達信公司 (TXT) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Textron Third Quarter Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Vice President, Investor Relations, Mr. Eric Salander.

Please go ahead.

Thanks, Greg, and good morning, everyone.

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

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

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

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

Textron's revenues in the quarter were $3.3 billion, up $59 million from last year's third quarter.

Net income in the third quarter was $0.95 per share compared to $0.61 per share of adjusted net income in the prior year.

Manufacturing cash flow before pension contributions totaled $181 million compared to $259 million in last year's third quarter.

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

Thanks, Eric, and good morning, everybody.

Revenues were up in the quarter, primarily driven by Textron Aviation and Industrial.

Segment profit margin was up 140 basis points as we continue to see strong execution across our businesses.

At Bell, revenues were up in the quarter, largely due to commercial deliveries of our 407 and 429 aircraft.

Year-to-date, orders of these models are ahead of last year's rate and we look forward to continued higher deliveries of these popular platforms as we continue to ramp production to align with customer demand.

In the quarter, our Bell 407GXi received IFR certification from the FAA.

Bell has proposed the new 407GXi as its entry from the Navy's Advanced Helicopter Training System program, where an award decision is expected later this year.

Moving to the military side.

The Czech Republic announced their intent to acquire a mixed fleet of 8 Bell UH-1Y utility and 4 Bell AH-1Z attack helicopters as part of a total transaction estimated at $620 million.

This is one of several foreign military opportunities for the H-1 platform that we're continuing to pursue.

Within the Future Vertical Lift, we recently unveiled a full scale model of the new Bell 360 Invictus rotorcraft, our entrant in the Future Attack Reconnaissance Aircraft program at the U.S. Army's AUSA Annual Meeting.

The Bell 360 Invictus combines new technologies validated on our 525 commercial helicopter with unique characteristics to deliver the U.S. Army an affordable, agile and lethal solution to win on the modern battlefield.

At Systems, revenues were down on lower armored vehicle deliveries at Textron Marine & Land Systems.

In the quarter, Textron Systems was among 3 companies down-selected by the U.S. Army to deliver prototypes for the next phase of the Next Generation Squad Weapons program.

Also in the quarter, our Ship-to-Shore Connector craft 100 successfully completed builder's trials, will now be followed by Navy load acceptance trials.

Within Unmanned, our fee-for-service product line captured over $50 million of new wins in the quarter for the Aerosonde platform.

Earlier this week at AUSA, we unveiled the Ripsaw M5 as Textron System's offering for the U.S. Army's Robotic Combat Vehicle program.

Moving to Industrial, revenues were higher, primarily reflecting improved pricing at Textron Specialized Vehicles.

In Specialized Vehicles, we saw continued favorable performance from the cost reduction and manufacturing alignment actions we initiated in the fourth quarter of last year.

Also in the quarter, we continued to onboard Bass Pro and Cabela's stores as well as independent TRACKER Marine dealers and have seen steady retail volume growth through this channel.

Moving to Textron Aviation, revenues were up from higher jet and aftermarket volumes, partially offset by lower defense volume.

In the quarter, we delivered 45 jets, up from 41 last year, and 39 commercial turboprops, down from 43 last year.

Looking at commercial turboprops, we saw a pickup in order activity sequentially as well as compared to the third quarter of last year.

In late September, we received FAA certification of the all-new Citation Longitude and began customer deliveries in the first week of October.

We're real excited to have this innovative aircraft in the hands of our customers and expect this platform to drive revenue growth and margin expansion in the future.

Overall, Aviation had a solid quarter with mid-single-digit revenue growth.

Coming into the year, we had planned for higher growth in our legacy jet models with commercial turboprops about flat.

Year-to-date, legacy jets volume is running ahead of last year with 135 deliveries compared to 125, with commercial turboprops tracking to plan.

As we look to the remainder of the year and in light of some uncertainty in the marketplace, we're adjusting our outlook for legacy aircraft sales and now expect Q4 delivers, excluding Longitude, to be about flat with last year.

With respect to Longitude, we started customer deliveries and expect to continue those through the current quarter, although we've seen some deliveries pushing to next year to allow for required aircraft modifications related to certification that was granted at the very end of the quarter.

We've also experienced some delays in defense order activity and volume compared to our original plan, all of which have been reflected in our revised full year guidance for 2019.

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

Thank you, Scott, and good morning, everyone.

Segment profit in the quarter was $297 million, up $52 million from the third quarter of 2018, with segment profit margin of 9.1% up 140 basis points from a year ago.

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

Revenues at Textron Aviation of $1.2 billion were up $68 million from the last year's third quarter, primarily due to higher jet and aftermarket volumes, partially offset by lower defense volume.

Segment profit was $104 million in the third quarter, up $5 million from a year ago due to the higher volume and mix and favorable performance, partially offset by higher net inflation.

Textron Aviation backlog at the end of the third quarter was $1.9 billion.

Bell revenues were $783 million, up $13 million from last year on higher commercial revenues, partially offset by lower military volume.

Bell delivered 42 commercial helicopters in the quarter compared to 43 last year.

The segment profit of $110 million was down $3 million from a year ago, primarily due to an unfavorable impact from performance which included lower net favorable program adjustments, partially offset by higher volume and mix.

Bell backlog at the end of the third quarter was $5.6 billion.

Revenues at Textron Systems were $311 million, down $41 million from last year, primarily reflecting lower armored vehicle volume at Textron Marine & Land Systems.

Segment profit of $31 million was up $2 million from last year's third quarter.

Textron Systems backlog at the end of the third quarter was $1.4 billion.

Industrial revenues of $950 million increased $20 million from year ago largely related to a favorable impact from pricing within the Textron Specialized Vehicles product line.

Segment profit was up $46 million from the third quarter of 2018 largely due to favorable performance and a favorable impact from net pricing primarily related to the specialized vehicle product line.

Finance segment revenues were down $1 million and profit was up $2 million from last year's third quarter.

Moving below segment profit.

Corporate expenses were $17 million and interest expense was $39 million in the quarter.

We also repurchased 2.3 million shares at an overall cost of $109 million.

Year-to-date, we have repurchased 9.3 million shares, returning $470 million in cash to shareholders.

To wrap up with guidance, we are narrowing our expected full year earnings per share to a range of $3.70 to $3.80.

This includes revised tax guidance at an effective rate of 17% for the full year.

We are revising our outlook for manufacturing cash flow before pension contributions to a range of $600 million to $700 million, largely reflecting higher ending inventories at Textron Aviation.

That concludes our prepared remarks.

So Greg, we can open the line for questions.

(Operator Instructions) Your first question comes from the line of Sheila Kahyaoglu from Jefferies.

Scott, I wanted to talk about Kautex and your decision to put out strategic alternatives for the business.

You've talked about not selling it for as long as I've known you.

Kind of what's changed and what are you thinking about from here?

Well, Sheila, look, I think there's -- obviously we get a fair bit of feedback from investors as to the fit of the Tier 1 automotive business in a company that is otherwise kind of an end market product, highly engineered sort of a business, and we've been paying attention to that.

We think that we do a pretty good analysis every year to make sure that nothing in the portfolio is holding back our stock from a sum of the parts standpoint and we've obviously seen a disconnect in that over the last year or so.

And given that and the feedback that we get, we thought it was appropriate to at least explore what it would look like and what alternatives there might be for Kautex.

And so that's why we announced that we were launching that process.

Got it.

And then, Frank, just on the free cash flow.

Working capital has been a hindrance here.

Kind of how do we think about that ramp?

How much is pushed out given the Longitude and working capital into 2020?

Yes.

Again, we're going to see, we think, some higher inventory levels at Aviation given kind of the outlook on the legacy models that Scott discussed and a little bit of Longitude.

The $100 million reflects that working capital growth.

We'll liquidate a lot of inventory here in the fourth quarter, but we think some will get pushed into early next year.

Yes.

So Sheila, there's several pieces of that.

As Frank said, we'll have a few Longitudes, just the mods of the aircraft which are trivial from a technical and production standpoint but are kind of invasive, and we're rolling each craft through that.

Based on these last-minute changes, means a few aircraft that we've had in our plan will probably move into next year.

There'll still be a bunch of Longitude deliveries in the quarter, obviously.

We have a military customer, for whom we built T-6s that originally was planned to take delivery this year, has asked to take that delivery next year, which again that's fine, but it does put some -- obviously, some inventory.

And as we've said all year, if we see any softness, we're going to align and trade volume versus having to drive price to get there.

So with sort of the dynamic we're seeing in the marketplace, we'd rather back off on that number.

And obviously, there's some penalty to us in carrying some inventory into next year.

But I'd rather do that than try to push more volume into a market if it shows any signs of softness.

Your next question comes from the line of Cai von Rumohr from Textron (sic) [Cowen].

I didn't know I joined.

Welcome aboard, Cai.

Yes.

So to follow up on Sheila's question.

If you sell Kautex, it looks like it's quite dilutive.

And then if you're going to look at selling that part of Industrial, wouldn't you also sell the more troubled part, Specialty Vehicles (sic) [Specialized Vehicles]?

So ultimately, I think the question comes, Scott, what is Textron going to be in 3 to 5 years?

Well, Cai, obviously we haven't made -- had any commentary on the vehicle business.

As you know, the vehicle business historically for us has been a good business.

It's had good growth.

It generates good margins and cash.

I think obviously we went through some issues last year which we've been working hard to get turned back around.

I think it's heading absolutely in the right direction and a business that has a lot of potential for us in terms of growth and strong performance.

And it is, like the rest of our businesses, one where product matters, investing and having a better product than the other guy is how you win in the market.

And those are the kind of businesses we like.

Got it.

And then so, Frank, if we look at Industrial, the margins look like they were weaker than I thought.

And you keep on talking about the better pricing in Specialty Vehicles, was Kautex down significantly?

No.

Kautex was fine.

I mean we -- this is -- the pricing obviously was relative to the third quarter of last year, which was a really tough quarter at TSV.

And so we made considerable progress in terms of kind of no longer discounting in the marketplace and having a more appropriate distribution strategy and pricing, therefore pricing strategy.

But Kautex performed well.

Kautex was kind of flat at the revenue line and saw a better kind of margins year-over-year.

Your next question comes from the line of Seth Seifman from JP Morgan.

Scott, I just wanted to follow up on some of the weakness that you mentioned in the business jet end market.

I think the commentary you made suggests that, excluding Longitude, deliveries will be down about 10 units year-on-year in the fourth quarter.

And is there a particular set of models that that's affecting more a particular geographical area or a customer set that's driving that?

Seth, I think on the fourth quarter, we would expect, again ex Longitude, to be fairly flat from 2018.

So we're not expecting it to be down.

But the market and obviously order activity has been obviously, sort of an implied book-to-bill here about 1 in Q3.

So it's not a horrible market, but I mean we do see some softness as we saw sort of in the latter part of Q2.

We saw again in the latter part of Q3 just uncertainty in the end market and some customers who have been in discussions and clearly intend to buy new aircraft, debating do I do it now, do I wait.

And again, I think we would rather take prudent action and not go out and try to use price to incentivize those transactions to happen.

They're going to move into next year, then they move into next year.

But there's no reason after all the work we've done to try to get pricing back to a healthy level that we should compromise that.

But again, it's -- I think we're talking about a flat market on -- in terms of legacy deliveries, not one that's down.

We're up 10 units on non-Longitude so far year-to-date, so that's where we're compare, right.

It's not that we were giving those 10 back, we just expect to be flat on a quarter-over-quarter basis -- year-over-year basis, I'm sorry.

Okay.

So year-on-year then you'll be up 10?

Yes.

If you're up 10 year-to-date, and if you're your flat -- okay.

Yes, yes.

Yes, that's right.

Sorry for the confusion.

It's not a down, it's a flat on a year-over-year basis on the quarter.

In the fourth quarter?

Correct.

Okay.

Great.

And then just as a quick follow-up in terms of thinking about Kautex proceeds that come in, there's obviously potential to do share buyback.

There's also, I think about $1 billion of debt coming due in the next 2 years.

So how do you think about those proceeds in light of the -- also in light of whatever target leverage level you have?

Well, look, I think again, our balance sheet, while it's somewhat unlevered at this point, we'll have to make a decision at that point how much we think is appropriate on the share buyback and then obviously some debt requirement would go in line with that.

Your next question comes from the line of Peter Arment from Baird.

Scott, just a follow-up, I guess on Seth's question lastly on Kautex.

Can you maybe just provide a little color, is there -- since you made the announcement, have you seen interest in what historically has been a very good business for you?

Look, I -- we can't give a whole lot of commentary.

I mean obviously, the process is fairly early on.

Goldman has been running that process for us.

There's been a lot of NDAs, there's been a lot of management meetings with prospective interested folks, but it's fairly early on in that process.

Okay.

I appreciate that.

And then just quickly on the 360 Invictus unveiling.

Maybe you could just give us some commentary what the feedback you've heard already since that announcement's come out kind of leveraging the 525 and what advantages you think you'll have there.

Sure.

Well, look, I was at AUSA all day on Monday, so we had the opportunity with our teams to interact with a lot of folks from the customer community.

I'd say the interest level is pretty high.

They're intrigued with what we've done.

Obviously, the Army's has seen this for a while when we submitted our proposals.

I mean we're under contract of -- at this point, as well as a number of others for the first phase of that program which is kind of aiming towards a down-select and I think probably March of next year to go down to the 2, that will then go build flyable viable aircraft.

But I think the reaction is very positive.

I mean clearly, this is great technology.

It's not as some have portrayed it as, well, this is older technology, absolutely not.

I mean this is -- the way that you get the speed and the agility from this craft leverages the huge investment that we made, obviously, on the 525 front and scaling that rotor technology and fly-by-wire technology into the Invictus.

So the performance numbers meet or exceed the customer's requirements.

We think we can do it very cost-effectively.

And as I said, the risk in terms of the entrance of the technology has been validated already with a lot of flying on the 525.

So I think the response was very positive, but we'll see where this falls out.

Obviously, the down-select is next March and we're hoping to be 1 of the 2 that gets to proceed into the fly-out phase.

Your next question comes from the line of Pete Skibitski from Alembic.

Scott, I want to ask you just kind of lessons learned from the Longitude certification.

Anything you guys are taking away from future design or documentation or process efforts that would lead you to think that maybe the next certification effort won't be so painful?

On the other hand, I think about this issue that the FAA initiative is going through with Boeing, is this going to maybe make things going forward more painful for everybody?

Just want to get your thoughts on all that.

Well, look, Pete, I think there's a lot to learn from this, both on our part and interactions with the FAA.

I think this is a pretty extraordinary case.

The reality here is that we had a new process, frankly one that we did not understand very well and which was evolving and sort of changing.

And the reality is, we had an aircraft that was essentially designed and built before the total scope of the process was understood.

And so we ended up having to do a lot of work to conform what we had done, which is a very safe, fantastic aircraft, to this new process.

And the scope of the changes were not material, but they were painful to have to go through and make the mods and the changes and understand this new documentation process and the analysis.

And what that drove, in most cases didn't actually impact the aircraft, but in several critical cases, it did.

And so again, the aircraft we end up with today through certification is not wildly different than -- and fundamentally different than what we had already designed and built, but there were several critical areas that in order to gain the certification and work our way through that process, required changes that were painful.

And so look, I think as we go forward, we now, first of all, understand that process very well.

The aircraft that are in our pipeline -- I mean we'll start with Sky Courier, that's next on deck.

Obviously, this is a Part 23 aircraft, not a Part 25 aircraft, so the process is much different.

Obviously we've done lots of Part 23 aircraft in the past.

So I think we understand and have been working very close with the FAA in a very collaborative way to make sure that we lay out what is the process and what -- how do we get from here to there on the certification of that aircraft.

So I think we're in a much better place in terms of understanding of the process, interaction work with the FAA and again this is a Part 23 aircraft, as is Denali.

So it's something that's much more familiar to us and I would certainly expect it to go much smoother than the process that we went through on Longitude.

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

Scott, you had commented in the release that the net inflation was higher in Aviation.

What's happened, for since the last 3 or 4 quarters we've been seeing you ahead of that?

Well, what happened, George, is I mean we do have inflation, and unfortunately price was pretty flat but we didn't have price to offset that inflation.

And generally speaking, we should.

And look, that's part of our looking at the market and the dynamic and saying that we're going to be cautious about the volume side of this thing because we need to be netting price and inflation, obviously.

Now there was a lot of performance in Aviation and a lot of good execution that helped to offset some of that disconnect between price and inflation.

But we need to be -- I mean I'm not suggesting necessarily we're going to continue to get big price increases, but we certainly can't give price up and we really saw price flatten the quarter.

So does that continue into the fourth quarter or no?

Well, we'll see, right.

I mean I think clearly from a volume standpoint, what we're saying we're going to back off a little bit on our plan on volume to continue to maintain and not give up on the price front.

Obviously, we've got to continue to do work to offset inflation.

And Scott, you talked about the market weakening some into September.

Did it continue into October?

And where was the strength?

Because normally you've said July and August are pretty weak.

Well, look, George, I would say that when you looked at -- the level of activity with customers has been lumpy.

It's been that way through the whole year, right.

I mean turboprops is a great example, when you look at, for instance, Q2 to Q3.

Q2 was very light in turboprops and we had a fair number of concerns and what should we do on volume, and Q3 we had a lot of order activity in turboprops.

So literally, it's -- when you have a market that has uncertainty in it, that's kind of something we see a high level of activity, then things soften out a little bit.

So it kind of comes and goes and that's why we'll keep an eye on it as we work through the quarter.

And then one last one.

In Industrial, you said that Kautex did quite well.

So that would imply to me that special vehicles performed worse than in the second quarter.

Is that a correct statement?

George, I don't think we've...

No, we -- I mean we don't disclose things at that level, George.

But my comment was that Kautex did -- on a year-over-year basis, Kautex kind of improved margins Q -- '18 to '19.

Okay.

And then if I could get one last one.

How much was aftermarket up?

You had commented in the release.

In Aviation?

Right.

About 7%.

Okay.

And you had been running kind of flat or down a little bit, but that was due to 606.

So maybe you've overlapped that, is that what's happening (inaudible)?

No.

I think on the Aviation side, George, the first half of the year was a little lighter than we expected.

It kind of stabilized more in the second quarter.

And again, we saw the 7% increase in Q3.

So again, whether there's deferrals or what was going on, but I mean it started out a little bit lighter.

But obviously, 7% in Q3 was a pretty strong quarter.

Your next question comes from the line of Rajeev Lalwani from Morgan Stanley.

Just 2 relatively quick biz jet questions.

Scott, can you provide a little more color on your comment into the fourth quarter on the Aviation side?

Just different parts of the market and how they're doing, whether it's turboprop or going to the upper end of the business side for you on Longitude, so just some broader color there.

And the second question, just higher level.

Scott, do you think in order to get Aviation margins back to where they used to be, you simply need a recovery in the end market?

Or do you think consolidation may be necessary just given how fragmented the overall market is?

Well, so first of all, this commentary on the quarter, again, I think we've seen this thing moving around a little bit in terms of strengths and weakness in the end market through the course of the year -- or I should say really the order activity, right.

I mean you see turboprops are kind of soft, then turboprops are pretty strong.

Jet, again, from month-to-month is moving around.

Like I don't think there's a -- there's certainly not a collapse of market.

It's just a question of is it a stronger market and can you deliver more volume than you delivered last year?

And I think we've been sort of -- on the non-Longitude, have been exceeding that from last year a little bit.

We think it'll be more flat in Q4.

Longitude, at the high end, the demand and the interest in that aircraft continues to be very strong.

Obviously, we're in a good position in terms of the units that we have on the book and we just got to get deliveries rolling as we go through the quarter and into the next year.

So I think we feel good about where that aircraft is in terms of its interest in the marketplace.

But like I say, we're seeing this kind of flattish at this point.

And we've talked with you about the fact that given where the market is, mostly legacy probably is kind of flat.

And we need to control our own destiny in terms of growth by putting new products out there, and Longitude is obviously a big example of that.

Sky Courier behind that.

Denali behind that.

We need to make sure that we're making the right investments to continue to grow our business even in a flattish market.

Sometimes the market is going to be better, sometimes it's not going to be better, but we got to manage in whatever that market is.

So we're continuing to drive the margin performance of the business.

We expect certainly to see dilution associated with these early aircraft, particularly in light of the rework that we're having to put into them.

But in terms of the learning curves and the productivity and the cost line, I think we're in a good place with that, but we need to go through this rework phase of getting these aircraft mod-ed and getting them into the field.

Again, from a technical standpoint, it's not a big deal, but it's fairly invasive just in terms of the amount of touch labor that we have to put in to make those mods.

So I think margins will continue to track in the right direction.

Obviously, volume and a strong end market is only helpful to us.

As to is there opportunity for consolidation, look, I think everybody would tell you given the nature of how this market has been for the last decade or so that there probably still are too many guys and too many products in some of these crowded spaces.

We think we've been performing very well in getting share in these areas.

We continue to invest in the right products.

I don't know if there's consolidation opportunities, we'll see how that plays out over time.

Your next question comes from the line of David Strauss from Barclays.

So Scott, following up on that, on the Longitude.

When the Latitude got certified, we saw a very aggressive quick ramp.

You had big backlog with NetJets there.

You had a big backlog with NetJets on the Longitude.

How should we think about that program ramping?

And has NetJets firmed up any additional options since the airplane was actually certified?

Yes, Longitude for NetJets, as we do with Latitudes, we work with NetJets and kind of have sort of a 1-year horizon as we look at what comes into the order book.

So we don't put -- as you know, we do not have that big Longitude order with NetJets in our backlog until it firms up, which is again roughly, you'd be looking out about 12 months is the horizon that they do their planning, and we work together to move those into kind of firm backlog.

So look, the absolute numbers, obviously, are not going to be as high on the Longitude as they were on the Latitude.

That's a smaller piece of the market.

But I think that the ramp -- obviously we'll see a significant ramp here in Q4 and we'll see that continue to ramp through 2020.

Okay.

And from an inventory perspective on Longitude, I mean given the airplane was delayed 12 to 18 months or the certification was delayed 12 to 18 months, I mean can you give us any sort of sense how much kind of excess inventory or inventory you're -- extra inventory you're carrying on Longitude given that extended delay?

Well, I wouldn't give you the absolute number, David.

Look as we said, I think as you look at our revision to our cash guidance for the year, that is inventory at Aviation.

And several aircraft that will -- have been in our plan with our original guide are going to move into 2020.

I mean these are aircraft for which they're sold, this is just a matter of our ability to make these mods, incorporate the mods and get them delivered to a customer.

So I think just given the limited amount of time, we're going to see several of those move into 2020 that would've originally been in our 2019 plan.

So you combine that, you combine a few T-6s that were expected to be delivered this year, that drives the bulk of that change to our cash guidance.

It is inventory at Aviation.

But again, these are largely aircraft that are sold aircraft, ordered aircraft, deposited aircraft that are simply going to turn into deliveries in 2020.

Your next question comes from the line of Jon Raviv from Citi.

So just on biz jet once again.

Last year around this time we talked about tweaking some legacy rates up.

It sounds like we're tweaking down right now, fully understand that.

Would it, though, be fair to expect legacy jet deliveries to perhaps be down in 2020 if we just run rate 4Q '19?

Or is it still too early to say?

And can you improve legacy jet margins if volumes are down?

I would say it's a long way until 2020, right.

So I mean we still have NBAA coming up.

We got another full 2.5 months.

So I think again as we said, the deliveries we would expect in the quarter to be flat on a year-over-year basis.

That's our view of how we finish 2019.

It's way too early for us to guiding what we think 2020 is going to look like.

But obviously, we'll be working that over the next few months.

And as always, adjust our production run rates accordingly.

Okay, Scott.

And then a follow-up on the Industrial segment.

Can you just give -- I understand you don't guide by subsegment within Industrial, but margins didn't seem to get that tick-up in 3Q that perhaps some of us had expected with the restructuring efforts going through.

How do you see that Industrial segment margin pacing out over the rest of the year and into next year?

I think they're pretty in line with what we expected given our year-over-year changes in terms of the inventory levels and not needing to do the kind of rebating that impacted us in 2018.

The discipline around inventory management is on track with what we said we were going to do.

The volume increase, the channel development that's going on, both in the old Arctic Cat channel as well as the TRACKER channel, is going well.

We had a very successful launch of kind of our business model around snow with Snowmageddon.

The vast majority of that was delivered obviously in Q3.

We built to what was preordered.

So from our perspective, the margins and the performance of the business are in line with what we expected in our plan.

So it's not a 1-year turnaround to get to where we want to be.

There's more improvement coming, absolutely, but I think we're on track with where we want to be.

Your next question comes from the line of Robert Spingarn from Crédit Suisse.

I just wanted to ask with fade-in of the Longitude, how we think about margins in Aviation in Q4 and beyond.

How will that learning curve factor in?

Well, Q4, the Longitudes obviously, as we've talked about all along, we're going to have a significant dilution to our overall margin rates as those come into the market.

And again, the early units combined with the labor that we're putting in to incorporate the modifications, again, are not material from what is the aircraft, but it's a fairly labor-intensive, invasive process, are going to cause a dilution.

So I think we will certainly see that in Q4.

We've accounted for all that in the guidance that we've put out.

And clearly, as we go into 2020, you get to where you're now running aircraft that are now coming through our productions lines, productivity of which is good, cost position of which is good.

So we'll see those margins become stronger as we work our way into 2020.

Okay.

And then just separately, on the helicopter side, with FARA, I guess coming in the spring, what is the trajectory at Bell military if you're not part of that down-select?

Well, there's 2 big pieces of -- well, I shouldn't say just 2, the Bell military story is more complicated than that, right.

I mean I think we continue to sustain the Multiyear III rates on V-22, which is where we are.

I think we're seeing a significant uptick in aftermarket because those fleets, both on V-22 and H-1, continue to grow.

Obviously, FMS is important.

We just saw the announcement of us being selected in the Czech Republic.

There are several additional FMS cases that are out there.

I think you've probably seen publicly the Israelis have now requested formally a P&A on the V-22, which is encouraging.

Obviously, we've started deliveries on the Navy for their CMV-22s.

I think there's potential to see that grow over time, which is -- which would be very good for the business.

So I think we have a pretty good plan in place to sustain where we are on the military side of Bell.

The long-term big upside is around FARA.

And obviously, around FARA, which is the V-280.

And the good news is those programs seems to be moving out very well with the Army.

So we already are under contract on FARA.

We'll see that down-select I think next March.

And on the V-280, as you know, the Army has come out and made a pretty significant move to the left in terms of their dates from 2035 to 2030.

We think there's potential for that to accelerate further.

But at this point, they expect to put people under contract, again in the early part of next year, to do -- to start their official process.

It would be under contract.

They're saying it's probably a 19-month process, and then award an EMD contract for the selected winner.

I think our V-280 is in a great position.

Obviously, that's an Army decision that's got to be made.

But I think we're -- have clear line of sight to compete and hopefully win what would be a very large program on the V-280 front.

So those are the future, obviously.

And they're terrific programs, but I think we have a pretty good plan in place to sustain that military business in both V-22 and H-1 and aftermarket to bridge that gap.

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

Scott, when you're talking to the team at Cessna or talking to customers directly, is it possible to kind of hone in on what your customer set was enthused about in the world or in their business earlier in the year, and what has them concerned today?

Is it just total broad macro or stock market?

If you get a trade deal, does that help your business?

Are folks going to now want to wait until the 2020 election passes to act?

Any help you can provide there?

Well, Noah, look, I think -- I don't think it'll be a surprise that when you talk to customers and they look at the uncertainty, you got trade deals, you got Brexit, most of these guys can't feel good watching the political stuff that's going on in D.C. I mean that just creates a lot of uncertainty.

And look, I think we see this reflected in business confidence numbers, right, the surveys.

And we're not economists here, but we read all those numbers as well.

And it's understandable that a lot of businesses, particularly small and midsize guys, which is our -- big part of our customer base are, in many cases, deferring CapEx investments in their business, be it business jets or otherwise, just because of uncertainties.

And obviously, the trade kind of things and the Brexit things and the prospects, I mean I think concern over an administration that's anti-business is one that makes people pause.

Yes.

Okay, okay.

On the cash flow change, the Longitude inventory build makes total sense, but the cash flow guidance before today's change, I think would've had the free cash to net income conversion a little bit below 100%.

And it's kind of been below 100% 5 of the last 6 years or so and there's been a negative change in working capital.

Can you guys help us better understand why that is?

Is it percentage of completion accounting somewhere in the business?

Or what's driving that?

And do you get to that -- do you get to a better conversion rate going forward?

Well, look, we've talked about a number of distribution issues.

Obviously, the bill that we've had at Aviation around the Longitude coming in clearly has been a drag.

We had a similar situation with 525 going on in Bell.

Yes, for sure, there's been a change on the military side from a cash flow, from a performance base to the 606 and how you roll the cash versus the cost kind of revenue recognition.

So those things are all contributors.

I don't know, I'm not probably prepared to go back and do a 5-year look at it, but...

Yes.

I mean certainly not analyzing all 5 years, as Scott said, but most recently, particularly this year in addition to the Aviation stuff that we're talking about, we've highlighted kind of what's going on at Bell, which is a significant difference from a cash timing standpoint in revenue and profit recognition relative to cash, where we were kind of ahead on cash, if you will, and now we're reverting more to be in line as we close out Multiyear II.

So that's been kind of the big drag in terms of conversion this year away from the Aviation inventory issue.

Should we -- what kind of drag or lack thereof from that accounting perspective should we expect 2020, 2021?

That will have washed itself out as we close out Multiyear II here.

So you shouldn't expect that.

Got it.

And then if I could just sneak one more in.

On the -- on Ripsaw that you displayed at AUSA for RCV, I was curious if you could talk about your decision to partner with FLIR and to have the new unmanned offerings that they've recently acquired as part of that vehicle?

I don't know.

I'm not sure I would go into a whole lot more detail than what we've talked about at the show and what we have on display.

Obviously, FLIR -- I think when you look at the -- obviously, look, we acquired Howe & Howe because we felt they had some fabulous technology in terms of the vehicle, which I think shows itself in both SMET and now the RCV programs.

FLIR has been a terrific partner in terms of bringing their technology to that platform.

Obviously, the technology that we brought really which has its roots in our Hunt Valley unmanned aircraft business, the intersection of that stuff has really, I think brought out a terrific vehicle with a great essential partner in FLIR and obviously, our organic technology around the control capability.

So I don't know that I would go into much more than that.

I think it's been really well-received.

It's a spectacular vehicle and obviously one that we're looking forward to competing for some of these future Army programs.

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

This is Caitlin Dullanty on for Ron.

Textron Systems was down 12% year-over-year this quarter and you mentioned that Aviation saw weaker military volumes.

Can you expand on what areas and programs will provide growth in defense for you guys in the short to midterm?

Did anything new come from AUSA this week?

Well, on the Systems side, obviously we were sort of -- the year-over-year change is the end of the TAPV program and ANA programs, which were all vehicle programs.

In terms of the rest of that business, looked like it's in pretty good shape.

Obviously, as we go into 2020 and beyond, the big change in the Marine & Land Systems business is Ship-to-Shore Connector moving from a developmental program into a production program.

We're in detailed negotiations with the customer at this point on the FY '17, '18, '19.

As I said, we've passed our builder trials.

We're getting ready to go through the Navy acceptance trials.

By the way, earlier this week, we flew Craft 101, which is the second one.

It did its first time on the water and ran flawlessly for over 6 hours and accomplished an awful lot of the test cards.

So in terms of the -- I think we feel very good about that program which has been a challenging developmental program, transitioning now into the balance of those units and obviously the production contract.

So that is a big turnaround for the business as we go into 2020.

On the defense side at Aviation, again, T-6 has been -- it's mostly foreign military sales.

These things always take time.

Again, we -- it's a little bit problematic this year that we had a delay in the light attack program.

Obviously, something at this time a year ago was going to start early in 2019.

We're still being assured by the customer this program is going to happen.

Obviously, from a budgeting funding standpoint in Congress, it's fully supported.

So we expect and are being told this is now going to be a 2020 activity.

That sort of defers that from '19 into '20 versus our plan.

And again, we have a customer that was already on the books that, just for budget reasons, whatever, has moved into 2020.

So there's a lot of -- there's not 1 big program at Aviation.

These are -- tend to be a number of smaller FMS-driven programs.

So we just were notified to Congress on Tunisia, which again is a nice T-6 program, but one that will, in all likelihood, probably have deliveries in '21, but which we'll start into production next year.

Your next question comes from the line of Robert Stallard from Vertical Research.

Scott, on the biz jet front, I'm not sure if you can answer this, but you can have a go.

What are you seeing from the competition?

Are they matching what you're doing in terms of discipline on price and volume?

Or is that making your life more difficult?

Well, Rob, I'd say our guys always say it makes our life more difficult.

But look, this is -- every deal is a competitive deal.

And I think again, our share is based on the products we're putting in front of customers.

We absolutely, as we look at things like Longitude, feel like we've got a better product in the market than our competitors do.

We get great feedback from customers that look at the aircraft, that fly the aircraft, that take demos in the aircraft, and I think we see those convert to sales.

And I do believe that today we see a premium on the pricing on that because it's a better aircraft.

Are you seeing similar sort of dynamics on some of your older models as well?

Yes, I mean but I don't know that it's very different than it's been for the last few years, Robert.

It's -- I mean be it competition in the M2s, in the CJs and XLS and Embraer, obviously it's -- I don't think there's a big difference in the dynamic that we're seeing in most of that -- most of those segments of the market, which again, we've been driving price over the last couple of years successfully and I think we want to make sure that we continue to do that.

Okay.

And then secondly on Kautex and what could happen there.

Historically, you've been very reluctant to make any disposals if they're dilutive to earnings.

So this is a pretty big change here.

Are there any other parts of the portfolio where you think there is this disconnect between what's reflected in the share price and what people think of the businesses?

I don't think so.

So this is a one-off, you're saying, Kautex?

Yes, look, Robert, as we said, it is arguably a different business model, right.

A Tier 1 automotive is different than engineering and manufacturing and selling and servicing end products.

And that is the difference in that model.

It's a good business, been a successful business for us, but it's one that warranted at least understanding what options there might be.

Your next question comes from the line of Carter Copeland from Melius Research.

Just a couple of quick clarifications.

One, Scott, with respect to the Longitude's reworks, roughly how many aircraft are we talking about here?

Is it a handful, less than that, slightly more than that?

And then, Frank, just I wondered if you could give us some insight in what the -- if there was a favorable net EAC impact in Systems?

Carter, I don't -- we don't go into specific unit numbers.

We haven't forecast specific deliveries, so I'm not sure I want to go into that number.

Obviously, it's a finite number.

The aircraft have been produced, and we'll get this behind us here in the quarter.

So it shouldn't -- obviously, will not extend beyond that.

Yes.

And in terms of EACs, as you know, we don't break that out by segment.

There was -- for the total company, the net program adjustments was $21 million in the quarter.

But Carter, we don't break that out between where that resides.

Okay.

Just maybe to get at it another way, Scott, just to try to bound the outcome here.

Were -- was it a limited finite number of aircraft in construction that had to go back for rework?

Or was it all of them pre-cert?

Oh, I mean it's all of them, right.

I mean you have to bring them all up to the same configuration.

So all of the aircraft are going through the same process in terms of the mods.

And these mods, by the way, Carter, as I said, that it's wiring for some changes, I said hey guys, we got to go through multiple channels or different connectors.

It's not a big deal, but it is kind of invasive, right, to get access to all of that sort of stuff.

Yes, it's a lot of work.

And it's -- so it's -- I mean you wouldn't see any difference in aircraft.

There's no performance difference in the aircraft.

The customer -- there's no change to the aircraft.

It's largely to do some of these redundancies and things that we just had to make these really technically minor modifications.

But they are invasive.

But again, we'll have that behind us.

Yes, it's well understood work scope, it's just tedious.

It's tedious.

Your next question comes from the line of David Strauss from Barclays.

So you've talked a little bit about this.

On V-22, can you tell us exactly when you're going to be through -- all the way through Multiyear II and completely onto Multiyear III?

And how is that transition going?

And how do you feel about the Bell margin profile as you get closer to being fully on Multiyear III?

Well, I think the last delivery is probably in the late Q1 or in the beginning of Q2 next year.

Now remember under the accounting, most of the revenue is complete.

So from a margin standpoint, no, look, I think the margin and the productivity we continue to drive to Multiyear III is -- it's going to take a little time to get to Multiyear II.

Obviously the big difference, which again we've seen a lot of this year, is that the program adjustments are lower than they were a year ago because of the reaching the end of Multiyear II and the reductions in management reserve and so forth.

So but most of that we're seeing as we go from '18 into '19, but there'll be some further into '20.

I'm not sure I can give you a lot more.

I don't think we want to get into margin rate by specific contract at this point.

But like all Multiyears, you had some -- you get pretty good productivity and efficiency.

And we're working on that now as we've started to roll the Multiyear III aircraft.

I mean a lot of the revenue this year is Multiyear III aircraft because it's on the cost-to-cost basis.

Right.

Okay.

And Frank, with interest rates down a fair amount year-over-year at least based on where we are today, any thoughts on pension for next year?

I think you're booking pension income currently and contribution.

And then also on corporate, corporate and the tax rate running, I think that's a fair amount lower than what you originally projected.

Those kind of numbers carry through into 2020?

So on the pension, obviously kind of we'll see how things ultimately play out from a rate standpoint, kind of 50 basis points of discount rate is about $31 million of pension expense.

That's disclosed in our 10-K.

So well, we haven't kind of obviously run those -- all of those numbers yet.

As we look at corporate kind of for this year, we're probably maybe $10-ish million below our original guide of $140 million.

We're probably looking at $130 million.

That obviously depends on share price.

As you know, that impacts corporate expense.

I wouldn't expect any kind of significant change to those types of ranges as we look at next year, but we haven't gone through all those budgeting exercises yet.

And tax rate for next year?

Tax rate, kind of we've had some discrete items this year that have gotten us to 17%.

We're probably in the 20-ish percent type area.

We'll continue to have some items as we kind of look forward that are a slight benefit to rate versus kind of the lower 20s area that we had talked about.

So maybe 20-ish percent type area.

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

Yes.

Just a couple of quick ones.

Frank, earlier in the year, you said that Systems revenues for the year would be about $1.4 billion, it certainly doesn't look like we're going to get there.

What's kind of a new number for the year?

We're running around to that level, maybe a little -- slightly less than that level, but not a significant change from that level.

[I mean I'd say] Systems is going to do better on a margin standpoint and kind of maybe just a little short of that $1.4 billion from a revenue standpoint, but it's in that area.

Revenue should be very close to what we thought, George, and the performance of the business has been very good from a margin standpoint.

So I think it'll actually exceed our guidance on the -- for sure it'll exceed our guidance on the...

On an ops side.

On an ops side and should be pretty much in line on the revenue side.

So that implies a big jump to like $470 million or so in the fourth quarter.

And what's going to drive that from what was like $311 million this quarter?

I don't know, George.

I know we're not -- I mean your numbers are roughly right, it's probably going to be north of $400 million, if you do the math.

But it's -- I mean we're not going to get into program-by-program deliveries, but that's what's in our plan and our latest forecast.

As Frank said, it's probably going to be a little lighter than $1.4 billion, but not dramatically, and the margin and performance is very strong.

And I think we continue to feel very good about opportunities and the wins on new programs and selections.

There's obviously more to come, but I think we're in a pretty good place.

Your next question comes from the line of Jon Raviv from Citi.

On the Longitude, I think for -- you've been waiting for the certification for a while.

What does certification and entering the service mean for actually selling the plane?

Can you talk a little bit about your backlog and pipeline, whether it's fractional versus individual versus corporate?

And does the pricing in that backlog support the margin plan?

Look, I don't -- I mean we're not going to -- I don't think we're going to go into dissecting the backlog.

I think we have a good backlog on Longitude.

It has certainly some fractional with NetJets, who's a great partner.

We expect to see a lot of success of that platform, much as we saw with Longitude in that class.

But also we have a lot of retail customers, as we've said all along, is -- are lined up for the aircraft as well.

So the -- I mean the pricing has been where we expect it to be, the cost is where we expect it to be.

Again, we have this issue of getting through the already built aircraft and making the mods, which is a problem.

But again, we'll -- just as we finally got cert behind us, we'll get that activity behind us here in the fourth quarter.

And I think we have a great outlook on both the success of the product and the profitability of the product going forward.

Your next question comes from the line of Cai von Rumohr from Cowen.

Just a quick follow-up.

So obviously, with interest rates down close to 100 bps, you're talking $50 million, $60 million noncash headwind.

Any thoughts about switching to mark-to-market?

I don't know if we'd comment on that yet, Cai.

I mean certainly, we've seen some other companies do that and it's something our team will look at just as I'm sure many companies are.

But your math is probably about right.

I'm sure you're...

Okay, Greg.

I think that does it for the call.

And if there are any follow-up questions, I can be reached today, tomorrow, next week.

So that's it.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation and for using AT&T Executive TeleConference.

You may now disconnect.