達信公司 (TXT) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Textron First Quarter 2017 Earnings Call.

(Operator Instructions)

Thanks, Brad, and good morning, everyone.

Before we begin, I would 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 $3.1 billion, down $108 million from last year's first quarter.

During this year's first quarter, we recorded $37 million of pretax special charges or $0.09 per share after tax, of which $22 million was attributable to the Arctic Cat acquisition that closed on March 6, 2017, and $15 million related to the restructuring plan we announced last year.

Excluding these items, adjusted income from continuing operations was $0.46 per share, down $0.09 from last year's first quarter.

Manufacturing cash flow before pension contributions reflected a use of cash of $205 million compared to a use of cash of $222 million in last year's first quarter.

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

Thanks, Eric, and good morning, everybody.

Overall, revenues and profits were down in the quarter, consistent with our expectations.

We're continuing to execute our restructuring plan while maintaining our focus on new product introductions and integration of acquired businesses, all of which will have a positive impact on our long-term growth outlook.

At Bell, revenues were down on lower military volumes for the quarter due to the timing of H-1 deliveries.

Despite the lower volumes in the quarter, Bell achieved an 11.9% operating margin.

We delivered 27 commercial helicopters, down from 30 in last year's first quarter; 6 V-22s, flat with last year; and 3 H-1s, down from 10 last year.

On the commercial side, we've seen our third straight quarter of improved year-over-year order flow.

And we achieved the first deliveries of our new 505 Jet Ranger X helicopter in the quarter, and order conversion remained strong.

We also had a good showing at HAI this year, where we displayed our first concept aircraft, the FCX-001, demonstrating innovations that could revolutionize the future of rotorcraft.

On the service side, we were named #1 in the helicopter service and support for the 23rd consecutive year by Pro Pilot magazine.

Moving to systems.

Revenues were up as we were able to accelerate our weapon delivery in the quarter, along with continued TAPV deliveries, although the TAPV program remains a challenge.

During the first quarter of 2017, TAPV production has not ramped up as anticipated, resulting in inefficiencies and revised estimates for production costs on the remaining vehicles still to be delivered under this contract.

Based on our revised estimates, we've recorded a $24 million loss in this contract in the first quarter of 2017.

This unfavorable performance was partially offset by strong program execution at Unmanned Systems.

In our Unmanned Systems business, we received an award for 2 additional common unmanned surface vessels in support of the Navy's mine countermeasure mission.

In our TRU Simulation + Training business, we qualified 6 commercial air transport full flight simulators and received an additional 777X full flight simulator order from Boeing.

Moving to Industrial.

We saw a 4.2% increase in revenues, primarily reflecting the impact of higher volumes at Kautex and the acquisition of Arctic Cat, which we closed in the first week of March.

Arctic Cat, which is now part of our Textron Specialized Vehicles business, immediately broadens our presence in the powersports segment and significantly expands our dealer network.

In specialized vehicles, we also began delivering on our new ELiTE series lithium golf cars in the quarter.

The ELiTE offers high efficiency with 0 battery maintenance and further demonstrates our industry-leading product innovation.

Moving to Textron Aviation.

Revenues were down $121 million.

We delivered 35 jets, up from 34 last year; 12 King Airs, which is down from 26 last year; and 2 Beechcraft T-6 trainers compared to 11 last year.

We were encouraged by the pricing trends on retail sales in the quarter as we experienced a sequential increase in price across all Citation and King Air models.

Citation Longtitude continues to makes progress towards certification by year-end, with a third aircraft entering a flight test program during the quarter.

On the military side, last week we received a $61 million contract from the U.S. Air Force for services and support on our Beechcraft T-6 aircraft.

Moving to Scorpion.

Our second production aircraft had a successful first flight earlier this week and will enter the flight test program.

In March, the U.S. Air Force formally authorized their OA-X light attack aircraft experimentation program, for which we have offered to demonstrate the capabilities of both the Scorpion and the AT-6 later this summer.

To finish, we are updating Textron's 2017 financial guidance to adjust for the Arctic Cat acquisition.

We're now expecting full year adjusted EPS from continuing operations in the range of $2.40 to $2.60, which reflects earnings per share dilution of $0.10 per share, consistent with our expectations at the time we announced that transaction.

Our outlook for cash flow for the continuing operations of the manufacturing group before pension contributions remains in the range of $650 million to $750 million.

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

Thank you, Scott, and good morning, everyone.

Segment profit in the quarter was $219 million, down $61 million from the first quarter of 2016 on $108 million decrease in revenue.

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

At Textron Aviation, revenues were down $121 million from this period last year, primarily due to lower commercial and defense-related turboprop volumes, partially offset by higher preowned volumes.

Segment profit was $36 million, down from $73 million a year ago, primarily as a result of lower volume and mix.

Backlog in the segment ended the quarter at $1 billion, approximately flat from year-end.

Moving to Bell.

Revenues were down $117 million, primarily due to lower H-1 program revenues.

Segment profit increased $1 million from the first quarter of 2016 despite the lower volumes, reflecting favorable performance.

Backlog in the segment was $5.7 billion at the end of the quarter, up $292 million from the end of the fourth quarter.

At Textron Systems, revenues were up $92 million, primarily due to higher Weapons and Sensors and Marine and Land Systems volumes.

Segment profit was down $9 million due to unfavorable performance at Marine and Land.

Backlog in the segment was $1.7 billion, down $113 million from the end of the fourth quarter.

Industrial revenues increased $40 million due to the impact of acquisitions and higher volumes at Kautex.

Segment profit was down $15 million, primarily due to unfavorable performance, which includes the operating results of Arctic Cat.

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

Moving below segment profit.

Corporate expenses were $27 million compared to $32 million last year.

This reflected the transition of the Scorpion program to Textron Aviation, partially offset by the effect of a higher stock price on stock-based compensation.

Interest expense was $34 million, essentially flat with last year.

Our effective tax rate was 17.4%, reflecting benefits recognized in the first quarter of 2017 resulting from audit settlements and the recognition of excess tax benefits related to share-based compensation.

During the quarter, we recorded pretax special charges of $37 million, which included $22 million attributable to the Arctic Cat acquisition and $15 million related to the restructuring plan we announced last year.

To update our previously announced restructuring plan, we now anticipate pretax charges of $155 million to $170 million from a previously announced range of $140 million to $170 million.

Through the first quarter of 2017, we have recognized pretax charges of $38 million under this plan.

In connection with the Arctic Cat acquisition, we are estimating full year pretax restructuring charges of $30 million.

During the quarter, we issued $350 million of 10-year notes at an attractive rate of 3.65%, and we repurchased approximately 4 million shares, returning $186 million in cash to shareholders.

As Scott mentioned earlier and consistent with our initial full year guidance range, we are now expecting a full year adjusted EPS from continuing operations in the range of $2.40 to $2.60 per share, which reflects earnings per share dilution of $0.10 per share from Arctic Cat.

We are maintaining our outlook for cash flow from continuing operations of the manufacturing group before pension contributions of $650 million to $750 million despite an estimated use of cash of $55 million related to the Arctic Cat acquisition.

That concludes our prepared remarks.

So operator, we can open the line for questions.

(Operator Instructions) And we'll move to the first question here with George Shapiro with Shapiro Research.

And we'll go to Cai Von Rumohr with Cowen and Company.

So your guide update, based on the first quarter tax rate, it looks like we're going to have a lower tax rate and weaker ops than you had when you first guided.

So maybe update us in terms of where is the tax rate likely to be for 2017.

And maybe run us through the operations, because it kind of looks like some of them are going to be light.

Well, Cai, let me say, on the operational side, most of the businesses performed consistent with where we expected and actually, most of them probably a little bit stronger performance, the exception, of course, being the TAPV program.

And obviously, that's a headwind for us.

So that $24 million of [ NOP ], I think, largely, over the course of the year, we think we can offset that.

As I said, we saw stronger performance in our Unmanned Systems business, we saw stronger performance at Bell.

And again, in general, most of the businesses are performing well.

The tax rate certainly will have some benefit.

Although the tax rate this quarter is lower, I think in the second, third, fourth quarter, we would expect to be in our more nominal rate, which means we'll probably finish the year something just under 30% in terms of the overall tax rate for the company.

But the issue for us really is to focus on the operations and find offsets to the impact of the $24 million charge on the TAPV program, and I think we can work hard to get there through better performance in most of the businesses.

Okay.

And then a quick one on aviation.

Maybe explain why the turbo -- the King Airs were as weak, and what you expect for the year.

And walk us through your color about pricing improvement -- improving as you went through the quarter for biz jets.

So I would say, on the King Air side, Cai, as you know, the King Air's have traditionally been a fairly international product, usually averaging around half of our sales, sometimes more than that.

And right now, with kind of where economies are and the strength of the dollar, it's just been tough selling on the King Air front, so we only had 3 international deliveries of King Airs.

I think if you look at the order pipeline, you talk to our sales teams, they feel pretty good that we'll see a positive trend as we go through the course of the year and feel like we can get to what our original plan was even though we're obviously lighter than we would have expected to be here in the first quarter.

So that's kind of the color, I suppose, on the King Airs.

The T-6s, that will not be the case, right?

I mean we know -- that was built in to our original plan, that we would see low deliveries on T-6s.

And again, there's some other opportunities out there, which I think will help us in the future, but it's going to be a pretty tough year.

And we always understood that on the T-6 front.

On the pricing in general, as we talked about on the last call, we're just -- we've sort of reestablished what we're willing to do in terms of pricing in the marketplace, and obviously, we've had to communicate that with customers.

There is still a very good deal, frankly, compared to historical pricing in the market, but I think it reflects our view of where we need to be to have a healthy business.

And so there were difficult conversations with many customers.

I think as we got towards the end of the quarter, people started to understand that, that's just the reality of where we are.

And we did see incremental improvements in pricing across every model, and we expect to continue that on a go-forward basis.

And that was true on both the Citation as well as the King Air front.

So again, I think we're in a -- we all know we're in a weaker demand environment maybe than we've seen in the past.

We've adjusted production rates down on a number of these aircraft, and we need to hold the line on the pricing to keep the business healthy.

And we'll go to the next question in queue that will come from Julian Mitchell with Crédit Suisse.

So I guess one bright spot in these results was the Bell margin performance.

I think you'd guided that to drop about 100 points for the year as a whole.

Obviously, you had a good improvement in the margin in the first quarter.

So was there anything specific around mix or anything that supported the Bell profits in Q1 that you think unwinds over the balance of the year?

Well, Julian, I mean, we're a little bit light, obviously, on the revenue side, but that wasn't really a mix issue.

It's H-1s, which were something that which -- was a relatively minor issue.

We had some tolerance issues, which has been resolved in aircraft during flight tests, so I expect we're more or less on plan in terms of how we expect the year to go from a revenue standpoint.

I think I wouldn't change our guidance in terms of how we think about Bell for the balance of the year.

But certainly strong performance, but it was across the board, with one -- no one specific thing or no specific mix impact that affected it.

So I think we'll perform to what we guided, and maybe there's a little upside based on the performance of the business for the year.

I think the guys are doing a nice job.

And then just with the aviation profitability, you talked about the Scorpion being about a $50 million EBIT impact in that segment for the year.

Was there any particular sort of front loading in those costs?

And I guess, related to that, how do you feel about the overall aviation cost base exiting Q1 in light of the orders performance?

Sure.

The -- so absolutely.

If you look at the Scorpion program, we forecasted kind of within the guide to be about 100 basis point dilution for the year.

That's certainly very much front-end loaded.

It was in the order of a couple of 100 basis points or so in the quarter, just to give you a sense of that.

And that's just the fact that we're sort of in the heavy-spend part of that program in the latter part of last year, beginning half of this year as we get the aircraft ready for the flight test program, for the airworthiness as well as, obviously, our expectation that we'll be able to participate in this Air Force experimentation program.

So we've got a lot of spend here in getting those aircraft in the air and not just the aircraft themselves but the mission systems that are expected to be there for the Air Force experimentation program.

So absolutely, in the case of Scorpion, that's very front half of the year loaded in terms of its impact to the aviation business.

I'd say in terms of the cost base, in general, the aviation guys actually did a pretty nice job in the quarter, delivering where we expected them to be, even though we were lighter than we expected to be on the King Air front.

So there's no question that volume was below our plan for the first quarter, again, driven primarily by the King Airs.

But given the King Air volume that was not there and what we anticipated in terms of the volume and mix on the jet side, the performance and the cost controls were where they needed to be to deliver on the operating plan.

And our next question will come from Sam Pearlstein with Wells Fargo.

Could you talk a little bit more about Arctic Cat?

Just help me understand, I guess, what should the Industrial segment look like this year now as you consolidate that and we look at the intangible amortization?

And you talked about the $55 million of outflow this year.

How should we think about, I guess, from an earnings benefit or even a cash impact into '18 at this point?

Well, most of the negative impact of the acquisition in terms of the 2017 financials is driven by solving the inventory issue, which has been out there for some time and which we knew about, obviously, and talked about as part of the deal.

And that was clearly factored into our valuation of deal economics.

So this issue of '17 operating performance is really very highly correlated to those rebate programs associated with clearing out the older-model product, and that will have, obviously, the operating profit hit and, certainly, the cash hit.

And we have factored that in.

As you noticed, we did not change our cash forecast for the year.

We think we have other opportunities in general in terms of working capital management that we can use to offset that $55 million of cash outflow associated with, in essence, cleaning up the inventory balance and the dealers as we go through the balance of the year.

We expect to clear the lion's share of that out.

Frankly, we're already getting pretty good traction.

The guys are very, very focused on resolving that issue.

So we've already seen a fair bit, which is why we had some impact in the quarter, of coming out of the gate and we know we have to go clean up the dealer channel to get this thing back on a growth trajectory and then generating good profit.

And that's certainly our expectation for 2018.

Okay.

And then from a restructuring standpoint, can you help me just to -- it looks like the total restructuring plan moved up a little bit relative to, I guess, the case that you could spend up as much as -- or have as much as a $47 million hit this year, but now it looks like it's a smaller amount.

So did programs get pushed into '18?

Does it carry forward longer?

Can you just update us on the restructuring?

No.

I think on the initial restructuring program that we announced, we brought the bottom of the range up a little bit, so we've tightened it.

But the top of it remains what we had discussed in previous guidance, so there's no real change there other than just tightening it.

And then that will certainly be done by the end of 2017.

I mean the bulk of it will be done by the end of the next quarter.

There's a little bit that [ trickles ] out towards the end of the year, and that's just because, in the case particularly of Jacobsen, we're sort of moving that stuff one production line at a time, and so it does go out to the end of the year.

In the case of the restructuring associated with Arctic Cat, the bulk of that was taken here in the first quarter because it had to deal primarily with deal costs and change of control clauses and things associated with the transaction, severance of folks here immediately.

And there's a little bit through the -- principally through the second, somewhat third quarter, but the bulk of it has already been taken.

And one last question.

Just with all the discussion about the Navy potentially looking at more ships, has there been any change in terms of the desire to pull forward Ship to Shore Connector?

Is there any change in kind of the outlook for that program?

So there are -- there have been some discussions about increasing the initial LRIP buy.

Right now, the original plan was a couple of ships.

They're talking about that could be as high as 5 ships.

We're in discussions with the Navy right now in terms of getting ready for the long-lead material to support that contract.

But to be honest, I mean, they don't have a budget right now.

So I can't tell you whether that number is 2 or 5, but the program of record appears very solid.

The program -- I think the Navy is happy with where things are and how they're progressing and, as I said, are ready to start long lead for the LRIP program, but unfortunately, just given the status of -- I mean, the CR and all the budgetary turmoil that's going on, we nor they, I don't think, have very good visibility right now as to what the number of units will be for this first LRIP tranche.

And our next question comes from the line of Robert Stallard with Vertical Research.

Scott, I was wondering if you could start on aviation and whether you could comment on the regional demand profile, whether you've seen any pickup in demand from the U.S. region.

Well, most of the demand is still very U.S.-centric.

I think, obviously, we've been there for a while, and I don't necessarily see that changing here over the next few quarters.

We do see some activity in Europe, which is encouraging.

We've had a couple of transactions in South America, but it's still a very U.S.-centric market right now.

And you've not seen any miss or any major pickup in the U.S. because we've seen some pretty positive economic indicators?

There's -- the pipeline, I think the guys feel pretty good about.

And obviously, we're pretty flat on a year-over-year basis in terms of the number of jets, but I think there's still folks who are kind of waiting to see what happens, particularly around the tax reform side.

So there's a little bit of a stall, kind of waiting to see what's going to happen around taxes and, therefore, expectations that people have around the U.S. economy.

So I think people are still positive, but a little bit guarded, waiting to see what will happen.

Okay.

And then on the TAPV, could you elaborate on what the issues were in the quarter and why you are confident you can reclaim the situation by the end of the year?

Well, I hate to go through a litany.

Look, the problem of this thing has been a series of issues, none of which are rocket science to fix, but things that just have not been -- met the expectation that the customer has in terms of some things around finish, and we've had some paint issues.

I mean it's -- yes, it's been a handful of issues, each one of which has largely led to some increases in bill of material cost and, more importantly, rework to get the vehicle to an acceptable condition.

And again, it's not stuff that's particularly technically challenging, but they've been a series of issues, and that's driven not only bill of material growth but an awful lot of rework.

And that's slowed down the pace of deliveries, and it has driven increased rework costs.

And that's why we finally got to a position, "So look, we just have to take this charge." Obviously, our expectation is, is that we're done with that.

We need to do a better job here on the ramp of deliverables.

I think we can still get to where we need to get to by the end of this year per our plan, but certainly, the first quarter, we did not see the ramp that we expected to see.

And that impacted both cash in terms of getting these things delivered and out of inventory and, even more importantly, it's driven higher costs, which has resulted in the charge.

And our next question comes from Rajeev Lalwani with Morgan Stanley.

Scott, a couple of Scorpion questions for you.

Can you walk us through the process from here, a possible Air Force order, implications for the program, whether you win or lose and just the competitive landscape there as you progress?

Well, the experimentation program is a stand-alone program, right?

So this is basically Air Force saying, "We want to see what's out there that would support that category of mission." So they have articulated what their expectations are, what kinds of things they would like to see demonstrated.

They issued that.

Companies were invited to send in proposals on what they would be able to demonstrate if they were invited to do that.

We have done that for both Scorpion and AT-6.

We think both aircraft, I mean, whilst they're different aircraft in terms of the performance envelope, can both fit within the realm of what kinds of capabilities the Air Force is looking to see demonstrated.

So we'll know here probably in another month whether we have been invited to participate in that.

The expectation right now is, at that program, the actual flying of the aircraft would occur in that kind of August into September time frame.

And what the Air Force has been saying publicly is that they will use that experimentation program to help inform them as to what's out there and available and use that as a basis to decide whether they're going to put together a program of record on a go-forward basis.

And given your comments earlier on Ship to Shore, how does CR come into play and budgetary concerns, et cetera, if at all?

Well, under a CR, obviously, you're not going to see any new programs.

So -- but I think that anything that would happen around Ship to Shore expansion is going to be a combination of what ultimately is approved even in the FY '17 budget, as you know, which doesn't exist.

So the resolution of the FY '17 and then, clearly, what's going to be in the FY '18 budget will drive programs like Ship to Shore in terms of their ability to ramp up and go into a limited-rate and, ultimately, full-rate production.

And certainly, anything around an OA-X-type program is something that's going to need to be embedded within an FY '18 budget.

So obviously, the Air Force has the flexibility to allocate some money to do things like an experimentation program to understand what's out there, but any kind of real acquisition program is something that would have to, I think, at this point, be in the FY '18 budget.

Maybe there is something they can put in to get something started in FY '17, but I think most of the funding associated with these larger programs would have to be FY '18 budgets.

A quick question for Frank, if I could slip one in.

Frank, I think you mentioned buybacks in the quarter, $180 million or so.

Can you just talk more about the step up there and internally, how you're thinking about capital returns given that shift?

Yes.

It's consistent with where we've been, which is we've said we're going to look to buy stock to at least offset the dilution associated with our employee stock programs and that, above that, we would look to be opportunistic kind of around share repurchase and return of capital relative to acquisition activities and other needs for the cash.

And so it was just a reflection of the fact that with the Arctic Cat acquisition happening kind of fourth quarter, we didn't buy much stock kind of, and so we look to offset some of the dilution and do other things in the first quarter here.

And our next question comes from Pete Skibitski with Drexel Hamilton.

Just to finish up on Arctic Cat, can you give us your updated expectations for Industrial revenue for the year?

So the Arctic Cat is probably going to be somewhere around $0.5 million.

Billion.

I'm sorry, $0.5 billion of revenue, and it's about 100 basis point dilution, which is how we get the sort of $0.10 EPS that we talked about and now have baked into the latest number.

Got it.

Got it, okay.

And then, Scott, is there any upside to Bell margin guidance for the year?

You started off pretty well there, and you talked about H-1 timing.

And so those will ramp the rest of the year, and I'm assuming they're at least in line with the sector average.

Any thoughts there?

They are.

Yes, look, Pete, I think, if we look at businesses that had strong performance in the first quarter or that we expect to continue through the balance of the year, it's certainly a couple of the systems businesses and Bell.

I think the guys -- again, it performed very well on the margin rate, and I think that we continue, as we've talked about, to feel pretty good about opportunities around the 412, which is a good margin product for us.

And you're right, the H-1s is purely a timing issue, and they tend to be in line with the segment margin rates.

So yes, I would say there is probably some upside potential at least on the margin rate side at Bell for the year.

And our next question comes from Seth Seifman with JPMorgan.

I guess, can you tell us -- do you plan to also offer the T-6 for the light attack experiment?

Sure, yes.

No, we'll submit both the Scorpion as well as the AT-6, which is the attack variant of the T-6 trainer.

So the experimentation in terms of the way it was expressed by the Air Force, in terms of the requirements or what they want to see demonstrated was, I think, intentionally broad enough to pick up a pretty broad swath of capability that would involve everything from aircraft class of the AT-6 in the sort of the single-engine turboprop class of aircraft up to and including twin jet kind of aircraft like a Scorpion-type aircraft.

So it's a -- the breadth of how wide, they kind of said, "Hey, here's what -- we'd like to see aircraft with the following kinds of capability," was, I think, very -- intentionally very broad.

And so where ultimately they want to go from a requirement standpoint, then -- if they go at all, is I think to be informed by that.

And so they'll be able to see aircraft that range everything from, I'd say, the light turboprop space to the heavier jets.

And the good news for us is we can put both capabilities into the program.

Yes.

And just as a follow-up, just a follow-up on Pete's last question.

Guidance for Industrial, excluding Arctic Cat, is that still about $4 billion of sales and a 9% margin?

Yes.

That was the original guidance.

And as Scott said, kind of Arctic Cat will be $400 million to $500 million, and about 1% dilution will be best reflected in that $0.10 of dilution that we indicated.

Your next question comes from Sheila Kahyaoglu with Jefferies.

Frank, if I could start with you.

Just on the manufacturing cash flow, can you talk a little bit about the working capital build in the quarter?

And how do you think that swings, if it swings positively in Q2, and just the ramp-up for the full year?

Yes.

Sheila, obviously, kind of Q1 is always a bit of a build for us as we -- given the seasonality of the business.

The first quarter from a balance sheet impact -- or standpoint was impacted by Arctic Cat.

So when you look at working capital, for instance, about $140 million of the inventory increase related to the Arctic Cat acquisition.

So it's hard to make an apples-to-apples comparison.

But kind of generally, we did okay on the working capital side, I'd say, in the first quarter, and we expect things to improve as we move forward and that Q2 kind of will be better than Q1 and cash flow will continue to improve as we move through the year.

Okay, got it.

That's helpful.

And then one on systems, if I could ask, just the top line trajectory there.

Weapons and Sensors is pretty strong.

Is that expected to continue throughout the year?

Or is that the -- how do we think about the last Sensor Fuzed Weapons shipments and just the profitability swings there quarterly?

So there's, basically, at this point, Sheila, one additional delivery that will happen for the balance of the lot on SFW.

Right now, we're in conversations with the customer on that as to whether that will be a third quarter or a second quarter delivery.

Right now, on a contractual basis, it's probably out in the third quarter.

If they have an issue in taking them, we could probably -- and again, not certain but we could probably get the deliveries and inspections completed to deliver on the second quarter if that's what they want to do, and that would be the last delivery.

Okay, got it.

That's helpful.

And then -- so the profitability mix sort of is in line with the full year guidance of 8.5%.

It normalizes once weapons comes down a bit and TAPV, I guess, resets.

Well, the impact there -- the only thing that's not factored into that guidance is that $24 million of the impact on TAPV.

Now as I said earlier, I think some of the offsets to that, from a program performance standpoint, are likely to be Unmanned Systems.

So we'll see some mitigation in -- within the systems segment, but part of the offset will also be in other segments.

So you can certainly expect that we will be on the low end or below the guidance range on systems as a result of that TAPV charge.

And our next question comes from Peter Arment with Baird.

Just a quick one on -- back on Scorpion.

Just Scott, how many -- you mentioned the second production aircraft just had its first flight.

How many do you need for the Air Force program?

Well, you could do it with just one.

They kind of leave that up to the companies.

We obviously have 2 that are flying right now.

We'll actually have a third that will be flying at that point in time.

And so depending on how they want to schedule things and run the operation, we could support that with probably 1 or 2 aircraft.

And then we would have a third aircraft that's really dedicated to the flight test program associated with airworthiness.

Okay.

And then just switching over on the -- you mentioned unmanned, the demand was there.

Is that really -- is that just operational tempo that's impacting that?

Or what specifically is driving that?

It's operational tempo, which is strong, and just performance in terms of managing cost and executing on the other contracts pretty efficiently.

So I think, overall, that business is -- flows to the next quarter, and I would expect that will continue for the balance of the year.

Okay.

And lastly, just you mentioned -- I think the T-6 shipments for the year, we know, are going to be down significantly.

I think the last time I heard, it was about 15 or so.

Is that still a good number to use?

It's a little lower than that.

Probably 10 to -- somewhere in the 10 or 12 for the total year.

And our next question comes from Ron Epstein with Bank of America Merrill Lynch.

Just a couple of quick questions.

Most everything has been asked.

Frank, on the delinquencies, they were up, and just not a big number but it was up 50% year-over-year.

What's going on there?

Is there anything?

Is it just seasonality?

Or what's going on there?

Yes.

There is no -- really no trends.

It bounces around a little bit quarter-to-quarter, but there is no trends.

And we feel good about kind of how the portfolio is doing.

Okay, good.

And then moving back to the vehicles business.

As we go into the spring here, and I would imagine the selling season for side-by-side vehicles is picking up, how does that look?

I mean, can you give us any color on the order activity and the shipment to the channel and all that sort of stuff?

Well, it's fairly soft right now, Ron.

Again, the challenge that we have on the company as we acquired it was the -- frankly, they have too much inventory.

And so the first step out of the gate here has been to put together these programs to help -- put rebating together to help the dealers move it out.

I think that's been very well received, and as I said, we're already starting to see the impact of that.

In terms of restocking, which is certainly very important to us, we have, obviously, the Stampede product line and we have some additional new products that are coming out.

And we have scheduled, frankly, the -- basically just about the whole month of May are going through with that dealer channel and meeting with them and explaining the products that are in the pipeline and what's available to show them what's new that they want to put out on the floor.

So the timing of the deal was probably not ideal just in terms of when it closed because you're kind of into that season.

Obviously, we couldn't go out and be part of that process before the deal closed.

But having the deal now closed, we do have meetings set up with all the dealers in kind of a region-by-region basis.

We've got all our sales folks now aligned post deal.

So I'd say we're just now, frankly, as we're going to the month May, able to have these conversations with that channel around what products are now being added, what's going on in terms of new products, both things within the Arctic Cat pipeline as well as what was in the Textron off-road pipeline and to really start that selling process.

Okay.

And then maybe one last one.

Kind of moving back to Scorpion again.

In the past, there had been some discussion around international opportunities, right?

Kind of everybody is focusing on this U.S. Air Force light attack.

But in the Middle East, there were some opportunities and so on and so forth.

What's going on there?

Can you give us some color on what's going on with Scorpion outside of the U.S.?

Sure.

So they're still there.

We continue those conversations with those customers.

We are at the phase right now, frankly, with one of the more important ones who's already scheduling when they're coming over to fly the aircraft.

We have to do a certain number of hours and get certain tickets from the FAA to allow somebody that's not our experimental pilots to fly these things.

But now that we have the aircraft flying and are working our way through that with the FAA, we can start to actually schedule demo flights.

As you can imagine, the foreign customers are also very interested in this U.S. Air Force program because they like to see what the U.S. Air Force is doing.

So I think that is a -- I don't know if it helps or hurts, but certainly something that they're watching as well.

But anyway, I would say, the international conversations continue.

And our next question will come from the line of Jason Gursky with Citi.

Scott, I was wondering if you could spend a few minutes on Kautex.

Talk a little bit about some of the competitive dynamics going on in that market, and describe to us, perhaps based on the wins that you had there in 2016, what we might expect the growth rate at Kautex to be relative to the overall market.

Certainly, the market is flat.

What would Kautex do in that environment, given what you know about the wins that you had in 2016 and the legacy things that might be rolling off?

Sure.

Look, it usually takes a couple of years from the time between a new model win is announced and the time that, that manufacturer is going to roll that product down the line.

So that translation from a selection to an SOP or start of production in the auto lingo is usually 2- to 2.5-year kind of window.

So we have pretty good visibility into what they tell us, but do keep in mind that, that's based upon what their forecasts are and, in general, what the overall automotive industry forecast is for those units.

Of course, that's true even for our current production rates.

So there's always a -- as you compete for those deals, there's sort of a maximum number and then there's usually some percentage discounts applied in terms of how much capacity you want to allocate to it because they're going to have an ability to flex in terms of their order rates based on what the end market is doing.

So all that being said, I think that if you look at where we are with Kautex, where we have been over the last few years and, certainly, where we expect to be over the next few years, given some new technology, given some of the conversion and FCR and things of that nature, we have tended to outgrow what the end market is doing, and I expect that we'll continue on that trend.

So we will -- I feel very comfortable that we can outgrow the overall industry.

What we always have to have in terms of how we forecast is what is the overall industry doing.

And if the industry has, in general, been growing, we see some volatility between regions at times.

So far this year, I'd say it's more or less operating the way we expected it, maybe a little bit of North American softness offset by a little higher growth in some other regions, but that's kind of normal for us.

I mean when we look at our plan every year, there's usually a little bit of shifting back and forth between the regions, but it's still been a net growth.

And again, our growth has been in excess of that of the industry.

And again, based on the win rates and based on our products, I think that's a trend that will continue.

Okay.

That's very helpful.

I appreciate that.

And then as a follow-up -- I may have missed it, but you talked about pricing for new jets.

I was wondering if you might make a comment, if you haven't already, on the pricing environment in the used markets, what you're seeing from an inventory level, pricing of Citations out there in the markets.

And if you can make some general comments about the pricing environment across the various segments in the business given the fact that your portfolio was expanding to cover some more segments here.

Just kind of give us a flavor of what you're seeing in the used market, would be helpful, across the industry.

Well, I think -- I mean, obviously, I've spent more time looking at our particular numbers than some of the other classes.

But our used available for sale has been a pretty flat, stable number now for a while.

The pricing, for the most part, has been a pretty flat, stable number.

If you look at sort of publications, you'll usually see that the -- we have one model in particular, the Citation X, that has seen pricing pressure in the used market.

But that's -- I mean that's been true with that aircraft now for as long as I've been around.

For some reason, the pricing in the aftermarket for that one has been tough.

But if you look across the rest of the core of our businesses, from CJs up through XLS and Sovereigns, it's been pretty stable, and certainly, that's generally what we see as we're selling aircraft from our used inventory.

So I guess I would say that it's -- I mean I'd love to see prices going up in that segment.

I don't think I could say they're going up in that segment, but the used market has been fairly stable.

And I'm afraid I don't -- I just don't track enough probably on the other classes of aircraft to give you much commentary on that.

And we can move to the next line.

It would be George Shapiro with Shapiro Research.

On aviation, Scott, you mentioned Scorpion was maybe 200 basis points and maybe about $19 million.

Is the second quarter going to be relatively high and then will tail off so we get to the $50 million for the year?

Yes.

That's what I would expect, George.

We've got the -- as I said, we've got -- 2 of the aircraft are flying.

We have the third one that's in its sort of final assembly.

There's a fair bit of work going on right now on the mission systems, which is very specific to what we know the Air Force is going to want to see demonstrated in their experimentation program.

And obviously, all that culminates in having these aircraft ready to go do that program by the beginning of August, actually a little bit earlier than that because the program will require flight training for some of the Air Force pilots.

So it's certainly been very heavy here in the first quarter.

I would expect it to be pretty heavy in the second quarter and then tail off through the balance of the year.

And how about other R&D?

I know last year, you said R&D was abnormally high because of Longitude expenses.

How was the rest of the R&D this quarter compared to, say, last year's first quarter?

Yes.

There was certainly a benefit if you look at -- have you looked at the business without Scorpion in there, would have had a bit of a tailwind on the R&D front for exactly what you just said.

We had a lot of spending.

We had Longitude in a very similar situation last year at this time as we have with Scorpion right now.

Obviously, that program was very heavy in the first half, got all the aircraft flying into the certification program.

And we have 3 aircraft now on the Longitude program, but they're all flying.

And it's kind of normal flight test type of expense, but we certainly have gotten past the bolus of R&D spending on that program.

So would it have been down $5 million, $10 million relative to last year, can you ballpark it for me?

Somewhere in that range, George.

But I mean, as you know, we don't break out business by business.

But certainly, it would have been a slight tailwind to the business if we didn't have the Scorpion funding.

Okay.

And then if I go to Industrial, where the margin was a little less than I was looking for.

Can you break out how much of the impact was from Arctic Cat and how much was just from the restructuring to combine the couple of divisions that you talked about?

Well, on the order, we probably had about -- somewhere around half of it was really associated with the costs that incurred on the Arctic Cat front, and it was a little bit lighter quarter on the [ NOP ] front in a couple of other businesses.

But again, nothing that was beyond what we have expected or expect certainly for the full year.

And then at systems, Scott, if I take out the $24 million charge you mentioned, you would have had a margin over 10%.

I mean, is that kind of a run rate or it will be a little bit lower because you'll still have higher deliveries of the 0 margin TAPV?

That's correct, George.

Yes, we would have had, frankly, a great quarter in the systems business had it not been for the TAPV.

I think the other businesses will continue to perform well through the balance of the year, but we are going to have a lot of revenue that's coming through with 0 margin on TAPV for the balance of the year.

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

Just on the last question, you mentioned in Industrial that it was a little bit lighter quarter on -- and you were referring to part of the business.

I think I missed that.

Well, we had some issues around some deliveries in other parts of our vehicle business.

Frankly, the good news is some new product came out that was very well received, and we just couldn't build it fast enough.

So that will move some things into the second quarter, but there's nothing fundamental at issue there.

It's a little bit of timing on that front.

The rest of the business of tools and test stuff was performing as we would expect.

Kautex was where we expected.

And again, with the exception of being a little bit light on some vehicle deliveries just based on getting production units out, I think we're fine.

Okay, great.

And then secondly, on your Textron Aviation revenue and margin guidance for the year that you gave at the start of the year, I mean, given that pricing is firming, are you expecting margins to potentially come in above the earlier range?

Or is Textron Aviation not a source of sort of upside for your annual guidance at this point?

I don't think it's an upside source of guidance.

I mean, obviously, we talked about in the latter part of last year what we had to do on the pricing front, and that's absolutely baked into our operating plan for the business.

And our next question comes from the line of Myles Walton with Deutsche Bank.

There's just 2 that I had still left.

One was on King Air.

Scott, you mentioned despite the slow start, you think you could still reach the original plan.

Could you remind us what the original plan was for King Airs year-on-year in '17?

No, we don't guide at that level.

But it's going to be roughly -- I mean, our expectation is it's roughly flat year-over-year is, I think, what we originally talked about.

And that's still our expectation in terms of units.

In terms of units, yes.

And so -- but your sales force, they kind of see this 1Q as being anomalous, and you mentioned the dollar strengthening.

Is it competitive?

Is it market?

Or is it -- competitive in the sense of they're finding competition at lower prices?

Or is it that they're deferring the purchase because ...

No.

It's just generally deferring the purchase, which is -- again, that's just kind of -- that's part of the impact I think of how we saw some of the lower volumes as people say, "Well, geez, the dollar strengthened, so you need to lower the price."And -- but we can't do that.

So we'd rather take the hit on some of the volume because these are deals that's -- it's a great aircraft.

It's the right aircraft for the mission.

And when people can afford the aircraft, even considering the strength of the dollar, I think they'll buy the aircraft.

So I think it's largely deferrals of purchase decisions.

And then could you just give us the data points for aftermarket growth for the Bell and the Cessna on a year-on-year basis?

Bell was probably up very slightly, and actually, aviation was probably down very slightly.

And our next question comes from Carter Copeland with Barclays.

Just a couple of quick kind of cleanups here.

On TAPV and TMLS, usually, these sorts of realizations are accompanied by changes in process, review process, leadership.

Have you had any of that at TMLS?

And then you talked last quarter about the 412 outlook at Bell in 2018 and beyond looking a little bit more healthy.

Wondered if you could give us some color on that.

So I would say, in the case of TMLS, yes.

I mean there have been a number of changes operationally to try to address some talent issues around there, and so that's been done.

On the 412, yes, look, we still -- our sales teams still feels pretty bullish on a number of important 412 opportunities that are out there.

Several units did close in the quarter, and we have a number of deals which are sort of multi-aircraft orders that are progressing well.

As you know, the 412 is virtually exclusively an international product.

So these things, particularly the extent that some are government involved, usually take a little bit longer than any of us would like, but they continue on the path to closure, and we still feel good about it.

Okay, great.

And with respect to the Latitude, one last one.

The profit profile you saw there, essentially unchanged versus the end of last year?

Yes.

Look, the volume that goes into NetJet is the same on a year-over-year, quarter-over-quarter basis, and I expect it to stay there sequentially and year-over-year.

Based on the actions that we've taken on Latitude pricing, we've seen improvements.

Your next question will come from Noah Poponak with Goldman Sachs.

Scott, do you think the Cessna book-to-bill will move above 1 as you move through 2017?

I don't know that it will.

I think that we're really in a mode now where there's no reason for people to book aircraft very far in advance.

So the -- we usually, as we're working with somebody, kind of know when their delivery -- when they want their delivery to be.

They may have aircraft that's coming off lease or we have guys that want to go do their trade obviously, go to look to remarket their existing aircraft.

But there's no reason, given the sort of where the industry is, to be looking at deals that are a year out or even 6 months out.

So I think that's just the nature of where we are in the market.

And again, Noah, it's different than the industry used to be, for sure, but we've been doing this for a lot of years now, so it's just a bit of the nature of the beast.

Yes.

I guess I was a little surprised that it was 1 in the quarter, given you're early -- I guess, early in the process of trying to incrementally hold firmer on price.

I would think that would sort of weaken the bookings.

But was there firming of NetJets in the quarter that contributed to backlog?

I think it's just a subsequent quarter.

So if you look at what we delivered in the quarter versus what got out of the backlog, there's not net change in terms of the NetJet deliveries.

And look, I think on the dynamic of the sort of, let's call it, the retail booking of all of the aircraft, I think, as we went through the quarter, we certainly had some customers that said, "Look, as I -- give me a little better price, I'll do it this quarter.

I'll go ahead and book it now." And as I said, we can't do that.

And so we're working with them, and so then deals do start to book at a higher price, which is where we need to be.

Okay.

So the amount of NetJets units that firmed and went into backlog was about the same as what was delivered?

Yes.

We're looking just to get and see if it's the exact number or not.

But -- so I mean, there -- it might have been up a couple of units.

As you know, the way we treat the NetJet stuff is once we've identified the specific tail number, the specific delivery date, that's when we move them into the backlog.

So again, these aircraft are coming into backlog and then delivering over -- I don't know, it's probably a 6- to 9-month-or-so period.

Okay.

What are you seeing your competitors do as you incrementally hold the line on price?

Are you seeing them do the same or not?

I think it's been largely the same.

Look, I think we -- collectively, the industry has been a little unhealthy.

That's certainly how we've seen it, and I suspect they see it the same way.

But I don't know, they're -- obviously, they have to make their own calls in terms of the pricing environment.

But I certainly would say that, as we work for the customers and explain what we're doing and then why we have to do it, it's -- I mean, they're unhappy, but they do realize these are -- these aircraft are still a heck of a price compared to historicals and it's a good deal.

And that's why we still see deals closing.

Yes, okay.

And then just to make sure I'm clear on the systems margin.

Is it the correct interpretation that I should be thinking about that $24 million contract reset as going to 0 in the second quarter and rest of the year and, therefore, the margin should be pretty even in the kind of 9% to 10% range each of the next 3 quarters to get you in the vicinity of your original 8.5% guidance?

No.

So I think you need to take that $24 million largely out of our guide number.

And I mean -- I would guess we can probably relook at that.

We tend not to get into the revisions of segment-level guidance.

But the color on it, Noah, is that we will certainly miss that segment-level guidance given that $24 million charge.

I think we'll make up some of that $24 million within the other systems businesses, but some of it will be made up across the rest of the company.

Okay.

So it's just a little like [ 4% ] out of the original systems guidance, assuming you're outperforming a little bit in the rest of systems, outperforming a little bit in Bell and then getting a little tax rate?

That's correct.

And our next question comes from Drew Lipke with Stephens.

I'm curious, in aviation, do you have a sense if just the prospect for tax reform has caused customers to maybe take more of a wait-and-see approach on placing orders?

Are you hearing any commentary on that through the sales channel?

A little bit.

But I think the tax -- the specific tax impact of acquisition on aircraft, while -- if you take a view that says, "Hey, you're going to get 100% deductibility on a capital acquisition like that," that certainly gives some incremental benefit in terms of the math behind that transaction, and so I think that would be beneficial.

But I have to say the bigger issue here is not just the particular tax rate.

Because, remember, under bonus depreciation, you're really talking about a 2-year window here anyway.

So it is an improvement, but it's not a huge improvement.

The issue for most of our customers is -- the bigger issue is what kind of economic growth are we going to see in the country and, therefore, what's the outlook for the performance of their businesses.

And so an overhaul of the tax system, a reduction of rates, the stimulus that, that would generate in terms of economic growth is the bigger factor for them, I think, than the particulars associated with the tax treatment of this particular transaction.

And that's why they're kind of waiting what's really going to happen here in terms of tax reform and how does it play out from a legislative standpoint.

Okay.

So you're seeing it in the sentiment and the confidence but not follow through yet in orders?

Correct.

Okay.

And then we've seen some slowing trends pretty consistent in terms of utilization rates for Citation and for Beechcraft.

How should we think about aftermarket trends in aviation over the next 12 to 18 months?

Well, we seem to be pretty flat in terms of utilization.

Particularly as it -- if you look at the average utilization rate, I would expect, as we go forward, given that we're starting to put -- obviously, Latitudes now have been going into the NetJet fleet for coming up on a year.

As we get into the latter part of the second quarter and to the third quarter, we'll start to see some growth in services associated with those, but obviously, we also see some decrement associated with older aircraft coming out of the NetJet fleet.

So it's -- I don't think we see a reason for a whole lot of change here on the total year service side.

Okay, Brad.

Ladies and gentlemen, that concludes our call for today.

Thank you for joining us, and we'll talk to you next quarter.

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