達信公司 (TXT) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Textron first quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Doug Wilburne.

Please go ahead.

Thanks, Greg, 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.

Textron's revenues in the quarter were $3.2 billion, up $128 million from last year's first quarter.

Income from continuing operations was $0.55 per share, up 19.6% from $0.46 reported in last year's first quarter.

Manufacturing cash flow before pension contributions was a $222 million use of cash, compared to $125 million use of cash in last year's first quarter.

With that, I'll turn the call over to Scott.

Thanks, Doug, and good morning, everybody.

Revenues were up 4.2% in quarter, reflecting the success of our strategy of investing for growth, both in new products and acquisitions.

Segment revenue was up in industrial, aviation and systems, while essentially flat at Bell consistent with our expectations.

At Bell, we delivered 6 V-22s, flat with last year's first quarter, 10 H-1s up 4 units from last year, and 30 commercial helicopters down from 35 a year ago.

On the commercial side, we had a good showing at Heli-Expo, where we displayed actual flight test articles of our new 525 Relentless and 505 Jet Ranger, though both of which generated significant interest.

At the show, we signed a Letter of Intent for 10 525s with Guangxi Diwang Group, a Chinese investment company.

More recently, we also signed an LOI with PT Whitesky Aviation, an Indonesian operator for 30 505s.

Development on both program's proceeding well.

The three test 505 helicopters have completed over 700 test hours, with certification and first deliveries expected later this year.

The 525 has two aircraft in flight test, with a third unit expected to enter soon.

The Relentless is meeting or exceeding all of its performance objectives, including having demonstrated a top speed in excess of 200 knots.

The effectiveness of 525s integrated fly-by-wire design has been evident during the testing, by the aircraft's superior in-flight handling, maneuverability and stability.

Combined, these factors should significantly contribute to the value of this aircraft for our customers.

At HAI, we also announced the new Bell Customer Advantage Plan or CAP, which provides our customers the opportunity to lock in predictable, cost effective maintenance for their aircraft.

Our CAP product delivers broad cover solutions for our customer's daily operation, which in turn protects the value of their investment while increasing aircraft availability.

We were also named number one in helicopter service and support for the 22nd consecutive year by ProPilot magazine.

On the H1 front, we have received recent orders from the DoD for 61 additional units, including 9 FMS units for Pakistan.

This takes production through the first quarter of 2019.

The remaining US DoD program of record, and significant additional foreign military demand provide a solid long-term outlook for this program.

Moving to systems, revenues were up modestly, primarily driven by higher unmanned systems volume.

During the quarter, our Textron marine and land systems, we received a $174 million contract for five additional ship-to-shore units to be delivered in 2020.

Earlier this month, we were also awarded a contract for 60 COMMANDO Select armored vehicles to be delivered this year in Iraq and Columbia.

On the Canadian TAPV program, we're on track for deliveries to begin in the third quarter, as we successfully completed the customer reliability testing program two weeks ago.

At TRU simulation and training, we were just awarded another contract by Boeing to design and manufacture simulators for their newest twin-aisle airplane, the 777X.

Moving to industrial, we saw a 9.2% increase in revenue, reflecting our continued investments.

During the quarter at specialized vehicles, we launched our newest Bad Boy product, the Onslaught 550, a mid-size 4 by 4 ATV.

At Jake, we announced the HR700, which is the world's first 14-foot wide rotary mower, providing increased productivity for our professional turf care customers.

At tools and test, new products in our electric utility space are driving significant growth in this category.

At Kautex, our Selective Catalytic Reduction products and geographic expansion drove growth in excess of global vehicle production rates.

Moving to Textron aviation, we delivered 34 jets in quarter compared to 33 last year, and 26 King Airs compared to 25 last year.

Our sales success affirms that our strategy of investing in new products is resonating with aircraft buyers.

During the first quarter, we also received European certification for the Latitude, as well as the Pro Line Fusion-equipped King Air 250 and 350.

Advanced sales of Latitude fractionals by NetJets to their end customers have been going very well, and we look forward to starting deliveries of the new aircraft later this summer.

To sum up, we had a good start to the year, as demand in our end markets finished the quarter generally consistent with what we were expecting.

Operationally, we also had another good quarter, as we achieved margin improvements at each of our manufacturing segments.

We continue to believe that we will be able to generate solid overall growth in revenue, earnings, and cash this year.

And with that, I'll turn the call over to Frank.

Thank you, Scott, and good morning, everyone.

Segment profit in quarter was $280 million, up $21 million from the first quarter of 2015 on a $128 million increase in revenues.

Let's review how each of the segments contributed, starting with Textron aviation.

At Textron aviation, revenues were up $40 million from this period last year, primarily due to higher jet volume.

Segment profit was $73 million, up from $67 million a year ago.

Backlog in the segment ended the quarter at $1 billion, $47 million lower than at the end of the fourth quarter.

Moving to Bell, revenues were essentially flat, as higher military revenues offset lower commercial revenues.

Segment profit increased $6 million from the first quarter of 2015, primarily due to improved performance.

At systems, revenues were up $9 million, primarily due to higher unmanned systems volumes, while segment profit was up $1 million.

Industrial revenues increased $80 million due to higher overall volumes and the impact of acquisitions.

Segment profit increased $9 million, also reflecting the higher volumes and the impact of acquisitions.

Finance segment revenues decreased $2 million, and profit decreased $1 million.

Moving below the segment line, corporate segment -- or our corporate expenses were $32 million compared to $43 million last year, reflecting the impact of a lower stock price on our share-based compensation expense.

Interest expense was $33 million, flat from last year.

During the quarter, we issued $350 million in 10 year notes at a rate of 4%.

This was effectively pre-funding the retirement of $250 million in 4 5/8% notes that are set to mature in September.

We also repurchased 6.2 million shares of stock during the quarter, returning $215 million in cash to shareholders.

To wrap up with guidance, we are confirming our expected full year EPS from continuing operations of $2.60 to $2.80 a share, and cash flow from continuing operations of the manufacturing group before pension contributions of $600 million to $700 million.

This concludes our prepared remarks.

So Greg, we can open the line for questions.

Thank you.

(Operator Instructions)

Your first question comes from the line of Cai von Rumohr from Cowen and Company.

Yes, thank you very much.

So your aviation volume was up, but your inventory step up was down.

Maybe give us some color in terms of why the profitability wasn't a little bit better?

Well, Cai, I think that, you look at the first quarter, the revenue increase was fairly modest.

So in terms of leverage, we're talking about sort of what I would call the law of small numbers, okay?

We, I think had pretty good execution by the team.

We had an awful lot of R&D spending frankly, as we're getting ready to do the first Longitude flight here, coming up in the early part of this summer.

And so, even with the step up as you note in there, which was probably $5 million, $6 million something like that, that was more than offset by a fair bit of R&D spending to get ready for Longitude.

So there's nothing fundamentally different I don't think.

The mix obviously was more biased towards Latitudes than some of our legacy aircraft, but that's something we expected, and talked about in the context of our overall guidance for the segment leverage for the year.

And I think that's what we are seeing play through.

And then, the last follow-up, so should we assume that the Latitude is a mix negative, in terms of your shipment?

And also, could you comment on the level of used aircraft losses if any?

So yes, I think that, as we've talked about, I think the Latitude mix will be a slight drag in terms of our normal gross margin flow through.

We expect obviously, that should improve over time.

It's still a good product for us, but it's a little bit lower on the mix side than some of our other aircraft at this point.

Used aircraft, there were some losses in the [core], but they are de minimus.

I mean, they're not a material number.

Thank you.

Sure.

Your next question comes from the line of Robert Stallard from RBC.

Thanks very much.

Good morning.

Good morning.

Scott, there's been a lot of negativity in the last couple of months about the business jet demand environment, used inventories seem to have gone up, pricing softened.

I was wondering what [Cessna] is seeing out there, in terms of customer interest, and how confident you are in your forecast for 2016 in this division?

Robert, I would say that, if we look at the first quarter, there's no question that January and February were pretty rough sledding.

The turmoil in the market and the general sentiment, I mean, I think caused a lot of people to sort of stop and wait to see what was going on.

But if we went in through March, and I'd say continuing now into April, the market has been pretty good.

I mean, we'd always like to see it stronger, but the momentum that we felt in the latter part of last year, certainly took a pause through January and February, but has returned to a pretty decent market here in March, going into April.

And then as a follow-up, Frank, obviously, you highlighted the buyback was strong in Q1.

Do you expect it to moderate going forward, and would you be more interested acquisitions perhaps?

Well, as we said, I mean, we'll continue to take a look at what the acquisition opportunities look like, our cash flow needs, and be -- return to excess capital to shareholders.

As you say, we did a lot of that in the first quarter.

We'll continue to look at kind of the appropriate use of capital, as we go through the year.

But we are ahead of the game, in terms of our -- certainly our plan to at least offset dilution at this point.

That's great.

Thanks very much.

Your next question comes from the line of Sam Pearlstein from Wells Fargo.

Good morning.

Just following up on that last comment about the share count.

Do you still assume it's going to be the 277 million shares, or now that it was heavier in the first quarter, will that be lower for the year?

It should be lower for the year, by about the number over the normal dilution, so kind of [3 million-ish].

We bought about [3 million] more than our normal employee plan dilution would reflect, and it would be lower by about that amount.

Okay.

And then, can you talk a little bit about Bell, and what you've seen as far as demand on the 412s, and does the relatively stronger dollar hurt you in those sales?

And I guess, I'm wondering with two deliveries in the first quarter, are we still on track for 12 of them?

Sam, I think that the commercial market is still challenging for sure on the helicopter side, and exchange rates, the US dollar doesn't help us particularly.

But the 412, I would say, our line of sight on the year for the guidance we provided which was around 12, I think is firming up.

So I think we feel pretty good about that.

And there's certainly opportunities out there, as we look into the out years, and there's deals that still need to close.

But there's still -- it's a great helicopter.

It serves its purpose very well, and it's got a great customer base, and there's still people looking at expanding and increasing their fleets of 412s.

So I'd say, we have a pretty reasonable line of sight on to the 2016, and are working opportunities that are going out into 2017 and 2018 at this point.

Thank you.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies.

Hi.

Good morning.

Thanks for taking my question.

I guess, on R&D, can you talk about the expectations for R&D for the full year, maybe on a segment basis?

And then also, in terms of headcount, I think you added headcount across three of the four segments, with the exception of Bell, and maybe what that additional capacity is for?

Well, Sheila, I would say the total year R&D is probably going to be pretty consistent with what we guided, which we only do for the total company level.

There's always a little bit of timing in this thing.

I mean, clearly, with getting ready for the flight test programs and whatnot at Aviation on the Longitude program, we spent a disproportionate amount of that in terms of the run rate, of getting ready for flight test.

So the other programs are running about as we expected.

There's really no change to the guidance.

The 525 flight test programs are going very well, but and are consuming expense at about the pace we expected.

The V-280 is going very well.

We've had some nice significant milestones in the fabrication of that first unit for flight next year.

So I think our guidance for the total year remains unchanged.

We just had some higher spending here in the first quarter, particularly at aviation getting ready for the Longitude program.

Okay.

And then, on the headcount?

The headcount numbers, I don't -- I'm not sure -- I don't have the exact numbers in front of me Sheila.

I don't think there's any big material changes.

The only place we've had really material changes in headcount unfortunately have really been around Bell, and that's mostly been dialing back some of the production run rates in Mirabel on the commercial helicopter front.

Other than that, it's been, I think, relatively stable in most of the businesses.

Okay.

And then, just a follow-up on the demand question asked earlier.

It's pretty original, but can you just talk about pricing, and maybe if the competitive environment has changed at all?

In --?

In -- more so, in aviation, I guess?

Yes, aviation has been fairly flattish on a year-over-year basis, Sheila.

There's a couple models that have seen a little bit of an uptick in price, a couple have been a little bit down in price.

But overall, not a big impact in pricing, really across the whole Company.

Pricing has been relatively flat.

As I said, I think part of it just, we had to be a little bit patient here, as we went through a couple pretty tough months, and hang in there.

But the demand environment, which is really kind of in the end what drives it, picked up in March, and felt pretty good.

Great.

Thanks.

Your next question comes from the line of Jason Gursky from Citi.

Yes, good morning.

I'm going to go back to Bell.

Scott, can you talk a little bit about the next multi-year on the V-22?

There has been some recent press reports out there about how that's shaping up.

If you could provide a little bit of color on your thoughts on that, that would be helpful, particularly around the volumes?

Sure.

So I'd start by saying, that it's early in that process, so we've already started to work with the customer on providing information.

Right now, the challenge is it's a pretty broad range of volumes, depending on -- as they are working on their budget for those out years.

And obviously, it's -- there's a mix of what they want to do with the program of record for the Marine Corps.

You've seen some articles out there about the Air Force having interest in some additional [CVs].

There's the Navy [COB] program, and how that starts to drive demand, as well as creating some optionality around FMS opportunities.

So right now, it's -- when we're providing numbers, it's across a pretty broad range of units.

So it's at this point, I'd be reluctant to put a number out there.

Seriously, I don't think there's anything we would want to guide to yet, to give you guys an idea, because it's just -- the range of opportunity is just too high, in terms of where that number falls out.

It could -- it's just -- they're running the numbers, running the financials, and asking us for a lot of input on a pretty broad range of possible numbers of units.

Okay.

Let me ask it a different way.

Without FMS, does the top end of that range allow you to hold current production rates?

No, I don't think it's likely that we would hold current production rates.

It going to be -- it will be south of that.

I really don't see a potential outcome that would be the current production rate.

So we are planning for another decrement down, when we get out there into that 2019, 2020 time frame.

But it's, we just don't know how big that decrement is going to be right now.

When you look at Navy [COB], that's 40 some units.

There's still 20 some in the Marine Corps program of record.

There could be a couple CVs, there could be some optionality built in for FMS, but I do not think that the expectation [should] be able to run at the current run rates.

Okay, understood.

And then, the follow on, the LOIs that you got both on the 505 and the 525, can you just remind us when those convert into actual contracts?

When will you start telling us, or have a better idea of what your ramp is going to look like on deliveries, for both of those aircrafts?

Just the timing of the LOIs can bring to contracts?

Well, I think we'll start to see conversion on 505 contracts, and probably starting here pretty soon.

Those aircraft, we'll be looking at the initial deliveries likely in the fourth quarter.

So there's already conversations going on with customers that will convert those to actual contracts.

I would say on the 525, you won't likely see that until some time as you get closer to certification in mid summer or so last year, next year rather with a -- just because our certification expectations are kind of late summer, early fall before we would start firming those up for deliveries, by the end of the year.

Okay, great.

Thanks, guys.

Sure.

Your next question comes from the line of Peter Skibitski from Drexel Hamilton.

Good morning, guys.

Good morning.

Hey, Scott, geographically, excuse me, is North America kind of still the only game in town?

I think you've been running -- I don't know -- 75% of your Citation deliveries were North America, and I think a similar amount at Bell Commercial.

I'm just wondering if that's the status, and if there's any change that you detect in the North America market versus three or four months ago?

Well, certainly on the aviation side, it's still more or less US-driven.

I think jets this quarter were probably about 80% US deliveries, about 20% international deliveries.

If you look at our turboprop product, between the King Air and the Caravans, those are more like 50/50 US and international.

And that's more typical for those products.

I think the turboprops are doing well.

Caravans, particularly in China are strong.

So we, but I would say, however, here that we're starting to see some momentum pick up a little bit in Europe.

So I think you'll start to see some increased jet deliveries over there, and turboprop again staying fairly balanced between US and international, as we go through the balance of the year.

Okay.

Okay, got you.

And then, a last one, just wonder what your expectation was on this Air Force nuclear helicopter program?

I think basically you guys are the incumbent.

It's, I think, a few billion dollars probably, and there has been a lot of chatter that they would sole-source it to a competitor.

I'm just wondering what your expectation is there, and if you had any thoughts?

Well, look, we're probably seeing and hearing the same things that you're hearing.

It sounds like -- I mean, we are the incumbent, but those helicopters have been there, those are Hueys from a long time ago.

And at least the requirements that we've seen out there, we think they are looking for a larger and a different helicopter.

So we're seeing and hearing the same chatter.

It sounds like they're looking at going sole-source to another product at this point.

Okay.

Okay, understood, thank you.

Sure.

Your next question comes from the line of Carter Copeland from Barclays.

Hey, good morning, guys.

Hey, Carter.

Just Scott, quickly wondered if you could give us some color on what you saw in service revenues across aviation and Bell in the quarter?

So on the aviation side, it was pretty consistent with where we been.

I think it was around 35% of revenue.

On the helicopter side, I'm sorry I don't have the exact percentage here in front of me, but it was down a bit year-over-year.

And again, I think that's just reflecting that we continue to see lower utilization, in particularly in the oil and gas segment in the marketplace.

Yes, when do you think you reach a bottom on that?

I mean, clearly, there's some destocking in that end market.

So when do you start to lap some of the easier compares there?

Hard to say, Carter.

I mean, I would be just making a total guess.

But I think a lot of it's going to have to do obviously with what happens with oil prices, and when the guys start utilizing the assets.

I can tell you, down in the Gulf, where we have an awful lot of 412s that are operating with the oil prices being down, things have been slower.

Frankly, some customers have been slow to pay some of the operators that we work.

So as a result, those guys will put aircraft on the ground, or they will back off in general.

But it's got to go through its cycle.

So I'm not probably the right guy to opine on the oil prices and what that recovery looks like.

But I think it will tie more to that going forward.

Great.

And then on systems, just a quick follow-up.

Any more color you can give us on the unmanned revenue in the quarter?

Do they have a negative mix impact for the margins?

No, I think the unmanned is probably in line with typically what we expect for margins in that business.

We've seen fairly high utilization on our fee-for-service programs which are going well, and the aircraft are performing well, and executing the contracts that we have.

We've continued to deliver the upgrades for the Shadow B2 program, and those are flowing through exactly as we expected.

And we've got some decent business development work going on for some international sales and things like that.

So I think everything in the unmanned world is good.

The margins, obviously we were this quarter fairly light at marine and land systems because we'll largely generate a lot of the revenue here in the third and fourth quarter associated with the Canadian TAPV program.

Obviously, getting that milestone and the test complete was a big deal for us.

So I think each of the units are doing well, and are where we expected.

But unmanned is good business, and margins consistent with our expectations.

Great.

Thanks a lot.

Sure.

Your next question comes from the line of Julian Mitchell from Credit Suisse.

Hi, good morning.

Just wanted to start with the first question on aviation margins because, I guess in Q1, you were talking earlier about how the margins were a couple of hundred points short of the full year margin target in aviation, based off a mix of leverage, volume leverage, and also R&D.

As we think about the rest of the year, and how you make up that 200 bips, should we think about that as fairly evenly split between R&D tailing off, and leverage recovering?

Or is there some sort of weighting between the two?

Julian, I mean, I think it's -- I wouldn't read a whole lot into the Q1 numbers, right?

I mean, the revenue was up $40 million.

So leverage on $40 million, a couple million of a -- a few million of R&D and a couple million of this or that, just makes such a huge swing.

So I don't think there's anything that I would look at the first quarter granted -- yes, just in terms of specifically R&D, the R&D spending is probably somewhat disproportionate in terms of the overall impact on margins here in Q1, than it would be in the latter quarters.

But I mean, I really don't think there's been anything fundamental we look at in the leverage issue in the first quarter, as being indicative of what's going to happen in Q2, 3, and 4. So our guidance that we provided you guys around sort of that window of overall operating margin percent, I think we're on track to do that, and the revenue side.

So the leverage is going to be pretty consistent I think, with what we told you.

And again, the number in Q1 is such a small incremental on the revenue, that I don't think you can read a whole lot into it, in terms of leverage.

Very clear.

And then, my follow-up would be around the manufacturing cash outflow.

That was about a $100 million higher year-on-year, the vast majority of that due to working capital stepping up.

But at the same time, your buyback spend in Q1 suggests you're very confident of that cash flow swinging around.

So maybe just give a little bit of background, as to where that big working capital build really came, and do you think we should see the manufacturing cash flow swing positive in the second quarter?

So I think first of all, on an absolute basis, you guys know we generally consume cash in the first quarter.

We tend to have inventory build associated with products that do sell off, good, better and different aviation, and Bell tend to have more higher sales in the latter part of the year.

So on an absolute basis, there's -- I don't think there's anything terribly surprising.

In terms of the year-over-year comparative, we do have a situation with respect to customer deposits, primarily almost exclusively frankly, on the military side of Bell.

Where as a result of performance-based payments over the last couple of years, we had a favorable position in terms of working capital, which will unwind through the course of this year, and that's a good part of what you're seeing here in the first quarter.

But those numbers are absolutely consistent with what we guided to you guys in the overall cash numbers.

So we'll see that working capital impact through the course of the year, but again, completely planned and consistent with expectation.

And so, we have no change in our confidence in terms of our overall cash flow for the year.

Very helpful.

Thank you.

Sure.

Your next question comes from the line of George Shapiro from Shapiro Research.

Yes, Scott, I wanted to pursue a little bit more this R&D.

So you made a comment first thing, that the R&D spend was more than offset, what was maybe $5 million step up in Beech.

Could you quantify how much more it offset, and then how much lower the R&D might be in the subsequent quarters?

So the dynamics we have in the quarter, George, for sure we have the last quarter really of any of the step up impact on accounting in aviation.

That was about a $5 million number.

And all I'm saying is that our spending on the R&D side on a year-over-year basis to be comparative, was a number that was quite a bit bigger than that.

So it was -- if you take those two significant pieces, it was dilutive to our margin rate or overall leverage if you will on a year-over-year basis.

But again, they're in either case are these huge numbers.

It's just when you're looking at a $40 million increase in revenue, the difference between $4 million better in margin and $8 million better in margin, and 10% leverage, 20% leverage, you're talking about a couple million dollars.

So it's -- none of these numbers are big numbers.

Yes, I recognize that.

I'm just wondering, so does R&D -- $10 million versus say, the step up being [$5 million] in the quarter?

I'm just trying to roughly calculate what that impact might be?

And then, how much higher R&D was this quarter, than what you might expect it to be in subsequent quarters?

George, it was on the order of about $10 million.

I mean, I think for modeling purposes, that's about the right number to put in there.

Again, it's not a particularly big number, and we don't expect it to change our overall Company R&D over the whole course of the year.

It's a relatively small number.

But it's on that magnitude.

Okay.

So does R&D go down a little bit, then in the subsequent quarters?

Yes.

But again, not by a very big number, because it was only up by a very small number.

Right, understood.

And Frank, just to qualify, the tax rate was more like 30% this quarter versus the 31% guide.

Are we going to still see 31%, or is 30% a better number?

I'd just keep using 31%.

It obviously depends on, at the end of the day kind of what our international versus domestic mix is, and we won't know that until we move further through the year.

But I'd continue to use 31%.

Okay.

And then, one last one, Scott.

Orders this year versus last year's first quarter are up like $90 million or so or almost 10%.

Was that still primarily domestic, or did you see more of the orders from international at all this quarter?

I would say, on the jet side, most of the orders in the quarter were US.

I think we'll see a more international mix here, certainly as we're proceeding through April into Q2.

Okay.

Thanks very much.

Sure.

Your next question comes from the line of Seth Seifman from JPMorgan.

Thanks very much, and good morning.

I'll really beg for your indulgence here, to ask one more question about aviation margins.

Which is just that if you look at what's implied for the remainder of the year, it looks fairly flat with what you did in Q2, Q3 and Q4 overall last year, excluding the inventory step up.

And so, to have flat margins year-on-year in aviation for the rest of the year, when it would seem like more Latitude deliveries to NetJet would be a head wind, what's sort of the opposing factor that allows you to keep those margins flat?

Well, I think, in general performance in the business is -- I mean, the guys are executing well, and we do have some volume that's increased on a year-over-year basis, and we still have good gross margin products.

So that does create leverage to help offset, some of what might be a bit of a negative mix on a year-over-year comparative basis, in terms of the mix of aircraft so.

Okay, great.

And then, just as a follow-up also in terms of the pick up in activity that you've seen in March and April, in terms of where it is or across, would you say that it's across platforms or is there any place where it's concentrated?

And one of the reasons I ask -- I know we're talking about small numbers, so it's hard to tell.

But if you just look at the high end, the Sovereign and ex deliveries were fairly low in Q1.

I know Q1 is light, but is that a place where you're seeing kind of incremental weakness in demand relative to the other platforms?

It's probably some of what you're seeing is, with the Latitude in there, we do see some aircraft that maybe a year, two years ago could have been a Sovereign are now going to be a Latitude.

So the aircraft in terms of their range and performance are different.

And for a lot of our customers, the Sovereign is still the right answer, and that's why we still see reasonable sales of Sovereign.

But for sure, when we look at the total number of aircraft in that Sovereign space, some of those are now becoming Latitudes.

So someone's in the middle of the country or they're in Europe, or they are in a place where that [2,800] per miles will get you there, they're tending to err the side of a Latitude versus a Sovereign.

So that explains kind of where I think we are on Sovereigns.

And on 10s, as we've said that's a fairly unique product.

It has been a very popular product over time, but it's a relatively small number of units each year.

Great.

Thank you very much.

Sure.

Your next question comes from the line of Myles Walton from Deutsche Bank.

Thanks.

It sounded like in the fourth quarter, the King Airs maybe were a little bit disappointing on the international side.

But I guess, Scott, some of your commentary there, sounds like you had seen a pick up as expected, and still expect year-on-year growth in King Airs?

Yes, I mean, I think we've seen the King Air market been pretty solid in most applications.

I'd say it's a little lighter on special missions than it has in the past, and that's a little bit what we saw in the fourth and the first quarter this year.

But remember, we also had the conversion going from the old cockpit to the new model that came out very late last year.

And so, getting that into production, and getting the last of the older models sold, and now making that conversion to the new model also had some impact on volume.

But frankly, with the new model out there is selling well.

We just got certification in Europe, which is [EASA] is a big deal for us.

So I think we feel pretty good about the King Air market and where it's going.

Okay.

And then, just a clarification on the margins.

The pension tail wind year-on-year, I would've expected would have been $10 million to $15 million across the segments, and maybe Aviation was $5 million of that.

Is that about the right way to think about the tail wind from pension?

No, it was probably somewhere around that $10 million number, but most of that is actually taken at corporate, just the way we -- well, I mean, we spread it out, but it wouldn't be $5 million at aviation.

It's going to be a smaller number than that.

So I wouldn't -- I don't know have the exact number in front of me, but it's a relatively small.

There's a benefit, but it's spread around the organization.

Right.

Okay, thanks.

Your next question comes from the line of Jeff Sprague from Vertical Research.

Thank you.

Good morning, gentlemen.

Good morning.

Just a couple of questions on cash flow.

Frank, thanks for the color on the -- or maybe it was Scott, but on the military dynamics.

But I was just trying to think about the quarter here.

Accounts receivable and inventories were both actually up.

I would guess that Bell issue is actually in some accrued accounts somewhere?

Can you speak to what was going on in the accounts receivables and inventories in the quarter?

No, the -- well, the issue I talked about on Bell is in the working capital line, Jeff.

So that's where it's reflected.

Yes, I'm just looking at the absolute growth and receivables and inventories in the quarter.

Jeff, just to be clear, the comment on customer deposits was a first quarter last year to first quarter this year, versus a end of year last year to this quarter, so --

Okay.

All right, fine.

And then, just shifting to pension, do you foresee continued contributions at this level, or is there a potential that those need to move up in the out years?

Well, it obviously just depends on returns and discount rates and everything else, but we don't see meaningful contributions beyond these levels in the near-term, unless there's some significant change in the market dynamics.

And then, I was also just wondering on the -- back to the tax rate, Frank.

There's this FASB change on stock comp that can be adopted this year.

It's not required until next year, but we are seeing a few companies adopt that.

Is that being considered this year, and is that something that could meaningfully impact your tax rate if you adopt?

No, I think, we're looking at it, but as I said, stick with the 31% as the right place to think about things.

And then, just one last one.

Could you give us some idea of what percent of the aviation backlog is the NetJet Latitudes, or some way to just think about that?

No, we don't get into that level of detail on the backlog, Jeff.

But the only thing I'd say around the NetJet thing is, that we really don't put stuff in from NetJet into that backlog, until we have agreed delivery dates, and tail numbers and that stuff.

So we will incrementally add NetJets to that backlog, only when we and NetJet says hey, look, this is when I want delivery, this is the date, this is the tail.

And so, there's only a small percentage of that overall order is in backlog today.

And that will grow, the number we put in there fairly linearly, as they start taking deliveries, and start committing to the next aircraft delivery date.

Right.

Thank you for the color.

Your next question comes from the line of Justin Bergner from Gabelli & Company.

Good morning, Scott.

Good morning, Frank.

Good morning.

I wanted to ask a question on the industrial business.

Would it be possible for you to give us a sense as to how the different parts of the Industrial segment grew, relative to that 6.5% organic constant currency growth in that business?

Yes, we can provide some color around that.

The -- I didn't have that number right in front of me, but if you looked at the overall growth rates for -- I'm not sure how to break it out exactly -- our specialized vehicle business had pretty reasonable growth.

We had a relatively flat market in our tools and test world.

Again, there's, just dynamics within that, which we kind of talked a little bit about.

I think we are doing very well in the utility space.

A lot of the other tools that were highly consumed by a lot of the oil and gas exploration kind of guys obviously continues to be soft, but net, there was some growth in that segment.

We had very solid growth on the automotive side of things on a year-over-year basis, and the turf care world was relatively flat.

Thank you.

That's helpful.

Given that the first quarter in the industrial business is tracking slightly ahead of your full year goal, should we think about the industrial business as being a segment that could exceed your earlier guidance?

Or are there parts of the business you don't expect to be quite as strong as you look through the rest of the year?

Well, I think we feel pretty good about where we are right now.

The guys in pretty much all of the businesses had a pretty solid quarter, but it's probably a little early in the year to feel like we would materially change the range on what we told you, with respect to the segment.

So certainly, on the track they're on right now, they'd be towards the high end of it.

But I'd say, it's pretty earlier in the year too.

Thank you.

Sure.

Your next question comes from the line of Ronald Epstein from Bank of America.

Hey, good morning, guys.

Good morning.

Just maybe a couple quick details.

You guys announced you won the 777X flight simulator at Mechtronix, so congratulations on that.

How big is that potentially?

I mean, how do we think about that for the Mechtronix business?

Well, it's a good question.

So the -- and I have to be careful, because I don't know exactly all that was disclosed with our customer.

But certainly, the scope of that contract is to provide the simulators for their use, as well as their training centers.

And beyond that, obviously a lot of Boeing's 777 customers will buy their own simulators for doing their own pilot training.

So I think that the scope of the contract that we have is for the sales directly to Boeing.

But obviously from our perspective, well, that's a great contract and we're thrilled to have it, it also gives us we think the position in the marketplace that we should win our fair share of end customers from Boeing, who buy their own simulators.

So the contract value is specifically associated with Boeing, plus future opportunities that are still to be determined.

Now just maybe for clarity, and thanks for that.

But this is a bigger -- Mechtronix historically wasn't as big a player, right, in large commercial, right?

This is a nice new segment of business for them, correct or no?

No, it is.

So true, when we bought Mechtronix, obviously part of the rationale for the acquisition, was we felt they had some terrific technology, a very capable team, and a great product.

But they were a very small company, and they have had some challenges, and got a little overleveraged at one point, and ran into some financial trouble.

And that hurts you in that market, because when you look at big customers, whether it's a Boeing or a lot of the major airlines in the world, these assets are like an aircraft.

They are very long-lived, right?

So companies want to know when you're buying a fairly high dollar capital item, that you're going to be able to be around and provide the service and support and upgrades and such over time.

And I do think one of the things that hampered them in the marketplace was, as a result of their financial struggles they had some uncertainty around them.

So it wasn't a technical or a product problem, it was a business viability issue.

And obviously, when we acquired them and sort of put our balance sheet and reputation behind it, that kind of got rid of that sort of barrier with a lot of customers.

So the team up there won the 737 MAX a couple years ago.

I think that they've executed very, very well on that.

The Boeing folks, obviously have been very happy with how the team has performed on the 737 MAX, and that gave them confidence to then also make us their partner on the 777X.

So if you execute well and perform well, it can throw a snowball in the right direction.

But for sure, part of the underlying thesis of the deal was that, we thought you had a Company that had a lot of great technology, a great product, a great capability, but it needed to have a little more certainty and strength from a financial standpoint.

And I think we've provided that.

Yes, cool.

Thank you for that.

And then, one more, my favorite airplane, the Scorpion, where do we stand on international interest, potential order, that kind of thing for it?

So I think there's a fair bit of international interest.

We still have a lot of customers that are talking to us.

We've had the aircraft all over the country.

We've had a lot of customers flying it, really the next major milestone for us -- well, there's really two.

One is that we've had a couple relatively minor things that we wanted to change in the production configuration of the aircraft.

We've completed that engineering work, and we're in the manufacturing process right now building that, let's call it, the conforming production version of the aircraft.

Customers obviously want to fly that, and see that before they would place an order.

And the other issue for us, was always around airworthiness, and how do you get a certification.

And as I think you've heard publicly, there is now an Air Force program, They're standing up a program office where they will conduct airworthiness certifications of aircraft that were not funded in development by the Air Force.

And so, we've already submitted our application in that process, so that's sort of a work-in-progress as well.

So we think this all kind of dovetails with getting the first conforming article built and ready to fly here, in probably early to mid summer.

And the airworthiness program will get underway, and the Air Force ultimately will provide the airworthiness certification of that aircraft, which is a big deal to all of our perspective customers so.

Sure, sure, sure.

Okay, cool.

Thanks.

Sure.

Your next question comes from the line of George Shapiro from Shapiro Research.

Yes, just a couple of quick follow-ups.

So Frank, the corporate expense being $32 million, you said it was due to the share price.

Does that though change at this point your thinking on corporate expense being around [$160 million] for the year?

No, I'd stick with the same number, George.

Okay.

And then, just to make sure, you commented after market was about 35% of revenues each year, which would imply about 3.5% to 4% growth in the after market?

That's probably about right.

I'd say, low to mid single-digit at this point.

Okay, and you had $164 million of acquisitions in the quarter, Scott.

Maybe if you could just list what they were, because you make a couple of small ones, and it's hard to keep track of them?

Well, the principal deals in the quarter were Able Engineering which we announced.

This is a repair and overhaul business that does sort of a mix of both Bell product, as well as some fixed wing products.

So we acquired that early in the quarter.

That's now integrated into our aviation services network.

But it's providing both work -- actually right now, probably more Bell than anything else.

So they had a company that had great relations with a number of our customers, that looked at a mix of how they maintain their fleet with a combination of both new parts as well as some parts that can be overhauled.

We've entered that business through that acquisition with Able, and frankly that's gone very well so far.

We also acquired in the first quarter, a company called ATAC.

This is a company that provides tactical training, and principally under contract to the US Navy, so supporting our current customers.

We fly missions that allow the Navy and the Marine Corps to not utilize their own asset, to provide things like [tactical] training, controller training, as well as adversary forces for schools like Top Gun, as well as a lot of other aggressor forces to emulate enemy aircraft in exercises conducted by the US Navy and the Marine Corps.

It also has a history of doing some work for the Air Force, there's a number of opportunities out there, that we think we continue to grow in that space.

And it's a nice augmentation for us, in terms of how we address customers, both in the US as well as internationally to provide training capability.

There was also a very small acquisition we did in the quarter.

A lot of the service and support that was done on the TRU simulation trading platforms in particular, the actual simulator maintenance which is an important part of the business, that had been effectively outsourced for quite some time to a small company that was doing that.

We think providing the right level of service of support is critical to those products over time, and didn't feel comfortable that we should be dependent on a third-party.

So we acquired, and it was basically acquiring those people, so that they're now part of the Company, as opposed to having a third-party conducting that service and support.

So the M&A impact on aviation at 1.3% that you mentioned in the slides, and was that all due to service, so the organic service number is somewhat less than the 3.5% to 4% I just mentioned?

Yes.

But again, it's not a huge number either, George, but a little bit smaller.

Okay.

Okay, those are my follow-ups.

Thanks very much.

Sure.

Your next question comes from the line of Noah Poponak from Goldman Sachs.

Hey, good morning, everyone.

Good morning.

So the 34 jet deliveries in aviation, if I take out 7 Latitudes, it's 27 ex Latitude deliveries, and last year it was 33 total, with no Latitudes.

So there's a 6 -- a unit decline of 6 units year-over-year ex Latitude in the legacy business.

How should I think about that rate of change, how it run rates through the remaining quarters of the year?

I think it's still going to be relatively flattish.

I think what you're seeing there is that the -- in the first quarter, as I said January and February were pretty slow months, with all of the stuff going on with the market and whatnot.

But the -- I'd say the rate of how the team is doing in terms of sales that will certainly pick up in March through April, and we would expect we will continue to pick up a bit through the course of the year.

So I don't think that we're viewing it as very different than we originally thought when we guided.

Okay.

I mean, should I be thinking -- rough order of magnitude, I had something close to 30 Latitude deliveries, so call that, up 15 for the year.

If that 6 run rated, that would be close to 25, giving you a net spread of up 10.

Is it in that ballpark, or it sort of sounds like you're saying that negative 6 could improve through the year?

I don't think that we can go into that level of granularity at this point.

I mean, we're going to be up -- I think we might be up a little bit more in Latitudes.

But the mix when you get down into M2s and CJ3s, and it's -- I just don't think that it's going to be materially different.

So I think, Noah, our original guidance, in terms of top revenue, we're still on track for that.

We're still on track to see most of the growth coming from Latitude.

And at the end of the day, we expect latest it would be approximately flat plus or minus.

Okay.

And I think you said you'd expect the Latitude to be mix, slightly mix negative to the overall segment margin this year.

Do you expect it to be negative or positive to the mix next year?

I think that I'm not ready to do 2017 guidance, Noah, the details.

(laughter) So I think we'll -- we don't know yet, next year or what we're going to look at in terms of the mix of NetJet versus normal retail sales.

So I think it would be probably premature to talk too much about that.

Okay, yes, understood.

It's -- the business is moving around.

I just thought maybe on that airplane, you might have more visibility further out, but understood.

Thank you.

Sure.

All right, Greg, that concludes our call for today.

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