達信公司 (TXT) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Textron second-quarter earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I'd now like to turn the call over to your host, Doug Wilburne, Vice President of Investor Relations.

Please go ahead.

Thanks, Stacey, 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 $3.5 billion, up $264 million from last year's second quarter.

Income from continuing operations was $0.66 per share, up 10% from $0.60 reported in last year's second quarter.

Manufacturing cash flow before pension contributions was a $26 million use of cash, compared to a positive $106 million cash flow in last year's second quarter.

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

Thanks, Doug, and good morning, everybody.

Before I discuss our results, I would like to comment on the 525 accident which occurred on July 6, during developmental test flight that tragically claimed the lives of two Bell pilots.

Both pilots were highly regarded individuals, well-respected members of Bell's team, and very experienced test pilots.

We will miss them greatly, and keep them and their families in our thoughts and prayers.

We're currently providing assistance to the NTSB, in support of the investigation to understand exactly what caused the accident.

We've suspended flight test activities on the program, until we determine the cause of the accident.

In the meantime, we're proceeding with all non-flight-related certification and program activities.

At this time, we do not have an estimate as to when flight testing might resume, or the length of delay in certification or first deliveries.

We do remain committed to 525 program, and we'll work to ensure the aircraft will be a safe, reliable, and high performance helicopter.

Moving to the quarter, revenues were up 8.1%, reflecting our ongoing investments in both new products and acquisitions.

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

At Bell, we delivered six V-22s, flat with last year's second quarter, nine H-1s, up from six units last year, and 24 commercial helicopters, down from 39 a year ago.

On the commercial side, our new 505 Jet Ranger X continues to generate strong interest in the marketplace, and certification activities remain on track to support initial deliveries at the end of this year.

On the customer service front during the quarter, we opened the new paint and delivery center in Prague to provide full aircraft completion and delivery capabilities to customers in the region.

Moving to the military side of the business, during the second quarter, we received an order for an additional V-22 under the current multi-year contract for delivery to US Air Force, and earlier this week, we received an order for four additional V-22s for delivery to Japan, and we continue to work with the DoD to identify sufficient quantities both domestically and internationally to support a third multi-year contract.

We also continue to make progress on assembling our first V-280 aircraft, as we reached the important milestone of mating the wing and nacelles to the aircraft fuselage in late April, bringing us one step closer to our scheduled first flight next year.

We displayed our full scale mock-up at Farnborough last week, and had significant interest from a large number of international customers.

Moving to systems, revenues were up significantly from the first quarter and last year, reflecting international weapons deliveries and higher unmanned aircraft volumes.

On the TAPV program at TMLS, we're making final preparations with our Canadian customer to begin deliveries next month.

At our unmanned systems business, we received a contract for upgrading an additional 24 Shadow systems, which takes us through the end of 2018 for this program.

The Shadow system also reached a major milestone during the quarter, achieving one million hours of in-service operation.

Finally at systems, earlier this year, we acquired a small business located in Newport News, Virginia called Airborne Tactical Advantage Company, or ATAC.

This business provides tactical flight training and adversary services to the US Navy, Air Force, and Marine Corps, using a fleet of 27 fighter and tactical aircraft flown by former US military fighter pilots.

During the quarter, ATAC was awarded a new contract with the US Navy worth up to $43 million over the next year.

ATAC's great fit for the Company, as it has significant synergies with a number of our businesses and a good growth outlook, as we believe the US DoD and foreign militaries will increasingly rely on third-parties to provide live airborne threat training services.

Moving to industrial, we saw a 8.3% increase in revenues, reflecting growth at Caltex in specialized vehicles.

At specialized vehicles, we began shipping our newest Bad Boy Off Road product, the Stampede 900, a recreational 4 by 4 utility vehicle with unmatched power and unrivaled hauling and storage capacity.

We expect the Stampede will contribute to top line growth, as this product taps into an entirely new market for this business.

During the quarter, we also acquired Premier Engineering & Manufacturing, a producer of deicing vehicles for the aviation industry.

Premier will be part of our ground support business, which continues to grow nicely as airlines and airports invest in their infrastructure.

At Caltex, we continue to see good volume growth, reflecting ongoing adoption on our selective catalytic reduction product lines.

Moving to Textron aviation, revenues were up $72 million, while profits were down $7 million.

The increase in revenues reflected the delivery of 45 jets in the quarter compared to 36 last year, and 23 King Airs compared to 30 last year.

The increase in jets reflected nine Latitudes, including our first delivery to NetJets.

The Latitude continues to do well in the market, with superior performance, range, comfort and operating costs, and customer acceptance has been strong, including sales of fractions by NetJets to their end customers.

As a result, NetJets increased their total expected contract requirement from 150 to 200 units, and accelerated their delivery schedule.

However, launch pricing for the Latitude has been less than what had we hoped for, due to competitive dynamics in this segment of the market, resulting in a lower per plane margin contribution.

Looking forward, while a large portion of our capacity is currently allocated to NetJets, we continue to see strong end customer demand, which has translated to improved pricing for second half and next year deliveries.

Overall, we believe we're still on track for our aviation segment profit outlook, although our margins will likely be at the lower end of the range, with slightly higher volumes of expected Latitudes.

Longitude development continues to progress, as we mated the wing and nacelles to the aircraft fuselage on our first aircraft in May, and powered the electrical distribution system three weeks later We're on track for first flight later this summer, and the aircraft continues to generate significant interest, as customers anticipate its entry into service late next year.

On the service front, we opened our newest line maintenance station in Bremen, expanding our support offerings in Germany and throughout Europe.

Moving to the Scorpion, the program is gaining momentum as we've begun the US DoD accreditation process with this week's signing of a cooperative research and development agreement with the United States Air force.

Also production of the conforming aircraft is nearly complete, with first flight expected next month.

We believe having the accreditation process underway and the conforming aircraft available for demo flights will help facilitate the initial sales of the aircraft.

Last week at Farnborough, we also announced that we were selected by the team of QinetiQ and Thales to supply Scorpion jets for their bid on the UK's Air Support to Defense Operational Training program, should they win the competition.

To sum up, demand in our end market has been challenging, but we continue to believe that our new products and recent acquisitions will continue to contribute to overall growth in revenue, earnings and cash for the year.

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

Thank you, Scott, and good morning, everyone.

Segment profit in the quarter was $328 million, up $22 million from the second quarter of 2015, on a $264 million increase in revenues.

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

At Textron aviation, revenues were up $72 million from this period last year, primarily due to volume and mix.

Segment profit was $81 million, down from $88 million a year ago, primarily reflecting an unfavorable impact from the mix of products sold in the period.

Backlog in this segment ended the quarter at $1.1 billion, $122 million higher than at the end of the first quarter.

Moving to Bell, revenues were down $46 million, primarily due to volume and mix.

Segment profit decreased $20 million from the second quarter of 2015, reflecting the lower volume and mix.

At Textron systems, revenues were up $165 million, primarily due to higher volumes in our weapons and sensors and unmanned product lines.

Segment profit was up $39 million, reflecting the higher volumes and mix.

Industrial revenues increased $77 million due to overall higher volumes and the impact of acquisitions.

Segment profit increased $13 million, reflecting the higher volumes.

Finance segment revenues decreased $4 million, and profit decreased $3 million.

Moving below the segment line, corporate expenses were $31 million, compared to $33 million last year.

Interest expense was $37 million, up $5 million from last year.

On the tax front, the Internal Revenue Service approved a settlement on July 11 of our 1998 to 2008 tax years.

As a result, in the third quarter, we expect to record an income tax benefit, including the reversal of accrued interest of approximately $315 million, of which approximately $200 million or $0.74 per share is attributable to continuing operations.

The settlement results in an immaterial net benefit to consolidated cash during the year.

To wrap up with guidance, we are reiterating our expected full year EPS from continuing operations of $2.60 to $2.80 per share, exclusive of the tax settlement.

We also continue to expect cash flow from continuing operations of the manufacturing group before pension contributions of $600 million to $700 million.

That concludes our prepared remarks.

So Stacey, we can open the line for questions.

Thank you.

Carter Copeland, Barclays.

Hey, good morning, guys.

Good morning, Carter.

Scott, I wondered if you could speak to the aviation margin?

I know you talked about last quarter, when we did the incremental math, the Longitude R&D being elevated ahead of that first flight.

Can you quantify how much of an impact that would have had on the incremental this quarter?

Well, Carter, it did have incremental impact, for sure.

It wasn't probably quite as significant, as it was in the first quarter.

I would say, probably most importantly from an R&D standpoint we've, in the first half, at aviation had pretty high levels of spending.

And that really was largely around getting ready for the Longitude first flights, and flight test programs.

So we've incurred an awful lot of R&D.

So our total year number is still going to be about what we thought it was, but there'll be a significant reduction in the second half -- just associated with the fact, that we're just about complete with the high spending load on the Longitude program.

And on the pricing impact, you talked about on Latitude, what sort of gives you the confidence that the pricing improves as you exit this year and into next year?

Well, the fact that we already have a lot of aircraft sold.

And so, we're looking at actuals in terms of the realized pricing that we're seeing in the second half of the year and going into 2017, versus the pricing that we had realized on the aircraft that have already shipped in the first and second quarter.

So there's no change in the NetJet pricing, that's a fixed number through the period.

But when you look at retail aircraft sales, whole aircraft sales to end customers, what's already in our book is higher in the back half of the year and into 2017, than what we've experienced in the first half of the year.

Great.

Just wanted to make sure it was in the backlog.

Thanks, I'll let somebody else ask.

Julian Mitchell, Credit Suisse.

Hi, good morning.

Thank you.

Just wondered on the aviation side of things.

If you look classically, you do have a very healthy, second half versus first half margin ramp.

Should we take from your prepared comments that the margins in the back half are flattish year-on-year, for the second half of last year in that segment?

Oh, I'm sorry, Julian, I haven't looked in the numbers in front of me, just in terms of a comparable from 2015 to 2016 on the second half.

But certainly, incrementally as we usually see, you can certainly expect better margin rates as we go through the second half of the year versus the first.

In part, driven by the fact that we normally have higher volumes, and we would certainly expect to see that.

But also as I mentioned, we'll have lower R&D spending as well within that segment.

Okay.

But you still think you can get to about 8.5% for the year as a whole in aviation?

That's correct.

Thank you.

And then, on Bell, just very quickly, any color you could provide there on the trends in the commercial side, particularly aftermarket?

And there as well, the margins year-to-date running at the low end of the original full year guide.

Should we expect a second half pick up in that?

Well, I think we will have a second half pick up.

Look, the end markets in the commercial helicopter business remain very challenging.

What's most critical for us, obviously, is around our 412s.

I think we still have reasonable line of sight on needing where we need to be this year on 412s.

As I mentioned in the last quarter, we think there's some -- a number of opportunities out there that we're working on, which hopefully will give us some better visibility into the future.

But at least in terms of how we think the year will close out at Bell for 2016, I think it will be consistent with our expectations.

Great.

Thank you.

Sure.

Jason Gursky, Citi.

Hey, Scott, good morning.

I just wondered, if you could just walk us around the world and talk about demand generally speaking, across your varied segments in North America, Europe, and then maybe over into the Middle East and Asia?

Well, I think if you looked at the aviation business, the US remains probably the strongest market.

We've seen, particular earlier in the year, a little bit of an uptick in Europe, which has been encouraging.

Obviously, we saw a fair bit of dislocation here, everywhere in the world in the last few weeks of the quarter, with the whole reaction to Brexit.

I don't think any of that is actually fundamental at a macro level with Brexit.

But just the upset in the financial markets create a lot of uncertainty, which froze things up.

But I think other than that, we've seen a bit of a strengthening in Europe.

South America is still very difficult.

I think there's some opportunities that are starting to show in some places like Argentina, that are starting to improve modestly.

But Brazil, most of the economies down there are still very, very challenged.

Middle East is, there's activity certainly across most of our businesses, but again, it's a challenging environment.

The conflict, the wars are going on down there have a lot of the governments fairly distracted and focused on pretty immediate needs, as opposed to much in the way of long-term work.

But there certainly are opportunities that are in the works.

That Southeast Asia, frankly, is one of the healthiest on the international markets, in terms of opportunity.

There's economies that are little more diversified and doing okay.

China continues to be okay for us.

It's not the strength of the growth, maybe that it was in the past, but it's certainly generally speaking, solid, particularly in the aviation segment.

So automotive, I think, our numbers fairly well match what you see going on in the world.

The European market has actually been stronger, and North America has had general strength, but there's more strength in the larger vehicles, in the trucks and high end, than there are in some of the smaller models, just I think reflecting the price of gas.

So I don't think that we're seeing anything probably that would surprise you a lot, versus just what's going on in general, in terms of what GDP looks like in these various regions.

Okay, that's helpful.

And then, Scott, you made some comments about conversations with customers on the Longitude.

I'm just wondering if you can give us flavor for how you think how pricing is going to shape up in that, given the fact that we had goal posts moved us, on us a little bit here on the Latitude?

And what kind of customer mix, are you expecting here out of the gate on the Longitude?

Are we going to be selling into the fractional guys, or is this more directly into customers on a one-off basis?

Well, I think at this point, we expect it to be primarily just end use customers on the Longitude.

We've had kind of our normal sort of customers that have been into Wichita pretty extensively, looking at the aircraft.

As you may recall, we had a full, not just a mock-up, but a full aircraft that we displayed last year, and we've kept that aircraft at the plant.

We've had lots of people coming in to look at it.

And with respect to pricing, I think our challenge on Latitude is that our competitor in that space has two aircraft, right?

One, which is the smaller aircraft, which is really what we thought we would end up competing with, with the Latitude that was sort of our intention.

And then, they got a larger aircraft, and those two aircraft have created a pricing problem.

I think our performance and our range, we're far superior to the smaller aircraft, which is where we wanted to be, but is kind of using the larger aircraft to try and compete with us, and that's really what's generated a lot of the pricing problem.

When you look at Longitude, that's the combination, where you have the much larger aircraft, and frankly, performance and range and [load] that I think will distinguish us very nicely from where the competition is.

And so, certainly our expectation is that we have a much better pricing position, because we can distance ourselves in terms of performance and capability of that aircraft.

And there's not another aircraft, the competitor has sitting on top of that, to try to bring down on price to compete with it.

Great, thank you.

Sam Pearlstein, Wells Fargo.

Good morning.

Hi, Sam.

I was surprised that you guys didn't buy any stock in this quarter, and I know at the end of last quarter, you only had about 4.5 million shares left in the authorization.

So just can you talk a little bit about philosophically how you are dealing with that, and then typically when does the Board look at that, as to whether you need to expand the buy back?

Well, Sam, we did an awful lot of buying in the first quarter.

So we did back off a little bit on the second quarter.

But I wouldn't attribute it to the share, short of the shelf that's sitting there.

We still do have 4.5 million or so available under that.

But if we thought it was the right thing to do, we've had these discussions with the Board, and there'd be no problem going back and extending that authorization.

So it's just, we haven't officially taken that action, because we still have enough that's available to exercise under the previous authorizations, that we haven't taken that formal Board action.

But I mean, obviously, it would have to be a discussion with the Board.

We've had preliminary discussions, and I wouldn't expect that that would be an issue.

Okay.

And then on the aviation side, the $120 million or so increase in the backlog, is that driven by any particular products, or any way to look into that and say there's a trend there?

Well, we're trying, Sam, not to go model by model in terms of backlog.

But it would be a pretty safe assumption that Latitude is driving the bulk of that.

Okay.

Great, thank you.

Sure.

Noah Poponak, Goldman Sachs.

Hey, good morning, everyone.

Good morning, Noah.

Scott, I don't know how far or deep you'll go, but I just wanted to stay on that last question if possible.

It would be really helpful to be able to understand, like we see the headline backlog and the headline book-to-bill being better in the quarter.

It'd be great to understand how much of that is NetJets, Latitude, aircraft folding into the backlog, as you've said you'll do carefully, versus something at Beech, versus just pure underlying regular, old business jet?

Well, no, again, I don't think we want to get into the specifics on a model by model basis, and we haven't done that in quite some time.

But look, I think it's not just NetJet.

I think we've been pretty open about the fact that Latitude is selling well.

And our expectations for the year was that the overall market would be generally fairly flattish from last year, in terms of most of the model types.

And most the growth would be driven by the big new product introduction, which in this case this year is Latitude.

And so, I think that expectation is kind of what we're seeing.

We are seeing good demand on the Latitude, both on the NetJet, as well as on the retail side, and other models are selling fine.

They're selling consistent with how we expected.

Some models are stronger than others.

But in general, the volume on the jet side is what we expected, and the thing that's driving the upside in terms of growth on a year-over-year basis.

And then, we would continue to expect to see that, as we roll into next year is based on Latitude.

And so, the bulk of that increase in backlog, I would say is going to be attributed to that, both NetJet and retail sales.

Okay.

I understand the desire to not get into specific aircraft.

But just the NetJet situation alone is pretty unique.

And if there was zero NetJets brought into backlog versus if there 15 to 20, it's a difference between a book-to-bill of 1.1 and of 0.8.

It just makes a big difference.

I don't know if you would consider breaking that out today, or in the future or whatever but --

No, look, we're not trying to do this on purpose.

It's as competitively, very important.

I think our competitors and whatnot, would love to know which aircraft have, what kind of backlog.

And I, we can give you guys the absolute number, we can give you the color around where it's going, but I don't need to damage the business by providing my competitors a whole lot of information on where we stand on sales on which aircraft.

Sure, I understand.

What's your sense, Scott, of why market-wide used inventory is now back on an upward trend in business jet?

Well, first of all, it's -- in total, it is from the numbers, and I'm sure I read all the stuff that you guys read.

But there's an awful lot of mix down within that, right?

I would say that if you look at our aircraft, and particularly on that light mid-size, it's been relatively stable, and frankly, the market is healthy.

So the amount of turn, the number of sales that are going on has been fine.

So when we look at the amount of used aircraft sales that we had in a quarter, versus previous quarter, it's up.

We see the number of transactions that are in our space involving our aircraft are -- some seem to be doing fine, and we see relatively stable residual values.

So there's different dynamics obviously, in terms of what sizes of aircraft, and there are different markets, right?

The heavy iron market behaves differently than the light jet market.

So actually for us, and for our customers, they're looking to sell used aircraft, buy used aircraft, it's been pretty stable, both pricing and volume.

And now just to be clear, the availability of used Citations is not up.

It -- on a percentage basis, it's down slightly from where it was at the first quarter.

Right.

And that's what I'm saying, there's just a lot of variability from aircraft, model by model, sizes of aircraft, that you have to go through all the details.

But I think in the Citation side, we haven't seen much change.

It looks fine.

Okay.

Just finally then, with all of that, and everything you know today, and it being little more than half way through this year, where would you pin the likelihood of up, versus flat, versus down Cessna production next year?

Oh, I'm probably not quite ready to do 2017 yet.

But we certainly feel like -- our view has been generally that markets are fairly flat, but new products matter.

And that's what we saw last year.

That's what we're seeing this year.

We're not ready to do 2017 guidance.

Obviously, we still think -- feel good about where the Latitude is in the market and its trend, in terms of its demand.

And obviously, as we get into next year, we'll hit Longitude towards the latter part of the year.

So I think that will help us as well.

So but again, I think that will be positive.

Longitude will be positive, Latitude will be positive.

It's too early to make a call on just sort of the base market, I guess.

Okay, thank you.

Sure.

George Shapiro, Shapiro Research.

Are you on mute, George?

Good morning.

Hey, George.

Scott, I wanted to try and pin you down a little bit more on R&D.

It was up $11 million I think in the first quarter.

You said it was up less this quarter, though I figure maybe $5 million.

And then, do we get $5 million or $10 million drop in each of the subsequent quarters for the rest of the year?

That's about right, George.

Pardon?

That's about right.

Okay.

And then, Frank, what was the aftermarket growth in the aviation sector?

It was good.

It was kind of high single-digits type year-over-year.

So that's a step up from what we've been seeing as more mid single-digits in the prior quarters?

Well, we also had -- so we, I think we were healthy on our historic organic side of the business.

And of course, we also have Able, which is in the aviation services business, which is still coming in as an M&A transaction on a year-over-year basis.

And that business is doing well.

Okay.

And the weaker King Airs in the quarter, Scott, is that just how it fell in the quarter, or are you seeing impact from oil affecting King Air demand?

Well, I mean, there's a little bit of that, George.

I'm not sure that it is just specifically oil and gas.

But the King Air has had a strong international marketplace, is a big part of that business, and it's a good part of the business.

And it has certainly been a little bit weaker in the first half of the year.

And we've obviously, made some accommodation for that, and think it will be a little bit weaker than we'd like it to be.

But again, I think that's mostly driven by a lot of international markets that are just a little soft right now.

And last, when you mention talking about pricing up across the product line, is that pretty much across all the products, or is it more the lower end products versus the higher end?

Or if you can expand a little bit more on that?

Our product pricing in general, George, has been pretty flat.

There's been a couple models where we've seen a little bit of price, have a couple models that are a little bit -- at any rate, they're really very small variances on a year-over-year basis or quarter-to-quarter basis.

So I'd say right now, pricing by and large is fairly stable in most of the models.

Okay.

But you had commented that pricing is better in the second half of the year for --

Well, specifically, the Latitude.

Yes, the Latitude is the one that, as we work into the second half of the year, we're seeing a increased price, that's already largely booked on that product line.

So there's definitely a positive pricing trend on Latitude.

Okay.

Thanks very much.

Sure.

Myles Walton, Deutsche Bank.

Thanks, good morning.

Doug, you're sounding awfully happy this morning.

It must be because you're retiring, so congratulations on that.

Thank you, Myles, and that would be one factor.

So could you touch on the pricing comment you made, Scott, with respect to the second half of this year and into next year?

I mean, you're not carrying much of a backlog, so how much visibility do you actually have on pricing into 2017?

Well, I think it's -- obviously, it's mixed across the models.

The one we are commenting around, where we feel like we have seen some nice, positive momentum on the pricing side, is specific around Latitude.

And that product is pretty well-spoken for at this point.

Outside of NetJet, so from individual buyers, you have a pretty good visibility into 2017?

Correct.

Certainly, through the balance of this year, and just starting now, as we're selling into 2017.

Okay.

And then, as we look at the systems margins, obviously, really good performance there.

Were there any positive adjustments outside of just pure mix?

We have a small EAC, but it wasn't major.

Not material relative, to what we normally see.

Right.

No, it's primarily driven by the fact that -- as you guys know, the weapons and sensors business has a tendency to be lumpy, right?

Because we build at a stable level, but lot acceptance is typical of a lot of international customers.

So a lot of the positive margin is the fact, that we had significantly seen an uptick in volume in the quarter.

Okay.

And good execution performance by the team, in terms of getting it done, and doing it productively.

Okay.

And the only other one, so just a run rate, a clean up on interest expense, the tick there up, is that the new run rate, or is [133] still a good planning number for the year?

[135]-ish type number for the year.

Sounds good, thanks.

Seth Siefman, JPMorgan.

Thanks very much, and good morning.

Just a follow up on systems, with the small acquisition that you mentioned there, the strong margin in the quarter.

Can you quantify what the acquisition contributed, and would you say that your expectation for sales and EBIT there, is higher than it was at the beginning of the year?

The acquisition didn't play a whole lot into this thing.

I mean, as you'd expect in the initial year of a deal like that, there's step up, there's the normal accounting first year.

So I would say it's a relatively neutral impact on 2016, and we certainly expect it to be a nice accretive contributor in 2017 and on.

Okay.

Okay.

And then with regard to cash flow, you told us in the past to expect the cash flow to be fairly back half weighted.

Could you -- is there any way to sort of calibrate our expectations for -- there's a lot of cash coming in, in the second half, to calibrate our expectations for Q3 versus Q4?

I'm not sure we want to get in a quarter by quarter, but we certainly still feel confident, with the numbers that we provided in terms of the overall year guidance.

We know we've talked in the past, we know have a headwind associated with the customer deposits, largely the military payments that are sort of unwinding through the course of the year.

So those have been unwinding, as we've gone through the first half of the year.

And generally speaking for us, will serve to offset an awful lot of that in Q3 and Q4, as we see working capital reductions, and a loss of inventory through volume, largely in aviation and Bell, as we go through the balance of the year.

(multiple speakers) And TAPV, of course, which remember we don't start deliveries of those units here until August.

So that's fair bit of inventory that we've been carrying, that we'll see a significant reduction in Q3 and Q4.

And we're, obviously, always seasonally stronger in Q4, if you just looked historically, given the volumes that we see in Q4.

Great.

Thank you very much.

Sure.

Sheila Kahyaoglu, Jefferies.

Good morning, guys.

Good morning.

Just on Bell profitability, in terms of margins going forward, does it remain at about a 10% rate, if we assume commercial helicopters doesn't recover for some time?

Yes, Sheila, that's what we've talked about is probably being in 10% to 11% range.

And an awful lot of that will have to do with where we are, as usual on the commercial side, on 412's.

So again, I think we feel pretty good about where we are for 2016.

And we'll have a lot more visibility as we get to the end of the year, to be able to provide guidance on where we think that will be in 2017.

But at least so far -- for this year we're, I think we'll finish where we expect to be.

Got it.

And then, just one on the broader military opportunity set.

If you could talk about that a little bit, whether it's the V-22 or the Scorpion both domestically and internationally, and how you think about the programs and opportunities there?

Well, the V22, obviously has made some progress with the Japanese deal.

And those orders now are firming up and coming in, being exercised either under the multi-year II contract, or as some of the potential volume in a multi- year III deal.

There continue to be a number of conversations with international customers that are going on.

I certainly still think that Israel is potential.

That was talked about for quite awhile and moved out.

There's still uncertainty around that, but I think there's still conversations going on, which are at this point, very much government to government.

The same is true with a couple other countries.

And so, those are things, however, that would all be talked about in the context of a multi-year III.

So it's not something that's going to hit here in the next couple years.

The only ones we'll see really probably will be Japan in that near-term.

So there's certainly a lot of other discussion and opportunities, dialogue going on, some of which is public, some of which is not around H-1s.

The H-1 is performing fabulously for the Marine Corps.

It's both -- the utility and the attack versions of that are in the quote process, and proposal processes for several potential international applications.

So we'll be following that pretty closely.

Scorpion is still very much a wild card.

It was a huge milestone for us to have the Air Force sign up to do the accreditation program.

That just happened this past week.

We've had as you know, a number of international customers that have been looking at the aircraft, and there really have been two issues for them.

One is, how are you going to get this thing certified, so that they can provide their certification on top of it.

And not unreasonably, customers want to fly the production, fully conforming aircraft.

We have the accreditation path checked off, and here in the next month or so, we'll be flying the first production configured aircraft.

So our customers are already talking about when they are going to be able come in, and get a chance to fly the aircraft.

So two big milestones, sort of boxes that we needed to check, to get done before we can proceed with final sales of the aircraft.

Got it.

And just so, on the Scorpion, do you think international or domestic order is more likely?

Well, international has always been the focus of the aircraft, for sure.

And so, those are the deals that we've been pursuing and working, and staying close to those customers for awhile.

Look, I think there is US opportunity at some point.

I think there has been some papers written recently.

I mean, the Air Force is facing the reality in the US that cost matters, and they need more aircraft that guys can fly and build hours.

And frankly, a lot of missions that can be executed that don't need to have very, very high end fighter capability.

But those requirements, I think are still in the early formative stages within the US.

And so, we'll -- well, I think we'll see how that plays out here over the next year or two.

Okay.

Thank you.

Pete Skibitski, Drexel Hamilton.

Good morning, guys.

Yes, a couple quick program questions.

Scott, on the T-6, you guys delivered about 22 year-to-date.

I'm wondering if you think you'll hit 40 for the full year, because that would make it flat year-over-year?

And I was actually thinking it would trend down, because I think US deliveries are over?

So just wonder what your thoughts are on that program going forward?

Yes, I think it will be fairly flat for the year.

The US program is winding down, but we've had a couple international programs that we won, which will flush out or fill out the year.

So I think 2016 feels fairly solid, and we'll -- deliveries will be exactly where we expect them to be.

Okay.

And then, just last one from me, Sensor Fuzed weapon, I think there was some news in the quarter that the State department was considering blocking the sale to Saudi.

I was wondering if you heard the same thing, what your thoughts were, if that's real or not?

And I know this is a lumpy program, but I think Saudi was one of the meaningful customers, so just raised a question in my mind there?

Well, they're not a current customer, they're a prospective customer for sure.

They have been a customer in the past.

And so, but basically, Pete, you're right, there's a lot of issues going on, between the State department, NSC, and what's going on over in the Middle East.

And that is certainly, at a minimum, delaying getting approvals.

Whether that breaks loose and ultimately is approved, or whether it's not, is still to be determined, but there's certainly an interest on their part.

It's been notified to Congress in the past.

It was approved through that notification process, but now going back through, and getting the approvals through State, it is hung up at this point.

Okay.

Okay.

That's helpful, thanks, guys.

Sure.

Justin Bergner, Gabelli & Company.

Mr. Bergner, your line is open.

We'll go to Cai von Rumohr, Cowen and Company.

Yes, thank you very much.

And Doug, too young a man to retire.

So you guys had very nice results at systems, and that's even without any shipments of TAPV that come here -- in here in the second half.

On paper, it looks like systems might have some upside.

Is that a potential?

Well, I don't know, Cai.

I mean, it's probably too early to say one way or the other.

But look, and you know that the SFW side in particular can be lumpy, just because of the way those deliveries happen.

It was a very strong quarter for that business.

TAPV will certainly kick in here in Q3 and Q4, as we expected that it would.

But again, that's all, it is built into our plan, right?

We did expect the TAPVs to be Q3 and Q4.

So it was a [very good] quarter for that team.

I think that they're going to deliver a very solid year.

But right now, my expectations is, it will be consistent with what we guided.

Okay.

And then, alternatively, when you look at Bell, you had a strong military shipment in the first half, and that looks like it's going to be weaker in the second half.

And commercial again, was weak in the first half, has to get better in the second half to kind of get you home.

My understanding was that commercial margins were lower than military margins.

So is there much risk at Bell that, that mix, that you come in at the low end or below it?

Well, the mix is different, even in the commercial world, model by model, Cai.

I think that our military margins are solid, and will stay that way through the balance of the year.

We're delivering the same V-22s and H-1s that we delivered in the first half.

So I think that business is in good shape, and they'll deliver to our expectations.

I do think we'll be lighter on some of the commercial volume in total number than we would have expected at the beginning of the year.

But it's largely in a lot of the lighter helicopters, which on the initial equipment sale is not as material to the business as others.

Now those aircraft, of course, turn into a lot of service opportunities.

So I mean, net, the margins on the commercial side are still good, because of all the service that those aircraft pull through with them.

But to be light, in terms of volume on some of the lighter aircraft will not have a meaningful impact within the year.

In the end, it all comes down largely to the larger aircraft, in particular the 412s.

And I think we're on track to do that.

And those are more heavily laid into the back half of the year.

Got it.

And then, switching to aviation, so you mentioned the better pricing for Latitude in the second half.

Talk to us a bit about the productivity, does the profitability improve?

Because presumably you're coming down the learning curve as time goes by, so should we expect the profitability of Latitude to improve going forward?

Well, I mean -- okay, I think that in general it will.

There's always a little bit of start-up costs and variances and whatnot in the early model years.

The team has done a nice job on costs, frankly, the aircraft is coming in around the costs, where we expected it to be.

Is there still some benefit to be had?

Certainly.

And especially, since we have for the first time in a long time, a fairly significant volume of aircraft, which are to the same configuration, that being NetJets obviously, which will help.

I mean, so obviously, the guys in the factory are focused on that, and trying to drive some incremental productivity and efficiency around that.

So we'll see some benefit from that.

And I think in part, that will help us with some of our margin rates, as we go into the back half of the year.

Got it.

And then could you conjecture, when you look at the Longitude, when in the second half it might deliver?

Does it look like very late in the year, or could really have any sort of meaningful impact in terms of next year?

Well, I mean, it's largely going to be a fourth quarter issue, Cai, and I don't know that we really want to guide too much on it yet.

We're still -- we haven't started the test flight program yet.

And we still have to go through the certification process with the FAA.

So it's -- having not yet started flight tests, it's probably a little bit early to get a sense of where we are in that process, and what the exact schedule will come out to be.

But it's easily a year flight test program, right.

So you're talking about something that would probably be best case, late third quarter, probably into fourth quarter.

Well, that's why I asked, because when do you expect it to fly, because usually I would expect it to take at least a year to kind of get the thing certified?

So it, I mean, there would be some risk that it might slip out of 2017?

Well, there's some risk to that, of course.

But Cai, we're thinking we're going to be flying here in the next couple months.

So a year flight test program, that puts you at the end of third quarter, beginning of fourth quarter.

And as you know, we've been able on other models and programs to get certifications done, in that kind of a time frame, and make some deliveries shortly thereafter.

So, there's still -- there's certainly a reasonable probability that we'll see fourth quarter sales of Longitude next year.

Worst case, if there's a few month delay, for sure, it could roll into the beginning of 2018.

But again, we'll know an awful lot more, when we get around to really doing 2017 guidance, because we'll be months into flight test, and have a better feeling for where we are.

Terrific.

Thank you very much.

Sure.

Justin Bergner, Gabelli & Company.

Good morning, guys.

I'm sorry about not being there, when I was first in the queue earlier.

No problem.

Two quick questions.

First on this tax impact, will there ultimately be a benefit to Textron from a cash point of view, related to this $315 million and $0.74 from continuing operations?

There will be a little bit of cash inflow flow associated with it, but it's not material.

As we said in the comments, I think obviously the big cash impact is that, the avoidance of kind of paying what we had accrued on the books here, obviously.

So which we always expected, but had the reserves for over a substantial period of time.

But there will be some cash inflow associated with it, but it's not material.

Okay, great.

And I know the call hasn't focused as much on Bell, but are you seeing a bottoming in the commercial rotorcraft market, or are you still seeing incremental weakness, as you look out into the second half of the year?

I don't know, it's hard to say.

I certainly hope it's a bottom.

It is pretty tough out there.

Okay.

What sort of are you looking for on the Bell side, to get more confident that you've reached a bottom on the commercial side?

Well, obviously, not to be too simple, but orders, right?

We're talking to a lot of customers obviously, and we have a sense of where they are.

Oil and gas obviously, remains very difficult, right?

You've got some of these guys are in bankruptcy, they've got a lot of their fleet that's sitting on the ground.

They're just not being utilized.

Now the oil and gas cycle is, in all likelihood exactly that, a cycle, right?

We have seen a rebounding of the price of oil, but not back to where it probably needs to be for them to feel better.

It's starting to probably impact [postively] in some regions of the world where $50 or so is, you can extract and be profitable at that.

There's certain other parts of the world where it needs to be significantly higher than that, to make them feel like that end customer is going to start getting stronger.

And, of course, a lot of these economies, they're just oil and gas petro dollar based.

So their economies will get healthier, as that price per barrel rebounds.

But we don't really have a great sense at this point, what that lag is, between those rebounds and pricing, and how quickly that will flow through, to having the ability to invest in their fleets.

Or in general, in those economies, for people to feel comfortable to start laying out the funding for significant CapEx kind of projects.

But anyway, look, I wish I had a clear answer for you, but we talk to customers every day.

Our team is out there working it.

We kind of know pretty much every opportunity in the world that's out there.

It's just a matter of seeing some of this stuff start to convert to orders, and it's been soft.

When you see that in the volumes in the quarter.

And I'd be misleading you, if I thought it was going to, all of a sudden materially improve to affect the second half of this year.

Which is why I would say, I would expect unit volumes to be down, from where we would have expect it to be, but not with significant financial impact for the year.

Again, in terms of how we look out any further than that, that's something we'll have to work on, and factor that into how we guide for 2017.

And that will depend a lot on just the general outlook of what those conversations are like with customers.

And in particular, a number of opportunities out there, that are fairly significant, that will materialize or not between now and the end of the year.

Great.

Thanks for taking my questions, and for that perspective on the helicopter market.

Sure, no problem.

Jason Gursky, Citi.

Hey, guys.

I wanted to get back on to congratulate Doug publicly on his retirement, first and foremost.

And then secondly, Scott, just to ask you to offer up some perspective on the M&A pipeline at this point, and cash deployment going forward?

I'd say on the M&A front, most of what we've done this year have been relatively small, add-on transactions.

And I think that's something that we continue to look at.

There's a number that are in the pipeline that are relatively small.

We like doing those deals.

In general, they've been attractive for us.

They've played out very well, in terms of returns and financials, as they built into the business.

And so, our expectations is that's probably how things will continue to play out through the balance of the year.

There's always stuff we're looking at.

But at this point, there's nothing out there, that's of any materiality that's something I would say, hey, guys, here's something we're looking at or doing.

But we have a number of things that we're always looking at.

And whether one of those could happen in the balance of the year or not, is still to be determined.

In general, our capital allocation strategy is unchanged.

We reserve and target a certain amount of our allocation to M&A.

But again, it's all totally opportunistic, right?

If it's the right kind of deals, and we think it's good, we'll do them.

If we don't, then obviously, we don't do them so.

Great.

Thanks.

George Shapiro, Shapiro Research.

Yes, just a couple of quick ones.

On the Sovereign, we've seen the deliveries get pretty low.

Is it really just getting cannibalized from the Latitude, and what's your outlook for the Sovereign?

So there's certainly some cannibalization, George, between the Sovereign+ and the Latitude.

The aircraft are similar in some respects.

It's really a trade-off between, the size of the cabin versus the number of passengers and range.

So if you are looking, and your requirement is to do a little bit of a longer haul, and you need to put more packs on board, then the Sovereign is a great airplane, and that's why we still sell them.

And we have a number of customers that are still looking at acquiring the Sovereign, because it fits great for that mission, and it continues to be great aircraft in that area.

If you don't quite need the range, and you don't quite need the number of passengers, but you want to go with that larger cabin, then the Latitude is a great choice.

I think what you're seeing is that we have a fair number of customers that will give up a few hundred nautical miles, and don't need to have the higher passenger count, and they'll err on the side of the Latitude.

So from our perspective, they're both selling.

Certainly, with the Latitude being new, it is generating a little bit more demand, which is exactly what we expected.

And certainly, some of those customers, if you went back two years ago, may have been people that would have bought a Latitude.

But it's good having them both in the portfolio.

It gives us the ability to deal, work with a customer, and say what's your mission, and which one fits your mission better?

And that's kind of where we're continuing to sell.

Okay.

And on the 10, Scott, you still figuring, that that's kind of 6 to 10 a year, in terms of the demand there?

Yes, I think the 10, with just the market dynamic out there, George, it's just a relatively thin market.

It's a great aircraft.

We still have customers that love -- absolutely the airplane.

So we still see some demand, but it's going to be a small number.

Okay.

And then, one quick one for you, Frank.

Caltex, I mean, I don't think they have a huge amount of exposure to the UK, but with the devaluation of the pound happening towards the end of the quarter, probably didn't have a big impact this quarter.

How much of an impact, you look forward in the third quarter?

Yes, there's a little bit of an impact, George, but it's that not material on an overall basis.

It will be a little bit of a headwind, but not that much.

Okay.

Thanks very much again.

All right, ladies and gentlemen, that concludes our call.

And for me, it concludes my 65th earnings call.

So I want to say thank you to all you fine analysts and investors, and a shout out to one person who has listened to 65 of these, and that would be my wife, Becky.

So all the best.

Thank you, ladies and gentlemen.

This conference will be available for replay after 10:00 AM today running through October 19 til midnight.

You may access the AT&T replay system at any time by dialing 1-800-475-6701 or 1-320-365-3844, and when prompted, enter the access code of 373339.

Those numbers again, 1-800-475-6701 or 1-320-365-3844, access code 373339.

That does conclude your conference for today.

Thank you for your participation, and for using AT&T executive teleconference.

You may now disconnect.