達信公司 (TXT) 2017 Q4 法說會逐字稿

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

(Operator Instructions) As a reminder, today's call is being recorded.

Now I'd like to turn the conference over to your host, Eric Salander, VP, Investor Relations.

Please go ahead.

Thanks, Sean, 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 in our -- 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 $4 billion, up $192 million from last year.

During this year's fourth quarter, we had a couple of notable items that impacted our performance, as we disclosed earlier this month in our 8-K filing.

First, as a result of the recently passed Tax Cuts and Jobs Act, the company recorded provisional tax charge in the fourth quarter of $266 million or $1 per share related to the remeasurement of net deferred tax assets and the repatriation tax on our non-U.

S. [undistributed] earnings.

Second, we recorded $55 million in pretax restructuring charges or $0.14 per share after tax.

Adjusted income from continuing operations was $0.74 per share, down $0.06 from last year's fourth quarter.

Manufacturing cash flow before pension contributions was $474 million compared to $727 million last year's fourth quarter.

For the year, revenues were $14.2 billion, up 3% from a year ago.

Adjusted income from continuing operations was $2.45 per share compared to $2.62 last year.

Manufacturing cash flow before pension contributions was $889 million, up from $573 million last year.

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

Thanks, Eric, and good morning, everybody.

Revenues were up in the quarter with increases at Industrial and Bell, partially offset by lower revenues at Aviation and Systems as Bell revenues were up on higher military volumes for the quarter.

We delivered 7 V-22s, up from 4 last year; 13 H-1s, up from 8 last year; and 45 commercial helicopters compared to 35 in last year's fourth quarter.

On the commercial side, we continue to see a pickup in order demand across a broad base of customers.

We've seen several recently signed 412 orders for customers in Southeast Asia.

We received an order from Reignwood International for 50 505s as a follow-on to the 60 aircraft that were ordered earlier this year.

We also received an order from Mercy Flight for 3 429s to upgrade the remainder of their existing air medical fleet.

On the new product front, we achieved first flight of our Bell V-280 Valor's tiltrotor, representing a major milestone on this important development program.

The Systems revenues were down on lower volumes, primarily at Weapons and Sensors, related to the discontinuance of the SFW production program.

In the quarter, we received an FMS order for the Afghan National Army for 55 mobile strike force vehicles with the potential for up to 200 additional units.

At TRU Simulation + Training, we signed an agreement with Copa Airlines to provide a Boeing 737 MAX Full Flight Sim to fulfill the Latin American airline's growing pilot training requirements.

Moving to Industrial.

Revenues were up 20% for the quarter, primarily reflecting the impact of Arctic Cat.

We saw improved demand in the snow retail channel, allowing dealers to clear all their inventory and drive 2018 model sales, including our new introductions in the youth and mountain categories.

We also saw higher sales in our E-Z-GO product line, led by our new lithium-powered ELiTE golf car.

At Textron GSE, our ground transport business received an order from Airpro in Finland for 7 Safeaero Typhoon deicers.

Moving to Textron Aviation.

Revenues were $1.4 billion, down 3%.

In the quarter, we delivered 58 jets, flat with last year; 31 King Airs, up from 28 in last year's fourth quarter; and 2 Beechcraft T-6 trainers, down from 8 last year.

For the full year, we delivered 180 jets, up from last year's 178, including 54 Latitude deliveries.

Since its introduction in 2015, we have now delivered 112 Latitudes, demonstrating the importance of new product development in this industry.

We saw strong order intake in the quarter for both turboprops and jets, including 8 Caravans for charter cargo and logistics operators in Botswana, 3 King Air 250s to a North American customer configured for air ambulance services and 3 Latitudes for fractional operator in Mexico.

Moving to the aftermarket.

Increased aircraft utilization continue to drive higher aftermarket revenues, which were up over 11% in the quarter.

To summarize the year, we continue to execute our plan for growth through strategic acquisitions and new product innovation to create long-term shareholder value.

At Industrial, integration of Arctic Cat continues and reflects our strategy of acquisitions that complement our core businesses and product lines.

Equally important is the need to continue to innovate through new product introductions, which is evident throughout Textron Specialized Vehicles.

Earlier this year, we unveiled the revolutionary E-Z-GO ELiTE lithium-powered golf cart, which has now seen over 21,000 units delivered.

On the snow side, we introduced a class-leading Arctic Cat ZR 200 new snowmobile as we continue to develop our [Slone] product lineup.

In December, we introduced the Textron Off Road Havoc X, a best-in-class, high-performance side-by-side, featuring 100 horsepower and a class-leading 4-wheel, double A-arm suspension package.

At Textron Systems, we advanced our Ship to Shore program towards its first flight, introduced the NIGHTWARDEN Tactical Unmanned Aircraft System and received a follow-on FMS mobile strike force vehicle order.

At Textron Airborne Solutions, we're making the necessary investments to position the business to capitalize on the growing air adversarial services market.

Moving to Bell.

We saw the V-22 fleet surpass 400,000 flight hours, demonstrating the reliability of our technology, which we further evolved to another significant milestone, which is the first flight of the V-280.

On the commercial side, strong order activity for the new 505 Jet Ranger X and the resumption of the 525 Relentless flight test program demonstrates Bell's position as an innovative leader in the commercial helicopter market.

At Textron Aviation, we saw improved order intake in the back half of the year as well as a strengthening of the international market.

On the new product front, the Longitude is nearing the end of its flight test program, and we anticipate certification in the first quarter.

This new entry in the super midsize business aircraft market offers class-leading range, payload and cruise speed, along with the quietest interior in the industry.

In November, we announced the Cessna SkyCourier, a new twin engine large utility turboprop with FedEx as our launch customer with an initial fleet order of 50 aircraft.

In summary, we came into 2017 knowing it would be a challenging year with uncertainty surrounding many of our end markets, several key product development programs nearing key milestones and restructuring integration activities in many of our businesses.

That said, we have entered now a 505 into service, 525 is resuming its flight test program, we achieved first flight on the V-280, we had successful demonstration on both the Scorpion and the AT-6 in the U.S. Air Force OA-X program, the Longitude is nearing its certification entry into service, Denali is progressing towards first flight and we successfully integrated the integration of Arctic Cat.

With these accomplishments behind us and improving end markets, we're well positioned coming into 2018.

As we look at our financial guidance, we're projecting revenues of about $14.6 billion as we expect growth at Aviation and Industrial with lower revenues at Bell and Systems.

We expect margin improvements across Aviation, Industrial and Systems with Bell about flat.

EPS from continuing operations will be in the range of $2.95 to $3.15.

Manufacturing cash flow before pension contributions will be in the range of $700 million to $800 million.

And consistent with 2017, we expect a substantial portion of the cash to be returned to shareholders through share repurchase programs again in 2018.

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

Thank you, Scott, and good morning, everyone.

Segment profit in the quarter was $360 million, down $31 million from the fourth quarter of 2016 on $192 million increase in revenues.

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

At Textron Aviation, revenues of $1.4 billion were down 3% from this period last year, primarily due to lower military volume.

Segment profit was $120 million, down from $135 million a year ago, primarily due to higher research and development expense largely driven by the Longitude flight test program.

Backlog in the segment ended the quarter at $1.2 billion, up $15 million from the end of the third quarter.

Moving to Bell.

Revenues were $983 million, up 11% on higher military volumes partially offset by lower commercial volumes.

Segment profit of $114 million was down $12 million despite the increase in revenues, primarily related to a change in commercial mix.

Backlog in the segment was $4.6 billion at the end of the quarter, down $407 million from the end of the third quarter.

At Textron Systems, revenues were $489 million, down from $532 million a year ago on lower volume at Weapons and Sensors.

Segment profit of $37 million was down $16 million, primarily reflecting the lower volume at Weapons and Sensors.

Backlog in the segment was $1.4 billion, down $67 million from the end of the third quarter.

Industrial revenues were $1.1 billion, up 20% largely related to Arctic Cat.

Segment profit was up $10 million from the fourth quarter of last year due to favorable performance.

Finance segment revenues decreased $3 million and profit increased $2 million.

Moving below segment profit.

Corporate expenses were $44 million compared to $56 million last year.

This reflected the transition of the Scorpion program into the Aviation segment.

Interest expense is $38 million, an increase of $5 million compared to last year.

With respect to our restructuring plan, we recorded pretax charges of $55 million on the special charges line in the quarter.

This represents the final charge under our restructuring programs.

We ended the year with gross manufacturing debt of $3.1 billion.

For the full year, we repurchased approximately 12 million shares at an overall cost of about $582 million.

Turning now to 2018, our guidance includes the impact of adopting the new revenue recognition accounting standard.

This adoption principally impacts Bell and Textron Systems as we will transition government contracts from recognizing revenue at delivery to a cost-incurred method.

The impact of the new method will be immaterial to our overall segment profit with revenues slightly higher at Textron Systems and relatively unchanged at Bell.

Also related to this adoption, we will record an increase to retained earnings of approximately $90 million in the first quarter of 2018 with no restatement of prior periods.

Additionally, we are adopting a new pension accounting standard that will change how we present pension and OPEB cost on our income statement but will not change our segment reporting.

The effect of adopting this accounting standard will not have a material impact to our financial results.

Finally, to align with new revenue recognition standards, our R&D guidance is now presented on a gross basis, whereas we previously netted U.S. government share R&D costs.

Turning now to our presentation, I'll begin with our segments on Slide 9. At Textron Aviation, we're expecting higher revenues of about $5 billion, reflecting higher volumes across all our product lines.

Segment margin is expected to be approximately 8%, reflecting the higher volume and improved performance.

Looking to Bell, we're expecting overall revenues will be slightly down at about $3.2 billion, reflecting lower military volumes.

We're forecasting a margin of about 12%.

At Systems, we're estimating lower 2018 revenues of about $1.6 billion, reflecting lower volumes at Unmanned Systems and Weapons and Sensors.

Segment margin is expected to be 8%.

At Industrial, we're expecting growth in each of our businesses, resulting in projected segment revenue of about $4.7 billion and a margin of about 8%.

At Finance, we're forecasting segment profit of about $20 million.

Turning to Slide 10.

Based on a U.S. planned discount rate of 3.75%, we're estimating 2018 pension cost to be $40 million, down from last year.

Turning to Slide 11.

Gross R&D is expected to be about $620 million, down from $634 million in 2017.

We're estimating Capex will be about $525 million, up from last year.

Moving below the segment line and looking at Slide 12, we're projecting about $130 million for corporate expense, $140 million for interest expense and a full year effective tax rate of about 22.5%.

Our estimated tax rate for 2018 is lower than '17 due to the enactment of the Tax Cut and Jobs Act of 2017.

Our guidance assumes a share count of about 263 million shares, reflecting the continuation of our share repurchase activity in 2018.

That concludes our prepared remarks.

So Sean, we can open the line for questions.

Our first question, it'll come from the line of Sheila Kahyaoglu from Jefferies.

I guess first one, on Aviation margins.

You're assuming up 150 basis points to 8% for Aviation.

How do we think about the R&D impact, mix and pricing factor into those assumptions?

Sheila, I think it's largely favorable on all fronts, I mean, obviously, as -- on the R&D front, as we finished last year's work around the Scorpion program.

Obviously, we have a lot of work around the Longitude.

We're complete with the Scorpion activity.

The Longitude here will wrap up in the first quarter.

Obviously, we have Denali coming along.

We've got SkyCourier.

I mean, there's certainly plenty of work.

But on a year-over-year basis, it's certainly a tailwind for them.

As we've talked about, we will certainly have better volume on our T-6 line, which has been a good business for us.

So as we increase that, we certainly expect to see some margin improvement driven by that, and we'll have better year-over-year on the after-market side.

We have seen a strong back half to the year, given the aircraft utilization rates are higher.

So I think, particularly on a year-over-year basis, we'll benefit from that as we go into the first half.

On the jet side, I don't think it will be a huge difference.

We'll have the initial Longitude deliveries, which is going to be most of the increase in the jet side of things.

Obviously, the first few units will be at a lower-margin rate, but that'll correct as we get towards the back half of the year.

And so in terms of pricing, there's isn't a major pricing assumption there?

Well, we do have price factored in.

And as you'll see, we had fairly strong year-over-year pricing increases here in the fourth quarter, and we'll continue to do that.

Now part of what we're looking at in terms of volume anticipation in our plan is that there's no question that we think everyone feels much better about where we are in the end market here in terms of demand.

So I think we're, certainly, compared to 2017, entering into a much better market, but we are going to continue to drive price to make sure that it's healthy volume.

And I think that we will.

We're successful in doing that this year, and I think we'll be successful doing it next year as well.

So there will be, obviously, a positive contribution on the pricing side.

Got it.

And then just on -- as it regards to Scorpion R&D.

I believe you might have ended up at $100 million for 2017.

How do we think about that into 2018?

Is there any way to quantify?

It was not that high, Sheila.

I mean, we don't give the R&D by -- program by program, but certainly, it's going to de minimis in 2018.

There's still some customer activity going on, some demo flights, integration with a couple of different sensors that customers have asked us about, but it's -- it'll be an immaterial number in 2018.

Our next question, it'll come from the line of Carter Copeland from Melius Research.

Look, I wondered if you could give us just a little bit more color around this, the gross R&D disclosure.

I know you don't disclose the R&D by program, but just kind of give us a sense of some of the moving pieces there year-over-year.

Clearly, you've got Longitude and Scorpion are down and 525 is up, but now you've got that government portion that you called out in there.

Just any chance you can give us some color on the moving pieces there, just in general terms?

So I think when you look at our numbers, Carter, we recast last year so that this issue of what's netted versus gross is kind of a nonissue.

I mean, we were showing you the numbers on an apples-to-apples basis.

So the actual reduction that we're showing, your dynamics that you're kind of looking at are correct, right?

We have significantly lower spend on Scorpion.

We will -- we'll see, as I said, and then to some of the more intense spending around Longitude as we get that through certification.

Principally, that's offset by the fact we have the 525 back in flight testing.

We have the V-280 in flight test.

So that aircraft did get its first flight last year.

But the guys were flying it a lot here in January, and we expect to see that sustained all the way through the year.

So it's largely a trade between a couple of those fixed wing programs and a couple -- some increased spending in the rotor and tiltrotor area.

Okay.

And then an additional one for Frank on the pension front.

Any consideration around prefunding associated with the -- clearly, the change in tax? ?

Well, we did that last year.

We did that in the third quarter.

We are -- we did a debt offering kind of in the third quarter for $300 million and contributed that to the pension plan.

So we feel like we're in very good shape.

We did have a discount rate reduction, but frankly, that was offset by our performance from a return standpoint in 2017 that was well above kind of our expected rate.

And so we feel like we're in good shape on the pension front and do not anticipate any contributions, as we said, other than the $55 million of cash related to kind of unfunded plans.

Our next question, it'll come from the line of Robert Stallard from Vertical Research.

Scott, your counterpart over at General Dynamics had some pretty positive things to say about the biz jet market in the fourth quarter.

Would you agree with the general prognosis that we've seen a distinct turn in demand environment over the last 3 months?

I would never disagree with Phebe, of course.

So the -- no, look, I think what they're seeing in the larger aircraft is probably quite similar to what we're seeing in the light to midsize, where most of our work is, I think the number of inquiries, the amount of activity through the fourth quarter.

As you know, for us, to sustain a 1:1 or greater book-to-bill in the fourth quarter, considering that's our seasonally very heavy sale side, is a pretty significant accomplishment, I think, for our team to hold that book-to-bill.

So the amount of activity, the interest, I think, is reflective of the fact that we have a stronger growth economy.

Business confidence is up, and these are our buyers.

So I think there's no question that the level of activity out there is stronger than we've seen in some time.

Again, we're being a little bit cautious in making sure that we see all this stuff really convert and continue to convert into orders at a fair price.

And if that continues to happen, I think we feel the same about our business, that it's in a pretty good position.

We got some great new products.

I think we're well positioned that if this market is, in fact, strengthening and it does deliver, then we'll be in good shape to benefit from that.

Okay.

And then a follow-up on your investment plans.

In terms of company-funded R&D and CapEx going forward, where do you see this heading in 2019 and 2020?

I just -- we're just kind of recovering from our 2018 activity, Robert.

So I don't know if I'd go into '19 and '20 just yet.

But look, I think, if you look at the work that we have underway, the amount of investment that we think we need to make to make sure that we have the right products in place in our key businesses, to ensure that we can capitalize on strong markets, I don't think there's going to be a huge change in the R&D.

Obviously, we expect to continue to generate a tailwind in terms of percent of sales.

But we have a lot of great stuff in the pipeline at Aviation.

We have a lot of great stuff in the pipeline in -- at Bell.

We have a lot of great stuff going on in the vehicle business.

These are things where you need to make these investments if you're going to continue to grow the business.

So again, I don't think we'll see radical changes in terms of the R&D spend, but obviously, our expectation is it will reduce as a percent of sales.

Our next question will come from the line of Peter Arment from Baird.

Scott, I guess finally -- to get pretty excited about the Longitude getting across the goal line here with certification.

What's been some of the feedback now as you get close to kind of certification from some of the customers in terms of you've introduced the aircraft to?

It's been great, Peter.

We have had a demo aircraft that's completely fitted out with full customer interior that's been flying around, doing a lot of customer demos here for the last few months.

And I think the feedback has been great.

It's a great cabin.

I mean, from a space standpoint, we get a lot of the same feedback that we get on the Latitude, which has been obviously a very, very well received product.

Obviously, this is a bigger aircraft.

It's a longer aircraft.

It's a very quiet aircraft.

It is the quietest aircraft in the industry, and we get that feedback very strongly.

Customers get in the back of this thing and do a demo flight and are amazed at how quiet and, as a result, comfortable it is in the back of that aircraft.

So again, the feedback is great.

we need to get this thing across the goal line on the certification, and we feel good about where the aircraft is.

It's flown beautifully.

I mean, it's -- there's no issues there It' s a matter getting through the paperwork and the certification process, which we will do.

Okay.

And then just a quick one, maybe Frank or just -- on the CapEx step-up, what's really driving that this year?

Well, I can -- the big step-up is -- as we've kind of been public with, Peter, is we're acquiring quite a few assets to be able to support these adversarial programs.

So that's really the change in year-over-year is our acquisition of aircraft.

The Navy program is in proposal phase right now.

The Air Force is already having their industry day.

So there's a huge opportunity out there in terms of the number of hours that the U.S. government, I believe, ultimately international customers as well, are going to look to private contractors to provide adversary air.

And the reality is if you don't have the assets, you can't do it.

So the only tough part to this process is you got to get out in front of it and spend the capital to have the assets and get everything prepared in terms of maintenance facilities and demos.

So there's a little bit of a drag, frankly, in there to support that, but it's a huge growth opportunity and one that seems to be materializing, so.

Our next question will come from the line of Cai Von Rumohr from Cowen and Company.

Yes.

So last year, you projected R&D, and this is on a net basis for 2017, of $495 million and the gross number was $634 million.

So what was the number apples-to-apples, '17 versus -- achieved versus '17 projected?

Hold on a second, Cai.

We're on apple-to-apple-ing it so that we can get to your other apple-to-apple, but.

Okay, great.

If you tell me what the military is, I think we can back into it.

Yes.

We're just trying to get -- go back to the guidance number, Cai.

It was $495 million net.

It was about $520 million.

So basically, you overran your guide by $25 million.

And I assume a lot of that was the Scorpion and, to a lesser extent, the Longitude?

It was primarily driven by the support we put into the Air Force experimental program.

So between mission systems development on Scorpion as well as the cost to get the AT-6 up and running and configured and ready for that test, that's most of what drove the spend.

So when we started the year, we didn't know anything about the Air Force experimentation program, and obviously, putting 2 aircraft into that program was not in our plan.

All right.

Right.

And maybe -- you said that the outlook is good to sell them.

Who's going to buy it and when?

Are you talking about Scorpion or AT-6?

Scorpion or AT-6, either one.

So look, I think that the Air Force has been very open about the fact that they're working on determining their next steps.

We have every reason to believe that they're doing that in terms of what their next step is going to be, to see our -- complicates that process for them, because obviously, these are new programs, and therefore, they don't really have any budget authority under CR to do that.

But we know they're working to determine what those next steps will be.

I think the next steps, again, will be different for different platforms, but it would be presumptuous to talk much about that since they haven't been able to publicly say what they want to go do until they understand their budget situation.

In terms of non-U.

S.-related things, as I said, we still have customers that are in discussions with us.

There are ongoing activities.

I think the level of activity in terms of what we have to spend to support those at this point is pretty de minimis.

But we have customers coming in, asking questions, looking at integration of different systems, and we continue to support that.

Our next question will come from the line of Pete Skibitski from Drexel Hamilton.

Scott, I was wondering if you could talk more about what you're hearing in terms of the impact of tax reform to your light biz jet customer base.

You've got -- they've got the corporate rate reduction, which I imagine, if you're a small business owner, that's got to be helpful.

You've got, I think, the -- expensing out to 2022.

You've also got this kind of issue to repeal the like-kind exchanges.

So I'm just wondering how you're hearing that's all going to net out for your biz jet customer base.

Okay.

I think it nets out all to the positive really, right?

So I -- there's certainly a benefit to them, sort of what I would say mechanically around tax, that is the 100% expensing is beneficial.

The overall tax rate reduction for all these businesses is obviously very helpful.

And I think probably even more importantly, I think everybody's expectation is that -- and I think we are seeing this, is that the impact of the tax cuts beyond the mechanics here is to help drive economic growth and get GDP at a higher level.

And I think we're seeing that.

And that reflects -- when the guy is sitting there looking at his business and what their anticipation, what their expectations are for the growth of their own business, I think this is what's driving business confidence to a very high level.

So I think the combination of the direct tax benefit around the expensing, the lower rate that they're experiencing in their business and probably, most importantly, the level of confidence they have that they're going to see growth in their business as a result of higher economic growth, higher GDP primarily around U.S. is all very positive.

So I think that is a huge help in terms of the U.S. market, but I think we're also seeing stimulation around the international markets.

And again, the U.S. helps to drive that.

If we have higher economic growth, that's good for, generally speaking, economies around the world.

A little bit of weakening on the dollar, obviously, for a company like ourselves that's a U.S. manufacturer with a lot of export is beneficial.

So I think that not only the direct impact around tax in the U.S. but the knock-on benefits in some of the international markets is, clearly, we're seeing a different tone in those markets as well.

So it's sort of a combination of all of the above.

That's great, very helpful.

I appreciate it.

One quick headwinds, at Systems in 2018, could you guys quantify the year-over-year headwind from the Sensor Fuzed Weapon closure?

And then -- so UAVs will be down in '18.

Are they going to bounce back, return to growth?

Or will that be kind of a flattish outlook go forward for UAVs?

Well, certainly, it's going to be down this year, Peter.

The question is going to be -- there are a couple of new upgrade programs and things that are in the works, but again, this is one of our challenges.

And again, in that business, which has a large U.S.-centric customer base, is where the budgets go, when do we get budgets.

I mean, there's a lot of noise around that.

There are certainly opportunities around that class of aircraft to look at next generations of upgrades and enhancements and improvements, which we would benefit that -- if that goes forward.

But without having budgets, it's hard to figure out exactly where that is.

So it's a -- in terms of the future, I just -- it's hard for me to comment directly on that.

I can't give you the direct number, I don't think, at SFW.

But last year, we went -- basically, if you think about what our SFW was, we had about 50% of what we usually have last year, and we have 0% this year.

So we're sort of taking a 2 step from what that business historically was to basically being out of that business right now.

Now there are a number of new weapons, munitions programs that we're bidding on, that we're actively pursuing.

Again, the budget situation makes it difficult to know exactly where theirs are going.

But that's certainly a business where we've gone through a steep decline as a result of the exit of SFW, but obviously, we have a lot of work going on to try to get that piece of the business back in a growth trajectory.

Our next question will come from the line of Sam Pearlstein from Wells Fargo.

Can you just tell us what your underlying assumptions are in terms of Aviation delivery this year?

We know the Longitude is coming in.

But just kind of jets versus King Airs, T-6s broadly, how are you thinking about it year-over-year?

Well, I'd say probably, Sam, the jets we're assuming at this point largely flattish with the exception of an increase driven by the Longitude introduction.

The turboprops, clearly, we expect those to be up.

T-6, we talked about all year, this was a tough year for us in '17 on T-6s.

We see a nice increase in T-6 deliveries in 2018, and we saw a fairly weak front half of the year on commercial turboprops.

Obviously, we're feeling better about where we're going into 2018 in terms of the level of activity and, frankly, some backlog in those areas.

So I certainly think that we'll see increases in the commercial turboprop in total as well.

And again, we saw strong growth in the second half of the year in the service side of the business driven by high utilization rates.

So clearly, we would expect that we'll see that continue, which means we'll see particularly comparables in the first and second quarter of the year will be stronger than they were in '17.

You get to the back half of the year, I mean, it's hard to say at this point, but it's because we saw a lot of growth year-over-year already in those 2 quarters.

But that's why we say it, Sam.

I think that if you look at jets, principally driven in our assumptions around Longitude, service growth and, clearly, in the turboprop, we'll see growth, especially on the military side of business.

And is there any way to think about in terms of new programs, whether it's 525 or Longitude, how many you can expect to get out this year?

Well, Sam, we don't go -- we don't do units by model.

Obviously, we expect to get certification by the end of the quarter, so you would expect entry to service with first customer deliveries in the second quarter.

And look, we'll -- again, it depends a lot on how the market's doing.

And I'd say the feedback on the aircraft is very strong.

History we've seen in recent times is you won't start to see a lot of these things flow to orders until you work your way through the certification.

So we kind of have to play that by ear.

So 525, you won't have sales this year, right?

We should get all of our flight test program complete and wrapped up by the end of the year.

Everything should be into the FAA, and we'll be working that certification process at the end of '18.

So -- but we certainly don't expect to see sales.

The first 525 sales activity should be '19.

Okay.

And then just more on Bell, I guess 12% margins on modestly lower sales.

Last year, you started 11% in terms of the margin and ended up doing better.

Feels like -- what has changed in the helicopter business that's allowing you to put up these kind of margins versus the 10% or 11%?

And what are those key drivers in terms of what's down year-over-year on a sales level?

Well, what's down on a year-over-year sales level will be on the military side, right, we'll see fewer military sales.

I think that we certainly hope to turn that corner.

There's a lot of FMS activity that's going on.

Obviously, we've been frustrated by lack of notifications in Congress, some things in the Middle East.

But clearly, we have customers that want product, and we think we will get some of that progressed into the order category here as we work our way through '18 to try to get that turnaround.

We certainly expect to be up on the commercial side.

We have a good full year of strong deliveries on 505s.

We've closed a couple of important orders on 412, so we'll certainly see an increase in 412 volume this year, which is a great product for us, obviously.

So in general, you're seeing a trade between some military product that's going to be the lower volume, and commercial, that's going to be at a higher volume.

But net of all that, I think the team is doing a nice job of managing, driving productivity to help offset some significant investments in the new product front.

But it's paying for all for us, right?

The 505 is driving good volume.

The 412 EPI, those upgrade programs are helping to keep the 412 alive and well, and obviously, we have 525 and the V-280 coming down the line.

So I think the business is doing a nice job of driving productivity, maintaining strong margins and yet making some pretty significant investments in products that are going to drive our future growth.

Our next question will come from the line of Justin Bergner from Gabelli & Company.

Just want to discuss the demand for business jets and tax reform.

First off, as it relates to personal purchases of business jets, are you, as a team, aware of anything that would prevent someone from buying a business jet and taking the full deduction on their personal tax return to get a deduction where the state and local tax deduction might be going away for a wealthy individual?

Well, I mean, it has to be a business expense, right?

So I mean, we certainly have individuals that purchases aircraft, and they have to pro rata the depreciation between business and personal utilization.

But no, absolutely, there's nothing in the tax law that changed with respect to how that's done.

The only difference is that it's 100% expensing versus the 50% -- well, I mean, obviously, we had bonus depreciation, which is effective 50% year 1. But no, there's no change in the tax law.

It's purely a matter of allocation between a legitimate business expense or a personal expense.

Okay, great.

That's helpful.

And then there's a big article in The Sunday Times by a London-based business jet broker talking about sort of extraordinary ramp-up in demand for business jets over recent months.

Are you seeing any signs of sort of meaningful acceleration?

I know you've had the tempered guidance for business jets.

But are there signs that you're seeing that suggest maybe things are going to ramp up much quicker than your guidance would suggest?

Well, I have to say I don't usually read The Sunday Times, so I don't know the specifics of this article.

But look, we are -- as I said, I think the sentiment that we're seeing in customer reaction, the level of activity is all very positive.

We need to see these things come to fruition.

There's no question that in the used aircraft market, that's continued to be a good liquidity.

People are selling aircraft.

Good news for us is we see fewer trades because the market is strong enough that the brokers out there are -- be able to move aircraft.

So look, I hope he's right.

And obviously, we think with the investments that we've made and the product lineup we have that if the market strengthens, that we'll be a big beneficiary of that.

But I think we need to see sort of that -- the enthusiasm that we sense that's out there turn into sales.

Next question will come from the line of Jon Raviv from Citi.

When I look at -- what am I saying -- when you look at Slide 9 of your presentation, where do you see some of the opportunities or risks, not just in '18 but really going forward?

And maybe I'm speaking more about something like Systems, where in the past we've seen double-digit margin, Industrial margin used to be higher and, obviously, Aviation could be higher as well.

So on a long-run basis, where do you want to see improvement in your segments?

Well, we'd like to see improvement everywhere, I mean, that's kind of stuff that we work with the guys all through the year.

But look, Aviation -- when we look at the Aviation number, obviously, we are assuming a relatively flattish legacy jet line.

And clearly, we have the ability to flex that if we do see stronger demand.

So if we see stronger demand, if the market is there, then we can see upside to that.

I think at Bell, you're probably not able to see a whole lot of upside on the revenue side.

We pretty much know what that number is.

The guys do a good job, generally, as we work our way through the year on the productivity side.

But I think it's a pretty solid guide.

We'll -- obviously, we'll try to work to get a little upside on the profitability side, but it's -- I think at even at 12%, that business is doing really well, and it's pretty balanced performance.

Look, Systems is tough because you take SFW out, which is a great program for us.

We're kind of heavy right now on things like Ship to Shore, which are great programs.

I mean, there's going to be a lot of volume there and a great business going forward, but we're still in that sort of fixed price development.

And we're working the integration, and testing should come along okay.

We should get some major milestones this year as we get this thing into the water and get it operating and go through trials.

But I wouldn't say that there's a lot of upside there, just given the nature of the kind of programs that we're executing right now.

Industrials, probably -- I mean, a pretty solid guide, I think.

I mean, there's -- it's a -- it gets Arctic Cat where it's accretive.

It's pretty solid performance, but I think that's where we would really expect to be.

So that's kind of color around it, I guess.

So clearly, the largest upside would be if the business aviation market really does start to accelerate, then we'll benefit from that.

Got it.

And just in your commentary about the tax reform bill creating changes in the economy, what are you guys doing, maybe almost philosophically?

How are you guys approaching the way you're managing the business capital allocation with this relatively wide-ranging bill now legislated?

We're -- yes, it really hasn't changed our strategy.

I mean, we've already been investing significantly in terms of R&D in our next generations of product.

I think we've been appropriately putting the capital in place to support that, be it in the tooling to support new product programs, continuing to win and grow in our Industrial businesses.

So I think our capital allocation strategy isn't really impacted.

I mean, clearly, we will see a cash tax benefit in '18 as a result of the lower tax rates.

And as I said, I think from a capital allocation perspective, we'll continue to pursue what we did in '17, which was, frankly, pretty aggressive on the buyback side, and that's been our principal way of returning cash to our shareholders.

I would expect to see that continue in '18.

And the next question will come from the line of Seth Seifman from JPMorgan.

Scott, in recent years, you guys have had some tough breaks in some of the end markets and some execution items that came up, and so there's been a fair number -- a fair amount of downward pressure on estimates.

When you think about how you set up this year and how things are looking, I mean, I know you always set the guidance and intend to make it.

But in terms of like the puts and takes and how much risk there is around the guide this year compared to previous years, how would you sort of -- how would you assess that?

So I think it's kind of the walk-in we just did through the Page 9 is kind of where I would say the puts and takes are to this thing.

I mean we've -- as I said, we struggled a little bit, particularly in the third quarter, in some of the Industrial on TSV.

I think the guys are getting that back on track.

I mean, there's obviously still work to do in finishing the integration, but we're -- I think our guide is a fair number.

There's -- I don't know that I could add a whole lot more color to it.

I mean, I think, yes, we ran into some softer end markets than we expected.

We had a couple of problem programs that put a lot of pressure on us in '17, which we started the year of '17 saying that we thought we were dealing with some difficult year in terms of a lack of growth, which we've historically delivered.

But I think we're positioned well going into '18.

There's always issues to work through the year, but I think a lot of the things that we need to do based -- both problem programs as well as some investments that we thought we needed to do and things we had to get in place for '18 are largely there.

So I think we feel pretty good about where we are going into the year.

Great.

And just as a follow-up on V-22.

Maybe if you could give us an update on where you think we are in terms of signing the next multiyear, in terms of if the type of appropriations bill that's being talked about gets signed, does that gives you, you think, a plus up?

And maybe kind of take some of the staying out of the decline that's coming for 2019 and 2020 and how you're thinking about preparing Bell for that and just sort of an overall update on V-22.

Well, so V-22 is -- the multiyear 3 negotiations are underway, right?

We're working that in real time with the customer.

I think they, obviously, are working, and I'm trying to understand their budgets and that whole process to frame the program.

But right now, I would say we're probably looking at a Q2 or so contract to get multiyear 3 underway.

I think the program of record is well understood.

Obviously, we've had the ads on the Navy COD program that are, again, well understood.

And I don't think there's going to be a whole lot of volatility around volumes, but it will be a step-down, certainly, from where it was in multiyear 2. But I don't think that's changed.

So I think it is probably looking like a 5-year program, right?

There was -- a while there, people were talking maybe could be a 7-year program.

It's looking to me -- I think the way they're going to appropriate it will probably be in the more of a 5-year contract, which is fine.

We have a question from the line of George Shapiro from Shapiro Research.

Scott, I was wondering if you could break out, at least a little bit overall, the backlog increase or the book-to-bill, what it would've been in commercial versus military, because it seems like military was down and commercial would've been up by more.

Yes.

George, I think from a color standpoint, the stuff that was in the -- largely in the backlog, predominant on the T-6 front, has been there.

So most of the movement you've seen was driven by the commercial side of the business.

So if you took out the military side, what would the commercial have been up?

I don't think we'll probably do anymore color than that, George, in terms of the backlog.

Okay.

And then on R&D, why wouldn't R&D be down by more in '18?

I mean, I figure Scorpion was maybe $75 million in '17, going down to pretty close to 0, and you got total backlog down -- I mean, total R&D down $14 million.

Longitude finishes.

You start delivery here in the first quarter.

So where's all the imputed higher R&D coming from?

Well, we are obviously getting a benefit on significantly lower funding, I should say, on the Scorpion program.

Yes, we do have the Longitude, which will be still strong here in the -- at least in the first quarter or so of the year as we finish the certification testing.

So we do -- we will certainly have less R&D spending on the fixed wing side, but we do have Denali heading towards its first flight.

We do have the SkyCourier program, which is I think will be a great program for us, and we're being pretty aggressive about getting all over that thing and doing that program in sort of that 30-month window.

And we have a full team working that.

So it's not like R&D spending is going away.

In the fixed wing world, we do have work to do, and I think these programs, it'll be a very strong growth programs for us.

As I said earlier, I think there is a bit of a shift here with 525 being back for the full year, the flight test program, V-280, which again is a huge potential program for us.

So a lot of R&D spending in that area to support that flight test program as well.

Okay.

And then the last one.

How long would it take for you to decide that you want to increase production rates if you saw continued strength in the business jet market?

Would that be something you could do in 6 months?

Or would that be something that would more affect '19?

I think we're in a position that we could affect '18 in more in a 6-month kind of a window.

We have a question from the line of Ronald Epstein from Bank of America.

Can you give us an update on Hemisphere in light of the engine issues with the 5x program being killed at Dassault and then moving on to a different engine?

Where does that put Hemisphere?

And are you guys thinking about a different engine?

Or -- just if you could give us an update on that.

So our guys are actively engaged sort of real time, I guess I would say, Ron, on that -- the issue of where the engine and what will the scope and time frame be to get the engine on track.

So in the case of that particular aircraft, I mean, I think what you saw the 5x guys do is go to a larger aircraft.

You have to match engine airplanes obviously pretty well to make it work.

That's obviously not a strategy that we would follow.

So in our case, to do that aircraft requires that engine.

I mean, to get the differentiation in the market, the fuel burn, efficiency and range and whatnot is dependent on that aircraft -- or on that engine, I'm sorry, and the engine performing per spec.

So we're working with the Safran guys to understand where they are and what their path forward is.

And look, we'll have to sort of gate off of that, Ron.

So right now, we're in a position where we haven't spent a ton of money on that program.

We continue to do a lot of the early work that you need to do around key subsystem selections and basic aerodynamic work and whatnot.

That's at a fairly low level, and we'll have to make a call of when do we lean into that program or not based on what we see as the engine time line, so.

Got you, got you.

Is there opportunity there to maybe use a [Canada] engine or something like that?

Or is that kind of not a possibility?

Well, I think the challenge to do to make that aircraft be what we want it to be, that's the engine that makes it work.

So if you go to a larger engine, then you've got to go to a larger aircraft, and that's a path that we're not going to do.

Could you -- ultimately, again, it all depends on where this engine is, Ron.

If the engine is not there, then you kind of would do a step back and say, "Okay, guys, what do we want to do?" Going bigger doesn't make sense to us, so we would have to evaluate a change in our strategy.

But again, it's all predicated on where the engine is, and we just don't know yet.

Got you.

Got you.

And then maybe just as a follow-on from that.

If something didn't go well with that front, is there any recourse for you guys?

Or is still too early to even project that?

Well, no, not really, Ron, but again, we haven't put an enormous amount of money to that anyway at this stage of the game.

So there's obviously -- I mean, you could -- like I say, you could step back, you could suspend the program, you could -- there's a whole bunch of options here.

But there's no significant financial harm that's been caused.

So I mean, it's not like we would go back with any kind of a recourse.

You just have to wait and see how the engine program progresses.

Got you, got you.

And then if I can, maybe just one more really big-picture question.

There's been a lot of talk in the general aviation community about like the electrification of aircraft, particularly around propulsion.

Is Cessna looking at that at all?

Did you have any thoughts on it, if that's kind of too Buck Rogers and far out there?

Or is that something that could be more of a reality sooner?

Well, look, we have spent some time on our kind of advanced concept guys running numbers and looking at that.

It's tough math, right?

I mean, when you look at how much energy is required to take an aircraft and go any kind of range with any kind of weight, the energy storage technology just isn't there, right?

I mean, when you talk about anything in the air, weight is not your friend.

So we continue to look at that.

And by the way, we're doing the same thing on the rotorcraft side, right?

I mean, we've probably done more work on the rotorcraft side because there are some small drone technologies and smaller vehicles that don't have to go as far.

And just the nature of a helicopter, you tend to do shorter ranges and less weight.

So it's probably more feasible in the rotorcraft world.

We were doing short hop kind of things as opposed to the longer haul that you see in the fixed wing aviation side.

So -- but it's largely going to be driven by energy storage and electric propulsion, which for us is -- that's our supply base that does that.

So are we actively engaged with guys that are working on that?

Absolutely.

Do I see it as becoming a material thing that is going to happen in the sort of mid-time frame?

Probably not, but.

Our next question will come from the line of Rajeev Lalwani from Morgan Stanley.

Just a question for you on the M&A landscape and how you're approaching it this year, whether as a buyer or a seller of assets.

We don't make any comments with respect to M&A on either front, Rajeev.

Okay.

And then as it relates to Bell, Scott, you were talking about not seeing too much in terms of margin opportunity.

Can you maybe highlight how an oil and gas opportunity would fit into that, just with oil and gas prices obviously a bit better here?

Well, I don't think it has anything to do with the margin side of things, Rajeev.

I mean, we're expecting the business around 12%.

If you think about oil and gas, which, I agree, I mean, there is some -- certainly, some strengthening in that end market.

I think in terms of sales into the oil and gas industry, we are actually seeing some of that already.

I mean, in some of the more near end, so therefore some of the smaller helicopters, there's clearly opportunity in the longer haul here in terms of things like 525, but there's also a lot of assets out there, right?

So I mean, as they went through a pretty tough contraction, they've got to put a lot of assets back to work.

But clearly, we see that end market as a big opportunity for the 525.

And hopefully, here, as we see that end market start to strengthen and we get the 525 certification, we'll be about lined up in the right place.

But it certainly won't be a 2018 impact.

And then a quick clarification.

On Arctic Cat, did you say that it is going -- hit the target of being accretive this year?

Yes, yes.

Our next question, it'll come from the line of Drew Lipke from Stephens.

On Aviation and commercial turboprop, just -- King Air deliveries still kind of a low level here in the second half.

Caravan deliveries were pretty -- down pretty significantly year-over-year.

You talked about inquiries picking up a little bit last quarter.

Did you see that convert into increased orders?

And then maybe just a little commentary on that market for 2018.

Yes, we did.

I think the King Air market started their early part of last year a little soft.

It certainly strengthened as the year went on.

I think we'll be in a pretty solid position here as we go through '18.

Caravan, similarly, were quite soft in the first half of the year, got stronger as the year went on.

I think we've seen a pretty strong level of order activity on Caravan.

So we feel very good about those going into 2018.

And then on Bell commercial.

How much of the order book build or the strength that you've seen there has been tied to the China market?

And how much of that is due to just some of the regulatory changes that we've seen in that market?

And how's your opportunity there?

And how sustainable is it, in your opinion?

Well, I think that we haven't seen a lot of change on the regulatory side in the low altitude spaces.

I mean, that has been certainly more [levelized] than other areas.

We continue to feel very good about China in terms of how we're doing and as -- -- particularly on the light side.

So this past year, obviously, we had large orders for 407s, large orders for 505s.

So I think we feel very good about our position in the Chinese market, particularly as has to do with the lights, so particularly the 505 and the 407.

And I think our deliveries into China this year, as we look at our backlog and our customer bases, I think, will be pretty strong.

Okay.

Ladies and gentlemen, thank you for joining us today, and that concludes our call.

Ladies and gentlemen.

Thank you for today's call.

Now that it's concluded, you may now disconnect.