達信公司 (TXT) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Textron earnings conference call -- Third Quarter Earnings Conference Call.

(Operator Instructions)

At this time, I would like to turn the conference over to the Vice President of Investor Relations, Eric Salander.

Please go ahead.

Thanks, Brad.

And good morning, everyone.

Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today.

These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release.

On the call today, we have: Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer.

Our earnings call presentation can be found in the Investor Relations section of our website.

Textron's revenues in the quarter were $3.2 billion, down $284 million from last year's third quarter.

During this year's third quarter, we recorded an after-tax gain of $410 million related to the sale of the Tools & Test product line or $1.65 per share.

Excluding this item, adjusted income from continuing operations was $0.61 per share, down $0.04 from last year's third quarter.

Manufacturing cash flow before pension contributions totaled $259 million compared to $281 million in last year's third quarter.

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

Thanks, Eric.

And good morning, everybody.

Revenue was down in the quarter, primarily driven by the Tools & Test disposition within Industrial and lower TAPV volumes with Systems as that program continues to run-off.

Segment profit was down in the quarter largely due to lower profit in Industrial, which more than offset higher profit at Bell and Aviation.

At Industrial, segment profit was breakeven, primarily due to unfavorable operating performance in specialized vehicles.

Specialized vehicles has undergone significant change over the past 2 years as we've expanded the product portfolio.

While we've seen increasing revenue in the segment, we haven't seen the planned level of growth or delivered the operating leverage necessary to support the expected returns.

We've made progress on new product introductions and continue to be encouraged by the favorable trends in the powersports market, but we need to work on our go-to-market strategy and focus on cost performance.

We're focused on driving improvements in this business and believe it will be a valuable part of our portfolio moving forward.

Moving to Bell.

Profits were up in the quarter, and operating margin expanded on slightly lower revenues.

On the commercial side we delivered 43 helicopters, up from 39 in last year's third quarter.

In the quarter, we further expanded the global operating footprint of 505 Jet Ranger X, with a delivery into Kenya making -- marking the first 505 in Africa.

Also in the quarter, the 525 program completed hot weather and high altitude testing in Yuma, Arizona as the aircraft continues to meet or exceed all design specifications as it progresses towards its planned certification in 2019.

On the military side, Bell was awarded a $510 million contract for 29 AH-1 helicopters in support of the Marine Corps' AH-1 upgrade program.

We also featured the UH-1 at NATO Days in Ostrava and Czech Air Force Days, billed as the largest security show in Europe, as we continue to market this multi-role aircraft to our international military customers.

Moving to new military products.

The V-280 recently exceeded 250 knots as the team continues to successfully expand the aircraft's flight envelope and validate key performance parameters.

Also during the quarter, Bell unveiled a full-scale mockup of the V-247 unmanned aerial system at Fort Myer in Arlington, Virginia for a review by DoD leadership as well as representatives from the Marine Corps, Navy and Army, to give them a better understanding of the proposed capabilities of this Group 5 UAS.

At Systems, revenues were down on lower TAPV deliveries at Textron Marine and Land Systems, as we near the end of that program.

At Marine and Land Systems, we were awarded a $100 million contract for procurement of long-lead material to support the U.S. Navy Ship to Shore Connector program.

Marine and Land Systems also completed pre-delivery inspection and trials of its Common Unmanned Surface Vehicle and is now in the development and testing phase.

Earlier this week, we also announced our intent to form a joint venture between Textron and FlightSafety International to serve our Textron Aviation customers.

This combination of capabilities will enable us to provide best-in-class pilot and maintenance training programs to our customers around the world through a more extensive network of training centers.

Moving to Textron Aviation.

I'd like to address the change in leadership that I announced last Friday, with the appointment of Ron Draper as CEO of the Aviation segment, succeeding Scott Ernest, who has moved to Textron Specialized Vehicles as their new CEO.

This move is consistent with our strategy of developing leaders within our businesses.

Ron was Textron Aviation's Senior Vice President of Integrated Supply Chain and as such, led all aspects of manufacturing operations for Textron Aviation since 2012.

Ron has a great depth of knowledge about the aviation business and has led several of Textron Aviation's most impactful strategic initiatives to date, including the successful integration of our Cessna and Beechcraft operations, expansion of our quality management systems and global sourcing strategies.

I'm confident in his abilities to lead Textron Aviation through its next phases of product development and growth.

Now looking at the quarter.

Profits were up for Textron Aviation, and operating margin increased on slightly lower revenues.

We delivered 41 jets, flat with last year; and 43 commercial turboprops, down from 57 last year.

In the quarter, we saw continued strength in order flow, with the backlog finishing up over $200 million from the end of last quarter.

On the new product front, we've begun function and reliability testings on the Citation Longitude with the FAA, putting the aircraft on track for certification and first deliveries in the fourth quarter.

We remain committed to investing in industry-leading aircraft across our product lines, and we're looking forward to building on the success of the Latitude with the Longitude's class-leading performance, operating efficiency and an outstanding quiet cabin.

At NBAA this week, we announced the expanded relationship between Textron Aviation and NetJets, reaching an agreement for an option to purchase up to 175 Longitudes, with anticipated deliveries beginning in the second half of 2019.

In addition to the Longitude agreement, we also announced that we reached an agreement with NetJets as the launch customer for the upcoming Cessna Citation Hemisphere, with an option to purchase up to 150 aircraft.

We are excited to partner with NetJets in the design of this new aircraft.

We believe that Hemisphere will be a truly revolutionary aircraft and represent the first new clean-sheet design in the $30 million to $40 million large-cabin jet segment in more than 20 years.

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

Thank you, Scott.

And good morning, everyone.

Segment profit in the quarter was $245 million, down $50 million from the third quarter of 2017 on a $284 million decrease in revenue.

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

Industrial revenues decreased $112 million, largely related to the disposition of our Tools & Test product line.

Segment profit was down $48 million from the third quarter of 2017, largely due to unfavorable pricing performance and the impact from the Tools & Test disposition.

Moving to Bell.

Revenues were down $42 million, primarily on commercial mix, partially offset by higher military revenues.

Segment profit increased $7 million from the third quarter in 2017, largely the result of favorable performance on military programs, partially offset by commercial mix.

Backlog in the segment was $5.7 billion at the end of the quarter.

At Textron Systems, revenues were down $106 million on lower TAPV deliveries at Textron Marine and Land Systems and lower volumes in the Simulation, Training and Other product line.

Segment profit was down $11 million, primarily reflecting the lower net volume.

Backlog in the segment was $1.1 billion.

At Textron Aviation, revenues were down $21 million from this period last year due to lower volume and mix, largely reflecting lower turboprop volume, partially offset by favorable pricing.

Segment profit was $99 million, up $6 million from a year ago due to favorable price and performance, partially offset by the impact of lower volume and mix.

Backlog in the segment ended the quarter at $1.8 billion.

Finance segment revenues were down $3 million, and profit was down $4 million from last year's third quarter.

Moving below segment profit.

Corporate expenses were 21 -- $29 million compared to $30 million last year.

Interest expense was $32 million compared to $37 million a year ago.

In the quarter, we booked an after-tax gain of $410 million related to the disposition of Tools & Test.

We also repurchased 7 million shares, returning $468 million in cash to shareholders in the quarter.

Year-to-date, we've repurchased 21.6 million shares, returning $1.4 billion in cash to shareholders, about $800 million of which reflects the use of proceeds from the sale of Tools & Test.

We now expect the full year tax rate to be 17%.

To wrap up with guidance.

We're narrowing our expected full year adjusted earnings per share from continuing operations to a range of $3.20 to $3.30 per share, as compared to our prior outlook of $3.15 to $3.35.

We are also reaffirming expected cash flow from continuing operations of the manufacturing group before pension contributions to a range of $750 million to $850 million.

That concludes our prepared remarks, so Brad, we can open the line for questions.

(Operator Instructions) And our first question today comes from the line of George Shapiro with Shapiro Research.

Scott, in Aviation, the backlog increase, was that mainly Longitude?

Or it was all across the board?

It was across the board, George.

I mean we've continued to see the strength we talked about last quarter.

I'd say order activity in virtually every class of aircraft remains strong, and we feel pretty good about the diversity of that backlog.

And the weakness in the King Air shipments, is that something that's just a 1-quarter phenomenon?

Because you had been expecting up deliveries this year versus last year.

Yes, and we still expect that, George.

I think all you're seeing in the third quarter here, frankly, is still pretty strong deliveries on both King Air and Caravan, but as you recall, last year, Q1 and Q2 were very soft.

And so when orders did come through and the market started to pick up in the third quarter, we had quite a few aircraft that were available based on the production rates.

So there were basically the aircraft available from the Q1 and Q2 production, so we could deliver a lot in the third quarter.

This year obviously has been much more linear, reflecting a stronger market.

And we're absolutely on track for the volumes that we expected for the full year on the turboprop market.

And what was the pricing benefit to Aviation in the quarter?

I think the price number is in the Q, if I look.

Like, 9...

Sorry.

Gross price was 25, and net price was 14.

14.

So...

Okay.

And then just one quick one.

On Industrial, was there restructuring in that number?

Or kind of what's the plan going forward?

I mean, you didn't lower the guide that much for the year, so clearly the fourth quarter has got to look better.

Well, for sure.

So look, George, I think what you're seeing in Industrial in the quarter is primarily, as we said, driven by the specialized vehicle business.

And particularly, it's around some of the consumer markets.

And it's a recognition that we still have more work to do in terms of strengthening that channel, and so we recognized a fair bit of that cost here in the quarter.

Clearly, we expect that team to perform better in the fourth quarter, so -- and I'm sure that they will.

We also had, just on the auto side, I mean, markets -- third quarter is always the weakest of the year just because you have all the summer shutdowns.

So clearly, we expect that business also to perform stronger in the fourth quarter.

And with respect to overall guidance, George, I think what you're seeing is where we -- we still feel and are very comfortable with the strength that we're seeing in the aviation market.

That's going to deliver above the original guide.

I think the same is true with Bell, the commercial market.

And the execution of that team continues to be very strong.

And Systems, frankly, is I think going to deliver on a good year and exceed their guide.

So the strength of those 3 segments will largely overcome the weakness that we're -- that we saw this quarter in the Industrial side and which is why we're able to just narrow the guide.

And we do have a question from the line of Jon Raviv with Citi.

On Aviation, just want to get a sense, Scott, of just sort of what you're seeing in terms of that order trend and your confidence or visibility to potentially raising production rates at some point.

And then related to that, while you raise production rates as you go through this process, what do you kind of consider a normalized Aviation margin?

It looked pretty good in the quarter despite the turbo being down year-over-year, which I know you could explain.

Well, Jon, I think that, look, we expect the trend on the margin to continue.

Obviously, we're feeling very good about where we're positioned here in Q4, with strong order rates that have occurred through the course of the year.

I think our teams -- I mean obviously we have NBAA going this week, spend a fair bit of time with our sales teams.

The level of activity continues to be robust.

And as we usually do, we'll tweak production rates as we move through the course of the year.

So certainly, our expectations -- we're certainly not ready to guide for 2019 yet, but we will -- clearly expect to see volumes continue increase, which means we will tweak production up.

I think in particular, one of the announcements that we've made at the show was the agreement around the Longitudes.

Now with that announcement is out there, clearly the NetJets team is going to start ramping up with us, working on the sales and marketing effort to the fractional community.

And we expect that, that team will deliver on Longitude, much as we've seen it deliver on Latitude, in terms of driving volume in the business.

So for sure, our expectations on Longitude in terms of its production rate and volume is going to be increased as a result of that announcement.

So we'd be able to -- just watching out for -- as with the case of Latitude where, because it's NetJets and because it's a competitive space, there just could be some incremental margin softness as that particular aircraft ramps up?

Look, Jon, I mean, the deal that we've struck with NetJets is a fair deal for both sides.

I mean obviously NetJets understood that we couldn't do the kind of pricing that we did on the Latitude deal, that, that was not something that worked for us.

And I think we've ended in a place with a pricing agreement that's fair to both sides.

So I guess the short answer is, clearly, there's discounting to NetJets because they manage and have to handle all the go to market and the sales and operating the aircraft, but it's a much more balanced deal.

And it's a deal that will be good for us as it's going to be good for them.

So no, I wouldn't expect to see the sort of dilution that we saw in the Latitude side.

And we do have a question from the line of Seth Seifman with JPMorgan.

Scott, I wonder if you could talk about the news we've seen recently about Future Vertical Lift and the Army approach to that and the desire to kind of move money from legacy programs toward new programs and kind of how your thinking has evolved around what opportunities might be there for Textron and for Bell in the 2020 budget.

Well, I mean it's a good question, Seth.

Obviously, the Army and what they've been saying publicly, we're very encouraged.

I mean clearly we're the guys that are -- have been making pretty significant investments in what we would like to think will be the next generation of aviation for the Army.

So the fact that they're -- look, they're not being pollyannish about stuff, all right?

They're saying, look, we're not expecting some huge increases in budget.

And we recognize that we need to move money from just continuing to do what we've always done and move it into the modernization programs.

Obviously, we're very encouraged by that.

We think the V-280 is in a great place with respect to the Cap Set 3 program.

And look, that's a program we've been working with the Army for years to develop the prototype aircraft, and it's doing fabulously in terms of the flight test program.

There's also a discussion around the Cap Set 1. Obviously, we will compete on that program as well.

I think we have some very good ideas and that can meet that requirement, so -- then of course, there's -- beyond those really big programs, there's a number of other things that we're engaged and working with the Army, whether it's next-generation weapons, armored vehicles.

I mean there's a lot of opportunity as the Army kind of makes this shift into the modernization programs that I think will be beneficial to us over the years.

Would I quote an exact number of what we expect to see in 2020's budget or how they're going to move that money?

I mean I think that's all still to be determined, but it certainly seems like a very appropriate way to try to fund their modernization programs.

And we're excited about the opportunities that it could create.

Okay.

And then the -- maybe as a follow-up, just in the vehicle business, if you could talk a little bit more about what came so -- sort of off the route this year relative to initial expectations?

Why is -- I guess it seems like pricing is very tough.

Why is pricing so tough?

Do you still expect that business to do, I was thinking, maybe $1.75 billion of sales or so this year?

And how long do you think it'll take to get back to -- or to get toward maybe a high single-digit level of profitability there?

Well, look, I think that I don't think this is a problem if -- overall pricing in the market so much, as our team has been going through sort of a painful learning experience about how that channel is managed and how discounting is handled and how that plays out through the course of the year.

So I -- it's -- it, for sure, has manifested itself in more discounting than we would like to continue to work that channel.

I think the team will get better at that.

And it's things we're learning.

And I think the team is going to make progress on it.

As we've talked about before, I think we were on the snow side.

I'm a lot more bullish.

I think we had some great product introductions last year's that got the channel pretty excited.

We have a ton of new stuff going in this year's, and we're -- again, when you look at pre-season sales activity and order activity, it's up.

Recognize that.

On the dirt side, we missed a better part of last year because some of the product that was sort of in the pipeline wasn't really ready to go.

And we didn't want to release it till it was ready, so we're kind of maybe a year behind in terms of the new product feeding into that channel.

But those things, we're introducing now, so I think we'll start to see some momentum and a little more excitement in the channel as we go forward.

But the bottom line answer is I think that the revenue number you're talking about is probably consistent with where we'll end up this year, but we need to see more growth, particularly through that channel.

And we do have a question from the line of Rajeev Lalwani with Morgan Stanley.

Scott, on the Systems side, can you just talk a little bit about the growth that you saw there?

Obviously, TAPV weighed on you this quarter, but I'd like to just get a good sense of what the underlying revenues are looking like and [bps in] growth going forward.

From a revenue standpoint, Rajeev, I mean I think we're more or less where we expected to be.

I mean we're seeing the ramp-down on the TAPV program, which we fully expected.

I would say we would have expected to see a little more coming through on the Ship to Shore Connector program.

I think that's just a timing issue.

As we've looked at the appropriations bills, I mean, the funding for the volume of Ship to Shore Connectors we expected is happening.

We just have not reached a definitized contract at this point.

As I said in the prepared remarks, and I think it was out in the press, is the Navy continues and gave us another $100 million towards the long-lead material to keep that program going at the rate that we expect it to be, but it's been coming a little bit later in the year than we originally laid into our plans.

But as we look through the balance of this year and certainly as we start thinking about 2019, we expect to see that program ramping.

And that should be -- contrary to the development side of the program, it should be a normal-margin business.

And just switching gears a little bit on the commercial side at Bell, can you just talk about how deliveries are looking overall, maybe putting aside the 505 and just whether or not you're seeing the strength that you had been alluding to previously?

Yes, absolutely, Rajeev.

We feel very good about the order activity at Bell.

The -- obviously, the 505 dominates the numbers of the new deliveries.

And that continues to be a very, very successful program for us.

We were -- I mean we always have a mix from quarter to quarter, obviously, on the type of air vehicles in terms of the mix of 412s, 9 -- 429, 407, 505, if you will.

We certainly expect Q4 to be stronger on both the 412s and the 429 side.

Those were both relatively light in the quarter, but that's just timing of deliveries and customer need dates.

So I think, from our perspective, the commercial market continues to be strong.

Order activity is good.

And we'll -- we're actually in a position where we're -- we'll be tweaking up the production rates on a number of those models to meet the demand we see going forward.

And we do have a question from the line of Carter Copeland with Melius Research.

Just a couple of quick clarifications.

So I'm just piecing this together, Scott, from your comments.

It sounds like the specialized vehicle weakness was isolated to Arctic Cat, and I think I'm just wondering.

The management change is all related to that as well, I would assume.

So if you can just clarify that, it would be great.

And then secondly, Frank, just wondered if you could give us some color on the favorable versus unfavorable adjustments at Bell since that seemed to be a benefit in the quarter.

So Carter, I would say on TSV the most fundamental challenge in the business is around particularly the dirt side of the consumer side of that business.

And that's the area that we're -- where we need the most work, but when you have something like that going on in the business, it creates enough chaos that it drags down the operating performance in total.

Most of that, I think we have a very good team in place.

They've done a great job in the past, and I think they'll recover.

And the performance and profitability with most of those sort of subsegments, if you will, will do just fine.

The area that's going to require the most work and most focus here going forward is around the sort of that acquired piece of the business.

So in terms of performance, Carter, Bell continued to perform well as they have in other quarters.

We saw continuing improvement in our cost position.

We saw kind of risk retirement in the military programs.

Frankly, we saw the same thing at Systems and in our defense business at Aviation.

So overall kind of program net adjustments were $63 million in the quarter, but that was kind of spread.

But the larger part of that was at Bell, but it was spread across our other businesses as well.

Okay, great.

And one last one, Scott, the pricing benefit you mentioned and quantified in Aviation, was that across the board or isolated?

And any additional color you can give us there?

No, across the board.

We've been trying to press price in every one of the models, and we continue to realize it.

And we do have a question from the line of Robert Stallard with Vertical Research.

Scott, on the vehicle issues here, how long do you think it's going to take to sort this out?

And do you think there's going to be some additional restructuring charges required?

Well, Robert, I think that we're probably a year behind the schedule that we would like to have had, right?

I mean, obviously, we went into this expecting to be able to generate accretion in year 1. Obviously, that's not going to happen, as we've kind of realized these costs in the quarter.

But we still feel, with the products coming out, the strength -- and again, we're kind of seeing this as momentum builds on the snow side.

We're kind of 2 launches into that second season.

We've sort of lost a year [or so] in the dirt side.

I think we're going to see that.

So it's probably a 1-year delay again.

Okay.

And then secondly, on the aerospace side on both Bell and business jets, I was wondering if you could comment on how the aftermarket did in the quarter and what sort of growth rate you achieved.

So the aftermarket, I think that, when you see the numbers, Cessna was -- or Aviation, rather, was kind of flattish.

It was up a little bit on a year-over-year basis.

I think part of that is -- we've been looking at lot of the data.

The daily -- average daily utilization, the flying rates are all continuing to grow modestly, but I mean they are improving, so frankly, I would have expected to see a little more growth in that side.

On the other hand, as we look out back at Q3 last year, it was particularly strong.

So I think a little bit of it is just comp on year-to-year.

But anyway, look, we didn't -- it was modest, very little growth but again, still a very healthy franchise and a great part of the business.

And I would expect we'll get back to seeing growth going forward.

And on the helicopters?

Helicopters was the same.

It was up modestly.

Yes.

And we do have a question from the line of Cai Von Rumohr with Cowen and Company.

So Scott, the Longitude, with the NetJets order, I -- given you're saying that they're going to start delivering in the second half of next year, I assume you have a firm order.

Is that true?

And if so, does it come in the third quarter or the fourth?

So we do not, Cai.

So there was nothing in the backlog associated with the NetJet Longitude deal.

We didn't sign the agreement really until the fourth quarter, so -- and as you know, our -- the way we manage these programs is the same as we have been doing at Latitude.

As NetJet puts a firm order, with -- you know we have a specific tail and deposit.

That's when we move that into backlog.

That usually is within sort of that 1-year time window.

We didn't do it because we kind of, again, didn't sign the agreement until into the fourth quarter.

The NetJet guys are very excited about this thing, and they're about to unleash their very capable sales team to go start driving sales of Longitude into the fractional market.

And as soon as they start to see that, clearly, we'll be firming up orders here, I would expect, in the fourth quarter, but nothing in the backlog at this time.

Okay.

And you've been kind of on again, off again on the Hemisphere given the Silvercrest issue.

At what point will you feel comfortable enough with the Silvercrest to say we're definitely going ahead or we're still unsure?

Well, I think that what's going to happen, Cai, is by mid-year next year, we should see an engine on a test stand that will validate where they are.

Our guys have been working very closely with them.

We had a team over with the Safran guys just a couple weeks ago.

I think that they've been very open.

They've been working very closely, explaining look, where was -- why was the issue that occurred on the compressor, how did that get through all the analytical models.

We understand that very well.

They understand that very well.

I think that the issue is very, very well understood.

They believe the design solution on the model that they've come up with addresses that, which is terrific.

We feel confident that there's a good understanding of the root cause, and so I would say we're very bullish.

I think we're very confident in their solution.

That being said, we do want to see it on a test stand.

So I think you're looking at a mid-year next year when would say, okay, this is a firm go or not.

Obviously, we will continue to invest at some level here between here and there, as will the NetJets folks.

One of the benefits of the -- of them being the launch customer is that they're making pilots and crew and maintenance folks available as we finalize the detailed specifications of the aircraft to make sure it's something that's going to be a home run in that space.

So we'll both be working between now and then to be ready to pull the trigger.

Terrific.

Last one, the V-280, when do you expect to get to the point where the Army will start to fund some of your development?

I'm ready tomorrow.

Yes, I know you're ready, but when are they going to be ready?

Well, look, Cai, I mean, as we talked about earlier, I think the Army has -- coming out of AUSA and all of their talk about a shift from kind of the current programs to modernization is very encouraging.

I would hope that there will be some level of activity that will start next year, but I don't want to prognosticate on this thing.

But I mean clearly what the Army is saying is very encouraging.

We continue to work with them, obviously, on a regular basis, and I'm hopeful that we'll start to see some level of activity towards that next year.

And we do have a question from the line of Pete Skibitski with Alembic Global.

I guess, one more on Textron Aviation, Scott.

I was wondering if you could talk about kind of your perception of the health of the Textron Aviation customer.

We've seen a lot of good indicators out there, and I'm kind of wondering if it really still feels like you're in an up cycle or is there still a lot of caution in the marketplace?

Because if you look at some of the secondhand numbers and -- it seems like there was a kind of drying-up there in that market.

So it would seem to indicate the cycle is really strong, but the numbers obviously aren't coming through delivery-wise quite yet, so I just wanted you to characterize it maybe more.

Well, I will say, Pete, first of all, statistically -- or actually you're right.

I mean the secondary market for anything that's kind of under 10 years old is pretty thin.

When people do list an aircraft, it moves quite quickly.

And as you've seen in some of the surveys, the pricing is healthier.

And so I think the secondary market is certainly a help.

There's very little out there that would even compete with somebody thinking about a new aircraft.

More importantly, for someone who wants to trade-in their aircraft, they have an easy source of liquidity to sell their old aircraft to be able to put that towards a new aircraft.

In terms of the health of our customers, we've had an opportunity, obviously, here recently to spend a lot of time with a lot of these folks.

And I think that the dialogue from them is reflective of what you see in a lot of survey information.

These are people that feel good about their businesses right now.

They've been hiring people.

They're much more comfortable with making CapEx decisions, be it for building a new plant, expanding capacity, buying a jet.

So clearly, the tax cuts and some of the reform, regulatory pullback has made -- the business community in the U.S. is feeling better than they've felt in a long time.

And that confidence is -- gives confidence to hire people and to spend CapEx.

Okay, well, I appreciate the color.

And maybe just one quick follow-on on Industrial.

There's a lot of talk about global automotive these days, and I'm just wondering how the Kautex guys are kind of seeing the cycle right now and if they're feeling any impact from tariff-related issues globally.

We don't see a lot of tariff-related.

I mean there is some pressure, obviously, on raw material pricing.

We're largely -- we have contracts that's across the company, mitigating most of that.

Remember we do most of our production in-country for those plants because you have to be close by, anyway.

On the other hand, look, there's a great deal of uncertainty around the tariffs and around the Brexits of the world, which we are seeing some impacts of that.

There's just caution right now in the global auto OEMs.

And that's coupled with, I think, just an overall softening a bit of the global auto OEM manufacturing.

And I say Q3 is always the most susceptible because most of these guys do shutdowns during the summer months, anyway.

And so one of the ways they -- that's easy for them to regulate output is to extend some of these shutdowns.

And again, that's something that generally manifests itself in Q3, and we certainly saw that at Kautex.

So it's not a huge reduction in volume, but there have been some modest declines.

Okay, so your expectations are basically nothing heroic out of Kautex but nothing terrible either.

No.

I think, again, Q3 is always the most difficult.

And I think we'll certainly see a better Q4, which is cyclically normal in that business, but I do think in that, it's still in the context that global auto OEM volume is going to be down somewhat.

And we do have a question from the line of Sheila Kahyaoglu with Jefferies.

It's good Industrial is finally getting some airtime but not for good stuff, unfortunately.

Just one last one on it, how do we think about specialized vehicles recovery?

I think you mentioned to Rob's question it was the dirt product introduction that seems to be the issue.

And how long will the product introductions take?

And how do we think about that profitability recovery?

Is it a year's time?

Is it a few quarters?

Well, Sheila, I think that it's probably in a year's time.

I mean we do have some good things coming out here in the model year '19s, which are heading to dealers now.

I think in general how we manage that channel is something that, frankly, we just haven't done as well as we should have.

And our sales tools and how easy we make it for prospective customers to configure our product, have access to the dealers, have a natural way to help customers move to our product is just something we didn't do well.

So some of that is there are some things that were problematic that I think can be fixed very quickly, but I mean I think this is a year process to get this thing to where we want it.

Now I don't -- certainly we don't expect to see another quarter like we just saw.

Most of the rest of this business is definitely performing better.

And look, it's disappointing, obviously.

Industrial has been quietly growing and generating good margins for us for some time.

People don't talk about it a lot, but it's been a good segment.

It's unfortunate that we've gone through this issue.

And obviously, I think we have the team behind it to go get it on a better path.

And then just one more, as it regards the systems.

How do we think about the profitability profile of the business?

Is it around 8%?

And then you announced the joint venture with FlightSafety.

Maybe how it came about and how it expands your capability for TRU.

So the margin rates, as we've kind of talked about, we knew it would be stronger in the front half of the year than the back half, but overall I -- clearly, we expect to beat the full year guidance that we provided for Systems.

I think the execution of the programs has been very good.

And obviously, there's a lot of opportunity out there the guys are chasing, but performance in 2018 has been net very strong and we feel good about that.

In terms of the FlightSafety deal, look, I think FlightSafety has been a large training provider for our Textron Aviation products for a long time.

We decided we wanted to get into that market because we saw it's a very attractive area and one which was good for us to maintain relations with our customers into the aftermarket.

That's been going well.

Particularly, our Tampa facility has grown dramatically.

We've been doing all the training on the new types of aircraft.

So we are quite happy with the business.

It's been growing.

It's kind of what we expect it to be, but it does take a fair bit of time as you look at how many training centers you have to have in order to continue to grow that business.

FlightSafety approached us, said, look guys, you're -- we know you're getting into this business.

Wouldn't it be better if we were together in this thing?

And we could instantly -- I mean, look, they've been hearing, getting a lot of good feedback on what we've been doing with customers and how we run our training programs.

They obviously have a much, much larger footprint to provide that training, and so I think the combination of the 2 makes a lot of sense for our customers.

And so it's a good deal for us.

It's a good deal for them.

And I think we'll -- this will rapidly accelerate our participation in that market.

So it's a deal that we sort of explored the concept and came up with a place where both companies feel like it's a win, and I think it will be very good for our business.

And we do have a question from the line of Peter Arment with Baird.

Yes.

Scott, just focusing on Systems, the top line.

This is the lowest quarter from a revenue standpoint in, I guess, 10 quarters or so.

And I guess it was expected with the runoff of TAPV.

Is this a good level, I mean, going forward?

I mean just trying to understand from a modeling perspective, I know Ship to Shore was the timing issue, but maybe a little help there.

And then also, just it's unrelated, if you could just talk about how you still see the competitive landscape for Longitude.

Great news at NBAA, but you also heard some announcements from some competitors.

Sure.

So I think on Systems, it was an unusually low quarter.

And again, I think the runoff of TAPV, which we fully expected, we did expect we would see a little more ramp-up on the Ship to Shore side.

We'll start to see that as we get into Q4.

So certainly, our expectation is we'll be seeing -- we'll see a little stronger revenue in Q4 than we did in Q3.

With respect to the competitive dynamic, look, we've been competing with the 450 and the 500.

We'll continue to compete with the 450 and the 500, even if they call them the 500 and the 600.

They're largely the same aircraft.

It's been some clever marketing, right?

It was the engine guys celebrating being selected and the avionics guys celebrating being selected.

They're all the same guys.

I mean it's I think what they've done is they've extended the wing a little bit with a winglet, a bigger winglet, and they've put more gas in it.

But our guys feel very comfortable.

We've been winning head to head in that market against those products.

Obviously, with Longitude now coming to certification, I think we feel very good about where we are with respect to those products.

And obviously, having been selected by NetJets now to be their super-mid product that they're marketing in the fractional side, I would expect we'll see very much the same phenomenon we saw in Latitude.

It helps to validate the aircraft and get good volume driven in the market, which obviously is a huge benefit to us on the fractional market but also has a knock-on benefit, I think, on the retail side.

So we've always had competitors.

I'm sure we'll always have competitors, but I think we feel very well about where those 2 products are positioned.

And we do have a question from the line of David Strauss with Barclays.

I just wanted to ask about -- so going back to Industrial again.

How surprised were you by the result relative to whatever your internal expectations were for the quarter?

I'm speaking specifically to the $1 million in EBIT.

When did you find out?

The [facts are --] would seem to point to that, given the management change, that you kind of found out late in the game?

Just wanted to get some sense of how much of a surprise this was to you guys at corporate.

Well, look, I think it was a -- clearly, it was a surprise, all right?

I mean, as we looked at the load-in of product, which was really starting to ramp right at the end of Q2, into the beginning of Q3, there was clearly an expectation that -- as that product rolled out there, that we would start to see stronger retail sell-through.

And we didn't.

And so as we kind of worked our way to the end of the quarter and said, guys, we're not seeing the level of retail sell-through that we expected to see, that's when we had to take the actions that we took around recognizing it's going to be something we got to continue to work on this channel.

But we've had some dealers that have been fabulous, that are selling through a lot of retail.

They're doing a great job.

The product that gets into the field has been spectacular.

We've had great feedback from customers, the performance.

I -- we don't have a product problem.

I mean we have still gaps, which again as I said, we're working on as we go forward but I think the progress on what the product is and how the product is performing, we're very pleased with.

But we're still not seeing as much retail as we would like to see.

And again, we're having to make adjustments in the channel and how we manage the channel, and that's the recognition of some of those costs that we're going to bear to work through that.

So it really is something where we expected to see us a much stronger Q3.

And when -- as we got towards the end of the quarter and weren't seeing that, that's when we decided we needed to act accordingly.

Okay.

And then just trying to help us frame in terms of how we should model Industrial going forward given this result in Q3, so kind of how I'm thinking about is Kautex is -- within the number that we're seeing, Kautex is still a high single-digit margin business, which implies the vehicle side is a significant loss-making business.

Is it right to think about that Kautex kind of holds at that level of profitability going forward and the vehicle business gets to break even in the fourth quarter and then profitable next year?

Or is it breakeven next year?

Just to try and help us model the business, given the volatility.

Well, look, I mean I don't know how much modeling I want to do, but certainly your characterization of Kautex as a high single-digit margin business is what we typically see and certainly what we expect.

For the balance of the year, I clearly expect the vehicle business to be better than breakeven.

A lot of these costs that we are managing in terms of the channel are things that we're accounting for as we go into the quarter, so I think we will certainly see a healthier Q4.

We'll see a stronger performance on Kautex, which is its normal cyclical basis.

And we will see improvements as a result of some of the actions that we're taking at TSV.

Okay.

And then last one for me, on the tax rate.

Frank, I think you said 17%.

Just is that -- that's adjusted, I assume.

And is that a fourth quarter tax rate or a full year tax rate?

And if it's full year, can you just tell us what you expect for the fourth quarter?

Well, I think you could derive the fourth quarter.

So it's 17% for the full year, and that's the as-adjusted.

Kind of that's on an as-adjusted basis.

So kind of just the math of that would suggest around a 22% rate for the fourth quarter.

And we do have a question from the line of Sam Pearlstein with Wells Fargo.

Scott or Frank, is there any way to just look at the Industrial risk segment and tell us is there any sort of quantification of one-time costs?

Is there an impairment?

Or when do you do the next impairment tests?

Just trying to think about what's one-time to this quarter that's not part of ongoing.

Sam, I wouldn't characterize it as one-time, right?

This is not some special charge, but it -- when we look at what we reserve and accrue around anticipated discounting programs and things like that, I mean, we had to make adjustments to that given the nature of where we are and where the inventory is.

So there's some probably that it's more in the quarter than we would expect, but it's not something like an impairment of goodwill or an intangible or something of that nature.

Okay.

And then the CapEx looks like it was reduced about $50 million.

Is that all the divestiture?

Or has -- have you done anything else in terms of just the CapEx?

It's about half and half, Sam.

So about half of that was associated with not having the second half of Tools & Test, but about another half of that is just CapEx that there's tooling and things that we are able to -- we just don't need to do this year.

So it's a split.

And we do have a question from the line of Ron Epstein with Bank of America.

It's Kristine Liwag calling in for Ron.

Scott, you mentioned how you wouldn't expect a firm NetJets order for the Longitude to be as dilutive as a Latitude order.

And after visiting Wichita a few years -- a few weeks ago, it's clear that you've invested a lot in automation for the Latitude line.

And there's even more automation on the Longitude line, so how much of this better Longitude margin expectation is from better expected operational efficiency versus actual better pricing terms?

And essentially, how much of this production efficiency for the Longitude could flow to your bottom line?

So I guess I would -- when you, when we talk about the operations side, I think that on both Latitude and clearly what we're seeing so far on Longitude, we feel very good about our cost position.

I think the investments the guys have made around automation, around tooling and making sure that we are able to be very productive and cost effective at the production of both the Latitude and the Longitude are on track.

I mean we've always felt good about where those are from a production cost standpoint.

And Longitude obviously is in its early days, but the fixturing and a lot of the things that you saw when you were in Wichita are playing out as we expected.

So I think we'll be very -- we'll be on our cost targets in terms of what we set for the business.

The biggest difference on this issue of the dilution around the Latitude deal versus our expectations on the Longitude deal is largely around the fact that we locked in on a Latitude price that was just too low.

I don't know how else to say it.

I mean we should never have gone that low on it, and I know that the NetJet guys understand that.

I mean, when we sat down and went through the negotiation process around Longitude -- as I said, it's a fair deal.

It's a deal that will be a good-margin deal for us and it's a deal that they'll be able to do quite well as well, so it was definitely a fair agreement.

Great.

And following up on the Longitude, as you go down the learning curve on the program and you get more orders from non-NetJets customers at presumably better pricing, how should we think about incremental operating margins for the program going forward?

We clearly expect that the Longitude is going to have 20-plus-percent leverage as it comes into production and starts to sell.

So I think we expect it to be typical, let's say, as the rest of our jet programs.

And we do have a question from the line of Noah Poponak with Goldman Sachs.

Frank, the -- sorry to ask another tax rate question, but just since it's kind of moved around a lot and people have had different versions of digesting the bill, what's your latest thinking on the kind of medium-term sustainable beyond-2018 rate?

Yes, it's kind of low-20s area, a [24-ish-type] number.

Okay, got it.

Scott, just going back to kind of like kind of the overall health of the business jet market and used versus new.

Just spent 2 days at NBAA, everyone was some version of incrementally positive, but the -- sort of those we spoke to at your business or other new jet manufacturers were much more in the slightly more positive camp versus, when you talk to the brokerage community or those in the secondary market, it was particularly bullish.

And I guess I was -- I know you've sort of already been asked this already, but I'm sort of wondering where the tipping point is in the translation of used to new.

And is there something that's made the used market more attractive than it used to be?

A lot of the brokers are talking about the full depreciation in year 1 now being applicable to used, making it more attractive and that the OEMs didn't like it.

I don't know if that's true or not.

On the other hand, if you're washing out all that inventory, eventually you're just going to run out of things to buy in the used market and it would help new.

So I'm just wondering if you can maybe put a little more color around that item specifically.

And just what's the tipping point when it tips over into your business?

Well, I think our guys are pretty bullish about where we are.

I don't know that I would -- there's no reason for there to be a line of demarcation about is -- the secondhand market is good but that's not good for OEMs.

I mean, the better the secondhand market is, the better it is for the OEMs, right, as it provides a source of liquidity.

I think the brokers are -- look, they're very bullish right now because there are pretty much -- there's just so little out there that, the time -- from the time somebody says, hey, I'm going to sell my older jet so I can buy a new jet, the time on the market for that transaction to happen is so short.

If you're a broker, you love that, right?

I mean you're -- how much time you're having to invest in that asset before you sell it and get your commission is -- I mean they have every reason in the world to be bullish, but that bullishness is not a negative for us by any stretch of the imagination.

It's providing liquidity for that guy who's going to buy the new jet, that's going to upgrade to a new jet.

So I think that's -- look, I mean there was a period for sure.

If you went back after the sort of the 2009, '10, '11, where you had so many virtually new airplanes out there that, yes, that was a problem for OEMs, obviously, because it was you could buy a newer plane in the used market versus a newer plane in the new market.

So I think those days are way behind us.

I mean there's just not new stuff out there, all right?

I mean it's -- so this is not a -- there's not a situation here where we're competing.

Quite the contrary, it's -- this is very healthy for us to have that level of activity and such low inventory and quick turns on sales in the secondhand market.

It's absolutely good for us.

You guys had cited in the past that the excess used inventory and the pressure that, that -- less from a volume perspective but more from a value perspective, the pressure that had on residual values created a trade-in issue for someone who wanted to buy new without a plane.

Is it a matter of if you get a few more quarters of bigger, positive residual value improvements or price increases in the secondary market but then that could more strongly move into your market because now the trade-in value is back?

Is that something you're watching out for?

Well, look, I mean, obviously any improvements in the residual value of the aircraft is beneficial to us, right, because that means that's a better value for that customer.

But I think a lot of this -- because we went through such a long down cycle, these residual values dropped, but then they've largely flattened or are going to a more normal depreciation schedule than the dramatic reductions that we saw in that sort of '09, '10, '11 time frame when you saw [DRP] numbers just dropping dramatically, even in the absence of transactions, frankly.

Like it was just a sort of a drive price down into an illiquid market.

It was a terribly unhealthy period of time.

So I think we're beyond that.

But obviously, as residuals come up incrementally, that's beneficial because that's better value for the -- someone who's looking to make that trade-in decision.

Last one on it.

Could you maybe give us a lead time update, maybe just using CJ3, CJ4 kind of light-cabin bread-and-butter?

What kind of -- how long to get an airplane today versus what it was earlier in the year?

I would have a hard time getting one for you, Noah, but I'm willing to take a look, if you're serious about it.

I mean, is it more than a year to get a CJ3 or a CJ4 at this point?

No, no, no.

You meant a hard time in 2018.

Yes.

Okay, what about in first half 2019?

Look, Noah, I mean...

[Did you want delivery or...]

We're not going to get too much into it, look, as I think a year or...

Okay, I thought you guys had sort of consistently provided that number.

Just...

No, I don't think we've consistently done that.

So it -- look, I think this market, if you're looking at models and -- that are a year out there or 3 to 6 months, I think that's a healthy place for this thing to be.

If someone's looking at doing a trade and they can't get an aircraft for a year, I don't think that's healthy.

I think that we try to match this thing to where you'd like to be in more of an ideally, and I mean I'm making up a number of 3 to 6 months, all right?

Most people don't want to wait a year for something, right, but I don't...

So do you think you'll raise production next year then?

We're probably going to raise a couple of models, sure.

Okay, Brad, that concludes our prepared remarks for today.

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