Ladies and gentlemen, thank you for standing by. Welcome to the Q3 2023 Textron Earnings Release Call. [Operator Instructions]. I would now like to turn the conference over to Eric Salander, Vice President of Investor Relations. Please go ahead.

Thanks, Leah, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Revenues in the quarter were $3.3 billion, up $265 million last year's third quarter. Segment profit in the quarter was $332 million, up $60 million from the third quarter of 2022. During this year's third quarter, we reported income from continuing operations of $1.35 per share. Adjusted income from continuing operations, a non-GAAP measure, was $1.49 per share compared to $1.15 per share in last year's third quarter. Manufacturing cash flow before pension contributions, a non-GAAP measure totaled $205 million in the quarter compared to $292 million in the third quarter of 2022. With that, I'll turn the call over to Scott.

Thanks, Eric, and good morning, everyone. The third quarter was a strong quarter for Textron with revenues up at Aviation, Industrial and Systems, while revenues were flat at Bell versus the prior year. At Aviation in the quarter, we delivered 39 jets, flat with last year and 38 commercial turboprops, up from 33 in last year's third quarter. Aviation solid demand across our jet and turboprop products resulted in our strongest order quarter of the year with a 12% increase over the third quarter of 2022. Backlog grew $521 million, ending the third quarter at $7.4 billion. In the quarter, Aviation announced a new fleet agreement with NetJets, extending our 40-plus year relationship and giving NetJets the option to purchase an additional 1,500 aircraft, including the Citation Latitude and Longitude for the next 15 years. As part of this agreement, NetJets will also be the Fleet Watch customer for the newly announced Citation Ascend, which is expected to enter into service in 2025. Also in the quarter, Aviation received a special missions order for 17 King Air 360 to be used for flight inspection. Aviation also announced [indiscernible] favorability finalized its initial order for 20 grand caravans during the third quarter. On the new product front, Aviation wrapped up a successful NBAA show last week, where we announced 2 new product upgrades, the Citation CJ3 Gen 2 and the Citation M2 Gen 2, continuing our strategy of modernizing our existing aircraft portfolio while also investing in clean sheet aircraft. Moving to Bell. Overall, revenues were flat in the quarter with improved margin performance. Bell had higher military revenues in the quarter, largely reflecting the continued ramp on the [indiscernible] program. On the commercial side, Bell delivered 23 helicopters, down from 49 in last year's third quarter. The lower deliveries reflected…

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.3 billion were up $171 million from last year's third quarter, reflecting higher volume and mix of $89 million and higher pricing of $82 million. Segment profit was $160 million in the third quarter, up $29 million from a year ago, due to favorable pricing net of inflation of $39 million and a $23 million favorable impact from higher volume and mix, partially offset by an unfavorable impact from performance of $33 million, largely related to supply chain and labor inefficiencies. Backlog in the segment ended the quarter at $7.4 billion. Moving to Bell, revenues were $754 million, flat with the third quarter of 2022, with lower commercial helicopter volume largely offset by higher military volume. Segment profit of $77 million was up $3 million from last year's third quarter, primarily due to favorable platform performance of [indiscernible] million, largely reflecting a lower research and development costs, partially offset by lower volume and mix of $16 million. Backlog in the segment ended the quarter at $5.2 billion. At Textron Systems, revenues were $309 million, up $17 million from last year's third quarter, largely reflecting higher volume. Segment profit of $41 million was up $10 million compared with the third quarter of 2022 primarily due to a favorable impact from performance of $8 million. Backlog in this segment ended the quarter of $2 billion. Industrial revenues were $922 million, up $73 million from last year's third quarter, largely due to a higher volume and mix of $45 million at both product lines and an $18 million favorable impact from pricing. Segment profit of $51 million was up $15 million from the third quarter of 2022. Textron eAviation segment revenues were $7 million and segment loss was $19 million in the quarter, primarily reflecting research and development costs. Finance segment revenues were $13 million and profit was $22 million, up $15 million from last year's third quarter, largely due to a recovery of amounts that were previously written off related to one customer relationship. Moving below segment profit. Corporate expenses were $38 million. Net interest expense was $11 million, LIFO inventory provision was $26 million. Intangible asset amortization was $10 million and the non-service components of pension and postretirement income was $59 million. In the quarter, we repurchased approximately 3.1 million shares returning $235 million in cash to shareholders. Year-to-date, we've repurchased approximately 12.5 million shares, returning $885 million in cash to shareholders. To wrap up with guidance, we are increasing our expected full year adjusted earnings per share to be in a range of $5.45 to $5.55, up from our prior range of $5.20 to $5.30. We're also continuing to expect full year manufacturing cash flow before pension contributions of $900 million to $1 billion. That concludes our prepared remarks. So we can open the line for questions.

[Operator Instructions]. Our first question comes from Sheila Kahyaoglu with Jefferies.

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

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

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

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

We move on to David Strauss with Barclays.

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

Well, David, I guess the color I would give is that, look, obviously, the business pays a lot of attention and tracks sort of trend data. And I would say that from a standpoint, is it getting better, the trend data would say, yes, it is getting better. The number of parts that come in late to PO has been declining through the course of the year. They look at labor, effectivity and efficiencies that has been getting, modestly better as we're going through the year. But it's still a problem, right? So it's -- I wouldn't say we have any one big like engine that's just driving this. As you get towards the end of the quarter, if you're missing parts for aircraft, that's -- you still can't deliver that aircraft. So it is I guess, getting better from a context of how many parts are late to PO, but parts are still late to PO. And as we often say, David, every part is important on an airplane. So we're continuing to see that challenge across the number of aircraft types. I think it will continue to -- we certainly expect it to get better as we go through time, but it's going to be something we're going to fighting our way through. But I guess the only thing I would point out is despite all that, I mean, we obviously would like to have delivered some more aircraft in the quarter. And in particular, we have customers that would like to see us to deliver those aircraft in the quarter. But despite all that and the challenges and the headwinds around labor and supply, we're still posting strong growth in the business and good strong margin expansion in the business. So I think despite a lot of these headwinds, the business performance is growing very well. It's growing and it's continuing to drive improved profitability.

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

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

Next, we move on to Noah Poponak with Goldman Sachs.

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

Look, Noah. The demand environment continues to be strong. I mean, this is a really strong -- book-to-bill is very strong and just an absolute dollar flow of order activity in the quarter. So we just haven't seen it slowing down. People are buying aircraft. And are they replacing older aircraft? Absolutely. Or in some cases, are the expanding fleet capacity, absolutely. We continue to see strong demand, obviously, part of the rationale behind the [indiscernible] program. As they continue to see very strong demand on the fractional side. So it's really across the board. And it's typical what we've been seeing for a while. It's very strong jets in the U.S., although there's certainly some good order activity with jets outside the U.S., it's very strong across the turboprop product lines and both the King Airs, obviously, with SkyCourier and Caravans continue to perform well. So it just continues to be a strong demand environment.

Okay. And then just on the margin in Aviation, recognizing your point that it has expanded quite a bit from the trough. It's down sequentially and the incremental -- the year-over-year incremental, I think, is a little light of what you normally look for despite healthy unit and price. So -- anything to note there? And I guess, what do we look for, for the Aviation margin to finish the year and maybe into next year?

Well, look, I think we're going to continue to see strong margin performance, Noah. We -- without a doubt, are still being impacted by performance issues, just the amount of efficiencies that are driven by those parts that are showing up late and labor turnover, which I think everybody is experiencing. It's a challenge in the industry still, and we're going to continue to fight our way through it. But I think we'll continue to do that with very healthy margins.

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

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

Next, we go to Doug Harned with Bernstein.

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

No, it really hasn't. Look, I mean we did sort of set our base plan, expecting kind of 1:1, and look, I think eventually, the industry has to get to 1:1. It's not -- I don't really think it can continue to exceed that much for that long. But obviously, our sales teams are out there and customer demand is what it is. So if it's greater than 1:1, obviously, that's terrific for the business. And as you note, we have seen that through the course of the year. So we'll continue to kind of plan and look at production volumes and adjust accordingly as we go forward. But the mix is markedly different. As I said, we're still seeing strong jet demand, we're seeing across all the turbo product lines. We're seeing it virtually across all of our different aircraft types. Obviously, it's helped by having some new aircraft like the Sky Courier out there, it's helped by having some of these upgrade programs which always stimulates the market when you do a next version of CJ3, our next version of an M2. We have [indiscernible] announced out there. So there's a lot of things we're always doing to invest in the product lines to kind of continue to help drive that demand in the market. But for sure, versus our estimation at the beginning of the year 1:1, the end market continues to be stronger than even we would have expected, which is obviously a positive.

Yes, it is a positive, but I'm also -- I'm interested in how you deal with this because you have delays in supply -- some delivery delays with the supply chain. You've got this huge backlog. I mean, how far out are you scheduling deliveries now? And do you start to run into an issue here if this were to continue? Because as you say, ultimately, should be at 1:1 at some point.

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

Next go to the line of George Shapiro with Shapiro Research.

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

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

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

I would say, George, that for sure, we are delivering fewer aircraft than we originally expected, and that is as a result of these issues and challenges that we're still seeing in the supply chain. We have forecasted and just the way we run our manufacturing operations, obviously, we took down some of the units to accommodate that. Did we have aircraft that moved from Q3 to Q4 this year? Absolutely. Do I think we'll have aircraft that will move from Q4 to Q1? Absolutely. Again, how much of that is our aircraft that you would add on to what we were originally planning in our 2024 guide versus where we'll be, I mean that's -- that will all be incorporated into what we guide when we get into 2024, George. So -- and again, we're not at a point to do that. We're still working through all those kind of numbers. But the only color I would give you is I expect that you certainly would expect to see good growth and over the 2023 number. So for sure, be it just overall demand or things that are moving from '23 to '24. '24 should be a strong year for us.

Next, we move on to Cai von Rumohr with TD Cowen.

And good quarter. Frank, could you maybe talk a little bit about do we see -- do you get any benefit out of the latest IRS clarification of Section 174? And should we be concerned about pension being a significant headwind next year?

On the 174, we had been following kind of what the guidance clarification resulted in. So we -- there is no change to -- from a cash tax standpoint. With regard to pension, as you know, we'll go through our year-end process around that. I would not expect it to be a headwind. So I think that kind of we shouldn't have a problem with pensions and from a headwind standpoint as we move into '24.

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

Well, I think where we are right now, Cai, I mean, obviously, we've just come up the SkyCourier program. We had Denali, which is in certification, that's coming along very nicely. I think that will be a spectacular product for us. We did just announce the Ascend which is a pretty big program. That's -- and so I think, I guess, strategically, Cai, I think where we are on the sort of that Latitude/Longitude family are in really good shape. Those are both relatively new aircraft. Certainly, there will be upgrades and enhancements to those programs as we go down the line but we sort of have turned from a long period of time, a decade really of making major investments in those mid- to super mid aircraft and have gone back now and we made some pretty good investments in some of the turboprop family. And again, that light to mid-sized jet, Ascend, I think, is going to be a fabulous product for us. That kind of fits that space where the XLS has lived in the XL before that for many years, home run product for us. And I think the Ascend is going to be kind of filling those shoes. So we're really excited about that. And again that Denali is going to be a great product that's, I think, doing well here and going through the certification process right now. So look, we're always -- as you know, there's always stuff on the drawing board and ideas and plans that we're always working on, but that's -- we don't have any new announcements for you beyond that stuff. We're pretty full up right now, actually.

Next, we move on to Robert Stallard with Vertical Research.

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

No, we really haven't, Robert. It's been -- I mean, if there's been a cancellation here or there, it's none that I'm even aware of here lately. I think the demand is strong and look people are thinking about, what could you be a 12- to 18-month softness in the economy. The reality is right now, people are talking about deliveries that are out way beyond that. It's just because of the nature of the backlog. So I don't think -- we certainly have not seen any impacts of this shortsighted kind of, hey, you guys what's going to happen in the economy in the next 18 months window, the deliveries. People are taking their aircraft. We haven't seen any problems there. And again, from an order perspective, they're out way beyond that period that might be of any concern.

And then similarly on the Industrial side of things, what sort of demand pool are you getting from your customers at both Kautex and Specialized Vehicles?

We've been seeing a very strong year. The Kautex side of things, North America, in particular, has been growing. Europe has been growing. So we are -- we've seen nice increases in volume growth here in 2023. I expect we'll see that continue in 2024. Obviously, everybody was a little bit worried about the UAW situation. You see this morning, it was Ford has got a tentative agreement, which is great. We haven't seen much impact from that yet. And hopefully, this will get resolved before it has any kind of material impact to us. We're pretty diversified in terms of the OEMs that we serve and particularly in North America, a lot of the Toyotas and the BMWs, Mercedes and [indiscernible] in the southern part of the country. So Anyway, the volume does continue to grow at Kautex. We've seen nice volume growth in the vehicle business as well. So for sure, we pay close attention to sort of the high-end consumer, if you're going to have a slowdown, adjust accordingly. But all in all, the golf market, the commercial market, it's staying strong, even in the consumer market, which it's not as strong as it was as you see most people and say '21, '22, but it's claims are still quite strong on a historical basis. So I think the business -- and that's a lot of the intersection of all those things is what's been driving nice growth for us.

Next, we move on to Kristine Liwag with Morgan Stanley.

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

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

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

Yes, I don't -- I'm not -- I don't know all the details of that. I mean, we're obviously -- we work very, very closely with our engine suppliers and making sure that there's great MRO capability for them. Obviously, there's engine programs, which we promote with those suppliers. But I mean we love our service business. Our service business has been growing. As you know, over the last decade, we've taken a lot of this and do a lot more direct service around our aircraft than we used to do, and that's been a big success for us. But getting into the engine MRO business is not something that I think would make any -- it would make any sense for us. I mean all cared about the engine in the world. The value in engine overhaul is in the parts and those parts come from those suppliers. So I think that's probably best left to them to manage.

Next, we go to Jason Gursky with Citi.

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

Well, look, it's a good question, Jason. There's no way to know totally the answer to that. I mean there's no question that right now, we have customers that would like to see us have delivery dates earlier than what we're able to promise them. I mean that's true. I think that obviously, this adjustment that's going on is that I think for -- obviously, for a decade or so, customers knew they could come in when they wanted to get a new aircraft and get something delivered in a very short period of time. That wasn't true historically, as you know, and it's certainly not true today. So I do think that we've gone through some challenging phase with customers who are kind of accustomed to say, "Well, geez, I should be able to get that in 3 months or 6 months" and say, no, guys, actually, it's a couple of years. But I think the market is adjusting to that, right? Customers know what the order backlogs look like in the industry. And people now realize that if you're thinking about your fleet planning, you're thinking about your current aircraft and when you're going to want to do an upgrade that you need to be thinking about that being a couple of years out, not something that you just could come in inside of a quarter or even inside of a year and get a transaction done. So I think we're probably on the -- certainly at a point, where customers would like earlier delivery dates than what we can promise them. But I think customers are getting accustomed to the fact that this is a couple of year kind of a time line and they need to plan accordingly which frankly is not all bad for them either because they can think about how they plan the sale of their used aircraft, it's a much more -- it's a better market environment for everybody, including those buyers because so many of them currently own an aircraft. I don't know if that helps you because I mean, there's not really a specific answer here, but 2 years that's a long time, but people have to kind of plan accordingly at this stage of the...

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

That math is too sophisticated for me.

Maybe an easier one then on Industrial. Can you talk a little bit about the margin and the margin opportunity in that business over the longer term based on new product offerings and product development things that you're working on today? Just whether there's any structural opportunity for margins in that business over the longer term.

No, look, I mean, I think we still have margin opportunity. I mean, this business should be a high single-digit margin. I mean it's got a lot of auto in there. Kautex is a good business. It generates good cash. It generates good margin. But we're, obviously, right now, you're still trying to get some of the auto volumes back up around the world, and we have obviously capacity to do that. So better utilization, more efficient utilization of some of that capacity would be obviously be helpful. And that's part of what's driving the margin improvement this year. The same is true in the vehicle business. We've had strong demand across most of those product lines. Some of them are still recovering from some of the post-COVID. Some of them still are struggling with a lot of the same kinds of supplier and labor challenges that we talk about in aviation, and that's -- we're still -- have a fair bit of inefficiencies in some of those factories as we manage our way through that. So I do think there's still some upside in terms of margins in the future.

Next, move on to Myles Walton with Wolfe Research.

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

So look, I want to probably [indiscernible] go into all of the gory details of the arrangement, but we've always worked with -- there's always been a factor in how we work with NetJets that takes in consideration market pricing. So it's not something that's a fixed price 15-year thing. I mean nobody could do that. I mean in the industry. So there's adjustments that are made that have to do with market pricing that's, frankly, a very fair equitable deal because, again, you really have to think of NetJets. I mean they're out selling aircraft into this marketplace. So we -- you think about, I guess, almost a wholesaling right of these aircraft to NetJets and then they have a spread for covering their costs and sales and running their business. So there is a market adjustment scheme that's incorporated into this thing. So nobody is trying to sit down and imagine what pricing is 15 years from now.

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

Yes, I think that's about right. I mean, again, it's an add-on, right? So we're -- it extends the agreement we already have, and we sit down obviously, every quarter and sort of true up what's that deliveries that are a year out. So -- but yes, I think if you looked at how many aircraft were left on the old agreement versus the new agreement, it's kind of phasing kind of '24, '25 time frame.

And then, Frank, just to clean up, can you level set us on interest and tax rate for the year at this point, given we only have the quarter left?

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

Next, we move on to Peter Arment with Baird.

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

Peter, I think they're in a very good place. I mean a lot of the things that we've been working on for a very long time are starting to kind of come to roost. We had a nice strong growth in the quarter. That's driven by things like XM250, which -- as you know, we're sort of decade-long investments in IRAD for some of these new munition systems, which are doing well. The sentinel program, obviously, we're one of the partners with Northrop Grumman that program continues to grow nicely. We had some very important down select here just in this quarter around the RCV program with the Army, the ARV program with the Marine Corps. The FUS down select with the Army. So I think the business is performing well. The margins are strong. We've got this business back into a growth mode, and we have several additional opportunities out there that are material, do you win all of them or not, I don't know. But I mean, we have probably 4 or 5 pretty significant opportunities that we'll close here over the next couple of years. So I think the business is executing well. They're delivering on their existing programs very well. And I think they've got a lot of pretty significant growth opportunities that we've been -- are clearly in the pipeline.

Appreciate that color. And then just Frank, a quick one on do you have the -- what services growth was in Aviation for the quarter?

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

Next, we go to Ron Epstein with Bank of America.

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

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

So is it -- so I guess is it core? Is it not core?

We've never defined core or noncore. I certainly have never said that. Look, I get what we have said, Ron, is when we think about M&A activity in the company, we certainly would view that the places that we would additionally or add additional capital would probably be in our Aerospace and Defense portfolio. And that's kind of how we look at the M&A world as opposed to thinking that we should increase the size of our Industrial business. But certainly, to the extent that we can drive organic growth in these businesses, and make smart investments and generate good returns for shareholders. That's the best thing we can do for the shareholders is make sure there's performance. Those businesses are performing as well they can perform.

Yes. Fair enough. And then on the M&A front like you mentioned. What's it like out there right now? Are there opportunity? Are there directions that you want to go in terms of A&D. Are you more A focused or D focused or agnostic? How should...

Yes, probably agnostic. We've done some small deals here in recent times, largely around expanding some of our services footprint. Obviously, we did the Pivotal deal, which has turned out to be, I think, a great acquisition for us to help grow our focus in the future for our Aviation business. Obviously, there's some opportunities there. There could be massive opportunities in the future or not. We don't know. But I think that's a nice acquisition that's given us some real additional capability in the company. Again, as I said, most of what we look at in terms of any material M&As in that A&D space. As you know, Rob, there's deals only come along so often, so you kind of keep an eye out. And look at things that come down the pike. So we'll -- that's what we've been doing, and we'll continue to do that. And if something makes sense, that we think is a great deal. It will be good for our shareholders, and we would certainly be willing to participate in that. We obviously have the capacity to do a fairly material deal, but it has to be something that financially makes sense.

Our next question is from Pete Skibitski with Olympic Global.

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

No, they don't. Look, guys, the relationship and the way this works is that I mean, our friends at NetJets are out every day selling aircraft. And they're selling those shares. And by the way, I think that's a very robust strong market right now, which is fabulous but they sit down with us in real time. I mean, every quarter, looking out a year out and given where the market is and what sales activity looks like, what their pipeline looks like, firming up. Those aircraft that we're going to deliver in roughly that 1-year window. So when the market is strong, they're selling. We expect that thing to continue to grow. If there was a slowdown, and we expect to see that number come down. So it's a total 100% alignment around that end market.

Okay. And how do you think about the high end -- I mean, on average, 100 aircraft a year would be more than 50% of your deliveries this year. How do you think about contemplating if you could ever get to the high end of that deal?

Well, again, that's based on the market, right? I mean if the end market continues to be that robust, but I would -- I guess, what I would say is if the end market is going to be that robust on the fractional side and all like it's also going to be that robust in the whole aircraft side. So you have to expect to see overall production output growing, not locked into where it is in the 2023 number.

And we have a follow-up from David Strauss with Barclays.

Just wanted to ask specifically on FLRAA. I think you guys have talked about getting kind of $800 million to $900 million annual revenue run rate on FLRAA. Where -- are you fully ramped to that rate in Q3? And if not, did that have something to do with the Bell margin holding up, I think, certainly better than we had thought?

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

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

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

And we have a follow-up from Cai von Rumohr with TD Cowen.

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

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

And ladies and gentlemen, that does conclude the Q&A portion of today's conference. If you would like to access the digitized replay of this call, it will be available after 10 a.m. Eastern Time today through October 26, 2024 at midnight. You may access the replay by calling 866-207-1041 or 402-970-0847 and use the access code 5951112. Again, that's 866-207-1041 or 402-970-0847 with the access code 5951112. And that does conclude your conference for today. Thank you for your participation. You may now disconnect.