Steven Winoker: And for the fourth quarter, just on that number question, just take the 4.7 to 5.1 midpoint, subtract our year-to-date number that Larry mentioned, Deane, you end with a few billion.
Operator: Our next question comes from the line of Andy Kaplowitz with Citigroup.
Andrew Kaplowitz: Good morning, guys.
Larry Culp: Good morning, Andy.
Andrew Kaplowitz: Larry, could you give us more color on how you’re thinking about the defense business at this point? It was up high single digits in the quarter. It does seem like you’re having a better year this year. Have you turned the corner toward better operating performance in that business? Could you talk about the budgeting environment for that business moving forward?
Larry Culp: Well, Andy, I would say that we have made some progress, but we are far from satisfied. You clearly saw the high single digit growth in the quarter and now year-to-date. I think we’ll be in that zone for the year. But the supply chain challenges that we’ve talked about, which has made some of our equipment shipments somewhat lumpy, both with respect to our internal process yields and our material availability from our suppliers, is still job one in this business, right? I think if you look at what we’ve done inside of our own shops, we’re really encouraged by the process improvements that we’ve been able to lay in. If you look at some of the delays that are a function of quality internally in the third quarter, we were at our lowest level in the last two years.
Still plenty to do, but that’s a lot of progress. We’re adding capacity, not only in production, but in our test cells, particularly up the road here in Lynn. And we have put even more people into the field with the supply base. Rahul mentioned earlier some of the delays that we have seen in terms of on-time performance by our suppliers. And that covers an array of commodities, be it just general raw materials, castings, forgings, valves, and the like, there’s a lot of work to do to create that flow that Deane and I were talking about a moment ago. I think in terms of the top line environment, again, really encouraged by the progress that we’re seeing with FARA. I think we are heartened by what the Congress is poised to do with respect to continuing to support the XA100.
And we know as we look forward, just given the dynamics in the world, there’s going to be plenty of opportunity for us, both on rotorcraft and in combat, to continue to grow this business. And it’s a business we don’t talk a lot about. It may be a bit overshadowed by commercial. But that’s not the way we’re operating today. And I think as we get ready for the Vernova spin, there’ll be more time and attention paid externally on defense, and I think the team is very much looking forward to that. We’re doing a lot of good work, plenty of opportunities, but we need to execute better. And again, we need our suppliers hand in hand in that effort.
Operator: Our next question comes from the line of Jeffrey Sprague with Vertical Research Partners.
Jeffrey Sprague: Thank you. Good morning, everyone.
Larry Culp: Good morning.
Jeffrey Sprague: Good morning. Could we just talk a little bit more about cash flow and kind of what you’re thinking into next year? The spear to my question, Larry or Rahul, is we’re still dealing with kind of a sizable difference between actual free cash flow and adjusted free cash flow. I think some of this is warranty and other things working through the system. Can you just elaborate a little bit on the factors in the disconnect and can we get to maybe a normalization of these factors as we think about the independent companies in 2024?
Rahul Ghai: Yes. Let me kind of — let’s just spend maybe a minute on our free cash flow here. So first, as you look at our cash for the year, it’s a really good year. We’re going to generate $4.9-ish billion of free cash at the midpoint, up from $3.1 billion that we did last year. And a lot of that is coming from earnings growth. Clearly, that is a huge contributor and that is helped by kind of lower interest payments. But if you look at our working capital performance continues to be really strong this year. You’ve seen our year-to-date numbers. You’ve seen — even as you project that into the fourth quarter. We are doing an exceptional job managing our days sales outstanding. So despite our top line revenue growth, we are still expecting that overall our AR balance will be neutral, Jeff.
And the reason I say that is just kind of shows the opportunities that the business has for continued improvement. And then progress payments, contract assets continues to be a positive as well given the strong growth environment. The part I want to anchor on is a little bit on ground inventory. Given the supply chain challenges that we are having, inventory, as you will see from our Q, was up substantially in the quarter. Now we’re expecting it to come down slightly as we get into the fourth quarter, but it will still be a substantial inventory build by the end of the year. And as we look forward into ’24 and ’25, that should start getting liquidated with improved supply chain performance. So that is where — I would say that is what gives us the confidence that this will be a continued good cash flow story.
Now as you look overall, we’ll be at about 160%-plus of free cash flow to net income. Part of that is amortization. But even if you take amortization out, it’s still 130% free cash flow performance. So it’s still very, very strong. Now on your question between — I think most of that adjustments below the line are related to spin-related adjustments. I don’t think there’s anything — and insurance and spin-related restructuring costs and expenses. And some of that will obviously continue as we go into ’24 and maybe even a little bit into ’25. But after that, at least a spin and the restructuring cost should add. And the insurance is not a big number.
Operator: Our next question comes from the line of Andrew Obin with Bank of America.
Andrew Obin: Hi. I didn’t hear. I assume it’s me. Good morning.
Larry Culp: Good morning.
