator]

We do have a question from the line of Seth Seifman with JPMorgan. Please go ahead.

[Tyler Jayroe, Managing Director at JPMorgan]

Hey, good morning. It's Tyler in for Seth.

[Scott Donnelly, Chairman and CEO at Textron]

Morning.

[Tyler Jayroe, Managing Director at JPMorgan]

Just on FLRAA, can you just provide an update, just maybe where things stand today, what Textron is doing in the meantime, and when we could expect a decision?

[Scott Donnelly, Chairman and CEO at Textron]

Sure. The SORA program, the proposal went in back at the beginning of September, which was consistent with the, you know, the Army schedules. You know, what their, you know, the analysis that they expect to have a, you know, an announcement, a decision, and contract for that by the second quarter of next year.

[Scott Donnelly, Chairman and CEO at Textron]

By the end of next June is kind of our expectations. You know, remember that the FLRAA program, you know, I feel is a little unique in that, you know, we've obviously put an enormous amount of work into getting the proposal submitted. But in parallel with that, you know, we are under contract on an OTA. We are continuing, you know, the design development activity towards PDR.

[Scott Donnelly, Chairman and CEO at Textron]

That, of course, work is going on in parallel with the Army doing their proposal evaluation. You know, the team obviously, you know, kind of worked a lot on the proposal and now they're all back hard at work at, you know, working towards our next milestone for the program, which will then dovetail into, you know, hopefully, a program of record.

[Operator]

We do have a question from the line of Cai von Rumohr with Cowen. Please go ahead.

[Cai von Rumohr, Managing Director at Cowen]

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

[Scott Donnelly, Chairman and CEO at Textron]

Well, you know, Kai, we're not—I mean, look, there's always a pop-up problem even in the best of times, right? With managing a supply chain. I would say we're not seeing big issues right now in our supply chain associated with the A&D businesses. You know, my view is, you know, most of these suppliers also do defense work, you know, much like our company.

[Scott Donnelly, Chairman and CEO at Textron]

So most of them didn't go through an entirely hard shutdown as you saw a lot of the commercial world doing. Also, as you know, a lot of these suppliers also, you know, have a lot of business that goes into the commercial aviation space with the Airbus and the Boeing of the world. And those guys are not back anywhere near the demand that they used to have.

[Scott Donnelly, Chairman and CEO at Textron]

There's capacity available, you know, in these supply chains. You know, as we work our way through this thing, you know, most of our critical suppliers in the A&D space are able to meet our demand. I'm not suggesting there's never an issue or a problem, but you know, those things pop up here and there.

[Scott Donnelly, Chairman and CEO at Textron]

It's also a longer cycle supply chain, so if you do have a problem or a challenge, you've got more time to work on it and go manage it and look for alternatives and work with the supplier around that. Whereas, you know, in the industrial and commercial world, you know, you tend to find out about a problem that's gonna hurt you on Tuesday, the previous Friday.

[Scott Donnelly, Chairman and CEO at Textron]

You know, we don't see as much of that in the A&D side. I don't think, you know, when we look at this, that we feel like we're gonna be supplier constrained at this stage of the game. It's more around managing and making sure that we're doing the right thing here in terms of, you know, production rates versus, you know, long-term demand. And again, managing, you know, to a backlog that works for us and works for our customers.

[Operator]

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

[Peter Arment, Senior Research Analyst at Baird]

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

[Scott Donnelly, Chairman and CEO at Textron]

Well, look, Peter, obviously, volume is a huge contributor to that. We've talked about that for a very long time, and I think we'll see, you know, as you remember, we were getting close to that level, you know, pre-pandemic. I think as our volumes are recovering, you know, back on track to where we were, you know, in 2019 and move beyond that. We clearly have been working to drive to hit double-digit margins, and I think we're on track to be doing that. We'll obviously give you more specifics in January, but I feel pretty good about our path to get there.

[Operator]

We do have a question for the line of Pete Skibitski with Alembic Global. Please go ahead.

[Pete Skibitski, Director at Alembic Global Advisors]

Hey, good morning, guys. Nice quarter. Maybe to piggyback off Cai's question a little bit. Scott, can you talk about kind of how you manage, you know, kind of the two businesses at Industrial in this environment? Do you have much visibility at Kautex?

[Pete Skibitski, Director at Alembic Global Advisors]

You know, would you guide us in any way, Kautex, over the next couple of quarters? That is kind of, you know, it seems like the market is very strong in specialized vehicles, but there's, as you mentioned, some supply chain issues there as well. I'm just wondering if you could give us more color on how to think about that segment over the next couple of quarters.

[Scott Donnelly, Chairman and CEO at Textron]

Sure. Look, obviously, Pete, they're a bit different, right? In the case of Kautex, we're a tier one guy. We're sort of following the OEM path, right? We don't independently set that. It's you know, one of the challenges, frankly, this year is, you know, there's been a lot of disruption that the OEMs have felt in changing model types and volumes through the course of the year as a result of other supply chain issues.

[Scott Donnelly, Chairman and CEO at Textron]

Fortunately, you know, the Kautex guys have done a nice job in not being the problem, right? I mean, we've been able to fulfill whatever demand is placed on us, and certainly, we don't wanna be the reason they can't run a line. I think our guys have done a really nice job of that.

[Scott Donnelly, Chairman and CEO at Textron]

You know, we look really at the IHS data, Pete, in terms of how it, you know, how we forecast. I mean, we obviously have to go down model by model. You know, I think, you know, when you listen to what the OEMs are saying, you know, they're starting to indicate that, you know, a lot of their other issues in their supply chain, which semiconductor is the one that's obviously talked about the most, you know, that's gonna start to abate.

[Scott Donnelly, Chairman and CEO at Textron]

I think if you look at IHS data right now, they're talking about probably a, you know, a 10%-11% increase in global auto volumes as you go from 2021 to 2022. That's how we think about our business, right? We look at that IHS data.

[Scott Donnelly, Chairman and CEO at Textron]

We don't really have an independent view, I suppose, of what's going on in that market. In the case of our vehicle business, you know, we're the OEM, we're the end market guy. So we, you know, we are a lot closer in, you know, having to make that call. As you indicated, look, the good news is demand is very strong.

[Scott Donnelly, Chairman and CEO at Textron]

I mean, you know, everything we can build is going out in the channel and selling. Inventory levels are at frankly unhealthy low levels. You know, we're working hard, you know, with our suppliers to get parts in, and everything we can build we can get out there and, you know, tends to be selling through strongly.

[Scott Donnelly, Chairman and CEO at Textron]

I think our guys in the vehicle business, frankly, look, we would love to have seen, you know, revenue growth, you know, in the quarter from year over year. We couldn't get that just because we can't get the parts to do it.

[Scott Donnelly, Chairman and CEO at Textron]

I think the team has managed, you know, price inflation, disruption and all that sort of stuff, so that at least we've, you know, we've been able to hold on to the margin rates where we were. Obviously, as we can get the supply chain flowing better and get the revenue top line growing, we think the margins will improve with it.

[Scott Donnelly, Chairman and CEO at Textron]

You know, our dynamics in that business in terms of pricing, and the performance of the business was able to, at least at a margin level, overcome, you know, a lot of the interruptions and inefficiencies that we've seen in the factory. I think the business is being well run.

[Scott Donnelly, Chairman and CEO at Textron]

It just needs to be able to start to generate, you know, more top line, and that's a supply issue. I mean, demand is quite strong. We've got great products out there and, you know, as a result, we're getting good pricing for them. You know, we would love to get higher revenues, and I think we will. We just gotta work through the supply chains.

[Operator]

We do have a question from the line of Kristine Liwag from Morgan Stanley. Please go ahead.

[Kristine Liwag, Executive Director at Morgan Stanley]

Hey, good morning, guys.

[Scott Donnelly, Chairman and CEO at Textron]

Good morning.

[Kristine Liwag, Executive Director at Morgan Stanley]

Scott, you mentioned how longer lead time nature in aviation provides more visibility for the supply chain. Right, that makes sense in a normal environment. The vaccine executive order effective December eighth is a little different than what we've seen before. How are you anticipating this executive order to affect labor, your supply chain, and ability to raise production in aviation, and what mitigating actions can you take?

[Scott Donnelly, Chairman and CEO at Textron]

Well, look, it's a good question, and all of our, you know, our business as well as obviously all of our key suppliers are, you know, tend to have that defense component and therefore are subject to the mandate. Frankly, it's a curveball we wish we didn't have, but we're managing our way through it.

[Scott Donnelly, Chairman and CEO at Textron]

I think, you know, we and all of our peers and suppliers are all sort of in the same place here. Look, it's created a lot of noise. It's not been terribly well received by a pretty sizable portion of our employees. People are working their way through it. You know, it's the nature of, you know, I think people have accepted it as a fact of what they've got to go do.

[Scott Donnelly, Chairman and CEO at Textron]

You know, in the end, there's no question that we're gonna lose some employees because of this. We're trying to ramp up our hiring and expectations of that. You know, look, we'll manage our way through it. It's not the first challenge we've ever seen.

[Operator]

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

[David Strauss, Managing Director at Barclays]

Great. Thanks for taking the follow-up. I guess, Frank, question for you on working capital. It looks like, you're assuming for the full year a couple hundred million dollar benefit from working capital. I assume that's mainly, or predominantly, aviation advances. How should we think about working capital as we move into next year? That's my first question. Then any initial thoughts on pension income for next year as compared to I think you're doing like $30 million or something in pension income this year? Thanks.

[Frank Connor, EVP and CFO at Textron]

Yeah. On the working capital front, I think, you know, as we said, we've had a strong year from a inventory management standpoint, and the aviation business being far more linear obviously is a really good thing there. We've had, you know, kind of better seasonality of cash flow and good customer deposits.

[Frank Connor, EVP and CFO at Textron]

The cash flow for the fourth quarter guide continues to be, you know, in the area of one-one or a little over one of net relative to net income. We saw a lot of benefit this year, you know, kind of that we'll continue, I think, to see very strong working capital management next year. I'm not ready to guide on it.

[Frank Connor, EVP and CFO at Textron]

A lot of it will depend on order activity. You know, I think that on the inventory side and the linear, you know, the business, we'll continue to see strong performance. It will depend on, you know, kind of customer deposit activity to some degree to how that ultimately works out.

[Frank Connor, EVP and CFO at Textron]

Look, on the pension side, we're not ready to, you know, kind of lay out numbers there. We've had a good year so far on return on assets. Interest rates are up a little bit. As you sit here today, I, you know, I don't think that we would expect pensions to continue to be a benefit, as we go into 2022, but we're not ready to quantify things.

[Operator]

We do have a question for the line of Robert Stallard with Vertical Research. Please go ahead.

[Robert Stallard, Partner at Vertical Research Partners]

Yeah, thanks. Just a follow-up from me. I was wondering if there's any changes on the divisional guidance for 2021 with one quarter to go.

[Scott Donnelly, Chairman and CEO at Textron]

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

[Operator]

Our last question comes from the line of Noah Poponak with Goldman Sachs. Please go ahead.

[Noah Poponak, Managing Director at Goldman Sachs]

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

[Frank Connor, EVP and CFO at Textron]

Yeah, look, we're not gonna guide 2022. As I said, I believe we'll continue to see solid and strong working capital management next year. We had a lot of benefit this year of, you know, particularly the aviation, again, of getting the business, you know, kind of running the way Scott described, which is, you know, kind of with some visibility on delivery and order activity and run it far more linear. I would expect that to continue, as I said, into 2022. I'm not gonna start kind of guiding cash flow and profitability here for 2022. I'm sorry, Noah, the second piece of that was?

[Noah Poponak, Managing Director at Goldman Sachs]

Margins.

[Frank Connor, EVP and CFO at Textron]

Oh, systems margin. Look, on systems, we've talked about this. You know, kind of systems has had a very strong year. Defense business is generally, you know, kind of consistent with how we've talked about Bell or, you know, kind of 10%-12%.

[Frank Connor, EVP and CFO at Textron]

We have made some investments in systems where we're, you know, seeing solid return on those investments. There are a number of businesses there where, you know, we have invested in assets to drive higher margin, like the ATAC business. We expect to see good execution on a go-forward basis out of the systems business.

[Frank Connor, EVP and CFO at Textron]

You know, kind of these levels of performance this year are, you know, kind of strong relative to the general mix of those businesses. We expect solid execution on a go-forward basis, but we've had a very good year this year.

[Operator]

With that, ladies and gentlemen, today's conference will be available for replay after 10 A.M. Eastern through January 29, 2022. You may access the AT&T Replay system at any time by dialing 1-866-207-1041 and entering the access code 6190396. International participants may dial 402-970-0847.

[Operator]

Those numbers again are 1-866-207-1041 and 402-970-0847, and again entering the access code 6190396. That does conclude your conference for today. Thank you for your participation and for using AT&T Conferencing service. You may now disconnect.

Participants

Executives

• Eric Salander, VP of Investor Relations
• Frank Connor, EVP and CFO
• Scott Donnelly, Chairman and CEO

Analysts

• Cai von Rumohr, Managing Director at Cowen
• David Strauss, Managing Director at Barclays
• George Shapiro, Managing Partner at Shapiro Research
• Kristine Liwag, Executive Director at Morgan Stanley
• Noah Poponak, Managing Director at Goldman Sachs
• Pete Skibitski, Director at Alembic Global Advisors
• Peter Arment, Senior Research Analyst at Baird
• Robert Stallard, Partner at Vertical Research Partners
• Ronald Epstein, Managing Director at Bank of America
• Sheila Kahyaoglu, Managing Director at Jefferies
• Tyler Jayroe, Managing Director at JPMorgan